hi everyone supply side policies are policies designed to increase the productive capacity of the economy and thus shifting lras to the right and if these policies are successful then all four main macroeconomic objectives will improve this diagram shows you that if these policies work in boosting lras we can see the increase in growth rates with that we see reductions in unemployment in fact supply side policies target the types of unemployment in the natural rate frictional and structural unemployment in particular we see reductions in long-term rates of inflation and from that we can deduce improvements in the current account position our trade position now with exports being more competitive so all sounds great but we're going to learn later that there are some issues we can evaluate supply-side policies but in theory anyway they are perfect for the macroeconomic objectives there are two groups of supply-side policies interventionist supply-side policies and market-based supply-side policies they are fundamentally different policies but have the same end goal i.e they both try and increase lras and boost the productive capacity of the economy but how they do that is very very different interventionist supply side policies promote more of a role for the government in the economy to try and boost lris whereas market-based supply-side policies go completely the opposite way reduce the role of the government take away the government from the operation of markets in the economy let markets be freer that will boost efficiency that will boost productivity that will boost competition that will promote the right incentives and from that we will see a boost of lras so now guys let's go into the specific policies within these two groups before we look at these policies one by one remember the three generic reasons why the lrs curve will shift to the right it could be an increase in the quantity of factors of production an increase in the quality of factors of production or an improvement in the productive efficiency in the economy that's a reduction in long-run costs of production for businesses so now let's go to our individual interventionist supply-side policies remember these are policies that promote more of a role of the government in the economy to boost lras you can see that all three are government spending dominated let's start with government spending on education and training so this could be the government spending money to build new schools to recruit more teachers to train teachers better maybe it's curriculum reform maybe it's adult training these are all different examples but all of these policies aim to boost skills of the workforce improve the productivity of labor that's an improvement in the quality of labor and there's your shift of lras similarly we can talk about government spending on health care as an interventionist supply side policy which again aims to boost the productivity of the workforce improving the quality of labor then we have government spending on infrastructure we can look at this in two ways first of all by looking at transport infrastructure either new transport infrastructure being built or maybe existing transport infrastructure being upgraded so for example newer upgraded roads ports airports railway lines bridges that's the basic idea what that means is that long-run costs of production for businesses will fall why because it's easier and cheaper to access raw materials for businesses and it's easier and cheaper to sell goods and services if transport infrastructure is better and therefore productive efficiency in the economy will rise but also if we add on not just transport infrastructure but the building of schools and hospitals for example we could also say that new infrastructure or better infrastructure increases the quantity of the capital stock in the economy that's increasing the quantity of capital boosting lras that way and our final intervention is supply side policy is subsidies given by the government to firms in order to promote investment remember investment is when firms spend on capital goods so these subsidies are there to target firms spending on r d for example or buying new capital maybe it's upgrading capital maybe it's new technology factory expansion you get the idea it's got to be for investment and we know that investment can increase the quantity of capital the quality of capital but also can reduce long-run costs of production for businesses and therefore shift lras that way now we go into our market-based supply-side policies and these policies aim to reduce the role of government in the economy take away government from the functioning of markets and let markets be freer and therefore we'll see lra shift and we can look at market-based supply-side policies in three different groups we have tax reform labor market reform and competition policy let's look at the specific policies within these little bands let's look at tax reforms as market-based supply-side policies we have lower income tax and we can have a lower corporation tax now hang on the first five policies we've looked at all look like expansionary fiscal policies don't they so how come we can call them supply-side policies as well well it's all about the intention if we're talking about these policies in order to boost lras then they become supply-side policies whereas if we're talking about these policies in order to boost a.d then they become expansionary fiscal policies that's how you don't get confused okay so here we're linking to lres so they become supply side policies so lower income tax for those who are inactive those who are outside the labor force there is now an incentive for them to enter the labor force and become active that increases the quantity of labor and boost lrs similarly for those who are in work they have an incentive to work harder be more productive earn more income because they can keep more of it as disposable income that could boost the quality of labor the productivity of labor and shift lrs lower corporation tax means firms have got more retained profits they may use some of those profits for investment purposes and we already know what investment does it can increase all three here the constant quality of capital what about labor market reform well there could be a reduction in benefits in welfare payments welfare benefits and if that occurs there is a very strong incentive for the economically inactive those outside the labor force to enter the labor force in order to find work that will increase the quantity of labor the size of the workforce the size of the labor force and boost lras then we can look at these two together a reduction in minimum wages and the reduction in trade union power both of these things minimum wages and union power drive up costs of production for businesses so if we reduce minimum wages and reduce union power it's going to reduce long-run costs of production for businesses boost productive efficiency in the economy and therefore boost lrs and you can see how all of these are taking away the role of government in the economy and that's why they're market-based supply-side policies then we have competition policies all three of these privatization deregulation and trade liberalization in their own unique ways aim to boost competition across the economy and if that happens then firms have to reduce their long-run cost of production in order to be competitive in order to survive in competitive markets and that's going to improve the productive efficiency across the economy and boost lres that way so these are all the policies that we need to know inside out how they boost lres what about looking at evaluating them now well we love the theory that supply-side policies are perfect in improving all the four main macro objectives but there are some major issues one of the biggest issues is that there is no guarantee that they are going to work there's no guarantee that government spending on education and training is going to boost the productivity of the workforce there's no guarantee that subsidies to firms will be used for investment purposes no guarantee lower corporation tax will lead to more investment no guarantee that competition policies are actually going to boost competition and therefore they could well fail these policies and when we mix that together with point number two and that is that a lot of these policies are very costly there is a real risk so there's a real danger of wasteful spending on these supply side policies especially the interventionist supply side policies these are all very very very expensive and we can also question them how are these funded and that raises other issues for the future and also concerns about debt interest and the opportunity cost that comes with paying debt interest but it's not just those three even our tax reforms carry a significant cost when we put the two together it makes us really critique whether we should go ahead with certain supply side policies a lot of these supply side policies carry very large time lags take government spending on infrastructure for example it could be many years even decades before an infrastructure project is completed government spending on education and training it takes several years before we start seeing improvements in productivity as these children go through whatever changes are made to the education program but even policies like our tax cuts over here i've got significant time lags before we start seeing investment or before we start seeing increases in the labor force because of lower income taxes some of our market-based supply-side policies come with quite severe negative stakeholder impacts i mean it's pretty obvious to see our labor market reforms seem very harsh and for those especially on lower incomes you could see the impact on living standards could be very severe for them if we see these labor market reforms take place but even policies like deregulation we can question what laws what regulations are taken away or relaxed are they product safety laws are they environmental laws are there health and safety laws are they planning laws well if that's true then maybe the environment could be damaged very significantly maybe worker safety could be impacted maybe consumer safety could be impacted basically these laws that are taken away or relaxed might not be in the interest of society and can harm some key stakeholders in the economy which we don't want the impact of supply-side policies and boosting growth very much depends on the size of the output gap and really what stage of the economic cycle the economy is in if the economy is in a recession supply-side policies really are going to be useless in boosting growth and doing all the great things that we mentioned here with the macro objectives whereas if the economy is booming and maybe at full employment then yes supply-side policies are going to be very effective and very healthy for the economy and lastly we need to talk about the need for targeted supply-side policy there are so many different types of policies that could be used but they need to be used to target issues in the economy so for example if there are infrastructure problems then yes go for it spend on infrastructure if productivity is low then target by using supply-side policies that hit productivity if competition is lacking then yes use supply-side policies that target that you see what i mean we need to target our supply-side policies to chronic supply-side issues in the economy so that covers some key evaluation it tells you that supplier side policies aren't perfect as they might seem make sure you take that all in really important stuff right here and i'll see you all in the next video [Music] you