Give People Shares of GDP We can solve the debt crisis by replacing T-bills with “Trills.” by Robert J. Shiller Time frame: before the economy tanks | Degree of difficulty: easier than inventing mortgage-backed securities | Barrier: political will 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. HBR List of Audacious Ideas Tackling the World Economy Give People Shares of GDP Double Down on Start-ups Partner with China in Afghanistan Enroll the World in For-Profit Universities Tackling Science Challenges Give NASA a Real Mission Declare 20% of the Ocean Off-Limits Electrify the Bottom of the Pyramid Tackling Social Problems Die the Way You Want To Pay Businesses to Keep People Out of Prison Grow More Apples and Less Corn Tackling Business Problems Stop Tying Pay to Performance Crowdsource Management Reviews Stop Collecting Customer Data 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 market. 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. Trills Could Be Attractive Investments Suppose that in 2005, two people each invested $1,000 in different portfolios of Trills from various countries. (Each Trill equals one-trillionth of a country’s GDP.) Here’s how the portfolios would have fared. 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 currency, it would eliminate another moral hazard associated with conventional debt. Countries could not reduce their real obligation by creating massive inflation, as they can today with conventional government debt, because their nominal GDP would increase with the inflation. Trills based on GDP have the great merit of being simple. Other measures of national earnings might seem more accurate than GDP but would sacrifice simplicity. It might appear to be an improvement to calculate national earnings as GDP minus some national proxy for costs. This would have the effect of leveraging Trills so that they would be more volatile and appeal to investors in secondary markets. For instance, we might subtract some appropriate measure of interest on the conventional national debt from GDP to arrive at national earnings. After all, corporations subtract their interest costs when they calculate their earnings. It certainly would have helped Greece to have a Trill based on GDP minus interest during its recent crisis; as investors balked at efforts to roll over their debt, interest costs skyrocketed, making a bad situation even more unmanageable. On the other hand, adjusting for interest costs adds a complication—and another possible moral hazard, since it could tempt a government to play with interest rates. Speaking of Greece, what effect could Trills have had during the Great Recession and its aftermath? Greece’s real GDP fell 7.4% in 2010. If its Trills were leveraged substantially—say, five to one—then the dividend paid on them would have fallen by about 40%. This would have done much to mitigate the crisis, making it easier for Greek taxpayers to bear. It would have given Greece a bailout without any international hand-wringing or broken promises. After the fact, investors in Greek Trills would have been unhappy. But they still might have been willing to purchase them, considering the possible upside of such a leveraged investment. Investors avidly pursue leveraged corporate stocks, so it’s plausible that they would buy leveraged Trills as well. Markets for national shares would fundamentally change the economic atmosphere. An immediate market response would accompany every new government plan affecting the future of the economy, generating a discussion of each country’s development plan, as well as a flow of international resources toward governments with plans that passed the market test. At the same time, with Trill prices gyrating up and down from minute to minute, national shares might seem to be a dangerous extension of financial capitalism—a system in some ill repute at the moment. But in fact the enthusiastic implementation of financial capitalism has been the story of every successful nation on the planet. We should not shrink from having real markets for countries, which would track countries’ successes much more accurately than stock markets do. Stock markets represent only claims on corporate earnings after corporate taxes—an unreliable measure of a country’s success. We can do better. Robert J. Shiller is the Arthur M. Okun Professor of Economics at Yale University and the author of Finance and the Good Society (Princeton University Press, forthcoming). Double Down on Start-ups The most sensible VC investments are the boldest. by Bruce Gibney and Ken Howery Time frame: now | Degree of difficulty: easy | Barrier: risk aversion The past decade has been an embarrassing one for the venture capital industry. Seventy-five percent of funds made no money. Venture capital changed for the worse in many ways, becoming less entrepreneurial and less engineer-driven, and putting up less of its own money. Today VC firms care more about exploiting the next bubble than about investing in great technology companies with long-term goals and the potential for major breakthroughs. Entrepreneurs respond accordingly, building low-tech clones with a high probability of being funded. With the heyday of Bell Labs, Xerox PARC, and their kind long over, we need venture capitalists to help foster disruptive change. To do that, they’ll have to take real risk and back companies they believe passionately in. VC firms must behave more like the Howard Hughes Medical Institute, which funds radical scientific innovations over long periods of time—and less like the NIH, which prefers incremental, almost-sure advances. If this approach results in occasional huge failures as well as huge successes, so be it. It’s time for VCs to return to boldness. We must find and help build the revolutionary start-ups that will generate transformational change and create billions in value. That is where the returns lie. Here are three steps we should take: Learn patience. Real progress takes time—and the discipline to refrain from exiting at the first sign of success. Mark Zuckerberg held fast to his belief that Facebook should remain private and focus on growth rather than a quick sale, and as a result the company created $70 billion in value it never would have seen if it had been sold early. And if Amazon had succumbed to the shortsighted scrutiny that followed its IPO, it might never have become the Walmart of the web. Meanwhile, companies like Myspace, in their rush to find an exit for investors, ended up leaving the stage entirely. During longer periods before exits, there may be uncomfortably few metrics to report to investors. SpaceX and Palantir took years to develop their transformative technologies and initially posted none of the rapidly rising, often flimsy metrics that excite VCs. Most VCs were unwilling to fund them; the Groupons of Moldova beckoned instead. Clones and other bagatelles require tantalizingly little investment to demonstrate short-term value, but that just proves how simple—and generally irrelevant—the problems they solve are. Stop consulting. Investments shouldn’t be a way for VCs to express their inner McKinsey consultant. “Adult supervision” is a VC marketing gimmick that helps nobody. Instead, VCs should work to promote improvements that help all start-ups. We should increase the mobility of labor by lobbying for immigration reform, help reduce the burden of student debt, and battle patent trolls. Sensibly embrace risk. Companies tackling big challenges may fail in spectacular ways, but as a portfolio they are far less risky than an assortment of bland nonentities, whose chief merit is that they fail quietly. Ambitious companies attract the best engineers; their vision inspires those engineers to work hard in a way that financial returns never could. By developing durable technological advantages, such companies can in time achieve the gigantic payoffs necessary to offset the failures in the portfolio. For VCs, an audacious business model is a better one. It’s time for venture capital to be serious about its role in the world. Bruce Gibney and Ken Howery are partners at Founders Fund, a venture firm based in San Francisco, which invested in Facebook, Palantir, SpaceX, Spotify, and ZocDoc. Partner with China in Afghanistan It’s time for a grand strategy in South Asia. by Wayne Porter Time frame: a decade | Degree of difficulty: four-dimensional chess | Barrier: mistrust and cultural differences Ten years ago, U.S. troops entered Afghanistan to address a clear security threat. Today our presence there is still heavily oriented toward security and trying to contain the factional violence that has long plagued the country. America’s approach to Afghanistan is reactive and backward-looking. It’s as though we were driving a Humvee down an unfamiliar, crowded street with our gaze fixed on the rearview mirror—repeatedly striking parked cars and cursing at all the reckless drivers around us. It’s time for the United States to look to the opportunities ahead rather than obsess over the threat we fear will overtake us from behind. And one way to do this is to team up with a nation that already views Afghanistan mainly in terms of opportunities—the People’s Republic of China. It is clear that China sees a strategic imperative in South Asia. Over the past 30 years it has cultivated a close relationship with the Pakistanis. It has worked with them to build a deepwater commercial port in Gwadar that gives it access to the Indian Ocean and may eventually serve as a port of entry for a road and rail system in and out of China. China is also intent on building oil and gas pipelines to the Persian Gulf—which, like the roads and rails, would have to pass through Afghanistan or Pakistan or both. Finally, it is spending considerable sums in Afghanistan to secure mineral rights and the hydroelectric power needed to extract copper, iron, gold, and rare earth elements for Chinese industry. Meanwhile, U.S. and NATO troops are providing de facto security for China’s investments in Afghanistan without any tangible payback—and at the cost of many lives and billions of dollars. America’s interest in Afghanistan is rarely, if ever, seen as anything beyond denying a safe haven to Al Qaeda and other terrorists. Yet the country offers strategic opportunities to help stabilize South Asia, stem the flow of dangerous narcotics, expand a lucrative market for U.S. investors, balance the power in a volatile region of the globe, and restore America’s credibility in the Islamic world. Interestingly, U.S. military withdrawal from Afghanistan may hinge on these very opportunities. It is in our economic and security interests to see South Asia and Afghanistan thrive. From this perspective, China’s interests in Afghanistan can be seen as converging with those of the United States on a grand scale. By investing in infrastructure and mining in Afghanistan, the Chinese are contributing to a stronger local economy; perhaps they could be persuaded to help develop a trained labor pool instead of depending on imported Chinese labor. By pursuing economic initiatives and commercial investment in Afghan industry (including mineral extraction, alternative energy, and agriculture), the U.S. might encourage the Chinese to work with it to strengthen the Afghan job market and economy. The Chinese could, for instance, buy mining and transportation equipment and services from U.S. companies, while contributing to internationally sponsored job-training programs for Afghans. A stronger Chinese presence in Afghanistan would give Pakistan another major nuclear-armed ally to offset the perceived threat from India—thereby reducing its motivation to subsidize violent extremist groups and to maintain a large nuclear arsenal. Though India—a key strategic U.S. ally in South Asia—would feel less sanguine than Pakistan about a stronger Chinese foothold in Afghanistan, it might appreciate China as a more predictable (and affluent) neighbor and an ally in countering Islamist terrorism. Within the context of strong U.S.-India and U.S.-Pakistan strategic relationships, a U.S.-Chinese partnership in Afghanistan could promote a multimodal détente among nuclear-armed nations in South Asia and provide a stabilizing economic boost to the region. That, and it just might provide the opportunity for us to see the street ahead rather than fixate on the road already well traveled. Wayne Porter is a captain in the U.S. Navy and the chair of Systemic Strategy and Complexity at the Naval Postgraduate School. The views expressed are his own and do not reflect the official policy or position of the U.S. government or the Department of Defense. Enroll the World in For-Profit Universities Growth and wealth will follow. by Parag Khanna and Karan Khemka Time frame: 10 Years | Degree of difficulty: C+ | Barrier: regulators Throughout the world the proportion of a country’s population attending colleges and universities is directly correlated with the country’s wealth. In emerging markets such as India and China, incomes and higher education enrollment have been rising hand in hand in recent years. Though correlation doesn’t necessarily imply causation, the rationale for the argument that higher education increases productivity and affluence is clear: Education creates human capital, which enables economic growth. That’s why pouring much more money into for-profit higher education could jump-start the global economy and deliver big returns. Emerging economies do not require the sort of human capital that traditional Western universities produce; instead of generalists, they need skilled graduates with training relevant to their developing industries, typically in engineering and management. Copying the Western model is a luxury that emerging markets, with limited resources, cannot afford. For-profit universities first and foremost offer courses that enable students to fill skill shortages in the market. They are also designed to be sustainable and scalable. Private colleges and universities in emerging markets are able to fund their expansion and invest in quality to compete with public institutions. They are the best way for emerging markets to build a skilled labor force, create more jobs, broaden the consumer base, and ultimately sustain economic growth. University Funding by Source In 2010 tuition made up the lion’s share of income at Asian private universities but a small share at U.S. schools. At the same time, for-profit higher education creates massive opportunities for investors that have only just begun to be realized. The business has five characteristics that are rarely found in one enterprise: 1. Negative working capital. Students pay up front, at the start of the semester or year. 2. Steady, predictable revenue. Students stay for the duration of the program, often four years. 3. High barriers to entry. These include regulation, land, and capital. 4. Prices that rise faster than inflation. 5. More demand than supply. In emerging markets, private sector education is already a growing and very profitable industry, with several billion dollars in turnover. In India, for example, single campuses have revenues as high as $150 million with 50% profit margins and 35% internal rates of return. In Malaysia private higher education is a market worth $2.4 billion, or about 1% of the country’s GDP. Private equity funds such as Actis in China and GP Investments in Brazil have taken stakes in new private universities being developed in East Asia and Latin America. Still, overall awareness of this opportunity is low. There’s room for many more private investors to jump in, and governments could do far more to encourage the growth of the industry. In some countries, regulators have limited the expansion of private colleges and universities or the potential for investment in them. That is counterproductive. Private investment in higher education leads to more enrollment in higher education. In China for-profit operators have been able to enter the education market since 2001. The Chinese government has created specific laws, tax structures, and regulatory bodies that support both foreign and Chinese players in the market. From 2000 to 2008, enrollment in higher education in China grew 21%, while India (where for-profit higher education is technically not allowed, forcing entrepreneurs to adopt work-arounds in the form of management companies serving universities) saw only a 7% increase in the same period. Because education is traditionally valued for its social good, it’s imperative that educational institutions be accountable to both students and citizens. Yet the economic necessity of expanding higher education in the developing world makes it essential for political leaders, educators, and the investment community to work together to fill the great global education gap with private, for-profit institutions. Parag Khanna is a senior research fellow at the New America Foundation and author of How to Run the World (Random House, 2011). Karan Khemka is the Asia head of the Parthenon Group and leads the firm’s Emerging Markets Education Practice.
