 Less than a month into a downturn that has much longer to run, the crisis is underway. This is why Conquer The Crash advises readers not to “rely on government programs for your old age. Retirement programs such as Social Security in the U.S. are wealth-transfer schemes, not funded insurance, so they rely upon the government’s tax receipts. Likewise, Medicaid is a federally subsidized state-funded health insurance program, and as such, it relies upon transfers of states’ tax receipts. When people’s earnings collapse in a depression, so do the government’s tax receipts, forcing the value of wealth transfers downward. Every conceivable method of shoring up these programs can lead only to worse problems.” The Children’s Health Insurance Plan is supplemental to Medicaid, but Medicaid itself is also under assault. The administration’s 2008 budget proposes cutting almost $26 billion from Medicaid over the next five years. Cuts of over $4 billion over five years went into effect with the Deficit Reduction Act in 2006. New York state has is also cutting $1.3 billion from the state’s $46 billion Medicaid program, which serves millions of low-income patients.
This is all happening while taxes are still rising. The initial downticks in the value of residential housing foreshadow a much different environment in which tax receipts will fall. As they do, the difficulties will be compounded by all kinds of ancillary effects of the reversal in social mood. Consider, for instance, government pensions. Like so many investors, most funds are busily trying to “shore up” returns by moving into “alternate investments” like venture capital, commodities and real estate, assets that are particularly well positioned for decimation in the unfolding deflationary storm. With taxes falling, governments will simply be unable to pay pensioners their promised benefits. So, it’s interesting that we’re just now starting to see stories about what a great deal government work is because of fat pensions. USA Today reported in February, for instance, that retired government workers are twice as likely to get a pension as their counterparts in the private sector, “and the typical benefit is far more generous.” But with cities like San Diego and states like Illinois, Indiana, Michigan, New Jersey, Ohio and West Virginia already struggling to figure out where the money to fund pensions is going to come from, the likelihood is that benefits will be slashed. In industries that are on the front-edge of the deflation, like the airlines and autos, pensions have already been hit. As usual, government will be last to know what’s going on. Once it finds out, however, the effects are likely to be dramatic. |
