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.
Automatic stabilizers are designed to expand during an economic downturn and contract during an expansion—providing timely and temporary fiscal stimulus. Boushey, Nunn, O’Donnell, and Shambaugh assess the various policy responses available to the federal government and argues that when well designed, automatic stabilizers can be an effective part of the policy tool kit for responding to recessions.
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.
Consumer spending, which makes up about 70 percent of aggregate expenditures in the economy, slows sharply during recessions. This slowdown can exacerbate employment losses and reduced production, making a recession even worse. Claudia Sahm proposes automatic direct payments to individuals to support consumer spending when the national unemployment rate rapidly rises.
In the face of large declines in tax revenues and increased demand for state programs during and after recessions, state governments are often forced to raise taxes, cut programs, or both. In order to protect state Medicaid programs and counteract recessions, Matthew Fiedler, Jason Furman, and Wilson Powell III propose to automatically increase the federal share of expenditures under Medicaid and the Children’s Health Insurance Program when a state’s unemployment rate exceeds a threshold level.
Transportation infrastructure investment during economic downturns often occurs too slowly—and in insufficient quantities—to help stabilize the economy. Andrew Haughwout of the Federal Reserve Bank of New York proposes a modification of the BUILD grant program that would automatically fund additional transportation infrastructure investments during recessions.