Automatic+Stabilizers+-+Support

How is the stimulus package designed to support those hit hardest by this economic downturn?

According to Investorwords.com, Automatic stabilizers are defined as: Federal government expenditures or receipts that automatically increase or decrease without requiring action by Congress or the President. Examples are unemployment compensation and corporate and individual income tax.  Total: $82.5 billion $40 billion to provide extended unemployment benefits through Dec. 31, and increase them by $25 a week $19.9 billion for the [|Food Stamp Program] $14.2 billion to give one-time $250 payments to Social Security recipients, people on Supplemental Security Income, and veterans receiving disability and pensions. $3.95 billion for job training $3 billion in temporary welfare payments $500 million for vocational training for the disabled $400 million for employment services $120 million for subsidized community service jobs for older Americans $150 million to help refill [|food banks] $100 million for meals programs for seniors, such as [|Meals on Wheels] $100 million for [|free school lunch programs]

[] (This imformation come from this wikipedia site. Even though some wikipedia pages can not be trusted this is still a valuable starting point).

http://www.npr.org/news/graphics/2009/feb/stimulus/ Figures based on details released by the U.S. Congress Thursday, Feb. 12, 2009. Source: U.S. House Appropriations Committee (The site above is a credible source of information based on its estimates on the Stimulus Plan).
 * ~ $24.3 billion* ||~  ||
 * $19.9 billion || Supplemental Nutrition Assistance Program (SNAP), formerly food stamps, to increase the benefit by 13.6 percent ||
 * $2 billion || Child Care Development Block Grant, to provide quality child care services for an additional 300,000 children in low-income families ||
 * $2.1 billion || Head Start and Early Head Start, to allow an additional 124,000 children to participate in this program ||
 * $4 billion || State and local law enforcement ||
 * $555 million || Expand the Department of Defense Homeowners Assistance Program (HAP) during the national mortgage crisis ||

We have seen that changes in government purchases, taxes and transfer payments can have an impact on equilibrium aggregate demand. When a government deliberately changes its spending or taxation policies in order to influence aggregate demand, we call that "fiscal policy." But there is another, more automatic way that spending and taxation can influence the economy.

Some kinds of taxes rise more than proportionately when income increases. A progressive income tax is an example of this. "Progressive" means that the tax rate is higher on higher incomes. Thus, when income in general increases, more people are in the higher tax brackets, and so the average tax rate is higher. Some kinds of transfer payments and government purchases rise when income drops. Unemployment compensation and income supplements for poor people are examples, as are purchases of services for the poor. When income in general drops, there are more poor people eligible for these transfers and services, so spending on them increases. These taxes, transfers, and purchases are automatic stabilizers of the economy. To see why, think of what happens when the economy goes into a recession, perhaps because of a sudden drop in autonomous consumption. The progressive taxes drop even faster than income, and this decrease in taxes has a multiplier effect, partly offsetting the drop in autonomous consumption, so that equilibrium income doesn't drop as far or as fast as it could. Similarly, the transfers to and services for the poor increase, and these too have multiplier effects and tend to offset the drop in autonomous consumption. Thus, equilibrium aggregate demand drops less than it would have dropped simply because of the decrease in autonomous consumption alone. The economy is more stable.

This works the other way in a boom. An example is the year 1997 in the U. S. A. At the beginning of the year, our government was divided over plans to gradually reduce the government deficit to zero by sometime in the next century. By the end of the year, the deficit was much lower than anyone had anticipated. This happened because, over the year, steady growth of production reduced unemployment to its lowest rate in twenty-five years. This increased growth raised tax revenues and cut transfers, reducing the government deficit. Incidentally, the multiplier theory tells us that the dropping deficit will also have slowed the growth of production, partly offsetting the rise in aggregate demand that would otherwise have occurred.

On the whole, these automatic stabilizers speed up the potential impact of fiscal policy. If the government has to pass a law to cut taxes in a recession, for example, that can be a time-consuming process. First, the government has to be made aware that there is a recession, and then it makes a law, and then the law takes some time to go into effect. By the time it has an effect, the recession may very well be over and a boom going on -- so that instead of stabilizing the economy, the tax cut makes it less stable. Automatic stabilizers can act in a much quicker and more timely fashion.

We hope that the government deficits in recession periods will be offset by government surpluses in boom periods. This is called a "cyclically balanced budget," and probably is the only realistic kind of balanced budget. Unfortunately, it is a potentiality -- a hope -- not a fact. Source- http://william-king.www.drexel.edu/top/prin/txt/fiscal/stable.html (This website explains basic 'Automatic Stabilizers' ideas).

Americans today receive a maximum of 39 weeks of unemployment benefits, down from 65 weeks in the 1970s. The average weekly benefit is $293. And low-income workers — a category that tends to include women and those in part-time employment — are one-third as likely to receive unemployment insurance as higher-income workers.Bill Clinton presided over a further tightening of welfare, with the federal government limiting the amount of time most recipients can receive benefits and many states imposing strict work requirements. Federal housing subsidies have also been cut by nearly two-thirds since the 1980s, after inflation. As 1.2 million workers have lost their job this year, for instance, many have turned to Medicaid, causing some states to spend more on health care, boosting the economy in the process. At the same time, some cash-strapped states have cut Medicaid, losing federal matching funds and slowing down the economy. http://www.nytimes.com (The New York Times online- a credible source of information).

Automatic stabilizers are features of the tax and transfer systems that tend by their design to offset fluctuations in economic activity without direct intervention by policymakers. When incomes are high, tax liabilities rise and eligibility for government benefits falls, without any change in the tax code or other legislation. Conversely, when incomes slip, tax liabilities drop and more families become eligible for government transfer programs, such as food stamps and unemployment insurance, that help buttress their income.
 * Automatic stabilizers are quantitatively important at the federal level. A 2000 study estimated that reduced income and payroll tax collection offsets about 8 percent of any decline in GDP. Additional stabilization from unemployment insurance, although smaller in total magnitude than that from the tax system, is estimated to be eight times as effective per dollar of lost revenue because more of the money is spent rather than saved.
 * Automatic stabilizers also arise in the tax and transfer systems of state and local governments. However, state constitutions generally require balanced budgets, which can force countervailing changes in outlays and tax rules. These requirements do not force complete balance on an annual basis: they generally focus on budget projections rather than realizations, so deficits can still occur when economic conditions are unexpectedly weak. In addition, many governments have "rainy day" funds that they can draw down during periods of budget stringency. Even so, most state and local governments respond to an economic slowdown by legislating lower spending or higher taxes. These actions are contractionary, working at cross-purposes with the automatic stabilizers.