10.5 Supply Side Policies

© 1999-2020, Douglas A.Ruby (06-17-2020)

Supply-side are designed to work through the aggregate production function by affecting the availability of factor inputs or their productivity:

X* = f(L, K, M).

These policies can be categorized via each of the three factors of production (labor, capital, materials) listed in the above function or the technology that defines the functional relationship between the inputs and potential output 'X*'.

10.5.1 Labor Policies

Policy makers have attempted to increase the potential output of an economy via relaxed immigration policies, population policies(encouraging greater birth rates) , or increasing labor force participation rates. Policies can also attempt to increase the productivity of labor (an increase in Human Capital) through improved access to education and policies designed to make educational activities more effective.

10.5.2 Capital Accumulation

The capital stock of a nation, so important for rising living standards, can also be affected by different policies. Governments are often involved in the direct creation of necessary infrastructure that complements and enhances the movement of goods and services as well as reducing the transaction costs associated with market activities. This infrastructure may include new roads (i.e., the U.S. Interstate system), bridges and dams, airports, and improvements to waterway shipping. In addition this infrastructure may include legal systems, courts and police to help make market transactions more efficient.

Policy makers can also encourage capital accumulation through the private sector through grants and subsidies for research, development, and capital creation. Tax laws can also favor capital by lowering the real cost of borrowing thus encouraging investment spending -- spending on new capital and the replacement of existing capital.

10.5.3 Availability of Raw Materials

Policies may also be developed to improve access to and the general availability of raw materials. These types of policies would include different land-use/land-management policies allowing for resource extraction, logging, oil exploration, and urbanization. Often these types of policies run counter to efforts at environmental protection leading to strong debate in the political arena.

Concepts for Review:

Top of page related: Economic Policy previous: Deficits and the Federal Debt Macroeconomic Theory
© 1999-2020, Douglas A.Ruby (05-20-2020)