Understanding Economic Equilibrium

CHAPTER 13

Stabilization and Procyclicality: How Governments Balance Spending with Taxes

One of governments’ roles in society, one of their primary roles, is to keep things going, to stabilize their economy with measures that provide relief, such as a stimulus, during a downturn. In economic terms, federal, state, and local governments should be countercyclical in their spending and policies. Of course, that doesn’t always happen because their revenue streams are procyclical. When the economy sours, tax revenues decline, and that makes it harder for governments to engage in their usual activities, to provide services as they would normally, even without additional programs to stimulate the economy.

For the U.S. government, an economic downturn ...