Recession Curatives

"It's all about stuff." -- George Carlin
Prices rise to absorb the amount of money available. Ask any tourist.

   An economy, simplistically put, is the production and trading of stuff.
   Here's a lesson from the George Carlin School of Economics. I got stuff; you got stuff. Let's trade. I want some of your stuff because you have extra, but I don't have the kind of stuff you want. OK, let's invent money, so I can buy your stuff and you can buy what you want from other people.
   A recession, also known as an economic downturn, happens when total output of goods and services in a country declines for two consecutive fiscal quarters. People stop producing, selling and buying stuff, and one way to change that is to make sure prices are low enough and people have money enough to get back in the game.
   Recessions happen when consumers stop spending and companies stop investing (spending) on production.
   There are several ways to fix that:
   One/ Reduce prices and/or interest rates, so consumers and firms can better afford to buy more stuff.
   Two/ Increase the amount of money available, which will lower interest rates. However, that can boost prices, putting stuff further out of reach of consumers. It's called inflation.
   Three/ If consumers and firms don't respond to the first two measures, government can step in, buying more stuff and investing in projects, thus putting people to work so they in turn have money to buy stuff on their own.

   In the past, the accepted wisdom was to leave the economy alone, and it will work itself through the cycle and eventually revive. We should live so long.
   Another strategy is for government to cut spending and raise taxes, as a way of reducing its debt, on the premise that government debt is a bad thing. Or is it? Both actions slow the money flow, and while that may be a good thing for a government, it's bad for consumers and firms, since a reduction in spending cuts worker income, and higher taxes cut into company profits, making them less able to borrow and invest in production capacity.
   Recent experience in Japan shows that strategy doesn't work, and it sent that nation's economy back into recession.
   How about cutting spending as well as taxes? That, however, trims government money flow, which in turn reduces its ability to contribute to recovery.
   How about raising both? By increasing spending as well as taxes, a government could help consumers but at the same time it would harm companies.
   Consider option three: Increase government spending and reduce taxes. That would certainly put government further into debt, but it would help both consumers and firms. Then, when the economy recovers, government can revise its strategy by stepping back, lowering spending as the private sector regains strength, and raising taxes so it can pay down the debt incurred in reviving the economy.
      The trick is in knowing when to do that, so government efforts don't crowd out company efforts to take advantage of low interest rates and increase their investment.
   Taking money out of the economic flow may enrich government officials and reduce government debt, but the rest of the economic population -- consumers and companies -- are reduced.