The Shutdown: A Simulation of Fiscal Panic

The partial shutdown of the federal government continues. It may continue for some time still. I have an idea of how we could bring it to an end - and never, ever see another shutdown: suspend taxes and government regulations for the duration of the shutdown. 

I guarantee Democrats and Republicans would agree on a budget every year from now to the next Big Bang.

At the end of the day, the shutdown does not have much of a negative effect on most Americans. However, there is a segment of our population that could be hurt. The Wyoming Tribune Eagle, WTE, reports (December 29, page A1 print edition):
Wyoming's 30,000 low-income food assistance recipients are guaranteed benefits through January, despite the federal government shutdown. But the department overseeing the program is exploring what an extended shutdown would mean for those in need. ... Although the Supplemental Nutrition Assistance Program is funded through January - and child nutrition programs into February - U.S. Department of Agriculture Secretary Sonny Perdue suggested states may need to rely on local resources if lawmakers can't approve a spending bill by that time.
The SNAP benefits are paid entirely with federal funds, while the administrative costs are split evenly between the federal government and the state of Wyoming. In total, the WTE reports, Wyoming received $42 million in federal SNAP funds in 2018. That is the amount that our state would have to cover if the government shutdown lasts long enough.

It is, of course very unlikely that it ever will come to a point where the program will actually run out of federal funds, at least under the shutdown. Therefore, the problem discussed in the WTE article may seem hypothetical. 

It is not. It actually makes a good point that we should all be taking seriously: what do we do the day the federal government actually does run out of money?

Absurd? Not so fast. This past summer I published a two-part Prosperitas study for the Center for Freedom and Prosperity about the case for an American version of the Greek fiscal crisis. In the first part I explained how our decades-old deficit-spending problem has brought us precipitously close to a fiscal crisis. In the second part I made a direct comparison between the Greek fiscal meltdown and the U.S. economy. My conclusion:
Once we cross the line between a fiscally troubled situation and an overt fiscal crisis, and the global debt market expects austerity policies similar to those in Greece, Congress will be locked on a policy path that is destructive both politically and economically. This outlook should serve as a stark warning that our elected officials better take the opportunity to reverse course on big spending, before it is too late.
Once we cross the Rubicon and a fiscal crisis is set in motion, everything we take for granted about federal spending will be thrown out the door. The question that Congress will be wrestling with is no longer going to be about how much they can grow spending. Their question at that point will be: what programs can we cut, by how much and how fast? The more they can cut, the faster; the better. 

To some crudely libertarian minds, this sounds like a wet dream. There are just two problems with this attitude:

1. The cuts will be disorganized and not lead to any reforms that can replace government spending programs with the free market.
2. While Congress takes the fiscal chainsaw to entitlements, they will raise taxes in every cardinal direction. 

In other words, we will be paying more for a smaller, and increasingly disorganized government. This is the kind of panic-driven austerity that hurled Greek economy back to the pre-industrial age, and it is what America is going to experience (unless a political miracle happens). Its very opposite is a series of structured spending reforms by means of which Congress can combine thoughtful spending cuts with cuts in taxes.

Panic austerity will be driven by one rule, and one rule only: the fastest, biggest spending cuts possible, no matter what the long-term consequences are. This is precisely, exactly, to the tee how the Greeks have made their spending cuts over the past decade. It is what other countries have experienced, from Puerto Rico to Spain to Portugal to France to Denmark to Sweden... 

It has the same result everywhere: entitlement programs implode. Wyoming would soon face the situation that the WTE is pointing to - and it could even be as serious as a complete cut-off of federal funds for some programs. At that point, Congress would tell states to take over responsibility, plain and simple, without any compensation whatsoever. 

Can't happen? In Greece, the parliament slashed some entitlement programs by more than 50 percent. In one instance the total reduction was 90 percent. Yes: the parliament took away 90 percent of the funding for one of Greece's most important welfare programs. 

There are, of course, important differences between Greece and the United States, but as I explain in my two-part study of the case for a Greek crisis here in America, those differences are much smaller than people generally think. Even more scary is the fact that those differences are insignificant once we pass the point where a crisis is inevitable; the unfolding of a crisis will be almost the same here as in Greece. 

In theory, Wyoming has the financial resources to take fiscal responsibility for federally sponsored programs. In practice, there is no political preparedness for it. On the contrary, we have a legislature that is spending an inordinate amount of time and effort on raising even more revenue than they already get. They take for granted not only that they can raise taxes, but that they will be able to continue to fund government as it is - no matter what happens, either in Wyoming or nationally. 

Fiscal panic can strike fast. It took Denmark by surprise in 1987. It hit Sweden and Britain over night back in 1992. During the Great Recession it struck Ireland, France, Portugal, Spain, Cyprus, Greece and other countries almost like lightning from a clear-blue sky. If we are not willing to prepare ourselves, we will be hit just as hard as they were.

To avoid being taken by a nasty surprise, we as a state must start working in structural spending reforms:

School choice for K-12, where funding follows the student and private charities can set up their own voucher programs;
Cut the federal government out of Medicaid, open it to free-market solutions in terms of insurance (vouchers) and health care;
Privatize the I-80 and turn it into a toll road so that it funds itself and is cut out of the state budget;
Make a deal with the federal government where all other federally funded programs are brought home to be run by the state of Wyoming, all according to a welfare reform model I developed six years ago

These reforms would go a long way toward making Wyoming free and prosperous. 

Need I mention that our much smaller government would be fiscally sustainable while we can actually start cutting taxes?

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