Automatic stabilizers (built-in stabilizers) - American businessAutomatic or built-in stabilizers are government programs and policies that cushion the impact of a change in spending in the economy. Technically automatic stabilizers reduce the multiplier effect of an autonomous change in spending.
Fiscal policy includes taxation and spending decisions by government designed to stimulate the economy during periods of recession and to slow economic activity during periods of peak levels of output. In the United States, personal income taxes are slightly progressive, meaning the marginal tax rate increases as income increases. During periods of peak economic activity, the higher marginal tax rates reduce consumers’ disposable income, which in turn slightly reduces their consumption spending. This automatically slows the rate of growth in the economy, and economists suggest it helps reduce the potential for inflation.
Similarly, during recessions, when economic output is declining, workers are often laid off or put on temporary furlough. Most workers in the United States are then eligible for unemployment benefits. These benefits allow workers to maintain some of the spending in the economy they were doing before they lost their job. During the Great Depression, unemployment and welfare benefits did not exist. When workers lost their jobs, their income dropped to zero, which in turn dramatically decreased their spending and reduced national income even further. Unemployment benefits and welfare benefits automatically offset some of the lost income and spending during a recession, cushioning its impact by supporting some level of consumer spending.
During periods of extreme economic decline, like the Great Depression, the federal government also engages in discretionary fiscal policy, tax cuts, and/or increases in government spending to stimulate economic activity when there is not sufficient consumer spending or private investment. Automatic stabilizers, as the term suggests, occur without direct intervention of government policy makers.