Implementation of Supply Side Fiscal Policy

The Keynesian model was based on the premise that, until the capacity constraint is reached within an economy, supply remains passive.3 In this model, supply always reacts to the stimulus of aggregate demand.4 Thus, in the Keynesian model, there is a link between a fullemployment deficit or surplus, and aggregate demand.5 Within this model, thus, fiscal policy

1J. D. Gwartney, R. Stroup, and A. H. Studenmund, Economics, 5th ed. (New York: Academic Press, 1989), 297.

2R. B. Ekelund, Jr., and R. F. Hebert, A History of Economic Method, 3rd ed. (New York: McGrawHill Book Company, 1988), 430445.

3Gwartney, Stroup, and Studenmund, 176183.

2attempts to stimulate demand, as a means of promoting economic growth.

In the late1970s, the Keynesian model appeared to be losing its ability to accurate explain economic events, as the phenomenon of stagflation developed. Supplyside fiscalists stepped into this apparent breech. The supplyside fiscalists emphasized the interrelationship between governmental tax and expenditure policy, and aggregate supply.6 It was the contention of the supplyside fiscalists that relative price changes induced through governmental tax and expenditure policy would generate production incentives; thereby promoting economic growth. For fiscal policy, the supplysiders argued for tax reductions, and governmental spending reductions.

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almost unbelievable magnitude. These outcomes are partly the result of the implementation of supplyside fiscal policies at an inappropriate time, but are largely to result of the borrowing of bits and pieces of supplyside fiscal theory by the Reagan administration, which then added those bits and pieces Keynesianstyle pump priming, and created alarming longterm consequences for the economy. The Federal Budget Deficit When Ronald Reagan campaigned for the presidency in 1980, one of his most consistent themes was that of the economic evils of the irresponsibly high federal budget deficits attributed to the Carter administration. Candidate Reagan pledged to restore economic sanity by, among other things, eliminating federal budget deficits by the end of the third year of his first term as president. During the four fiscal years in which Jimmy Carter was president (fiscal years 19771980), the federal budget deficits totaled $226.8 billion. This cumulative Carter administration deficit followed a cumulative deficit of $144.1 billion in the 19731976 fiscal year period of the Nixon/Ford presidency.7 __________ 7Council of Economic Advisers, Economic Report of the President 1984 (Washington: U.S. Government Pr
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