Mar 8, 2019
Welcome to Finance and Fury, the Furious Friday edition.
We are continuing the series on supply-side economics. Today we will focus on the down-side of supply-side economics. Remember, supply-side economics believes that governments should remove barriers to production.
How is this done?
- Lowering taxation and decreasing regulation
- The aims of the policies?
- What are the 4 major downsides?
Income Inequality:
- Those that supply more also accumulate more wealth
- Results in a disproportionate amount of the tax savings going to those on the highest incomes
- More wealthy people is a good thing
- More supply means lower inflation and cheaper goods
- The billionaires of Australia own companies that supply jobs, they don’t sit on piles of cash
- Countries with more billionaires have lower rates of poverty
- We are very well off despite what you might think
Deregulation will Destroy the Environment and Public Safety
- Experts do agree, lower regulation leads to increases in profits and increased GDP
- Deregulating coal mining will lead to more destruction of the environment? Really? Cheaper and cleaner power isn’t appealing to you?
- It's about opening the door to new ideas and new creation of those ideas
- Using the private sector to achieve the creation of new ideas, the government never innovates, just adopt it
- Deregulation can lead to more competition within free markets for better ideas to replace old ideas
- Who have higher safety rules? The government or companies internally?
- Deregulation from the US about the railroad industry
- There will be mistakes in deregulation, but compare that to mistakes in increased regulation
These first two strawman arguments highlight misconceptions, the next two arguments are real potential downsides
Budget Deficits
- This comes from a reduction in tax revenue but maintained levels of spending
- Lowering the tax rate increases wealth, so the pie to take taxes from is larger
- Critics say under president Reagan, there were decreased tax revenues. However, there was a recession just before this.
- Demand side economics increases deficits
Volatile Economy
- Deregulation can make the economy more volatile
- Like investments, volatility is your friend
- The slow down in GDP growth is from the increased size of government, spending, debts, regulation increase, and increased taxes or introducing new taxes
- When you look at a lassie-faire economy, it can be more volatile than a centrally planned one
- When you look at the regulation of the taxi industry, it created an industry that needed protection from Uber. Because the regulation of taxies was inefficient.
- Recessions occur when there are 2 or more consecutive quarters of negative gross domestic product growth. We are in a per capita recession as of this week.
- Creative destruction – innovation is destructive
- No government bailouts – recessions can be a forest fire, and bailouts incentivise moral hazardous behaviour
- Deregulations and lending guarantees leads to the banks taking on additional risks if it is backed by the governments
- No government stimulus, if there was a stimulus from the government – where did it come from? Do people actually spend it? Australia had a slow rebound from the GFC
- Industries that require protection from the government lead to inefficient workforces. Look at the prior example of railroads and inefficient rail tracks.
- Flying industries, the airline deregulation act of 1978 eased controls on fares
- We will run through the policies of Thatcher in a few weeks. Lead to a massive loss of jobs in manufacturing.
- Creative destruction does happen – this is what the government should focus on
In Summary:
- We have explored the 4 criticisms of supply-side economics
- It leads to inequality, deregulation causing a destruction of the environment and worker safety, deficits and recessions
Next episode: We will look more into recessions and some real-world examples of recessions. And we will break down supply side theory and a demand side theory for dealing with recessions.
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