Ed Miliband speaks at the Scottish Labour conference on March 21, 2014 in Perth. Photograph: Getty Images.
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The real struggle in Labour isn’t between factions, but between Red Ed and Moderate Miliband

If the public is unsure what Miliband stands for, it is partly because he has often appeared unsure himself.

The Labour Party, Harold Wilson once remarked, is like a stagecoach. “If you rattle along at great speed, everybody is too exhilarated or too seasick to cause any trouble. But if you stop, everybody gets out and argues about where to go next.” No one can claim that Ed Miliband has stopped. Since the 2013 Labour conference, he has announced policies at a rate that Westminster historians agree exceeds that of any recent leader of the opposition. Yet everybody is still arguing about where to go next.

Turn left, turn right, stay straight: Miliband wakes each day to contradictory advice from party grandees. Absorbed by the deadly cycle of comment and countercomment, Labour MPs fear a repeat of last year’s summer of discontent.

If the party is divided over where to go next, it is partly because the journey has taken so long. By this stage of the parliament, a general election would usually have been held, or be imminent. But as a result of the Fixed-Term Parliaments Act introduced by the coalition, the date has been rigidly fixed at 7 May 2015. With ten months remaining and the Damoclean sword of a snap election removed, the arguments go on.

The uncertainty surrounding the outcome next May, amplified by the modern innovation of daily opinion polls, breeds further tension. “We know what it looks like when a party isn’t going to win after one term. We’re not in that place,” says one Labour strategist, contrasting the progress made by Miliband with William Hague’s unambiguously doomed leadership. “But we’re also not in a ’97-style position.” As long as this remains the case, Labour figures have every incentive to offer unsolicited advice. Even Miliband’s loudest detractors believe he has a plausible chance of becoming prime minister. Peter Mandelson says, “The electoral arithmetic is probably on his side.” Maurice Glasman declares, “Labour can win under Mr Miliband.”

The internal ructions ultimately reflect a more profound question: which direction is the driver going in? Of all the criticisms made of Miliband in recent weeks, the one that has stung most is that voters don’t know what he stands for. The Labour leader is a man who prides himself on his ideological clarity, contrasting his “intellectual self-confidence” with David Cameron’s equivocations. Yet the truth, wearily relayed to the leader by MPs and activists, is that few voters know how Britain would look different under a Labour government.

This is partly a reminder of what the Conservative peer Daniel Finkelstein calls “the universal law of politics”: most people, most of the time, don’t listen to anything said by any politician. If Miliband is fortunate, the majority of voters may have heard of his energy price freeze, but he should assume little more. This is why Labour MPs are so troubled by his poor personal ratings and by the party’s perceived lack of economic credibility. A shadow cabinet minister tells me that he fears future policy announcements will sound like “white noise” to voters who doubt Labour’s basic fitness to hold office.

If the public is unsure what Miliband stands for, it is partly because he has often appeared unsure himself. There is Ed the radical, who is “bringing back socialism” and talks of sweeping away three decades of neoliberalism through a Thatcherite revolution in reverse. Then there is Ed the incrementalist, who learned his politics at the feet of Gordon Brown and who talks gently of building a “fairer capitalism” and reveres consensual “one-nation politics”.

The radicals in Labour fear the latter is winning the contest for Miliband’s soul. One of his early supporters recently told me how disappointed he had been by the modesty of his announcements to date. “When Ed mocks the Tories for calling him a ‘Marxist’, or for stealing his policies, it’s a reminder of how timid he’s been.”

The blame for Miliband’s caution used to be attributed to the nefarious influence of “the Blairites”. But after their humbling in last year’s shadow cabinet reshuffle, it is now more often attached to Ed Balls.

The shadow chancellor is sceptical of Miliband’s project to remake capitalism. He warned that his energy price freeze would harm relations with business and sought to dilute his commitment to carve out two “challenger banks” from the big high street institutions. The speech he gave at the London Business School at the end of June, in which he argued, “Over the last 20 years, the global economy has fundamentally changed – and changed for the better,” took a notably more benign view of globalisation.

However, there is no evidence that he or anyone else has acted as a significant brake on the Labour leader’s radicalism. The more plausible explanation is that Miliband’s moderation is the result of his own calculations about the compromises necessary to win a general election. When the Unite general secretary, Len McCluskey, recently warned him to reject “the siren voices of austerity-lite”, he neglected to consider that Miliband simply believes they are right.

The complaint frequently expressed by the left is that his team lacks “true believers”. But this, too, rests with him alone. In a little-remembered act of boldness early in his leadership, he abolished shadow cabinet elections to give himself complete freedom over appointments. Whether he stages the reshuffle that some are privately urging will be an early test of his willingness to reassert his authority.

The most important struggle in a Labour Party that remains, by historic standards, ideologically united may not be between factions – but within Miliband himself. Only when this internal conflict has been resolved, only when the radical or the incrementalist has taken charge, will the rest of the party stop giving directions. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 02 July 2014 issue of the New Statesman, After God Again

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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?