What happens to automatic stabilizers in a recession?

During a recession, automatic stabilizers play a crucial role in moderating the economic downturn. Automatic stabilizers are government policies, such as unemployment insurance and progressive taxation, that automatically adjust to changes in economic conditions without the need for direct intervention by policymakers.

When the economy enters a recession, unemployment tends to rise as companies lay off workers and reduce hours. As more people become unemployed, government expenditure on unemployment benefits increases, providing financial support to those who have lost their jobs. This increase in government spending helps to sustain consumers’ purchasing power, thereby promoting spending on goods and services, which can, in turn, help to mitigate the decline in overall economic activity.

At the same time, lower incomes due to job losses mean that individuals fall into lower tax brackets, which decreases tax revenue automatically. This also leaves more disposable income in the hands of consumers, helping to cushion the decline in consumption.

Therefore, during a recession, automatic stabilizers effectively increase economic activity by providing essential financial support to individuals and maintaining aggregate demand, which can help the economy recover from the downturn.