During Past Recessions and Economic Downturns, These Factors Supported an Effective Fiscal Response

When recessions occurred in the past, many Americans turned to their government for help. Within the federal budget, there are supports that automatically kick in to help people and stabilize the economy.

Today’s WatchBlog post looks at our new report about the effectiveness of these supports, known as automatic stabilizers, during tough economic times.

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Automatic supports are most effective when they are timely, temporary, targeted, and predictable

Since 2000, the U.S. has faced three recessions—the “dot-com recession” of 2001, the Great Recession (late-2007 to mid-2009), and the recession following the onset of COVID-19. When these crises occurred, many Americans sought financial support from three key federal programs—unemployment insurance; SNAP (formerly known as food stamps); and Medicaid, which provides health care coverage to people with limited income.

How well did these supports work? We looked at how these programs were used during the last three recessions. What we found was that supports worked best when they were timely, temporary, targeted, and predictable.

Timely. Timing is everything. In a recession, early support provides the greatest benefit. But if stimulus is provided too early, the economic impacts may not be large enough to justify the costs. If it’s provided too late, the economic situation could already be so severe that the stimulus doesn’t have much impact.

Temporary. Recessions, thankfully, don’t last forever. Ending stimulus as the economy recovers can help minimize federal deficits and prevent the economy from overheating. Phasing out benefits gradually can help those receiving assistance get back on their feet.

Targeted. The government doesn’t have endless resources. So, making sure taxpayer money is well-targeted is the best way to ensure stimulus is used effectively and efficiently. Targeting stimulus can also ensure support reaches those who are most affected by an economic downturn. Research suggests that providing stimulus to low-income people and families had the greatest boost to the economy because they were likely to spend assistance on immediate necessities.

Predictable. A key advantage of automatic stabilizers, like unemployment insurance, is that they are in place before a crisis occurs. Having supports established in advance allows for the aid to be deployed more quickly.

How can we strengthen these supports?

So far, we’ve described automatic stabilizers as just that—automatic supports that kick in and sometimes even adjust (like unemployment insurance) to economic conditions. But even though they are automatic, there are policy options for Congress that could make them stronger.

These include temporarily expanding eligibility, increasing benefit amounts, changing the duration someone can receive assistance, and lowering taxpayer burdens by expanding certain tax credits. 

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Expanding eligibility and duration. Depending on how deep an economic downturn is or how long it lasts, changes can be made to expand access to supports. For example, during COVID-19, unemployment insurance was extended to continue supports during the recession.

Increasing benefit amounts. Benefit amounts can also be increased during significant economic downturns and then adjusted when conditions improve. During both COVID-19 and the Great Recession, SNAP benefit amounts were increased, which reduced food insecurity and helped the economy.

While helping more people during hard times sounds like an easy choice, each of these policy options comes with tradeoffs. For example, providing prolonged supports can contribute to inflation. They can also grow federal deficits and debt—which can lead to a higher cost of borrowing for the federal government.

And finally, increasing benefit amounts or expanding eligibility without strong administrative supports can lead to payment errors or fraud. We saw this during COVID-19. As programs rapidly expanded to meet needs, some states struggled to protect against payment errors (also known as improper payments) and fraud. Now that the pandemic is over, there’s an opportunity to look at what could be improved next time.

Today’s blog is just a quick look at our larger report on automatic stabilizers. To learn more about the effectiveness of these supports and policy considerations, please see our full report.

• GAO’s fact-based, nonpartisan information helps Congress and federal agencies improve government. The WatchBlog lets us contextualize GAO’s work a little more for the public. Check out more of our posts at GAO.gov/blog.
   
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