Baby Bonds: An Investment In Our Future

Tuesday, December 6, 2016

"Now, let’s consider the wealth gap. The wealthiest 20% of American households hold just under 90% of all wealth in the nation, while the bottom 40% of households actually have negative wealth, that is, they actually owe more than the total value of their assets, i.e., such households are in debt. For those on the lower end, of the wealth curve, breaking out of this cycle is even more challenging than outearning their parents (i.e.narrowing income inequality). Since so much wealth in the United States is transferred intergenerationally, even if someone from a poor background completes advanced schooling, and earns far more than his or her parents, he or she is already at a substantial disadvantage, compared to peers from wealthier families, whose families might have helped pay for school, provided the down payment for a home, or helped fund a new business. This chasm remains for generations to come.

Yet, wherever we face major challenges, solutions are never too far away. One of the most fascinating approaches to bridging the wealth gap, is the idea of “baby bonds.” This phrase, coined by late historian Manning Marable, came into prominence thanks to a 2010 paper, published by economists Darrick Hamilton of The New School and William Darity Jr. of Duke University. Hamilton and Darity’s work sought to address racial disparities in the distribution of wealth. According to a 2013 study from the Institute for Policy Studies, the average white household was almost 7.7 times as wealthy as it’s African-American counterpart, and had almost 6.7 times the wealth of the average Latino household.

Why is this? Hamilton and Darity cite to a study by economists Maury Gittleman and Edward Wolff, which found that, once controlled for income, African-Americans and whites have similar savings rates, eliminating one source of this wealth disparity. However, inheritances play a large role in raising the wealth levels of whites, relative to African-Americans. This effect is so pronounced that the median wealth of an African-American household headed by a college graduate, is lower than that of a white family whose primary earner dropped out of high school. Hamilton and Darity also note that lending and housing policies have been disproportionately harmful to African-Americans, which has an added impact on wealth creation."

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