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We have been thinking about Brexit back to front

The EU referendum fallout has only served to remind us of the status quo. "Taking back control" is meaningless unless we also reshape our democracy.

After a year of unprecedented political change, it’s worth thinking about all the things that haven’t changed. Voters in Britain and America may have upended the political order with their choices at the ballot box, but the systems that produced these results have been left more or less untouched.

This is most stark in the United States, where the electoral college has delivered a president who has thrown everything into doubt yet has no desire to alter the con­stitutional architecture that delivered him victory. A partisan, archaic, gerrymandered, dysfunctional system helped to engender the frustration that gave Trump his chance. Now President-Elect Trump plans to govern by deploying the full resources of that broken system. He represents a doubling down on the dysfunction.

The situation in the UK is similar. The upheaval caused by the vote for Brexit has had the effect of entrenching many of the features of our constitution that were most in need of reform.

The House of Lords, still basically unreformed after decades of politicians’ promises to sort it out, now finds itself being held up by opponents of a hard Brexit as a means of resistance to complete EU withdrawal. The first-past-the-post system has produced a government that is both relatively weak and enormously powerful: deciding what Brexit means lies with a small group of ministers whose party barely has a majority in the Commons.

If the Tory government seems overwhelmed by the challenge of Brexit, that is in large part because our political system puts too much power in too few hands. Yet the effect of this pressure to deliver is for the government to circle the wagons and draw the strings of decision-making closer together. Theresa May is doubling down on the centralisation of the British state.

The one big change that is coming is likely to reinforce rather than disrupt the status quo. The planned redrawing of constituency boundaries gives the Conservatives no reason to change the electoral system. Meanwhile, it gives Labour the excuse it needs to use reselection as a proxy for fighting its internal battles.

The result will be to drive the two main parties further apart. It will not improve the prospects for reform that finds common ground across partisan divides. The Brexit battles will be fought through a system that is likely to widen the divisions that made Brexit possible in the first place.

The British constitution is changing all the time; precisely because it is not codified it can be adjusted almost at will, and there have been several adjustments in recent years, particularly in relation to devolution. However, this usually happens more or less by stealth, without any of the fanfare that attends constitutional reform in other countries.

How many people in Britain were even aware that we had a Supreme Court, until they discovered that it was being asked to intervene in the process of how Article 50 might be triggered? Now those same judges find themselves at risk of being branded enemies of the people. One case for the British constitution has always been that it is inherently “political”, which means that it can evolve with the times. But when politics itself is as fractured as it is now, a “political” constitution risks getting fractured along with it.

The great irony of Brexit is that a revolt against the established order has so far done nothing to force the established order to rethink how it does its business. Brexit has sucked power back into the Whitehall and Westminster institutions with which many of those who voted to leave the European Union are so disgusted.

The gaping hole in the case for taking back control was always the absence of an argument for how political control would be ­redistributed within the UK. To put it in Ukip terms: what we’ve got is a Farage Brexit rather than a Carswell Brexit.

Douglas Carswell, still Ukip’s only MP, has long been one of the most vocal and provocative champions of a radical reform of the democratic system that would reflect the changing expectations and life experiences of the electorate. But his voice, and the voices of those like him, have been almost entirely drowned out by the cacophony of arguments about what Brexit means for basic challenges such as money, jobs and immigration.

These things matter far more to almost everyone than constitutional reform. But that is precisely why subsuming constitutional reform in the ordinary business of politics is so dangerous.




There is a great risk that we have been thinking about Brexit back to front. We treat the political system as a vehicle for expressing what people are angry about. But what if their anger is a reflection of the failures of the political system? In that case, by allowing politics to carry on as normal while trying to deal with the unprecedented administrative challenges of exiting the EU, we are in fact enabling the problems to fester. But where there’s a risk there is also a huge opportunity.

In the end, a politician such as Carswell isn’t going to make much difference – he is at the flaky end of his flaky party, which is going nowhere for now. For politicians of the left, however, there is a wide open space for radical thinking about how power is distributed in 21st-century societies, and how our democratic system must find ways to distribute it more effectively.

Some of that, as I wrote in the last New Times special (NS, 23 September), demands hard thinking about the digital revolution and its consequences. But some of it is simply the bread-and-butter business of constitutional reform. Change the voting system! Democratise the second chamber! Empower local government! Deepen devolution! Just because there are many other things going on that seem more pressing doesn’t mean now is not the time. Now is the time – otherwise, instead of opening up British politics, Brexit will just lock it up for another generation.

David Runciman is a professor of politics and the head of the department of politics and international studies at the University of Cambridge

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump

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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?