The Baby Bonds Solution to Inequalityby naomi zewde
naomi zewde is a postdoctoral research scientist at the Columbia School of Social Work. Her research on baby bonds is available from Columbia’s Center on Poverty & Social Policy.
Published August 20, 2019
The myth of the American dream is deeply ingrained in the American psyche. But that uplifting picture of success to the worthy simply doesn’t square with the facts. Most Americans’ social status does not change over their lifetimes, and social mobility has gotten less common, not more, over the past three decades.
The decline in upward mobility has coincided with a rise in wealth inequality to almost incomprehensible levels. Consider this: Forbes reports that Bill Gates’s fortune swelled to over $100 billion this year. Meanwhile, the Federal Reserve reportsthat 40 percent of American adults survive month to month, lacking the cash to cover an unexpected expense of $400. This insecurity leaves little room for taking on risk for things like moving to a new city in search of a better job or buying a home or starting a business.
The Democratic presidential candidates (among others) have flooded the web with complex proposals for reducing inequality. But the clearest solution, I would argue, hasn’t gotten its due: baby bonds. The idea is to automatically create a federally endowed trust fund for every newborn. Each would get something, but the least wealthy would get the most.
A digression for some basics. I’ll reach for what historian Steve Fraser referred to as the economic pornography of numbers: the three wealthiest Americans hold as much wealth as the bottom 160 million. Put differently, if we had $100 to represent U.S. wealth and 100 people to represent all Americans, we’d give $40 to just one guy. (Yes, it’s a guy.) Then we’d give another $40 to the next nine. That leaves us $20 to spread across the other 90 of us. In reality it’s worse: the last few actually owe the first few.
Status at birth largely determines the point along that line where each of us stands today. This is because wealth is a generational concept. It is handed down through neighborhood and social capital, through help from parents like the down payment on a house or college tuition, and eventually through inheritance. Those born into wealth will be in a decisively better position to retain and build assets. Or, as blues singer Billie Holiday put it, “God bless the child that got its own.”
These wealth dynamics directly beget contemporary racial inequities as well. The U.S. has made some headway on racial income inequality since the civil rights era of the 1960s and ’70s, thanks mostly to a loosening of education and employment restrictions. Yet the racial wealth gap has remained intact. African-Americans have had strikingly few generations to accumulate and transmit excess capital, and are actually losing ground in relative terms. According to the Urban Institute, median white wealth was five times greater than median black wealth in 1985, but seven times greater in 2016.
Baby Bonds to the Rescue
The moniker is misleading: baby “bonds” are actually a grant of equity. Babies born to families with little or no savings would get up to $50,000, while on the other extreme, the wealthiest would get a token — maybe $500. Most would fall in between. The child could not access the funds until reaching young adulthood, at which point he or she would gain control over the principal and accrued interest. The money, however, could come with strings: reserved only for school, housing or education, for example.
Baby bonds could make a big difference in breaking the vicious cycle of growing wealth inequality. In my own research, I used data from the University of Michigan’s Panel Study of Income Dynamics, which has continuously followed a sample of U.S. families since the late 1960s. I looked at the group of young adults in 2015 to simulate what wealth inequality would look like today if we had introduced equivalent baby bonds (in 2015 dollars) in the late 1980s to early ’90s. Without baby bonds, white young adults have about 16 times the wealth of black young adults at the median in 2015. With baby bonds (assuming an after-inflation return of 2 percent) the simulated ratio is only 1.4 to 1.
All of this could be accomplished at about 10 percent of the cost of Social Security. With an average grant of $20,000, and a total of four million babies born each year in the U.S., the annual cost comes to $80 billion. Baby bonds, it’s worth noting, would cost much less than the asset-building subsidy currently provided to the wealthiest households through preferential tax treatment of capital gains and dividend income ($129 billion in 2018).
Now, we can’t be certain that the kind of reduction to inequality simulated in the study would hold across lifespans just because the young adults’ wealth gap would be sharply narrowed. Still, gerontologists like Stephen Crystal and colleagues show that early-in-life disadvantages tend to grow over the course of a life. So it’s also possible — I think likely — that evening out life chances in young adulthood could create a virtuous circle across the decades.
Many past efforts meant to broaden savings and asset ownership have ended up primarily benefiting the wealthiest. For example, the so-called 529 college-savings plans offer tax breaks to parents who set money aside for their children’s education. But the tax breaks only benefit those with enough income to pay taxes in the first place and, even among the beneficiaries, offer proportionately more to the highest earners. It should not be terribly surprising, then, that only 3 percent of eligible families opened a 529 plan — and those who did had 25 times the median financial assets of those who did not. Over the years Uncle Sam has also experimented with programs that subsidize the savings of low-income households seeking to buy houses. But this approach fails to account for the profound difficulty of saving while poor. One randomized control trial a few decades ago was unable to identify any impact of savings incentives on targeted households.
I think baby bonds could be the politically viable as well as economically effective policy that breaks through today’s partisan atmosphere. Baby bonds provoke little in the way of organized opposition. Contrast that to the ideologically reflexive (or self-interested) opposition to other proposals designed to narrow inequality — consider a wealth tax, or Medicare-for-all, or rent control in cities that are crowding out the working poor.
I’ll confess that I am frustrated that the United States, for all its resources, stops short of guaranteeing every citizen cheap (or free) post-secondary education, quality healthcare and affordable housing. Regardless of whether, or how well, we reform those sectors, baby bonds would still give citizens greater capacity to pay for their own education, healthcare and housing. Broad access to capital supported by baby bonds seems a politically and economically feasible way to shore up the fortunes of Americans who begin life two strikes behind.