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Personal Equity

One of the virtues in People’s Economics, which is still evolving, is “equity.” This is a complicated word that has taken on several meanings, but the most important ones are a sense of fairness and a kind of “ownership” stake.

Talking about this as “social equity,” or a belief that all social and political systems need to be fair and that everyone needs to feel they have a stake in greater social success, is not very controversial. There is some politics which revolves around pure individualism and denies or diminishes any need for social equity, for sure. But this is not what the US or any democratic republic was really founded on. It is a denial of an integrated and cooperative world, and I am simply going to reject it out of hand.

But what does any of this mean in practical terms? A bit of an experiment is starting to take hold that may answer this question.

Stocks are just an ownership stake, nothing more.  The market for it is … a lot more.

Equity, as an ownership stake, is easily defined for the business world. It’s an ownership stake that shares in profits, usually kept track of as shares of stock. Holders of stock do not expect a regular payment, but instead rely on one of two sources of income – capital gain, or the increase in value of that stock, or a dividend, which is a share of the profit.

The difference between equity and debt has been discussed in this framework before.

But business, as a part of the marketplace, is one of three spheres of agreement which need to work together to create a harmonious and fair overall system. We have also discussed how an equity based model might work for governments, replacing debt which has to be constantly re-issued and acknowledging that public equity needs to have a source of capital and a stable repayment system.

What does this mean for the third sphere of agreement, the personal?

Chains of slavery need to be broken.  Connections between people and their work need to be based on equitable connections.

An equity model for individuals doesn’t seem to make much sense. It certainly can’t be based on an ownership model, as slavery is not only illegal but immoral. But it can be set up as a way of acknowledging that personal capital and credit is a necessary part of the modern world. Simply put, borrowing money early in life for the purpose of education or buying property can create a more productive, secure, and happy life.

Debt, however, does feel like slavery far too often. Managing this need for cash early in life, can easily be a trap. Any equity model simply has to avoid this problem.

One new concept which is gaining ground is a model close to equity, but not quite the same, for repayment of student debt. It is called an Income Driven Repayment (IDR) plan by the US government. Popularly, it is referred to as an Income Sharing Agreement (ISA) and Income Based Repayment (IBR). It is still very much debt, a fixed amount repaid over time with interest applied, but the terms are flexible.

As with any debt agreement, it’s important to be careful.

Total student debt in the US is now $1.57 trillion, and growing steadily. It’s one of the largest categories of debt, and it is often life-long.

In any of these systems for student loans, the borrower agrees to a fixed share of their future income. If they are unemployed, they pay nothing. Usually if they are making only minimum wage they still pay nothing. But if they land a good job, a fixed share of it, say 7%, goes into the loan repayment – and no more.

Don’t make those in need have to reach for it.

Again, this is not strictly equity, but it comes close. It acknowledges that this debt is an investment and that the payback might require a lot of time, perhaps even a lifetime. It prevents the debt from becoming enslaving and damaging. But there are other effects which are rarely discussed.

For one, the debt issuer now has a stake in the success of the borrower. It will not be long before they offer career advice, training, and perhaps even connections. This will likely redefine life insurance in the long run, which is always the foundation of any financial plan. Through all of this, it directly points to a greater need for a strategic life plan developed and executed with professional coaching and assistance to maximize returns.

This naturally takes us to a true equity based model which acknowledges the connection between a personal investment, such as education, and productivity. The same model could also be applied to the acquisition of major assets, such as a house, where a partnership develops between the homeowner and the investment firm. This would again change the nature of insurance, but in that case it also provides incentives for quality construction and proper inspection in advance, along with consistent maintenance and improvement.

In short, such an arrangement can be good for communities as well as individuals.

Real equity is a partnership.

Equity, or something like it such as an IBR plan, is an acknowledgement of permanent debt. There is no way to get around the feeling that, on a personal basis, it’s a lot like slavery. But acknowledging that access to credit and capital is essential in this world, and that managing this process in a way which both protects individuals and investors, is essential. A truly equity based model starts with the understanding that time based fix repayment schedules are inflexible and do not include great incentives for anyone.

Is a personal equity model a way forward? A small step towards them is being taken with student debt. As time goes on, we will all see how the incentives to maximize the debtor’s income play out in the market. One great concern is who will be offered such plans and how much social equity, or fairness based on equal access, will be achieved.

Considering this as an experiment, for now, it’s best to see if this is a good idea first. If it does prove itself, expanding the concept to all potential borrowers and developing a more true equity model. That would include a professional team of career coaches and financial advisors which, if truly accessible by everyone, could make a tremendous difference in the productivity of the whole nation – and dramatically increase social equity as a result.

It’s worth keeping an eye on.

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