If George Washington Were Alive, He'd be Reading Your Email

What James Madison (and the rest of the Founding Fathers) would have thought of the NSA and Edward Snowden.

One notable topic not addressed in President Barack Obama's State of the Union speech this year -- at least not in clear, direct language -- was the NSA scandal. Toward the close of his remarks, the president did say that, in the vein of pursuing terrorist networks, he intended to work with Congress to: "reform our surveillance programs because the vital work of our intelligence community depends on public confidence, here and abroad, that privacy of ordinary people is not being violated." There was no admission of wrongdoing or a true promise to scale back surveillance but it did allude, however subtly, to the idea that the agency's perceived violation of privacy is somehow wholly un-American. 

This idea is actually something that FP's David Rothkopf has picked apart in recent columns, writing that, in the years since 9/11, the NSA has engaged in systematic violations of personal privacy and human dignity. On top of which, he believes (as he notes in one column), that by not reining in the NSA, President Barack Obama has failed to protect Americans and others worldwide who have a right to privacy. Rothkopf also argues that by highlighting the National Security Agency's abuses of power, Edward Snowden is carrying on the legacy of James Madison and underscoring the importance of the Fourth Amendment. The conclusion that Rothkopf ultimately makes is that the NSA's overreach today would not have gone over well with Madison or the Founding Fathers.

While there are plenty of grounds on which one can disagree with the tactics employed by the Bush and Obama administrations in combating terrorism, it is a distortion of history to assume that these tactics run counter to the principles and practices of the nation's founders -- as well as a distortion of their position on the importance of intelligence gathering and executive secrecy. James Madison, "the father of the Constitution," is a case in point, for he is frequented portrayed as the personification of a restrained chief executive who championed transparency and was slavishly obedient to the letter of the Constitution. In a sense, Madison was obedient to the Constitution, believing that the power given the president under Article II of that document gave the chief executive the unfettered capability to conduct clandestine operations.

From George Washington to Thomas Jefferson, the key members of the founding generation believed that intelligence operations were essential to the defense of the United States, including the 18th-century equivalent of today's electronic eavesdropping -- clandestine mail opening. Certainly none of the Founders spoke about a "right to privacy," nor did James Madison initiate the effort to amend the Constitution with what became known as a "Bill of Rights." In fact, Madison thought a listing of such rights was misguided, as did Alexander Hamilton and other supporters of the proposed Constitution: "I have never thought the omission [of a Bill of Rights] a material defect, nor been anxious to supply it even by subsequent amendment, for any other reason than that it is anxiously desired by others," wrote Madison.

Rothkopf assembled a number of impressive quotes by Madison in support of the idea that he and other members of the founding generation would be appalled at the "Orwellian" actions of the NSA. (Others, like Rand Paul and Larry Klayman, have also invoked Madison and the Founding Fathers in their opposition of NSA surveillance.) But as the "Happy Warrior" of 1920s American politics, New York's Gov. Al Smith, was fond of saying: let's look at the record.

For starters, Madison collaborated with Alexander Hamilton in drafting The Federalist Papers, which claimed that presidential "secrecy and dispatch" were essential to a successful foreign and military policy. Madison and his co-authors argued that "the business of intelligence" was left for the president to manage "in such a manner as prudence may suggest." As a congressman in 1790, Madison led the effort to create a presidential "secret service fund" that was exempt from traditional congressional oversight -- this allowed the president to spend money for services of a sensitive nature, including intelligence gathering, without revealing to Congress how those monies were spent. (In 1805, as the nation's secretary of state, Madison actually procured a prostitute at the request of a foreign ambassador, dipping into this same public fund, no doubt thinking that a happy ambassador would make for a good friend of the United States.)

Later, as president, Madison withheld information in 1810-1811, when he launched covert operations from the executive office, the details of which were kept from Congress and the American public for decades. Madison's State Department simply lied to British, French, and Spanish envoys about the American machinations in toppling the feeble Spanish regime in West Florida, as well as about their involvement in a failed effort to overthrow the stronger presence of the Spanish government in East Florida. Madison authorized the expenditure of $50,000 from the secret service fund in 1812 (spending the entirety of that fund) to purchase letters written to and from various New England Federalists that allegedly revealed treasonous links with Great Britain. The letters were in the possession of a British spy and were purchased by Madison and Secretary of States James Monroe, who presented them to Congress in an attempt to fuel the war fever and discredit the president's Federalist opponents, all of whom were American citizens.

But, compared to his fellow Founding Fathers, James Madison was the picture of forthrightness. Secrecy and the use of unrestrained clandestine intelligence operations are as American as George Washington, who ran his own mini-NSA during the American Revolution because of the "innumerable ... advantages" that arise from such intelligence gathering, even if this required snooping on your fellow citizens. With all due respect to Glenn Greenwald and Edward Snowden, Washington knew how to tell a lie, and was ruthless in his quest for intelligence, urging his agents to "leave no stone unturned" in their pursuit of secrets. In fact, the Founding Fathers engaged in covert mail opening throughout the revolutionary war; Washington went so far as to provide instructions on successful mail-opening techniques: "contrive a means of opening them [letters] without breaking the seals, take copies of the contents, and then let them go on." Thomas Jefferson, Benjamin Franklin, and John Adams all served on a committee charged with disseminating excerpts from this intercepted mail for propaganda purposes.

When it comes to the Founders' alleged commitment to transparency, it should be noted that many of these same men would go on to suspend the rules of the Articles of Confederation and draft a new Constitution in strict secrecy. Madison's notes on the Constitutional Convention were not released until 1840, over 50 years after the framers assembled in Philadelphia, while the United States Senate met in secret for its first years of existence, following the example set by the Continental Congress. While not a member of the Constitutional Convention, Thomas Jefferson echoed the sentiments of his peers in Philadelphia when he noted that "all nations have found it necessary, that for the advantageous conduct of their affairs" certain secrets should "remain known to their executive functionary only." Jefferson also wrote in 1790 that the Senate "is not supposed by the Constitution to be acquainted with the concerns of the executive department." And in a letter dated 1807, he wrote that "on great occasions every good officer must be ready to risk himself in going beyond the strict line of the law" if necessity so required.    

And though it may not fit with the exalted opinion many Americans have of the founding generation, there's evidence showing that in the 41 years between the time Thomas Jefferson wrote the Declaration of Independence and the time James Madison left the White House in 1817, the Founders sanctioned secret operations involving espionage and deception, kidnapping (George Washington authorized an attempt to kidnap George III's son), bribing foreign leaders, using the clergy and journalists for intelligence gathering, overthrowing a foreign government (the Pasha of Tripoli), and covertly assisting insurgencies designed to overthrow colonial governments in Latin America.                        

The lessons from this assertive use of executive power were not lost on a future American president confronted with disloyalty on the part of his fellow citizens. For all practical purposes, President Abraham Lincoln considered the telegraph companies of his day as wholly owned subsidiaries of the federal government, which routinely intercepted the private communications of American citizens. None of this was seen as a violation of the Fourth Amendment, nor did anyone think that Lincoln had somehow radically diverged from the practices of his esteemed forefathers. A court case generated by Lincoln's unilateral control of intelligence and espionage during the Civil War, Totten vs. United States (1875), led the Supreme Court to unequivocally declare that the president had the authority to "obtain clandestinely" intelligence information "in time of war" or simply "upon matters affecting out foreign relations."

A more accurate appraisal of the Founding Fathers' legacy reveals that they were averse to transparency, were opposed to congressional oversight of intelligence operations, and believed that -- in the Byzantine world of international relations -- America's defense rested in part on the use of intelligence gathering. All of these actions, it should be noted, were designed to protect American liberty. It's really not at all clear -- as Judge Richard Leon said in his verdict -- that Madison "would be 'aghast'" at the sweeping nature of the NSA programs targeting the personal data of U.S. citizens" in its efforts to uncover those consorting with terrorists abroad.      

The restraint on intelligence gathering and the accompanying argument of "privacy" rights that Edward Snowden and Glenn Greenwald invoke is not our Founding Fathers' privacy, nor is it their understanding of the power granted the president in Article II of the Constitution -- this is the "privacy" of absolutists like the American Civil Liberties Union. Additionally, the notion that the so-called "privacy" protections of the Bill of Rights should be extended "worldwide" would be categorically rejected by the Founding Fathers. Snowden and Greenwald and their supporters are free to argue for an absolutist interpretation of privacy and the dismantling of the American "surveillance state," but enlisting the Founding Fathers in support of this position is a distortion of history.


The Great Debtscape

Why China's economy is not going to be swallowed alive by its massive deficit.

Since the global financial crisis of 2008, China has persistently defied skeptics who warned of a severe recession or financial collapse. Today the skeptics are louder than ever, as they point to the difficulty Beijing will face in maintaining economic growth even as it tries to discipline an unruly financial sector and cut back on debt. "China's debt-fueled boom is in danger of turning to bust," Ruchir Sharma, head of Morgan Stanley Investment Management's emerging-markets team, warned on Jan. 27. "Only five developing countries have had a credit boom nearly as big as China's. All of them went on to suffer a credit crisis and a major economic slowdown."

But a glance at China's recent history shows why prophecies of doom for the world's second-largest economy should be treated with suspicion.

The first worry after the global crisis was that the country would be unable to wean itself of its addiction to exports. Exports had helped China's economy grow, but fed global instability because of the large trade deficits countries like the United States had to run to offset China's huge surpluses. Yet in the past five years, China's export growth has slowed into the low single digits, the country's share of global exports has stabilized, and the trade surplus has shrunk from 8 percent of GDP to a more sustainable 2 percent.

The next concern was that China would not be able to kick its reliance on infrastructure spending. To maintain economic momentum amid the export slowdown, Beijing authorized local governments to jack up investments, mainly in municipal and transport infrastructure. This drove up the investment-GDP ratio to 47 percent, several points higher than the previous peaks achieved by Japan and South Korea, the other investment-intensive East Asian economies, in similar periods of economic development. Yet in the past two years, infrastructure spending has slowed dramatically, as Beijing has tried to rein in local governments. China's economic growth now relies as much on consumer spending -- which continues to grow at 7 to 8 percent annually in inflation-adjusted terms -- as it does on investment.

In short, over the past five years China has rectified one of its famous "imbalances" -- excessive reliance on external demand -- and made a good start on fixing the other (excessive reliance on investment spending). But a growing chorus of observers views China's economic future with trepidation. In mid-January, Ray Dalio, who runs Bridgewater Associates, the world's biggest hedge fund, declared that China was a bubble. And earlier that month, Patrick Chovanec, a well-known China bear, warned that "China's leaders are riding a runaway train that they don't quite know how to stop."

These worries are plausible. There is no question that China's economy has slowed substantially. From an average rate of more than 11 percent in the last decade, growth is now running at around 7.5 percent, and a further slowdown in the next couple of years is likely. Second, since the global crisis, China's authorities have supported growth by permitting a huge increase in debt. From 140 percent of GDP in 2008, the nation's gross debt soared to 210 percent in 2013. Much of that new debt financed infrastructure projects by local governments, and capacity expansions by the state-owned companies that provided the goods and services necessary for those projects. While a lot of that infrastructure will prove economically beneficial in the long run, in the short term it will generate financial losses. The big questions for China over the next two years are, can it get its debt under control, and, if so, how much of a toll will that take on economic growth?

It is perfectly reasonable to worry that the cost of reining in runaway debt will be another big growth slowdown. It is also reasonable to worry that as Beijing tries to solve the debt problem, the risk of a major financial accident will go up. Since April, the Chinese monetary authorities have tried to curb lending by raising short-term interest rates and imposing more stringent controls on the non-bank "shadow finance" sector. The sector, which includes lightly-regulated finance companies that offer depositors high returns by investing in risky assets, has been responsible for much of the increase in borrowing since 2011. As a result of these new government controls, funding costs for companies and financial institutions are two or three percentage points higher than they were just six months ago, and year-on-year growth in total credit has slowed from 23 percent to less than 18 percent.

These are necessary measures, but they will exact a price. While local governments will be allowed to roll over loans that they are unable to repay, cash-strapped companies probably will not. Corporate bankruptcies will rise, and this in turn could precipitate defaults in the so-called wealth-management and trust products that provide the funding for many "shadow" loans. Wealth-management and trust products offer investors much higher rates of return than ordinary bank deposits -- anywhere from 5 percent to 15 percent. Unlike bank deposits (which are not formally insured but enjoy a strong implicit guarantee from the government), these products are explicitly not guaranteed either by the government or by the financial institutions that sell them. But many investors assume that the government will bail them out -- so defaults could cause a crisis of confidence in China's financial system.

These risks are not simply hypothetical. For weeks, investors have anxiously watched as China Credit Trust, a shadow lender, has worked furiously to avoid default on a $496 million trust product, maturing on Jan. 31, that is built around a loan to a coal-mining magnate in central China who is under arrest. A last-minute deal preserved investors' capital, though not the interest. But it is very possible that some other large-scale trust or wealth-management product will default this year, sending shock waves through the financial system.

Yet despite these undoubted risks, the doomsayers are likely to be disappointed again, and China will manage to avoid both a financial crisis and a severe recession. Instead, it will probably succeed in slowly bringing its debt problem under control, and GDP growth will settle at a slower -- but still more than respectable -- pace of 6-7 percent annual growth over the next three years.

One cause for optimism is that the government of President Xi Jinping, which took power about a year ago, is clearly committed to a sustained policy of tighter money and slower but higher-quality growth. Another is that the systemic risks of a wealth-management or trust product default can be contained, because these products still account for less than 15 percent of the funding base of China's financial system -- the rest comes from stable bank deposits.

Most important, the pessimistic view underestimates the flexibility and dynamism of China's growing private sector. It is this dynamism that has enabled China to absorb the serial shocks of a global liquidity crisis, a sharp decline in export growth, and the more recent slowdown in infrastructure investment, while still maintaining one of the world's fastest economic growth rates. This dynamism is reflected in the small-cap ChiNext stock market in Shenzhen, which was one of the world's best-performing stock markets in 2013 with a gain of 83 percent -- compared to an 8 percent decline in the Shanghai stock index, which is dominated by state-owned firms. And it shows up in the spectacular performance of Chinese Internet companies, which despite the constraints of government censorship have created one of the world's biggest and most vibrant markets for e-commerce, social networking, and online gaming. Betting against the power of China's entrepreneurial spirit has been a losing wager for the last three decades. The odds are it will continue to be a bad bet for several more years to come.