I attended today a very interesting conference on the role of fiscal policy at the IMF. I presented a paper on the role of automatic stabilizers. It is interesting that there are very few academic papers that have looked into the effectiveness of automatic stabilizers. In my paper I argue that the evidence suggests that automatic stabilizers are effective and should not be ignored. I also find that in recent years countries with smaller automatic stabilizers have compensated with more aggressive discretionary fiscal policy (e.g. the US has smaller automatic stabilizers than Europe but in the current crisis has used discretionary fiscal policy more aggressively). The program of the conference and copies of the papers can be found at the IMF web site.
"Discre(onary fiscal policy or automa(c stabilizers?
• At the end the debate depends on our views on the
quality of fiscal policy ins(tu(ons. If we trust
governments to use discre(on op(mally (and act
quickly during recessions), the addi(onal flexibility to
adapt their ac(ons to the specific shocks that are
hisng the economy makes discre(on superior to
• But if there are implementa(on lags or we simply do
not trust government to produce op(mal responses
to recessions, then automa(c stabilizers dominate"
I would argue that the best Automatic Stabilizer would be a Guaranteed Income. For one thing, it's actually Automatic. It's also defined and certain, which is extremely important during a panic.Friedman also offered a similar proposal that Brittan likes, and I do as well:
"a 1948 paper by Milton Friedman entitled A Monetary and Fiscal Framework for Economic Stability, reprinted in Essays in Positive Economics (1953).
I found this early essay much more helpful than his better-known later proposal for a constant growth of the money supply. The 1948 paper contained four proposals:
First, a long-term policy of determining government expenditure on goods and services, either in money or real terms, entirely on the basis of the community’s desire and willingness to pay for such services.
Second, a predetermined programme of transfer payments for items such as pensions and unemployment pay. “Such payments will be high when unemployment is high and low when unemployment is low.”
Third, a progressive tax system primarily based on the personal income tax. The rates set should be sufficient to balance government spending at a hypothetical level of national income corresponding to “reasonably full employment at a predetermined price level”.
Fourth, budget deficits would be financed entirely by the creation of money by the Fed and surpluses used to retire money. This would best be accomplished by adopting the 100 per cent reserve proposal for banks, “thereby separating the depositary from the lending functions of the banking system”.
The first three proposals look at first sight like the “automatic stabilisers” that governments came to rely on as the main fiscal contribution to economic stability before the present emergency. But there is a crucial difference. In a recession, governments would not have to forecast the path of recovery, as the British government has done, or the timing of the return to budget balance. In a normal cycle, the return would be automatic. But, if forebodings of secular stagnation, with the desire to save at high employment levels exceeding investment opportunities, were fulfilled, then budgetary stimulants would continue as long as necessary."
The point, again, as I see it, is to make the Automatic Stabilizers actually automatic and predictable.
Don the libertarian Democrat