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British austerity's consequences may be repeated in U.S.

"Pensions melting like polar ice" was chalked on a London wall I passed while returning to my hotel after giving a talk at the London School of Economics last week.

Earlier, talking with English colleagues, I realized that policies being carried out by the coalition government headed by Prime Minister David Cameron prefigure what is likely to happen in the United States if a Republican is elected president next fall.

As George Osborne, the chancellor of the Exchequer, made clear in his "Autumn Statement" on Nov. 29, the government remains committed to an austerity strategy of major budget cuts.

The basic theory, sometimes called "expansionary fiscal contraction," holds that cutting public spending will reduce the deficit, keep interest rates low and stimulate a boom in private employment.

So far, no such boom has taken place, and the spirit of John Maynard Keynes, channeled through an opinion piece in the Guardian newspaper by his biographer, Robert Skidelsky, helps explain why. Austerity has contributed to persistently high unemployment and declining real wages. Lower-than-anticipated rates of economic growth have led to reduced tax receipts.

Therefore, the cuts have not reduced the deficit as planned. Osborne blamed a "debt storm," or force of nature originating somewhere between Germany and Greece, and reassured his constituents that further cuts in public spending would solve the problem.

These cuts are largely focused on cutting pension benefits for workers in the public sector. As Lord Hutton, author of an influential government report, has emphasized, some changes are necessary to improve both fairness and sustainability.

But the Cameron government — calling for increased private contributions, reduced benefits and a higher retirement age — added insult to injury by announcing strict limits on future wage increases. Given current and expected rates of inflation, public-sector workers — more than two-thirds of them women, and many of them teachers and nurses — are looking at an average pay cut of about 16 percent over the next five years.

Researchers who have formed a Women's Budget Group in Britain assert that lone mothers and older female pensioners are suffering ill effects from other budget cuts.

One could credibly argue that these groups should help bear the brunt of adjustment to slower economic growth if those who benefited most from the financial boom were also paying up. But as Stewart Lansley makes clear in his new book, The Cost of Inequality (and in this brief summary of it), the higher echelons of the British income distribution are thriving. A recent report by the High Pay Commission points to excesses in top executive pay.

The Cameron government seems remarkably uninterested in reducing tax evasion, much less increasing taxes on the rich.

As in the United States, divisions among the lower 99 percent are great. Indeed, the British welfare state has divided its own constituency: Few private-sector workers have access to any kind of occupational pension offering defined benefits. As a result, they feel less sympathy for their public-sector counterparts than they might.

Cuts in public spending seem to reflect a divide-and-conquer strategy. Planned increases in unemployment benefits next year will be paid for by cuts in tax credits for low-income families.

Although the Cameron government insists that it remains committed to a long-standing British campaign to reduce child poverty, it has scrapped its plans to increase the child tax credit. Families with children in the lower half of the income distribution will be hurt most.

Opposition to the austerity program is growing. On Wednesday — just as I was leaving the country — public-sector workers staged the largest strike in a generation, closing more than half of all state schools, as well as many hospitals.

Protesters from Occupy London found their way to the office of the highest-paid chief executive in the country, Mick Davis of Xstrata, to brandish a banner reading: "You get £18,426,105, we get austerity."

Prime Minister Cameron referred to the strike as a "damp squib," a firecracker that fails to ignite. Melting wages and benefits do dampen spirits, up to a point. But continued austerity, along with disregard for economic inequality, will increase their explosive potential.

Nancy Folbre, who writes for the New York Times, is an economics professor at the University of Massachusetts in Amherst.

British austerity's consequences may be repeated in U.S. 12/05/11 [Last modified: Monday, December 5, 2011 8:11pm]
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