The theory of the causes of unemployment, interest rates, and inflation falls under the subject known as macroeconomics. Macroeconomics is like astrology or Freudian psychology, in that a lot of people used to believe it, and a lot of people still do, but many with a scientific bent tend to stay away from it.
Or maybe not:
My current view is that what we call "cyclical" unemployment is in fact a severe version of structural and/or frictional unemployment. During the Great Depression, many government policies, such as the National Recovery Administration, served mainly to create structural unemployment. There also was an unusually high level of frictional unemployment, as the spread of motorized road transport greatly altered the efficient structure of production.
Given this theoretical outlook, I would be inclined not to forecast a severe recession in 2008. There have not been any major developments that would have an impact on structural unemployment. Frictional unemployment should not be extensive, either. The housing construction industry needs to be smaller than it was two years ago, but much of that contraction has already taken place. Higher oil prices will cause some shifts in our mix of goods and services, but these do not need to be terribly drastic or terribly rapid.
But I may be wrong. There is a chance that the Keynesian story is correct. If unemployment were to spike up toward 10 percent, I would be very sympathetic to attempting Keynesian remedies, including monetary expansion and deficit spending. But for now, the main "crisis" motivating "stimulus" is the fact that this is an election year.
I'll be awfully happy when complexity theory is up to the task of explaining the business cycle.
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