Comments on Fatas: Automatic Stabilizers Steven Symansky FAD

Consensus Not many papers in this area With one exception, everyone seems to agree that automatic stabilizers are good – even Taylor - leave discretion to monetary policy; if fiscal discretion it will complicate monetary (negative one is that if shocks have a non-zero mean, there needs to be discretionary action) But that is where the consensus ends(only some answered in presentation) –Defined differently –Increasing or decreasing over time? –How large should they be? –How do they affect output? –How should they be designed?

Overview Definitional Issues What do we know about automatic stabilizers Should they be enhanced and how

Antonio recognizes the problem and puts out some definitions, but they are contradictory in spots Definitional issues: Not sure that this presentation clears them up: –If revenue changes in line with income is that an automatic stabilizer? Fatas ─yes/ Melitz-no –If G doesn’t change is that a stabilizer? Fatas I think says yes as he talks about gvt size –What about asset prices? Inflation? Interest rates? Commodity prices? (1% of GDP in crisis) Automatic vs cyclical –Levels? Ratio to GDP ? Ratio to Potential GDP? –Can they really be compared if definitional issues? Definitional

Why we care about stabilizers? Antonio’s work on size of government is important – larger government reduces volatility unless government is source of instability (although recent paper by Debrun et al provides some contradictory evidence) Antonio recognizes –tradeoff between stabilization and other issues – equity and efficiency –stabilization does not depend on change in the budget but the demand effect –temporary and anticipated tend to increase demand (although not always true – VAT, investment incentive vs tax rebate) Auerbach: There are also supply side effects

Are They effective? Most argue that they are effective but –Graph raises some questions Finland and only modest differences –Why same multiplier if different automatic stabilizers (contrary to standard definition) –And states that multiplier close to recently estimated (not sure what these are) Argues that automatic generate larger multipliers: –Endogenous – timely – therefore larger (timely - yes but multiplier should be smaller;) –Anticipated should work better –Temporary for sustainability Even if theory says automatic have smaller multipliers, other arguments are compelling

Discretion vs Automatic Difficult to separate the two Negative tradeoff is very suggestive Should we care ? –NO: i) an increase in unemployment benefits is an increase ii) impossible to define the concepts (data) ; German argument in G20 –Yes: i) temporary and anticipated but that is marginal; ii) timing is right iii) political economy

Should they be Increased? Need to address question of whether fiscal should be a key stabilization tool What is the tradeoff between stabilization, efficiency and equity as well as sustainability (next presentation) Does it apply equally to emerging and developing countries (volatility of advanced and emerging market countries)

How to Increase them Missing from this presentation - but should be in next one Solow, Ball, and others have argued that you need a Fiscal Council – more timely –but still subject to error –Parliament looses power Data responsive rates of expenditures/taxes –but data revisions can be large Increase progressivity –but efficiency and –Argument that flat tax would have larger stabilization since lower end at higher tax rate (but equity)