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Build back sausage

Summary:
Inspired by Casey Mulligan's blog post, I went to read some of the "Build Back Better" bill. (Is it just me, or doesn't "Build Back Better" sound a lot like "Make America Great Again?") Heavens, not the whole thing -- that's way beyond me. I just read the first half of the child care tax credit, ...

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Inspired by Casey Mulligan's blog post, I went to read some of the "Build Back Better" bill. (Is it just me, or doesn't "Build Back Better" sound a lot like "Make America Great Again?") Heavens, not the whole thing -- that's way beyond me. I just read the first half of the child care tax credit, starting on p. 241. I was also inspired by PBS, which, coincidentally, I'm sure,  announced last week a Child Care Crisis. Well, what is the federal government going to do about this "crisis?" Following media coverage, I thought this was mostly a line on your income taxes. I was wrong. 

p. 251

 (d) ESTABLISHMENT OF BIRTH THROUGH FIVE CHILD CARE AND EARLY LEARNING ENTITLEMENT PROGRAM.—

 (1) IN GENERAL.—The Secretary is authorized to administer a child care and early learning entitlement program under which families, ... shall be provided an opportunity to obtain high-quality child care services...

(2) ASSISTANCE FOR EVERY ELIGIBLE CHILD.—Beginning on October 1, 2024, every family who applies for assistance under this section...shall be offered child care assistance...

A new entitlement.  Forever.  How much is this going to cost, I wonder? Oh, good, p. 249 


Appropriations 

(A) $20,000,000,000 for fiscal year 2022, to remain available until September 30, 2025, 

(B) $30,000,000,000 for fiscal year 2023, to remain available until September 30, 2026

(C) $40,000,000,000 for fiscal year 2024, to remain available until September 30, 2027; 

(D) such sums as may be necessary for each of fiscal years 2025 through 2027, to remain available for one fiscal year.

Those look like awfully round numbers, don't they? Actually, this isn't even money for child care, it's money for the federal government to give to states to pay for a lot of the bureaucracy, which is what this section is about.  But it's a good sign of how costs are treated here. 

The public discussion of this bill focuses on the cost number. Is it $3.5 Trillion? Or only $2 Trillion? In this line, it is perfectly clear what the answer is: nobody has any idea what it will cost. Lawyer friends: Can Congress appropriate "such sums as may be necessary?"  

Discussing the cost of these provisions is pretty much useless given the current level of analysis. We should discuss the programs, whether they do any good and what their disincentives are. 

Casey noticed this huge provision: (p. 255) 

(II)  the State’s payment rates for child care services for which assistance is provided in accordance with this section...

(AA) at a minimum, provide a living wage for all staff of such child care providers; and

(BB) are equivalent to wages for elementary educators with similar credentials and experience in the State; and

(dd) are adjusted on an annual basis for cost of living increases...

Casey, 

According to the Bureau of Labor Statistics, elementary school teachers earned an average of $55,640 annually in 2019. The same BLS data show childcare workers earning an average of $23,930.  

There is a bit of a puzzle here, that the PBS piece (of course) did not notice. If child-care costs $10,000 per child (their number) and child-care workers are paid $20,000 (also PBS), and child care does not have two children per worker (obvious), then where is all the money going? Or, which number is wrong? 

In any case, this is a whopping mandated cost increase. Of course, if a child care worker had the credentials and experience to be a $55,640 unionized public school teacher, they would be a  $55,640 unionized public school teacher. Oh, "equivalent," not "equal." This will be fun. 

The bill mandates a 

(B) TIERED SYSTEM FOR MEASURING THE QUALITY OF CHILD CARE PROVIDERS.

...the State will implement within 3 years after receiving funds under this section, a tiered system for measuring the quality of eligible child care providers. Such tiered system shall...

(iii) provide for sufficient resources and supports for child care providers at tiers lower than the highest tier to facilitate progression toward higher quality standards.

(C) ACHIEVING HIGH QUALITY FOR ALL CHILDREN.—.... all families of eligible children can choose for the children to attend child care at the highest quality tier...

OK, so if you operate a low quality tier day care, you get more money. But everyone has the right to only the highest quality tier. Hmm, just how is this going to work out? All of the children shall be above average? The only equilibrium I can spot is the whole thing becomes useless and all day care centers are certified high quality. 

(ii) SLIDING FEE SCALE.—A full copayment ... shall use a sliding fee scale .. for a family with a family income—

(I) of not more than 75 percent of State median income for a family of the same size, the family shall not pay a copayment, toward the cost of the child care involved for all eligible children in the family;

(II) of more than 75 percent but not more than 100 percent of State median income for a family of the same size, the copayment shall be more than 0 but not more than 2 percent of that family income, toward such cost for all such children;...

(V) of more than 150 percent of the State median income for a family of the same size, the copayment shall be 7 percent of that family income, toward such cost for all such children. 

Here is the work disincentive writ clear. It's not totally clear if this is 7 percent overall or 7 percent per child. That may seem small, but the smaller it is the longer it lasts.  For example, 7% of family income is $7,000 at $100,000 per year income, typical of 150 percent. Childcare now costs $10,000 per year according to PBS, so the 7% marginal tax rate keeps going until the family hits  $150,000 per year. If doubling the wages paid to childcare employees raises the price, keep going. 7% isn't the end of the world, but remember it adds on top of everything else -- 30% for section 8 vouchers, food stamp income limits, regular taxes, and so on. 

The cliffs may be more significant. A couple where one party makes $40,000 and the other makes $150,000 could save a lot of money by not getting married. The percentages apply to all income.  If you make 149% of state median income, a raise to 151% moves you up a bracket on total income, not just the 7% of income above 150%. 

So, this means you have to bring your form 1040 in to the day care center, disclose your "family income," however that is going to be defined, somebody figures out what "state median income for a family of the same size" is... This is the tip of what Casey points out

See also Section 132002 [and following].  Complying with all of these statutes, certifications, and the implementing final rules will add administrative costs to childcare.  E.g., just as physicians today complain about paperwork taking away from their real job, so will childcare providers under BBB.

Suppose you have a really good child-care facility. Or you're located in a convenient but high-rent area. 

(F) PROHIBITION ON CHARGING MORE THAN COPAYMENT.—The State plan shall certify that the State shall not permit a child care provider receiving financial assistance under this section to charge... more than the total of—

(i) the financial assistance provided for the child under this section; and

(ii) any applicable copayment pursuant to subparagraph (E).

I presume blog readers know how well price controls work. The result is, of course, lines. Between mandating higher wages and forbidding higher prices, I cannot think of a better way to shift the supply curve of child care... to the left. 

Oh, yes, p. 264

(J) LICENSING.—The State plan shall include an assurance that the State has or will develop within 3 years after receiving funds under this section, licensing standards for child care providers..

Now there is a key to increasing supply -- add a new state-by state occupational license. 

I won't even start on immigration. If you have a child-care cost "crisis," maybe letting in some of the eminently qualified child-care providers massing on our borders might be a good idea. 

Even the definitions are humorous. p. 247 

(H) INCLUSIVE CARE.—The term ‘‘inclusive’’, with respect to care (including child care), means care provided by an eligible child care provider—

(i) for whom the percentage of children served by the provider who are children with disabilities reflects the prevalence of children with disabilities  among children within the State involved; and

(ii) that provides care and full participation for children with disabilities ... alongside children who are...not children with disabilities...

OK, so you can't have less than the state average of disabled children. But by addition, that means you can't have more than average either! And no matter how severe the disabilities, heaven forbid you hire a teacher with real qualification and expertise at handling disabled kids and run a specialized facility. 

It goes on. Section 132002 and following describes the tax part of it. I'm exhausted. 

*****

So what will all this do? I'll hazard a forecast. This will create a big state bureaucracy. The majority of child-care operators, especially those who work for actual poor and disadvantaged people, in poor and disadvantaged areas, will look at this mess and say no thanks, we don't take federal money. (All of these are couched as requirements conditioned on receiving federal funds, as they must be given what's left of the commerce clause.)  They take cash, hire who they want, and operate under the current slightly less restrictive set of rules. Or, they operate underground. As the wealthy send their kids to private schools, they send their kids to high cost private day care also outside the system to avoid price caps. 

The US creates one more of thousands of programs with take-up rates in the low single digits.  Politicians get to feel good about offering child care, without actually doing it. Costs of the official programs balloon. But overall costs may not end up that large, because it reaches so few people. On the margin, though, a few more people work less, to avoid losing benefits, to avoid losing coveted spots in half decent child care facilities, and a few less people get married. 

Programs that only a small percent of people actually use are key to our political economy. Many people are eligible for hundreds of programs. If they signed up for all of them, their marginal tax rates would be in the many hundreds of percent, and the federal government would be even more bankrupt than it is. 

Over a decade or so states  clamp down, and add requirements. There will be occasional scandals about illegal cash only low-quality child care. We create a mildly costly program, supporting a large bureaucracy, throwing sand in the gears of what should be a low-cost, competitive, flexible necessary business. Child cate remains expensive, hard to find, and distressingly low quality. 

And this is one tiny section of one enormous piece of sausage. If the rest is like this, heaven help us. 

***********

Update: I may have gotten the forecast wrong. People don't have to pay more than x% of their income. That means the state pays the rest. How much is the rest? That is left unsaid. So, a better forecast is that, that the price of child care will skyrocket. If a child care place doubles what it charges, none of its customers have to pay any more at all! 

Imagine if restaurants charged a set fraction of your income, no matter what you order, and the state pays the rest. Steak. No, I meant caviar!

A good forecast following that is price controls. This is going to look like Medicare or Medicaid very quickly. 


 

John H. Cochrane
In real life I'm a Senior Fellow of the Hoover Institution at Stanford. I was formerly a professor at the University of Chicago Booth School of Business. I'm also an adjunct scholar of the Cato Institute. I'm not really grumpy by the way!

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