Wednesday, February 8, 2012

Supporting Bad Habits With Public Money

Copyright, The New York Times Company

Florida and a few other states are considering additional restrictions on food stamp and welfare payments to the poor, such as prohibiting the purchases of snacks and sweets with food stamps and prohibiting withdrawals of welfare cash at casinos and strip clubs.

Economists have two basic principles they use in these cases: fungibility and screening, and both point to unintended consequences of the sin-based restrictions.

The principle of fungibility says that dollar bills are equivalent, regardless of their source. If a customer brings in his wallet $100 he received from the government and another $100 from a job, the cashier at the store cannot tell whether the customer is spending his government money or his employer money.

For many years, the Department of Agriculture tried to affect this situation by making the government “money” a different color – that’s why they were called food stamps – and merchants were not permitted to accept food stamps for alcoholic beverages, tobacco and other prohibited items.

But there is hardly any difference between giving somebody $20 to buy beer and giving that same person $20 earmarked for food, because the earmarked funds allow her to spend $20 less of her own money on food, leaving $20 left to buy beer, if she wants. Earmarked funds can be as good as unrestricted money.

The only situation when food stamps could really increase food purchases is when the value of stamps exceed what beneficiaries would be willing to spend on food on their own. The Department of Agriculture, which runs the food-stamp program, estimates that only 30 percent of beneficiaries are in this situation.

The same analysis applies to proposed restrictions on snacks and sweet foods. A family receiving a $200 monthly food-stamp benefit that spends $300 a month in total on all food – $200 of food stamps plus $100 of its own – can still buy its usual monthly amounts of snacks and sweet foods under the more restrictive rules, as long as the snacks and sweets part of the monthly food bill is no more than $100.

Perhaps a few food-stamp beneficiaries, absent restrictions, spend a large fraction of their food budget on snacks and sweets (I am not aware of any U.S.D.A. analysis of the frequency of such cases). They would find the food-stamp program less attractive and might even let some of their food stamp benefits go unused.

The U.S.D.A., or specific states like Florida that put additional restrictions in place, could respond by increasing the total food-stamp benefit, but that brings about another unintended consequence, counterproductive screening.

The principle of screening recommends introducing program attributes that are more attractive to the target population than to the rest of the population or attributes that are less unattractive to the target population than to the rest of the population.

For example, a public housing project intended for poor members of a particular ethnic group might be built in the poor part of that group’s neighborhood, even if there might be other places to build more efficiently, so that the project is more accessible to the target population and less accessible to others.

The food-stamp program, like much of the social safety net, is intended for the poor. Most Americans, even many whose incomes are temporarily low, are not poor. As a result, the program needs methods for distinguishing households that are truly poor from households that are not. It used to have an “asset test” – people with money in the bank and other non-trivial financial assets were not eligible – but most states have eliminated that test in the last few years.

If it were true that preference for snacks and sweets are correlated with poverty – that people who are not poor allocate more of their food budget to “healthy” foods – then the snacks and sweets restriction tends to make food stamps less attractive for the poor, but not less attractive for those not poor. The result could be that the snacks and sweets restriction increases the fraction of beneficiaries for whom the program is not intended.

By definition, the economic principles of fungibility and screening do not account for an important political principle – that the food-stamp program and other safety-net programs must continue to have political support, so that Congress and the states continue to be willing to allocate tax dollars to them. That’s the only justification I see for taking aim at the poor with restrictions on purchases of snacks, sweets and other items thought to be bad for you.


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