Read this supply side economics definition covering its theory, policies and problem in relation to economic growth through the supply of goods and services.
Definition of Supply Side Economics
It is an economic theory which suggests that the only surest way of stimulating economic growth is through increasing the economy’s ability to supply goods and services.
This economics theory is popularly known as “Reaganomics” or the “trickle – down” policy. Proponents of this theory hold that for an economy to grow the production of goods and services is very vital. They believe a cut in marginal tax will encourage more investors. This in turn create more job opportunities and the economy will grow.
Additionally, they dismiss the Keynesian theory which asserts that demand for goods and services is the key to economic growth. They further argue that the supply side creates its own demand. Even when there is a glut, the price of the commodity lowers and the consumers will buy more to offset the excess supply. Similarly, if there is a deficit in supply, the price will shoot up. This will encourage suppliers to supply more due to supernormal profit margins.
Supply side Economics Pillars – Tax policies
Proponents of this branch of economics argue that a reduction of marginal income tax will have a positive impact on economic growth. To explain this notion, they argue that a reduced income tax will work as an incentive to induce workers to even work during their leisure time as they will earn more.
A reduction in capital gains tax will also encourage more investors in the economy. This will have a multiplier effect as it will create more job opportunities and thus grow the economy.
On regulatory policy, such economics prefer a free market with little government interventions. This is so because they believe the supply of goods and services can self regulate itself.
The theory asserts that monetary policy is of no economic value as it may create excess inflationary liquidity with an expansionary policy or halt economic growth with a contractionary policy.
Problem with supply side
Proponents advocated for a reduction of taxes which they argue will spur economic growth by trickling down the economic benefits. However, they don’t acknowledge the fact that for the supply side to flourish they require infrastructure such as passable roads. Reduction of taxes will limit government spending on such vital instruments and the effect can be counterproductive.
In conclusion, both Keynesian and supply side economics should be used simultaneously if an economy is to experience any growth.