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Evaluation of supply-side policies

The strengths and weaknesses of supply-side policies

Time lags: Supply side policies generally take time to implement and show results in the long run. For example, improving the quality of human capital, through education and training, is unlikely to yield quick results.

These policies have an ability to create employment as more jobs are created in various fields such as education, technology and health care. Moreover, these jobs are long term and sustainable.

Supply side policies have the ability to reduce inflationary pressure in the long term because of efficiency and productivity gains in the product and labour markets.

Supply-side policy is very costly to implement and have severe impact on the government budget.  For example, the provision of education and training is highly labour intensive and extremely costly. The government has to carefully plan these spending over a period of time. In the short run market oriented supply side policies such as reducing in income and corporate taxes can reduce government’s main source of revenue, however in the long run size of the economic growth would be significant enough that the increased government revenue from a faster growing economy would cause overall revenue to increase.

Effect on equity:  Many supply-side measures have a negative effect on the distribution of income, at least in the short-term. For example, lower taxes rates, reduced union power, and privatisation have all contributed to a widening of the gap between rich and poor.

Effect on the environment:  Supply side policies lead to more economic growth. However, it can lead to exploitation of natural resources and environment if environmental regulations are relaxed thus creating negative externalities of production.

Opposition: Power of labour unions, reducing unemployment benefits and abolishing minimum wages can lead to wide spread discontent among the labour force in the economy. Thus governments are usually hesitant in taking these steps. Moreover, these might also lead to worsening of working conditions in the long run which will affect labour productivity.

 

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