What is Feedback-Rule Policy?

Feedback-Rule Policy is action undertaken by the government with the goal being to restore equilibrium within an economy that has been destabilized.

Key Takeaways

  • Feedback-Rule Policy is action undertaken by the government with the goal being to restore equilibrium within an economy that has been destabilized.
  • Feedback-Rule Policies can take many forms, including changing the aggregate supply of money in an economy, changing the level of taxation, and altering aggregate consumption by changing government expenditures.
  • Feedback-Rule Policy contributed to the New Deal programs enacted during the Great Depression in the 1930s, as well as the Recovery Act following the Great Recession in 2008.

Understanding Feedback-Rule Policy

Feedback-Rule Policy is triggered when an economic situation becomes unstable, and the governing body intervenes to restore equilibrium. Feedback-rule policies can take many forms, including:

  • Changing the aggregate supply of money in an economy.
  • Changing the level of taxation.
  • Altering aggregate consumption by changing government expenditures.

One scenario in which feedback-rule policy could occur if the net exports of a country decrease. A government could take a feedback-rule policy approach to increasing net exports by decreasing government expenditure on imported goods. When imports are reduced, net exports rise.

Economic instability severe enough to prompt a feedback-rule policy could occur for any number of reasons, including gross domestic product (GDP) being either above or below full employment equilibrium or the price level not clearing the aggregate market.

While feedback-rule policies are often introduced on a smaller scale to correct economic shifts in a country, they are also enacted in a larger scale in response to major economic events. Feedback-rule policy contributed to the New Deal programs enacted during the Great Depression in the 1930s, as well as the Recovery Act following the Great Recession in 2008.

American Recovery and Reinvestment Act of 2009

The American Recovery and Reinvestment Act of 2009 was an $831 billion stimulus package enacted by the U.S. Congress in 2009 in response to the Great Recession.  Known also as the Recovery Act, this sweeping act contained many policies designed to help correct the economic impact of U.S and worldwide financial crises in the late 2000s. Many of the policies within the Recovery Act would be considered feedback-rule policies.

The primary objectives of the Recovery Act were to promote immediate job growth in the U.S. economy, and to provide relief and investment in a wide range of sectors including health, education, transportation, environmental protection and other infrastructural programs.

The statement of purpose of the Recovery Act included:

  • To preserve and create jobs and promote economic recovery.
  • To assist those most impacted by the recession.
  • To provide investments needed to increase economic efficiency by spurring technological advances in science and health.
  • To invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.
  • To stabilize state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases.