Automatic Stabilizer

Automatic Stabilizer

Automatic stabilizers are a type of fiscal policy designed to offset fluctuations in a nation's economic activity through their normal operation without additional, timely authorization by the government or policymakers. Automatic stabilizers are ongoing government policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle. Automatic stabilizers are a type of fiscal policy designed to offset fluctuations in a nation's economic activity through their normal operation without additional, timely authorization by the government or policymakers. This aspect of fiscal policy is a tool of Keynesian economics that uses government spending and taxes to support 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.

Automatic stabilizers are ongoing government policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle.

What Is an Automatic Stabilizer?

Automatic stabilizers are a type of fiscal policy designed to offset fluctuations in a nation's economic activity through their normal operation without additional, timely authorization by the government or policymakers.

The best-known automatic stabilizers are progressively graduated corporate and personal income taxes, and transfer systems such as unemployment insurance and welfare. Automatic stabilizers are called this because they act to stabilize economic cycles and are automatically triggered without additional government action.

Automatic stabilizers are ongoing government policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle.
Automatic stabilizers are a type of fiscal policy, which is favored by Keynesian economics as a tool to combat economic slumps and recessions.
In the event of acute or lasting economic downturns, governments often back up automatic stabilizers with one-time or temporary stimulus policies to try to jump-start the economy.

Understanding Automatic Stabilizers

Automatic stabilizers can include the use of a progressive taxation structure 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 transfer payments decline when the economy is in an expansionary phase since there are fewer unemployed people filing claims. Unemployment payments rise when the economy is mired in recession and 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 by 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 budget deficits. This aspect of fiscal policy is a tool of Keynesian economics that uses government spending and taxes to support 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 $831 billion in federal direct subsidies, tax breaks, and infrastructure spending under the 2009 American Reinvestment and Recovery Act.

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 lasting recessions or to target specific regions, industries, or politically favored groups in society for extra-economic relief.

Related terms:

Aggregate Demand , Calculation, & Examples

Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level at a given time. read more

American Recovery and Reinvestment Act (ARRA)

The American Recovery and Reinvestment Act of 2009 (ARRA) was a law passed by the U.S. Congress in response to the Great Recession of 2008. read more

Budget Deficit

A budget deficit typically occurs when expenditures exceed revenue. The term is typically used to refer to government spending and national debt. A budget deficit is an indicator of financial health. read more

Business Cycle : How Is It Measured?

The business cycle depicts the increase and decrease in production output of goods and services in an economy. read more

Economic Shock

An economic shock is an event that occurs outside of an economic model that produces a significant change within an economy. read more

Economic Stimulus

Economic stimulus refers to attempts by governments or government agencies to financially kickstart growth during a difficult economic period. read more

Economics : Overview, Types, & Indicators

Economics is a branch of social science focused on the production, distribution, and consumption of goods and services. read more

Expansionary Policy

Expansionary policy is a macroeconomic policy that seeks to boost aggregate demand to stimulate economic growth. read more

Fiscal Policy : Types & Tools

Fiscal policy uses government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, and inflation. read more

Induced Taxes

Induced taxes are taxes induced by changes in real economic activity that can act as automatic stabilizers on the macroeconomy. read more

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