Tackling existential threats to our future like climate change and economic inequality is a huge undertaking, and building the future is going to require massive public investment. Cornell Law Professor Saule Omarova calls for a National Investment Authority that would work inside private markets as a soup-to-nuts problem-solving operation.
Saule Omarova is the Beth and Marc Goldberg Professor of Law at Cornell Law School. She specializes in financial sector regulation, banking law, international finance, and corporate finance.
Twitter: @STOmarova
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Further reading:
Public Investment Reimagined: A National Investment Authority – https://prospect.org/economy/public-investment-reimagined-a-national-investment-authority/
Key benefits of a National Investment Authority: https://www.dataforprogress.org/a-national-investment-authority
Website: https://pitchforkeconomics.com/
Twitter: @PitchforkEcon
Instagram: @pitchforkeconomics
Nick’s twitter: @NickHanauer
Jessyn Farrell:
It’s exciting today to have a guest who’s going to preview a big idea for us.
Nick Hanauer:
A huge idea called the National Investment Authority.
Saule Omarova:
The NIA is not meant to step in and do the job that either local or state governance can do or private investors could do or the federal government. The NIA is meant to become a catalyst for attending to the problems that are in our face right now.
Speaker 4:
From the home offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer, the best place to get the truth about who gets what and why.
Nick Hanauer:
I’m Nick Hanauer, founder of Civic Ventures.
Jessyn Farrell:
Jessyn Farrell, and I’m senior vice president at Civic Ventures and a former state legislator.
So Nick, today we have a very exciting conversation. We’re going to be talking about government entities and how to really improve planning and building and solving problems that currently aren’t being solved by the public or private sector. We’re in a moment that’s calling for a similar amount of creativity as the New Deal era did, which resulted in the creation of many new government entities that were able to do really big things. And so it’s exciting today to have a guest who’s going to preview a big idea for us.
Nick Hanauer:
Absolutely. Today we get to talk to Saule Omarova, who’s a professor at Cornell Law School. She is going to talk to us about a huge idea called the National Investment Authority, which would help both identify and execute against the nation’s largest and most strategic economic challenges and opportunities. It should be really, really interesting. It’s a really hard problem, obviously, and a complex challenge, but it needs to be addressed. And it’ll be interesting to hear her talk about how to do that.
Saule Omarova:
I’m Saule Omarova. I’m Beth and Marc Goldberg Professor of Law at Cornell University. And I’m working on issues of financial regulation and connecting the financial system to the macro economy.
Nick Hanauer:
Well Saule, let’s dive right in. And we’re incredibly excited to have you on the program today to talk about your big idea for creating a new government entity called the National Investment Authority. So it would be awesome if you could sort of explain to our listeners what it is and how it would work.
Saule Omarova:
The gist of the proposal is quite simple. I think everybody understands what kind of challenges we’re currently facing as a country and part of the planet really. Right? Especially in the wake of the COVID crisis, we need to take off, with respect to our economic recovery. We need to address issues of poverty, structural inequality. We need to figure out how to counter climate change that is going to bring bigger and more frequent crisis in future. We’re also struggling with the loss of domestic manufacturing base and the increasing concentration of economic power.
In other words, there is a whole host of challenges that seem to come together in this one big cluster. And in order to tackle that cluster, of course, we need to start from the bottom up. In other words, we need to start rebuilding our core public infrastructure. In some sense, it’s kind of like rebuilding the main platform for the economy, and there are important structural obstacles on that path.
So first of all, the scale. The scale of the task in front of us. Right? The piecemeal solutions are not going to be enough when we’re facing such a complex of societal problems. So in order to tackle these problems, we need some form of coordination and strategic direction. Typically, economic problems have been tackled by two sets of actors. Right? There are two sides. Usually it’s either we’ll leave it to the private market or to the government. So the private market, that’s what we at least are always told, has better expertise, better understanding of issues on the ground. And also has supposedly superior motivational factors driving them. Right? They want to make money. Whereas the government on the other hand is more focused on the public needs, on what we all need. And the government has greater set of resources. It’s not as constrained in its resources as any company, even the biggest private company, for that matter. And the government has longer time horizons and it has great the patience.
So typically, public infrastructure is left to the government to take care of, to the extent that those kinds of qualities what’s needed. But the problem right now is that it’s really difficult to figure out which tasks specifically should be left or could be left to the private market and which tasks specifically and cleanly should be left to the government. Each side in this sort of textbook division has its own state jacket. Leaving aside the substance of these debates and the merits of this debate, the irrefutable fact is that the government cannot just easily step in and say we’re going to build those new clean infrastructure, clean energy networks, we’re going to rebuild all of our social infrastructure and do all of those things that private markets are not willing to do.
So as a result, there is that dead zone. There is a lot of private capital swishing around in financial markets that sort of isn’t willing, feels it’s irrational for it, feels it’s incapable or would be justified in entering the type of financing, big infrastructure projects, that we need to be financed. On the other hand, the federal government and the local state governments and tribal authorities, they’re willing to do it, but they are constrained in the practical ability to really commit, for political reasons, to basically putting in a lot of money over long stretches of time into this project.
So what we need is we need an institution that can step into that dead zone, and that is designed to be a hybrid, a true hybrid, in that it is free of both of those straight jackets. In other words, it’s not hamstrung by the short-term profit obsession. It has longer time horizons and it has vast resources, and it has its eyes on the public benefit and the public interests first and foremost. But at the same time, unlike the existing government institutions, it’s not so constrained by the immediate sort of vagaries of budgetary politics or other things of that kind, so that it can actually get inside the markets and not be just an outsider, waving his hands around and not being able to really push anybody to put their money where their mouth are. Right? But that can instead get inside those markets, roll up his sleeves, and start working alongside other private market actors and other public government agencies in order to get those projects financed, planned, designed, and implemented.
Nick Hanauer:
Let’s try and make it clearer by using examples why this entity would be useful and novel. So let me first ask, when most people think about infrastructure, they’re thinking about roads and bridges, right?
Saule Omarova:
Yeah, that’s right.
Nick Hanauer:
Yeah. And obviously there’s more to it than that. But to be clear, America’s roads and bridges could use a bunch of help, have needed a bunch of help for a very long time, and still haven’t gotten help because the Congress could not get its act together to fund that infrastructure. Okay, so would that kind of stuff be in the purview of the NIA?
Saule Omarova:
Well, it will and it won’t. It sort of, at the same time, it depends. Right? So the NIA is not going to be a single solution to absolutely every pothole on every road. Right? It cannot be. And it’s not meant to step in and do the job that either local or state governments can do or private investors could do, or the federal government or these existing federal agencies could do. The NIA is meant to become a catalyst for the type of the projects that incorporate the fixing and the maintenance and attending to the problems that are in our face right now, but also to leap frog the economy to the next level.
In other words, instead of just fixing the roads that we have today, how about we will try to modernize the national system of highways so that it is technologically amenable to shifting to clean cars, electric cars, or hydrogen based transportation and so on and so forth. That is the job of the scale and the significance and the, quite frankly, riskiness that the federal government should undertake. But it also requires the kind of across the board nationwide coordination that the existing federal agencies, because of their jurisdiction or limitations, are not necessarily able to do efficiently. That’s where the NIA would step in.
Nick Hanauer:
Another way to think about this as a little bit of re-injecting industrial policy into governance-
Saule Omarova:
Absolutely.
Nick Hanauer:
… and to use a very simple example, that certainly, it’s obvious today. It was less obvious 10 years ago, and was highly resisted 20 years ago, would be, for instance, the goal of building scale and dominance in photovoltaic cells, PVC. Right?
Saule Omarova:
Absolutely.
Nick Hanauer:
That clearly, at some point it became staggeringly obvious that these would be enormously useful to the economy and the world. And that having a national competence and advantage in making them would be a good thing. We, the United States left it to the market. The Chinese did not. Right?
Saule Omarova:
Mm-hmm (affirmative). That’s right.
Nick Hanauer:
And as a consequence, they dominate that industry and we’re far behind. So are those examples of the kinds of things that the NIA would do, too?
Saule Omarova:
That is absolutely right, Nick. I’m really glad that you brought that up because my understanding of public infrastructure, critical public infrastructure, includes the industrial infrastructure of exactly the type that you are describing. Not simply rebuilding the old manufacturing facilities, but actually taking our industrial base into the future, looking into new technologies, the technologies of tomorrow. And looking toward reestablishing, regaining our leadership in producing those types of technological products that would position us really well in the future globally. But also, to do it, what’s important here is, just like you said, why is it important that the government gets involved in financing and managing these types of investment? The government could do it through the traditional channels of, let’s say, giving tax breaks. Right? The tax incentives to private sector to build certain new technology plants and so on and so forth. And even that would be an improvement, quite frankly, over what we have today. Right?
Nick Hanauer:
Yeah. Right.
Saule Omarova:
But at the same time, why not have the NIA acting through one of its subsidiaries, which is sort of that kind of a market actor specifically set up to do this kind of work to become a co-investor, a controlling co-investor, an equity holder in a company that actually does that. Because from that perspective, you’re not just financing and basically forgoing your tax revenue in order to allow some private company to build this new factory, but then to decide how much of the profit, how much to charge for those products, whom to hire, where to build those plants. Right? So they might want to build it in the area that’s already doing quite well economically. Right? But because that’s where the main managers live. Right? They might want to build it near Silicon Valley, for example.
But if the government is sort of managing this types of investment, the NIA might decide to build that type of a plant, new plant, new complex of plants in Flint, Michigan, for example. Right? Or in West Virginia. Somewhere where that plant will actually have far-reaching, very important collateral benefits to the economy and to the society as a whole. It will create new jobs. It will bring new businesses. It will bring more capital because once you start building that kind of industrial capacity in those currently economically depressed areas, then you need to bring new infrastructure. Right? Then somehow, magically, there will be money and there will be interest in building new, clean water distribution system.
And then also the NIA being kind of, let’s say, it’s a joint venture partner in this new technological, industrial complex that is being built in Detroit or in Michigan or in all of these things. Then the NIA can actually from within decide whom they’re going to hire. So they’re going to bring in… The governments have to, for example, retrain local people for jobs that would have been necessary to take on, and pay wages and encourage unionization, and all of those things that are currently completely out of reach.
Jessyn Farrell:
So this is a really ambitious vision and it integrates industrial planning and implementation and finance and labor standards and environmental standards. How do you get from this ambitious vision and strike that balance between needing to have technocratic expertise at the helm, and democratic accountability? Are there specific ideas that you have? And are there entities that exist currently that do that particularly well that we could look to?
Saule Omarova:
It’s a brilliant question. And that question actually hits right at the core of the biggest problem. Right? How do you combine the technocratic acumen and expertise and the ability to act within financial markets, which is not what our federal government is, at least currently, very good at. Because we’ve had a bit of that muscle in the beginning, since the New Deal era and World War II, and slightly after World War II, but we’ve lost a lot of it. And I agree with that. How to combine the revival of that kind of public finance muscle, market muscle, so to speak, with the need for democratic accountability and the need to really serve the needs of the people? And the fact that once you bring in politics, of course you bring in a lot of squabbling and a lot of this kind of recommendations and accusations and whatnot. So the NIA proposal is actually thoroughly quite developed. And as a lawyer, as a former lawyer, anyway, this is I really love doing, trying to design the structure.
So the structure of the NIA is, the political accountability and democratic accountability that is one of the factors for that, is having that NIA board as a federal agency on top of the system. But the NIA board itself will not act in financial markets. In other words, the actual operations will be conducted by its subsidiaries, the federal government owned specialty charter corporations. And the two such subsidiaries in the current iteration of the proposals are called the National Infrastructure Bank and Nicky Mac and CMC, National Capital Management Corporation, for example.
And they are the form of these entities. Right? They’re not quite a federal agency. They are, by nature, it’s a hybrid entity, the federal corporation. And we have a lot of experience with federal corporations of different kinds. And they give you a lot of flexibility with respect to structuring the governance, but also with respect to how they run their own balance sheets and how they run their own businesses. And that’s a very important lever for trying to bring in technocratic expertise and the ability to really act as if you were publicly owned. BlackRock, for example. Right? With that sort of oversight and the strategic regulation and strategic direction that will come from the NIA board, which is a political body.
Nick Hanauer:
I think it’s not fair to call, for instance, the legitimate conflict between the relative ease of locating a new factory to produce technology near a technology center versus locating it in a place like Flint, Michigan or rural West Virginia or wherever it is, where the social needs may be higher, but where it will be unambiguously harder to get that thing off the ground because there won’t be the people and the infrastructure there to support it. Right? And so let me just say, I am wildly in favor of some form of this and think that our country would be immeasurably better off if we took a more strategic approach to solving our macro economic and technological challenges in the future, rather than… I mean, people think we don’t have an industrial policy, but we do. It’s no industrial policy. Right? Like, no strategy is a strategy. It’s just a shitty one.
So I’m personally very, very bullish on this kind of approach, but I’m also keenly aware of the de-stabilizing politics around these legitimate tensions. The hard stuff, it seems to me, is adjudicating these conflicts over path of least resistance to get the technology up quicker versus let’s do it in a place that creates more social benefit at, potentially, the expense of technological progress. I’m a entrepreneur. Right? The vast majority of things I’ve tried to have failed. But luckily, I’m not a democracy where people will… I don’t know what. Like, not elect me anymore to make these decisions. I just keep getting to make these decisions, and once in a while a good one hits. But it’s much harder if you’re Congress where the government makes some big bet, a smart bet, but just because the bet is smart doesn’t mean it’s going to work out. Right? And so how do you think about that? How do we get the public and the Congress to be supportive of an approach like this?
Saule Omarova:
Actually, there are many questions and many queries you pack, Nick, into enter that into that comment.
Nick Hanauer:
Yes, I did.
Saule Omarova:
Yes. Quite a bit. So first of all, you are absolutely right. The reason we don’t have the kind of institutional channel for adjudicating this very legitimate conflict among different groups pushing for different solutions and driven by different interests is because it’s difficult. How do you kind of argue against fact that, well, it’s much easier to get off the ground some kind of a high tech, new industrial production when it’s already located in successful urban areas with a lot of highly educated workforce that’s basically behind the technology, rather than trying to build new type of a Silicon Valley somewhere in the desert of West Virginia. Right? And that may be very well true, and there probably is a lot of issues that would need to be addressed. But at the same time, it’s like the Chinese government, they are not afraid of making those kinds of big decisions.
Nick Hanauer:
Absolutely.
Saule Omarova:
Those kinds of decisions… What we need is, and you are right about that what we need is we need the institutional forum for adjudicating them at the right level. But also, we need an institution that would be sufficiently insulated from the endless kind of political conflict around those issues.
Nick Hanauer:
Right.
Saule Omarova:
And that’s what the NIA design is trying to do. So the NIA being kind of a federal independent federal agency, it sort of tries to offer that type of mid way institutional forum for adjudicating a lot of those conflicts, but not in that kind of, you know, the way Congress kind of operates, unfortunately today. The sort of pure ideological way, or extremely kind of ideologically conceptually kind of disjointed type of way. But within the framework of specific strategic priorities, we need to do it. We have to do it. Like you said, if we don’t do it, it becomes, de facto, the realm of… I don’t know., JP Morgan’s and Amazon’s of the world. And we have to take control of that.
But then the fact that the NIA is meant to be a system, and a system where, at each level, the actual entities that make those investment decisions further insulated from the kind of overwhelming, constant, highly politicized and idealized ideologist conflict, that should be a helpful factor. It’s not going to resolve the problem that for the first five, ten years of its operation, everybody will be watching it’s every step. And always, the scrutiny that we subject public actors and government authorities in the economic activities is always going to be higher and less fair than the scrutiny to which you subject private investors. And I completely understand that. But there is no guarantee it will all work out. Right?
But if the NIA is able to show some success, significant success, in the first years of its operation, I am convinced that the tide will turn because a lot of the investors out there in the private markets will see that this is actually a good channel for co-investing, for getting your safe assets and doing good. And also, not being constantly, basically, enslaved to the Goldman Sachs’s of the world. And so, the political dynamics might change. But of course, everything depends on how well we design it and how well we support it in the first years of its operation.
Jessyn Farrell:
What I really love about this idea is that at its most simple, it is trying to use government, creative design around government, to solve problems that we are unable to solve right now. And I think you get at this political problem in your last comment, which is we would need to support it. And once it’s up and running and has a set of successes to show, that’s a way to build support. And that is true for any government entity. It needs to eventually, as soon as possible, show that it has successes. Where would you, if you were to choose a place to aim this effort at right out of the gate, what would you want to do?
Saule Omarova:
That’s an interesting, and it’s kind of a hard question. Right? Because there are so many problems that could be tackled. I would probably try to focus, first and foremost, on the transitioning of certain industries like fossil fuel industries, coal industry, oil and gas industry. And kind of transitioning those industries into the future, a cleaner future, more sustainable future by helping also the regions in which that production, in those industries, for decades have been the dominant employers and providers of economic activity and revenues for the local governments and local populations, to bring them to rebuild the industrial base, to shift it, to do what Nick was kind of alluding to when he was talking about industrial policy in those regions. So that’s where I would focus, first and foremost. And the kind of adjacent priority in that respect for me would be trying to revitalize communities that have been economically left behind. And to me, it’s all kind of coming together. That’s what I would try to focus on.
Nick Hanauer:
Yeah but, given that 90% of our communities have been left behind, that’s a pretty tall order.
Saule Omarova:
It is a tall order. But, you know what? Let’s first get the NIA either on the agenda of Congress and see where Congress is. And my hope is that the all legislators will see the fact that this is really kind of the bipartisan issue. Right? We need to rebuild our economy no matter what, no matter which party is in control. And if it’s big and powerful as I want it to be, or maybe it’s not as big and as powerful, maybe it’s successes and its work is initially more circumscribed and more focused on particular sectors or particular projects. Whatever it is, we need to start this work. And that’s what I’m hoping for.
Nick Hanauer:
Well, this is… It’s a fascinating idea. It’s a huge and complex idea. And I think that it’s a conversation that’s probably long overdue, sort of politically, in the country. And it’ll be interesting. I hope that the Biden administration takes at least the spirit of this idea very seriously, because I think there’s a lot of really productive conversation that can be had about it.
Listen, we want to finish the interview by asking you a question we ask all the people we talk to, which is why do you do this work? What motivates you?
Saule Omarova:
So on a personal level, I want to give back to my adoptive country, this country. I came here when I was very young and I came here from the former Soviet Union. I grew up there in Kazakhstan. So I’ve lived through the disaster of a big and powerful and enormously rich country, basically, unable to adjust and to reform itself, to adjust to the new conditions and to take care of its own people. And ambitious at this as this might be, but my hope is, to the extent of my limited abilities, to help this country to avoid that mistake. And I also think that we need more people who are kind of designers and developers of the details of these types of ideas. Everybody now is sort of talking about modern RFC and kind of Rooseveltian, FDR-like presidency coming. And it’s all great. So the spirit is already there. Right? But what we need to do is we need to dive into the design details, and that’s what the NIA proposal that I’m working on is hoping or trying to do.
Nick Hanauer:
Fantastic. Well Saule, thank you so much for being with us. It’s really, really interesting, and we wish you fantastic success in this endeavor.
Saule Omarova:
Thank you so much. Thank you very much.
Jessyn Farrell:
Yeah. So this is such a cool idea, this National Investment Authority. Particularly its scope and the thoroughness of the design that Saule laid out. And what I think is really interesting is just that our infrastructure problems are so big and this is an idea that’s really scaled to the size of the problem.
Nick Hanauer:
And I agree. But, as I said in the interview, I’m really bullish on some sort of coordinated, strategic, federal authority around industrial policy and investment. It’s a super hard nut to crack in a non authoritarian government. I mean, there’s a reason why the Chinese government is effective at making these big bets. One of them is that they are not democratically elected. Right? When they have a failure or when they have an explosion that kills thousands of people, nothing happens to the people who made that call. But the darn truth of it is that these bets are incredibly hard to make for the most agile well financed expert organizations. You’re just going to have failures under the best of circumstances, and it is very difficult to withstand the attacks, for an agency to withstand the attacks by people who are legitimately antagonized by these mistakes. And by the way, these mistakes always look obvious in hindsight. Right?
Jessyn Farrell:
That’s right.
Nick Hanauer:
You can always… Right? I’ve done this. I mean, I’ve made so many investments over time. I think it’s up to 38 or something like that. And 100% of them looked super smart going in. And then 36 months later, you’re saying to yourself, what the hell was I thinking? It was the dumbest thing. How could anyone have ever been so stupid to have thought that that idea would work, or that these people could walk and chew gum at the same time. You know? It’s just super hard to get out from under that problem in a democracy.
Jessyn Farrell:
Yes.
Nick Hanauer:
And I also think, Jessyn, these conflicts, like again, the simple one that I mentioned, between plopping a new enterprise in Silicon Valley because that’s where the expertise is versus plopping it in a place that would just benefit economically a hundred times more but doesn’t have the expertise, that’s not squabbling. That’s a legitimate democratic conflict. Right? That’s a hard one to solve.
Jessyn Farrell:
Yeah. But on the other hand, it is hard, but one of the core myths of trickle-down economics is that the private sector is best suited to be the problem solvers-
Nick Hanauer:
Oh, for sure.
Jessyn Farrell:
… particularly where there are gaps. And so I think that it is less a problem of the concept, because I think that we do need government entities that are expressly created to be filling gaps that the private sector is not willing to fill. Right? That is a core function of government. And so it, to me, is less about the concept and more around the nuance and what it is. And specifically, the relationship to risk. Is this entity supposed to be the frontline of risk-taking or is it supposed to be socializing some risk taking-
Nick Hanauer:
Yeah. [crosstalk 00:32:43].
Jessyn Farrell:
… or is it supposed to be doing something… Like, I think of compressed laminate timber, or mass laminate timber. Right? Which, we know works. We know solves multiple problems around our forests, around manufacturing, around climate change. And yet, there’s not this flood of private capital into these kinds of projects. And so I think that part of the critique is that… It’s not conceptual, but it is around where does this, an entity like this, live on that risk continuum?
Nick Hanauer:
That’s right.
Jessyn Farrell:
It doesn’t need to be everything to everyone around risk.
Nick Hanauer:
That’s right. And what you certainly don’t want this entity to do… I mean, this is what the National Institute for… Or the federal government funds a lot of research through are a bunch of arms. That’s where that should live, right?
Jessyn Farrell:
Yes. Exactly.
Nick Hanauer:
That’s awesome. But clearly, this entity should not be a early stage venture capital business throwing money at crazy ideas.
Jessyn Farrell:
Absolutely.
Nick Hanauer:
Cross-laminate timber is a great example. Solar photovoltaic cells is another great example. Giant wind turbines is a good example. There are lots and lots of things that are reasonably well understood and where the nation would just benefit from more investment and more scale and that’s where this could be.
Jessyn Farrell:
Exactly.
Nick Hanauer:
Well anyway, it’s a super interesting idea. I think that the time has come to re-up these kinds of ideas, and I hope that Saule makes good progress with hers. It’d be super cool.
Speaker 4:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer. Follow our writing on Medium at Civic Skunk Works, and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always from our team at Civic Ventures, thanks for listening. See you next week.