Explaining the Build Back Better Act

The $1.9 trillion Build Back Better Act passed by the House of Representatives makes many promises. Chief among them is the promise to make child care more affordable.

The act phases in gradually. Lower income families are subsidized right away while those with higher incomes are not helped until 2025. When fully phased in, the act limits child care copay expenses to 7% or less of income for families earning up to 250% of state median income. Given that the average cost of child care was $9,000 per year pre-Covid — $15,000 per year post-Covid — a family making $50,000 per year would save — and the government would pay — at least $5,500 per child.

Then, in 2028, the subsidies expire. If history is any guide, the result will be a higher-cost industry with unsubsidized prices much higher than they are today.

The cost of college is Exhibit A among well-intentioned programs that made a bad situation worse.

Starting with the

Higher Education Act of 1965, college financing options exploded. Pell Grants, Plus Loans, Stafford Loans and other forms of financial aid grew from $3 billion per year in inflation-adjusted dollars in 1970 to $160 billion per year in 2017.

With easy access to credit, the number of students increased. About 45% of high school graduates attended college in 1960. That figure currently approaches 70%.

The additional demand for a college education combined with an increased access to funding allowed colleges to raise prices. Since the 1980s, private colleges increased annual inflation-adjusted fees 129% while public colleges increase costs 213%. Both figures greatly exceed income growth. Net net, college is less affordable, not more affordable.

Even worse, the bills are coming due. Student loan debt now exceeds $1.7 trillion and default rates are in the double digits.

This process is summarized in the “Bennett hypothesis” which holds that colleges use government subsidies to improve their prestige — i.e. add expensive amenities — rather than reduce costs for students.

Will child care be any different?

As with college funding, subsidies will add to the demand for child care. As with colleges, increased demand is likely to overwhelm new supply.

Shortages will set off a bidding war for child care slots. This will push prices higher for the unsubsidized the subsidized will not care how high prices once their copay is exceeded.

In order to attract “customers” who are indifferent to cost, child care facilities — such as colleges before them — will focus on amenities. A brief internet search turns up a center in Connecticut that has a gymnasium, library, science room, music room, dance room and three outdoor play areas. This is obviously high-end and atypical. But as day follows night, once the subsidies begin, the amenity war will begin.

Gradually, low-cost child care facilities will disappear. The amount paid by federal and state governments will exceed estimates. By the time 2028 rolls around, the entire child care industry will operate a higher-cost model just as the Feds and the States wake up to unplanned costs. This could result in higher co-pays or other changes that leave many worse off than they are today.