The Safety Net Has Become A Hammock

Show Notes

As the reopening of the U.S. picks up speed lots of available jobs are going unfilled. Businesses are practically begging their previous employees to come back but, in many cases, employees are finding their extended unemployment benefits have given them the luxury of saying no. What is going on here? Has the safety net become a hammock?

In the latest episode of the DrillDown podcast, Peter Schweizer and his co-host Eric Eggers explore how the incentive structures of public assistance create lots of winners and losers. But the winners might not be who you would think.

As Schweizer explains, there is a cronyism aspect to public assistance programs that make some large corporations lots of money, especially when people are out of work. The podcast talks about three different areas where this is so.

First, there is the Electronic Benefits Transfer (EBT) card itself. EBT cards work like debit cards for people on public assistance programs such as the SNAP program (formerly food stamps) and other forms of welfare known as transfer payments. The card is loaded up monthly or semi-monthly and the holder can use it at stores selling food and other covered items. These cards and accounts are managed by many different companies who get fees each time these cards are used, whether at a grocery store, Walmart, or even Amazon.

JP Morgan was a huge player in the industry before leaving it in 2014. Xerox spun off a business called Conduent in 2017 that is one of the largest EBT card vendors in the country. Vendors of EBT cards for government benefits also include Fidelity National Information Services eFunds, Solutran, and Inmar.

Where the story gets weird is that these companies have a vested interest in having as many transactions as possible run through these cards, as cheaply as possible for them, to the point where they have lobbied against reforms designed to curb abuses of EBT cards, or even to add additional security features to these cards, because it would raise their own production costs. Their incentive is to have as many of these cards in circulation as possible, whether they’re being used fraudulently or not.

Another example Eric introduces is the availability of government-assistance cellphones. This program became known as “Obamaphones” because it expanded greatly during Barack Obama’s presidency, starting in 2012. The idea was that individuals need to be digitally connected and that the poor would suffer most if they did not have a mobile phone to help them seek employment. This has since morphed into a situation where government is buying phones for people on public assistance from large phone companies. During the pandemic, one company actually bragged about how it much it had expanded its phone program with the government because of the impact of quarantines. This program is being gamed by telecom companies who are making huge amounts of money from the government for providing these phones and fighting to expand the number of people who can get them.

As Schweizer says, it’s possible to debate the idea that low-income people on public assistance might need help with necessary expenses such as phone service without turning that into a cash cow for powerful, highly profitable cellphone companies.

As Ronald Reagan once said, “Government programs, once launched, never disappear. Actually, a government bureau is the nearest thing to eternal life we’ll ever see on this earth!​”

Then there is another well intentioned program that really helps people… the school and summer lunch program. The rules for this program were changed not too long ago, such that if 40% of the people in your school district qualify for public assistance, then 100% of the students at your schools qualify for the free lunch program. Who does this benefit?

It benefits the large corporations in the food service business who lobbied for provisions like this. They get more money to provide more food for more students, whether those students show up to eat it or not. The National School Lunch Program, which was started during the Great Depression, now costs $28.2 billion a year. The three largest contractors for the federal school lunch programs are Compass Group North America, Sodexo Inc, and Aramark Corp. These three companies made $9.5 billion in revenue from their education-related food service contracts in 2014. Compass Group and Sodexo are based in the United Kingdom and France, respectively.

The programs themselves are incentivized to cost as much as they can. In fact, we even found a case of a Boston suburb where school and summer feeding programs were raffling off iPhones and iPads just to get people to show up for the free meals. The Florida Department of Agriculture contracted with professional sports teams to promote free food programs in that state.

It all adds up to a mighty big free lunch, or as Eric says, “un grand déjeuner.”