Supply-side economics emphasizes economic growth achieved by tax and fiscal policy that creates incentives to produce goods and services. In particular, supply-side economics has focused primarily on lowering marginal tax rates with the purpose of increasing the after-tax rate of return from work and investment, which result in increases in supply.
The broader supply-side policy mix points to the importance of sound money; free trade; less regulation; low, flat-rate taxes; and spending restraint, as the keys to real economic growth. These ideas are grounded in a classical economic analysis that understands that people adjust their behavior when the incentives change. Accordingly, the lower the regulatory and trade barriers, and the lower and flatter the tax rate, the greater the incentive to produce.
The supply-side approach stands in sharp contrast to economic theories that held sway from the 1930s through the 1970s which were preoccupied with boosting demand, ideas most closely associated with economist John Maynard Keynes and his publication of The General Theory. These ideas enjoy a resurgence today as growth in spending, along with growing government involvement in the economy, has given new life to Keynesian ideas. Indeed, the idea of government spending as a stimulus to help boost demand and consumption, is rooted in quintessentially Keynesian ideas.
Yet in the roughly 30 years from the 1980s through the first decade of the new century, supply-side ideas contributed to the longest boom in United States history and an incredible transformation of the world economy. According to the National Bureau of Economic Research, 1982-1999 was one continuous mega-economic expansion. In fact, as it stretched into 2007, this 25 Year Boom saw a tripling in the net wealth of U.S. households and businesses from $20 trillion in 1981 to $60 trillion by 2007. When adjusted for inflation, more wealth was created in this 25 year boom than in the previous 200 years.
This sustained economic growth is not only impressive on its own, but even more astonishing as it compares to the period immediately preceding it. In the 10 years from 1972-1982, recessions were deep and recoveries were short. In fact, throughout American history, the nation’s economy has been in recession or depression roughly one-third of the time. But from 1981-2005, the annual growth rate of real gross domestic product (GDP) in the U.S. was 3.4 percent per year, and 3.8 percent per year during the 1983-1989 Reagan expansion alone.
© Copyright 2014 The Laffer Center at the Pacific Research Institute