Underinvesting in Resilience: The Role of Automatic Stabilizers

A Romney win would have provided fertile ground for econ blogging -- there were so many polices that I passionately disagree with. But even though it makes the job here a little tougher, and not quite as fun, I'll take the outcome we got. There will still be plenty to complain about in a second Obama administration, and the top priority for me is protecting social insurance programs from the cuts that the Republicans and misguided, centrist, grand bargain types on the left would like to make.

The other thing I would like to push even though it is pretty much hopeless to expect much change is our approach to fiscal policy. In deep recessions, we need it to buttress our monetary policy efforts with fiscal policy, but as it stands discretionary fiscal policy is largely dysfunctional due to the inability of Congress to agree on how to proceed (that would be easier to understand if it was simply an honest disagreement over the underlying economics, but politics -- winning the next election -- gets in the way and obstructs the ability of fiscal policymakers to respond to economic downturns).

But while discretionary policy is generally difficult to implement, and usually suboptimal when it is, another type of policy, what are known as automatic stabilizers, did much better (much of the increase in spending during the recessions was due to social programs expanding as conditions worsened). To the extent that we can shift policy from discretionary to automatic -- spending and tax cuts that kick in automatically when economic conditions deteriorate, and reverse themselves when things improve -- we would be better off.

We will worry a lot about improving the equivalent of automatic stabilizers for natural disasters in light of events like Sandy and Katrina. For example, Michael Spence could be writing about automatic versus discretionary fiscal policy instead of preparedness for national disasters:

Underinvesting in Resilience, by Michael Spence, Commentary, Project Syndicate:  ... There are two distinct and crucial components of disaster recession preparedness. The one that understandably gets the most attention is the capacity to mount a rapid and effective response. Such a capacity will always be necessary, and few doubt its importance. When it is absent or deficient, the loss of ... livelihoods can be horrific...

The second component comprises investments [in automatic stabilizers] that minimize the expected damage to the economy. This aspect of preparedness typically receives far less attention. ...

Recessions like we have just been through are costly in both personal and economic terms, and we need to worry just as much about fixing fiscal policy -- both our preparedness to ease damage with automatic stabilizers and our ability to respond rapidly with additional fiscal policy measures -- as we do about preparing for hurricanes. We will likely think hard about ways to improve hurricane preparedness, but, unfortunately, there are few signs that politicians even understand what a disaster fiscal policy has been -- how much blame they should shoulder for the continuing unemployment problem for example. Since the first step in fixing a problem is recognizing you have one, I have little hope that any effort will be devoted to improving our ability to use fiscal policy to respond in deep recessions (there are ideological barriers as well, and while the mounting evidence that fiscal policy works ought to break those barriers down, that hasn't happened).

[See also: Putting Fiscal Policy on Autopilot, a column I wrote on this in late 2010.]