Introduction | 1

Chapter 1

Introduction

Are we ready to combat the next severe recession? We can be, but we’re not. A severe recession always involves a plunge in aggregate demand for goods and services that compels producers to sharply cut back production and employment. To recover from the recession, aggregate demand must be boosted all the way back up to normal. Economic analysis and experience shows that waiting for the free market to reverse the plunge in aggregate demand takes much too long—usually half a decade to a full decade. Monetary stimulus—cutting interest rates to zero—is much too weak to induce a huge boost in demand because experience shows that sensible consumers and business managers aren’t willing to go deeper in debt by borrowing to spend in a severe recession. Fortunately, a huge boost in demand can be achieved by a large fiscal stimulus—a temporary large increase in tax rebates for households, federal grants to state and local governments, tax credits to partly reimburse firms for purchases of capital goods, and government spending on infrastructure maintenance projects.