Saule Omarova on Emergency Fiscal Facilities and the Missing Architecture of Government Finance

US public finance may need a third agency to complement the work of the US Treasury Department and the Federal Reserve.

Saule Omarova is a professor of law and the director of the Jack Clarke Program on the Law and Regulation of Financial Institutions and Markets at Cornell University. Saule joins Macro Musings to talk about the prospects of an emergency fiscal facility, as well as a broader vision for a National Investment Authority. Specifically, Saule and David discuss the need for a third public finance agency, what the mandate of such an authority would be, and how the agency would be structured and held accountable. Saule also answers common objections to her vision such as the potential institutional redundancies, as well as how to prevent cronyism and excessive politicization.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Saule, welcome to the show.

Saule Omarova: Thank you very much, David. It's my pleasure and thank you for having me on this show.

Beckworth: Well, I'm glad to have you on. Now we were introduced by a common friend, Yakov Feygin, who was on the podcast, I think it was last year probably summertime. And he was on here discussing his idea, his hopes for municipal state financing being supported by the Fed. And shortly thereafter, the Fed actually adopted a facility to support them. So we had him on with Skanda Amarnath and some others, had a fun conversation. But I know the two of you have been working together on some projects and what's interesting is I've been frustrated during the pandemic, during the response the government provided to the pandemic in terms of what could be done. And we can get into this in a little bit more detail, but Yakov is the one who introduced you to me because he saw that your work kind of addressed my questions.

Beckworth: So I'm excited to talk to you about that today to help fill in the gaps. And I think our listeners will appreciate this vision you have painted for a hole, a gap in the architecture of the federal government, but we'll come to that in a minute. Before we get into all that good stuff, let's learn about you some more. Now I know you're a part of this group, this law and finance group, a number of scholars and law schools who are working on issues related to finance and law. I'll just mention a few names in addition to you yourself. I think of Lev Menand, Morgan Ricks, Peter Connie Brown, Melissa Beltran, Dan Awrey, Kate Judge, and there's probably other ones as well. But there's a group of scholars like yourself that has emerged in doing fascinating scholarly work on issues that affect the topics we discuss on their show. So tell us about yourself, how you got into this and maybe the origins of this group as well.

Omarova: Thank you, David. You are right, those are all familiar names, they're all good friends and colleagues and we have grown up so to speak as scholars together, although in a slightly staggered way, shall we say, I started teaching in 2007 literally on the cusp of the latest financial crisis. And before that, I practiced law at Davis, Polk, & Wardwell in the Financial Institutions Group for several years and spent a year at the Treasury. And so I was a banking lawyer effectively, but that was a very peculiar kind of banking lawyer because I've done a lot of structuring transactions in my private practice which really teaches you how to approach solving problems. In other words, how to work from the goal that you're trying to achieve and figure out what the problems are that are standing in the way of your achieving that goal and then walking back to what needs to be fixed.

Omarova: And all of us came to this law and finance type of scholarship through different paths. Some were more corporate lawyers, some were maybe coming straight from academia, but we were all entering this academic world at the time when the accepted wisdom for decades previously, before the crisis suddenly fell apart. And so all of this sort of axioms that corporate law and business law and banking law scholarship was built on for decades and decades with respect to, oh, let's just let free markets work and market efficiency we'll figure it out and basically just provide transparency and information flow. And the government has to stick to its own knitting kind of a thing suddenly fell apart because everybody realized that if you actually do it that way, then you will get this tremendous crisis on your hands and then the government has to step in and fix problems.

Omarova: So when we started working on these issues and some of my colleagues that you didn't mention, but I would like to mention Miguel Peron, Adam Levitan, Erik Gerding, Dan Schwartz, we're all part of this new group and we're all... In some sense it was really very stressful because it was just a very new open field, but on the other hand, it was liberating. And now I realize how liberating it was because now we could actually grapple with real issues rather than worrying about stepping on somebody's toes or citing the right names or whatnot. And that's now that I'm getting more senior as a scholar now and beginning to appreciate it more and more. And then of course, all these other guys, Morgan and Kate, and Dan, they all came on stream, joined the group and it's growing. And it's really a fun group of people. We disagree with one another, we argue, we label one another who's more prone to take an X kind of position versus a Y type of a position, but we all respect one another and we're having a ball.

Beckworth: Well, that's great. So if you're a young law student or even an undergrad who's thinking about going into law school and going into this area where you think about the financial markets, maybe regulation of markets, there is actually a career path you can pursue now working with one of the scholars like yourself or the other ones you've mentioned.

Omarova: Oh, that's absolutely a possibility these days. And my sense is that it might actually become more and more interesting and more and more popular because it's still very much a growing field, it's extremely interdisciplinary. My colleagues and I, we're constantly trying to engage in conversations with economists, with historians, with sociologists, political scientists, what have you and the problems are just incredibly complicated and the most interesting and challenging thing about this field is that the greatest tasks in this area are actually about shifting people's perceptions, shifting the accepted wisdom and uncovering how things that are written in all the textbooks are actually not true.

Omarova: And it's the hardest part but it's also the most rewarding because more of us are beginning to realize that you don't have to accept this narrative as the reality of the world, you can actually go out into the world and figure out what the reality is and then come back and create a new narrative. Then it opens new prospects for building careers, for establishing one's name, but also for actually benefiting the society in a way that is far more rewarding personally and professionally, than replicating yet another perspectives for yet another company, doing a spec offering.

Beckworth: Well, it sounds like a lot of fun. And what you said reminds me of when I first met Morgan Ricks, he had a book, I think it's The Money Problem.

Omarova: Yes, The Money Problem.

Beckworth: The Money Problem, yeah it was a really good book and I was surprised it was written by a law professor. I was like well, this guy knows a lot about monetary theory. And I agreed with a lot of what he said, the importance of runs in the financial system and dealing with that problem and it was just fascinating to see this interdisciplinary work that he was doing, I think all of you've been doing. There is this fascinating conversation and in fact I would say over the past year, when I've thought and wrestled with these issues of what the Fed's doing, all these new facilities for the Fed, some of the best insights I've got were from your group, Lev Menand, Kate Judge, others were writing and thinking in real time, given Twitter, but that as well as articles and stuff, Lev had a fascinating article.

Beckworth: I had him on the show to discuss about the difference between a liquidity facility versus a credit facility. I was like man, that's amazing framing. It just clicked and it's perfect and I think what we're going to talk about today is maybe the need, at least in my view, the need to take those credit facilities and put them somewhere else that's a little bit more transparent and easier to use maybe and that's what we want to get to in our conversation. But again, this is the fascinating chance to think about this emerging group in finance. So I encourage any young students who are interested to reach out and talk to Saule or any of the people we've mentioned, I'm sure they'd be interested to share their field more with you.

Beckworth: So let's move on then to the topic of the show. And you've written several articles we'll link to on a National Investment Authority. And as I alluded to earlier, our paths cross because I was poking around going down this path, trying to figure out what is the better way for the Fed or for the U.S. government I guess more generally to respond to severe crisis like what we had last year? Because the Fed is being asked to do a lot. All the credit facilities were being tasked to the Fed and the Fed really isn't designed for that legally. There was this question of, what can the Fed do? And the Fed really can only extend loans or investments and has to put assets on its balance sheet, it can't do grants, it's this limited by law, it can't do grants.

Beckworth: And so there was this kind of this need for what I thought in my mind was an emergency fiscal facility and others were talking about it too. And as I mentioned, Lev had his idea of a National Investment Authority. George Selgin, a good friend of the show, he also had discussed the need for something along these lines, and there've been some proposals too. I remember several last year, Algo Bart, Stanley Fischer, actually this was the year before, in 2019. They proposed a temporary fiscal facility that would be turned on during crisis and there's several like that basically giving the Fed and Treasury the chance to do helicopter drops in emergencies and give them the flexibility and maybe the guard rails they need to do that effectively.

Beckworth: And that's where I was thinking in heading down that path. And then Yakov comes along and introduces you to me and I start reading some of your articles. And so today, I want to talk about your vision for a fiscal facility like this. And your vision as I understand is much broader than an emergency fiscal facility. So I was thinking emergency fiscal facility, you're thinking a standing facility through thick and thin, good times, bad times, no matter what the business cycle may be. So maybe you can begin by explaining to us why do we need a National Investment Authority? What's missing in the government's architecture in terms of a facility that can address the needs that you think aren't being met currently?

Why US Public Finance Needs a Third Agency

Omarova: That's a big question, a very open-ended question, right?

Beckworth: Yep.

Omarova: And you threw in a lot of important kind of hooks for me to start talking about the NIA idea. It's typical for people to start thinking about these types of institutional solutions during the crisis time or it always happens because that's when we realized in a very visceral way, where our existing institutional structure is missing some important tools and some important elements. The problem with attending to this kinds of issues only during crisis or in connection with the crisis management task is that it misses out on the full potential of a structural reform that would actually smooth out the process of the federal government managing the financial system and managing the flow of finance into the real economy, into the macro economy on an ongoing basis.

Omarova: So when the crisis hit, and they do hit and they will hit recurrently, we now know that. And we don't know when they will hit and what shape they will take. So if the government is already in that game, when it's playing inside the financial market and managing the flow of finance to certain types of economic enterprise and working with the private markets and with the public agencies to prevent certain imbalances in how the finance flows and how the economy is doing, then when the new crisis comes, it's much easier for the government to adjust its strategy and its tactics and actually attend to the new form of a challenge by using the existing institution.

Omarova: And so the institutional capacity is extremely important. In fact, it's critical in terms of being able to jump into a particular issue being prepared and being effective, being efficient in addressing these challenges. And unfortunately, a lot of them, a lot of the discourse has been proceeding for years, even before this crisis but even in the wake of the prior financial crisis of 2008, has been proceeding on an assumption that what we have to do is just change certain rules, change certain types of behavior within the existing structure and existing structure was and still is, we have the Treasury, the fiscal authority, and we have the Federal Reserve.

Institutional capacity is extremely important. In fact, it's critical in terms of being able to jump into a particular issue being prepared and being effective, being efficient in addressing these challenges.

Omarova: The Federal Reserve is more attractive institutional tool of attending to crisis because it has its own balance sheet, let's just face it. It doesn't have to go to Congress and ask for money every time it wants to sneeze, it actually can extend the credit or open the liquidity facility or whatever you call it. Whereas Treasury, while the Treasury can do a lot more things than the Fed can do, in other words Treasury can give money for free as a grant if it's in the public interest, it can also technically speaking buy equity in certain companies if that's what's required. However, the Treasury's greatest problem and perhaps that's not the right word, but in reality, it is the problem is that it is a directly politically accountable institution, politically accountable to Congress.

Omarova: So the Treasury, yes, it can issue bonds and it can raise money this way in markets but it cannot spend money, it cannot allocate money to use this that are not explicitly authorized by Congress and that's where the greatest limitation comes on the Treasury. So when the crisis comes, we have these two institutions. One is politically hamstrung constantly by all this budgetary politics. And by the fact that whenever it spends money, it has to effectively answer to those who worry about federal deficit, budget deficit, and we know how politically messy that gets. And the other institution is the Fed that has the money, has the balance sheet, but it is really sticking to its legal mandate as the Fed has traditionally interpreted it. And even though the mandate is broad, it's not as broad as to encompass everything in the world that might need to be done.

Omarova: So what we end up having is these two institutions that don't have the capacity, the full capacity. They also don't have the expertise in house because they haven't done this kind of allocation, direct capital allocation to the economy for a variety of reasons. Now they have to jump into this mess and immediately solve it. So what do they do? First, they have this very tenuous political relationship with one another. But more importantly, in order to manage the money that even Congress earmarked for them and then the Fed puts up, they hire private asset managers. They hire BlackRock, they hire State Street, they hire private institutions in order to actually run those facilities. And that often gets dropped from the discussions, but it shouldn't be dropped from the discussions because what that shows is that in every crisis, there is a need for a particular function to be performed.

Omarova: And that's the function of a real asset manager. In other words, they have to be professionals who actually are going to look at the market and decide which bonds to buy, which bonds to buy at what price, which bonds not to buy, which companies may deserve grants or equity injections, which companies may not deserve it, what conditions to impose, what price to exert and how to structure those relationships and how to monitor the conditions. And right now, neither the Fed nor the Treasury are able to do that or allowed to do that or willing to do that. So what they do is they hire BlackRock. And then we have a problem, BlackRock decides I don't know which ETF shares to buy, for example in the pandemic.

Omarova: But BlackRock is also in its own capacity as a private asset manager has a tremendous portfolio of ETFs that it manages for its own paying clients. And so that's the conflict of interest if you've ever seen one. Why do we always have to play this game? If there is a need for a particular function, if there are recurring conditions in which this function comes into play and becomes acutely necessary, then we should have a public institution that have the expertise that has the mandate and it has the capacity to do so and is standing and ready to do so.

Omarova: So that would be the bailout management, the emergency fiscal financial, federal financial aid management entity. And if we have that kind of entity, it will be much easier for us to structure the conditions including democratic accountability and oversight conditions that would attach to that public entity rather than sort of wishy washy… there is this complex structure of, is it the Fed? Is it the Treasury? And then multiple private agents underneath, how far do you see and how do you oversee it? It becomes a big, big issue.

Omarova: And what happens is it gets politicized, inevitably, people end up extremely disillusioned in how the financial assistance actually gets distributed. And what it does, it's always significantly the Federal Reserve's reputation being technocratic and neutral because clearly it's not neutral and it endangers what the Fed can do in future in its capacity as the monetary authority. So why do we always have to walk that line? It's only because we cannot imagine the simplest solution of all that there is a hole, there is a third leg of the stool that needs to exist there. And it's that kind of an entity that is a permanent financial, a permanent institution that specializes in capital allocation and management of assets on behalf of the federal government. So once you make that leap that we need that certain institution, then you start realizing that that certain institution can also do a lot more than simply manage bailouts.

There is a hole, there is a third leg of the stool that needs to exist there. And it's that kind of an entity that is a permanent financial, a permanent institution that specializes in capital allocation and management of assets on behalf of the federal government.

Beckworth: So that makes a lot of sense, there's this hole in the architecture, the institutional structure of the U.S. government, and it is interesting to think about the pandemic also 2008, 2009, I think back to maiden lane, how controversial that was back then and then as you mentioned, this past year, a lot of questions were raised too about who was actually implementing the Fed’s facilities and you raise a great point. So you want a more neutral party doing this but it has to have the experience, it has to be doing it regularly.

Beckworth: So you don't want to build a shop or an agency in the midst of a crisis. You want to have it around... And I think that's a great point because the best historical example I can think of in terms of the U.S. government and maybe there's other countries have done this already, but as the RFC, the Reconstruction Finance Corporation from the Great Depression. And I've been covered it on the show before, but I've read up on it, it wasn't perfect, it had challenges and I think maybe some of those challenges were due to the fact that it was created on the fly, it was created and it missed the Great Depression.

Beckworth: Early on, there was a lot of corruption in it. They lent to people they knew, it got better over time and there's still a lot of questions but I think you're suggesting you want to have a well thought out national investment authority designed to play this role and to step in when there is a crisis, but also outside of a crisis, it needs to be practicing working in normal times, as well as in times when we're in deep, deep crisis.

Beckworth: So I like what you said, there's a third leg that's missing currently in the government's architecture and we want to have that put in, that's the argument. And you would call it a National Investment Authority. Are there any examples of other countries that have done something like this to help us think what it might be?

Contemporary Examples to Emulate

Omarova: The idea of the NIA, the National Investment Authority, first I and my Cornell colleague at the time, co-author Bob Hockett, we started writing about it in 2015. And at the time, it was really fun. I remember making many presentations, academic presentations of the NIA idea and a lot of people haven't even heard of the RFC and they were surprised to-

Beckworth: Really?

Omarova: Yes, yes. This is what I'm telling you. Now I'm going to sound like an old person complaining about how the world hadn't appreciated my brilliance at the time. No, it's not that. But it's interesting to see how in this particular crisis, suddenly everybody is talking about a modern RFC, literally everybody's saying about the modern RFC but a few years back, people were not all that enamored or even aware of it.

Omarova: And it's interesting because RFC is a very American creation, but it's also part of a longer history of course of developmental state in a way that can also be traced back to Alexander Hamilton in a fact, and then it went circuitous route through Europe, the German unification and the German industrial policy in the late 19th century that was a key to industrializing Germany at the time. A lot of that strategy was inspired by the Hamiltonian concept of the strong federal government that is actually a hybrid government that participates in markets, financial markets and leads them.

Omarova: And then of course later in the '80s and '90s, there is this whole rage about the development of state and East Asian tiger states. So South Korea, Singapore, Taiwan. And to this day, some of these Asian states provide probably the best example of having a government institution that acts directly in financial markets and is not afraid to be a proactive market participant, including taking equity stakes in certain national enterprise for a variety of reasons.

Omarova: For example, Singapore is probably the best the most clear-cut case of this type of policy that they've been conducting for years now and quite successfully, they have a sovereign wealth fund that is not exactly the RFC/NIA model because sovereign wealth funds typically, they basically just sort of a trading in financial assets for the portfolio, but they also have a state holding company in effect that's called Temasek. And Temasek actively invests in equity of certain private or hybrid firms.

Singapore is probably the best the most clear-cut case of this type of policy...they also have a state holding company in effect that's called Temasek. And Temasek actively invests in equity of certain private or hybrid firms...because of strategic significance.

Omarova: And they invest in some firms because of strategic significance. For example, they want to have a national champion in I don't know, semiconductor industry or in airlines or whatnot, telecom. Some of these decisions that they make with respect to investing in particular companies have to do with provision of social services and public goods because they want all Singaporeans do have access to broadband for example, or certain other services. And so they feel that the best way to do it is to have the state agency, the government agency be a majority shareholder or a significant shareholder for example, directly in an enterprise and work directly with private shareholders in order to make sure that this company actually serves the needs of the Singaporean people.

Omarova: Having said all of that, I realize that we can't replicate what Singapore does because we have a very different political system, we have a very different economic system and we have very different set of challenges, but also opportunities. It's unfair to compare a small effectively city state with a huge diverse country that's in the center, still in the center of the global financial markets as we are. So in that sense, RFC is our own native example, but it's from the ear a long [inaudible], much simply ear in some sense. Temasek is the current contemporary example but it's from a different institutional context.

Omarova: So the NIA unfortunately or fortunately, I don't know, depends on how comfortable you are with complexity and novelty of a solution. So the NIA is not exactly a replica of what we had 60, 70, 80 years ago, nor is it exactly a replica of what other countries have right now. It is probably most likely a model toward which a lot of European countries are going to be moving and are moving already right now, because a lot of those countries have infrastructure bank types, investment bank types already, national development banks or multinational development banks that only engage in credit extension for a variety of purposes. That's kind of part of the NIA model.

The NIA is not exactly a replica of what we had 60, 70, 80 years ago, nor is it exactly a replica of what other countries have right now. It is probably most likely a model toward which a lot of European countries are going to be moving and are moving already right now.

Omarova: But now they're beginning to realize that that's not sufficient to tackle the post COVID problems or longer-term structural transformation tasks in face of climate change and other issues. And so they're beginning to think about adding the equity investment asset management function onto the existing credit banks. So in that sense, this is like a long-winded answer to your question. The NIA doesn't have a specific exact precedent, it's not exactly what we had. At the same time, it's not exactly just some fancy that some crazy law professor made up in their own minds. It actually builds on a lot of bits and pieces that exist either in the public investment schemes or in private finance and trying to replicate some of those financial engineering techniques to come up with a solution that probably has the best chance of working, given our complex situation.

Omarova: We have very complex financial markets, very interconnected, lots of actors, lots of problems and they're all structural problems. So we can just come in with a big ax and start hacking directly. But we also can just step back and say, "Oh, well, interest rates are low, all we need to do is to convince Biden administration or Congress to just borrow," I don't know, "five, $300 and just throw the money at the problem." Because if we do just that, the existing institutional structure of our financial markets will channel that money not in the right direction but in the direction that would create the next set of problems and will precipitate the next set of crisis. So that's why we have to come up with a bigger solution, more complex solution.

Beckworth: Well, that's interesting. So there are examples out there, not identical, but similar, Singapore and then RFC and then maybe where Europe is headed. So you have like a whiteboard, you can draw from scratch. You can put down all the blueprints of this new institution and you have. So you've outlined in great detail, so let's actually talk about your proposal. So you have several papers and again, we'll provide links to them in the show notes, but you actually go through and list like the mandate, the mission structure financing. Let's start with the mandate.

What Would be the Mandate?

Beckworth: So the mandate as I saw in one of your papers was to formulate and implement a cohesive national strategy of long term economic reconstruction and development. So in the context of the past year, that'd be dealing with the pandemic obviously, and then maybe in a broader context might be the Green New Deal, trying to move the country towards in that direction. But how would you flesh that mandate out? What other examples would you draw upon or would those be the main examples you have in mind?

Omarova: It's intentional to define the mandate broadly, precisely because we live in an era where you can't predict specific challenges that will likely arise. And a lot of the challenges that we are dealing with and have been dealing with and will be dealing with are actually a result of a certain structural issue or problem. And that structural problem is that there is a growing need for certain types of let's call it critical public infrastructure. And that term is a broad term, it's not just the roads and bridges, although we do need better roads and better bridges as we can see, even the logistics of delivering PPE and masks and vaccine for example, across this huge country can be thrown off by for example the infrastructural deficiencies, that's just one example.

Omarova: But beyond that, we now realize that we need to provide broadband access not only in metropolitan areas but throughout the country, we need to make sure that there is healthcare network that works throughout the country and so on and so forth. In other words, we need to do a lot of things. We also need to ensure our resilience of the supply chains. How do you ensure that? And one of the simplest answers to that or the most obvious ones, we probably need to make sure that we can produce domestically a lot of the critical inputs in whatever we might need for strategic reasons. It's hard to predict what we might need but at the very least, it clearly indicates that we need to rebuild our domestic industrial manufacturing capacity.

It's hard to predict what we might need but at the very least, it clearly indicates that we need to rebuild our domestic industrial manufacturing capacity.

Omarova: That would also create jobs and we need to create jobs because we need to figure out how to tackle inequality, how to create greater social cohesion and maybe minimize some political strife that we've lived through with such painful results for the last decade or so. So all of these needs, they're there. We all know there's like big issues. So how do we solve them? Like one critical input into solving all of those problems is financing. We need to make sure that enough money goes to where it's needed to finance the specific types of projects, specific types of infrastructure or domestic re-industrialization capacity or job creation or whatever that we need. And here's the structural mismatch. There is plenty of money, there's plenty of capital sloshing around in U.S. capital markets, global capital markets.

Omarova: U.S. is still the draw for a lot of money for institutional investors from around the world, but also domestically. And think about it for a second, David. This is another kind of simple thing that people don't think about all that much. A lot of that money that's currently sloshing around in private capital markets comes from us, from our 401(k)s because the federal government doesn't really provide for our old age through some kind of social safety net system. So every two weeks out of my paycheck, money goes somewhere and then it goes into funds and it goes somewhere being invested in stocks and bonds, so there is a lot of money. The problem is that that money doesn't have the right rails, the right channels for flowing into enabling the construction of the type of social infrastructure, public infrastructure, or productive assets, productive enterprise that we will need.

Omarova: And there are reasons for it. The funding gap has its explanation. It's not because people, those asset managers and private financial markets, the pension fund managers or insurance company or bank managers, they somehow are not interested in doing the right thing. A lot of them would love to be able to tell their constituencies oh, we are investing in clean technologies, we're investing in job creation in your region, we are improving your life and you can see. They would love to do that, they just don't have the capacity to do that because as private investors in private markets, they live and die by certain dictates of generating certain types of returns, competitive returns, vis-a-vis their own competitors, their peers in the industry. And that requires that they can only invest in the types of financial instruments that basically will generate the profits for them and sufficient returns for them within certain period of time.

Omarova: And that window is getting shorter and shorter as the financial markets themselves get more and more competitive because there is more money flowing into it, so all these asset managers are basically vying for the money and they say well, invest with me, I'm going to give you this return within three years or five years, or maybe even within one week. And what can be easier than for example just invest in some financial instruments we will see how GameStop for example, stock or Bitcoin nowadays. Why not? So what we need to do is shift some of that private capital away from this speculative investments, purely financial investments that don't really go into the real economy into the types of instruments that will finance real economy. And that's why the mandate of the NIA, while it's broad with respect in a coordinated fashion, look across the entire national economy and see where the imbalances are, structural imbalances among sectors, geographic imbalances, and all kinds of other imbalances have that picture where the money needs to go.

Omarova: But then also not just say, go to Congress and say, well, now give me the money because Congress may or may not give it to you in any year, it depends on the politics of it. But instead, go look at the private markets and actually create the new financial instruments, new channels for the institutional investors that already are in the financial markets looking for the deployment of their capital to send their capital, to finance those types of projects that would benefit the public. And that's the mandate then splits into the public infrastructure financing because that's the more concrete hook for that kind of national development strategy, how it would operate. And the other element of the mandate would be to act as a public asset manager. And that's where it's slightly different from infrastructure financing.

Omarova: It's the kind of a function that we talked about earlier in the moment of a systemic crisis for example, when the NIA can step in and become what the BlackRock does basically on an outsourced basis, do that kind of stuff. But also the NIA could do it outside of a systemic crisis but with respect for example to certain industries that are currently in a transitioning phase and are having trouble transitioning, for example like fossil fuel industries, coal in West Virginia, oil and gas industries. We all know that those industries are going through some tough times now because the future is unclear.

Omarova: We need to shift away from fossil fuel, otherwise the climate change will accelerate and that will create tremendous new problems. So what will happen to these industries? And it's easy to say well, let free market figure it out, the companies either restructure completely on their own or they will go out of business. But going out of business in this kind of ad hoc fashion creates tremendous knockoff effects for the economy because people will lose jobs. And to the extent those industries are concentrated in certain regions that would create a regional kind of recession. And we don't know how far that will go, ultimately it will all end up on the government's books. We will have to somehow step in and we don't know how to deal with it.

Omarova: So why not have a public entity, the asset manager that would effectively function as a venture capital slash private equity fund, or not driven by private equity type short-term profit considerations and go and become the kind of investor in these distressed assets for the purpose of actually restructuring those firms, those industries and walking them through this very difficult process, risky process, lots of loss and unlike private equity fund, this public authority will actually have the mandate, have the ability to take on that risk and absorb that risk because the timeline, the time horizon that the NIA will have is much longer term because if we walk this industry through this patch, even though they will be losses, immediate losses to us because it's a risk enterprise, in the longer run it will put the economy on a much sounder footing and it will preserve people's jobs and it will basically create better foundation for the national economy to prosper in the future.

This public authority will actually have the mandate, have the ability to take on that risk and absorb that risk because the timeline, the time horizon that the NIA will have is much longer the longer run it will put the economy on a much sounder footing and it will preserve people's jobs.

Omarova: So those are the two elements of the big developmental mandate that at least right now on the next level of concreteness I foresee. But the mission of it is a little bit, that's kind of a slightly different aspect of discussing what it will do because the fear at least what I hear a lot from people is that well... And perhaps I will preview some of the questions, David, that you were going to ask me.

Beckworth: Sure, go ahead.

Omarova: Anyway, but a lot of people will say, "Well, I'm confused. Why do we want this new kind of hybrid entity to work with private investors and use public capital and the federal government strengths to channel the investments into proper infrastructure projects, because A, don't we want private markets to do it because private markets have better on-the-ground knowledge? And B, why not just have the existing public agencies to do it as a pure fiscal policy? Federal agencies will just get more money for grants and whatnot and state authorities. Just give money to the states and the states they already know what they need, what kind of roads they need, what kind of bridges they need.”

Omarova: And my view here is that it's important to understand that the NIA is not meant to supplant or replace, either of those existing channels for financing important publicly beneficial projects. It is meant to hit that funding gap where there are particular types of projects that are particularly large-scale projects for example. In other words, instead of doing a tunnel that connects I don't know, New York and New Jersey, that maybe the New York State and New Jersey State authorities with enough money could do on their own, what we need is perhaps I don't know, a network of regional high speed rail to connect a variety of metropolitan areas for instance, to reduce the emissions from all this car driving and make it easier for people to commute to work and so on and so forth.

The NIA is not meant to supplant or replace...those existing channels for financing important publicly beneficial projects. It is meant to hit that funding gap where there are particular types of projects that are particularly large-scale projects.

Omarova: Or maybe we need a nationwide highway system that is fully technologically equipped for recharging electric vehicles, so hydrogen vehicles for example. And again, perhaps in some areas, some private enterprise or state authorities with a private enterprise could build such a piece of the highway. But their jurisdiction and their ability to absorb the risks would not allow them to extend that type of a project on a national scale, somebody on the national scale has to deal with it. And one could say well, Department of Transportation should do it, but Department of Transportation has been running its grants system for years and years and somehow we still don't have that kind of a highway system because there are issues with how federal agencies are able to finance these kinds of wide-scale projects.

Omarova: So there is a funding gap. Private markets do not step in because of the scale and the risk, and perhaps the long-term, the time horizons for when these kinds of projects will generate benefits. And also a lot of those benefits as is diffuse public benefits, that's classic kind of public goods private investment type of problem. Private investors want to be able to appropriate the bulk of the benefit. And if the benefit is hard to really calculate, then they might not really take it on. So it's that gap, the gap with respect to time horizon and riskiness and scale, and also the transformative innovative type of a project, that's where neither private markets nor existing public agencies are able to provide the type of unified, coordinated and sustained investment that the NIA will provide.

There is a funding gap. Private markets do not step in because of the scale and the risk, and perhaps the long-term, the time horizons for when these kinds of projects will generate benefits.

Beckworth: So you see it filling a gap.

Omarova: Yes.

Beckworth: And going back to your point, it would be filling a gap as I comprehend, not necessarily crowding out existing private spending.

How Would the NIA be Structured?

Beckworth: Now Saule, just to go back and recap the structure of this, and you alluded to these two parts to the NIA, I want to go back and just quickly highlight what you have in your papers but you would actually have a Board. And in a Board, seven members sounds a lot like the Federal Reserve and similar appointments and all that, but then the two big bodies you were talking about, you had a National Infrastructure Bank that kind of be like a GSC financing.

Beckworth: So think of another GSC but directed towards infrastructure. And then you'd have what in your paper, you call a national capital management corporation, this is your asset manager. And this would be the sovereign welfare fund. So I encourage listeners to go check out the details of this. And very interesting again, you see it as filling a gap, the third leg of a stool, complimentary, I think your argument is also we're doing it anyways during crisis. Why not make it more efficient, well-designed, more organized, be thoughtful about it?

Beckworth: The RFC is an example where it had problems because it was made up on the fly. So let me just bring up a few objections I imagine some of our listeners would have on the show here. And you've already touched one of them that you see it as being a compliment, not necessarily a substitute or crowding out. And that'd be I guess probably the first question, but would not the NIA take on roles that already exist? So you're saying they would do something different, is that right or do what's not being done currently by the Department of Transportation and other agencies, is that right?

Responding to Common Objections

Omarova: That's exactly right. It would directly in the markets, that's what Department of Transportation doesn't do, or Department of Energy they don't do that. And what happens with federal agencies is basically when they have the money for certain grants, there is usually a specific conditionality because of their jurisdiction, they have limited jurisdiction, so they can only extend those grants for specific purposes, but then they basically just... And I'm simplifying here, they sit back and wait for private firms to come to them and present to them ideas for certain projects, and then they decide okay, I'll give you money and you go and build it. That is not how we're going to get to the type of large scale, transformative, leapfrogging type of infrastructure projects that we currently need in order to shift the entire economy to new technological basis and solve a lot of our problems.

Omarova: In other words, the NIA will actually become a much more proactive participant in this market. It will go out just like a venture capitalist would go out and seek out ideas. And the NIA will work with researchers for example on the new technologies, nuclear technologies, and work on developing certain applications or fundamental research, but then they would also work with potential partners and come to them as a potential investor, an equity investor taking on risk in expectation of generating greater public returns in the future and also participating in those returns.

The NIA will work with researchers for example on the new technologies, nuclear technologies, and work on developing certain applications or fundamental research, but then they would also work with potential partners and come to them as a potential investor.

Omarova: But just like a venture capitalist, it would come as a partner with money and ideas and solicit their participation and be the guiding force behind it, enabling therefore a lot more to be done of the type of project that currently with the fiscal policy system that we have simply cannot be achieved. And that's an important piece of the puzzle here.

Beckworth: Okay, fair enough. Another objection I'm sure you've probably encountered before the concern about corporate cronyism. So how do you prevent certain firms who'd happen to have connections to people who'd sit on the NIA board, that kind of thing? And the example that comes to mind today would be like the EX-IM bank. There's a lot of criticism about that, that's that export import bank that will help subsidize like companies getting their goods overseas. So we often read about like Boeing and I think General Electric being the biggest recipients of that, and there's arguments for that, every of every other country does it, so why shouldn't we do it? But there's also this sense that man, they have an inside track. So how would you prevent that?

Beckworth: And I'm going to be fair here. I think any ambitious project, there's probably going to be some inefficiencies no matter who you are, like getting to the moon. I imagine there was some spending that NASA did that probably wasn't the most efficient price, some corruption along the way and I understand turning the world around, turning us into a green, new deal world would probably... it's probably impossible to have a perfect set up. In fact, you're saying you don't want perfection to be the enemy of good here, but still I think people would ask how do you prevent the NIA from being used as a spigot for corporate cronyism? How do you get around that?

Omarova: It is a difficult question, because nobody can guarantee that a particular institution no matter how perfectly designed will in fact be absolutely immune to the corrupting influence of money. And that's because money in our system speaks the loudest. But the good news about this is that if we are designing a new institution from scratch, then we are cognizant of that danger and we can design it as best we can with accountability mechanisms and the belts and suspenders, overlapping accountability mechanisms that would minimize as much as possible the chances of the NIA being corrupt by the private interests and getting away with it. So in the articles and in the older memos and the white papers that I've written about it, I go into a variety of institutional design features of that kind.

Omarova: And one of them for example, we can create a so-called public interest council. And in my view, that's like a standing permanent congressional oversight commission in a way. It doesn't participate in the decision-making by the NIA. It's not the technocratically empowered authority, but it's clearly the forum for the public interest for independent public interest representatives to keep a watchful eye on how the NIA makes decisions and how it performs and what results it achieves. And so that would become an important lever of keeping an eye on it, but also David, if you think about it, in some sense, we do have the government we deserve in some sense, right?

We can create a so-called public interest a standing permanent congressional oversight commission...It doesn't participate in the decision-making by the NIA. It's not the technocratically empowered authority, but it's clearly the forum for the public interest for independent public interest representatives to keep a watchful eye on how the NIA makes decisions and how it performs and what results it achieves.

Beckworth: Fair.

Omarova: In other words, some sometimes we have to be able to imagine the kind of government we want and to give it respect, give the government agency the respect and the power that it needs to feel not inferior to Goldman Sachs's and Blockcrux of the world, but superior to them. So if the NIAs, the 800-pound gorilla in equity markets and credit markets, infrastructure markets, then the esprit de corps will more likely develop that. Then there is a more lucrative and more fulfilling career opportunities in that institution for many people. So people will not be so apt to kind of, okay, I'm just going to close my eyes on this little thing here because five years from now, I want to go and work in private industry to make money and to get the respect I deserve. That change is not something that you can design into an institution. But if your big idea for that institution to become an important player, then you might actually be able to change the way people perceive what it means to be part of that institution.

Beckworth: Yeah, that reminds me of the Norwegian sovereign wealth fund. Being a part of that is a prestigious opportunity. If you can get a job at the sovereign wealth fund Norway, which is run incredibly well, of course again, the Nordic country seems to do everything right but that would be an example, I think what you're getting at here is that you want this to be an agency where it's something you might look forward to because it's run well and it has the ability to do things. Okay, fair enough on that. The last objection I guess I would bring up is not corruption but the politicization of what projects get chosen.

Beckworth: What I hear when I think of the Green New Deal is renewable energy, electric cars, but there are some areas a little more controversial for example, like we could think of nuclear energy as one form but that's highly contentious or geothermal, some have suggested geothermal energy. And so there's a lack of consensus, maybe one group wants truly green and they don't see nuclear energy. And so you could see some fights emerging over well, what exactly is the best way to go? And depending on who's in power, who's overseeing this process, it seems like there could be the opportunity for some politicization, like we will only do certain sectors of technology, we will avoid these other ones. I'm sure you've thought about this before. So how would we wrestle with that? How do we agree on what's appropriate without getting too politicized?

Omarova: Well, I don't think we can agree on it a priori in the abstract because it's extremely hard to articulate some kind of a universal golden rule as to what kind of political motivation is appropriate and what isn't appropriate. In other words, there is good politicization and there is a bad politicization.

Beckworth: Okay.

Omarova: So bad politicization, and again this is tremendously over simplifying things, but bad one is basically your kind of powerful interest groups pushing for their own interests and buying political support for it and then the politicians pressuring the technocrats to make certain decisions because the politicians want to be reelected and blah-blah-blah, that's not good. The better or more legitimacy type of politicization is acknowledging upfront the public policy rationale for certain economic decisions for many economic decisions, because that public policy rationale is legitimate.

Omarova: And that's how we need to figure out what to build and where to build. It's not just for the sake of I don't know, squeezing as much profit out of a particular energy plant, it is about providing a particular community, a particular sector, particular geographic region with particular type of a service or goods. So in that sense, I think bringing it out into the open and creating an institutional platform, a forum and the process for making those decisions, regularizing the procedure for what kind of criteria will be applied, what kind of input from whom will be accepted and how this will be reported to the public and what format, it actually would create a lot less controversial or less dangerous scheme for adjudicating among inevitably competing different interests because that's what politics is about, right? It's choosing which interest wins.

Omarova: So as long as the interest that wins doesn't win because they just have more money and are able to use shady political channels, but because even though it's always a trade-off and even though it's not a perfect solution, but considering the input and all these other interests under the circumstances right now, this is the best solution, that type of a politicization to me is more like a democratic politics.

Beckworth: Okay, very interesting. Now we are running out of time, but I will mention to our listeners that Saule has this vision of a National Investment Authority as part of an even bigger and broader vision. So she has a paper titled “The People's Ledger: How to Democratize Money and Finance the Economy.” And this is one piece of her bigger puzzle. So you have some ideas you share with Morgan Ricks and Lev Menand. So we'll provide a link to that and then listeners check it out, that's a part of her broader vision for finance in the U.S. economy. But today we are wrapping up and thinking about the National Investment Authority. Any final thoughts that you want to share with our listeners on this topic?

Omarova: First of all, I'm really grateful for a chance to talk about the NIA and I realize that it's very difficult to cover all the details of the NIA in a one-hour podcast, maybe even in a three-hour podcast.

Beckworth: Right.

Omarova: And I do encourage everybody to read about the NIA idea and I do realize that people will have a lot of questions and probably a lot of doubts. But the most important thing about it is that we need to engage in very creative institutional design type of search right now, because if we don't entertain the big ideas, we will never be able to figure out how far we're willing to go and what kind of trade-offs we're willing to take along the way. So thank you, thank you, David and thank you everybody.

Beckworth: No, thank you and your parting thoughts is to think big. Think big, be ambitious and read Saule's papers. We will have them on the show note page, so please check them out, of course you can always Google her.

Beckworth: Well, our time is up. Our guest today has been Saule Omarova. Saule, thank you so much for joining us.

Omarova: Thank you.

Photo by Jessica McGowan via Getty Images.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.