You hear a lot of metaphors in talk about the economy, and one of them is talk about it in terms of speed, as if it's a vehicle of some sort chugging along--so you get an economy that is in a slowdown, or that is in danger of overheating, or that is humming along nicely. But I never really grasped in what sense an economy could be like a vehicle like this.
Maybe it's something like this: in America you have a bunch of stuff--natural resources and factories and the like--and you have a couple of hundred million people standing around doing nothing. It's also the case that most of those people would like to have more stuff for themselves (including things which they, as human beings, definitely
need, like food and shelter). And so a bunch of them get to work, using their individual time and energy to take the stuff that's there and work it into other stuff, which they can then trade for stuff that they want.
So the important things to keep track of here are two different rates: the first is the rate at which people make new stuff out of the stuff that's there, and the second is the rate at which they trade that stuff for other stuff. And, of course, the two rates are related: for example, if people are very willing to trade stuff they have for other stuff, then there's going to be a lot of demand for people to step up to the plate and start making that other stuff; contrarywise, if people are very reticent in their trading for other stuff, then the makers of this other stuff will soon find themselves without a trading partner, and will once again go idle.
Now, this relation between the two rates creates the potential for a vicious circle, because if lots of individuals decide to lower the rate at which they trade their stuff for other stuff, and makers of this other stuff go idle as a result, then these makers must lower the rate at which they trade their stuff for other stuff. And everybody else is watching this chain reaction slowly build, and so--since they as makers figure they may well go idle soon--they all decide to conserve the stuff they have by lowering the rate at which they trade it for other stuff. And so the rate of trading lowers across the board, causing there to be less of a need for making stuff to be traded, causing the rate at which stuff is made to go down. And so you have this suboptimal arrangement, where far more of those hundreds of millions of people are standing idle than need be.
So that is, I think, the way in which an economy could be said to be going "faster" or "slower". If it's faster, then that means the rate of making stuff and trading stuff is really high, and all those hundreds of millions of people are busy as bees, making stuff for the first half of the day and then trading that stuff for other stuff for the second half of the day (and on weekends, trading all day). But if the economy is "slow", then that means that the rates of making and trading stuff is low, and that--while lots of people are still busy as bees--there are also lots of people just standing around idle, not making any stuff and trying to keep their trading of stuff they have to an absolute minimum.
So that's the metaphor, I
think. It is worth adding that the government, via a central banking system, can take steps to control the speed of the economy to interrupt the positive-feedback loops that occur, where increasing speed begets increasing speed and decreasing speed begets decreasing speed. If I understand it correctly, it does this in a very tricky way. Above, when I say that people exert time and effort to work stuff that's there into other stuff, which they then trade for stuff they want--well, as you have probably noticed, people tend not to directly barter, but to trade their stuff for an intermediary thing--dollar bills--which serve no other function besides being containers of value. So when there is a slowdown in the rate that people trade their stuff--their dollar bills--for other stuff, this rate can be effectively raised simply by increasing the overall number of dollar bills. The government does this by allowing banks to borrow into existence dollar bills, and charging the banks interest on those newly created bills. When the government lowers the interest rate, the banks borrow more, and thus they are able to spend more--that is, the banks are able to trade more of their stuff for other stuff, and all that extra trading propagates through the economy. If the economy is moving really fast, the government can slow it down by raising that interest rate, and thereby reducing the rate at which the banks trade their stuff (their dollar bills) for other stuff. Of course, by constantly creating dollar bills out of thin air, and thereby increasing the total number of dollar bills in existence, eventually prices start to go up, because everybody has more dollar bills in their pocket, and so everybody bids up the price of everything. This is inflation.
What's happening now--and the reason why people like Paul Krugman are saying that the federal government should run deficits of many hundreds of billions of dollars to get the economy sped up--is that we're in a so-called "liquidity trap". This just means that the usual mechanism for speeding up the economy--cutting that interest rate, thereby allowing banks to borrow into existence more dollar bills--doesn't work anymore, because that rate has already been cut to (virtually) 0%. Moreover, even when the big banks do borrow a bunch of dollar bills into existence, it doesn't help increase the rate of trading, because the banks are hoarding the dollar bills rather than using them to trade for stuff (first off, the banks are worried that the assets on their books will plummet in value, causing them to fail; second, they don't want to lend to anyone because they're afraid they won't get paid back). And so the only way now to increase the rate of trading is to have the government itself actually start doing a whole bunch of trading (i.e., trading dollar bills for things like subway systems, improved roads, etc., or just straight up giving dollar bills to people who will surely spend them, like the unemployed). This is called "stimulating the economy".
The last time there was a massive slowdown in the economy like this was the Great Depression. The thing that eventually got the economy back up to speed again was World War II, because it required the government to singlehandedly spend absurd amounts of money on war thingys. So now it looks like it's up to the government to spend and spend and spend.
It's all so strange. I remember my grandfather once told me that, during the Depression, some communities--communities with able workers and plenty of natural resources and factories and such all around--nevertheless found themselves mysteriously idle. There were no jobs and no one could borrow money. People were starving in the streets, and yet farms were throwing away truckloads of fruits and vegetables because they couldn't find buyers for them. There was a shortage of dollar bills! So: they printed their own script. And in no time economic activity started up--people started making stuff, and trading that stuff for other stuff (using their script as the intermediary). And lo, they were busy as bees once again.
