Supply-Side Economics

Essay Question

Supply-Side economics and policies would best benefit the economy in the case of a recession in the year 2000. Supply-side policies are made of several important points to regulate the economy. Supply-side policies consist of stimulating the economy by production, cutting taxes, and limiting government regulations to increase incentives for businesses and individuals. Businesses then would invest more and expand to create jobs for people who would save and spend more money. Thus, increased investment and productivity would lead to increased output in the economy. With this increased output the economy grows and unemployment goes down. Yet, this would not be the only policy to bring the economy out of a recession.

A monetary policy must be implemented in order to compliment the supply-side policies that stimulate the economy to bring it out of recession. The monetary policy that would best work with the supply-side policies would the easy money policy. Under the easy money policy, the Fed allows the money supply to grow and interest rates to fall, which normally stimulates the economy. The idea behind this policy is that when interest rates are low, people tend to buy on credit, this in turn encourages sales at stores and production at factories. This would definitely compliment the theory behind the supply-side policies by creating more "supply" for consumers to buy. Businesses also tend to borrow and then invest in new plants and equipment when money is "cheap". This "cheap" money is used not only in these new plants but in the hiring of employees to work and earn money to spend. Along with moral suasion, persuasion to get consumers to buy, and open market operations, the buying and selling of government securities in financial markets, the easy money policy can only help supply-side economics in it's route to ending a recession and gaining economic stability.

All of these policies combined, supply-side, easy money policy, open market operation, and moral persuasion, can all have an impact on important issues. Some of these issues are employment, international trade, and inflation. Employment may be greatly effected by a huge surge in supply that would cause businesses to hire more workers to meet the need of this great surge in supply and production. This surge in new employment would then put money in the pockets of consumers to buy products and create a demand. International trade can be greatly affected by supply-side policies. Businesses are more likely to export their goods if the economy is good and they have the resources to do so. Also businesses may import resources to produce their goods or services. This in the long run could benefit other countries tremendously. It is even possible to cause the same effects of the supply-side policies in the US to occur in the other countries, like an increase in employment. Unfortunately, there are limitations on supply-side policies. In the case of the Laffer Curve for the years 1981 through 1989, total tax collections when adjusted for inflation, actually declined after 1981 tax reductions were implemented. The result is that one of the main foundations of the supply-side policy was found to be weak. Inflation then could rise because of the huge surge in the economy due to the new jobs and spending it caused. The economy has a tendency to do really well once supply-side policies take effect, but then spending becomes too "cheap" and inflation begins to set it.

Unfortunately there is no one single economic policy that can guarantee a stable and secure economy. Economists may try their hardest to create a policy and analyze the ones in effect, but nobody can predict the economy on a day to day basis. Yet, with a combination of monetary and supply-side policies an almost near perfect economy can be created, but then again no one person can predict the future.