Contained in every recession are the seeds for its own recovery. It is a little known fact, but true, that prior to the 1930’s the government did not intervene in recessions. The economy was left to heal itself which it did very nicely. Such an approach, call it a non-approach if you will, is not feasible in today’s electoral Democracy. Given that constraint, what should government do?
Stimulation needs to be focused on the private sector. It is the private sector that’s in recession, not the government. Jobs added to the private sector are a boon to the wealth of the nation. The cost is relatively small, with emphasis on the “relatively” of course. A few one shot injections and a modicum of patience is all it usually takes.
One such injection was used by both John F. Kennedy and Ronald Reagan was to open a 2 year window during which business could get quicker tax write-offs on new plant and equipment. Inasmuch as it was a temporary benefit the response of business was quick. The immediate cost to the government was zero. The long term outlay by the government was zero. The only thing that changed was the timing of the receipt of revenue. That is the sort of thing government should do.
Most important of all is for the government to get out of the way and let the recovery begin.
Don’t expand the government sector. The government sector is never in recession and does not need “stimulation”. Do not encourage the destruction of usable personal property. When many people are out of work it is not the time to reduce the supply of goods and increase the cost of living. Roosevelt ordered the slaughtering of thousands of young pigs, Obama paid to have serviceable used cars destroyed. Roosevelt’s avowed purpose was to raise the price of pork. Obama’s purpose was not to raise prices but used car prices have risen as a normal consequence.
The most dangerous thing a government can do in the midst of a recession is to raise taxes. Raising taxes, even a little bit, during a recession risks depression. Raising taxes substantially increases the risk proportionately.
THE ROCK AND THE HARD PLACE
Two other weapons government can normally use to fight a recession are lowering interest rates and lowering taxes. But taxes are already low and interest rates are near zero. On both the fiscal and monetary fronts, we are out of ammunition. Only an external event, a change of administration or the passage of time will lead us out.