The Demand Side Awnser

29/11/2010
Economics 11
Martin Graham


The Demand Side Answer

Although there are many types of economic systems; one characteristic that distinguishes them the most from one another relies on how they answer one of the main economic questions, what should be the role of the government in the economy? All economic systems focus on achieving in the long term performance of the economythe basic macroeconomic goals, which are accomplishing a significant economic growth, remain with a constant full employment, and maintaining price stability. It is of a great importance to answer this question since it will determine the path every society will take to achieve the economic goals in the best possible way. The response to this question will reflect the society’s basic values,beliefs, and attitudes. The ideology they represent will create the foundation for the development of their economic system.

Over the last decades there has been a debate on which approach the government should to take to help achieve the economic goals in the most efficient manner. The question basically lies in deciding between supply side or demand side economic practices. Demand sideeconomics believes that by handling demand through government intervention it is possible to maintain a stable economy. In contrast supply side economics believe the answer is to enhance production capacity in the private sector, where the only role of the government would be to reduce all possible restrictions on productive capacity. Evidence indicates that the best out of these two theories is thedemand side economics. Based on historical record Demand Side economics has had a number of successes when put into practice over the last decades, whereas Supply side economics has proven to be an accepted practice in theory but has failed every time it has been tried in the real world. Also demand side economics operates with policies that deal with the problems in a more direct and effective wayand are easier to control and to be put into practice. Unlike supply side, whose policies and plans try to influence the private sector, which is not easy to manipulate and is subject to other uncontrollable influences.
When analyzing the historical evidences on both theories there is a clear winner, which is Demand side economics. So let’s see a little closer at each theory’s historicalrecord. Supply side theory emerged during the 1970’s as an opposing view to the classical demand side economics. At first it looked very new and promising; assuring it had the solution to handle an economy. But in its outcomes is that the theories present such marked differences. During these years the U.S economy was passing through a very difficult time. America was passing through the Vietnam Warwhich created an inflationary pressure and it was during this time as well that the price of the oil tripled, making the prices rocket as well as interest rates. These high prices were also the cause of a cutback in production and the rising of unemployment. This created what is called stagflation a stagnating economy with uncontrollable inflation.


Precisely here it was that supply sideeconomics came in. In 1981 Ronald Reagan was elected as the president, with the supply side theory as the basis for his economic plans, claiming it was the solution for the economic crisis America was going through. The following year 1982, the first full year of Reagan’s government, the economy got smaller by 2%. That was the worst year for the U.S economy since the great depression. Also itmanaged to create an unthinkable budget deficit of $128 billion and by the next year it incremented to $208 billion. This created some serious problems for the economy. The annual deficits accumulate to the National debt. At that time the National debt was of $1 trillion, and it had taken two hundred years to get there. By the end of the rule of the supply side theories (12 years later) the...