How Recessions Work

Fiscal Policy

Workers build a government storage facility as part of the Works Progress Administration (WPA). Franklin Roosevelt set up the WPA and other programs during the Great Depression in the hopes that the new jobs would help turn the economy around.
Photo courtesy NARA

With fiscal policies, the government influences the economy by changing how it (the government) spends and collects money.

The most common fiscal policy actions in a recession are:


  • Tax cuts for businesses or for individuals - This gives people and corporations more money, which may make them more likely to buy things, which increases demand.
  • Increased spending to establish new government jobs - This increases demand for labor, which can lower the unemployment rate.
  • Automatic fiscal policies, which kick in right away - One of the most important automatic fiscal policies is unemployment insurance. This system provides an income for people who are out of work.

Fiscal policies are dictated by congress and the president.