Don't you need to decrease spending for supply side economics to work?

Question

How can presidents keep telling people that supply side economics works, and then practice it incorrectly, creating deficits? How can you still support someone who cuts taxes, without cutting spending? I need to know how this is conservative...has supply side economics ever been practiced successfully in reallity?

Ken, what happened between 1984 and 1988? Just trying to 'get my facts' straight'...oh, and the allusion to supply side econ being exercised by Bush is a claim made by many on the right, and the inspiration for asking this question...got it?

Answer 1

You don't, necessarily, but you shouldn't increase it either.

Answer 2

The purpose of supply-side economics is to stimulate the economy--in this respect, it has worked. However, to be sustainable, spending has to at least remain constant, not be increased. Don't forget, however, the Keynesian, or demand-side of the equation. This what was used to get this country out of the Great Depression. This theory states that government spending can be used to stimulate demand, thus stimulating the economy. This works well, and the combination of supply-side economics and demand-side is what got us here today. The problem with demand-side is that it cannot be used to exclusion of the other. When demand-side economics was used exclusively, what that got us was the stagflation of the 1970s. It took supply-side economics and a tight monetary policy to get us out of stagflation. That's the third piece of the puzzle--economic monetary policy. Monetary policy is what keeps inflation in check by restricting the growth of the money supply. When these three schools of thought are used correctly, they can have exactly the right effect on the economy.

Answer 3

The basic idea to what is called supply side economics is that supply will create its own demand. In other words, if you start producing more products, a demand for those products will develop. It opposes the theory that a demand for products must first exist. Relating this theory to tax cuts to business is a stretch.
The supply side theory states the business must put capital into payroll to make the products. This payroll expense creates the market to sell the products. It was the theory followed during the Great Depression, put the people back to work first and the market will develop.

Answer 4

"Supply side" economics means putting money back into the hands of businesses/corporations, so that they can produce more and hire more workers. This, in turn, gives more workers more money to buy the products that are being made. In theory, it works really well. As Ken pointed out, the economy completely turned around from 1981 - 1984...which it did. Almost everyone was better off in 1984 than they were in 1978.

However, this gets you labelled as a crony of Big Business. Fair enough--you are putting money into Big Business' hands.

Where it fails in practice is this: Big Business often sees tax breaks as a way to increase share value, which the shareholders love, rather than hiring new employees, expanding production, improving their infrastructure, or reducing debt. The money never "trickles down" like it is supposed to.

If you want to improve the economy, put more money back into the hands of individual consumers. The likelihood that the average consumer will spend that extra money (recycling it through the economy) is much greater than the likelihood of a corporation expanding itself.

Answer 5

The Bush deficits were not caused by his tax cuts. They were caused by his spending. Myth #1: Tax revenues remain low. Fact: Tax revenues are above the historical average, even after the tax cuts. Myth #2: The Bush tax cuts substantially reduced 2006 revenues and expanded the budget deficit. Fact: Nearly all of the 2006 budget deficit resulted from additional spending above the baseline. Myth #3: Supply-side economics assumes that all tax cuts immediately pay for themselves. Fact: It assumes replenishment of some but not necessarily all lost revenues. Myth #4: Capital gains tax cuts do not pay for themselves. Fact: Capital gains tax revenues doubled following the 2003 tax cut. Myth #5: The Bush tax cuts are to blame for the projected long-term budget deficits. Fact: Projections show that entitlement costs will dwarf the projected large revenue increases. Myth #6: Raising tax rates is the best way to raise revenue. Fact: Tax revenues correlate with economic growth, not tax rates. Myth #7: Reversing the upper-income tax cuts would raise substantial revenues. Fact: The low-income tax cuts reduced revenues the most. Myth #8: Tax cuts help the economy by "putting money in people's pockets." Fact: Pro-growth tax cuts support incentives for productive behavior. Myth #9: The Bush tax cuts have not helped the economy. Fact: The economy responded strongly to the 2003 tax cuts. Myth #10: The Bush tax cuts were tilted toward the rich. Fact: The rich are now shouldering even more of the income tax burden.

Answer 6

Cutting taxes can work because you leave more money for capital investment. Capital investment will lead to more real growth and profits which in turn means more tax money for the government.

Too much tax stiffles growth and reduces your tax base. Then again, too much growth triggers inflation which devalues your growth.

Striking the right balance is more intuition than formula.

Answer 7

Supply Side economics are successfully when the "supply side" is young and spends indiscriminately.

Like Rock and Rap Stars, Sports Athletes, Actors, Lottery winners.

It works because these people just spend and spend, they don't save. Also, they spend and spend on services too.

Other than that..... I don't think the "supply side controllers" of supply side economics put enough money back into the economy.

Answer 8

Not sure what you are talking about. We had Supply Side Economics for 4 years. 1981-1984. Interest Rates fell by over 300%, Unemployement was cut in half, and the Dow Jones went over 1000 for the first time since Nixon.
Remember George Sr. abandoned it, and it has not been used since.
If you are gonna talk about Econ. Learn your facts first, do not generalize...

Answer 9

Yes.

Beyond that. Anyone who took ECON 101 knows that supply side isn't a good idea and still can't believe that Regan bought into it.