Econ Macro Supply-side policies

Supply-side policy goals

Expand productive capacity, increasing competition in product markets, increase flexibility of the labour market, improve firms' incentives to invest in new capacity and technologies, reduce risk of inflation (improving international competitiveness of domestic firms)

Market-based supply-side policies

Role of the government shrinks while role of free market expands

Interventionist supply-side policies

Government takes on an active role in trying to influence the productive capacity of the economy

Market-based supply-side policies history

Stimulate private investment and thus growth, after 2008 global financial crisis came under scrutiny

Types of market-based supply-side policies

Product market related policies, labour market related policies, incentive-related policies

Product market related policies

Anti-monopoly regulation, deregulation, privatization, trade liberalization

Anti-monopoly power regulations

Antitrust laws, competition commissions, blocking certain mergers and acquisitions

Monopoly effects

Higher prices, lower output, slower rates of innovation and increased income inequality

Regulations

Rules, restrictions and laws imposed by governments that aim to modify the behaviour of firms and operation of markets

Deregulation

Refers to the process of dismantling or relaxing inappropriate rules, restrictions, and laws in the operation of firms or markets

Benefits of deregulation

Benefits competition and consumers if entry barriers are removed and prices are determined by market forces, decreases costs burdening firms

Privatization

The transfer of state-owned assets, usually enterprises, to the private sector

Benefits and drawbacks of privatization

Operate more efficiently, but can create a monopoly, lead workers to be hired to cut costs, higher prices, inferior quality

Trade liberalization

The elimination of policies protecting domestic firms from foreign competition such as tariffs, quotas, subsidies, regulatory health and safety barriers

Benefits and drawbacks of trade liberalization

Domestic monopolies forced to cut costs and lower prices, accused of displacing domestic labour, world market controlled by large companies, leading to globally high prices and income inequality

Labour market related policies

Decreasing or even abolishing the minimum wage, reducing non.wage labor costs, decreasing unemployment benefits

Labour market related policies justification

Labour unions raise production costs and reduce output, also less unions = more FDI, however they also protect workers from harassment, unlawful firing, and keep wages high

Decreasing or even abolishing the minimum wage

High minimum wage decreases demand for labour and raises UE, lower wage decreases production costs, but may also decrease job satisfaction

Reducing non-wage labour costs

Pension schemes and employer contribution to national insurance, decreasing these decreases production costs, but decreases workers' disposable incomes, devastating for unskilled labour

Decreasing unemployment benefits

Increases incentives for UE to accept jobs, however some may accept jobs that underutilize their skills, lower efficiency

Incentive related policies

Cutting personal income taxes, cutting business taxes and the capital gains tax

Cutting personal income taxes

Expected to increase labour supply, more people accepting jobs and working longer, up LRAS, unless more disposable income induces workers to choose more leisure

Cutting business taxes and the capital gains tax

Investments are more profitable, faster growth, however has been shown to increase inequality as it doesn't necessarily lead to investment

Capital gains

The profits an individual earns from selling an asset at a higher price than it was purchased, typically stocks, bonds, and real estate

Interventionist supply side policies

Increased government spending on education and healthcare, infrastructure and R&D, and industrial policies

Increasing public investments in education, training, and health

Increase stock of human capital in economy, increasing labour productivity, employability and innovation

Human capital

Education, training, skills and experience embodied in the labour force of a country

Public investment in infrastructure

Better infrastructure help firms sell in more markets, removes constraints, electrification key to many industries, efficiency, water infrastructure leads to more health, telecommunications improves access to information for businesses, decreases overall cost of economic activity

Infrastructure

Physical capital, typically financed by the state

Public investment in R&D

Technological developments most significant determinant of long-term growth, have spillover benefits, incentives for private investment in R&D, increases labour productivity

Industrial policies

Subsidies, low interest loans, tax cuts and tax allowances, joint public-private research programmes, and protection from foreign competition for industries considered key to growth

Political capture of industrial policies

When policies are captured by powerful business groups, closely linked to the ruling party, who tailor these policies to their own interests instead of the country's goals

Supply-side effects of fiscal and monetary policies

Fiscal policy creates supply-side effect long term, depending on investment areas can increase potential output, if people more incentivized to work and invest also, and if it is prudent business will also invest more

Prudent fiscal policy

Budget deficit is low and level of national debt considered sustainable

Strengths of market-based supply-side policies

Improved resource allocation, minimal burden on government's budget

Strengths of interventionist supply-side policies

Targetted towards factors critical for accelerating growth and industries critical to driving growth

Drawbacks of market-based supply-side policies

Increased income inequality, very long time lags, vested interests that may stalll or even block their implementation, deregulation of environmental rules that may worsen pollution and accelerate climate change

Drawbacks on interventionist supply-side policies

Costly financing adding to national debt, very long time lags

Economic development

Economic development is the efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base

Economic well-being

The overall health and quality of life in an economy. Encompasses factors like income levels, access to essential services, employment rates, and overall living standards.