Presidential candidate Hillary Clinton proposed giving every newborn $5000 that would accumulate interest and be available once the young person turned 18. She is now backing away from the idea but it’s still worth thinking about the economics of the proposal.
Consider first that many parents already save to help their children through college. Thus, the first and primary beneficiaries of the plan wouldn’t be children but parents who knowing that their child has some $12,000 (with interest) coming on their 18th birthday can afford to spend more on themselves. (Or if you like the parents can spend more on buying the teenager a new car instead of tuition, room and board.)
The parents may be the primary beneficiaries of the transfer but they are also the primary bearers of the tax. Thus, instead of parents taking money out of their pocket and giving it their children directly we have the government reaching into the pocket of the parents with one hand and giving to the children with the other. But taking a dollar from A and giving it to B typically costs a lot more than a dollar – given the costs of taxation and bureaucracy a dollar taken may be only 50 cents received.
Baby bonds are more likely to be a net increase in wealth for poor families. But will the money be spent on something like college? Yes, in some cases, but it’s naive to think that the only problem of poverty is lack of money. Laugh or curse if you like but think about it this way: A child born in the United States already owns an immensely valuable asset, namely the right to live and work in the United States. This right is worth much more than $12,000 (ask any immigrant) so is more money really going to make a big difference in life choices?
A baby bond might be worth testing if it were targeted to the poor (to avoid the wasteful transfer) and if instead of focusing on income it looked to incentives. A better baby bond would be a true bond paid only if say the baby graduated from high school and had not been charged with a crime by their 18th birthday.
“Not yet charged with a crime” is too high a hurdle. Sheriffs across America would be shaking down 17-year-olds with the threat of trumped-up misdemeanor arrests.
It sounds rather like the Child Trust Fund introduced in 2002. This is a £250 voucher given to the parents of a newborn to be paid into a saving scheme and available to the child when they turn 18. There is then an extra £250 when the child turns 7 (or £500 for children from lower-income families) The intention of the scheme is to encourage a habit of saving as further payments (either up to £100 monthly or up to £1200 annually) can be paid into the fund which is tax-free.
Imposing additional eligibility conditions on the fund, such as passing exams, makes the savings less certain (so additional funds are unlikely to be saved that way) and increases administrative complexity (and therefore costs).
The Baby Grant in Australia has been a mixed success. Anybody who has a baby gets 5k. Some data suggests
that it is in fact an incentive (or removes cost restrictions) for lower income parents As for
the value of living in working in the U.S., consider the discount rate–especially for low income people.
Makes a difference–many would rather get the money now than wait for the kid to earn a living. Plus, living in the U.S. aint what it used to be.. Hey, no need to spend billions in Iraq, give some money to some poor people. Odd how
programs/proposals directed to plain folks are heavily scrutinized while say military adventure and waste
get a pass in the U.S. Seriously, this baby bond would be a trivial amount relative to the other useless
crap taxpayer money (or debt) is squandered on…….
Aren’t you are assuming every adult have the same number of children?
What about a $5,000 tax rebate, or a grant for university? That might cost less to spend. I doubt increasing tax raises the cost that much: isn’t it a fixed cost system? I’m surprised by the figure you are giving, too: aren’t their ways to reduce that cost of tax, like simplifying the tax code?
Bertrand deJouvenal explained things like this nicely in “The Ethics of Redistribution.” The poor have little political clout, so politicians go for programs that seem to benefit the middle class, which in turn pays for the programs, so the only real effects are to give politicians more power and waste a lot of money.
Doesn’t the EITC function like a rebate for poor people’s kids already?
Something in the back of my head remembers a similar (Clinton?) proposal, but the baby bond would be the initial funding for a private account to supplement Social Security.
At age 21 (or so) the initial $5000 seed money would be repaid to the government and the balance left to compound.
That’s interesting you would quote my citizenship at $12,000.
I worked four part-time jobs and couldn’t even declare that much on tax return. And I had no insurance so I racked up a bunch of debt my dad had to pay when I had to go to the hospital.
Now I work in Japan where I get universal healthcare for less money in taxes than I might have paid out of pocket in the U.S. and I make a lot more money.
Right now my U.S. citizenship is worth about $40,000 in loans. My college degree and the ability to speak English was the only thing that I needed to get this quality of life in Japan. I could have gotten that in one of several dozen different countries, not nearly as “free” as America is.
So I should fund not only the generation before me but also the generation after? Any chance I could keep some of the money I earn to fund my own life?
So I should fund not only the generation before me but also the generation after? Any chance I could keep some of the money I earn to fund my own life?
Colleges will just raise their prices. Not that they really need any excuse to do so.
If you consider the national debt as an intergenerational transfer of wealth from the young and unborn to the presently living who would otherwise be taxed, then I suggest using the proposed inefficient transfers to instead pay down debt.
“So I should fund not only the generation before me but also the generation after? Any chance I could keep some of the money I earn to fund my own life?”
As soon as you’ve paid back the money of those who funded you when you were young, and those who will fund your life when you’re old – yes, why not?
I read you as saying that the poor can’t be trusted to spend their money wisely. Then why trust them with credit? Aren’t you making the argument of a “baby bond snob”?
Collecting several good points, how about making a matched contribution to one of the college savings plans the parents establish. That would create an incentive for parental saving. The machinery for linking the money to university attendance is already there.
Peter hits the mark. When your child goes to college, the college will take whatever money you have saved, adjust tuition assistance accordingly, and ensure that your child has the same debt as the kid whose parents spent their money on fancy cars and ski vacations. Even what Thomas describes is just a money funnel to universities that is very unlikely to alleviate tuition costs.
“But taking a dollar from A and giving it to B typically costs a lot more than a dollar – given the costs of taxation and bureaucracy a dollar taken may be only 50 cents received.”
I don’t have the figures, but I think the administrative expenses for government programs like Social Security and Medicare are a lot lower than 50%.
I don’t think the parents would be indirectly paying these bonds through their taxes. They’re bonds. The babies would receive a $5,000 bond and the indebtedness of the nation, for which they would be responsible, would increase by the same $5,000. As far as the real net worth of those babies, including their share of federal indebtedness, the change would be zero. For no net benefit, they’d get an extra bureaucracy and cede more power to federal politicians.
I believe it is a good theory but how are we going to provide the money for the bonds and how are we going to make sure the poor families don’t get taxed to decrease the money they make.
“had not been charged with a crime by their 18th birthday”
What if someone is charged with a crime, brought to trial, and found not guilty? In that instance, it would be unfair for there to be a stain against their character.
How about a Roth IRA for each child when they are born. Funded by parents, grandparents, anyone. No need then to worry about retirement. 59+ years of tax free compounding.
John,
Are you implying along the lines that if the government printed enough money to give everyone $1,000,000 it would cause massive inflation?
What a novel idea!
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