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What is Supply-Side Economics?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 April 2014
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Supply-side economics is one expression of macroeconomics that focuses on the stimulation of economic growth by encouraging greater production of goods and services. Essentially, this removes the issue of demand from the economic task, as the concept of supply-side economics takes the stand that demand will follow if there are goods available for purchase. Often, proponents of this approach will use the extension of incentives to stimulate interest or demand for the goods and services produced.

One of the more common incentives used with a supply-side economics model is to provide tax breaks. Lowering the taxes owed by manufacturers of finished goods is thought to make it practical for producers to create more products. In turn, more products mean more choices for consumers, who will respond accordingly.

Along with a reduction in taxes for the producer, supply-side economics also sometimes takes the form of lowering personal income taxes as they relate to the consumer. With this application of the method, consumers have more disposable income, since the amount of income tax that is deducted from gross pay is reduced. With more money in their pockets, consumers are more likely to feel good about the general state of the economy. This increase confidence leads to additional purchases, which in turn justifies the increased production of manufacturers.

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One of the goals of supply-side economics is to minimize the influence of government in the function of economics within the nation. By limiting taxes on producers and consumers alike, governments are less likely to control the process of supply and demand. Unencumbered by heavier tax burdens, the general public buys more goods and services. Manufacturers reap the rewards of increased sales, which helps to justify the high level of production. In theory, supply-side economics has a great deal of appeal.

However, supply-side economics has a number of opponents as well as many supporters. One of the main objections is that the theory does not take into account the idea of demand governing supply, at least not in the traditional sense. The concept is also often compared to Say’s Law, which essentially promotes the idea that demand is created by supply, rather than the other way around.

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Discuss this Article

anon147340
Post 4

Oasis: You seem to have left G w Bush's contributions to the disastrous state of the economy under Obama completely out of the equation.

oasis11
Post 3

Sunshine31-What is really interesting to note that Franklin Delano Roosevelt, Jimmy Carter, and Obama presided over the worst economies in US history. I don’t think that it was a coincidence either.

There is a link between increased governmental spending and high taxes and a high level of unemployment.

The reason for this is simple, when there is too much governmental intervention and high taxes as is in the Keynesian model, businesses lay off people in anticipation of these new tax increases.

What’s more is that 90% of new jobs are created by these small businesses who are dubbed, “The wealthy”.

To make matters worse, in uncertain economic times of high taxation, businesses resort to replacing fewer workers that they initially fired because of the potential future costs.

This happened during the depression, when FDR served, during stagflation when Jimmy Carter served, and through Obama with the extraordinary unemployment rates.

These unemployment rates will continue to stay high until some supply side economic policies occur. Keynesian economics has failed every time it has been tried. The Presidencies of Franklin Delano Roosevelt, Jimmy Carter, and Obama are living proof that Keynesian economics don’t work because government don’t create jobs but businesses do.

sunshine31
Post 2

Bhutan-I wish we had another President Reagan in the White House.

Currently Obama is practicing Keynesian economics which is also referred to as neoclassical economics or demand side economics.

The main difference in supply side economics vs. demand side economics involves government spending and control. Keynesian economics involves the use of massive governmental spending in order to create entitlement programs and infrastructure projects in order to stimulate the economy.

In addition, Keynesian economics also involves high levels of taxation because it is these taxes that fund the entitlement programs that people that believe in Keynesian economics feel it is necessary to keep people afloat in difficult economic times.

They also believe in increased governmental regulations of businesses as a necessary way to control the economy. They felt that stimulus spending done by the federal government was the only way to achieve economic success.

Presidents that practiced Keynesian economics were Franklin Delano Roosevelt, Jimmy Carter, and Obama.

Bhutan
Post 1

Reaganomics was dubbed so because President Ronald Reagan epitomized supply side economic model.

The main difference between supply side economics vs. Keynesian economics is huge. Supply side economics referred to providing policies that stimulates economic development by offering tax breaks to all of the American people.

With these tax cuts, not only would businesses hire more people because they now have an economic incentive to expand and grow, but individuals would spend more money in the economy furthering even more economic growth.

Supply side economics fosters a relationship with businesses and realizes their importance in stimulating the economy. Every time supply side economics was tried it worked. When President Ronald Reagan developed his supply side economics policies and dropped the top tax rate from 70% to 24%, he created 25 million jobs.

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