In his February 3 Executive Order, President Trump directed his minions to begin planning for establishment of a “Sovereign Wealth Fund” that he originally touted in a speech to the Economic Club of New York last September. The fund would be on the order of $2 trillion, investing in things like manufacturing hubs, defense, and medical research. The order states:
It is the policy of the United States to maximize the stewardship of our national wealth for the sole benefit of American citizens. To this end, it is in the interest of the American people that the Federal Government establish a sovereign wealth fund to promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish economic security for future generations, and promote United States economic and strategic leadership internationally.
This order reflects a new anti-capitalist economic orientation of the Republican Party, embracing fallacies that government can somehow be made efficient, that tariffs can perform miracles like saving the fiat dollar from destruction, and that selecting the right executive personnel is a substitute for rule of law. Republicans have evidently forgotten the eternal economic truth that planning not driven by free markets doesn’t work; government shouldn’t be trying to pick winners and losers in the business world. Whatever claim Republicans had to being pro-liberty, pro-Constitution, pro-free market, etc. is gone now.
To be sure, it is undeniably true that America is not on a path towards fiscal sustainability and future economic security, and it is losing its economic and strategic leadership in the international arena. However, one does not “maximize the stewardship” of American wealth by forcing the American people to hand it over to presidential appointees. The fact that numerous other states possess such collectivized investment arrangements (a talking point that Trump repeatedly stresses) is not a valid excuse for America to commit a similar blunder.
In a passage from A Critique of Interventionism, making the case that government-controlled enterprises can’t escape the inefficiencies of bureaucratic management, Ludwig von Mises explained how responsible stewardship of capital goods is, in fact, maximized by private ownership of the means of production in conjunction with an unhampered market:
The entrepreneur operates on his own responsibility. If he does not produce at lowest costs of capital and labor what consumers believe they need most urgently, he suffers losses. But losses finally lead to a transfer of his wealth, and thus his power of control over means of production, to more capable hands. In a capitalistic economy the means of production are always on the way to the most capable manager, that is, to one who is able to use these means most economically to the satisfaction of consumer needs. A public enterprise, however, is managed by men who do not face the consequences of their success or failure.
Mises went on to note how even introducing an element of profit-seeking into government enterprises doesn’t replicate the benefits of a capitalistic economy:
Even a profit-seeking public enterprise could not be unbureaucratic. Attempts have been made to eliminate bureaucratism through profit-sharing by managers. But since they could not be expected to bear the eventual losses, they are tempted to become reckless, which then is to be avoided by limiting the manager’s authority through directives from higher officials, boards, committees, and “expert” opinions. Thus again, more regulation and bureaucratization are created.
But usually public enterprises are expected to strive for more than profitability. This is why they are owned and operated by government. Deumer, too, demands of the nationalized banking system that it be guided by national rather than private considerations, that it should invest its funds not where the return is highest, but where they serve the national interest.
It is important to note here that Mises neither denied that a principal-agent problem might exist in a private firm nor denied that private firms might have their own issues with bureaucratism; rather, he was affirming that market-based, profit-and-loss accounting is the primary cure for such problems and that government interference with markets and with private ownership is the primary obstacle to profit-and-loss governance of private businesses. Mises perceptively points out how profit-sharing doesn’t curb reckless behavior by managers who have no skin in the game, and how political considerations often override considerations of profitability when government has a large stake in the business. Investors must retain an active role in looking after their own investments and be unhampered by government restrictions and controls for profitability to be a useful feedback mechanism.
A myth popular among some non-Austrian economists is that investing can be reduced to an automated, mathematical exercise in diversification and statistical measurement of cyclical risks (e.g., the capital asset pricing model), which, in turn, gives some superficial plausibility to the assumption that handing trillions of dollars over to managers of “sovereign wealth funds” can be a harmless exercise when organized in the manner of a passive index mutual fund. However, several searing experiences in recent decades such as Enron systematically fleecing equity investors with misleading financial statements or a massive bank credit expansion featuring an unusual concentration in subprime housing mortgages due to regulatory arbitrage remind us that investing can never be safely put on autopilot. American citizens are better off picking their own stewards who serve at their pleasure, rather than blindly trusting governmental stewards they can’t even fire and phony government pretenses of insuring the uninsurable.
The wisdom of Mises’s position is further reinforced by the revealing statements made by Trump regarding his political motivations for the fund. Trump stated that the fund might be used to buy TikTok, presumably for the “strategic” reason that its current ownership is Chinese. It’s bad enough that TikTok would then be managed like the US Postal Service (presumably with all the efficiency and customer service that the USPS is infamous for), but what assurance would there be that the American government’s abuse of TikTok user data or its politicized manipulation of messaging on the platform would be any less malevolent than what is currently practiced by the Chinese Communists? More generally, what is to prevent the fund from becoming a means for funding graft, political machines, and ever more intrusive forms of social engineering on a colossal scale?
If one wants to get serious about improving the stewardship of wealth in America and empowering its citizens to have their interests prevail, that wealth should be transferred back into the possession of its rightful owners. Wealth also needs to be liberated from the sort of tax and regulatory regime that favors concentration of stewardship in the hands of Davosian-oriented stakeholders like BlackRock, Vanguard, and State Street and the funneling of funds into lower-yielding investments.
It would also help a great deal if the pursuit of future economic security were to become an individual responsibility again, not reliant upon the unsustainable entitlement obligations of the Social Security and Medicare trust funds and on the unsustainable inflation of the quantity of fiat dollars by the Federal Reserve. It is the capital-consuming nature of the welfare state and its fiat dollar-financing mechanism that has been steadily eroding America’s economic security and fiscal sustainability and forfeiting America’s leadership on international economic and strategic matters.
