United States Congress
Mr. Chairman and members of the committee, thank you for inviting me to testify today.
Ensuring that a family can be raised affordably in America should be an uncontroversial public policy objective.
Yet government policies at the federal, state, and local levels today raise prices of basic goods and services, to the disproportionate financial detriment of poor households and families with children.1
Where Households Spend Money
Households across the income spectrum spend large amounts on goods and services that at their most basic should be considered “necessities.” Items such as food, shelter, transport, clothing, utilities, and, often, child-care services.
The average household in the poorest 20 percent by income allocates 57 percent of its spending towards shelter, food, transport and clothing alone.2 The average married family with young children allocates 53 percent. Any meaningful analysis of family affordability must therefore consider the determinants of prices in these and other important product markets.
The Role of Policy
In recent years, housing and child-care affordability have become particularly pertinent political issues given their high toll on family budgets. High housing and child-care prices are often deemed market failures, necessitating corrective government intervention, price controls, or subsidies.
But in both these product markets existing government regulations constrain supply, in turn raising prices.
Extensive work has shown how overly-restrictive, local land-use planning and zoning laws constrain new housing supply, particularly in major cities.3 As demand for housing rises, an unresponsive supply of homes drives up the market price of housing services, forcing downsizing, longer commutes, or higher rents and mortgage payments on poorer families.
Lesser known is that state-level child-care staffing regulations—notably, restrictive staff to child ratios and qualification requirements for workers—reduce the supply of child-care centers in poor areas, driving up prices and reducing formal care options for families.4
Again and again, one finds the same pattern of government policies increasing prices. The federal sugar program5, milk-marketing orders6, and ethanol mandates raise the price of families’ groceries7; federal fuel-standard regulations8 and state-level automobile dealership laws inflate the cost of driving9; protectionist tariffs raise retail clothing and footwear prices10; and state occupational licensing laws create barriers to entry for workers raising the price of services from hair braiding to dentistry.11
My research has sought to aggregate the price effects of all these policies. Using cautious assumptions, I find that, combined, they raise prices faced by typical poor families directly by anywhere between $830 and $3,500 per year.12 That’s between 7 percent and 30 percent of average after-tax income for households in the poorest quintile.13
Given my analysis excludes much utilities and labor market regulation, this severely understates the negative price impacts government intervention has on basic goods and services. Nor does this calculation consider the potentially huge indirect costs. We know, for example, that elevated housing, child-care and transport costs make it more physically or financially difficult for families to access jobs with higher wages.14
The Benefits of a Cost‐Focused Affordability Agenda
Undoing the worst of these price-inflating, regressive regulations could therefore benefit poor families considerably.
For example, estimates suggest that relaxing the average mandated staff-to-child ratio by just one child across all age groups would reduce child-care prices by 10 percent or more.15 On housing, some economists estimate that lowering regulation levels in just New York, San Francisco, and San Jose to the median of all US cities would raise nationwide GDP by nearly 9 percent.16
Addressing government policies that drive high prices at the source would also dampen the demands we see for risky rent control measures, affordable housing mandates, higher minimum wages, government subsidized child-care, and new tax credits and allowances.
My main message is therefore simple: before proposing new or expanded federal programs we should acknowledge that important pro-market reform levers already exist to improve family affordability, particularly at the state and local government level.
These regulatory changes, especially in housing and child-care policy, do not require yet more federal borrowing, nor do they come with the risks associated with wage and price controls further worsening the availability of housing, child-care, and low-skilled job opportunities.
Such a “cost-based, affordability agenda” may not be the full or final answer to the affordability challenge you’re considering. But before reaching for new programs or regulation, we – through government policy at levels — should at least attempt to undo the harm caused by existing policies.