Feedback: A Familiar Idea

Abstract

Feedback is a familiar idea that has worked well in macroeconomic policy for fifty years under the name of automatic stabilizers. They are called automatic stabilizers because they go into effect without action by Congress or the Administration. Of these policies unemployment compensation is the most prominent but the stabilizing effect of income taxes is also well known. This chapter will discuss automatic stabilizers currently in use as well as a variety of other feedback policies that have been proposed but not passed into law.

Lester Thurow has pointed out that some automatic stabilizers may also make it more difficult to get back to a desired path once away from it. For example, if the unemployment rate were too low and goverment expenditures were cut to increase unemployment, the unemployment compensation scheme would work to make it more difficult to get back to the desired (and in this case higher) levels of unemployment. This problem will not occur with optimatically derived feedback rules since the rule will attempt to return the economy to the desired path.