Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 16, 2020 at Wall Street in New York City. JOHANNES EISELE/AFP via Getty Images

A Solution to Recession

Automatic Stabilizers might be able to help the U.S. during this time.

As the bottom falls out of our economy thanks to the Coronavirus pandemic, I thought it would be worth writing a few articles exploring various policy changes that the United States could enact that would save the country from financial ruin. 

But instead of talking about fairly banal and obvious answers like sending out $1000 checks or cutting taxes, I want to look at innovative policies which in one fell swoop will save the country from this oncoming recession.

The first policy change is one that has been on the academic periphery for a while, but should it be enacted, it would essentially end economic recessions as we know it.

Enter Automatic Stabilizers. Unlike most economic policy which is more nuanced and multi-pronged, Automatic Stabilizers are a simple concept: once certain economic indicators reach a clearly defined point, such as 5 percent unemployment or a loss in the monthly jobs report, the government will automatically activate a temporary relief program that expands Social Security to all workers that will grow proportionately to the severity of that recession or economic downturn.

To put it simply, take Social Security. Long considered the gold standard in terms of welfare state programs, its simplicity and success are second to none. The program is a three-legged stool, using regressive payroll taxes to divide payments between the elderly, unemployed and widowed. The first leg, the elderly one, is the most ubiquitous and is also the largest aspect of the program. It constantly makes payments that are usually fixed and revolve around a strict formula based on the payroll tax burden of the recipient.

Automatic stabilizers, however, would be very different from the other aspects of Social Security. Instead, upon the economy reaching a predetermined vector such as 5 percent unemployment, the Social Security Administration would be directed to make payments to all workers on a progressive sliding scale that would vary in size as the recession deepened. Therefore, a worker toward the highest end of the payroll tax spectrum would receive a much smaller amount but a worker who makes little would receive a much larger check. In this system, the corresponding drop in economic output would be balanced out by the increase in demand-side input that is proportional, so, in essence, recessions would either no longer occur or be far less severe.

As negative economic indicators recede, the Stabilization program will automatically be rolled back until the economy recovers to the vector point that is predisposed.

However, another critical aspect of the Stabilizer program is that it will not be limited to those who pay into FICA, the federal payroll tax that bankrolls Social Security and Medicare. Otherwise, workers such as waiters and contractors like Uber Drivers would be left out of the program and the Stabilizers resulting effectiveness would be reduced.

Therefore, the program must be financed by other means than the FICA tax such as a Capital gains increase or borrowing the money in Keynesian fashion.

The point of this program is that after a series of massive bailouts for big banks during the last recession, counter cyclical stimulus should be targeted to identify the narrow lynchpin of recessions, the loss of demand, and neutralize it, rendering the economic pain of such recessions to be much less acute.

Most critical of all, this program won’t require an act of congress, allowing economic recovery to bypass congressional gridlock and flow directly to workers. While this policy will by no means solve all economic issues America faces, its implementation would be a cheap and efficient way to prevent a lot of suffering and, perhaps most importantly, restore the American people’s faith that their government is on their side.

Please note that the opinions in this piece are presented solely by the author, and neither Fresh Ink for Teens nor its partners assume any responsibility for them.

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Yoav Shames is a junior at The Ramaz School in Manhattan. He is a member of the Fresh Ink for Teens' Editorial Board.

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