Built-in stabilizers: concept, types, economic meaning

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Built-in stabilizers are a type of toolkit designed to prevent the "overheating" of the economic system with uncontrolled growth of indicators. In addition, this economic mechanism avoids or reduces negative impacts during a recession without requiring any active action from the political or economic management. They are often considered on the example of fiscal policy, but may also include tools of a different kind. With some support from the state and proactive actions, they can avoid a situation in which there is a real budget surplus, but economic indicators are declining.

The cyclical fluctuations of the economy and the place of built-in stabilizers

Perhaps even a person far from economics has heard of Kondratiev's "long waves". According to this theory, constantupward movement, that is, the growth of economic indicators, the reduction of the budget deficit, the increase in production rates, is possible only up to a certain point (peak or upper extremum on the line of economic fluctuations). After that comes the decline. Factories produce more than consumers buy, in conditions of contentment, the efficiency of the workforce decreases, progress slows down. There comes a fall, then a recession and a bottom, from which a new rise starts after that. The wave is between the two extremes of this function and can last 60 years, 8 or 2 years, depending on its length.

Where is the "lever" in this scheme

Automatic stabilizer exists regardless of the position of the political system or the course of the state apparatus. Prevents the acceleration of the onset of "overheating" and softens the fall, which allows you to reduce the fluctuations to a less acute phase. In practice, this turns an economy with sharp jumps in 8-10 years into a calmer model. However, this is possible only if there is a kind of "feedback" between the chosen model for the development of the state's economy and built-in stabilizers.

Correlation of indicators

That is, such a brake exists regardless of the actions of the government, but its effectiveness and rate are in direct correlation. At the same time, it is important to avoid the policy of “tightening the screws”, since it contradicts other goals of the fiscal toolkit, stimulating variabilitysupply and production volumes.

Fiscal policy as the "standard" answer

What is a budget surplus in simple terms? In fact, we are talking about a positive balance of the state balance. That is, the country spends less than it receives, which creates a certain amount of money. This seems like a very pleasant indicator, but only up to a certain point. Without an appropriate redistribution of funds, for example, to benefits, social security, state enterprises or subsidies, this is simply a withdrawal of money from the economic circulation, a dead weight that will be useless at the stage of inflation. Delay in the decision on this issue will lead to the fact that the counterparties will pay taxes, but they will not be spent. In fact, companies will simply lose huge capital.

Tax question

The task of an effective state budget policy is to abolish the risk of such a scenario. For example, the simplest and most successful domestic stabilizer is taxation. You can say: "How is it, because taxes are established by the state, where is the automatism here?" However, we are talking about a progressive rate, which is considered one of the most effective. With the threat of an excessive surplus, such a system automatically increases the rate of contraction from key players and weakens it at the stage of decline in the economic system.

Types and differences of internal stabilizers

There is noless than three main categories of leverage to slow the economy, namely:

• Taxation. The complex wording "non-discretionary fiscal policy" means only what we have already stated: higher taxes during the rise, and lower - during the fall. Added to this are options for contraction, depending on sales, as well as the profits of individuals and corporations.
• Unemployment benefits. Has many options. Returning to the question of what a budget surplus is in simple terms, we can say that this is the unwillingness of the unemployed to work. During the rise, such subsidies are reduced, including limiting consumer potential and demand in case of "overheating", and when falling, they are increased. People get more from the state, spend more often, which ultimately contributes to the productivity of counterparties, and the goals of fiscal policy are met.
• Fiscal rules. It makes sense only if the corruption of the state apparatus is at a low level. Such rules are designed to redistribute the budget during the various phases of the fluctuation cycle of the economy. For example, before the peak condition, part of the funds is sent to the reserve fund, which will provide a "soft cushion" in case of a fall. This is possible if capital does not settle in the private sector before the very recession.

Built-in economic stabilizers are designed to bring order to the chaos of any model that is larger than a small household. But if the apparatus does not use such tools in full force, then there are inexpedient expenses during the economic recovery,stealing capital, creating preferential taxes for key corporations that should pay more.

The essence of the counter-cyclical policy of the state

In 1862, Clement Juglar, after analyzing the state of affairs in France, came to the conclusion that the crisis should be regarded as something natural. That is, a decline in the economy will occur in any case, the question is whether the state will be ready for it, and how hard it will affect the state of the model as a whole. The countercyclical policy is designed to increase the effectiveness of internal stabilizers. For example, the abolition of bureaucratic red tape around taxation and the transfer of workflow to the virtual space. The efficiency and effectiveness of internal stabilizers will increase. As money enters the budget faster, the speed of its distribution also increases. However, the countercyclical policy itself implies many more different instruments, including those aimed at eliminating corruption. However, it is impossible to cover them all in one article.

Benefits of supporting such a mechanism

The government's fiscal policy becomes more efficient and timely - that's the key benefit of supporting domestic stabilizers. Instead of idle time, money returns to the economy and makes a profit, and the model starts to work better. The rest of the pluses of the "brakes" can be described as follows:

• Efficiency. While the billundergoing several readings and adjustments, the progressive tax rate is already in place. The device only analyzes the position of key "whales" in the market, and the budget is already replenished due to a higher contraction from "thick" corporations.
• Wide coverage. The stabilizer improves the situation as a whole. If they operate effectively, the poor do not find themselves in an even worse situation in an economic downturn, but spend the resources of the reserve fund raised from excess capital a few years ago.
• No negative consequences. Unlike the double-edged policy of "tightening the screws", stabilizers allow you to correct the situation without critical consequences. Yes, corporations will pay more, but due to increased demand from subsidized consumers, profits will be much higher (in the long run).

As you can see, with an effective model for constructing the policy of the state apparatus, stabilizers allow you to prolong the recovery and reduce stagnation, which almost always leads to a satisfactory result.