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Supply-side Policies Workings (Intro (Improve S hence faster rate of…
Supply-side Policies
Workings
Intro
Improve S hence faster rate of growth of real ouput
AS curve shifts rightwards, :arrow_up:output for any given level of P / :arrow_down:P for any given level of output
Shift SRAS: temporary :arrow_down:COP
Shift LRAS & SRAS: permanent
Allows sustained growth w/o rise in inflation, provided enough AD so productive capacity is put to use
Market-Oriented vs. Interventionist
Market-Oriented
Reliance on market forces & competition
Minimum gov. interference: restricted to providing dynamic & pro-business environment through encouraging individual enterprise
Promote Competition
Privatisation
Sell state-owned assets to private sector, more efficient with profit motive to :arrow_down:costs and develop better services
Deregulation
Reduce barriers to entry (eg. monopolies) to :arrow_up:competition hence :arrow_down:P and better quality
Deregulation in financial and labour markets
:arrow_down:borrowing costs for consumers & firms
Easier to hire & fire workers
Remove trade barriers
spur efficiency within domestic market
Promote Productivity
:arrow_down:Income taxes (personal & corporate) & state welfare benefits
Incentive to work harder if substitution effect > income effect
Encourage unemployed to take jobs
:arrow_down:Power of trade unions
:arrow_up:Efficiency eg. less time lost to strikes and :arrow_down:unemployment (competitive labour market)
Remove unnecessary red tape
Too many rules and administrative costs eg. cumbersome admin procedures to get approval to do business, :arrow_up:efficiency
Interventionist
Substantial gov. interference, usually :arrow_up:gov. expenditure
Nationalisation
Gov. takes control of industry previously owned by private firms to :arrow_up:investment and efficiency
Invest in R&D
Provide subsidies, tax exemption to firms that set aside more budget for R&D, or spearhead research via partnership with research institutes
Improve transport & infrastructure
Gov. intervention due to market failure
:arrow_up:mobility of goods & resources, :arrow_down:firms' costs
SG: expand rail network & add more trains, expand airport
:arrow_up:Education & training
Often under-provision of edu in free market, market failure
Subsidise, improve labour productivity
SG: Skillsfuture
Short- vs Long-run
Short-run
Primarily target :arrow_down:business costs, usually in recession/ inflation
eg. price controls, wage freezes, temporary cut in CPF
Temporary results, :arrow_up:output, :arrow_down:GPL
Does not solve root problem of D-deficiency but keeps businesses from going bust, saving jobs
Long-run
Mainly :arrow_up:productive capacity hence faster growth
eg. edu, subsidy to encourage R&D, infrastructure, deregulation
Long gestation period
LRAS shifts right hence sustained non-inflationary growth
AD also shifts right as long-run S-side policies usually involve :arrow_up:investment or gov. spending
Hence :arrow_up:output with little impact on GPL
