The downsides to heavily subsidized childcare
When legislators talk about resolving the childcare crisis, one answer seems to come up more often than others: subsidizing childcare using taxpayers’ money. At the national level, politicians have touted universal childcare as a solution to the childcare crisis. At the state level, in Minnesota, for instance, legislators have proposed increased funding for state programs.
This idea seems to ignore one important point, however. Childcare is unaffordable and hard to find, for the most part, due to burdensome regulations. Therefore, Subsidizing childcare does not deal with the root cause of the crisis, but only worsens it.
Here is why.
Government funding exacerbates the regulatory burden on providers
Programs that use public funds usually tend to have a lot of bureaucracy and regulations. This is because governments, unlike markets, do not possess signaling tools for quality. So they make up for this by increasing regulations for those programs.
This has already been seen in the Child Care and Development Block Grant (CCDBG). When Congress reenacted the CCDBG in 2014, states were tasked with enacting numerous regulatory reforms. Minnesota, among other things, increased training requirements, enhanced background studies, and increased the frequency of inspections for childcare facilities.
These regulations can be especially destructive to family childcare providers since they are small and do not have enough resources to invest in regulatory compliance.
Limited choice and increased cost
Government regulations associated with subsidies usually follow a one-size-fits-all approach. That is, any childcare arrangements that cannot follow state or federal rules cannot access public funds. This forces non-compliant providers to go out of business. Unfortunately, small providers and non-traditional providers tend to make up a huge bulk of the non-compliant.
When these small and/or nontraditional providers exit the market, parents are left with fewer options. Additionally, providers who can follow these regulations are forced to raise costs, leading to higher prices for parents, especially those who cannot access subsidies. For those who get subsidies, taxpayers are forced to foot an ever-rising bill for childcare services.
Subsidies eliminate parental control over quality
Parents care about the level of quality of childcare available to their children. In a privately provided market, when parents do not like the quality of care they are receiving, they can take their demand elsewhere. This, in turn, signals to other parents where they can go to find higher-quality services.
Other signaling tools like ratings also provide quality information to parents. A recent study from the University of Minnesota found, for instance, that parents in Minnesota are willing to pay 36% more, on average, to access a highly rated provider compared to a low-rated or unrated provider. This is a phenomenon termed “quality premium”.
With government-financed and regulated services, however, none of these quality indicators exist. Instead, increased regulation is used as a substitute for quality. The ability of a provider to comply with government rules is taken as a sign the provider is more able to provide safe and high-quality childcare compared to others, which is not necessarily true.
Sometimes, too much regulation could, in fact, worsen childcare quality by taking providers away from caring for kids to focus on compliance activities. In addition, government regulations do not always reflect or influence factors that parents care about when it comes to quality
Conclusion
The lack of affordable high-quality childcare in Minnesota has emerged as one of the biggest policy issues facing the state, especially after the pandemic. To address this issue, there is a potential that legislators will focus on increased funding as the sole solution to solving the crisis. That, however, would be misguided. Not only do subsidies not address the root cause of the issue, they also come with a lot of downsides.