How Foreign Money Is Changing

The Face of Our Nation

By Martin and Susan Tolchin

Times Books. 400 pp. $19.95

PARANOIA ABOUT foreign investment in America is a persistent feature of our postwar evolution from "the" leading industrial nation to "a" leading industrial nation. American concern over "foreign control" emerged in the mid-1970s as recycled OPEC money flowed into financial and real estate markets. A decade earlier, Jean-Jacques Servan-Schreiber sounded a warning cry that Americans were buying up Europe.

In Buying Into America, Martin and Susan Tolchin have tried to revive the "foreign control" bogey man. The Tolchins' emphasis is on the surge of foreign investment into America during the 1980s that has mirrored, not to mention financed, America's decision collectively to borrow about 3 percent of its total spending.

According to the Tolchins, although "foreign investors have provided new jobs, capital and technology, they have seized control of vital sectors of the American economy . . . have become increasingly involved in U.S. politics {and are} threatening to engulf America and undermine its ability to control its own fate and to defend its position as a premier industrial power."

The Tolchins have an overblown view of the extent to which foreigners control the U.S. economy either through direct ownership or through "having become increasingly involved in U.S. politics." Although they include some excellent and generally constructive case studies of successful foreign investments -- like that of Komatsu, Japan's earth-moving equipment company in Tennessee and Japanese Bridgestone's takeover of Firestone -- the ever-present underlying theme is that America is giving away the store.

What does it mean to say that foreigners are "buying into America" at an increasing rate? Stated as objectively as possible, it means that we are selling assets to foreigners faster than we've done so in the past, so that foreign ownership of America has caught up with American ownership abroad. The Tolchins express a belief that this fact is cause for alarm. What do do?

Their suggestions for a modest beginning are familiar: Watch out for threats to "national security," "demand a level playing field," "negotiate from strength," "coordinate a foreign investments strategy," "learn from others," etc. If our "problem," whatever it may be, consisted of simply overlooking these obvious points, then we are indeed in serious trouble.

Buying Into America is a book whose tone is better suited to the recent Brady Report on the causes of the October stock market crash. It is meant to be a book about a threat that could affect you, dear reader. But the foreign takeover threat is just not as tangible as the stock market crash threat. Visions of "foreign investors threatening to engulf America" are not as real to potential readers of Buying Into America, especially those who have looked over their latest pension fund statements, as are visions of another Great Depression. Indeed, we might hope that some of those foreign investors would keep buying and bid up stock prices. Consistency aside, there were newspaper headlines about the crash but there have been precious few about the foreign hordes undermining our ability to "control our own fate."

The Tolchins' threat, lacking palpable urgency, has to sound a little like the object of a witch hunt. When they come to proposing solutions they, unfortunately, are as weak as the Brady Report. But their hazy solutions are less noticeable since you are not sure what the real problem is supposed to be.

I remember the feeling I had when foreign investors, British as it happened, bought Howard Johnson's restaurant-motel chain. The "Ho-Jo" in Brattleboro, Vermont, was an American institution that hosted many joyful, early-childhood meals with my mother, father and sister. When my mother asked me about the sale, her question seemed like a plea for me, now a grown-up economist, to tell her whether something was wrong that she ought to know about.

The restaurant as I knew it was something that I would have liked to hang on to, like the National Honor Society pin in my memorabilia drawer. Having the Ho-Jo sold to foreigners, even though the sale didn't make the restaurant disappear, engenders the same feeling I'd get if I'd lost my honor society pin. I'd rather it didn't happen, but I wouldn't write a book about it or call for Congressional hearings and new laws.

The Tolchins are expressing a "gut" response to two things that are more emotional problems than they are real ones. Foreign ownership of familiar "American" institutions like Howard Johnson's or, for that matter, New York's Algonquin Hotel (recently purchased by Japan's Aoki Construction Company) may leave us uneasy, but Congressional hearings and new laws are not called for. The world is internationalizing fast. The fact is that "foreign" ownership is a worldwide phenomenon, including many cases where the "foreign' investors are Americans.

The other emotional problem that has a sounder footing is the perception that maybe we're slipping, if not absolutely at least relatively. World War II left America with the scepter of world leadership firmly in hand. We probably didn't know how long to expect we'd remain the unrivaled economic and military leader of the world, but no doubt we were counting on more than half a decade of nuclear monopoly and maybe in the economic sphere we were thinking of a century akin to the "British Century" that began in 1815 after Waterloo.

THE "us and them" tone on which Buying Into America is based, though less vicious than the anti-communist rhetoric of the early 1950s, is similar to that era's Congressional witch-hunts. Both are essentially xenophobic, driven by fears of foreigners "seizing control" with sinister objectives that "undermine our ability to control our own fate." Senator McCarthy held hearings about the communist threat in the 1950s that I doubt anyone, including the Tolchins, would like to see repeated or even remotely paralleled in the 1980s as American addresses foreign threats to its economic sovereignty.

The first oil crisis and currency turmoil of the late 1970s, another oil crisis and double-digit inflation brought us to 1980, the year in which American net foreign assets peaked. Since then, our net asset position has, according to U.S. Commerce Department figures, slipped from a positive $150 billion to a negative $250 billion. Japan, with net foreign assets of $180 billion, has replaced the United States as the world's largest creditor nation in just five years, while, simultaneously, the United States has become the world's largest debtor nation.

But are things as bad as they sound? The fact is, compared with national wealth, the United States' swing in its net asset position since 1980 is modest. America is a $50 trillion economy with about $15 trillion in financial claims on physical capital and $35 trillion in natural and human resources. Since 1981, America's net foreign investment position has swung negatively by about half a trillion dollars. That is the equivalent, counting only the $15 trillion in physical capital, of a family with a net worth of $150,000 running up a debt of $5,000 over five years. Right now, at market value, Americans' total assets abroad are about equal to foreign claims on us. This hardly amounts to having foreign investors "threatening to engulf America."

There are self-correcting mechanisms always at work in capital markets. As foreign investors rushing into the United States push up prices of American investments relative to those abroad, the net inflow will moderate and perhaps reverse itself. We do not know when or how rapidly. The new reality is that corporations denoted by country and "American" or "Japanese" companies are fast becoming a thing of the past. IBM and Honda are no longer "American" or "Japanese" companies. Their companies are based respectively in America and Japan with employees in manufacturing and sales and service facilities worldwide.

Buying Into America manifests some strange crosscurrents within the American political spectrum. The Tolchins, like Felix Rohatyn and Robert Reich who also have recently warned of "foreign takeovers," are part of an atrophying breed of Eastern liberals who see themselves as enlightened and right-minded on domestic issues but who become indistiguishable from midwestern conservatives and reactionary hicks nationwide when it comes to looking at "foreigners." It almost seems that they feel, like many Americans forgetful of their own past, that they are on to a good thing here and anybody who thinks they can come along now and just "buy into it" had better think again, or better still, had better just forget it. :: John Makin, director of fiscal policy studies at the American Enterprise Institute, is the author of "The Global Debt Crisis."