The “Build Back Better” Childcare Disaster 


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.

Ep. 4 – From Cradle to Grave [6/7]. Milton Friedman’s Free to Choose (1980)

January 20, 2021

President Biden c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President,

Thank you for taking time to have your office try and get a pulse on what is going on out here in the country. I wanted to let you know what I think about the minimum wage increase you have proposed for the whole country and I wanted to quote Milton Friedman who you are familiar with and you made it clear in July that you didn’t care for his views! Let me challenge you to take a closer look at what he had to say!

Joe Biden’s “Full Employment” Economists

Joe Biden has nominated economist Cecilia Rouse to chair his Council of Economic Advisers, with Jared Bernstein and Heather Boushey as members working alongside her. That announcement drew a common reaction from progressive commentatorsand economists: that it was great news that Biden had chosen candidates committed to “full employment.”

This concept can be a bit of a minefield for non-economists. When economists say “full employment,” they generally do not mean a situation where “everyone is working” or even “everyone who wants to work has a job and the hours they desire.” Instead, they usually define “full employment” as a situation when unemployment is at its natural rate, i.e. when the economy is operating at its full, realistic potential (with only those between jobs, or who will find it near impossible to get jobs, out of work).

This definition throws up all sorts of disagreements between academic economists that can mean people talk past each other on the desirability of the goal.

The level debate

First, economists argue over what level of unemployment constitutes full employment, and thus how far we are away from it. On the face of it, the U.S. appeared very close to something like it prior to COVID-19 hitting, with unemployment at a five-decade low, the prime-age labor force participation rate having risen sustainably for the first time since the 1980s, and African-American unemployment at its lowest level since the 1970s, as real compensation grew strongly.

But the “natural rate” of unemployment is a moveable feast and difficult to predict with any certainty. Over the past decade, the Federal Reserve and others have revised down their estimate of the natural rate from near 5 percent to closer to 4 percent. Trends therefore suggest they were initially overly pessimistic, although the natural rate can vary year-to-year. Some economists even think there was still substantive slack in the labor market in 2019, with a lot of workers desiring longer hours and the potential for those “economically inactive” to be pulled back into the labor force if only the opportunity arose.

How to lower the natural rate debate

Second, economists argue over whether particular “structural” policies could reduce the natural rate of unemployment and so enhance the number of people we’d expect to be in work at “full employment.” Libertarian economists like me would say that if only governments didn’t gum up labor markets through policies such as minimum wage laws, unemployment insurance, and land-use policies that reduce the mobility of workers, the natural rate of unemployment would be lower.

More progressive economists tend to favor the idea that there are structural barriers to entry in the labor market for particular groups, which different government policies could alleviate. For example, they often propose child-care subsidies to encourage more parents into the labor market, or subsidies for retraining for certain groups of workers, particularly those who have been rendered unemployed from technological change. Free-market economists would usually reject such attempts to tilt the playing field towards certain work-leisure decisions and highlight the deadweight costs of the taxation ultimately required to finance such programs.

The desirability of “full employment” debate

Third, economists argue over whether “full employment” should be an explicit aim of government policy.

Technically, governments could get everyone into work if they employed all out-of-work people on public works projects at high enough wages. But free-market economists would point out that these sorts of make work schemes and extensive subsidies would tend to harm overall prosperity and crowd out private jobs.

Sure, governments can “create jobs” – you could always put everyone to work in some capacity through getting people to pick up litter (think of Milton Friedman’s famous example of giving canal building workers spoons instead of shovels to create more jobs). But what delivers prosperity over time is the process of value creation in markets delivering jobs that serve our ever-changing wants and needs. Putting everyone in some form of useless work undermines this process of wealth creation, as Steve Horwitz explains here.

Again, economists on the progressive and socialist left often appear to reject this way of thinking. Instead they often talk about “full employment” as if it should be the primary aim of policy, so advocating for job guarantees or public works, as if these are perfect substitutes for private sector roles, particularly during downturns.

The macroeconomic debate

Finally, economists argue over what is needed to achieve “full employment” from a macroeconomic perspective and whether targeting it is a sensible goal. The term became re-popularized during the debates about “austerity vs. stimulus” after the Great Recession. Sometimes it is just a synonym for the economy running hot at its potential.

Certain economists argued that policymakers were too pessimistic about the true “natural rate” of unemployment, or at least the closely related concept of the NAIRU (the non-accelerating inflation rate of unemployment) after the financial crisis. They thought that a belief that there was a high structural unemployment was becoming a self-fulfilling prophecy, because the fear of generating inflation from pushing unemployment below the NAIRU was causing policymakers to hold back on macroeconomic stimulus. With just more government borrowing not offset by the Fed, these economists believed government could achieve full employment faster.

That, of course, relies on fiscal and monetary policy actually being successful in achieving this goal. Some economists would cite the 1970s example as showing it is naïve to believe you can run the economy hot until you see inflation rising, because at that stage it is difficult to keep a lid on it. In other words, underestimating the NAIRU can be just as much of a problem as overestimating it. That’s why a lot of monetary economists, including my colleague George Selgin, believe that NGDP level targeting is a good way of avoiding both errors, because that regime negates the need to think about targeting employment at all.

The views of Biden’s CEA

So where do Biden’s nominees fall on these questions? It’s clear from public musings that they generally hold an economic understanding of “full employment.” Cecilia Rouse’s work has focused more on the barriers to a higher level of employment—what might be deemed supply-side explanations for unemployment, such as poor education and regulatory barriers.

Jared Bernstein has been more of a demand-sider, explicitly talking about a full employment goal as a macroeconomic aim. He has been the most prolific in suggesting that policymakers were too pessimistic about the natural rate of unemployment post-financial crisis, arguing that the unemployment rate did not sufficiently reflect underemployment or that many people had given up looking for work. The labor market strength since then suggests that he was correct in that analysis.

In terms of policy, however, the nominees are much more likely to think interventionist government is the route to a more expansive level of employment than libertarians—pushing, in particular, for child-care policies to lower the natural rate and being committed to a very expansionary macroeconomic policy.

A lot of Bernstein’s work in particular seems predicated on the idea that the federal government should target “full employment” as a sort of moral duty. Yet, given Biden’s campaign’s position on the need for more regulation of the gig economy and these economists’ commitment to a $15 minimum wage—which most economists would acknowledge at least risks jobs in low productivity areas of the country—one cannot say that raising employment levels is a consistent goal underpinning the whole Biden policy platform.

Indeed, given something near full employment was achieved in 2019 through a policy mix that Bernstein and the other nominees do not favor, it is not clear why these candidates should be considered “full employment” advocates any more than the Trump White House has been. Rather than outcomes, what the label is really referencing here, I suspect, is the intention to use active government policy to attempt to achieve the goal.

Bernstein has wanted to run macroeconomic policy hot in targeting “full employment” for a long time. In a 2013 book with Dean Baker, for example, he defined “full employment” in macroeconomic terms as a goal to get to a level of employment (hours and jobs) whereby further increases in aggregate demand would not increase employment.

That particular definition, aiming to get to a place where pumping in additional money had no impact at all on employment levels, is an extraordinarily expansive one that would soon hit diminishing returns, with the ever-growing threat of more inflation resulting from trying to push unemployment below its natural rate.

I commented at the time of the publication of Joe Biden’s campaign policy agenda that the labor market policies were receiving insufficient attention. Not only was there a commitment to a $15 federal minimum wage, as well as a desire for something akin to the AB5 California law affecting the gig economy, but the proposals contained a lot of pro-union policies, such as having the federal government effectively preempt right-to-work laws. Combined, these represented a huge overhaul of U.S. employment policy.

It’s not a surprise then that Biden’s CEA is dominated by labor market economists. But given the jobs market was an area of clear economic strength prior to COVID-19, particularly relative to other countries, it will be interesting to see how this purported commitment to “full employment” manifests itself over time.

_____________

Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.

Sincerely,

Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733

Williams with Sowell – Minimum Wage

Thomas Sowell

Thomas Sowell – Reducing Black Unemployment

By WALTER WILLIAMS

—-

Ronald Reagan with Milton Friedman
Milton Friedman The Power of the Market 2-5
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