1.8.3 Supply Side policy Flashcards
What is supply side policy?
-Policies to improve production potential of an economy illustrated by an outward shift of LRAS
They are either market led or state intervention policies.
They can affect both short run and long run aggregate supply but often have a time lag - some may have an impact quite soon
Classical economists use market based policies freeing up markets and the private sector to compete and expand.
What are the objectives of supply side policy?
- Improve incentive to look for work and invest in skills
- Increase labour and capital productivity
- Increase occupational and geographical mobility of labour
- Investment and research and development
- Competition and innovation
- Non inflationary growth
- Start up of new businesses
- Improve trend growth of real GDP to help improve living standards
How do supply side policies work?
- Achieve sustained improvement in trade of between inflation and unemployment
- More flexible in response to demand and supply side shocks
- Raise living standards through sustainable long term economic growth
- Reduce unemployment by lowering frictional and structural unemployment
- Improve competitiveness in global markets - balance of trade
What are the different types of supply side policy?
- Size of labour pool - migration, retirement, women
- Flexibility - geographical and occupational mobility - job centres, reduced regulations, easier to hire
- Productivity - education and training, technology, automation, motivation - reduce benefits and lower tax at lower pays to reduce poverty trap. online courses and training
Capital - technology innovation and process design. Research lacks due to uncertainty, risk and lack of skilled workers
- Limit influence of trade unions to promote productivity
- Infrastructural development
- Increase technology and adaptation of technology
- Commitment to minimum wage to improve work incentives
- higher taxes on wealthy to fund services
- Regional policy to inject demand into poorer areas
- Selective import controls to allow domestic industry to expand
- Management of the exchange rate to improve competitiveness
- Nationalisation of key industries
What policies may attract FDI?
- Corporation tax
- Soft loans and tax reliefs/subsidies
- Trade and investment agreements
- Flexible labour markets
- SEZs
- Infrastructure
- Open capital markets to remit profits
- Attraction of low unit labour costs
What are market side supply side policies?
- Cut government spending and borrowing
- Lower business taxes to stimulate investment spending
- Lower income tax
- Reduce red tape and legal barriers
- Improve flexibility of the labour market
- Competition policies - deregulation and CMA
- Privatisation of state assets
- Open up economy to overseas trade and investment
- Open up economy to inward skilled labour migration
What is some evaluation for supply side policies?
- Often have a time lag e.g. training, education
- May be ineffective when there is low AD and reflationary monetary and fiscal policies may be more appropriate
- State intervention picks who benefits
- Sustainability may be issue is raises growth rate - leads to externalities
- Other policies can be done such as innovation, investment and productivity improvements
- Opportunity cost
- Fiscal deficit cost
- Inequalities
- Potential for waste - skills and education may be wasted if no longer needed in future
What is some evaluation for particular supply side policies?
Red tape - corners cut, customers at risk, insecure employment
JSA reduced - inequality, assumes jobs available, workers may have wrong skills
-Increased education - time lag, wrong cost
Infrastructure - pollution, hard to calculate cost
Incentivise R&D - no guaranteed return, wasted cost
Income tax cuts - laffer curve
What is the laffer curve
Beyond a point tax revenues fall when they start to get bigger as people will not want to work longer just to pay more tax and so stop working as much so pay less in tax
Summary of SS policy:
-Tax, government regulations and spending to expand supply
E.g.: labour, immigration, education, training, R*D, investment, open capital markets, allow FDI, higher productivity - infrastructure, power, defences, broadband and communications
Reduces cost of production and increases quantity and quality of available factors of production
Evaluation: opportunity cost, time lag, waste of resources etc.
