Supply-Side Theory
Categories: Econ, Financial Theory
See: Supply Side Economics.
The economy rolls along, as it does, thanks to the marriage of supply and demand...a holy matrimony, indeed. But when times get tough, do we try to bolster demand, or supply?
Supply-side theory says “supply!” Supply-side theory theorizes that making an economy business-friendly...and therefore supply-friendly...is the most effective way to stimulate economic growth.
Business-friendliness includes deregulation, cutting corporate income taxes, and supporting entrepreneurs. Supply-side theorists believe things like regulations and corporate income taxes stifle the economy. Supply-side theory is also called trickle-down economics, because the idea is that all this economic stimulus from free flowing production will trickle down the economic ladder, benefiting everyone in the economy.
Reaganomics, the economic policy put in place during the Reagan admin in the 1980s, put supply-side theory into action. The top tax rate and corporate tax rates were cut, and the national debt went up on a steeper incline than before.
Did supply-side theory pan out? Well...mixed opinions as to what these changes did for the economy, as in GDP, but overall, economists believe the cuts neither helped nor hurt that much, based on the data.
As far as the trickle-down aspect goes...that’s another story. Income inequality in the U.S. has been increasing since the 1980s. Hourly wages and net productivity were rising in tandem at similar rates, until they diverged in the late '70s. From 1979 to 2017, worker productivity increased 138%, while worker pay increased 23%, suggesting that productivity gains have not trickled down as supply-side theory theorized.
Supply-side economics is still around. The 2017 Trump tax bill is based on supply-side theory, cutting both income and corporate taxes to boost the economy. This contrasts with the reigning Keynesian macroeconomic theory, which is more demand-side theory...about giving consumers more buying power so they can spend, spend, spend. While most modern day, high GDP countries run on Keynesian principles, supply-side theory is far from being a thing of the past.