DALLAS — THE rest of the world, from 1982 to 1988, provided a $660 billion net capital inflow to the United States to help finance our need for savings. This capital inflow leads to suggestions that policy actions may be needed to make it more difficult for foreigners to invest in the US, since foreign money is ``taking over.'' But calls for regulation in this area overlook the fact that foreign capital inflow is necessary to help finance US savings requirements. And despite fears of foreign ownership, the foreign portfolio in the US is distributed so it doesn't appear to present a public policy concern. Thus far, at least, concerns about capital inflows appear misdirected.
This nation started running a current account deficit in 1982, and in the last seven years has run up a cumulative deficit of over $660 billion. An international payments (current account) deficit means the US is spending abroad more than it is earning in other countries. The US can do this because the rest of the world earns more in the US than it spends there and invests the difference in the US via the capital account.
The net capital inflow of $660 billion is 15 percent of total US gross savings needs from 1982 to 1988. If the US didn't have the net capital inflow, other sectors contributing to gross saving such as business, government, or personal would need to make up the difference.
For instance, the US personal savings rate averaged 4.5 percent from 1982 to 1988. Without the net capital inflow the personal savings rate would have needed to average 8.3 percent to make up the difference. Or the cumulative federal deficit would have needed to be a mere $530 billion instead of the nearly $1.2 trillion it was from 1982 to 1988 to make up the $660 billion of capital imports.
The benefits of deficit reduction have been widely discussed but taxpayers obviously didn't want higher taxes and Congress and administration couldn't come to grips with a spending cutback. The other option - a higher personal savings rate - would only have come about through a policy change such as removing personal savings from the tax man's reach.
Thus the US needs a net capital inflow because we as a country cannot come to grips with domestic economic policies to curtail our need to be a capital importer. The idea of placing constraints on capital infusions entirely misses the central point: US capital import requirements result from our internal economic policies creating the need for capital imports.
The cumulative capital inflow of $660 billion over the last seven years, added to already existing foreign investment in the US, gives a foreign portfolio in the US of $1.786 trillion. That's distributed among the following categories: US government bonds, 23 percent; corporate bonds, 11 percent; equities, 11 percent; direct investment (direct ownership of US companies), 18 percent; and other, 37 percent.
From a savings need it doesn't matter which form of investment capital imports take. In other words, it doesn't matter whether the capital inflow goes into US government bonds or common stock or goes to purchase a US company. It is still part of US gross savings.
Foreigners, from 1980 to 1988, upped their ownership of corporate bonds significantly while lowering ownership of US government bonds. These numbers suggest a diversified foreign sector rather than a concentrated one.
Foreign ownership as a percentage of US asset categories is another way of looking at foreign ownership. The 1988 relative foreign ownership by category: 20 percent of outstanding US government bonds, 22 percent of outstanding corporate bonds, 8 percent of equities, and about an 8 percent direct ownership of corporate America.
The US needs capital imports because domestic economic policies are failing to provide adequate domestic savings. Distribution of those capital imports across asset categories does not suggest an undue concentration in any one category. Fears of a foreign economic takeover reflect inadequate domestic economic policies.