It is truly heartening to observe that President Biden and former President Trump share a common vision: they both favor the establishment of a sovereign wealth fund. It might, at first glance, seem like a welcome eruption of bipartisan agreement. It’s absolutely the kind of unity we need! Yet, pausing for a deeper consideration, one could argue that the concept of a sovereign wealth fund isn’t necessarily the game-changing solution our nation needs.
Sovereign wealth funds serve a very specific purpose and can indeed become instrumental under certain circumstances. A government, for instance, may accrue an impressive surplus from an owned asset, which it can then invest in a sovereign wealth fund, separate from its regular budget. It’s like a treasure box full of surplus profits, just waiting to be wisely invested. Indeed, this strategy has served Norway and Alaska, where huge revenues from oil have been efficiently utilized in this method.
However, not all nations follow this route. Some countries choose to integrate the income from unique and potentially exhaustible resources into their consolidated government budget, and then find themselves facing a budget crisis when the asset’s value falls. Consider the scenarios witnessed by numerous developing nations, relying heavily on singular commodities like cocoa or petroleum, to fuel the government’s everyday expenses.
Unfortunately, the past suggests that in the case of the United States, its more traditional stance might be to lean toward the second model, thus merging any profits from the sovereign wealth fund into the total government budget. This was the approach taken with the Social Security trust fund surplus back in 1968. It seemed like a good idea at the time, serving to camouflage the growing budget deficit due to Vietnam and the Great Society.
On the contrary, if we were to speculate and the sovereign wealth fund didn’t live up to expectations, it would likely be taken offline from the consolidated budget. An interesting twist considering that similar moves landed key players from Enron behind bars! However, this time, Congress would be making it legal for the federal government.
A second hitch lies in the absence of any unique revenue stream identified to feed the fund, as is the case for Norway with its oil revenue. The present echoes of a budget deficit rather than surplus, complicating matters further. Advocates of the fund are, astonishingly, suggesting that the US borrow money to support this venture. Those with memories long enough may recall how Orange County was engulfed in a financial fiasco due to similar borrowing back in 1994.
Moreover, the success of this delicate game of financial seesaw hinges on the crucial condition that the returns from the US sovereign wealth fund outpace the interest payable on borrowed funds. Those taking the stand for the fund point to the historically faster appreciation rate of the stock market as compared to the federal interest rates. The same reasoning was touted by President George W. Bush in 2005, advocating the diversion of some social security contributions to market investments.
Senate Democrats had promptly rejected President Bush’s proposal, labeling it as a move towards ‘privatizing’ social security and threatening retirement funds owing to potentially poor investment decisions. Today, one can’t help but notice the irony in their sanctioning a sovereign wealth fund, which would essentially carry similar risks.
The stakes rise even higher in the context of a sovereign wealth fund as political influences may then sway the government’s investment directions. No one can deny that the political realm has consistently failed to resist signs of favoritism when choosing where to distribute funds. From the Solyndra mishap under the Obama administration to the resurfacing of earmarks in 2021, the rollercoaster of political expedience continues.
Further exacerbating this issue are potential conflicts of interest that might rise once the government gets a stake within a company. Government strategies regarding taxes and other policies could be skewed to favor the firm in whose stocks it is investing. Hypothetically, let’s consider a situation where the federal government owned Ford but not GM stocks in 2009, would the decision to aid GM have extended to Ford? It’s a tough call with no clear answer.
A sovereign wealth fund, therefore, brings along its financial uncertainties and potential conflicts of interest. While tackling economic challenges necessitates innovative thinking, it is essential to remember that not every proposition passed up the chain is a golden ticket. Sometimes, it’s better to examine the rabbit before we pull it out of the hat.
Keeping the economy’s long game in view, it might then be worth asking: is a sovereign wealth fund truly the best strategy for the United States? Are the risks justified by the anticipated gains? An in-depth and objective analysis would provide the necessary insights.
Former President Trump and President Biden’s agreement on this issue could potentially spark a broad and serious dialogue about these very concerns. Their bipartisan acknowledgment provides a solid footing to launch into a comprehensive and nuanced debate.