For the kids, let's do it

Regulations and tariffs make life more expensive for American families.

One of the many villains in my new book (which you can now download in full for free) is the classic Washington move of throwing ever‐​increasing taxpayer money at groups supposedly failed by the “free market,” without any examination of the existing government policies contributing to the problems these folks face. American families may be the group that gets this kind of attention the most right now. Both parties are competing to give them gifts from the government, like tax credits, childcare subsidies, required employer benefits, and so on, to help them pay for things that are getting more and more expensive. We just found out yesterday that these kinds of policies will be a big part of the Biden administration's 2023 economic agenda and the president's state of the union address. Yet, as I explain in many chapters of my book, policymakers often ignore the many state, local, and federal policies that make it harder for Americans to get essential goods and services and raise the prices of them. This hurts working families, especially poor ones, more than it does other people. Today, I'm going to use two of these areas—childcare and consumer necessities (food, clothes, etc.)—to show why the most common government solutions to American families' real problems usually fall short.

Why Is Childcare So Expensive in Many Places?
As my Cato colleague Ryan Bourne explains in the book’s childcare chapter, it’s undeniably true that childcare is an ever‐​increasing burden for many American families—taking up at least 40 percent of a single parent’s median income in many states and thus imposing significant economic harms on workers and their families:

Lincicome - 12/21/2022 - Chart 1

As he explains, some of these price pressures are likely the result of market forces: As Americans get richer, we may demand higher‐​quality childcare, and the service might also face “Baumol’s cost disease” because it’s a labor‐​intensive service that can’t be easily automated.

However, ample research shows that government policy is contributing to the childcare problem in major ways, especially at the state level. This includes:

  • Staff‐​child ratio requirements. One study from 2015 found that loosening the ratio by just one child across all age groups would reduce center‐​based care prices by 9 to 20 percent each year. Earlier research found that allowing a childcare worker to look after only two more kids would reduce prices by 12 percent. Studies also show that these changes have an insignificant effect on the quality of care—i.e., it’s all pain and no gain.
  • Occupational licensing requirements. Mandating certain educational or training requirements also increases prices by restricting the pool of potential childcare workers. One study found, for example, that adding a year to childcare center directors’ educational requirements reduced the number of centers in the average market by more than 3 percent. A separate study found that requiring lead providers to have a high school diploma can increase prices by 25 to 46 percent. Many places—such as Washington, D.C., and California—impose much more stringent requirements (e.g., a bachelor’s degree in early childhood education), and, as shown in the table above, they unsurprisingly have some of the highest childcare prices in the country. Unlike staff ratio requirements, these licensing rules do appear to have some effect on the quality of care. However, as Bourne notes, “quality improvements… overwhelmingly occur in just high‐​income areas,” while poorer residents simply get reduced access to care. Furthermore, that many states lack these requirements show that they’re more a mandated luxury than a real necessity. (See the occupational licensing chapter for more.)
  • Zoning restrictions. Many state and local governments consider home daycares a “problem use” and have thus used zoning restrictions to ban them. This further reduces the supply of childcare in affected neighborhoods, thus increasing prices even more. (This is discussed more generally in the book’s chapter on home businesses.)

Given its role in influencing federal policy and its insanely high childcare prices, the highly regulated Washington, D.C., market deserves special mention. As Bourne noted in the Washington Post earlier this year when lamenting the district’s new licensing restrictions requiring providers have college degrees, “putting two kids into a child‐​care center in D.C. costs 41 percent more than the local average mortgage payment and nearly twice the cost of tuition at a public university.” That's probably why so many Hill staffers, D.C.-based journalists, and policy wonks think the national market for child care is broken and needs help from the government. Yet, as the above studies show, small changes in state regulations could give American parents a lot more choices and lower prices by thousands of dollars per year, especially in D.C. (Rich parents could pay for childcare with all the bells and whistles, but the government wouldn't make that the only option.) Other common-sense policy changes, like making it easier for people to move to the U.S. so there are more childcare workers, au pairs, and babysitters, could help save even more money.

Why Do We Pay More for Essential Goods?
Of course, not every American family needs regular childcare, but they do all need food, clothing, energy, and other essential consumer goods—goods that, as my colleague Gabriela Beaumont‐​Smith details in her book chapter, are also needlessly inflated by government policy. Let’s start with food—

  • Both sugar and dairy products (milk, cheese, ice cream, etc.) are subject to complex systems of subsidies, price controls, and import restrictions that push domestic prices well above world averages and—as we’ve seen with infant formula—cause all sorts of other problems in the U.S. market for these and other, derivative food products.
  • The United States imposes high (greater than 10 percent) tariffs and quotas on numerous other foods, including “peanuts, tuna, cantaloupes, apricots, various meats, sardines, spinach, soy‐​bean oil, watermelons, carrots, celery, okra, artichokes, sweet corn, Brussels sprouts, cut cauliflower, and so on—costing American importers billions of dollars per year.”
  • “Produce marketing orders” let U.S. farmers dictate their commodity’s prices, quality, size, and other factors when sold on the U.S. fresh food market, thus increasing prices of these foods too (and encouraging anti‐​competitive collusion).
  • The Renewable Fuel Standard (RFS), which requires U.S. biofuels to be blended into transportation fuel, raises the price of not only corn‐​based products, but also other crops (by taking up finite farmland for corn). According to studies from the Congressional Budget Office and other organizations, “artificial demand for ethanol raises Americans’ total food spending by between 0.8 and 2 percent.”

The United States also imposes high taxes on imported clothing and footwear, further increasing prices. And, adding insult to injury, these taxes tend to increase as product quality decreases, thus heightening their impact on poorer Americans who tend to consume cheaper stuff:

Lincicome - 12/21/2022 - Chart 2

Household goods face similar treatment:

Silverware, plates and cups, and drinking glasses are subject to an average tariff of 11 percent, which is almost 16 times the average tariff for all other goods. In fact, tariffs on a small set of home consumer goods made up well over half of all tariff revenue ($144 billion out of $2.33 trillion) as of 2017, even though these goods only make up 6 percent of total imports. Even school supplies are more expensive because of U.S. trade policy. Ballpoint pens and notebooks, for example, are each subject to tariffs of about 10 percent; backpacks and gym bags face 28 percent tariffs.

Nothing says “pro‐​family” policy like taxes on school supplies, eh? Sigh.

Anyway, studies show that trade policies alone force American households to spend hundreds of extra dollars per year on basic necessities. The U.S. International Trade Commission estimated in 2017, for example, that various U.S. import restrictions raised prices by as much as 56 percent:

Lincicome - 12/21/2022 - Chart 3

A separate study from that same year—before President Trump’s expansive new tariffs were implemented—conservatively estimated that U.S. tariffs cost the median American family around $200 per year via higher import prices. (Higher prices for American‐​made goods, which usually follow tariff increases, likely increased this tax even more.) Given subsequent tariff actions, this burden is likely even higher today.

Plenty of Other Necessities TooBeaumont Smith points out that government policies also affect other things that people need. For example, "tariffs, fuel economy regulations, taxes, maritime restrictions (the Merchant Marine Act of 1920, also known as the "Jones Act"), and other policies significantly raise automobile and fuel prices in the United States, hurting the almost 85% of Americans who drove to work before the pandemic." Government policies also raise the price of energy, not just gasoline but also a lot of renewables, which makes Americans' real incomes and wealth go down even more. Costs of health care in the U.S. go up because states have different rules about how they can provide medical services. These rules include licensing and telehealth restrictions, "certificate of need" laws, and more. And, as we've talked about many times here, many federal, state, and local policies drive up the cost of construction and housing. In the coming weeks, I'll have more to say about these issues, but for now, you can read the chapters in the book about transportation, affordable housing, homeownership (and bad U.S. housing finance policy), and health care.

Importantly, the authors of these chapters point out over and over how the laws and regulations in question not only cause prices to go up but also hurt Americans with lower incomes more than those with higher incomes. Bourne points out, for example, that research shows that staff-to-child ratio regulations "reduce the number of child care centers in low-income neighborhoods, making it harder for low-income families to take care of their kids and work at the same time, while also raising prices, which can make other families less likely to move there." Beaumont Smith explains why U.S. tariffs are very regressive, which means that poorer Americans pay a much larger share of their incomes in tariffs than do rich Americans: "Rising prices of basic necessities are usually a regressive tax on American households, hurting people with lower wages and larger, more expensive families, especially those with a single parent." In the housing chapter, research is used to show that "less-skilled workers couldn't afford the higher housing costs in heavily regulated cities with good job opportunities, so they were stuck in low-cost areas with fewer job opportunities." In many parts of the country, "starter homes" may not be profitable because of the cost of building them:

And the chapter on U.S. homeownership shows how federal mortgage subsidies and related policies, which are a global outlier in their intrusiveness, disproportionately fueled home price appreciation at the lowest end of the scale—making those homes less affordable for new, lower‐​income buyers.

Lincicome - 12/21/2022 - Chart 4
In case after case, academic research and real-world evidence show that simple changes to these policies would raise the living standards of Americans and help big, working-class families the most (who tend to consume more of these necessities than other groups). Few in Washington, D.C., try to change the supply side and related government policies. Instead, they focus on what the kids used to call "more demand-side cowbell" while blaming the problem on the "free market." That might make sense from a political point of view, especially right now, but it's not a real, long-term solution. And just throwing more taxpayer money at these limited-supply essentials is a surefire way to make prices go up even more, which would mean that the government would have to subsidize them even more or get even more involved in the market.

Or is that maybe the point?

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