A map has to have a lot of truth in it. A map that would show Philadelphia in the west and Pittsburgh in the east would not represent Pennsylvania as it is, and at best could cause confusion and make the map useless. But, on the other hand, no map is perfectly accurate. Maps are designed to be useful, not to be true. To be useful, they have to have a mixture of truth and falsehood -- and just what needs to be true, and what needs to be false, depends on what you want to use the map for.

Many (not all) economic models are like that. The Aggregate Supply -- Aggregate Demand (AS/AD) model is that sort of model.

• An increase in the money supply
• An increase in autonomous consumption
• An increase in investment from some other cause beside changing interest rates
• An increase in government purchases of goods and services
• A decrease in taxes
• An increase in the size of a balanced budget

• A decrease in the money supply
• A decrease in autonomous consumption
• A decrease in investment from some other cause beside changing interest rates
• A decrease in government purchases of goods and services
• An increase in taxes
• A decrease in the size of a balanced budget

Changes in

• The population
• The Rate of Labor Force Participation
• The NAIRU
• The Average Productivity of Labor

• A tax cut would cause a large government deficit and increasing federal debt.
• A cut in taxes would itself stimulate aggregate demand, frustrating the purpose of the policy.
• Because it neglects the short run, the proposal is not really practical.

There is plenty of room for controversy, here -- but let's focus on the key issue, the effect on the Federal Deficit.

A Supply Side Tax Cut

So -- how did it work? Here is a diagram of the government deficit for 1960-96:

Figure 9: The Federal Deficit, 1960-1996

Figure 10: Real Investment 1960-96

There seems to be some slight acceleration of the growth of investment after 1963, although only for a few years. After the 1981 "Supply-Side" tax cut, we see a considerable drop in investment, followed by a recovery in the mid-eighties; but the performance for the decade of the eighties as a whole was quite disappointing.

• Changes in Aggregate Demand, such as might result from monetary policy or fiscal policy or changes in saving behavior, will have somewhat less impact on output in the short run, and much less impact on output in the long run, than the Simple Keynesian Model would have suggested.
• A stable price level over time would require a "balanced growth" of both aggregate demand and supply.
• In terms of the logic of the AS/AD model, it is possible for a Supply Side tax cut to work, but it seems very improbable that the policy would work in fact.