What does a modern Labour Party expect from its leader?

What the party has never had and needs today more than ever is a theory of leadership.

This is the time of year when Ed Miliband gets a pasting from the polls and the media. It has happened regularly since he became Labour leader in 2010. And virtually all the comments, criticisms, and attacks involve the crucial and dangerously undermining issue of leadership authority. Is Miliband up to it? Is he really leading the party? Is he a credible future prime minister? Where are the policies? Where is the leadership? His – fewer – defenders basically stress the opposite – that he is a good leader because he absorbs the criticism and is in fact calm, ruthless, and determined, or else that it doesn’t matter if the leader is less popular than the party, the party will win anyway.

This cacophony confuses and is drowning out two related but very separate issues: the question of the elaboration of policies and the party’s 'voice' on the one hand, and the question of Miliband’s leadership of the party and eventually of the country on the other. For a hundred years the party has been organised around the former – policies, policy programmes, and manifestos – its very existence is based around these; it knows nothing, however, about the latter – the role of leadership within a centre-left party.

Let’s look at them separately. First, policies. The current lack of policies is no accident. What the party, backed, indeed led, by the leadership has been doing in this area is nothing short of a fundamental ideological revision. For the last two years, the Policy Review has been a review of social theory and ideas, not of policy; and the input of the responsible capitalism, relational state, Blue Labour and One Nation thinkers in the party has seen a dramatic attempt to take the party away from New Labour, even away from Clement Attlee’s Labour, towards, or back to, an earlier tradition of localism, mutualism, community, self-help, solidarity, and self-reliance. And the rhetorical efforts of the Policy Review chair, Jon Cruddas, have been to take this emerging narrative and modernise it.

The move, over the next two years to a real policy review will be the test of whether One Nation is underpinned by a theory of power – this will determine whether this newly-fashioned craft, built from many traditional materials, will fly. But the critics will be confounded as the barrage of new policies emerges over the coming months. The question is not whether there will be policies, but whether the policies, based upon One Nation, will be bold, far-reaching, and inspirational enough for the party to deserve to be carried back to power and government.

This brings us to the other issue, Miliband’s personal presence and leadership. The party – rightly or wrongly - has always had theories of power and the policies that flow from them, theories of how capitalism works and what should be done about it to create the good society. What it has never had, and today needs more than ever in a society with unrelenting focus on the issue, is a theory of leadership itself. For the Conservative Party, a theory of leadership is hard-wired into the DNA. Leadership is a give and there are two desirable types: the grandee and the executive manager. Cameron is a hybrid of the two. Ironically, Margaret Thatcher was not an ideal-type Tory leader at all, but a happy accident that the Tories ran with, most of the time in a state of complete bemusement.

On the left though, there is a serious problem. In this age of perpetual media scrutiny, spin, and leadership image, the UK left has no idea what leadership is. In fact, it does not really believe it exists, or should exist. If Miliband’s personal popularity falters in the polls there is a storm of criticism, much of it little more sophisticated than the tabloid press’s attacks: he should have been here in the summer; where was he, in France somewhere? And where are those policies? The Tories grabbed all the headlines (Did they? What headlines?). François Hollande decided not to go on holiday this year and his ratings remain catastrophic; Angela Merkel did and hers are stratospheric. As the adage says, be careful what you wish for.

The left needs to ask itself a whole series of questions about leaders and leadership. What is the nature of leadership for the left today? What is its place in the traditions of the British left? In what way should the leader personify the party in the public sphere? What is the relationship of the leader to the party’s narrative or narratives? What is the role and place of leadership competition in a modern centre-left party? Are there leadership archetypes in the leftist imagination (and are they all male?). Practically, what should the leader of a major political party be doing in the silly season when the media can’t find solid political stories to talk about?

Miliband did extremely well at the 2012 conference – even the media agreed. But how should he talk to the party, the media, and the public between conferences? As well as developing the party’s ideas, expressing its deeply-held beliefs, and bringing forward a raft of policies for the next election, the party should – before collapsing once again into Miliband bashing - pay more attention to this historical and ideological blind-spot impeding its view of the world and of politics: what constitutes leadership in the left’s imagination and what does a modern Labour Party expect from its leader?

Ed Miliband makes his way to give a speech on the high street in Worcester town centre on April 25, 2013. Photograph: Getty Images.

John Gaffney is the co-director of the Aston Centre for Europe, specialising in French politics and the discourse of leadership.

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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?