We do the math: High-quality clothes save $
It's counter-intuitive, but you should spend a little more on the stuff they wear every day, because it will save you $ in the end. Cheap clothes look like crap after four or five washings. Good clothes keep their shape, don't shrink, and have better hand-me-down potential and resale value.
Consider this: a pair of Old Navy jeans ($19) lasted for six months before there were holes in the knees and were too short (due to shrinkage). Resale value: $0 Net cost per month: $3.17
A pair of Hanna Andersson jeans ($28 on sale) lasted for sixteen months (and my kid grows fast), looked good through practically weekly washings, and were snapped up at the resale shop. Resale value: $8 Net cost per month: $1.25 (Less if you have more than one kid of the same gender.)
Don't get us wrong -- we love Old Navy. You can't beat it for a $5 t-shirt that will soon be splattered with paint, or for a dress-up outfit that runs the risk of being outgrown before leaving the hanger. (Man, that sucks.) But for the everyday stuff, go for quality. Think Hanna (a Portland favorite, available via Web and catalog elsewhere), LL Bean, Nordstrom, Gymboree, and, in some cases, Gap. I'm sure there are many local kids' clothing shops that are even better than the chains I've listed here (suggestions are welcome in the comments).
Caveat: this applies less to babies, who grow like weeds but aren't running around in the dirt and scuffing their knees.