Last month, Scioto Analysis released its most recent calculation of the Ohio Poverty Measure. This measure calculates the total income of Ohioans, including benefits and after taxes and unavoidable expenses, and compares it to basic consumption needs.
This is how we usually measure poverty: through a lens of income. A problem that some economists have with this approach is that they believe that escape from intergenerational poverty also has to do with accumulation of wealth than income.
There is reason to believe this. While income disparities in the United States have been increasing, wealth disparities are even more pronounced.
A 2020 Pew Research Center analysis found that while the average high-income household makes about seven times as much as the average low-income household, the average high-wealth household has assets 75 times as large as a low-wealth household. This means the U.S. wealth gap is seven to eight times as large as the U.S. income gap.
Wealth does a few things for families. First, it provides a family safety net for working people. That “emergency fund” you keep in your bank account in case you experience a bout of unemployment? That’s wealth. Wealth helps working people weather the ups and downs of employment endemic to a market economy.
Second, wealth can be a source of income. Large amount of wealth invested can yield dividends that can provide income to a household. It also can be drawn on during retirement as an ongoing source of income.
Wealth also provides the safety that allows people to take risks. Starting a business or investing in a job that is unlikely to have large returns in the short-term is a lot easier to do if you have wealth to fall back on.
But how do we promote wealth, especially for families that are already living paycheck to paycheck and can’t afford to set money aside with pressing needs to pay for now?
Last month, Economist Darrick Hamilton published a commentary in TIME Magazine addressing this topic. His answer is a policy called “baby bonds.”
A baby bond works by paying someone a lump sum once they reach a certain age. This often comes from an investment made at birth that grows in value over time. These can be restricted in use or not.
A great example is Connecticut’s program, which automatically invests $3,200 for any child that qualifies for Medicaid at birth. Between age 18 and 30, the recipient can claim the fund and spend it on buying a home in Connecticut, starting or investing in a Connecticut business, paying for higher education or job training, or saving for retirement. The state of Connecticut estimates a typical bond will have a value of $11,000-$24,000 by the time it is claimed.
By targeting these funds to children who are Medicaid recipients, the Connecticut program focuses on low-income children. But a program like this could be targeted in a number of different ways: by being claimed by low-income households, targeted toward low-income zip codes, or even universal eligibility. Medicaid has the simplicity, though, of being a high-uptake program for low-income families that the state has good data on.
Income interventions are important for fighting poverty today, but wealth-based interventions like baby bonds could be a valuable tool for disrupting intergenerational poverty. State and local lawmakers interested in helping fight poverty in the long-term should consider policies like baby bonds if they are looking for creative ways to fight wealth inequality.