Supply Side Policies

Supply-side policies aim at positively affecting the production side of an economy by improving the quantity or the quality of the factors of production.

These policies put heavy emphasis on the use of government spending to stimulate the economy, spending that often required increases in either taxes or government debt to finance the resulting deficits.

On an aggregate diagram, successful supply-side policies shift the long-run aggregate supply (LRAS) curve to the right, increasing the overall productive capacity of the economy. This pushes future full-employment income, YFE, out to the right to YFE1. A higher standard of living and greater employment

In Theory this policies, improve the overall macroeconomic environment in which individual actors operate. Good policies would encourage productivity as well as create more and better factors of production. In this environment of productive surplus, growth is the logical outcome. Furthermore, increasing LRAS manages to expand the economy without generating inflation, a typical problem with expansionary demand-side policies.

One of the main uses of Supply Side Policies is to solve Stagflation, one of the most serious challenges of macroeconomic policies. Stagflation is the mixture between, economic recession and rising inflation.

Market-Based Supply-Side Policies

Policies to encourage Competition

Labour Market Reforms

Incentive-related policies.

Derregulation

Anti-monopoly Regulation

Privatization

Trade Liberation

Reducing Business taxes and Capital Gains Taxes

Governments can discourage business by applying stringent or unnecessary regulation to markets. Deregulation is applied to reduce Bureaucracy as well as the required costs of complying with government rules. The rules under attack are typically intended as protection against some negative externality of production to do with product quality and safety, worker safety, or pollution control.

Privatization of public companies

Where monopoly power exists, it gives producers the ability to restrict output and increase prices. Anti-monopoly laws (also called anti-trust laws) seek to prevent or dismantle monopolies in the market.

They opposed tariffs, quotas, and subsidies that encouraged dependence on the government. They encouraged free trade, reduction of trade barriers and open competition.

Reducing Unemployment Benefits

Ending the Minimum Wage

Reducing Trade Union Power

Restricting trade union power to organize or bargain collectively with employers would decrease their wage-setting power. In theory, more workers would then move more freely among employers and more employment will result.

According to supply-side economists, reduce the incentive to find employment. is creates a disincentive for workers to accept jobs at lower wages during periods of unemployment, and thus prolongs the economy’s return to full employment.

The minimum wage sets a price floor for labor, which creates a surplus of workers who will not be hired at the government-enforced wage rate. Higher wages reduce the profits of business and thus lower supply and may reduce employment even further.

Reducing Income Tax

Arthur Laffer, began advocating lower taxes on the basis that lower taxes (at the high end of the tax rate) would actually raise tax revenue, "Taxes had grown too high and a reduction would stimulate work to the extent that the greater income of workers would bring in increased tax revenue".

A tax on business profits obviously diminishes profits. Cutting corporate taxes, it is said, encourages firms to produce more, shifting supply to the right, and possibly encouraging more employment. It taxes the gain made on a capital investment, such as the profit made when selling property or shares in a company. These taxes discourage investment. So reducing the tax will make these entrepreneurial risks more rewarding and encourage investment.

Interventionist Supply Side Policies

Investment in new technology

Investment in infrastructure

Investment in human capital

Industrial policies

Education

Training

Health Services

Public education is a common policy in most countries. This has not always been true but has gradually become accepted as a necessary ingredient of a modern economy. Education improves the skills and productivity of the workforce as well. High levels of educational achievement are highly correlated with national income.

Specific training for some jobs may not be offered in schools and may be offered by special job training centres established by the government. It helps businesses find productive employees and thus should enhance economic growth.

In countries where public health is poor, it is di cult for children to regularly attend school, and worker absenteeism is chronic. If the government implements a working public health system, it may improve productivity of this.

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Investing in this three type of policies must estimate AD, however, the lingering effects of a well-trained, educated and healthy workforce should endure into the future, pushing LRAS outwards by improving labor and entrepreneurship.

Policies that encourage research and development have an immediate impact on AD. However, the more enduring effect should come through the resulting new technologies that will increase LRAS. When the government hires sponsors, scientist etc, to work on a particular area, AD is stimulated, where, if goods are improved, LRAS is pushed outwards. This can be accomplished by public/private sector partnerships, as well as tax incentives for research and development.

Increasing Infrastructure most certainly increases AD in the short run, but should also expand the capital base of the country in the long term, increasing LRAS in the process. For ex. A port makes it easier for the country to import goods, which may enhance the capital base of that country. At the same time, exports of goods will also be improved. The expanded market for domestic goods spurs investment to produce for overseas markets.

Financial Initiatives

Protection for Infant Industries

The government can support the industry with reduced taxes, subsidized loans, and even direct subsidies. These all reduce the costs to the firms, and encourage more production.

Compared to a (National Firm) their global competitors, they may currently be too small to enjoy the benefits of economies of scale. Governments can put down protective tariffs or quotas to keep foreign competition out until the firm is sufficiently large and developed.

Evaluation of market-based supply-side policies

Evaluation of interventionist supply-side policies