IV. Supply-side economics originated because of stagflation
three key problems causing slow
1. High taxes are a fundamental problem, especially high marginal
a. They decrease incentive to work and save.
b. They cause cost-push inflation.
High transfer payments lower worker incentives.
Government regulation is expensive and counterproductive.
B. This would
noninflationary economic growth by
C. Here is one estimate of the cost of government
D. For the cost of regulation visit
of Advocacy, U.S. SBA, The Impact
Unit 4 Review Reagonomics
stated high taxes increased
government regulation, lowered
A. President Reagan
attempted to eliminate the causes of stagflation
supply-side economic policies.
B. These were the key ingredients of President Reagan's
1. Supply-side policies
a. Lower government expenditures on social programs
b. Reduce government regulation
c. Cut personal and corporate taxes, especially high marginal
2. Monetary policy:
President Reagan did not discourage the
Federal Reserve from their continued attempt to lower inflation
with a tight money policy.
C. Keynesian economics predicted lower taxes would
already high rate
D. Many predicted high deficits, economist Arthur
1. Laffer Curve
2. Lowering the tax rate
from X to X' would increase tax receipts.
a. Lower tax rate would lessen avoidance of taxes.
transfer payments due to tougher welfare policies
would result in more people working and paying taxes.
c. Overall effect of the program would be higher productivity.
This would increase AS causing GDP and tax revenue to
Laffer Curve- Economic Theories in 60 seconds
Liberal Richard Wolff On Reaganomics
Unit V. Review cut taxes and
regulations and he let the FED
kill inflation resulting
the first Great Recession in the early 1980's.
VI. Effectiveness of Reagan's
A. Contractionary effects of tight money came
earlier than the
effects of a tax
cut and the result was two recessions from
B. Short-term results were good.
1. Inflation dropped
dramatically although much of the credit
must go to the
Federal Reserve which began tightening in
eventually came down.
3. The longest peacetime
expansion in history resulted although
out that the large increase in military spending
during the early Reagan
years made for high peacetime
C. Supply-side effects may have been negligible.
1. Aggregate supply moved
little as productivity increases were
2. Saving went down
(though much of the drop in saving had
causes as baby boomers borrowed to furnish
homes, many of which
were investment type multifamily dwellings.
D. Some results seemed bad,
especially at the time.
1. Large federal deficit resulted
(in part because inflation came
down much faster
expected lowering tax revenues).
Many felt these
would compete with (crowd out)
private investment for
2. The trade deficit increased.
a. The problem began when an increase in borrowing by
the federal government
caused high interest rates.
b. High interest rates combined with a drop in inflation and
recovery making U.S. investments attractive
c. The resulting high foreign
demand for the dollar pushed
its value up making
imports cheaper and exports
E. Opinions differ as to the overall
1. Some think the recovery was a
typical Keynesian demand-side
phenomenon (i.e., deficit
Trickle Down Economics
2. Supply-side economists point to
a number of improved conditions.
increase in manufacturing productivity indicates supply-side
b. Comparing saving rates for countries is
procedures are used to measure saving.
When Reagan left office, the average United States
earned about 25%
more than the average citizen of Germany
1. Data based upon purchasing power parity and not the
rate of the dollar.
2. Critics point to a widening income
gap between rich and
3. Other things happened that affected
Industry was deregulated.
Property rules were rewritten.
Pressure was put on the Soviet Union by enhancing the
military buildup started
Striking air traffic controllers were fired.
Social Security funding was enhanced with benefit cuts and tax
government increased dramatically funding semiconductor
Who caused what?
Review Unit VI.
It worked or was it large Keynesian deficits?
VII. The future = Savings + Investment + Risk Taking = Productivity
Review of government action to stop recessions by NYT
Supply-side Versus Keynesian Economics 8/18/14
Note: Material supplied by
Editors Note: The great
inflation of the 1970's
made the CPI a less valuable inappropriate measure
for calculating wage growth .
Recent tax reforms
Recovery Tax Act of 1981
Cut personal tax rates by 25% over three
Reduced capital gains tax rate below
that paid on ordinary income
Allowed for a more rapid write-off of
capital (accelerated depreciation)
Tax Cuts Don't Pay for Themselves 8/30/17
2. Tax Reform
Act of 1986
Lowered top rates from 50% to 28%
Increased the tax base by doing away
with many tax loopholes
3. Budget Accord of
Increased the top tax rate to 31%.
Increased regressive excise taxes.
4. Tax Increases of 1990 and 1993
a. Taxes were increased to
b. Hope was a lower
lower interest rates.
c. Interest rates came down,
things happened to
strong economy, and the
deficit (ignoring the long-term
security liability) disappeared.
Growth and Tax Relief
Reconciliation Act of 2001 and
highest income tax rates: the 28,
31, and 36 percent rates
fall by 3
points, while the 39.6
percent rate falls
to 35 percent.
new 10 percent tax bracket is
carved out of the 15 percent
Although the cuts in the highest
income tax rates phase in slowly,
percent bracket is available
d. The tax act also expands the child
credit and the Earned
reduces marriage penalties
increases subsides for education
and retirement saving
repeals the limitations on itemized
deductions and phase
provides temporary, limited relief
from the alternative
complex law that was
to prevent aggressive
tax sheltering but primarily
large families or
residents of states
with high income taxes.
tax act reduced the estate tax
and generation skipping tax between
2001 and 2009
and repeals them in
Different views of the act
2001 Tax Cut
an in depth look.
Analysis of Final Bush Tax Plan
2001 Tax Cut Made a Difference
most conservatives feel 5
Kennedy Reagan, Bush
Bush Administration Assessment
Republican Tax Cut Myth
6. Jobs and Growth Tax Relief Reconciliation
Act of 2003
a. Lowered long term (over one year)
taxes from 20% to 5%
for those in the lowest two brackets
jointly in 2008)
and 15% in higher brackets.
b. Most rate reductions would expire if
c. Primary residence is excluded to
jointly) if held two of the five years
prior to the sale.