Great Depression And Supply-Side Economics

Q. (1)

The Great Depression can be viewed as a series of what seemed to be favorable conditions, but in truth, their hidden dynamics would impact the U.S. and other developed economies across the globe. It might be the first incidence where spillover effects and economy shocks propagate from the U.S. to Europe. While a number of theories exist on the causes of the Great Depression, none is more discussed than the role of the Federal Reserve in fueling, and then lacking the ability to end the economic downturn. Before the Great Depression (GD), the Fed’s policy can be categorized as expansionary, following the First World War. The roaring 20s, modernization, and other factors prompted large spending by the U.S. government, and private-sector

(8) Supply-side economics is a school of thought in the macroeconomic field. It believes the economic growth can be most effectively created by lowering barriers for people to produce goods and services, as well as investment in capital. In essence, consumers will benefit from a greater supply of goods and services at lower prices, and investments leads to expansions in the businesses and increase the demand for employees. In essence, it advocates the need for competitive marketplaces to trigger increased production. Supply side economics believes that taxes are a form of barrier that causes economic participants to revert to less efficient means of production. In addition, it views taxes as following a convex curve – the Laffer Curve – in which taxes at 100% and 0% have the same outcome. The optimal tax rate would be somewhere between these two extremes. Reduction in taxes, alongside free trade and the idea of comparative advantage, allows for economic expansion and increasing production. As such, governments are able to benefit from the rapid growth of the economy, which will offset the foregone revenues due to the short-run tax cuts. Implicitly, supply-side economics is based on Say’s law in which supply creates its own

Reagan assumed office when the U.S. was facing double digit inflations following increased government spending in the 1960s (Vietnam War), and the economic turbulence caused by the 1973 energy crisis due to the Arab Oil Embargo, as well as the detachment from the Gold Standard and following a floating exchange rate for the U.S. dollar. Reagan believed the supply economics – later became known as Reaganomics – was the painless and easy way to get rid of inflation. He asserted that there were limited ways to fight off inflation such as tightening the monetary supply (contractionary monetary policy), which would create a recession and lead to layoffs. Rather, supply-side economics presented a planned approach to gradually cut taxes across a number of years. This would lead to a boost in revenues due to increased production. While revenues did increase, economists argue that revenues as a percentage of GDP declined during Reagan’s term. However, while there are number of critiques of Reaganomics, the economy was in recovery which aided the election of George Bush in 1988 as he coasted on the benefits of supply-side economics from Reagan’s term. It may have caused Bush to lose the second election in 1992 recalling that his administration went back on the promise of cutting