# What Are Automatic Stabilizers? Definition, Mechanism, and Examples

> **Definition**
>
> An automatic stabilizer is a fiscal policy mechanism that automatically adjusts tax rates and government spending without the need for additional government intervention.

## What Is an Automatic Stabilizer?

Automatic stabilizers are government programs that help keep the economy afloat. Examples include progressive taxes and welfare benefits, which automatically adjust based on income or economic conditions. These measures help counter economic ups and downs by supporting spending during slowdowns and moderating growth during economic booms. Stabilizers play an important role in [fiscal policy](https://www.investopedia.com/terms/f/fiscalpolicy.asp) by keeping economic activity more stable over time.

### Key Takeaways

*   Automatic stabilizers are fiscal policies that work without government action to stabilize economic cycles.  
    
*   These include progressive taxes and unemployment insurance, adjusting as incomes and employment levels change.  
    
*   During economic downturns, automatic stabilizers can lead to increased government budget deficits to support aggregate demand.  
    
*   By reducing taxes in hard times and increasing government payments, automatic stabilizers aim to maintain consumption and investment spending.  
    
*   Examples of automatic stabilizers in action include the U.S. 2008 tax rebates and the 2020 CARES Act.

## How Automatic Stabilizers Function in Economic Cycles

Automatic stabilizers are primarily designed to counter [negative economic shocks](https://www.investopedia.com/terms/e/economic-shock.asp) or [recessions](https://www.investopedia.com/terms/r/recession.asp), though they can also be intended to “cool off” an expanding economy or to combat inflation. During severe or prolonged economic downturns, governments often supplement automatic stabilizers with temporary stimulus policies to boost the economy. When the economy slows or incomes drop, these policies inject more money through government spending or tax refunds. This has the intended purpose of cushioning the economy from changes in the [business cycle](https://www.investopedia.com/terms/b/businesscycle.asp). 

Automatic stabilizers can [use progressive taxes](https://www.investopedia.com/terms/f/fiscal-drag.asp), taking a higher income share when incomes are high. The amount then falls when incomes fall due to a recession, job losses, or failing investments. For example, as an individual taxpayer earns higher wages, their additional income may be subjected to higher tax rates based on the current tiered structure. If wages fall, the individual will remain in the lower tax tiers as dictated by their earned income.

Similarly, unemployment insurance payments decline during economic growth because fewer people are unemployed. Unemployment payments rise when the economy is mired in recession and [unemployment](https://www.investopedia.com/terms/u/unemployment.asp) is high. When a person becomes unemployed in a manner that makes them eligible for unemployment insurance, they need only file to claim the benefit. The amount of benefit offered is governed by various state and national regulations and standards, requiring no intervention by larger government entities beyond application processing.

## The Intersection of Automatic Stabilizers and Fiscal Policy

In a recession, automatic stabilizers may lead to higher [budget deficits](https://www.investopedia.com/terms/b/budget-deficit.asp). This aspect of fiscal policy is a tool of [Keynesian economics](https://www.investopedia.com/terms/k/keynesianeconomics.asp) that uses government spending and taxes to support [aggregate demand](https://www.investopedia.com/terms/a/aggregatedemand.asp) in the economy during economic downturns.

By reducing taxes and increasing payments and tax refunds, fiscal policy aims to maintain or boost consumption and investment spending.

## Examples of Automatic Stabilizers in Practice

Automatic stabilizers can also be used in conjunction with other forms of fiscal policy that may require specific legislative authorization. Examples of this include one-time tax cuts or refunds, government investment spending, or direct government [subsidy](https://www.investopedia.com/terms/s/subsidy.asp) payments to businesses or households.

Some examples of these in the United States were the 2008 one-time tax rebates under the Economic Stimulus Act and the $832 billion in federal direct subsidies, tax breaks, and infrastructure spending under the 2009 [American Reinvestment and Recovery Act](https://www.investopedia.com/terms/a/american-recovery-and-reinvestment-act.asp).

In 2020, the [Coronavirus Aid, Relief, and Economic Security](https://www.investopedia.com/coronavirus-aid-relief-and-economic-security-cares-act-4800707) (CARES) Act became the largest stimulus package in U.S. history. It provided over $2 trillion in government relief in the form of expanded unemployment benefits, direct payments to families and adults, loans and grants to small businesses, loans to corporate America, and billions of dollars to state and local governments.

## Important Considerations for Automatic Stabilizers

Since they almost immediately respond to changes in income and unemployment, automatic stabilizers are intended to be the first line of defense to turn mild negative economic trends around. However, governments often turn to other types of larger fiscal policy programs to address more severe or lasting recessions or to target specific regions, industries, or politically favored groups in society for extra-economic relief.  

> **Article Sources**
>
> 1.  U.S. Congress. "[H.R.1 - American Recovery and Reinvestment Act of 2009](https://www.congress.gov/bill/111th-congress/house-bill/1)."
>     
> 2.  Obama White House Archives. "[Chapter 3 The Economic Impact of The American Recovery and Reinvestment Act Five Years Later](https://obamawhitehouse.archives.gov/sites/default/files/docs/erp_2014_chapter_3.pdf)." Page 7.
>     
> 3.  U.S. Congress. "[H.R.5140 - Economic Stimulus Act of 2008](https://www.congress.gov/bill/110th-congress/house-bill/5140#:~:text=Economic%20Stimulus%20Act%20of%202008%20%2D%20Title%20I%3A%20Recovery%20Rebates%20and,married%20taxpayers%20filing%20joint%20returns%29.)."
>     
> 4.  U.S. Department of the Treasury. "[Cares Act](https://oig.treasury.gov/cares-act)."