supply and demand or demand and supply
TRANSCRIPT
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.