What is "supply-side economics"

n. a branch of economics that focuses on the supply side of the economy and on tax reductions

n. the school of economic theory that stresses the costs of production as a means of stimulating the economy; advocates policies that raise capital and labor output by increasing the incentive to produce

Supply-side economics is a macroeconomic theory that argues economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices; furthermore, the investment and expansion of businesses will increase the demand for employees and therefore create jobs. Typical policy recommendations of supply-side economists are lower marginal tax rates and less government regulation.

The term "supply-side economics" was thought, for some time, to have been coined by journalist Jude Wanniski in 1975, but according to Robert D. Atkinson's Supply-Side Follies, the term "supply side" ("supply-side fiscalists") was first used by Herbert Stein, a former economic adviser to President Nixon, in 1976, and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell and Arthur Laffer. Supply-side economics is likened by critics to the theory of trickle-down economics, which may, however, not actually have been seriously advocated by any economist in that form.

The Laffer curve illustrates a central theory of supply-side economics, that lowering tax rates may generate more government revenue than would otherwise be expected at the lower tax rate because moving off of a prohibitively high tax system could generate more economic activity, which would lead to increased opportunities for tax revenues. However, the Laffer curve only measures the rate of taxation, not tax incidence, which is a stronger predictor of whether a tax code change is stimulative or dampening. In addition, studies have shown that tax cuts done in the US in the past several decades seldom recoup revenue losses and have minimal impact on GDP growth.