27. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon 1

SUBJECT

  • Payments Effects of U.S. Government Transactions, FY 1968-70

Attached at Tab A is Bob Mayo’s report on the balance-of-payments effects of recent and current U.S. Government international transactions. Comments by Arthur Burns and Paul McCracken are at Tabs B and C.2

The key elements of the reports are:

1.
The payments effects of all government transactions leveled off during the past two years at about $2 billion net deficit.
2.
This figure, however, includes window-dressing receipts of about $1.5 billion.
3.
The deficit on regular transactions has thus been about $3.5 billion, although it has shown steady improvement and is expected to diminish by 12% to about $3 billion in FY 1970.
4.
Because this Administration has decided to eschew window-dressing statistical gimmickery, however, the total net payments effect of government transactions will deteriorate this year.
5.
The Defense Department accounts for over two-thirds of the gross payments—almost $5 billion annually—and is responsible for the total net deficit on regular transactions plus offsetting the effect of the special transactions.
6.
Non-defense agency transactions now produce a slight favorable balance on their regular transactions, which should grow somewhat in 1970. Much of the inflow is return on previous loans.
7.
AID, which is often labeled as a major source of the U.S. payments deficit, has steadily reduced its foreign payments to the relatively small figure of $145 million in 1970. This is a good bit less than half its receipts and less than the combined payments of Interior, NASA and the Panama Canal. The AID receipts are mainly repayments on past loans.

Analytically, this report is useful but cannot be simply compared with our overall payments position—as many people do to conclude that “the deficit is caused by the government spending.” This is because there are large offsetting feedbacks to the government expenditures which show up in the private accounts.

For example, Korea and Thailand would not buy as many U.S. exports if they earned no dollars from DoD programs. Even Japan and major countries in Europe adopt easier economic policies because of our military expenditures there, of which some share comes back to us. This is not to say that government expenditures are not a major factor in our payments deficit—but simply to flag the error in simplistic comparisons.

Paul McCracken comments that we should carefully consider the domestic economic effects of the policies, which we inherited from the previous Administration, to minimize foreign expenditures for government programs. He is referring to such practices as the 50 percent preference extended by DoD to domestic suppliers and AID’s tying policies, which create some balance of payments savings but are quite costly in budgetary terms. (Reductions in the level of our overseas programs, as per your recent directive on personnel and the Vietnam troop withdrawals, of course help our balance of payments. McCracken is here referring to the foreign exchange costs of a fixed level of government programs.)

Arthur Burns, on the other hand, suggests that you ask the Treasury Department to make recommendations on steps to reduce further the balance of payments costs of overseas government expenditures. Any such steps would probably carry the increased [Page 74]budgetary costs mentioned by McCracken and have small payments effects, unless they represented major program changes.3

An interagency committee, chaired by Treasury, is in fact already reviewing present policy and will be making recommendations soon on possible changes. I therefore think that you do not need to take any action now. One change—the elimination of the “additionality” requirements under our AID programs—has of course already been made.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments. No classification marking. Bergsten sent this memorandum to Kissinger under cover of an August 26 memorandum indicating it had been revised (from an August 13 version) pursuant to Kissinger’s instructions and comments from McCracken and Burns. Bergsten recommended Kissinger sign the memorandum to the President. (Ibid.)
  2. None of the attachments is printed. Mayo’s memorandum is dated August 8, Burns’ is dated August 11, and McCracken’s is dated August 15.
  3. In the margin next to this paragraph the President wrote “no” and someone added the date 9-24-69. In a September 25 covering memorandum to Kissinger Bergsten interpreted the President’s “no” as pertaining to Burns’ suggestion, in the first sentence of the paragraph, rather than to the analytical point in the second sentence, which he said would put the President in error. Bergsten wrote: “I am sure that Burns did not feel very strongly about his suggestion, which was made August 11, and I see no reasons to pursue the matter any further, since no action is called for under either interpretation. Inaction is particularly appropriate because of the uncertainty over the ‘no’meaning and in view of Burns’ sensitivity over his memos going to the President through you.” On September 29 Kissinger approved Bergsten’s recommendation to take no action on the “no” written in the margin.