American families need a basic income to thrive in today’s economy. However, all many of our leaders are offering them is more layers of bureaucracy and schemes to enrich Wall Street.
A perfect example of the pseudo solutions to poverty and income inequality intellectuals are peddling in America is the “Baby Bond.” To explain, the Baby Bond is an investment account the government will open for every child at birth, The Washington Post reports.
The government will invest cash in the Baby Bond account until the child turns 18, economists Darrick Hamilton and William Darity propose. At 18 the child will withdraw the money for education or buying a home.
The Baby Bond is stupid
First, handing a large sum of cash to an 18-year-old sounds stupid to me. If somebody gave me a lot of cash at 18; I would have spent it on a fast car – not college.
I imagine today’s youth will be more likely to buy video games with the cash but it’s still dumb. Okay, we could attach strings that require recipients to spend the Baby Bond on housing or education.
However, I imagine that will only enrich real estate agents or colleges. Nor is giving 18-year-olds money for education, a wise investment. Student Loan Hero estimates 5.14 million American student loans are delinquent or in default.
Thus, 5.14 million Americans’ college course choices did not generate enough money to pay their students. Thus, 11.5% of the 44.7 million Americans with college loans made bad education decisions.
Moreover, a large percentage of that loan money goes to for-profit colleges with high-rates of failure, The Brookings Institution estimates. Now, Hamilton and Darity want us to dump more money down that rathole.
The Baby Bond is Bad for the Economy
Frighteningly, the Baby Bond could damage America’s economy by limiting economic activity.
To explain, providing a baby bond for each of the 74 million children in America will take cash out of the economy. Instead of circulating in the economy and being spent on goods or services that drive economic growth. Those funds will sit in an investment account or a bond.
Moreover, the Baby Bonds could make very little money if they work like other government investment instruments. To clarify, the interest rate on a popular government-issued investment; the 20-year Long-Term Treasury note ,was 1.83% on 21 August 2019, Treasury.gov calculates.
Meanwhile, the annual U.S. inflation rate in July 2019 was 1.8%, the U.S. Inflation Calculator estimates. If you subtract the Treasury interest rate from the rate of inflation you get a return of 0.03%.
Therefore, Hamilton and Darity propose taking large amounts of money out of the economy to put in investments that will not grow. That sounds like terrible economics to me.
Why the Baby Bond could Lose Money
The low interest returns will spur calls to invest the Baby Bond funds in other vehicles like stocks or mutual funds.
Theoretically, investing the Baby Bond in stocks is a great idea because the stock market has a high rate of return. For instance, the S&P 500 delivered an average return of 10% a year between 1926 and 2018, Investopedia estimates.
However, there’s no guarantee the Baby Bond money will go into a straight S&P index fund. Instead, the investment industry is likely to divert that money into managed instruments like mutual funds. Historically, those funds generate big paychecks for investment professionals and poor returns for investors.
For example, S&P Dow Jones estimates 85% of large cap mutual funds underperformed the S&P 500 in the 10 years between 2008 and 2018, CNBC reports. Furthermore, 92% of large cap mutual funds underperformed the S&P 500 in the 15 years between 2003 and 2018.
How the Baby Bond will Enrich Wall Street
Yet, the most popular government-promoted investment vehicles in America individual retirement accounts (IRAs) such as 401Ks usually place money in mutual funds. Given the history of IRAs, the Baby Bond is likely to be a bonanza for investment professionals and fund managers, but generate no money to send working-class kids to college.
Notably, 78% of Americans admit they do not have enough money saved for retirement, Northwestern Mutual estimates. Even though the Investment Company Institute estimates there are 42.6 million IRAs in America.
Given the history of IRAs, I predict the Baby Bond will not work. In particular, the Baby Bond money will be too much for the investment industry to ignore. A likely outcome is that the Baby Bond funds will not be there requiring Congress to invest tax money to replenish them.
Tellingly, the largest so-called government trust fund for average people, Social Security could run out of money as early as 2035, ABC News claims. To explain, Social Security cut benefits in 2035, if Congress does not give Social Security more cash.
Why can’t the Elite Trust Average Americans with Money?
The worst aspect of the Baby Bond scheme is the arrogant and condescending attitude behind it.
The thinking is “average Americans are lazy and ignorant children incapable of managing their own money or deciding what is in their family’s best interest.” Thus, the intellectuals or bureaucrats must think for average Americans.
I think this attitude is dangerously close to both racism and class prejudice and totally un-American. Yet, both journalists at elite publications and politicians love the Baby Bond.
Moreover, mutual funds’ inability to outperform the S&P and the Social Security crisis, show the elite’s money management skills are no better than those of average people. Yet, the elite wants to manage your money for you.
A Basic Income is better than the Baby Bond
I think a Universal Basic Income or a Freedom Dividend will do far more for American families than the Baby Bond.
First, the Basic Income will stimulate the economy by giving real people some real cash they can spend on Main Street now. By spending that cash, people will create jobs and businesses in their communities, and increase their local tax bases.
Second, a Freedom Dividend will help parents buy things their kids need now like food, housing, clothing, etc. Third, a Basic Income can alleviate poverty and income inequality by giving cash to families.
Fourth a Freedom Dividend can help disadvantaged groups. For instance, the average U.S. black family income in 2018 was $40,946 while the income for the average American family was $62,527 a year, Market Mad House estimates.
However, Presidential Candidate Andrew Yang’s $1,000 a month Freedom Dividend for all adults could raise the income of a two-parent African American family by $24,000 to $64,946 or over the median household income.
Fifth, a Freedom Dividend will give families money to cover expenses right now. For example, mortgages, diapers, rent, food, etc. This could improve lifestyles and help children grow up healthier and stronger.
Something Hamilton and Darity forget is that children cannot eat college savings. What good is the Baby Bond if parents need to turn to the food bank to feed the kids?
My Alternative to the Baby Bond
My alternative to the Baby Bond is to offer the $1,000 a month Freedom Dividend to all Americans from birth.
In detail, I would pay the Freedom Dividend to the child’s parents or guardians until he or she turns 18. Thus, families will get an extra $1,000 a month to invest in each child. The parents will be free to spend the money on what’s best for the child, whether it’s a mortgage payment on a better house, food, investments, or savings for college.
In addition, we can cover education expenses by making all public universities, public trade schools, and community colleges, which taxpayers finance, tuition free. Consequently, most Americans will have access to a good education at no cost. Thus there will be no need for a Baby Bond.
There are many options for paying for a Freedom Dividend and free college. My favorites include a Value-Added Tax (VAT), a Carbon Tax, higher income taxes on the rich, higher corporate taxes, a Border Adjustment Tax (BAT), and a Robin Hood Tax; a sales tax on financial transactions.
In the final analysis, America needs programs that empower families not arrogant paternalism. Yet, condescending paternalism like the Baby Bond is all our leaders seem to offer.