As I would expect from you, an intelligent response, and one in which (I think) you grasp the difference between the supply side approach and Keynesianism. I will try to be brief: the issue is marginal rates. People work to get raises and promotions. If the real value of the raise or promotion is greater, they will work harder. If it is less, they will work less. If I know that I am going to get $750 for something, I am more likely to take the job than if I am going to get $500. Suppose the nominal fee is $1000. If the marginal tax on the next piece is 50%, I am less likely to take it on than if the marginal tax is 25%. It is very simple: If you want more of something, lower the costs. If you want less, raise the costs. High marginal rates were a drag on productivity.
Of course it is anticipated that demand will increase to absorb supply. That is true with any new product. However, before the product is introduced, the demand does not exist. Keynesianism stimulates demand, and production follows to catch up, which produces a higher rate of inflation. Lafferism stimulates production, and demand increases to catch up, as improvements and new products are introduced, and prices are reduced to sell more units.
Is it impossible to prove which was in operation? Well, it depends on which model more plausibly fits what happened, right? The preponderance of evidence is in favor of Lafferism......... |
