Civil War, Part II

[Jester]

I was assuming that demands for government services would rise in proportion to the unemployment rate and the foreclosure rates.

If you're expecting the unemployment rate and the forclosure rate to increase from here until 2019, then you've got be beat hands down on pessimism.

Remember that in order for the government to hand out a dollar, they need to spend something like $1.50. Also, SSI is deducted from payrolls. With dropping payrolls, the government loses not only tax income, but also the receipts shoring up Social Security (which are used on the budget anyway). So Social Security and Medicare will become insolvent faster here as well.

Maybe. I don't think unemployment is going to be so awful for so long that government revenues are going to drop through the floor. At most, that's going to be a relatively small loss. The big differences in your model come from underestimating spending, and from the inability to raise more revenue. I don't think either of those things is fixed. If push comes to shove, entitlements will be scaled back, probably as part of some kind of nationalized health care system, and taxes will be raised to compensate. Revenue goes up, deficit goes down.

The risk of hyperinflation would occur after the Treasury has monetized a significant amount of debt, and then if we get a recovery. Once demand for commodities and labor rebounds, dollars being worth less, would cause prices to climb in relation to the new value of the dollar.

Perhaps. But then the Fed can step in and curb inflation with monetary policy. Very little about this process would be pleasant, but it would certainly be better than hyperinflation.

Well, in my way of thinking (Austrian), you would just be sucking air from a deflating bag. The more you suck, the more the bag deflates. Less income, less growth, begetting even less income.

This analysis only makes strong sense if you think you're already on the wrong side of the laffer curve, or at least very close to it. Growth slows down with tax increases, but not even close to enough to negate the revenue increase. You don't get a free lunch, but slower growth is an acceptable price to pay for keeping the government solvent.

You can prop up the government temporarily by sapping the wealth of the nation, but if you rob the people of the means by which they can recover, the recovery will not happen. Eventually, the props will fail, and we suffer economic collapse (depression).

"Temporarily" and "eventually" are rather large terms when it comes to government finances. If the government is going to become insolvent next year, you need to print money, pronto. If the government will become insolvent in twenty years, if you assume revenue-to-GDP stays constant, but expenditures grow at fixed rates compounding interest, then that's a problem, but it's a rather different type of problem. Specifically, it's a type of problem that doesn't imply a Mad Max scenario where you buy gold, fuel and ammo and hide in your concrete bunker, as some Austrians are suggesting.

Consider also the churn is some States, where government is the largest employer. Dwindling economy results in lower tax receipts, which results in government trimming jobs, which results in lower tax receipts and more demand on services.

It is precisely to counter these kinds of effects that the stimulus package was introduced. By spending today, you minimize the crisis, and position the country to better face the long-term problems. Without spending today, deflation and depression become self-sustaining, and Keynes' ghost will haunt the halls of Washington forevermore.

-Jester