US primary elections draw battle lines between insiders and outsiders

Republican voters pick a dark-horse Tea Party candidate to run for the Senate in Nevada, while two f

Overnight in the US, ballots were counted and and races called in ten primary elections, with a contentious run-off election also held. After a day that included the largest set of primary elections held this year, ballots are now finalised in several key elections that will take place on 2 November this year.

The analysts are calling the elections a sea change for the Republican Party, after voters chose female candidates in several high-profile states.

But behind this headline is the prospect of an insider-versus-outsider showdown in government, and the anti-incumbent rumblings that are bound to surface in the run-up to the November general elections.

A conservative, Tea Party candidate scored a major upset against the establishment Republican candidate in Nevada. And, in California, two former CEOs won in their respective Republican primaries and will face off against Democratic career politicians for statewide office.

Voter discontent with incumbents, "politics as usual" and the growing national deficit are having an impact on sitting politicians, with some even getting shown the exit by voters. The primary election season and the November midterm elections will decide the agenda of the Democratic Party-controlled Congress, and President Barack Obama, who has been perceived as not doing enough but spending too much.

Here are the results from the races to watch:

Nevada

Sharron Angle, a former legislator and schoolteacher, shot to political stardom yesterday, defeating the GOP-endorsed candidate for US senator in the Nevada Republican primary. Angle received a major boost after getting financial support and an endorsement from the Tea Party Express, a national group devoted to supporting Tea Party candidates.

The Republican Party had backed Sue Lowden in the primary race, but she stumbled after making a gaffe about going back to the days of bartering for health care by offering the doctor chickens. Despite winning the nomination, Angle will face an uphill battle against an established Democratic incumbent. She has made several provocative stands, such as ending the social security programme for younger people and closing the department of education.

Angle will go head-to-head in November with the Democrat and Senate majority leader, Harry Reid, who won his nomination race. Reid has had a target on his back and been losing in polls against Republican candidates. But with the support of the powerful casino industry, CNN reports, Reid is well on his way to raising $25m.

Angle, on the other hand, ran her primary campaign from her own house. A win in November would be a true Cinderella story for the Tea Party candidate.

Arkansas

In Arkansas, Senator Blanche Lincoln (Dem) survived attack from the labour unions in a come-from-behind victory over the challenger Lt Gov Bill Halter. An endorsement from the former president -- and former governor of Arkansas -- Bill Clinton helped to salvage Lincoln's seat. The win also prevented her from becoming the third major incumbent to feel the wrath of voters and be dislodged from office during the primaries.

Lincoln had been forced into a run-off election with Halter which took place on Tuesday. She now admits she and her party misunderstood the spirit of voter discontent. "I would say that we may have underestimated the anti-incumbent mood," she said.

Lincoln now faces a tough battle with the Republican John Boozman until the November elections, in a usually conservative state, during a rough time for politicos in power.

California

In a high-profile contest among Republicans to occupy the seat of the departing governor, Arnold Schwarzenegger, the former eBay CEO Meg Whitman defeated the former Silicon Valley businessman Steve Poizner.

The governor's race now shifts to a fight between business acumen and experience in government. Whitman will do battle with the Democrat Jerry Brown, who held the governor's office twice in the 1970s. Given the state of California's budget crisis, and the anti-insider mood of the electorate, independent voters may opt for Whitman in November. Whitman is so far outside the political establishment that she has been accused of not voting in elections for two decades.

Following this trend of "inside-versus-outside", another CEO will go up against a career politico in the California race for senator. The 28-year Democratic Party veteran Barbara Boxer, who is feeling the anti-incumbent heat, will square off against the former Hewlett-Packard chief and Republican Carly Fiorina after both won their nomination races on Tuesday.

South Carolina

State Representative Nikki Haley overcame a scandalous attempt to derail her campaign to gain the Republican nod to run for South Carolina governor. Haley, however, will have to face off against Representative Gresham Barrett in a 22 June run-off, as no one in the race earned a 50 per cent majority.

Barrett and Haley are seeking to replace the scandal-ridden Republican governor Mark Sanford, who was caught last year having an affair with an Argentinian woman, and who created a new euphemism with the phrase "hiking the Appalachian Trail".

Haley herself faced allegations of infidelity in the last two weeks of campaigning, in a scandal that has shades of the whisper campaign that defeated John McCain during the 2000 Republican presidential primary in South Carolina. Haley charged that rival Republican campaigns were behind the allegations levelled against her this year. During the run-up to Tuesday's primary, one of the men who allegedly took part in the affair released phone logs, and another one even did a lie-detector test to prove his claims.

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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?