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Economic Theory

While sitting in KFC, you can also see macroeconomic forces at work.
Inside the restaurant, some young men are sitting around talking and
looking at the newspaper. It is early afternoon on a weekday, yet these
individuals are not working. Like many other workers in France and

around the world, they recently lost their jobs. Across the street, there are
other signs that the economy is not healthy: some storefronts are boarded

up because many businesses have recently been forced to close down.
You know from your economics class that the unemployed workers
and closed-down businesses are the visible signs of the global downturn,
or recession that began around the middle of 2008. In a recession, several

things typically happen. One is that the total production of goods and
services in a country decreases. In many countries, the total value of all the
goods and services produced was lower in 2008 than it was in 2007. A

second typical feature of a recession is that some people lose their jobs,
and those who do not have jobs find it more difficult to find new
employment. And a third feature of most recessions is that those who do
still have jobs are unlikely to see big increases in their wages or salaries.

These recessionary features are interconnected. Because people have lower
income and perhaps because they are nervous about the future, they tend to
spend less. And because firms are finding it harder to sell their products,

they are less likely to invest in building new factories. And when fewer
factories are being built, there are fewer jobs available both for those who
build factories and for those who work in them.
Down the street from KFC, a large construction project is visible. An

old road and a nearby bridge are in the process of being replaced. The
French government finances projects such as these as a way to provide

more jobs and help the economy recover from the recession. The
government has to finance this spending somehow.
One way that governments obtain income is by taxing people. KFC
customers who have jobs pay taxes on their income. KFC pays taxes on its

profits. And customers pay taxes when they buy their food. Unfortunately
for the government, higher taxes mean that people and firms have less
income to spend. But to help the economy out of a recession, the

government would prefer people to spend more. Indeed, another response
to a recession is to reduce taxes. In the face of the recession, the Obama
administration in the United States passed a stimulus bill that both
increased government spending and reduced taxes. Before you studied

macroeconomics, this would have seemed quite mysterious. If the
government is taking in less tax income, how is it able to increase

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