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Macro Minute -- Demand-side vs. Supply-side Economics

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Supply and Demand is a subject that everyone has a strong belief about. There are many people who believes in the supply side and there are many people who believes demand side. I honestly feel like I am in the middle. The pros and cons of both, demand and supply side, outweigh each other. The demand is the amount of a product people are willing to buy at a certain price. The supply side is how much the market can offer. Instead of competing, they should work together. The relations between the actual price and how much a good or service is supplied make sense to work together.

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The safety social net is at risk. The supply-side argued that cutting taxes would lead businesses to invest more.

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The social safety net is forever at risk of becoming a hammock, to use House Speaker Paul D. Ryan's memorable metaphor.

That, anyway, is an operating assumption behind much of the discussion of social welfare programs. Economists have often taken it as a given that there is an inherent trade-off in which the larger the social safety net, the fewer people will work.

But what if that framing is backward? Certain social welfare policies, according to an emerging body of research, may actually encourage more people to work and enable them to do so more productively.

That is the conclusion of work that aims to understand in granular detail how different government interventions affect people's behavior. It amounts to a liberal version of "supply-side economics," an approach to economics often associated with the conservatives of the Reagan era.

Those conservative supply-siders argued that cutting taxes would lead businesses to invest more, unleashing faster economic growth as the productive capacity of the nation increases. In the emerging liberal version, government programs enable more people to work, and to work in higher-productivity, higher-income jobs. The end result, if the research is correct, is the same: a nation that is capable of growing faster and producing more.

The clearest example of a program that appears to increase labor supply and hence the United States' economic potential is the earned-income tax credit (E.I.T.C.), first enacted in 1975 and expanded several times since then. It supplements the income of low-income workers, and numerous studies find that its existence means more Americans work than would in its absence.

For example, there was a major expansion of the program that was passed in 1993 and phased in over the ensuing years. Jeffrey Grogger of the University of Chicago finds that it was a major driver of higher employment among single mothers. By 1999, his research suggests, 460,000 more women who headed their household were working than would have been without the E.I.T.C. expansion. That is more, in his estimates, than the number of such women who were pulled into the work force by welfare reforms or a booming economy during that decade.

Child care subsidies appear to work the same way. It's a pretty straightforward equation that when government intervention makes child care services cheaper than they would otherwise be, people who might otherwise stay home raising their children instead work. More women work in countries that subsidize child care and offer generous parental leave than in those that don't.

In other areas, the relationship between public programs and higher incomes and employment rates is more indirect and takes longer to play out, but researchers are analyzing vast troves of data to detect trends.

For example, the food stamp program was introduced gradually in the United States from 1961 to 1975. Hilary Hoynes of the University of California, Berkeley, Diane Whitmore Schanzenbach of Northwestern University and Douglas Almond of Columbia University have found that low-income children who benefited from the program were healthier and more likely to be working decades later than otherwise similar children in counties where the program arrived later. There is similar evidence of long-term economic benefits from high-quality childhood education.

What is behind the surge of research in this vein? "It is a combination of data and time," Ms. Hoynes said. "What we've seen so far is just the tip of the iceberg in terms of what is possible."

The advent of more advanced computer processing power has enabled social scientists to mine administrative data - actual records on individuals - instead of relying on often spotty, inconsistent surveys.

But also important is that a variety of social welfare programs introduced and expanded since the 1960s have now been around long enough, often with periodic changes to their structure, to allow for an analysis of their long-term effects.

Some studies are truly long-term. Anna Aizer of Brown University and three colleagues studied what happened to boys whose families were beneficiaries of the "Mothers' Pension" program, which from 1911 to 1935 paid cash benefits to poor families in which the breadwinner had died or become disabled. Compared with children in similar circumstances who did not benefit from the program, their incomes were 14 percent higher during their prime working years of 20 to 45. (They also lived longer, got more education and, among those who served in the military in World War II, were taller.)

None of this means that all social welfare programs result in more people working. Receiving unemployment insurance, for example, appears to make people slower to find new work, and the Congressional Budget Office projects that the Affordable Care Act will lead to fewer adults working because they can more easily obtain health care without having an employer.

It also isn't an assertion that these programs pay for themselves by generating more economic growth. Something like food stamps or the E.I.T.C. can have pro-growth effects while still being costly to the government.

And finally, many elements of the social safety net are justifiable purely on moral grounds, regardless of whether they increase or decrease the labor supply. The entire range of programs that benefit older adults are in place because society has judged taking care of this group to be the right thing to do, not because it might increase the nonagenarian labor force.

But the emerging body of evidence on the supply-side benefits of certain programs does mean that the specific structure of a given program matter, and policy makers shouldn't take for granted that the trade-offs around the social safety net always point in the same direction.

"We're not there yet in terms of having models we can feed into to say that you'll get X amount of extra G.D.P. in 20 years if you invest in people now," said Chye-Ching Huang, who studies these issues at the Center on Budget and Policy Priorities. "But maybe we will, as that body of evidence develops."

The United States and other advanced nations are struggling to emerge from a pattern of persistently low growth, an era when many prime-age people aren't in the labor force at all and productivity gains have been weak for years. Supplementing low-end wages through the tax code and ensuring that children have the food and education to become productive adults just may help, and that means "supply-side economics" isn't just for low-tax conservatives any more.

A version of this article appears in print on , on Page BU8 of the New York edition with the headline: Supply-Side Economics, but for Liberals. Order Reprints | Today's Paper | Subscribe

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The social safety net is forever at risk of becoming a hammock, to use House Speaker Paul D. Ryan's memorable metaphor. That, anyway, is an operating assumption behind much of the discussion of social welfare programs. Economists have often taken it as a given that there is an inherent trade-off in which the larger the social safety net, the fewer people will work.

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National debt- Have to increase government spending.
Inflation- Higher demand cause inflation, which can affect the economy.

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Introduction from Alison Evans (ODI)

Fletcher has a background in community negotiation at World Vision, with a focus on aid and the domestic accountability of work. It is from this background that he approaches the Mwananchi Programme.

The Governance Transparency Fund (GTF) has been an opportunity to broaden the understanding of the social contract between citizens and the state.

The presentation covered the following areas:

Defining social accountability.

Background and approach to Mwananchi GTF.

Six main lessons from the programme so far.

1. Thinking about 'How did we get here?' to inform theories of change.

2. Knowing who the 'Game Changers' are.

3. Embedding politics back into socio-cultural roots.

4. Overgeneralised policy frameworks give room to corruption.

5. Linking accountability to production and natural resource management.

6. Creating mechanisms for dialogue.

Challenges

Six implications for policy and practice - making social accountability claims a reality.

Why the World Bank is involved in the demand side of governance - The context in Africa has changed and citizens are demanding change (ref. the Arab Spring).

World Bank works at the Africa level - a global fund is being launched next month; the World Bank's bank niche is in knowledge and partnerships.

The use of evidence - there are 2 schools of thought a) the 'believers' who have tended to do development work before evidence becomes available and now point to qualitative evidence and b) those who want more robust quantitative evidence.

Implications for development partners - The demand for good governance is a good rebalancing of the governance model, but the demand and supply side cannot be separated - they are mutually reinforcing. Aid can and does distort, and we need to understand incentives properly so that we can achieve 'islands of success' rather than a widespread 'one size fits all' approach.

World Bank's pending agenda - the focus is on the new global fund and finding windows for funding around knowledge and partnership.

David Booth - Overseas Development Institute - response.

Generally agreed with all that was said, but felt some realism was needed.

It is very important to think about how to handle politics - a shift to focussing solely on the demand side is not necessarily the right solution.

A 'welcome rebalancing'

The research evidence points towards pincer movements working on both the demand and supply sides. Internal structures often do not favour this pincer movement. A 'welcome rebalancing' as suggested by Kathy would really be the second best option.

We need to be realistic about incentives which take us down certain pathways.

Theory and the current climate

There is an assumption that political systems in developing countries are imperfect and just need some 'tweaking' to make them work. However, theory says that in poor (peasant) countries, democracy doesn't function anywhere like it does in industrial nations. Therefore, sensitivity to the political context is very important.

Example of the Egyptian middle class - this is not necessarily a good model for the rest of the world.

Improving government behaviour

This is still the big problem.

Learning experiences are a good way to approach development. However, the obstacle to learning is that high quality-evidence needs to be collected on all factors that influence results, and this is often not done. RCTs sometimes work, but sometimes do not. Sometimes bad evidence is collected.

The challenge is that it is more important to understand processes rather than measure outcomes.

Roy Trivedy - Department for International Development - response

Thanks

Many thanks to GTF for pulling this together. The GTF is the single largest multi-country work within civil society that DFID has done.

Many thanks to the southern implementing partners and all those involved in their own coalitions.

Sequencing, timing and learning

An important question to ask is 'what is the causal link?' Do supply-side interventions lead to an increase in demand or does increased demand lead to improved supply?

Different contexts are important and this also depends on what kind of organisation you are and your own links, networks etc.

If the GTF was to start again today it is unlikely that DFID could make the same commitment, such as the loose framework and flexibility given. We need to find out how the TOC have altered along the way to lead to the transformational change that we are seeing.

Bureaucracy - How can we get beyond only funding the best proposals? We need to be funding the real influencers of change which are not always those who write the best proposals.

Learning and Practice

Documentation is very important. The evidence from all of the GTFs need to be pulled together to see what 'nuggets' can be drawn in different sectors. The TOC in multi-country programmes are more complex and difficult to learn from.

We need to think about how we apply what has been learnt. If the GTF was to start again, what would be done differently?

Questions and Comments

The importance of politics and understanding the intra-elite struggle for power - is there any role for outsiders? Maintaining power and extracting the benefit for the elites is what the developing country governments are most interested in. This is very different from the agenda of development actors.

The importance of institutional design to mobilise different groups e.g. Judith Temba's study on the Brazilian health programme. Civil society groups are given equal status in some well-designed interventions. It is also important not to forget that non-state actors also include the private sector, not just civil society.

Context is a word which is used at many different levels. Systems and projects are often very specific to a local context, and yet the expectations of change are at a national level. This is also linked to how funding is disbursed in large packages. Is it ok to see success at a local level only?

Natural resource governance and the impact on SA. This creates a much greater energy in rural populations, for example land issues. Can the GTF use this lever?

Fragile states and uncivil societies - mobilisation can be conflictive. How does social accountability (SA) deal in situations where citizen voices are fractured and ranged against each other?

Panel responses

FT agreed that natural resources were a big hook. The big question is what is in the interest of the citizens here? Are we driving them to demand change? Not so in regards to natural resources - this is a subject that they are already passionate about, such as the salt mining example in Ghana.

FT agreed that fragile states are very important and this a big concern for the Tiletonse fund in Malawi where the visibility of civil society leaders gets them into trouble.

KB agreed that there is a struggle between the elites and that the role of outsiders is questionable, reflected in the development effectiveness agenda. In Tanzania the Aid Effectiveness Agenda is used as a smokescreen and they are implementing their own development plan as well as a poverty reduction strategy programme (PRSP).

In terms of institutional design, KB thinks that the World Bank can play a useful role in getting local actors together, solving informational asymmetries, and creating spaces for debate.

KB thinks that there needs to be more emphasis on parliament. The World Bank is trying to work with MPs informally and individually, outside of their committees.

Further questions and comments

It is important to build the capacity of CSOs to provide evidence and impact, for example through data capture on mobiles. The grassroots M&E capabilities of CSOs need to be taken into account to prevent the 3 W's - wrong people asking the wrong questions and the wrong time.

Is there a relationship between social accountability (SA) and advocacy? And between rights-based approaches?

There are specific governance features within context and within political drivers that make some projects more successful than others. For example, in the case of score cards in Malawi , important features included the presence of local leaders that were open to reform and the communities' own capacity to address the changes needed.

Panel responses

RT commented that the GTF started with the CAR framework (capacity, accountability, responsiveness) but that what is also needed are CAR citizens.

RT agreed that success at the local level is acceptable as long as long-term transformation is seen. GTF can work at all levels and add value at each.

DB commented that what is needed are clever ways of interacting with national politics and elites. Natural resources can be more dynamic, but there is also the potential for greater harm in this area by creating conflict. Therefore context specific approaches are very important (rather than having a global model).

KB mentioned the Public Interest and Accountability (PIA) model used in Ghana in the Oil and Gas industry. This is an area that SA tools have been effective, but in other areas, such as budget information, they have failed.

FT suggested that organisations come up with better questions themselves. There are linkages across all GTFs and these change features should be analysed. The main question should be 'how can we support that change?', not necessarily through workshops but other mechanisms.

Fletcher Tembo - Overseas Development Institute

Kathy Bain - World Bank

The presentation covered the following areas:

Closing comments

Alison closed the event with an online comment from Jonathan Glennie (ODI) : Why do we always say that developing country leaders have mixed motives (at best!) whereas the motives of donors are always considered impeccable! All actors have complex motives.

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Demand-side governance: are we overstating the claims on social accountability?

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This event will represent the first of six discussions around the broader theme of 'demanding accountability from the bottom-up: examining what works,what does not work, and why'. These themes reflect on the four years of implementing Governance and Transparency Fund (GTF) programmes such as Mwananchi, in various parts of the world.

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Trump's Tax Plan-  He is deciding to cut taxes and flatten tax rates.

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Taxes: President Trump's tax plan, unveiled on Thursday, slashes the corporate tax rate from a top rate of nearly 50% to 15%. It's a smart move. Not only will it kick start the economy and job growth, but it's likely he'll be able to get bipartisan support.

Right now, there is no consensus on broad-based tax reform. So, at least for now, a broad tax reform package including tax cuts, fewer deductions and a flattening of tax rates may be tough to achieve. Even Republicans, who are eager for some kind reform, remain split on how it should be done.

But nearly everyone agrees that the current U.S. corporate tax rate is outrageous.

Sadly, average Americans often don't agree. They believe that corporations pay no taxes. But that's not true. U.S. corporations pay a top marginal rate of close to 40%, compared to an average of about 24% for all the OECD nations.

That puts U.S. companies at a tremendous disadvantage to other nations' companies and reduces the money they have available for investing and hiring new workers.

We don't know what else Trump's tax reform will contain, but just cutting corporate taxes would be a big winner. Even President Obama supported the idea in 2015, when he and congressional Democrats were considering a deal that would cut corporate tax rates in exchange for spending more on infrastructure.

But apart from Washington political wrangling, the economic reasons for a corporate tax cut are even more compelling.

Back in 2015, the nonpartisan Tax Foundation ran the numbers and concluded that cutting the corporate rate to 15% would boost GDP by 3.7% and actually increase federal revenues by 0.3%.

More importantly, it would be a huge boon to working Americans: "Depending on the size of the corporate rate reduction, we would expect to see an additional 425,000 to 613,000 new jobs, and wages would increase between 1.9% and 3.6% over the long-term."

That means higher after-tax incomes for all. Talk about a stagnation-buster. That's a recipe for 3% plus annual GDP growth, something that never happened during the Obama years. The plan that was Trump unveiled Thursday said that one of the goals of tax reform was to "grow the economy and create millions of jobs."

This will do just that. And it's something Trump has been talking about for a long time.

Back in September, Trump unveiled a corporate tax plan was both bold and aggressive. In addition to cutting the top rate, he proposed eliminating the corporate alternative minimum tax, letting businesses choose to either fully expense investments or deduct their interest costs, and reduced capital gains for many investors.

One other thing he suggested he would do: A one-time tax on repatriated overseas corporate retained earnings that are now kept in overseas accounts to avoid onerous U.S. taxation.

The estimated amount of these funds is staggering: $2.4 trillion. Even repatriating just two-thirds of that amount at 10% would add close to $160 billion to federal tax revenues.

Taken together, these form the core of an extremely supply-side oriented economic growth program that would create jobs and new incomes.

Nor is this a "tax cut for the rich," as some have claimed.

As IBD noted last September, the "dirty little secret" of corporate taxes is that corporations don't actually even pay them. Average Americans - that's you - do. You pay it through lower wages, lower returns on investments and retirement accounts, and higher prices for the things you buy.

A study last year by The R Street Institute noted that "some studies suggest that as much as three-fourths of direct corporate income-tax costs are borne by a firm's worker s."

High corporate tax rates are also why many big American companies are undergoing "inversions" - merging into a foreign company, then relocating their headquarters to the foreign country to avoid super-high U.S. taxes.

In short, our excessively high corporate tax rate does nothing good for the economy, for investors or for workers. While 15% is a very good rate, it would be better to get rid of it entirely.

Sadly, such a radical move isn't likely. Still, in case you're wondering why the stock market, as measured by the S&P 500, has soared 11.6% since Trump was elected, one big reason is the promise of major corporate tax cuts.

Wall Street and Corporate America have hoped that Trump would do what he promised to do. Now, it seems, he will. But as good as it will be for Wall Street and Corporate America, it will be even better for U.S. working men and women.
RELATED: Never Mind The Gimmicks, We Need Real Tax Reform Trump's Tax Plan Is Good, But Here's How It Could Be Better Trump Is Right - Corporate Taxes Should Be Slashed Or Eliminated

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Trump's 'Yuuge' Corporate Tax Cut: A Supply-Side Shot In The Arm | Investor's Business Daily

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Taxes: President Trump's tax plan, unveiled on Thursday, slashes the corporate tax rate from a top rate of nearly 50% to 15%. It's a smart move. Not only will it kick start the economy and job growth, but it's likely he'll be able to get bipartisan support.

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1. When there is an expectation of a price change, then they are more likely to purchase as soon as possible. the consumers will increase.  Ex; If you hear that apple is coming out with a new phone that is water proof, consumers will think about purchasing it.
2. Demand helps change preferences. Anytime demand increases, it's a good thing for businesses, it helps bring consumers in.
3. The greater income means the greater purchasing power. So when incomes from the people increase, they can afford to buy more.
4. Consumers demand creates more jobs, not tax cuts for the rich.
5. It's does not make sense to cut taxes and then increase government spending. Doing that, causes deficits.

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The economic growth rate gets weaker. Supple-Side lowers tax rates causes a lot of problems. Middle Class households become , (lacklustre) low economic growth, or no increase in profits.

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an economic theory that shows the use of government spending and growth in the money supply to stimulate the demand for goods and services and therefore increase economic activity.

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Complimentary Goods are examples of demand. If they closed the beach, there would be an increase in demand for beach towels.

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is a macroeconomic theory that argues economic growth can be most effectively created by lowering taxes and decreasing regulation.

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Entrepreneurship- supply side helps new entrepreneurs to start business and lowering marginal tax rates.

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One example is College education. A firm doesn't have to pay the full cost for the emission because the supply side helps to lower those prices.

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Substitutes is another example. A substitute is like Coca Cola and Pepsi, they're similar. If one of their prices go up, the demand will rise.

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1. Lower Employment Supply-Side can help to lower the rate of unemployment.
2. Supply Side also improve economic growth by , LRAS, which represents the relationship between the price level and output in the long run.
3. Supply-Side are known for the tax cuts and deregulation, and government spending on facilities, buildings, and schools
4. Income levels reflect our ability to produce goods and services that people value.
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