How would a US sovereign wealth fund even work?

0:01NPR.

0:11This is The Indicator from Planet Money. I'm Patti Hirsch. And I'm Waylon Wong. President Trump issued an executive order this week telling the Treasury and Commerce Departments to produce a plan for, wait for it, an American Sovereign Wealth Fund. Well, the reaction to this latest order ran the usual gamut from disbelief and derision through hilarity to rapture. Depending on who you follow on social media, an American Sovereign Wealth Fund could be an end run around congressional roadblocks, or maybe an opportunity for corruption and cronyism. Could be a chance to create value and be of great strategic importance to the U.S.

0:49But my personal favorite, it's a shiny new toy for both parties to play with as they spend and splurge the U.S. Treasury into financial oblivion. That's from the libertarian Mies Institute. Spicy. The fun could be used for all sorts of good things, Trump said. Maybe even buying TikTok. No wonder the announcement had the internet foaming at the mouth and searching for an explanation of what exactly a sovereign wealth fund is. Fortunately, we already have a ready-made explainer. Last year, we aired an episode laying out what a sovereign wealth fund is and how these funds came about. So today, we're going to re-air that show, which we've updated to explain what Trump's executive order actually means.

1:30That's coming up after the break. This message comes from NPR sponsor Zendesk. Introducing the next generation of AI agents built to deliver resolutions for everyone. With an easy setup that can be completed in minutes, not months, Zendesk AI agents resolve 30 % of interactions instantly, quickly giving your customers what they need. Loved by over 10 ,000 companies, Zendesk AI makes service teams more efficient, businesses run better, and your customers happier. That's the Zendesk AI effect. Find out more at zendesk.com. I promised you an explanation of what a sovereign wealth fund is, and for that, we're going to hear from Tyler Cowen.

2:11He's a professor of economics at George Mason University and a longtime friend of The Indicator. A sovereign wealth fund arises when a government has some excess money, and it takes that money and it invests it. And the idea is to earn a highly positive rate of return on that money so the country's wealthier and citizens can pay lower taxes. Sovereign wealth funds really took off in the late 90s, but they're not a new invention. They've been around for a long time. In fact, the very first sovereign wealth funds were created back in the 1800s, right here in the United States. Yeah, and there are as many as 15 sovereign wealth funds in the U.S.

2:47still operating today at the state level. Marisa Perez-Diaz is vice chair of one of the biggest, the Texas Permanent School Fund. The fund was created in 1854 to generate revenue to fund Texas public schools. Marisa says the money that goes into the$56.8 billion fund comes from management of certain state lands. The Texas Constitution identified certain lands across the state. And all of the proceeds from the sale or the lease of those lands would be the funding mechanism for the permanent school fund. That included the leasing of surface and mineral rights and, in particular, oil and natural gas royalties.

3:28Around the world, the same thing happens at the national level. Countries direct surpluses from oil production or exports into funds and use the returns to do anything from lowering taxes to building roads and airports. That all sounds really good, right? Yeah, right, yeah. So why don't we do that on a national level here? The biggest problem is we don't have a surplus. Oh. Small problem. Tyler Cowen notes that the U.S. hasn't had a surplus since 2001. That means for the last 23 years, we've been spending more on our annual budget than we've been making. Instead, we've been racking up a stupendous amount of debt.

4:05And Tyler says that makes the idea of a sovereign wealth fund for the United States, well, absurd. If your country is small, well-governed and has a surplus, it is probably a good idea. We are not any of those. If we were playing overrated, underrated with Tyler, I'd say this means he thinks the idea of a sovereign wealth fund for the U.S. is highly overrated. I'd say you're right. And most economists seem to agree, but not all. And not James Brawl. He's a senior fellow at the Competitive Enterprise Institute. It's a conservative think tank. He's also a graduate of George Mason's economic program, where Tyler Cowen teaches.

4:40He was my advisor, actually. Oh, he was? Yeah. So we don't see eye to eye on this issue. Yeah. Unlike Tyler, James thinks the idea of a sovereign wealth fund for the United States is underrated. He acknowledges that we're not running a surplus right now, but then neither is the UK or Germany or Mexico, and they all have wealth funds. James says there are various other ways for the U.S. to generate the money to use in a fund. We could channel some of the investment dollars that flow into the country from foreign investors, he says. We could sell special bonds. Not a popular idea with Tyler, by the way.

5:13No. Or we could manage some of our national assets better, kind of like Texas does with its land. The federal government owns a lot of land. It owns a lot of assets of various kinds. We had a more specific focus on just managing those existing resources more prudently. I think we could make trillions in revenue. Yeah, he says some federal land could be developed. I think that would be kind of a spicy idea, especially out West. Yes, indeed. But the proceeds from investing, he says, could be used for a variety of things, to pay down debt, to pay a dividend to citizens, to build infrastructure. But whatever a sovereign wealth fund did with that money, James says, it would do it a lot more efficiently and cost-effectively than the system we currently have, which is called the Congress.

5:57Congress is not always very efficient in the way that it allocates funds. And the political dynamics in Congress lead to a lot of special interests, pandering for dollars and setting up programs that maybe don't pay off over the long haul. You can see the attraction here, right? Our system can be torturous, infuriating even. Tyler Cowen says no wonder the idea of a fund that would spend independently of Congress has gotten some traction. Our governments have decided they want to do extra things, things like industrial policy, but they're frustrated with the notion of having to go through Congress and get approval for expenditures, even though that's our Constitution.

6:41Oh, the Constitution always getting in the way. Just like its evil cousin, politics. Tyler makes the point that any sovereign wealth fund in the United States would be hamstrung by the way politics works here. Politics is politics. You cannot stop politics from interfering in what the government does with its money. Just look at Texas. The original point of the Texas Permanent School Fund was to fund public schools in the state. But Marisa Perez-Diaz, the vice chair of that fund, says that's not where all the money goes once the legislature gets a hold of it. Depending on what the legislature that's in office at the time is really prioritizing, those dollars can go everywhere from public education to infrastructure to transportation.

7:23To be fair, the reason this happens is because in 1856, the Texas legislature saw all that money going to schools and they appear to have gotten a wee bit jealous. They decided that the schools could share with railroad infrastructure projects. I mean, I guess when they wrote that provision, they weren't as specific as they needed to be. Yeah, that's the problem of how money that goes out of the fund is spent. There's also the problem of deciding how the money that goes into a United States fund would be invested. One huge temptation for political leaders, Tyler says, would be to push a sovereign wealth fund to invest in certain U.S.

7:57assets, which, when you think about it, sounds entirely dodgy. We would be trusting our government to be allocating funds to investments without a very good process for evaluating how well that will be done and possibly outside the normal bounds of our Constitution. James Brill actually agrees with Tyler here. Political interference of any kind would be bad, he says. But he argues that there's no reason we couldn't insulate a U.S. sovereign wealth fund from politics. You really want to have independence, probably something akin to what the Federal Reserve has when it conducts monetary policy. It's this concern that's going to be front of mind for Trump watchers as the administration rolls out its plan for a U.S.

8:39sovereign wealth fund. Constitutional lawyers are going to be particularly interested. There's a line in there about potentially proposing legislation to Congress. So I think that they are anticipating that there could be some roadblocks as far as legality to establishing a sovereign wealth fund. To actually establish and expand a sovereign wealth fund, James suspects it would take an act of Congress, which could be difficult to pass. But we might end up with a kind of sovereign wealth fund light. We might see some reorganization in the way that the federal government manages its assets. They might call that a sovereign wealth fund or call it or create some new office tasked with overseeing management of those assets.

9:19but that may or may not look like what people traditionally think of when they think of a sovereign wealth fund. And we're talking about a lot of assets here. The executive order notes that the government has$5.7 trillion worth of assets. Cash, property, buildings, land. Congress may not be managing them as well as it could. Would a sovereign wealth fund do it any better? This episode was produced by Julia Ritchie and engineered by Jimmy Keeley. It was originally produced by Angel Correras with engineering by Maggie Luthar. It was fact-checked by Sierra Juarez. Kicking Cannon edits the show, and The Indicator is a production of NPR.