The U.S.A. Sovereign Wealth Fund Revisited

New research from Michael Elsby, Bart Hobijn, and Aysegul Sahin on the role of trade in reducing the labor share of income is attracting a lot of attention, e.g., from Matt Yglesias:

One thing that they find is that the headline decline in this indicator is actually a bit overstated due to technical issues with the treatment of self-employment income. About a third of the total decline, they think, can be attributed to miscalculation. The blockbuster finding, however, is that the remainder is very heavily concentrated in industries that are newly composed to import competition. In other words, the labor share of national income has fallen because many more industries are exposed to foreign competition in a way that’s systematically advantaged the owners of capital.

This seems broadly consonant with David Autor, David Dorn, and Gordon Hanson in “The China Syndrome: Local Labor Market Effects of Import Competition in the United States“:

We analyze the effect of rising Chinese import competition between 1990 and 2007 on U.S. local labor markets, exploiting cross-market variation in import exposure stemming from initial differences in industry specialization and instrumenting for U.S. imports using changes in Chinese imports by other high-income countries. Rising imports cause higher unemployment, lower labor force participation, and reduced wages in local labor markets that house import-competing manufacturing industries. In our main specification, import competition explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in more trade-exposed labor markets.

Back in 2007 — I can’t locate the original post — Tyler Cowen suggested that in the event trade had a significant negative impact on middle-income wages, the right response wouldn’t be to increase redistribution but rather to create a sovereign wealth fund:

After all, if Samuelson-Stolper factor price equalization is the main mechanism at work, wages would have a long way to fall downwards and if anyone in the middle class is to keep working, the safety net must eventually be cut, not increased. You might think we can fund all these trade-losers by taxing capital but of course the incidence of taxes on capital sometimes falls on labor, not to mention that at some point the Laffer Curve kicks in.

Is not the appropriate policy recommendation to create a budget surplus, create a U.S.A. Sovereign Wealth Fund, and invest the resulting capital in the corporate winners from this entire process? In other words, we would be giving the trade-losers a more direct share in capital. Since output is rising and wages are falling, the return to capital must be rising; let’s make money off of that.

Dalton Conley has elaborated on what a U.S. sovereign wealth fund might look like and how it ought to be structured. The basic idea is that as the returns to capital increase while the returns to labor decline, pooled asset ownership could provide Americans with economic security even when the labor market is in grim shape. For a less radical approach to spreading asset ownership, we might build on the idea of universal retirement savings accounts. 


The Agenda

NRO’s domestic-policy blog, by Reihan Salam.