Automatic Stabilizers and Their Effects
According to an essay written by Carl Walsh and published online by the Federal Reserve Bank of San Francisco, automatic stabilizers are a tool used to dampen fluctuations in real GDP without any explicit policy action by the government. The term automatic stabilizer refers to the fact that the stabilizers act without explicit authorization from the Congress or from the President.
In addition to automatic stabilizers, the federal government may make discretionary changes in the face of an economic downturn. Expansionary fiscal policies are intended to boost demand and output in the economy either directly, through greater government expenditures, or indirectly, through tax reductions that tend to stimulate private consumption and investment spending.
Here is an example of an automatic stabilizer: The government pays unemployment and welfare benefits. The number of unemployed people and those on low incomes who are entitled to these benefits increases in a recession and decreases in a boom. As a result, government expenditure increases automatically in recessions and decreases automatically in a boom.
According to Walsh, while the automatic adjustments of federal spending and taxes work to stabilize the economy, not all automatic fiscal adjustments are stabilizing. State
and local governments see tax revenues fall during recessions, but because many governmental agencies must balance their budgets annually, they often must cut spending during recessions even if that involves cutting services and benefits to people in need (Walsh, 2002).
Source: Bureau of Labor Statistics, Current Population Survey
Shown above is a graph showing the unemployment rate in the United States for the last ten years. This information was gathered and published by the US Department of Commerce's Bureau of Labor Statistics. Many of the individuals represented on ...