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a n e c o n o m ic re v ie w b y th e F e d e ra l R eserve B a n k o f C hicago The food stamp program Bank profits in 1974 in ly 1975 The food stamp program 3 The federal governm ent w ill spend an estim ated $4.8 billion in fiscal 1975 to support a program that touches the lives o f 20 m illion Am ericans. B oth advocates and critics agree that the food stam p program falls short o f complete success. The issues th a t will be o f central concern in upcom ing debates in policy-m aking circles are discussed in this article. Bank profits in 1974 13 Operating ratios for Seventh D istrict m ember banks indicate that the effects o f increased expenses and higher losses on securities and loans were largely offset by bigger income last year for the vast m ajority o f banks. Subscriptions to Business Conditions are available to the public free of charge. For information concerning bulk mailings, address inquiries to Research Department, Federal Reserve Bank of Chicago, P. 0. Box 834, Chicago, Illinois 60690. Articles may be reprinted provided source is credited. Please provide the bank’s Research Department with a copy of any material in which an article is reprinted. Business Conditions, July 1975 3 The food stamp program The food stamp program has been greatly expanded in recent years. The number o f areas—political subdivisions—covered by the program has more than doubled since 1969 and now virtually blankets the entire United States and extends to Guam, Puer to Rico, and the V irgin Islands. Participa tion in the program has risen sixfold since the end o f fiscal 1969 and presently encom p a sse s some 20 m illion individuals. Federal governm ent outlays to support the program have soared 19-fold during the same period, reaching an estimated $4.8 billion in fiscal 1975. The rapid expansion m ight indicate to some observers that the United States has turned the com er in feeding its hungry, a plight featured in several documentaries in the 1960s and a m ajor factor supporting the legislative changes that have con tributed to the growth in the program. Nevertheless, criticisms o f program short com ings and proposals for revision from several differing viewpoints suggest the food stamp program has fallen short of complete success. Some observers argue the program needs further liberalization to achieve its goals. Others contend the program is in need o f m ajor revisions to curtail costs and needless excesses. Still others argue the program, as presently constituted, is not capable o f achieving its objectives and that more efficient alter natives should be considered. T h ese opposing viewpoints have become particularly apparent in recent m onths and will continue to generate wideranging debate in federal policy-m aking circles in the m onths ahead. This article, in attempting to provide a com m on base for e v a lu a t in g th e v a rio u s p ro p o sa ls , describes the characteristics o f the ex isting food stamp program as well as the policy actions that have contributed to the program ’s growth over the past few years. Also, concerns and proposals that will weigh heavily in the future direction o f the food stamp program are discussed. Organization of the program The food stamp program is ad ministered by the U.S. Department of A g ricu ltu re. T h e o p e ra tio n o f the p ro g r a m —in c lu d in g ce r tific a tio n o f applicants, issuance o f coupons, and promotional efforts—is conducted through the local county offices o f cooperating state agencies.1 State agencies must operate the program according to regulations es tablished by the U.S. Department o f A g ricu ltu re. The flexibilities in the regulations, however, often result in slight differences in program operation between cou n ties. E lig ib ility standards and benefits are uniform throughout the con tiguous states. Slightly different benefits are applicable in Alaska, Hawaii, and U.S. territories. The food stamp program provides eligible households with a m onthly allot ment o f coupons that are redeemable for food. The value o f the m onthly coupon allotment varies by household size and is based on the U S D A ’s “ econom y food plan,” a quantity o f food designed to provide the recommended daily allowance o f all m ajor nutrients. The value o f the monthly coupon allotment is adjusted up ward sem iannually to m atch increases in food prices, provided the higher food prices have boosted the cost o f the econom y food plan by at least $2 per month. 'One-half of all operating expenses incurred by the state agencies in conducting the program are reimbursed by the federal government. Federal Reserve Bank of Chicago 4 Participating households with little or no incom e receive their entire coupon allot ment free, while households qualifying at the upper range o f the incom e eligibility standards pay the equivalent o f 75 to 85 percent o f the value o f coupons received. The difference between the value o f the coupons issued to a household and the amount the household pays for the coupons represents the value o f “ bonus” stamps or, alternatively, the governm ent subsidy extended to participants. In fiscal 1974 bonus stamps accounted for nearly 58 percent o f all the coupons issued to par ticipating households. F ood stam p coupons are issued through several sources, but banks, post of fices, and local offices o f the cooperating state agency are the predominate issuing points. The coupons are issued at least semimonthly, although some counties offer a more frequent issuance schedule. Participating households have the option o f purchasing all, three-quarters, one-half, or one-quarter o f their coupon allotment. The coupons are issued in booklet form in denom inations o f $1, $5, and $10. The Expanded participation in the food stamp program boosts federal outlays participating household can use the coupons only in authorized2 food stores to purchase food—excluding pet food, tobac co, and alcoholic beverages—and plants and seeds that can be used to grow food in gardens. However, elderly persons unable to prepare their own meals m ay use the coupons to purchase meals prepared by authorized communal dining facilities or prepared and delivered by authorized non profit meal delivery services. Moreover, alcholics and drug addicts participating in regular treatment or rehabilitation pro grams can use the coupons to purchase food prepared as a part o f treatment. In ad dition, eligible households living in remote areas o f Alaska m ay use coupons to purchase hunting and fishing equipment, excluding firearms, ammunition, and other explosives. Food stamp coupons received by stores or food service organizations can be used by the firm to purchase food from wholesalers or can be deposited for cash or credit at a bank. The first bank to receive the coupons is responsible for m arking them “ paid” or “ canceled” and affixin g its routing sym bol on the coupon. The coupons are then routed to the regional Federal Reserve Bank, w hich credits the ac count o f the bank that sent the coupons, charges the U.S. Treasury for the face value o f the coupons received, and destroys the coupons. In 1974 the value o f food stamp coupons processed by the Federal Reserve Bank o f Chicago totaled nearly $668 million. Eligibility standards and procedures The state agency is required to certify all applicants for the food stamp program. For households in w hich all members are included in a federally aided public assistance program —old-age assistance, aid to fam ilies with dependent children, fiscal year 2The U.S. Department of Agriculture is responsi ble for authorizing firms that trade in food stamps. Business Conditions, July 1975 aid to the blind and the disabled— certification is based solely on the ap plicant’s signed affidavit and the as s is ta n c e ca s e file . Public-assistance households typically account for about three-fifths o f all those participating in the program. For all other households the state agency bases its certification on the household’s completed application form, an interview, and a verification o f the household’s reported income, assets, and expenses. The certification process must be com pleted within 30 days. Households de clared eligible for participation are assign ed a certification period—the length o f time the household can participate in the food stamp program before going through another certification process if it is to con tinue in the program. The certification period m ost com m only authorized is three months, but m ay range from as short as one m onth to as long as 12 months. N onassistance households must meet three standards to be certified as eligible for the food stamp program; the incom e standard, the resource standard, and the work registration standard.3 There are no local residency requirements, but partici pants must be U.S. citizens or aliens law fully admitted to the United States for permanent residence. The income standard is based on a net incom e concept that permits liberal deductions from a household’s gross in come. Earnings and com pensation re ceived by all household members from vir tu a lly all sou rces—including wages, governm ent paym ents, scholarships, pen sions, strike benefits, etc.—are combined in determining a household’s gross in come. However, earnings o f a student un der 18 years old and m any lump sum paym ents—such as insurance settlements, cash prizes, inheritances, tax refunds, etc.—are not included as household in’Public assistance households also must meet the work registration standard. 5 come. In m ost cases the standard applies to incom e that will be received by the household during the certification period. In deriving net m onthly income, the follow ing items are deducted from gross in come: • 10 percent o f w ages and salary, up to a maximum o f $30 per month. • M andatory w ithholdings from earned incom e—such as incom e taxes, social security taxes, union dues. • All m edical expenses if in excess o f $10 per m onth per household. • Paym ents for the care o f children or other persons when necessary for a household member to work or seek work. • Expenses resulting from disaster or casualty losses. • Tuition and m andatory fees assessed by educational institutions. • Court-ordered support and alim ony payments. • Shelter costs—including utilities, rent or m ortgage payments, and taxes—that exceed 30 percent o f the household’s in come less all o f the above deductions. A household qualifies under the in come standard if its net m onthly incom e is equal to, or less than, the amount obtained by multiplying the m onthly coupon allot ment for its size o f household by three and one-third. For example, the current $162 m onthly coupon allotment for a fourperson household would permit a fam ily o f four with a net m onthly incom e o f $540 or less to qualify for the program. On an an nual basis such an amount would be equivalent to a net incom e o f $6,480 and perhaps as much as $8,000 to $10,000, or more, in gross income. If a household qualifies for the food stamp program, its net m onthly income also determines its purchase requirement, the amount the household must pay for its m onthly coupon allotment. A s suggested by the table, a fam ily o f four with a net m onthly incom e o f $350 would only have to pay $95 to receive the $162 m onthly coupon Federal Reserve Bank of Chicago 6 Food stamp allotments and purchase requirements* __________ 1 2 __________ 48 90 Number 3 Monthly 128 of persons in household**___________ 4 5 6 7 8 coupon allotment (dollars)__________ 162 192 222 250 278 Monthly net income _________Monthly purchase requirement (dollars)_________ 0 ■ 19.99 20 ■ 29.99 30 ■ 39.99 40 ■ 49.99 50 - 59.99 60 ■• 69.99 70 ■ 79.99 80 ■• 89.99 90 ■• 99.99 100 ■• 109.99 110 • 119.99 120 ■- 129.99 130 ■ 139.99 140 ■ 149.99 150 - 169.99 170 ■ 189.99 190 ■ 209.99 210 ■• 229.99 230 ■ 249.99 250 ■• 269.99 270 ■• 289.99 290 -• 309.99 310 -• 329.99 330 -• 359.99 360 -• 389.99 390 -• 419.99 420 -■ 449.99 450 -• 479.99 480 -• 509.99 510 -• 539.99 540 -• 569.99 570 -■ 599.99 600 -• 629.99 630 -• 659.99 660 -■ 689.99 690 -• 719.99 720 -• 749.99 750 -• 779.99 780 -■ 809.99 810 -• 839.99 840 -• 869.99 870 -• 899.99 900 -• 929.99 0 1 4 6 8 10 12 14 16 18 21 24 27 30 33 36 36 38 0 1 4 7 10 12 15 18 21 23 26 29 32 35 38 44 50 56 62 68 70 70 0 0 4 7 10 13 16 19 21 24 27 30 33 36 40 46 52 58 64 70 76 82 88 94 100 109 110 0 0 4 7 10 13 16 19 22 25 28 31 34 37 41 47 53 59 65 71 77 83 89 95 104 113 122 131 138 138 138 0 0 5 8 11 14 17 20 23 26 29 33 36 39 42 48 54 60 66 72 78 84 90 96 105 114 123 132 141 150 159 164 164 164 0 0 5 8 11 14 17 21 24 27 31 34 37 40 43 49 55 61 67 73 79 85 91 97 106 115 124 133 142 151 160 169 178 187 190 190 190 0 0 5 8 12 15 18 21 25 28 32 35 38 41 44 50 56 62 68 74 80 86 92 98 107 116 125 134 143 152 161 170 179 188 197 206 214 214 214 214 'Effective July 1,1975 for participants in the 48 contiguous states. "F o r each additional household member over 8, add $22 to the 8-person allotment. 0 0 5 8 12 16 19 22 26 29 33 36 39 42 45 51 57 63 69 75 81 87 93 99 108 117 126 135 144 153 162 171 180 189 198 207 216 225 234 238 238 238 238 Business Conditions, July 1975 allotment. The difference o f $67 would represent the value o f bonus stamps. The resource standard restricts food stamp program eligibility to those households that have $1,500 or less in assets ($3,000 for households having two or more persons with at least one aged 60 years or more). However, assets specifical ly exempt from the resource standard are numerous, including a hom e and lot, one licensed vehicle—two if needed for pur poses o f em ploym ent—household goods, the cash value o f life insurance policies and pension funds, personal effects, incom e-producing property, tools and m a chinery deemed essential to the em ploy ment o f a household member, and re sources with cash values not accessible to the household—such as irrevocable trusts. The work registration standard req u ires ea ch able-bodied household member between the ages o f 18 and 65— except those caring for children, students in school at least h a lf time, and those work ing at least 30 hours per week—to register for em ploym ent with the local state or federal em ploym ent office. Registration must take place at the time o f applying for the food stamp program and every six m onths thereafter while participating in the program. Such individuals are required to accept bona fide offers o f suitable em ployment as a condition o f continued par ticipation in the food stamp program. Factors contributing to growth The growth in the food stamp program since its modern day inception4 in 1961 4The original food stamp program, inaugurated in 1939, permitted families on relief to purchase—in the amount equivalent to normal food expenditures— orange colored stamps that were redeemable for the purchase of any foods. In addition, participants were provided free blue stamps—equal in value to one-half of the orange stamps—that could be used to purchase surplus-declared foods. Participation in this original program peaked at 4 million people in the earlyForties, then declined until the program ended in 1943 as the unfolding of World War II reduced unemploy ment and the availability of surplus foods. 7 largely reflects legislative changes that have expanded program coverage, liber alized eligibility standards, and altered the emphasis o f the program. The Food Stamp Act o f 1964 expanded program coverage from the few counties established by P r e s id e n t ia l d ire ctiv e s d u rin g the preceding three years to all areas re questing coverage. Throughout the Sixties, the emphasis o f the program was to “ sup plem ent” the ability o f low income households to “ more nearly” attain a nutritionally adequate diet. Consequently, purchase requirements were established at levels that corresponded to normal food ex penditures, while coupon allotments were established at levels that were closer to the cost o f a nutritionally adequate diet. Im plementation o f this concept w as achieved by linking both the purchase requirement and the coupon allotment to a household’s income, reflecting the tendency o f food ex penditures to rise with income. Hence, households with higher incom es were eligi ble for a larger coupon allotment than were households o f the same size but with lower incomes. Lower-income households, how ever, paid proportionately less for the stamps received than did higher-income households. Legislation in 1971 contributed to the growth o f the food stamp program by ex panding program coverage—to Guam, Puerto Rico, and the V irgin Islands—and by replacing state-determined eligibility standards with a uniform and more liberal set o f national standards. But the most im portant growth element that emerged in this legislation w as the concept that all households should have the opportunity to consume a nutritionally adequate diet. A s suggested by the chart, this change in program emphasis substantially altered coupon allotment schedules. In contrast to the former stepwise allotment schedules, the revision instituted a uniform monthly coupon allotment for all households o f a given size, regardless o f income. For most 8 Federal Reserve Bank of Chicago Comparison of 1969 and 1972 food stamp issuance schedules for four-person households dollars households the revised allotment substan tially exceeded the allotment provided un der the old standard, particularly am ong lower-income households. The 1971 legisla tion also severed the tie between purchase requirements and norm al food expen ditures.5 The com bined effect o f the resulting lower purchase requirement and the rise in coupon allotments led to a 30 to 80 percent boost in the value o f bonus stamps issued to most participants. In 1973 growth in the program was stimulated further by a congressional mandate that required all areas o f the U ni ted States to adopt a food stamp program by June 30,1974.6Prior to this change state agencies had to request coverage. The 1973 legislation also replaced the annual costof-food adjustment in coupon allotments with the semiannual adjustment. The more frequent adjustments contribute to program growth in two ways. First, the ad justments raise the value o f bonus stamps since purchase requirements remain un changed as a function o f income. Second, cost-of-food adjustments permit higherincom e households to qualify for the pro dollars gram because the upper limit o f the incom e eligibility standard is related to the m onth ly coupon allotment. The number o f individuals partici pating in the food stamp program soared from 14.4 million in September 1974 to 18 million at the start o f 1975. T his increase, which is as rapid as any experienced in the history o f the program, reflects the deteriorating conditions in the labor market and, to a lesser extent, the conver sion from the food distribution program to the food stamp program in Puerto Rico. 5The severance of purchase requirements from normal food expenditures effectively added an in come supplement to the food stamp program. The supplement, which is equal to the difference between the amount a household would normally spend for food while not participating in the program and the amount paid for stamps as a participant, can be used to purchase food or nonfood items. HWhile this resulted in a substantial increase in the number of participants in the program, the bulk of the increase represented the conversion of households from the “food distribution program”—a plan that provides government-acquired foods to low income families—to the food stamp program. The Food Stamp Act prohibits, with only minor exceptions, the simultaneous operation of both programs in a county. Business Conditions, July 1975 Emerging issues A number o f observers have criticized the food stamp program and offered sug gestions for refinement. Their criticisms and proposals, however, cover a broad range o f differing viewpoints and differing priorities. Some observers are primarily in terested in curbing program abuses and elim inating unwarranted costs. Others argue that the regulations and operations o f the food stamp program are too restric tive and that further liberalization is need ed. Still others contend that the program is a highly inefficient m eans o f achieving its goals and that other alternatives should be considered. These varying viewpoints are certain to generate a wide-ranging policy debate in the m onths ahead. There have been repeated efforts, with only limited success, to close apparent loopholes in the eligibility standards. Recently, such efforts succeeded in tighten ing the eligibility prospects for individuals who are employed under an annual con tract but do not receive regular com pensa tion throughout the entire year.7But m any observers contend there are other eligibili ty loopholes that should be closed. E x amples m ost frequently cited include those that permit the eligibility o f college students—particularly those w ho have parents with incom es and resources that exceed eligibility levels—and households that qualify solely on the grounds that a member is not w orking because o f a strike. Proposals to cut the surging costs o f the food stamp program have been most evident in recent Adm inistration actions. One proposal would limit “ cost-of-food” in creases to 5 percent through July 1, 1976. Another proposal attempted to raise the 7This tightening—designed primarily to prevent teachers and professional athletes from being eligible during summer vacations or during off seasons—was accomplished by requiring that the monthly incomes of such individuals be averaged over an annual period rather than over the months in which no salary was received. 9 purchase requirement, for all households— except those with little or no incom e—to 30 percent o f net income, the legal maximum provided under existing legislation.8 A l though Congress has not accommodated either o f these proposals, the issues are likely to persist in the future. The Senate Committee report Arguments o f observers who are con cerned with program shortcom ings and needed program improvements are sum marized in a recent report by the Senate Select Committee on Nutrition and Human Needs. The report cites evidence that the participation ratio in the program —the number o f people actually participating in the program relatve to the total number eligible to participate—has declined from over 50 percent in 1972 to around 40 per cent in 1974.9 The report concluded there were a number o f factors contributing to the apparent decline in the participation ratio including insufficient promotional efforts, certification bottlenecks, and prob lems in issuing stamps. The rules and regulations o f the food stamp program require each state agency to take “ . . . effective action . . . to in form low incom e households . . . o f the availability and benefits o f the program and encourage the participation o f eligible households.” A side from the fact that one m ight be hard pressed to recall any food stamp prom otional cam paigns through "Under current regulations the purchase require ment, as a percent of net household income, varies from 5 percent upward to the legal maximum of 30 percent. A recent study concluded that for the average household participating in the food stamp program, the purchase requirement was equivalent to 23 per cent of its net monthly income. "Three separate studies conducted in 1974 suggested that the number of people eligible to par ticipate in the food stamp program ranged from 36 to 38 million people. Although most observers concur that the number of people eligible to participate sub stantially exceeds the number of actual participants, the paucity of data for estimating the total number of eligible people renders such estimates suspect. 10 established media channels, the report cites evidence that suggests a number o f states expended no m oney for prom otional efforts in fiscal 1974. Consequently, it is conceivable that m any people m ay not be aware o f the food stamp program, or more likely, do not understand the eligibility re quirements sufficiently to know if they qualify for participation. A nd based on the results from the few concentrated pro motional cam paigns, it would appear that sizable increases in participation would result from expanded prom otional efforts. To strengthen prom otional efforts, the committee recommends that the U.S. Department o f Agriculture develop a model prom otional cam paign and m onitor all state agencies for com pliance. The committee report also attributed the low participation ratio to “ certification bottlenecks.” The report indicated that lengthy application forms, inflexibilities in acquiring trained certification workers, and inadequate facilities to handle peak work loads were preventing com pletion o f the certification process within the 30-day maximum established by regulations. It also noted that in some areas extremely short certification periods were com m only issued to participants. In such cases the process o f recertification is doubly taxing on the strained state agency facilities dur ing periods when participation rises rapid ly. To counter these problems, the report suggests that the certification process be simplified by standardized application forms and replacement o f the verification requirement by a m onitoring program similar to that used by the Internal Revenue Service in checking for tax fraud. Moreover, the report recom m ends the adoption o f an optional standard deduc tion that could be used in lieu o f itemizing actual deductions. The select committee report also enumerated problems in issuing stamps that have contributed to the low participa tion ratios. The report suggested that Federal Reserve Bank of Chicago semimonthly coupon issuance schedules result in undue hardship on participants, particularly since m ost people purchase food weekly. Other problems include a shortage o f issuing facilities in some areas, a limited number o f issuance days, such as three days per week, and restrictive hours o f issuance, such as fours hours per day. To ease the problems o f coupon issuance, the committee proposed that the postal service be required by law to offer stamps for sale in every post office during all hours o f business. In addition to the above proposals, the select committee also recommended the follow ing actions w hich, if implemented, would have an obvious im pact on program participation and costs: • Boosting the federal governm ent’s share o f state operating costs from the present 50 percent to 65 percent. • Changing to quarterly adjustments in coupon allotments to m aintain closer parallels with food costs. • Reducing the maxim um purchase re quirement from the current 30 percent o f net incom e to 25 percent. • Raising the resource eligibility stan dard from the current $1,500 to $2,000 for a two-member household, up to a maximum o f $3,000 for a household o f six. Old age limits would be raised to $4,500. The AEI report A standing criticism o f the food stamp program is that it is inefficient in meeting its expressed objectives and that other alternatives should be considered. These conclusions, expressed m any times in the past, were most recently summarized in a study published by the Am erican Enter prise Institute (AEI). Since its inception in 1964, the objec tives o f the food stamp program have been: • To strengthen the agricultural econo- Business Conditions, July 1975 11 my by providing a more beneficial dis tribution o f agricultural surpluses. • To alleviate hunger and malnutrition by m aking it possible for low-income households to purchase a nutritionally adequate diet through normal channels. The A E I study concludes that the benefits o f the food stamp program to the agricultural econom y are, at best, m ini mal, particularly in regard to surplus com modities. The im pact o f the program on the distribution o f surplus commodities is en tirely contingent upon the types o f foods participants purchase with coupons that would not be purchased if no program was available. Although some studies indicate that a dollar’s worth o f bonus stamps m ight increase food expenditures by 50 to 65 cents, other studies indicate most o f the in cre a se d expenditures are used to p u rch a se c o n v e n ie n c e foods a n d /or preference foods rather than a larger quan- Profile of participants A study o f 2,191 households that were eligible for the food stamp program in Novem ber 1973 found that one- and two-member households accounted for nearly one-half o f those surveyed. Three- and four-member households a c counted for one-fourth, and households with seven or more members accounted for just over one-tenth. Individuals 18 to 34 years old head ed well over one-fourth o f the eligible households as did those 66 years o f age or over. Household heads aged 45 to 54 accounted for only one-eighth o f those surveyed. A predominance o f female household heads was evident in all age categories, especially am ong those o f 18 to 34 years o f age. Overall, women h ea d ed n e a rly tw o-th ird s o f the households surveyed. R o u g h l y 18 p ercen t o f the households resided in rural areas and about 58 percent were located in the city p ortion s o f Standard Metropolitan Statistical Areas. The remaining 24 per cent o f the households were located in urban areas (nonmetropolitian areas containing 25,000 or more inhabitants). By race, blacks accounted for 38 percent o f th e h o u s e h o ld s , and w h ites rep resen ted 55 p ercen t. SpanishAm ericans accounted for 8 percent o f the households in the study. About seven out o f ten household heads were not in the civilian labor force. O f these, five were unemployed and not seeking work, while two were retired. Thirteen percent o f household heads were employed full time (30 hours or more per week), 10 percent were employed part time, and 8 percent were unemployed but seeking work. The employment status o f public assistance households and nonpublic assistance households, however, varied widely. Over three-fourths o f the households not on public assistance were in the labor force—either w orking or seeking work— as opposed to only 15 percent o f the public assistance households. Net after tax incom es o f par ticipating households averaged $364 per month in N ovem ber o f 1973. One-fifth o f this amount represented cash income from private sources, while 45 percent was cash incom e from public sources— such as social security payments, un employment com pensation, and other types o f g o v e rn m e n ta l tra n sfers payments. T he remainder represented “ in -k in d ” in co m e , i.e., the cash equivalent o f benefits received from such program s as medicaid, public hous ing, food stamp, etc. 12 tity o f foods. Consequently, processors and producers o f preference-type com m odi ties—such as fresh fruit or m eat—tend to reap the bulk o f the increased food expen ditures rather than producers o f surplus com m odities.ip The A E I study expands the same argu ment as evidence that the food stamp program falls short o f meeting its objective to eliminate hunger and malnutrition. The tendency o f participants to use coupons to purchase convenience a n d /o r preference foods does not guarantee the consum ption o f a more adequate diet. Indeed, the ad ditional processing associated with the preparation o f convenience foods can lower the nutritional content o f food. The A E I study demonstrates the dif ficulties o f im proving nutritional levels o f low-incom e fam ilies above what the families themselves, rightly or wrongly, perceive to be adequate. While m any lowincom e households lack adequate diets, they apparently have a preference for ex panded purchases o f nonfood items as op posed to increasing their food consum ption levels. M any participants value the stamps at well under the actual dollar value o f the stamps issued. The A E I study estimates that in the eyes o f the average household participating in the program, a dollar o f bonus stamps is valued at 82 cen ts. In other words, the average household would just as soon have an 82 cent cash transfer as a dollar’s worth o f bonus stam ps.11 The A E I study recom m ends the divorce o f the dual objectives embodied in the Food Stamp Act. Proposed con siderations for im proving nutrition am ong low-income households include expanded co n su m e r e d u ca tio n , direct transfer Federal Reserve Bank of Chicago payments to increase consumer incom es, and the nutritional fortification o f food products as a w ay to lower nutrition costs. Summary The above discussion represents some o f the more divergent views regarding needed revisions to the food stamp program. In all likelihood, the changes that emerge from the ongoing policy m aking process will reflect a com prom ise o f these views. It is true that loopholes exist in the food stamp program and that some participants obtain benefits out o f propor tion to actual need. But it is also true that in some areas a variety o f problem s in cer tification, stamp issuance, and prom o tional efforts add needless encumberances to legitimate participants. But in the same vein, due consideration must be given to the costs and benefits o f the food stamp program and possibilities for more ef ficient alternatives. Gary L. B enjam in "’One could also add that the objective to strengthen the agricultural economy is somewhat redundant since the Food Stamp Act virtually prohibits the simultaneous operation of the food stamp program and the food distribution program, a program designed to expand the distribution of sur plus commodities. uThe AEI study suggests that this preference is related to two important side issues. First, reports of a large black market in which stamps are traded at less than 50 cents per coupon dollar tend to support the view that participants would prefer to increase their nonfood expenditures before boosting food consump tion levels. The second related issue is that participa tion in the food stamp program is more responsive to the households’ valuation of bonus stamps than the actual dollar value of bonus stamps. Hence, large in creases in the value of bonus stamps, in the absence of a black market, would not neccessarily lead to signifi cant increases in program participation. Business Conditions, July 1975 13 ank profits in The effects o f increased expenses and higher losses on securities and loans in 1974 than in 1973 were largely offset by h ig h e r in co m e s at Seventh District member banks last year. Profitability o f member banks, as measured by the ratio o f net incom e to equity capital including reserves, averaged 11.6 percent, just about m atching the recent high o f 11.7 percent in 1973. For banks in a number o f deposit-size groups in the various states, average profitability ratios were actually higher than in 1973. While the average bank in m o st deposit-size groups recorded a profitability ratio above 10 percent, it was the banks with less than $50 m illion in deposits that showed the highest returns. H igh interest rates affected both earn ings and expenses. The net effect o f high interest rates on profits o f individual banks depended largely upon the com posi tion and the maturity o f assets and lia b ilitie s . L o a n s — esp ecia lly federal funds—yielded the highest returns, while reliance on short-term sources o f funds was relatively costly. The return on loans (the ratio o f in terest and fees to the average o f total loans outstanding on three call report dates) was 9.52 percent for the average district bank, up 77 basis points from 1973. The return on loans excluding sales o f federal funds averaged 8.46 percent, up 66 basis points. Increases in average returns on securities were som ewhat smaller. Although net loan losses over recoveries rose last year, they averaged only lA o f 1 percent o f outstandings. Interest paid on deposits averaged 5.78 percent o f time and savings deposits, an in crease o f 66 basis points—the largest ab- Profitability ratios of member banks, 1973-1974 percent 20 deposit size (mil. $) 15 h over 100 10 - III III 5 - o _ 15 " 10 5 - 0 _ 50-100 II II II II III III 25-50 III 10-25 III 5-10 20 " 15 10 III - 5 - 0 _ under 5 II III Illinois Indiana Iowa III Michigan Wisconsin Note: Averages of individual bank ratios of net income to equity capital plus reserves. Federal Reserve Bank of Chicago 14 Average operating ratios for district banks are heavily weighted by banks in the $10-25 m illion deposit-size group, which includes almost onethird o f the membership. A t these banks: Record high rates paid on federal funds (overnight loans to other banks) boosted earnings of the smaller banks but were an impor tant cost to the largest banks that are the major purchasers. Gross revenue from sales of fed funds and securities purchased under resale agreements in creased the return on loans significantly. . . percent of operating income: from earnings on fed funds sold and securities bought under RPs absorbed by the cost of fed funds bought and securities sold under RPs ratio of loan income to loan amount (percent) Note: Ratios are based on gross revenues and gross expenses and exclude banks not reporting amounts for these items. ill. IIIU . id. IV IIU II. ‘ Includes federal funds and security RPs. “ Excludes federal funds and security RPs. . . . while the composition of total loans was in line with each state’s usual pattern. Interest on deposits was the largest expense item for the average bank in each size group— even for the smallest banks, some of which were in business little more than a year. percent of loans interest on deposits as percent of operating income 0 deposit size ^ (mil.$) under 5 5-10 10-25 25-50 50-100 100-500 ‘ Includes federal funds sold. over 500 10 20 30 40 ^ ^ I 50 I Business Conditions, July 1975 15 Income and expenses involved in earning $1 of profit in 1974 Under 5 Deposit-size groups of district member banks (million dollars) Over 500 5-10 10-25 25-50 50-100 100-500 All members Income from: Loans1 U.S. Treasury sec. U.S. agency sec. State & local sec. Other sec. Other sources2 Total $3.90 1.28 .39 .25 .05 .31 $6.18 4.52 .98 .44 .44 .07 .30 6.75 5.10 .90 .51 .65 .09 .38 7.63 5.51 .78 .47 .71 .10 .51 8.08 6.05 .66 .55 .76 .16 .65 8.83 6.13 .52 .39 .77 .13 .72 8.66 9.06 .44 .23 .70 .14 1.14 11.71 5.26 .85 .47 .62 .09 .46 7.75 Minus expenses: Interest on deposits Interest on borrowings Salaries & benefits Bank premises Loan loss provision Taxes3 Other subtractions4 Total $2.03 .01 1.40 .20 .09 .49 .96 $5.18 2.92 .04 1.24 .16 .13 .42 .84 5.75 3.69 .04 1.31 .19 .14 .34 .92 6.63 3.83 .10 1.43 .23 .16 .28 1.05 7.08 4.20 .27 1.57 .27 .18 .23 1.11 7.83 3.91 .54 1.48 .27 .18 .23 1.05 7.66 4.88 1.98 1.78 .33 .27 .28 1.19 10.71 3.57 .15 1.39 .21 .15 .32 .96 6.75 Income minus expenses $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 includes income from sales of federal funds and securities purchased under agreements to resell, includes service charges, trust department income, and net remittable income from foreign branches. Estimate of taxes applicable to 1974 income. 4Largely other operating expenses but includes net securities losses and all other additions and subtractions, net. solute increase on record and the largest relative increase since 1963. A substantial portion o f last year’s increased interest ex pense stemmed from upward adjustments in rates paid follow ing the raising o f legal ceilings in m id-1973. The full effect o f these adjustments on bank costs w as not felt un til 1974. At the largest district banks, moreover, a very important interest ex pense factor w as the record high rates paid on large time certificates o f deposit that are not subject to any rate ceiling. These rates exceeded 12 percent for several weeks in the summer o f 1974. At banks with deposits over $500 m illion the ratio o f total interest paid to total time and savings deposits averaged 7.36 percent, an increase o f 144 basis points over the previous year. Since there are relatively few banks in the group, this increase had little effect on the average cost o f funds district-wide. A number o f the factors determining incom e appear to be related to bank size. The im portance o f loans in asset portfolios, the average return on loans (excluding the effects o f federal funds sold), and conse quently, the proportion o f operating in come provided by loan incom e all were higher at larger banks. Higher average in terest rates paid on time deposits and greater reliance on nondeposit sources o f funds com bined to absorb an increasing proportion o f incom e as bank size in creased. These differences are reflected in the amounts o f revenue and expense in volved in earning an average dollar o f profit. A s the table shows, both incom e and expense per dollar o f profit were about twice as high at the average bank in the largest size group as at the average bank in the smallest size group. Jean L. Valerius
@FedFRASER