WHAT: WHAT ARE supply-side policies?
HOW: research the historical context of why ssp's were required in either uk, usa in 1980's AND australia in the 2000's and what policies were implemented?
why: ssp's are a key policy instrument for increasing economic potential

  • Explain how supply-side policies aim at positively affecting the production side of an economy by improving the institutional framework and the capacity to produce (that is, by changing the quantity and/or quality of factors of production). 
  • State how supply-side policies may be market-based or interventionist, and that in either case they aim to shift the LRAS curve to the right, achieving growth in potential output. 
  • Explain how investment in education and training will raise the levels of human capital and have a short-term impact on aggregate demand, but more importantly will increase LRAS.
  • Explain how policies that encourage research and development will have a short-term impact on aggregate demand, but more importantly will result in new technologies and increase LRAS. 
  • Explain how increased and improved infrastructure will have a short-term impact on aggregate demand but, more importantly, will increase LRAS. 
  • Explain how targeting specific industries through policies including tax cuts, tax allowances and subsidised lending promotes growth in key areas of the economy and will have a short-term impact on aggregate demand but, more importantly, will increase LRAS. 
  • Explain how factors including deregulation, privatisation, trade liberalisation 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 cuts in personal income tax 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. 
  • 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. ​

Made with Padlet
Picture
  1. Supply-side policiesIn this section we consider the following topics in detail:
  2. The role of supply-side policies
  3. Interventionist supply-side policies
  4. Market based supply-side policies
  5. Evaluation of supply-side policies

The history of supply-side policy: From 1945 until the mid-1970s, Keynesian fiscal policy (influencing aggregate demand levels) was the major instrument of government economic policy in most countries around the world. The Phillips curve represented the observed inverse relationship between the rate of unemployment and the rate of inflation in an economy, which had been recorded historically. In other words, the lower the level of unemployment in an economy, the higher the rate of inflation (and vice-versa). This observed relationship had underpinned many governments' macroeconomic policies since the 1950s. However, while this trade off appeared to exist in the short-run, the relationship broke down in the long-run. In the early 1970s, 'stagflation', or 'slumpflation' occurred in many countries, which was the simultaneous increase in both prices and unemployment; a situation that Keynesian economists believed was not possible.

As a result, the use of monetary policy to achieve macroeconomic goals became widespread, and has dominated government policies in major economies since the 1970s. The 'radical right', or monetarists, in the USA particularly (although similar moves were happening in Europe), suggested that concentration on the demand-side of the economy was untenable and that governments should focus instead on the use supply-side policies to create greater flexibility in the economy to react to changes in aggregate demand. Monetarist policies became to dominate government economic approaches in most developed economies with a growing importance placed on the use of interest rates to fine tune economic development.

The debate moved away from Keynesian policies to arguments over the nature of about supply-side policies and whether these should be more or less interventionist in nature as both liberals and conservatives embraced policy measures focusing on increasing aggregate supply. However, it should be noted that many governments reacted to the financial crisis of 2007 - 2010, by using traditional Keynesian approaches to stimulate aggregate demand, in face of opposition from Monetarists who saw these policies as inevitably inflationary in the longer-term.

The role of supply-side policies: Supply-side policies are designed to make aggregate supply (AS) more responsive to changes in national income. Supply-side policies tend to concentrate on improving efficiencies in either product markets, i.e. specific good or services such as cars, or labour markets. Supply-side policies are designed to increase competition and efficiency of production by improving the quality and quantity of labour available to firms. When combined with other macro policies, they are supposed to deliver a more competitive and efficient economy. Supply-side policies focus on:
  • Removing market imperfections - barriers to the smooth operation of product and labour markets
  • Removing restrictive practices - rules that do not allow the free movement of factors within an economy
  • Making work more attractive
  • Making workers more efficient
Supply-side policies aim to shift the LRAS curve to the right, increasing the level of real output and lowering the price level. This is shown in Figure 1 below:
The Solow Model of Economic Growth
MR's Intro to THE SRAS: a recap
MR's intro to the LRAS
ACTIVITY 2: WHAT SUPPLY-SIDE POLICIES WERE UTILIZED IN THE 1980'S BY THATCHER AND REAGAN? Download a copy of the table below and then add in all of the separate market based and interventionist Supply-side policies from the text book. Briefly explain what each is and then using the resource library as a starting point find some examples of each SS policy and in the final column evaluate their overall effectiveness. Once you start to research your own sources - remember to look at quality sources. For a list of recommended quality sources the Economics homepage has the links to these.
supply-side_policies.docx
File Size: 17 kb
File Type: docx
Download File
Some articles to kick-start your research.

Reagan fires 11,000 striking air traffic controllers Aug. 5, 1981

On this day in 1981, President Ronald Reagan fired more than 11,000 air traffic controllers who ignored his order to return to work. The sweeping mass firing of federal employees slowed commercial air travel, but it did not cripple the system as the strikers had forecast.

Error - Cookies Turned Off

Cookies are disabled for this browser. Wiley Online Library requires cookies for authentication and use of other site features; therefore, cookies must be enabled to browse the site. Detailed information on how Wiley uses cookies can be found in our Privacy Policy.

It's 20 years since polytechnics became universities - and there's no going back

The post-1992 universities have transformed higher education, and whatever the political talk about 'differentiation', today's students are not interested in timeworn distinctions, says Peter Scott

Privatising the UK's nationalised industries in the1980s - Centre for Public Impact (CPI)

Stakeholder Engagement Fair The main internal stakeholders were the Conservative government, particularly the Department of Trade and Industry (DTI). The main external stakeholders were those who became shareholders in the privatised companies: Employees, who were given the opportunity to becomes stakeholders by buying shares in newly privatised businesses - "in the privatisation of BT in 1984, up to 10% of shares were reserved for employees and 96% of employees bought shares".

Supply side policies in the UK during 1980s and 1990s

Some of the supply side policies used in the UK during the 1980s and 1990s. 1. Privatisation. There has been an extensive privatisation campaign, most of the major utilities such as Gas , Water and Electricity were sold by the government and floated on the stock market. In some industries...

Would Reaganomics Work Today?

Reagan's position was dramatically different from the status quo. Prior presidents Johnson and Nixon had expanded the government's role. Reagan pledged to make cuts in four areas: Reaganomics is based on the theory of supply-side economics. It states that corporate tax cuts are the best way to grow the economy.
Some key ideas to help you along...
ACTIVITY 3 - WHAT SHOULD AUSTRALIA DO? - Read the article below. What market based or interventionist supply-side reforms could the Australian government make? Discuss and evaluate the pros and cons of each policy.

The limits to growth

YOU can see it best from the air. At Dalrymple Bay in Queensland (above), on any given day recently, more than 40 huge ships have been lining up waiting to take on coal. Australia has plenty of the stuff, and China's demand for it is so voracious that this year's contracts are being signed at prices 70% higher than last year's.
You can add your ideas to the Padlet at the top of the page. Aim to write a paragraph each.
The Economist Log-in
Username: [email protected]
Password: humanities