As the economy moves along the business cycle, experiencing periods of economic growth or recession, and changing unemployment and inflation, it impacts people’s lives. Ideally, the economy would experience a steady, stable, growth near its long run trend growth rate.

Automatic stabilizers help. Automatic stabilizers are a standing policy that activates automatically without intervention, usually during a recession.

An example is unemployment insurance.

Unemployment insurance is a program providing cash benefits for a specified period of time to workers who lose a job through no fault of their own.

When the economy is in recession, there are normally more people who are unemployed, which means more people qualify for unemployment insurance. The income provided by unemployment insurance supports people while they are out of work, and the extra spending supports the economy. So, unemployment insurance is an “automatic” stabilizer because government spending automatically increases during recessions.

As the economy recovers, and people find jobs, they move from receiving unemployment insurance to earning income, and government spending on this program automatically adjusts.

So in this way, automatic stabilizers are a little like the cruise control on your car – when you are going uphill, the cruise control will adjust the engine to work harder to keep the car near a constant speed; and as you reach the crest of the hill and go down the other side, the cruise control will adjust the engine so it keeps that same speed going downhill.

In a similar way, automatic stabilizers can moderate, or smooth the business cycle, but can’t entirely eliminate the highs and lows.