Last night, I wrote about the ongoing controversy over Rolling Stone contributor Jesse Myerson’s “Five Economic Reforms Millenials Should be Fighting for,” raising a couple of concerns to the first two components of his platform (guaranteed employment and basic universal income) as well as challenging the idea that the proposed reforms would satisfy millenials as an entire class of people. I’ve been thinking about Myerson’s article further since then and would like to raise a couple more points for consideration.
Specifically, I’m interested in discussing the fourth point of Myerson’s program, which he labels as “make everything owned by everybody.” Because that proposition is vague and could be construed to mean any number of different things, I’m going to focus on the case that Myerson tries to make for expanding sovereign wealth funds.
Hoarders b***. Take, for instance, the infamous one percent, whose ownership of the capital stock of this country leads to such horrific inequality . “Capital stock” refers to two things here: the buildings and equipment that workers use to produce goods and services, and the stocks and bonds that represent ownership over the former. The top 10 percent’s ownership of the means of production is represented by the fact that they control 80 percent of all financial assets.
This detachment means that there’s a way easier way to collectivize wealth ownership than having to stage uprisings that seize the actual airplanes and warehouses and whatnot: Just buy up their stocks and bonds. When the government does that, it’s called a sovereign wealth fund . Think of it like a big investment fund that buys up assets from the private sector and pays dividends to all permanent U.S. residents in the form of a universal basic income. Alaska actually already has a fund like this in place . If it’s good enough for Levi Johnston, it’s good enough for you.
First of all, I find it somewhat surprising that someone with as much loath of finance and Wall Street as Myerson displays throughout this article is actually advocating funneling a large portion of federal money toward big banks. It may not seem that way based on the way that he phrases it–we should “just buy up their stocks and bonds”–but the only way that we would be able to do that is, quite obviously, by forking over a bunch of cash. This, however, is the least of my concerns with regard to sovereign wealth funds.
When I shared my concerns on Myerson’s arguments for guaranteed employment and the universal basic income yesterday, a large part of my analysis was based on the notion that salaries and other market figures function as signals. By interfering with those signals, it’s possible that the tenets of Myerson’s economic reforms could disrupt resource allocation within the economy in a manner that aligns less with consumer wishes than with political fault lines, thereby potentially leading to waste of resources and relative impoverishment within society. These concerns can be applied in an orthogonal fashion to Myerson’s case for a sovereign wealth fund.
Before jumping in, it’s critical to establish a basic understanding of capital markets, what they are and how they function. A capital market is essential to optimizing production, as well as the allocation of resources, within an economy, as the presence of capital markets allows savers to put their wealth with companies that are capable of using it to lengthen the structure of production, improve productivity and efficiency, and provide in general for the economic reality of the future. Self-interested savers invest because they wish to see a return on the investment they make; they therefore use their savings to buy stock in companies they believe are most suited toward fulfilling consumer wishes. In this way, a stock price serves as one of the most crucial signals available to entrepreneurs seeking to turn a profit by delivering desirable goods and services to the market’s consumers: rising stock prices of tech companies such as Apple and Google, for instance, may reflect general desires on the part of the members of society to enjoy products like theirs in the future. On a more basic level, the prices of commodities and raw materials around the world are also capable of serving as signals, and direct the allocation of resources according to the underlying global economic realities. A rise in the price of oil due to international conflict or severe natural disaster, for example, provides entrepreneurs with an incentive to save scarce oil by economizing on cheaper alternative inputs. Like the system of wages, this is not a perfect solution to the problems of scarcity we face, but it is the best one devised by humankind up until this point in our history on planet Earth.
One of the reasons that capital markets are so effective is their capability for harnessing the natural self-interest of all parties involved and channeling them towards an outcome that is, in general, mutually beneficial. The sovereign wealth funds of Myerson’s platform, however, do not necessarily enjoy this advantage. Sovereign wealth funds (or SWFs) can be funded in a number of different ways, and Myerson does not make clear which method he would choose for a SWF here in the United States. No matter the method, though, it’s likely that a venture such as an SWF would be subject to political pressures. (Some SWFs do not publicly reveal their portfolios but it is difficult to believe that this would fly here in a federal format–in addition to concern over using federal money in undisclosed ways, it is also possible that the rise of a large fund of this kind could fuel systemic risk). The public disclosure of fund management decisions, however, also seems problematic–we need only look at issues like conflict minerals and the gay marriage views associated with certain companies to see how collective investment decisions can become politicized. At present, citizens are free to choose on an individual basis whether or not to patronize or invest in companies that are tied to any of these or other issues, but under a SWF arrangement, the state makes these investment decisions for all of its citizens. This also raises concerns over allocating capital and resources according to political pressures instead of the preferences of individual savers and consumers, and thereby risking waste of resources and relative impoverishment.
Another obvious area of concern for SWFs is their management may not be regulated by the profit-and-loss mechanisms that, in a truly free market, root out lousy financiers and companies and reward those whose investment decisions pay off. As Tim Swanson, in an article for the Mises Institute, has explained:
Tasked with conducting meticulous due diligence, even the most seasoned investment manager of a private firm is capable of ill-advised business investments, however they face the ultimate penalty for failure: being canned. Otherwise their firm stands not only to lose clients, but also to face bankruptcy. Thus managers continually live under easily quantifiable, objective, apolitical performance measurements.
In contrast, SWFs, because they are inherently political machinations, need only satisfy political goals in order to stay afloat. As a result, neither profitability nor solvency have to be achieved. Business acumen and entrepreneurial talent are tossed out in favor of those with political capital, clout, and connections.
As a consequence, millions of faceless taxpayers and socialized industries bear the fiduciary responsibility for underwriting all losses.
My final area of concern with regards to SWFs, and one I’m surprised to see Myerson, for all of his rhetoric against the banks and Wall Street, doesn’t really seem to share with me, is the fear that they will become honeypots for corruption. Myerson’s full-fledged support for the SWF idea ignores the fact that funds in several countries acted to infuse Citigroup and Merrill Lynch with $21 billion in January of 2008, and gave as much as $69 billion in the waning months of 2007 after the onset of the subprime crisis. Although these funds were from foreign countries, it is difficult to imagine an American SWF that does not find itself under pressure from political allies to place large investments with its friends. Even if this might seem a bit outlandish, it’s worth noting that despite the fact that it is a valid consideration, Myerson offers no look at it in his wholehearted advocacy of the SWFs.
As I expressed yesterday, my biggest issue with the Myerson piece is that he doesn’t give enough detail to the suggestions he makes. Without a more clearly articulated platform, it is more or less impossible to scrutinize his ideas for feasibility and desirability. I can sympathize with word limits and picky editor issues, but the lack of caveats mentioned when it comes to SWFs (or any of his other recommendations, actually) imparts a certain sense of naivete to the entire Myerson reform platform. Perhaps he has answers for all of the common objections to his platform, but he doesn’t give any. He doesn’t, in fact, even seems to acknowledge that there are legitimate concerns surrounding many of his ideas, which suggests that he may be unaware of them himself.
Again, if millenials really should be fighting for these reforms, the onus is on Myerson to prove it.