Blocking a bad idea that enriches the rich: Peterson, Austerity, and the Washington Consensus

By William K. Black

John Williamson, a Peterson Institute “senior fellow” coined the term “the Washington Consensus” at a conference in 1989.

Williamson joined the Institute in 1981 when it was founded.  Pete Peterson is the Republican billionaire from Wall Street who has dedicated his life to proselytizing for lower taxes on the wealthy, stringent spending cuts in social programs, and privatizing Social Security – the unholy grail of Wall Street that would provide our largest banks with hundreds of billions of dollars in additional investment fees.  Peterson has funded many groups to evangelize for these neo-liberal dogmas.

I explore the extent to which Williamson’s statement of the “ten” “principles” of what he chose to label “the Washington consensus” parallels Pete Peterson’s policies.  Williamson, and the Reagan administration and the IMF did not see these principles as being of equal importance.  Williamson’s paper makes clear that the focus of the Washington Consensus was on Latin America.

Here is Williamson’s introductory paragraph, in full.

“No statement about how to deal with the debt crisis in Latin America would be complete without a call for the debtors to fulfill their part of the proposed bargain by “setting their houses in order,” “undertaking policy reforms,” or “submitting to strong conditionality.” The question posed in this paper is what such phrases mean, and especially what they are generally interpreted as meaning in Washington. Thus the paper aims to set out what would be regarded in Washington as constituting a desirable set of economic policy reforms. An important purpose in doing this is to establish a baseline against which to measure the extent to which various countries have implemented the reforms being urged on them.”

The paragraph is critical to understanding the context of the creation of the Washington Consensus.  It was all about the Latin American “debt crisis.”  It was all about a quid pro quo.  The Washington Consensus was a consensus of creditors about how to deal with their debtors.  Latin American debtor nations would be allowed to delay the repayment of their debts, but only if they “submit[ed]” to “strong conditionality” dictated by the Washington creditors.  The creditors – the U.S. Treasury, the Federal Reserve, the IMF, and the largest U.S. banks – needed to develop a coordinated position on what to demand as their quid pro quo from the Latin American debtors.   The number one thing on their list from the beginning was austerity (“setting their houses in order”).

The Washington Creditors were not willing to accept mere promises from the Latin America debtors.  Williamson emphasized that a key purpose of creating an explicit Washington Consensus was to be able to use it as a scorecard to ensure that the Latin American debtor Nations were “submitting” fully to the Consensus’ requirements imposed by the Washington Creditors (“strong conditionality”).  “An important purpose in doing this is to establish a baseline against which to measure the extent to which various countries have implemented the reforms being urged on them.”

Williamson then (implicitly) acknowledged that the Washington Creditors’ ten principles bore three equivalents to an Achilles’ heel.  First, he agreed that corruption could pervert the plan so that it would cause great harm.  He admitted that the Washington Creditors had “at least some awareness” of this danger – a classic example of damning with faint praise.  Williamson acknowledged that the Creditors who shared the Consensus believed that corruption in Latin America was “pervasive.”  Williamson was implicitly admitting that the Creditors had committed the classic economics error (and the defining joke of the economics profession) by “assuming the can opener.”  The Creditors implicitly assumed that privatization, deregulation, and the protection of private property (Consensus principles 8-10) would not be perverted by “pervasive” corruption (and I would add, private “control fraud”).

Second, Williamson acknowledged that there were many matters that Latin Americans considered to be vital to their well-being that the Washington Creditors deliberately ignored – even though Latin Americans correctly viewed them to be essential if the Patricians’ ten principles were not to cause harm.

“For better or worse, however, these broader objectives play little role in determining Washington’s attitude toward the economic policies it urges on Latin America. Limited sums of money may be offered to countries in return for specific acts to combat drugs, to save tropical forests, or (at least prior to the Reagan administration) to promote birth control, and sanctions may occasionally be imposed in support of democracy or human rights, but there is little perception that the policies discussed below have important implications for any of those objectives.”

Third, Williamson grudgingly acknowledged that the Washington Creditors who created the faux Consensus had disabling conflicts of interest because they were creditors of Latin American governments and were strongly motivated by their desire to impose policies that would maximize the repayment of their debts.

“Political Washington is also, of course, concerned about the strategic and commercial interests of the United States, but the general belief is that these are best furthered by prosperity in the Latin countries. The most obvious possible exception to this perceived harmony of interests concerns the US national interest in continued receipt of debt service from Latin America. Some (but not all) believe this consideration to have been important in motivating Washington’s support for policies of austerity in Latin America during the 1980s.”

I want to know which Washington Creditors told Williamson that debtors and creditors have a “harmony of interests.”  They have a wonderfully droll sense of humor.  The powerful love to take the position that “what’s good for GM is good for America,” so it is no surprise that the Washington Creditors were sure that the positions they were forcing Latin American Nations to “submit” to “best furthered … prosperity in the Latin countries.”  We have centuries of history proving that Washington Creditors are the people who know best the needs of Latin Americans and are passionately committed to serving the poor.  Austerity is frequently the enemy of “prosperity.”

Williamson then set out his ten principles.  His first was austerity and he called it the “central” policy that the Washington Creditors had long insisted that Latin American Nations “submit” to through “high-conditionality programs.”  That phrase is code for harsh austerity likely to throw the Nation into receivership and emasculate the Nation’s sovereignty by agreeing to “submit” to its creditors’ demands.

Fiscal Deficits

“Washington believes in fiscal discipline. The International Monetary Fund (IMF) has long made the restoration of fiscal discipline a central element of the high-conditionality programs it negotiates with its members that wish to borrow.  Left-wing believers in “Keynesian” stimulation via large budget deficits are almost an extinct species.”

Williamson is an ultra-hawk on austerity.  Even running a budget surplus may not suffice for Williamson:

“Unless the excess is being used to finance productive infrastructure investment, an operational budget deficit in excess of around 1 to 2 percent of GNP1 is prima facie evidence of policy failure. Moreover, a smaller deficit, or even a surplus, is not necessarily evidence of fiscal discipline: its adequacy needs to be examined in the light of the strength of demand and the availability of private savings.”

Williamson did not distinguish between Nations with sovereign currencies that they allow to freely float and who borrow in their own currency and Nations without fully sovereign currencies.  He and the Washington Creditors shared this lack of understanding of sovereign currencies, which led them to demand that Latin American Nations “submit” to austerity when that policy would be economics malpractice analogous to the medical malpractice of bleeding patients.

The Washington Creditors’ succeeded in getting most of Latin America to “submit” to austerity, deregulation, and privatization.  The resultant scandals enraged tens of millions of Latin Americans and led to the election of many national leaders running on the promise to refuse to “submit” to the Washington Consensus.

Neo-liberal economists and politicians, however, are prisoners of their pro-austerity dogmas.  They repeatedly force nations back into recession or even depression.  It does not matter how many times austerity makes the crisis worsen; the austerians are a one-trick pony.  I believe that within five years we will see a series of political leaders elected in Europe on anti-austerity planks.  The Washington Creditors’ Consensus is a leading cause of financial crises and human misery because of it self-destructive austerity and anti-regulatory principles.  Austerity is the leading cause of the election of national leaders who promise that if elected they will stop “submitting” to creditors’ demands that they inflict austerity on their people.

13 Responses to Blocking a bad idea that enriches the rich: Peterson, Austerity, and the Washington Consensus

  1. Hello Dr. Black, this essay verges near a deconstruction of the Bretton Woods capture at its outset. I have been looking for a P/K or similar analysis of the Bretton Woods agenda. The Nixon “shock” being primarily an extension of that capture. Parallel to this perspective, instead of assuming that the various steps down this garden path were by chance, it all seems to be consistent even if also pressed according to opportunity, unplanned and not. As a base point it seems that the results of that agenda needs to be compared to what would been more likely under Keynes’s Bancor model of clearing and exchange reserves. Argentina’s pegging of their Peso to the US dollar, seems like the same pattern of capture at a deeper and sovereign level. Here I’d be curious to find out who exactly pressed the pegging of the Peso upon the US$. Do you know of anyone else who has explored this slice of economic history further from a P/K or a’la real economique perspective?

    in appreciation, Tadit Anderson

    • Have you watched the video “Confessions of Financial Hit Man” ?

      The author recounts that the IMF and the World Bank have the policy of making loans to developing economies and then insist that they hire US companies to run their economies and impose austerity. If they refuse to go into debt, the US sends in the CIA to overthrow the elected government and install a dictatorship. Failing that they invade – Iraq and Libya.

      Ecuador is a recent case in point where water supplies were privatized and monopolized by Bechtel, who increased water prices beyond the capacity of poor people to pay. The poor rebelled by placing rocks on all major highways rendering them unusable and it brought commerce to a standstill. Bechtel were kicked out, but are suing the Ecuadorian government. Rafael Correa the new President, has now required the US to remove it military bases. He is also the man who gave refuge to Julian Assange in its London Embassy. His days might be numbered, but the World is watching.

      • Thanks. and I’m not a fan of John Perkins, because even his curreent economics are merely a watered down version of the confidence game he was running when he was doing the “hits.” And yes, Kirchner’s piloting Argentina out of the clutches of the WB/IMF was a start, and Correa’s current resistanc.e are positive. I’m looking for a peeling back of the neo-liberal ideology closer to its phase in establishing the post WWII world trade standards. THe major point is that the Bancor would have had a radically more positive impact, and still could. MMT/FF is mostly applied at a national sovereign level which is all good, and I think that there is an extension via fair trade and the Bancor which would be vastly better.

  2. Your last sentence will, I hope, also apply to the United States if austerity is imposed here as in Latin America. It’s too bad we will have to suffer through austerity to get to that point, but it looks to be inevitable.

  3. What exactly are the arguments in favor of austerity, for society at large, according to the Washington Consensus? Can someone please briefly explain the basic theory or point me in the right direction? I fail to see how austerity can help, especially when a country or a region like Europe is in a recession, so I looked for clues in the Peterson website. I found an article (Why Austerity Works and Stimulus Doesn’t) (http://www.piie.com/publications/opeds/oped.cfm?ResearchID=2311)), but it doesn’t really shed light in terms of the rationale behind austerity.

    • Perhaps it’s just that Pete Peterson doesn’t believe in the Common Welfare clause.
      …. Obviously!

    • The reason for austerity is to beat the 99% down, make them more insecure and afraid, increase inequality and the wealth gap between the rich and everybody else. The wealthy want to be a ruling aristocracy. Austerity is not a means, it is the end.

  4. Clearly America’s Politicians and Courts continue to support the “Right” which CentaMillonaire$ and Billionaire$ possess because of the vast wealth they have been “Allowed” to hoard! A “Right” granted to them by a chain of Wealth Granting systems which refuses to TAX the Root of All Evil – GREED – out of existence!
    Governments betraying the governed. Corrupted by CentaMillionaire$ and Billionaire$ and their GREED! Systemic hubris that has historically defied all peaceful attempts to create systems with true “liberty and justice for all”
    http://www.ianwelsh.net/justice-is-not-law-law-is-not-justice/
    “A social system only works if there are people willing to carry it out.”
    So far the 99% are content! Their Ignorance is bliss! The Lords of Wealth are doing a great job keeping the 99% ignorant and fearful of “Change”. I see no “Hope” in that.

  5. “Washington believes in fiscal discipline. The International Monetary Fund (IMF) has long made the restoration of fiscal discipline a central element of the high-conditionality programs it negotiates with its members that wish to borrow. Left-wing believers in “Keynesian” stimulation via large budget deficits are almost an extinct species.”

    Apparently not so any longer. The IMF is now creeping back to Keynesianism if not Lerner’s Functional Finance:-

    http://www.haaretz.com/business/imf-economists-raise-alarm-over-austerity-measures.premium-1.493159

    http://www.imf.org/external/pubs/ft/wp/2013/wp1301.pdf

  6. Michael Hudson

    Bill, when Latin America DID try to “get its house in order,” the State Dept. called that a revolution and sent in the CIA’s assassination teams!
    The Peterson new consensus kills them demographically by forcing young graduates to emigrate — turning a zero into a net gain for the countries receiving this immigration.

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