Is the Norwegian Oil Fund a Socialist Idea?
Recently I wrote about what happens when Norway runs out of oil? Will it be the end of the social democracy and the welfare state? In it I discuss how Norway stashed away oil money for a rainy day, what is known as the Norwegian Oil Fund worth of a trillion dollars.
Not everyone agreed in my characterization of countries and states following capitalist ideology blowing their money instead of saving it. Jim Roye writes:
Despite your bemoaning “capitalist ideology”, Norway has used a very (economically) conservative method of funding social programs. All that interest the fund earns that you wrote about IS capitalism.
To respond to this I need to be a bit more precise in how I use my vocabulary. Capitalism as we know is not an ideology, strictly speaking. It is simply a description of an economic system. What type of economic system? Capitalism is a free market system where society is divided into a small rich capitalist elite owning most of the means of production (factories, farms, warehouses) and a majority employed as workers.
Capitalism as an Ideology
However such a definition says very little about the beliefs and motivations of those who promote such a system today. While capitalism is really just an economic system, it has also become an ideology to many. It is not merely a description of how the economy operates but also a goal onto itself. Being “more” capitalist is seen as better than being less. In this context what do we mean by “more”?
That the role of private enterprise is expanded and the role of government is diminished. Typically this means less regulation, lower taxes and fewer rights to workers. Government is reduced to what we often mockingly call the Night-watchman state in Norway, but which originates in Germany:
As a term, night-watchman state (German: Nachtwächterstaat) was coined by German socialistFerdinand Lassalle in an 1862 speech in Berlin. He criticized the bourgeois liberal limited government state, comparing it to a night-watchman whose sole duty was preventing theft. The phrase quickly caught on as a description of capitalist government.
In this ideological idea of the state it should certainly not concern itself with building an oil industry, taxing this heavily, and then saving that money. Making money and saving it should be the occupation of the private sector. The state should really only provide security.
This also explains why American conservative oil states tend to end up in economic ruin. Their ideology does not allow for the state to play a significant role in the economy. The state is not not have a stake in the oil industry and it is certainly not supposed to tax it heavily. The state in this capitalist and conservative driven ideology should tax as little as possible. Any extra revenue it may obtain through oil should be used to reduce taxes. The state should not be saving funds for itself. That implies that the state is an active economic entity which invests and plans.
How Did the Norwegian State Get So Rich?
It is prudent to ask how exactly did the Norwegian oil fund get so large? How did the Norwegian state make significantly more revenue than e.g. the British state, despite the latter actually pumping more oil and having larger oil reserves. This happened for several reasons:
- The Norwegian government set an unusually high tax rate on oil companies. The way this worked is that the oil formally is owned by the Norwegian state and companies pumping it up gets a finder’s fee of 20%. In practical terms that means a tax rate of whooping 80%. British taxes was significantly lower. Not to mention e.g. Oklahoma oil taxes of a measly 1%.
- The Norwegian government built its own oil company Statoil which it actively engaged in searching for and producing oil. Thus the state got direct oil income by owning one of the major oil explorers itself. The British in contrast had no state run oil company to directly profit from.
- The Norwegian government deliberately held back exploration rate to spread the income over more years. In Britain oil production expanded more quickly. Hence oil was sold at much lower price. Norway kept production on hold to be able to sell more in later years with higher prices.
- The Norwegian government mandates twice the recovery rate of the standard in the industry. In practice this means each Norwegian oil well produced twice as much oil as a comparable British or American well.
The later part requires some elaboration. For a corporation increasing the recovery rate is expensive. One needs to install more expensive measurement instruments early on and monitor the production better. Long term however you make more money this way. From a purely capitalist perspective this does not make any sense. A company is optimizing for its own selfish profits. It is more profitable to extract 10% from a field, then abandon it and produce from a second field.
But the Norwegian government was no operating on capitalist principles. It was operating on the perspective that this was a shared common heritage for all the Norwegian people and they would not let individual companies waste this wealth due to short term profit motives. This was a hollistic and collectivist perspective. Thus for Norway as a country it made sense to insist on twice as high recovery rate. This meant Norway as a country would get twice as much oil before the oil was all gone. To oil companies it means more upfront investment and not making money as quickly.
This is why you also see Norwegian oil revenue not increasing as quickly initially as British oil revenue. Norway was playing the long game.
Is This Capitalism Or Social Democracy?
If we follow up my discussion of capitalism from earlier, it must be understood as an ideology which emphasize a minimalist state. You can see that in e.g. Oklahoma and other US states where taxes are cut to a minimum. The Government is in fact not allowed to accumulate wealth. Thatchers Britain was the same. Both run by people idolizing capitalism as an economic system.
Social Democracy in contrast has a long tradition for an active state which actively engage in industrial policy. Norwegian social democracy owns and has owned a large number of large corporations:
- Statkraft — Owner of most hydroelectric power in Norway. A power source primarily built by the Norwegian government.
- Telenor — Norwegian telecoms. Partially owned by the Norwegian state but used to be a fully owned state run monopoly. Today a global corporation with millions of subscribers.
- Equinor — Former Statoil, the mostly state owned and created oil company.
- DnB — One of the largest banks in Norway. Partially government owned.
- Norsk Hydro — Larger producer of aluminum.
- Yara — Major global fertilizer producer.
In short the Norwegian government’s involvement with oil production and securing oil revenue fits with its historical role. With such vast funds it also has to have an active management of that money using it to buy foreign assets. This is not a task somebody running on a capitalist ideology would want to give a national state.
In short, even with the best of intentions I cannot see how the policy Norway as been following has anything to do with the predominant ideology followed by states and government trying to adhere to capitalism as an ideology.
Thus what Jim Roye is really trying to get to in my opinion is a truthism I often see repeated among American conservatives. And that is this idea that being prudent and responsible with your money is somehow naturally conservative, while being wasteful is somehow typical liberal:
The vast majority of those who are promoting the idea of social democracy here in the U.S. don’t have any of that in their play book. Go read the Green New Deal. There is no wealth fund involved. Everything is based on “raise taxes and spend it on X”. Cash in/Cash out.
However anyone who has an interest in American political and economic history should know there is no truth to this. Historically Republican presidents have been increasing the debt most. Yes Obama increased the debt a lot but he had to clean up the economic mess left by Bush.
Interestingly it is not all that different in Norway. Social democrats have generally been better at balancing budgets. Moderate conservatives have not been too bad. But radicals similar to people like Ronald Reagan have generally splurged money.
Whether democrats in the US or social democrats in Norway, you will find both typically spend more money on social programs. However this does not generally increase the debt, because they are also better at raising taxes accordingly. The reason conservatives fail to balance budgets is because they cut taxes far more than they cut costs, thus creating an imbalance.
It is what we saw in Oklahoma e.g. deep tax cuts which cause public finances to be destroyed. This mocking democrats as someone who has no clue about keeping within spending limits seems premature.
Next section is addressing some of the fascination with MMT among some democratic socialists in the US.
Modern Monetary Theory
Modern monetary theory is really just a description of how an economy works. The assumed political implications or actions from that is somewhat different. Jim Roye disparages Modern Monetary Theory as a way of trying to mock the understanding of economics among the more social democratic side of the democratic party:
If you can’t raise enough cash via taxes then they throw in gimmicks like Modern Monetary Theory, make money out of thin air and pretend that doing so won’t have any negative effects.
Modern Monetary Theory (MMT) is in many ways a far more realistic description of the economy than what you normally see. How often do you not see someone talking about “making money” as if they created more value, while all they did was to move money from one place to another?
What MMT says is that the ability of an economy to make things is constrained by its physical assets not by its money supply. What do we mean by that? Let us imagine a simple economy. You got two factories and two farms.
Say all of them produce useful products, and that their output have more value than their input. If one factory and one farm sits idle while half the country is unemployed, then that country is wasting economic resources. The country has the ability to put the unemployed to work in the factory and the farm to make useful things.
Lacking money to pay employees is not an issue. You can always just print that money. That is what MMT says. Money has no intrinsic value. It is just to facilitate trade. Once everybody is employed and all farms and factories are producing we have doubled our economic output. The country is richer from having printed money.
Now somebody says “Let us doing it again!”. So they print the same amount of money, with the intention of spending it to double production. They demand twice as much goods as before. What would happen? Inflation. There are no more people to employ and no more farms and factories. Hence production cannot be increased and printing twice as much money will simply double the price.
Previously doubling the money didn’t double the price, because we doubled the output of goods. When twice the money gets twice as much goods then, prices don’t change. But if we double the money but don’t double the output, then the prices increase.
Thus MMT isn’t magic. MMT just says that as long as there is productive capacity available, you can print money to utilize it. Those who disparage MMT tend to think that MMT is saying you can print money indefinitely. But no prominent MMT advocate is suggesting that. In fact MMT advocates do take inflation serious, but the difference is that MMT advocates want to raise taxes to reduce the money supply rather than raising interest rates. The effect is however mostly the same.
Are American Social Democrats Different From Norwegians Ones?
It is hard to compare political ideologies in countries with vastly different political traditions and starting points. However I will argue that this argument by Jim Roye does not point to an actual difference:
The vast majority of those who are promoting the idea of social democracy here in the U.S. don’t have any of that in their play book. Go read the Green New Deal. There is no wealth fund involved.
A key reason Norwegian social democrats pushed the wealth fund was for multiple reasons:
- To avoid the dutch disease. Massive windfall profits from natural resources can cause destruction of domestic industry by causing domestic currency to increase rapidly in value.
- Knowing Norwegian oil profits was something that would not last.
- Tackle the variable profits from oil.
Thus there is no general Social Democratic idea to have a wealth fund. It only applies to wind falls from profitable natural resources. The US as a country is not in that situation, and hence creating a wealth fund makes no sense. This would also require numerous changes conservatives would never agree to:
- Nationalization of American oil. Setting a high tax rate on oil extraction. Around 80% e.g.
- Creating a national champion owned by government to extract oil income directly on behalf of government.
- Raise taxes in general. In the US taxes are kept so low that government runs no surplus.
But for the most part these choices are not available to the US as a country. Individual American states make these choices. These states are primarily run by conservatives. Hence it is not democrats who are failing to create oil funds and balance budgets, rather it is American conservatives which are failing to creating oil funds and balance budgets.