Nancy Pelosi says that the fastest way to create jobs is to expand food stamps and unemployment insurance. She further stated that food stamps have a 1.84 multiplier effect. Let’s examine how food stamps (now called the SNAP program) work. The government taxes one person and then gives that money to a food stamp recipient so they can buy food. This means that the recipient has provided no value to the economy for the dollars they receive. As a result, when the food stamp recipient trades the dollar(s) (electronic credit – food stamp recipients now get something like a debit card) they got from the government for food at the grocery store they have provided no value for the food. If we eliminate the middle men, government and the taxpayer, then what the food stamp recipient is doing is taking food from the grocery store without providing any value in return – i.e., stealing. According to Nancy Pelosi’s logic, we should advocate people stealing from grocery stores because this will have a multiplier effect, which will create jobs. This would save on the cost of government having to run the food stamp program. Now you may object that this does not spread the cost of this theft (government forced charity) across society and therefore is unfair to grocery stores. However, the multiplier effect should more than make up for the grocery stores’ losses.
The reality is that food stamp programs clearly destroy wealth. The taxpayer receives nothing for the taxes he pays for the food stamp program. You may object that the taxpayer receives the same benefit as would accrue from an insurance policy, but this is a false analogy. The taxpayer does not have a choice of whether to be a part of this insurance policy, cannot select the coverage for this policy, and the cost is not related to the risk he will receive a payout on of his policy. The insurance policy analogy is nonsense. The taxpayer has to spend a significant amount of money to comply with the tax code. In order for the government to receive one dollar from the taxpayer, the taxpayer will spend more than one dollar. Estimates are that it cost at least ten cents in compliance costs for each dollar collected by the federal government. The government has to pay tax collectors and food stamp administrators out of the dollar they collected from the taxpayer before they can get it to the food stamp recipient. I think a reasonable estimate is that this cost is at least 20%, so the food stamp recipient gets perhaps eighty cents for each $1.10 the taxpayer expends. The food stamp recipient then spends the eighty cents at the grocery store. Clearly, this is a net destruction of wealth.
The hardcore believers in the multiplier effect will argue that the eighty cents spent at the grocery store will cause the owners and employees of the store to have an extra eighty cents that they will spend elsewhere. When the grocery store owners/employees spend the eighty cents, the recipients will further spend part of the money creating the 1.84 multiplier effect. Even if this were true (which it is not), it is less than the value that would have been created if the taxpayer had been able to keep the $1.10. Any value created in the food stamp chain is significantly less than the value that would have been created by the taxpayer holding on to the money. The cost of complying with the tax system, the cost of administering the food stamp program, and the food stamp recipient provide no value (goods and services) to the economy. In addition, the food stamp program increases the demand for certain foods driving up the cost for all other buyers. This increase in cost of food has to be subtracted from the return on the food stamps. Any economist who argues for the multiplier effect should be fired. Any politician who advocates a transfer payment program based on the multiplier effect should be treated like a member of the flat earth society.
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