The Euro Crisis is Simpler Than it Appears

Not long after I arrived at Stanford, our medical center entered into a disastrous union with the UC-San Francisco’s health care system which ultimately poured tens and probably hundreds of millions of dollars down the drain. I could tell an enormously complicated story about why it didn’t work, bringing in issues of risk-pooling, local cultures of clinical practice, patient preferences and integrated care models. That would make your head spin to the point that you would miss the obvious: The system was set up financially such that one party could spend far more money than it had secure in the knowledge that someone else would have to pick up the tab. That’s all you fundamentally need to know about why the merger was doomed from the outset.

I have read endless coverage of the Euro Crisis, and my head is now spinning as I learn of sovereign debt swaps, inter-market currency trades and European Central Bank-mediated transaction insurance schemes. I then go back to a much simpler analysis: The system was set up financially such that one party could spend far more money than it had secure in the knowledge that someone else would have to pick up the tab.

I generally have distaste for the populist sentiment that there are no experts and that all opinions are equal. Yet I find myself wishing that when all the genius economists got together and agreed on the euro, some plain-spoken fellow (Wilfred Brimley, if available from central casting) would have said “Now hold on people! I don’t know spit about European Central Bank-mediated transaction insurance schemes and all that, but from what I’m a-hearin’ it sounds like this Euro thing is settin’ up a system in which one fella can spend more money than he has because he knows someone else is gonna get stuck with the bill. Well that’s crazy folks. You pointyheaded types may know way more than me ’bout economics, but you got less understanding of human nature than God gave an ant.”

[Cross-posted at The Reality-Based Community]

Keith Humphreys

Keith Humphreys is a professor of psychiatry at Stanford University. He served as a senior policy advisor at the White House Office of National Drug Control Policy from 2009 to 2010.