Fallacy of the Walmart Food Stamp Subsidy Argument

walmartCourtesy of Jobs With Justice, although countless others outlets have repeated this same argument.  This data comes from a study by one of the most respected and disciplined group of academics in the nation, the Democratic staff of the US House Committee on Education and the Workforce!  They analyzed data from Wisconsin’s Medicaid program, and determined that each Walmart store costs taxpayers $904,542 per year in Wisconsin, which the media extrapolated to mean every store in the nation.  The statistic is actually irrelevant, as it’s the logic and economics behind it which is flawed.

The rationale behind this “study” and meme is this; since some Walmart workers get paid so little they qualify for food stamps, Walmart is getting a subsidy, as it benefits from the government assistance program by not having to pay their employees as much.  On the surface, this argument seems plausible, as it might appear the government is covering for Walmart’s low wages.  However, when examined carefully, this argument falls apart.  It turns out that most welfare programs actually increase Walmart’s labor costs, not subsidize them, as we’ll see in a minute.

First, it should be apparent that even if this argument were true, it wouldn’t be limited to Walmart.  They are the biggest employer, but certainly not the only one who pays wages where employees could qualify for food stamps.  Looking at the government’s income chart for the SNAP program, we see that the qualifying income threshold level for the proverbial family of 4 is $2,628 per month, which turns out to be $15.20/hr (assuming one works 40 hrs/week, 4.3 weeks/month).  That means that any business paying less than $15/hr (or more, if including part-time work) could have working families on food stamps.  This would include virtually all retail stores and restaurants in the US, whether mom and pop, or Walmart.  So, are taxpayers really subsidizing the profits of countless businesses with food stamps and other welfare benefits by letting them off the hook hiring cheaper labor?

Why Welfare Benefits Actually Drive up Labor Costs

For a more technical explanation, Bryan Caplan, professor of economics at George Mason, analyzes this issue here and here.

allowanceIn the US, most welfare benefits are given for being poor, regardless of whether or not one works (food stamps, Section 8, Medicaid, etc.).  The more one makes, the less benefits they get typically.  This has the economic effect to employers not as a subsidy, but the opposite.  As an example, think of a kid with an allowance.  If they receive $20/week from their parents, will they be more or less likely to want to mow the neighbor’s lawn for $20?  Less likely.  With their allowance, they could still buy some things they wanted, plus have more time to play, which they prefer versus work.  With no allowance, they’d be forced to work to buy the candy bar or video game they wanted.  If we imagine a street full of kids with $20/week allowances, it would tend to push up the price of lawn mowing relative to a street with no allowances.  Perhaps it might take $30 or $40 to pique some interest, and to raise the marginal benefit of working above that of playing.  For the miser on the block who wants the cheapest price for lawn service, they would clearly not want to live in a community where every kid had an allowance.

The preferences of working adults are obviously different, and far less trivial (particularly if they have children), but the laws of supply and demand operate the same way.  Again, think what the “evil” Walmart CEO, or shareholder, would prefer.  A labor market where the poor are subsidized, or one where they aren’t?  The former tends to reduce labor supply and push up the price of hiring, the latter pushes it down.  To argue that Walmart can hire cheaper labor because they get food stamps is a fallacious economic argument.

The main welfare program that does help Walmart and other employers of low skilled workers, is the Earned Income Tax Credit.  This gives a benefit to low income people for working, which encourages work and increases the supply of labor to businesses.  This has the effect of subsidizing lower wages, but is a popular program supported by both political parties, even the perpetrators of this meme.

What About the Profits From Food Stamps?

snapThe secondary argument put forth is that Walmart profits from the food stamp money itself.  This is likely true, to the extent that these recipients spend more than they otherwise would absent the SNAP program.  In 2014, the government spent $76 billion on SNAP, of which about $70 billion went to actual recipients to buy food.  Assuming Walmart gets 18% of food stamp purchases, and has a 2% profit margin on food sales, it could be argued they get roughly a $250-300 million subsidy per year from food stamp revenue.  This would be about 1.5% of their total profits.

It should be noted that this profit subsidy comes not from evil intentions, but because Walmart offers low priced food which poor people desire.  Their money would not go as far at an organic market, or mom and pop shop, where both the prices and profit margins on food are higher.  The reality is that any store profits from accepting food stamps, unless they sell their products at a loss, which means that the very existence of the food stamp program guarantees a subsidy to certain businesses.