Cliff Notes: Part One

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As I mentioned in my last post, I have been absolutely gobbling up A Fiscal Cliff. I haven’t enjoyed reading a book this much since fellow Sloper David Stockman’s Great Deformation. As for “Cliff”, I am only five chapters of this rather lengthy twenty chapter book, but I wanted to share some of my notes with you from what I’ve read so far:

  • The country will experience retardation and stagnation, and economic growth give way to financial crises and economic instability
  • The book predicts that eventually there will be an actual default, printing money to avoid a default, drastic spending cuts, tax hikes, and/or the sale of mineral rights
  • Even the elimination of all cabinet departments created over the past 75 years would not close the budget deficit
  • The federal government’s most valuable assets or mineral rights which are worth up to $50 trillion, but this is not an excuse to go crazy with debt. After all, you can only sell what you have one time, and it isn’t yours anymore.
  • The book states that academics agree the federal government cannot collect more than 20% of GDP via taxes
  • Historically the government went into debt during wars but paid it down afterward when the country started debt went up to 30% of GDP but then declined to 6% by the year 1811
  • By the 1820s the country was running surplus is in most years and the general opinion among the public was that government government debt was representative of corruption and lax morals
  • Andrew Jackson was a firm believer in debt freedom and from 1835 to 1837 was the only time in US history were the federal government was debt-free
  • During the 1850s the government ran a surplus is nearly every year and the federal debt was just 1% of GDP in the Civil War came pushing dirt to 31% however it be routed to 3% at the beginning of World War I and on top of that the government balanced its budget every single year from 1866 to 1893
  • Everything changed starting in the 1930s because of the creation of entitlement programs and the rise of Keynesianism
  • The prior peak the federal debt to GDP was 106% in 1946 however in the year 2020 we exceeded that for the first time, pushing the level to 135% which had never been seen in the nations history
  • There is a group that believes the deficits do not matter and that debt does not matter because it is money with you to ourselves but this is incorrect for a variety of reasons including the distorting effect on spending as well as the deadweight cost of tax policy
  • The economist Edgar Browning calculates that it cost taxpayers three dollars to provide a benefit worth one dollar to recipients given the current structure of the government
  • Switzerland has a constitutional amendment which specifically dictates the amount of deficits in debt that are allowed and the amendment passed with overwhelming to 85% support amongst the population. Their economic situation and debt are in a vastly better place than ours.
  • The United States has made many attempts in Congress to get spending under control the the most recent major one was the budget control act from August 2011 when at the time the dead was $14.3 trillion but even though this was supposed to be in place for a full decade it has been whittled down and eroded to the point of meaninglessness

As I hack my way through this book, I suppose the overarching conclusion will be that it’s time for politicians to get their act together and get serious about addressing the deficits and the debt. I think you and I can agree that this won’t happen in a million years, and Congress will address the issue at a very specific time which we can predict with certainty: that is, when they have absolutely no other choice, and the entire financial world is on fire.