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How Irene, Ben and Christine are blowing all forecasts off course

As well as the hurricane, the recent speeches by the heads of the Fed and the IMF could have a huge

The United States is recovering from the effects of three severe headwinds, courtesy of Irene, Ben and Christine: a tropical storm and two speeches. All three have implications for the US economy - and for ours.

First, Irene. The devastation that the hurricane caused to the east coast of the country may not have been as severe as feared but is likely to have resulted in billions of dollars of damage. Almost six million homes and businesses lost electricity, flooding was widespread (eight inches fell in 24 hours where I live) and more than 13,000 flights were cancelled. It will be a while before normal service is resumed. A pal of mine, due to fly back to Boston from Chicago, was faced with a five-day wait for the next available flight. He chose instead to rent a car and set off on a 950-mile road trip.

Hurricane Irene could provide a downward shock to US GDP growth, as a result of the disruption to commerce. (Peter Morici of Maryland University estimates that the final cost of the storm could be as high as $45bn, once loss of economic activity is factored in.) As with the tsunami that struck Japan in March this year, economic policymakers have to be ready for these sorts of "negative surprises", which make accurate forecasting almost impossible.

Easing does it

The effects of Hurricane Irene were preceded by two shocks of a different kind. On Friday 26 August, Ben Bernanke, chairman of the board of governors of the Federal Reserve, the US central bank, made a speech in Jackson Hole, Wyoming, entitled "The Near and Long-Term Prospects for the US Economy". Bernanke argued that he remained optimistic about the "longer-run" prospects for the country's economy, because "The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years."

However, he did note that the US economy had slowed more than expected, so the recession was "even deeper and the recovery even weaker than we had thought".

Earlier that day, GDP growth in the US for the second quarter of 2011 was revised downwards, from 1.3 per cent to 1.0 per cent. In addition, we discovered that consumer confidence, as measured by the Thomson Reuters/Univer­sity of Michigan index, fell from 63.7 in July to 55.7 in August. The US economy, like the UK economy, appears to be slowing again.

Of particular significance was Bernanke's announcement that the meeting of the Federal Open Market Committee, originally scheduled for one day, has now been extended to two days, allowing for fuller discussion. Why the extension? This indicates that the committee - which, like the Monetary Policy Committee (MPC) of the Bank of England, has the power to set interest rates - is about to act. There is no guarantee of consensus among committee members, but poor economic data, along with the disruption caused by Hurricane Irene, suggests that the next meeting presages a further bout of quantitative easing (QE) in the US.

During his speech, Bernanke insisted that "fiscal policymakers should not . . . disregard the fragility of the current economic recovery. Fortunately, the two goals of achieving fiscal sustainability - which is the result of responsible policies set in place for the longer term - and avoiding the creation of fiscal headwinds for the current recovery are not incompatible. Acting now to put in place a credible plan for reducing future deficits over the longer term, while being attentive to the implications of fiscal choices for the recovery in the near term, can help serve both objectives." Bernanke could easily have been addressing his comments to our coalition government.

The final headwind came from Christine Lagarde, managing director of the International Monetary Fund (IMF). Her Jackson Hole speech, like Bernanke's, would not have pleased the British coalition government. Lagarde called for a recapitalisation of European banks to prevent another financial crisis and echoed Bernanke's argument that the pace of deficit reduction should be slowed when growth is being compromised, as is occurring in the UK.

“Put simply," she told her audience, "while fiscal consolidation remains an imperative, macroeconomic policies must support growth [my italics]. Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery."

March madness

Lagarde's intervention will be particularly painful for the Chancellor, George Osborne, given his frequent claims that the IMF supports his austerity programme. Meanwhile, because he supported Lagarde's candidacy over that of Gordon Brown, the criticism will stick.

In his Budget speech on 23 March 2011, Osborne said: "We are able to set off on the route from rescue to reform and reform to recovery . . . because of the difficult decisions we've already taken. Those decisions have brought economic stability." He added: "We have put fuel into the tank of the British economy" - and that his plan for growth was for "a Britain carried aloft by the march of the makers". I'm reminded of George W Bush's "Mission Accomplished" speech on the deck of the aircraft carrier USS Abraham Lincoln in May 2003. Years later, Bush admitted his mistake. One suspects Osborne will have to do the same.

Contrary to Osborne's claims, there is increasing evidence of economic instability in the UK and, as a result, growing international support for him to perform a policy volte-face. It is vital that both fiscal and monetary policies operate together to aid growth in the UK. Comments from members of the MPC such as Ben Broadbent and Martin Weale suggest that the Bank of England - which is, once again, playing catch-up - will restart QE sooner rather than later. That would be a welcome move.

It is high time that the coalition loosened fiscal policy to boost growth, investment and jobs by increasing spending on infrastructure, lowering payroll taxes, especially on the young, and providing significant tax incentives for firms to hire and invest.

This is exactly the type of package that President Obama is likely to announce in his major speech on jobs on 8 September. The coalition needs to act quickly to prevent a march of the makers becoming a march of the unemployed ex-makers.

David Blanchflower is the NS economics editor and a professor at Dartmouth College, New Hampshire, and the University of Stirling

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 05 September 2011 issue of the New Statesman, 9/11

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The Conservatives have failed on home ownership. Here's how Labour can do better

Far from helping first-time buyers, the government is robbing Peter to pay Paul

Making it easier for people to own their own first home is something to be celebrated. Most families would love to have the financial stability and permanency of home ownership. But the plans announced today to build 200,000 ‘starter homes’ are too little, too late.

The dire housing situation of our Greater London constituency of Mitcham & Morden is an indicator of the crisis across the country. In our area, house prices have increased by a staggering 42 per cent over the last three years alone, while the cost of private rent has increased by 22 per cent. Meanwhile, over 8200 residents are on the housing register, families on low incomes bidding for the small number of affordable housing in the area. In sum, these issues are making our area increasingly unaffordable for buyers, private renters and those in need of social and council housing.

But under these new plans, which sweep away planning rules that require property developers to build affordable homes for rent in order to increase the building homes for first-time buyers, a game of political smoke and mirrors is being conducted. Both renters and first-time buyers are desperately in need of government help, and a policy that pits the two against one another is robbing Peter to pay Paul. We need homes both to rent and to buy.

The fact is, removing the compulsion to provide properties for affordable rent will be disastrous for the many who cannot afford to buy. Presently, over half of the UK’s affordable homes are now built as part of private sector housing developments. Now this is going to be rolled back, and local government funds are increasingly being cut while housing associations are losing incentives to build, we have to ask ourselves, who will build the affordable properties we need to rent?

On top of this, these new houses are anything but ‘affordable’. The starter homes would be sold at a discount of 20 per cent, which is not insignificant. However, the policy is a non-starter for families on typical wages across most of the country, not just in London where the situation is even worse. Analysis by Shelter has demonstrated that families working for average local earnings will be priced out of these ‘affordable’ properties in 58 per cent of local authorities by 2020. On top of this, families earning George Osborne’s new ‘National Living Wage’ will still be priced out of 98 per cent of the country.

So who is this scheme for? Clearly not typical earners. A couple in London will need to earn £76,957 in London and £50,266 in the rest of the country to benefit from this new policy, indicating that ‘starter homes’ are for the benefit of wealthy, young professionals only.

Meanwhile, the home-owning prospects of working families on middle and low incomes will be squeezed further as the ‘Starter Homes’ discounts are funded by eliminating the affordable housing obligations of private property developers, who are presently generating homes for social housing tenants and shared ownership. These more affordable rental properties will now be replaced in essence with properties that most people will never be able to afford. It is great to help high earners own their own first homes, but it is not acceptable to do so at the expense of the prospects of middle and low earners.

We desperately want to see more first-time home owners, so that working people can work towards something solid and as financially stable as possible, rather than being at the mercy of private landlords.

But this policy should be a welcome addition to the existing range of affordable housing, rather than seeking to replace them.

As the New Statesman has already noted, the announcement is bad policy, but great politics for the Conservatives. Cameron sounds as if he is radically redressing housing crisis, while actually only really making the crisis better for high earners and large property developers who will ultimately be making a larger profit.

The Conservatives are also redefining what the priorities of “affordable housing” are, for obviously political reasons, as they are convinced that homeowners are more likely to vote for them - and that renters are not. In total, we believe this is indicative of crude political manoeuvring, meaning ordinary, working people lose out, again and again.

Labour needs to be careful in its criticism of the plans. We must absolutely fight the flawed logic of a policy that strengthens the situation of those lucky enough to already have the upper hand, at the literal expense of everyone else. But we need to do so while demonstrating that we understand and intrinsically share the universal aspiration of home security and permanency.

We need to fight for our own alternative that will broaden housing aspirations, rather than limit them, and demonstrate in Labour councils nationwide how we will fight for them. We can do this by fighting for shared ownership, ‘flexi-rent’ products, and rent-to-buy models that will make home ownership a reality for people on average incomes, alongside those earning most.

For instance, Merton council have worked in partnership with the Y:Cube development, which has just completed thirty-six factory-built, pre-fabricated, affordable apartments. The development was relatively low cost, constructed off-site, and the apartments are rented out at 65 per cent of the area’s market rent, while also being compact and energy efficient, with low maintenance costs for the tenant. Excellent developments like this also offer a real social investment for investors, while providing a solid return too: in short, profitability with a strong social conscience, fulfilling the housing needs of young renters.

First-time ownership is rapidly becoming a luxury that fewer and fewer of us will ever afford. But all hard-working people deserve a shot at it, something that the new Conservative government struggle to understand.