The Public Option

by Ganesh Sitaraman

The shortfalls of the U.S. child care system fall disproportionately on women. Although more fathers now take a solid role in raising their children, mothers still take the bulk of the responsibility for child care when a child is sick, or the day care center is closed, or the schools close for the summer.9

  The subject of child care meshes perfectly with the themes of this book. Our society hasn’t yet come to terms with the demise of the Treaty of Detroit: we have not yet replaced the stay-at-home mom with reliable, affordable, and high-quality care for working parents. Instead, we have left child care (outside the public school day) to the private market, which has produced spotty, unaffordable, and low-quality care. We believe that a public option could help rebuild this critical piece of our social foundation by ensuring access and quality at a reasonable price. Let’s take a closer look at each of these points in turn.

  The Failure of the Private Market

  Neoliberals posit that the laissez-faire marketplace should provide ample options for child care. They point out that women’s wages have risen over the last few generations, giving them greater purchasing power and creating a vast demand for child care. In theory, then, the free market should respond by offering a range of options—for kids of all ages and parents of all incomes. These very dynamics have produced booming markets in all kinds of convenience goods that cater to busy working families. With no mom at home to make dinner (and wash the dishes), the microwave and dishwasher have become standard in American kitchens, and fast food has, if anything, become too cheap and plentiful. People who want help cleaning their homes need only consult Yelp for a wealth of choices. And cheap, imported fashion is so plentiful that only cultural outliers would consider making their own clothes, as 1950s moms once did.

  But, at the risk of stating the obvious, taking care of children is different from making food, cleaning the house, and buying clothes. In fact, the rosy prediction that the laissez-faire market can handle child care founders on three predictable problems.

  First, child care is exceptionally labor-intensive. Rising wages for women have created demand for child care, but quality child care is simply expensive. It can’t be outsourced to machines or low-wage foreign workers. Children need one-on-one, sustained interactions with adults. The problem isn’t that day care workers earn too much. Salaries for day care workers have remained low, and working conditions are poor, since the free market tends to sacrifice quality of care to keep costs down (and profits up).10

  Even with these compromises on quality, child care remains unaffordable, because the basic math is unavoidable. Imagine an average thirty-five-year-old parent who works full-time and earns $865 per week (the median earnings in the United States in the first part of 2017), or about $43,000 per year for fifty weeks of work.11 She has two children, and because she is a single parent, her earnings must cover everything—from taxes to rent to food to child care. Now assume that this parent wants to buy child care from a peer who also needs to earn the average wage of $43,000 per year. Even if the child care provider can reliably care for six children, she must charge more than $7,000 per child to make ends meet. That means that our hypothetical parent must pay $14,000 per year, or 32 percent of her pre-tax salary.

  The math is cruel because there are limited (if any) economies of scale. Big business may be able to produce cheaper microwaves or T-shirts for consumers who want lower prices. But a day care center cannot reduce staffing levels and other resources per child without severely compromising children’s development.

  A second problem with the child care marketplace is that quality can be difficult for parents to monitor. In an ideal laissez-faire market, providers might offer an array of options, charging higher prices for higher quality. Perhaps basic day care would cost $7,000 per child (as in the stylized example just given), but enriched care would cost more. (We strongly object to this neoliberal fantasy, because children’s care shouldn’t depend directly on their parents’ budget. Still, let’s see why the thought experiment falls apart on its own.)

  Studies have shown that parents often can’t tell high-quality from low-quality day care.12 The nice lady down the street may do a great job—or she may park the kids in front of the television and feed them junk food. Child care isn’t a standard commodity. If I buy a cheap microwave from Walmart and it conks out after a few weeks, I won’t go back for another. But young children can’t reliably report what’s happening to them, and it’s easy enough for canny adults to furnish (misleading) signals of quality. A large room with lots of books and toys is no guarantee that the teachers will warmly engage the children in play. A solid staff-to-child ratio may hide a high turnover rate that creates distress in both the workers and the children.

  There is one reasonable proxy for quality in child care: overall, center-based care is of higher quality than informal care. But this is a noisy result, because not all centers are better than all family day care homes. The overall result is explained much more simply: when subsidies permit parents to pay more for care, they often respond by purchasing center care and leaving behind kin care and other informal arrangements. The result is an overall quality improvement. But it isn’t evidence that parents can distinguish quality in choosing among centers or well-run family day care homes.13

  Third, and perhaps most important, child care is too important to be left to the high cost and uncertain quality that the private market provides. Our collective future depends on the children we raise—whether directly, as parents, or indirectly, as members of society. When we force parents to sacrifice quality for the sake of affordability, we damage children’s development, with lasting consequences for them and us.

  We can express our common stake in children using the economist’s idea of externalities. Poor-quality child care has negative externalities, or spillover effects on all of us. Childhood stress can permanently undermine children’s ability to learn and to manage adversity. At the same time, high-quality, accessible care has positive spillover effects. Secure, well-educated human beings are more productive and less likely to turn to crime and to drugs.

  And there are even deeper values at stake. A society that aspires to freedom and equality must take seriously the task of caring for its youngest members. Children are future citizens who deserve to begin life with a secure foundation that offers them a decent change to shape a good life for themselves.

  Why Market Subsidies Fail

  Child care also illustrates the shortcomings of market subsidies. In theory, as we discussed in Chapter 3, vouchers can reduce the cost of goods to consumers. And so, in theory, a child care voucher could cut the (after-tax) price of child care paid by families. In Massachusetts, for instance, center-based care for one infant costs $17,000 per year.14 If the government offered a $5,000 voucher, the net cost to the parents would fall to $12,000. And in theory, the parents would retain valuable choices about the type of care, the location, and so on.

  But in the real world, market subsidies cannot provide universal access at a reasonable price, for five reasons. First, a voucher (or refundable tax credit) approach doesn’t aim to guarantee affordability to all families. Return to our example of the $5,000 voucher for child care in Massachusetts. The voucher would reduce the price of the child care center from $17,000 to $12,000. But for a worker earning, say, $20,000 per year, that $12,000 price tag is equally out of reach.

  A market subsidy could be set to vary by income level using a sliding scale so that a rich family might get no subsidy, while a parent who earns $20,000 a year might get much more, maybe $14,000 per year. This kind of system is appealing in theory but difficult to implement in practice. Measuring income is tricky for a host of technical reasons, and low earners tend to have volatile incomes.15

  To illustrate, imagine a McDonald’s assistant manager who has worked her way up and earns $40,000 in a good year. But she loses her job when the restaurant closes the following year, and bumps back down to minimum wage at a convenience store until she can find a management job or w
ork her way up again.16 Fairness suggests that she should get a smaller voucher in the first year but a much larger amount in the second year. The problem, in a nutshell, is that it’s difficult to design a system that can adjust the market subsidy in a timely way. Tax credits—like the Earned Income Tax Credit—are really bad at this, because they have a built-in one year lag. Our hypothetical McDonald’s manager wouldn’t qualify for the subsidy she needs until she’s earned the minimum wage for a year or more.

  Second, market subsidies may not reduce the cost of care at all if the voucher leads providers to raise their prices. Let’s go back to our Massachusetts example, where unsubsidized infant care costs $17,000. Suppose that Congress enacts a massive market subsidy of $14,000 per child per year. If the top-line price of child care stays at $17,000, then the net price to parents falls to $3,000. But if child care providers raise their prices in response to the subsidy, the whole scenario looks much less rosy. If day care providers raise prices just as the subsidy hits, they can capture some of the federal largesse. So if over time the unsubsidized price of child care rises to $25,000, then the profits of the day care company will skyrocket—and parents will face a net price of $11,000, less than before the subsidy, but not by much.

  This is, of course, an extreme scenario, in which the providers capture the lion’s share of the subsidy. Whether prices rise and by how much depends on market conditions and can be hard either to predict or to study. Still, we have some evidence that child care subsidies in California did raise the price of child care.17

  A third predictable problem of market subsidies is that they can provide wildly uneven assistance to deserving parents. The Trump campaign, for instance, proposed a tax deduction for child care.18 At first glance that sounds pretty good, but the well-known pathology of a tax deduction is that it is an upside-down subsidy—it offers a greater dollar subsidy to higher-income families than to lower-income ones.

  For instance, suppose that two Massachusetts families each deduct the $17,000 cost of infant care. One family is rich, while one is lower-middle-class. The rich family would get a tax benefit worth $6,200 (37 percent of the price), while the lower-middle-class family would get a tax benefit worth just $1,700 (or 10 percent of the cost). This is backward: if affordability is our goal, then the lower-earning family should get a larger subsidy, not a smaller one.19

  Fourth, market subsidies often are not tailored to the costs that parents face. The price of child care varies across the country, from $5,000 per child for center-based infant care in Mississippi to $17,000 for similar care in Massachusetts.20 The result is that a one-size-fits-all subsidy won’t work well. A federal voucher for, say, $5,000 per child would pay 100 percent of the cost in Mississippi but just 30 percent in Massachusetts. In theory, market subsidies might be tailored to local costs, but doing this is tricky in practice. For instance, the cost of care in Boston is probably higher than in rural Lenox, Massachusetts, but even a state-by-state approach wouldn’t capture that differential.

  When market subsidies are set too low, quality tends to suffer. Georgia, for instance, subsidizes day care for young children, but the state sets reimbursement rates so low that poor families have “no choice but to attend the worst day cares.”21 The result is a major quality problem: an independent monitor found that most infants and toddlers go to low-quality programs with few age-appropriate toys, safety hazards, and teachers who lack the language skills needed to foster learning in children.22

  Fifth is the problem of ensuring quality care for all children. Monitoring is one issue: quality is both critical for child development and hard to monitor, because parents don’t have a reliable window on what’s going on during the eight- or ten-hour days their child may be in care, and young children aren’t reliable reporters. Another issue is that in the hurly-burly of daily life, quality isn’t the top priority for all parents. Higher-income parents often put quality at the top of their list, and they tend to choose expensive center-based care. But other parents, pressed for time and money, have to prioritize low cost, a convenient location, and long hours of operation, with the result that they trade off quality of care.23

  The price-quality trade-off is the dark side of parental choice. Voucher proponents trumpet the value of choice in all settings, but sometimes consumer “choice” opens a back door for opportunists to sell shoddy goods. When parents can’t tell high- from low-quality care, they may assume quality or prioritize the lowest price, and so market competition may cause a downward quality spiral, as high-cost and high-quality operations predictably lose out to low-cost, mediocre-quality providers.24

  In theory, a voucher might condition payment on some measure of quality, so that parents could only use the money for child care providers who have in some way demonstrated the high quality of their product. But there is no national, accepted quality metric for child care. While some “hard” characteristics of quality (like staff-to-child ratios and teacher education) can be measured, some equally important “soft” characteristics (like teachers’ positive attitude, the frequency of positive interactions with children, and the frequency of language modeling) cannot.

  Failing in Real Time: The Dependent Care Tax Credit

  These aren’t just academic possibilities. The United States has tried the market subsidy approach, and it has failed parents and children. The federal government devotes $4 billion every year to the dependent care tax credit, a provision of the tax code that offers a tax rebate for child care, and the system founders for most of the reasons we just sketched out.25

  To begin with, the tax credit doesn’t guarantee affordable care. The credit pays a maximum of $1,050 for one child ($2,100 for two), which is just a fraction of the cost of child care anywhere. (To be precise, that’s 21 percent of the cost of infant care in Mississippi and 6 percent of the cost of care in Massachusetts.) The credit is not updated for the cost of care (or even for inflation), with the result that it has become less and less useful over time.

  The dependent care credit also provides widely varying assistance to families. The credit isn’t adjusted for the local cost of care—and so a family in a low-cost area receives a greater percentage of aid than an identical family in a higher-cost area. Perhaps most damning, the tax credit isn’t refundable, which means that taxpayers with incomes below about $30,000 get very little or nothing at all, no matter how high their child care costs.26 The perverse result is that a family earning $100,000 receives more dollars in child care assistance than a family earning just $25,000. And the credit tops out at two children, leaving larger families in the lurch.

  The tax credit also has no quality control. Parents can claim $1,050 regardless of the care provider’s qualifications, experience, or track record. The regulations do specify that a day care center must meet applicable local licensing and safety regulations, but there’s no monitoring mechanism. And only centers must meet the requirements: nannies and smaller home-based day care providers need not meet any quality standards at all.27

  Some people have proposed reforming the tax credit, and their ideas would certainly improve the program. Making the credit refundable would extend assistance to low- and moderate-income families. Updating the credit amount for the cost of care and for inflation would improve affordability. Expanding the credit for larger families would also address a glaring hole in the program.28 And the credit might be conditioned on choosing a licensed day care provider.29

  But even with these well-intentioned reforms, the dependent care tax credit would fall short of the ideal we believe is compelling—a guarantee of high-quality care for every child at a price that is affordable for all parents.

  Toward a Public Option for Child Care

  A public option could go a long way toward solving the predictable problems of the dependent care tax credit (and of child care vouchers more generally). A public option would offer every child an age-appropriate placement in a local care facility run by the federal (or state) government. The price paid by parents
would be affordable, because the government would set the price. Because the centers would be staffed and run locally, the cost to government would adjust for the local cost of living: it would be automatically be cheaper to run a public child care center in a low-cost area. And quality would be built into the model: the public option would set the educational program along with staff qualifications, staff-to-child ratios, and space requirements.

  This is all eminently practical. Indeed, we already have a partial public option in child care in the form of the public schools. We understand that public schools aren’t perfect. As Chapter 6 acknowledges, public schools provide an uneven education and need reform, including major changes in political boundaries and funding structures. Still, public schools provide much-needed child care for kids age five and up. Parents across the nation don’t have to worry about whether the local public school will have a slot for their child, and they don’t have to worry about paying the bill every month. They know that their kids will be occupied productively during school hours.

  Viewed as part of America’s child care system, today’s public schools have limitations, which could be addressed. The school day is short, typically just six hours, which fits poorly with parental jobs that last eight hours plus a commute. And starting and ending times are inconvenient for the majority of parents who work full-time: it’s the rare worker who can arrive at work at ten o’clock (having dropped off her child at school at nine) and leave at two (to pick up a child at three). Public schools also have numerous holidays and a long summer vacation.

  And it’s not just the public school day that reflects outdated assumptions about children and families; the yearly school calendar does, too. No longer do children work on the family farm in the summer. And no longer do many families have a stay-at-home parent ready to care for the children during holidays and the summer vacation.