Junk Bonds
Here’s an idea: Uncle Sam should stage an IPO. And here’s how it would work:
The Federal Government would create two new types of securities: “GDP Shares” and “Revenue Shares”. Each quarter, the GDP Shares would receive dividend payments totaling 0.063% of GDP. The Revenue Shares would receive quarterly dividend payments equal to 0.360% of Federal revenues. Both the dividends and any gains on the sale of the shares would be exempt from all Federal, State, and local taxes.
For FY2012, based upon the GDP and Federal revenues projected in the CBO’s 6/30/10 Long-Term Budget Outlook (LTBO) “Alternate Fiscal Scenario” (AFS) case, these percentages would cause $10 billion in dividends to be paid on the GDP Shares, and another $10 billion to be paid on the Revenue Shares. (By way of comparison, Exxon Mobil currently pays dividends of $8.9 billion/year.) The $20 billion in total dividend payments in FY2012 would amount to 0.719% of Federal revenues, or 0.127% of GDP.
It’s certainly a novel, even amusing, idea. But do we really want Washington getting new tools for getting its hands on other peoples’ money?
I can see “a few” problems with that:
- Who, exactly, has $2.5 trillion to simply lay out, and even if they did (and wanted to lay it on Uncle Sam), what would the disappearance of that money do to the rest of the economy?
- Somehow I don’t think it’s going to be $2.5 trillion, even if that amount is just laying around burning a hole in, say, Red China’s pocket. At a total of $20 billion (even if it’s tax-free) in 2012 dividends, that’s a 0.8% return on investment.
- What’s going to happen with that $2.5 trillion (or whatever the IPO would be worth) hitting the Treasury all at once? Can you say, “Mother of all Stimulii?”
- The author assumes (and you know what that is the mother of) the politicians care about the spread between the “GDP shares” and “revenue shares”.
- Even if they cared about the spread, those same politicians will by nature be more prone to maximize the return on the “revenue shares” by taxing the rest of us to death, and the market will cheer it on. After all, the same dollar increase in GDP and federal revenue will increase the “revenue share” dividend far more than the “GDP share” dividend.
Steve,
I don’t think this is something worth losing sleep over. Shares, like all securities, are VOLUNTARY investments, not compulsory transfer payments like taxes. If people want to invest, let ‘em I’ve always said.
Plus, this has the advantage of a real market based feedback system; in order to encourage the investment (or ongoing investment after the initial offering) the government would be compelled to figure out what policies actually make the economy expand. People won’t buy an investment that doesn’t return a positive yield of some sort, after all. This would also be an astute way to gauge the market’s confidence in future or continued economic growth; if people, especially smart people or institutions with a vested interest in the outcome, aren’t investing, we can be pretty sure of where we’re headed. This is a great way to get real time info; if the shares start selling at a discount or are being shorted, that’s valuable info. If they’re being sold at a premium in the secondary market that’s good news for all of us.
Fundamental problem: GDP shares reinforce the idea that the Federal government, not private citizens, are responsible for economic activity.
How much people will be invest in t he government would depend on expectations of future GDP. Consequently, GDP dividends would create additional incentive for the Federal government to meddle in economic activity in an inevitably failed attempt to boost growth. This is “state capitalism” writ large – and not the least bit Capitalist.
As steveegg mentioned, the revenue dividend creates additional problems. A congress which wants to boost lending to the government in the short term (like their current term of office) can raise taxes to increase short term revenue expectations, and thus inflate the short term value of the revenue “shares”, potentially increasing investment in government (and how much they have to spend).
Anyway, we already have financial tools very similar to these: The dollar and (closely related) Treasury bonds. We can all see how well these are working… There is no mechanism which could prevent the government from simply printing additional shares, as they do with dollars and treasury bonds.
Moreover, there is nothing to prevent them from modifying the procedure to measure GDP to increase or decrease dividends. This is already done with CPI, which is essentially the published value of the dollar.
Such a scheme would create a perpetual taxing system with no financial benefits over traditional debt all while creating another malleable bureaucratic boondoggle. It’s zero-sum less administrative costs.