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Carbon Tax sovereign social security wealth fund 3.0 The macroeconomics of open economies

August 20, 2014

UM Flint Summer principle of economics  201   

net exports equals value of country’s exports minus value of country’s imports

The $250 Billion annual carbon tax would for the most part be invested in the capital markets of the world.As such it would become a part of the macroeconomic concept of net capital outflow.We have proposed a $50 Billion per year nuclear power plant and other renewable energy build program that would produce cash flows from electrical sales for future generations of unborn future social recipients.

The other $200 Billion per year invested in the world economy would according to the text book by N. Gregory Mankiw represent a net capital outflow that must be balanced by the principles of equality of net exports and net capital outflow,


net capital flow equals  net exports

S = I + NCO 

saving  equals domestic investment plus net capital outflow

The carbon tax social security sovereign wealth fund has acquired some foreign asset such as a stock or bond or some physical capital asset.The carbon tax sovereign wealth fund is also a very large national savings fund.according to Mankiw savings = investment + net exports or S= I + NX 


However the $200 Billion capital outflow is not NET and it also must balance as in Gregory Mankiw’s table 1 above.Does the formula in table 1 work in reverse? our $200 Billion might be offset by domestic investments in stocks and bonds and the net capital outflow implies that this would be offset by a reduction in the american balance of trade or reduce the american trade deficit!


Figure 2 from  Mankiw’s chapter 18 The macroeconomics highlights the relationship between national savings and domestic investments and the percent of national capital outflow to GDP, they match. So if $100 Billion per year were “saved’ in the domestic capital markets and $ 100 billion per year in the foreign domestic markets and $ 50 billion per year in power plant construction projects than $100 Billion minus the $50 Billion power plant build yields $50 Billion in additional capital outflow from invested carbon taxes in addition to the $100 Billion already invested in foreign markets

$ 150 Billion total capital outflow per year

this would be a little less than 10% of the trade deficit  or would reduce the trade in balance by this amount.

The $150 billion per year carbon tax net  capital outflow would change the percent of capital outflow as a percent of GDP by less than 1% upwords.


The above chart from UM econ 411 class seems to show a $150 Billion Carbon tax invested as net capital outflow would be a increase of almost 3 % or more of GDP increase.

GDP+Fed spending 1900-1950

the $50 Billion in annual power plant build would represent a small percentage of the federal budget, what would this $50 Billion per year investment do to the Phillips curve? would this cause inflation? Nuclear power plants and solar voltaic panels are high tech high wage trades jobs so this could have a multiplier effect but this is chapter 22 of the Gregory mankiw text.

The nuclear and renewable investment might put pressure on the consumers price index that would make the exchange rate for the USD higher, (e x P ) / P* exchange rate x price index / by foreign price index.Nominal exchange rate is currency trading real exchange rate  products and goods sold at that rate.

The carbon tax sovereign wealth fund and its governance by the federal reserve and the social security trust fund board

The business cycle and the stabilization of the economy would be greatly benefited by the management of the sovereign wealth fund by a partnership of the federal reserve board and the presidentially appointed social security trust fund board.At times the sovereign wealth fund might want to slow its use of carbon tax cash to build power plants domestically and to borrow funds on foreign markets to build power plants,Euro bonds would have the effect of transferring or decreasing net capital outflow if in fact the eurobonds to fund nuclear power plants where bought by foreigners.another idea would to slow down or speed up capital expenditures in the american market to slow or speed up the business cycle and/or inflation.

Nuclear build


Recessions could be dealt with by always having shovel ready investments held in reserve for a surge of building by the sovereign wealth fund as a new mechanism to be used by the federal reserve as long as the capital is deployed for positive cash flow activities.In a true national emergency the sovereign wealth fund could buy bonds from the federal government in order to move aggregate demand and aggregate supply to the right.The sovereign wealth fund could have lent money to the government for the 2009 stimulus and that loaned  money could have gone to non positive cash flow projects to boost employment.Injecting cash through buying a $ trillion of bonds makes more sense then attempting to have shovel ready power plants ready to construct.

The aggregate supply curve for electricity is most likely  in a recession to be affected by a leftward shift of  Aggregate demand another reason not to increase or decrease power plant production/construction but instead to loan sovereign wealth fund cash to the federal government. ideally the amount of the federal debt owed to the sovereign wealth fund should never exceed 5%

So the job of the sovereign wealth fund is to invest in positive cash flow capital, loaning money in a downturn for the government to spend on public works and relief is the job of both.

ramping up construction of such large projects as power plants would produce a effect that lags results over time as to be noticed only after the recession is over, this is a known problem in fiscal policy recognition lag,implementation lag and effectiveness lag.deploying rapidly deployable solar arrays would make more sense. 


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