Sunday, January 01, 2012

U.S. Net Investment Income Isn't As Strong As It Seems

Paul Krugman argues that the fact that the U.S. has a net investment income surplus from abroad even after more than 30 years of often large current account deficits means that one shouldn't worry about excessive borrowing.

He is actually partially right on this one. The fact that many foreign investors have been stupid enough to buy the crappy Treasury securities (governments because of irrational mercantilist policies, private investors because of the even more irrational belief that they are "safe havens") which historically have given lower returns than almost all alternatives, and which at today's yields are guaranteed to inflict even greater losses on anyone who buys them have indeed meant that the U.S. has been able to evade the normal cost of a high level of borrowing.

However, official investment income statistics exaggerates just how high U.S. investment income from abroad is while underestimating GDP by the same amount. The reason for this is that U.S. multinational corporations systematically evade the high U.S. corporate income tax by attributing (using manipulated prices in intra-corporate deliveries) their profits to Ireland and other countries with low corporate income taxes. Because too much of costs and too little of revenues are attributed to U.S. operations this means that imports are overestimated and exports underestimated in official statistics,thus contributing to a too low estimate of GDP while net investment income is overestimated by the same amount that GDP is underestimated.

Because the underestimation of GDP is as big as the overestimation of net investment income, this has no effect on GNP or national income. The relevance is instead that net investment income statistics is misleading when it comes to estimating the effects of foreign borrowing.


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