Miliband needs to go much further to restore confidence

The Labour leader must use this moment to emancipate himself from the machine that won him the job in the first place.

Ed Miliband is at a fork in the road. Plainly he cannot go back, by which I mean he cannot pretend that there is nothing of great significance to see in the row over the Falkirk selection – that it was a rogue case; single bad apple etc.

Len McCluskey’s attack on the Labour leadership – accusing the party of smearing Unite and betraying its trust – bars that route. Besides, every Labour activist, member, MP and any journalist who has spoken much to any of those people knows there is a systemic problem with the opaque way the apparatus has traditionally operated. They also know there has been a concerted effort by Unite to manipulate that process to increase its control over Labour. So when McCluskey implies the party leadership is involved in some nasty plot to be beastly to the union and that Unite, in other words, are the victims of a conspiracy, he is directly challenging Miliband’s authority. He is saying, in effect: "You are not the master of this situation and have no control over how it will end; so let me make this easy – back down, and it ends." Except, of course, it won’t.

So the choice for Miliband is between prolonged managed crisis and full-blown confrontation. It is between hoping that this can be made to go away with some judicious, calculated moves (Miliband’s standard modus operandi) or using the situation to open a whole new chapter in his leadership.

Miliband might think that Tom Watson’s resignation, freezing the Falkirk selection process and ending the system that allows unions to buy up bundles of party membership will signal determination to get a grip. He may believe that the necessary resolve is indicated with some firm words, whether from his own mouth or through a spokesman or shadow cabinet ally, saying dodgy selections will not be tolerated. If so, he is wrong.

Judging by my conversations with some Labour MPs in the past 24 hours, I’d say Miliband has to go much, much further to restore confidence. This isn’t about whether he supports the union link or whether he should be acquiescing to Tory attacks on the left. Nor is it about mechanisms to ensure more "working class" candidates are selected. (Of course, in that argument, class is usually a category of ideology, not background or income. The people defending Unite on those terms aren’t hankering after the next generation of working class Alan Johnsons, Alan Milburns or Hazel Blears.)

What this is really about is Ed Miliband’s capacity to be a leader at all – to emancipate himself from the machine that won him the job in the first place and that has helped consolidate his position, but at a heavy price. A superficial unity was achieved but there was no intellectual or ideological harmony, no reconciliation between factions, no meaningful synthesis of ideas and, as a result, no clarity of direction. As I wrote in this week’s magazine, Miliband is desperate to be a candidate who talks about the future, but the Labour Party is still tangled up in a way of doing politics that reeks of a joyless, airless, stale past.

Worse, it looks to many people inside the party and beyond as if Miliband has been shrinking, not growing into the job. The cavalier and patronising tone of Watson’s resignation letter has not gone unnoticed. Between the lines, Labour MPs are reading a message of casual disregard: sorry mate, all got a bit tricky, can’t be bothered anymore, good luck with that whole 'leadership' thing, see ya around.

There is a feeling around the parliamentary Labour party today that Watson and McCluskey are threatening to take their ball home if the game can’t be played by their rules. And there is concern that Miliband is looking like the weedy kid in the playground who will be left standing alone, unpicked to play on any team. As one shadow minister, a despairing Ed supporter, put it to me last night: "It’s time to stand up to the bullies now and say clearly, 'f--- off'".

Raising the tone a bit, I’d say this is starting to feel like Ed’s Prince Hal moment. There is the famous scene at the end of Henry IV Part II when the young Prince comes away from his coronation and is accosted by Falstaff – the ribald villain whose company he kept through the years of misspent youth. Falstaff has been waiting for this moment, thinking he will be in with the new King and enjoy grotesque and fabulous privileges. But Hal surprises everyone by cutting his old crony down. "I know thee not old man," he says.

Well, Ed Miliband needs that kind of moment. He needs something that will signal the beginning of a new phase in his leadership; that he has the confidence and the vision to govern in a better, more open, more imaginative way. At the moment it looks as if it is Falstaff who is getting the last word, saying to the new King: "Thanks for the ride but, frankly, I’ve got better things to do." And if Henry IV Pt II had ended like that, there would never have been a King Henry V.

"It looks to many people inside the party and beyond as if Miliband has been shrinking, nor growing into the job." Photograph: Getty Images.

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

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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?