How to Cut Taxes and Fund Infrastructure
We hear a lot about public debt. But we rarely discuss public wealth: the corporations, financial institutions, land, buildings, infrastructure, and so on that governments own and profit from. Better management of this wealth could pay off handsomely — if only we approached the problem the right way, placing these assets under professional management away from the influence of politicians.
In the U.S., for every 1 percentage point increase in yield from the federal government's asset portfolio, general taxes could be lowered by 4 percent. Worldwide, professional management of public commercial wealth among central governments could easily raise returns by as much as 3.5 points, to generate an extra $2.7 trillion. This is more than the total current global spending on national infrastructure — for transport, power, water, and communications combined. This alone should make every individual citizen, taxpayer, investor, financial analyst, and stakeholder stand up and pay attention. And it should spur demand for action.
More than 25 percent of all land in the U.S. is owned by the federal government. Along with all this land, it holds buildings with a book value of $1.5 trillion. In addition, state and local government assets amount to $6 trillion. The U.S. Bureau of Economic Analysis calculates that the value of nonfinancial public assets in the U.S., as a whole, was equal to 74 percent of GDP in 2011.
Many assets could perform far better than they do currently, or be sold when fully developed. The U.S. General Accounting Office (GAO) has noted that the federal government has "many assets it does not need," including billions of dollars' worth of excess or vacant buildings.
Consider also the U.S. Army Corps of Engineers, a federal agency that builds and maintains the infrastructure for ports and waterways. Most of the agency's $5 billion annual budget goes to dredging harbors and investing in controlling waterway locks and channels, as on the Mississippi River. In addition, the Corps is the largest owner of hydroelectric power plants in the country and manages 4,300 recreational areas, funds beach replenishment, and upgrades local water and sewer systems. Congress has used the Corps as a "pork barrel" spending machine for decades. Funds are earmarked for low-value projects in important members' congressional districts, while high-value projects go unfunded.
Another example is Amtrak, a publicly owned entity operated and managed as a for-profit corporation. Amtrak operates a 22,000-mile nationwide passenger railroad service. Amtrak's long-haul routes are deeply unprofitable, and if they were canceled, Amtrak would serve just 23 states, down from the current 46. But support from only 23 states is not enough for Congress to keep providing any subsidies, so the cuts never happen. State ownership, in other words, has perverted the democratic process.
There are many other underperforming assets as well, including Fannie Mae and Freddie Mac, which buy and securitize mortgages; the Department of the Interior, which oversees approximately 260 million acres of land, some of it oil-rich; and the Tennessee Valley Authority and four Power Marketing Administrations, which sell power in 33 states.
How to address the problem? Transparency is a good first step. The U.S. has no central registry of either federal, state, or local government assets. As long as government ownership stays murky, it is easier for government institutions to distribute favors without scrutiny. With a consolidated understanding of the value and breakdown of the portfolio of public commercial assets, it is not difficult to improve the yield, be it of government-owned firms, real estate, productive forests, or other public assets that provide some kind of income stream.
Another worthwhile measure would be to require the government to sell or redevelop high-value properties, consolidate space, and dispose of unneeded assets. According to the Office of Management and Budget, such a process could generate $15 billion in revenue from property sales within the next ten years; additional savings would come from reduced federal spending on leases, energy, and maintenance.
But to truly manage these resources effectively, a more ambitious approach is needed. This debate often boils down to a fight over ownership, but that is not always the right answer — in fact, the process of privatization itself offers tempting opportunities for quick enrichment, risking crony capitalism, outright corruption, counterproductive regulations, and selling assets at big discounts to placate vested interests. Instead, governments can combine public ownership with private-sector management techniques, and sell assets only when fully developed and as part of a well thought-through business plan.
Most governments have already outsourced the management of monetary and financial stability to independent central banks, and passed control of pension funds to professional fund managers. Following this lead, establishing a more professional solution for our public commercial assets is the logical next step. The U.S. should set up a National Wealth Fund (NWF) for the federal government, as well as similar funds — regional, state, and urban wealth funds — at lower levels of government.
An NWF is a ring-fenced corporate vehicle owning all commercial assets at arm's length from short-term political influence. NWFs enable transparency, and their debt ratings enable independent borrowing that optimizes capital structure and maximizes value. Public listing is also possible, providing the ultimate form of transparency while broadening the shareholder base and potentially maximizing value to the taxpayer.
The economic benefits of consolidating all commercial assets into a single company stem from the ability to structure an integrated business plan for the entire portfolio, without constraints on necessary actions to maximize value. This has important scale effects, with lower transaction and operational costs, and enables the portfolio to be developed and (when desired) privatized more efficiently. In addition, when politicians relinquish direct access to public wealth, they can focus solely on issues concerning individual citizens and the economy as a whole.
Our common resources are limited. It is therefore imperative that they are managed responsibly. Recognizing these vast resources and reforming our approach to public wealth is a financial and social enterprise with a huge upside for public finances, democracy, and the ongoing battle against corruption.
Dag Detter is an adviser to investors in Europe and Asia, specialized in identifying underperforming, high-potential assets. Stefan Fölster is the managing director of the Reform Institute, a market-oriented think tank in Stockholm. This piece is adapted from their forthcoming book The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth.