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

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.

Variations on the idea, which dates to the American Revolution, have been appearing across the political spectrum. The latest proposal comes from Shaun Donovan, a candidate for New York City mayor. In 2020, the concept was part of Senator Cory Booker’s failed Democratic presidential primary campaign and made it into Governor Phil Murphy’s 2020 New Jersey budget proposal before being dropped.

The recent wave of baby-bond policy proposals follows two related ideas: state-sponsored college savings accounts and universal basic income. Maine, Nevada and Rhode Island are among the first states to deposit funds via 529 college-savings plans for very young children — Maine’s $500 deposit for newborns is among the most generous.

The problem with these plans, most of which involve relatively small one-time payments, is that they focus on building a culture of saving, a laudable but unrealistic goal for the poorest families. Many also rely on philanthropic seed money, an unreliable source of long-term funding.