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Q&A on the Idea of a US Sovereign Wealth Fund

Summary:
Chris Campbell asked me some interesting questions about the idea of a US Sovereign Wealth Fund. Here they are, along with my answers. His questions are in bold. Afterward, I gives some related links and Chris gives an introduction to himself. 1.     What makes sovereign wealth funds such an exciting concept for countries to adopt and/or implement?The big benefits are (a) getting more risky physical and software investment to happen, with the positive consequences that has for economic growth in the long run (b) as a way around an irrationally high aversion to risk by individuals—an aversion to risk that goes beyond decreasing marginal

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Chris Campbell asked me some interesting questions about the idea of a US Sovereign Wealth Fund. Here they are, along with my answers. His questions are in bold. Afterward, I gives some related links and Chris gives an introduction to himself.

1.     What makes sovereign wealth funds such an exciting concept for countries to adopt and/or implement?

The big benefits are (a) getting more risky physical and software investment to happen, with the positive consequences that has for economic growth in the long run (b) as a way around an irrationally high aversion to risk by individuals—an aversion to risk that goes beyond decreasing marginal utility and can be mitigated by having the government as an intermediary doing those risky portfolio investments, (c) serving as a “lump of QE for risky portfolio investments,” and thereby increasing the running room for monetary policy within the context of current paper currency policy, (d) moderating the financial cycle by contrarian investment. (Note that the financial cycle would still exist even if the business cycle were subdued in the sense of an output gap always close to zero.)

2.     Sovereign wealth funds have been around since the early to mid-1900s and have shown positive results in being a sustainable and long-term wealth building initiative. Why haven’t more countries established sovereign wealth funds if it is evident that an initiative as such produces results? 

Sovereign wealth funds are seen as a place to store funds if there are funds that need to be stored. There is no tradition of creating sovereign wealth funds financed by issuing Treasury bills. But once that idea is demonstrated, I expect it to soon become reasonably common.

3.     We see countries like Norway, China, United Arab Emirates, and Kuwait create Sovereign Wealth Funds to build long-term wealth. In your opinion, what is stopping the United States from creating a Sovereign Wealth Fund?

As noted above, there is no tradition of “optional” sovereign wealth funds that are not required as a place to store funds. Another big reason not to have a sovereign wealth fund is that it might become corrupt or politicized so much that it becomes a bad thing on net. Whether a Treasury-bill-financed sovereign wealth fund is a good or bad thing depends on whether the design problems for avoiding politicization and corruption and incompetence can be solved.

4.     Is capitalism a factor that is stopping the United States from establishing a sovereign wealth fund? If not, what is and why?

Capitalism itself is no barrier, but I would expect many people to oppose a sovereign wealth fund based on ideas out of right-wing ideology. Some of that opposition out of right-wing ideology would be effectively the concern expressed above about politicization and corruption and incompetence. But there would likely be opposition flowing from other elements of right-wing ideology as well.

5.     People have argued the inefficiency of some federal programs like Social Security and have little confidence of the effectiveness of federal programs. In your opinion, is it more efficient to establish a sovereign wealth fund at the federal or state level? Why?

There is much better oversight at the federal level because many more people would be looking at every action. One example of this is that there is still excellent coverage of national news, but the business model for local and state news has suffered from online advertising. This can be expected to make state and local corruption easier.

6.     What are some advantages and disadvantages to creating a sovereign wealth fund either at the federal or state level?

Another advantage of a sovereign wealth fund at the national level is that a national sovereign wealth fund can take on the important macroeconomic stabilization role I see as an important part of the benefit of a sovereign wealth fund. State-level sovereign wealth funds are unlikely to take on that macroeconomic stabilization role as well, as powerfully, or as knowledgeably.

7.     A sovereign wealth fund could help the US invest for the long-term and be used for multiple reasons such as offsetting the cost of healthcare, fund economic development, assist during economic recessions, etc. In your opinion, what is the best use for a sovereign wealth fund if established at the federal level?

Many of these purposes would, to my mind, politicize the sovereign wealth fund unacceptably. They are better handled through regular appropriations, either the normal budgeting process or a concept of capital budgeting along the lines I discuss in these three posts:

·      A Big Threat to America's Future Has an Easy Fix

·      Capital Budgeting: The Powerpoint File

·      Discounting Government Projects

The purpose of a sovereign wealth fund should be economic growth through encouraging private-sector risky investment, getting a good return, and macroeconomic stabilization. A sovereign wealth fund should not be used as an avenue for government spending that cannot get passed in the usual way in Congress. That said, if we can develop and implement technocratic concepts of capital budgeting for the Congressional Budget Office that are at least as difficult for politicians to distort as other Congressional Budget Office numbers, the additional public investment that many people see a sovereign wealth fund as a route to can happen through through Congress’s budgeting process.

8.     Of the established sovereign wealth funds, royalties from oil and gas are the primary sources that supply the fund. As the demand for oil declines globally and US seeks to create more renewable energy, what other revenue producing assets could supplement the sovereign wealth fund if created?

A US sovereign wealth fund should be funded by issuing an amount of Treasury Bills equal to a large fraction of annual GDP.  

9.     Currently, sovereign wealth funds invest in fixed income, equities, and real estate on a global scale. Do you see any advantages or disadvantage to the global market if more sovereign wealth funds are created on a global scale?

The big advantage of a sovereign wealth fund on a global scale (as I am recommending for the US) is that it can serve the purpose of macroeconomic stabilization on a global scale. Even if its mandate is macroeconomic stabilization for the US, stabilizing the US economy would be likely to stabilize the world economy because of the importance of the US economy. Note my view that sovereign wealth funds should abide by the principles I enunciated in an interview with Alexander Trentin. See:

·      Alexander Trentin Interviews Miles Kimball about Establishing an International Capital Flow Framework

10.  There are debates on the topic of sovereign wealth funds that the US government needs to create more laws to protect against foreign sovereign wealth fund investments into the US. What would be some of the repercussions and/or consequences if the US created laws that blocked foreign sovereign wealth fund investments in the US?

My interview with Alexander Trentin on establishing an international capital flow framework suggests a way to address many of these concerns. Beyond those concerns about overall international capital flows and genuine national security concerns, I think investors from abroad should be treated the same as domestic investors.

11.  In your opinion, why should the US government look to establish a sovereign wealth fund?

Yes, but with great care in the design to avoid corruption and politicization of sovereign wealth fund decisions, to avoid meddling by the sovereign wealth fund in the decision of the firms it invests in (for example, by restricting the sovereign wealth fund to investing in exchange traded funds that have no voting rights in the underlying firms) and to attain high levels of competence in the sovereign wealth fund. In order to attain a high level of competence in the sovereign wealth fund, it must have a pay scale that is dramatically higher than any other government agency. Unless a dramatically higher pay scale than any other government agency is in the original legislation for the sovereign wealth fund, the sovereign wealth fund is probably a bad idea.

12.  Any last comments or remarks on sovereign wealth funds?

It will be interesting to see what happens in the area of “optional” sovereign wealth funds not required as a place to store funds. The idea of a Treasury-bill financed sovereign wealth fund has quickly moved from the fringes of policy discussion to an active area of debate by many.

Here is Chris’s introduction of himself:

My name is Chris Campbell and I am the author of the blog Wealth and Community.

Wealth and Community is about understanding the concepts to build personal wealth and how these concepts not only impact ourselves, but our communities. Think about it -- if a person does not know how to budget or even wisely invest at a personal level, what makes you think they can do it while working in a small business, big corporation, or even the local, state, federal government. 

Wealth and Community gives me the opportunity to embrace my passion to help people realize the different ways to build wealth and how to serve and be impactful to their community. Additionally, learn from you all in other wealth building tips and how to give back to the community.

Learn how to build personal wealth and be impactful to your community so that one day we can change the world. Look forward to seeing you all soon at Wealth and Community.

Miles Kimball
Miles Kimball is Professor of Economics and Survey Research at the University of Michigan. Politically, Miles is an independent who grew up in an apolitical family. He holds many strong opinions—open to revision in response to cogent arguments—that do not line up neatly with either the Republican or Democratic Party.

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