Supply and Demand or

Demand and Supply?

A comparison of Keynesian and supply side economics

Amal Dua

Classical Economics

• Birthed both Keynesian and Supply Side schools of thought

• Mathematics and models aplenty in both

• Same macroeconomic priorities

• Same Assumptions

• Belief in the business cycle

The Keynesians

• ‘The General Theory of Employment, Interest and Money’, published in 1936 during the Great Depression

• high level of government intervention to regulate aggregate demand

• through monetary and fiscal policies

• lowered interest rates via the central bank and by government spending for infrastructure

• determinants of saving, consumption, investment, and production to control the level of output and employment of an economy

Why was it so appealing?

• Tangible policies

• Tangible results in short run

• Animal spirits

• Politics

• Proactive

Neoclassical Critique

• more labour than demand for labor, wages would fall until hiring began again

• too much saving, and not enough consumption, then interest rates would fall until people either cut their savings rate or started borrowing

• Self-correcting market

• Boom is the disease not the bust

• Malinvestments due to low interest rates

• Bubble behavior

• No long run focus

Supply Side

• Say’s Law

• Supply creates its own demand and savings drive investment

• Lower barriers to production

• lower marginal income and capital gains taxes to increase the supply of labor and capital

• lowering regulation on the private sector to further lower their cost of production

Logic behind freeing the market

• extra disposable income, especially for the wealthy who seem to have a higher marginal propensity to save, will be reinvested into the economy

• Let people spend money as they see fit

• Taxes are a misallocation of resources

• Government intervention is a form of market failure

• Signaling, rationing, incentive

Laissez-Faire or Anarchy?

Keynesian’s argue that

• Liquidity trap

• Paradox of Thrift

• Thomas Sowell said that the actual path of money in the private sector economy is very different

• Political agenda for trickle down effect

Raegan Years

• Massive tax cuts

• Less regulation on production

• Huge budget deficit

• Real GDP growth

• Slight unemployment rate reduction

• Raised taxes later due to budget deficit and political pressure

Supply Siders Fail or Keynesian Win

• Supply siders take credit for economic recovery due to lower taxes

• 2nd largest peacetime economic expansion from -0.3% to 4.1% GDP growth

• According to Keynesian economists, a combination of deficit spending and the lowering of interest rates slowly led to economic recovery

• The federal government spent an average of 21.6% GDP from 1982-1989, versus the 1974-1981 average of 20.3% GDP

• Federal revenues averaged 17.5% GDP from 1982-1989, versus the 1974-1981 average of 17.8% GDP

• Federal income tax revenues fell from 9.1% GDP in 1981 to a trough of 7.5% GDP in 1984, then rose to 8.0% GDP in 1989

• Both sides suit the case to their agenda

Going back and forth for a Century

• Supply siders strike back Keynesian critique of the paradox of thrift by saying it only takes into account a closed economy

• They don’t account for international trade and exchange

• Free the market or steer it?

• Impossible to isolate variables and truly determine

• Interparadigm debates leading to intraparadigm inclusions and explanations

Thank You

Bibliography

•  Bartlett, Bruce R. Reaganomics: Supply Side Economics in Action. Westport, CT: Arlington House, 1981. Print.

• Cingano, F. (2014), “Trends in Income Inequality and Its Impact on Economic Growth", OECD SEM Working Paper No. 163, www.oecd.org/els/workingpapers.

• Coy, Peter. "Why John Maynard Keynes's Theories Can Fix the World Economy." Bloomberg.com. Bloomberg, 30 Oct. 2014. Web. 08 Mar. 2015.

•  Hailstones, Thomas J. Viewpoints on Supply-side Economics. Reston, V.A.: Reston, 1982. Print.

•  Hailstones, Thomas J. A Guide to Supply-side Economics. Richmond, VA: Robert F. Dame, 1981. Print.

• Vera Lutz, Central Planning for the Market Economy, An Analysis of the French Theory and Experience (London: Longmans, Green and Co. Ltd., 1969).

• "Some Thoughts on Supply-side Economics." Mises Institute. N.p., n.d. Web. 31 Jan. 2015.

• Wikipedia. "Keynesian Economics." Wikipedia. Wikimedia Foundation, 3 Mar. 2015. Web. 05 Mar. 2015.