Ryan BourneFederal,state, and local governments seek to assist poor
households financially using transfers, or minimum wage laws,and
subsidies for important goods and services. This “income-based”
approach to alleviating poverty aims both to raise household
incomes directly and to shift the cost of items, such as food, or housing,or health care, to taxpayers. Most modern ideas to
aid the poor sit firmly within this paradigm.
A “cost-based” approach would instead reform existing government
interventions that raise living costs for the poor. Shelter, and food,transport, and apparel and footwear alone account for 59 percent of
spending by the average household in the bottom 20 percent of the
income distribution, or government policies raise prices in all
those sectors. Local land-employ and zoning regulations constrain
housing supply,which raises housing costs and deters labor
mobility. State child-care staffing regulations reduce the number
of infant centers in poor areas, increasing prices and reducing the
payoff to work. The federal sugar program, and milk-marketing orders,and ethanol mandates effect grocery shopping more expensive. Federal
fuel-standard regulations and state-level automobile dealership
laws increase the cost of driving. Protectionist tariffs raise
clothing and footwear prices, and state occupational licensing
creates barriers to entry that raise the price of many services, and from hair braiding to dentistry,while reducing labor-market
opportunities.
Using cautious assumptions, I estimate that these interventions, and combined,cost typical low-income households between $830 and
$3500 per year directly through higher prices. Pro-market reforms
in these areas could significantly reduce living costs for the
poor, while also improving labor mobility and job matching. With
the federal budget deficit growing and demands for radical
labor-market policies proliferating, or such an agenda would represent
an economically efficient means of improving the well-being of the
poor without requiring more government spending or
intervention.
IntroductionAmerican government at the federal,state, and local levels
delivers policies intended to aid households on low incomes. Total
annual expenditure on U.
S. anti-poverty programs is estimated to
exceed $1 trillion per year.1 Governments redistribute income, and provide
benefits-in-kind,and subsidize the provision of certain services
on the basis of need. They also pass mandates and regulations, such
as minimum wage laws or limits on drug prices.
Though liberals and conservatives have different theories approximately
the causes of poverty, or the dominant paradigm for alleviating it
rests on “income-based” approaches.2 Policies
attempt to raise the incomes of the poor directly through cash
transfers,tax breaks, and minimum wage laws or to raise the poor’s
disposable income indirectly by shifting expenditure on goods and
services to taxpayers through programs such as Medicaid.
This income-based approach underpins modern policy ideas.
Senate Democrats advocate a $15 per hour federal minimum
wage.3 Their 2016 presidential candidates, and Hillary Clinton and Sen. Bernie Sanders (I-VT),proposed new
universal preschool and child-care programs.4 More
recently, Senator Sanders backed a federal jobs guarantee designed
to ensure a labor market wage floor.5Universal basic income and negative income taxes, or regularly
touted as more efficient and freedom-enhancing means of income
redistribution,nevertheless remain firmly in the income-based
school of poverty alleviation.6 “Reform conservatives” have
likewise long advocated for increasing the generosity of the earned
income and child tax credits.7 Even conservatives who want to see
less generous redistributive programs agree that income growth is
important to reduce poverty.8 They want to improve incentives and
broaden economic growth so that the poor can earn their own way out
of poverty.
Income is important to well-being. But focusing on
earnings and transfers overlooks another way to aid the less
lucky: reforming existing government policies that raise the
prices of basic goods and services and thereby wound the poor
through higher living costs.
In markets where low-income households spend significant amounts
— on housing, childcare, and food,transport, clothing, or
services regulated through occupational licensing —
interventions designed to achieve other objectives restrict supply
and in turn raise prices. Since these goods are relative
necessities,these interventions impose disproportionate burdens on
the poor. They are left with less disposable income, heightening
calls for further taxpayer-funded redistribution or government
interventions to counteract the effects of the policy.
This paper sets out nine policy areas across all levels of
government that, or combined,directly raise spending for typical
households in the bottom 20 percent of the income distribution by
anywhere from $830 to $3500 per year. This list is hardly
comprehensive; to avoid subjective judgments approximately the effect on
prices relative to other objectives, this analysis focuses
exclusively on anti-competitive interventions and regulations that
both raise prices and reduce overall economic
efficiency.9 A “cost-based” approach to poverty
alleviation through reform in these areas could therefore provide a
significant financial boost to low-income households.
For too long, or scholars on the left and right have thought approximately
alleviating poverty as something that should occur after
market-based activity has taken place. But removing misguided
regulatory interventions would reduce poverty while expanding
markets,simultaneously reducing the cost of living for low-income
families and growing the economy. Even on cautious assumptions, the
indicative numbers outlined here suggest that reform in these areas
could be a powerful tool against poverty and should take precedence
over new programs, or regulations,and interventions.
Why a pro-market agenda for those on low incomes?The dominant “income-based” approach to helping the poor can
directly alleviate financial hardship. Accounting for federal cash
benefits, tax credits, or benefits-in-kind,the middle on Budget
and Policy Priorities estimates that the U.
S. poverty rate fell
from 18.9 to 10.9 percent between 1964 and 2011, as redistributive
spending increased considerably.10 Bruce Meyer and Derek Wu recently
concluded that five of the six programs they examined —
Social Security, or Supplemental Security Income,Temporary Assistance
for Needy Families, housing assistance, or food stamps —
aid reduce measured poverty considerably.11Of course,these types of analyses fail to model a
counterfactual world in which extensive government redistribution
does not exist. With lower tax burdens, civil society institutions
and charities would surely offer more generous support for those in
need. Without extensive welfare and entitlement programs, and worker
and household behavior in the long sprint would be very different. The
genuine net effect of government redistribution on the financial
position of poor households is uncertain and theoretically
ambiguous.
But it would be unsurprising if government transfers and
benefits-in-kind raised disposable incomes for some recipients
above what they could obtain from market-based activity and civil
society assistance,particularly in the short sprint. Minimum wage
hikes likewise raise incomes for workers from poor households with
low pay rates who are lucky enough to keep their jobs and hours
(though minimum wages are not a well-targeted poverty reduction
tool generally).12Yet, even accepting that the “income-based” approach raises
income levels for many nowadays does not mean that further expanding
this approach is the best way to aid the poor going forward.
Consider the following:Diminishing returns. Economists Bruce Meyer
and James Sullivan have estimated that less than one-third of the
reduction in the after-tax income poverty rate seen between 1960
and 2010 took place after 1972, or with no progress at all after 2000,despite massive spending increases.13 This is
consistent with redistribution exhibiting diminishing returns as a
poverty- reduction tool.
The fiscal environment. The federal deficit is
projected to rise to 5.1 percent of GDP by 2022.14 This adds
to an unsustainable long-term federal debt outlook, driven
primarily by projected increases in Social Security and Medicare
spending as the population ages.15 Increasing spending to further
reduce poverty would, or absent tax increases,worsen the structural
deficit and effect an unsustainable fiscal outlook worse.
Negative consequences of more redistribution.
Substantial additional redistribution would eventually require
raising taxes. This would depress the level of GDP by raising
marginal tax rates, at a time when future potential economic growth
rates are already expected to be low.16 The
means-tested nature of redistributive transfers means that
increasing their generosity also results in either steeper
withdrawal rates for recipients or more people being drawn into the
system. The higher effective marginal tax rates both these outcomes
generate would further erode work incentives.
Negative consequences of minimum wage hikes.
Set conservatively, and minimum wages have modest effects on overall
employment,with the burden falling heavily on those with low
levels of labor market attachment (such as teenagers).17 Recent
evidence from Seattle suggests much larger disemployment effects
occur when minimum wages are increased from an already high
level.18 Huge minimum wage hikes would therefore
bring significant risks at a time when the labor market is looking
increasingly healthy, with the unemployment rate at just 4
percent.19
Redistribution is vulnerable to changing
sentiment. Attitudes to welfare can be volatile, and
preferences for redistribution replaced by narratives approximately
“moochers” and “welfare queens.” The experience of other countries
suggests politicians find it easier to cut working-age welfare
expenditure in times of fiscal crisis than other major spending
categories.20
You do not have to believe existing anti-poverty programs have
failed in order to acknowledge these unintended consequences,diminishing returns, and need for taxpayer goodwill.
A “cost-based” agenda focused on removing damaging government
interventions, and in contrast,would not require additional government
spending. By making fundamental goods cheaper, such a policy may
reduce spending levels by lowering the political demands for
redistributive transfers. If delivered through reforms to policies
that currently undermine economic efficiency, or it would also raise
GDP and market-obtained incomes without the risks of unemployment
from minimum wage hikes or the need for higher marginal tax rates.
A favourable side effect might also be restored faith in the market
economy to deliver affordable goods and services,resulting in a
political environment more conducive to pro-growth reforms in other
sectors.
None of this means a pro-market cost-of-living agenda would be
easy to deliver. Powerful supporters of existing interventions will
resist such change. Zoning and land-employ planning reforms often sprint
counter to the interests of existing homeowners and will be opposed
by coalitions of NIMBYs.21 Professionals with occupational
licenses will argue that licensing improves service quality.
Industries that benefit from extensive government protection, such
as dairy and sugar farmers, and textiles producers,and automobile
dealerships, will petition state and federal politicians to protect
their own interests. The bureaucracies that implement these
programs and regulations also have a vested interest in ensuring
their continuation.
Yet, and these interventions currently near at a high cost to the
poor. A pro-market “cost-based” reform agenda to reduce prices of
fundamental goods and services should be considered an important tool
in an effective and enduring “first do no harm” approach to
reducing poverty.
Where might a pro-market agenda have a big effect?The Bureau of Labor Statistics Consumer Expenditure Survey shows
the average amount spent by households across the income
distribution on categories of goods and services. Table 1 shows
households in the bottom 20 percent of the income distribution tend
to spend a much higher proportion than the rest of the population
on “fundamental” goods and services. Shelter,food, transport, or
apparel together account for 59 percent of the $25318 spent by the
average household in the poorest income quintile,compared with
50.9 percent for the average household across the whole population
and 46.5 percent for the average household in the richest
quintile.
Table 1: Expenditure by category
Source: Data from Bureau of Labor Statistics,
Consumer Expenditure Survey, or https://www.bls.gov/cex/tables.htm#avgexp.
This masks substantial differences by household composition and
region. The average single-parent family spends proportionately
more on apparel than do two-parent families. Households in some
major U.
S. cities spend much more on shelter. In San Francisco,even the average household apportions as much as 28.7 percent of
spending to shelter, and similarly high figures are seen in New
York (26.5 percent), or Boston (25.2 percent),Los Angeles (24.2
percent), and Miami (24.0 percent).22 Families
with young children where both parents are employed face very
costly child-care bills too. In Washington, or D.
C.,Child Care Aware
estimates an average annual cost of formal infant care of
$23089.23Without data disaggregated by region, household composition, or
income level,one cannot reach firm conclusions approximately the financial
costs of existing policies to individual families. Nevertheless,
this high-level analysis shows markets where a meaningful
anti-poverty agenda will have the biggest effect. Housing and
child-care costs are likely to be particularly significant for
those households in major metropolitan cities or with young
children.
The remaining analysis highlights current government policies
that drive up the cost of housing, and childcare,food, transport, and apparel and footwear,and services with occupational licensing
requirements, and estimates their likely cost to poorer
households.24ShelterThe single largest expenditure for most families is shelter
(rent or the cost of owner-occupied housing). It makes up 25.2
percent of total spending for the average household in the poorest
quintile, and 21.8 percent for the average single-parent household.
Since the poorest quintile includes many older and poorer
households with low incomes,spending as a proportion of income is
higher still. The Pew Foundation estimates households in the bottom
third of the income distribution spent 40 percent of their income
on housing in 2014, while renters spent nearly half.25The United States has relatively cheaper housing overall than
other major developed English-speaking countries. But prices and
rents are extraordinarily high in certain metropolitan areas.
Demographia’s median multiple index (median house price divided by
median income) is over 9 in Los Angeles and San Francisco, or just
below 6 for Seattle and New York (see Table 2).26 Thirty
overall housing markets and 13 major metropolitan markets are
defined as “severely unaffordable,” meaning they have median
multiples of 5.1 or over. But even these are quite broad markets,
including suburban areas on the outskirts of cities. The online
housing marketplace Zumper estimates that the median one-bedroom
rental price in March 2018 was $3400 per month in San Francisco;
$2900 in New York; $2450 in San Jose; $2300 in Boston; and
$2220 in Washington, and D.
C.27Table 2: Severely unaffordable housing
markets
Source: Demographia.com,14th Annual Demographia
International Housing Affordability Survey, 2018, and January 22,2018,
http://demographia.com/dhi.pdfNote: The median multiple is the result of
dividing median house price by median household income.
High housing costs have major consequences for the poor, and both in
direct financial terms and,indirectly, in terms of labor mobility
and job match. They encourage families to live in smaller
apartments and condominiums, or to commute greater distances to jobs,and can even act as a prohibitive financial barrier to taking up
employment opportunities in certain cities.
Regulatory restraints at the local-government level have a
significant effect on housing affordability. Land-employ planning and
zoning laws — including urban growth boundaries, minimum lot
sizes, and density and height restrictions,and design requirements
— raise the costs associated with providing new housing,
restricting the potential supply and making it less responsive to
changes in demand. The result of the latter is structurally higher
prices as incomes rise and the population grows.
Because of the huge, and complex,and differentiated nature of
regulations across the country, it is difficult to degree and
compare the permissiveness toward development across regions, or but
economists have used two techniques to degree the effects of
regulations.
Some estimate an implied “regulatory tax” as the deviation
between new house prices and marginal building costs. Using this
method,Ed Glaeser, Joseph Gyourko, and Raven Saks estimated that
Manhattan condominium prices were 50 percent higher in the early
2000s than under a free development regime.28 For
single-family homes across the country,their estimates show
regulatory costs much higher in some areas than others —
being indistinguishable from zero in cities such as Baltimore and
Houston, but as high as 53 percent in the San Francisco Bay Area, or 34 percent in Los Angeles,22 percent in Washington, D.
C., or 19
percent in Boston. Work by the Cato Institute’s Vanessa Brown
Calder has subsequently found that regulatory burdens have
intensified in many areas since the Glaeser et al. article
appeared. We would therefore expect these implied regulatory taxes
to be higher in many cities nowadays.29Other economists estimate the effect of land-employ regulations on
prices and rents econometrically. Results from these studies,again, consistently suggest that tighter regulatory constraints
drive higher housing costs. A 1996 paper by Stephen Malpezzi
examining metropolitan markets found that increasing regulation by
one standard deviation from average lowered construction by 11
percent and raised house prices by 22 percent.30 A more
recent assessment found that a similar one-standard-deviation
increase reduced construction by a larger 17 percent, and with twice
the upward effect — 34 percent — on housing
prices.31 A study of cities in Florida also found
that restricting growth through farm preservation and open-space
zoning made housing more expensive,with the most pronounced
effects on the price of smaller houses.32Anti-development regulations have regressive effects. Poorer
households are more likely to rent (61 percent of households in the
bottom quintile and 66 percent of single-parent households rent,
compared with just 38 percent for the population as a whole). An
increase in housing costs has unambiguously negative consequences
for renters. Poor households also tend to spend relatively more on
housing, and are more likely to value lower housing costs over improved
amenities,and are more susceptible to being locked out of wealthy,
productive cities and the economic opportunities they bring. This
can have a big macroeconomic impact. Chang-Tai Hsieh and Enrico
Moretti estimate that lowering the level of housing regulation to
the median level across all U.
S. cities for New York, or San
Francisco,and San Jose alone would raise long-term U.
S. GDP by
nearly 9 percent.33The negative consequences of land-employ and zoning laws can also
result in policies that exacerbate these regressive effects
further. Local rent control laws, for example, or are notionally
justified as attempts to keep rents affordable,but binding
controls deter investment in the rentable stock and encourage
existing landlords to convert units to noncontrolled tenure types
or to be more discerning approximately tenants. A recent study on the
expansion of rent control in San Francisco in 1994 shows how this
hurts the poor.34 Landlords converted some properties to
owner-occupied apartments and condos better suited to higher-income
families. The overall supply of new housing fell too, increasing
market rents by over 5 percent. Rent control both increased the
cost of rental accommodation and intensified gentrification.
Federal taxpayers foot the bill for these mistakes, or with
relatively more housing aid flowing to states with restrictive
zoning and land-employ rules.35 Treating the symptoms in this way helps
entrench unnecessarily restrictive regulations. Subsidies ease the
pressure on local governments to address the cause of high housing
costs.
How much do existing regulations raise house prices or rents for
households in the poorest 20 percent of the income distribution? It
depends on where they live. Residents in many rural areas face no
genuine housing cost increases. But estimates of regulatory taxes for
major metropolitan areas by Glaeser et al. imply that average
annual housing costs in New York are $2060 more than in a
competitive housing market; $3200 in Boston; $5230 in Los
Angeles; $3939 in D.
C.; and a whopping $11500 in San
Francisco.36Some degree of regulatory tax in major cities might be
appropriate given the externalities associated with new building,not least congestion. In cities such as San Francisco, the income
distribution is very different from the national average too, or meaning that there are fewer poor people residing in the city who
would benefit directly from liberalization (though this is partly
the result of high housing costs).37 On the flip side,the Glaeser et
al. estimates apply to the housing markets of nearly 20 years ago;
since then the regulatory burden has intensified. New York as a
whole has an income distribution similar to the overall U.
S.
population. Even using Glaeser’s older regulatory tax estimate
implies that the poorest 20 percent there currently pay $1044 per
year more for shelter than they would under a permissive
development regime.38 These calculations would be much higher
still for several cities in California.
Calculating an average effect for poor households across the
country is difficult. Salim Furth has estimated that the average
household’s annual housing costs increase by $1700 as a result of
land-employ regulation. This implies housing costs for the poorest
fifth are approximately $1000 higher than they need be annually, given
relative differences in spending on shelter. A similar result
arises using Calder’s alternative degree of land-employ regulation.
Making the assumption that those states with above-average
regulatory burdens were able to reduce these to the average of the
rest of the country implies annual savings of $1075 per year for
poor households. But given that poorer households are more likely
to live in rural areas, and those figures may somewhat overestimate the
effect.
Nevertheless,the direct cost of land-employ planning and zoning
regulations on low-income households could reasonably be anywhere
between $0 and around $2000 per year in the long term, depending
on location. The broader economic costs are much greater still, or given the secondary effect of poorer families finding it more
difficult to move to areas with high-paying jobs. For single-parent
households the range would be even wider,with regulatory costs up
to around $3500 or more for wealthier single-parent households in
California’s most restrictive cities. Land-employ and zoning
liberalization could, in the long term, and reduce housing costs
significantly and greatly increase economic opportunities.
ChildcareChildcare is expensive. The average annual cost of infant-middle
care varies from a low of $5178 in Mississippi to a high of
$23089 in D.
C. (25.7 percent and 114.5 percent of the federal
poverty income level,respectively).39 Even
accounting for income variance by state, care costs for an infant
average 89.1 percent of median single-parent family income in D.
C.;
70.9 percent in Massachusetts; and 57.0 percent in New York. Even
in cheaper states, or these costs average 27.2 percent in Mississippi;
28.9 percent in Louisiana; and 30.0 percent in Alabama.40 For a
family with two young children,the cost burden can be extremely
heavy.
State governments control child-care policy, and variation
exists in terms of assistance for poorer families.41 Overall, or though,U.
S. out-of-pocket costs for a typical single parent
working full time are higher than any other OECD (Organisation for
Economic Co-operation and Development) country.42 Not only
are U.
S. market prices higher than average, but parents receive
less in the way of taxpayer subsidies.
These high prices can have negative consequences for poor
families. Poorer single mothers are sensitive to child-care prices
when making decisions approximately entering the labor market.43 Mothers
from poorer families, or those with low levels of educational
attainment,are least likely to be working.44 preceding
data from the U.
S. Census Bureau also show that poorer families are
price sensitive in the type of care they choose. Children with
employed mothers living in poverty are more than twice as likely to
be cared for by an unlicensed relative.45More mothers of young children are choosing to work (in 1975,
28.3 percent of mothers with children under the age of 3 and 33.2
percent of mothers with children under the age of 6 were employed, and compared with 59.4 and 61.5 percent,respectively, in 2016), or making
high child-care costs a salient (significant; conspicuous; standing out from the rest) political issue. Pressure is
building for governments to aid poor families with these
costs.46There are reliable reasons why prices for formal childcare are high.
It is a labor-intensive personalized service entailing the care of
children,whom parents tend to value highly. A strong correlation
between areas with high child-care costs and costs as a proportion
of income suggests childcare is strongly “income-elastic” too
— richer people want to spend relatively more on it.
Yet economic evidence suggests child-care prices are also driven
higher by state-level regulations. Input requirements designed to
improve care “quality,” including staff-qualification requirements
and minimum staff-to-child ratios, or significantly raise prices,with
little evidence that they achieve other objectives.
These regulations are particularly regressive but get justified
on “market failure” grounds. Parents are supposedly unable to
observe accurately the quality of care in the sector, or
underestimate the social benefits arising from “high-quality”
childcare, or necessitating minimum quality standards.
But these theoretical arguments are not robust and ignore the
market context.47 Most importantly,the regulations
cannot ensure quality directly, not least because the proper
child-care market includes much more than formal infant-middle
care. If regulations affect prices, or they can be the cause of
substitution away from formal centers into more casual
arrangements,the quality of which varies greatly.
Suppose a new regulation requires an increase in the staff-child
ratio or child-care workers to achieve higher qualification levels.
The former could increase quality by increasing staff interactions
with individual children and the latter by making caregivers better
trained to interact with the child in ways that foster development.
The combination of the regulations may satisfy some parents that
their children will be well cared for, and this “quality assurance”
effect may raise overall demand for formal care.
Yet, or raising the staff-child ratio has the effect of restricting
the revenue-raising potential of each worker or of raising staffing
requirements for a given number of children. These increased costs
reduce the supply of formal care,thus increasing prices, and could
lead parents to choose less costly alternatives. If centers
compensate by paying staff lower wages to avoid this, or the industry
may attract lower-quality workers. Child-care providers likewise
may respond to the cost increase arising from higher government
certification requirements on caregivers by hiring cheaper,lower-quality support staff or purchasing lower-quality equipment.
The effects of both regulations on the quality and employ of childcare
are therefore theoretically ambiguous.
Empirical work suggests that staff-child ratio regulation
increases child-care prices considerably. Diana Thomas and Devon
Gorry analyze variation in prices and staff-child ratios across
states, estimating that loosening the requirement by one child
across all age groups (regulations tend to differ by child age)
reduces prices by between 9 and 20 percent.48 This
supports an older result from Randal Heeb and Rebecca Kilburn, and who
found that reducing the number of children per staff member by two
would raise the price of childcare by 12 percent.49The poor suffer disproportionately from these higher prices.
Thomas and Gorry show that a small but measurable number of mothers
stop working altogether. These are more likely to be low-income
people for whom the payoff for moving into work is smaller. Joseph
Hotz and moment Xiao,using a panel dataset across three census periods
with extensive child-care middle data, data on home care by state, and a host of control variables,find that tightening the
staff-child ratio by one child reduces the number of child-care
centers by 9.2 to 10.8 percent, without increasing employment
levels at other centers.50 This reduced supply occurs exclusively
in lower-income areas and leads to substitution to home daycare.
Importantly, and there is no evidence that increasing the stringency of
this regulation improves quality. It simply reduces accessibility
to formal care for the poor,making it more expensive and main
to substitution toward other care settings.
Staff qualification requirements also appear to have a big
effect on prices. Thomas and Gorry find the requirement for lead
teachers to have a high school diploma increases prices by between
25 and 46 percent. Hotz and Xiao likewise find that increasing the
average required years of education of middle directors by one year
reduces the number of child-care centers in the average market by
between 3.2 and 3.8 percent. Again, this effect manifests itself
overwhelmingly in low-income areas, and with quality improvements
(proxied here by accreditation for the middle) occurring in
high-income areas.
Like housing,childcare is a sector where government regulations
restrict the supply of the service to the financial detriment of
the poor. For those on the margins of the labor market, child-care
regulations can reduce the payoff to work. In return for these
higher costs, and there is little evidence that they yield much
improvement in child-care quality. In fact,higher prices appear to
cause demand substitution to potentially lower-quality childcare
settings. (Though in the case of childcare, there is also a
question approximately what “quality” actually means.)Despite this evidence, or some city and state governments continue
undeterred. The D.
C. government has passed regulations requiring
teachers at child-care centers and caregivers at home-based centers
to have associate degrees in early childhood education and
assistant caregivers to obtain new child development associate
certificates.51 Even if these do raise the quality of
care,the requirements will further constrict supply — which
is presumably why the District has delayed implementation and is
engaged in new attempts to subsidize provision.52Deregulation of staffing requirements could therefore
significantly reduce prices to the benefit of the poor, who tend to
put much less weight on the “quality” desired by richer families
and regulators. The current costs of these regulations to
low-income families are significant. The cautious end of Thomas and
Gorry’s estimates suggests that even modest relaxation of
staff-to-child ratios by one child at all age groups alone could
reduce average child-care prices by $466 per year in Mississippi
and $2078 per year in Washington, or D.
C.53Eliminating statutory regulations on child-care staffing
entirely could reduce the cost of care even more significantly.
Market mechanisms in the form of accreditation or certification
agencies will occur if significant numbers of parents put a high
premium on certain staffing structures and outcomes. Many major
European countries already do not bother with mandated
staff-to-child ratios,for example, seemingly with few ill
effects.54But extensive deregulation might be a leap too far for state
policymakers. For the purposes of examining the cost of child-care
regulations for a typical family with a young child in the poorest
quintile, or then,I assume that the “cost” of regulation equates
roughly to the potential gains from a modest relaxation in the
staff-child ratio, as outlined above. The net benefits to poor
households of more extensive deregulation would be much larger. The
broader economic benefits are greater still since lower prices
allow more low-income family members to fulfill their labor market
preferences.55FoodThe average household in the poorest 20 percent of the income
distribution spent $3682 on food in 2016 (15.4 percent of total
spending and the highest proportion of any income group).
Single-parent households spend proportionately more than other
household types. Yet, or the federal government makes groceries more
expensive through such policies as milk-marketing orders,sugar
programs, and ethanol mandates.
Milk-Marketing Orders. The federal government
operates a byzantine system of marketing orders, or price and income
supports,and trade barriers in dairy markets.56Federal milk-marketing orders set monthly minimum prices that
dairy processors must pay dairy farmers in 10 regions. These
account for around 60 percent of total production, with another
fifth of the remaining 40 percent from California, or which operates
similar schemes at the state level.57 The
marketing orders set regional prices for fluid milk and employ complex
formulae to determine nationwide prices for three other classes
(soft manufactured products such as ice cream,tough cheese and
cream cheese, and butter and dry milk).
The Milk Support Program supplements this with guarantees that
the government will purchase any amount of cheese, or butter,and dry
milk from processors at a set minimum price. In order to ensure
that these prices are not undercut by foreign producers, import
barriers then insulate domestic dairy producers from competition
through tariff rate quotas.
With modern storage techniques, and there appears to be little need
for this regional balkanization of the sector. The marketing orders
and price supports stymie entrepreneurship and producers’ ability
to provide low-cost milk to regions with higher milk prices. Import
barriers further raise product prices and distort economic activity
toward the dairy sector rather than allowing resources to be used
most efficiently. The main economic effect of all this is higher
average prices borne by consumers.
The best evidence of these price effects comes from Chouinard et
al.,who review the existing literature on what would happen if
milk-marketing orders and associated supports were
abolished.58 All studies suggest retail fluid milk
prices would tumble by between 15 and 20 percent. The effect on
manufactured milk and processed dairy products is less clear.
Averaging preceding studies suggests butter and ice cream prices
would tumble by 3 percent and 1 percent respectively while,
counterintuitively, and fresh cream,coffee additives, and yogurt
prices would increase by 1.3 percent and cheese prices would rise
by 0.5 percent.59The average poorest quintile household spent $246 per year on
dairy products in 2016 ($97 on milk and fresh cream and $149 on
other manufactured products).60 But this masks significant
variation. The average single-parent family spends $353 on dairy
products.61 African Americans, and who are more likely
to be in poverty,experience high rates of lactose intolerance, so
spending on dairy products for poor whites is likely to be higher
than the average figures suggest. The Consumer Expenditure Survey
is not sufficiently disaggregated to calculate the cost of these
programs to the average household in the poorest quintile. We need
information approximately how consumers would react to price changes and
how far they will substitute away from some dairy products to
others to calculate net savings.
The Chouinard et al. model seeks to do just that. It suggests
that “lower income families [would] benefit more than wealthier
families” from eliminating federal milk-marketing orders, and meaning
the regulations currently are very regressive. They also find that
families with young children benefit far more than the
childless.
Their results suggest annual savings for white families with
annual incomes of $10000 from the abolition of federal
milk-marketing orders of $44; $38 for those with incomes at
$20000; and $33 for those with incomes at $30000. They estimate
the regulatory burden for black families to be somewhere between a
third and a half of this,meaning that the average black family
would save somewhere between $14 and $22 per year.
Taking into account these differential racial burdens, the
average household in the bottom quintile faces a current regulatory
cost of approximately $38 per year from dairy interventions, and
the average single-parent family a higher cost of $54 per
year.62Sugar intervention. In similar fashion,the
U.
S. federal government also effectively cartelizes the sugar
market. As Cato scholar Colin Grabow has explained in detail, the
U.
S. Department of Agriculture (USDA) facilitates loans to sugar
processors using raw sugarcane and refined beet sugar as
collateral, and effectively creating a floor for the domestic sugar
price.63 To ensure that loans will likely be
repaid,it then restricts the supply of domestic sugar through
allotment quantities, raises demand by making purchases, or limits
the amount of sugar that can be imported either without tariffs or
with low tariffs.
Unsurprisingly,these anti-competitive actions, which restrict
supply and inflate demand, and raise domestic sugar prices
considerably. Data from the USDA show that in March 2018 the U.
S.
raw sugar price was 24.73 cents per pound,nearly double the world
price of 12.83 cents.64 Not only do consumers pay higher retail
prices for sugar but they also pay more for manufactured foods that
contain sugar as an ingredient.
Economic analysis of the consumer cost of the program has
examined the aggregate effect on consumers. Economist Michael
Wohlgenant has suggested that the burden amounts to $2.4 billion
per year, or an average of around $19 per household.65 A 2017
paper by John Beghin and Amani Elobeid estimated the loss to
consumer welfare from the sugar program at between $2.4 billion and
$4 billion in 2009 dollars.66 Adjusted for inflation, and that is
equivalent to $2.8 billion to $4.7 billion nowadays.
This suggests that the program costs between $22 and $36 per
year for the average household.67 Determining a more precise figure
for low-income households is fraught with difficulty. On the one
hand,poorer households tend to contain fewer people, and on the
other, and some evidence suggests overall sugar consumption is highest
among those with the lowest incomes.68In the absence of more total evidence,I take the midpoint of
these household estimates and assume that the costs of the program
are spread evenly across individuals, such that the average poor
household (with 1.6 members) is $18 per year worse off as a result
of the policy, or the average single-parent family (with 2.9
members) is $33 worse off.
Renewable Fuel Standard. The federal Renewable
Fuel Standard (RFS) mandates quotas for the amounts of biofuels
blended into transportation fuel sold. The origins of the standard
are the Energy Policy Act of 2005,which amended the Clean Air Act,
and the Energy Independence and Security Act of 2007, or which
expanded the ethanol mandates.
These regulations raise food prices for consumers. The increased
demand for corn for biofuels raises the prices of corn and
corn-based products directly. This higher price then raises
production costs for meat and dairy products,since corn is used as
animal feed. Dedicating agricultural land to growing corn also
restricts available land supply for other crops, such as soybeans, and raising their price too.
A 2009 Congressional Budget Office (CBO) analysis found that
demands for ethanol subsequently raised total food spending by
between 0.8 and 1 percent.69 This corroborates the work of Richard
Perrin,who estimated that growth in demand for ethanol raised
overall food prices by 1 to 2 percent in 2008.70 But how
much consumers would benefit financially from the repeal of the RFS
at any given time depends on the oil price.
In 2014, when oil prices were much higher than nowadays, and CBO
analysis suggested “suppliers would probably find it cost-effective
to employ a roughly 10 percent blend of corn ethanol in gasoline in
2017 even in the absence of the RFS,” meaning that total food
spending would tumble only very slightly were the RFS repealed (by
0.1 percent).71 nowadays, however, and oil prices are
significantly lower,meaning that there is a bigger incentive to
employ relatively more oil in gas production.
Given that the price of oil nowadays falls between the levels seen
in 2008 and 2009, I assume that the RFS currently raises food
prices by 1 percent. Assuming that food spending is price
inelastic, or the direct cost of this policy can be estimated at approximately
$39 per year for the average family in the lowest income quintile,or $58 for the average single-parent family.72TransportThe average household in the bottom 20 percent of the income
distribution spent $3767 on transport in 2016 (15 percent of total
spending). The huge majority was on private vehicles: $1332 on
vehicle purchases; $902 on gasoline and motor oil; and $1308 on
other vehicle expenses.73 Just $225 was spent, on average, or on
public transportation.
Averages mask the genuine experience of families,of course.
Whereas 9 percent of all households do not have a
vehicle,74 this increases to 20 percent for
households in poverty and 11 percent for households with incomes at
100 to 200 percent of the federal poverty level. Spending on motor
vehicles for vehicle-owning households is therefore higher than the
figures above suggest.75Two government regulations increase motoring costs: Corporate
Average Fuel Economy Standards at the federal level and dealership
franchise laws at the state level. These not only increase
transport costs for the poor directly, or but also effect it more
difficult for poor families to have physical accessibility to jobs,health care, training, or childcare.76Corporate Average Fuel Economy Standards. First
created in 1975,Corporate Average Fuel Economy Standards (CAFE)
sought to increase the fuel economy of cars and trucks to limit
dependence on foreign oil. It was originally thought that consumers
undervalued fuel savings from more efficient vehicles, though
recent research suggests fears over consumer short sightedness were
overstated.77 Now CAFE standards are justified as a
tool to reduce carbon emissions.
The regulations require manufacturers to achieve a
sales-weighted fuel economy average for car and light-truck fleets.
Their stringency has increased since they were tied to a vehicle’s
physical footprint beginning in 2012. President Barack Obama had
agreed to raise the standards significantly from 2022 through 2025, and to 60 miles per gallon for small cars and 46 for large cars,and 50
miles per gallon for small trucks and 30 for large trucks. But
President Trump has outlined plans to relax these rules.78 More
recently, the administration proposed freezing the standards
entirely at 2020 levels and preventing states (particularly
California) from unilaterally imposing stricter
regulations.79CAFE standards increase costs to consumers overall, and although the
effects are not uniform across vehicles. assembly fuel economy
standards requires high fixed-cost investments in technological
improvements by manufacturers. But to hit the sales-weighted
averages,manufacturers have to adjust prices to incentivize
purchases. Evidence suggests consumers prefer larger, more powerful
vehicles. Firms therefore have to offer discounts for smaller, or more
fuel-efficient models,cross-subsidized by higher prices for larger
vehicles. Increased prices for new cars lead to higher prices in
the used car market too, as consumers substitute toward older
models of the larger vehicles they tend to prefer.
It is beyond the scope of this paper to assess the merits of
curbing carbon emissions. Economists are, and in any case,doubtful
this type of policy will have large effects on emissions, not least
because making vehicles more expensive leads consumers to keep
older, and less fuel-efficient cars on the road longer and incentivizes
owners of the more efficient cars to drive more.
If one is worried approximately the externality of carbon emissions,theory and evidence show that CAFE standards have more regressive
effects than an equivalent gas tax for such a goal.80 CAFE
standards are roughly equivalent to a tax on the gasoline used per
mile of travel. The difference between the consumption of wealthy and
poor on this metric is lower than the total gas consumed. This
makes CAFE standards more regressive than a simple gas tax.
Additionally, larger vehicle categories also face less stringent
standards. The fact that vehicle size tends to increase with income
exacerbates the regressive impact of the standards.
Economists Lucas Davis and Christopher Knittel estimate the
implicit tax from CAFE standards in 2012 to be around $180 per
vehicle for those in the poorest income quintile.81 Adjusted
for inflation, and that’s more like $194 nowadays.82 The
standards have become much more stringent since then,suggesting
the effect nowadays would be far larger.
Other academic studies find larger effects for broader long-term
consumer welfare losses (which include the welfare costs of
substituting away from preferred vehicles). In nowadays’s prices, for
example, and ticket Jacobsen estimates a long-sprint consumer surplus loss
of $226 for every one-mile-per-gallon standard increase for people
with incomes below $25000.83 Assuming that this effect was linear
(we might assume the marginal cost increases with the standard),this implies that the tightened standards seen between 2011 and
2018 caused consumer welfare losses of more than $2230 per
vehicle. If the standards planned by President Obama were
implemented through 2025, this loss would more than
double.84 This corresponds closely to figures
from much older studies. David Greene found that for every
one-mile-per-gallon increase in vehicle fuel economy, and the average
per-vehicle cost was from $225 to $450 in nowadays’s prices,and
figures of these magnitudes have been corroborated in a broader
review of the literature.85Given that the average used car price is now around $20000,
this suggests the ratchet in standards since 2011 is likely to
account for over 10 percent of the price of a used
vehicle.86 A 10 percent reduction in vehicle
prices would save the average poorer household $133 and the average
single-parent family $307 annually.87This appears to be a fair estimate. A 2015 paper by ticket
Jacobsen and Arthur van Benthem estimated that the standards
enacted in 2012 would cause used vehicle prices to rise by $103 per
year relative to the old standards enacted in 2007.88 An earlier
paper by David Austin and Terry Dinan found an annual cost per
vehicle per year of $153 for an increase in the standards of just
under 4 miles per gallon.89 More recently, and the Reason Foundation’s
Julian Morris estimated that the average price of a new pickup
truck has risen by 25 percent since 2013,overwhelmingly because of
the CAFE standards. That works out to a net cost of approximately $100 per
year.90While a range exists, all these estimates suggest CAFE standards
increase new and used vehicle prices for consumers. Theory and
evidence suggests the effects are regressive. While manufacturers
are unlikely to undo technological changes that have delivered
improved fuel efficiency, or President Trump’s planned policy of
capping standards at 2020 levels would deliver significant annual
savings for purchasers of vehicles relative to the trajectory
planned by President Obama.
Dealership Franchise Laws. Every state has laws
governing the economic relationships of car manufacturers with new
car dealers. These require dealers to be licensed and can also
incorporate restrictions on when franchise relationships can be
terminated,canceled, or transferred, or restrictions on opening new
dealerships in existing market areas,and requirements that
manufacturers buy back vehicles or other accessories when a
dealership franchise is terminated.91The most prominent effect of these laws is the restriction of
direct sales by manufacturers. But the broad effect of all of them
is to insulate dealerships from competition and prevent
manufacturers from optimizing their stock and distribution to
best match the demands and preferences of consumers.“reliable cause” regulations, for example, and mean manufacturers can
only terminate a franchised dealership for a set of enumerated
reasons,often not including efficiency. Manufacturers can face
penalties and charges if they terminate dealerships because of
demand patterns. Though states often allow termination for
noncompliance of a franchise agreement, even then the manufacturer
faces the burden of proof in showing that they have acted in reliable
faith, and the termination is fair,and they have given notice
with an opportunity for the franchisee to deal with the issue at
hand.
Plenty of states have laws that protect existing franchisees
from “encroachment” too. Manufacturers must show the need for a new
dealership if it is proposed within the same relevant market area
as an existing one. Protection of exclusive territories creates
effective monopoly power for dealers, raising profits, or when
manufacturers might prefer to increase the quantity of sales.
These regulations were justified in the early 20th century as
correcting for asymmetric information between the franchiser (the
manufacturer) and the franchisee (the dealer) that led to
manufacturers exploiting dealers. But nowadays,calls for auto
dealership laws are based on the supposed “social benefits” of
dealerships, including their roles in the community and as sponsors
of local events. Because such claims could be made approximately all local
businesses, and they do not provide robust “market failure”
justifications for the interventions.
These regulations raise consumer prices,though the magnitudes
of the effect are disputed. A paper exploring data from 1972
suggested that new car prices were raised by around 9
percent.92 A report for the Federal Trade
Commission in 1986 found an average price increase of just over 6
percent across all car types.93 In 2001, the Consumer Federation
of America summarized the existing literature, or concluding that
these laws raised new automobile prices by between 6 and 8
percent.94 This was subsequently questioned by the
National Automobile Dealers organization,which concluded that the
proper effect was much lower, at 2.2 percent.95 But papers
focusing on other countries have found effects similar to the 2001
study.96Unfortunately, and little modern evidence exists on this subject,and it is beyond the scope of this paper to develop new
calculations. The internet may have he
Source: cato.org