Are 'Automatic Stabilizers' Possibly 'Automatic Destabilizers'?
Rudolf Richter*
Universitat des Saarlandes, Germany
Submitted: May 01, 2018; Published: May 07, 2018
*Corresponding author: Rudolf Richter, Universitat des Saarlandes, Germany, Email: r.richter@mx.uni-saarland.de
How to cite this article: Rudolf R. Are 'Automatic Stabilizers' Possibly 'Automatic Destabilizers'?. JOJ Mater Sci. 2018; 4(4): 555643. DOI: 10.19080/JOJMS.2018.04.555643
Opinion
Despite the demonstration that the adjustment from nonequilibrium to equilibrium states could not be guaranteed in the standard general equilibrium model, macroeconomics has persisted with the unwarranted assumption that the unfettered agents in an economy would somehow achieve such an adjustment. Alan Kirman [1]. The argument of the concept of automatic stabilizers runs as follows: Income taxation leads to a decrease in the investment multiplier. As a consequence, the multiplier becomes smaller and thus exogenous shocks on national income decline. Employment will be more stable Carry Brown [2]. However, that is no more than comparative static observations. Still, automatic stabilizers are understood that way up to date, i.e., that income taxes have a dampening effect on business fluctuations. But what exactly does 'dampening' of business fluctuations mean? To answer that question presupposes a mathematical model like that of Samuelson's paper on the 'Interaction between Multiplier Analysis and the Principle of Acceleration' (1939) [3]. Analytical solutions of simple macroeconomic systems have one advantage, for sure, namely to illustrate of what "stabilizing" an economy may mean. Thus, introducing, e.g., an income tax into an economy, represented by a simple model of linear difference equations with constant coefficients, may destabilize the model economy by increasing both the frequency and the amplitude of cycles Richter and Selten [4]. In other words, dynamic interpretations of 'comparative static' results may lead to wrong conclusions. Still, teachings in fiscal policy remain unimpressed. 'Automatic stabilizers' continue to be part of scientific policy advice. The arguments ofthe Bertelsmann Foundation [5] are illustrating that: It argues, stabilization in the event of symmetric shocks would be the task of the European Central Bank, while the smoothing of asymmetric shocks and diverging cyclical conditions would have to be taken care of by national fiscal policy. Interestingly to be noted: Keynesians, who deeply mistrust in the stabilizing effect of the price mechanism, believe firmly in the stabilizing effect of legal action: the introduction of an income tax.
References
- Kirman A (2016) Complexity and Economic Policy: A Paradigm Shift or a Change in Perspective? A Review Essay on David Colander and Roland Kupers's Complexity and the Art of Public Policy. Journal of Economic Literature 54(2): 534-572.
- Brown EC (1955) The Static Theory of Automatic Fiscal Stabilization. The Journal of Political Economy 63: 427-441.
- Samuelson PA (1939) Interaction between Multiplier Analysis and the Principle of Acceleration. The Review of Economics and Statistics 21(2): 75-78.
- Richter R, Selten R (1963) Dynamische Theorie der Built-in-Flexibility. Zeitschrift fur die gesamte Staatswissenschaft 119(4): 565-578.
- Bertelsmann Stiftung (2013) Automatic Stabilizers at Euro Zone Level Written Statement by Aart De Geus, Chairman & CEO, Bertelsmann Stiftung. Gutersloh, p. 1-7.