a relatively new economic condition that confounded the expectations of a federal government operating since the New Deal under the influence of the economic theories developed by John Maynard Keynes. According to Keynesian analysis, the federal government could stabilize and strengthen the national economy by controlling money supply and employment via the tool of government spending. The formula was simple: for inflation, cut back government spending - for unemployment, increase it. But the 1970s brought simultaneous inflation and stagnation - "stagflation" - which seemingly defied the conventional expectations: despite federal intervention, joblessness increased, inflation increased and the economic stagnated. It was Ronald Reagan's promise to rectify that situation by applying a new set of principles - a "Supply Side" theory of economics based upon a theorem developed by Arthur Laffer.
Laffer's theorem - described in a graph known popularly as the "Laffer Curve" - summarized the basic principles of the free market/government relationship. Simplified, the Laffer Curve indicates that there is an optimal point of taxation beyond which taxes actually serve to decrease economic activity and, thus, deprive the government of revenue. It is a very old formula, actually, with many zeniths, nadirs and asterisks indicating "other factors involved." Still, it was the simplified version, drawn on a napkin, that first struck the imagination of political leaders (Schaller 26-27; Stockman 31-34; Wills 364-365). In terms of Ronald Reagan and his conservative leanings, the "Supply Side" interpretation of Laffer's theorem held great appeal: by reducing government involvement in the economy - via lowered taxes, deregulation, and spending cuts - stagflation could be cured by the revitalized economic activity that would ensue. Encouraged by Congressman Jack Kemp (R-NY) and Senator William Roth (R-Delaware), Reagan brought into his new Adm...