The Democrats’ “Build Back Better” proposals for childcare represent a disastrous step in the ongoing government takeover of the sector – raising care costs, creating dependence, and instilling incentives against work and earning more income along the way.
New York Times columnist Ezra Klein recently heralded an ascendant “supply-side progressivism.” Modern leftists want a bigger welfare state, he claimed, but they increasingly understand that “if you subsidize the cost of something that there isn’t enough of, you’ll raise prices or force rationing.” Scant evidence of such an enlightened view is observed within the childcare sections of the Democrats’ House bill. This is the classic recipe of government policy constraining supply and then subsidizing demand.
Despite a stated goal of making childcare more affordable, the legislation would make it more expensive:
-eligible providers would have to pay “living wages” to all staff, with child-focused care workers paid commensurate salaries to their state’s elementary school teachers. These provisions would raise costs dramatically in a labor-intensive sector where staff costs can average around 60-70 percent of the total. The average childcare worker nationally is currently paid $25,460, against $60,660 for the average elementary school teacher (in other words, the latter earns 138 percent more).
-to qualify for federal grants, states must also develop licensing regimes “appropriate for childcare providers in a variety of settings.” Past research on childcare licensure, including educational requirements, has found that these also raise costs by restricting the supply of would-be carers, without improving child outcomes.
-state program plans would have to place providers into “quality” tiers, providing resources to achieve “high quality” care for all. In childcare speak, “quality” isn’t about what parents actually want, but criteria defined by government officials, usually meaning low child to staff ratios, extensive educational requirements for staff, and other regulations, all of which tend to raise costs and reduce the availability of care in poor areas (again, without much evidence they improve outcomes for kids or parents).
This bill then doesn’t make childcare cheaper, but more expensive. The main thing that it changes is who pays for it, with taxpayers on the hook for extensive demand-side subsidies through an income means-tested copayment system with a “sliding fee scale.”
If you earn less than 75 percent of your state’s median income for a family of your size, your childcare costs are wholly paid by taxpayers. As you move from 75 percent to 100 percent of your state’s median income, your out-of-pocket copay would rise to a cap of 2 percent of your income. By 125 percent of state median income, that would slide up again to 4 percent. It then increases further, such that above 150 percent of state median income, out-of-pocket childcare costs would settle at a copay of 7 percent of income.
These would be substantial subsidies. According to ChildCare Aware of America data, in 2018 the annual price of full-time infant center care was more than 7 percent of median married couple income in all states, ranging from a high of 17.5 percent in California ($16,450), down to 7.6 percent in Mississippi ($5,760). So this would be a very generous new entitlement that would essentially make the government the major purchaser of childcare.
What sort of perverse incentives would this create?
On the provider side, it would surely crowd out many alternatives to center-based care. So large are the subsidies that demand for other, non-formal childcare options would fall away, especially given the regulatory hurdles necessary to eventually reach “high quality” status. Democrats might see this as a feature, rather than a bug. But every child and families’ needs are different. This approach would stifle a pluralistic market that serves different households’ needs.
The bill also mandates that centers cannot charge more than the combination of the determined state subsidy plus any copay. This is to prevent people who’ve hit their copay cap from loading up on limousine care. But mandating prices that providers can charge according to government officials’ cost estimates over broad areas creates a de facto price control that history suggests might create shortages of provision in places where certain costs (such as building rents) might be unusually high.
For households, the program creates big disincentives to work or earn more income.
Suppose median household income in a state is $55,000 and full-time infant center care for one child costs $10,000 (not untypical figures). Under this program:
-a family with an infant earning up to $41,250 would have childcare fully paid for by taxpayers.
-families with incomes rising from $41,250 to $55,000 would see their contribution slide up from $0 to $1,100 (equivalent to an implicit additional marginal tax rate of 8 percent over this income range).
-families with incomes rising from $55,000 to $68,750 would see childcare costs increase from $1,100 to $2,750 (equivalent to an additional marginal tax rate of 12 percent).
-families with incomes rising from $68,750 to 150 percent of the state median ($82,500) would go from paying $2,750 in childcare per year to $5,755 (an additional marginal tax rate of almost 22 percent).
-above incomes of $82,500, families would face an additional 7 percent marginal tax rate on new income until the household covered the full costs of their childcare out-of-pocket (in this example, at around $143,000).
Across a wide income range, then, this program would add serious disincentives to earning more income, by raising the effective marginal income tax rate households face. That’s based on the sorts of prices families face for childcare now. For all the reasons outlined above, prices would likely be much higher under the new regulatory environment. As a consequence, taxpayer subsidies would both be larger still and the damaging marginal tax rate hikes would ripple much further up the income scale.
Former CEA chief economist Casey Mulligan has calculated that for a family with two children under 5, the marginal tax rate uplifts described above could extend to much higher levels of household income again. Why? Because the legislation says the copayments count “toward such cost for all such children.” So, in our above example, if the family instead had two young children in full-time care, meaning $20,000 of annual care costs, then the elevated effective marginal tax rate would run right up to a household income of $285,000.
Childcare costs per child are much higher than this in many parts of the country. At $14,000 per child per year and $28,000 in total in some states, the copayment cap of 7 percent of income wouldn’t cover the full childcare cost for a family with two young children in care unless they earned $400,000. So the subsidies and implicit marginal tax rates would push up to very, very high levels of income. That’s not to mention that for any given family with a fixed level of income, this policy would encourage them having more children by dramatically lowering the marginal cost of childcare.
If all that wasn’t troublesome enough, Matt Bruenig, a supporter of childcare subsidies, has shown that the way the program would be phased in over three years would create even more egregious work incentives in the near-term:
But in the first 3 years of the program, families with incomes that are just $1 over 100% of the median income (year one), 115% of the median income (year two), or 130% of the median income (year three) will be eligible for zero subsidies, meaning that they will be on the hook for the entire unsubsidized price, which as discussed above will now be at least $13,000 per year higher than before… [note: due to the higher wages to carers the legislation demands providers pay].
…the median household income last year in the country was $67,521. If this was your state’s median income, then having a family income just $1 higher than that would result in you being ineligible for childcare subsidies in 2022 even as the unsubsidized price of child care skyrockets due to the wage and other mandates in the Democratic proposal….
Under this scenario, there will be many dual-earning couples who cannot afford child care if both of them continue to work, but could afford child care if one of them quit their job and thereby brought their family income below the eligibility cutoff. Normally people who quit jobs to take care of their kids do so in order to save the money they’d have to spend on child care. Under this plan, they have to quit their job in order to afford child care!
I’ve written before that Western governments are tangling themselves up in contradictions as the state has gotten more heavily involved with childcare. Politicians can’t decide whether the problem they want to solve is childcare being too expensive, not enough parents entering the formal labor force, or supposed “poor quality” care hindering child development.
Targeting any one of these goals brings obvious trade-offs with the other objectives, but an unwillingness to confront these contradictions has seen a policy devised that would:
-make childcare more expensive;
-push parents towards using more formal care that might not best suit their needs or wants;
-and create new disincentives against working.
The libertarian view is that parents should be free to decide how to care for their own children, including what cost-quality bundle to opt for. This might be through markets, family, or civil society institutions. Governments should unpick cost-raising regulations or requirements that price people out from obtaining the care they want. A proper “supply-side” agenda for childcare would therefore entail examining how federal and state regulatory, zoning, and migration policies all make care more expensive than it needs to be, resulting in fewer options for families.
The “Build Back Better” proposals do the opposite: offering subsidies with the quid pro quo of choking supply through all sorts of ongoing restrictions to shape the market in a particular image. And because of the unwillingness to address the contradictions in aims, I suspect implementing this program would be a one-way street to, in time, an even fuller government takeover of this important economic and social area of life.
Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including fiscal policy, inequality, minimum wages, infrastructure spending, and rent control.