Uncle Sam as investor: Why America is considering a sovereign wealth fund

Early in February, President Donald Trump ordered the Treasury and Interior departments to come up with a plan for a sovereign wealth fund for America. Many nations have SWFs, which are essentially giant, state-owned investment portfolios.

But questions about how America would amass resources for such a fund, direct investment decisions, and ensure ethical practices are critical ones. President Trump says an SWF could play an important role in economic development, in public finance, and even in potentially buying TikTok, the social media platform whose U.S. future hangs in the balance.

Does the idea make sense for the United States?

Why would a country want an SWF?

A sovereign wealth fund can help a nation stabilize its economy, build savings, and generate long-term financial returns. Like any investor, a nation can create a portfolio of stocks, bonds, real estate, or other assets and, assuming those investments make money, reap the returns year after year. The portfolio can also be structured to boost economic development, as the White House announced Feb. 3, to “promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish long-term economic security, and promote U.S. economic and strategic leadership internationally.”

Do such funds work?

Yes, they can, when structured well. Successful funds can pay for national programs without raising taxes. They can buffer against the unexpected or ensure that future generations will have adequate financial resources. Of the more than 90 nations with one or more SWFs, Norway is the star. In 35 years since the SWF’s formation, it has invested more than $1.8 trillion of its oil revenues into the fund, and it has reaped another $1.8 trillion in investment returns. “In a way, we found oil twice: once on the [oil-rich] continental shelf and then again in financial markets,” quipped Nicolai Tangen, head of the investment firm that manages the fund, in Washington late last year.

How are SWFs funded?

The seed money for these funds comes from excess government revenues. Often, governments (Norway and Saudi Arabia) use the income they make from oil drilling or minerals mining. Others (China) use the money they make from trade surpluses. That’s also one reason many analysts pooh-pooh the idea of an American SWF. The U.S. almost always runs annual deficits, not surpluses, and has amassed a mountain of debt.

But other analysts are more optimistic. The administration says an SWF could be funded by selling off some of the $5.7 trillion the federal government directly holds in land and other assets or the much larger sum of indirect assets, such as natural resource reserves. Last week, the Treasury Department appointed JR Gibbens as a senior adviser for a U.S. SWF. Mr. Gibbens previously worked for the Defense Department’s recent effort to attract private capital to invest in areas critical to national defense.

Are there pitfalls?

Plenty. A fund can make or lose money, depending on how the individual investments in that fund perform. If the fund managers aren’t fully independent, government officials can use the SWF money for their own political ends. If the funds can be invested in domestic assets, such big investments can distort the economy. If the fund managers are not fully transparent about where the money is invested, it can lead to fraud. That’s what happened to Malaysia’s SWF a decade ago, when allegations of an estimated $4.5 billion siphoned off for lavish spending toppled the then-prime minister, who ended up in prison as a result of the scandal.

More subtle forms of corruption and cronyism can also emerge. “If you have government officials with huge investment authority, people are going to want to sway their views,” says Darrell West, a senior fellow at the Brookings Institution.

Does an SWF make sense for the U.S.?

The idea of an American SWF is generating increasing attention since President Trump suggested it as a vehicle to purchase TikTok, the Chinese social media site.

Starting with some $2 trillion, which could make it the world’s largest, an American SWF could (1) support U.S. infrastructure renewal, (2) develop strategic mineral mining in the U.S., and (3) replace corporate taxes and fund startups that would maintain America’s technological edge over China.

But many analysts remain skeptical.

“It is not a traditional conservative idea,” says Mark Warshawsky, a senior fellow at the American Enterprise Institute. More details will emerge in early May when the Treasury and Interior departments report back with a plan.