Constraints to Supply-Side Policies
Market-Based Policy Constraints
Equity
- Policies like the reduction of unemployment benefits, minimum wage reductions and reducing the power of labor unions all can have a detrimental effect on income equality.
- Reduction in household income taxes may benefit higher income earners more,
- Reduction in corporate taxes will benefit shareholders.
Time Lags
- Supply-side policies, like fiscal policy, require legislation passed by parliament or congress.
Vested Interests
- Lobbyists have the ability to influence political decisions due to their vested interest (a government decision that directly benefits a firm on industry).
Sustainability (Environmental Impact)
- Freeing firms from regulations sometimes results in environmental damage.
Also a reduction in worker safety and other worsening working conditions.
Interventionist Policy Constraints
Costs
- Supply-side policies can be quite expensive for governments, resulting in:
An increase in the budget deficit and debt
crowding out effect
debt servicing costs
- Opportunity costs of spending.
Time Lags
- Government policies are constrained by the legislative process which can delay them.
Strengths of Supply-Side Policies
Improved Resource Allocation
- Government intervention typically results in allocative inefficiency.
- Allowing markets to operate freely should improve resource allocation.
No Burden on the Government Budget
- Market-based policies typically do not negatively impact the government budget and might even improve the budget (i.e. reduction of unemployment benefits).
Direct Support of Sectors Important for Growth
- Interventionist policies can target specific sectors for economic growth by providing resource and funds to aid their growth.