I Do Not Understand Why the Left Should Want a Sovereign Wealth Fund
I do not understand why the Left in a country like the United States should want to see the creation of a sovereign wealth fund (SWF) as part of their agenda. It is not necessary for and probably one of the worst ways to go about securing the Left’s agenda. The problems of the United States do not stem from trying to manage resource booms, temporary trade surpluses, debt denominated outside our currency, or any of the traditional reasons for a SWF. Our problems are systemic, and a SWF could easily amplify them.
Yet the idea continues to show up on the Left. It is in all the “market socialism” literature of the 1990s. Hillary Clinton almost endorsed such an idea in 2016. Economist Noah Smith brings it up often. And now Matt Bruenig of People’s Policy Project has a big, well-designed launch for creating one, calling it the American Solidarity Fund. Journalist Rachel Cohen asked me to comment for her piece on the launch, and I gave her some critical ones. I thought I’d write out why here.
I see three potential economic objectives of a SWF for the Left: it can increase spending, reduce inequality and the power of wealth owners, and regulate the activities of business. The SWF is not necessary for any of these three goals. Worse, a SWF is a particularly weak way to bring about these changes. So what? A lot of policies aren’t the best ones but they can build up a movement. But, third, there’s good reason to think that a SWF could easily backfire and make it harder to make progress on any of these goals. Since it is an unnecessary idea poorly deployed and prone to backfiring, it should not be a priority of the Left. Let’s take these in turn.
The United States needs to spend more money. It needs to spend more on a variety of goals, from basic income to infrastructure to removing key spheres of life like health and education from the market. Let’s abstract from what form that spending should take. Bruenig’s American Solidarity Fund would pay out in a basic income, but we can also imagine the profits of a SWF going to free college, the expansion of Medicare or better infrastructure.
A SWF is a terrible way to try and increase spending in the United States. It introduces a new failure point in the otherwise straightforward mechanism of spending and requires extensive and unnecessary prefunding. Normally we increase taxes on income X to secure spending Y. Here we increase taxes on income X to buy assets Z whose profits then secure spending Y. What is the point of this extra step? There is no economic argument presented that argues you can raise revenues more effectively or efficiently this more complicated way.
It also requires saving in order to spend, postponing resources necessary to meet urgent, contemporary needs. Let’s take free public college, which costs about $80 billion a year. We can do that by passing a financial transaction tax. But if we did this with a SWF, assuming a 5% returns on the fund, we’d need to first spend $1.6 trillion dollars buying up financial assets. We’d have to prefund 20 years of free college in order to give the very first person free college. You need to do this in order to secure the assets necessary to make the income necessary to get this spending. This problem presents itself no matter how to go about funding that $1.6 trillion dollars, be it printing money, taxing incomes or putting requirements on public firms. Why not spend that trillion and a half dollars in a useful way right now?
There are reasons you may want to prefund spending. Private companies may not be around in the future to pay out their pensions, hence we have a policy interest in them not working on a PAYGO mechanism. But we need to be very skeptical of applying that logic to the public sector. Why should we build programs assuming the government won’t be there in the future to tax the income to pay for them? It has major consequences. As J.W. Mason, Arjun Jayadev and Amanda Page-Hoongrajok have found, the increasing pressure to prefund spending has been a major constraint on state and local spending. Conservatives know this. When they wanted to weaken the Post Office, they forced them to prefund all their future health care liabilities in a manner unique among government agencies.
Note that this can easily backfire. We have urgent needs for spending now, not later. If the Left comes to believe that spending needs to come from prefunded savings that weakens our overall position in securing programs. And in a period of depressed demand and secular stagnation the logic of building up savings to spend out of is even worse, and could make the macroeconomy even weaker.
Decrease Inequality and the Power of Owners
There is more than just spending more money. Another goal for the Left is reducing the massive inequality in income among the top, as well as reducing the power exercised by owners of financial wealth. Mileage varies on this, but economists increasingly believe that shareholders themselves are strangling the economy, through a combination of short-term pressure to prioritize payments to owners over investments, and by concentrating industries and exercising oligopolistic pressure via large asset management holdings.
We have many legal and regulatory tools to change this besides a SWF. But a SWF is a particularly weak tool for dealing with this. By tying public goals to the profits of shareholders, it means that we have a vested public interest in ensuring that owners exercise even more control over the economy. Shareholders do not own firms. They are one of many groups in a large nexus of contracts, each exercising numerous mutual obligations and rewards. Since the 1980s, there’s been an intellectual hijacking arguing that shareholders own the firm and the firm should only work for them. It has lead to a large runup in the size of dividends and stock buybacks. A SWF piggybacks on this awful development.
Let’s consider a SWF versus very high taxes on the rich. We know very high taxes on the rich reduce market income inequality, because they make it difficult for the rich to take money out of the firm at the top. Why is a board going to approve a superstar salary if 80 percent of it is taxed? This “third elasticity” shows that taxes have a very important regulatory function in keeping the rich in check. But a SWF could backfire by pushing in the exact opposite direction. It would incentivize getting money out the top by tying it directly to not only dedicated funding of programs, but citizenship itself.
It’s not even clear how this fund would play out in terms of inequality. If we printed a trillion dollars and then went to the financial markets and bought a trillion dollars worth of stocks, it’s not clear how that punishes the financial sector. It would bid up the value of stocks, and leave the previous holders with more cash. It does not own or even interact with privately-held wealth. You couldn’t buy share in Koch Industries, for instance, since there aren’t any shares. A significant amount of financial wealth claims aren’t traded publicly.
Regulate the Economy
The last major goal is to change the behavior of corporate America. Corporations treat their workers poorly, ignore stakeholders, and raise costs to all Americans. Whether it is raising the minimum wage or dealing with climate change, corporate America is an obstacle to reform.
Yet a SWF is one of the worst ways to deal with this. There was a period where I’d go to meetings about responsible investing, people who wanted public pension funds to invest in companies that treated their workers better or took proactive measures on the environment. And there was always a moment where someone stood up and said “why should we do this when hedge funds and private equity promise us better returns?” All the answers about stakeholders and broader commitments and “#actually, it’s more profitable” wouldn’t really cover it. And indeed, public pension funds go into hedge funds and can’t even bring transformation of their fee structure, much less a broader social change.
This whole conflict is built into the concept of “market socialism.” We want shareholders to ruthlessly extract profits, but here for the public, yet we also want the viciousness of market relations subjected to the broader good. Approaching this as shareholders is probably the worst point of contact to try and fix this essential conflict.
The “profits” from the SWF don’t fall from the sky. They are the result of decisions society makes about how the fruits of economic relationships are distributed. The value of a SWF is just the sum total of future corporate profits, and if we are worried about those profits being too large the SWF nudges us in the wrong direction.
This could easily backfire. Imagine someone looking at their phone and seeing that they will get a $3,000 citizen’s dividend. Then they look at the news and see that a major strike is about to break out at a large public company. A labor representative says that workers think that owners are taking too much of the profits and workers deserve a raise. Do you think that person is more or less likely to support the strike, given we’ve worked so hard to identify their interests with owners?
By tying citizenship and economic security directly to the power of shareholders we are working in exactly the wrong direction. It isn’t necessary, and it isn’t even an effective way of accomplishing our goals. So why all the effort?
(Special thanks to J.W. Mason for discussing this issue.)