Recently, I came across a new working paper that looks at some of the impacts that came about as a result of recent changes to the Supplemental Nutrition Assistance Program, otherwise known as SNAP (formerly “food stamps”). In some states, SNAP benefits became more limited and are no longer able to be used on the purchase of certain unhealthy items including sugary drinks.
The whole paper is extremely interesting and definitely worth a read, but today I wanted to dive in more closely to one of the key questions the paper raises, is money fungible?
What does it mean for money to be fungible?
If something is fungible, that means it can be interchanged with something equivalent. It shouldn’t matter whether someone gets paid in cash, a check, or via direct deposit. As long as the value is the same, (aside from some minor inconvenience) those differences don’t matter.
Two of the core functions of money are that it is a unit of account and a medium of exchange. In practice, these two characteristics should suggest that all money is equal. In a broad sense, money is certainly fungible (i.e. when considering how people trade money).* However, it is more interesting to think about this in terms of how people make decisions about their personal spending.
Is money fungible across a budget?
This is where the paper comes in. The researchers looked at changes to the SNAP program that banned the purchase of sugary drinks and food. This is an interesting change, because according to the paper over 80% of SNAP households spend more on food each month than their SNAP benefits cover. According to economic theory, this implies that SNAP essentially acts as a cash transfer, since we’d expect monthly food budgets to remain constant with or without these benefits.
If this is true, then we should expect these SNAP changes to have little to no effect on specific spending decisions. The benefit size isn’t changing, these are just new restrictions on how it can be spent. If these households are already spending more than their SNAP benefits on food, then they could just switch around what items they buy with their SNAP cards and what items they buy with cash after.
The main takeaway from the paper is that money isn’t necessarily fungible across budgets. People who receive SNAP benefits do not appear to be changing their non-SNAP grocery spending to compensate for the fact that their SNAP-supported grocery spending changed. While there may be situations where a one-to-one change isn’t possible for some reason, economic theory would suggest that the fungibility of money should make it so this transition was much smoother than it ended up being.
What does this mean for policymakers
While many of us will find it inherently interesting that we have another concrete counter-example to a basic principle of economic theory, we should ask ourselves how this is actually relevant to policymakers in the real world.
One takeaway is simply that policies such as these SNAP restrictions can actually reduce consumption of certain goods. This can be both a blessing and a curse, as it gives policymakers another tool for changing behaviors which can be difficult, but it also highlights how some policies might have unintended consequences.
Another takeaway is that household budgets play an important role in how people make spending decisions. In this SNAP example, nothing about the market for sugary drinks was impacted by this policy change. There were no new taxes or subsidies, nothing impacted a substitute or complimentary good, from a theoretical perspective the equilibrium price and quantity should have remained constant. The fact that we saw an observable change in the amount consumed suggests that policies such as these can have indirect effects that shape markets.
One important difference that makes SNAP different from other tax-and-transfer programs is that SNAP benefits come preloaded on an electronic benefits transfer card (essentially a debit card). This is functionally quite different from programs like Social Security or the Earned Income Tax Credit that are distributed as cash. Those programs are the most similar to SNAP given their size and scope, but it may not be possible to achieve a similar impact because their administration doesn’t create a separate pool of resources that can be budgeted separately.
One argument against this kind of policy intervention is that it is an overly paternalistic decision made by the government, and that people should have the ability to make decisions about their food intake more freely. That is a tradeoff that policymakers should be wary of, since overly restrictive policies can reduce the overall economic benefit that comes from improved health outcomes. Whether these policies end up becoming more widespread, it is fascinating to see how people react to changes like these.
* There are plenty of examples where money can have different values. Someone who wants to buy something from a vending machine might have a higher value for five $1 dollar bills relative to a single $5 bill. Similarly, most people I know don’t like carrying around $100 bills, preferring the easier to use $20 denomination.
