In this age of SWF (sovereign wealth funds, not the flick Single White Female, which is almost thirty already!), it may seem odd to question the right of a government to own corporate common shares directly (e.g., by the Treasury), or indirectly through the Federal Reserve or other government-sponsored organizations.
Recent suggestions that lawmakers allow the Fed to purchase corporate common shares in order to combat recession, however, have brought the question to the fore once again, as have recent comments by President Trump regarding the form COVID-19 bailouts might take.
Government ownership of common shares, as opposed to bonds or hybrid debt-equity instruments called preferred shares (preference shares in the UK), portends, quite literally, socialism, i.e., government control of the means of production, and is, with limited caveats, unconstitutional.
As part of the 2008-9 bailout following the Panic of 2008, the U.S. government purchased preferred shares issued by distressed corporations. Owners of preferred shares are not allowed to vote in corporate elections unless the fixed dividends they are promised go unpaid. They are little more than bondholders, who also often gain a voice in corporate affairs after default or bankruptcy.
Owners of common stock, by contrast, enjoy the full voting rights associated with the class of shares they own. Since the mid-nineteenth century, one vote per share has been the norm in America, but prior to that stockholders in many corporations received less than one vote per share or had the number of votes they could cast capped. Since the mid-twentieth century, some shares of stock have entitled their owners to more than one vote per share, often way more than one vote per share. Such super shares are often used by founders and families to maintain control of corporations while raising capital on the stock market.
Government ownership of corporate equities was common in the early United States. The federal government owned big chunks of the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836) until it needed cash and sold off its positions. Some state governments acquired shares in banks as a sort of tax in return for an act of incorporation. Some American governments, including the federal one, also purchased shares to support the young nation’s many for-profit transportation infrastructure companies (canals; railroads; toll bridges and tunnels; turnpikes).
Andrew Jackson and his followers, however, heavily criticized such practices. Jackson’s 1830 veto of the Maysville Road bill, which authorized the federal government to buy common stocks in a turnpike, ostensibly as part of an effort to build a National Road connecting the eastern and western parts of the country, represented the first key turning point. The road, Jackson argued, was unconstitutional because it was an intrastate project that mostly aided Kentuckians living near the proposed right of way.
To the extent Maysville was to be part of the National Road, he hinted, the subsidy would hurt private investors building similar east-west transportation improvements through New York and Pennsylvania without government aid. When read against his 1832 veto of the recharter of the Bank of the United States (1816-1836), it is clear that Jackson did not want the federal government to “pick winners.”
Moreover, Jackson reminded Congress that it would be imprudent for the federal government to build a SWF while the nation remained indebted. Once the debt was repaid (as it indeed temporarily was), taxes, especially “upon the laboring and less prosperous classes of the community,” should be reduced instead of encouraging “a scramble for appropriations” like that represented by the Maysville Road Bill.
And then Old Hickory really let the hammer drop: “In the best view of these appropriations, the abuses to which they lead far exceed the good which they are capable of promoting. They may be resorted to as artful expedients to shift upon the Government the losses of unsuccessful private speculation, and thus, by ministering to personal ambition and self-aggrandizement, tend to sap the foundations of public virtue and taint the administration of the Government with a demoralizing influence.”
The experience of government agencies, like the Navy Pension Fund (NPF), that had invested in the common shares of private companies provided additional evidence of the incentive problems inherent in government ownership of common shares. When investments did well, lawmakers expanded benefits, which bankrupted the NPF when markets turned downward with a vengeance in 1837.
Ever since, the U.S. federal government has been wary of investing directly in American enterprise. Several state governments have established SWFs, including the Texas Permanent School Fund in 1854, but to this day they remain few, small, and narrow in scope.
Formed almost exclusively by fossil-fuel rich states like Alaska, Louisiana, North Dakota, Texas, West Virginia, and Wyoming, state SWFs ostensibly try to smooth state income from natural resource exploitation and are not funded by general taxes or printing new money. They invest in stocks, bonds, real estate, and even private equity but usually with at least some attempt to act like a private investor, i.e., to invest in a rational portfolio of assets and not a politically expedient one. With less than $200 billion in total assets, they could barely budge any of the major stock market indices even if they all acted in concert.
What the Federal government has in contemplation is a bailout that, unlike TARP, does not require the consent of corporations, which can then credibly claim that they did not want or ask for the government to support the prices of their shares in the secondary market. It is really an investor bailout, or a convenient way to engage in quantitative easing that doesn’t really hurt or help anyone, they will say.
Consider the irony here: the entity that so badly botched the nation’s pandemic preparedness now wants more control over big businesses, the major remaining bulwarks against government ineptitude and power, to fix (presumably) the very economic problems it caused. The unmitigated gall of it all!
To be sure, the Fed and/or Treasury will claim common stock purchase is an emergency measure, temporary and limited, and they would never think of using their voting power in corporate elections to install political cronies on boards or to induce corporations to embrace CSR or Green precepts. And stock selection will be across the board or otherwise “fair,” “scientific,” or some such.
If you believe any of that for a minute, I have a book to sell you — Bob Higgs’ Crisis and Leviathan — and a question to ask: when and how does the government unwind its positions? Surely not in an election year, but how will it keep those-in-the-know from profiting, as several lawmakers recently did in reaction to their own COVID-19 policies and pronouncements?
In the spirit of Phil Magness calling out Abraham Lincoln on his colonization schemes, Andrew Jackson was a slave-owning, Indian-killing monster, but that does not mean he was wrong about the incentive problems inherent in federal government common share ownership. If the people want the government to possess such rights, Jackson admonished, then they should pass a Constitutional amendment making explicit provision.
“In presenting these opinions,” Jackson concluded his Maysville Road Bill veto, “I have spoken with the freedom and candor which I thought the occasion for their expression called for.”