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."

Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations by Paul Krugman

This book is essential reading if you want to understand how politics led the U.S. into misguided economic policies.

Information about the book from Amazon.com:

Editorial Reviews

Review
In ten lively chapters, Krugman traces how loose economic thinking has repeatedly led to wrongheaded government policies. In the process, he offers the best primer around on recent US economic history. -- Newsweek 

Product Description
The past twenty years have been an era of economic disappointment in the U.S. They have also been a time of intense economic debate, as rival ideologies contend for policy influence. But strange things have happened to economic ideas on their way to power--they've been hijacked by policy entrepreneurs who offer easy answers to hard problems. 

About the Author
Paul Krugman is the recipient of the 2008 Nobel Prize in Economics. He writes a twice-weekly op-ed column for the New York Times and a blog named for his 2007 book, The Conscience of a Liberal. He teaches economics at Princeton University.

Arthur Laffer - Father of Our $11 Trillion Debt

Arthur Laffer, the Ph.D. economist who created the Laffer curve and is sometimes called "the father of supply-side economics", can also take credit as the father of our massive public debt.  The tax cuts (and subsequent revenue reductions) he inspired were not matched by decreases in government spending.  And contrary to the claims of supply-siders, the tax cuts did not result in extraordinary economic growth. (See Table B-4. Percent changes in real gross domestic product from the Economic Report of the President.)

Supply-Side Economics

Supply-side economics refers to theories that suggest the best way to promote economic growth and prosperity is to cut taxes.