The Determinants of U.S. Capital Imports

Abstract

Since 1982 the United States has been a large net importer of capital. This condition, consistent with the standard explanation, appears to be primarily attributable to the large sustained federal budget deficit. In addition, net U.S. foreign investment in the 1980s appears to be more sensitive to changes in domestic demand, suggesting an increasing substitutability of domestic and foreign goods in the U.S. market. Changes in foreign economic conditions and policies in the 1980s do not appear to have had a substantial effect on the balance of capital flows. The article concludes that the large net U.S. importation of capital is not a policy problem but is the result of a policy problem, specifically, the decline in private saving and the large continuous federal budget deficit.

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References

1. The measure of gross saving in Figure 1 includes the statistical discrepancy.

2. The measure of additions to the U.S. investment abroad in Figure 2 includes the statistical discrepancy and the small differences between the national income account measure of net foreign investment and the balance-of-payment account measure of the current-account balance.

3. A. Lans Bovenberg , “The Effects of Capital Income Taxation on International Competitiveness and Trade Flows,” American Economic Review, 79:1045-1064 (Dec. 1989).

idem , “The Uneasy Relation between the Budget and Trade Deficits,” in Dollars, Deficits, and Trade, ed. James A. Dorn and William A. Niskanen (Boston: Kluwer Academic, 1989), pp. 305-316.

5. See Niskanen , “Uneasy Relation,” for a summary of this evidence.

Bovenberg , “Effects of Capital Income Taxation.”

7. The measure of the real interest rate in Figure 3 is the yield on U.S. Treasury securities with a 10-year maturity minus the inflation rate on the fixed-weight GNP deflator. The real exchange rate is the multilateral trade-weighted value of the U.S. dollar adjusted for changes in consumer prices.

8. The substantial proportion of the U.S. government budget deficit financed abroad, in turn, is probably the best explanation why the deficit does not have much affect on domestic interest rates.

9. The tax preferences on domestic business investment in the 1980 tax law, for example, appear to have contributed to the unusually strong rate of investment and real GNP growth in 1983 and 1984. See Michael J. Boskin , The Impact of the 1981-1982 Investment Incentives on Business Fixed Investment (Washington, DC: National Chamber Foundation, 1985).

10.

10. Niskanen , Reaganomics, p. 104.

11.

11. Bovenberg , “Effects of Capital Income Taxation,” p. 1060.