HBRR.ORG.ORG HBR’S LIST OF AUDACIOUS IDEASFOR SOLVING THE WORld’S ProbLEMS The new year begins precariously. The global economy vacillates between signs of recovery and omens of collapse. Businesses seem paralyzed. Even though they’re sitting on $2 trillion in cash, they’re risk-averse, strategically incremental, and notably lacking in fresh ideas. We think this stinks. The world needs invention and daring now more than ever. Now is the time for audacity, not austerity. To that end we’ve asked experts and leaders from many disciplines to propose audacious ideas that attack big, difficult problems while improving the economy and society as a whole. Though these ideas are bold, they’re not quixotic. They represent real business opportunities. They aren’t lectures; they’re conversation starters that ask the one question TEVEN J. MOORE S that sparks every revolution: Why not? ON: I ILLUSTRAT January–February 2012 Harvard Business Review 2 HBR’S LIST OF AUDACIOUS IDEAS TIME FRAME BEFORE THE ECONOMY TANKs DEGREE OF DIFFICUltY EASIER THAN INVENTING MORTGAge-BACKED SECURITIES BARRIER POLITICAL WILL growth versus 2.5% annual S&P 500 growth over the past half century), Trills might very Give People Shares of GDP well sell for a multiple higher than 50, too. The advantage of keeping shares equal We can solve the debt crisis by replacing to a perfect trillionth of the economy is that people will know exactly what they are get- T-bills with “Trills.” by Robert J. Shiller ting: One-trillionth of a country is real and easy to understand. That kind of clarity en- courages trust that governmental shenani- orporations use a combina- the U.S. government, for instance, would gans will not compromise the obligation. tion of debt and equity to have paid $13.22 in 2010, in four quarterly An investor who bought one Trill from finance their investments installments. The payoff in future years each country would have effectively in- and operations. Nations, in would vary, of course. If the economy sur- vested in the entire world for a perfectly contrast, rely exclusively on prised us on the upside, dividends would diversified portfolio. Moreover, Trills might Cdebt. When a nation’s economy stalls and go up; if it slumped, dividends would fall. plausibly appeal to international inves- its debt continues to grow—you may have The market would determine the price tors even more than corporate shares do noticed this happening a lot recently—di- of a Trill, which would be volatile. It would because Trills would avoid the problem of saster looms for the country’s taxpayers. depend not only on the most recent divi- moral hazard. Here’s why: If international This is why Europe is in turmoil right now. dend but also on investors’ expectations investors ever acquired a good fraction of But things don’t have to work this way. for the future, which can change minute to a country’s corporate shares, the country Here’s an audacious alternative: Coun- minute. There’s some evidence that a Trill would have an incentive to raise the corpo- tries should replace much of their existing might often be expensive relative to the rate profits tax on those shares or regulate national debt with shares of the “earnings” dividend, which would be good for the gov- them to lessen their value. If a country did of their economies. This would allow them ernment issuer. Shares of many U.S. cor- so, it would benefit without technically to better manage their financial obligations porations and 10-year U.S. Treasury notes breaking any promises. The issuance of and could help prevent future financial cri- now sell for over 50 times their annual Trills, however, would involve a clear and ses. It might even lower countries’ borrow- dividend. Since the growth rate of real U.S. unambiguous promise of share in value to ing costs in the long run. GDP has been higher than that of real S&P international investors. If the shares paid National shares would function much 500 earnings in the past (3.1% annual GDP dividends in the country’s domestic cur- like corporate shares traded on stock ex- changes. They would pay dividends regu- TRILLS COULD BE larly. Ideally, they’d be perpetual, although AttrACTIVE INVESTMENTS 2010 a country could always buy its shares back TOTAL Suppose that in 2005, two people each VALUE on the open market. The price of a share $1,350.32 invested $1,000 in different portfolios of Trills would fluctuate from day to day as new from various countries. (Each Trill equals information about a country’s economy one-trillionth of a country’s GDP.) Here’s how PORTFOLio 1 came out. The opportunity to participate the portfolios would have fared. AMOUNT REAL GDP INVESTED GROWTH in the uncertain economic growth of the MEXICO $300 9.71% issuer might well excite, rather than scare TURKEY 500 36.43 POLAND 200 38.29 off, investors—just as it does in the stock market. Mark Kamstra of York University and PORTFOLio 2 I have mapped out how these new national AMOUNT REAL GDP INVESTED GROWTH shares could work. We propose that they JAPAN $300 7.27% IRELAND 300 −9.24 pay a quarterly dividend equal to exactly GREECE 400 12.97 one-trillionth of a country’s quar- terly gross domestic product, the simplest measure of national $1,001.55 earnings. We could call 2005 NotE ACCUMULATED GDP GROWTH RATES ARE REAL: these shares “Trills.” ADJUSTED FOR EXCHANGE RATE CHANGES AND INFLATION. A Trill issued by 3 Harvard Business Review January–February 2012 FOR ARTICLE REPRInts call 800-988-0886 or 617-783-7500, OR VISIT HBR.ORG AUDACITY WorKS! ERADICATE SMALLPOX Smallpox was still killing millions in 1967, two centuries after the invention of a vaccine for it. That year the World Health Organization decided to immunize everyone in the world. To do so it had to develop a vaccine that rency, it would eliminate another moral dangerous exten- required no refrigeration and a new needle hazard associated with conventional debt. that would simplify inoculation. Then came sion of financial Countries could not reduce their real obli- a seven-year program to contain outbreaks capitalism—a system through door-to-door surveillance. By 1979 gation by creating massive inflation, as they in some ill repute at the smallpox had disappeared from the planet. can today with conventional government moment. But in fact the en- debt, because their nominal GDP would in- thusiastic implementation of crease with the inflation. financial capitalism has been the Trills based on GDP have the great merit story of every successful nation on the of being simple. Other measures of national Markets for national shares would fun- planet. We should not shrink from having earnings might seem more accurate than damentally change the economic atmo- real markets for countries, which would GDP but would sacrifice simplicity. It might sphere. An immediate market response track countries’ successes much more ac- appear to be an improvement to calculate would accompany every new government curately than stock markets do. Stock mar- national earnings as GDP minus some na- plan affecting the future of the economy, kets represent only claims on corporate tional proxy for costs. This would have the generating a discussion of each country’s earnings after corporate taxes—an unreli- effect of leveraging Trills so that they would development plan, as well as a flow of in- able measure of a country’s success. We be more volatile and appeal to investors in ternational resources toward governments can do better. secondary markets. with plans that passed the market test. For instance, we might subtract some At the same time, with Trill prices gy- Robert J. Shiller is the Arthur M. Okun Professor of Economics at Yale University and the author of appropriate measure of interest on the con- rating up and down from minute to min- Finance and the Good Society (Princeton Univer- ventional national debt from GDP to arrive ute, national shares might seem to be a sity Press, forthcoming). at national earnings. After all, corporations subtract their interest costs when they cal- culate their earnings. It certainly would have helped Greece to have a Trill based on TIME FRAME Next week DEGREE OF DIFFICUltY OPERATIONALLY EASY, PSYCHOLOGICALLy hard BARRIER GREED, ECONOMIC THEORY GDP minus interest during its recent crisis; as investors balked at efforts to roll over their debt, interest costs skyrocketed, mak- Stop Tying Pay to Performance ing a bad situation even more unmanage- able. On the other hand, adjusting for inter- The evidence is overwhelming: It doesn’t work. est costs adds a complication—and another by Bruno S. Frey and Margit Osterloh possible moral hazard, since it could tempt a government to play with interest rates. Speaking of Greece, what effect could e’ve talked about 40:1 in the 1970s to 325:1 in 2010. The ratio Trills have had during the Great Recession this since the finan- isn’t as extreme in most other countries, but and its aftermath? Greece’s real GDP fell cial meltdown. Now the trend is the same. Below the top level, 7.4% in 2010. If its Trills were leveraged it’s time to do it: Un- mismatches between pay and performance substantially—say, five to one—then the link pay from perfor- aren’t so acute. But all variable-pay-for- dividend paid on them would have fallen Wmance. The evidence keeps growing that performance schemes still suffer from four by about 40%. This would have done much pay for performance is ineffective.