The need for a new and tremendous belt-tightening by the US government and the costs of the recession to consumers is about to hit like a tidal wave. And the drops in government services to individuals and businesses could be unprecedented. Deficits in this country and elsewhere have become that large a burden.

America is in for a generation of privation that most people alive now have never experienced.

John Lipsky, the International Monetary Fund’s first deputy managing director, warned the nations including the US, UK, Japan, and may EU nations will need to begin to cut government costs as early as next year, according to several media reports of a speech he gave at the the China Development Forum. Reuters reports that Lipsky said “the scale of the adjustment required was so vast that it would have to come through less-generous health and pension benefits, spending cuts and increased tax revenues.”

The effect on the average American citizen is hard to imagine, if Lipsky is right. Social Security, Medicare, and Medicaid costs would most likely have to be cut. The amount of money many people will have for retirement will drop. Taxes could rise to levels that most working Americans have never experienced.

The by-products of higher taxes is that most consumers will have less to spend. That could send the US and other developed nations into a downward spiral where muted consumer activity undermines GDP growth and lower GDP means that ability of countries to pay their deficits is damaged.

Lipsky’s comments come at a time when the US is ramping up government spending, both to stimulate the economy and accommodate and aging population. Lipsky’s view of the world is that America is headed for a harder fall than many nations which have controlled their expenses more carefully than America has.

The middle and upper classes in the US are used to expecting recoveries after recessions that allow them to recuperate from periods when they have to sharply decrease what they spend and the government can lower taxes because of robust economic activity. This time around, it may not work that way.

Douglas A. McIntyre

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