Supply Side Policies: Canada

Part 1

Part 2

All credits go to Dwight Stewart.

Mind Map on Supply Side Policies 

MCQ Questions:

1. Which of the policies below is an example of a supply side policy?

      a. Privatisation of State Assets
      b. Raising Corporate Taxes
      c. Decrease saving rates
      d. Improving Infrastructure

2. Which of the following is a drawback of supply side policies

      a. Income Inequality
      b. Inflation
      c. Budget Deficits
      d. Over-consumption

3. Which of the following is not a benefit of supply side policies?

      a. It is relatively cheap to implement
      b. It can help to create sustainable employment.
      c. It is less likely to have negative side effects such as market instability.
      d. It can help reduce inflationary pressure in the long term.



Answers:
1. A
2. A
3. A

Limitations on Supply Side Policies- Case Study- Europe




An alternative view on supply side policies and an analysis on its shortcomings.

Europe places too much faith in Supply Side Policies?

Podcast on Supply Side Policies by Tow Ying Xiang

Introductory Video to Supply-Side Policies

Supply Side Economics in Japan- The Rise of Abenomics

Abenomics is a term used to describe the policies advocated by Shinzo Abe, the current Prime Minister of Japan. It is meant to solve the macroeconomic problems facing Japan, namely excessive currency appreciation, deflation and poor consumer sentiment. It aims to address these problems through monetary policy and fiscal policy, thereby encouraging GDP growth in the long term to pay off the deficit. Abenomics is a radical set of policies aimed at pushing

Monetary policy:

Abenomics involves adopting an expansionary monetary policy which involves increasing the supply of money to the economy, causing the interest rate to decrease. This encourages consumer to spend and increases interest rates in the short term as nominal prices increase.

This also increased Japan's export competitiveness as the depreciation of the Japanese currency made Japanese products more attractive to export markets, turning the persistent trade deficits into surpluses.The yen has fallen 12% so far in 2013.

Mr. Abe targeted an inflation rate of 2%., doubling the existing goal of 1%.   The persistent deflation in Japan had led to high unemployment rates among youth and stagnating wages because the real value of money increased over time, leading to firms being reluctant to recruit more workers as a result and young workers are disproportionately affected by this. 

Abe's policies have also driven domestic demand as lower interest rates have led to increasing willingness of consumers to spend. 

Downsides of Monetary policy

The rapid devaluation of the Japanese currency could lead to many Japanese withdrawing their bank savings to invest in foreign currency if they believe that the Yen is going down in the long term. This could lead to a drain in capital of Japan's banks, leading to a deeper deficit for Japan's government as they will have to recapitalise the banks.

Another risk is that the Bank of Japan (BOJ) might default if the rate of depreciation is too rapid because the value of Japan's currency would be nearly worthless if the Yen depreciates beyond 400 yen to US$1 as Japan would then be unable to fulfil its debt obligations. 

As with all low interest rate policies, there is the downside risk of the Zero Lower Bound problem or Liquidity Trap, which refers to the situation when interest rate is zero, limiting the central bank's power to stimulate economic growth because it means that consumer sentiment is so bad that the multiplier effect is almost negligible.

Fiscal Policy:

Abenomics involves reversing high taxation to encourage in combination with monetary stimulus to settle the issue of debt sustainability. The reversal of high taxation is a supply side policy that hopes to increase the incentive for workers to be more productive, using the Laffer curve which shows that tax revenue might actually increase if taxation is lowered, provided the rate of taxation is higher than optimum.

The buying back of bonds by the Abe administration resulted in short term bonds rallying while longer terms bond yields dropped. Bonds are basically securities that the government has to pay in full at the end of the term. This signifies that the investors think that the Japanese government is more likely to default in the short term, causing the dividends to remain high because of the drastic policies put in place by the Abe administration increased the chance of default but it is a good sign that long term dividends dropped which means that investors see Abe's policies as beneficial to the economy in the long term.
In addition to that, the Abe administration also adopted a expansionary fiscal policy in tandem with quantitative easing. This increase in government spending is aimed at increasing domestic consumption and investment through the multiplier effect. In fiscal year 2013, 10.3 trillion yen ($US 116 billion) was set aside for government spending, a massive stimulus package to kickstart anaemic domestic consumption.

Drawbacks of Supply Side Fiscal Policy:

A long term low tax rate system is usually unsustainable especially in Japan's case, as they have a government debt 237% the size of GDP. In the long term, this could become a big problem for the young working class as they would have to carry the burden of paying the massive government debt incurred by the current administration.

Another drawback is that without fiscal discipline in keeping a balanced budget, these policies would be ineffective. If the budget is continuously imbalanced over a few fiscal years, in this case continuous deficits under Abe, it could result a downgrade of Japan's credit rating which would mean it would have less space to deal with any subsequent recessions.

Evaluation:
While Abenomics involves significant risk-taking, it is dealing with an extraordinary case of a massive deficit with low consumption and declining export competitiveness. Therefore, drastic measures have to be taken including the deregulation of certain sectors and reforms in others. Thus, it is a concept not without flaws but is the best that can be done in the given situation.

Britain's Supply Side Policies(2)

Measures to encourage small business start-ups / entrepreneurship

Today’s SMEs have a strong likelihood to form tomorrow’s MNCs, getting more workers and creating fresh ideas that may benefit other sectors of the economy.

Government encourages enterprising spirit and setting up of new SMEs via policies in hope they will grow and benefit the economy.

Supply side policies benefitting this cause include guaranteed loans for new SMEs; regional help policy for businessmen in less economically successful areas of the country; and advice from experts for these young entrepreneurs.

Capital investment and innovation:

Expenditure on capital goods by firms adds to AD (C+I+G+(X-M)) but also affects aggregate supply in the long run.

Supply side policies on this aspect includes tax relief on R and D and decreased rates of corporate tax

One important SS policy implemented is the  establishment of 24 new Enterprise Zones that offer lower tax rates and easier planning policies for SMEs in  specific areas backed by a Regional Growth Fund.

Supply side policies for the Labour Market

These SS policies are  made to better the quality and quantity of the economy’s labour force.

These policies make the British market more manipulable so that the labour force is able to meet the needs of the bosses in expanding sectors thereby reducing the risk of structural unemployment.

An increase in the number of workers in the labour force increases the productive potential of the economy.  

Examples of supply side policies to aid this are :increasing the no. of elderly in the workforce; a relaxed foreign labour policy and increase employment of non working parents..

The UK labour market suffers from many problems E.g. Continually high unemployment rates. Supply side policies for this are designed to better the employment prospects for all workers , .

“The UK faces a 10-year gap in its skills profile and damage to its future economic performance unless it tackles the problem of youth unemployment, business leaders and recruiters have warned. They say that failure to acquire work experience and skills at the outset of their careers will not only damage young people prospects but leave deficiencies in the workforce for decades. The UK has 1.02m jobless 16 to 24-year-olds, or 21.9 per cent of the workforce in that age group – just below the EU”

Quoted

Trade Union Reforms

The power of the trade unions have been greatly reduced. Trade unions are no longer guaranteed protection from arrests, for example.

Better partnerships between trade unions and companies can  raise productivity and improving the freedom of workers.

Britain's Supply Side Policies(1)

Quote

"As a student I was not a fan of her government, but in retrospect I believe it is clear that the important changes in economic policies that began at the end of the 1970s contributed to the reversal of a century of UK relative economic decline. Her macro-economic policies a mixed record, but the micro-economic policies have had a more enduring success. In particular, the supply side policies she launched to make labour and product markets more competitive and flexible have been broadly continued under subsequent Conservative (under John Major) and Labour (under Tony Blair and Gordon Brown) "

Thoughts of Ex British Student John Van Reneen, who lived under Magaret Thatcher's economies policies, on the success of her supply side policies

Examples if SS policies in UK in last few decades

Privatisation of state-owned enterprises

Many former state-owned companies have been made private due to the ex-British Government's support for supply side policies.

Examples  

• British Gas,
• British Telecom,
• British Airways,
• Utility Companies e.g. water/electricity
• British railways.

This was because the British Government believed it would prevent these companies from being monopolised(by the state),creating more competition.

The government regulates and oversees moves towards competitive markets in previously state owned industries

Less Market regulation

Deregulation refers to the opening of markets to allow increased competition to increase market supply and increase choices available to the consumers.

Examples of successful deregulation in the UK:

• urban bus transport,
• telecommunications
• gas and electricity supply.

Increased competition encourages companies to use the limited resources they have more efficiently.

How did the British Government boost competition?

• They implemented policies to remove anti-competitive practices such as price-fixing cartels and other abuses of monopolistic companies

Willingness to adopt free trade policies

International trade boosts competition and encourages dropping in production costs and lower prices for consumers.

The UK recognizes this thus:

• Expressed support for expansion of free trade within the European Union Single Market
• is pushing for global free trade
  
  

Supply Side Policies: Singapore

Main supply-side policies in Singapore include:

1. Low tax rates: Corporate Tax rates in Singapore dropped from 26% in 1997 to 17% in 2010. It also
    has the one of the lowest income tax rates (capped at 20%, UK: 45%, US: 35%) among first world
    countries worldwide. This motivates citizens to work harder and earn more money as well as
    accumulate more savings, since most of these earnings can be personally appreciated by them.
    Furthermore, low corporate and income tax rates would also encourage companies and the rich to
    invest in Singapore.

2. Encouraging Entrepreneurship: Relaxing bankruptcy act and promotes enterprise in schools and
    tertiary institutions. With these in place, more Singaporeans are motivated to start up companies,
    which in turn would employ more people.

3. Reduce government intervention: De-regulation by government such as no minimum wages mean
    the market is less disrupted and allowed to run freely. Theoretically, this would allow the market to
    reach a maximum equilibrium, growing the economy.

4. Work incentives: Various schemes such as profit-sharing and pay based on productivity (NWC)
    encourages workers to maximise their potential and work harder since more work now equals more
    pay.

5. Availability of world-class economic infrastructure and services: These include government backed
   global banks (e.g. DBS), Singapore's unique location making it a convenient regional HQ (e.g. Rolls
   Royce), political stability etc.
   These provides investors and companies with the appropriate resources to grow in Singapore.

Proposal

Economics Alternative Assessment

Done by: Darren Foo, Shawn Lim, Tow Ying Xiang

Role: Government

Audience: Firms

Form: Blog

Topic: Supply-side policies

Definition and Theory

Supply side policies refer to policies which are aimed at increasing aggregate supply. The main goal of supply side policy includes any policy that improves an economy’s productive potential and its ability to produce. It is based on the General Theory that lowering restrictions on supply is the best way to grow the economy. The goal of supply side policies is to incentivise work by reducing restrictions such as taxes and heavy regulation to stimulate supply. This is based on the belief that when tax rates are lowered, employment would increase causing income to increase and revenue to increase  which would then offset the drop in revenue from a lower tax rate. This can be seen from the Laffer Curve as presented below, where at a certain tax rate between 0% and 100% (not necessarily 50%), tax revenue is maximised. Thus too high a tax rate may actually result in low growth and high employment- i.e. a situation of stagflation.

Benefits

Supply-side policies can help reduce inflationary pressure in the long term because of efficiency and productivity gains in the product and labour markets as people are motivated to work more and firms become more efficient. This means that through their positive effect on labour productivity and efficiency, demand push inflation is mitigated because the vertical range of the AS curve is shifted to the right. As producers become more competitive, Balance of Payment also will also tend to have surplus as the goods produced are of competitive value so they can be exported, resulting in the aforementioned surplus. In addition, Supply-side policy is less likely to create conflicts between the main objectives of stable prices, sustainable growth ,full employment and balance of payments equilibrium because it relies on This partly explains the popularity of supply-side policies over the last 25 years.

Disadvantages

Disadvantages of supply side policies include the long time period it takes for the effect to be felt by these policies. This is because it for such policies to work, the mindset of the workers need to be changed as they need to be willing to undergo skills upgrading and becoming an entrepreneur etc. In a stable economy like Singapore’s this takes a large amount of time as workers tend to favour a stable job in an MNC. Another disadvantage is the large income inequality it tends to create. Supply-side policies tend to support lowering income and capital-gain tax and the largest beneficiaries are usually high income individuals. Justification for this includes the trickle-down theory. However, this theory that wealth would naturally trickle down to all groups in society is somewhat flawed. The trickle down theory is based on the belief that when tax rates are lowered, the wealthy would spend more through purchase and investment. However, in many aspects, these expenditure would not benefit many parts of society.

How Supply Side Policies Aid Countries

Government can choose to help to improve supply-side performance by helping firms by encouraging them to use new machinery, and new,ingenious ways to work , in other words, to stimulate factor output rather than to alter demand.( Supply Side Policies are focused on supply). Another measure taken by the government can be the deregulation of product markets to decrease the difficulty for firms to enter markets, encouraging fresh and interesting market entrants, and boost supply-side performance. Economies become more competitive and increasingly efficient, via the entrance of competition.Another method the government can use is the privatisation of state industries. This action boosts number of entrepreneurs in the long run. Governments must also  promote competition  to ensure efficiency gains for the firms, and productivity gains for the employees.The last thing the government can do is to ensure that there is a constant supply of new firms. Small firms are often creative  and fluid, and can be helped by the government in ways such as providing start-up loans and tax breaks.

References

http://www.economicsonline.co.uk/Global_economics/Supply-side_policies.html

Principles of Economics/ Karl E. Case, Ray C. Fair - 3rd ed.  ISBN 0-13-095886-7