What are interventionist supply-side policies?

An interventionist supply-side policy is where the government becomes more actively involved on the supply side of the economy to achieve its macroeconomic objectives. Diagram 3.46 shows how the application of interventionist supply-side policies can increase the long-run aggregate supply curve from LRAS to LRAS1 through, for example, government investment in infrastructure.

Methods of supply-side intervention to increase long-run economic growth

The following methods are used as part of interventionist supply-side policies that can increase potential output in the economy and cause the production possibility curve in diagram 3.47  to increase from PPC to PPC1 increasing the potential output.

Education and training

Education is a crucial part of government intervention in the economy as an interventionist supply-side policy because it affects the productive potential of the labour force. This is also true of government-provided and funded training schemes. More skilled workers can achieve higher levels of productivity in their work which increases the overall productivity of the economy and increases potential output.

Healthcare

State involvement in healthcare is important in a similar way to education. A healthy population is likely to be more productive in employment because employees are less likely to be absent from work.  In addition, physically and mentally healthier workers are likely to be more efficient when they are doing their jobs. There is also the effect of health on families where family members have to be carers when there is no effective healthcare. Family members who become carers are either taken away from the labour market or their productivity at work is reduced. Many governments invest a high proportion of their total expenditure in healthcare services to make sure the population has access to high-quality, low cost or free healthcare.

Infrastructure

State provision and funding for effective infrastructure are crucial to the supply side of the economy. Infrastructure is the capital and systems that support the overall functioning of a country's economy. Infrastructure can be in the following forms:

• Transport systems like roads, bridges, ports, airports and rail services
• Utility provision in the form of electricity, gas and water supplies
• Communication networks such as mobile communications, broadband, digital services and postal services.

Countries where governments have provided well-funded and planned infrastructure create the conditions for long-term economic growth. Good infrastructure means businesses can achieve higher levels of productivity, communicate efficiently, easily move their goods around and effectively access labour.

Research and development

Governments often use a supply-side approach to facilitate innovation and the development of new technology. This can be done through grants, subsidies and tax incentives for research and development. Innovation in production systems is very important in leading long-run economic growth on the supply side. Many economists regard government support for the development of information technology and communications as important in providing the conditions for significant advances on the supply side leading to long-term economic growth. For example, many governments are now providing large-scale support for the development of renewable energy to make economic growth more sustainable.

Industrial policies

As part of an interventionist, supply-side policy governments can use a targeted industrial policy as a strategic approach to certain industries to achieve long-run economic growth. Governments often try to change the structure of production in the economy and target industries that are the most likely to facilitate economic growth. For example, China and South Korea used a set of industrial policies in the 1980s and 1990s to focus on their manufacturing sectors so they could target growing export markets. The government are now looking to use industrial policies to support industries involved in artificial intelligence, robotics and automated vehicles.

Evaluation of interventionist supply side to increase economic growth

Strengths

• Interventionist supply-side policies to increase economic growth can be targeted at areas of the economy in a way demand-side policies cannot. For example, demand-side policies cannot effectively deal with the problem of a shortage of skilled labour that is holding back economic growth, but a training and education policy can.
• Expansionary monetary and fiscal policy used to increase economic growth often have the trade-off of increasing the rate of inflation. Supply-side policies do not have this as a disadvantage and can even lead to lower prices in certain sectors of the economy.
• Demand-side policies increase the actual rate of economic growth whereas interventionist supply-side policies increase potential growth which is more likely to deliver economic growth in the long run.
• There can be significant social benefits associated with an interventionist approach to increasing economic growth. Improving the provision and quality of healthcare and education brings with it external benefits and enhanced economic development as well as economic growth.

Weaknesses

• Interventionist policies can come at a significant opportunity cost to the government in terms of government expenditure in other areas and also the increased tax revenue needed to fund the policy.
• Government intervention is often criticised for inefficiency and bureaucracy. State-managed enterprises and services often suffer from diseconomies of scale which reduces their efficiency.
• All government involvement in the economy is subject to some political influence which might conflict with the economic benefits of the supply-side policy. For example, a government might provide funding for infrastructure projects in an area of the country where it needs to encourage support from voters.

Methods of supply-side intervention to reduce unemployment

Many of the policies used to achieve economic growth may also create employment, but there are also interventionist supply-side policies that are aimed specifically at reducing unemployment.

Education and training

Importance of training on the supply side

Governments often use education and training to reduce structural unemployment. Where workers need to re-skill to find work, government-funded and managed training schemes can support unemployed workers as they try to transfer to new types of employment.

Trade protectionism

Countries sometimes resort to trade barriers to reduce foreign competition for domestic firms which protects domestic employment. This has been a key policy of Donald Trump’s administration. The US government has used tariffs on many manufactured goods such as steel and cars to try and protect American workers.

Employment agency

Government-financed and run employment agencies to improve information flows in the labour market can particularly target frictional unemployment, although it can reduce all types of unemployment. Many government services in this area take place through the Internet. For example, the Indian government has an employment service portal where potential employees can register for work and be matched with potential employers.

Direct government employment

Governments can try to reduce unemployment by directly employing workers in the public sector. This can be in state-owned and managed enterprises such as transport, postal services and healthcare.  For example, over 40 per cent of China's and Russia’s working populations are employed by the state.

Employment subsidies

Employment subsidies involve the state paying part of the wages of workers employed by private-sector employers. This reduces the cost for firms of taking on employees and acts as an incentive for them to take on new workers. The impact of a wage subsidy is shown in diagram 3.47(1). The subsidy paid by the government in the labour market cause the labour supply curve to shift from SL to SL1. For businesses, this reduces the cost of employing workers and leads to an increase in employment from QL to QL1.

The German government, for example, operates a scheme called Kurzarbeit. This is an employee subsidy scheme where the government pays up to 60 per cent of the wages of a worker who has had their working hours reduced. This means workers are not made redundant but employed for fewer hours by their employer. This subsidy prevents unemployment from rising in a recession and was used extensively during the recession in Germany caused by the Covid19 pandemic.

Evaluation of interventionist supply side to reduce unemployment

Strengths

• Interventionist supply-side policies are effective at specifically targeting frictional and structural unemployment. Training and education and employment agencies are particularly good at doing this.
• Supply-side policies can also have some impact on demand-deficient unemployment in a recession. Employment subsidies and direct state employment can be used to target certain sectors of the economy when there is a recession.

Weaknesses

• Government training and employment agencies cost money to set up and operate and represent an opportunity cost in terms of other areas of government expenditure.
• Government training schemes and employment agencies also cost money and can be bureaucratic and inefficient.
• Trade protectionism often leads to retaliation from other countries so protecting jobs in one industry can lead to unemployment in another.
• Employment subsidies cost the government money and can be abused by employers who take on workers with the subsidy rather than paying workers themselves.
• On their own, interventionist supply-side struggle to deal with a significant rise in unemployment caused by a recession.

Methods of intervention to reduce inflation

Incomes policy

An incomes policy involves the government setting a limit on wage increases to try and break a wage-price spiral. Diagram 3.48 shows how the application of an incomes policy reduces the rate at which short-run aggregate supply falls when there is cost-push inflation. With the incomes policy, SRAS only shift to SRAS1 rather than SRAS2 and the price level only reaches P1 rather than P2. This approach reduces the impact of cost-push inflation.

Evaluation of interventionist supply side to reduce inflation

Strengths

• Incomes and price controls can be used to directly target cost-push inflation in a way monetary and fiscal policy cannot.
• One of the main problems of applying contractionary fiscal and monetary policy is the way both policies reduce aggregate demand and economic growth. Interventionist supply-side policies do not reduce aggregate demand in the same way.

Weaknesses

• Controlling wages increases for workers when there is high inflation can reduce real incomes and can lead to poverty.
• An incomes policy can lead to conflict and unrest where workers take industrial action such as going on strike because they cannot get a wage rise to cover inflation.
• Firms can find their way around wage controls by changing job titles or offering fringe benefits like company cars.
• Wage restrictions distort the operation of the labour market and can lead to labour shortages.
• Firms can find their way around the price controls by changing the goods they sell such as altering the size or name of a product they sell.
• Maximum prices distort the operation of the goods market leading to shortages and parallel markets.