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Nov 8, 2017 in Economics
Cons Supply-Side Economics
In every economy, there are factors that affect the productivity of goods and services; their quality or quantity (Dalton, 1967). These factors are referred to as supply side. Therefore, supply-side economies are measures or policies put in place to eradicate or lower the barriers on people to produce and supply various types of goods and services. Some economists believe that for an economic growth to be realized, the barriers of production, for instance, lowering the income tax and the capital gain rates, should be effectively carried out. Compared to demand-side economics, supply-side economics is often regarded as an avenue for fostering the selfish interests of a few people in the market. The ultimate outcomes are diminished corporate responsibility and lose social ties. Since a small portion of an economy prospers at the expense of the majority. This paper explores the cons of supply-side economics. In addition, it shades some light on pros associated with it.
Deregulation is also a key factor in supply-side economics. Eventually, consumers benefit from reduced prices of goods and services. Increased taxation does not necessarily mean an increase in revenue. Instead, when people are taxed heavily, they shy away from investing. Taxes act as economic barrier; hence people revert to poorer means of satisfying their needs. Generally, higher taxation discourages intuitive innovation, lowers level of specialization and eventually, lowers economic efficiency. Therefore, supply-side economists strongly advocate for reduction of income tax by the government and deregulation of some means of production.
Supply-side economists advocate for the following policies to be put in practice for a nation to register a growth in its economy. For instance, there are policies advocated for in the market sector that helps in the economic growth of a country. There are some policies put in place to boost competition of the firms in a country. For example, deregulation policies and removal of tough monopoly laws and anti-cartel laws. Privatization of state assets is also advocated for opening oversees trade with other countries including measures to enhance the responsiveness of the labor market. For instance, this may involve reforming employment laws like reviewing the salaries and opening up economy for labor migration.
There are also measures set to encourage small businesses start up and entrepreneurship. Those measures include lending loans to small business investors, reducing the payment rate of loans, and also increasing the repayment period of the loans. Another key measure is offering advice for the new business start up. The supply-side policies for small businesses should include tax relief for investment research for these businesses. In addition, the supply-side policies should also include those that boost the labor market as well and they should be designed in a way that they enhance the efficiency of supply of labor in an economy. This is done by making the labor market more responsive to be able to meet the demand set by the employers in the expanding sectors of the economy. Consequently, it reduces the risk and tendency of unemployment. This can come from several sources, for example, encouraging the aged and able to work people to stay in the workforce, establishing a relaxed labor migration, and also encouraging the non-working parents to look for work.
Supply-side economics benefits greatly from an economy:
- First, there is an improvement on people’s incentives and investment in people’s skills. Lowering the income tax is a way of inciting and motivating people to invest, especially in their skills. Once people invest in their skills, the levels of specialization increases and the economic growth of a nation shoots up.
- Second, investments in turn fetch a higher increase in labor and capital productivity. A working nation is a capital building nation. If, for example, some of the regulations on production are removed and the income taxes are lowered, investors will be encouraged; hence there are more investments in the country. The investors are likely to hire people, eventually increasing labor and capital production. In addition, since the investors are likely to accumulate more profits, they are likely to spend more money in expanding their businesses and investing more together with spending more capital in conducting research and development spending in these firms. More firms are likely to come up. This growth-stimulated competition, in turn creates an avenue for invention and innovation with regards to the quality and quantity of goods and services supplied.
- Third, supply-side economics provides a platform of sustained inflationary goods and services in the economy. Supply-side economics advocates believe that once the barriers of production are lowered, people are more likely to produce goods and services that they can consume; consequently, the economy does not suffer from inflation.
There are, however, several cons associated with the supply-side economics. First of all, there is a major deficit in the government services offered to its citizens. Advocates of supply-side economics strongly argue for a reduction in the income tax of the production population of the country. This is of greater benefit to the producers and the labor force of the country, but the government of such a country is disadvantaged. Once the income tax of the people is reduced, the government revenue is reduced. Income tax is the major contributor of the government revenue. By reducing it, the government will have no choice, but to cut down some of the services rendered to its citizens. The infrastructure of the country is greatly affected since the government may not have enough money to improve on it. Consequently, poor infrastructure leads to poor economic growth. The telecommunication sector, for instance, is a major contributor in seeing the economic growth of the country. If the roads in a country are poor, the economy of the county reduces since these telecommunication sectors are pivotal in the movement of goods and services. Therefore, a decrease in tax revenue leads to a decrease in the reduction of government services.
A decrease in the tax revenue also leads to deficit. Since the government revenue comes from the tax revenue, a decrease in the latter leads to a deficit in the country. This implies that the country is forced to borrow more from other countries, or from other monetary fund’s bodies. This would eventually mean that the country is indebted and therefore, the economic growth remains static. This scenario is commonly associated with developing countries that remain in a web of debts.
Supply-side economics is more often than not associated with the widening gap of income inequality. Since the employers make more money than they give in form of tax, they are likely to amass more wealth hence widening the gap between them and their employees. With this kind of tendency, the country cannot register any economic growth. Therefore, only a small group of people will be at the good receiving end. The consequence is an economy characterized by a wealth remaining in the hands of a few with the majority of the tax payers remaining poor.
Another disadvantage of supply-side economics is that there will be higher tendency of monopolistic market. The income inequality in such an economy encourages the rich to invest more and making the market policies since they are few. This makes the upcoming investors shy away from investing. They are made to fear that they may not keep up with the pace set by the rich who were in the businesses earlier and who know the market better. This in turn discourages the invention and innovation by the low income earners.
According to Sparos (1980), monopolies discourage competition. They set the market price of the goods and services produced. This means that consumers will have to buy the goods and services at the price set in the market, whether at a higher cost or at a fair price. This instance is associated with supply-side economics due to income inequality. Since competition is significantly discouraged, there is a tendency of poor quality of goods and service produce. There is also a high tendency of low production of goods and services in terms of quantity. Low quantity goods produced in a country could contribute to inflation in a country.
Deregulation is another key policy advocated for by the supply-side economics. Deregulation often means higher profits and also higher gross domestic product. However, there is always a cost to pay. If, for instance, a country produces coal and the government reduces the emission regulation of coal power plants, then the plants will make more money and there will be cheaper and affordable electricity for every citizen of that country. However, those benefits do not take into account the medical cost of people who get lung cancer and asthma from the continued inhalation of the burning smoke of the coal. The production of these people also reduces once they fall ill and a reduced production means a reduction in the economic growth of the county. Therefore, in as much as deregulation increases the economic growth of a country it can also reduce the growth by reducing the overall population health and the living standard.
Aside from the cons of the supply-side economics it is clear that the benefits of the same far much surpass the disadvantages. Proponents of supply-side economics assume that lower rates of income tax causes a boost in demand in the short term. Then it provides incentives for people to work more hours or take another job to cover for the free non-working hours and make more money as they try to improve their living standards. Improved or better living standards are very much associated with the better health and actually, a healthy nation produces an improved economic growth.
Another key advantage of the supply-side economics is that it plays a pivotal role in recovering from recession. Recessions are often as a result of negative demand shock that hit the incomes of the employees of a country and the profits and demands of the businesses. This is usually reflected in the economy of the country by significant levels of unemployment in the country’s population, a high fall in capital investments where investors fail to invest in such a country, a big failure in the businesses of the same country. There is a greater danger in such a country, especially if the recession persists and the recovery takes longer than expected. This will be harmful to the supply or rather the productivity of such a country leading to a reduction in growth rate and the GDP and the reduction of the production capacity of such a country. Most of the supply-side policies in a recession aims at boosting the demand and confidence with the quest of generating more jobs and incomes in the circular flaw of the capital of such an economy and prevents recession from happening.
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