Michael Wickens's picture
Affiliation: 
Cardiff Business School & University of York
Credentials: 
Professor of economics

Voting history

Surging Inflation in the UK

Question 2: Will the inflation surge of 2021 prove persistent?

Answer:
Yes
Confidence level:
Confident
Comment:
Yes because they will continue to be accommodated by monetary policy. Monetary policy should instead just accommodate the first round effects.

Question 1: Which of the following factors is the primary reason for the rise in inflation in 2021?

Answer:
Supply constraints
Confidence level:
Very confident
Comment:
Clearly there have been price rises due to supply effects. (The main point of zero emissions policy is to deter carbon energy use by reducing its supply resulting in it being more expensive.) But whether such price rises on their own should be referred to as inflation is debatable. I would describe inflation as the persistence of price rises due to second and third round effects such as wage increases in an attempt to maintain real incomes and subsequent price rises due to higher labour costs. In theory shocks to the economy such as supply shocks will result in different relative prices (including real wages) in the new equilibrium but not inflation (a persistent rise in prices) unless accommodated by monetary policy. There may be short-lived dynamics of adjustment to the new equilibrium which could be interpreted as temporary inflation. The policy issue is to allow these price changes but to avoid them being persistent.

Towards a High-Wage, High-Productivity Economy

Question 2: What is your evaluation of the following statement: “A well-designed government-stipulated wage increase can lead to higher productivity”?

Answer:
Neither agree nor disagree
Confidence level:
Confident
Comment:
As my first answer makes clear, this could be at the expense of lower employment. To be well-designed the policy would therefore have to be accompanied by a demand stimulus to avoid generating unemployment. To be sustainable such a stimulus should follow from government investment and not by raising current expenditures.

Question 1: Which of the following statements most closely reflects your understanding of the relationship between productivity and wages.

Answer:
Wage increases cannot increase productivity in and of themselves
Confidence level:
Very confident
Comment:
The relation between real wages and productivity is an equilibrium condition. It does not imply causality one way or the other. However, it is difficult to see how real wages can be higher than productivity for long without profits suffering. This would induce a fall in the demand for labour and increased unemployment in the transition back to equilibrium. The fall in employment would cause the required increase in productivity. In equilibrium a rise in nominal wages can be passed on to prices without altering real wages or requiring a productivity increase.

Post-Covid Fiscal Rules for the UK

Question 3: Which of the following variables should fiscal rules target to best improve the performance of the UK macroeconomic policy going forward.

Answer:
Public debt
Confidence level:
Extremely confident
Comment:
The only fiscal rule that is needed is that debt should be sustainable, meaning the public are willing to hold it. This entails tax financing permanent government expenditures, including debt service payments, and debt financing temporary expenditures, including investment and temporary shocks such as Covid. The sustainability of debt depends on fiscal deficits, the cost of borrowing, inflation and the rate of growth. To date, no government has shown any understanding of this.

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