Inflation & Unemployment I: Supply-side policies

The purpose of supply-side economic policies is to increase the amount of supply and therefore the productive potential that the economy is able to produce.  This kind of policies shift rightward the long-run aggregate supply curve and outward the production possibility frontier.  They can be divided in policies that act over the production function, and those that act over the cost of labour.

On the one hand, the former are targeted at increasing production levels and examples of this kind of policies include incentives to technological improvement and capital stock increase. On the other hand, the latter are targeted directly on decreasing the cost of labour and this way more workers can be hired. Examples of these policies include reduction of social security contributions, increase of subsidies for firms, reduction of indirect taxes etc.

Supply-side policies have been praised by many economists including Nobel laureate Robert Mundell. There have been many studies regarding their effectiveness, and although it is true that they take effect in the long run, they are the only ones that can lead to perdurable economic growth. Furthermore, critics coming from monetarists and Keynesians have questioned the effectiveness of other policies, such as fiscal and monetary, respectively, pointing out how they are only useful in the short run, but are useless or even harmful for the economy in the long run. In fact, the last two great economic doctrines, New Classical Macroeconomics and New Keynesian Economics, have proven the ineffectiveness of fiscal and monetary policies, leaving supply-side policies as the only ones that are useful.