henever Congress and the president lock horns over a vital national interest, it is easy to declare "a pox on both their houses" and reflect fondly on those nonexistent days when government worked brilliantly. This time though, the public mood is a little different. Self-defined libertarians, pseudo-anarchists, Tea Partiers and other formerly fringe groups have come into national prominence by openly questioning the federal government's scope and role in America.
As a thought exercise, then, consider what would happen if there was no federal government anymore. For purposes of this experiment, assume that one day government just disappears - the people still exist and the infrastructure is there, but the laws, rules, systems and policies disappear. Admittedly it is an outlandish scenario, but what would life in the United States look like? (For more read Why You Don't Want A Government Shutdown.)
TUTORIAL: Credit Crisis
The Immediate AftermathIf America woke up to no federal government, there would be absolute chaos in the financial markets.
U.S. federal debt is the largest single investment instrument in the market, and the disappearance of a federal government would have everyone scrambling to figure out who, if anybody, would honor that debt. Moreover, since each and every U.S. dollar is essentially a debt instrument backed by the "full faith and credit of the U.S. government", what would that be worth (and also, of the billions of dollars of reserves held around the world in U.S. dollars) with no U.S. government?
Suffice it to say, the equity markets would also go absolutely haywire. So much of what is taken for granted in business - including taxes, regulations and the smooth operation of interstate and international trade - is facilitated or overseen by the federal government, and nobody would have any immediate answers as how that would continue. Likewise, what would happen to corporate profits if the federal government vanished as a customer? In such an environment, gold and silver would likely skyrocket, as speculators reassured themselves that precious metals would always be worth something in trade.<
br/>Perhaps contrary to expectation, there would not necessarily be full-scale bedlam and anarchy. Police are funded and administered at state and municipal levels, and while the National Guard is technically part of the U.S. Army and Air Force, it is still operates at the state level and could be called upon by governors to maintain order.
The Following WeeksOnce the chaos of the initial disappearance of the government abated, there would be a sorting out of day-to-day life. Governments have fallen in many countries around the world in the last few decades (often in violence and bloodshed), and there is a remarkable consistency - once the bullets stop, people go back to work and try to resume their lives.
Absent a federal government, there would be no reason to deduct federal taxes from wages, so workers' paychecks may be larger. Likewise, less overarching and overlapping tax and regulatory burdens could translate into lower prices on store shelves. On the other hand, Social Security and Medicare benefits would stop.
Many retired people would likely struggle to find the cash for day-to-day necessities, and the disappearance of Medicare would seriously jam up the healthcare system.
There would also be a serious need on the part of states and communities to resolve how certain functions would be handled. Would states step in and offer to pay USDA inspectors, FAA flight controllers and other key personnel? Would they take over installations like federal prisons? Likewise, would states pass emergency legislation to increase income tax so as to pay these workers? With roughly three million people employed by the federal government, their fate would be no small matter to the U.S. economy.
It would also be interesting to see how quickly the major banks tried to band together to replace some of the functions of the U.S. Treasury and other federal bodies. There is a history in the United States of banks issuing their own currency in the absence of a national authority, and it is not unthinkable that the likes of Citigroup (NYSE:C), Bank of America (NYSE:BAC) and so on could band together in an attempt to create a replacement system. Certainly, they have infrastructure and expertise that could be of use in a confederation of states lacking a federal government. (For more on banks, check out The Evolution Of Banking.)
Taxes would be another interesting case. While many would initially celebrate the disappearance of federal income taxes, capital gains taxes and excise taxes, the joy would likely be temporary. States would find that they need to raise revenue to pay for services previously handled by the federal government, and would simply reinstitute many of those same taxes - though it is not unthinkable that the sum total tax burden would be lower.
