Are food stamps the best macro stabilizer?

by on May 7, 2013 at 3:13 am in Economics | Permalink

I have not read the underlying paper, but this summary seemed interesting enough to pass along, via Evan Soltas:

In a new working paper, Ricardo Reis of Columbia University and Alisdair McKay of Boston University…find that stabilizing aggregate disposable income plays a “negligible role” in stabilizing the economy as a whole. Transfer payments can indeed stabilize output, they find, but mainly through a different channel — not by changing disposable income in the aggregate, but by changing its distribution. Fiscal policy, in other words, is all about inequality.

“It’s the redistribution that has a lot of kick,” Reis said in an interview. “The usual argument for transfers is basically Keynesian. We find that has very low impact in our model.”

Reis and McKay reach this conclusion by building a complex macroeconomic model calibrated to U.S. data, but the intuition isn’t all that complicated. Transfer payments yield the highest amount of stabilization per dollar when focused on people who can’t effectively insure themselves against macroeconomic volatility — namely, people with little savings to draw on and limited opportunities to borrow.

…They also find — this is a surprise — that fiscal policy as currently designed does little to stabilize the economy. The most effective transfer programs, Reis says, constitute a small share of all transfers. “When we look at the whole set of stabilizers in the U.S., it turns out that even though food stamps are a plus, all of the other ones have near-zero impact. That means we’re not stabilizing very much,” Reis said.

If distribution matters above and beyond the disposable income variable, that might imply that the sectoral composition of fiscal policy is quite important and that sectoral factors are an important part of any stabilization (or non-stabilization) story.

1 Claudia May 7, 2013 at 5:37 am

I saw Reis present this paper at a workshop last winter. The group assembled, who had all done research (using various approaches) related to this question of whether marginal propensity to consume (MPC) out of income varies across groups, generally found his main conclusions plausible. People who are temporarily in economic hardship (that they can’t smooth through themselves with savings/borrowing) are going to spend extra income … food stamps, unemployment insurance benefits, etc. … are going to have high MPCs out of stimulus. Other programs like broad-based tax cuts or one-time stimulus checks don’t have the same bang for the buck. I am not saying those have no bang for the buck and it is also not clear that targeting low income households (though a common assumption) does you much good either. The idea of automatic stabilizers has a lot of economic appeal, but interestingly it is more limited in the US than say in Germany.

2 Nylund May 7, 2013 at 10:18 am

I thought it was already pretty commonly accepted that MPC was higher the poorer people were and therefore, fiscal multipliers were largest when transfer payments were directed to those at the bottom of the income distribution.

Here’s one set of multipliers. I haven’t read the paper posted here yet to see how well they jive, but do note that it lists food stamps as having the largest multiplier:

3 Claudia May 7, 2013 at 10:30 am

Sometimes there is a gap between commonly accepted (or even intuitive) and empirically shown. Income, especially just current income, on its own need not be a great predictor of what people are going to do with an extra dollar (in a short period of time). Income may be the best target criteria we have in common practice, but that doesn’t mean it is most effective criteria we could use. I have work (and have seen it in others’ work) that there is sometimes a u-shape in MPCs by income, so high income folks also spend a lot of stimulus income … but mainly what you see if you look across studies is pretty unstable relationship. Programs which help people who have experienced temporary bad shocks are good for directly supporting spending and good indirectly since they reduce the fears of those who are subject to those shocks. Neat how insurance works.

4 Bob Knaus May 7, 2013 at 7:33 am

This stabilizer may be carrying about all the ballast it can, given the well-documented supersizing of America’s lower-income population. They have done their patriotic duty… should we expect them to consume even more calories for the benefit of the nation’s economy?

5 john personna May 7, 2013 at 9:53 am

There are periodic calls to shape food stamps toward healthy foods. Those are usually opposed by those who feel food-freedom is more important. This includes those who would prefer cash transfers, and who believe a food stamp which can buy soda is a meaningful step towards cash transfers. Me, I’d make food stamps for healthy food, or jump all the way to the cash transfers.

6 Bill May 7, 2013 at 7:54 am

The MPC tables on p 25 tell you an awful lot about directed stimulus, and the reason why tax cuts for the wealthy are unlikely to stimulate.

Also, the tables on variable tax rates also remind you why government revenue declines…this includes property and sales taxes, not just income taxes, during a severe recession.

7 Joe Eagar May 7, 2013 at 11:59 pm

Partisan talking points aside, no one has ever proposed upper-bracket tax cuts for the purpose of stimulating short-term demand (that’s what middle and lower class tax cuts are for). Upper-bracket cuts (starting with Reagan) were passed as a rather easy way to increase productivity; it’s the least painful of all structural reforms (just imagine if the government had, say, reformed the Wagner Act, or civil service laws; for that matter, immigration reform is difficult enough).

The Reagan cuts did not completely survive, by the way; the tax code is only slightly less progressive than it was in 1979, and only because of payroll taxes (you’ve gotta love the smoke and mirrors nature of tax policy: “70%! 80% 90%!”. . .not so much).

8 Becky Hargrove May 7, 2013 at 9:02 am

Transfers for the ones that don’t really need it, tend to crowd out the positive effects of the ones that do – in part because everyone “lines up” to serve the “unequal” with the fiscal pipeline (since that’s where the money is). I explored some thoughts about this process in a recent post:

9 Brian Donohue May 7, 2013 at 10:24 am

Redistribution from anti-social savers to those with a higher MPC as a means of stimulating aggregate demand. In what way is this not orthodox Keynes 101?

10 Yancey Ward May 7, 2013 at 12:54 pm

Good to know. My proposal from 5 years ago looks better and better- $5,000 gift cards to The Olive Garden mailed to everybody under the age of 35.

11 Joe Eagar May 7, 2013 at 11:50 pm

Do the authors find real evidence, or are they simply constructing a model that repeats their assumptions back to them?

My understanding is that the most effective automatic stabilizer is progressive taxation, which to me seems to contradicts this view. After all, the cushioning effect on falling incomes of progressive taxation is highest for people at the top of the income distribution.

Is there any evidence from the Bush stimulus packages, or Obama’s Making Work Pay tax credit? The recent consensus seems to be that transfer programs don’t stabilize the economy in the short term. So many types of tax and transfer fiscal stimulus were tried during the 2007-2009 recession that I think a lot of us are doubting whether such policies work at all, and if the government shouldn’t have a countercyclical infrastructure policy.

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