Supply Side Economics or Demand Side Economics - Example

Supply side economics or Demand side economics. Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name Introduction Government intervention to economic challenges has varied over time due to their economic advisers view. The supply side economist have always argued for the lowering additional tax rates for the producers of good and services and less government intervention in the production process while the monetarist on the other hand have been standing for the lowering of taxes to the low income workers in order to improve on the demand of products. This paper will analyse both supply side and demand side economic views and provide a recommendation for best option. Literature review The main concern of any government having a growing and sustainable economic development that will ensure that all produced goods and services finds ready market. The main leverage in ensuring that a country’s economy maintains equilibrium in the production and consumption of goods and services is in having a relevant taxation schemes. Variations in the state of the country’s economic parameters likes employment levels, inflation and gross domestic product requires government intervention in the form of monitory policies therefore taxation and other measures will be used. Supply Side economics Supply side economics involve the use of tax cuts in order to increase the supply of goods and services in the economy. It is a laissez faire form of intervention to the depression related economic challenges where it is believed that economic problems usually stabilise themselves naturally. Supply side economics mainly focus on tax cuts for the rich who can further invest their savings resulting in order for them to build more industries and manufacturing or production plants therefore more goods and services will be produced. The central pillar in the supply side economics is the believe that tax cuts causes economic growth by stimulating investments in production facilities like factories, office buildings and research and developments which are key in increased production and innovation. Supply side economics are therefore sound when it comes to taxation cuts for the already wealthy persons in the economy leading to more desire to be wealthy but for the case of the working class majority it tends more towards Keynesian economics where tax reduction is believed to induce increased consumptions of goods and services. Supply side economics tax cuts for the wealthy as per this theorist will lead to increased disposable earnings available to the rich who will not consume but invest more consequently leading to increased production of goods and service; increased supply. This will lower the prices of goods and services. Says law further argues more to the supply side economics since it explains that supply creates its own demand. This therefore encourages more to do with production of goods and services as a way of indirectly improving on the available income for consumption which is critical to sufficient demand for the produced goods and services. Arthur Laffer’s law Laffer argued that lowering of the marginal tax rates would increase marginal revenues. This has been explained using Laffer’s curve where a graph of tax rates versus tax revues is plotted as indicated below; Tax Rates D C B E A 0 Tax revenues Laffer’s argument was that from point D and C lowering marginal tax rates will induce more people to increase their production and therefore incomes and this will consequently add more income inform of tax revenues to the government. At the points there will be reduction in government budget deficits. Later it was confirmed that after point B further lowering of the marginal tax rates would actually lower the government revenues. The assumption by Laffer’s curve that the reduction in marginal tax rates for manufacturers could improve on the real GDP somehow is misplaced because it has been proved that beyond certain tax rates reduction in the marginal tax rates lead to budget deficits for some countries especial the US during the period 1981 to 1986 (Sterner, 1996). Supply side economist also argued that if more was left in the hands of the manufacturers then increased productions would further lead to price reduction therefore indirectly increasing the demand from consumer Demand Side economics Demand side economic focussed more the role of government especially in the injection of more incomes to the consumers so that they can be able to improve on their purchasing power. Demand side economics is also referred to as Keynesian economic due to the contribution of the English economist John Maynard Keynes who argued that the main cause of economic depression is due to lack of the ability to purchase goods and services by the consumers therefore more incomes should be availed to them in order to improve on the economic activity. Keynes further linked the scenario of low demand to loss of jobs due to layoffs and less production of goods and services from industries therefore he argued that it was imperative that government must intervene by injecting more income in the hands of consumers. Loss of jobs and low production from industries and on the extreme closure of some of the manufacturing entities according to Keynes would be as a result of low demand, therefore consumers must be given some incomes from the government through policies that ensures easy access to credit and direct government employment so that more incomes are left in the hands of the consumers consequent increasing demand for the industrial products and services. Greater demand of products and services is an impetus for industrial growth and generally growth of the economy through multiplier effect. Keynesian or demand side economics argues that lowering of tax rates should always increasing the purchasing power of the majority buyers and therefore should be done to those who earn the least income in the economy. This is due to the fact that all incomes to lower income worker are always directed to spending there having a high marginal propensity to consume compared to the wealthy who have low marginal propensity to consume. How taxation is used in economics-Incentives and Disincentives. Taxation is the most direct way of wealth redistribution by governments. According to supply side economist, taxation provides ground for availing the necessary earnings to investors in order to spur further growth of manufacturing industries. This therefore means that taxation can be used to increase the level of investment in an economy where the government reduces tax rates on investments. Taxation can be used to regulate demand for goods and services as generally alluded by the demand side economists. Increasing tax rates for the low income earner can lead to a depression or low demand for goods and services since less income or lower purchasing power is experienced by the consumers. Taxation also can be used to regulate inflation depending on the nature of inflation. Demand push inflation can be reduced or managed using increased taxation to the relevant market segment creating it. Tax rates manipulation can be used either to encourage or discourage consumption of different products. For example consumption of drugs and alcoholic beverages can be discouraged by use of heavy taxation. Supply side versus Demand side economics In the current economic arguments, alignment to either supply side or demand side economic perspectives does not hold any water anymore since most of the two views have been effective for a short while then failed in some scenarios. It is therefore necessary to understand that supply side economist in verifying relationship between marginal tax reduction and investments. Also Supply side economist failed to obey the critical characteristic of equity where a tax system should ensure a redistribution of wealth. On the other hand demand side economist have also failed in in controlling demand push inflation on the contrary, it has been the main driving force for inflation. Printing of more currency and lowering of taxes for the poor has been the main driving force for inflation and therefore increase in prices of commodities. To be more realistic, an economy requires both demand and supply therefore argue for either increased supply or demand will lead to a tilt in the equilibrium state of the same economy therefore measures to either encourage supply or demand must be used relevantly and not haphazardly. Supply side economic argument would help more in times of inflation where the prices and incomers are soaring upwards therefore requiring interventions of more productions and investments in manufacturing in order to reduce prices and avail more commodities for the consumers. On the other hand demand side or the monetarist view is very relevant in times of depression where the economy shrinks and therefore consumers have low purchasing power. Conclusion Arguments for or against supply side economic views or monetarist view are currently misplaced since both interventions will be required for a successful economic progress in a country. The role of government is to provide a conducive economic environment for both consumers and investors therefore government economic interventions at different times must vary in order to provide the necessary security for economic growth. It is therefore important to note that both demand side and supply side economic views are necessary in an economy since supply without consumption might lead to bankruptcy. References Sterner, T., 1996. Economic Policies for Sustainable Development. Dordrecht: Kluwer Academic publishers. Read More