Where have the left-wing Liberal Democrats gone?

New Lib Dem group decries the party's role in supporting this "heartless, right-wing Tory government

The last 22 months have been uncomfortable for many of us on the left of the Liberal Democrats. Many of us have had to think long and hard about whether to stay and fight, or throw in the towel. Some of us have decided to do the latter and are now seeking to fight back collectively through the establishment of Liberal Left.

We haven't been in hibernation since the establishment of the coalition. We have all, in our different ways, been active in challenging the party internally and externally and in doing our best to work towards the elusive "realignment of the left".

The current leadership narrative has been around taking the centre ground, "we're all centrists now" the mantra, equidistance the declared aim. But the truth is, we have never been equidistant. We have always been a party of the centre left and that self-evidently means we are always going to have more in common with the parties of the left than of the right. So as Liberal Left we have two clear aims, to provide a voice within the Liberal Democrats, opposing the party leadership on economic and fiscal policy, and advocating a positive alternative; and to seek every possible opportunity to build good relations across the left, between Liberal Democrats, Labour, the Greens, and the non-party liberal left, recognising that organisations such as Compass offer a thriving space for such dialogue around democracy and sustainability.

Now, of course our stance has earned us criticism from both left and right, but we take our lead from the declared aim of the party, namely "to build and safeguard a fair, free and open society, in which we seek to balance the fundamental values of liberty, equality and community, and in which no-one shall be enslaved by poverty, ignorance or conformity". And it is clear that the grassroots of the party have not abandoned that aim. Particularly noteworthy has been the internal campaign against the Health and Social Care Bill.

This week we published our first pamphlet, Challenges for the Liberal Left, thoughtful essays laying out in more detail our ideological position. Exploring some of the most pressing issues, the economy, the role of the state, the impact of coalition policy on women, liberalism and the liberal left.

In exploring liberalism and the liberal left Richard Grayson, former Lib Dem Director of Policy, reminds us that "as a party we argued during the last election that eliminating the structural deficit in a single parliament, as the Tories proposed, would remove growth from the economy. We also said that the impact of such a plan would fall disproportionately on those least able to afford the cuts, increasing the gap between the rich and poor and further dividing the country. This is exactly what has happened and we must not as a party stay silent and accept it as the best deal possible."

Stephen Knight calls for radical thinking from the liberal left regarding how the state can best support a sustainable, stable, green economy with real distributive justice, while Simon Hebditch draws on his wide experience in the third sector to explore the contested role of the state. He critiques the contradictions in current policy and concludes that true localism must imply local sustainability if the theory of local power is to be realised.

Jo Ingold explores the disproportionate and adverse impact of current coalition policies on women, specifically in relation to tax, benefits and childcare policies; Ruth Bright strongly argues that the party is fooling itself if it does not understand that the need to appeal to women voters cannot be separated from the need to make the party itself look democratically representative of the country.

Ed Randall's historical analysis challenges us to consider seriously how as Liberal Democrats we should be responding to the current economic crisis and Stephen Haseler argues that the deficit reduction programme is not dealing with the underlying debt crisis but is in fact making it worse. He urges the party to ditch the Orange Book and Conservative neo-liberalism and return to our social liberal roots.

Our official launch will take place on Saturday evening -- 8pm in Hall 2 at the Sage Gateshead. We expect a lively debate, so if you are there, do come along. And if like us, you are a Liberal Democrat committed to Liberal Democrat values but dismayed at our party's role in supporting one of the most heartless, right wing Tory governments ever; do join us.

Linda Jack is the chair of Liberal Left.

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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?