Re: Reagan's policy of cutting taxes and raising interest rates

Brablo wrote:
We know that Reagan's policy of cutting taxes and raising interest
rates (w. Volcker) worked well.

Worked well at what? Causing a severe recession and an enormous budget
deficit? The only positive that came out of it was the halting of
inflation, but that was an expected effect of the tight monetary policy
and was also influenced substantially by the easing of the oil shocks.
Had nothing to do with "Reaganomics".

However, my question is:
1. Since cutting taxes has the effect of creating liquidity, did this
measure counter-act the raising of interests?

Cutting taxes does not "create liquidity". Liquidity is a function of
1. The desire of firms and individuals to spend and 2. Monetary policy.
Don't make the mistake of assuming that funds that are taxed disappear
from the face of the earth rather than being spent by the government.

2. Would the desired outcome (lowered inflation and economic growth)
have been expedited if he did *NOT* cut taxes? I've heard that the 2
opposing measures had a somewhat chaotic effect on the economy, but
it's known that they worked.

Had he not cut taxes, the recession would have been marginally worse,
but it would not have been that significant of a change. Recall that
very few people were actually paying the top marginal rate at the time
and also that many other taxes were actually raised shortly after the
initial cuts were passed.

It seems that macro-economics is so multi-variate - another words, a
given variable (i.e. interest rates) is a function of many, many other
things. There are so many built-in negative feedback loops and
stabilizing mechanisms behind economics, that it seems that Reagan
could have done *anything* (i.e. raise interests and cut taxes, or
raise interest and raise taxes to reduce demand for money) and still
achieved the desired outcomes.

Yes, economics is a lot more complex than the simple textbook models
imply.

.

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