Predict the Outcome of the Recession by Looking at Economic Incentives and Disincentives

Economics has long been characterized as a study of the effects of "carrots and sticks." Dangle a carrot to get someone to do something, or hit someone with a stick to get them to stop and go in the opposite direction.  Among the principal economic carrots is a drop in prices, which obviously induces people to buy more and to substitute more of the cheaper good or service for other stuff.  A point seemingly beyond the comprehension level of legions of beginning economics students who get bored at the beginning of the semester and stay that way until the final exam.  But--and here's the catch--people will buy more at a cheaper price other things remaining equal.  And in a downturn, other things don't remain equal.  In particular, incomes fall or are wiped out from layoffs and cutbacks in work schedules.  Fears of worsening circumstances mount.  

Thus, consumers are induced by the carrot of cheaper prices to buy more of cheaper goods, but are hit over the head by the stick of falling or nonexistent incomes. Businesses, obviously, can only lower prices so much before they shutter their windows and close their doors.  Under these circumstances, the economy can only rebound once jobs and incomes stabilize once more so that spending can begin a steady upward increase.

These observations may seem so elementary that you may wonder why I am even insulting your intelligence by spelling them out.  However, the level of economic illiteracy among some news pundits, bloviators, politicians, and the general public is so appalling that even basic economic principles learned by college freshmen, supposedly, in the first month of a freshman economics class, remain largely absent in the current theater of debate and pontification over the Great Economic Stimulus Package of 2009. 

The problem in stimulating the economy is to find the carrots with the "biggest bang for the buck," to use a time-worn cliche.  And the biggest bang for the buck comes from spending, dollar for dollar, and not tax cuts, especially for people who don't make any money or who make very little money.  And rich people who make money don't really need a tax cut, and they will save it or pay off debt with it anyway, leading to little to no stimulus.  All of the idiotic talk by neanderthal observers about what constitutes "socialism" and what constitutes "true Americanism" just puts up smoke screens to cover the reality of what is happening or what is likely to happen under alternative courses of action in seeking paths out of the recession.  Just identify the carrots, and make a list of the sticks, and do your own economic analysis. 

Economics, we emphasize in lecture number 1 in Econ 101, is the study of what is, and not what we want things to be.  Figuring out "what is," or what is actually expected to happen, is positive economics and can be analytically examined.  Focusing on wishful thinking of what we think "ought to be" is just that, wishful thinking, bogged down in so-called value judgments, and can be fodder for daydreams and hopes, but cannot be objectively analyzed, even with a rubber band.