What are the challenges faced when adopting supply side policies?

A student posed me this question on my live chat, and what follows is a slightly more elaborated response for the purpose of sharing here.

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Quite briefly, there are 2 main approaches to expanding productive capacity, with each having corresponding challenges:

1. Increase the quantity of resources

Aka increasing the long-run aggregate supply:

1. Increase labour
   • May result in strain on infrastructure such as hospitals, roads, access to food etc.
   • Frequently linked to destabilising social fabrics.
2. Increase capital
   • Takes time to accumulate capital stock.
   • Diverts resources from producing consumer goods and possibly reduces consumers’ welfare in the short-run.
3. Increase land
   • Part of natural endowment that may not be easy to increase or utilise further.
4. Increase entrepreneurship
   • Strongly dependent on the business and even cultural environment, and may not be easily improved organically.
5. Improve the utilisation rate of existing factors of production (pseudo-resource increase)
   • Often linked to structural deficits which need to be solved first, e.g. poor transport or education.
   • Can lead to over-exploitation of resources.

2. Improve the quality of resources

Aka improving the short-run aggregate supply:

1. Improve production techniques
   • Organic improvements from R&D can get very expensive and risky, and may not be viable even, for less well-off countries
   • Takes significant amount of time to develop
   • Can result in unintended consequences (e.g. structural unemployment due to automation)
2. Make better factors of production
   • Can result in higher costs of production which may offset higher efficiency in production
   • Also often requires time and money to develop

Other challenges in adopting supply-side policies.

1. Political challenges
   • Implementing supply-side policies can be difficult due to impacts to various interest that may get affected with these changes.
2. Demand-limited impact
   • Depending on the size of the employment state of the economy, it is possible for supply-side policies to have reduced contributions to economic growth:
3. Unequal distribution of benefits
   • Incoming investments frequently benefits the immediate location or industry directly, and not economy-wide.
   • More generally, improvements to resources often find greater benefits with those already in position to take advantage of.

Summary

The above response was a touch-and-go explanation that does little justice to the details and nuances that should accompany a proper discourse.

Nonetheless it should be clear that supply-side policies are a broad class of policies that can be usefully dissected for analysis as I have done earlier, to suss out policy-specific difficulties.

Equally as important, the overarching theme in regards to the difficulties in executing supply-side policies most commonly have to with:

1. Time
2. Cost (Explicit, implicit or unintended)

If further elaboration of any of these points are needed, feel free to ask me in the comments below.