What are automatic stabilizers in an economy?

Automatic stabilizers are programs and policies that automatically adjust to changing economic conditions without the need for direct intervention by policymakers. These stabilizers work to dampen the effects of economic fluctuations, helping to stabilize the economy during periods of recession or inflation.

For example, unemployment benefits are an automatic stabilizer; when the economy is struggling, more individuals become unemployed and thus, they start receiving benefits automatically. This increase in government spending helps to support consumer spending, which can mitigate the downturn. Conversely, during economic booms, tax revenues naturally increase as incomes rise, which can help cool down the economy.

The key aspect of automatic stabilizers is their ability to respond enacted laws without any additional action required from Congress or other government bodies, distinguishing them from discretionary fiscal policies that require political action to implement changes.