[Given the recent American trend of political alliteration, I was thinking of entitling this Build Back Better By Borrowing Billions for Big Beautiful Baby Bonds.]
The administration has proposed giving newborn babies (whose parents have Social Security numbers) a savings account containing $1,000, which must be saved at least until the child reached the age of 18. Here is Ryan Teague Beckwith at MSNBC:
If a lower-income family added no money to their Trump account, after 18 years that $1,000 would have grown to around $2,000, if we assume a generous 4% rate of return.
So, how should we think about this policy?
At first glance, it seems sort of like a natalist policy, as the money is going to babies. But the babies don’t actually benefit until reaching the age of 18, at which point that money goes to almost all 18-year-olds, regardless of whether or not they later choose to have children. So, unless I’m missing something, I don’t see how it encourages fertility.
Why not just give all qualified individuals a $2,000 check at age 18? What’s the purpose of these special savings accounts? Perhaps the goal is to encourage thrift, to get people in the habit of saving. But the proposed plan would be funded with borrowed money, so I have difficulty understanding how it would encourage thrift. Isn’t the public being encouraged to believe in “something for nothing”, i.e., in deficit spending?
Imagine the typical baby were to invest the $1,000 in government bonds yielding 4%. Then at age 18, they would come into possession of two things:
A $2,000 government bond.
An expectation that they’ll have to pay an extra $2,000 in future taxes (in present value terms) in order to service that debt.
In other words, on average, they will be no better off than if the program had never been created. Under the assumption of Ricardo/Barro equivalence, they should just hold onto the bonds forever.
In other words, there’s no such thing as a free lunch.
The previous discussion looks at the average impact of the program, but not everyone is identical. Perhaps half the population are marshmallow eaters and the other half are misers. At age 18, the marshmallow eaters sell their bonds to the misers, and splurge an extra $2,000 on consumption. But the misers reduce spending in consumption by an equal amount, as they need to cut back to buy the bonds being sold by the less thrifty.
[Technically, until the age of 30, the funds can only be spent on certain approved items, but money is fungible.]
Of course, you can develop more realistic models where aggregate consumption does change. But in most of those models, the change would be in the direction of more consumption and less saving. That is, the marshmallow eaters would spend $2,000 more and the (presumably richer) misers would reduce consumption by less than $2,000. This does not seem like a policy that would increase aggregate saving and investment.
Beckwith suggests another argument for the Trump policy. He sees it as creating an opening for a much more expansive policy, which would presumably be created by a future Democratic administration:
Under the Booker-Pressley proposal, every child would get $1,000 in a savings account and as much as $2,000 more each year up to age 18, depending on the family’s income. By contrast, the Trump accounts only include the initial $1,000 deposit, though parents could add up to $5,000 a year of their own money up to age 18.
Those seemingly minor changes make a huge difference.
If a lower-income family added no money to their Trump account, after 18 years that $1,000 would have grown to around $2,000, if we assume a generous 4% rate of return. . . .
By comparison, a poor kid with a Booker-Pressley account would have more than $50,000 at age 18 and more than $85,000 at age 30 — literally life-changing amounts of money.
Beckwith doesn’t like the Trump proposal, but supports it anyway:
The biggest mistake that both Republicans and Democrats make when considering a proposal from the other side is to treat it as static. Good ideas often start as bad ones, and good policies often grow out of flawed ones. When it started in 1935, Social Security didn’t cover agricultural or domestic workers, which meant it disproportionately excluded African Americans. But over time, it was expanded. Today, it is more fair — and actually helps Black and Hispanic workers more due to the way benefits are structured.
Beckwith is a progressive and sees this policy as a form of income redistribution. Everyone receives the same amount, but the future taxes that will pay for the program fall disproportionately on the rich.
Alternatively, you can view the program as a way of leveling the playing field. Today, the federal government heavily subsidies young adults who go to college, through programs like 529 accounts and Pell Grants. An egalitarian might argue that it would be better to subsidize all 18-year-olds by an equal amount, regardless of whether they went to college or whether they went immediately into the workforce.
In recent years, non-college voters have switched to the GOP, while college grads have switched to the Democrats. Beckwith seems to see the poor as the group that progressives should favor, whereas Trump sees those who don’t go to college as the group that should be favored. Not sure how voters align in the long run, but the political equilibrium of 2025 is certainly not going to last very long. The politics of the 2030s will likely be almost unrecognizable to today’s pundits.
I have very mixed feelings on this sort of policy. On the plus side:
I see the utilitarian argument for income redistribution.
I favor treating college and non-college youth equally.
On the minus side:
A recent study suggests that giving money to poor people doesn’t provide durable gains.
I hate the complexity of our tax system, and this proposal makes it even worse. We already have IRAs, Roth IRAs, SEP IRAs, 401k plans, 403b plans, 529 saving plans, etc. The proposed plan has a very complicated tax treatment, which depends on all sorts of factors.
We are broke, and should not be creating even more new programs with borrowed money until we have made our fiscal situation sustainable.
For me, the final item is the most important. I’d be far more likely to support the plan if it were combined with an equal reduction in federal spending on things like college grants and loans.
A while back, I argued that President Trump might end up being one of those “Nixon to China” situations, where a GOP president ushers in a European-style welfare state. I don’t see it happening during his term, but down the road I could see tariffs eventually turning into VATs, and baby bonds eventually turning into a much more generous income redistribution scheme.
The artificial intelligence boom creates a sort of barrier that I cannot see beyond. If it ends up being as transformative as its boosters suggest, then all bets are off the table as to how future public policy will play out. As with almost all of my posts, this one analyzes things from a 20th-century mindset, which might soon be viewed as obsolete.
PS, Like most social science experiments, the Stanford marshmallow-eating study doesn’t seem to hold up.
