This subject is a bit detached from the day to day but I thought it was interesting and decided to share it.  I was reading an article where former Treasury Secretary, Larry Summers, was discussing the problems inherent in sovereign wealth funds.  Sovereign wealth funds are government investment arms primarily designed to convert the present day receipts that come from national oil revenues into wealth that is more long-term, diversified and stable.  Summers discusses some of the problems with SWF's in the article: http://www.slate.com/id/2182746/

 

I was intrigued by the second point Summers brought up regarding SWF's, reprinted here:

 

2. Multiple-motive issues. "It's the premise of capitalism that people own shares to maximize value. But if you think of an investment made by a state fund, there could be multiple motives. Perhaps we want the airline to fly to our country, perhaps we want the bank to do extensive business in the country, suppose we want suppliers in our country to be sourced, perhaps we want some disablement of a competitor for our country's national champion. When there's no assurance that value maximization is not being pursued, there is a potential question."

 

His question has considerable merits given what we conceive of as the purpose of the independent capitalist style economy.  But isn't Summers complaining about exactly what every city, county and state economic development office does in the United States?  How can we rectify the supposed losses of value (the non-maximization of value that Summers says is occuring since other motives are driving the investments) with the necessity to play the game of local industry retention and creation?

They're like hedge funds, but I think it's inevitable that SWFs allocation would be politically motivated since they're controlled by the state. At the same time, I think it's fair to also expect them to do what's good for business, bringing in fast returns on investment by taking on high risks. By having SWFs they don't run the risk of damaging credit and paying interest because they don't have to borrow from banks and that definitely puts SWFs at an advantage. I can't remember if it was UAE or Saudi Arabia that dumped more money into Citigroup but that can only help us, as well as them. I think they're smart for diversifying; most of the wealth in Saudi Arabia and UAE comes from oil, and that won't be sustainable for long. I do think there should be a consenus regarding ethics, as well as public disclosure of investment strategies. If that happens, it can only benefit all of us.

Can you clarify a bit LK?

 

It seems to me that Summers' biggest complaint is that these are non-US actors. So he therefore wouldn't level the same complaint against US economic dev agencies, even if they are ultimately after the same goal.

 

I think he would admit that the zero-sum actions like poaching taken by local economic dev agencies provide no benefit to the economy as a whole.

"If this young man speaks in terms too deep for me, then what a singularly deep young man, this deep young man must be!"

 

 

The article is definitely about the U.S. potentially losing control over domestic assets, to these countries with SWFs. We own much more foreign assets in the developing world than vice versa; I think people exaggerate a bit about the future of SWFs and the harm they'll do to us. Only time will tell, eh?

^I agree that that is Summers main complaint.  I'll admit the start was confusing and round about.

 

What I was getting at was taking Summers comment that I highlighted and divorcing it from the context of SWF's (which aren't mentioned in the quoted text) and instead thinking about what it implies about government intervention in a capitalist economy.  Is it simply a situation of diverting dollars from one place to another, with results that possibly harm the overall economy, basically a form as bribery?  Or is it an inevitable and important part of the process?  Or does Summers (and by implication, the average economist) get it wrong, that value maximization isn't effected, or that some of the values being maximized are the lives of people in that space?

 

It's broad, but that's kind of what I was aiming at.

 

2. Multiple-motive issues. "It's the premise of capitalism that people own shares to maximize value. But if you think of an investment made by a state fund, there could be multiple motives. Perhaps we want the airline to fly to our country, perhaps we want the bank to do extensive business in the country, suppose we want suppliers in our country to be sourced, perhaps we want some disablement of a competitor for our country's national champion. When there's no assurance that value maximization is not being pursued, there is a potential question."

 

His question has considerable merits given what we conceive of as the purpose of the independent capitalist style economy.  But isn't Summers complaining about exactly what every city, county and state economic development office does in the United States? 

 

State and local governments can create incentives for business, but they do not own the businesses or directly impact the financial value of the business.  SWF's provide opportunities for governments to directly manipulate the value of companies.  In the author's example, a government could 'conspire' with an airline to bring service to the country.  In this scenario, the SWF would then buy massive amounts of stock to increase the value of the airline in exchange for service to the country.  Once the airline relocates, the government has the potential to hold the company financially hostage if they do not get favorable terms.

 

Currently, Corporations have to use leverage to get incentives from governments.  An example of this is when Cincinnati paid Convergys to keep jobs in the area.  A corporation can use these public threats to receive incentives.  SWFs potentially allow the company to lobby government behind the scenes to get favorable business deals.  This would empower both governments and corporations at the expense of the markets and the people.

 

It is important to remember that there is not any evidence at this time of irresponsible behavior by SWFs in the private sector, but the potential remains.

 

How can we rectify the supposed losses of value (the non-maximization of value that Summers says is occuring since other motives are driving the investments) with the necessity to play the game of local industry retention and creation?

 

I would question the necessity for government's role in industry retention and creation.  It would seem to me that the government should provide a solid and fair business environment to allow the market to determine these factors. 

 

I agree that there have been some scare tactics with these SWFs.  Many cite China's reserve of US dollars that is so large that China could devalue our currency any time that it likes.  While this might be true, it is unlikely to happen.  I agree with those who think that we should take a harder look at the consequences of our policies because it has been our policy to allow the Chinese to finance our debt, which has created said reserves.

 

This type of fear could ultimately be used to justify our government taking control over assets.  We should take a realistic look at our government's policies and realize its impact around the world.

 

Bouncing around out there is some work on why it is a bad idea for the U.S. to run budget surpluses and it is connected in with this whole issue. Basically the problem is that if the gov't runs a surplus it needs to do something with money and get some sort of return and the process of investing it in the private sphere opens up so many issues about corruption and gov't choosing winners often disconnected to actual market forces. I'm pretty the Nixon-era was the last time the feds invested in a private sector and it got ugly and it has long been avoided.

Taking it out of the realm of the feds, what do you all suppose is the proper level of involvement of government at the state and local level?

I'd argue that it is higher at the state and more so the local level. The closer to the people the more the government operates as an extension of the general will (federalism and subsidiarity and all), whereas the federal and to a lesser extent the state level, government accumulates a level of force that I am more uncomfortable with. The other challenge though is that heavy involvement at the local level means that the sort of competition between localities would get worse not better as each place continued to pursue its own interests rather than those of the common good.

^I agree with this, and I think that the type of involvement changes with the changes in the general economy, as well as with the parameters that the federal government sets up (either explicitly or in an ad hoc fashion).  Taking Cincinnati as an example, it's pretty clear that the shifts in the economy and technological improvements have made the it clear that the city has to take the lead in redeveloping old properties and brownfield sites.  This seems like an area where the free market fails, and it's just too petty for the state and federal entities to really pay any attention to.

 

With the new focus on the environment and what seems to be a growing consensus that this is an issue that the public takes seriously, it will be interesting to see if any new federal legislation comes about concerning water usage.  Places like the high plains of the Dakotas and Montana have been depopulating largely out of a lack of water, yet other arid areas like Las Vegas and Arizona are the most rapidly growing areas in the country.  It doesn't seem sustainable to me.

redeveloping old properties and brownfield sites.  This seems like an area where the free market fails, and it's just too petty for the state and federal entities to really pay any attention to.

I have some mixed feelings about this statement.  Brownfields absolutly, but it is in many cases the influence of the fed and local intities that has made "old property" redevelopment a free market looser.  HUD section 8 rules that have caused major shifts in urban areas across the nation to historic guidlines or taxing incentives or disincentives have greatly affected places like OTR and its "old property" redevelopment.

shifts in the economy and technological improvements have made the it clear that the city has to take the lead in redeveloping old properties

The biggest reason that the city has to have the level of involvement now in areas like OTR or the west end is because of the Federal rules that have been in place for so long that allowed areas like this to deteriorate to a level that makes it both extrodinarily expensive as well as the effort necessary to purchase such large amounts of land and buildings to cause a sea change in not just the area, but a perception that has been ingrained in an entire generation of people.  They are basically paying to undue the damage that they in large part caused.

 

 

 

The hardest part of all these questions is to make sure that the gov't gets out of the way when the market can do the heavy lifting. For instance, so long as the gov't is doing things that pick winners they are also picking the losers.

 

The question always is: are people more amenable to losing when the market fails to live up to their expectations rather than being told by the gov't that their choices are wrong and stand in the way of progress?

The question always is: are people more amenable to losing when the market fails to live up to their expectations rather than being told by the gov't that their choices are wrong and stand in the way of progress?

Depends on where in the market cycle you are when the question is asked.

>market can do the heavy lifting. For instance, so long as the gov't is doing things that pick winners they are also picking the losers.

 

 

Certainly there are significant government operations in the Washington, DC metro region that could be dispersed throughout the country.  The continued growth of that metro area is incredibly unfair to the rest of the country, a major cause of the Midwest's brain-drain.  And although there is obviously no state government to draw upon for a more traditional funding scheme (and yes, I know the suburban counties each contributed significantly to the plan), the federal funding behind the Washington Metro was also incredibly unfair to every other metropolitan region.           

 

And obviously some mechanism by which interior cities could be ranked and awarded federal offices accordingly would cause a lot of griping in its specifics but would achieve the goal of dispersing high paying federal jobs. 

 

500-1000 good jobs make little difference in Washington but can make a huge difference in a city the size of Dayton or Youngstown.   

Toledo has been making a variation on this argument for state jobs for the last 30 years.

 

It would be one thing if the federal gov't was required to keep their offices with the federal district and out of the individual states. But the feds instead have sprawled all over NOVA and Southern Maryland and some still in the district itself. I agree with JMeck why not move spread the bureaucracy across the country.

^Its funny that you both mention the dispersement of the federal government from outside of the Greater Washington Area.  Aside from the State, Treasury, Justice and Defense Departments I don't see any particularly compelling reason for any of the other executive departments to be located in the capital region.

 

As for the Washington Metro, I wasn't aware that the surrounding suburbs had made any contribution.  When I was living in DC in the late 90s I was under the impression that the primary reason that the Metro didn't go all the way out to Dulles Airport was because Virginia refused to pay for it.

The biggest reason that the city has to have the level of involvement now in areas like OTR or the west end is because of the Federal rules that have been in place for so long that allowed areas like this to deteriorate to a level that makes it both extrodinarily expensive as well as the effort necessary to purchase such large amounts of land and buildings to cause a sea change in not just the area, but a perception that has been ingrained in an entire generation of people.  They are basically paying to undue the damage that they in large part caused.

 

I agree with this, though I think it is fair to add that both of these neighborhoods (and I'd toss in Lower Price Hill as well) were the primary first stop for immigrants to Cincinnati, and the lack of immigration between 1924-1965 probably helped contribute to the decline of those neighborhoods (black folks and Appalachians represent an internal migration to the city but they still flowed into these same neighborhoods).  Pretty much every federal action or lack thereof since the Second World War has slammed inner cities in general and the Midwest in particular.

 

Since the way the federal government interacts with cities and states doesn't look like it's going to change anytime soon, I think that cities gaining the technical know how and capacity to become stewards of the property in their borders is the trend, and not necessarily a bad thing.  Michael, what's your experience in how the local and state government can help or hinder the market in these high input and high risk locations?

Since the way the federal government interacts with cities and states doesn't look like it's going to change anytime soon, I think that cities gaining the technical know how and capacity to become stewards of the property in their borders is the trend, and not necessarily a bad thing.  Michael, what's your experience in how the local and state government can help or hinder the market in these high input and high risk locations?

 

Actually it already has changed and this is why I put my faith behind a lasting redevelopment of inner cities, not just ours, around the country.  That change was a HUD rule change and ended project base section 8 and moved to vouchers.  This had more to do with not just the demise of the inner cities, but the trapping of low income people in an area where property owners were encouraged to stop making any real investment into their property other than the minimums described by HUD.  And if a building in a place like OTR fell into disrepair and no longer met HUD requirements, a mathematical decision had to be made as to whether it was worth bringing it back for section 8 or was it cheaper to tear it down or abandon it all together. 

 

Neighborhoods have its ups and downs but it was the hand of the Federal gov in this case that kept it down.  "high input and high risk" without the interference of HUD would have meant high reward as well as we are now seeing with a rule change.

 

black folks and Appalachians represent an internal migration to the city but they still flowed into these same neighborhoods

And why?  Not because of the color of their skin or their origin (my family was one of the appalachians) it was because of a funneling of poverty into one small, contained area which allowed for easier management by the local gov to allocate services and police to a segment of the population that statistically had a higher crime rate.  It was a failure, not for the outer lying areas but for the inner city community and a failure to the people it was meant to help "black folk and appalachians". 

 

This is why you see Denhart go bankrupt in 2000 because a person holding that voucher makes the decision to stay in a neglected buidling in OTR or the West End or exercise the voucher in a suburb.  He could not fill his buildings and neither could a lot of "slum lords" and this signaled a mass migration of lower income people allowing for the market to do its work.  Places like Gateway or here on Mulberry will sink or swim by the quality of product they put out and we no longer have the foot of Gov on our face keeping us down any longer.

 

There's a great article in the January/February issue of The Atlantic Monthly that discusses the way the Chinese economy is run, and the reasons for their trade surplus and large purchases of American debt.  It ties in slightly with the sovereign wealth fund angle that was discussed earlier.  It's somewhat typical behavior from an East Asian country to value full employment as the highest social priority which seems to be the point of the current Chinese economic model.  But they may very well be entering a stage where they need to start investing more of their gains back home in the form of infrastructure and environmental and product quality regulations that will make their goods more expensive.

 

http://www.theatlantic.com/doc/200801/fallows-chinese-dollars