Foreign Direct Investment into US Rising

Here's an interesting post by Timothy Taylor.

He notes that foreign direct investment into the US has recently spiked.  Here is a graph from his post.

That is interesting.  The US has a longstanding pattern of investing in high-return direct investment in foreign economies.  Foreign investors into the US tend to invest in low risk/low return debt.  This is actually the main source of our trade deficit.

Think of it this way.  Take $1 billion of US foreign direct investment earning 6% returns and $2 billion of foreign investment in the US earning 3% returns - $60 million each.  Let's say that earnings are reinvested in both cases, with similar returns.  Next year, US investors abroad will earn $3.6 billion additional returns and foreign investors in the US will earn $1.8 billion.

Foreign investors must invest an additional $60 billion into the US in order to keep up with the growing US foreign income.  If they don't, then US foreign income will continue to climb.  In order to get those additional $60 billion, they export us goods and services and then they send those dollars back to the US as investments.

This is basically what has been happening over the past 20 or 30 years.

So, this is an interesting development.  We should expect that foreign earnings on US investment will grow.  And, this should also moderate the trade deficit.  (I mean to state that as a fact, not as some sort of normative hope.  We shouldn't be that concerned one way or the other.)  And, Taylor mentions that these tend to be export-intensive investments.  In other words, the operations funded by these investments tend to produce US exports.

All in all, I think this is generally a good sign, if only because it is a sign, finally, of a return to more at-risk investments and a possible decline in the equity risk premium.

Housing: Part 197 - It's barriers to trade that are hurting rural workers, not free trade

Tim Duy has recent comments on a popular recent topic - the supposed problem of free trade.

Was this “fair” trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal.

He concludes that a & b were right, but that c was wrong, and this has had disastrous results.   A couple of other comments from the post:

My take is that “fair trade” as practiced since the late 1990s created another disenfranchised class of citizens. 

The damage done is largely irreversible. In medium-size regions, lower relative housing costs may help attract overflow from the east and west coast urban areas.

Housing costs are an effect, not a cause.  Lower housing costs do not attract overflow.  Lower housing costs are the result of a lack of demand.  But, the thing is housing costs aren't low anywhere.  Rents are high across the board today because we killed the mortgage market and the homebuilding market a decade ago.  They only look low because the coastal urban areas are high.  The reason those areas are high cost is because "fair trade" doesn't include free movement of capital and labor within our own country.

We don't need new federal subsidy programs or job training programs.  We need to let people take the jobs that are already there.  Practically every article on this problem - including Duy's post here - notes the issue of housing affordability.  There would be no great obstacle to the shifting of workers across sectors.  The obstacle is that when they try to make that shift, the gates are closed.  It is expressed through cost, because we still let supply and demand determine the price of housing in the Closed Access cities.  But, at its base, this is a problem of inelastic supply.  The house that worker needs won't get built.  It won't be built because the voters in New York City, Boston, and California make sure it won't get built.

The price, in that context, simply reflects the value that worker is being kept from.  The more opportunities there are in those cities, the higher the price of the housing stock has to be bid to in order to keep those workers out.  The scale of the excess price of a house in coastal California and the northeast is sort of a measure of how much opportunity those workers are getting screwed out of.

Manufacturing employment hasn't been declining any faster than it had for decades before.  Why are things so tense now?  The consensus now seems to be that the housing "bubble" covered up this problem until 2007, and now it has been laid bare.

Actually, the housing "bubble" was just a reflection of the blocked opportunity.  Homes were built outside the Closed Access cities as a second-best alternative.  There was nothing unsustainable about that.  In fact, opening up the Closed Access cities would have provided even more opportunities for growth.  When we killed the housing market, we created a dislocation that continues today.  The stress isn't from a decline in manufacturing.  That's not new.  It's that we have stopped allowing what little bit of that natural transition we were allowing before 2007.  Now, we've got our thumbs down on the whole country, not just the Closed Access cities.

We don't need to fear free trade.  We actually need to try it for a change - in our own country.  California.  New York.  Tear down this wall.