I covered it once here in my depression blog, but I will walk through another example below:
-Ted owns a shoe store
-Molly buys one pair of shoes per month from Ted
-With the revenue from Molly Ted pays his employee Sara
-Ted also pays taxes based on revenue
-Ted's taxes help fund local teacher's salaries
-Molly stops buying shoes because of the recession
-Ted lays off Sara because he can't afford to pay her
-The school lays off some teachers because of decrease in tax base
-In turn Sara and those teachers, like Molly, spend less on "shoes" too
That's a vicious cycle folks. Now on a micro level I'm a big fan of financial prudence, and obviously people need to adjust their budgets as they see fit. However, from a macro level you can easily see how this vicious cycle is more or less self-fulfilling in that everyone cutting back will only hasten layoffs and further cause everyone to cut back more...especially when hyperbolized by our jouranlism friends.
The good news is that there are smart people who do get it. Who, through history and basic logic, understand this cycle and its component parts and are being as proactive as they can in addresing it. NO ONE (latin for not a single person) knows exactly what needs to be done to lessen the impact of the recession, including the changeman himself. If you talk to 100 people in the know you are sure to get 150 different hypotheses on exactly what needs to happen. But the fact that smart, educated and well studied people have cogent and well thought out action plans increases my sanguinity.
