Money Talks: Do Childcare Subsidies Pay Off?

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1:54Hello and welcome to Money Talks. I'm your host, Elizabeth Spires, and today I'm joined by Martha Gimbel, who's the Executive Director of the Yale Budget Lab, and we're going to talk about the economics of early education and childcare in America. The Budget Lab has a new report out on how federal subsidies could work to make these things affordable and how they pay off or don't. So Martha, introduce yourself. Hi, my name is Martha Gimbel. I am the Executive Director of the budget lab. I have bounced around federal policy in many different roles. And I think importantly for this conversation, I should specify I have a year and a half year old who is in daycare.

2:33So this is a, you're, you're feeling the pain and pleasure of these problems. I'm very lucky. I'm very happy with our childcare arrangements. Shout out to Ms. Tia, Miss Nikki and Miss Andrea, but there's a lot of decisions parents have to make and they're resource constrained and that has implications. And that's what we were kind of trying to get at in this report. Absolutely. My husband had no paternal leave when I got pregnant. He used his two weeks of vacation and then I just went back to work. One of the things I remember when I was in government is that you used to have this thing where someone would get pregnant and you would all like donate your sick leave to the person before they had paid family leave.

3:13It was crazy. That is crazy. So tell us a little bit about the report. Yeah, so what we did here was we built a model. I should take a moment here to say I am here talking about this, but I say we built the model. The model was built by Harris Epsteiner, John Rico, and Maddie Lee here at the Budget Lab. So I am taking credit for their work, but they are the ones who did it. And what we've done here is built a model that's really supposed to look at both the supply and the demand side of childcare and how this kind of looks in equilibrium. And that's really important, right? Because if, for instance, you subsidize certain forms of care, demand's going to go up for those.

3:51You have to hire more childcare workers. That has implications for costs, that has implications for wages, and so on down the rabbit hole. So we were really kind of trying to look at the whole thing together. Yeah. So why don't we talk about the different types of subsidies and solutions that you guys looked at? Yes. I want to emphasize that these are meant to be illustrative types of policies. There are many different policies out there. If we did not model your specific policy, shoot us an email. We're always happy to model more things. But part of what this report should do was just kind of show different versions of this and be more illustrative rather than directly comparative.

4:28So first we looked at a universal subsidy, which basically says, you know, we will pay for your child care costs up to X percent of income. Income limited subsidy, which basically says hold your horses. If you make X amount of money, we're cutting you off. expanded care credit. So we have something called the CDCTC, which I always get the acronym wrong, but is the Child Dependent Care Tax Credit, Provider Tax Credit, which is aimed at lowering payroll costs for providers, and then child allowance, which is basically you have children, here is money. So why don't we talk about these individually and talk about some of the outcomes?

5:05You know, you guys measured things like what the expected payoff would be for government or, you know, the expected costs and things like that. Which of these policies kind of paid for itself the most? Because I know none of them totally did, but. Yes. I do want to say in general with the conversations about policies, quote unquote, paying for themselves, and this is not childcare specific. There's a question about the societal benefit from a policy, right? A policy can really pay off for society. And then there's a question about the policy paying off for government. And people have to keep in mind, the amount of return that you have to get on a policy for the policy to pay off for government is huge.

5:45Because we only tax 17, 18 % of GDP in this country, right? That's how much we get in revenue. And so basically, you have to earn a multiple back just in GDP, not even in like welfare, we're all happier, but like in GDP, that then when you take 17 % of it, you get the cost of the policy back. So I think that's really important for people to keep in mind. Yeah. And I think people don't understand that at all, you know, especially and partly because these things have been so politicized in terms of what the government should spend money on or what they shouldn't. And there's definitely a kind of, I think, Republican Party line that anything that we introduce that provides, you know, safety net style benefits to people needs to be budget neutral.

6:24And that strikes me as fanciful thinking. Right. And I think it's really important to remember that we do things as a society and as a government because they have payoffs for society or like we think that we would enjoy them and not because we expect them to pay for themselves. I mean, one of the things that I always go to is at various points in 2022, sending arms to Ukraine added, I'm going to get this exact number wrong, but let's say 20 basis points onto quarterly annualized GDP growth. That's not why we did it. We did it because invading other countries is bad and you shouldn't do it. If we were just worried about increasing economic growth, we could have also have sold arms to Russia and had a grand old time.

7:06That's not what we were doing. And so I think it is really important not to get overly focused on does the policy pay for itself or not, but to really think about what are we trying to accomplish? How much is it costing us? And do we think the benefit to cost is worth it? This is a very long-winded way of saying, yes, none of the policies pay for themselves. The policy that has the best fiscal recovery ratio, and I should say that there are various things that we're not including in this, like spending on Medicaid, et cetera. This is really about increases in tax revenue from higher earnings, is the provider tax credit, which has a fiscal recovery ratio of about 24%.

7:46But I think that this question actually gets at a really important part of this, which is what are we trying to do here? Part of the reason that the provider tax credit has more benefits for the government just from a revenue standpoint in the future is that it's a policy that disproportionately benefits high-income families. And so if you then impact the earnings, let's just overly simplify, you impact the earnings by 1 % of children who get these policies in high-income families, 1 % of a higher income generates more tax revenue for the federal government than 1 % of a lower income. Is what policymakers are trying to do help more high-income families?

8:29Maybe. That's a decision for them. But I think it sort of gets to this point that just focusing on how much tax revenue do we get back in the future, we shouldn't just be looking at that in isolation. There are questions like, what are the goals of the policy? What are we trying to achieve? And really thinking about this as a holistic whole. Well, to go back to that question, for purposes of this discussion, what are the goals of the policy? So I should say, I will talk about the goals of the policy that Budget Lab analyzed. Yes, that's what I mean. There are plenty of other things that people have as goals for early childhood.

9:05Yeah, we've only got like 45 minutes, so. Exactly. But, you know, we looked at things like maternal employment. Yes, impact on wages, what we call economic value. and we can get into why we look at economic value and not just changes in out-of-pocket costs, changes in care worker wages, changes in enrollment. These are all important things that policymakers and families need to think about. So of the policies, which ones made the biggest difference in terms of women returning to the labor market? So one thing I should say is that these policies don't all scale in size, right? So some of them cost more than others, Some of them are more generous than others, and that is obviously going to make a difference.

9:48That being said, of the ones we looked at, the subsidies made the biggest difference. So the universal subsidy increased maternal employment by about six percentage points. The income limited subsidy did almost the same amount because there just aren't that many families with young children who have incomes above a certain amount. And so limiting the subsidy doesn't have a huge impact on the number of families you target because there just aren't that many really well-off families with very young children. So this is a little bit out of scope for what you do, but I'm wondering, of these policies, which ones strike you as the most politically viable in this kind of environment?

10:29You know, I should say Budget Lab does not take a stance on all the things. I'm just thinking about the way the rhetoric around certain types of subsidies versus others, you know, direct subsidies versus tax credits, that sort of thing. Yeah. I mean, I think you didn't ask me this, but you didn't say which one of these policies decreases maternal employment. Oh. And I think this is important. The child allowance has a small, partly because it is small, very tiny 0.1 percentage point decrease in maternal employment. But I think that this gets to this broader question, right, about are we supporting all types of families?

11:07Are we helping people really figure out what the right preferences are for them and their families and children? And I do think there's a lot of interest from Capitol Hill on making sure that childcare is affordable, but also that families are more broadly supported. How do you think about the tension between federal initiatives like that could be any of these? And then things like what Zorn Mamdani and Kathy Hochul are doing in New York, which is they're trying to bring free 2K early education and child care to New Yorkers. And we've seen this actually work in New York before, because if you think about Bill de Blasio's tenure, he will be known for two things.

11:47One is going to the gym in Park Slope in the middle of the day, inexplicably. And the other is pre-K. I disagree with that. he will also be known for killing a groundhog. That is fair. I forgot about the groundhog. Yeah. So how do you think about the interplay between these potential federal solutions and then these highly localized things? I mean, I do think you are seeing more action at the state and local level. New Mexico has also just recently passed some provisions. And I think that speaks to the frustration that a lot of families have about finding and paying for childcare. I actually probably should have given a conflict of interest disclaimer at the beginning of this.

12:28We have seven children under the age of six at Budget Lab. So this is a subject that we are all intimately familiar with. And it's a constant subject of discussion. How do you find childcare? Is the price for this childcare worth it? Does one spouse need to stay home? Do you need to adjust your hours? And it makes a really big difference for the quality of parents' lives, if they can access high quality child care, or alternatively, if they want to stay home with their children, that they have enough family resources to do that. And so I think a lot of the action that you're seeing at the state level is partly just because people are frustrated that this conversation has stalled out at the federal level.

13:13Yeah, I think that's right. And we're going to talk more about that when we get back from the break.

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16:14Was there anything about the report that surprised you in the findings? Yeah, I was really surprised by, in some ways, how little difference there was between the universal subsidy and the income-limited subsidy options. So over 10 years, the universal subsidy costs about$770 billion. If you limit the income, say, to higher earners, sorry, no dice, the cost only goes down to$728 billion. Now, to be clear,$42 billion is real money. But it really does speak to one of the problems that people talk about here, which is that many parents, because you tend to have children when you're relatively younger, are earlier in their earnings life cycle.

16:59And so their incomes just aren't as high. Yeah. Parental preferences are not necessarily, I think, straightforward or predictable. Where do you think that really affects how these policies impact people and where might the people who would be on their seething end of them make a decision that's counterintuitive? Yeah. I mean, I think, you know, sometimes economists, including myself, get overly maximizing about this. Okay, you know, this policy has the greatest return on maternal employment. And then, you know, what about the impact on child's earnings? Like, to be clear, those things are important and we should look at them.

17:32But also part of what you need to look at and part of what you need to think about is the parental preferences. My mother stayed home with me and my sister when we were little. And there is no amount of money that you could have subsidized the local daycare with that would have changed how she looked after us. Yeah. Like that's what she was going to do. I send my child to a daycare that we love. There is no amount of money on the child allowance side that you could subsidize me with that would get me to stop doing that. And both of those preferences are valid. And so part of this is also kind of thinking about how do we make sure that we're kind of reflecting that in how people make decisions.

18:15It's not the case that if you just fully subsidized different forms of care, that all parents would switch into them. And that is one of the things that we've built into the model. And it's why, you know, you can see, for instance, if you look at changes in enrollment, just looking at the universal subsidy, right? Baseline, about 24 % of children are in center-based care. In a universal subsidy situation, it's about 34%. For home-based daycares, it moves from 6 % to 10%. If it's just parent only, so largely stay-at-home care, you go from 43 % to 33%. So that's still a substantial portion of parents who are like, I'm going to stay home with my kids.

18:56And that is a reasonable decision for people to make. Have you seen any shifts in people's preferences since you've been at the budget lab and been looking at this problem? One thing I know Pew has looked at, for instance, is changes in stay-at-home parents over time. And for instance, fathers are much more likely to be stay-at-home parents than they used to. I do think also I should say we talk about maternal employment in this report. That is, in general, where we see the biggest impacts. Fathers are also providing care. Yeah. You know, I'm looking at the sort of overall report findings. Can you tell me a little bit about the model, too?

19:35Because, you know, it's open source. Tell me how it works. How is it distinct? So I think the biggest thing here is that we are kind of trying to look in general equilibrium, which is really important for these policies. Parents are going to make decisions in response to these policies. The centers are then going to make decisions. Those decisions then affect other parents all the way down. So, you know, for instance, as an example, depending on the type of subsidy that you offer, certain types of parents can actually move away from certain types of care because as you move more parents into that care, the providers have to raise prices to pay higher wages, attract more workers, etc.

20:14And so then that causes other parents who don't receive the subsidy to adjust their care accordingly. And so in some ways, the model goes back to what we were saying at the beginning of like we are in a society. And it is the case, right? Some people don't believe that, Martha. Some people really do not believe that we are in a society, but I regret to inform them, particularly when it comes to childcare, we really are. And if demand goes up substantially for your local daycare center and they have to raise wages to attract more workers to respond to that demand and you don't receive the subsidy, you may have to adjust or you may want to adjust your care decision accordingly.

20:53I think one of the biggest things in this report is so much of the adjustment that we see from people is really about the relative prices of these different types of care and the way that subsidies change the relative prices of different types of care. That's one of those things that economists say. We're like, isn't that so interesting that the relative price you have to pay for different types of care changes your decision? And then a bunch of parents of two-year-olds go home and knock their heads against the wall while they're listening to this because they're like, yes. Obviously. Are there specific inflection points where that happens?

21:29You know, I think, you know, one of the things we were looking at is an income limited subsidy. It was interesting to me that from a cost perspective really didn't make that much difference. But for child enrollment, it does make a difference for parents in the top quintile because they're not receiving that subsidy and the price of the service is going up. And so then they have to adjust accordingly. Did the findings generate new questions for you that now are just sort of on your to-do list? All right, now we have to go look at this because we... Yeah, there's a couple of ways that we're hoping to expand the model in the future.

22:03One is, you know, we're asking about states and localities. We're hoping to expand this such that we are able to break down what is happening in states and localities and what this type of modeling could tell us there. One of the things that we didn't do here is what's called dynamic modeling. People often talk about this, for instance, in the tax context where like you give people a tax cut, they spend more money, therefore it generates more tax revenue, therefore the tax cut isn't as expensive as you think it's going to be. There's a lot of arguments about this. But one of the things that we didn't do is feed through the results that we have for some of these policies about increases in child earnings into like a broader productivity shock in the economy and how that affects macroeconomic incomes.

22:48And that's one of the things that we are hoping to do moving forward. There's also just things like, you know, a lot of these policies would induce higher wages in the early childhood and education care and education sector. There's evidence, right, that higher wages decrease turnover in the sector. We all know that these workers are very low paid. And decreased turnover has a huge impact on outcomes for children. And so I am very proud of this model. It was incredibly complicated to build. And there are certainly things that we've not built into it that we're hoping to build into it moving forward.

23:24Just anecdotally, what are some innovative programs that you know of at the state and local level that you think are interesting and might be worth modeling? You know, I'm interested in what New York City is thinking about, what New Mexico is thinking about or has thought about. California on the paid family leave has done some interesting stuff. I think one of the things that's hard in these conversations is the U.S. has been stalled out so much on policy innovation in this area. It's interesting. If you look at a lot of the economic papers in the U.S. from this, a lot of it references programs during World War II.

24:03And so you're trying to think about, to economists who are thinking of more recent papers, please don't yell at me. I'm aware that there are more recent papers, but like the entire conversation in some ways has been very stalled for decades, which is partly why you have so much frustration. And so I am very excited that there is all of this action on the state and local level. One, because hopefully it will make a difference for parents. But two, as an economist, we then get to study it and then see what happens. Why do you think it's been so difficult for the U.S. to innovate in this area, especially given that our peers globally have already got some of this worked out?

24:37It's expensive. And I think it also is a policy where, you know, one of our economists refers to it as kind of the trilemma of childcare. You can cap costs for families, you can have higher wages for childcare workers, and can have low costs for the government. Pick two, right? And we want all three. And that is hard. I mean, another way of asking your question, right, is like, why did it take so long for healthcare to get passed in the United States relative to other countries? And we're just not good at these big social programs. Arguably, we're still not there. We did pass the ACA. We'll bring you back.

25:18Right, exactly. One thing that's been interesting about some of the tax cuts that have been done recently is, for instance, when the TCGA was originally passed, large parts of it were done temporarily in an attempt to keep costs down. Obviously, then the One Big Beautiful Bill Act extended those and it was very expensive. On childcare and these things like that, if you're trying to do these big new permanent programs, it's just expensive. And people also, I think, sometimes disagree on what the outcome you're trying to drive towards is, right? Like, are you trying to support families? Are you trying to drive up maternal employment?

25:57Are you trying to impact children's future earnings? And everyone wants all of those. But is it best to do it through cash? Is it best to do it through direct provision of service? You know, people just disagree on these issues. Yeah. How much of it do you think, and this is a little bit out of scope from the report, but how much of this is gender economics? Because yes, more men are staying home, but it's still unusual. Yeah, it disproportionately affects women. Also, there's a certain amount of this of, I mean, for lack of a better phrasing, women have kind of beasted through this problem. You know, one of the things that I have to keep reminding myself of in this report is that what do you think the maternal employment rate is for women with children under the age of four, four and under?

26:44I have no idea. It's great. It's 73%. And I think most people would guess that it was lower than that. And like mothers are making it work. Making it work is a relative term. But to go back, you know, the universal subsidy increasing maternal employment by six percentage point, That's pretty substantial. That's a big increase. But part of the reason you're not getting a 15, 20 percentage point increase off of it is mothers are working. And so part of what these policies do is not even necessarily increase maternal employment or increase child earnings and things like that. They're just taking financial pressure off of families.

27:22And I want to say, I said just taking financial pressure off of families. That's huge. That makes a difference for people. Yeah. How much did remote work affect all this in terms of childcare choice? Right. We have seen that access to remote work does seem to make a difference for parents with respect to childcare arrangements, particularly women. There's been this whole conversation about remote work getting rolled back. Yeah. That has been somewhat overstated. But I think it does make a huge difference. I mean, frankly, I have seen this in my own life, right? I work remotely, the budget lab works remotely, and it's made a big difference for the parents of young children on our team because someone's always getting pink eye.

28:06It's easier to sort of handle those unexpected events. If there's one thing in this report that you can point to that you think most people just really don't understand or they think about through the wrong frame, what would it be? I do think with all of this, I really want to encourage people to kind of pull back. And when we talk about child care, when we talk about support for families, think really clearly, like, what is it that you are trying to do? Are you trying to make things easier for families financially? Are you trying to increase long-run earnings for children? Are you trying to increase maternal employment?

28:45Because different policies have different impacts on each of those things. Are you trying to generate the most tax revenue for the government in the future? And I think sometimes when we have conversations about federal policies, per your point, because so many of these people care about have been stalled out for so long, there's a little bit of a tendency to say everything can do everything. And that's not quite right, right? Like in the same way, this is not a policy that we looked at here. But if you think about, for instance, paid family medical leave, that is sometimes talked about as a policy that could like massively boost maternal employment.

29:22And actually the best evidence that we have is not that it massively boosts maternal employment, which like makes sense if you think about it, right? You have 12 weeks of paid leave and then what do you do with the baby? You need childcare. care. And so I think it's really important in general for policymakers to take a step back and think, what is the thing we're trying to do? Like, what is our primary goal? What is our secondary goal? And then kind of try to think about the policies around that. That all makes sense. So by the way, just for our listeners, you can find the Budget Lab's work at their website, budgetlab.yale.edu.

29:55And by the way, if you click under their people tab, you can see profiles of everybody's dogs and they're all adorable and seem to be very good boys. So I highly recommend that. Yes. Some of them are more or less helpful with the modeling, but we're very fond of all of them. All right. That's it for money talks. Thank you to our guest, Martha Gimbel for joining. And thanks to Jessamyn Molly of seaplane Armada for producing. We'll be back on Saturday with our regular edition of slate money. Thank you so much for doing this. Thank you so much for having me and for being interested in this very wonky Keep reporting.

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