2.6.3 Supply-side policies Flashcards
What are the different approaches to supply side reforms?
- Market-led policies - to make markets work better and give the private sector more freedom
- State / government intervention in markets to overcome market failures
What are supply side policies?
- Policies that improve the productive potential of an economy. This is Illustrated by an outward shift of LRAS
What are the main objectives of supply side policies?
- Improve incentives to look for work and invest in people’s skills
- Increase labour and capital productivity
- Increase occupational and geographical mobility of labour to help reduce the rate of unemployment
- Increase investment and research and development spending
- Promote more competition and stimulate invention and innovation to improve competitiveness
- Provide a strong platform for sustained non-inflationary growth
- Encourage the start-up and expansion of new businesses / enterprises especially those with export potential
- Improve the trend growth of real GDP to help improve living standards and regional economic balance
What does supply side policy look like on AD-AS diagram?
What key macro objectives does a stronger supply side performance allow them to hit?
- Achieve a sustained improvement in the trade-off between inflation and unemployment (see Phillips Curve)
- Be more flexible in response to external demand and supply-side shocks such as rising energy prices
- Raise living standards through sustained long-term economic growth
- Reduce unemployment by lowering frictional & structural unemployment
- Improve competitiveness in global markets and achieve a stronger balance of trade in goods and services
What are interventionist supply side policies?
These are state (government) driven supply-side policies. Supporters argue that an interventionist state can have a
powerful and positive long-term effect on supply-side performance.
Give examples of interventionist supply side policies
- State investment in public services and critical infrastructure
- A commitment to a minimum/living wage to improve work incentives & productivity in the labour market
- Higher taxes on the wealthy to fund public and merit goods
- An active regional policy to inject extra demand into under-performing areas / regions of persistently high
unemployment / low per capita income – e.g. the Northern Powerhouse Project - Selective import controls to allow domestic industries to expand
- Management of the exchange rate to improve competitiveness
- Nationalisation of and/or tougher regulation of key industries
How can human capital be improved in a UK context?
- Sustained gains in average educational attainment – in the academic year ending 2015, 53.8% of pupils that
left school in England achieved 5 or more GCSE A star to C grades, including Maths and English - Expanded access to and quality of in-work training and opportunities for life-long learning
- Higher real incomes that allow people to consume more knowledge products including online courses
- Inflow of migrants with above average skills & qualifications
What is R&D?
R&D is focused on the creation and improvement of products and processes, based on scientific research – applied
to market needs.
What are the biggest barriers to aversion?
- Risk aversion – research is expensive whilst rewards are uncertain
- Uncertainty about firms’ ability to exploit research profitably
- A lack of high-skilled workers in key research industries
What are policies to attract FDI?
What do market driven supply side policies do?
These market-driven supply-side policies focus on reducing the size of the state and in extending the role of market
forces in allocating scarce resources.
What are examples of market led policies?
- Cutting government spending (including welfare) and borrowing
- Lower business taxes to stimulate capital investment spending
- Lower income tax rates to improve work incentives
- Reducing red-tape to cut the costs of doing business
- Improving flexibility of the labour market (e.g. reforming employment laws and encouraging part time work)
- Competition policies i.e. deregulation & tough anti-cartel laws
- Privatisation of state assets – i.e. transferred to private sector
- Opening up an economy to overseas trade and investment
- Opening up an economy to inward skilled labour migration
Give evaluation points concerning supply side policies
- Supply-side policies can have long time lags this depends on the type of policy. Polices may be ineffective
when there is low aggregate demand when reflationary monetary and fiscal policies would be more
appropriate - Some supply-side policies (e.g. cutting higher-rate income taxes) might lead to greater inequalities of income
& wealth - State intervention to “pick winners” in different industries/sectors may be ineffective – i.e. are risks of
government failure - Sustainability issues arise if policies raise a country’s long-term growth rate – leading to increased externalities
such as pollution - Supply side improvements can also occur from non-government policies such as firm’s innovating, investing,
productivity improvements
