William C. DudleyI favor automatic, rather than discretionary, fiscal actions because they would typically go into effect more quickly and would be better anticipated. Expectations matter greatly in affecting economic behavior. For example, if the economy were to weaken, the anticipation that strong fiscal stabilizers would kick in to support incomes should lead workers to be less fearful about losing their jobs, and businesses to be less concerned that demand for their products might fall precipitously. This, in turn, would make workers more confident that they could sustain their spending, and would make businesses more confident that they could keep workers on their payrolls.[p|div|span]>
What type of fiscal stabilizers would be most effective? I would turn first to those that Congress has implemented on a discretionary basis during past economic downturns, such as extensions of unemployment compensation and cuts in payroll taxes. For example, when the unemployment rate climbs, extensions of the duration of eligibility for unemployment compensation could be triggered automatically, helping to stabilize household income. Similarly, when the unemployment rate breaches certain thresholds, payroll tax cuts could be triggered, helping to support the disposable income of workers facing reductions in hours. Payroll tax cuts also have the advantage of skewing more toward low- and moderate-income workers, who typically have a higher propensity to consume out of current income.
Obviously, it is up to the incoming Administration and Congress to decide on the appropriate fiscal measures. But, the point that I want to highlight is that robust automatic fiscal stabilizers would complement monetary policy, and take some pressure off of the Federal Reserve to undertake extraordinary measures in situations where there is little scope for cutting short-term interest rates.