GDP growth

Macroeconomic Policy In a Nutshell

James BaileyLeave a comment

What I’m telling my Intro Macro students on the last day of class, since we weren’t able to get through every chapter in the textbook:

A few of you might end up working in economic policy, or in highly macro-sensitive businesses like finance. For you, I recommend taking followup classes like Intermediate Macroeconomics or Money and Banking so you can understand the details. For everyone else, here are the very basics:

  1. In the long run, economic growth is what matters most. The difference between 2% and 3% real GDP growth per capita sounds small in a given year, but over your lifetime it is the difference between your country becoming 5 times better off vs 10 times better off.
  2. How to increase long-run economic growth? This is complicated and mostly not driven by traditional macroeconomic policy, but rather by having good culture, institutions, microeconomic policy, and luck.
  3. In the shorter run, you want to avoid recessions and bursts of inflation.
  4. High inflation means too many dollars chasing too few goods. To fix it, the federal government and the central bank need to stop printing so much money (the details can get very complicated here, but if we’re talking moderately high inflation like 5% the solution is probably the central bank raising interest rates, and if we’re talking very high inflation like 50% the solution is probably a big cut to government spending).
  5. If there is a recession (which will look to you like a big sudden increase in layoffs and bankruptcies), the solution is probably to reverse everything in the previous point. The government should make money ‘easier’ via the central bank lowering interest rates while the federal government spends more and taxes less.
  6. If you don’t take more economics classes, you will likely hear about macro issues mainly through the news media and social media. You should be aware of their two main biases: negativity bias and political bias.
    • Negativity Bias: If It Bleeds, It Leads on the news. Partly this is because bad news tends to happen suddenly while good news happens slowly, so it doesn’t seem like news; partly it just seems to be what people want from the news and from social media.
    • Political Bias: People tend to seek out news and social media sources that match their current preferences. These sources can be misleading in consistent ways for ideological reasons, or in varying ways based on whether the political party they like is currently in power.
  7. There are different ways to measure each key macroeconomic variable. Think through them now and make a principled decision about which ones you think are the best measures, and track those. Otherwise, your media ecosystem will cherry-pick for you whichever measures currently make the economy look either the best or the worst, depending on what their biases or incentives dictate.
  8. There are good ways to keep learning about economics outside of formal courses and textbooks, I list a few here.

Bad Claims About Food Stamps (SNAP)

Jeremy Horpedahl11 Comments

One of the likely effects of the federal government shutdown is that recipients of SNAP benefits (what used to be officially called “food stamps,” a term still used by the general public, especially those that dislike the program) may lose their benefits next month. This would obviously be a hardship for those that depend on this program, but it has also led to bad claims being made about the program, from both supporters and opponents of the program.

Let’s start from the political right: Matt Walsh makes the claim that by subsidizing food consumption “obviously drives up the cost” of groceries.

As with all bad claims, there is a nugget of truth baked into them. If the government subsidizes anything, we would expect demand to increase, and thus unless supply is perfectly elastic, there will be some effect on prices. However, we need to think more carefully about the nature of the subsidy.

The way SNAP works is that beneficiaries receive an electronic voucher to spend at the grocery store, which is about $300 per month on average for a household. That $300 must be spent on groceries. However, if that household had already planned to spend $300 or more on groceries, it is unlikely they will spend all of the additional $300 on food. In the limit, it’s entirely possible they will spend no additional money on groceries, merely reducing their out-of-pocket spending on groceries by $300. They will then effectively have $300 more to spend on other goods. More likely is that they will spend some of the additional $300 on groceries, and some of it on other goods.

Many studies have tried to look at the extent to which SNAP benefits affect household spending, but these were mostly observational studies. There was no treatment and control group. But a 2009 paper titled “Consumption Responses to In-Kind Transfers: Evidence from the Introduction of the Food Stamp Program” has a better approach to studying the question. Since the original Food Stamp program was slowly rolled out across the country over more than a decade, you can compare counties that entered the program first to counties that entered it later. By doing so, Hilary Hoynes and Diane Schanzenbach find out some first interesting things about the causal effects of SNAP benefits.

For the claim by Walsh in his Tweet, the most relevant result from the paper is that food stamps impact household spending similarly to a cash transfer. Yes, the program increases household spending on groceries, but it also increases spending on other goods and services. And it does so almost identically to how cash transfers impact household spending. In other words, while pitching the program as assistance for buying groceries may make it more politically palatable, SNAP benefits are no different from a similarly-sized cash transfer for the average recipient. If they do cause any inflation, they do so in the same way as a cash transfer would, and thus there is no specific impact on food inflation.

A second bad claim about SNAP comes from the political left, in this case Minnesota Governor Tim Walz:

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