Could ISAs help save early education?
A case for experimenting with Income Sharing Agreements in K-12 education
In his book Saving Capitalism (which I highly recommend), Robert Reich makes an interesting point which has stuck with me for some time.
He notes that though our current economic system is supposed to reward value creation fairly, it tends to overvalue people whose work is positioned closely to value extraction events, while undervaluing those whose work is farther from extraction events (note - by value extraction events, I mean times where money is changing hands).
For example, a good M&A banker will do better relative to the value they create compared to a good teacher. Why? Because the value the M&A banker creates (facilitating the process by which one firm acquires another) is typically tied directly to a major value extraction event, and the banker can justify taking a cut of transaction itself.
On the other hand, good K-12 teachers are examples of value creators that are unfortunately distant from the realization of the value that they create (which we will crudely define in this post as the future earnings of their students).
I’d be willing to bet that just a few good teacher's during early education can have a life altering impact on the trajectory of a student and thus their lifetime earnings. This was the case for me personally, and I believe there many successful people out there that feel the same way (especially those that came from less advantaged backgrounds). It’s a difficult measurement/attribution problem, but a few studies have actually taken a stab at it - a 2012 study by Harvard and Columbia economists found that replacing a poor teacher with an average one would raise a single classroom’s lifetime earnings by $266,000.
I think good K-12 teachers in America aren’t compensated proportionally to the value they create. If this is factually true, it means we have an economic inefficiency in our society, which, if we corrected would generate tremendous value for everyone. This inefficiency currently dissuades talented individuals who are also self-interested (ie want to be fairly compensated for their talent) from entering the teaching profession.
On a slightly separate note, I also don’t think teachers get as much respect in America as they do in other societies. Where I grew up, I often felt that students around me were disrespectful towards teachers. As I grew older, I also learned that becoming a K-12 teacher isn’t a traditionally “respected” profession if you’re ambitious and talented. These ideas clashed with how I personally had been raised. Growing up in an Indian household, I was routinely programmed to venerate teachers. One of the sayings my mom drilled into me was “Acharya devo Brava,” which I think translates roughly to "we should treat teacher’s as we treat God." Given America’s distinctively capitalistic culture, where one’s economic value is too often considered a proxy for their human value, perhaps one reason (of course, there are many) why teacher’s aren’t respected here is because they’re low on the totem pole in terms of earnings.
Restructuring and improving teacher compensation would likely attract better talent towards become teachers, increase the level of respect they carry and in turn their happiness in their day to day jobs, all of which would lead to better outcomes for students and ultimately a wealthier society.
I believe this is a problem that Income Sharing Agreements (ISAs) could help solve. While today we are starting to see ISAs used as a way to fund vocational training (where there is clear, short term relationship between the education received and a job offer afterwards), I think there is potential for broader, more “radical” use cases. ISAs might be the thing that could finally aligns the incentives in the right way for K-12 education.
Whereas today public school teacher’s salaries are almost determined entirely by an arbitrary political negotiation between teachers unions and governments, what if instead they were at least partly determined by how well their students actually do after graduating?
Suppose we introduced an new K-12 school - let’s call it ISA Academy (the “academy”). Student’s who enter the academy agree that they will give 1% of their future income for 20 years once they get a job (after college, post-graduate studies, etc) to the academy. The academy has 100 students per grade, and so 1200 students overall, with 100 graduating each year. Let’s assume a 1:12 student to teacher ratio (pretty good), which means the school has 100 teachers. Assuming that each student earns an average of $75k for the 20 year period, this values their total contribution back to the school over 20 years at $15k. Since there are 100 students graduating from the school each year and exactly 100 teachers (thanks to my nicely contrived example), this means that every teacher gets an additional $15k per year in the terminal state (ie 20 years after the first class graduates).
Obviously there are a lot of parameters and stipulations here that would be need to be tweaked for this example to start becoming realistic. We’d probably need various exemptions and payout caps for students. We’d really need to think about how to split the ISA proceeds pool amongst the teachers to best align the teacher’s incentives with student long term success and prevent any party from being able to “game” the system. I provided this very simple hypothetical just to illustrate that it’s possible to structure a relatively modest ISA that would be a non-trivial financial motivator for teachers.
Of course, there are many more questions to be discussed and debated:
How do you structure the ISA so it’s fair and acceptable to all involved parties
Would parents be willing to send their students to ISA Academy?
How would the ISA incentive change teacher behavior? What if it actually leads to teachers favoring a few students they believe are likely to “make it big” at the cost of paying attention to everyone else?
Doesn’t incentivizing teacher’s to maximize their students’ future income clash with the goals of providing students a broad general education?
Would ISA Academy ultimately have better outcomes for its students compared to a normal school?
However, I believe that the only way to really find out the answers to these questions is to give it a shot and start experimenting. I’d love to see an ISA Academy come to life soon.