Wendy Davis, who looks likely to lose her bid to be Texas governor. Photo: Stewart F House/Getty
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The US Midterms: the races you need to watch

Rarely has an election elicited a louder national cry of “meh”. But there are some important races buried beneath the banality.

America is abuzz with excitement today as it goes to the polls to elect a third of the Senate and all of the House of Representatives, as well as 38 governors of states or territories.

Well, no, actually, it isn't. In fact, despite the fact that more money will be spent on campaigns this year than in any other midterm election in America’s history, rarely has an election elicited a louder national cry of “meh”. Polls show that interest is record-breakingly low, and especially so among the undecided voters.

Americans are turned off by what many see as a choice between two fundamentally unappealing options: the Democrats, who have largely spent the campaign trying desperately to wriggle out of any suggestion of ties to the Obama administration; and the pretty much equally unpopular Republicans, including the extremist Tea Party.

The odd thing about all that is that actually this election is pretty important. Particularly, a couple of key races could decide whether the Democrats keep control of the Senate – the upper house of Congress – the balance of control of which currently relies on the narrowest of margins.

Then there are the gubernatorial races, which by and large have caught the media’s attention less. Wendy Davis, the Texas state legislator who held that incredible filibuster on reproductive rights last year, is looking likely to lose to current state Attorney General Greg Abbott. Wisconsin’s race is closer – Scott Walker, tipped as a possible Presidential contender in 2016, has the slimmest of leads. Florida, where former Governor Charlie Crist is trying to win back his old job against the genuinely alarming-looking current governor Rick Scott, is also close.

But the Senate is the really important thing about today’s election. Holding on to the upper house of Congress is crucial for the legislative possibilities of Obama's final two years in office, and the results today will shape the country in serious ways. The Republicans already control the House of Representatives; if they take the Senate too they will have carte blanche to pursue a right-wing legislative agenda.

The balance in the Senate could rest on a few key races; these are the ones that will receive the most coverage tonight:

 

Kentucky

The race between challenger Alison Lundergan Grimes and current Senate Minority Leader Mitch McConnell may not be looking as close now as it was a few weeks ago, but there’s still a chance Grimes could unseat the man who is otherwise the secont-most powerful Republican in the country. McConnell isn’t particularly popular, and has had trouble with his pledge to repeal Obamacare – mainly because Obamacare’s rollout in Kentucky has been a spectacular success. But Grimes has also suffered from an embarrassing episode in which she refused to say whether or not she voted for Obama in previous elections.

 

New Hampshire

Former Massachusetts senator Scott Brown has parachuted in to the state as something of a carpetbagger, but is currently neck-and-neck with incumbent Jeanne Shaheen, and the race is too close to call.

 

Alaska

The state that gave us Sarah Palin is a toss-up between incumbent Mark Begich and challenger Dean Sullivan. It’s a long way West, so polls don’t even close until 5AM GMT, so this will be one of the last races to be called – and last time around when Begich won, it was by so slim a margin that his Republican opponent didn’t concede until a full fortnight after election day.

 

Louisiana

Another popular Democratic incumbent, Mary Landrieu, is struggling to fend off a challenger. But under Louisiana’s electoral system, there can be multiple candidates from each party. If one candidate fails to get 50 per cent on the first ballot – which seems likely – then the state goes to a run-off election. There are two Republicans on the ballot, so once they combine, Landrieu could well be out of a job. But this one will run late.

 

South Dakota

A few weeks ago, nobody thought this was going to be interesting. But some recent polling has shown that an independent candidate, Larry Pressler, might be able to pull off an electoral miracle, beating both the Democrat and the Republican challengers. The incumbent is retiring, so the race is wide open. If the people of South Dakota opt for the outsider, it will be strongly emblematic of the people’s disgust with both parties.

 

Iowa

This one’s the big one. Obviously, each party wants to win as many Senate races as possible, but most election models portray Iowa as the bellwether. Polling has Democrat Bruce Braley running neck-and-neck with Republican Joni Ernst – who gained nationwide fame earlier in the campaign with this astonishing campaign ad.

 

Nicky Woolf is a freelance writer based in the US who has formerly worked for the Guardian and the New Statesman. He tweets @NickyWoolf.

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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?