Like the rest of us, the US Government is not immune from bankruptcy. The Federal Government could avoid bankruptcy through inflation, even though bankruptcy would be more costly at the polls than inflation, it would resolve little. Many in Congress prefer hyper inflation to bankruptcy. Hyper inflation is 100% inflation or higher. That means that the price level doubles annually. And it is not a real solution if the level of spending in Congress continues. Not to mention how the electorate would feel about it.
Eventually, however, even members of Congress will realize that we can not go on and on with a deficit forever. And there may be a point where it will become obvious that it is at the breaking point and can not continue. The troubling fact is, Congress can avoid bankruptcy at any time. They have the power of the purse, and can cut spending to the bone any time they can all agree to do so. Budgetary items are the only items that can avoid the cloture vote in the senate, meaning no filibusterer...a simple majority vote in both houses will take care of it.
But if the congress can't do that, there is chapter 11 or something similar to it. This is not chapter 7, where debts are forgiven. It is not chapter 13, where a time table is agreed upon. It has to be like a business reorganization, because this is the closest legal precedent we have. We do not have a provision in the constitution for the bankruptcy of the US Government. I suspect that if it is bad enough for bankruptcy, that the President can make the formal declaration without a vote from Congress. The Supreme Court would need to back him or her up. This is basically taking the power of the purse away from the Congress and putting it in the hands of the courts until the books are brought back in line and Americas creditors are satisfied. This would be a constitutional crisis, expect the legality of it all to be contested in courts. If these proceedings are tied up in courts long enough, the plan will fail and the Federal Government with it.
If it succeeds, the government continues. The government as we know it today may be unrecognizable afterwords. If it fails, the government fails. But only the Federal Government. The governments of the 50 states would individually continue. Here is how that process is likely to take place:
How it works:
1. A trustee would need to be appointed. The judge over the case would be the chief justice of the United States. The trustee would likely be either a former president or a retired associate justice of the Supreme Court. If this were to happen today, it would likely be Sandra Day O'Connor.
2. Constitutionally, Congress has the power of the purse and should make any financial decisions. Because Congress would be afraid of the political consequences of the tough choices made, they would facilitate a committee to take care of the bankruptcy and vote on their findings. The Congress would have to agree on their findings. The committee would make some choices that would be hard on the Democrats, and some choices that would be hard for the Republicans. The committee would have to be made up of people that could set aside their partisanship and get something accomplished quickly--within 120 days by law. Therefore, it could not include any who are currently sittings in elected positions. I would appoint retired federal and state judges with experience in bankruptcy cases.
3. They work it out in four phases. First, you have to list the assets and liabilities. Then you have to list income and expenditures. Third you list contracts and leases. Fourth, you create a statement of financial affairs.
4. In short writing, a plan will be developed to bring the Federal Government's financial affairs in order. This is where a lot of lobbying will take place and why the members of the trustee's committee will need to be untouchable. Obviously some contracts and obligations will be canceled, some assets sold, and some commitments curtailed. (This is over-simplified.)
5. There needs to be a time table to emerge from bankruptcy and milestones to track progress.
6. The bankruptcy would fail if the Congress votes against it, the trustee rejects it, the president vetoes it or any milestones are missed or the government debt continues to grow afterwords.
Likely Outcome of the Proceedings:
Now for the consequences for the government, some things that may have to happen to bring our federal house in order. Many of these steps can be taken now to avoid bankruptcy.
1. Many government bureaucracies would need to be eliminated or downsized. There are a lot of functions that are duplicated within the Federal Government by multiple agencies. These can be combined or consolidated. There are also functions that are duplicated by various state agencies. Due to the 10th amendment, these functions can be eliminated completely at the federal level. Only those given to the government explicit by the Constitution would be eliminated at the state level. The departments of Education, of Health and Human Services and others could disband. Many federal employees will be laid off. Federal employee retirement programs would be restructured.
2. Many federal court cases would be dismissed or referred back to state courts. This could include criminal cases where state laws were also violated. All civil lawsuits could be referred back to the states. The scope of a "Federal Question" would be reduced.
3. At best, the retirement age would be raised to 75 effective for all people under the age of 75. At worst, all able bodied people would be asked to return to the work force and social security payments would be eliminated for every person who can not prove that they are not able to work. The population dependent on the government dole would need to be reduced significantly.
4. Taxes would increase. Most likely to happen: many tax loopholes could be closed. The EITC would likely disappear as well. But the top marginal rate could increase, or another top bracket would be added. But taxes would need to remain at a realistic level.
5. Closed military bases would be sold. Many stationed overseas would return home. Commitments to foreign bases and governments could be curtailed. There would have to be some consolidation of the military, but it would have to be done in a way that would not compromise our defenses. There may even be layoffs of active duty soldiers, airmen, sailors and marines...meaning people being moved from active duty to what is called the "ready" reserve before their commitments are complete. Many military vehicles, ships and planes would either be scrapped and salvaged or "civilianized" and sold.
6. Some national monuments and recreation areas and even some national parks would be privatized. Indian reservations would be decommissioned. Much land now owned by the Federal Government would be sold. This would likely be the most controversial part of the plan as environmentalism has become so powerful in the US.
7. Some federal debts, where the government is the creditor, could be accelerated.
8. The size of the House of Representatives could be reduced. The pay of many elected officials would be reduced. This would include the pay of the President, the Vice President, the federal courts and Congress. Congressional sessions would be reduced. Congressional travel would be reduced.
9. Many farm subsidies would be canceled.
10. Medicare goes away. Doctors would have to find a way to work with patients that have been covered by Medicare, refuse to accept these patients or go out of business. Same with Medicaid, SCHIP and other federal health care programs.
Negative consequences on society as a whole:
1. High unemployment with the limitation of unemployment benefits.
2. Deflation, including real estate prices. This is not usually a good thing. It usually accelerates the pace of lay offs in business as companies will take advantage of the opportunity to replace higher paid people with those who can provide the same quality of work for a lower wage. No one is happy about having to work for less money, even if it means your pay check will go farther. The Federal Minimum wage may even need to be decreased.
3. Higher crime due to reduced law enforcement activities and more idleness among the population.
4. Increased terrorism both from foreign enemies and domestic.
5. Higher turnover in elected offices. Currently there is about a 10% turnover rate in Congress in each election. (3 new senators and 50 new congressmen/congresswomen each election.) This could increase significantly.
6. Lower quality of infrastructure, including the collapse of many bridges, dams and other capitol projects managed by the Federal Government. Highway projects would be delayed or canceled.
7. Lower environmental quality.
8. Many more people falling through societal safety nets. This means more deaths due to lack of access to health care facilities, more accidents in the workplace, more suicides, more starvation, more homelessness etc. These problems would be especially severe among the elderly. There will be more strain on faith based charities and other private charities.
9. Imported items will be more expensive as the US dollar will be weak. Energy prices would increase.
10. Recovery from natural disasters will be slow. What now takes days now will take months. Some communities heavily damaged by natural disasters would become ghost towns.
11. Many pubic schools will close. This will include universities.
12. Many businesses will close.
13. Many homes will fall into foreclosure. So will many commercial properties.
14. The "entitled" could become frustrated, disenfranchised and disaffected.
15. Some state governments would be overwhelmed with the loss of federal funds.
16. If the US were involved in a war, the draft would return.
17. More corporate control of American Farmland. Many farms will fail. Many farmers will have to find lower-cost methods of farming to survive.
What would happen if the bankruptcy of the United States fails and the government of the United States were to fall? Each of the 50 states would become 50 independent countries. Some have the resources to survive very well as independent republics, like Texas. Others will quickly become failed states. If the US survives and emerges from bankruptcy, the country could be better off. The eventual positive consequences will include:
1. Reduced federal spending that could eventually lead to lower taxes. But not until the National Debt is completely retired.
2. A reduced "entitled" population.
3. The balance of power would be shifted to state governments and courts.
4. The end of congressional earmarks.
5. A smaller federal government. Larger state governments.
6. Less land owned by the federal government means a higher tax base for local governments.
7. People would find a way to survive without big brother helping them every step of the way.
8. The American manufacturing base would be rebuilt.
9. Lower interest rates as the largest borrower in the United States pays off her debt.
10. Facilitating the creation of a federal rainy day fund to take care of the cleanup from natural disasters.
11. Energy independence.
12. More entrepreneurship among the populace.
Now you decide, is this worth the panic that Glen Beck and others are preaching? Yes, it is time to take prudent steps to prepare, but not time to panic. It's not going to be easy to take these steps, especially if you have parents in their 70s or older, but it will not be complete anarchy either. Remember, if the Federal Government fails, many of us have a strong state government as a backup. Many businesses survive bankruptcy and the US Government can as well. Bankruptcy would not mean the end of, or the collapse of, the Federal Government, but a way to avoid it.
How can we prepare?
1. Get out of debt.
2. Store food.
3. Be a good employee.
4. Be active in politics and choose good, prudent representatives even if it means crossing party lines. Be involved in state and local politics as well. Strong state governments will save us from anarchy if the Federal Government fails.
5. Hug your kids daily.
6. Save money.
7. Plant a garden.
8. Take care of your health.
9. Watch over aging parents.
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