By J. O. N. Perkins
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Additional info for Unemployment, Inflation and New Macroeconomic Policy
LAGS IN COST REDUCTIONS Some people have commented on the proposal to reduce costs by tax cuts (accompanied by an appropriately tight monetary policy) that its effects will be only short-term, where as others have argued that the favourable effects on productivity that might result would operate only in the long term. In fact, however, the various types of favourable effects on prices will be spread over widely differing time spans: and this constitutes an additional argument for making tax cuts general, rather than concentrating them on particular types of taxes.
For the two groups of budgetary instruments are likely to have contrasting effects: a stimulus provided by way of a tax cut is likely to be the least inflationary form of stimulus, whereas one provided by means of a rise in government spending on goods and services will normally be one of the most inflationary. This important distinction is blurred if one speaks of budgetary policy as a single instrument incorporating both taxation and government spending, or if one judges the setting of policy by such inadequate and misleading indicators as the budget deficit (or Public Sector Borrowing Requirement in Britain).
But the main reason why people (including those who assert that all stimuluses must be inflationary) expect recovery to be accompanied by price rises is not that rising activity of itself necessarily causes rises in prices, but simply because in the past the forms of stimulus usually employed have consisted predominantly of easier monetary policies, higher government spending, and tax cuts that initially stimulate consumption - which operate mainly by a process that tends to raise the price level.