Automatic Stabilizers: What Are They and Do They Help Workers Who Stay Home Due to the Corona Virus?

2020 Geneva International Motor Show

From the International Geneva Motor Show 2020 this week, before cancellation due to Corona Virus; GIMS

Editor's Note: Nowadays, we're always behind with our newspaper reading. But then again, we're usually determinedly catching up, even if we're a week behind and our newspaper mercilicious in providing lengthy stories. Thus, we found ourselves staring at an unfamiliar term, "automatic stabilizers" in their Business section last Tuesday.* After reading this paragraph from The New York Times article, Social Safety Net in Europe Eases Quarantine's Toll, I decided to look up a Congressional Budget Office Working Paper from 2015. (When we Googled the term, it came up with sandwiches termed C.B.O. for McDonald's Chicken, Bacon and Onion!)

We went back to an earlier time and read the available working paper explanation from our Congressional Budget Office in November 2015:

"Federal receipts and outlays regularly respond to cyclical movements in the economy. When the economy is operating below its potential, personal income and other tax bases are depressed, causing revenues to be lower than if the economy was operating at its potential. At such times, outlays for unemployment insurance benefits and other types of transfer programs are elevated. By contrast, when the economy is operating above its potential, revenues are higher and transfer payments are lower than would be the case if the economy was operating at its potential.

Those “automatic stabilizers” thus tend to dampen the size of cyclical movements in the economy, by supporting or restraining private spending. The Congressional Budget Office estimates the size of the automatic stabilizers using actual data for past years and the agency’s current-law projections for the current and future years by relating movements in various components of federal revenues and outlays to measures of cyclical movements in the economy.

Most types of revenues — mainly personal, corporate, and social insurance taxes — are sensitive to the business cycle and account for most of the value of the automatic stabilizers. A relatively small part of total outlays — those for the programs that are intended to support people’s income and have a cyclical component — contribute to the value of the automatic stabilizers; those benefits include ones from unemployment insurance, Medicaid, and SNAP (the Supplemental Nutrition Assistance Program). The automatic stabilizers do not include discretionary spending because that spending (which requires legislation) is not automatic or interest payments because those outlays are not designed to provide income support.

CBO’s estimates of the automatic stabilizers are based on the estimated cyclical elements of those revenues and outlays. The magnitude of the automatic stabilizers is zero when the economy is operating at its potential and grows as the economy operates further away from its potential.1 CBO estimates that the automatic stabilizers significantly increased the federal deficit in fiscal year 2014 but will increase the deficit by smaller amounts as the economy improves over the next few years. 2 Given the degree to which the economy was operating below its potential, CBO estimates that the automatic stabilizers added $203 billion to the deficit in 2014, an amount equal to 1.1 percent of potential (maximum sustainable) gross domestic product (GDP) (see Tables 1 and 2). By comparison, CBO estimates that the automatic stabilizers added $343 billion (2.2 percent of potential GDP) to the deficit in fiscal year 2010 — the year after the most recent recession.3 According to CBO’s projections, under current law the automatic stabilizers will add an amount equal to 0.2 percent of potential GDP to the deficit each year after 2017.

*"The governments of most European countries are offsetting the cost of emergency sick leave for employers an aiding smaller companies that are scrambling to survive. Most European governments require business to grant employees some form of paid sick leave. Germany, France, Denmark and The Netherlands are among the countries where workers have a right to receive full pay, in some cases for at least six weeks, if they are ill, are quarantined or are told to stay home by their employers." From The New York Times Business section, Tuesday, March 10, 2020.

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Automatic Stabilizers: What Are They and Do They Help Workers Who Stay Home Due to the Corona Virus?

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