Transcript Comments on Fatas: Automatic Stablizers

Comments on Fatas:
Automatic Stabilizers
Steven Symansky
FAD
Consensus
Not many papers in this area
• With one exception, everyone seems to agree
that automatic stabilizers are good – even Taylor
- leave discretion to monetary policy; if fiscal
discretion it will complicate monetary (negative one is
that if shocks have a non-zero mean, there needs to be
discretionary action)
• But that is where the consensus ends (only
some answered in presentation)
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Defined differently
Increasing or decreasing over time?
How large should they be?
How do they affect output?
How should they be designed?
Overview
• Definitional Issues
• What do we know about automatic
stabilizers
• Should they be enhanced and how
Definitional
• Antonio recognizes the problem and puts out some
definitions, but they are contradictory in spots
• Definitional issues: Not sure that this presentation clears
them up:
– If revenue changes in line with income is that an
automatic stabilizer? Fatas ─yes/ Melitz-no
– If G doesn’t change is that a stabilizer? Fatas I think
says yes as he talks about gvt size
– What about asset prices? Inflation? Interest rates?
Commodity prices? (1% of GDP in crisis) Automatic
vs cyclical
– Levels? Ratio to GDP ? Ratio to Potential GDP?
– Can they really be compared if definitional issues?
Why we care about stabilizers?
• Antonio’s work on size of government is
important – larger government reduces
volatility unless government is source of
instability (although recent paper by Debrun et al
provides some contradictory evidence)
• Antonio recognizes
– tradeoff between stabilization and other issues –
equity and efficiency
– stabilization does not depend on change in the
budget but the demand effect
– temporary and anticipated tend to increase demand
(although not always true – VAT, investment incentive
vs tax rebate)
• Auerbach: There are also supply side effects
Are They effective?
• Most argue that they are effective but
– Graph raises some questions
• Finland and only modest differences
– Why same multiplier if different automatic stabilizers
(contrary to standard definition)
– And states that multiplier close to recently estimated
(not sure what these are)
• Argues that automatic generate larger
multipliers:
– Endogenous – timely – therefore larger (timely - yes
but multiplier should be smaller;)
– Anticipated should work better
– Temporary for sustainability
• Even if theory says automatic have smaller
multipliers, other arguments are compelling
Discretion vs Automatic
• Difficult to separate the two
• Negative tradeoff is very suggestive
• Should we care ?
– NO: i) an increase in unemployment benefits
is an increase ii) impossible to define the
concepts (data) ; German argument in G20
– Yes: i) temporary and anticipated but that is
marginal; ii) timing is right iii) political
economy
Should they be Increased?
• Need to address question of whether fiscal
should be a key stabilization tool
• What is the tradeoff between stabilization,
efficiency and equity as well as
sustainability (next presentation)
• Does it apply equally to emerging and
developing countries (volatility of
advanced and emerging market countries)
How to Increase them
Missing from this presentation - but should be in
next one
• Solow, Ball, and others have argued that you
need a Fiscal Council – more timely
– but still subject to error
– Parliament looses power
• Data responsive rates of expenditures/taxes
– but data revisions can be large
• Increase progressivity
– but efficiency and
– Argument that flat tax would have larger stabilization
since lower end at higher tax rate (but equity)