Hey, thanks a lot for bringing up the topic, I think it deserves more attention in general and I don’t get some of the objections raised in the comments.
I’m not sure I understood how investors would value the perpetuity/annuity. What I mean is that the least they can expect is to receive the annuity for a minimum of 50 years (following the example), so they would probably go with a valuation of this sort so to already discount the case in which the state reneges on its pledge. When this happens (because of MPs or justices) there’s no one left to actually care about the law being passed, and no financial consequences for the state since investors had already discounted the possibility of reneging.
Another point is targeted default not affecting the credibility of a country, given the nature of the debt, but I won’t go into that since it has already been argued in the comments.
An issue I see is that policy makers are not that committed to reducing public debt, since it doesn’t affect them personally and can always kick the can down the road/pass the buck/blame it on past legislatures.
This very much depends on the nature of the reform and basic cost-benefits, but I believe that lack of incentive and the targeted default not being seen as catastrophic weaken the enforcement mechanism.
I think you should write a longer piece explaining more in detail your proposal in light of the comments, I’d personally be happy to read more on this.
I appreciate it. If I do write a longer version, it won’t be on here, because I have no tools to moderate the comment section.
How would the enforcement perpetuity be valued? I agree, it would not be worth $1T at the moment before default because the market would assign some probability that the legislators would follow through the land value tax. Now, the important question is, “Does that matter?” I say no, it doesn’t, and my reasoning is as follows.
If you bought a $100M lottery ticket, what’s it worth before the numbers come out? Basically zero. But what if the numbers come up and they match your ticket? You’ve won the jackpot, literally. Now what if that happens, but the lottery owners don’t pay? Are you going to be okay with that? Are you going to say, “The ticket was never worth much anyway, so it doesn’t matter”? No, that’s a huuuuge breach of contract! You don’t just get to not pay $100M dollars and have no impact on your financial credibility. That’s crazy talk. If they didn’t pay, you’d be very upset, and rightfully so.
I don’t think that because “It’s a one-off, not a repeat lottery business” is a meaningful distinction here. The government issuing debt is a repeat business.
My actual work is at an investment fund. If I saw a government being like “Nah, we’re not paying that $1T perpetuity because it’s a weird security”, I am selling every regular bond of theirs that we own as fast as I reasonably can. If they can just not pay that $1T contract, what else are they capable of? I am significantly increasing my probability of them defaulting.
People like me would sell the government’s regular bonds ASAP, which drops the bond’s prices, thereby increasing the rate of interest that the government has to pay on new debt. The fund managers who didn’t do this are having to explain to their investors why they didn’t sell before the prices dropped. The government just defaulted on a major debt, and their reaction was to do nothing. That’s not a good career move. Fund managers don’t want to be in that position, so even if they personally don’t think it’s a huge risk, they know that other fund managers do, so they’re forced to sell as well.
An issue I see is that policy makers are not that committed to reducing public debt, since it doesn’t affect them personally and can always kick the can down the road/pass the buck/blame it on past legislatures.
You’re right, but you’re not fully thinking a selfish policymaker. If I were a selfish policymaker, I would implement the land value tax regardless of what I think of it, so now the government now doesn’t have to pay $1T of debt. So now I create $1T worth of new debt, and spend it on public services that will buy me more votes. Governments do not have access to infinite debt, despite what some crackpots say. (If government did have access to infinite debt, most of our problems are solved.)
I don’t know if I’ll respond to your next message. I’ll send you a private message on where I’ll be writing in future.
Hey, thanks a lot for bringing up the topic, I think it deserves more attention in general and I don’t get some of the objections raised in the comments.
I’m not sure I understood how investors would value the perpetuity/annuity.
What I mean is that the least they can expect is to receive the annuity for a minimum of 50 years (following the example), so they would probably go with a valuation of this sort so to already discount the case in which the state reneges on its pledge. When this happens (because of MPs or justices) there’s no one left to actually care about the law being passed, and no financial consequences for the state since investors had already discounted the possibility of reneging.
Another point is targeted default not affecting the credibility of a country, given the nature of the debt, but I won’t go into that since it has already been argued in the comments.
An issue I see is that policy makers are not that committed to reducing public debt, since it doesn’t affect them personally and can always kick the can down the road/pass the buck/blame it on past legislatures.
This very much depends on the nature of the reform and basic cost-benefits, but I believe that lack of incentive and the targeted default not being seen as catastrophic weaken the enforcement mechanism.
I think you should write a longer piece explaining more in detail your proposal in light of the comments, I’d personally be happy to read more on this.
I appreciate it. If I do write a longer version, it won’t be on here, because I have no tools to moderate the comment section.
How would the enforcement perpetuity be valued? I agree, it would not be worth $1T at the moment before default because the market would assign some probability that the legislators would follow through the land value tax. Now, the important question is, “Does that matter?” I say no, it doesn’t, and my reasoning is as follows.
If you bought a $100M lottery ticket, what’s it worth before the numbers come out? Basically zero. But what if the numbers come up and they match your ticket? You’ve won the jackpot, literally. Now what if that happens, but the lottery owners don’t pay? Are you going to be okay with that? Are you going to say, “The ticket was never worth much anyway, so it doesn’t matter”? No, that’s a huuuuge breach of contract! You don’t just get to not pay $100M dollars and have no impact on your financial credibility. That’s crazy talk. If they didn’t pay, you’d be very upset, and rightfully so.
I don’t think that because “It’s a one-off, not a repeat lottery business” is a meaningful distinction here. The government issuing debt is a repeat business.
My actual work is at an investment fund. If I saw a government being like “Nah, we’re not paying that $1T perpetuity because it’s a weird security”, I am selling every regular bond of theirs that we own as fast as I reasonably can. If they can just not pay that $1T contract, what else are they capable of? I am significantly increasing my probability of them defaulting.
People like me would sell the government’s regular bonds ASAP, which drops the bond’s prices, thereby increasing the rate of interest that the government has to pay on new debt. The fund managers who didn’t do this are having to explain to their investors why they didn’t sell before the prices dropped. The government just defaulted on a major debt, and their reaction was to do nothing. That’s not a good career move. Fund managers don’t want to be in that position, so even if they personally don’t think it’s a huge risk, they know that other fund managers do, so they’re forced to sell as well.
You’re right, but you’re not fully thinking a selfish policymaker. If I were a selfish policymaker, I would implement the land value tax regardless of what I think of it, so now the government now doesn’t have to pay $1T of debt. So now I create $1T worth of new debt, and spend it on public services that will buy me more votes. Governments do not have access to infinite debt, despite what some crackpots say. (If government did have access to infinite debt, most of our problems are solved.)
I don’t know if I’ll respond to your next message. I’ll send you a private message on where I’ll be writing in future.