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.
Historically, one impediment to such a move was the difficulty in accounting on a national scale: governments didn’t even try to measure gross domestic product (GDP) until well into the 20th century.
Although GDP numbers still aren’t perfect—they are subject to periodic revisions, for example—the basic problem has been largely solved. So why not issue shares in GDP now?
Such securities might help assuage doubts that governments can sustain the deficit spending required to keep sagging economies stimulated and protected from the threat of a truly serious recession. In a recent pair of papers, my Canadian colleague Mark Kamstra at York University and I have proposed a solution. We’d like our countries to issue securities that we call “trills”, short for trillionths.
Let me explain: Each trill would represent one-trillionth of the country’s GDP. And each would pay in perpetuity, and in domestic currency, a quarterly dividend equal to a trillionth of the nation’s quarterly nominal GDP.
If substantial markets could be established for them, trills would be a major new source of government funding. Trills would be issued with the full faith and credit of the respective governments. That means investors could trust that governments would pay out shares of GDP as promised, or buy back the trills at market prices.
If trills were issued by Canada, for example, they would pay about 1.50 Canadian dollars in dividends this year, one trillionth of the annual cash flow. The value of the security is derived from the dividend, and might be priced very highly in the market—perhaps at around 150 Canadian dollars—given that country’s strong prospects for growth. Trills issued by the US treasury would pay about $14 (around Rs655) in dividends this year and might fetch $1,400 a trill or more.
The Standard and Poor’s (S&P) 500-stock index currently has a dividend yield of 2.3%. The dividend yield on trills might be much lower, reflecting the substantially higher long-term growth rate of GDP relative to S&P dividends —in real terms, 3.1% versus 1.1% a year, respectively, since 1957.
The market price of trills would fluctuate, reflecting the changing prospects for future GDP growth, just as the market price of stocks reflects the changing prospects for future earnings growth. There is no complexity here. It is all plain-vanilla financing, though unconventional by today’s standards.
There are indications that officials in China are starting to worry about threats to their huge investment in US debt from a possible outbreak of high inflation. The trills, tied to nominal GDP, would protect them. Right now TIPS, or Treasury Inflation-Protected Securities, are offering disappointingly low yields, which may have to be raised to attract more investment. Trills, even at an ultralow dividend yield, would seem more exciting as an inflation-protected prospect, because they represent a share in future economic growth.
The US government is highly unlikely to default on its debt, but even this remote possibility would be virtually eliminated by trills, because the government’s dividend burden would automatically decline in tough times, when GDP declined.
The final statement of the Group of 20 economic meeting in Pittsburgh in September pledged to “establish a pattern of growth across countries that is more sustainable and balanced, and reduce development imbalances”. These imbalances—exemplified by the massive Chinese holdings of US government debt— might not be so worrisome if the investments were financed better.
In fact, issuing shares in GDP might even be viewed as a policy that systematically rectifies a wide array of imbalances in capital flows. People who expect strong economic growth in a country would bid up the price of a claim on its GDP, creating a cheap source of funding for the issuing government. So a country with good investment prospects gets the resources at a low current cost. There would be no need for central bank machinations to try to correct global imbalances.
We already have international equity markets that allow international investments in private firms within countries. But these do not represent the entire economy. Corporate stocks represent implicit claims on after-tax corporate profits, which typically amount to no more than 10% of GDP. Moreover, after-tax corporate profits are a much more slippery concept than GDP, affected as they are by many domestic policies, including taxes, government involvement in labour disputes and even government bailouts —as we now know very well.
Someday, China might issue shares in its GDP, too, and international investors who would love to participate in its economic miracle might put a very high price on them. That could help secure international financing of future growth without relying on the enormous government and enterprise saving that is now suppressing China’s standard of living.
Proposals for securities like trills have been aired many times over the years. I argued for them in Macro Markets, my 1993 book. The Nobel laureate Robert Merton has had similar proposals. Other ideas for GDP-linked securities have been advanced by John Williamson at the Peterson Institute, by a group at the UN Development Programme, by Kristin Forbes of the Council of Economic Advisers under George W. Bush, and by Eduardo Borensztein of the Inter-American Development Bank and Paulo Mauro of the International Monetary Fund.
So far, these proposals have gone unheeded. But the current environment may be more suitable for them.
©2009/THE NEW YORK TIMES
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