Tag: elizabeth warren

Are Child-Care Subsidies Actually “Good For The Economy”?

Commentators are already implying Democrat Elizabeth Warren’s new universal child-care plan will be “good for the economy.”

Moody’s Analytics reckons subsidies will induce more mothers into the labor market, raising growth rates by 0.08 percent per year over a decade. Others say that cheaper out-of-pocket child-care will reduce time spent out of the labor force by working mothers, and this greater maternal labor market attachment will boost recorded productivity and women’s earning potential. Combined, it is said the universal program will raise the economy’s productive capacity and thus recorded level of GDP.

Such claims about heightened measured economic activity are not crazy. But previous research for England has found that the effects are unlikely to be as great as proponents imagine.

The roll-out of free child-care for three-year-olds there induced 12,000 extra mothers into work (coming at an extremely high cost of around $84,900 per job). This suggests government subsidies resulted in substantial crowd out of other informal or paid care, meaning overall the substitution effects (the higher effective wage inducing more labor supply) only narrowly exceeded the income effects (the higher effective wage reducing labor supply as people took more leisure with their child-care cost savings). Along the way, there was substantial “deadweight” - subsidies going to people who would work or stay attached to the labor market anyway.

But let’s suppose the proponents of Warren’s scheme are correct about their estimates of bigger effects here. Does any boost to measured GDP mean child-care subsidies are “good for the economy”? The answer is “probably not.”

GDP should not be confused with general economic welfare. Economists generally start from the view that free action in the economic sphere - people acting on their own preferences - maximizes economic welfare except in cases when there are market failures present. It is not clear what markets failures exist in relation to female labor force participation and child-care. That means subsidies to make child-care free, or nearly free, mask the opportunity cost to the parent of putting their kids in daycare in a way that harms broader economic welfare.

The idea that non-attachment to the labor market is a market failure needing correction is particularly peculiar.

Every day we freely opt not to maximize time at work or our productivity. These are choices that come with a significant opportunity cost, not least of time, after all. Some men and women obtain more “utility” from dedicating themselves to family life. Others may decide to work in vocational jobs, or part-time, or on activities that give them substantial non-pecuniary satisfaction, even if this does not maximize their productivity or wages. Some people decide not to invest in their own human capital to boost their earnings potential; others to care for an elderly relative nearing their end of life.

Why should government act to incentivize greater parental attachment to the labor market through child-care subsidies but not, say, incentivize French teachers to train to work on Wall Street or as engineers?

If failing to reach your labor market potential is a cause for intervention, then what about subsidies to other groups, such able-bodied retirees or non-working partners in single parent households with no children?

If child-care costs are too high to allow parents to be as productive as possible, then what about out-of-pocket housing, transport or training costs that prevent other people from working where they would be most productive?

Once you think about it, the idea that the role of government is to maximize labor force attachment and recorded productivity is bizarre – with huge implications that justify a whole host of new interventions.

And that would only be looking at one part of the equation too. Large new subsidies would ultimately have to be financed by raising taxes, as Warren acknowledges. Raising them on incomes for some would reduce their return to work and so labor force participation and human capital investment. Raising them on wealth, as Warren suggests, will reduce the return to saving and investment – which could reduce productivity. It is not clear what the net effect of this would be overall.

So is there ever a case for child-care subsidies under a “neutral” framework that allows preferences to be realized? Perhaps.

In some cases, the provision of means-tested welfare benefits without work requirements may reduce the incentive for parents to work. Targeted assistance to rebalance this disincentive may be desirable for those on low incomes, and indeed already exists in the form of the earned income tax credit.

More broadly though, if governments want to act neutrally in relation to children they should either operate no subsidies at all or else support families with children through tax allowances or distributions available to all children.

That way, parents get to decide what is best for their child without warping the financial incentives and structure of the child-care sector itself.

Elizabeth Warren’s Universal Child-Care Proposal: The Starting Point For A Government Takeover Of The Sector

Senator Elizabeth Warren is right: Child care services in America can be extremely expensive.

In certain areas, child care can be difficult to find at all. High prices have perniciously regressive effects on low-income families, causing them to miss job opportunities, use unlicensed relatives to care for their children or else forego high amounts of their hard-earned income.

So the presidential candidate’s new promise of universal child care subsidies will no doubt resonate with many families. She would have the federal government cover the costs of child-care from birth to school age entirely for any family earning below 200 percent of the federal poverty line, provided they use government-approved local providers. Federal funding would also be available above that, with a cap on out-of-pocket spending on child-care at 7% of any family’s income. According to Warren’s explanation, this would come coupled with providers being held to government educational standards and a desire to push up pay for child care workers to levels seen for public school teachers.

This would have dramatic consequences for the child-care sector. A few observations:

  1. Warren’s plan will significantly reduce out-of-pocket costs for many families. It represents a huge new subsidy. Take care for 4 year-olds as one example; at the moment, data from Child Care Aware of America show just two states (Alabama and Mississippi) have average full-time care costs below 7% of median income. For infants, no state has average costs below 7% of median income. For families with 2 or more children in these care settings, the subsidy will be massive. Such a large, universal subsidy will bring significant deadweight (people using the scheme who would otherwise have paid for their own care anyway). But it is so generous that it will encourage many new users of child care too.
  2. This is significant, because state-level government regulations – not least on staff:child ratios and qualification requirements for carers – currently make providing child-care more expensive. This reduces the number of child-care facilities available in low income markets and increases prices for families. Warren’s subsidy response amounts to a classic case of government restricting supply through policy, on the one hand, and then labelling the resulting high prices a “market failure” that needs to be corrected. In fact, Warren’s plan would worsen the supply problem through its promise to raise pay rates for carers substantially. This would restrict supply further while the subsidies induce demand, raising underlying market prices – higher prices now overwhelmingly paid by taxpayers.
  3. In the U.K., child-care subsidies drove providers in some areas out of business. Why? The government-provided subsidy rates to deliver “free” care were often lower than market prices, meaning providers had to cross-subsidize government-guaranteed places by charging more for unsubsidized families. As “free” care expanded, the opportunity to engage in this cross-subsidization fell, and some companies found the government-funding rate uneconomic as it took over more of the sector.
  4. In the U.S., the average cost of child care varies dramatically by state. For a 4 year-old, the cost of full-time center-based care ranges from $5,061 in Alabama, right through to $18,657 in D.C. Warren’s plan would cap the proportion of income any family paid on child-care. But no government would put taxpayers on the hook for a blank check for any family’s spending habits. Otherwise providers would have every incentive to provide extremely luxurious care on the basis that taxpayers would foot the bill. Instead, the federal government would either likely try to fix rates to prevent over-spending (risking big distortions in certain markets through de facto price controls, as seen in Britain), control what services child-care facilities provide very prescriptively or else cap the overall amount any family could spend while still benefiting from the subsidy.

In short, instead of reducing the costs of providing care through much-needed supply-side reform, this new demand-side scheme will further drive up the market price of child-care, with taxpayers on the hook now for increased use of formal care.

Given the cost implications of capping the per income amount spent by any family, the federal government would inevitably have to circumscribe the nature of care, fix the rates taxpayers would finance or cap the total amount families could spend on child-care within the scheme. These would fundamentally change the types of care available or used in the sector.

 

The Warren Plan and the History of Corporate Chartering

Sen. Elizabeth Warren’s proposal for drastic changes to corporate governance, which I wrote about in this space last week, continues to draw thoughtful responses from commentators. Colleague Ryan Bourne notes that one study “found that German firms were 27 percent less valuable to their shareholders” because of the workers-on-boards co-determination laws Warren would have us emulate. Moreover, the value given up was not merely transferred to the firms’ workforces but was in part dissipated through inefficiency. At National Review, Samuel Hammond discusses how co-determination undermines the overall dynamism of a national economy (for example, by discouraging the transfer of capital to risky, high-value new enterprises) and also notes some of the problems with making “stakeholder” value a subject of fiduciary duty for investors.  

Now NYU lawprof and Cato adjunct scholar Richard A. Epstein, a leading libertarian voice on law, tackles the Warren plan in a piece for the Hoover Institution’s Defining Ideas series. Epstein’s piece is worth reading in its entirety for his analysis of (among other topics) the “stakeholder” mystique, the efficiency-friendly role of share buybacks and executive incentive stock, and the constitutional infirmities of the overall Warren scheme (citing the unconstitutional-conditions doctrine), as well as his warning that large-scale capital flight from the U.S. could ensue if investors mistrust the whims of a new federal charter regulator.

In the passage I want to highlight, however, Epstein makes a point often overlooked in other critiques. Writing on the popular and populist Left these days often romanticizes the idea that business charters should be revocable by some central authority for misconduct (“corporate death penalty”), although it is often not spelled out whether the assets of a giant bank or oil or pharmaceutical company hit by scandal should be taken into the public sector by some sort of confiscatory state authority, allowed to revert to shareholders, or perhaps transferred to a successor entity that would maintain the same brands and facilities and headquarters as before (leaving the question of what exactly is being accomplished by charter revocation). Epstein takes the broad historical view: 

…Warren wholly misunderstands the historical role and constitutional position of corporate charters. The last thing that any country needs for economic growth is a situation in which government officials decide which firms receive charters subject to what conditions. Does she really think that some public bureaucrat should have the power to refuse to issue Apple a corporate charter unless it puts community members or union members on its board, makes gifts to the Sierra Club, or adopts minimum minority hiring set-asides? And what should be done when thousands of firms balk at these conditions? Can they go to court, or does the federal board run the corporation directly?

Lest anyone forget, the great 19th-century corporate reform was the passage of general incorporation laws that allowed any group of individuals to form a corporation, with its attendant benefit of limited liability, so long as they met certain minimum conditions relating to their capital contributions, their ability to sue and be sued, and their board structures. The new legal regime ushered in sustained economic expansion by knocking out the political favoritism that had previously given some businesses corporate charters that gave them a huge edge over direct competitors denied similar authorization. It would be unsurpassed folly to re-open the doors to these abuses today.

Indeed, a key point about general incorporation laws was that they were egalitarian: you could launch an incorporated venture even if you were obscure, new in town, or out of favor with political influentials. Supporters of plans like Warren’s should be asked whether they really want some combination of political actors – very possibly appointees of Donald Trump or another President like him – to gain power to revoke Google’s or Amazon’s or Facebook’s charter to continue doing business unless the management agrees to cut a deal, perhaps involving private understandings with officialdom, to stave off such a penalty. 

(In)digesting the DeVos Confirmation Hearing

I got my dinner and a show last night. The dinner was fine, but the show? Not so great. Not much substance was covered in the DeVos confirmation hearing before the Senate Health, Education, Labor and Pensions committee, and when meaty issues were brought up they were too often smothered in gotcha questions and commentary rather than meaningful discussion.

A good part of the hearing was occupied by bickering over each committee member only getting one, five-minute questioning period, and whether or not that was committee tradition or an effort by the GOP majority to protect the witness. Maybe that’s insightful stuff if you care about the politics of all this—though I doubt it—but it doesn’t tell us one whit about where the nominee stands on the federal role in education.

The good news is that when DeVos was asked about her views on federal policy, she was deferential to states and districts. I don’t recall her stating resolutely that the Constitution leaves ed power to the states and the people—she stated little resolutely—but she hit the right notes. Included in that was telling committee chair Lamar Alexander (R-TN) that she would not use the power of her office to try to coerce school choice. She said she would try to convince Congress to push choice—an unconstitutional goal, but at least using the constitutionally correct process—but she would not try to do it unilaterally.

Student Loan Gifts Don’t Help

Today must be student loan day in President Obama’s “year of action” – also “year of midterm elections” – as the President announced he will expand eligibility for student loan repayment capping and forgiveness. In addition, this week the Senate is set to take up Elizabeth Warren’s (D-MA) bill to federally refinance student loans at lower interest rates, including truly private loans.

Let’s review the folly of such seemingly well-intentioned efforts:

  • Making student loans cheaper, which includes indicating that Washington will always soften your loan terms if politically possible, mainly encourages students to demand more stuff, and colleges to charge more. They’re called “perverse incentives.”
  • In the name of helping them, federal politicians, and many other people, massively oversell higher education to the detriment of students. Perhaps as much as half of people who enter college don’t finish; a third of people with a bachelor’s degree are in jobs not requiring the credential; underemployment is even worse for graduate-degree holders, and; cheap college has almost certainly fueled credential inflation, not major increases in knowledge or skills.
  • Decreasing what borrowers will repay means taxpayers – who had no choice in whether the loans were made – have to make up the difference. And there is a little matter of being nearly $18 trillion in debt already.
  • The Public Service Loan Forgiveness program encourages people to work for not-for-profit entities, especially government. As if government work were a major sacrifice, and things produced or operated for profit such as iPads, grocery stores, bicycles, door knobs, restaurants, books, airplanes, and on and on, didn’t make us better off.

Someday, I hope somebody’s “year of action” will finally deal with the crippling reality of federal student aid “help.” But that will only happen if the public gets tired of sweet-sounding “solutions,” especially in years of elections.    

No Big Deal. Just Taxpayers Getting Clobbered

According to Ben Jacobs at the Daily Beast, Sen. Elizabeth Warren (D-MA) will soon be introducing legislation to allow holders of federal student loans to refinance at lower interest rates. There’s no indication that the new rates would be in exchange for longer terms, or anything like that. Just lower rates because someone might have borrowed at 7 percent, rates for new loans are now at 3 percent, and, well, paying 7 percent is tougher.

According to Jacobs, the proposal “seems to encapsulate…free-market principles” because recent changes to the student-loan program connect rates on new loans to broader interest rates. Apparently, pegging interest rates to 10-year Treasuries is very free market-y.

Perhaps more concerning than the questionable use of the term “free-market principles,” however, is the article’s handling of my reponse to the author’s request for comment. Apparently, I was fine with Warren’s rough idea, except for one little thing. Writes Jacobs:

In fact, Neal McCluskey, a higher education expert at the libertarian Cato Institute, had difficulty finding objections to the concept of Warren’s bill though he cautioned that was without any legislation for him to read. Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

How much bigger an objection could there be to “the concept of Warren’s bill” than that such a move would leave taxpayers holding the bag? As I often try to emphasize, taxpayers are people, too. There are lots of other concerns – most centrally, easy aid fuels tuition inflation – but to gently paraphrase Vice President Biden, reducing revenue that’s already been budgeted is a big deal!

Let me rephrase that: It should be a big deal. But as proposals like this indicate, it’s not nearly as big as it ought to be.

 

Elizabeth Warren, Fair Play, and Soaking the Rich

Elizabeth Warren’s recent remarks on class warfare, made during a campaign stop in her quest for a Massachusetts U.S. Senate seat, provide a nice microcosm of the broader philosophical views behind much contemporary political debate.

Here’s Warren:

The relevant bit that has her supporters so fired up goes like this:

I hear all this, oh this is class warfare, no! There is nobody in this country who got rich on his own. Nobody. You built a factory out there–good for you.

But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory.

Now look. You built a factory and it turned into something terrific or a great idea–God Bless! Keep a Big Hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Fully exploring the thinking behind Warren’s remarks would demand a book at least. We might point out that most of the rich got that way by creating value for others, meaning they gave back in the process of getting rich. Or we might wonder if her thinking implies that, because the state is responsible in part for the environment in which all of us earned what we have, the state is the actual owner of what we have.

To spare you having to read that book, however, I’m going to instead address just two points I find particularly interesting. First, we can tease out the theory of political obligation Warren advances and see if it holds up to scrutiny. Second, we can ask whether her argument, even if we accept it on its own terms, supports a tax increase on high income earners.

In a 1955 essay, H. L. A. Hart articulated what’s come to be known as the “fair play” principle of political obligation.

When a number of persons conduct any joint enterprise according to rules and thus restrict their liberty, those who have submitted to those restrictions when required have a right to a similar submission from those who have benefited by their submission.

Framed in Warren’s language, “the rest of us” restricted our liberty by paying taxes for the creation of roads, the formation of police forces, the funding of fire departments, and so on. And the rich benefited from our submission to taxes by getting rich (in part) because of the existence of roads, police, and fire departments. Therefore, we have a right to a similar submission from the rich in the form of them paying an increased amount in taxes to fund roads, police, and fire departments, too.

So by her account, this can’t be class warfare because it’s a simple matter of obligation. But is that true? Does the so-called “fair play” account of political obligation work?

Not really. Robert Nozick famously knocked it down in Anarchy, State, and Utopia with a thought experiment about a neighborhood public address system. And A. John Simmons went even further—and did so more persuasively—in his 1979 classic, Moral Principles and Political Obligations.

But the basic response to “fair play” is pretty simple: It seems awfully weird to demand that we repay benefits we never had a choice about accepting in the first place.

Nobody approached the rich before they were rich and said, “Hey, we’re all pitching in to pay for roads and police, which we all think are pretty valuable. If you’d like to benefit from those things like we would, we ask that you pay for them. Are you up for that?” A (pre-)rich person might very well say, “Yes, I’m game.” In that case the principle of fair play would apply. But it would only apply if he had a meaningful choice about the matter. On the other hand, he might say, “Yes, I think we do need roads and police, but I also think they’d be better provided by an alternative cooperative scheme (the market, a different government, a different voluntary group, etc.) to the one you’re offering.”

Simmons calls this the distinction between “receiving” benefits and “accepting” them. The fair play principle creates obligations when benefits are accepted, but not when merely received.

With that in mind, Warren would have a difficult time arguing that any of us genuinely accepted the particular roads and police provided by the particular scheme she supports. We’ve received them, yes, and may rather like what we received—but we were never presented with an actual choice.

There may, of course, be plenty of other good reasons to feel obligated to pay our taxes—or to even pay more taxes than our neighbors—but fair play, at least in the form Warren presents it, doesn’t quite get us there.

Still, let’s set such concerns aside and grant to Warren that, if the rich did benefit from the particular services paid for by the rest of us, they have a duty to pay (more) for them. Would that allow us to justify asking the rich to pay more taxes today?

Again, probably not. Just look at the beneficial services Warren draws our attention to.

  1. Roads
  2. Police
  3. Fire departments
  4. Education

She tacks an “and so on” to the list, but there’s something striking about the concrete examples she does give. Namely, they’re all the kinds of things you’d expect even from a much smaller state than the one we have today.

In other words, the need to raise taxes at the present moment (if such a need exists) is precisely not to pay for roads, police, fire departments, and education. We had those—and they were functioning quite nicely—for a good while before the explosion of federal spending under the last two administrations.

If Warren’s claim is that the rich got rich because of certain benefits they received from government and so should pay more to provide those benefits to others, then the overwhelming bulk of government spending is completely outside the scope of her argument.

It’s not obvious that many rich people got to be rich because of Medicare, Medicaid, Social Security, or military expenses. (Those who got rich because of subsidies are another matter, but she doesn’t draw that distinction, nor is she calling for an end to government handouts to the wealthy and politically connected.) But those are where we’ve seen so much of the spending increases that now demand, according to Warren and her peers, that all of us pony up more cash to the federal government.

This means that an easy response to Warren is to grant her general philosophical point but then add that what it leads to is not increased taxes but cutting government back to those programs that do make people rich and only then worry about how much of what remains the rich should pay for.

Of course we might also point out that, even with the bloated leviathan we have in Washington—one that does far more than provide roads, police, fire departments, and schools (which are, after all, chiefly state and local matters)—the rich still pay for most of it. Certainly more than “the rest of us” pay. As the Wall Street Journal pointed out back in May, “the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes.” The top 20% of American income earners pay over half the federal taxes. Which means that “the next kid who comes along” already is getting his federal benefits from the rich. To Warren and her supporters, I ask, “How much is enough?”

If Warren’s moral case for increasing the tax burden of the rich doesn’t hold up, can she still maintain her claim that this isn’t class warfare? Probably not. By her arguments, the rich are not obligated to pay more than they already are. Nor will their paying more do much of anything to ameliorate America’s fiscal woes. That means it’s rather difficult to see her speech as anything but a ploy to fire up her base by attacking a disfavored minority.

If that’s not class warfare, I don’t know what is.

Update: I just finished a podcast on the subject of this post with Caleb Brown.