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A New Dual Federalism
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NEW DUAL FEDERALISM
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should function as close substitutes for AFDC benefits. The rules of the two programs create a strong incentive to substitute. The means test for food stamps includes AFDC as a source of income in calculating an applicant’s need for assistance (but AFDC does not count Food Stamp income). Therefore, when AFDC benefits go up, neediness goes down and food stamp benefits decline at a rate of 30 percent (and vice versa). This policy led to the so-called Food Stamp cushion whereby states that cut AFDC benefits could rest assured that a third of the cuts would be restored to recipients via increases in food stamps. Given these incentives, combined with the fact the Food Stamps is wholly federally financed while AFDC involved shared costs, an economist would expect the rational state policymaker: (1) to cut state AFDC benefits, or at least neglect to raise them, in response to indexed increases in Food Stamps; and (2) show greater overall willingness to cut AFDC benefits in the presence of the Food Stamp cushion.
While a few states have openly admitted pursuing the second strategy (Besharov and
Baehler 1992, Peterson 1995), testing for systemic substitution is notoriously difficult because Food Stamp benefits do not vary across states and have not been available long enough to provide adequate time-series variation. In addition, a certain amount of mechanical substitution occurs because Food Stamp benefits are indexed to food inflation and rise automatically each year, while AFDC benefits were not. Therefore, as Food Stamp benefits rose each year, a state that either cut its AFDC program, neglected to increase benefits, or simply raised benefits at a rate below the Food Stamp adjustment, for whatever reasons, would have seen its share of financing for the total benefit package decline.
Despite the technical problems, econometricians have amassed evidence suggesting
that states engaged in some program displacement (passive and/or active), but probably less than expected. Colburn (1992) found that a $1 increase in Food Stamps depressed AFDC benefits 27 cents. In Plotnick’s (1986) study, a $1 Food Stamp raise generated only an 8 cent drop in AFDC. Food Stamp substitution in Gramlich (1982) was zero, although his later study (Gramlich and Laren 1984) points out serious flaws in those findings.
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Colburn explains these surprising results in terms of a flypaper effect.
44
While Food
Stamps function as a very cheap substitute for AFDC, they also provide the equivalent of a specific lump-sum grant to a state in the form of individual transfer payments. When Colburn compares the effects on AFDC benefits of changes in taxpayer before-tax income, on one side of a flypaper equation, and changes in Food Stamp "grants" on the other, he finds significantly larger grant elasticities than income elasticities. For whatever reasons, states seem reluctant to fully realize the income effects of Food Stamps by cutting AFDC.
43
In the later paper, Gramlich and Laren include Food Stamps as part of the dependent variable and do
not test for substitution.
44
The “flypaper effect” refers to the tendency for grant recipients to spend intergovernmental grant
funds on public goods rather than private (i.e., tax cuts), thus seeing to it that the money sticks in the sector where it hits. Gramlich (1977) attributes the phrase to Arthur Okun.
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NEW DUAL FEDERALISM
19
should function as close substitutes for AFDC benefits. The rules of the two programs create
a strong incentive to substitute. The means test for food stamps includes AFDC as a source of
income in calculating an applicant’s need for assistance (but AFDC does not count Food
Stamp income). Therefore, when AFDC benefits go up, neediness goes down and food stamp
benefits decline at a rate of 30 percent (and vice versa). This policy led to the so-called Food
Stamp cushion whereby states that cut AFDC benefits could rest assured that a third of the
cuts would be restored to recipients via increases in food stamps. Given these incentives,
combined with the fact the Food Stamps is wholly federally financed while AFDC involved
shared costs, an economist would expect the rational state policymaker: (1) to cut state
AFDC benefits, or at least neglect to raise them, in response to indexed increases in Food
Stamps; and (2) show greater overall willingness to cut AFDC benefits in the presence of the
Food Stamp cushion.
While a few states have openly admitted pursuing the second strategy (Besharov and
Baehler 1992, Peterson 1995), testing for systemic substitution is notoriously difficult because
Food Stamp benefits do not vary across states and have not been available long enough to
provide adequate time-series variation. In addition, a certain amount of mechanical
substitution occurs because Food Stamp benefits are indexed to food inflation and rise
automatically each year, while AFDC benefits were not. Therefore, as Food Stamp benefits
rose each year, a state that either cut its AFDC program, neglected to increase benefits, or
simply raised benefits at a rate below the Food Stamp adjustment, for whatever reasons,
would have seen its share of financing for the total benefit package decline.
Despite the technical problems, econometricians have amassed evidence suggesting
that states engaged in some program displacement (passive and/or active), but probably less
than expected. Colburn (1992) found that a $1 increase in Food Stamps depressed AFDC
benefits 27 cents. In Plotnick’s (1986) study, a $1 Food Stamp raise generated only an 8 cent
drop in AFDC. Food Stamp substitution in Gramlich (1982) was zero, although his later
study (Gramlich and Laren 1984) points out serious flaws in those findings.
43
Colburn explains these surprising results in terms of a flypaper effect.
44
While Food
Stamps function as a very cheap substitute for AFDC, they also provide the equivalent of a
specific lump-sum grant to a state in the form of individual transfer payments. When Colburn
compares the effects on AFDC benefits of changes in taxpayer before-tax income, on one side
of a flypaper equation, and changes in Food Stamp "grants" on the other, he finds
significantly larger grant elasticities than income elasticities. For whatever reasons, states
seem reluctant to fully realize the income effects of Food Stamps by cutting AFDC.
43
In the later paper, Gramlich and Laren include Food Stamps as part of the dependent variable and do
not test for substitution.
44
The “flypaper effect” refers to the tendency for grant recipients to spend intergovernmental grant
funds on public goods rather than private (i.e., tax cuts), thus seeing to it that the money sticks in the
sector where it hits. Gramlich (1977) attributes the phrase to Arthur Okun.
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