Today, America's Foodstamps Program Gets A 6% Haircut: What Happens Next?

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Today, one of America's best-known welfare programs with 47.6 million participants or 15% of the total population, the Supplemental Nutrition Assistance Program also known as "foodstamps" or EBT, is due for a substantial haircut: beginning Friday, there will be a phased in $5 billion reduction (6% of the program) for the 12 month period starting November 1st 2013. So what happens next? 

Nick Colas of Convergex explains.

The U.S. Supplemental Nutrition Assistance Program (a.k.a. Food Stamps) is the largest means-tested social support program in the country, with $6.3 billion in direct monthly cash transfers to individuals for the purchase of food.  Some 47.6 million people (15% of the total population) are in the SNAP program as of the most recent data (July 2013) and these individuals receive an average of $132 per month.  This support is set for a cut on Friday, with a $5 billion reduction (6% of the program) for the 12 month period starting November 1st 2013.  From a Wall Street perspective, these numbers may seem small at 0.0003% of GDP.  From the perspective of Main Street, however, is means a cut of $36/month for a family of four receiving full SNAP benefits.  Record levels for stocks, record level for SNAP participants…  An odd societal disconnect, to be sure. 

We’ve written about the U.S. Supplemental Assistance Program (SNAP, also known as food stamps) in these pages over the years even though the topic bears no direct relationship to corporate earnings, interest rates, the Federal Reserve, or any other recognized business topic.  The reason for this focus is threefold:

  • It is a very large visible government program with monthly data updates.  There are, for example, 47,637,407 Americans in the SNAP program as of the most recent update (July 2013) from U.S. Department of Agriculture.  A total of 23,074,914 households receive an average monthly benefit of $272.51.  This amounts to $6.3 billion in monthly support.  As a percent of the population, this is 15% of all Americans and +20% of all households in the program. 
  • It is a good measure of how deeply the economic recovery in the U.S. is reaching through the socioeconomic strata.  Qualifying for SNAP means you make no more than 130% of the poverty line and generally have limited assets.  Those 47.6 million people in the SNAP program are, for all intents and purposes, a record high for food stamp participation once you exclude months where the program includes disaster assistance. 
  • It generates a large amount of hate email direct to my inbox and voicemail from both ends of the political spectrum.  From the right comes criticisms over certain parts of the US population using EBT cards (the debit cards used to distribute the program’s payments) to buy beer and potato chips.  This, yes, does occasionally happen.  From the left, we get missives that feel a lot like that guy who told the world to “Leave Britney alone!” Food stamps, these folks argue, are part of living in a just society, which doesn’t allow anyone to go hungry.  Half of all the people enrolled in SNAP are children, so it is pretty easy to see their point of view as well.

In the spirit of bringing our two warring readerships together, I would propose the following statement: “Something has changed about America since the Financial Crisis, and the still widespread popularity of the SNAP program is emblematic of that shift.”  Or, in the words of Bill Parcells, “You are what your record says you are.”  The American economic record, based on the Food Stamp data, is still pretty lousy:

  • Before the Great Recession of 2009, enrollment in the SNAP program ebbed and flowed with the state of the U.S. economy.  There are links to the data after this note, with the high water marks in 1976, 1981, 1992-4 and cyclical lows in the late 1970s, 1980s, and 1990s. 
  • From 2004 to the present day, SNAP enrollment has doubled from 23 million people to more than 46 million.  The cost of the program over that period has moved from $25 billion annually to $75 billion in 2012. 
  • The notional economic “Recovery” which has helped domestic equities more than double from their March 2009 lows is entirely absent from the U.S. food stamp data.  As mentioned, enrollments are still essentially at record highs. 
  • Sometimes big numbers are hard to visualize, so here’s a few ways to think about the size of the SNAP program.  For example, if every SNAP participant lived in one state, it would be 20% more populous than California.  If every person in the program linked hands, human chain style, they could circle the Earth (assuming a 3 foot reach per person). 

We’ll sidestep the inevitable political discussion for a moment longer, and point out that things are about to change in the food stamp program.  On November 1st, everyone in the SNAP program will see lower payments.  Here’s the hows and whys:

  • Monthly payments increased because of the 2009 American Recovery and Reinvestment Act, but these increases expire on Friday.  The jumps were substantial – the average benefit per person increased to $125 in 2010 from $102 in 2009 and topped out at $133/person in 2010 – 2012. 
  • The change cuts $5 billion out of the program for the November 2013 – 2014 period, on a base of $75 billion (based on the latest run rate of $6.3 billion/month).  The USDA estimates that this will be a $36/month reduction in benefits for a family of four. 
  • The Center for Budget Policy Priorities, using USDA data, stated in a recent note that 80% of SNAP households live below the Federal poverty line ($19,500 for a family of three) and 40% live in households making less than half that amount.  The SNAP program helps feed 25% of all US children and over 9 million seniors.

Let’s see if we can dodge the political bullet for one more paragraph, with a few more fact-based points:

  • The SNAP program is explicitly NOT designed to provide the only income available to economically distressed Americans for the purpose of purchasing food.  There’s been a raft of celebrity and CEO ‘Live on SNAP benefits’ challenges, where these economically fortunate individuals chose to live on $133/month in food purchases.  This ignores the fact that the program is intended to be “Assistance” rather than 100% support. 
  • There are further cuts in the program coming in 2014 – 2016, to the tune of $11 billion over the period.  It is an odd quirk of the SNAP program that its funding is part of the annual Farm Bill in Congress.  That means these future cuts could be overturned as House and Senate consider this legislation. For right now, however, these proposed reductions would take the SNAP program down to $60 billion from the current $75 billion run rate.  Truth be told, the pressure within Congress is to cut these payments further, rather than to increase them. 
  • If you are looking for a capital markets impact, retailers in southern and western states are one place to look.  There are 13 states with over 1 million SNAP participants: Arizona, California, Florida, Georgia, Illinois, Michigan, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, and Washington.  The economic “multiplier” on food stamp purchases is about 2:1, so the $5 billion reduction in 2013-2014 looks more like $10 billion in the real economy. 

To sum up (apolitically, of course)…  The amount of money 15% of the U.S. population uses to purchase food is about to go down, and by enough so this group will notice its absence.  It may not matter to the economic data on which Wall Street hangs its fedora, but it is certainly enough to spark a political response.  How this plays out, I honestly have no idea.  We are in uncharted waters here, as the historical record clearly shows.