The supply-side argument that tax cuts induce businesses to increase investment and create jobs.

A business does not need a tax cut to create a job. A rational business manager will hire a worker if that person generates more additional income than what he or she is paid in wages, salary, and benefits. Similarly, business investment will occur if the perceived future revenues exceed the expected costs.

Subsides can be used to increase private investment in factories or equipment. But they may be of no more benefit than similar expenditures by government entities. Any increases in physical capital can be of future benefit to the economy, whether in the form of government subsidies to private businesses or direct government purchases for public investment.

Factory workers do not lose their jobs because of the lack of a factory, as supply-side theorists might suggest. It is insufficient demand for their products that causes the job losses.

See also "Recessions & Depressions: Questions & Answers."