Cement plants call idled workers back. As the world starts to look like a better
place, we feel comfortable making major purchases again. The cycle we
described earlier begins to work in reverse. This is the logic of the American
Recovery and Reinvestment Act of 2009—the stimulus bill that was the first
major piece of legislation under the Obama administration. The Act authorized
more than $500 billion in federal spending on things ranging from expanded
unemployment benefits to resurfacing the main highway near my house. (There
is a big sign on the side of the road telling me that’s where the money came
from.)
The government can also stimulate the economy by cutting taxes. The
American Recovery and Reinvestment Act did that, too. The final bill had nearly
$300 billion in assorted tax cuts and credits. The economic logic is that
consumers, finding more money in their paychecks at the end of the month, will
decide to spend some of it. Again, this spending can help to break the back of the
recession. Purchases generated by the tax cut put workers back on the job, which
inspires more spending and confidence, and so on.
The notion that the government can use fiscal policy—spending, tax cuts, or
both—to “fine-tune” the economy was the central insight of John Maynard
Keynes. There is nothing wrong with the idea. Most economists would concede
that, in theory, government has the tools to smooth the business cycle. The
problem is that fiscal policy is not made in theory; it’s made in Congress. For
fiscal policy to be a successful antidote to recession, three things must happen:
(1) Congress and the president must agree to a plan that contains an appropriate
remedy; (2) they must pass their plan in a timely manner; and (3) the prescribed
remedy must kick in fast. The likelihood of nailing all three of these
requirements is slim.
Remarkably, in most postwar recessions, Congress did not
pass legislation in response to the downturn until after it had ended. In one
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