U.S. Bleeding Capital Overseas

by Matthew Glans on July 6, 2011

Capital investment is the power that runs the American economy. It allows new factories to be built, new jobs to be generated and new technologies to be introduced into the market. Unfortunately, for the first time in years, the U.S. economy has lost growth capital to other countries instead of keeping it in our own economy. A new article by David Malpass and Stephen Moore of the Wall Street Journal, examined this growth capital deficit, why it has emerged and the effects that the capital deficit could have on the economy.

“In June, President Obama celebrated a rare sliver of good economic news: Foreign investment was up 49% last year over 2009. The president says that this boost in capital shipped to the U.S. by international companies or foreign investors leads to more businesses and higher-paying jobs here at home. He’s right.

But this isn’t the economic success story that the White House is spinning. The real truth of the recession and limping recovery is that for the first time in decades America is, on net, losing, not attracting, growth capital. That may be the single most important explanation for persistently high unemployment and stagnant wages.

It is true that foreign direct investment rose to $236 billion in 2010 from $159 billion in 2009. But that was still well below the $310 billion invested in 2008. The White House also neglected to disclose that in the first quarter of 2011 foreign investment fell by 51% from the first quarter of last year, according to data released last month from the federal Bureau of Economic Analysis. Foreigners of late have not found the U.S. to be a receptive, high-return home for investment.”

The real problem, Malpass and Moore argue is that American investment dollars are making their way overseas. This means that new jobs that could be created in the U.S. are instead being created in countries like China, Germany and India. This is a significant problem for the U.S. economy, one that cannot persist in the long run if U.S. companies hope to compete in the international marketplace.

“Much more worrisome is that Americans are taking their investment dollars abroad at a faster pace than foreigners are bringing capital to these shores. In 2010, for example, U.S. investment abroad was $351 billion—$115 billion higher than foreign investment here. Economic recoveries are periods when investment capital usually surges into a country, but since this weakling rebound began in the middle of 2009 the U.S. has lost more than $200 billion in investment capital. That is the equivalent of about two million jobs that don’t exist on these shores and are now located in places like China, Germany and India.

This is a recent and dramatic reversal of fortune. Huge net inflows of productive capital into the U.S. in the 1980s and ’90s helped finance the 25-year boom in jobs and broad-based prosperity from 1982-2007. Over that period, foreigners invested just over $6 trillion more in the U.S. (in total capital) than Americans invested abroad, according to the Bureau of Economic Analysis, with most of it going into businesses.”

While both Malpass and Moore believe that the free flow of capital across borders benefits both international and domestic companies in the long run, they do show concern that a long term deficit in foreign direct investment and bleeding of growth capital internationally may be a red flag, warning of a loss of U.S. competitiveness.

“The free flow of capital across borders is unquestionably a positive sum game for everyone—in the same way free trade is—but the U.S. can only retain its status as a high-wage dynamic economy if we are enticing capital for new operations to these shores. The U.S. is still by far the world leader in the cumulative stock of foreign investment, which now stands at some $3.3 trillion. But the composition of that investment is tilting toward government securities.

Meanwhile, the best related measure of our competitiveness as a nation—the balance of foreign direct investment into the U.S. versus the investment capital going abroad—is a red flag.”

Malpass and Moore’s Wall Street Journal story, “America’s Troubling Investment Gap” is available online at: http://online.wsj.com/article/SB10001424052702304584004576416202937808330.html

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