15. longterm economic growth & supplyside policies

Long-term EconomicLong-term EconomicGrowth andGrowth and

Supply-side PoliciesSupply-side Policies

Long-term Growth and Supply-side PoliciesLong-term Growth and Supply-side Policies

Economic Growth in the Long run

Economic Growth in the Long run

ECONOMIC GROWTH IN THE LONG RUNECONOMIC GROWTH IN THE LONG RUN

Growth over the decades

long-term growth versus short-term fluctuations



30

40

50

60

70

80

90

100

110

120

1950 1960 1970 1980 1990 2000

Real

GD

P (

1995 =

100)

UK GDP at market prices (1995=100)UK GDP at market prices (1995=100)

Average annual percentage growth rateAverage annual percentage growth ratein GDP per person employedin GDP per person employed



convergence of rich economies








growing gap between the richest and poorest countries










the determinants of economic growth












increase in quantity of factors














increase in productivity







increase in productivity


Output per person employed in 2000relative to that in 1961

Output per person employed in 2000relative to that in 1961

Productivity in selected countries, 1999 (UK = 100)Productivity in selected countries, 1999 (UK = 100)

Capital accumulation simple model of economic growth

diminishing returns to capital

growing proportion of replacement investment

growth to a long-run equilibrium national income




growth to a long-run equilibrium national income


K0

Depreciation (D)

Investment (I)

Steady-state outputSteady-state output

Capital stock (K)

Ou

tpu

t (Y

), In

vest

me

nt (

I), D

epre

cia

tion

(D

)

K1

Y1

Output (Y)

g

Y0

bI0

D0

O

c

f

a




growth to a long-run equilibrium national incomeeffect of an increase in the saving rate






Capital stock (K)

K1 K2

Y2

Y1

Y

D

I2

I1g

m

nh

Ou

tpu

t (Y

), In

vest

me

nt (

I), D

epre

cia

tion

(D

)

f

Effect of an increase in the rate of saving and investmentEffect of an increase in the rate of saving and investment





human capital and education












an optimum rate of saving?








Saving rate (%)

Co

nsu

mp

tion

O 100

a b

An optimum saving rateAn optimum saving rate

Saving rate (%)

Co

nsu

mp

tion

C*

s*O 100

a

m

b

An optimum saving rateAn optimum saving rate







an increase in the workforce







an increase in the workforce


Technological progress

the effect on output




Capital stock (K)

K1 K2

Y2

Y2

D

I2

I1g

p

nh

Ou

tpu

t (Y

), In

vest

me

nt (

I), D

epre

cia

tion

(D

)Effect of embodied technological progressEffect of embodied technological progress

Y1

Y1

f



the steady-state growth path





Effect of technological progress on growth ratesEffect of technological progress on growth rates

Lower rateof technological

progress

Higher rateof technological

progress

Time

Out

put




the effect of an increase in the saving rate










movement to a higher steady-state growth path







Effect of an increase in the saving rate,with a given rate of technological progress


Time

Ou

tpu

t

Steady-stategrowth path 1

Actualgrowth path

Slope determinedby rate of

technological progress




Time

Ou

tpu

t

t1


Rate of savingincreasesat time t1

Actualgrowth path






Endogenous growth theory














determinants of technological progress
















importance of institutional factors and incentives








importance of institutional factors and incentives


Supply-side PoliciesSupply-side Policies


SUPPLY-SIDE POLICIESSUPPLY-SIDE POLICIES

Supply-side policies and macroeconomic problems economic growth

unemployment

inflation

Market-based approach to supply-side policy market-orientated supply-side policies


unemployment

inflation


AD

AS1

Q1O

P1

National output

Pri

ce le

vel

AS2

P2

Q2

Aggregate demand and supply: monetarist analysisAggregate demand and supply: monetarist analysis

O

Unemployment (%)

Infla

tion

(%)

Un1Un2

Long-run Phillips curve: monetarist analysisLong-run Phillips curve: monetarist analysis



unemployment

inflation


neo-Austrian / libertarian school


unemployment

inflation


neo-Austrian / libertarian school


Keynesian approach to supply-side policy


O

AD1

National output

Pri

ce le

vel

AS1

AD2

Q1 Q2

AS2

Q3

Aggregate demand and supply: Keynesian analysisAggregate demand and supply: Keynesian analysis

O

Unemployment (%)

Infla

tion

(%)

I

II

a

b

Phillips curves: Keynesian analysisPhillips curves: Keynesian analysis



interventionist supply-side policies






'Third-Way' supply-side policies








The link between demand-side and supply-side policies




The link between demand-side and supply-side policies

Market-orientated Supply-side Policies

Market-orientated Supply-side Policies


MARKET-ORIENTATED SUPPLY-SIDE POLICIESMARKET-ORIENTATED SUPPLY-SIDE POLICIES

Varieties of market-orientated supply-side policies

Reducing government expenditure



Government expenditure (central plus local) as a percentage of GDP at market prices



Income tax cuts



Income tax cuts




Income tax cuts

effects on supply of labour



Income tax cuts





Income tax cuts


effects on unemployment



Income tax cuts




O

Number of workers

Lab

ou

r co

sts

(k),

afte

r-ta

x w

age

ra

tes

(W)

ASL

ADL

W0

Q0

N

Position withno taxes

yx

Effect of a tax cut on total unemploymentEffect of a tax cut on total unemployment

O

Number of workers

Lab

ou

r co

sts

(k),

afte

r-ta

x w

age

ra

tes

(W)

ASL

ADL

Q1

N

Equilibriumwith taxes

W1

k1

b

TAX

a

e


O

Number of workers

Lab

ou

r co

sts

(k),

afte

r-ta

x w

age

ra

tes

(W)

ASL

ADL

W1

Q1

N


a

b

k1

e

Pre-taxwage rate

(unit labour cost)

TAX


O

Number of workers

Lab

ou

r co

sts

(k),

afte

r-ta

x w

age

ra

tes

(W)

ASL

ADL

W1

Q1

N


a

b

k1

e

Pre-taxwage rate

(unit labour cost)

After-taxwage rate

(`take-home’ wage)

TAX


O

Number of workers

Lab

ou

r co

sts

(k),

afte

r-ta

x w

age

ra

tes

(W)

ASL

ADL

W1

Q1

N

Equilibriumwith tax cut

a

b

k1

e

Q2

fW2

k2

c

d


O

Number of workers

Lab

ou

r co

sts

(k),

afte

r-ta

x w

age

ra

tes

(W)

ASL

ADL

W1

Q1

N

Equilibriumwith tax cut

a

b

k1

e

Q2

c

d fW2

k2

New reducedunemployment




Income tax cuts



effects on employment



Income tax cuts







Income tax cuts




Tax cuts for business



Income tax cuts




Tax cuts for business


Reducing the power of labour Reducing the power of labour


W1

O

Number of workers

Wa

ge r

ate

ASL

ADL

Q1

N

Position withunions: wagerate above the

equilibrium

Q2

a b c

Effect of reducing the power of labourEffect of reducing the power of labour

O

Number of workers

Wa

ge r

ate

ASL

ADL

We

Qe

N

Union powerremoved:

wage rate atthe equilibrium

e f

Effect of reducing the power of labourEffect of reducing the power of labour

Reducing the power of labour

Reducing welfare

Reducing the power of labour

Reducing welfare


ASL2

The effect of a cut in benefits on the number unemployedThe effect of a cut in benefits on the number unemployed

O

Number of workers

ADL

We1

N

b a

ASL1

c

Assumption:wage rates not

flexible downwards

(Re

al)

wa

ge

rate

O

Number of workers

(Re

al)

wa

ge

rate

ADL

We1

N

b a

ASL1

c

ASL2

Assumption:wage rates are

flexible downwards

We2 de

The effect of a cut in benefits on the number unemployedThe effect of a cut in benefits on the number unemployed

Effect of a cut in benefits on the duration of unemploymentEffect of a cut in benefits on the duration of unemployment

O

Wa

ge r

ate

Time

Wo

Wa1

T1

Wa2

T2

Policies to encourage competition

privatisation

deregulation

internal markets in the public sector

the Private Finance Initiative

free trade and capital movements

Policies to encourage competition

privatisation

deregulation

internal markets in the public sector

the Private Finance Initiative

free trade and capital movements


Interventionist Supply-side Policies

Interventionist Supply-side Policies


INTERVENTIONIST SUPPLY-SIDE POLICYINTERVENTIONIST SUPPLY-SIDE POLICY

The case against the market

too little R&D and training

imperfections in the capital market

problems of lack of investment

problems of cyclical nature of investment

the problem of de-industrialisation

UK experience of lack of investment and de-industrialisation

The case against the market

too little R&D and training

imperfections in the capital market

problems of lack of investment

problems of cyclical nature of investment

the problem of de-industrialisation

UK experience of lack of investment and de-industrialisation

Gross fixed capital formation as apercentage of GDP: 1960–2001

Gross fixed capital formation as apercentage of GDP: 1960–2001

UK balance of trade in manufactures:selected years: 1978–2001

UK balance of trade in manufactures:selected years: 1978–2001

Industrial and manufacturing production in the UKand the OECD: selected years, 1970–2000

Industrial and manufacturing production in the UKand the OECD: selected years, 1970–2000

The forms of intervention

nationalisation

grants

rationalisation

advice and persuasion

information

direct provision

The forms of intervention

nationalisation

grants

rationalisation

advice and persuasion

information

direct provision


Planning types of planning European experience of planning

Selective intervention research and development industrial reorganisation assistance to small firms training




Funding Welfare to Work (£ millions)Funding Welfare to Work (£ millions)



The case against intervention



The case against intervention


Regional and Urban Policy

Regional and Urban Policy


REGIONAL AND URBAN POLICYREGIONAL AND URBAN POLICY

Causes of regional imbalance

changing geographical patterns of demand and supply

market responses to imbalance

regional multiplier effects

Causes of urban decay

changing patterns of demand and supply

local multiplier effects

Causes of regional imbalance

changing geographical patterns of demand and supply

market responses to imbalance

regional multiplier effects

Causes of urban decay

changing patterns of demand and supply

local multiplier effects

Regional (claimant) unemployment rates (%):Regional (claimant) unemployment rates (%):

Region Unemployment (%)

Jan 1979 Jan 1987 Jan 1990 Jan 1993 Jan 1996 Jan 1999 Jan 2002

UK (average)

South East

Eastern

South West

East Midlands

London

West Midlands

North West

Wales

Yorks & Humber

Scotland

Northern Ireland

North East

4.1

4.1

3.4

2.8

3.9

–

5.5

4.1

5.7

7.8

10.8

6.8

8.1

8.8

9.7

8.9

12.4

11.5

13.1

12.1

13.8

16.9

16.2

5.6

2.6

3.1

3.8

4.9

4.7

5.7

6.1

6.6

6.6

8.4

13.0

9.7

10.5

9.0

9.7

9.8

10.0

11.6

11.1

9.8

10.4

10.5

9.9

14.0

12.8

7.7

5.5

6.4

6.5

7.0

9.1

7.6

7.0

8.3

8.3

7.8

11.2

11.1

4.6

2.5

3.2

3.3

4.0

5.2

4.7

4.2

5.4

5.6

5.5

7.3

7.4

3.2

1.6

2.1

2.1

3.1

3.5

3.6

3.7

3.8

3.9

4.2

4.9

5.4

Region Unemployment (%)

Jan 1979 Jan 1987 Jan 1990 Jan 1993 Jan 1996 Jan 1999 Jan 2002

UK (average)

South East

Eastern

South West

East Midlands

London

West Midlands

North West

Wales

Yorks & Humber

Scotland

Northern Ireland

North East

4.1

4.1

3.4

2.8

3.9

–

5.5

4.1

5.7

7.8

10.8

6.8

8.1

8.8

9.7

8.9

12.4

11.5

13.1

12.1

13.8

16.9

16.2

5.6

2.6

3.1

3.8

4.9

4.7

5.7

6.1

6.6

6.6

8.4

13.0

9.7

10.5

9.0

9.7

9.8

10.0

11.6

11.1

9.8

10.4

10.5

9.9

14.0

12.8

7.7

5.5

6.4

6.5

7.0

9.1

7.6

7.0

8.3

8.3

7.8

11.2

11.1

4.6

2.5

3.2

3.3

4.0

5.2

4.7

4.2

5.4

5.6

5.5

7.3

7.4

3.2

1.6

2.1

2.1

3.1

3.5

3.6

3.7

3.8

3.9

4.2

4.9

5.4

Regional (claimant) unemployment rates (%):Regional (claimant) unemployment rates (%):


Radical-right policies local wage agreements

control of local authority taxes

reducing unemployment benefits

Interventionist policies subsidies and tax concessions

provision of facilities

restrictions on expansion of firms in prosperous regions

Radical-right policies local wage agreements

control of local authority taxes

reducing unemployment benefits

Interventionist policies subsidies and tax concessions

provision of facilities

restrictions on expansion of firms in prosperous regions


Regional policy in the UK assisted areas

regional selective assistance

regional enterprise grants

Regional Development Agencies

EU regional policy





EU regional policy

Distribution of structural funds between objectivesDistribution of structural funds between objectives






EU regional policy

Government attitudes towards regional policy





EU regional policy







EU regional policy


Effectiveness of regional policy





EU regional policy


Effectiveness of regional policy


Urban policy in the UK Single Regeneration Budget

New Deal for Communities

English Partnerships

other schemes




other schemes

Government expenditure on regeneration policyin England (£ millions)

Government expenditure on regeneration policyin England (£ millions)





other schemes

training initiatives




other schemes






other schemes


The effectiveness of UK urban policy




other schemes


The effectiveness of UK urban policy





other schemes


The effectiveness of UK urban policy limited financial help




other schemes







other schemes



many jobs ‘created’ are not new jobs




other schemes



many jobs ‘created’ are not new jobs

15. longterm economic growth & supplyside policies

Education

Transcript of 15. longterm economic growth & supplyside policies