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Techs from the manufacturer Siemens Gamesa during a training exercise 27 miles off the coast of Virginia Beach, October 2020
This article is part of the Prospect roundtable on the case for a new large source of public capital.
The National Investment Authority (NIA) proposes creating a public investment fund to invest in crucial planet-saving innovations. It is clearly not a silver bullet for solving all of the challenges of the twin crises of climate change and financialization, but it can play a useful institutional role in supporting much-needed investment while reducing extractive Wall Street behavior. At stake in its design is this key question: Where do the financial benefits of the Green New Deal go?
Economist Robert Pollin estimates that reaching the Intergovernmental Panel on Climate Change’s recommendation of net-zero emissions by 2050 will require an average level of investment in the United States of about 2 percent of GDP per year to transform our energy supply and energy efficiency in our infrastructure and production. This translates to about $18 trillion over the 30-year period. The NIA proposal will create a path for private investment capital to be channeled alongside public funds into economic transformation in a way that ensures that gains go largely to working families, rather than the American elite.
In order to evaluate the merits of the NIA, and in particular the proposal for a National Capital Management Corporation, or “Nicky Mac,” and assess what its effect would be on financialization—the power of the financial sector—it is critical to distinguish between financial activity that earns an elite group of fund managers fees, and the workers’ capital that makes up public and private pensions, 401(k)s, and mutual funds. The point of the NIA would be to take the trillions of dollars in workers’ capital and offer it a public option for investment that would produce positive externalities of reducing climate change. This could dramatically reduce the funds flowing to private equity, which could stop workers’ capital from being complicit with private equity extraction from companies like Toys R Us.
Consider the current pools of workers’ capital that are investing in both the public markets and private equity and hedge funds. U.S. pension funds hold $23.3 trillion in total financial assets, while mutual fund assets stood at $14.5 trillion. Public pension funds have invested heavily in hedge funds and private equity, despite evidence of lost revenue and mounting fees to fund managers (which has led to prominent public pension funds exiting from hedge funds). Yet public pension funds continue to invest in hedge funds and suffer losses. And despite the clear harms of private equity on workers in sectors like retail, CalPERS—the nation’s largest investment fund—held $24.6 billion invested in private equity as of June. New York City’s public pension funds had a combined $13.2 billion in private equity as of July.
Pensions are workers’ capital: Creating a new “public option” for the investment of these resources, with the public interest in mind, would reduce the ability of asset managers to extract wealth from working families.
There are, of course, numerous questions of policy design that are critical to ensure that the NIA would actually meet its goals. The NIA should not replicate the mistakes of public pension funds that outsource actual management of their funds—and the fees reaped from such activity—to Wall Street asset managers (note the benefits that BlackRock is reaping from the fact that the Treasury and Federal Reserve have outsourced asset management to the world’s largest private asset manager). The method of determining the substance of the NIA’s investments, and who is in the room when those decisions are made, is critical to get right.
The fiduciary duty of Nicky Mac as a fund manager also deserves careful consideration. It is critical that Nicky Mac fund managers consider the full range of interests of the underlying beneficiaries of the investments, including the societal interests that all beneficiaries have in common, including the stewardship of our planet. Crafting this new standard for fiduciary duty is central to making sure that Nicky Mac actually maximizes public welfare.
Investors would also have a chance to engage in corporate governance with the companies that would engage in the actual productive activity that the Green New Deal would entail. Companies today operate according to the mantra of shareholder primacy. Pressure on the actual companies that would engage in the production is crucial—there must be a reduction of short-term-focused pressures. Part of the proposal should include changes to the corporate governance and equity ownership structures of these companies, including placing employee representatives on corporate boards, shifting board fiduciary duty so that it runs to all stakeholders, and exploring direct employee equity trusts (as well as banning extractive practices, like stock buybacks).
Public pension funds have invested heavily in hedge funds and private equity, despite evidence of lost revenue and mounting fees to fund managers.
If companies continue to prioritize maximizing shareholder wealth at the expense of other key stakeholders, and at the expense of investing in innovation, then the Green New Deal could reinforce long-standing income and wealth inequities and the decline in innovation in the U.S. economy (for an important example, Bill Lazonick and Matt Hopkins document how maximizing shareholder value minimized the strategic national stockpile for ventilators and personal protective equipment). The original Reconstruction Finance Corporation required strong labor standards in private companies benefiting from loans—the NIA could require that companies benefiting from its investments adopt benefit corporation status, so that board fiduciary duty requires the board to consider the consequences of their actions on all stakeholders, including the natural world, and also include workers on the corporate board of directors.
These conditions should also hold for the NIA’s management of public stakes in private companies requiring a bailout, which we’re watching happen in real time in the pandemic era. The CARES Act required a few restrictions on companies, like a temporary ban on stock buybacks, but did not require corporations to generally operate in the public interest while using the public’s money to survive.
Of course, ownership of any kind of corporate equity is extremely stratified by class and race: 92 percent of corporate equity is owned by white households, and the top 10 percent of households by wealth own roughly 88 percent. The project of democratizing capital will certainly take more than even an institution like the NIA, which would financially benefit only those who are able to opt in to retirement assets in the first place. Yet it is critical in designing policies to deal with the twin crises of climate change and economic inequality to not ignore the current trillions of dollars flowing around the capital markets: Harnessing them for the public benefit is a critical step in reducing the power of finance and giving the planet a fighting chance at survival. After all, the costs of doing nothing are far worse.
