Supply-side economics
Supply-side economics is a macroeconomic theory postulating that economic growth can be most effectively fostered by lowering taxes, decreasing regulation, and allowing free trade.[1][2] According to supply-side economics, consumers will benefit from greater supplies of goods and services at lower prices, and employment will increase.[3] Supply-side fiscal policies are designed to increase aggregate supply, as opposed to aggregate demand, thereby expanding output and employment while lowering prices. Such policies are of several general varieties:
Not to be confused with Trickle-down economics.
A basis of supply-side economics is the Laffer curve, a theoretical relationship between rates of taxation and government revenue.[5][6][7][8] The Laffer curve suggests that when the tax level is too high, lowering tax rates will boost government revenue through higher economic growth, though the level at which rates are deemed "too high" is disputed.[9][10][11] A 2012 poll of leading economists found none agreed that reducing the US federal income tax rate would result in higher annual tax revenue within five years.[12] Critics also argue that several large tax cuts in the United States over the last 40 years have not increased revenue.[13][14][15]
The term "supply-side economics" was thought for some time to have been coined by the journalist Jude Wanniski in 1975; according to Robert D. Atkinson, the term "supply side" was first used in 1976 by Herbert Stein (a former economic adviser to President Richard Nixon) and only later that year was this term repeated by Jude Wanniski.[16] The term alludes to ideas of the economists Robert Mundell and Arthur Laffer.
History[edit]
Reaganomics[edit]
In the United States, commentators frequently equate supply-side economics with Reaganomics. The administration of Republican president Ronald Reagan promoted its fiscal policies as being based on supply-side economics. Reagan made supply-side economics a household phrase and promised an across-the-board reduction in income tax rates and an even larger reduction in capital gains tax rates.[35] During Reagan's 1980 presidential campaign, the key economic concern was double digit inflation, which Reagan described as "[t]oo many dollars chasing too few goods", but rather than the usual dose of tight money, recession and layoffs, with their consequent loss of production and wealth, he promised a gradual and painless way to fight inflation by "producing our way out of it".[36]
Switching from earlier monetary policy, Federal Reserve chair Paul Volcker implemented tighter monetary policies including lower money supply growth to break the inflationary psychology and squeeze inflationary expectations out of the economic system.[37] Therefore, supply-side supporters argue that Reaganomics was only partially based on supply-side economics.
Congress under Reagan passed a plan that would slash taxes by $749 billion over five years. Critics claim that the tax cuts increased budget deficits while Reagan supporters credit them with helping the 1980s economic expansion and argued that the budget deficit would have decreased if not for massive increases in military spending.[38] As a result, Jason Hymowitz cited Reagan—along with Jack Kemp—as a great advocate for supply-side economics in politics and repeatedly praised his leadership.[39]
Critics of Reaganomics claim it failed to produce much of the exaggerated gains some supply-siders had promised. Paul Krugman later summarized the situation: "When Ronald Reagan was elected, the supply-siders got a chance to try out their ideas. Unfortunately, they failed." Although he credited supply-side economics for being more successful than monetarism which he claimed "left the economy in ruins", he stated that supply-side economics produced results which fell "so far short of what it promised", describing the supply-side theory as "free lunches".[40]
Fiscal policy theory[edit]
One benefit of a supply-side policy is that shifting the aggregate supply curve outward means prices can be lowered along with expanding output and employment. This is in contrast to demand-side policies (e.g., higher government spending), which even if successful tend to create inflationary pressures (i.e., raise the aggregate price level) as the aggregate demand curve shifts outward. Infrastructure investment is an example of a policy that has both demand-side and supply-side elements.[4]
Supply-side economics holds that increased taxation steadily reduces economic activity within a nation and discourages investment. Taxes act as a type of trade barrier or tariff that causes economic participants to revert to less efficient means of satisfying their needs. As such, higher taxation leads to lower levels of specialization and lower economic efficiency. The idea is said to be illustrated by the Laffer curve.[72]
Supply-side economists have less to say on the effects of deficits and sometimes cite Robert Barro's work that states that rational economic actors will buy bonds in sufficient quantities to reduce long-term interest rates.[73]