The Government Shareholder: Regulating Public Ownership of Private Enterprise

Abstract:     
During the subprime financial crisis of 2007-2009, the U.S. transformed its policies from a focus on privatization and deregulation to one where the government plays an active role as a market participant. By the end of the 2009 fiscal year, the U.S. government became one of the largest shareholders in the world owning a portfolio of investments valued at $959 billion. Some pundits condemned the investments as socialism. The sudden increase in the government portfolio is better understood as a Keynesian response to market failure rather than a change in the political economy. However, the dramatic increase in the government portfolio strained the capacity of the U.S. political and bureaucratic establishments to effectively and efficiently make and manage the investments. Using institutionalism as an organizing principle, this article defines a set of institutional norms and rules of the game that allow and encourage government investment while preserving the free market economic principles that drive growth and foster innovation. The article attempts to reconcile the reality of massive government investment with the institutional framework of a liberal market economy in order to foster private incentive and entrepreneurial innovation. At the core of the prescriptive regulatory proposal are three principles: (1) there must be political insulation of the investment decision and management of assets by creating an investment authority as an independent agency within the federal government, (2) ethical walls should be created between the investment authority and the regulatory agencies overseeing private enterprise to address conflicts of interest and (3) the investment authority should be market driven and required to act as a prudent investor with the goal of maximizing the return on investment (ROI). In applying these principles, this article defines a typology of government investments that includes five categories: (1) infrastructure investments, (2) social investments, (3) political investments, (4) economic investments and (5) financial investments. The typology creates different measures of ROI according to the type of investment.
Much of this paper is based on a previously uploaded, unpublished paper titled "State Enterpreneurism," which can be located at http://ssrn.com/abstract=1428108.

Number of Pages in PDF File: 91

Keywords: bailout, banking, Capital Purchase Program, Emergency Economic Stabilization Act, preferred stock, TARP, subprime, financial crisis, government, investment, capital, markets, capitalism, political economy, state capitalism, AIG, Chrysler, GM, Fannie Mae, Freddie Mac

JEL Classification: A14, E60, E12, G1, G20, H00, H50, H81, K23, O10, P10, P16

Accepted Paper Series