Transcript Automatic Stabilizers

Automatic Stabilizers
Government Spending on Auto Pilot
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.
Building Fiscal Policies Into Institutions
• Automatic stabilizers include welfare
payments, unemployment insurance,
and the income tax system.
Building Fiscal Policies Into Institutions
• Automatic stabilizers include welfare
payments, unemployment insurance,
and the income tax system.
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.
How Automatic Stabilizers Work
• Government spending increase
without an explicit act by the
government.
• When incomes increase, government
spending declines automatically.
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.
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.
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.
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.
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.
Building Keynesian Policies Into
Institutions
• Despite these problems, most
economists believe automatic
stabilizers have played an important
role in reducing fluctuations in the
economy.
Percent change in real GDP
around the trend
Decrease in Fluctuations in the Economy
20%
15
10
5
0
5
10
15
20
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Before demand
management
Active demand
management
Modern period