Michael McMahon's picture
Affiliation: 
University of Oxford
Credentials: 
Professor of Economics

Voting history

Covid-19: Economic Policy Response

Question 3: Which would be the maximal public debt you would be willing to tolerate if used effectively (as in your answers to 1 and 2 above) to support an economic recovery?

Answer:
>140% of GDP
Confidence level:
Confident
Comment:
This is a whatever it takes moment and the first use of fiscal funds has to be on supporting the health sector. The recession is desirable from a public health perspective. But then the options listed above are needed for the economic support during the epidemic crisis and subsequent support for the recovery. It will be very costly but it is necessary.

Question 2: Which of the following would have the second greatest impact in mitigating the economic effects of the coronavirus economic crisis in the UK?

Answer:
Broad cash transfers and/or tax cuts
Confidence level:
Very confident
Comment:
My answer is first support for business and then (but almost equally important) the support for households through direct transfers. Tax cuts do not help households in the traditional sense since they will mostly benefit those earning and miss those who lose their job and the multiplier will be small if people cannot spend as usual.

Question 1: Which of the following would have the greatest impact in mitigating the economic effects of the coronavirus economic crisis?

Answer:
Government transfers to and bailouts of businesses
Confidence level:
Very confident
Comment:
I think the first key to the economic recovery will be having businesses in place to re-hire staff and resume some sort of normal business and especially service provision. It would be possible to make these conditional on businesses maintaining employment levels or paying staff somewhat while the economy is frozen during the isolation periods. I think that the uncertainty as to how long such isolation will last makes the provision of even favourable credit too much of a future burden for small firms to maintain employment if they face (nearly) complete shut down such as bars, hotels, and restaurants. And credit doesn't help the self-employed and people in the gig economy much either for similar reasons. These people also need to be able to continue to provide food and pay rent/mortgage while their earning opportunities are low or zero. As such, direct transfers to businesses are necessary.

Labour Markets and Monetary Policy

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Question 2: Do you agree that, in a period of great uncertainty and after a prolonged period of weak real wage growth, monetary policy makers can afford to wait for greater certainty about real wage developments and building inflationary pressure before raising interest rates?

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Answer:
Strongly Agree
Confidence level:
Confident
Comment:
I am normally quite hawkish in taking steps against inflation. However, I believe that today there are reasons for waiting. First, the labour market data has, in recent years, suggested building inflationary pressures that turned out to be false dawns. Second, there remains huge economic uncertainty going forward in the UK. Finally, given the erosion of real wages in the aftermath of the financial crisis (still 5% below 2008 levels in recently-released data) and the fact that real wages have not grown for 2 years (April 2018 ONS release), I believe that the costs of falling behind the curve are not huge.

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Question 1: Do you agree that a strong labour market is a good indicator of building inflationary pressure?

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Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
I see merit in the arguments for why the Philips curve is hiding. With that in mind, at a time of a weakened relationship, then the extent of the pass through from labour market strength to future inflation will be reduced and with it the quality of indicator that labour market variables play in forecasting inflation.

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