AP Photo
President Franklin Roosevelt inspects Chickamauga Dam near Chattanooga, Tennesee, November 21, 1938. The dam was built in the late 1930s by the Tennessee Valley Authority.
The transition to a renewable economy will pay huge social and economic dividends in the long run. But as Keynes famously observed, in the long run we are all dead. The planet and its economy could be facing extinction if we don’t come up with very substantial investments in the short and medium term.
Cornell professor Saule Omarova has come up with an ingenious proposal to raise adequate sums, inspired by the Roosevelt-era Reconstruction Finance Corporation. The idea is to combine a new infusion of public capital with socially benign investment options for workers’ capital held in the form of pension funds. Omarova’s design, which she explains in the first of the several pieces in this Prospect roundtable, has stimulated both support and respectful skepticism.
Would it compete with, or complement, other long-standing proposals for various forms of green investment banks? Would the new public option for worker pension funds truly wrest control from traditional Wall Street pension managers, or would it be one more form of disappointing “public-private partnership” where the private captures the public? What order of magnitude are we talking about and how do we get it through a divided Congress?
Today we are publishing Omarova’s article describing her proposal. Tomorrow we will publish four reactions, and Omarova will offer a brief final response on Thursday. This is another in the Prospect’s continuing series of Big Ideas—proposals that will not be enacted today or tomorrow, but that can set the agenda. —Robert Kuttner
In the wake of the COVID crisis, we are facing a multifaceted challenge of rebuilding the American economy by addressing climate change, economic and racial inequality, financialization and privatization of productive assets, and other structural problems the crisis made impossible to ignore.
Leaving this effort in the hands of private actors and markets is not an option. A massive shift toward a sustainable, inclusive, and dynamic 21st-century economy requires tremendous commitment of public resources and, just as importantly, public leadership and coordination. It is a fundamentally political undertaking, which involves making explicit distributional choices and using governmental powers to turn them into reality. To do it right, we need a well-designed institutional base: a federal entity with democratic accountability, broad legal authority, and in-house capacity to identity long-term economic-development goals, translate them into specific investment priorities, and finance and actively implement these priorities in practice.
We currently don’t have such an institution. The last entity of this kind in the past 100 years of American history was the New Deal era’s Reconstruction Finance Corporation (RFC). Established in 1932, the RFC played the pivotal role in leading the country out of the Great Depression. As the federal government’s principal financing arm, the RFC systematically supplied massive amounts of credit and equity capital to banks, big and small businesses, and public agencies at a time when private credit was scarce.
Not surprisingly, the pandemic reignited interest in creating a modern version of the RFC. In a recent report, I have outlined core features of a proposal to create a National Investment Authority (NIA) as precisely this kind of a public institution adapted to today’s realities. This essay describes the NIA’s role as a powerful public actor working inside private markets—and making them work for all of us.
The NIA would be a federal entity created by Congress to fill the institutional gap between the Treasury, our fiscal authority, and the Federal Reserve, our central bank. It would be charged with devising, financing, and executing a long-term national strategy of economic development and reconstruction. The NIA would act directly in financial markets, actively allocating both public and private capital to where it’s most needed in our fight against climate change, inequality, and other structural ills. We can call it industrial or developmental policy, a crucial supplement to the fiscal and monetary policies.
The NIA structure would be broadly similar to that of the Federal Reserve System. At the top of the NIA ecosystem would be the NIA Governing Board (NIA Board), an independent federal agency whose members are appointed by the president with congressional approval for sufficiently long terms and guaranteed a high degree of decision-making autonomy. The NIA Board members would be selected based on their experience and expertise in finance, environmental science, engineering, urban planning, labor relations, law, community organizing, and so forth. The breadth of representation on the NIA Board is key, as its principal role would be much broader than purely financial investment decisions. The NIA Board would be charged with planning and coordinating the overall strategy of the country’s transition to a clean and inclusive economy. It would identify and continuously update key national economic priorities and formulate a public-investment strategy in line with those priorities.
The NIA would be a federal entity created by Congress to fill the institutional gap between the Treasury, our fiscal authority, and the Federal Reserve, our central bank.
The NIA Board would operate via specially chartered government-owned corporations: the National Infrastructure Bank (NIB) and the National Capital Management Corporation (“Nicky Mac”). Initially financed through a one-time congressional appropriation, these NIA subsidiaries would be charged with mobilizing and channeling public and private finance into large-scale critical public-infrastructure projects. These would include not only traditional physical infrastructure but also cutting-edge clean energy and manufacturing facilities, public-transit and broadband systems, affordable housing, job retraining, and public education, etc.
Both NIB and Nicky Mac would target investments in publicly beneficial projects that do not get funded at the necessary scale either in private markets or through existing fiscal channels. While there is plenty of private capital eager to invest in “hard” assets like toll roads, private investors are rationally averse to funding inherently risky transformative projects that take a long time to become profitable in any commercial sense. Public investment, in turn, is perennially constrained as a result of dysfunctional budget politics and lack of internal coordination. The NIB and Nicky Mac would step into this funding gap, in both credit and equity markets.
The NIB would be the NIA’s lender arm. It would focus on credit-based financing of large-scale public infrastructure through federal grants, loans, guarantees, insurance, securitization, and secondary market-making. The NIB would purchase and pool revenue bonds and project bonds issued by municipalities, public utilities, and other government instrumentalities, as well as qualifying private-sector bonds supporting publicly beneficial projects. The NIB would finance its operations by issuing its own bonds, backed by their pooled assets and eligible for the Federal Reserve’s purchases—much like Treasury and agency securities are today.
Nicky Mac would be the NIA’s venture capital and asset management arm. It would focus on equity-based finance, more appropriate for truly transformative public and social infrastructure that bond investors consider too risky. Nicky Mac would set up a series of investment funds and solicit pension funds, insurance companies, endowments, foreign sovereign wealth funds, and similar investors to purchase passive equity stakes (“limited partner” interests) in its funds. Wall Street banks, private equity, and hedge funds would not be eligible participants. As the sole manager (or “general partner”), Nicky Mac would control each fund’s investment decisions. Its in-house professional teams would select and manage, with appropriate public input and oversight, individual funds’ portfolios of assets: nationwide clean energy and high-speed rail networks, regional air and water cleaning and preservation programs, state-of-the-art community health care facilities, and so on. By taking equity stakes in multiple operating companies, Nicky Mac’s funds would be able to finance a wide range of innovative projects that can potentially leapfrog the U.S. economy, in accordance with the NIA’s national development strategy.
Importantly, these projects need not all be commercially viable, in the conventional market sense. Unlike private fund managers, Nicky Mac does not have to squeeze cash revenues out of its portfolio assets to repay fund investors. This is because (1) its investments are driven not by short-term profits but by public-policy considerations, and (2) if and when necessary, it can leverage its direct access to the federal government’s financial resources.
Thus, Nicky Mac could guarantee return of the principal investment to those investing in funds prioritizing commercially unprofitable projects like toll-free roads, adult education centers, or public parks. It would also offer equity-like additional returns that reflect the current estimates of long-term local, regional, or national macroeconomic impacts of these funds’ projects. If, for example, experts calculate that a particular fund’s investments would generate an additional 5 percent in regional or national economic growth over a certain period of time, Nicky Mac would translate that projected public gain into a corresponding added return for the investors in the fund.
The Federal Reserve would effectively free the NIA from the debilitating constraints of “commercial viability.”
As to the actual sources of repayment, the expectation is that, after an initial takeoff period, the NIA’s total assets generating interest, dividend, and other revenues should be sufficient to cover its ongoing expenses. The larger and more diverse its project portfolio, the more flexibility the NIA will have in utilizing various streams of operating revenues to fulfill its current investor obligations.
In addition, the Federal Reserve’s continuous liquidity support would play the critical role in increasing the NIA’s ability to finance what needs to be built, rather than what generates short-term profits. By maintaining a liquid secondary market for NIB bonds and a dedicated borrowing line for Nicky Mac, the Federal Reserve would effectively free the NIA from the debilitating constraints of “commercial viability.” It would also give the NIA the flexibility to scale up its investments if and when necessary to sustain the momentum in the economy, without being subject to the whims of a dysfunctional political process.
Putting the Federal Reserve’s balance sheet behind the NIA instruments would make them highly desirable “safe” assets for institutional investors. It is hard to overestimate potential systemic—that is, public—benefits of this move. With carefully structured federal backup, the NIB bonds and Nicky Mac issuances would be able to absorb large amounts of private capital that currently has no productive outlet. The NIA would divert substantial flows of money from short-term financial speculation and job-destroying private equity funds into job-creating, environmentally clean, and socially responsible economic activities. One could think of this as an effective “public option” for institutional investors. Introducing this option would significantly reduce the likelihood of speculation-induced financial crises. It would also blunt, if not eliminate, the underlying structural causes of excessive “financialization”: too much money “trapped” inside the financial system increasingly divorced from the real economy.
More fundamentally, the NIA would redefine the public-private balance in the economic sphere. By directly allocating capital to productive uses, it would undermine the currently unchallenged structural power of large Wall Street banks and private fund managers over our economic lives. Thus, without pension funds’ and other investors’ money, private equity groups would not be able to continue accumulating control over entire industries, looting firms’ assets and laying off their workers. As a major lender to—and especially as an active shareholder in—multiple portfolio companies, the NIA would be able to set effective nationwide standards for wages and worker representation, environmental safety, workplace diversity and equity, and so forth. This is where NIA’s ability to invest in equity with full voting and management rights—including the new “golden share” instrument I proposed elsewhere—becomes an invaluable tool of real social change. To magnify this effect, the NIA’s role as the ready source of “patient” equity capital dedicated to public good could also encourage the emergence of new forms of mutual and employee-owned firms and investment vehicles, thus democratizing ownership of financial assets.
In short, the bigger and more assertive NIA would help to reverse the systemic damage wrought by the decades-long process of privatizing control over the nation’s economic resources. In this sense, the NIA is the exact opposite of the traditional “public-private partnership” model of infrastructure finance. Instead of placing public money under private managers’ control, here the public institution controls how private investors’ capital is deployed and how their contribution is rewarded.
This distinction is vital: The NIA model preserves the healthy core of the public-private partnership, while removing its present dysfunctions. Tellingly, the NIA’s target investor base is not “greedy Wall Street” seeking to privatize public infrastructure. By partnering with pension funds, “green” and socially responsible funds, and other mission-driven institutions, the NIA would strengthen these entities’ abilities to pursue their important social objectives more successfully and independently. Stronger pension funds, for example, would mean more financially secure retirees and less strain on public resources. By facilitating this outcome, the NIA would be effectively “subsidizing” all of us.
The NIA would redefine the public-private balance in the economic sphere.
From the NIA’s perspective, partnering with outside investors offers a crucial benefit of shielding its operations from the vagaries of federal budget politics. With its own balance sheet and funding sources, the NIA need not be hostage to annual congressional infighting over the federal budget, and therefore would not be unnecessarily hamstrung in its activities. It would be free to pursue a bold economic agenda of the kind needed today.
Of course, this makes it especially important to ensure democratic accountability and transparency of the NIA’s operations. The NIA’s business model heightens the ever-present risk of “capture” by private interests and abuse by incumbent politicians. Accordingly, the NIA proposal contains specific governance, reporting, and audit mechanisms, including the creation of a permanent Public Interest Council to keep a watchful eye on the NIA’s activities. The NIA’s regional offices, spread across the country, would also play a critical role in enabling continuous community input and democratic dialogue on the NIA’s developmental priorities.
The precise NIA design is a work in progress. But the main point here is simple. We cannot rely on traditional channels for public credit, both because our politics is dysfunctional and because the public needs more control over how resources are deployed on the ground. We need a public-investment strategy that leads the entire financial market in the right direction. We need to blend political pragmatism, financial sophistication, and passion for progress. That is what the NIA would do.
