Reagan was so enamored of the Laffer Curve
idea that he famously promised to pay for his defense buildup with the revenues generated by his tax cuts.
Hamilton obviously saw that Laffer-type considerations could prevent the national government from exacerbating regional "oppression" by pushing tariff rates further up the upper portion of the Laffer curve
. However, Hamilton left unaddressed the question of how to constrain governments to the lower portion of the Laffer curve
where there are equivalent revenue possibilities with less regional "oppression." The latter is the issue that we argue the Confederates effectively addressed.
Another aspect of Debt Laffer curve
analysis is related to the price elasticity of the market value of the debt.
(For discussion of the intuition behind the debt-relief Laffer curve
, see, for example, Krugman, 1989; Sachs, 1986.)
"Thoughts on the Laffer Curve
," Proceedings of the 1980 Economic Policy Conference, St.
Positive linear dependence leads to the conclusion that in both cases, according to the Laffer curve
theory, the Laffer point lies to the right of the implicit rates of the selected economies.
Moreover, seigniorage itself faces its own Laffer Curve
(known as the Bailey Curve, after economist Martin Bailey).
The Laffer Curve
is a piece of economic mythology convenient for helping shield people like this from the consequences of their own actions.
In the media and the academy, however, the Laffer Curve
widely is discredited.
The down side of the rational expectations innovation was that it left theorists arguing that a likely outcome was a stationary equilibrium on the high-inflation side of the Laffer curve
. On the other hand, more sophisticated treatments of the adaptive expectations hypothesis, mostly appearing in the recent literature on learning in macroeconomic models, have found less tendency toward instability at low inflation rates.
First, if the share of foreign real balances is sufficiently large, then an elasticity of currency substitution that exceeds unity produces a Laffer curve
which is very narrowly peaked around the exogenously given positive foreign inflation rate.
For a time, he even allowed himself to be swept along on the Laffer Curve
, but his enthusiasm for that fiscal gimmickry came to an abrupt halt when Reagan married it to a huge defense buildup.