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.
What are Automatic Stabilizers?
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 of 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 automatic economic stabilizer is to prevent the negative consequences related 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 need only 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.