For a number of months we have been discussing at dinner and other occasions the recession and its causes. Here is our take:
What causes a recession? Answer: people stop buying things. In other words, demand goes down (it never vanishes completely).
What causes demand to decrease? (1) people lose their jobs; (2) people get maxed out on their credit (think of the mortgage meltdown) and are unable to buy what they would like to buy; (3) everybody has everything they want (theoretically possible but highly unlikely).
So what is the cure? Beats us. Except we know you have to have more demand to get out of a recession. But the theorists in the Potomac Pantheon are happily trying to make more credit available for people who are not at the moment interested in borrowing anyway (I recall a TV spot in which a small business owner answered a question by saying, "why would I hire more people if I can't sell what I have?").
Incidentally, "stimulus" was known during the Great Depression as "pump priming." That didn't work either. All efforts should be directed at increasing demand, possibly by cutting taxes, investigating ways of helping people reduce their personal debt, etc.
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Great discussion! I wish I had been at the table for that one with you. :)
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