{"id":184500,"date":"2010-01-15T04:28:20","date_gmt":"2010-01-15T09:28:20","guid":{"rendered":"http:\/\/nw0.eu\/2010\/01\/15\/does-the-government-own-the-whole-economy.html"},"modified":"2010-01-15T04:28:20","modified_gmt":"2010-01-15T09:28:20","slug":"does-the-government-own-the-whole-economy","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/184500","title":{"rendered":"Does the Government Own the Whole Economy?"},"content":{"rendered":"
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\n
\n
\n

Robert Murphy
\nCampaign For Liberty<\/a>
\nWednesday , January 13th, 2010<\/p>\n

In a recent New York Times<\/em> op-ed<\/a>,
\neconomist Robert Shiller (coproducer of the famous housing-price index)
\nrecommended that the US government begin to sell claims on fractions of
\nGross Domestic Product. Besides the practical problems with his
\nproposal, it rests on the premise that the US government owns the
\nentire economy. It will be instructive to parse Shiller\u2019s column
\nto see just how badly his collectivist thinking misleads him.<\/p>\n

Shiller\u2019s Proposal<\/h2>\n

To set the context, let\u2019s quote liberally from Shiller\u2019s piece:<\/p>\n

\n

Corporations raise money by issuing both debt and
\nequity, the latter giving investors an implicit share in future
\nprofits. Governments should do something like this, too, and not just
\nrely on debt.<\/p>\n

Borrowing a concept from corporate finance, governments could sell a
\nnew type of security that commits them to paying shares in national
\n\u201cprofit,\u201d as measured by gross domestic product\u2026.<\/p>\n

Such securities might help assuage doubts that governments can
\nsustain the deficit spending required to keep sagging economies
\nstimulated and protected from the threat of a truly serious recession.
\nIn a recent pair of papers, my Canadian colleague Mark Kamstra at York
\nUniversity and I have proposed a solution. We\u2019d like our
\ncountries to issue securities that we call \u201ctrills,\u201d short
\nfor trillionths.<\/p>\n

Let me explain: Each trill would represent one-trillionth of the
\ncountry\u2019s G.D.P. And each would pay in perpetuity, and in
\ndomestic currency, a quarterly dividend equal to a trillionth of the
\nnation\u2019s quarterly nominal G.D.P.<\/p>\n

If substantial markets could be established for them, trills would
\nbe a major new source of government funding. Trills would be issued
\nwith the full faith and credit of the respective governments. That
\nmeans investors could trust that governments would pay out shares of
\nG.D.P. as promised, or buy back the trills at market prices\u2026.<\/p>\n

The United States government is highly unlikely to default on its
\ndebt, but even this remote possibility would be virtually eliminated by
\ntrills, because the government\u2019s dividend burden would
\nautomatically decline in tough times, when G.D.P. declined.<\/p>\n<\/blockquote>\n

Shiller\u2019s article is problematic for several reasons, which I outline below.<\/p>\n

GDP Isn\u2019t Analogous to Corporate Profits<\/h2>\n

Right off the bat, a major problem with Shiller\u2019s motivation
\nfor his proposal is that GDP isn\u2019t really analogous to corporate
\nprofits. If we insist on looking at the country as one giant
\ncorporation, then GDP would be more analogous to total sales<\/em>, not net income.[1]<\/a> Indeed, the reason they call it Gross<\/em> Domestic Product \u2014 as opposed to Net<\/em> Domestic Product<\/a>
\n\u2014 is that the GDP calculation doesn\u2019t subtract out the
\ndepreciation needed to produce the year\u2019s total output. If a
\ncorporation produces $1 million in final goods for its customers, but
\nwears out $100,000 worth of machinery to do so, its profits (net
\nincome) are at most $900,000. Yet the GDP calculation for a
\ncountry\u2019s economy does not care how much machinery was worn out
\nin producing the finished goods and services going into the figure.<\/p>\n

For a country dependent on nonrenewable resources such as oil fields
\nor diamond mines, the linking of GDP with \u201cnational profit\u201d
\nis especially flawed. If a corporation buys a field estimated to hold a
\ncertain number of barrels of oil, it would be bad accounting for them
\nto then book subsequent oil sales as pure income. If the corporation
\nextracts the oil at a faster rate, for example, there will be less oil
\navailable for sale in the future. The extra revenues (from selling more
\nbarrels today) overstates net income for the period, because the market
\nvalue of the field falls as more barrels are removed.<\/p>\n

Yet even though a corporation would make an adjustment in its
\nbookkeeping to account for the declining value of its natural assets,[2]<\/a>
\nstandard GDP accounting doesn\u2019t do so. If Saudi Arabia increases
\nits pumping, its GDP goes up by the full amount of the extra sales.
\nThis is another illustration of the fact that Shiller\u2019s analogy
\nbetween GDP and corporate profits (or net income) is misleading and
\nhence probably not something he should be writing in op-eds for the lay
\npublic.<\/p>\n

Selling Shares in USA Inc.?<\/h2>\n

Besides my pedantic quibbling over the definition of GDP, the more
\nfundamental flaw with Shiller\u2019s analogy is that the government
\ndoesn\u2019t own the economy. By contrasting corporate debt with
\nequity, and arguing that selling \u201ctrills\u201d would reduce the
\nfederal government\u2019s risky reliance on issuing Treasury debt,
\nShiller gives the clear impression that the US government controls all
\nthe resources in the economy; thus, it has the ability to sell shares
\nin \u201cUSA Inc.\u201d<\/p>\n

Obviously this isn\u2019t right. Beyond contributing to the
\ndangerous myth that all wealth in the economy starts by default in the
\nhands of the government \u2014 so that a tax cut is viewed as a
\n\u201cgiveaway to the rich\u201d for example \u2014 Shiller\u2019s
\narguments are weak because GDP and tax receipts are not tightly
\nconnected in the same way that corporate dividends and corporate
\nprofits are tightly connected.<\/p>\n

For example, if the government eliminated the corporate and personal
\nincome taxes altogether, total tax receipts would probably drop
\nsharply. (Revenues from tariffs and other sources would go way up, but
\nsurely wouldn\u2019t fully offset the fall.) Yet scrapping these two
\ntaxes would cause GDP to skyrocket. If the government had followed
\nShiller\u2019s advice beforehand, and thus investors were holding
\nmillions of trills, the federal government would then have to default
\non the trill contracts. Barring the printing press, the only way the
\ngovernment could avoid reneging on the trills would be to order the
\nTreasury to issue more debt in order to make its contractually
\nobligated \u201cdividend payments\u201d to its
\n\u201cshareholders.\u201d<\/p>\n

To grasp just how awry Shiller\u2019s analogy is, try a different
\none: Suppose an electric utility having a monopoly for a certain city
\nwants to build a new power plant there. Rather than issue new bonds to
\nraise the necessary funds, the utility sells legally binding claims
\nthat carry the following rule: At the end of every year, the holder of
\neach claim is entitled to receive a $1 payment from the electric
\ncompany for every $1 million in sales that all<\/em> businesses in
\nthe city reported on their taxes the previous year. The theory is that
\nif business is booming (high sales) in the city, then the demand for
\nelectricity should boom as well; therefore the utility will be raking
\nin lots of revenues, making it easy to meet their payment obligations.
\nNow, regardless of whether we think this funding plan is wise or
\nfoolish, would anybody describe these odd securities as shares of stock<\/em> in the utility company?<\/p>\n

Conclusion<\/h2>\n

Shiller and his colleagues have written formal academic papers on
\nthese matters, and I am sure that the mathematics are correct given the
\nmodeling assumptions. But for all the reasons cited above, the proposal
\nto tie government payments to GDP figures is dubious both in terms of
\ntheory and practice.<\/p>\n

If Shiller really wants assets that are analogous to corporate stock
\n(as opposed to bonds), it would make much more sense for the government
\nto sell securities entitling the buyer to a percentage of tax receipts,
\nnot a percentage of GDP. Besides making for a better analog to
\ncorporate stocks, this approach would also provide a healthy incentive
\nby making massive tax cuts less \u201ccostly\u201d to the government.
\nShiller\u2019s proposal, in contrast, gives the government a perverse
\nincentive to raise tax receipts while strangling GDP. Isn\u2019t the
\ngovernment doing a great job of that already?<\/p>\n

\n
Notes<\/big><\/big><\/h5>\n

[1]<\/a>
\nIf we were looking at an economy such as Japan\u2019s, which imported
\na large quantity of raw materials in order to produce its measured
\noutput, then GDP might be more analogous to corporate profits. But in
\ngeneral GDP is closer in spirit to revenues.<\/p>\n

[2]<\/a> In this context the term would be depletion<\/a><\/em> rather than depreciation<\/em>.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n

<\/div>\n

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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 […]<\/p>\n","protected":false},"author":2604,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-184500","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/184500","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/2604"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=184500"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/184500\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=184500"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=184500"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=184500"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}