Now that famed Yale University economist Robert Shiller has won the Nobel Prize in economics, maybe his work in Canada will get a bit more notice. Sure, it hasn’t been as influential as his insights into the long-term predictability of stock prices in relation to dividends for which he was recognized by the Nobel committee, nor is it as sexy as Irrational Exuberance, his seminal bestseller on asset bubbles that in successive editions predicted both the dot-com crash and the U.S. housing crash. But maybe now we’ll give “the Trill” its due.
Upon the announcement last week of Mr. Shiller’s Nobel win (along with Eugene Fama and Lars Peter Hansen), the C.D. Howe Institute issued a congratulatory news release that was more than happy to point out that Mr. Shiller had, in fact, worked with the Toronto-based think tank. It reminded us of a 2008 paper Mr. Shiller co-authored with York University finance professor Mark Kamstra, which proposed an innovative bond product for the Canadian government.
The proposed bond would pay a dividend tied directly to how much Canada’s nominal gross domestic product (GDP) grew each year. They named it the Trill because its annual dividend would equal to one-trillionth of Canada’s GDP. (In 2012, that would have equated to a payout of $1.84 for each Trill unit.)
Since government debt is, at its root, “a claim on future labour income” (as the authors put it), the Trill would give investors their first real way to participate in labour income, which accounts for about two-thirds of the national GDP. (Equity markets, by contrast, give investors a way to participate in corporate income, which accounts for only about 20 per cent of GDP.) Over the long term, as the economy grows, Trill investors benefit directly from that growth. And because Trills would be based on nominal GDP (i.e. including the contribution from inflation), Trills would be essentially inflation-protected – their annual returns would encompass a combination of both inflation and real GDP growth.
There was a key attraction for the government, too. Since Trill dividend payouts would rise and fall only to the extent that GDP rose and fell, the payouts would shrink in slow economic times. Trills would, in effect, cushion the government budget against unforeseen economic fluctuations.
At the time of the 2008 Shiller/Kamstra paper, Canada’s Finance Department said all the nice polite things about reading it and thinking about it, while noting that it didn’t love the idea of GDP-linked bonds. The concerns seemed to be largely centred on the possible disruptions the new product might pose to existing Government of Canada bond programs. Specifically, Trills would compete for investor attention with the government’s popular Real Return Bonds, as both products shield investors from inflation. And given the run of popularity that Canadian government bonds of all stripes enjoyed since the financial crisis (the markets flocked to Canada’s stability), there was little incentive for Ottawa to mess with what was clearly a good thing.
Still, the Trill is an intriguing notion. And now that one of its biggest proponents is about to have a Nobel medal hanging around his neck, maybe Ottawa will take another look.