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The economic recovery program proposes to inject about $100 billion into the aggregate spending stream while simultaneously reducing the inflation rate. Careful analysis of estimates of the supply response to tax rate reductions and deregulation show that output increases will not balance the increased demand. Savings rates several times historic levels are thus necessary not only to reduce inflation, but even to prevent the program from worsening inflation. Recent evidence indicates that none of the scenarios most often mentioned as producing the requisite savings hold much promise.


For Presentation at the Conference of the Western Economic Association, San Francisco, California, July 2, 1981.

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