Automatic Stabilizers

Published Dec 23, 2022

Definition of Automatic Stabilizers

Automatic stabilizers are economic policies that are designed to automatically adjust income levels, government spending, and taxation in response to changes in the economy. That means they are designed to reduce the severity of economic fluctuations, such as recessions and booms.

Example

To illustrate this, let’s look at the US federal income tax system. During a recession, people tend to earn less money, which means they pay less in taxes. This is an example of an automatic stabilizer because it helps to reduce the severity of the recession by reducing the tax burden on consumers and companies. Similarly, during a boom, people earn more money, which means they’ll have to pay more in taxes, which reduces their spending power.

Why Automatic Stabilizers Matter

Automatic stabilizers are an important tool for governments to manage economic fluctuations. They help to reduce the severity of recessions and booms, which can help to reduce unemployment and other economic problems. In addition, they can help to reduce the need for more drastic measures, such as raising or lowering interest rates. As a result, they can help to maintain economic stability and promote long-term economic growth.