President Trump's executive order is being called for Creating a US Sovereign Wealth Fund (SWF) A glossy object looking for useful features. The idea that Washington should set up an investment fund when he can't even control his own budget is laughable at best and at worst dangerous.
Unlike some other countries where the SWF has been successful, such as Norway, Singapore and the Gulf countries, where the president appears to praise, the US has no surplus of investment income. Instead, it owns in debt and has an unworthy obligation of an estimated net worth of $80 trillion.
The fundamental flaw in this proposal is that the US SWF will not generate new wealth. It would simply redirect capital from the private sector to the government. Given the government's financial position, the fund will ultimately rely on government debt to make an investment. This is true even when relying on dedicated sources of funding, such as fees and income from natural resources and asset sales. The government's purely negative position remains unchanged.
To generate capital for the fund, some supporters suggest “monetizing the asset side of the US balance sheet.” This is a vague phrase that refers to the sale or lease of federal assets such as public land or infrastructure. But even if this is viable, why should governments do business managing their investment portfolios when the private capital markets already allocate resources much more efficiently? Instead, Congress should use revenue from federal assets to reduce out-of-control deficits and debts and lock down low taxes for Americans.
Even if the fund was superior to the government's borrowing costs, it would not simply be an actual increase in the prosperity of the nation, but simply a transfer of economic activity. Worse, it leads to political interference in the capital markets, opening the door to chronism, favorability and inefficiency. Given Washington's track record, does anyone believe that government-run investment funds will be free from political interference?
I haven't looked for more US International Development Finance Corporation (DFC) For a preview of how incorrect the American SWF is. The agency is a rebranded and expanded version of the former International Private Investment Corporation (OPIC), created under the Trump administration to fund private sector projects in developing countries. That mission? It promotes the economic interests of the United States and supports global development. To achieve this goal, we use taxpayer-supported loan guarantees to socialize investment risks to support investments that may struggle to secure funding in the market.
US authorities justify the DFC by claiming it promotes economic development and supports US foreign policy goals. But in reality, foreign governments ease the need to implement reforms that attract their own investments. Instead of securing property rights, enforcing contracts and adopting sound economic policies, recipients can resort to Washington-supported schemes to support investment.
US sovereign wealth funds could fall into the same trap as allocating capital based on political priorities rather than economic merit.
Additionally, the SWF creates dangerous incentives for government intervention in the economy. Will government-controlled funds invest in politically favorable industries such as green energy and biotechnology, avoiding sectors where the administration's administration is deemed “unacceptable”? Do you use your shareholder influence to promote a political agenda in corporate America? These risks are not hypothetical. They are the natural consequences of state-managed investments.
If anything, managers should be aiming to eliminate the Development Finance Corporation, not replicating it on a large scale. Rather than protecting foreign governments from the need to create an attractive investment environment, the US should encourage market-driven reforms that will ensure that the local economy flourishes without Washington's artificial support.
The same logic applies domestically. If the US wants a prosperous economy, it needs to reduce deficits, reduce wasteful spending, and create a stable economic environment for private investment. Rather than launching a new bureaucratic experiment in government-run asset management,
US sovereign wealth funds are more than just a bad idea. It's an illusion. America's strength lies in its dynamic private sector, not in its government-controlled wealth scheme. The administration should focus on revising its balance sheets rather than pretending to be a hedge fund.
Romina Boccia is Director of Budget and Eligibility Policy at the Cato Institute.
