The Economic Rationale for Investing in Children: A Focus on Child Care. Overview of Proceedings


Barbara Broman, Acting Deputy Assistant Secretary for Human Services Policy at DHHS, opened the conference by welcoming participants and underscoring the conference goals of fostering dialogue across disciplines and eliciting new ideas about the rationale for public investment in quality child care. The aim of the conference was to solicit multiple points of view, raise issues, and identify areas in which further research is needed.

Next, to provide an overview of child care quality research and to set the stage for later discussions about the merits of government intervention in the child care market, Deborah Vandell and Barbara Wolfe presented highlights of their paper, "Child Care Quality: Does It Matter and Does It Need to Be Improved?" Their presentation addressed four key questions:

  1. How is child care quality measured?
  2. Does the quality of child care have meaningful effects on children's developmental outcomes?
  3. What is the quality of child care in the United States?
  4. Is there a persuasive economic rationale for improving quality?

Vandell and Wolfe argued that the quality of child care does affect children's health and development and their readiness for school. They described two main ways that child care quality has been measured. First, researchers observe children in their child care settings  including their interactions with other children and adults and the activities in which they participate  to measure indicators of process quality. Second, researchers measure quality by examining the structural characteristics of child care settings, such as child-adult ratios, group size, and the level of caregiver education. Vandell and Wolfe reported that the process quality of child care in the U.S. is, on average, "fair" or "minimal." Moreover, structural quality in typical settings does not meet recommended standards. Finally, they argued that failures in the child care market  including imperfect information, the presence of externalities in the market, and an imperfect capital market, justify government intervention. Such intervention could improve the market's performance and ensure equality of access to quality child care across families at all income levels.

The remainder of the day consisted of three panels in which economists with expertise in labor, education, and health care summarized the arguments for investment in these markets and explored the extent to which they could be applied to the child care market. In the first panel, Robinson Hollister summarized the arguments for public investment in the labor market, with a particular focus on training programs, in his paper, "Rationales for Public Sector Training and Other Investments in Labor Markets and Their Applicability to Public Investments in Child Care" (see Appendix B). Hollister asserted that human capital, equality of opportunity, and merit good rationales for public investment in the labor market applied most directly to the child care market. According to human capital arguments, government intervention is needed because individuals or firms may not invest in developing human capital (such as paying for employment training or high-quality child care) when they do not have good information about the investment, ignore externalities, or are unable to finance the investment. Public investment may also be justified to ensure equal access to opportunity (such as the opportunity to participate in training or quality child care). Merit good rationales assert that public investment in quality child care is warranted because, like elementary education, it is in children's best interests. Hollister presented other arguments for public investment in training programs but found them less relevant for the child care market. These arguments included those related to macroeconomics (public investment in training produces more favorable market conditions, such as lower unemployment and low inflation), segmented markets (public investment in training prepares workers to move out of labor surplus markets into markets with labor shortages), and area redevelopment (public investment in training improves the labor force and thus the economic prospects of workers in a specific geographic area).

In his remarks on the paper, discussant Joseph Hotz said that care must be taken to ensure that these arguments address problems specific to the child care market. For example, he said that distributional rationales alone may not justify public investment in child care. If people are poor and do not have equal access to capital markets, then why invest in child care instead of giving them cash and allowing them to make their own consumption choices? Hotz argued that information problems in the child care market, such as parents' lack of information about child care quality and lack of information about the positive effects of high-quality child care on children's development, are better rationales for government intervention.

Hotz also pointed to parents as imperfect agents for their children as another failure of the child care market. He asserted that, because the buyer of child care (the parent) is not also the consumer of child care (the child), the buyer may not make decisions that fully reflect the position of the consumer. Parents may fail to take into account the potential long-term consequences of their child care decisions. For example, they may underestimate the benefits of quality care that could accrue to the child later in life. He also pointed to the possibility that parents sometimes may not make decisions based on what is best for their child. For example, parents may choose a conveniently located child care arrangement rather than a higher-quality one farther from work or home.

Steven Rivkin presented the second paper, "Public Investment in Education: Lessons for Child Care Policy," in which he summarized the main arguments for public investment in primary and secondary education (see Appendix C). Specifically, he reviewed rationales for public investment in education related to externalities associated with schooling, inadequate information about school quality, equity and fairness, and protection of minors. Rivkin asserted that, although the details may be somewhat different, the arguments for public investment in elementary and secondary education also apply to the education of younger children. Next, Rivkin discussed what is known about the determinants of elementary and secondary school quality, then identified several policy implications for early childhood education. He recommended that additional years of schooling (early childhood education) not simply be added to the existing public school structure. Instead, competition and choice should be encouraged, at least in pilot programs. He also suggested that the government has an important role to play in disseminating information about the quality of early childhood education providers and in conducting evaluation and research on early childhood education.

In her comments on Rivkin's paper, Ann Witte identified additional arguments for public investment in child care. These included use of child care as a way to socialize children and assimilate new immigrants into American society, externalities produced by quality child care, imperfect capital markets (parents cannot borrow money to pay for quality child care), and imperfect information about child care quality and the benefits of quality care. Her arguments also included inequality in accessing quality child care and the potential for producing two generations of more productive workers (parents who trust their child care arrangements and children who benefit from high-quality settings). She also said that parents, acting as agents for their children in the child care market, may prioritize meeting short-term goals over the long-term benefits that may accrue to children who experience high-quality child care. This could occur because parents are not aware of the long-term benefits, are focusing on meeting immediate needs such as food and shelter, or are pursuing their own self-interests.

Witte also raised questions about the efficiency and equity of current government interventions in the child care market. She noted that the government currently funds multiple programs  such as Head Start, public prekindergarten, child care subsidies, and early intervention services  that are not always well integrated and thus are less efficient. These programs have multiple  and, at times, conflicting  goals. Some programs, such as Head Start and public prekindergarten, focus on producing positive outcomes in children, while the child care subsidy system focuses on enabling low-income parents to work. In addition, Witte noted that the mechanisms in place to publicly fund child care may not be equitable. Middle-class families receive government assistance paying for child care through tax credits and deductions, while low-income families receive assistance through child care vouchers and partially funded Head Start and prekindergarten programs. Finally, Witte asked whether the public resources already dedicated to child care could do more to improve the well-being of children if they were distributed more efficiently and equitably.

Janet Currie presented the third paper, "What Can We Learn About Child Care Policy from Public Investments in Children's Health?" (see Appendix D). She reviewed lessons from the expansions of public health insurance for low-income children, drawing heavily on lessons from the State Child Health Insurance Program, and applied those lessons to the child care market. She stressed the importance of setting clear goals for child care policy. For example, she described a lack of clarity about whether the policy goal in children's health is to equalize access to care across socioeconomic groups or to improve child health outcomes. Similarly, conflicting goals (for example, supporting parents' ability to work versus promoting positive child outcomes) could hamper efforts to develop sound child care policy.

Next, Currie identified several potential arguments for government intervention in child care markets. These included liquidity constraints (the inability of some parents to finance quality child care), imperfect information about child care quality (parents' lack of information about the quality of child care settings), and externalities in the child care market (the positive and negative impacts on society of parents' child care choices). Drawing on the experience of public health insurance for children, she also pointed to the possibility that low utilization of means-tested programs, "crowd out" in universal programs, and the need for outreach may be important child care policy issues(3). Finally, she argued for rigorous evaluation of the long-term effects of high-quality child care on child outcomes. Because the family supplies most child care and family caregiving has the largest impact on children's development, she also argued for policies that support good parenting.

In her comments on Currie's paper, Genevieve Kenney concurred with Currie on the efficiency and equity arguments for public investment in the child health care and child care markets. She also agreed with her on the importance of clarifying policy objectives and then tailoring policies to meet those objectives. Kenney noted that current public investments in child care seem to be directed more at supporting parents' ability to sustain their employment than at enhancing children's developmental outcomes. Thus, characterizing child care as an essential work support for low-income parents could serve as a strong impetus for increased public spending on child care.

Kenney also cautioned that, in her experience in the health field, successful initiatives aimed at meeting specific policy objectives tended to be much more comprehensive and expensive than anticipated and involved more than removing financial barriers. Some problems with access to services can be readily addressed through program changes, such as greater outreach efforts and increased information about available services. In both health care and child care, however, family and parental characteristics (for example, parents' education levels) also affect the outcomes of interest, which makes it difficult for government subsidies aimed at reducing financial barriers alone to reduce gaps in access to services across socioeconomic groups. Finally, Kenney cautioned that the consensus among policymakers and the public that low-income children should have access to health insurance is not based primarily on failures in the health care market. Rather, it is based on societal expectations about providing access to health care for all children. With the exception of welfare mothers, the public is ambivalent about the extent to which mothers with young children should work and place their children in child care. Thus, while it is necessary to explore the economic rationale for public investment in child care, it is also important to recognize that arguments for public investment are likely to be driven by other factors, such as societal values about who should care for young children.

Next, John Love, Christine Ross, Deborah Vandell, and Barbara Wolfe reflected on the discussion that took place during the day and outlined a set of next steps for research that could help in formulating economic rationales for public investment in quality child care. Barbara Broman and Jeffrey Evans from the National Institutes of Child Health and Human Development made remarks to conclude the conference. The following sections describe the main issues and next steps that these speakers and other conference participants identified.