Baby Bonds: A Plan for Black/White Wealth Equality Conservatives Could Love?

Yves here. I strongly suspect that Naked Capitalism readers will find a lot not to love about this proposal, but I’ll let you have at it in the comments section. I’ll start with two. The first is setting up this program as bonds, when they are most like a trust account. And why should the amount of the grant be set at birth? A lot of children suffer severe setbacks after birth, like the death of a parent or debilitating injury.

Second is that this proposal does nothing to address the expressed problem. The issue is that even though children from lower-income backgrounds might get into college, they can’t mix much/at all socially with the better off students because they don’t have the spending money to allow them to do that. But these “bonds” provide for spending money only for perceived-to-be-legitimate purposes, like the education itself. Even though going on ski trips with the other kids might be key to economic advancement, it would be politically unacceptable for a government program to pay for that sort of thing.

By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website

Imagine that a black child from a family of modest resources gets the opportunity to attend an elite college preparatory school. Motivated by a love of learning and strong desire to achieve, he excels in school and goes on to attend highly regarded universities, earning advanced degrees. Surely that child is well positioned to ascend the ladder of economic prosperity in America, right?

Not so fast.

The goal of broadening financial wealth to all Americans, regardless of race, gets plenty of applause across the political spectrum. But so far this goal has remained devilishly elusive. To understand why you have to know how people come by wealth in the first place. It’s popular to say that we build wealth through discipline — by hitting the books, working hard and saving money. The reality is a little different.

Past Injustice Shapes Present Reality

Darrick Hamilton knows this from personal experience. Despite his family’s modest means — not poor but hardly affluent — he attended the Brooklyn Friends School, an elite private institution where teachers emphasized social justice. Hamilton started college at Oberlin excited to seek out his path to the American Dream. But he soon found out that the path was smoother for some than for others.

All around him, white kids from affluent families were getting checks in the mail from their parents — money that could be spent on tuition, extracurricular activities, and the kind of socializing that builds professional networks. Black students of more modest means, on the other hand, were often at a disadvantage even when their parents were able to help financially. If they received money from home, things besides books demanded financial attention. The same was true if they had a job. Even when black students worked hard and saved diligently, the money was often spoken for before it was time to pay the tuition bill for the semester.

The reason has to do with the cumulative effects of centuries of gross economic disadvantages that black families have endured, from slavery to Jim Crow and beyond. The legacy of those severe headwinds is that even when an individual family is able to reach the middle class, there is still likely to be a constellation of poorer extended family members in need of various kinds of financial assistance. When they call, you help, if you can. Economists call this “wealth leakage.”

Hamilton noticed this phenomenon play out among black students at school and in the professional realm. Rather than enjoying resources from parents and grandparents, they often had to provide money for cousins, nieces, uncles, and siblings.  After obtaining his Ph.D. in economics at UNC-Chapel Hill, Hamilton, who now teaches economics and urban policy at The New School in New York, focused on how poverty in the family increases the racial wealth gap for middle class black individuals.

The source of wealth building in America, he realized, is less what you save than your capacity to invest in an asset through money given by parents and grandparents. These transfers are critical to the acquisition of assets, like a home or a small business — the kinds of things that require huge down payments.

“If you’re not fortunate enough to get that down payment or have that resource at a key juncture of your life,” observes Hamilton, “you will not have that pathway towards building economic security that somebody else has. You could be a jerk. You could be a good person. It has little to do with the particular individual.”

This logic flies in the face of the long-cherished belief that education and hard work are the great equalizers in American society. Many still insist that much present day inequality is caused by bad individual decisions and not by structural problems associated with discrimination. But the vast inequality between black and white citizens suggests that there’s more going on than poor choices. In 2013, according to the Federal Reserve’s Survey of Consumer Finances, the median household wealth was $134,230 for whites compared to a paltry $11,030 for black Americans.

The reason, says Hamilton, is pretty clear: “In a capitalist system, if you lack capital, it just locks in inequality.”

Fortunately, he thinks the problem can be alleviated if we are willing to aim the attack at the source. Hamilton and his colleague William A. Darity, Jr. of Duke University are stratification economists, pioneers in an emerging subfield of social science who focus on the structural dimensions of a person’s economic position. They propose a solution to wealth inequality that may appeal across the political spectrum: Why not give every American baby seed capital so they can grow up to take part in the capitalist system? This could be done, they argue, through “Baby Bonds” that would be set up for every child born.

How Baby Bonds Work

Baby Bonds, in Hamilton’s formulation, would be funded directly out of Treasury and held in an account by the federal government, similar to Social Security. The amount a child receives would depend on the wealth position into which she is born. If she’s the offspring of Oprah Winfrey and Bill Gates, she might get $500, but upwards of $50,000 if she is born at the lowest rungs of the economic ladder. The average amount for a child would be around $20,000. Accounts would be guaranteed a nominal one and a half rate of return, and the payout would not take place until the child becomes an adult. At that time, you get to spend the money — but not just on anything. The funds would have to be used for a “clearly defined asset enhancing activity,” like financing a debt-free education, purchasing a business, or buying a home. (The program would need to be coupled with financial reform and regulation to mitigate predatory effects, including extraordinary tuition increases aimed at exploiting better-resourced young adult baby bond recipients).

A commission would be set up to identify exactly what kinds of activities might qualify.

“These conditions are set up to protect the resource,” says Hamilton. “In my own situation, if I had received an infusion of cash as a young adult, there would have been a lot of family needs to take care of before I could begin thinking about self-investment like purchasing a home. Specifying what the money can be spent on may not guarantee an outcome, because people still choose the investment they engage in, but it at least ensures that the investment is an asset-enhancing endeavor which can help build wealth over the long run.”

Unlike some past proposals for child savings accounts, Baby Bonds are designed so that it doesn’t matter if your parents can contribute or not. Hamilton says this is done so that however good or bad or affluent or poor your parents may be, as a citizen you get some seed capital so that you can take part in the American economic mobility system.

But wouldn’t such a program be too costly?

Not at all, says Hamilton. He notes that there are about 4 million children born every year, so if the average account is at $20,000, the whole program might cost $80 billion. If you add another $10 billion, the very highest estimate for administering the program, it comes to $90 billion maximum. That might sound like a lot, but not when you consider what the federal government already spends trying to promote asset ownership through the tax code. He cites a report on all such policies (like the mortgage interest reduction and reductions in capital gains) by CFED, a Washington-based non-profit focused on expanding economic opportunities for low-to-moderate income Americans. All told, these programs cost over $500 billion dollars. (The mortgage interest deduction alone is estimated to cost more than $405 billion for tax years 2014 through 2018).

Next to these figures, Baby Bonds looks like a bargain. They also have the advantage of distributing the capital where it’s needed most.  Federal programs already in place tend to funnel money towards the more affluent, says Hamilton, noting that the bottom 60 percent of earners get about 5 percent of that $500 billion, while the top 10 percent get well over half. He thinks that Baby Bonds could be fully funded simply by capping the existing mortgage interest reductions.

So how would a race-blind program help to close gaps in wealth and income between black and white Americans?

Hamilton points out that about 85 percent of black households fall below the national median of the wealth distribution, so the means test for the Baby Bonds program as well as its target needs to be keenly focused on wealth.

Baby Bonds address wealth in two ways: First, because of the way black people are clustered at the poorer end of the wealth distribution, more will qualify for the program. Secondly, because the program is focused on asset-enhancing activities, they will benefit when they become adults and are able to use the funds to build the kinds of assets that have so often been out of reach historically.

A Potential Political Winner?

Inequality has been a hot topic this political season, but much of the discussion has focused on student debt. Hamilton acknowledges that this is important, but it’s not enough to close the racial wealth gap.

“It will help avoid wealth leakage for millions of people and black individuals that end up going to college,” he says. “It’s certainly the case that black students are disproportionately impacted by student debt. But this only helps those who actually end up going to college. It’s limited in its approach.”

Something more is needed. He notes that in other countries, programs similar to Baby Bonds have already been implemented, such as a child trust program set up in 2005 that gave every British citizen born on or after September 1, 2002 an investment account to build savings that would help fund their transition to adult life.

The U.K. program differed from Baby Bonds in several key ways: it was smaller in scale, parents could add to the account, and the trust was unconditional, meaning that the money could be used for anything rather than a specific set of potentially wealth-building activities. Unfortunately, the program sank under a wave of austerity in 2011 following the global recession, so it’s unclear exactly how well it worked because the children who received the accounts are not yet old enough to have used them.

Could Baby Bonds work in America? Hamilton observes that in the past, both conservatives and liberals have endorsed programs designed to give American children a stake in the future. KidSave, a program conceived by then-Senators Bob Kerrey of Nebraska, with then-Senator Joe Lieberman of Connecticut as co-sponsor, would have allotted each child a small deposit at birth (around $1000), with additional $500 deposits every year for five years. The money would then be invested in a limited number of mutual funds, but it couldn’t be withdrawn until retirement, when a substantial nest egg would have theoretically grown. Various versions of the plan attracted support from conservatives like Senator Rick Santorum of Pennsylvania and the Heritage Foundation.

The premise behind Baby Bonds is slightly different; it’s based on the recognition that the problem in building wealth is not savings.

“Most Americans don’t save, period,” says Hamilton. “It’s really getting access to that asset that’s going to appreciate. Homes give Americans most of their wealth, or, if not homes, some other asset. So this is moving us a bit from that narrative of how to leverage poor people to do better things by giving them incentives to saying, well, why don’t we empower them with an account so that they actually can make decisions that can lead to their mobility.”

Hamilton observes that Baby Bonds simply arm everybody with the opportunity to benefit from the markets— an idea the most die-hard free market champion might appreciate. “If conservatives really believe in the fairness of the markets,” he says, “then let’s give everybody opportunity to participate. We’re talking about babies, so this is before we start coming up with narratives about the deserving poor or the undeserving poor. We’re saying, at birth, we’re going to give everybody a chance to engage in economic mobility in America.”

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  1. Jeff


    The funds would have to be used for a “clearly defined asset enhancing activity,” like financing a debt-free education, purchasing a business, or buying a home. (The program would need to be coupled with financial reform and regulation to mitigate predatory effects, including extraordinary tuition increases aimed at exploiting better-resourced young adult baby bond recipients)

    is called “free tuition” elsewhere on the planet.

    1. Cry Shop


      There’s that tax on time” thing again, as if any kid from a poor, disfuctional family is going to know how to really establish a business, instead of having his clock cleaned by the USA equivalent of RBS. Goldman Sachs, anyone?

      Reminds me of how all the really valuable land still got into the hands of the railroads even after the Homestead Act. In the end, the author knows this will never fly in the USA, so I guess it’s really about the Overton Window effect. Showing the right (and neo-liberals) care, but those shifty welfare bums just won’t let us help them.

  2. UserFriendly

    This would never work without single payer. Would we tell poor parents of a sick kid that needs expensive care they can’t use the money on healthcare? What about if the parent gets sick? how is the kid going to feel if they can’t use their baby bond to save mom’s life? If poor people know they can use the bonds for health care then that is one thing they wont budget for. That is just the first thing that jumps out at me. But I’m sure there are tons of other things where it would be cruel to say here is some money that you can’t use for anything but what we deem appropriate.

    1. scott 2

      I’d be for this but the value of the bond would have to be forfeited by the parents if said child committed a felony, multiple misdemeanors, got pregnant (name behaviour you would like to discourage)…..

    2. Arizona Slim

      Exactly, skippy.

      IMHO, overpopulation is at the root of a lot of our problems. It’s time to pay people NOT to reproduce.

  3. PlutoniumKun

    I can appreciate the political argument that social programs that appeal to the right and libertarians have more chances to be implemented, but much more likely is you end up with something like Obamacare, which of course was ‘sold’ on precisely this basis. The best way to appeal beyond ‘the left’ is to advocate widespread universal benefits that have an obvious appeal for the majority, i.e. the 90%. This is straightforward – free healthcare, free (or very cheap) third level education, free kindergarten, etc.

    I think the notion of baby bonds is a reasonable one in principle – but only as one small part of a comprehensive system of support. As others above have noted, this proposal seems entirely aimed at paying for things that would in most advanced civilized societies be provided anyway – free (or at least, highly subsidised and cheap) third level education, support in providing housing, support for setting up small businesses, etc.

    It also avoids the huge issue of early development. There is overwhelming evidence that the key years in helping children from disadvantaged households achieve equality in education (notwithstanding all the other disadvantages such as social ones) can only be addressed by intervention in pre-school and early schooling. In Scandinavia, there is a huge focus on providing free childcare from 2 years old onwards. The reason for this is simple – the evidence suggests that providing safe secure play and educational for children at a very early age is the best way to aid in ensuring they don’t suffer disadvantages in later education. No amount of hard work and capital is going to help a person if they have suffered from poor healthcare, general care, and support as a small child. This is the key flaw in baby bonds. Access to capital for education is just one small part of the problems people in poverty face.

  4. Bill Smith

    How does it work if after one year the kid’s parents who had been in the top 1% divorce and the mom gets nothing? Or if the parents kick the kid out of the house at 16? Or if after the kid is 1 the parents who had been in the top 10% get laid off and never got a good job again?

  5. TG

    Excuse me.

    The overwhelming majority of the recipients of affirmative action in the United States are post-1965 third world refugees and their US-born descendants. I fail to see how their poverty could be due to centuries of oppression in this country. And soon they will be a majority of the population. And not much after that, and the United States will itself be a third-world country, and if there is no money to spread around what is the point of even talking about this?

    This is simply the oligarchy playing divide and conquer. We should be focused on why the working class in this country – black, white, asian, etc. – is losing ground, not squabbling over crumbs while the elites rob us blind. IMHO.

    1. Katharine

      The overwhelming majority of the recipients of affirmative action in the United States are post-1965 third world refugees and their US-born descendants.

      Can you document that, please?

  6. John Day

    Getting into an elite institution won’t help you if your momma swore at you and called you a “piece-of-shit” when you didn’t obey, and people got shot at night where you grew up, and you got beat up for talking-smart in school, and so on. Head-Start does better, because it comes in at a point of critical formation of the world-view in young humans.

    1. nony mouse

      stop talking about my momma!

      a “thank you” from one whose early life resembled this. i can barely read the article. why should most of us cry about a “child from modest means” who makes it to an “elite (educational) institution” not being able to ski trip with their should-be peers?

      some people have real problems growing up. why should they suffer more, simply because of that?

      guess we all had the wrong fathers…

  7. Jupiter

    Most people have children at a time where they have not reached full income potential. Heck, people might take a few years off to lower their incomes to raise young kids and get bigger baby bonds and then go back to work as an attorney. When their kids are 18 and they are pulling in six-figure incomes we may wonder why their kids are getting the big bonus. And we can imagine all of the mortgage sharks out there preying on 18 year-olds to get them to buy crappy houses because they will be tempted with their nest egg.

  8. PaulHarvey0swald

    When we start handing out free money, you know the banks are going show up. If I need cash for something else, something legitimate like health care (or something illegitimate like gambling “expenses” or a vacation) what stops me from…
    1. selling the “clearly defined asset enhancing activity” to a financier the day after I buy it?
    1b. Make that illegal.

    2. borrowing against it?
    2b. Then, *wink* defaulting on the loan, so the bank gets it?

    3. getting a “reverse mortgage” on it?

    Naturally, the banks will not twist any arms to get this ball rolling. This will turn into a pawn store on steroids. Which will, eventually, cross the line between actually buying a “clearly defined asset enhancing activity” and just getting the money before I turn 18. Which will eventually devolve in to the money changing hands at the hospital nursery.

  9. Fred

    Separate but equal opportunity. On a bright note lots of it will get spent on a Democractic constituency. What a wonderful idea.

  10. Katharine

    Disappointing. When I first came across the phrase it sounded promising, but this has so many strings and qualifiers it’s just mingy.

  11. Sean

    I thought i was going to hate this proposal, but then I thought of my own situation. Child of single mom making 30k a year. Got into top 20 university with heavy financial need aid. Here’s the thing my father provided little but he ended up dying when I was 16 so I received SS benefits from I believe that time until I graduated high school maybe a few months later. Amount to something like 25k over that time period which was almost entirely saved.

    That cash in my situation ended up allowing me not to do work study and take extra classes or extracurricular. Allowed me to participate in 2 study abroad programs including extra trips during one of them. A little bit of beer money for socializing which I’d consider important in learning adult socialization. And I think I even had some money left over after graduating to make the transition to a major city more feasible and with a cash cushion (well graduated 2007 so wasn’t seeing signing bonuses etc that were there in other job markets).

    This would never become a real program. It would be too difficult to monitor that the cash is spent wisely and create a huge bureaucracy. So the program is dead on arrival. But for those who are truly motivated and sound decision makers this amount of cash would be a huge benefit.

    1. flora

      an aside: years ago, starting in 1965, before the neoliberal slash and burn crowd got to dc, SS would pay benefits to a surviving child thru age 22 who was attending post-secondary school. In 1977 almost 900,000 students were receiving this benefit. The student benefit was repealed in 1981. (Thanks, Reagan.)

      The govt could simply increase Pell and Perkins grants – grants, not loans, so no need to pay back. But that would eliminate the interest/fee charging FIRE sector, and sent the neolibs into shock.

        1. flora

          19 is the current age limit for a child still in school. The old limit of up-to-22 covered a surviving child for a child enrolled in post-secondary education. That additional post-highschool education could be a 1-2 year trade school, tech school, voc-ed, or a 4 year college. So 22 was good upper limit. A surviving child could get a post highschool education and start a career without massive debt.

          1. Cry Shop

            Apparently Sean’s Mom didn’t need any of the ss benefits Sean recieved to feed and cloth him, nor did Sean need to work to help his family. Single parent, yes, hardly indicative. its hard to see past personal experience.

            “[Money] can’t create sympathy between rich and poor…Because
            sympathy – common feeling – the sense of fraternity – can spring only
            from like experiences, like hopes, like fears. And money cannot buy

            1. Sean

              I was pretty clear on my situation so not sure why you are attacking me. When your use to living on X income and discipline its pretty easy to save a sudden bonus.

              I also said I went to a top 20 Institution. How those work with financial need if its high which I qualified for basically everything means you only have a couple thousand in tuition payment and a small amount of loans per year (3-5k) and the savings from SS were too small to effect need based aid much. So maybe special situation. So I had fairly low cost of living for that time period.

              You can’t spend money on everything so 22 does seem excessive.

  12. dk

    This is a lousy end-run substitute for better wages for workers

    The balls on some people. Still waiting to something other than privatization-oriented mish-mash from the New Economic Thinking crew.

    It also strikes me as a step further towards “people farming”. We gave you something when you were born, so you owe us from day one.

    1. Sean

      Holy Grail is a government income program. With where I think productivity is going its going to be necessary some day when the robots take all the low wage jobs.

      But the politics are a mess. Expanding earned income credits is probably the best path.

      government interferring with prices like wages will only cause more problems.

      1. Alejandro

        Whether by commission or omission, ” government interfering with prices like wages”, is always in play…the challenge would still seem to be, does this “government interference” steer towards a fair and just society {OR} does “it” continue to subsidize the rich at the expense of the poor?

        While “baby bonds” may sound lofty, fuzzy, and well-intentioned, from my POV seems like an attempt to defer to the future, what needs reconciling today. IMO, a policy prescription that would immediately impact the lives of most, would be a well remunerated guaranteed job TODAY!

        Also, presenting technology (AI, robots etc.) as replacing/displacing humans is just sociopathic fear-mongering, and only effective to the point that “its” accepted as an inevitable “reality”…but “reality” can be subjective and perceptions can be deceptive…like “government interference” can “technology” be re-purposed towards a fair and just society {OR} does “it” continue to subsidize the rich at the expense of the poor?

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