The Pros And Cons Of Supply-Side Economics

The country was billions of dollars in debt. Lowering the government's income by lowering taxes would only make this worse. But Reagan believed that lower taxes would help the economy. With a stronger economy, people and businesses would make more money. These increased profits would mean more taxes would be paid because the extra money would be taxed. The economic program Reagan implemented during his presidency became known as Reaganomics. This approach to healing the economy focused on low taxes, fewer and cheaper government programs, and high military spending. Reaganomics was intended to keep inflation down. The president believed his program was the best way to rebuild America's failing economy. (Benson 79)

This idea of reducing taxes to increase investment within the economy sounds like a good idea but hasn’t lived up to its expectations historically. The idea of supply side economics wasn’t a new idea for the American tax code. During the early 1920s, income tax rates were cut multiple times which averaged to a total of most rates being cut by a little less than half. The Mellon Tax Cuts named after Treasury Secretary Andrew Mellon under Presidents Warren Harding and Calvin Coolidge. He believed that changes in income tax rates causes individuals to change their behavior and practices. As taxes rise, tax payers attempt to reduce taxable income by either working less, retiring earlier, reducing business expansions, restructure companies or spending more money on accountants to find tax loopholes. If executed properly tax cuts can actually benefit economic growth, data from the Internal Revenue Service(IRS) showed that the across-the-board tax cuts in the early 1920s resulted in greater tax payments and larger tax share paid by those in the higher incomes. As the marginal tax rate on the highest income earners were cut from 60 percent or more to just 25 percent, the amount that this tax group payed soared from around 300 million to 700 million per year. (See Figure 2) This sudden massive increase in revenue allowed the U.S. economy to rapidly expand during the mid and late 20s. Between 1920 to 1929, real gross national product grew at an annual average rate of 4.7 percent and

Supply-side policies are made of several important points to regulate the economy. Supply-side policies consist of stimulating the economy by production, cutting taxes, and limiting government regulations to increase incentives for businesses and individuals. Businesses then would invest more and expand to create jobs for people who would save and spend more money. Thus, increased investment and productivity would lead to increased output in the economy. With this increased output the economy grows and unemployment goes down. Yet, this would not be the only policy to bring the economy out of a recession.

In addition, Reagan’s 1981 Program for Economic Recovery had four major policies, which are: to reduce the growth of government spending, reduce the marginal tax rates on income from labor and capital, reduce regulation, and to reduce inflation by controlling the growth of the money supply (Niskanen). Reagan’s Economic Recovery Program, also known as Reaganomics, was the most serious recession of the U.S. economic policy since Franklin D. Roosevelt’s New Deal (Niskanen). However, according to historian, Eric Foner, there have been many issues with Reaganomics since the new policies, rising stock prices, and deindustrialization inevitably resulted into the rise of economic inequality, also known as the second gilded age (Foner 832).

Reaganomics—also known as supply-side and trickle-down economics—is an economic policy practiced by presidents Warren G. Harding, Calvin Coolidge, and Herbert Hoover in the twenties and most recently, by the fortieth president of the United States, Ronald Reagan. Just like the state of the economy before Reagan stepped into office, the economy of the United States today is in a vulnerable place. The economy has taken multiple blows over the last few years: a recession in 2008, a close call in 2011, and an overwhelming deficit. Most Americans are looking for something to change. While some are advocating for an increase in the government’s power in order to step in and seemingly help the people, the way for the government to truly succor

President Reagan’s radical tax cuts lead to a decrease in unemployment and an increase in incomes for Americans of all statuses. Despite the fact that, “in the late 1970s, the US economy was experiencing what was then the greatest economic crisis since the great depression… almost every economic measure substantially improved after Reagan’s reforms took effect” (Hannaford). Editors Pat Hannaford and Darcy Allen observe that, “by reducing America’s tax burden, Reagan’s

Hayek believed the economy should remain untouched and in times of trouble, with enough time, the markets would regain equilibrium. He also surfaced the ideas that increasing taxes led to discouragement of consumer spending. These ideas are viewed as flawed because during times of depression unemployment remains constant and there is so guaranteed time issues will resolve while the economy is trying to rebalance itself. No government regulation results in unfair monopolies of industries or businesses in the free market. This restricts modern liberal principles such as the equality of outcome. No government intervention is an ineffective way to structure the economy. It allows for numerous issues such as cheap labor, overpriced goods, non-equal wages. All issues could be resolved through government action and regulation. Hayek’s ideas can be closely ties with those of the Untied States president in 1981, Ronald Reagan. Reagan upheld a huge economic practice know as “Trickle-Down Economics”. This practice involved an attempt to redistribute wealth among different social classes. The government would cute taxes on wealthier citizens with hopes the wealth would trickle down in the economy through mass spending of the elite. This effect was never successful in practice, by cutting taxes for the rich it left them with a high concentration on wealth. This practice aimed at the wrong target and did not prevent relative poverty; it just increased the economic gap between the rich and poor. Both theory’s are evidently flawed and validate the need for a government to obtain economic responsibilities. Regulations ensure an equal ground for the mixed market, which is a key aspect in a stable economy. Modern liberal principles require government involvement to achieve economic

Reagan implemented policies based on supply-side economics and advocated a classical liberal and laissez-faire philosophy, seeking to stimulate the economy with large, across-the-board tax cuts. Reagan’s outlook on economics was what he and the public called “Reaganomics”. “The blueprint for “Reaganomics,” was a sketched out supply-side approach to the economic, including massive cuts in income taxes, capital gains taxes, and corporate taxes,”(340). His platform advocated reducing tax rates to spur economic growth, controlling the money supply to reduce inflation, deregulation of the economy, and reducing government spending. Reagan's policies proposed that economic growth would occur when marginal tax rates were low enough to spur investment, which would then lead to increased economic growth, higher employment, and wages. Reagan’s beliefs on cutting taxes were supported by ideas of William Sumner who believed that the best equipped to win the struggle for existence was the American businessman, and concluded that taxes and regulations serve as dangers to his survival. Reagan believed strong nations were composed of people who were successful at expanding their empires and these strong nations would survive in the struggle for dominance.

Leading up to the year 1981, America had fallen into a period of “stagflation”, a portmanteau for ‘stagnant economy’ and ‘high inflation’. Characterized by high taxes, high unemployment, high interest rates, and low national spirit, America needed to look to something other than Keynesian economics to pull itself out of this low. During the election of 1980, Ronald Reagan’s campaign focused on a new stream of economic policy. His objective was to turn the economy into “a healthy, vigorous, growing economy [which would provide] equal opportunities for all Americans, with no barriers born of bigotry or discrimination.” Reagan’s policy, later known as ‘Reaganomics’, entailed a four-point plan which cut taxes, reduced government spending,

Poverty can be reduced through economic policies by slashing taxes and regulations, and by reforming the welfare system. High tax rates and excessive regulation have been shown to impede economic growth. By cutting the tax rate and deregulating industries, the economy will boom and poverty will decline. One of the best examples of the effectiveness of these measures can be seen in the Reagan recovery. Two points of Reagan’s four-point economic program were to cut tax rates and deregulation. These, along with the rest of Reagan’s plan, proved to be a huge success in turning the economy around. Peter Ferrara, who served in the White House Office of Policy Development under President Reagan, reports that nearly 20 million new jobs were created during the recovery, which increased civilian employment by almost 20% and reduced unemployment to 5.3% by 1989. Ferrara also reports that the American standard of living increased close to 20% in just seven years, and that the poverty

One of the ways that the cold war affected the U.S. economy was in the 1980’s when President Roald Regan attempted to end stagflation while also increasing military spending. In the 1970’s under President Jimmy Carter the phenomena of stagflation occurred and continued into the 1980’s. Stagflation is what happens when the economy is experiencing stagnation and inflation at the same time. Due to inflation workers demand higher wages, the worker receives the higher pay but then inflation rises keeping the economy in an unusual cyclical pattern of idle growth. To combat this Regan opted to use ‘Reaganomics’ or what it is also known as trickle-down economics.

United States Federal Reserve system, also known as Federal Reserve or simply “Fed” is the United States central banking system. The Federal Reserve took inception in 1913, after the adoption of the Federal Reserve Act. The United States Congress has mandated three macroeconomic objectives to the Federal Reserve. These are minimum levels of unemployment, prices stability and keeping in check the rates of interests. Over the years, the role of Federal Reserve has expanded. It now formulates the country’s monetary policies, conducts supervision and regulation of the banking institutions, maintenance of the financial

Over the past few years we have realized the impact that the Federal Government has on our economy, yet we never knew enough about the subject to understand why. While taking this Economics course it has brought so many things to our attention, especially since we see inflation, gas prices, unemployment and interest rates on the rise. It has given us a better understanding of the effect of the Government on the economy, the stock market, the interest rates, etc. Since the Federal Government has such a control over our Economy, we decided to tackle the subject of the Federal Reserve System and try to get a better understanding of the history, the structure, and the monetary policy of the power that it holds.

Monetary Policy, in the United States, is the process by which the Federal Reserve controls the money supply to promote economic growth and stability. It is based on the relationship between interest rates of the economy and the total supply of money. The Federal Reserve uses a variety of monetary policy tools to control one or both of these.

President Ronald Reagan signed the Economic Recovery Tax Act of 1981 into law on August 13, 1981 that proposed to stimulate the growth of the economy by reducing income tax rates, which provided incentives for small business owners. The Act, implemented from the Laffer curve theory stating an increase in tax rates provides government revenue until a hypothetical point in the curve where the rates are too high to provide the incentive for individuals to continue working and paying taxes at which point the government revenue would relatively decrease. The results eliminated tax bracket creep, however to continue gaining revenue it caused the signing of several other tax bills throughout the 1980s and into the early 1990s to compensate. Whether or not any benefit came from the Act is up to debate. Skeptics claim it increased the United States deficit, and others defend it stating that the cuts increased revenue and held economic expansion responsible for the deficit that would have gone unrestrained without the Act.