US not a debtor nation, but the idea doesn't worry economist
Milton Friedman thrives on controversy. The Nobel Prize winning economist loves to challenge standard economic views. His latest effort to put the cat among the pigeons is a statement that the United States is ``nothing like a debtor nation.''
Only last week the Commerce Department published statistics showing that the US international investment position dropped further into the red, making it by far the world's largest debtor nation. The difference between the amount of US assets held by foreigners and the amount of foreign assets owned by US investors more than doubled last year to $263.5 billion, the government statisticians said.
The United States, according to these official numbers, became a debtor nation in 1985 for the first time since 1914.
Dr. Friedman holds that not only is it unlikely that the US is a debtor country, but that there is nothing wrong with being a debtor.
His first argument is statistical, that US assets are ``greatly underestimated,'' he said in a telephone interview from his office at the Hoover Institution in Palo Alto, Calif. The Commerce Department's numbers show US investors owning $1.068 trillion in assets in other countries at the end of 1986. Foreign investors held $1.331 trillion in assets in this country.
The problem is that the nature of these investments differs considerably. A larger proportion of American foreign assets is plant and equipment bought years ago, much of it in the 1960s. These businesses have increased greatly in value since then, but they are recorded at book value - $260 billion at the end of 1986.
Commerce Department officials are aware of this problem. But they don't know how to update the value of these factories in France, or pineapple plantations in the Philippines, or other such assets. Do you double or treble their worth?
Foreigners held $209 billion in such ``direct investments'' in the US at the end of 1986. Many of these were bought in the 1970s and 1980s and have presumably not appreciated in value so much. But, again, how do you value them?
Valuation of some other assets is less of a problem. US investors, for example, own $131 billion of foreign securities. These can be priced according to the current market value. Similarly, foreigners own large amounts of bonds, stocks, and other paper assets which can be priced with reasonable accuracy.
A Commerce Department official pointed to other valuation problems compounding that one noted by Friedman.
For example, the United States records its official gold reserves at $42.22 an ounce as an asset worth $11.06 billion. In fact, the price of gold is running at about $450 an ounce on the bullion markets. So those gold reserves could be priced at more than 10 times $11 billion - if the statisticians so chose. Of course, were the government to try to sell that much gold, the market would collapse.
On the liability side, balance of payments statistics each year show large unrecorded inflows of money into the United States, presumably invested here by foreigners. These ``errors and omissions'' in this statistical series have probably reached a cumulative $200 billion since 1979. Should this be recorded as an additional US ``liability'' in the international investment position statistics? It isn't at present.
Also, US assets include $506 billion of bank claims abroad, a large chunk of that consisting of loans to developing countries.
These loans sell on a thin secondary market for large discounts, often 30 percent or more. Should those claims thus be discounted for international investment bookkeeping purposes by the Commerce Department statisticians?
Whether these statistical factors combined would keep the US an international creditor is almost anyone's guess.
Friedman notes that one point in favor of his position that the US is not a debtor is the fact that this country gets some $20 billion more in income from its foreign investments than it pays to foreigners on their assets in the US.
Last year the US had a surplus in its international service account (which includes investments) of $22.3 billion, down from a peak of $41.3 billion in 1981 but not much changed in recent years.
If US debts are piling up so fast, how come the US net income from its investment position is not changing much? Friedman asks. He regards these two sets of figures as ``contradictory.''
But even if the US is a debtor nation, Friedman sees this as a political problem rather than an economic issue. ``It doesn't matter,'' he says.
His explanation for this position goes like this: In recent years, Americans have saved somewhat less. But investment in the US has remained steady. Foreign money has offset the decline in savings. Many of these investors are trying to get around various protectionist devices such as quotas or higher tariffs.
These foreign investments provide Americans with jobs, products, and services. And, most importantly, they generate the income to pay the foreigners a return on their investment.
Friedman says that if 250 million Americans decide collectively to save a little less and enjoy a somewhat higher standard of living immediately, that's fine. No one can decide for this multitude of individuals the right amount of savings.
Their standard of living won't necessarily decline in the future - as some other economists argue - because the foreign investment is now generating its own return. Indeed, those investments wouldn't have been made if the foreigners hadn't wanted to put their money in the relatively safe and sound US economy.
He adds: ``It's the foreign investors who are hostage to fortune, not we.''
In other words, it is the foreign investors who are taking risks putting their money in the US. It is they who would suffer losses if the US government decided to expropriate their assets or economic circumstances made their investments less profitable.