Who owns the State NOW?

February 23, 2012 9:02 AM

Robert Shiller wants to replace much of existing state debt by selling shares of the “earnings” of national economies, in units of 1/trillon GDP.
posted by T.D. Strange (39 comments total)

The Banksters already control the gov't.
Might as well sell the national GDP to them anyway.
posted by Flood at 9:05 AM on February 23

Why he's absolutely correct! We DO need to make more convoluted securities that a relative handful of people understand! That's never bitten us in the ass before!
posted by Mister Fabulous at 9:06 AM on February 23 [19 favorites]

This is a fantastic idea! Also, in the same spirit, I am now calling all Walmart employees to throw down their chains, pick up a rifle, aim it at management and demand the formation of the People's Democratic Republic of Walmart.
posted by griphus at 9:09 AM on February 23 [2 favorites]

It's Turtles all the way down...
posted by Windopaene at 9:09 AM on February 23

Sorry, I don't believe in buying high and selling low.
posted by michaelh at 9:10 AM on February 23

States aren't supposed to make money? They're not for-profit entities? Um? Uhhh. Is this satire?
posted by hellojed at 9:12 AM on February 23 [2 favorites]

Despite the predictable framing of the post, the issue here really isn't an increase in bank or corporate control of the state. Holders of sovereign are already influential over policy of a state; people are going to stop buying state debt if they do not believe they'll get a return, and governments want them to keep buying debt. Hence, governments implement austerity when increased spending is actually needed.

The problem here is that added volatility of a stock market. We'll see a lot more states follow the path of Greece if a flash crash or some other momentary panic can make credit unavailable to them overnight. The last thing we need right now is to increase the potential influence of over-reactions.
posted by spaltavian at 9:16 AM on February 23 [8 favorites]

The main unintended consequence I can see from this would be countries artificially making their GDP seem very high or very low using accounting tricks. Sort of like how in the film industry, big blockbuster films don't make a profit on paper because the producers don't want to pay out much to anyone who is entitled to a cut of the profits.
posted by burnmp3s at 9:16 AM on February 23 [1 favorite]

Okay, so it looks like the idea is that instead of having a fixed interest rate payout like with government bonds, you wind up with a rate of return that varies depending on GDP.

It seems to me that the biggest difference is the perpetual nature of the security, though (1) that's not a required feature of the plan, and (2) it's not like the US or other countries are planning to retire their debts anytime soon, so a perpetual security and a constant renewal of debt seem pretty much indistinguishable at this point.
posted by Clandestine Outlawry at 9:18 AM on February 23 [2 favorites]

This sounds like my idea for reducing state debt, except I would have the states nationalize money-making businesses instead of vice versa.
posted by DU at 9:27 AM on February 23 [10 favorites]

The problem here is that added volatility of a stock market.

But right now there's already the volatility of the bond market, which is driven by the same factors that would move a stock-ish market in Trills.
posted by beagle at 9:35 AM on February 23 [3 favorites]

Hmmm, so another state-run lottery?
posted by Philosopher Dirtbike at 9:35 AM on February 23 [1 favorite]

The problem here is that added volatility of a stock market.

The problem here is a fundamental misunderstanding of what a nation state is.
posted by SkinnerSan at 9:49 AM on February 23 [9 favorites]

It's Turtles all the way down...

Actually, it's idiots. All the way up and all the way down. Welcome to New World Ponzi Scheme.
posted by doctor_negative at 10:15 AM on February 23 [3 favorites]

Corner the market on Kenya!
posted by pianomover at 10:19 AM on February 23

So, who gets to be on the Board?
Do trill-holders get to vote in proportion to their holdings?
What is the relationship between the Board and the Government?
posted by the Real Dan at 10:20 AM on February 23 [1 favorite]

It would also give states an incentive to target nominal GDP, something that progressives - like the ones who predictably shat on the idea and this thread - should support.
posted by downing street memo at 10:25 AM on February 23

This is fine until $BADGOVERNMENT screws over the country by selling 10% of the GDP then burning it on stupid stuff and/or embezzling it all.

It's a very bad idea because the benefits are 100% front loaded and the results are permanent. That, historically, has roughly equalled thing : bad government :: candy : small child.
posted by jaduncan at 10:27 AM on February 23

I'm sure Robert Shiller is a very smart man, but I read the article and completely failed to understand how it would work.

In his example, a US trill in 2010 would have paid $13 based on the GDP. There would have been a trillion of them. So someone would have to pay out $13 trillion. That's more money than exists in the world.

Ok, so maybe the US doesn't sell all the trills, it holds onto 90%. It still would have to pay $1.3 trillion. Since the US spends more than it collects in taxes, where does this come from? More trills? Once the US has sold all its trills, what happens? Tax receipts do not automagically match GDP.
posted by justkevin at 10:29 AM on February 23

So, umm... the government, all governments really, are supposed to magically be able to pay a "dividend" on the national economy? Is the revenue for this part of existing tax receipts, or is it in addition?

And is there a limit to the number of these sold? Remember, we're talking about a concrete fraction of the GDP here. Collecting 10% of the GDP simply for the purposes of giving it to people who own "trills" seems a completely pointless exercise.
posted by valkyryn at 10:31 AM on February 23

Tl;dr version: this is a stupid idea.
posted by valkyryn at 10:31 AM on February 23

This is one of the MacGuffins in Po Bronson's very amusing novel Bombardiers.
posted by chavenet at 10:32 AM on February 23

So, umm... the government, all governments really, are supposed to magically be able to pay a "dividend" on the national economy? Is the revenue for this part of existing tax receipts, or is it in addition? And is there a limit to the number of these sold?

I'd imagine it would work the same way as bonds presently do - paid out of tax revenues as debt servicing costs. And I don't see any reason why the government couldn't limit the number sold.

Moreover, "collecting [~2]% of GDP simply for the purposes of giving it to people who own [bonds]" is exactly what is happening right now in the US.

Justkevin posits that the US government could hold on to 90% and "someone would have to pay" $13T. But that's money that the government would owe to itself, so no one would actually have to pay anyone for that bit. I think it's vanishingly unlikely that the US government would sell one hundred billion trills (10%), for the same reason it won't sell one hundred trillion dollars worth of bonds this year.

I suspect people are thinking of this as way more revolutionary as it actually is. The idea isn't to sell shares in a country. If I'm understanding it right, the idea is simply to sell government bonds whose payout is tied to GDP. I'm not particularly knowledgeable about finance, though, and I'd welcome any correction.
posted by Clandestine Outlawry at 11:17 AM on February 23 [4 favorites]

Nations, in contrast, rely exclusively on debt.

Nations that refuse to levy taxes rely exclusively on debt. Across much of Northern Europe it is only the debt of other deadbeat nations which is a problem.

Here’s an audacious alternative: Countries should replace much of their existing national debt with shares of the “earnings” of their economies.

Why not just give Goldman Sachs the keys to the Fed and be done with it already?
posted by three blind mice at 11:17 AM on February 23 [1 favorite]

Wait, wouldn't US GDP include the actions of the markets that traded these trills? Isn't this some sort of economic Klein bottle?
posted by stevis23 at 11:31 AM on February 23 [4 favorites]

This seems like a backdoor version of a balanced budget amendment. After all, a government can't keep financing its debt with Trills like it can with bonds; after a certain point, the government will have sold all its income to investors.
posted by Edgewise at 12:04 PM on February 23

I love Mefites, but there's an awful lot of economic ignorance around here. Let's stick to ripping of Kottke.org posts where we know what we're talking about.
posted by C.A.S. at 12:28 PM on February 23 [2 favorites]

I'd love to hear more specifics, C.A.S. I was curious and interested when I read this, but I lack the grounding to recognize whether this is a feasible idea or not -- or even, for that matter, whether it was suggested as a feasible idea or as a thought game.
posted by roll truck roll at 12:44 PM on February 23

The main unintended consequence I can see from this would be countries artificially making their GDP seem very high or very low using accounting tricks.

Um, in exactly what way would this be different, burnmp3s?

I mean, we have some faith in the US & UK GDP statements, perhaps, but PRC?
posted by IAmBroom at 12:47 PM on February 23 [1 favorite]

Mister Fabulous: "We DO need to make more convoluted securities that a relative handful of people understand! "

spaltavian: "The problem here is that added volatility of a stock market."

jaduncan: "This is fine until $BADGOVERNMENT screws over the country by selling 10% of the GDP then burning it on stupid stuff and/or embezzling it all."

valkyryn: "So, umm... the government, all governments really, are supposed to magically be able to pay a "dividend" on the national economy?"

All the above concerns apply just as well to the bond market we already have. It seems to me the primary improvements are:

1. It contains a workout pre-agreement. This is similar to a plan he's trotted out before in Subprime Solution called "continuous workout mortgages", which would help keep people in their homes by having predefined mortgage adjustments based on things like job loss. Except here, we're thinking of massive decreases in GDP. Now that I've read the article, I can confirm he's imagining a less violent resolution to the Greece situation.

2. It aligns the incentives of the lenders with the citizens of the nation. Imposing short term austerity measures harms the trill holders just as bad as the citizens. So the perpetuity is probably the best approach.

3. Trill futures would essentially be predictions of long term growth of a nation.

4. Built in inflation protection. We already have TIPS, this is just another method of getting that. This comes with the same incentives to understate GDP as already exists for inflation, then.

5. I think it'd be hilarious to require politicians to divest their investment assets and buy trills with them as part of serving their term.

As for whether this is a serious proposal or mere gedankenexperiment, it's hard to say. I haven't seen anyone adopt some proposals from his books, but the Case-Shiller index is a pretty popular one even if there aren't contracts on it yet.
posted by pwnguin at 1:12 PM on February 23 [4 favorites]

All the above concerns apply just as well to the bond market we already have.

Are bond markets as volatile as stocks? I know that speculation plays a role in bonds as well, but it seems like that's a bigger concern in stocks. Is this not the case? I'm sure this has been studied at some point, but I am not an expert.
posted by spaltavian at 1:19 PM on February 23

Are bond markets as volatile as stocks?

What's the right level of volatility? And which bonds? Take a look at the 10 year treasury bond market. The US is a relatively boring market. Greece and Ireland (and friends) though, I imagine are bumpy rides. Same goes for GM and other bonds.

It's been argued by some (Nassim Nicholas Taleb I think) that the repayment risk is hidden in with interest payments, and that risk is poorly estimated, so we should prefer more small variations in price than apparent stable prices subject to random rare total writeoffs.
posted by pwnguin at 1:37 PM on February 23

Oh, and to address your main point, spaltavian, I don't think market volatility would directly cause a crisis since these are perpetuities. Once issued, the only thing that must be done is measure and pay out a fraction of GDP. There's no moment of crisis certain governments are facing, where they owe face value of the bond, and can only afford that by selling new bonds. No crisis where a big chunk of debt rolls over from a low interest rate to an expensive one, and suddenly money must be raised or risk default. It's like how when Accenture's stock was a penny during the flash crash didn't mean the impending doom of the IT consulting firm.

So I guess that's a plus--no need to constantly run treasury auctions unless you want to adjust the debt level. And you can just retire debt by buying it in open market operations.
posted by pwnguin at 2:04 PM on February 23

> that progressives - like the ones who predictably shat on the idea and this thread

So wait, what are you saying? That it's a good idea (for some reason you aren't telling us) and "progressives like to shit on things"?

Or that progressives are sufficiently smart that they can tell a crazy idea when they see it every time?
posted by lupus_yonderboy at 2:24 PM on February 23

We DO need to make more convoluted securities that a relative handful of people understand!

Hehe, the current state of finance politics makes me think of Formula One racing after the Lotus 79.
posted by rhizome at 3:14 PM on February 23

Ach, reading the article a second time just makes it worse. The idea is so patently ridiculous, it seems to fail every common sense test I can think of, even the "Where does the money come from?" issue.

pwnguin:

> All the above concerns apply just as well to the bond market we already have.

You are wrong three out of four times when you are correcting others here.

> 1. We DO need to make more convoluted securities that a relative handful of people understand!

It is absolutely correct that valuing a country's stock would be much harder to understand than valuing their bonds.

Bonds are fixed-income securities, and are literally the easiest possible securities to understand. If you buy a 10-year, 10% bond for $1, you give someone a dollar today, then you get a nickel every six months for ten years, when you get your $1 back and another nickel's interest.

The math to value them is a little more difficult but nothing a smart highschooler couldn't understand.

> 2. "The problem here is that added volatility of a stock market."

Also true.

Bonds are intrinsically less volatile than stocks on the corresponding entity - again, they are fixed income securities. Bonds have exactly two risks - interest rate risk, and risk of default. Stocks suffer from exactly the same issues as bonds, but you also have the huge issue of a company's performance, something that has very little effect indeed on a company's bonds unless the company starts doing extremely badly.


> 3. " "This is fine until $BADGOVERNMENT screws over the country by selling 10% of the GDP then burning it on stupid stuff and/or embezzling it all."

Here I agree with pwnguin: you could do that just as well with bonds.


> 4. "So, umm... the government, all governments really, are supposed to magically be able to pay a "dividend" on the national economy?"

This is a huge objection - I can't see how you can get past it.

Dividends are absolutely NOT the same as interest payments on bonds - they're part of earnings. What could "earnings" possibly mean for a country? Most of the revenue for a country comes from taxes of one sort or another. "Earnings" would then seem to mean that the country collected more money in taxes than it spent, right? So to improve "dividends" a country should increase its taxes and provide fewer services?

Schiller proposes that the dividend be nothing to do with earnings, but instead be a trillionth of the GDP of the country. So, where do these dividends come from? Note that the country as a whole produced that GDP, but the government, a separate entity entirely, is required to pay out on that GDP.

Where does the money come from? More taxes - after the fact?! (Because you won't know what the GDP is until quite a while after the year is over.) Bonds?


Another misleading data point:

> Take a look at the 10 year treasury bond market.

Those are interest rates, not prices, and do not at all convey what would have happened to your money if you had invested in the bond market.

Let's look at the most dramatic 20-year period in that graph. A 15% 10-year note that you purchased at the lowest point in 1983 with face value $1000 would be worth about $1800 if interest rates dropped to 5%, as they did by 2003. (**)

On the other hand, if you'd purchased the Dow Jones in 1983 and sold it in 2003, you were buying it at almost exactly $1000 and selling it at almost exactly $8000.

And the comparison only gets worse as you move out toward Dow 14000.

And yet another.

> Oh, and to address your main point, spaltavian, I don't think market volatility would directly cause a crisis since these are perpetuities.

NO, stocks are not "perpetuities", which are interest-bearing vehicles, again, fixed-income securities, but simply ones with an "infinite" term.

(And there's a very good reason that there are almost no perps left in the world - it's because modern governments and modern investors are both extremely wary about obligations with an infinite time period.)


(* - 10-year treasuries are notes, not bonds...)
(** - yes, I know your original note would be long gone - but you'd be rolling them over. Yes, I know there are dividends being paid - that's nothing to do with volatility.)
posted by lupus_yonderboy at 3:28 PM on February 23

A more rigorous articulation of the concept of Trills is in this 2009 white paper by Schiller & Kamstra. One of the interesting things about the concept is that it would discourage slash-and-burn politics such as vote-buying tax cuts or ideologically-motivated defunding of government functions - refusals to invest in infrastructure rt or education, for example. While Politicians could still engage in such efforts, underfunding that appeared to hurt the long term competitiveness and sustainability of an economy would be punished by the market faster than the economy would be punished by the implementation of the policy.
posted by anigbrowl at 4:20 PM on February 23 [5 favorites]

GDP bonds are a really bad idea, part 3

Can countries issue equity? Greece is making a stab at it, giving its bondholders GDP warrants which start paying out "in the event the Republic's nominal GDP exceeds a defined threshold". Chances are, the market won't give the warrants much value; they're more symbolic, really, of Greece's good faith...

This was a bad idea when Jonathan Ford proposed it in August 2009, it was a bad idea when Shiller wrote about it in December of that year, and it's an even worse idea now, because Shiller's decided to kick it up another five notches or so: "Greece's real GDP fell 7.4% in 2010. If its Trills were leveraged substantially—say, five to one—then the dividend paid on them would have fallen by about 40%. This would have done much to mitigate the crisis, making it easier for Greek taxpayers to bear."

This is almost literally incomprehensible. I spent a long time on the phone today with Shiller's co-author Mark Kamstra, and even he had no real idea what Shiller was talking about here... while Trills are designed to respond to news about the economy, in fact they would be an incredibly noisy and volatile instrument reacting mainly to changes in long-term interest rates... But what if I'm wrong and Kamstra's right, and economic news is more important than discount rates? At that point, measuring GDP accurately becomes extremely important... Except, you really can't measure GDP to within that degree of accuracy...

The only people welcoming GDP bonds with open arms would be in futures markets, where traders love volatility and try to make lots of money off it. Which, of course, is the whole reason that Shiller is pushing this idea so aggressively. Shiller is a principal in a company called MacroMarkets, which exists to create "innovative financial instruments to facilitate investment and risk management" — a/k/a volatile new derivatives.

posted by kliuless at 9:54 AM on February 24 [3 favorites]

Kliuless, quiet an interesting story analysis. Also of interest is the first comment:

Felix – you misrepresent me, and I am disappointed. I did not speak of Bob’s experience with macro markets, I did not speak definitely on some of Bob’s ideas because I do not speak for him, not because I have “no real idea what Shiller was talking about here” and your implication that Bob’s monetary interests drive him only reveal a cynic’s perception of the world, and is no substitute for actual understanding of this effort.

Posted by MarkKamstra

Actually, most of the comments are pretty tame and well thought out, despite the shrill headline.
posted by pwnguin at 7:01 AM on February 27