Former President Donald J. Trump and the Biden-Harris administration have little common ground on the policy front, but one unexpected area of agreement is the idea that the United States might be ready for a sovereign wealth fund.
Such government investment vehicles are popular in Asia and the Middle East. They allow countries like China and Saudi Arabia to direct their budget surpluses toward a wide range of investments and wield their financial influence around the world.
While some individual states have their own versions of wealth funds, the United States, which runs large budget deficits, has never pursued one.
Last week, Mr. Trump suggested during a speech at the Economic Club of New York that, if elected, he would like to create an American sovereign wealth fund that could be used “to invest in great national endeavors for the benefit of all of the American people.” After Mr. Trump’s remarks, the White House indicated that senior officials had been quietly working for months on a proposal for a sovereign wealth fund that Mr. Biden and his cabinet could review.
Despite the newly bipartisan appeal of a national sovereign wealth fund, creating one might not be so simple. It would need the approval of Congress, where lawmakers are likely to be skeptical about authorizing the creation of a fund that could essentially circumvent its own powers to approve federal spending. And then there is the matter of how a nation with perpetual deficits would fund such an investment vehicle.
“Establishing a U.S. S.W.F. would raise highly complex technical and conceptual questions and on its face would appear to be a dubious value proposition for America,” said Mark Sobel, a former Treasury official who is now the U.S. chairman of the Official Monetary and Financial Institutions Forum. “None of the tough questions has been answered so far.”
What is a sovereign wealth fund?
Sovereign wealth funds are national investment funds that operate separately from central banks and finance ministries. They generally aim to take trade surpluses and invest the money in potentially risky asset classes that could generate high returns.
There are more than 100 sovereign wealth funds around the world with combined assets worth over $10 trillion.
Saudi Arabia, Kuwait, the United Arab Emirates, China and Norway have some of the largest funds in the world. The funds invest in areas such as infrastructure and technology, often playing constructive roles in financing new projects.
But they also can cause controversy when concerns arise over the political motivations of a fund or its potential to interfere in financial markets. Saudi Arabia’s Public Investment Fund, for example, has faced accusations that it is linked to human rights abuses, and U.S. lawmakers have called for investigations into the fund out of concern that it is a tool for foreign influence.
A Trump sovereign wealth fund
The former president suggested that the United States should have a fund to invest in national development projects such as highways, airports, manufacturing hubs and medical research. He said the fund would generate so much profit that it would help pay down the national debt.
The investment vehicle would be funded with income collected from new tariffs that Mr. Trump plans to impose on imports. He did not say who would run the fund, but that it would be advised by some of the financiers he was speaking to, including the billionaire investor John Paulson.
Mr. Paulson, who is advising Mr. Trump’s campaign, said in an interview that a fund could be created after Mr. Trump’s policies reverse the United States’ annual deficits and the country starts running budget surpluses.
“When you look at the wealthiest countries in the world, they have sovereign wealth funds,” Mr. Paulson said. “We’d like to become one of those wealthy countries.”
However, the United States has not come near a surplus since 2001. Instead, it has relied on ever larger amounts of borrowed money and is projected to run budget deficits far into the future. Economists remain skeptical that Mr. Trump’s policy proposals — which include additional tax cuts — would do much to narrow the gap between what the country spends and what it earns through taxes and other revenue.
The Biden-Harris fund
The fund under consideration by the Biden administration would be focused on supply chain resilience, technological pre-eminence and energy security, a White House official said. They described the country as being at a competitive disadvantage globally because it does not have a “pool of patient and flexible capital” that can be deployed strategically.
Jake Sullivan, the White House national security adviser, and Daleep Singh, his deputy for international economics, have been holding regular meetings and brainstorming sessions about a sovereign wealth fund.
Officials have discussed using the fund to provide guarantees or bridge financing to illiquid but solvent companies that lack the scale to compete with rival Chinese firms.
The structure of the funding model for the American sovereign wealth fund has not been determined, but the administration has started discussing it with the private sector and with Congress.
Easier said than funded
While an American sovereign wealth fund might sound like a cure-all for some of the nation’s competitive and financial challenges, creating one would not be simple. It would most likely require an act of Congress and the ability of the federal government to stop running the kind of annual deficits that have allowed the national debt to top $35 trillion.
“The only way would be to levy taxes, not spend the money and build the fund,” Douglas Holtz-Eakin, the president of the American Action Forum and a former director of the Congressional Budget Office who has advised Republicans, wrote this week. “I don’t know if anyone has noticed, but the federal government does levy taxes, but not as much as it does spend money, and has only accumulated debt in the process.”
Mr. Sobel suggested that the U.S. sovereign wealth fund would raise thorny budgetary issues if tariff revenues were set aside for the fund but other spending levels remained the same. While Norway and countries in the Middle East use their oil and gas proceeds to finance their funds and China uses foreign exchange reserves, the United States would most likely be left selling off assets at Fort Knox or federal lands.
And then there is the question of who oversees the American sovereign wealth fund and decides how to invest it.
“How could it be assured that sovereign wealth fund funding didn’t serve as a slush fund for politicians?” Mr. Sobel said. “Or might it serve as a vehicle for an American industrial policy and is that in the U.S. interest?”