Social Insurance and the Severity of Recessions

The question of how bad would economic conditions be right now if there had been no stimulus package and no financial bailout is receiving considerable attention. There's no way to know for sure, but I believe the economy would have been much worse off without these two policy interventions. But without actually running the alternative scenario - something we can't do - there's no way to know for sure.

But one thing I am fairly certain of, and something I don't think is getting enough attention, is the effect that automatic stabilizers have had in helping to ease the impact of the recession for individual households on and for the overall economy.

What are automatic stabilizers? Automatic stabilizers are taxes and transfers (e.g. unemployment compensation and food stamps) that automatically change with changes in economic conditions in a way that dampens economic cycles. For example, when the economy turns downward, the amount spent on food stamps automatically goes up as more people apply (or eligibility rules are eased), and the extra spending the food stamps helps to soften the downturn for the individuals receiving the help and for the businesses and employees where the money is spent (and then the multiplier process spreads the benefits more widely). Similarly, unemployment compensation, which obviously rises as jobs are eliminated, goes up when conditions deteriorate and that also provides a boost to demand. In addition, income tax as a share of GDP goes down in recessions and that helps to offset the fall in GDP as well.

How much worse would things be now if we had followed the advice of the hardcore rightwing and eliminated the welfare state programs that function so effectively as automatic stabilizers? It still wouldn't be like the pictures you see of the Great Depression because we are a much wealthier nation than we were then and thus have more private resources to rely upon. But even so, not everyone has wealth to rely upon and the recession would be much more evident, and the amount of human suffering would be much greater, without the social insurance programs we put in place in the years since the Great Depression -- programs that we, for the most part, now take for granted. I don't mean there is no suffering due to the downturn, there is and I don't want to minimize it - I wish our social insurance programs were even more generous than they are now for that reason - and I don't mean to say there are no signs at all of economic problems, there are, but we shouldn't overlook the important role that social insurance plays during recessions.

I think we can have a debate over the appropriate level and form of social insurance, as I said, I don't think it is generous enough and I would also broaden it to include health care. But I don't think there can be any doubt about the importance and effectiveness of social insurance in helping to limit the impact of economic downturns.

So when we are assessing the effectiveness of government interventions designed to ease the recession, there are two alternative (or baseline) scenarios to think about. One is a world without the stimulus package and without the financial bailout, and that would be bad enough. But the other is a world without the stimulus package, without the financial bailout, and without social insurance, and that would be much, much worse.