Gene Tunny welcomes Dr Nicholas Gruen from Lateral Economics to explore the decline of Australia’s policy exceptionalism. They delve into the era of microeconomic reforms, the role of neoliberalism, and the challenges current policymakers face. Nicholas provides a historical perspective and discusses potential ways forward. He shares insights from his time advising the Hawke and Keating governments, discussing the successes and failures of Australia’s economic reforms from the 1980s and 1990s.
If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com or send a voice message via https://www.speakpipe.com/economicsexplored.
You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.
What’s covered in EP248
- Introduction to Australia’s loss of policy exceptionalism. (0:00)
- Regulation, economics, and politics in Australia in the 1960s and 1970s. (4:59)
- Early Australian economic reform and its challenges. (10:45)
- Australian economic reform under Hawke and Keating governments. (16:20)
- Car industry policy. (21:36)
- Free education vs HECS – why was HECS a good reform? (32:06)
- Airline deregulation. (36:48)
- Privatisation of public assets and its consequences. (42:55)
- Economics of toll roads (48:18)
Takeaways
- Since the early 2000s, Australia seems to have lost the problem-solving spirit and policy exceptionalism of the 1980s and 1990s, struggling in various policy areas like energy.
- Impact of Neoliberalism: Neoliberal reforms, initially embraced by the left, significantly improved Australia’s economic landscape but also led to unintended consequences.
- Key reforms included cutting tariffs, higher education policy changes, airline deregulation, and other competition policy reforms, but some privatised infrastructure assets have not been appropriately regulated post-privatisation.
- Challenges in Current Policy: Australia faces challenges in various policy areas, including energy and housing, indicating a need for renewed reform efforts.
- Moving forward will require reinvigorating honest, evidence-based policy conversations focusing on problem-solving rather than fixed ideological positions.
Links relevant to the conversation
Nicholas’s YouTube channel where Uncomfortable Collisions with Reality episode will be published:
https://www.youtube.com/@NicholasGruen
Nicholas’s Club Troppo post on economic reform featuring Colin Clark quote:
https://clubtroppo.com.au/2008/03/01/compare-and-contrast/
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Transcript: Australia’s Lost Policy Exceptionalism w/ Nicholas Gruen – EP248
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. 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 00:00
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 and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode features a conversation I had with Nicholas Gruen about the loss of Australia’s previous reputation for exceptionalism in public policy. This conversation will also be published on YouTube as the latest installment of Nicholas’s uncomfortable collisions with reality podcast. So check that out if you’d like to watch the video recording in our conversation, Nicholas shares some great insights from his experience as an advisor in the hawk and Keating governments of the 1980s and 1990s he’s well positioned to tell us about what went right during our so called microeconomic reform era. He’s also well placed to provide some great insights into why we’re messing things up so badly right now. I’ll be interested in your reactions to this conversation, so please let me know. You can email me via contact@economicsexplored.com Before we get into it, please be aware I’m taking a four week break after this episode, but the show will return in August. Also, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it.
Nicholas Gruen 01:51
Welcome everyone to another edition of uncomfortable collisions with reality. And my guest not looking uncomfortable is Gene Tunny, my colleague, Gene Tunny and this podcast, this discussion came out of an email that gene sent me as he was reflecting on some of the work we were doing. We’ve been doing over the over the last six months. Gene please explain what the story is,
Gene Tunny 02:21
yeah. So thanks, Nicholas, good to be with you again. What I was reflecting on was that it seems that in a number of policy areas now, we seem to be struggling as a nation. Whereas I remember when I was in Treasury, we told ourselves a story about how we were exceptional in policy, there was this view that of Australian policy exceptionalism, and that was behind our recovery in terms of GDP per capita relative to our OECD peers. We had a productivity surge in the late 90s, and that allowed us to catch up with, you know, other OECD economies. And so we essentially moved from the bottom third of the OECD, the 24 countries, as it then was, to the top third, so the top eight. And there was a feeling that in large part, this was due to the the era of micro economic reform of which you were, you were part of. And, I mean, I’d like to explore that with you. And somehow we just seem to have lost that policy exceptionalism. I mean, I look at various different areas of policy, energy policies, one, for example, where we just we’re really not performing as we once did. I mean, that we things seem to be in a real bit of a mess. So I thought it would be good to discuss that. And I mean, what’s the way forward that we might see if there is a way forward? Yeah,
Nicholas Gruen 04:00
yeah. Well, it’s a subject that I’ve thought about a lot, and I can’t, I can’t sort of give you any easy answers. I can certainly give you plenty of thoughts. And I think, I guess this sort of happens a lot, when new movements turn up, and the movement we’re talking about, whether we use it as a swear word or as a word of allegiance, is neoliberalism and around the world actually certainly true of the United States, and it’s absolutely true of Australia. Australia is an exemplar here, the Neo early neoliberalism was a left of center project. It was taken most seriously by the left. And by the left, I mean the center left, and I mean people like Jimmy Carter, who had the audacity to spark pretty dramatic Airline Deregulation. They had a. Entirely regulated, ridiculously regulated civil aviation sector, in which delta airways, if they existed, would apply to the government to say, we want to go on a new route. And then there’d be lots of discussion about whether they’d be allowed to, and that that even got to them clearing menus of the food that would be would be served on these routes. And it’s pretty obvious that that regulation, if it ever had any, if there was ever any sense to it, was clearly wildly over regulated and stupidly over regulated, and we had that sort of thing as well. And in fact, my father had been part of a kind of a movement in which, I mean, he was an economist, and this was a time of triumph for economists. But I the way I saw it when I was young is that he was university educated, and he was, he was his role in society was to at least make the case as to how we could run this system better, and he was an agricultural economist. And one of the things that I remember. I think I now remember this in retrospect. I mean, I think I heard him talking about it, but I know something of the policy background, which is that in Australia in the 1960s it was illegal to put yellow dye in margarine and Gene you. I don’t know whether you know that, but you can probably extemporize now until and say why that rule existed. Why do you think it existed?
Gene Tunny 06:49
Would it be unfair competition with butter? Yes,
Nicholas Gruen 06:52
exactly, terrible. It’d be terrible for farmers. It’d be terrible. You know, it was against the human rights and farmers, and you can see you can make it’s easy to make this stuff up. We don’t want to mislead people. You know, you can smuggle in these holier than thou excuses for what you’re doing and what you’re doing is what we see every day, which is we see lawyers do it and surgeons do it, and we’re not doing much about that today, just as we weren’t doing anything about this kind of nonsense from farmers and from wharfies on the on the labor side of things back then. And so neoliberalism, in my experience, is a is a revolt against businesses politics as usual. And you’ll find some marvelous descriptions of politics as usual in Adam Smith from 200 years previously, which is business men. They were men in his day. They’re still mostly men today. Re of seldom meet even for merriment, but even for merriment, but that the conversation turns to some conspiracy against the public, yeah,
Gene Tunny 08:07
to fix prices, or something like that. It was it That’s right?
Nicholas Gruen 08:10
Or contrivance to fix prices. Or, yeah.
Gene Tunny 08:13
Can I ask about your father? For those who don’t know, I mean, Fred Gruen. He was an advisor to Prime Minister Whitlam, wasn’t he?
Nicholas Gruen 08:22
Yes, and he was a bit unusual in that regard. But he was a professor of Agricultural Economics who, in 1970 at the end of 1972 picked up Trevor Swan’s chair. He was a Trevor swan was a great Nobel Prize quality economist that Australia produced. But all his Nobel Prize quality work was wasn’t even published. It circulated around Canberra, but something known as this he growth theory. He was an innovator in growth theory. And there is you may. There’s the solo Swan model of growth. I think it’s called or it’s a solo Swan model, or maybe it’s the solo Swan model of internal and external balance.
Gene Tunny 09:11
There’s a swan Salter model, which is internal and external balance. And then there’s the solo Swan growth model, which is the neoclassical growth model. So we had two innovations, yeah,
Nicholas Gruen 09:22
that’s right. And he so he was that kind of, he was that good. And I don’t know, I don’t think either of those were published. Certainly the solos, the certainly the internal and external balance stuff wasn’t, which was basically a diagram wasn’t, wasn’t published. It circulated around Canberra. So dad got that that dad got that gig at the end of 1972 and the Department of Prime Minister and Cabinet were looking around for an external advisor, a consultant, if you like. And it was. Wasn’t the prime minister. And my I think my father was quite proud of the fact that he was a consultant to the Prime Minister’s department, not a political mate of the Prime Minister, although he would have voted for that Prime Minister, Gough Whitlam. And so he then had a problem, because he just accepted this job. This is also, I think this is also a nice thing to talk about, because it talks about a world that’s more or less gone, and that is that he just accepted the chair in this position at ANU, and along came this job that he was would have loved to do, and he basically said, Well, I won’t do it if the university doesn’t want me to do it, because I’ve agreed to do this other job. I don’t think that sort of happens very much these days. And so that was worked out. And he was a part time consultant to the Prime Minister’s department, and he had been an advocate for economic reform, for freer trade, which was, which was really almost every Australian agricultural economist was a an advocate for freer trade and but, but all kinds of things at the same time, his great friend Alan Lloyd was a great campaigner for a thing called the little Desert. So he was an early environmentalist. He was saying, Look, this We’re now developing this land, which is the Ord River in WA was another famous example where it was economists who said, this recipe for development is a scam. It won’t work. We’re not getting the right advice. And it’s it’s a it’s being driven by private interests. And the little desert, a minister in the Victorian Government had a holiday home or something and wanted a road built to the little desert. Now, there may be more to it than that, but this little desert needed to be a national park. And Alan Lloyd, an economist, helped, helped galvanize. He was one of the early campaigners for this. Now, my father wasn’t nearly as strong an environmentalist. He wasn’t an environmental campaigner, but it was the same kind of mentality, which is, we want a civilized life here. Economists are there to help us be rational in pursuing a civilized and rewarding life, not just to optimize GDP. Optimizing GDP is a great thing to do other things being equal, other things are never equal, and therefore we try to make the appropriate compromises in our ignorance as we go.
Gene Tunny 12:48
Yes, okay, and so, yep. So is that a good place to start with, the reform era, if you’d call it that in Australia. Yeah.
Nicholas Gruen 12:55
So that was kind of what I was getting at. So it’s, it’s kind of London to a brick at that stage, for any I don’t know whether that’s an English saying, I suppose it must be an English saying, not an Australian saying. I’m thinking of our international listeners, but it’s kind of obvious that at that early stage there is lots of low hanging fruit. There’s lots of worthwhile things to do, a lot of completely crazy and and and borderline corrupt things going on. And by corrupt here, I don’t mean that any that money is necessarily changing hands. I mean in the sense that Adam Smith meant it, that government decisions are being influenced by private to advantage private people and to advantage private interests. And so this was the early part of economic reform. Gough Whitlam himself was, if you kind of look through the chaos, was this was an important part of Gough whitlam’s political rhetoric, which is that the super phosphate bounty should be justified on economic grounds, and we’re going to take it off the farmers because we’re doing a bunch of other more sensible things. And of course, that turned into a big political bun fight. And likewise, we’re going to take the opportunity in 1973 we had this situation. Remember, we didn’t have floating exchange rates, and we had a lot of pressure on the current there was a lot of pressure to revalue the currency, and we did that as I recall, but we also took the opportunity to cut tariffs because the economy was booming. We didn’t have enough labor. Inflation was taking off, so this was a great opportunity to achieve longer term goals in a way that was very consistent with short term imperatives. So that was early. Uh, that was early neoliberalism, and it was a success. Then along comes a massive recession, and then, and this is somewhat unfair to Malcolm Fraser’s government, but not terribly unfair. Malcolm Fraser wins government, promising jobs, not dogma. Malcolm Fraser is part of a an operation which blames tariff which blames unemployment on tariff cuts. It wasn’t tariff cut. Very little of it was tariff cuts. Most of it is macroeconomic. Most of it’s the state of the economy, which is a different thing, and Whitlam can take some uh, reverse credit for that. Whitlam management the economy was far from exemplary management of the macro economy. And the other main thing that was leading to large scale layoffs in Australia was equal pay for women, particularly in textiles, clothing and footwear. Well, no government so Malcolm Fraser wasn’t going to come out and say it was equal wages for women. That is, that did it. So this thing suffers from politics. I’m not, again, I don’t want to be overly critical of Malcolm Fraser. It’s a bit like being critical of lions for eating meat. That’s kind of what or or business people for making profits. That’s kind of what they have to do to stay in business. And, and, but then, after with this sort of promising towards the end of his reign, towards the end of Malcolm Fraser’s reign, he became famous for giving speeches overseas talking about how great free trade was, and arguing for countries to embrace free trade, and coming back to Australia and not doing a damn thing about how very high protection levels and that that sort of set the scene for the Hawke government and the glory Days, which lasted until arguably the first third of the Howard government, from the whole of the Hawke Keating government, and then in economic terms until 2001
Gene Tunny 17:10
Yeah, okay. And I mean, Fraser government famously sat on the was it the Campbell inquiry report into the financial system, there were, yeah,
Nicholas Gruen 17:22
I think that’s right. It was a record, yeah, that’s right. And then it was the Martin inquiry that the Hawke government had, yeah, when it got in. Yeah, that’s correct.
Gene Tunny 17:30
So I think there’s a general recognition among conservatives in Australia that the Fraser years were a wasted opportunity to reform the economy, to to make it more
Nicholas Gruen 17:46
and and I recall, I think it was the 20, I think this was 19. I mean 2003 I think it was, yeah, it would have been during, yeah, it was 2003 rather an interesting time, because I went to a dinner that was put out, put on by people associated with the think tank. You’re associated with the CI, the Center for Independent Studies, right of a right leaning Think Tank. Now it wasn’t, it wasn’t an official function. Was a whole bunch of people, people like Andrew Norton and a bunch of other people. It was a dinner. It was just a dinner in Melbourne. It was a dinner to celebrate the election of the Hawke key, of the Hawke Labor government in 1983 because that was seen as the beginning of Australia getting serious about economic reform, becoming better than pretty much anyone else in the world, and I think held in 2003 people were already starting to be anxious that the Howard Government, really, having done its having kind of had a near death experience with the GST, just sort of improvised away. We know that when it got control of the Senate, then we need to another reform paroxysm which killed it off. At least. That’s the that’s the folklore, but it but, but by but Howard. I think of Howard as a very momentum free politician. He was a good politician in a number of respects, and I use that term as in terms of virtuosity rather than virtue. He was good at what he did, and he had a certain idea about what he wanted. And I don’t fully I’m not very sympathetic with that, but I have some sympathy for it now in the age of wokedom, of talking about things like practical reconciliation rather than symbolic stuff. But then anyway, that’s another that’s another topic, but Howard lost momentum almost immediately on. Gaining office, the business community was very upset about it. I was working for the Business Council at the time, and it was an attempt at a reasonable interpretation, is that it was an attempt to to respond to that listlessness that Howard said we’re going to have tax reform. And that turned into another major reform episode in Australia, and that was kind of the last one. Yeah,
Gene Tunny 20:32
yeah. So be good to talk about Hawke and Keating, I mean, very consequential government that essentially brought about the end of what Paul Kelly called the Australian settlement. This is something I talked about with my friend Darren Nelson on a recent episode of my podcast economics explored, you know, the conciliation arbitration, the the, you know, the very rigid IR regulation, the tariff wall, White Australia Policy, although that ended under Whitlam, I suppose. But that that had ended before, it had sort of ended before you, I think. And then there are a couple of other elements of the I might have been Imperial preference that had already gone. And there was another. There was one more element, maybe state paternalism, I think it was the his five elements of the Australian settlement. And, you know, that is that really, you know, shook things up. It got rid of the tariff wall. And as I’m sure, we’ll, we’ll talk about, and, you know, various other policy innovations. Can I ask? How did you get involved in it to begin with, you’re, you’re an advisor to John Button. Were you the industry? I
Nicholas Gruen 21:41
asked as an advisor to John Button. I was my first job out of it. Was my first job out of uni, and I got the job. I think, yeah, I think this is how I got the job. I was a volunteer in Gough whitlam’s office in 1977 when he was in opposition. I was at uni, and I used to go in and do a couple of hours filing for his secretary, Roz Byrne, and I’d just go in and do her filing. And occasionally this enormous red faced man would walk in, walk past, say, slaves coffee, and then walk, then walk into his office. And anyway, I met him once or twice, and John Button used to board in ROS burns house in Canberra. And I don’t know whether I don’t know what happened, but I may have said to ROS I was looking for a job or something. Anyway, I started working for John Button when he was Shadow Minister for Communications in 1981 then I went back to uni in 1982 and finished a law degree. And then in 1983 Hawke got in. And so I started working for John Button, and he put and and the government had got in with a classic opposition’s promise, which is General Motors. Holden had sacked 14,000 workers. Ford was sacking people, and the labor policy was that this was a disgrace. Was all the government’s fault, and that what we and we would review it and fix it up so no one had any idea what to do. And I was given this job, and it was completely fascinating, and it sort of extend, you know, I kind of, I’d never studied economics, but I realized, I realized, in retrospect, that I understood a lot about economics because I’d been talking to my dad about it at the dinner table. And one of the strange things that happened was that I didn’t really I ended up making common cause, not with the economists in the what was then called the industry’s Assistance Commission is now called the Productivity Commission and the Treasury, because they were in ways that I can explain extremists of a certain kind. And I I basically made common cause. And then there was John Button’s department, the Department of Industry and Commerce. It took me, I don’t know, six or nine months. John Button said to me, what do they want? And I said, I don’t know. And, and it took me, I don’t know, nine months to work out that they were following Jerry Seinfeld’s principles of life, which is, we’re not thinking anything. We’re just walking around, looking around, and, and they were sort of, they had this immensely complicated system of local content plans and and limits here, and special rules there, and they were just sort of having meetings with all the stakeholders and trying to keep them as happy as they could. I. Yeah. So anyway, I ended up making common cause with people in people like Ed vis board in the department and John spaziovich in the Department of Prime Minister and Cabinet. And these people were all economically trained, but they weren’t economic zealots. They knew that local content plans made no damn sense. They were broadly free trading, but they didn’t get themselves as tied up in the culture war of in the culture war of of neoliberalism, of of economic reform and so on.
Gene Tunny 25:39
So what was the Could you explain the local content plan this? This was highly interventionist industry policy. Was it for the car? Well,
Nicholas Gruen 25:47
I’ll start with a few, a few riddles, if you like, a few questions. Which is, what government body made an independent recommendation to have a local content plan for Australia in the car industry, answer the tariff board, which was the forerunner of the industry’s Assistance Commission that was in 1957 year. I was born then in 1965 al frantic, and was the chairman of the Productivity Commission of the in of the tariff board. And he’s a kind of Saint among us, among us early neoliberals. And he recommended a and he signed off on a report that recommended a local content plan as well. So he was figuring stuff out himself. Now the local what the local content plan said was that in return for the for access to duty free components, so there’s a tariff of 35% on components. You can have free components if your local content is over 95% now this was always a moving feast. And the big thing that came along was not really that. That killed the industry all on its own. We had the oil shock and a swing towards smaller cars that Australia was bad at making. And then everybody looked all the policy makers looked at Japanese cars coming in and said, Well, can we make those here? Which was a terrible idea. And so then what happened was that we watered down the local content plan for them, to get them to assemble here. They started making cars at about 60% local content. 60% local content is basically zero. What we would, what a non economist would think of a zero local content. There’s virtually no pieces. You pick up some tyres and some windscreen wipers and some spark plugs. But basically, this is a fully imported car, imported in pieces and stuck together in Australia. And then it and then, and then they fiddled. And then so there was a 65% local so then we wanted to get their content up from 60% to 65% and then so there was a 65% plan and a 95% plan. And of course, lots of fights between different factions of the industry. They’re saying, Well, you’ve so Holden and Ford would just say, well, thanks a lot. When we’re making serious cars here and we are now discriminated against, these people have got access to these people have got access to 35% of their content, duty free. So then the Department of of do Industry and Commerce would say, well, we’ll put quotas on these so you can only make 30,000 of each of these things. And it just went on. It just went on and on. I mean, let me tell you one other thing, which was a thing called the non reversion rule. And that was that if you had, if you had started buying breaks in Australia, and then your break supplier was a lousy break supplier, or for some other reason you wanted to change, you weren’t allowed to, and you have to get permission from the non reversion from the reversion Committee, which was a body that sat in the Department of Industry and Commerce. And I will say one further thing, which is that in 1974 under the Whitlam government, that rule had been torn up as part of tariff cuts and things like that, and there was a caucus revolt. And guess who, and guess who moved the motion to retain the to retain the non reversion rule, one, one Junior, the. Old, soon to be Junior minister, then back bencher, member for Blaxland. Need I say more? Paul Keating anyway, like Ratigan, Paul Keating changed his tune on a lot of those things.
Gene Tunny 30:15
Yeah, it’s fascinating just how differently we did things back then. I mean, the past is a foreign country, as they say, Isn’t it just extraordinary? Yeah, yeah. And what do you see as the highlights of that reform era of Hawk and Keating? What do you see as the real great achievement? Well,
Nicholas Gruen 30:35
obviously, cutting tariffs, getting rid of tariffs, is a major highlight. I’ll tell you something that I think of we should put further up there. I know well, Bruce Chapman will thank me for this, but it’s not really, it’s not that it was a great intellectual piece of genius, and this is the higher education charge hex. Now that was something that Milton Friedman had suggested, and it’s just bleedingly obvious. And the reason I and so, what it is, is that the government sits there and says, Well, we administer the tax system that makes a great piece of infrastructure, which we can build finance around, and we can say to people, we’ll help you. We’ll fund your education, and you will and then we’ll once your income achieves a certain amount, we will chart, we’ll tax you more, and we will tax some of that money back. So I think of that as the sort of neoliberalism I would have liked to see far more of we also did it for we also did it for child support. So typically ex husbands, but doesn’t have to be it can be ex wives who have left a left some partnership, instead of the ram shackle system that is run by the courts. Once you have a court order, we then run all that through the tax system, and it works like a charm. Yeah.
Gene Tunny 32:07
Can I ask about, oh, sorry, I was just gonna ask about, Heck, yeah, because that was very controversial at the time. I mean, I was in, I was probably in high school at the time, and I remember, like, you’d see all the news footage of the protests at university, and people were saying, Oh, this is the end of free education, and we’re going to be a backward nation. There’s a lot of controversy. What, what do you see as the benefits? I mean, did it allow an expansion of higher education? Well,
Nicholas Gruen 32:34
well, that was the argument. And I think the answer is yes, but I do. I mean, I think that the thing about the thing about hex, was that the argument for Hex, and again, it was a left leaning neoliberal argument, and the argument picked up by the right and the argument for people paying for their own tuition is that, guess who gets their own tuition? People who are predominantly wealthy, relatively speaking, so it’s it’s so it’s very hard to get around the the fact that free education produces a subsidy from the least well off to the comfortably well off and the comfortably well educated. Now, in fact, that gives me an opportunity to kind of complicate my story, because I’m not sure. Well, firstly, I didn’t really agree with the way hex was introduced. We were told fairly arbitrarily when the when the was the RAND Neville ran, was on the committee, and Bruce Chapman is the person who’s the economist, who’s associated with this. The RAND committee, as I recall, recommended that hex recover 20% of cost. Now, my in my way of thinking, if you’ve if you become a lawyer and you’ve become extremely successful, I don’t see any problem with asking you for 100% of those costs back. In fact, I don’t see any problem with asking for 150% of those costs back. And that takes you back to the idea that which, again, neoliberal, neoliberalism is expunged largely which is progressive marginal tax rates. Australia has cut its top marginal tax rate, like almost every other western country, but still has one of the highest, which I think we can be proudest of, not now, that’s we can argue about when it should cut in. But this was one of the, this was one of the what Martin, whether I can call it the jewels in the crown, it was, it was a piece of common sense among economists of my father’s generation that as you get more money, money becomes less important to you. And therefore, if you can take more. Money off wealthy people without messing up their investment decisions too much, either with their human capital or their physical capital, go for it. That’s a good thing to do. So so it’s so in a way, hex is a nice segue, because it shows you that these arguments that the neoliberals put were right and powerful, but they weren’t complete that they weren’t so it’s absolutely true that free education with an ex with the same existing tax system is is, is a certainly in the short term, a transfer of wealth, transfer income, to the well off and moderately well off from the poor, or not the poor, but the working poor. And so that should have been factored in, it wasn’t factored in. So one of the things neoliberalism did is that it bit like modern university education. It kind of compartmentalized things, and it said university fees, we’re going to talk about that as its own system. And there’s some sense to do that, but it’s all in a larger system, and we’ve got to try and do both things,
Gene Tunny 36:23
some other successes of what they call neoliberalism. Now I’m, I’m a bit reluctant to use the term, because it seems to be always used pejoratively. Yeah, and oh, you’re this neoliberal economist as a way of dismissing what economists say. So I’m always
Nicholas Gruen 36:40
where. That’s what always happens with such words, yes,
Gene Tunny 36:45
yes, anyway, but I was just thinking of other successes. There’s the the airline. Was it deregulation? Did
Nicholas Gruen 36:51
we have a two airline policy here? Yeah, two airline policy was crazy, but, but again, let’s have a look at two airline policy. So what we did was we, we had a kind of nutty system, and it was a kind of, it was a compromise that Menzies made. Because I think what happened was that Chifley was sort of halfway through nationalizing airlines at the time, and so Menzies created this cozy little duopoly. And there were nice cartoons of a twin bodied plane flying from from Melbourne to Sydney, with one one of the fuselages had an set written on it, and the other one had TAA, as it was called, trans Australian airlines, which has subsequently became quant well, was subsequently bought by Qantas. So, so that was a kind of complete mess, and it was like the local content plan. However, airlines are naturally very oligopolistic, and so that was an opportunity not, not, not to just think, Well, I think deregulating the airline was with a system was better than what we had. I think that’s quite clear, but it sort of jumped out of the out of, well, sort of, let’s say it jumped out of the out of the fire and into the frying pan. In other words, it is a bit better, but I think we could have done quite a lot better. And let me give you an example of what I mean, quite a because it’s this is hard. It’s hard to interact oligopolies are hard to interact with. Policy finds it hard to interact with oligopolies. Helpfully, it’s one of the problems we have with supermarkets and things. But this is one of the things we could have done at the same time as deregulating the airlines, or a little bit later, actually, we implemented national competition policy. And national competition policy gave us the tools to say to Qantas, oh, by the way, your your terminal facilities, or some chunk of the terminal facilities that we require you to negotiate with us are, I think, the term and the relevant act is, infrastructure of national significance, and any newcomer. Remember, compass was an old newcomer, and a recent one is bonds or airlines. I think it was called, any newcomer has a right to pay you a commercial price to access those resources. We didn’t do that. And in fact, we did something quite different, which is we essentially allowed, and we would have, I’m pretty sure we would have been doing this while it was publicly owned, or majority publicly owned. We allowed Qantas to do what oligopolists do, which is to have price wars, targeted price. Wars against any new entrant, and that’s the exact opposite of the sort of behavior that we want. And so here’s two policy levers that we had, and we sort of behaved as if, we sort of behaved as if those policy levers didn’t exist. They barely were discussed in the in at the time, and one way of thinking about our failures in reform is to say that we went through a very comprehensive process of policy reform, and we had a quite a powerful philosophy of private enterprise, and really no philosophy of public enterprise, of the role of the public sector in in being a good host for the most competitive possible private sector we could have,
Gene Tunny 40:47
right? And so is this why I think I’ve heard you say this before, or you’ve written it that the micro economic reform era, it contained the seeds of its own demise, or, etc, yeah, yeah. Well,
Nicholas Gruen 41:01
yeah. I mean, what I would say is that it, it, it collapsed into a kind of reductive formula. And the reductive formula was that being market oriented was somehow better than not the and so something like re fashioning the CES the Commonwealth employment services as job active and as a network of private competitors. I’m not actually, I’m not saying that’s a terrible thing to do. I’m saying that, if you do it, pay attention to the problems that the public sector, that the public system has tried to deal with, and be confident that you’re doing a reasonable job on them. And if you can do that, then you might some of this might work. But we didn’t really do that. We just we’re in there, and VT, particularly in Victoria, we just said, Oh, this looks pretty you know, this is kind of competitive. It’s, this is sort of like supermarkets or something, and it’s not these different sectors operate differently. And if you were going to play your role as a custodian of the public interest. You have to think about these things in a critical way, not in a formulaic way. So that’s what I that’s the way in which this, these ideas that, and I’m kind of romanticizing it a bit. I think, as a young person, did his what he saw people older than him do, but it as I saw it when it was being built. This was an engine of human liberation in the spirit of the Scottish Enlightenment and Adam Smith. And it was a problem solving. It was a problem solving mindset, and it became an ideology. It became a formula, and we just went from one difficult area of policy after another saying, Well, how hard can it be? We’ll privatize electricity or as much of it as we can. And then, oops, we got the regulation of rates of return wrong on transmission. Well, how much harm can that do? Well, $100 billion of too much investment, that’s how much harm that’s, that’s, that’s not bad, that’s not bad. Just a little, just a little glitch.
Gene Tunny 43:37
Yeah, yeah, there’s, yeah, there’s certainly been problems. And yep, if you’re going to privatize monopolies or natural monopolies, and you need to have effective regulation and, and, well,
Nicholas Gruen 43:48
yeah, and we don’t know a lot about what we’re not, you know, the state of economic knowledge is not so great. We can, we can help prevent things being a complete disaster. But the state of economics is not so great that we can be that helpful in producing a great result from a from a sector like that. But one thing, I mean, another thing that economic reform did, really, I makes me quite angry, actually, is that there were things that were being done, that were obviously wrong economically, and which were not corrupt in the sense of money changing hands, although that might have happened, but corrupt in a policy sense that we would we were the governments were getting away with mortgaging the public interest. And I The example I give. I remember Chris Richardson telling me this at a conference. Now at No actually, he’s not at Access Economics. I don’t think a Deloitte Access Economics. I think he’s playing his own trade. But I remember Chris Richardson telling me that the Commonwealth Government was selling off its offices. Office, and it was selling off its offices so that it could sell them to a property in trust and rent them back. And the rent would be substantially more than the interest that they were paying. The rent would be about a real return of 7% and they were and they the interest they were paying was a real return of 5% just a plan to miserize the public sector and and it’s just just working out on a spreadsheet. And we’ve done this with every tonight, I’m driving out to the airport. If I go on the road that is the most direct route to the airport in Melbourne, I will pay $20 $20 in fees for 15 minutes, either way, on a on a tollway. And that is much more than what I would be paying or the state would be paying if the government had built that and we replicated that, Sydney did this, and Melbourne did this, and it’s being done much less now, for various reasons, partly because these things have fallen over, because the price the private sector got better at doing them, and then ended up having to sharpen its pencil too much. And there were various bankruptcies. Queensland made these mistakes much less than the southern states. As I recall, you’ve got if you’ve had a few of them, but you’ve done rather well because you had a privately built train line to the airport, and that went broke. But I think the state did rather well out of that. Anyway,
Gene Tunny 46:41
costiness, it’s controversial now, because, because of that deal, it’s a 30 year deal and extend it, you know, and certainly the state government got some money out of it, some reasonable money out of it, but, yeah, because it overlaps with the Olympics, like the deal lasts longer than the Olympics. Yeah, we Brisbane City Council can’t run busses to Brisbane Airport, and that’s going to affect our ability to get people to the games,
Nicholas Gruen 47:07
exactly. And so it’s financially very generally speaking, I don’t know about the Brisbane train line, but generally speaking, the this form of funding, because it uses private funding, not government borrowing. It’s about 40% more expensive, but that’s before you count these things where you have to sign away your ability to improvise using the infrastructure you have, which has happened in Melbourne. So we’ve widened the Tollway to Tullamarine airport. And of course, how do we do that? Well, the the owner says, Oh, well, we don’t really want to do that unless you extend our monopoly for another decade or two or three. So you’re basically caught up in this evergreen monopoly, and you’ve signed away your ability to use infrastructure the way you need to use it. It’s really terrible.
Gene Tunny 47:58
Yeah. And so, I mean, look, I mean, I’m, I like the idea of, you know, trying to use the private sector as much as possible, but I do recognize that in many cases, governments in the past have made decisions based on what they saw as a favorable short term budget treatment like the wholesale and leaseback. Yeah, yeah.
Nicholas Gruen 48:19
Well, let me make a rhetorical point, but it’s a pretty important one. We call these mechanisms for these free these mechanisms for funding freeways, public private partnerships. In England, they call the private finance initiative. Now I think it’s really important, a really nice way to crystallize This is to say that with roads, are always public private partnerships. It’s just that they were good private public partnerships when governments designed, funded and then outsourced the building of them. That’s a good that’s an excellent interface between the public and the private sector. The public does its role, which is to stay in control of planning a city, and it’s a cheaper source of funds. So if you keep that reasonably efficient, that’s going to work for you. And then you’ve got the private sector grinding the gravel and and running the steamrollers up and down and laying the concrete. That’s exactly how you know these weren’t these weren’t these, these, these. None of these roads are built by governments. They’re they’re funded by governments. They’re planned by governments. And you really should have a good reason, and so saying you’ve got private funding when this is a thing that Tony Harris, the former auditor general of New South Wales, says, you know, this stuff, we can’t afford to build it. What absolute nonsense. We can’t that’s simply not true. So sort of a throwaway line, and then you end up building something that’s 40% too expensive and. It ties you up in knots for decades.
Gene Tunny 50:03
The other point, I think, is interesting, is one John Quiggin makes. He gave, he gave a really good talk to Economic Society of Australia, Queensland branch a few years ago. And his point is that, I mean, the issue with toll roads is that you’re not thinking as the road network, as a whole network, as a whole system, and you can end up it can be inefficient in an economic sense, yeah, yeah. Just basically,
Nicholas Gruen 50:27
I mean, that is what a transport economist will learn at university and and our trends and the transport economics that our system implemented, didn’t know any transport, didn’t know any of that stuff. That just sort of said, Oh, well, you know, market, you know, we’re going to stick a toll road here. I mean, all of these toll roads. You know that if you ask the question, why a toll road there? Well, that’s just because a particular politician had a particular thing that they wanted to do at a particular time. There’s, there’s no logic to any of that.
Gene Tunny 51:02
Yeah, yeah. And so we’ve got arterial roads clogged, but yet we’ve got toll roads which, which could take some of that traffic, but because there’s a toll on it, people are hopping on it. And in
Nicholas Gruen 51:15
fact, you know, as you would know, Gene hope I’m not being presumptuous. I think you would agree with this. The standard economic textbook answer is, if you want to put tolls on roads, put them on the old clogged ones, not on the new not on the new ones that are not congested. That’s where the opportunity costs are.
Gene Tunny 51:34
Yeah, yeah, yeah, yeah. So you should be charging a court. You know, the congestion charging that economists talk about, absolutely. Yeah. I’m just thinking we’ll probably have to start wrapping up soon. But I want to ask you before we go, yeah, about this great quote from Colin Clark in an article you wrote, you put it in your compare and contrast article about in the early days of the Rudd Government in 2008 Yeah? And, I mean, Colin Clark, at the time was, he was working here in Brisbane, I think in Queensland, is economic advice.
Nicholas Gruen 52:07
No, no, no, he wasn’t. No. He was working for Keynes in England, and he went back to Queensland. But that’s where the quote, that’s the, oh, actually, it says, I want to stay in Australia. So it must have what must have happened is Colin Clark, a great Australian economic historian and economist who was instrumental in building national accounting. Was, I guess he must have been at Cambridge, possibly was at lac, but he was a big contributor to the econocracy, the iconocrates in such as they were in the United Kingdom. I think this is so. This is in the 30s, and Keynes says to him, I think Keynes had the same sort of attitude to Australia as Churchill did, which is us into the world, basically. What the hell would you want to go there? So do you want to read it? I can read it
Gene Tunny 53:03
well. If you you’ll read it with more passion, I think, than I will. So please go ahead. Yeah. So
Nicholas Gruen 53:12
he’s so John. John Maynard Keynes is saying, Look, come to England. You know, we’ll get the band back together. This is really important work to be done here. And he says, I’m reaching the conclusion I want to stay in Australia. People have minds which are not closed to new truths, as the minds of so many Englishmen are. Of course, Keynes would have agreed with him about that, and with all the mistakes Australia has made in the past, I still think she may show the world in economics. And I think of that as a sort of we did show the world. We showed the world with Australian exceptionalism, until around about 2001 and then the politics as usual caught up with us.
Gene Tunny 53:58
We might have to come back and talk about, you know, how we might reinvigorate that exceptionalism. Yeah,
54:06
that’d be good.
Gene Tunny 54:07
I think it’s having honest conversations and and not believe in your own you know. I mean, we have, we seem to have too many fixed positions on some of these issues, and ideology plays a role. But I think to resolve some of these, we really have to be much more open, yeah, and just have those conversations. But yeah,
Nicholas Gruen 54:27
I agree with that. And I also think that there are a lot of people it’s easy to pose as an expert about these things, and the experts actually, there’s a marvelous quote from and I’m he was the editor of The Sydney Morning Herald, and he resigned on a matter of principle about Vietnam. And his name was Tom Fitzgerald, and he gave the Boyer lectures. You can’t get them on the net, which infuriates me. And he said that Paul Samuelson, the great post war. Economist talked about my down under heroes, and what he was talking about was the way in which the economists of the Brigden committee in the 1930s anticipated his ideas about factor proportions driving trade. And Tom Fitzgerald said that economists that good economic policy relies on talented amateurs to it relies on a kind of, you know, people like Henry George, a 19th century economist who came up with a very simple and incredibly important idea and was rather and other more learned economists were rude about him, basically. But I’ll try and find that quote, but, but my point is that, I mean, I, I, well, here’s, I hope this doesn’t offend anyone, but I worked for two ministers, and one of them had an economics degree, John Dawkins and the and then I saw Paul Keating in action. I’m not a huge fan of Paul Keating, but Paul Keating had a terrific intuition about what economics was about. He was the only one who could on the Sunday interview program, explain not that he used these terms. He could explain the principle of comparative advantage. He could explain why it wasn’t in Australia’s interest to have trade barriers, even if other countries had trade barriers. And so in that sense, I mean, that’s what we we need. But what I’m getting at is that everyone and their dog and all the journalists class, they pose as economic experts, and almost an awful lot of these people are kind of surfing. They’re kind of sound. They’re going with the vibe, but they’re not that. They don’t, they don’t. They don’t have a real regard for the simplicity, and was an odd word to use, but the beauty of some of the basic ideas and economics, and that means they just end up confused and following the latest, following the latest, the latest trend, the latest fact. Yeah, yeah, economics is about problem solving, and there’s this whole discipline. It helps a little bit, but mostly about problem solving on the merits.
Gene Tunny 57:33
Yeah, exactly. And I think, yeah. I think you’ve, you’ve given some good examples of how there was that problem solving approach in the 80s. I mean, you talked about hex and, I mean, you know, the various other innovations. I mean, it certainly was an incredible reform period. And, yeah,
Nicholas Gruen 57:51
I mean, another problem we had was the trade deficit. It wasn’t entirely clear whether we should regard it as a problem that was a controversy in itself, but what we did was we adopted a very principled approach, which, I mean, it was haggled through politics, but that was the superannuation system. Now, again, I’m quite critical of certain aspects of the superannuation system, but I think I participated as an amateur in this debate that people rather like, which is, why did New Zealand do so much worse than Australia and we were both economic reformers, and I don’t think anyone really knows, but I think one of the reasons is that we gave ourselves access to a big pot of savings, and we lowered the cost of investing, of investment in Australia, and the New Zealanders did the opposite. They didn’t. They’re, I think the only developed world country that doesn’t have a capital gains tax certainly doesn’t have an effective one. And I think those things, those things might matter, but, but that was an example of a bit like the tariff cut an example of a series of themes being run together and turning into a policy solution to a range of problems. Of course, as is almost inevitable with a system like as big as that, especially set up by politicians, advised by economists. We didn’t get much of a look into certain aspects of it. It also created some new problems, but there you are. Life goes on, and we try and solve those as well.
Gene Tunny 59:33
Yeah, yeah. I’ll have to have a closer look at New Zealand. I mean, the big thing I think about is, I mean, we’re lucky. We’ve got iron ore and coal, and New Zealand’s got sheep. So, I mean, it’s, you know, we’ve, we’ve been very fortunate in some of our the minerals that we have and that we can export, although there’s an argument over whether we’ve properly, whether we’re properly taxing the the economic rents that earned off those resources. Yeah,
Nicholas Gruen 1:00:00
that that might be right. But then again, there’s the we’ve got a, we have a I think right now we’re in the grip of a mild form of the resource curse. And you know, the wealthiest, the countries that have done well in the last 3540 years have been resource poor countries. New Zealand has some fantastic assets in in tourism, in dairy, you know, could have tried to set itself up as an offshore bank. We’re not in offshore banking. Now, that wouldn’t do the world any favors, but it might have done New Zealand some favors the way the Irish managed to get some favors done for it. So but, but anyway, they weren’t really thinking. They weren’t thinking like that. And, but, but, look, I don’t know. And I think it’s the other possibility with New Zealand is that its distance from major markets started to matter more than than than it mattered in the 1970s but it’s quite remarkable that New Zealand and Australia have exactly the same standard of living until 1970 and then they just diverge, and now they’re about 20 25% less well off. One other thought is that there are two countries in the in the developed world, two English speaking countries, that effectively have an elective dictatorship, and they’re the English speaking countries that have done worst, the UK and New Zealand. They have a single house. They have no federal infrastructure. So the game is, you head for the center, you persuade the center to do what you want, and then it does what it wants. And it turns out that that you know that that might not be such a distributing power and having more deals and and more log rolling, more deals done to in the way that we do in the Senate. Of course, it’s, it’s like, like Bismarck said, It’s like making sausages. It’s better if you don’t see them being made, but the result turns out, turns out to be better.
Gene Tunny 1:02:07
Yeah, very good. Okay, Nicholas grew and that was, that was good. I learned a lot about your experience in that in the reform era, and some some highlights from it, and just thinking about how we might do better in the future.
Nicholas Gruen 1:02:23
So Well, there we are. We’ve got a teaser for the next for the next episode.
Gene Tunny 1:02:27
I think so. I think so. So you’re happy to wrap up here. Yeah, that sounds good. That’s okay. Very good. Okay. And thanks everyone for for watching and listening. Really appreciate it. And Nicholas, I’ll catch up with you sometime soon for another uncomfortable collision with reality.
Nicholas Gruen 1:02:46
Thank you.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
