One of Labour's most effective operators. Photo:Getty
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Why Labour is playing for a draw as far as business is concerned

Labour's policies deserves a better relationship with business that it has. But its aggressive rhetoric has done it unnecessary harm.

On Monday Ed Miliband launched a brave if somewhat forlorn attempt to neutralise some of his more strident business critics in the run up to May 7th.  By making an appeal to pro-EU sentiment the centrepiece of his election manifesto for business, the Labour leader attempted to play up fears that a future Conservative government would preside over an EU exit, with all that would mean for the dampening of trade and investment.

As an electoral tactic, reinforced by a full page advertisement in the Financial Times, the move was only partially successful.  Grumbles quickly emerged from business leaders like Siemens UK boss Juergen Maier who had been quoted in Labour’s ad saying “The prospect of a referendum that may or may not happen, at a date yet to be decided upon, with a choice between two unknown options, is profoundly worrying for business leaders”. 

Individuals and their companies did not deny the quotes, which were all in the public domain.  But there was clear irritation at the apparent co-option of business voices in the Labour Party’s election campaign - particularly as the business leaders in question were given very little opportunity to prevent the inclusion of their quotes in such a partisan communication.

Frosty Relations

The communications between Ed Miliband and the corporate world have been somewhat testy ever since his infamous caricaturing of businesses as either predators or producers in a party conference speech in 2011.

And in a pre-election skirmish in January that was clearly calculated to undermine Miliband’s business credentials, the Daily Telegraph carried a critical interview with outspoken multi-billionaire Stefano Pessina, chairman of high street chemists Boots.  Pessina – an Italian citizen who pays his personal taxes in Monaco – was quoted saying that if the Labour Party acted in government as it speaks in opposition “it would be a catastrophe.”  

Some commentators believe that  Miliband came off better in the ensuing controversy, pointing out that it is not for foreign tax exiles to tell the British people how to vote.  However, it was not long before Miliband was forced to defend his personal approach to tax planning and indeed the tax practices of his small band of business supporters in the right wing press. 

Meanwhile, other British business leaders accused the Labour leader of stifling debate by making personal attacks on Pessina.

Unfortunately, in a Newsnight interview around the same time Shadow Chancellor Ed Balls struggled to recall the name a business supporter he had met earlier that day. 

It seems safe to say that the business community will not be coming to the rescue of Ed Miliband in time for May 7th, save for a few Labour-created peers in the House of Lords and individuals like Simon Franks, the philanthropist co-founder of on-line movie business LoveFilm, and Dale Vince of green energy firm Ecotricity.

It was all very different under New Labour.

The Cosy Years

Tony Blair’s biographer John Rentoul described how much the former Prime Minister was fascinated by entrepreneurs, identifying with their reforming instincts and propensity for risk taking.  Blair was also keen to attract alternative sources of party funding as New Labour sought to reduce its financial dependency on the unions. 

His team pursued business endorsements assiduously in the run up to the landslide victory in 1997.  Building on the party’s long term seduction of business leaders, dating back to John Smith’s ‘prawn cocktail offensives’ of the early nineties, Body Shop founder Anita Roddick was one obvious target for the New Labour team.  At that time she was one of only two business people recognisable to the general public, the other being of course Richard Branson.

Roddick had long been courted by the Liberal Democrats and took some convincing that it was worth her while switching sides in order to defeat the Conservatives.  But like many people in the mid-1990s she was despairing of the visibly fragmenting Conservative government of John Major.  She had felt particularly let down by Major’s lack of action on behalf of Ken Saro Wiwa, the Nigerian environmental and human rights activist executed by military dictator Sani Abacha in 1995.

Labour’s first TV broadcast of the meticulously executed 1997 campaign was a masterstroke. It focused on why big business was delighted by the prospect of Prime Minister Tony Blair.  Anita Roddick’s interview led the broadcast followed by comments from Terence Conran of Habitat and Chair of Granada TV Gerry Robinson. Labour never did get a plug from Branson, who restricted himself to a photo-op with Blair standing next to one of his red locomotives.

Of course it all ended in tears.   In his damning history of the rise and fall of New Labour, The End of the Party, Andrew Rawnsley catalogues how allegations of corporate influence started early for  Blair, with the appearance of a direct conflict of interest over relations with Labour donor Bernie Ecclestone and the protection of tobacco advertising in Formula One racing.  The story broke in 1998 but dated back to a personal meeting between Ecclestone and Blair just a few months after his election.

The perception of favouritism to business donors and lenders persisted throughout Blair’s time in office, reaching a low point with the ‘cash for honours’ scandal in 2006.  Despite receiving a knighthood, Anita Roddick gave up on Blair over the Iraq war

Too Late to Tango?

It is interesting to speculate whether the Blair and Brown governments would have played out differently if they had paid less attention to business leaders as sources of cash and instead paid more serious attention to supporting the growing movement for socially and environmentally responsible ‘stakeholder inclusive’ business practices.

Blair certainly had sufficient popular support - and the parliamentary majority - to effect progressive reforms to corporate governance and regulation, but he and his ministers had no interest in that particular form of modernisation. 

Perhaps a less timid company law review in the early years of New Labour might have tempered some of the excesses of ‘financial capitalism’ that caused the Great Recession of 2007-9.   However in all likelihood such reforms would not have had a material impact on the global banking madness that precipitated the financial meltdown.  

Although Gordon Brown was among its most hubristic cheerleaders, light financial regulation was not invented by New Labour.  And countries with more effective systems of corporate governance and regulation such as we see in northern Europe were not immune to the crash.  Casino banking can only be prevented by effective system-wide regulation as Brown has now accepted

So with the benefit of hindsight, how is Labour is to learn the lessons of the Blair/Brown years and the deeply troubled relations with big business they represented?

In my view it is unhelpful to create simplistic caricatures of business people.  The predator versus producer commentary was a divisive mistake and should have been withdrawn.  Businesses are social institutions, just like political movements - neither wholly virtuous nor completely venal.

That is why Labour must continuously emphasise principles of good corporate governance, regulation and transparency, creating real forums for effective policy making with business organisations both in opposition and in government.  Businesses need help navigating the rampant forces of globalisation, competition and social and environmental change through high level dialogue and engagement with political leaders.

The Labour party should also champion cross-party initiatives to support small business and entrepreneurship, which are the real drivers of a productive and competitive economy.  To his credit Chuka Umunna has been particularly effective in this regard. 

And finally political leaders should avoid like the plague any action that implies preferential treatment for any source of promised support whether that is from individual business leaders or any other special interests, and this should apply before, during and after their time as government ministers.

Ed Miliband and Chuka Umunna have provided solid evidence that this is the general approach they favour.  So it is a pity that their good work to date has been drowned out in the absence of more cordial and constructive relations with the business community.

But we can perhaps forgive the Labour Party for not focusing on pre-election celebrity endorsements this time around.  It would do them no good in government and is probably not what the public is looking for. 

David Wheeler is President and Vice-Chancellor of Cape Breton University in Canada.  He was an academic advisor to the British Labour Party between 1986 and 2001 and worked at The Body Shop International from 1991 to 1998.  He is writing here in a personal capacity.

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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?