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Law and Macroeconomics: The Law and Economics of Recessions

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In this Article, I offer a macroeconomic perspective on law that reshapes the microeconomic perspective that currently dominates law and economics. I argue that, first, the economy works one way in ordinary economic conditions, in which supply capacity determines output, and a different way when interest rates are zero. At the “zero lower bound” on short-term interest rates, spending demand determines output. Second, because the economy functions differently at the zero lower bound, a law causes one set of effects at the zero lower bound and a different set of effects at other times. And third, because the same law has different effects at different times, law should be different at the zero lower bound than in other times. Specifically, law should do more to promote spending when the macro-economy is characterized by zero interest rates than in ordinary economic conditions. Because the stakes of recessions in which interest rates hit the zero lower bound are so high—for instance, tens of trillions of dollars in lost output, countless lives impaired, and a much higher likelihood of political upheavals like Donald Trump’s ascendancy to the U.S. Presidency—I argue that the (significant) costs associated with introducing macroeconomics into law are worth bearing.