I wish to address the federal government’s food stamp program, SNAP. Generally, in all political debates, SNAP falls under one of two categories, depending on which “team” you support: “It helps the poor” or “lazy moochers”. Factually, both sides miss the point. The debates only result in vicious attacks and the mention of useless “statistics” that prove nothing and do nothing to protect SNAP, such as, “red states are the moochers”. Yes, SNAP does help lower income people buy groceries and yes, there most likely is a tiny fraction of recipients wishing to “milk” the system. But the function of the program is far more than just providing a means to buy food. In fact, without SNAP, some of you who aren’t on the program might not have jobs today. The “lazy” vs “hard working” political thinking is the result of a culture steeped in Calvinistic thinking, too much TV “news”, a steady diet of political nonsense and not enough education.
Most nations these days operate some form of what we call “automatic stabilizers” to prevent a large drop in aggregate demand when the economy heads south. An automatic stabilizer creates a floor in aggregate demand, so consumer spending cannot fall through it and also, it creates a ceiling in aggregate demand when the economy is doing well. In the US, SNAP is one of these stabilizers. The actual macroeconomic purpose of SNAP is to prevent a large drop in consumer spending on food, which in turn, prevents the economy from sinking further into a downturn. The function is automatic. When the economy stalls or recesses, jobs are lost or working hours are cut back and so, applications for SNAP increase as more people need help to supplement the loss in pay. Today, low wage jobs and underemployment is commonplace. Therefore, we get a valuable insight as to why so many people are on SNAP. In today’s job market, the lowest income distribution cannot afford to pay bills and buy groceries when wages are so low and work is mostly part-time. And no, I’m sorry, but George W. Bush was wrong: Working three jobs to make ends meet might be “American” in the sense of how poorly the United States operates its economy, but it isn’t desirable, nor is it patriotic, an act of responsibility, or a healthy thing to do. Frankly, it’s irresponsible, foolish and pure evil to force people into such a needless situation.
What we are told today is that wages are mere costs. If wages go up, unemployment will soar majestically like a bald eagle over the Grand Canyon. Of course, such an assertion is an outright lie. The truth is that wages contain both a cost element and a demand element and you cannot ignore the demand component. If you do and claim that wages are just costs, then you are asking everyone to assume that workers never spend their paychecks. They just hoard their income. Now that, folks, is pure nonsense. Yet, this is what the media, politicians and certain elements in the academic world ask us to believe.
The fundamental rule in macroeconomics, which is ignored by the mainstream, is that somebody’s spending is somebody’s income. It’s just plain reality. If you give me $30,000 for my car, you get my car and I get your $30,000. That $30,000 is my income. That $30,000 was your spending. If Walmart pays a worker $500, that $500 is Walmart’s spending and it is the employee’s income. If the employee spends $5 at Walmart on some apples, that $5 is the employee’s spending and it is Walmart’s income. So, when business pays wages, that is the worker’s income and the worker, in turn, spends his/her income. Wages are both a cost for business and a source of demand.
Believe it or not, there was a time when business understood that good wages were a stable means to ensure that what we produced as a nation, got sold to consumers. Today, partly because of the mantra “wages are a cost”, wages are now low and lowered even further with a reliance on part-time work. Suppressing wages like this causes a redistribution of GDP to profits, away from worker’s share. And no, this is not a political statement by any means. It is macroeconomic reality and it should concern all of you Joe and Jane Citizens, both conservative and liberal alike. I’m going to demonstrate this reality to you, so put on your math caps. I won’t ask you to calculate anything. I’m simply going to show you why GDP redistribution to capital is bad.
We must first understand four concepts:
1. The Real Wage
2. The Nominal Wage
3. The Price Level
The Real Wage: Workers do not have any control over the real wage. The real wage is determined by the nominal wage and the price level.
The Nominal Wage is the wage that is agreed upon between employer and employee at the time of hiring. So, when you are offered a job, the employer might say, “Ok, we’ll start you at $9.50 an hour” and you agree and sign on the dotted line.
The Price Level is the level of the prices of goods and services in the economy. You know, the thing that the mainstream worries endlessly about, screaming “Oh my God! Inflation!” whenever government spending is mentioned.
GDP is the Gross Domestic Product, which is also known as the National Income. Workers and capital share in GDP. To get any useful insight into this redistribution of GDP to capital, we need to be able to know what we call “the wage share”. The wage share is expressed as:
Wage share = (W.L)/P.GDP
Where wage share equals total labor costs (W.L) divided by real GDP valued by the price level (P.GDP). We can rearrange the expression (W.L)/P.GDP as:
Where (W/P) is the Real Wage and (GDP/L) is Labor Productivity. At this point you might be saying, “Stop! What has this to do with anything?” It has everything to do with it. First, we’re going to prove that what I am saying about GDP redistribution isn’t political, then we will finish up. Hang in there.
So, then, (W/P)/(GDP/L) is equivalent to a thing we call “Real Unit Labor Costs” which is the ratio of real wages to productivity. When the ratio falls, workers have a smaller share of GDP and capital has a greater share. Therefore, when growth in productivity rises faster than real wages, national income, or GDP, moves away from workers, redistributing to capital. In other words, all of our national income moves away from you, both liberal and conservative alike and into the pockets of the 1%. There you have it. No politics, just macroeconomic reality. This redistribution of GDP, if left unchecked by government policy, results in vast income inequality. Why is income inequality important?
Because wages contain both a cost and a demand element. At this point, some of you are now saying “Ah, I get it.” When wages are low, demand will drop and unemployment will rise. The US government controls the level of aggregate demand through deficits (cutting/raising taxes, or net spending greater than that of taxation). If the deficit is too small, unemployment results. However, what do you do when wages are low and the US government is slashing the deficit? Well, you need to fill the spending gap to ensure that production is sold, or you will get a downturn. So, you rely on bank credit to fill that gap. This means a private debt build-up in the private sector. As the level of private debt expands, demand increases. But then, when the private sector cannot take on any more debt, without government intervention, spending will contract. When that happens, demand drops, unemployment increases, SNAP applications increase and along with that, the federal deficit automatically increases. That’s right: the federal deficit automatically increases without any input from Congress. Hence, SNAP is an automatic stabilizer for the economy, ensuring that there is a floor in the drop of aggregate demand. The deficit rises automatically and consumer spending on food is maintained to some level. Now then, what happens to the economy when politicians cut SNAP benefits to stop these lazy “takers” from “mooching”? They end up harming poor people, companies like Walmart and the entire economy. Everyone takes a hit.
Let us suppose politicians succeed in getting cuts to SNAP during a downturn. The first thing that occurs is spending on food will drop. SNAP recipients will begin to make some hard choices and what they used to buy, will now be reduced to the essentials. As this situation progresses, companies like Walmart will notice that income is dropping (because somebody’s spending is somebody’s income) and they will begin to lay off workers to attenuate the fall in income. As unemployment then rises, those who used to work at companies like Walmart experience an income drop and so, they not only spend less on food, they spend far less on gasoline, clothing, electronics, Tylenol, utensils, power tools, oil changes, appliances, lawn mowers, paint, pencils, pens, paper, printer ink, artwork, music, picture frames, carpet, curtains, etc. So, companies that make and/or sell food, gasoline, clothing, electronics, Tylenol, utensils, power tools, oil changes, appliances, lawn mowers, paint, pencils, pens, paper, printer ink, artwork, music, picture frames, carpet, curtains, etc., experience a drop in income and begin laying off workers. The end result of cutting SNAP in a downturn is that politicians will only deepen the downturn as aggregate demand falls lower to the new floor that was set when they cut SNAP.
So, SNAP isn’t about “moochers”. It’s an automatic stabilizer for the economy that protects both you and business alike. Let’s drop the politics. Can we do that? Those of you who aren’t on SNAP should really think twice at this point.
Turns out, these so-called “lazy moochers”, using the power of federal spending, might actually be protecting your job (or your second and third job), helping you to keep that nice house of yours that you “responsibly” worked hard for, out of foreclosure.