Food Stamps and Fungibility of Money Lead to Unintended Outcomes

Food Stamps and Fungibility of Money Lead to Unintended Outcomes
September 10, 2013

Kathryn Shelton and Richard B. McKenzie

Kathryn Shelton (kshelton@mail.cox.smu.edu) is a research associate at the O’Neil Center at... (read full bio)

Members of Congress have locked political horns over the dramatic growth in the Supplemental Nutrition Assistance Program (SNAP), known informally as “food stamps.” Federal expenditures on food stamps have grown from $38 billion, with 28.2 million recipients, in 2008 to $78 billion, with 46.6 million recipients, in 2012, an increase of 105 percent in dollars spent and of 65 percent in number of recipients (partially attributable to the two-thirds increase in federal spending on food stamp advertising and outreach efforts).

Regrettably, the growth in food stamps has had perverse and unintended consequences, not the least of which has been to induce a growing cadre of Americans to join the ranks of food-stamp recipients to increase their consumption of “unapproved” goods.

101 Million Recipients

One out of six Americans now receives food stamps, and one in three (or 101 million) Americans participates in one of the 15 food programs (including SNAP) offered by the federal government. The number of Americans receiving some form of food assistance now exceeds the number of full-time private-sector workers in the United States.

Conservative members of Congress (mainly Republicans) see food stamps as a grand example of out-of-control government spending and are determined to rein in the federal food-stamp program. Liberals (mainly Democrats) see the conservatives’ efforts as callous and yet another attempt to fray the nation’s welfare safety net.

Both conservatives and liberals (in and out of Congress) press their political cases under the delusion that the welfare benefits Congress prescribes for Americans with the best of intentions have the intended effects. When policymakers spread food stamps in ever-increasing amounts among the poor, no doubt they ramp up the nutritional consumption levels of the targeted groups of poor Americans to some extent, but not nearly as advertised.

Money’s Fungibility

Politicians of all stripes overlook (or choose to ignore) a critically important constraint on their good intentions to help low-income groups with taxpayers’ dollars—the fungibility of money. As everyone knows, money is freely and readily exchangeable for goods and services. Although few politicians seem to realize it, government dollars received by targeted groups in the form of various welfare benefits can be freely substituted for recipients’ own dollars of income. This means the government dollars distributed in whatever form often will not be used for their intended purpose. The recipients of the government dollars may be “better off” because of government largesse, but not necessarily in the ways policymakers intend.

Food stamps are actually no longer distributed in the form of paper “stamps.” The subsidy is now encoded on debit cards that recipients can draw down as is done with bank accounts. Generally, the lower the income and the larger the recipient family, the greater the food-stamp subsidy.  

Under the food-stamp program, the federal government provides targeted low-income groups with dollars that are intended to help recipients improve their diets. Officially, the dollars cannot be used for non-food items and certain “bad” goods, such as drugs, alcohol, and dog food.

However, such restrictions are hardly binding on many (very likely most) poor recipients, who are more savvy than politicians seem to believe. Even the U.S. Department of Agriculture has acknowledged that nonelderly women, who constitute 28 percent of all food-stamp recipients, have found ways to use food stamps to buy foods that contribute to their incidence of obesity, which means food stamps have contributed to the country’s healthcare crisis.

More for Booze, Smokes

Moreover, low-income people know they can use their food-stamp cards to buy permissible foods and then use their own earned dollars or welfare payments that no longer need to be used on foods to buy the prohibited items. In short, food stamps enable many low-income people to buy more food, but they also enable them to buy more alcohol, cigarettes, chocolates, or whatever else they desire. Food stamps can encourage, albeit marginally, alcoholism (and even a greater incidence of drunk driving among some) and lung cancers among recipients who use food stamps’ fungibility to increase their purchases of alcohol and cigarettes.

If given a choice between $100 in cash and $100 in food stamps, low-income people would understandably take the dollars, which suggests that the stamps are worth less to them than dollars. That also means, as research has shown, that low-income people would accept less in cash, say, $80, than $100 in food stamps.

Stamps for Cash

Thus, no one should be surprised that a secondary black (or gray) market in food stamps has emerged, in which recipients sell their food-stamp cards at discounts for cash (with reported trades reaching two for one: $200 in food stamps for $100 in cash). The food-stamp recipients can use the acquired cash to buy whatever they desire, including “scripts” (prescription pills) and street drugs.

Moreover, no one should be startled to hear that grocery stores in low-income areas accept food stamps for non-approved purchases and ring up the purchased items as various approved foods, extracting higher prices and profits from the food-stamp recipients. In fact, audits of the SNAP program by the U.S. Department of Agriculture found many types of trafficking in benefits, including black markets and fraudulent retailers.  

Such secondary markets can also be expected to increase, at least to some extent, drug addiction among food stamp recipients. In turn, secondary markets for food stamps can cause more low-income Americans to join the ranks of food-stamp recipients just to sell off their cards for cash to use in buying drugs.

No doubt, as widely heralded by their advocates, food stamps can give rise to more food purchases by the poor. But as the late Milton Friedman recognized long ago, food stamps are a form of “funny money” because of their fungibility.

They also can give rise to purchases that are not always good for the recipients, as judged by the intentions of food-stamp backers as well as greater real income among non-poor Americans who buy the SNAP cards in secondary markets for discounts. Hence, foods stamps don’t always live up to their advertised laudable social goals. Indeed, they can have unintended consequences that can cause more Americans to seek to become food-stamp dependent not always for added nutrition but for behaviors the government is trying to discourage.

Kathryn Shelton (kshelton@mail.cox.smu.edu) is a research associate at the O’Neil Center at Southern Methodist University. Richard McKenzie (mckenzie@uci.edu) is professor emeritus in the Merage Business School at the University of California, Irvine.

Kathryn Shelton and Richard B. McKenzie

Kathryn Shelton (kshelton@mail.cox.smu.edu) is a research associate at the O’Neil Center at... (read full bio)