Nearly every day brings news of trillion-dollar government interventions in the world’s economies.
With the power of deficit financing and the printing press, Washington is clearly leading the pack. Using the credit accumulated over many decades as the world’s largest economy and issuer of the world’s reserve currency, the U.S. is on track to borrow several trillion dollars over the course of a year or two that will be spent attempting to reverse the recession and credit freeze.
How well these multi-trillion efforts will succeed is still very much up in the air. The administration, which must of, course, be seen as optimistic, is predicting some sort of an economic revival next year. Others are not so sure. They believe the massive borrowing at home and abroad at close to zero interest rates will be coming to an end soon as lenders simply run out of funds and the willingness to invest in U.S. government securities. Rates will rise, the government will resort to printing money, and a whole new set of still more serious economic problems will occur. Current policies will come to an end soon for they are simply unsustainable.
In America, government is not just Washington. We have 50 state governments and thousands of local ones that provide most of the services that hold our civilization together – water, sewers, sanitation, schools, roads, police, fire, courts, welfare, and prisons. Now these governments have another set of problems. They can’t print money, most are already indebted to the hilt, and many are under legal restrictions to balance their budgets. In recent decades, the prevailing political in America sentiment has become one of opposition to taxes. Without much thought being devoted to just what goods, services and edifices might be bought with the tax money, a substantial portion of the body politic is convinced that nearly all government is a waste of money and that the less taxes, the better off we will all be.
This of course is what comes from nearly 70 years of good economic times. There are few left to remember the bad years of the 1930’s when life, even in America, was a struggle for survival and not just deciding what to buy today.
There is no question that state and local governments are in trouble. Revenues are falling and were it not for the recent stimulus package of federally-borrowed money, tens of thousands more teachers and municipal employees would be drawing unemployment before the end of the year. The bottom line is that state and local governments, that provide really essential services, have taken a first step in becoming more dependent on the federal government for part of their funding. Some local jurisdictions are so poor that there is simply nothing left to tax. These are already dependent on state governments to shuffle money from wealthier places to poorer ones.
Many, however, believe the days of the great federal borrowing binge are numbered. The favored scenario says that the U.S. Treasury will on day no longer sell increasing amounts of debt, interest rates will soar into double digits, the government will turn on the printing presses and we will all be living in the Weimar Republic with a worthless currency.
From a peak oil perspective, the notion of returning to days of vibrant economic growth is simply not in the cards. Economic growth takes oil; world production has already started to drop; and there will be much competition for that which is left. While gasoline is currently cheap, three to five years from now it won’t be as a combination of slowly increasing rates of oil depletion and lack of investment in new production will lead to shortages and growth-stifling prices.
At some point, the federal government which, through inertia and good lobbying, tends to fund all sorts of relics from bygone eras – space travel, submarine fleets, jet fighters, and a world-wide military presence — will have to rethink what it is doing. There clearly are vast amounts of “government” expenditures which can be cut before we get to elementary teachers, sanitation departments, and public health.
If the past year is any example, the next few decades will be ones of extreme hardship. Governmental priorities are already from nice-to-do to can’t-survive-without. The relationship among and services provided by the various levels of government will change – perhaps radically. For the coming fiscal year we seem to have a new paradigm under which the federal government borrows and sends enough money to lower levels of government to keep them functioning. If the borrow-without-much-taxing model is to continue to work, then some flavor of continuing federal support for local services will have to continue.
The transition from a lifestyle in which we live on dwindling reserves of fossil energy to something more sustainable is obviously going to take increasing amounts of government support just to keep functioning. We have built a very complex civilization in which we are dependent on a complex supply chain for the essentials of life – food, warmth, sanitation, health. The days of the independent, self-sufficient farmer are over for 98 percent of us. Take away or even start to reduce supplies of food, electricity, natural gas, and gasoline and we are in a lot of trouble.
As the supply of liquid fuels dwindles and increases in price, travel, particularly by aircraft, is likely to fall sharply. Services provided by the federal government – defense, foreign relations, interstate highways, and regulation — that have grown to massive proportions in the last 70 years are likely to take on a much lower priority in favor of food, clothing, shelter, public safety, education, health care, and employment that will be provided at the local level.
Over the next 20 years we are almost certain to witness major changes in the functions performed by various levels of government and whether we like it or not, the share of our resources going to pay for these functions – i.e. higher taxes. Although it is not yet generally recognized, this great transition has already begun.