Why are fiscal stimulus policies so important in the aftermath of a crisis?

Alright, no problem. Imagine we're chatting in a coffee shop, and I'll tell you about this topic.

Why is Fiscal Stimulus So Important After a Crisis?

Brother, that's a great question. A lot of people hear "government spending big money" and immediately think it's bad, but after a crisis, it's actually quite crucial. Let's skip the complex jargon; I'll give you an analogy.

Imagine the entire national economy is like a huge marketplace, filled with countless buyers (us ordinary people, companies) and sellers (also companies, us).

When a crisis hits, it's like someone suddenly shouts in the market: "It's all going to hell!"

What happens then?

1. We ordinary people (buyers): We immediately panic. Worried about losing jobs, worried about income dropping, what's our first reaction? We clutch our wallets tightly and stop spending. If we were planning to buy a new phone, we don't; if we had a trip planned, we cancel it. Consumption instantly drops to freezing point.
2. Companies (sellers/buyers): Seeing that no one is buying, their products don't sell, and inventory piles up. What do they do? They stop production, cancel investment plans, and even start laying off staff. They themselves don't dare to spend money on raw materials or new equipment.

You see, this forms a vicious cycle: People don't spend → Companies don't make money → Companies lay off/cut salaries → People have even less money/are even more afraid to spend → The economy gets worse and worse

Once this cycle begins, it will be very, very slow for the market to stop it on its own, and the process will be extremely painful, potentially leading to widespread unemployment and business failures, which is what we call a "Great Depression."

At this point, "fiscal stimulus" is like a "booster shot."

When everyone is "afraid to spend," there must be a role that is wealthy, capable, and must spend money to break this deadlock. That role is the government.

Fiscal stimulus is when the government actively spends money, mainly through these methods:

• First: Infrastructure projects (building roads, bridges, high-speed rail)

  • This is the most direct approach. The government pays people to work, so construction workers have jobs and income. With that money, they'll buy food and clothes, and business for supermarkets and restaurants will improve. Then, supermarkets and restaurants will purchase from upstream suppliers, and the entire chain slowly comes back to life.

• Second: Direct payments to the public or tax cuts

  • Just like what the US did during the pandemic, sending checks directly to your home. Or announcing lower taxes for the year. The goal is simple: to put more money in your pocket, so you have money to spend and dare to spend it. As long as you consume, you help businesses survive.

• Third: Subsidies or loans for businesses

  • Many businesses are actually healthy during a crisis; it's just that temporarily no one is buying, and their cash flow is broken. The government gives them low-interest loans or subsidies to help them "catch their breath" and get through the toughest period without having to lay off staff.

To summarize, why is it so important?

1. Breaking the vicious cycle: It's the only effective way to break the "fear → no consumption → recession" cycle in the short term.
2. Restoring "confidence": This is the most crucial point. When people see the government taking action, economic data starting to improve, and job losses no longer increasing, the panic in people's hearts will slowly dissipate. Confidence is more valuable than gold; once confidence is restored, people will naturally be willing to consume and invest, and the economy can truly run on its own.
3. Preventing a "minor illness" from becoming a "major one": An economic recession is like an illness. Fiscal stimulus is like a strong dose of medicine; although it might have side effects (like increased government debt), it prevents the condition from worsening into a "Great Depression" that requires ICU. First, save the life, then talk about recuperation.

Of course, fiscal stimulus isn't a panacea; using it too much or incorrectly can also have side effects, such as inflation, excessive government debt, and so on. But this is like a doctor prescribing medicine: although there are side effects, in an emergency, it's a necessary life-saving measure.

So, simply put, fiscal stimulus after a crisis is when everyone else is hitting the brakes, the government must step up and hit the accelerator hard, to get the entire economic vehicle moving again.