US sovereign wealth fund is latest grand political idea but is it realistic?

Biden and Trump have both proposed the possibility of creating such a fund

Economists suggest that a US sovereign wealth fund would have to be totally independent of the federal government. EPA

The top Republican and Democratic names in the US are in rare agreement about the establishment of an American sovereign wealth fund, but the practicality of actually doing so has generated a mixed reaction outside Washington.

During a speech in New York last month, Republican presidential nominee Donald Trump brought new momentum to the idea when he complained that nations such as Saudi Arabia and Norway have sovereign wealth funds while the US does not. “Why don’t we have a wealth fund? Other countries have wealth funds. We have nothing,” he said.

The former president pictured a future in which a US sovereign fund financed by his across-the-board tariffs policy and “other intelligent things” could invest in projects such as highways, airports, defence capabilities and medical research.

The next day President Joe Biden's aides were reported to have been working on a proposal to establish a sovereign fund which, according to Bloomberg, would allow the US to invest in technology, energy and supply-chain links.

Vice President and Democratic nominee Kamala Harris has not publicly expressed support for a sovereign wealth fund, but the idea has crept into the US Congress, where Republican Representative Morgan McGarvey introduced a bill to explore the feasibility of creating one.

Despite the apparent bipartisan allure of a sovereign wealth fund, key obstacles remain – not least the nature of the US economy, as well as significant logistical and political hurdles.

What is a sovereign wealth fund?

There are three key characteristics of a sovereign wealth fund: they must be owned by a general government, hold investments in foreign financial assets and invest for a government's financial objectives such as achieving macroeconomic stability, as defined by the Santiago Principles in 2008.

Funds for these arrangements usually come from a country's surplus reserves from either commodity revenue, trade surpluses, bank reserves or other sources.

For countries such as the UAE, Saudi Arabia or Norway, a sovereign wealth fund can be an important tool to stabilise the economy and generate wealth.

Yara Aziz, an economist at the non-partisan Official Monetary and Financial Institutions Forum in London, said a US sovereign wealth fund could be a good idea because it could help to stabilise the country's economy during a downturn.

“It could also reduce debt and it could help in investments for the long run and generate growth for the economy,” she said.

The Norwegian model

There are more than 100 sovereign wealth funds in the world that manage more than $12 trillion in assets, according to the Global SWF tracker. The biggest is Norway's, which Mr Trump hopes to surpass.

US billionaire and hedge fund manager John Paulson, who is advising Mr Trump on creating a sovereign wealth fund, told Bloomberg that he would like to follow Norway's model.

Worth $1.77 trillion today, the Government Pension Fund of Norway was established after one of the largest offshore oilfields in the world was discovered off the country in 1969, giving the small Scandinavian nation an enormous supply of hydrocarbons. Set up in 1990 after the oil discovery generated economic surpluses, the fund's aim was to shield Norway's economy from fluctuations in the oil market and to serve as a long-term savings plan for future generations.

Today it owns roughly 1.5 per cent of all shares in companies listed worldwide, according to Norges Bank Investment Management, which manages the fund.

The fund has a few key rules. Among them is to only invest abroad, to avoid overheating the Norwegian economy. Norwegians also implemented a rule ensuring the fund does not spend more than its expected return.

“I think Norway is the best transparent example of how a strong state can run its funds,” said Ana Nacvalovaite, a research fellow at the University of Oxford.

Those who want to model a US fund after Norway also point to its record on transparency. In addition to an annual report listing on all investments, the country's finance ministry reports to the Norwegian Parliament on matters relating to the fund.

While such an idea is economically viable, Ms Aziz cautioned the importance of transparency when establishing a wealth fund in America's political environment.

“It would help to be very transparent in its global investment approach,” she said.

The US environment

Some, however, dismiss the idea that Norway's model can be replicated, pointing to different economic and political circumstances in Washington.

“Would you really trust the government of either stripe to have a politicised investment fund?” said Bill Megginson, a professor at the University of Oklahoma.

Mr Megginson said that the US is a nation with massive debt and one of the deepest capital markets in the world, characteristics that are inconsistent with commodity-rich nations and excessive surpluses.

“In certain cases, small countries with surpluses, they can invest domestically … None of those apply to the United States,” he said. And given the fiscal promises made by both presidential candidates, Mr Megginson believes plans to create a wealth fund “will be dropped”.

Establishing such a fund would also be a departure from fiscal responsibility, said Veljko Fotak, a professor at the University of Buffalo. “Investing money from tariffs via a [sovereign wealth fund] instead of using it to pay off our debt is what I think is the ultimate perversion,” he told The National.

Economists also suggest that a US sovereign wealth fund – should there ever be one – must be totally independent of the federal government.

It would also come with its own political wrangling, such as finding the political will to create and staff one, and determine how to manage such a fund. Still, Mr Fotak said that is the easy part.

“The hard part is keeping it alive when power changes hands. Especially in such a politically polarised environment,” he said.