Recall that fiscal policy is the use of changes in government spending and tax rates to influence the path of the macro economy. Thus, recessions are somewhat milder. Fiscal policy uses government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, and inflation. Figure 1. This video briefly explains the difference between automatic stabilizers and discretionary government spending. By their normal operation, these policies take more money out of the economy as taxes during periods of rapid growth and higher incomes. Accessed September 23, 2020. Notice that in recession years, like the early 1990s, 2001, or 2009, the standardized employment deficit is smaller than the actual deficit. Every federal budget reflects some fiscal policy. In this case, the goal of fiscal policy is to help prevent an economic setback from deepening. All of these things serve to buoy aggregate demand and prevent it from falling as far as it otherwise would. 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. 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 are a type of fiscal policy, which is favored by Keynesian economics as a tool to combat economic slumps and recessions. When an economy is in a recession, automatic stabilizers may by design result in higher budget deficits. 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.
Figure 2 compares the actual budget deficits of recent decades with the CBO’s standardized deficit. This offset may not seem enormous, but it is still useful. Automatic stabilizers, like shock absorbers in a car, can be useful if they reduce the impact of the worst bumps, even if they do not eliminate the bumps altogether. On the spending side, stronger aggregate demand typically means lower unemployment, so there is less need for government spending on unemployment benefits, welfare, Medicaid, and other programs in the social safety net. As a result, we can’t look at the deficit figures alone to see how aggressive fiscal policy is. Investopedia requires writers to use primary sources to support their work. Around 1900, for example, federal spending was only about 2% of GDP. Accessed Sept. 23, 2020. Automatic stabilizers, like welfare programs such as food stamps, automatically kick in when aggregate demand falls.
These include white papers, government data, original reporting, and interviews with industry experts. Consider, though, the effects of automatic stabilizers. From the previous section, it should be clear that the budget deficit or surplus responds to the state of the economy. Automatic stabilizers are primarily designed to counter negative economic shocks or recessions, though they can also be intended to “cool off” an expanding economy or to combat inflation. A glance back at economic history provides a second illustration of the power of automatic stabilizers.
"H.R.1 - American Recovery and Reinvestment Act of 2009." It provided over $2 trillion in government relief in the form of expanded unemployment benefits, direct payments to families and adults, loans and grants to small businesses, loans to corporate America, and billions of dollars to state and local governments..