Has the time for income-sharing arrived?

That is the topic of my new Bloomberg column, here is one excerpt:

To be sure, there are problems with the idea of equitizing human capital. For instance, what if less talented, less hard-working individuals turn out to be the most likely to sign away part of their future income? That creates a problem that economists call “adverse selection.” This is a real issue, but it hasn’t stopped companies from selling equity and startups from selling venture capital shares. As for the students, due diligence and talent measurement may suffice to identify enough good students with bright prospects.

There are also genuine questions about how far this model can be extended. The demand for labor is robust in information technology, but would a similar system work for philosophy professors or prospective musicians? In both cases incomes are undoubtedly lower, motivations non-pecuniary, and the chances for real success more remote. The company Pando Pooling, meanwhile, is trying equitization with minor league baseball players. The importance of raw baseball talent may be so paramount, however, that companies cannot much improve the labor market prospects of their clients.

Note also that we already equitize each other’s labor in many non-explicit, non-corporate ways. If two economists write a paper together, for example, each is tying his or her fate somewhat to the other. And if two people in business decide to share networks or trade favors, each has a stake in the success of the other.

The piece also consider Lambda School in San Francisco as an institution trying to operationalize this practice.

Comments

Short term formation? Yes, 9 months. Hands-on experience? Yes. Industry partners? Yes.

The software industry needs qualified workers so bad that they invented vocational education.

If reading is a form of travel, why can't it be a form of luxury. The problem with vocational education is that it replaces the advisor's office college. Is that meeting important? Or is this just a technological trend issue? "By the end of February, Cosmopolitan.com had logged 41 million unique visitors, according to comScore. In February 2018, the month after Ms. Pels started as the top editor, there were 15 million."

https://www.nytimes.com/2019/04/05/style/cosmopolitan-magazine-jessica-pels.html?action=click&module=Features&pgtype=Homepage

The college loan problem is an obvious indicator of the uselessness of the college advisor. Either advisors are incompetent or they are selling college services to the student for the benefit if the institution, in which case they are engaging in fraud - they are hucksters.

I think this is a good idea worth trying. It is certainly better than the current system which saddles naive students - like my nieces and nephews - with near lifetime debt while taking away their ability to take potentially life enhancing risks.

Anything that challenges the current monopoly in education, including primary and secondary education, is worth trying.

My son's college advisor tried to steer him away from engineering and physics into a more 'socially redeeming' field such as social work or psychology - two of the lowest paying and over-supplied fields, and subjects for which he had no interest at all. She left him with the idea that there was something wrong with him for not wanting to use his 'gifts' to serve humanity or something,

Anecdote. Advisor should be reprimanded or fired. Unlikely that's representative or the engineering and other practical fields would be on their uppers.

We don’t need to go to full equitization. The student loan crisis would be resolved if we just priced student loans based on the risk of default, the same as any other kind of loan. This would create a positive selection spiral as good programs with low default risk become more affordable and bad programs with higher default risk find it harder to attract students who would have to pay higher interest rates to go there.

It's as if you never heard the cries of disparate impact.

So rather than just fix the loan issue, let's go with indentured servitude instead. This is worse than loans that can't be discharged in bankruptcy.

If these are the only options, we are well and truly screwed.

Fortunately, these are not the only options.

I would advise people against borrowing $100,000 to buy a lousy car that doesn't work well.

+1 Bingo!

I have 5 nieces and nephews with heinous and constraining college loan debt. None of them need a degree for their current jobs. College was a waste of money and time.

That said, certain jobs require credentials.

I'd like to get in on some 7-15% risk free interest. How do I get in on this college loan scam? It's as though it's just for rich lenders... My money is good.

Seriously, loans that can't be discharged through bankruptcy? No risk to lenders? Our future highly educated workers... Who ever thought that was an uncorrupt good idea? Where is the OUTRAGE, people?

>disparate impact.

That's an interesting issue. Will these companies make pricing decisions based on the likelihood of various ROI-reducing (from their perspective) life events? e.g., women are statistically more likely to leave the workforce to raise kids, and minorities are statistically more likely to be incarcerated

Will these companies make pricing decisions based on the likelihood of various ROI-reducing (from their perspective) life events?

If they don't, then their customers will do it for them (students who are confident of earning high and consistent incomes won't sign up for these deals in the first place).

Get the government out of student loans and the problem will be solved.

I'm in favor of abolishing public education and land grants entirely. Education is not a public good.

Basic economics would say that subsidising something creates an excess supply of that thing. Education is no different.

'Education is no different.'

Well, possibly you mean credentials, because there is not much evidence of an actual increase in a better educated citizenry in the last generation.

Well, certain types of education are a public good. If you have shortages of doctors and engineers, you can make a case that helping produce more of them is a public good. There are other arguments against student loans and subsidies, however.

The question is whether ALL education is a public good. I am not sure a B.A. general makes you a better or more productive citizen. I'm not sure a watered down degree is a public good if the graduate isn't capable of doing the job the degree enables.

And 'grievance studies' programs are the opposite of public goods, and as a modest proposal we should consider a Pigouvian tax against such degrees to correct for the negative externalities they cause. The revenue from such a tax can be used to fund more STEM and junior college and apprenticeship programs.

"It would be nice" is not a workable definition of a public good. Education is excludable and rivalrous. It's also subject to marginal utility. Classroom instruction in literacy and numeracy is a waste of time for most people after age 14. Perhaps even age 12. Higher math and STEM, the cutoff is probably age 18. Academics and theoreticians could be done by age 22.

Stupidity has spillover effects.

As does education.

Take your pick.

Education does not equal intelligence. Education may not even generate intelligence. We got Classical Antiquity and the Renaissance without that Prussian anthill model. Walt Whitman left school at age 11 with no apparent detriment to his literacy.

Modern education is mostly day care.

Education does not equal intelligence is disputed by the tests you have to take to prove otherwise.

You can be intelligent and not educated, but it is hard to be educated and not intelligent.

If you expect the next middle school dropout to become Walt Whitman, whose literary talents by the way are quite something but also quite useless in today's economy, you need to update your thinking. Countries that drill their kids like in East Asia, Europe, and North America are also the most modern and prosperous. Its not perfect but it largely works.

Yes, I'm aware journalists do for pay what numerous hobbyists do for free; their business model is unsustainable, which is why they either have billionaire sugar daddies or they're just advertising mediums.

I do not expect the next middle school dropout to become Walt Whitman. Nor do I expect the next English Ph.D. to become Walt Whitman. QED, education is not the sine qua non for talent.

If education were non-compulsory, it's actual utility would show up very quickly.

Compare/contrast the old practice of indentured servitude (obviously, now often viewed as a form of oppression)

The issue in my mind is that there's a big information asymmetry in this arrangement. The folks providing the capital have a lot more knowledge of the market for skilled labor than does your typical 18 year old. That's a recipe for...maybe not abuse or exploitation, because I don't like those words in economic contexts, but socially sub-optimal outcomes, shall we say.

If this is going to expand, the kids will need an agent, just like the ball players mentioned above, to negotiate on their behalf. Maybe it wouldn't be Drew Rosenhaus, maybe you would just need a website that would crunch numbers for you and tell you when you were getting a raw deal, like Kelly Blue Book or something.

I suspect their parents will act as agents to some degree.

And in any case the current deal is capped at $30K maximum and $0 if you make less than $50K per year. That seems like a better deal than a lot of undergraduates are managing within the current system.

Agreed. Some parents don't have great knowledge of labor markets, either though. My parents, for example. Both of them had college degrees, but my dad owned a small business and dealt only with a gaggle of folks making, if they were lucky, maybe $5 an hour above minimum wage. My mom worked part time at a public library, just for ***** and giggles. They would not have been much use if it had been me in that situation.

If the scheme is as economically viable as "operationalizing equitization" is verbally unwieldy and cognitively sterile, it will not fly, perhaps TC's signal here.

the definition of a metaphor is something that is impossible.

Yours is no apt definition of "metaphor", in which case.

"a jade-tiled hall hung with curtains of pearls
is one superlative beauty's home.
her splendor would make immortals blush,
her complexion the charm of a perfect peach.
mists of spring hover in the east,
autumn winds blast in from the west:
once the seasons of thirty years have passed,
her beauty will rival gnawed sugar cane's."

Han-shan offered "gnawed sugar cane" as a metaphor for "beauty exposed to the ravages of time": were his metaphor "impossible", cosmetic surgery and American manias for "appearance" would not enjoy crazed appeal today.

For Alfred Jarry "UBU" was a working metaphor for the French bourgeoisie of his day, still works (mutatis mutandis) when applied to our tech tyrants, media hegemons, and cognitive elites.

For Zamyatin "the square root of negative one" was a working metaphor for modern utopian politics, if not for contemporary science and applied technology, if not for modernity more broadly, and still works as such.

Metaphors LIVE, whereas the way we commonly see it deployed mathematics KILLS (mathematics may well yet prove intrinsically biocidal in ways metaphor could never be).

Doctors have been doing this for years. They sell a slice of their practice's income to a "management" company in return for a cash payment, determined based on the present value of the future stream of income, the stream of income structured as a "management fee" to the "management" company. The company funds the arrangement via arbitrage: the company sells its stock for one multiple (say, 30), and then buys the stream of income for a lower multiple (say, 10). There's a problem: the doctor, having received the large cash payment, isn't motivated to work the halls of the hospital at nights and on weekends, and he can't recruit young doctors to work for him because the practice is encumbered by the "management" contract. What's to be done. Well, some doctors don't bother to tell the young doctor about the "management" contract, the surprise coming when the young doctor, having devoted all of his efforts to the practice, is finally told about the contract when he is to become an "owner" of the practice. This scam in medicine came and went, but you cannot believe how often I have encountered it. Anyway, my point isn't that everyone is capable of a scam (Dr. Welby?), rather incentives matter.

I should point out that the scam favoring doctors has been replaced with a scam favoring (among others) hospitals, which have been buying doctors' practices for the liquidation value of the practice's assets and employing the doctor for a short term, after which, well, you get the idea. Why would doctors agree to this arrangement? Fear. Now that's motivation! It's what finance has done for us, and it's mostly a scam.

sometimes, you have to take 2 steps back before you can take 1 step forward.

Ah the unicorn-investors' withdrawals. Must...find...the...next....ONE!

Meet the new unicorn. Same as the old unicorn. We must be fooled again!!!

Betteridge's Law of Headlines strikes again!

Incentives matter.

What's to stop the companies from simply doing as little as possible and hoping some students will succeed regardless? Steve Sailer has pointed out that many of the "new" moneymaking ideas of the 21st century are just old ideas we thought were discredited, but now with a tech-y flair.

So that is it. Communist writ large!

The company Pando Pooling, meanwhile, is trying equitization with minor league baseball players. The importance of raw baseball talent may be so paramount, however, that companies cannot much improve the labor market prospects of their clients.

They may be able to hook you up with some ex-Balco guys, though, ya know...just to give you that extra little edge.

Not a terrible idea, but no, rather spending per student can and should plummet. I think the feds getting out of the loan business would cause short term pain but the desired result in the long run.

I am afraid I have to put "income sharing" into the category of Band-Aid plans. The current system of loans and grants are Band-Aids as well. Well, worse than that. Band-Aids that exacerbate the problem with perverse incentives.

I am going to say that it is centrist and pragmatic to have a complete system of public education from kindergarten through PhD, but the thing that keeps it centrist and pragmatic is that you limit the size.

To throw some numbers out, k-12 offered to 100% of students.

Job training and apprenticeship programs for 33%

Two year degrees for 33%

Four year degrees for 33%

And then some reasonable bar for graduate studies

This is more or less the German model, I think, and I think it works.

Income sharing doesn't solve the basic American problem, that we pretend everyone is suited for college, and load them with debt (or equity obligation) before the students face the sad reality that college is (and must be) hard.

Good post.

To avoid disparate impact it would need to be the same proportion by race and gender. Within two generations we would achieve racial equality.

Banning private schools and universities would be an accelerator.

It would be a little less confusing if you joined an active conversation with a name not in play.

And for what it's worth I am fine with the GPA:SAT pair as, not perfect, but good enough for determining placement.

What do the Germans use?

LOL at actually believing this.

the personification of the public space

For everyone calling this indentured servitude, I'd be curious to see thoughts on the (I would guess ubiquitous) Income Based Repayment plans for federal student loans.

If they framed it as: "Pay $30,000 over two years and be eligible for Income Based Repayment equal to $0 if you make less than $50,000," this would sound much better than the current student loan system.

As an aside, I went with a nephew to a University of California Santa Cruz spring tour this week. The number they presented was $36K per year (CA resident). Maybe that is small compared to lifetime earnings for good majors, but I think it leans a bit toward being a business model, rather than a economic stimulator. To parallel Tyler on Harvard, if they can charge that much, maybe there should be more UCs instead.

I love government schools, but I am not proposing zero tuition. It should be low, but high enough to show commitment. Not so high to be a burden, because we *want* lots of graduates of good, hard, schools.

wait, so just because their price up, you think there should be more UC's? what kind of equalitist are you? equality is about opportunity, such as when you read a jack Kerouac haiku, and despite his looming history that spreads over you, you feel equal. it's not about reality. development, on the other hand, such as low tuition is difficult due to a preponderance of....look, you still have to face your fears and take the sats. it's not a blank slate or white fence, its a fish at an aquarium, look at me!

There is a literature on this. While smart rich kids get through good schools, equally smart poor kids won't even apply.

Do you know about Pell Grants? Scholarships? Cal Grants? They give these to poor people.

That's in the literature too, and not surprisingly they are not enough to produce equal application for equal SAT score across the family income spectrum.

Foreign countries condition low or free tuition on passing exams to qualify. So, in a sense there is a restriction, and also studying to pass the exams and make it in.

You’re a few years behind. Get with the times.

We’re about to shut down Stuyvesant and Bronx Science specifically because it’s free, public, and uses an entrance exam.

We’ve collectively decided that’s racist.

Guess you can't read.

I said college.

I guess they didn't teach you that in high school.

Another role of equitization is as insurance. At 18 years old, your future income is uncertain (maybe very uncertain, e.g. for smart kids from poor backgrounds). Paying a portion of future earning smooths your income across future possible selves.

1. Income sharing has always been available - indeed, has been done for as long as people have paired up to raise families. That people don't do it outside that context suggests that not enough people see any upside to it outside that context.

2. OK Cowen, let's do this. I'll give you half my income - you give me half yours.

Can we not use the word "sharing" for what is fully 100% a transaction? It is like the "sharing economy" nonsense with Uber, Lyft, and AirBnB. Nothing is shared. You pay money for goods and services rendered. Period. No need to sugar coat, hype, or pretend it is something else.

As applied to education financing, this looks like a solution in search of a problem.

At prevailing interest rates, any education worth buying is still worth buying with borrowed money. Now, there are some educations not worth buying, but figuring out a way to finance value-destroying activity does not seem like a pressing social problem.

The Pando folks have a formula that fits a few features of professional sports (extreme right tail of the payoff distribution, initial uncertainty even among highly selected young people as to who will be a superstar, possibility of career ending injury even at the top of the distribution) that might translate over to the arts of maybe MBAs, but not to the generality of most career paths.

I think its worthwhile to consider an Income Sharing Agreements compared to the current Income-Based Repayments made on student loans. According to Lambda, if after 5 years the former student has not made enough to pay 30K, ISA is cancelled. Does the cancelled balance equate to taxable income? Because any balance forgiven after an income-based repayment plan is considered taxable income. And, what happens if the person enters bankruptcy? They wouldn't be able to discharge their student loan, what about under ISA? How do students know their debt is actually being cancelled?

We are learning that under the Trump administration, the Department of Education is not forgiving loans in the 10 year, public service program (99% of applicants are being rejected, most for arbitrary reasons). This obviously sounds like fraud by the DoE. But all important questions to consider.

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=newssearch&cd=1&cad=rja&uact=8&ved=0ahUKEwj2i6uJxrvhAhWt11kKHcW7AAwQqQIIKSgAMAA&url=https%3A%2F%2Fwww.washingtonpost.com%2Feducation%2F2019%2F04%2F03%2Feducation-dept-rejects-vast-majority-applicants-temporary-student-loan-forgiveness-program%2F&usg=AOvVaw3yNxUCJ4-lKsbG8vr38eT0

The fact that such a model might not work with regards to musicians or philosophy professors could be used as a sign of how little value employers find in these fields? Don't you think?

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