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The oil boom of the late 2000s created significant headwinds for Iranian manufacturers. As the value of oil exports surged, the Iranian rial appreciated, real wages rose, and foreign goods flooded the Iranian market. Middle-class families relished in their newfound purchasing power, gladly buying French cosmetics, Korean appliances, and Turkish clothing while shunning domestic brands. This is how Iran caught a textbook case of “Dutch disease”—the oil bonanza undermined Iran’s manufacturing base. Given the strong rial, programs initiated by populist president Mahmoud Ahmadinejad redistributing wealth to Iran’s lower classes widened the trade deficit and set off an inflationary boom in housing and services. But when the Obama administration hit the financial and energy sector with heavy sanctions in 2012, thrusting Iran into a recession, things changed course.
Sanctions hit an already weakened manufacturing sector, precipitating a stagnation in Iranian industrial output that persists until today. But the volatility of US diplomacy—relief from sanctions following the 2015 Iran Nuclear Deal, reimposition of sanctions under the Trump administration in 2017—has also produced uneven effects for Iranian manufacturers. Some major players have experienced significant drops in production. Iranian automakers produced around 1.5 million vehicles in 2017, when the country was still enjoying the benefits of sanctions relief. Last year, they produced just 1.2 million vehicles. In the case of the auto sector, sanctions have constrained access to key manufacturing inputs, reducing both the quantity and quality of Iranian cars and trucks produced each year.
Other manufacturers have bucked sanctions by taking advantage of their macroeconomic effects, including currency devaluation and diminished imports. This has paradoxically enabled domestic Iranian capital to reverse the effects of “Dutch disease.” A closer examination of the home appliances sector in Iran reveals the significant degree to which firms can adapt to sanctions, creating new economic value in economies otherwise encumbered by the coercive measures. These adaptations contradict the commonly held view that resilience to sanctions arises from the allocation of state investment and top-down industrial policy. On the contrary, in Iran, resilience appears to be a bottom-up phenomenon, led by opportunistic private capital. In fact, how firms adapt to sanctions can influence both domestic economic policy and the international sanctions regime in unexpected ways. Today, the Iranian home appliances industry is being held back not by the effects of sanctions on production, but by the effects of overcapacity on price competition. Many Iranian manufacturers can only survive in a protected market, meaning these firms may actively oppose the kind of market liberalization inherent to sanctions relief.
Domestic manufacturing
The Iranian home appliances industry emerged during the first industrialization wave in the 1960s. By the mid-1970s, domestic brands like Arg and Azmayesh had become staples of Iranian homes, and, given decent quality and competitive features, were even exported to regional markets. After the Islamic Revolution in 1979, these factories were nationalized. Soon after, the outbreak of the Iran-Iraq war prevented further investment and modernization. Domestic brands became the low-price, low-quality option for Iranian consumers. By the mid-2000s, as Iran’s economic growth accelerated, foreign brands entered an increasingly segmented Iranian market. High-income families would outfit their homes with appliances from brands like Germany’s Bosch and Italy’s De’Longhi. Middle-income families became loyal to imported Korean brands LG and Samsung. Low-income families would choose Iranian brands, whose appliances could not compete on features, but could compete on price. By 2017, the major Korean brands had come to dominate the Iranian market, accounting for 65 percent of the refrigerator market and 77 percent of washing machine sales, according to market data compiled by GfK. The Korean market share ballooned following the intensification of Western sanctions on Iran, particular after 2012, which saw European brands reduce their footprint in the country.
Then, in 2018, everything changed. The Trump administration withdrew from the Iran nuclear deal, reimposing US secondary sanctions on Iran. Trump’s “maximum pressure” policies had a dramatic impact on the Iranian economy. Among the first effects was a steep devaluation of the Iranian rial, as Trump froze Iran’s access to its foreign exchange reserves and throttled oil exports, the primary source of hard currency revenues. In an effort to ration hard currency and defend the new exchange rate, the Iranian government introduced a ban on the importation of over 1,300 goods, including home appliances, effectively closing the market to foreign brands. Even before the protectionist measure from Iranian authorities, these brands had already faced difficulties in maintaining their Iran sales operations as international banks began to cut ties to Iranian counterparts.
The combination of protectionist policies and intensifying sanctions squeezed foreign brands out of the Iranian home appliances market, reversing two decades of market consolidation. Iranian home appliance manufacturers, as well as opportunistic investors with no experience in the sector, quickly recognized the opportunity. The return of sanctions would no doubt slow Iran’s economic growth and high inflation would erode household purchasing power. But the demand for appliances—a household essential—is stubborn. Suddenly three-fourths of the Iranian home appliances market was up for grabs, representing a $12 billion opportunity.
Iranian home appliance manufacturers began to invest heavily in new production capacity. To meet the needs of Iranian consumers that had been purchasing imported brands, appliance manufacturers also added new features. The investment was not limited to incumbent players. The home appliances market saw many new entrants, leading to a dramatically fragmented landscape. Today, there are 140 firms producing refrigerators in Iran and 100 firms producing washing machines, according to figures compiled by the Ministry of Industry, Mine, and Trade. Domestic firms now dominate the home appliances market. Foreign brands continue to be available in Iran, but products arrive as parallel imports. These imports tend to be more expensive than locally produced brands because of ongoing currency devaluation. Moreover, products imported unofficially lack the warranties and after-sales support now offered by Iranian producers. These factors have crushed the share of the once dominant foreign players. In 2022, the combined share of LG and Samsung in Iran’s refrigerator market was just 8 percent. The two Korean brands accounted for just 13 percent of washing machine sales.
Alongside the fragmentation of the market caused by the dramatic increase in the number of domestic home appliances manufacturers, data from the Ministry of Industry, Mine, and Trade shows that production capacity has also exploded. The home appliances sector is now the second largest contributor to manufacturing value-add, surpassed only by the automobile sector. For both refrigerators and washing machines, total production volume was flat in the years leading up to 2018. But after an initial drop in output owing to supply chain disruptions, the sanctions shock spurred significant growth in production volumes. Iranian firms produced 2.7 million refrigerators in 2022, double the 2017 total of 1.35 million. Washing machine production totaled 1.6 million in 2022, up from about 900,000 in 2017. Iranian officials have heralded the home appliances sector for adding jobs in an otherwise soft labor market.
If there has been one winner in Iran’s otherwise fragmented home appliances market, it is Entekhab, which accounts for 40 percent of the washing machine market and 27 percent of the refrigerator market. The company, which produces mid-price appliances, was well-positioned to expand production after sanctions were reimposed on Iran. For decades, Entekhab produced South Korean Daewoo appliances under license. In 2018, it even attempted to acquire Daewoo’s home appliances division for the second time (a first attempt was made in 2010). The deal eventually fell through, but it was a marker of Entekhab’s ambition and its desire to access valuable intellectual property.
Entekhab also has a partnership with Haier, a Chinese appliance manufacturer. It was this partnership that positioned the firm for growth after sanctions pushed the likes of LG and Samsung out of the Iranian market. Entekhab could tap its Chinese supply chain as it sought to boost production. Meanwhile, its competitors were scrambling to shift away from European, Japanese, and Korean suppliers, who largely stopped exporting to Iran due to sanctions risks. More importantly, Entekhab was an experienced company with a track record of supply chain localization and cash to invest. There have been many entrants into the Iranian home appliances market, but most lack these important competitive advantages. As such, no other Iranian firm in the home appliances market has achieved similar scale.
Overcapacity and industrial policy
While Iranian authorities might have at one time worried that sanctions would hobble the production capacity of home appliances manufacturers, the rapid and uncoordinated growth of the sector has instead led to overcapacity. The Majles Research Center, which is affiliated with the Iranian parliament, estimates that the current total annual production capacity for refrigerators is around 10.5 million units. Meanwhile, maximum domestic demand is less than 3 million units per year. As sanctions have constrained exports, the significant unused production capacity represents wasted resources.
In a recent report on the sector, the Majles Research Center warns that Iranian home appliances manufacturers are engaged in a race to the bottom. “Free entry into the home appliance industry has led to many operating licenses over recent decades. Yet, this freedom of entry has not allowed firms to benefit from economies of scale. Exploiting economies of scale is necessary to achieve competitive production with high localization,” the report finds. In other words, Iranian firms succeeded in increasing production capacity under sanctions. But the mobilization of private capital under sanctions reflects a partial success. In the aggregate, record high production volumes could indicate that Iran’s home appliances market has shrugged-off sanctions disruptions. But at the firm level, many home appliances manufacturers are contending with negative cash margins as they face intense competition in a fragmented market. Firms in a sector where production has surged can lose money much like firms in sectors where sanctions have constrained production or sales. In this way, overcapacity has become an unexpected headache for Iranian policymakers.
Whereas in many countries, industrial policy entails the use of subsidies to “crowd-in” private capital in strategic sectors where investment has been lacking, Iran has struggled to maintain government spending due to sanctions pressures. In a context where government investment is inherently constrained, efficient allocation of private investment is critical, and industrial policy should focus on addressing coordination failures in those sectors where private capital has been opportunistically deployed. The coordination failures evident in the Iranian home appliances industry also make clear how, despite calls to create a “resistance economy” in the face of sanctions, Iranian economic policymakers have failed to harness industrial policy to reign in and direct the adaptive behavior of private sector firms. This failure also has also created constituencies among various types of domestic manufacturers opposed to the kind of market liberalization inherent to sanctions relief—undermining a core belief held by Western policymakers that sanctions can spur behavior changes in countries like Iran through bottom-up pressure, including from business lobbies.
When rumors first emerged in 2021 that Iran might agree to a prisoner deal with the United States that would also result in the release of frozen reserves held in South Korean banks, a dozen home appliance manufacturers wrote an unprecedented open letter to the Supreme Leader Ali Khamenei, asking him to ensure that any such deal would not lead to the repeal of the import bans keeping the likes of LG and Samsung out of the market. The signatories opposed “the importation of international brands when local production meets the domestic market’s quantitative and qualitative needs.” Bizarrely, their letter name-checked Richard Nephew, an Obama administration official. Nephew is widely seen in Iran as the key architect of the US sanctions program, a reputation he earned after his book The Art of Sanctions was translated into Persian. The group of home appliance manufacturers claimed that “saturating the domestic market with Korean and Japanese brands aligns with Richard Nephew’s objectives,” presumably because it would lead to the underdevelopment of Iran’s manufacturing base. As the debate over the import ban continued, key officials, including Abbas Aliabadi, the industry minister, expressed support for its repeal, spurred by public anger at the letter. Aliabadi has noted that “in a perfectly competitive market, there is no need to impose such physical restrictions.” But for now, the policy remains in place.
Whether Iranian policymakers can turn Iran’s fragmented home appliances market into a competitive market remains to be seen. Policymakers could launch a rationalization program to enhance the capabilities of domestic manufacturers and prepare them for competition with foreign brands, including in export markets. Recent appraisals of industrial policy and its applicability of today’s economic challenges note the potential value of “entry control” measures that ensure only qualified firms are allowed to operate in strategic sectors. The Majles Research Center report notes that the “absence of effective industrial policies in the home appliance industry has led to a large number of issued licenses, many of which result in firms operating as assemblers with minimal localization.” That such measures have not been adopted indicates the limits of state capacity in Iran.
In their studies of the economic resilience of sanctioned economies like Iran and Russia, Western policymakers mistakenly see resilience as an outcome of policies enacted by centralized states that boast significant control over the economy. The Iranian economy has not been felled by sanctions. But its resilience, which is largely centered on the manufacturing sector, has been generated by firm-level adaptations, rather than state-led directives. In Iran, economic output has been sustained by opportunistic firms that took advantage of the conditions created by the sanctions and the kneejerk protectionist policies those sanctions elicited. But these firm-level adaptations have largely reached their limits in Iran’s sanctioned economy, and Iranian policymakers have been thus far unable to put forward a responsive industrial policy. The consequences of these developments for future sanctions negotiations should not be overlooked—a crucial segment of Iran’s business lobby has become the unexpected beneficiary of global economic warfare.
Lopezobradorismo is without a doubt the most significant political movement to have emerged in Mexico over the past three decades. Since 2018, it has reconstituted the country’s post-authoritarian political system. The movement’s new leader, Claudia Sheinbaum won the Presidency with 60 percent of the votes in early June. With a two-thirds majority in both houses of Congress, the Movement for National Regeneration (Morena) will have the power to completely rewrite the country’s constitutional compact.
The reach of Morena’s popularity—leading twenty-two out of thirty-two states with its allies—is astounding. For twenty years, Mexican politics was a three way game between the National Action Party (PAN) on the center-right, the Party of the Democratic Revolution (PRD) on the center-left, and a shape-shifting Institutional Revolutionary Party (PRI) which had ruled the country for most of the twentieth century. During those two decades presidents seldom had a majority in congress and any constitutional change required corrupt bargains between the parties’ grandees. That game is now over: the PRD has disappeared, the PRI has hollowed out as most of its leaders moved to Morena, and the PAN has shrunk into a local organization of socially conservative families in the Catholic center-north. Morena has gained more electoral support than any party throughout the country’s quarter century of democracy.
When he came to power in 2018, Andrés Manuel López Obrador (AMLO) promised to contain unbridled neoliberalism and end political violence. This, he argued, could only be done by protecting and uplifting the poor, by “disjoining political from economic power,” by ending the military occupation of so many regions, and instead tackling the “root social causes” of violence. Indeed, Morena’s popularity has been bolstered by the passage of minimum wage laws, infrastructure programs, and old age pensions. But these successes belie important setbacks. Two key planks of Morena’s platform—curbing military power and raising taxes on Mexico’s wealthy—were abandoned before AMLO’s inauguration. A third—resisting the US’s inhumane treatment of migrants—was abandoned less than a year into his presidency.
The constitutional reforms that did reach the legislative floor were often of a completely different character: empowering and institutionalizing the power of the army, enabling punitive sentences for the incarcerated, and effecting an authoritarian power grab over the judiciary and the autonomous institutions in charge of organizing elections. To understand the government’s apparent shortcomings, we ought to situate its efforts in relation to three central features of Mexico’s political economy: the state, the elite, and the military. In its loyalty to the first, Morena ultimately yielded to the latter two.
A state hollowed out
AMLO’s presidency came on the heels of deep rooted discontent. The PAN, the first party to hold top office through democratic elections, shed its progressive elements in the early 2000s. In 2006 President Felipe Calderón distracted from electoral fraud accusations with an empty campaign against the cartels—an effort which only exacerbated the violence and power abuses of the military. The PRD, the traditional party of the left, became as corrupt and neoliberal as its adversaries. The PRI returned to the Presidency in 2012, and the three parties formed a super legislative coalition to fast-track a series of structural reforms, one of which tampered with time-honored features of Mexico’s petronationalism by allowing foreign companies to extract oil. Overall, the three parties sought to make Mexico more appealing to foreign capital by reducing wages, corporate taxes, environmental regulations, and government oversight.
It’s for this reason that one of Lopezobradorismo’s early talking points was “PRIAN”—the idea that the two major parties are the same. Mexican democracy had been characterized by the complete retreat of workers as a structuring force of the political arena and the explosion of violence. Unions were dismantled or hollowed out and new ones were not formed across Mexico’s enormous industrial belt in the north.
It was during these years that the minimum wage plummeted to a nearly global low, competing with Haiti’s and El Salvador’s. Carlos Slim, Mexico’s foremost business tycoon, replaced Bill Gates on the Forbes’ list as the drug war spiraled out of control. Drug-related violence transformed from armed resistance over trafficking routes into a decentralized battle against a patchwork of loose criminal cell networks in the business of extorting small producers. Over 400,000 people have been murdered, and a further 100,000 have disappeared since 2006.
The control of criminal organizations over large swathes of the economy spilled into the political class. Over the past two decades, the involvement of municipal presidents, prosecutors, police commanders, congressmen, and governors has been exposed, and the most notorious ones have been prosecuted in the United States. This is the institutional environment in which, in 2018, Morena attempted to put forward its earliest reforms. Key among them was the tax system, without which no infrastructure or social expenditure was viable. AMLO’s original proposal had an element of redistributive justice: at 13 percent, Mexico has the lowest tax to GDP ratio of the OECD, 10 points below other large countries in Latin America and half of the OECD average. The progressive economists he placed in charge of the transition and in the first Finance Ministry forecasted that while the government could pay its way through the first couple of years without a tax reform, a reform would be essential for the second half of the administration. But early on these ambitions had been replaced with a more modest focus on ensuring proper payment of current tax dues and reigning in graft. Six years later it is clear that collection has not been meaningfully increased. As head of Morena Mario Delgado said in 2021, “there is no businessman that has had a bad time with us. Among the big ones, you can’t find one”. Moreover, the progressive economists were out of the Ministry of Finance within a year—the most prominent of them, Carlos Urzúa, the first Minister, became an open critic of the government; the others were cowed into submission.
The sidelining of AMLO’s tax agenda had profound consequences. Deprived of a critical source of income, the government began to position the state as a bottomless pit, with major savings to be had by cutting the royalty perks of civil servants. This was the justification for what was widely nicknamed “republican austerity.” Government offices were merged and the wages of public employees slashed. The most dramatic instances have been the excision of government programs like full-time elementary schools, and the wholesale defunding of the non-contributory health system used by low-income and informal workers.
As a result, one undeniable feature of Lopezobradorismo has been the steep degradation of public services. Austerity policies did very little to curb corruption and abuse. Instead, they transferred money from one section of the state (health, education, and environmental protection) to others (infrastructure projects, pensions, and the military). While most people approved of cutting expenses on chauffeurs, private insurance premiums, and first-class flights, the cuts quickly became irrational, with the President at one point personally approving all international flights by public servants.
At the same time, the health system has exhibited structural decline.1 Budget items for treatment of different types of cancer have been cut by over 90 percent since 2018. Arguably the most efficient arm of the Mexican state was the vaccination service, which often reached levels of 100 percent among children. In the first two years of AMLO’s administration, over six million children were left waiting for different types of vaccines. There were 46 percent fewer doctor appointments, 14 percent less surgeries, and 20 million fewer lab exams between 2018 and 2022.2
The reshuffling of resources within the Ministry of Education is another case in point. A successful full-time school and meal program was removed, and funding for school renovation via parents’ associations was initiated in its place. They carried out procurement, bought materials, and hired construction workers. A high proportion of these renovations were poorly done, with no architects or civil engineers involved. In many of them the money was lost, or poorly spent. López Obrador tellingly presented this as a veritable deliverance from the oppression of big government, with families now free to choose how to spend the money and cut the middlemen of the ministry’s bureaucracy. But as in many other contexts, the language of free choice in education masked a shifting of resources from public to private hands.
Budgetary tightening left no room for other programs. Inspired by Lula’s energetic expansion of public higher education, for instance, early on a program of new public universities for people of lower income was discussed. The Benito Juárez University System never took off though: only some $50–60 million USD were assigned to it yearly for over 145 campuses. The best of them were old houses hastily turned into classrooms, but some were in ruins, and other “schools” were just empty, barren lands. Teachers complained of poor working conditions and low salaries, but when they organized to pressure the administration over two hundred of them were fired.
Republican austerity was ultimately a consequence of AMLO’s surrender to Mexican elites over the question of taxes. Morena’s flagship infrastructure projects and cash transfers demanded money. And without raising taxes on the country’s wealthiest, funding came from other sources. It is no coincidence that the institutions hardest hit by Republican Austerity were those related to the provision of public services to the poorest. The overall consequence of this pattern is that while cash transfers have increased considerably, the provision of public services has worsened.3
A bourgeoisie unchallenged
Who are the elites that AMLO was unable to challenge? Compared to its peers across Latin America and the developing world more broadly, the summit of the Mexican bourgeoisie is in a class of its own in terms of economic power. The twenty wealthiest Mexican families have a fortune several times over that of the Brazilian ones. With government concessions in telecommunications, television, and mining, this tip of the Mexican bourgeoisie holds an aggregate fortune of $200 billion dollars, of which Carlos Slim, owner of a telecom empire, gold, and silver mines, owns little over $100 billion. Other relevant names include Germán Larrea, copper mogul; the Bailleres family, also in mining; Ricardo Salinas, holder of a TV concession and a retail and banking network for the poor; Carlos Hank González, in banking and tortilla making; and Daniel Chávez, tourism mogul. These twenty families increased their wealth by over $150 billion over the past six years. Mr. Slim and Mr. Larrea, the two wealthiest, have increased their net worth by over 70 percent since the pandemic.
As the primus inter pares of the Mexican bourgeoisie, Slim has received preferential treatment from the government, which he has reciprocated through constant public appearances with the President. When it became clear that the collapse in 2020 of an elevated metro line that had killed twenty-six people was due to poor workmanship by Mr. Slim’s engineering firm, then-mayor of Mexico City Claudia Sheinbaum reached an agreement with the billionaire: the firm would rebuild the line at a cost of about $40 million dollars. The victims received a compensation of $20,000 to $290,000, depending on whether they had been wounded or killed. For less than $50 million dollars, Slim bought his innocence.
AMLO has cast his career and his government as a mythical struggle between the poor and the rich. The truth is that he has governed not just with the oligarchy, but through the oligarchy, and for the oligarchy. And they have paid in kind. The three large television networks, owned and controlled by individual families, have been friendly to the government, in part out of political opportunism and in part because they have received hundreds of millions of pesos in government ads. Whatever else has been discussed in their meetings in the National Palace, the periodic encounters between the Forbes’ summit and the President have sent a signal to the broader bourgeoisie: the big men stand with López Obrador, and López Obrador lets them have their cut of the cake.
A military empowered
The militarization of public security harkens back to 2006, when PAN President Felipe Calderón declared war on the drug cartels. The military was deployed across different regions to compete with the cartels’ firepower. They have patrolled much of the country ever since, setting up a revolving door between the military and state-level police forces, which are in most cases led by former military commanders. It is now well established that the arrival of the military has not eroded the power of criminal organizations, and that on the contrary it has brought about more intense waves of violence. The army, to the surprise of no one, has been involved in countless episodes of excessive use of force, murdering civilians and innocents in too many scandals to count.
López Obrador’s campaign advocated for sending soldiers back to the barracks, promising to reduce the military’s abuse of power. But after a series of high-level meetings with the military command in the fall of 2018, he reversed his position. Declaring that the “problem was much worse” than he expected, López Obrador reinforced the strength of the Armed Forces—increasing their budget more than three-fold over the past six years and passing a new constitutional reform giving them full control over the remaining national civilian force.
Lopezobradorista militarization has been qualitatively different from the prior iteration between 2006 and 2018. In a pattern not unlike that of Egypt or Pakistan, the military has been made owners, concessionaires, or contractors of major public works and enterprises. Like Mr. Slim, the military was give a concession for the Mayan Train, and with it a share of the tourism boom in the Yucatan peninsula. The military are now building a luxurious hotel in Tulúm, and own the airport in this tourist spot. The Armed Forces are in control of customs points and airports; they now build hospitals, plant trees, run freight and passenger trains, and distribute textbooks.4 Through public concessions, the military now has autonomous and opaque sources of funding. It has become a private economic agency with no oversight from public bodies.
The most dramatic symbol of military empowerment during Morena’s tenure is the derailed investigation of the disappearance of the forty-three students of Ayotzinapa teachers’ college. In September 2014, six people were murdered and forty-three young students from a rural teachers’ college disappeared in the city of Iguala. This remains the darkest moment of Mexico’s past quarter century. The government argued, in a hastily concocted cover-up, that students were involved in drug trafficking and that their murder was yet another episode in the ongoing war against crime. But public outrage forced then-President Enrique Peña Nieto to let an independent, international commission carry out an investigation. Each report has shown more evidence of the Armed Forces’ involvement in the disappearance. There is no doubt today that the Army had spies among the students—who spearheaded a radical, broader peasant movement—that students’ phones were tapped, that the students’ movements were being carefully monitored by different security agencies during the night of the disappearance, and that the government carried out a massive cover-up operation, which included extracting confessions through torture from dozens of people.
López Obrador’s first official act as President in December 2018 was to meet with the parents of the disappeared and promise them full support for an independent investigation. But the military exerted its newly acquired political power to force Omar Gómez Trejo, the special prosecutor’s ousting in the Fall of 2022. The once-independent prosecution was captured by the government and all access to military files or personnel was denied. After López Obrador accused the prosecutor of seeking to undermine the legitimacy of the army at the behest of American agencies and hinted that charges would be raised, the prosecutor fled the country.5
In 2024, the arch of the Ayotzinapa case bends back full circle to where it began with Peña Nieto a decade ago, far from the promise with which López Obrador started his presidency. In an open letter sent to the parents of the disappeared published on July 20, the President tells them that there has been a conspiracy of the DEA, the OAS, and local reactionaries to stain the Army. They have been manipulated, he suggests, by foreign-funded human rights organizations into a plot to undermine the state.
The manifold faces of Lopezobradorismo
The Morena government’s most characteristic features have been its unflinching loyalty to the Mexican state. With tax reform discarded, the government’s narrow budget made it vulnerable to military influence. Upholding the ideological legitimacy of the state builds on longstanding nationalist and progressive traditions. But in a country ravaged by violence and inequality, loyalty to the Mexican state meant complying with its repressive legacy.
On the other end of loyalty to the institutional status quo was the continued demobilization of labor. Many of the cities of Mexico’s industrial belt—Monterrey, Ciudad Juárez, Tamaulipas, Tijuana, recently Guanajuato—are the most castigated by cartel-related violence. The upshot of this void is that there was no political locale from which to elaborate a cogent critique of Lopezobradorismo. Movement demands have been sublimated into hyper-local grievances. This shielding of the government from criticism has yielded a depoliticizing faith: while approval ratings for the President sit at about 70 percent, many people simultaneously disagree with the government’s actions and policies.
An illustration of these dynamics is provided by the June protests in Veracruz against a major pork farm accused of pollution and water grabbing. Sheinbaum had won that region with an above-average turnout barely two weeks before, yet that did not stop anyone from joining the protests. In turn, electoral support did not prevent the Morena governor from sending the police, who shot and killed two men and wounded many more. Protestors point to the governor as the direct culprit, which is true as far as the repression is concerned, but this risks obscuring the role of the federal government in empowering the company and, later, in the lack of a forceful reaction to pressure local authorities and bring justice.
The upshot of Lopezobradorismo’s statist orientation has been the unremitting failure to resolve some of the core structural problems plaguing Mexican society. While the last six years have seen a respectable 10 percent increase in average real wages, economic growth remains sluggish.6Violence has not dwindled (witness the 40,000 yearly murders), state capacity has withered, and environmental catastrophe is a non-issue.
Claudia Sheinbaum’s incoming government thus faces an uphill battle. The alliance with the bourgeoisie and the military are structural supports of Morena’s rule, and chipping away at them means fracturing the party’s support. Already, there are reasons for concern. In the two months since her election, Sheinbaum has delivered one key message: there will be no tax reform. In a move that has enraged a large chunk of Morena’s so-called progressive wing, she appointed one of the commanders of the Federal Police involved in the Ayotzinapa scandal her incoming Minister of Security. Morena’s critics worry that AMLO will rule from the shadows. It is an immaterial preoccupation: military rule and billionaires’ reign remain the key influences to be unmade.
The Biden administration first embraced the slogan of “modern supply-side economics” six months before anyone uttered the phrase “Inflation Reduction Act.” Speaking before the World Economic Forum in January 2022, Treasury Secretary Janet Yellen explained that what distinguished the Biden administration’s “modern supply-side economics” from the Reagan-era variety was its program to raise labor-force participation and productivity through government spending and increased taxation of capital—to create a “supply-side expansion…that distributes expanding national income more equally.” “Three aspects of the Biden agenda” would address “longer-term structural problems, particularly inequality”: reform of key social-service industries such as elder and childcare, increased public expenditure on education, and corporate taxes. All that remained, Yellen declared, was passage of “the Build Back Better legislation that remains under consideration in Congress.”
Six months later, congressional reality parlayed “modern supply-side economics” into something else entirely. Speaking in Detroit in September 2022, Yellen outlined three different pillars that defined the administration’s “modern supply-side” approach. In place of increasing labor-force participation through paid-leave requirements, child-care price caps, public pre-K classes, and nursing-home reform, there was “resilience to global shocks.” Where there had been community-college funding to raise labor productivity, there were now business subsidies for “expanding productive capacity.” Rather than raising corporate taxes, there was now “economic fairness.” The meaning of “modern supply-side economics,” Yellen explained, was about “reducing economic and national security risks” posed by “countries like China.”
How did this transformation occur?
In early 2021, the push for public-sector solutions to the problems of inequality, wage stagnation, and political legitimacy began its encounter with the nexus of business and government that controls fiscal policy in America. In late 2022, it emerged as an amalgamation of business tax credits, targeted technology grants, and long-delayed infrastructure modernization. The resulting program—legislatively defined by the trio of the Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act—passed in the context of procedural barriers, razor-thin Congressional margins, the ideological strictures of US budget politics, and a revival of defense spending amid a new Cold War consensus. Operating above all was the deep influence of corporate power within the federal government—which ultimately determined what kind of spending the US political system could tolerate.
As a positive vision, the resulting program centers on developing green technological (and military) prowess, national-security hawkishness, and the priority of corporate profitability over social reform. By the summer of 2023, the administration had embraced a name for this vision: Bidenomics. But as the American political system oriented towards the November 2024 elections—amid record evictions and homelessness, a flagging race between wage and price increases, and a gradually but definitely softening labor market—the rhetoric about Bidenomics created intractable confusion about the nature of the recovery from the Coronavirus pandemic. Fiscal expansion was underway, but mostly in the form of business tax credits, while public school districts were warned of staffing cuts and school closures. Military spending was forthcoming—for a foreign policy inviting charges of genocide at the International Court of Justice. With the President’s late-July announcement to withdraw from the election, and Vice-President Kamala Harris’s decision to run a ticket with Minnesota Governor Tim Walz, the forgotten promise of Build Back Better and its service-sector gambit to reshape the American political economy briefly became a resource for the party’s 2024 campaigns. But what was the promise? And what transformed it into the national-security synthesis that followed?
The two poles of budget politics
The terms of struggle over the federal budget, which define the limits of modern American government, were established in the resolution of the inflation of the 1970s. The fluctuations of inflation across the peaks of the Korean and Vietnam wars—both stopped with government controls—had by the 1970s brought growth economists to what would today be considered radical conclusions about the administrative and regulatory responsibilities of government. Down this path lay peacetime price controls, higher taxes on capital and top incomes, negotiated wage restraint, and government ownership: the panoply of planning tools required to reconcile full employment to price stability—to raise the standard of living for working people without sparking inflation.
Despite the heroic liberalism of the 1970s, the decade’s inflation was actually overcome not by greater public oversight but by a celebration of private entrepreneurialism. Price deregulation, union busting, top-end tax cuts, spending ceilings, and the rhetorical independence of monetary policy—these took priority as the program to stabilize the economy. Between 1978 and 1989, Congress lowered the tax rate on the highest earning corporations from 48 to 34 percent, on capital gains from 40 to 28 percent, and on top-bracket individuals from 70 to 28 percent. Through a growing non-union sector and its competition with union firms, capital captured a growing share of productivity gains. These transformations fundamentally reshaped common sense assumptions of how stable economic growth was achieved.
While the new commonsense was supposed to stimulate growth, private investment as a share of GDP declined throughout the 1980s. At first, the large deficits resulting from Reagan’s fiscal policy offered economists an explanation: in 1975, when faced with large recession-year fiscal deficits, then-Fed Chair Arthur Burns had warned that interest rates might rise and “private business and consumers may be squeezed out” of credit markets. Treasury Secretary William Simon had repeated Burns’s threat throughout the late 1970s; the Carter-appointed Fed chair Paul Volcker made them good after 1979. But “Reaganomics” did little to alleviate demands on credit markets from the US Treasury, which engaged in a seemingly unplanned buildup of government debt, averaging $167 billion annually—a total increase of $1.5 trillion.1 And as it flexed new forms of political power, big-business’s aversion to deficit spending accordingly underwent a qualitative shift.2
When the US was adjusting to the reconstruction of Western Europe and Japan in the 1960s and 1970s, fiscal deficits had represented to many policymakers the risk labor’s power posed to the value of the US dollar—which was sinking after the unplanned shift to floating exchange rates in 1973. But after Reagan, as deficits resulted from tax cuts rather than spending increases, their political salience changed. The deficits faced at this time were unprecedented, but employment growth was sluggish and the dollar stronger than ever. Organized labor was in near-universal retreat. In the pinstriped world of American business, high interest rates supplanted workplace discipline as the guiding explanation for fates and moods.3 In response, the Congress had already set statutory deficit targets in 1985 and 1987, culminating in the Budget Enforcement Act of 1990. The Democrats limited new spending to what could be raised in new revenues—the “pay-as-you-go” rule, or PAYGO. Budget authority centralized in the reconciliation procedure.4 After the 1992 election, President Bill Clinton therefore made an agreement with Fed Chair Alan Greenspan that echoed the designs of Burns and Simon fifteen years prior. The former Arkansas governor raised the top-bracket rates to 35 percent for corporations and 39.6 percent for individuals—only to keep the lid on spending and begin paying down the debt. Greenspan’s low interest rates fueled the market for corporate paper and yielded the long-awaited stock- and labor-market boom. In the new political climate, a condition of leadership was building coalitions to militate against the expansion of non-defense expenditures—to reduce annual deficits—while cutting taxes to stimulate income and employment growth.
Yet the PAYGO theory of economic growth was little more than rhetoric for rationalization. The fiscal policy of the George W. Bush years threw a wrench in the theory that government borrowing “crowded out” corporations and raised interest rates. Congress again cut taxes in 2001 and 2003—leaving the corporate rate untouched but lowering the capital gains rate to 15 percent and the top-bracket for individuals to 35 percent. From 2002 to 2006, Treasury debt issuance averaged $300 billion annually—but interest rates remained at all time lows. As the debt again grew step-wise in response to the Global Financial Crisis, many liberal economists continued arguing government borrowing imperiled recovery, and urged reform of social-insurance programs to maintain “confidence” in the value of a paper that was also the world’s reserve asset. The earlier theory of investment emphasizing the political nature of profits and the distribution of income had given way completely to a constraining focus on the tightfisted concerns of large owners of public debt and the needs of entrepreneurs—reduced taxes and labor costs—despite the insatiable world appetite for investments in America.
As corporations have kept a greater share of pre-tax incomes since the 1980s, the lower tax burden on top-end individuals created new corporate payout incentives.5 Salary scales distended. Inequality increased. While the old public sector was withering away in overcrowded schools, reduced or canceled welfare benefits, and public-housing demolition, a new publicly financed but privately administered social-service sector grew up around the Great Society-era programs of Medicare and Medicaid. All the cycles of tax cutting, spending ceilings, and PAYGO legislative rules could not rectify the structural reality of a post-industrial mixed economy suffering from chronically insufficient demand created by extreme income inequality and an increasingly emaciated public sector. In the four decades before the Coronavirus pandemic, the US unemployment rate was at or below 4 percent for a total of thirty-six out of 470 months. Twenty-five of those thirty-six months were the period from January 2018 to February 2020.
Seeing the dual economy
The politically constrained environment in which Republicans pursue tax cuts, and Democrats pursue deficit reduction defined a decades-long period of unchallenged corporate hegemony. By Obama’s second term, some economists began to ask whether a theory of politics might be necessary to explain the observable economic trends. When Janet Yellen, then Chair of the Federal Reserve, began to raise interest rates in 2015 to check the tightness of labor markets, a number of them—including Peter Temin, Lance Taylor, and Servaas Storm—recovered the concept of the “dual economy,” originally articulated by Saint Lucian economist W. Arthur Lewis in the 1950s, who was awarded a Nobel Prize for the idea.
Lewis had described problems of economic growth characteristic to developing countries. With labor markets split between modern, high-wage firms in urban centers and a rural low-wage subsistence sector, they tended to see labor migrate to cities in search of higher incomes—regardless of whether jobs were available. Wages in the modern sector, while higher than the rest, were regulated by the virtually unlimited supply of labor from the countryside. Though modern industry raised productivity and lowered the cost of living, large owners with political power might oppose it to maintain the work discipline in subsistence areas. But even if future-oriented statesmen embraced new technologies, they faced the problem of how to rapidly increase and distribute investments without either creating inflation or exacerbating the social problems created by an unlimited supply of low-wage labor. For this, they needed the state—to raise taxes and to coordinate growth geographically and industrially.
As the US stumbled through its inertial recovery from the Global Financial Crisis, and both wings of the two-party system embraced fiscal and monetary austerity, its growth pattern appeared increasingly to exhibit many of the same characteristics of a post-colonial nation at midcentury guided by a backward-looking elite. “Conditions we were taught to regard as typical of developing nations,” wrote Temin, “are appearing in the world’s most advanced nation.”6 But as America’s economic recovery accelerated in the late Obama and early Trump years, it began to exhibit signs of dual-economy growth with implications very different from those faced by the developing world. Rather than a self-serving subsistence economy, the low-wage sector of the advanced capitalist world consisted of services—many of them vital to social reproduction. When labor markets tightened before the pandemic, giant firms in the low-wage sector such as Walmart and Amazon began raising their minimum wages. Labor became scarce not only in retail, however, but in healthcare and public education. As rising private-sector wages met public-sector austerity, the political effects of this kind of growth were expressed forcefully in a remarkable series of public-sector strikes in 2018 and 2019 involving over 645,000 educators across both the Republican-governed states of West Virginia, Oklahoma, and Arizona and the urban public school districts of Los Angeles, Denver, Oakland, and Chicago.7
Given its dual-economy structure, grown up around the low-wage services over the preceding decades, the American economy appeared unable to provide basic public services at full employment. This was an aspect of the dual-economy analogy many economists did not anticipate. Overcoming this problem would depend not just on raising the level of investment in modern, technologically advanced industries—the path for a developing country. It would require instead altering the terms of business in the service sector—expanding the provision of public spending on loss-making activities, such as education, to pay competitive wages; regulating the profits in low-wage industries such as long-term care or childcare, where expanding service at scale with high wages and high profits meant pricing themselves out of their markets; and overcoming the political resistance of low-wage employers, for whom softer labor markets were preferable to making these adjustments to a high-wage economy. It took the world-historical shock of the Covid-19 pandemic to make those deformations part of genuine legislative struggle.
The K shape
Signs of a tidal shift in Democratic political consciousness registered in the summer of 2020, in the form of pervasive rhetoric about the nation’s “K-shaped” economy. As the pandemic and election campaigns unfolded, the idea that the long-run development trends behind growing US inequality might have some structural explanation in a growth theory of bifurcated labor markets appeared increasingly plausible. The bewildering, taboo-dispelling mood of 2020—with four emergency spending bills totaling $2.3 trillion passed before the November election—obliterated the obdurate consensus between tax reduction and deficit reduction. A shift in economic thinking underway since the late Obama and early Trump years clicked into place.
As Biden explained in the first presidential debate that year, the “K-shaped economy” was “a fancy phrase for everything that’s wrong with Trump’s presidency…what ‘K’ means is those at the top are seeing things go up, and those at the middle and below are seeing things go down and get worse.” These kinds of explanations, used to diagnose the overlapping emergencies in American life, were key to what was new in the Democratic Party that secured a narrow victory in November 2020. “People worry about a K-shaped recovery, but well before Covid-19 we were living in a K-shaped economy,” Yellen would explain during her confirmation hearing. “Wealth built upon wealth, while working families fell farther and farther behind. This is especially true for people of color.”
In March 2021, the Congress passed the American Rescue Plan appropriating $1.8 trillion through the budget reconciliation process, with the bulk of outlays concentrated in the first two years. This was the moment of triumphant historical judgments about the “end of neoliberalism.”8 To the chief economics commentator at the Wall Street Journal, “Bidenomics” at this moment was “more a political movement than a school of economic thought. The Democratic base has moved left…That base now seeks, through Mr. Biden, to reshape the economy and society for years to come.” “We just lived through four years of Donald Trump, which certainly raises the stakes for making sure that we can effectively deliver and never go back to that again,” said Brian Deese, the former Obama official and BlackRock executive, who Biden appointed first head of the National Economic Council. “Historically…these moments of crises are moments where the potential spectrum of possibilities expands….the politics of the Democratic Party have changed.”
To make good on these aspirations, in April 2021 Biden announced requests for new tax and spending legislation for FY2022 and beyond. Their annual size was significantly smaller than the emergency bills signed by Trump and the Biden administration’s own ARP. But congressional budget rules required discussing them in ten-year totals—a point of procedural arcana which lent the public debate an air of unreality. First was the “American Jobs Plan”: $2.3 trillion for highways, bridges, water systems, and reform to the country’s Medicaid-financed long-term care market. Second was the “American Families Plan”: $1.8 trillion for tuition-free community college; existing K-12 programs; universal pre-kindergarten; Medicare expansion for dental, vision, and hearing; 12-weeks paid sick leave; and expanded eligibility for the Child Tax Credit. Offsetting this $4.2 trillion ten-year spending increase was $3.8 trillion in new revenues from the “Made in America Tax Plan”: an increase in corporation taxes—raising the rate on corporate income from 21 to 28 percent, a 21 percent minimum on offshore profits, a 15 percent minimum on reported profits, closing exemptions and deductions for fossil-fuel income, and reforming cross-border deductions. On top of these changes to corporation taxes, the White House proposed a 39.6 percent rate for top-bracket individuals, closing the “carried interest” loophole on capital gains, ending tax deferral for Section 1031 “like-kind” exchanges (a method of exempting real estate from capital gains), and $80 billion in expenditures for IRS staffing.
Improved conditions for care workers became a new touchstone, discussed in terms of “social infrastructure.” “Part of what is failing is the society failing to dignify the work that they [elder and child care workers] do, which is some of the hardest work,” said Deese. “As one of the expanding areas of employment in our economy, we’re going to need more care. And so we want to have that sector create not only more power for those workers, but more dignity for those workers.” The way to do that was not only “building childcare facilities, investing in the supply side of childcare so there are more available options,” but also ensuring “that the workers who provide that care are better paid, and have more opportunity to organize.”9
Altogether, the White House proposed to run annual deficits of $41 billion over ten years. Despite its relative modesty—about one seventh of the annual cost of the Bush deficits—the expansion of the public sector augured a profound reorientation of the direction of the US political economy: a reconstitution of fiscal policy in favor of greater social security, greater public payrolls, and an improvement of life for children and elders. “If the main elements in Joe Biden’s American Family Plan become law,” wrote Paul Krugman, “they’ll deliver huge, indeed transformational benefits to millions.” Rather than restraining the growth of the post-Great Society welfare system, reducing demand and employment in an attempt to stimulate private investment, the conventional wisdom had shifted. Together the spending and tax packages centered the ways public investment in these care sectors could sustain the sellers’ market for labor, begin to raise wages, and, with taxes on top incomes, set some constraint to the continued growth of inequality. It reimagined growth as a way out of the K-shape.
Lobbying in the dual economy
While much attention was being paid to the grand strategists in Biden’s advisory circle, a less dazzling but more foundational set of actors was becoming mobilized. Some form of the White Houser program appeared, in the spring and early summer of 2021, as inevitable to many business leaders. That meant some form of higher corporate tax obligations—the President was proposing 28 percent for domestic income and a minimum 21 percent for all income. (The direction of change had reversed over just a decade: in 2011, President Barack Obama had proposed reducing the corporate rate to 28 percent; presidential candidate Mitt Romney ran on the Business Roundtable’s own proposal of lowering the top bracket for corporations to 25 percent.) “None of these guys can realistically with a straight face oppose a 25 percent rate,” a Fortune 100 tech company executive told Politico in April 2021. “That’s not where the fight is.” Logrolling would come over the increases on foreign profits (global intangible low-taxed income, or GILTI), over the “stepped-up basis” exempting capital gains from inheritance taxes, or over the Section 1031 real-estate loophole.10 In late April, a partner at corporate law giant Holland & Knight said: “People are taking this seriously. It’s a high-anxiety time.”11
Straight faced or not, the American business community mobilized against the Biden agenda. The President of the Chamber of Commerce staked out an early position, calling the infrastructure proposal a “nonstarter,” while the Business Roundtable warned “tax increases would make the United States uncompetitive as a place to do business.” Josh Bolten, Roundtable CEO and previously George W. Bush’s chief of staff, complained that, “having been elected precisely because he was neither Bernie Sanders nor Elizabeth Warren, Biden is governing like both of them.”
Among trade groups, the National Retail Federation led the opposition. With a board composed of executives from Walmart, Target, Albertsons, Microsoft, Macy’s, and Dick’s, among others, the NRF represents those low-wage service-sector employers whose costs would be most acutely affected by a restructuring of the American labor market. NRF hired Ernst and Young to model the effects of Biden’s proposed tax increase; the firm reported 700,000 job losses and a reduction in long-term GDP growth of -2 to -3 percent.12 Major employers in the leisure and hospitality sector—represented by the International Franchise Association (IFA), the American Hotel and Lodging Association (AHLA), and the National Association of Wholesaler-Distributors—joined the fray. Before the pandemic, the retail and leisure-hospitality sectors each employed over 10 percent of the workforce, some 31.6 million workers altogether. The kinds of spending the Democrats were proposing would force a structural adjustment to their labor markets—indeed, that was the point. In May, the IFA, AHLA, and NAWD launched their own pressure group to shape the emerging economic agenda. Naming themselves America’s Job Creators for a Strong Recovery, they argued that a tax increase threatened to tip consumer and business spending downward into a recession, smothering the recovery. By focusing on the tax increases, this new coalition was able to mount a campaign against these larger changes to the terms of employment in their labor markets.
Joining these low-wage employers in their mobilization against taxes was big multinational capital. Founded during the 2012 election to urge Obama to lower corporate taxes, the RATE Coalition (Reforming America’s Taxes Equitably) was led by NRF chief tax counsel Rachelle Bernstein, along with executives at Disney, Carlyle Group, the Association of American Railroads, and Bank of America. By 2021 it included such behemoths as AT&T, FedEx, UPS, Toyota, Verizon, and Cox. The group was chaired by Clinton operative Elaine Kamarck, responsible for cutting federal payrolls in the 1990s. (She bragged then about “squeez[ing] all the left-wing socialist junk out of the Democratic Party.”) Lobbying from the liberal wing of big business was matched by Wall Street’s conservatives: The Committee to Unleash Prosperity—a six-year-old 501(c)(3) directed by Wall Street Journal opinion editor, Heritage Foundation economist, and Club for Growth founder Stephen Moore.
An historic strategic decision shaped the first phase of this struggle. Confronting wall-to-wall opposition among large employers, the White House delayed its legislative push for taxes in favor of a smaller agreement over spending with a group of Republican senators. A leading influence behind this decision was Anita Dunn, the lobbyist from the Washington consulting firm SKDK whose clients, in addition to party campaign committees, include Pfizer, AT&T, and Amazon, and who had “prepped the President for every interview and news conference since she took over his campaign.” In April, Dunn circulated a memo to “interested parties” in defense of the least controversial parts of the agenda: “Key components of President Biden’s American Jobs Plan are overwhelmingly popular among a bipartisan and broad coalition,” she argued, citing support for infrastructure spending from the US Chamber of Commerce and the CEO of Ford Motors. To flip eleven Senate Republican votes and secure additional spending, the White House removed from its $2.3 trillion proposal: $400 billion for long-term care, $424 billion for clean energy tax credits, $326 billion for affordable housing and public schools, and $566 billion for domestic manufacturing and research and development. All mention of taxes was removed. What remained was $550 billion over ten years for roads, bridges, airports, ports, water, broadband, and electric power distribution. (In July, the $80 billion for IRS funding was also cut.) In late June 2021, just as the tax debate got underway, the White House announced an agreement on the “Bipartisan Infrastructure Framework.” For some, the decision reflected an acknowledgement that the forces amassed to oppose a tax increase held the power of the Senate filibuster. To others, it made that fear into a reality.
Punting the tax fight in favor of the infrastructure bill cleaved the Democratic Party. Those around Senators Manchin and Sinema and the White House urged spending on infrastructure without taxes. The push for the Bipartisan Infrastructure Framework (BIF) built solidarity among the bipartisan coalition against new taxes. But it alienated significant portions of the activist and advocacy forces mobilizing behind labor-market reforms, public-sector expansion, and renewable energy. (When polled, the American public regularly approves of raising taxes on the wealthy.) With the framework secured in June 2021, Anita Dunn left the White House in July to return to SKDK. Punctuating the episode, when Kristen Sinema endorsed the infrastructure proposal to the Arizona Republic she added that she would not be voting for the larger $3.5 trillion spending package. In contrast to this bipartisan package, those around Representatives Pramila Jayapal and Nancy Pelosi urged tax increases to fund the full suite of White House proposals. On the same day Sinema announced her opposition to spending beyond physical infrastructure, Pelosi, yoked strategically leftward by Jayapal, announced her counter to the bipartisan pivot. Understanding that the left of the Democratic Party’s only leverage over the center was its ability to block bipartisan legislation, Pelosi declared that the House would vote on taxes before spending—ensuring at least some advance of the tax increases and “care economy” packages in what was excluded from the BIF.13
The structure of power revealed by House Democrats’ three month struggle in the late summer and early autumn of 2021 was little affected by the upheavals of 2020 and the ideological transformation represented in some fractions of the White House advisors circle. By July, the corporations that had urged social responsibility and the peaceful transfer of power after January 6 were mobilizing an inertial wave of money to carry a message against the new government’s efforts to limit top incomes. Seeking to protect low taxes on foreign profits, the RATE Coalition saw its annual budget increase eightfold during 2021. To block an excise tax on funding EPA “superfund” projects, the American Chemistry Council—representing 3M, Dow, DuPont (not yet merged), and Exxon Mobil—doubled its lobbying expenditures above the levels of 2018 and 2019. In July, the head of the Committee to Unleash Prosperity authored a public letter to Mitch McConnell—cosigned by FreedomWorks, the Conservative Action Project, and the Leadership Institute—demanding exclusion of tax increases from any legislation submitted to a vote in the Senate. Even the AFL-CIO joined in coalition with the National Association of Manufacturers (NAM), its generational opponent over the century-long career of the American labor movement, to urge prompt passage of the BIF.
Isolating the tax issue to divide the Biden coalition, McConnell allowed the Senate to vote on infrastructure in August.14 The next month, the Democrat-controlled House Ways and Means Committee marked up its own omnibus legislation for the FY2022 budget—now titled the Build Back Better Act.15 Registered lobbying expenditures lurched noticeably upward. Averaging $870 million per quarter for the preceding two years, total lobbying expenditures reached $934 million in Q3 2021 and $983 million in Q4, passing $1 billion in Q1 2022. This money flowed strategically into conversations within the Democratic Party, as corporate clients hired key staff from Senate offices and committees as lobbyists. The Business Roundtable, for example, retained senior staff from the offices of Chuck Schumer, Ben Cardin, Nancy Pelosi, and Ron Wyden.16 The American Investment Council, the trade association of private equity, hired staff from the offices of Karen Bass, Josh Gottheimer, Bob Menendez, and Tom Carper.
When the Ways and Means Committee reported the Build Back Better Act in late October, the wall of opposition took on new features aimed at specific spending measures designed to reshape power relations in the care economy. The pharmaceuticals industry has long been the top-spender on registered lobbying, with annual disbursements nearly double those of its nearest emulators in insurance, oil and gas, and securities. This medical segment of the chemicals market earned $92 billion in after-tax profits in 2019, and could afford a few hundred million more in lobbying costs.17 With a small number of drug price controls looming in the Build Back Better Act, pharmaceutical lobbying expenditures jumped upward in 2021, from $318 million in 2020 to $364 million in 2021, a 14 percent one-year increase.
But pharmaceutical-industry lobbying was only a part of a general resistance to reform inside the care economy. The American Dentists Association opposed including dental benefits under Medicare, which would limit their members’ pricing autonomy. Television ads featured patients concerned that drug-price negotiations would “make it harder for people on Medicare to get the medicines we need.” The president of America’s Health Insurance Plans (AHIP), a super-lobby formed in 2003 that shaped the Affordable Care Act (ACA), described Medicare expansion for dental, vision, and hearing as “unnecessary and unfair.” Together with for-profit insurers like Cigna, AHIP’s board consists of non-profit insurers such as BlueCross/BlueShield and Kaiser that are contracted to administer semi-privatized MedicareAdvantage plans; these companies would either expand coverage for the new benefits or lose customers to the public programs. From a level of $167 million in 2020, the insurance industry’s registered lobbying expenditures jumped 18 percent to $197 million in 2021 and $227 million in 2022; the biggest jump occurred between Q3 2021 and Q1 2022.
These were the months when the logjam within the Democratic majority between Pelosi-Jayapal and Manchin-Sinema reached its point of highest pressure, after the House Ways and Means Committee’s release of the Build Back Better Act met Senate Democrats’ conditions on any reconciliation package. But the surge of healthcare industry spending against reform was also matched at this moment by a rising tide of lobbying expenditures from another group, one interested in peeling off another portion of spending from the omnibus package—electronics manufacturing. In their insider accounts of the first Biden years, Alexander Burns and Jonathan Martins, and Franklin Foer all report that Sinema had made agreements with the White House to allow passage of the House bill.18 In his Biden book, Chris Whipple reports that Biden aide Ron Klain on October 30 thought “either we’re able to get it over the hump in the House this week, or else it just kind of falls apart” and said he “put BBB at 60 percent” on December 18. Foer dates December 19, when Manchin appeared on Fox and Friends to say he “was a no on this legislation,” as the day Build Back Better died.
The wistful tone of dramatic conflict that marks these journalistic accounts is difficult to square with the observed reality of corporate domination of the legislative process. The balance of power had been struck in June, when the White House agreed to separate infrastructure from taxes—to anticipate and accept corporate opposition to the latter, and secure votes for the former. Absent some change in events outside Washington, we can now judge that there was no reason to expect a different outcome. When Mitt Romney asked Sinema that autumn whether she was concerned about her re-election prospects, she made her motivations clear. “I don’t care. I can go on any board I want to. I can be a college president. I can do anything.”19
The price veto
What happened to the intellectual environment that produced the White House proposals amalgamated in Build Back Better? The key rhetorical device employed in the power struggle within the Congress over Build Back Better—the namesake of the legislation that eventually resolved the legislative cycle—was inflation. Despite gestures toward PAYGO politics, the agreement the White House had achieved had increased spending without taxes. The tax-hike package continued its advance, by November reaching the floor of the House. But even as it did, the environment the House Progressive Caucus fought in had changed dramatically.
Inflation replaced the K-shaped economy as the urgent target for domestic economic policy. By June 2021, the rate of inflation had risen to 5.3 percent, the highest since the oil price shocks of 2008. It leveled off for three months that summer, just as the agreement over tax-free infrastructure crystalized. But in October, as the Ways and Means Committee marked up the Build Back Better bill and the passage of the BIF hung in limbo, inflation jumped again to 6.2 percent and in November to 6.9 percent. As the tax legislation stalled in Congress but refused to die, inflation accelerated even more. The American economy was experiencing something it had not seen since the late 1970s: continuously accelerating inflation. It would shape the fate of fiscal policy for the next three years.
If it was to come at all, the investment spending that was integral to a new supply-side approach to economic growth would require a different form and political constituency. Internationalist in orientation, with a board chaired by Qualcomm CEO Cristian Amon, the Semiconductor Industry Association (SIA) had spent much of late-Obama and Trump years arguing against trade and investment controls that would disrupt their supplier and client relationships. The US semiconductor industry had for many years relied on fluid supply chains. “Fabless” chip design companies such as Qualcomm and Nvidia source their manufacturing to dedicated foundry companies, of which the largest is Taiwan Semiconductor Manufacturing Corporation (TSMC), before selling their products to device makers such as Apple, Lenovo, Dell, and so on. “Government actions…to ensure ‘self-sufficiency,’” the SIA warned in 2016, posed a “risk” to the industry in the “threat of overcapacity”—falling prices and oversupply being the primary hazard for any trade association.20
This position ground against the reality of the Trump administration’s nascent trade war. Before the pandemic, John Neuffer, SIA president, represented the older vision of US global dominance through multinational capital’s global division of labor. Celebrated triumphantly by the neoconservatives of the Bush era, this vision opposed capital expansion and guarded against governments’ attempts to shape its growth. Neuffer himself had served in the Office of the US Trade Representative for George W. Bush; Neil Bush, the president’s brother, was a partner in a Chinese semiconductor manufacturer. The SIA opposed the Trump administration’s licensing restrictions on Huawei; the US market was, after all, only a portion of a multinational corporation’s income statement.21 Eric Schmidt, the former CEO and Chairman of Google, who served on President Trump’s National Security Commission on Artificial Intelligence, agreed with the new foreign policy consensus that “some degree of technological separation from China is necessary” but also insisted that “China’s tech sector continues to benefit American businesses.”22
Against this Trumpian horizon a centerpiece of Bidenomics appeared: domestic subsidies for the construction of semiconductor manufacturing facilities and R&D. Washington’s most aggressive move on the semiconductor issue came on the eve of the pandemic with Canada’s detainment of Huawei executive Meng Wanzhou at the request of the DOJ. (The Royal Canadian Mounted Police held her under house arrest for 33 months altogether.) With 75 percent of global semiconductor manufacturing located in East Asia, and Sinophobia a defining feature of the protectionist coalition behind Trump, the pandemic and related shortages made new configurations of business and government power imaginable. As the White House began invoking the Defense Production Act (DPA), Secretary of State Mike Pompeo announced a new procurement policy: the State Department would no longer transmit communications using hardware manufactured in China. Shortly thereafter, former GM finance executive Keith Krach, then Pompeo’s Under Secretary of State for Economic Growth, Energy, and the Environment, secured the agreement that would become one of the defining achievements claimed by Bidenomics. In May 2020, Taiwan Semiconductor Manufacturing Co. (TSMC) announced a plan to locate a $12 billion foundry in Phoenix, Arizona. In September 2020, Krach traveled to Taiwan to fulfill the “global economic security strategy”: the White House would sell $7 billion of cruise missiles, mines, drones, and control stations to the island government.
The foundations of a techno-security manufacturing program were thus laid before the 2020 election. All that remained was a new formula for fiscal policy. In July 2020, the House had passed an omnibus defense bill that included authorization for “Semiconductor Manufacturing Incentives.” But the authorization did not appropriate any new funds. That same month, Google’s Eric Schmidt convened the China Strategy Group to produce policy and political pressure on the subject of tech and national security, featuring members from the Obama administration-staffed Center for New American Security (CNAS), former George W. Bush State Department staffers, management consultants, investment bankers, venture capitalists, and an NFT impresario. By September 2020, the SIA published recommendations for a $50 billion program to subsidize the construction of nineteen new semiconductor foundries in the US.
The lobbying push coincided with a definite partisan alignment within the industry. In prior election cycles, campaign contributions from the electronics manufacturing and equipment industry totaled around $50 million in a roughly bipartisan pattern with a slight Democratic margin. But in 2020, the industry spent $102 million on Democrats compared to $34 million on Republicans; $2 million for Biden compared to $684,000 for Trump. Most notable in this turn to politics was the SIA’s movement into the national-security lobbying apparatus. While member firms such as Qualcomm had long been active here, the trade association itself had remained above the partisan fray of State and Defense Department policy planning. This changed in November, with Biden’s victory. The day after the election, CNAS added the SIA to its public list of donors. The semiconductor corporations that had invested in Democratic Party defense-policy planning would soon have allies studding the top of Biden’s foreign-policy bureaucracy: Deputy Secretary of State Kurt Campbell had co-founded CNAS with Flournoy; Undersecretary of State for Political Affairs Victoria Nuland was CNAS CEO.
The American Families Plan in March 2021, the package of proposals that would become the Build Back Better Act, included $230 billion over ten years for semiconductor manufacturing and R&D. Two weeks before Sinema and the White House announced their June 2021 bipartisan agreement on infrastructure without taxes, the Senate passed the US Innovation and Competition Act (USICA), a $250 billion standalone semiconductor and corporate R&D bill, attempting to peel off the technology corporations’ subsidies from the larger project of raising taxes and expanding social services. But given competing claims over fiscal policy from within the Democratic Party, semiconductor subsidies were still contentious. As the Congressional Progressive Caucus ground down against the Manchin-Sinema obstruction, holding up all legislation in the summer and autumn of 2021, the fate of any spending was in limbo.
The rising cost of labor across 2021–2022 was intolerable for many business owners; they generated enormous amounts of political pressure to eliminate relief payments to working people. Widespread employer complaints of a “labor shortage” reflected this perspective, which cashed out in the effort to eliminate the enhanced unemployment benefits funded by the CARES Act and the American Rescue Plan, which twenty-two Republican governors had done at the state level by May of that first year. Inflation certified an ideological veto against the expansive worker-oriented spending of the immediate recovery period. The broad claims over the budget process, reoriented by inflation, had narrowed, and the semiconductor industry’s lobbying success provided something of a model for a bipartisan spending coalition.
Finding the national security base
Having shed its more social democratic, public services-oriented skin, the corporate claims on the national treasury now made their sleek advance. Topped by Oracle, Apple, Microsoft, Qualcomm, Intel, Palantir, Dell, Cisco, and IBM, among others, quarterly lobbying expenditures from electronics manufacturing and equipment makers increased 28 percent over the course of 2021, from an average of $40.7 million during 2019 and 2020 to $52.3 million by Q4 2021. As 2022 began, electronics and equipment manufacturers were ready to seize from the 117th Congress what its gridlock was refusing to the constituencies of hospital patients, healthcare workers, retirees, students, teachers, and parents: government spending. In January, the House passed the COMPETES Act—patterned on a bill John Cornyn had introduced during the initial Krach-TSMC negotiations of two years earlier. The industry’s registered lobbying then pulled noticeably away from the pack, reaching $57 million in Q2 2022 and $58 million in Q3, second only to pharmaceuticals among all industries. (See Figure 3 above.) Secretary Antony Blinken had set the tone for the legislative debate on the industry subsidies a year earlier in announcing the administration’s “national security strategy” as facing “the biggest geopolitical test of the twenty-first century: our relationship with China.”23
The immediate impetus for salvaging a legislative coalition came with Russia’s invasion of Ukraine. On March 15, 2022, the President signed the first military supplemental appropriation bill for Ukraine for $10 billion. On March 18, the entente between Biden and Manchin occurred by way of Brian Deese, who flew to West Virginia to hear—over a zip-lining outing—Manchin’s opposition to Medicare entitlements and openness to business tax credits.24 Weeks earlier Manchin had, he told Deese, begun discussions with Senator Schumer’s office about reviving a reconciliation package for FY2022. Having defeated the challenge over the use of government’s fiscal power, it was now time to bring it back into use.
On March 22, 2022, Biden attended the quarterly meeting of the Business Roundtable to thank the assembled multinational executives for adhering to US sanctions on Russia. General Motors’ Mary Barra—who had already announced a $35 billion commitment for EVs in 2025—hosted the meeting: its theme was green profits. These moves mirrored the world of tax lobbying. The green energy lobby flooded the field and reaped a series of bipartisan congressional meetings on climate. But reopening the budget process on Manchin’s terms meant concessions from the gains that the Congressional Progressive Caucus had made in the ARP: spending for FY2022 and FY2023 would be negotiated downward.
The revival of budget talks—sans taxes—also dislodged the stalled semiconductors package. Four days after Biden met with the Business Council meeting in March, the Senate passed its version of the COMPETES Act. Despite Manchin’s opposition to increasing the deficit throughout the saga of Build Back Better, the war in Ukraine had put spending back on the agenda; in late April, Congress approved and the President signed the second Ukraine military supplemental, this time for $33 billion. Meanwhile, the House and Senate COMPETES proposals sat in conference committee with the USICA, subject to the discretion of the Senate and its minority leader Mitch McConnell. As if signaling corporate sanction over the emerging fiscal policy, Biden in early May re-appointed Anita Dunn as a special advisor. A solution to the investment problem was at hand. On May 27, 2022, Manchin finally revealed to the public his ongoing discussions with Senator Schumer on climate subsidies—the $424 billion originally in the American Jobs Plan. But one last gasp of Republican Party partisanship remained. Not one to let the Democratic administration gain too much in the way of fiscal policy, McConnell was quick to understand his leverage in the evolving situation over the successes of the White House and the Democratic Congress. McConnell responded that he would now play Jayapal and Pelosi’s obstructionist game of the preceding summer. “Let me be perfectly clear,” he wrote, “there will be no bipartisan USICA as long as Democrats are pursuing a partisan reconciliation bill.”
How this partisanship was finally overcome illuminates the values that made Bidenomics possible. The administration whipped up a war scare. On July 13 Democratic Senators Schumer of New York and Maria Cantwell of Washington hosted a classified security briefing for the entire Senate on the importance of semiconductor manufacturing to the defense industry. There, a bipartisan group of Senators listened to Secretary of Commerce Gina Raimondo, Deputy Defense Secretary Kathleen Hicks, and National Intelligence Director Avril Haines explain for two hours the importance of stimulating the semiconductor industry. Hicks told the group that “98 percent of the chips purchased by the Department of Defense are tested and packaged in Asia,” while Haines walked the group through a hypothetical Chinese invasion of Taiwan. The next week, Pelosi’s office began telling reporters the House Majority Leader would be flying to Taiwan, the first time an American official of her rank had visited the island in a quarter century—provoking aerial military exercises from both sides of the South China Sea.
Manchin played the final card with a bluff. After the briefing, Raimondo asked Pompeo and Trump National Security Adviser Robert O’Brien to call through the GOP Senate caucus for approval of the funding. The day after the classified security briefing, Manchin announced he would not vote for a reconciliation package that raised taxes and spending. His agreement with Schumer had fallen apart, he said; McConnell’s opposition was now meaningless. On July 27, McConnell, satisfied, allowed the Senate to vote 64 to 33 on sending the USICA spending bill—now the CHIPS and Science Act—to the House. Early next morning, Schumer and Manchin went public with an agreement on a legislative package for budget reconciliation, billed as a climate, health, and tax deal: $369 billion in tax credits offset by $313 billion in revenue, raised from a variety of changes to corporate taxes that did not include raising the statutory rate; Medicare would gain controls over a small set of the pharmaceutical industry’s prices. The Inflation Reduction Act had arrived.
The invention of Bidenomics
The power structures holding together many congressional districts operated as a kind of decentralizing centrifuge against the forces driving the Build Back Better agenda. Employers needed labor costs stabilized; government spending, the national media consensus agreed, was the culprit of the destabilizing inflation. Opposition to spending was the solution. The weakness of a national constituency for even the kinds of spending increases necessary for the new global security agenda—much less an increase in the confidence of working-class activism—surfaced in the Rashomon-style theatrics required to cut taxes for green energy providers and subsidize the semiconductor industry.
The final details of the reconciliation process made this weakness explicit: of the tax increases included in the Schumer-Manchin agreement of July 28, Sinema was able at the twelfth hour to exempt core lobbies. At her insistence, the Congress retained the carried interest loophole that leaves private equity and hedge funds paying lower capital gains tax rates on their management fees. Manufacturing and telecommunications corporations won new accelerated depreciation and spectrum rights deductions. The $80 billion over ten years in IRS funding secured in August 2022 was bargained down, in June 2023 and March 2024, in budget-ceiling negotiations with the 118th Congress, to $60 billion.
The old hegemony of big business over the policy leadership of the Democratic Party weakened only after a global pandemic and the historic urban uprisings of summer 2020. But political resistance to growing and reforming the care economy and renegotiating the terms of employment in the American labor market decisively shaped what Bidenomics became: the embrace of national-security justifications for public expenditure; the celebration of technology and its attribution to entrepreneurs; the quieting of campaigns to build political power capable of raising the rate and shaping the distribution of taxes; the return of austerity to city budgets; and the pursuit of border security. In sum it had become what National Security Adviser Jake Sullivan calls “a strong, resilient, and leading-edge techno-industrial base” capable of “usher[ing] in a new age of the digital revolution.” This project, combined with military intervention abroad, eclipsed the incipient Build Back Better project of constructing an electoral coalition of low-wage service-sector workers, public-sector unions, and immigrants. Between the new Democratic Party insurgency to raise taxes and remake the welfare state, on the one hand, and the tax-averse, labor discipline-minded American business elite, on the other, the pressurized political impasse produced an adjustment of commitments.
And yet, a new fiscal policy has emerged from the Biden period. This has seen a stepwise increase in federal spending above the pre-pandemic norm. During the FY2011 federal budget negotiations in November 2010, in the nadir of that recession, OMB Director Peter Orszag said Social Security cuts would “help the federal government establish much-needed credibility on solving out-year fiscal problems.” John Podesta thought that “reforms [to Social Security] could starkly demonstrate to skeptical debt markets that the United States is willing to take on a politically difficult fiscal issue.” Paul Volcker, then an Obama adviser, supported the proposed benefit cuts as “confidence building.” This kind of rhetoric is not present in the 2024 election. Instead, both Donald Trump and Kamala Harris are campaigning on protecting Social Security and Medicare while the FY2024 budget, in an election-year political business cycle, projects a $940 billion deficit. Fiscal policy is back—in a murky synthesis of tax cuts that make up the new industrial policy. National security provides the ideological glue for the Continuing Resolutions and debt-ceiling increases that sustain this fiscal policy: since March 2022, when the war in Ukraine began, the Congress has granted an additional $275 billion across seven military supplemental funding bills while reducing civilian program budgets from their pre-IRA levels.
But will economic growth produced by the return of growing fiscal deficits reverse a half century of inequalities? The largest employment gains in the Biden years have been divided between two very different kinds of markets. The sector enjoying the largest absolute growth in total employment compared to February 2020 is professional and business services. Over three fourths of the 1.4 million jobs the economy added in this sector compared to before the pandemic have been in professional, scientific, and technical services: astonishingly, management consulting leads the group, followed by computer systems design and related services, and scientific research and development services. Following this is private education and medical services (1 million jobs) and transportation and warehousing (836,000 jobs). The latter are both low-wage industries with limited productivity gains from expanding demand; while their wages are also increasing, they are, in hourly terms, small fractions of the labor costs in the high-wage sector. Altogether, these trends represent a continuation of K-shaped patterns in the economy.
The changes in industrial and occupational structure of American employment produced so far by Bidenomics reflects the underlying balance of power in the mixed economy. Of the administration’s much-touted 800,000 manufacturing jobs, 650,000 of these represent recovery to the levels of February 2020. Manufacturing’s absolute gain of 150,000 jobs since before the pandemic represents a rate of employment growth lower than that of the rest of the economy. Extremely productive, manufacturers simply cannot find enough customers for their products to be able to grow their share of the workforce. Even in a newly protected trade environment, manufacturing has continued to decline as a share of national employment during the Biden years, dropping from 8.5 to 8.2 percent of the employed workforce. 25
The fiscal expansion of 2020–2021 appears to have changed this picture only temporarily. New investments—spurred by IRA achievements like the Greenhouse Gas Reduction Fund, or the expansion of publicly backed loans from the Department of Energy—will shape the growth of new green energy projects across the country. But the private investment on offer has had the effect of reproducing and expanding a dual economy of low-wage services sustained by new construction, speculatively inflated values in real estate and securities, and a wealthy but low-employment sector of high technology and final assembly manufacturing firms. Given the full-employment experience preceding the pandemic and its continuation in the rapid recovery, the classic problem of growing government spending without provoking business panic or placing the spending in the hands of self-interested corporate actors remains untouched. Doing so would mean confronting the way that public spending and private investment together create the prevailing patterns of inequality in the service sector and the care economy—exactly the part of the agenda that could not find a home in the new legislative synthesis. In the absence of any alternative purpose that can glue together legislative coalitions in pursuit of what economists call “balanced” economic growth, advancement under the sign of national security will continue to be uneven, unequal, and politically constraining.
To be in a position to contemplate alternative full-employment strategies requires not only sustaining a tight labor market, but also control of government. The Harris-Walz campaign enters the final month of its election with a bare grasp on the former and an attempt at the latter through its embrace of George W. Bush-era conservatism on foreign policy and immigration. Unable to sustain a fiscal policy capable of more rapidly compressing wages and sustaining labor’s share of national income, Bidenomics converted a program for raising taxes and social spending into deficit-financed corporate tax credits for targeted growth of existing profit centers. To do this, the Democrats have turned to the imperial designs of the State Department to squeeze spending out of the Treasury.
In the 2020s, military preparedness is being reinvented as a winning bipartisan issue. “These professedly warlike preparations have in effect been preparations for breaking the peace,” Thorstein Veblen wrote in February 1917, a month before Woodrow Wilson committed American soldiers to Europe and set this process in motion. “A remedy had been sought in the preparation of still heavier armaments, with full realization that more armament would unfailingly entail a more unsparing and more disastrous war—which sums up the statecraft of the past half century.” However much political strategists may persuade themselves that the new nationalism can secure domestic consent and geoeconomic reach, the currents in which they are flowing lead back to the historical catastrophes out of which the very tools of macroeconomics were invented—to understand and consciously shape economic change.
The need to reorganize global governance so as to make space for a growing China has long been apparent. With the financial crisis of 2008, another demand emerged: the reshaping of capitalism itself. The Covid-19 pandemic represented a strategic moment to advance this dual task. A decade after the announcement of Lehman Brothers’ bankruptcy, the health emergency provided an occasion for one international grouping to launch their plea for a post-neoliberal new world order, a plea that went hand in hand with calls to restructure global governance, particularly its economic dimension. This project became known as the “new Bretton Woods.”
Though there is now a general consensus that neoliberalism is in crisis, remarkably few alternatives have emerged that might point to a meaningful change of course. Regardless of how one classifies China, it is clear that, unlike the former USSR, it in no way represents an international movement. Even though it followed the Soviet model for at least three decades, by the end of the 1970s, China was paving its own path, enabling it to survive the collapse of the Soviet bloc without abandoning its project.1 The unique circumstances of the current crisis mean that the globalized world depends on China, but this does not imply that the country is a model that can be imitated or exported.
The lack of an implanted and exportable post-capitalist alternative does not, however, imply an absence of serious geopolitical tensions. Nor does it exclude the existence of alternative models of capitalism that might be emulated elsewhere. There is a real possibility that the current crisis could lead to all-out war, hence the calls for a “new Bretton Woods”: reorganize global governance so that the transition to a post-neoliberal order does not eventuate in global warfare.
The double appeal for a reform of capitalism and its governance model is framed in terms of conversion to a new creed. The content of this creed has yet to be determined, since its direction and scope entail a battle already underway within the neoliberal establishment. Whatever its outcome may be, however, this self-reform ultimately aims to become a new creed, something that, since the neoliberal era, has often been called a “consensus”—a “new consensus,” as Jake Sullivan said in April 2023.
Although it may seem paradoxical, the proposed model for this transition away from neoliberalism seeks to mimic the very rise and consolidation of neoliberalism itself. A common-sense view sees neoliberalism having emerged—fully formed—from the tenets of a newly articulated economic paradigm, with its own economic policies and precepts, and a distinct vision of society and geopolitics. Then came the takeover of institutions and the cultural and electoral battles that made this new paradigm hegemonic.2
The logic behind the contemporary adaptation of the past neoliberal project roughly unfolds as follows: neoliberalism emerged in the context of the Cold War and, within the capitalist world, managed to consolidate itself without the outbreak of a generalized war. Similarly, for some central countries, the current moment of deglobalization would be characterized by a new form of Cold War which, as long as it remains “cold,” would allow the transition to a new post-neoliberal order along the lines of the rise of neoliberalism itself.
However, this proposal would not be feasible if it relied solely on the institutional and economic power of these global elites. There are at least two other assets that render the project plausible, even if it doesn’t materialize. First, the irreversibility of the social transformations brought about by neoliberalism has made it objectively impossible to have a program that attempts to “turn back the clock.” Today, the proposal to resume Keynesian-type regulation is little more than illusory political voluntarism. Second, the consolidation of a life-or-death political divide—born from the crisis of neoliberalism itself—serves this project of transition within the order well, as it mobilizes the far-right’s potential victory as a threat to compel moderate forces further to the left.
Domesticated geopolitics
Neoliberalism is more than an economic doxa; it has established deep social roots.3 Its success in dismantling universal solidarity mechanisms has intensified disputes over distribution, with destructive, and self-destructive, effects. The sharp political divide that can be seen in many countries today is the result of this process. In still-democratic countries, this divide is between a right unafraid of allying itself with the far right and a new progressivism that wishes to reform neoliberalism, drawing it away from its more extreme features. This is a genuine division, not a mere “polarization” in which, according to the metaphor, both sides would belong to the same “magnetic field.”4 The two sides are not only different but irreconcilable. They are two “world projects.”
It might be argued that today’s political divide finds its analogy with the divide of a hundred years ago; then, there was no common ground between the distinct projects of New Deal capitalism, fascism, and Soviet socialism. The two sides of today’s divide, however, do share some common ground. This is not the ground of democracy, even though in today’s still-democratic countries, unlike a hundred years ago, the far right poses as a champion of democracy. The shared ground is neoliberalism itself and its legacy. Which parts of neoliberalism are to be preserved and which are to be discarded is the animating question.
In their own way, both sides of the current divide are legitimate heirs of neoliberalism—two sides of the same coin. Speaking about the United States, Gary Gerstle5 described how one side is heir to “neo-Victorianism” (the conservative neoliberalism of Ronald Reagan in the 1980s), while the other is heir to “cosmopolitanism” (the progressive neoliberalism consolidated since Bill Clinton’s administration in the 1990s). Today, it should be stressed, the neo-Victorian right is controlled by the far right with the explicit and brutal violence that characterizes it. The new progressivism, on the other hand, is now the establishment itself in many of the still-democratic countries.
The call for a “new Bretton Woods” comes precisely from the establishment, which is another peculiarity of the current situation: for the new progressivism, there is no need for the costly effort of taking over the institutions. Carrying on with the analogies, the historical counterfactual for a reform of neoliberalism from within would be a Keynesian order that had managed to self-reform in order to avoid being supplanted by the “anti-system” neoliberal order. In the dispute over the spoils of neoliberalism, it is the right that presents itself as “anti-systemic” and puts forward a project of taking over the institutions. This reminds us that the call for a new Bretton Woods, although made by the new progressives, involves far more than the two main blocs of the still-democratic countries. It also courts consolidated autocracies and countries with one-party rule.
The great divide between the fearless right and new progressivism shapes domestic political spaces in still-democratic countries, but it has no clear counterpart in international alignments. When governments aligned with new progressivism adopt foreign-trade policies such as friendshoring, their geopolitical “friendships” doesn’t translate to defending the often vulnerable democracy of their partners. The underlying tension in the battle over a new order stems from the mismatch between national and global conflicts.
To a large extent, this mismatch lies at the heart of the difficulties in negotiating new patterns of global governance. As the life-or-death political divide continues in still-democratic countries, and as no consolidated geopolitical alignments exist, even among countries in the global North, an effective dialogue to reach global agreements is also indefinitely postponed. So far, nothing indicates that this dispute between the fearless right and new progressivism will be resolved in the short term.
Nevertheless, ongoing negotiation attempts should not be abandoned. Achieving new standards of global governance could mean the difference between war and peace. For many countries in the global South, a “new Bretton Woods” could include much-needed debt relief and provide funding for necessary technologies for an effective energy transition.
Even this already quite optimistic scenario, however, is insufficient. The horizon of this new order under negotiation can not assure a genuine ecological and socially just transition. This remains true despite the fact that global inequalities are unsustainable, and the environment is on the brink of collapse. Although current discourse on geopolitical and geo-economic reorganization revolves around this premise, the actions of the three largest carbon emitting countries tell a different story. Under Biden, the United States has ramped up oil exploration and accelerated fracking; China has reduced its own climate targets, recently announcing that it might only reverse its emissions curve after 2030, postponing emissions neutrality until at least 2060; looking on, India has followed suit.
If the International Monetary Fund, the World Bank, or the World Trade Organization could be meaningfully reformed, what’s at stake is laying the technological and productive foundations for a mere energy transition. And even within this narrow framework of a transition led by these multilateral institutions, such a transition would likely take three to four decades to be completed—if it happens at all.
For countries in the global South, the cost of this transition will be high, regardless of the outcome. The reforms may impose prohibitive standards of geopolitical alignment, standards that many of the still-democratic nations of the South may not be able to meet. The price will be especially high if the “new consensus” does not broaden its scope to tackle poverty and inequality. For many of these countries, the cost could be losing any chance of escaping the neo-extractivist trap,6 which strangles their domestic autonomy and constrains their role internationally.
Globalized domestic policies
The still-democratic countries of the global South cannot afford the luxuries of economically decoupling from autocratic or one-party partners. In the current wave of deglobalization, decoupling is an option only for nations that can afford it. Friendshoring, as a trade and national-security policy, is reserved for those who can choose their friends.
The principle of “comparative advantage” has led to the re-primarization and deindustrialization of economically dependent countries. In Latin America, for example, this has transformed most countries into neo-extractivist societies and economies, despite the fact that a number of left-wing governments have formulated programs opposing neoliberalism. There is no reason to attribute neoliberal intentions to governments that explicitly reject them. But it is necessary to distinguish their intentions from the practices they have been forced to adopt in order to make their political projects viable, given the inescapable nature of neoliberalism as the global regulatory framework for capitalism.
Today, there is no room left for a third way, either in discourse or in practice. Both nationally and globally, left-wing, or simply progressive, governments are part of the field of the new progressivism. As a global order, neoliberalism has overshadowed domestic aspirations, re-establishing the boundaries of action available to peripheral countries. In this context, “resisting” neoliberalism means exploiting the small loopholes within an overarching framework that is not very elastic. This is seen clearly when analyzing the effects of neoliberalism in many peripheral countries.
In the years following the Second World War, many Latin American countries adopted a development strategy that aimed for greater autonomy and productive self-sufficiency, whose emblem was the so-called “import-substitution industrialization.” Import substitution was considered key to creating significant domestic consumer markets and reducing or overcoming the typical dependence on primary-goods exports.
With the consolidation of the neoliberal order, the globalization of the principle of “comparative advantage” rendered import substitution obsolete as a national project. Latin America’s so-called “advantages” led to the overexploitation of minerals and agricultural products, which largely supplanted the contribution of complex industries to national GDPs. Latin American countries were progressively confined to the neo-extractivist trap.
Though this trap severely limits the region’s room for maneuver, it does not mean that the only option is to return to the previous developmentalist project; such a return is neither possible nor desirable. The material conditions are no longer there and the industrializing national projects of the past were also marked by authoritarianism, environmental destruction, and growing inequalities—issues that should not serve as models for contemporary ambitions.
Today, as in the past, the task is to seek frameworks for domestic development and international integration that allow for the broadest possible exercise of autonomy. This time, however, it must be achieved without exacerbating inequality, imposing barriers to ecological transitions, or threatening democracy.
For this to happen, the four decades of neo-extractivism propelled by neoliberalism must not be viewed as a purely economic problem. Neoliberalism itself is an authentic model of society, not just a set of economic precepts. Its expression on the periphery of the globalized world must be read through this same lens. The same applies to the current calls for a transition to post-neoliberalism; the terms in which the new order is planned and the different development trends it will entail around the world need to be scrutinized in all their complexity.
Recognizing the specificity of the current moment also involves understanding that the neo-extractivist trap is not set in the same way everywhere. Identifying the various forms of devastation left by the globalization of “comparative advantages” around the world is, in fact, the first theoretical task in understanding the global South’s position within the decline of the neoliberal order.
In many still-democratic countries of the South, the political dimension of this trap is expressed through the fundamental divide between the fearless right and new progressivism. In Brazil, for example, the neo-extractivist trap has the country caught between global climate collapse and the possibility of holding back the far right domestically. The predatory exploitation of natural resources, without reservations or restrictions, is part of the far right’s agenda. Conversely, the abandonment of predatory extractivism in favor of building a low-carbon society is central to the program of new progressivism. Yet, if the new progressivism aims to continue defeating the fearless right in elections and maintain its program of tackling inequalities, it cannot entirely relinquish neo-extractivism. That’s how the neo-extractivist trap sets itself up.
What comes after neoliberalism
In the context of these reformist debates, there are likely two possible outcomes. The ongoing wave of deglobalization may provide many countries in the global South to break out of dependency, giving them more room for action. This process would take time and doesn’t mean a total escape from the extractivist trap. An alternative outcome would see the continuation of neoliberalism for those countries caught in the neo-extractivist trap. This would mean the coexistence of neoliberal and post-neoliberal orders for a long time, stratified, with the usual inequalities, according to the relative power and freedom of each country. This would have consequences for the energy transition, which would have to follow a riskier path, rolled out unevenly between the countries of the North and South.7 This could also mean the coexistence of still-democratic and authoritarian neoliberal orders, alongside democratic and authoritarian post-neoliberal orders.
The categorical imperative to avoid warlike solutions to international conflicts at any cost is often confused, in still-democratic countries, with the defense of the new progressivism. In the current balance of forces, only a generalized victory of new progressivism can preserve some democracy domestically and allow for the creation of geopolitical blocs capable of negotiating a peaceful coexistence as far as possible. The enduring maintenance of peace, in turn, is an essential condition for the effectiveness of any global agreement aimed at tackling the ecological emergency.
This is an extremely narrow horizon for action. In the global North, the political straitjacket of the new progressivism certainly constrains the neoliberal defectors it shelters to some extent, but it restricts their left field even more. The dependent position of still-democratic countries of the South and their consequently diminished margin for action on the global stage intensifies new progressivism’s domestic constraint on the left.
The geopolitical blocs of the future will be characterized by major asymmetries in power. The still-democratic countries of the global South can and should negotiate the terms of their participation with autocratic, one-party countries. The latter are interested in maintaining links with a potential new progressive geopolitical bloc, while the former are not inclined to “decouple” their economies from countries that are not aligned with this bloc.
Even in the context of some international relief and the beginnings of an energy transition, the constraints imposed on the countries of the South will not be limited to dependence on external financing and technology transfers. Even with access to financial aid, the global South will still be deprived of the theoretical and practical tools needed to exploit as much as possible the room for action that the new scenario might open up—just as it was four decades ago when neoliberalism emerged. Things are likely to remain this way unless the struggle for an effective reform of global governance is coupled with efforts to produce these tools.
It is possible that a “new Bretton Woods” will not happen, just as it is possible that the neo-extractivist trap will remain set for a long time. Nevertheless, the global South can still take action: as analogies are in vogue, let the call for a new Bretton Woods be joined by a call for a new dependency theory.
In the 1960s, dependency theory sought to understand the specific position developing countries held in the world economy and politics. In the case of Latin America, it was closely associated with the principle of import substitution industrialization and the “structuralism” typical of the economic thinking of the Economic Commission for Latin America, the ECLAC, later widened to include the Caribbean.
One path to producing the necessary tools for the current moment is to renew dependency theory—a path that can start with the development of a new economic theory but cannot be reduced to that alone if its aim is to truly understand neoliberalism and discern accurately the tendencies of a post-neoliberal reconfiguration of capitalism. The theoretical and practical tools required at the present time cannot be produced without an interdisciplinary and collaborative effort.8 And this effort cannot be limited to the work of a single research group or a single region of the world. Nor can it involve merely adapting obsolete formulations to current circumstances. To begin with, it must take into account not only the criticisms directed at the original version of dependency theory, but also the self-criticisms voiced by its theoreticians, particularly since the 1980s.
At the time of the Bretton Woods negotiations, the possibility of import-substitution industrialization and dependency theory did not exist. Likewise, today, there are insufficient instruments for the global South to negotiate its participation in a potential new model of global governance. In the search for a historical reference for such collaborative action, it may be that the movement of 1974, when the joint effort of developing countries culminated in the resolutions of the New International Economic Order (NIEO), suits the South better than 1944. By the time of the NIEO, dependency theory was already an available tool, which was effectively used in proposals submitted to the UN. Even so, it must be remembered that the 1974 formulations, even fifty years ago, arrived too late: their Keynesian framework was unfeasible for peripheral countries then, just as it seems to be for the globalized world at present.
In a world where crises overlap, formulating common parameters capable of taking into account the particular conditions of different countries is a necessary, albeit difficult, task. It may take time to shape a global effort to produce these instruments, as happened both in the Bretton Woods negotiations and in the development of NIEO’s proposals. However, no matter how great the distance between the timidity of action and the urgency of the moment, and no matter how overwhelming the magnitude of the effort required to find adequate answers to so many questions, the most prohibitive course of action is to do nothing.
Central banking has been described as a “quest for stability” and with good reason. Nearly every major central bank today is charged with securing price stability. The Fed sees itself as responsible for securing price stability and maximum sustainable employment. The European Central Bank was created by the Maastricht Treaty in 1993 with a primary mandate to maintain price stability. The Bank of Japan “decides and implements monetary policy with the aim of maintaining price stability” which is important “because it provides the foundation for the nation’s economic activity.” And so on. Since 2008, most central banks have become responsible not just for securing price stability but financial stability as well.
This commitment is not merely formal. Central bankers see themselves as doctors for the economy, charged with preserving the nation’s (or currency zone’s) economic health. As the former Governor of the Bank of England Mervyn King put it, “monetary or macroeconomic stability is like ‘healthy living.’”
Central bankers act to preserve the stability of the system, even when doing so requires massive structural changes to how they make policy or a revolution in how they model and conceptualize the economy. Their response to the global financial crisis made this particularly clear. Central banks like the Fed deployed a wide range of brand new and, in some economic circles, highly controversial policy tools aimed at preserving everything from insurance companies and banks to the Eurodollar market. This shift was solidified by the Fed’s choice to reopen and expand these facilities in the wake of the Coronavirus pandemic when the central bank deployed everything from an ersatz discount window for shadow banks to a junk bond buying scheme. All was done in the name of stability.
Securing macroeconomic stability, however, is becoming an increasingly difficult task. Persistent inflation, banking crises, and political crises have all come at a time when central bankers are less and less confident in their knowledge of how the economy or monetary policy actually work. As Jerome Powell put it, “we are navigating by the stars under cloudy skies.”
Bagehot’s Dictum
Stability is foundational to modern life. Political theorists have long recognized the importance of stability to society. It was one of Hobbes’s great insights that people would enter political society so that controversies could be settled by the sovereign, thereby eliminating the constant threat to their lives posed by others in the state of nature. Achieving some semblance of stability, for Hobbes, was the root of political society. More recently John Rawls described a “well ordered society” as a stable equilibrium in which all citizens hold the same concept of justice, and society’s institutions conform to that conception. Discussing ancient Greek democracy Daniela Cammack argues that democracy was designed to sustain solidarity and thus stability of the political community over time. She writes, in contrast with the Greeks, “in modern states…coordinated and solidaristic mass action is more likely to be regarded as a threat to political stability than a preserver of it.”
While nearly all agree that stability is foundational to society, what exactly stability requires is less clear. We need to have a reasonably reliable understanding of what the future will look like so we can plan. Planning is essential for a functional society, not to mention a prosperous economy. Investment—in infrastructure, in business, in education—relies on our capacity to plan for the future. Stability contributes to our capacity to plan by offering a predictable future. As one Fed Governor put it recently, “price stability reduces uncertainty.”
As politics, and especially democratic politics, are the means through which states change the world in which we live, it seemed intuitive to some that securing a stable financial and monetary system would require removing its governance from the political sphere. James Buchanan argued that stability is desirable for predictability and, as such, the best approach to monetary policy was one that was independent of politics at a constitutional level. Hayek agreed, writing that “our only hope for a stable money is indeed now to find a way to protect money from politics.” Advocates of just this view have promoted encasing democracy, thereby limiting its power over the economy.
While Buchanan didn’t get his dream arrangement, in which monetary policy was constitutionally independent and set by pre-determined rule, here we are, with independent central banks, insulated from day-to-day democratic politics that seek stability through the exercise of “constrained discretion.” Central bank independence is meant to facilitate a credible commitment to “good policy.” What constitutes “good” policy has changed over time. In the past, economists argued that good monetary policy would be the product of an insulated and constitutionally conservative central banker. As one scholar put it, “independence only guaranteed stability…if it was granted to a stable caretaker.” More recently, central banking has started to look more creative, even radical—intervening in markets, offering new purchase facilitates, backstopping international markets and more. What hasn’t changed is the driving intention: to preserve stability.
Leon Wansleben describes central banks as “regime preservers” seeking to maximize predictability. Paul Tucker, the former deputy governor of the Bank of England writes, a “central bank has a special role in nurturing a stability-oriented culture in society.” As the Bank of England has itself described its current policy approach, “any asset sales would be conducted in a predictable manner over a period of time so as not to disrupt the functioning of financial markets.” In other words, don’t rock the boat.
The summary of Robert Hetzel’s recent book on the Fed puts it well, describing the central bank’s history as “the story of a century-long pursuit of monetary rules capable of providing for economic stability.” One such rule is known in central banking circles as the Bagehot dictum. First articulated by Walter Bagehot in 1873, the dictum is meant to guide the practices of central banks when they are acting as lenders of last resort. As Bagehot first put it, there are two rules for lending in the event of a panic:
First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it… Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public ask for them.
Or as one modern central banker describes it, “Walter Bagehot’s description of the ‘Lender of Last Resort,’ which (in essence) recommends stemming financial panics by lending freely, to sound institutions, against good collateral, and at rates materially higher than those prevailing in normal conditions.”
Bagehot encourages central bankers to lend freely in a panic to those who are willing to pay penalty rates and have good collateral because those are the firms who were solvent prior to the panic, and will be solvent after the panic, assuming the panic is nothing more than an irrational and random crisis of confidence. Bagehot writes:
The great majority, the majority to be protected, are the “sound” people, the people who have good security to offer. If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed.
In other words, Bagehot’s dictum asks central bankers to discriminate in their creation and allocation of credit between those who would have survived had the panic not ensued and those who wouldn’t have. If a panic is genuinely random then once it is staved off, underlying economic conditions should be the same pre- and post-panic. In that case, it makes sense for the state to protect firms that were solvent before the crisis, as they should be solvent after the crisis and the interim protection merely prevents society from suffering the transaction costs of rebuilding.
According to Bagehot then, it is the job of the central bank to secure stability by preserving the macroeconomic state of affairs status quo ante. A (random) panic, in this view, is simply not an acceptable reason for a firm to suffer. Consequently, it is appropriate for the central bank to step in and prevent that suffering. The same reasoning persists today. In launching the Main Street Liquidity facility on April 9, 2020, Fed Chairman Jerome Powell said, businesses “didn’t close because of anything they did wrong. To the extent we have the ability to make them whole, we should be doing that as a society.”1
Although it is presented and interpreted as a technical dictum that central bankers should apply in the case of a panic, Bagehot’s rule actually reveals something rather interesting and inevitably political. He suggests that central banks should only rescue firms that would have prospered, except for the random and unforeseeable circumstance of the panic, thereby preserving the “proper” macroeconomic state of affairs. But enacting this rule, securing stability through preservation, can have some rather odd and potentially perverse consequences.
Bagehot in action
During the pandemic, the Fed opened up a panoply of emergency lending facilities to support the stability of the financial system. The industry that perhaps benefited the most from the Fed’s Secondary Market Corporate Credit Facility was the dirty energy sector. $432.1 million in Fed support went to the oil and gas sector directly, another $735.4 million was spent on the oil and gas sector via the Fed’s purchases of Exchange Traded Funds, some of which were rated as junk bonds. The Fed’s support of the market further fueled a private borrowing binge that enabled the oil and gas industry to raise $93 billion in newly issued debt. All this despite the impending climate crisis and the fact that the sector was financially floundering before the onset of the pandemic.
Consider two examples: Diamondback Energy and Marathon Oil. In the wake of the Fed announcing its coronavirus relief efforts, Diamondback Energy issued $500 million in new bonds. $3 million of these were purchased by the Fed. The company spent $285 million in dividends in 2020, a 140 percent increase over 2019. In 2020 the company’s share price was 65 percent lower than its 2019 level. These trends are not independent of one another. A company can mitigate the negative effects of a dropping share price by increasing their dividend offerings. Investors may loose on share price, but the dividends compensate, ensuring shareholders break even, or maybe gain, despite the company’s poor performance. Diamondback Energy benefitted immensely from the Fed’s coronavirus relief efforts despite the fact that prior to the pandemic the company was “struggling mightily” with many fearing that it could fall into bankruptcy. Its net income was at an all-time low and net long-term debt at an all-time high. The borrowing the company was able to engage in as a result of the Fed’s actions, enabled it to kick the can down the road, “denying the eventual avalanche of debt payments.”
Marathon Oil fired 2,000 people two months after it announced a $1.2 billion tax bailout from the federal government. It has paid $1.3 billion in penalties to the Environmental Protection Agency (EPA) since 2000. In the wake of the coronavirus, Marathon issued $2.5 billion in new bonds. $17.3 million were purchased by the Fed. In 2020, it paid out 11 percent more in dividends than it had in 2019 and its share price dropped 36 percent.Marathon is the thirty-third worst air polluter in the United States, has violated state emissions limits near Detroit fifteen times and once released 35,500 gallons of diesel into a river in Indiana. Prior to the Fed’s rescue efforts, Marathon’s share price has been in decline since 2018 and it had generally anemic financials with a net loss of $750 million in the second quarter of 2020.
Those who believe in the power of free markets see the Fed’s efforts to preserve as unjustified acts of market intervention. Those who see good reason for state intervention wonder why such intervention should be deployed in pursuit of preserving a status quo that is far from optimal—economically, socially, or ecologically. As one scholar describes it, “Today’s Fed officials are not aiming for radical change. They are trying to return to things as much as possible to the status quo ante, to the way things were before the summer of 2007. They are trying to preserve a system of globalized finance that their predecessors played a leading role in constructing and that imploded spectacularly fourteen years ago.” That being the case we must ask: why should we work to preserve that world?
What are the alternatives? The Fed’s efforts in the wake of the coronavirus were merely one example of the larger trend in central banking: maintain stability by preserving, in other words, seeking stasis. But there are at least two types of stability: stability as stasis and stability as resilience. If secured, both forms of stability can deliver a measure of predictability. Stasis means tomorrow will look roughly like today, resilience suggests tomorrow will work roughly like today. Both assist in planning for the future. An institution that seeks stability as stasis aims to preserve a particular set of conditions—i.e. 2 percent inflation and the existing make-up of the macroeconomic environment. By contrast, an institution seeking stability as resilience is one that seeks to preserve the ability of citizens to plan, while allowing for the future to look different to the present. It means allowing things to change but ensuring they do so according to predictable, manageable processes. This is what democratic decision-making systems are designed to deliver.
Stasis in crisis
Seeking stability as stasis, i.e. preserving, is limiting in two ways. First, because it limits the capacity of the state to make transformational change. If policymakers are focused on repairing rather than reforming then it’s hard to see how we can make the transformative changes required to address problems like climate change. In his recent book, Matthias Thiemann describes a tragic state of affairs in which central bankers recognize the need for structural change to the regulatory system to prevent financial crises but are unable to deliver it as they are not empowered to transform the system, but rather, merely to stabilize it.
Second, seeking stasis can (ironically) lead to volatility. Pursuing stability as stasis does not work when we are in a world that demands change. We have witnessed this in recent years both in the case of supply chains and in ‘populist’ politics. When the pandemic hit everything stopped. But it didn’t all stop at once. Countries shut down at different times, in different ways, and to different degrees. The global network of supply chains couldn’t handle it. We all became oddly familiar with the concept of the tanker ship during this strange period of life, watching from our closed-up living rooms as ports became bottle necks, bombarded with goods they couldn’t process fast enough, and then were left sitting empty for long periods of time. Our “just-in-time” supply chains were fragile. When the situation demanded they change, they couldn’t comply. The consequence was instability—in inventory, in prices, and in the delivery of essential goods.
Many political systems are facing a similar challenge today in the form of “anti-system politics.” Anti-system political movements exist across the partisan spectrum. They are political movements organized around dissatisfaction with the contemporary political system, with the way in which politics is conducted, and in particular, with who holds the power. On the right, this tends to be cached out as a call to “take back control” and get rid of “experts.” On the left we see movements against corporate power, lobbying, and the influence of the wealthy.
Attempts to preserve the stability of the political system by “sticking to the plan” or conducting “business as usual” have only made these political movements grow stronger. Stability, in this instance, is not served by an effort to preserve. If anything, attempts to do so are likely to lead to more radical volatility. If people cannot make their voices heard through the existing system, then it is no wonder we’re hearing louder and louder voices calling for the more radical notion of smashing the system altogether.
Stability as resilience: the political option
What would it look like to embrace stability as resilience rather than stability as stasis? How can we ensure that tomorrow will worklike today, if not looklike today? This is where a few thousand years of political theory can be helpful. Let’s return to Daniela Cammack’s point, “in modern states…coordinated and solidaristic mass action is more likely to be regarded as a threat to political stability than a preserver of it.” To rephrase: in modern states, democratic politics, and in particular majority rule, is a mechanism for changing the status quo, and as such, is disruptive to stability understood as stasis–hence Buchanan and Hayek’s opposition to it. But it hasn’t always been that way. In fact, historically democratic politics was an agent of stability in its capacity to stabilize the political community by making change predictable.
Under a democratic system, we cannot know what policy will be in three months, three years, or three decades time, but we can have confidence in how it will be decided. Recognizing the inherent uncertainty of the future, this view of stability is one that bakes in change. There is no attempt to guarantee any particular policy position or state of affairs will persist over time, rather, the stability of the system is achieved through its ability to facilitate stable change.
The stability, or resilience, of the democratic system comes out of the very fact that no decision is ever permanent, and consequently, the belief that if one loses a vote today, she knows she’ll have the chance to win another tomorrow, on an entirely new topic, or simply a new vote on the same topic. Because decisions are provisional, nothing is ever fully settled. This provisionally offers institutional stability because it is a reason for citizens to buy into the system over time. If one lost a vote, say an immutable constitutional vote, and didn’t foresee any chance to change it going forward, this would surely put a dent in her desire to continue in good faith to abide by the existing system of government.If she were to feel that she had no chance to make her voice heard, why not tear down the system itself?
Some call this loser’s consent. Helen Thompson explains the idea as follows, “exchanges of power via elections require tacit justifications for those who lose elections that enable them to accept the outcome without resorting to violence of secession.” We see this same idea, of institutional stability through policy instability, in the political theoretic literature about democracy and reciprocal sacrifice. Danielle Allen writes, “A democracy needs forms of responding to loss that makes it nonetheless worthwhile or reasonable for citizens who have lost in one particular moment to trust the polity—the government and their fellow citizens—for the future.”
“Losers do not forfeit the right to compete in elections, negotiate again, influence legislation, pressure the bureaucracy, or seek recourse to courts.” Their continued power, as a part of the collective body of citizens, to determine the rules they live by, is what undergirds the system’s stability. As Adam Przeworski writes, democracy is stable or “consolidated” “when all the losers want to do is try again with the same institutions under which they have just lost.” Stability, he writes, comes from “reducing the stakes of political battles.”
A more democratic approach to central banking, one dedicated not to seeking stasis but to preserving the resilience of the political community, would inevitably be more, well, political. It might empower the legislature to engage in credit policy, to determine who gets bailout support, to reassess and restructure the central bank, and to guide policy. That might sound destabilizing. But that’s only if we see stability as stasis. It’s true that more political central banking, more democratic central banking, would inevitably mean more uncertainty, and likely more policy churn. But it would also be more resilient because that change would happen according to predictable, manageable, democratic political processes. The alternative is to hold tight to stasis, and in doing so produce unpredictable volatility.
Employing expertise
Central banks are the poster boys (and they are often boys) of elite government. They are filled with highly educated experts that deploy complex and technical models, analyze vast swathes of data, and are insulated from traditional channels of democratic politics. This arrangement was designed to secure stability. Stability in prices, stability in financial markets, and as such, economic stability more broadly. From one perspective, that has completely failed: just see the recent inflation or the preceding financial crises. From another perspective, it has entirely succeeded: in the face of inflation, financial crisis, pandemics, and wars, the macroeconomic status quo has persisted. Central banks have channeled unfathomable amounts of public money and public power into preserving the private financial system, into maintaining a degree of stasis.
But this insistence on stasis is now producing volatility. There was the Occupy Wall Street movement. There were protests at the European Central Bank. There was the Fed Up campaign. But these were small beans compared to what we are seeing now. There are now governments, left and right, across Europe, the US, and beyond that oppose the powers and structures of independent central banks in their entirety. Erdoğan has turned traditional central banking upside down in Turkey. Donald Trump tried to nominate someone to the board of the Fed who advocated a return to the gold standard. Liz Truss claims the Bank of England led a coup to remove her from power. We put central banks outside of traditional democratic channels to seek stability of the private financial system, but what we didn’t predict was that seeking stasis in the economy would produce instability in the political community.
Political theorists have long touted the benefits of representative government in preserving political stability. Representative government creates the opportunity for the people to throw out the government, to make real change in who has power in society, without a revolution. It builds in the possibility of change and in so doing, secures stability. This is exactly what we lack with central banks.
Despite their numerical minority as individual voters, in electoral democracies the economic elite wield significant political power. Through their investment decisions, those who control a nation’s wealth and credit have significant influence over its pace of economic growth, the value of its debts, and the exchange rate of its currency. On each of these rests the stability of a government and, ultimately, the legitimacy of its democratic institutions.1 Though employers’ associations and finance are traditionally the core constituency of conservative political parties, those seeking to redistribute or alter the shape of economic growth do not have the luxury of ignoring this influence. It is something that progressive political parties must acknowledge—in response or anticipation—in devising their programs and campaigns.2
An illustrative case is the relationship between Brazilian industrialists and the successive governments of the Workers’ Party (PT) since it first took over the Brazilian presidency in 2003. The quality of that relationship has varied over the past two decades. Despite Lula’s balanced-budget courting of international finance and his successor Dilma Rousseff’s subsidies to construction and manufacturing, the partnership became a vitriolic feud after 2013, culminating in industrialist-championed impeachment hearings against Rouseff and eventually the election of Jair Bolsonaro.3 Brazilians contemplating the future of continued PT rule disagree over the meaning of this history. Since Lula began his third term last year, competing interpretations have returned to practical significance. On them hangs the PT’s program, and the country’s future.
Some argue that the PT has lead a “productivist coalition,”4 a “neo-developmentalist front,”5 or even “an alliance of the losers of neoliberalism”6 consisting of the administration in the Planalto (the Brazilian executive office building, named for the plateau where Brasilia sits), organized workers, and segments of the business community that benefit from growth. Though Lula (2003–2010) prioritized finance, his social insurance programs maintained high demand and employment for the domestic market. His successor Dilma (2011–2016) committed to a developmentalist stance, reducing real interest rates and devaluing the currency in order to juice exports, and launching a package of spending measures (Plano Brasil Maior and the “New Economic Matrix”) and national development bank credit lines to stimulate industry. Against this evidence, however, is the fact that the very sectors stimulated by the Rouseff government campaigned emphatically for her impeachment in 2016.
Why has the alliance between sectors of business elites and workers under the PT been so volatile? One potentially obvious answer—that the Workers’ Party and organized employers have a naturally antagonistic relationship—is less obvious given the deference the PT has shown to financial markets and the subsidies it has provided to business. Furthermore, it is not clear whether industrialists led the anti-PT wave of 2013–2020 or just followed it.7 Given the obvious ideological friction within the coalition, what sustained the alliance during the high-growth years of the early 2000s was short-term convenience—of aligning industrialists’ short-term interests with the widespread popular approval for the PT. What drove the alliance apart was the recession that followed the collapse of world commodity markets after 2012, coinciding with a popularity crisis sparked by national protests in June 2013. The recession, allowing industrialists to reorganize themselves as opposition, demonstrated the frailty of their alliance with the PT and shed light on the contradictions between the industrialists’ long-term interests and the PT project.
Contextual support and latent tensions under Lula’s governments
The alliance that underpinned Lulism in the early 2000s is best understood as a response to the particularly hostile economic and political conditions of the 1990s. Historically dependent on the state for protection against imports and preferential access to credit, Brazilian industry had enjoyed a certain monopoly over the domestic sector since the 1950s. This changed with the privatizations and trade liberalization of the 1990s, and with the monetary policy required to maintain exchange rates under currency convertibility and increasingly liberalized trade.8 The so-called “tripod” of President Fernando Henrique Cardoso’s stabilization program—a budget surplus, flexible exchange rate, and discretionary interest-rate policy—coincided with an abrupt deindustrialization process, as imports rose and factories closed. Confronted with their economic and political decline, a part of the industrial elite was attracted by the development project that the PT presented in these years.9
Once elected, Lula accommodated the interests of the industrial sector in microeconomic policies and, to a lesser extent, in trade protection. However, he maintained the macroeconomic tripod.10 As early as Lula’s first term in office, business leaders criticized a macroeconomic approach aimed at controlling inflation to the detriment of national development.11 Although the commodities boom during Lula’s second term allowed for greater fiscal leeway, and high economic growth enabled industry to grow in absolute terms, pro-industry policies and increased domestic demand were not enough to reverse the ongoing deindustrialization.
The unfulfilled project of the New Economic Matrix
Rousseff took office at the turning point of an economic cycle, as the aftershocks of the 2008 crisis slowed down the global economy and increased the pressure from financial markets for reductions in government expenditure as to match lower tax receipts—fiscal austerity.12 As a response to this new context, the president introduced a program called the New Economic Matrix (NME) that sought to halt the ongoing deindustrialization process and hence generate economic growth, income, and employment.13
The industrial reaction to the NME can be characterized by three distinct moments. Initially, between 2011 and early 2012, the business sector was extremely optimistic about the new economic policy and demanded its expansion. The second moment, from mid-2012 to early 2013, was marked by a growing impatience regarding the slow implementation of announced policies. The concern was that the measures would be more lip service than concrete. Business leaders were already suggesting the measures were “palliative” and “short-term”—that, although welcome, they would not be enough to correct the “predatory” competition from Asian countries, especially China, in the local market.
From the second half of 2013 onwards, the business sector would go so far as to describe the NME as a cause of the ongoing economic crisis. What could explain this shift? The end of the commodities boom had led to a decline in export demand at the start of 2013. At the same time, the government expenditures for NME brought the future of the tripod into question. Financial markets were already threatening a crisis as inflation, which had risen gradually over Lula’s second term to 6.6 percent, did not fall under Dilma. Financiers pressed for contractionary measures.14
In the face of these new challenges from organized business, the administration itself backed down on both micro and macroeconomic measures. Policies that were in the process of implementation were frozen, and measures already in place were announced as being at risk of reversal.15 Meanwhile, business saw that the same kind of restraint on spending for entrepreneurs would not be true on the labor front. The government maintained its commitment to the minimum wage increase and had until then resisted cutting expenditure on social policies. The general assessment among business leaders was that industrial productivity was no longer keeping pace with rising labor costs, which meant that their share of national income would fall. Business leader Fernando Pimentel (ABIT) argued that if the government didn’t control inflation by curbing demand, the business sector would do so through unemployment.16
Faced with the economic slowdown, the fine balance of the productivist coalition between the conflicting interests of workers and businesspeople became difficult to maintain. Industrialists had lost faith in the government’s ability to meet their sectoral demands.17 Pressure mounted for fiscal austerity and neoliberal reforms—tax, social security, and labor, as well as a reduction in the size and function of the Brazilian state—as an alternative to the NME. As the government resisted for at least another year, industrialists found themselves no longer aligned with the priorities of the government’s agenda.
June 2013 as a window of political opportunity
As for the timing of the industrial opposition, this is best explained by the political context. While there were signs of dissatisfaction at the start of the year, the business community seemed to maintain its veneer of support for the government. After all, Dilma was extremely popular, with around 65 percent approval for the first half of 2013. Business leaders had little reason to harbor open discontent with a government that had every chance of being re-elected the following year.
The scenario profoundly changed with the major protests in June of that year, which brought thousands of Brazilians onto the streets. Although it had originated with progressive agendas over public-transit fares in Sao Paulo, the result of the demonstrations was the strengthening of the extreme right, anti-politics rhetoric, anti-PTism, and a generalized desire for “change” in politics.18 The protests pushed Dilma’s government “towards the demoralization and discredit to which governments everywhere were subjected as a result of the economic crisis that began in 2008.”19 In a matter of weeks, the president’s approval rating fell to 30 percent. This radical change in the Brazilian political scene made possible a new kind of politics for business.
As illustrated in the figure above, business preference followed the opposite trend to the expectation of the voters’ preference until the beginning of 2013. In other words, although Dilma was not the favorite candidate of businesspeople, there was a high expectation that the president would be re-elected—and it was this expectation that determined the apparent maintenance of industrial support until June 2013. Following the protests, however, businesspeople calculated that expectations would align with their preference in the 2014 elections, and they bet on the victory of PSDB candidate Aécio Neves—grandson of former president Tancredo Neves, leader of the institutional opposition to the military dictatorship—against Dilma. Goldman Sachs-Brazil’s then-president summed up the harmony between the streets and the private sector: “Both investors and the population have expressed, in different ways (the population, with the protests; the private sector with the loss of confidence), similar things, which relate to the loss of connectivity between politics, investors, and popular concerns.”20
Expecting that Dilma would not be re-elected, industrialists publicly broke with the ruling coalition and sided with the opposition to the government. From that point on, industrial disapproval of the government grew,21 and business rhetoric became largely critical of the government and its economic policy.22 As Fernando Pimentel, the same industrial leader, summarized in an interview with the author, “these demonstrations came with the intention of solving the problem, a situation that had been growing more complicated. So, I believe they were part of the solution for us to overcome that problem.”23
Qualitatively, the diagnosis of the main obstacle to industrial growth also changed. The international crisis and the advancement of imported products in the domestic market were no longer identified as the source of industrial hardships. The main issue became a “national crisis,” caused by the Brazilian state model and, consequently, by its governing power. In brief, the businessmen argued that the ruling party was responsible for a “bloated and inefficient” state. They claimed the PT’s “backward” and “ideological” economic policy had dragged the country into crisis, and that, as a corrupt “political elite,” the PT was responsible for leaks in the public coffers. Therefore, according to the business narrative, the economic crisis was directly linked to a political and ethical crisis. The solution, following this argument’s logic, would be for the PT to step down from the presidency and for the state and the economy to undergo a simultaneous transformation. Instead of “excessive” social spending, a “rigged” and “parasitic” state apparatus, and “short-termist” economic policies, the state should “turn off the tap” on public spending and limit its activity to macroeconomic management. Moreover, it should be a priority to “modernize” the 1988 Constitution, which established social and labor rights that were “not consistent” with today’s economic competition. This meant advocating for the passage of so-called structural reforms, such as “flexibilizing” labor rights, reforming the social security system, and reducing taxes on industry’s value chain.24 By no coincidence, the critique and the proposed reforms were compatible with popular opposition to the government—as embodied by movements like Brasil Livre, Vem pra Rua, and Revoltados Online—as well as with the partisan opposition, especially that of candidate Aécio Neves, both being strengthened by the June demonstrations.25
Implications for the present moment
Both the timing of the business sector’s shift toward the opposition and the substance of its criticism exposed the fragility of its alliance with the PT government. In fact, the targeted policies implemented during the PT’s administration had a positive impact on national industry, although they were not enough to reverse the ongoing deindustrialization process. As industrialists often commented, and as the sector’s performance confirmed, the PT’s measures to help the industrial sector were specific and compensatory. With the exception of a brief attempt to reduce bank spreads, the economic policies did not alter the model of accumulation and, therefore, did not reinvigorate the declining position of national industry—especially industry destined for the domestic market—in the global value chain and in national economic participation. Hence, there is a structural misalignment between the PT governments’ state model, committed to labor rights and redistributive policies, as well as the model of accumulation fostered by the period’s policies and the national industrial business sector that has hindered a long-term, ideological alignment within the so-called productivist coalition. In a period of economic deceleration, in which Dilma’s administration slowed down the pace of implementing micro policies and meeting industrial demands, and as macro policy was no longer aligned with business expectations, the immediate and punctual material motivation to support the government was corroded. When presented with a political opportunity—the scandalization of PT fiscal policy—industrialists abandoned ship. The apex of the conflict is materialized in industrialists spearheading the pro-impeachment movement during Dilma’s second term, but the argumentative grounds for opposing the PT had already been present in the industrial rhetoric since 2013.
This discussion is even more relevant when we observe the rapprochement between industrialists and the PT during the 2022 elections, made explicit by a letter in defense of democracy issued by FIESP. Despite having mostly supported Bolsonaro in 2018, Bolsonaro’s administration acted more independently, marginalizing a significant part of the business sector from 2020 onwards. Additionally, the country’s political handling of the pandemic deepened the economic crisis. Motivated by these factors, part of the business sector supported Lula in the electoral contest—albeit indirectly through a pro-democracy speech. In this new Lula administration, we have been watching almost a rerun of the pre-June 2013 dynamic between the PT government and industrialists, with the launch of Nova Indústria Brasil (New Industry Brazil), the resuming of Minha Casa Minha Vida (My House, My Life), and the Programa de Aceleração do Crescimento (Growth Acceleration Program, PAC). Yet maintaining this alliance seems even more delicate today, as Lula’s third administration has limited room for economic and political maneuvering. Firstly, support for Lula was not consensual.26 Secondly, the economy is nearly a decade out of steam, and the government’s budgetary autonomy is further reduced due to high fiscal and monetary pressures—even stronger now under an independent Central Bank and the legal restrictions implemented by the post-coup regimes.27 Elected on the promise of resuming and strengthening redistributive policies, Lula has to make difficult choices about public spending, which have the potential to deepen class conflict. Lastly, with the government’s parliamentary base reduced, Congress is more radicalized, and the far-right opposition is proving to be more competitive than the PSDB of the 2010s. It remains to be seen whether the support of a part of the business elite is once again circumstantial and dependent on the government’s popular approval, or whether the threat to democracy represented by the Bolsonarist opposition has produced greater solidity in the new Lula-PT alliance.
In 2023, a “banner year” for labor in many regards, only 115,551 workers voted in National Labor Relations Board (NLRB) representation elections, out of roughly 160 million workers in the United States labor force. In FY 2018, that number was 84,505, and in FY 2013, 85,290. Union density today sits at a historic low of 10 percent, with only 6 percent density in the private sector. A mere 1 percent increase in union density would mean that a fresh 1.6 million workers are organized with no losses elsewhere, before accounting for growth in the labor force. Even if unions won every 2023 NLRB election (which they did not), this rate of growth would have been far less than the increase in the civilian labor force, which, in the full employment years of 2015–19, averaged around 1.5 million new workers annually.
While there has been a reported uptick in union activity, any casual observer can see that no great reversal in the union density trend is in the offing on our current trajectory. Figures on recent organizing show plenty of evidence that changes are required if the American labor movement is to grow at anything approaching the establishment of a new balance of power in the labor market. Broad strategic reconsiderations are needed to address labor’s impasse.
Within the framework of the National Labor Relations Act, the NLRB is authorized to process union representation elections in the private sector, which employs the vast majority of workers in the US (roughly 85 percent). If the labor movement is going to take advantage of the present popular approval for labor unions and interest in labor organizing, it must go after big targets in the private sector, shops where workers can potentially be added to union rolls en masse. Historically, the labor movement has not grown in gradual fashion but in large spurts. As labor historian Erik Loomis has commented, “There are too many workers in America to rebuild the labor movement in groups of twenty or thirty or even one hundred. You need thousands and thousands of people to be joining the labor movement at the same time.”
UAW International Representative Michael McCown was a lead organizer on the union’s successful bid to organize the University of California system, which netted 16,000 researchers across multiple campuses. He also worked in Chattanooga for about three months, helping push the recent victory at Volkswagen to the finish line. For McCown, taking advantage of renewed enthusiasm for unions requires larger victories. “I don’t think the labor movement has much of a future if we’re just organizing small units. Whenever you see people who want to form a union, you want to help. But if we’re going to have any kind of class power, we must organize the large-units.” Understanding how best to grow given the current confines of federal law is therefore of paramount importance.
Union elections
I analyzed the NLRB’s “large-unit elections”—those involving 500 or more eligible voters—over the past ten years. For fiscal years 2020–2023, these accounted for, on average, 1.5 percent of all elections. By contrast, small shop organizing (i.e., units of twenty-five or under) made up a solid majority of all elections—58.5 percent of the total number of elections in FY 2023, but these elections only involved 10 percent of all eligible voters. By contrast, the twenty-four large-unit elections that fiscal year accounted for 43.5 percent of all eligible voters.
Averages of Certified NLRB Elections Between FY2020–2023
Number of workers
Percentage of total elections
500+
1.5%
251-499
2.7%
101-250
8%
25-100
32.8%
1-25
55%
The number of 500+ worker elections remained fairly stagnant between 2014–2020. After the pandemic drought of 2021, the number of large-unit elections has been increasing, with twenty-two in 2022 and thirty-two in 2023. Projecting out from the current data, we are scheduled to have about the same number (over thirty) this year.
This uptick coincides with a similar rise in victory percentage. Unions have become quite good at winning large-unit elections. From 2014–2021, 63 percent of large-unit certification elections (as opposed to decertification and employer-petitioned elections) were successful. From 2022 through the present, since the cultural vogue for union organizing has taken hold, that success rate has risen to an astounding 86 percent. Not only has the total number of workers petitioning the federal labor board for certified union elections slightly increased in the Biden recovery from the Covid-19 pandemic, but those who do so in large groups are also finding victories at a rate unseen in generations.
What’s intriguing about these results is that the composition of large-unit elections has changed considerably—by far the largest sectors involved in large-unit organizing are academic and healthcare unions. Healthcare unions have consistently run a large number of such certification elections over the past decades. But the more noticeable trend is in the marked increase in academic elections, culminating in a wave of very large-unit victories in 2022 and 2023.
What explains the particular interest in organizing among healthcare and academic workers? Amy Gladstein, 1199SEIU United Healthcare Workers East (UHE)’s Assistant for Strategic Organizing, chalks up a small part of recent labor organizing activity to a friendly National Labor Relations Board but attributes the main impetus behind new organizing success among healthcare workers to the aftereffects of the Covid-19 pandemic:
I would ascribe a lot of it to Covid, and to healthcare workers feeling like they were abused. They didn’t have enough personal protective equipment, and they weren’t recognized in the way that healthcare workers want to be recognized, which is respect and input on the job and monetary compensation.
Large hospital campaigns sometimes stall in not being able to penetrate certain departments, but pandemic frustrations were felt across departments, thus uniting workers across common interests. While academic workers were not affected by the pandemic in quite the same way, they too have recently seen great large-unit successes. In a four-month period between November 2022 and March 2023, unions racked up nine victories covering more than 20,000 academic workers. Measly stipends and pay in cities that are increasingly expensive for academic workers with dire career prospects are typically cited as motivating factors, but these conditions apply to other workforces as well. Perhaps there is some ideological predisposition among graduate students to organize. Other credentialing junior professionals, like medical interns and residents, are also organizing at a rapid clip, indicating possible structural factors at play.
Divergent trends
For some, these results confirm the idea that opportunity for organized labor lies in the post-industrial growth of semi-public healthcare and education services. As promising as these growth areas might be, however, healthcare and education services make up a total of 14.8 percent of employment in the US. For the remaining 85.2 percent of workers the news is not so good, as the number of all other large-unit certification elections besides those in healthcare and academia have declined, including those in other service sector areas like retail. The data indicates that the much discussed labor upsurge of recent years is only a segmented break from the broader decline of labor that has characterized the last fifty years, which appears to be continuing apace outside of healthcare and academia.
Unsurprisingly, the Service Employees International Union (SEIU) ran the most large-unit certification elections in the last decade (fifty-four), followed by the United Auto Workers (UAW) with twenty-three, and the United Electrical Workers with twelve.
NLRB 500+ Worker Certification Elections By Union, 2014–Present
Union
RC Elections
Wins
Losses
Number of eligible voters
Number of new union members
SEIU
54
44
10
59,050
49,620
UAW
23
16
7
46,320
36,823
UE
12
10
2
24,414
22,362
UFCW
10
1
9
6,326
500
IBT
9
5
4
6,962
3,620
UNITE HERE
9
7
2
9,600
7,500
AFT
8
6
2
8,120
6,264
NNU
7
7
0
4,682
4,682
IAM
6
2
4
6,703
1,958
IBEW
5
2
3
4,272
2,091
NUHW
5
5
0
4,589
4,589
Of SEIU’s large-unit wins, 63 percent have been in healthcare, but the union has also won large-unit elections for academics, janitors, and airport service workers, not to mention its seeding of Workers United, which among other things has recently brought Starbucks to the table. SEIU has become very successful at winning large hospital campaigns in recent years: their Committee for Interns and Residents (SEIU-CIR) has won six large-unit elections since 2022, and SEIU-UHW is quickly organizing the Sharp Healthcare system (with 1000+ worker hospital units) in southern California. Gladstein’s local, 1199SEIU-UHE, has won a few such victories in recent years, including a 948-person unit at WestMed Medical Group in Yonkers, NY, earlier this year.
The other major international running large-unit campaigns is the UAW, better known recently for its successful Stand-Up Strike on the Big Three automakers, its commitment to new organizing, and its major win at the Volkswagen plant in Chattanooga, TN, for 4,326 workers. Despite these important victories in its namesake industry, 52 percent of the UAW’s large-unit wins in the last decade have come from academia.
What would it take to reverse the decline of large-unit organizing beyond healthcare and academia? This is one facet of the broader question of how to reverse labor’s decline, which no one today can claim to have solved. There may be lessons from recent large-unit victories that can be shared among unions and port to other contexts. As in the case of the UAW at Volkswagen in Chattanooga, which lost a few times before it finally won, such lessons might take years to bear fruit, but the seeds must be planted now.
Comments Off on The Contest to Shape “Country Platforms”
Last month, young people in Bangladesh revolted against their government over a jobs quota bill that would have reserved 30 percent of public-sector jobs for family members of veterans of the 1971 war with Pakistan. Protestors did manage to drive out the country’s prime minister Sheikh Hasina, though not before hundreds were killed by authorities.
Bangladesh, like many developing countries in a dollar-centered world, suffered disproportionately from Covid-19 and from the higher commodity prices that ensued in the wake of the lockdowns. A recent IMF review found that its public debt servicing costs were almost 72 percent of its combined export and grant income. Millions of Bangladeshis endured lengthy blackouts in 2022 when contracted LNG shipments were acquired by Europeans for higher prices on the spot market after Russia disrupted continental gas supplies.
Bangladesh earns 84 percent of its export income from garments, but the statutory wage for garment workers is less than two thirds of the typical household cost of living, according to the Anker Research Institute. In 2023 several big western clothing brands signed a Fair Labor letter to Hasina asking that the wage be increased, noting that it had not increased since 2019 despite a substantial increase in living costs. Workers’ unrest in Bangladesh has often been repressed because of ties between the country’s garment oligarchs and Sheikh Hasina’s ruling party.
Choices made by countries matter even in an unequal world order. Bangladesh’s government oversaw decades of economic growth but spent far less on social priorities than other peer governments. EMs = emerging markets, LIDC = low income developing countries. Source: IMF country report (2023)
A new approach
At COP 28 in Dubai last December, the IMF announced that Bangladesh would be the beneficiary of a “climate and development platform.” The announcement was essentially a pledge from development funders, the IMF, two donor governments, and the government of Bangladesh to coordinate on finance in the country. In its content, the pledge closely resembles what is now commonly referred to in development finance circles as “country platforms.”
Country platforms are now an increasingly hot topic, and are being advanced by the Brazilian hosts of this year’s G20, along with the IMF, multilateral banks, G7 governments, and the financial sector. An increasingly reached-for concept, the terms in which it will be realized are as yet unclear. Analysts at ODI have suggested that, in their most basic form, platforms are simply an extension of “development effectiveness”—jargon for measuring the impact of development finance. In recent years, they write, the country platform idea has coalesced around a few key planks. The main idea is to coordinate between international finance institutions, as well as between those institutions and private finance—while emphasizing that states themselves should retain agency to decide how the money is spent. The idea is for some overall coordination as each country drafts its Nationally Determined Contributions (NDCs), Long Term Strategy (LTS), National Biodiversity Strategies and Action Plans (NBSAPs), and National Adaptation Plans (NAPs).
This current definition of country platforms arose from the G20 Eminent Persons Group—a panel of current and former high-level finance officials such as Raghuram Rajan, Lord Nicholas Stern, and Ngozi Okonjo-Iweala, which in 2018 published a report on international financial architecture and international financial institutions. The report proposes a kind of liberal, development financialization agenda that Daniela Gabor would later name the “Wall Street Consensus,” and country platforms were the Group’s second recommendation:
A country platform must be owned by its government, encourage competition, and retain the government’s flexibility to engage with the most suitable partners. However, transparency within the platform is essential to avoid zero sum competition, such as through subsidies or lower standards.
Since that recommendation, the spike in essential commodities and the strengthening US dollar have shifted a situation that was already urgent into one that is catastrophic for many countries. Larry Summers and NK Singh pointed out earlier this year that net flows are moving in the wrong direction: capital outflows to private creditors have come to overshadow the increased concessional lending to developing countries. Despite the World Bank’s plans to mobilize private-sector money—“billions to trillions,” went the catchphrase—developing countries are being drained.
National policy reforms are a strong theme in the IMF and World Bank visions of country platforms, but the most frequently invoked purpose is to increase the volume of finance—especially private finance—that flows into a particular country. Country-level coordination between development institutions and the national government holds the promise of a one-stop shop for investment landing in global South countries.
Insofar as the country platforms approach is an attempt to orient all participating actors toward medium-to-long term coordination, its benefits and requirements should be understood from the point of view of those actors, which we break down into three types:
International financial institutions. Multilateral development banks have already declared in a joint statement that they will prioritize country platforms, emphasizing a shift from short-term projects to “a longer-term, programmatic perspective.” In particular, the IMF and the World Bank also seem focused between themselves—between the two institutions—shifting their respective financing programs toward longer-term and more systemic “policy reforms.”
Private Investors. Mark Carney’s GFANZ alliance called for country platforms to be “a single focal point to channel technical assistance and public and private finance.”
States. Importantly, country platforms will allow states to set national priorities themselves, rather than be subject to requirements imposed by foreign institutions.
National Policy
The Bangladesh “Climate and Development Platform” announcement last December brought together various development finance entities including the IMF, World Bank, Asian Development Bank, European Investment Bank, Green Climate Fund, Japan International Cooperation Agency, and the governments of South Korea and the UK. A total financial commitment of $1.85 billion was made—though some of this includes commitments already made.
For its part, the IMF announcement said, Bangladesh would enact reforms required by the Fund itself, such as a “periodic formula-based price adjustment mechanism for petroleum products,” improvements to water supply, and updating its Green Bond Financing policy.
In May, the IMF and World Bank announced an “Enhanced Cooperation Framework for Climate Action” in which they’d collaborate on identifying policy reforms, as well as work with other development partners and, if requested, developing country platforms. A month later, Madagascar was declared to be the first site for this collaboration; the IMF and World Bank “stand ready” to develop a country platform there.
Country platforms are in no way immune from private finance’s tendency to see a given nation’s shortcomings, rather than those of finance itself, as the barrier to investment. In fact, foreign private investors are often beholden to cultural and regulatory constraints that have little to do with the degree of national coordination in countries they might invest in. Advait Arun described these constraints for us last year, and a recent report from Finance Watch analyzes the constraints specifically affecting European pension funds and insurers. Investors are frequently asking countries to present a more investible version of themselves, but in fact investors themselves are often simply prevented from engaging in anything beyond the safest assets in the richest and most stable developing countries.
Reading through the literature on the topic one gets the sense of a chicken-and-egg dilemma. As for the implementation of these country platforms, certain risks are involved. Country platforms would work best in countries with strong institutional capacity and ability to coordinate internally; but those are likely the countries that are already most able to marshal development finance, climate finance, and private external finance in accordance with a sovereign strategy.
Even countries with exemplary governance, institutional capacity, and social and political harmony must exist within the ramshackle international financial architecture and be subject to foreign exchange rates, sovereign debt frameworks (or lack thereof), and shifting risk appetite in global capital markets.
Still, what is emerging is a World Bank with a more systemic agenda, working more closely with an IMF that can now (via its new Resilience and Sustainability Fund) lend beyond the short term. The two are collaborating with a particular eye on policy reforms. The prospect of deeper coordination between two such powerful institutions with a focus on national policy could be a boon for recipient countries, but for it to be just, as Brazil is emphasizing, it must be country led.
Still, as an approach to development finance, there are reasons to be optimistic. Framing finance for climate and development at the country level may well allow more space for sovereign development strategy and multilateral support. As the US administration becomes more cognizant of the need for a substantive international effort—a Green Marshall Plan, but for real this time—any opportunities for agency among countries with less access to capital and little strategic power might be precious.
The relationship between money world and the concrete social and material world is a long-standing, though not always explicit, question in the history of economic thought. Do the money payments and prices we see all around us have their own independent existence, distinct from the objects they are attached to? Can things that happen in money world affect the real world?
One central strand in that history is the idea that the answer to these questions is, or ought to be, negative. Money is, or ought to be, neutral—a passive record and measuring stick of real social facts that exist independently of it. The use of the word real in economics as the opposite of both nominal and monetary, as well as in its everyday ontological sense, is not just a bit of confusing terminology; it reflects a deeply-held intellectual commitment.
As early as 1752, we can find David Hume writing that:
Money is nothing but the representation of labour and commodities … Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad.
At the turn of the twenty-first century, we hear the same thing from Federal Open Market Committee member Lawrence Meyer: “Monetary policy cannot influence real variables—such as output and employment.” Money, he says, only affects “inflation in the long run. This immediately makes price stability … the direct, unequivocal, and singular long-term objective of monetary policy.”
These accounts share the perspective that money quantities and money payments are just shorthand for the characteristics and use of concrete material objects. They are neutral—mere descriptions that can’t change the underlying things. If money is neutral, changes in the supply or availability of money will only affect the price level, leaving relative prices and production unchanged.
There is, of course, also a long history of arguments on the other side—that money is autonomous, that money and credit are active forces shaping the concrete world of production and exchange, that there is no underlying value to which money-prices refer. But for the most part, these counter-perspectives occupy marginal positions in economic theory, though they have been influential in other domains.
The great exception is, of course, Keynes. Indeed, there is an argument that what was revolutionary about the Keynesian revolution was his break with orthodoxy on precisely this question. In the period leading up to the General Theory, he explained that the difference between the economic orthodoxy and the new theory he was seeking to develop was fundamentally the difference between the dominant vision of the economy in terms of what he called “real exchange,” and an alternative vision he described as “monetary production.”
The orthodox theory (in our day as well as his) started from an economy in which commodities exchanged for other commodities, and then brought money in at a later stage, if at all, without changing the fundamental material tradeoffs on which exchange was based. His theory, by contrast, would describe an economy in which money is not neutral, and in which the organization of production cannot be understood in nonmonetary terms. Or in his words, it is the theory of “an economy in which money plays a part of its own and affects motives and decisions and is … so that the course of events cannot be predicted, either in the long period or in the short, without a knowledge of the behavior of money.”
While it may be easy to reject the idea that money is neutral, it’s far more difficult to figure out how money world and concrete social reality connect. In my forthcoming book with Arjun Jayadev, we explore the importance of money in four settings: the determination of the interest rate; price indexes and “real quantities”; corporate finance and governance; and debt and capital. In what follows, I consider the first of these settings.
Debunking interest as the price of savings
Axel Leijonhufvud long ago argued that the theory of the interest rate was at the heart of the confusion in modern macroeconomics. “The inconclusive quarrels … that drag on because the contending parties cannot agree what the issue is, largely stem from this source.” I think this is still largely true. There is a basic incompatibility between a theory of the interest rate as the price of saving or time and the monetary interest rate we observe in the real world.
Orthodoxy thinks of the interest rate as the price of savings or loanable funds, or alternatively, as the tradeoff between consumption in the future and consumption in the present. Interest in this sense is a fundamentally nonmonetary concept. It is a price of two commodities, based on the same balance of scarcity and human needs that are the basis of other prices. The tradeoff between a shirt today and a shirt next year, expressed in the interest rate, is no different than the tradeoff between a cotton shirt and a linen one, or one with short versus long sleeves. The commodities just happen to be distinguished by time, rather than some other quality.
Monetary loans, in this view, are just like a loan of a tangible object. I have some sugar, let’s say. My neighbor knocks on the door and asks to borrow it. If I lend it to them, I give up the use of it today. Tomorrow the neighbor will return the same amount of sugar to me, plus something extra—perhaps one of the cookies they baked with it. Whatever income you receive from ownership of an asset—whether we call it interest, profit or cookies—is a reward for deferring your use of the concrete services that the asset provides.
This way of thinking about interest is ubiquitous in economics. In the early 19th century Nassau Senior described interest as the reward for abstinence, which gives it a nice air of Protestant morality. In a current textbook, in this case Gregory Mankiw’s, you can find the same idea expressed in more neutral language: “Saving and investment can be interpreted in terms of supply and demand … of loanable funds—households lend their savings to investors or deposit their savings in a bank that then loans the funds out.”
It’s a little ambiguous exactly how we are supposed to imagine these funds, but clearly they are something that already exists before the bank comes into the picture. Just as with the sugar, if their owner is not currently using them, they can lend them to someone else, and get a reward for doing so. Money and finance don’t come into this story. As Mankiw says, investors can borrow from the public directly or indirectly via banks—the economic logic is the same either way.
We might challenge this story from a couple of directions. One criticism—first made by Piero Sraffa in a famous debate with Friedrich Hayek about 100 years ago—is that in a nonmonetary world each commodity will have its own distinct rate of interest. Let’s say a pound of flour trades for 1.1 pounds (or kilograms) of flour a year from now. What will a pound or kilo of sugar today trade for? If, over the intervening year, the price of usage rises relative to the price of flour, then a given quantity of sugar today will trade for a smaller amount of sugar a year from now than the same quantity of flour will. Unless the relative price of flour and sugar are fixed, their interest rates will be different. Flour today will trade at one rate for flour in the future, sugar at a different rate; the use of a car or a house, a kilowatt of electricity, and so on will each trade with the same thing in the future at their own rates, reflecting actual and expected conditions in the markets for each of these commodities. There’s no way to say that any one of these myriad own-rates is “the” rate of interest.
Careful discussions of the natural rate of interest will acknowledge that it is only defined under the assumption that relative prices never change.
Another problem is that the savings story assumes that the thing to be loaned—whether it is a specific commodity or generic funds—already exists. But in the monetary economy we live in, production is carried out for sale. Things that are not purchased will not be produced. When you decide not to consume something, you don’t make that thing available for someone else. Rather, you reduce the output of it, and the income of the producers of it, by the same amount as you reduce your own consumption.
Saving, remember, is the difference between income and consumption. For you as an individual, you can take my income as given when deciding how much to consume. So consuming less means saving more. But at the level of the economy as a whole, income is not independent of consumption. A decision to consume less does not raise aggregate saving, it lowers aggregate income. This is the fallacy of consumption emphasized by Keynes: individual decisions about consumption and saving have no effect on aggregate saving. So the question of how the interest rate is determined is linked directly to the idea of demand constraints.
Alternatively, rather than criticizing the loanable-funds story, we can start from the other direction, from the monetary world we actually live in. Then we’ll see that credit transactions don’t involve the sort of tradeoff between present and future that orthodoxy focuses on.
Let’s say you are buying a home. On the day that you settle, you visit the bank to finalize your mortgage. The bank manager puts in two ledger entries: One is a credit to your account, and a liability to the bank, which we call the deposit. The other, equal and offsetting entry is a credit to the bank’s own account, and a liability for you. This is what we call the loan. The first is an IOU from the bank to you, payable at any time. The second is an IOU from you to the bank, with specified payments every month, typically in the US, for the next 30 years. Like ordinary IOUs, these ledger entries are created simply by recording them—in earlier times it was called “fountain pen” money.
The deposit is then immediately transferred to the seller, in return for the title to the house. For the bank, this simply means changing the name on the deposit—in effect, you communicate to the bank that their debt, which was payable to you, is now payable to the seller. On your balance sheet, one asset has been swapped for another—the $250,000 deposit, in this case, for a house worth $250,000. The seller makes the opposite swap, of the title to a house for an equal value IOU from the bank.
As we can see, there is no saving or dissaving here. Everyone has just swapped assets of equal value. This mortgage is not a loan of preexisting funds or of anything else. No one had to first make a deposit at the bank in order to allow them to make this loan. The deposit—the money—was created in the process of making the loan itself. Banking does not channel saving to borrowing as in the loanable-funds view, but allows a swap of promises.
It’s inaccurate to talk about putting money in the bank. The bank’s record is the money. On one level this is common knowledge. But the larger implications are seldom thought through. What did this transaction consist of? A set of promises. The bank made a promise to the borrowers, and the borrowers made a promise to the bank. And then the bank’s promise was transferred to the sellers, who can transfer it to some third party in turn. The reason that the bank is needed here is because you cannot directly make a promise to the seller.
You are willing to make a promise of future payments whose present value is worth more than the value the seller puts on their house. Accepting that deal will make both sides better off. But you can’t close that deal, because your promise of payments over the next thirty years is not credible. They don’t know if you are good for it. They don’t have the ability to enforce it. And even if they trust you, maybe because you’re related or have some other relationship, other people do not. So the seller can’t turn your promise of payment into an immediate claim on other things they might want.
Orthodox theory starts from the assumption that everyone can freely contract over income and commodities at any date in the future. The familiar Euler equation is based on the idea that you can allocate your income from any future period to consumption in the present, or vice versa. That is the framework within which the interest rate looks like a tradeoff between present and future. But you can’t understand interest in a framework that abstracts away from precisely the function that money and credit play in real economies.
The fundamental role of a bank, as Hyman Minsky emphasized, is not intermediation but acceptance. Banks function as third parties who broaden the range of transactions that can take place on the basis of promises. You are willing to commit to a flow of money payments to gain legal rights to the house. But that is not enough to acquire the house. The bank, on the other hand, precisely because its own promises are widely trusted, is in a position to accept a promise from you.
Interest is not paid because consumption today is more desirable than consumption in the future. Interest is paid because credible promises about the future are hard to make.
Interest as the price of liquidity
The cost of the mortgage loan is not that anyone had to postpone their spending. The cost is that the balance sheets of both transactors have become less liquid. We can think of liquidity in terms of flexibility—an asset or a balance sheet position is liquid insofar as it broadens your range of options. Less liquidity means fewer options.
For you as a homebuyer, the result of the transaction is that you have committed yourself to a set of fixed money payments over the next thirty years, and acquired the legal rights associated with ownership of a home. These rights are presumably worth more to you than the rental housing you could acquire with a similar flow of money payments. But the title to the house cannot easily be turned back into money and thereby to claims on other parts of the social product. Home ownership involves — for better or worse — a long-term commitment to live in a particular place. The tradeoff the homebuyer makes by borrowing is not more consumption today in exchange for less consumption tomorrow. It is a higher level of consumption today and tomorrow, in exchange for reduced flexibility in their budget and where they will live. Both the commitment to make the mortgage payments and the non-fungibility of home ownership leave less leeway to adapt to unexpected future developments.
On the other side, the bank has added a deposit liability, which requires payment at any time, and a mortgage asset that in itself promises payment only on a fixed schedule in the future. This likewise reduces the bank’s freedom of maneuver. They are exposed not only to the risk that the borrower will not make payments, but also to the risk of capital loss if interest rates rise during the period they hold the mortgage, and to the risk that the mortgage will not be saleable in an emergency, or only at an unexpectedly low price. As real world examples recent as Silicon Valley Bank show, these latter risks may in practice be much more serious than the default risk. The cost to the bank making the loan is that its balance sheet becomes more fragile.
Or as Keynes put it in a 1937 article, “The interest rate … can be regarded as being determined by the interplay of the terms on which the public desires to become more or less liquid and those on which the banking system is ready to become more or less unliquid.”
Of course in the real world things are more complicated. The bank does not need to wait for the mortgage payments to be made at the scheduled time. It can transfer the mortgage to a third party, trading off some of the income it expected for a more liquid position. The buyer might be some other financial institution looking for a position farther toward the income end of the liquidity-income tradeoff, perhaps with multiple layers of balance sheets in between. Or the buyer might be the professional liquidity providers at the central bank.
Incidentally, this is an answer to a question that people don’t ask often enough: How is it that the central bank is able to set the interest rate at all? The central bank plays no part in the market for loanable funds.
But central banks are very much in the liquidity business. It is monetary policy, after all, not savings policy.
One thing this points to is that there is no fundamental difference between routine monetary policy and the central bank’s role as a regulator and lender of last resort; all of these activities are about managing the level of liquidity within the financial system. How easy is it to meet your obligations? Too hard, and the web of obligations breaks. Too easy, and the web of money obligations loses its ability to shape our activity, and no longer serves as an effective coordination device.
As the price of money—the price for flexibility in making payments as opposed to fixed commitments—the interest rate is a central parameter of any monetary economy. The metaphor of “tight” or “loose” conditions for high or low interest rates captures an important truth about the connection between interest and the flexibility or rigidity of the financial system. High interest rates correspond to a situation in which promises of future payment are worth less in terms of command over resources today. When it’s harder to gain control over real resources with promises of future payment, the pattern of today’s payments is more tightly linked to yesterday’s income. Conversely, low interest rates mean that a promise of future payments goes a long way in securing resources today. Therefore, claims on real resources depend less on incomes in the past, and more on beliefs about the future. And because interest rate changes always come in an environment of preexisting money commitments, interest also acts as a scaling variable, reweighting the claims of creditors against the income of debtors.
There is a basic incompatibility between a theory of the interest rate as the price of saving or time and the monetary interest rate we observe in the real world. And once we take seriously the idea of interest as the price of liquidity, we see why money cannot be neutral—why financial conditions invariably influence the composition as well as the level of expenditure.
Interest and expectations
In addition to credit transactions, the other setting in which interest appears in the real world is in the price of existing assets. A promise of money payments in the future becomes an object in its own right, distinct from those payments themselves. I started out by saying that all sorts of tangible objects have a shadowy double in money world. But a flow of money payments can also acquire a phantom double. A promise of future payment creates a new property right, with an owner and a market price.
When we focus on that fact, we see an important role for convention in the determination of interest. To some important extent, bond prices—and therefore interest rates—are what they are because that is what market participants expect them to be.
A corporate bond promises a set of future payments. It’s easy, in a theoretical world of certainty, to talk as if the bond just is those future payments. But it is not. This is not just because it might default, which is easy to incorporate into the model. It’s not just because any real bond was issued in a certain jurisdiction, and conveys rights and obligations beyond payment of interest—though these other characteristics always exist and can sometimes be important. It’s because the bond can be traded and has a price that can change independent of the stream of future payments.
If interest rates fall, your bond’s price will rise—and that possibility itself is a factor in the price of the bond. This helps explain a widely acknowledged anomaly in financial markets. The expectation hypothesis says that the interest rate on a longer bond should be the same as the average of shorter rates over the same period, or at least that they should be related by a stable term premium. This seems like a straightforward arbitrage, but it fails completely, even in its weaker form.
The answer to this puzzle is an important part of Keynes’ argument in The General Theory. Market participants are not just interested in the two payment streams. They are interested in the price of the long bond itself.
Remember, the price of an asset always moves inversely with its yield. When rates on a given type of credit instrument go up, the price of that instrument falls. Now, let’s say it’s widely believed that a ten-year bond is unlikely to trade below 2 percent for very long. Then you would be foolish to buy it at a yield much below 2 percent, because you are going to face a capital loss when yields return to their normal level. And if most people believe this, then the yield never will fall below 2 percent, no matter what happens with short rates.
In a real world where the future is uncertain and monetary commitments have their own independent existence, there is an important sense in which interest rates, especially longer ones, are what they are because that’s what people expect them to be.
One important implication of this is that we cannot think of various market interest rates as simply “the” interest rate plus a risk premium. Different interest rates can move independently for reasons that have nothing to do with credit risk.
The “natural” rate
On the one hand, we have a body of theory built up on the idea of “the” interest rate as a tradeoff between present and future consumption. On the other, we have actual interest rates, set in the financial system in quite different ways.
People sometimes try to square the circle with the idea of a natural rate. Yes, they say, we know about liquidity and the term premium and the importance of different kinds of financial intermediaries and regulation. But we still want to use the intertemporal model we were taught in graduate school. We reconcile this by treating the model as an analysis of what the interest rate ought to be. Yes, banks set interest rates in all kinds of ways, but there is only one interest rate consistent with stable prices and, more broadly, the appropriate use of society’s resources. We call this the natural rate.
This idea was first formulated around the turn of the twentieth century by Swedish economist Knut Wicksell. But the most influential modern statement comes from Milton Friedman. He introduces the natural rate of interest, along with its close cousin, the natural rate of unemployment, in his 1968 presidential address to the American Economics Association, which has been described as the most influential paper in economics since World War II. The natural rates there correspond to the rates that would be “ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity markets, including market imperfections, stochastic variability in demands and supplies, the cost of gathering information … and so on.”
The appeal of the concept is clear: it provides a bridge between the nonmonetary world of intertemporal exchange found in economic theory and the monetary world of credit contracts in which we actually live. In so doing, it turns the intertemporal story from a descriptive one to a prescriptive one—from an account of how interest rates are determined, to a story about how central banks should conduct monetary policy.
Fed Chair Jerome Powell gave a nice example of how central bankers think of the natural rate in a speech a few years ago. He introduces the natural interest rate R* with the statement that, “In conventional models of the economy, major economic quantities … fluctuate around values that are considered ‘normal,’ or ‘natural,’ or ‘desired.’” R* reflects “views on the longer-run normal values for … the federal funds rate,” which are based on “ fundamental structural features of the economy.”
Notice the confusion here between the terms “normal,” “natural,” and “desired,” three words with quite different meanings. R* is apparently supposed to be the long-term average interest rate, and the interest rate that we would see in a world governed only by fundamentals, and the interest rate that delivers the best policy outcomes.
This conflation is a ubiquitous and essential feature of discussions of natural rate. Like the controlled slipping between the two disks of a clutch in a car, it allows systems moving in quite different ways to be joined up without either side fracturing from the stress. The ambiguity between these distinct meanings is itself normal, natural, and desired.
The ECB gives perhaps an even nicer statement: “At its most basic level, the interest rate is the ‘price of time’—the remuneration for postponing spending into the future.” R* corresponds to this. It is a rate of interest determined by purely nonmonetary factors, which should be unaffected by developments in the financial system. Unfortunately, the actual interest rate may depart from this. In that case, the natural rate, says the ECB, “while unobservable … provides a useful guidepost for monetary policy.” The idea of an unobservable guidepost perfectly distills the contradiction embodied in the idea of R*.
As a description of what the interest rate is, a loanable-funds model is merely wrong. But when it’s turned into a model of the natural rate, it isn’t even wrong. It has no content at all. There is no way to connect any of the terms in the model with any observable fact in the world.
Go back to Friedman’s formulation, and you’ll see the problem: we don’t possess a model that embeds all the “actual structural characteristics” of the economy. For an economy whose structures evolve in historical time, it doesn’t make sense to even imagine such a thing.
In practice, the short-run natural rate is defined as the one that results in inflation being at target—which is to say, whatever interest rate the central bank prefers. The long-run natural rate is commonly defined as the real interest rate where “all markets are in equilibrium and there is therefore no pressure for any resources to be redistributed or growth rates for any variables to change.” In this hypothetical steady state, the interest rate depends only on the same structural features that are supposed to determine long-term growth—the rate of technical progress, population growth, and households’ willingness to defer consumption.
But there is no way to get from the short run to the long run. The real world is never in a situation where all markets are in equilibrium. Yes, we can sometimes identify long-run trends. But there is no reason to think that the only variables that matter for those trends are the ones we have chosen to focus on in a particular class of models. All those “actual structural characteristics” continue to exist in the long run.
The most we can say is this: as long as there is some reasonably consistent relationship between the policy interest rate set by the central bank and inflation, or whatever its target is, then there will be some level of the policy rate that gets you to the target. But there’s no way to identify that with “the interest rate” of a theoretical model. The current level of aggregate spending in the economy depends on all sorts of contingent, institutional factors—on sentiment, on choices made in the past, on the whole range of government policies. If you ask, what policy interest rate is most likely to move inflation toward 2 percent, all that stuff matters just as much as the supposed fundamentals.
The best you can do is set the policy rate by whatever rule of thumb or process you prefer, and then after the fact say that there must be some model where that would be the optimal choice.
Conclusions
What are the implications of this? First, with regard to monetary policy, let’s acknowledge that it involves political choices made to achieve a variety of often conflicting social goals. Second, recognizing that interest is the price of liquidity, set in financial markets, is important for how we think about sovereign debt. The third big takeaway, maybe the biggest one, is that money is never neutral.
There’s a widespread story about fiscal crises that goes something like this. A government’s fiscal balance (surplus or deficit) over time determines its debt-GDP ratio. If a country has a high debt to GDP, that’s the result of overspending relative to tax revenues. The debt ratio determines market confidence: private investors do not want to buy the debt of a country that has already issued too much. The state of market confidence then determines the interest rate the government faces, or whether it can borrow at all. And there is a clear line where high debt and high interest rates make debt unsustainable. Austerity is the unavoidable requirement once that line is passed. And finally, when austerity restores debt sustainability, that will contribute to economic growth.
If you accept the premises, the conclusions follow logically. Even better, they offer the satisfying spectacle of public-sector hubris meeting its nemesis. But when we look at debt as a monetary phenomenon, we see that its dynamics don’t run along such well-oiled tracks.
First of all, as a historical matter, differences in growth, inflation, and interest rates are at least as important as the fiscal position in determining the evolution of the debt ratio over time. Where debt is already high, moderately slower growth or higher interest rates can easily raise the debt ratio faster than even very large surpluses can reduce it—as many countries subject to austerity have discovered. Conversely, rapid economic growth and low interest rates can lead to very large reductions in the debt ratio without the government ever running surpluses, as in the US and UK after World War II. More recently, Ireland reduced its debt-GDP ratio by twenty points in just five years in the mid-1990s while continuing to run substantial deficits, thanks to very fast growth during the “Celtic tiger” period.
At the second step, market demand for government debt clearly is not an “objective” assessment of the fiscal position, but reflects broader liquidity conditions and the self-confirming conventional expectations of speculative markets. The claim that interest rates reflect the soundness or otherwise of public budgets runs up against a glaring problem: The financial markets that recoil from a country’s bonds one day were usually buying them eagerly the day before. The same markets that sent interest rates on Spanish, Portuguese, and Greek bonds soaring in 2010 were the ones snapping up their public and private debt at rock-bottom rates in the mid-2000s. And they’re the same markets that returned to buying those countries’ debt at historically low levels today, even as their debt ratios, in many cases, remained very high.
People like Alberto Alesina want to insist both that post-crisis interest rates reflected an objective assessment of the state of public finances, and that the low rates before the crisis were the result of a speculative bubble. But you can’t have it both ways.
This is not to say that financial markets are never a constraint on government budgets. For most of the world, which doesn’t enjoy the backstop of a Fed or ECB, they very much are. But we should never imagine that financial conditions are an objective reflection of a country’s fiscal position, or of the balance of savings and investment.
If the interest rate is a price, what it is a price of is not “saving” or the willingness to wait. It is not “remuneration for deferring spending,” as the ECB has it. Rather, it is the capacity to make and accept promises. And where this capacity really matters is when finance is used not just to rearrange claims on existing assets and resources but to organize the creation of new ones. The technical advantages of long lived means of production and specialized organizations can only be realized if people are in a position to make long-term commitments. And in a world where production is organized mainly through money payments, that in turn depends on the degree of liquidity.
There are, at any moment, an endless number of ways some part of society’s resources could be reorganized so as to generate greater incomes, and hopefully use values. You could open a restaurant, or build a house, or get a degree, or write a computer program, or put on a play. The physical resources for these activities are not scarce; the present value of the income they can generate exceeds their costs at any reasonable discount rate. What is scarce is trust. You, starting on a project, must exercise a claim on society’s resources now; society must accept your promise of benefits later. The hierarchy of money allows participants in various collective projects to substitute trust in a third party for trust in each other. But trust is still the scarce resource.
Within the economy, some activities are more trust-intensive, or liquidity-constrained, than others:
Liquidity is more of a problem when there is a larger separation between outlays and rewards, and when rewards are more uncertain.
Liquidity is more of the problem when the scale of the outlay required is larger.
Liquidity and trust are more important when decisions are irreversible.
Trust is more important when something new is being done.
Trust is more scarce when we are talking about coordination between people without any prior relationship.
These are the problems that money and credit help solve. Abundant money does not just lead people to pay more for the same goods. It shifts their spending toward things that require bigger upfront payments and longer-term commitments, and that are riskier.
In settings where ongoing relationships exist, money is less important as a coordinating mechanism. Markets are for arms-length transactions between strangers.
Minsky’s version of the story emphasizes that we have to think about money in terms of two prices, current production and long-lived assets. Long-lived assets must be financed—acquiring one typically requires committing to a series of future payments. So their price is sensitive to the availability of money. An increase in the money supply—contra Hume, contra Meyer—does not raise all prices in unison. It disproportionately raises the price of long-lived assets, encouraging production of them. And it is long-lived assets that are the basis of modern industrial production.
The relative value of capital goods, and the choice between more and less capital-intensive production techniques, depends on the rate of interest. Capital goods—and the corporations and other long-lived entities that make use of them—are by their nature illiquid. The willingness of wealth owners to commit their wealth to these forms depends, therefore, on the availability of liquidity. We cannot analyze conditions of production in non-monetary terms first and then afterward add money and interest to the story. Conditions of production themselves depend fundamentally on the network of money payments and commitments that structure them, and how flexible that network is.
Taking money seriously requires us to reconceptualize the real economy.
The idea of the interest rate as the price of saving assumes, as I mentioned before, that output already exists to be either consumed or saved. Similarly, the idea of interest as an intertemporal price—the price of time, as the ECB has it—implies that future output is already determined, at least probabilistically. We can’t trade off current consumption against future consumption unless future consumption already exists for us to trade.
Wicksell, who did as much as anyone to create the natural-rate framework of today’s central banks, captured this aspect of it perfectly when he compared economic growth to wine barrels aging in the cellar. The wine is already there. The problem is just deciding when to open the barrels—you would like to have some wine now, but you know the wine will get better if you wait.
In policy contexts, this corresponds to the idea of a level of potential output (or full employment) that is given from the supply side. The productive capacity of the economy is already there; the most that money, or demand, can accomplish is managing aggregate spending so that production stays close to that capacity.
This is the perspective from which someone like Lawrence Meyer, or Paul Krugman for that matter, says that monetary policy can only affect prices in the long run. They assume that potential output is already given.
But one of the big lessons we have learned from the past fifteen years of macroeconomic instability is that the economy’s productive potential is much more unstable, and much less certain, than economists used to think. We’ve seen that the labor force grows and shrinks in response to labor market conditions. We’ve seen that investment and productivity growth are highly sensitive to demand. If a lack of spending causes output to fall short of potential today, potential will be lower tomorrow. And if the economy runs hot for a while, potential output will rise.
We can see the same thing at the level of individual industries. One of the most striking, and encouraging developments of recent years has been the rapid fall in costs for renewable energy generation. It is clear that this fall in costs is the result, as much as the cause, of the rapid growth in spending on these technologies. And that in turn is largely due to successful policies to direct credit to those areas. A perspective that sees money as epiphenomenal to the “real economy” of production would have ruled out that possibility.
Taking money seriously as its own autonomous social domain means recognizing that social and material reality is not like money. We cannot think of it in terms of a set of existing objects to be allocated between uses or over time. Production is not a quantity of capital and a quantity of labor being combined in a production function. It is organized human activity, coordinated in a variety of ways, aimed at the open-ended transformation of a world where results are not knowable in advance.
On a negative side, this means we should be skeptical about any economic concept described as “natural” or “real.” These are very often an attempt to smuggle in a vision of a nonmonetary economy fundamentally different from our own, or to disguise a normative claim as a positive one, or both.
For example, we should be cautious about “real” interest rates. This term is ubiquitous, but it implicitly suggests that the underlying transaction is a swap of goods today for goods tomorrow, which just happens to take monetary form. But in fact it’s a swap of IOUs—one set of money payments for another. There’s no reason that the relative price of money versus commodities would come into it. And in fact, when we look historically, before the era of inflation-targeting central banks there was no particular relationship between inflation and interest rates.
We should also be skeptical of the idea of real GDP, or the price level. That’s another big theme of the book, but it’s beyond the scope of this piece.
On the positive side, this perspective is, I think, essential preparation to explore when and in what contexts finance matters for production. Obviously, in reality, most production is coordinated in non-market ways, both within firms—which are planned economies internally—and through various forms of economy-wide planning. But there are also cases where the distribution of monetary claims through the financial system is very important. Understanding which specific activities are credit-constrained, and in what circumstances, seems like an important research area to me, especially in the context of climate change.
Let me mention one more direction in which I think this perspective points us.
As I suggested, the idea of the interest rate as the price of time, and the larger real-exchange vision of which it is part, treats money flows and aggregates as stand-ins for an underlying nonmonetary real economy. People who take this view tend not be especially concerned with exactly how the monetary values are constructed. Which rate, out of the complex of interest rates, is “the” interest rate? Which of the various possible inflation rates, and over what period, do we subtract to get the “real” interest rate? What payments exactly are included in GDP, and what do we do if that changes, or if it’s different in different countries?
If we think of the monetary values as just proxies for some underlying “real” value, the answers to these questions don’t really matter. On the other hand, if you think that the money values are what is actually real—if you don’t think they are proxies for any underlying material quantity—then you have to be very concerned with the way they are calculated. If the interest rate really does mean the payments on a loan contract, and not some hypothetical exchange rate between the past and the future, then you have to be clear about which loan contract you have in mind.
Along the same lines, most economists treat the objects of inquiry as the underlying causal relationships in the economy, those “fundamental structural characteristics” that are supposed to be stable over time. Recall that the natural rate of interest is explicitly defined with respect to a long-run equilibrium where all macroeconomic variables are constant, or growing at a constant rate. If that’s how you think of what you are doing, then specific historical developments are interesting at most as case studies, or as motivations for the real work, which consists of timeless formal models.
But if we take money seriously, then we don’t need to postulate this kind of underlying deep structure. If we don’t think of interest in terms of a tradeoff between the present and the future, then we don’t need to think of future income and output as being in any sense already determined. And if money matters for the activity of production, both as financing for investment and as demand, then there is no reason to think the actual evolution of the economy can be understood in terms of a long-run trend determined by fundamentals.
The only sensible object of inquiry in this case is particular events that have happened, or might happen. Approaching our subject this way means working in terms of the variables we actually observe and measure. If we study GDP, it is GDP as the national accountants actually define it and measure it, not “output” in the abstract. These variables are generally monetary.
It means focusing on explanations for specific historical developments, rather than modeling the behavior of “the economy” in the abstract. It means elevating descriptive work over the kinds of causal questions that economists usually ask. Which means broadening our empirical toolkit away from econometrics.
These methodological suggestions might seem far removed from alternative accounts of the interest rate. But as Arjun and I have worked on this book, we’ve become convinced that the two are closely related. Taking money seriously, and rejecting conventional ideas of the real economy, have far-reaching implications for how we do economics.
Recognizing that money is its own domain allows us to see productive activity as an open-ended historical process, rather than a static problem of allocation. By focusing on money, we can get a clearer view of the nonmonetary world—and, hopefully, be in a better position to change it.
In South Africa’s watershed election last May, the African National Congress (ANC) failed to secure an outright majority for the first time in the country’s democratic history, sinking 17 percentage points from five years prior to obtain just 40.18 percent of the vote. Opponents of the ruling party celebrated the sudden shift in popular sentiment. The ANC’s “liberation dividend”—the condition-free support it has been granted in appreciation for its role in delivering democracy—appeared to have expired. The ANC was becoming an ordinary party, in an ordinary country.
The sudden decline in the ANC’s electoral fortunes can’t be understood without examining the broader electoral dynamics in South Africa, key among them the emergence of the breakaway uMkhonto weSizwe (MK) party, formed by former ANC president Jacob Zuma just six months before the election. MK won 14.58 percent of the total vote, mostly from Zuma’s native KwaZulu Natal (KZN) province. Another relative newcomer, the Patriotic Alliance (PA), cut heavily into the ANC’s vote share in majority colored districts, mostly in the Western and Northern Cape provinces. In voting districts where the ANC was not harassed by newcomer parties, its average vote share dropped by 6.3 percentage points—a more significant drop than the last election, but no earthquake. The party still won a comfortable majority in these districts. In contrast, in areas where newcomer parties made a strong showing, ANC support plummeted, from 57.3 to 29.5 percent.
These figures suggest something simple but important: there has been a supply side issue at the heart of South African electoral politics. The glacial trends in voting behavior that we’ve seen over the past decade are not solely explained by the sheer depth of loyalty to the ANC. Rather, they have much to do with the persisting lack of credible opposition. For specific segments of the electorate, this dynamic changed in May. Where newcomer parties gained traction, the slow trickle away from the ANC turned quickly into a flood. But most voters remained uninspired—only 58 percent of those registered went to the polls—down from 66 percent in 2019—which is less than 40 percent of the voting eligible population. Reversals for the ANC and patchy gains for its opponents are producing a fragmentation of the electoral field which looks set to hold for some time.
Disorienting dominance
Opposition weakness is partly endogenous to the strength of the ANC: opposition parties have been so ineffective because the ANC has been so powerful. The ANC’s stranglehold over the electorate since the end of Apartheid worked to constrain the space available to its opponents, nudging them towards niche strategies, focused on mobilizing specific segments of the electorate rather than constructing platforms with wide appeal. This is most evident in the case of the Democratic Alliance (DA), which grew out of the Democratic Party—the main liberal opposition in the Old South African parliament. Maligned as race traitors by the ruling National Party (NP), the DP received modest support right up until the country’s first democratic elections, in which it won just 1.73 percent of the vote. But it maneuvered skillfully in the early transition period, hoovering up former NP voters as that party collapsed under the weight of its historical associations with Apartheid and its modern links with the ANC (with whom it had formed a Government of National Unity). The DA also made large inroads into colored and Indian communities around this time, positioning itself as a defender of minority interests in the face of the ANC’s increasingly black-centered notion of transformation.
Propelled by its rapid ascent but facing the exhaustion of its minority-centered growth path, the DA switched to a different strategy from the mid-2000s. In an attempt to broaden its appeal among black voters, it softened its opposition to affirmative action, blended welfarist positions into its economic platform, and began aggressively courting black leaders. Mmusi Maimane’s ascent to the helm in 2014 represented the apogee of this strategy, showing real dividends in 2016 with the party achieving its high water mark of 26.9 percent in local elections. But a decline set in thereafter, as white voters defected to the right and middle ground black voters went back to the ANC following Zuma’s ouster. The DA won only 20.77 percent in the 2019 national elections. With dizzying suddenness, the party’s long gestating pivot to the center left was unwound. High profile black leaders were forced from the seats with most choosing to leave the party, including Maimane himself. A virulently neoliberal, color-blind faction under John Steenhuisen gained ascendancy.
Several factors contributed to this outcome, first of all genuine concern that the DA was losing its grip on its core constituency—white voters. Secondly, the fact that certain key figures had had a sudden rethink on race issues as they were sucked into the vortex of culture war politics spinning out of the US. Thirdly and perhaps most importantly was the internal pushback emanating from white functionaries of the party who saw power slipping from their hands as younger black leaders were rapidly elevated up the ranks.
But the force of the right-wing backlash would have been seriously blunted if the Maimane program had gained real ground. Had he managed to make and sustain large inroads into the black electorate he might have succeeded in shifting the racial complexion of the party, stabilizing his hold on power and drawing in a wider coalition of less ideological actors, particularly in business, who had an interest in fostering a viable alternative to the ANC. As it were, the unpromising electoral math made it far easier for revanchist elements to make the case for the DA embracing its role as a professionalized—and ideologically pure—opposition.
It’s harder to say what strategic bearing the single-party landscape has had on the Economic Freedom Fighters (EFF), because that party—and the leader-for-life with which it’s inseparably bound—have always been more ideological in nature. The EFF was formed in 2013 by Julius Malema several years after his expulsion from the ANC. A former leader of the ANC’s Youth League, Malema tried to cast his new party in the historical mold of that organization, which was traditionally seen as the radical conscience of the Congress movement. Always heavily disposed towards revolutionary bombast, it’s not entirely clear whether the EFF would have tried to cut a more electable image in its early days, even if a more open path were available. That said, Malema’s track record is hardly one of unshakable principle. Tailed by corruption scandals and deeply mistrusted by centrist voters, his current political brand appears to be hitting up against its limits. The EFF’s selectoral share has been broadly flat for eight years—although this conceals massive churn among individual supporters, which suggests that many treat the party as a protest vote rather than a viable alternative. Moreover, the niche it has chosen to occupy has grown suddenly more crowded with the emergence of MK—most of the EFF’s losses in the last election were in KZN (see the first figure, second panel). While it’s hard to see the party making any wholesale pitch for the middle ground, we might start to see electoral expediency start to curb aspects of its radicalism.
Immigration will be the bellwether here. Outwardly, Malema himself has been fairly steadfast in his commitment to an inclusive Pan-Africanism, a stance which has become increasingly costly as xenophobic attitudes have hardened in the public. In truth, though, the party has always talked left and walked somewhat right on the issue, loudly defending immigrants from the podium while allowing local branches to dabble in xenophobic politics. An alignment of rhetoric with practice might signal a bigger shift in strategic direction.
The ANC’s unassailable dominance hasn’t only worked to disorient existing contenders, but also potential ones. The strategic confusion induced by the ANC’s control over civil society is central to explaining why several decades of vibrant activism at a street and community level have failed to congeal into any political alternative. Radicals outside the ANC have faced an enduring dilemma: deep cultures of protest have provided ample resources for mobilization but resilient loyalties to the Congress tradition have frustrated efforts to cohere organization. This has fomented a deep rooted movementist tendency within the so-called “independent left” which has tended to spurn electoral and party politics in favor of an abiding faith in spontaneous action. The fact is that in over two decades, the only new major opposition parties have come from within the ANC.
Complex cleavages
Strategic errors can’t wholly account for the weakness of opposition. Contenders to the ANC have been forced to navigate a complex political terrain that offers no easy formulas for assembling majoritarian coalitions. The South African polity is partitioned by deep, cross cutting cleavages which have been somewhat obscured by the ANC’s broad church but are now coming into view as the latter recedes.
Race has been of singular importance for most of the democratic period—political scientists tended to refer to South African elections as a “racial census,” with black voters lining up almost universally behind the ANC. Race remains one of the most powerful predictors of individual voting behavior today. DA supporters like to argue that the party is post-racial, pointing out that it is the most diverse major party, which it is in a narrow statistical sense. Somewhere around one third of its regular voters are black, which might have been regarded as an achievement if it weren’t for the fact that 81.4 percent of the country is black. The DA is a major established organization with national reach and profile, a record of (relatively clean) governance and huge resources drawn from its ties to the business community and the white elite. Despite this, it captures less than 7 percent of the vote share in black electoral districts—a figure which has been flat for ten years—hardly evidence that the party is managing to transcend the color line.
South Africa’s sixth largest party after the May elections—the Patriotic Alliance—is a racially exclusivist one. Formed in 2013 by Gayton McKenzie, a former bank robber turned motivational speaker, the party only got 6,660 votes in 2019. In the five years since, it rode a wave of nationalist sentiment in the colored community. It also appealed to conservative voters with hardline anti-immigrant and tough on crime stances.
Until 2024, ethnicity had not played a particularly strong part in South Africa’s elections. In the early transition years, large shares of the electorate in the Zulu-dominant KwaZulu Natal (KZN) province aligned with the traditionalist Inkatha Freedom Party (IFP), but when Zuma came to power they were progressively won over to the ANC. The ANC suffered a wave of defections in KZN after Zuma was deposed in 2017, with many of those leaving going back to the IFP or turning to the EFF. In May, Zuma’s MK collected a huge portion of these votes, winning 45 percent of the vote despite having formed just six months prior. The party stoked entrenched social and economic grievances in a province that has borne the brunt of the social and ecological crises in the country. But it also raised traditionalist demands, including the call for a third house of parliament comprising traditional leaders. MK’s stunning victory in KZN was achieved by turning large sections of the ANC to its banner. Whole branches went over to MK, but often in secret, continuing to draw resources from the ruling party while campaigning for its opponents.
This outcome was only possible because Zuma had continued to command mass appeal and huge influence with local potentates in KZN. His resilient image—despite the leading role he played in the numerous crises afflicting the province—cannot be fathomed apart from his ability to act as a standard bearer for renascent Zulu nationalism. Outside KZN, Zuma is one of the most disliked politicians in the country. Yet his party also won substantial support in Gauteng and Mpulmalanga. Some analysts have read this as evidence of the party’s more universal appeal, but a closer look shows that its gains in those provinces track extremely closely to the size of the Zulu speaking population. In parts of the country where Zulu’s speakers are marginal, the party had little traction.
If there was to be an ethnicization of South African politics, KZN was always going to be its ground zero. For historical reasons, ethnic consciousness and organization are far more elaborated there than in other parts of the country. While there are few signs of this so far, there is nonetheless some risk that the emergence of a strong Zulu faction on the national scene will spur ethnic mobilization elsewhere.
In the countryside, challengers to the ANC face serious dilemmas. The vast majority of the rural population lives under traditional authorities—originally colonial instruments of indirect rule. Today they’re a somewhat mixed bag: some abide by certain principles of consultative democracy while most remain firmly in the colonial mold of concentrated patriarchal authority. For whatever reason, traditional authorities have retained far greater legitimacy than other spheres of government. Because they facilitate access to mining rights and corral their “subjects,” into voting booths, they’ve become important cogs in the ANC’s patronage machinery, helping the ruling party secure its hold over the rural population in exchange for a share of the mineral rents and supportive legislation. Excluding KZN, ANC support in 2024 held up far better in traditional areas than other parts of the country, declining at half the rate it did in urban settings.
Patronage politics
This brings us to the final and most important cleavage in South Africa—the divide created by the vast systems of patronage surrounding the ANC-controlled state. It might seem odd to talk about patronage as a “cleavage,” a term which refers to deep, lasting divisions in the general population. But in fact, this is exactly the nature of the conflict engendered by entrenched practices of rent-seeking that have themselves become a defining feature of post-Apartheid political economy. As Karl von Holdt has argued, rent-seeking in modern South Africa is more than a narrow criminal enterprise, it comprises an “informal political-economic system” that has become the primary vehicle of class formation for an aspirant black elite.
This informal economy is in many ways the progeny of the neoliberal formal economy that the ANC built over the last thirty years. That economy reinscribed the dominance of an increasingly globalized set of major corporations while inflicting enormous damage on the productivity and foreign exchange-generating engines of the economy. While a small but influential cohort of black elites were secured entree into the globalized enclaves of the new economy through Black Economic Empowerment policies, the aspirations of the broader class fraction of emergent black business were thwarted by poor growth prospects and premature deindustrialization. Those aspirations were increasingly displaced from the private economy onto the state.
A similar process occurred at a popular level, as the sclerotic job market failed to absorb the giant surpluses of labor that had been previously contained by the bantustan system. Mass unemployment and state dependency became defining features of the new dispensation. Huge “demand-side” pressures for patronage and rents were thus exerted directly onto the new ANC-controlled state. On the “supply-side,” the conditions for the rapid expansion of the informal economy were laid by the ANC’s politicization of the public service and its attempt to project party control over all levers of government. A “contract state,” defined by bloated procurement expenditures, was brought into being alongside and enmeshed with a “tenderpreneurial” layer of capital. Public employment became a huge engine of social advancement for black South Africans.
Patronage machineries formed the social base of the Zuma presidency. Brought to power in 2007 by a wider coalition in which organized labor was prominent, he quickly jettisoned the left planks of his platform and amplified a traditionalist message more resonant with the rural hinterlands of the party, where clientelism is more entrenched. His administration oversaw a gigantic increase in rent seeking and a surge in public sector employment. But he also ensconced himself personally at the heart of the largest single nexus of corruption in the state, which was centered around the infamous Gupta brothers—a family of Indian businesspeople who had been building close relationships with ANC bigwigs since the 1990s.
The Zuma-Gupta nexus operated according to an expansionist model in which rents were heavily reinvested into accumulating political capital and access. It grew rapidly, with the Gupta’s extending influence over an extraordinary array of public institutions and inserting themselves into the executive level of power, going as far as to summon, appoint, and fire cabinet ministers from their Johannesburg compound. Soon the Gupta machine butted up against the limits imposed by the pockets of still-intact regulatory authority in the state, particularly those located in the National Treasury which had retained broad oversight over procurement and financial intelligence. The “logic” of the informal economy, as von Holdt argues, required the capture of these agencies.
In December 2015, Zuma announced a shock cabinet reshuffle in which a little known backbencher, Des van Rooyen, was announced as the new Minister of Finance. That catalyzed massive opposition from big business, particularly the banking sector, which promised a financial maelstrom should the appointment remain in place. Van Rooyen was removed three days later and a business-friendly candidate reinstated. That incident put big business on a war footing and opened a phase of assertive mobilization against Zuma. In a public relations campaign orchestrated by the infamous marketing firm Bell Pottinger, the Guptas and their allies began to cast themselves as the protagonists of a vision of “radical economic transformation” (RET)—in practice, state capture and large-scale corruption—which was being stymied by so-called “white monopoly capital.”
Thus the relationship between informal and formal economy quickly evolved from one of symbiosis to one of contradiction. Patronage systems helped to stabilize the initial path of neoliberal reform by undergirding the ANC’s legitimacy, but under Zuma they began to critically undermine conditions for corporate accumulation. The most intense predation during Zuma’s administration was targeted at state owned enterprises (SOEs), including those in logistics and electricity. Recent analyses have shown that it was the collapse of these sectors above all else which produced the “lost decade” of growth that stretched across Zuma’s years in power. In setting its sights on the Treasury, the RET faction threatened the key institutional pillar of the fiscally prudent, neoliberal economy and made certain an all out confrontation with large-scale capital.
The informal-formal economy division is therefore a cleavage within the elite sphere first and foremost. Broadly, although these delimitations are not so neat in practice, it pits historically-white but now actually-mixed big business against a “tenderpreneurial” fraction of capital. But the fault lines it inscribes extend much deeper. Patronage in South Africa has always had a social character. Large constituencies are directly incorporated into the circuits of the informal economy through the politicization of public employment, welfare delivery, and the clientelistic practices of branch level machines.
Beyond this, RET forces have amassed a broader social base by framing their project as an answer to the unresolved national question. Convergent interests within the informal economy and the persistent failure of the formal economy to offer pathways for transformation have given RET coherence and social traction. In this way, von Holdt is right to speak of processes of “class formation” incubating within the patronage system. To some extent, these divisions will correlate with unemployment status, which is the key marker of inclusion in the formal economy. According to some surveys, supporters of populist parties are somewhat more likely to be drawn from the swelling ranks of the unemployed. That also gives these parties a more youthful character.
On the other hand, the impact of actually existing “radical economic transformation” has been a catastrophic erosion of state capacity—this has made RET many enemies. The collapse in basic service provision, driven by the failure of utilities and of local administration, has been ruinous for millions of ordinary South Africans. The economy shrunk consistently in per capita terms during Zuma’s lost decade and unemployment reached staggering highs. Anger with corruption runs white hot in large sections of the population. Outside of KZN, Zuma was unable to shirk the blame for this and left office with an approval rating in the low twenties. Other RET figures, like thee EFF’s Julius Malema, faced similar disdain outside of their devoted support base. As the clean-up candidate, the ANC’s Cyril Ramaphosa assumed office with an approval rating in the high 70s.
Age of framentation
The era of ANC dominance is ending. But the historical weakness of opposition, the complex cleavage structure of the electorate, and a low-barrier proportional representation system means that the ANC is not giving way to any single new party but to a fragmented political field. May 29 produced a parcelized legislature: the ANC took 159 seats; three mid-sized opposition parties collectively won 184 seats; two smaller opposition groups claimed twenty-six seats between them, and the remaining thirty-one seats were split between minnows. This is going to cause serious challenges of governance in a society that is deeply divided, with no history of coalition politics at the national or provincial level. Recent turbulence in the local government sphere, where coalitions have been a widespread reality for some years now, provides a concerning foretaste of the problems to come.
But fragmentation may be the main reason South Africa hasn’t been dragged along in the global undertow of populist authoritarianism. If Dani Rodrik is right to attribute the populist tide to globalization’s aftershocks, then South Africa should have been among the first countries to have undergone democratic “backsliding.” In the last few decades, the country has experienced major trade and immigration shocks, aggravating an already acute crisis of mass unemployment and high crime. But while populist formations (MK and the EFF) have grown, these so far haven’t shown any potential of achieving the level of majoritarian support that has facilitated democratic erosion elsewhere.
We shouldn’t let this be cause for more South African exceptionalism. It’s true that the liberation legacy imparted a certain resilience to democratic institutions here, not least through a strong constitutionalist strain in the Congress tradition. But it’s also true that popular sentiment has grown more nativist and more authoritarian in recent years, tracking the populist tide globally. A key reason this hasn’t produced the same kind of electoral result is that globalization shocks, rather than producing their own divisions, have been refracted through the post-colonial cleavage structure, which remains dominant. Consequently, local variants of populism cannot be likened to those abroad, they are largely sui generis. The EFF and MK, the two major populist parties, emerged from within the ruling party. They are not outsider movements, and their moral grammar is one of transformation not anti-corruption. Their vital energies derive from elite patrimonialism rather than middle-class chauvinism.
Crucially, their class configurations are very different from other populists in the global South, most saliently in that they are locked into a deep antagonism with large scale capital. This gives them a much more difficult road to power, but it also makes them more dangerous. Their irreconcilable breach with the investor class means that they have no means of crafting a viable economic program. That in turn means that, to govern, they will either have to moderate drastically and enter a wider coalition—or they will have to usurp the investment prerogative from their antagonists. The latter route implies a direct conflict with property and with democracy, not a slow curtailment of political freedom as has been the modus operandi of most modern authoritarians.
Lumping the EFF and MK together might be seen as analytically questionable when they are so divergent ideologically. The EFF describes itself as Fanonian-Marxist and draws heavily on the caché of the Left (minus the democratic bits) in its manifestos, which denounce exploitation, call for state-led development and espouse Pan-Africanism. MK also calls itself a left party, though makes no similar effort to live up to the label. Its message is brazenly chauvinistic, misogynistic and even feudalist. Yet the two find themselves in an ever tightening alliance, now made official in the parliamentary “Progressive Caucus” which also comprises a number of smaller nationalist and ostensibly left parties. Key figures associated with Zuma’s project, like the disgraced former public protector Busisiwe Mkhwebane, have joined the EFF’s parliamentary benches. The convergence of EFF and MK demonstrates most clearly the ways in which the informal-formal divide has become the primary contradiction in the South African social formation—if not by way of its popular salience then by way of its centrality in organized political conflict. It’s a common commitment to graft, rationalized as historic redress, that binds these parties together.
While organizationally fragmented, the political field is more and more splitting into two great hostile camps: the liberal camp on the one side, and the kleptocratic on the other. What complicates this otherwise neat bifurcation is the ANC, which straddles both liberalism and kleptocracy. Its ruling faction under Ramaphosa sits firmly in the liberal camp and has strong ties to the corporate bourgeoisie. There is no openly organized RET faction in the ANC though key power brokers, including the chairman and deputy president, retain ties to the kleptocratic camp. They are said to have preferred an alliance with the EFF following May’s result. The Gauteng branch of the ANC, in which the deputy president has his base, has rebuffed the national organization’s mandate to seek co-governance with the DA.
More broadly, the party as a whole remains utterly enmeshed in the circuits of the informal economy. This doesn’t necessarily mean that a majority favors a return to the Zuma model of statecraft. There is likely a substantial “moderate” faction that wants to keep up the flow of rents but to mitigate their antagonism with the formal economy and avoid the electoral consequences of regression to state capture. At a grassroots level and within the Left of the party, Ramaphosa’s clean up agenda likely remains popular. His appeal with the electorate, which despite some knocks remains much higher than that of the ANC itself, is still his greatest advantage within these factional conflicts.
Future fractures
Hence the ANC was deeply divided over the coalition question following May 29’s outcome. There were loud voices denouncing a potential agreement with the DA as amounting to doing a deal with Apartheid. Others preached doom should the ANC bring RET back into the fold. Ramaphosa, the consummate negotiator, deftly navigated these choppy waters, managing to secure his first order preference in a consolidation of the liberal camp; the so-called Government of National Unity is in practice a deal between the ANC, the DA, and the IFP. None of the other minnows in the tent have the seats to make any difference. If the Government of National Unity is in many ways an achievement, it’s been won by Ramaphosa without expending the considerable capital that would have been required to have called openly for a DA pact. Instead, Ramaphosa flung the door wide open, inviting all parties to join the GNU while betting correctly that RET’s intransigence towards working with “white interests” would prevent the EFF and MK from joining an alliance. At the same time, by keeping alive the threat of an RET tie-up, he managed to extract a highly favorable deal for the ANC in negotiations with the DA, holding on to the main centers of ministerial power.
Ramaphosa’s masterstroke has given the country a welcome reprieve. Had the ANC chosen to form a government with the kleptocratic camp, it would have thrown fuel on the simmering social crisis and reversed recent gains. But major questions present themselves about how long the GNU coalition will last. Ramaphosa’s term as ANC president will end in 2027. He currently has no successor of the stature that could guarantee the continued stability of his project and the main contender to take over from him, Deputy President Paul Mashatile, is generally thought to have EFF leanings.
To win decisively, the liberals would have to chip away at the material basis of kleptocratic power. They would have to squeeze the informal economy on both the demand and the supply side. That would require firstly an ambitious project of state rebuilding to professionalize the public service and establish centralized control over procurement. Ramaphosa has no possible means of purging corruption root and branch but there may be ways in which he might canalize it such that rents start to align with rather than undermine institutional goals, in the manner that East Asian developmental states seemed to achieve. On this front, there are some faint grounds for hope. Ramaphosa and his GNU partners are pro-reform. Public service transformation might be somewhat easier to sell to the ANC now that it is losing its monopoly over appointment. History shows that dominant parties are more likely to accede to a de-politicization of the state when confronted with the possibility that the weapons of patronage might be turned against them.
Much dimmer are the prospects for a major revamp of South Africa’s defunct growth model. Here the liberals don’t have any discernible vision or program. The GNU’s immediate priority is to carry forward Operation Vulindlela, Ramaphosa’s marquee reform program, which focuses on modernizing the country’s infrastructure and undoing the damage that state capture did to key network industries. It has made notable progress, most visibly in the dramatic turnaround in the electricity crisis. At the time of writing, South Africa had gone 144 days without scheduled outages. In 2023 there were only seventeen calendar days in which the lights stayed on uninterruptedly.
Modest though it may be, Vulindlela stands a good chance of affecting meaningful improvements given the complete rut in which the economy is currently stuck. That gives the GNU some welcome runway in the medium term. But even in the rosiest scenario in which growth bounces back to around 3 percent, is it not clear that this will be enough to consolidate the liberal bloc in the longer run. The country’s current unemployment rate is an eye watering 41.9 percent. The vast majority of those caught in the trap of long term exclusion from the job market are young people. Unless the political class sets its sights higher, towards a fundamental transformation of South Africa’s economic model, the country will continue to skirt around the chasm of populism and social unraveling.
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