Can Baby Bonds Narrow the Wealth Gap?

Earlier this year, New Jersey became the first state to introduce an initiative directly aimed at closing the racial wealth gap in the United States. If successful, it could utilize the power of the market to help people in low-income communities move out of poverty and pay for college. However, it could also end up inflating the cost of college and place an unnecessary burden on all taxpayers.

Let’s take a closer look at how the “baby bond” proposal would work — and how things might go wrong.

New Jersey Governor Phil Murphy introduced the plan in August as part of an amended state budget. Every child born in New Jersey to a family earning less than $131,000 per year would receive a $1,000 bond payable with interest when the child turns 18. If implemented, about 70% of the state’s families would be eligible.

Though the low-return bond market would only yield modest gains over 18 years, Murphy said every bit helps when it comes to closing the racial wealth gap.

“The inequities are too wide, too raw, to ignore,” Murphy told the New York Times.

Murphy’s plan is a scaled-down version of a measure introduced in Congress by New Jersey Senator Cory Booker that would take the same $1,000 initial investment and add $2,000 from the U.S. Treasury each year, totaling around $50,000 by the time the child turned 18. Booker said such a program would have a “transformational effect” on communities of color.

“I think people really underestimate the impact that poverty has in limiting life potential,” Booker told the Washington Post.

The idea to bridge economic inequality dates back to Thomas Paine in the 1700s and connects back to the idea that it’s difficult to achieve upward economic mobility if you do not have any capital to start with, which Booker and other advocates argue is disproportionately the case for nonwhite children.

“The source of inequality generally is that some young adults have capital and others do not,” Darrick Hamilton, a professor of economics and urban policy at The New School in New York City, told the New York Times. “The difference between a renter and a homeowner is a down payment.”

However, Booker’s proposal is expensive, with watchdog group The Center Square putting the price tag at $60 billion. Conservative economists argue that it’s irresponsible for the government to place this burden equally on all taxpayers when only some will benefit from the policy.

Additionally, there’s reason to believe that giving students money to pay for college will only wind up making higher education more expensive for everyone. A 2015 study from the Federal Reserve Bank of New York found that tuition increases at colleges and universities were based on federal policy changes, and universities were using taxpayer money to build lavish facilities and add to administrative staff.

“Thus, the recipients are no better off, and college officials use new taxpayer monies to build extravagant facilities and create more niche majors that relatively few students will benefit from,” said Ross Marchand, director of policy for the Taxpayers Alliance. “Dozens of schools have installed luxury “lazy river” complexes complete with hot tubs over the past decade, all a part of a multi-billion dollar capital spending race.”
In the end, the baby bonds program was not included in the final version of New Jersey’s budget passed earlier this year. However, the state’s lawmakers agreed to continue discussing it as a way to reduce the state’s racial and economic disparities.

Grassroots Pulse covers public policy and political issues aimed at engaging highly-active policy makers, donors, and grassroots leaders at the forefront of the political process in America today.

Image Credit: Photo by Bas Emmen on Unsplash

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