The President signed an executive order this week creating a U.S. Sovereign Wealth Fund. Putting the legality of doing that aside, does this make sense? There seem to be many supporters, but I have questions.
For those who don’t know, a Sovereign Wealth Fund is a government-owned investment vehicle funded by tax or other revenue with the purpose of making investments in private companies, real estate, and other assets. Many countries have them. They had their start with countries that had big oil revenue windfalls they didn’t know what to do with (a nice problem to have). Norway is an example. They took their North Sea oil revenues and invested it on behalf of future generations of Norwegians. Saudi Arabia has a huge Sovereign Wealth Fund approaching a trillion dollars and it makes investments around the world, including in a big chunk of real estate in London, SoftBank, Banco Santander, and many other places. Even here in Vermont, this is not a conceptual discussion. Global Foundries, a publicly traded company with big operations in Essex Junction, is majority owned by the UAE’s Sovereign Wealth Fund.
CRITICISMS
There are criticisms of these funds. First, how the funds are governed is important. Critics point out that the decision-makers and the process for making decisions is often opaque. This is a frequent ding on the Saudi fund where the royal family seems to have significant influence. A second criticism is that these funds allow governments to “game” the system by putting their finger on the scale. Sovereign Wealth Funds can pick and choose sectors or companies that they want to succeed. In effect, they can pick winners and losers in what is supposed to be free market capitalism. These two issues lead to a third concern; that unless decision making is transparent, corruption and fraud can become endemic. In a number of funds, bribes to key decision-makers have influenced where investments have gone.
A final issue is particularly interesting to me. I recall the Bush/Obama bailout of the U.S. auto industry during the 2008 financial crisis. It was a desperate situation and the investment was made to keep these companies from going under, but it didn’t look all that different from a Sovereign Wealth Fund investment; the U.S. government used taxpayer money to take a financial position in private companies. The outcry at the time was vociferous. The move was decried as socialism, even communism; the government taking ownership of the means of production. The counter argument was that it was an extraordinary action necessary to save the companies and preserve employment in a tough economic time. It was viewed as a one-off and certainly not an indication of future policy. The U.S. government made a return on that investment in the end.
PROPRIETY?
I have heard barely a word about this around the current Sovereign Wealth Fund discussion. For an administration purporting to support free market capitalism, I find that interesting. Conceptually, it is no different than what Bush and Obama did in 2008. It is just setting it up as a permanent function of government. Where’s the discussion around the propriety of the U.S. government investing in private enterprise? Have we changed that much since 2008? My guess is because it is an “official” Sovereign Wealth Fund and “other countries are doing it,” we aren’t thinking about whether it’s socialism or unfair competition, or even if it is an appropriate use of government resources. Here’s another way to think about it. If the U.S. government does have funds lying around, return them to the taxpayer. Let me make my own investment decisions. I don’t need the government doing it for me. It’s ironic that this argument gets used for Social Security, Medicare and other social programs, but a Sovereign Wealth fund seems to be getting a pass.
MANY OTHER QUESTIONS
Many other questions exist for me. How will the fund be capitalized – taxpayer dollars? How will it be governed? Who will decide on investments and how? What is the investment policy (all good funds have very explicit policies governing things like foreign investments, type e.g., Bitcoin, level of risk, etc.)? How will the fund report and be held accountable? Who will oversee it? There are many more.
In summary, this may not be a bad idea. But it is certainly a departure from the past and seems like a “socialist” move akin to Social Security and Medicare. If you don’t like those programs, you shouldn’t like a Sovereign Wealth Fund. Unless the operating details are worked out a Sovereign Wealth Fund risks becoming a speculative venture controlled by a few individuals that creates undue risk for the citizens of the country.
Finally, whatever is done, it must be done on behalf of the American people to which it is ultimately accountable.
Mooney lives in Waitsfield.
