Joining a national trend, local governments here in fiscally conservative Colorado have taken a meat axe to their budgets in order to bring spending in line with plummeting sales tax revenues. Broomfield, for one, has just cut outlays by $12.2 million, or five percent, postponing dozens of construction projects and instituting a hiring freeze.  Boulder has sliced $3.6 million from this year’s budget and is preparing to trim millions more, since the local business picture is continuing to deteriorate rapidly. (Every resident knows it, too, because of the relentless shuttering of big stores in the relatively new Twenty-Ninth Street mall.)  Lafayette is in somewhat better shape, having initiated layoffs at the beginning of 2009 in anticipation of a drop of at least 10 percent in sales taxes revenue. Meanwhile, my hometown of Superior is preparing a contingency budget, having determined that a 3.7% increase in sales taxes revenues estimated not long ago was far too optimistic.

Across the U.S., local governments have been retrenching in the face of the most severe economic downturn since the 1930s. But suppose cities had followed the lead of the U.S. Government, revving up outlays and socking homeowners with significantly higher property and local taxes, even as they justified such reckless policies with absurdly optimistic recovery projections for 2010 and beyond?  Homeowners would be rioting in the streets — and with good reason, since, unlike the Federal Government, states and municipalities have wisely been prohibited from deficit spending.  When their budgets go into the red, taxpayers feel the pain immediately, resulting in higher levies just as soon as they can be enacted. Just ask someone who lives in Californian, which in its desperation to paper over a giant deficit, has implemented punitive new taxes on workers, employers and motorists.

The Death of Affluence

Does any taxpayer actually believe that state and local governments could grow their way out of the crisis if they were allowed to go deeply into hock? Surely not. And yet, that is what we are being asked to believe as the U.S. government purports to dig the economy out of a deep hole with vast increases in deficit spending. Americans know better but appear to have suspended their disbelief, presumably because a further decline in the economy is just too scary to imagine. This state of denial cannot last, however, because the erosion of our standard of living is too severe, and continuing at a rate too steep, to ignore. Indeed, we are witnessing nothing less than the death of middle class affluence. Nowhere has it been more obvious or painful than in the realization that, for most of us older than 50 , prospects for retirement have vanished.

Meanwhile, the news media are promoting the absurd notion that last week’s rally on Wall Street may have signaled an end to the crisis. In fact, it has barely begun. We give President Obama another six to ten months before he is forced to take a radical new approach. Will it be hyperinflation? If so, expect to see creditors edging toward the exits by mid- to late summer. Gold will be trading well above $1000 at that point, and Treasury bonds in the throes of their worst decline in memory.

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