The Macroeconomics of SNAP

It is the fault of politicians and the media for the public believing that the purpose of SNAP is to be a handout for poor people. That is not the purpose of SNAP or food stamps. For liberals, that is the political justification for SNAP. For conservatives, that is the political justification for killing SNAP. The actual purpose of SNAP is to serve as an automatic stabilizer for the economy, which is a critical macroeconomic function.

SNAP is but one initiative in a family of stabilizers employed today. Other automatic stabilizers are unemployment insurance and various other welfare programs. These initiatives create and maintain a floor in consumer spending, through which that spending cannot fall in the event of an economic downturn.

Briefly, The Macroeconomics of SNAP

Somebody’s spending is somebody’s income. When consumers buy an iPad for $299 from Apple, that $299 is Apple’s income. When Apple pays an Apple employee $1,200, that $1,200 is Apple’s spending and the employee’s income. When the Apple employee then spends $1,000 of that $1,200 paycheck on a Macbook Air, that $1,000 is Apple’s income. So, on aggregate, when consumers spend then business has an income. This spending by consumers is aggregate demand which directly influences job creation.

When consumers on aggregate increase their spending, that increase places pressure on business to increase its production of goods and services. For business to meet a persistent demand to increase its production, it must hire more labor. The main result of increased consumer spending is more goods and services for consumers to buy. Job creation is the by-product of that consumer demand for increased production. In other words, business asks for help from labor to meet increased production demands.

Oppositely, when consumer spending on aggregate falls (contracts), business loses income. When business loses income, it enters the inventory cycle, which means that business has excess inventory. Output of goods slows down since there is little point in over-producing. To attenuate the fall in income, business cuts payroll expenditure and lays off workers that it no longer needs. Those workers are now unemployed. As consumer spending contracts further, business income contracts further, and so, unemployment rises. If consumer spending on aggregate continues contracting unabated, a recession will occur. The question now becomes, “why do consumers contract their spending?”

The Federal Government Determines the Unemployment Rate

We live, work and play in a modern monetary economy. This means that our economy revolves around “money”. “Money” is the voucher that allows us to obtain necessary and leisure goods and services. The monetary instrument that consumers use in the United States is the US Dollar. The US Dollar does not come from business or anywhere else in the US private sector. The US Dollar does not come from China, Japan, the UK, Saudi Arabia or the moon. The US Dollar comes from the US government. The federal government is the exclusive manufacturer of US Dollars and it is where US consumers, business and China obtain US Dollars that they use.

The US government ensures that both consumers and business will use the US Dollar through tax collections. Because the US government can enforce it tax collections, people will demand US Dollars. The reason for this, is because federal tax is only payable in US Dollars. If you don’t have US Dollars, you cannot pay the tax. If you do not pay the tax, there are serious penalties involved. So, people must obtain US Dollars for this reason. When a private entity has obtained enough US Dollars to satisfy all tax liabilities, the remaining dollars in a private entity’s hands can be used for whatever legal purposes that person or business deems appropriate. Because of the federal tax, the US market operates based on the US government’s currency – US Dollars. The US government ensures that the private sector can pay taxes by purchasing good and services from the private sector in exchange for the federal government’s US Dollar, which allows the government to provision itself with goods and services necessary for the government to function. In short, this is what the “Federal Budget” is. It is when Congress determines what the federal government will buy with its very own currency, and for how much it will pay in US Dollars, whether that be military hardware, computers, employees, or tax refunds. Since 1971, the US Dollar has existed as a free-floating, non-convertible fiat currency. That means that all federal spending is “money creation”, or another way we can put it is all federal spending is the disbursement of new US Dollars that Congress manufactured when it agreed upon a budget for the fiscal year.

It is the constitutional duty of Congress to ensure that the US government will supply the US domestic economy with US Dollars, and also, to determine the appropriate level of taxation for that particular fiscal year. Each year, Congress must, therefore, decide how many dollars the federal government will manufacture and how many it will reclaim through taxation and destroy. (We will discuss taxation momentarily. For now, let us concentrate on how the manufacturing and disbursement process) Then, when approved by the President, the US Treasury is authorized to begin disbursements of those newly manufactured US Dollars. In the case of US Dollars, manufacturing is not the physical creation of a product, but rather, it is the decision to set the level of US Dollar injections into the private sector to a fixed amount for that fiscal year. Congress has the authority to manufacture and then disburse an infinite number of US Dollars. So, when Congress sets the US Dollar manufacturing output to a certain level in any given fiscal year, Congress is setting a limit on the number of US Dollars that it will allow to be created and then disbursed by the US Treasury.

When Congress decides to authorize the manufacturing of a certain number of US Dollars in any given fiscal year, it also decides how many US Dollars it will withdraw from the US economy and destroy. The withdrawal and destruction of US Dollars by Congress is called taxation, which like US Dollar creation, is authorized by the US Constitution, Article 1, Section 8. Federal taxation is not theft, because US Dollars are not a privately created product. They are not commodities.

While it is true that private entities can possess US Dollars and it is illegal to steal US Dollars from those private entities, it must be understood that the only reason why private entities possess any US Dollars in the first place, is because the US government manufactured the dollars and then spent them into the economy. In simple terms, this means that all US Dollars are the property of the US government. The US government authorizes you to use them for any legal purposes you wish. Whatever goods and/or services that you manage to obtain using the US government’s currency are yours to keep. However, the US Dollars are not yours. Again, you are only authorized to use them for any legal purposes. All US Dollars are public funds that belong to the US government, and at any time, the US government has the authority to demand back from you any or all of its currency in your possession, which by law, you must surrender upon demand. The US government makes this demand through taxation. Just like you can demand the return of your property from someone whom you allowed the use of your property, and resort to the force of law to ensure the return of your property, the US government can also demand its property back from you through the force of law.

Federal taxation today, does not fund any federal spending of any kind whatsoever. There is no such thing as federal “taxpayer-funded” corporate subsidies, welfare, military or anything else. The tax dollars that you pay to the federal government are not given to people on welfare or to “ham and eggers” in charge of large corporations. All federal tax dollars are destroyed. However, at one time in US history, federal tax dollars did fund federal spending. That time in US history was during the fixed exchange regime called the Gold Standard.

In today’s fiat regime, the capabilities of federal spending expand to the limit of the production ability of the economy. The gold standard forced the federal government to target the gold supply instead, which, depending upon the nation’s trading position, could be less than the limit of the production ability of the economy or equal to it. Nations with weak trading positions had to ship their gold overseas to settle payments, thus, as their supply of gold dropped, these nations also had to reduce the amount of their own currency in circulation. As a result, these nations couldn’t address domestic unemployment and so, they were forced to endure persistent recessions. The point here, then, is that unlike a fiat currency regime, during the gold standard the gold reserves were the target and not the economy’s actual maximum ability to produce goods and services. It is through federal spending and taxation levels (fiscal policy) that the US government controls the unemployment rate.

When the federal government is running deficits, it is manufacturing new US Dollars, spending them into the economy, and then leaving more of those new US Dollars in the economy rather than removing all of the new US Dollars through taxation. In other words, federal deficit spending is the adding of US Dollars to the economy. When consumer spending on aggregate contracts, the US government must run deficits to ensure that consumer spending increases (fill the spending gap), which, in turn, decreases unemployment. If the federal deficit is being cut, then unemployment will eventually increase when consumers contract their spending. Thus, the US government creates unemployment in the United States and it is the only entity in existence in the United States that can eliminate unemployment in the United States, which it does through deficit spending. Now that you understand how unemployment and recessions arise, let’s examine how SNAP prevents economic downturns from becoming decade long depressions.

SNAP Recipients Are Employed by the Government

Since the federal government is both the currency issuer and regulatory authority, it creates all unemployment. It also creates poverty and allows low wage environments and underemployment to exist. Because it has created this situation, the government employs (makes use of) poor and unemployed persons to function as an automatic stabilization mechanism for the economy.

SNAP is not about the US Dollars, nor is it about helping the poor. “Helping” the poor buy food is not the intent. Like anything else concerning federal spending, SNAP is about the real resources: the food supply and people who, through the SNAP program, will be employed (labor) to do one simple job, which is to buy food, and that, in turn, maintains a floor in the US economy through which consumer spending cannot fall. In other words, rather than providing a full-time job to these persons by directly purchasing their labor power, the US government chooses to employ these persons as automatic stabilizers by providing them a small salary which they can only spend on food. Those who are too disabled to work obviously cannot be employed in a full-time job, but that fact does not invalidate the point concerning employment as an automatic stabilizer. SNAP recipients do not have to perform any labor other than finding a way to get to the grocery store and purchase food.

Obviously, if SNAP funds were allocated by Congress, but nobody participated in SNAP, then the program would not be able to perform its macroeconomic function. The government needs living human beings to go out and buy food with the US Dollars that it pays them. In doing so, these unemployed, poor and disabled persons are ensuring that middle class, skilled and highly educated jobs are not lost in an economic downturn. (I’ll explain this momentarily). So, on the one hand, we can be thankful that some help exists for the poor and disabled. Otherwise, they’d starve. But on the other hand, from the macroeconomic perspective, for the crucial job they perform for the economy ensuring the jobs of people who earn comfortable livings are not lost, their extremely meager compensation is totally insufficient, unfair and altogether unacceptable.

For those willing and able to work, the US government should provide a job guarantee at a decent wage, plus any necessary further assistance to lift them out of the poverty that the US government created for them, restoring their dignity as human beings. For those who are disabled and cannot work, the US government must provide them with a basic income guarantee and any further assistance necessary that will lift these persons out of the poverty that the US government created for them, restoring their dignity as well. In short, these persons are forced into unemployment and poverty by the US government, then they are being used by the federal government to ensure that those who earn comfortable livings maintain their comfortable livings. Such a system is not a desirable way to operate an economy.

SNAP Protects Middle Class, Skilled and Educated Jobs

Now we come to the point in our discussion where you will understand the purpose of our long trek through consumer spending, job creation and federal spending. Since we now understand that somebody’s spending is somebody’s income as well as how jobs are created and why there is unemployment, we can now properly explore how SNAP protects the economy.

When unemployment rises, the unemployed seek assistance from the federal government by applying for unemployment insurance, welfare and SNAP. When they do, the federal deficit automatically rises, because increased federal spending is necessary to pay these claims. Since we understand that federal deficits are necessary to boost consumer spending, we can also understand that when the unemployed spend these benefits, consumer spending will continue. That is the purpose of federal deficits – to boost consumer spending sufficiently to create and maintain a situation of full employment, and also, to ensure the public purpose (healthcare, education, infrastructure, etc.) So, what we’re talking about here is that the US government chooses each year to mismanage the economy, and because of that mismanagement, SNAP is necessary to ensure that consumer spending will not collapse. In macroeconomic terms, this is called “inefficiency”.

When millions of people spend their SNAP benefits on food, those US Dollars are income for grocery retailers, who, in turn, pay their workers with the US Dollars earned through SNAP purchases. Those workers then take their paychecks and buy food as well as non-food items from other businesses. They purchase clothes, toothpaste, DVDs, gasoline, books, furniture, TVs, and seek out services to purchase, such as oil changes, carpet cleaning, medical, dental, window replacements, on and on. Now, let us cut SNAP from the picture.

Without SNAP, when consumer spending contracts, business loses income and jobs are lost. The dollars from SNAP that would have purchased food and meant an income to grocers and paychecks to their employees are no longer there. So, as consumer spending contracts, spending on certain food items will fall along with the income of grocery retailers. Grocery retailers will then defend themselves from the fall in income by laying off workers. When those workers are unemployed, they will either slow or stop spending on clothes, toothpaste, DVDs, gasoline, books, furniture, TVs, and slow their purchase of services, such as oil changes, carpet cleaning, medical, dental, and window replacements.

Businesses who sell clothes, toothpaste, DVDs, gasoline, books, furniture, TVs, oil changes, carpet cleaning, medical, dental, and window replacements will experience a drop in income and will then defend themselves from the fall in income by cutting payroll and laying off workers. As the lack of aggregate demand, falling business income and rising unemployment winds its way through the economy, some small businesses go out of business entirely, mid-sized businesses take a major hit, large corporations downsize, and demand for the jobs of the middle class, skilled and educated weakens and then falters. These workers begin losing their jobs and end up in the unemployment line. Without automatic stabilizers such as SNAP in place, consumer spending would enter a free fall, collapsing to the point of an economic depression.

Concluding Remarks

Thus, we see that because of its own mismanagement of the economy, through SNAP, the US government employs the unemployed, the poor and the disabled to protect against a major collapse in spending. The government invites them to apply for SNAP, checks their application to ensure they’re qualified, then pays them a meager wage that can only be spent on food. While the SNAP recipient can only spend their pay on food, others who earn that spending can spend what once were SNAP dollars on any goods and services they wish. Those employed as automatic stabilizers get food, those receiving that spending get more than food. In summary, when we think of SNAP as handouts to help the poor, we are confirming the age old lie that the US government is powerless against business, and that the federal government bears absolutely no responsibility for the existence of unemployment and poverty. The entire reason why the unemployed, poor and the disabled need SNAP is because the US government intentionally placed them in that position of dire need.

So, while SNAP is a vital program and, outside of drastic changes to the US government’s fiscal policy stance, should never be cut, we must look for better ways to ensure automatic stabilization of the US economy. Rather than keeping people in a situation of involuntary unemployment and poverty, the federal government must buy up the labor of all who are willing and able to work, but cannot find a job and pay them a living minimum wage. Initiating a federal Job Guarantee will achieve this goal, ending all involuntary unemployment with price stability. It will drive out of the economy all low wage producers, and over time, it will enhance the private sector. For the disabled who cannot work, the federal government must raise their benefits to a level sufficient to ensure a life of dignity. A basic income guarantee is one means to achieve this end. If we combine the Job Guarantee with a basic income guarantee, we end involuntary unemployment, provide price stability, and we go a long way towards ending poverty. Of course, there are other initiatives necessary to realize this goal. Education must be tuition-free. Healthcare should be universal with Medicare for All, infrastructure modernization is a must. We end unemployment and poverty by changing course from neoliberalism to the public purpose. In short, we bring about prosperity for and ensure the dignity of all US citizens by demanding that the US government do its job properly as a currency issuer.