THANK YOU MR. OSBORNE

This week, the cable channels and print media were abuzz with news stories coming out of London reporting on the Government's new deficit reduction program. This followed somewhat less intense coverage of Britain's defense cuts on Tuesday. On Wednesday, the New York Times ran two detailed articles on the total package of spending cuts [see below]. This morning, the Times ran a very critical editorial on Britain's misguided austerity program.

I think that America owes a huge "thank you" to George Osborne for making Great Britain the economic guinea pig and allowing the country the opportunity of proving wrong all the lessons learned from the Great Depression, and documented by one economist after another. How courageous to turn economic logic on its head and disprove the lessons of history. But more importantly, we owe thanks to Osborne and Cameron that they are taking the economic gamble instead of American policymakers. Now we will all see if the "deficit hawks" have it right, or as Stiglitz and Company say below, there is absolutely nothing to gain in Britain's policy, and everything to lose.

The first Times article, written by financial reporter Landon Thomas, includes the following:

"In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday arguing forcefully that Britons, despite slowing growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle class because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit.

In Ireland, devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

Combined with what Dublin has already imposed, the cuts could add up to as much as 14 percent of Ireland’s gross domestic product, an extraordinary amount for a modern industrial country. Ireland’s budget deficit reached 32 percent of total economic output this year.

Indeed, across Europe, where the threat of a double-dip recession remains palpable, governments from Germany to Greece are slashing public outlays. But even as students and workers in France clash with the police and block fuel shipments to protest a rise in the retirement age, the debate in Europe is more on how fast to cut government spending rather than whether such reductions are the right thing to do under the circumstances.

Joseph E. Stiglitz argued that the British government’s plan was “a gamble with almost no potential upside” and that it would lead to lower growth, lower demand, lower tax revenues, a deterioration of skills among the unemployed and an even higher national debt. [Emphasis mine.]

“We cannot afford austerity,” he wrote in The Guardian.

The stiff upper lip with which Mr. Osborne delivered his call for sacrifice on Wednesday in the House of Commons reinforces that point. It is grounded in memory of Britain’s economic collapse in the 1970s, when the International Monetary Fund had to come to the rescue just as it has done recently in Greece.

Even the previous Labour government of Prime Minister Gordon Brown proposed substantial budget cuts before losing office in May, many of them incorporated by Mr. Osborne into his four-year spending plan.

“There is nothing fair in running huge deficits that we are not prepared to repay,” Mr. Osborne said in his speech, responding to arguments that cuts would fall hardest on the country’s poorest.

It is this institutional memory — combined with the widely accepted view that bond market demands to follow through on promised austerity plans cannot be ignored — that underpins not only Mr. Osborne’s approach but also that of his European peers.

That contrasts sharply with the United States, where White House policy makers are urging caution in reducing deficits too quickly, fearing that ending stimulus efforts before the economy is clearly on the road to recovery risks making a mistake similar to President Franklin D. Roosevelt’s budget cutting in the middle of the Great Depression, which extended the downturn.

“In the U.S., central bank memory is ingrained in the Depression, while in the U.K. it is being bailed out by the I.M.F.,” said Michael Saunders, an economist with Citigroup in London. “That gives policy makers different sets of priorities.”

To be sure, the prospect of the once munificent British state sharply cutting benefits for children of middle-class families, making students pay much more for their schooling and cutting jobs and the pay of public sector workers has led to a backlash from the country’s labor unions.

“Today, the fight begins,” David Prentis, the general secretary of Unison, the country’s largest union, exhorted participants at a rally on Tuesday. “Hands off our public services.”

The second Times piece was written by Sarah Lyall, reporting from London, and Alan Cowell from Paris. Julia Werdigier contributed reporting from London. Here are some selected excerpts:

"The coalition government is gambling that the reductions in public outlays will stimulate the private sector and restart growth, rather than send the economy back into a tailspin, [Sue, the emphasis is mine, and I must comment that I have never heard anything so stupid in all my years of studying economics] as liberal economists have warned.

Britain has been bracing for the cuts for months, after Mr. Osborne announced in June the details of the so-called spending review, but Wednesday was the first time the government had set out its plans, department by department.

Mr. Osborne said that 490,000 public sector jobs would be lost over the next four years, some to attrition. At the same time, payments to the long-term unemployed who fail to seek jobs will be cut, he said, saving $11 billion a year. Additionally, he said, a new 12-month limit will be imposed on long-term jobless benefits, and measures will be taken to curb benefit fraud.

Mr. Osborne said an increase in the official retirement age to 66 from 65 would start in 2020 — four years sooner than planned — saving $8 billion a year. Britain has already said it will stop paying child benefit payments to people earning more than around $70,000 a year.

This morning's Times editorial is worth quoting in full:

BRITAIN'S AUSTERITY OVERDOSE
There is a time and a place for aggressive deficit reduction. Now is not the time, especially not in Britain. The deep spending cuts announced by Prime Minister David Cameron’s government will hobble public services, strain poor families’ budgets and weaken Britain’s influence abroad. They could suffocate a feeble recovery.

Mr. Cameron and his team appear to be driven solely by Conservative Party articles of faith. They are gambling on the improbable theory that in a period of weak consumer demand, the private sector will generate enough business activity to replace the $130 billion the government will be withdrawing from the economy over the next four and half years. We are not sure why the Liberal Democrats, the coalition’s junior partners, are going along.

On average, government departments will have to slash their spending by an average of nearly 20 percent. The National Health Service was shielded from cuts, and after a last-minute intervention by Mr. Cameron at Washington’s behest, the military budget will be cut by only 8 percent.

Most military reductions will come through sensible retrenchments like delaying the replacement of Britain’s nuclear missile submarines and drawing down British forces stationed in Germany. But they will still require significant reductions in the number of British troops available for any new major NATO operations.

Shielding the military and the health service, while essential, required cutting more recklessly elsewhere. Nearly 500,000 public jobs (out of 6 million) will be eliminated. Long-term unemployment benefits will be cut off after 12 months. Public housing tenants will pay higher rents. School construction will be cut by 60 percent.

Recession, bank rescues and short-term stimulus spending pushed Britain’s deficit up to 11.5 percent of total economic output, even higher than the United States’ 10.7 percent. Both countries will have to bring those numbers down over time. But otherwise healthy economies can afford to run fiscal deficits in times of weak private sector growth. In fact, they cannot afford not to.

Britain’s deficits did not spawn bond market panics. Interest rates remained low. That left room for a nuanced policy that relied on a reviving economy to boost tax receipts and deferred major spending cuts until a solid recovery was under way. Unfortunately, Britain’s leaders chose posture over sound economics.