Macroeconomics ·October 13, 2020 The Issue:Increases in public spending or tax cuts that stimulate the economy can mitigate the economic damage during a recession and hasten recovery. However, these types of fiscal stimulus often require approval from Congress and the President, which means that aid is uncertain and can be delayed by the political process or expire when support is still needed. Automatic stabilizers are predetermined — automatically kicking in when conditions deteriorate and tapering off as they improve — and can provide a way to inject timely stimulus and remove the uncertainty inherent in a political process. When paired with discretionary or direct action from policymakers, these stabilizers can be an important part of fighting recessions and cushioning their impact on families and the economy. Automatic stabilizers in the U.S. are relatively small. Congress consistently has to provide additional aid to the economy during downturns, raising the odds that political complications delay needed support. The Facts:
The United States relies heavily on discretionary policy to support families and the economy in recessions. Given that interest rates are likely to stay low for an extended period of time, fiscal policy will be even more important over time in smoothing out economic downturns. Automating parts of the country's fiscal response to recessions would be good policy. While the United States has automatic stabilizers, they are generally smaller than those in other advanced economies. In many consecutive recessions, Congress has needed to act to provide more support, often passing the same policies but each time in an ad hoc way. In the last three recessions, Congress has made direct checks available to households, extended unemployment insurance, and provided additional aid to states via the Medicaid cost-sharing formula. Given that these policies are done over and over, they could be automated. As could changes to SNAP, some spending on infrastructure, or support to the most needy through Temporary Assistance for Needy Families (TANF). Details of proposals on those policies are available in the book Recession Ready. Expanded use of automatic stabilizers would bring aid to the economy in a quicker, more predictable manner. Does the government increase spending during a recession?During a recession, the federal government is in principle able to counteract declines in economic activity by increasing spending, even while revenues decline—making up the difference with additional borrowing.
What happens to government expenditures during a recession?During recessions, the median real GDP decline is 2.3 percent, with most of the drop explained by reductions in investment and profits, while government spending typically goes up.
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