http://en.wikipedia.org/wiki/Economic_Recovery_Tax_Act_of_1981
Critics claim the tax cuts worsened the deficits in the budget of the United States government. Reagan supporters credit them with helping the 1980s economic expansion[3] that eventually lowered the deficits. Supporters of the tax cuts also argue, using the Laffer curve, that the tax cuts increased government revenue. This is hotly disputed—critics contend that, although government income tax receipts did rise, it was due to economic growth not caused by the tax cuts, and would have risen more if the tax cuts had not occurred. Supporters see the growth as caused by the tax cuts. Controversy still remains as to whether the tax cuts of 1981 increased revenues.
“The ‘Laffer Curve’—appropriately named.”
—Comment by one of my long-ago econ professors.
The Reagan tax cuts were demand-side, despite all the “supply-side” (warmed-over “Say’s Law” ) rhetoric. However, businesses did not translate tax-cuts into increased investment in physical capital. Investment decisions by firms are demand-driven. To think that firms would increase productive capacity based on tax cuts alone—without regard to predicted demand for their products—is to assume that the managers of such firms act irrationally (hardly an assumption touted by the supply-siders).
Originally posted by AThousandYoungIn general, the production of luxury goods takes less labour per $ of production than collective (government-funded) goods. Furthermore, luxury goods tend to require more imports than collective goods. So shifting production away from collective goods towards luxury goods will lower the amount of jobs available.
This Act sent the nation into 10.8% unemployment, worse than the current recession. What went so horribly wrong?
Originally posted by AThousandYoungAt the time, Fed Chairman Volcker was busy raising interest rates to sky high levels to get rid of the inflation problem. It did lead to a recession in the short-run, but over the long run, his idea worked.
This Act sent the nation into 10.8% unemployment, worse than the current recession. What went so horribly wrong?
Originally posted by AThousandYoungok, what was the mechanism?
It took a fairly steady 7.2% unemployment rate and launched it to 10.8% in a little more than a year. Look at the dramatic change right at that time:
http://www.miseryindex.us/urbymonth.asp
do you fall on the ground trembling at every solar eclipse, crying "Woe! Woe!"?