Issue #12, Spring 2009

Seeking SWF

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

Some lucky Americans already have experience with such an investment vehicle. Alaskans enjoy the returns from the Alaska Permanent Fund that was seeded by oil and mineral rights revenues. However, even the Alaskan Permanent Fund Corporation is not managed with complete transparency. While the Board of Directors is constrained by statute to invest certain percentages of the fund into specific asset classes, board membership itself is a product of political patronage rather than direct democracy. A similar model is provided by Norway’s sovereign wealth fund. Seeded by the Scandinavian country’s oil windfall, the fund deploys a “socially responsible” investment strategy–for example, it recently divested itself of shares of Walmart stock due to concerns about that company’s labor practices. But like Alaska’s, the Norwegian fund is managed by political appointees who are not directly accountable to the “shareholders,” but rather the state.

In a democratic society such as ours, the fund should be controlled by the American people and should be directed to socially responsible investments. But it’s not just political idealism that dictates a more direct-control model. While European parliamentary democracies have a long history of crony industrial policy (whereby the major centralized players–e.g., trade unions, the state, capital–get together and plan the economy), the United States is a fractured cacophony of competing interests and sometimes contradictory goals across the branches and levels of a federalist government. That is not to say the state has not played a huge role in our economic choices, just that we like to tell ourselves there is no coordinated central planning.

In this cultural context, the notion of a secretary of the Treasury or a Federal Reserve Board chair deciding where to invest our collective wealth rightly raises our collective bristles. Even a board of directors appointed to terms that do not align perfectly with presidential terms–like the Fed or the National Labor Relations Board–would probably leave shareholders uncomfortably in the hands of “experts” who can themselves be highly politicized.

But there already exists a viable model for fund governance: Fidelity, Vanguard, TIAA-CREF or any number of large investment funds. In a U.S. SWF, each adult citizen would own one inalienable share (i.e. non-transferrable and non-heritable) and therefore cast one vote at the annual (online) shareholders’ meeting, where they would elect a board of directors. There’s one important distinction: Since each citizen has one inalienable share, there should be no worries about power becoming concentrated in the hands of a few robber barons.

One Person/One Vote

With over half of U.S. households now involved in the securities markets either directly or indirectly (through defined-contribution pension plans that they can manage themselves), double the rate of 30 years ago, the American population clearly has the knowledge and sophistication to manage its own national investments. While many folks may delegate their voting proxy to chosen representatives–just as they do for most funds they own–others may attend an annual, electronic town hall shareholders’ meeting to make their preferences heard and their votes count with respect to the management of the fund. With a modified online social networking application–a sort of “Facebook for finance”–that allowed individuals to aggregate their shares into vote bundles to back certain candidates for the board or particular investment strategies, such a fund could represent the greatest experiment in direct democracy–on the largest stage–in world history.

A similar one-person/one-share ownership structure has been proposed by Peter Barnes to manage airborne emissions through a “Sky Trust.” In order to properly price the right to emit greenhouse gasses or other matter into the atmosphere, the Sky Trust–owned by the American people, one share each–would sell the rights at a price determined by auction, within overall limits set by international treaties such as Kyoto. Barnes, however, would have the federal government administering the program directly, making it essentially a version of a cap-and-trade system, with distributed revenue rather than an investment portfolio.

This simple auction strategy may be appropriate for a single-issue fund–so to speak–but an SWF must manage trade-offs across multiple domains: Invest in green technology or biotech? Educational software or high-speed rail? Who would determine the possible investments? Would a truly democratic SWF invest in socially responsible projects? There is, of course, no guarantee that the “wisdom of crowds” would lead us to the best investments for future generations. And of course, every seemingly bright idea has unintended consequences. (Just think of the environmental impact of any number of technologies, from coal-fired rail in the nineteenth century to the oil-driven interstate highway system of the twentieth.) But ideally, these decisions and tradeoffs–made by the shareholders rather than a Congress beholden to lobbyists and donors–would balance typical private-sector concerns about profitability and return on investment against the desire to develop commonly pooled resources such as our stock of human capital, our transportation and energy infrastructure, and the environment; the putative Sky Trust could, in fact, represent one tranche of the overall portfolio. And the logic of statutory floors or ceilings on, for example, the amount that can be realized as dividends or invested in a particular sector, or be sold off, can be built into the founding constitutional charter, as was the case for the Alaska Permanent Fund.

For example, the Abu Dhabi Investment Authority owns shares of private, overseas companies, but at the same time devotes significant resources to luring and building cultural and educational institutions to the Emirate–notably the Louvre and my employer, New York University. A sovereign wealth fund thus structured is neither communist–though the people would be the owners via the state–nor does it constitute traditional industrial policy–since the decision-making power is not controlled by the people who run the rest of government but rather the American people themselves, through shareholder votes. It would represent, arguably, the most democratic form of budgeting in history.

The Benefits of an American SWF

Boosting Private Savings

The benefits of such a fund are manifold, the most obvious being to reverse the declining private savings rate. As recently as 1984, the rate stood at 10.8 percent of national income. By 2006 it had slid into the red, at negative 1.0 percent. We have the lowest savings rate of the G-20 countries and the lowest rate since the Great Depression. How did the country achieve such an abysmal number amidst an unprecedented growth spurt? Answering this question is key to understanding the recent disconnect between the macroeconomic health of the economy as traditionally measured and the poll numbers that show most Americans are less sanguine and, in fact, anxious about their economic prospects.

Indeed, some may argue that it was strong capital growth, particularly in housing, during this period prior to the subprime lending crisis that has allowed our savings rates to fall, since they are made up–at least in part–by capital gains. Others argue that it is increased income volatility that has necessitated a lower net savings rate, since we spend down and use credit in order to smooth consumption in a volatile labor and marital climate. Still others will assert that we have simply gone on a consumption binge, thanks to policies–such as the home mortgage interest deduction–that have had the perverse consequence of promoting borrowing rather than savings.

But underlying these disparate possibilities is the institutional context of savings in America. Like our health care system, our savings system is broken to a large extent due to its historic linkage to employers. Today, in an era of flex time and more frequent job change, only about half of workers are covered by an employer retirement plan. And less than 30 percent of low-income workers (the bottom fifth) have the opportunity to take advantage of such plans. Just as it does not make sense from a competitiveness or efficiency standpoint for the United States to lean on employers to provide health care, the same can be said for savings policy. Individuals should be able to enjoy all the tax and match benefits of savings regardless of employer.

A sovereign wealth fund would also have a role to play here. Evidence shows that saving and investing are habit-forming. Once individuals are drawn into the financial system, they are more likely to avail themselves of more sophisticated financial tools. Assets beget saving, which, in turn, begets investment. Financial firms know this, which is why they lure clients into the door with enticing loans, rates of return, and other financial services and then “sell” them an entire portfolio of services. By this logic, once more Americans have experience with owning an asset, they may be more likely to save and invest privately. That is, we might expect increased investing savvy and financial literacy beyond what is directly produced by the ownership of one share of the fund. Indeed, the rise in private investing over the last three decades has largely been driven by individuals initially brought into the market through their employer-based 401(k). In this vein, a U.S. SWF may reach the majority of Americans who still do not invest in securities markets and draw them into the “investor class.”

Civic Participation

Positive externalities need not be limited to private savings and financial literacy; they extend to civic life more generally. While there has been much recent debate over whether America’s tradition of civic association is in decline, surely with real money at stake in such a transparent, direct way, many Americans would log in to participate in the Fund’s collective governance. As such, one might optimistically expect positive spillover effects on civic life in the form of not only higher voting rates during election season, but also greater concern with our collective future.

Ample research shows that once individuals become owners, they have a different attitude toward the future that, in turn, generates positive externalities in terms of human capital investment, and respect for the rule of law. One study took advantage of a natural experiment in Argentina: By chance some squatters obtained title to their land, while others arbitrarily did not. Interviews later showed those who owned formal assets had more psychic investment in capitalism and an ideology of individual self-reliance. We know it wasn’t just innate differences in those motivated to obtain assets, since it was random who got formal titles. For their part, commercial banks have known this for years. In urban settings, many banks will not offer home loans to apartment purchasers in buildings where a significant share of the units are not owner-occupied, since owners have a real stake in the upkeep of the community’s real estate values in a way that renters do not. The same could be said for our collective future in a universal stakeholder society.

A Foreign Policy Tool

So far, most of the debate about America’s relationship to sovereign wealth funds has revolved around the desire to recruit capital from the Abu Dhabis of the world to America’s shores to stimulate job growth, or, alternately, about fears of a loss of control over its own policies thanks to undue foreign influence. These discussions are hardly fitting for the world’s largest economy, which should instead be walking softly in the world, carrying a big money sack.

America used to get away with not having a significant collective presence on the global financial stage, since the dollar was the default currency in world markets; it could flex its financial muscle merely by tweaking the money supply. But with a weaker dollar relative to historical benchmarks and stronger alternative currencies like the euro, those days are over. Yes, U.S. companies continue to be major players on the world stage. But private sector equity cannot (and should not) be expected to carry the weight of national interest. U.S. corporations answer to their shareholders (who are increasingly foreigners) and not to the American public. But a U.S. SWF would also answer to the American people, and thus give the country a powerful collective voice in international finance. Indeed, the more America has a collective, national financial stake in other countries (and vice versa), the more it will have a mechanism to ensure peace, prosperity, and democracy abroad without the necessity of pointing guns or spending directly on aid. Put simply, when there are more ties of mutual interest, the propensity to conflict is mitigated. After all, who wants to bomb a country in which they hold major investments? In this vein, Americans should cheer China’s ownership of U.S. firms. Now not only is it in the interest of the Chinese (or Russians) to have access to American consumer markets (which could be thought of as a new form of dependency), it is also important to these would-be rivals that Americans enjoy productivity growth and profitability, since they are getting royalties on that growth, so to speak.

A Time for Action

But achieving an investor society will require Americans to rethink their fundamental economic approach. Put simply, they have been obsessed with job growth as the only means to foster economic security. But that is fighting against the tides of capital, which inevitably flows to cheaper labor markets. Americans must keep in mind that the growth in jobs is just a means to the desired end of economic security for all Americans. But what if Americans–who now work more hours than almost any other world population–needed to work less thanks to great wealth?

Yes, a recession may not seem like the ideal time to start saving for the future–but it is precisely when households are feeling the pinch that they understand the notion of saving for a rainy day. After all, our recent dip into negative savings happened when the housing market was booming. Now families are squirreling away money. As a nation of scrappy immigrants, Americans have lots of experience in saving and squirreling away money despite limited resources and other obligations–at least since the time of Benjamin Franklin. It’s time they rediscovered those roots of thrift and investment by starting the U.S. SWF. Otherwise the country’s financial future will increasingly be in the hands of the Chinese, Saudis, and other states that may make us shudder. In a globally connected political economy, America cannot stand on the sidelines.


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Issue #12, Spring 2009

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