Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

Automatic stabilizers are the unsung heroes of modern fiscal policy. In the United States, no more than one third of federal government spending is discretionary. The rest is made up of mandatory expenditures required by existing “entitlements,” social programs such as unemployment and disability benefits, or retirement pensions. These tend to increase during a recession. Likewise, tax revenue flows into Treasury coffers at preexisting rates of taxation and contribution levels, driven not by political decisions but by the fluctuating fortunes of the economy. Dominated by these nondiscretionary flows, modern state budgets have a powerful stabilizing effect on the economy. As economic activity declines and the economy calls for stimulus, tax revenue falls, entitlement spending increases and the government deficit automatically expands.