New Monetarist Economics - Term Paper Example

Case Study: Holden Name: Lecturer: Course: Date: Table of Contents Table of Contents 2 Introduction 3 Main issue presented in the media report 3 Key stakeholders impacted by the issue 4 Relevant economic theories 5 Keynesianism 5 Relevance to the case of Holden 6 Monetarist theory 7 Relevance to the case of Holden 7  Relevant issues and recommendations 8 Conclusion 9 References 10 Introduction GM Holden has suffered from the increased production costs and the impacts of the high Australian dollar. This has caused the company to threaten shutting down its Australian car manufacturing plants unless the government commits to grant the company financial assistance beyond 2015. This report discusses issues affecting the company and the possible impacts of financial assistance by the government. Also examined include the key stakeholders affected by the issue. The report further discusses Keynesian theory and Monetarist theory and how they are reflected in the issue. Lastly, alternate actions are discussed with reference to the government’s decision to offer financial assistance. Main issue presented in the media report The key issue is that GM Holden has suffered from the increased production cost and the high Australian dollar. This has caused the company to threaten shutting down its Australian car manufacturing plants unless the government commits to grant the company financial assistance beyond 2015 (Johnston & Drill 2012). Fortunately, the company can continue manufacturing cars in for the next 10 years after it secured a subsidy package from the South Australian government, the federal government, GM Holden and the Victorian government of an excess of $200 million. In the initial assistance deals, car manufacturers have been forced to commit some $3 for each $1 of assistance by taxpayers. To the government, the financial assistance is necessary as it enables the country to have a car industry which promotes employment and high technology skills, both of which are essential for economic prosperity (Coorey & Hagon 2012). Without the financial assistance, various implications were bound to happen. The company was going to shut down some of its car manufacturing facilities. Alternatively, the company would have laid off its workers to reduce production cost, resulting to Wanton loss of jobs. The company has employed an estimated 200,000 workers who are recruited directly by GM Holden across Australia. Hence, thousands of jobs will be saved for the next decade. Consequently, car manufacturing would have both direct and indirect contribution to increased employment, increased investments, increased innovation and increase national output. Key stakeholders impacted by the issue Financial assistance to GM Holden by the South Australian government, the federal government, GM Holden itself and the Victorian government of $1 billion has several impacts on different stakeholders. The key stakeholders affected include tax payers, the government, car buyers, GM Holden investors and GM Holden employees. To GM Holden investor, since the Australian government opts to increase supply of money, people would be willing to spend the excess money they hold causing increased expenditure and subsequent purchase of the cars. This would result in high sale of the Holden cars, which would in turn enrich the investors. On the other hand, if the government increases its spending through the subsidy while other components of spending are constant, then there will be an increase in national output. To the employees, there will be increased employment opportunities and sustained wages. However, wages or prices do not respond fast to changes in supply and demand therefore resulting in periodic surpluses or shortages in labour. In this case, wages of workers at Holden manufacturing plants will not respond fast to supply and demand causing periodic surpluses or shortages in labour. To the taxpayers and car buyers, it is likely that the Australian government will increase supply of money in the economy through increased financial assistance to GM Holden. Hence, there will be excess money in the economy. Individuals would not just hold the excess money balances, that is, if they were in equilibrium before the increases. Therefore, the excess money balances would be spent on buying Holden cars causing the aggregate demand of the cars to increase. This would also result in high sale of the Holden cars, which enriches the investors. Towards this end, it is likely that GM Holden investors will be impacted most as the likely beneficiary. Relevant economic theories Keynesianism Keynesianism is an economic theory that advocates for government fiscal and monetary initiatives that are meant to fuel business activity as well as increase employment. The theory believes that that the aggregate demand is a consequence of a range of economics decisions that sometimes behave unpredictably (Blinder 2001). Public decisions in this regard involve those on fiscal and monetary policy such as taxation and spending. It may also be described as an economic theory of total expenditure and its impacts on inflation and output to the economy. It is generally a “demand-side theory” whose focus is on changes in economy in the short-run. In this case, according to the theory, shifts in aggregate demand whether expected or unexpected had their highest short-run effect on employment of real output rather than on prices. Proponents of the theory believe that what is real in the short-run is not necessarily the same with what happens in the long-run, hence people live in the short-run (Davidson 1991). Relevance to the case of Holden As reflected in the case study of Holden, the government’s monetary policy can generate real impacts on employment and output if wages of workers at the company are rigid. In this case, Keynesian theory attempts to explain rigid wages or prices. This idea is showed in the Philips curves that reflect on rising inflation rather slowly whenever there is a fall in unemployment. Figure 1: Philips Curve (Anon n.d.) For instance, if wages of the workers in dollar do not adjust instantaneously, injecting new money through government could affect change in wage rate by a similar percentage. Additionally, Keynesian theory hypothesises that since processes are to some extent inflexible, fluctuations in any form of spending such as government investment in Holden or increased sale of Holden cars will cause output of the cars to fluctuate (Drakopoulos 1992). Consequently, if the government increases its spending while other components of spending are constant, then there will be an increase in output of the cars. Indeed, it is based on this premise that the Australian government appears to have decided to assist the company financially. Monetarist theory Monetarism or monetarist theory places emphasis on the function of the government in controlling the amount of money that is in circulation. Basing on this theory, the perspective is that changes in money supply will influence national output in the short-run as well as the level of price over the long periods. The theory contends that variations in the supply of money are vital determinants of economic growth rate as well as the behaviour of the business cycle (Williamson & Wright 2010). Relevance to the case of Holden In the case, the theory explains why the high Australian dollar has led to imminent closure of GM Holden and wanton loss of jobs. In any case, it can still be reflected that excessive increase in money supply through government investment in Holden can cause inflation. Hence, the Australian government should place emphasis on maintaining price stability (Drakopoulos 1992). Therefore, where the Australian government increases supply of money in the economy, individuals would not just hold the excess money balances, that is, if they were in equilibrium before the increases. This is since people were already holding money balances to satisfy their requirements and hence after the increase, they would have some balances surplus to their requirements. Therefore, the excess money balances would be spent causing the aggregate demand of the Holden cars to increase. Similarly, if the Australian government opted to reduce supply of money, people would be reluctant to spend the money they hold causing reduced expenditure. This would result in low sale of the Holden cars.  Relevant issues and recommendations Several other issues can be inferred from the case study of GM Holden. These include likely loss of jobs and Australia’s manufacturing capability, reduced economic productivity, high business costs and costs of production and reduced competiveness of the Australian car manufacturing industry. Several recommendations are suggested to confront these challenges that face many aspects of Australian car manufacturing industry and the possible loss of jobs and manufacturing capabilities. First, there should be an increase private and public investment in GM Holden to increase the company’s finances. This could help in meeting the existing market pressures by reducing loss of jobs and technology skills of the industry. In addition to encouraging investments, the government should have placed emphasis on reducing the cost of doing business in Australia, through reducing costs of transport, energy, regulation, taxation and broadband targeted at the car manufacturing industry. This could serve to reduce the production cost incurred by GM Holden in manufacturing cars in Australia. Conclusion The key issue is that increased production cost and high Australian dollar has threatened GM Holden’s existence in Australia. The company has however secured a subsidy package worth $200 million to continue operating. If the government increases its spending through the subsidy while other components of spending are constant, then there will be an increase manufacturing of the cars and subsequent increase in national output. This can be explained by Keynesian theory as the subsidy will have real impacts on employment and output. Monetarist theory contends that variations in the supply of money are vital determinants of economic growth rate as well as the behaviour of the business cycle. In the case, the theory explains why the high Australian dollar has led to imminent closure of GM Holden and wanton loss of jobs. References Anon n.d. A Short Note on Inflation, Unemployment and Philips Curve, viewed 26 Dec 2013, http://www2.econ.iastate.edu/classes/econ102/bishnu/short_note.pdf Blinder, A 2001, Keynesian Economics, viewed 26 Dec 2013, http://mysite.avemaria.edu/gmartinez/courses/econ201/pdf/keynes_newclassical.pdf Coorey, P & Hagon, T 2012, Holden secures $200m subsidy, viewed 26 Dec 2013, www.smh.com.au/opinion/political-news/holden-secures-200m-subsidy-20120321-1vko6.html Davidson, P 1991, "Is Probability Theory Relevant for Uncertainty: A Post Keynesian Perspective," Journal of Economic Perspective, Vol. 5 No, 1, pp.129-143 Drakopoulos, S 1992, "Keynes' Economic thought and the Theory of Consumer Behaviour," Scottic Journal of Political Economy, Vol. 39 No. 3, pp.1-15 Johnston, M & Drill S 2012, $275m deal keeps Holden in Australia, Herald Sun, viewed 26 Dec 2013, www.heraldsun.com.au/business/m-deal-keeps-holden-in-australia/story-fn7j19iv-1226306999030 Williamson, S & Wright, R 2010, New Monetarist Economics: Methods, viewed 26 Dec 2013, http://research.stlouisfed.org/publications/review/10/07/Williamson.pdf Read More