Supply-side economics

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. According to supply-side economics theory, consumers will benefit from greater supply of goods and services at lower prices, and employment will increase. 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:

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. 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. 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. Reduction in government regulations, to encourage business formation and expansion. A basis of supply-side economics is the Laffer curve, a theoretical relationship between rates of taxation and government revenue. 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. 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. The term alludes to ideas of the economists Robert Mundell, Arthur Laffer and Milton Friedman. The term is contrasted with demand-side economics.

Historical origins

Supply-side economics developed in response to the stagflation of the 1970s. It drew on a range of non-Keynesian economic thought, including the Chicago School and New Classical School. Bruce Bartlett, an advocate of supply-side economics, traced the school of thought's intellectual descent from the philosophers Ibn Khaldun and David Hume, satirist Jonathan Swift, political economist Adam Smith and United States Secretary of the Treasury Alexander Hamilton. In 2007, Bartlett stated:

Today, hardly any economist believes what the Keynesians believed in the 1970s and most accept the basic ideas of supply-side economics – that incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon. Consequently, there is no longer any meaningful difference between supply-side economics and mainstream economics. ...

Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates – the tax on each additional dollar earned – as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity. ... today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Current day advocates of supply-side economic policies claim that lower tax rates produce macroeconomic benefits and emphasize this benefit rather than their traditional ideological Classical liberals opposition to taxation because they opposed government in general. Their traditional claim was that each man had a right to himself and his property and therefore taxation was immoral and of questionable legal grounding. Supply-side economists argued that the alleged collective benefit (i.e. increased economic output and efficiency) provided the main impetus for tax cuts. As in classical economics, supply-side economics proposed that production or supply is the key to economic prosperity and that consumption or demand is merely a secondary consequence. Early on, this idea had been summarized in Say's law of markets, which states: "A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value." or, in other words, production (supply) must first occur to enable economic activity or trade. Supply-side economics rose in popularity among Republican Party politicians from 1977 onwards. Prior to 1977, Republicans were more split on tax reduction, with some worrying that tax cuts would fuel inflation and exacerbate deficits. In 1978, Jude Wanniski published The Way the World Works in which he laid out the central thesis of supply-side economics and detailed the failure of high tax rate progressive income tax systems and United States monetary policy under Richard Nixon and Jimmy Carter in the 1970s.

Definition and principles James D. Gwartney and Richard L. Stroup provide a definition of supply-side economics as the belief that adjustments in marginal tax rates have significant effects on the total supply. Gwartney and Stroup said "that the supply-side argument provided the foundation for the Reagan tax policy, which led to significant reductions in marginal tax rates in the United States during the 1980s". Barry P. Bosworth's book, Tax incentives and economic growth, published in 1984, provided another definition by presenting supply-side economics from two perspectives:

"A broad interest in the determinants of aggregate supply – the volume and quality of the capital and labor inputs and the efficiency with which they are used" "A narrower focus on tax reductions as a means of increasing the supply of savings, investment, and labor."

Supply-side vs. previous approaches to economic policy

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