For the economy to work, individuals need jobs and businesses need orders or demand for goods and service to keep them going.
For every transaction for goods and services there has to be a buyer and a seller.
If there is no spending there will be no buying. There will be no business or jobs.
Spending is vital to a healthy economy.
In a recession, spending from the private sector drops for variety reason. Businesses suffer.
Individuals get laid off. They in turn cannot spend for even the basic goods and services. This creates hardship like hunger and homelessness. Businesses then would not want to invest because there is no demand for their goods and services. This vicious cycle get worse and worse. Unemployment gets even worse. The economy is now bad.
Even the tax-base and government revenue to support essential services drops.
The federal government can drop interest rates to make borrowing more attractive to boost demand of goods and services. This can help in marginal situations.
The biggest help however is what economist calls the “injection effect” or stimulus. That is government has to start deficit spending. This is one of the few times deficit spending is justifiable. Why deficit spending, because raising taxes to prevent deficit will make thing worse. When government spending starts the demand for jobs and services go up. Government can spending on infrastructure projects like roads, bridge, utilities, communication networks, education, and even defense projects.
This creates jobs instantly. Soon demand for good and services picks up.
More people start to shop for houses, cars, and furniture. Demand increases for things like pizzas, laundry services. Everybody has more opportunities to make money and get out of financial hardships.
This creates a positive ripple effect. With low interest rates, low taxes and high demand for goods and services, businesses tend to invest even more creating even more jobs and more demand goods and services.
The stimulus package is a temporary measure to jump-start the economy. It must be big enough to make the impact.
When the recession ends, government can stop deficit spending. The tax revenues would naturally increase to overcome the deficit. Then government has the opportunity to reduce the deficit. Taxes and interest rates can be re-adjusted carefully as needed to regulate the economy.