Food Stamp Caseloads over the Business Cycle

Abstract

1. Introduction The onset of the current economic downturn following the longest expansion in U.S. history has renewed interest in the role of automatic stabilizers designed to insure households against negative cyclical income shocks. This system of income and consumption stabilizers includes, among others, the individual income tax and the panoply of social insurance programs, such as unemployment insurance and the Food Stamp Program. While the income tax and unemployment insurance have received recent attention (Gruber 1997; Auerbach and Feenberg 2000; Kniesner and Ziliak 2002a, b), little is known about the role of food stamps as an automatic stabilizer even though the program served over 27 million Americans at its peak in 1994. This gap in the literature is particularly acute in light of passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (Welfare Reform Act), which introduced new rules on cash-assistance recipients and thus the nearly half of food stamp recipients who also receive cash welfare. Moreover, the 1996 welfare reform also had a direct administrative effect on the Food Stamp Program by ending the eligibility of some recipients, reducing average benefit levels, and requiring states to replace paper coupons with Electronic Benefit Transfer cards. Importantly, the Welfare Reform Act also eliminated the entitlement status of the main cash-welfare program, Aid to Families with Dependent Children (AFDC), thus positioning food stamps as a more prominent countercyclical consumption stabilizer. A first task in assessing the possible stabilization role of food stamps in the era of welfare reform is to identify the cyclical sensitivity of food stamp caseloads. If food stamp caseloads are acyclical, then we would expect no role for food stamps in smoothing consumption over the business cycle. If, however, food stamp caseloads are highly cyclical, then food stamps may function as an important antirecessionary tool. By the same token, the new welfare policies may independently affect food stamp caseload movements and interact with the business cycle, thereby altering the possible stabilization role of the program. In this paper, we specify a dynamic model of food stamp caseloads to estimate the responsiveness of the caseload to the business cycle, to welfare policies, and to interactions between the business cycle and welfare policies. Unlike cash welfare, there has been scant research on the cyclicality of food stamp caseloads.1 Wallace and Blank (1999) are a recent exception in their use of both static annual and dynamic monthly food stamp caseload models based on state-level panel data for the 1980 to 1998 federal fiscal years. With annual data, food stamp caseloads were strongly countercyclical, and reform of AFDC led to weak declines in total caseloads.2 Specifically, they attribute up to 44% of the 1994 to 1998 food stamp caseload decline to economic conditions and about 6% of the decline to welfare reform. They reach broadly similar conclusions with monthly data. However, Wallace and Blank calculate that upward of 85% of the post-1996 decline in food stamp caseloads can be attributed to welfare reform if one is willing to ascribe all the unexplained residual to welfare reform, which as the authors note is undoubtedly an overestimate of welfare reform's effect on food stamp caseloads (p. 85). In their static models, Figlio, Gundersen, and Ziliak (2000) reached conclusions similar to Wallace and Blank's estimates with annual-level data. In their preferred dynamic models, they attribute about 35% of the 1994 to 1998 caseload decline to the macroeconomy and virtually nothing to welfare reform. We improve on this previous research on food stamp caseloads along several dimensions. First, we not only follow other research in estimating the impact of AFDC policy changes on food stamp caseloads but also examine the impact of policies that are focused directly on food stamps. …