April 11, 2021

Andrea Gabor: Invest in Children and Equality: Hand Out Baby Bonds

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Andrea Gabor is the Bloomberg chair of business journalism at Baruch College of the City University of New York. Her book “After the Education Wars” is an excellent look at the ways in which real reform can actually succeed.

At Bloomberg’s site, she looks at a bold idea about how the government can address several issues. Baby bonds.

A consensus is emerging around an idea Americans used to scorn: That government cash payments are a good way to help struggling citizens and give the economy a boost.

President Joe Biden’s $1.9 trillion pandemic relief law is on its way to giving 159 million households $1,400 or more apiece, no strings attached. Some localities are experimenting with universal basic income plans, and politicians are finding them popular enough to advocate their expansion.

But there’s a smarter way to hand out government money, one that could target pressing social problems like inequality of wealth and educational opportunity, and at much lower cost: baby bonds.

Baby bonds are government grants deposited into interest-bearing accounts. If issued to all low- and middle-income children, they could eventually cover most of the costs of a four-year education at a public college or the down payment on a home. Assuming average interest rates of 2%, an investment of $1,000 at birth, plus $2,000 annually, would yield about $44,000 at maturity, when the recipient reaches 18, according to Kent Smetters, Professor of Business Economics and Public Policy at the University of Pennsylvania’s Wharton School.

How could baby bonds help?

Not only would baby bonds be cheaper, they would target the biggest source of inequality among White, Black and Latino Americans: the wealth gap. While baby bonds would not be a substitute for the welfare system — they would do nothing for poor families now — they’d be likely to sharply cut future welfare expenditures by boosting college attainment and home ownership, key factors in building household wealth.

The wealth gap is actually a chasm, with median White households holding nearly eight times the assets of Black households. It makes Black families more vulnerable to economic shocks, such as the Covid-19 pandemic, and helps explain the recent plunge in the number of poor students, especially Black youths, who enrolled in college straight out of high school. While high school graduation rates held steady, college matriculation was down 21.7% in 2020 compared to 2019, but for students from low-income and high-poverty schools, the drop was over 30%.

Read the rest of the article at the Bloomberg site.

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