Supply-Side Economics
Objectives of supply-side
 These policies focus on shifting LRAS to the
right in order to achieve long-term economic
 There are two major types of supply-side
policies that we will discuss today
Market-oriented supply-side
 Based on the neo-classical point of view, economists in
the early 1980s argued that growth in real GDP
depended on the supply-side of the economy as
opposed to the demand-side.
 They argued that increasing potential output should be
the focus of economic policy, not the stabilization of
the business cycle
Any takers? We’re in!
The foundation
 As we know, neoclassical economists argue
that in the long-run, macroeconomic
equilibrium always occurs at the full
employment level of GDP, automatically
eliminating inflationary and recessionary gaps.
The possibilities
 Supply-siders argue that an economy pursuing supply-
side policies will be able to achieve rapid growth, price
stability and full employment all at the same time.
 The key is to continuously shift SRAS and LRAS to
the right and watch increases in AD follow accordingly
Stagflation? No problem!
 Supply-siders argue that if a negative supply shock
occurs in the economy, supply-side policies can
effectively shift the SRAS curve back to its original
position, thus dealing with the dual problems of an
increasing price level and falling output……Remember,
demand-side policies can only fix one of those
So how do we put supply-side
policies into effect?
 Market-oriented supply-side policies focus on
introducing legislative, regulatory and institutional
changes in the economy which are intended to increase
efficiency of production, decrease the natural rate of
unemployment, and increase the economy’s
production possibilities.
The gospel according to
 Supply-side policies can be classified under four particular
categories. They include:
 Reducing the size of the government sector
 Lowering taxes on businesses
 Making the labour market more competitive
 Liberalizing international trade and capital flows
Smaller government
 Remember me driving my government car, working 3
hours a day, people asleep at their desks, expensive
trips to Puerto Rico? Supply-siders argue that this is
common and changes need to be made. Their
proposals to reduce the size of the government
 According to supply-siders, by transferring ownership
of a firm from the public to the private sector,
efficiencies will result due to the more competitive
nature of private industry.
 No more sleeping at your desks!
 No more 3 hour workdays!
Private financing of public
sector projects
 Need a highway or airport built? Supply-siders want
private firms to build, finance and operate public
services, and then allow the government to buy these
services from the private firm.
 The thinking here is that private firms will be more
efficient and the government sector will be reduced
 Rather than the government employing armies of
accountants, information technology workers and
other professionals, supply-siders want government to
hire private firms to provide these services.
 Increased efficiencies and competition should result
from outsourcing of this work according to supplysiders
Deregulation (2 kinds)
 Economic deregulation involves removing government
controls on price and output in industries such as
airlines, broadcasting, energy, and financial services.
 Again the argument is that with less government
involvement, more competition and inefficiencies will
Deregulation (2 kinds)
 Social deregulation involves removing some of the
protections for consumers in areas such as product safety,
pollution control and injuries in the workplace.
 Supply-siders argue that all these protections for consumers
are unnecessary, cost businesses too much money to comply
with, and result in less output by firms due to the excessive
Restricting Monopoly Power
 Supply-siders want to take away monopoly power from
firms, by breaking them up and ensuring more
competition in the industry.
 They also try to prevent mergers of companies who
could achieve monopoly power if they were permitted
to join together.
Lowering personal income taxes
 Supply siders argue that cuts in personal
income taxes will have an even greater effect
on aggregate supply than on aggregate
 How does that work you ask?
Lowering personal income taxes
 Supply-siders argue that if the tax rate on individuals is
lowered, people will take home more money and then:
 be motivated to work more hours,
 motivate unemployed people to go back to work,
 delay retirement dates.
 All these can shift LRAS to the right
Lowering taxes on interest
 Supply-siders argue that if interest income is not taxed,
people will save more money, therefore increasing the
funds available for businesses to borrow which will
lead to greater capital expenditures and more output.
 The wealthy like this idea 
Lowering business taxes
 Supply-siders argue that cuts in business taxes lead to
increased spending on capital goods and more money
to spend on technology and research and development.
This should also lead to increased output
 Business owners like this idea 
Increasing labour market
 Supply side economists argue that making the labour
markets more competitive will lead to increased levels
of aggregate supply.
 They point to several ways this can happen….
No more minimum wage!
 Supply-siders argue that if minimum wage was
eliminated, wage rates would fall to the equilibrium
level, companies would hire more workers at the lower
rate, company profits would increase, which would
then lead to increased investment on capital goods, and
long-term economic growth
 Whaddya think?
Down with Unions!
 Supply-siders argue that unions keep wage rates above
the equilibrium rate, having the same detrimental
effects on the economy as minimum wage. Less union
labour would mean lower wage rates, more workers
employed, greater business profits, and long-term
economic growth
 Whaddya think?
Reducing unemployment
 Supply-siders argue that unemployment benefits are
too generous and discourage people from looking for
work. If we reduce unemployment benefits, lazy
people will get motivated to work, find jobs, and
increase the level of output in the economy.
 Whaddya think?
Reduce job security
 Supply-siders argue that job security for workers makes
them lazy and unproductive. Put a little fear into a
worker and he/she will work harder, it will be easier to
fire unproductive workers, and economic output will
 Whaddya think?
Liberalizing international trade
 Supply-siders argue that increased global trade and
capital flows increase competition and improve
allocation of resources.
 We’ll talk more about this later in the course, but it is a
key point of supply-side economic policy
Interventionist supply-side
 Market oriented supply-side policies argue that if
markets are free, efficiencies will result. Supply-siders
also argue for some government intervention to affect
the aspects of the economy that the market itself will
not act upon.
 Such as…..?
Training and Education
 Improvements in training and education lead to more
productive workers. Improving the quality of our
factors of production is one way towards achieving
economic growth, right?
 Hard to argue with that one isn’t it?
Improved Health Care
 Healthier workers are more productive workers and
another improvement in our quality of factors of
 Hard to argue with that one isn’t it?
Research and Development
 R & D leads to technological innovation and large
potential gains in economic growth. Tax incentives to
businesses in this area, as well as patent protection for
inventions are all supported by supply-sider economists
 Hard to argue with that one too isn’t it?
Support for infant industries
 Supply-siders argue for the support of small, growing
firms through tax breaks, grants, subsidies and other
 Small companies can become giants very quickly, right
Mr. Google?
 Investments in infrastructure such as roads, airports
and telecommunications can increase efficiencies in
production as costs are lowered.
 Hard to argue with that one isn’t it?
Other interventionist policies
 Provision of job information
 Support for adolescent industries
 All of the above interventionist policies are known as
industrial policies because they are designed to support the
industrial sector of the economy and shift LRAS to the
right. These might not be provided by the free market so
government must be involved.
Criticism of interventionist
 Some argue that any government involvement in the market
is likely to do more harm than good.
 Others argue that using government tax money to support
industries could be more wisely used elsewhere, and
requires a higher level of taxation that they would like.
 So what say you, are there any supply-siders in the room?
Me neither!