5.4 supply side policies Flashcards
What are supply side policies?
They are policies designed to increase the productive capacity of the economy, shifting LRAS to the right
If successful then all 4 main macro objectives will improve. Trade position unemployment growth and inflation
What are the 2 types of SSP’s?
Interventionist and market based
What are interventionist SSP’s?
These are policies that have more of a gov role to boost LRAS
Increase gov spending on education/training and infrastructure. Train teachers, curriculum reform etc. Aim to boost skills of the workforce and improve productivity of labour. On healthcare which aims to boost productivity of the work force. New transport infrastructure being built or upgraded. Tis means long run costs of production will fall as it is easy and cheaper to access and sells goods and services
Subsidies to promote investment. Target firms to spend on RandD or buying new capital technology etc. Investment increases the Q* of capital and reduce the long run costs for businesses
What are market based SSP’s?
They take away the role of a gov in an economy
Tax reform - lower income or corporation tax which increases incentives and increases productivity
Labour market reform - Reduction in benefits (encourages more people to find work), reduction in minimum wages and a reduction in trade union power. This will reduce long run costs to businesses and boost productive efficiency and boost LRAS
Competition policy - Privatisation, deregulation and trade liberalisation (causes them to be more competitive, boost LRAS as productive efficiency has improved
What are 3 things that shift LRAS?
Increased quantity and quality of FOP’s - better tech and R&D
Increase in productive efficiency
What are good evaluation points on SSP’s?
No guarantee of success
Very costly and opportunity cost especially interventionist SSP’s
Time lags
Depends on the size of the output gap and what stage of the cycle economy is at
You need to target the right problems with the right policies
Policies to increase growth and living standards with evaluation
Short run growth - boost of AD. Expansionary fiscal or monetary policy. Increases in gov spending or reduction in tax. Or via cuts in IR or a boost in the money supply via QE. AD would shift to the right which is an increase in SR growth.
But, there could be a conflict of objectives, higher growth and unemployment has a risk of demand pull inflation and overshooting our desirable target. Also depends on the side of the output gap. Risk of inflation is more significant this way.
Widening CA deficit. Worsening gov finances which increases budget deficits and national debts. Also these are dependent on consumer and business confidence. Also come with a severe time lag which limits the effectiveness of these policies
Long run growth - shift LRAS to the right. SSP’s either interventionist or market based. Gov spending on education infrastructure but also subsidies to firms to encourage investment. Market SSP’s like tax reforms or labour market reforms or competition policies like privatisation and deregulation. This boosts long run growth
However they are not guaranteed to work and you may get diff effects in reality. Interventionist policies are costly. Significant time lags. Negative stakeholder impacts for example worker welfare living standards and deregulations can hit the environment and effect worker safety
We want growth to be strong, sustained and sustainable.
Policies to reduce unemployment with evalation
Cyclical employment occurs in a recession when AD is very low. To boost AD we can use expansionary demand side policies to do so. This can be done thru increasing gov spending or decreasing tax. Or a reduction in IR. AD will shift to the right and with that we get econ growth and since labour is a derived demand, unemployment decreased.
There is a risk of a conflict of macro objectives in the form as demand pull inflation or worsening of CA deficit. Could also worsen gov finances. Reliant on strong consumer and business confidence. In a recession, confidence likely to be low limiting the effectiveness of these policies. Also there are time lags associated with these
Real wage unemployment occurs when wages in the labour market are forced above equilibrium which creates an excess supply of labour. We nee d policies that can bring down the wage rate. This is reducing min wage or the strength of trade unions which brings wages towards equilibrium and close the gap.
There is a strong negative impact on workers and their living standards. Also drives up inequality in the economy
NRU specifically structural is about the immobility of labour. We need SSP’s that target the reductions in those immobilities. Interventionist ones are increasing gov spending on education and training. Idea here is boosting skills of the workforce and improving productivity. Gov can offer subsidies to encourage more in work training programmes. If ever unemployed they can transfer easily. Spend more on transport infrastructure to help w geographical immobility of labour. Market based- reduction in benefits gives an incentive for workers to skill themselves up and start working. Will also reduce geographical immobility as they will be forced to take those jos as they know they don’t have the safety net of benefits in the background. Also deregulation of hiring and firing laws. Workers have incentive to higher low skill workers knowing they can pay lower wage and train them up to productive workers while knowing if they’re shit you can fire them easily. Therefore reducing occupational immobility of labour.
NRU specifically frictional is the search unemployment when workers are between jobs. Interventionist SSP’s to reduce that search time. Govs could spend more to provide better resources for job centres. Or can provide subsidies to private job agencies which allows them to provide appropriate jobs for the unemployed. Or govs can spend on transport infrastructure so they can have a wider search area for vacancies. Or market based route you can reduce benefits which means they don’t have safety net of benefits to fall back on to make their search time quicker
Evaluation:
Lot of these policies aren’t guaranteed to work. Very costly and time lags associated and negative stakeholder impacts on the workers themselves. Some type of unemployment are more healthy than others
Policies to reduce inflation and evaluation
Demand pull inflation is pushing the rate beyond the target rate. Contractionary monetary policies via an increase in IR or a contractionary fiscal policy via higher tax and a cut in gov spending. (unlikely) It is the central banks job to target inflation. Also, monetary policy is more suited to target inflation and the MP transmission mechanism has got a variety of avenue for IR changes to feed through into the economy. Central banks independent of the gov so they are more trustworthy. If successful AD shifts left and u see disinflationary pressure
Eval: Conflict of macro objectives. Lower econ growth and higher unemployment happen as a result. Macro econ is about achieving all the core objectives. Impact on investment - high interest rates put people off investing. Impact on indebted is great as if IR goes up, they might default on their loans and can drive into poverty and bankruptcy. High IR means hot money inflows which boosts the exchange rate. Imports will then be cheaper so they will increase which can worsen the CA deficit
Cost push inflation. Input or reduce an inflation target. Workers wage bargaining will be at that rate and that limits the amount wages can rise and bring down the yearly rates by doing so. Reduce VAT/or subsidise firms to reduce their costs of production and bring inflation down. However there is a significant cost to gov and a worsening of gov finances. Intervene in FOREX markets to strengthen the exchange rate. Stronger pound means imports cheaper which reduces the price of imported raw materials. Lots of the causes of cost push inflation are short run causes which can change on their own very quickly
High long term inflation rates:
This happens because there are not enough spare capacity in an economy. If this is happening you need SSP’s to increase long run productive capacity in an economy and reduce the pressure on FOPs consistently which reduces inflation rates. However no guarantee of success. Very costly and also time lags
It all depends the type of inflation and whether it is low and stable inflation
Macro policy trade offs with evaluation
Growth unemployment inflation and trade are the main ones. Others are fair distribution of income, stable gov finances, high labour productivity and environmental health
Expansionary fiscal and monetary policy:
Goal is to shift AD right and in theory. This increases growth, lowers unemployment and lowers income inequality. However there will be increase in inflation, CA deficit gets worse, gov finances are worse and also higher income inequality. Is the growth we’re seeing promote equality or not. depends if its capital intensive or one sector dominant. Also negative environmental impacts. Resource degradation deforestation etc etc.
Eval: Depends on the size of the output gap which depends the amount of inflation you expect. Nature of growth is crucial. Specific policy used is key. Classical view of compatible macro objectives. Especially in a recession if the gov done nothing, they believe wages will fall and the economy will naturally heal itself
Contractionary fiscal and monetary policy:
Decreases inflation, improves CA deficit, betters gov finances, reduction in income inequality and better for environment
However comes with lower growth and high cyclical unemployment and recessionary impacts. Low labour productivity if taxes go up as it reduces incentives to work. Higher corporation taxes can reduce investment and labour productivity
Evaluation: Depends on the size of the output gap. Laffer curve concerns if direct taxes go up. Less of an incentive to work hard and be entrepreneurial and for tax evasion and tax avoidance. Depends on the specific policy used
SSP’s: Boosts LRAS
Higher long term growth, lower unemployment, lower inflation and a better CA position due to lower inflation which means exports more internationally competitive.
Eval:
Depends on the size of the output gap. Keynesian believe we need demand side policies when in a deep recession as we need more demand. But if an economy is booming and LRAS increases then we need these policies. Impact on gov finances. These stuffs are expensive. Income inequality and living standards which is not the goal of these policies they want to improve living standards. Also environmental concerns from things like deregulation
