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America Needs a Government Wealth Program

(Bloomberg Opinion) -- Americans are deeply attached to the idea of equality of opportunity — that if people don’t always end up with the same outcomes, then at least they should start at the same place and each get their fair shot. In practice, of course, this is impossible to achieve. Some people’s parents, neighborhoods, and other circumstances of birth give them enormous initial advantages over others. So U.S. policies are generally committed to creating a level playing field — public education, need-based financial aid, and so on.

Family wealth provides one kind of opportunity that no amount of education can redistribute. Wealth can provide capital for a business, buy a home, or fund an education. But most of all, it’s a cushion against risk. Now that health and financial risks are rising for so many low-income Americans, it’s time to think of government policies to make wealth more accessible to all.

The lives of poor and working-class people are defined by risk and precarity. A health issue or the loss of a job can send a lower-income family into a spiral of debt, tipping them from a semblance of stability into a never-ending economic nightmare. Financial risks that might seem small to the wealthy — speeding tickets, negative run-ins with the police, family troubles, having hours cut at work — loom larger for a person without means, which in turn generates stress that can make poverty hard to escape.

Familial wealth, however, provides a shield against all of these terrors, converting existential risks into moderate ones and moderate dangers into mere annoyances.

Perhaps most importantly, the backstop of family wealth enables people to shoulder more potentially rewarding risks such as starting a business. Copious research has already shown that a strong social safety net tends to increase entrepreneurship. A safety net acts as a crucial fallback; when failure is less catastrophic, people of modest means are more likely to take a shot at leaping to a higher rung of the economy. Family wealth, of course, is its own kind of safety net.

This suggests that, along with solid social programs, government should consider making sure each person starts their economic journey with at least a modest cushion of wealth.

A recent study by economists Clare Balboni, Oriana Bandiera, Robin Burgess, Maitreesh Ghatak and Anton Heil supports this notion. They evaluated a program in Bangladesh that gave cows — an important source of wealth for small farmers — to poor women in rural villages. Comparing women who either just barely made the cutoff for receiving the cows to those who just missed it, they found a significant and persistent effect: Women who got free cows were more likely to escape poverty in the long run, accumulate more cows, and enjoy a better lifestyle.

That study fits with the general evidence that giving people just a little initial wealth lets them reach for upward mobility. But when it comes to wealth, the median American is not doing as well as her counterparts in many other rich nations:

Twenty percent of U.S. households have zero or negative wealth.

The U.S. should therefore consider one-time wealth boosts for poor families as a tool for creating equality of opportunity. Instead of cows, the government could start young families out with a form of wealth more suited to a developed country — bonds, or houses.

The bond idea has been advanced by economists Sandy Darity and Darrick Hamilton. Under their proposal, each American child would be given a federally funded trust that would be accessible at adulthood. Essentially, everyone would be a trust fund baby. The amount needn’t be large, but it could be enough to go to college, buy a house, start a business, or simply cushion against the vicissitudes of life.

An alternative is to use the housing system, which traditionally has been the primary driver of wealth accumulation for the U.S. middle and working class. A system adapted from Singapore could have the government build new houses and sell them cheaply to young families buying their first homes, or help those families with a down payment if they wanted to buy an existing house. That house would then serve as a cushion against risk, as well as an asset young people could borrow against to start a business. Though houses aren’t as liquid as bonds, they provide a real tangible asset most people can intuitively understand, and they’re a place to live so people will never be out on the street.

A one-time wealth boost for young people, whether in the form of cash or houses, might seem like redistribution of wealth to many. And it is — but the purpose would be to equalize opportunity. Not everyone is born with rich parents, but a truly level playing field demands everyone have some of the opportunity family wealth provides.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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