Professors Suggest 'Baby Bonds' Could Fix Widening Inequality In The U.S.

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What if every baby born in the United States was a trust fund baby? That's what two economics professors are proposing, that Uncle Sam provide each American newborn with a trust fund. The amount would vary depending on the parent's wealth, with an average of about $20,000. NPR's John Ydstie reports the professors floating this idea say it could help boost opportunity.

JOHN YDSTIE, BYLINE: Duke University professor William Darity Jr. says there's a huge wealth gap in the United States. He points out that the richest 1 percent of Americans hold nearly 40 percent of the nation's wealth. Meanwhile, nearly a third of Americans have no accumulated wealth outside the value of their home. And wealth gives you opportunity, says professor Darity.

WILLIAM DARITY JR: Wealthier families have the capacity to purchase homes in higher amenity neighborhoods. They have the capacity to provide their kids with higher quality education.

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YDSTIE: And he says wealthier families have assets they can draw on to handle emergencies like the loss of a job or a serious medical condition, emergencies that can devastate families with no assets. Darity says there's often a bias against providing help for those struggling families because they're viewed as having been irresponsible or having made bad choices. That's why he says providing a trust fund for infants makes sense.

DARITY JR: You can't blame the infants for the condition that they are born into. And so let's do something about that when they have an opportunity to reach adulthood.

YDSTIE: Darity and his partner, Darrick Hamilton of The New School in New York City, suggests providing trust funds of between $500 and $50,000, depending on the wealth of the family. The trust funds would be guaranteed to grow at the rate of inflation plus 1 percent a year. When a child reached 18 years of age, he or she would get access to the funds.

DARITY JR: My general impulse is to be non-paternalistic and to give the young people as much discretion as possible. I think it would be vital in this context for them to be given training and preparation for management of their accounts.

YDSTIE: Darity acknowledges that politically it might be necessary to limit use of the funds to things like paying for education, purchasing a home or starting a business. Tyler Cowen, an economics professor at George Mason University, is skeptical of the idea. He thinks the money would be more useful for children at a younger age.

TYLER COWEN: By the time a lot of people reach 18, they're already in quite a disadvantaged position. So I would instead prefer to extend the earned income tax credit, say, for working parents who had young children at home. I think that would help more.

YDSTIE: The earned income tax credit, which supplements low-wage work, has been part of the U.S. social safety net since 1975. Cowen is also skeptical of giving the money to 18-year-olds.

COWEN: I don't think there's a case for arguing we would do better to let everyone be spending the money at 18. That's really the age when you're often most irresponsible.

YDSTIE: Professor Darity says he'd be open to delaying access to the trust fund until the young adults are a bit older. As for just increasing the earned income tax credit, Darity says that's an income program that doesn't necessarily build wealth, which is the focus of his proposal.

DARITY JR: Wealth gives you a much wider range of opportunities and options than income. Wealthier families can have a greater impact on the political process. Greater economic wealth gives you greater civic wealth.

YDSTIE: Darity says he estimates his proposal would cost around $80 billion a year, or about 2 percent of the federal budget. But he argues it would increase skills, investment and business creation that would boost the economy. John Ydstie, NPR News, Washington.

(SOUNDBITE OF VASSAR CLEMENTS' "PERDIDO") Transcript provided by NPR, Copyright NPR.