The British left shouldn't write off Romney yet

The left underestimated Reagan and Bush. It may be making the same mistake about Romney.

 In August 1999, I wrote a memo for Tony Blair entitled "Why George W Bush Will be the Next President of the United States." It was not especially prescient. I just mooched around Democratic pals in Washington and New York and found that none of them could combine the words "President" and "Gore". 13 years later, on two recent trips to both coasts of America and into the midwest, I found the same overwhelming underenthusiasm for Barack Obama. To be fair, he is not quite Jimmy Carter but the parallels keep surfacing. Obama’s best card is Mitt Romney who has taken some  positions that would put him closer to Marine Le Pen or Nigel Farage than the Eisenhower or even Reagan Republicans. Indeed, Jeb Bush, the thinking person's George W, recently told a seminar in Manhattan that both his father and Ronald Reagan would  "have a hard time fitting into today's Republican party" as it has moved so far to the right.

Commentators are queuing up to trash Romney after his foreign tour. It will make no difference in the election. George W Bush famously couldn’t name the president of Pakistan in a TV interview in 2000, while Reagan thought François Mitterrand was a communist and laid a wreath on the graves of Waffen SS soldiers in Germany. Was Romney so wrong when he said Britain was not well-prepared for the Olympics? Boris Johnson got excited whipping up crowd fever against Romney in Hyde Park but he and other Olympic boosters are not doing well as the economic slump in London suggests. In Israel, Romney, promised like every wannabe US president, including Hillary Clinton in 2008, to move the US embassy to Jerusalem. It won’t happen. In Poland, a Romney aide told the press to "kiss my ass". So what? The photo of Lech Walesa holding up Romney’s hand like a champion will do for the Polish vote in Chicago.

In America,  the liberal-left dislike of Romney may not be enough to offset the Obama record. The "Yes we can" élan of 2008 has turned into the "No we couldn't" morosity of 2012. Figures from the US Survey of Consumer Finances show that the median US family is now no better off than 20 years ago. The Clinton and Bush years made rich Americans ever richer but median family income has fallen from $49,600 in 2007 to $45,800 in 2010 under Obama.

Most Americans are just one serious illness or spell of unemployment away from financial disaster. American trade unions, which negotiated the creation of middle-working class America with high wages for industrial, office and public sector workers between 1950 and 1980, are no longer a force. Only seven in a hundred employees in the private sector are unionised. American labour's attempt at a fightback have failed as auto firms and others slash wages and benefits, and threaten workers with closures if they resist.

Democrats and US trade unions will point to the vicious partisanship of Republicans in Congress and the relentless hostility by well-funded right-wing attack outfits and employers. That's true and the elite east coast commentariat fret and wring their hands at the end of bi-partisanship. But a dominant president creates his own political weather and breaks apart opposition alliances. As the fourth volume of Robert Caro's magisterial biography of Lyndon Johnson goes on sale, the necessity of politics as craft, dark art, and forging coalitions is never more evident. Obama is no LBJ.

Like Jimmy Carter persuading himself he could bring the Soviet leader Leonid Breshnev into a relationship with America, Obama thought that  if he pressed the "reset" button with Russia, there would be harmony between the White House and the Kremlin. Putin has made no concessions and still believes America is out to get him. As a result, Obama has been quagmired on Syria, on Iran, on the Balkans, and has no foreign policy pluses to show. He has not moved on the Middle East and his war in Afghanistan drags on and on like the last years in Vietnam. Drone strikes have alienated Pakistan and while Osama Bin Laden is dead, jihadi terrorism isn't. To be sure, Obama hasn't been helped by the worst generation of leaders in Europe since the 1930s.  Unlike Thatcher with Reagan or Blair with Clinton, Obama has little bond with Britain's Old Etonian prime minister who is bored by foreign affairs and believes in economics most Americans think come from Downton Abbey times.

If American tax-paying men don't like Obama, the president does have support from women and from the near half of US citizens who are not Caucasian. Romney's Mormonism is compared to Kennedy's Catholicism in 1960. But cultural issues like abortion and gay rights were not an issue in 1960. Today, the Mormons are resolutely anti-gay. Romney's possible running mate, the Florida senator Marco Rubio, was also a Mormon in his youth though he reverted to Christianity. He is a telegenic right-wing American-Cuban but it is far from clear that Miami anti-Castroism matters any more to the bulk of Hispanic Americans. Romney's endorsement of brutal crackdowns of Hispanic immigrants in Arizona has alarmed liberal Republicans. Romney won the nomination by being as close to the Tea Party as possible. But he will be packaged as a centrist for the election.

Nevertheless Obama may win a second term thanks to his opponent’s flaws more than his own strengths. But no one is as sure as in 1984, 1996 or 2004 that the sitting president will be re-elected. Thirty years ago, America elected a Republican president followed shortly by the arrival of a Socialist president in France. In 2012, might the same happen if in a different sequence? The left here and in Europe thought Reagan and Bush were too thick, too right-wing, and too, well, un-European, to become president of the United States. It may be making the same mistake about Romney.

Republican presidential candidate Mitt Romney before his speech in the hall of the University of Warsaw Library. Photograph: Getty Images.
Denis MacShane is MP for Rotherham and was a minister at Foreign and Commonwealth Office
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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?