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Why did Labour use this system to elect its leader?

Labour's new electoral system is under fire from all sides. Declan McHugh, who was there at the beginning, sets out how it came about. 

On the face of it, a party leadership election that stimulates over half a million people to take part should be a cause for celebration; a remarkable political mobilisation in an age when parties are in decline. Yet the Labour leadership election is being derided as a fiasco and a political disaster. The new rules which have allowed non-members to take part have come under particular fire. Rumours of legal challenges abound. How did it come to this?

As director of the Labour Party’s Constitution Unit I saw at first hand the process by which the new leadership election rules were developed, and worked alongside Ray Collins and Jenny Smith on the final package of reform that was passed by an overwhelming majority at the special conference in March 2014. The change was sold by Labour spinners as a modernising moment on a par with Tony Blair’s revision of Clause IV. The reform was undeniably significant. But it was not the culmination of a carefully crafted modernising plan. Rather it was the product of political panic, damage limitation and - ultimately - a deal with the unions.

Refounding Labour

That is not to say the changes lacked any sense of political vision. A recurring theme of Ed Miliband’s leadership was the desire to resurrect Labour as a ‘movement’ with a mass membership actively involved in community politics. That had been evident through the “Refounding Labour” reforms of 2011. Those changes added a new commitment in the party constitution which obliged Labour not just to fight elections but to “make communities stronger through collective action”. More substantially, Refounding Labour established for the first time the right of non-member supporters to vote in leadership elections.

That, too, was spun as a significant change. But the headlines masked a crucial caveat. The new section could only be triggered once a minimum of 50,000 supporters had joined. Everyone rested easy after that. It would never happen. The unions weren’t going to organise supporters and, in the absence of any pressure from the leadership, neither was the party. The new supporters section would most likely have withered on the vine – had it not been for a row over selecting a parliamentary candidate in Falkirk.

The St Bride’s Speech

The Falkirk episode was a self-inflicted mess that got out of hand – personal psychodrama as much as political dispute. It culminated in the resignation of Tom Watson from the shadow cabinet and a panicked decision to call in the Scottish police.

Four days after the police referral, on 13 July 2013, Ed Miliband delivered a speech at the St Bride’s Foundation on transforming Labour’s relationship with the trade unions. The speech contained no direct reference to the trade unions’ role at Conference, their representation on national committees, or their share of the leadership electoral college. Instead it covered a strange hotchpotch of measures including a commitment to introduce open primaries for mayoral selections; new limits on spending in internal elections; and reform of constituency development plans.

At its heart, however, was a proposal to turn union funding of Labour on its head. Instead of trade union executives paying affiliation fees on the basis of the number of levy payers in their ranks – a predictable and relatively strings-free flow of cash for Labour – in future millions of individual trade unionists would each have to give their active consent to the payment of fees. The goal was a new and more direct relationship between the party and individual trade unionists. Those who consented to the payment of affiliation fees would effectively become members. 

For years Labour had resisted Tory calls for union money to be subject to an “opt-in” process (which they are now implementing, with bells on, in the Trade Union Bill). There was a case for reforming Labour’s finances, but in the context of a broader change to the entire political funding framework. The sudden pronouncement to upturn affiliation fees was seen by many in the party as an act of unilateral political disarmament. A Lib Dem representative who had sat opposite me during months of cross-party talks on political funding emailed to ask why we had done it.

The principled case was that in the twenty-first century it no longer made sense for trade union members to pay fees to Labour unless they had personally chosen to do so. Yet the moral high ground had a cost. Internal estimates suggested the party could lose up to 90 per cent of the affiliation fees through the opt-in mechanism.

There was some suggestion that the party could make up for these losses by continuing to accept big discretionary donations from trade unions. But such a shift from affiliations to donations would put Labour in a terrible position. A stable source of income was being swapped for an unstable one that handed trade union executives greater leverage. Yet it ultimately contained the seeds of destruction for the union link, as it would fatally undermine the traditional model of collective affiliation.

According to one recent account, fear that the reforms would break the link prompted the hard left in the unions to oppose the reforms. In actual fact they welcomed Ed’s speech for that very reason. Len McCluskey was the most enthusiastic endorser of his plans. That reflected shifting politics at the top of Unite, where there was a growing belief that the union should begin to detach from Labour and reduce its funding for the party.

The Unite leadership looked upon affiliation fees as wasted money which was not delivering sufficient influence. Instead, they sought two strategic goals: first, to secure the selection of Labour parliamentary candidates who were close to the union; second, to develop a more transactional financial relationship with the party by switching from affiliation fees to discretionary donations.

In contrast, other unions led by general secretaries more strongly attached to the Labour Party were horrified at the St Bride’s speech. Paul Kenny, of the GMB, was apoplectic. While his union, like Unite, initially reacted by slashing the amount of affiliation fees they paid to Labour, the motive was entirely different. They were trying to pressure Miliband into a U-turn by showing him the consequences of his actions.

The Collins Review

In turning the St Bride’s speech into practical reality the Collins team determined that the proposals needed to be recast in two key respects.

First, to maximise affiliation fees individual choice would have to be accommodated within a structure that still enabled unions to affiliate as collective bodies. In other words, we would retain the traditional federal structure whereby organisations and individuals could both be joined to the party. That would work by determining union representation according to the numbers of their levy paying members who gave active consent to the payment of fees.

Secondly, to protect parliamentary selections from manipulation, only full party members would have constitutional rights at a constituency level. That was bitterly opposed by Unite. Trade unionists who agreed to the payment of affiliation fees and, separately, signed up as Labour supporters, would not be eligible to participate in local or parliamentary selections but would have certain rights at the national level; most notably in respect of leadership elections.

After all, members of affiliated trade unions already had that right. In 2010, 2.5 million members of affiliated unions received a ballot for the Labour leadership. They were required to tick a box declaring their support for Labour values, but that was the extent of the verification. The ballots themselves were distributed not by the Labour Party – which was never given the names and addresses of these people – but by the unions themselves. That enabled them to plaster envelopes in propaganda for Ed Miliband. In the event it was the extent of Ed’s lead among affiliated members that enabled him to secure the leadership despite losing in the other two sections.

The leadership election system contained many imperfections and was ripe for reform. The St Bride’s speech, perhaps unwittingly, ensured it would happen.

The Leadership Election Rules

The move to an “opt-in” system of affiliation fees was bound to dramatically reduce the number of trade unionists eligible to take part in a leadership election. That undermined the claim of affiliates to hold a third of the Electoral College. It would have to be reformed.

The initial plan, agreed with the leader’s office, was to press for a new college based on one-third MPs and MEPs, and two thirds members and affiliates. Two problems immediately arose. One was the complicating factor of (non-trade union) registered supporters, whose potential presence in the leadership ballot had been established under Refounding Labour.

The other more serious issue was trade union opposition to the dissolution of the affiliates’ section. That was ultimately only overcome by agreeing to dissolve the entire college and removing the MPs as well.

The result was a new system in which members and supporters alike voted in a single ballot. That gave the party oversight of the electorate, which meant multiple voting could be ended and abuses round the dissemination of ballots stopped.

The new process was trumpeted as the final realisation of the OMOV reforms begun by John Smith. But it was by definition not an OMOV ballot. Supporters were now involved.

Some warned that the change was dangerous and gave the unions what they always wanted – the destruction of the MPs section of the college. They argued that Ed should have insisted on a pure OMOV system as the price for removing MPs from the college. But great fanfare had already been made of opening the process up to non-members in 2011. Rolling back from that position would have been politically difficult.

In any event, the trade unions would have rejected demands for OMOV. Not for the first time in Labour’s history, what arguably should have happened didn’t correlate with what could have happened.

The 2015 Leadership Election

In practice the new system has evolved in ways that no one imagined. For a start, no one foresaw Jeremy Corbyn making the ballot, let alone emerging as the favourite to become leader.

Ironically the system was intended to stop a candidate who could not command the Parliamentary Labour Party (PLP) reaching the ballot. In response to the dissolution of Electoral College, including the MPs’ section, the nomination threshold to enter the contest was raised to 15 per cent of Labour MPs. Consideration was initially given to a higher threshold of 20 per cent or 25 per cent. But that was rejected on the grounds that it would narrow the field too much; members from both the Blairite and Campaign Group wings of the party favoured a lower number. Nonetheless, 15 per cent was judged to be a safe barrier to any outsider – especially someone from the hard left. That judgement proved to be mistaken.

Corbyn was placed on the ballot. His presence has stimulated a surge in supporter registrations that has prompted claims of organised entryism. But the extent to which hostile political groupings have managed to infiltrate the contest on a scale that could distort the outcome looks open to question. If Trotskyist and Green groups really have that kind of influence they have been keeping it well hidden. Furthermore, the Labour Party – for all the criticism directed its way – has worked tirelessly to vet the new joiners; way beyond anything it has run in the past. Individuals who could be identified as having campaigned for other parties have been weeded out.

Yet despite this activity constituency reports suggest that up to 15 per cent of new joiners do not have any record of voting Labour. That has to be a cause for concern. The supporter concept was built on the premise that there are large numbers of people may not be Labour members but vote Labour and could be encouraged to become members via the supporter stepping stone.

If, in practice, significant numbers have entered the party under the guise of “supporters” but with malign intentions, then that raises a question about the validity of using such an open process to select the party leader. It seems unlikely that the current election will be halted but looking ahead the party will want to consider the use of freeze dates, especially in terms of registered supporters.

That also relates to the issue of affiliated supporters. The capacity of trade unions to organise recruitment was always understood and seen as a double-edged sword. The party needed active union support if affiliation levels were to be maintained at any kind of level. But the recruitment of supporters around a leadership election held obvious dangers, because it risked unions recruiting on behalf of a particular candidate. That went against the spirit of the reforms, which were aimed at moving away from the sort of organised influence that unions had exercised in 2010. Had a freeze date been set for before the point that nominations opened, it may have helped to reduce that activity.

But, important though they are, issues around freeze dates are in essence technical points. The bigger question for the future is where to draw the line between having a committed, secure membership and an open democratic process that encourages participation. That is not a new question. When the Labour conference first considered the proposal to admit individuals as members before the First World War, the idea was rejected by trade unions and socialist societies for fear that it may open the door to “men who had not the interests of the party at heart”. Eventually the benefits associated with admitting individual members were judged to outweigh the risks. The same judgment may yet be made in respect of the contemporary system for electing the leader, though for many the advantages are not currently obvious.


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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?