The 2015 battle bus. Photo: Christopher Furlong/Getty Images
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Leader: Labour has to choose between reform and irrelevance

It seems as if some on the left prefer the ideological purity of opposition to the pragmatism of winning elections.

Ed Miliband challenged his brother, David, for the leadership of the Labour Party in 2010 because he believed that it was his destiny to become prime minister and, as his confidants liked to put it, to rewire capitalism for a new era of deepening inequality. Convinced that the financial crisis and the consequent Great Recession had created a “social-democratic moment” rather than, as it turned out, a preoccupation with fiscal discipline and balanced budgets, Mr Miliband steered his party to a defeat that was all the more shocking for many of his supporters because, misled by the polls, they believed to the last that he would end up in Downing Street. Yet, had this happened, it would have been no victory at all. A Miliband minority government would not have had a resounding mandate for economic and political transformation: it would have been dependent on the whims of the Scottish National Party, Labour’s rival.

This magazine had long been sceptical about Mr Miliband’s leadership. Last autumn, we warned that he was leading ­Labour to defeat, not because it gave us pleasure to do so but because the most vulnerable in society are not best served by Labour being out of power. It seems as if some on the left, however, prefer the ideological purity of futile opposition over the pragmatic task of winning elections.

In our issue of 1 May, in which we made our election endorsement of Labour, we warned that Mr Miliband had not “changed the character of his party enough” and that he had “not created a sentiment from which truly transformative policies could have flowed”. He had argued “simultaneously for more austerity and more socialism”. Nor had he found a way of channelling the aspirations of working-class and skilled lower-middle-class voters in the Midlands, the Home Counties and southern England. In our view, Labour must be the party not only of social justice, but of social mobility.

Surrounded by a small group of male academics and advisers (whom the shadow cabinet minister Michael Dugher calls “pointy-heads” on page 36), Mr Miliband offered a highly theoretical critique of globalisation’s failings. But it was as if, at times, he was addressing a group of insiders rather than seeking to build a broad coalition of support throughout these islands. The result was a devastating defeat for Labour. As soon as he became leader, Mr Miliband was eager to distance himself from the Blair years, even the successes. This was a strategic mistake and angered many of his MPs. Unlike Tony Blair, Mr Miliband seldom spoke about education (even though state academies were the creation of New Labour) or Britain’s place in the world. Far too late, he attempted to reframe Labour as the party of fiscal rectitude by including a “Budget Responsibility Lock” in the manifesto, months ­after forgetting to mention the deficit in his party conference speech. In the end, when it mattered, Labour was not trusted to run the economy more competently than the Tories.

On 11 May, David Miliband criticised his brother for allowing himself “to be portrayed as moving [the party] backwards” and said that Labour “will not win” unless it “embraces aspiration and inclusion”. Other senior figures from the so-called Blairite wing of the party have been much bolder in their denunciations of what they perceive to have been Labour’s wrong turn under Ed Miliband, who, in our view at least, was correct to identify inequality as one of the great moral challenges of our time.

We are urging no return to Blairism. It was the creation of a certain time and a peculiar set of circumstances. What applied then may not work today. What is necessary is a period of sustained reflection. “Labour has a cultural problem to resolve,” Andrew Marr writes on page 32. “It’s about how the party speaks, the way it pitches its appeal. It’s vastly more important than who the next leader is.”

Meanwhile, the Tories have returned to power with a slim majority that very few – an exception being our own Peter Wilby, as he reminds us on page nine – thought they were capable of winning. Already some trenchant right-wingers, such as John Whittingdale, the new Culture Secretary (and scourge of the BBC), have been appointed to the cabinet. We face the prospect of a divisive EU referendum and £12bn of hastily and ideologically enforced cuts to the welfare budget, which will hurt the weakest and poorest. And the unity of the United Kingdom as a multinational polity remains imperilled. This is what defeat feels like. Has Labour got what it takes to absorb the pain and return stronger, ready to win? Or does it face another long ­period in the wilderness, speaking only to itself?

This article first appeared in the 14 May 2015 issue of the New Statesman, The Tory triumph

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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?