Washington's New Consensus

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By MICHAEL ROBERTS*

The New Washington Consensus aims to sustain the hegemony of US capital and its junior allies

In March of this year, US National Security Advisor Jake Sullivan outlined the US government's international economic policy. He gave a key speech because, as a senior official, he explained what the so-called “New Washington Consensus” on US foreign policy consists of.

The original Washington Consensus consisted of a set of ten economic policy prescriptions considered as a “standard” package of reforms for developing countries in crisis of growth. It would be fostered by Washington, DC-based institutions such as the IMF, World Bank, and US Treasury. The term was first used in 1989 by the English economist John Williamson.

The prescriptions included policies to promote free markets, such as commercial and financial “liberalization” and the privatization of state assets. They also recommended monetary and public spending policies designed to minimize budget deficits and public spending. It was the neoclassical policy model applied to the world and imposed on poor countries by US imperialism and its allied institutions. The key was “free trade” without tariffs and other barriers, the free flow of capital and minimal regulation – a model that specifically benefited the US hegemonic position.

But things have changed since the 1990s – in particular, with the rise of China as a rival economic power globally, but also in the face of the failure of the neoliberal international economic model to generate economic growth and reduce inequality between and within nations. .

Particularly since the end of the Great Recession in 2009 and throughout the Long Depression from the 2010s onwards, the US and the other advanced capitalist economies – normally thought of as the leaders – have been on the slump. “Globalization”, based on rapidly increasing trade and capital flows, has stalled and reversed. Global warming has increased the risk of environmental and economic catastrophe. The threat to dollar hegemony has expanded quite a bit. A new “consensus” was therefore necessary.

The rise of China with a government and economic system that does not bow to US wishes is a red flag for US strategists. The World Bank numbers below speak for themselves. The US share of global GDP rose from 25% to 30% between 1980 and 2000, but in the first two decades of the 25st century it has fallen below 4%. In these two decades, China's participation rose from less than 17% to more than 7% – that is, it quadrupled. The share of other GXNUMX countries – Japan, Italy, UK, Germany, France, Canada – has fallen sharply, while developing countries (excluding China) have stagnated as a share of global GDP. And these shares have changed as commodity prices change and debt crises erupt.

The New Washington Consensus aims to sustain the hegemony of US capital and its junior allies through a new approach. Here is what Sullivan said: “In the face of worsening crises – economic stagnation, political polarization and the climate emergency – a new rebuilding agenda is needed.” In this context, the US must maintain its hegemony, he added, but it is necessary to see that “hegemony (…) does not consist in the ability to prevail – that is to dominate others – but in the willingness of others to follow us (under constraint, of course ) and our ability to set the global agenda”. In other words, the US will define a new program and its junior partners must follow it – it is, therefore, an alliance of those willing to be led. Those who do not follow the new guidelines, however, may face consequences.

But what is this new consensus? Free trade and capital flows and no government intervention must be replaced by an “industrial strategy” in which governments intervene to subsidize and tax capitalist enterprises so that national goals are achieved. There will be more trade and capital controls, more public investment and more taxation of the rich.

Surrounding these goals, from 2020 onwards, each nation must maintain itself – that is, without global pacts, but through regional and bilateral agreements; the free circulation of capital is no longer prescribed, but capital and labor must be controlled nationally. And around that, new military alliances will be needed to enforce this new consensus.

This kind of change is not new in the history of capitalism. Whenever a country becomes economically dominant on an international scale, it wants free trade and free markets for its goods and services, but when it starts to lose its relative position, it wants to move from free trade to more protectionist and nationalist forms of management.

In the middle of the XNUMXth century, the United Kingdom was the dominant economic power and defended free trade and the international export of its capital, while the emerging economic powers of Europe and America (after the civil war) relied on protectionist measures and “strategy”. industrial” to build its industrial base.

At the end of the 1945th century, however, the United Kingdom lost its dominance and, therefore, started to defend a protectionist policy. Then, in XNUMX, after the US “won” World War II, the Bretton Woods-Washington consensus came into play and economic policy turned towards “globalization” under US hegemony. Now it's Americans' turn to move from free markets to government-led protectionist strategies—but with a difference. The US hopes that its allies will also follow its path and that its enemies will be crushed as a result.

Within the New Washington Consensus lies an attempt to introduce, still under the aegis of conventional economics, what is being called “modern supply-side economics”. The old “supply-side economics” was a neoclassical approach that opposed Keynesian economics; she argued that all that was needed to promote growth were macroeconomic, fiscal, and monetary measures to ensure sufficient “aggregate demand” in the economic system; if that happened, everything would be fine.

More liberal economists disliked the implication that governments should intervene in the economy, arguing that macromanagement would not work but would only “distort” market forces and prices. In this they were right, as experience from the 1970s onwards has shown.

The alternative to promoting supply-side economics was to focus on increasing productivity and expanding trade, that is, on supply rather than demand. However, the more liberal ones were also completely opposed to the government's intervention in the supply. The market, companies and banks – they argued – could do the job of sustaining economic growth and real incomes if left alone. This too proved false.

So, now, within the New Washington Consensus, there is supposed to be a “modern supply-side economy”. This was outlined by current US Treasury Secretary and former Federal Reserve Chair Janet Yellen in a speech at the Stanford Institute for Economic Policy Research. Janet Yellen is the last New Keynesian who still advocates both aggregate demand policies and supply-side measures.

Janet Yellen explained, “The term 'modern supply-side economics' describes the Biden administration's economic growth strategy; so that you understand, I will contrast it with Keynesian and traditional supply-side approaches”. That said, she continued, “we're really comparing our 'new approach' to 'traditional' supply-side economics”; the latter – note – sought to expand the potential output of the economy through aggressive deregulation combined with tax cuts designed to promote private equity investment”.

So what's different about this new Biden administration policy? “The modern supply-side economy, in contrast to the previous one, prioritizes the supply of labor, human capital, public infrastructure, research and development and investments in a sustainable environment. Concern for these areas is intended to increase economic growth and resolve long-term structural problems, in particular inequality”.

Janet Yellen thus dismisses the old approach: “our new approach is much more promising than the old supply-side economics, which I see as having been a failed strategy to increase growth. Significant capital tax cuts have not achieved the promised gains. And deregulation has a pretty bad track record in general; but it was very, very bad with regard to environmental policies – especially with regard to reducing CO emissions2.” Really!

Janet Yellen notes, then, what was discussed in this blog [The next recession blog] often. “Over the past decade, US labor productivity growth has averaged just 1,1% – about half of what it had been over the previous fifty years. This has contributed to slow wage and compensation growth, with historical gains especially slow for workers at the bottom of the wage distribution.”

Janet Yellen wants to direct her audience of “mainstream” economists to the specific nature of modern supply-side economics. "A country's long-term growth potential depends on the size of its workforce, the productivity of its workers, the renewability of its resources and the stability of its political systems."

Thus, “modern supply-side economics seeks to stimulate economic growth by increasing labor supply and increasing productivity, while reducing inequality and environmental damage. Essentially, we are focused on achieving high growth that is sustainable, inclusive and green.” Thus, “modern supply-side economics” aims, according to her, to solve the failures of capitalism in the late XNUMXth and early XNUMXst centuries.

But – one wonders – how should this be done? Basically, through government subsidies aimed at industry. But this is not to be understood as meaning that the State will control the key sectors on the supply side. But yes, he will tax companies both nationally and through international agreements aimed at putting an end to tax evasion in tax havens and other tax avoidance tricks practiced by companies.

As he said in summary: “The Biden administration's economic strategy embraces, rather than rejects, collaboration with the private sector through a combination of better market-based incentives and direct spending based on empirically proven strategies. For example, a package of incentives and discounts for clean energy, electric vehicles and decarbonization will encourage companies to make these critical investments for our development.”

In my opinion, “incentives” and “tax regulations” will produce no more supply-side success than the neoclassical version of this same policy because the existing structure of capitalist production and investment will remain largely untouched. Modern supply-side economics looks to private investment to solve economic problems, assuming only that the government will “steer” that investment in the right direction. But the existing structure depends on the return on capital. In fact, corporate taxation and government regulation is more likely to decrease profitability than any government incentives and subsidies will increase it.

Modern supply-side economics and the New Washington Consensus combine domestic and international economic policy for major capitalist economies into an alliance of those willing to collaborate. But this new economic model offers nothing to countries facing rising debt levels and service costs that are driving many of them into default and depression.

The World Bank reported this week that economic growth in the Global South (excluding China) will decline from 4,1% in 2022 to 2,9% in 2023. Hit by high inflation, rising interest rates and record levels of debt, many countries were getting poorer. Fourteen low-income countries are already at high risk of debt, up from just six in 2015. “By the end of 2024, per capita income growth in about a third of so-called developing economies will be lower than it was on the eve of the pandemic. In low-income countries – especially the poorest – the damage is even greater: in around a third of these countries, per capita income in 2024 will remain below 2019 levels by an average of 6%.”

And there is no change in lending terms from the IMF, OECD or World Bank: indebted countries are expected to impose austere fiscal measures on government spending and privatize remaining state-owned enterprises. Debt cancellation is not on the agenda of the New Washington Consensus… [any more than a renewal of social democracy].

In addition, see what Adam Tooze said recently: “Janet Yellen sought to demarcate the boundaries so that competition and cooperation are healthy, but left no doubt that national security, today as ever, trumps any other consideration on the part of of Washington”. Modern supply-side economics and the New Washington Consensus are models, not for better economic and environmental conditions for the world as a whole, but for offering a new global strategy that is capable of sustaining capitalism in the US, or whether at home, and to sustain that country's imperialism abroad.

*Michael Roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério FS Prado.

Originally published in The next recession blog.

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