Uncle Sam's cynical secret
Several days ago, gifted economics columnist Bruce Bartlett said on NPR that he was puzzled by the prevailing low interest rates despite U.S. government borrowing at magnitudes that would make the Reagan '80s blush.
Bruce, let me help you.
In 1984, when the reelection contest was thundering toward the Reagan Administration, high U.S. interest rates, forced by the FED to quell inflation and also by prodigious federal government borrowing, seemed not conducive to smooth electoral success. The president's poll numbers had already dipped stunningly as a consequence of the deepest recession since the Great Depression of the '30s. The White House urgently needed lower private interest rates in order to make The People less unhappy.
I can imagine the White House consternation as they gathered to discuss how there could be a Harry Houdini escape from the dilemma of this jagged juggernaut.
Ignance: "We gotta get the interest rates down."
Igor: "Yeah, but how? The FED might help a little, but our borrowing is crowding the money markets and shoving interest rates to the moon."
Ignance: "Well, we could reduce the borrowing."
Igor: "Are you kidding? If we reduce the borrowing, we'll have to reduce the spending and we've already got everything we can from school lunches. How do we keep our commitments to contributors, raise taxes?"
Guffaws are heard.
Ignance: "Wait a minute; I have an idea."
Igor: "What now."
Ignance: "Well, since our borrowing is pressuring U.S. money markets, let's sell our bonds on foreign money markets."
Igor: "Great idea, but aren't you overlooking something? We're already selling as many as they will buy. How do we get the Chinese and Japanese to buy more of 'em?"
Ignance: "We make Uncle Sam pay higher rates to foreign nationals than he pays to his own nieces and nephews here."
Igor: (Sarcastically) "How do you expect to get away with that, Adam Smith?"
Ignance: "Hear me out. We pay the same amount of interest; we just repeal the federal income tax on it for our offshore saviors. No one will notice that, but they'll sure notice when our money markets lower their rates."
Igor: "Wow, you've hit it. Brilliant, you're the genius of disingenuousness. Let's get on it. Call the Ways and Means Committee and tell 'em to do it in a closed session of a House-Senate conference; keep it quiet." Ignance: "But what will we do about the Democrats?"
Igor: "Simple; we'll sign a few bills for some of their pet projects. They'll jump at it."
And so they did, the few in the closed-door conference who knew about it. It was kept secret from the rest of the Senate Finance Committee and Ways and Means Committee members. The rest of Congress was kept in the dark, too. A little bird staffer at the conference told me.
Up until then, foreign nationals and their governments had paid 30 percent U.S. federal income taxes on income from their U.S. portfolio investments. That's what was repealed and U.S. government debt grew all the more because of the loss of tax revenue from foreign investors. Suddenly, huge hunks of the U.S. government debt were held by foreigners, mostly Chinese and Japanese - tax free. The land we love became a debtor nation. Call it the hocking of America.
The political trick worked. Interest rates became modest and remain so, despite the current federal borrowing binge. And almost everyone doesn't know why. I know, I was there - and I cast our congressional vote against it. "Then why didn't you tell the public, Andy?"
Don't think I didn't try. I sent a letter detailing the "scammy" hoax to Hobart Rowan, financial editor of The Washington Post. Flabbergasted, he called me here in Indianapolis the next Saturday. We talked for a half hour. Looked like a banner headline in the Sunday edition of the Post; the conniving cat would be out of the bag. Next day, no headline; in fact, no line at all. Someone higher up killed the story. Couldn't get it reported anywhere else either.
In 21st century Washington, the "phrase mongers" came up with a slick and specious slogan, "If you cut taxes [mostly for high income campaign contributors], Congress won't be able to spend so much." Some people actually believed that absurdity. The reality was that "tax and spend" has been replaced by borrow and squander, something much easier for conscientious-less politicians to do. But the low interest rates and cut taxes come at a staggering price. Like the one of Dorian Gray, the debt picture grows more grotesque daily.
Nature strikes back and when the debt balloons beyond its collateral, it will explode into foreclosure by the foreigners. When that happens, our interest rates will rocket, our economy will collapse, our standard of living will plunge and we the people will not be happy. Comedian Roger Price said it: "You can't fool all the people all the time, but if you can do it once, you're good for four years [maybe eight]."
Andy Jacobs Jr. was born and has not yet passed away. We're all pretty much the same - except Andy has a Thoughbite each week on the first page of our Dispatch section.