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Slowdowns in the economy are inevitable. While it may be tempting to rely on Federal Reserve policy as a lone response to recessions, this would be a mistake; we know that fiscal stimulus is effective. Rather than wait for a crisis to strike before designing discretionary fiscal policy, we would be better served by preparing in advance. Enacting evidence-based automatic stabilizer proposals before the next recession will help the next recovery start faster, make job creation stronger, and restore confidence to businesses and households.
Louise Sheiner and Michael Ng investigate the cyclicality of fiscal policy over the past 40 years, finding that fiscal policy has been increasingly countercyclical, with automatic stabilizers providing roughly half the stabilization. By contrast, state fiscal policy has been mildly procyclical.