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Book Review
April 2023

Fiscal policies as a response to recessions

Recession Ready: Fiscal Policies to Stabilize the American Economy. Edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh. Washington, DC: The Brookings Institution, Hamilton Project, 2019, 250 pp., download.

The National Bureau of Economic Research has documented 34 business cycles from 1854 to 2020 in the United States. The downturn phases of these business cycles are usually characterized as recessions. During recessionary periods, declines in investment and employment are common. Recession Ready: Fiscal Policies to Stabilize the American Economy is a recent addition to the literature on the effectiveness of fiscal policies in minimizing the impacts of economic downturns. Edited by Heather Boushey, Ryan Nunn, and Jay Shambaugh, this book, a collection of papers penned by economists, focuses on two main topics. First, it documents the impacts of recessions and the effectiveness of antirecessionary fiscal policies. Second, it presents several automatic stabilizers that could dampen the effects and length of recessions. Automatic stabilizers are fiscal policies that automatically respond to macroeconomic fluctuations, such as declines in tax revenue during an economic downturn.

In the first chapter of the book, Boushey, Nunn, Jimmy O’Donnell, and Shambaugh review the economic impacts of recessions and the effectiveness of past fiscal responses. The authors empirically show that recessions reduce gross domestic product (GDP), increase unemployment and underemployment, increase the probability of people leaving the labor force, diminish the job prospects of recent college graduates, and reduce private and public investment. The authors estimate the effectiveness of past fiscal responses to economic downturns, concluding that these responses have been slow and too short to counter the impacts of recessions.

In the second chapter, Louise Sheiner and Michael Ng find that federal spending is usually countercyclical, whereas state-level spending is usually procyclical (because many states require their budgets to remain balanced). This finding leads the authors to favor federal-level fiscal spending over state-level spending. Automatic stabilizers are considered an effective response to recessions because they quickly match the timing and duration of spending to recession indicators. Also, automatic stabilizers can target those who are the most adversely affected by economic downturns, such as the unemployed and individuals with low incomes.

In the third chapter, Claudia Sahm proposes an automatic stabilizer involving lump-sum payments to all individuals, regardless of their income. These payments would be triggered by a 0.5-percentage-point increase in the unemployment rate, which is an increase observed only around recessions. Sahm reviews the literature on the effectiveness of lump-sum payments during past recessions, finding that such payments are spent more quickly than payroll deductions or multiple payments. The author also finds that the amount of these payments should total 0.7 percent of GDP, which is approximately half the average spending decrease during past recessions. Such lump-sum payments should be repeated each year in which the unemployment rate is at least 2.0 percentage points above the trigger level.

In the fourth chapter, Matthew Fiedler, Jason Furman, and Wilson Powell argue that federal spending on Medicaid and the Children’s Health Insurance Program (CHIP) should automatically increase when a state’s unemployment rate reaches a predetermined level. They recommend this funding increase because of the negative social effects of reduced state-level spending during recessions. For example, reduced education spending by states during recessions has hurt student achievement. Besides assessing the direct effects of healthcare spending, the authors estimate that, over the long term, an automatic increase in spending on Medicaid and CHIP would increase GDP by 0.12 percent and reduce the unemployment rate by 0.1 percentage point.

In the fifth chapter, Andrew Haughwout proposes road-repair spending as a countercyclical stabilizer. The author documents this spending as a long-term investment that provides service flows to individuals and businesses. Usually, spending on road repair is seen as a poor countercyclical measure because infrastructure projects involve lengthy planning. According to Haughwout, to make infrastructure spending a timely response to recessions, states should consider developing a catalogue of planned road-repair projects that would be federally financed. This planning would ensure quick project completion, making the spending more effective as a countercyclical policy.

In the sixth chapter, Gabriel Chodorow-Reich and John Coglianese propose an updated and expanded unemployment insurance (UI) program that uses automatic triggers based on unemployment levels. The authors argue that such a program would better serve as a countercyclical antirecessionary policy. Because people who receive UI benefits are usually in need of transfers, unemployed people are likely to spend these transfers relatively quickly, which would provide a countercyclical effect. Chodorow-Reich and Coglianese’s recommendations include expanding benefits eligibility, encouraging the filing of more applications, extending benefits automatically during spells of high unemployment, and increasing benefit amounts during recessions (which would increase the use of UI as a macroeconomic stabilizer).

In the seventh chapter, Indivar Dutta-Gupta proposes changes to the Temporary Assistance for Needy Families (TANF) program that would increase the program’s effectiveness during recessions. The author argues for increases in both basic assistance and the number of subsidized jobs with supportive services. Under the latter component of the proposal, unemployed individuals would be prepared for and placed in jobs in which their wages are partially or fully subsidized by federal spending. In addition, these individuals would receive services, such as childcare and transportation assistance, that would increase their odds of becoming and staying employed. Dutta-Gupta finds that these changes to TANF would strengthen the program’s antipoverty and countercyclical effects.

In the eighth chapter, Hilary Hoynes and Diane Whitmore Schanzenbach argue that the Supplemental Nutrition Assistance Program (SNAP) can be altered to become a more effective automatic stabilizer. The authors show that SNAP has reduced financial hardship and poverty and improved health outcomes, children’s educational attainment, and children’s economic outcomes during adulthood. SNAP benefits have a fast fiscal effect, as 97 percent of benefits are spent within a month of being received. Hoynes and Schanzenbach argue that increasing SNAP benefit levels and waiving SNAP work requirements during recessions will make the program a better automatic stabilizer.

Recession Ready is an accessible book focusing both on the past effects of recessions and on the policy responses to those effects. Readers new to these topics will find the book to be a good starting place for their research. Professional macroeconomists will benefit from the book’s review of current research. Also, the book would be a useful reading in courses on the business cycle or fiscal policy. Despite these strengths, Recession Ready does not discuss some policies that could also be used as automatic stabilizers, such as work sharing proposals and public service employment.

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About the Reviewer

Justin Holt

Justin Holt is an economist in the Office of Publications and Special Studies, U.S. Bureau of Labor Statistics.

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