From Economic Stabilization to Budget Stabilization

This chapter starts with an introduction to the concept of the economic cycle and how Mankind has been coping with economic fluctuations; then it traces the evolution of the stabilization function of government: How this function was started and theorized as a necessary addition to the allocation and distribution functions and why fiscal policy is always necessary besides monetary policy. Section 2.2 discusses economic stabilization at the central level. This role carries with it some inherent problems, in particular three types of lag – those in identifying recessions, in taking policy actions, and in obtaining the designed effects of the policies. What is the core of the debate about the efficacy of the stabilization function and why such policy has long been practiced despite the absence of consensus? Section 2.3 elaborates on why the stabilization function that had long been assumed to be exercised solely by the central government was extended to the subnational level and how state governments in the USA experimented with their fiscal practices. The chapter concludes that the stabilization function at the subnational level is best taken as budget stabilization for smooth provision of public services across the economic cycle.