David R. Henderson  

The Right Amount of Manufacturing

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In my latest Freeman column, I take on Huffington Post author Ian Fletcher on his claim that the United States doesn't have enough manufacturing. Some excerpts from my article:

To judge whether a sector of the economy is too small, we need criteria. Fletcher writes: "Unfortunately, the only rational standard for how much America should produce is how much Americans wish to consume. Because the only way to consume is either to produce what you wish to consume, or produce something else you can exchange for it" (italics in original).

But if that were the only way, Fletcher should be content--yet he's not. Why not? Because, as he well recognizes, it's not the only way, and that's why he wrote his article. He notes two ways that we consume what we get from foreigners besides selling them goods and services: 1) by selling them assets (these assets are produced, but that's not what he means) or 2) by borrowing. He objects to both.

By the end of 2009 foreigners owned about $21.1 trillion of the $48.5 trillion U.S. capital stock-over 40 percent. Sounds scary, right? But it overlooks that Americans own $18.4 trillion of the rest of the world's capital stock. So the U.S. "net international investment position" was negative $2.7 trillion, or less than 6 percent of the U.S. capital stock. Interestingly, even though "our" ownership of "their" capital is less than theirs of ours, in 2009 "we" made $121 billion more on them than they made on us. That suggests the U.S. government's data underestimate the value of U.S. investments abroad or overestimate the value of foreign investments here, or both.

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CATEGORIES: International Trade

COMMENTS (9 to date)
Peter H writes:

I don't think your logic at the end of what you excerpted necessarily follows. That total overseas investments by the US have a larger real rate of return than US investments by non-americans can be explained by many factors other than underlying value. These include simple variation (your data point is for one year, not a time series), risk premiums, exchange rate variation, and differential taxation.

David R. Henderson writes:

@Peter H,
Good point. But I believe this has been true for at least the last 20 or so years, essentially since the time in the late 1980s that people started worrying about it.

steve writes:

I would be curious to see just what americans own over seas (oil wells?) and vica verca (skyscrapers?).

steve writes:

wait... maybe its not so much skyscrapers that foreigners own but car factories.

Bryan Willman writes:

The "car factory" line raises a good point - so foreign parties own US assets - but who do those assets benefit?

Put another way, is the "ownership" of capital goods (and accounting and property statement) very well aligned with the economic and social benefits of those goods?

If some foreign entity (JapanCarCorp) owns a factory in the US which hires lots of US workers to make cars, with lots of US made parts, which are mostly sold to US buyers, that particular body of capital is meeting the consumption demands of the US, and employing US labor, even if the profits end up in Japan.

On the other hand, if ForeignExportCorp owns, say, forrests, and exports raw timer rather than lumber or furniture, then one could argue that the productive capacity of the forrest isn't being maximally utilized to US benefit. (Assuming that US made lumber or furniture would be worth more than raw timber.)

But both cases will show up as foreign investment in US capital, even though they're really different in how they affect the economy.

PirateFriedman writes:

Does this "capital stock" include government debt securities? I suspect that this type of ownership is much more one sided. Probably they own a lot of treasury securities and Americans own very few bonds from foreign governments.

Tim Worstall writes:

[Comment removed for policy violations. --Econlib Ed.]

Patrick R. Sullivan writes:

You're deleting Tim's comments now!

Brad DeLong, call your office.


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