2.6 Supply side policies

Interventionist supply-side policies

Government intervention to increase productive capacity and long-run aggregate supply

Includes investment in human capital, infrastructure, new technology, and industrial policies

Investment in human capital

Government spending on education, training, and healthcare

Improves labor productivity

Increases potential output and aggregate demand

Investment in infrastructure

Government spending on physical capital such as roads and water systems

Increases labor productivity

Increases potential output and aggregate demand

Investment in new technology

Government funding for research and development

Enhances capital quality

Increases labor productivity

Increases potential output

Industrial policies

Support for specific industries through subsidies, tax incentives, or grants

Encourages investment

Increases economic output

Strengths of interventionist supply-side policies

Direct support to essential growth sectors

Reduces structural unemployment

Increases productive capacity

Improves income distribution

Improves potential output

Weaknesses of interventionist supply-side policies

Policies have time lags

Involve opportunity costs

Involves budget deficits

May lead to inefficient government allocation of resources

Market-based supply-side policies

Institutional reforms to increase production efficiency and improve resource allocation

Enhances potential output through market mechanisms

Privatization

Transfers firms from public to private ownership

Increases efficiency and potential output by reducing bureaucracy

Deregulation

Reduces government control over markets and industries

Improves efficiency

Increases competition

Increases potential output

Trade liberalization

Reduces tariffs and quotas on international trade

Encourages competition

Increases potential output

Labor market reforms

Increase labor flexibility and reduce rigidities

Lowers structural unemployment

Improves productive capacity

Incentive-related policies

Policies using tax cuts to increase work and investment incentives

Increases labor supply

Increases technological advancement

Strengths of market-based supply-side policies

Improves production efficiency

Improves allocation of resources

Increases market competition

Increases economic growth

Decreases structural unemployment

Weaknesses of market-based supply-side policies

Has time lags

May worsen income distribution

Risk of unemployment and environmental degradation from deregulation

Criticism of privatization

Private firms may prioritize profit over public interest

Risks inequality, unemployment, and environmental harm

Criticism of deregulation

May lead to cost-cutting layoffs and instability

Risks income inequality and market failures

Criticism of trade liberalization

Less efficient firms may shut down

Causes short-term unemployment and disruption

Criticism of labor market reforms

Reduces worker protections and wage levels

Increases income inequality and job insecurity

Criticism of tax cuts

May increase deficits and reduce public revenue

Could worsen distribution of income