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Supply side policies and its economic impact.

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Introduction

Written by: Eisa Asadi Appointed 2nd group manager SUPPLY SIDE POLICIES AND ITS ECONOMIC IMPACT Supply side policies are those that improve the supply side of the economey. There are the two forms of supply side policy. Supply side policies of the product market and that of the labour market, which can directly influence the national economy. All the supply side policies of the product market are design to increase competition and therefore productivity. An increase in productivity will mean that an industry is able to produce more with a given amount of resources. Privatisation is a major supply side policy of the product market side that is intended to increase the productive potential of the economy and consequently lead to a higher rate of economic growth. Privatisation actually break up state regulated monopolies into privately own enterprises and this would eventually mean that the intensity of competition among businesses will increase, rather than having government firm not competing against each other, these privately owned businesses compete together. Recently in the United Kingdom the utilities such as gas and electricity have been privatised and this has benefited the economy greatly, although there have been a few exceptions to this such as rail track privatisation which has generally been considered as a national failure due to excessive under investment. Another common supply side policy of the product market side is deregulation, which aims at removing excessive sate imposed regulation on economic activity within the national economy. ...read more.

Middle

But there is no evidence that the incentives would be so strong as to result in higher government revenue after a tax cut. Similarly, an increase in the growth rate of output will contribute to reducing the inflation rate-but the effects are unlikely to be powerful. The events of two years following the Reagan tax cuts do not support the views of the radical supply-siders. Inflation was indeed reduced, but the reduction was a result of tight monetary policy and not of expansionary fiscal policy. Output fell rapidly; it did not increase. These events led to the departure of the radical supply-siders from responsible policy-making positions, but did not slow their claims that supply-side economics (of the radical branch) was the solution for the economy's problem. An interesting sidelight on supply-side economics comes from considering the relationship between supply-side economics and monetarism. Both approaches are often associated with conservative political positions. But the two groups of economists are critical of each other. In their policy positions, favouring tax cuts in almost all circumstances and believing also that the Fed should allow rapid money growth to foster rapid output growth, the supply-siders are closer to Keynesianism than to monetarism. Supply side policies An alternative or even a complementary policy to demand-side management is to increase the productive potential of an economy, irrespective of the state of aggregate demand. Policy measures, which raise the long run or potential GDP, are known as supply-side policies. Successful supply-side policies raise potential GDP faster than if were it left to the normal process of economic growth. ...read more.

Conclusion

The high level of transfers observed in Europe is to some extent a response to high unemployment, which may have other underlying causes. At the same time, these transfers-in the form of unemployment benefits, welfare and premature retirement and disability pensions-take the pressure off workers and firms to adjust to a changing world economy. The greatest danger is that the safety net becomes a trap, leading to long-term unemployment. It is useful to think about the adverse effects of the safety net on incentives. The social systems of most countries share two institutional features. First, poor or unemployed people receive transfers-income maintenance programmes or unemployment benefits-from the state. Second, income taxes are progressive: the rate of taxation increases as income rises. Taking up a job not only means receiving a salary, but also paying taxes if the salary is high enough and thereby losing eligibility for income maintenance programmes. It is conceivable then that people can be financially worse off by taking a job, not to mention incurring a loss of leisure and possibly some activity in the underground (shadow) economy. Implicitly, these people face an effective marginal tax rate-considering the overall effect of work on their income-in excess of 100%. Recent experience of "work-to-welfare" in the USA indicates that the incentive aspect is important for bringing workers on social assistance back to work. Labour taxation. Because labour is so important in any economy, it is natural to expect governments to tax it. Labour is one of the most highly taxed "commodities". Not only is labour subject to income taxes paid by households, but also to a number of social security contributions by both employees and employers. 6 ...read more.

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