Senator Mitt Romney’s proposal for universal child allowances caused a ruckus in February. Pro-family libertarians, like Lyman Stone, are excited to simplify the current tax credit system, expand family autonomy, and constrict bureaucracy. Yet economic conservatives, like Oren Cass, balk at welfare without work incentives.
Meanwhile, Democrats are starry-eyed that Republicans are coming to the table on universal welfare programs. Some hope that it is the first step in constructing an entire system of Denmark-style universal programs in America. With free college tuition, child care, pregnancy leave, and pre-K, Denmark may sound like the land of opportunity.
But is it? The debate on universal child benefits is a piece of a larger puzzle that needs to address whether universal benefits are a promise of or detriment to economic opportunity.
It may come as a surprise for some, but the economic upward mobility, or how well a person fares later in life in comparison to their parents, is the same in the U.S. as in Denmark. Let that sink in: A parent’s income determines their child’s adult income every bit as much in Denmark as in the U.S.
In short: If we hope to ensure that where a child comes from does not determine their future success, we should not seek to emulate Denmark’s universal programs.
The first thing to note is that Denmark equalizes income without equalizing opportunity. Denmark and the U.S. have almost equivalent income inequality before taxes and transfers. In other words, Denmark’s post-tax equality of income comes from a heavily progressive tax and transfer system, not through universal programs like free college.
Nobel prize winning economist James Heckman shows why Denmark fails at equalizing opportunity. The first bit is education access. While Denmark’s teachers all get paid the same by law, there is still intense educational sorting. Similar to what happens in the U.S., well off parents move to better neighborhoods where the better teachers live. This creates a correlation between a family’s income and the quality of their child’s education. Mitigating lack of educational opportunity has everything to do with school choice.
The second bit is that universal systems for people after childhood produce disincentives to pursue education. The benefits of pursuing higher education diminish as the returns to education decrease or as public transfers increase. This was proven in the 1990s when Denmark raised the age for receiving universal benefits. College enrollment dropped by 2-3% the exact year young adults became eligible for the new benefits.
One thing we should learn from Denmark is early childhood development. In large part because of their universal child care system, Danish children have higher cognitive skills before the age of 11 compared to U.S. children. Across the globe, cognitive skills acquired by the age of 15 are the biggest influence on adult outcomes. Unfortunately, in Denmark, the impact of improved early cognitive skills on adult income disappears after the age of 11. Why? The disincentives from continued universal programs start to kick in.
The bottom line is that universal programs that start after early childhood are not only too late, but also self-defeating. Universal benefits during childhood generate the cognitive boosts that serve to equalize opportunity early on, but universal programs lasting into late adolescence and adulthood can inhibit opportunity.
That’s where Senator Romney’s child allowance proposal fits into the puzzle: give all parents a set benefit per child no matter their income. As a general rule, I agree with economic conservatives that welfare benefits should incentivize work, as it should for millions of working age people who have dropped out of the labor force. We should be retraining them instead of subsidizing their couch. However, when it comes to family support, libertarians have a point.
For families, investing in children should be the primary goal, rather than incentivizing parent employment. The best way to invest in children is to give their parents options. With the financial assistance, parents could elect to stay at home, work part time, or finance a pre-K education that best suits their children.
Other child care policies like our current tax credit system or universal public pre-K are inferior because they come with restrictions that limit a family’s decision making power over how to care for their child. That is partially why Canada’s universal public pre-K resulted in a decline in child motor and social skills of between 8 and 20 percent. Evidently, replacing parents with government subsidized babysitters benefits neither childrens’ physical nor intellectual development.
In the long run, Romney’s proposal would also have an effect on the non-income part of childhood opportunity – family environment. Economist Raj Chetty repeatedly makes the point that the number one predictor of opportunity later in life is family stability and structure growing up. By eliminating the segment of the child earned income tax credit system that penalizes single people for getting married, allowances would actually increase marriage rates and family stability.
Conservatives should continue to come to the table on universal benefits policies for children. But they need to be armed with a no-nonsense red line for restricting the expansion of universal programs after childhood, lest we risk reversing the precious gains in equalizing opportunity.
