Long term bonds have a higher risk of default if total factor productivity trends down. So long term bonds would actually be helped if part of the money was used to invest in projects that would increase total factor productivity in the long run. Many of these investments would be in schools or education methods. This type of investment can get ESG credit for issuers or investors.
Fairfax County could sell municipal bonds that had these types of investments packaged in. Because Fairfax County is on the liberal side, it would pick projects that it believes in. So it might pick a partnership with local universities, independent tutors, and math tutoring companies to improve the words in math education. Switch emphasis from 2 is greater than -3 to 2 is more positive than -3. Or teach number line rules. Or provide continuing education to math teachers.
Fairfax County could partner with the Brookings Institution to help design the program. Or smaller hungrier think tanks or even independent consultants. Perhaps some of them in Fairfax County or that would relocate there.
More conservative counties could invest in mechanism design for voucher programs. They might partner with AEI or Cato or Koch or Betsy DeVos. They would try to fund studies into why voucher programs don’t work and to try experiments with different mechanism designs to make them work.
The mortgage market could package up mortgages as it does, tranche them out and make these investments part of the longer term or residual tranches. Those tranches have the risk of a long term decline in total factor productivity that leads to lower wages, lower home prices and lower employment to population ratios. So by investing in total factor productivity projects, those tranches help fix themselves. They invest in preventing their own risk, that long term productivity trends down.
Any long term bond with default risk can do this. So can packages of them like Collateralized Debt Obligations, CDOs, or Collateralized Loan Obligations, CLOs. The bonds fix themselves of their own risk, an increase in long term default rates from a long term trend decline in total factor productivity.
Even TFP growing at .5 percent a year will result in higher defaults than if it grew at 1 percent or higher. So TFP doesn’t have to trend negative to be a problem. Just the current long term trend since 1973 of .5 percent is a problem. Greg Mankiw gave his best estimate to me after a recent Brookings seminar of .5 percent. But he said it had a wide margin either way. He is one of the experts in this area.
Most of these investments would qualify for ESG credit. Maybe the ESG people would credit any reasonable investment in TFP as ESG because it helps wages at the bottom.
The Federal Reserve has become unable to liquidate its Quantitative Easing. It has a permanent QE portfolio. This permanent QE portfolio could purchase TFP bonds and tranches. That could include municipal bonds issued by Fairfax County or mortgage TFP tranches or CDO or CLO TFP tranches or just long term corporates that had a TFP investment component. This could be called QE TFP.
This way the Fed’s QE program could target long term growth. This would help fix the economy at a fundamental level. It would also help fix the problem of the low employment to population ratios of Black men in particular, but also all groups of men. The employment to population ratios of each group of men have trended down since 1973, the end of the Golden Age of Productivity.
TFP bonds could also support the Quantum Initiative, the government’s program to invest in quantum mechanics. This is inherently a TFP raising program. Part of this could be to invest in molecular docking, the use of quantum mechanics, to find small molecules that dock with malformed molecules that are the underlying cause of cancer, Parkinson’s, Alzheimer’s, etc.
Solving chronic diseases with quantum mechanics is inherently TFP raising. In addition, it would lower the costs of healthcare and preserve Medicare, Medicaid, the health market place and even generous employer health benefit programs. It would also lower the cost of long term care insurance or of just long term care however funded. Public funds for long term care would stretch farther with these diseases cured by quantum mechanics.
Fairfax County schools could aim to make Fairfax County part of the Quantum Initiative and this type of financing as part of its long term goal of being a high value added county for public and private initiatives and investments. It can also aim to be a place where small independent consultants can be part of this work. That is part of the labor market of the future and today. Some of the TFP investments should be reserved for small or independent consultants or entities in order to keep the world of work having many options for workers.
