more on a sovereign wealth fund (AKA a REAL Heritage Fund)

Suppose you live in a town of 1000 people and a million dollars suddenly lands in the town square, to be shared equally by all the people. Each person is $1000 richer, right? Yes. But are you really richer? Suppose you go into the local gadget maker's store and say you want to buy two gadgets today instead of the usual one. After all, you have the money for more. Meanwhile, she comes into your store and says she'd like two widgets instead on the usual one. But how is everyone in town supposed to double production overnight? They can't, of course, which means that the fact all your customers have another $1000 means you raise prices for your limited supply, while they, in turn, raise prices on you. No one in town will end up genuinely better off, and tourists willl stop coming because they can't afford it anymore.

This is why economists talk about moving out the long run supply curve as the ultimate policy objective, as opposed to manipulating the demand curve. In a closed system, you aren't any better off unless you can increase output.

There is another solution, and that's to open the closed system. If that million dollars is in the form of an asset outsiders want, A) you can trade with foreigners for stuff OR B) use it to buy foreign assets. I've been primarily advocating solution B, in part because many things are non-tradable. You can't import a haircut, so if everyone in town decides they are going to spend their money on services like haircuts, the price of a haircut will simply rise (and the haircutter won't be any better off either if the services he wants, like being waited on at a fancy restaurant, can only be supplied locally as well). More dollars chasing an unchanged supply is the very definition of inflation.

The other argument for solution B is that if Jay-Z can, "in anticipation of precipitation, stack chips for a rainy day" on Rihanna's Umbrella track, so can we. If Alberta simply consumes its natural resource windfall, we could end up in the situation whereby Alberta's future generations survive by selling their labour while the citizens of Norway, the UAE, Singapore, live off their capital (investment bank Morgan Stanley estimates that sovereign funds currently hold an estimated $2.3-trillion and their holdings will expand to $12-trillion within a decade). This would be a less than brilliant strategy for the province when the ratio of active to retired workers is expected to decline.

Now how can this be sold politically to Albertans? A problem is that governments are not generally held to account for what they COULD do but didn't. Albertans need to feel that they are entitled to that ownership future, where that ownership is of a growing (financial) asset as opposed to a depleting (non-renewable) one. My thinking has been that a periodic dividend to Albertans could be promised starting at some future date, such that unless the government starting saving instead of spending, independent actuaries would stand up and say, the promises cannot be fulfilled. If the government is seen as trying to fund current expenditures by raiding social security, Albertans might not tolerate it. The abstraction will be more concrete. The problem with this approach is that the idea that there will be a cash shortage remains pretty abstract given current conditions. The government could always find someone to say that if oil prices continue to rise indefinitely, the government can continue its profligate ways. Indeed, the raiding of Albertans' futures is essentially what is happening right now, yet it seems to be tolerated just fine...

The room for optimism here follows from the fact Albertans don't tolerate deficits. Conceptually, building an asset is the exact same thing as reducing a deficit. If we can get that across, it can sell politically.