Editorial: The Legacy Fund and the power of compound interest
So, which would you rather have: a million dollars?
Or a checkerboard that has one penny on the first square, two pennies on the second, four pennies on the third and so on, doubling each time through the 64 squares?
Your answer probably should be, "It depends." And what it depends on is whether you mind losing your checkerboard, given that by the end of the penny sequence, it's going to be buried under 18 quintillion pennies.
That's enough pennies to cover all of North Dakota in stacks several inches thick. In dollars, it would be $180 quadrillion, which is something north of 1,000 times the net worth of the entire United States.
The "pennies on a checkerboard" problem is a classic illustration of the power of compound interest. And we're picturing North Dakota here for a reason, because North Dakota this very week will be wrestling with a compound interest problem of its own.
No, it's not a problem that involves quadrillions of dollars. But multiple billions are at issue for sure. And in North Dakota, that's real money, so residents should be very much aware of the high stakes.
Here's the question: What should North Dakota do with the interest from the Legacy Fund?
The state's facing a shrunken revenue stream, as residents know. So, the strong temptation in Bismarck will be to take the earnings from the fund and spend them, as the Legacy Fund law allows.
But before the lawmakers do this, they should understand that they're in effect swiping the first penny off of the checkerboard. No first penny on the first square means no two pennies on the second square—and no 18 quintillion pennies burying the board on square 64.
Again, we're not dealing with that kind of growth.
But we are dealing with this kind:
If the Legislature now and in the future spends all of the fund's earnings, then the Legacy Fund will grow to about $20 billion in 2060, the Great Plains Institute reported this week.
In contrast, if the Legislature keeps its hands off the fund and reinvests the earnings, the difference is profound. Eighty billion dollars' worth of profound, to be exact.
For a "Reinvest all earnings" fund would contain about $102 billion in 2060.
By comparison, Gov. Doug Burgum's executive budget suggests that North Dakota's state government should spend about $4.6 billion in the upcoming biennium.
Clearly, having $102 billion in the bank would be a hugely important nest egg, and North Dakotans would enjoy great feelings of security as they watched their fund grow between now and 2060.
In all probability, the Legislature will chart a course between the spend-it and save-it extremes. But as the lawmakers do, they should know what's at stake—so North Dakotans can make an informed decision on how fast they want their own "pennies on the checkerboard" to grow.
-- Tom Dennis for the Herald