![]() ![]() Heather Boushey, Ryan Nunn, and Jay Shambaugh have edited a collection of eight essays under the title Recession Ready: Fiscal Policies to Stabilize the American Economy (May 2019, Hamilton Project at the Brookings Institution and Washington Center for Equitable Growth). So when the next recession comes, monetary policy will be limited in how much it can reduce interest rates before those rates hit zero percent, and will instead need to rely on nontraditional monetary policy tools like quantitative easing, forward guidance, and perhaps even experiments with a negative policy interest rate. But interest rates are lower around the world for a variety of reasons, and the federal funds interest rate is now at 2.5%. Might it be possible to redesign the automatic stabilizers of tax and spending policy in advance so that they would offer a quicker and stronger counterbalance when (not if) the next recession comes? The question is especially important because in past recessions, the Federal Reserve often cut the policy interest rate (the "federal funds" interest rate) by about five percentage points. Thus, even before the government undertakes additional discretionary stimulus legislation, the automatic stabilizers are kicking in. Government spending rises to some extent automatically, as a result of more people becoming eligible for unemployment insurance, Medicaid, food stamps, and so on. But in an economic downturn, taxes fall to some extent automatically, as a result of lower incomes. For example, in an economic downturn, a standard macroeconomic prescription is to stimulate the economy with lower taxes and higher spending. ![]() For economists, "automatic stabilizers" refers to how tax and spending policies adjust without any additional legislative policy or change during economic upturns and downturns-and do so in a way that tends to stabilize the economy. ![]()
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