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Baby bonds could shrink the Black-white wealth gap

A race-neutral plan to give young Americans economic security at birth.

Photo-illustration of children in a wagon holding Black Lives Matter signs. Christina Animashaun/Vox

Bodine Smith turns 38 this year, and she has a lot to be proud of. She is working toward a doctorate in human resource management and a master’s in psychology, adding to the three related degrees she’s already earned. “I’ve taken up studies in these fields because there are lessons here that Black families can use to empower themselves and understand that their circumstances are not who they are,” she told me.

Striving for better understanding, however, hasn’t afforded Smith protection from the struggle that hinders her the most: At almost 40, the single mother has no savings or assets for either herself or her two young children. She is over $130,000 in debt. Her current degree costs $34,000, which she makes payments on every other week. She sees her predicament as a “generational struggle” that was handed down to her. Smith’s mother raised her and her five siblings alone and worked as a commercial driver for a bus company, earning less than $40,000 for much of her career and never accruing any savings.

Wanting better opportunities and circumstances for her family, Smith’s mother moved them around New Jersey, and in each neighborhood, Smith would compare what her family had in relation to others, particularly white families with greater means. “I saw [my mom] struggle a lot,” she said. “Although she wanted to be with us all the time, she knew that it was a choice between being home or working to make sure we had a roof over our heads.”

For Smith, there was no passing down of assets or wealth; her mother had nothing of the sort to give. “What she passed down to us was that we need to work to survive,” she said. Smith, too, says she “hasn’t seen any wealth” despite the number of hours she works as a personal care provider. The one hope Smith holds on to is her degrees. She believes that education and better financial literacy on her part will help her eventually set up savings for her two children.

“I hope I can break the generational curse,” she told me.

Though Smith is banking on education, it might not pay off like she hopes. A 2015 study found that, regardless of education level, white Americans have more wealth than Black Americans. The report also noted that Black households headed by a college graduate have less wealth than white ones headed by a high-school dropout, perhaps an even more egregious disparity.

In fact, the Black-white wealth gap hasn’t budged since researchers started collecting related data more than 50 years ago: The typical white family remains nearly 10 times wealthier than the average Black one. In 2016, the average middle-class Black family had $13,024 in wealth — including not only wages but also material possessions (a home) or intangible resources (a monetary inheritance) — compared with $149,703 for the average white one. In New Jersey, where Smith lives, the numbers are even worse: In 2016, the median net worth for white residents was $106,210, versus $179 for Black residents.

This may seem surprising given the sweeping legislation over the decades, including the Fair Housing Act of 1968, that has sought to shape a more tolerant and inclusive America. But the gap’s endurance has been abetted by structural racism that stems back to slavery and the nation’s founding.

Many policies and their vestigial effects, like segregation and redlining, continue to benefit white Americans, allowing them to accumulate wealth on the backs of the enslaved and through the inheritances they amassed early on. Meanwhile, Black people, through the country’s failure to center them as the citizens who are owed, have been knocked back.

An African American family watches President Lyndon B. Johnson on TV as he speaks about voting rights before Congress in 1965.
Bettmann/Getty Images

The racial wealth gap numbers show “that not only is the problem systemic and structural, but also that the ways we’ve tried to solve the problem in the past, which is better access and more opportunity to the current system — like building wealth through housing or through education — just aren’t working,” Felicia Wong, president of the progressive think tank the Roosevelt Institute, told Vox.

Combating America’s extreme wealth concentration will take a robust approach, including progressive taxation, such as an inheritance tax, and stronger enforcement of laws that fight against discrimination in housing, employment, and education. But these policies must also be paired with actual capital. One idea is baby bonds — giving money to children at birth.

Under the American Opportunity Accounts Act reintroduced this month by Sen. Cory Booker and Rep. Ayanna Pressley, a baby bonds program would give every child in America a savings account seeded with $1,000 when they are born. Children would receive up to $2,000 more each year, depending on their family’s income, and wouldn’t be able to access the funds until they turn 18. A child from a low-income household has the chance to receive around $46,000 by then, to be used for buying a home, paying for school, or starting a business.

“To truly ‘build back better’ our economy, we cannot ignore the extreme and persistent wealth inequality that deprives kids of economic opportunity right out of the gate,” Booker told Vox. “We know this growing gap has been driven in part by federal policies and a federal tax code that subsidizes asset building for some Americans but fails to extend and expand that opportunity for all Americans. Baby bonds will start to level the playing field.”

Javier Zarracina/Vox

While there are still details to be ironed out about the specifics of baby bonds — including how 18-year-olds would access the investment and how the government would regulate the funds — numerous economists and lawmakers point to it as a step toward racial wealth parity. And it’s a policy Congress can take action on today.

Smith believes the bill would completely change what’s possible for her children and grandchildren. “This would give them a boost in the right direction and act as a bridge opportunity and the chance to build wealth,” she said. “And it would be a recognition from our government that some of us keep having to play catch-up knowing that we will never, ever catch up.”

Why America’s racial wealth gap exists

Black Americans have been denied the opportunity to build wealth for centuries, and for decades the government has failed to craft interventions that address the core of the chasm.

Nearly 250 years of chattel slavery — the ownership of Black bodies — allowed white people to advance. When the Emancipation Proclamation was signed in 1863, Black people owned 0.5 percent of the country’s wealth. Generations later, they own slightly more than 4 percent of it, despite making up 13 percent of the population.

After the Civil War, millions of newly freed Black people had plans to find employment, go to school, and buy lands and homes — and eventually pass their earnings down to their progeny. But institutionalized shackles and white supremacy killed their hopes.

The failures of the Freedmen’s Bureau and the Freedman’s Savings Bank — efforts to help the formerly enslaved adequately reach independence during Reconstruction — decimated what Black progress was made in the years after the end of slavery. More than 60,000 Black depositors experienced a total loss of nearly $3 million when the bank collapsed in 1874. This calamity came about 10 years after an order promised Black families “40 acres and a mule” — that thousands of acres of white-owned land would be transferred to them in Georgia, Florida, and South Carolina. Though thousands of Black people did settle on the land, President Andrew Johnson eventually reversed the order, returning the property to white plantation owners less than five months later.

In the decades after, massacres strangled Black wealth. A white mob destroyed 35 blocks of Tulsa, Oklahoma’s Black Wall Street, the mecca for Black growth, in 1921. President Franklin Roosevelt’s New Deal in the 1930s and ’40s seemed like an opportunity for Black people to finally get what they were owed, but the policies largely excluded them.

As historian Ira Katznelson wrote in When Affirmative Action Was White, the GI Bill of Rights was “the most wide-ranging set of social benefits ever offered by the federal government in a single, comprehensive initiative.” The model welfare system, which aimed to reintegrate 16 million World War II veterans, allowed millions — almost exclusively white people — to buy homes, go to college, start businesses, and find jobs.

Throughout the rest of the century and into the 21st century, housing discrimination — inequities in mortgage lending, restrictive covenants that prevented home sales to Black people (as in redlining), and designating homes in Black neighborhoods as low value — became a leading method of blocking Black people from accumulating wealth.

A child riding a tricycle in the Sojourner Truth housing project in Detroit, circa 1942.
William Vandivert/The LIFE Picture Collection/Getty Images

The story has remained the same for centuries: Black people gain a little bit of wealth and white people take it away; affirmative action measures aimed at building wealth, like the GI Bill, have traditionally excluded Black people.

But in 2021 — with a Democratic majority in Congress, a president who has promised to advance racial equity, and a renewed focus on racial justice — there’s an opportunity to embrace bold policies that counter America’s lack of equality of opportunity. Enter baby bonds.

Baby bonds would be race-neutral in practice, but still center racial justice

Under Booker’s baby bonds bill, any child born in America, regardless of race or family income, would receive a seed account of $1,000. While the plan is race-neutral, it is expected to address the racial wealth gap because of the historical correlation between race and income. Poor children would receive more money in their accounts each year, while rich children, already supported by family inheritance, would receive less.

Booker’s office estimates that a child in the highest income bracket of the program — above 500 percent of the poverty line, or $147,100 for a family of four — would receive just under $1,700 by their 18th birthday. Their numbers show that by the same age, the average Black child would accrue $29,038, the average Latino child would gain $27,337, and the average white child would get $15,790.

“We are talking a lot about addressing the economic crisis in this country, which is critical, but we need to expand the aperture about how we prevent future economic crises from happening,” Booker told Vox. “Stimulus checks help people get by, but we now need to start talking about how to help people get ahead. Wealth helps people get ahead.”

Booker said there are a number of procedural details that need to be ironed out, including how children would actually access the money when they turn 18 and how the government would ensure they use the money for wealth-building endeavors. Booker’s proposal relies on family income to determine how much money the government would deposit into a child’s account each year, though the bill tasks the administration with devising a system that ties the accounts to wealth.

The team estimates that baby bonds would cost $60 billion annually, based on 2019 census data and what the rough cost of baby bonds would have been that year if all children up to age 17 had received payments. This cost would be only a fraction of the country’s asset-promoting budget that currently supports the top 10 percent of earners.

“I see [the cost] in the context of understanding that we use over $600 billion in our tax code to help people with wealth get more wealth,” Booker told Vox, citing the mortgage interest deduction, which he supports, as one example. The deduction allows homeowners to subtract the interest they pay on a loan used to purchase, build, or improve a home from their taxable income. “The majority of this tax expenditure goes to people making more than a quarter of a million dollars per year,” Booker said.

The $600 billion also supports 529 college savings plans, according to Booker, which are overwhelmingly used by people with wealth. “Why don’t we use 10 percent of that $600 billion to create a program that helps people without wealth actually create it?” he said.

Javier Zarracina/Vox

Economists Darrick Hamilton (the New School) and William Darity Jr. (Duke University) published a paper in 2010 that outlined the foundation for Booker’s baby bonds legislation. In the years since, the plan has only gained momentum — Booker’s bill currently has 15 co-sponsors in the Senate, including Majority Leader Chuck Schumer.

“There’s a realization that the source of inequality has a lot to do with capital itself,” Hamilton told Vox. “The narrative is shifting away from what individuals can do with regards to behavior and attitudes, and towards asset accumulation and the recognition that behavior and attitudes are irrelevant without capital itself.”

According to Hamilton, the wealth disparities between Black and white Americans are rooted in resource deprivation that is a direct result of unjust policies, complicit government, and outright terror toward the Black community.

But baby bonds aren’t reparations. Under reparations for Black Americans, the government would remedy the atrocities of slavery through financial payments to descendants of the enslaved. HR 40, a bill that would establish a commission to study and create a proposal for reparations, has been introduced numerous times since 1989 but has never received a vote. Hamilton calls reparations “the most anti-racist, race-specific program,” but argues they aren’t enough on their own.

“Reparations are not prospective,” he said. “The trends associated with capital — consolidation and accumulation — would still exist after reparations.”

In comparison, baby bonds are in perpetuity, working against natural trends in capital, which consolidate and exclude. Baby bonds, though race-neutral, are an anti-racist program because “the criteria for inclusion, as well as the intended outcome, are associated with a domain of economics that is so racially disparate,” Hamilton said. Still, baby bonds would be a complement to reparations, not a substitution.

To Booker, reparations and baby bonds are separate and distinct. “We wrote the bill with a deliberate focus on erasing the racial wealth gap among our young people, and that is a benefit of the bill,” he said. “But when you’re talking about specific economic harm of the past, we definitely should be moving forward with creating a nationwide study of this issue with recommendations for how to address it.”

Baby bonds could be a big equalizer

A 2018 analysis by Columbia postdoctoral researcher Naomi Zewde found that baby bonds could “dramatically reduce” the median racial wealth gap. Zewde estimated that in 2015, white adults aged 18 to 25 had a median net worth of $46,000, while Black adults in that age group had a median net worth of $2,900. In other words, young white adults had nearly 16 times as much wealth as young Black adults. Zewde’s study also considered how net worth would be impacted by universal baby bonds, with investments varying by family wealth up to a maximum of $50,000.

Zewde’s analysis found that with a baby bonds policy in effect at birth, the median white young person would have had a net worth of $79,159, and the median Black young person would have had a net worth of $57,845. Baby bonds wouldn’t completely eliminate the Black-white wealth gap, but would “alleviate the effects of differential access to inheritance and gifts” and possibly “introduce greater economic stability for young African American adults to use in navigating early life challenges and potential barriers to economic success and family creation,” Zewde wrote.

Christina Animashaun/Vox

A 2020 study from financial services firm Morningstar, which studied the income-based design presented in the American Opportunity Accounts Act, found that baby bonds would “dramatically reduce the wealth gap” and would be even more successful if they focused on lower-income recipients.

There’s also a big chance that baby bonds would be successful because we’ve seen the concept work through Social Security. Baby bonds would be an extension of that program — instead of focusing on end of life, the program would consider young people who are just starting their lives to provide them with asset security. Thomas Paine originated the idea of Social Security in his 1797 pamphlet Agrarian Justice, in which he also advocated for baby bonds — a nest egg for every American that they’d access to begin a lifetime of economic security, according to the New School’s Hamilton.

There has been criticism of baby bonds, too. Some have argued it would create a moral hazard, encouraging people to have more children and strain government resources. Others argue that a young person could mismanage their account.

A more likely problem may be predatory behavior from the financial and higher education industries that may inflate tuition costs. Legislation must prepare for this, or perhaps consider raising the age at which account holders can access the money, thereby preventing them from spending it just as they begin making decisions about college.

Booker first introduced baby bonds legislation in 2019, and for the past two years the idea has failed to take the spotlight. But hope for baby bonds has grown alongside the election of President Joe Biden, who has signed a slew of executive orders aimed at rebuilding American institutions to be more equitable. And after a year of historic protests that called for racial justice and equal opportunity, more Democrats may support the legislation.

Schumer, who is not one of the most progressive members of the Democratic Party, has become more vocal in his support. “Giving our youngest Americans and their working parents an economic opportunity like baby bonds would deliver strong economic relief and mark an investment in our collective future,” Schumer said in a February statement. “This legislation ... will help address inequality, establish the foundation of a solid financial future for our kids, and serve as a down payment on the milestones that too many families find are out of basic reach.”

If budget reconciliation is not an option, Booker will likely have to pick up Republican support and reach 60 votes in the Senate. “That’s a challenge for a lot of legislation, from raising the minimum wage to my marijuana justice work,” Booker said. But baby bonds make sense for Republicans, he added, for free-market, fiscal conservative capitalists.

“We’re trying to get more people excited about the possibility,” Booker told Vox. “The knowledge of the policy and the actual impact it would have is capturing a lot of the moral imagination of the country, and increased momentum is actually part of the dialogue.”

Smith, the mother of two with a number of degrees and few material assets, hopes lawmakers can recognize the urgency of situations like hers. “It would give us ease of mind, knowing that our children have an incentive that could help them finance their education or even buy a home,” she said. “It is definitely a struggle from week to week, not knowing whether I’ll be able to sustain my job.”

A man and a young child near a fresh produce giveaway at Barry Farms Recreation Center in September 2020 in Washington, DC.
Brian Stukes/Getty Images