Summary on the Supply Side

To repeat, simply in terms of the logic of the AS/AD model, it is possible for a Supply Side tax cut to work, but it seems very improbable that the policy would work in fact.

Probably few economists today would disagree that "Keynesian economists (and most others, for that matter) have concentrated too much on the demand side in their views on economic policy," and that economic policy must consider the supply side if it is to be successful in the long run. There is no question that a rapid increase in aggregate supply would solve many of our problems, and would solve them less painfully than other policies would. What is not clear is that anyone knows how to bring about this increase in supply.

Advocates of the "Supply Side" policies propose that a cut in the tax rate would do it. Critics claim that this would increase the government deficit. The proponents of Supply Side Policies say that it would not, since the lower tax rate would be collected on a larger production. Application of the AS/AD model clarifies the conditions under which this could occur. In a long run perspective, it is possible. However, it seems very improbable. No-one doubts that a tax cut would stimulate investment and increasing productivity to some extent. But, in order to keep tax revenues from dropping, the increase in investment would have to be very large -- so large that the probability of success seems tiny at best. What seems far more likely is that tax cuts would lead to increased deficits, with increasing burden of interest to be paid on the federal debt by future generations. And this is what did in fact follow the tax cuts of the 1960's and 1980's.

All of this was meant mainly to demonstrate that the AS/AD model can help us to reason through a practical issue of economic policy, and in that it seems to have been successful.