Labour’s Sovereign Wealth Fund idea has taken a fair bit of criticism over the past week. The Herald’s editorial page called it “a policy without substance or merit”. 

Economist Paul Walker strolled through the usual economic problems in state-directed investment funds: it’s not easy for the government to pick winners, and we too often rely on political rather than economic criteria for deciding what should be under state rather than private ownership.
 
One additional problem is that wealth funds directed at investing in clean energy sit uncomfortably with the Emissions Trading Scheme (ETS). The ETS seeks to reduce New Zealand’s greenhouse gas emissions by requiring emitters to purchase permits. If the ETS were properly designed, with appropriate consequent incentives for reducing emissions, the case for additional subsidisation of or government investment in clean technology is extremely limited.

Adam Jaffe correctly notes, in this month’s MOTU Research Update, that if technological innovation provides benefits far beyond those that the inventor can recoup, we could have too little innovation relative to some unattainable textbook ideal. But this provides little basis for government directed investment in environmental technology unless this general problem is far more severe in relation to environmental technology. Where an ETS allows an enviropreneur to sell carbon credits, that does not seem particularly likely.

Japan’s Ministry of International Trade and Industry, MITI, was established to help to solve the kind of problem Jaffe identifies. MITI played a role not entirely unlike the one that Labour proposes for a sovereign wealth fund: directing investment and credit towards preferred areas to encourage innovation and development. Among its less notable successes were its attempts to keep Honda out of the car market and recommending that Japanese firms abandon consumer electronics. As Stan Liebowitz and Stephen Margolis put it in Winners, Losers and Microsoft, “[v]ery simply, MITI, which may well have had the best shot of any government agency at steering an economy toward the best bets, was no substitute for the interplay of multitudes of profit-seeking rivals competing with each other to find the best mousetrap.” It is not plausible that a New Zealand sovereign wealth fund would do any better, competent though our Superfund managers are.

Perhaps instead we should consider a Civilian Wealth Fund. Each of us could receive an equal bundle of shares in our State Owned Enterprises to do with as we pleased. Instead of the SOEs being owned by “us”, we could really own them: each, and individually. Instead of “us” having to decide what to do with our rights to SOE dividends, we each could make our own decisions.