A Sharecropper's Society?

Sunday, August 7, 2005

"THE ECONOMY of ours is strong," President Bush declared on Wednesday, and to some extent his boast was right. U.S. growth is outpacing that of rivals in the Group of Seven club of rich nations, and productivity is improving faster. But this progress is accompanied by a troubling phenomenon. Every year Americans sell or mortgage a slice of their productive assets to foreigners, with the result that income from those assets must flow abroad in the future. Warren E. Buffett, a legendary investor and a director of The Washington Post Co., has written that the United States is on its way to becoming a "sharecropper's society."

Some optimists say that this doesn't matter. They argue that purchases of U.S. equities and bonds are a vote of confidence in our economy, glossing over the fact that we're signing up to pay dividends and interest to foreigners. They point out that Americans are accumulating assets in other countries, not mentioning that those purchases aren't enough to offset sales of our own assets to foreigners. Rather more persuasively, the optimists say that if we sell bonds to foreigners and use the proceeds to build laboratories or deploy broadband, we may end up with more productive assets than we had in the first place. But are we really selling assets to finance clever new investments? Or are we mortgaging our future to pay for today's comforts?

There have been times when foreign money did finance productive investment. In the late 1990s the U.S. government was saving rather than borrowing, so foreign capital flowing into the country found its way to firms that invested it -- not always wisely but on the whole quite well. But since the tech bust, corporate America has reversed its usual pattern of taking in people's savings and investing them; companies have become net savers, returning cash to people via dividends and share buybacks. So foreign capital has been flowing instead to government.

This pattern, in which foreigners buy U.S. bonds and equities and the money gets spent on Medicare bills, is unlikely to expand the nation's stock of productive assets. Moreover, it has coincided with a period of extremely large foreign purchases. The U.S. current account deficit has grown to an astonishing 6.5 percent of gross domestic product, twice the size that Federal Reserve officials used to call unsustainable. This means that the nation is consuming around $700 billion more than it earns each year and paying for the difference by mortgaging or selling assets. Foreigners' "net ownership" of the United States -- the assets they own here minus the assets that Americans own abroad -- already comes to $2.5 trillion. The International Monetary Fund projects that it could more than double by 2010.

This isn't a crisis, at least not yet. A modest decline in the greenback would boost the dollar value of America's overseas portfolio enough to wipe out foreigners' "net ownership" of the United States. Moreover, Americans are clever investors -- they earn more from their foreign assets than foreigners earn from their larger stock of American assets -- so Mr. Buffett is himself part of the solution to the problem that he identifies. But the vision of the United States as a sharecropper's society remains distressingly plausible. The country is living beyond its means, spending more than it earns and relying on foreigners to supply the difference. If a future generation of Americans is called upon to tighten its belt to repay overseas creditors, today's ugly economic nationalism may seem mild in retrospect.

© 2005 The Washington Post Company