Two years ago Robert Shiller wrote an interesting proposal for countries to replace their national shares with national equity. He’s not the first to float such an idea. On the economics groups that I’m a part of I’ve seen such a proposal more than once.
On the one hand I like the idea. On the other I think there are serious problems. I like the idea because it might change the way that government spending is perceived. If a government issued equity rather than debt there would be an immediate reframing of the implications of their spending beyond their current revenues — after all, who has ever got upset that a solid company issued too much debt.
I also very much so like the automatic adjustment mechanism that Shiller talks about when he says that dividends on such shares should be a function of outstanding GDP (note that he calls such shares ‘trills’),
Speaking of Greece, what effect could Trills have had during the Great Recession and its aftermath? 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. It would have given Greece a bailout without any international hand-wringing or broken promises.
So, what are the problems? Well, Shiller himself hints at one but doesn’t follow it through. He writes,
If international investors ever acquired a good fraction of a country’s corporate shares, the country would have an incentive to raise the corporate profits tax on those shares or regulate them to lessen their value.
Actually I think Shiller misses a key difference between the difference of the nature of equity and debt here: if I own, say, 20% of a company’s shares, I own 20% of their company. This is not the case with debt. If a single company acquires a large amount of a country’s ‘trills’ then it would have a substantial ownership of that country. What we are talking about here is giving private individuals and corporations the option of buying countries.
To my mind this is an extremely dangerous concept. This would mean that very wealthy individuals or large corporations could, for example, buy up a majority share position in a small country. It would then possess ‘voting rights’ in making decisions about that country’s future. I don’t think I need to spell this out to anyone why this might be a very dangerous concept.
My other problem with Shiller’s proposal is that, while I think it looks nice in retrospect, it can’t really solve our current problems. If, for example, Greece issued national shares right now the price of these would crash when they hit the market. Just issuing shares alone will not restore confidence in a country’s ability to service its payments — whether these be interest payments or dividend repayments.