If you think about food stamps – Snap benefits – over in the US the idea that most of them get spent upon food should be obvious. They’re only legal tender to buy food so most of them will get spent upon food. D’Oh. But then we can talk about black markets, which we know exist and….
Or, we can even note that income is fungible. So, sure, we add $200 a month to the household budget but food expenditures are about 10% of household income, so $200 in Snap should mean about $20 more spent upon food. Thus, adding food only spending to the budget doesn’t increase by that amount spent upon food but it is fungibled (?) off into the real spending priorities of the household.
It’s also true that we generally think that the household is the peeps who know what they’d like most. Their utility is thus maximised by giving them straight cash so they can go buy what they want. Note that not all of these points are entirely consistent with each other. The more fungible restricted spending is within that household budget the less utility is lost by providing restricted spending.
At which point we get a nice study looking at all of this. And the fact is that Snap benefits are worse than we’d usually think they were:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]A study published recently in the American Economic Review finds that SNAP is successful at increasing household food expenditure. A household receiving, say, a $200 monthly SNAP benefit can be expected to increase its monthly expenditure on groceries by a little over $100. This far exceeds what would be expected for a cash benefit of comparable size, which might increase food spending by only $20 or so. It goes against a core principle of microeconomic theory: that money is ‘fungible’ and how it is spent does not depend on the form in which it is received.[/perfectpullquote]
So, from the paternalists’ point of view Snap works. We want to give them money for food, they spend much more of this benefit upon food than they would cash, that’s good. The reason is:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]So if households are not abiding by the principle of fungibility, what principles do guide their behavior? The researchers – Justine Hastings and Jesse Shapiro – turn to the hypothesis of ‘mental accounting’, developed by economics Nobel laureate Richard Thaler. The idea is that people put money in different mental accounts depending on their source or intended use. So, for example, a household receiving the SNAP benefit might think of it as ‘food money’ and psychologically earmark it for grocery spending. If that same household got its $200 as cash, it might spread the money across several mental accounts and therefore spend it quite differently.[/perfectpullquote]
But of course from the point of view of the household this makes them even more than we might have thought worse off as a result of not getting the cash. Purely unrestricted spending, purely untricked mental accounting, would give us $180 spent on other things (diapers, beer, school books) and being tricked gives us only $100. They’re worse off than without the restriction.
Ah, says the paternalist. But we want them to have better nutrition so that’s alright. Except:[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The preliminary findings of that research suggest that while SNAP is successful in increasing food expenditures, the success does not translate into meaningful gains in the nutritional quality of purchased foods.[/perfectpullquote]
So in the end the paternalism doesn’t work. Giving food stamps instead of cash leaves the recipients worse off than they could be at the same cost to ourselves. This is not an effective welfare policy therefore. Or, at least, it’s one we can make more effective – more utility gained by the recipients for less lost by the funders – by simply handing out the cash.