The Conservative Counterrevolution

The New American Economy (New York: Palgrave Macmillan, 2009)

28 Pages Posted: 23 Sep 2016

Date Written: September 17, 2016

Abstract

Keynesian economics dominated macroeconomic thinking for 25 years after World War II. But conservatives based at the University of Chicago mounted a counterrevolution. Monetarists led by Milton Friedman were first to attack, blaming the Keynesians for the inflation that began in the 1960s and got much worse in the 1970s. But the monetarists lacked a theory of growth. This was supplied by Robert Mundell, who argued that inflation interacted with the tax system to raise effective tax rates on work, saving and investment. He advocated tight money plus tax cuts to conquer stagflation. The Keynesians thought this was like stepping on a car's brakes and accelerator at the same time. But when the Reagan administration cut taxes and the Fed tightened monetary policy, inflation came down much more quickly than mainstream economists thought possible, and economic growth rose sharply after the relatively brief 1981-82 recession. Ironically, the budget deficits of the 1980s resulted significantly from inflation coming down more rapidly than expected, thus depriving the government of revenue anticipated from bracket-creep.

Keywords: rt Mundell, Milton Friedman, Arthur Laffer, Jude Wanniski, monetarism, supply-side evconomics

JEL Classification: B22, E32, E52, E58, E59, E62, E65, N20

Suggested Citation

Bartlett, Bruce, The Conservative Counterrevolution (September 17, 2016). The New American Economy (New York: Palgrave Macmillan, 2009), Available at SSRN: https://ssrn.com/abstract=2840230 or http://dx.doi.org/10.2139/ssrn.2840230

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