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Allison Schrager: Universal Basic Wealth?

If you want to reduce inequality, these new proposals aren’t the way to do it. Forget UBI, or universal basic income–the future could be universal basic wealth (or capital), according to a recent op-ed by California state senator Bob Hertzberg and tech titans Eric Schmidt and Evan Spiegel. They argue that California should use its budget surplus to give every resident $1,000, to be invested by professional money managers in tech start-ups. The trio propose restrictions on residents' ability to withdraw money from these accounts; qualifying events might include educational expenses or starting a business, for instance.

Tech billionaires aren't the only ones coming up with such plans. Governor Gavin Newsom plans to use the surplus to disburse $500 to low-income parents to invest in their children's education. New Jersey senator Cory Booker has proposed Baby Bonds, in which the federal government would create a $1,000 savings account for every child at birth and add up to $2,000 each year until the child turns 18. The accounts would earn a 3 percent return a year (more than twice the yield on a ten-year Treasury bond) and the government would take on the additional guarantee of ensuring that no account would lose money. The hope is that these generously funded accounts with above-market (sometimes guaranteed) investments would reduce wealth inequality. Booker claims this plan will somehow close the racial wealth gap, too.

What could possibly go wrong? So many things.

As with the various universal basic income plans, the concept of universal basic wealth presents many potential problems. For starters, consider the logistics of investing taxpayer money in high-risk, illiquid assets and offering individuals notional claims on these assets. If the investments lose money, would the state be on the hook? What if many individuals want to draw on the accounts when asset values are down (as is often the case in a recession)? This could be deadly for start-ups. And would withdrawals be taxed?

Any universal basic wealth plan would also be expensive and expose taxpayers to risk. These plans essentially take wealth from the future (or future taxes) and give it to individuals (or to their all-knowing investment managers) to invest today. If the money grows and debt remains manageable, it may work out. But that entails a lot of "ifs."

Take California's $38 billion surplus this year. That's not free money. California still has $482 billion in outstanding municipal debt and $160 billion in unfunded pension liabilities (under reasonable accounting standards, those numbers would be higher). Handing out surpluses today rather than using them to pay off current debts is simply leveraging income to make a bet on risky assets–and in the case of Schmidt, Spiegel, and Hertzberg's plan, risky, illiquid private equity.

If those investments don't pay off, if the California population continues to fall, or if interest rates rise, future Californians would be on the hook for all that debt, without much to show for it. To make matters worse, risky assets tend to rise and fall alongside state finances, since both suffer in recessions, especially if the assets are invested in local start-ups. In a dire financial situation, service cuts and tax increases might be necessary just when wealth and wages are lowest.

Nor is it clear what the goal of universal wealth is in the first place. If the point is to "close the wealth gap," are beneficiaries expected not to spend the wealth and to maintain a minimum asset balance? In Booker's Baby Bond plan, beneficiaries can spend the money once they turn 18 for "the kind of investments that change life trajectories." Criteria this vague make it essentially a cash payment similar to last year's stimulus checks, which people were free to spend or to save, depending on their needs and preferences. The preferences of 18-year-olds are often neither patient nor forward-looking. Such payments are politically popular, but they don't necessarily increase wealth, since they alter incentives to work and save.

If the goal is to ensure that everyone has a minimum level of wealth, stricter limits would be needed on how people spend their money, and such restrictions may be neither optimal nor viable. Individuals face unique financial circumstances, making it hard to legislate the "right" usages for the money.

Let's suppose the money can only be used for educational or retirement expenses. Some families need money for education; others would be better off spending it on other child-care needs, like mental-health care. Some families need to save more for retirement, while others need it for more pressing, emergency expenses. You can layer in exceptions or contingencies, but with each one the accounts verge on becoming, not universal wealth, but a cash payout that people can freely spend.

One could argue that there is no harm in giving people money and putting restrictions on how it is spent. We already steer people to save for certain events; retirement accounts and educational savings plans enjoy tax advantages. But universal basic wealth accounts are altogether different. With tax-advantaged accounts, people make choices about how to allocate their money: to long-term saving, emergency assets, or consumption. Putting restrictions on universal basic wealth accounts might not serve the best interests of many households.

There is arguably value in transferring wealth from high-income to low-income individuals for long-term saving goals. But universal wealth is an expensive and inefficient way to do it. We already have programs that target the kinds of expenses that people need to save for. Social Security payments follow a progressive income formula so that lower-income people need to save less for retirement. As for education, such wealth-transfer programs already exist: the federal government offers Pell grants, and colleges and universities offer additional need-based financial aid.

Certain aspects of universal basic wealth proposals are compelling. Many families are struggling, and it feels unfair that rich parents can help children pay for higher education or a first house or leave them an inheritance that makes success in life all the more likely. Nevertheless, the plans come up short when accounting for individual differences in risk tolerance and how people spend money.

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Posted: July 21, 2021 Wednesday 02:01 PM