It’s Called “Stock”

There’s something the federal government can do right now to help students caught by our terribly unjust higher-education financing system. … Under an income-contingent loan system, … students pay a fixed percentage of their income toward their loans. Payments are automatically deducted from their paychecks by the IRS. .. After an extended time period of 20 or 30 years, any remaining debt is forgiven. … The concept has been proven to work—Australia and Britain have used it for years— and … the Nobel Prize-winning economist Milton Friedman proposed the idea all the way back in 1955. …

Because student loans can almost never be discharged in bankruptcy, defaulted loans can haunt students for a lifetime. … That is insane. A similar-sounding federal program, called income-based repayment, is now on the books and is scheduled to become somewhat more generous starting in 2014. But the program is administratively complicated, involving income-eligibility caps and requiring students to reapply every year. (more)

Yup, it can be easier to fund investments via “loans” whose repayment amounts are set to be a proportion the venture’s net income. This is usually called “stock,” however, and proposals for private sector stock in individual future income are usually criticized as “slavery.” Especially if such stock claims on income are exempt from the usual bankruptcy evasions. But to most folks the same policy doesn’t seem like slavery if the government does it, just like we refuse to call conscription slavery.

Some argue that the government needs to make student loans because private loan markets fail in this case. But if they fail, it is mainly because we purposely hobble private investors by not allowing them the tools we are allow governments to ensure a return on their investment. This is how a lot of market failures go these days – they are real failures, but failures caused in large part by refusing to allow private actors all the tools we allow governments.

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  • Drewfus

    Robin, check last sentence for intended meaning and delete me 🙂

  • Albert Ling

    Why limit ourselves to selling income equity only in cases where loans for education are involved? I’d see no problem in allowing for selling personal equity in any case for any reason.

    There could also be a secondary market where you can trade equities in people, and companies could use the price information on that market to give promotions or fire people given that the market is let’s say overpaying for the lifetime earnings of a certain researcher, writer, etc where people see future potential but employers fail to aggregate this info into their salaries.
    So we generate liquidity for people and at the same time gain all the efficiencies of prediction markets!

  • http://sensebridge.net Eric Boyd

    There is an *awesome* fictional presentation of the idea of having “personal stock” in each person, and using it for things like paying for higher education: The Unincorporated Man by Dani Kollin.

    “The Unincorporated Man is a provocative social/political/economic novel that takes place in the future, after civilization has fallen into complete economic collapse. This reborn civilization is one in which every individual is incorporated at birth, and spends many years trying to attain control over his or her own life by getting a majority of his or her own shares. Life extension has made life very long indeed.

    Now the incredible has happened: a billionaire businessman from our time, frozen in secret in the early twenty-first century, is discovered and resurrected, given health and a vigorous younger body. Justin Cord is the only unincorporated man in the world, a true stranger in this strange land. Justin survived because he is tough and smart. He cannot accept only part ownership of himself, even if that places him in conflict with a civilization that extends outside the solar system to the OortCloud. People will be arguing about this novel and this world for decades.”

    One of the most interesting features of this personal stock system is that the government collects “tax” via this system – it simply owns 5% of everyone, granted at birth, and so gets 5% of the income of everyone. Parents are granted 20% as well. Higher ed often takes 10-30%, so it’s easy to end up with less than 50% of yourself, at which point your share holders can out vote you on important decisions like which of two job offers you should take…

    • http://hanson.gmu.edu Robin Hanson

      The first link in my commentary above was to my review of the sequel of that book.

      • anon

        Your link to that post is actually broken (both here and in the OP), because it ends in .htm instead of the correct .html —Fixed link.

      • http://hanson.gmu.edu Robin Hanson

        Thanks, fixed.

    • Boris

      There is no particular reason that revenue-sharing stock should involve control over things like which job offer is taken. Non-voting stock exists just fine in companies today.

      Now of course you can probably get people to pay more money for voting stock, since it does give them the chance to affect their dividends. But that’s a separate issue.

  • Rudd-O

    But it’s not slavery because (some meaningless excuse that does not demonstrate a difference in ethical substance).

    That is what statists will reply in this comments section.

  • http://zgp.org/~dmarti/ Don Marti

    Random startup idea: what if there were a way to lend money only to students who had passed certain classes? If an investor believed that, say, getting a B or better in Probability and Statistics would make a student more likely to be able to pay back a loan after graduation, the investor could back a bundle of loans to students who had done it.

  • http://daedalus2u.blogspot.com/ daedalus2u

    I thought the way that student loans worked was that schools would steer students to preferred private corporations who would loan the money to the student at a high rate and send a kick-back to the school. Then collect interest at a high and above market rate, which the Government would then guarantee to pay.

    http://chronicle.com/article/Nelnet-to-Pay-55-Million-to/123912/

    The lenders would then use their profits to lobby politicians to keep the gravy train chug-chug-chugging along.

    The whole point of the “no bankruptcy discharge” is to hold the students hostage so that maybe someone else will pay, or maybe not, but who cares, it is just a student, someone who was dumb enough to not choose wealthy parents.

    What we should do is bring back debtor’s prison. Put those who can’t pay their debts in prison. That would be a good business to be in, providing prison space for students who can’t pay their loans because there are no jobs. I am sure the GOP could find money in the budget to pay for that. At $10k per person per year, $10 billion would cover a million students. That would sure put a dent in the occupy Wall Street protests.

    • Wonks Anonymous

      I heard the cause of restrictions on bankruptcy/default were that too many law school students were doing it right after school, figuring the dent in their credit at that point in their lives wasn’t worth as much as their total debt.

  • kebko

    I think this same thing happens with finance regulations. How many times has the world economy been hobbled because banks were illiquid? One convoluted scheme after another has been implemented to deal with this problem, with varying levels of failure, when we could simply allow banks to issue their own currency and then regulate from that context.
    In historical accounts, this limit may not be mentioned explicitly as a cause of bank runs, when in fact it is THE cause.

    • Doug S.

      We tried that, back in the 19th century. It didn’t work out so well.

      • Albert Ling

        You gain no points on associating the 19th century (probably the fastest growing century in history) with something bad.

      • Cyan

        I’m with Albert Ling. If the financial crisis* has taught us anything, it’s that the bank runs that were common in the 19th century were definitely not anything bad! The uncertainty of not knowing when a self-fulfilling rumour of bank insolvency would wipe out your savings just added zest to life.

        *Y’know, the one that was triggered by a run on the shadow banking institutions by repo purchasers who were their effective depositors.

      • kebko

        I don’t think you all took my comment to its conclusion. If a bank was able to issue or access currency without limit, there could never be a run on the bank.
        Issues about insolvency would be handled by clearinghouses, trade associations, bondholder agreements, etc.

      • Albert Ling

        Cyan,
        I don’t see much value in the financial innovations of central banking and even deposit insurance. It creates moral hazard, leaves huge economic rents to be grabbed by those with political power, and arguably ‘hides’ systemic risk by failing to purge the system of rottenness leading to huge panics that involve ALL banks not just a few. And I see much simpler ways to deal with the safety of personal savings such as insurance and diversification.
        There is value in the ruggedness of a system that has lots of small failiures instead of the instability of fake smoothness.

    • Mark M

      So…

      If I were to start a bank, I would never run out of money? Nice. Sign me up. Yes, I’m sure regulations will be designed to prevent me from simply issuing money to myself. I’ll do my part to make sure regulations are as effective as possible by identifying the loopholes and demonstrating how they may be abused.

      • kebko

        Gosh. You’re right. It’s that simple. I rescind my statement. I hadn’t thought of this.

      • Gulliver

        If I were to start a bank, I would never run out of money?

        I believe the idea is that, like government fiat currency, if a bank prints or mints too much of its own currency, confidence in that currency will plummet, reducing its exchange rate. Whether this is a feature or a bug is debatable – the bank and its customers assume more risk, while society at large shoulders less and bank solvency is, as previously noted, considerably more transparent – but I thought I’d clarify. I also see no reason why you couldn’t have both government funny money and private issue legal tender and let them compete for users. It’d at least be an interesting experiment.

      • kebko

        There are lots of ways this could be handled, and banks could all be issuing dollars printed by the treasury. There are any number of private institutional frameworks which could manage the risk. There is no reason that customers would need to take on extra risk. It’s my understanding that in the 1800’s banks belonged to trade associations that would issue IOU’s when there was a run on the bank. It seems as though this would have worked better if banks could have simply issued dollars, and private insurers, bondholders and/or trade associations would have dealt with claiming assets of an insolvent bank, except that regulations prevented many of these things from happening.
        Consumers could treat dollars from all banks equally, and bank associations could handle the issue where the value of a bank’s dollars was in question.

        But, I’m now hijacking the thread, so I’ll leave it at that.

  • Ari T

    This is an interesting idea Robin. I think welfare state could be probably privatized if the organization could tax people like the state does. I don’t know if it would work financially but ability to tax could make some room for all new institutions.

  • Doc Merlin

    “This is how a lot of market failures go these days – they are real failures, but failures caused in large part by refusing to allow private actors all the tools we allow governments.”

    I agree. A good example is default. Any sovereign can default at will on anything and everything. Normal people can’t.

  • Robert Wiblin

    Income contingent loans are good but are not equity/’stock’ in human capital because in none of those countries (Oz, UK, NZ), can you pay back more than you originally ‘borrowed’ if things go well for you. The govt accepts the downside risk but has no upside. Nobody has criticised income contingent loans as slavery, though they have of human capital equity.

    The analogy to conscription is not so good because that is involuntary while human capital equity would not be. An alternative funding mechanism – income taxes – looks a lot like compulsory government stock ownership of people living in the country.

    • Gulliver

      An alternative funding mechanism – income taxes – looks a lot like compulsory government stock ownership of people living in the country.

      Hence the expression advanced by some more extreme anarcho-capitalists that (income) tax is slavery.

      Of course the reason insolvent college grads get little sympathy from the American public at large is because they are a privileged class who had the choice to go to university. Conscripting people into college would certainly change that; but until then, Rudd-O’s preemptive jab at statists notwithstanding, it is not a meaningless difference for all the people who never had a shot at higher education.

      The ed loan industry is a train wreck, but equating bankruptcy-proof debt to slavery is basically Godwin’s law for consumer economics. A more apt analog would be indentured servitude. Even with that, however, most of the European émigrés who indentured themselves were not among the well-to-do or even middle-class. One could at least argue the tired, the poor, the huddled masses yearning to breathe free had less viable options than the last several generations of matriculating young Americans, and do so without the actual poor looking on in bemusement.

  • http://whyiamnot.wordpress.com Salem

    I agree with Robert Wilbin. This is not stock. This is a loan with generous terms on repayment.

    The very reason why we don’t allow private sector players to make such loans is that in a free market the interest rates would adjust to take account of the generous repayment terms, and then it really would become a stock-like interest. Which is generally thought to be bad (although I am personally open-minded).

  • Robert Wiblin

    For those interested in true human capital equity investments, this paper gives a description of how they would work: http://www.cato.org/pubs/pas/pa-462es.html

  • Akshay Alladi

    Totally agree. In fact, in a remarkable coincidence, I blogged about the conceptual reasons for financing education through equity, rather than loans in my blog http://ulyssesmusings.blogspot.com/2011/10/in-praise-of-slavery-or-why-education.html

    Also, touched upon the slavery metaphor in this

  • Matthew C.

    Of course, the fact that people have to borrow huge sums of money for college for a paper certification is the root cause of the problem.

    Like everything else the government subsidizes, college costs go through the roof year after year.

  • http://www.andreasmoser.wordpress.com Andreas Moser

    There are a lot of countries that charge almost nothing for very good universities. Come to Europe!

    • Jeremy H.

      And these wise investments in human capital have led to… per capita incomes that are 70-80% of the United States.