Supply-side economics

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Supply-side economics is a school of macroeconomic thought that argues that economic growth can be most effectively created by lowering barriers for people to produce (supply) goods and services, such as lowering income tax and capital gains tax rates, and by allowing greater flexibility by reducing regulation. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices. Typical policy recommendations of supply-side economists are lower marginal tax rates and less regulation.[1]

The Laffer curve embodies a tenet of supply side economics: that government tax revenues are the same at 100% tax rates as at 0% tax rates. The tax rate that achieves highest government revenues is somewhere in between. Whether it is worth the corresponding decrease in economic growth that is often assumed by supply-side economists to accompany such a rate increase is a policy question.[2]

The term "supply-side economics" was thought, for some time, to have been coined by journalist Jude Wanniski in 1975, but according to Robert D. Atkinson's Supply-Side Follies [3] [p. 50], the term "supply side" ("supply-side fiscalists") was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell and Arthur Laffer. Today, supply-side economics is compared by critics to "trickle-down economics".[4]


Main article: Reaganomics

Ronald Reagan made supply-side economics a household phrase, and promised an across-the-board reduction in income tax rates and an even larger reduction in capital gains tax rates. (Case & Fair, 1999: 781, 782). When vying for the Republican party presidential nomination for the 1980 election, George H.W. Bush derided Reagan's supply-side policies as "voodoo economics". However, later he seemed to give lip service to these policies to secure the Republican nomination in 1988, and is speculated by some to have lost in his re-election bid in 1992 by allowing tax increases. (See: "Read my lips: No new taxes".)

The centerpiece of the supply-side argument is the economic rebound from the 1980-1982 "double-dip recession", combined with the continued fall in commodity prices. The "across the board" tax cuts of 1981 are seen as the great motivator for the "Seven Fat Years". Critics of this view point out that the "rebound" from the recession of 1981-1982 is exactly in accordance with the "disinflation" scenario predicted by IS/LM models of the late 1970s: essentially that the increases in fed funds rates squeezed out inflation, and that federal budget deficits acted to "prime the pump". This model had been the basis of Volcker's federal reserve policy.

See also

Notes and references

  1. Wanniski, Jude (1978). The Way the World Works: How Economies Fail—and Succeed. New York: Basic Books. ISBN 0-465-09095-8. 
  2. Bartlett, Bruce (2007-04-06). "How Supply-Side Economics Trickled Down". New York Times. 
  3. Atkinson, Robert D. Supply-side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics Is the Answer. Lanham: Rowman & Littlefield, 2006. Print.
  4. Martin, Douglas (2005-08-31). "Jude Wanniski, 69, Journalist Who Coined the Term 'Supply-Side Economics,' Dies". New York Times. 

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