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.