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Monday, May 15, 2006

A Tale of Two Theories: Supply Side and Demand Side Economics

It was the best of times. It was the worst of times. It was the era of low taxes. It was the age of high deficits. Prices were up. Wages were down. Oil and gold soared. Housing and big cars cratered. Foreign powers threatened. Foreign currencies beckoned. Some saw a new Jerusalem in the nation’s future. Others saw only the glaucoma of gluttonous greed. It was the summer of economic hope. It was the winter of economic despair.

In short, the early eighties were an economic time not unlike our own—a time that scared the Dickens out of most sober observers.

The common thread that unites the two times is Supply Side Economics. In the eighties it was new and promising. In the aughts it is recycled and damaging. In both eras, it stood against Demand Side Economics in its prescription for how to manage the economy. But it is in their outcomes that the two theories present such stark and measurable differences.

In the late seventies, the U.S. economy was falling to pieces. Johnson’s Great Society programs and the Vietnam War had produced enormous inflationary pressures. But these were only the beginning. In 1973, Arab oil sheikdoms tripled the price of oil and in 1978, they tripled it again. Inflation soared, interest rates skyrocketed, and the economy tanked.

Higher prices cut into corporate profits, forcing employers to cut back production. The higher prices also reduced the purchasing power of workers, causing a slowdown in the economy. It was the worst of both worlds: a stagnant economy with rampant inflation. Economists called it “stagflation.” They were at a loss for a cure.
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read the rest...A Tale of Two Theories: Supply Side and Demand Side Economics

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