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.


A Conversation with Marietje Schaake (Part I)

Marietje Schaake is a leading and influential voice in Europe on digital platforms and the digital economy. She is the founder of the European Parliament Intergroup on the Digital Agenda for Europe and has been a member of the European Parliament since 2009 representing the Dutch party D66 that is part of the Alliance of Liberals and Democrats for Europe (ALDE) political group. Schaake is spokesperson for the center/right group in the European Parliament on transatlantic trade and digital trade, and she is Vice-President of the European Parliament’s US Delegation. She has for some time advocated more regulation and accountability of the digital platforms.

Recently, I sat down with Marietje Schaake in a café in the European Parliament in Brussels to talk about what’s on the agenda in Europe when it comes to digital platforms and possible regulation.

The CFPB and Payday Lending Regulations

The Consumer Financial Protection Bureau (CFPB) recently proposed the elimination of new payday lending rules created under the Obama Administration and imposed in 2017. Payday lenders are frequently vilified—a recent New York Times editorial declared that the CFPB “betrayed financially vulnerable Americans last week by proposing to gut rules…that shield borrowers from predatory loans”—but recent evidence indicates that the predatory costs of payday loans may be nonexistent and the benefits are real and measurable. Thus, the original regulatory restrictions were unnecessary.

Most Americans take access to credit for granted, but many lower-income Americans have difficulty meeting the requirements to get a credit card or take out collateralized loans. With minimal approval requirements that are easier to meet—often just a bank account statement, a pay stub, and a photo ID—payday lenders offer short-term, uncollateralized loans. These loans are advances against a future paycheck, typically about $100-$500 per loan, and customers usually owe a fee of around $15 per $100 borrowed for two weeks.

Consumer advocates oppose these terms for two reasons. First, they argue the terms are onerous. They convert the loan terms into an annual percentage rate (APR) that would be disclosed by a conventional credit-card issuer, and the result is 391 percent. This number shocks the sensibilities of the average person and easily leads to the conclusion that the payday lender is ripping off the consumer.

The APR is misleading because the fixed costs of lending as well as the default costs must be defrayed over much smaller sums than conventional loans. According to research reviewed by Victor Stango in the fall 2012 issue of Regulation, the fixed and marginal costs of the average $300 loan are $25. Thus, with no risk of default, the break-even per-loan charge is $25. But 5 percent of customers default increasing the break-even per-loan charge to $40, or $13.33 per $100 borrowed.   

In addition, the revenues of payday lenders do not seem to lead to excess profits. Payday lending appears to be very competitive. There are more physical payday lenders (24,000) than there are banks and credit unions (16,000). And according to research cited in Stango’s article, payday lenders do not earn “excess returns” in the stock market.   

The second objection consumer advocates have against payday lenders is the inability of some consumers to pay back their loans after the initial two weeks. If borrowers rollover their loans, the fees grow larger quickly.

Two papers, which I reviewed in the spring 2017 issue of Regulation, utilize data from the military to investigate the effects of payday loans and challenge this objection. In the mid-2000s active duty military members were three times more likely than civilians to take out a payday loan, and as many as 20 percent of active duty military members had used a payday loan in the past year. The belief that payday loans were predatory and that they adversely affected young soldiers’ performance led Congress to cap the APR on loans for military servicemembers and their families at 36 percent in the Military Lending Act of 2007 (MLA), effectively banning payday lending to the military nationwide. 

The authors of both studies exploit the fact that military members are randomly assigned to bases across the nation (in states that ban payday loans and in states that do not). Thus, using the military’s rich administrative data, the studies are able to analyze differences between individuals in states with and without payday lending bans, before and after the MLA.

In the first paper, Susan Payne Carter and William Skimmyhorn of the United States Military Academy examine labor market and credit outcomes for military members. Specifically, Carter and Skimmyhorn analyze involuntary separation from the military (which may reflect financial mismanagement or stress that affects service members’ job performance) and the denial or revocation of security clearances (which, because the military considers high levels of debt as a threat to individuals with clearances, provides another indicator of negative payday loan effects). The authors find that access to payday loans did not increase involuntary separation or denial of clearances because of bad credit.  

In the second paper, Mary Zaki investigates how access to payday loans allowed service members to smooth consumption over their pay cycle by using data on sales at on-base stores to analyze consumption behavior. Exploiting the same differences between state laws and before and after enactment of the MLA, she finds that after the ban sales on paydays were 21.74 percent higher than sales on non-paydays, but sales on bases before the ban and near payday lenders were only 20.14 percent higher—a 1.6 percent smaller gap between payday and non-payday spending. The variance in spending across the pay cycle was lower (i.e., consumption was smoother) when soldiers had access to payday lending services.  

Together, these results undermine consumer advocates’ claims of the negative impacts of payday loans and demonstrate the consumption smoothing benefits. Carter and Skimmyhorn found no negative effects (as measured by involuntary separation from the military or revocation of security clearances) for members of the military even though they utilize payday lending more than civilians. And Zaki illustrates that payday loans, like all loans, allow consumers to smooth consumption.

Though often portrayed as predatory, payday lenders provide many Americans, who often don’t have access to traditional bank services, with the opportunity to smooth consumption or get cash quickly when emergencies arise. The apparently “high” fees are a natural outcome of lending small amounts to riskier borrowers. Any restrictions that limit these fees or impose increased costs on lenders may eliminate access to any loans, leaving former borrowers with less-desirable, higher-cost options.

Written with research assistance from David Kemp.

Federal Transit Aid Harms Cities

The federal government spends $13 billion a year on subsidies for local rail and bus transit systems. This spending should be zeroed out in the next federal transportation bill.

Federal transit aid prompts cities to spend on boondoggle projects that citizens do not want and cities would not spend on if they had to pay the full costs themselves. Transit aid has been mainly for capital costs, not for operations and maintenance. That has induced cities to purchase excessively costly systems ill-suited to solving local mobility needs.

A case in point: a $133 million electric bus system in Albuquerque, New Mexico, which has turned out to be a big waste of money, as revealed by the Los Angeles Times. City leaders sprang for an expensive electric bus system because federal subsidies covered more than half of the costs.

We see this pattern over and over—the lure of federal money induces state and local politicians to make dumb decisions. I discuss this folly in a forthcoming Cato study on federalism.

From the LAT:

Shortly after being elected in 2017, Albuquerque Mayor Tim Keller stood on one of the passenger platforms for ART, the city’s ambitious new $133-million all-electric bus line that cuts through a 10-mile stretch of the city.

“Drivers waved and cheered, ‘Congrats to the new mayor!’ ‘I voted for you!’ ‘Go get ’em!’” said Keller. “And then in the next breath, they would lay on the horn and give the giant ART sign the middle finger out the car window.”

Civic leaders had initially pitched Albuquerque Rapid Transit as a way to revitalize the city’s former stretch of Route 66 and make the community a national leader in sustainable mass transit. Instead, the ART project resulted in parts of what’s now Central Avenue being ripped up to host dedicated lanes for the electric buses, which are currently out of commission and have so many problems that Keller freely calls them “a bit of a lemon.”

ART was supposed to supplement Albuquerque’s regular bus system by the fall of 2017 with a fleet of 20 buses. But Keller slammed the brakes on the project in January last year, barely a month after ART’s debut.

Shiny stations along the line stand dormant. Vandals have smashed ticket dispensers. Flat-screen televisions meant to alert passengers about boarding times flash a request to get rebooted. Autos can’t use the bus lanes, which cyclists have claimed as their own.

“It’s a nightmare with nothing to show for it,” says Jonathan Hartshorn, a librarian at the University of New Mexico.

… “I don’t know anyone who’s for it,” said a local restaurant owner, adding that business had plummeted by nearly 40% since Central Avenue was constricted to make way for ART stations and the dedicated bus lane. “Who would be for a dud?”

ART has roiled Albuquerque for years. Public meetings saw citizens shout down public officials in English and Spanish over a lack of definitive answers.

… [Steve] Schroeder has owned Nob Hill Music, named after a trendy neighborhood on Central Avenue, for a decade and has been among ART’s loudest opponents. Schroeder claims he’s lost 12 pounds since 2016. That’s when the federal government announced it would award Albuquerque a $75-million grant for ART.

… The Albuquerque City Council, with the support of then-Mayor Richard Berry, eventually applied for and received the federal grant that allowed the city to begin construction in the fall of 2016. Berry found bipartisan support for the funding thanks to New Mexico’s congressional delegation.

… [Schroeder’s] website, SaveRt66.org, lists more than 50 businesses he claims have closed since construction on ART began less than three years ago. His record store has suffered, he says, with visitors complaining that GPS systems consistently tell them to bypass Central Avenue altogether because of congestion: Traffic is now reduced to one lane each way as a result of the changes wrought to design the non-running ART line.

“This is now,” he said while ringing up a customer, “the ugliest street in New Mexico.”


Bad Policy Begets Insecurity

The New York Times is reporting a major spike in aggressive cyber attacks by Iran and China against businesses and government agencies in the United States. “[S]ecurity experts believe,” the Times reports, that the renewed cyber attacks “have been energized by President Trump’s withdrawal from the Iran nuclear deal last year and his trade conflicts with China.”

Chinese cyberespionage cooled four years ago after President Barack Obama and President Xi Jinping of China reached a landmark deal to stop hacks meant to steal trade secrets.

But the 2015 agreement appears to have been unofficially canceled amid the continuing trade tension between the United States and China, the intelligence officials and private security researchers said. Chinese hacks have returned to earlier levels, although they are now stealthier and more sophisticated.

…Threats from China and Iran never stopped entirely, but Iranian hackers became much less active after the nuclear deal was signed in 2015. And for about 18 months, intelligence officials concluded, Beijing backed off its 10-year online effort to steal trade secrets.

But Chinese hackers have resumed carrying out commercially motivated attacks…

In other words, the United States has been the target of major cyber attacks from both Iran and China as a direct consequence of two Trump administration policies, neither of which were justified.

Last year, against the advice of his own top national security officials and the US intelligence community, as well as US allies, President Trump withdrew from the 2015 Iran nuclear deal (JCPOA). That deal rolled back Iran’s nuclear program and imposed strict limits on it for the foreseeable future. To this day, it remains one of the most robust non-proliferation agreements ever negotiated and Iran continues to comply with its stringent controls and invasive inspections regime. Trump’s withdrawal, which lacked a national security rationale (at least one that had any relation to reality) resulted in the automatic re-imposition of harsh economic sanctions against Iran. Although the sanctions have hurt the Iranian economy, the regime in Tehran has kept to its obligations anyway, even amid threatening and overtly hostile rhetoric from the Trump administration that strongly suggests it is seeking regime change.

Many predicted withdrawal from the JCPOA would pressure Iran to unburden itself from the deal’s restrictions and restart its nuclear enrichment program in earnest, the exact opposite of the White House’s stated aim. Thankfully, this has not happened (yet). But what has happened is that Iran has ramped up aggressive cyber attacks against us.

Likewise, Trump’s determination to initiate a trade war with China, arguably America’s most important trade partner, cannot be justified on either economic or national security grounds. China’s immediate response was to retaliate with its own tariffs against US imports. Both the US and Chinese economies have consequently suffered an economic hit worth billions of dollars. We can add to these costs the apparent revocation of the arrangement Obama and Xi secured in 2015 not to engage in commercial cyber espionage. 

As I see it, we can draw two lessons from this. First, countries are likely to retaliate if we punish them for engaging in cooperative diplomacy with us. Second, Trump’s policies have made America less safe.

For those who think the proper response to intensified Iranian and Chinese cyber attacks is to adopt a more aggressive, offensive cyber posture (in retaliation for the retaliation), I recommend reading this Cato Policy Analysis we published last month which demonstrates the dangers, and low utility, of such a path.

That’s Not a Knife… This Is a Knife!

If a law is so vague that it makes it impossible to know whether what you’re doing is illegal or not, it cannot stand. Especially not when the vague law requires no criminal intent to render an action unlawful. The state of New York ignored this basic point of criminal law with its ban of “gravity knives”—pocket knives capable of being opened by the mere force of gravity or a slight flick of the wrist, as opposed to “switchblades,” which are spring loaded. The legislature both failed to define what a gravity knife is and eliminated any requirement that a person have criminal intent (mens rea) when it made simple possession of a pocket knife that could qualify as a “gravity knife” a crime.

The central problem here is that this law, which imposes strict liability on simple possession of a contraband knife, provides for discriminatory and unpredictable enforcement. The U.S. Court of Appeals for the Second Circuit acknowledged the law’s absence of a mens rea requirement but held that it makes no difference whether the defendant believed a knife was legal or not, whether he actually attempted a “wrist flick” to open the knife, or even if he received advice from a police officer that the knife was lawful. Ultimately, the court below suggested that challenges to such prosecutions could only be raised on an as-applied basis—meaning that when someone is prosecuted under this law for carrying a Swiss Army or other common folding knife, then he may be able to raise this defense. But forcing people who don’t and can’t know how to conform to a vague law to wait until they are prosecuted to challenge it is unreasonable.

John Copeland, who was arrested for possessing a common folding knife, now seeks Supreme Court review, hoping to have New York’s law overturned. Cato has joined a group of criminal-law professors on an amicus brief in which we provide a primer on criminal liability where weapon possession charges should be accompanied by a showing that a defendant has both knowledge of possessing an illegal object and of the object’s unlawful characteristics. Our argument parallels a Supreme Court ruling in an analogous drug case, McFadden v. United States (2015), regarding the defendant’s knowledge of substances he possessed.

When a law is vague in a substantial part of its application and provides people no means of knowing whether their conduct is legal, that law is unconstitutionally vague and must either be struck entirely or narrowed to eliminate the infirmity. It is fundamentally (and constitutionally) unfair to impose criminal liability on people who have no way of knowing their conduct is illegal and have no intent to commit a crime.

The Supreme Court will decide later this winter or spring whether to take up Copeland v. Vance.

Roger McNamee’s Facebook Critique

In a recent Time magazine article, Roger McNamee offers an agitated criticism of Facebook, adapted from his book Zucked: Waking Up to the Facebook Catastrophe.  Facebook “has a huge impact on politics and social welfare,” he claims, and “has done things that are truly horrible.”  Facebook, he says, is “terrible for America.”

McNamee suggests his “history with the company made me a credible voice.” From 2005 to 2015, McNamee was one of a half dozen managing directors of Elevation Partners, an $1.9 billion private equity firm that bought and sold  shares in eight companies, including such oldies as Forbes and Palm.  U2 singer Bono was a co-founder. Other partners included two former executives from Apple and one from Yahoo.  Another is married to the sister of Facebook’s COO.  Such investors are not necessarily disinterested observers, much less policy experts.

Between November 2009 and June 2010 Elevation Partners invested $210 million for 1% of Facebook.  That was early, but two years after Microsoft made a larger investment.  Back then, McNamee and other investors had facetime with Zuckerberg. 

McNamee supposedly became alarmed while perusing “Bay Area for Bernie” on Facebook and finding suspicious memes critical of Hillary.  Later, he imagined the Brexit vote must be due to misleading Facebook posts (as if British tabloids and TV were silent).  “Brexit happens in June,” he says, “and then I think, Oh my god, what if it’s possible that in a campaign setting, the candidate that has the more inflammatory message gets a structural advantage from Facebook? And then in August, we hear about Manafort, so we need to introduce the Russians into the equation.” 

He suggests goofy Facebook ads by Russian trolls stole the U.S. election from Clinton. Actually, the Mueller indictment said the Internet Research Agency “allegedly used social media and other internet platforms to address a wide variety of topicsto inflame political debates, frequently taking both sides of divisive issues.  Such political trolling for fun and profit (clicks generate advertising money) is commonplace in Russia, and also at home in the USA.