How would a US sovereign wealth fund even work?

Summary

Episode Summary: "How Would a US Sovereign Wealth Fund Even Work?"

Podcast: The Indicator from Planet Money
Hosts: Paddy Hirsch & Waylon Wong
Release Date: February 6, 2025

In this insightful episode, Paddy Hirsch and Waylon Wong delve into President Trump's recent executive order mandating the Treasury and Commerce Departments to develop a plan for establishing an American sovereign wealth fund. The hosts explore the concept, potential benefits, challenges, and the varied reactions this proposal has elicited from experts and the public alike.

Introduction to the Executive Order

The episode kicks off with the announcement of President Trump's executive order aimed at creating a sovereign wealth fund for the United States. The hosts highlight the spectrum of reactions, ranging from skepticism to enthusiasm.

Paddy Hirsch remarks, "The reaction to this latest order ran the usual gamut from disbelief and derision through hilarity to rapture" (00:27).

Understanding Sovereign Wealth Funds

To provide a foundational understanding, the hosts revisit the basics of sovereign wealth funds (SWFs), referencing a previous episode that explained their origins and functions.

Tyler Cowen, a professor of economics at George Mason University, elaborates on SWFs:

A sovereign wealth fund arises when a government has some excess money and it takes that money and invests it. And the idea is to earn a highly positive rate of return on that money so the country's wealthier and citizens can pay lower taxes.
— Tyler Cowen (02:50)

Historical Context and Existing Funds

The discussion traces the history of SWFs, noting that the first were established in the United States in the 1800s. Currently, there are approximately 15 state-level SWFs in the U.S., with the Texas Permanent School Fund being one of the most prominent.

Marisa Perez Diaz, vice chair of the Texas Permanent School Fund, explains:

The Texas Constitution identified certain lands across the state, and all of the proceeds from the sale or the lease of those lands would be the funding mechanism for the Permanent School Fund. That included the leasing of surface and mineral rights and in particular, oil and natural gas royalties around the world.
— Marisa Perez Diaz (03:43)

The U.S. Fiscal Situation

A critical barrier to establishing a national SWF is the absence of a federal budget surplus. Tyler Cowen points out:

If your country is small, well governed, and has a surplus, it is probably a good idea. We are not any of those.
— Tyler Cowen (04:21)

The U.S. has been operating with a deficit since 2001, resulting in substantial national debt. This long-standing deficit challenges the feasibility of a traditional SWF.

Divergent Opinions: Cowen vs. Bruhl

While Tyler Cowen remains skeptical about a U.S. SWF, not all economists share his view. James Bruhl, a senior fellow at the Competitive Enterprise Institute, offers a contrasting perspective.

James Bruhl argues:

We could channel some of the investment dollars that flow into the country from foreign investors, we could sell special bonds. Or we could manage some of our national assets better, kind of like Texas does with its land.
— James Bruhl (05:34)

Bruhl suggests alternative revenue streams and improved management of federal assets as viable pathways to funding a national SWF, despite the current deficit.

Potential Uses and Challenges

Both experts discuss the possible applications of an SWF's returns, such as paying down debt, issuing dividends to citizens, or investing in infrastructure. However, they caution against political interference in fund management.

Tyler Cowen warns:

We would be trusting our government to be allocating funds to investments without a very good process for evaluating how well that will be done and possibly outside the normal bounds of our Constitution.
— Tyler Cowen (08:36)

James Bruhl responds by emphasizing the need for independence in fund operations:

You really want to have independence, probably something akin to what the Federal Reserve has when it conducts monetary policy.
— James Bruhl (08:59)

Structural Considerations and Legal Hurdles

Establishing a national SWF would likely require legislative action, presenting potential legal and political obstacles. The hosts speculate that the final structure of a U.S. SWF might differ significantly from traditional models, possibly resulting in a "sovereign wealth fund light."

James Bruhl muses:

We might see some reorganization in the way that the federal government manages its assets. They might call that a sovereign wealth fund or create some new office tasked with overseeing management of those assets.
— James Bruhl (09:42)

Conclusion

The episode concludes by weighing the practicality of a U.S. sovereign wealth fund amid current fiscal realities and political dynamics. While the idea garners interest as a means to efficiently manage national assets and generate revenue, significant challenges remain in terms of funding, governance, and legislative approval.

Tyler Cowen succinctly captures the overarching concern:

Politics is politics. You cannot stop politics from interfering in what the government does with its money.
— Tyler Cowen (07:16)

Key Takeaways

• Sovereign Wealth Funds (SWFs): Government-owned investment funds that manage national savings for purposes such as reducing debt or funding public services.

• Current U.S. Fiscal Deficit: The U.S. has not had a budget surplus since 2001, complicating the establishment of a traditional SWF.

• Expert Opinions: Economists are divided on the feasibility and effectiveness of a U.S. SWF, with arguments around potential revenue generation versus political interference.

• Legislative Challenges: Creating a national SWF would require congressional approval, adding layers of complexity to its implementation.

This episode provides a comprehensive exploration of the prospects and pitfalls of instituting a sovereign wealth fund in the United States, offering listeners a nuanced understanding of fiscal policy and governmental finance strategies.

Transcript

[NPR]

Npr.

[Paddy Hirsch]

This is the indicator from Planet Money. I'm Paddy Hirsch.

[Waylon Wong]

And I'm Waylon Wong. President Trump issued an executive order this week telling the treasury and Commerce Departments to produce a plan for, wait for it, an American sovereign wealth fund.

[Paddy Hirsch]

Well, the reaction to this latest order ran the usual gamut from disbelief and derision through hilarity to rapture.

[Waylon Wong]

Depending on who you follow on social media, an American sovereign wealth fund could be an end run around congressional roadblocks, or maybe an opportunity for corruption and cronyism.

[Paddy Hirsch]

Could be a chance to create value and be of great strategic importance to the U.S. but my personal favorite, it's a shiny new toy for both parties to play with as they spend and splurge the US treasury into financial oblivion. That's from the libertarian Mies Institute.

[Waylon Wong]

Spicy. The fun could be used for all sorts of good things, Trump said. Maybe even buying TikTok. No wonder the announcement had the Internet foaming at the mouth and searching for an explanation of what exactly a sovereign wealth fund is.

[Paddy Hirsch]

Fortunately, we already have a ready made explainer. Last year we aired an episode laying out what a sovereign wealth fund is and how these funds came about. So today we're going to re air that show, which we've updated to explain what Trump's executive order actually means. That's coming up after the break.

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[Paddy Hirsch]

Explanation of what a sovereign wealth fund is and for that we're going to hear from Tyler Cowen. He's a professor of economics at George Mason University and a longtime friend of.

[Tyler Cowen]

The indicator, a sovereign wealth fund arises when a government has some excess money and it takes that money and it invests it. And the idea is to earn a highly positive rate of return on that money so the country's wealthier and citizens can pay lower taxes.

[Waylon Wong]

Sovereign wealth funds really took off in the late 90s, but they're not a new invention. They've been around for a long time. In fact, the very first sovereign wealth funds were created back in the 1800s right here in the United States.

[Tyler Cowen]

Yeah.

[Paddy Hirsch]

And there are as many as 15 sovereign wealth funds in the US still operating today at the state level. Marisa Perez Diaz is vice chair of one of the biggest, the Texas Permanent School Fund. The fund was created in 1854 to generate revenue to fund Texas public schools. Marisa says the money that goes into the $56.8 billion fund comes from management of certain state lands.

[Marisa Perez Diaz]

The Texas Constitution identified certain lands across the state, and all of the proceeds from the sale or the lease of those lands would be the funding mechanism for the Permanent school Fund. That included the leasing of surface and mineral rights and in particular, oil and natural gas royalties around the world.

[Waylon Wong]

The same thing happens at the national level. Countries direct surpluses from oil production or exports into funds and use the returns to do anything from lowering taxes to building roads and airports. That all sounds really good, right?

[Charles Schwab]

Yeah.

[Waylon Wong]

Right?

[Paddy Hirsch]

Yeah.

[Waylon Wong]

So why don't we do that on a national level?

[Tyler Cowen]

The biggest problem was we don't have a surplus.

[Paddy Hirsch]

Oh, small problem. Tyler Cowan notes that the US hasn't had a surplus since 2001. That means for the last 23 years, we've been spending more on our annual budget than we've been making. Instead, we've been racking up a stupendous amount of debt. And Tyler says that makes the idea of a sovereign wealth fund for the United States well, absurd.

[Tyler Cowen]

If your country is small, well governed, and has a surplus, it is probably a good idea. We are not any of those.

[Waylon Wong]

If we were playing Overrated Underrated with Tyler, I'd say this means he thinks the idea of a sovereign wealth fund for the US Is highly overrated.

[Paddy Hirsch]

I'd say you're right, and most economists seem to agree, but not all. And not James Bruhl. He's a senior fellow at the Competitive Enterprise Institute. It's a conservative think tank. He's also a graduate of George Mason's economic program where Tyler Cowan teaches.

[James Bruhl]

He was my advisor, actually.

[Paddy Hirsch]

Oh, he was?

[James Bruhl]

Yeah. So we don't see eye to eye on this issue.

[Paddy Hirsch]

Yeah, unlike Tyler James thinks the idea of a sovereign wealth fund for the United States is underrated. He acknowledges that we're not running a surplus right now, but then neither is the UK or Germany or Mexico, and they all have wealth funds.

[Waylon Wong]

James says there are various other ways for the US to generate the money to use in a fund. We could channel some of the investment dollars that flow into the country from foreign investors, he says we could sell special bonds. Not a popular idea with Thailand, by the way.

[Paddy Hirsch]

No.

[Waylon Wong]

Or we could manage some of our national assets better, kind of like Texas does with its land.

[James Bruhl]

The federal government owns a lot of land. It owns a lot of assets of various kinds. We had a more specific focus on just managing those existing resources more prudently. I think we could make trillions in revenue.

[Tyler Cowen]

Yeah.

[Paddy Hirsch]

He says some federal land could be developed.

[Waylon Wong]

I think that would be kind of a spicy idea, especially out West.

[Paddy Hirsch]

Yes, indeed. But the proceeds from investing, he says, could be used for a variety of things. To pay down debt, to pay a dividend to citizens, to build infrastructure. But whatever a sovereign wealth fund did with that money, James says it would do it a lot more efficiently and cost effectively than the system we currently have, which is called the Congress.

[James Bruhl]

Congress is not always very efficient in the way that it allocates funds. And the political dynamics in Congress lead to a lot of special interests pandering for dollars and setting up programs that maybe don't pay off over the long haul.

[Waylon Wong]

You can see the attraction here, right? Our system can be torturous, infuriating even. Tyler Cowan says. No wonder the idea of a fund that would spend independently of Congress has gotten some traction.

[Tyler Cowen]

Our governments have decided they want to do extra things, things like industrial policy. But they're frustrated with the notion of having to go through Congress and get approval for expenditures, even though that's our Constitution.

[Paddy Hirsch]

Oh, the Constitution. Always getting in the way, just like its evil cousin, politics. Tyler makes the point that any sovereign wealth fund in the United States would be hamstrung. By the way politics works here.

[Tyler Cowen]

Politics is politics. You cannot stop politics from interfering in what the government does with its money.

[Waylon Wong]

Just look at Texas. The original point of the Texas Permanent School Fund was to fund public schools in the state. But Marisa Perez Diaz, the vice chair of that fund, says that's not where all the money goes once the legislature gets a hold of it.

[Marisa Perez Diaz]

Depending on what the legislature that's in office at the time is really prioritizing, those dollars can go everywhere, from public education to infrastructure to transportation.

[Paddy Hirsch]

To be fair, the reason this happens is because in 1856, the Texas legislature saw all that money going to schools, and they appear to have gotten a wee bit jealous. They decided that the schools could share with railroad infrastructure projects.

[Waylon Wong]

I mean, I guess when they wrote that provision, they weren't as specific as they needed to be.

[Paddy Hirsch]

Yeah, that's the problem of how money that goes out of the fund is spent. There's also the problem of deciding how the money that goes into a United States fund would be invested. One huge temptation for political leaders, Tyler says, would be to push a sovereign wealth fund to invest in certain US Assets, which, when you think about it, sounds entirely dodgy.

[Tyler Cowen]

We would be trusting our government to be allocating funds to investments without a very good process for evaluating how well that will be done and possibly outside the normal bounds of our Constitution.

[Waylon Wong]

James Brill actually agrees with Tyler here. Political interference of any kind would be bad, he says. But he argues that there's no reason we couldn't insulate a US Sovereign wealth fund from politics.

[James Bruhl]

You really want to have independence, probably something akin to what the Federal Reserve has when it conducts monetary policy.

[Paddy Hirsch]

It's this concern that's going to be front of mind for Trump watchers. As the administration rolls out its plan for a US Sovereign wealth fund, Constitutional lawyers are going to be particularly interested.

[James Bruhl]

There's a line in there about potentially proposing legislation to Congress. So I think that they are anticipating that there could be some roadblocks as far as legality to establishing a sovereign wealth fund.

[Waylon Wong]

To actually establish and expand a sovereign wealth fund, James suspects it would take an act of Congress, could be difficult to pass, but we might end up with a kind of sovereign wealth fund light.

[James Bruhl]

We might see some reorganization in the way that the federal government manages its assets. They might call that a sovereign wealth fund or call it or create some new office tasked with overseeing management of those assets. But that may or may not look like what people traditionally think of when they think of a sovereign wealth fund.

[Paddy Hirsch]

And we're talking about a lot of assets here. The executive order notes that the government has $5.7 trillion worth of assets, cash, property, buildings, land. Congress may not be managing them as well as it could. Would a sovereign wealth fund do it any better?

[Waylon Wong]

This episode was produced by Julia Ricci and engineered by Jimmy Keeley. It was originally produced by Angel Carreras with engineering by Maggie Luthar. It was fact checked by Cierra Juarez. Kicking Cannon edits the show and the indicator is a production of npr.

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