2 ways to prevent and reverse a recession

Recession is defined by sustained periods of reduced economic activity. Economic activity is primarily driven by consumer spending, so reduced economic activity means consumers are spending less.

There are two things I think are necessary to mitigate and even reverse a recession as quickly as possible.

1. Increase government spending

The first is the easier of the two to implement: increasing government spending. This can be done in two ways: public sector wages and capital projects.

Public sector wages

Because public sector wages are not determined by sales revenue, governments can insulate those employees from the effects of recessions. As governments continue paying their employees, they will continue spending their salary. If their salaries increase, they spend more. If the public sector workforce increases, there are more employees spending their salaries.

Public sector employees spend salaries on general goods and services. They buy groceries, cars, fuel, and clothing. They go out to eat, go to the movies, go to sporting events or the theatre. And every time they spend money, it drives up demand.

The grocery store orders more produce. The car dealership orders more cars. The gas station orders more fuel. The restaurant orders more ingredients. And so on.

That demand also increases employment. The grocery store hires more people to stock groceries and check purchases. The car dealership hires more salespeople and technicians. The gas station hires more attendants. The restaurant hires more servers and cooks. And so on.

And those new employees spend their wages, and the economy continues growing.

Capital projects

Capital projects have a similar effect. When governments build hospitals, schools, highways, commuter rail lines, and so on, they generally contract out the construction to private companies. Those companies purchase construction materials, equipment fuel, and other project components.

And as with consumer purchases, these corporate purchases drive up demand, resulting in higher wages and more jobs. Plus, as contractors hire more employees for these projects, it increases the number of consumers in the economy spending their salaries, further driving up demand.

2. Increase private sector wages

The second way to mitigate and reverse recessions is to increase wages in the private sector. As private sector workers receive more money, they’ll spend it, and as I outlined above, that added spending increases demand, which in turn drives employment rates.

The problem with the two ways I mention for mitigating and reversing recessions is that no one seems to want to do it.

Corporations keep profits for executives and shareholders instead of increasing worker wages, and they may even lay off workers. Governments freeze or even rollback wages and they eliminate positions.

Laying off workers and reducing salaries doesn’t reverse recessions; it prolongs them.