Is an American sovereign wealth fund such a bad idea?

Summary

Episode Summary: Is an American Sovereign Wealth Fund Such a Bad Idea?

Podcast: The Indicator from Planet Money
Hosts: Waylon Wong and Paddy Hirsch
Release Date: October 1, 2024

In this engaging episode, hosts Waylon Wong and Paddy Hirsch delve into the controversial idea of establishing a sovereign wealth fund for the United States. The discussion explores the origins, benefits, and potential pitfalls of such a fund, juxtaposed against historical precedents and expert opinions.

Introduction to Sovereign Wealth Funds

The episode opens with a nod to popular culture, referencing a cameo in HBO's Industry where sovereign wealth funds are depicted as significant financial players. This sets the stage for a deeper exploration of what sovereign wealth funds entail.

Waylon Wong (00:37):
“Sovereign wealth funds are having a bit of a moment right now. You can never accuse them of living in the shadows.”

What is a Sovereign Wealth Fund?

To lay the groundwork, the hosts introduce Tyler Cowen, a professor of economics at George Mason University, who succinctly defines a sovereign wealth fund.

Tyler Cowen (01:39):
“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.”

Historical Context and Current Examples

Waylon and Paddy trace the origins of sovereign wealth funds back to the 1800s in the United States, highlighting the Texas Permanent School Fund as a prominent example still in operation.

Paddy Hirsch (02:30):
“The Texas Permanent School Fund was created in 1854 to generate revenue to fund Texas public schools.”

The discussion emphasizes how various countries utilize these funds, typically deriving from natural resource revenues like oil, to fund public projects and reduce tax burdens.

The Case Against a U.S. Sovereign Wealth Fund

The conversation shifts to the viability of such a fund for the United States. Tyler Cowen presents a critical viewpoint, citing the absence of a national surplus as a major obstacle.

Tyler Cowen (03:09):
“The biggest problem is we don't have a surplus. The US hasn't had a surplus since 2001.”

Given that the U.S. has been operating at a deficit for over two decades, Cowen argues that establishing a sovereign wealth fund under these conditions is "absurd."

Waylon Wong (03:39):
“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.”

Diverging Opinions: James Bruell’s Perspective

Contrasting Cowen’s stance, James Bruell from the Competitive Enterprise Institute offers a more optimistic view. Despite acknowledging the lack of a surplus, Bruell points to other nations like the UK and Germany, which operate without surpluses yet maintain sovereign wealth funds.

James Bruell (04:09):
“We could channel some of the investment dollars that flow into the country from foreign investors. We could sell special bonds.”

Bruell suggests alternative revenue streams and better management of national assets as viable paths to funding a sovereign wealth fund.

Political Challenges and Potential Solutions

The hosts and guests discuss the inherent political complexities in managing a national fund. Bruell argues for the independence of such a fund, akin to the Federal Reserve's autonomy in monetary policy.

James Bruell (07:52):
“You really want to have independence. Probably something akin to what the Federal Reserve has when it conducts monetary policy.”

However, the reality of U.S. politics poses significant hurdles. The Texas Permanent School Fund serves as a cautionary tale where legislative priorities often divert funds from their original purpose.

Waylon Wong (06:24):
“Depending on what the legislature that's in office at the time is really prioritizing, those dollars can go everywhere.”

Feasibility and Future Outlook

Bruell remains hopeful that opinions on sovereign wealth funds have evolved, similar to global trends where initial skepticism gave way to acceptance.

James Bruell (08:37):
“Plant a few seeds now, decade or two down the line, you never know what happens.”

Conversely, Cowen maintains that the unique financial and political landscape of the U.S. makes the establishment of a sovereign wealth fund unlikely in the near future.

Tyler Cowen (08:43):
“The United States has a lot of strengths. Let's build on those. Let's not pretend we're a small, well-governed country with a big budget surplus.”

Conclusion

The episode concludes with the hosts encouraging listener engagement, inviting the audience to share their opinions on the feasibility and desirability of a U.S. sovereign wealth fund.

Waylon Wong (09:02):
“But you know, we would be curious to hear what you all think. So you can email [e-mail] and tell us what you would do with a US sovereign wealth fund.”

Key Takeaways

• Sovereign Wealth Funds Defined: Government-owned investment funds derived from surplus revenues.
• Historical Precedent: The Texas Permanent School Fund as an enduring example.
• Economic Constraints: The U.S. has lacked a budget surplus since 2001, challenging the establishment of a national fund.
• Divergent Views: Economists like Tyler Cowen oppose the idea, while others like James Bruell see potential through alternative funding mechanisms.
• Political Hurdles: Ensuring the independence and proper management of a sovereign wealth fund amidst U.S. political dynamics remains a significant challenge.
• Future Possibilities: While currently unlikely, evolving global practices and strategic planning could pave the way for future consideration.

This episode offers a comprehensive examination of the concept of a sovereign wealth fund for the United States, balancing skepticism with cautious optimism and highlighting the complex interplay of economics and politics in shaping national financial strategies.

Transcript

[NPR]

Npr.

[Waylon Wong]

This is the Indicator from Planet Money. I'm Waylon Wong.

[Paddy Hirsch]

And I'm Paddy Hirsch. There's a point in a recent episode of the HBO TV series Industry where a certain type of financial instrument makes a surprise cameo. Picture a bank boardroom at 4am in London filled with sweaty people in shirt sleeves. Surely there are a number of sovereign wealth funds that would like to grow their stake in Pierpoint.

[Waylon Wong]

All right, no spoilers here, especially if you haven't seen the season finale yet. But sovereign wealth funds are having a bit of a moment right now. You can never accuse them of living in the shadows. Exactly. But recently, both members of the Biden administration and the Trump campaign have been heard floating the idea of an American sovereign wealth fund.

[Paddy Hirsch]

Yeah, and this is an idea that has, for the most part, attracted snorts of derision from political scientists and economists. But before we leap to judgment, let's do a little due diligence.

[Waylon Wong]

Due diligence is my love language, Patty.

[Paddy Hirsch]

I know it is. On today's show, we'll learn what a sovereign wealth fund is and how these funds came about, and then we'll hear a bit more about whether a US national sovereign wealth fund is a good or even viable idea. That's coming up after. After the break, I promised you an explanation of what a sovereign wealth fund is. And for that, we're going to hear from Tyler Cowan. He's a professor of economics at George Mason University and a longtime friend of the Indicator.

[Tyler Cowan]

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.

[Paddy Hirsch]

Yeah. 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.

[NPR]

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?

[Tyler Cowan]

Yeah.

[Waylon Wong]

Right?

[Paddy Hirsch]

Yeah.

[Waylon Wong]

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

[Tyler Cowan]

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

[Paddy Hirsch]

Oh, small problem. Tyler Cowen 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 fuel 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 Cowan]

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 Bruell. 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 Bruell]

He was my advisor, actually.

[Paddy Hirsch]

Oh, he was?

[James Bruell]

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 Tyler, 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 Bruell]

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 Cowan]

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 Bruell]

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 both in the Biden administration and the Trump campaign.

[Tyler Cowan]

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 Cowan]

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.

[NPR]

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. I would roughly say around 50% is what we'll see. That typically goes back to education. And the other 50% is allocated into different branches of governance.

[Waylon Wong]

Okay, so that's half of the money not going to public schools, usually.

[Paddy Hirsch]

Well, 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.

[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 Bruell]

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

[Paddy Hirsch]

The concept of a sovereign wealth fund, it's an idea, right? But even James admits it's actually unlikely to come to pass anytime soon. Ryan, now, who says there isn't close to enough support on Capitol Hill?

[James Bruell]

It would take an act of Congress. And I just think it's very unlikely that we would see enough political will to put this in place.

[Waylon Wong]

James says he heard a lot of opposition to sovereign wealth funds when they first took off. People feared politicization and national security threats. But those fears faded and now sovereign wealth funds are a part of the global financial landscape. He hopes the same will happen with a US Fund.

[James Bruell]

You plant a few seeds now, decade or two down the line, you never know what happens.

[Paddy Hirsch]

And Tyler, what does he think?

[Tyler Cowan]

Every country is different. We should take that very, very seriously. The United States has a lot of strengths. Let's build on those. Let's not pretend we're a small, well governed country with a big budget surplus.

[Waylon Wong]

Wouldn't it be nice to think so? I'm gonna write some fan fiction.

[Paddy Hirsch]

One can dream.

[Waylon Wong]

But you know, we would be curious to hear what you all think. So you can email [e-mail] and tell us what you would do with a US sovereign wealth fund.

[Paddy Hirsch]

Or even if you think it's a good idea.

[Waylon Wong]

This episode was produced by Angel Carreras with engineering by Maggie Luthar. It was fact checked by Ciara Juarez. Caitkin Cannon is our editor and the Indicator is a production of npr.