What If There Were No Government?

By Stephen D. Simpson, CFA | August 04, 2011 AAA
What If There Were No Government?

Whenever 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 Aftermath
If 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.

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 Weeks
Once 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.)

The Following Months
As time would pass, more complicated and nuanced issues would crop up. Absent a federal food inspection system (assuming the states didn't hire those workers and maintain the system), there would eventually be a major outbreak of contaminated food, and it would likely only be a matter of time before a company took shortcuts on maintenance and a major transportation disaster ensued. What these companies would likely find, though, is that there reputation would be irretrievably destroyed - absent a federal "seal of approval", company reputations would matter even more and one mistake could be the end of a company.

Interstate commerce would be a curious case as well. Would companies really be hampered by the absence of a federal court system and a means of resolving litigation across state boundaries? Given the amount of cross-border traffic around the world (and shaky rule of law in many regions), it seems safe to say that business may slow, but would not stop - companies would simply find that reputation and honor mean more, and in lieu of pursuing cases in federal courts businesses would simply blackball unreliable counterparties.

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.

A Year After
What would the world look like a year after the federal government was gone? In many respects, it would probably resemble the America of the 18th century, and considerably more responsibility would be shifted back to the citizens.

Instead of EPA regulations, town councils might decide whether to allow business projects to go forward. Instead of Medicare or Social Security, there could be mutual aid societies and more individual savings. Instead of a Food & Drug Administration, perhaps people (or industry) would demand an independent organization like Underwriters Laboratories to develop standards, conduct tests and certify which drugs were safe and effective. Likewise, people would probably see more things like toll roads as the states offload the construction and maintenance of public goods to private companies.

The Bottom Line
Clearly this is just one possible outline of how the disappearance of the fed would look, and does not address topics like international security and the fate (or role) of a national military. Much as readers will likely take issue with individual points, a few overarching themes emerge. First, many people survive in areas of weak (if not nonexistent) national government, and they survive on a day-to-day basis, just as Americans of the 18th century and before survived. Second, perhaps it is past time to review just how far-reaching and ever-present the federal government has become, and whether or not the people of the U.S. rely too much on Washington and too little on their own initiative, creativity and responsibility. While the most ardent critics of the federal government are mistaken when they say the U.S. government does all harm and no good, they may yet have a point, insofar as sometimes "less is more". (For more on a totally free unregulated market, check out Free Markets: What's The Cost?)

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