It only looks like chicken feed.

By EDWARD P. LAZEAR [Wall Street Journal] – It seems everyone is worried that problems in Europe will derail our fragile recovery. For this reason, markets breathed a sigh of relief when the Europeans came up with a plan to provide yet another reprieve to Greece. The main worry, now somewhat eased, was that a Greek default would spread to countries like Italy, Spain and Portugal.

Although there are legitimate concerns about contagion, the fundamental problem facing Europe is one of governments becoming too big to be supported by the economy. Unless Europe solves its fundamental problems with meaningful structural reform, a temporary debt restructuring, no matter how clever, will fail to right the ship. Closer to home, the same issues that threaten Europe may soon become immediate concerns to Americans.

To understand why, consider two theories of economic destruction, which can be labeled the domino theory and the popcorn theory. Everyone knows the domino theory; it is the analogy that is commonly used to denote contagion. If one domino falls, it will topple the others, and conversely, if the first domino remains upright, the others will not fall. It is this logic that underlies most bailout strategies.

The popcorn theory emphasizes a different mechanism. When popcorn is made (the old fashioned way), oil and corn kernels are placed in the bottom of a pan, heat is applied and the kernels pop. Were the first kernel to pop removed from the pan, there would be no noticeable difference. The other kernels would pop anyway because of the heat. The fundamental structural cause is the heat, not the fact that one kernel popped, triggering others to follow.

Many who believe that bailouts will solve Europe’s problems cite the Sept. 15, 2008 bankruptcy of Lehman Brothers as evidence of what allowing one domino to fall can do to an economy. This is a misreading of the historical record.

Continued at The Wall Street Journal | More Chronicle & Notices.