JW: You have written about how child care subsidies worsen cost-disease, which ultimately drive up the costs of child care and stymie innovation. What policies do you favor to ensure child care affordability and quality, and to promote innovation?
SH: The cost of professional child care services has grown dramatically in recent years, particularly in urban areas. As usual, policy makers want an easy answer, like new day-care subsidies or a voucher that caps the percent of a parent’s income going to child care. Unfortunately, pushing demand higher would simply increase the cost of child care further, unless supply increases at an even faster rate. But since child care is an inherently labor-intensive service, it is hard for it to realize productivity improvements. The main way subsidies increase child care supply is therefore to attract more workers through higher wages, which would simply raises costs for parents even more. Economists call this problem the “cost disease,” and it afflicts many labor-intensive sectors, including healthcare and education.
The only way to put a dent in child care costs is to get to the root of the problem. In urban areas, a key cost driver in recent years has been the rising cost of real estate. Loosening land-use policies and promoting denser urban development would help to reduce the cost of child care centers and make cities more affordable to live in overall. Liberalizing immigration would also do a lot to reduce the cost of child care, because supply could be increased without needing to raise wages to pull in labor from other sectors.
On the regulatory side, we could do a lot to reduce the barriers to entry for child care providers. Washington, D.C. recently began requiring day care workers have a college degree, for example. Those sort of licensing and credentialing requirements simply drive up costs, with minimal impact on quality. Other regulations like the number of kids permitted to be under one worker’s supervision could also be loosened, as there’s very little evidence to justify them.
JW: The Earned Income Tax Credit is a policy that some libertarians favor to improve outcomes for young children. What makes the EITC such a powerful policy tool for children and families?
SH: The power of the Earned Income Tax Credit and the Child Tax Credit, as well, stem from the fact that they each put cold, hard cash into the pockets of lower income parents. Cash helps preserve parental choice, and entrusts parents with the responsibility to spend their money as they see fit. Indeed, in the context of child care, cash is neutral, meaning it doesn’t discriminate between families which rely on external child care services, or the 40% of families who use relatives or spouses for home based child care arrangements.
In addition, libertarian economists like F.A. Hayek have long emphasized the importance of local knowledge to efficient decision making. It’s a lesson that applies equally to the economy with the home. On any given day, the needs of a child are incredibly diverse and heterogeneous, and the parent is almost always the person best equipped to respond to those needs. Cash lets them do that, since it is flexible and fungible in a way that, say, a voucher for diapers or baby formula is not. That also means programs like the EITC and CTC help reduce more general financial insecurity, which has been shown to reduce stress within the household. Less stress means lower tobacco and alcohol consumption, and less household instability.
JW: Looking ahead, what trends do you perceive that make you most hopeful about the future our youngest children will inhabit?
SH: Many parts of the service economy are about to face a long-overdue productivity boost driven by the internet, automation, and artificial intelligence. I believe jobs ranging from retail sales to much of the legal profession stand to be eliminated in my lifetime. That productivity growth will translate into a much richer world. And yet it seems to me that, no matter how advanced technology becomes, humans will have an intrinsic comparative advantage when it comes to caring for other humans. Indeed, caring for children and the elderly may be some of the last remaining jobs humans are left to do once robots and AI have learned to do everything else. That will be a world where child care takes up an even bigger portion of our take-home pay than it does now, but that won’t be a bad thing. What could be a brighter future than one of radical abundance in everything except the scarce time we have with one another.
You can read the whole interview here.