Automatic Stabilizers, Public Transit, and Money Supply React to COVID-19
- Fiscal Policy on Autopilot
- Transit Derailed
- Don’t Fret Over The Money Supply
Automation is the watchword for this age. Everyone seems to be striving to make things less manual and more formulaic. Human intervention is seen in some corners as unnecessary and inefficient. With more people around the world doing things more remotely during the pandemic, the drive to digitize has become even more important.
That spirit has been extended to the realm of economic policy. “Automatic stabilizers” are features of government budgets in many nations. They have been on prominent display this year, as many have kicked in during the current recession. While headlines have focused on the large discretionary fiscal packages passed by world legislatures, stabilizers are playing a major role in buffering the economic shock of the COVID-19 crisis.
The most common form of automatic stabilizer centers on unemployment. As a leading example, Germany’s kurzarbeit (short-time working) is a scheme under which employers reduce employees’ hours instead of laying them off when times are tough. The program kicks in when at least 10% of a firm’s employees have a loss of earnings of more than 10%. The workers need to fill out a form and get it signed by the employer. The government replaces up to 60% of lost income over a period of 12 months.
Programs like this seek to keep workers engaged with their firms, allowing for a faster recovery in employment when business improves. The program also enables employees to maintain their networks and to continue accumulating skills. As shown in the chart below, jobless rates in Europe remain well below those seen in the United States.
Automatic stabilizers like kurzarbeit are a more efficient way of providing support to a struggling economy than discretionary fiscal measures. They do not suffer from the time lags required to craft, approve and implement new legislation. Features or parameters can be adjusted swiftly depending on the intensity of the crisis; having a structure in place makes this easier than starting from scratch each time a recession arises.