SUPPLY SIDE ECONOMICS

1. SUPPLY SIDE ECONOMICS ALTERNATIVE TO KEYNESIANISM RESPONSE TO THE “STAGFLATION” OF THE 1970S – BOTH HIGH INFLATION AND HIGH UNEMPLOYMENT SOME ECONOMISTS SAID NEEDED A NEW MODEL OF THE MACROECONOMY

2. ELEMENTS OF SUPPLY SIDE ECONOMICS KEYNES FOCUSED ON THE DEMAND SIDE – IMPROVING CONSUMERS’ ABILITY TO BUY SUPPLY SIDE ECONOMICS FOCUSES ON THE SUPPLY SIDE – ON THE COST TO BUSINESSES TO PRODUCING AND HIRING

3. THREE ELEMENTS OF SUPPLY SIDE ECONOMICS PURPOSE: “UNTIE” BUSINESSES SO ARE MOTIVATED TO INCREASE PRODUCTION AND HIRING FOCUS ON: * LITIGATION * REGULATION * TAXATION

4. LITIGATION FOCUS ON COSTS OF LAWSUITS BALANCE BETWEEN PROTECTING THE CONSUMER AND ENCOURAGING “FRIVOLOUS” LAWSUITS LAWS SHOULD CONSIDER THEIR COSTS AND BENEFITS

5. REGULATION SAME IDEA – FOCUS ON THE BENEFITS AND THE COSTS OF REGULATION “OHSA” – OCCUPATIONAL HEALTH AND SAFETY ADMINISTRATION “SMART” REGULATIONS

6. TAXATION COULD HIGH TAX RATES DISCOURAGE SO MUCH ECONOMIC ACTIVITY THAT ACTUALLY BRING IN LESS REVENUE? TAX REVENUE = TAX RATE * TAX BASE TAX RATE AND TAX BASE MAY BE INVERSELY RELATED

7. THE “LAFFER” CURVE SHOWS RELATIONSHIP BETWEEN TAX RATE AND TAX REVENUE LEFT PART OF CURVE – TAX REVENUES RISE AS TAX RATES RISE BUT BEYOND A CERTAIN TAX RATE, TAX REVENUES FALL BECAUSE SO MUCH BUSINESS ACTIVITY IS DISCOURAGED

8. QUESTION – WHERE IS THAT TAX RATE, BEYOND WHICH, TAX REVENUES FALL? VARIES BY THE TYPE OF TAX, BUT A COMMON FINDING IS 60% - SO TAX RATES ABOVE 60% ARE COUNTERPRODUCTIVE NOTE: THIS DOESN’T MEAN THE TAX RATE SHOULD BE 60% - JUST THAT 60% WOULD YIELD MAXIMUM TAX REVENUES

9. MIS-USE OF SUPPLY SIDE ECONOMICS SOME WANT TO CLAIM TAX REVENUES RISE EVERY TIME TAX RATES ARE REDUCED “CAKE AND EAT IT TOO” ONLY HAPPENS IF BEGINNING RATE IS ABOVE THE RATE FOR MAXIMUM REVENUE