by James A. Bacon

by James A. Bacon

I call it “Boomergeddon.” Blogger-columnist-law school prof Glenn Harlan Reynolds calls it “Debt Doom.” Whatever you call it, the fiscal meltdown of U.S. government finances is nearly inevitable. The only meaningful questions are how long it takes to happen and how to survive it.

Reynolds and I are hardly the only people worried about the impending deficit-induced crash. There’s a vast community of gold-bugs and crypto-jockeys who believe the same thing. But Reynolds is the first I’ve seen (other than yours truly) to explore the implications for state governments. He, like I, says it’s time now for states and businesses to prepare themselves for a collapse in federal finances and capacity.

First a quick refresher. Uncle Sam posted a $1.8 trillion deficit in fiscal 2024 — not during a recession, not during a time of war, but during a period of peacetime economic expansion. Most of the deficit is structural, in that spending consists increasingly of entitlements and interest payments on $35 trillion in debt. The Congressional Budget Office projects that the deficit will exceed $2.8 trillion within 10 years — and that doesn’t take into account all the spending that both Kamala Harris and Donald Trump have promised to enact if they get elected president. A likely trigger for crisis will come by 2033 at the latest, when the Social Security Trust Fund runs dry, payments will be cut roughly 25%, and Congress has to figure out what to do about it.

That’s all well known. What’s interesting about Reynolds’ latest column, found on his Substack blog, is that he recognizes that when the federal government can no longer beg, borrow and steal like an opioid addict, governmental power and responsibility inevitably will shift to the states.

State and local governments will still be there if the federal government goes broke. States have their own credit ratings, their own bureaucracy, their own police and military forces.  Local governments retain the main role in maintaining order and providing essential services. States have issued their own currency in the past, and can do it again if necessary.

Some states will be better prepared than others — those with the strongest economies, least dependence upon federal spending, and most robust fiscal policies.

Reynolds continues:

If I were preparing my state for federal collapse, I’d make sure its debt was manageable and its credit good, invest its “rainy day fund” in things that would still be valuable when treasuries weren’t, and build up my State Guard, state police, and other state resources so that they could pick up some of the slack when the feds fell down. I’d also start boosting my state’s independence in terms of resources and food supplies as much as possible. Also, stockpiles of essential medical supplies and other goods, mutual aid agreements with neighboring states, emergency communications systems independent of federal networks, plans to temporarily pay unpaid federal workers, or find them alternative employment, and more.

Reynolds also has some ideas on what businesses could be doing to protect their supply chains, and the opportunity a federal collapse would create for a new constitutional convention. Read the whole thing.

To paraphrase an old adage, doo-doo runs downhill. When the federal government can no longer borrow except at exorbitant interest rates that magnify the crisis and is compelled to cut spending levels to what it brings in through taxes, federal spending will plummet by as much as $3 trillion a year. Without even calculating what this massive loss of fiscal stimulus will mean to the national economy, it will have a devastating impact on state finances, which are dependent in large measure upon federal transfer payments to government, business and the population at large. This is certainly the case in Virginia, which is especially reliant upon federal spending in Northern Virginia and Hampton Roads.

The first order of business is for the General Assembly to fund a fiscal stress test. How dependent is Virginia on federal government spending, and what would the impact be if the feds had to slash spending by, say 30% to 40%? What would this do to the states, what would it do to the localities, and what would it do to critical quasi-governmental authorities such as the Washington Metropolitan Area Transit Authority (which runs Washington Metrorail)?

Such a study would examine the commonwealth’s ability to maintain its current level of services. Perhaps most problematic is healthcare, which receives roughly half its funding from federal Medicare, Medicaid, WIC, and Obamacare programs. Virginia has committed to maintaining an expanded Medicaid program, which is mostly funded by the feds. Will Virginia be able to sustain that commitment through a debt crisis?

Perhaps most important will be the capacity to maintain public order. Society is fraying as it is. Imagine the dislocation, protests and riots that would ensue from a debt crisis. Virginia law enforcement is understaffed today. Will Virginia’s police, sheriffs, state police and National Guard be able to handle the mayhem?

It may be too much to expect Virginians to actually begin acting in anticipation of Boomergeddon, which still may be ten years off, but we should at least begin thinking about how to act. If we can’t even do that, we deserve what’s coming.