Private Wealth and Public Goods: A Case for a National Investment Authority.

• Author: Hockett, Robert C.

1. INTRODUCTION II. FINANCING COLLECTIVE GOODS: A REVISED CONCEPTUAL FRAMEWORK A. Public Goods and Public Action: Rethinking the Theoretical Link 1. The Standard Account of Public Goods: A Brief Recap 2. A Revised Account: Collective--Including Public--Goods as Solutions to Collective Action Problems B. Public-Private Provision of Collective Goods: Rethinking Solutions 1. Collective Goods and Controllability Problems 2. Collective Goods and Capturability Problems 3. Synthesizing Capturability C. The Missing Link: Rethinking the Goals and Architecture of Public Finance III. PUBLIC INVESTMENT AS A POLICY TOOL: INSTITUTIONAL EXPERIENCE A. Credit Mobilization: The Reconstruction Finance Corporation B. Asset Management: Sovereign Wealth Funds IV. REIMAGINING PUBLIC INVESTMENT: A NATIONAL INVESTMENT AUTHORITY A. Purposes and Functions of the NIA: An Overview B. Credit Mobilization: The National Infrastructure Bank C. Asset Management: The National Capital Management Corporation V. INSTITUTIONAL DESIGN: KEY CONSIDERATIONS A. Organizational Issues and Accountability Mechanisms 1. Organizational Lines 2. Personnel Issues 3. Accountability Mechanisms and Political Legitimacy B. Funding and Operational Issues VI. CONCLUSION I. INTRODUCTION

   Much American electoral and policy debate now centers on how best to reignite the nation's economic dynamism and rebuild its competitive strength. Some of the rhetoric heard in this debate has exposed deep fault lines in the country's social and political fabric. Decades of systematic erosion suffered by domestic industrial capacity and a corresponding loss of well-paid manufacturing jobs, a shrinking social safety net, a steady dismantling of the regulatory state and a decline in overall government capacity--these are among the many structural factors that have brought rising economic inequality and dysfunctional political dynamics to contemporary America.

   This Article rests on the premise that, ultimately, the solutions to all of these problems depend on the ability of the united states to address its most pressing public policy challenge: the challenge of ensuring structurally balanced, sustainable, and socially inclusive long-term economic development. (1) Only by continuously facilitating the long term growth of its "real" economy (not merely short-term speculative finance), and by more widely spreading the benefits of such growth, can America rebuild its true strength as an economy and as a polity.

   This is an extraordinary challenge, demanding a correspondingly extraordinary institutional response beyond the familiar menu of corporate tax breaks and government subsidies to private business ventures. This Article proposes precisely such a response. It designs and advocates a new, though not entirely unprecedented, public institution. This new federal instrumentality, which we call a National Investment Authority (NIA), would be charged with the critical task of devising and implementing an ongoing and comprehensive long-term development strategy for the United States.

   Patterned in part after the New Deal-era Reconstruction Finance Corporation, in part after modern sovereign wealth funds, and in part after private equity and venture capital firms, the NIA we envision is an inherently hybrid, public-private entity. By exploiting the unique advantages of the federal government as a market actor--its vast scale, high risk tolerance, lengthy investment horizons, and direct backing by the full faith and credit of the United States--the NIA will harness and channel more private capital and expertise than is presently possible into ambitious publicly beneficial projects. (2) In effect, the NIA will operate as an economy-wide public-private partnership (3) with one especially distinctive feature: it will reverse the usual model of "public money, private management" by drawing freely invested private money to publicly-managed investment vehicles.

   This reversal of roles is the key to unlocking the full efficiency- and productivity-enhancing potential of the public-private partnership form. Placing a public actor with a long-term, national view in charge of managing investments is prerequisite to remedying a well-known and widely-criticized P3 dynamic, whereby the government bears disproportionately high implicit costs in financing certain projects by virtue of its redirecting large future revenue streams to private partners. (4) On a deeper level, making a public instrumentality the fund manager and the principal decision-maker will fundamentally transform the partnership's strategic outlook and identity as an investor and magnify its ability to deliver economy-wide benefits. (5)

   In essence, the new institutional arrangement envisioned in this Article will enable private investors to enjoy reasonable financial rewards for participating in the production of many currently under-provided collective goods, including nationwide networks of high-speed rail, regional air and water cleaning and preservation programs, systems of ongoing adult education and technical training, and other cutting-edge public infrastructures. (6) These goods constitute temporally extended, socially desirable benefits that no private participant in a decentralized market economy can rationally attempt to supply--and whose provision accordingly requires some form of sustained collective action. (7)

   The NIA envisioned here will facilitate this kind of sustained collective action on a currently unattainable scale. By creatively adapting familiar tools of financial and legal engineering, it will remove or mitigate many risks and incapacities that presently prevent private investment in publicly beneficial goods. In most cases, we expect the NIA's public infrastructure projects to generate benefits that can be reasonably estimated in monetary terms: direct revenue streams, increased tax revenues, public budget savings, or general productivity gains. (8) These monetizable public benefits will serve as the basis for determining reasonable returns for private investors in the NIA-managed funds. (9)

   Of course, the NIA will also work to provide many socially desirable collective goods--for example, the far-reaching societal benefits of a less stressed, more economically secure, better connected and socially engaged population--whose full social value cannot, and should not, be monetized. In these cases, the returns to investors will not, as a technical matter, aim at capturing some proportion of such inestimable pecuniary gains but will instead represent a reasonable financial reward for participating in the provision of these publicly important non-pecuniary benefits.

   In all cases, the intended effect of this "structuring" will be to transform what is ordinarily an individually irrational action into a rational investment opportunity. Unleashing the uninhibited flow of such newly enabled "patient" private capital into publicly beneficial socio-economic infrastructure, in turn, will allow the NIA to (1) take advantage of the superior micro-informational efficiency of decentralized private markets, while (2) sidestepping inherently contentious and politicized fiscal policy decisions. (10) It will also free up more public capital for the direct public provision of a greater range of non-monetizable collective goods. (11)

   The wide variety of projects the NIA will seek to undertake necessitates that the structure, level, and sources of funding for the payment of investor returns will have to be determined on a case-by-case basis. (12) If properly designed and implemented, the NIA should be able to finance its operations primarily, if not entirely, from internally generated revenues. It is important to emphasize, however, that there are compelling economic and policy reasons for supplementing these internally generated funds--if and as necessary--with public resources. After all, tax revenues are traditionally viewed as the principal method of financing important public infrastructures that otherwise would not be supplied. Channeling some of this financing through the hybrid NIA structure would simply make a more efficient use of public money by leveraging its impact.

   There is also another, independently significant policy reason for supporting the NIA's operations, regardless of whether this involves partial public funding. (13) A vital benefit of the NIA model, as we envision it, is that it will significantly enhance the resilience and long-term stability of the U.S.--and, by extension, the global--financial system. (14) "Getting financial regulation right" is not merely a technocratic exercise: it involves important normative choices regarding the principal purposes and social functions of finance. A self-referential financial system, in which disproportionate growth on the part of secondary markets encourages heavy speculative trading in financial instruments, is bound to experience socially destructive asset price bubble-and-bust cycles. (15) By contrast, reorienting the financial system toward its primary social function--allocating credit to its most productive and beneficial long-term non-financial uses--will likely alter its present dysfunctional dynamics. (16)

   In other words, as we have argued elsewhere, the task of preventing excessive accumulations of risk and leverage in the financial system (what we call the credit modulation task) is inextricably linked to the task of preventing the misallocation of capital (what we call the credit allocation task). (17) From this perspective, the NIA will perform the critical role of an endogenous financial market stabilizer. By offering yield-hungry private institutional investors a flexible new "safe" asset class, the NIA will diffuse potentially destabilizing demand for privately-issued substitutes and channel it into non-speculative, longer-term productive investments. (18) Thus, in addition to introducing a highly desirable new institutional asset class, (19) the...