Nicholas Oulton's picture
Affiliation: 
London School of Economics
Credentials: 
Senior Visiting Research Fellow

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:
120% of GDP (e.g. if fiscal support were doubled)
Confidence level:
Confident
Comment:
Assuming the virus dies out during this year the effect on the debt level need not be that great. Suppose GDP falls by say 7% after 2 quarters (a bigger hit than in 2008-2009). Then a rise in public debt from 80% to 120% of GDP is a generous allowance. Under this scenario a fairly rapid recovery after a V-shaped recession is possible. However if the virus returns, possibly in more virulent form as did Spanish flu, then I might have to rethink this.

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:
Government transfers to and bailouts of businesses
Confidence level:
Very confident
Comment:
See my comment on Question 1.

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

Answer:
Making unemployment benefits more generous, streamlined, or comprehensive
Confidence level:
Very confident
Comment:
This crisis is quite unlike an ordinary recession caused by a demand shock. There the response is to boost aggregate demand by fiscal and monetary policy. Ideally, though this is never achieved in practice, the policy is so well designed that we never see a decline in output and employment. But with the Covid-19 crisis a decline in GDP is inevitable since large parts of the economy are shut down either by high sickness rates amongst workers or by social distancing by consumers leading to closures of pubs restaurants, cinemas, theatres, etc. Since a hit to GDP is inevitable, the real issue is how to share the burden fairly and protect the vulnerable. It is also necessary to prevent unnecessary losses of GDP and employment in the rest of the economy, i.e. second round effects: Demand could fall in the rest of the economy if mass redundancies are allowed to occur in the most affected sectors. Given this analysis, the best response of those offered in the question is “”Making unemployment benefits more generous, etc”. But I hope it would be possible to do better than this. The government should in effect take on a large part of the employment costs of workers in the most affected sectors, on condition that workers are not made redundant but kept on the books. Bailouts of businesses may be needed too but should also come with strings. “Broad cash transfers and/or tax cuts” may have a role in preventing secondary effects but should not be the main focus, unless the first best policy is for some reason infeasible.

The UK Productivity Puzzle

Question 4: Which of the following policies would be your second choice of policy to boost private sector productivity, in addition to or absent your first choice?

Answer:
None of the above, other, or no opinion
Confidence level:
Very confident
Comment:
Given my answers to questions 1 and 2, my second favourite policy (after incentives for business investment) is to cut unskilled immigration radically. This would reinforce the business case for capital deepening and so raise productivity.

In the last two questions you are asked which government policies are best suited to help the UK emerge from its productivity growth slowdown. Question 3 asks for your most preferred policy option, while question 4 asks for your second choice. You may use the comment section to outline specific policy recommendations.

Question 3: Which of the following policies would best help improve private sector productivity?

Answer:
Tax and subsidy policies
Confidence level:
Very confident
Comment:
Given my answers to Questions 1 and 2, the first best policy would be to revive demand in the rest of the EU. But this is not within the UK’s power. So my preferred policy is to increase incentives for business investment of all types in a radical way, say by giving 100% investment allowances against corporation tax in the first year. Infrastructure investment may help here too as it may crowd in some business investment.

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