Tag: subsidies

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 Trumps’ Mistargeted Child Care Proposal

Sadly, there’s a growing bipartisan consensus for more extensive federal involvement in child care policy. Recently, presidential candidate Elizabeth Warren proposed extensive new demand-side subsidies. Now today’s Budget from President Trump proposes additional resources for the Child Care and Develop Block Grant program to “increase the supply of child care to underserved populations.” Ivanka Trump is championing this new proposal.

Child care can be extraordinarily expensive. There are big problems with lack of availability in poorer neighborhoods. Ivanka Trump is to be commended for recognizing this is a supply-side problem, rather than just proposing throwing money at it. But that problem is generated in large part by misguided regulations in the form of staff-child ratios and occupational licensing requirements at state level that make it more expensive to provide care. Efforts to formalize the sector as more educational raises costs and so increases prices, with the inevitable regressive consequences. The Trump budget plan only works at the margins to improve affordability and availability, with big potential drawbacks. It is mistargeted.

Under Trump’s proposal, $1 billion extra would be temporarily put into the Child Care and Development Block Grant program. States could apply for funding to be used to encourage employers to invest in child care as they saw fit. But the quid pro quo is that to get the extra money, states would have to show commitments to reducing regulation or requirements that raise the cost of care.

Transit Death Spiral Continues

Transit ridership has been dropping for four years and increased subsidies won’t fix the problem. Data released by the Federal Transit Administration yesterday show that nationwide ridership was 3.1 percent less in June 2018 than it had been in June 2017. Ridership fell for all major modes of transit, including commuter rail (-2.6%), heavy rail (-2.5%), light rail (-3.3%), and buses (-3.8%). 

June 2018 had one fewer work day than June 2017, which may account for part of the ridership decline. But ridership in the first six months of 2018 was 3.0 percent less than the same months of 2017, and again ridership declined for all major modes of transit.

As in previous months, I’ve posted an enhanced spreadsheet that has all of the raw monthly data from the FTA spreadsheet but includes annual totals from 2002 through 2018 in columns GZ through HP, modal totals in rows 2125 through 2131, transit agency totals in rows 2140 through 3139, and urban area totals for the nation’s 200 largest urban areas in rows 3141 through 3340. The same enhancements are included on the “VRM” or vehicle-revenue miles worksheet.

June 30 is the end of the fiscal year for many if not most transit agencies, so now we can compare transit’s 2018 fiscal year performance against 2017 (see columns HU to HW in the spreadsheet). Nationwide ridership in FY 2018 declined 2.7 percent from 2017 and of course it fell for hundreds of transit agencies.

Of the nation’s 50 largest urban areas, June ridership grew in eleven, January through June ridership grew in ten, and fiscal year ridership grew in just six. Seattle is one of the six, having grown by 1.4 percent, the others being Pittsburgh (0.2%), Providence (1.1%), Nashville (3.5%), Hartford (3.3%), and Raleigh (6.1%). Except Seattle, these urban areas have seen declines in other recent years so this increase is not a great victory and probably won’t be sustained for long in the future. 

As I’ve noted elsewhere, Seattle has enjoyed steady growth in transit ridership not because it built light rail but because it has increased downtown jobs from 216,000 in 2010 to 292,000 in 2017. Downtown jobs are the key to transit ridership because most transit agencies run hub-and-spoke systems focused on central city downtowns. But replicating Seattle’s downtown growth is impossible in most regions, as all but six American cities have far fewer downtown jobs; nor would most people agree to accept the costs Seattle is paying in terms of subsidies to new employers, traffic congestion, and high housing prices resulting from land-use restrictions that prevent jobs and housing from moving to the suburbs.

Fiscal year ridership declines in many urban areas were larger than the increases in the few regions where ridership grew. The worst were Charlotte (-15.1%), Cleveland (-11.7%), Miami (-10.3%), St. Louis (-8.2%), Memphis (-7.7%), Jacksonville (-7.0%), Baltimore (-6.6%), Richmond (-6.6%), Philadelphia (-6.5%), Cincinnati (-6.2%), Virginia Beach (-6.1%), Dallas-Ft. Worth (-5.9%), Phoenix (-5.6%), and Boston (-5.2%). This is in addition to significant declines in all of these urban areas between 2014 and 2017.

Officials at the Charlotte Area Transit System must be proud that the light-rail expansion they opened in March led to a 65 percent increase in June light-rail ridership over June 2017. Yet this was a hollow victory as the agency lost 36,000 more bus riders than it gained in rail riders.

Transit agencies get about a third of their operating funds from fare revenues, and the decline in ridership has forced many to reduce service. The vehicle-revenue miles page shows that nationwide transit service declined by 5.1 percent in June 2018 vs. 2017. While some people blame the ridership declines on the service reductions, at least one study says it is the other way around: service has declined because riders abandoned transit, forcing agencies to cut back on spending.

Transit ridership has declined in many urban areas despite increasing service. Among many others, Phoenix increased 2018 service by 11.0 percent yet lost 5.6 percent of its riders; San Jose increased service by 3.1 percent but lost 4.2 percent of its riders; Indianapolis increased service by 4.3 percent yet lost 3.9 percent of its riders; Austin increased service by 6.5 percent yet lost 1.1 percent of its riders.

It appears that ride hailing is the principal factor in ridership declines. A recent study estimates that ride hailing grew by 710 million trips in 2017. If just 36 percent of those trips were people who would otherwise would have taken transit, then ride hailing is responsible for all of the decline in 2017. Declining ridership leads to service reductions, which results in more ridership declines, producing a death spiral of revenue shortfalls followed by service reductions followed by more revenue shortfalls.

Some cities are supplementing transit revenues by taxing ride-hailing companies, which I’ve noted elsewhere is a little like taxing word processors to protect the typewriter industry or pocket calculators to protect the slide rule industry. At least one city is looking at taxing marijuana to subsidize transit.

It doesn’t really matter. The decline in transit ridership is beyond the control of transit agencies, and increasing subsidies to what is already the nation’s most-heavily-subsidized form of transportation won’t make much difference. The only question is when will appropriators realize that it is pointless to continue subsidizing a dying industry and start winding down those subsidies.

What Do the Subsidy Recipients Think about Cutting Subsidies?

Ever since President Trump and budget director Mick Mulvaney released a proposed federal budget that includes cuts in some programs, the Washington Post has been full of articles and letters about current and former officials and program beneficiaries who don’t want their budgets cut. Not exactly breaking news, you’d think. And not exactly a balanced discussion of pros and cons, costs and benefits. Consider just today’s examples:

[O]ver 100,000 former Fulbright scholars, among them several members of Congress, are being asked to lobby for not only full funding but also a small increase.

As a former Federal Aviation Administration senior executive with more than 30 years of experience in air traffic control, I believe it is a very big mistake to privatize such an important government function. 

On Thursday, all seven former Senate-confirmed heads of the Energy Department’s renewables office — including three former Republican administration officials – told Congress and the Trump administration that the deep budget cut proposed for that office would cripple its ability to function.

This is nothing new. Every time a president proposes to cut anything in the $4 trillion federal budget — up from $1.8 trillion in Bill Clinton’s last budget — reporters race to find “victims.” And of course no one wants to lose his or her job or subsidy, so there are plenty of people ready to defend the value of each and every government check. As I wrote at the Britannica Blog in 2011, when one very small program was being vigorously defended:

Every government program is “well worth the money” to its beneficiaries. And the beneficiaries are typically the ones who lobby to create, expand, and protect it. When a program is threatened with cuts, newspapers go out and ask the people “who will be most affected” by the possible cut. They interview farmers about whether farm programs should be cut, library patrons about library cutbacks, train riders about rail subsidy cuts. And guess what: all the beneficiaries oppose cuts to the programs that benefit them. You could write those stories without going out in the August heat to do the actual interviews.

Economists call this the problem of concentrated benefits and diffuse costs. The benefits of any government program — Medicare, teachers’ pensions, a new highway, a tariff — are concentrated on a relatively small number of people. But the costs are diffused over millions of consumers or taxpayers. So the beneficiaries, who stand to gain a great deal from a new program or lose a great deal from the elimination of a program, have a strong incentive to monitor the news, write their legislator, make political contributions, attend town halls, and otherwise work to protect the program. But each taxpayer, who pays little for each program, has much less incentive to get involved in the political process or even to vote.

A $4 trillion annual budget is about $12,500 for every man, woman, and child in the United States. If the budget could be cut by, say, $1 trillion — taking it back to the 2008 level — how much good could that money do in the hands of families and businesses? How many jobs could be created? How many families could afford a new car, a better school, a down payment on a home? Reporters should ask those questions when they ask subsidy recipients, How do you feel about losing your subsidy?

House Testimony on Energy Subsidies

I testified to a House committee today on Department of Energy (DOE) loan programs. These were the Bush/Obama-era subsidies to Solyndra and other renewable energy businesses.

I discussed five reasons why the loan programs should be repealed:

1. Four Decades Is Enough. The federal government has been subsidizing solar and wind power since the 1970s. These are no longer the sort of “infant industries” that some economists claim need government help. Solar and wind are large and mature industries, and they already receive subsidies from state governments, particularly in the form of utility purchase mandates, which are in place in 29 states.

2. Failures and Boondoggles. The DOE claims that Solyndra’s bankruptcy was the exception, and that the agency’s overall loss rate on loans is low. But as an economist, I’m more concerned with whether the overall benefits of projects outweigh the costs, and that appears not to be the case for numerous projects. The Ivanpah solar project in California, for example, is producing less electricity and consuming more natural gas than promised, and its cost per kwh is at least three times more than for natural gas plants.

3. Corporate Welfare and Cronyism. The Washington Post found that “Obama’s green-technology program was infused with politics at every level.” Public opinion polls have shown plunging support for both politicians and big businesses over the years, and one of the reasons is such cronyism. Businesses and policymakers would gain more public respect if they cut ties to each other by ending corporate welfare.

4. Private Sector Can Fund Renewable Energy. Most DOE loan guarantees have gone to projects backed by wealthy investors and large corporations, such as Warren Buffett and General Electric. Such individuals and companies are fully capable of pursuing energy projects with their own money. Buffett’s Berkshire Hathaway has invested $17 billion in renewable energy since 2004. With that kind of private cash available for renewables, we do not need the DOE handing out subsidies.

5. Subsidies Distort Decisionmaking. Federal energy subsidies create counterproductive incentives in the economy. For example, subsidized firms tend to become slow and spendthrift, thus subsidies undermine productivity. Also, because subsidies are not driven by consumer demands, they can induce firms to invest in activities that will not succeed in the marketplace in the long term.

You can watch the full hearing here. My testimony is here. More background on energy subsidies is here.

TTIP Could Rein in the Abuse of Tax Incentives to Attract Foreign Investment

I’ve written often about the global competition to attract foreign investment, and have made the point that investment flows to jurisdictions with good policies in place. Globalization of production and the mobility of capital mean that national policies (regulations, tax policy, immigration, trade, energy, education, etc.) are on trial, with net investment inflows rendering the verdicts.

But some countries (and some U.S. states) use tax holidays and other forms of tax forgiveness, in lieu of adopting good policies, to attract investment, which burdens taxpayers and subverts the process of matching investment to its optimal location. These are subsidies – like so many other programs – that distort markets and should be discouraged.

In today’s Cato Online Forum essay, which is associated with the TTIP conference taking place on October 12, Ted Alden from the Council on Foreign Relations puts forward a strong proposal to end this madness via the Transatlantic Trade and Investment Partnership negotiations.

Read it.  Provide feedback.  And please register to attend the conference.

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