Bloomberg editorial writes:  Subsidies, as a rule, distort financial incentives and leave the economy less efficient. Subsidies on fossil fuels are doubly foolish: They also divert investment and consumption away from cleaner energy, and cost taxpayers a bundle.

Yet last year, for all the talk from world leaders about cutting greenhouse-gas emissions, the richest nations spent more on subsidies for coal, oil and natural gas than they did a decade ago. Those subsidies — a mix of direct spending and tax breaks — amounted to $65 billion among the 34 members of the Organization for Economic Cooperation and Development, and another $103 billion in China, India, Brazil and other large countries outside the OECD..

Developed countries have made some progress: Their fossil-fuel subsidies have inched downward for each of the past three years. But inertia remains a problem. About two-thirds of the individual subsidies have been in place since before 2000. Times change, and so should policies. When people and businesses need incentives to use less fossil fuels, it makes no sense for taxpayers to give them an advantage in the marketplace.

Hans-Helmut Kotz,Eric Labaye, Sven Smit write:  With the third Greek loan program almost in place, it is time for European leaders to start focusing on the future. That does not mean concentrating on Greece’s debt-service schedule over the next few months. Rather, it means embarking on a broad economic-reform program that combines growth-enhancing supply-side reforms and demand-side efforts to support investment and job creation.

Low oil prices, a more competitive euro exchange rate, and the European Central Bank’s judicious use of its full suite of monetary-stabilization policies – not to mention the fact that the threat of Grexit has been averted, at least for now – provide a favorable backdrop for such ambitious reforms. Even the political environment may not be as inauspicious as is often believed: Despite the worrying rise of anti-European sentiment in many countries – especially those hit hardest by the crisis – there is a palpable yearning among Europeans to break out of the continent’s debilitating economic (and political) rut.

Indeed, a recent McKinsey survey revealed not only that Europeans aspire to a more vibrant economy, higher incomes, and better public services (especially health care and education), but also that they are prepared to accept tradeoffs, including longer hours and reduced social protection, to achieve them. A whopping 91% of the 16,000 respondents said that they would favor changes to the status quo, even if it required some sacrifice.

And the status quo is in urgent need of change. As it stands, European economic output per capita remains well below 2008 levels. In most European countries, gross sovereign debt exceeds the threshold (60% of GDP) established by the Stability and Growth Pact. Immovable adjustment constraints have caused eight countries to experience nominal wage deflation in at least two years since 2008. And unemployment remains stubbornly high.  EU’s Vitality

Anatole Kaletsky writes:  The US Federal Reserve’s decision to delay an increase in interest rates should have come as no surprise to anyone who has been paying attention to Fed Chair Janet Yellen’s comments. The Fed’s decision merely confirmed that it is not indifferent to international financial stress, and that its risk-management approach remains strongly biased in favor of “lower for longer.” So why did the markets and media behave as if the Fed’s action (or, more precisely, inaction) was unexpected?

What really shocked the markets was not the Fed’s decision to maintain zero interest rates for a few more months, but the statement that accompanied it. The Fed revealed that it was entirely unconcerned about the risks of higher inflation and was eager to push unemployment below what most economists regard as its “natural” rate of around 5%.

It is this relationship – between inflation and unemployment – that lies at the heart of all controversies about monetary policy and central banking. And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association.

Friedman’s theory asserted that inflation would automatically accelerate without limit once unemployment fell below a minimum safe level, which he described as the “natural” unemployment rate. In Friedman’s original work, the natural unemployment rate was a purely theoretical conjecture, founded on an assumption described as “rational expectations,” even though it ran counter to any normal definition of rational behavior.

The theory’s publication at a time of worldwide alarm about double-digit inflation offered central bankers exactly the pretext they needed for desperately unpopular actions. By dramatically increasing interest rates to fight inflation, policymakers broke the power of organized labor, while avoiding blame for the mass unemployment that monetary austerity was bound to produce.

A few years later, Friedman’s “natural” rate was replaced with the less value-laden and more erudite-sounding “non-accelerating inflation rate of unemployment” (NAIRU). But the basic idea was always the same. If monetary policy is used to try to push unemployment below some pre-determined level, inflation will accelerate without limit and destroy jobs. A monetary policy aiming for sub-NAIRU unemployment must therefore be avoided at all costs.

A more extreme version of the theory asserts that there is no lasting tradeoff between inflation and unemployment. All efforts to stimulate job creation or economic growth with easy money will merely boost price growth, offsetting any effect on unemployment. Monetary policy must therefore focus solely on hitting inflation targets, and central bankers should be exonerated of any blame for unemployment.

The monetarist theory that justified narrowing central banks’ responsibilities to inflation targeting had very little empirical backing when Friedman proposed it. Since then, it has been refuted both by political experience and statistical testing. But, despite empirical refutation, the ideological attractiveness of monetarism, supported by the supposed authority of “rational” expectations, proved overwhelming. As a result, the purely inflation-oriented approach to monetary policy gained total dominance in both central banking and academic economics.  Inflation Over?

Jerry Hirsch writes:  Volkkswagen called them “clean diesels,” branding them as the fun-to-drive alternatives to hybrids as it dominated the U.S. market for the engine technology.

Turns out the increasingly eco-conscious buyers of the sporty German cars have been unwittingly pumping smog into the air — because of software VW installed to cheat on U.S. emissions tests.

The world’s largest automaker has admitted selling 482,000 such diesels since 2009, California and U.S. regulators announced Friday. The scandal could cost the company billions of dollars in fines and lawsuit judgments and threatens to stunt the development of all diesel vehicles.

Autos editor Brian Thevenot explains how Volkswagen used a software trick to hide illegal pollution levels in half a million diesel cars.   VW’s software trick allows the cars to emit up to 40 times the legally allowed amount of nitrogen oxide, environmental officials said.

Nitrogen oxide is among the auto pollutants that put more smog into California’s skies.

Many owners of VW diesels — who tend to be enthusiasts — were enraged at being deceived.

The affected diesel models include: Jetta (model years 2009-15), Beetle (model years 2009-15), Audi A3 (model years 2009-15), Golf (model years 2009-15), and Passat (model years 2012-15).

The EPA made its charges by sending Volksagen a notice of violation of the Clean Air Act. It covers models equipped with 2.0-liter, four-cylinder diesel engines. The California Air Resources Board issued a similar letter for violations of state regulations.

Volkswagen admitted that the cars contained “defeat devices,” after EPA and the state air regulator demanded an explanation for the emission problems.

Volkswagen is the world’s biggest auto company, outselling Toyota and General Motors this year. The automaker issued a statement saying it is cooperating with the investigation and declined further comment.

Air board investigators started testing the vehicles on a special dynamometer — a kind of treadmill for vehicle testing — and on the open road using portable equipment.

VW programmed the engines to detect certification tests over many years and through three generations of engines, said Dave Sullivan, manager of product analysis at consulting firm AutoPacific Inc.

In addition to fines, VW will likely face consumer lawsuits.  Other vehicle manufacturers don’t appear to be doing the same thing, but still get good performance from diesel vehicles,” Tonachel said.

Consumers should not read VW’s action as an indictment of all diesel cars, said Don Anair, research director for the Clean Vehicles Program at the Union of Concerned Scientists.

Consumer Reports on Friday suspended its recommendation for two of the diesels, the Jetta and Passat.