How About a U.S. Sovereign Wealth Fund?

Last month, the Congressional Budget Office released new budget projections to much fanfare. The big takeaway from the projections is that the federal budget deficit and federal debt level are doing fine. Under the new projections, deficits will be much lower than previously thought, and the debt level as a percentage of GDP will basically stabilize at the current level. The debt-to-GDP ratio is even projected to remain below 90%, much to the delight of the recently-disgraced Reinhart-Rogoff duo.

This is good news because now the right-wing will presumably walk back their exhortations to cut social insurance and other safety net programs in order to save ourselves from a debt disaster. Since the debt disaster is not materializing, no need for that kind of talk anymore. I kid of course: they won't ever stop crying about the deficit or debt because their desire to cut social insurance has nothing to do with a genuine concern about the country's fiscal situation and never will.

The question then is what should we do going forward when appeals to the debt and deficit persist, as they most certainly will. We can point to the new projections showing that the debt and deficit are not serious issues. But that's not very fun. We can play along and suggest raising more taxes on the rich. That's more fun, but likely to meet the same fate as usual for such talks.

Instead of going down either of those routes, I think we should go in a totally novel direction, at least in the short-term. What if there was a way we could reduce the federal deficit and the federal debt without raising taxes and without cutting spending? It seems too good to be true, but it's not. All the federal government has to do is borrow money and invest it. If the interest paid on the borrowed money is less than the return on the investment, then the government will net revenue.

Luckily, the interest rate on treasury bonds are extremely low right now. As of 06/11/13, the Treasury could borrow money at 1.61 percent for 7 years, 2.20 percent or 10 years, 3 percent for 20 years, and 3.33 percent for 30 years. All of these rates are considerably below the historical returns of a number of investment vehicles, stocks especially. By taking advantage of the spread between the rock-bottom treasury rates and rates of return for relatively passive investments, the government could capture a substantial amount of revenue, thereby reducing the debt and deficit.

Because there is no real reason to be worried about the deficit and debt right now, there is no real reason to do this policy either. But to the extent that we know the right-wing will continue beating that drum, I think offering this policy as a fix would be a healthy change-up from the tired script everyone is used to. If we played our cards right, such a policy could even be a precursor to a sovereign wealth fund that pays out social dividends.

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