Modern Economic Theories
Two controversial economic policies are Keynesian economics
and Supply Side economics. They represent opposite sides of the
economic policy spectrum and were introduced at opposite ends of the
20th century, yet still are the most famous for their effects on
the economy of the United States when they were used.
The founder of Keynesian economic theory was John Maynard
Keynes. He made many great accomplishments during his time and
probably his greatest was what he did for America in its hour of need.
During the 1920's, the U.S. experienced a stock market crash of
enormous proportions which crippled the economy for years. Keynes
knew that to recover as soon as possible, the government had to
intervene and put a decrease on taxes along with an increase in
spending. By putting more money into the economy and allowing
more Americans to keep what they earned, the economy soon
recovered and once again became prosperous. Keynes ideas were
very radical at the time, and Keynes was called a socialist in
disguise. Keynes was not a socialist, he just wanted to make sure
that the people had enough money to invest and help the economy
along.
As far as stressing extremes, Keynesian economics pushed for a
“happy medium” where output and prices are constant, and there is no
surplus in supply, but also no deficit. Supply Side economics
emphasized the supply of goods and services. Supply Side economics
supports higher taxes and less government spending to help economy.
Unfortunately, the Supply Side theory was applied in excess during
a period in which it was not completely necessary.
The Supply Side theory, also known as Reganomics, was
initiated during the Regan administration. During the 1970's, the
state and local governments increased sales and excise taxes. These
taxes were passed from business to business and finally to the
customer, resulting in higher prices. Along with raised taxes for
the middle and lower classes, this effect was compounded because
there was little incentive to work if even more was going to be
taxed. People were also reluctant to put money into savings
accounts or stocks because the interest dividends were highly
taxed. There was also too much protection of business by the
government which was inefficient and this also ran up costs, and
one thing the Supply Side theory was quite good at was reinforcing
inflation.
The two opposites of the Supply Side and Keynes' theories are
well matched theories, but it was the time of use that made them good
and bad. Keynes' theory was used during that aftermath of the Great
Depression, a catastrophe America will never forget and will never
be able to repay Keynes for the economic assistance in recovering
from it. The Supply Side theory was used after a long period of
prosperity, and although seeming to continue the practices of the
past administration, was the cause of a fearful
recession. The success of those or any economic theory is based on
the time at which it is implemented.