Subject: Foreign Money, National Security, And The Midterm Elections
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>, "Devon Archer" <[email-masked]>, "Curtis Hastings" <[email-masked]>, "Neil Callahan" <[email-masked]>
Date: Mon, 1 Nov 2010 10:47:19 -0400

Foreign Money, National Security, And The Midterm Elections
Posted: 31 Oct 2010 05:41 AM PDT
By Simon Johnson

Campaign contributions by non-citizens are a huge issue lurking behind  
the midterm elections; they will be even more important in 2012.   
Think about the economic dynamics:

Americans have a long-standing and well-founded aversion to foreign  
involvement in their politics, and it is well-established that this  
can happen in part through corporate “commercial” structures.  Thomas  
Jefferson objected to Alexander Hamilton’s plan for a national bank in  
part because he feared this would become a stalking horse for the  
British in some form (see Chapter 2 of 13 Bankers for the context).   
Dubai Ports World was not allowed to invest in the United States – for  
reasons of perceived national security.  You may or may not think that  
case was handled well, but we have the CFIUS process to vet foreign  
direct investment for good reason.
The Supreme Court has determined that corporations can make political  
contributions virtually without limit, apparently not understanding or  
not caring that (a) management has a fiduciary responsibility to  
shareholders, (b) globalization means more foreign shareholders on  
average (for privately held companies and funds, as well as publicly  
traded companies), and (c) at the margin, key strategic shareholders –  
the people who provide extra capital when the chips are down –  
increasingly tend to be foreign.  Think about the role of Sovereign  
Wealth Funds in providing funds to our banking system in 2007-08, or  
the fact that Citigroup goes cap-in-hand to Saudi Arabia every decade  
or so.
During the Reagan years and again, even more, under the Second  
President Bush, the US ran a large current account deficit – reaching  
6 percent of GDP before the 2008 crisis (and still around 3 percent of  
GDP).  You may think this a technical detail that is largely  
irrelevant to the political process, but you would be wrong.  We  
finance our current account deficit with capital inflows from abroad  
or, to put that more plainly: Foreigners buy and hold financial assets  
in the United States.  Some of those assets are US government  
obligations but traditionally and increasingly non-US people have also  
acquired claims on corporate entities – including common or preferred  
stock.
There are good economic reasons to allow foreigners to buy financial  
assets in the United States.  We like to invest around the world and a  
high degree of reciprocity is only reasonable.

The US dollar is the “reserve currency” of choice – for the past 50  
years this is where countries and careful individuals have chosen to  
keep their rainy day funds.  This was a core idea behind the  
international trading system constructed after 1945.  You may not like  
it, but what alternative exactly would you propose?

And there is nothing wrong per se with running a current account  
deficit – although it would be much better if we used the inflow of  
foreign capital to finance investment, rather than (as in the Bush  
years) tax cuts that just further encourage overconsumption.

Irrespective of how you feel about foreign capital inflows in economic  
terms, you have to face the political reality.  As foreigners  
accumulate claims on the United States, they will increasingly  
diversify into corporate assets (in fact, this is the advice they get  
from their Wall Street advisers).  Some of these corporate assets  
explicitly come with voting rights – but those are supposed to be  
voting rights over the corporation (or investment fund), not voting  
rights in political elections.

We have effectively enfranchised foreigners in US elections.  This is  
clearly and absolutely not what the drafters of the Constitutions had  
in mind.

This dissonance between our claimed political values and the political  
reality will grow over time – unless you think our current account  
deficit will swing into surplus at any time in the future, the net  
inflow of foreign capital will continue.

The only way to deal with this is to require complete disclosure by  
all corporate entities (and similar “veils” like investment funds of  
any kind) regarding the contributions they make to any organization or  
individual involved in political messaging or campaigning.

To be sure, this would be onerous.  Thomas Jefferson and his  
colleagues would have wanted it no other way.  The US Constitution was  
not drawn up to protect the rights of foreign citizens.  It defines  
who is and who can become an American – and the rights and  
responsibilities of those who would like to rule the United States.

And however you prefer to define our legitimate national security  
interests, how are they consistent with letting foreign citizens  
influence or even determine the outcome of our elections?