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September 2002

The new New Deal


For over a decade the triumph of the Anglo-American model of capitalism seemed assured: but no longer. So what happened to the Washington Consensus, and what new ideology might replace it?




       
Andy Fastow
       
Samuel Insull
A YOUNG ENTREPRENEUR builds up an energy empire that takes the US market by storm. He creates an impossibly complex financial pyramid made up of hundreds of subsidiaries, on most of whose boards he sits. He deftly juggles stock between these subsidiaries, making his company the toast of the stock exchange, until the market crashes, his investors lose millions, and he sinks in a matter of weeks from national hero to figure of hate. He becomes a symbol of greed and larceny and prompts the US president to promise to winkle out corporate crooks like him and clean up the economy. He goes into self-imposed exile.
Sounds familiar? But it's not Enron's Andy Fastow: it's Samuel Insull (pictured right), one-time CFO to Thomas Edison and the archetypal bad capitalist of the 1929 crash.
Insull built up what ultimately became known as the Commonwealth Edison Company into one of the world's biggest corporations. After the crash, he became the figure who more than anyone inspired Franklin D Roosevelt's New Deal, with Roosevelt, not unlike George W Bush, promising to "get the Insulls".
Insull's fall marked the end of a long period of laissez-faire capitalism and the beginning of 30 years of regulation, government intervention and Keynesian mixed-economy strategies. It is one of many similarities between our current economic and political circumstances and those of the 1930s - the return of right-wing extremism to European politics and isolationism to the US, the economic threat of stagnation, and a general public suspicion of free markets and entrepreneurs. So are we standing on the verge of a new New Deal?
One Sarbanes-Oxley Act does not a new deal make. There is apparent confusion at the very top of policymaking about the direction we are heading in and what economic policies are viable.
Whose Consensus is it anyway?
People have been saying that the Washington Consensus is dead almost since the phrase was coined. Partly that's because it means different things to all those who use it. For example, Nobel-prize winning economist Joseph Stiglitz says: "The Reaganite/Thatcherite philosophy was really the underlying philosophy of the Washington Consensus". George Soros declares: "The Consensus really came in with Reagan and Thatcher. It became market fundamentalism."
       
Joseph Stiglitz
Moises Naim, editor of Foreign Policy magazine, points out: "Stiglitz, in an article in the New York Times, denounces the Washington Consensus for Brazil's problems then prescribes the Washington Consensus, ie, trade liberalization, as the solution. The brand name has acquired a life of its own."
John Williamson, senior fellow at the Institute for International Economics in Washington, DC, came up with the term in 1989. He has since watched it "grow into a monstrous thing that everyone loves to hate". A mild-mannered Englishman who still seems slightly incredulous at both the success of his phrase and the abuse it has inspired, he says: "I never intended to endorse the whole idea of the minimal state as part of the Thatcher/Reagan approach. Very few seem to have read what I actually wrote. It wasn't about less spending on health and education but more."
Williamson also complains that one Washington policy - capital account liberalization - now widely blamed for emerging-market crises, was definitely not in his original formulation.
However, even in Williamson's original formulation the emphasis is very much on fiscal discipline, privatization, trade liberalization and deregulation. As Stiglitz, a former colleague of Williamson and the public figurehead for opposition to the Consensus, tells us: "There was within the World Bank [before he joined], the IMF, and the US Treasury a strong view that macrostability, privatization and liberalization were of the first order. Everything else was secondary."
When these policies, particularly capital account liberalization, failed in east Asia and Russia in 1998, the first wave of articles appeared obituarizing the Washington Consensus.
However, writing death notices for laissez-faire economics was still something of a minority pursuit. After all, the US and much of Europe was in the middle of a record boom market, apparently thanks to the virtues of privatization, liberalization and deregulation.
Even newly elected centre-left governments in the US and UK pronounced their conversion to Thatcherism.
But what really shook this consensus was the failure of these policies at the centre of the financial system.
Now it is possible to point to significant policy changes in many of the issues central to the free-market consensus - deregulation, privatization, capital mobility, and fiscal policy - all of which mark a new shift in the relationship between government and markets.
The trend towards deregulation is most obviously being called into question - after all, most of the recent corporate scandals were in the most deregulated industries. The US financial sector, which has enjoyed 20 years of deregulation culminating in the Gramm-Leach-Bailey Act, has seen some of the most drastic legislation since the 1930s, in the form of the US Patriot Act, which enables much greater government scrutiny of capital mobility, and the Sarbanes-Oxley Act, which beefs up financial disclosure and supervision of auditing. The investigation into investment banks' involvement with Enron, according to George Soros, could well prompt even more far-reaching legislation.
Privatization, until very recently another orthodoxy of the market consensus, has also been called into serious question by such failures as UK rail infrastructure company Railtrack and the fiasco that has resulted from California's energy privatization. Railtrack has been made into a not-for-profit company: the trend in the UK is towards more non-shareholder "public interest companies".
In the US as free-market-inclined a commentator as Neal Soss, chief economist of CSFB, is calling for the creation of a government-sponsored enterprise for telecoms and energy utilities - a form of renationalization.
What brings these strands together is an emphasis on stronger government, and a renewed belief in the power of the state to provide efficient public services and to stimulate the economy when markets fail.
This final belief has led to a return in the UK, Europe and even the US of Keynesian-style fiscal policy, where governments are allowing themselves to risk a deficit to spend in the name of avoiding stagnation. As Peter Warburton of the Institute of Economic Affairs (IEA) in London puts it: "There has been a very distinct change in the handling of government finances."
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