This research examines the contemporary state of supply side economic theory. Supply side economic theory is an approach to fiscal policy (Gwartney, Stroup, & Studenmund, 1989). Supply side economic theory opposes the Keynesian model, in which aggregate demand is the propelling force (Eke lund, & Hebert, 1988).
BACKGROUND ON THE IMPLEMENTATION OF
The Keynesian model was based on the premise that, until the capacity constraint is reached within an economy, supply remains passive (Gwartney, Stroup, & Studenmund, 1989). In this model, supply always reacts to the stimulus of aggregate demand (Gwartney, Stroup, & Studenmund, 1989). Thus, in the Keynesian model, there is a link between a full employment deficit or surplus, and aggregate demand (Gwartney, Stroup, & Studenmund, 1989). Within this model, thus, fiscal policy attempts to stimulate demand, as a means of promoting economic growth.
In the late 1970s, the Keynesian model appeared to be losing its ability to accurate explain economic events, as the phenomenon of stagflation developed. Supply side fiscalists
stepped into this apparent breech. The supply side fiscalists emphasized the interrelationship between governmental tax and expenditure policy, and aggregate supply (Gwartney, Stroup, & Studenmund, 1989). It was the contention of the supply side fiscalists that relative price changes induced through govern mental tax and expenditure policy woul generate production incentives; thereby promoting economic growth. For fiscal policy, the supply siders argued for tax reductions, and governmental spending reductions.
The supply side approach to fiscal policy was made to order for the Reagan campaign for presidency in 1980. What the Reagan faction desired above all else even above the defeat of Communism was reduction in taxes and government spending. Thus, subsequent to the inauguration of President Reagan in 1981, supply side economics provided the basis for...