Supply Side Economics

According to the economic theory known as “supply side economics,” an economy can grow by increasing the overall, or aggregate, supply of goods and services available to its citizens. This is accomplished by lowering financial obstacles that prevent manufacturers from offering surplus goods and services at a discount, which will increase demand. The most often mentioned strategy for lowering these obstacles is to lower marginal tax rates. The fundamental tenet of supply side economic theory is that an economy’s ability to expand depends more on the quantity of products and services provided than it does on the demand from all segments of the economy. Over time, supply-siders contend that any financial impediment to supply deters labor inputs—workers—and businesses from exerting more effort, which lowers overall economic production. Conversely, an economy with low barriers to entry for its businesses and people will see an increase in the output of goods and services. Prices are lowered as a result of the extra goods and services produced, encouraging customers to purchase more and utilizing the excess supply.  The quantity of taxes imposed on both individuals and businesses is the primary tenet of supply side economic policy. Governments encourage their populations to work and invest by changing tax rates.

Lowering the marginal income tax rate, according to supply-siders, should encourage people to work harder and businesses to generate more goods and services. Reducing capital gains taxes through income tax cuts would encourage more investment. Reducing taxes would also increase business earnings, which would improve the value of stocks and other assets and, ultimately, increase consumer spending. Conversely, a rise in marginal tax rates tends to discourage people from working and encourages them to engage in more leisure activities.

The function of regulatory policy forms the second pillar of supply side economics. According to supply side economics, government interference prevents businesses and individuals from creating commodities and services. They contend that government restrictions, quotas, and subsidies are examples of intervention. The effective labor supply, according to certain supply side theorists, is distorted by government involvement in the form of welfare, minimum wage, unemployment insurance, and other entitlement programs. They contend that resource allocation is most effectively accomplished through free markets. Because they believed that governments are monopolists, inefficient because they are not “profit-maximizing,” and lacking in market discipline, supply side economists advocated for smaller governments. Large, bureaucratic, and inefficient governments are not the lowest-cost providers of these services, according to pure supply side economics, even when it comes to genuine public goods (like military) and merit goods (like aid for the poor). According to supply side economics, central banks’ monetary policies—such as those of the US Federal Reserve—to regulate the money supply in an effort to manage employment, aggregate demand, and inflation are ineffectual. Supply-siders are concerned that when central banks loosen monetary policy in an attempt to boost the economy, needless inflation will result. Conversely, supply side economists lament tight monetary policy because it deprives the market of vital liquidity.