The 1996 welfare reform act dramatically changed the system of
government assistance programs for low-income households. The new
welfare system placed greater emphasis on employment and training,
while altering the way cash assistance is administered. Specifically,
the act replaced a federally run program with block grants to the
States, allowing States more flexibility in disbursing funds to
The Food Stamp Program, however, remained a federally funded entitlement
program. Still, proposals to further decentralize the program and
allow States additional flexibility to design and administer their
own food assistance programs periodically arise. Under one approach,
food stamp recipients would receive cash in lieu of food stamp vouchers,
giving them greater choice in what they consume. If implemented,
such a "cash-out" could have some surprising effects on
the Nation's economy.
food stamps to cash transfers would trigger a number of economic
changes. On average, low-income households tend to buy more food
with food stamps than with an equivalent amount of cash assistance.
For example, if a household receives $100 in cash assistance in
place of $100 worth of food stamps, spending on food falls by about
$15 and spending on nonfood goods and services, such as clothes
and rent, rises by $15. This change in the household's spending
patterns would in turn affect the production of food and nonfood
goods, employment, household income, and taxes.
Cashing out a $19-billion Food Stamp Program would result in an
estimated $3.5 billion-decrease in cash receipts for farming and
food processing and a loss of 20,000 jobs in these sectors. Food
stamp recipients' shift from buying less food to buying more nonfood
goods and services shifts production in a way that dampens the demand
for labor and reduces earnings for mid- and high-income households.
The shift in production and lower earnings reduces tax revenue paid
to the Federal Government. For the purpose of evaluating the impact
of this policy change on household well-being, ERS researchers offset
the revenue loss with an increase in personal income taxes. Thus,
mid- and high-income households would feel the pinch of the higher
taxes needed to cover the shortfall created by the policy change.
The result: a change in welfare policy that is seemingly limited
to low-income households may have ramifications that extend to other