Supply Side Economics

Supply-side economics is better known to some as "Reaganomics," or the "trickle-down" policy espoused by 40th U.S. President Ronald Reagan.

President Reagan and his Republican contemporaries popularized the controversial idea that greater tax cuts for wealthy investors and entrepreneurs provide them with incentives to save and invest, and produce economic benefits that trickle down into the overall economy.

He often quoted the aphorism "a rising tide lifts all boats" to explain his take on the theory.

Understanding Supply-Side Economics
Like most economic theories, supply-side economics tries to explain both macroeconomic phenomena and—based on these explanations—offer policy prescriptions for stable economic growth.

In general, the supply-side theory has three pillars: tax policy, regulatory policy, and monetary policy. However, the single idea behind all three pillars is that production (i.e. the "supply" of goods and services) is most important in determining economic growth.

The supply-side theory is typically held in stark contrast to the Keynesian theory which, among other facets, includes the idea that demand can falter, so if lagging consumer demand drags the economy into recession, the government should intervene with fiscal and monetary stimuli.

This is the single big distinction: a pure Keynesian believes that consumers and their demand for goods and services are key economic drivers, while a supply-sider believes that producers and their willingness to create goods and services set the pace of economic growth.

The Argument That Supply Creates Its Own Demand
In economics, we review the supply and demand curves. The chart below illustrates a simplified macroeconomic equilibrium: aggregate demand and aggregate supply intersect to determine overall output and price levels. (In this example, the output may be the gross domestic product, and the price level may be the Consumer Price Index.)  READ MORE...