The downside to heavily subsidized childcare

When legislators talk about resolving the childcare crisis that so many states seem to be experiencing, one answer seems common; universally provided childcare or heavily subsidized childcare. At the national level, politicians have touted universal childcare as a solution to providing childcare to families and making sure that providers make a profit. At the state level, for instance in Minnesota,  legislators have proposed increased funding time and time again as a way to do away with the crisis.

This proposal seems to ignore one important thing; childcare is scarce because we do not have enough capacity. And the reason that most states seem to have inadequate capacity is due to overregulation. But setting this issue aside, there are also some other downsides that come government provision of any good. Childcare is not an exception to that. And for some reason, these downsides do not seem to come up when these proposals come up.

Government funding exacerbates the regulatory burden to providers

One thing that usually seems to follow government funding of anything is increased bureaucracy and regulation. Governments, unlike markets, do no possess signaling tools for quality. So they make up for this fact by increasing rules for any government-funded projects. In childcare, we have seen this with the reauthorization of the Child Care and Development Block Grant (CCDBG). When congress reenacted the  CCDBG into law in 2014,  states faced a huge task of enacting numerous regulatory reforms. The state of Minnesota, among other things, increased training requirements, enhanced background studies, and increase the frequency of inspections for childcare facilities.

What makes overly burdensome regulation even more destructive is the fact that it disproportionately affects family childcare providers. Most in-house providers are small and do not have enough resources to invest in compliance activities. So, when a change in the rules increases their cost of operations, they fold. This generally makes the childcare situation worse because the fact is that family childcare providers are more suitable for some areas, like rural areas. Small providers are also preferred by parents who work non-traditional hours and require more flexibility.

Limited choice and increased cost

This stems back mainly to the fact that regulation which often follows government funding drives providers out of the market. Any introduction of all size fits all approach to funding tends to push out small providers and leave little choice for groups that prefer small providers to centers. This also worsens the shortage of overall childcare capacity.

But in addition to that, government funding tends to drive the cost of childcare services. This essentially means any parent who is not lucky enough to be eligible for subsidy gets to pay higher than normal costs. But even if funding is available for everyone, increasing cost essentially means the government will have to spend more money every year, which is also a cost out of taxpayers’ pockets.

Parents have no control over the quality of childcare services

In a private provided market, parents have some say over where their kids go. And by extension to this fact, parents have some control over the level of quality of care that they chose to access. When parents do not like the quality of care they are receiving, they can take their demand elsewhere. This essentially also signals to other parents about where they can find quality services. Other signaling tools like ratings also provide information on quality. A recent study from the University of Minnesota found 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, increased regulation substitutes quality. And 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. This is not necessarily true. Sometimes, too much regulation actually takes providers out of 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.


In the state of Minnesota, childcare has emerged as one of the biggest issues needing solving out of the coronavirus. But even before that, there was already a need to build capacity. This need is obviously back, and more apparent than ever. And like before, there is potential that legislators will focus on increased funding as the sole solution to solving the crisis. And as well-intentioned as subsidies are as a solution to solving the childcare crisis, is it also important that we draw light on the downsides they seem to come with.