Reframing centre-left neoliberalism: New Keynesian theory,Third Way ideology,and the construction of an elite consensus in the US,Britain,and Australia

Abstract

This article aims to contribute to a growing literature on the role of social democratic and progressive parties in shaping neoliberalism. We argue that existing literature has not fully recognised the unique intellectual and ideological traditions of the Centre-Left as a distinctive wing of neoliberalism. Much of this confusion can be resolved by examining the unique ideological contributions of New Keynesian economics in the context of a Gramscian political analysis. Focusing on Centre-Left Anglo-American governments in the US, Britain, and Australia throughout the 1990s and 2000s, we demonstrate how New Keynesian theories provided the intellectual justification for the Third Way’s ideological project and model of state interventionism at the height of the neoliberal period. While Centre-Left political parties in these Anglo-American states have recently sought to re-invent themselves under a new interventionist economic paradigm, we conclude by showing how they have continued to reproduce orthodoxies associated with the New Keynesian consensus.

Introduction

In an apparent response to the political success of right-wing populism throughout the 2010s and the experimentation with state interventionism during the COVID-19 pandemic, intellectuals, pundits, and policymakers have sought to lay the foundations for a new model of Centre-Left politics. Commentators have dubbed this ‘supply-side progressivism’, a growth-oriented set of economic and social policies that actively deploys the levers of state power to relieve bottlenecks in productive inputs on the supply side of the economy (Klein, 2021). The most influential example of this doctrine has been the Biden administration, whose COVID stimulus, infrastructure, and industrial policy measures have seemingly flouted key tenets of the neoliberal policy consensus. Commentators have described ‘Bidenomics’ as a ‘new era of big government’ (Brower et al., 2023), while influential figures in the Biden administration have sought to outline the economic policy foundations of a ‘new Washington consensus’ (Sullivan, 2023). In the aftermath of the pandemic, Centre-Left politicians from Biden to Macron, Scholz and others have been at the forefront of pursuing a ‘new industrial policy’ (Levitz, 2023). Despite this distinct political inflection behind the return to dirigisme, much of the current debate between sympathetic and sceptical observers alike has dedicated surprisingly little attention to the recent history of Centre-Left politics in advanced capitalist countries. Instead, commentary has largely focused on how this new interventionism reflects the waning ideological influence of neoliberalism over economic policy, saying more about what the new industrial policy is not rather than illuminating the values and beliefs that it represents.

We suggest that this form of analysis is symptomatic of a broader tendency within the academic literature on neoliberalism and ‘post-neoliberalism’, which focuses primarily on right-wing political figures, academics, and think tanks as the main producers and disseminators of a dominant neoliberal ideology. As a result, the literature does not fully account for the distinct intellectual influences and ideological orientations of the Centre-Left and its contributions to the hegemonic consensus surrounding neoliberal policy prescriptions. Failure to do so, we argue, runs the risk of mistaking old wine in a new bottle in the analysis of the contemporary Centre-Left. ¹

In the 1990s and 2000s, many Centre-Left parties across the advanced capitalist West, exemplified by Bill Clinton’s New Democrats and Tony Blair’s New Labour, became part of what was known as the ‘Third Way’ movement. To its advocates, the Third Way was predicated on modernising the political programme of social democratic or ‘progressive’ political parties in line with the new constraints of globalisation. The Third Way sought, it was believed, to address the ‘new social risks’ engendered by economic integration through targeted forms of ‘social investment’, all while maintaining a commitment to fiscal consolidation. To its critics, the Third Way is regarded as a historical turning point when many of the traditional tenets of social democracy were abandoned in favour of neoliberal principles (Moschonas, 2002). We argue that regardless of their assessment of the movement, many commentators on the Third Way have relied on a shallow understanding of the intellectual underpinnings of the Centre-Left movement and underestimated its endogenous ideological contributions in solidifying the turn towards neoliberalism. We believe that many of the theories and ideologies associated with the Third Way continue to shape Centre-Left political discourse, even if the Centre-Left parties have ceased to identify with the ‘Third Way’ label itself. It is important in this sense to provide a close reappraisal of this ideological movement within Centre-Left political circles to understand if and how the apparent return of interventionism in the 2020s is connected to this lineage and whether it truly represents a break with neoliberal hegemony.

Those few analyses that delve into the theoretical sources of Centre-Left ideology in the Third Way period provide helpful signposts but typically focus their attention on a select few theorists. Prominent in these discussions is British sociologist Anthony Giddens, seen as the public intellectual par excellence of the Third Way movement in the 1990s (Ryner, 2002). However, focusing on public intellectuals like Giddens, we argue, only provides a superficial glimpse into the underpinnings of Third Way ideology. The intellectual roots of the Third Way movement in fact go much deeper. They reflect a coming together of several strands of ‘progressive’ thinking and economic theory dating back to the 1970s crisis period. It was during this crucial time, on the heels of the breakdown of the postwar Keynesian consensus and heeding the important example set by Mitterrand’s infamous 1983 macroeconomic policy ‘U-Turn’ in France, that Centre-Left intellectual and policy circles formulated alternative economic theories that broke with the traditional tenets of Keynesian macroeconomic management on the one hand and the theoretical influences of the nascent New Right movement on the other (McDaniel, 2023). Chief among them was New Keynesian theory, which prescribed a combination of fiscal austerity and limited forms of state intervention geared towards fostering the competitive infrastructure of the economy and enhancing national productivity. While the more interventionist approach prescribed by New Keynesian economics differed from the ‘laissez-faire’ economics of the New Right, it nonetheless solidified a neoliberal common sense that militated against activist forms of state planning and redistribution, elevated fiscal consolidation as the preeminent economic policy goal, and focused state intervention on ‘structural reforms’ to the supply side of the economy.

We offer a Gramscian analysis of how New Keynesian theory shaped the ideology and political economy of the modern Centre-Left social bloc and examine its role within the overall consolidation of neoliberalism. This article focuses primarily on Anglo-American countries – the United States, Britain, and Australia – who were at the forefront of the Third Way movement in the 1980s and 1990s. However, the Third Way movement spread across the advanced capitalist democracies by the turn of the 20th century, impacting national party systems regardless of their previous relationship to the social democratic tradition or existing institutional arrangements: the consensus democracies of Continental Europe were just as influenced by the movement as the Anglo-American majoritarian electoral regimes (Blair and Schröeder, 1998; Clift, 2004).

We argue that New Keynesian theory informed the ideological framework of the Third Way movement and was central in solidifying the Centre-Left social bloc and its broader claims of economic competence and credibility. From the Hawke-Keating ALP governments of the late 1980s and early 1990s to the highly influential electoral victories of the Clinton administration in 1992 and 1996 and the Blair-Brown government in 1997, each of these governments drew on common intellectual traditions and implemented similar macroeconomic and social policies that helped propel the Third Way to a global movement.

This article has five sections. The first section situates our argument in relation to current literature on neoliberalism and the Third Way. Focusing on the role of New Keynesian theories in providing ideological cohesion to the Centre-Left social bloc, we argue that our Gramscian approach resolves some of the ambiguities of existing literature by demonstrating the unique ideological contributions of the Centre-Left in consolidating neoliberal hegemony in the Anglosphere. The second section maps the Anglo-American network of intellectuals central to the New Keynesian movement and their relationship to the Centre-Left parties and elites. The subsequent third and fourth sections outline key aspects of New Keynesian paradigm and trace its influence on the economic and social policies of Centre-Left governments in the US, the UK, and Australia during the height of the Third Way movement at the turn of the century. Finally, the concluding part reflects on what the contributions of this article can tell us about the current era, charting the continued influence of Centre-Left neoliberalism from the 2008 crisis through the COVID-19 pandemic.

Neoliberalism and the Third Way

Within the last decade, some of the most influential scholarship on neoliberalism has focused on excavating its intellectual history. Important examples in this vein are found in the work of Slobodian (2018), Biebricher (2019), MacLean (2017), and Philip Mirowski (Mirowski and Plehwe, 2015). In tracing the contours of the neoliberal ‘thought collective’, this literature has sought to narrow its focus to a clearly defined intellectual lineage – one stretching from Vienna to the University of Chicago via Mont Pèlerin – and thereby avoid the charge from critics that the concept of neoliberalism has been unduly extended (Birch, 2015; Boas and Gans-Morse, 2009; Venugopal, 2015). While the search for definitional precision is admirable, this new generation of scholars has arguably gone too far in limiting the criteria of what constitutes neoliberalism, reducing a complex political phenomenon to relatively esoteric exchanges between economists – most of whom are situated philosophically and politically on the Right. The usual list of suspects includes figures like Friedrich von Hayek, Milton Friedman, and James Buchanan, among others, whose ideas – despite adhering to different schools of economic thought – nevertheless contributed to important right-wing political movements around the world beginning in the 1970s. However, by now it is generally acknowledged that the governing parties of the Centre-Left, including in continental Europe, have played an essential role in consolidating the neoliberal turn of developed economies since the 1970s (Humphrys, 2018; Mudge, 2018). Recognition of this fact is at odds with the recent preoccupation with a largely right-wing thought collective within the literature dedicated to the analysis of neoliberalism.

These accounts, we maintain, are problematic for two reasons. First, they neglect important strands of intellectual and ideological history that are endogenous to the Centre-Left and have actively contributed to the consolidation of neoliberalism. While existing accounts in this vein have noted the historical role of the Centre-Left in the ‘roll-out’ of neoliberalism (Peck and Tickell, 2002), they have generally failed to provide a satisfactory explanation for why these centre-left actors have justified doing so from an ideological perspective. Second, this body of work overlooks the pivotal role played by political parties in transforming the activity of intellectuals into ideological orientations and their transmission to different social forces.

There is a significant literature on the Third Way as a political-ideological movement dating back to the 1990s. However, it has similarly struggled to situate the Third Way in relation to neoliberalism in a consistent manner. This body of work can be divided into three broad tendencies. First, there is a critical literature that understands the Third Way as a definitive break with postwar Keynesianism and social democracy towards neoliberalism. This is believed to have occurred either through a process of the co-optation of the Centre-Left by the New Right movement, who pushed the ‘Overton window’ to the political right, or due to economic pressures associated with globalisation. In these accounts, the Third Way movement is largely emptied of its own ideological and intellectual content and is perceived as a strategic reaction to neoliberal globalisation and the growing prominence of right-wing ideas. Centre-left elites are perceived to have incorporated fundamental tenets of neoliberal thought directly into their political agendas, adding only minor revisions at the margins to mitigate, but not fundamentally change, the process of market-oriented restructuring (Hay, 1999; Wiseman, 1996). Anderson (2000: 11), for instance, noted that ‘[i]deologically, the neo-liberal consensus has found a new point of stabilization in the Third Way of the Clinton-Blair regimes’, in which the ‘hard core of government policies remains [the] further pursuit of the Reagan-Thatcher legacy’. Similarly, in Stuart Hall’s (1998: 14) analysis of New Labour he maintains ‘the Blair project, in its overall analysis and key assumptions, is still essentially framed by and moving on the terrain defined by Thatcherism. Blair’s historic project is adjusting us to it’.

The second tendency, which can be found among commentators more sympathetic to the Third Way movement, regards the latter as a pragmatic response to the structural constraints introduced by globalisation and technological change. Here, the Third Way represents a calibrated ‘modernization’ of the social democratic project rather than a fundamental revision. These commentators maintain that the Third Way movement pursued similar egalitarian objectives as their postwar Keynesian predecessors, including broad-based economic growth and the amelioration of inequality, but contend that the means employed to obtain these ends had to adapt to increasing economic integration (Gamble and Wright, 1999; Thelen, 2014; see also Clift and Tomlinson, 2007). Jingjing Huo (2009: 2), for example, argues that the Third Way’s focus on labour market ‘activation’ policies reflected an ideological adaption to the contemporary realities of labour market dualization and high levels of structural unemployment: ‘Solidarity became increasingly productivist and egalitarianism increasingly prioritarian, focusing on protecting the worst off. Meanwhile, neither solidarity nor egalitarianism was abandoned as a fundamental principle. This is why there was not a retreat from social democracy’.

A third, more recent literature argues that the Third Way represents a sui generis ideological tradition that is distinct from both postwar social democracy and the New Right. More critical in tone than the second tendency, commentators in this vein argue that Third Way ideology combines elements of traditional social democracy with the Right’s affinity for marketization. On this reading, Third Way social democracy promotes a form of supply-side interventionism that is market-led rather than market-controlling (Bremer and McDaniel, 2020; Cebul, 2019), and traditional social democratic institutions like the welfare state and industrial relations systems are subordinated to a new market logic and enlisted to the cause of enhancing productivity and national competitiveness (Andersson, 2009; Geismer, 2022). For instance, in her book on the Third Way in Britain and Sweden, Andersson (2009: 12) argues that the Third Way ‘add[s] up to a fundamental ideological change in social democracy’s outlook on capitalism’, which ‘is distinct from ideologies in the history of social democracy because it turns arguments that historically were arguments in critique of capitalist structures into arguments for these structures’.

In drawing a clear distinction between neoliberal hegemony and the disparate ideologies that contribute to it, our approach synthesises the first and third tendencies. While the first strand of critical literature captures the significant political transformation of social democratic parties associated with the Third Way movement away from their historical roots, it nonetheless shares similar pitfalls to the recent wave of ideational literature on neoliberalism. That is, by foregrounding the ideological hegemony of the New Right and the Centre-Left’s assimilation, it ultimately underestimates the role played by an endogenous Centre-Left ideology in consolidating the neoliberal turn. That said, existing third tendency or sui generis arguments have thus far only provided a limited analysis of the theoretical underpinnings of Third Way ideology. Their focus has rather been on broad themes of productivism and competitiveness or the movement’s tendency to prescribe market solutions to achieve traditional social democratic aims without much further elaboration or excavation. In contrast, we present a more expansive view of Third Way ideology by showing how the movement’s embrace of competitiveness, productivism, and market solutions reflect the theoretical influence of New Keynesian economics. While there has been some similar research examining the influence of New Keynesian economic theory on the Third Way movement, it has either been a) undertaken by heterodox economists that present a surface-level political analysis (Arestis and Sawyer, 2001) or b) focused on the post-2008 decline of social democracy rather than at the height of the Third Way movement (Bremer, 2023). ²

As a result, there is substantial ambiguity concerning the Third Way’s influence on neoliberalism. Much of this confusion, we contend, has been a result of the failure to distinguish between the ideologies of neoliberalism on the one hand and neoliberalism as hegemony on the other. Below we unpack our own Gramscian perspective for analysing this relationship, recognising the distinctive character and intellectual roots of Third Way ideology while situating that ideological worldview within a broader neoliberal hegemonic order. By drawing attention to the important role played by intellectuals in ideology formation, our framework identifies the central and underappreciated role of New Keynesianism in shaping the political project of the Third Way movement.

Hegemony, ideology, and common sense: A Gramscian alternative

Antonio Gramsci understood hegemony as the political leadership of a dominant class within society; a leadership characterised by a mixture of consent and coercion exercised over subordinate or ‘subaltern’ classes and groups. Within capitalist liberal democracies, the existence of competitive elections, the regular alternation of political power, and the presence of an active civil society means that the generation of widespread popular consent plays an important role in solidifying a hegemonic order favourable to the capitalist class (Anderson, 1976). Consent is obtained not through the dominance or naturalisation of a singular ideology, but rather ‘spontaneously’ through its accordance with a shared common sense or ‘average’ worldview of the population (Donoghue, 2018: 400). ³ Common sense, according to Gramsci (1971: 422), is a ‘chaotic aggregate of disparate conceptions’ – an amalgam of popularly held beliefs, ideologies, and doctrines that comprise people’s everyday understanding of the world (Hall and O’Shea, 2013). Within a social formation different social blocs will compete not only for material and political resources but to define and shape the worldview reflected in popular common sense. This process was famously examined by Stuart Hall (1979) in his analysis of Thatcherism, which identified how Margaret Thatcher’s New Right hegemonic project was able to solidify a reactionary bloc by connecting principles of social conservatism and monetarism with the everyday concerns, prejudices, and beliefs of a cross-class alliance of voters (Hall, 1979). Social blocs are not simply electoral coalitions, but hierarchical networks composed of political elites, representatives of capital and/or labour, intellectuals, and broader class segments united by ideology and adhering to a common political leadership (Amable and Palombarini, 2014; Baccaro and Pontusson, 2019). In competing to influence the broader common sense of a period, social blocs strengthen or consolidate their claims to hegemony.

Within a hegemonic order, it is possible for several distinct and even oppositional ideologies to co-exist that draw from and influence the common sense of an era (Ryner, 2002: 10). We define ideologies as collectively held and (relatively) coherent systems of normative beliefs and ontological representations that guide political behaviour. Ideologies are crucial to the cohesion of a social bloc: the material and strategic interests of different elements of a social bloc are articulated through shared ideologies that provide the pursuit of these interests with a normative and scientific foundation and simultaneously promote political consensus across the bloc.

Within a Gramscian framework, the activity of intellectuals is central to this process of ideological cohesion (Gramsci, 1971: 5–12). Intellectuals, according to Gramsci, are not defined by their academic profession or ‘intrinsic activity’ but by their functional role within a complex social division of labour. An important part of this function is the articulation of knowledge and worldviews that shape and organise common sense. Academics are intellectuals, but so too are a range of social actors: partisan experts, political pundits, business leaders, union activists, and so on. ⁴ The working classes might develop ‘organic’ intellectuals from within their ranks to perform this function, but ‘traditional’ intellectuals from the dominant social class (or assimilated to it) also promote ideological cohesion by sublimating and universalizing the material and strategic interests of that class through their supposedly impartial and autonomous activity both inside and outside of the state (Ives, 2004: 74–77). Historically, this activity has taken the form of a variety of truth-making processes, both secular and religious. In the modern era, the construction of economic theory on the part of professional economists has played a preeminent role in informing the ideological cohesion of the dominant social blocs and the policy activity of states (Fourcade, 2009; Mudge, 2018). These theories are essential ingredients in the construction and justification of the social bloc leadership’s claims to superior political and economic competency.

Gramsci maintained there were close linkages between intellectuals and political parties, with intellectuals connecting the mass and elite elements of parties ‘morally and intellectually’ (Gramsci, 1971: 153). We similarly view parties as central nodal points within social blocs that consolidate, institutionalise, and transmit the ideological work of intellectuals. Partisan differences are important not only insofar as they (potentially) produce distinct policy outcomes, but functionally as social incubators of ideas that legitimate a hegemonic order in the face of underlying social cleavages. Of course, this function is not always well served. In the face of crises, such as the 2008 Global Financial Crisis, the legitimation provided by political parties for a hegemonic order can falter. This gives rise to what Gramsci called a ‘crisis of representation’ in which classes become detached from their traditional representative bodies and political parties lose their authority (Gramsci, 1971: 450–453), often leading to the rise of ‘anti-system’ political movements (Hopkin, 2020). When this occurs, much of the common sense of the hegemonic order comes into question, but the ideological cohesion and orientation of a dominant social bloc is unlikely to change in the absence of a successful political and organisational challenge to its leadership.

We maintain that the Third Way movement of the Centre-Left bloc was one of the distinct and major ideological formations that contributed to the construction of a neoliberal common sense. Historically, its ‘other’ has been the ideological constellation and social bloc of the New Right most commonly associated with neoliberal thought (Biebricher, 2019; Slobodian, 2018). These blocs varied significantly in terms of their intellectual influences and normative orientations but nevertheless reflected a consensus on the desirability of several broadly defined policy objectives that informed the popular common sense of the period: fiscal consolidation, labour market flexibility, and market-based reform. However, what is less recognised is the role New Keynesian economic theory played in informing the Third Way and by extension consolidating the neoliberal common sense.

New Keynesian intellectuals and the centre-left social bloc

While the Third Way movement has spread across all Western capitalist democracies, Anglo-American countries were at the forefront of its political and ideological development. Throughout the late 1980s and early 1990s, Australia’s Labor Party was an important precursor to the Third Way (Pierson and Castles, 2002). Indeed, the successes of the ALP provided a highly influential example of a ‘modern’ approach to social democratic governance to Tony Blair, who visited the Antipodes and his partisan counterparts several times before his 1997 election (Harcourt, 2001). However, it was within the US and UK that the Third Way fully developed as a coherent political project. Strongly influenced by the electoral victories of the Clinton administration in 1992 and 1996 and the ‘New Democrats’ in the US, Tony Blair’s New Labour government maintained close connections and ideological affinities with key members of the Clinton administration, the US Treasury, and the Federal Reserve (Denzau and Roy, 2004).

New Keynesian economic theory played a central role in legitimising the ideological contours of this political movement. Many of the core tenets of this programme were developed in elite academic and political circles in Anglo-America, particularly in the economics departments of American Ivy League academic institutions, including MIT, Princeton, Yale, and Harvard. Within these institutions, from the 1970s through the 1990s, a new cadre of (what were in Gramscian terms) ‘traditional’ intellectuals working in economics departments played a central role in the formation of a New Keynesian paradigm that would inform the ideology of the Third Way movement and contribute to a new macroeconomic consensus in the 1990s and 2000s (Goodfried and King, 1997). New Keynesian intellectuals and theory provided the policy orientations of the Third Way political elites with scientific credibility and boosted their claims of superior economic competency compared to their right-wing counterparts.

New Keynesianism emerged in response to the influential critiques of postwar Keynesian demand management made amid the stagflation crisis of the 1970s. In response, a new generation of macroeconomists sought to rejuvenate the Keynesian paradigm by incorporating elements of rival schools of economic thought – in particular, rational expectations theory. The economics department at MIT was the epicentre of these efforts. Some of its most influential faculty included Robert Solow, Stanley Fischer, Gregory Mankiw, and Rudi Dornbush, who supervised some of the leading figures of New Keynesian theory, including Olivier Blanchard, David Romer, Laurence Ball, Joseph Stiglitz, Paul Krugman, and Kenneth Rogoff. Princeton, Harvard, and Yale similarly produced central figures in the New Keynesian tradition, from Alan Binder to Janet Yellen. Many of these economists would go on to secure faculty positions within the same Northeastern Ivy League ecosystem (Svorenčik, 2014), producing highly influential theories of inflation, unemployment, and growth.

The formation of this New Keynesian elite was not confined to professional economists but also included a wider constellation of ‘intellectuals’: policymakers, advisors, and party experts who traversed the border of what Gramsci called ‘political society’ and ‘civil society’. That is, moved between formal state institutions, on the one hand, and the ‘private bodies’ within the social and cultural spheres of capitalist society (Thomas, 2009). This included influential policymakers with well-established connections between economics departments and government policymaking circles. At MIT, for instance, some of the world’s most influential central bankers, including Mario Draghi, Ben Bernanke, Mervyn King, Charles Bean, and Stanley Fisher either secured their doctorates or taught as visiting professors (Hilsenrath, 2012). This New Keynesian elite extended beyond central banking and included future treasury ministers, economic advisors, and civil servants. At Harvard, for instance, future US Treasury secretary Lawrence Summers supervised the doctoral research of New Labour’s future chief economic advisor, Ed Balls – in the same department as Janet Yellen, future board member of the Federal Reserve and later chair of the Council of Economic Advisors under Bill Clinton (Denzau and Roy, 2004: 75–76). This cadre of New Keynesian intellectuals and policymakers took up central positions within Centre-Left governments that came to power throughout the 1990s and 2000s, leveraging the theoretical foundations of New Keynesian theory to shape the Third Way’s economic agenda and bolster its claims to economic credibility within the Centre-Left social bloc (The Economist, 1997: 63).

The rise of New Keynesianism and the new macroeconomic consensus

Throughout the 1970s and 1980s, the New Classical school of macroeconomics advanced influential critiques of postwar Keynesian macroeconomics. Perhaps the most influential critique emerged from rational expectations theory and the work of Lucas (1976), who insisted that macroeconomics be grounded in microeconomic theory that incorporated the rational expectations of individuals and firms into theoretical modelling (Lucas, 1976). Based on the assumptions of rational expectations theory, new classical approaches posited the ineffectiveness of discretionary macroeconomic interventions aimed at stabilising the business cycle and supporting full employment (Kydland and Prescott, 1982). New Keynesians embraced the orientation of rational expectations theory, and in particular, its desire to ground macroeconomic outcomes in the behaviour of individual rational actors (Mankiw and Romer, 1991).

Despite accepting these parameters, however, New Keynesianism advanced its own research agenda. New Keynesians sought to explain why non-optimal market outcomes occurred even in economies composed of rational actors. Through concepts such as price stickiness and imperfect competition, they highlighted the macroeconomic importance of ‘nominal rigidities’, that is, the reasons why nominal prices and wages were slow to adjust and reach the equilibrium levels posited by neoclassical theorists (Ball et al., 1988). Unlike New Classical perspectives, New Keynesians argued that fluctuations in ‘nominal’ variables such as the money supply affect ‘real’ variables like output and employment in the short to medium term, which could generate market imperfections that necessitate limited and specific forms of state intervention (Mankiw and Romer, 1991). These theoretical innovations were incorporated into New Keynesian Dynamic Stochastic General Equilibrium (DSGE) models, which became the dominant forecasting devices used among central banks and economic policymakers at the turn of the century (Stockhammer, 2018).

By recognising the stimulating power of the money supply and the existence of market imperfections, New Keynesianism allowed for limited forms of state intervention. However, this interventionism was highly circumscribed by other theoretical considerations, in particular the non-accelerating inflation rate of unemployment, or NAIRU. Similar to the ‘natural rate of unemployment’ (NRU) posited by monetarists (Friedman, 1968), the New Keynesian NAIRU presumed there was a long-term equilibrium level of unemployment below which accelerating inflation was said to emerge (Storm and Naastepad, 2012). The notion of a long-term equilibrium unemployment challenged the postwar Philips Curve model of economic policy that maintained lower levels of unemployment could be progressively exchanged for higher levels of inflation and vice versa. New Keynesians argued that while this trade-off might operate in the short term, that as the expectations of economic agents adjusted to inflation unemployment would return to its structurally determined equilibrium position. This ultimately made macroeconomic policy futile ‘in the long run’ as in the NRU model. Yet how this long-run employment equilibrium was established reflected important differences between the two schools of thought. In New Keynesian theory, labour markets were not seen as self-clearing and unemployment was involuntary rather than voluntary (Stockhammer, 2008). Similarly, the price for labour was determined not by laws of supply and demand, but by the bargaining power of firms and workers. As such, unlike its contemporary theoretical rivals, the New Keynesian NAIRU posited competing distributional claims between labour and capital within product and labour markets as the source of inflation (Whyman, 2006: 66). A non-inflationary employment equilibrium is reached when the respective income claims of workers (wages) and firms (profits) are consistent with current levels of supply-side determined productivity (Snowden and Vane, 1994: 323).

With its emphasis on the competing distributional claims of capital and labour and acceptance of involuntary unemployment, the New Keynesian NAIRU model presented a more realistic depiction of wage determination than the NRU model. In many other respects, however, the implications of the New Keynesian NAIRU reflected the conventional neoliberal common sense regarding the dangers of over-regulation (Stockhammer, 2004). Informal and formal labour market protections and worker bargaining power were considered ‘wage-push’ factors that increase the wage claims of workers potentially beyond their levels of productivity – leading to inflationary pressures.

Centre-left macroeconomic governance: Towards constrained discretion

Throughout the 1990s and early 2000s, New Keynesian theory became the dominant paradigm of macroeconomics adopted by central banks around the world, playing a central role in shaping the economic policies of Centre-Left governments (Levingston, 2021: 1469). As global financial markets were liberalised, New Keynesian theory prescribed that government macroeconomic policy had to be realigned with financial market expectations, which would in turn result in lower interest rates and government borrowing costs (Whyman, 2006: 59–60). Price stability rather than full employment became the primary macroeconomic objective of central banks and policymakers, which was best realised by outsourcing monetary policy to independent authorities (Hay, 2004). In order to maintain low and stable rates of inflation, interest rate adjustments by independent central banks in line with pre-determined inflation targets became the primary mechanism of macroeconomic governance. In this task, central bankers were guided by the monetary policy directive called the Taylor Rule named after New Keynesian economist, John Taylor. It prescribed central banks to adjust nominal interest rates in response to divergences between actual and target levels of inflation and output gaps in the economy, that is, the difference between the actual and potential economic output (Koenig et al., 2013).

While in the US and Australia, the foundations of central bank ‘independence’ were established in the early 1950s and 1960s, for many capitalist states, modern central bank independence was not fully solidified until the 1990s under a new inflation-targeting regime. One of the first initiatives of Tony Blair’s New Labour government, for example, was to grant the Bank of England operational independence in 1997 and allow the Monetary Policy Committee to determine control of short-term interest rates based on pre-established rigid inflation targets (Smith, 2010: 53). This macroeconomic policy consensus further prescribed distinct and separate roles to central bank monetary policy and government fiscal policy, with the former responsible for price stability pursued through inflation-targeting and the latter for prudent management of public finances.

Throughout the 1990s, key aspects of New Keynesian theory were adopted in macroeconomic policy. While it did not proclaim the ineffectiveness of all discretionary macroeconomic policy like New Classical theory, the assumption that the economy could no longer be stabilised by counter-cyclical fiscal policy became a central tenet of New Keynesianism that was taken up by Centre-Left governments. Predicated on the assumptions of the NAIRU model, New Keynesian theory nonetheless predicted that effective demand would shape output in the short run (Stockhammer, 2018). As a result, despite advocating overriding commitments to price stability, New Keynesians believed in limited forms of discretionary government intervention amid unexpected and exogenous economic shocks. This New Keynesian policy model was adapted into a macroeconomic approach by Centre-left policymakers termed constrained discretion. As former chair of the Federal Reserve, Bernanke (2003) described,

‘constrained discretion is an approach that allows monetary policymakers considerable leeway in responding to economic shocks, financial disturbances, and other unforeseen developments. Importantly, however, this discretion of policymakers is constrained by a strong commitment to keeping inflation low and stable’.

This framework was also premised on the idea that credibility with financial markets, secured by demonstrating consistent commitments to price stability and fiscal discipline, would lead to reduced borrowing costs and greater flexibility for government intervention during market failures. The commitment to price stability was primarily demonstrated by outsourcing monetary policy to independent central banks pursuing Taylor-rule determined inflation targets, which was said to stabilise inflationary expectations determined by NAIRU forecasts (Arestis and Sawyer, 2008). Fiscal policy was similarly intended to demonstrate an overarching ambition towards balanced budgets to support price stability, which would in turn allow for government flexibility in the presence of unanticipated shocks (Whyman, 2006: 84–85).

The Clinton and Blair governments in the US and UK, and the Hawke-Keating governments in Australia, were some of the most ardent adherents of balanced budgets across the political spectrum. Their commitments to fiscal consolidation often overtook campaign promises for increased public investment and social spending. From the mid-1980s onward, the successive Hawke-Keating Labour governments elevated fiscal consolidation as a central aim of economic policy (Harcourt, 2001). Indeed, from 1983 to 1990 the general government’s underlying balance shifted from a deficit of 3.5% of GDP to a surplus of over 1% (Gruen and Stevens, 2000). Similarly, the Reserve Bank of Australia’s embrace of inflation-targeting in 1993 and commitment to price stability was regarded as a success by New Keynesian observers (Bean, 2000). In the US, deficit consolidation also became an all-encompassing feature of Clinton’s two terms as president. Clinton’s self-appointed cabinet members, and above all, Robert Rubin, played a central role in promoting the necessity of balanced budgets and the consolidation of US federal debt. During Clinton’s two terms in office, there was a dramatic reversal of the federal budget deficit, which stood at roughly $290 billion in 1992 and, by the time he left office in 2000, had shifted to an OMB Historical Tables surplus of $236 billion, the first surplus in over a decade (OMB Historical Tables 1.2 and 1.3, n.d.). Similarly, the Clinton administration reduced federal net debt from 49.5% in 1994 to 34.7% in 2000 as a percent of GDP, the lowest level since 1984 (Romano, 2006: 58).

The macroeconomic stability and perceived successes of Clinton administration and Hawke-Keating governments were highly influential examples for the fiscal regime of the newly elected Blair-Brown New Labour government in 1997. New Labour’s pervasive concern with financial market credibility became the overriding principle informing its economic and social policy agenda. This was affirmed with its passage of the fiscal ‘Golden Rule’, enshrined in the Code of Fiscal Stability passed under Section 155 of the (1998) Finance Act, which maintained that the British state would only borrow to finance long-term investments rather than current expenditures and that public sector net debt would rise no higher than 40% of GDP (HM Treasury, 1998). From 1997 to 2002, New Labour under the Blair administration pursued a stringent policy of fiscal consolidation. UK government expenditures as a percentage of GDP, for example, declined from 32.4% in 1997 when New Labour took office down to a low of 31% in 2000, with some of the most substantial cuts in welfare expenditures, which fell from 7% to 5% of GDP. As a result, the UK central government’s budget deficit, which stood at 2.8 as a percentage of GDP in 1997, was transformed into a budget surplus of 1.7% in 2001, the largest fiscal surplus since the early 1970s (UKPublicSpending.co.uk, n.d.).

The late 1990s through 2007 were characterised by a period of declining unemployment, decreasing inflation, and relative macroeconomic stability. Policymakers, central bankers, and New Keynesian academics triumphantly described this period as ‘The Great Moderation’ (Bernanke, 2004). Centre-Left political elites were quick to attribute these macroeconomic trends to their commitments to fiscal discipline and price stability. However, these trends were accompanied by unprecedented levels of economic inequality, stagnant living standards, and the systemic decline of working-class bargaining power (Piketty, 2014; Pollin, 2000). Moreover, the growth experienced during this period proved to be fleeting, fuelled by high levels of household debt, asset inflation, and the dot-com bubble (Adkins et al., 2020), while falling inflation was largely driven by global factors rather than responsible domestic macroeconomic management (Perry and Cline, 2016). Nonetheless, the political fortunes and ideological appeal of the Centre-Left were significantly enhanced by these fortuitous macroeconomic conditions.

The New Keynesian NAIRU, labour market policy, and endogenous growth

As with fiscal consolidation and inflation-targeting, the Centre-Left bloc in Anglo-American countries came to embrace a notion of labour market flexibility from a unique theoretical basis that reflected a degree of ideological separation from opposing right-wing political elites and intellectuals. During the crisis of the 1970s, a dominant narrative on the Right was that stagflation was driven by the excessive wage demands of unionised workers in tandem with the bloated growth of a ‘Leviathan’ state (Brennan and Buchanan, 1980). Halting the forward advance of the labour movement and rolling back welfare state protections were thus seen as vital for monetary stability. Moreover, labour market flexibility was important for economic growth according to the ‘supply-side economics’ popularised by the Laffer Curve and the Reagan administration which saw state intervention similarly standing in the way of private sector investment.

The Third Way movement, on the other hand, saw the need for labour market flexibility in less normative terms but as an inevitable and necessary process of ‘modernization’ (Beilharz, 2009; Hay, 1999; Murphy, 2023). Globalisation brought increased competition and enhanced the exit options available to capital, requiring a more flexible and mobile workforce. The dispersion of ICT technologies within the knowledge economy precipitated the rapid restructuring of labour markets and demand for new skills. In policy terms, for the Centre-Left flexibility was as much a process of re-regulation as it was one of deregulation. This includes ‘activation’ or skill formation/training measures that enhance workers ‘functional’ flexibility – that is, their ability to qualitatively adjust to the changing skill demands of a restructured economy – in addition to measures enhancing their ‘quantitative’ flexibility or the ability of employers to restructure/downsize their workforces as required.

Moreover, 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 it, but rather from successful participation in the turn of the century knowledge economy. This required a significant commitment to ‘social investment’ in human capital formation to generate a highly skilled and technically competent workforce to fuel new forms of economic activity (Giddens, 1998; Jenson and Saint-Martin, 2003). In believing so, elites within the Centre-Left bloc were influenced by the spread of ‘endogenous’ or ‘new growth’ theories in the late 1980s and 1990s. Endogenous growth theory, best represented in the work of Romer (1990) and Lucas (1988), incorporated investment and returns to knowledge and human capital into economic growth models. Previously these factors had remained outside older growth models that focused on the quantitative variation in the traditional inputs of land, labour, and capital. Now not only was the quantity but also the quality of labour Giddens deemed important for economic growth. Moreover, the aggregate accumulation of knowledge became the ‘X-factor’ in the growth process, perceived as a ‘non-rivalrous’ good producing beneficial spill-over effects elevating innovation and productivity in and beyond firms. Endogenous growth theory became hugely influential within centre-left policy networks at the time (Warsh, 2006). As a result, many centre-left parties adopted a ‘progressive competitive’ economic strategy predicate on state intervention in human capital formation and R&D to foster growth (Albo, 1994). This progressive strategy was pursued through socialised provisioning or, as was often the case, creating financial and regulatory incentives to induce private actors into providing these public goods.

New Keynesian economics provided a crucial theoretical backing for the Centre-Left’s philosophy on labour market flexibility and endogenous growth. Implicit in the New Keynesian NAIRU is a trade-off between unemployment, inflation, and labour market regulation. For labour market policy, the implications of the NAIRU are clear: over-regulation of the labour market will lead to either a) higher levels of unemployment and labour market dualization or b) run-away inflationary pressures. If full employment was to be achieved from this perspective, it would be accomplished on the supply side of the economy through flexible labour markets and human capital investments that contribute to the competitiveness and productivity of business (Hombach, 2000). Since investments in human capital were perceived to enhance the long-term productivity of the workforce and economy, interventions in human capital formation fell within NAIRU parameters as a viable way to increase long-term rates of employment without pushing the economy into an inflationary spiral (Storm and Naastepad, 2012). This economic policy focus on microeconomic competitiveness represented a significant break from the postwar belief that macroeconomic demand management could be continually recalibrated to promote investment, full employment, and wage-led growth.

From theory to practice

With the ascendency of New Keynesian economics within the Centre-Left social bloc in the 1990s and 2000s labour market flexibility became the chief policy prescription put to policymakers (OECD, 1994). One of the major planks of New Labour’s policy agenda upon taking power in 1997 was a ‘New Deal’ in labour market policy aimed at enhancing the ‘social inclusion’ of the unemployed. The New Deal provided several activation measures – or active labour market policies (ALMP) – to enhance the human capital and job prospects of the unemployed like job search techniques, education and training schemes, and temporary placements. These positive activation measures, however, were paired with coercive ‘workfare’ measures that allowed the state to withhold or reduce benefits if it was deemed that an unemployed recipient was not accepting suitable job opportunities. A similar, in fact earlier, ALMP was introduced by Labour in Australia in 1994 following the publication of the white paper, Working Nation (Keating, 1994). The Australian policy both foreshadowed and in some important programmatic details directly influenced the ‘carrot and stick’ workfare policies of Blair’s New Deal (Pierson and Castles, 2002: 695–697). Moreover, this same approach informed Clinton’s welfare reform agenda as well. With the introduction of the Personal Responsibility and Work Opportunity Act in 1996, Clinton famously declared to ‘end welfare as we know it’. What this entailed was the transformation the welfare benefits regime to produce a more flexible workforce, albeit with less skill development due to the Clinton administration’s overriding focus on fiscal consolidation (Peck, 2001: 103–106).

Education spending constitutes the most direct form of human capital investment and is indicative of the Centre-Left’s social investment strategy for that reason. While Centre-Left governments highlighted all levels of education as important facets of the overall social investment growth strategy, the higher education and vocational training sectors were prioritised due to their proximity to labour markets. As such, the expansion of these sectors became a focus of Centre-Left governments. In the UK and Australia, Labo(u)r governments removed tertiary enrolment caps and formulated ambitious expansion targets (Ansell, 2010: 200). In Australia, reforms to the vocational training sector were intended to complement the ongoing process of microeconomic reform by contributing to the flexibility and productivity of labour (Macintyre et al., 2017: 41–45).

However, the embrace of NAIRU-principled austerity meant that the fiscal costs of expanding human capital needed to be offset by private expenditures. This came in the form of the introduction of tuition fees under Labo(u)r that were supplemented by means-tested loan schemes. Overall, despite a considerable expansion of enrolment in both cases, government spending per student remained constant or declined slightly during the Hawke-Keating and Blair-Brown governments, while private funding – overwhelmingly from tuition fees – ballooned. In the UK, the Blair government introduced tuition fees in 1997 and private sources went from comprising just 28% of higher education revenues in 1995 to 75% in 2010 when Labour left office (OECD, 1998, 2013). Moreover, while public funding of higher education fluctuated around 1% of GDP, enrolment expanded by over 10% within the relevant age cohort. Similar trends were experienced in Australia following Labour’s introduction of tuition fees in 1989 (Abbott, 2018: 206–207; Williams, 2013).

A clear human capital strategy was articulated during Clinton’s first term. Upon taking office in 1993 his economic policy manifesto: Technology for Economic Growth: A New Direction to Build Economic Strength, claimed the administration would ‘make training accessible and affordable to all workers who need to upgrade their skills to keep pace with a rapidly changing economy’. With the influence of Robert Reich’s Department of Labour, the administration also proposed a radical transformation of the national apprenticeship system with the School to Work Opportunities Act of 1994 (Thelen, 2014: 79–80). However, a broad-based project of human capital formation never really occurred due to the Democrats self-imposed fiscal constraints during their two terms in office.

From 2008 to the 2020s: Mutations of centre-left neoliberalism

Throughout this article, we have sought to demonstrate the key intellectual influences that informed the ideology and governing practices of the Centre-Left social bloc in Anglo-American countries in the 1990s and 2000s. New Keynesian theory was leveraged by politicians and policymakers to bolster claims of economic competence and credibility, which provided ideological cohesion to the wider Centre-Left social bloc, and ultimately helped consolidate a neoliberal common sense. We argued that this constituted an endogenous tradition of Centre-Left neoliberalism that was highly influential in shaping the macroeconomic and social policies of governments in the US, Britain, and Australia.

What relevance do these arguments have in the present era? Following the 2008 crisis, the Centre-Left bloc suffered major political setbacks. Across the Anglo-American countries, right-wing forces either defeated Centre-left governments (as in the 2010 and 2013 elections in the UK and Australia), or significantly expanded their legislative power (as in the 2010 US midterms). Across Europe, from Germany’s SPD to Sweden’s SAP, Centre-Left parties lost major electoral support or spiralled into political marginality (Manwaring and Kennedy, 2017). Indeed, the 2008 crisis and its aftermath seemed to signal the death knell of the Third Way (Ryner, 2010: 555).

While the 2008 global financial crisis upended the period of economic stability that had underwritten the political project of the Third Way, the economic theories and ideological dispositions of New Keynesianism continued to provide influential guideposts for macroeconomic policy throughout the 2010s. Indeed, Centre-Left policy elites played an important role in justifying the turn towards austerity in many countries after 2010 (Bremer, 2023; McDaniel, 2023). Despite presiding over significant bailouts and fiscal stimulus packages from 2008–2009, Centre-Left policymakers in Western European countries drew on central tenets of New Keynesian theory to caution against further stimulus measures and justify a return to ‘responsible’ macroeconomic policy (Bremer and McDaniel, 2020). While austerity programmes were particularly severe across Europe, the Centre-Left likewise played a central role in legitimating the politics of austerity in the Anglo-American countries surveyed throughout this article. In the US, Barack Obama assembled the Simpson-Bowles Commission in February of 2010 to initiate a return to fiscal discipline, and deficit reduction and ‘entitlement’ reform remained central priorities of his second presidential term. In the UK, Gordon Brown’s Labour Party promised fiscal consolidation in the lead-up to the 2010 election, and key figures within the Labour Party continued to leverage New Keynesian theory to argue against further fiscal stimulus measures following their electoral loss. Australia’s Labour Gillard-Rudd governments similarly returned to a programme of fiscal discipline in 2012 (Whiteside, 2015). This trajectory, we suggest, was the corollary of the principles of ‘constrained discretion’ established by Third Way policy elites during the 1990s and 2000s, which prescribed time-limited discretionary macroeconomic interventions in the face of ‘exogenous shocks’ before returning to a default position of relative fiscal discipline.

This time-limited approach likewise played an important role in influencing central bank monetary policy post-2008. With fiscal policy largely consigned to austerity, central banks took the reins of macroeconomic policy throughout the 2010s under the auspices of quantitative easing (QE). While this ‘unconventional monetary policy’ introduced a novel and highly interventionist monetary policy regime, New Keynesian theory and the institutionally privileged role conferred to central banks by Centre-Left policy elites throughout the 1990s and 2000s laid the institutional groundwork for the hypertrophied role of central banks throughout the 2010s (Tooze, 2018). By establishing the principle of monetary dominance, that is, that fiscal policy should assume a subordinate role to monetary policies pursued by ‘independent’ central banks, while also conceding that monetary policy could affect ‘real variables’ in the economy in the short run (Arestis and Sawyer, 2008; Stockhammer, 2018), New Keynesian theory provided a key part of the intellectual justification for monetary-led macroeconomic policy throughout the 2010s (Arbogast et al., 2024).

Throughout the 2010s, the emergence of a populist left and right within capitalist democracies has seen the mobilisation of electoral constituencies in direct competition with the Centre-Left bloc (Hopkin, 2020). While the populist left has experienced some political success in Europe and America by galvanizing downwardly mobile, urban, and educated segments of the working and middle classes (Borriello and Jäger, 2023), the electoral breakthroughs of the populist Right have constituted a more acute political threat. From the 2016 Brexit referendum in the UK to the presidential victory of Donald Trump, the Right has recruited discontented blue-collar working classes against globalisation, elevating protectionism and economic nationalism as central themes of political discourse (Rodrik, 2018). During the COVID-19 pandemic, the breakdown of global supply chains associated with the shutdown of the global economy and the macroeconomic emergency measures that followed further accelerated pressures towards state intervention in the economy (Gerbaudo, 2021). In its aftermath, discussions surrounding public investment, particularly related to decarbonization, supply-side economic reforms, and industrial policy have increasingly dominated the politics of capitalist democracies (Mazzucato and Rodrik, 2023).

These cumulative political and economic pressures have spurred an ideological shift among Centre-Left political elites, who have sought to re-invent themselves under the umbrella of a new interventionist economic paradigm of ‘supply-side progressivism’. This has been spearheaded in the US by the Biden administration, whose legislative achievements have contributed to an ongoing political shift on the Centre-Left and its understanding of the role of the state in the economy. This framework was outlined in an influential speech in 2023 by Biden’s national security advisor, which fused together an interventionist domestic economic policy agenda with a hawkish foreign policy intended to strengthen global supply chains (Sullivan, 2023). Biden’s Treasury secretary and stalwart New Keynesian, Janet Yellen, has similarly described the economic model of the Biden administration as ‘modern supply-side economics’, which prioritises ‘labour supply, human capital, public infrastructure, R&D, and investments in a sustainable environment’ that are aimed at ‘increasing economic growth and addressing longer-term structural problems’ (Yellen, 2022). ‘Bidenomics’ has had a significant influence on the ideological commitments and political strategies of Centre-Left governments across the West (Parker et al., 2023). In the UK, after winning the leadership of the Labour Party in 2020, Keir Starmer outlined an ambitious industrial, trade, and climate policy agenda that drew on the model of the Biden administration (Kelly and Pearce, 2023). ⁵ This included promises of a New Deal for labour, a substantial public investment agenda for decarbonization, and a new industrial policy (Rodgers, 2020). Similarly, in Australia, Anthony Albanese’s Labor government came to power in 2022 promising to break with old orthodoxies based on an interventionist governmental agenda across industrial, training, and immigration policy (Karp, 2022).

The new interventionism of the Centre-Left has seen political elites increasingly distance themselves from policy prescriptions that defined neoliberal common sense, particularly in relation to globalisation, trade, and industrial policy (Manwaring et al., 2023). However, we suggest that the supply-side progressivism of the Centre-Left has been a thin ideological transformation that has co-existed alongside persistent orthodoxies and neoliberal models of state intervention. Centre-Left political elites throughout the 1990s and 2000s endorsed a particular model of state interventionism promising public investments in the competitive infrastructure of the supply side in the economy (‘good spending’) while largely eschewing consumption-driven expenditures associated with Keynesian welfare policy (‘bad spending’). This model of state interventionism and its continued neglect of the demand side of the economy has remained a central thread of the contemporary Centre-Left.

Within the US, the election of the Biden administration seemed to mark a break with this trajectory. Shortly after being elected, the Biden administration proposed an ambitious legislative agenda of social policy, infrastructure, and environmental programmes. This included Biden’s American Families Plan, which eventually became the Build Back Better (BBB) Act, proposing a significant expansion of the American welfare state through redistributive social policy measures such as the Child Tax Credit and paid sick leave, financed by raising taxes on the wealthy (Salam, 2021). This was part of a broader vision of the Green New Deal and the care economy advocated by the left wing of the Democratic Party (Adranga, 2021). Yet with a fragile coalition in Congress, conservative Democrats in the Senate assumed a veto position, refusing to countenance welfare spending or tax increases on the wealthy. Facing opposition from conservative Democrats and a torrent of corporate lobbying against the proposed tax increases, the White House opted to pass a modest bipartisan supply-side infrastructure bill, delaying the tax legislation (Elrod, 2024). Alongside the resurgence of inflation in mid-2021 and 2022, BBB was eventually stymied on the grounds of its fiscal largesse and was repackaged as part of the Inflation Reduction Act, shorn of redistributive social policy measures (Stein, 2023). Following this legislative struggle, as inflation and interest rates climbed upwards, the expansive demand-side measures proposed by the Left of the Democratic Party fell out of favour, and Biden’s economic agenda gravitated towards scaled-down supply-side investments supporting national security priorities (Elrod, 2024).

Following this legislative trajectory of the Biden administration, other Centre-Left political parties have carefully differentiated their support for supply-side investment policies from redistributive demand-side measures (Berry, 2023). In the UK, while the Labour Party has embraced an interventionist stance on trade and industrial policy, it has refused to countenance progressive social policy measures or redistributive demand-side policy proposals. This was recently highlighted in Chancellor of the Exchequer Rachel Reeves’ 2024 Mais lecture. Drawing explicitly on Yellen’s supply-side economics, Reeves outlined a vision of activist supply-side reforms and public investment in human capital and infrastructure in a ‘new age of insecurity’. At the same time, Reeves steered clear of any substantial social or redistributive measures that do not – from a New Keynesian perspective – contribute to long-run productivity growth (Reeves, 2024). Thus, despite the more assertive role conferred to the state in Centre-Left thinking throughout the 2020s, its continued focus on the supply side of the economy to the exclusion of distributional considerations ultimately remains within the ideological territory of the Third Way.

What is arguably the most decisive terrain shaping the political project of the Centre-Left is macroeconomic governance. While Centre-Left governments came to power throughout the 1990s and 2000s based on promises of significant public investment, as our analysis has shown, in practice, they were often superseded by commitments to fiscal austerity and macroeconomic orthodoxy. A similar trajectory, albeit under very different political and economic conditions from the pre-2008 period, is once again shaping the political project of the Centre-Left. From 2020 to 2021, expansionary macroeconomic policies associated with pandemic emergency measures, most notably the fiscal policies of the Biden administration, seemed to represent a decisive break with long-standing commitments to fiscal orthodoxy (Davies and Gane, 2021). In the US, the American Rescue Plan (ARP), a $1.9 trillion stimulus package passed amid the historic economic downturn of the pandemic, sought to move beyond the limitations of Obama-era fiscal policy by running the economy hot through substantial deficit-financed government spending (Tooze, 2021: 289). While this expansionary orientation seemingly rebuked New Keynesian NAIRU-based prescriptions (Summers, 2021), these measures were time-limited and specifically designed to address the exogenous shock of the pandemic (Casselman, 2022). With the return of inflation since mid-2021 and the rapid cycle of monetary tightening that followed, Centre-Left political elites have retreated from expansionary macroeconomic policies towards more targeted and deficit-neutral pledges (Lawrence and Sterling, 2023). Viewed in this light, pandemic-era economic policy appears less indicative of a paradigm shift in economic governance than the result of extraordinary crisis-fighting measures in keeping with the time-limited constrained discretion approach.

This reversal in macroeconomic policy has been most visible in Keir Starmer’s Labour Party in the lead-up to the 2024 UK election. Despite outlining a wide-ranging economic agenda in 2020, the Labour Party has since embraced a highly conservative approach to macroeconomic policy, abandoning many of its central campaign promises in the name of ostensibly insurmountable fiscal constraints, including its flagship pledge of £28 billion a year of green public investments. At the time of writing, the current Labour Government has ruled out substantial progressive taxation measures to finance public investment. While it will likely alter existing fiscal rules to allow for more long-term public investment in infrastructure, this has been accompanied by promises of strict fiscal discipline on day-to-day expenditures and spending cuts to ‘unproductive’ spending such as social security (Islam and Espiner, 2024). In Australia, despite mounting pressures for relief from the cost-of-living crisis, the Albanese government has prioritised fiscal responsibility, posting successive budget surpluses in 2022–2023 and 2023–2024 (Coorey and Read, 2023).This trajectory, we suggest, reflects the persistent legacy of New Keynesian thinking and Third Way ideology.

As the Centre-Left bloc has gravitated towards an increasingly conservative fiscal approach, the new interventionism is on shaky ground. In the context of intensifying instabilities in the global economy, growing urgency for expansive green public investment amid an escalating ecological crisis, and the enduring threats posed by right-wing populism, these persistent ideological legacies associated with the Third Way will continue to pose major barriers to the political fortunes and future of the Centre-Left. Going beyond the Third Way to meet the overlapping ecological and political crises that define the contemporary moment will require, as Gramsci maintained, not only a transformation of our common sense notions of the world but of the social forces upholding them.