Supply-side economics

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Supply-side economics is a macroeconomic concept developed in the 1970's as a counter to the dominant Keynesian macroeconomic theory during the years of stagflation. Before the early 1980's Keynesian views predominated.

Economist John Maynard Keynes believed that "demand creates supply" (see Law of supply and demand). This concept drove many of the ideas behind the recovery from the Great Depression. Government played a role in subsidizing individuals by giving them jobs and therefore an income to have to spend on goods. This "demand-side" theory posited that demand would create supply, and feedback to in turn create more demand.

Supply-side theory is based on Say's law, which, paraphrased, states that supply creates its own demand. A simplified version of these ideas were taken up as a popular political movement during the 1980 election campaign, with Ronald Reagan proposing a modified policy of supply-side economics (although liberals disparagingly used the term "trickle-down" economics). [1] The decreased regulation begun in the late 1970s, together with lower marginal tax rates would provide enough savings and investment to pool new capital and drive economic growth. Manufacturers for example, would hire more people, produce more, and create more demand and economic activity. The idea gained wide popular support, and became known as "Reaganomics".

Most criticism came from the Left, but some on the Right was skeptical as well. George H.W. Bush during a campaign debate famously referred to it as "voodoo economics", due to the discarding of New Deal orthodoxy. On the Left, it was seen as threat to the welfare state with the loss of federal revenues in tax cuts that had funded the failed War on Poverty programs for more than a decade.

One key aspect of the program in 1982 was tax cuts for Research and Development (R&D) in high technology firms intended to make United States more competitive with Japanese electronics manufacturers which had dominated the industry since the late 1960s. Liberals were critical of the idea, claiming "tax cuts for business" only benefited "the rich"; however, the "trickle down effect" became a flood of prosperity in high tech industries by the mid to late 1990s.

Murray Rothbard wrote:

Specifically, Reagan called for a massive cut in government spending, an even more drastic cut in taxation (particularly the income tax), a balanced budget by 1984 (that wild-spender, Jimmy Carter you see, had raised the budget deficit to $74 billion a year, and this had to be eliminated), and a return to the gold standard, where money is supplied by the market rather than by government. In addition to a call for free markets domestically, Reagan affirmed his deep commitment to free­dom of international trade. [1]

See also


  1. Understanding Supply-Side Economics, David Harper

External Links