World's Economy Needs a Supply-Side Revolution
There's a new religion in economic policymaking. It's a more modern view of supply-side economics with converts on both the right and the left. But what that means and how to achieve it is dividing policymakers. The different paths taken by the UK and Europe may shed some insight.
Prices and the amount of economic activity are determined by supply and demand. Supply is what the economy produces and the demand side is its appetite for goods and services. Both can be tinkered with by policymakers.
Supply-side economics used to have a bad name. In the 1980s it was the idea that if you cut taxes enough you would spur so much growth that the tax cuts would pay for themselves. This might be true if marginal taxes are very high — as in, more than 95% — but at more normal levels it was wishful thinking. Cutting taxes is no free lunch. While the move can increase growth, that growth is usually not enough to make up for lost tax revenue.
So supply-side economics became a punchline. Supply concerns such as what the economy can make through workers’ skills and constraints on starting or building a business received less attention or outright mockery. The approach totally fell off the radar during the Great Recession, which decimated household balance sheets and caused people to spend less. Instead, policymakers thought they could grow the economy by boosting demand: giving people money to spend or by the government spending more money.