Food stamps may be best fiscal policy tool

Reis and McKay reach this conclusion by building a complex macroeconomic model calibrated to U.S. data, but the intuition isn't all that complicated. Transfer payments yield the highest amount of stabilization per dollar when focused on people who can't effectively insure themselves against macroeconomic volatility -- namely, people with little savings to draw on and limited opportunities to borrow.“When you look at the different programs, we find that food stamps and similar programs are really the ones that work, because they are being targeted to individuals who are up against their borrowing constraints and aren't going to work less because they are already unemployed," Reis told me. "They have very high marginal propensities to consume and are very underinsured, so it can very stimulative."  They also find -- this is a surprise -- that fiscal policy as currently designed does little to stabilize the economy. The most effective transfer programs, Reis says, constitute a small share of all transfers. “When we look at the whole set of stabilizers in the U.S., it turns out that even though food stamps are a plus, all of the other ones have near-zero impact. That means we’re not stabilizing very much,” Reis said.  The upshot: If the U.S. wants milder recessions in the future, its most effective fiscal policy options are food stamps, Temporary Aid for Needy Families and unemployment insurance. If the study is right, a better safety net for the poor turns out to be the best safety net for the whole economy.

Read the complete article at:

Best Stimulus Package May Be Food Stamps - Bloomberg