1. Supply-Side Economics Economics at Klein Oak High School Fall 2003

2. Review Keynesian Economics focus on demand side aggregate demand (AS) management C+I+G+(Ex-Im)=GDP

3. Keynesian Recession Strategy increase AD increase G (government spending) government spends more increase C (consumption) decrease taxes (fiscal policy) increase money supply (monetary policy)

4. Keynesian Inflation Strategy decrease AD decrease G (government spending) government spends less decrease C (consumption) increase taxes (fiscal policy) decrease money supply (monetary policy)

5. Supply Side Perspective stagflation is different caused by decrease in AS (aggregate supply) because lower supply  lower output (GDP) and higher prices (inflation)

6. Cause of Decrease in AS government policy (unintended consequences) high taxes discourage business investment  “tax wedge” decreases after tax rate of return decrease savings  same reason  causes higher interest rate  decreases business investment

7. Note on “Tax Wedge” difference between what is paid and what is received ex: to pay $5.50 to an employee costs a business $7.00, due to taxes after taxes, the employee receives $4.50 difference between $7.00 cost to business and $4.50 incentive to employee is the “tax wedge”

8. Cause of Decrease in AS (2) government policy (unintended consequences) high taxes discourage work  “tax wedge” increases after tax cost to business  “tax wedge” decreases after tax return to employee  therefore, employment decreases and so does production

9. Cause of Decrease in AS (3) government policy (unintended consequences) excessive regulation increases cost of production  decreases supply supply shock little can be done about this but it isn’t a long run problem

10. Supply Side Goal

11. Supply Side Policy increase AS reduce taxes on business reduce regulation on business reduce taxes on savers people with a high “marginal propensity to save”  i.e. people who save additional dollars  primarily high income people

12. The Laffer Curve after a point the disincentive effect of higher tax rates will result in high rates reducing tax revenue more

13. Implications of Laffer Curve it’s possible to raise rates and get less revenue the higher rates cause a “recession” it’s possible to lower rates and get more revenue if the lower rates stimulate the economy enough

14. Tax Fairness tax cuts will give more $ to wealthy than to others because wealthiest 50% pay 96% of income taxes wealthiest 5% pay 53% of income taxes

15. Short-run vs. Long-run Keynes: “In the long run we are all dead.” Keynes ignored the long run complications of the policies he advocated. Of course, it was the great depression. Supply-side policies focus on the long run emphasis on incentives requires that people and businesses can depend on policies remaining in force for years

16. Effect of Supply–Side Ideas Most economists still primarily Keynesian. However, most now acknowledge that we must consider the supply-side effects of our policies. Recommendations are now more long-run in perspective.