Foreign Government Ownership of US Companies

What if China tries to buy, say, the Wall Street Journal?:

Globalization's Stir-Fry, by Harold Meyerson, washingtonpost.com: ...Now let's consider the suddenly hot issue of government ownership of private American companies. Nobody on the left has seriously proposed nationalizing private concerns for the past 60 or so years. During the 1980s, we did debate what was called "industrial policy" -- whether the government should invest in certain strategic industries -- but the idea was defeated by free-marketeers who argued that our government should not be in the position of "picking winners" in the U.S. economy, and that it probably couldn't pick winners anyway.

But, improbably, industrial policy is back. Only, it's not our government that is buying up our companies and picking the winners. It's China's, and will surely soon be those of Russia and other oil-rich states. ...[F]oreign governments control a cool $5.4 trillion in foreign currency reserves and have begun to invest a chunk of that in American companies. ...

To be sure, the Committee on Foreign Investment in the United States has the power to nix such purchases if they compromise national security. But what is the proper response of laissez-faire advocates to this sudden wave of foreign government investment in non-security-related companies? It's okay if the Chinese government owns a slice of our economy but not okay if our own government does? We trust every other government more than we trust our own?

I posed this question to William Niskanen, chairman of the libertarian Cato Institute... Foreign government ownership, he argued, shouldn't pose a problem unless that government obtains a controlling interest. When I then asked whether it would be a problem for the U.S. government to buy into such a company, he answered immediately, "I don't think I would want to be a shareholder in a company in which the U.S. government owned a good bit of the shares," and then, pausing, continued, "I haven't thought about this" -- "this" being the distinction between U.S. ownership and, say, Chinese.

Niskanen is hardly alone. None of us have thought sufficiently about how the belief in untrammeled capitalism could lead to foreign governments, whatever their agendas, controlling more and more of the American economy.

Upset that Rupert Murdoch, who kowtows to China, will buy the Wall Street Journal? What if China itself buys the Journal? Would the Journal's hypercapitalist editorial board oppose that free-market transaction? Globalization, as I said, scrambles everything.

There's been quite a bit on foreign government ownership of companies located in the U.S. recently so I'm starting to wonder, should I be more concerned about this?

Comments

[Robinia]

Excellent!!!
This post gave me a GREAT morning laugh, and a good ponderable for the day. Arrogant know-it-alls, as it turns out, very seldom do (know it all)...

[Meh]

It's certainly an interesting conundrum. Of course the game-theoretic point is that you have potential owners who (unlike pension funds) care about things other than profit. At that point, all the economic models of how the company will behave are off...

More entertaining to consider than the WSJ (because even though there are large barriers to entry in the newspaper industry they can be overcome with enough money) is to consider: "What if China wants to buy News Corporation?" i.e. Fox TV. There you're talking about a resource (TV spectrum) which is not so easy to replace, no matter how much money you have...

Of course, this is (or should be) a good moment to consider that "Economic commentators in the media" can be broken into two groups: the Academic camp and the Wall Street camp. The Wall Street camp doesn't care who is buying and selling shares, for them it's all commission, and remember kids, "What's good for Wall Street is good for America!"

The other camp is of course split between various political views, but at least as academics, they have more than Wall Street to think about.

[JRip]

Warren Buffett in Fortune mag October 2003:

…our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.

A perpetuation of this transfer will lead to major trouble. To understand why, take a wildly fanciful trip with me to two isolated, side-by-side islands of equal size, Squanderville and Thriftville.

On each island everybody works...each society is self-sufficient. ...the industrious citizens of Thriftville decide to do some serious saving and investing,...begin exporting ...to their one and only trading outlet, Squanderville. ...citizens of Squanderville are ecstatic ...they can now live their lives free from toil but eat as well as ever. ...there's a quid pro quo-but to the Squanders, it seems harmless: All that the Thrifts want in exchange for their food is Squanderbonds (which are denominated, naturally, in Squanderbucks).

Thriftville accumulates an enormous amount of these bonds, which at their core represent claim checks on the future output of Squanderville. ...Thriftville gets nervous...how good are the IOUs of a shiftless island? ...they continue to hold some bonds, they sell most ...for Squanderbucks and use the proceeds to buy Squanderville land....eventually the Thrifts own all of Squanderville. ...Squanderville has been colonized by purchase rather than conquest

[JRip]

October 2003 - Buffett continues...

So what does all this island hopping have to do with the U.S.? Simply put, after World War II and up until the early 1970s we operated in the industrious Thriftville style, regularly selling more abroad than we purchased.
_snip_
To put the $2.5 trillion of net foreign ownership in perspective, contrast it with the $12 trillion value of publicly owned U.S. stocks or the equal amount of U.S. residential real estate or what I would estimate as a grand total of $50 trillion in national wealth. ...5% of our national wealth.
_snip_
...will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them... We have entered the world of negative compounding-goodbye pleasure, hello pain.
+++
among those new owners:
Mr. Chavez of Venezuela,
the governments of China, Iran, Iraq, Saudi Arabia...

[dd]

Paulson and his Treasury crew are not worried (per Berry column):
"What if the Chinese fund, or that of another government, acquires an entire company? Lowery said that Deputy Treasury Secretary Robert M. Kimmitt was assured during a just-completed visit to Beijing that such acquisitions are ``not in their current planning but if such an opportunity arose in the future, it would be in non-sensitive areas.''

Non-sensitive = China buys Wal-Mart
The circle is complete as China buys at the market top and ends up with a double dip on the subprime bust.
Sounds like a plan.

[bakho]

Trade deficits are paid with assets. If we don't want to sell off assets, we should eliminate the trade deficit.

It is good that Toyota owns auto plants in the US. Domestic auto makers are making bad decisions, not giving customers the products they want, and shedding jobs. Toyota is giving customers the high mileage, reliable cars we want and providing thousands of new high paying jobs.

We should worry more about investments in unstable foreign countries (like Iraq) where the it costs more to protect the assests by military occupation than they are worth.

[Oupoot]

The only difference is that the profits of the intellectual capital, as illustrated by the iPod article, will start to flow to China, Saudi Arabia, etc. and not to the US. What will the US do then??

[JRip]

bakho says...
good that Toyota owns auto plants in the US
Oupoot says...
What will the US do then?

Automaking & selling in the USA:
1. Most folks finance their car purchase; many cars today are traded in "under water" - i.e. not paid for. The debt is just rolled into the new loan.
2. The negative savings rate in the USA was funded by rapidly inflating real estate pricing and easy refinancing to extract the new, higher "value". That source is drying up and the borrowers have moved to other forms of credit BUT the party is winding down.

Why do you think Toyota is rethinking their strategies for the USA and has already decreased their plans for plants?
Why do you think Daimler gave up on Chrysler? Ultimately a dim 10 years ahead as Americans are tapped out.

How badly?
June 2007: CenterPoint Energy announced that a record 1/3 of customers for natural gas in Minnesota have not paid all they owe for heating last winter. And neither was the winter a tough one nor was the price of natural gas very high. A $100 million hole.

So the folks who possess $$ come Directly to buy assets but are rebuffed as was China when the national Oil Co tried to buy Chevron or Dubai when they almost directly owned American ports.

So maybe they will come less directly.
What is the source of the money for Murdoch as he buys the Wall Street Journal?

Why do non-American companies sanitize their names and move their HQs? British Petroleum is BP. Hong Kong Shanghai Bank is based in London and is called HSBC.

So now we see these companies with dark names like Blackwater and Cerberus [guardian of the gate of Hades] running around buying up assets. Paying top prices. Winning all their deals. Where does their funding come from?

[kthomas]

Good article.

There's nothing like watching libertarians and laissez-faire advocates eat mud.

[dissent]

What is distressing is that we have arrived at this point because of the influence of the free market types and their libertarian fringe. Our whole country and its institutions have been corrupted by the rise of greed. Now it has gotten to the point that the borders of the nation, financial as well as physical, are threatened by greed. The libertarians and free market types should look closely at this situation: it is their mirror.

On a lighter note, remember when our esteemed govt was blathering that we couldn't buy drugs in Canada, as Canadian drugs weren't 'safe' enough for Americans? Well, where do you suppose American pharmeceutical companies make their potions? Often enough, in China. Doesn't that make you feel 'safe'?

[Bruce Wilder]

Do you think George W. Bush's policy in the Middle East serves the interests of the American People, or of Saudi Arabia and the Gulf States?

[Gerard MacDonell]

I don't see the irony. If the Chinese government is motivated by profits, then they are just like any other investor. If the Chinese government is motivated by something other than profits, then they are inclined to overpay and transfer wealth from China to the United States. In contrast, the United States government would presumably not be motivated by profit and is funded by local taxpayers. So the two forms of public ownership are indeed quite different, and there is no contradiction in supporting one and not the other.

This is not to say that we should ignore Chinese purchases of US assets. As you mention, there may be security interest involved here. Or maybe there is some sort of social social cost incurred when we allow the Chinese to depress returns here by driving up our stock (and bond) prices.

It is just that your sniggering over foolish consistency is beside the point, something I would expect more from the right than the intelligent left. If you have an argument, then why not just present it? I am sure you have something interesting to say.

[James Killus]

I'm actually most intrigued by Meh's point:

"Of course the game-theoretic point is that you have potential owners who (unlike pension funds) care about things other than profit. At that point, all the economic models of how the company will behave are off..."

To the extent that economic models demand any general underlying assumptions be made about motives and the rational pursuit thereof, they are suspect. I've seen far too many arguments that contains something like, "Well, X wouldn't do Y, because they'd make more money by doing Z."

As long as X is making money by doing Y, there is no reason to assume that X will pursue any other strategy. In fact, the only universal truth about economics is that if X is losing money by doing Y, then X will eventually go broke unless X stops doing Y. And even here, "Y" must include all of X's cash flow activities, because you can cross-subsidize behavior indefinitely so long as you have a net positive cash flow.

Or, as Charles Foster Kane said:

"You're right, I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars *next* year. You know, Mr. Thatcher, at the rate of a million dollars a year, I'll have to close this place in... 60 years."

Currently, of course, the U.S. government has a negative cash flow, which it will eventually cover either by tax or the printing press, but it also has a lot of assets that can be sold, and a lot of patronage that can be locked in for decades, provided the right kind of thieves are in office.

[jonfernquest]

"None of us have thought sufficiently about how the belief in untrammeled capitalism could lead to foreign governments, whatever their agendas, controlling more and more of the American economy."

Well to start thinking, read the award winning "China Shakes the World: Rise of a Hungry Nation"...and then quickly look for the rebuttal because this book doesn't make any concessions to the basic theme of China as a threat.
http://www.chforum.org/scenarios/new/china4.html

http://www.chforum.org/scenarios/new/china4.html

[anne]

Oh dear, the point Warren Buffett was making was that we are simply not saving enough privately, which has been the case these last 6 years, and government in turn is both not saving and spending in extremely wasteful, impossibly wasteful fashion. But, we are determined to continue to spend more than $15 billion a month on the tragic insanity Iraq, and private consumption is not likely to decline as long as the economy is fairly healthy, so whar are we complaining about?

[johnchx]

James Killus writes:

In fact, the only universal truth about economics is that if X is losing money by doing Y, then X will eventually go broke unless X stops doing Y.

Good point.

I'd put it a little differently: the economist's "standard model" (to borrow the physicists' terminology) of the firm assumes that firms -- or their investors -- care about opportunity costs. If you care about opportunity costs, then the distinction between "failing to earn maximum return" and "losing money" disappears. They are the same thing.

If, on the other hand, economic actors ignore or underweight opportunity costs -- and I believe that there is both survey evidence and behavioral econ lab evidence that they do -- the results will not be so Pareto-optimal as we might hope.

The Charles Foster Kane example illustrates a different -- though also interesting -- phenomenon: the fact that business activity can have both "firm-like" and "household-like" dimensions, and that separating the two can be extremely difficult. In particular, running a business in a particular way can be a consumption good. In the film, Kane is perfectly contented to pay a million dollars a year (plus opportunity costs...that capital could be turning a profit elsewhere!) in order to subsidize what is basically his hobby.