Review

The widespread dissatisfaction with almost two decades of worldwide inflation has prompted interest in a return to some form of a gold standard. Some crucial questions must be answered, however, before such interest can be taken seriously. 

The latest sensation in the popular press and among policymakers is the discovery of “supply-side economics” and the exciting promise of supply-side policies. To provide a perspective on the current debate, this article reviews the conceptual basis for supply-side economics and examines the fundamentals of supply performance in the United States.

The Reagan administration has proposed some major changes in the federal tax structure as part of its economic plan for the early 1980s. This article discusses the effects of these tax cuts on federal revenues. 

This forward provides an overview of this conference issue and thanks those who helped prepare the conference and this issue.

Victor Canto, Douglas Joines, and Arthur Laffer develop a simple, static, one-good, two-factor general equilibrium model in which taxes on factor incomes drive a wedge between gross factor payments and net factor incomes. The authors then derive the response of factor supplies, output, and tax revenue to changes in tax rates.

Michael Evans discusses the implications of the supply-side macroeconometric model he recently developed. According to Evans, stimulating investment is a key to supply-side policy because it will both increase real growth and moderate inflation. Evans finds that investment would be significantly stimulated by reductions in tax rates, regardless of whether the tax cuts apply to corporate income, personal income, or capital gains. 

Alan Blinder notes that the proposition that the function relating tax rates to tax revenues rises to a peak and then falls is both an old idea and a noncontroversial one. The important issue raised by the Canto, Joines, Arthur Laffer paper, according to Blinder, is whether current U.S. tax rates are in the prohibitive range of the Laffer curve, implying that a decrease in tax rates would increase tax revenues.

While the political discussion in the United States has suddenly focused on the so-called “supply-side effects,” this is not a new discovery in the literature of economics. No one has denied the theoretical possibility that labor supply may depend on the real wage rate and that personal savings may depend on the real after-tax rate of interest. 

Lawrence Summers evaluates various arguments in support of policy measures to stimulate investment and then presents empirical evidence on the response of investment to an assortment of tax changes. He concludes that policies to encourage investment will result in only a small increase in the rate of economic growth over the next decade, that tax policies to stimulate investment are unlikely to moderate inflation, and that fears of insufficient capital accumulation as a source of unemployment are groundless.

Patric Hendershott evaluates the investment sector of Evans’ macroeconometric model and discusses the implications of the composition of investment for productivity growth. Hendershott concludes that Evans’ treatment of nonresidential investment and residential investment does not represent an advance relative to conventional treatments.

I find myself mostly in agreement with Lawrence H. Summers’s conclusions about the relative magnitude of the effects of capital-favoring tax changes, despite the fact that I largely disagree with the way he arrives thereat. 

Jerry Hausman presents evidence on the effects of income and payroll taxes on labor supply. Hausman emphasizes that while supply-side economics has focused attention on the labor supply and revenue effects of changes on tax rates, the correct measure of the economic cost of taxation is the deadweight loss associated with taxation.

Daniel Hamermesh presents a detailed examination of the effects of individual tax and transfer programs on the unemployment rate (specifically, on the nonaccelerating inflation rate of unemployment, NAIRU), labor supply, and employment. He argues that this microeconomic approach, building up from a study of individual programs, is likely to be more reliable than an aggregate or macroeconomic approach that ignores the programs’ complexities.

Jerry Hausman’s paper makes major contributions to both the labor supply and taxation literatures. His paper provides the most reliable labor supply estimates to date since he takes account of the nonlinear budget constraint created by federal and state income taxes. 

Daniel Hamermesh has undertaken an extensive survey of what we know about the impact of income maintenance programs on employment, unemployment, and labor force participation. Reflected in this paper is an awesome amount of research, both that of others and his own

Murray L. Weidenbaum warns that, at a time when the importance of tax incentives on economic activity is being debated, economists should not overlook the continually increasing array of government regulation that impairs economic activity.

Senator Orrin G. Hatch concludes that the establishment of a “budget process” in Congress in the mid- 7Os has not helped arrest the growth in government spending or the reliance on deficits.