5 Reasons Supply-side Economics Doesn’t Work

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What is supply-side economics?

Supply-side economics is a widely held belief that increasing the supply of goods and services fuels economic growth. A key principle of this theory is to create a better climate for companies, suppliers. Supply-side actors believe that when corporations and the wealthy are wealthier, everyone prospers, so their policies typically focus on tax cuts, deregulation and lower interest rates. This contrasts this approach with Keynesian or demand-side economics, which is based on the idea that economic growth is generated by putting more money in the pockets of consumers.

The basic idea behind supply-side economics is that companies reinvest their profits, which leads to more jobs, higher productivity, higher tax revenues, etc. This is largely how US President Ronald Reagan, and countless politicians since, sold supply-side economics to the public and paved the way for its acceptance.

However, not all economists agree with this theory. Many experts, armed with decades of evidence, disagree that when the wealthy succeed, their extra income trickles down to everyone else.

Key points to remember

  • The supply-side economy, which is based on the belief that everyone prospers when corporations and the wealthy have more money at their disposal, is an economic model used by many countries.
  • Supply-side policies typically focus on tax cuts, deregulation, and lower interest rates.
  • Many claims made by supply actors have been factually challenged.
  • Data shows that tax cuts and other policies aimed at increasing corporate profits do not always translate into jobs, investment, productivity and economic growth.
  • Nor is there any hard evidence supporting the view that tax cuts pay for themselves.

History of supply-side economics

Supply-side economics was first introduced as an economic theory by Arthur Laffer in the 1970s. Laffer argued that tax cuts stimulate demand, which translates into more business opportunities. employment and wealth circulating in the economy.

It didn’t take long for Laffer’s theory to enter the mainstream. In the 1980s, President Reagan and British Prime Minister Margaret Thatcher advanced the idea that the money saved by high earners by paying less tax would be pumped back into the economy for the benefit of all, and adopted the supply-side economy in their respective countries.

Tax cuts for the rich are an economic policy that has been championed by several prominent politicians since, including George W. Bush and Donald Trump. More recently, it was also a feature of Liz Truss’ disastrous short stint as British Prime Minister.

Truss lasted just six weeks in office after his bold call to tax Britain’s wealthiest less during an unprecedented cost of living crisis backfired. The move scared off investors, destroyed the value of the local currency, and was abandoned, much to Truss’ humiliation, in less than a month.

Supply-side economics is sometimes called Reaganomics because it was President Reagan who popularized this theory and generalized it.

Cracks in the armor of the supply economy

Few subjects divide economists as much as that of supply. For every expert who swears this economic approach works, another vehemently disputes it.

Like other theories, supply-side economics is not perfect and has some flaws. Here are five main reasons why the theory has been debunked.

Tax cuts don’t create more jobs

If companies are taxed less, they will use their excess savings to employ more staff, supply players argue. The problem is that there isn’t much evidence to back this up.

From 1982 to 1989, when the United States was ruled by Reagan and taxes were drastically reduced, the working population did not increase more than before. A similar thing happened under the watch of George W. Bush. In 2001 and 2003, Congress passed two generous tax cuts for the wealthy, and the slowest job growth in half a century followed.

Supply-side policies have weakened investment

Data supporting the popular view that lowering taxes on the wealthy further stimulate investment is also hard to come by. In fact, the Center for American Progress, citing figures from the Bureau of Economic Analysis, said that average annual growth in nonresidential fixed investment was significantly higher in the 1990s than in the Reagan and Bush decades.

Ironically, in the 1990s, the top income tax rate was increased.

Supply-side economics is not synonymous with productivity growth

Another thing that supply-side advocates often talk about is productivity growth. In a 2017 essay, Republican economists John Cogan, Glenn Hubbard, John Taylor and Kevin Warsh claimed that productivity growth had “increased dramatically” in the 1980s and 1990s after tax cuts and the removal of the regulations.

Other economists, including Brad DeLong and Nouriel Roubini of Berkeley, quickly proved that this claim was not based on evidence and that productivity growth had in fact been in decline since World War II. According to Roubini, the annual productivity growth rate hovered around 1.1% between 1973 and 1997, and did not change course during the 1980s.

Tax cuts do not stimulate stronger economic growth

All of the above reminds us that supply-side economics does not always achieve what its proponents claim and is in no way a guarantee of economic growth. Often, supply-side actors cite the 1980s as proof that these policies are driving economic upturns. However, as Nouriel Roubini points out, the resumption of growth observed from 1983 to 1989 came after a severe recession and is not extraordinary.

Further evidence that traditional supply-side policies do not stimulate economies has been uncovered in Kansas. In 2012 and 2013, lawmakers cut the top state income tax rate by nearly 30% and the tax rate on certain corporate profits to zero in a desperate attempt to boost the economy. local. This experiment lasted about five years and did not go well, as Kansas’ economy underperformed most neighboring states and the rest of the country during that time.

Tax cuts don’t pay for themselves

A key selling point of supply-side economics is that tax cuts actually increase overall tax revenue by boosting employment and people’s incomes and therefore do not leave the country even more indebted. This view has gained political popularity but is not supported by much concrete evidence.

Nor are the economic benefits of deregulation as obvious as the proponents of supply suggest. While some regulations can be unnecessary and onerous, the majority are essential standards that underpin the economy and protect consumers.

In fact, the data shows that budget deficits skyrocketed during the era of Regan’s tax cuts. According to the New York University Stern School of Business, the ratio of public debt to GDP rose from 26.1% in 1979 to 50.6% in 1992.

The National Bureau of Economic Research (NBER) also denied talk of paying tax cuts. According to his estimates, for every dollar of income tax reduction, only 17 cents will be recouped through increased spending.

What do economists think of supply-side economics?

Reviews are mixed. Some economists firmly believe that putting more money in the pockets of businesses is the best way to ensure economic growth. Others strongly dispute this theory, arguing that wealth does not trickle down and the only result is that the rich get richer.

What are the disadvantages of supply-side policies?

The most obvious drawbacks are the time it takes for these policies to work, the fact that they can be very expensive to implement, and the backlash they receive from leftist thinkers. Telling the public that helping the rich will benefit everyone is a tough sell, especially since there is no concrete evidence to back it up.

Are there examples of supply side policies that work?

Although there are many shortcomings in supply-side economics, it is not completely flawed, although its success can be difficult to measure. It takes a long time to reap the benefits of these policies and any good that comes from them can also be attributed to something else. A lot also depends on your political position. Some people credit Reagan and Thatcher with bailing out the economy in the 1980s. Others think their supply-side policies ruined everything and spurred inequality.

The essential

The supply-side economy, which posits that everyone prospers when companies have more money at their disposal, has reshaped the way most major world economies work. The fact is that not all economists agree with the “trickle down” theory. A lot of evidence has been presented to support the view that supply-side economics is not working as advertised. According to their findings, this economic model does not create more jobs and does not stimulate the economy or result in similar overall tax revenues.

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