Tar sands test Obama’s green credentials

New pipeline is another indication that the US has failed to curb its oil addiction.

After a week in which WikiLeaks revealed in forensic detail how rich countries set about nixing a meaningful climate agreement at Copenhagen last year, climate-change hypocrisy looks increasingly like a fact of life. In the context of all the duplicity laid out by the leaked embassy cables, official doubletalk on emissions reductions is no more of a revelation than Russian corruption, or America's cosy relationship with the Saudis.

But as another round of climate talks limps to its conclusion with the usual cry of "a proper deal next year", Barack Obama has an opportunity to do something substantial about climate change. He could reject a proposal for an oil pipeline that would pump 900,000 barrels of the world's most polluting fuel – the oil squeezed out of Alberta's oil sands – to the oil refineries on America's Gulf Coast every day.

If the project – which would extend an existing pipeline running from Alberta to the midwest – goes ahead, America's dependence on a resource which has been described as "the dirtiest source of transportation fuel currently available" will be locked in for decades. You don't construct a 2,000-mile pipeline at the cost of $7bn if you plan to stop using it in a couple of years. US demand for Canadian tar sands will soar. Canada's oil companies will set about their task of converting Alberta's wilderness into greenhouse gases with ever greater feverishness.

It's hard to exaggerate how bad oil sands are. Turning this gritty mix of bitumen, sand and heavy metals into fuel is three times as energy-intensive as extracting conventional crude. The extraction process has poisoned Canada's surface water with mercury, arsenic and lead. Only yesterday it emerged that Canada's environment department has never tested the nearby Athabasca River for the presence of pollutants from the mining operation. This is despite the existence of a permanent laboratory downstream from the oil sands, which checks the Athabasca for the presence of all kinds of chemicals – but not oil sands pollutants. Huge tracts of Alberta now resemble Mordor.

The extension to the pipeline has already stalled twice. In July the US state department extended its review period for assessing the environmental consequences of the pipeline by 90 days. Then, in mid-October, with the Deepwater Horizon disaster still fresh in voters' minds just a fortnight ahead of the midterm elections, the government delayed once more. Crunch time is now approaching.

Hillary Clinton was criticised in October for letting slip that the government was "inclined to approve" the pipeline – before the end of the review period. As for Obama himself, he went quiet after admitting early last year that the oil sands' carbon footprint was a concern. A WikiLeaks cable from not long after gives the likely reason: he was urged to shut up on the subject, for fear of offending Canada's "sensitive" government.

Yesterday the No Tar Sands Oil Campaign, a group sponsored by most of America's environmental lobby groups, launched a $500,000 ad campaign calling for Obama to block the pipeline by calling for another audit of its environmental impacts. They claim doing so could prevent the next oil spill disaster, since a leak could endanger Nebraska's Ogallala Aquifer – the source of nearly 80 per cent of Nebraska's drinking water

Inevitably, Big Oil is fighting back. The American Petroleum Institute (API), Washington's biggest oil lobby, is launching its own campaign, saying that the pipeline's environmental impacts have been exaggerated and that Canadian oil will reduce America's dependence on the Opec cartel. It would, of course – but so would investing in clean energy.

But if Obama chooses to oppose the pipeline he might find he has the public's backing, despite the inevitable scrap in Washington. As Cindy Schild of the API conceded: "We've been promoting the economic benefits and jobs this resource can bring and we don't think it has been fully registering with the public."

Back in 2006, Obama said: "Our continued use of fossil fuels is pushing us to a point of no return. And unless we free ourselves from a dependence on these fossil fuels and chart a new course on energy in this country, we are condemning future generations to global catastrophe."

Obama must be acutely aware that, so far, his government hasn't been able to do much for those future generations. Allowing this pipeline to go through would be a sign that they don't really figure in the arithmetic of US politics at all. As long as oil is pumped through the pipe every green sentiment mouthed by Barack Obama or his successors will be a platitude. A government trying to reduce its dependence on fossil fuels doesn't prolong its dependence on the worst kind of fossil fuels.

The battle lines have been drawn – but do Obama and his government have the bottle to take the right side?

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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?