The Keynes-Laffer Effect

I had the pleasure of meeting Richard Musgrave some 23 years ago at a conference on Reaganomics when he walked up and suggested to me that all this yada, yada, yada, about Laffer curves was really the Keynesian suggestion that reductions in tax rates is one of many aggregate demand tools that might pull us out of a recession. In a word, the Keynes-Laffer effect. It seems Thomas Nugent has finally figured this out too:

Paulson, demonstrating that he is not only a financial heavyweight but an agile debater when among undereducated politicians, focused on the impact of tax cuts on the economy in 2001, and gave credit to President Bush’s first tax cuts for moving the economy out of recession and into expansion. Nice job, Henry!

Of course, the cheerleaders at the National Review are telling us that we are now at full employment, which would imply we have hit the limit of the Keynes-Laffer effect. If fiscal stimulus lowers national savings in a full employment economy, we get less growth not more.