Automatic Stabilizers

1
Automatic Stabilizers

• Government Spending on Auto Pilot

2
Building Fiscal Policies Into Institutions

• Economists have attempted to create built-in
  fiscal policies.
• Automatic stabilizers any government program or
  policy that counteracts the business cycle
  without any new government action.

3
Building Fiscal Policies Into Institutions

• Automatic stabilizers include welfare payments,
  unemployment insurance, and the income tax system.

4
Building Fiscal Policies Into Institutions

• Automatic stabilizers include welfare payments,
  unemployment insurance, and the income tax system.

5
How Automatic Stabilizers Work

• When the economy is in a recession, the
  unemployment rate rises.
• Unemployment insurance automatically is paid out
  to the unemployed, offsetting some of the fall in
  income.

6
How Automatic Stabilizers Work

• Government spending increase without an explicit
  act by the government.

• When incomes increase, government spending
  declines automatically.

7
How Automatic Stabilizers Work

• When the economy expands, tax revenues rise,
  slowing the economy.

• When the economy contracts, tax revenues decline,
  providing stimulus to the economy.

8
State Government Finance and Procyclical Fiscal
Policy

• State constitutional provisions mandating
  balanced budgets act as automatic destabilizers.
• These states cut spending and raise taxes during
  recessions and increase spending and cut taxes
  during expansions.

9
State Government Finance and Procyclical Fiscal
Policy

• Procyclical fiscal policy changes in government
  spending and taxes that increase the cyclical
  fluctuations in the economy instead of reducing
  them.

10
State Government Finance and Procyclical Fiscal
Policy

• Economists have suggested alternatives to state
  government procyclical budget policy.

• Establish rainy-season funds.
• Use five-year rolling-average budgeting procedure.

11
The Negative Side of Automatic Stabilizers

• Automatic stabilizers have their problems.
• When the economy first starts climbing out of a
  recession, automatic stabilizers may slow down
  the process.

12
Building Keynesian Policies Into Institutions

• Despite these problems, most economists believe
  automatic stabilizers have played an important
  role in reducing fluctuations in the economy.

13
Decrease in Fluctuations in the Economy
Modern period
Before demand management
Active demand management