http://www.ibtimes.com/articles/20090520/spending-without-jobs-strange-case-todayrecession_1.htm
Automatic Stabilizers Help Increase Consumer Spending in Recession
There has been a decline in employment in manufacturing, construction, retail and financial services. In the first quarter, there was an increase of 2.2% in consumer spending while 700 000 jobs were lost over the three months of the quarter. John Silvia, the Chief Economist wonders if the economy was affected by the low employment and the consumer spending or were households over-saving? Recently, employment insurance and reduced income tax payments contributed to enormous income gains for households to ease the recession. As well, transfer payments such as welfare, social security and disability also have increased more than what was expected.
Connection
In Chapter 8, the definition for automatic stabilizers are government programs react automatically to help adjust the level of aggregate demand during changing economic conditions. The article introduced the two most recognized automatic stabilizers which were the employment insurance and the progressive income tax. While employment was declining, an increase of employment insurance contributed to enormous income gains for households to ease the recession. The textbook explains that since individuals are unemployed, their spending decreases, the multiplier effect initiates and overall spending in the economy declines. By receiving some money in the form of employment insurance benefits, it encourages consumers to spend more. Lastly, a reduction in the progressive income tax means that a lower percentage of income in taxes is paid. It provides the individual with a greater proportion of income to spend.
It is amazing how automatic stabilizers can still stabilize the economy that is in a recession. It is good sign that these automatic stabilizers are successful contributions that helps increase 2.2% in consumer spending when there are so many job losses. With the rise in overall spending, the unemployment should be seen more of a concern. I believe that the increased spending will slowly take an effect on creating a demand for more workers, which can reduce the level of employment. Hopefully, consumers will gain the confidence in boosting the employment growth. It sounds likely that the worst of the economy may soon be over.
I have to agree with you. With the use of automatic stabilizers while the economy is in recession, it can successfully contribute to influencing consumer behaviours and economic conditions to bring it back to stability. Exactly as the governments are doing, the use of automatic stabilizers like employment insurance and progressive income tax contributed to an increase in income to households that influenced them to spend more because they are receiving money in a form of benefit. The cause of unemployment will mean a decrease in consumer spending, a lower circular flow of money in the economy causing the economy to decline. But because of automatic stabilizers put into use, a reduction of tax rates and employment insurance in effect, households are provided with and increase amount of income to spend.
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