Supply-side economics

Supply-side economics is a school of macroeconomic thought which emphasizes the importance of tax cuts and business incentives in encouraging economic growth, in the belief that businesses and individuals will use their tax savings to create new businesses and expand old businesses, which in turn will increase productivity, employment, and general well-being. While all macroeconomics involves both supply and demand, supply-side economics emphasizes the importance of encouraging increases in supply. It was popularised in the 1970s by the ideas of Robert Mundell, Arthur Laffer, and Jude Wanniski. The term was coined by Wanniski in 1975.

Historical origins

Supply-side economics was principally a response to perceived failings of Keynesian ideas that had steadily risen to dominance following the Great Depression. In particular, the point of disagreement was the question of the stagflation of the 1970s, and the failure of Keynesian policies to produce growth without inflation, and the failure to provide a clear solution for the series of recessions which occurred in the wake of the oil crisis in 1973. As with the crash of 1929, whether particular policies could have avoided the negative outcomes of history is a matter of intense debate.

Related Topics:
Economics - Keynesian - Great Depression - Stagflation - Oil crisis in 1973

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Specifically, supply-side economics grew out of monetarists' critiques of Keynesian economics, and instead focused on encouraging investment, which they asserted was the basis of classical economics. In particular it proposed the notion that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. In classical times this idea had been summarised in Say's Law of economics, which had been opposed by Keynes in the 1930s. This led the supply-siders to advocate large reductions in marginal income and capital gains tax rates to encourage allocation of assets to investment, which would produce more supply (Jude Wanniski and many others advocate a zero capital gains rate). The increased supply would then lower inflationary price pressures because of competition and an improved goods to money ratio, hence the term "Supply-Side Economics". Furthermore, in response to inflation, supply-siders called for lower marginal income tax rates, as price/wage inflation had pushed wage earners into higher marginal income tax brackets that remained static; that is, as wages increased to maintain purchasing power with prices, income tax brackets were not adjusted accordingly and thus wage earners were pushed into higher income tax brackets.

Related Topics:
Monetarist - Classical economics - Production - Supply - Consumption - Demand - Say's Law - Keynes - Jude Wanniski

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Like many conservative versions of economics, many supply-side advocates claim that they are merely reinstating classical economics. (See Keynesianism for a discussion on Keynes and the classical critiques of his theory.) However, to most economists they are practicing Keynesian economics, with the alteration of promoting demand side for investment and upper income consumption, that there is nothing to distinguish "Supply-Side Economics" from ordinary borrowing to finance present budget deficits.

Related Topics:
Conservative - Keynesianism

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Supply-siders maintain that they offer a production-centred world view, and that this was behind the writing of classical economists such as Adam Smith and Karl Marx. In contrast to the modern Keynesian world view these authors are thought, by supply-siders, to focus exclusively on production, as opposed to the effects of demand. Despite both economists being frequently characterised as polar opposites in economic thinking, Jude Wanniski says that their production-centered world view puts them closer to each other than to Keynesian economic thinking. By appealing to Say's Law supply-side economists such as Jude Wanniski seek to return the emphasis of macro-economic analysis to these classical traditions.

Related Topics:
Adam Smith - Karl Marx - Jude Wanniski - Say's Law

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Critics of supply-side economics, such as Paul Krugman, quote one-time Reagan aide, David Stockman, who argued that this rhetoric was merely "a trojan horse for upper bracket tax cuts without economic justification." They point out that demand is crucial to both Marx and Smith, and that Keynes formulated demand side ideas because there had been a demand side failure in the late 1920s and early 1930s.

Related Topics:
Paul Krugman - Reagan - David Stockman

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Krugman has been heavily criticized by conservative supply-side enthusiast Lawrence Kudlow, who like Krugman worked for the Reagan administration, and Kudlow's TV colleague James Cramer, a Democrat supporter, on their CNBC TV programs Kudlow & Cramer, Kudlow & Company and Mad Money, because of Krugman's anti-supply-side views, and Cramer voodooed Krugman as a "bubble head", by bursting a helium-inflated bubble, for hypothesizing about a possible supply-driven "housing bubble".

Related Topics:
Lawrence Kudlow - James Cramer - CNBC - Kudlow & Cramer - Kudlow & Company - Mad Money - Voodoo - Bubble head - Bubble

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Supply-side supporters broke with Friedman and Lucas in that they argued that cutting tax rates alone would be sufficient to grow GDP, lift tax revenues and balance the budget. Supported by the powerful editorial page of the Wall Street Journal, seconded by the Washington Times, supply-side economics became a force in public policy starting in the early 1980s.

Related Topics:
Friedman - Lucas - GDP - Wall Street Journal - Washington Times

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In the United States commentators frequently equate supply-side economics with Reaganomics. The fiscal policies of Ronald Reagan were largely based on supply-side economics. During Reagan's 1979 presidential campaign, the key economic concern was double digit inflation, which Reagan described as "Too 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". However, by the time he took office, Federal Reserve chair Paul Volcker, based on standard Keynesian and monetarist theory, had already embarked on harsh monetary policies and Reagan had little choice but to embrace them: Volcker pursued an expensive policy of using high interest rates, unemployment and low money supply growth to break the inflationary psychology and squeeze inflationary expectations out of the economic system. Hence supply-side supporters argue that "Reaganomics" was only partially based on supply-side economics. Nonetheless, Jude Wanniski cited Reagan--along with Jack Kemp--as a great advocate for supply-side economics in politics and repeatedly praised his leadership.

Related Topics:
United States - Reaganomics - Ronald Reagan - Federal Reserve - Paul Volcker - Economic system - Jack Kemp

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Supply-side theorists also point to the success of the Kennedy tax-cuts to defend their case (even though they were justified at the time by Keynesian theory).

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