Journal of Economic Perspectives Volume 10, Number 2 Spring 1996 Pages 189 198 Policy Watch The Food Stamp Program and Welfare Reform Betsey A. Kuhn, Pamela Allen Dunn, David Smallwood, Kenneth Hanson, Jim Blaylock, and Stephen Vogel Public policies are often made without much recourse to economic reasoning. Economists are often unaware of what is happening in the world of public affairs. As a result, both the quality of public decision making and the role that economists play in it are less than optimal. This feature contains short articles on topics that are currently on the agendas of policymakers, thus illustrating the role of economic analysis in illuminating current debates. Suggestions for future columns and comments on past ones should be sent to Daniel Weinberg, c/o Journal of Economic Perspectives, HHES Division, Bureau of the Census, Department of Commerce, Washington, D.C. 20233. Introduction to the Food Stamp Program Food stamps are intended to help low-income families and individuals meet their basic nutritional needs by ensuring they have the means to purchase a nutritionally adequate and palatable low-cost diet. Major changes have been proposed for this program, including how much should be spent and whether the payments should be converted to block grants to increase state flexibility. This article will Betsey A. Kuhn is Acting Director, Food and Consumer Economics Division; Pamela Allen Dunn is a Visiting Scholar from the Department of Agricultural and Resource Economics, University of Maryland at College Park, College Park, Maryland; David Smallwood is Acting Chief of the Food Consumption, Nutrition, and Assistance Branch; Kenneth Hanson is Economist, Rural Economy Division; Jim Blaylock is Acting Associate Director, Food and Consumer Economics Division; and Stephen Vogel is Economist, Rural Economy Division. All authors are at the Economic Research Service, U.S. Department of Agriculture, Washington, D.C.
190 Journal of Economic Perspectives explore the impacts of food stamp reform on food spending, income support, welfare reform, the agricultural sectors and the rest of the economy. The Food Stamp Program is the largest noncategorical federal welfare program, serving approximately 27 million people a month including 14 million children and costing more than $24 billion in 1995. Some basic characteristics of the program and of households receiving this assistance are presented in Table 1. In particular, most of the money spent on food stamps is federal. Benefits under the Food Stamp Program are entirely federally funded, while the costs of program administration are shared by federal, state and local governments. The number of individuals participating in the Food Stamp Program rises and falls at about the same rate as the number of people living in poverty (Kinsey and Smallwood, 1994). To be eligible for food stamps, households must meet both asset and income tests. 1 All households may have up to $2,000 of countable resources, such as bank accounts; $3,000, if at least one household member is age 60 or older. Income tests require that gross monthly income be at or below 130 percent of the Federal Poverty Guidelines and net monthly income be at or below 100 percent of the guidelines. Households with an elderly or disabled member are exempt from the gross income test. Net income is computed by subtracting the following deductions from the sum of earned and unearned income: a standard deduction available to all households, an earned income deduction, a medical expense deduction limited to the elderly and disabled, a shelter expense deduction and a dependent-care deduction for households engaged in work or training. Food stamp benefit levels assume that households participating in the program devote about 30 percent of their net income to food purchases. In fact, the lowest income quintile actually spends about one-third of its income on food, compared to under 10 percent for the highest income quintile (U.S. Department of Agriculture, 1995a). The difference between the household's expected contribution to its food costs and an amount judged to be sufficient to buy an adequate low-cost diet is provided as food stamp coupons. This maximum food stamp benefit level is derived from the Thrifty Food Plan, the lowest cost of four plans designed by the U.S. Department of Agriculture. The maximum benefit amount varies by household size and is adjusted annually for changes in the cost of the Thrifty Food Plan. In 1995, singleperson households were eligible for a maximum of $115 worth of coupons a month, and a family of eight for a monthly maximum of $695 in coupons. The first U.S. food assistance programs were established during the depression of the 1930s. The government purchased surplus agricultural commodities and distributed them to the poor, with the goal of stabilizing farm prices and incomes. Not until the 1960s did food aid programs begin to focus on the food and nutritional needs of society independent from the support of farm programs. The Food 1 The Food Stamp Program defines a recipient household as one in which all members of the household customarily purchase and prepare their meals together. This definition does not necessarily include all the individuals who live together in a single dwelling unit, and it is a broader definition than that used by Aid to Families with Dependent Children and Supplemental Security Income.
Betsey A. Kuhn et al. 191 Table 1 Program and Participant Information for the Food Stamp Program Stamp Act of 1964 established the first coupon-based system allowing participants to buy a wide variety of food with coupons rather than restricting their consumption to surplus commodities. Participants had to purchase food stamp coupons for an amount based on income and household size. In doing so, participants would receive some free "bonus stamps." National eligibility standards were established in 1971, and all states were required to inform low-income households about the availability of food stamps. In 1974, if any area of any state participated in the program, then the entire state had to participate. In 1977, the requirement that households purchase their food stamps with cash was eliminated, due to concern over low participation rates. It was believed that many needy households had difficulty obtaining enough cash each month to meet the purchase requirement. The elimination of the purchase requirement did not change the net dollar value of the subsidy received; households received fewer coupons, but did not have to pay for them. This legislation added an estimated 3.6 million participants to the Food Stamp Program (Ohls and Beebout, 1993). This was the most recent change to the fundamental structure of the program. The Food Stamp Program is the largest public assistance program that has
192 Journal of Economic Perspectives uniform national standards and is available to all households on the basis of financial need, regardless of age, family type or disability. For many low-income households, food stamps provide a major share of the family's total purchasing power. For a typical welfare family consisting of a single female head of household with two children, food stamps comprise about 25 percent of the family's household resources. In states that offer relatively low benefits through the Aid to Families with Dependent Children (AFDC) program, this share can exceed 50 percent (Ohls and Beebout, 1993). Impact of Likely Cuts in the Food Stamp Program All of the reform proposals considered by the 104th Congress involved cuts in the size of the Food Stamp Program. The cuts range from $2 to $5 billion per year and $11 to $35 billion over the period 1996 2000 from baseline funding (U.S. Department of Agriculture, 1995b; Smallwood et al., 1995a,b). As of the time of this writing, the most likely cuts in the size of Food Stamp Program benefits seem likely to be about $20 billion over the period from 1996 to 2000. Reductions in food stamp benefits will decrease spending on food and other goods by low-income households. Food stamps do increase total spending on food, although the increase is less than the amount of the benefit. The marginal propensity to consume food from food stamps has been estimated in the range of.20 to.45 (Fraker, 1990; Ohls and Beebout, 1993; U.S. Department of Agriculture, 1993, 1995a,b). While all of the food stamps are spent on food, funds previously spent on food are reallocated to other needs, such as rent, clothing or medical care. This marginal propensity to consume implies that the initial impact of a $20 billion decrease in Food Stamp Program benefits would be a decline of $4 to $9 billion over five years in retail food spending and a decline of $16 to $11 billion over five years in nonfood spending (Smallwood et al., 1995a). Preliminary research by the Economic Research Service calculated that this reduction in retail food expenditures would reduce gross farm income by $1 to $2 billion over the period 1996 2000, with the largest impacts on meat, dairy and vegetables (U.S. Department of Agriculture, 1995a). In addition to a decline in gross farm income, falling commodity demand causes the cost of farm programs (under current law) to increase by about $187 to $420 million over the five-year period. We used a modified computable general equilibrium model based on Robinson, Kilkenny and Hanson (1990) to simulate economy-wide output and employment impacts from this reduction in Food Stamp Program benefits. Starting from a 1993 base, the model simulates the adjustments that would occur to the economy, given an annual average decline in the Food Stamp Program (a $20 billion cut over five years is treated as a $4 billion annual average cut). The model allows prices and wages to adjust to restore full employment and to readjust supply and demand for goods and services. The model also assumes that budgetary savings are returned
Policy Watch: The Food Stamp Program and Welfare Reform 193 to the economy either through deficit or tax reductions. With tax reduction, demand and, hence, jobs shift primarily into consumer goods and services. With deficit reduction, an increase in investment leads to a shift into durable goods and construction. Returning budget savings to the economy is the basis for maintaining the same total employment in the long run. 2 Assuming that savings from shrinking the Food Stamp Program are used for deficit reduction, farm sector annual output losses are estimated to be $0.2 billion (0.1 percent of sector output) to $0.5 billion (0.2 percent). Food processing and distribution sector annual output losses amount to $0.9 billion (0.15 percent) to $1.9 billion (0.3 percent). There is also a loss in output among service sectors of $1.3 billion to $0.7 billion (0.03 to 0.02 percent) as expenditures on consumer services are reduced to supplement food expenditures. Annual output in durable manufacturing expands by $2.3 billion (0.1 percent), while construction expands by $2.0 billion (0.25 percent). 3 Employment impacts display the same pattern the farm sector loses 3,000 to 6,000 jobs, food processing and distribution lose 14,000 to 25,000 jobs, services lose 11,000 to 19,000 jobs, durable manufacturing gains 15,000 to 16,000 jobs, and construction gains about 18,000 jobs. Cashing Out the Food Stamp Program In several of the options before Congress, states will have an option to receive a block grant for food stamps instead of participating in the federal program. If states elect to replace the Food Stamp Program with a block grant, many expect that states will also "cash-out" the program, which means substituting income assistance in place of coupons that must be spent on food. Proponents of cash-out argue that it reduces administrative expenses and enables low-income households to allocate their limited resources more efficiently among food, shelter, clothing and medical care. Cash benefits are also believed to reduce the stigma associated with using food stamp coupons (Ranney and Kushman, 1987), so it may increase participation rates. Opponents of cash-out believe that the current restriction, namely that food stamps must be spent on food, is the cornerstone of the political support for the program. This political support has come from food retailers, commodity groups, farm groups, and those more comfortable with providing food rather than direct cash support. In fact, food spending does increase more when assistance is provided in the form of food stamps instead of cash. The difference between the marginal propensity to consume food out of cash versus stamps is referred to as the "slippage" 2 Our analysis does not account for dynamic growth effects from investment into private capital or from potential changes in work incentives. 3 Output per worker differs across sectors. The reallocation of jobs from low-productivity sectors, agriculture and services, into high-productivity sectors, construction and durable goods manufacturing, leads to greater total production. For the tax cut scenario, see Smallwood et al. (1995a).
194 Journal of Economic Perspectives effect. On one hand, it is true that practically all poor households receiving food stamps spend more on food than their monthly allotment. Therefore, when they receive food stamps, they are able to allocate some income previously spent on food for other uses, such as rent, medical care or clothing. However, cash is clearly more fungible than food stamps and easier to transfer to other uses. The empirical evidence indicates that slippage falls in the range of 15 to 30 percent of benefits (Fraker, 1990; U.S. Department of Agriculture, 1991). For example, consider a food stamp program whose size is unchanged, but that is converted from a coupon to a cash system. Assume food stamp benefits total $25 billion a year, or $125 billion over five years. With the marginal propensity to consume out of food stamps between.20 and.45, the increased food spending from the present program will be $25 billion to $56 billion. However, given 15 30 percent slippage, the marginal propensity to consume food out of cash will be.05 to.15, and increased food spending from a cash assistance program would only be $6.25 billion to $18.75 billion. In other words, cashing out food stamp benefits would reduce food spending by $18.75 billion to $37.25 billion over the five-year period from 1996 to 2000. Such a decline in food spending would be two to four times larger than the initial spending cuts. Even assuming the larger marginal propensity to consume out of food stamps of.45, this amounts to only a $9 billion reduction in food spending over five years. Thus, the economic and employment impacts of cashing out food stamps could be two to four times as high as the initial spending cuts. Of course, if cashing out food stamps weakened political support for these payments as opponents of cashing out fear then the eventual cutbacks would be still larger. Interaction with Other Welfare Programs The main welfare programs available to low-income households are the Food Stamp Program, Aid to Families with Dependent Children (AFDC), Medicaid and Supplemental Security Income (SSI). These programs are inextricably linked by income eligibility, family composition, and/or administration. For instance, the Food Stamp Program and AFDC are typically administered by the same state or local office, and the food stamp recipient population is primarily composed of recipients of other government benefits. For most individuals participating in the Food Stamp Program, food stamps represent a second or third form of assistance. Fewer than 20 percent of food stamp households rely solely on nongovernmental sources for their cash income (U.S. House of Representatives, 1994). Other welfare programs vary considerably across states, with important implications for the Food Stamp Program. In the AFDC program, for example, states define benefit needs, set their own benefit levels, establish income and resource limits (within federal guidelines) and administer the program. The result has been a wide variance in AFDC transfers. Peterson and Rom (1990) estimate that over the period 1940 1990, the variation in AFDC payments among states has remained
Betsey A. Kuhn et al. 195 fairly stable and large, nearly $300 a month for a family of three. For example, the maximum AFDC grant in Mississippi, Alabama and Texas is less than $200 a month, while the maximum grant in New York, California and Connecticut exceeds $570 per month (U.S. House of Representatives, 1994). But as the level of cash assistance declines, food stamp benefits will increase, since food stamp benefits are based on income. Whenever cash assistance benefits are reduced by one dollar, food stamp benefits increase by about 30 cents. The strategic behavior by states to shift income support toward food stamps has received little attention. In one study, Moffitt (1990) found that the decline in real benefits in the AFDC program has been precipitated by state legislatures, which have allowed federally funded food stamps and federally subsidized Medicaid to substitute for AFDC. In another study, Peterson and Rom (1990) reported that the Food Stamp Program reduced interstate variation in combined total benefits by roughly one-half, compared to interstate variation prior to the creation of food stamps. Entitlement Status and Automatic Stabilizer Entitlements are programs in which an individual who meets the criteria for participation in the program is entided to its benefits. They are typically contrasted with programs subject to fixed spending limits. The Food Stamp Program is technically not an entitement; it is subject to an annual appropriation. In practice, however, it functions as an entitlement. States are required to serve all eligible people, and Congress has always appropriated sufficient funds for full operation of the program (Ohls and Beebout, 1993). As a de facto entitlement, expenditures on food stamps tended to rise and fall with the poverty rate, which often moves countercyclically. However, if food stamps are converted into a fixed block grant, then spending in this area would not adjust as the economy fluctuates. This raises the issue of whether food stamps would continue to function as an automatic stabilizer to the economy and whether converting them to a fixed block grant might exacerbate economic fluctuations. Little work has been done in this area, but there is some evidence that food stamps function as both a fiscal and a monetary stabilizer. Blank and Ruggles (1993) note that women who decide to participate in the program receive benefits almost immediately, which implies that the program reacts fairly quickly to economic downturns. Hamermesh and Johannes (1985) found that food stamps were substitutable for money, and thus food stamps cause both the money stock (broadly understood) and disposable income to increase during a recession. Our work on the short-run employment impacts associated with reductions in the size of the Food Stamp Program indicates that a $1 billion reduction in the size of food assistance programs is associated with a reduction of about 25,000 jobs
196 Journal of Economic Perspectives nationally (U.S. Department of Agriculture, 1995b). 4 This implies that rises and falls in food stamp spending have the appropriate short-term effects to help stabilize the economy. We do not want to overstate the ability of the Food Stamp Program to function as an automatic stabilizer. From 1992 to 1995, for example, food stamp spending increased even though the economy was in an upturn. The reason was straightforward: economic growth was accompanied by a widening income distribution, and as the number of people living in poverty increased, so did food stamp spending. Movements in food stamp spending and the economy are not always inversely related to each other. However, the number of people receiving food stamps did decline as the economy grew in 1995 (Dixon, 1995). Combining Cuts in Food Stamps, Cash-Out and Interactions with Other Welfare Programs In this section, we combine four ways food spending will be affected by overall welfare reform 1) direct reductions in food stamp benefits; 2) changes in the form of assistance; 3) changes in food stamp benefits due to changes in cash assistance through other programs; and 4) reductions in cash assistance in other programs and offer a rough scenario of the overall impact. Table 2 contains estimates of changes in benefits associated with one of the leading proposals, the Personal Responsibility and Work Opportunity Act of 1995. 5 The first row shows baseline federal funding for the Food Stamp Program out to the year 2000. The second row shows the level of funding if all states elect a block grant, which does not increase, thus resulting in a fall of $11 billion in federal spending on food stamp programs from 1996 to 2000. The third row gives the proposed reductions in cash assistance paid through AFDC, SSI and child support programs, which total approximately $37 billion over five years. The fourth row shows the increase in food stamp benefits (if it remains an entitlement) as the cash support programs are reduced. We ran 10 scenarios in which we varied several key parameters: how many states elect block grants; the amount of funds diverted from food benefits; how consumers respond to food assistance or supplementation; and how consumers respond to different types of food assistance or slippage (U.S. Department of Agriculture, 1995b). To give a sense of our results, consider one mainstream scenario. States are offered an option to convert food stamps to a block grant, and 25 percent of 4 This data is based on 1987 data. A preliminary estimate based on 1993 data suggests a reduction of approximately 14,000 jobs nationally. 5 In January 1996, President Clinton vetoed the Personal Responsibility and Work Opportunity Act of 1995. At the same time, the administration presented a new balanced-budget proposal calling for a balanced budget by 2002. Reductions in the Food Stamp Program would total $20.6 billion over seven years, with no block grant option for the states.
Policy Watch: The Food Stamp Program and Welfare Reform 197 Table 2 Proposed Food Stamp and Cash Assistance Funding, 1996 2000 states take the block grant option. These states then take 7 percent of the food stamp block grant, half of the funds that can be diverted to other uses such as wage supplements or job training, and use it for those purposes. This step alone would reduce food stamp benefits by $19.7 billion over the five-year period. At the same time, cash support payments like AFDC, SSI and child support programs are cut by $37 billion over five years, as mentioned earlier. This lower income makes recipients eligible for increased food stamp benefits of $4.5 billion. Thus, the overall effect on food stamp benefits would be a drop of $15.2 billion. The decrease in food stamp and cash benefits reduces retail food spending by $5 $10 billion over five years. 6 Gross farm income falls by $1.3 $2.8 billion, and farm program costs increase by $230 $495 million from 1996 to 2000. Short-term economy-wide annual impacts range from decreases of $3.2 $5.3 billion in the output of the food sector, and decreases of $16.2 $14.5 billion in the nonfood sector. If we assume that Food Stamp Program savings are used to support a tax decrease for all consumers, longterm cumulative impacts over the period 1996 to 2000 range from decreases in output of $4.0 $11.l billion in the food sector to increases in output of $7.5 $10.6 billion in the nonfood sector. Changes in food stamps, block grants, state flexibility, AFDC, Medicaid and other assistance programs will affect not only the income and incentives of the poor, but also the mix of jobs and extent of stability in the economy as a whole. Given the restructuring of AFDC and Medicaid presently under discussion, the impor- 6 This decline in food spending is roughly equal to the drop that would result from a $20 billion cut in food stamps over five years, which was our first example in this paper. Thus, it is less than what would result if food stamp benefits were cashed out all over the country, as discussed in that section of the paper.
198 Journal of Economic Perspectives tance of understanding the relationship of these programs to food stamps and to each other will only increase. This paper has benefitted from the thoughtful comments of Alan Auerbach, Alan Krueger, William Levedahl and Timothy Taylor. References Blank, Rebecca M., and Patricia Ruggles, "When Do Women Use AFDC & Food Stamps? The Dynamics of Eligibility vs. Participation." National Bureau of Economic Research Working Paper Series No. 4429, 1993. Dixon, Jennifer, "Food Stamp Rolls Down by 1 Million Since '94," The Washington Post, June 1, 1995, 21A. Fraker, Thomas M., The Effects of Food Stamps on Food Consumption: A Review of the Literature. Washington, D.C.: Mathematica Policy Research, 1990. Hamermesh, Daniel S., and James M. Johannes, "Food Stamps as Money: The Macroeconomics of a Transfer Program," Journal of Political Economy, 1985, 93:1, 205 13. Kinsey, Jean D., and David M. Smallwood, "Domestic Food Aid Programs." In Hallberg, M., R. Spitze, and D. Ray, eds., Food, Agriculture and Rural Policy into the Twenty-First Century: Issues and Trade-Offs. Boulder, Colo.: Westview Press, 1994, pp. 135 52. Moffitt, Robert, "Has State Redistribution Policy Grown More Conservative?," National Tax Journal, 1990, 53:2, 123 42. Ohls, James C., and Harold Beebout, The Food Stamp Program: Design Tradeoffs, Policy, and Impacts. Washington, D.C.: Urban Institute Press, 1993. Peterson, Paul E., and Mark C. Rom, Welfare Magnets: A Case for a New National Standards. Washington, D.C.: Brookings Institution, 1990. Ranney, Christine K., and John E. Kushman, "Cash Equivalence, Welfare Stigma, and Food Stamps," Southern Economic Journal, April 1987, 53, 1011 27. Robinson, Sherman, Maureen Kilkenny, and Kenneth A. Hanson, "The USDA/ERS Computable General Equilibrium (CGE) Model of the United States." Economic Research Service Staff Paper No. AGES-9049, 1990. Smallwood, David M., et al., "Proposed Reforms in the Food Stamp Program: Economic Impacts on Agriculture and the Economy." Economic Research Service Staff Paper No. AGES9516, 1995a. Smallwood, David M., et al., "Proposed Reforms in the Food Stamp Program: Economic Impacts on Agriculture and the Economy of the Work Opportunity Act of 1995." Economic Research Service Staff Paper No. AGES-9520, 1995b. U.S. Department of Agriculture, Agricultural Research Service, "The Effects of Food Stamps on Food Consumption: A Review of the Literature," Family Economics Review, 1991, 4:3, 28. U.S. Department of Agriculture, Economic Research Service, "The Economics of Food Assistance Programs," briefing paper, Economic Research Service, 1995a. U.S. Department of Agriculture, Economic Research Service, Food and Consumer Service, "The Nutrition, Health, and Economic Consequences of Block Grants for Federal Food Assistance Programs," joint staff report, Economic Research Service and Food and Consumer Services, 1995b. U.S. Department of Agriculture, Food and Consumer Service, "New Directions in Food Stamp Policy," papers presented at the Food and Consumer Service Research Conference, June 1993. U.S. House of Representative, Committee on Ways and Means, 1994 Green Book. Washington, D.C.: U.S. Government Printing Office, 1994.