From Trump, Biden or Harris, Sovereign Wealth Funds Can Be Dangerous
Who would have thought that Donald Trump and the Biden White House would come up with the idea of creating a sovereign wealth fund (SWF) for the United States within days of each other? The Biden and the Trump fund, unsurprisingly, would have different objectives, but they would have the same basic structure. Like SWFs elsewhere in the world, each would create a pool of money, likely from some dedicated revenue source, to invest for the public’s benefit, on projects presumably too risky or too long-term to interest private investors. Although the idea has considerable surface appeal, an American SWF would carry a significant potential to distort the economy, dull its innovative edge, and perhaps even undermine representative government.
SWFs exist across the world and have done so for years. Globally, they control some $12.4 trillion in investable funds at present. Most exist in resource-rich places, typically associated with oil. Saudi Arabia and Norway stand out as most prominent. Because governments in these countries know that someday the oil will run out, they have taken a portion of the nation’s current oil revenue to fund investments in stocks, bonds, and other business ventures that will provide a source of wealth and income when oil ceases to do so. Some 23 states have also set up such funds – Alaska’s $78 billion Alaska Permanent Fund prominent among them, again associated with oil.
How Trump and Biden’s SWF Proposals Differ
Biden and Trump, separately, are talking about something broader than these SWF arrangements. Neither is looking to replace something it expects the country to lose in the future. The White House wants a fund to meet the challenge of China by investing in early-stage technologies and energy security. Donald Trump has talked about using such a fund to “invest in great national endeavors for the benefit of all American people.” He has mentioned infrastructure and medical research. Both sides are vague about sources of funding. Trump would draw his funding from his proposed tariffs. The Biden White House claims to be considering a number of revenue streams, presumably the millionaires’ tax that the president has so far failed to get through Congress, but that Vice President Kamala Harris’ campaign has also proposed. She has, however, not yet embraced the idea of a SWF.
The Appeal and Risks of an American Sovereign Wealth Fund
Each proposal has a definite surface appeal. China’s economic challenge is real and something that this country must address one way or another. Medical advances are always welcome and countless sources of research have emphasized the country’s need to refurbish and improve its roads, bridges, port facilities, rail links, the power grid, and the like. But if a SWF can appeal as a way to meet these needs, it carries significant disadvantages that deserve attention.
One problem might emerge from how the funds are invested. If, as is the case of other SWFs, the money goes into stocks, bonds, and other business interests, even if only initially, a Washington-based fund would soon become a major shareholder and bondholder in American corporations. The government, in other words, would come to own the economy’s means of production. The socialist overtones of such a result are certainly enough to give a great number of citizens pause, but even aside from this risk, a large government ownership stake could not help but influence management priorities, pulling them away from maximizing profits by appealing consumers and toward the service of political objectives.
There is more. The distraction from the pursuit of profits would surely discomfort private shareholders. Should they then lose interest in corporate shareholding and bond-holding, corporations, for all the funds channeled from the government’s SWF, would ultimately lose access financial capital and accordingly face limits on their ability to modernize, expand, hire, and meet consumer demands. Even if government management was especially careful to avoid such a result, the SWF’s need to siphon investable funds from the economy would tend to limit the monies available to private investors. However valuable the investments promoted by the SWF, a shrunken pool of private investments would disadvantage the economy’s ability to meet needs outside the government’s areas of interest.
Beyond the tendency to twist the economy’s emphasis from consumer to government priorities, a SWF could detract from the economy’s innovative dynamism. American innovation in large part depends on the great diversity of effort among the country’s entrepreneurs. That diversity is essential. It is, to repurpose a popular expression these days, “our strength.” The need for diversity arises because no one can see the future – not even the best educated and best-informed Washington bureaucrats. The truism makes innovation something of a guessing game about what will work best in the fundamentally unknowable years to come, what the great economist John Maynard Keynes described (rather poetically) as “the dark forces of time and ignorance.” Some guesses, of course, are better informed than others, but because all necessarily must cope with an unavoidable uncertainty, a lot of different guesses raises the odds that somewhere one of these many efforts will hit on a future need. But a SWF will by nature concentrate on just a few areas favored by its political managers – a limited number of guesses. Its dominance would then reduce the odds of effective innovations.
Proceed with Caution
Potential political ramifications are most unsettling. The income flowing from the fund’s investments would give the executive branch of government an ever-larger flow of funds that is entirely independent of a vote in Congress. No doubt Trump or Biden or Harris would delight in financial resources beyond those appropriated by Congress. But the nation would then live with government power independent of control or even review by the people’s elected representatives. Such a lack of review or even the need for a vote is antithetical to the constitution’s intent, if not its letter. In this regard, Americans would do well to look back to the origins of representative government even before 1776, when kings, needing financing and hence taxes, had to ask parliament for the levy and in the process elevated parliament to an equal if not superior status.
Doubtless, the SWF proposals from either the Biden White House or the Trump campaign have emerged in good faith. China is a challenge, the nation needs infrastructure investments, and the kind of financial support a SWF would offer must sound like an answer. But before rushing in the direction of what on the surface must sound very appealing, the citizenry and its leaders should look at all sides of the matter, including those that fall far short of appealing.
