Tuesday, February 15, 2005

The Economics of Food Stamps

So, my current students are now feeling the effects this new-found curiosity of the different effects of giving the poor food stamps versus a cash subsidy of some equivalent value (i.e. so my honest indigent can buy his beer). Their second problem set of the semester is now based on this case study of the Food Stamp Program, with the economic question:

Would a switch to a comparable cash subsidy increase the well-being of food stamp recipients? Would the recipients spend less on food and more on other goods?

Here is some interesting background for you:

The Food Stamp Program (FSP) provides nutrition assistance benefits to low-income households that can be used to purchase foods from authorized food retailers. When Congress created the FSP in the early 1960s, it envisioned a program to provide low-income Americans with access to a healthy, nutritious diet.

Nearly 11% of U.S. households worry about having enough money to buy food and 3.3% report that they suffer from inadequate food (Sullivan and Choi, 2002). Households that meet income, asset, and employment eligibility requirements receive coupons that can be used to purchase food from retail stores. The Food Stamps Program is one of the nation's largest social welfare programs. Initial data from 2004 shows that 23,854,000 people participated, receiving approximately $86 dollars per month. The program provided 24,627.8 million dollars in benefits and cost the federal, state, and local governments 27,151.4 million dollars.

Food Stamps can purchase only certain kinds of foods:

Households CAN use food stamp benefits to buy:
Foods for the household to eat, such as:
* breads and cereals;
* fruits and vegetables;
* meats, fish and poultry; and
* dairy products.
* Seeds and plants which produce food for the household to eat.
Households CANNOT use food stamp benefits to buy:
* Beer, wine, liquor, cigarettes or tobacco;
* Any nonfood items, such as:
* pet foods;
* soaps, paper products; and
* household supplies.
* Vitamins and medicines.
* Food that will be eaten in the store.
* Hot foods

In some areas, restaurants can be authorized to accept food stamp benefits from qualified homeless, elderly, or disabled people in exchange for low-cost meals. Food stamp benefits cannot be exchanged for cash.

Since the food stamp programs started in the early 1960s, economists, nutritionists, and policymakers have debated "cashing out" food stamps by providing checks or cash instead of coupons that can be spent only on food.

Legally, food stamps may not be sold, though a black market for them exists. Because of technological advances in electronic fund transfers, switching from food stamps to a cash program would lower administrative costs and reduce losses due to fraud and theft.

The question that economists ask about the program is:

"Would a switch to a comparable cash subsidy increase the well-being of food stamp recipients? Would the recipients spend less on food and more on other goods?"

In order to analyze this, we must identify the costs and benefits of offering food stamps versus the costs and benefits of offering cash transfers to the poor. According to the Food Stamp Nutrition Education Framework,

A USDA study from 2000 indicates many low-income adults do not know specific facts related to what types of dietary practices are healthful, such as what specific foods they should eat to maintain a healthy diet (Gleason and Olson, 2000). More recently, attention has focused on providing nutrition education and services to program participants to address the rising epidemic of overweight and obesity in America. Here, too, the need is great-for example, 65% of adults in America are overweight-putting them at risk for serious health problems including heart disease, hypertension, diabetes, and some cancers.

Low-income households have a higher prevalence of health conditions related to poor nutrition than households with higher incomes. Women with lower family income levels are 50% more likely to be obese than those with higher family incomes. And, while obesity rates have doubled in children and tripled in adolescents over the last two decades, they have increased the most among those in the lowest income levels, especially African American and Mexican American children (Ogden, Flegal, Carroll and Johnson, 2002; CDC, 2002).

Empirical Evidence

According to Franker (1990), an additional dollar of income causes an average low-income household to increase its food expenditures by $0.05 to $0.10, and an additional dollar of food stamps leads to a $0.20 to $0.45 increase in food expenditures.

Experiments by various researchers (Moffit, 1989; Fasciano, Hall, and Beebout, 1993; and Carlson, 1993) show that responses to trading food stamps for cash have had different effects by area and demographic group. In Puerto Rico, for example, giving cash instead of food stamps had no detectable effect. In 75% of studies in the U.S., researchers found that giving cash reduces household food expenditures, with magnitudes varying from the negligible to 17%. Three studies of the nutrition effects of substituting cash for food stamps found no effect in Alabama, a 5% drop in San Diego, and a 6% to 11% decline in nutrients in Washington State.
Other studies show significant declines in administrative costs due to fraud and theft by cashing out food stamps. In Alabama, for example, administrative costs fell from $2.05 to $1.03 per case per month.

Lastly, I should note that according to one study, 54% of families with children and incomes below the poverty line participated in the Food Stamp Program in 1999.

Centers for Disease Control. 2002. "Health, United States" National Center for Health Statistics.

Gleason, P, Rangarajan, Olson C. 2000. "Dietary Intake and Dietary Attitudes Among Food Stamp Participants and Other Low-Income Individuals." USDA.

Ogden, CL, Flegal, KM, Carroll, MD, and Johnson, CL. "Prevalence and trends in overweight among US children and adolescents, 1999-2000" JAMA 288: 1728-32.

Sullivan, Ashley F., and Eunyoung Choi. 2002. "Hunger and Food Insecurity in Fifty States: 1998-2000." Center on Hunger and Poverty, Brandeis University.

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