Exploding the US `debtor nation' myth
SOME United States politicians and news people recently had some ``bad'' news for us: For the first time in nearly 70 years the US had become a net debtor country. The impression given was that the US has become another Mexico or Argentina, tottering on the edge of financial disaster. But like many simplis- tic interpretations of the facts, the impression bears little resemblance to reality. The reason for the hysteria is that foreigners now have investments of more than $900 billion in the US, whereas American investments overseas are now slightly below that amount. Hence the picture of America living on borrowed money. Yet this ``indebtedness'' actually results from a massive vote of confidence in the American economy by foreign investors. Strangely, when a business is actively pursued by willing investors, it is taken as a sign of strength. When foreigners put their money in American ind ustry, however, there is concern that the US has become a ``debtor nation.''
Industrial development in America has often been heavily dependent on foreign investments. It was British capital that financed much of the westward expansion of the railroads. The US became a net lender only when, to finance World War I, the European powers were forced to sell many American investments.
Foreigners have again concluded that America is a much better investment opportunity than their own sluggish economies. Led by Britain, the Netherlands, Canada, and Japan, overseas investors have put nearly $300 billion into US factories and businesses, real estate, and privately owned stocks and securities, helping to create 8 million new American jobs. The Japanese, for instance, recently built a Honda auto plant in Tennessee. Was this bad for the country?
In addition, Americans are now keeping more of their own investment dollars at home. In 1982, during the recession, net new US investments overseas peaked at $119.2 billion. American investors were shipping their dollars elsewhere. In 1983 the amount dropped to $55 billion and in 1984, to $20.5 billion. It is this choice by Americans to invest more of their capital in US business, in fact, that is the principal cause of America's ``debtor'' status. Yet when Americans send capital overseas and foreigners
shun this country -- making the US a net creditor -- the complaint has always been that America is ``exporting jobs.''
Being a debtor nation, of course, can still be undesirable. Contrast Argentina with South Korea. Both countries have an international debt of about $45 billion. But the government of Argentina borrowed billions of dollars to pour into unproductive government-controlled industries. Most South Korean borrowing, on the other hand, went into productive private investments, giving that country one of the healthiest economies in the third world. So indebtedness can spell trouble if it is used simply to bail o ut bad economic policy.
Some policymakers maintain that this is the case in the US. They point out that as the federal budget deficit grows, more foreign funds are borrowed by the government to finance the budget gap. There is also concern that foreign money collecting interest in US banks could be pulled out at the first sign of economic problems, causing a large capital outflow and a financial crisis. But while there has indeed been a net increase of foreign funds used to purchase US Treasury securities, the percentage
of US debt owned by foreigners dropped from 26.2 percent in 1978 to 15.9 percent in 1984.
On the other hand, net new foreign capital going into direct private investments rose from $12 billion in 1983 to $22.5 billion in 1984. Moreover, US liabilities reported by US banks (the ``hot'' money that many fear might be pulled out at a moment's notice) has dropped as the economy recovered, declining from $65.9 billion in 1982 to $31.7 billion in 1984. Rather, a growing percentage of foreign money is now in direct, job-creating investments, as opposed to bank accounts.
Thus America's new status as a ``debtor'' nation is not, of itself, a matter for concern, since it means that the country's economic strength and stability are attracting foreign investors and keeping American capital at home. This boosts the economic base and creates new jobs. To the extent that bloated government spending absorbs that capital, whether in the form of borrowing or taxes, action is needed. But the solution is to cut the size of government, not to make the US economy unattractive to forei gners.
Edward L. Hudgins is a Walker fellow in economics at the Heritage Foundation in Washington, D.C.
