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Monday, July 19, 2010

Getting on the same page for 'third way' to recovery


"The third way" to economic recovery, as advocated by Prime Minister Naoto Kan, appears to have been misinterpreted by a columnist who wrote for the July 3 issue of Nihon Keizai Shimbun, a leading Japanese economic journal.

In the article titled "What is the Third Way?," the columnist stated that the "first way" called for an economic recovery led by investment in public-works projects and that the "second way," which replaced the first way, turned out to be a mistake, as it involved excessive market fundamentalism that relied too heavily on supply-side economic policies, attaching importance to improvements in productivity.

The third way, he wrote, is aimed at achieving economic growth by creating demand that contributes to resolving problems related to social security and environmental protection.

The expression "third way" has a long history. Former British Prime Minister Tony Blair was the first politician to use this expression as a slogan.

To Blair, the first way meant the policies pursued by Old Labour and the second way was Thatcherism. What is Old Labour? It is a classic example of social democracy favoring nationalization of basic industries, redistribution of income and the "equality of outcome." Its support base was primarily workers and labor unions.

Thatcherism is the neoconservatism that Margaret Thatcher introduced when she became prime minister in 1979. She argued that maximum efficiency can be achieved if everything is left to market forces. Indeed, she abolished the minimum wage and replaced the property tax with the poll tax, obliging every individual to pay an equivalent of ¥100,000 per year in local taxes regardless of income.

The aforementioned columnist is not far off the mark in his understanding of the first way and the second way. The third way, as advocated by Blair, however, emphasizes an efficient utilization of market forces.

Blair reimposed the minimum wage while lowering it. He gave the social welfare system the "positive" role of providing new opportunities to the aged, the physically handicapped and those who had lost jobs because of corporate bankruptcy and other causes. This was in stark contrast to the "negative" role that Thatcher wanted the welfare system to play — providing a "safety net" of livelihood subsidies to the aged, the handicapped and the unemployed.

In implementing this "positive" policy, sometimes referred to as providing the needy with a "trampoline" compared with Thatcher's safety net, Blair had to improve vocational training programs, elevate the standards of education and minimize risks involved in switching jobs.

Another aim of the third way is to bring about a "fair society." Although this means building a society in which nobody is excluded, it does not mean working toward "equality of outcome."

A typical "exclusion" from society happens when a worker loses his or her job despite the willingness to continue working. It follows, therefore, that a low unemployment rate is one of the top prerequisites for building a fair society, along with equal opportunities to get an education.

Yoshiyasu Ono, professor of economics at Osaka University and one of Kan's brains, said in a June 21 interview with Reuters: "The first way under the old Liberal Democratic regime of the past stemmed from the Old Keynesian concept of lavishly splashing money on consumers, which resulted in wasteful public works projects, tax reductions and provision of subsidies.

"The second way is nothing other than structural reform, which was pursued by former Prime Minister Junichiro Koizumi and his top economic adviser, Heizo Takenaka during the 1990s. They sought to further expand the nation's production capacity even though it was already in excess.

"Neither the first nor the second way gives any consideration to efficient utilization of labor resources. They only either spend money or save money. Pursuing either way will not lead to creation of demand or employment opportunities.

"The primary aim of the third way, on the other hand, is to enable people to work. If financial resources are needed for that purpose, taxes should be increased. Such tax increases would not add a financial burden on households because the amount equal to the tax increase would be returned as household income.

"The third way would provide better services and facilities, increase employment, ease deflation and the fear of unemployment, stimulate consumption, lead to economic growth, boost tax revenues and create sound state finances."

The third way, as interpreted by professor Ono, represents a strategy of achieving economic growth by using revenues from a higher consumption tax for measures to create employment opportunities, thus reducing deflation and the fear of unemployment as well as stimulating personal consumption. In a sense, it appears substantially similar to the first way.

It seems that the columnist I referred to at the outset has accepted professor Ono's theory as is. If Ono's theory is identical with that of Kan, it means that the third way advocated by Kan is completely different from that advocated by Blair. I strongly urge those who care about the path that Japan takes toward economic recovery to refrain from using confusing explanations.

Takamitsu Sawa is president of Shiga University, Japan.


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