The real difference between the Milibands

What the brothers really disagree about is why Labour lost, and how it must change to win again.

For the first time in Labour's history, party members will return leadership ballots, which hit their doormats yesterday, without knowing who will win. That is because Ed Miliband rejected a Bobby Kennedy role, seeking to influence his brother's leadership from a kitchen-table seat. A significant political disagreement with his brother gave him reason to believe that his advice would seldom be taken.

That argument has finally moved to centre-stage as the campaign closes. It is not about different world-views -- both are social democrats who believe that Labour's mission is to narrow the gap in life chances, albeit with mildly different instincts about how to get there. And the brothers have resisted excessively personalising their fraternal battle, to the mutual frustration of some supporters.

What the Milibands really disagree about is why Labour lost and how to win again. Couching the argument in psephological number-crunching about the shifting class structure, they are playing out a deeper existential question about the party's strategy and public identity. What does "moving on" from New Labour mean, and how deep should it go? David Miliband warns that throwing out too much of a recently successful formula could mean a long spell in opposition; Ed Miliband fears that it is failing to recognise the scale of change needed which would keep the party from power.

David Miliband's campaign presents the election as a "head versus heart" choice. The idea that Ed Miliband is a "comfort zone" candidate irks John Denham, the Southampton MP who has focused most on Labour's southern challenge and who is leading on future policy development for Ed Miliband's campaign.

Denham warns that what he calls the "New Labour establishment" could fatally underestimate how much must change. "It is Ed Miliband who is the brave choice, who says 'we are going to have to change again as we changed before' against those who think we have still pretty much got it right and need to tweak things a bit to return to our winning formula," he says.

The sharpest argument in the party's inquest into May 2010 is not about this May but Labour's last victory five years earlier. Whether to treat that as a triumph or near-disaster could determine whether "change" is in a major or minor key. For Liam Byrne, the main election number cruncher backing David Miliband, the "simple fact" about 2005 is that "Labour won", with the historic 1997 New Labour coalition "sustained to carry Labour to victory once again". Byrne's Progress paper on the 2010 defeat argues that the lessons of 2005 were "much misunderstood", alluding to fierce internal arguments over the analysis he produced at Tony Blair's behest that autumn, just as New Labour factionalism hit new lows.

Contrast 2005 with 2010 and the message is "carry on New Labour". The recession, Gordon Brown's brooding presence and the MPs' expenses crisis all deepened a "time for a change" mood after 13 years in power. These one-off factors shall pass. Even in soberly assessing Labour's 29 per cent share, Byrne declares "our coalition was cracked but not broken".

Denham is unconvinced. A focus on the one million votes lost after 2005 "misses the point" of the four million votes lost before 2005. Thirty-five per cent could just be enough under first-past-the-post, if votes fall happily, but how often should Labour expect as unattractive an opponent as Michael Howard? In this view, Humpty-Dumpty cannot be put together again: the deep fracturing of New Labour's electoral coalition demands a more fundamental reappraisal.

New Labour already had a "one more heave" victory in 2005 and surely experienced a "one more heave" defeat in 2010. Gordon Brown ran on "change" yet failed to define it. Why? Ultimately, because he could see no viable alternative to the New Labour election playbook.

"We quickly defaulted to a textbook New Labour campaign," says Patrick Diamond, who worked at No 10 for both Blair and Brown. "Brown never took the chance to recast New Labour: was it that the opportunity didn't really exist, or was it a failure of imagination or courage?"

Diamond, who has not endorsed a leadership candidate, believes that the next leader must realise that a strategy of "consolidating New Labour modernisation" will fail. "It simply leaves too many questions unanswered" about a very different world, he says, and underestimates the coalition, too.

Core votes?

Premature obituaries for Labour now date back a half-century to the Must Labour Lose? Penguin special of 1960. New Labour escaped death by sociological treatise, yet now finds a sting in the tail. A party on 29 per cent is assumed to have "retreated" to its "core vote". Yes, even as Labour's vote fell across 2001, 2005 and 2010, each election produced the most balanced cross-class pattern of votes in the party's history. New Labour's professional support proved much more resilient than the so-called core vote, which collapsed.

"The core Labour vote that some thought could be taken for granted became the swing vote that went Conservative," wrote Ed Miliband in his recent Fabian essay. The dramatic post-1997 slump in DE share alone cost Labour 40 marginal seats in 2010: the difference between opposition and government.

But the former Scottish secretary Jim Murphy, co-chair of the David Miliband campaign, tells me: "A core vote strategy guarantees you opposition. It fails the Downing Street test. The road back to power isn't inverting the mistake of New Labour and describing that as a strategy." Yet the pejorative expression "core votes" is misapplied to those voters most likely to switch.

"It is dangerous to pretend that we don't need the middle classes," warns David Miliband. His brother could hardly disagree, but he does argue that New Labour has also understood the loss of middle-class support -- too often dismissing liberal critics as a noisy, unrepresentative Guardianista niche, though AB and C1 voters have been twice as likely to go yellow as blue. Labour's working-class and middle-class challenges mirror each other, in the scale of substantive policy change and symbolism required on both economics and social liberalism to reconnect.

This argument between the Milibands is often narrower than that between their supporters. David Miliband would represent more continuity than his brother, but knows that the next leader must credibly substantiate the claim to "change". His argument that "an alphabet analysis can lead you backwards into the triangulation politics which led to our downfall" signals his own critique of New Labour.

If the coalition lasts until 2015, the next election -- coming 18 years after 1997 -- would take place in a Britain as distant from Tony Blair's first victory as that landslide was from Maggie Thatcher's defeat of Jim Callaghan. The new leader might find inspiration in the history of how Labour built a broad winning coalition in 1997, 1966 or 1945. But they will have to build Labour's next governing majority for themselves.

Sunder Katwala is general secretary of the Fabian Society.

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?