Last month, the US National Security Advisor, Jake Sullivan, outlined the international economic policy of the US administration. This was a pivotal speech, because Sullivan explained what is called the New Washington Consensus on US foreign policy.
The original Washington Consensus was a set of ten economic policy prescriptions considered to constitute the “standard” reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the IMF, World Bank and the US Treasury. The term was first used in 1989 by English economist John Williamson. The prescriptions encompassed free-market promoting policies such as trade and finance ‘liberalisation’ and privatisation of state assets. They also entailed fiscal and monetary policies intended to minimise fiscal 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, free flow of capital and minimal regulation – a model that specifically benefited the hegemonic position of the US.
But things have changed since the 1990s – in particular, the rise of China as a rival economic power globally; and the failure of the neoliberal, neoclassical international economic model to deliver economic growth and reduce inequality among nations and within nations. Particularly since the end of the Great Recession in 2009 and the Long Depression of the 2010s, the US and other leading advanced capitalist economies have been stuttering. ‘Globalisation’, based on fast rising trade and capital flows, has stagnated and even reversed. Global warming has increased the risk of environmental and economic catastrophe. The threat to the hegemony of the US dollar has grown. A new ‘consensus’ was needed.
The rise of China with a government and economy not bowing to the wishes of the US is a red flag for US strategists. The World Bank figures 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 21st century it fell back to below 25%. In those two decades, China’s share rose from under 4% to over 17% – ie quadrupling. The share for other G7 countries—Japan, Italy, UK, Germany, France, Canada—fell sharply, while developing countries (excluding China) have stagnated as a share of global GDP, their share changing with commodity prices and debt crises.
Source: Bert Hofman, World Bank data
The New Washington Consensus aims to sustain the hegemony of US capital and its junior allies with a new approach. Sullivan: “In the face of compounding crises—economic stagnation, political polarization, and the climate emergency—a new reconstruction agenda is required.” The US must sustain its hegemony, said Sullivan, but “hegemony, however, is not the ability to prevail—that’s dominance—but the willingness of others to follow (under constraint), and the capacity to set agendas.” In other words, the US will set the new agenda and its junior partners will follow – an alliance of the willing. Those who don’t follow can face the consequences.
But what is this new consensus? Free trade and capital flows and no government intervention is to be replaced with an ‘industrial strategy’ where governments intervene to subsidise and tax capitalist companies so that national objectives are met. There will be more trade and capital controls, more public investment and more taxation of the rich. Underneath these themes is that, in 2020s and beyond, it will be every nation for itself – no global pacts, but regional and bilateral agreements; no free movement, but nationally controlled capital and labour. And around that, new military alliances to impose this new consensus.
This change is not new in the history of capitalism. Whenever a country becomes dominant economically 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 change to more protectionist and nationalist solutions.
In the mid-19th century, the UK was the dominant economic power and stood for free trade and international export of its capital, while the emerging economic powers of Europe and America (after the civil war) relied on protectionist measures and ‘industrial strategy’ to build their industrial base. By the late 19th century, the UK had lost its dominance and its policy switched to protectionism. Then by 1945, after the US ‘won’ WW2, the Bretton Woods- Washington consensus came into play, and it was back to ‘globalisation’ (for the US). Now it’s the US’ turn to move from free markets to government-guided protectionist strategies – but with a difference. The US expects its allies to follow its path too and its enemies to be crushed as a result.
Within the New Washington Consensus is an attempt by mainstream economics to introduce what is being called ‘modern supply-side economics’ (MSSE). ‘Supply-side economics’ was a neoclassical approach put up as opposition to Keynesian economics, which argued that all that was needed for growth was the macroeconomic fiscal and monetary measures to ensure sufficient ‘aggregate demand’ in an economy and all would be well. The supply-siders disliked the implication that governments should intervene in the economy, arguing that macro-management would not work but merely ‘distort’ market forces. In this they were right, as the 1970s onwards experience showed.
The supply-side alternative was to concentrate on boosting productivity and trade, ie supply, not demand. However, the supply-siders were totally opposed to government intervention in supply as well. The market, corporations and banks could do the job of sustaining economic growth and real incomes, if left alone. That too has proved false.
So now, within the New Washington Consensus, we have ‘modern supply-side economics’. This was outlined by the current US Treasury Secretary and former Federal Reserve chair, Janet Yellen in a speech to the Stanford Institute for Economic Policy Research. Yellen is the ultimate New Keynesian, arguing for both aggregate demand policies and supply-side measures.
Yellen explained: “the term “modern supply side economics” describes the Biden Administration’s economic growth strategy, and I’ll contrast it with Keynesian and traditional supply-side approaches.” She continued: “What we are really comparing our new approach against is traditional “supply side economics,” which also seeks to expand the economy’s potential output, but through aggressive deregulation paired with tax cuts designed to promote private capital investment.”
So what’s different? “Modern supply side economics, in contrast, prioritizes labor supply, human capital, public infrastructure, R&D, and investments in a sustainable environment. These focus areas are all aimed at increasing economic growth and addressing longer-term structural problems, particularly inequality”
Yellen dismisses the old approach: “Our new approach is far more promising than the old supply side economics, which I see as having been a failed strategy for increasing growth. Significant tax cuts on capital have not achieved their promised gains. And deregulation has a similarly poor track record in general and with respect to environmental policies—especially so with respect to curbing CO2 emissions.” Indeed.
And Yellen notes what we have discussed on this blog many times. “Over the last decade, U.S. labor productivity growth averaged a mere 1.1 percent—roughly half that during the previous fifty years. This has contributed to slow growth in wages and compensation, with especially slow historical gains for workers at the bottom of the wage distribution.”
Yellen directs her audience of mainstream economists to the nature of modern supply side economics. “A country’s long-term growth potential depends on the size of its labor force, the productivity of its workers, the renewability of its resources, and the stability of its political systems. Modern supply side economics seeks to spur economic growth by both boosting labor supply and raising productivity, while reducing inequality and environmental damage. Essentially, we aren’t just focused on achieving a high top-line growth number that is unsustainable—we are instead aiming for growth that is inclusive and green.” So MSSE-side economics aims to solve the fault-lines in capitalism in the 21st century.
How is this to be done? Basically, by government subsidies to industry, not by owning and controlling key supply-side sectors. As she put it: “the Biden Administration’s economic strategy embraces, rather than rejects, collaboration with the private sector through a combination of improved market-based incentives and direct spending based on empirically proven strategies. For example, a package of incentives and rebates for clean energy, electric vehicles, and decarbonization will incentivize companies to make these critical investments.” And by taxing corporations both nationally and through international agreements to stop tax-haven avoidance and other corporate tax avoidance tricks.
In my view, ‘incentives’ and ‘tax regulations’ will not deliver supply-side success any more than the neoclassical SSE version, because the existing structure of capitalist production and investment will remain broadly untouched. Modern supply-side economics looks to private investment to solve economic problems with government to ‘steer’ such investment in the right direction. But the existing structure depends on the profitability of capital. Indeed, taxing corporations and government regulation is more likely to lower profitability more than any incentives and government subsidies will raise it.
Modern supply economics and the New Washington Consensus combine both domestic and international economic policy for the major capitalist economies in an alliance of the willing. But this new economic model offers nothing to those countries facing rising debt levels and servicing costs that are driving many into default and depression.
The World Bank has reported just this week that, economic growth in the Global South outside of China will fall from 4.1% in 2022 to 2.9% in 2023. Battered by high inflation, rising interest rates and record debt levels many countries were growing poorer. Fourteen low-income countries are already at high risk of, debt distress, up from just six in 2015. “By the end of 2024, per-capita income growth in about a third of EMDEs will be lower than it was on the eve of the pandemic. In low-income countries – especially the poorest – the damage is even larger: in about one-third of these countries, per capita incomes in 2024 will remain below 2019 levels by an average of 6%.”
And there is no change in the lending conditions of the IMF, the OECD or the World Bank: indebted countries are expected to impose austere fiscal measures on government spending and to privatise remaining state entities. Debt cancellation is not on the agenda of the New Washington Consensus. Moreover, as Adam Tooze put it recently that “Yellen sought to demarcate boundaries for healthy competition and co-operation, but left no doubt that national security trumps every other consideration in Washington today.” Modern supply-side economics and the New Washington Consensus are models, not for better economies and environment for the world, but for a new global strategy to sustain US capitalism at home and US imperialism abroad.
Michael Roberts Blog 
1. It’s important not to confuse the “advertising”– free markets, free movement of capita, unhindered trade– with the function. In this case, the “Washington Consensus” of the 1980s was an outgrowth of the Reagan/Thatcher “neocon” attack on wage rates, living standards, worker protections. The real Washington Consensus was the “lost decade” (and beyond) in countries of Latin America, famine in Africa, accompanied by the eruption of tremendous waves of migration from subsistence producers in rural areas to urban areas in Asia, Latin America. The Washington Consensus then was designed to put Latin America and Africa on short-, or no-, rations.
2. As the table shows, it accomplished just that, and the slowing of growth in China will make those trends more acute in the rest of the developing world.
3.”There will be more trade and capital controls, more public investment and more taxation of the rich.” Wanna bet? See details of the “no-default” bill. And more taxation of the rich???? In the US???
4. “Then by 1945, after the US ‘won’ WW2, the Bretton Woods- Washington consensus came into play, “– come on, calling the period 1945-1980 the Washington Consensus empties the phrase of any historically specific meaning.
5. The new Washington Consensus is not all that new, is it? It’s nostalgia – mongering, like the “new” New Deal, and the good old days of WW2– a little bit of fascism in a cake, iced with Bonapartism, restoring capitalism to its glory days of the planet’s largest abattoir. Again, pay no attention to the Powerpoint.
China’s 17.3% share of global GDP corresponds quite accurately to China’s share of world population.
Only the rest of the world is completely out of whack,
USA with about 5% of the world population should contribute 5% of global GDP, not a 25%.
“The US must sustain its hegemony, said Sullivan, but “hegemony, however, is not the ability to prevail—that’s dominance—but the willingness of others to follow (under constraint), and the capacity to set agendas.” In other words, the US will set the new agenda and its junior partners will follow – an alliance of the willing. Those who don’t follow can face the consequences.”
That’s what they call the “rules based order”: Washington sets the rules, the rest has to follow,
“The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,”[1] its unit being a single commodity.” CAPITAL V.I, chapter one
“Whoever has the gold makes the rules.” Johnny Hart
In CAPITAL, Marx also says: ‘gold, when a mere commodity, is not money, and … when other commodities express their prices in gold, this gold is but the money-form of those commodities themselves’ (Marx, 1887, p. 106).
Which ruling class of the political States of the world possesses the most wealth has the most political power.
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“Which ruling class of the political States of the world possesses the most wealth has the most political power. ”
Disagree. Political power comes from control of soldiers, guns, nukes, navies etc. Power is what secures wealth, not the other way around.
The American Empire* is clearly in inexorable decline. The only question now is how this fall will take form. By the looks of it, this is already a second stage of collapse: the first one was strictly economic in nature and culminated in the crisis of 2008; this now appears to be a second phase or stage of the collapse, characterized by the erosion of the main components of its superstructure. I call this “Political Anarchy”, in homage to the Roman Empire (Military Anarchy).
If you think the fall of the USSR was anarchic, you haven’t seem anything, as capitalism is a much more diffuse, decentralized and aggressive mode of production than socialism. There will be the proverbial fireworks during the USA’s collapse, that’s for sure.
*this is a historian term, akin to the term “Byzantine Empire”; the Americans actually almost never use it — instead they call themselves “Rules-Based International Order” when speaking about the USA in imperial form. Poetically, the terms “City on a Hill” and “Shining City on a Hill” were also used, during the Cold War.
“said Sullivan, but “hegemony, however, is not the ability to prevail—that’s dominance—but the willingness of others to follow (under constraint), and the capacity to set agendas.”
At least Sullivan, unlike too many leftists, grasps the difference between hegemony and dominance, as anyone can determine the etymology of these classical Greek and Latin words.
But “ironically”, the embrace of “industrial policy”, however limited as it is to managed subsidies to US and politically allied capital, is an admission that China is already world economically “hegemonic” (even as it remains financially subordinate), as its state capitalism forces the USA to a certain degree onto its own “capitalist road”.
What has not changed, however, is “supply side” as conscious anti-worker policy, where labor power is the ultimate “supply side” factor. The supply side strategy remains: No permanent structural concessions to the working class, as these can only strengthen its social power to act against capital. This remains the unified touchstone for supply side economics, old and new.
China is now the status quo power in the world capitalist system. Mere economic hegemony does not automatically translate into “full spectrum” geopolitical-economic hegemony, however. This as against economistic perspectives by too many Marxists. There is no world hegemon, and I will predict, here in the epoch of the decay of capitalism as a mode of production, that there will never be such a hegemon.
Instead there will be attempts to form geopolitical blocs. All will fail to reverse the world-systematic decay of capitalism. But in the meantime, the US-*dominated* bloc of the EU and Japan/Korea/Taiwan/Australia will present a formidable competitor to China, even in the US blocs’ own geopolitical decline.
Isn’t de-risking investment (the wall street consensus) component of the New Washington Consensus solving the falling capital profitability problem to which you have been pointing years now?
What I find surprising about Michael’s excellent analysis is its failure to properly address what is happening on the other side of the developing geo-political conflict. Namely, the rise of the Belt and Road Initiative, the SCO and the BRICS. If this was unimportant as Michael seems to think – I recall him recently writing about “the so-called BRICS” – one must wonder why the United States and its allies are in such a panic about this development.
Significantly, the same capitalist countries that first emerged in the 19th century and established empires through which they sucked wealth out of the rest of the world, are still on top. Yet, other countries that are much larger than most of the G7 members, with more natural resources and much bigger populations, are still relatively poor 150 years later. Surely, this is not something that has happened by chance? Clearly, the imperialist and now neo-imperialist nations, have not just exploited the raw materials and labour of the poorer countries, but have used all kinds of methods from debt slavery, economic sanctions, to regime change and invasion, to artificially prevent them from building up their economies.
The question that now arises is: can these countries rise up economically if the artificial restrictions that have held them back for so long, are removed through China’s strategy of building a parallel global economy between the developing countries, along with powerful international institutions that will make it difficult for the more advanced countries to continue to enforce their will?
For example, I noticed that while world trade is now only growing at 2% annually, the trade between China and its BRI partners is growing at 16%. And this not just trade going one way. In Brazil, where I live, it has a large trade surplus with China. Indeed, China is now the biggest trading partner with over 140 countries, the complete reverse of the position in 2000 when the US was the largest trading partner for most countries. The tactic of relocating manufacturing to the developing world and collecting all the profits was always risky as it increasingly de-industrialised the richer countries and made them vulnerable to increased competition from the rest of the world. Now the chickens are coming home to roost.
Certainly, the developing countries are aiming to reshape the world economic and power balance. Which is why so many are queuing up to join the BRICS. It has the potential to become an organisation of over a hundred countries including all the main oil and gas producing countries (except for the US). The BRICS could then become the most powerful institution globally aside from the United Nations, unlike the Non Aligned Movement which was toothless and lacked any real economic power. The UN was never able to deal with these global divisions because of its lack of internal democracy and inbuilt limitations. The BRICS has no such limitations. Imagine if a powerful future BRICS was to threaten to impose economic sanctions on one or more of the more advanced countries in order to stop their attempts at interference or bullying of a BRICS member? It’s not as far fetched as it sounds.
I really think that many on the socialist left in the advanced countries are missing these potentially epoch-making changes.