Wednesday, June 14, 2017

Teaching Supply-side and Demand-side Economics

Just as macroeconomics and microeconomics are taught separately at most universities, so too should demand-side economics and supply-side economics be taught separately.  Demand-side economics and supply-side economics are fundamentally distinct and require a program of coursework designed to explore each of these two approaches in full, absent conflicting arguments and theories.  Teaching the rudiments of each in one course is like teaching Spanish and French from the same textbook.  Without a suitable immersion into the efficacy of each approach, the student is left with a confusing array of theories and counter-theories.

Tax policy provides a good example for this concern.  Tax policies differ greatly depending on the policy objective.  There is little middle ground.
On the supply-side, tax strategies favor capital accumulation.  Lower taxes on wealthy corporations and high-income individuals they say will promote growth.  Reducing inefficiencies and distortions in the market are of paramount concern.  Ensuring business has a ready supply of investment capital is an objective.  For supply-side economics, the market is king, and a low tax rate for movers and shakers is critically important.

On the demand side, the consumer is king which suggests a more bottom-up approach.  Lower taxes for middle income earners they say will spur economic growth.  Demand-siders maintain aggregate demand for products and services drives the economy, and governmental infusions of money into the marketplace when growth lags are essential.  A sufficiently progressive tax code is a key component to demand-side policies.

Given these conflicting approaches to public policy, teaching them in one course does a disservice to the student.  The result of each strategy is unique and requires development in total.  Without a deep dive into the outcome of each approach, the student is left with nothing more than a bewildering array of counter-factual theories.  Instructors need to flush this out by examining competing theories in an untainted atmosphere of hard data.  This can only be done by examining the finer points of each strategy in a stand-alone, end-to-end analysis of these two distinct approaches to economic growth and stability.