A U.S. sovereign wealth fund could help address America’s persistent trade imbalances, a goal of … [+] former President Trump’s.
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Both former President Donald Trump and aides to President Biden have floated the idea to create a U.S. sovereign wealth fund (SWF). While some have dismissed the idea outright, it’s worth examining the potential benefits and addressing some of the concerns surrounding this ambitious proposal.
Critics on the political right often reflexively oppose any new government entity. Some argue that as a debtor nation, the U.S. is ill-suited for an SWF, which typically are associated with countries running surpluses. However, this overlooks the vast, underutilized assets controlled by the federal government. By some estimates, the U.S. federal government controls roughly $5.4 trillion in assets and potentially more than $100 trillion when including natural resource wealth. An SWF could be a tool to better manage and leverage these resources. Other funding mechanisms could include special bond issuances or direct injections from entities like the Federal Reserve.
Rather than add to the debt, a well-designed SWF could prove a credible mechanism for paying down national debt, especially if a portion of its returns is dedicated by law to debt repayment. Returns on the fund could also be used to update America’s infrastructure or to provide dividend payments to citizens, similar to Alaska’s Permanent Fund, thereby returning some U.S. national wealth to its rightful owners.
Another common concern is that an SWF would crowd out private sector investment. Given the U.S.’s current fiscal situation, it’s unlikely a U.S. SWF would start off particularly large. If it ever began to truly compete with the private sector, we could expect healthy pushback from corporate lobbying to limit its growth. So long as SWF profits stay in the public sector, companies will fight to maintain market share.
More to the point, the purpose of a government SWF is to invest in assets that the private sector won’t, taking on riskier bets or projects with longer time horizons than private investors are willing to consider. This could fill important gaps in the market and potentially catalyze innovation. On the flip side, some investments, due to taxes, are too low-yielding to be attractive to investors, and these could also be a target of an SWF, since presumably it wouldn’t shoulder any tax burden.
It’s also worth noting that SWFs are not limited to autocratic regimes. Norway has one of the world’s largest SWFs, and the country remains free and has low-corruption. According to the Wall Street Journal, 23 U.S. states already have some form of sovereign wealth fund. This includes Alaska, Texas, and New Mexico. These examples demonstrate that SWFs can operate successfully within democratic systems.
One might question whether the government is even capable of earning a healthy return on investment. Public choice economists love to point out that government employees are subject to the same motivations and self-interest as people in the private sector. By this same logic, if private individuals can earn a profit, why can’t government entities do the same? Both can rely on the same price signals and profit-and-loss feedback mechanisms that free market advocates champion. Moreover, decades of experience shows that sovereign wealth funds can indeed earn consistent profits.
The danger of politicization is a legitimate concern, but one that may be overstated based on the real-world experience of existing SWFs. Many have achieved a level of independence similar to that of central banks like the Fed.
Another compelling reason for creating a U.S. SWF is to address what could be called the “reserve currency resource curse.” The dollar’s status as the global reserve currency allows the U.S. to borrow and spend far more than it could otherwise, leading to fiscal profligacy akin to that found in some oil-rich nations. However, U.S. borrowed funds are typically spent on consumption in the form of military and entitlement spending. In this regard, it may even be desirable if an SWF were initially funded via borrowing. To the extent it displaces traditional federal government borrowing, a SWF could redirect some of this funding toward productive investments, applying a potential brake on spending by Congress by raising the federal government’s cost of borrowing and providing a competitor to U.S. Treasury bonds.
One often overlooked argument for an SWF is that it could serve as a benchmark for government efficiency. Very few government policies aim to achieve benefits commensurate with their costs. An SWF earning, say, a 5% annual return would offer a clear point of comparison. Any proposed regulation or government program should, at a minimum, be able to demonstrate comparable returns. Historically, some critics of comparing government investment yields to private ones have argued that it is impractical for direct government investment in markets. An SWF makes that point moot.
Additional benefits of a U.S. SWF are that it could serve as an intergenerational savings vehicle, thereby preserving wealth for future generations, and give confidence to investors in U.S. Treasury bonds that they will be repaid. This will not eliminate the need to make other difficult decisions, such as reforming entitlement programs, but it does make the U.S. fiscal outlook a little less terrifying.
With these benefits in mind, there should still be clear limits placed on any such fund. It should not engage in industrial policy or otherwise attempt to pick winners and losers in the domestic economy. An obvious model is the Federal Reserve System, which enjoys considerable independence from the executive branch and the president so it can conduct monetary policy. An explicit mission to maximize risk-adjusted returns should be any SWF’s mandate.
In fact, there may be good reasons to bar an SWF from investing domestically altogether. Besides avoiding political entanglements, this could help address global financial imbalances. Developing countries often offer higher returns and have greater need for capital, but geopolitical and economic distortions cause funds to flow in the opposite direction. A U.S. SWF investing abroad could help address these distortions.
In this sense, Trump’s focus on trade deficits, while misguided in its proposed solution in the form of tariffs, highlights a real issue. Short of dramatic government spending cuts (which seem unlikely in the near term), an SWF could create more financial outflows, thereby helping to reduce the trade deficit. Meanwhile, independence from the executive branch and a clear mandate could protect it from being used as a tool of foreign policy.
Lastly, a sovereign wealth fund could help reverse one of the most pernicious outcomes of government policies in recent years. This is the problem of privatizing gains while socializing losses, as exemplified by the 2008 bailout of banks or loan guarantees from cronyist government agencies like the U.S. Export-Import Bank. With an SWF, the gains are shared by all.
So often our debates center around the size of government. But the key distinction is not between the government and the private sector, but between market and non-market activity. Government so often fails because it lacks the advantages of the price system. Sovereign wealth funds offer a way to bring market discipline to one portion of government activity.
While challenges and risks exist, a well-designed U.S. sovereign wealth fund could be a powerful tool for addressing our long-term fiscal challenges, balancing global financial flows, and setting a new standard for government fairness and efficiency. In short, a U.S. SWF merits serious consideration and debate. Any specific proposal would have to be scrutinized carefully, but the fact that leaders of both major political parties are suggesting it demonstrates the SWF idea has legs.
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Publish date : 2024-09-10 08:15:00
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