15 January 2019

Subsidising childcare might boost GDP, but it doesn’t increase welfare


Childcare subsidies are money well spent because they get more women into the labour force. That is the argument made by the Social Market Foundation’s James Kirkup in yesterday’s Times. That sounds sensible enough, but there are two problems with the point James is making. First: why subsidise when it should be possible to reduce that cost without spending government money? The second, broader point involves a bigger question about the size of the economy.

James’s basic argument is simple enough. The British economy faces a labour shortage as a result of decent economic performance and Brexit, there are plenty of women not working in the formal economy, move them into it and we solve that first problem. The barrier to the process is that child care is expensive. Caring for their children keeping women out of that marketplace so let’s subsidise the care.

Except is subsidy the answer? The past two decades have seen the imposition of substantial regulations – and thus costs – on the childcare sector: strict limits on who may do it, for how many children, what training they need and so on. Funnily enough the explosion of these rules coincides with the arrival on the scene of the cost of childcare as a major issue. A useful first step might be to roll back some of that regulation and thus expense.

The second possible mistake being made by James stems from economist Paul Samuelson’s joke that a “when a man marries his maid, GDP falls”. When what were formerly paid services acquired in the market become unpaid within the household then GDP does indeed fall — even if exactly the same activities are taking place.

Similarly, moving childcare out from unpaid household activity into paid for does indeed increase GDP. But has much else changed? To deliberately concoct an example, a child carer may have no more than four charges. A mother of four working to pay for childcare from one other woman – and yes, childcare will almost entirely be done by women in the commercial sector – hasn’t changed very much about what is happening even if GDP has indubitably risen.

So, why fixate on commercialising childcare?

At a deeper level this supports a conclusion often reached by the greener parts of the left: that the creation of GDP is a bad idea. Yes, we do indeed want all of us out here to become ever richer and GDP is a useful proxy of that process. But it’s a proxy, it’s not the thing itself. GDP is only the value added in market transactions, it’s not the economy as a whole at all. It, as above with Samuelson, doesn’t include that unpaid household production at all.

What we want is an increase in wealth from both household and market production, simply shifting from one to the other doesn’t aid us in this task at all. Increased GDP is not our aim, increased wellbeing is.

The other name economists have for this is maximising utility and utility is always defined as an intensely personal thing. Some parents actually enjoy taking care of their own children and, for whatever reason, that is more likely to be the mother not the father. For us to be deliberately enticing such off into paid and market work should not be an aim of public policy.

Instead, the focus should be concentrating on enabling, that utility maximisation, not subsidy to a particular view of what someone thinks people should be doing. Not, for example, shifting people’s labours across that arbitrary GDP measurement line.

There’s nothing wrong with making childcare more affordable by reducing the regulation of it and thus enabling more to maximise their utility through market work. But to subsidise childcare is to miss the point of our goal entirely. The economy we should be aiming for is the product of our individual decisions and desires, not something engineered by those who would have us do as they think we should.

Tim Worstall works for the Adam Smith Institute and the Continental Telegraph.