Economics: America For Sale?

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We hear it all around us. "America is a net debtor." "We are having a fire sale and the buyers are foreigners." "We are being taken over." "Decisions that used to be made in Sacramento, Albany, and Washington are now being made in London, Tokyo, and Riyadh."

The alarm is spreading, not just among those who seek more excuses to regulate our lives but also among people who are genuinely concerned. What are the facts? And what should we do about them?

First, no economist or journalist who claims that America is a net debtor has presented data on net debt. Those who write about the subject typically classify foreign-owned U.S. stocks and real estate as debt. But they are not: My ownership of my house, for example, makes no one indebted to me.

The admittedly cumbersome term to describe what people are concerned about is the U.S. net international investment position, that is, U.S. assets abroad—stocks, bonds, structures, and equipment—minus foreign-owned assets here. It is true that our net international investment is a negative $400 billion.

But let's put that in perspective. The net income (foreigners' earnings on their U.S. assets minus ours on foreign assets) is less than half a percent of GNP. And even if our net international investment continued to decline as fast as in 1987, by the year 2000 the net income would reach about 2 percent of GNP, roughly the same proportion as in Canada in recent years. It's hard to argue that this could make us poor.

So what are the critics of foreign investment worried about? Three things.

First, they say, we've been depending on foreigners to lend money to our government and to invest in our industries. Couldn't we suffer severe economic disruption, they ask, if all foreigners decided to sell off their Treasury bills, their high-rise buildings, and their factories in the United States? The answer is yes.

But what follows is that we should make sure the United States remains a safe haven where foreign investors can feel secure in their holdings. We shouldn't pass laws to make holding those assets less desirable. This would only encourage foreign investors to divest themselves of U.S. assets—precisely the awful event that the worriers want to avoid.

The critics might counter that we should at least avoid making the situation even worse by selling more Treasury bills and buildings to foreigners. But our government sells them Treasury bills to finance the budget deficit. Refusing to do so is not going to eliminate the deficit—it will simply raise the cost of financing it, because if we exclude a source of lending, the interest rate must rise. Certainly for other reasons we should slash the deficit, but as long as we have it we should finance it as cheaply as possible.

And as for selling more buildings to foreigners, we are getting goods—VCRs, computers, and cars—in return. We apparently as a group value these goods more than the buildings.

Second, critics often worry that foreign investors will have too much influence on our political system. Martin and Susan Tolchin, for example, in their recent book, Buying Into America, cite the key role played by foreign firms in persuading California to eliminate the unitary tax (where a company is taxed on its worldwide sales of products made in the state, not just on sales in the state).

But should foreign companies have no say about how our governments tax them? If so, would the Tolchins and others claim that American-owned firms abroad should have no say in how foreign governments tax them? It is hard to see what is wrong per se with individuals or companies trying to affect the laws they have to live under.

Third, critics argue that a high level of foreign investment reduces our control over our lives. No it doesn't. The manufacturer who sells his company to a British investor chooses to do so (the United Kingdom is the biggest source of investment in the United States—the Japanese, contrary to popular impression, are a distant third behind the Dutch). Consumers who buy from that company may not like the new owner's products as well—or they may like them better. Employees may not like their new boss as well—or they may like him better. No case I know of has been made that foreign owners are worse at serving consumers or managing workers.

Foreign investment in the United States is no different in principle from investment by New Yorkers in California. Both New Yorkers and Californians gain in the latter case, and both foreigners and Americans gain in the former. Foreign investment is simply the next logical step in the division of labor. By allowing specialization, the division of labor has raised living standards and has been one of the most liberating forces in human history. The international division of labor will do the same if we let it.

Contributing Editor David R. Henderson writes frequently for Fortune.

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