Leader: Ed Miliband has shown leadership and courage

With a mixture of high-minded principle and political cunning, he has reimagined the Labour-unions link for a less collectivist age.

The art of political leadership lies in turning crisis into advantage and misfortune into gain. In his deft response to the Labour parliamentary selection scandal in Falkirk, Ed Miliband succeeded in doing both. It was not a fight he chose. Ever since his election in 2010, the Labour leader had resisted defining himself against his own party, shunning tiresome demands for a “Clause Four moment” and prizing unity above all else. But confronted by the imperial ambitions of Unite’s general secretary, Len McCluskey, and the insistent question “Who runs Labour?”, he has taken a path more radical than any of his recent predecessors.

His plan to require trade union members to opt in to donating to the party, rather than being automatically enrolled by general secretaries, would be the most significant change to the Labour-unions relationship since the party’s formation in 1900. If Mr Miliband’s support for democracy and transparency is to be consistent, it is also an entirely necessary one.

At present, of the 15 unions affiliated to Labour, only Unison allows new members to choose whether or not they contribute to the party when they sign up. Just two others, the Musicians’ Union and Usdaw, mention the existence of a political fund (but do not mention Labour) and six affiliated unions, including Unite and the GMB, do not mention Labour at all in the membership sections of their websites. As a result, even though all members have the formal right to opt out of paying the levy, just 10 per cent do so in practice, and many are not even aware of the fund’s existence. It is this arrangement that allows the Conservatives to argue, with some justification, that unions such as Unite (just 37.5 per cent of whose members vote Labour) dupe workers into subsidising the Labour Party.

By turning his back on such machine politics and declaring that no individual will donate to the party “unless they have deliberately chosen to do so”, Mr Miliband has confronted this charge head-on. No longer will Labour and the unions’ relationship be defined by backroom meetings between the leader and his or her representatives and the general secretaries. Instead, Mr Miliband will reach out to the three million workers who now pay the political levy and seek to rebuild Labour as a mass-membership party. At a time of corrosive cynicism with politics, his vision of a party “truly rooted in every community and every walk of life”, a party of “shopworkers, nurses, engineers, bus drivers, construction workers, people from the public and private sector”, is an inspiring one.

Comparisons with Tony Blair’s decision to rewrite Clause Four understate the boldness of the move. Mr Blair’s revision of that hallowed section of Labour’s constitution, which committed the party to “col - lective ownership of the means of production, distribution and exchange”, was of largely symbolic significance. The party had long abandoned its support for wholesale nationalisation. By contrast, the reforms announced by Mr Miliband on 9 July will have profound consequences for Labour. Party officials privately estimate that the introduction of an opt-in system would result in the loss of at least £5m of the £8m it currently receives each year in union affiliation fees. For a party with existing debts of £9.9m – more than every other party put together – the act is almost masochistic.

Worse, should relatively few trade unionists choose to join the party, it will be hard for the unions to justify remaining affiliated at all. The events set in motion by Mr Miliband could lead to the severing of all ties between Labour and its founders. It is the immensity of this gamble that prompted the rare praise for Mr Miliband from Mr Blair, who declared: “This is big stuff and it takes a real act of leadership to do it.”

If the risks are great, then so, too, are the potential rewards. Having abandoned his previous opposition to the introduction of an opt-in system, at potentially great cost to his party, he has earned the right to challenge the Conservatives and the Liberal Democrats to reopen the stalled talks on party funding. Should the Tories continue to resist his proposal of a cap of £5,000 on all donations, he will be able to present them as a party too much in hock to vested interests to reform a system that verges on corruption. The Conservatives will insist that Mr Miliband’s position contradicts past statements and that he has acted under duress. That still leaves unanswered the question of how they will respond now.

The Labour leader showed similar astuteness in calling for a limit on MPs’ outside earnings, as we did in a leader last week. He was right to recognise the public disdain for those whose second jobs often pay “higher salaries than the job of an MP itself”. As we argued, restrictions on outside earnings would also make it easier to justify any future increase in MPs’ pay. The Conservatives’ decision to respond by describing Mr Miliband’s proposal as a “smokescreen” represented a profound misreading of the public mood. As in the case of big-money donations, David Cameron has exposed himself to the charge he is defending the interests of his own side. In the 2012-2013 parliamentary session, Tory MPs declared more than £4.3m in earnings from outside directorships or jobs, compared to £2.4m by their Labour counterparts, £1.37m of which was accounted for by Gordon Brown, who did not personally benefit from any of the money.

Mr Miliband’s promise to introduce a new code of conduct for those seeking parliamentary selection, a cap on spending by candidates and organisations operating on their behalf (including trade unions) and standard constituency agreements with the unions so that no one can be subjected to undue local pressure was the minimum required to restore trust in the selection process after the Falkirk debacle.

Far bolder was his announcement that primaries will be held to select Labour’s 2016 London mayoral candidate and to choose parliamentary candidates in seats where the local party has few members or, in effect, is moribund. While seeking to recruit as many members as possible to Labour, he is also right to recognise the need to engage with those who will never be persuaded to join by allowing them to register as supporters and vote in selection contests.

Faced with his biggest crisis as leader, Mr Miliband demonstrated the ambition and idealism that were the most attractive features of his campaign in 2010. With a mixture of high-minded principle and political cunning, he has reimagined the Labour-unions link for a less collectivist age.

This past week, Mr Cameron derided him as “too weak to run Labour and certainly too weak to run the country”. The reverse may now apply. If Mr Miliband can sustain the moral courage and the stamina that will be required in order to transform his party into something that looks more like a mass movement for economic and social change, he will have proved his credentials to serve as the nation’s prime minister.

Ed Miliband delivers his speech on the Labour-trade union link at The St Bridge Foundation in London yesterday. Photograph: Getty Images.

This article first appeared in the 15 July 2013 issue of the New Statesman, The New Machiavelli

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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?