Robert Lucas. Some readers will have heard of him.

He won the 1995 Nobel Prize for Economics, in part for pioneering work in the field of ‘rational expectations’:

One important implication of Lucas’s work, which was confirmed by Thomas Sargent is that a government that is credible—that is, a government that makes itself understood and believed—can quickly end a major inflation without a big increase in unemployment. The reason: government credibility will cause people to quickly adjust their expectations.

He also looked deeply at what really makes societies grow, and how success compounds up over time:

“Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the “nature of India” that makes it so?

The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else…”

Indeed.

Which is why it is so amazing to run the numbers to compare eg Slovenia with Serbia since 1990 to see the Cost of Milosevic (several hundred billion dollars lost to Serbia for ever, and the loss is growing fast).

Or the Cost of Mugabe, the wealth lost to Zimbabwe by Mugabe’s insane policies which will have caused needless misery and disadvantage down far decades to come.

The modern drama we face in the West (Greece, UK and USA and beyond) is simple. Public debt has reached such a level (as with a credit-card) that the total debt starts to compound up faster than the likely capacity of the system to repay the debts by squeezing  new taxes out of the system. Plus the more tax is taken, the less the growth, so the less wealth generated to pay the debt.

Aaargh.

That can stagger on for some time. It suits the governments concerned to project an ability and willingness to honour their debts, just as it suits the institutions which have lent the money to believe that it will one day be repaid.

Sooner or later, the numbers no longer make sense.

See for example Illinois. Illinois has unfathomable commitments for unsupportable health benefits and pensions for bureaucrats:

By July, Illinois will be $130,000,000,000 (that’s BILLION!) in debt. This crushing load hampers the state’s ability to fund public schools and universities, health care, and other essential public services. Most of that money is owed to the state’s pension funds and retiree health care plans…

How did this happen? Basically, Illinois spends $3 for every $2 it takes in. Only in Springfield is this kind of math possible. The state accomplishes this by borrowing or by simply ignoring its unpaid bills. And it has been doing so for years.

California ditto.

So who pays?

It is a moral hazard disaster to expect people who have been relatively prudent to have to dig deep into their own pockets to help deal with greedy state-sponsored profligacy on this scale, the more so since the profligates tend to be in denial and snarl angrily when anyone tells them to cut back on their banal, unsustainable lifestyles.

Which is why wise Germany claims to be holding out against paying for foolish Greece’s fast escalating debt.

But if no bail-out, then what?

As Robert Lucas showed, “a government that is credible—that is, a government that makes itself understood and believed—can quickly end a major inflation without a big increase in unemployment.government credibility will cause people to quickly adjust their expectations”.

But the corollary of that is that wild and sustained government stupidity as we are seeing in so many places and policy areas can lead to people adjusting their expectations – and behaviour – in wild and persisting stupid directions:

The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else…