SUPPLY SIDE POLICIES YOUSIF AL ZAROUNI

WHAT ARE SUPPLY SIDE POLICIES? Supply side policies are policies designed to improve the supply side potential of the economy It is used to make markets and industries work more efficiently and thereby contribute to a faster rate of growth of real national output An improved supply side performance is the key to achieving sustained economic growth without a rise in inflation

THE AIM OF SUPPLY SIDE POLICIES

THE TYPES OF SUPPLY SIDE POLICIES Interventionist Market based

Supply Side Policies Interventionist Investment in human capital Investment in new technology Investment in infrastructure Industrial policies Market Based Encouraging competition Labor market reforms Incentive Related policies

INTERVENTIONIST Investment in human capital ( education and health ) Training and education Improved health care services and access to these Investment in new technology Investment in infrastructure Industrial policies

INVESTMENT IN HUMAN CAPITAL Training and education Better trained or educated workers lead to an improvement of labor resources, they will produce more output. Decrease the rate of natural unemployment Improved healthcare services and access to them Workers become more productive Improves quality of labor resources

INVESTMENT IN NEW TECHNOLOGY Research and development is the fundamental activity behind the development of new technologies The results of this investment are new or improved goods Governments are heavily involved in this ( Government Intervention ) New technology though could cause the u/e levels to rise

INVESTMENT IN INFRASTRUCTURE Physical capital Many types of there qualify as merit goods or public goods (example: Parks, Public hospitals) More and better quality infrastructure increases efficiencies in production and it lowers costs example: save time (metro), Cheap travel (public transport), easy communication (effective telecommunications)  All of these factors enable economic activity to increase throughout the economy - The only draw backs of this could be the startup costs

INDUSTRIAL POLICIES Support for small and medium-sized enterprises or firms Governments put in certain policies to support the growth of these industrial firms Invest in technology, human capital and infrastructure Support for infant industries Government support in the form of grants Subsidies Tax exemptions Tariffs

MARKET BASED Encouraging competition Labor Market Reforms Incentive-related policies

ENCOURAGING COMPETITION Encouraging competition is done in order to keep the prices of the goods or the services low. It is done in these ways: Privatization Deregulation Private financing of public sector projects Contracting out to the private sector (outsourcing) Restricting monopoly power Trade liberalization

PRIVATIZATION The transfer of a firm from the public sector to the private sector Increases efficiency due o improved management and operation of the privatized firm One less risk for the government to operate

DEREGULATION Deregulation involves the elimination or reduction of government regulation of private sector activities It is broken down to economic and social deregulation Economic deregulation involves government intervention in terms of the government controlling the prices and the output of firms offering them protection from competitions from other firms in exchange

PRIVATE FINANCING FOR PUBLIC SECTOR PROJECTS This is when a private firm builds, finances and operates public services. Private sector firms compete with each other to be selected by the government to take on the project The government will select the firm that will run it at the lowest possible cost

CONTRACTING OUT TO THE PRIVATE SECTOR (OUTSOURCING) Public services are provided by private firms Example: information, technology, human resources management and accounting services

RESTRICTING MONOPOLY POWER Enforcing anti-monopoly legislation Breaking up large firms into smaller units Preventing mergers between firms that might result in too much monopoly power

TRADE LIBERALIZATION Free or freer trade internationally This leads to greater efficiency in production and an improved allocation of resources

LABOR MARKET REFORMS Abolishing minimum wage legislation Weakening the power of trade unions Reducing unemployment benefits Reducing job security

ABOLISHING MINIMUM WAGE LEGISLATION Elimination or reduction of the legal minimum it is argued Reduces unemployment by allowing equilibrium wage to fall Firms can hire more workers at lower wages Increased wage flexibility

WEAKENING THE POWER OF TRADE UNIONS Unionized labor frequently succeed in securing high wage increases so if labor unions are weakened, wages will be more responsive to the forces of supply and demand

REDUCING UNEMPLOYMENT BENEFITS Unemployment benefits have the unintended effect of reducing the incentive to search for a new job, causing some of the unemployed to remain unemployed Reducing the benefits will encourage workers to work Lower the natural rate of unemployment

REDUCING JOB SECURITY Firms will usually hire more workers if they know that firing them is easy. Low compensation payment Lower labor costs for firms

INCENTIVE RELATED POLICIES Incentive related policies involve cutting various types of taxes which are expected to change the incentives faced by tax payers whether firms or consumers. Lowering personal income taxes Lowering taxes on capital gains and interest income Lowering business taxes

LOWERING PERSONAL INCOME TAXES The government can change personal income taxes as part of fiscal policy, thereby changing the level of aggregate demand.

LOWERING TAXES ON CAPITAL GAINS AND INTEREST INCOME In most countries people are made to pay taxes on capital gains which are profits on financial investments, or from buying and selling estate.

LOWERING BUSINESS TAXES Lower taxes on business profits can work to increase aggregate demand by increasing investment spending.

IMPACT ON ECONOMIC GROWTH Time Lags Increases In Potential Output Arguments Favoring Interventionist Policies Arguments favoring market-based policies The debate over incentive-related policies Ability to create employment Ability to reduce inflationary pressure Impact on the government budget Effects on equity Effects on the environment

TIME LAGS Interventionist and market based supply side policies work after significant time lags, this makes the aggregate supply increase over the long term basis.

INCREASES IN POTENTIAL OUTPUT Long term economic growth is usually caused by investments which lead to increased productivity of the labor when new technologies are introduced to them.

ARGUMENTS FAVORING INTERVENTIONIST POLICIES Supporters of interventionist or market based policies are more effective in increasing potential output. Supporters argue in terms of the major advantages of targeted government support areas.

ARGUMENTS FAVORING MARKET-BASED POLICIES Supporters of market-based policies argue that government interference in the market may lead to inefficiencies in the and resource misallocation whereas the reliance on the market can achieve long-term growth.

THE DEBATE OVER INCENTIVE-RELATED POLICIES Tax cuts are among the more controversial market-based policies, because of their questionable effects on work, saving and growth of potential output.

ABILITY TO CREATE EMPLOYMENT One of the objectives of supply-side policies, we have seen, is to create employment. This does not refer to a reduction of cyclical unemployment, arising from business cycle fluctuations. Market based policies that focus on encouraging competition will increase unemployment eventually.

ABILITY TO REDUCE INFLATIONARY PRESSURE Supply-Side no matter the type, are likely to reduce inflationary pressures over the long term. This is because these policies tend to increase potential output.

IMPACT ON THE GOVERNMENT BUDGET Interventionist policies and incentive-related market-based policies have negative effects on the government budget, though for entirely different reasons.

EFFECTS ON EQUITY This means there is greater income equity. Interventionist policies ten to focus on investments in human capital that are broadly distributed through the population are likely to have positive effects on equity over the longer term.

EFFECTS ON THE ENVIRONMENT it is possible that market-bases policies to increase competition like privatization have negative effects on the environment because of the increased scope for activities that lead to negative externalities affecting the environment The government could limit these externalities by taking appropriate measures to correct these externalities

CONCLUDING COMMENTS… every policy will have negative impacts as well as its positives Economists believe that interventionist and market-based policies should complement each other A mix of policies should be used Each country will have a different mix depending on its economic and social conditions