In this week’s Grumpy Economist rant, John Cochrane looks at food stamps, health subsidies, and the wider network of government programs meant to pay for “specific” necessities. With tens of millions of Americans receiving food assistance and many more getting help through the Affordable Care Act, debates often rely on emotional claims about hunger and access. Cochrane argues this framing ignores a basic economic fact: money is fungible. When government covers one expense, households can reallocate their own dollars, so earmarked benefits often act much like extra income.
That insight doesn’t settle whether these programs are good or bad—but it clarifies where the real problem lies. When earning an extra dollar triggers the loss of a dollar or more in combined benefits, the incentive to work weakens. Cochrane’s maintains that policies should be evaluated on how they shape incentives, not by the comforting labels attached to them.
Transcript
Hi, I’m John Cochrane, senior fellow here at the Hoover Institution, and welcome to my weekly rant.
Today, we’re going to talk about food stamps and other government programs. The news is: money is fungible.
During the shutdown, the news came out that 40 million Americans are on food stamps, and many more get subsidies for their health insurance through Obamacare.
And the usual song and dance, people will starve in the streets, they won’t get health care. That’s not how it works.
These are two of many programs by which the government tries to pay for specific things that each of us buy: food, health insurance, college grants to pay for college, along with loans which get forgiven; heating assistance to pay for heating oil in the winter; Medicaid, CHIP, other programs to pay for health insurance; Head Start to pay for preschool; public housing, rental assistance, and affordable housing lotteries paid for by landlords, but still ways that the government insures that people pay for specific things.
The news here: money is fungible.
By giving food stamps, you’re not necessarily helping someone to buy food and not something else.
Suppose someone spends 300 bucks a month on food, and we give them $150 of food stamps. What do they do? Do they now spend $450 on food? What would you do?
Not likely, you’re more likely to spend $350: $50 extra on food, and $100 more on other things. The money that you used to be spending for food, you can now use for other things.
Almost everybody, and this goes in academic studies as well, works that way. They don’t spend all the extra money on food, they use some of the food money that they had been spending to buy other things.
So food stamps help pay for food? No. Giving someone food stamps is exactly the same as just giving them more money, that they’ll spend a little bit on food and a little bit on other things.
“Food stamps can’t be used to pay for alcohol,” says the government. No, because the money that you used to spend on food, now you can spend on alcohol if you want to, for better or worse.
This is the central lesson of economics: Money is fungible.
People don’t have specific buckets of money that go to pay for specific things, and if you fill up one bucket, they spend it only on that. They trade off.
None of this is good or bad, necessarily. Maybe it’s better, in fact, to give people money through the programs than give them directly cash. It’s a lot harder to scam the programs than it is to scam just plain old cash payments.
And if our government decides that it wants to take money from wealthy people and give it to poor people, to some extent, that’s a value in political judgment that I don’t want to argue with today.
There is an issue with these programs. The big one is always the incentives.
If you earn a dollar in today’s programs, you lose, typically, a dollar of federal benefits all taken together. That’s a bad incentive not to earn the dollar.
And worse, if you go out and get another program, they don’t take away the money that you get in a particular program.
So the incentives not to work and to stay on the programs, that’s the problem.
I just ask us not to be hypocritical. The idea that food stamps pay for food, heating oil pays for heat, the low-income bus pass pays for buses and you’d walk otherwise, that rent assistance pays for rent, that’s pulling on heartstrings, not our brains.
Let’s think harder.
Don’t forget to subscribe and thanks for listening.
John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow of the Hoover Institution at Stanford University. An economist specializing in financial economics and macroeconomics, he is the author of The Fiscal Theory of the Price Level. He also authors a popular Substack called The Grumpy Economist.
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