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Consequences Readers should be aware (or warned) that this gives an opportunity to bring opinions to the discussion. The specific impacts of what might happen if there is no change in federal policy or budgeting behavior are not known, except that borrowing funds to cover larger deficits will become more difficult. The resources of the federal government are immense, and it would still be collecting trillions of dollars in taxes even if borrowing becomes limited. The federal government’s mandatory responsibilities to Social Security, Medicare, some other social programs, and for paying interest on the national debt would continue, although there is a possibility that Social Security payments will be reduced if these payments must rely solely on payroll tax revenue. It is also likely that the discretionary support for national defense would continue. Other discretionary programs would then be left to make up the difference. If there is an actual reduction in federal spending (or in the value of federal payments), we would all be affected and our lives would eventually change. Smaller nations have survived such financial problems, but their people suffered. The first to suffer here would be those who rely on federal funding for income or other basic needs. And problems with discretionary federal spending would inevitably lead to state and local financial shortfalls. As shown in Table 4, the State of California relies heavily on federal funds, and the state would have to solve an annual budget problems that could exceed 100 billion dollars plus its unbudgeted and growing debt of over 20 billion dollars along with spending that has been moved to future budgets. Let’s consider for a moment the options for increasing government income taxes to pay its existing bills and the promises, which seem especially common during election season, for spending even more. It is actually true that goods and services are never really free. Despite not seeing a connection, especially when governments are paying the bill, people are either paying for or foregoing payment for all goods and services received by others. It is also true that wealthy people have more money to spend, but this is money left after paying income taxes, property taxes, sales taxes, license fees, and other government levees. We also need to be sure of what is meant by “rich” when politicians say that services should be paid for by taxing the rich. And what the government isn’t collecting is being spread among those who build, sell, provide services to, and take care of this “extra” wealth, including financial institutions. So, wealth generates employment that is lost by taxing it. Then there is the urge to make somebody else pay – especially corporations. But corporations are mechanisms for spreading wealth among people. If too much wealth is held in corporations, we can change the distribution requirements. Wealth that isn’t trading hands is mostly tied up in assets, like land and equipment, that are used by people to produce the goods and services that we enjoy and depend on. Resources - like iron, oil, wood, and wheat – come from the work of people. And equipment is made by people. So, goods and services provided by government are not free and are, in the end, all paid for or produced by other people. It should also be mentioned that the burden of dealing with potential federal government financial problems falls primarily onto the shoulders of future generations. So, it would be a major failing for today’s decisions to reduce our children’s future opportunities. Government’s first response to financial problems would probably be to increase taxes or print currency to continue paying bills and to keep the economy going (at least this has been the usual response). But printing currency and raising taxes without economic growth would soon lead to inflation that harms everyone (the usual result). And with the United States being the world’s leading market and banker, there would be serious worldwide effects. Eventually, inflation here would lead to loss of currency confidence and property values, which would reduce the value of bank collateral, and to reductions in consumption that would bring down the value of companies and reduce tax collections. These are some of the reasons why economists and government officials are so concerned about deflation. But enough of this speculative doom and gloom. Wouldn't it be better to begin budget reforms now to avoid a later slow-motion financial crisis? |
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