Tuesday, September 20, 2016

Immigration, trade, and child care

Both Mr. Trump and Mrs. Clinton want to lower the cost and, presumably, increase the amount of child care. A quick economics quiz: What is the policy change that would have the greatest such effect?

I hope you answered: legal immigration of child care workers! And remove the large number of restrictions on providing child care.  As the WSJ points out in a recent editorial,
... regulation drives up the cost of care. States set minimums on square feet per child; licensing requirements; ratios for staff-to-children; group sizes. Zoning laws prevent care centers in convenient places such as residential neighborhoods. Regulation also limits options like informal care at grandma’s house or families who share nannies.
On the latter, zoning, for example, forbids commercial activity in residential-zoned areas, like the ones where people live. And WSJ left out the full weight of American labor law and taxation. Anyone who has tried to legally hire a nanny has a good sense of that. (See also Ivanka Trump's oped  describing the plan.)

Needless to say, that is not the candidates' preferred approach, who were vying with each other to offer federal subsidies. Mr. Trump is, needless to say, simultaneously vowing to deport large number of child-care workers. Mrs Clinton is not making any noises about removing legal restrictions or taxes on low-skill part time employment. (The WJS offers that "Mr. Trump deserves credit for noting" the above comments on regulation, but did not offer a link. If anyone knows where this is, put it in a comment, as I had not heard about it.)

A lot of economics comes down to: Supply competition is the best answer to just about every economic problem. 

This is a small example of a spreading disease in American economic policy. The recipe: 1) introduce strong supply and competition restrictions, usually to politically favored groups. Soon, however, those groups start charging higher prices. So 2) give subsidies so people can pay the higher prices induced by 1). It's perfect: now both sides depend on politicians. See, most egregiously, health care and housing.

The trouble is, you can only make one thing (child care, now) cheaper by making everything else more expensive. A tax credit for child care means higher taxes on everything else. We're running out of everything elses fast!

This is a good moment for supply and demand, and a good illustration of how this basic economic tool gives insights that are not obvious.

(If you can't see the supply and demand graph, try here.)  Demand slopes down. The less child care costs, the more of it people buy.  Supply curve slopes up. If child care workers can charge more, more people take those jobs or set up child care businesses.

The red graph shows what happens if we allow lots of immigration, and also deregulate supply. The supply curve shifts to the right -- more child care offered at the same price. Moreover, if we allow immigration, the supply curve becomes flatter -- a smaller increase in price produces a larger increase in the amount of child care.

There is a very important distinction between domestic and international supply. In the end, the US workforce is limited. The more people who go in to child care, the fewer do something else. The upward slope of the child-care supply curve represents an inward shift of the supply curves of everything else, meaning higher prices and lower quantities. Immigration gives us a free upward slope.

This graph analyzes a federal subsidy for child care. If people get a $100 subsidy, they are willing to pay $100 more for the same amount of child care, so the demand curve goes up by $100, as shown. I drew the supply curves with more extreme slopes, to make a deeper point.

The "restricted" supply curve is nearly vertical. This is what happens in an industry with strong supply restrictions, like, say, epi-pens. The subsidy means people are willing to pay $100 more. With no more supply forthcoming, the result is simply that people pay $100 more and get the same quantity.

Subsidizing something with restricted supply does not benefit consumers. It just raises the price and benefits the producers. 

The consumers, unaware of what's going on, become dependent on the subsidy of course. See health care and education.

With lots of supply competition, and a flat supply curve, the subsidy instead raises the quantity of child care delivered, which is presumably what both Mrs. Clinton and Mr. Trump desire from the policy. A subsidy only increases quantities if there is lots of supply competition and easy entry. 

The journal gets this
Mrs. Clinton raises the Trump offer in every regard, from more Head Start funding to salary support for day-care workers. And if you think care is expensive now, wait until Mrs. Clinton wades in. She likes to say that child care can be more expensive than college tuition, which is false. The irony is that her day-care blowout would recreate what has made college notoriously expensive—large subsidies for the provider and buyer. Day-care centers and pre-Ks could raise prices, confident that government will cover the increase.
The graph offers a little more precision. Subsidies only raise college expenses because of restricted supply. The Administration's war on for profit colleges unambiguously pushes the supply curve to the left.

On the human side of our immigration restrictions, I recommend a beautiful New Yorker article by Rachel Aviv on the life of a woman who immigrated illegally from the Phillippines to care for the children of... well, people like the Trumps and Clintons. The US will not kick out illegal immigrants because deep down we know that without them the cost of child care will skyrocket. But the cost to a low-wage worker of illegal status -- never being able to see family again -- is worth remembering.

The New Yorker article makes clear also how much immigration to the US is driven by desperate conditions elsewhere. If you don't want immigration to the US, the best possible solution is to aggressively buy what other countries have to sell, so people can make a living there. Needless to say, neither Mr. Trump nor Mrs. Clinton seem at all aware of this obvious connection.

(Vaguely competent foreign policy is the second best possible solution. Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war.)

Most child care is not Mrs. Trump, handing off children to a loving nanny in Manhattan as she speeds off to her job as.. whatever it is she does. Tellingly, the Trump plan takes the form of a tax credit and a new addition to the bewildering number of tax sheltered savings vehicles. What, doesn't everyone have a tax lawyer? A lot of child care is done off the books, for people who also work off the books.  This is also a good moment to reflect on the wisdom of the new ban-cash movement plus e-verify so that every single transaction in the US is taxed and appropriately monitored for compliance with labor laws, licensing, OSHA, and so on...


  1. When you have a chance, could you discuss the current administration's push on occupational licensing:



    1. It's great. I hope it works. I wrote a few blog posts about it a while ago. Not much more to say.

  2. Replace supply with the supply of low skilled American workers and supply with immigration with supply of low skilled American workers with immigration. The price (or wage) of low skilled American workers will fall so that rich people like Donald Trump won't have pay a lot for their Nannies and landscaping. Go further and promise Americans that if only there were open borders their wage would fall to the world average wage. Finally, insult them by telling them you don't care about American's wages because all people matter and what about the wages of third world people wanting to come here. Just lay out the whole argument.

  3. What program do you use to draw those supply and demand graphs?

    1. keynote. Not great, but on my computer and free!

    2. I'm mac fan, but even I'm not going to describe keynote as "free" when the cost of a mac far outstrips comparable windows computers...

  4. There are about 12 million undocumented immigrants here. Their effect isn't clear. Since most Americans don't compete with undocumented workers for jobs, there hasn't been a significant lowering of the wage rate. But, high school drop outs are affected. Undocumented immigrants lower wages for jobs where low skilled workers compete.

  5. We pay $1200 a month for child care at a well-regarded location in the Kansas City metro that serves 100's of kids.

    Per discussions with a woman who decided to move on to a better paying job at a warehouse, the starting salary for these workers is $10 per hour.

    So you recommend an increased supply of workers because their wages are too high?

    I would hope you can acknowledge your/WSJ opinion page view is not in the best interest of child care workers.

  6. If we want Americans to vote for free enterprise, we should embrace policies that generate "labor shortages," but preferably not through welfare and occupational licensing and property zoning, but through very strong aggregate demand.

    Clogging up the domestic economy with structural impediments, and then importing lots of cheap labor, strikes me as a sure path to socialism.

  7. I wonder whether someone will craft an Uber-like private sector intervention to fix the public choice failures in child care regulation. For example, maybe one can't run a child care center in a residential neighborhood but maybe residents can share their excess child care capacity for payment.

    Of course, the key to Uber was that it was able to attract enough enthusiastic customers before the regulators noticed so that those customers could act as the political force to oppose the regulatory capturers. Not sure whether one could build a critical mass of childcare sharers strong enough to challenge the incumbent childcare rent-seekers.

  8. "Refugees from Syria and Honduras would not be coming here if we had not let their country fall apart, or fueled a drug war."--John Cochrane

    Have no fear. The US is preparing to win the drug war, at least as it pertains to terrorism. See press release below.


    CACI Awarded Prime Position on $480M Multiple-Award Contract to Support Department of Defense Counter-Narcoterrorism Efforts

    Work Will Help Secure United States Against International Threats Funded by Illicit Drug Activity

    Company Website: http://www.caci.com
    ARLINGTON, Va. -- (Business Wire)

    CACI International Inc (NYSE MKT: CACI) announced today it has been awarded a prime position on a $480 million multiple-award, indefinite delivery/indefinite quantity contract to provide command, control, communications, information, detection, and monitoring support for the Office of the Assistant Secretary of Defense for Special Operations and Low Intensity Conflict (OASD-SO/LIC) supporting Counter Narcotics and Global Threats. This four-year contract represents new work for CACI in multiple market areas, primarily its Intelligence Systems and Support market area.

    OASD-SO/LIC is primarily responsible for the overall supervision of special operations and low intensity conflict activities to include: counterterrorism, unconventional warfare, direct action, special reconnaissance, foreign internal defense, civil affairs, information operations, and counter-proliferation of weapons of mass destruction. Under this contract, CACI will provide a range of solutions and services, including building communications networks, performing trade studies that identify the most effective of proposed technical solutions, and supporting linguistic operations centers. This work will include building mobile communications networks in multi-national, potentially hostile environments to enable U.S. forces and related agencies, as well as host nations, to conduct counter-narcoterrorism activities.


    I am not sure how this relates to Afghanistan, widely considered a narco-state, and a superpower in opium.

    1. The missing input here is that the Colombians have been complaining that the Afghans are undercutting them on the European heroin market. The idea that wasting more blood and treasure in international hellholes exacerbates migrant flows is absurd on the face of it - let them stay home fight their own wars.

  9. As much as I am personally opposed to senseless zoning restrictions, I don't think that's a large part of the cost, at least in California, where home-based daycares are allowed in residential neighborhoods. There's one near my house, and my children went to on in the Barron Park neighborhood of Palo Alto when they were small.

  10. What's wrong with a tax deduction for child-care? Let's say you're right that that's effectively a subsidy that will raise prices.

    So, what's special about child-care expenses? Why not tax revenues instead of income? Taxing income raises prices because corporations are willing to spend more.

    You can see where this is going. Tax-deductions work because the apply unequally. Just like most folks aren't corporations (and so can't deduct expenses) most moms aren't in the highest tax bracket. So for folks in the high tax bracket, it's still worth it to deduct those expenses.

  11. I agree with your logic. However, as to the underlying premise: intuitively I would have expected the supply curve for childcare to be quite flat, and the demand curve to be quite steep. You've stated the opposite to be the case (at least re: supply). So why is supply so much steeper than one would expect in the childcare market? Aside from becoming an Uber driver, I'm not sure there are many forms of self-employment with fewer barriers to entry than launching a small day care.*

    My question is not rhetorical: (1) I've no direct experience in the childcare space, (2) have enough experience elsewhere to appreciate that market outcomes and intuition often diverge in surprising ways, and (3) agree with the vast majority of what I read on your blog. As such, I'm more curious than anything else: why isn't the childcare market one of those few that required you to include the qualifier "just about" in your statement that: "Supply competition is the best answer to just about every economic problem[?]"

    *I fully agree that the few barriers that do exist are primarily the result of poor policy choices. My question is whether these silly policies are significant enough to result in a steep supply curve, or rather simply result in a supply curve that is somewhat steeper than it should be, but is nevertheless still quite flat.

    1. I overdid the graphs to make the point that opening up immigration would not just shift the supply curve out, but also make it flatter. I suspect as you do that supply is reasonably elastic, though there are barriers. Supply of labor comes by substituting out of something else -- labor provided in another industry, in another country, or not working. If out of non-employment , the standard labor supply barriers are there, such as losing benefits if you accept legal income. If out of other employment, well, then we produce more child-care workers and fewer uber drivers. Also, anything legal and federally subsidized is going to require more training and certification than uber driving.

    2. As long as you can stay under the radar, it is cheap to take care of kids. But if the govt finds out or you hang out a public shingle then the costs skyrocket. There's all kinds of very expensive controls on what you have to do and have in order to legally run a daycare facility.

      Granted, it varies from state to state or even between cities, particularly where zoning kicks in, but there's no place free of government meddling in the simple act of taking care of someone else's child for pay.


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