Supply Side Economics

Aug 15, 2022 | Finconomics 101, No Bull Economics

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Summary: Back in the day, Reagan rejected the premise of the Phillip’s curve which stated that the higher the unemployment rate, the lower the inflation rate. This is important because we hear economists currently speaking about the same trade-off today. In other words, they claim that we must increase unemployment to deal with the current inflationary spiral. According to this thinking, the fewer people working, the less demand for goods and services (translating into lower prices).

Instead, Reagan promoted the idea of “supply-side economics” which has been badly maligned by those sticking with the erroneous Phillip’s Curve. Supply-siders make a very common-sense claim: if you reduce the tax rate for the most productive people (i.e. highest paid), you provide them an incentive to produce more, thus increasing supply and lowering prices.

In other words, Reagan figured out that the key to eliminating inflation is not to destroy demand but to provide an incentive to increase supply by lowering tax rates.

the Phillip's Curve Graph

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