A rather unpleasant theme of recent columns has been the Clark Center’s various Expert Panels not exactly being overjoyed with much of the policy prospectuses emerging from the ongoing American presidential campaign. This was both predictable and, indeed, predicted by the first On Global Markets column back in February.
Working in a subject close to the heart of public policy and political debate brings its own rewards, but sometimes that silver lining comes with a cloud. The nuanced debate of the academy often becomes twisted out of shape when forced into the world of politics. Trade-offs are played down, uncertainty is minimized and bold – and occasionally unsupported – claims are made. In an election year, the risks of such partisan arguments increase markedly.
As the election has neared, the claims have become ever larger, and the trade-offs minimized further. This has been coupled with the uncomfortable fact that the policies which the Clark Center’s Expert Panels are least keen on, tend to be amongst those most popular with the general public. Politicians, as economists of all people most surely appreciate, respond to incentives and their incentive structure can lead to, at times, suboptimal outcomes.
Over the last few weeks, the Clark Center’s US and Finance Panels have looked at the economics of Sovereign Wealth Funds (SWF) and, in particular, the notion that rich countries should be founding their own. It is fair to say that they are not especially impressed. And yet both the Trump and Harris campaigns are calling for an American SWF and the Biden administration is reportedly exploring setting one up regardless of the result of Tuesday’s vote.
The results of both the US and Finance Expert Panels were well-aligned.
Asked whether “establishing a sovereign wealth fund to invest in domestic infrastructure, emerging technologies, and/or strategic sectors would bring substantial benefits to the US economy over a ten-year horizon”, 68% of US Expert Panel respondents (as ever, weighted by confidence) and 69% of Finance Expert Panel disagree or strongly disagree.
Similar results came when the question was broadened out by asking whether “the typical advanced economy could substantially boost growth by establishing a sovereign wealth fund to invest in infrastructure, emerging technologies, and/or strategic sectors”. This time, 59% of US Experts disagree or strongly disagree.
Both Panels were also asked whether, in the US case, “establishing a sovereign wealth fund would be substantially better for citizens relative to reducing public debt burdens”.
Interestingly the UK based Centre for Macroeconomics recently polled its own expert panel on the question of a UK SWF, as muted by the new British government in the form of a National Wealth Fund (NWF). As with the Clark Center’s results, the answers were not especially supportive.
The results showed that most of the panelists were not confident in the NWF’s ability to boost growth. The panel was roughly equally split between those supporting and opposing the creation of a NWF. However, even supporters of the NWF expressed low confidence in its impact and expressed many caveats. On the financing of the NWF, the panel expressed little concerns about the affordability of the NWF.
In reality, what American politicians and the British government are proposing, is not really a sovereign wealth fund at all in the traditional sense.
Rather the proposals, as many respondents to the polls suggested, are best thought of as a form of industrial policy – a vehicle controlled by the government making “strategic” investments in either infrastructure or firms in sectors seen as important to future growth.
Most economists support, at the very least, state-backed investment in infrastructure but it is far from clear why that requires a specific vehicle. Building the Federal highway network was no doubt good for growth in both the short term and long run but it did not need an American sovereign wealth fund to do it.
Given high public debt levels on both sides of the Atlantic and ongoing deficits, any new SWF would effectively be funded initially by borrowing. The implicit bet of policymakers would be that their new fund would make a return higher than the cost of debt. That may indeed be possible but would certainly be less likely if the new vehicle was forced to respond to political pressures to back favored projects.
Most economists, as some respondents noted in their answers, can see a case for a SWF when a country is enjoying excess revenues from a time limited resource. Norway, for example, chose to invest the government’s share of its North Sea oil receipts in a fund so that future generations could share in the proceeds well after the oil was gone. That fund, which has been managed in a hands-off way by the government and invested widely in global assets rather than the pet projects of politicians, is now worth around $300,000 per Norwegian inhabitant.
Ireland is another country in the process of establishing its own SWF. In recent years the domicile of some large American tech firms in the relatively small country has seen a surge in corporation tax receipts. Such revenues rose from around €7B in 2015 to almost €25B this year. But just ten firms account for two-thirds of them and the Irish government, sensibly, understands that such a narrow tax base may not last forever. In this case, as in Norway, the case for a SWF is clearer.
Establishing a SWF without some sort of temporary revenue surge is a harder thing to justify. And giving such a fund a mandate to invest in strategic sectors rather than seek the best returns available on behalf of taxpayers is still harder.
It is unlikely to be the last major policy call on which economists and politicians find themselves on opposing sides.
*An earlier version of this article did not specify what 68% of US Expert Panel respondents (as ever, weighted by confidence) and 69% of Finance Expert Panel voted.
