Understanding Supply-Side Economics

Supply-side economics is better known to some as "Reaganomics", or the "trickle-down" policy espoused by former U.S. president Ronald Reagan. He popularized the controversial idea that greater tax cuts for investors and entrepreneurs provide incentives to save and invest and produce economic benefits that trickle down into the overall economy. In this article, we summarize the basic theory behind supply-side economics. 

Like most economic theories, supply-side economics tries to explain both macroeconomic phenomena and - based on these explanations - to offer policy prescriptions for stable economic growth. In general, supply-side theory has three pillars: tax policy, regulatory policy and monetary policy. 

However, the single idea behind all three pillars is that production (i.e. the "supply" of goods and services) is the most important determinant of economic growth. The supply-side theory is typically held in stark contrast to Keynesian theory, which, among other facets, includes the idea that demand can falter, so if lagging consumer demand drags the economy into recession, the government should intervene with fiscal and monetary stimuli. 




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