How U.S. Economic Stimulus Can Be Put on Autopilot

(Bloomberg) -- Sensors can turn your porch light on as night falls and off when the sun rises, without any intervention by you. Government relief programs can be automated in a similar way. Some Democratic lawmakers are pushing to add so-called automatic stabilizers to President Joe Biden’s stimulus proposals working their way through Congress. The idea is to enact spending measures that kick in as economic conditions deteriorate -- now or in future downturns -- and fade out as things improve.

1. Why is this discussion happening now?

The U.S., on balance, has weaker automatic stabilizers than many other advanced economies. But their appeal has grown as Democrats, in particular, have grown frustrated by the repeated standoffs over temporary pandemic relief measures.

2. What stabilizers already exist in the U.S.?

Some assistance programs act as basic stabilizers because they have fixed qualifying thresholds that more people meet during hard times. For instance, when recessions hit, more people lose their jobs and end up qualifying for unemployment insurance, the SNAP food-assistance program and Medicaid health-insurance benefits. Thus, spending on those programs rises without any new legislative action. The U.S. tax code can also be seen as a stabilizer, especially on the personal side, because of its progressive nature. As incomes rise or fall, Americans see their effective tax rates fall or rise.

3. What else is being proposed?

Many Democrats want supplemental unemployment benefits, such as the extra $400 a week through September that Biden has proposed, to be turned into a permanent feature that is turned on and off by economic circumstances. Cecilia Rouse, Biden’s pick to lead the Council of Economic Advisers (CEA), said in her confirmation hearing that unemployment insurance is “a natural place for us also to have automatic stabilizers.” Former Democratic administration officials Peter Orszag, Robert Rubin, and Joseph Stiglitz called for a new infrastructure program that continues or grows during recessions. Indivar Dutta-Gupta, co-executive director of the Georgetown Center on Poverty and Inequality, says it makes sense to offer automatic paid leave to parents when schools get unexpectedly shut down. One of the most ambitious proposals, which won backing from some of Biden’s rivals for the Democratic presidential nomination, is for a federal jobs guarantee in which the government would act as employer of last resort.

4. Where does Biden stand?

Though he voiced his support for the concept as a candidate, new automatic stabilizers didn’t show up in his proposed $1.9 trillion stimulus package. An accompanying fact sheet did say Biden would “work with Congress on ways to automatically adjust the length and amount of relief depending on health and economic conditions.” And Biden has shown interest in short-time compensation, also known as work sharing.

5. What is work sharing?

It’s a program that pays pro-rated benefits to employees whose hours have been reduced. That replaces lost income for workers while helping companies reduce payroll costs without cutting jobs. It also keeps workers tied to job-related health care insurance. Such programs have been central to the Covid-19 response in Europe, where Germany’s Kurzarbeit serves as a model. About half of U.S. states offer such programs, but they’re limited in scope and many businesses are unaware they exist.

6. Who is driving this conversation?

Oregon Senator Ron Wyden, the incoming Democratic chairman of the Senate Finance Committee, supports tying federal benefits to economic conditions such as the unemployment rate. Other key backers are Treasury Secretary Janet Yellen, Biden adviser Jared Bernstein, CEA member Heather Boushey (co-author of a 2019 book, “Recession Ready: Fiscal Policies to Stabilize the American Economy”) and former Fed economist Claudia Sahm. Some support can be found among right-leaning economists, too. Kevin Hassett, former head of the CEA under President Donald Trump, is a longtime proponent of work sharing.

7. Can this get approved?

Republicans in Congress typically oppose automatic stabilizers because, once a measure is in place, it reduces the ongoing discretion lawmakers hold to control spending. That will make it very difficult to get any such measures approved given the narrow majority Democrats enjoy in each chamber of Congress. The question may hinge on whether automatic stabilizers can be included in a so-called reconciliation bill, which allows the Senate to proceed on a simple-majority vote -- avoiding the need for 60 votes to block a filibuster. But to qualify, its budget impact must be estimated, or “scored,” by the Congressional Budget Office. That’s difficult to do when the spending is dependent on future economic conditions.

8. How does the rest of the world do things?

Automatic stabilizers are found mostly in developed economies and are strongest in northern and western Europe. Antonio Fatas and Ilian Mihov, professors at Insead business school outside Paris, wrote in a 2011 paper that discretionary fiscal policy is “a substitute for the lack of strong automatic stabilizers” in the U.S., and they cautioned that “relying on quick political decisions to achieve changes in fiscal policy may be less than ideal.”

The Reference Shelf

• The Brookings Institution explains how automatic stabilizers work.
• QuickTake explainers on Germany’s Kurzarbeit program to minimize unemployment and on how the U.K. and other European nations borrowed the idea during the pandemic.
• The book “Recession Ready: Fiscal Policies to Stabilize the American Economy.”
• The 2010 paper for the National Bureau of Economic Research, “Automatic Stabilizers and Economic Crisis: U.S. vs. Europe.”
• Bloomberg Opinion columnist Jonathan Bernstein argued that the real problem is state and local austerity during rough economic times.

©2021 Bloomberg L.P.