Stabilization Policy

It's what the yacht captain prays to every morning.

Some people don’t mind wild west economics: giant swings in prices, markets going up and down. Yee and haw. Others, not so much.

Those other economists favor a stabilization policy, which is when a government steps in and purposefully tries to keep economic growth, prices, and inflation slow and steady. The tortoise over the hare. The government-managed over laissez-faire. Hey, that rhymes.

There are things that both a country’s government as well as their central bank can do to stabilize the economy. For instance, the Fed (the U.S.’s central bank) oftentimes keeps interest rates low to encourage borrowing (and thus spending) when times are bad...and the cost of renting money high when times are good. The Fed also can play with the money supply by choosing to add more money to the system, or to restrict it, affecting prices and inflation.

Congress can play with things like taxes and government programs to affect economic growth...for instance, approving stimulus measures during recessions.

In general, the idea of a stabilization policy being the right thing to do is pretty Keynesian, the macroeconomic status quo of today’s major governments. There are other economists who believe a more hands-off government approach would be better, i.e. let market forces correct themselves where they can.

The financial crisis of '07-'09 is a good example. Pro-stabilization policy people were all for bailing out the banks and stimulus packages. Anti-stabilization policy people point out that, because big banks got bailed out for bad behavior, they could do it again. Like...why not? The government will just bail everyone out again if things go wrong, right? They argue that letting market forces take their course, and letting big banks go under for their bad behavior (and their customers along with them), would have been the better move. That way, only trustworthy banks would be patronized later down the road.