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Social democracy in a digital era

The digital revolution presents an opportunity for the left.

The shadow business secretary, Chuka Umunna, made headlines recently by highlighting that employees in France and Germany completed work by Thursday afternoon that would take the entire working week in Britain.  The purpose was to underline one of the UK’s chief economic weaknesses – its poor productivity performance – and to attack the current government’s approach to long-term investment and inclusive growth.

As a new Policy Network and ITIF book on Sharing in the Success of the Digital Economy shows, improving the adoption of ICT across the UK economy can drive-up productivity. The US has been more successful at adopting ICT than Europe, to the extent that if the EU-15 and US had swapped productivity growth rates from 1995 to 2013, it is estimated that GDP would be €2.2 trillion larger than the United States, instead of €1.6 trillion smaller.

The economic evidence shows that ICT-induced innovation – the development and adoption of new products, services, processes and business models – is vital to support rising living standards. But making the political case for the progressive power of innovation, and the digital economy, can be more challenging. The forces of “creative destruction” threaten incumbent firms, jobs, and the way people work and live, creating strong incentives to oppose change.

Confronting these hard realities is one of the defining challenges for progressive politics in the 21st century as we enter a “high opportunity, high risk society”. The danger is that under the short-term pressures of the election cycle, and at a time of widespread economic insecurity, progressives will shirk long-term decisions that will support and shape the environment for radical innovation and thus reinforce the low-growth, low-productivity cycle that consumes many European economies. If stuck defending the status quo, votes will continue to leak to new political competitors and populist insurgents. Electoral coalitions risk being further splintered by those who feel they benefit from technological change and those who do not. 

Voters may, of course, hanker for quick fixes if that is all that is offered to them. But, equally, as voters’ livelihoods become increasingly risky they may value new institutions that provide them with greater security and the means to succeed. The big policy responses to the industrial revolution – welfare states, public health services and education – developed into institutions with widespread public support, albeit challenged somewhat in recent times. Similarly, new institutions that reflect the new political realities – not least a more individualistic society and one less trusting in the state to spend taxpayers’ money – can flourish.

So how should progressives respond? First, all of the above opportunities and risks underline the need for progressive politics and a rethinking of the role of the state. There is a new purpose in navigating and supporting capitalist models through their next phase of creative destruction and in leveraging technology to tackle the great societal challenges of our times.

Second, progressives need to embrace the potential of innovation and technological change to reduce the number of low-wage, unsafe and unsatisfying jobs and transform public services. Promoting innovation by investing in science and R&D is the easy part politically but dealing with the impact of innovation on specific industries and local communities is more challenging, not least for the left when this impacts on the jobs and practices of public sector workers. The short-term “losers” from change are typically easier to identify and louder, but the benefits can be spread across society and over time. Politicians need to be straight with voters that these headwinds will have both positive and negative consequences, and be careful not to champion incumbents and rent-seekers in the name of social justice.

Third, a radically new concept of social investment is required which renews welfare edifices for the 21st century. Gone are the days of a job, or even a career, for life. Government, trades unions and businesses need to collaborate on new forms of protection, investment and flexibility, as well as on lifelong learning. People from all backgrounds need to be enabled to harness technology and meet the demands of rapidly changing labour markets, whether they work for themselves or for someone else.

Fourth, progressives need to work together to forge a European innovation agenda, built around an EU digital single market, and make the case for international cooperation to develop new institutions, regulatory approaches and tax systems that are fit for the digital age.

Innovation is about the constant transformation of an economy and its institutions. By its nature some industries and firms will lose out to new challengers. Rather than trying to stop this perennial gale, managing the transition into new work and creating new forms of social investment should be the key mission of progressive politicians in the 21st century. Labour should be the party concentrating on how to make these changes work for the population as a whole and thinking about how they can be directed to tackle structures of inequality.

Michael McTernan is acting director of Policy Network and Alastair Reed is a researcher at Policy Network.

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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?