In economics, supply and demand side theories or policies play a significant role as approaches for stimulating a country’s national economy during hard economic times. A good example of a scenario where the two approaches to economic stimulation played out was in the US during Great Depression where the US economy suffered the greatest slump down in years. The adoption of the Keynesian or demand side economic policies by the Clinton administration after the terrible economic policies by the Reagan and Bush administrations helped save the US economy from crashing further.
Supply Side Approach to Economic Stimulation
Economically, supply side refers to an economic theory or approach that calls or advocates for the cutting of taxes on wealthy citizen in order to jump-start the economy by encouraging them to invest their tax savings in various sectors of the economy such as industries. This, it is believed, will help create jobs in these companies or factories and hence tame unemployment in the long run besides producing more goods at low production costs and thus also taming inflation rates. According to this approach top economic stimulation, by issuing tax cuts on the wealthy or rich people in the economy, an economic stimulus is created whereby these rich individuals are encouraged to invest the extra income saved to invest in the economy which consequently raises the capacity of the economy to produce and supply more goods and services thus reducing, say, oil and gas prices. This approach lays emphasis on bringing about economic growth through fiscal and tax policies that are aimed directly at creating incentives for the production of goods and services. It thus advocates for low marginal taxation rates in order to increase the after-tax rate of return that results from employment opportunities created and investment in the economy besides an increase in supply of commodities (Mastriann 21). The supply-side policy also entails such measures as deregulation, trade liberalization, reduction and flattening of taxes and restraints on national governmental spending which are considered as being key to achieving economic growth stimulus. This economic theory mainly associated with the Republican Politicians like Ronald Reagan mainly aims at raising the supply of goods and services and their availability to consumers.
Demand- Side Economics Approach
Also referred to as the Keynesian economics, this theory emphasizes on achievement of economic growth through tax cuts, not to the rich, but for the low income middle and lower classes of an economy in order to spur or stimulate demand. The basic assumption here is that any savings made as a result of tax cuts among g this group in the economy go directly or are ploughed directly back into the economy due to their willingness to spend and invest (McEachern 436). Any savings by the lower class more often go back into circulation thus facilitating consumer spending and purchasing of goods and services. This theory in the US is mainly associated with the Democrats like Clinton and Obama who believe the only way to salvage and stimulate the economy is to redistribute wealth in the economy by highly taxing the wealthy people and big corporations while lowering the tax burden on the poor middle class. According to this theory, economic activity and growth are mainly stimulated by an increased demand for commodities and the only way of ensuring this is to ease the burden on middle class by increasing their disposable income. The adherents of this theory favor heavy government spending in situations when a nation is suffering or recovering from an economic recession or downturn. It helps in economic recovery and resilience (AdamRose & Krausmann 78).
Works Cited
AdamRose and ElisabethKrausmann. "An economicframeworkforthedevelopmentofaresilience indexforbusinessrecovery." InternationalJournalofDisasterRiskReduction 5 (2013): 73-83. Web. 13 March 2016. <www.elsevier.com/locate/ijdrr>.
Mastrianna, Frank V. Basic economics. New York: Cengage Learning , 2013. Print.
McEachern, William A. Economics: A contemporary introduction. London & New York: Cengage Learning, 2011. Print.
