Why Biden’s plan might only make childcare more expensive

On August 11, the U.S. Senate passed a massive $3.5 trillion spending plan, which, among other things, includes $225 billion for affordable childcare.

Details for the bill are yet to be released. But if the bill mirrors President Joe Biden’s American Families Act, it would likely include subsidies for households with up to 1.5 times their state’s median income. For those with incomes under 75 percent of their state’s median income, childcare would be fully covered. Biden also proposed a $15 minimum wage for childcare workers.

But is this the right approach to childcare? The evidence suggests no.

Subsidies are the wrong approach

Childcare is essential to the economy; it frees parents to work and contribute to the economy while also providing a stimulating environment for children’s development. It is laudable that efforts are being taken to improve access to childcare. Subsidies, however, are the wrong approach.

For one, subsidies raise the prices of goods and services. As economist Michael R Strain explains,

When government subsidizes the demand for something, more people want to buy it, leading to higher prices. That’s what happened in higher education and health care. The rising costs intensify calls for even more generous subsidies, which in turn boost prices even further. Congress should not want to make the same mistake with child care.

While the economics of childcare contribute to rising costs, evidence indicates that excessive regulations significantly reduce supply and raise prices. By requiring a $15 minimum wage, this bill will likely raise prices further.

Overall, childcare regulations are made at the state level. However, the federal government also plays a role in setting minimum standards. When the federal government reauthorized the Child Care and Development Block Grant (CCDBG), for example, it required states to enact numerous rules to improve quality.

These provisions raised costs without providing extra funding for compliance. Result?

Numerous providers left the market due to increased regulations. In Minnesota, for instance, numerous providers reported that federal health and training requirements were increasing the cost of care and making it hard for providers to stay in business.

If the federal government wants to help working parents, it should advocate for policies that will boost the supply of childcare providers. Spending More taxpayer money on childcare while tightening regulations will only worsen the childcare crisis.