Podcast episode

Transcript of EP127 on US inflation, Woke Capitalism + weird Aussie tax rules

In Economics Explored Episode 127, Darren Brady Nelson of LibertyWorks spoke with show host Gene Tunny about the 40-year high US inflation rate, so-called Woke Capitalism, and China. In the second part of the episode, Brendan Coates, Economics Program Director of the Grattan Institute, explained the implications of the peculiar Australian tax rules relating to superannuation and company dividends. You can listen to the episode via Apple PodcastsGoogle PodcastsSpotify, and Stitcher, among other podcasting apps. A transcript of the episode is presented below.

Here’s a recent clip of video from the episode:

Transcript of EP127 on US inflation, Woke Capitalism, and China + weird Aussie tax rules

N.B. This is a lightly edited version of a transcript originally created using the AI application It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny 00:01

Coming up on Economics Explored.

Darren Brady Nelson 00:04

For the viewers who saw me take a sip of coffee from my favourite local café, the past year, it was about $3.50, maybe $3.75 for a coffee and now it’s 75 cents to a dollar more.

Gene Tunny 00:22

Welcome to the Economics Explored Podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 127, which started out as an update on inflation, covering the four-decade high US inflation rate, but it ended up being a wide-ranging discussion, not only about inflation, but about so-called Woke Capitalism, and China as well. This is a longer episode than usual, because following the first part of the episode, we have a segment responding to a listener’s question prompted by Episode 112, on taxing the rich.

Our first guest this episode, returning for his ninth appearance on the show, is Darren Brady Nelson. Darren is chief economist of the Australian libertarian think tank LibertyWorks. He’s also a policy advisor to the Heartland Institute in the US. Darren has previously worked for an Australian senator, the New South Wales Treasury, and the Queensland Competition Authority. Right now, in February 2022, Darren is based in Milwaukee, Wisconsin, so he has firsthand experience with US inflation, as we discuss in this episode.

I’ll probably come back to the topic of inflation in a future episode soon, as I want to have a closer look at this question of whether the market power of big corporations is allowing them to jack up prices more than would be justified by cost increases. Darren and I start a conversation on this issue in this episode, but I want to return to it and have a closer look at the data and how economic theory may help us answer the question. I think this is a very important question to answer.

Okay, my second guest this episode is Grattan Institute Economic Policy Program Director Brendan Coates, who answers a question from regular listener James about a peculiar feature of Australia’s tax system. Please check out the show notes for links to materials mentioned in this episode, and for any abbreviations used and clarifications I need to make. I’ll include links to all the articles and charts that Darren and I discuss, and materials that I discuss with Brendan too.

Regarding clarifications, I need to clarify something I say about Amazon. I say it pays minimum wage, whereas I should have said that it pays low wages. It appears Amazon does at least pay above the US federal minimum wage, so sorry about that.

You find the show notes via your podcasting app, or at our website, If you sign up as an email subscriber, you can download my new e-book, Top 10 Insights From Economics. please consider getting on the mailing list. If you have any questions, comments, or suggestions relating to this episode or the previous ones, please either record them in a message via SpeakPipe, see the link in the show notes, or email them to me via I’d love to hear from you.

Righto. Now for my conversation with Darren Brady Nelson, on inflation, Woke Capitalism and China, among other things. Thanks to my audio engineer, Josh Krotz for his assistance in producing this episode. I hope you enjoy it. Darren Brady Nelson, Chief Economist at LibertyWorks. Welcome back to the programme.

Darren Brady Nelson 03:51

Thank you. Thank you for having me.

Gene Tunny 03:53

Oh, it’s great to be chatting again, Darren, about an issue that we’ve spoken about quite a lot. We had a previous podcast episode on inflation. Inflation continues to accelerate around the world. We had a reading for the US the other day for January, if I remember correctly, and it’s a 40-year high. US inflation hit a 40-year high in January after food, electricity, and shelter drove a bigger than expected rise in the consumer price index and pushed financial markets to price in a higher chance the Federal Reserve will hike rates by 0.5 percentage points in just over a fortnight. that’s from Matthew Cranston, US Correspondent for The Australian Financial Review. Now, Darren, this is something you’ve… You’ve been expecting this, haven’t you? You’ve been expecting inflation to continue to accelerate, even though some people have thought it may only be transitory. Is that right?

Darren Brady Nelson 04:55

Yeah. It’s certainly in one of the episodes that we spoke. We used a kind of a jumping off point was an article that I wrote for Town Hall essentially saying that. Often in the mainstream media there’s, you know… From my perspective, they don’t quite get inflation for the most part. There are exceptions definitely. You mentioned Matthew Cranston from the Australian Financial Review, which I quite like his work. But I think even better, in terms of economics, would be Adam Creighton. I think you might also agree. He’s certainly someone in Australia, he’s part of the mainstream media, and he’s always been very good at tying it back to the most important factor, which is inflation of the money supply. There’s a lot of factors that obviously can exasperate that, and in a market sense, obviously, prices are ultimately responding to demand and supply situation. But people like Adam Creighton and myself and some others, we go a little bit deeper. Okay, right, demand, what’s driving a lot of what’s going on in demand, that’s where the money supply really comes in, because that’s where the money balances are coming into people’s possession through various means. That’s where you start getting the really, if you like, the demand pull side of inflation, more so than a supply push.

Gene Tunny 06:26

Yeah. This is because what we have is, what’s the old saying about too much money chasing too few goods?

Darren Brady Nelson 06:37

Yeah, that saying, that’s a good quote.

Gene Tunny 06:40

I think that might be from Milton Friedman. We get so many great quotes about inflation and money.

Darren Brady Nelson 06:47

For the viewers, he’s to the left on the top stream there.

Gene Tunny 06:54


Darren Brady Nelson 06:57

It warms my heart.

Gene Tunny 06:58

I’m not necessarily making an ideological statement, but I am making a statement about… Friedman, to me, is the ultimate economist of the 20th century. He’s the economist who I think best combined theoretical rigour, a grasp of the empirical data. He wasn’t a great econometrician or mathematician, I don’t think. I don’t think he’s in that sort of league. But he is the person who best combined the theory with the evidence with the communication ability. He was just a master at that. Even though there’s a lot of debate about just how right he was about the monetarism and that policy recommendation with the constant money supply growth rule, there’s a lot of debate about that, but to me, Friedman is the… If I could be any one economist from history, this is gonna sound odd, but it’s probably a tie between Friedman and Keynes. I think they’re both great in their own way. Keynes, he was so influential in the policy circles in Britain. I think that was quite impressive. Yes. Then obviously he transformed economic theory. There’s a big debate about the Keynesian legacy. But he had a huge impact, too. Yeah.

Darren Brady Nelson 08:25

But look, yeah, I certainly can’t deny, in terms of the 20th century, I guess those two would be the most influential economists of the 20th century. Obviously we’re gonna talk about inflation. But I think in my article, I don’t actually have it close to hand, but I do quote both those people that you mentioned. Friedman and Keynes, they’re on the same page, at least to some extent, on inflation and it not being a good thing, and something that’s actually a policy outcome, basically. Whether you think it’s intentional or unintentional, that’s a separate issue. But it is something that’s under the control of the policy levers. They both agreed on that.

I think the third person I quoted, who is my favourite economist of the 20th century, is Ludwig von Mises. As you mentioned, Keynes was certainly very original. I personally think he’s wrong, for the most part, but he was certainly very original. That’s probably where Friedman isn’t. Friedman’s not on that scale of originality, whereas Mises and Keynes are actually, for me, the two most original economists of the 20th century.

But I would certainly agree that even though Friedman and Mises were certainly very close in the way they viewed economics, not completely, but the way they viewed economics and obviously what their policy prescriptions were were certainly not light years away. I’d certainly agree that Friedman certainly was a more powerful communicator to a broader audience or to the policymakers. I agree with you, with the caveat of Mises and Keynes as the two most original economists of the 20th century. All three of them obviously talk about inflation. That was an important topic.

Gene Tunny 10:10

Yeah, we’ll have to come back to Mises in a future episode. I’d really be interested in exploring his ideas. You mentioned Keynes, you quoted Keynes in that article. Were you quoting Keynes quoting Vladimir Lenin, was it? Is it Lenin?

Darren Brady Nelson 10:28

No. Not that. No. It’s just basic pointing out that inflation… One of the important things he pointed out, yeah, this is a bad thing, it’s something that’s under controlled policy, but the greatest thing that he pointed out there is, there’s winners and losers, important part is there’s winners. People sometimes, and even I in the past even just jumped to like, ultimately, we’re all losers from inflation. That’s not true. That’s not true. Ultimately, so far in the central bank era, what’s called in the US from 1913 onwards, it’s obviously a different date in Australia, that there’s winners. With any policy, even though you look at it overall, you go like, “Wow, this is really bad,” but there will be winners.

Then throw in, I guess, a different school of thought, the public choice school, which I’m also a big fan of. That’s where they come into play, to really highlight the fact that in the political marketplace, which inflation is also influenced by the political marketplace, there’s winners and losers. The winners are quite a small group of people compared to the losers, but they win big, relatively, compared to the losers, which is why the losers aren’t always fighting back very hard, because they can’t combine, they’re not as animated to combine, and it’s much harder for them to combine, compared to the small group of winners. That’s public choice economics 101, basically.

Gene Tunny 12:03

Let’s go over that. I think this is interesting. Let’s look at the losers first, because it’s more obvious who the losers are. That’s going to be people going to the supermarket. You’ll notice your prices are rising. If your wages haven’t been increasing, if they haven’t been increasing at the same rate as prices, and we know that in the States that is certainly the case. I think we were looking at some data the other day, where at the time inflation was up 7% through the year. Now it’s 7.5% through the year. The figure I found for average hourly wages growth was about 5.3%. There’s that real loss in having a real pay cut of 1 or 1.5% or something or whatever it was. Maybe it was 5.7% wages growth. I’ll put the exact figures in the show notes. But yeah, that’s costing households. There was some estimate from, was it the America First Policy Institute? You sent me some article they had. They were calling that an inflation tax. What I think they were talking about was the loss of real purchasing power for households. They estimated it was about $850 per annum. You’d have to compensate households by that much to make up for the fact that their prices have increased more than wages. I guess the first sort of group that’s affected is consumers. Is this is something you’re noticing on the ground there, Darren? You’re in Milwaukee, in Midwestern USA. Are you noticing those price rises yourself?

Darren Brady Nelson 13:40

Oh, very much so. For the viewers who saw me take a sip of coffee from my favourite local café-

Gene Tunny 13:48

Fairground Coffee and Tea.

Darren Brady Nelson 13:49

In the past year, it was about $3.50, maybe $3.75 for a coffee, and now it’s 75 cents to a dollar more, in a year. It’s in a year.I think there used to be, once upon a time, the Coca Cola. Wasn’t there a price index that you know was used to relate to just the average sort of person who’s not an economist. I still like Coke to some extent, but coffee’s kind of the thing I notice the most. I believe you’re also kind of a… You’re a coffee and cafe aficionado like I am.

Gene Tunny 14:24

Less so during the pandemic, but yes. Yeah, generally I am.

Darren Brady Nelson 14:30

Yeah, that’s another story obviously, another episode.

Gene Tunny 14:34

The cafe across the street from me, that we’ve had coffee at from time to time when you’re in Australia here, that shut down, because the hotels on the street where I live, they were so dependent upon interstate and international visitors. That all went away for a lot of the pandemic, and so that cafe couldn’t survive anymore, unfortunately. But I expect I’ll be back out and about again soon. We’ve just had the Omicron wave here, but that looks like it’s dying down, which is good.

Okay, so you’re noticing the price rises. I just thought I’d ask that because it does seem to be something that’s being noticed by a lot of people. I know there was one of the audio or the podcast… There’s a lad, Bandrew Scott, who has a channel on YouTube, Podcastage, and he does reviews of microphones and things like that. He was talking about inflation the other day, and I thought, “Oh, that’s interesting. It’s not the usual thing you’d talk about.” But he mentioned it. You hear it in the commentary of people, when they’re talking about just the general state of things. It seems like it is starting to impact people over there.

Darren Brady Nelson 16:00

The CPI figure, the way the CPI is calculated in the US is different from in Australia. It’s basically got less stuff in it, less important things than the Australian version does. The Australian version is pretty good, actually. You could say, yeah, there should be some more stuff in there, whatever, but it’s a lot better than the US version.

There’s this organisation called ShadowStats. They do really good work, but there’s a lot of paywall stuff. But the person who runs that recently said, basically, he did the CPI calculation, not in some really weird and wonderful way, he just did it the way they used to do it originally in the US for quite a long time. He said, using the way they did it then, we’re talking 15%. 15, so double what the current US CPI is saying. Even if you go debate, like, “Okay, that’s too high, blah, blah,” the point is it’s probably worse than 7%. That’s what you see just talking about my coffee, obviously. I go grocery shopping, obviously, like everybody does. I don’t do a whole lot of restaurants, but certainly groceries and going to cafe and and having my coffees. It is certainly even worse than the 7%.

I’ve seen different estimates of CPI. It clearly doesn’t represent all the economy. I’ve seen figures like it’s only 40%, and whatever, but obviously there’s the asset prices, which is hard. There’s no really good statistic that does an asset price. There’s also the Producer Price Index. Obviously the US and Australia has that. You got to look at that too, because that’s getting some other prices. You start to get the full picture of what’s going on, how prices are inflating all over the place. We obviously don’t do it uniformly. Then Australia and the US, you can dip down into things like, you mentioned energy, you can look at housing separately. That’s not to say that it’s a cause and effect relationship necessarily, because really, at the end of the day, the cause is the money supply. That’s the main thing.

But it can be exasperated by things, various things, including I think a topic you may want to discuss, I think, in regards to John Quiggin’s latest article, is to what extent does the degree of competition in the economy, whether you’re talking about competitive markets or monopolies or cartels, what role does that play? Does it make it worse, or is it more just moving the deck chairs around? That’s an interesting question.

Gene Tunny 18:44

We might come back to that. There are a few things I want to come back to, but I better go back to the winners and losers from inflation. We talked about losers. Now, who’s winning? It’s people who have borrowed money to invest in other assets. Is that right? The inflation is eroding… Go ahead.

Darren Brady Nelson 19:07

I’ll give you the quick logic sort of thing. It’s definitely from the Austrian School, Mises, Rothbard, Hayek, and all sorts of people, who talk about basically the people who get the money first. They get this inflated money first. Essentially, it’s a game of keep your income/revenues ahead of your costs/expenditures. That’s business and individuals. It’s the same logic, right? The people who get that, and really in the system, there’s kind of certain people who always get it first, obviously government itself, the treasuries, but then there’s Wall Street types and various other words, those sort of people, but then also you’re getting into the people who are attracting funds more easily in larger quantities anyways, like Big Tech, Big Pharma. That’s putting aside whether the monopolies or cartels are competitive. At any point in time, it’s not a universal thing that Big Pharma or Big Tech always get it first.

But in the recent economy, particularly in the COVID times and whatnot, Amazon, obviously, who was already doing extremely well in the world of what’s called retail, if you like, and then they killed it during COVID, whenever most everybody else was not killing it. Those are sort of people who can get the money first and stay well ahead of the bad aspects of inflation. Oh, and then throw in it may be some sort of… There was also a recent article about Woke Capitalism. That starts to cut into that. It cuts into the sort of people who could often get this money first, who often have monopoly power. That’s also an interesting aspect, for them to have the cultural, the censorship, and all these other interesting things that come into play as well. I raised a lot of different things.

Gene Tunny 21:14

Yeah, I’ll just go back over that. You get the money first. That’s an interesting way of looking at it. I borrow the money, and I buy an office building, or I buy some shares, and so they’re going to appreciate in value. The bank, which lent me the money, it’s lent me a million dollars or something, or whatever it is, or a couple of million to buy, actually I probably need more than that if I’m going to buy an office block nowadays, but however much they’ve lent me, they’re going to lose out with inflation, because I’m going to be paying them back, I’m going to pay back that $2 million with dollars in the future that are, in real terms, worth less than they were, than I borrowed them. If the bank hasn’t charged me a higher interest rate, in expectation of that higher inflation, then they’re going to lose out. It’s people who borrow money, who they can actually benefit from inflation, if they’ve used that to go and purchase assets that are going to appreciate in value. The people who lose out, consumers and anyone who’s just holding on to money, if you’ve just got money sitting in a bank account, or if you’re a retiree.

Darren Brady Nelson 22:40

The pensioners, all that, fixed income. But even taking what you were getting at, but there’s gonna be … Even that lending market, the Amazons, they’re gonna have lower interest rates than what we’re gonna be getting, and a whole lot of other businesses, not just individuals. They’re gonna be able to get a hold of the money quicker, in bigger quantities, and put it to use better to stay ahead of their cost curve, if you like, that ultimately everybody’s going to get impacted to some extent by the inflationary cost curve, but they can stay ahead of it, and then bigger, more quickly, and to a larger extent. Things like, as I said, the degree of monopoly power will factor into that, putting aside how you figure that out empirically. That’s a separate question. But yeah, that’s the basic logic, and I can’t remember who basically had that kind of terminology. It might have been Rothbard, actually. I would have to go back to find that out. But obviously, Rothbard learned from Mises and Hayek. They would have all agreed with that.

Gene Tunny 23:47

Right. We’ll go on to the causes of what’s underlying inflation. I think that’d be good to chat about it in a moment, but first, what do you mean by Woke Capitalism, Darren? Could you tell us what you mean by that, or what do they mean by that term?

Darren Brady Nelson 24:05

Yeah, look, I’m not sure exactly what the definition is. You can, like always, usually, I believe you share different articles, links. There’s a link that goes through the history of it and who originated that term. But essentially, yeah, look, it’s the Big Tech people who seem to care more about … Like Amazon. Look at Amazon. They have such big, if you like, monopoly type profits, that you can afford to do all this virtue signalling, you can throw money at campaigns, political campaigns, for one, but you can also throw all these virtue signalling campaigns. In the US, we’re getting them all the time, about how diverse they are and how they care about gender. They can afford to get involved in the culture wars, either directly through, they go like, “Oh, this is what we’re doing inside our company, and our hiring policies are this,” basically signalling that they’re not hiring on merit, essentially, they’re just hiring based on the colour of your skin, your gender is, or what you identify as, all that sort of culture war related stuff, that the corporates have really come out big in favour, the past two years in particular, but it’s been coming for some time.

I think in that particular article, and I would agree, that that’s a rich person’s game, basically. You have to have a lot of supernormal type profits to afford that. If you’re in a company and in a particular market where your profits aren’t supernormal at all, that’s pretty hard to sit there and really play that game, except look, you could probably afford a small marketing budget to say you’re doing that, but you’re not really doing it, whereas I believe Amazon actually is doing it, because our mutual friend, Tim Wonhof worked for Amazon, and he can confirm with the hiring practices and people who get promoted in there is not so much based on merit at the moment, or there’s a big degree of not based on merit. That’s part of Woke Capitalism, virtue signalling, and just like a competitive market place would suggest you would be doing.

Gene Tunny 26:18

Yeah, I’ve heard this term increasingly. We’ll get on to, a moment, what it means for or what monopoly power means for inflation. We’ll get on to that. I just want to spend a bit of time on this, because it’s interesting, because I’m hearing this term more and more. There’s that book Woke Inc, I think it was, and this idea of Woke Capitalism. Now, they’re woke in some ways, but not in others. Amazon’s renowned for how poorly it treats its workers in fulfilment centres, isn’t it? They don’t get toilet breaks. They’re having to pee in bottles. Tt least that’s what the stories are. They’re paying minimum wage. they might have these great diversity policies on the one hand, but on the other hand, working conditions at Amazon are pretty dreadful.

Darren Brady Nelson 27:06

Look, they’re probably not dreadful as such in the US, but they’ve got in the headlines in the US about just they’re fighting all these unions around the country to make sure that the wages don’t go up, for  the people who are on the minimum wage. Obviously, that doesn’t impact people above minimum wage, which there’s plenty of people at Amazon like that. I’d highlight more of the fact that they source most of their stuff from China now. China is, rightfully so, infamous for its use of actual slave labour, not the pejorative, like, “Oh, I think you’re paying someone too low.” They’re the actual slave labour where they don’t actually get paid. They’re forced to do the job. I think that’s actually even more hypocritical than them fighting in the US against unions about whether the minimum wage should be $15 or $17, right?

Gene Tunny 28:01

Yeah. What are we talking about there, Darren? Are we talking about people in China who have been imprisoned for various different reasons? Look, they’re going to have a variety of political prisoners over there, for sure. There’s the oppression of the Uyghur people. Is this what you’re talking about?

Darren Brady Nelson 28:17

Yeah, that’s it. These people are often the sort of people who are making the things that then Amazon not only sell, but they actually promoted. This is what’s changed with Amazon. I’ve been a customer of Amazon since they’ve been around, basically. I think that’s something along the mid to late 90s. I’ve just totally noticed a very huge change. Even when you actually go to type in well-known brand that you want, yeah, you’ll get it, but it’ll be down the list. They’ll have all these Chinese knockoffs of various sorts. We don’t know, empirically know, who is who in terms of using slave labour in China. But it’s a common practice, and it’s certainly there. There’s a pretty good chance that you’re buying products that have been made with slave labour. That to me is far more, if you like, hypocritical or immoral than the questionable conditions in a US warehouse. That’s on quite a different scale. If you’re making the broader point that they’re hypocrites, yeah.

Gene Tunny 29:29

Yeah, I think that’s a point that, that I hear on some channels. I think it’s a point that people like Krystal Ball and Saagar Enjeti on their show, on Breaking Points have made. I think it’s a good point. We’ll have to come back to that topic of China in a future episode, because it’s fascinating. I’d like to know what the actual evidence is. Then there’s a question about what do we do with it. What are our obligations as consumers? What should the powerful countries in the world? What should the United States? What should Britain, to a lesser extent Australia? We think we punch above our weight, but who knows? What should we be doing?

Darren Brady Nelson 30:10

Australia does. Australia does, definitely. We won’t go into this, but even on the inflation thing. Maybe it’s a topic for another time, why the US gets away with a bit more, because it’s the reserve currency for the world, right? You have a lot of dollars just in other countries. Some of the inflation is being spread throughout the world from them, from their US dollar inflation, and surely it’s a top five trading currency, so they can punch above their weight. The reserve bank can get away with a little bit more than New Zealand can, for instance, even in a relative sense.

One thing to sow the seeds for a China discussion in the future, whether it’s with me or someone else, is it’s just completely illogical that somehow China, in such a short period of time, went from essentially a Soviet Union economy, where really, the people aren’t productive, they’re not very good at anything, even manual labour they’re not very good at, and they just attracted 80% of the world’s manufacturing. Really? There are those poor countries that in a free market… This is what I’m getting at is China’s rise is not quite as free market as it’s been portrayed over the years, but a lot of dirty deals done, basically, US, Europe, Australia, etc, to artificially throw trade their way, that they wouldn’t have actually won in a competitive marketplace in the world.

Gene Tunny 31:44

Okay, we’re gonna have to come back to that. There’s so many issues there that I’d want to explore. Let’s come back to that, in a future chat. We’ll go back to this question of monopoly, why we brought that up. You sent me an article earlier today, I think it was Woke Capitalism Is A Monopoly Game or something like that. That was, I’ll put a link to it in the show notes, from the Mises Institute, by Michael Rectenwald I think.

Darren Brady Nelson 32:19

He’s legit.

Gene Tunny 32:20

Yeah. I guess this Woke Capitalism, that’s a reflection of the fact that there are all of these monopoly profits out there. There’s arguably been an increase in concentration in monopolisation in the US economy and in other advanced economies, and this has been behind a lot of the calls for antitrust action. There’s been a renewed interest in antitrust. I chatted with Danielle Wood from Grattan Institute here in Australia about antitrust last year, I think it was. Why is this relevant to inflation?

One of the assertions that’s being made is that this inflation is partly being driven by greedy corporates taking advantage of this, all of this discussion about inflation, this inflation narrative, and using it to jack up their prices, and they’re taking advantage of their monopoly power.

I sent you an article by John Quiggin. I’ll put a link in the show notes to that. John did a blog post on this where he was criticising Larry Summers. Larry Summers was dismissing that he says, “Oh, there’s no sort of reason to think that just because we’ve got this monopoly power out there or this market power in some parts of the economy, that that would exacerbate inflation. John Quiggin goes, “No, that’s not quite the case. I’ve written this paper with Flavio Menezes that demonstrates in our model that this can actually be the case. Do you have any thoughts on that, Darren? What extent could this be due to monopoly power, due to market power, that companies taking advantage of this inflation narrative to jack up their prices, to the detriment of consumers?

Darren Brady Nelson 34:02

Look, that was actually a very interesting… It’s a very short article. For people who want to read it, it’s very short. Strangely enough, I’m something in between, I think, between what Summers and Quiggin are saying. I don’t usually have a lot of alignment with John Quiggin on economics or policy or much of anything else.

Gene Tunny 34:29

Just for clarity, John’s a self-described Socialist or Democratic Socialist, so yep, yeah, that’s what you mean there. I think John’s a very good economist. A lot of things I agree with him on, but there are things I strongly disagree with him on. I just thought I’d clarify that for people who are listening.

Darren Brady Nelson 34:48

Look, he’s Australia’s Paul Krugman in many ways. Look, on this point. I would think that ultimately, I think it’s going to be an empirical question. That’s not going to be an easy thing to figure it out, to be honest, because it’s basically going… We talked about who’s getting the money first or the order of how that’s coming in.

I would think, logically speaking, and we’ll even come back to the Woke Capitalism as well, but yeah, look, I would’ve thought that those companies with the monopoly power, particularly in these growing industries… It’s one thing if you’re a monopoly power in a utility industry, okay. They’re not the most dynamic, go-getter type industries. They got monopoly power. Then they’re also usually facing some regulators who are going to try to eat away at that and all that. We’re talking the Amazons of this world. I’m not saying they’re a monopoly as such. Under textbook definitions of monopoly power, they seem to have a fair bit of it. Those sorts of companies, yeah, why wouldn’t that money be attracted more to companies like Amazon, than to a utility, a non-dynamic utility with a regulator on top of them all the time, because the antitrust authorities, they’re kind of hit and miss. Actually, sadly, in Australia, too.

It’s very politically driven. It depends on who’s in power. Once upon a time in Australia, that wasn’t the case, in the good old days of Allan Fels, for instance. But the ACCC’s gotten a little bit more political over time, to be like the US’s Department of Justice, who are extremely political, for the most part, and they actually have been with antitrust for not just… It’s not under the Biden administration. They’ve been political for decades. I would expect places where the supernormal profits are there and they’re expected to continue or increase or at least not decrease too much. Yeah, why wouldn’t that money be attracted more to that? I guess, does that sound like I’m actually more in Quiggin’s camp, I guess, than Summers’s?

Gene Tunny 36:56

I’m not quite sure what you’re driving at there. The money is more attracted to that sector.

Darren Brady Nelson 37:02

Chasing returns, so obviously, monopolies are gonna have bigger returns, right? That’s investment 101.

Gene Tunny 37:09

Yeah. That’s right. the money’s going there. But we’re talking about the-

Darren Brady Nelson 37:17

Oh, they’re greedy.

Gene Tunny 37:18

The prices, yeah. Why does that monopoly-

Darren Brady Nelson 37:21

That argument has been made by the Biden administration. Did Quiggin actually make that argument in this paper?

Gene Tunny 37:27

No, no, he’s assessing that argument. That argument’s been made by the Biden administration, among others.

Darren Brady Nelson 37:34

Yeah, but Biden’s administration was doing two things at once, like talking out of the mouth one way and then the other way, like antitrust, which this what we’re talking about, the degree of competition in markets, and does that exasperate it. Again, it’s probably, I think, an empirical question. Does it exasperate it overall in the entire economy? I’m not sure. That’s certainly an interesting thing. That’s certainly an area worth exploring, because  two things. Is it being attracted to monopolies and cartels more than it is to competitive markets? Then what does that look like overall in the economy? I think that would depend also on to what extent is your economy… How many cartels and monopolies are there in your economy versus competitive stuff. You’re touching on a lot of things. Greedy’s a separate issue. That’s making a almost nonsensical moral assessment. I think greed existseverywhere. Are there more greedy people in monopolies? Maybe. I don’t know. I don’t even know how you would go about assessing that. As economists we’re less concerned about what people’s intentions are, because greedy’s going… That’s your intention.

Gene Tunny 38:50

Oh, yeah. I haven’t characterised what they’re saying correctly and I was just using greedy to illustrate, to make it more interesting.

Darren Brady Nelson 39:00

No, you’re right, though. People are saying that right. The Biden administration is saying that. It doesn’t look like Quiggin is actually saying that, but he may agree. I’m not sure. But you said he’s a Democratic Socialist, so he might gravitate towards the idea that just capitalism in general is more greedy, even if it’s competitive. I’m not sure, but that’s a totally different question. Good luck trying to figure that out. Greed exists in governments. You’re telling me that bureaucrats on high salaries, with no threat of losing their job, that there isn’t greed amongst those sort of people? Politicians, I think most people could see how politicians might be a bit greedy, with their ridiculously large pensions and all that sort of stuff. I know Aussies certainly view it that way, even across parties. In the US is a bit more polarised. Democrats think their politicians are like saints for some reason, whereas Republicans seem capable of criticising other Republicans. But that’s a separate issue, of course. Quiggin and Summers, that’s a very interesting point. Yeah. I think it’s a legitimate area to be explored. I think the logic is, yeah, I’d expect more money to be attracted to monopolies and cartels. That would exasperate, certainly, in certain industries and for certain consumers. Does it exasperate over the entire economy? I’m not sure. I’m not sure. What do you think?

Gene Tunny 40:27

I think, potentially, it is the case that these… Look, to some extent, I think these companies could be getting ahead of what they see as the inflation that’s to come. It’s possible that yes, they could rise their prices more than maybe justified by the increase in their costs. If you’ve got monopoly power, that’s certainly possible. I think there could be something to it.

I think trying to characterise the inflation as just a result of profit-maximising monopoly companies or companies operating in perfect competition, I think that’s going too far, because underlying all of this, as we’ve been talking about for quite a while now, is that big monetary expansion that we’ve seen in the US and other economies, so there is a reason to be expecting the inflation that we’re seeing. It’s not just because of greedy corporations. But look, it could be part of it, as could the supply chain disruptions.

What’s challenging I think, here, Darren is that there are so many different things going on. We’ve had the disruption due to the pandemic. We’ve had the supply chain disruption. We’ve had a drought, which is affecting meat prices. Meat prices, that’s an important part of the CPI. That’s one contribution. Fuel prices have been increasing. Used cars, new cars. There are factors affecting these specific markets which are driving up prices. That’s led some people to think maybe it’s just this supply chain disruption due to COVID, it’s going to be transitory. Look, I really don’t know. It’s hard to say. But we know as economists that it’s that monetary expansion, inflation is always and everywhere a monetary phenomenon. That would lead us to think that this inflation is something that could be locked in for quite a long time, unless the Fed takes quite aggressive action. I just don’t know whether they’re going to do that or not. Probably we’ll start to see the federal funds rate increase this year. There’s going to be, what is it, the tapering they’re talking about with the balance sheet? I really don’t know. It’s just so hard to determine what the relative contributions of all these different factors are. Do you have any thoughts on that?

Darren Brady Nelson 42:58

I think you’re right. I would just add in that, again, coming back to, just as per my article and our previous discussions, CPI is not a measure of inflation as such, because inflation is the money supply. That’s a measure of the effect on obviously quite a few prices in the economy, but not all the prices in the economy. What’s been different is the inflation previously has been showing up in PPI. It’s actually been mainly showing in asset prices, the usual stuff, stock markets and property.  Those are the classic places where the easy money shows up first. Pretty much every money inflation boom, if you like, that’s where it always goes. Then sometimes it goes to some other places too, new and wonderful places. It depends on where the economy is at. Obviously Big Tech’s a thing nowadays in social media. You have to keep on looking at…

It’s interesting how it’s really showing up in CPI. That gets the public’s attention. Obviously, as you said, even more so is literally the coffees and other things that people are buying. They’ll hear the CPI figure, but if they’re actually seeing it in the stuff they’re buying, that’s… That’s where it gets, if you like, definitely, the pressure will come on to the politicians who would otherwise like to keep on inflating. Then the Federal Reserve and the Reserve Bank and all the different central banks will also start feeling that pressure, because at the end of the day, they’re not independent of government. They’re quasi-independent of government. For instance, the Federal Reserve, obviously the head is chosen by the President. That clearly shows you that’s not a completely…

The Federal Reserve has a funny ownership arrangement where it looks like it’s private, but  it in practice, it operates like a government agency. In Australia, it’s more clear cut. The Reserve Bank is a government agency, etc, etc, and we know it is. But that doesn’t really change the characteristic of how a central bank operates.  I’ve never seen any difference. The Federal Reserve can operate differently from the Reserve Bank, not because of its ownership, but because obviously, it’s the world’s reserve currency.  It’s got some different things at play that, if you like, it can hide that US dollar inflation, spread it throughout the world, and have it not hit quite as hard inside the US as it might if it was a different, like was New Zealand or something. New Zealand can’t get away with inflating their money supply like the US can. Even Australia can get away with it more than New Zealand can, because it’s one of the five top traded currencies in the world. Australian dollar’s not just sitting in Australia, it’s out there as well.

Gene Tunny 45:54

I think there’s a lot of speculation on the value of the Australian dollar.

Darren Brady Nelson 45:58

Yeah, it’s more a speculative thing, but there’s a lot of Aussie dollars that just aren’t in Australia, if you like, or it’s out there being used for other purposes and speculation and whatnot. Obviously, Australia is a big player in certain areas, like mining and agriculture and stuff, which also tends to have a very international flavour to it.

Gene Tunny 46:18

Yeah. Just finally, I thought we should touch on the government as a potential beneficiary of inflation. I think you were sort of suggesting that before. I guess there are a few different things to chat about there. Governments can have a… They would prefer the inflation, or they could prefer policies that are inflationary, particularly in the lead up to the election, because that can help people get jobs. Then the inflation could come later, and they can worry about that later on, or another government could worry about that. That’s one issue.

Then there’s also the fact that governments benefit from inflation, because of what I’ve always thought of as the inflation tax. People use that term in different ways. But one way that has been used is to talk about what’s the erosion of the federal debt, so the money that the government owes, and that’s denominated in dollars. The real value of that decreases with inflation, so the government’s getting a benefit in that way. It’s borrowed all this money in the past, and then it pays it back with money that’s worth less because of inflation. The economy is bigger in nominal terms, its tax take is bigger in nominal terms, so it gets a benefit from inflation.

Darren Brady Nelson 47:46

The bracket creep…

Gene Tunny 47:48

Yeah, that’s right. That’s another part of it. Yeah, governments can actually benefit from inflation, although if it gets too high… It looks like this is what’s happening in the States now. You see all the commentary. Even Biden, I think, at a press conference the other day, didn’t he make a comment about, just a sarcastic comment about, “Yeah, inflation, great,” or, “That’s great, isn’t it?” because someone asked him about, “Do you think this is a great… Do you think this is going to help you in the midterms, or what’s it gonna mean for the midterms?” Do you remember that comment? Was it Steve Doocy?

Darren Brady Nelson 48:24

Are you talking about where he did the thing under his breath and got caught?

Gene Tunny 48:27


Darren Brady Nelson 48:28

It was quite rude. Yes. There was a Fox News reporter.

Gene Tunny 48:35

Doocy. Was it Peter Doocy? Steve Doocy’s son? I’ll put a link in the show notes for people.

Darren Brady Nelson 48:41

Which one’s the son and which one is the father? I can’t remember their names.

Gene Tunny 48:44

I think Steve Doocy is the one on Fox and Friends, and Peter Doocy’s the one in the White House press pool.

Darren Brady Nelson 48:52

Peter Doocy’s good. He’s very good at… He asked a lot of uncomfortable questions, but in a very professional way.  Biden’s response to him wasn’t particularly professional enough.

Gene Tunny 49:03

It was funny.

Darren Brady Nelson 49:05

It was funny. It was funny.

Gene Tunny 49:07

He said, “Yeah, yeah, inflation, high inflation, yeah, that’s a real asset for us going into midterms, you stupid SOB.”

Darren Brady Nelson 49:17

Look, I’m a little bit disappointed in Joe that he wasn’t as creative as that. What was that comment he had in the election to one of the people in the audience  at one of his town halls? He called her, I think it was, a… It was something, it had pony and dog in the … Something-

Gene Tunny 49:37

You’re a lying dog-faced pony soldier or something. Was that it?

Darren Brady Nelson 49:42

That’s the one.

Gene Tunny 49:44

Whatever that means.

Darren Brady Nelson 49:46

I’ve never heard that term before. I’m disappointed he hasn’t used it more often since. He should have used that with Peter Doocy perhaps, rather than just going so lowbrow with what he said.

Gene Tunny 50:01

Yeah. I don’t know, it showed that he’s a real person. I thought that was quite authentic, that moment. Anyway. Inflation, right. We didn’t even get on to those charts, Darren. You had prepared some charts.

Darren Brady Nelson 50:20

Oh, exciting stuff.  I hope this works for people at home.

Gene Tunny 50:25

I thought one of the charts you showed was really… They’re all interesting. There was one that showed that inflationary expectations are increasing, too. People in the markets are expecting, or people in the community are expecting this inflation, this high rate of inflation continue into the future.

Darren Brady Nelson 50:43

I think we’ve been…Apple’s telling me or Zoom’s telling me that I have to somehow go into some system and do security and privacy or something.

Gene Tunny 50:53

All right. I can put them in the show notes. I’ll just put the charts in the show notes. But I thought one of them was quite… It demonstrated that those inflationary expectations have increased. I’ll put that in the show notes for people.

Darren Brady Nelson 51:09

Oh, and so people aren’t confused, it has the word Michigan in it, and it’s not the inflationary expectations of the state of Michigan. The survey is done by an institution that’s in Michigan, basically. I think the one I had had the one-year-out expectations, but plus alongside a five-year expectation sort of thing. Are they only expecting it in the short term to be problem versus in a longer term sort of thing, and both weren’t looking good, basically.

Gene Tunny 51:44

Yeah, I’ll put that there. I thought that was a good chart for context, because as I said, there’s this debate about whether it’s transitory or is it just due to used cars and new cars and meat prices and petrol, all that, or is it something longer term. It’s looking like it’s-

Darren Brady Nelson 52:01

Then there’s also a chart in there with wages, too. That’s an important one to do, to what extent is wages versus inflation, if you like, people’s costs versus their income. Obviously if your expenditures are going to be higher than your income, in real sense, then obviously, that’s a problem.

Gene Tunny 52:22

Okay, Darren, this has been great. There’s so many issues we’re going to come back to. I’ve got to come back to you or to, say, John Humphries might be a good person chat with about this, but I want to chat more about China. Lots of important issues there. Also, we could do a deeper dive on Woke Capitalism. I might do some reading up on that, to what extent is this a real thing or is it just the cover for some unsavoury practices. I wouldn’t believe Amazon’s really a woke corporation, given some of their labour practices, what I’ve been seeing. But yes, I think we can come back to that. Any final thought? Go ahead.

Darren Brady Nelson 53:01

Another one, because I want to write a paper at some stage, or at least an article to start out with, is revisiting trade. I find most free market economists are garbage on understanding free trade. What I mean by that is they jump from the theory of free trade good to then look at China, everybody go, “That’s an outcome of free trade.“ They kind of miss the linking the two together.

Also, I’d go even a step further, that they rely too much on… A lot of these people who even specialise in international trade seem to be that their education in trade was nothing more than what they learned at their first year at university. They go like, “Oh, here’s the theory from Ricardo on comparative advantage,” okay, fine, without actually doing a deeper dive into it and go like, “All right, how valid is that?” Yes, comparative advantage of trade between businesses and human beings, yep, gotcha. How can you then jump to a political nation state and say that it’s exactly the equivalent, beyond a teaching tool? I’m fine with it as a teaching tool. But I think it’s completely overstated, because you’re dealing… A nation state is a completely different beast, and all the little things inside that nation state, particularly when you’re talking about China, because you’re never dealing with a private free market corporation in China, for the most part. You’re always dealing with government inside China. You’re talking a very different beast.

Then I’ll throw in the fact that they didn’t win all this business because they were actually better or in reality were offering cheaper products. They weren’t even offering cheaper products in a market sense, because not just the slave labour, but just all the government fiddling inside the country that goes on. Anyway, I’m just sowing the seeds for-

Gene Tunny 55:03

Yeah. I think we’ll probably have an extensive debate in that one, Darren, because I may be one of those free market economists that you’re talking about, or very pro free trade. Maybe not a debate, but I’ll want to explore what your contentions are a bit more.

Darren Brady Nelson 55:23

Oh, and by the way, I’m debating me from not that long ago as well. Again, just to be clear, I am totally for free trade.

Gene Tunny 55:34


Darren Brady Nelson 55:34

I’m not trying to argue that free trade is bad. I’d be happy to revisit the Trump tariffs and all that and the logic behind them, and bring in concepts we both obviously love, like cost benefit analysis.

Gene Tunny 55:47

Excellent. Any final thoughts on inflation, Darren, before we wrap up?

Darren Brady Nelson 55:51

Inflation bad? It’s gonna get worse, at least for a while. But it’s really a political thing at the end of the day, so it’s going to be heavily influenced by the midterms, in the US, just to look at a US picture, because there is a distinction between the Republican and Democrat Party on what they think about inflation, whereas in Australia, sadly, both parties are just kind of cool with it for the most part.

Gene Tunny 56:20

Okay, now, the Democrats are gonna get absolutely wiped out in the midterms.

Darren Brady Nelson 56:26

They should.

Gene Tunny 56:26

I’m not making a comment on whether they should or whether they shouldn’t.

Darren Brady Nelson 56:31

No, sorry, I’m saying like projections, that looks like… That’s what I’m talking about.

Gene Tunny 56:36

The GOP is going to be in power. What do you expect? The Federal Reserve’s ultimately the important institution, isn’t it, in controlling inflation in the States?

Darren Brady Nelson 56:48


Gene Tunny 56:49

How’s the midterms gonna matter? How are they going to matter, in terms of-

Darren Brady Nelson 56:54

They’ll be under pressure because they know… Look, internally, these are people who… There’s some of these people actually like things like MMT, or who would be happy to keep inflating, but not everybody in the Feds views it that way. Fortunately, the Feds actually kind of decentralised. It has a head. But  there’s actually different Federal Reserves, and they have often very different philosophies on inflation and its importance and what you should do about it.  That’ll be interesting.

They’re gonna feel the pressure, not directly, because they don’t really report to Congress as such. They’re supposed to be independent, but the head gets appointed by the President. I think they’re going to be feeling the economic and the political pressure, if it is a… The Biden administration’s gonna be able to do nothing, basically, once the Republicans… We might actually see, whether you agree with it or not, we’ll probably see a lot of, I’m expecting possibly impeachment proceedings. That’s probably what I’m going to be seeing. I think we’re going to see that. Then we’re going to see a Republican president, whoever that is, in 2024.

Gene Tunny 58:08

It’s quite possible, yeah, that with impeachment. This is an economic show, not a political show, but just from my observation of what’s going on in the States, certainly that could be possible if you get more of the Marjorie Taylor Greene, Lauren Boebert types into the Congress, then yeah, that’s certainly possible. Just on the House and others in the Senate or the Congress, what does that mean for inflation? The only way I could see that as having any impact is if there was the opposite of what’s going to happen, is if there’s a blue wave, and you have more AOC types coming in, and then you have a massively inflationary Green New Deal or something like that, but the prospect of that happening is absolutely… It’s almost zero.

Darren Brady Nelson 59:01

Look, no, it actually isn’t even that. If they just held on by one seat, the AOCs, etc, hold far more sway than you would think. Not only within Congress, but then in the White House as well. They just have to hold on by one. That’s all they have to do. They just have to, because they’re desperate.  There’s a lot of things that they shouldn’t be doing, because they’re probably going to lose. But I think the psychology is like, “Hey, we’re probably going to lose, or at best, we might just hold on, so let’s get this stuff done now that we’ve always wanted to do,” for not just years, but sometimes even decades. The sort of things that  the AOCs, etc, of this world want done. Look, there’s a small chance that, okay, let’s say the Republicans do, sorry, that’s not a small chance, that Republicans win and perhaps win big, but there might be even a chance that the old Joe Biden who used to actually do deals with the opposite side may reappear somehow, because we haven’t seen that guy so far. He did exist once upon a time, pretty much throughout his career actually, to be honest. This Joe Biden is actually quite different than we’ve seen over the decades.

Gene Tunny 1:00:14

Looking at what’s happened, Darren, you haven’t seen any radical policies being implemented by the Biden administration, have you, in terms of economics? But this infrastructure bill that was ultimately bipartisan, the larger Build Back Better Bill, was not bad.

Darren Brady Nelson 1:00:31

That infrastructure bill had no infrastructure in it virtually. It was all about the woke agenda on education and  race policy and all that sort of stuff. Now, that’s extremely radical. Just because you got a couple Republicans who went along with it doesn’t mean it wasn’t a radical bill. It’s a very radical bill.

Gene Tunny 1:00:50

It was a lot smaller than what they wanted to implement, so the full Build Back Better, which some people on the other side we’re labelling Build Back Broke.

Darren Brady Nelson 1:00:59

Yeah, but the percentages of stuff that actually went to infrastructure stayed the same. It was a very small minority of actual physical infrastructure as we know it. They defined infrastructure to be something completely different, that bill.

Gene Tunny 1:01:13

I have seen that. I think that’s right, to an extent, yep. I’m gonna have to come back. Either you or another guest I’ll have to invite them on and unpack that. I’m interested in that. It’s probably too much to go over there. Darren, every time we chat, I just think about all of these other things we need to explore. But I think we better wrap out now because we’ve been chatting for quite a while. But yeah, I really want to thank you. Unless there’s anything else you want to say, to end with, we can call it a-

Darren Brady Nelson 1:01:45

Quick one. Because we’re both renaissance men, we don’t want to be pigeonholed into one little thing.  We’d like to go off and explore different things.

Gene Tunny 1:01:54

Exactly right, Darren. Darren Brady Nelson, Chief Economist at LibertyWorks. As always, I’ve really enjoyed it. Thanks so much for your time.

Darren Brady Nelson 01:02:03

Cheerio. Thank you.

Gene Tunny 01:02:06

Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny 1:02:40

Now back to the show. Brendan Coates, Economic Policy Programme Director at Grattan Institute, good to have you on the programme.

Brendan Coates 1:02:50

Thanks for having me on, Gene.

Gene Tunny 1:02:52

It’s a pleasure, Brendan. You’re gonna help me respond to this question from a listener, a really curly one. Now, in response to an episode I did with Miranda Stewart, we chatted about wealth inequality and taxing the wealthy. There’s a big conversation going on about that at the moment. James, one of my listeners, wrote in and said, “I’d be interested in hearing more on how low-income/labour tax rates and tax credits work together, to oblige the government to pay wealthy individuals. I instinctively start from a position that the least anyone can pay in taxes $0. I was frustrated by the conversation in 2019, around imputation credit refunds, that people could actually have a negative tax rate that creates a liability for government to pay. However, I also realised that the conversation is bound up in concerns around double taxation, and would be interested in hearing from someone unravel those threads in an upcoming podcast. “

You’re probably one of the best people in Australia to talk about this incredibly complex issue that ended up becoming… It was one of the contentious elements of the Opposition Labor Party’s policies at the 2019 federal election and possibly cost them some seats. Just to begin with, Brendan, would you be able to explain what’s actually going on here? I think James is on the right track. He’s talking about this interaction of the low-income labour tax rates and the tax credits. Could you sort of explain what’s going on, please?

Brendan Coates 1:04:42

Thanks, Gene. First of all, thanks to your listener, because you’re bringing back bad memories, nightmares even, of the 2019 election and trying to simply explain how franking credits work. In its heart, franking credits are… We have an imputation system in Australia for dividends for corporate profits. When you’re paid a dividend by a company, it has a franking credit attached, which represents the tax that’s already being paid on those profits by the company. They can be used to offset any personal income tax the shareholder owes to the Tax Office. So in a sense, franking credits represent the tax that’s already been paid.

Now, when the system was set up, back pre-Howard, basically you could only use those franking credits to offset your personal tax income, if you had a tax liability. If you had no taxable income, therefore, no tax liability, then you couldn’t use those credits. Now, what happened after Howard in 2001 was we essentially, and Castello, is they allowed people to claim those franking credits, the tax already paid, to reduce the tax, their taxable liability that they had to pay as a person. The whole point is to sort of look at an individual and the company tax systems collectively and say, how much does someone owe? What you should be paying is essentially a marginal tax rate on both your income from all your other sources, and the tax that you’re paying on any dividends you receive for owning shares in Australian companies.

Gene Tunny 1:06:15

Okay, so this comes from the fact that we’ve got this peculiar way of taxing companies in Australia, this dividend imputation system that we share… Do we share it only with New Zealand? I’m trying to remember if that’s right. It’s really a different system from the typical classical company tax system, whereby the company would pay tax, so it might be, say, 20% tax on corporate profits, and then you would get paid a dividend, and then you would pay income tax on that dividend. But that’s not what happens in Australia, is it? Although, actually, the company’s paying tax at a 30% tax rate on its profits. If you get paid a dividend, the tax office takes into account the fact that the company’s already paid, say, well, the 30%. If your marginal tax rate is higher than 30%, so if you’re one of the top, if you’re on the top marginal tax rate, and…

Brendan Coates 01:07:33

Then you’re paying 47 cents on the dollar so 17% [more].

Gene Tunny 01:07:37

Yeah, so you got to make that up. But on the other hand, if you’ve got, effectively a zero marginal tax rate, because you’ve got all of these tax-exempt earnings, so we’ve got a tax-free threshold of 18,000 or something, then the company’s paid all of this tax on behalf. Theoretically, well, there’s been too much taxation paid, because the company is, it’s really an aggregation of individuals. The idea is that the company is just the sum of the individuals. What’s relevant is all of the marginal tax rates, and so there’s been too much pay. That seems to be the logic. Am I on the right track there, Brendan?

Brendan Coates 1:08:25

Yeah, that’s right, Gene. But the basic idea is that every shareholder in Australia pays tax at their marginal tax rate on those dividends, like they do everything else. Now, the problem here, so Labor’s policy was to remove refundability, to reverse the change made by Costello and Howard in 2001, and to mean that if you had a marginal tax rate of… If you had no taxable income left, then there was no tax, there was no ability to deduct those franking credits, the tax that’s already been paid.

Now, the original sin per se is not actually refundability. Refundability is actually a relatively normal part of a tax system. The issue is that there are a lot of Australians, particularly a lot of wealthy Australians, that don’t pay any income tax, which is why when Labour announced the policy to reverse the changes they were gonna collect a lot of money. I think the revenue figures are sort of in the ranges of five, six billion dollars a year. It’s because superannuation earnings. You put your money in super. You contribute through your working life, you hit retirement, and during your working life, any earnings, any dividends super fund earns on your on your behalf, are taxed at 15%. But when you hit retirement, they’re tax free. You have hundreds of thousands of retirees, often quite wealthy, self-funded retirees, paying no tax at all, and then claiming these franking credits back as well.

Labour’s approach was, okay, instead of going after what is the key source of the problem, which is the tax-free status of superannuation earnings in retirement, the fact that it’s 0% tax rate, they instead went after the franking credits themselves, because it was largely only hitting largely the top 10, 20% of the earnings distribution of retirees. It wasn’t hitting their base. It was hitting wealthy people, who frankly probably should be paying more into the tax base than they are. But it was certainly a second best solution to a third best problem.

Gene Tunny 1:10:24

Okay, okay. Right, there are a couple of things I might pick up on there. Okay, with the taxation of super, so it’s taxed in the earnings phase, or when it’s in your super fund, so there, it’s taxed, but it’s at a concessional rate. Then when you withdraw it, when you get that sort of pension in retirement, then it’s not taxed. There’s an argument that your super is taxed highly concessionally in Australia and it’s a growing cost to the budget if you look at the tax concessions as a cost.

You mentioned this concept of refundability. That’s whereby if you get a tax credit you can have a negative liability with the Tax Office, and therefore they would pay you the money. Instead of you paying money to the Tax Office, they pay you. That was something that was brought in in 2000 or 2001 by the Howard government. This is where the issues come from. I think the opposition, they were pointing to the fact that this is a growing cost to the budget, is that right, the money paid out for these franking credits?

Brendan Coates 1:11:58

That’s right. You can think of the money…as a refund, as a refund of the tax already paid, right? It’s refund the tax that has already been paid on your behalf by the company, which took the tax out of the money it was going to give you and gave you a smaller dividend, because it paid the other 30 cents the dollar at the Tax Office.

Now, the issue here is that we have an aging population, which generates challenges in its own right, because health spending in particular rises with age.  There are some long-term intergenerational challenges in terms of Australian federal government budgets in particular. The issue here, though, is that we also at the same time have retirees or older Australians who, because of the tax-free status of super, essentially opting out of the personal income tax system. The share of  over-65s that pay any income tax at all has gone from just under 30% 25 years ago, to more like 15% today, even though they’re receiving larger benefits from the State because they’re receiving more in healthcare and the rest of it. You’ve kind of got a generation that’s paying a lot less tax than it used to, than the generation before paid at the same point in time. It’s also drawing more in services.

I think the ALP would argue that the franking credits proposal was a way of trying to right that wrong, because it’s particularly wealthier super annuitants with very large balances that were paying the most, that were getting the largest tax concessions from the superannuation system, because they’re not paying any tax at all on their earnings or on their withdrawals from superannuation.

Gene Tunny 1:13:38

Yeah, and so this is a function of clever financial planners basically getting people before retirement to just put all your money and assets into super because it’s going to be taxed concessionally in retirement, so that must be what it is. Whenever you create a rule, you’ve got all of these clever, I guess financial advisors and accountants and lawyers trying to figure out how to get the best for their clients out of it. It’s a function of that. Okay.

Now, I think we’ve covered this point of double taxation that James had. That’s the idea that, well, you could look at it as double taxation if you got rid of franking refundability or franking credits, because the company has already paid that tax on your behalf and you shouldn’t have paid any tax, given the rules and the system, the tax rules what your marginal tax rate is. I think that explains that point there. I think that’s a good observation you made. Rather than the opposition tackling the concessionality of superannuation, super earnings, they decided to address this refundability of franking credits issue. I guess a couple of things there. One, I guess tackling the super concessions, that would be politically courageous, very difficult. There must be a case, is there a case for some concessionality on earnings from superannuation, Brendan?

Brendan Coates 1:15:17

Like anything that involves the taxation of savings, there’s often a lot more complicated or there’s more to the story. It’s not necessarily complex, but there’s often a little bit of nuance to the story. It is certainly true that we should be trying to tax superannuation earnings in retirement more than they are. The 0% tax bracket we currently have on earnings is unsustainable in the long run, particularly as more money in the super system enters the retirement phase, because that concession takes off from the age of 60.  People have got a lot of time left in their lives from the age of 60 onwards, where they’re basically opting out of the tax system entirely. But it’s fair to say as well that the tax rate on savings, on superannuation and the like, probably should be the marginal rate. It shouldn’t be 47 cents on the dollar for the top income earner, 32 cents on the dollar for the median. That’s because when you tax the return of savings, those tax rates compound over time. Basically, you get compounding at higher effective marginal tax rates if you tax the return to savings.

Now there are some that say, this is the UK, there was a public review for the Mirrlees Review that said the optimal arrangement is to have a 0% tax rate on the state, so you’re not distorting the choice between should you consume money today or consume money in the future.

I tend to fall on the… I think some of the other literature is pointing to the fact that the rates should be concessional relative to the marginal rate. It’s okay to tax return to savings a bit, partly because returns to the savings rates themselves don’t seem to be particularly responsive to the tax settings.  People don’t tend to change their behaviour very much. If you tax the return to savings, they might. They’re not that responsive. If you’re going to tax that margin less, then to raise the same revenue, you’ve got to tax other margins like labour income more.

On balance, we think that the appropriate tax rate on savings, it might be 15, 20 cents on the dollar, rather than say 47 for the top marginal rate. Now, if you’re thinking of something like superannuation, look, you are still taxing that savings, because you’re taxing a bit on the way and the income that you’re earning is being taxed, so 15 cents on the dollar when you put those contributions in. It’s just that a 0% tax rate in retirement, it is too much. It is too high. if we’re thinking about shifting the balance of tax in Australia in a way that’s going to improve economic efficiency, the taxes on super savings probably should be a little bit higher, and maybe the taxes on other forms of savings like term deposits, which are taxed at full marginal rates, probably should be a bit lower.

Gene Tunny 1:17:59

Okay, just for clarity, Brendan, I better make sure I’m getting this right. We’re talking about this is the money you take out being tax-free, out of your super. What about the money or the funds that still remain in your super fund once you’re retired?

Brendan Coates 1:18:16

Let’s back up a little bit, Gene. There are three stages. There’s the money you put into super contributions. There’s the earnings on the dividends. Then there’s the fact that you can withdraw the funds. Australia under Howard and Costello in 2006 removed all taxation on those withdrawals. Taking money out of your super is tax-free.

The issue is that at the point when they took the money out, they removed that tax on withdrawals, which was a very complex tax. It was called the reasonable benefit limits. Anyone who’s  an accountant or financial planner that listens to your show will agree that it was a complete pain in the ass. The issue, though, is that the taxation on those earnings is also tax-free from the age of 60. You’re paying no tax on the earnings as accounts, and then no tax on withdrawals.

Now, I should say that since some of the changes that the Turnbull government put through in 2017, look, if you’ve got more than $1.7 million in super, it’s only the stuff less than 1.7 million that’s tax-free. Anything above that is taxed at 15%. But most of the money is those people with less than 1.7.

Gene Tunny 1:19:26

Okay, it’s so complicated, isn’t it?

Brendan Coates 1:19:29

It’s just like pulling an onion apart. There’s layer after layer after layer.

Gene Tunny 1:19:33

If you’re listening, whichever country you’re in, regarding taxation, retirement income matters, please speak with a financial advisor, because they’re going to be the best people to help you. It’s just so complex. You and I both worked at the Treasury. You remember all of the hundreds of people in the revenue group dealing with these tax policy issues. It’s so incredibly complicated. Okay, Brendan, it’s been good. Anything else? Have we missed anything? Is there anything else we need to chat about? Oh, yes. I like the way you characterise this. You’re talking about abolishing franking credits. Did you say it’s a second best solution in a third best world or something like that?

Brendan Coates 1:20:22

That’s right. It takes us in the right direction. It’s not the reform I would have done. I would have introduced some sort of taxation on super earnings in the retirement phase, so that the dividends people are receiving from companies in which they own, that they pay some tax on those earnings, as they do before they retire. That would be the cleaner, neater solution to the problem, because you’re hitting all taxpayers, you’re not just hitting the ones that don’t have any income against which to offset their franking credits. That would be more efficient from a tax perspective, from say a tax economics perspective. But it’s just not the path that the governments or oppositions have gone down. We’re working on it. That’s obviously an area of grants research and advocacy. We think that is something that needs to change. But  it’ll be a bold government that does go and take that step.

Gene Tunny 1:21:20

I think what’s interesting, Brendan, you made this point that the cost of these concessions, this concessional taxation and superannuation, that is increasing over time, and it’s increasing at a faster rate than government revenue, isn’t it? Is that right?

Brendan Coates 1:21:38

That is right, because you’ve finally got these compounding amounts of money. The super system has $3.2 trillion in it. I think the amount of money… That’s rising really quickly. In 2014, it was $1.4 trillion. then at the same time it’s more than doubled in that short period of eight years. At the same time, you’ve got, as population ages, you’ve got a growing share of superannuation assets hitting that age 60, were super earnings becomes tax-free. The size of those concessions is growing really quickly. I think the retirement income review that was done by the Treasury estimate that I think by about late 2050s, actually might even before that, it might be a bit earlier, the cost of the tax concessions themselves will cost more than the age pension.

Gene Tunny 1:22:27

Right. Okay, I’ll have to have a closer look at that. It just seems to me that with these concessions, and also the NDIS, there’s some cost issues to do with the National Disability Insurance scheme. Eventually, yep, there will have to be some hard decisions made somewhere in the Commonwealth Government regarding Commonwealth programmes and tax policies. Unclear exactly what those will be.

I think Grattan’s doing a good job at highlighting what all of the issues are and just crunching the numbers. I’d just like to say to you and your colleagues, keep up the good work. I’ve been lucky enough to chat with quite a few Grattan people on the podcast and always, always find it a really great discussion, and I learn a lot, as I have done today, Brendan. If there’s anything else, yeah, happy to hear it. Otherwise, I think that’s been great. I’ve certainly learned a lot. Thanks so much for your time.

Brendan Coates 1:23:34

Thanks very much, Gene. If I can leave you with one final thought, which is something I think you should think about for a future podcast, is with an ageing population, you tend to find that the services that people rely on are often provided by government, like health care. It does raise the question that if you want to provide these services with an ageing population, the size of the state probably ends up being a bit bigger than what it has historically, which means you need the tax revenue to fund it. Now, there’s always spending you can try to cut, but all else equal, it strikes me that that’s the direction you end up heading in, just as a matter of just the dynamics of ageing Australia. I think that’s something we’re just yet to grapple with in Australia, that it probably does mean tax to GDP, it probably increases from where we are today.

Gene Tunny 1:24:26

Yeah, yeah. If there is that political desire to have those higher expenditures, then naturally, you would need to have that higher rate of tax to pay for it. Personally, I may not support that. But look, I accept that that is the case, that if there is the desire from the public, if that’s how people vote, and they support that, then exactly, those expenditures have to be funded. Very good point. I think I will try and cover that in a future podcast episode, because Richard Dennis I’ve seen has written a book, Bigger, or Big, maybe it’s Big, from the Australia Institute. I don’t know if you’ve seen that. I think Richard’s making a similar point to what you’ve made. I’ve been meaning to get a copy of that and delve into it and see if I could get a podcast episode out of that. Great suggestion, Brendan. Great.

Brendan Coates 1:25:24

Thanks very much, Gene.

Gene Tunny 1:25:26

Cheers, Brendan. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

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