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 us@indicatorpr.org 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.