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Supply-Side Policies in Balanced Economic Growth

Introduction

There are many concepts and activities that may influence economic growth and make it balanced. These are the reduction of income taxes, attention to educating and training processes, privatization, and, what is more important, the improvement of Aggregate Supply. All these are the types of supply-side policies that aim at changing the productive capacity of the economy of a particular country and the world economy in general. Economic growth takes place when specially trained people evaluate a current situation, take a number of steps, and rearrange resources in a way that can make these resources more valuable from different perspectives. The current paper aims at analyzing the peculiar features of economic growth and the period when it may be called balanced, defining the essence of supply-side policies and their types, and explaining the role of the supply-side policies to achieve balanced economic growth.

Balanced Economic Growth

To understand the essence of economic growth, it is possible to find some comparisons in the food industry. In order to prepare a good dish, it is necessary to mix a number of ingredients, follow the proportions, and follow certain steps in a particular order. Almost the same happens in the sphere of economics when it is necessary to achieve balanced economic growth. It is not enough to promote the growth by using the same materials (activities) because one day all of them can run out; it is crucial to mix different ideas like ingredients accordingly and try something new paying attention to the demands and opportunities of a certain period of time (Fernandez-Villaverde, Guerron-Quintana, & Rubio-Ramirez 2014). The results of these activities will be a properly prepared product, balanced economic growth.

In general, the definition of balanced economic growth is as follows: it is a certain increase of goods/services per person in a definite period of time that results from properly organized activities and is characterized by such features like a low level of inflation, the balance between export and import and saving and consumption, and evident incomes across different regions. This is why balanced economic growth should not be regarded as one particular issue or achievement (Lewis 2013). It is a combination of several factors under the same conditions. Economic growth is balanced only in case several factors are combined. Some theorists admit that it is wrong to believe that this kind of growth is “the long-run tendency for advanced capitalist economies” only (Goldstein 2014, p. 47). Every country that takes certain steps and demonstrates a high level of economic relations has a chance to achieve balanced economic growth by means of a number of supply-side policies.

Supply-Side Policies, Their Essence, and Types

A supply-side policy is considered to be any kind of policy that aims at improving the productive potential of the economy and its ability to remain productive for a long period of time (Economics Online 2015). This type of microeconomic policy helps to provide markets within various industries with a chance to operate more effectively and react faster to the current demands in order to demonstrate appropriate national output rates. From a general perspective, supply-side policies create a necessary shift and make aggregate supply (AS) of the appropriate beneficial level. AS is usually defined as a general level of goods/services’ supply within the frame of a national economy (Dutt 2006).

Their Essence

The offered Harper (2015) diagram demonstrates the relation between aggregate demand and aggregate supply and the result of their relation, a possibility of overall output and price levels.

Their Essence

The following diagram helps to observe and realize what can happen to output and prices in case supply undergoes certain changes and demand takes the same positions. In the chosen example, the increase of supply leads to the following: output is increased and the price is decreased proportionally.

From these two diagrams, it becomes clear how some supply-side policies may influence the general economic picture. Now, it is high time to identify the most important types of supply-side policies and their main characteristics.

Tax policies are all possible activities with taxes that can lead to some changes as a result of financial charges imposed on a person or an organization by a government. A properly implemented tax system becomes a good stimulus for taking actions that improve the output factor (Burda & Wyplosz 2012). As one of the most frequently used supply-side policies, the reduction of tax rates promotes more unemployed workers to find new jobs and more employees to use workers paying less and improve the economy demonstrating the increased amount of output.

Privatization is another type of supply-side policy that can promote economic growth and make it more balanced. With the help of this policy, it is possible to use the abilities of a private sector and run a business achieving the required profit, service improvement, and cost reduction (Suter & Herkenrath 2011). However, in regards to balanced economic growth, privatization is not very appropriate because it is hard to predict all possible changes that may affect the development.

Finally, deregulation is considered to be an effective supply-side policy by means of which it is possible to reduce the entry barriers and promote competitions among markets and all necessary additional services and activities such as educating and training of workers or changing the already existing platform for work (Economics Online 2015). This kind of policy is closely connected to competition policy as the former will certainly lead to the latter. Deregulation is considered to be failed in case competition is impossible in the end.

All these three supply-side policies are effective in regards to the promotion of balanced economic growth in case all steps are taken properly in regards to the rules and expectations of the current society. It does not matter what kind of policy is chosen, governmental control is a necessary item for consideration.

Role of Supply-Side Policies to Bring about Balanced Economic Growth

The role of each supply-side policy mentioned above is crucial in bringing about balanced economic growth. However, certain precautionary steps have to be taken into account to benefit from the policies and enjoy the results of economic growth. For example, deregulation makes it possible for a number of new workers and companies to enter a labor market on their own conditions. A stream of new forces leads to the necessity of improving skills, services, and quality. The result is evident –high-quality services promote stable and, what is more important, beneficial economic growth. A balance between demand and supply does not change but improves with its quality.

Taxes have a considerable impact on economic growth all the time. As soon as taxes are increased, it is hard to promote economic growth within a region the process of taxation happens. However, a considerable reduction of income taxes makes people work with a kind of enthusiasm all the time. People start being eager to work more in order to earn more. These incentives are usually very favorable for balanced economic growth due to a high rate of return from services offered and work done (Economics Online 2015). However, not all tax changes may positively influence economic growth. As a rule, the reduction of taxes that leads to the reduction of the existing subsidies, a possibility to avoid windfall gains, or a chance to avoid financial deficit helps to promote balanced economic growth and create the best conditions for the development of new relations. In all other cases, the tax changes will hardly have a positive impact on possible growth in the sphere of economics.

Finally, privatization, as a method of possible asset reallocation, may play a considerable role in balanced economic growth. When property rights are formulated and implemented correctly, people get a chance to be sure of the effectiveness of their own decisions and ideas. And the formulation of property rights is one of the sides of the process of privatization. In addition, credits that are available for the private sector, successful ownership conditions, and a kind of fiscal relief are all favorable for economic growth conditions based on privatization. Anyway, all these privatization ideas (regardless of the nature of the effects) do play a crucial role in achieving balanced economic growth and cannot be omitted or neglected.

The above-mentioned supply-side policies define the ways of how to achieve balanced economic growth as well as the effects that need to be expected. Any kind of economic change supposes some changes within a staff. It means that balanced economic growth is predetermined by the level of workers’ access to education, abilities to develop their professional skills and learn the demands, and chances to promote changes in time. Not all supply-side policies may be applied any time a person or a company want them to be implemented. It is also necessary to consider the period and current economic conditions. Only in case a supply-side policy does not contradict the current economic state of affairs and is regulated by governments, it may play a positive role in achieving economic growth by providing changes.

Conclusion

In general, the current paper defines the connection that exists between such supply-side policies as privatization, deregulation, and tax reduction and the promotion of balanced economic growth. These policies introduce the ways of how changes should be implemented and inform about the possible effects. The analysis of several supply-side policies shows that the same actions may influence economic growth in different ways in case they are not or poorly regulated by governments or are taken at the wrong time. The effects of the policies are more evident in case they are not alone. Proper collective use of privatization, taxation, and deregulation promotes balanced economic growth. The reduction of pressure caused by inflation, the control of payment methods, and the abilities to avoid or forecast economic conflicts, are the main advantages of supply-side policies. However, the necessity to spend much time for implementation of the policies and to wait for the results creates a kind of obstacle on the way to balanced economic growth. Still, it is better to wait for some time but benefit from the results of the policies than to be unable to promote the changes when they are necessary for a situation.

Reference List

Burda, M & Wyplosz, C 2012, Macroeconomics: A European text, Oxford University Press, Oxford.

Dutt, AK 2006, ‘Aggregate demand, aggregate supply and economic growth’, International Review of Applied Economics, vol. 20, no. 3, pp. 319-336.

Economics Online 2015, Supply-side policy, Web.

Fernandez-Villaverde, J, Guerron-Quintana, P, & Rubio-Ramirez, JFR 2014, ‘Supply-side policies and the zero lower bound’, IMF Economic Review, vol. 62, pp. 248-260.

Goldstein, JP 2009, ‘An introduction to a unified heterodox macroeconomic theory’, in GP Goldstein & MG Hillard (eds), Heterodox macroeconomics: Keynes, Marx and globalization, Routledge, New York, pp. 36-53.

Harper, D 2015, ‘Understanding supply-side economics’, Investopedia, Web.

Lewis, WA 2013, Theory of economic growth, Routledge, New York.

Meyer, LH 2012, The supply-side effects of economic policy, Springer Science & Business Media, Boston.

Sawyer, M 2009, ‘The central core of heterodox macroeconomics’, in GP Goldstein & MG Hillard (eds), Heterodox macroeconomics: Keynes, Marx and globalization, Routledge, New York, pp. 24-35

Suter, C & Herkenrath, M 2011, World society in the global economic crisis, LIT Verlag Munster, Berlin.

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StudyKraken. (2022, April 16). Supply-Side Policies in Balanced Economic Growth. Retrieved from https://studykraken.com/supply-side-policies-in-balanced-economic-growth/

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"Supply-Side Policies in Balanced Economic Growth." StudyKraken, 16 Apr. 2022, studykraken.com/supply-side-policies-in-balanced-economic-growth/.

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StudyKraken. "Supply-Side Policies in Balanced Economic Growth." April 16, 2022. https://studykraken.com/supply-side-policies-in-balanced-economic-growth/.

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StudyKraken. 2022. "Supply-Side Policies in Balanced Economic Growth." April 16, 2022. https://studykraken.com/supply-side-policies-in-balanced-economic-growth/.

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StudyKraken. (2022) 'Supply-Side Policies in Balanced Economic Growth'. 16 April.

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