2004GIR Government-Business Relations

Lecture 4: Economic Policy

Economic Policy:
The economic policy of governments covers the systems for setting levels of
taxation, government budgets, the money supply and interest rates as well as the
labour market, national ownership, and many other areas of government
interventions into the economy.

What are the aims of Economic Policy?

- High employment
- Rising incomes
- Stable prices
- Profitable investment opportunities
- Stable monetary environment
- Growing trade

What are the elements of Economic Policy and Key Tools

Fiscal (budgetary) Policy:
- Provision of goods and services
- Transfer Payments
- Taxes and Chargers
Monetary Policy:
- Interest Rates
- Credit
Industry Policy
Labour Market Policy
Trade Policy
- Tariffs and quotas
- Agreements
- Currency arrangements

Laissez-Faire
- Early industrialization characterized by commitment to limited government
intervention although often forced to enact laws by political & social pressure.
- Opposes government intervention in economic issues (mostly)
- Open business competition (including international competition) is good for all
- Leads to optimal efficiency in capitalist markets
- From Laissez-faire to New DealLaissez-faire: government should leave
economy to manage itself1930s The Great Depression – continuing high
unemployment and stagnant output; economy did not self-
correctGovernments intervene (both fascist and liberal)Work programs,
welfare, big construction projects

Booms & busts regarded as inevitable

1930s – Global Economic Crisis

- Price deflation (flowing instance of hyperinflation)
- Very high unemployment
- Collapse of international trade, protectionism; (practice of shielding a country's
domestic industries from foreign competition by taxing imports.)
- Political fallout and beginning of welfare

Impact of Depression and War

Circumstances were right for new economic policy paradigm
- Mass devastation
- Redeployment of returning service personnel
- Large numbers of displaced persons (Individuals leaving home due to war)
- Economic transformation from war economy
- Search for political stability, lessons of post WW1

Keynesianism
Keynes ‘General Theory” tuned traditional economic thinking on it head.
Key Points:
- Economy is not self-adjusting
- Economic actors are not ‘rational utility maximisers’
- Recession not caused by high wages but rather by reduction in aggregated
demand
- Government can be intervened to counter economic cycles.
- Governments can and should direct economic development.
- Private sector decisions lead to economic problems that require fixing by
public sector eg. bailouts
- Government provides public spending and rate manipulation to stimulate the
economy, including government owned enterprises eg electricity, water

Policy for the ‘Long Boom”

‘Active’ Government:
- Built on pre-war welfare initiatives
- Nation (re) building
- Active countercyclical fiscal policy
- Structured system for global trade (including protectionism)
Outcomes:
- Sustained full employment, rising wages
- High growth
- Expansion of Global Trade

1970s Stagflation
- Rising unemployment and inflation
- Oil shocks
- Tax ‘revolt’
- Political unrest

Monetarism and Neo-Liberalism

Monetarism (Supply side Economics):
- Uncontrolled growth in money supply caused by government spending leads
to inflation.
- Solution is to control money supply through reduced spending and higher
interest rates.
Neo-Liberalism:
- Expanded critique of government intervention to incorporate
- Reducing taxation
- Repudiation of orderly markets, emphasis on deregulation (domestic and
international)
- Embrace the ‘trickle-down’ theory of wealth sharing
- Support for free trade (globalisation)
- Deregulation of business and finance
- Free market will allocate resources efficiency if the government doesn’t
interfere.

Globalisation
The process by which businesses or other organizations develop international
influence or start operating on an international scale.

What’s different?
- Scale
- Complexity
- Goods
- Services
- Scope
Scope
Economy:
Trade, capital, markets, world-wide sourcing of RM, global supply chains
Communications & media:
News, social media, influence
Society:
Sport, language, culture
Law:
International organisations and agreements (WTO, NAFTA) conventions, values

Overall Impact

Positive aspects for big business Negative aspects for government,

society and local business
- More funds available from global
capital markets
- Business able to relocate to avoid
regulatory controls over rates,
taxes and quotas
- Greater cross-border economic
activity makes it hard for
governments to control events
- Rise in size and power of MNCs
- Exploitation of workforces in
developing countries;
deindustrialisation in developed
countries
- Environmental degradation

- Outsourcing opportunities - Avoidance of taxes and other

regulations

- Government choices in many

policy areas restricted
Risks: Global Financial Crisis
Immediate cause: sub-prime housing crisis in US:
- Practice of risky loans; many defaults
- Housing price crash
Underlying conditions:
- Neo-liberal deregulation policies
- Globalisation forces
- Technological capacities
Global consequences:
- Bank failures (400+ in US; also Iceland, UK, Scotland, Ireland,
Belgium, Switzerland, Germany, etc)
- Business closures and unemployment
- Budget crises & austerity (esp Greece, Spain, Italy)

New Challenges: Tech change and the Gig Economy

Digital platforms: Uber | Airbnb | Task Rabbit
Pros:
- Flexible employment
- Multiple parallel employments
- Individual control
- Exit from dull ‘9-5’ work form
- Innovation potential
Cons:
- Casualisation, ‘precarious’ (insecure) employment
- Juggling multiple employments
- Lower wages, minimal/no benefits, no rep
- Displacement of established sectoral employment
- Poor regulation

Inequality

New Paradigms?
Inequality and populism
Populist economic ideas
 - Pull out of FTA, impose tariffs
- Deregulation and tax cuts
- Targeting individual firms and industries
- Limiting movement of labour

Summary
- Ideas have been important in determining economic and social policy
- Keynesianism supported the development of welfare and active economic
intervention but couldn’t be sustained in the very long run
- Neo-liberalism and globalization justified commitments to reduced
government spending and small government but fostered economic inequality
and political instability in rich economies
- We may be in a time of paradigm transition