The conventional wisdom is that the results of recent elections in France and Greece show that "Europe tried austerity, and it failed."

Some economic gurus have begun extrapolating this along the following lines:

The French and Greeks have publicly repudiated austerity => austerity is a failure => the opposite (more Govt spending) is the answer

In fact, US-based Leftist commentators are already using this to justify more Keynesian stimulus, and more of all the other fun Govt spending that we've had over the last few years.

The above article touches on the following:

• Keynes
• Debt and GDP
• Japanese fiscal policy
• Inflation and deflation
• Austerity - as it applies to Govts
• France & Greece

The above article contains data and analysis that is relevant to this topic. Particularly as it relates to the real 'reform' that Germany undertook.

Entitlement reform is the key. And, adding new entitlements (as both GWB and BHO have done) is completely bass-ackwards.

In Europe, they faked the experiment by adopting faux-austerity (loosely translated into Euro-speak as: raise taxes NOW, promise spending cuts LATER, win elections NOW). Then, reality bit ... hard, proving that the laws of economics can't be trumped by good intentions. But, the lessons that were inexplicably drawn by Leftists (on both sides of the Atlantic) is to advocate higher taxes, more entitlements and more Govt spending.

For Europe, it was too late - even before the present crisis struck. Their tipping point was reached a decade ago, with more than 50% of the electorate working for the Govt, or dependent on the Govt for subsidies and/or subsistence.

In the US, a return to a sustainable and growing economy is still possible - but, it will require major changes in fiscal and monetary policy as well as a serious rollback of entitlements. Although Europeans look down on their gauche cousins in America, we stupid Colonials may voluntarily stop a few inches short of the tipping point. This will require a major U-Turn on the part of one, or both of the political parties, in response to a common sense sentiment from the great unwashed American electorate.

Or, this will happen involuntarily and painfully in the US, as we are seeing in Europe, which is going through a slow motion train wreck.

Oh well, I'll see y'all in the breadlines during the next Crash.

That said, there is a larger point that can be gleaned from this: 

Human response to incentives being the same (whether in Detroit, Delhi or Delphi), there is no cultural immunity against the long term results. The only variable is time. A generation or two may resist the seduction of the welfare state, but their descendants will usually fall into the swamp. Case in point: the post war generation retained notions of shame/honor, patriotism and Kum-ba-yah, understanding that welfare was sometimes a last resort - but should never be a lifestyle.

Note: the above is an attack on the welfare state on the grounds that it doesn't work - this is the argument from pragmatism. There is also an argument that is based on its unfairness, which I think is even more compelling, but often obscured due to the fog and tear gas of altruism.

HIROSHIMA 1945 {Pictures}

We all know that Hiroshima and Nagasaki were destroyed in August 1945 after the explosion of atomic bombs. However, we know little about the progress made by the people of that land during the past 65 years.

What has caused more long term destruction - the A-bomb,

or

Government welfare programs created to buy the votes of those who want someone to take care of them?

Japan does not have a welfare system. Work for it or do without. And I don’t think there has ever been a better explanation of the importance of incentive than this example

These are possibly the 5 best sentences you'll ever read and all applicable to this:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

Consider that it is at the family/neighborhood level that people exhibit the kind of sentiments that are conducive to sharing and planning. For example: Parents willingly forego luxuries in order that their kids have a better education. A person may be willing to provide food to an ailing neighbor.

Translating those human behaviors to economics, when information and interests are regional or local, central planning can be effective. Once you get past those proximate/local relationships, knowledge (and incentives) taper off.

Something else is required to act as a messenger once you get into more complex and interconnected systems.

The social experiment that has been in effect for the last ~200 years shows us that complex economic systems work when something as simple as "price" fulfills the role of messenger.

Central Planners in Moscow could never determine the no of bags of wheat that would be reqd in Kiev in September. Result: either a surplus or a shortage. Misallocation of resources, in either case. Laissez faire pricing implies that there are no Central Planners in Washington DC making similar decisions regarding wheat supplies in Peoria.

Central Planning requires an army of omniscient and scrupulous bureaucrats. Society at large pays for inefficiency in one manner or another (bribes, theft, shortages ...). Laissez faire systems work with normal people, in spite of their foibles, because the incentives are congruent with the self-interest of individuals.

So, I would argue that the more interconnected a society (or the world ) becomes, the greater the need to do away with Central Planning. Otherwise, a short term, well intentioned fix - whether President Obama's mandated universal health care - or, President Bush's misguided steel tarrifs - will precipitate unforeseen, unintended consequences.

Consider the implication of separating the consumer/beneficiary from the payee - consider also that much of the modern day technology has been developed in countries that are closer to a laissez faire model than the alternative. A centrally planned economy in the US would have required an enlightened bureaucrat in Washington DC to dream up the need for personal computers, providing large sums of tax-extorted money to well-connected entities to develop a product that could be used by other central planners (hey, that kinda resembles the Solyndra model).

Instead, with no involvement from Washington DC, teenagers such as Steve Jobs, Wozniak, Bill Gates developed PCs - driven by their own self-interest (initially just for kicks, and then for profit). Beneficiaries included private citizens, who bought PCs for their own purposes, with their own money.

Much is made of the fact that bureaucrats in a Centrally Planned economy are "disinterested", and are not motivated by profit. This is often extrapolated to mean that such bureaucrats are, by definition, incorruptible. In reality, such bureaucrats quickly realize that they can make decisions based upon their whims! And, since there are no competitive forces brought about by the for-profit model, bureaucrats begin to exchange favors & trade influence. At first, these may be rather benign examples of "you scratch my back, and I'll scratch yours". However, it soon evolves into bribery and other forms of corruption. It is no surprise therefore, that Centrally Planned economies experience a larger amount of bribery and influence peddling. The inefficiency of such systems far outweighs the "cost" extracted by a for-profit model in which inefficiences are carefully wrung out by interested parties. Economists refer to profit as the price paid (in Laissez Faire economies) for efficiency. As a corrollary, Centrally Planned economies pay a much higher price in the form of inefficiency, misallocated resources and corruption.

In a laissez faire system, information and decisions are broken down into small quanta that no one really controls, and that are transmitted through whatever system that exists (jungle-drums, smoke-signals, monkey-mail, horse, rail, telegraph, telephone, internet …). The magic quanta that achieve this objective? Nothing more elaborate than old fashioned pricing signals, signifying supply-and-demand. Moms in Peoria decide what their kids will eat, and purchase more vegetables (or pizza) from their local grocers … who then purchase more of the desired items from their suppliers … who grow more vegetables (or pizza!)

Q) Why do folks get so upset when oil companies make a profit?

Oil companies make approx 5~10% net profit margins; compare that with Apple's net profit margin of approx 24%. Oil companies also pay more in taxes - at least in the case of US oil companies - than their combined profit (not that I'm a big proponent of corporate taxes). To earn this 5-10% profit, they search for and dig up this stinky stuff from the ground, ship it half way around the world, refine it and then deliver it to gas stations, so that we can just fill-er-up while sucking down our Slurpees.

That said, I don't think that oil companies (or anyone else) should get tax breaks or subsidies. All that those things do is to conceal the true cost of goods and services and cause unsustainable bubbles, such as the renewables bubble which has recently burst in Europe. Nor should the Govt impede/obstruct the legitimate actions of oil companies under the guise of "enlightened" intervention that is almost always politically inspired.

Incidentally, the recent run up in oil prices isn't due to speculation, or all the usual suspects that will be trotted out during the upcoming Presidential debates. It is mainly due to the weakness in the US dollar caused by inflationary monetary policy (an unprecedented 61% of the issued US debt in 2011 has been monetized by the Fed). The US Govt is spending recklessly and buying up its own debt at artificially low rates. This is a great racket - as long as we can get away with it. But there is a day of reckoning just around the corner ... read the following WSJ article.

Q) So, what is the TRUE cost of Oil?

Oil is a commodity just like anything else that is mined or extracted. There are costs (yes, these include environmental ones) in its prospecting, extraction, transportation , refinement and eventual use whether in energy or in other byproducts. These costs also include the costs incurred in overcoming local inefficiencies (bribes, infrastructure, security ...) and geopolitics, including collusion by cartels. In the so-called advanced countries there are fewer inefficiencies - but there are costs in meeting good regulation (for safety and legitimate environmental concerns). There are also additional costs incurred in dealing with illegitimate (inspired mostly by political meddling ) regulation and disproportionate taxation - much of it constituting a shakedown by 'activists' who exaggerate the problems (which certainly exist) while blanking out the benefit.

If not for the evil, dastardly Big Oil companies those activists wouldn't be able to travel to attend those protests along with all their other cool friends. Nor would they be able to wear those cool wrist bands that make such trendy fashion statements.

Q) But why did oil go from $29/bbl to $130/bbl?

It is mainly due to the weakness in the US dollar caused by inflationary monetary policy. As stated above, an unprecedented 61% of the issued US debt in 2011 has been monetized by the Fed.

This is borne out by the following graphs that show a relatively narrow trading range in the price of oil (when priced in Gold). Unfortunately, voters don't tend to think in terms of "the value of a dollar", because we tend to think of the price of commodities in terms of dollars.

Look for all kinds of scurrilous scapegoating during the silly season.