Who's Paying The Bills? Why America Needs An Investor Visa That Works
At a time when America stands unchallenged as the world's only superpower, skeptics may perhaps be permitted one small question: "Who's Paying the Bills?" The answer, as provided by New York Times columnist Thomas Friedman in his June 11th essay, might surprise you:
As we and our government continue to spend and invest more than we save, we will become even more dependent on the outside world to finance the gap. Foreigners will have to buy even more of our T-bills and other assets. And do you know on whom we'll be most dependent for that? China and Japan. Yes, that China - the one the Bush team says is our biggest geopolitical rival. "In the 1990's, Japan's and China's excess savings were financing our private sector investment, because the government was in surplus," says Robert Hormats, vice chairman of Goldman Sachs International. "Now, with these looming deficits, China and Japan are being asked to finance our government's actual operations." That makes us very dependent on their willingness to continue sending us hundreds of billions of dollars of their savings. Should China and Japan not want to play along, your services will very likely be cut even sooner...
Mr. Friedman is only the latest Cassandra to sound such a warning. Even before the boom times of the go-go nineties, some doubting thomases just could not be satisfied. Listen to what Jock O'Connell had to say about "The Not So Great Foreign Investment Debate" in the Sacramento Bee on June 25,1989:
In the short term, we have remarkably little choice in the matter. After a decade of consuming more than we produced, importing more than we exported, and spending more than we saved, the U.S. has become "hooked" on foreign money to finance the federal budget deficit and to provide investment capital for American industry. Any steps which would hinder this infusion of foreign funds, without at the same time providing the U.S. economy with the financial equivalent of methadone, would be monumentally unwise.
We are not talking about peanuts, folks. During the 1987-1997 decade, foreign ownership of U.S. corporate equities soared more than 380%; foreign ownership of U.S. corporate debt rose annually and the 1997 total of $532 billion represented a 235% increase when compared to 1987. By the time that President Clinton began his star-crossed second term, foreign ownership of U.S. securities had passed $2.8 trillion. Such a massive infusion of international savings was a prime factor in the fantastic bull market and low interest rates that made the prosperity of this golden era possible. The growth of foreign ownership of U.S. government securities is even more dramatic, exceeding some $1.5 trillion in 1997. By mid-1998, foreign ownership of U.S. public debt surpassed the olympian 37% mark. Analyzing the patterns and implications of such massive foreign ownership of U.S. securities, Professor Jerry Prock of the University of Texas - Pan American explained in 1999 why Uncle Sam now had to rely, much like Blanche Du Bois, on the kindness of strangers:
Whether the politicians and citizenry want it or not, the American capital markets have been integrated with a broadening world financial system. This means that U.S. debt and equity markets and even U.S. government policies are becoming more influenced by forces outside the U.S. borders...the rapid growth of foreign investment in U.S. securities makes it clear that the United States has become dependent on foreign investment funds to meet some of its capital and money market needs. This dependency puts the American economy "at risk" to shifts in foreign investor behavior, whether or not that behavior is economically or politically motivated. http://www.sbaer.uca.edu/Research/1999/SRIBR/99sri041.htm
The good news is that the U.S. trade deficit is something that Americans should not fear, but welcome with open arms as a symbol of our political stability and national prosperity. Such deficits expand in good times and shrink in bad. It is the very existence of this deficit that gives foreigners a fistful of dollars with which they must make a happy choice: either buy American exports or invest in American assets, such as Treasury bills, stocks and real estate; either way, our economy gets a jolt. Daniel T. Griswold, Associate Director at the Cato Institute's Center for Trade Policy Studies, reminded the Senate Finance Committee on June 11, 1998, that being dependent on foreign capital may not be so bad after all:
Because of our stable and relatively free domestic market, we remain the world's most popular destination for foreign investment. We have beome a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy. This inflow of capital from abroad allows us to pay for imports over and above what we export..the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings. http://www.cato.org/dailys/5-15-98.html
The gap between domestic savings and domestic investment results in a persistent trade imbalance which springs neither from free trade nor a lack of industrial competitiveness. Daniel Griswold explained on August 11, 1999 how this "savings-investment gap" works:
The fundamental cause of the trade deficit in the United States today is the gap between what we save as a nation and the level of domestic investment. To cover this shortfall of savings, we offer investment opportunities to foreigners, using the surplus of incoming capital to pay for the import of goods and services over and above what we export. The US trade deficit has grown so rapidly in the 1990's because of a dramatic increase in domestic investment. Since 1992, annual real private investment in plant and equipment in the United States has rise 81%, from $557.9 billion to an annual pace of slightly more than $1 trillion so far in 1999. Real, price-adjusted investment in computers and peripheral equipment during that same period has increased more than 10-fold...Without a trade deficit, Americans could not import the capital we need to finance our rising level of investment in plants and new equipment, including the latest computer technology. The same appreciating dollar that expands the trade deficit helps keep a lid on inflation while lower import prices raise the real wages of the vast majority of workers. http://www.cato.org/testimony/ct-dg081999.html
Critics focus on the fact that the trade deficit continues to rise inexorably upward into the stratosphere; the 2002 level, some $435.2 billion,was the largest in history. See U.S. Bureau of the Census, "U.S. International Trade in Goods and Services: December 2002," Report Text, February 20, 2003, p.3. The flip side, which garners much smaller headlines, is the net inflow of foreign surplus investment. The dollars that Americans spend on foreign imports quickly return home to underwrite foreign purchase of stocks, bank deposits, commercial and Treasury bonds, or as direct investment in factories and real estate. It was no coincidence that the 1990's was a time of unpararelled prosperity and ever-widening trade deficits. Not having the eyes to see it, those who attack foreign investment in this country are walking sightless among a major economic miracle. Once again, Daniel Griswold shows us the way:
A principal reason why the United States runs a trade deficit with the rest of the world year after year is that foreign savers continue to find the U.S. economy an attractive place to invest...That net surplus of investment capital buys new machinery, expands productive capacity, funds new research and development,and keeps interest rates lower than they would otherwise be. Daniel T. Griswold, " The U.S. Trade Deficit and Jobs: The Real Story," Cato Institute Center for Trade Policy Studies' Free Trade Bulletin (No.3, February 2003).What Americans should be worried about is not the amount of foreign investment in the United States, but the fact that, as our domestic economic growth continues to remain sluggish, foreign dollars heading our way may no longer be as plentiful as they once were. A trend that first appeared during the Asian financial meltdown has continued to strengthen and, in all markets, there has been a sharp decline in foreign direct investment. The United States, while still the favorite spot for such investment, has not been immune. The flood of goods, services and capital across national boundaries, so marked in the early 1990's and throughout the decade, has noticeably slowed. Critics that have called for an end to what has come to be known as "globalization" may finally be getting what they wished for. http://www.conference-board.org/economics/press.cfm?press_ID=2115. The laws of economics, it seems, have not been repealed; our holiday from history may be ending sooner than any of us expected or would like. In its annual report released in early June 2003, the Commerce Department's Bureau of Economics Analysis reported that foreign spending in the United States was the lowest since 1994; foreign direct investment fell by over 64% in 2002 to a still healthy, but nonetheless smaller, $52.56 billion. http://xtramsn.co.nz/money/0,,5489-2428282,00.html
Other surveys are even more pessimistic. Last week, the Organization for Economic Co-Operation and Development released its study on this same topic entitled Trends and Recent Developments in Foreign Direct Investment. The OECD found that foreign direct investment in the United States plunged from $131 billion in 2001 to $31 billion in 2002- a 77% decline. Foreign investment in America last year was a shadow of what it had been as recently as 2000- only 10%!. Regardless of how much the Federal Reserve cuts short-term interest rates, fears of domestic terrorism, continued international insecurity, loss of confidence in corporate ethics and a general reluctance to assume risk are combining to stall the economic revival that is the necessary precondition for a restoration of sanity on immigration policy matters.
The rest of the world may be losing some of its confidence in the American economic miracle. The dollar has declined 12.2% against the euro; a currency that, only recently, was an object of derision for late night comedy shows no longer seems so funny. This is not because venture capitalists elsewhere expect the eurozone to do well, or even to out perform the United States. Indeed, the prospects for European growth are less promising than here at home. What is the problem with the dollar then? It is not that Europe is doing well, but that we are doing badly, that has given jittery foreign money a reason to sell off dollars. Precisely at a time when the American current account deficit may reach a record $500 billion, the ability of the American economy, no longer jazzed up by a booming stock market, to attract the foreign investment it needs to cover the difference has begun to be called into question.
In the view of James McCormick, global head of foreign exchange strategy at Lehman Brothers, the under-performance of the American economy has increased pressure on the dollar and will likely intensify the sudden, but pronounced, and largely unfamiliar, shortage of foreign capital. If, as seems to be happening, the flood of foreign investment is finally slowing, the Federal Reserve and the US Treasury will be forced to entice these now more reluctant investors by increasing interest rates. Driving up interest rates would serve as a serious drag on prospects for future economic revival and, in turn, weaken the lure of the dollar in global money markets still further. For Americans, this has the same effect as a tax increase. People will have less disposable income, consumer spending will drop, and the economy will remain sluggish. Not only are foreign dollars not flooding into the United States as they once did, but foreign investors may be re-evaluating what domestic capital positions they want to maintain; Lara Rhame, senior foreign exchange economist at Brown Brothers Harriman, expects a 10% decline in the dollar in 2003. Jonathan Fuerbinger, "Dollars and Euros: A Look Beyond the Parity Line," New York Times (Nov. 10,2002).
That brings us full circle to the need for a new kind of investor visa, one that works for America. The existing immigrant investor visa created by the Immigration Act of 1990 has not done what its advocates hoped, and its detractors feared, it would do. Few jobs have been created and even fewer visas issued as a result since October 1991. While it is still possible for individual investors to invest a million dollars in a new business, or rescue a struggling existing one, or even to invest half that amount in a rural area or urban ghetto, create 10 full-time jobs and thereby earn the right to the precious green card, few takers have appeared.
The reasons are not hard to find. Other countries, such as Canada and Australia, have more welcoming investment schemes; the panic over PRC reacquisition of Hong Kong has long since died down; and the persistent cultural opposition to foreigners "buying their way" into the United States simply will not go away. Moreover, despite the recent victory on the issue of retroactivity in the Ninth Circuit, the fact remains that immigrant investors continue to confront a bureaucracy and a system of regulations that offer short-term frustration and precious little long term success. At a time when America needs foreign investors more than ever, the relevance of the investor visa the law does allow has virtually disappeared. While it would be grossly overstating the case to argue that a meaningful investor visa would cause a tidal wave of foreign capital to cascade through the financial canyons of Wall or even Main Street, it is eminently defensible to maintain that the absence of such an investor visa makes a bad situation that much worse by serving to deprive the nation of a powerful lure that it could otherwise employ.
Since immigration policy, like all government action, is, at bottom, an expression of cultural values, the key to restoring the efficacy of the investor visa is to reassure a skeptical public that America is not for sale. How to do that? By decoupling the investment from any immigration benefit to the investor, but preserving it instead for the country from which the money comes. People invest in America to make money and will continue to do so if we remain a preferred option for their surplus capital. Instead of the EB-5 investor visa rationale, which seeks to entice and reward individuals, let us instead improve investor relations with those countries whose citizens service our debt, keep interest rates down, and provide the capital to turn economic opportunities into tangible assets. The individual investor may no longer get the green card, but China or Japan, for example, is awarded an investor visa to use as it sees fit consistent with the promotion of national security and preservation of national sovereignty. The new investor visa should be governed by the following precepts:
America needs an investor visa that works. We do not have one now. Isn't it time for a better idea?
Gary Endelman practices immigration law at BP America Inc. The opinions expressed in this column are purely personal and do not represent the views or beliefs of BP America Inc. in any way.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.