We often debate the role of government in the economy, with most of your Berean bloggers taking a skeptical view of government beyond the biblical role of avenger of evil that God calls out in Romans 13.  Government is an institution that, while populated by people marred by the fall, is nevertheless ordained by God to punish evildoers.  This is why Bereans, who generally agree with libertarians on market matters, do not claim to be libertarians–as Christians, we Bereans understand the need for government in a fallen world, and embrace government action to improve our lives where government acts in accord with biblical principles.  Indeed, it is precisely because government is so necessary in this fallen world that we decry government getting involved in areas outside its biblical sphere. Government action in other areas cannot help but come at the expense of its focus on its core biblical responsibilities.

So as we examine the scope of government, we might look first at the actual resources the government expends as  percentage of GDP, with the combined federal/state/local totals ~40% of GDP.  But this doesn’t capture the full impact of government on the economy, tax compliance costs ~6% of GDP according to this Mercatus study.  Add in another almost 11% of GDP in regulatory compliance costs and we’re rapidly approaching 60% of GDP!  Of course these numbers are debatable–I’m sure we could find other studies with lower estimates–but the point is not:  our economy is anything but what one would consider a “laissez faire” economy that it is portrayed as when something goes wrong.   Part of the amazing success in the public debate by those against markets is simply to attribute problems that have their root in government policies intervening in markets as a problem of markets themselves!  Display #1:  the Federal Reserve and its ability to create bubbles, Display #2, Fannie Mae and Freddie Mac and the national mortgage market (and of course we could go on and on with these type examples).

But this is simply background to today’s topic.  As big as government is in the actual expenditures and economic activity of an economy, I learned something new this morning in a report from Reuters that is perhaps more startling:

Sovereign investors manage assets worth $29.1 trillion – equivalent to 40 percent of the global economy – which are held by 157 central banks, 156 public pension funds and 87 sovereign wealth funds,

Sovereign investors are government sponsored agencies to manage state funds pursuant to some objective (which undoubtedly differ from fund to fund).  But surely we should not expect such funds to be “profit maximizers” in the traditional sense; for example, no one believes that the Federal Reserve’s current balance sheet has anything to do with maximizing its portfolio return.   Why is this a problem?  Who cares if they don’t maximize profit?  Well, you can be assured that each one of these investment agencies are optimizing something, and if you don’t like them optimizing profit, how do you feel about them optimizing political cronies’ interests?  One of the benefits of profit maximization in a market economy is that it is indicative of effectual service to consumers–profit maximizers serve their costumers well.  But a sovereign investor has other interests.  For example the China Investment Corporation was a heavy investor in U.S. mortgage backed securities (MBS) prior to our collapse–indeed they helped fuel our bubble.  And they did so not because they thought it was the best investment on its own merits, but because they correctly perceived the U.S. government would stand behind those securities.  We’re still living in the aftermath of that misallocation of capital.

And that is the point of this blog post.  If sovereign investors were small or marginal market players, who would really care?  Yes, they would enrich some cronies and distort some markets–but there are many ills in the world and we can’t get worked up about them all.  But when they own 40% of the economic assets of the world, and when therefore capital allocation decisions are not necessarily made based on satisfying consumers but on political considerations, this is a major problem.   As the Reuters article says:

With returns on government bonds at rock-bottom prices, sovereign wealth funds are muscling into stock markets and other higher-yielding assets like real estate at a rate that private investors warn could destabilize the world economy.

Since central banks cut interest rates to record lows in a bid to shore up flagging economic growth, world governments have had to look further afield to grow public pension money or central bank currency reserves. But the resulting tide of money is in danger of distorting markets, causing prices to reflect political priorities rather than financial reality, insiders say.

It’s also threatening to inflate the very price bubbles that central bank teams globally are working so hard to prevent, experts suggest.

Holy Smokes Batman.