Sorry, Peter - the facts of life aren't Conservative, says Mehdi Hasan

My brief response to Oborne's silly Telegraph column.

In every area of our public life, the Left is losing the argument

proclaims the online headline to Peter Oborne's Telegraph column today. The standfirst goes further:

The facts of life are Conservative - as Labour's smartest minds now realise

Er, not they aren't. I consider Peter to be a good friend and one of the finest minds, and boldest writers, on the centre-right. Unlike so many other Tory-supporting columnists, he isn't tribal and has been willing to denounce Cameron and co when the occasion demands it.

Today's silly column, however, contains a series of unfounded, unsupported and curious claims and assertions, e.g.

It is now widely accepted that the years of New Labour government were an almost unalloyed national disaster. Whichever measure you take - moral, social, economic, or the respect in which Britain is held in the world - we went into reverse.

Er, no it isn't. This sounds like the kind of party-political propaganda which Peter has so often denounced fellow hacks for producing, purveying and peddling in the past. The Tories and their supporters in the press, of course, want people to believe that 13 years of Blair and Brown were an "almost unalloyed national disaster" in order to (a) discredit the social-democratic ideas and values, (b) undermine the legitimacy of the state and, in particular, the welfare state, and (c) make themselves look good, no matter how high unemployment gets, no matter how many riots or protests erupt, on their watch. It is brazen historical revisionism.

Peter begins:

Let's start with economic management, the scene of New Labour's most obvious debacle. In the early months after the 2010 general election, Labour's shadow chancellor, Ed Balls, refused to accept the clear fact that high spending and high borrowing had driven us to economic disaster. He called on George Osborne to spend even more in order to avert recession.

A year on, Balls has lost the argument.

Sorry, has Peter been abroad for the past twelve months? Has he not read the papers? Or looked at the unemployment figures? It is Osborne who lost the argument and lost it badly last November when his growth forecasts were downgraded yet again, his deficit-reduction timetable had to be extended and the Office for Budget Responsibility (OBR) then revealed that the Chancellor would be borrowing more - an astonishing £158bn more! - than he had planned to in October 2010's Spending Review and an embarrassing £37bn more than the much-mocked Labour plan (or "Darling plan") to cut the deficit in half over the lifetime of this parliament (as outlined in the March 2010 budget). Meanwhile, pretty much everything Balls said in his Bloomberg speech in August 2010 has come to pass. Read it for yourself; judge for yourself. The Keynesian argument, or what the US economist and former White House adviser Christina Romer calls the empirical argument, has, once again, been vindicated.

On a related note, if you want a more nuanced and less gloomy take on the UK's economic performance between 1997 and 2010, check out this recent report from the LSE's Centre for Economic Performance.

Throughout his column, Peter makes the basic mistake of conflating the Labour Party with the left, and acts as if all Labour leaders and politicians believe the same thing (when, of course, there is an ideological gulf between, say, Tony Blair and Ed Miliband). He argues:

Labour has come to accept Duncan Smith's profound insight that welfare payments can trap people in poverty, rather than offer them a hand out of it, thus forcing generations of families into dependence on the state.

This is absurd and ahistorical. There has been a bipartisan consensus for several decades now that the welfare trap exists and needs to be tackled. This isn't some unique or "profound" insight of IDS. The reason left-wingers object to Duncan Smith's welfare "reforms" is because you can't cut the number of people on welfare when there are no jobs available. Meanwhile, it is immoral and unjust to slash £18bn from the welfare budget - that is, from money spent on the poorest, most vulnerable members of society - while taking only £12bn or so from the big banks who caused the economic crisis.

Peter also claims:

The vital importance of this experiment lay in the special circumstances of the post-war period. Throughout this time, the liberal Left, as general election results show, has tended to be unpopular with voters.

That's only if you judge "popularity" on the basis of our disproportionate and dysfunctional first-past-the-post electoral system. For example, the general election of 1983 - widely considered to be Margaret Thatcher's greatest electoral triumph - saw 53 per cent of the public vote for liberals (the SDP/Alliance) and the left (Michael Foot's Labour Party) compared to 42 per cent who voted for Thatcher's Tories. There has never been a Conservative majority in the country in the post-war period - in fact, at the last election, Cameron's Conservatives failed to secure a majority in the country and in the Commons.

Peter writes that

. . . a handful of prime ministers have led governments that reshaped the world we all live in. Since 1945, only two - Clement Attlee and Margaret Thatcher - have fallen into this very rare second category.

It now looks as if Cameron may turn out to be the third. In some ways this is very strange, because Cameron, at heart an
old-fashioned Tory pragmatist, is the least revolutionary Prime Minister one can imagine.

But he has taken the job at a fulcrum moment, when some of the most intelligent minds on the Left have come to realise that the facts of life are Conservative.

Three quick points here: 1) Peter defines Liam Byrne and Stephen Twigg as examples of his "intelligent minds on the Left". This is totally arbitrary and subjective; some would say that such a label better suits, say, Stewart Wood or Gavin Kelly or David Marquand. 2) It is amusing to see Peter now singing Cameron's praises given how critical - and personally critical! - he was of Cameron just a few months ago. 3) He again just declares that "the facts of life are Conservative". Yet, high Tories like Thatcher biographer Charles Moore, seem to be saying otherwise. Unlike Peter, who says literally nothing in his column about the monumental failure of financial capitalism and deregulation, Moore has acknowledged, for instance, that "it turns out - as the Left always claims - that a system purporting to advance the many has been perverted in order to enrich the few". Writing in Oborne's own paper in July 2011, Moore declared:

I'm starting to think that the Left might actually be right

Hear, hear!

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?