Riffing off of Adam’s post on the NYC food stamp decision, I have found it useful to think of the issue through the lens of the excess cash balance mechanism (or in this case, excess stamp balance mechanism).

For those who may not be familiar, this is a concept in which adding to the supply of money causes investment/spending to increase due to individuals and firms having cash that is sitting idle, earning no return. It is a fundamental concept in “monetary disequilibrium”, and I think that it applies here.

First, let me state that regardless of the particulars of the issue, my position is that this is well outside of my comfortable level of paternalism. I had a Twitter conversation with (I believe) Adam last night about the issue, in which he brought up the fact that this could be a cheap way to buy health, and thus is comparatively libertarian at the margin, but it still doesn’t inspire me. That is why comments like this from Melanie B strike me as odd:

If you provide low-income individuals and families with vouchers to purchase foods, especially if those individuals also receive Medicaid or other gov’t-subsidized medical care, it is totally counter-intuitive to allow the use of such vouchers on items that do not assist with nutrition (as the mission-in-the-name clearly states).

In any case, on to a quick note about how I’m currently thinking about the issue. Suppose you have $100, which you consume completely in each period. You average 10% a period on foods that are now banned, thus giving you an “excess stamp balance” each period of $10. In the cash economy, people rid themselves of excess cash balances in three ways; increasing their stock of wealth by saving (by hoarding dollars or buying antiques, etc. [in a Nick Rowe economy]), engaging in higher current consumption, or delaying current consumption by loaning the cash out (i.e. buying stocks/bonds).

Unfortunately, in the food stamp economy, it is only possible save in a roundabout way (not in currency)*, as I don’t think that food stamp accounts accumulate interest (but correct me if I’m wrong!). People could definitely consume more (different) foodstuffs, or they could loan out the funds. I’m using loan here very loosely to describe the act of barter exchange. It seems to be fairly common for people to organize trades in which they purchase food items for other people, who then pay cash for the items that the person using food stamps wants…and then they trade the items.

I think the most likely set of substitute transactions is the barter situation, but even if increased consumption is the result of having an excess stamp balance, that of course doesn’t guarantee a healthy diet. However, it is possible that for some people the extra stamps will be enough to push them out of inferior good territory, which would actually be a Pareto superior outcome, which would come at very little cost.

*As Rebecca Burlingame points out in the comments:

Temporary savings = frozen dinners, which can be eaten next week or month. Long term savings = honey or something sugar preserved like syrup or jam, can be eaten next year!

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