Demand-side economics is a macroeconomic theory which argues that economic growth is most effectively created by high demand for products and services. According to demand-side economics, output is determined by effective demand. High consumer spending leads to business expansion resulting in greater employment opportunities. Higher levels of employment creates a multiplier effect that further stimulates aggregate demand leading to greater economic growth. Demand-side economics maintains economies are built from the wage earner up and not from the producer down.
Typical policy recommendations include:
- a sufficiently progressive tax code to ensure a financially strong middle class
- increase governmental deficit spending in times of low growth
- a watchful eye on inflation, which for a sovereign currency is more critical than a balanced budget
Demand-side economists maintain a sufficiently progressive tax code will give the middle class more discretionary income and the ability to spend more. Accounting for roughly two-thirds of the Gross Domestic Product (GDP) a financially strong middle class has the ability to drive the economy by creating more demand. Demand-side economists argue the main constraint facing capitalist economies is demand for goods and services. They maintain giving tax breaks to the wealthy produces little, if any, economic benefit because most of those funds get saved and more saving mean less consumption.
Demand-side economists, in the Keynesian tradition, argue increased governmental spending will help to grow the economy by spurring additional employment opportunities. They cite the lessons of the Great Depression of the 1930s as evidence increased governmental spending spurs growth.
Demand-side economists maintain inflation (and not a balanced budget) is the necessary constraint to prevent economic and financial dislocations. Once full employment has been achieved an economy is subject to higher rates of inflation. Higher rates of inflation are best dealt with through higher interest rates and/or higher rates of taxation.
British economist John Maynard Keynes is the most celebrated of demand-side economic theorists. Keynes saw his theories successfully demonstrated in the 1930s when they helped to end the Great Depression and into the 1950s and '60 when capitalism experienced its Golden Age.
Demand-side economics is held in opposition to supply-side economics which argues that economic growth can be most effectively created by investing in capital and by lowering barriers on the production of goods and services.
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