Editing Recession (section)

==Government responses==

{{See also|Stabilization policy}}
[[Keynesian economics|Keynesian economists]] favor the use of expansionary macroeconomic policy during recessions to increase [[aggregate demand]].<ref name="StiglitzOcampo2008">{{cite book |editor1-last=Stiglitz |editor1-first=Joseph E. |editor2-last=Ocampo |editor2-first=José Antonio |title=Capital Market Liberalization and Development |year=2008 |publisher=OUP Oxford |isbn=978-0-19-923058-7 |page=360 |url=https://books.google.com/books?id=u8OTK5cIOSoC&pg=PA360}}</ref><ref name="Ahuja2019">{{cite book |last1=Ahuja |first1=H.L. |title=Macroeconomics, 20e |date=2019 |publisher=S. Chand Publishing |isbn=978-93-5283-732-8 |page=527 |chapter-url=https://books.google.com/books?id=7psGEAAAQBAJ&pg=PA527 |chapter=Monetarism and Friedman's Restatement of Quantity Theory of Money}}</ref><ref name="Thornton2018">{{cite book |last1=Thornton |first1=Saranna |title=Bucking The Deficit: Economic Policymaking In America |date=2018 |publisher=Routledge |isbn=978-0-429-97052-8 |page=30 |url=https://books.google.com/books?id=jwHFDwAAQBAJ&pg=PA30}}</ref><ref name="Mason2020">{{cite book |last1=Mason |first1=J.W |editor1-last=MacLean |editor1-first=Brian K. |editor2-last=Bougrine |editor2-first=Hassan |editor3-last=Rochon |editor3-first=Louis-Philippe |title=Aggregate Demand and Employment: International Perspectives |date=2020 |publisher=Edward Elgar Publishing |isbn=978-1-78643-205-6 |chapter-url=https://www.elgaronline.com/downloadpdf/edcoll/9781786432049/9781786432049.00009.xml |chapter=Chapter 1: Macroeconomic lessons from the past decade |page=29}}</ref> Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. [[Monetarism|Monetarists]], exemplified by economist [[Milton Friedman]], would favor the use of [[Friedman's k-percent rule|limited]] expansionary [[monetary policy]], while [[Keynesian]] economists may advocate increased [[government spending]] to spark economic growth. [[Supply-side]] economists promote tax cuts to stimulate business [[capital (economics)|capital]] investment. For example, the Trump administration claimed that lower effective tax rates on new investment imposed by the [[Tax Cuts and Jobs Act of 2017]] would raise investment, thereby making workers more productive and raising output and wages. Investment patterns in the United States through 2019, however, indicated that the supply-side incentives of the TCJA had little effect on investment growth. Although investments increased after 2017, much of the increase was a response to oil prices, and investment in other sectors had negligible growth.<ref name="GaleHaldeman2021">{{cite web |last1=Gale |first1=William G. |last2=Haldeman |first2=Claire |title=Searching for supply-side effects of the Tax Cuts and Jobs Act |url=https://www.brookings.edu/wp-content/uploads/2021/07/20210628_TPC_GaleHaldeman_TCJASupplySideEffectsReport_FINAL.pdf |website=Brookings |access-date=5 August 2022 |date=6 July 2021 |pages=3–4}}</ref>

Monetarist economists have argued that objectives of monetary policy, i.e., controlling the money supply to influence interest rates, are best achieved by targeting the growth rate of the money supply. They maintain that money may affect output in the short term but that in the long run, expansionary monetary policy leads to inflation only. Keynesian economists have mostly adopted this analysis, modifying the theory with better integration of short and long run trends and an understanding that a change in the money supply "affects only nominal variables in the economy, such as prices and wages, and has no effect on real variables, like employment and output".<ref name="JahanMahmudPapageorgiou2014">{{cite journal |last1=Jahan |first1=Sarwat |last2=Mahmud |first2=Ahmed Saber |last3=Papageorgiou |first3=Chris |title=What Is Keynesian Economics? – Back to Basics |journal=Finance & Development |date=September 2014 |volume=51 |issue=1 |page=54 |url=https://www.imf.org/external/pubs/ft/fandd/2014/09/pdf/basics.pdf}}</ref><ref name="JahanPapageorgiou2014">{{cite journal |last1=Jahan |first1=Sarwat |last2=Papageorgiou |first2=Chris |title=What Is Monetarism? – Back to Basics  |journal=Finance and Development |date=March 2014 |volume=51 |issue=1 |page=38 |url=https://www.imf.org/external/pubs/ft/fandd/2014/03/pdf/basics.pdf}}</ref> The Federal Reserve traditionally uses monetary accommodation, a policy instrument of lowering its main benchmark interest rate, to accommodate sudden supply-side shifts in the economy. When the [[federal funds rate]] reaches the boundary of an interest rate of 0%, called the [[zero lower bound]], the government resorts to unconventional monetary policy to stimulate recovery.<ref name="Skaperdas2017">{{cite web |last1=Skaperdas |first1=Arsenios |title=How Effective is Monetary Policy at the Zero Lower Bound? Identification Through Industry Heterogeneity |url=https://www.federalreserve.gov/econres/feds/files/2017073pap.pdf |pages=2–3 |date=7 July 2017}}</ref>

Gauti B. Eggertsson of the Federal Reserve Bank of New York, using a [[New Keynesian economics|New Keynesian]] macroeconomic [[Dynamic stochastic general equilibrium|model]] for policy analysis, writes that cutting taxes on labor or capital is contractionary under certain circumstances, such as those that prevailed following the economic crisis of 2008, and that temporarily increasing government spending at such times has much larger effects than under normal conditions. He says other forms of tax cuts, such as a reduction in sales taxes and investment tax credits, e.g., in the context of Japan's "Great Recession", are also very effective. Eggertsson infers from his analysis that the contractionary effects of labor and capital tax cuts, and the strong expansionary effect of government spending, are peculiar to the unusual environment created by zero interest rates. He asserts that with positive interest rates a labor tax cut is expansionary, per the established literature, but at zero interest rates, it reverses and tax cuts become contractionary. Further, while capital tax cuts are inconsequential in his model with a positive interest rate, they become strongly negative at zero, and the multiplier of government spending is then almost five times larger.<ref name="Eggertsson2011">{{cite journal |last1=Eggertsson |first1=Gauti B. |title=What Fiscal Policy Is Effective at Zero Interest Rates? |journal=NBER Macroeconomics Annual |date=1 January 2011 |volume=25 |pages=59–60 |doi=10.1086/657529 |hdl=10419/60825 |s2cid=16071568 |url=https://www.journals.uchicago.edu/doi/full/10.1086/657529 |issn=0889-3365|hdl-access=free }}</ref>

[[Paul Krugman]] wrote in December 2010 that significant, sustained government spending was necessary because [[household debt|indebted households]] were paying down debts and unable to carry the U.S. economy as they had previously: "The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble...highly indebted Americans not only can't spend the way they used to, they're having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what's actually happening is that some people are spending much less while nobody is spending more—and this translates into a depressed economy and high unemployment. What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained..."<ref>{{cite news|url=https://www.nytimes.com/2010/12/13/opinion/13krugman.html|title=Opinion – Block Those Economic Metaphors|first=Paul|last=Krugman|newspaper=The New York Times|date=13 December 2010|access-date=26 November 2018|archive-date=20 August 2019|archive-url=https://web.archive.org/web/20190820122049/https://www.nytimes.com/2010/12/13/opinion/13krugman.html|url-status=live}}</ref>

[[John Maynard Keynes]] believed that government institutions could stimulate aggregate demand in a crisis.<ref name="Nayak2009">{{cite journal |last1=Nayak |first1=Pulin B. |title=Anatomy of the Financial Crisis: Between Keynes and Schumpeter |journal=Economic and Political Weekly |year=2009 |volume=44 |issue=13 |page=160 |jstor=40278675 |url=https://www.jstor.org/stable/40278675 |issn=0012-9976}}</ref>