Fabian Society hustings: are you a socialist?

The five candidates for the Labour leadership were grilled on their definitions of socialism and the

Are you now, or have you ever been, a socialist? The Labour leadership candidates all pleaded guilty to quietly harbouring ideological convictions when asked what socialism meant to them, though they may well have anticipated some inquiry of a philosophical kind given that last night's hustings event at the Institute of Education in London was organised by the Fabian Society in partnership with a "broad front of the mind" (namely Progress, Compass, LabourList, Left Foot Forward and the Young Fabians).

Only David Miliband hinted that the question offered an old shibboleth, before showing that he was prepared to genuflect before it anyway in being "happy to sign up to" the assertion that "Labour is a democratic socialist party", a statement left in new Labour's new Clause Four in 1995.

This was clearly judged not quite the moment for Miliband the Elder to identify social democracy as the main live ideological strand of the socialist traditions, and to stake his claim that its political future now depends on a plural progressive fusion with the liberal tradition. Perhaps there will be other occasions and platforms for that argument, but a leadership hustings wasn't the place.

Miliband the Younger struck a Compassite note in arguing that socialism was about a critique of capitalism, or it was nothing: "being a socialist for me is about being willing to criticise capitalism and the injustices it creates". There is a significant difference of tone and rhetoric here, though "It is not about abolishing capitalism, but it is about changing it" was also essentially an argument for social-democratic reform, proposed as the viable means to meet socialist ends.

Andy Burnham quoted a popular socialist, saying that Billy Bragg's line "I've got a socialism of the heart" was the ethical socialist tradition rooted in the idea of community. For Burnham, socialism is about looking out for each other -- his best line of the night had been: "All of the things we criticise in the American health system are present in the way we fund care for older people in this country." But reciprocity has a hard edge in demanding a contribution, too: "Everybody looks out for each other, and everybody who is able to does their bit and makes a contribution."

Ed Balls wanted to make clear that he had been taking flak long before the contest for declaring himself "proud to be a democratic socialist" -- in the New Statesman, no less, during the New Labour high tide. The distinctive idea was collectivism in breaking down barriers.

But the substantive shift in "party ideology after New Labour" was not demonstrated by how they dealt with the S-word. That was a question Tony Blair could answer, too: hyphenating social-ism to argue it is essentially a "we're in this together" creed. (Indeed, Blair devoted a very short Fabian pamphlet to fleshing that thought out.)

What Blair the Social-ist had been unable to say, interviewed by Jeremy Paxman during the 2001 election, was that narrowing the gap between rich and poor mattered. Each of the "next-generation New Labour" candidates found ways to directly reference and reject his approach to what became known as "the David Beckham question", showing that Diane Abbott's claim that "there was a period when it seemed as though equality was a dirty word in the party" was now about the New Labour past and not the future.

Ed Miliband stated clearly: "It must be a central objective of policy to narrow the gap between rich and poor. It is so hard to do, that unless you make it a central objective, it isn't going to happen."

Ed Balls repudiated Mandelsonism, too, stating: "We aren't intensely relaxed about the filthy rich and it is important we say that." However, he wanted to stress the important commitments the previous government had made on redistribution and poverty, while attacking its "pandering" on inheritance tax in 2007 as a major political mistake.

"The gap does matter: it is not just about the floor, it is about inequality, too," said David Miliband, wanting to give equal priority to inequalities of wealth and power. As did Andy Burnham, who spoke about his background having informed his belief in a society where "health, wealth and life chances were more equal", presenting this as his defining mission and the cause of the party.

So Labour is clearly once again a pro-equality party. Yet, on the socialism question, it was Diane Abbott of the Campaign Group who suggested that a commitment to socialism need not be rooted in an intellectual framework.

"I am a socialist. What's it about? Well, I've never been a special adviser, I'm not an intellectual. For me, it's about: if you draw a line in the sand, what side are you on? If you come from a minority working-class background, you are acutely aware of what it is to feel marginalised in society. I've always chosen to stand with the voiceless and the powerless."

That hint of disdain for the usefulness of ideological speculation may be a rather more authentic Labourist tradition than any theory of socialism has ever been (the trade unions would never have founded the party if it had really wanted to be a socialist one).

The Fabian intellectual G D H Cole had written, somewhat approvingly, of Labour having a "socialism so undefined in its doctrinal basis as to make recruits readily among people of different types".

With the candidate of the left suggesting she was the least interested in the question of ideology, Cole's description of Labour as "a broad movement on behalf of the bottom dog" would seem to be the idea of socialism around which all five leadership candidates can easily converge.

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.

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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?