Ch 18 - Supply Side Policies

^^Supply side policies^^ are government attempts to increase productivity and efficiency in the economy

• if successful, they will shift aggregate supply to the right and enable higher economic growth in the long run
• Supply side policies should increase productivity and shift long-run AS to the right

^^Free market SSP^^: policies which increase competitiveness and free-market efficiency

• lower income tax rates, reduced power of trade unions
• ^^Privatisation^^: set state owned assets to private sector, improves incentives
• ^^deregulation^^: allows new firms to enter the market open monopolies to competition
• ^^income tax cuts^^: greater incentives to work longer hours
• remove regulations: reduce power of trade unions, minimum wage and regulations
• free trade agreements: reduce tariff barriers and obstacle to trade
• reduce welfare benefits: increase incentive to get a job
• all these factors improve efficiency and competitiveness by extension

^^Interventionist SSP:^^ government intervention to overcome market failure

• higher government spending on transport, education, and communication
• government provides capital goods and services where it is believed that the market has failed to provide them.

Benefits of SSP:

1. Lower inflation: shifting AS to the right will cause a lower price level

• More efficient economy → SSP will reduce cost-push inflation
• Privatisation leads to more efficiency and lower prices

In deregulation, competition tends to lead to lower prices + better quality of goods and services

• Difficulty: not all industries are amenable to competition. Privatising and deregulation these industries creates a private monopoly who can charge higher prices
• Lower income taxes increases incentive for people to work harder, leading to an increase in labour supply and more output. A cut in corporation tax gives firms more retained profit they can use for investment. (not always the case, incentive isn’t always increased and firms may choose to save profit)
• Labour markets can be regulated through policies such as:
• make it easier to hire/fire workers
• reduce maximum working hours and minimum holiday pay
• enable zero-hour contracts, which allow firms to employ workers when demand is greater
• flexible working hours decrease productivity

^^Interventionist SSP^^: policies which are based on the idea that the government has a fundamental role to play in actively encouraging growth

• Investment in human capital
• increases productivity through improving education, labour force and training
• education creates positive externalities
• Research and development
• economies need to study up-to-date with modern developments to develop new production techniques
• tax credit: could allow firms to not pay taxes from retained profit spent on R+D
• Provision and maintenance of infrastructure: defined as large scale capital provided by the government
• necessary for economic activity
• productive potential of an economy illustrated by LRAS will be imposed by a better infrastructure
  • Direct support for businesses or enterprise

Limitations for Interventionist SSP:

• significant monetary cost involved
• time lags before an outcome is produced
• depends on politics of the country
• supply SP are long run, but when implemented, some will have short run demand side effects

Demand side theory: is built in the idea that economic growth is stimulated through demand

• main goal is to continue consumer spending on products → keep the economy afloat

In market based supply policies, the reduction of household income taxes and corporate taxes will have expansionary fiscal effects

• In interventionist SSP, increased government spending increases AD in the economy and has expansionary fiscal effects