Nick Clegg’s shameful U-turn on cuts

The truth continues to ooze out.

Can you guess who said this?

Look, the decision on how we govern this country and how people vote shouldn't be driven by fear of what the markets might do. Let's say there was a Conservative government. Let's say a Conservative government announced, in that sort of macho way: "We're gonna slash public spending by a third, we'll slash this, we'll slash this, we'll do it tomorrow. We have to take early, tough action."

Just imagine the reaction of my constituents in south-west Sheffield. I represent a constituency that has more people working in public services as a proportion of the workforce than any other constituency in the country. Lots of people working in universities, the hospitals and so on.

They have no Conservative councillors. They have no Conservative MPs. There are no Conservative MPs or Conservative councillors as far as the eye can see in South Yorkshire. People like that are going to say: "Who are these people telling us that they are are going to suddenly take our jobs away? What mandate do they have? I didn't vote for them. No one around here voted for them."

I think if we want to go the direction of Greece, where you get real social and industrial unrest, that's the guaranteed way of doing it.

It was, of course, our beloved Deputy Prime Minister, Nick Clegg, leader of the Liberal Democrats and MP for Sheffield Hallam, speaking at an event organised by the Yorkshire Post on 19 March. (You can watch the video of his remarks here.)

So what happened? Why did he drop his opposition to the Tories' "macho" cuts? And when did he stop worrying about the "reaction" of his constituents in Sheffield?

First, Clegg told the Observer's Andrew Rawnsley on 6 June that a conversation with the governor of the Bank of England, Mervyn King, in the wake of the debt crisis in Greece, helped change his mind:

He [King] couldn't have been more emphatic. He said: "If you don't do this, then because of the deterioration of market conditions, it will be even more painful to do it later."

But, as the Guardian reports, at yesterday's Treasury select committee hearing, under questioning from Labour's Chuka Umunna, King revealed that he had said nothing to Clegg during a phone call, on 15 May, that he had not already said in public, most notably at a press conference three days earlier:

I said nothing that was not already in the public domain. In the telephone conversation, I basically repeated what I had said at the press conference . . .

There was nothing I said in that conversation that was different from what I had said in public. When I am needed to give advice, I try to make sure the advice I give is full square in private and in public.

But just as Clegg's "Mervyn made me do it" excuse begins to fall apart -- and, remember, Clegg spoke to King after he had already signed up to the coalition agreement with its "accelerated" deficit reduction programme -- along comes Nick Robinson with his BBC2 documentary Five Days that Changed Britain. Asked by Robinson if he had changed his mind about cuts during the five days of negotiations, Clegg says:

I changed my mind earlier than that . . . Firstly remember between March and the actual general election . . . a financial earthquake occurred on our European doorstep.

Hmm. Yet see Clegg's comments (above) in Yorkshire. Does he sound like a man who is having second thoughts about the Lib Dems' opposition to "early" cuts? Does he give any indication to the audience that he plans to junk the Lib Dems' position on the timing of so-called fiscal consolidation? And did he, at any stage during the election campaign, a month later, even hint that he was going to perform such a sharp U-turn on the biggest election and economic issue of all?

As Chuka Umunna puts it:

If Nick Clegg changed his mind on such an important issue during the election campaign, why did he choose not to share this epiphany with the electorate?

The Liberal Democrats fought the election campaign vehemently opposing the Conservatives' economic policies, and the public deserves a full explanation of when and why Mr Clegg reversed his views on the economy.

Will we get one? No.

UPDATE:

On a side note, the more revelations that emerge about those five days of coalition negotiations, the more I feel like reaching for the late Anthony Sampson's Anatomy of Britain. I mean, should the governor of the Bank of England really be intervening, directly or indirectly, in such important political decisions? Should the head of the civil service, Sir Gus O'Donnell (or "God", as he is nicknamed by colleagues, according to Nick Robinson), have been advising Conservative and Liberal Democrat negotiators in their first meeting with the Cabinet Ooffice "that "the more comprehensive the agreement" between the two parties, the more it would reassure the markets"?

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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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?