July 2006

Macroeconomic Conditions, Health and Government Policy

Christopher J. Ruhm, University of North Carolina at Greensboro, and National Bureau of Economic Research

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Abstract

Many government policies influence short and medium-run economic performance. Some, such as the monetary and interest rate targets, are explicitly designed to stabilize the economy. Fiscal policy has the potential to play a similar role, although it is not aggressively used for this purpose in the United States. The unemployment insurance and federal income tax systems act as "automatic stabilizers" because they make government spending more expansionary in economic downturns and less so during booms. Other programs, such as the Earned Income Tax Credit (EITC), increase incomes during expansions, when work is easier to find, and so operate in the opposite direction (Edwards, 2005). Spending by local governments also tends to be procyclical, since most states are required to balance their budgets and receive greater tax revenue when the economy is doing well. ...