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Monday, June 27, 2011

We Need to Enhance Our Automatic Stabilizers

I don't always agree with Clive Crook, but I do agree with his call for the US to strengthen its automatice stabilizers (as discussed in the link mentioned a few days ago at the bottom of this post):

A fiscal policy fit for the next crisis, by By Clive Crook, Commentary, Financial Times: ...The fiscal response to a recession is partly automatic (lower revenues and higher transfers as the economy shrinks) and partly discretionary (lower tax rates, infrastructure projects, extra help for states and so on). Two factors weaken automatic stabilizers in the US. First, the government is small, so economic fluctuations, other things being equal, move fiscal quantities less. Second, states are subject to balanced-budget rules. Much of the US government has to follow a pro-cyclical fiscal policy – cutting spending and raising taxes – during a recession.
This puts a great burden on discretionary policy. Extra federal stimulus, and plenty of it, is needed just to offset automatic tightening in the states. To supply net discretionary stimulus requires very aggressive action in Washington. It is much to Barack Obama’s credit that he pushed through a big federal stimulus for 2009. ... Nonetheless, severe fiscal tightening in the states would have justified something even bigger.
Unfortunately Mr. Obama lost the battle for public opinion. The country thinks the stimulus has failed – and this could be a lasting reversal for fiscal activism. Discussion now revolves around premature tightening and, equally disturbing, new budget rules to constrain fiscal discretion in future. The government of a country with weak automatic stabilizers is talking about ways to limit its own discretion – as though the current paralysis is not enough. This could be a new calamity in the making. ...
As well as steering clear of that, the US should embrace an explicit goal of strengthening its automatic stabilizers. The aim should be to boost stimulus in downturns and curb it in expansions, with a smaller need for intervention by Congress over the course of the cycle. The less one needs to ask of that broken institution, the better. ...

    Posted by on Monday, June 27, 2011 at 12:33 AM in Economics, Fiscal Policy, Politics | Permalink  Comments (13)


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