Interventionist Supply Side Policies

Supply side policies are policies aimed at increasing the production capabilities of the economy and therefore lead to long term economic growth of the economy. In the above diagrams, we see this as a shift rightwards in the LRAS or AS and an increase in the potential output from Yfe1 to Yfe2. Similarly, we can show this through an shift outwards in the potential output from PPC1 to PPC2.

Interventionist Supply Side policies are policies whereby the government intervenes in the macroeconomy in order to increase the potential output. This may be through direct investments or policies to grow a particular industry.

Economists in favour of Interventionist supply side policies argue that these policies can help achieve the macroeconomic objectives as well as promoting more equity within a society.

Forms of Interventionist Supply Side Policies

Investing in Education and Training

Governments can spend on improving access to better quality education and training. By increasing the expenditure on merit goods such as schools, governments can improve the quality of human capital, leading to an increase in the long run aggregate supply and potential output. Similarly, governments can support firms with training and education programs in order to improve the overall levels of education and training. For example, the UK government will financially support firms to offer apprenticeships (a form of on the job training with some form of studying for people to learn skills and trade professions) to encourage firms to train and provide individuals with skills

Investment in the quality and access to healthcare.

Similar to investment in education and training, governments investing in the provision and quality of healthcare, can lead to higher levels of productivity and therefore increase the potential output of the economy. Improving the overall quality of healthcare can also extend individuals working capabilities, allowing for more people to be part of the labour force for longer and therefore increase the potential output of the economy.

Investment in Technology and Infrastructure

Similar to investing in human capital, governments can invest into physical capital such as technology and infrastructure. By increasing their spending on this, governments can improve connectivity and productivity within the economy and therefore improve the potential output of the economy. For example, governments investing in better road networks or railroads may improve mobility of goods or people, increasing the potential output of the economy.

Industrial Policies

Industrial policies are when the government targets growth in a particular industry through a number of policies such as subsidies, tax breaks or tax allowances, in order to grow that particular industry. This may be to encourage growth in an infant industry or to encourage small medium enterprise to grow. This in turn may increase employment in the economy as well as economic output from the growing industry, therefore increasing the LRAS. These policies may also be used to protect domestic industries from larger more efficient foreign firms and therefore protect employment and economic output.

Research and Development

Governments can fund or subsidise research and development by firms or other institutions such as universities. This funding can improve the overall levels of R&D, thus improving efficiencies and the overall levels of productivity by researching new technologies etc. Governments may wish to encourage R&D into a particular area, such as healthcare, that may have a knock on effect to the levels of human capital in the long run, therefore increasing the LRAS.

Evaluating Interventionist Policies

Strengths of Interventionist Policies

These interventionist policies tend to be more equitable compared to market based policies and can improve equity in the distribution of income due to the provision of goods and services such as education usually at lower prices or for free (non excludable).
Governments can target direct sectors with specific policies, such as tax breaks. This can be useful for protecting industries governments deem strategically important for the economy in terms of economic or political importance. As well as this, as we have previously read, the free market fails to provide certain goods due to the free rider problem, therefore government investment can increase external benefits from the provision of these merit goods.

Limitations of Interventionist Policies

Large amounts of government spending may add to governments budget deficits and therefore increase the overall levels of national debt.
Time lags. Increasing spending on infrastructure may take years to finish and therefore may take many years in order for the increase productivity and output to be felt.
Usually requires political consensus in order to enact a policy. For example, a high speed rail project in the UK (HS2) has been planned since 2009 and would increase connectivity between UK cities. However, due to a number of problems such as rising costs and poor planning, some politicians are against the project and this may cause further delays if governments can´t pass legislation etc.
Political Nepotism may limit the effectiveness of industrial policies if the policies are used to favour individuals instead of economic objectives.

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