The Republican Party is eating itself

Conservatives have forgotten that Americans are pragmatists first, ideologues second.

We say we are pro-life and then say we want abortion to be legal. We say we're mostly economically conservative but then say we like Medicare and food stamps. We say we want affordable health care and then say that the law that makes it affordable is un-American. What gives?

Part of it is the media. It can badly distort reality. But part of the reason (I think the greater part) is that Americans are so often lied to. Europeans have no doubt heard of the impact of Citizens United, the US Supreme Court case that permits unlimited sums of money to be spent on elections. This is the ruling that allowed Newt Gingrich to survive the GOP nomination process for much longer than he would have under prior conditions, and it allowed Mitt Romney to take the GOP nomination without the political benefit of charm, charisma or likeability.

Europeans, however, may not have heard of the army of secretive front groups that stealthily spread corporate propaganda. Recently, one of those advocating for the coal industry paid people $50 each to attend a regulatory meeting in Chicago. The goal here was creating the illusion that coal enjoys mass grassroots support when in fact it does not. This same tactic prevailed in 2010 when billionaire-backed groups like the Center for Protect Patient's Rights created the false impression that the Tea Party was a bottom-up conservative "insurrection." It funneled more than $44.5 million in 2010, much of it provided by two people: Charles and David Koch.

"Grassroots" isn't the only way the power elite masks its unpopular and oligarchical agendas. So is "small business." Few things are more sacred in Washington than the entrepreneur and small-business owner. Carrying its mantle, a group called the National Federation of Independent Business (NFIB) is challenging the constitutionality of Obama's health care reform law along with 26 states. The US Supreme Court is expected to issue a ruling in June. Meanwhile, a cursory look at the group's leadership suggests it has long-held ties not to small business but to Big Business Republicans. 

Its president is a former lobbyist for the steel industry who served in Ronald Reagan's White House. Its chief lobbyist served in the first Bush administration before working for Citizens for a Sound Economy, a think-tank financed by the Kochs. Citizens for a Sound Economy is now part of the brothers' Americans for Prosperity, which, along with FreedomWorks, underwrites much of the Tea Party. And the NFIB's communications director once worked for the American Legislative Exchange Council, which, as a service to state legislatures, writes "model legislation" that often undermines the right to collective bargaining. The Kochs are known for their anti-unionism.

But in politics, lies don't last forever. Eventually, there is a reckoning, and in the case of the president's health care law, a GOP reckoning may be on the horizon.

Consider Congressman Allen West of Florida. Over the weekend, he told a liberal blog that if the Supreme Court strikes down the law, it has to be replaced with something. That is, as a practical matter, something has to do done, and as a political matter, it's important to consider features of the law that Americans now like. Those, in West's words, would include: allowing children up age 26 to be covered by a parent's plan, outlawing discrimination based on "pre-existing conditions" and expanding drug coverage, aka closing the "donut hole."

For those paying attention, West's remarks amount to a tiny incendiary device going off beneath the skullcap, as West is one of the beneficiaries of the Tea Party "insurrection" and probably best known for saying that more than 80 Congressional Democrats are members of the Communist Party (they're progressives, but that's the same thing, right?). He and other Tea Party conservatives (libertarians mostly) won office by slamming "Obamacare" as evil socialism, and now, here he is, saying, well, some of that socialism is kinda sorta OK.

Unsurprisingly, West is up for re-election, as are many other Congressional Republicans (the House has two-year terms). And some of them, even among the GOP's leadership, are saying privately that Obamacare ain't all that bad. This has inspired worry among ideologues and swift reprimand from conservative groups like FreedomWorks, which demands that none of the law be re-packaged. Ever. FreedomWorks and others scare the bejesus out of Republicans because of the cyclical threat of primaries. They recently gave the boot to Indiana's Dick Lugar. He was the Senate's longest serving member.

This puts the entire party in a position that perhaps only presidential candidate Mitt Romney can fully appreciate. As he turns his attention to the general election and starts courting mainstream "swing" voters, Romney must constantly protect his right flank from trumped up charges of being a RINO (Republican in name only). Same for House Republicans. They must appeal to mainstream voters who are only now warming up to the health care law while ducking the ire of the conservative power elite.

The irony is that the power elite is hoping to elect candidates of dubious electability. The more ideological they are, the less likely Americans are to vote for him. Americans are pragmatists first, ideologues second. Fixing the problem is more important than who's right, and the problem is so clearly that health care costs too much (it grew at twice the general rate of inflation).

The other irony is that the power elite, by backing candidates of dubious electability who themselves parrot the power elite's missives of misinformation, are setting themselves up for failure. They have manufactured an entirely self-contained world of delusion and hysteria that has no application to real-world issues. That is, they aren't offering solutions unless you count preserving the status quo as a solution, and Americans, despite our abundant confusion, know that the status quo is not sustainable.

The next couple of months are going to be a doozy for the radicalised Republican Party. Either it navigates this political mine field, repudiates the propagandists or gives itself entirely to the theatre of the absurd, in which case we may really be witnessing a party eating itself. Fun!

Republican presidential candidate Mitt Romney smiles as he is introduced during a campaign rally at Somers Furniture on May 29, 2012 in Las Vegas, Nevada. Photograph: Getty Images.

John Stoehr teaches writing at Yale. His essays and journalism have appeared in The American Prospect, Reuters Opinion, the Guardian, and Dissent, among other publications. He is a political blogger for The Washington Spectator and a frequent contributor to Al Jazeera English.

 

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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?