recession, or even in response to subpar growth, becomes an empirical matter. however much they do, we have another stabilizer for the economy. as demand growth heats up, the central bank will raise short - term rates to try to limit the boom and the resulting inflation. as recessions threaten, the central bank will lower short - term rates to try to limit the downturn. discretionary fiscal policy? with this long - run strategy in place, and with at least two shock absorbers - - one monetary, one fiscal - we are now ready for the sixty - four dollar question. in the average recession, should there be additional discretionary fiscal actions? for such actions to be effective, they must satisfy three conditions : • they should stimulate spending. • they should be instituted quickly. • they should be reversed quickly or automatically. the reason speed and reversibility are important is that most recessions are not very long, averaging about twelve months in the united states. if some expansionary action comes into effect late in a recession, say in the twelfth month, it is likely to add to the vigor of the next expansion and hence increase business - cycle volatility. reversibility is also important because of the overall budget rule discussed earlier. if the general budget were already in approximate balance, any continuing expansionary fiscal action taken on top of that would generate normal deficits, not normal budget balance. there is a limited set of fiscal actions that satisfy all these conditions. many of the commonly discussed proposals fall short on at least one ground. by way of illustration, i will discuss a few that have been mentioned in recent debates. extend unemployment insurance. unemployment insurance benefits run out after twenty - six weeks in the united states. in general having a time limit to control caseloads is helpful - - the basic idea of unemployment insurance is to provide temporary, not permanent, support to unemployed workers. but in recessions, when unemployed workers have much more difficulty in getting new jobs, it may make sense for policy to be more lenient by extending time limits. such extensions have been enacted in nearly all postwar u. s. recessions. the extensions would provide benefits to unemployed workers who might have trouble maintaining their pre - unemployment standard of living, implying that the extensions should stimulate consumption spending. the extensions, say to thirty - nine weeks, could be made for a defined period, such as a year. even if the period exceeded a year, most of the budget dollars would

, the united states gets the returns on this investment, which raise income growth and future consumption. the only instance in which government surpluses do not raise national saving is the so - called ricardian equivalence scenario. in this scenario, households learn that the government plans to run a surplus, and they reduce their own saving by their proportionate share of this surplus. in general, economists find that if ricardian offsets exist at all, they are a modest share of the relevant government surpluses. at a more casual level, i have, for many years surveyed my non - economist friends to see how they alter their own consumption behavior in response to national fiscal policy. the usual response is a blank stare : if these non - economists have even imagined there to be a connection between government deficits and their own saving, they have no idea how much to respond and in what direction. fiscal policy what, then, is the long - run fiscal policy that leads to a vibrant economy with a high rate of productivity growth? in general, it implies nudging the economy in the direction of raising the overall rate of national saving. it is theoretically possible for an economy to save so much that the long - term path of consumption per capita is actually lowered, but generally economists believe that the u. s. economy is well short of that saturation point. for the present circumstances, i am proceeding on the assumption that more saving is better. i start by decomposing the federal budget into two components, the cash surplus of the trust funds for social security and some other entitlement programs, and the net surplus for all other activities of government, which i will call the general budget surplus. for the general budget surplus, let me repeat a very simple rule, similar to that enunciated by both the committee for economic development and milton friedman fifty years ago. the rule is that the general budget surplus should average zero over the long run. this general budget should not be exactly balanced each year, but there should be long - run balance. in the event of a recession, for example, it is natural, and actually healthy, for revenues to fall, spending to rise, and the general budget to move into deficit. this deficit helps prop up the economy in the recession, which is why these budgetary movements are called automatic fiscal stabilizers. but though deficits are excusable in a recession, they are not desirable in general. if the following period sees an expansion, the