Big Banks, Food Stamps, and the Trouble With Vouchers

The American Prospect has posted a story headlined "How Big Banks Are Cashing In On Food Stamps." Here's an excerpt:

An old-school food stamp from 1981. I'm not sure the Declaration of Independence is the most appropriate illustration.Banks reap hefty profits helping governments make payments to individuals, business that only got better when agencies switch from making payments on paper—checks and vouchers—to electronic benefits transfer (EBT) cards. EBT cards look and work like debit cards, and by 2002, had entirely replaced the stamp booklets that gave the food stamp program its name. SNAP is the most well-known program delivered via EBT, but they also carry payments for Temporary Aid to Needy Families (TANF); Women, Infants and Children (WIC); childcare subsidies; state general assistance; and many other programs....

Distributing government benefits is a lucrative industry. According to the Government Accountability Institute, J.P. Morgan Chase, which currently controls EBT contracts in 21 states, Guam, and the Virgin Islands, made more than half a billion dollars between 2004 and 2012 providing government benefits to U.S. citizens. In New York alone, J.P. Morgan Electronic Financial Services (EFS) holds a nine-year, $177 million EBT services contract with the State Office of Temporary and Disability Services (OTDA). New York currently pays $0.95 per month for each its 1.7 million SNAP cases. In addition, J.P. Morgan EFS collects penalties and fees from benefit recipients: $5 to replace a lost EBT card, $0.40 for each balance inquiry, $0.50 each time their cards are declined for insufficient funds, and $1.50 per withdrawal if they use ATMs to get cash more than once a month. While information about profit margins on EBT contracts is neither collected at the national level nor released by banks, EBT is a significant growth area for big banks. Last year, the Federal Reserve Payments Study reported that the number of EBT transactions more than doubled since 2006.

You can read the rest here. J.P. Morgan Chase's role in these programs has been covered before, but the Prospect piece moves the story forward with details about the new farm bill, which may have lowered benefits to the low-income Americans spending those subsidies but could end up actually sending more money to the banks, since the law's provisions for anti-fraud enforcement will mean there's more government contracts to be won.

Government programs.Food stamps, of course, are a voucher program, and free-market types have a history of proposing vouchers as an alternative to the direct state or federal provision of services. There are obviously good reasons to expect the market to do a better job of providing food (or education, or housing, or whatever) than the government, and in some contexts vouchers may be a step in the right direction. But voucher markets are tightly regulated, with special administration required and with strings attached for both buyers and sellers, and they thus open up new opportunities for rent-seeking. (The Government Accountability Institute has noted a steady increase in J.P. Morgan Chase's donations to members of the House and Senate agriculture committees.) Those rent-seekers then become new constituents for the program, a fact that should aggravate conservatives; and those constituents' chief interest is not the reduction of poverty, a fact that should aggravate liberals.

If you want to propose a more market-oriented system that stops short of withdrawing the government's fingers altogether, it would be better just to send poor people money: That takes away a lot of these opportunities for companies to game the market, and it makes it easier to start collapsing all these different programs into a lump payment like Milton Friedman's negative income tax. (Indeed, it offers a gradualist route toward the negative income tax: You can cashify and combine transfer payments one by one.) I have seen the best voucher, and it is called cash.

Bonus fun fact: The recent cut in SNAP benefits reduced payments to poor people by nearly $5 billion. The program's combined federal and state administrative costs, meanwhile, are nearly $7 billion.

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  • ||

    IIRC, Friedman thought a negative income tax was better than the other options on the table, but was seriously worried about how it would be gamed if implemented.

  • John||

    Actually, arch Liberal John Kenneth Galbraith advocated for as much in the form of a minimum income before even Friedman. It is not very difficult to figure out how ineffective these efforts are.

  • John||

    Sure it would be more efficient to send poor people money. The fact that we don't goes to the underlying problem that Progressives can never admit; poverty is a moral and cultural issue not a monetary one. The reason why Progressives came up with food stamps is because they rightfully figured a lot of poor people would waste their welfare checks on drugs or booze or whatever and leave their kids to starve. So the solution was to give them vouchers that they could only spend on food.

    That of course failed miserably. As this article points out, the system has all kinds of transaction costs to administer. Moreover, as anyone with an ounce of common sense predicted, there quickly developed a black market and poor people still used their money on booze and drugs and other things instead of food. So the change accomplished nothing except enrich a few crony banks.

    But none of these welfare programs ever accomplished anything except encourage poor people to continue to make the stupid decisions that make them poor in first place.

  • Invisible Finger||

    But none of these welfare programs ever accomplished anything except encourage poor people to continue to make the stupid decisions that make them poor in first place.

    Wrong.

    The poor now live longer and vote Democrat. How is that NOT the intended result?

  • John||

    Except that they don't live longer, they are too busy eating fatty foods they bought with their food stamps

  • Invisible Finger||

    Eating fatty foods means living longer compared to starvation.

  • John||

    They wouldn't be starving if we cut off welfare. They would be out working.

  • Griffin3||

    They would be out working

    ... and no longer voting progressive/free handouts?

  • John||

    To some that would be a bug in my system. This is true.

  • Pro Libertate||

    Scams within scams within scams.

  • ||

    Welcome to government!

  • Swiss Servator, mehr Käse!||

    "Have you observed this, Feyd?"

  • Pro Libertate||

    It takes a Scamtat to come up with such brilliance scamary.

  • Invisible Finger||

    Welcome to scAmerica.

  • GILMORE||

    OMG government throws enormous piles of cash into the void, and somehow *financial institutions* find a way to get a piece??

    HOW DOES THAT WORK!?

    sigh.

  • ||

    Really. I mean, somebody is going to find a way to profit off government waste. This time it's the banks. But someone will always find a way.

  • John||

    Drug dealers have been accepting food stamps for decades. Why should drug dealers be the only ones to get in on the act?

  • Steve G||

    Government travel credit cards are another great example. Just give a few hundred thousand E-1 to E-3 a credit card for "travel" and reap the interest, late fees, etc on purchases that weren't covered by the voucher.

  • John||

    That is one of the worst examples of crony theft I have ever seen. They made it against the rules to even use your own credit card. So everyone had to get one of those things and take the hit on your credit report of having another open line of credit.

    Meanwhile, as you point out, it lead to people using them in all kinds of illegal ways. The card is nothing but a honey pot for the careless, stupid, and unethical.

    But it gave BOA a bunch of transaction fees.

  • kinnath||

    The issue isn't whether banks profit by providing debit cards for food stamps and equivalent. The question is whether states spend more or less money paying banks for debit cards instead of printing non-counterfeit-able one-time-use coupons for food stamps and the equivalent (and note that some printer made a fortune printing those of course).

    It was my understanding moving to electronic distribution of benefits saves the states a lot of money.

  • John||

    That is a good point. Of course, there wouldn't be any money there to save if states didn't try and control what people spend their money on.

  • kinnath||

    The first evil is having the transfer program to start with. The second evil is to waste money implementing the transfer program. The third evil is making sure your cronies benefit from wasting money implementing the transfer program.

    Moving to debit cards allowed one set of cronies to underbid another set of cronies by offering to lower the cost to the state (while potentially fucking over the recipients of the transfer program benefits). I find it difficult to get upset over banks charging ATM fees and transaction fees to welfare beneficiaries.

  • John||

    Since they charge me the same thing, neither do I. And I was agreeing with you. As I pointed out above, the real problem is the entire idea that we can get people out of poverty by sending them money.

  • kinnath||

    Sorry. I knew you were agreeing, and I was just expanding on the thought.

  • John||

    No worries. Just wanted to make sure.

  • Spartacus||

    I know you're wrong, because Jesus said "Give a man a fish, and he will become a productive member of the middle class who will send his children to college and retire comfortably." Or something like that. It's in the Bible, I'm sure.

  • Carolynp||

    My husband's favorite version of the old proverb is "Give a man a fish, and he'll eat for today. FEED a man to a fish, and everyone will work faster."

  • Robert||

    That's one question. Another is whether, if the money were left in private hands, banks and other financial service institutions wouldn't still be profiting off the transactions people would still be making. I see the moral hazard of contracting this business to JP Morgan Chase or whoever to be a minuscule effect of the program on the economy. You could say the same about tax preparation services. You might as well complain about the concentration of food trucks & carts outside gov't offices.

  • ||

    the law's provisions for anti-fraud enforcement will mean there's more government contracts to be won.

    Meanwhile in an example of how truly evil and incompetent agents of the government are, insurance companies are enjoined from their anti-fraud endeavors by minimum loss ratios. But as with all institutional corruption the solution is more government.

  • Matrix||

    Jesse... why do you hate the poor?

  • ||

    I have seen the best voucher, and it is called cash.

    Gold or bitcoins would be the best voucher.

    Just saying

  • Adam330||

    $500M, which appears to be total revenue, not profit, over the course of 8 years is chickensh*t to JP Morgan Chase.

  • Carolynp||

    I noticed a sign over the frozen foods the last time I went shopping which said you couldn't buy frozen vegetable mixes, only fresh veggies or a single frozen veggie. I found this amusing as I had a coupon in my hand which made the frozen veggie mix free. The regulations around this stuff are complicated and silly. They are based on whatever passes for food fads currently, so they can change on a dime. I'd probably be ripping my hair out if I used food stamps.

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