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Supply and Demand or Demand and Supply

Aug 16, 2015

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amal-dua

  1. 1. Supply and Demand or Demand and Supply? A comparison of Keynesian and supply side economics Amal Dua
  2. 2. 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
  3. 3. 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
  4. 4. Why was it so appealing? Tangible policies Tangible results in short run Animal spirits Politics Proactive
  5. 5. 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
  6. 6. Supply Side Says 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
  7. 7. 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
  8. 8. Laissez-Faire or Anarchy? Keynesians 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
  9. 9. 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
  10. 10. 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
  11. 11. 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 dont 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
  12. 12. Thank You
  13. 13. 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.
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