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Julian Sanchez | March 14, 2006

Ronald Bailey recalls the last panic over mysterious furrnerrs buying up American "critical infrastructure."

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|3.14.06 @ 5:03PM|#

I remember many years ago there was a big to-do about a Japanese company buying Rockafeller Center. Even back then I didn't understand why it was such a big deal, it wasn't like they were going to take the buildings and move them to Tokyo.

Although I guess they could if they wanted to.

|3.14.06 @ 5:08PM|#

And I also remember that some years after the Japanese purchase of Rock Center, some crafty Americans bought it back for a lower price......

|3.14.06 @ 5:10PM|#

That's what I remember most about the Rockefeller Center sale: analysts said at the time that it was a bad deal for the Japanese and they had paid too much. If you look at the things they were buying, they were mostly brand names, instantly recognizable icons that would be impressive to the stockholders back home.

The American owners were smart to unload them at the price the Japanese were offering and they probably invested the money they made wisely. In that period the Japanese were pretty flush and were bidding up the price of artworks, too.

|3.14.06 @ 5:16PM|#

Hunter is introducing legislation this week that would require majority U.S. ownership of "critical infrastructure."

Hunter should point out that this legislation will decrease the trade deficit, thus allowing the economically illiterate to get on board with the nationally bigoted.

R C Dean|3.14.06 @ 5:41PM|#

Actually, wouldn't prohibiting the sale of American goods/property ("critical infrastructure") to furriners make the trade deficit worse?

Captain Holly|3.14.06 @ 5:50PM|#

Ah yes, I remember it well.

The best hysterical manifestation of the Japanophobia of the late '80's was the dark suggestion that the real estate deal was somehow part of an organized plot to get back at America for World War II.

I swear I read that in a major news publication, but I don't remember which. However, given the wild accusations about DPW during the past few weeks, it doesn't sound very far-fetched.

KipEsquire|3.14.06 @ 5:53PM|#

The Japanese bought an interest in the mortgage underlying Rockefeller Center, not the title to property itself.

|3.14.06 @ 5:58PM|#

American goods and American property are on opposite sides of the fiction that is the trade deficit. The foreign purchases regulated by this bill represent repatriation of foreign owned dollars back to the US as investments in the US.

So the investment surplus decreases. The investment surplus is equal to the trade deficit, but has the opposite sign.

The second order effects of this legislation might even have a bigger impact on the trade deficit. Foreigners are less likely to want to hold dollars, so the prices of imports to the US go up, and the trade deficit goes down. And the decreased investment in the US likely induces a recession, again causing the trade deficit to go down.

All in all, bad news for the US, as all protectionism is.

|3.14.06 @ 6:05PM|#

I remember when the investment company I was workin' for bought so many of those Japanese portfolios back after the Asian currency meltdown too. ...We made a bundle partin' those babies out.

I think part of the reason people are gettin' so wacky about this foreigners runnin' our ports thing is because they've been more or less spoon fed paranoia for so long now. ...and the transition to rational thinking can be a toughie.

Al Qaeda's so scary that we have to monitor your phone calls, we have to know what you're reading, we have to know what you search for on Google, we have to hold American citizens without charge, and, yes, we have to torture people, but the people runnin' our ports?

...eh, no biggie.

We've been told for so long that we aren't sufficiently terrified. ...It's no wonder people are doin' a double-take.

Jadagul|3.14.06 @ 6:16PM|#

RC Dean: MikeP's answer was exactly right, but I might have put it differently. The short answer is that "critical infrastructure" is an asset, not a good; the trade deficit goes up when we trade away our assets for foreign goods. If we restrict sale of our assets, we can't trade as many assets for goods and the deficit drops.

R C Dean|3.14.06 @ 6:53PM|#

So, if I trade a billion dollars for foreign tennis shoes, the trade deficit goes up.

If I trade American tennis shoes for a billion dollars, the trade deficit goes down.

If I trade a bridge ("critical infrastructure") for a billion dollars, wouldn't the trade deficit go down, not up? What's the difference between trading a bridge for money and trading tennis shoes for money?

Maybe its the distinction between "goods" and "assets" that I'm a little fuzzy on. Don't know about you, but if I had a warehouse with a billion dollars of Nikes in it, I would think that was a billion dollar asset.

|3.14.06 @ 7:24PM|#

R C Dean,

Your concerns go a long way to explain why I called the trade deficit a fiction.

Hot off the presses is the year 2005 accounts balance sheet. The main accounting table is at the bottom.

You can look through that table and see that what defines the trade deficit is nothing more than what you put on one side of a minus sign and what you put on the other.

Strictly speaking, the trade deficit is exported goods and services minus imported goods and services. It is a particularly mercantilist prejudice to think that this is the most important metric on the balance sheet. But that attitude sells a lot of newspapers and moves a lot of legislation.

The relevance to the current topic is that every dollar of that trade deficit comes back to the other side of the balance sheet as an investment in US assets. If legislation limits those investments, it limits trade itself.

|3.14.06 @ 8:03PM|#

I remember Japanophobia. It survived into the 90s. I remember my Republican room mate explaining that Japanese people thought of business as war. As war, joe!

It's wishful thinking to pretend the discussion around the port deal was equivalent to that.

|3.14.06 @ 8:06PM|#

It's wishful thinking to pretend the discussion around the port deal was equivalent to that.

So, do you think it's more to do with what I was talkin' about above, or are you sayin' that there really are legitimate security questions?

|3.14.06 @ 8:14PM|#

If anyone wants to see early 90's Japanophobia, rent Robocop III, where the Japs help OCP to turn out the residents of Detriot for the future Delta City. What makes it worse is the use of robotic ninjas to try to kill robocop, it was just too damn silly.
Bad movie, but man, it really resonates with all this going on...

|3.14.06 @ 8:27PM|#

Captain Holly: you may be thinking of one of the more dreadful Tom Clancy/Jack Ryan novels, where the evil Japanese use their ownership of an American brokerage to create a financial panic. On the plus side, it ends with a Japanese airline pilot crashing his 747 into Congress. On the down side, Ryan survives and is made President.

|3.14.06 @ 8:29PM|#

man, it really resonates with all this going on...

As does this.

The broad historical causes which shaped these decisions were race prejudice, war hysteria and a failure of political leadership.

Personal Justice Denied: Report on the Commission on Wartime Relocation and Internment of Civilians, 1982

Jadagul|3.14.06 @ 9:10PM|#

RC Dean: Really, a large part of the distinction is that the bridge stays here and isn't shipped to Japan (you'll note that we said at the beginning that this appeals to the economically illiterate). It all boils down to an accounting identity: Net Exports=Net Foreign Investment. In other words, abstracting away from currency for a bit, if we import more than we export, we have to pay for it somehow. We'd do that by giving a claim on some American asset that isn't actually exported.

We could pay through debt: we have net imports of a million sneakers that we pay for by promising to repay 1.1 million sneakers in a year. Or we could pay with an asset: they give us a million sneakers and we give them a sneaker-producing factory. The sneakers count as an import since they cross national boundaries; the factory stays put even though the title changes, and so isn't an export. Either way, we import more than we export, so Net Exports are negative and we have a trade deficit.

Returning to the real world that has money, the same dynamic happens. We could get a million sneakers from Japan by paying $50 million. But they're not just going to sit on that money; they'll invest it somehow. At the very least, they'll buy T-bills. But any dollars we send abroad get returned, either to pay for our exports or to purchase domestic assets. A current account deficit means that more dollars' worth of stuff is imported than exported; the difference has to be found in foreign purchase of domestic assets. Now, if we restrict purchase of domestic assets, foreigners have fewer things to do with their dollars; ceteris paribus demand for dollars drops and foreigners won't want as many, so they export less stuff here. Presto, the current account deficit drops.

Now there are situations when the current account deficit matters; for instance, if you're running a deficit in someone else's currency and your currency depreciates, you suddenly owe a whole lot more than you used to and you're screwed. Since most developing countries especially have lots of dollar-denominated debt, a large current account deficit puts them at risk of a hard currency shortfall, where they can't find enough physical dollars to repay their debts. But we don't have that problem.

For us, it's all a savings-rate issue; we have a current account deficit primarily because other countries want to invest here. So we get lots of foreign currency, and we don't want to save it/invest in other countries, so we spend it instead. Voila! Current account deficit! This is an issue if and only if (jeez I'm a math nerd) the savings rate here bothers you, but that's an underlying problem that won't be fixed by making sure other people don't invest either.

|3.14.06 @ 10:06PM|#

|3.14.06 @ 10:17PM|#

In other words, it would be great if we could consume more than we produce with no negative consequences. But if it seems too good to be true, it probably is.

Jadagul|3.14.06 @ 10:36PM|#

Crimethink: the question is what's pushing the debt. One possibility is that we Americans are spendthrifts, and we're borrowing money and selling assets so we can spend more than we produce. This isn't necessarily bad (there are times when capital consumption is totally sensible), but in general it sets of red flags. Especially when we weren't saving that much beforehand.

Second is that other countries badly want to invest in America. In that case, they may give us good enough terms to, once again, make it reasonable to go ahead, accept the investment, and buy their stuff. For instance, suppose I go to buy a computer online and plan to spend about $1200. I go to Dell, and find that they're making me an offer where I can buy a $1500 computer instead, with a loan that's interest-free for a year and cheap afterwards. Buying the more expensive computer now makes perfect sense, even though I have to go into debt. Similarly, when banks were offering those ridiculous negative-down-payment no-interest-for-two-years mortgages, or whatever they were, it could have been really smart to take the money and spend it, as long as you got a fixed-rate or something and had reasonable assurance that it wouldn't blow up in your face down the road.

The question is which one of these situations we're in. No one really knows, but my international macro teacher did point out that the downtick in American savings was accompanied by a drop in the real interest rate, suggesting that there was an increase in people wanting to loan money to us, rather than an increase in Americans wanting to borrow. Even that, though, doesn't mean the debt structure won't blow up in our face eventually, and I'm nowhere near the kind of expert who would have any ability to address that question.

One final note: you say that ownership restrictions won't help. You're wrong there; if we pass laws forbidding foreigners to loan us money or buy our assets, then by definition we're not going to be net debtors-we're not in debt to anyone because we're not allowed to borrow. It's an abysmal idea and would cause a whole host of problems, but it would eliminate the trade deficit. I just think the trade deficit isn't itself a major problem. It can, however, be a symptom of real problems; if it is, addressing the symptom won't be terribly helpful.

|3.14.06 @ 10:43PM|#

To use a simpler example, if I have a trade deficit with the rest of the world (ie, I spend more money than I make), and have to sell my house to cover the shortfall, should I find comfort in the fact that my property has been "invested in"?

If you are a retiree who just converted his house into cash through a reverse mortgage, you might find great comfort in it. Not to sound like Ecclesiastes, but for each of us through our lives there is a time to save and a time to spend, a time to be a net investor and a time to be a net debtor.

If, on the other hand, you are an idiot and personally can't afford your lifestyle, that is a different issue.

There is no reason to believe that the society as a whole is doing latter rather than the former.

|3.14.06 @ 10:46PM|#

I'm not convinced that the trade deficit is as irrelevant as some make it out to be. To use a simpler example, if I have a trade deficit with the rest of the world (ie, I spend more money than I make), and have to sell my house to cover the shortfall, should I find comfort in the fact that my property has been "invested in"?

In other words, it would be great if we could consume more than we produce with no negative consequences. But if it seems too good to be true, it probably is.

In general terms, I agree with you. Our savings rate is largely a function of the way we're taxed, which promotes consumption over investment. However, there are a couple of other ways to look at this problem:

1) Capital in the US has a really high rate of return compared to most of the world. People want to invest here like they want to invest in a rapidly growing company. GE in the 1990s is a great analogy. It was big, stable and grew really fast-- people wanted a piece of that. It's a facile analogy, but since the US is, likewise, big and stable, yet growing at a pretty good clip, it's a pretty desirable place to invest. Well, to get those dollars, they have to give us something, so they give us TVs and sneakers.

From this perspective, it's a benefit of our success, not a cost of our need for instant gratification.

Of course, it's really both working in concert. In each case, ceteris parabus: If the US became a less desirable place to invest, the dollar falls. If it becomes more desirable, the dollar strengthens. If we stop buying more stuff overseas, the dollar strengthens. etc etc. Of course, each of these works in concert-- dollar falls, people buy dollar denominated assets because the relative return is now higher relative to their currency, pushing the dollar back up, which causes us to buy more sneakers because they're cheaper which, in turn, makes the dollar go back down.

So, yes, we give up assets in exchange for capital, which helps us to grow the economy, which attracts more capital, which finances our spending.

Which leads me to my second reaction-- borders are becoming increasingly inconsequential (a good thing, I think). No one worries about a Kansas-Nebraska trade imbalance. Capital chases highest return and no one cries foul if Warren Buffett, in Omaha, buys a building in Topeka. Likewise, my home state, South Carolina, spends a heck of a lot of time trying to figure out how to attract investment (people outside buying bits of the state), so that the big chunks of the state that are really poor cease to be so.

Anyway, I guess I'm saying that the underlying problem isn't a problem and that the way it's measured is arbitrary. Further, it's so muddied by five hundred year old mercantilist thinking that, simultaneously, we're scared about foreigners buying American assets, while individual locales are desperately trying to get outsiders (foreign or domestic) to invest there (buy their assets).

It's absurd!

|3.14.06 @ 11:07PM|#

My particular take on the trade deficit comes from looking at what the comparative advantages of the US are. We have comparative advantages over most of the globe in technology, in research and development, in knowledge. The fear of loss of these prompt reactions like the American Competitiveness Initiative.

But the greatest comparative advantage of the US is in productivity itself. The US is the most productive nation on the planet in worker-hours. Not only that, but the American economy is better at turning ideas into sellable goods and services than any other nation.

So if you are a foreigner looking to buy the best product America has to offer, you buy American companies.

It is unfortunate that what passes across the national border in this case are a bunch of pieces of paper. Those pieces of paper are not even neutral in the accounting. They are trade deficit.

|3.14.06 @ 11:17PM|#

I should rephrase...

It is unfortunate given that people worry about the trade deficit that what passes across the national border in this case are a bunch of pieces of paper.

|3.14.06 @ 11:29PM|#

MikeP,

I have a giant stack of legal-size paper that I'm probably never going to use. Drop me an email and I'll gladly trade it to you for, just half its weight in those dollars that are just pieces of paper.

|3.14.06 @ 11:32PM|#

The pieces of paper I was referring to are stock certificates.

|3.15.06 @ 1:19AM|#

I'm surprised no one's brought up the buildup to the Opium Wars yet. That's what happens when you have to ship all your currency reserves to someone 'cause you want their tea and they don't want anything of yours. It screws with your economy, 'til you reverse the process with something they want more.

|3.15.06 @ 1:20AM|#

|3.15.06 @ 3:47AM|#

It drives me crazy that everyone assumes we have a trade deficit because no one wants our goods and services, even though we sell more of them overseas each year.

I think a more plausible explanation is that people see the US as the best place to invest their money, whether in T-bills or buildings or whatever. At the same time we don't want to invest our money overseas at the same pace that they want to invest here. Then there is a huge surplus in foreign currency that can only be filled if we buy more in imports than we sell in exports.

In other words, why do people assume the trade tail is wagging the investing dog instead of the other way around? Aside from Lou Dobbs' ignorant rants of course so he can sell more copies of his ignorant book.

|3.15.06 @ 3:56AM|#

That brings me to the other thing people are panicking about. They say things that boil down to the following: "It is bad for us to have a net inflow of investments because what if those scary foreigners decide they don't want to invest here anymore and take their money back home? Our interest rates will go up."

Well yeah, they'll go up, or at least be higher than they would otherwise anyway. But if so, this implies our interest rates are lower now because of such investments.

It is also pretty ridiculous to scare away investments now because we are afraid they'll be scared later and leave later instead.

But since a net trade deficit (in a particular year) equals by definition the amount of net investments (in a particular year), this is precisely what they are arguing. We have too many damned foreigners investing here and it needs to stop now because it might stop later instead. Oh please.

|3.15.06 @ 8:42AM|#

There is a small difference with the situation here and the Japanese panic a few years back. We were not in war with the Japanese, while we are in war with an amorphous entity called either "terrorism" or "islamism" or "islamic terrorism". The problem with warring with amorphous entities is that anyone with a superficial ressemblance to an "islamist" or a "terrorist" is fair game.

Let's not forget that because we are at war we have to listen that the President the United States can suspend consitutional guarantees when he feels like it, to defend "national security" This is the same government that wants Google to turn over its records so it can see who accesses that (I have sympathy for the FBI agents in blog detail, so much useless information floating around, and they have to read it all... I think that Stanislas Lem wrote a story like that).

Now, if the Governement has the right to detain anyone in secret withot trial for months, and release them without even an attempt at an apology when they found out they got the worng man, why shouldn't it have the right to say who can or cannot buy certain things? He who grants the greater grants the lesser.

|3.15.06 @ 8:49AM|#

Ken Schultz,

I would say that different people were motivated to oppose the deal for different reasons.

While I haven't exactly made up my mind as to whether the security issues warranted the extra cost of handling this task domesitically - what with there not being a public process in which the issues could be hashed out and the arguments and counterarguments made available for us commoners to consider - I'd say that operating ports of entry raises security concerns in a way that simply investing in real estate does not.

|3.15.06 @ 9:34AM|#

I remember my Republican room mate explaining that Japanese people thought of business as war.

That's funny, joe, most of the people I knew who thought that way were Democrats or Perotistas.

One of the good things that Bill Clinton did for the Democrats was to put and end to that kind of thinking, except among the hardline industrial union crowd, for his administration at least. The fact that it resurfaced in the Gore and Kerry campaigns was one of the least attractive features of them.

Of course, the Republicans talk a good line on free trade but then like Reagan with trucks and motorcycles and Bush with steel and Canadian lumber cave in. To give Clinton his due this was one issue he remained true on.

The funny thing is that Japanaphobia was still around in late 1993 when anyone who was paying attention could see the wildly inflated values of their investments imploding.

|3.15.06 @ 10:24AM|#

Isaac,

You mean the Al Gore who drove a stake through Perot's heart by beating him in a debate about NAFTA on the Larry King Show?

So when Pat Buchanon said, on a political chat show, that we need to tell the Japanese "You no buy our car? We no buy you lice," was he a Democrat or a Perotista? All three of my Republican roomies got a kick out of that zinger back in 1992. The Democrats I knew thought it was racist and lame.

|3.15.06 @ 11:14AM|#

joe, please note taht I said "most of the people I knew who thought that way....". My point was that I think your mistaken in implying that this is an exclusively Republican trait.

And I was talking about Gore's 2000 campaign, not 1992 when he was still sane (read what I said about Bill Clinton). And, yes, I really enjoyed what he did to Perot. And no actually Gore was still pretty good on trade in 2000 even, it's just that he didn't get the protectionists reined in the way Clinton did.

So when Pat Buchanon(sic) said, on a political chat show,.... Pat Buchanan is the Republican's equivalent of Al Sharpton, there to throw red meat and exite part of the base but otherwise someon that nobody really wants to aknowledge. Although Buchanan is pretty much as significant a feature in the Rep party as David Duke is nowadays.

If you'd read the whole post you wouldn't have missed it. You also wouldn't have missed the fact that I complimented Clinton and criticized Republicans for their inconsistency and hypocracy on the issue. But you'd never take of your party line blinders lomg enough for that, would you.

But I guess just like dr x you just think everyone who isn't a Democrat is just another bushbot.

|3.15.06 @ 11:17AM|#

Shorter version: I was speaking of pre-Clinton Democrats.

|3.15.06 @ 11:34AM|#

Isaac Bertram,

I can agree that Gore didn't "rein in" protectionists as well as Clinton, but I'd attribute that more to Gore lacking Clinton's political skills, rather than a philosophical difference on the issue. That's a pretty big job!

|3.15.06 @ 11:52AM|#

Gore lost because he's an idiot. His lack of political skills just made his run for prez all the more difficult.

|3.15.06 @ 12:01PM|#

...but I'd attribute that more to Gore lacking Clinton's political skills, rather than a philosophical difference on the issue.

Can't disagree with that.

And Just in case I didn't make it clear, I thought Gore was at his acme in the debate with Perot. That debate was a thing of beauty.

And I'm not even going to get mad that you spelled my name wrong.

The Real Bill

I think Gore's lack of skills is his idiocy (or vice versa). My problem with Gore is that he pissed all over Clinton's legacy 'cause he didn't want the association after Lewinsky. That and his advisors talked him into abandining the DLC position. That was the thing that Clinton brought that made it so Democrats could win, and Gore just about completely turned his back on it.