How Ted Cruz, the US Tea Party’s Darth Vader, is preparing for a tilt at the presidency

The end of American empire has presented difficult questions about what might come in its place – even for those who found the George W Bush “freedom agenda” so difficult to stomach.

The latest revelations about the activities of the National Security Agency (NSA) may still be reverberating in Europe and South America, but the impact here in the United States has been muted. If anything, the Obama administration is taking more heat for its technological incompetence than its Orwellian overreach. The dominant story in the media is that the website set up to allow Americans to enrol for health care under the Affordable Care Act is in meltdown, putting the Department of Health and Human Services under severe strain and prompting the president to order a “tech surge” to solve the problem.

It is hard to find much sincere outrage at the activities of the NSA – except from the libertarian right, whose main concern is homeland surveillance, in any case.

The reason why the NSA has been allowed to grow so large is that it gives the US a significant advantage in a world in which the cybersphere is becoming ever more important. To restrict its activities to terrorist threats would be to cede the field to nations that are prepared to use this space for a range of equally nefarious activities, including industrial-scale theft of intellectual property. China is already reported to have stolen from the Pentagon the blueprints for the US’s much-prized F-35 fighter jets.

At the heart of this scandal is a deeper truth – which is that the US is operating within a narrower conception of its core national interests than at any time since the cold war. President Obama’s arrival in office was perceived in the rest of the west as an era of rapprochement and multilateralism. While he has eschewed the adventurism of his predecessor, it is hard to make the case that he has been any less unscrupulous. He is certainly not any more engaged. A recent story in the New York Times described how he sat through discussions of Syria policy in the summer, chewing gum and scrolling through his BlackBerry.

This is not to say that Obama’s idealism was a mirage. But it is clearer than ever that his priorities are domestic and that he has a bold agenda fundamentally to change the role of government in American society.

This is far from unpopular with the US electorate. The National Interest magazine, enjoying something of a renaissance, leads with a story about the return to the primacy of the nation state, “surpassing in significance all the recent preoccupations over civilisational clash, globalisation, history’s end and great-power polarity”. In the same spirit, Obama’s national security adviser, Susan Rice, has just completed a review of US policy in the Middle East addressing the question of “core American interests”. “‘We can’t just be consumed 24/7 by one region, important as it is,” she has said, signalling a much more hard-headed approach in which American commitments are to be scaled down further. The support for democratic reform in Egypt, once seen as a cornerstone of US strategy, has been dropped, emphatically.

The end of American empire has presented difficult questions about what might come in its place – even for those who found the George W Bush “freedom agenda” so difficult to stomach. Saudi Arabia, in particular, has been grumbling about the failure of US leadership in Syria and about the vacillation of policy during the summer, which Riyadh believes is playing into the hands of Iran. The Saudi view is that the deal to dispense with Assad’s chemical weapons has taken the diplomatic pressure off him in the civil war. The Saudi decision to turn down a seat on the UN Security Council was intended as a sign of discontent directed at Washington.

Saudi Arabia is not the only ally to feel a little stung by the new realpolitik rationale in DC. After Pakistan’s prime minister, Nawaz Sharif, raised the issue of the ongoing drone campaign at a meeting with Barack Obama late last month, documents were leaked to Bob Woodward of the Washington Post proving that senior Pakistani officials co-operate closely with the CIA on its drone programme. This may be the worst-kept secret of US-Pakistani relations. But it defies the logic put forward in a book doing the rounds in DC – One Hundred Victories: Special Ops and the Future of American Warfare by Linda Robinson of the Rand Corporation – which suggests that “partnering” is the critical element of the new American approach to war.

GOP fallout

The Republican Party, meanwhile, continues its internal feud over the strategy that led to the US government shutdown last month.

As much as anything, the battle between the GOP and the Tea Party was about tone and tactics. On the substantive policy issues involved – opposition to the Affordable Care Act and belief in the need to cut government spending – they were fundamentally on the same page. The same can’t be said of the looming issue of immigration reform, shortly to appear on the legislative agenda. It represents the single greatest threat to party unity.

Senator Ted Cruz, the Tea Party hero who came to national prominence during the shutdown, continues to court the spotlight. Over the course of his 21-hour filibuster speech against “Obamacare”, the maverick Princeton-educated Texan imitated Darth Vader and read from Green Eggs and Ham by Dr Seuss. He spent last weekend drumming up support in the bellwether state of Iowa. That’s a sure sign he is preparing a run for the Republican presidential nomination.

Ted Cruz speaks about immigration in Washington, DC. Image: Getty

John Bew is a New Statesman contributing writer. His most recent book, Realpolitik: A History, is published by Oxford University Press.

This article first appeared in the 30 October 2013 issue of the New Statesman, Should you bother to vote?

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?