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.