Clinton’s $5,000 Baby Giveaway

In a speech last week, Senator Hillary Clinton proposed giving $5,000 (of your money) to every baby born in America in the form of a government-controlled savings account. In a speech last year, Clinton proposed a $500 baby savings account, so the cost is rising as we get closer to the election.

Clinton’s comments had roots in ideas proposed by both conservative and liberal think tanks and politicians. That’s not surprising, because both liberals and conservatives inside the beltway specialize in top-down government planning schemes. The liberal New America Foundation has a plan for a $6,000 baby giveaway. Conservative plans are discussed here.

Here are seven problems I see with baby giveaway plans:

1) Cost. Clinton’s plan would cost about $20 billion annually, but would be higher if added private savings were matched by further government subsidies. The money would come from higher taxes, causing damage to the private economy on the order of $2 for every $1 extracted (as Martin Feldstein estimated).   

2) Lobbying for Expansion. Suppose Clinton’s plan passed and would begin January 1, 2010. Do you think that parents of kids born in 2009 or 2008 would be happy that their neighbors were getting $5,000 giveaways and they weren’t? I don’t think so. I think lobby groups would quickly get Congress to expand the benefits to tens of millions of existing kids.

3) Cookie Jar Problem. Clinton suggested that when kids turned 18, they could use the money for college, buying a home, starting a business, or saving for retirement. But don’t you think that a $5,000 per-child cookie jar would be tempting for families to raid early? Interest groups would help them by lobbying to expand the accounts to cover: baby formula expenses, kids’ health costs, children’s clothes, kid’s school and tutoring costs, family emergencies, and so on. 

4)  Bureaucracy. All these exceptions would require hundreds of pages of regulations and a huge bureaucracy to administer. And we would also need a huge enforcement bureaucracy because with the government handing out $5,000 to anyone who mailed in a birth certificate, the temptation for fraud would be large.

5) Not savings. Giving people $5,000 is not savings. Savings involves individuals sacrificing current consumption for greater future security and income. There is no sacrifice here except by the taxpayers who have their own income and savings swiped by the government in higher taxes. 

6) Increased Consumption. Proponents of these savings plans claim that giving people money in freebie savings accounts will encourage them to save more on their own. Maybe. But the opposite would also occur. Parents would increase their own consumption rather than saving for their kids’ college costs because they would be counting on the government account. And kids reaching 18 would increase their own consumption because the government has their home downpayment covered. Savings is about frugality, but these accounts would encourage the opposite.

7) Generational Issues. The current Social Security and Medicare systems create a huge and involuntary transfer from young people to old people. Senator Clinton does not favor cutting these programs, while her new baby proposal would create a new program to take from older people (who are paying taxes) to give to young people. Clinton thus favors different programs that work exactly against each other.

Rather than having multiple government transfer programs working at cross-purposes, politicians might try simply cutting benefits and scaling down the fiscal war of all against all.

To boost savings, we should eliminate current government tax hurdles through universal, all-purpose, tax-free savings accounts

While money to fund baby accounts doesn’t grow on trees, crackpot schemes do in the fertile ground of federal election campaigns.