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Strengths and Weaknesses of Supply-Side Policies

Strengths:

  • Only thing that can increase Long-run Aggregate Supply.
  • Based on the idea of lowering marginal tax rates.
  • Works wonders if the economy is currently in a recessionary gap.
  • Helps sustain non- inflationary growth

Weaknesses:

  • Violates most peoples sense of morals.
  • Doesn't always work out the way it is expected to.
  • Wages tend to be "sticky" in the short run (wages are tough to decrease due to labor unions; there's also the minimum wage)
  • The supply-side policy only increases short run aggregate supply in the short run if the economy is currently at equilibrium or in an inflationary gap.
  • Expectations matter quite a bit--> people act in such a way due to their expectations and what they expect will happen because of people's actions (interest rates don't work as well as a stimulus, especially during a recession) For example if people expect the price of peanut butter to dramatically increase tomorrow, they will rush out to the super market and stock up on PB. This will increase demand and therefore price will actually increase. It's a self fulfilling prophesy.
  • Unemployment benefits may be cut - Bad for the ones who really truly aren't able to work. So they are forced to work or die.

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