The Ensuing Chaos

An automatic stabilizer is a non-discretionary item in a government budget which kicks in automatically when economic activity decreases.

Unemployment benefits are an example of automatic stabilizers. As economic activity decreases & workers are laid off, the automatic stabilizers kick in to provide a floor of support.

This is a critical concept when talking about Government deficits, because it means that the deficits themselves are outside of the direct control of the budget process. We could say the deficit result is endogenously determined, that is, it is determined by events in the private sector of the economy.

Targeting a desired deficit outcome (such as a balanced budget) becomes impossible because if private sector activity decreases, as people are laid off the automatic stabilizers will kick in and throw the desired deficit result off track.

When economists talk about stocks and flows of money, they are essentially adding time to the equation.

A flow is a quantity of money measured over a given time period. For example, the Government deficit is a flow, typically measured over a quarter or a year.

The Government debt is a stock, which is the cumulative total of Government deficits. In this way, the deficits accumulate to become the debt. So we say flows accumulate to stocks.

One common measure we frequently see is the Debt to GDP ratio. In my opinion, this is a difficult ratio to draw meaningful conclusions from because it compares a stock to a flow. Presumably a high debt to gdp ratio is bad because it means you are getting less productivity out of each dollar of debt. However, it could also mean that the population has a high amount of savings relative to economic activity. Not necessarily a bad thing.