Automatic Stabilizer
Plain definition
A government tax or spending program that automatically expands during downturns and contracts during booms, without new legislation.
In economics
Automatic stabilizers dampen the business cycle by design: in recessions, unemployment benefits rise and tax revenues fall, supporting incomes; in booms, the reverse happens, cooling demand. Because they act instantly, they are the fastest-acting form of fiscal policy and need no political decision.
Example
When a recession hits and layoffs rise, unemployment insurance payments automatically increase, putting money in jobless workers' hands exactly when spending is collapsing. Simultaneously, falling incomes push workers into lower tax brackets, leaving them more after-tax income, all with no new law passed.
Automatic stabilizers are confused with discretionary fiscal policy. Stabilizers (unemployment insurance, progressive taxes) respond automatically to the economy; discretionary policy requires Congress or parliament to pass new stimulus or austerity laws, which takes time and political agreement.