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The mystery of supply-side economics: How did it emerge from the economic crisis of the 1970s?
Supply-side economics is a macroeconomic theory that argues that lowering taxes, reducing regulations and promoting free trade are the most effective ways to promote economic growth. According to the theory of supply-side economics, consumers will benefit from a greater supply of goods and services, lower prices, and increased employment. Such policies are designed to increase aggregate supply rather than make up for aggregate demand, thereby expanding output and employment while reducing product prices.
"Today, few economists believe the views of the Keynesians of the 1970s, and most accept the basic ideas of supply-side economics."
Specific examples of supply-side policies include investments in human capital, such as education and health care, and encouraging the transfer of technology and business processes to improve productivity. In addition, global free trade has further promoted economic growth. Lower taxes are seen as an incentive to work and to increase the willingness to invest and take risks. Lowering income taxes and imposing lower tariffs are examples of these policies.
One of the foundations of supply-side economics is the Laffer curve, which is a theoretical relationship between tax rates and government revenue. According to the Laffer curve, when tax levels are too high, lowering tax rates will increase government revenue through higher economic growth, although the discussion on how high is "too high" remains controversial.
"Supply-side economics argues that tax rates and tax revenues are independent."
Historical Origins
Supply-side economics originated during the stagflation period of the 1970s. This trend of thought draws on the ideas of various non-Keynesian economic theories such as the Chicago School and the neoclassical school. Bruce Bartlett, one of the proponents of the theory, even traced its philosophical roots to Ibn Khaldun, David Hume, and Adam Smith. A thinker.
Definition and Principles of Supply-Side Economics
Supply-side economics believes that adjustments to marginal tax rates have a significant impact on total supply. Some economists believe that supply-side advocacy was the basis of Reagan's tax policy and was reflected in the sharp reduction in US tax rates in the 1980s. Compared with Keynesian policies that focus on demand management, supply-side economics emphasizes production rather than consumption, and believes that supply is the key factor in economic prosperity.
The role of marginal tax rates
The core of supply-side economics is to promote economic growth. Studies have shown that marginal tax rates affect individuals’ decisions on income distribution. Higher tax rates will reduce the willingness to invest and save, and vice versa. In addition, marginal tax rates also affect the allocation of time between work and leisure, which further affects economic productivity.
Laffer Curve
The Laffer curve further supports the argument of supply-side economics by showing the mathematical relationship between taxes and tax rates, which holds that taxes are maximized at some unknown tax rate point. Supply-side economists believe that lowering excessively high tax rates can promote investment and economic growth, thereby increasing total revenue from income tax and capital gains tax.
Supply-side economics in practice
In American history, the economic policies of the Reagan administration are often equated with supply-side economics. Reagan promised a nationwide income tax cut and pledged during his 1980 campaign to beat inflation through production rather than traditional monetary tightening. In the years since, a reduction in capital gains taxes and a slew of tax cuts have fueled a short-term recovery. However, these policies have also sparked controversy over budget deficits.
In addition to the practices during the Reagan era, the Clinton administration's initiatives also contrasted with the supply-side philosophy. Clinton improved the budget by raising taxes on the rich and created a large number of jobs during this period. Similarly, Kansas' tax cut experiment also caused widespread discussion, and the economic growth brought about by the tax cuts was not as significant as expected.
Supply-side economics has returned to the spotlight during Trump's administration, with tax reform and tariff policy becoming important topics. Although some of the ideas put forward by supply-side economics overlap with mainstream economics, they often cause controversy during implementation.
Overall, the concept of supply-side economics has evolved and been challenged in different economic periods and political upheavals. So, how should we view the impact of supply-side economics when dealing with economic difficulties in the future?
