Supply-side policy

• Supply-side policies


  Policies designed to increase the productive capacity of the economy and thus shifting LRAS to the right
• If supply-side policies are successful


  All four main macroeconomic objectives will improve
• Supply-side policies target the types of unemployment in the natural rate: frictional and structural unemployment
• If supply-side policies work in boosting LRAS

  We can see the increase in growth rates, reductions in unemployment, reductions in long-term rates of inflation, and improvements in the current account position
• Two groups of supply-side policies


  • Interventionist supply-side policies
  • Market-based supply-side policies
• Interventionist supply-side policies promote more of a role for the government in the economy to try and boost LRAS
• Market-based supply-side policies reduce the role of the government, take away the government from the operation of markets in the economy, and let markets be freer
• The three generic reasons why the LRAS curve will shift to the right are: increase in the quantity of factors of production, increase in the quality of factors of production, or an improvement in the productive efficiency in the economy
• Interventionist supply-side policies


  • Government spending on education and training
  • Government spending on healthcare
  • Government spending on infrastructure
• Government spending on education and training


  Aims to boost skills of the workforce and improve the productivity of labor, which is an improvement in the quality of labor
• Government spending on healthcare


  Aims to boost the productivity of the workforce, improving the quality of labor
• Government spending on infrastructure


  Can reduce long-run costs of production for businesses by making it easier and cheaper to access raw materials and sell goods and services, improving productive efficiency in the economy
• Subsidies given by the government to firms


  Promote investment, which can increase the quantity of capital, the quality of capital, and reduce long-run costs of production for businesses
• Market-based supply-side policies


  • Tax reform
  • Labor market reform
  • Competition policy
• Lower income tax


  Provides an incentive for the inactive to enter the labor force, increasing the quantity of labor and boosting LRAS
• Lower corporation tax


  Firms have more retained profits, which they may use for investment purposes, increasing the quantity and quality of capital and boosting LRAS
• Reduction in benefits/welfare payments


  Provides a strong incentive for the economically inactive to enter the labor force, increasing the quantity of labor and boosting LRAS
• Reduction in minimum wages and trade union power


  Reduces long-run costs of production for businesses, boosting productive efficiency in the economy and shifting LRAS
• Competition policies


  • Privatization
  • Deregulation
  • Trade liberalization
• Competition policies


  Aim to boost competition across the economy, which will improve the productive efficiency and reduce long-run costs of production, shifting LRAS
• There is no guarantee that supply-side policies will work
• Many supply-side policies are very costly, risking wasteful spending
• Supply-side policies often have significant time lags before their effects are seen
• Some market-based supply-side policies can have severe negative impacts on certain stakeholders
• The effectiveness of supply-side policies in boosting growth depends on the size of the output gap and the stage of the economic cycle
• Supply-side policies need to be targeted to address specific chronic supply-side issues in the economy