Does supply-side economics work? Why or why not?
1 answer:
Answer:
It depends
Explanation:
<h3>What is Supply-Side Economics?</h3>
Supply side economics is an economic theory that supports deregulation and tax cuts. It focuses on making business easier believing in positive effects that will be felt by the entire economy. It encourages businesses and the wealthy to save or invest, increasing GDP and ultimately growing the economy. In sum, it is a form of fiscal policy that benefits businesses before consumers. (Opposite of Keynesian theory)
This theory can be visualized and a little bit better explained with something called the Laffer Curve. I've attached an image of this curve on my answer that might aid your understanding.
The laffer curve works like this: On the x-axis you'll see the tax rate and on the y-axis you'll see government revenue. You'll notice that it is a bowed-out shape, indicating that as tax rates increase past a certain point, government revenue actually decreases. This is because the tax rate is so high that the marginal benefit of working becomes close to 0, and the wealthy have little incentive to work because their wealth will go to the government anyway. Supply-side economics uses this theory to advocate for lower tax rates that will incentivize people to work, invest, save, and ultimately be part of the economy.
The short and easiest answer to if supply-side economics works is it depends. This is because it really depends on the specific policy, how it;'s implemented, and the overall state of the economy. Additionally, it also depends on what is specifically meant by "Does it work?" Is economic growth the only factor being considered?
As you can see by the Laffer curve, if tax rates are already past the vertex, supply-side economics will increase tax revenue while keeping the economy productive. However, if it has not reached the vertex yet, and further tax cuts are made, the economy may grow, but the government may find itself in debt due to not enough revenue.
On the other hand, if the economy is in a recession, tax cuts are certainly able to boost the economy by giving people more spending power. If the economy isn't, drastic tax cuts could result in inflation. Moreover, economists disagree on whether the trickle-down economic benefit really exists. Some have found that tax cuts increase GDP, while others believe that there is a minimal effect.
As I mentioned previously, the base of supply-side economics is really the Laffer Curve, which was created by economist Arthur Laffer back in the 1970s. However, what really made supply-side economics a widely known phenomenon is President Ronald Reagan and his economic policy in the 1980s, which is why supply-side economics is often referred to as Reaganomics. You can further evaluate the effectiveness of supply-side economics by looking at the effects of its implementation throughout history. For example, Reagan's implementation of the policy was able to drastically reduce the stagflation in the time period, however, it also contributed massively to the US national debt due to the lower tax revenues.
President Bush also utilized this policy, though the positive effects on the economy are often contributed to other factors and some even argue that he set the economy up for failure during the 2008 recession by increasing deficits.
Of course, the economy is a complicated system that depends on a variety of factors, so it is impossible to contribute economic growth to one cause. Therefore, it really depends on other factors, the state of the economy, and the implementation of the policy to truly determine if supply-side economics work in each scenario.
Learn more about supply-side economics here:
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