Recently, the Biden Administration has approved a permanent increase in the Supplemental Nutrition Assistance Program (SNAP) benefits, effective this October.
On average, SNAP participants will receive their monthly benefits at a level up to 25% higher than their pre-pandemic benefits, which implies a monthly increase of about $36 per person. Annually, the federal government will provide an additional 44.5 million dollars to the 103,000 SNAP participants in Montana to help them secure enough and healthy food for their families.
The approved change in the SNAP benefits will take place when the current 15% temporary boost to benefits expires at the end of September. To make the change permanent, the US Department of Agriculture revised the costs of the Thrifty Food Plan in August, 2021. The Thrifty Food Plan measures the lowest cost of obtaining a “basket” of healthy, nutritious food, which the USDA uses as a guideline to determine the maximum possible benefits for SNAP. This is the first time in 45 years that the purchasing power of the Thrifty Food Plan is revised to better reflect the changes in “food prices, food composition, and consumption patterns.”
There is no doubt that additional SNAP benefits will help ease the difficulty that many households face in the current context of pandemic and rising food costs. However, economists have empirically found that people do not spend all of the additional income on one type of good. For most households, SNAP benefits consist only part of their food expenditure, with the rest paid with cash or credit cards. Thus, when they receive additional SNAP benefits, they will reduce some cash or credit card payments in food purchases.
According to the model mentioned in my previous post, we estimate that the additional 25% SNAP benefit will lead to a $21.9 (monthly) or 5.7% increase in food-at-home expenditure for an average household. In particular, for three-person, four-person, and five-person families, the increased food-at-home expenditures are projected to be $20.1 (5.9%), $26.5 (5.8), and $28.1 (6.5%), respectively. Meanwhile, the expenditures on food-away-from-home will not significant change since most SNAP benefits are spent on at-home food products. Hence, the changes in food expenditures (about 6%) are smaller than the change in benefits (25%). This, however, does not imply the policy is not successful because people do receive extra income—they simply make rational decisions in allocating it between food and non-food consumption.
One of the most challenging issues facing many households now is inflation or the rising cost of living. I briefly discussed inflation in my post in April when it was a potential issue. The most recent Consumer Price Index published in August by the Bureau of Labor Statistics shows that almost all goods and services have experienced substantial price increases, with the energy price jumping by 25%, compared with last year. Inflation could easily erase the income of ordinary households. Higher SNAP benefits will help the participating households in their food purchases, but the effect will diminish quickly if food (and other goods) prices continue rising at the current pace. After all, families also need to pay for rent, utility, and transportation, all of which are becoming more expensive.
The unfortunate fact is that we are probably in a stagflation period, i.e., lower production coupled with higher prices. Typically, to deal with stagflation, the government implements monetary and fiscal policies that expand consumer demand. Based on the idea that producers are willing to supply more goods and services if the prices are higher, these policies increase production by allowing for higher inflation. In this pandemic, there have been various stimulus policies and higher government spending in the hope of raising demand (which partly caused the inflation). But the particular challenge at this time is that due to social distancing and other pandemic measures, we now have an inelastic aggregate supply that does not respond well to higher prices. In other words, even with increased prices, it is difficult to stimulus production when productivity is low and there are shortages of raw materials. Generally, bending or shifting a supply curve is difficult to achieve with economic policies. Hence, the most effective way to bring back productivity may be simply to work on measures that help slow down or end the pandemic.
