What The Hell America!

1990s and 2000s — most notably Bill Clinton’s New Democrats and Tony Blair’s New Labour — moved away from their postwar legacy of Keynesian interventionism. They embraced the competitive pressures of neoliberal globalization, becoming part of what was popularly known as the “Third Way” movement.

To its academic and political advocates, the Third Way movement was a pragmatic response to the structural constraints introduced by globalization and technological change — a calibrated “modernization” of the social democratic project for a new era. To its critics, the Third Way marked the turning point in which these parties abandoned their traditional tenets and working-class constituencies in favor of the right-wing neoliberalism championed by Margaret Thatcher and Ronald Reagan.

While these common historical accounts are true in some respects, they underestimate the role of the Third Way as a distinct ideological and political movement that helped consolidate the neoliberal turn of Western countries at the end of the twentieth century. Ideologically, the Third Way embraced what now might be called “supply-side progressivism”: an active state role in building the productive infrastructure of the economy, while largely forgoing any significant pursuit of socioeconomic redistribution and equality.

Understanding the Third Way is vitally important for socialists today, to avoid repeating the mistakes of social democracy’s recent history. Then — as arguably now — those sympathetic to the Third Way’s “progressive supply-side” approach overlooked its shift away from a redistributive agenda and its contribution to the neoliberal turn. At the same time, critics on the Left often dismissed the Third Way as merely a vehicle of New Right co-optation, emptying it of its own ideological and political content.

While a critical stance is welcome, overlooking the unique features of Third Way ideology allows its proponents to claim its distinctiveness whenever center-left elites propose or enact policies that diverge from the Right. As a result of these oversights, many have been unable to grasp the center left as a distinct wing of neoliberalism that has shaped many of the economic and social policies of the modern era.

In a recent article, we argued that the intellectual justifications for Third Way ideology were often rooted in New Keynesian economics, whose practitioners were closely integrated with the center-left political elite. The New Keynesian tradition emerged in Ivy League academic circles in Anglo-America after the stagflation crisis of the 1970s largely discredited the postwar Keynesian consensus on demand management and full employment. Macroeconomists working in this tradition, from Stanley Fischer to Larry Summers and Janet Yellen, produced highly influential theories of inflation, unemployment, and growth that would inform the economic policy consensus of the 1990s and 2000s. These New Keynesian precepts would be leveraged by the Third Way movement to forge a political project that shaped the neoliberal common sense of the 1990s and 2000s.

In contrast to the economic theories espoused by the likes of Friedrich von Hayek, Milton Friedman, and James Buchanan — that drove the New Right agenda of Thatcher and Reagan — New Keynesian theory advocated limited forms of state intervention to correct market “imperfections” during unexpected economic shocks. Yet this interventionism was highly circumscribed. New Keynesians argued that government policy should, in the long run, ensure that labor’s wage claims were in line with the economy’s productive capacity and that state intervention should focus on enhancing supply-side competitiveness rather than on what they considered “unproductive” spending on welfare and consumption. These political concerns were embedded within arcane concepts, such as the non-accelerating inflation rate of unemployment (NAIRU), which claimed that below a certain level of unemployment, inflation would inevitably accelerate.

Throughout the 1990s and early 2000s, New Keynesian theory became the dominant paradigm for central banks and governments around the world. Under its guidance, price stability — not full employment — became the primary macroeconomic objective, with independent central banks using interest rate adjustments to meet inflation targets.

Moreover, the influence of the New Keynesian elite extended beyond professional economists to include policymakers, advisors, and future central bankers who would secure leading posts within Third Way governments. Alongside more radical — and often impractical — ideas from public choice theory and monetarism, this intellectual tradition provided a durable basis for Third Way elites to craft a new model of governing the capitalist economy.

The New Keynesian elite was critical to the success of the Third Way project. As Third Way politicians sought to project an image of competence and credibility to their increasingly middle-class electoral constituencies, New Keynesian theory furnished them with scientific credibility — portraying them as superior economic managers compared to their right-wing counterparts.

In the context of post–Cold War globalization, New Keynesians argued that macroeconomic policy had to be realigned with financial market expectations. In response, Third Way governments — led by the Clinton and Blair administrations — pursued a program of radical fiscal consolidation that included substantial cuts to social security and welfare spending. The aim was to build credibility with financial markets and leave room for subsequent government intervention. However, these fiscal austerity measures soon overshadowed their promises of public investment and social spending, becoming the dominant objective of their administrations.

The New Keynesian consensus maintained that globalization increased competition by offering capital more exit options and necessitating a more flexible and mobile workforce. From a Third Way perspective, economic investment and growth would not follow automatically from freeing the hands of capital — as the right-wing narrative had suggested — but rather from successful participation in the turn-of-the-century knowledge economy. This vision required a significant commitment to “social investment” in human capital — to generate a highly skilled and technically competent workforce to fuel new forms of economic activity. The Third Way movement pioneered contemporary approaches to labor market “flexibility” as an inevitable and necessary process of “modernization.”

Facing strict constraints on their ability to borrow and spend, Third Way elites sought to expand social investment by incentivizing private forms of social provisioning and public-private partnerships. This strategy, however, increased the power of the financial sector, as debt-based consumption grew and the public sector was cannibalized by investors. At the same time, any attempt to steer social investment was undermined by market-based influences.

For many observers, the relative macroeconomic stability and prosperity of the 1990s and 2000s seemed to give credence to the Third Way project. Center-left political elites attributed these macroeconomic trends to their responsible economic management. Yet the height of the Third Way movement took place against the backdrop of a highly favorable global economic environment. More troublingly, it was accompanied by unprecedented levels of economic inequality, stagnant living standards, and the systemic decline of working-class bargaining power. The growth experienced during this period would also prove fleeting, fueled by high levels of household debt, asset inflation, and a fragile economic model that would soon erupt in crisis.

Following the 2008 global financial crisis, the center left suffered major political setbacks. The crisis upended the period of economic stability that had underwritten its political project, resulting in substantial electoral losses throughout the early 2010s.

Despite these setbacks, New Keynesian ideas continued to shape macroeconomic policy throughout the 2010s. Under the influence of his New Keynesian advisor, Larry Summers,  President Barack Obama’s administration took a timid approach to fiscal stimulus and embraced austerity. Similarly, the UK Labour Party, while in Opposition throughout the 2010s, championed fiscal austerity — reflecting the enduring influence of Third Way neoliberalism.

At the same time, populist movements on both the Left and the Right increasingly challenged the center left. From the 2016 Brexit referendum in the UK to the presidential victory of Trump, the Right successfully recruited sections of the discontented and disillusioned working class, elevating protectionism and economic nationalism as central themes of political discourse. The COVID-19 pandemic further accelerated state intervention in the economy, as disruptions to global supply chains and emergency measures spurred debates about public investment — particularly related to decarbonization, supply-side economic reforms, and industrial policy.

These political and economic pressures prompted an ideological shift among center-left political elites, leading them to distance themselves from traditional neoliberal policies on globalization, trade, and industrial policy. However, this shift has been largely superficial. As we have shown, throughout the 1990s and 2000s, center-left elites endorsed a model of state intervention that promised public investment in the competitive infrastructure of the supply side in the economy (“good spending”) while largely avoiding consumption-driven expenditures associated with Keynesian welfare policy (“bad spending”). This model of state interventionism and its continued neglect of a substantive redistributive agenda has remained a central thread of the contemporary center left.

For some, the Biden administration’s initially expansive macroeconomic policy and its flirtation with redistributive social policies in the Build Back Better Act signaled the start of a radically new era. But its swift retreat in the face of inflation and rising interest rates — shifting back to a supply-side and national security focus — has realigned center-left parties with core New Keynesian principles.

This reversal is visible in Starmer’s Labour Party. Despite outlining a wide-ranging economic agenda on the campaign trail, the Labour government has since embraced a highly conservative approach to macroeconomic policy, abandoning many of key promises — including its flagship pledge of £28 billion a year of green public investments — due to claimed fiscal restraints.

Viewed in this light, pandemic-era economic policy appears less as a paradigm shift in governance or an enlightened reorientation of the center left than as extraordinary, crisis-driven measures reminiscent of the time-limited government interventions that defined the Third Way era. As the center left has gravitated toward an increasingly conservative fiscal approach, its interventionist politics are on ever more shaky ground. With global economic instability, an urgent need for expansive green public investment amid an escalating ecological crisis, and the enduring threat of right-wing populism, the ideological legacies of the Third Way continue to undermine the political fortunes of the center left. Overcoming these challenges will require not only breaking with the ideological orthodoxies of the Third Way’s New Keynesian consensus but also transforming the social forces upholding them.