In a recent New York Times op-ed, economist Robert Shiller (coproducer of the famous housing-price index) recommended that the US government begin to sell claims on fractions of Gross Domestic Product. Besides the practical problems with his proposal, it rests on the premise that the US government owns the entire economy. It will be instructive to parse Shiller’s column to see just how badly his collectivist thinking misleads him.
Shiller’s Proposal
To set the context, let’s quote liberally from Shiller’s piece:
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.…
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 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.
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 G.D.P. as promised, or buy back the trills at market prices.…
The United States 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 G.D.P. declined.
Shiller’s article is problematic for several reasons, which I outline below.
GDP Isn’t Analogous to Corporate Profits
Right off the bat, a major problem with Shiller’s motivation for his proposal is that GDP isn’t really analogous to corporate profits. If we insist on looking at the country as one giant corporation, then GDP would be more analogous to total sales, not net income.1 Indeed, the reason they call it Gross Domestic Product — as opposed to Net Domestic Product — is that the GDP calculation doesn’t subtract out the depreciation needed to produce the year’s total output. If a corporation produces $1 million in final goods for its customers, but wears out $100,000 worth of machinery to do so, its profits (net income) are at most $900,000. Yet the GDP calculation for a country’s economy does not care how much machinery was worn out in producing the finished goods and services going into the figure.
For a country dependent on nonrenewable resources such as oil fields or diamond mines, the linking of GDP with “national profit” is especially flawed. If a corporation buys a field estimated to hold a certain number of barrels of oil, it would be bad accounting for them to then book subsequent oil sales as pure income. If the corporation extracts the oil at a faster rate, for example, there will be less oil available for sale in the future. The extra revenues (from selling more barrels today) overstates net income for the period, because the market value of the field falls as more barrels are removed.
Yet even though a corporation would make an adjustment in its bookkeeping to account for the declining value of its natural assets,2 standard GDP accounting doesn’t do so. If Saudi Arabia increases its pumping, its GDP goes up by the full amount of the extra sales. This is another illustration of the fact that Shiller’s analogy between GDP and corporate profits (or net income) is misleading and hence probably not something he should be writing in op-eds for the lay public.
Selling Shares in USA Inc.?
Besides my pedantic quibbling over the definition of GDP, the more fundamental flaw with Shiller’s analogy is that the government doesn’t own the economy. By contrasting corporate debt with equity, and arguing that selling “trills” would reduce the federal government’s risky reliance on issuing Treasury debt, Shiller gives the clear impression that the US government controls all the resources in the economy; thus, it has the ability to sell shares in “USA Inc.”
Obviously this isn’t right. Beyond contributing to the dangerous myth that all wealth in the economy starts by default in the hands of the government — so that a tax cut is viewed as a “giveaway to the rich” for example — Shiller’s arguments are weak because GDP and tax receipts are not tightly connected in the same way that corporate dividends and corporate profits are tightly connected.
For example, if the government eliminated the corporate and personal income taxes altogether, total tax receipts would probably drop sharply. (Revenues from tariffs and other sources would go way up, but surely wouldn’t fully offset the fall.) Yet scrapping these two taxes would cause GDP to skyrocket. If the government had followed Shiller’s advice beforehand, and thus investors were holding millions of trills, the federal government would then have to default on the trill contracts. Barring the printing press, the only way the government could avoid reneging on the trills would be to order the Treasury to issue more debt in order to make its contractually obligated “dividend payments” to its “shareholders.”
To grasp just how awry Shiller’s analogy is, try a different one: Suppose an electric utility having a monopoly for a certain city wants to build a new power plant there. Rather than issue new bonds to raise the necessary funds, the utility sells legally binding claims that carry the following rule: At the end of every year, the holder of each claim is entitled to receive a $1 payment from the electric company for every $1 million in sales that all businesses in the city reported on their taxes the previous year. The theory is that if business is booming (high sales) in the city, then the demand for electricity should boom as well; therefore the utility will be raking in lots of revenues, making it easy to meet their payment obligations. Now, regardless of whether we think this funding plan is wise or foolish, would anybody describe these odd securities as shares of stock in the utility company?
Conclusion
Shiller and his colleagues have written formal academic papers on these matters, and I am sure that the mathematics are correct given the modeling assumptions. But for all the reasons cited above, the proposal to tie government payments to GDP figures is dubious both in terms of theory and practice.
If Shiller really wants assets that are analogous to corporate stock (as opposed to bonds), it would make much more sense for the government to sell securities entitling the buyer to a percentage of tax receipts, not a percentage of GDP. Besides making for a better analog to corporate stocks, this approach would also provide a healthy incentive by making massive tax cuts less “costly” to the government. Shiller’s proposal, in contrast, gives the government a perverse incentive to raise tax receipts while strangling GDP. Isn’t the government doing a great job of that already?
- 1If we were looking at an economy such as Japan’s, which imported a large quantity of raw materials in order to produce its measured output, then GDP might be more analogous to corporate profits. But in general GDP is closer in spirit to revenues.
- 2In this context the term would be depletion rather than depreciation.
