Supply-Side+Economics

=Supply-Side Economics= Supply-Side Economics is a school of macroeconomic thought that argues that economic growth can be most effectively created using incentives for people to supply and produce goods and services such as fixing income tax and capital gains tax rates, by allowing greater flexibility by reducing regulation. The typical policy recommendation of supply-side economics is to achieve the proper level of marginal tax rates, which, by moral goodness of the high rate of taxes in general, equates with cutting of taxes. Many early proponents argued that the size of the economic growth would be big that the increased government revenue from a faster growing economy would be sufficient to completely compensate it for the short-term costs of tax cuts and that tax cuts could increase the revenue. toc =Beginning=

Supply-side economics developed during the 1970s in response to the Keynesian dominance of economic policy and the failure of demand management to stabilize Western economies during the stagflation of the 1970's, in the wake of the oil crisis in 1973. As in classical economics supply-side economics proposed that production or supply is the key of prosperity and that consumption and demand is entirely a secondary consequence. =Effects=

1970's
In 1971, Richard Nixon stopped the convertibility of the US dollar into gold. Commodity prices, including gold and oil particularly, which had been rising steadily in response to the dollar glut. The supply side explanation for this event is that taxation on investment had depleted the incentive to capital investment either in new sources of materials or in substitute goods, which when combined with eroding confidence in the U.S. dollar cause to be rapidly devalued.

Stagflation
Robert Mundell believes Nixon's failure to cut taxes in the early 1970's to be the cause of stagflation, his argument being that the incentive for individuals to invest was reduced to below zero. The argument form the supply side point of view then goes on to state that the cuts in capital gains tax rates were part of the 1981 tax package incentives to invest.

Criticism
Critics of supply-side economics point to the lack of academic economics credentials by movement leaders such as Jude Wanniski and Robert Bartley to imply that the theories were bankrupt. The continuing debate on supply-side policies tends to focus on the massive federal and current account deficits, increased income inequality and its failure to promote growth. =Conclusion=

Some theorists see supply-side economics as "a half baked economic theory." Other economics disagree and dismiss it as nothing particularly new or controversial to an updated view of classical economics. A lot of proponents argued that the size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would be sufficient to make up completely for tax cuts costs. =References=

http://www.econlib.org/library/Enc/SupplySideEconomics.html

http://www.investopedia.com/articles/05/011805.asp

http://en.wikipedia.org/wiki/Supply-side_economics = = = =