Why Labour needs the nation

As in Wales, a renewed sense of national pride is necessary to rebuild our politics and our economy.

In Manchester, the theme of "patriotism" is set to feature alongside more familiar Labour keywords such as progress or public service. For many on the left, patriotism is a dangerous credo, capable of calling men and women to action, of course, but corruptible, and enlisted too easily in the service of chauvinism and conflict. The power of patriotism is, however, too potent a force to be left to the right, or to those who would subvert it.

The Australian academic Tim Soutphommasane has played an important part in stimulating a reappraisal of modern patriotism and the importance of nation-building for progressive politics. However, Labour might look closer to home for an example of how the power of patriotism - or nationalism, even – has been freed from jingoism and xenophobia and harnessed in service of social democratic ends. We might look to Wales.

In the Welsh Assembly, despite a system pre-disposed to deliver coalition government, Labour remains in power after almost a generation of devolution, while Plaid Cymru’s separatist agenda appears shrunken and shrill. Why should this be the case in Wales, in sharp contrast to the fortunes of traditional parties of the left elsewhere in Europe? Certainly, the "institutional" strength of the left in Wales, and the Labour Party as its principal expression, is part of the answer. But so too is the authenticity of Welsh Labour, which has been an anchor in the confused and convergent politics of the last 25 years, particularly since devolution.

The party in Wales has cleaved to its radical roots, even at the height of New Labour revisionism, eschewing, for example, private sector engagement in the delivery of public services and generally maintaining faith in collectivist, community and comprehensive models of service provision. And crucially, in delivering devolution, Labour responded not only to a renaissance of Welshness, but to a demand for local accountability being expressed across the world. Thus, Welsh Labour’s success is both a product of the left and radical traditions of Wales and of a renewed sense of national mission. It is this fusion of progressive politics with national mission – this nation-building from the left – that Labour needs to understand and adopt across the UK. Is that a realistic aspiration? In modern, multi-cultural Britain, where "identity politics", compounded by immigration, devolution and political cynicism, seems to many to have fatally compromised the notion of a British "nation", can Labour conjure and then command that patriotism? The answer is that we must.

For Labour, the party of hope and progress in Britain, a renewed national pride is a necessary condition for a call to action to rebuild our politics, our society and our economy – in the national interest of us all, not the vested interest of a few. And despite the manifest difficulty of calling "the nation" to action in our nation of nations, there are reasons for Labour to be hopeful.

To begin with, we must recognise the great strength of our movement as a British institution in our own right - a powerful and unifying institution. We remain a meeting place for people from across the classes, faiths, ethnicities and all other divides within British society and we’re the only British party with meaningful representation in Wales, Scotland and England, the last "One Nation" party of Britain, if you like.

Secondly, as in Wales, we must be authentic in Britain. That doesn’t mean adopting old-style, statist solutions. Water is delivered in Wales by a not-for-profit mutual, and our railways may soon operate under similar models of ownership and control. However, it does mean being explicit about the need to reform capitalism such that it acknowledges its co-dependence with the state and its potential to damage the fortunes of our people, or limit their achievement, unless it is regulated and reformed.

Thirdly, we must combine these twin strengths in a new national mission for the reinvention and renewal of Britain. That doesn’t mean just recalling or celebrating those values, experiences or institutions - fair play, the war or even the NHS - that have defined Britain for previous generations. That isn’t enough anymore. Instead, it means inventing and instituting those values, experiences and institutions that might define it for the next. And that demands we rediscover the radicalism, the boldness of thought and action that we’ve demonstrated at our best, as at the creation of the welfare state, the introduction of devolution or the establishment of the minimum wage.

For this generation, it might require a new constitution, written perhaps, to enshrine national standards and common values and to frame a more formal, confederal architecture of British government, including at a more local level in England, as in Wales and Scotland. It may entail the creation of a new National Care Service, as some Labour colleagues have suggested, to provide equitable and decent care for our burgeoning elderly population,  a new period of national, civic service for our young, inculcating values of tolerance, responsibility and duty.  A National Day and a State of the British Union Address are other ideas that have been canvassed and that might usefully play a part in this task of reinvention.

Such new institutions and innovations might create a new spirit and rhetoric of fraternity and national solidarity – of common endeavour and collective enterprise – to replace the narrative of individual rights and personal achievement that has dominated our political discourse for much of the last 30 years. It might also provide a framework within which we could more easily recognise the gross inequality of wealth, education, opportunity and even life expectancy that persist in Britain, and enlist a majority in favour of their eradication.

Of course, achieving that ambition against the backdrop of deficit reduction and low growth, which appears set to constrain our economy – especially if the government persists with its current strategy until 2015 – will be a formidable task. But we cannot allow our own dreams to be curtailed, because those of the British people will not be.

This new narrative of social solidarity could provide the backbone for a new British patriotism, a social and liberal patriotism, with new symbols, institutions and sense of common purpose. Only the left, only Labour, can imagine and nurture such a hopeful vision of our future. That’s our job in politics. Let’s raise up our eyes and look to it.

In Wales, Labour has cleaved to its radical roots. Photograph: Getty Images.

Owen Smith is a Labour leadership candidate and MP for Pontypridd. 

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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?