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Economist proposes giving every US baby $20,000 or more

The Washington Post logoThe Washington Post 1/8/2018 Heather Long

Forget baby showers. There's a proposal to give every newborn in the United States a Baby Bond account with somewhere between $500 and $50,000 in cash. Neither the kids nor their parents would be able to touch the money until the child turned 18. Then the young adult could spend the trust fund on attending college, buying a home or starting a business.

The whole point of Baby Bonds would be to dramatically lessen wealth inequality in America, according to the economist who came up with the idea, Darrick Hamilton of The New School and William Darity of Duke University.

“The key ingredient of how successful you will be in America is how wealthy your family is,” Hamilton says. Baby Bonds are one way to change that, he argues. He presented the idea at the American Economic Association conference in Philadelphia this weekend.

Under the proposal, kids of incredibly rich parents such as Bill and Melinda Gates or Beyoncé and Jay-Z would get the lowest amount of $500 while babies born into extremely poor families would get the highest amount of $50,000. There would be a sliding scale to determine how much each baby would received based on their parents' wealth. A typical middle-class baby would receive around $20,000.

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While there are a number of criticisms about Baby Bonds, especially how to pay for it, presidents and prime ministers around the world are trying to figure out ways to reduce inequality. In the United States, inequality is back at the levels of the 1920s Gilded Age. It's gotten so bad that Wall Street firms are warning their clients to pay attention to it because inequality is driving the rise of populism. Torsten Slok, Deutsche Bank's chief international economist, says the United States and other nations are going to need creative thinking to address this. He called Baby Bonds an “intriguing” idea.

Nearly a third of American households now have $0 in wealth, according to Deutsche Bank, the worst situation since the U.S. government began keeping track of that statistic (wealth outside of a home) in the early 1960s.

Families of color have struggled especially hard to try to move up the socio-economic ladder. The median net worth of white households is 10 times the size of African-American households.

“People like to argue if only poor black and Latino families were more responsible and made better decisions, then inequality could be dramatically reduced,” says Hamilton. But years of data and real-life evidence don't support that. Hamilton points to the fact that most college-educated African Americanshave less net wealth than whites who dropped out of high school.

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To some, Baby Bonds sound too radical for America. But the United Kingdom tried a similar plan where every child born between 2002 and 2010 received a modest “child trust fund” of £250 to £1,000. The plan was axed during the Great Recession because of funding concerns.

In the United States, Hillary Clinton endorsed a version of Baby Bonds in her 2008 president run, proposing to give all babies born in the United States $5,000 to be used for college or buying a home.

“I like the idea of giving every baby born in America a $5,000 account that will grow over time, so that when that young person turns 18 if they have finished high school they will be able to access it to go to college or maybe they will be able to make that down payment on their first home,” Clinton said at the time.

Hamilton says Clinton didn't go far enough. A few thousand is barely enough to pay for a semester at some community colleges. But the higher the amount of the Baby Bond goes, the greater the cost for the federal government.

“My first instinct in thinking about Baby Bonds is; How are you going to pay for it?” says economist Veronique de Rugy, a senior fellow at the Mercatus Center, a free-market oriented think tank.

Hamilton estimates Baby Bonds would cost $80 billion a year, or about 2 percent of America's $4 trillion in annual federal government spending. If implemented, the first payments wouldn't go out for 18 years, so there could be time to build up a budget for it.

When asked where the money would come from, Hamilton pointed to all the incentives in the tax code, such as the mortgage interest deduction, that mainly go to wealthy families who don't need the money, although the recent debate of the Republican tax bill illustrate how hard it is to take away tax breaks for housing.

Critics also flag concerns about the formula to determine how much each baby gets and all the rules about when and how the money could be spent when a child turns 18. De Rugy doesn't like “paternalistic” proposals where the government restricts how the money can be spent. “People, even poor people, know what is best for them,” she says. She thinks some on the right might get on board, but only if Baby Bonds replaced some other welfare programs to help low-income households. Hamilton doesn't want to do that.

“Baby Bonds are like Social Security, but for young adults,” says Hamilton. “This is not meant to replace our entire social safety net.”

But there's a growing belief that something needs to be done about inequality. Top business and political leaders are set to meet in Davos, Switzerland later this month. The theme for this year's meeting is “creating a shared future in a fractured world” with many of the discussion panels focused on what to do to lift the fortunes of those left behind.

Deutsche Bank put out an 80-page report last week full of charts illustrating how life for the 1 percent is great, live for the top 10 percent is pretty good and life for just about everyone else isn't much better financially than it was in the 1970s. By many measures, it's gotten worse for the bottom 90 percent.

“Inequality is likely a key source of populism in many countries,” says Slok, the economist at Deutsche Bank. “Many of our clients in the U.S, Europe and Asia are asking us: What is the next populist step if these inequality trends are not reversed? What kinds of candidates are we going to see?”

It's very difficult to predict revolutions or social unrest. Slok isn't saying that will happen, but he says it's become a hot discussion topic in Wall Street circles where many were caught off guard by Brexit and President Trump's election victory. Before joining the investment bank, Torsten traveled the world for the OECD and IMF advising countries on how to solve problems, including inequality. He's quick to say there's no easy solution to a problem as complex as inequality.

“There is no Holy Grail. There is no easy answer to inequality,” says Torston. Some say education and technology will solve the problems; others advocate raising taxes and redistributing wealth. Torston says the reality is almost every major economy is getting worse right now, so nobody seems to have the right playbook.

One of the most alarming charts in the Deutsche Bank report shows how people under 55 have far less wealth at this age than past generations did in the 1980s or early 2000s. It's another reminder how much the middle class today is falling behind, even compared to their parents and grandparents.

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Improving the lives and finances of the bottom 90 percent is likely to take some dramatic changes, which is why Torston was interested in hearing more about the Baby Bond idea.

Baby Bonds have a lot of similarities to universal basic income, which has generated a lot of buzz as a possible solution if robots cause mass job losses. The idea is to pay everyone $15,000 or so a year, enough to prevent anyone from starving, but still low enough to incentivize people to try to work or start companies.

Both universal basic income and Baby Bonds are a way of leveling the playing field, but the key difference is Baby Bonds are cheaper because the money only goes out once to an individual, not year after year. In the United States, a universal basic income would likely cost over $1 trillion a year compared to an estimated $80 million a year for Baby Bonds.

“Wealth gives you choice. Wealth gives you freedom. Wealth gives you opportunity,” says Hamilton. “But it takes wealth to beget more wealth.”

Related video: If robots take your job, the government might have to pay you to live (provided by CNBC)

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