Arms-length government investment in equities?

1. An independent Fed works because the American public fears inflation.  If anything, the data suggest that people are too afraid of inflation.  American voters do not have similar instincts about an independent investing trust.

2. It is harder to maintain political independence when large amounts of money are being allocated or invested.  Note that seigniorage is no longer a significant source of revenue; central bank performance has improved accordingly.

3. If we reform social security, it will lose its status as a "sacred cow."  This is not objectionable per se.  But it will make it harder to treat an independent investment board as a sacred cow.

4. It took long periods of experimentation and meddling to establish the independence of most central banks.  What is the learning process for these investment boards?

5. Most state pension funds (Calpers is one notable exception) are not big enough to influence corporations as the federal government could.  Furthermore state pension funds are much less visible than is social security.  That being said, state pension funds are starting to meddle.

6. What if Brad DeLong is right that the Bush Administration manages to politicize everything?  What if the Democrats learn the same?

A core question is why we don’t run our entire government by independent experts, insulated from political pressure.  The answer, in short, is twofold.  We both require some degree of accountability, plus our government (and yes I include voters under that designation, not just "evil politicians") cannot precommit to leaving things alone.  The Fed works because of a relatively high coincidence of interests in its topic areas, namely monetary policy and bank regulation.

When it comes to the investment board, the greatest danger is simply that voters will get upset if returns are low for a ten or fifteen-year period.  They will demand a change — any change — and I fear how this pressure will work its way through the political process. 

The bottom line: There is nonetheless a good chance that the independent panel idea could work.  Maybe a fifty percent chance.  But still I would not do it, as the downside is higher than the upside.

My general perspective is simple.  Social security will bring some form of big government, whether we like it or not.  Let us do our best to keep private capital markets free to outrace the size of that government.  I am confident that markets are up to the task, and afraid of tinkering with this basic fact about our world.


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