Donald Trump wants to create a sovereign wealth fund (SWF). It's a bad idea if your standard is freedom, free enterprise, and free markets. That's not Trump's standard, but we already knew that.
A sovereign wealth fund is a government-run investment program. Where does the money come from? In the private sector, people save money (defer consumption) and let entrepreneurs and capital owners (perhaps including themselves) use it to produce goods and services that serve consumers sooner or later. They do so because they anticipate a worthwhile future return (interest, dividends, capital gains) that will enable them to consume more than they could have otherwise.
What about the government? Governments with SWFs typically used budget surpluses to get them going. We might ask why those governments didn't cut taxes and spending instead. After all, the government had taken in more money than it required to cover its spending. If you look at this from the politicians' and bureaucrats' point of view, the answer is obvious. They like using other people's coerced money for social engineering.
As for the U.S. government, it has not had a budget surplus in ages. It doesn't have money sitting around with nothing to do. Its formal debt is larger than the GDP, and its unfunded future liabilities from the entitlement programs are humongous. It faces daunting annual budget deficits way into the future, with interest on the debt a rising budget item. Is Trump proposing to borrow money to stock the SWF?
To put it mildly, it's a bad time to set up a SWF, which is not to say there is a good time. Instead, it's the right time to massively cut spending, shrink the government, let the taxpayers spend their money as they prefer, and retire the debt. (A good case can be made for repudiating the debt. People who chose to lend money to the government relied on its power to tax, that is, to aggress. They voluntarily took a risk. With no debt to repay, the government would have less of an excuse to tax us. That would be a boon. I don't expect Trump to repudiate the debt, well not directly, though monetary inflation would bring a partial and implicit repudiation since it would be repaid in dollars that buy less than when the money was borrowed. This has happened before.)
"The idea that Washington should set up an investment fund when it can’t even manage its own budget is laughable at best and dangerous at worst," writes the Cato Institue's Romina Bocci in "The Fool’s Gold of a US Sovereign Wealth Fund."
Some people say that the government could finance a SWF by selling assets such as land, raw materials, and buildings. But that answer raises other issues. If the government sells off assets, it could do other things with the money: namely, pay off debt or cut taxes and spending. One might also ask if selling assets is appropriate. Shouldn't government land be opened to homesteading as it should have been long ago?
Any dollars the government invests, however it procures them, could have been invested by private individuals. For example, when the government pays off a Treasury bill, the holder has cash to invest privately. As everyone should realize, the government ultimately obtains money and resources only by taking it from producers. The government is a transfer machine.
Here's another question: do we want the government to be a player in the capital markets? Emphatically not! That's why Cato's Romina Boccia describes an SWF as not just laughable but dangerous. "[W]hy should the government be in the business of managing investment portfolios when private capital markets already allocate resources far more efficiently?"
Any presidential administration will bring its political agenda to its investment program. A Harris administration would have "invested" in so-called green enterprises. (This has been a fiasco in the past. See the Solyndra case.) Trump's program would undoubtedly embody his belligerent nationalist, industrial-policy program. We can only shudder.
More generally, a government fund administrator would be different from a private investor. Anyone who has read Ludwig von Mises's, classic Bureaucracy will know that. Apart from the president's political agenda, a bureaucrat would only be playing entrepreneur. Since he would not be risking his own capital and would not personally profit or lose from his decisions, he would face different incentives from his private counterpart, who would face bankruptcy. Mises and F. A. Hayek also made this point when they refuted the socialist economists who argued that government planners could mimic the market.
As Boccia writes, an SWF "would invite political interference in capital markets, opening the door to cronyism, favoritism and inefficiency. Given Washington’s track record, does anyone believe that a government-run investment fund would be free from political meddling?" Her example of such political meddling is the U.S. International Development Finance Corporation. Peter C. Earle of the American Institute for Economic Research gives another example in "Scrapped Ventilators and Sovereign Wealth: Why Central Planners Shouldn’t Invest."
Back to the drawing board, Mr. Trump.
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