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Where did it go wrong for Ed Miliband?

Ed cannot escape responsibility for his defeat but neither can the Labour Party as a whole.

So Ed Miliband has joined the roster of Labour leaders never to have become Prime Minister, and already plenty of people have been more than happy to tell anyone who’ll listen that they always knew he was a loser. 

Many of those people have defaulted straight to the idea that Labour picked ‘the wrong Miliband’ in the first place.  This is counterfactual nonsense.  Out of a field seemingly dominated by fortysomething Oxbridge graduates who looked to most voters like they’d never done a proper day’s work outside politics in their lives, the party (surprise, surprise) elected the Miliband who’d taken the trouble to work out how best to win over those doing the picking – the Miliband who’d bothered to build good working relationships with the unions and to chat to his parliamentary colleagues regardless of their rank.  The latter, along with the fact that ‘Team Ed’ ruthlessly framed the contest as one between their ‘change-candidate’ and an opponent all-too-easily cast as a Blairite throwback, proved vital when that contest came down to a handful of MPs’ second preferences.

Ed’s critics also risk forgetting three more, equally sobering truths.  First, he took over after Labour had gone down to a defeat every bit as bad (at least outside Scotland) as the one it suffered last week: the chances of turning that around in one term were always tiny.  Second, the difficulties faced by Labour in appealing to a more fragmented electorate, much of which is as concerned by immigration as it is about the economy and public services, and important parts of which do not feel sufficiently inspired to actually vote (assuming they are registered at all), are shared by social democrats across Europe.  Third, Ed was facing political opponents who are past masters (and much better than their Labour counterparts) at using office to alter the terms of political debate and who, at least when it came to personalised attacks, were prepared to stoop lower than they have ever stooped before in order to win.

And yet, as Ed was honest enough to admit in his resignation speech on the morning after the night before, he cannot escape a large measure of responsibility for the failure of his five-year mission.

Leaving aside his failure to see Scotland coming, Ed’s biggest mistake, after winning the leadership by appealing not just to those who wanted to move on from New Labour  but to those who regarded it as some sort of neo-liberal/colonialist aberration, was failing to head immediately and noisily for the centre-ground. Inasmuch as it happened – and on immigration, on welfare, and (by the end) on tax and spend, it did happen – it came about too late, and too stealthily, to make much difference.

True, one could argue that there was some method in this madness – a superficial logic in delaying in order to lock in left-wing voters disgusted with Nick Clegg’s deal with David Cameron before turning to make a play for those who’d voted Tory.  It was also possible to believe (just) that the initial left-populist pitch might appeal to a bunch of people – mainly working people (and how many times did we hear that term during the election campaign?) – who’d become detached from Labour since 1997 and, like many younger ‘voters’, dropped out of politics altogether.  Not straying too far or too early outside the social democratic comfort-zone helped preserved party unity – no small thing in an organisation that traditionally descended into electorally suicidal civil war after a big defeat.

But the opportunity cost turned out to be massive.  Segmenting the electoral market may have seemed sensible, but it risked blotting out the basic truth that any party hoping to win elections has to win over a more nebulous, but ultimately far bigger bunch of voters –the archetypal residents of middle England who simply want to get on in life, who like a bit of leadership, and who value public services but worry about others ripping them off.

Virtually nothing Ed did during his leadership was counter-intuitive and therefore capable of cutting through to these voters in a way that might have led them to re-evaluate either him or his party.  In particular, waiting far too long before publicly committing his party to fiscal consolidation – and failing once he’d done so to adopt measures that might have made a few eyes water and therefore commanded attention and respect (cancelling HS2 and going back on his absurd early commitment to reduce tuition fees are only the most obvious examples) – meant Ed was simply unable ever to persuade people that he really meant it.  Refusing to admit either that Labour had overspent in government or else defend its record against all-comers only made things worse.

Yet just as Ed cannot escape responsibility for his defeat, neither can the Labour Party as a whole.  Ed put himself up for election but it didn’t have to choose him.  And, having chosen him, it didn’t have to stick with him when it became patently obvious that the public (rightly or wrongly) didn’t think he was up to the job – something that could all-too-easily happen this time, too, if it once again goes for a leader with a gilded glide path from Oxbridge to Labour’s frontbench via a think tank and/or a job as a special adviser.

Since it now looks likely that whoever emerges may well come from such a background, then Labour had better make damn sure that it’s the candidatet best able both to connect with the public and to tell the party what it needs (as opposed to what it wants) to hear.  And if it gets it wrong first time, it should have the courage this time to dump them if they turn out to be a dud.  If not, the party will have nobody to blame but itself if loses every bit as badly in five years’ time as it did last week.

Tim Bale teaches Politics at Queen Mary University of London and is the author of Five Year Mission: the Labour Party under Ed Miliband.

Tim Bale is professor of politics at Queen Mary University of London.  The second edition of his book, The Conservative Party from Thatcher to Cameron, was published in September 2016 by Polity Press.

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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?