Thought for the day: automatic stabilizers do work (in the Euro area)

from Merijn Knibbe

A staple of traditional macro economics are ‘automatic stabilizers’. When people loose their job or income, they receive some kind of welfare, which leads to additional spending, which mitigates the macro consequences of a downturn. The unusual severity of the 2008 – … downturn can be seen as a ’natural experiment’ of this theorema: would household income and demand have been lower if these stabilizers would have been absent (or less generous)? The answer is clear: they do work, at least in the Euro area, as is shown from a recent publication of Eurostat. Disposable household income increased much less because of the rise in welfare payments, expenditure would have fallen even more if it had not been for this rise. See especially the second and the third graph of:  http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-28102010-AP/EN/2-28102010-AP-EN.PDF

p.s. – Eurostat should number its graphs.

p.p.s.  – mind that the third graph shows changes. The 2008 increases are still effective.

p.p.p.s – contrary to ‘received wisdom’ it did not compensate for ‘compensation of employees’ but for ‘mixed income’ and profits of small and medium business.

About these ads