There is no need for Miliband to choose between radicalism and pragmatism

Neil O'Brien has underestimated the sophistication of the Labour leader's approach.

The longer Tories keep underestimating Ed Miliband, the better for Labour. So I feel slightly disloyal in pointing out where and why Neil O’Brien got it wrong in his essay in this week's New Statesman.

First, Ed didn’t go from "joke" to 45% in the polls by chance. For two years, he has kept setting the political agenda. Time and again, commentators and politicians who didn’t take him seriously missed the importance of what he was saying and its resonance outside Westminster.

His phrase "squeezed middle" was met with derision. A year later it was the Oxford English Dictionary's "word of the year".  Ed’s "producers vs predators" conference speech was taken as a sure sign he hadn’t got what it takes to be a "proper" political leader. Three months later, everyone was fighting to own responsible capitalism. And, now, as another banking scandal rages, it turns out that Labour has the best framework to understand what is going on.  He pitched "responsibility at the top and the bottom" against the exclusively anti -poor rhetoric of the government’s welfare reforms and forced a debate about top pay.

Miliband’s judgement on these issues reflects a profound belief that Britain can be more different than most people in politics dare imagine. I don't think for one moment that David Cameron thought hacking Milly Dowler’s phone was a good idea, but he couldn’t imagine a politics without Rupert Murdoch’s influence. Ed could, which is why he made the right calls on BSkyB and Leveson. This week, George Osborne’s inability to see the banking crisis as anything but a chance to score political points has, once again, put the Tories on the wrong side of a strategic argument. Sorting out the City today is more important than who might have done what ten years ago.

None of us in Westminster have yet broken free of the public cynicism about all politicians. But, maybe, just maybe, people are beginning to understand that Ed Miliband does things differently. Maybe it’s not such a surprise that Labour has recovered rather faster than most of us thought possible.  

Of course, the Tories certainly haven’t helped themselves. The NHS bill did not have to become a golden opportunity for Ed to hone his PMQs skills. The Budget did not have to be so incompetent.  Labour's attack was only possible, though,  because Miliband and Ed Balls had already defined fairness and growth as the two crucial budget tests.

But O’Brien’s biggest misjudgement is the belief that Miliband’s Labour is torn between radicalism and pragmatism, and that this choice has to be resolved one way or another. Ed Miliband is coming from a different place altogether.  As a new Fabian book, The Shape of Things To Come, shows, his genuine radicalism stems from a deep belief that it is only through far-reaching changes in the economy, society and politics of Britain that we can deliver for those who want practical answers to practical problems

He's confident that the economy can be reshaped by an active state enabling successful private business; an ambition that goes beyond the odd token grant and investment that passes for Osborne's "industrial strategy". The rules of the game can be set to favour long-term investment, innovation, competition and better jobs. If we don’t, we won’t be able to pay our way in the world. But as importantly, too much of Labour’s public spending was driven by problems of failing markets.  The cost of tax credits rose in an economy producing too many poorly-paid jobs. Housing benefit paid the cost of a private sector of limited supply, poor quality and high rent. 

There are some in Labour who assume that progressive change is measured by the level of public spending. But the emerging consensus among those Ed has promoted is that there is no foreseeable point where the public spending taps are turned back on. The cost of an ageing population, the need to invest, and the impossibility of increasing taxes for the squeezed middle will see to that. So it is the construction of a different economy, one that offers through work what past governments delivered through redistribution, that will let Labour deliver its aims even in lean times. O'Brien's belief that Labour's spending instincts are bound to spill out misreads the way Labour's debate is going.

This is a radical change, although some elements of an active industrial policy were pioneered by Peter Mandelson at the business department before the 2010 election. But it also has the best chance of delivering what Britain’s worried, vulnerable and socially conservative voters want to see; the ones who increasingly thought Labour doesn’t stand for them any more; the ones who didn’t think the economy worked for them.

O’Brien is right to say there are many issues that remainchallenging for Labour, not least welfare. But it’s telling that he sees this as a tactical issue for the Tories. Adopt an unpleasant policy that will really hurt some people and challenge Labour to vote against it. The truth is that time is running out for that sort of politics. The public know what politicians are up to. They don’t like it.

While few people will vote for a party that is seen as soft on fiddling or downright idleness, maybe there’s a bigger prize in offering a welfare system that actually works better. Shifting investment from tax credits to affordable child care, or landlords' rents to bricks and mortar. Rewarding those who work and contribute over those who didn’t.

So Miliband might respond to O'Brien's false choice by saying that in these times, radicalism is the pragmatic option. But as one of the authors of The Shape of Things To Come says, "Ed's self confidence in speaking about morality and culture sets him apart from the 'left liberal' social democrat norm of the past 50 years". This is not radicalism unrestrained by the views of real voters. The tough issues like migration and welfare will be tackled but not, I suspect, by the occasional lurch to the right, but by building a vision of Britain's future that connects Miliband's radical instincts to the instinctive fairness of the British people.

In a few weeks' time, kids across the country will ask, "are we nearly there yet?" In truth, not yet. But there is a radicalism, coherence and optimism to Ed Miliband's politics. I hope Neil O'Brien continues to underestimate it.

The Shape of Things To Come: Labour’s New Thinking, edited by John Denham, is published by the Fabian Society and FEPS.

"There is a radicalism, coherence and optimism to Ed Miliband's politics." Photograph: Getty Images.

John Denham was a Labour MP from 1992 to 2015, and a Secretary of State 2007 to 2010. He is Director of the Centre for English Identity and Politics at Winchester University

Getty
Show Hide image

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?