Automatic Stabilizers and Crowding out effect

Automatic Stabilizers and Crowding out effect 

Recently in the past few economics classes we have discussed Automatic stabilizers and how they affect fiscal policy, the government, and the people. 

Automatic stabilizers are government programs currently in operation that reacts automatically to help adjust the level of aggregate demand when economic conditions change. Automatic stabilizers are good for the economy and can influence economic conditions; however they can be very controversial.  People either seem to agree with how automatic stabilizers work or they completely hate the aspects of automatic stabilizers.  

Crowding out effect refers to when government crowds out the private sector, and increases the level of taxation to battle the ongoing problem which is debt.

Achieving Economic stability 

Employment insurance, progressive tax, and welfare are all examples of automatic stabilizers, however the most controversial aspects of the stabilizers is how the government influences the economy.  A system known as the crowding out effect is used by the government; it is a concept where an increase in public spending decreases the private sector spending. The government will change their initial spending habits and level of taxation to influence the overall economy. However what they don’t understand or simply chose to ignore is that by increasing the level of taxation, people have less money to spend at businesses and in turn the economy, private sector and businesses suffer. 

 What are the different stabilizers? 

Employment insurance: it a system that kicks into effect when a person loses their job. Once a person loses their job, their income decreases and so does overall spending this leads to an economic decline. The existent of the employment insurance is to help people keep somewhat of a steady income as well as keep the economy from declining significantly.

Progressive income tax: the progressive income tax system places different incomes into different tax brackets. The more the person makes the more they will pay in taxes compared to someone who makes less than them. This has a stabilizing effect on the economy; if a person who makes more money will be taxed higher it will reduce the potential increase in spending and reduces the chances of increased inflation.

 

Welfare: is a system introduced to allow people who make less than the minimum level of well-being to get social support from the government.  The Canadian welfare system acts like a social safety net which refers to specific payments to the poor individuals. This system is known to be very flawed and is a very controversial topic.

How is the crowding out affect achieved?

The video shows us that there are two different ways that a government can introduce the crowding out effect, indirectly and directly. The government can directly crowd out a book store by increasing funding to the public library while indirectly they can crowd out a book store by increasing taxes which leads people to have less income.

 https://www.youtube.com/watch?v=EIIMHP3nLRE

Controversy in economic stability 

There is a very controversial aspect associated with economic stability. The crowding out effect is very controversial; the government increases taxes significantly to then decrease the debt that the government has accumulated. They are the reason for debt and they leave it the people to somehow fix it.  The government doesn’t take into account that some people cannot afford to pay the tax as it is, and an increase in taxes means they have less money to live. Another controversial aspect of economic stability is the welfare system; it is a lenient system that allows for people who make less than a pre-set income, to receive money from the government. The government has minimal regulations when it comes to the actual welfare system, and so people use their money on alcohol and drugs instead of being productive members of society.

A different approach.

There have been many ideas when it comes to bettering the welfare system and even the automatic stabilizer systems. The welfare system is too lenient in giving money away. Different ideas put out, include having the people who want welfare do different jobs for the city, this would mean that the people would need to earn the welfare payments rather than just get it. This would get different unattractive jobs done, keep people off the streets, and stabilize the economy. Another problem pointed out was that a lot of the money given away by the government is used for illegal activity; a way to solve this problem is to have the people who receive the payments to pass a drug test before actually receiving any money. Another aspect of economic stabilization that seems to be a problem is the crowding out effect. Ideas put forth to fix the problem include completely getting rid of the system and introduce a system where the government works side by side with the people to reintroduce money back into the economy, putting money back into businesses and stabilizing the economy. This in the long run would allow for economic growth and from there the government could steadily and minimally increase taxes and be able to pay off any debt. Another idea put forth was to change spending habits and readjust the existing budget, if the government is constantly accumulating debt then there is a serious problem with how they are spending their money. The government needs to reassess their spending habits and look for flaws in the existing budget and set aside money to pay off any debt accumulated. 

In my opinion 

I think the government needs to reassess the way they are running social programs and the way that they crowd out businesses. I agree with the alternatives provided with handling the welfare system and I think that not only should people be working for any money that they get from the government but they should also have to pass drug testing before.  I find the crowding out effect to be a huge mistake; the government should not be taking money away from businesses so that they have a quick fix to the debt. Lastly the idea of having automatic stabilizers to help during an economic down fall is awesome, that way the economy can essentially self-stabilize.

- Daniel Kosinski