BOHANON & CUROTT: Remember that increasing government benefits has a cost

Should the federal government give American households more benefits? Economists cannot answer the “should” part of the question, but we can offer some insights on the tradeoff between universal benefit programs and means-tested benefit programs.

Suppose political candidate X proclaims that “Food is a Right” and proposes “SNAP benefits for all!” (SNAP is the Supplemental Nutrition Assistance Program aka food stamps.) The candidate calls for average household SNAP benefits of $500 per month. (The current average is around $127 per month.)

Of course, “for all” implies the benefit goes to all 150 million U.S. households. Some quick math reveals the program will cost $900 billion per year. The federal government currently collects around $1.5 billion annually in individual income taxes. The newly conceived “SNAP benefits for all!” eats up 60% of that revenue. Major tax hikes are required.

The main problem with universal benefits programs: They are inevitably budget busters. What’s more, because taxpayers one way or another cover the costs of the benefits, the average household, by definition, pays more in taxes than it gets in benefits. That makes no sense.

Back to the drawing board. Target SNAP benefits only to those households with the lowest income—say the bottom 10%. The $900 billion tab becomes a more manageable $90 billion. But the 10% threshold is about $8,000 a year in household income, which is well below current SNAP eligibility requirements. This highlights the main drawback to means-tested benefits: the incentive problem.

If a household earns more than $8,000, it loses the SNAP benefit. This establishes a bad incentive. It creates a “dependency trap” for the most vulnerable because it penalizes the household if it earns more income. What’s the point of accepting additional work opportunities if $6,000 in annual SNAP benefits are lost or significantly reduced?

Of course, the SNAP benefit can be phased out gradually as income rises to soften these bad incentives. That’s how the current SNAP and other means-tested programs work.

Unfortunately, phaseouts simply extend the dependency trap to more recipients further up the income ladder, albeit in a less dramatic way. Phaseouts also increase the program’s costs as more households receive the SNAP benefit. In other words, benefit phaseouts give us the worst of both systems.

So pick your poison: dysfunctional incentives for those who receive benefits or massive budget-busting programs. As usual, economists offer no clean solutions; we just highlight tradeoffs. Ah, the dismal science!•

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Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.