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Better Baby Bonds
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.
Posted by Alex Tabarrok on October 17, 2007 at 07:08 AM in Economics | Permalink
Comments
"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.
Posted by: sammler at Oct 17, 2007 7:15:21 AM
Sheriffs and high school teachers, competing to shake out kilobucks from teens. There's an image that just screams "improved incentives" to me.
Posted by: Grant Gould at Oct 17, 2007 7:31:36 AM
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).
Posted by: Brett Dunbar at Oct 17, 2007 7:31:54 AM
We already know that Social Security is a failing sham. Why would we want another ponzi scheme?
Oh yeah...`cuz we want other people's money without having to work for it.
Posted by: Scott at Oct 17, 2007 8:05:49 AM
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.......
Posted by: Robert C at Oct 17, 2007 8:11:03 AM
Samuel Brittan has several articles (www.samuelbrittan.co.uk) in favour of such proposals.
His basic thesis is that the problem in the world is not too much unearned income but too little. As he points out a bond is effectively the same as a capitalised Negative Income Tax. Given that we would be unlikely to let anyone who squandered a lump sum Negative Income Tax actually starve, paying the "interest" rather than the capital is preferable.
However the opportunities that a lump sum gives in a world with imperfect capital markets are real, so where possible we should facilitate it. Alex's points about the reduced incentives on parents (who have money) to save for their children are true - but this has to be recognised as a redistributive programme. Clearly I'd expect Alex and Hillary to disagree on the degree of redistribution appropiate.
Posted by: tadhgin at Oct 17, 2007 8:11:24 AM
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?
Posted by: Bertil at Oct 17, 2007 8:11:58 AM
Obvious solution: allow adult US citizens to sell their citizenship to the highest bidder.
Posted by: James Clippinger at Oct 17, 2007 8:14:00 AM
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.
Posted by: Alan Gunn at Oct 17, 2007 8:23:58 AM
Surely you mean *convicted* of a crime? In any case, the bar can be set a bit higher - a floor on high school attendance, GPA etc.
Posted by: D at Oct 17, 2007 8:27:12 AM
Doesn't the EITC function like a rebate for poor people's kids already?
Posted by: jgray at Oct 17, 2007 8:32:26 AM
Won't this increase the inflationary pressure on university costs thereby making the bond worth nothing at all?
Posted by: prices at Oct 17, 2007 8:32:47 AM
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.
Posted by: save_the_rustbelt at Oct 17, 2007 9:07:29 AM
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.
Posted by: save_the_rustbelt at Oct 17, 2007 9:07:41 AM
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.
Posted by: Pearl Alexander at Oct 17, 2007 9:11:38 AM
Let's not sell our own citizenships for $12,000, let's sell the right to live and work in the U.S. to a few million "highest bidders" every year. Change immigration from a problem to an opportunity.
Posted by: Tom Kelly at Oct 17, 2007 9:17:51 AM
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?
Posted by: joe at Oct 17, 2007 9:35:15 AM
"Pure" collectivism
Posted by: R. Richard Schweitzer at Oct 17, 2007 9:36:12 AM
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?
Posted by: joe at Oct 17, 2007 9:36:15 AM
Instead of lump-sum incentives, like increased exemptions, a bond, or increased EITC, why not lower marginal tax rates on families with children?
Posted by: Christina at Oct 17, 2007 9:41:50 AM
Colleges will just raise their prices. Not that they really need any excuse to do so.
Posted by: Peter at Oct 17, 2007 9:43:45 AM
prices: "Won't this increase the inflationary pressure on university costs thereby making the bond worth nothing at all?"
I made exactly this point on another economics blog, but no one seemed to care. Glad to see someone else agrees with me.
peter: "Colleges will just raise their prices. Not that they really need any excuse to do so."
Glad to see two people agree with me.
Posted by: John Dewey at Oct 17, 2007 9:53:26 AM
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.
Posted by: happyjuggler0 at Oct 17, 2007 9:58:50 AM
scott: "We already know that Social Security is a failing sham. Why would we want another ponzi scheme?"
I hadn't thought of it that way. Excellent point.
If the "government" funds are "invested" in T-bills, then this is simply a burden for future taxpayers, right? So why not let future taxpayers decide how much education they wish to fund?
If the "government" funds are invested in private market equities, then those markets will be distorted. That's what Greenspan warned when politicians in the 90's decided what to do with social security surpluses (They spent the surpluses, of course, and declared they had balanced the budget.)
Posted by: John Dewey at Oct 17, 2007 10:00:19 AM
"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? ;-)
Posted by: Arne B at Oct 17, 2007 10:00:34 AM
