With such large contraction in the economy, what policies could the government take in order to create economic growth?
If we knew what actions would, without fail, cause economic growth, we would pursue those actions and no country would suffer from a lack of such growth. However, economists disagree on the best course of action. Let us look at two general types of policies could be enacted.
First, there are actions that are meant to stimulate aggregate demand (AD). Typically, what a government does in this situation is to increase spending and to lower taxes. It employs more people to do various things and it increases spending on such things as unemployment insurance. By doing so, it puts more money in people’s pockets. The people then spend that money and AD increases.
However, conservatives typically believe that these actions are not effective in our current situation. They prefer to stimulate aggregate supply (AS). They, too, are interested in tax cuts, but they are particularly interested in cutting taxes on the rich and businesses because those are the people who are more likely to create jobs for others. In contrast to the people who want to stimulate AD, these economists would prefer cuts in government spending to free up more money for private investment. They also want the government to impose fewer regulations so that businesses will be freer to operate.
Thus, there are at least two different types of policy that can be taken. No one knows for sure which is most likely to cause economic growth.