pcr explains supply side economics; 

 

Supply-side Economics Explained

Paul Craig Roberts

What is Supply-side economics?  There are various ways, if speaking to economists, to introduce Supply-side economics. 

One is that Supply-side economics introduces the second blade of the scissors into macroeconomics that the famous British economist Alfred Marshall introduced into microeconomics. In Marshall’s time, economists argued whether price was determined by the cost of production or by what people were willing to pay. That is, by supply or by demand.  Marshall said the argument was like arguing which blade of the scissors cuts the paper.  Price was determined by supply and demand.

In Keynesian macroeconomics, the demand management policy of the post World War II era, there was no second blade of the scissors. There was only the demand blade.  The manipulation of aggregate demand was used to control inflation and unemployment.  Aggregate demand consisted of consumer demand, government spending, and investment.  Investment demand played no real role, because “the reason companies produce is that consumers buy.”  Investment was a response to demand. 

Fiscal policy was the means Keynesian policymakers used to control inflation and unemployment.  If unemployment was the problem, government could cut taxes, thereby giving taxpayers more money to spend, or government could overspend its revenues by running a deficit which would raise government demand. Keynesian economists maintained that the government spending multiplier was larger than the tax cut multiplier.  In keeping with their view, aggregate demand was increased by government running a larger deficit by which it overspent its revenues.  In other words, Keynesian fiscal policy favored the growth of government........more............