Through May 5-9 the fine economics class of St. Maurice school had been busy preparing for the test we are to receive this week. We had been reviewing various terms, going over case studies, and sadly... cramming for biology tests/quizzes. Yet, Miss Teetaert was devoted to ensuring her class stayed motivated through various outlets of markable material. During two review periods, one for marks and the other for candy, the topic of Supply-side economics came up. The class had agreed that this term was to be defined as "Describes a stabilization policy that stresses increasing the supply of goods and services in order to reduce the level of prices and to create jobs to counter unemployment." This definition is simply not enough, and because I want to ensure everyone gets 100% on the topic of Supply-Side economics tomorrow, lets talk about it.
Both Monetary and Fiscal policy (policies we have studied) fall on the demand side of economics. They both influence the level of spending in a nation's economy. When there is a general movement to spend less the rate of inflation falls, yet the number of people unemployed rises. This is due to the fact that people are, generally, "saving" their money. In turn, businesses receive less money and cutback on production and labour forces.
On the other had, if spending was to increase the demand for employees would rise and unemployment rates would fall! This sudden rise in spending also has its drawbacks... increased spending raises prices because this thrust in demand for goods/services may overtake levels of supply. To ramp up supply in order to keep up with this sudden demand companies would have to raise prices to produce new levels of goods and services.
To combat this issue, Supply-side economics is introduced. To combat both unemployment and inflation policies would be introduced to increase the supply of goods and services. If supply increases, prices fall (or rise more slowly) therefore reducing the rate of inflation. More workers are needed to produce the additional products and conduct services, so in this way unemployment rates would fall as well.
- What needs to be done?
Those who believe in Supply-side economics believe that the best policies for this method are carried out by cutting taxes and reducing government regulations that restrict production.
- Implementing Tax Cuts for businesses and society
1) This would provide businesses with more money for investment. These funds could be used for improving equipment, repairing equipment, for new construction and researching development models. Tax cuts allow a business to use saved money to produce more and ultimately stay competitive. This ensures supply increases while keeping prices static. Also, to create more product and invest in a company there is a need for additional employees to carry out these tasks.
2) A tax cut would also provide and incentive for individuals to earn more money and increase spending. With progressive income tax higher-income individuals pay a higher percentage of their income in taxes, this discourages people from earning more money. A tax reduction puts extra revenue in the pockets of the everyday citizens. As we have learned, when people have more money they typically spend it, this facilitates the increase in supply of goods and services.
- Reducing Government Regulations
1) Firstly, reducing Government regulations would reduce business costs, this would then lead to a reduction in prices. Due to the fact that current government regulations greatly increase the cost of doing business, companies must counter this by increasing price. But, if regulations are lifted and demand stays the same, prices will fall. Businesses would no longer have to abide by the premium costs of regulations, allowing their prices to adjust to the money saved. This action would hopefully lead to the purchasing of more goods by consumers.
2) Secondly, through lifting legal restrictions businesses would have the ability to produce more. Many restrictions that companies face is at the manufacturing level. If these regulations were relaxed or eliminated production of products would skyrocket. Employment at manufacturing, shipping and sales positions would rise with the ability of the company to produce on larger scales. This, of course, would lead to lower levels of inflation, because the financial penalties and/or production penalties would be eliminated; allowing businesses to supply products at new heights!
-The Bad
1) Regulations are extremely hard to change. This is true in terms of regulations that attempt to protect the environment. If there is a relaxation in pollution controls, overtime a company may be able to produce large quantities but at what price? It does not make sense to remove vital environmental protection regulations to ensure mass production of goods and services for the present time.
2) There is no guarantee that once a company enters the stage of increasing production it will employee those within the nation. Using the method of Supply-side economics companies may take advantage of dollars saved and inject it into foreign labour. It would be safe to say that a large production company would likely outsource in order to save money during the process of increasing its inventory. In a time of great savings and freedom, why wouldn't an international business take advantage of a charitable economy and planet?
- My Opinion
I believe that the fundamental purpose of Supply-side economics is a great aid to a nation. It is a process that creates jobs, stimulates business nationally, lowers prices of goods and services and establishes a level of stability for both parties. I believe that tax cuts may be a measure that can help facilitate this process. Companies that have a keen sense for production value and creating consumer buzz around their products would take full advantage of these cuts. Additionally, regular citizens are able to save money that would have been taken and use it towards supporting Canadian business.
Still, I believe the problem lies with what the business plans to do with the money it has saved. I feel that too many businesses would use this saved revenue and inject it into foreign programs where their products could be produced at low rates. I do not agree with softening or eliminating regulations. I feel that they are in place for a reason, and to remove them would have our Government bow down to business over issues we can't afford to lose. Overall, Supply-side economics is a marvellous tool in the fight against unemployment and inflation. But, as a nation, we must ensure that this tool is placed in the right hands, lest it stab us in the back.
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