What is Supply Side Economics and How it Failed to Foster Equitable Economic Growth

What is Supply Side Economics, How it Works, and Why It Became Popular in the 1980s

According to economic theories, the economy can be stimulated either through putting money in the hands of the people or in the hands of firms.

While the former targets consumer spending by increasing the disposable incomes in the hands of the consumers, the latter ensures that firms and businesses have enough money to ramp up production and produce more leading to more supply that creates its own demand.

This is the so-called theory of Supply Side Economics that promotes the idea that increasing the supply of goods is the best way to stimulate economic growth.

Another tenet of Supply Side Economics is that by ensuring that corporations have enough money to produce more goods, the consumers benefit by decreased prices thereby leading to more consumption and in the process, stimulating economic growth.

Indeed, this is the reason why Tax Cuts and Tax Breaks for the Rich and the Big Businesses are thought to be the answer to how economic growth can be fostered.

This concept of Supply Side Economics became popular in the 1980s during the time of President Reagan and the famous Chicago School Economists.

Why Supply Side Economics Failed and How Targeting Only Supply Does Not Deliver

However, Supply Side Economics has its own limitations and as an Economic Paradigm, it has failed to foster equitable economic growth.

Indeed, the period from the 1980s to the present has seen the Rich Become Richer and the Poor Become Poorer as Big Businesses produced more but not in proportion to the needs of the consumers who were forced to contend with higher prices despite the generous largesse bestowed upon the former.

Moreover, along with the Trickle down Economics Theory which proposed that Wealth Trickles down from the Top to the Bottom, these theories, though pushed by the mainstream economists, failed to deliver the results for those at the Bottom of the Pyramid.

The point to be noted here is that increasing supply does not always guarantee equitable economic growth in the absence of corresponding rise in spending power of the consumers.

In other words, without disposable incomes rising, increasing supply does not lead to a corresponding increase in demand.

In addition, the forces of demand and supply that determine economic activity are such that they need to move in tandem with each other and tinkering with only side of the demand-supply equation does not solve the economic problems.

How the American Rescue and Recovery Act Represents a New Economic Paradigm

Therefore, the spectacular failure of Supply Side Economics is the reason in recent years; many economists have been discarding this theory in favour of putting money in the hands of the people.

This is the thinking that led to the passage of the Covid Relief Bill or the American Rescue and Recovery Act this week that was the first substantial legislative win under the Biden Administration.

Indeed, some commentators are calling this Act as the one that finally upends decades of economic orthodoxy that started with President Reagan in the 1980s.

Of course, there are those who complain that putting money into the hands of the people leads to inflation as increasing spending drives up the prices of goods and services.

In addition, there are others who point out that this increased disposable income can result in consumers hoarding money and increasing savings rather than spending leading to no tangible results for the overall economy.

However, as an experiment in stimulating economic growth, there is every chance that this New Economic Thinking might yield the results that are expected from it.

Whatever be the outcome, it is notable that there has been a perceptible shift in the way economists think.

Why We Must Discard Neoclassical Economic Theories In Favour of Centrist Theories

Having said that, there is also a case to be made for moving away from the Neoliberal Classical Theories of Supply Side Economics and Trickle down Economics along with Unfettered Capitalism and Deregulated Markets.

In other words, these theories have failed to ensure equitable growth over the decades and have led to widening inequalities and inequities in societies worldwide.

Though even emerging and developing countries accepted this dogma, the results have been anything but equitable and hence, it is our argument that the time has come to discard and discredit these theories.

As an alternative, there are many who propose that the Wealthy pay more tax and also pay higher minimum wages.

The recent economic depression has been blamed on excessive wealth and income gaps and hence, in the United States, there is a strong push for reducing this unconscionable and glaring injustice.

Of course, one can also say that whatever its failings, Supply Side Economics did lead to more efficiencies in the way we make and distribute goods and services and has also led to more efficiencies from the economies of scale and synergies from integration.

So, there are some benefits of Supply Side Economics to the overall economy.

New Paradigms for the Fourth Industrial Revolution

Last, as the world moves into the Digital Age, what we need is a new approach to economic thinking and economic growth and a movement away from neoclassical thinking.

In addition, as the Fourth Industrial Revolution gets underway, we also need to recalibrate our systems and paradigms for the new realities.

Apart from this, the present economic depression is also forcing us to adopt unconventional approaches.

Therefore, put together, what all these aspects indicate is that we must embrace the kind of thinking that the Covid Relief Bill envisages and take this as the first step towards a changed paradigm.



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Managerial Economics