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Modern Economic Theories
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 1920Õs, 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
Òhappy mediumÓ 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 1970Õs, 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 KeynesÕ theories are
well matched theories, but it was the time of use that made them good
and bad. KeynesÕ 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