Automatic
Stabilizers
1
Discretionary Fiscal
Policy in Practice
• Time Lags
•
Recognition Time Lag
• The time required to gather information about the current
state of the economy- “ID the problem”
•
Action Time Lag
• The time required between recognizing an economic
problem and putting policy into effect
• Political debate delays putting policy into effect
• Short for monetary policy
• Long for fiscal policy
•
Effect Time Lag
• The time it takes for a fiscal policy to affect the economy
2
Automatic Stabilizers
• Discretionary fiscal policy is a deliberate change in
government spending and taxation to achieve economic
goals.
• Automatic Stabilizers effect the economy without
government action
3
Automatic Stabilizers
• Automatic Stabilizers
• Changes in government spending and taxation that
occur automatically without deliberate action of
Congress
• Examples
• The progressive income tax
• Unemployment compensation
4
Progressive Income Tax as an
Automatic Stabilizer
During a Recession- jobs lost/wages down
• Income tax being paid but at a lower marginal
tax rate because people making less money. As a
result of the progressive tax system, disposable
income doesn’t fall as drastically because your
income is less. In other words, the individual
isn’t hurt as much because of the progressive
(marginal) tax.
5
Progressive Income Tax as an
Automatic Stabilizer
During an Overheated Economy- employment
up, wages up
• Disposable income does not go up as rapidly as
their gross income because of the progressive
income tax. Taxes rising at a greater rate. More
taxes will slow down the overheated economy. In
this situation, progressive tax tends to stabilize
any drastic, abrupt increases in the economy.
6
Unemployment Insurance as
an Automatic Stabilizer
• During a Recession- Unemployment
insurance(gov’t transfer) tends to alleviate the
severity of a recession by giving individuals some
disposable income.
7
Automatic Stabilizers
Government Transfers and
Tax Revenues
Government
transfers
The automatic
changes tend to drive
the economy back
toward its fullemployment output
level
Budget
deficit
Lower taxes
and higher
Y2
Yf
Y1
Unemploy.0
Real National Income per Year
Insurance tends
($ trillions)
To lessen effect of recession.
Tax
revenues
Budget surplus
Higher taxes/
and lower
unemployment
insurance tends
to slow overheated
8
economy. Result
budget surplus.