Better Autonomatic Stabilizers

Mark Thoma has a very good column discussing the virtues of automatic fiscal stabilizers, the process through which social insurance programs help with macroeconomic stabilization. They’re great virtue, relative to “stimulus” programs, is specifically that they work automatically. When the economy slows down, tax receipts fall but expenditures on social programs rise. This happens right away, avoiding recognition lags and also has the “additional advantage of being outside the political process”:

One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. Agreeing on tax cuts versus spending, who should get the tax cuts, how money should be spent, etc., is difficult if not impossible, and the delays and compromises involved in passing legislation undermine the effectiveness of the policy. Automatic stabilizers bypass this difficulty by doing exactly what their name implies, they kick in automatically without the need for Congressional action.


Under the circumstances, as he argues, it would be nice to give some more thought to how automatic stabilizers could be improved. For my money, the most important thing here is to do something about pro-cyclical boom-and-bust budgeting at the state and local level. I’m not really sure what kind of limits the constitution puts on the federal government’s ability to constrain state budget options, but the sheer volume of conditional grant programs probably makes it possible for Congress to de facto put limits on this. I’m not sure exactly what the best thing to do would be — maybe could could force states to place a defined percentage of their total outlays in some kind of escrow account that can be released during recessions. Smart people could probably think up a better idea than that. Indeed, unlike a hazily defined deficit commission, this is actually an area where I could imagine a bipartisan commission coming up with some useful ideas.