Wednesday, September 25, 2013

Why Poverty Hasn't Taken a Good Licking From Food Stamps....Oh, Snap!

Poverty is no fun. Neither is food insecurity. Not knowing where your next meal is coming from must be a real drag, especially given the issues with food security since the recession. With the House's recent passing of Nutrition Reform and Work Opportunity Act of 2013 (H.R. 3102), which will provide $39 billion in food stamp spending cuts over the next ten years, I had to wonder whether food stamps are a viable solution to the nation's culinary woes or not.

First, let's delve into how food stamps work. Food stamps are a form of financial assistance provided to low-income families for the purposes of purchasing food, and economically speaking, they function as a social in-kind transfer. What makes an in-kind transfer different from a cash transfer is that the individual does not receive direct cash, but rather a good or service [at a reduced rate]. Historically, this sort of in-kind transfer has been in the form of stamps, although recently, there has been increased usage of providing the subsidy in form of an Electronic Benefit Transfer (EBT). Not only does an EBT reduce the rate of fraud, but it also removes the stigma of using the in-kind transfer in the first place, although given that over 47 million citizens (15% of the population) derive benefit from SNAP , the social stigma seems to be dissipating.

So do food stamps make for good public policy? Let's ask ourselves what is good about this policy. As the Left will argue, the money goes to people in need, and it increases the wealth of low-income families. At least right now, SNAP-related fraud is at a near-historic low (1.2%), which is exceptionally low for a government program. The program is popular. The program also compensates for undesirable consumer preferences, e.g., alcohol, smoking, which proponents use to justify the paternalistic intervention (Currie and Gahvari, 2007). According to the USDA (because we all know that they would never have a vested interest in this outcome), the multiplier effect is 1.84.

If the multiplier effect is that great, why not just continue generating food stamps? Probably because the supposed multiplier effect within a transfer program generates economic effects  is net zero. There is a reason why they call the GDP "Gross Domestic Product." Food stamps do not add to the economy because there is no net production.

Aside from lack of wealth creation, there are other issues with food stamps. The Government Accountability Office (GAO) found that the effects of SNAP on hunger relief are inconclusive (GAO, Domestic Food Assistance, p. 27), which is hardly desirable considering that hunger relief is supposed to be SNAP's primary goal. Availability does not translate into healthier diets (GAO, p. 28), which is unsurprising because the program isn't paternalistic enough to regulate participants' diets. Direct cash transfers have smaller administrative costs than in-kind transfers. In the instance of SNAP, administrative costs are $4.8-5.7 billion per annum, which ends up being nearly 6% of total costs. There is lack of transparency, as well as bureaucratic overlap (GAO, p. 41) that creates redundancies. Another issue with food stamps is that they are economically inefficient because cash transfers typically lead to higher indifference curves, i.e., higher utility, because food stamps create a kinked budget curve.

Much like with unemployment benefits, food stamps cause reduced employment and average working hours (Hoynes and Schanzenbach, 2010), which is foreseeable because that sort of wealth transfer creates a disincentive to work. Body mass index increased for 28% of the participants. There is also the issue of payment error rates, which when combined with the fraud and the administrative costs, exacerbate the inefficiencies.

There is also the matter of the cost of the program. The Congressional Budget Office (CBO) recently published a report that the Supplemental Nutritional Assistance Program (SNAP) will cost $724 billion over the next ten years. The plus side is that the cost of SNAP is a small percentage of the country's overall GDP, although I would argue that the federal budget is too large as it is. Although a lot of the increase in food stamp production is due to the recession, the inefficiencies related to food stamps go well beyond the mere need for food stamp reform. Food stamps are symptomatic of just how much entitlement programs are driving up the nation's debt-to-GDP ratio and causing increased dependency on Big Government. What was initially a temporary safety net turned into a form of subservience (see chart below, which shows that the participation isn't going to decrease all that much, certainly to its pre-recession levels, by 2019). As FDR said back in 1935, "The lessons of history, confirmed by the evidence [immediately before me], show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre."

Even with all of that to consider, my biggest kvetch would have to be that the rate of poverty has not decreased since the onset of the recession (Census, Poverty Data, Table 5). Food stamps are not pulling people out of poverty; they perpetuate the status quo. There would be better alternatives to food stamps, not mention better topics to focus on in order to alleviate hunger issues.

One could argue that direct cash transfers are more economically efficient than in-kind transfers, which is true, but then there's the who redistributionist mentality of which I am not a huge fan. I'm not saying that poverty is going to be fully eliminated anytime soon, but there was a time when food pantries, feeding centers, and faith-based and other charitable organizations could adequately handle the poverty issue before government largesse began back in the New Deal and continued during LBJ's War on Poverty, but increasing their role would mean that the government would have to stop crowding out the private sector.

Although this can be expounded upon in multiple blog entries in the future, perhaps we should be looking at other factors would make the issue of food security less burdensome. The government could remove [or lower] minimum wage or take it easy on regressiveburdensome regulations so employers would feel more amenable to hiring employees. Alternatively, the government could eliminate agricultural subsidies that distort unhealthy food prices so that healthier foods could be cheaper.  Looking at the expenditures for the lowest quintile, I'd opine that consumers can also look at how they spend money and take more personal responsibility for their expenditures, or even work on their propensity to save because spending more than you have is not a sustainable way of life. The Fed could work on its monetary policy so that the dollar stops devaluing. There are multiple ways to approach the improvement of overall economic wellbeing so that individuals have more purchasing power, and this is by no means an exhaustive list. However, given the economics behind the program, there is no way that SNAP will ever stamp out poverty.

October 16, 2013 Addendum: The Cato Institute just came out with a policy report on reforms for SNAP. Worth the read!

October 8, 2015 Addendum: The National Bureau of Economic Research recently released a working paper showing that SNAP doesn't reduce obesity.

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