The inescapable problem with Elizabeth Warren's child-care plan

Virtually everyone with young children knows through personal experience that the structure of the American economy is viciously anti-family — particularly for the period between birth and school age. Raising a baby is both enormously expensive and enormously time-consuming, creating an awful choice between staying at home and foregoing work income, or going back to work and having to pay for expensive child care (that is, a nanny or a day care to look after the child while its parents are at work).

That is the motivation behind Elizabeth Warren's new proposal for a child-care subsidy, which would drastically cut child-care costs for most families. It's not a bad idea, but it could be better. It raises a key question: Should Democrats start pushing for direct state provision of things like child care, instead of subsidizing private institutions?

Under the Warren plan, qualified child-care providers would receive federal money for children depending on their parents' income. The subsidy schedule would be pretty generous — families making up to twice the poverty line ($50,200 for a family of four, as of 2018) would pay nothing for child care, while others would pay on a sliding scale topping out at 7 percent of their income. (In other words, only people making enough money such that prevailing child-care costs constitute less than 7 percent of their income would get no subsidy.)

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At bottom, this is an ObamaCare-style approach: a means-tested subsidy to private providers. But unlike ObamaCare, the subsidy is actually generous enough to help most parents. Child care is also dramatically less complicated and difficult than health care, so it should be a correspondingly easier lift. The Netherlands has a system somewhat like this and it appears to work reasonably well.

A Moody's analysis of the Warren plan finds it would have substantial economic benefits because it would allow parents to return to work and thus increase the labor force. (American female labor force participation in particular is much lower than in peer nations, undoubtedly due in large part to the child-care problem.)

However, there are still some sizable downsides to this approach. The first is cost — not to the government, but of the care itself. Now, Warren's proposal is intended to expand child-care supply, but the subsidy being based on one's income means there will be little incentive to compete on price. The result will very likely be child-care centers competing on expensive deluxe amenities, as parents will naturally be drawn to the fanciest options since they will pay the same regardless. Prices will rise as a result.

The limitations of Warren's proposal are clearly driven in part by the desire to keep the headline price down, but somebody, in this case middle- and upper-class parents, will still have to make up the difference. Designing it in this way could easily increase the total cost (that is, including both state and private spending) of child care. The government could counter this problem by fixing prices, but there are no such controls mentioned in the proposal outline.

Second is wasteful bureaucracy. Giving out subsidies based on income will require an administrative/surveillance apparatus to calculate payments and make sure that people aren't cheating the system. That's a lot of paperwork and very likely a lot of mistakes and headaches.

Third is lower political durability. Families only eligible for smaller subsidies will be naturally resentful of the downscale families paying nothing, so there will be less resistance to a future Republican administration attempting to roll back the program. (Witness the last GOP Congress coming within a hair's breadth of repealing ObamaCare, but largely leaving Medicare alone.)

A fourth problem is that families in the phase-out zone of the subsidy will potentially face a high effective marginal tax rate, as a large portion of any additional income will be eaten up by reduced subsidies — especially when combined with other proposals for means-tested tax credits that would phase out in a similar way, like Kamala Harris's LIFT Act.

There is an alternative approach that can be seen in the Family Fun Pack proposal from the People's Policy Project: universal state-run child care, funded by the federal government but administered by local school districts just like elementary schools are today. (Full disclosure: I wrote a separate paper on housing policy for the People's Policy Project.) This would be administratively simpler, benefit a broader population, avoid the marginal tax problem, and also directly help hold down costs. (It would cost the government considerably more, but as seen above, the net cost to society would probably be less.)

As economist J.W. Mason explains, a key justification for direct state provision of public goods instead of subsidies is the price-lowering effect. When supply is difficult to expand (as it would be to some degree for child care, given necessary regulations about qualifications, sanitation, and so forth), then some portion of subsidies will tend to just increase private profits rather than expand supply. But if the state directly provides its own option, that will force private competitors to compete on price.

At any rate, I don't want to be too hard on the Warren proposal. It would be far superior to the status quo and help millions of families who are struggling to reconcile parenthood with our warped economic system. But it's worth considering whether this is the direction America and the Democratic Party should want to go. It may be politically easier to pass social programs by shunting much of the cost onto individuals. But the policy results are clearly inferior.