Budget Deficits, Tax Incentives and Inflation: A Surprising Lesson From The 1983-84 Recovery [report]

Martin Feldstein, Douglas Elmendorf
1989 unpublished
In November 1982, the unemployment rate reached 10.6 percent, the trough of the worst recession of the postwar period. During the next twenty-four months, the unemployment rate fell by 3.5 percentage points and real GNP expanded by 11.9 percent. This stronger-thannormal expansion was accompanied by a declining rate of inflation; the annualized rates of increase of the GNP deflator fell from 3.6 percent in the fourth quarter of 1982 to 3.0 percent in the fourth quarter of 1984. The saying that
more » ... . The saying that failure is an orphan, while success has many selfproclaimed fathers can be applied to business cycles in general and to this one in particular The battle over paternity is joined here by supply siders, by Keynesian fiscalists, and by monetarists. Some supply-side economists argue that the recovery reflected the favorable incentive effects on individual work effort of the January 1983 reductions in personal tax rates. In the extreme version of this view,
doi:10.3386/w2819 fatcat:udrlmu4lg5amxgbenuqliqdpme