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The Economics and Policy of Automatic Stabilizers

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PST)

Marriott Marquis, Point Loma
Hosted By: American Economic Association
  • Chair: Jay Shambaugh, Brookings Institution and George Washington University

Strengthening SNAP as an Automatic Stabilizer

Diane Whitmore Schanzenbach
,
Northwestern University
Hilary Hoynes
,
University of California-Berkeley

Abstract

While SNAP already functions in many respects as an effective stabilizer, existing and proposed rules limit its usefulness in this regard. For example, we show in this paper how SNAP work requirements can limit and automatic stabilizer role and discuss how such rules should be designed to maximize SNAP effectiveness. Moreover, federal policymakers could make more use of SNAP as a stabilizer by establishing an automatic procedure for temporarily increasing benefits during economic downturns. Accordingly, we propose that SNAP benefits be temporarily increased by 15 percent during recessions. SNAP’s effectiveness in the Great Recession was augmented by policy choices made at the time. Making these adjustment automatic would both remove uncertainty and speed up the use of SNAP as both insurance to individuals and an automatic stabilizer.

Direct Stimulus Payments to Individuals

Claudia Sahm
,
Washington Center for Equitable Growth

Abstract

This chapter proposes a direct payment to individuals that would automatically be paid out early in a recession and then continue annually when the recession is severe. Research shows that the stimulus payments that were broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and 2008 recessions raised consumer spending and helped counteract weak demand in the recessions. Making the payments automatic by tying their disbursement to recent changes in the unemployment rate would ensure that the stimulus reaches the economy as quickly as possible. A rapid, vigorous response to the next recession in the form of direct payments to individuals would help limit employment losses and the economic damage from the recession.

Unemployment Insurance and Macroeconomic Stabilization

Gabriel Chodorow-Reich
,
Harvard University
John Coglianese
,
Federal Reserve Board

Abstract

Unemployment insurance (UI) provides an important cushion for workers who lose their jobs. In addition, UI may act as a macroeconomic stabilizer during recessions. This chapter examines UI’s macroeconomic stabilization role, considering both the regular UI program which provides benefits to short-term unemployed workers as well as automatic and emergency extensions of benefits that cover long-term unemployed workers. We make a number of analytic points concerning the macroeconomic stabilization role of UI. First, recipiency rates in the regular UI program are quite low. Second, the automatic component of benefit extensions, Extended Benefits (EB), has played almost no role historically in providing timely, countercyclical stimulus while emergency programs are subject to implementation lags. Additionally, except during an exceptionally high and sustained period of unemployment, large UI extensions have limited scope to act as macroeconomic stabilizers even if they were made automatic because relatively few individuals reach long-term unemployment. Finally, increasing the benefit amount for short-term unemployed likely has an output multiplier of between 0.5 and 1. We propose five changes to the UI system that would increase UI benefits during recessions and improve the macroeconomic stabilization role: (I) Expand eligibility and encourage take-up of regular UI benefits. (II) Make EB fully federally financed. (III) Remove look-back provisions from EB triggers that make automatic extensions turn off during periods of prolonged unemployment. (IV) Add additional automatic extensions to increase benefits during periods of extremely high unemployment. (V) Add an automatic federally financed increase in the weekly UI benefit amount during recessions. We caution that these reforms may not by themselves have a large macroeconomic impact. Still, they would help to better align the UI system with its microeconomic objective. Together with other policy reforms to automatic stabilizers, these proposed changes to the UI system would help to mitigate future recessions.
Discussant(s)
Jay Shambaugh
,
Brookings Institution and George Washington University
Heather Boushey
,
Washington Center for Equitable Growth
Noah Smith
,
Bloomberg
JEL Classifications
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
  • H3 - Fiscal Policies and Behavior of Economic Agents