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February 23, 2009

Clinton Grovels at the Panda's Door

By Lee Cary
Hillary Clinton, Presidential Candidate, March 2007:

"Clinton is making America's dependence on Chinese investors a central theme of her 2008 message. She took to the CNBC airwaves Thursday [March 1, 2007] to declare that America was undergoing ‘a slow erosion of our own economic sovereignty.'  In a letter to Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, Clinton said Wednesday's stock market sell-off ‘underscores the exposure of our economy to economic developments in countries like China. As we have been running trade and budget deficits, they have been buying our debt and in essence becoming our banker'... She argued in her letter to Paulson and Bernanke that Congress and the president had to ‘ensure foreign governments don't own too much of our public debt.'" Source

Hillary Clinton, Secretary of State, February 2009:

"Clinton told [China's President] Hu she felt like [sic] a beginning of ‘a new era' of bilateral relations characterized by ‘positive cooperation.' Clinton's visit to Beijing, the last leg of her inaugural overseas trip, marked the beginning of face-to-face diplomacy between the two countries since the Obama administration took office last month... She thanked China for its ‘continued confidence in U.S. Treasuries.' China replaced Japan as the top holder of U.S. treasury debt last September, with its overall holding hitting 585 billion U.S. dollars, according to U.S. Treasury data.  Source (news.Xinhuanet.com) 

While visiting China recently, Secretary of State Hillary Clinton groveled for more money at the Panda's door, and got it. 

Two years ago, presidential candidate Hillary Clinton voiced concern that the Bush administration was leaning too heavily on foreign nations to underwrite the federal debt.

Today, though, China's purchase of U.S. Treasuries is welcomed news to the Obama administration.

Clinton's shift in attitude symbolizes a federal government that, through several administrations, resembles an alcoholic who repeatedly promises to cut back on drinking. Then, in the wake of a personal challenge, rushes to the bar to order a double, on credit.

For the purposes of this article, there are three layers to the public debt. (1) The total amount. (2) The portion of U.S. Treasury Securities owned by other countries. And (3) the leading foreign holder today of those Securities - the Panda, as in China.

(1) Growth of the public debt is largely a result of historically out-of-control Human Resources (social services programs) expenditures.

The total public debt number is growing beyond comprehension. Imagine you're in Colorado Springs, Colorado looking up toward the top of Pike's Peak.  That's the slope of the upward trend line of America's public debt.

The preface to the 206-pages document entitled "The 2008 Financial Report of the U.S. Government," an analysis compiled by the Department of the Treasury, is a 12-pages summary entitled "A Citizen's Guide to the 2008 Financial Report of the United States Government." (Go here to view only the Guide.)  Page 3 of the Citizen's Guide displays a line graph version of the slope up Pike's Peak. Its visual impact will command your attention.

The overall message from the Department of the Treasury is summarized in the subheading, "An Unsustainable Fiscal Path" under the heading "Where We Are Headed." (p.7)

We're headed up, and then over, the cliff.

According to an historical study of the federal debt by Robert E. Kelly entitled The National Debt of the United States, 1941 to 2008, this unsustainable fiscal path is on autopilot. It's being directed by an ever-increasing portion of the federal budget allocated to legislated entitlement programs (Human Resources) that began, in earnest, not with FDR, but with LBJ.

FDR's programs did not work, but new relationships forged during those years between the people and Washington remained, and they paved the way for the social service activities that now make up the Human Resources cost center. (p. 10)

Total breakaway from past disciplines began when Lyndon Johnson because president. His no-holds-barred approach to spending what he wanted, when he wanted, led to the debt we have today. (p. 349)

Kelly summarizes the historical evolution of the public debt by focusing on the major categories of federal expenditures:

Defense - It approaches the humorous to hear politicians blame continued deficits on wars. Only 18 percent of the total deficits accumulated since 1941 can be fairly assigned to Defense.


Interest - The cost of money should never be a dominant number in a federal budget. It was too high in 1960 because debt was too high (some World War II debt was still outstanding), and it was even higher in 2008 for the same basic reason. The only way to substantially decrease its cost is to substantially reduce the size of debt.

Government - With some exceptions, succeeding presidents did a good job of controlling the cost of Government despite the fact that 10 percent of the accumulated deficits came from this cost center.  Generally speaking, uncontrollable external events caused the unfunded spending to a degree that would have been recoverable in a saner budget environment.

Human Resources - This cost center is the core of the budget problem. Accumulated unfunded costs represent 66 percent of the additions to public debt since 1941.  Absent this level of spending, public debt of $5.3 trillion in 2008 (estimated) would have been $3.4 trillion lower (70 percent) and Interest cost of 2008 would have been about 3 percent of all spending.

Politically, the Human Resources portion of the budget constitutes the Lazarus of federal fiscal policy. We're even now watching a reversal of President Clinton's welfare reform happen through President Obama's economic stimulus bill.  

Here are just three examples of out-of-control growth in elements within the Human Resources cost center (Source: Executive Office of the President of the United States, Fiscal Year 2009, Historical Tables, Table 8.5 - Outlays for Mandatory and Related Programs: 1962-2013, pp. 138-149):

Medicaid in 1962 was budgeted at $0.5 million (all numbers in FY 2000 dollars). The estimated 2009 expenditure is $215,662 million. 

Federal employee retirement and disability was $9.1 million in 1962.  Estimated for 2009 - $113,681 million. 

Food and nutrition assistance: $1.3 million, 1962; $56,336 million, 2009

Legislatively mandated entitlement programs are consuming the federal budget and driving up debt and the interest necessary to service that debt. Again, quoting from Kelly's book,

Until all federal fringes and programs are put on the table and sorted out in terms of value and priority, the federal budget is in a condition of systemic deficits for as long as presidents maintain an adequate military force. (p. 221)

In the current political climate, we can anticipate a raid on the largest remaining discretionary budget item, defense budget, in order to maintain out-of-control spending on Human Resources. Why? Because, long ago, the federal government's budgeting emphasis shifted away from providing for the common defense and toward providing a myriad of social services. And that emphasis promises to accelerate during the Obama administration.

LBJ's Great Society has become the Dependent Society. With more to come. 

New York Times columnist Paul Krugman recently wrote an op-ed piece entitled "Franklin Delano Obama?" A more accurate title would have been "Barack Hussein Johnson."

But in case you're tempted to blame only Democrat administrations, consider this:

Under Presidents Nixon, Ford and Carter, the average increase in Human Resources for four years was 76.5%.  During that same period, the average increase in revenue was 47.1%. In a nutshell, that is the basic explanation for rising debt. (Kelly, p. 201)

Culpability for growing the public debt is truly bipartisan. One parent is named Democrat. The other, Republican.

(2) The importance of the role of foreign nations in underwriting our public debt through the purchase of U.S. Treasury Securities is increasing.

In 1997, foreigners owned about 38% of U.S. Treasuries. In 2007, the percentage had risen to 52%. The trend is tracking steady upward as increasingly the U.S. Government looks to other nations' monies to underwrite budget deficits. 

(3)  China has become the leading foreign underwriter of our public debt.

The Panda is our favorite bartender, now holding approximately 22% of foreign-owned U.S. Securities. Japan, once in first place, is second at 18.7%; the United Kingdom third at 11.7%. 

Even before our Secretary of State became a presidential candidate, she warned about a risk to American sovereignty posed by our indebtedness to China. Back in 2005, she took this position:

"Hillary Clinton has met the enemy, and it is foreign investment. She unleashed a barnburner of a speech at a New York fundraising event the other day and reserved special salvos for China. She warned that we are ‘giving up our fiscal sovereignty' to the Chinese. Our borrowing from Beijing makes it impossible to ‘get tougher on China,' she said, because, ‘How do you get tough on your banker?'" (Source)

That was then. This is now. And now, more than ever, we need to be nice to the bartender so he'll keep filling our glass, as we run up the tab. And since we're among his best customers for exported goods, he needs us to keep drinking, for now anyway.

Conclusion:  America's foreign policy is becoming a lap dog to a federal debt that grows heavier by the year.

I don't worry about my children or grandchildren paying off the public debt.  It's won't happen. It can't happen.

I do wonder how their America will be able to merely pay the mounting net interest on the public debt. That's the most imminent challenge.  

The projection for the growth in net interest on the public debt is displayed on page 9 of the 206-pages Department of the Treasury document here.

If you have young children, or grandchildren, you might want to visit an actual bartender before looking at it. It will sober you up.
on "Clinton Grovels at the Panda's Door"