Cory Booker’s “Baby Bonds” Won’t Close the Wealth Gap

Senator Cory Booker (DN.J.) at a Senate Foreign Relations Committee hearing on Capitol Hill, Jan.27, 2021. (Michael Reynolds / Pool via Reuters)

Useless document nestled in $ 3.5 trillion budget reconciliation plan

The A $ 3.5 trillion budget reconciliation plan is already turn into a godsend for questionable spending and reckless tax increases. Provisions including tax breaks for green energy and “free” community college tuition would disproportionately benefit the wealthy while leaving the burden of the bill on taxpayers. And now Senator Cory Booker (DN.J.) is to push for even more red ink. Booker wants the legislation to include his proposed “baby bonds,” which would give every American newborn baby $ 1,000 to put into a savings account that the government will regularly deposit additional money into. However, this Proposal of $ 60 billion per year would only succeed in exacerbating income inequalities while inflating debt. Policymakers should exclude “baby bonds” from the budget bill and give Americans a break from soaring federal debt.

Senator Booker argues that priming and depositing funds in babies’ savings accounts (which they wouldn’t be able to touch until they reach adulthood) is a new way to close America’s wealth gap . Fortunately, the country does not need to resort to armchair theories and complicated economic models to determine if this is true. There is a lot of research that shows what happens when Americans suddenly find themselves with a windfall of money to spend. A 2011 study published in The Journal of Economics and Statistics to analyse whether lottery winnings (that is, between $ 50,000 and $ 150,000) allow financially troubled Americans to avoid bankruptcy. The researchers found that “although these beneficiaries are 50% less likely than small winners [who won less than $10,000] file for bankruptcy immediately after winning, they are more likely to file for bankruptcy three to five years after winning.

Five years later, net assets and unsecured debt levels are virtually identical between big lottery winners and small winners. This probably wouldn’t be the case if the big money winners would take their earnings and, say, split them into index funds or use the dollars to further their education. Unfortunately, it turns out too often that this is not the case. The researchers suggest that “nearsighted behavior” such as quickly spending gains on material goods is to blame for these bankruptcy figures. It doesn’t mean that ordinary or struggling people don’t know how to save money. The sad truth is that many Americans are conditioned by their financial situation to live paycheck to paycheck and spend their earnings as they arrive. And it turns out that people tend to be creatures of habit and don’t become investment gurus overnight. This simple idea explains why the the lottery fails make people healthier, happier or richer in the long run.

Analyzes of government cash distribution programs tend to confirm this result. For example, the government of Alaska gives every resident of the state $ 1,000 to $ 1,600 per year on the basis of oil revenues received by the State. And, while the Alaska Permanent Fund certainly has its benefits (for example, allowing beneficiaries to buy more nutritious meals and thus reduce obesity among the population), the payment system may actually increase the cost. income inequality. Summarizing the empirical results on the fund, University of Alaska professor Mouhcine Guettabi Remarks that dividend controls tend to widen the gap between rich and poor in the short and long term. Research suggests that if the money is “spent on non-durable goods by the lower income groups but is saved or invested by the higher income groups, then this can gradually lead to increasing disparities between the groups”. It is difficult to imagine that the “baby ties” would not have the same end result, because the language of the proposal allow for adults to use baby bonds as long as the expenditure constitutes an investment in “personal capital that provides long-term gains in wages and wealth.” . . . “That, of course, can mean anything from a new car to fancy clothes to a gym membership.

The obvious alternative is to offer means-tested grants focused on specific and large purchases such as health insurance. The Affordable Care Act (aka Obamacare) already does this to some extent, but the effectiveness of the program is limited by mandates to purchase additional insurance (e.g., smoking cessation, pregnancy care) including many consumers don’t want or need it. Allowing low-income Americans to purchase the private care of their choice without onerous requirements would go a long way in strengthening health and increasing equity.

Likewise, education tax credits could go a long way in ensuring that millions of students are not trapped in failing school systems. These types of targeted programs ensure that taxpayer dollars are used for important priorities without micromanaging the products and institutions Americans buy and interact with. Policymakers can lend a hand without breaking the bank and worsening inequalities.

Ross Marchand (@RossAMarchand) is the Policy Director of the Taxpayers Protection Alliance.

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