The Supply-Side Revolution: 20 Years Later

The U.S. suffered three increasingly painful episodes of "stagflation" in 1970, 1974-75 and 1980-82. That nasty combination of inflation and recession baffled mainstream macroeconomics. Recessions were supposed to be fixed by "stimulating demand," while inflation supposedly required the opposite remedy. Since it was obviously impossible to stimulate and dampen demand at the same time, many economists argued that we should simply tolerate the lesser evil of inflation, or adopt wage-price controls, or use higher tax rates to fight inflation and lower interest rates to fight recession.

The result of following this sort of advice for 1968 to 1980 was that inflation moved higher and higher, while recessions became longer and deeper. These were not accidents of fate, but the predictable consequence of the following misguided economic theories.