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US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

US Treasury Secretary Janet Yellen claims the US economy is not in a recession,  despite two consecutive quarters of declining GDP. Economics Explored EP151 guest Darren Brady Nelson disagrees with the Treasury Secretary and argues she is taking a political position. Whether she’s being political or not, Janet Yellen has certainly taken a big risk, as Darren and Gene discuss. Darren and Gene also talk about the review of the Aussie central bank, the Reserve Bank of Australia, particularly how climate change could figure in that review. Darren argues the review team should have a broader range of views represented, including Monetarist and Austrian perspectives. 

You can listen to the episode via the embedded player below or via podcasting apps including Google PodcastsApple PodcastsSpotify, and Stitcher.

About this episode’s guest – Darren Brady Nelson

Darren is Chief Economist of the Australian think tank Liberty Works and he’s also an Economics Associate at the CO2 Coalition in Washington, DC. For Darren’s bio, check out the regular guests page.

Links relevant to the conversation

While it’s the NBER that declares whether the US economy is in recession, this CNBC report notes: “Since 1948, the economy has never seen consecutive quarterly growth declines without being in a recession.”

But many economists are skeptical about whether the US is in a recession, including recent podcast guests Stephen Kirchner and Michael Knox. 

Stephen Kirchner on the US recession question.

Michael Knox’s Economic Strategy: Fed hikes rates, but Fed says no recession (PDF).

Transcript: US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

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  00:01

Coming up on economics explored…

Darren Brady Nelson  00:05

like to see seemed to have sold or sold for political purposes as the head of Treasury in the US each year is a political appointee. So you know, that is, to some extent a political position.

Gene Tunny  00:19

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 151. On whether the US economy is in a recession. Joining me is returning guest Darren Brady Nelson. Darren is chief economist of the Australian Think Tank Liberty works. And he’s also an economics associate at the co2 coalition in Washington DC, as well as chatting about the US economy. Darren and I discuss climate change and the review of the Reserve Bank of Australia. In the shownotes. You can find relevant links and details of how you can get in touch. Please let me know your thoughts on what either Darren or I have to say. I’d love to hear from you. In the show notes. I’ll include links to some great commentary on whether the US actually is in a recession from two previous guests, Michael Knox and Steven Kirschner, so make sure you check those links out. Right now for my conversation with Darren, thanks my audio engineer Josh Crosby, his assistants in producing this episode. I hope you enjoyed. Darren Brady Nelson, Chief Economist at Liberty works. Welcome back to the programme.

Darren Brady Nelson  01:35

Thank you. Good to see you. I guess it’s been a while since we last spoke about woke capitalism, I think.

Gene Tunny  01:41

Yes, that’s right. That was a few months ago. So yeah, it’s good to catch up. Again. This is a 100 and 51st episode, and this is your 11th appearance on the show if I’m counting correctly. So yeah, we get around to another chat every 15 episodes or so. So it’s a it’s about time to catch up with you. So it’s great to have you on the show again.

Darren Brady Nelson  02:06

Yeah, congratulation, because I’ve been so prolific. 151 That’s great.

Gene Tunny  02:11

Yeah, well, it’s, it’s just drip by drip. Really? It’s one per week, and they they mount up. Yes. Thankfully, we’re out of the COVID period, although I had it recently. And I was in isolation, but we’re, we’re over all of that. That craziness, which was dominating the conversation for a while, and now we’re getting on to two other issues. Okay, so I thought we could chat now about the US GDP figures and we had some big news last week. Last week in Australia, you’re, you’re still on Saturday there I think Darren in in the states in DC. And we’ve got to now we’ve got two consecutive negative quarters of GDP growth. So GDP grew at an annualised rate or didn’t grow, it fell at an annualised rate of 0.9% in the June quarter, and that followed a decline of I think it was 1.6% in the March quarter, that’s at an annualised rate. Okay, so there’s a big debate about whether the US is in recession or not. Darren, what do you think is the US in a recession at the moment?

Darren Brady Nelson  03:26

Um, well, yeah, I would say so both it, you know, I must admit, in this conversation, you know, certainly, you’re going to be more expertise that I, you’re, you’re a guru of sort of macro economic indicators, and all that, you know, particularly from your treasury background, but other things you’ve done, too. So, you know, maybe I’ll be asking you some questions, too, and hoping to get some answers. But yeah, I’m not sure. Maybe you know, the answer this, but, you know, entire time I’ve been, you know, first studying economics and being an economist, putting aside the debates on whether two consecutive quarters is the greatest definition or not, it seems to have been the definition for a long time. And the most interesting thing I’ve seen recently, and I guess this would have been headlines, I imagined in Australia as well, was the Biden ministration going? No, no, that’s not really the technical definition of a recession. I don’t think I recall it administration, you know, democrat or republican ever, that they may come up with excuses and say, it’s not well, you know, it’s not our fault. It’s the previous administration and all that sort of stuff, our you know, external circumstances. But this is really the first time someone’s ever, you know, including, you know, some of the economists that the Biden administration has, are on record, obviously, talking about in the past that yes, the recession. You know, the technical definition, if you like is the two consecutive quarters of negative growth. So it’s been very interesting time. Once again, I guess in the 2020s, including a lot of media organisations and our favourite, you know, sort of Neo Keynesian economist Krugman coming out and also defending that the Biden administration on Oh, well, it’s not really a recession. So it certainly fits the technical definition that, you know, if you’d like I grew up with. And, you know, that’s, that’s certainly my impression, you know, just actually being in the US. Is it dire just yet? Yes. On the inflation front, yes. But unemployment, you know, still is fairly low. And putting aside the fact that participation rate, you know, that’s a little bit of a worry, but the unemployment rates not so bad at this stage. And usually, obviously, that’s, you know, if you’d like a key secondary indicator, besides GDP itself, that people usually turn to right away, you know, before they maybe dig into, you know, what aspects of GDP have gone down, energy manufacturing, etc, etc?

Gene Tunny  06:02

Yeah. Okay. So there are a few things you mentioned there, Darren, so yes. Not not as strong. Yes. So, yeah,

Darren Brady Nelson  06:09

I’d say yes. technical definition. You know, kind of weak, yes. In a kind of more judgement point of view.

Gene Tunny  06:16

Yep. So you referred to what the White House was saying, and what Janet Yellen in the treasury was saying. So I might just read that out. And then we can go from there. And I can, I can let you know what, what I thought about that. So what, what Janet Yellen said and this is reported by the Financial Times, The White House has maintained that the US economy is not at present in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be amazed if the NB declared it was okay. So what what she’s talking about there is the National Bureau of Economic Research, which is I think it’s attached to that attached to Harvard or MIT or one of those East Coast universities. There’s this elite group.

Darren Brady Nelson  07:01

I think it’s I think it’s independent. I mean, look, I don’t know, but I think it’s, it’s more independent than even being associated with one particular university, I think, yeah,

Gene Tunny  07:10

yeah. Yeah, I think you’re right. Yeah. But it’s, it’s an elite group of macro economists, some of the top people and you’ll have regarded, yeah, some of the leading lights of economics on it. And they will, they will date the business cycles, they will declare whether the economy’s in recession or not, and, and generally, what they’re looking for is a sustained downturn that lasts several months, so more than one quarter. And they look at a broad range of indicators. So it’s not just GDP. But that having said that, it looks like GDP is a very, I mean, it’s an important part of it, because it’s that comprehensive measure of economic activity. And one thing I noticed when I was preparing for for our chat, is there was a report from CNBC, where it noted that I don’t think there’s ever been a recession that the NBR has called, which didn’t have two consecutive quarters of GDP growth, if that makes sense. So let’s where’s the actual passage? I

Darren Brady Nelson  08:21

think that’s not correct. I think the they did they call the recession, you know, during the pandemic, and that wasn’t two quarters, I think. So they do have a bit of leeway. But they tend to usually use the two quarters as part of the definition as a, you know, key component.

Gene Tunny  08:38

Okay, look, I’ll have to check that I thought I was ready. I thought I read that. That earlier today. I had that somewhere here in my notes. Okay. Okay. So we might go back to what, what Janet Yellen, what she said here, so she underscored the message at a press conference on Thursday, emphasising that the economy remains resilient. Most economists and most Americans have a similar definition of recession, substantial job losses and mass layoffs, businesses shutting down private sector activity slowing considerably family budgets under immense strain. In some a broad based weakening of our economy. She said, That is not what we’re seeing now. Okay. It seems to me that’s that’s a pretty risky call from her because it does she is running the risk that that the NBA does eventually define this as a recession. And that’s going to be incredibly embarrassing for the administration. So yeah, that would be my sense of it. I think it is a big call from Janet Yellen. And it may be too early to tell. But look, a lot of there are a lot of economists out there who seem positive about the US economy. But that said it does appear that I mean, is it the interest rates, is it what the Federal Reserve’s been doing that’s causing issues? Is it inflation that’s hitting Consumers, what do you think are the main forces affecting the US economy at the moment? Darren?

Darren Brady Nelson  10:06

Yeah, I think, you know, you’ve definitely touched on two key components. But just comment on Janet Yellen. But you know, Janet Yellen was was totally wrong on inflation. So, you know, you know, in, that didn’t seem to impact her sort of credibility within her sort of circle that she goes around with, and the people who hire that didn’t seem to make any difference. So probably won’t next, you know, when she’s proven wrong on recession, which I think she already has been. Yeah, I mean, that inflation is like, one of the key things, it’s, you know, the biggest problems in the US, and obviously, even the Federal Reserve, which has been, you know, the Federal Reserve is part of the process of creating inflation. So, but, you know, they’ve, they’ve gotten spooked, even if the boat administration itself has not, which they, you know, at least publicly, they keep on, you know, they don’t seem to be, you know, they acknowledge it a bit, but they don’t really kind of acknowledge it as bad as you know, even though the official statistics are showing. So, you know, you have, like, you know, I’ve I guess we’ve talked about this many times, but, you know, you have kind of two things going on at once, you know, the, the unprecedented levels of money printing, and, you know, the credit that goes with it, which, you know, from, if you’d like, from a macro point of view, is hitting the demand side. And then on the supply side, they’re doing all sorts of, you know, the Biden administration’s policies are just hurting supply, and hurting productivity, so and competition. So you know, that can sometimes you’ll make up a lot for that money printing, you know, the supply side can react to it, and really dampen what, you know, it’s for the money to the demand side of things. So, you know, energy is a classic one, you know, they had a complete 180 on their energy policy. So the US went from the number one energy producer in the world to not that anymore, and, you know, record time, essentially?

Gene Tunny  12:08

And is that the bottom administration’s fault in your view,

Darren Brady Nelson  12:12

yet? Well, exactly. It’s not just their fault. That is literally their policy. You know, they they’re, they’re going for the sort of green transition, if you like, No, you know, come hell or high water. Right. So, which includes, you know, mounting allowing oil companies to extract oil and all sorts of things. oil, natural gas, coal, etc. And they’ve also hit agriculture with bad policies as well. You know, manufacturing. Yeah, it’s, you know, literally, if you want to destroy an economy, the buy administration is basically ticking all the boxes of you know, their policies. And, you know, putting aside, you know, you can argue whether that’s intentional or unintentional, but I think there’s not too many, if you like, remotely free, market friendly economists who think the buying policies are particularly good

Gene Tunny  13:10

rod, okay, I’ll have to have a closer look at some of the policies. And in come back to that, I just want to go back to that definition of recession, I think I might have missed or may not have communicated properly what that factoid in that CNBC report was. So what they were saying was that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. So they’re not saying that, if it’s that they would, I mean, there could be recessions if you don’t have this, and that’s what you were saying with the pandemic that was, like you could call a recession, if you don’t have the two negative quarters. But what this point is, is that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters, the NBA ultimately, has declared a recession. So you can have a recession, even if you don’t have the two quarters, but every time you’ve seen it in the data, they’ve the NBR is ultimately called the recession. So what Janet Yellen has done is, yeah, that’s a really big call on her part. And, I mean, Janet Yellen, someone with a distinguished academic reputation, and yep, so really, really big call and potentially it will, will backfire on her so yeah, have to wait and see about that. Yeah,

Darren Brady Nelson  14:38

yeah, y’all want to make it you know, like she’s she seemed to have sold or sold for political purposes. Not unusual that that, you know, it’s not like this has never been seen before. Most of her sort of like topics when she gets into public is less focused on inflation and, you know, recessions and she’s talking about equity and diversity and inclusivity You know, all that sort of stuff? You know, as for? Well, I guess, you know, I guess she is that the head of Treasury in the US each year is a political appointee. So, you know, I guess, you know, that is, to some extent, a political position. Although, you know, usually in the past, it’s been Department of Justice and Treasury have, you know, usually been less partisan, if you like, you know, the people regardless of whether it was democrat or republican in charge, but you know, things have changed quite a bit. Certainly this century and certainly in the 2020s.

Gene Tunny  15:33

Yeah, exactly. Okay. So you mentioned the supply side. Before, we one thing we’ve had in Australia here is just the the ongoing disruption to supply chains. And I mean, the random things just been unavailable in the supermarket’s cuantas seems to have lost its mojo can’t seem to run a flight on shedule any, any any time anymore. And partly, that’s because they lost people during the pandemic. And now we’ve got people on isolation leave, like if you get COVID and have to isolate for seven days, and that’s disruptive. Things just don’t seem to be working as they once did. Is that the same in the States? Have you noticed that in the US? Yeah,

Darren Brady Nelson  16:21

I think some extent, less. Although I understand aviation has been kind of bad here, too. But I haven’t actually been, you know, I’m just going on to sort of news reports and talking to other people that, yeah, they’ve had, you know, things. Well, you know, what happened in the US probably, maybe more than as surely as a lot of pilots, either were, you know, let go or just left because they didn’t want to get the vaccine. Right. So, you know, that was in the federal government has a bigger say, in aviation than they do and other industries, for instance, particularly on employment. And so yeah, that’s all contributed, including also understand, not just pilots, but you know, other people in the aviation industry, you know, various hubs, you know, the people needed at the airports and the hubs as well, you know, similar sort of circumstances. The the supply chain disruption in general, I haven’t noticed it as much in terms of like, you know, like at the grocery store, there was a period where there was a little bit of that. And, but not as bad, but certainly, you know, there were issues as well, in the US, perhaps, maybe not as bad in terms of like, you know, grocery stores and whatnot. So, yeah, it’s been, yeah, again, the 2020s have been very weird times. And I don’t think it’s some sort of like natural market outcomes as such, obviously, markets wrecked, and they, you know, the impact, but I think there’s just the amount of, really over the top interventions and status sort of policies in the 2020 2020 has taken me by surprise, you know, we’ve been prepping backwards, if you like, towards bigger and bigger government, and I think, you know, reaping the rewards. I don’t know why people, even people who, you know, seasoned economists, who should kind of know better, you know, the more the government does stuff and interferes the worse things get it it literally is becoming, like, more and more like an Atlas Shrugged world? I don’t know if you’ve read Atlas Shrugged. probably familiar with the premise anyway. It’s, it’s like that was John go. Like, I’m like Atlas Shrugged there. You know, there were places to escape to in that world, the fictional world of as many, as you can see, in this world, when, you know, all the governments are, have uniform sort of policies on COVID and uniform policies of not tackling inflation, you know, and all that. And maybe it will be interesting to see if the elbow government copies the Democrat lead, which I suspect they will, you know, if Australia gets two quarters of negative growth, that they’ll go that’s not really a recession, you know, we’ll be interesting to see if they go down that road as well.

Gene Tunny  19:12

Yeah, but I mean, one thing that we’ve we’ve traditionally relied on to keep the economy growing is migration, just the, you know, addition of people and and that those consumption, and so that’s starting to pick up again. Look, yeah, possibly that try and redefine it. I mean, I don’t think we’re, we’re at risk of that at the moment. Although having said that consumer confidence has dropped with the, you know, the higher interest rates, so people are freaking out over just the, the increases in interest rates we’ve seen already, because it looks like they just, you know, borrow lots of money during the when interest rates were really low. In the end, you even had the I mean, the Reserve Bank, Governor, I mean, I couldn’t believe it. He last year he was saying, Oh, the interest rates will, our official cash rate will stay at point one until 2024. And arguably, he misled people. And so I mean, he really has a lot of questions to answer for. And there is the Reserve Bank of Australia review, which I’ve talked about in this programme. I don’t know if you’ve had a look at that at all. Darren,

Darren Brady Nelson  20:22

oh, no, tell me Give me Give me a synopsis of what drove that. And what’s happening? Well,

Gene Tunny  20:28

I mean, the RBA has been under a lot of criticism in recent years for for different reasons. I mean, there’s been one group of economists who’ve been critical of it, because they argue that they didn’t, that they kept in their head interest rates too high in the lead up to the pandemic. Now, whether that’s true or not, I, I think it’s debatable, but I’ve had people like Peter tulip and Steve Kirschner on the show. I mean, they they’re very good economists. I think it’s worth considering their view for sure. Their argument is that if you try if you’re trying to achieve the inflation target of two to 3%, so that the so they they were arguing that because inflation was actually lower than that you had scope to have looser monetary policy, lower interest rates, to have more employment growth. And there was some modelling that was done by Andrew Lee, who’s a Labour Party MP and a former a new professor, and Isaac gross, who’s an economist at University of Melbourne, I think. And they showed that if the RBA had met its inflation target, it allowed if it had lower interest rates and let the economy grow faster. You could have had, I think it was like 250 to 300,000 more jobs in the economy. So there were a group of economists criticising the RBA from that direction. And they were saying that, well, the RBA was too concerned about households taking on too much debt. So they didn’t want to have interest. They didn’t want to put interest rates lower. And look, I mean, I could see why the bank would be concerned about that. So that’s why I’m not fully on board with that criticism of the bank. That said, I think it is good to review the Reserve Bank, because it is a bit of a it’s not exactly transparent what they’re doing. So I think there could be greater transparency. And I mean, since last year, when Phil Lowe was making those sort of bold calls, that turned out to be wrong within months, right. It was obvious that we’re in the in the new year when we started getting those inflation numbers that the Reserve Bank would have to act. And so I think they lost a lot of credibility over that. So it’s important now to to have this review. And they’ve appointed So Caroline Wilkins from she’s a former Deputy Governor of the Canadian central bank. They’ve got Gordon to Brewer, who’s a former bureaucrat, I worked for him when he was in the treasury. And he was also at a new at times. He’s good. He’s good value. And Rene fryer McKibben, who’s a professor of economics at ASU. And so they’re going to review the board like the how’s the there are issues to do with board composition, who’s on the board? There’s issues to do with the inflation target, but I’m not sure they’ll do much about that they might tweak some of the language. And then there’s issues to do with the transparency of the board’s decision making what do they release to the public every month? So that’s essentially what the reviews about and I think it’s, it’s a good thing that they’re doing that. So yeah, that’s it. So yeah, it’s worth definitely worth keeping an eye on. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  24:01

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Gene Tunny  24:30

Now back to the show.

Darren Brady Nelson  24:33

So are they the reviewers? Are they sort of, you know, leftist? Senator, for the most part, you know, like a Keynesian and MMT and, you know, something else or what, what’s, what’s the story there?

Gene Tunny  24:47

I’d say the typical mainstream macro economists. So however, however you’d like to characterise that, the definitely not MMT if you had to give them a label, maybe you could You give them a new Keynesian label, possibly. But yeah, they’re not I don’t think they’re radical in in any particular direction. They’re non political appointees, which is a good thing. One of the big ish questions and something that I think the Prime Minister Anthony Albanese, so elbow, as we call him, one thing he will be, he’ll be getting pressured to put a trade union representative on the board. So they’ve had one in the past, I think Bob Hawke, our former prime minister was on the board in the 70s, when he was the head of the A CTU. And then we’ve had various other ICTU secretaries on the Reserve Bank Board, there are some people pushing for a regional rep. But, you know, one thing that Peter Tula, who’s chief economist at Centre for independent studies has been pushing for he’s, he’s he said that the problem is, we don’t have enough people who know about inflation and monetary policy on the board. And so we need more of those people. We need more, it’d be better to have more economic experts or economists on the board.

Darren Brady Nelson  26:05

Yeah. Yeah. And maybe, also further, how about a variety of use, and not just the one kind of, you say, mainstream, and but that’s still a worldview, it’s still it’s still a way of looking at things. And it’s not the only way of looking at things, you know, the combination of, you know, essentially New Keynesians, for the most part, with maybe a little, you know, like 8080 20, Keynesian monetarist? You know, that’s maybe what, you know, most mainstream sort of macro, folks, you know, that’s kind of what they’ve learned and whatnot, be good to, you know, have somebody else, you know, have an Austrian point of view, have maybe a full on monetarist point of view, you know, whatever it is something that’s not just the one point of view, you know, so, so it’s not just Tweedledee and Tweedledum, you know, every time for the, you know, either on the board or this review, you know, I’m not saying these people aren’t smart, or anything like that the three people you mentioned, but I suspect they don’t, they’re, you know, there’s not gonna be a whole lot of push and shove between the three. So

Gene Tunny  27:04

I think the review in a way, please presumes that there won’t be radical changes. I mean, we’re not, I mean, the reserve bank is going to continue as a, an institution, we’re still going to have fiat money is that the sort of thing that you would you think should be up for review that we should be looking at something more fundamental?

Darren Brady Nelson  27:25

Well, at least have one person on there who can be the dissenting voice to say, something like that, but I’m saying like, you know, like, you know, even if it was like, say, one Keynesian one, monitor someone Austrian, I think you might get a pretty decent review out of that, you know, with the monetarist if you like, in between the two to some extent. So, you know, you still have 2221221, you know, want to keep a central bank going, but we just, you know, good to kind of be realistic about, you know, what, you know, what a central bank does, and, you know, what inflation is, what monetary policy is, you know, all that sort of stuff. That’s fine, if the board, you know, I’m not saying, you know, the board should be all full of economists, even if it was a mix of those types of economists, I think it’s fine to have some other, you know, you know, depending on how big the board is, you know, you know, there would be room, I guess, for a union and a business representatives and maybe some other stuff as well, that’s fine. And then they should also review, you know, also the, you know, the goals of the Reserve Bank, you know, obviously, what’s legislation, there’s a lot of stuff in there besides inflation, you know, maybe, you know, just to look at it, and kind of whether all that needs to be in there, or whether there’s should be a better balance, or you should prioritise and go, you know, inflation is number one, and then something, you know, that type of thing. It’d be great. If it was a, you know, a lot of these reviews aren’t all that genuine, you know, they already have a political goal. I mean, you say they’re not political, but it always is, you know, you know, to some extent, they’re under certainly under pressure anyway, regardless of who they stick in there to review things. Now, in the past, you know, some of these reviews have been a lot less political than others, there’s always a political element, you know, like the competition policy review wasn’t particularly political, but there’s always a little bit of an aspect to it, of course, you know, I’d be surprised if they’re not under, you know, some fairly great political pressure to, you know, start going beyond and started looking at, you know, kind of cultural war type stuff, too, you know, that they want to ingrain, you know, sort of race, gender, race and gender and all that other stuff. You know, I’ll be I’ll be pleasantly surprised as if that isn’t going to be a part of

Gene Tunny  29:37

the review. So, as far as I’m aware, race and gender What won’t be at this stage, I don’t think but one thing that possibly will be now whether there’s a culture war issue or not, I don’t know I think I’m not sure it’s, I guess, it does get there are aspects of it that are part of the Ultra wall but the debate about the climate. So, Warwick McKibbin, who is he’s a professor of economics at ASU. And he’s actually the husband of one of the reviewers. But you know, she’s independent of she’s, she’s her own person. You know what, I’m Rene fryer. And she, she’s, she’s work. So, by definition,

Darren Brady Nelson  30:22

you know, at least the old school definition marriages, you’re not your one flesh. But anyway, I understand what you’re trying to say. Okay.

Gene Tunny  30:29

Yes, yeah. So I don’t think she’ll necessarily go along with with works for you. But Warwick was at the conference of economists in Hobart two weeks ago, where I call COVID. And he was on he was, it was good conference. Other than that, it was a great conference.

Darren Brady Nelson  30:46

And super spreader of it.

Gene Tunny  30:49

Yeah, that’s right. And Warwick was on the panel. And now we’re talking about the Reserve Bank review. And one of the things he one of the points he made is that we’ll have to, we may have to amend actually, I think he’s saying we will have to amend our inflation targeting settings or our our goals or objectives, or we’ll have to amend that to incorporate climate change, because we have to recognise that if we’re going to be increasing the will, if we’re going to be responding to climate change, we’re going to introduce a carbon price and one that increases over time. So that’s the, that’s what you need to have that sort of lowest cost adjustment path. So to minimise the cost of adjusting to climate change, you’ll need to have a carbon price that increases and so that’s going to be increasing prices. So you’ll need to look through the inflation, you’ll have to ignore the inflation that comes from the carbon price. So I think culture war issues won’t come into it. But the I think the climate climate change will come into the RBA review.

Darren Brady Nelson  32:01

Okay, well, that’s good to know. It’s terrible news. But it’s not surprising,

Gene Tunny  32:06

though. But But doesn’t it make sense? What Warwick is saying? I mean, if you’re going if the if a government does introduce a carbon price, and you’re going to have increasing prices because of that, then that’s, that’s not really inflation that the central bank should be concerned about? I mean, what do you think of that?

Darren Brady Nelson  32:25

It still should be concerned about it, even if, you know, you know, this is all about thinking about the costs and benefits. It sounds like, just assuming, okay, well look, you know, we’re just not going to worry about the downside of our carbon tax and our climate policies, you know, because it’s such a, you know, unquestionable good to pursue this. That’s, that’s ideology. That’s not economics, that’s really bad economics. And it’s also bad constitutional law, you know, like, to what enshrine you know, certainly a very long standing fad, you know, of the climate sort of industry. But, you know, the concept of inflation, you know, it’s something that stands the test of time, you can disagree on various aspects of it, but it’s always going to be, you know, to the extent you’re gonna have monetary policy, inflation is going to be an important thing to be thinking about, right. Climate change, may not be, you know, like I’ve, you know, been following this debate since the mid 90s. And, you know, I can tell you, Well, just look at the polling, you know, I can’t speak for Australia, but in the US, it’s, you know, something along the lines of it’s well outside the top 10 of topics that people are concerned about in the US, for instance, then you want to start because, you know, elites like him, are in a position to influence these things they want to shove in, you know, the things that they care most about. And I think it’s just atrocious to think you can stick that into the Reserve Bank act. Yeah, sure. You another government can come along and potentially change that if they want, if the if the electorate says, Alright, you know, you’ve been trying to convince us that, that the end of the world has been coming for 30 years, it hasn’t arrived, we no longer trust you. Sure, that might happen. And then, you know, government could change things, but you know, so it’s a bit hard to change stuff in legislation, a lot of damage can be done in the meantime.

Gene Tunny  34:20

Okay. So on where it’s where they’d make the change, it probably wouldn’t be in the act, they would have it in the agreement between the treasurer and the Reserve Bank. If I remember correctly, I think the general view on the Reserve Bank act from the late 50s Was that all look, you know, some of the language is a bit outdated. But you know, maybe leave that alone, you can do all you need you want to do within the agreement between the treasurer and the Reserve Bank. So I think that’s where they would, they would adopt something like that. So yeah, just on that Reserve Bank X, I think, I think what I talk about in that is that the Reserve Bank is supposed to set monetary policy to, to have a stable currency to have to achieve full employment and to promote the prosperity of Australians or something. Something broad like that. Yeah. Yeah. So they’ll probably leave that. And then they’ll, they’ll do whatever they want to do with regard. If they if they did want to put some wording in about climate change, it’ll probably be very vague, because it is all very vague. What’s, you know, what do you? We don’t really, I mean, I’ve got no idea what’s going to happen here in Australia. I mean, politically, it’s, you know, it’s such a vexed issue. And you’re saying is not in the top 10 issues in the US, it’s certainly in the top 10. It’s top five, top three here in Australia. I mean, the previous government lost Blue Ribbon seats, seats that it’s held for decades, seats in affluent areas of Sydney and Melbourne. And it lost them because of climate change was people in those seats are extremely concerned about it.

Darren Brady Nelson  36:07

Yeah, look, there’s a different point of view. You know, that? Certainly they did. But I wouldn’t extrapolate to say that, that is a that means Australia as a whole, has the same views as these inner city suburbs, they’ve just changed the demographics and the ideological viewpoints of these people. That’s why That’s why they lost. You know, these are, you know, just like we’ve seen around the world, it’s, you know, the, it’s the rich and upper class professionals who gravitate towards status policies and status causes, like climate change the working class, and in the middle, and lower middle classes do not. And you know, electoral politics, you know, isn’t just a straight representation of what the entire nation views necessarily. And putting aside the fact that the polling is often biassed and bad and misleading and all that sort of stuff, but that decide. So, ya know, I’ve seen some other people who, you know, Australian, you know, intelligent Australian commentators, James Allen, and people like that. We’ve been having a bit of look at that, to see whether that, you know, that mainstream narrative is actually true. They certainly lost obviously, those seats, they were blue ribbon, but they’ve been changing and moving left for a while now. So many are burdened with just comedy, obviously, particularly in the in the US, you know, how climate change is almost really a non issue from you know, abroad electorate point of view, not, you know, not any specific electorates. Yet, that doesn’t stop the policies from carrying on and then you have all these perverse outcomes of like, you know, I imagined Albanese will get more copy a lot of what the Biden administration so, you know, the push for electric vehicles? Well, you know, electric vehicles are still being produced by coal and natural gas, you know. So you’re really in many ways, you’re not, you actually might even be increasing carbon dioxide emissions through transitioning to electric vehicles from from petrol vehicles. And the fact is, you know, most of the world is actually increasing the use of coal, mostly India, China, Brazil, etc, etc. And even there’s even been a coal like I said, there’s been a coal comeback, even in Western countries as electric vehicle usage gets ramped up. So you know, that and these people don’t go, oh, no, we, you know, they still keep the same people who say there’s an existential problem, keep on producing, keep on pushing electric vehicles, for instance, so that their actions speak louder than their words that it isn’t really an existential crisis. It putting aside the fact obviously, all these elites tend to keep on buying beach side homes and all these sorts of stuff. I think just look at their actions speak much louder than than their words. So we’re getting this system where we get a worse electrical system because they keep on showing throwing more and more unreliable and expensive renewable energies on top of it, yet, they’re not actually starting to take much of the load of electricity production, they’re just sitting there costing more money and hurting the rest of the system. Yet, we’re still relying, and we’re going to keep on relying on on coal and natural gas and the only renewable energy we’re going to lie and it’s going to be, you know, water, hydro, and, you know, putting aside the fact you know, allow many new hydro to be built, but it’s bloody reliable. You know, us Quebec, is, you know, if it wasn’t for Quebec, all the hipsters in New York would be having more blackouts because they’re wrong on water that you know, hydro from Quebec coming down into the US.

Gene Tunny  39:55

Where is that is that near Niagara Falls, or is it is that up in that Region. Yeah,

Darren Brady Nelson  40:00

I mean, kubek is like, you know, the king of hydro in that part of the world, not just for Canada fact, Quebec is mainly supplying electricity to the US part of the population bigger. And that sort of the northeast of the US. So, you know, that’s kind of insulating on, you know, the sure they can shove on some more solar panels and wind, but that’s not really generating a lot of electricity. And we also the perverse effect from that, you know, you know, the main thing that, besides all the kind of pollutants, the actually the toxic sort of chemicals, and all the stuff that it’s needed for electric vehicles needed for solar panels needed for wind turbines, which obviously have detrimental environmental effects. They need coal, natural gas, and hydro to make those things in the first place. Not just to be the ones that really, you know, supplemented when the winds up blowing, and the sun’s not shining. But if it wasn’t for all the, you know, the fossil fuels, it couldn’t even build this stuff in the first place. So it all you’re doing is shoving all this stuff, people making a lot of money. A lot of people are virtue signalling, you know, sort of, you know, they keep on crying wolf for what, like 30 years now. There’s, you know, there’s nothing, you know, there’s there’s no significant evidence that we have a problem. Well, I’ll

Gene Tunny  41:15

push back and say we just had a 40 degree Celsius day in England that they’ve never had in their whole history. And so

Darren Brady Nelson  41:23

you go back, and we look at the Paleo challenge. You look at the evidence, all right. For instance, in the US this damn out in the Colorado River is having you know, it’s because of climate changes is at its lowest level, lo behold, a study, you know, two weeks prior to them making such statements show that they’ve had more levels on the Colorado River 2000 years ago, you know, so, no, I mean, yeah. And we’ve had warmer periods, we’ve had more carbon dioxide in the atmosphere in times. No, none of this. None of this is accurate. It’s all cherry picked to scare the poop out of people to accept these policies they want anyway. And you watch it when we’re old men, we’re going to be the people will go yeah, we’ll look okay, this thing didn’t happen. But I think it was the right thing to do anyway, you know, you hear that a lot. Even now they go like it will even for wrong, it’s the right thing to do. How’s it the right thing to do to make people poor? And have people in Africa starve? How’s that the right thing to do?

Gene Tunny  42:22

Okay, so in a future episode, we’ll have to come back to this. Darren, and we’ll see where we are with the with the data.

Darren Brady Nelson  42:28

You want to see the green policies and action. Look at Sri Lanka.

Gene Tunny  42:31

Yeah, yeah. Look, I’m not I’m not. Yeah, I’m not advocating for these policies, necessarily. Yeah. But I do recognise

Darren Brady Nelson  42:42

that you that’s just kind of a, like, whoever’s watching this. It’s like, you know, you want to see the future, the potential future that Sri Lanka, that’s, you know, that that’s, you know, the way you know, Australia could look, you know, if they’re not careful.

Gene Tunny  42:55

And what did they do? They actually required organic. Org organic produce, did they they been did they ban the importation of some fertilisers?

Darren Brady Nelson  43:07

Lasers? You know, yeah. So, you know, that. Yeah, fertiliser was was the main thing using, you know, green organic things instead of actual fertiliser. You know, they’ve really, you know, this is what this is, what’s happened in countries like Sri Lanka and African countries is to get their aid money. They do the green agenda, essentially. And it’s just a disaster. You know, I’ll tell you the countries that won’t be it won’t be China won’t be India, you know, the bigger countries that don’t need the foreign aid. You know, they’re not going to it’s like, yeah, fine. And there’s also strategic implications, obviously, yes, yes. We’re, you know, who controls the green energy market? Ultimately, China, Communist China

Gene Tunny  43:51

produces a lot of the solar panels. That’s correct. Yeah. Yeah.

Darren Brady Nelson  43:54

When to their, you know, if they are almost a monopoly on this, you know, and increasingly, all the support technology for it as well. So, and in China, this is not a coincidence. It’s not like, who the market chose China, they were just the best people to do it. This is like, this is a plan. It’s a strategy by the Chinese government, they, and you can see it’s written down. There’s books written on this by them to say, Oh, this is what we’re gonna be trying to do, you know, that basically, it’s their mind calm. So don’t be surprised, you know, like, you know, when they when some of this stuff comes true. You know, they have a plan that the Chinese economy is not a free market economy by any stretch of the imagination. You know, it’s it’s a government controlled run for the purposes of, you know, for the benefit of the Communist Party and the strategic interests of China. You know, this is it’s not like you’re dealing with, you know, the Netherlands, that sort of thing. So that’s also a huge thing. Because they’re an aggressive mode. Free power. And you know, when the time’s right, you know, they’re, they’re gonna take action, you know, Taiwan and whoever else, you know, eventually over over time gets in their way. So, you know, to aid and abet this, you know, through these green policies that, that are aimed at a problem that doesn’t really exist or certainly not in the scale. And certainly, even if the problem doesn’t exist, too deep, you know, to essentially decarbonize the economy is just like literally the worst solution for it. And to decarbonize it in a way that, you know, benefits China immensely. These just terrible policies the whole way through and, and, you know, you know, you know, people hopefully one day will be held accountable for this.

Gene Tunny  45:46

Rod. Okay, we might go back to GDP just before we wrap up, and yeah, I think I agree. Look, there’s a big book, there’s a big debate to be had about those, those policies for sure. I mean, from Australia’s perspective, given that mean, we’re such a small part of the world doesn’t make sense for us at this stage to to adopt those policies on a large scale. I mean, we, I mean, we should, my view is we need we should try to cooperate internationally. But we need to ensure that that other countries are following through with their commitments. And I’m not sure that that has always been the case, or it is the case. So that that’s my, my perspective on that. Bond GDP. I guess the view is that, that my sort of thought is that Janet Yellen certainly went too far. The US possibly could be in a recession, despite the fact that jobs growth has been strong, despite the fact that you’ve got unemployment at 3.6%, you could be going into a, you could be in a downturn, the GDP figures, if you look at the composition of them, you had inventories falling, that was a big part of it. So businesses were selling goods, but they weren’t replacing their their inventories. So that that could be a signal that they’re not expecting. They’re worried about the future about future sales, we had a drop in residential construction. That was one. And so that’s, that’s probably driven by the increase in interest rates. At the same time consumption spending was up. So that’s why the summer economists are thinking it’s a bit of a mixed report. And and we’re not entirely sure, but yeah, my take on it would be, yeah, the GDP numbers are definitely something be concerned about. And Yellen probably went too far. When she said, not, we’re not in a recession. I think that certainly could come back and invite her. Do you have any final thoughts on the GDP numbers? But where the US economy is that

Darren Brady Nelson  47:55

pretty much agree with what you just said? And obviously, time is going to tell. I think the bad ministration policies are very bad. And that’s going to come home to roost. So I think, you know, it’s not going to be good times, economically for the US and if it’s not good times, economically, for us, it’s not worth it. Kinda, you know, is obviously a major player, but it’s not the really, you know, in terms of, it’s not the engine of growth for the world. Just yet, the US still pretty much is so you know, when the US sneezes everybody catches a cold.

Gene Tunny  48:39

Yeah, yeah, that’s right. I remember that. That was a that was a popular. So it’s a popular scene in Australia, in the Reserve Bank and Treasury. So yeah, absolutely. Okay. Darren Brady Nelson. Thanks so much for your time. It’s great to catch up. Yes. And I look forward to chatting with you again in the future.

Darren Brady Nelson  48:58

Always great to be on your show and see Eugene, thank you.

Gene Tunny  49:02

Thank you. 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 contact at economics explore.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

Credits

Thanks to this episode’s guest Darren for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

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Podcast episode

Global economic outlook + Aussie inflation & house prices – EP150

The message from the IMF July 2022 World Economic Outlook was that the outlook is “Gloomy and More Uncertain”. This week also saw the United States slide into a technical recession. Certainly there are big risks to the global outlook. It’s possible that central banks could tip many economies into recession as they hike interest rates to tame inflation. This episode considers the global economic outlook as well as the economic challenges facing Australia’s new federal government. It’s an abridged version of a conversation that show host Gene Tunny had with Decactivist host Randall Evans on his show. The conversation was recorded prior to the US GDP release, but Gene remarks on the data in his introduction to this episode.

You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher.

Randall Evans’ Deactivist show:

https://www.youtube.com/c/Deactivist

IMF World Economic Outlook July 2022: Gloomy and More Uncertain:

https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022

US recession news from NPR:

https://www.npr.org/2022/07/28/1113649843/gdp-2q-economy-2022-recession-two-quarters

Transcript: Global economic outlook + Aussie inflation & house prices – EP150

Gene Tunny  00:01

Coming up on Economics Explored.

Randall Evans  00:04

I don’t know if you saw the lineup for Qantas, I think two days ago. But it was out the door all the way down the road for Qantas flights in Sydney, like all the way out there. Never seen it like that, it’s insane.

Gene Tunny  00:21

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 150 on the Economic Outlook. 

We are at a risky point in the global economy. It’s possible that Central banks could tip economies into recession as they hike interest rates to tame inflation. Indeed, I’ve just seen the news that the US has experienced the second quarter of negative economic growth. So, according to the traditional definition, the US economy is in a recession. I’ll have to cover this in more depth in a future episode. But for now, I’ll know that there will be a big debate about this, given the jobs growth has been really good in the States, something noted by US Treasury Secretary, Janet Yellen, she’s claimed the two quarters of negative growth rule for a recession can be misleading. And you need to look at a broader range of indicators, as the National Bureau of Economic Research does when it calls recessions. There’s a lot to explore here, so I’ll leave it to a future episode. 

Okay, I should note that this current episode is an abridged version of a conversation that I had with fellow Australian podcaster, Randall Evans, on his Deactivators show earlier this week, on Wednesday, 27th, July 2022. I’ll put a link to Randall’s YouTube channel in the show notes. So, you can check out the full unedited chat, and Randle’s other videos. 

You may notice I’m short of breath at some points in this episode. That’s because I’m still recovering from COVID. I picked it up at the Conference of Economists in Hobart, two weeks ago. It was an awesome conference, but it was also a super spreader event. Alas. 

In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments or suggestions. Please get in touch and let me know your thoughts on this episode. I’d love to hear from you. 

Right on, for my conversation with Randall on the Economic Outlook. I hope you enjoy it.

Randall Evans  02:38

Hello, everyone and welcome to the show. We’re here with Gene Tunny. Gene, how’re you doing?

Gene Tunny  02:42

Good. Thanks, Randall. How are you?

Randall Evans  02:44

I’m pretty well. For people who don’t know you, why don’t you give us a little background about yourself and what you do?

Gene Tunny  02:52

Okay, I’m an Economist. I’ve got my own consultancy business, Adept Economics. So, I do project work for different clients, private businesses, nonprofits, some government agencies, councils. So, often business cases for different projects or analysis of different policies or programs. So, I’ve been doing that for the last 10 years or so. Before that, I was in the Federal Treasury. So, we’ve got a broad background in Economics.

Randall Evans  03:27

And you’ve also got your podcast as well with over 130 old episodes I think, so far.

Gene Tunny  03:33

Yeah. Economics Explored. Yeah, that’s going well. I’m really happy with how that’s going. I mean, we’ve covered you know, a wide variety of issues on that, including housing and inflation and the RBA and the current review of the RBA. So, yeah, that’s going really well.

Randall Evans  03:55

What’s the current review of the RBA? Is to get rid of it? 

Gene Tunny  04:02

Some people might want that. There are some libertarians out there who are pushing for the abolition of Central banks and the abolition of fiat currency. But no, they’re not going to do that. I mean, they probably won’t do anything too radical, they might make some changes to the board composition, they might make some changes to the language around what the Reserve Bank is supposed to do in terms of targeting inflation. But yeah, there won’t be any radical changes, I’m afraid. Particularly if you look at the people who are who are going to be doing the review. They’ve got an academic Economist. They’ve got a former government bureaucrat, Gordon Brewer, and then they’ve got a deputy head of the Central Bank of Canada. So, you’ve got fairly mainstream people there. So, I don’t think we’ll see big changes. Having said that though, I mean, the Reserve Bank certainly needs reviewing, because there’s been a lot of concern that their policy settings have been wrong at different times. Phil Lowe’s, arguably misled people last year, and there are a lot of people who are concerned about that. His forecast, which was widely reported that interest rates wouldn’t be increasing until 2024. And he was saying that late last year, and now, they’ve already gone up from 0.1; this is the official cash rate, the overnight cash rate, which is lower than what people pay for home mortgages. Now it’s at 1.35. It’ll go up to 1.85 tomorrow, sorry, not tomorrow, on Tuesday, next week.

Randall Evans  06:02

Is that just people wishful thinking that believed that it wouldn’t go up till 2024? I mean, we had mass quantitative easing and the inflation followed, and then the logical step was; interest rates are going to go up. So, who was saying we can hold off till 2024?

Gene Tunny  06:22

Well, I guess there was this view that the economy had changed. And, I mean, there was quantitative easing, not in Australia, but in other countries during and after the financial crisis. So, starting around, 09, 0-10. And there were people forecasting, oh, this is going to lead to runaway inflation at the time, and that didn’t really happen. But what we’re seeing in the last was over the pandemic period, is that we’ve had, you know, more quantitative easing, and we’ve had big budget deficits to try to stimulate the economy as well. And I think the combination of that has meant that, you know, inflation has really soared. So, they were lucky last time, it didn’t happen. Last time, they got away with it. I think perhaps they thought that they might be able to get away with it again. Yeah, they were wrong.

Randall Evans  07:32

Imagine my shock that they might have. So, I guess first off, one of my first questions would be, as you see, is it all doom and gloom for Australia, or are we In a place we have to be? Where do you see us going over the next 12 to 18 months?

Gene Tunny  07:55

Well, I think it’s doom and gloom for Australia. I mean, really, things have been pretty good when you think about it. I mean, we’ve recovered very strongly from the pandemic. And unemployment is now at three and a half percent, right? This is extraordinary. And now there’s talk about sign-on bonuses. I don’t know how legit this report is. But there was a report in Perth now, that McDonalds in WA is paying sign-on bonuses of $1,000 due to the shortage of people; how difficult it is to get people. And the mining sector is paying $10,000 sign-on bonuses just to get people, there’s a shortage. Partly, that’s related to the fact that we haven’t had; I mean, immigration starting to increase now. But we had a year or so when we weren’t letting anyone in the country. So, I guess we’ll start to see that impacting wages. That could end up leading to inflation itself. I mean, one of the things we want to avoid is what they call a wage price spiral, where inflation just keeps feeding on itself. And prices and wages just sort of, go up in this; once leads to so high wages lead to higher prices, higher prices lead to higher wages, because people need to be compensated for that and they push for it in their wage bargaining. So, yeah, that’s the sort of thing that people are concerned about.

Randall Evans  09:35

The unemployment rate, typically, when there’s high inflation will be low. And I think that’s on the Phillips curve, if I’m not mistaken. Can you just explain that for the for the layman viewing?

Gene Tunny  09:52

I probably should finish the previous question, first. I will get on to that, Randall. I just realized you asked me about if it’s gloomy; I don’t want to be too positive, because, there certainly are risks in Australia, I better clarify that. Because of the rising interest rates, and it looks like, people probably; many households possibly overextended themselves, borrowed too much. There was that fear of missing out. And so therefore, as interest rates increase, even though they’re not going to get up to the really crazy levels that they got up to, in the late 80s, when they were up around 17, 18%. I mean, that won’t happen. But I mean, still many households could get into trouble. We’ve seen consumer’s confidence really plummet, and it’s at you would associate with before, like just before a downturn or a recession. So, there are levels that are almost recessionary. I think one of the bank economists, may have been the ANZ, economist, who said that. So, there’s certainly concerns about that.

On this point about unemployment and inflation. Yes, I mean, the traditional view, and this is a view that we learned was not correct. It broke down in the 70s was that, there is this tradeoff between unemployment and inflation; one story you can tell is if you have low unemployment, that means that workers have more bargaining power. Labor is scarce and so, workers are able to negotiate better with their bosses, and that pushes up wages. So, that’s the theory. 

So far, at least in the official data we’ve had up till March, we haven’t really seen a wages breakout in Australia, that’s why there’s was all their talk about declining real wages. And I think that cost Scott Morrison at the last election. That was really a strong attacking point that the then opposition, now government were able to make against the then government that you’ve got inflation running at the time was 5.1%. Now 6.1% yearly, and wages are only grown at 2½%  So, you’ve got a real wage decline of over 2 ½%. So, that was a bit of a worry. 

The traditional story was that, if you had low unemployment, you’d get high inflation. Conversely, you could, if you wanted to reduce inflation, you had to have high unemployment, because that would give workers less bargaining power. Okay, so there’s this tradeoff between unemployment and inflation. And this was based on a study by a New Zealand economist, Bill Phillips, who was actually an engineer, but he was an economist as well. And he might have been at LSE, in London, at the time. But that whole thing sort of, broke down in the 70s because what we noticed is that there wasn’t this stable tradeoff between inflation and unemployment. What there was, was the possibility that you could have both high unemployment and high inflation, and indeed, you could have unemployment increasing and inflation increasing, you could have what’s called stagflation. 

So, there’s no real trade off in the long run between unemployment and inflation. You can have high unemployment and high inflation at the same time, if people come to expect inflation, if there are, what you call inflationary expectations if they increase. So, that’s one of the concerns that people have about the global economy at the moment. The IMF, World Economic Outlook came out overnight. So, it came out Tuesday, in the US, and it’s gloomy; it’s talking about a gloomy outlook, globally. And I think it’s suggesting  we have very high inflation globally. Was it 6 or 7? It was it was a high rate. I’ll have to just check it. But there’s a lot of talk globally about stagflation, where they will end up in stagflation. And then there’s acknowledgement by international agencies that we could end up in a situation with high unemployment and high inflation down the track. I mean, it’s not likely at the moment. I mean, we are having global growth slowdown, because we’ve had this shock from the war in Ukraine, which has increased the oil price and petrol prices. So, one of the reasons you can have a stagflation is if you have this shock to the economy, such as higher oil prices, which push up the costs of production. And that means that it’s less profitable for businesses to produce what they were doing. And so that could lead to reductions in economic activity, and at the same time as costs of production is increasing, that’s passed on to consumers and increases prices. So, that’s one of the great concerns now.

That’s certainly something that, you know, people are concerned about, and you couldn’t rule it out as a possibility. I’d like to be a bit more optimistic than that, though. But so much depends on what happens with this war in Ukraine, and whether we can resolve that; the oil prices are coming down, but they’re still higher than they were a few years ago. So, a lot is going to depend on what happens there. Also the pandemic, which is causing all sorts of problems with the supply chain, it’s very disruptive. Things just don’t work now, as they did before. I mean, you’d see you see all the delays with Qantas and the disruptions that are occurring.

Randall Evans  17:04

I don’t know if you saw the lineup for Qantas, I think two days ago. But it was out the door all the way down the road for Qantas flights in Sydney, like all the way out there. Never seen it like that, it’s insane. I did want to ask you, and perhaps you should explain the theory first because the question from cue, which disappeared off the chat, was whether the RBA will actually increase interest rates enough to slow down inflation. But first of all, what is that theory though? How does that work? And then, what do we expect the right to probably go to?

Gene Tunny  17:46

Okay. Let’s begin with the fact that inflation is a monetary phenomenon. So, this is a famous quote from Milton Friedman. So, inflation is always in everywhere, a monetary phenomenon. In that, it’s associated with an expansion of the supply of money or the stock of money. So, this is currency that we have, but it’s largely; it’s mostly deposits sitting in the bank accounts of households and businesses. Okay, so, there’s the view that although the understanding that we end up with inflation, because the amount of money is expanding, and it’s expanding faster than the capacity of the economy. So, what we have is too much money chasing too few goods. 

So, inflation is a monetary phenomenon. The Central bank, the Reserve Bank is responsible for the money supply. And so therefore, it’s the RBA that has responsibility for dealing with inflation through monetary policy. So, the way they do that is by manipulating the overnight cash rate, this is the standard way of doing it, the official cash rate. This is what they call the cash market, which is a market in which banks and other market participants will borrow money overnight. And banks need money so that they can settle their accounts with each other at the RBA. The RBA controls this overnight interest rate. And what it’s trying to do is it’s trying to influence all the interest rates in the economy that are have a longer term. And so, what happens is as the cash rate increases, though the cost of borrowing money overnight increases, and that has a knock on effect to the cost of borrowing money for 30 days and six months and 12 months, etc. 

What they’re trying to do there is a few things and the RBA talks about different channels by which monetary policy works. Now, let’s think about what those channels are; one of those channels is through the amount of credit that’s created in the economy. One of the reasons we’ve had the big expansion in the money supply in the last couple of years during the pandemic, it’s not just because of the quantitative easing that the bank has engaged in, it’s not just because of their own money printing in their purchases of bonds. It’s also because with the very low interest rates that the bank has said, that’s meant that more people have borrowed money, or the bigger mortgages. So, we’ve had this expansion of Housing Credit. And the new credit, so the net additions the Housing Credit, that is expanding the money supply, I mean, there’s additional money in the economy. 

Okay, so one thing that the bank needs to do through increasing interest rates is reducing the amount of borrowing for housing and new credit creation. So, that’s one thing they’re trying to do. The other way it works is possibly more direct, or more immediate. It’s the fact that I mean, when they increase the cash rate, and that flows through to variable interest rates, mortgage rates, and eventually to fixed rates, when they reset, people have fixed rates for a few years, and then they reset at higher interest rates. What that means is households have less money to spend, they’re paying more to the bank, the bank gets the money, but the bank may not necessarily lend it to someone who’s going to spend it then. So, you have this subtraction from demand that way. So, that’s another channel by which monetary policy works, what the what the bank, what the Reserve Bank, what all Central banks are trying to do is they’re trying to take some of the heat, well, they’re trying to take the heat out of the economy, they want to have the economy go on this Goldilocks path, not too hot, not too cold. So, make sense? 

So, with the interest rate increases, the idea is you can pull some money out of the economy; will have the money supply, expand at a slower rate, or even contract, so that you can get inflation under control. And because you’ve got less, people don’t have as much to spend, that puts less pressure on the economy; it’s not overheating, there’s not as much demand out there. There’s not as much money chasing the few goods that we talked about before; too much money chasing too few goods. So, that’s the general idea. There are multiple channels, we know that if you do increase interest rates, it does eventually slow the economy. The great challenge is knowing how far you have to do that. And it’s not always obvious in advance how much you have to do that. And the problem in the 80s, the late 80s, in the lead up to the recession, is that they discovered that they really did have to increase those interest rates a lot to be able to slow the economy.

Randall Evans  24:18

Yeah. I was going to ask you a question, but then I was reading a comment.

Gene Tunny  24:28

Was the comment okay?

Randall Evans  24:31

Yeah, it was just should Australia be concerned with China’s financial issues that seem to be compounding? And also, these crazy images coming out of China of the tanks rolling in front of the banks not lending money out. What are your thoughts on what’s going on in China, and will it will impact us? I know, that’s kind of off topic to inflation and the housing market, but can we have your initial thoughts?

Gene Tunny  24:59

Clearly, we need to worry about what happens with China given that it has become such an important part of the global economy. And yes, if the Chinese economy did crash; it is slowing. So, we know that it has been slowing down. And the IMF is concerned about the outlook. I mean, there are risks from you know, that the property market, and construction sector, we know about Evergrande. Look, , it could be a could be a real concern for us, because so much of the commodities boom that we experienced, starting around 2003; we had the first phase of that over about 2003 through to 2013. And then, late to late last decade, commodity prices started rising again, then there was a bit of a downturn before; I think coal prices came down even before the pandemic. But since, end of last year, I think this started picking up with the global recovery, the global recovery was stronger than we thought. And then this year, commodity prices have gone absolutely nuts because of what’s happened in Ukraine. So, I guess, China is important. At the moment, it’s hard to forecast what would happen if we did have a downturn in China, because they’re probably, given all the disruptions that have occurred in the world and the fact that they need our; the world needs our coal, and coal prices are crazily high because of that. We probably would be okay in terms of coal. Iron ore would suffer because China has been a major purchaser of that. So, yeah, I mean, it certainly would be a problem. I mean, it’s hard to know what’s going on with China. Just a very difficult place to understand, really?

Randall Evans  27:33

Yeah. I did remember my other question relates to housing as well, you were talking about interest rates in the economy at different times, because a lot of people on mortgages might be on a fixed term mortgage, and that might go for X number of years. So, that flow-in effect might not hit them, and might not actually reflect in the numbers, two years down the track. So, what do we expect for the housing market, even though interest rates just going to keep going up?

Gene Tunny  28:09

Well housing prices are already coming down. I don’t know if you’ve seen those statistics. But Christopher Joy, who’s one of the top financial commentators in Australia, he writes for the Australian Financial Review. I’ve actually done some work for him in the past. He’s incredibly a bright guy. He’s got a company called Coolibar Capital Investment. And they’ve got billions of dollars of money under management. So, they’re really paying attention to this stuff. Look, you just look at the losses in or the reductions in housing prices since the first interest rate increase in May. And this is suggesting that, look, this is already impacting how sales was. I don’t know the exact breakdown; I should have looked it up before I got on. But I mean, there are a lot of households that are on variable rates. We see in the data that house prices are falling. I guess that will be, because as the interest rates increase, people won’t be able to borrow as much as they could have previously. And so that means they don’t have as much or they can’t go to the auction with the same expectations as they did before. Or maybe they’re more cautious about borrowing. They’re more concerned they’re less willing to bid at an auction because they are worried about the future. We know that consumer confidence has dropped. So, I think the interest rate increases have started to have an impact. So, there are obviously enough people worried about it. And it’s also impacting prices because it’s reducing the ability of people to the amounts that they can borrow. So, what was seen as Sydney’s fall and 5%, Melbourne, 3%, Brisbane, around 1%. That since May, since the first rate hike, capital cities overall, that minus 2 ½%. So, look here we prices are going down.

Randall Evans  30:35

I was just saying you’re recovering from COVID and I forgot to thank you for coming on.

Gene Tunny  30:43

Thank you. I usually think I’m okay. I thought I was okay, before I started. And then as I keep talking; should be okay. So, what Chris was writing was, if you look at Sydney, it’s declining at an annual rate of 22%. So, house prices are falling, and it looks like they’re falling at an accelerating rate.

Randall Evans  31:10

That’s a huge number to be dropping at 22%.

Gene Tunny  31:15

That’s if you take the rate it’s dropping out at the moment and annualize it. So, it may not last over the year. Although, it’s possible that it could; house prices soared during that pandemic period, even though many forecasters were expecting they might fall, it actually, surged because there was all this additional borrowing. There’s the fear of missing out. And, the market went nuts. And so, they’ll probably land above where they were at the start of the pandemic, but a lot of the gains will have been lost; it’s looking like that now. Because those interest rate increases are having more of an impact than was expected.

Randall Evans  32:11

Yeah, I couldn’t believe how much housing prices rose during the pandemic, it was just so counter to what I thought was going to happen. But it did, and I guess we’re going to see that correction. Probably not an overcorrection, though maybe, like you said, probably just above pre pandemic levels.

Gene Tunny  32:35

Yeah. And that’s what we’re seeing. It’s it started for sure. The big unknown is just how vulnerable households are to interest rate increases and whether you will start; they will massively cut back on their spending and that could then lead to a downturn. At the moment, the labor markets going ridiculously strongly, we’ve got 3 ½% unemployment, 300,000 vacancies, I think I saw someone report the other day.

Randall Evans  33:11

The unemployment figure that includes people actively looking for work, right. Yes. So, I’m not sure if that’s a great signal to our strength, if there’s a lot of vacancies and a lot of people looking for work, or am I missing something?

Gene Tunny  33:33

But that’s showing that there’s hardly anyone looking for work compared with before the pandemic. And there’s lots of vacancies. So, this is why we would expect wages to start increasing or perhaps we hope that they will. I think they probably are. We’re certainly seeing well, the sign- on bonuses that have been reported, there’s a story about McDonald’s. Possibly, who knows whether that’s true or not, it’s hard to know whether McDonald’s would be paying $1,000 sign-on bonuses, but that was the Perth Now report. I believe it in the mining sector though.

Randall Evans  34:12

Yeah, I could fly to Perth for like 400 bucks, have a job for a week and I’ll pay for my holiday.

Gene Tunny  34:20

You probably have to serve at some time. I’m sure they’ve got something or their agreement to cover that. So, I think the unknown is just how the economy will react as interest rates increase and just how much people will cut back their spending and whether you know, we had a boom and then we’ll have a burst. One of the challenges is going to be; and this is a big issue for the new government. You will recall that the previous government cut the fuel excise in half, so it’s down at about 22 cents a liter now, and what’s going to happen is that that’s going to go up to, it has to be 44 cents because they cut it in half, at the end of September. People will notice that unless petrol prices come down a bit more, they’ll really notice that and that’s going to come at a bad time, because we know interest rates are still going to go up. They’ll go up half a percentage point next week.

Randall Evans  35:38

What are your thoughts on how the Albanese government is going to shake up the economy? I guess some of the things that are promising, like, I guess the government backing certain home loans by 40%, and things like that. Does anything about his election promises stand out to you that will have a big impact?

Gene Tunny  36:06

Not really. They wouldn’t implement policies that I would probably implement at the moment to try to get inflation under control, they wouldn’t do that, they wouldn’t go that far. There was a discussion that we had? Well, I think we have to massively reduce his budget deficit we’ve got now. So, Jim Chalmers, the Treasurer, he’s talking about the need for savings. One of the reasons they’ve got to find savings; they need to get the debt under control – the trillion-dollar debt, but also because the government at the moment is contributing to the inflation problem we’ve got by running these large budget deficits. Still large, what you call a structural budget deficit. so that they’re still running these large structural deficits of 3 to 4% of GDP, if you look at the budget documents. So, what that means is that if you adjust for the state of the economy, you take into account the fact that the economy has been doing very well. At this point in time, the government should be running much smaller deficits or surpluses than they actually are, and they’re not. They’re still running reasonably sizable deficits. So, there’s this structural deficit, and that’s contributing to inflation. They’re adding to the demand in the economy, they’re contributing to the overheating. So, what this federal government has to do is to really cut back on their spending. Or, one alternative, I don’t know whether they’ll do it or not, because they promised that they would follow the stage three tax cuts. I think in stage three. There’s another tax cut coming through, that’s going to knock out one of the marginal tax brackets, if I remember correctly. And so, there are some people on the left who are arguing that the government shouldn’t go through with those, those tax cuts that are programmed in.That’s one possible thing they could do. To address that structural deficit. I’d probably prefer that they cut their spending, because they’ve got some big spending programs that are really getting out of control. So, NDIS, it’s well intentioned; I think a lot of people support the principle of it. But it’s growing, it’s tens of billions of dollars, or 30 billion, or whatever it’s going to overtake Medicare, in terms of the amount of money that’s spent on it over the budget estimates, over the next four years. 

So, that’s something they’ve really got to get under control, but that’s going to be difficult for them. I think it’s a well-intentioned program. The challenge is, where do you limit it? That’s the problem. There’s the desire to keep expanding it and to make it to provide as high level of service as possible and I think yeah, that’s just financially unsustainable at the moment, we need to really fix that up. 

That’s what I think needs to happen. There needs to be the expenditure restraint, or you know, the larger cuts than anything Jim Chalmers would be contemplating. I’m former Treasury, the Treasury would have provided some list of the things that should be cut. And knowing how these things work, Treasury have this huge book full of potential savings that could occur. And the government will probably pick a handful of them, because they look at most of the things Treasury’s proposing and they go, how could you ever contemplate cutting all of these things? Politically naive, so that that’s what will happen, that’ll be the reality. 

Randall Evans  40:38

Well, one of my questions is that, I know the RBA is supposed to be a separate entity, but allowing the RBA to increase interest rates to such a level that’s going to hurt your voter base. It’s almost political suicide. And I know they don’t really have a say, but, there was that kind of situation where I think it was Roosevelt who grabbed one of the members of the Federal Reserve by the scruff of his neck and was like, you’re destroying my presidency. So, is there a situation where the Australian Government can effectively halt the interest rate rise for political reasons? Or do we have enough kind of checks and balances to stop that happening?

Gene Tunny  41:31

Okay, they actually could, there’s, they have the power to do that. I’m trying to remember this is a point that Nick Growing often makes, I’m trying to remember correctly, I think there’s a provision in the Reserve Bank Act that the treasurer can table something in Parliament and tell the RBA what to do, right. So, the Treasurer could direct the RBA. And I don’t know if you remember, back in the 80s, we had a treasurer of Paul Keating, the Labor treasurer at the time, and he gave a famous or probably infamous speech. It was in the lead up to his challenge to Hawk when he said, I am like the Placido Domingo of Australian politics. And I’ve got the Treasury in this pocket, I’ve got the RBA in the other pocket. That was a great speech; it was not a modest man, it was a very coveted man. But yeah, Keating thought he ran the RBA. So, back in the day, the government had a lot more control over the RBA. The problem then is that, you don’t want monetary policy set by the government. Because for that reason, because the government’s going to want to have it more well, looser, they probably want to have the economy more prosperous in time for their reelection. And they’re not thinking longer term about what the inflationary consequences of that are. 

So, what economists have learned from that problem, the problem that if you have a Central bank politically influenced and you can get you can get higher inflation is we need to have Central banks independent of the government. So, we need to give them some independence. And so, what our governments have done is that they’ve struck an agreement with the Reserve Bank, there’s an agreement on the conduct of monetary policy. That was first, I think it was first formalized by Peter Costello, and in the fall, and in the 90s, in 96. And what that did was that codified in an agreement, the inflation targeting goal that we have now. So, the Central bank, the Reserve Bank, is targeting inflation between 2 to 3%, on average, over the economic cycle, so it’s of which means that they don’t have to be zealous or they don’t have to solely target inflation, if they’re going to crash the economy, they could ease up a little bit on interest rate increases, but ultimately, their goal is to get inflation under control, get it 2 to 3%. That’s what they’re accountable for. So, they’re going to be doing everything they can without crashing the economy to get inflation under control. But look, who knows? We hope we’re not in a situation that the Americans or that we were in the late 80s or the Americans were in the sort of early 80s and Britain too when you really had to increase interest rates a lot to get inflation under control because you had double digit inflation. Now we’re not there yet, hopefully we’ve moved in time to prevent that from occurring. But if you get to a situation where you’ve got double digit inflation, then you might have to increase interest rates much more than the economy can bear and then you end up in a crash. 

I’d like to think that we haven’t left it too late. And we’ll need to resort to those measures. But, let’s wait and see. So, I guess the answer is that, the government could direct the RBA. But then, the bad press they would get over that would be incredible. You’d have all the financial journalists around the country, criticizing them over compromising the independence of the RBA, Jim Chalmers wouldn’t be able to finish a press conference.

Randall Evans  45:52

You’re acting like they answer the presses questions. I think Anthony Albanese is the fondest to just brush off questions. But I understand completely what you’re saying. And I wasn’t suggesting; just for my viewers that the government should do that. I was just putting the thought out there. As a former Treasurer, what do you think the current government values most when it comes to the economy? Because everything seems to be a trade-off, right? It’s either we can get inflation under wraps, or we can have high job growth or, we can have housing affordability, so what do you think that they’re actually going to? Because you can’t have all of them or maybe you can? What do you think their focus should be, moving forward?

Gene Tunny  46:49

Well, I think the focus should be on the overall health of the economy. So, it should be about making sure that we’ve got the right tax policy settings or we’re spending on the right things, we’re not wasting money. We’re not contributing to the inflationary situation. We’re not enacting silly policies. 

One thing I have been encouraged by is the fact that they’re not doing really silly things, or they’ve knocked back this idea from the greens that we should have a moratorium on coal and gas projects, right? At a time when the coal price has been; well, that’s what Adam Danza saw, right. And at a time when the global coal prices being up at 500, or 400 US a ton for thermal coal, that’s extraordinary. 500 a ton for metallurgical coal, for coking coal. The idea that you’d actually wouldn’t develop any new coal mines when the world is crying out for it, because there’s no gas. We’ve got a global conflict and Europe’s worried about their gas supplies and whether they’ll have enough gas in the winter. Yeah, it’s a bit crazy. Full credit to the prime minister for knocking that back. 

I think there’ll be broadly sensible, but what you’ll see with a labor government is that they’ll be more aligned to what they perceive as the workers. Okay, and they won’t care as much about the costs they impose on business. Okay. And so, you’ve seen that recently. The problem we’ve got is that there are a lot of well-intentioned policies and so it’s hard to argue against a lot of these things, but they are costly to business. This government will probably do more things like this, we saw that there was that recent decision about from about, what is it? Paid leave for if you suffered domestic violence, or family violence? I can see what why that would be a good thing to have, at the same time, there is already paid leave available, you get four weeks if you’re a full-time employee. And this is an additional cost to employers. And you’d have to be a pretty nasty employer if you didn’t look after an employee of yours who was in that situation. I wonder why this sort of move is necessary from the government. Maybe they think it’s not going to have much of a cost because your employers would probably do the right thing, to begin with. 

I guess it’s a signal that this government is probably going to be more focused on the workers, it’s going to be less concerned about the impacts of its policies on employers. One thing that worried a lot of people, a lot of economists and financial commentators, John Keogh wrote a great column on this in the Finn review was when Anthony Albanese in the lead up to the election, talked about how the Fair Work Commission should just agree to wages going up at the rate of inflation. And there was a concern that, well okay, that’s a good thing that just leads to that wage price spiral where, if prices go up, oh, let’s increase wages by the same amount. And then that increases the cost to employers, they pass it on in prices. And then oh, let’s have wages go up again, prices go up again. And they just sort of gradually creep up a little, not gradually, they can increase, they can go up very quickly. And organizations such as the Bank for International Settlements and various other economic agencies around the world have warned about this wage price spiral, and one of the quickest ways to get there is to have automatic indexation of wages to inflation. 

So, there were people concerned about what the PM said there back in the election campaign. Ultimately, it was up to the Fair Work Commission, the Fair Work Commission recommended an increase that wasn’t complete. It was just a bit; I think it was a bit lower than the inflation rate. For non-minimum wage workers is about 4.6% or something, if I remember correctly.

So, that would be my take on it. I think they won’t do anything too crazy. They’ve resisted that crazy proposal from the greens, so, good on them for that. Sorry, go ahead.

Randall Evans  52:15

I follow a few greeny pages on Facebook just to see what they’re yapping on about. And I did see a lot of angry people today about that very thing you’re talking about. Saying, you can’t be for sustainability, but then allow coal mines to open. 

Gene Tunny  52:42

Yeah, well, just on that. it’s a real threat to labor. So, it was the coalition that got smashed on the climate change issue, last election, they ended up losing some of the blue-ribbon seats. But labor’s similarly threatened, right. Labor got what was it? 31% primary vote. So, labor was lucky to, it’s just the way that it played out in terms of the seats that were that were lost. And it managed to be able to form government, even though it ended up getting fewer votes than the coalition. But yeah, it’s in trouble from the greens as well.

All of these inner city seats are turning green. So, I’d be interested to see what happens in the future, whether Labor has to; how it survives, it’s under threat, as well as the coalition. So, I think that’s one thing that’s going to be fascinating to watch in the next few years.

Just on housing, the government’s policy isn’t going to do much for affordability because it was only going to apply to 10,000 people or so. It was it was limited in the amount of people that would apply to and it has to apply to hundreds of thousands of people to really make any sort of impact. The reality is there’s not much the federal government can do because the states are more relevant when it comes to housing because well, one, they’ve got responsibility for social housing. Now, my view is they’re just never going to be able to build enough of that. One of the problems with social housing is that they’re aiming to offer it at below market rent. The challenge there is you’re going to have a huge demand for your social housing because you’re offering something that’s cheaper than what the market is able to provide right? So, you’re never going to win there. You’re always going to be attracting more people, than you’re going to be able to build houses for. 

So, that’s probably not the answer. I think the answer is having a more liberal approach to development, allowing more development, particularly in the inner cities where we have heritage restrictions. There are all sorts of zoning rules around our capital cities. And even across the whole metro area here in Brisbane, for example, where I am, there’s a ban on townhouses in low density neighborhoods. And that’s just really silly. Because, that’s constraining the supply of housing. And there was research by Peter Tulip, at the Reserve Bank when he was there at the Reserve Bank, that showed that these zoning restrictions, they’re massively increasing the cost of housing, like 50, or 60%, something like that. So, that’s up to councils, but state governments, they possibly could do something like that with some of their planning legislation. But the commonwealth really can’t do much about housing. So, even though it’s an issue, it’s a big issue. I’m not sure they really can do much about that. 

The big issues the Commonwealth is facing; there’s the general economic management issue, what its budget deficit is doing for the economy, what its budget deficit means for the accumulation of debt and risk to the credit rating in the future and our ability to service that debt. And so therefore, that’s why Jim Chalmers is having to trim the budget where he can. He’s going to find it difficult though, just because that reason we discussed. Labor sees itself as the party of the workers, it also sees itself as more socially caring, more compassionate than the conservative side of politics. And so, it’s going to be very hard for them to make the substantial budget savings that are necessary.

Randall Evans  57:15

Well, we’ll touch base with you again, in a couple of months’ time and see where we’re at as a nation. And if people want to watch, we’ve had Gene on before, so you can just search for it in the little YouTube bar and watch that episode too. But apart from that, make sure you check out his website. It’s on the screen right now. If you want to have some more in-depth conversations.

Bye Gene. Thanks for your time. Thanks for being here.

Gene Tunny  57:42

Pleasure. Thanks. Thanks, Randall and thanks to everyone listening. Yeah, glad to be to be connecting with you. So, it’s been great. Thank you. 

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 contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Thanks to Randall Evans for letting us borrow the audio from his latest Deactivist show for this episode. Also, thanks to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.auPlease consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

The Reserve Bank of Australia has allegedly made some bad calls in recent years and now the Australian Treasurer has commissioned a major review. This episode’s guest, Dr Peter Tulip of the Centre for Independent Studies, has long pushed for a review of the RBA. Peter, a former RBA and US Fed economist, thinks the RBA can learn from other central banks such as the Fed and Sweden’s Riksbank, and it can avoid future bad policy decisions which cost hundreds of thousands of jobs. 

You can listen to the episode via the embedded player below or via podcasting apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher.

Here’s a video clip of Peter’s conversation with show host Gene Tunny to give you a flavour of what is covered in the episode.

About this episode’s guests – Dr Peter Tulip

Peter Tulip is the Chief Economist at the Centre for Independent Studies, a leading Australian think tank. Peter has previously worked in the Research Department of the Reserve Bank of Australia and, before that, at the US Federal Reserve Board of Governors. He has a PhD from the University of Pennsylvania.

Peter’s twitter handle: @peter_tulip 

Links relevant to the conversation

Peter’s previous appearance on Economics Explored: https://economicsexplored.com/2022/04/11/the-high-cost-of-housing-and-what-to-do-about-it-w-peter-tulip-cis-ep134/

Australian Treasurer’s 20 July 2022 announcement of RBA review:

https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank

Peter’s CIS paper on the RBA: https://www.cis.org.au/publication/structural-reform-of-the-reserve-bank-of-australia/

Kevin Warsh’s review of the Bank of England Monetary Policy Committee: https://www.hoover.org/sites/default/files/transparency_and_the_bank_of_englands_monetary_policy_committee.pdf

This is the 2010 Statement on the Conduct of Monetary Policy that Peter refers to at the end of the episode:

https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-5-30092010.html

This is the most recent statement:

https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html

Transcript: Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

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.

Peter Tulip  00:01

Coming up on Economics Explored. Many of us, including me, think that the Reserve Bank has been making big mistakes and is in need of structural reform.

Gene Tunny  00:15

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 149 on the review of Australia’s Central Bank, the Reserve Bank of Australia, or RBA. This review was announced by Australia’s new Labour government on the 20th of July, 2022. 

My guest this episode, is Dr. Peter Tulip. Peter has long pushed for a review of the RBA, and he’s been extensively quoted in local media on what needs to change. Peter thinks that the RBA has made some big mistakes in the past, and it could learn from other central banks, such as the US Federal Reserve, and the Bank of England, as he explains in this episode. 

Currently, Peter is the Chief Economist at the Centre for Independent Studies. And before that, he’s worked at the RBA, and at the US Federal Reserve Board of Governors. So, he knows how central banks work on the inside, and his perspective is a valuable one. 

This is Peter’s second appearance on the show. He previously appeared in Episode 134 on the high cost of housing. So, if you haven’t listened to that yet, please listen to it after this episode; it’s great. 

In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments or suggestions. Please get in touch and let me know your thoughts. I’d love to hear from you. 

Righto. Now for my conversation with Peter Tulip on the review of the Reserve Bank of Australia. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Peter Tulip, Chief Economist at the Centre for independent studies, welcome back to the program.

Peter Tulip  02:01

Good, Gene, how are you? 

Gene Tunny  02:03

Good. Thanks, Peter. It’s great to be chatting with you again. I’m keen to speak with you about the review of the Reserve Bank of Australia that was announced earlier this week by the treasurer, Jim Chalmers. One of our colleagues, Steven Kirschner; Stephen has been on the show before too. He wrote that the RBA review is; he wrote about it that everything is on the table, and that’s good. So, it is a very expansive review. The only thing it looks like they’ve left off the table to me, is that they’re not reconsidering the split in responsibilities between the Reserve Bank and the Australian Prudential Regulation Authority. They obviously still see a role for that as a separate entity, rather than rolling, prudential regulation back into the RBA. But other than that, it seems like a very broad ranging review. Are you generally happy with what’s been announced?

Peter Tulip  03:02

I’m delighted. Many of us have been calling for something like this for a long time. And the terms of reference are fairly deep and broad. The people running the review, first class, and there’s a good mix of people too. I mean, they’ve got a central banker, an academic and central bureaucrat. And any substantial reform, the RBA is going to require integrating those three perspectives. So, that’s useful also.

Gene Tunny  03:41

Right, okay. So, we’ve got an international expert, someone who’s been on the committee, the Monetary Policy Committee in the UK;

Peter Tulip  03:49

The Financial Policy Committee, slightly different. That’s financial stability rather than monetary policy.

Gene Tunny  03:55

All right. Okay. But she’s had a senior position in the Canadian Central bank, is that right? Caroline Wilkins? 

Peter Tulip  

Yeah, sure.

Gene Tunny  

And also, Renee A. Fry-McKibbin, who is an academic at the Australian National University, so highly regarded macro Economist, and also Gordon Brewer, who I worked with in the Treasury many years ago. And I mean, I think Gordon’s an excellent choice for that. So, yeah, it looks like;

Peter Tulip  04:24

And before that, Gordon worked at the RBA, so it’s good to have some internal experience.

Gene Tunny  04:31

Right, okay. But it wasn’t exactly what the RBA wanted, was it? Even though it looks like the RBA has had some role in shaping the terms of reference, I saw an interview with Jim Chalmers on, was either Coffee show or the Today show here in Australia. And he was saying that the RBA said some input in the terms of reference, but originally, they just wanted to review themselves, didn’t they? Which would have been a great idea if you think about it.

Peter Tulip  04:58

To be credible, it needs to be external and independent. They’ll have a secretariat, which will be largely staffed, I think, from Treasury and the RBA. So, they’ll be able to call on the resources of the bank, and it’ll be informed by the bank by insiders, but the ultimate judgments will be independent and external, which I think they need to be.

Gene Tunny  05:26

Well certainly will, particularly if they’ve got Rene on the review committee. So, Rene is the editor of the Economic Record here in Australia, which is the top Economics journal here, and she’s well known in the economics profession and her husband, Warwick McKibbin, is actually a former board member, isn’t he? I mean, she’s obviously a separate person to Warwick. But I mean, I’m wondering if this is a way that Warwick’s views are actually getting inputted into the review in some way, even though obviously, she’s her own individual.

Peter Tulip  06:03

Yeah. His views will clearly get a lot of weight. But Rene is an expert in her own right. Yes.

Gene Tunny  06:09

Yeah, along with other economics colleagues. So, it’s not going to be something that the Reserve bank is going to necessarily get its way on, which is good. There’s going to be input from a broad range of sources, including yourself, I mean, I’m guessing you’ll be making a submission to the review.

Peter Tulip  06:26

I’ve already written my submission. I mean, so I did a big paper calling for reform of the RBA, just a few months ago. In the context that this review has been called for. And I set forward my views on what I was hoping the review would look at and what it would conclude. So, I’ve done my bit, and now it’s up to them.

Gene Tunny  06:48

Great., I mean, you’ve certainly been one of the most influential people in in this discussion so far. And you wrote a fascinating AFR piece earlier this year, which was titled Reserve Bank must be made accountable for inflation mistakes. So, might chat about that in the moment. But to begin with Peter, could you tell us why do you think this review was necessary in the first place? Is it because of those inflation mistakes?

Peter Tulip  07:14

Can I give a long answer to that? So, there are three levels of an answer in increasing areas of being controversial. The first and simplest answer is that, it’s just good practice to regularly review your monetary framework every few years, in the light of new research and new experience. People are writing about these frameworks all the time, and you need to, every now and then have a stock take of that. And this is what all of our foreign, not all, most other Central banks do. It’s standard amongst foreign central banks to have regular reviews. And the format of those varies, and we’ll talk a bit about that. Some of them are external, some of them are internal. Some of them have a heavy academic focus. Some of them are on; the Bank of Canada does is on a regular five years schedule. Others are more ad hoc. So, that’s one thing. It’s just regular practice. 

The second bigger argument is that the Reserve Bank has been missing its targets that prior to the pandemic, the inflation rate was well below the target of 2 to 3%. And the unemployment rate for an even longer period was well above estimates of its sustainable or full employment level. And so, particularly with the inflation rate, which is the reserve bank itself describes as a key performance indicator, when you’re persistently failing to hit your targets, there is there has to be a presumption that a review is necessary that otherwise there’s just no accountability at all. 

And then the third layer of arguments I gave, which is more controversial, is that many of us, I mean, including me, think that the Reserve Bank has been making big mistakes, and is in need of structural reform. And it’s great to have a chance to hear those views. And these are arguments that part of them are related to the composition of the board that these are decisions for the government and parliament often, rather than for the bank itself. And so, you need some kind of external review to evaluate this widespread argument.

Gene Tunny  09:53

Yeah, I think they’re good points. Peter, can ask you about that inflation target of 2 to 3%. Now, there could be two possibilities couldn’t there? It could be that either the 2 to 3% target doesn’t make sense, or we should review that target; we should, maybe we could downgrade it or just set it at 2% or have it at 1 to 2%? Or another possibility is the Reserve Bank; I mean, it was derelicting its duty. So, is that right? There are two possibilities there, there could be; and this is why a review would be desirable because you’d either look at the appropriateness of the target, and also whether the Reserve Bank is actually doing what it would need to do to achieve that target.

Peter Tulip  10:36

Correct. So, the reviews that other Central banks have had, often have had a strong focus on the specification of the targets. And that should be part of this review. And there are many people that would prefer a different target to the 3%. There are some people who think the inflation target should be lower, there are some people who think it should be higher. There are respectable arguments for both that the review should be considering. And that should be an important part. In my view, those arguments are really secondary, oh sorry, I should also say, there are other people who want to target a different objective completely, such as nominal income. And we’ll talk about that later on. 

In my view, those arguments are really secondary. That for most of the past decade, the bank has not been hitting its targets, it hasn’t even been trying to hit them. So, it’s a bit pointless specifying worrying about how you exactly define the target. If the bank isn’t just going to ignore. The most important question is governance, and how can we change the incentives of the RBA so that it actually does hit the targets it’s given? And you need to get that right before you worry about what that target actually is.

Gene Tunny  12:04

Okay, a bit of follow up on that. Peter, you’re saying that it hasn’t even been trying to achieve those targets?

Peter Tulip  12:11

Sorry, I’m wording that too strongly. You’re right.

Gene Tunny  12:13

I think I understand the point you’re making. I want to just explore that a bit. 

Peter Tulip  12:18

Can I give you an example? 

Gene Tunny  

Yes, please.

Peter Tulip  

So, in November 2019, just before the pandemic came along, the Reserve Bank issued a set of forecasts, and it had underlying inflation staying outside the target range for the whole horizon. And it had unemployment exceeding the bank system, it’s a full employment for the whole horizon. 

Gene Tunny  

So, inflation was below 2%?

Peter Tulip  

Yeah. Unemployment was I think, being forecasted 5% or higher, varying depending on the horizon. And despite what you would think is an obviously unsatisfactory outlook. The Reserve Bank didn’t change interest rates, either at that November meeting or subsequent meetings until the pandemic came along. And it did so because it was worrying about other things, in particular, financial stability. So, there was a disregard, or at least down weighting the bank statutory responsibilities in the legislation that says, the objectives stability of the currency, which we interpret is 2 to 3% inflation, and full employment, which we would interpret now as the preferred terming, that other Central banks uses, maximum sustainable employment, which were estimated about four and a half percent. So, there was a down weighting of those objectives in favor of this new objective that the bank invented about indebtedness, and we’ll talk about that later on too.

Gene Tunny  14:01

Okay, so shouldn’t central bank be concerned about indebtedness and the related issue of financial stability? I mean, that’s ultimately what they’re concerned about, isn’t it that if they’re worried that monetary policy, if it’s too loose, if it’s too accommodative, then households could take on too much debt and then get into trouble at a later date and that could have adverse economic consequences.

Peter Tulip  14:28

Sure. So, we know from the global financial crisis, that if your banks start failing, then it’s catastrophic for the economy. Australia had a similar experience in; when was it? In the early 1990s. When several of our small banks failed and some of our big banks came close. And again, that that was one of the worst recessions Australia’s had in living memory. So, yes, financial stability matters a huge amount. The question is how you deal with that? And what’s the appropriate instrument for that? And there’s a very large volume of research saying that it’s not interest rates or monetary policy, it’s prudential policy. And they were in particular, about the capital requirements that banks are required to have. And the way to avoid a repetition of the GFC is not to put 270,000 people unemployed, is to raise your capital requirements. So that if in the event of losses, banks making losses on their loans, banks have sufficient equity to cover that. And so, the important objective is, yes, we do very much want to avoid a repetition of the GFC. The way to do that is with high capital requirements.

Gene Tunny  16:04

This 270,000 jobs number Peter, is this from an analysis by, is it Andrew Lee and?

Peter Tulip  16:15

And Isaac Gross. So, Andrew Lee is now an assistant Treasurer, he’s a government minister. And Isaac Gross is an academician at Monash University of Economists. And they, just recently, published a paper in the economic record, which you were referring to before. That’s the journal that Renee A. Fry-McKibben edits. Where they found that, yes, the reserve bank kept interest rates too high, between 2016 and 2019. And because of these worries about debt, and because of that, unemployment was 270,000, higher than it should have been.

Gene Tunny  17:08

Yeah, it’s interesting. I mean, I’ll take the point there about; if you do run that simulation, and I think they use the Reserve Bank’s own macro-economic model Martin, I think they’d call it. And so, look, yeah, good point. I mean, if I were on the board, I’m probably one of those who wouldn’t have minded them having kept the rates where they are. I probably wouldn’t have supported cutting them, as that model would suggest, given that I would have those concerns about financial stability. But I do recognize that there are a variety of views. And I’ve been interested to learn about that literature that you’ve written about, and also Steve Kirschner talked about when I spoke with him on nominal GDP targeting. And I want to have a closer look at that. 

Peter Tulip  18:00

I’m happy to argue the merits of that particular argument further if you want, but what’s maybe a more important point to make here is that the process was bad. Yes, the bank never really explained or defended its position in public, that there seems to have been a real lack of scrutiny of the decision. So, there are people such as yourself, who were sympathetic to what the bank did. But those arguments, I would say, the large majority of expert opinion is on the other side, which is that you should regulate these considerations with prudential policy, not with monetary policy, that the most direct instrument is almost always the most efficient, and involves the least collateral damage? Yeah. 

And even though, a majority of expert opinion in a majority of other central banks were explicitly opposed to the bank, there was no real defense of that position in the bank’s documentation. Beyond a few brief sentences. The bank never quantified its concerns, was never actually very precise, even about whether it was really worried about the level or the growth rate of indebtedness. It didn’t even say what; no discussion of what’s the best way to measure this, no real clear discussion of the consequences of this. But maybe even more important, even though most expert opinion was against the bank, there was no; counter arguments were never addressed. 

So, in the paper I wrote that earlier this year, I mentioned another half a dozen arguments against the bank’s focus on indebtedness, any one of which I think would be fatal. And none of these were publicly addressed. Just to give one, a lot of research studies find that low interest rates don’t actually have almost negligible effect on indebtedness, that the debt to GDP ratio has a numerator and a denominator. And low interest rates will encourage both. And a lot of research says that actually, you have a bigger effect on GDP than you do on the debt. So, low interest rates have a greater effect on the capacity to repay, or to bear a burden than on the actual burden itself. Insofar as what the bank was doing, it was counterproductive. And there are more arguments and people; rather than going through succession of arguments on it. Yeah, actually, this is the paper. It’s called structural reform of the Reserve Bank of Australia. I mentioned a lot of further reasons as to why the bank was wrong in targeting indebtedness at the expense of its core objectives.

Gene Tunny  21:35

Yeah. I’ll put a link in the show notes to that paper for sure. Peter, in fact, I’ve got it in front of me, it’s a Centre for Independent Studies analysis paper, 36, April 2022. And in that paper, I mean, you, I mean, it’s Frank and fearless for sure. You’re someone who used to work at the bank. And you’ve probably still got a lot of friends there at the bank. But you mentioned or you talked about their poor communication and poor process. Now, I mean, you’re talking about that before. What do they need to do better? How do we improve it? I’m guessing this would be one of your hopes for what the review recommends. But how do we improve the process in the communication?

Peter Tulip  22:27

So, let’s start with this particular issue, the bank needs to fully explain itself, that it needs to outline the pros and cons of its arguments and address obvious counter arguments. And preferably, if something is important, you need to say what’s the evidence, both consistent with the bank’s position and how do we address evidence that people think weakens the position? And some kind of quantification of these effects is, well, I mean, some of these things can be measured, and there is substantial research on aspects of this question. And that really needs to be discussed and its relevance to policy explained. 

So, that’s dealing with one specific error, and why that’s important, is, unless you do that, mistakes will happen. And so, regardless of your position, on this particular question of indebtedness, the process was clearly flawed. That if you keep making big decisions that slip hundreds of thousands of people out of work, without a full, open public discussion, sometimes you’re going to make mistakes. And when you make mistakes, they will persist. An open discussion is the best antidote to making serious mistakes. Because this was not just a one off, the bank has a record of very controversial decisions that run counter to mainstream economics. For example, Warwick McKibbin, we mentioned earlier, was pushed out of the bank when he objected to its policy. This is back in the late 80s, early 90s of targeting the current account deficit. The bank had interest rates far too high, because it was worried about the current account deficit. Warwick McKibbin said that that was wrong. And essentially, he was told he wasn’t welcome. So, he left.

So, this is a cultural problem within the bank, its resistance to criticism and to scrutiny, even internal scrutiny.

Gene Tunny  25:09

Peter, can I just ask what are they doing now? So, at the moment, they do publish; there’s a decision, there’s a monetary policy decision every month regarding what they do with the cash rate, there’s a page or so of, you know, discussion of where the economy’s at and some sort of; all they make clear what their decision is, you’d like to think there’s some logical connection with their analysis of the economy in that decision. The governor does make himself available to give speeches, he appears that I mean, parliamentary committees, from time to time. So, what more needs to be done? And are there any examples around the world of how it’s done better?

Peter Tulip  25:54

Yeah, I think most Central banks are clearer and more transparent than the RBA. Where it matters most is in reasons better decision. So, where transparency, I think is most necessary is for the banks to say why it made a decision, and why its choice was preferable to alternatives. So, for example, at the moment, the bank with the rising rates, the market expects to be going up about 50 basis points a month, the next few months. It would be very useful, in fact, I think it’s necessary for the bank to say, what would be the consequences of alternative choices? Suppose interest rates were to rise slower, and interest rates could rise higher, and what would be the unemployment and inflation consequences of those alternatives? My guess is that a faster path of increases would give us lower inflation and higher unemployment, in both cases, bringing those variables closer to the bank’s targets. 

So, why is that not the preferred choice? That strikes me as the central requirement for transparency, explaining why you’re not doing something different, and the bank doesn’t really do that. It certainly doesn’t quantify it. But other central banks do. The Federal Reserve, the Risk bank are prominent examples. I mean, all it takes is just a little four panel chart to show; again, this is the Goldilocks path in the middle, and this is too high and this is too low. And these are the consequences and we pick the path, the Goldilocks path with the best outcomes. Other central banks do that as a matter of routine, so should the RBA.

Gene Tunny  28:05

Right, so you’re talking about the Federal Reserve and the Bank of England? Okay. 

Peter Tulip  28:09

The Bank of England does it in a slightly different way with scenario analysis. That would not be my preferred model. Either the Riksbank or the Fed approaches, or just very clearly convey the central issues in the monetary policy position.

Gene Tunny  28:27

Yeah. In preparing for our chat, Peter, one thing I noticed was a review that was done of the Bank of England’s Monetary Policy Committee by Kevin Walsh, 2014. Actually, I may have learned about that from you. I’m trying to, I can’t remember exactly, but I thought that was very good. If I’m reading one of his tables correctly, it does suggest that we have very low transparency here in Australia relative to those other countries. I think that’s.

Peter Tulip  28:57

So, about Kevin Walsh, he used to be a governor of the Federal Reserve and went to the Bank of England. This is an example of the kind of external reviews we were talking about, specifically to review their processes for transparency and openness. And it ended and it’s a very good thoughtful report, and anyone interested in that issue, I strongly recommend it. As part of his review, he looked up the Central bank practices and then yeah, the RBA was terrible. And the RBA is partly rectified. It as been more opened since that report was done. And in particular one, one of his glaring findings was that Australia was the only country he looked at where the Central bank didn’t give regular press conferences and and other countries find that a very useful way of explaining that as decision, and in particular, having important decisions challenged and defended. But since then, Philip Lowe has started getting press conferences, so, that’s a great thing. I’d still like them to be more frequent. He only does them occasionally, I would think you should do them, at least quarterly.,

Gene Tunny  30:34

Yeah. They certainly need to improve their communication. I’ll have to think myself about what that would best look like. I quite like the idea of having scenarios or having different, you know, looking at what different policy parts could mean for inflation and unemployment, but also being honest about what’s the uncertainty around that. And I mean, one of the things that our Governor, Philip Lowe has got into trouble for in the last few months is just the fact that their forecasts appear to have been just so bad. Perhaps, if they’re more honest about just how unreliable economic forecasts can be, given that the economy is hit by shocks all the time, and I mean, we’re not even sure we’re properly modelling the underlying mechanisms. Perhaps that would have; he would be held in high regard now. But everyone’s mad at him because he was, people were taking his word for it, that interest rates would stay where they were until 2024. And so, he’s in a heap of trouble now.

Peter Tulip  31:37

If I can comment on that. So, I think people exaggerate how bad these forecast errors were, and in particular, their relevance to the review. You have to remember that Jim Chalmers came out in support of a review of the RBA, over a year ago. So, before inflation took off, in fact, back a year ago, inflation was below the target. So, what’s happened? There are these unusually large forecast errors, but they’re not the reason we’re having a review. And forecasting is difficult, and in particular, if you’re forecasting in the middle of a pandemic that you’ve never been through before, you’ve got no historical experience to go by. And as it turned out, vaccines came on stream very much quicker than expected. And they worked much better than they’re expected. And the RBA got that wrong. You know what, no one can forecast accurately. I’ll be impressed with criticisms about the bank’s forecast record from people who actually do forecasts better than the bank. Hearing a lot of criticisms that we’re forecasting for people that don’t actually present forecasts themselves makes me roll my eyes a bit. Yeah, fair point. And the bank will always make forecast errors. And it has processes to improve its forecast performance and it does reviews of its models and this and the databases and things like that. The review will probably look at that. I’ve actually been involved in that process. I don’t see great scope for change or even questioning what the bank is doing there.

Gene Tunny  33:48

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Gene Tunny  34:22

Now back to the show. 

Okay, can I ask you about this transparency, like how we improve that? One of the suggestions that came from a panel member at the conference of economists last week when we’re in Hobart, you were there? I can’t remember. Sorry, Peter, were you in that session? You were in that session, weren’t you? There was that recommendation that I forgot who made it. But that part of members of the board of the Reserve Bank that their deliberations or their decisions are published or someone’s got a dissenting opinion that’s published. So, we get more communication from the board members. And so, we understand that there is a difference of views and that could help the public understand the deliberations and realise that the Reserve Bank isn’t this all-seeing, all-knowing entity that’s fully in command, or maybe that’s the wrong way of putting it. But maybe that would make people realise that they’re human, and mistakes can be made. And so, when we have a governor who says, oh, interest rates will remain this, at this level until 2024, we should realise, well, he’s talking about based on these assumptions. I mean, you can never guarantee anything. But what do you think about that idea of having more information about what different board members are thinking?

Peter Tulip  35:51

I think that’s a great idea, partly to improve the incentives have individual board members, that individual board members should be accountable for their decisions. And at the moment, there isn’t any individual accountability, these decisions are presented as decisions of the board. And so, I think there’s no incentive for a board member to say, I think this decision is wrong. The research says opposite. We need to pursue an alternative course of action. So, partly, there’s inadequate challenge within the board process, as and as a result, less need for the bank to defend itself. But also, it means the public is not brought into these highly consequential debates and decisions. And that would improve things. And where a board is divided on a particular course of action or a particular piece of analysis, this is where external research and external opinions are most valuable. But no one knows that. So, people talk about monetary policy, including you and me, but we’ve got no idea whether we’re talking about something that the board regards has completely settled, or as a 50-50 decision. And so, a lot of what we say is not relevant. And there are big questions on which further evidence would be useful. That we don’t know about.

Gene Tunny  37:30

Right. On the members of the board, you’ve been quite prominent in the media recently, and in the commentary on this RBA review, you’ve made the point that the level of expertise of board members is not really where it should be. I mean, obviously, there are some that have the expertise. But are you arguing for more economists on the board rather than business people? Is that correct?

Peter Tulip  38:01

Yes. And to be precise, more monetary policy experts. And this would be my number one recommendation for reform of the RBA. We talked earlier about the bank making mistakes, the first place that they should be caught and challenged is at the board level. But at the moment, the board seems to be operating as a rubber stamp for the governor, and that’s not good. I mean, so Phil Lowe is a very talented economist who gets lots of things right. But he is human and he’s just one person and he makes mistakes. You’ll have you will have fewer mistakes, if the decisions were instead, made by a committee of experts.

Gene Tunny  39:04

And is that what they’ve got in the States or in England or in or in the UK?

Peter Tulip  39:09

Yeah. So, I mean, that’s an interesting comparison. So, in 1959, when the RBA board was being set up, it was actually common to have non economists making monetary policy decisions. But since then, other Central banks have decided these are technical questions on which research is relevant and needs to be apply. So, they’ve moved to monetary policy committees, overwhelming, really comprised with monetary policy experts. Actually, it’s not just experts, but they have some of the leading economists in the world on monetary policy, sitting on their monetary policy committee. These the people that wrote the textbooks I learned my monetary policy from are often on the FOMC, or the Monetary Policy Committee of the Bank of England. So, whereas other countries have stars making their monetary policy decisions, we have part-time amateurs.

Gene Tunny  40:19

Yeah. Well look at who’s been the Federal Reserve Bank Governor in the US. You’ve had Ben Bernanke. You’ve had, I mean, he’s made huge contributions to macroeconomics. Janet Yellen.

Peter Tulip  40:33

The deputy of Stanley Fischer.

Gene Tunny  40:35

Right. And he’s the person who wrote the textbook;

Peter Tulip  40:39

And Bernanke and Frederick Michigan. Yeah, they’ve written textbooks on how to do monetary policy.

Gene Tunny  40:48

Okay. Yeah, good point. That’s a very good point,

Peter Tulip  40:52

Let’s say a bit more about the composition of the board. So, there are two parts of it, you would get better decisions with more experts on the board. And it’s just like, any other technical decision being made by a government bodies on immunisation or building a bridge or whatever you want. You don’t want business leaders making these decisions, you want experts in the field. Within that, you want a diversity of views. So, you want a mix of hawks and doves, for example, some empirical people, some theoretical people. Instead of that diversity of expertise, sorry, that diversity of views, we have a diversity of expertise, that there are some members of the board that are capable of challenging the governor, but most are not. And that results in groupthink and status quo bias and other flaws in decision making that we see in our monetary policy decision.

Gene Tunny  41:59

Yeah. So, look, I agree with you on that, Peter. And I think the government will find it, I mean, I don’t think that I’ll accept a recommendation along those lines, unfortunately. They’ll probably want to have a trade union member on the board. I think there’s going to be a push for that. Some people pushing for, let’s have a regional representative on the board. I mean, I don’t necessarily think we should be selecting people for the board for that reason. But what you’re going to have is, you’re going to have; there are people who are sceptical of experts, because there’s this general view out there now in western economies, that look, experts have led us down. And you know, people are upset about things that happened during the pandemic, and even before then. So, there’s a larger scepticism about experts. And there’s this issue of democracy, isn’t there? I mean, so, there could be an objection. Well, we don’t want all these technocrats running things. We think there should be some democratic element there. But then I think the issue there is that if you don’t have an independent Central bank, then you get worse inflation outcomes.

Peter Tulip  43:15

See, you’re raising several issues there, Gene. So, think about the other big important decisions that have been made in the news lately. I’m going to say public health. Do you want doctors and Epidemiologists making decisions on whether vaccines are approved? Or do you want business leaders?

Gene Tunny  43:36

I want the doctors and the Epidemiologists for sure. 

Peter Tulip  43:41

If a bridge is being built, you want that decision to be made by engineers or by business people? I mean, so in other areas, government policy, we rely exclusively on people that prompt eminent experts with technical expertise, and monetary policy is the same. It used to be that the values of monetary policy and even the objectives were vague and not clearly decided. And so, the board had a lot of discretion as to why monetary policy should be set but that’s no longer the case. Central bank has moved to a world of clearly defined objectives, essentially set by the government by the elected representatives. So, they decide that the objectives of the RBA are full employment and inflation of 2% to 3%. And it then becomes a technical question as to how to best achieve that, and that’s the decision that should be made in the national interest. It should not be made by representatives of sectional interests. Excellent point. And this interacts with the other recommendation we’re talking before about public votes. 

So, if you have a representative of say, the mining industry or the agricultural industry; industries that are heavily exposed to the exchange rate, do you want them making decisions that affect the exchange rate for the national interest or that will affect their sectional interests? I mean, if it’s the sectional interest one, they’ll always be voting for lower interest rates, and a depreciation of the exchange rate, and their constituencies will be expecting and demanding that. So, if you do have so called sectional interests, but you want the vote to be a national interest, you would need to keep the votes private. And this is an unusual way of dealing with a conflict of interest. Normally, we think conflicts of interest are best dealt with by transparency, not by secrecy.

Gene Tunny  45:58

Okay, what about the banks themselves, the staff on the banks themselves? Do you have views on how our reserve bank, how it compares with its peers with the Federal Reserve or Bank of England in terms of its ability to analyse the economy and to provide the advice to the board?

Peter Tulip  46:20

Yes. So, as background to that, before I worked at the Reserve Bank, I worked with the Federal Reserve Board of Governors, I was on the staff there for 11 years. I also worked at the OECD, on monetary policy, going on around the world talking to Central bankers about how they were sitting, making their decisions. And so it’s interesting, I mean, that background shows real differences in character and culture between different Central banks. I mean, have you noticed that just in government departments, different cultures, but even with Central banks, where they’re technically doing the same decision from different countries, they vary enormously. The RBA tends to be much less interested in research, and much less interested in technical modelling than other Central banks. And most clearly, with the Fed where the Fed has 400 PhDs on his staff, essentially putting together its forecast. The RBA has a very different human capital model, where academic qualifications and less important promotion and research is not ending, external research is not expected of most staff. And again, that is something that the review could look at a lot of people. I mean, there are differences on views as to whether that’s appropriate, and reflects lots of reasons that I mean, culture and history is a lot of it.

Gene Tunny  48:08

Yeah. So, your big recommendations for this review, or what you hope to get out of this review, improvements in transparency and communication.

Peter Tulip  48:18

Can I list them in order? Yes, please. 

Number one, we want more monetary policy experts on the board. 

Number two, we want those members to be individually accountable. That means public votes and public explanations of decisions. 

And third, the bank needs to be more open and transparent. And in particular, needs to do clear reasons for its decisions, and why alternatives are not taken. They would be my three main recommendations.

Gene Tunny  48:53

Okay. So, no changes to the inflation targeting regime, this flexible inflation targeting regime they talk about?

Peter Tulip  49:00

That’s why I have views on that. But as I said before, I think they’re secondary. So, the main changes I would make is, first of all, every time there’s a change in government or change in governor, there’s a new agreement between the bank and the government called the agreement on the statement of conduct of monetary policy. And that is where the target is specified in detail, which I think is appropriate. Currently, that says the main objective of the bank is inflation 2 to 3%. In my view, it should also specify full employment, or to be precise, maximum sustainable employment as an objective of equal status to the inflation rate. So, in legislation, the bank has a dual mandate that’s not reflected in the agreement on the statement of conduct and I think that causes a lot of confusion. People think that when people read the bank’s explanations of what it does, they often think that the bank is an inflation nutter. Which it’s not, it takes its unemployment objective very seriously. And it does it in this vague way, because flexible, inflation targeting, which should be specific about what flexibility is required and what isn’t. There would be other changes, but that would be the main one I would make.

Gene Tunny  50:31

Do you think there’ll be any changes to that framework? There seems to be a view from the RBA, and I guess from others that the inflation targeting approach seems to have worked pretty well in keeping inflation low over the last few decades, I mean, you mentioned, there is that issue of the times it might have meant we had higher unemployment than otherwise.

Peter Tulip  50:56

No, that was because they abandoned their inflation target. They had inflation too low, accompanied by excess unemployment, you would have sold both of those problems with lower interest rates. It didn’t do that, because it did invent this other objective of indebtedness that it should not have done. And it certainly shouldn’t have done it without a more open, transparent and accountable process. So, I think the main proposal for a change in the framework is for nominal income targeting, which Warwick McKibbin and Steve Kirschner and numerous other monetary policy experts think would be preferable. I think that’s a minority position. And I think you’re right, that the consensus of informed opinion doesn’t think that the framework needs to change much. I mean, I think there are some minor tweaks that shouldn’t be implemented. 

Nominal income targeting is not popular, partly because no other Central bank does it. So, there’s no example to show that it works. And the RBA is not a pace setter in these things. It’s a follower, not a leader, which is useful in a lot of ways. But also, the American literature on nominal GDP targeting some phrases in terms of nominal GDP targeting, which would just be inappropriate for Australia, because we have such volatile terms of trade. And we don’t want monetary policy being jerked around to target the coal price. Which just would mean big dislocations for most households. Not much apparent benefit.

Gene Tunny  53:02

Yeah. There seem to be some recognition of that in that panel discussion in;

Peter Tulip  53:08

So, Warwick McKibbin has said, you would target a slightly different variable, maybe some measure of nominal income. And that makes more sense. Warwick keeps contrasting his arguments for nominal income targeting with inflation targeting, which is what the bank says it is that it’s not what the bank is, in practice. In practice, the bank has a dual mandate. And we’re its main argument, as I take it is that inflation targeting is wrong, because activity is an appropriate objective of the Central bank and being explicit about the dual mandate would avoid that confusion.

Gene Tunny  53:50

Yeah. Okay. I’m just thinking about the tweaks; one tweak that seems clear to me that needs to be made is clarification on this point about what do you do about indebtedness? So, one way or the other, make that clear. Is the bank targeting financial stability or not?

Peter Tulip  54:09

And in my view, I mean, it’s the bank as an institution needs to worry about financial stability, but primarily, it should be dealt with, with prudential policy, not monetary policy.

Gene Tunny  54:23

And by that, you mean the Prudential Regulation Authority, which is looking at the banks and, you know, in looking at their balance sheets and making sure that they don’t make a bunch of risky loans.

Peter Tulip  54:34

Well, the nature of banking is you make risky loans. The big question is whether you’ve got an equity buffer to deal with those risky loans in the event that they all go sour at once. I mean, there are arguments about lending controls. That’s another controversial argument. But for this review, what’s going to be relevant is the status of financial stability within monetary policy. And in my view, I liked the wording. I think it was the 2009 agreement that the government had with the RBA, which said financial stability is an objective of the RBA, but it’s secondary, it’s subordinate to the core objectives. Or it should be said to be subordinate to the core objectives of full employment and stable inflation.

Gene Tunny  55:39

Okay. I’ll look that up and put in the show notes. Right, Peter, that’s been great. I mean, there are so many other aspects of this, I guess we could explore but we’ll probably have to wrap up because you’ve been generous with your time so far. Any final thoughts before we go? Anything we missed that you think is important to convey?

Peter Tulip  55:58

Oh no. I think it’s been good discussion of the key points. People who do want more, again, a lot of it is in my earlier paper.

Gene Tunny  56:11

Yes. You’ve been incredibly influential on this, Peter. So, well done. I saw you on ABC the other day, and it’s terrific that you’ve had this impact. And let’s say we get a really high-quality review with some recommendations that improve monetary policy in the future. 

Peter Tulip  56:34

Thanks for that, Gene. That’s great.

Gene Tunny  56:35

Pleasure. Thanks, Peter.

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 contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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