Corporations use a combination
of debt and equity to
finance their investments
and operations. Nations, in
contrast, rely exclusively on
debt. When a nation’s economy stalls and
its debt continues to grow—you may have
noticed this happening a lot recently—disaster
looms for the country’s taxpayers.
This is why Europe is in turmoil right now.
But things don’t have to work this way.
Here’s an audacious alternative: Countries
should replace much of their existing
national debt with shares of the “earnings”
of their economies. This would allow them
to better manage their financial obligations
and could help prevent future financial crises.
It might even lower countries’ borrowing
costs in the long run.
National shares would function much
like corporate shares traded on stock exchanges.
They would pay dividends regularly.
Ideally, they’d be perpetual, although
a country could always buy its shares back
on the open market. The price of a share
would fluctuate from day to day as new
information about a country’s economy
came out. The opportunity to participate
in the uncertain economic growth of the
issuer might well excite, rather than scare
off, investors—just as it does in the stock
Mark Kamstra of York University and
I have mapped out how these new national
shares could work. We propose that they
pay a quarterly dividend equal to exactly
one-trillionth of a country’s quarterly
gross domestic product, the
simplest measure of national
earnings. We could call
these shares “Trills.”
A Trill issued by
the U.S. government, for instance, would
have paid $13.22 in 2010, in four quarterly
installments. The payoff in future years
would vary, of course. If the economy surprised
us on the upside, dividends would
go up; if it slumped, dividends would fall.
The market would determine the price
of a Trill, which would be volatile. It would
depend not only on the most recent dividend
but also on investors’ expectations
for the future, which can change minute to
minute. There’s some evidence that a Trill
might often be expensive relative to the
dividend, which would be good for the government
issuer. Shares of many U.S. corporations
and 10-year U.S. Treasury notes
now sell for over 50 times their annual
dividend. Since the growth rate of real U.S.
GDP has been higher than that of real S&P
500 earnings in the past (3.1% annual GDP
growth versus 2.5% annual S&P 500 growth
over the past half century), Trills might very
well sell for a multiple higher than 50, too.
The advantage of keeping shares equal
to a perfect trillionth of the economy is that
people will know exactly what they are getting:
One-trillionth of a country is real and
easy to understand. That kind of clarity encourages
trust that governmental shenanigans
will not compromise the obligation.
An investor who bought one Trill from
each country would have effectively invested
in the entire world for a perfectly
diversified portfolio. Moreover, Trills might
plausibly appeal to international investors
even more than corporate shares do
because Trills would avoid the problem of
moral hazard. Here’s why: 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. If a country did
so, it would benefit without technically
breaking any promises. The issuance of
Trills, however, would involve a clear and
unambiguous promise of share in value to
international investors. If the shares paid
dividends in the country’s domestic curG