On Piketty's Capital: The Sovereign Wealth Fund Solution

Previously, I wrote on Piketty's point that wealth and income inequality is not about age because such inequalities exist at fairly equivalent magnitudes in every age group. Here, I draw upon Piketty's discussion of sovereign wealth funds (SWFs), university endowments, and wealth taxes to propose a more potent solution to economic inequality than the one Piketty offers.

The Wealth Tax

As a background, Piketty's overwhelming concern in "Capital" is about wealth inequality. Due to a slowing of economic growth, among other things, capital measured as a fraction of national income is increasing and will continue to do so. This increase will cause capital's share of the national income to increase as well. Because capital ownership is concentrated in the hands of a few, this will have extremely inegalitarian consequences if nothing is done to check it. A return to the rentier societies of the past is, according to Piketty, entirely possible.

Piketty's primary solution is a progressive wealth tax, one that would ideally be imposed globally (so as to check capital flight), but one that could be done by large countries or regions as well. Such a tax would provide a meaningful amount of revenue, but not that much. The point of such a tax is more to act as a drain and permanent drag on wealth concentration. The effective rate of return on capital would, net of the wealth tax, be diminished, which would check the rate of wealth divergence and target a lower equilibrium level of wealth concentration.

This is a good idea, but I think it could be improved by adding a sovereign wealth fund on top of it.

Sovereign Wealth Fund Add-On

A SWF is a huge pile of capital that is owned by the state and invested for a return just like a mutual fund, a pension fund, or a university endowment. The wealth of such funds is, by definition, held collectively by the public, instead of being held privately. To the extent that wealth concentrating in the hands of a tiny few is our concern, one obvious way to prevent that is to have the public hold a bunch of it collectively. If the public owns it, the super-capitalists don't. That helps check our wealth inequality problem.

In addition to reducing wealth inequality, SWFs would also reduce income inequality. The issue with capital, and the thing that can cause it to create inegalitarian death spirals, is that it generates passive incomes for its owners. Piketty claims that, on average, capital has an annual return of 4 to 5 percent. The income from these returns primarily flows to the tiny fraction of people that hold most of the capital. If the state holds a lot of the capital in a SWF however, then a lot of the income from the return on capital would flow directly to the public fund, which could then be used to finance social spending or transfer incomes (as Alaska's SWF is used for).

Moreover, there is reason to believe that a SWF, if run well, would be able to generate higher returns than anyone else. Using an analysis of university endowments, Piketty theorizes that investing larger pools of capital can generate economies of scale that enable them to get better returns than smaller pools of capital. The biggest pool of capital can hire the best money managers in the world while paying them only a fraction of the fund's overall assets. If we could put together a SWF and run it as well as Harvard or Yale runs its endowments, the SWF would generate better returns than almost any other fund, causing public wealth to grow faster than private wealth. This too would check wealth inequality and private wealth concentration.

Putting all of the above together, you could imagine the following ideal scenario. A big country or region imposes a progressive wealth tax. The annual revenues from the wealth tax are put into a SWF. The SWF utilizes its big size to generate solid returns. Some of those returns are reinvested into the SWF to allow it to grow (along with its annual wealth tax revenues) faster or at the same rate as private wealth. The rest of the returns are paid out to the public in an annual dividend as a basic income, like Alaska's SWF does.

By combining the wealth tax with a sovereign wealth fund that pays out a basic income, you cut wealth inequality by much more than a wealth tax alone, and take a bite out of income inequality while you are at it. As with all things, there are a variety of implementation details that would need to be hammered out, but if we are trying to come up with ideal egalitarian solutions, this should be considered one of the frontrunners.

Comments