Download 2.6 B-C How Supply Side Policies work

2.6 B-C
How Supply Side Policies work
Based upon pages 215-217
For Growth and therefore solving mainly
Disequilibrium Unemployment
Supply side policies aim for long run growth
Demand Side Policies can’t improve growth beyond Yf.
Price
Level
LRAS1980
LRAS1990 LRAS2000
And low inflation
In the longrun, only
improved
resources,
technology and
market reforms
increase AS
P2000
P1980 P1990
AD2000
AD1980
0
Y1980
Y1990
Y2000
This will lead to both real growth in output
AD1990
Quantity of
Output
Basics of Supply Side Policy
A1:Labour Market & Welfare Reform
 Reduce union power / worker rights
 Reduce minimum wages /welfare benefits
A2: Tax and Compliance Reform
 Reduce income taxes / corporate taxes
 Tax breaks for investment (including sharemarket)
 Reduce compliance costs – e.g. RMA
B1:Education and Training
 Provides incentives for investing in “human capital”
 Improve quality and delivery of training
B2: Incentives for improvements in technology
 Tax breaks, research grants, sharing information
Read text pages 186-190 and take notes
on 2 types of government policies:
 A: Market policies: explain 2 real world examples
 B: Interventionist policies: explain 2 real world examples
Learning Outcomes Part 1
re: Interventionist S-side Policies
 Explain how will raise the levels of human capital and have a
short-term impact on aggregate demand, but more
importantly will increase LRAS
 targeting specific industries through policies including tax
cuts, tax allowances and subsidized lending that promotes
growth in key areas of the economy
 investment in education and training
 research and development
 increased and improved infrastructure
Interventionist Solutions for:

Solutions for Structural Unemployment : The government can
either provide or subsidise retraining programs or apprenticeships,
etc. For example:

A long-term solution involves an education system that trains people to be
more occupationally flexible.
 Solutions for: Frictional unemployment The government can
either provide or subsidise Job search services
 public provision e.g. WINZ
 private “employment assistance" firms (e.g. Seek)
 Solutions for: Seasonal unemployment (as for Structural) The
government can either provide or subsidise retraining programs
 If jobs exist in other parts of the country, a government might provide
subsidies or tax breaks to encourage people to move to those areas.
Learning Outcomes Part 2
re: for Market Based S-side Policies
 Explain how factors including deregulation, privatization,
trade liberalization and anti-monopoly regulation are used to
encourage competition.
 Explain how factors including reducing the power of labour
unions, reducing unemployment benefits and abolishing
minimum wages are used to make the labour market more
flexible (more responsive to supply and demand).
 Explain how factors including personal income tax cuts are
used to increase the incentive to work, and how cuts in
business tax and capital gains tax are used to increase the
incentive to invest.
Market Solutions (Market Deregulation)
Overall goal: reduce unemployment by removing obstacles (less
interference) in the labour market – reducing either the “voluntary
unemployment” gap or the “involuntary” gap
Task: Illustrate and Give a reason for each below
[hint: Either shift the ADL or the ASL to the right]
 Lower employee costs: (Minimum wage, maximum hours,
minimum holidays, holiday & overtime pay, Kiwi-saver payments)
 Decreasing worker rights & protections
 Lower unemployment (welfare) benefits lower unemployment
benefits to encourage unemployed workers to take the jobs that are
available, rather then allow then the chance to wait for a better job
to become available.
 Decreasing personal income taxes
 Decreasing business income taxes
Learning Outcomes Part 3
Evaluating All Supply-side Policies
 Evaluate the effectiveness of supply-side policies
through consideration of factors including time
lags, the ability to create employment, the ability
to reduce inflationary pressure, the impact on
economic growth, the impact on the government
budget, the effect on equity, and the effect on the
environment.
Keynesians favour Intervention
Classicals favour Market Reform
Everyone agrees that using demand management policies
to cure equilibrium unemployment will be unsuccessful.
However, it is in the choice of supply-side policies that
disagreement is still to be found.
 Classical economists favour policies based on free
markets and incentives, such as lower taxes and
privatisation.
 Keynesian economists prefer supply-side policies of
interventionist type, such as government funding of
worker recruitment/education and re-training centres.
Problems with Interventionist Policies
This is likely to involve a high opportunity cost as
governments will have to forgo spending in other areas in
order to be able to afford the strategies.
2. If it involves large amounts of investment in building costly
infrastructure, subsidising large industries or huge
increases in public goods, then the problems associated
with fiscal policy becomes relevant.
3. How effective are these policies if run by the government?
Where is the incentive to provide cost-effective and well
targeted assistance?
1.
Problems with Market Reform Policies
 People who receive lower unemployment benefits or less
welfare benefits will have a lower living standard and this will
increase inequity in the economy and condemn more people
to a life of poverty.
 Labour market regulations are in place to protect workers
from unfair treatment such as being fired with due cause,
guarantee fair conditions of work, such as working hours,
holidays and safety at work.
 Environmental regulations are in place to protect the
environment from immediate or long term issues that may
become more costly as more economic growth occurs.