Investment No, Aid Yes?

February 17, 1964

The Jan. 27 issue of the Investment Dealers’ Digest reprints a letter from Secretary Dillon under the following prefatory note:

“Concerned about the effects of the proposed Interest Equalization Tax on foreign securities, the editors of the Digest were especially impressed by an article on the subject which appeared Dec. 16 in Newsweek. Written by Henry Hazlitt . . . it seemed to sum up succinctly the negatives of the proposal. We wrote to Secretary of the Treasury Douglas Dillon for his comments on the legislation and on Mr. Hazlitt’s article. The Secretary’s Jan. 8 response is published below in full.”

In his reply the Secretary begins with a concession: “It is true that in the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital.” But this is my main point.

The Secretary goes on to argue, however, that this does not meet the immediate problem in our balance of payments. This, he insists, can only be met by his proposed “temporary” tax on foreign securities. But if this immediate problem is so urgent, why do we continue to give away billions of dollars in foreign aid? The crucial difference between foreign investment and foreign aid is that, when we invest in foreign countries, we in the long run get our money back, with interest. But when we give away foreign aid we get no money back. Anyone who opposes foreign investment on the ground that it hurts our “balance of payments” should doubly oppose foreign aid.

‘EXPORTS’ GIVEN AWAY

Secretary Dillon contends that foreign aid is “increasingly in the form of U.S. goods and services and hence has a limited adverse effect on our balance of payments. In fiscal 1963, 80 percent of the foreign assistance commitments by the Agency for International Development was tied directly to U.S. goods and services.” This figure has been often used by the Treasury, but without detailed evidence. Congressman Thomas B. Curtis has complained that AID has put out this figure with “no working papers to establish it at all.” And Dillon himself testified in the House hearing on Aug. 20 that only “about half” of foreign economic assistance in calendar 1962 was in the form of U.S. goods and services.

But suppose the 80 percent figure were correct. What would it prove? As Melchior Palyi and other economists have pointed out, “tied” exports for foreign aid generate no payments from abroad. Such “unrequited” exports cannot offset imports for which we have to pay. It is misleading to include them, as we do, with commercial exports for which we get paid.

WILL TAX BACKFIRE?

Secretary Dillon contends that we must levy this tax “only as a temporary measure to meet our problem pending more fundamental solutions,” which, “however, require time.” Yet no fundamental solutions have been adopted. Nor are they even being seriously considered.

The deficit in our balance of payments began in 1958. It has since averaged nearly $3.5 billion a year. It is in the main the result of our own inflationary policies. Since 1957 we have piled up a cumulative budget deficit of $40.5 billion. We are planning another $5 billion deficit for 1965. Our government has also discouraged domestic investment and encouraged foreign investment by holding down interest rates. Yet as one of the “fundamental solutions” for the balance-of-payments problem Dillon astonishingly lists the $11 billion tax cut, which can only make the problem worse by encouraging more inflation and more imports.

The proposed foreign-investment tax may well have exactly the opposite effect from what its sponsors desire. As Allan Sproul, former president of the Federal Reserve Bank of New York, declared in a lecture last November: “We need to avoid experimenting with direct controls, whatever they may be called, which in times of strain may be interpreted as a forerunner of stronger controls of capital outflow, or even of all dealings in foreign exchange, which in turn would heighten the danger of anticipatory withdrawals of foreign funds from our market.”