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Monday, March 26, 2012

Please Do Not Feed the Animals

I pulled this quote from a friends Facebook page:

"The food stamp program, part of the Department of Agriculture, is pleased to be distributing the greatest amount of food stamps ever… up from 27 million people to over 47 million in the past 3 years.

Meanwhile, the Park Service, also part of the Department of Agriculture, asks us to "Please Do Not Feed the Animals" because the animals may grow dependent and not learn to take care of themselves."

While there is clearly some emotionally charged language in the above quote the general sentiment is, in my opinion, a great way to look at the food stamp program in the United States.

Economically, what happens in the case of food stamps occurs in the model of consumer theory. Initially, a consumer purchases F1 units of food and C1 units of all other consumer goods and services with the point, F1,C1 represented by the intersection of the consumer's budget line and the indifference curve that is tangent to the budget line. When that consumer is given a food stamp subsidy they can suddenly acquire F* units of food at no cost making their budget line horizontal at the point where they spend all of their income on consumer goods and services until point F*. At F* the budget line once again takes on its original slope and runs parallel to the original budget line. The new equilibrium point will be at F2, C2 where an indifference curve is tangent to the new budget line. For ease of understanding, see page 88 by following the accompanying link.

Based off of observations of actual behavior, after given food stamps, a consumer will choose a point of consumption on the budget line somewhere between F* and the point at which C1 intersects the budget line. The presence of food stamps and the options that it gives low wage earners for how to spend their earned income. Assuming the quantity of food stamps given to the consumer meets what they feel are their basic needs such that they value all other goods and services more than they value additional food. If that is the case, they will spend none of their own income on food and only depend on the food stamps to obtain food. Clearly if the stamps were taken away the consumer would have to adjust their spending, but in a world where loans are a potential part of spending on all other goods and services (i.e. the real world) if food stamps were suddenly taken away from a consumer, that consumer may have taken out a loan on which they are required to make payments and as a result may be forced into consuming less than the amount of food necessary for adequate nourishment in order to meet their loan commitments. In this way, food stamps encourage consumers to outspend their actual means.

Another possible result of food stamps directly related to the quote that got me thinking about food stamps is the possibility of a consumer intentionally keeping their income below the yearly determined level necessary to obtain food stamps. This is because they maximize their budget and therefore their ability to purchase foods and other products and services when they are making the exact maximum amount before their food stamp subsidy is taken away. As many people on food stamps who are working are wage earners, not salaried employees, taking a wage increase (or a higher paying job) may move their income line back toward their budget line without the food stamp subsidy from where it would be if they did not take the wage increase (or change jobs) with the food stamps. If it is the case that a wage increase in one's current job or in a new job does not more than compensate for the loss in the food stamp subsidy, the rationally self-interested consumer will choose not to take the wage increase as they will be worse off after they take it. In this case, the food subsidy program encourages consumers to remain reliant on the government program and not make themselves independently better off.

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