Boosting demand by the state and automatic stabilizers

Abstract

Since the global economic crisis broke out in 2007-2008, the theory of boosting demand by the state has again come to the focus of attention. Besides deploying the monetary tools, the individual governments and international organizations announce one after the other, sometimes even outbidding each other, what amounts from their respective budgets they plan to assign to the moderation of the economic recession. In many cases, the fiscal stimulation of demand is looked upon as a messiah, they talk about it as a magic weapon that helps everybody who has the chance to use it. What is less talked about, however, is the price of the wonder weapon, as well as the conditions required for its effective operation. Besides, the theory of stimulating demand by the state leaves its mark on all the discussions of the crisis to such an extent as if this were the most efficient tool of recovery and the only factor that contributes to becoming indebted for sure. In this study, we primarily strive to examine these phenomena. We are seeking to answer the question whether the boosting of demand by the state is in fact such a wonder weapon, to what extent the time and pace of recovery depend on this. Furthermore, we will try to illustrate, by describing the probable impacts, what weight is represented by the central stimulation of demand within the fiscal policy and to what extent it is responsible for the increase in state debts. In the first part, we will summarize those conditions the existence of which may contribute to the success of boosting demand by the state, by giving an overview of the theoretical literature and the experience gained to date. After the theoretical overview, we will present the result of practical experience and model calculations. Then we will briefly sum up the direct effect of the economic crisis on the national budgets. We will describe and compare in detail the fiscal demand stimulating packages of the economic powers and the EU states, as well as the role of the automatic stabilizers. Besides the estimated impacts and results, we will also show those projections which quantify the long-term costs of boosting demand.