Tuesday, December 29, 2009


Robert Shiller resurrects an impractical technocratic ideas--selling equity shares in the government (with a dividend payment as a certain portion of GDP):
CORPORATIONS raise money by issuing both debt and equity, the latter giving investors an implicit share in future profits. Governments should do something like this, too, and not just rely on debt.

Borrowing a concept from corporate finance, governments could sell a new type of security that commits them to paying shares in national “profit,” as measured by gross domestic product.
We’d like our countries to issue securities that we call “trills,” short for trillionths...

Each trill would represent one-trillionth of the country’s G.D.P. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal G.D.P.

This idea has gotten a lot of criticism, and there would be serious implementation problems getting it in place. It's also probably better suited for Third World countries with trouble borrowing debt rather than for a country which can borrow almost for free.

Still, there are some huge upsides for the government--which Shiller strangely doesn't mention. The Federal Debt is ~12 trillion, against a GDP of ~14 trillion. Paying off the interest and scheduled payments on that debt comes out to about ~700 billion dollars a year--and quickly growing. This makes up one of the largest portions of the federal budget.

Instead, the government could float stocks instead of debt. Swapping out all debt for shares would leave government liabilities the same, but now the government pays out a dividend that's about a constant one percent of GDP a year--or 140 billion dollars a year.

The downside is that the government pays out that one percent in perpetuity, and inflation can't erode it away. The upside is that the government could cut scheduled payments to service its liabilities by over 500 billion a year. That's huge, and very welcome at a time when the government needs about that much annually to curb looming deficits. Or, having cut the deficits some other way, Washington could then turn around and devote that 500 billion towards buying back shares over time. Freed up dividend payments can then go towards buying back more debt and that 12 trillion can be wiped out in about 20-30 years.

I don't want to discount the downsides here--the largest one being that such a cheap source of funding may go towards a spending binge rather than fiscal prudence. But I think a lot of the opposition to this proposal is driven by status quo bias. Suppose we had a plan in place like the above. I think very few people would argue that the government should instead take on trillions in debt and pay over half a trillion dollars a year more in interest payments. It sounds a little crazy, but so did the very idea of stocks not so long ago. This is one financial innovation that could have a huge impact.

As an added bonus, having a concrete equity as a proxy for GDP allows the Fed to better target monetary policy to match investors' expectations, rather than using lagging indicators.

1 comment:

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Readers Quotient
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