Supplyside vs Demandside Economics

Only available on StudyMode
  • Download(s) : 281
  • Published : February 17, 2013
Open Document
Text Preview
2012
Alex Savitt
Economics 256W
4/23/2012
2012
Alex Savitt
Economics 256W
4/23/2012
Demand-Side vs. Supply-Side Economics
Demand-Side vs. Supply-Side Economics

Ever since the 1980s when President Ronald Reagan implemented a form of economic fiscal policy known as supply-side economics, there has been a continuing debate over whether a supply-side fiscal economic agenda or a more demand-side, Keynesian fiscal economic policy is more effective in promoting short and long-term real GDP growth. Like any analysis in economics, there are many variables at work in the economy, however the purpose of this paper is to try and isolate a few key variables in the economy such as unemployment, real GDP, consumer spending, the federal budget, and inflation in order to formulate a conclusion which can determine which economic ideology is more effective in promoting growth in the short and long-term in terms of real GDP. As a result of my historical analysis, I will show that neither extreme supply-side or demand-side economic theory is suitable in all economic climates. In order to promote sustainable real GDP growth, we must model our economic theory around the principles of the 1950s and 1980s which include fiscal conservatism, moderate tax rates, and productive government spending.

In order to analyze the two theories it is first important to understand the underlying theory behind the two economic views and little about their origin. Supply-side economics, also known as “trickle-down economics” originated from the thoughts of Karl Marx, but was first formally theorized by French economist Jean-Baptiste Say. Say argued during the 19th century that supply was the dominant driver in an economy. He developed a law known as Say's Law, which states that the way to economic growth is to boost production, and demand naturally follows. This theory was supported by thinkers such as Thomas Jefferson. The idea is that even during a recession, people are still demanding work, and therefore, are still demanding products to consume. The only limitation to consumers is the high price of goods, and thereby expanding the supply, prices will be driven down and consumers will increase consumption.

However, supply-side economics was not officially coined until 1976, when Herbert Stein, an economic advisor to President Richard Nixon gave it the name. Although the theory was popularized by President Ronald Reagan, the theory has had roots since the 1920s and was supported by Presidents Harding, Coolidge, Hoover, and Kennedy. Supply-side economics is the theory that greater tax cuts for investors and entrepreneurs in the highest tax bracket will result in an increased production of output, thereby creating jobs and more economic incentives that trickle-down to the rest of economy. One of the major assumptions in supply-side economics is that supply is the key driver in economic activity and that more supply will be met by an increased demand for companies’ products. Supply-siders believe that consumer demand is ever-present and does not falter. Supply-siders argue that when companies temporarily "over-produce", excess inventory will be created, prices will subsequently fall and consumers will increase their purchases to offset the excess supply. As shown in the graph to the left, supply-side theory goes as far to say that the supply curve is essentially vertical, meaning that the only way that an economy will increase output is by moving the entire supply for goods curve. A shift in the demand of goods curve will do nothing to increase output, but will only increase or decrease the price of that good or service.

Supply-side economics can be broken up into three main pillars: tax policy, regulatory policy, and monetary policy. The belief among supply-siders is that a decrease in marginal tax rates will shift workers consumption bundle from less hours allocated for leisure towards more hours worked, because there are increased...
tracking img