Sunday, April 16, 2006

Friday 14th to Sunday 16th April

The piece of which a shorter description would be "Jim Glass is Right", sorry, "Jim Glass is right", is very Timesque. Tim takes issue with complaints that the projected returns on privatising social security were incompatible with US economic growth projections, as apparently he believes that no-one, except Jim Glass, was aware that companies derived income from overseas operations. He then quotes a statistic that 60% of US companies sales derive from home operations, and apparently all of that means "Jim Glass is right".

WW will restrict ourselves to a few comments:

1. The 60% figure seems too low - the Economist run a similar article in February also quoting Patrick Artus's figures and he said 75%.
2. We don't recall Krugman, De Long or Baker saying that US companies did not have overseas operations, or that US consumers did not buy foreign shares, just that it was not likely.
3. Current figures bear that out. There is some slight issue with apples and oranges in the following sets of figures, but it gives some idea of the magnitude. Profits of US companies in 2005 were $1,146 bn, of which overseas operations and US holdings of foreign shares added $334bn bn. However there were also outflows of $128bn, making a net equity addition of $206bn, ie under 20% of total profits. It's important to note here that around 50% of these profits come from Europe, which is not demographically unchallenged itself.
4. Furthermore those aren't the only inflows and outflows. In 2005 US GDP was 12,487 bn, and then there was 508bn of income from abroad and 474 bn of income flowing overseas. So the net earnings from income abroad was just 34 bn. In the context of US GDP then this is about 1/4 of 1%. If you think about it in terms of equivalent people then that would be about 600,000. I think there is something like 40m retired US citizens, a number that is rising quickly. So even if they got all the returns then it would mean their incomes were about 2% higher than they would otherwise be).
5. But can the situation change? Jim Glass envisages people sending their savings directly to Chinese mutual funds, presumably when they exist. However there are many signs that the situation will worsen. The current account is obviously the major thing to note here. Indeed the fact the US has a surplus on overseas income at all is somewhat of a mystery, and in this excellent summary Barry Eichengreen looks at the arguments. The two most commonly heard are in conflict - and as Eichengreen says there is apparently no reason to believe that the US can continue earning higher returns on its investments than it pays to overseas holders. Why? Because Markets Work.

Broadly speaking the issue here, as it has been in many of these discussions over the years, is a fallacy of composition. Because we can diversify our portfolios (or at least diversify our portfolios of quoted company shares, which is not the same thing) and even get some income from abroad, it is believed that everyone can do it, and perhaps worse, that everyone is doing it.

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