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.

Monetary policy theory

Supply-siders advocate that monetary policy should be based on a price rule. The aim of monetary policy should be to target a specific value of money irrespective of the quantity of money that must be created or withdrawn by the central bank to achieve this target. This contrasts with monetarism's focus on the quantity of money, and Keynesian theory's emphasis on real aggregate demand. The important difference is that to a monetarist the quantity of money, specifically represented by the money supply is the crucial determining variable for the relationship between the supply and demand for money, while to a Keynesian adequate demand to support the available money supply is important. Keynes famously remarked that "money doesn't matter".

Related Topics:
Money - Central bank - Money supply

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This is an area where supply-side theory has been particularly influential. Under macroeconomic theory, the general level of price was based on the strict increase in price of a basket of goods. Under supply-side theory, the rate of inflation should be based on the substitutions that individuals make in the market place, and should take into account the improved quality of goods. In the late 1980s and through the 1990s, under Presidents of both American political parties, shifts were made in the calculation of the broadly followed measure of inflation the "Consumer Price Index for Urban Consumers", or CPI-W, which reflected supply-side ideas on substitution. The argument for factoring in goods quality was not accepted, which has led supply-side economists to claim that the real CPI is actually between .5% and 1% lower than the stated rate.

Related Topics:
CPI-W

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This area represents one of the points of contention between conservative economic theorists who argue for a quantity of money theory of inflation, including Austrian economics, many strict gold standard economists and traditional monetarists, and supply-side theorists. According to the increases in money supply during the 1990s, the real rate of inflation must be higher than is currently stated. These economists argue that the cost of housing is understated in the CPI-W, and that the inflation rate should be between .5% and 1% higher. It is for this reason that many central bankers, investment analysts and economists follow the GDP deflator which measures the total output of the society and the prices paid for all goods, not merely consumer goods.

Related Topics:
Austrian economics - GDP deflator

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Typically, supply-siders view gold as the best unit of account with which to measure the price of fiat money, which is defined as a money supply not directly limited by specie or hard assets. Hence the purest supply-siders are in general advocates of a gold standard. However the reverse is not true; many gold standard advocates are harsh critics of supply-side economics.

Related Topics:
Gold - Unit of account - Fiat money - Gold standard

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Supply-side economists assert that the value of money is purely dictated by the supply and demand for money. In fiat money system the government has a legislated monopoly on the supply of base money. Hence it has complete control over the value of money. Any decline in the value of money (or appreciation) is hence viewed as the result of errant central bank policy.

Related Topics:
Monopoly - Central bank

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