The most neglected part of governing is educating. A government cannot get too far ahead of what the people understand and are willing to follow.
You'll recall the Austrian school of economics believes government receipts and disbursements should be equal each year. The Keynesian school believes, during times of under-employment or excess capacity, the government should spend more than received. The problem with the Keynesian approach is that it works best for nations that are not already deep in debt, such as the U.S. and Italy.
The Italians just voted to reject further austerity and plunged their government into the impotency of gridlock. As the third largest economy in Europe, it is "too big to fail" but may have made itself ungovernable at the worst possible time.
At this point, it is unclear if it can take the Keynesian approach of issuing a great deal more debt, because the market doesn't really want to buy much more of their bonds. To entice the bond-buyers, interest rates have already started rising. As a rule of thumb, a crisis begins when 10-year rates on government debt hits 6.0%. Yesterday, that rate for Italy jumped from 4.45% to 4.77%, a huge jump in one day.
Every Spring for the last three years, the European financial crisis has flared up, and Spring may be coming a little early this year. The Euro has clearly telegraphed its expectations following the Italian vote for gridlock. Take a look at the last five days:
As ominous as this appears, one cannot help but wonder how the Italian vote would have been different if the voters better understood the issue of austerity. It means working longer before retirement but not much longer. It means accepting some responsibility for their own health care but not much more. It means giving employers a little more control of their workers but not much more. But, then again, do Americans understand this?
The irony is that the Italians are declaring an end to austerity before the Americans even begin. The lesson for our government is that austerity will not be given enough time to work -- unless we educate our voters now. Maybe sequestration will begin that process of education?
