Is SNAP (Food stamp program) really as bloated as it’s made out to be?

Recently, legislation has been enacted to significantly reduce the Supplemental Nutrition Assistance Program (SNAP), also known as food stamps.  Frankly, prior to this legislation I had not followed the issue too closely.  But as debate flared up, rhetoric surrounding the national debate became increasingly public and, of course, was replete with standard Washington flair.  “Culture of dependency,” “Wasteful,” “Bloated,” and “Excessive” were the soundbites underpinning the justification for these cuts.  How bloated and excessive is this program? Looking at the data in this particular case can actually be quite an enlightening exercise, as they can tell us something about the rate of change in the cost of the program. This growth rate can better help us understand whether or not SNAPhas grown at an unusually rapid rate, which would be an indicator of excess or bloat.

Luckily for us, the government provides all this information for free (although as I currently write this in mid October 2013, many of the websites where I originally accessed this data are unavailable due to the government shut down.  Hopefully this is remedied expediently).  So let’s dig right into the data.

Some of the arguments I’ve heard in support of the “SNAP is bloated and excessive” argument refers to the large increase of the program’s expenditures of the last decade.  This is an accurate representation, as can be seen in the chart below.

SNAP - Chart 1a

Source: http://www.fns.usda.gov/pd/SNAPsummary.htm (Note: Currently unavailable – as of October 10, 2013) due to government shutdown).

From 1998 (an economic boom year) to 2012 (not a boom year, this will be important later), the SNAP program has grown quite a bit, 342% to be exact.  However, looking at a cumulative growth rate of such a program ignores the rate of change in individual years.  For example, even though my parents talked about going down to the cinema in the 1950’s and spending a nickel for a double feature, we know that the current $12-$15 cost of a film isn’t egregiously excessive because that change in price happened gradually over a long period of time.  So, my first criticism with the claim that “we are spending a lot more on this program now than we were a decade or 15 years ago” is: of course we are, prices tend to increase over time.  So how has that annual rate of change trended over the same period?

SNAP - Chart 2a

Source: http://www.fns.usda.gov/pd/SNAPsummary.htm (Note: Currently unavailable – as of October 10, 2013) due to government shutdown).

Wow!  Look at that spike in 2009.  That’s crazy, a 44.6% increase in spending!  It must be exorbitant and excessive, right?  Well, maybe not.  SNAP is a counter cyclical program, which is a fancy way of saying that SNAP spending goes up as the economy starts sucking.  And the economy did indeed start sucking in a serious way in 2008, as the U.S. faced the worst recession it has seen since the Great Depression.  As Americans lost their jobs, they were forced to sign up for the SNAP program in order to pay for meals.

Since my data is starting in 1998, which was a boom year prior to the internet bubble crash, perhaps it doesn’t make sense to consider spending growth in 2012, which was still a dampened year in terms of U.S. unemployment. 2008 was when all economic hell broke lose, so I will use 1998-2007 as a “peak-to-peak” time period to allow for an equal comparison.  After all, SNAP is strongly counter-cyclical, so it doesn’t make sense to compare boom years to bust years, as, obviously, SNAP is designed by nature to grow during bust years.

There’s one other snag, however.  Looking at total spending for a nation-wide program over time doesn’t make sense unless you take into consideration the change in that nation’s population.  And, as can be seen below, the population has been growing since 1998:

SAP - US pop

Source: U.S. Census Bureau.

As a tangent, I find it interesting that the rate of growth of the U.S. population has been declining over the last 14 years, but that’s for another blog post.

We need to take into consideration population growth, otherwise growth in benefits paid through SNAP may seem inaccurately high.  As an example, imagine you pay $100 to 5 people one year, each person gets $20.  10 years later, you’re paying out $200, which would mean $40 to each person.  Wow! They sure are lucky, twice as much money right?  Well, what about if that $200 was actually being paid out to 10 people (the new population size).  Then each person only gets $20, and there has been no growth in benefits paid out on a constant-person basis.  This is why population growth must be taken into account when looking at the growth rate of the SNAP program.

So, if we take into consideration population growth and our peak-to-peak economic year comparison, our new constant-person SNAP growth rate trend looks as follows:

SNAP - Chart 4a

Careful study of this chart will reveal two things.  One, following the 9/11 attacks in 2001, the proceeding recession resulted in an increase in SNAP benefits costs.  This is, as mentioned before, to be expected since the SNAP program is counter-cyclical (it goes up when the economy is suffering from a recession, and vice versa).  And, as we would expect, in 2005, at the beginning of the real estate bubble, the growth rate of the SNAP program began declining.

Two, I titled the chart “Total Nominal Benefits, Annual Growth.”  What does nominal mean?  It means that the growth rate shown does not reflect inflation in the underlying product (food).  Without getting too far onto another tangent, inflation is a general rise in the prices of goods.  If you are unfamiliar with the concept of inflation, please check out the wiki page here.  Inflation is why my parents were able to see that double-feature at “the cinema” in the 50’s for a nickel.  In a nutshell, if the cost of Product A goes up 2-3% every year due to inflation, then nominal growth is 2-3%.  But that doesn’t necessarily mean that that product is more expensive, it just means that there is more money supply in circulation resulting in a gradual devaluing of the currency used to buy it.  So, if the price of Product A grew at 0% nominally, it would actually be getting cheaper in real terms, because there would be a higher quantity of money available in the economy with which to buy it.

To summarize:
Nominal growth ignores inflation
Real growth takes inflation into account.

In order to understand how much more expensive the SNAP program is getting each year, we must compare it to the relative increases in food prices each year due to inflation.

SNAP - Chart 5

Source: Congressional Research Service. Consumers and Food Price Inflation.

“CPI” just means Consumers Price Index, and is a measure of inflation for consumer goods (as opposed to the Producer’s Price Index, or PPI, which is a measure of inflation for producers’ goods).

Now that we know the annual increase in food price due to inflation, we can take a look at the real growth in SNAP program costs each year (real growth = nominal growth – inflation):

SNAP - Chart 6a

The chart above is a compilation of all the analysis that has been discussed thus far.  It shows SNAP cost growth on a constant-person basis (accounting for population growth), in real terms (accounting for food inflation), and during a peak-to-peak time period (so we are comparing like years, apples to apples, not apples to oranges).

It’s difficult to tell from this chart, however, how much SNAP program costs have grown, on average, during the decade from 1998-2007.  In order to measure growth of the program in proper terms (on a real, constant-person basis), we must perform an additional 2-step analysis.

First, we must index the growth of the program to a specific year.  This is a fancy way of saying “apply the constant-person, real growth rates on an annual basis starting at a specific year.”  Since we’re looking at 1998-2007, we will apply these growth rates each year starting in 1998.  So, as an example, 1998 SNAP program costs were $16,890, so we would perform the following calculation:

$16,890 x (100%-9.9%)    Year 1

x                   (100%-8.3%)    Year 2

x                   (100%-0.4%)    Year 3

x                  (100%+14.7%) Year 4

So on and so forth through 2007.  The result looks as follows:

SNAP - Chart 7

Now that we know the start and end points of the SNAP program over the course of a decade, from peak-to-peak, we can use what’s called the “Compounded Annual Growth Rate” (CAGR, for short) to understand how the program’s costs trended over this time period.  The CAGR is a fancy way of saying “If this program grew at a single growth rate in each year for this 10-year period, what would that single growth rate be?”  For math-oriented folks out there, it’s the “geometric mean that provides a constant rate of return over the time period” (source: CAGR wiki).

The formula for CAGR is: (Ending cost/Starting cost)^(1/# of years) – 1

 

Let’s run the math.

Ending Cost = $22,213

Starting cost = $16,890

# of years = 9 (1998 to 1999 is considered one year)

CAGR = (22,213/16,890)^(1/9) -1 = 3.1%.

 

Our CAGR is 3.1%.  What this means is that if the SNAP costs grew at 3.1% in each year from 1998 through 2007, we’d start at $16,890 in costs and end at $22,213.  This, of course, is what happened, except in actuality the growth rates change in each year.  The CAGR gives a sense of the overall magnitude of growth in costs from start to finish.

For me, here’s the kicker.  Our analysis shows that, on a peak-to-peak, constant-person basis including the effect of inflation, the food stamps program in the U.S. only grew, on average, 3.1% each year for the decade from 1998-2007.  Is a low single digit growth rate indicative of a “bloated” or “wasteful” program?  My response would be no.  And yet, this impotent, rhetoric-based argument devoid of data appeared to be sufficient justification to cut food benefits to millions of desperate Americans.

SNAP costs have gone up quite a bit since 2007 due to the Great Recession.  This is in large part due to a doubling of the enrollment size of the SNAP program (~26 million participants in 2007, ~47 million in 2012).  Of course, unemployment also surged in this same period.

So, the question we as Americans must ask ourselves is this: is an increase in spending in a necessarily counter cyclical program indicative of excess or bloat?  I would have to respond no.  The necessary follow-up is:  how has the program performed in comparable years (i.e., peak to peak, not counting counter cyclical effects from the recession)?  And, as my analysis shows, the program averaged 3.1% growth per year for the decade preceding the Great Recession.  Is a low single digits growth rate indicative to you of excess or bloat?  To me, it sure isn’t.

 

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