Supply-side economics

Not to be confused with Trickle-down economics.

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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 theory, consumers will benefit from greater supply 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:

  1. Investments in human capital, such as education, healthcare, and encouraging the transfer of technologies and business processes, to improve productivity (output per worker). Encouraging globalized free trade via containerization is a major recent example.
  2. Tax reduction, to provide incentives to work, invest and take risks. Lowering income tax rates and eliminating or lowering tariffs are examples of such policies.
  3. Investments in new capital equipment and research and development (R&D), to further improve productivity. Allowing businesses to depreciate capital equipment more rapidly (e.g., over one year as opposed to 10) gives them an immediate financial incentive to invest in such equipment.
  4. Reduction in government regulations, to encourage business formation and expansion.[4]

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.

  1. ^ Neva Goodwin; Jonathan M. Harris; Julie A. Nelson; Brian Roach; Mariano Torras (4 March 2015). Principles of Economics in Context. Routledge. p. 286. ISBN 978-1-317-46217-0. supply-side-economics: the macroeconomic theory ... .
  2. ^ Dwivedi (2010). Macroeconomics, 3E. Tata McGraw-Hill Education. p. 372. ISBN 978-0-07-009145-0. The supply-side economics is the most recent macroeconomic thought.
  3. ^ Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books. ISBN 0-465-09095-8.
  4. ^ Chiang, Eric (2014). CoreMacroeconomics (3rd ed.). Worth Publishers. p. 245. ISBN 978-1-4292-7849-2.
  5. ^ Campbell, John L. (1998). "Institutional Analysis and the Role of Ideas in Political Economy". Theory and Society. 27 (3): 377–409. doi:10.1023/A:1006871114987. ISSN 0304-2421. JSTOR 657900. S2CID 145064609. The Laffer curve became a powerful pedagogical symbol that many supply siders used when presenting their position.
  6. ^ Kyer, Ben L.; Maggs, Gary E. (1994). "A Macroeconomic Approach to Teaching Supply-Side Economics". The Journal of Economic Education. 25 (1): 44–48. doi:10.2307/1182895. ISSN 0022-0485. JSTOR 1182895.
  7. ^ Kolb, Robert W. (27 March 2018). The SAGE Encyclopedia of Business Ethics and Society. SAGE Publications. p. 3303. ISBN 978-1-4833-8151-0.
  8. ^ Mankiw, N. Gregory (1 January 2020). Principles of Economics. Cengage Learning. pp. 161–162. ISBN 978-0-357-13380-4.
  9. ^ "the U.S. marginal top rate is far from the top of the Laffer curve." Saez, Emmanuel; Slemrod, Joel; Giertz, Seth (1 January 2009). "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review". Economics Department Faculty Publications.
  10. ^ “There is certainly some level of taxation at which cutting tax rates would be win-win. But few economists believe that tax rates in the United States have reached such heights in recent years; to the contrary, they are likely below the revenue-maximizing level” Mankiw, R. Gregory (11 December 2018). "Snake-Oil Economics". Foreign Affairs.
  11. ^ Cite error: The named reference Mankiw_SO_2 was invoked but never defined (see the help page).
  12. ^ "Laffer Curve | IGM Forum". igmchicago.org. Retrieved 14 October 2017.
  13. ^ "Once Again: The GOP Tax Cuts Are Not Paying for Themselves". The Fiscal Times, March 13, 2019.
  14. ^ "PolitiFact - Do tax cuts pay for themselves? Evidence is thin". @politifact.
  15. ^ Komlos, John (2019). "Reaganomics: A Watershed Moment on the Road to Trumpism". The Economists' Voice. 16 (1). doi:10.1515/ev-2018-0032. S2CID 159222280.
  16. ^ Robert D. Atkinson (29 October 2007). Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer. Rowman & Littlefield. p. 50. ISBN 978-0-7425-5107-7.