David Miliband on what Labour needs to do to win, Blue Labour and his future

"It does feel as if I have been going around attending various versions of my own funeral". Some highlights from a recent evening with the former foreign secretary at the Danish embassy.

Ahead of his departure to the US to lead the International Rescue Committee, David Miliband hosted an evening at the UK Danish Embassy last week, taking questions from an audience of Fabian Society members.

Miliband talked candidly about what Labour needs to do to win in 2015, his regret at not taking up the post of EU foreign policy chief and the significance of ‘Blue Labour’. Here are some highlights from the evening’s Q&A.

What is your take on the current state of play in British politics today?

“Today is an incredible exciting time in British politics for two reasons. Firstly, it is a really open time in politics because the traditional politics of the left, which was about the state providing answers, and the traditional politics of the right of the market finding answers, neither of those are going to meet the challenges of the present. Essentially, what is going on in politics is the centre-right and-centre left are trying to break out of the confines of their own inherited 20th century thinking – without losing the values which are the oxygen of these 20th century movements.

In this time of openness, when your elders are no longer necessarily your betters, the ideas that drive us forward are as likely to come from the young as from others.

What we do know is that successful left-of-centre parties are able to reinvent themselves and think in a way that holds on to the important anchors that brought them into politics in the first place, while at the same time really thinking about the new ways we can put our values into practice.”

Given you’ve got so much to say on the future of British politics, why are you leaving it?

“I’ve got a great opportunity to put my values into practice. The International Rescue Committee is an organisation founded by Albert Einstein in 1933 when he left Germany to flee the Nazis; it has 12,000 staff in 40 countries around the world who are literally doing life saving work, often in places governments can’t go.

For example, in parts of Syria today, there are IRC staff doing life saving work. I’ve got an opportunity within this role to make a real different to people who need help, a voice and representation. Moving to this role is an episode, not an emigration to the US.”

You describe your departure as an episode. What is the duration of that episode?

“Well I haven’t gone yet. When doing a bit of teaching in my old school, one of the kids said ‘I’m doing my A-levels, I’m 17 and I don’t really know what I’m going to do with my life’ and I said, look, I still don’t know what I’m going to do with my life either.”

How have the last few weeks been prior to you leaving for the US?

“It does feel as if I have been going around attending various versions of my own funeral, the difference being the corpse in the coffin is still speaking.”

Why did you choose not to take up the post of EU High Representative for Foreign Affairs? And do you regret that decision now?

“Well, with hindsight it did turn out to be a shame. The job came up in November 2011 and basically I didn’t want to be a rat leaving a sinking ship. We were five months away from a British general election, I’d spent 20 years trying to build the Labour Party up and having left at that point would have been wrong. I actually remember saying to my wife Louise, I don’t want to be sat in Brussels watching the Labour Party go to hell and so that’s the reason.”

During your time in Westminster, how do you think opportunities for women in politics have changed?

“On the one hand there has been a dramatic numerical break through, achieved through things like all women shortlists, which broke the back of the self-selecting oligarchic practices that we used to see of appointing candidates  because they were perhaps the son of so and so.

Culturally a lot of what passed as acceptable comment in the past doesn’t and isn’t acceptable now. Equally, the demands of politics now are massive and this isn’t conducive with the role of primary career. Things are tough, especially if you are trying to juggle a marginal seat, demands of the constituency and bringing up children.”

How can Labour secure victory in 2015?

“The Labour Party has only ever won elections when it’s been the party of production as well as the party of distribution. If left-wing parties are only about how you distribute the cake, and not how you grow the cake, that’s fine for a theoretical economy model but not for governing the country. So you’ve got to get into the guts of how to link production and distribution.”

What is your view on Maurice Glasman’s Blue Labour?

“Your could summarise Blue Labour by saying that by standing for change you mustn’t forget the social ties that bind people together and I think that’s right.

The criticism that New Labour lost a sense of community is a fair argument but, equally, I don’t think you want to flip into a position where you lose the modernising side. What I think marked out the successful elections of ‘97, 2001 and 2005 was that we weren’t just for social democratic virtues, we also had a progressive sense of national modernisation. Those words aren’t quite right, they are too technocratic, but they do sum up a sense of national purpose and progress. For both major parties, I think they are the keys to electoral success.

What I would say is the New Labour critique has force but beware of ending up looking back, rather than looking forward, because politics is always about the future. And the future can never be about remaking old things it’s got to be about retaining or rebuilding old virtues in new ways.

That’s the danger; you can’t do your politics through the rear view mirror.”

Marcus Hobley (@marcushobley) is a freelance commentator specialising in economic and public policy 

David Miliband will shortly become the new president and chief executive of the International Rescue Committee in New York. Photograph: Getty Images.

Marcus Hobley is a freelance commentator specialising in economic and public policy

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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?