Economic effects of refocusing national food-assistance efforts - includes related articles

In an era of budgetary and deficit pressures, food-assistance programs are headed for change as part of an overall effort to scale back on Government-funded welfare programs.

Most agree that the U.S. welfare system needs reform to reduce costs, improve the effectiveness of the programs, reduce dependency, and provide incentives for recipients. Proposals from the Executive and Legislative branches, as well as the States, offer modifications to current programs, including those providing food assistance. There is much discussion on how to make the programs more efficient while continuing to assist the needy.

The major proposals would reduce funding and eligibility for some Federal programs and transfer control of others to the States under a block grant with a fixed spending limit.

Impacts of changes in the Nation's food and nutrition assistance programs will extend beyond the programs' 45 million recipients to the rest of the food sector and the larger economy. With reductions in food assistance, national food spending would decrease, as would the demand for agricultural commodities (particularly meats), commodity prices, and farm income. Nonfood sectors would also be affected.

The extent of these changes depends on the size of the program cuts, the form of the new programs, and whether the savings are used to reduce the Federal budget deficit or to cut taxes.

Food-Assistance Programs Are Important

Food assistance is an important nutritional component of the support provided to low-income Americans. In fiscal 1995, Federal outlays on food-assistance programs will constitute about 20 percent of the $216 billion spent on welfare programs (table 1). (Other major assistance programs include Medicaid, housing assistance, and Aid to Families with Dependent Children.)

Table 1
Food-Assistance Programs Constitute About 20 Percent of the Amount
Spent for Welfare Programs

Programs May Be Cut or Transferred

Various reforms to nutrition-assistance programs have been offered, including reducing benefits, capping the growth in total food-assistance expenditures, replacing some Federal programs with block grants to the States, ending the entitlement status of many of the programs, restricting eligibility, limiting the length of time on the programs, adding work requirements, and giving States flexibility to combine various welfare programs.

Table 2
Costs and Participation in Food-Assistance Programs Have Grow in the
Last Decade

Effects of Cuts or Changes Ripple Throughout the Economy

Cutting Federal outlays on food assistance and/or changing the form of assistance affects both food and nonfood spending by recipients, which in turn affects national levels of output and employment. Impacts will depend on the type of program modifications, how recipients' spending responds to the change, and how the savings in Government expenditures are used.

We used an economywide model previously developed at USDA's Economic Research Service to explore possible outcomes of a $5-billion reduction in Federal outlays for food assistance per year from the anticipated program level of $45 billion. Three scenarios are reported here to reflect a range of outcomes. The low-impact scenario presents an estimate of what could happen if program funding is reduced $5 billion per year and the form of assistance does not change.

Two other scenarios - the middle-and high-impact scenarios - show what could occur with that same cut in funding along with program restructuring, such as could occur if cash benefits replace more targeted assistance like food stamps, WIC vouchers, and the like. The difference between these last two scenarios is the participant response to the changing form of benefits: with the [TABULAR DATA FOR TABLE 3 OMITTED] reduced targeting of assistance, food spending out of the benefits "slips" by 10 percent under the middle-impact scenario and by 25 percent under the high-impact scenario.

Lower Food Spending

At the lower end of the spectrum, if food-assistance funding is reduced by $5 billion per year and the form of assistance does not change (low-impact scenario), U.S. food spending drops $750 million. That is equivalent to a 0.1-percent reduction from the $642 billion spent on food in 1994.

If program reforms that reduce targeting are added to that $5 billion per year reduction in food assistance with modest slippage (middle-impact scenario), food spending falls by $4.2 billion, or 0.7 percent. But the cut in food assistance combined with these program reforms could result in sharper reductions in food spending under the high-impact scenario, by $10.5 billion, or 1.6 percent of total food expenditures.

Under the range of these three scenarios, recipients lower their spending on a national scale by $106 million (low-impact scenario) to $1.5 billion (high-impact scenario) on dairy products; $253 million to $3.5 billion on meat, poultry, and seafood; and between $115 million and $1.6 billion on grain products (table 3).

Reduction in Farm Income

The lower food spending due to a reduction in food assistance with and without program changes cuts total farm income between $201 million (low-impact scenario) and $2.7 billion (high-impact scenario), or 0.1 percent to 1.3 percent of gross farm income, respectively.

Beef producers would take the biggest hit, seeing their gross farm income fall 0.3 percent to 3.5 percent, or between $58 million (low-impact scenario) and $808 million (high-impact scenario). Dairy farmers would lose between $25 million (0.1 percent) and $315 million (1.5 percent), pork producers $24 million (0.2 percent) to $331 million (3.3 percent), and vegetable and potato farmers between $28 million (0.3 percent) and $402 million (3.6 percent).

Shortrun Job Losses in All Sectors

A fall in food spending from a reduction in food assistance directly affects farmers and food processors and distributors (wholesaling, transportation, retailing, and food service). Nonfood sectors are also directly affected, because food-assistance recipients reallocate some of their limited budgets away from clothing, housing, and other non-food goods and services to pay for food.

Each of these sectors uses goods and services from other sectors. Lower spending in these sectors reduces demand for farm commodities and nonfood goods and services, such as feed, seed, energy, paper products, and chemical products.

Reducing food and nonfood expenditures lowers demand for goods and services used in their production. This lower demand reduces output and in turn the need for labor, generating shortrun (within 6 months to 1 year) reductions in jobs throughout the economy. (The reduction in labor is expressed as "job losses," but it also could occur through cutting back on hours employed.)

In the short run, cutting food assistance with no change in benefit form under the low-impact scenario eliminates 3,600 farm jobs, 14,000 food processing and distribution jobs, and 103,000 nonfood jobs. Combining the cut in funding with a reduction in targeting resulting in modest slippage in food spending (middle-impact scenario) eliminates 23,000 farm jobs, 50,000 jobs in food processing and distribution, and 53,000 nonfood jobs [ILLUSTRATION FOR FIGURE 4 OMITTED]. A reduction in targeting resulting in higher slippage in food spending (high-impact scenario) eliminates 56,000 farm jobs and 120,000 food processing and distribution jobs, but increases nonfood jobs by 38,000. Under the high-impact scenario's larger slippage, nonfood purchases increase at the expense of food purchases (table 3), and so do production and jobs in the nonfood sector. Total job changes also increase with slippage. Even under the high-impact scenario, however, the total job loss would raise the U.S. unemployment rate by only 0.1 percent.

Recycling Program Savings Lessens Impacts on Economy

The full shortrun impacts will likely never fully materialize. Other, longer run, effects (occurring fully in roughly 2-4 years) arise in our analysis as the Government expenditures on food assistance are reduced and the money is injected back into the economy - applied to either deficit reduction or a tax cut.

While both alternatives cause similar losses in employment in food production (about 40,000 jobs under both middle-impact scenarios), each stimulates the economy differently.

Deficit reduction increases funds available for investment by private industry in factories, equipment, and other capital stock. The new investment generates demand for durable goods and construction.

This stimulus reduces job losses in farming and food processing and distribution and adds jobs in non-food sectors. For example, under the middle-impact scenario, the savings applied to deficit reduction lowers farm job losses by 0.6 percent from 23,000 to 15,000, and food processing and distribution job losses by 0.2 percent from 51,000 to 28,000 [ILLUSTRATION FOR FIGURE 4 OMITTED]. About 43,000 nonfood jobs are created in manufacturing, construction, and services.

The low- and high-impact scenarios provide a range of longrun job changes. In all scenarios, jobs shift out of farm and food processing and distribution into the nonfood sector of the economy. For example, long-run farm job losses range from 1,300 (0.05 percent) to 45,300 (1.7 percent). Food processing and distribution job losses range from 7,200 (0.06 percent) to 82,700 (0.7 percent). The losses, however, could occur through cutting back on hours employed. The nonfood sector realizes a gain in jobs in the long run, ranging from 8,500 (0.008 percent) to 128,000 (0.1 percent). When the savings from reduced Government expenditures are used to reduce the Federal deficit (which stimulates private investment), these job gains are in durable goods manufacturing and construction.

If the savings from reduced Federal expenditures on food assistance are instead used to lower taxes, disposable incomes of taxpaying households would increase. While households may save some of this additional income, most is likely to be spent on consumer goods, such as clothing, recreation, housing, and eating out. Such effects of tax reduction increase the demand for consumer goods and services, creating jobs in these sectors. Under the middle-impact scenario, the savings used to reduce taxes lower farm job losses from 23,000 to 15,000, and food processing and distribution job losses from 51,000 to 21,000. About 36,000 nonfood jobs are created.

Although these are small employment losses on a national level, a disproportionate impact is felt by State economies dependent on farming and food processing [ILLUSTRATION FOR FIGURE 5 OMITTED]. Most of these States bear a net job loss, because rural job losses exceed urban job gains. However, rural job losses may be offset with urban job gains in States with a lower share of rural food production jobs or those diversified into nonfood industries. Texas and California, for example, experience relatively large rural job losses. But because of strong manufacturing and service sectors, large gains in urban employment exceed the rural losses.

Food-assistance reform has other long-term impacts which lie beyond the scope of this analysis. For instance, using the savings from reduced food assistance to lower the Federal deficit will likely stimulate new investment for future economic growth. Our analysis accounts for the demand for durable goods and construction activity from this new investment, but not the impact on future production growth. The magnitude of this economic growth and its impacts on employment and household income are difficult to assess.

Incentives to work, while also difficult to assess, should be considered. For example, program participants may be influenced to work more by the program reforms. But incentive to work is often constrained by high unemployment and/or limited job markets. There is some empirical evidence on work incentives; however, the issue is beyond the scope of this analysis.

Impacts Depend on Final Reforms

Designed as a safety net to help meet the basic nutritional needs of low-income people, food assistance is a mix of Federal programs. One of the most important elements of the programs has been their ability to meet the increasing needs of individuals, States, and communities in economic downturns. Food-assistance programs also provide a targeted stimulus to the economy during a downturn in economic activity when it is most needed. While not a longrun solution to unemployment, food assistance provides a quick stimulus to the economy. Our analysis suggests an additional $1 billion in food assistance supports 25,000 jobs in a slack economy.

Impacts of changes in the Nation's food and nutrition assistance programs will extend beyond the program recipients to the rest of the economy. The potential economic impacts of food-assistance reform on the food sector and the general economy depend on the size of reduction in benefits and the form of the new program.

The period of adjustment affects these impacts. Some impacts will be mitigated as the savings from the reduced Government expenditures are injected back into the economy, through either a tax cut or deficit reduction. The long-term effect of either use of the savings will be a shift of jobs out of food and into nonfood production, with disproportionate losses being felt in rural areas.

Other reforms are also being proposed, such as modernizing benefit delivery by switching from coupons to electronic benefits, cutting back on fraud, strengthening work and training requirements to eliminate a person's need for the benefits, imposing time limits for some categories of recipients, and augmenting State administrative flexibility.

Regardless of the shape of the final reforms, any large reduction or change imposed will involve tradeoffs - program benefits will need to be balanced against costs. The key is to reduce costs and improve efficiency while ensuring that the poor have access to a nutritious diet.

References

Kinsey, J., and D. Smallwood. "Domestic Food Aid Programs," Food, Agriculture, and Rural Policy into the Twenty-First Century: Issues and Trade-Offs, M. Hallberg, R. Spitze, and D. Ray, eds. Boulder, CO: Westview Press, 1994.

Matsumoto, M., and M. Smith. "Food Assistance," National Food Review, USDA, Econ. Res. Serv., Vol. 12, No. 2, April-June 1989.

Robinson, Sherman, Maureen Kilkenny, and Kenneth Hanson. The USDA/ERS Computable General Equilibrium (CGE) Model of the United States, ERS Staff Report No. AGES9049. USDA, Econ. Res. Serv., June 1990.

U.S. Department of Agriculture, Economic Research Service. The Economics of Food Assistance Programs, ERS Staff Report No. AGES9507. May 1995.

U.S. Department of Agriculture, Economic Research Service. Issues for the 1990's, Various articles on Federal food assistance, AIB-664. Sept. 1994.

U.S. Department of Agriculture, Food and Consumer Service and Economic Research Service. The Nutrition, Health, and Economic Consequences of Block Grants for Federal Food Assistance Programs. Jan. 17, 1995.

Smallwood, Kuhn, and Blaylock are economists with the Food and Consumer Economics Division, Economic Research Service (ERS), USDA. Hanson and Vogel are economists with the Rural Economy Division, ERS, USDA.

For questions about welfare reform, contact Betsey Kuhn at (202) 219-0409. For questions about food-assistance programs, contact David Smallwood at (202) 219-1265. For questions about the economywide impacts, contact Kenneth Hanson at (202) 219-0017.

RELATED ARTICLE: Food Stamps Increase Food Spending

Food assistance increases recipients' total spending on food, but the increase is usually less than the amount of the benefit. The form of the benefit affects the size of the increase - the more targeted the benefit, the greater the increase in food spending. Our best knowledge about the size of these effects comes from extensive research on the Food Stamp Program.

When given assistance in the form of food stamps, people spend more on food than when given cash because they are likely to use more of the cash assistance to buy nonfood items.

Say, for example, that a household spends $100 for food. When it receives $100 of food stamps, food spending increases $20-$45 for a total of $120-$145. This is known as the supplementation effect - the extent to which retail food spending increases with every dollar of food assistance received (or decreases with every dollar in reduced benefits). While all of the food stamps are devoted to food, $55-$80 of the household's cash previously spent on food is reallocated to nonfood items, such as rent and clothing. The magnitude of the supplementation effect varies among other forms of food assistance.

In the same example, if the household receives $100 of food assistance in the form of cash, food spending increases $15-$30 (rather than the $20- to $45-increase when provided as food stamps) for a total of $115-$130. This reduction is known as the slippage effect, the extent to which retail food spending decreases as the form of assistance is modified. More of the cash food assistance is used for nonfood purchases.

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