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How the Food Stamps Cut Will Affect the U.S. Economy

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Following the U.S. National Debt Clock is frightening. America's national debt sits at $17 trillion already, and it increases an additional $2.63 billion each day. And government stimulus continues to pour into the economy. As seen in the recent food stamp cut debacle, government stimulus cannot sustain long-term success while necessary pullbacks cause rippling effects through the economy.

The backstory
In the wake of the 2009 financial crisis, Congress passed the American Recovery and Reinvestment Act, which, in part, increased funding for the Supplemental Nutrition Assistance Program (SNAP). According to the Center of Budget and Policy Priorities, the average increase of food stamp users was 20% in dollars per household. Then the one-time stimulus boost deadline arrived on Oct. 30. It ran its course. Now alarms and cries are resounding through the press — as if some retailers, politicians, and Americans were unaware that the temporary funding increase would cease.

The objective
The Congressional Budget Office estimates that not continuing the 2009 food stamp stimulus will give the government an additional $5 billion in 2014 and approximately $6 billion in the following two years. To put this figure in perspective, though, the Federal Reserve buys over $1 trillion in bonds a year through its seemingly unending quantitative easing policy. Comparably, the $78 billion a year food stamp program only comprises 7.6% of the Fed's bond buying stimulus. Still, spending must be held in check, and the impacts of the food stamp stimulus program's end are becoming more apparent.

The rippling effect
In addition to food stamp users, grocers, convenience stores, and dollar stores are wondering how they will cope with the adjustment. Smaller enterprises like Spartan Stores (NASDAQ: SPTN  ) , a grocery retailer and distributor in Michigan and Indiana, may take a harder hit than larger, cost-effective stores like Wal-Mart (NYSE: WMT  ) . For example, during its third quarter conference call, Spartan's CEO informed shareholders that the food stamp reduction is a potential reason for concern and that the reduction could be "a meaningful event for us."

Due to its economies of scale, ability to drive down costs, and many locations, Wal-Mart's chief executive for U.S. stores is more optimistic. William Simon reminded investors that because price matters more to food stamp users, Wal-Mart is more relevant than its higher charging competitors, for instance. And, Mr. Simon is right; but, Wal-Mart estimates that about 18% of all food stamp spending occurs within its store.

Running numbers, we see that Wal-Mart generated roughly $14 billion of its $443.9 billion from food stamps in 2012. Moving forward, assume food stamp users do not use cash to maintain their current purchasing patterns, and assume food stamp users who shop at higher priced stores do not begin shopping at discount retailer Wal-Mart. Combining these assumptions with the $5 billion cut to the food stamp program reveals that Wal-Mart will lose about $900 million in sales in 2014. But with a 0.3% increase in U.S. store sales in 2012 and a profit margin of 3.6%,  each dollar is critical for Wal-Mart's bottom line.

After Wal-Mart, about $60 billion is divided among the other companies that accept SNAP funding. Spread out over 248,000 locations, the effects of the decline will likely be minimal for these stores (click here for a list of all stores nationwide that are enrolled in SNAP). 

While time will tell these retailers' fate, they likely won't be going bankrupt any time soon due to food stamp reductions.

The bottom line
The cut in food stamps will lead to difficult times for many Americans; after all, about 48 million Americans utilize the program, 15% of the country's population.

As a nation, we must recognize that stimulus issues do not exist in a vacuum and supply chains, capital, humans, and other resources are involved in the processes. So, if a 2009 temporary increase in food stamp issuances can cause such concern and conflict — even when the deadline is set in stone — what will occur once the effects of other stimulus efforts reach American consumers? Perhaps it's time we mend our national spending habits. And then, maybe, we can rebound. 

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Read/Post Comments (9) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On November 07, 2013, at 12:28 PM, CrazyDocAl wrote:

    One has to ask a simple question. Why is a snap user is shopping at "higher priced stores"? Food stamps are money paid by someone else through taxes so a person who needs help can eat.

    If you gave a coworker $50 to help them out for the week until they got paid and then watched them sit down and spend the entire $50 for one meal at a restaurant wouldn't you be a little upset? So why would it be acceptable for someone who has never met you but still took your money to do the same?

    Will our economy take a hit if SNAP is reduced? Or will the money needed to pay back the money borrowed to pay for the program hurt the economy even more?

  • Report this Comment On November 07, 2013, at 10:47 PM, Jim85035 wrote:

    United States foreign aid is aid given by the United States to other countries.

    Category Amount[4]

    Total U.S. Private Assistance $71.2 billion

    Foundations $3.4 billion

    Private and Voluntary Organizations (e.g., NGOs) $9.7 billion

    Universities and Colleges $1.7 billion

    Religious Organizations $4.5 billion

    Corporations $4.9 billion

    Individual remittances $47.0 billion

  • Report this Comment On November 08, 2013, at 10:27 AM, Burstedbladder wrote:

    Well, with all the money cuts from the people on food stamps, this is also taking money away from the business as well. They didn't just cut away from the people, but from businesses that needs that cash to survive on. We all live in a form of a welfare nation. Once you start cutting back on one group (the poor) then you end up hurting all others around you sooner or later.

    If there are no jobs like in my small town Iowa. How do you expect the people to live? Are we suppose to let innocent kids and these that want to work just starve to death a slow death? NO!

    We all should be outraged on these cuts on the people while all politicians are increasing their salaries, pension plans and living off the taxpayers of this country. Government/Politicians are the biggest form of welfare we have in this country, and if you are going to make any cuts, then you need to start at the top (government) and end all this thievery.

  • Report this Comment On November 08, 2013, at 12:06 PM, grammy65 wrote:

    The Food Stamp Program was suppose to be a short fix after The Great Depression but turned into a generation crutch. People that are capable should work and not depend on tax payers to continue to support them. I understand that circumstances may cause some to use the program but not generation after generation. If they stay on the program there should be random drug testing, requirement to work so many hours per week free to gain the stamps, whether it be working in the parks or in the city providing free daycare or picking up paper. The program should be changed so that junk food can not be purchased (candy, sodas, cookies, chips, etc.) Those that have money on the card should be monitored and if they use the money to buy cigarettes their money should be cut off. If the program is suppose to help those in need then there should be checks in the system to insure that it is what is happening. No one wants to get off a program that supplies everything they need from housing, medical, food, transportation if they take classes, heat and cold assistance payments, etc. Lets make the program fair to the tax payers that are providing it. Children are starving because those that are getting the stamps are misusing the system and will continue to do so as long as they are getting a free ride. My parents fed us through hard work, there were no programs available. They are already getting paid by the system why should they not work free at what ever job they are assigned. You want to make sure your kids are not hungry, then get a job, they are you responsibility not mine. I work and take care of mine.

  • Report this Comment On November 08, 2013, at 8:03 PM, jonnyappleseeds wrote:

    so politicians give big banks free tax payer funds and themselves generous wage and pension packages and use the backs of poor and elderly to do so with? what a shame this country has become

  • Report this Comment On November 08, 2013, at 8:23 PM, Sjun wrote:

    The US Government and the State Welfare offices should begin reviewing their records of those on food stamps and begin cutting off all illegal aliens as well as those immigrating into this country. In the past when people immigrated to this country they had to have money in the bank, a sponsor and a job. Cutting off all of these people would help cut the food stamp program considerably and help lower the deficit. Cutting all foreign aid for the next ten years would also help considerably. The government needs to do these things before they ask the American people to pay more taxes or cut benefits that the American people have paid into all of their working lives. After all it is the our money and the government wastes so much of it. They could also cut many programs that are a waste and not necessary.

  • Report this Comment On November 09, 2013, at 7:15 AM, hollywoodlafl wrote:

    I've been saying this time and time again...

    American families are going to be strapped for cash, this season, due to the forcing of Americans having to purchase a healthcare plan. That, in itself, is going to be the cause of a dismal holiday season.

    Now, with the food stamp cuts, many Americans are forced to use cash to pay for the purchase of food, instead of purchasing gifts for relatives.

    Do the math.

    I'm not a fan of people collecting food stamps, however there are those legitimate few that are deserving until they get on their feet.

  • Report this Comment On November 09, 2013, at 7:41 AM, Mathman6577 wrote:

    In addition to cutting food stamp benefits the government also needs to cut taxes !!!!

  • Report this Comment On November 11, 2013, at 12:25 PM, marascobn1 wrote:

    As many of you alluded--to fully understand a phenomenon we must first go to the beginning. Good point.

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