CBO: The Role of Automatic Stabilizers in Deficits

Yesterday, CBO released a report on the effect of automatic stabilizers on the deficit, showing that in recent years, they have added hundreds of billions to the deficit. This report follows a report they released last year on the same subject.

Automatic stabilizers broadly refer to elements of the budget that work to increase deficits during downturns and reduce them during times of strong economic growth. In a recession (for example), programs like unemployment insurance, food stamps, and TANF see larger enrollment as employment and wages stagnate or fall, driving up outlays for these programs. A downturn also decreases the amount of payroll and income taxes collected by the government as wage and employment growth decline. Automatic stabilizers work as automatic countercylical fiscal policy.

As one can imagine, automatic stabilizers have contributed significantly to recent deficits: $315 billion in 2009, $363 billion in 2010, and $332 billion projected in 2011.

CBO's data show, not surprisingly, that automatic stabilizers track the output gap very closely, which we have compiled into the graph below. (Note: positive numbers for automatic stabilizers mean that they are reducing the deficit and vice versa.) 

CBO's data also show that because the output gap has generally been greater in magnitude on the negative side than on the positive side, automatic stabilizers have a tendency to add more to deficits during downturns than they reduce them when the economy is above its potential over the longer term. More precisely, over the past fifty years, they have added about $910 billion (in nominal dollars) to the deficit. However, this number masks the fact that they will add another $1 trillion over just the next five years (demonstrating the depth of the recession and the long road back to a full recovery). But as the economy strengthens, the net effect of automatic stabilizers will be more muted, nearing zero by 2016.