A Level Economics Essay 22: Phillips Curve

Evaluate the policies that a government could use to shift the long run Phillips curve to the left.

To shift the long-run Phillips curve to the left, which implies achieving lower inflation rates without increasing unemployment, governments can employ various policies. Here are some policy options and their evaluation:

1. Monetary Policy:

   • Tightening Monetary Policy: The government can raise interest rates or reduce the money supply to control inflation. This policy aims to reduce aggregate demand, which can lead to lower inflation rates in the long run. However, it may also have a temporary negative impact on economic growth and employment.

2. Fiscal Policy:

   • Reducing Government Spending: A government can decrease its spending to reduce aggregate demand and put downward pressure on prices. This policy may help in controlling inflation in the long run, but it can also have potential adverse effects on economic activity and employment in the short term.
   • Increasing Taxes: Raising taxes can reduce disposable income and dampen consumer spending, thereby decreasing aggregate demand and inflationary pressures. However, it may have implications for consumer and business sentiment, potentially affecting investment and economic growth.

3. Supply-Side Policies:

   • Structural Reforms: Governments can implement structural reforms to enhance productivity, increase competition, and improve the efficiency of markets. Such reforms can lead to lower costs of production and enhance the economy's potential output, which can help reduce inflationary pressures in the long run.
   • Labor Market Reforms: Policies that aim to increase labor market flexibility and reduce rigidities can improve productivity and promote price stability. For example, reforming employment regulations and facilitating job transitions can help to align wages with productivity levels and reduce the influence of wage inflation.

4. Income and Wage Policies:

   • Wage Restraint: Governments can work with trade unions and employers to promote wage moderation. This approach involves encouraging wage growth to be in line with productivity growth, which can help control labor costs and mitigate inflationary pressures.
   • Income Policies: Governments can implement income policies that address income distribution issues without significantly impacting overall inflation. This can involve targeted social welfare programs or measures to increase income mobility.

Evaluation:

• Effectiveness: The effectiveness of these policies may vary depending on the specific circumstances of an economy. Some policies may have a more immediate impact, while others may require longer-term implementation to yield results.
• Trade-offs: Shifting the long-run Phillips curve to the left often involves trade-offs between inflation and other macroeconomic goals. For example, tighter monetary or fiscal policies may lead to short-term economic slowdown or higher unemployment rates.
• Policy Coordination: It is essential for policies to be coordinated and complementary. Monetary, fiscal, and supply-side policies should work together to achieve desired outcomes and avoid conflicting objectives.
• External Factors: The success of policies may also depend on external factors such as global economic conditions, exchange rates, and international trade. These factors can influence the effectiveness of domestic policies in controlling inflation.

Overall, shifting the long-run Phillips curve to the left requires a combination of appropriate monetary, fiscal, supply-side, and income policies. Governments need to carefully evaluate the potential impact of these policies, considering their effectiveness, trade-offs, coordination, and external factors, to achieve sustainable and stable inflation rates without sacrificing other macroeconomic objectives.

"I Understand" - The Best Phrase for Long Term Relations

 

General Electric’s accounting tactics bared in SEC settlement

 Industrial powerhouse underlines risk of short-term, market-orientated approach to management writes Sujeet Indap in The FT 

In 2015, Larry Fink, the BlackRock founder and chief executive, released a public letter pressing fellow CEOs to eschew making business decisions based on short-term considerations. 

“It is critical, however, to understand that corporate leaders’ duty of care and loyalty is not to every investor or trader who owns their company’s shares at any moment in time but to the company and its long-term owners,” he wrote. 

One company that BlackRock was a major shareholder at the time was General Electric with a stake of nearly 6 per cent. Around then, Jeffrey Immelt, the chief executive of GE, appears to have been overseeing just the kind of instant market gratification management effort that Mr Fink was condemning. 

The industrial group “misled investors” and “violated antifraud, reporting [and] disclosure controls”, according to a recent US Securities and Exchange Commission order. In early December, GE agreed with the regulator to pay $200m to settle charges that it had misled investors about its financial condition in between 2015 and 2017.  

In statement, the company noted that no financial statements required correction and that it had neither admitted nor denied guilt as a part of the SEC settlement. 

Five years after Mr Fink’s letter, there has been a continued rise in “stakeholder capitalism” and investing for better environmental, social and corporate governance standards. But this coda to the GE saga of the 2010s is an ugly reminder of the world these new principles are attempting to replace. 

The SEC’s order alleged GE pulled forward future profits and cash flow and, separately, delayed reporting big losses in order to boost immediate results. Damningly, the SEC described how Wall Street pressure and undue attention to the company’s stock price appeared to drive the company’s actions. 

In 2015, GE announced that its once high-flying but controversial GE Capital unit would shrink by $200bn worth of assets. While highly profitable at times, the banklike entity was volatile and its heavy losses during the 2008 financial crisis had nearly sunk the entire company.  

Mr Immelt wanted to reposition GE as an industrial powerhouse with aviation, healthcare, energy and oil and gas units that were supposed to help the developing world become urbanised. In late 2015, the group would close its $15bn acquisition of France’s Alstom to boost its power plant business. 

The power division, according to the SEC, would become the home of accounting mischief. Maintenance contracts with customers that ran several years required estimates of costs and the reduction of such inputs allowed GE to boost its book profits. Separate alleged manoeuvres included selling receivables to GE Capital, allowing for commensurate gains in cash flow. 

The company had announced in 2015 that it would seek to hit $2 per share of earnings in 2018. It appears that precise and ambitious figure effectively became the central organising principle of the company. 

“GE was aware of investor and analyst concerns that its cash collections were not keeping pace with revenue and that its unbilled revenue was growing in its industrial business,” wrote the SEC. 

It said executives at GE Power and GE Power Services cited analyst reports when they discussed internally the need to show improved cash performance. In one 2016 presentation to GE senior management, the SEC said, one executive posited that GE’s stock price could reach $40 if operating cash flow performance improved. It averaged about $30 during that year.

At the same time, the pieces of GE Capital the parent company had retained would prove to be another time bomb. GE kept an interest in long-term healthcare insurance policies that had been sold decades earlier. Those policies proved to be more expensive than had been anticipated, a reality that became clear in 2015. 

In 2016, as it became evident that higher losses were going to need to be realised, one executive called the situation in the insurance business a “train wreck”. 

It seems GE only came clean with investors about its accounting practices in the power division in 2017 while also eventually taking a $22bn impairment to goodwill related to the Alstom buyout. 

And it finally took a $9.5bn charge related to insurance liabilities in 2018 and committed to plug another $15bn of capital into shoring up the GE financial services unit. 

A spokesperson for Mr Immelt said GE sought to comply with all standards for financial accounting. “To achieve this goal, it put in place strong processes with multiple checks and balances,” the spokesperson added. 

BlackRock continues to hold a stake of about 6 per cent in GE shares, which currently hover around $10. A recovery to the peak of nearly $33 seen in 2016 will undoubtedly require a very long-term orientation.