It’s Not Just the Price Tag

Eakinomics: It’s Not Just the Price Tag The focus of the discussions surrounding the Build Back Better (BBB) reconciliation bill has been what is in and what is out, and the number of years that those initiatives that are included will be funded. But there has been too little discussion on the incentives embedded in these programs and their likely implications for the economy. As an example, let’s consider child care subsidies. As nicely exposited by Tara O’Neill Hayes, meeting the likely demand for “child care is expected to cost a minimum of $171.2 billion in the first year, with much of these costs likely to increase each year as inflation rises and salaries grow.” That’s a pricey $1.7 trillion or more for the 10-year budget window, so clearly the legislation will sunset the subsidies after a year or two. But that doesn’t solve the biggest problem. The proposed child care subsidies are a tribute to the fact that people think child care is too expensive. The program will make child care much more expensive. That is the problem. Here’s the issue in a nutshell. The proposal would require that child care providers be paid as well as elementary school teachers; let’s ballpark that at $60,000 a person. And regulations generally cap the number of children per provider at 4 or so. Let’s call it 4. Then, ignoring rent, insurance, supplies, and everything else, child care will cost $15,000 per child. That’s the starting point for the problem.  The remainder comes from the fact that child care costs will be capped at 7 percent of the household income. That means if you make $50,000 – a little below the median income – you pay $3,500 and the taxpayer picks up $11,500. If you make $100,000, your cost is $7,000 and the federal taxpayer is footing $8,000. Indeed, only if you make $214,285.71 do you pay the full $15,000 cost. And if you make more than $215,000, you will continue to pay the full boat.  What happens if the price of child care rises? If you are making $50,000, your share remains $3,500. Similarly, the $7,000 price tag is unchanged for the household making $100,000. These households will have absolutely no sensitivity to child care costs, and their providers will have no incentive to control costs. Indeed, these poor incentives will prevail for everyone up to the magic $214,285.71 level. Only people making this amount and more will have any incentive to respond to price increases. This raises the empirical question: How many households who are at the stage in their career(s) when they have young children make $214,285.71 or more? Will there be anyone out there to control child care costs? I don’t know how you answer these questions, but in my case I just ask Isabel Soto and – voila! – the answers appear. It turns out that the number of households with children under 5 years and exceeding the cutoff is 1.37 million. (I confess, this is more than I anticipated.) Compared to all households (130.3 million) this is 1.05 percent. Compared to all households with young children (12.2 million), this is 11.2 percent. Is 11.2 percent enough to put a brake on child care costs? I doubt it. But even if it is, the geographic sorting of households by income means that the number is going to be much, much smaller in some areas. And, as child care costs rise, the threshold of $214,285.71 goes up and more people are insulated from price increases – a very bad dynamic. Child care subsidies may or may not be a good idea. That’s for the voters to decide. But this way of delivering child care subsidies is not a good idea.