If George Osborne&#39;s cuts are so clever, how come America isn&#39;t copying him?

The UK's austerity programme has been endorsed by US treasury secretary Timothy Geithner ? but he's not following suit

How many brandies did George Osborne buy for Timothy Geithner, the US treasury secretary, in Paris last weekend when they were at the G20 meeting of finance ministers and central bank governors? I ask ? in jest, of course ? because I trust that I was not the only listener to be surprised by Geithner's ringing endorsement of Osborne's austerity programme on last Tuesday's Today.

I was surprised, indeed shocked, for two reasons. First, I don't think Geithner has any business commenting so publicly on British economic policy. Second, his endorsement of the scope and speed of Osborne's cuts programme sits uneasily with the very different approach the US administration has taken, both at home and at successive G20 meetings.

US policymakers were much more enthusiastic than Osborne & Co about the economic "stimulus" that was required for emergence from the financial crisis, and far more cautious about withdrawal of the said stimulus. Indeed, if Osborne had been in charge of UK economic policy in 2007-10, I dread to think how much more severe the domestic crisis might have been.

As the revised estimates for GDP in the fourth quarter of 2010 demonstrate, things in this benighted economy of ours were even worse than we thought, and the statisticians were right to underplay the impact of snow. The cuts make the situation worse by the day, thanks to a government that bears a strong resemblance to a bunch of amateurs, egged on by a few devotees of reheated Thatcherism.

As one despairing industrialist recently complained, these people cannot distinguish between a policy and a strategy. Their policies are a collection of half-baked aspirations, whereas a strategy requires a plan.

Against this background, the poor old Bank of England monetary policy committee is the focus of economic policy, and evidently can make neither head nor tail of the conjuncture.

As I pointed out last week, when it comes to economic policy this is a nation gripped by dogma and obsession. The idea that the achievement of a certain rate of inflation is the be-all and end-all of economic policy is laughable. Certainly we want price stability. But those responsible for a viable modern economy should also keep the goals of reasonable growth and high employment in mind. This requires investment, not doctrinal cutbacks. Desirable concomitants include a sustainable balance of payments, both in budgetary and overseas trading terms.

We now, after many years of an overvalued pound, have a realistic exchange rate that will help, slowly, to improve our overseas trading. And budgetary balance will be best achieved by measures that foster economic growth, not by Osbornian austerity, as cheekily recommended (but not for his own country) by the US treasury secretary.

The combination of fiscal policy (taxation and public spending) and monetary policy (interest rates) affects the level of output and employment, which affects the rate of inflation. Over-stimulation of the economy tends to raise the inflation rate ? it is easier for business to pass on cost increases, and employees to demand higher wages; repressive policies have the reverse effect.

We now know that the nine-member MPC has four different views. One favours a rise in interest rates of 0.5%; two want a 0.25% rise; one wants a further monetary stimulus. And the rest have so far voted for no change, while noting that they have open minds about what to do if circumstances change and there is more justification for being concerned about inflation.

One man who, had the MPC been invented when he was still working in the City, might well have been a leading member, is the veteran economist Dick Sargent. In a new paper he argues that the decline in bank lending produced an adverse shock to the supply side of the economy, and that, even at these levels, there is excess demand, which is the source of the recent upward pressure on inflation. He sees the growth of the economy's capital stock as having been inhibited by the credit crunch, and VAT, rising fuel prices and higher import costs "coming through into higher prices" with the implication "that they are being allowed to do so because output is inadequate to meet demand. So when people were surprised by the jump in inflation, perhaps they were failing to take on board the full impact of the credit crunch on the supply side of the economy."

This is an interesting view, but I am not convinced. Sargent says the recession did not originate in a demand-deficiency of a typically Keynesian type, but in the credit crunch. However, I think the crunch produced a huge deficiency of demand. The argument within the MPC appears to be over how much spare capacity there is, rather than whether there is any at all.

The big concern now is the rise in the price of oil as a result of events in north Africa and the Middle East ? something that was most certainly not allowed for in earlier Bank of England forecasts.

If sustained, this certainly will have an impact on our terms of trade, and hence on living standards. But it is not as if, as when the (much bigger) oil crisis of 1973-74 occurred, we are in the midst of a boom that has to be restrained. On the contrary, confidence is depressed, unemployment is rising, and the government is making things worse.

The doves at the Bank should keep their nerve.

William Keegan

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