Automatic stabilizers bypass this difficulty by doing exactly what their name implies, they kick in automatically without the need for Congressional action. Agreeing on tax cuts versus spending, who should get the tax cuts, how money should be spent, etc., is difficult if not impossible, and the delays and compromises involved in passing legislation undermine the effectiveness of the policy. One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. Why have these stabilizers received so little attention? One reason is that they are automatic and hence largely outside the political process, this is one of their advantages, and it's only when programs such as unemployment compensation threaten to come to an end that they catch our attention.Īs just noted, in addition to their effectiveness at reducing the severity of economic shocks, automatic stabilizers have an additional advantage of being outside the political process. Yet, despite their importance in smoothing the impact of economic shocks, very little discussion of the recent crisis has been devoted to whether the automatic stabilizers we have in place have been adequate. I don't think there can be any doubt about the importance and effectiveness of social insurance in helping to limit the impact of economic downturns. Similarly, unemployment compensation, which obviously rises as jobs are eliminated, goes up when conditions deteriorate and this also provides a boost to demand. The extra spending the food stamps generates helps to soften the downturn for the individuals receiving the help, and also benefits the businesses and employees where the money is spent (and the multiplier process spreads the benefits more widely). For example, when the economy turns downward, the amount spent on food stamps automatically goes up as more people apply or eligibility rules are eased. What are automatic stabilizers? Automatic stabilizers are taxes and transfers such as unemployment compensation and food stamps that automatically change with changes in economic conditions in a way that dampens economic cycles. But one thing I am fairly certain of, and something I don't think is getting enough attention, is the effect that automatic stabilizers have had in helping to ease the impact of the recession. There's no way to know for sure, but I believe the economy would have been much worse off without these two policy interventions.
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The question of how bad would economic conditions be right now if there had been no stimulus package and no financial bailout is receiving considerable attention.
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What are automatic stabilizers and how do they work? In an earlier post on this topic, Social Insurance and the Severity of Recessions, I wrote that: Automatic stabilizers are a key factor in easing the consequences of negative economic shocks.