Goodbye Mr Milburn. And don’t let the door hit you on the way out.

I am fed up of the media myth about the Blairites.

Gaby Hinsliff has an interesting, if provocative, piece on the Guardian's Comment Is Free. She thinks Labour has "taken the bait on Alan Milburn's coalition role" and mocks the "considered" response of the left ("Well, good riddance to Blairite rubbish, eh?"). Some highlights from her piece:

Right now, the left is too busy behaving like a teenage girl who dumps her loser boyfriend only to react furiously when he goes out with someone else, loudly protesting about how she never fancied him anyway . . . The relevant question should be whether the supposed traitors still have any original, creative thinking left in them -- or whether they are a bunch of broken records, wrung dry by years of Whitehall grind . . . That means working out fast who else is on David Cameron's speed-dial -- Peter Mandelson? Charles Clarke? David Blunkett? James Purnell? -- and whether Labour should get its own offer in first. (Tip: sometimes it shouldn't.) But it would also mean establishing why some of Labour's bigger beasts are wandering off the reservation . . . But it does need Milburn if it seeks to imply that the Labour Party is splitting asunder and its reformist right wing (like it or not, to some swing voters, its electable wing) is deserting the sinking ship.

I would question a lot of this. First, how do you define "creative thinking"? Being right-wing?? And who or what is a "big beast"? James Purnell?? Blunkett, who left the cabinet in disgrace on not one, but two occasions? Mandelson, who may have been the second-most-powerful man in the land until 6 May, but has since become a joke figure? Charles Clarke, who could never muster enough support in the Parliamentary Labour Party to challenge Brown and couldn't even keep hold of his own seat? These people represent the "electable wing" of the party? Really? I mean, really??

I, for one, am fed up with the media myth that suggests the Blairites were the cool dudes in the dull Labour gang, that they were popular and/or adored, and that they single-handedly won general elections for the party. Did anyone ever say to themselves, "I'm voting Labour because of Alan Milburn"? Did people take to the street in protest when Blunkett was sacked from the cabinet? Did the likes of Patricia Hewitt, Geoff Hoon and Stephen Byers help or hinder the Labour re-election effort this year, when they were outed by Channel 4's Dispatches grubbing for cash? And did anyone really doubt that the ultra-Blairites such as Milburn and Hutton were closer to the Tories, in their pro-market, pro-privatisation, pro-rich ideology, than to the Labour Party, new or old?

Call me an unreconstructed, tribal lefty but I can't help but disagree with pretty much everything in Hinsliff's piece. For once, I'm with John Prescott. "Collaborators" might seem a little excessive, but Milburn, Frank Field, John Hutton et al are doing the exact same job for the coalition as the Liberal Democrats: they are providing ideological cover for a regressive Budget and an all-out assault on the public sector.

Here is Ed Miliband's response to the Milburn decision, which he shared with the New Statesman earlier today:

If Alan had asked my advice on whether he should be an adviser to the government on social reform and mobility I would have said it was a bad idea. I think you always have to weigh the influence you can have -- because Alan will have wanted to try and make their policy better -- with the credibility that you give them. I'm afraid that any influence that he might have will be outweighed by the credibility he will give them. He is someone who worked on social mobility, and when you look at what they are doing on housing benefit, on VAT, on council tenancies, tax credits -- the list of public services is very long -- they're certainly not going to promote social mobility. I think that now he has accepted this role, he better speak out against what they are doing on these issues.

Will we hear an anti-Cameron peep from Alan "Pepsico" Milburn? I doubt it.

By the way, on a side note, one of the few refreshing and satisfying aspects of the Labour leadership contest is that all the candidates -- from the "Brownites" Ed Balls and Ed Miliband to the "Blairites" Andy Burnham and David Miliband -- agree that it is time to move on from New Labour, and put Tony Blair and Gordon Brown behind us. Hear, hear!

Oh, and before the New Labour outriders start parachuting into the comment section "below the line" and smugly pointing out that "Tony Blair won three elections", let me add that I don't disagree. But am I expected to believe that Milburn, Blunkett, Byers, Hoon and Hewitt were responsible for them? Am I supposed to forget that Labour, under Blair, shed four million votes between 1997 and 2005? Or ignore the fact that his victories were guaranteed by a combination of a majoritarian, first-past-the-post system with a built-in, pro-Labour bias and a crazed Conservative Party that chose William Hague, Iain Duncan Smith and Michael Howard over Kenneth Clarke?

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?