Measuring the role of automatic stabilizers in the U.S. business cycle∗

Most countries have automatic rules in their tax-and-transfer systems that are intended, at least partly, to stabilize economic fluctuations. We measure how effective these automatic stabilizers are in a modern business-cycle model. We consider the effect of the stabilizers on aggregate demand, on the incentives to work and save, and on the distribution of income across households, all of which affect output. Our first finding is that most of the effectiveness of the stabilizers comes through the redistribution of resources across groups in the population. Our second finding is that, in the existing tax code and transfer system, some features attenuate the business cycle but others accentuate it; overall, the effect is only mildly stabilizing. Our third finding is that small changes to some social programs could make the automatic stabilizers significantly more effective. ∗Contact: [email protected] and [email protected]