Supply-Side Economics: History and Relevance

2977 Words Jan 26th, 2013 12 Pages
Supply-Side Economics: Its History and Relevance Today.

“Supply-side economics provided the political and theoretical foundation for a remarkable number of tax cuts in the United States and other countries during the eighties. Supply-side economics stresses the impact of tax rates on the incentives for people to produce and to use resources efficiently.” -James D. Gwartney

Introduction

The theory of supply-side economics has several labels associated with it, some positive and others negative, with “Reaganomics” or the “Trickle-down” policy being the most notable. Simply put, supply-side economics centers on the idea that the path to economic strength is achieved by focusing on the supply side of the market rather
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The Keynesian model and economists that agreed with Keynesian theory did not believe that monetary and economic policies should be left up to the entrepreneurs and investors and that there should be a strong, active government intervention in the marketplace to ensure economic growth (Brannon). “Keynesians concluded that the government needed to steer the economic ship on a steady course…” (Brannon). There was, however, one problem that Keynesian economics failed to address in the 1970’s, causing it to fall behind in importance compared to the new supply-side economics theory, and that was stagflation. Stagflation is when the economy sees an increase in inflation as well as stagnant business endeavors, coupled with an already increasing unemployment rate. Keynesian school of thought was for the Federal Government to increase the money supply, trusting that the increase of the money supply would drive up demand and price, which would lead to increased employment (Brannon).

Reaganomics

As the Keynesian Demand Management theory slowly started to lose political support, the Presidential race of 1980 was beginning to get underway. The candidate with the most support was Ronald Reagan, and during his campaign he proposed a new plan to help America out of its economic downturn. What would soon be dubbed “Reaganomics” was a
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