Final answer:
Supply-side economics refers to an economic policy approach that promotes growth by reducing taxes and regulations on businesses, intending to incentivize investments that lead to overall economic improvements. It was central to President Ronald Reagan's economic policies in the 1980s, aiming to decrease governmental influence and enhance private sector activities.
Step-by-step explanation:
Supply-side economics, the economic policy often associated with President Ronald Reagan in the early 1980s, emphasized stimulating economic growth through reducing taxes and regulations on businesses. This approach assumed that lower taxes would encourage investment by the private sector, leading to the creation of new jobs, an overall boost in economic growth, and thereby increasing net tax revenues despite the lower rates. This policy direction, a shift from previous administrations, relied largely on the idea that reducing the financial burdens on the wealthy would result in investment and spending that would trickle down to the rest of the economy.
One of Reagan's main goals was to revitalize a stagnating economy while also reducing the size of government. He achieved this through lowering income tax for high earners, a move influenced by economist Arthur Laffer. The theory predicted that this incentivization for the wealthy to invest would create opportunities and jobs further down the economic hierarchy, subsequently stimulating economic growth that would increase tax revenue even after tax cuts were implemented. Moreover, Reagan's policies included deregulation of industry and maintained higher interest rates to curb inflation.
The Reaganomics strategy was a concrete application of supply-side economic theory, diverging from Keynesian economics which favored government intervention to spur growth. The Reagan administration contended that high taxation reduced individual work incentives and suppressed potential economic output, thereby focusing policy efforts on boosting the production side of the economy.