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February 28, 2008

Can the government prevent a recession?

With many economic and business analysts saying a recession is looming for the economy, the obvious question is whether anything can be done to head it off. In these kinds of situations, we usually look to the government. What tools are available to the government to use against a possible recession? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The government we're talking about here is the federal government, and the tools the federal government has at its disposal are designed to try to get more spending in the economy, and that's essentially what you want to have happen when the economy is slow or in a recession. You want to generate more spending. And the two agencies that do this are, number one, the federal reserve, and what we would see the federal reserve do is, number one, to cut interest rates, which they have been doing, and essentially print more money and send that money to the banks so the banks have money to loan to people so they'll go out and borrow it and spend it. And then the other group that's on the job here would be the president and the Congress together through the federal budget, and here they would either increase government spending - for example, go out and build more roads and bridges and so forth - or they would reduce taxes. As we talk, the plan is to reduce taxes through rebates. Now, the analysis of whether these tactics work comes to the conclusion that they often can't reduce or prevent a recession but they can blunt the effect, maybe shave some of the negatives off the edges, maybe reduce the negative impacts of a recession by somewhere between 25 and 33 percent. But there is a cost to these actions, and that is that the government is going to go into debt more. They're going to borrow more, and this will have to be funded later from taxpayers."

Posted by Dave at February 28, 2008 08:25 AM