What Is an Automatic Stabilizer?

Automatic stabilizers are a type of 澳洲幸运5官方开奖结果体彩网:fiscal policy designed to offset fluctuations in a nation's eco☂nomic activity through their norma𝓰l operation without additional, timely authorization by the government or policymakers.

The best-known automatic stabilizers are 澳洲幸运5官方开奖结果体彩网:progressively graduated corporate and personal income taxes, and transfer systems such as 澳洲幸运5官方开奖结果体彩网:unemployment insurance a꧅nd welfare. Automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action.

Understanding Automatic Stabilizers

Automatic stabilizers are primarily designed to counter 澳洲幸运5官方开奖结果体彩网:negative economic shocks or 澳洲幸运5官方开奖结果体彩网:recessions, though they can also be intended to “cool off” an expanding economy or to combat inflation. By their normal operation, these policies take more money out of the economy as taxes during periods of rapid growth and higher incomes. They put more money back into the economy in the form of government spending or tax refunds when economic activity slows or incomes fall. This has the intended purpose of cushioning the economy from changes in the 澳洲幸运5官方开奖结果体彩网:business cycle. 

Automatic stabilizers can incl♌ude the use of a progressive taxation st♌ructure under which the share of income that is taken in taxes is higher when incomes are high. The amount then falls when incomes fall due to a recession, job🌳 losses, or failing investments. For example, as an individual taxpayer earns higher wages, their additional income may be subjected to higher tax rates based on the current tiered structure. If wages fall, the individual will remain in the lower tax tiers as dictated by their earned income.

Similarly, unemployment insurance 澳洲幸运5官方开奖结果体彩网:transfer payments decline when the economy is in an 澳洲幸运5官方开奖结果体彩网:expansionary phase since there are fewer unemployed people filing claims. Unemployment payments rise when the economy is mired in recession and 澳洲幸运5官方开奖结果体彩网:unemployment is high. When a person becomes unemployed in a manner that makes them eligible for unemployment insurance, they need only file to claim the benefit. The amount of benefit offered is governed 𓆉by various state and national regulations and standards, requiring no intervention by larger government entities beyond application processing.

Automatic Stabilizers and Fiscal Policy

When an economy is in a recession, automatic stabilizers may by design result in higher 澳洲幸运5官方开奖结果体彩网:budget deficits. This aspect of fiscal policy is a tool of 澳洲幸运5官方开奖结果体彩网:Keynesian economics that uses government spending and taxes to support 澳洲幸运5官方开奖结果体彩网:aggregate demand in the economy during economic downturns.

By taking less money out of private businesses and households in taxes and giving them more in the form of payments and tax refunds, fiscal policy is supposed to encourage them to increase, or at least not💖 decrease, their consumption and investment spending. In this case, the goal of fiscal policy is to help prevent an economic setback from deepening.

Real-World Examples of Automatic Stabilizers

Automatic stabilizers can also be used in conjunction with other forms of fiscal policy that may require specific legislative authorization. Examples of this include one-time tax cuts or refunds, government investment spending, or direct government subsidy payments to businesses or households.

Some examples of these in the United States were the 2008 one-time tax rebates under the Economic Stimulus Act and the $832 billion in federal direct subsidies, tax breaks, and infrastructure spending under the 2009 澳洲幸运5官方开奖结果体彩网:Amer🦩ican Reinvestme🦹nt and Recovery Act.

In 2020, the 澳洲幸运5官方开奖结果体彩网:Coronavir🍸us Aid⭕, Relief, and Economic Security (CARES) Act became the largest stimulus package in U.S. history. It provided over $2 trillion in government relief in the form of expanded unemployment benefits, direct payments to families and adults, loans and grants to small businesses, loans to corporate America, and billions of dollars to state and local governments.

Special Considerations

Since they almost immediately respond to changes in income and unemployment, automatic stabilizers are intended to be the first line of defense to turn mild negative economic trends around. However, governments often turn to other types of larger fiscal policy programs to address more severe or lasting𝐆 recessions or to target specific regions, industries, or politically favored groups in society for extra-economic🎃 relief.