Mix 'n match creditors with causes
By Angie Drobnic Holan
Published on Friday, June 20th, 2008 at 1:41 p.m.
SUMMARY: We take apart popular notions on foreign debt and oil imports. Economists say the relationship is complicated.
The candidates for president are fond of talking about how we like to borrow from Peter to pay Paul, and how bad this is. But they like to play mix n' match with who's lending us the money, and what we're buying.
Sen. John McCain said we're borrowing money from the Saudis to buy their oil, creating "dependency and debt."
Sen. Hillary Clinton lamented many times on the campaign trail that we were borrowing money from China to buy oil. She said it was why we couldn't "get tough" with them on trade.
And Sen. Barack Obama said we borrow money from China and Saudi Arabia to pay for the war in Iraq, which makes us "weaker."
Who's right? Let's put it this way: every one of them has a point, which is exactly why none of them really has it right. We can explain.
Let's look at Obama's claim first, which is a bit more straightforward than the claims about oil.
"We took out a credit card from the bank of China and the bank of Saudi in the name of our kids, borrowing money to finance this war," Obama said on the campaign trail in May 2008. "You're going to be paying them interest for generations to come -- that makes us weaker."
Obama's correct in his implication that the U.S. is borrowing money to fund the war, because the U.S. government is running budget deficits, meaning the government is spending more money than it brings in through taxes and fees.
Of course, the government cannot just print extra paper money when it needs to spend or it would devalue U.S. currency. Instead, it issues, or more precisely sells, U.S. Treasury securities, which are simply IOUs that guarantee repayment with interest. Many U.S. citizens buy them, often in the form of U.S. bonds, but so do many foreign countries, who see them as a safe, stable investment.
The number one holder of U.S. Treasury securities among foreign countries isn't China or Saudi Arabia. It's actually Japan. China is number two, the United Kingdom is number three, and a group of oil-producing countries (which includes Saudi Arabia) is number four.
So, here's the problem with Obama's argument. And with McCain's. And with Clinton's, while we're at it. The bonds the government sells are not program-specific so there is no direct relationship between the holder of bonds and any particular expense of the U.S. government. Obama could have easily said that Japan or the United Kingdom is lending us money to pay for the war, and that would have been just as true as what he did say.
McCain's statement is a little different, but the principle is largely the same.
"We are borrowing from foreign lenders to buy oil from foreign producers," he said in a Houston speech. "In the world's capital markets, often we are even borrowing Saudi money for Saudi oil. For them, the happy result is that they are both supplier and creditor to the most productive economy on earth. For us, the result is both dependency and debt.
"Over time, in interest payments, we lose trillions of dollars that could have been better invested in American enterprises. And we lose value in the dollar itself, as our debt portfolio undermines confidence in the American economy."
It's clear from this context that McCain is talking about the overall American economy, not just government spending. And when he says "borrowing", he doesn't mean a literal loan from a foreign country's government. Rather, it's the investments that foreigners make -- through buying bonds, but also through investments in the private sector -- because they see America as a good place to invest their money and want to keep their wealth in dollars.
Economists we talked to say McCain is right that collectively the United States as a whole spends more than it saves.
"As a country, we borrow because American households save very little and the government runs large budget deficits. As a result, we have a saving deficit that can only be financed by borrowing from abroad," said Barry Bosworth, an economist with the Brookings Institute, a nonpartisan research group.
We also import much more oil than we produce -- a lot more -- and that leads us to the second part of McCain's debt equation.
But as with the spending in the Obama example, there's no direct line between borrowing money from the Saudis and buying their oil, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC., who also blogs for the liberal magazine The American Prospect.
"What McCain says about Saudi Arabia and oil would be equally true of any imported good from any country," Baker said. "China is also a huge buyer of dollars, so they are lending us the money to buy their clothes."
Jerry Taylor, an economist with the libertarian Cato Institute, had the harshest assessment of McCain's comments.
"All trade across borders implies some degree of 'dependency,' as John McCain seems to define the term. If 'dependency' is bad, then free trade is bad," Taylor wrote us via email. "Restricting investments to 'American enterprises' is to restrict profit opportunity."
Bosworth says McCain is connecting problems -- low savings and dependence on costly foreign oil -- that are really separate issues.
"I don't think that there is any link between oil prices causing the low saving of American households or the government's budget deficits," he said. "Both preceded the rise in oil prices. Some people will prefer a solution that increases energy supply and others will argue that it is time to reduce demand. I don't think the lack of saving will play much of a role."
In both cases, though, McCain and Obama are trying to make a direct link between the dangers of running big deficits and borrowing money from abroad with the issues of their choice. For McCain, it's oil importation and for Obama it's the war in Iraq.
The fact that both of them are right to some degree only demonstrates that neither one of them is completely accurate.
Department of Treasury, Major foreign holders of Treasury securities , April 2008
Department of Commerce, International balance of payments
New York Times, A Map of the Oil World, Nov. 6, 2007
Interview with Barry Bosworth of the Brookings Institution.
Interview with Dean Baker of the Center for Economic and Policy Research.
Interview with Jerry Taylor of the Cato Institute.
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