The Case for Automatic Stabilizers: Lessons from Great Recession and COVID-19 Fiscal Responses

This podcast episode, featuring economist Claudia Sahm, delves into the critical differences and lessons learned from the fiscal policy responses to the Great Recession and the COVID-19 recession. Sahm argues that while the Great Recession's response was insufficient, leading to a slow and painful recovery, the COVID-19 response, which involved five times the spending, resulted in a more rapid recovery. However, she suggests a "Goldilocks assessment" is likely in hindsight, implying the Great Recession response was "too little" and the COVID-19 response might have been "too much," contributing to current inflation. The core of her argument centers on the need for automatic stabilizers to depoliticize and streamline economic policy during crises.

Sahm elaborates on automatic stabilizers as mechanisms that put economic policy on autopilot, activating quickly and efficiently based on pre-defined economic indicators like the unemployment rate. She distinguishes between targeted stabilizers, such as increased food stamp amounts and unemployment insurance benefits, which help those in immediate need, and more broad-based fiscal stimulus like checks, aimed at getting the overall economy moving. The key distinction is between discretionary policy, which involves political debates and delays, and automatic policy, which is planned ahead of time, removing the "hot potato" politics from crisis moments. This allows Congress and the administration to focus on non-automatable issues, such as public health crises.

A significant portion of the discussion focuses on the political challenges of discretionary stimulus, particularly during the COVID-19 pandemic. Sahm highlights how initial stimulus checks were widely accepted ("Everyone is a Keynesian in a foxhole"), but subsequent checks became highly politicized, with arbitrary amounts and timing influenced by electoral considerations. She references her own research, including a 2019 chapter on making stimulus checks automatic, which proposed tying them to a highly accurate recession indicator like the Sahm Rule (SRU). This rule, based on a half-percentage point increase in the three-month moving average of the unemployment rate, would trigger payments early in a recession, aiming to mitigate its severity.

Finally, Sahm discusses the broader implications of the COVID-19 fiscal response, noting it represented a "notable sea change" in how the U.S. approaches fiscal policy. While it provided a crucial buffer for households and led to a strong job market, it also coincided with higher-than-usual inflation, making its net positive impact a subject of ongoing debate. She emphasizes that stimulus checks benefit households by allowing them to spend, pay down debt, or save, providing a cushion for the future. The challenge remains in calibrating these policies—knowing when to turn them on is more straightforward than knowing when to phase them out, a complex research and policy question that still needs an answer.

in hindsight looking back people tend to look at the Great Recession and the response saying it wasn't enough like it could we could have done more

this time you spend a five times as much money and that's just the big programs and we get this more rapid than usual recovery that in my opinion was a good approach

we will probably come down to some kind of a Goldilocks assessment that we did too little after the Great Recession and we could have paired back some what we did after uh covid

an automatic stabilizer is a way to put economic policy on autopilot particularly in a time of a recession

you take the politics out of it in the moment and that can be important for a lot of reasons

the biggest problem that I think we we live through with the co recession is the politics

Everyone is a Keynesian in a foxhole

there is no like that was just a number that I assum was big like I don't so that and I agreed like I was in favor of the stimulus checks because 2,000 was better than zero right and the politics had said this is the number

the idea of the Som Ru is you trigger you get the payments out right away with the goal of making it a less severe recession with less unemployment

the ink is not dry right this the latest episode uh with the co recession and Recovery was a notable sea change in how we approach fiscal policy

It's much more straightforward to know when to turn it on is much harder to know when to phase it out in terms of the special relief