Welcome to the first installment of Swamponomics. The column that dives into the week’s morass of top news stories and swims through the stream of economic fallacies that have been accepted as conventional wisdom by swamp creatures for years. We hope this satisfies your demand for real and alternative economic insight not found in the minds of leftists anywhere.
Why is Daycare Expensive?
Senator Elizabeth Warren (D-MA) is touring the country in a bid to sell her $70 billion child care proposal ahead of the 2020 election. Under her plan, the federal government would subsidize and regulate a vast network of daycares. These facilities would be staffed by high-wage workers and charge families based on what they could pay, including free access for those households earning less than 200% of the federal poverty line. The ambitious initiative would be covered by her recommended wealth tax on the so-called super-rich.
No one will argue the fact that child care is expensive, oftentimes even more than tuition. Many families have one parent work just to pay for the full cost of daycare. The other major issue for households is how terrible most American child care centers really are, with most facilities rated “fair” or “poor.”
Did the market fail families? No, it’s the usual suspect: government.
Here is a basic principle from Econ 101: If a product or a service is in immense demand, but the supply is limited, causing the price to skyrocket, then you only need to identify the regulation.
Child care outlets are scarce, and the shortage is only intensifying. With demand ballooning every day, costs soar, leaving parents only two options: Stay home or work like you have a second mortgage. Indeed, child care is one of the most overregulated industries in the country, dating back to 1962 when lawmakers mandated that all these spaces needed state-licensing to receive federal funding. As a result, 40% of the money went towards establishing licensing procedures and, inevitably, child care services declined.
Then there are the other regulations:
Zoning laws.
Health and safety training.
Comprehensive background checks.
Labor code compliance (health benefits, vacation times, tax withholding, and more).
The only way a new supply can enter the marketplace is running a cash-only business through the black market. While the underground economy can be a boon for everyone, this isn’t something you want to do with your kids. Instead, you want transparency, customer reviews, receipts, and anything else that you would expect from a supermarket, a restaurant, or a refrigerator magnet store.
So, is government the answer? Like former President Ronald Reagan famously said, government is the problem. Simply put, the only reasonable solution to the child care conundrum is deregulation. This policy would bring down prices, create new supply, and labor would fill the demand – a generational problem is solved in just weeks.
The Powell Put
Federal Reserve Chair Jerome Powell confirmed that the Federal Open Market Committee (FOMC) would be hitting the pause button on reducing the $4 trillion balance sheet “fairly soon.” Not only that, according to a paper from the Kansas City Fed Bank, the Eccles Building is considering adding to its balance sheet again, which is mostly comprised of Treasurys and mortgage-backed securities (MBS).
Since October 2017, the central bank has removed $448 billion off the books by allowing bonds to mature as part of the Fed’s efforts to normalize monetary policy and gradually raise interest rates.
An official announcement is expected at the conclusion of its next FOMC meeting on March 20.
The purpose of this move is to apply downward pressure on short- and long-term interest rates, which is bad news for savings deposits, cash holders, and the bond market. Credit market yields will be heavily influenced by what the public thinks the central bank will do tomorrow, next month, and next year. This affects credit risk, deficits, economic growth, and inflation. Ultimately, artificially increasing or decreasing rates manipulates the process of saving, investing, and consuming; typically in a descending direction, the booms are produced that generate significant problems in the bust phase.
A better route for Powell to take is to allow markets to determine interest rates. In a truly unhampered market, rates are determined by the supply and demand for savings. The nation would be better off if the Fed, as well as the government, dismissed endeavors to set rates, wages, and commodity prices that contradict what the market indicates. An interventionist policy only distorts and destroys economies.
Protecting SNC-Lavalin Jobs
Canadian Prime Minister Justin Trudeau is in hot water again. Recently, former Attorney General and Justice Minister Jody Wilson-Raybould accused Trudeau and his senior staff of pressuring her into dropping a criminal conviction for SNC-Lavalin on bribery charges. A guilty verdict would have impacted 9,000 jobs in the vote-rich, Liberal-leaning province of Quebec.
Melanie Joly, the Minister of Tourism, appeared on CBC and made a remarkable statement that suggests a grave misunderstanding of the role of government:
“I think fundamentally the question that is behind this entire story is whether or not we're in favour, as a government, to protect 9,000 jobs.”
But should the state be in the business of protecting jobs for a well-connected company? If so, then it’s a case of cronyism and picking winners and losers. This behavior breeds and fosters corruption, waste, and, as we have witnessed in recent weeks, scandals. Instead, governments can create wealth, protect jobs, and be fair to all companies by maintaining a low-tax, low-regulation, and pro-business environment.
One more thing: If the grits really did care about overall job creation, then wouldn’t Ottawa slash regulations, limit the size of government, and rein in spending and deficits? The Liberals have chosen to buy votes and lend a helping hand to their buddies.
Beware the Government
The most dangerous words in the English language are, “Hi, I’m from the government and I’m here to help.” This should invoke fear into the heart of every man, woman, and child, for it is the hand of government that confiscates wealth (Federal Reserve), facilitates corruption (SNC-Lavalin), and makes matters worse (child care). Bad economics isn’t only practiced in Washington’s swamp, but in dirty waters all over the world.
