The Spirit of '45 reminds us of the importance of political myths

Tales of what might have been and what may be to come are a powerful and resonant part of the left's appeal.

In his book Election ’45: Reflections on the revolution in Britain, which marked the 50th anniversary of the 1945 Labour government, Austin Mitchell recounts an anecdote about a 20 year-old Tony Benn. Too young to actually vote, he instead spent the campaign driving a Labour candidate around central London. On bumping into a taxi one day, Benn, never knowingly without something to say, took to the loudhailer. "You have just been struck by the Labour candidate," he announced, "and everybody cheered – they were so excited."

Such are the tales, myths even, surrounding Labour and 1945, as a grateful Britain apparently flocked to the polls to vote for socialism. Ken Loach is the latest teller of this tale in his new film, The Spirit of ‘45, recounting the massive achievements of the post-war Labour government, which included the creation of the NHS, welfare stateand full employment.

However, the polemical documentary has come in for criticism over Loach’s tendency to be economical with the facts. The historian Steven Fielding upbraided him in the Guardian last week for offering a rose-tinted version of history: "Described as a 'celebration', Loach uses his vision of the past to make blatantly contemporary political points…I fear that Loach's version of 1945 is more imagined than real: it is, for want of a better word, propaganda", he wrote.

Elected on a wave of popular enthusiasm for social and economic change, 1945 was always a chimera. In as much as it was a call for Labour measures (heavily influenced, of course, by the work of avowed liberals John Maynard Keynes and Sir William Beveridge) it was also a call for Tory men, with many hoping Churchill would remain as Prime Minister after the war.

The timeline is also instructive here. Swept to power with a majority of 145 in 1945, Labour only just held on in 1950 with a majority of five, before succumbing to the Tories just a year later. The spirit of ‘45 might have seen lasting social and economic changes, but it certainly did not usher in an age of political dominance for Labour and the left: the party was out of office for the next 13 years.

As Fielding puts it: "Loach's film should therefore be better called The Myth of '45, for it peddles a fantasy, albeit one that provides comfort during these hard times for some on the left."

None of this is to deprecate Loach’s fine film, far less the massive achievements of the Labour government, both real and embellished. Myths play an important part in our politics, serving as shorthand for big, ungainly ideas; helping inspire, provoke and, crucially, motivate voters. The promise of a better tomorrow remains essential in galvanising the voting public behind a cause.

And the left likes it myths; from the Attlee government’s pledge to build a "New Jerusalem" through to Tony Blair’s promise of "New Labour, New Britain". Grandiose claims abound, whether it was Harold Wilson boasting in 1965 that Labour had become "the natural party of government" or Gordon Brown’s oft-repeated promise of "no more boom and bust". Myths can also serve as powerful warnings too. How may variants have there been on the "1000 days/ one month/ 24 hours to save the NHS" theme?

But it’s the governing bit that usually causes problems for the left’s myth-makers."You campaign in poetry, you govern in prose" as former New York Governor Mario Cuomo famously put it. When things don’t quite live up to the romantic billing, the left has a problem sustaining itself in power, as even the sainted Attlee found out.

Labour’s 1974 manifesto, which pledged to enact a "fundamental and irreversible shift in the balance of power and wealth in favour of working people and their families" was abandoned after just two years when IMF-imposed austerity measures, (amid the chaos of 1970’s economic stagflation) scuttled the government’s lofty ambitions. But the killing of a political dream quickly darkens into cries of betrayal. A sense that Labour had capitulated in the face of economic orthodoxy led directly to the fratricidal mayhem of the early 1980s when the party’s myth-making soared to stratospheric heights of implausibility.

It’s not just the preserve of the left though. Scottish, Welsh and Irish nationalism hold to their enduring myths too. Tales of what might have been and what may be to come are a powerful and resonant part of their appeal to voters’ emotions. As, indeed, is UKIP’s retro island myth of sepia-toned Great Britain bestriding the globe as a sovereign power. Chancellor George Osborne’s own myth-making prowess was on display in the Budget as he breezily accounted for the continued failure of his 'expansionary fiscal contraction' model.

For Ed Miliband, the risk in meeting the public’s desire for a better tomorrow is that it becomes a casual promise that it will be delivered. The most dangerous mythfor him is that a Labour government would not be taking an axe to public spending right now. It would - although the party’s framing of its own approach remains a work in (painfully slow) progress. However the big problem for Labour begins after it wins in 2015; with another three years of austerity already pencilled in. Ambiguity now may lead to howls of anguish later as dreams go unfulfilled.

Governing in prose, it turns out, is not much fun.

Clement Attlee waves to well-wishers outside Transport House in London after the Labour Party's victory in the 1945 general election. Photograph: Getty Images.

Kevin Meagher is associate editor of Labour Uncut and a former special adviser at the Northern Ireland office. 

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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?