Comments on Fatas: Automatic Stabilizers

1. Comments on Fatas: Automatic Stabilizers Steven Symansky FAD

2. 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) • Butthat 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?

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

4. Definitional • 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?

5. 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

6. 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

7. 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

8. 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)

11. 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)