Ed Miliband, accompanied by Jon Cruddas, addresses an audience at 'The Backstage Centre' on May 27, 2014 in Purfleet. Photograph: Getty Images.
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Miliband has lost momentum to the Ukip insurgents, but he’s fighting back by turning blue

Blue Labour's values of community and solidarity are the key to winning back alienated working class voters from Ukip.

This was supposed to be Ed Miliband’s great moment. Labour figures had long awaited the May elections as an event that would see him confirmed as a prime minister-in-waiting. But Nigel Farage disrupted the ceremony. After Ukip’s performance, it was he, rather than Miliband, who acquired that most valuable of political commodities: momentum.

Farage’s announcement that he would launch his party’s general election manifesto in Miliband’s constituency of Doncaster North (where Ukip topped the polls in the European election and finished a close second in the locals) was symbolic of how he has knocked Labour off course. Just when he would want to be advancing remorselessly on Downing Street, Miliband faces a rebel uprising in his own backyard. How he responds will do much to determine whether he recovers from the most difficult period for his leadership since last summer.

What he will not do, as he signalled in his speech on 27 May in Thurrock (where Ukip gains deprived Labour of overall control of the council), is to follow David Cameron’s example. The Prime Minister first insulted, then ignored, then imitated Ukip. Miliband is determined to fight Farage on his own terms. Unlike Cameron, he will not give the Ukip leader what he craves most: the promise of an in/out EU referendum in the next parliament. Farage needs Miliband to match Cameron’s pledge in order to repel the Tory line that the only way to guarantee a referendum is to vote Conservative, not Ukip, in 2015. But Miliband has no intention of making a promise from which he would derive little or no political benefit (the issue does not even make it into the top ten of voters’ concerns) and that could eventually produce a premiership-ending defeat.

That Miliband does not feel the need to lurch or to U-turn stems from the extent to which he believes the rise of Ukip confirms his existing intellectual and psephological analysis. As one shadow cabinet ally told me: “The idea that, suddenly, because of the magic abilities of Farage, Ukip have come out of nowhere to do what they did in the Europeans and the locals is wrong; it’s absurd and incorrect. We’re reaping what we sowed back in ’97 through to 2005, when we gave the impression to our working-class heartlands that they were communities that we took for granted. We kept on talking to them about globalisation, but that was passing people by.”

In his speech at Ukip’s triumphalist post-election press conference, the party’s deputy leader, Paul Nuttall, referred to the five million votes New Labour lost between 1997 and 2010, a figure Miliband cited often during his leadership campaign. Of this group, most of whom are working class, just 1.1 million went to the Tories, while 1.6 million went to the Liberal Democrats and half a million to the British National Party. The remainder stopped voting at all. It is this “left behind” demographic that Ukip is now attracting. Michael Ashcroft’s latest polls of marginals showed that 30 per cent of Ukip supporters in these seats did not turn out at all in 2010.

In recent months, Miliband has assembled a series of interventionist policies with potential appeal to this group: a higher minimum wage, more affordable housing, tougher labour-market regulation and cheaper energy bills. What he has lacked, figures from all wings of the party argue, is an overarching narrative that resonates with voters as powerfully as Farage’s story of national loss and abandonment. Labour’s offer, it is said, has become too “transactional”. As a former shadow cabinet minister told me: “We need simpler and stronger messages. A ten-point plan to deal with the cost-of-living crisis is a coherent policy programme which passes muster in seminars but can you remember ten items on a shopping list? I can’t when I go down to Morrisons to do the shop.”

Conscious of such criticisms, Miliband has begun to recalibrate his message. “Blue Ed is back,” one Labour MP told me after his Thurrock speech. With its references to “family”, “community” and “solidarity”, Miliband’s Thurrock address paid intellectual homage to Blue Labour, the group of communitarian thinkers assembled by Lord (Maurice) Glasman.

Owing to the leader’s recurrent disagreements with the iconoclastic peer, the movement’s enduring influence on the party has often been overlooked. Among Miliband’s inner circle, his speechwriter Marc Stears, strategist Stewart Wood and chief of staff, Tim Livesey, are all supporters. The party’s policy review is led by Jon Cruddas, Blue Labour’s greatest parliamentary champion. The group has been the dominant influence on Miliband’s stance on immigration, which rejects both the xenophobic parochialism of Farage and the laissez-faire globalism of Tony Blair. Although his position is attacked from the right of the party by John Hutton and Alan Milburn and from the left by Diane Abbott, Labour strategists argue it is consistent with his wider support for economic interventionism. As one told me: “In the same way that we think that free markets can be good thing, if they’re managed and regulated in the public interest, it’s not really surprising that we think the same about the labour market.”

Miliband is now entering what one shadow cabinet member describes as “the most important period in the whole parliament”. The party’s final pieces of policy work – Andrew Adonis’s growth review, IPPR’s “Condition of Britain” report and the Local Government Innovation Taskforce – will soon be complete. Miliband’s task, and that of his shadow cabinet, will be to weave these threads into a narrative of national renewal powerful enough to overcome the sour pessimism of Ukip. To defeat the Purple Peril, Labour must once again paint itself blue. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 28 May 2014 issue of the New Statesman, The elites vs the people

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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?