Unit 13.7 Flashcards
What are interventionist supply-side policies?
An interventionist supply-side policy is where the government becomes more actively involved on the supply side of the economy to achieve its macroeconomic objectives. Diagram 3.46 shows how the application of interventionist supply-side policies can increase the long-run aggregate supply curve from LRAS to LRAS1 through, for example, government investment in infrastructure, education and subsidies to firm to promote investment
Methods of supply-side intervention to increase long-run economic growth
Education and Training: Investing in education and training enhances the skills and productivity of the labor force, increasing the economy’s overall productive potential and output.
Healthcare: State-provided healthcare ensures a healthier workforce, reducing absenteeism and increasing efficiency, which positively impacts economic productivity and growth.
Infrastructure: Government investment in infrastructure such as transport systems, utilities, and communication networks supports the efficient operation of the economy, facilitating business productivity and access to markets.
Research and Development (R&D): Support for innovation through grants, subsidies, and tax incentives for R&D drives technological advancements and productivity, essential for long-term economic growth.
Industrial Policies: Targeted industrial policies aim to restructure the economy towards sectors with high growth potential, utilizing strategic interventions to foster development in key industries.
Strengths of interventionist supply side to increase economic growth
Targeted Approach: Interventionist supply-side policies to increase economic growth can be targeted at areas of the economy in a way demand-side policies cannot. For example, demand-side policies cannot effectively deal with the problem of a shortage of skilled labour that is holding back economic growth, but a training and education policy can.
No Inflation Trade-off: Expansionary monetary and fiscal policy used to increase economic growth often have the trade-off of increasing the rate of inflation. Supply-side policies do not have this as a disadvantage and can even lead to lower prices in certain sectors of the economy.
Long-Term Growth: Demand-side policies increase the actual rate of economic growth whereas interventionist supply-side policies increase potential growth which is more likely to deliver economic growth in the long run.
Social Benefits: There can be significant social benefits associated with an interventionist approach to increasing economic growth. Improving the provision and quality of healthcare and education brings with it external benefits and enhanced economic development as well as economic growth.
Weaknesses of interventionist supply side to increase economic growth
Opportunity Cost: Interventionist policies can come at a significant opportunity cost to the government in terms of government expenditure in other areas and also the increased tax revenue needed to fund the policy.
Inefficiency and Bureaucracy: Government intervention is often criticised for inefficiency and bureaucracy. State-managed enterprises and services often suffer from diseconomies of scale which reduces their efficiency.
Political Influence: All government involvement in the economy is subject to some political influence which might conflict with the economic benefits of the supply-side policy. For example, a government might provide funding for infrastructure projects in an area of the country where it needs to encourage support from voters.
Methods of supply-side intervention to reduce unemployment
Education and Training: Targeted at reducing structural unemployment, these programs help workers gain necessary skills for new job sectors, addressing skill mismatches.
Trade Protectionism: Implemented to protect domestic jobs by reducing foreign competition through tariffs, as exemplified by the Trump administration’s policies on steel and cars.
Employment Agencies: Government-run agencies that facilitate job matching, particularly targeting frictional unemployment, often through online platforms.
Direct Government Employment: Governments employ workers directly in public sectors like transport and healthcare, significantly in countries like China and Russia.
Employment Subsidies: The government subsidizes wages in the private sector, encouraging firms to hire more workers by making employment less costly.
Strengths of supply-side intervention to reduce unemployment
Targeting Specific Unemployment Types: Interventionist supply-side policies are effective at specifically targeting frictional and structural unemployment. Training and education and employment agencies are particularly good at doing this.
Addressing Demand-Deficient Unemployment: Supply-side policies can also have some impact on demand-deficient unemployment in a recession. Employment subsidies and direct state employment can be used to target certain sectors of the economy when there is a recession.
Weaknesses of supply-side intervention to reduce unemployment
Cost and Opportunity Cost: Government training and employment agencies cost money to set up and operate and represent an opportunity cost in terms of other areas of government expenditure.
Bureaucracy and Inefficiency: Government training schemes and employment agencies also cost money and can be bureaucratic and inefficient.
Retaliation from Trade Protectionism: Trade protectionism often leads to retaliation from other countries, so protecting jobs in one industry can lead to unemployment in another.
Abuse of Employment Subsidies: Employment subsidies cost the government money and can be abused by employers who take on workers with the subsidy rather than paying workers themselves.
Limitations During Recession: On their own, interventionist supply-side policies struggle to deal with a significant rise in unemployment caused by a recession.
Weaknesses of supply-side intervention to reduce inflation
Impact on Real Incomes: Controlling wages increases for workers when there is high inflation can reduce real incomes and can lead to poverty.
Potential for Conflict and Unrest: An incomes policy can lead to conflict and unrest where workers take industrial action such as going on strike because they cannot get a wage rise to cover inflation.
Circumventing Wage Controls: Firms can find their way around wage controls by changing job titles or offering fringe benefits like company cars.
Labour Market Distortion: Wage restrictions distort the operation of the labour market and can lead to labour shortages.
Avoiding Price Controls: Firms can find their way around the price controls by changing the goods they sell such as altering the size or name of a product they sell.
Market Distortion and Shortages: Maximum prices distort the operation of the goods market leading to shortages and parallel markets.
Strengths of supply-side intervention to reduce inflation
Direct Targeting of Inflation: Incomes and price controls can be used to directly target cost-push inflation in a way monetary and fiscal policy cannot.
Avoiding Reduction in Aggregate Demand: One of the main problems of applying contractionary fiscal and monetary policy is the way both policies reduce aggregate demand and economic growth. Interventionist supply-side policies do not reduce aggregate demand in the same way.
Methods of supply-side intervention to reduce inflation
Incomes Policy: This policy entails the government imposing limits on wage increases to prevent a wage-price spiral, aiming to mitigate the effects of cost-push inflation.
