Seeking SWF

In this time of global financial crisis, America needs a sovereign wealth fund of its own.

There are many reasons to feel uncomfortable about Barack Obama’s proposed near-trillion-dollar stimulus package (and the $700 billion bailout that preceded it last year). There are serious questions–about whether the cost is ultimately bearable; whether the timing is too late to be truly counter-cyclical (and thus have its intended effect); whether it will crowd out private investment or create perverse incentives to eligible firms; whether this or that sector or taxpayer should receive aid; whether the right safeguards and oversight are put into place; and, of course, whether the government should play such a role in the private sector in the first place.

This last, most fundamental question partly stems from the fact that the U.S. Treasury is the wrong public institution for such a job, and the federal government’s fiscal budget is the wrong account from which to draw such funds. For one, the annual budget process is not an appropriate mechanism for deciding long-term capital investments; it is like paying for college out of your weekly paycheck. And two, there is a distinctly undemocratic, non-transparent, and potentially corrupt aspect to the control that the executive branch can exert in directing such investments.

But what if the United States had–as a number of other rich countries already do–a sovereign wealth fund (SWF)? Then neither Treasury Secretary Timothy Geithner nor Federal Reserve Chairman Ben Bernanke would have to cross this invisible–yet important–line to bail out private firms or otherwise jump-start the economy beyond bread-and-butter monetary policy efforts. We wouldn’t have to worry about drawing down short-term funds for long-term projects. The U.S. sovereign wealth fund could do it all.

By sovereign wealth fund, I mean a national mutual fund of stocks, bonds, and real estate holdings, including investments in private firms, established in the hopes of realizing profits as well as public goods that may or may not produce a direct revenue stream but which are important to the long-term productivity of the U.S. economy. In other words, the fund would bring in profits for “shareholders”–i.e., American citizens–but also provide a source of investment funds for business. Not only would it make sense from an accounting perspective to make long-term economic investments via such a fund, but the establishment of such an institution would have other salutary effects on American society, including the reconceptualization of the distinction between public and private capital, democratizing long-term decision making, spreading investment knowledge, and raising our dismal private savings rate. In short, the creation of a sovereign wealth fund is a key step in turning the United States into an “Investor Society.”

Rethinking Fiscal Policy

If we are going to spend an unprecedented sum of public funds to stimulate the economy–while also boosting future productivity through targeted education, environmental, health, and infrastructure investments–we should also take this historic opportunity to rethink the very dichotomy between the public and private sectors. Indeed, one way to think about the distinction between the role of a central bank or Treasury Department and that of a national investment fund is the way we think about personal checking versus saving accounts: We don’t solve problems with the latter by dipping into the former. The current stimulus plan is like using your overdraft line of credit to prop up your retirement savings account. America has been running its books as if there were just one big checking account to deal with both capital investments and trips to the candy store.

This approach to fiscal policy is largely a legacy of John Maynard Keynes and the quest for full employment. In the standard, industrial model of Keynesian economics, job growth is what drives the economy, and consumption, in turn, is what drives job growth. As a result, most politicians are obsessed with jobs as the main avenue to economic security, the idea being that we need to create more and more jobs that pay higher and higher wages, and, in turn, find the right people to fill those jobs. This was, many assume, the underlying justification for long-gone efforts like the Works Progress Administration, but also enduring programs like Social Security.

But in fact, the social insurance programs that are the most lasting legacies of the New Deal were really intended to be stopgaps on the way to the full employment that was going to be achieved through careful counter-cyclical monetary and fiscal policy in the Keynesian tradition. Little did policymakers of the 1930s know that unemployment insurance, welfare, farm subsidies, and, of course, Social Security would be the programs that took root and grew, or that the full employment of all able-bodied workers would remain a pipe dream even in the best of times.

This jobs-jobs-jobs bias has led politicians to tilt at expensive fiscal windmills, particularly during recessions. Mainstream progressive politicians are right about the fact that productivity gains are not equally distributed to workers. (And, in fact, profits have been rising as a percentage of national income while wages have been declining.) But these progressive leaders are misleading themselves and taxpayers when they say they can fix the problem by scuttling trade deals or cutting tax rebate checks, all in an effort to boost jobs. In a globalized economy where wages are always lower somewhere else, keeping manufacturing jobs here is a losing battle.

Instead, we should focus on de-linking–to the maximum extent possible–economic security from the vagaries of the labor market by helping average Americans become part of an investor class. That is, we Americans should be thinking about ourselves as an “Investor Society,” as global capital managers. Yes, this may take a feat of imagination to envision during a period of recession and a bearish stock market, but, in fact, the downturn is an opportunity to take stock of our fundamental policy strategies.

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