Baby bonds to reduce racial inequality in US…

The major issue in US racial inequality. The solutions to address increasingly mirror those adopted by the developing world.

Lynn Paramore of INET writes about this idea by Prof. Darrick Hamilton of Professor at the New School. He says the same thing. What determines your future is the income your parents had in the past. As most of the time, whites parents have higher incomes, they do better than blacks.

Baby bonds is one idea which tries to address these income at birth differences:

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.

Calling it a bond etc just makes it sound fancier. This is your typical redistribution schemes which have long been ridiculed in this part of the world.

What about the economics of the scheme?

But wouldn’t such a program be too costly?

Not at all says Hamilton. He notes that thire 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 programscost 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.

Really tough times ahead as the world we thought did not have these problems is beginning to fight these problems..

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