Does the Government Own the Whole Economy?

Robert Murphy
Campaign For Liberty
Wednesday , January 13th, 2010

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?