Sovereign-Wealth Funds--Posner's Comment

I shall focus my comment on the consequences of the sovereign-wealth funds for the United States; Becker's post focuses on the consequences for the nations that have such funds. Owned mainly by major oil-exporting nations, sovereign-wealth funds have today in the aggregate some $2.5 trillion in assets, and if oil prices remain sky-high this figure may grow to more than $20 trillion in a relatively short time. At that point the funds will be among the world's most important sources of investment capital. (The total debt and equity capital in the world is about $110 trillion, though of course it will be greater when the sovereign-wealth funds reach $20 trillion, if they ever do.) The rise of the sovereign-wealth funds may well be a positive development for the rest of the world, assuming that the alternative would be for these countries to increase domestic consumption or to invest in domestic infrastructure. The decision to invest on a global basis increases the global supply of capital, including therefore the supply of capital for investment in the United States. As Becker and I argued in our August 7, 2005, postings concerning opposition to the proposed acquisition of Unocal by an oil company owned by the Chinese government, the purchase of assets by foreign nations, even when they are hostile or potentially hostile to us, does not threaten U.S. welfare or security. The purchase of a company from its owners places money in the hands of those owners that they can invest for a higher return--if they did not think they could do this, they would not sell the company. So such a purchase is wealth-enhancing. It does not undermine our national security just because the purchaser is a foreign government, but on the contrary enhances our security because the investment is a hostage. It's as if to guarantee China's good behavior the president of China sent his family to live in the United States. But it is different if the purchase could create a security risk, as was argued to be the case with the proposed purchase by Dubai of a British company that serviced a number of U.S. ports (see my posting of March 13, 2006). The concern (which may have been overblown, however) was that Arabs employed by the Dubai company would obtain in the ordinary course of business information about the ports and might pass it on to Islamic terrorists. Notice that this was a concern about foreign companies whether or not government-owned. One of the motivations for the creation of the sovereign-wealth funds is the concern of the oil-exporting nations with the value of their huge dollar surpluses; China has the same concern, though in its case its trade imbalance with the United States is not due to oil exports. As Becker points out, at least in the case of the oil-producing nations these surpluses are due to the fact that the governments of the nations are the producers, so they receive the export revenues; if the producers were private companies, the revenues would not go into government coffers. For political reasons, however, the governments are the recipients of the oil revenues, they are paid in dollars, and they want to put their dollars to work rather than just accumulate them or distribute them to their citizens. And rather than just purchase U.S. Treasury notes or other safe securities--which would not make economic sense, since as Becker points out the amount of money in the funds greatly exceeds the nations' liquidity needs--the governments are in effect operating giant hedge funds, investing in diverse assets all over the world. By doing this they are giving hostages to the nations in which they invest. We should welcome the fact that these investments are less liquid than the short-term securities in which governments conventionally invest their reserves. The less liquid an asset, the better a hostage it is; it can't be withdrawn as rapidly. In addition, excess liquidity in the world's financial system can lead to financial instability. The concern being expressed in some quarters in this country about the rise of the sovereign-wealth funds is ironic in view of the fact that our government's policies have contributed significantly to the growth of these funds. Those policies include failure to exploit our Alaskan and offshore oil resources more vigorously, because of the opposition of environmentalists; our low tax rates, which facilitate consumption, including consumption of foreign goods, which in turn shifts dollars abroad; and, in particular, our very low taxes on oil and on oil products, such as gasoline and aviation fuel. A stiff tax on imported oil, by reducing consumption, would reduce the wealth of the oil-exporting nations and hence the size of their sovereign-wealth funds. Such a tax would have the not incidental further benefit of reducing emissions of carbon dioxide (though from that perspective a tax on carbon emissions is superior to a tax on oil and oil products) and of stimulating the search for alternatives to fossil fuels, a major culprit in global warming.

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