The United States Should Stage an IPO

Forget GM. The Federal government itself should do an IPO-two of them, actually.

Since the economy crashed in late 2008, the Federal government has been funding much (37.4% in FY2010) of its spending by issuing debt. It is time for it to sell equity. The purpose of doing this would not just be to obtain money, although it is likely that a lot of money could be raised in this way, and at very low cost. Rather, the big benefit of having publicly traded equity shares in the Federal government would be to provide real-time, market-based, "dynamic analysis" of economic policy actions and proposals-starting with those of Obama's "Deficit Commission".

Here is an example of how the proposed IPOs could 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.

The proceeds from the sale of the GDP Shares and the Revenue Shares could be spectacular. The securities would possess a unique combination of attributes, including inflation protection, freedom from the risk of default, freedom from all taxes, ultimate diversification, and considerable potential for appreciation based upon future economic growth.

If the markets valued the new shares based upon the "present value to the infinite horizon" (PVIH) of future GDP and future Federal revenues, the two IPOs could bring in as much as $2.5 trillion. (By way of comparison, total Federal debt held by the public is $9.2 trillion right now.) And, this $2.5 trillion number assumes a somewhat pessimistic economic outlook, with the PVIH calculations based upon the GDP growth rates assumed in the 2010 Social Security Trustees report and the "tax take" (Federal revenues as a percent of GDP) assumed in the CBO LTBO AFS case.

The impact on the Federal deficit of the sale of these new securities would be positive in the short term, because the dividends would be less than the interest that would have otherwise been paid on Treasury debt.

The new securities would represent a direct claim on future GDP and future Federal revenues. Accordingly, the prices of these shares would fluctuate based upon the market's constantly changing projections regarding these aggregates. The movements in the prices of the new shares would provide invaluable feedback on economic policy actions and proposals.

Positive economic news would cause the price of the GDP Shares to rise. Developments that promised to increase Federal revenues would cause the Revenue Shares to go up. The ratio between the market prices of the Revenue Shares and the GDP Shares would provide feedback on the outlook for the Federal tax take. The difference between the prices of the two shares would provide a proxy for the economic well being of the rest of the nation (America exclusive of the Federal government).

Trading in the GDP Shares and the Revenue Shares would provide a powerful check on counterproductive proposals regarding taxes, trade, regulations, and monetary policy. The market prices of the shares would provide instant feedback on economic policy ideas, both good and bad.

This new market data would be invaluable for evaluating the merits of various economic proposals, including deficit reduction plans. The deficit reduction plan contained in the "Co-Chairs' Proposal" (CCP) released by Obama's Deficit Commission would be found severely wanting if subjected to this market test.

The CCP could be best characterized as "earnest, but clueless". This is because it ignores what is by far the most important factor impacting Federal finances, namely the rate of economic growth. The CCP basically applies "static analysis" to the CBO's LTBO AFS case. Following the LTBO, the CCP assumes that the U.S. economy will quickly settle down to a long-term average annual real GDP growth rate of about 2%. It also assumes that tax changes will not affect economic growth. This last point is manifestly untrue, as the market action in the GDP Shares and the Revenue Shares would quickly illustrate.

As an aside, economic plans based upon 2% growth are like meal plans based upon 300 calories a day. The details don't really matter-you're going to starve to death in any case. The U.S., which has grown at an average real rate of more than 3.5% for the past 100 years, cannot survive on 2% economic growth. For one thing, unemployment and underemployment-already unacceptable-would keep rising.

Because the expected rate of economic growth would drive the market value of both the GDP Shares and the Revenue Shares, on days when news events indicated that "austerity" proposals (e.g., the CCP) were advancing, the prices of these shares would fall. On the other hand, if "pro-growth" plans seemed to be making headway, prices for both shares would rise.

The markets for GDP Shares and Revenue Shares would push policymakers to evaluate deficit reduction proposals in the logical way, which is on the basis of the PVIH of GDP and Federal revenues. The PVIH of GDP is a measure of the nation's total financial capacity to meet the challenges facing it. The PVIH of Federal revenues quantifies the financial strength of the Federal government. The PVIH methodology also highlights the trade-off between economic growth and tax take.

While these PVIH numbers can and should be calculated for various policy alternatives, the market prices of the GDP Shares and the Revenue Shares would provide a "reality check" on the calculations. The market as a whole, which comprises everyone, will always have more information and greater insight than a few MBAs toiling away at the CBO.

The CCP proposes to raise the Federal government's tax take from its historic average of 18.5% of GDP to 21.0% of GDP. In terms of the PVIH of Federal revenues, this enormous tax increase would be completely neutralized by a reduction in America's long-term rate of economic growth of just 0.1 percentage point. If such a proposal were to advance, the market price of the Revenue Shares would fall, quickly exposing the futility of this approach.

The PVIH methodology suggests a more promising deficit reduction plan: eliminate the corporate income tax, the capital gains tax, and the death tax. If these huge pro-growth tax cuts, which would cut the Federal tax take by three percentage points, increased the GDP growth rate by just 0.21 percentage points, they would not only "pay for themselves", but also (on a PVIH basis) achieve the Federal revenue objectives contained in the CCP. Price movements in the GDP Shares and the Revenue Shares would provide market confirmation that these tax cuts were expected to increase the PVIHs of GDP and Federal revenues. They would also provide the best possible estimates of the magnitudes of the improvements.

While it makes sense to cut wasteful spending now, deficit reduction proposals that involve tax changes should be deferred until the Federal government goes public.