The Blunders of Our Governments: How attractive would a blunder-free government be?

Even the cleverest politicians make mistakes.

The Blunders of Our Governments
Anthony King and Ivor Crewe
Oneworld, 488pp, £25
 
It’s the summer of 1984. The Conservative government of Margaret Thatcher is once again discussing the issue of local authority rates. This form of local taxation was, like all taxes, deeply unpopular but the participants in this discussion also considered it to be profoundly unfair. It was levied on the value of the property, irrespective of the income of the resident. Although the money raised provided services to all local residents, many, such as those living in rented accommodation, made no contribution at all.
 
As the shadow minister with jurisdiction in this area ten years earlier, Margaret Thatcher had promised to release people “from this rates rack”. Yet there had been no mention of abolishing the rates in the 1979 or 1983 Conservative manifestos. An insipid green paper in 1981 had made a dismissive reference to the idea of a per-capita tax on individuals to replace the current system. It was taken no further and a white paper two years later had committed the government to the status quo. Now the matter was being discussed against the backdrop of the miners’ strike and with militant (and Militant) councils such as Liverpool refusing to comply with government-imposed rate caps.
 
The prime minister listened once again to the arguments about the inequitable nature of the rates: about the little old lady forced to pay the bills of her neighbours who lived in rented accommodation and had much higher incomes, on the basis of the theoretical value of a house that she could never sell. In another private house across the street lived a couple with three sons. All five were wage earners. Yet they paid exactly the same amount in rates as the little old lady living alone on a state pension.
 
To this was added a further argument: all adults were entitled to vote in local elections but millions of those voters paid no rates and were able to vote for those rate-busting councils that were defying the government, without any fear of financial retribution.
 
Mrs T’s scepticism evaporated. She was hooked and the poll tax was born. It wasn’t a measure developed in haste; neither was it shaped on an anvil of unquestioning cabinet support. The then chancellor of the exchequer, Nigel Lawson, thought it was “a colossal error of judgement” and voiced his criticism vociferously in a “memorandum of dissent” to fellow ministers.
 
Anthony King’s and Ivor Crewe’s book is based on exhaustive research; they have talked to the foot soldiers in the civil service and the officers in the cabinet. The result is a fascinating account based on a false premise with a misleading title. The authors tell us that they would have described the poll tax as the blunder to end all blunders, “except that far from ending all blunders it has been followed by numerous others”. As Lawson said, this was an error of judgement and such errors occur in governments all over the world. They always have and they always will.
 
To blunder is “to move blindly, flounder, stumble”. As the book dissects the corpse of the poll tax, we learn that the review team that formulated the policy was made up of ministers and civil servants of the highest quality: “the brightest selection of people ever gathered”, according to one insider. No stumbling or floundering here. The idea was certainly not developed blindly or in haste.
 
And what was the impact of the collective genius assembled to solve the rates problem? Eight million people gained from what was officially called the “Community Charge”. There were 27 million losers. Some householders found themselves with an annual loss of around £1,500, while a small minority in London were £10,000 better off. Hundreds of thousands of people simply refused to pay and some 700,000 disappeared off the electoral register, believing it was a way of avoiding the hated tax. As one exasperated civil servant told the authors, “It needed exceptionally clever people to produce anything so stupid.”
 
The poll tax marked the beginning of the end of Thatcher’s premiership. And in Scotland – where, believe it or not, the Scottish Conservative Party requested that it be implemented in its entirety before being introduced to the rest of Britain – it produced a quaint statistic: there are more pandas in Edinburgh Zoo than there are Tory MPs.
 
There aren’t that many actual blunders in British politics (though two recent examples come to mind: William Hague’s inexplicable public pronouncement at the beginning of the Libyan uprising in 2011 that Muammar Gaddafi was on a plane out of the country and Theresa May getting her dates wrong when she was rearresting Abu Qatada) but there are many failed policies, and if King and Crewe want to call them blunders, so be it.
 
I’ll dismount from my pedantic high horse.
 
It is less easy to ignore their claim that British governments since 1979 have been more prone to such mishaps than their predecessors or than the governments of other countries. Despite making this the premise of the book, the authors endearingly admit that they cannot support their assertions. “Both questions are pertinent,” they confirm, “but alas, we are not in a position to answer either of them.”
 
Mrs Thatcher spoke of Britain’s entry into the Exchange Rate Mechanism (ERM), over which she presided, as a “folly”. I think that is a better description of the poll tax than “blunder”, but I’m not sure it applies to the ERM. Here, the arguments were so rational that they had the support of all three main political parties, the bulk of British business and most trade unions. Joining the ERM would prevent speculative attacks against the pound, help reduce Britain’s high inflation rate and maintain our influence inside the European Community and in the wider world.
 
If there was a blunder inside the ERM folly, it was to join with sterling pegged at a rate of £1 to 2.95 Deutschmarks. The ever-prescient William Keegan said in his Observer column at the time: “I cannot for one moment believe that the current exchange rate will hold for more than two years.” It didn’t, ceasing to hold on 16 September 1992, almost exactly two years after British entry.
 
The mistake wasn’t entering the ERM and certainly wasn’t withdrawal, which helped the country out of recession. It was the bit in the middle: the rate at which sterling was pegged and the absence of any contingency plans as what soon became known as Black Wednesday approached.
 
This is a familiar pattern. Policy is adopted on the basis of rational arguments and hits the rocks for reasons other than the idea itself. Seeking to seize the proceeds of crime from criminals was an excellent idea. The problem was that the Blair government set up the Assets Recovery Agency by publishing the Proceeds of Crime Bill, grabbing the headlines and leaving the practicalities of how it would work until later. The result: the agency spent £65m to recover £23m, working on 700 cases and recovering assets in a mere 52.
 
As for the Single Payment Scheme to simplify the operation of the Common Agricultural Policy and Metronet, the public-private partnership for maintaining the London Underground, Labour can be thankful that these disasters weren’t publicised more widely. King and Crewe do them justice, explaining the story in a way that credits the reader with the intelligence to draw his or her own conclusions. Believe me, despite the yawn-inducing subject headings, these are particularly interesting, if little-known, disasters.
 
I suspect that readers will be unconcerned whether the book’s premise is questionable. It provides a hook on which to hang some meaty and absorbing tales (foreign policy is excluded, so if you’re looking for a blow-byblow account of how we became involved in Iraq, you’ll have to wait for Chilcott).
 
It is domestic mishaps that entertain the reader through the large part of this book. It’s a shame that King and Crewe didn’t leave it at that, instead of feeling obliged to attempt to draw conclusions across the final 150 pages. Thus we encounter much-debated themes about Whitehall departments working in silos; how there are too many reshuffles (something that the coalition has rightly avoided); cultural disconnect (ministers leading more privileged lives than those they govern); operational disconnect (ministers’ reluctance to be involved in delivery as well as formulation of policy); and so on.
 
I sympathise with many of their arguments and could add a few more. The virility test for secretaries of state is how many bills they can get into the Queen’s Speech. This can lead to unnecessary and ill-considered legislation. (At the old Department of Trade and Industry, I discussed with David Sainsbury a plan to reverse this process, offering no new bills and using the splendid bill teams – the civil servants drawn together to see through a piece of legislation – to remove legislation from the statute book, rather than add to it.)
 
There is also the problem of Having Something to Say at Conference. I was as guilty as any of my colleagues in scouring whichever department I was in charge of for an initiative to announce in my ten minutes of airtime by the seaside every year.
 
Even more pernicious was the prime minister’s demand for policy announcements in the leader’s speech. At least as secretary of state, I knew my patch and had to live with the consequences of my actions. The occupant of No 10 and his acolytes would appear like invading Vikings, pillaging policies and leaving us to clear up the mess.
 
The authors don’t mention this phenomenon but they rightly highlight the dangers of moving ministers around too much, pointing out that in Germany there have been only half a dozen large-scale cabinet reshuffles in the entire history of the federal republic. In these rather tedious discussions, however, for every argument there is a powerful counterargument. For instance, Enoch Powell approved of moving ministers around constantly. “When a minister begins to think like his officials and understands before they explain, his work in that office is done: he is losing the power to see the issues in a political light from the outside, which alone is what he is there for.”
 
None of these causes provides a narrative that links all the disparate effects described earlier in the book. They involved judgement calls made by human beings operating in a free society with a limited period to make an impact. A book about government successes would be very boring (and, a cynic would say, very short). Yet some of the factors used to explain these failures could apply equally to the successes. Gordon Brown’s predilection for acting on his instincts and excluding the input of others may well have been instrumental in keeping Britain out of the single currency.
 
On the other hand, China has many of the attributes considered essential for the absence of political blunders and all the features that would, to take the premise of this book, make blunder-free government such an unattractive proposition.
 
Alan Johnson is the MP for Hull West and Hessle and was a cabinet minister in the Blair and Brown governments
Government by slush pile: piles of policies get lost. Photo: Contrasto/Laif

Alan Johnson is a former home secretary and MP for Hull West and Hessle.

This article first appeared in the 16 September 2013 issue of the New Statesman, Syria: The deadly stalemate

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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?