Food Stamps and Unemployment Insurance Create Jobs in a Weak Economy
In a recent Wall Street Journal op-ed, Robert Barro dismisses Agriculture Secretary Tom Vilsack’s claim that every dollar spent on food stamps generates $1.84 of economic activity. Barro claims Secretary Vilsack’s “Keynesian” estimate conflicts with “regular” economics, which he says predicts that increasing transfer payments like food stamps and unemployment insurance (UI) would lead to a decline in economic activity and a fall in employment because they would “motivate less work effort by reducing the reward from working.”
Contrary to Barro’s assertion, however, the Secretary is in good company appealing to Keynesian multiplier analysis under current economic conditions, and Barro’s assessment is implausible. For example, the Congressional Budget Office has estimated that transfer payments to individuals like the increase in food stamp benefits and additional UI compensation of the 2009 Recovery Act generate between 80 cents and $2.10 for each dollar spent when the Federal Reserve holds short-term interest rates as low as possible (see Table 2 here). Barro says “there is zero evidence” that deficit-financed transfers increase economic activity and boost employment;” CBO explains why, taken as a whole, the evidence says they do.
Circumstances matter. When the economy is humming along on all cylinders and unemployment is very low – think the late 1990s – deficit-financed increases in food stamps and UI would not increase economic activity or boost employment. The multiplier would be essentially zero because the Federal Reserve would raise interest rates in response. Any rise in demand stimulated by the increase in transfers would be offset by the fall in demand due to higher interest rates. Barro’s concern about work disincentives could come into play if transfers were exceedingly generous.
That’s not where we are now. Higher interest rates due to Fed tightening will not likely be a concern anytime soon. Instead, we face a long period of high unemployment and excess productive capacity. These are just the circumstances in which transfers will most likely be effective in stimulating demand and creating jobs.
Food stamp and UI recipients spend most of any increase in income they get, and they spend it quickly. That means more spending at local businesses and more orders for those businesses’ suppliers. The additional spending generates income for local businesses and their suppliers, and the boost to demand multiplies through the economy. With nine unemployed workers for every two job openings and businesses generally operating well below full capacity, constraints on expanding production and employment to meet the increased demand should be minimal. Treasury borrowing costs will continue to be low and we will increase the odds that a real economic recovery will take hold.
I wish we were at a point where further deficit-financed spending would be counterproductive because growth is strong and full employment is in sight. But, we’re clearly not there yet and it’s bad economic policy – regular or irregular – to pretend otherwise.