Robert Shiller Just Made My Day

Robert Shiller is a prominent economist, associated with the Case-Shiller index for real-estate prices that foresaw and measured the extent of the housing bubble. He also wrote a semi-popular behavioral economics account of the crisis with Akerlof, Animal Spirits. Unrelated to both of those efforts (more or less), in a recent NYTimes piece, Shiller proposes something awesome: a market for “trills”. Alas, Shiller is likely not referencing Star Trek. Rather, Shiller is proposing that countries start financing their debts and deficits with the sales of a new kind of bond-ish-thing, a trill, which is short for a trillionth of GDP. Here’s his explanation:

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.

If trills were issued by Canada, for example, they would pay about 1.50 Canadian dollars in dividends this year, one trillionth of the annual cash flow. The value of the security is derived from the dividend, and might be priced very highly in the market — perhaps at around 150 Canadian dollars — given that country’s strong prospects for growth. Trills issued by the United States Treasury would pay about $14 in dividends this year and might fetch $1,400 a trill or more.

I love this idea on so many levels. The most important way in which I love this proposal is the way that it both relies on and enhances the black box-y-ness of G.D.P.. That is, this type of security only makes sense if G.D.P. is an objective fact (in Porter’s mechanical sense, of not subject to manipulation by the whims of any group). But, Shiller assures us, G.D.P. is an objective fact:

Historically, one impediment to such a move was the difficulty in accounting on a national scale: governments didn’t even try to measure G.D.P. until well into the 20th century.

Although G.D.P. numbers still aren’t perfect — they are subject to periodic revisions, for example — the basic problem has been largely solved. So why not issue shares in G.D.P. now?

We already have international equity markets that allow international investments in private firms within countries. But these do not represent the entire economy. Corporate stocks represent implicit claims on after-tax corporate profits, which typically amount to no more than 10 percent of G.D.P. Moreover, after-tax corporate profits are a much more slippery concept than G.D.P., affected as they are by many domestic policies, including taxes, government involvement in labor disputes and even government bailouts — as we now know very well.

So, what Shiller is saying (along with other things about the relationship between central banks, interest rates, inflation, and the growth of the economy as a whole) is that G.D.P. is a more factish-fact than corporate profits, which are more like artefacts of corporate accounting practices (Enron, anyone? See also Espeland and Hirsch 1990, MacKenzie 2009: ch. 6). But why should we believe that? What makes us think that G.D.P. is not just as much an artefact of its construction – by government actors, to be sure, rather than corporate ones, but since when have economists been unwilling to examine the motives, biases, and failings of government actors just as much (if not more than) corporate ones? Not to mention the fact that the data for G.D.P. comes itself from all kinds of other reporting procedures – the I.R.S. being a big one, for example – and is thus a sort of secondary fact. No single survey produces the G.D.P. (as the Census, more or less, produces the overall population of the U.S., say). Rather, G.D.P. is a kind of hodge-podge, thrown together based on what data is available and can easily be acquired. Admittedly, it’s a fairly stable hodge-podge, having been mostly stable in its definition for the past 60 years*, but it’s still a funny sort of measure, a routine solution to an impossible problem (how much material welfare was produced in an entire nation in a given period of time?) that’s only good enough for-all-practical-purposes. The question is, if we expand the practical purposes (from state planning and development aid to actually being part of the technical infrastructure of a market for government securities), will it still be good enough?

And despite Shiller’s assurances that the “basic problems” have been solved, a great many people disagree, arguing that G.D.P. gets hugely important things wrong like not valuing unpaid housework, the environment, or free information goods. The first two have always been important, and the last is seeming more so everyday. How are we to assure investors that a measure invented in the mid-20th century to make sense of the economic systems of the U.S. and U.K. during the Great Depression and World War II will make sense in Brazil in 2050 or China in 2100? What delicious hubris to think that we have solved such a massive problem in a way that will remain stably solved for the foreseeable future!

Anyway, thanks Robert Shiller, for giving me new food for thought.

* Although we did shift from emphasizing GNP to GDP, a consequential shift in an era of increase global trade, as GDP includes the value of goods and services produced in a country but owned by foreigners (say, a factory owned by an American company in Mexico). I have not yet found good sources that discuss how big a difference this shift has made in overall aggregates or in rankings of nations – does anyone know of any?

Comments are closed.