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Laurie Penny: The Paradox of the Welfare State

Aversion therapy for the poor.

Centuries ago, when ordinary men and women first began to dream of political suffrage, a radical theory surfaced whereby people without property or assets had as much right to a living as anybody else. Thomas Paine wrote in 1795 that every citizen should expect a minimum income as compensation for the "loss of his or her natural inheritance, by the introduction of the system of landed property." That notion has this week been utterly abandoned by the British administration.

Tomorrow, the Secretary of State for Work and Pensions will announce a new "contract" with the poor. Those receiving the miniscule and dwindling stipend that the government grants anyone without means to support themselves in these straitened times may be required to toil for the state, for free, or face being shoved off benefits.

This isn't just a Tory scheme. James Purnell, who tried to pull the same trick under Labour in 2009, has spoken of a "covert consensus" whereby, with true Vietnam war logic, it has become necessary to destroy the Welfare State in order to save it.

As strategies for tackling poverty go it's not subtle. In fact, it's roughly equivalent to a quack doctor plastering a typhoid sufferer with leeches or cutting a hole in a patient's head to cure a migraine. This trepanation of the welfare system is supposed to "get Britain working" by returning the poor to the "habit" of nine to five labour -- alongside savage cuts to housing benefit and Jobseeker's Allowance that will apparently "incentivise" them towards work that isn't there.

It's the Victorian aversion-therapy theory of poverty. Iain Duncan Smith, along with a sizeable chunk of the press, seems to have convinced himself that forcing low-paid or unpaid citizens to work for nothing or face homelessness and starvation will somehow snap them out of their beastly little "habit" of not having any money. It's a reimagining of poverty as a social disease that can be cured with shock treatment, rather than the inevitable result of years of profit-driven policymaking that have systematically neglected the needy and vulnerable.

The London Evening Standard's Matthew D'Ancona lovingly reports that Duncan Smith believes that work is "bigger than the idea of earning money." I'm sure that for him, with his personal assets of over £1m, work is less about the money than about the satisfaction and status of being one of the most powerful men in the country. For your average call centre or shop worker having to beg the boss every time they need to use the loo, though, paying the bills is precisely what it's about.

We keep being told that relentless work is good for us. The expectation that all people "of working age" should spend 45 hours a week performing pointless tasks in small cubicles for someone else's profit while cramming unpaid housework and childcare into the remaining time is only a very recent function of late capitalism, but conservative myopia would have us believe that this cruel and unusual process is somehow normal. If ordinary people begin to crack under the strain of trying to survive on ever-lower wages in an ever more insecure and debilitating job market, well, they're just not tough enough. They're layabouts and scroungers and they must be made to do more work for less pay to jolly well shake them out of it.

It's about control. It's always about control. When they say that work is good for us, what they mean is that work keeps us in line. Work makes us behave. Work makes us obedient and beaten and isolated and grateful. If that's the new definition of "the national interest", then we need to think harder about what sort of nation Britain is becoming.

How did this happen? How did we start tutting along when government spokespeople decry the fact that people on social security "expect money for nothing," rather than pointing out that this, in fact, is rather the purpose of a welfare state at a time of high unemployment? That the term for the phenomenon whereby people expect money in return for something is, in fact, employment? That if there's caring, cleaning and community work to be done, perhaps the state should be offering the people who do it a real living rather than barely-disguised contempt?

These welfare reforms are the next step in an ideological assault on ordinary workers being deployed by social conservatives of all parties and none who wish to protect the reputation of capital by blaming the financial failings of the rich on the moral failings of the poor. Believe me when I say that I really, truly wish it were going to work.

It's occasionally satisfying to see one's political enemies embark on the mother and father of all cock-ups, but not this time. Not when real lives are at stake. When these reforms inevitably fail, when the welfare system currently providing a rotten bandage for the old infected wounds to British industry, housing, wages and mental health care is finally ripped away, people I love are going to be left bleeding.

I don't want to watch this country become colder, crueller and more savage. I want to believe that Duncan Smith knows what he's doing. Unfortunately, what he is doing is approaching the problem of poverty with the same concerned brutality with which a Victorian doctor might approach a distressed patient: all she needs is a good hard slap and some ice water therapy and she'll pull herself together in no time. It might seem harsh, but a chap's got be cruel to be kind.
 

Laurie Penny is a contributing editor to the New Statesman. She is the author of five books, most recently Unspeakable Things.

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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?