Bring on the stabilisers

[I]magine we enacted an investment tax credit, the size of which was a function of the unemployment rate. Firms would have an incentive to time their investment projects toward those periods when the economy was weakest and most needed a shot in the arm.

This is Greg Mankiw, more here. I'm all for automatic stabilisers of all sorts; note that whatever the potency of fiscal policy in stabilising the economy (and it does have an effect) automatic stabilisers are never a bad idea: at worst, they are harmless, and don't forget all their other benefits (such as alleviating hardship).

Given the current talk of a fiscal stimulus, also note that in the US (and not only) automatic stabilisers are the only type of stabilisers there is. I recall the late Wim Duisenberg (I think it was him!), first President of the ECB, putting it very nicely in a lecture: the US does not, and cannot, exercise discretionary fiscal policy to stabilise the economy - Congress simply does not have that sort of coherence. Alex Tabarrok makes a similar argument (and others) here.

by datacharmer | Thursday, January 17, 2008
  | | Bring on the stabilisers @bluematterblogtwitter