Friday, September 23, 2005

Semantics - The Threshold Necessary To Be Called A Liar   posted by TangoMan @ 9/23/2005 10:58:00 PM

For the last few days I've been involved in an ongoing debate with Steve Verdon and one of his readers, Victor, on whether President Clinton is a bald-faced liar for making this statement:

On the US budget, Clinton warned that the federal deficit may be coming untenable, driven by foreign wars, the post-hurricane recovery programme and tax cuts that benefitted just the richest one percent of the US population, himself included.

"What Americans need to understand is that ... every single day of the year, our government goes into the market and borrows money from other countries to finance Iraq, Afghanistan, Katrina, and our tax cuts," he said.

"We have never done this before. Never in the history of our republic have we ever financed a conflict, military conflict, by borrowing money from somewhere else."--emphasis added

Clinton added: "We depend on Japan, China, the United Kingdom, Saudi Arabia, and Korea primarily to basically loan us money every day of the year to cover my tax cut and these conflicts and Katrina. I don't think it makes any sense."

After a few rounds of back and forth it looks like we've adopted two differing interpretations of what "financed" means. Steve and Victor argue from the default position that there have always been significant foreign debt holders of US Securities, and their default hypothesis must be refuted entirely by accounting for 100% of the debt sourcing. To account for less than 100% automatically implies foreign contribution, and even an insignificant foreign contribution, falsifies President Clinton's statement. I'm interpreting "financed" to mean the costs of the entire endeavor, not simply a minor part of the endeavor. This seems to be the more common usage, such as "I financed my house with a $600,000 mortgage from the bank" being a true statement even though I received a $5000 loan from my father-in-law in order to help with the downpayment.

Let's get into the details of the argument. Steve points to WWII as the case to prove that President Clinton is lying. I pointed out that on June 30, 1941 the National Debt stood at $49 Billion and that the debt grew to $259 Billion by June 30, 1945 and during that time there were 8 War Bond Drives which raised $185.7 Billion and that more traditional financial instruments, like Treasury bonds and Certificates of Indebtedness, were also being marketed. The War Bonds by themselves accounted for 88.4% of the proceeds borrowed. Turning to another source, (see Figure 12,) we see that there was no debt issued under the Foreign Government Series until 1960. I certainly wouldn't conclude that the WWII US war effort was financed by foreign borrowing.

Aside from sticking to the position that any amount of foreign borrowing, no matter how minor, invalidates President Clinton's position, Steve insists that the likely points of foreign capital were Canada and Britain. I think that contention unlikely, considering they had entered into WWII two years before the US and each were on a massive war footing with their own War Bond Drives, and in the case of Britain, were already receiving aid from the US in the form of Lend-Lease:

On 11th March 1941, Congress passed the Lend-Lease Act. The legislation gave President Franklin D. Roosevelt the powers to sell, transfer, exchange, lend equipment to any country to help it defend itself against the Axis powers.

A sum of $50 billion was appropriated by Congress for Lend-Lease. The money went to 38 different countries with Britain receiving over $31 billion. Over the next few years the British government repaid $650 million of this sum.

[ . . . . ]

Britain was in pawn, at the very time that Attlee was fighting to exert some influence on the postwar European settlement. The only solution was to negotiate a huge American loan, the repayment and servicing of which placed a burden on Britain's balance of payments right into the twenty-first century.

The rest of the Commonwealth joined with Britain in fighting against the Axis powers before the US joined the war. Their economies were also set on a war footing, which included extraordinary measures, such as found in Australia:

- the fixing of profit margins in industry;
- restrictions on the costs allowed for building or renovations;
- the pegging of prices;

I find that to posit that the private capital of the citizens was being used to finance the US deficit to be incongruent with the massive capital requirements that their countries were facing for at least 2 years before the US deficit started to rise. Isn't it more parsimonious to assume that the capital was being soaked up by their own governments? I looked for information on foreign exchange controls but couldn't find any information in my searches. Does any one know if such controls existed during the war period.

So, if not Canada and Britain, which countries were the major financiers of our debt? Japan, China, France, Germany, Saudia Arabia, Korea, the colonies of Africa? Anyone see a problem here? Maybe the Germans wouldn't have minded if the neutral Swiss financed the American war effort against them? Maybe the countries that financied our WWII debt were Boliva and Panama? The coffee barons must have had a lot of surplus capital that they wanted to invest in safe instruments.

So, WWII seems to me to be a bust as a case for falsification. Victor follows in his comments with the case of the Revolutionary War being financied by the Dutch and the run-up in debt during the Vietnam War era. If we couldn't agree on the semantics of financing a war like WWII how are we going to come to an agreement on whether a Republic exists before it wins a revolution?

On the issue of Vietnam, let's go back to President Clinton's text. The overall context of the remarks makes clear that he is concerned by the historical anomaly of cutting taxes and borrowing the foregone tax revenue in order to finance the tax cuts, the war effort, massively increased domestic spending and disaster reponse. There is a case to be made that some, if not all, of the additional borrowing could have been replaced with tax revenues absent the tax cuts. Underlying President Clinton's remarks are what I take to be two moral arguments common to the Democratic critique: 1.) It is immoral to not ask the citizens to sacrifice in times of national crisis and instead expect future generations to make the required sacrifice, and; 2.) It is immoral to actually lower taxes and raise discretionary domestic spending, thus necessitating borrowing, in times of national crisis and burdening future generations with the debt obligations. The added debt, much of the which is being supplied by foreign entities, would be smaller if tax cuts weren't implemented.

Now we got into a side argument about whether foreign sourced debt is less preferable to domestically sourced debt and my position is that any effort to broaden the market for the debt will lower the cost of servicing that debt and thus create a benefit for US taxpayers. However, President Clinton isn't saying having foreigners buy our debt is a negative for the US. His position is that the fiscal mismanagement we're seeing from President Bush is unprecedented in the history of the Republic.

Let's look at the broader financial indicators that occured during WWII (1941-1945), the Korean War (1950-1953) and the Vietnam War (1965-1973) and see how the Federal Government's finances were being managed compared to the Iraq War period (2001-2004).

U.S. Fiscal Indicators During Periods of War
YearPublic Debt/GDP (%)Top Marginal Tax Rate (%)Individual Tax/GDP (%)Corporate Tax/GDP (%)Excise Tax/GDP (%)Other Tax/GDP (%)
World War II
1941 42.3 81.00 1.2 1.9 2.2 0.7
1942 47.0 88.00 2.3 3.3 2.4 0.6
1943 70.9 88.00 3.6 5.3 2.3 0.4
1944 88.3 94.00 9.4 7.1 2.3 0.5
1945 106.2 94.00 8.3 7.2 2.8 0.5
Korean War
1950 80.2 91.00 5.8 3.8 2.8 0.5
1951 66.9 91.00 6.7 4.4 2.7 0.5
1952 70.9 88.00 3.6 5.3 2.3 0.4
1953 88.3 94.00 9.4 7.1 2.3 0.5
Vietnam War
1965 37.9 70.00 7.1 3.7 2.1 0.8
1966 34.9 70.00 7.3 4.0 1.7 0.9
1967 32.9 70.00 7.6 4.2 1.7 0.9
1968 33.3 75.25 7.9 3.3 1.6 0.9
1969 29.3 77.00 9.2 3.9 1.6 0.9
1970 28.0 71.75 8.9 3.2 1.6 0.9
1971 28.1 70.00 8.0 2.5 1.5 0.9
1972 27.4 70.00 8.0 2.7 1.3 1.0
1973 26.0 70.00 7.9 2.8 1.2 0.9
Iraq War
2001 33.1 38.60 9.9 1.5 0.7 0.9
2002 34.1 38.60 8.3 1.4 0.7 0.9
2003 36.1 35.00 7.3 1.2 0.6 0.7
2004 37.2 35.00 7.0 1.6 0.6 0.7

You'll note that there was a big increase in Public Debt during World War II, but there was a steady rate of decreasing the Public Debt/GDP ratio through the Korean and Vietnam Wars. The top marginal tax rate was either raised, or reduced to the long term average rate, during those wars. The contribution of individual tax collected increased as a share of GDP during times of war. It is only during the administration of President Bush and the Iraq war that all of these indicators don't follow historical patterns. At times of war we usually make the sacrifices needed to finance those wars, rather than pushing the cost onto the backs of our children while we add irresponsibilty onto irresponsibility by backing multiple tax cuts that have disproportionate benefit across socio-economic classes.

The financing of the Iraq War is different from that of the Vietnam War, in that while we increased our sale of debt instruments abroad during the Vietnam period, we were also growing our economy at such a rate that the added debt was actually diminishing our debt burden as a percentage of our GDP. President Bush's mismanagement of our treasury has resulted in increased borrowing adding to our debt burden as a percentage of our GDP while at the same time decreasing the share of individual tax collections as a percentage of GDP. We've reduced individual tax collections by 2.9% of GDP and increased our debt by 4.1% of GDP. The added financial burden of the Iraq War has been entirely financed by debt. This report (Table #20) shows that in the period July 2002 - July 2004, China has increased its portfolio of US Long Term Debt Securities from $165 Billion to $360 Billion and Japan increased their holdings from $411 Billion to $736 Billion. These two countries alone can account for all of the debt that was issued to finance our war efforts in Iraq.

So, it sure doesn't look to me like President Clinton was out to take a cheap shot at the fiscal policies of the Bush Administration - he had the facts behind him and this was in fact a substantive shot at the fiscal mismanagement we're seeing from the "Party of Spending Like Drunken Sailers", once known as the Republicans. Never before have we financed a war by increasing our Public Debt/GDP and borrowed those funds from abroad.

Lastly, when will we get serious about fiscal management if not at times like this? If we can't show fiscal maturity during a time of war and rebuilding after a disaster, how severe will a future crisis have to be to instill the discipline we'll need to get our fiscal house in order?

Update: Steve Sailer has a piece on the cost-benefit analysis of the Iraq War done by the AEI-Brookings Joint Center for Regulatory Studies.