Really good arti­cle explain­ing how reces­sions work and why tax cuts and “let­ting peo­ple keep more of their own money” may sound nice, but doesn’t actu­ally help anything.

Now we’ve entered “para­dox of thrift” ter­ri­tory. Peo­ple are sav­ing more. And the increased sav­ing isn’t being cycled back into the econ­omy as new invest­ment. In part, that’s because of prob­lems in the finan­cial sys­tem. But in part, it’s because with short-​term demand slump­ing so much, there’s not a lot of worth­while invest­ing to be doing. The econ­omy needs some­one to decide to bor­row some money and start a new firm that employs these newly unem­ployed peo­ple. But with the vol­ume of con­sump­tion going down so rapidly, nobody’s really in the mood to start a new busi­ness. And exist­ing busi­nesses are busy scal­ing back pro­duc­tion, not inter­ested in bor­row­ing money to ramp it up. The result of this is an over­all fall in the aver­age level of income. And that means that even with the share of income being saved going up, the actual level of sav­ings can be going down and we can truly end up in the toilet.

The ulti­mate point of a fis­cal stim­u­lus pol­icy is to avoid that toi­let sce­nario. To get money flow­ing in the econ­omy again, so that sav­ings gets trans­lated into invest­ment which gets trans­lated into jobs which pay salaries which, in turn, are spent and saved in ways that cre­ate jobs.

http://yglesias.thinkprogress.org/archives/2009/02/understanding_the_paradox_of_thrift.php