Can California find a “third way” set of successful economic policies?

David Kersten
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). Kersten is also an adjunct professor of public finance and economics at the University of San Francisco.

One of the greatest current impediments to the State of California’s long-term success, both economically and socially, is its lack of a coherent, consistent, and viable set of economic policies.

For example, how should California government handle the economy?  At what level should we tax private property, goods and services to provide the optimal level of government services while maintaining private enterprise and an incentive to work?

In short, what state economic policies would be most beneficial to ensuring both the economic security and providing the opportunity for upward economic advancement for all California residents?

Many of California’s economic problems are well known and documented, such as rising poverty, the housing crisis and increasing homelessness, the widening gap between rich and poor.  But there is very little understanding about what is actually driving these problems, and no consensus on the best set of policy solutions to these problems.

I refer to the study of these policy issues as the largely forgotten field called “political economy”—because addressing these issues combines the study and application of both politics and economics.

All economic solutions are inherently political.  And any political doctrine or policy that impacts the economy has an economic impact.

The history of why these two academic disciplines were separated in the first half of the 20th century and beyond is perhaps one of the biggest failings of academia, and why most state-run universities have created tracks in both disciplines that almost completely lack practical application and utility for solving real world public policy problems.

Fortunately, the most successful political leaders of our time, as well as rising political stars, almost without exception, thrive because of their understanding of the connection between politics and economics.

Just take the examples of socialists Bernie Sanders or Alexandria Ocasio-Cortez.  One may not agree with their politics or their economic policies, but they have generated vast amounts of media interest and political support because of their ability to fuse politics and economics—known as left-wing populism.

Similarly, not everyone agrees with President Trump’s politics or policies, but it is tough to dispute that the success that he has had is driven by what many experts and independent analysts perceive as a hugely successful economic agenda.In fact, many politicians in California are now directly benefiting from President Trump’s handling of the economy, even though most of California’s economic policies run counter to the policies of the Trump Administration.We are now more than 100 days into Governor Gavin Newsom’s term, as well as the new session of the Democrat-controlled Legislature, but have seen little of real substance that is new on the economic policy front except for a series of major tax increase proposals.Simply taxing and spending may work for many Democratic members of the California Legislature, but it is not going to help solve many of the state’s deepening economic policy problems that the state faces including the housing crisis, affordability crisis, and skyrocketing gas and energy costs, among other issues.

Politically speaking, Governor Gavin Newsom (D), has the most to lose from the economic status quo in California, particularly if things get worse relating to many of these key economic issues that he promised to address in a substantive way during the campaign.

Alternatively, Governor Newsom also has the most to gain if he shepherds a strong California economy into the 2020 election and beyond, regardless of what has driven this success.

The Governor and his economic team have begun discussing these economic issues in private industry meetings and with the media, but it is not clear that they have reached any hard conclusions about what a new economic agenda for California should look like.

I believe that the Governor’s legacy will, in large part, hinge on his Administration’s ability to develop and sell a set of successful “third way” economic policies which are consistent with Democratic values but actually produce beneficial economic results, or at least appear to.

The term “third way” has been used often during periods of political transition where political leaders such as President Bill Clinton and British Prime Minister Tony Blair successfully sought to differentiate themselves from the old ways of thinking that were widely perceived to not be working.

Such economic policies have been referred to as “third way” agenda because they essentially represents a compromise between two commonly acknowledged, yet often misunderstood, economic schools of thought–free market capitalism on the right and Democratic socialism, or pure socialism, on the left.

Or in simpler terms, “third way” economic policies contain a popular blend of the politics of the right and left, largely transcending partisan boundaries to provide practical solutions to real world problems.

The Newsom Administration has preliminarily dubbed its effort to carve out a “third way” set of economic policies as “inclusive capitalism.”

Perhaps what is most interesting is that if you look at the historical cases of political leaders charting a “third way” political and economic agenda, it is almost always founded on the pursuit of the free market principles of fiscal responsibility, less government control and intervention, and not the alternative–a collectivist or socialist agenda.

For example, I was in England in 1996-1997 when British Labor Party leader Tony Blair pulled the labor party out of the political doldrums by modernizing the labor party around more moderate, free market economic policies.

Similarly, on the other side of the Atlantic, after the failure of President Bill Clinton’s single-payer health care proposal and unsuccessful left-wing policy agenda early in his first term, President Clinton tacked right through a political strategy called “triangularization” where he sought to differentiate himself both from the left-wing Democrats in Congress and the Republicans in Congress led by Speaker Newt Gingrich.

The political success stories of both Prime Minister Tony Blair and President Bill Clinton are storied examples of political leaders bringing their party back from the dead largely based on a “third way” political and economic agenda.

There are many other similar economic success stories throughout history including the “German economic miracle” after World War II, which was largely based on the free market ideas of Wilhelm Ropke as outlined in his seminal work titled “A Humane Economy: The Social Framework of the Free Market.”

Other countries that have reaped huge economic benefits from implementing free market capitalist reforms in recent decades include China, Chile, Brazil, and Sweden, to mention a few.

In short, while “socialism” and the march leftward may be popular within the national Democratic Party at the moment, the historical record is not kind to political movements based on “socialist” ideas, as opposed to free market ideas.

Just take the examples of the Bolsheviks in Russia in 1919, the communists in Cuba in 1959, and the socialists who assumed power in 2013 under Nicolas Maduro.  All three examples ended in disaster on so many levels.

Despite the enthusiasm Bernie Sanders and many other “socialist” sympathizers had and still have for such “socialist revolutions,” the economic record of such movements is nothing but failure, despair, and economic collapse, human rights abuses aside.

If economic success and well-being for all is the objective, and it should be, the road to economic success is founded upon free market principles of freer markets, less government intervention, and reduced taxes and regulation, not the opposite–socialism, collectivism, and increased government control.

In fact, I challenge Bernie Sanders and other left-wing Democratic socialists to name a single example of a country that that improved the economic standing of its people and economy because it went the other direction and implemented a socialist economic agenda.

It is still an open question about what future economic road the State of California and its government will take in 2019 and beyond, but history has proven that the road to economic success runs through free market capitalism in one form or another.

 

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