Monday, March 26, 2012
Please Do Not Feed the Animals
I pulled this quote from a friends Facebook page:
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.
Labels: food stamps, Government Interventionism, Public Policy
Tuesday, February 28, 2012
Green energy subsides create ghost jobs
This week I read an article on the Wall Street Journal about the overestimations made by the government about the jobs that would be generated by the $10 billion stimulus given to renewable energy companies to expand their operations. In a study surveying many of the companies and communities recipients of the money injection, the results were far from the 2 to 4 million jobs projected by the President's Council of Economic Advisers. As a matter of fact, the net jobs were often negative after the stimulus package.
I'll leave the discussion of whether the Keynesian concept that an increase in Government spending serves as a catalyst for economic recovery through the multiplier aside and discuss the stimulus on efficiency grounds.
Unless there is a market failure associated with the matter, Government intervention will leave the market at a worse condition than previously. On this particular case, the President could argue that the reasoning behind the stimulus was based on the fact that there are externalities involved, and I think it could be a successful claim if the implementation and his message were different.The pollution generated by oil-based energy companies is definitely an externality, since it generates an unintentional non-market interdependency between market actors. If the government implemented a Deposit Refund System, where they impose a tax to reduce pollution, then they could in turn provide a subsidy for companies that are developing cleaner technologies. For this reasoning to be economically sound, I think that the Government would have to make it clear that they are not trying to create jobs through it but reduce pollution, and the money for the subsidies is coming from a pollution tax.
As it stands currently, the stimulus is not justified on efficiency grounds, since I don't see a positive externality on the creation of new jobs. Jobs create a market interdependence between actors, and the results are reflected on the wages paid to workers, so there is not a market failure involved here. Therefore, the disastrous results obtained by the package leading to the worsening of local economies does not come as a surprise.
Labels: Government Interventionism, Green Energy, Public Policy
