Here’s a letter to my long-time hostile correspondent Nolan McKinney:
You’re correct that in his “Memo” (of which I am highly critical) Sam Hammond proposes that capital controls be imposed, not to limit all foreign investments, but only (as Hammond says) “to restrict foreign capital from entering sectors that are either politically sensitive or subject to financial speculation.” Yet you are incorrect, I believe, to describe this proposal as “sensible, practical and clearly beneficial.”
First, what exactly is meant by “politically sensitive”? Are investments politically sensitive if they’re made by foreigners who are portrayed in the press and by politicians as economic competitors to Americans? What about foreign investments that strike the public’s nerve because these happen to be declared to be dangerous by bleating heads on Fox News or MSNBC? In this era in which nearly everything is cast in a political light, almost all foreign investments in America could be classified as “politically sensitive.”
I remember when in 1989 Japanese investors bought Columbia Pictures, creating what is today Sony Pictures. Many Americans were outraged that an iconic American movie studio was to be owned and operated by the Japanese. One of my then-fellow law students, decrying this purchase, commented to me that “The last thing we need is glitzy Hollywood movies of Godzilla.” Did such irrational outrage back then make this purchase “politically sensitive” enough to have the government prevent it?
Second, financial speculation is inherent to all investment. No one purchases assets knowing that their values will rise; everyone who purchases assets hopes and speculates that their values will rise; and every asset’s value is subject to rising excessively because of investors’ mistaken optimism.
Taken literally, Mr. Hammond’s proposal would in fact prevent all foreign investments in America.
You’ll accuse me of hyperbole. You’ll insist that experts charged with power to impose capital controls could be trusted to distinguish ‘bad’ investments, which are likely to trigger bubblicious speculation, from ‘good’ investments, which are made with appropriate sobriety. To which I respond: People with access to such knowledge don’t need government power to protect the rest of us from doomed investments. Such oracles would simply short all assets the excessive values of which are destined to decline. Indeed, these soothsayers would not waste their time working for the government, as that time would be far more lucratively spent by taking positions as private investors against the less-well-informed investors who are moving asset prices in wrong directions. Anyone who needs government power to allegedly prevent undue speculation is someone who, we can be sure, is too poorly informed to exercise that power in ways that will achieve the advertised happy results.
Here’s the bottom line: You, Sam Hammond, Oren Cass, Marco Rubio, and all promotors of protective tariffs, subsidies, capital controls, and other industrial-policy interventions as means of improving the economy believe that if the right people are given such power to intervene they thereby become angels with super-human knowledge. In contrast, I believe no such thing.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030