Daniel A. Epstein suggests that investors should be able to buy a share in children’s success:
It starts with a number: 17. A 17 percent compound annual growth rate, to be precise. That’s the astronomical potential return on investment of educational intervention on young children, according to the Nobel laureate economist James Heckman. The return manifests itself in increased future earnings and reduced social costs. Today, that 17 percent compound annual growth rate is inaccessible to investors, but if people could issue shares of their future cash flow, it would unleash that potential, initiating a massive influx of investment in children.Consider a situation that is, unfortunately, all too common. A mother works two jobs, dropping her toddler off at a friend’s house early each morning and picking her up late at night. The mother can’t afford high-quality child care and, because of that, statistics show, years from now that child will be more likely to repeat grades, become pregnant while a teenager, commit crime, visit the emergency room and depend on welfare. One day that child will probably earn less than people with similar backgrounds who did receive high-quality child care.
But what if that toddler had something to offer investors? If she could sell a percentage of her future income in exchange for a coupon to receive child care and if the government offered tax credits to investors to compensate them for the decreased social cost that they finance, investors might compete to pay for her education. Millions of children would gain access to the financing that they need to reach their full potential, the government would reap significant savings and investors would profit handsomely. Furthermore, such a system would have revolutionary side effects.
Just as the stock market has allowed the invisible hand to guide funds to stocks that have promising growth potential, a human capital market would guide funds to people with promising potential to increase earnings and cut social costs.
My first thought is that there’s a huge information asymmetry problem here leading to quite a bit of moral hazard. In fact, when this was tried at the (Ivy League) university level, many of the students planning on going into non-profits, the arts, etc. took the alternative loan that asked them to pay back a fraction of their income, while the students planning on going into, say, finance stuck with an ordinary loan.
Not-so-starry-eyed investors would offer tremendously different rates to different students, based on test scores and career goals — and that would be politically unacceptable.
Robin Hanson goes further, and “shockingly” calls the piece a pro-slavery op-ed:
If we allowed this, observers would happily laud the initial influx of money to these kids and their families. But a few decades later, many would complain loudly about the “exploitative” and even “racist” extra “tax” these kids must pay as adults. Media coverage would focus on those who sold the largest fraction of their future income and made the worst educational investments, becoming a new “slave underclass” of “company town” parents who feel they can’t afford to raise kids without selling off most of those kids’ future.
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I’d be reluctant to be an long-term investor, fearing that later political pressure would be irresistible to “free” these “slaves” from their payment obligations.