Following news coverage can be easy. Understanding some of the terms it uses, less so. In our Flashcard series, The Atlantic explains ideas you may read about but never see spelled out. In this installment, we dig into the case for (and against) stimulus.
In the twilight of a global recession, the world is sending a message: deficits matter, again. From the G20 announcement that the world's leading economies will begin removing fiscal stimulus, to Washington's revolt against the newest "jobs bill," we are entering a period where politicians are more concerned about tending to healthy-looking budgets than reviving their weak economies at all costs.
Recessions lead to deficits for two main reasons. First, tax revenues fall when workers lose jobs and the taxable income that comes with jobs. Second, governments put policies in place to spend more when its businesses cut back. When families earn less money, they spend less money, which means lower profits for firms, which can spiral into even more jobless families. To stimulate the wilting economy, the government spends money -- infrastructure projects, state relief, unemployment aid -- that families cannot. Much of this spending comes on top of what the government is earning in taxes. So countries borrow money by selling bonds to investors and promising to pay them back with interest later when the economy has recovered.