What is Feedback-Rule Policy?
Feedback-Rule Policy is an action taken by a government body with the goal of restoring equilibrium to an economy that has been destabilized. It may be fiscal policy enacted by a government or monetary policy imposed by a central bank authority.
- Feedback-rule policy is an action undertaken by a government with the goal of restoring balance to an economy that has been destabilized.
- Feedback-rule policies can take many forms, including changing the overall supply of money in an economy, changing the level of taxation, and altering overall 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 Policies
A feedback-rule policy is triggered when an economic situation becomes unstable, and the governing body intervenes to restore equilibrium. These policies can take many forms, including:
- Increasing or reducing the overall supply of money in the economy.
- Raising or lowering taxes.
- Altering overall consumption of goods and services by increasing or decreasing government expenditures.
Economic instability severe enough to prompt a feedback-rule policy can occur for any number of reasons. For example, if the net exports of a country decrease, a government could initiate a feedback-rule policy approach such as decreasing government spending on imported goods. When imports are reduced, net exports rise.
Feedback-rule policies are often introduced on a relatively small scale to correct economic shifts in a country before they reach a crisis level. They are enacted on a larger scale in response to major economic setbacks.
Examples of Feedback-Rule Policies
The COVID-19 pandemic that began in March 2020 led to a series of measures small and large to offset its inevitable economic impact.
- The Coronavirus Aid, Relief, and Economic Security Act (CARES) enacted in 2020, and no fewer than five follow-up measures, poured money into the hands of American individuals, small businesses, industries, and state governments that were being hurt by the pandemic's impact on spending. About $4.6 trillion in federal spending was allocated to shore up the economy and prevent a recession.
- In 2020, the Federal Reserve enacted a series of interest rate increases in order to reduce inflation. The pandemic was in part a side effect of the pandemic, as global production and shipping slowdowns created shortages in a wide range of imported commodities.
Earlier Feedback Rule Policies
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 onset of the Great Recession.
Known also as the Recovery Act, this sweeping legislation 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 number 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.
Is Feedback-Rule Policy Always About the Economy?
Yes. Feedback-rule policy is by definition a government response to an imbalance in the economy. The feedback-rule policy response may be either fiscal or monetary.
A fiscal policy is a change in government spending or a change in taxation. In the U.S., this is the province of Congress. It can order government agencies to spend more money or order them to reduce their spending. It can raise or lower taxes on everyone or just some groups of people.
A monetary policy is an action taken by a central bank, such as the Federal Reserve in the U.S. The central bank aims to restore equilibrium to the economy by either increasing or reducing the overall supply of money. To do this, it raises interest rates, discouraging spending, or lowers interest rates, encouraging spending.
What Triggers a Feedback-Policy Rule?
A feedback-policy rule is usually a response to one or more economic reports that indicate a dangerous imbalance in the economy that will have ripple effects if left alone.
The inflation rate is an example. The monthly Consumer Price Index indicates whether prices of essential goods are going up, down, or sideways. If they're going up too much, people will respond by buying less. If they're going down, producers will respond by producing less. Either has an impact on the overall economy. A feedback-policy rule may be enacted to bring inflation to a tolerable level.
What Was the Biggest Feedback-Policy Rule in U.S. History?
The biggest-ever feedback-policy rule in U.S. history to date is the $2.2 trillion CARES Act of 2020, the first fiscal government response to the COVID-19 pandemic. It is memorable in part for the $1,200 checks sent directly to every American taxpayer, plus $500 for each of their children.