As we worked our way through these supply-side tax policies, you noticed the common theme of more investment. This is one part of supply-side economics. The other major element is supply-side deregulation.

You already know that supply-side economists are interested in tax policies that increase profits for corporations so that more retained earnings are available for business investment. Deregulation is another way of incresing profits for companies. This will induce more investment.

Profit equals total revenue minus total costs. Business firms spend money to satisfy regulatory requirements, so the elimination of any unnecessary regulations would have the effect of increasing profits. When profits rise, firms are in position to expand their supply of goods and services to the market. This may include new retail outlets or entering new geographical areas or the introduction of new product lines. Firms can increase their production of goods so long as the additional revenues earned are sufficient to cover the additional costs incurred. When profits are good this condition is more likely to be satisfied. Conversely, when regulatory costs (or other costs, such as labor) are high, it is less likely that expansion will yield enough revenue to cover the additional expenses. If profits are squeezed business firms will cut back on their production, typically by trimming their work forces. Supply-side economics is about obtaining more production, not less; so more profits are clearly desirable.

Suppose the Baldman Pharmaceutical Company develops a new pill called "Pate". It is for men whose hair is falling out. Pate is designed to stop further hair loss and also stimulate new growth. It is intended to be sold over the counter instead of by prescription. Before this drug can be offered to the public, government regulations require that studies be done to prove that Pate is both safe and effective. These controlled studies prove to be expensive, costing Baldman two million dollars. The results are conclusive that Pate is safe but inconclusive on whether it is effective. Government regulators want more studies in order to determine whether this pill is really effective. The cost to Baldman will be another two million dollars and so Baldman pulls Pate from the market and moves on to develop other pharmaceutical products.

Whether or not Pate is sold on the market is not a life or death matter, but supply-side economics is concerned with ways of increasing GDP, not decreasing it. Supply-siders accept the proposition that both prescription and over the counter drugs should be safe before being sold to the public, but in this case the effectiveness issue can be determined by the market itself. As long as the drug is safe, why not?

Some years ago, airlines were deregulated and one of the government agencies involved in airline regulation, the Civil Aeronautics Board, was phased out of existence over a period of several years. Before deregulation, airlines had to have both their routes and fares approved by the CAB. Since deregulation, each airline can decide which routes it wants to fly and what fares it will charge. The intent was to spur competition in the industry and provide lower fares for the flying public.

The structure of the industry was oligopolistic before deregulation. A relatively small number of carriers dominated the business. Today, the industry is still an oligopoly. This may be due to the large capital (each plane costs tens of millions of dollars) and advertising requirements that are needed to compete in this business.

Some cities are heavily dominated by one carrier that has significant market power and may use it to charge higher fares. Other cities have two or more airlines with substantial market shares and enjoy lower fares, particularly if one of the airlines happens to be Southwest. Their efficient operation has provided them with a lower cost structure and has put pressure on their competition.

Overall, fares today are lower on an inflation-adjusted basis than they were twenty years ago, so in this sense airline deregulation has been a success. However, in some cities, the service level has been diminished and there are fewer direct flights than there used to be.

Supply-side economists want to keep the cost of labor, land, and capital down. Keeping factor costs low should increase corporate profits and result in more business investment. This in turn raises the productive capability of the economy and drives up GDP. Much of the regulation in factor markets deals with the labor force.

A typical target for supply-side economists is the minimum-wage law, passed back in 1938. Do you know the original hourly minimum wage when this law (known as The Fair Labor Standards Act) was first passed? In fact, we’ll make this a "hidden" two-point bonus question to be added to your next exam score. Just send an e-mail with your answer. Supply-side economists don’t like the minimum wage concept because when the price of labor or any other factor of production rises, then under the law of demand, buyers don’t purchase as much of it. This is just as true in factor markets such as the labor market as it is in consumer retail markets. Since increasing the minimum wage results in some job loss, this means that the GDP growth rate is less than it could be. In addition, a rise in the minimum wage will lead to wage increases for non-minimum wage employees. There is no rule that says this has to be so, but it has worked that way ever since the minimum wage law was passed. It should be noted that while there is some job loss associated with minimum wage increases, those who are earning the minimum wage do receive more income and their households are better off.

Supply-side economists don’t support laws such as time and a half compensation for overtime because this increases the cost of production for business firms and makes it less likely that the additional production will be profitable. Supply-side economists would prefer that this matter be left to the employer and the employee.

This approach to the labor market only goes so far. Supply-side economists definitely don’t favor small children working in factories, mines or sweatshops. The free market has its limits.