Chapter 16
Stagflation and Supply-Side Economic 

I. Understanding Stagflation

II. Stagflation of the 1970's

III. The Misery Index

IV. Stagflation Created Supply-side Economics

V. Reaganomics

VI. Effectiveness

VII. Recent tax reforms

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One-Page Studies

Post Pandemic Inflation

U.S. Economic Normality 1945-2015

Uncertanty of Capitalism

GDP Usefulness

Distributing GDP

Growing GDP

Test Review Notes Chapters 14-18


Lecture Notes

I. Stagflation
    A. Keynesian interpretation
        1. Inflation and unemployment change in opposite directions
        2. Correlation existed for four decades and was depicted by
            English economist Edmund Phelps in what became known
            as the Phillips Curve.
            a. He depicted an inverse relationship between changes in wages
                 and changes in unemployment.
            b. Today the Curve is used to depict changes in consumer prices
                and unemployment.
            c. The Curve points out the inconsistency of both low unemployment
                and low inflation as economic goals. 
            d. A trade-off between the two is required because the factors necessary
                for low unemployment cause high inflation and vice versa.
      3. The Phillips Curve Key Concepts in 60 sec video

Political Economy Stuff

 

Getting Better Since 2010
B. Stagflation Over Three Decades 1970's to 1990's
     1. High unemployment and high inflation during the 1970's was not easily
         explainable with Keynesian theory which emphasized aggregate demand.
     2. High unemployment caused by low aggregate demand typically lowering inflation.
     3. The Phillips Curve had moved to the right during the 1970's as both inflation and
          unemployment increased.
          a. Prices increased primarily because AS had decreased (shifted left).
          b. Unemployment increased because of slow growth in aggregate demand.

  

C. Has Phillips Curve Flattens 10/19/14
      1. Curve explained 76 percent of US inflation during the 60's.
     2. Curve explained 71 percent of US inflation during the 2000 to 2015.
     3. Curve explained 0 percent of US inflation during the 70's, 80's and 90's..

 

U +  

 I =

 MI   
2001 4.76 2.83 7.59
2002 5.78 1.59 7.37
2003 5.99 2.27 8.26
2004 5.53 2.68 8.21
2005 5.08 3.39 8.48
2006 4.63 3.24 7.87
2007 4.61 2.85 7.46
2008 5.76 3.85 9.61
2009 9.26 -0.34 8.29
2010 9.64 1.64 11.29

Misery index from - Wikipedia
 has interesting information

See  Misery Index

Misery Index by Year

(1948 to 2010)

Unemployment Rate
By Year (1948 to 2010)

Inflation Rate By Year (1948 to 2010)

Will the Real Phillips Curve Stand Up  04/04/11

II. The origin of stagflation during the 1970's
     A. OPEC monopolized oil prices.
     B. Inflationary psychology, the feeling that prices would always increase substantially,
          resulted because of the high inflation during the Vietnam War and OPEC price fixing.
          To some degree, society acquiesced to inflation.
     C. Wage-price controls put on in the early 1970's to artificially limit the Vietnam War
          inflation were lifted. Once these artificial constraints to market activity were
          removed, prices increased dramatically.
     D. Productivity declined because of an influx of inexperienced workers (baby
          boomers and women) and the transformation of our economy from a
          manufacturing base (with its high productivity) to a more service-oriented
          base with its low productivity.
   E. Check out AP Macroeconomics Review Materials!

Unit II Review Vietnam War deficits, two oil embargos and
low productivity led to low growth with inflation.

III. The misery index, which equals the unemployment rate plus the inflation rate, is
     an attempt to measure overall economic well-being. (Data from 1991 and 2000
     Economic Report of the President, 1992 Statistical Abstract of U.S., Economic 
     Trends published by the Federal Reserve Bank of Cleveland and Federal Reserve
     Estimates. Data was averaged by the author with the 1940's average taken from
     years 1941-1950, etc.

Unit III Review Unemployment + inflation up from 7.5% in 1960's,
 to14.3% in 1970's,
11.8% in 1980's and a more normal
 8.7% in 1990's. For 8/16 it was 5.7%.

OPEC Caused Gas Lines

 

IV. Supply-side economics originated because of stagflation
      A. Supply-side economics described three key problems causing slow economic growth.
          1. High taxes are a fundamental problem, especially high marginal rates.
               a. They decrease incentive to work and save.
               b. They cause cost-push inflation.
          2. High transfer payments lower worker incentives.
          3. Government regulation is expensive and counterproductive.
      B. This would stimulate high noninflationary economic growth by increasing AS. 
      C. Here is one estimate of the cost of government regulation.
      D. For the cost of regulation visit 
      Office of Advocacy, U.S. SBA, The Impact

Unit 4 Review Reagonomics stated high taxes increased
government regulation, lowered productivity and investment.

V. Reaganomics
      A. President Reagan attempted to eliminate the causes of stagflation
          by instituting supply-side economic policies.
     B. These were the key ingredients of President Reagan's economic policy.
          1. Supply-side policies
              a. Lower government expenditures on social programs
              b. Reduce government regulation 
              c. Cut personal and corporate taxes, especially high marginal tax rates
          2. Monetary policy: President Reagan did not discourage the Federal Reserve from
              their continued attempt to lower inflation with a tight money policy.
              Everyone loves Paul Volcker. Everyone is wrong.

 


     C. Keynesian economics predicted lower taxes would increase the already high rate of inflation.
     D. Many predicted high deficits but economist Arthur Laffer disagreed.
          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.
              b. Fewer 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 increase.


           3. The Laffer Curve- Economic Theories in 60 seconds

       E. Liberal Richard Wolff On Reaganomics

Unit V. Review  cut taxes and regulations and he let the FED
kill inflation resulting in the first Great Recession in the early 1980's.

 

VI. Effectiveness of Reagan's Supply-Side Economics
      A. Contraction effects of tight money came earlier than the expansionary effects of a tax cu
         t and the result was two recessions from 1980-83.
      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 1979.
          2. Unemployment eventually came down.
          3. The longest peacetime expansion in history resulted although critics point out that
              the large increase in military spending during the early Reagan years made for
              high peacetime defense budgets.
     C. Supply-side effects may have been negligible.
          1. Aggregate supply moved little as productivity increases were small. 
          2. Saving went down (though much of the drop in saving had demographic 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 than
              expected lowering tax revenues).
              Many felt these deficits would compete with (crowd out) private investment for many years.
         2. The trade deficit increased. 
              a. The problem began when an increase in borrowing by businesses, individuals,
                   and the federal government caused high interest rates. 
              b. High interest rates combined with a drop in inflation and an economic recovery making
                  U.S. investments attractive
              c. The resulting high foreign demand for the dollar pushed its value up making imports
                  cheaper and exports more expensive.
    E. Opinions differ as to the overall result.
        1. Some think the recovery was a typical Keynesian demand-side
            phenomenon (i.e., deficit spending) See Trickle Down Economics
        2. Supply-side economists point to a number of improved conditions.
            a. The increase in manufacturing productivity indicates supply-side economics worked.
            b. Comparing saving rates for countries is difficult as different accounting procedures
                 are used to measure saving.
            c. When Reagan left office, the average United States citizen  earned about 25%
                 more than the average citizen of Germany and Japan. 
                1. Data based upon purchasing power parity, not the international exchange rate of the dollar. 
                2. Critics point to a widening income gap between rich and poor.
         3. Other things happened that affected economic activity.    
             a. Industry was deregulated. 
             b. Intellectual Property rules were rewritten.
             c. Pressure on the Soviet Union by enhancing the military buildup started by President Carter.
             d. Striking air traffic controllers were fired.
             e. Social Security funding was enhanced with benefit cuts and tax increases. 
             f. The government increased dramatically funding semiconductor and network research.
             g. Who caused what?

 

         

 

Reagan and Bush Cut the Safety Net

He Cut Regulation

Editor's Question Will this Lowers Cost go to Profits, Wages, Both           
 Source

Reagan Started a Trend
Rates on Taxable Income Down

Problems: Many Americans Avoid Taxes

 

Significant Regulations Completed
by Presidential Year graph

 

Stephen Moore wrote as a member of the Wall Street Journal editorial board:

"... Reagan chopped the highest personal income tax rate from the confiscatory 70% rate that he inherited when he entered office to 28% when he left office and the resulting economic burst caused federal tax receipts to almost precisely double: from $517 billion to $1,032 billion."

"This is wrong. Partly that’s because Moore didn’t even use figures from Reagan’s first and last years in office. But mainly it’s because he didn’t account for inflation or population growth. Once you do that, it turns out that federal tax receipts actually went up 14 percent on Reagan’s watch, or 1.7 percent per year." See

Bush tax cuts Extension by ObamaCongress acts to delay 2014 Medicare Physician Fee

Editors Note: The great inflation of the 1970's
 made the CPI a less valuable inappropriate measure
 for calculating wage growth .

 Image result for Supply Side Cartoons

VII. Recent tax reforms
     1. Economic Recovery Tax Act of 1981
         a. Cut personal tax rates by 25% over three years
         b. Reduced capital gains tax rate below that paid on ordinary income
         c. Allowed for a more rapid write-off of capital (accelerated depreciation)
         d. Tax Cuts Don't Pay for Themselves 8/30/17
     2. Tax Reform Act of 1986
          a. Lowered top rates from 50% to 28%
          b. Increased the tax base by doing away with many tax loopholes
     3. Budget Accord of 1990
          a. Increased the top tax rate to 31%.
          b. Increased regressive excise taxes.
     4. Tax Increases of 1990 and 1993
           a. Taxes were increased to lower the deficit.
          b. Hope was a lower deficit would lower interest rates.
          c. Interest rates came down, other things happened to foster a
              strong economy, and the deficit (ignoring the long-term social
              security liability) disappeared. 
     5. Economic Growth &Tax Relief Reconciliation Act-2001 and the 2003 
          a. highest income tax rates: the 28, 31, and 36 percent rates fall by 3
              percentage points, while the 39.6 percent rate falls to 35 percent.
          b. A new 10 percent tax bracket is carved out of the 15 percent bracket.
          c. Although the cuts in the highest income tax rates phase in slowly,
              the 0 percent bracket is available immediately.
          d. Tax act also expands the child credit and Earned Income Tax Credit
          e. reduces marriage penalties
          f. increases subsides for education and retirement saving
          g. repeals the limitations on itemized deductions and phase
              outs of personal exemptions
          h. provides temporary, limited relief from alternative minimum tax,
              a complex law that was designed to prevent aggressive tax
              sheltering but primarily affects large families or residents of
              states with high income taxes.
          i. The tax act reduced the estate tax and generation skipping tax between
             2001 and 2009 and repeals them in 2010.
          j. Different views of the act
             1) 2001 Tax Cut an in depth look.
             2) Analysis of Final Bush Tax Plan
             3) 2001 Tax Cut Made a Difference
         is what most  conservatives fetl 5 years later.
             4) Kennedy Reagan, Bush tax-cuts
             5) Bush Administration Assessment
             6) Republican Tax Cut Myth 4/28/17

     6. Jobs and Growth Tax Relief Reconciliation Act of 2003
       a. Lowered long term (over one year) capital gains taxes from 20% to 5%
               for those in the lowest two brackets (Under $65,100 for married
               filing jointly in 2008) and 15% in higher brackets.
     b. Most rate reductions would expire if not extended by 2010.
        c. Primary residence is excluded to $250,000 ($500,000 married filing
            jointly) if held two of the five years prior to the sale.

      Review Unit VII. Unit VII. It worked or was it large Keynesian deficits? 

VIII. The future = Savings + Investment + Risk Taking = Productivity

I.X Readings
       A. Historic Review of government action to stop recessions by NYT
       B. Supply-side Versus Keynesian Economics 8/18/14

 

 
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