Supply Side Economics

Supply side economics is a macro-economic theory that suggests economic growth is most effectively created by lower tax rates and decreasing regulation, letting the free market grow and handle its own affairs. Named after the rise in supply curves that cutting taxes and regulation causes, supply side economics argues that consumers will benefit from larger supply, as prices will go down and employment will increase.

Lowering taxes and regulations on big businesses lowers the cost of expansion, incentivizing businesses to grow and invest in more capital and equipment. Supply side economics argues that the growth of such businesses is beneficial as more jobs are created, consumers have more supply to choose from and thus lower prices, and the economy will grow. Additionally, the growth in the economy would supposedly make up for the revenue lost due to the tax cuts. This is similar to trickle down economics which states that giving the wealthy more money would incentivize them to invest it back into the economy where it would then trickle down to the lower classes.

In theory, supply side economics works perfectly, in the short run it gives the economy the boost it needs to get out of a recessionary gap. In the long run it promotes economic growth as the money is recycled back into the economy allowing the economy to grow and the government to recoup the loss of their tax cuts.

In practice, it's a little more complicated. Supply side economics was put into practice during the Reagan administration of the 1980s. During this time the economy did indeed grow as corporate spending increased and revenue increased. However, the government revenue made from the growth was not a one for one correlation with their tax cuts. It's estimated that for every dollar of taxes the government cut they made back 17 cents from the economic boom. Coupled with large increase in defense spending during that time, Reagan increased the national debt by about 186%.

Later it was discovered that tax cuts do not affect all classes equally. Tax cuts towards poorer income families almost directly lead to higher spending as the poor use their money to buy more things. As a result the national aggregate demand curve shifts up and to the right. Tax cuts on middle to high income families are more volatile, sometimes the money is injected back into the economy, sometimes it is saved or used to pay off debt, sometimes it is invested, which boosts the stock market and banks, but not retail. Tax cuts on the wealthy or large corporations are even more varied, sometimes the money (as predicted) does get invested back into the economy, other times the money pools at the top and the lower classes only get a small percent of the taxes cut from the rich (the 17% mentioned earlier).

Ultimately, supply side economics does not work exactly as planned. Some argue that cutting taxes on the rich only makes them more rich, and that a better policy would to let the money rise from the lower classes up to the higher ones (demand side economics?). Others say it can be used correctly to boost the economy because individuals don't have the investing power of a large corporation, and that the short term boom is causes in the economy is still useful. Economists still argue over whether supply side economics is the most efficient way to grow an economy over the long term. And because any given economy has so many uncontrollable variables, testing such theories can be incredibly inaccurate.

Sources:

https://www.thebalance.com/supply-side-economics-does-it-work-3305786

https://www.masterclass.com/articles/learn-about-supply-side-economics-history-policy-effects

The Gospel of Supply Side Jesus - Highly Recommend:

https://imgur.com/gallery/bCqRp