by Carlos García Hernández (originally published in Spanish in El Común)
I was prompted to write this article by yet another sad fatality, the death of British economist John Williamson at the age of 83. As Max Planck used to say, sometimes science seems to advance one funeral at a time.
Williamson became famous for coining the term Washington consensus in 1989, a compendium of 10 points in which he set out the common position defended by the US government, the International Monetary Fund and the World Bank on economic policy. Over time, these 10 points became fundamental pillars of neoliberalism and mainstream economics.
Below, I confront the ten points of the Washington consensus with what I call the Modern Money Consensus. In my view, these alternatives are the most advanced refutation that economics offers to the Washington Consensus.
| Washington Consensus | Modern Money Consensus | |
| 1 | Any fiscal deficit is counterproductive | The right fiscal deficit is the one that allows full employment of resources and price stability |
| 2 | Reduction of public spending and the tax burden | If there is unemployment or idle resources, public spending should not be reduced. Increasing the tax burden is justified if there are inflationary pressures |
| 3 | Broadening of tax bases and moderation of marginal tax rates | Reduction of taxes on productive activities and on labour income. The tax burden should fall mainly on speculative activities |
| 4 | Substitution of public deficits by positive interest rate policies | Permanent 0% interest rates |
| 5 | Exchange rate policies aimed at controlling inflation and increasing exports | Floating exchange rates |
| 6 | Opening of domestic markets to imports | Ability of states to pursue import substitution policies if they deem it necessary |
| 7 | Foreign capital intervention in strategic economic sectors through foreign direct investment | The maintenance of strategic economic sectors should not depend on investment by foreign companies |
| 8 | Privatisation of public enterprises | The size of the public sector should be decided by the government as a means to achieve its social objectives |
| 9 | Deregulation of markets | Strong public regulation of the labour market, essential services, the financial sector, and banking |
| 10 | Protection of property rights | Ability of governments to regain public control of any national resource |
A fundamental point on which there is consensus within modern monetary theory is that states should only get into debt in their own currency. In this way, public debt is always sustainable and states avoid involuntary insolvency. In this context, as the Australian economist Steve Keen says, and contrary to the Washington consensus, it is not public debt but private debt that threatens the prosperity and sustainability of nations. Thus, the backbone of the modern money consensus is the fact that countries that are monetarily sovereign choose their level of unemployment, since thanks to their monetary sovereignty, they can always spend enough to hire the entire unemployed labour force through a job guarantee based on an employment buffer stock. This scheme allows full employment to be achieved without inflation. Therefore, the correct level of government deficit according to modern monetary theory is the one that allows for full employment without inflation.
In this way, modern monetary theory redefines the role of taxes and public debt. Modern monetary theory argues that taxes do not finance public spending, but have a triple function: they give value to money, they modulate inflationary pressures and they stimulate economic activities.
On one hand, the Washington consensus connects public spending to tax collection and debt issuance, and on the other it connects the reduction of public deficits to lower public spending rather than higher taxes. This resulted in the abandonment of a practice that until the implementation of the Washington consensus had been in common use, namely overt monetary financing. Through this financing, governments spent without issuing any debt securities, but through transfers from the central bank to the Treasury and to the bank accounts of individuals. The Washington consensus put an end to this, and since then governments spend by buying debt securities from private banks subject to interest, because this supposedly induces governments to spend responsibly. What modern monetary theory proposes is to recover the use of overt monetary financing.
The fiscal policy proposal of modern monetary theory is not aimed at reducing public deficits, but at modulating inflationary pressures. This means that tax collection could be done through a single property tax on land and real estate as proposed by Warren Mosler in his book “Soft Currency Economics”. Taxes would thus fulfil the three tasks outlined above, they would not interfere with productive processes, indirect taxes would be largely eliminated and property speculation would be prevented.
This means that the consensus within the field of modern monetary theory is that public policy should emphasise fiscal policy because it is much more effective than the monetary policy advocated by the Washington consensus. Modern monetary theory poses economic policy as a trilemma, since, in the words of Randall Wray in his work “Modern Money Theory”, “a country can choose only two of three policies: maintain an exchange rate peg, maintain an interest rate peg, and allow capital mobility”. The consensus among the ranks of modern monetary theory is that governments should not opt for fixed exchange rates, but rather let them fluctuate, and at the same time maintain a fixed interest rate of 0% and impose capital controls if foreign currency speculation and capital flight become destabilising factors.
Contrary to the Washington consensus, interest rates are decided by the Central Bank. As we have already said, as states do not need to issue any debt to finance public spending, interest rates should be set at 0% on a permanent basis. Attempts to control inflation by means of high interest rates have proved to be an inefficient and counterproductive method that only benefits the rentier classes.
The Washington consensus also advocates export-led growth strategies. In doing so, it confuses the national interest with the interests of export elites. The truth is that for national economies, exports are a drain of resources and imports are an income of resources. Therefore, the only reason why exports are desirable is because they allow an increase in imports, but they should not become the growth strategy of countries. The aim of governments should be that domestic production is consumed as much as possible at home, not that foreign countries enjoy domestic production. This also means that import substitution policies such as those advocated by Mexican economist Arturo Huerta are a perfectly legitimate tool to avoid dependence on foreign investment and to reinforce national sovereignty.
This is compatible with the existence of large public sectors made up of organisations that can guarantee their efficiency and proper functioning through external efficiency and quality controls if so desired. There is no justification that privatisation of public enterprises is an end in itself, nor that deregulation of markets implies greater social welfare. On the contrary, the consensus of modern monetary theory holds that the labour market should be regulated by public job guarantees based on employment buffer stocks, that it is the responsibility of governments to guarantee essential services, and that financial sectors should be very small in size and subject to strong regulation to prevent speculative practices.
The last point of the Washington consensus, according to which public sectors should not be protected and private sectors should, is therefore also unjustified. According to the Washington consensus, public bodies, once privatised, should become untouchable. Nothing justifies this position, and according to the modern money consensus, it is perfectly reasonable to opt for the renationalisation of companies if this is required for the better defence of national interests.
After more than 30 years of the prevalence of the Washington consensus, the world has seen how its prescriptions have progressively undermined the living and working standards of workers around the world. This impoverishment of the majority has been accompanied by major economic crises and unprecedented enrichment of the financial elites. Despite this, the most extreme interpretation of the Washington consensus is more alive than ever in the EU treaties. They contain policies that only the American extreme right defends and has not yet been able to impose in its own country. Therefore, reactionary organisms governed by the Washington consensus such as the European Union must be abandoned.