Loading the player...

What is an 'Automatic Stabilizer'

Automatic stabilizers are economic policies and programs designed to offset fluctuations in a nation's economic activity without intervention by the government or policymakers on an individual basis. The best-known automatic stabilizers are corporate and personal taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilizers are so called because they act to stabilize economic cycles and are automatically triggered without explicit government action.

BREAKING DOWN 'Automatic Stabilizer'

Designed to counter a current economic trend or event, automatic stabilizers can include the use of a progressive taxation structure, the share of taxes if national income falls when the economy is booming and rises when the economy is in a slump. This has the effect of cushioning the economy from changes in the business cycle. Similarly, total net transfer payments such as unemployment insurance decline when the economy is in an expansionary phase and rise when the economy is mired in recession.

Overall Function of Automatic Stabilizers

The purpose of an economic stabilizer is to prevent the negative consequences relating to unexpectedly high growth rates or recessions. For example, as an individual taxpayer earns higher wages, his 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 his earned income.

Application of Automatic Stabilizers

The use of an automatic stabilizer is triggered by a particular event within an economy and is applied to an entire region, such as a state or nation, based on specific qualifications. For example, when a person becomes unemployed in a manner that makes him eligible for unemployment insurance, he needs only to file to claim the benefit. The amount of benefit offered is governed by various state and national regulations and standards, requiring no intervention by larger government entities beyond application processing.

Automatic Stabilizers and Deficit Spending

When an economy is in a recession, automatic stabilizers may result in higher budget deficits. This can be due to the higher level of benefit payouts being used to support individuals or businesses in the economy, such as unemployment insurance or tax breaks, as well as the fall in the total amount of revenue being received, such as from declines in income tax payments based on individuals becoming unemployed. The deficit spending is used to boost economic activity. The goal is to lead the economy into recovery and, subsequently, be able to recuperate the funds through increased employment and higher productivity.

  1. Automatic Investment Plan - AIP

    An automatic investment plan is an investment program that allows ...
  2. Automatic Reinvestment Plan

    An investment program in which capital gains or other income ...
  3. Unemployment

    Unemployment occurs when a person who is actively searching for ...
  4. Global Financial Stability Report ...

    A semiannual report by the International Monetary Fund (IMF) ...
  5. Full Employment

    Full employment is a situation in which all available labor resources ...
  6. Automatic Additional Insured

    Additional insurance coverage that is automatically included ...
Related Articles
  1. Managing Wealth

    Should You Pay Your Bills On Autopilot?

    Now that you can sign up to have your bills paid automatically online, it it a smart way to make your life more efficient? A look at the pros and cons.
  2. Insights

    Top 4 Central Banks Dominating the World Economy

    Central banks play an integral role in market economies by maintaining the stability and credibility of national currencies used in those economies.
  3. Financial Advisor

    No Paycheck Doesn't Necessarily Mean No Income

    If you lose your job, be sure to apply for unemployment benefits. It's not welfare, but an insurance program that you and your employer have already paid into.
  4. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  5. Personal Finance

    Why Global Unemployment Is Rising

    The ILO is reporting that there are now 50 million fewer jobs in the global economy than before 2008. Find out why.
  6. Insights

    Is Germany Carrying The European Economy?

    Germany has been widely viewed as the economic catalyst and stabilizer for the European Union and for good reason.
  7. Insights

    Leading Economic Indicators: U.S. Bureau of Labor Monthly Stats

    The Bureau of Labor Statistics' monthly employment figures are a key economic indicator. Here's how they work.
  8. Investing

    Did Your State Cut Unemployment Benefits?

    Many of the states now cutting back on unemployment benefits significantly under-funded their coffers prior to the Great Recession.
  1. What macroeconomic problems do policy makers most commonly face?

    Learn about the macroeconomic factors policymakers have to be concerned with when deciding on economic policies, such as ... Read Answer >>
  2. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  3. How did the Great Recession affect structural unemployment?

    Structural unemployment is difficult to measure, but there are hints in the data that the spike in unemployment following ... Read Answer >>
  4. What are some examples of expansionary fiscal policy?

    Learn about expansionary fiscal policy – tax cuts and government spending – that are used by governments to boost spending ... Read Answer >>
  5. Why does unemployment tend to rise during a recession?

    Learn what a recession is, some attributes of an economy in a recession, and why the unemployment rate tends to rise during ... Read Answer >>
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center