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.