deflation, economic dynamics and strange attractors

most people really only think in microeconomic terms
and most of the time that is fine, except when it is not

an example of this, is the meme that governments ought to cut expenditure when economic times are hard, by analogy with families, which react rationally to budget shortages and overexpenditure by cutting back on spending

but, as was famously elucidated by one of the few economist to become rather rich through application of his own macroeconomic theories, this only works in the linear perturbative limit
we are not in the linear perturbative limit right now
covariance terms are large and second order effects are important

if there is a correlated economic crunch, and everyone cuts back on spending, then this exacerbates the crunch and drives a deflationary spiral which breaks normal perturbative economic business cycling and drives a deep depression with large underutilization of economic capacity, low velocity of money and suppressed demand
yuck

so, to break out of it, government may, ought to, do deficit spending to prime economic activity, get some velocity on money and sustain demand; prudently so as not to trigger an inflation spiral of course
(conversely governments should paradoxically trim spending and draw down debt or build reserves during good economic times, but politicians conveniently forget that bit)

so... times get hard, and for a lot of institutions the bulk of the budget is salaries, and one economy that can be made is cut salaries across the board (if collective bargaining is weak or absent of course).

this is terrible for local economic activity, if done by large institutions. The problem is that a small cut in gross salary leads to large cuts in discretionary income.

Consider a salary scaled to $100,000 (things don't really scale linearly, but close enough and I like round numbers).
There will be taxes, of order $30,000 including payroll, federal income and local taxes.
There will be housing costs: somewhere in the $20,000-40,000 per year depending on prudence, geography, time of purchase and stupidity of local mortgage company; lets model it theoretically as $24,000 to keep numbers round.
Health insurance - depends on employee contribution, but $6,000 per year would not be atypical; and asssorted other fixed costs like car loans and student loans, property insurance, fees like water and garbage, adding to maybe another $6,000 per year, in some median sense - these are costs that cannot be suspended or postponed at short notice.

So, by construction, the gross salary leaves about 1/3 - $34,000 in discretionary spending available. Which is a decent amount, provides a well above average lifestyle in much of the US.
Now impose a 5% flat cut. This leads to maybe 4% net cut, since taxes will be lower.
But the cut in discretionary income is from $34,000 to $30,000 - or almost 12% cut.
Which is what the local economy sees in terms of reduced spending, and lower velocity of money. And don't forget some of that discretionary income goes on utilities and communication, and food, which cuts non-necessity spending even more. And of course there is saving through substitution of inferior goods.
On top of that is a psychological damper - there is an instinctive reaction to try to overcompensate and save more of income to either reduce debt or build savings.
I'm sure that is quantified in the economic literature, but anecdotally I'd estimate it as roughly doubling the loss in discretionary spending - so a 20% cut in net discretionary spending from 5% cut in gross. And maybe 40% cut in spending on non-essentials.
And, the lower gross salary also lead to a 1% smaller gross amount in taxes paid, or a 3% frational cut in tax income.

This is why a stimulus package is important.
As an economic perturbation, a small percentage cut in individual income is negligible.
As a correlated macroeconomic trend it is a catastrophic phenomenon that can rapidly go non-linear and dump the economy into a different meta-stable state with lower sustained velocity of money and long term suppressed demand.

Crudely speaking, business cycles can be thought of as small oscillations about some stable point, with the stable point possibly having some underlying secular trend tied to population growth, productivity improvements and technology multipliers;
depressions happen when the oscillations exit the local attractor basin and seek a new, lower, stable state to oscillate about - such clearly exist, with a ground state consisting of zero economic acitvity and everybody dead, to within a rounding error.
Stimulus is trying to apply short term secular forcing to pop the economic level back into the meta-stable high state, and resume small amplitude stable oscillations about the high state equilibrium, which requires just enough damping to avoid overshooting the economy into a different inflation driven unstable state.

Such times are rather unpleasant for a lot of people.
That is where we are headed unless the political system retains enough intelligence, capability and negative feedback to act, and quickly.