Seven GOP-Controlled States Can't Be Wrong: Sovereign Wealth Funds Are Awesome

Yesterday, I wrote about some interesting programs that exist in Alaska that conservatives called communist when they saw Jesse Myerson propose them in The Rolling Stone. One of those programs is Alaska’s sovereign wealth fund, which is just a big pot of money that the state invests and generates revenue from.

The less unhinged parts of the internet appear to be waking up to the fact that what Myerson proposed is not nearly as crazy as conservatives seemed to think. Even Josh Barro at Business Insider provided reluctant support for some of the proposals. One of the things Barro did not support though was the sovereign wealth fund idea:

Similarly, I don’t see the appeal of a sovereign wealth fund for the U.S. We’re already sort of in this business: state and local pension funds are like mini-sovereign wealth funds. The investment sides of those operations are mostly pretty satisfactory, but problems arise when governments count on high expected returns on equity as a justification to incur fixed multi-year obligations. I see lots of risks from the federal government getting into this game (what promises might it make on the back of expected stock returns?) and few benefits.

I think Barro’s analysis here is lacking. First, the appeal of a sovereign wealth fund is pretty straightforward. It is a way for the state to passively capture capital income and spread it out to the public as a whole. Why might we want to do that? Barro himself incidentally identified the answer elsewhere in the post when he referenced “the sliding labor share of national income.” If more of the national income is flowing to capital, then putting the state in a position to passively capture a lot of that capital income is a fantastic way to fight inequality. The rise in capital income has, after all, been the biggest contributor to the rise in inequality in recent times.

Second, Barro’s concerns about a sovereign wealth fund are not particularly well-founded. He concedes that, in fact, the sovereign wealth funds we have are run pretty well. He just speculates that promises made on the revenues of the sovereign wealth fund could be imprudent. But that’s true of any type of government revenue. The government can make imprudent promises on expected tax revenues just as well as it can on sovereign wealth fund revenues. By itself, the SWF is just another revenue generator. Barro’s objections therefore having nothing to do with SWFs and everything to do with potential government handling of revenues in general.

Moreover, we have so many examples of SWFs already in the wild that are doing just fine. The Alaskan SWF, which I wrote about in my piece yesterday, is doing great. But there are many other SWFs throughout the country that are also doing well. There is the Permanent School Fund and Permanent University Fund in Texas. There is the Alabama Trust Fund. There is the North Dakota Legacy Fund. There is the Permanent Wyoming Mineral Trust Fund. There is the Louisiana Education Quality Trust Fund. New Mexico has three different sovereign wealth funds. And that’s just here in America. Forty-one other countries have sovereign wealth funds as well.

No assessment of actually-existing sovereign wealth funds that I have ever seen gives any support for Barro’s speculations on their revenues being uniquely subject to political mishandling. If anything, the trend appears to be that, unlike normal revenues, SWF revenues are often put to some dedicated social project and not just spent and promised willy nilly.

In close, I do think it is amusing that all seven states which have sovereign wealth funds in this country are headed by Republican governors. Insofar as this is impermissible communism, you’d think the conservative commentators have a lot of work to do within their own party to eradicate these communist ventures.

(Hat tip to Thomas M. Hanna.)