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Business Daily

Factual: Money

The daily drama of money and work from the BBC.

Business Daily: Inflation

14/07/2009

Inflation

BBC World Service - Business Daily, Inflation

We hear why one prominent thinker says government spending now will mean pain tomorrow.

We hear why one prominent thinker says government spending now will mean pain tomorrow. Arthur Laffer, the economist who gave his name to the Laffer Curve, says we risk stoking up future inflation.

It is not a new argument, this one, over whether governments can spend their way out of recession. The great man himself, John Maynard Keynes, was making the case in the Thirties.

The nub of Keynes' revelation - or mistake, depending on your point of view - is whether markets left to their own devices can sort out unemployment and an aversion to spending.  

The old argument was that the answer to a recession was simple: just let markets do it. Too much unemployment, then let the price of labour fall. Too little borrowing to spend and too much saving, then lower the rate of interest.  

Keynes' insight - or mistake, depending on your point of view - was to realise that falling wages meant falling overall demand, and that interest rates couldn't be cut below zero.   

The Keynesians are in power now, certainly in Washington and London. One sceptic, though, is Arthur Laffer, an enormously influential economist who gave his name to the Laffer Curve. 

His insight - or mistake, depending on your point of view - was to realise that just lowering tax rates might stimulate the economy and so result in more total tax revenue for the government. It's the idea behind George W. Bush's tax cuts.  He's also a strong believer that borrowing now means inflation tomorrow.  

We ask Arthur Laffer why?

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