David Cameron delivers a speech on welfare in Hove, East Sussex, on February 17, 2015. Photograph: Getty Images.
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It may take defeat to an “unelectable” Labour Party to force the Tories to modernise

The shock of losing to Miliband could awake the Conservatives from their dogmatic slumber.

The Conservatives are struggling to win this election because they failed to win the last one. Most governments endure by managing decline, rather than gaining support. Both John Major and Barack Obama, two leaders whose electoral success Tory strategists study obsessively, retained power with reduced majorities. Because of David Cameron’s failure to win outright in 2010, he will almost certainly fail to do so on 7 May. Indeed, the Tories face a fight to remain the single largest party: Labour needs to make net gains of just 24 seats to supplant them. There is increasing confidence among Ed Miliband’s inner circle that it will.

To win again, the Tories must understand why they fell short in 2010. Their problem is that many still do not. It was a dearth, not a surfeit, of modernisation that denied them outright victory. This is not an ideological assertion but a matter of empirical record. The Conservative pollster Lord Ashcroft’s audit of that election, Minority Verdict, found that too few voters trusted them to manage public services and to govern in the interests of all. In the months that followed, the myth developed that the Tories’ failure derived from the insufficient toughness of their policies on immigration, welfare and Europe. It was one that the party’s becalmed modernisers struggled to contest. After this, the Tories’ rightwards trajectory became inevitable. The “backfire effect”, the term coined by the US political scientist Brendan Nyhan to describe how individuals’ convictions grow stronger in the face of contradictory evidence, took hold.

After failing to decontaminate their brand in opposition, the Tories poisoned it in office. The abolition of the 50p tax rate, the reorganisation of the NHS and the bedroom tax were self-inflicted wounds that have yet to heal. More recent missteps have displayed a remarkable lack of self-awareness for a party that has had 18 years to reflect on its inability to win a majority. For example, this month’s announcement of further welfare cuts was masochistically scheduled to follow an opulent black-and-white ball, a sequence of events more suited to an Evelyn Waugh satire than the campaign of a modern political party.

It is in this context that Tim Montgom­erie, the founder of ConservativeHome, and Stephan Shakespeare, the chief executive of YouGov, have launched “the Good Right”, a new project to regenerate conservatism. They prescribe 12 initial policies for a “One-Nation Conservative Party”, including higher taxes on expensive properties and luxury goods, increased housebuilding, above-inflation rises in the minimum wage, greater infrastructure investment and limits on political donations. It is a programme of precisely the kind that the Tories need to embrace if they are to attract new supporters, most notably the blue-collar voters who have gravitated towards Ukip and who enabled their past majorities. Through a combination of ignorance and arrogance, too many Conservatives have convinced themselves that the economically insecure, interventionist-minded groups attracted to the “people’s army” will be appeased by the promise of an EU referendum, restrictions on migrant benefits and a relentless focus on austerity.

The Good Right has emerged too late in the political cycle to have much influence on the Conservative manifesto currently being assembled by Jo Johnson, Boris’s younger brother and the head of the No 10 policy unit. If its vision is ever adopted, it will more likely follow defeat than victory for the Tories. Referring to Labour’s poll deficit on leadership and economic management, George Osborne has declared that “water would have to start flowing uphill” for the opposition to win. Should the supposedly “unelectable” Miliband nevertheless enter Downing Street, the Conservatives may finally be forced to confront the question of why they are so disliked.

Alternatively, should they scrape over the line, many Tories will greet their victory as a vindication of their ideological prejudices. They will draw comfort from the rejection of Labour’s “socialist” programme, disregarding the individual popularity of many of Miliband’s policies. By again making too little effort to dispel their reputation as the party of the privileged, they will expose themselves to attack from a revived opposition and an economically populist Ukip.

The Conservatives’ historic strength has been their willingness to change according to circumstance. After their landslide defeat to Labour in 1945, they embraced the NHS, the mixed economy and the welfare state and were rewarded with 13 years in office from 1951. Confronted by the exhaustion of the postwar consensus at the end of the 1970s, they produced the transformative philosophy of Thatcherism.

It was in the 1990s that their beliefs ossified into dogma. The doctrine of free-market economics, one not inevitably tied to conservatism, was elevated to the status of a secular religion. Intelligent and practical policies of the kind advocated by the Good Right are now rejected as ideologically impure. A more politically adroit Conservative Party would harness the public discontent against the corporate sector, championing the “little man” in the manner of the trust-busting Republican president Theodore Roosevelt. The current one has rejected a “mansion tax” on the grounds that: “Our donors will never put up with it.”

Should they lose in May, the Tories may yet again draw the wrong conclusions, marching even further into the wilderness of Europhobia. But the party’s economic modernisers would at least have a window of opportunity to shape its future. Defeat to Miliband, a man they will remorselessly ridicule between now and polling day, could be the jolt the Tories need to awake from their dogmatic slumber.

George Eaton is political editor of the New Statesman.

This article first appeared in the 20 February 2015 issue of the New Statesman, Still hanging

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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?