Supply-side policies

Supply side policies

Policies designed to target the production/supply side of the economy, primarily to increase the LRAS and expand the maximum productive capacity of the economy

Goals of supply side policies

• promote long term economic growth

• Enhance competition and efficiency

• Lower labor costs and unemployment

• Reduce inflation for better international competitiveness

• Boost investment in innovation by cutting costs

Interventionist supply-side policies

Government financed investments in physical and human capital and technological advancement, supplementing the failure of the free market to provide an adequate amount of investments

List of interventionist supply side policies

• investment in human capital (training and education, improved healthcare)

• Investment in technology (tax incentive and patents for R&D)

• Investment in infrastructure (better and more infrastructure)

• Industrial policies (support SMEs and infant industries/start-ups)

Market-oriented supply side policies (6, 4, 3)

• encouraging competition

  • Privatization

  • Deregulation

  • Contracting out to the private sector

  • Private financing of public sector projects

  • Anti-monopoly regulation

  • Trade liberalization

• Labor market reforms

  • Abolishing minimum wage

  • Weakening the power of labor unions

  • Reducing unemployment benefits

  • Reducing job security

• Incentive-related policies

  • Lowering personal income taxes

  • Lower taxes on capital gains and investment income

  • Lowering business taxes

Strengths of supply side policies

• long term economic growth

• Reduce NRU

• Ability to reduce inflationary pressures

• Equity

Disadvantages

• Potential failure to achieve long-term economic growth

• Time lags

• Increased unemployment

• Government budget imbalance

• Equity

• Greater environmental degradation

Demand side effects of supply side policies

• interventionist supply-side policies: education/training, R&D investment improve the quality of FoP

• Market based, incentive related policies can encourage investment (AD increase)

• Tax cuts also increase disposal income + consumption

Supply side effects of demand-side policies

• demand side policies indirectly provide stable macroeconomic environment

• Demand side policies directly l=leads to aggregate expenditure that results in the growth of potential GDP

• Government spending on provision of physical capital and development of human capital increase quality and quantity of FoP

• Lower taxes can encourage firms to invest (new and better capitals)

• Monetary policies: lower interest rate can encourage firms to spend more on capital (quantity of FoP)