There is a narrative, an idea that with resilience, grit and personal responsibility people can pull themselves up and achieve economic success. In the United States we call it the American dream. A similar narrative exists all over the world. But the truth is that the challenges of making this happen have less to do with what we do and more to do with the wealth position in which we are born.
So I'm going to make the case that the United States government, actually that any government, should create a trust account for every newborn of up to 60,000 dollars, calibrated to the wealth of the family in which they are born. I'm talking about an endowment. Personal seed capital, a publicly established baby trust, what my colleague William Darity at Duke University and I have referred to as baby bonds, a term that was coined by the late historian from Columbia University, Manning Marable.
The reason why we should create these trusts is simple. Wealth is the paramount indicator of economic security and well-being. It provides financial agency, economic security to take risk and shield against loss. Without capital, inequality is locked in. We use words like choice, freedom to describe the benefits of the market, but it is literally wealth that gives us choice, freedom and optionality. Wealthier families are better positioned to finance an elite, independent school and college education, access capital to start a business, finance expensive medical procedures, reside in neighborhoods with higher amenities, exert political influence through campaign finance, purchase better legal counsel if confronted with an expensive criminal justice system, leave a bequest and/or withstand financial hardship resulting from any number of emergencies. Basically, when it comes to economic security, wealth is both the beginning and the end.
I will frame this conversation in the context of the United States, but this discussion applies virtually to any country facing increasing inequality.
In the US, the top 10 percent of households hold about 80 percent of the nation's wealth while the bottom 60 percent owns only about one percent. But when it comes to wealth, race is an even stronger predictor than class itself. Blacks and Latinos collectively make up 30 percent of the United States population, but collectively own about seven percent of the nation's wealth. The 2016 survey of consumer finance indicates that the typical black family has about 17,000 dollars in wealth, and that's inclusive of home equity, while the typical white family has about 170,000. That is indicative of an absolute racial wealth gap where the typical black household has about 10 cents for every dollar held by the typical white family.
But regardless of race, the market alone has been inadequate to address these inequalities. Even in times of economic expansion, inequality grows. Over the last 45 years, wealth disparity has increased dramatically, and essentially, all the economic gains from America's increase in productivity have gone to the elite or the upper middle class. Yet, much of the framing around economic disparity focuses on the poor choices of black, Latino and poor borrowers. This framing is wrong. The directional emphasis is wrong. It is more likely that meager economic circumstance, not poor decision making or deficient knowledge, constrains choice itself and leaves people with no options but to turn to predatory finance.
In essence, education is not the magic antidote for the enormous inherited disparities that result from laws, policies and economic arrangement. This does not diminish the value of education. Indeed, I'm a university professor. There are clear intrinsic values to education, along with a public responsibility to expose everyone to a high-quality education, from grade school all the way through college. But education is not the panacea. In fact, blacks who live in families where the head graduated from college typically have less wealth than white families where the head dropped out of high school. Perhaps we overstate the functional role of education at the detriment of understanding the functional role of wealth. Basically, it is wealth that begets more wealth.
That's why we advocate for baby trust. An economic birthright to capital for everyone. These accounts would be held in public trust to be used as a foundation to an economically secure life. The concept of economic rights is not new nor is it radical. In 1944, President Franklin Roosevelt introduced the idea of an economic Bill of Rights. Roosevelt called for physical security, economic security, social security and moral security. Unfortunately, since the Nixon administration, the political sentiment regarding social mobility has radically shifted away from government mandates to economic security to a neoliberal approach in which the market is presumed to be the solution for all our problems, economic or otherwise. As a result, the onus of social mobility has shifted on to the individual. The pervasive narrative is that even if your lot in life is subpar, with perseverance and hard work and the virtues of the free market, you can turn your proverbial rags into riches. Of course, the flip side is that the virtues of the market will likewise sanction those that are not astute, those that lack motivation or those that are simply lazy. In other words, the deserving poor will receive their just rewards.
What is glaringly missing from this narrative is the role of power and capital, and how that power and capital can be used to alter the rules and structure of transactions and markets in the first place. Power and capital become self-reinforcing. And without government intervention, they generate an iterative cycle of both stratification and inequality. The capital finance provided by baby trust is intended to deliver a more egalitarian and an authentic pathway to economic security, independent of the family financial position in which individuals are born. The program would complement the economic rights to old-age pensions and provide a more comprehensive social security program, designed to provide capital finance from cradle all the way through grave.
We envision endowing American newborns with an average account of 25,000 dollars that gradually rises upwards to 60,000 dollars for babies born into the poorest families. Babies born into the wealthiest families would be included as well in the social contract, but they would receive a more nominal account of about 500 dollars. The accounts would be federally managed, and they would grow at a guaranteed annual interest rate of about two percent per year in order to curtail inflation cost, and be used when the child reaches adulthood for some asset-enhancing activity, like financing a debt-free university education, a down payment to purchase a home, or some seed capital to start a business. With approximately four million babies born each year in the US, if the average endowment of a baby trust is set at 25,000 dollars, the program would crudely cost about 100 billion dollars a year. This would constitute only about two percent of current federal expenditures and be far less than the 500-plus billion dollars that's already being spent by the federal government on asset promotion through tax credits and subsidies.
At issue is not the amount of that allocation but to whom it's distributed. Currently, the top one percent of households, those earning above 100 million dollars, receive only about one third of this entire allocation, while the bottom 60 percent receive only five percent. If the federal asset-promoting budget were allocated in a more progressive manner, federal policies could be transformative for all Americans.
This is a work in progress. There are obviously many details to be worked out, but it is a policy proposal grounded in the functional roles and the inherited advantages of wealth that moves us away from the reinforcing status quo behavioral explanations for inequality towards more structural solutions. Our existing tax policy that privileges existing wealth rather than establishing new wealth is a choice. The extent of our dramatic inequality is at least as much a problem of politics as it is a problem of economics. It is time to get beyond the false narratives that attribute inequality to individual personal deficits while largely ignoring the advantages of wealth.
Instead, public provisions of a baby trust could go a long way towards eliminating the transmission of economic advantage or disadvantage across generations and establishing a more moral and decent economy that facilitates assets, economic security and social mobility for all its citizens. Regardless of the race and the family positions in which they are born.
Thank you very much.
Darrick. I mean, there's so much to like in this idea. There's one piece of branding around it that I worry about, which is just that right now, trust-fund kids have a really bad rap. You know, they're the sort of eyeball-rolling poster children for how money, kind of, takes away motivation. So, these trusts are different. So how do you show people in this proposal that it's not going to do that?
If you know you have limited resources or you're going to face discrimination, there's a narrative that, well, the economic returns to investing in myself are lower than that of someone else, so I might as well enjoy my leisure. Of course, there's another narrative as well, so we shouldn't get caught up on that, you know, somebody who's poor and going to face discrimination, they also might pursue a resume-building strategy. The old adage, "I have to be twice as good as someone else." Now, when we say that, we never ask at what cost, are there health costs associated with that. I haven't answered your question, but coming back to you question, if you know you're going to receive a transfer at a later point in life, that only increases the incentive for you to invest in yourself so that you can better use that trust.
You're giving people possibilities of life they currently cannot imagine having. And therefore the motivation to do that. I could talk with you for hours about this. I'm really glad you're working on this.