On the surface,
this supply side approach looked very similar to the kind of Keynesian tax
cuts that had been prescribed around the globe in decades past.
[SOUND] However, the Reaganite supply siders viewed such tax cuts,
not as a Keynesian-style aggregate demand stimulus, but
rather from a very different behavioral and aggregate supply perspective.
Indeed, unlike the Keynesians, the supply siders did not agree.
Such a tax cut would necessarily cause inflation.
Instead, the supply siders believe that people would
actually work much harder and invest much more if they simply
were allowed to keep more of the fruits of their labor.
The end result would be to increase the amount of goods and services the economy
could actually produce by pushing out the economy supply curve.
As illustrated in this by now familiar figure.
You can see as the aggregate supply curve shifts outward from AS to AS prime,
with the drop in the tax and regulatory burdens imposed on businesses.
That real GDP increases from Q to Q prime, and
price actually falls from P to P prime.
Do you see now why this kind of macroeconomic approach is
called supply side economics?
Why it offers the promise, a very sweet macroeconomic
cure to both recession and inflation?
[MUSIC]
In fact, this supply side philosophy is embodied in one of the few formal
theoretical constructs of supply side economics, the so-called Laffer curve.
This Laffer curve named, after American economist
Arthur Laffer, is illustrated in this figure.