By Andrew Atkeson
Since the early 1980’s, the residents of the United States (households, firms, and governments) have consistently spent more than they earn, and, as a result, the U.S. has run current account deficits with respect to the rest of the world for the past 40 years. And yet, even as late as 2007, the net foreign asset position of the United States, a measure of the market value of the net equity and debt claims that residents have on the rest of the world, was only mildly negative. How might these two observations be reconciled? How was it that U.S. residents were able to consistently spend in excess of their income without becoming deeply indebted to the rest of the world?
In important early work on this question, Pierre Olivier Gourinchas and Helene Rey argued that the answer to how these observations might be reconciled lay in the third observation that residents in the United States appeared to enjoy a special privilege: they appeared to enjoy capital gains on the assets that they held abroad well in excess of the capital gains that residents of the rest of world enjoyed on their assets in the U.S.
Over the course of the past decade since the Great Financial Crisis, however, the net foreign asset position of the United States has dramatically worsened, now standing at negative 60 percent of U.S. Gross Domestic Product (GDP). In a recent paper “The End of Privilege: A Re-examination of the Net Foreign Asset Position of the United States”, Professor Andy Atkeson and his co-authors Fabrizio Perri and Jonathan Heathcote analyze why the U.S. net foreign asset position has deteriorated so much. They find that two key developments explain a great deal of this big increase in the net liability of U.S. residents to the rest of the world. First, by the start of the past decade, foreign residents had acquired large equity claims on firms in the United States, both through their direct investments in U.S. subsidiaries and through portfolio investment in U.S. stock markets. Second, the market values of these equity claims on U.S. firms has boomed as stock prices in the U.S. have boomed over the past decade in a pattern not matched by foreign stock prices. Hence, over the past decade, at least ex-post, the apparent privilege enjoyed by U.S. residents has been reversed: foreign residents now appear to have enjoyed much larger capital gains on their assets in the U.S. than U.S. residents have earned on their assets abroad.
Professor Andy Atkeson and his co-authors then go on to ask what these developments might mean for the welfare of Americans? The data appear to give conflicting answers to this question. The boom in the valuation of U.S. corporations over the past decade has meant that U.S. residents have enjoyed record levels of financial net wealth relative to income at the same time that they have incurred record liabilities to the rest of the
world relative to income. To answer this question about the impact of these developments on the welfare of U.S. residents, they build a tractable valuation model of the U.S. corporate sector and of the impact of changes in the valuation of this sector on the U.S. current account and net foreign asset position that allows us to dig deeper into the underlying factors driving what they see in all these data.
Professor Andy Atkeson and his co-authors find that the most important factor driving the boom in the value of U.S. corporations is a dramatic increase in the profitability of these corporations relative to both historical experience and to what corporations are experiencing in the rest of the world. They find that the share of corporate value added that is flowing to owners of firms rather than to payments to labor, to taxes, or to investment in new fixed assets is now roughly twice as high as it was over the 50 years from 1950 to 2000 and has not occurred in other advanced economies for which data are available. Their model attributes this boom in profitability to a large increase in the market power of U.S. corporations. This boom in U.S. corporate profitability has been matched by a boom in corporate valuations. That is, they do not find that the decline in long-term real interest rates that the U.S. have experienced over the past few decades played a major role in accounting for the boom in the valuation of U.S. corporations.
With this more fundamental accounting of events over the past decade in hand, they are able to address the question of what these developments have meant for the welfare of Americans? Here their answer is negative. Certainly, Americans are receiving a smaller share of U.S. corporate value added in the form of labor earnings and tax revenue. But, to the extent that Americans are also owners of these firms, they are enjoying higher cash flows from their ownership claims on these firms. Absent substantial foreign ownership of U.S. firms, these two effects of an increase in market power of U.S. firms would roughly offset, leading to only a small impact on the welfare of U.S. residents overall. However, in a world in which residents of the rest of the world own a great deal of U.S. equity, then Americans lose out substantially as the market power of U.S. firms increases because much of these increased profits are send abroad to foreigners.
What implications does our work have for the evolution of the U.S. net foreign asset position going forward? Here Professor Andy Atkeson and his co-authors believe that the central lesson of our work is that, in our world in which U.S. residents and those in the rest of the world both hold large equity claims on each other, it will be the relative performance of stock markets in the U.S. and abroad that drive the U.S. net foreign asset position. They have already seen some of this in the data from 2022: as U.S. equities have fallen sharply in the past year, the U.S. net foreign asset position has improved. While they hesitate to make predictions about which stock market will do better, they
do believe that this factor, more than current account deficits, will be the key factor driving changes in the market value of U.S. net liabilities to the rest of the world.