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Modern markets for all w/ Wingham Rowan – EP167

In The New Yorker, Wingham Rowan was described as a “labor reformer” who “wants to reimagine labor markets for the digital age.” In episode 167 of Economics Explored, Wingham talks to host Gene Tunny about the potential of Public Official e-Markets. Wingham is a former British TV presenter who is now the managing director at Modern Markets for All (MM4A), a non-profit seeking to advise governments on the possibilities of new market technologies. 

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Links relevant to the conversation

Wingham Rowan’s Modern Markets for All website:

http://modernmarketsforall.com/

TheMM4A non-profit:

https://www.mm4a.social

New Yorker coverage of Wingham’s work:

https://www.newyorker.com/tech/annals-of-technology/should-gig-work-be-government-run

CIGI article by Wingham in which he argues “Market platforms are a natural monopoly; governments should dare to think about how they might initiate an alternative version for citizens and businesses.”

https://www.cigionline.org/articles/its-time-to-build-public-utilities-for-essential-digital-services/

Modern Markets Initiative: https://www.modernmarketsinitiative.org/

Articles on workforce scheduling tools:

https://www.businesswire.com/news/home/20151116006112/en/Kronos-Workforce-Central-8-Fastest-Adopted-Product-Release

http://modernmarketsforall.com/wp-content/uploads/2022/06/210120-Kronos-briefing.pdf

NB Kronos has subsequently rebranded as UKG: https://www.ukg.com

On the growth of irregular work hours: 

https://www.nytimes.com/2017/05/31/business/economy/volatile-income-economy-jobs.html

Quality Jobs Index from Cornell University: 

https://qz.com/1752676/the-job-quality-index-is-the-economic-indicator-weve-been-missing

The UK government program (then called “Slivers-of-Time” working): 

https://www.theguardian.com/politics/2010/nov/14/welfare-reform-working-slivers-of-time

The fate of the Universal Credit program which the program was eventually folded into: https://www.theguardian.com/commentisfree/2018/jun/15/universal-credit-colossal-catastrophe-national-audit-office   

Website about MM4A’s gig work markets: www.BeyondJobs.com

The Californian platform in action: www.cedah.video

The local website about the program: www.WorkLB.org

Wikipedia article on the Tobin tax which Wingham mentions a few times:

https://en.wikipedia.org/wiki/Tobin_tax

Transcript: Modern markets for all w/ Wingham Rowan – EP167

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

Gene Tunny  00:00

Coming up on Economics Explored.

Wingham Rowan  00:03

The problem I have talking about platforms gene is that our conception of platform technologies at the moment is so distorted by the business models that work for Silicon Valley. They have nothing to do with the potential of these technologies.

Gene Tunny  00:23

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 167 on public official E-markets. This episode’s guest Wingham Rowan is an advocate for the creation of such markets. Wingham is a former British TV presenter who is now the managing director at Modern Markets For All, a nonprofit seeking to advise governments on the possibilities of new market technologies. In the New Yorker magazine Wingham was described as a labour reformer who wants to reimagine labour markets for the digital age. Please check out the shownotes relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Wingham or I have to say in this episode. I’d love to hear from you. Right oh, now from my conversation with Wingham Rowan on modern markets for all. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Wingham Rowan, welcome to the show.

Wingham Rowan  01:26

Not at all. Kind of surprised to be here. I’m I’m not an economist. I’m just someone who sort of stumbled into what looks like a potentially very exciting area of economic policy.

Gene Tunny  01:38

Oh, excellent. Yes, yes. Well, I’ve seen your bio, and you’ve been described as a former British TV journalist and now a self identified policy entrepreneur. Could you please tell us how, how did that journey take place, please?

Wingham Rowan  01:55

Yeah, I was a television journalist in Britain in 1994, the ITV network, our main commercial network, was looking to do a show, a nighttime show, a bank software and gaming. And I said, No, no, there’s this newfangled thing coming out of America called the Internet. We need to do a show about this. It’s going to be really exciting. And I convinced them and I produced it, and I hosted it for five years. And in those days, the Internet was all about sex. And it’s often hard for people to understand, but you can actually get bored of working life full of foot fetishists, adult babies, alien abductees, voyeurs, exhibitionists, people who do odd things with champagne bottles. And so, I began, and I’ve always been a bit of a social justice warrior. And I’ve just got fixated on this idea of what is this tech potentially going to do, in terms of economic inclusion, economic opportunity for people on the fringes. And that led me to a think tank in London called Demos, which I was already a member. And I persuaded them to kind of convene a group of experts. And we began to address this. And we eventually came up with a realisation, that you could have online platforms for economic activity, that would be extraordinary in their ability to drive a more inclusive, dynamic, responsive, climate friendly form of capitalism. But it also became clear thinking that through that, governments would have to have some sort of role in initiating them. And we can get into that, and therefore it’s a public policy issue. And over the years, we have refined that public policy. And yeah, after a while, it just became very clear that sooner or later, something like this needs to happen. And somebody’s going to have to be doing the thinking to get it all ready and figure it all out. And that kind of fell into my lap as sort of group organiser. Plus, I really was getting too old to be interviewing people with bizarre sexual fetishes on late night TV.

Gene Tunny  04:10

Right. Yeah, that’s fascinating. So, so back. So how would you describe the the internet? I mean, now, I mean, in terms of what you saw back then, the promise that you that you saw, then the possibilities, we still have to unlock it. Is that that’s what you’re trying to do?

Wingham Rowan  04:31

Absolutely. Yeah, absolutely. Absolutely. And I think what I have to explain is, what with hindsight seems like extraordinary naivety. But back in 95-96, when we were figuring all this out, before I wrote the kind of definitive book about it. It just seemed so obvious. It almost wasn’t worth talking about because it was so obvious that someone else was going to do it. Someone else will pay for someone else, better placed, but broadly if you can imagine a platform for all forms of economic activity that regular people and small businesses engage in. So if I’m an ordinary regular guy, I might want to sell the hours that I want to work today and I might be good at gardening, I might be able to drive a van, I can operate a switchboard, I’ve got a talent for pet care. I’ve been trained to work in a warehouse, and so on, you know, I have a whole range of skills that defy siloing I might have have sold assets that I want to trade, I’ve got a bike I don’t need this afternoon, I’m only going to rent it out to people are completely reliable, someone else will have to handle that checking in and checking it back, because I haven’t got time. But I could get a few dollars for that. And I need a few dollars. If Australia has barbecues don’t they? Well, is there a market you know, where people will want to rent an extra barbecue? What about toys? What about video consoles, beauty aids, all this sort of storage and you stare in the cupboard? You know those massive assets that people could monetize? What about sums I want to lend? I’ve got $30 I don’t need until Monday, how do I lend it not not in some hideously complex login register, create a profile just seamlessly all in one platform that does it all in one place. And I need to be able to do this with data on where my opportunities are, I need a market that supports interventions and investment in my development as gaps in the market become clear. It all needs to be extraordinarily low cost and so on. And what I’m talking about is the public utility, like the electricity supply, the water supply, like roads. I’m not talking about a sizzling Silicon Valley investment opportunity. It’s the antithesis of the model that Silicon Valley eventually came up with. So as I say this all seemed utterly obvious. But no one else seemed to be saying it. So a group of us in London sort of knocked it together, I put out a book for Demos in 97, that sort of fumbled towards some of these conclusions. And then Britain’s, at the time most famous futurist Charles Handy, got involved, very helpful. And through him, I got an international book deal. And a book came out about it all for me in 1999.

Gene Tunny  07:26

Right. And so what was that book Wingham? And have you been a policy entrepreneur since then? Was that what launched you into…?

Wingham Rowan  07:33

No, I still had a day job hosting racy late night TV show. Well, so the first thing to say is the book sank without a trace. So it came out in February 1999. I’m kind of embarrassed to mention the title because it’s now seems so outdated, but it was called Net Benefit. And it was published by Macmillan in Europe, and St Andrews Press in the US and various other publishers around the world. But it absolutely sank like a stone. And by I think April that year, a book called I think Dow 36,000 hit the shelves, and it predicted like the internet is gonna be this explosion of wealth for shareholders. And that dominated the charts for a while. And then a few months later along came Dow 50,000, which said sort of the same thing with a bit more hyperbole. And then I think December that year along came Dow 100,000 by which point? I mean, these are all these books were off in their projections. But they were absolutely right about their core thesis, which is, which was the internet is just going to unlock huge amounts of wealth for investors, it’s not going to turn, it’s not going to be harnessed to create sort of economic platforms for the benefit of people at the economic base. So they were right, I was wrong. But it doesn’t go away. Right? We absolutely need this. And it’s very interesting. When you look at the history of I’m going to call it technology driven public utilities, you see a pattern of decades in the wilderness, and then suddenly it all begins to happen. And that has both fascinated and sustained me in my post television career.

Gene Tunny  09:26

Okay, we might talk about this in a moment? I’ll read from your, you wrote an article didn’t you in the Centre for International Governance Innovation that’s on the web, I’ll put a link in the show notes. Market platforms are a natural monopoly, governments should dare to think about how they might initiate an alternative version for citizens and business. So yeah, be keen to talk about that. One thing I’m wondering is what do you think of the current platforms that exist because there are certainly sharing economy, or whatever you call them, or two sided market platforms that exist. We’ve got Airbnb and then we’ve got Upwork, and Fiverr, and all of that. So what’s your view of the current state of play? And where we need to get to? And why do you think what you’re proposing is superior to that please Wingham.

Wingham Rowan  10:24

Existing platforms suck compared to what’s possible, they really, really do. And so if you want to understand what economic activity platforms can do, and I’m sorry, I have to use quite clunky language, because otherwise we get mixed up with social media and so on, which is outside the scope of this discussion, as far as I’m concerned. So if you want to know what economic platforms can do, look at what’s happened to Wall Street in the last 20-25 years, they have moved from kind of phone based trading and shouting across trading floors, to two platforms that trade with unimaginable precision with virtually zero costs, where risk is all but mitigated, where they have tools like collars on their losses, where they can trade across asset classes instantly, and fluidly. Governments have provided the regulatory background that allows those markets to thrive, these are in almost inconceivably broad, deep platforms, they have powered financialization, the, it’s now so efficient to invest 100 million in the financial markets, and we’ve got this huge suck up out of the mainstream economy. So that’s what’s possible. And when you look at what regular people have to sell, our key economic asset for 99% of us is that time, it’s what employers pay for. So what about markets for selling their time for people selling the time, they’re very different markets, they need very different functionality, they happen to be much more complex. But we do not have anything like markets that approach Wall Street’s level of efficiency, opportunity generation, risk mitigation, and so on. So you mentioned Airbnb, and so on. Uber is another great example. So Uber, as a platform has displaced taxi companies. Well, I talked about Uber because they’ve been subjected to unusual levels of scrutiny. So we know for example, that Uber has systematically missed this. So I’m sorry, when you evaluate an economic platform, don’t focus on what it does for buyers, cool new ways to buy stuff, don’t shift the economic dial, it’s what they do for sellers of whatever is on offer that we need to focus on. So focus on Uber not as a transportation app, but as a labour market, because that’s what it is for a lot of people. Is it a good labour market? No, it sucks. It’s, they take about 30% of your earnings. And they need to do that because they massively subsidised rides when they arrive in a new city to build critical mass and they’ve got to recoup that money. They have been caught systematically misleading drivers because they need an oversupplied market, you get very little data, you get marginal control. You know, Uber decides what, where you’re going, what you’ll be paid. You can’t build a regular client base, you can’t innovate. All the kinds of things that a dynamic market would allow. Uber doesn’t allow, and it’s a silo, you are stuck driving. There’s no progression pathway. You could be driving an Uber this year, and you’d be driving an Uber five years from now, where’s the movement? You know, what, where’s my ability to sell my other talents? That’s what I mean by the breadth of the market now in Wall Street, you know, that, that asset classes can be merged. Because they have the tools that dive into deeply regulated markets across all sorts of asset classes. So no, the existing platforms are awful. They are better than the old way we used to do things classified adverts, adverts in newspaper, sorry, adverts in newsagents windows, but that doesn’t make them the best markets possible. We need to focus on the best markets possible for the economic base. And have we got and we absolutely haven’t. We’ve got hideous inequality of markets. And it’s mostly out of sight. So you read you hear an awful lot about the gig work apps. They’re awful, most of them fail. There’s a famous HBR, Harvard Business Review article called a study of 250 platforms reveals why most of them fail. And when they fail, you know, the entrepreneurs who set them up can write that off to experience. What about the people who were selling their time? You know, when Homejoy the market for home cleaning in the US just collapsed overnight. That just left a whole load of people with their immediate flow of work cancelled their relationships with people who buy their labour canceled, that track record wiped. And so that is the problem, let’s call it market inequality, that people at the top, the big institutions at the top of the economy have trans transition to unbelievably efficient markets and we barely understand them. And people at the bottom have been that I’ve had to follow the buyers of their labour or whatever, into markets that are typically skewed around commoditizing. The workforce driving down labour costs, keeping the market over supplied, locking people into a narrow silo. And you really need to look at, and not so much the gig work apps, but at work for scheduling systems, which run monopsony markets, where one corporate buys the time of their employees, these things have exploded in the last few years get very little coverage, not very well understood, negligible transparency. That’s the world of markets today. You know, these platforms run markets, for labour, for capital, for services and for goods. And markets are totally fundamental to a capitalist economy. And they’re getting more and more so because so many drivers are fragmenting economic activity. And the more you’re driven towards fragmented economic activity, the more you’re in and out of the market. Yeah, sorry. Did I did I go off on a bit of a rant?

Gene Tunny  16:22

No, that was good, that was good. What are the workforce scheduling apps? What ones are you thinking of?

Wingham Rowan  16:30

Well yeah, the most famous, which came out I think, in 2018, is called Kronos Workforce Central Aid. They’ve rebranded subsequently to UKG and their website is full of photos of happy smiling, presumably workers. But there’s actually some documentation, I’m very happy to share it with you that they were using, which they would take to Corporate Finance Directors, presumably, and it would use phrases like manage your workforce without limits, no boundaries. It’s fantastic. It’s an unbeatable proposition. If I’m the finance director of a supermarket chain, hotel chain distribution company, my God, you know, staffing is my biggest cost. And these tools can absolutely box it in and minimise it a lot. Sign it with my needs. But the risk the all the problems are just dumped on low income workers, who often don’t know if they’re gonna go into work today. And if they’re not, they’re left scrambling for extra hours elsewhere. They still got to put food on the table tonight. It’s pretty hideous. And what really motivates us at this end is look at what’s possible. You know, and I think that is the key problem here is politicians and policymakers and think tanks, and economists are focused on well, how do we try to make Silicon Valley play nice. Yeah. And they’re engaged in these endless Whack-A-Mole battles with big tech that, frankly, they’re never going to win. And we can go into why that is. And then instead, they should be asking a completely different question, which is, have we got the best markets now possible in which our citizens and local businesses can pursue their economic potential? And if not, could policy change that?

Gene Tunny  18:28

Right, okay, so are you suggesting we need a common we need common market platforms, we need some sort of, we don’t need separate upwork and a fiver, we need a common platform. How would you describe it?

Wingham Rowan  18:47

Yeah, absolutely. So let’s, can I use a quick historical analogy? Because that’s the easiest way to understand that these things are always easiest to see in hindsight. So every so often, throughout history of the last two centuries, a technology has come along that needed the government to do something that only governments could do to get that technology to its full potential. So one of my favourite examples, for instance, is pumping. Industrial pumping arrived in about 1820, a whole bunch of small companies sprang up to pump river water in cities like London into well off households. And they made quite a bit of money, it was a lot more convenient than going to the river with a bucket. But meanwhile, the poor were just dying of cholera. And a bunch of people said, actually, you know, if we use this technology in a different way to create reservoirs, we could pump clean water 24/7 to everyone, but only government can make that happen because only government can forcibly buy valleys. evict people who live there, flood the valleys and then dig up everywhere to put in trunk water piping. 1848 public health care In Britain, essentially initiated that process, every country in the world copied. So you can see something similar in electricity, rail, roads, broadcasting telephony, air traffic control, gas canals, and so on. Every so often there’s a technology that needs something that only government can do. And governments for all the right reasons are slow to do it, you know, governments should not just intervene on a whim, there needs to be an absolute clear cut case of market failure. But eventually, one does, and one government gets it right. And, you know, got modesty aside, Britain and British was, has done pretty well at this. And then when the first country gets it, right, others follow. And eventually everyone does. So every country has a coordinated postage system, a coordinated currency. And right now, government has dictated this possibility when it comes to economic platforms. They really are, you know, this, what’s happening now with economic platforms would be akin to the British government in the 1840s, trying to beat up these little water companies, and there were hundreds of them and get them to be more inclusive, get them to pump clean water, well, they couldn’t pump clean water because they couldn’t stop other people using the river as a sewage outlet. Only government could put people in jail for chucking sewage in rivers. So it wouldn’t have worked. They needed to start with, what is this technology need to deliver its potential? what can government do to deliver that? And the answer is it needs reservoirs. And for that, you need compulsory land purchase rights, which even the most ambitious startup doesn’t have. So in answer to your question, don’t focus on the existing ones, the existing platforms, they’re kind of interesting. They’re not bad people. But their job isn’t to create an inclusive version of capitalism. Their job is to maximise return for their shareholders, and some of them are doing reasonably well at that. It’s we elect governments to create equitable economy, inclusive, dynamic, efficient economy, that minimises public assistance costs. It’s government that needs to start asking these questions. That’s what’s missing.

Gene Tunny  22:26

Okay. And so this is what you’re you’re trying to get governments to, to do something. Are you Wingham? Could you tell me a bit about what you’re doing in California at the moment? What’s your mission?

Wingham Rowan  22:39

Yeah, so take this notion of that we call modern markets for all this idea that just as government provides us routinely with its government’s responsibility, generally, to make sure we have electricity, that we have clean, drinkable water, that we have a coherent road network, and so on all these facilities that we just utterly take for granted as part of a modern economy. So what we’re saying is this now, the latest on this list is a platform for economic activity. And just like all the other public utilities, it needs to be completely inclusive, it needs to do a whole set of things that the private sector can’t do or has no incentive to do. So. Yeah. If you take that as the kind of guiding spirit here, once we’ve kind of figured this out, the worry. And once we realised that actually, it wasn’t obvious that other people weren’t going around saying it at the time. We, the question became, so what are we going to do about it now, and what we didn’t want is what I’m going to possibly unjustly called the The Tobin tax syndrome, where, as I understand it, the Tobin tax is a very elegant idea that could do a lot of good, but it’s never been implemented. And Tobin has toured the world economic conferences talking about it and won a lot of applause for his work. But it’s never been done. And we don’t want to be in that category. We wanted to get something going. So we tried to figure out which bit of this huge sort of public utility vision could we just bite off and get going? And the answer is, markets for what’s now called gig work. So about 35% of adults cannot work regular hours. They have complex parenting needs, medical issues that fluctuate day to day, family caregiving commitments that are unpredictable. They’re studying on a fluid schedule increasingly, their numbers being swollen by people who are partially employed and never know their work schedule. So you’ve got this huge mass of adults who need at work that fits around other things going on in their lives. And so that’s it over here, over there, you have what are called government employment services, job centres. I forgotten what they’re called in Australia. But typically, in America, they are called America’s job centres. And the government invests hundreds of millions a year in this infrastructure to create equitable labour markets. It’s bipartisan, nobody doubts it’s worth it. It grows the economy, it gets people off public assistance, it upskill the workforce, it brings in investment, it’s just a good thing all around. But these government employment services do nothing for people who don’t fit into the neat pigeonhole, of having regular availability for work. People who have complex lives, who just aren’t lucky enough to be able to say, Yeah, I can do 36 hours every week at the same time in the same place. So the small mission, the small vision, as we call it, at this end is extend government employment services, so that they bring everything that they aim to do for job seekers, too. We don’t like the term gig workers, because it’s it carries too much baggage. And it only describes a small proportion of the people we’re aiming for. So we use the phrase non standard workers. So the British government actually got off his butt and funded this. And I was appointed to lead the initiative, we built a platform that is all about protections and control and progression for people outside of standard employment. It was launched by 20 city governments in Britain, it was what seemed like really good news at the time, but turned out to be a disaster. It was then made a cornerstone of ambitious programmes to completely overhaul Britain’s buys and time welfare regime. And it was all these city pilots were shut down, it was all incorporated into this big amazing programme called universal, universal benefit, a sort of Universal Credit. Anyway, you’ve probably heard in your line of work, Gene, but Universal Credit has turned into an absolutely epic disaster. And opinions are the contributors own not not an official statement from the British government. But it’s something like five years behind schedule on four times over budget or the other way around. Anyway, they began shedding everything that wasn’t core and included us. And so we suddenly find ourselves looking around the world and realise, well, no other countries done anything like this. We’ve got this sophisticated platform. And we talked to the British embassies, philanthropist took over paying my salary and said, we’ll go figure this out. We put the tech in a nonprofit for open source into the world. And we talked to the British embassies and they said, go to America. They’ve got something called the public workforce system. They invest billions of it a year. It’s consists of 2400 local workforce boards. And we did and I toured various workforce, public workforce boards around America, and we ended up launching in California with public agencies funded by national philanthropies like all these workforce systems around the world, America’s federally funded workforce dollars can only go on traditional job creation and retention. It’s just a rather 20th century view of the world. But there is this the Franklin’s sort of guerrilla operation within farsighted workforce boards, who realise Yeah, why am I turning away people just because they’re trying to make rent on Friday, rather than because, you know, they want to be upskilled to a better job. And why am I throwing them at the mercy of these, frankly, rather unpleasant Silicon Valley companies that will treat them as cannon fodder. And yeah, I don’t want to paint a picture of this is easy and we’re on a meteoric trajectory. It’s three steps forward, two steps back public sector led innovation is always difficult. But we are steadily making the case that, yeah, Public Employment Services can sustainably scalable expand, to embrace people who are not fortunate enough to have regular availability for work. They need a platform to do that. It’s going to be very different from the platform that silicon for kind of platforms that Silicon Valley churns out, our platform is called Good Flexi. Yeah, I mean, you could have it for Australia. It’s just we don’t have the resources to engage anyone in the Australian Government.

Gene Tunny  29:52

Yep. So you’ve got, I just want to make sure I understand all the facts properly. So you’ve got your non-for-profit, Modern Markets For All. Is that what it’s called? 

Wingham Rowan  30:00

Yep. 

Gene Tunny  30:05

Okay. And you’re, you’re working with California, is it the California state government?

Wingham Rowan  30:10

No, it’s public workforce boards at local levels.

Gene Tunny  30:11

Oh, public workforce boards at local levels.

Wingham Rowan  30:16

It’s narrow, it’s expanding outside California.

Gene Tunny  30:19

Good one, okay. And you’re encouraging them to extend their services to people who are in non standard employment. So you’re encouraging them to offer is it training or advice on the workforce of connecting them with opportunities.

Wingham Rowan  30:35

all the above, okay, you want all sorts of interventions and non standard workers are an incredibly diverse bunch. They have different needs different aspirations, they’re on different pathways. But the core of it is if you are to systematically sustainably scalablely support these people, you have to have some sort of platform. This is such a fiddly complex part of labour markets. And when you go to a horizontal model, all types of work because that’s how you get progression, you need people to be able to move along from one type of work to another, that’s better paid higher skilled and keep moving up the ladder. Once you do that, it gets more complex. Once you make everything legal, once you make everything what’s called in America, a w-2, essentially, someone with employee status and protections not an independent contractor, it gets exponentially more complex, when you want to give everyone the data they need, it gets very complex. So you need a completely different kind of platform. And that’s what the British government created. It’s been Americanized with philanthropic funding. And yeah, it’s it’s now launched and the battle is, is persuading this huge system to pioneer something like this, given that all their federal funding and their targets, and their assessment is geared towards their ability to create jobs and keep people in jobs. And if you’re a workforce director in America, you are strongly disincentivized, from bringing non standard workers into your customer base, because they will drag down your outputs. Because somebody who only needs eight hours of work a week is bad news, if you’re being marked on your ability to get people into full time or formal part time work. So yep, so that’s the implementation at the moment. But what’s interesting Gene, from our point of view, is the kind of crisis of capitalism. I suppose, you know, 40% of Americans think socialism is a good thing. Now COVID, I can’t remember there’s some survey about the number of people who want to go back to pre COVID capitalism, and it’s something like 7% of the population. Now, and then you’ve got what capitalism is doing, as it currently can, constituted what it’s doing to the climate. So the drivers sense that somewhere there is going to be an ambitious politician who says, I got it, you know, I’m not going to fight in the old trenches of tax versus welfare and all this sort of stuff. Let those battles raged on. I am going to colonise a whole new era of political thinking, and it around, I am going to articulate what’s wrong with the new plumbing of capitalism. And what we need to what the questions we need to ask to get it right. And at the moment, I really would stress for a politician that the the policy space to be grabbed just involves asking questions, you don’t need to commit to do anything to be a trailblazer here, this is all this growth of platforms, and what they’re doing, particularly to people at the economic base, is kind of, I mean, we all know there’s something not right there, but it’s not being coherently articulated. It’s very poorly understood. So that’s what we’re trying to do. But yeah, we wanted to do something real. We didn’t want to be in the Tobin situation. And so, for what it’s worth, we dived in and you know, we’ve made mistakes, we’ve gone down cul de sacs. We’ve had disappointments, but my God, the body of learning around all this is fascinating. I mean, what, what platforms could what platform technologies could be doing? With a different structure with a different set of incentives is mind blowing.

Gene Tunny  34:42

Right. So you’re good? Was it Good Flexi you were talking about?

Wingham Rowan  34:47

Yeah, that’s what we call the platform for non standard employment. Yeah. Which is kind of think of it as a proof of concept for something much bigger. That is, it spans the entire range of micro economic activity rather than just people who need very fluid work?

Gene Tunny  35:06

And what sort of numbers have you got on that at the moment when I’m able to disclose that?

Wingham Rowan  35:11

Yeah, I mean, it’s small. I can tell you it’s in the hundreds. It was due to launch in Easter 2020 in California, focused on hospitality and elder care. Originally, I don’t need to tell you what happened to those sectors as COVID hit, we were refocused around responsive child care for essential low income essential workers. So we have a pool of childcare workers who could be booked as required. They’ve all vetted and everything. And then that was funded largely with COVID money. And then there was public funding to expand across all sectors. And that’s what we’re now doing in Los Angeles County. And meanwhile, philanthropies come forward to fund expansion into other cities. So right now, in terms of number of people transacting today, it’s in the hundreds. You know, this, you’ve caught this story early. It’s not a story of wow, I’m blown away by your Facebook like growth. It’s, I can tell you the procurement hurdles, the legal barriers, and the complexity of getting big blocks of demand from flexible, flexible labour into a new platform are formidable. And we have to turn to the public sector demand for flexible labour, school districts, Parks and Rec departments, public services, because we cannot, in the early stage tempt the big private sector buyers of flexible labour, retail, hospitality, distribution, care building, and so on, out of their workforce scheduling systems, which are so cost effective for them. If you’re running a workforce of 1000s. In a monopsony market, where you are the only buyer where you your system decides who’s called in and who’s sent home when, in the exact line with your needs, where anybody who gets a pity, you just tick a box and never see them again. Why on earth should you move that demand for labour and your workers into a platform that’s going to expose those workers to a whole range of other opportunities is going to systematically work to get new boundaries and new skills to monetize a whole range of each person’s unique abilities? Why would you do that? You’re not. You’re not going to do it in phase one. Now if we can build the demand from public sectors, by have flexible labour and government in aggregate is the biggest buyer flexible labour in any economy, then we’re going to leave you as the supermarket chief, finding his workers migrating into the public sector platform in unless you come in and offer to buy them through the platform that is going to be advancing them and giving them data and showing them where their new opportunities are, and so on. So that’s the challenge. And it is three steps forward, two steps back, it requires patience, it can be frustrating, but my God, it’s needed.

Gene Tunny  38:26

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

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Gene Tunny  39:01

Now back to the show. So this platform, do you envisage it? It has to be publicly funded?

Wingham Rowan  39:11

No, absolutely not. So it is partially publicly funded at the moment, and not with Federal workforce dollars. But that’s because it’s small vision, small scale, if we go back to the Big Vision, so let’s assume for a moment that the Australian Government says we’re gonna take a worldwide lead on this, we are going to instigate a policy of modern markets for all we are going to assume that it’s government’s role to ensure that everybody has access to the best markets now possible, not the best markets, Silicon Valley wants to give the best markets now possible in which to pursue their economic potential. So the Australian Government says that they then say, well, we’re not going to fund this because that would be politically unpalatable. And it’s all got to be based on choice. We are just here to give people a choice of economic infrastructure, we’re not going to shut down eBay, or Airbnb or Uber or DoorDash, or Postmates, or any of these 1000s of platforms that are out there. Now, we’re just going to give everyone a choice. They can use the public utility if they want, use it a bit, use it not at all, totally up to them. It’s the same with electricity. Nobody forces you to connect to the public electricity supply, go and buy your own generator. So assume the Australian Government says that, what do they do? And the short answer is, and there’s a huge amount of detail behind this. But you, you want a concession. It’s the model that governments typically use to create lotteries. So government has key features, key facilities that it alone can bestow on any platform for economic activity. So first of all, it can direct its huge spend on things like labour through the new platform. So that’s nurses, teachers, everything. Secondly, it can allow the platform to interface into all the official databases. So I say I want to be, I want to sell my time as a truck driver, I want to rent out my room for which I need to prove I’ve got a fire certificate. The platform will say to me, Well, do you give me the platform permission to look up your truck driving licence on the official government register of driving licences. And then once it’s done that I can sell my time as a truck driver. You want the government’s promotion channels, you want to be promoting the platform to tourists, to businesses, to taxpayers, to welfare claimants, to students, to all the people that the government routinely reaches, you want to interface into the courts. So if let’s say you hire me to come and drive a forklift truck in your warehouse today, and I drive through a wall and the warehouse collapses, and it turns out that I was high on drugs, that you don’t have to pursue it. Well, no, take a less dramatic example, you know, I back the forklift into some unit and damage it. You don’t have to sort of tediously begin a whole process of getting me downgraded and everything. The platform allows me to tell my side of the story and captures yours. It’s kept my payment in escrow, so it’s taking the money from you and held it. But ultimately, if the platform cannot push us to a resolution, it can put it into the courts, and the courts can downgrade me in the same way that the courts have the unique power to downgrade our driving licences. So I have an officially backed record of trading reliability that is really useful to me, and I can’t go market to market to market. In the public markets, there is only one official track record. It’s a bit like your driving licence, if you get, you know, six points in a disqualification, you can’t go to someone else to get another driving. That’s it, you can’t use the government roads, which are all roads effectively. So these are the kind of benefits there’s a whole set of obligations that need to be enforced as part of the concession I can go into those to ensure that the platform really is driving micro economic activity. That’s fair, it’s equitable. It’s fully featured, that it’s federal, it’s not got concentrated power, that it’s truly independent, and so on. And it charges a flat percentage markup on each transaction to fund a return for the operators. Because they’re going to fund the whole thing, design it and build it. And then you say, right, this concession is for 15 years across the whole of Australia. In that time, no one else will get these government awarded benefits. And whoever whichever consortium will build, fund and operate our platform for those 15 years for the lowest percentage cut of each transactions value gets the deal. And you do the modelling and the figure. It might be a bit higher for Australia, but it’s a random 1.5- 2% markup. It’s not 30%, which is what people at the base of the economic pyramid tend to be paying as a benchmark now. Yeah, so that’s it. We call this platform Poems, Public Official E-Markets. It is just a public utility that’s regulated. It’s there to use if you want, and if you don’t, that’s fine. You might choose to use it to get a haircut, get your lawn cut, and so on. But you choose not to use it when you want to book childcare or when you want to sell your time as a bookkeeper. It’s if it doesn’t work, the shareholders of the consortium are backed it takes a huge hit. If it works, it will massively grow economic activity. At the base, and the shareholders will be getting 2% of what could be billions and billions of dollars of new economic activity that they took all the risks they designed. No capital mass, good luck to them. They deserve it.

Gene Tunny  45:14

Yeah. Okay. So that model, that financial model, you’re talking about where you’re estimating, you could actually just have a 1 to 2% markup, there’s no, you’re not assuming any community service obligation paid by government.

Wingham Rowan  45:29

No, yeah, there is a public service obligation. Yeah. So nearly all public utilities have a non revenue component, you know, cyclists use the road network without paying road tax. Broadcasters have to carry religious and preschool programming, without advertising. So yeah, in this case, yes, there’s a range of things, once you’ve got the infrastructure to do this, that is able to check people’s identity, constantly keep monitoring it, if they wish. Yes, you might want to use it for things like voting, forming social networks. So connecting isolated elderly, people, volunteering, things like that. So yes, that is a community service obligation within that,

Gene Tunny  46:19

Okay. And then there would have to be a payment from the government to this.

Wingham Rowan  46:26

Not necessarily so you think if government says, where we want a platform that does X, Y, and Z across the base of the micro, the whole micro economy, and we are going to give that among the benefits we’re going to give that platform is we’re going to direct all public spending down to community level through that platform, that’s 30-35% of GDP in most developed countries. That’s a heck of a business opportunity. Now, if you’re going to say, as a government. Oh, and as part of that, you’ve got to fulfil certain community service obligations. Yeah, I as a consortium bidding to run your Poems or whatever it’s called platform, it’s just going to price that in, frankly, the infrastructure I’m going to have to build to monetize all these assets in the micro economy can run a, a plebiscite on whether, you know, a bunch of neighbours want to shut the road to traffic this weekend, so the kids can play in the road with no problem. I mean, we are talking about something a platform that will be hugely, hugely sophisticated, that will cost billions to build. That’s why you need a kind of 15 year concession, you’ve got to give them a chance to recoup that investment.

Gene Tunny  47:46

Yeah, well, I think it’s a great vision. One thing I’d like to ask you about is, how constrained are you by regulations that exist at the moment. And I’m thinking particularly in the labour market in Australia, we’re currently having a debate about the Fair Work Act and check possible changes to that. There’s, there are awards and there are all sorts of rules around hiring people, and what minimum shift lengths are that are just frustrating for employers? And I mean, I think that they’re, they are limiting people from taking on opportunities. I don’t think they’re in the best interests of workers necessarily. But then you’ve got the unions, you’ve got a political party here, that is very closely tied to the union movement, that I mean, I’m not sure exactly what they would think of this this type of thing. I’m, I’m concerned that the way that we do things in Australia, and I mean, this is something that I mean, regardless of the party that’s in government. There’s, we’ve got, we’ve had a highly regulated labour market, is that a barrier to the rollout of Poems?

Wingham Rowan  49:12

It isn’t necessary. So it goes without saying that the Poems platform has to enforce the law. And if the law is you have to have a minimum shift length of six hours. That’s what it will do. Personally, because I’ve spent an awful lot of time with people who are in non standard work. I think regulations like that can be very cruel. If I’ve got an injury that means I have back pain that comes and goes day to day and I’m waking up every morning thinking, well can I work today and the answer might be I’ll have to decide after lunch. I certainly can’t at the moment, depending on if my back pain goes away, depends if I get my parents into the Alzheimer’s centre, depends if one of my siblings can look after my disabled kid this afternoon. So the intention behind these rules is undoubtedly good. And it is undoubtedly true that big employers are using these aggressive workforce scheduling systems to push people into very precarious work, which is incredibly debilitating of their family, finances and their mental health even. So, I totally support the reasons that people are doing this. Unfortunately, a lot of these acts don’t work. And I mean, just to digress for a moment, what’s happened in America, where they’ve been having these Fair Work Week acts in some cities for some time, is that you then get a whole crop of companies that spring up with what’s called Tap the app staffing. So they will go, typically imagine a store manager, who’s told we’ve got to schedule the staff in your supermarket for weeks ahead. And these companies will say to the store manager, when you don’t know how busy your store is going to be, you know, this afternoon, let alone four weeks from now. So why don’t you just sort of let employees go. And we’ll just have a pool of temporary workers. And you just tell us how many you want each day, just tap the app in the morning, we’ll put it out to bed, we’ll see who will do it, we’ll send them along to anyone you don’t like just tap next to their name. And as I say, you’ll never see them again. And some of these apps will algorithmically calculate the lowest wage they need to pay to get the required number of people into your store today. So don’t underestimate the deviousness, the deep pockets, the aggression of the companies that are driving this, it really you we really need to think about what’s an alternative model, because in a healthy market, a healthy labour platform. You give people far, far more choice. So if the employer is bad, I might be flipping burgers today. And the employer might be awful. But if I’m proving reliability, and I’ve got all this data? Well, you know, there’s a real short, you know, we noticed you like you’re using the platform to spend time in an amateur soccer team. Well, did you know that there’s a chronic shortage of a system soccer coaches at the moment? Do you want to start doing some of that work on Saturdays, we noticed that you’ve got a qualification in gardening from when you were at school. Did you know that there are landscape crews now staffing up for the summer rush in public parks? Do you want some of that work, and eventually, you’re going to be able to turn off the burger flipping, which means the burger company that’s such a rubbish employer is now going to be constantly in churn. They’re just constantly onboarding people who build some sort of track record of reliability, and then they’re off up the ladder. So I mean, I need to make absolutely clear that unions in a democratic society have an absolute place in any platform. And there’s all sorts of new services and new models that the platform can enable for them. So there is absolutely you know, please don’t assume that when I talk about a platform, it’s synonymous with very short term, churning relationships sort of work. The problem I have talking about platforms Gene is that our conception of platform technologies at the moment is so distorted by the business models that work for Silicon Valley, they have nothing to do with the potential of these technologies. They aren’t just about maximising profits for, you know, the corporate operator or the owner of the market platform. That’s very different from running a public utility.

Gene Tunny  54:00

Yeah, yeah, absolutely. Okay. So to wrap up, when would you be able to talk about your next steps? And anything? Well, guess what’s where to from now? Well, and then I guess, in the next year or so, what are you hoping to do?

Wingham Rowan  54:17

Fascinating question, Gene. Absolutely. Fascinating. So I banks, I’m almost tempted to banks the question back to you, okay. We, if you look at this history of public utilities, they’re often a key part played by individuals who then pretty much get forgotten by history. But what we now take for granted as the public road system was pretty much invented by a New York property manager called William Phelps, you know, in the 1890s. And everyone opposed him and that was just the people who didn’t completely ignore him, and it took him 30 years before there was recognised that oh my god, if the government initiated a system of roads, it could be so much better than the sort of dirt tracks and random toll roads that we’re all using now. And the public water supply was pretty much the brainchild of a civil servant called Edwin Chadwick, a school teacher in the English Midlands called Rowland Hill, pretty much invented what we now call the Postal Service, but which he called Penny postage, and his model was copied around the world. So my question, my philosophical point that I discuss with people all the time is, what’s the 21st century equivalent of that? You know, these people badgered away for years in total obscurity, well, we got that under the belt. And eventually, they kind of made their argument through reason and luck, and they plugged into the right person at the right time. So New York State was the first to recognise government had a role in creating a coherent road network. And then the government of France. Europe was next. So it’s pretty random. But how do you do it in the 21st century? How do you do it when politics is so polarised when there is 1000 times the attention that is paid to platform issues is paid to the issue of what kind of bathrooms transgender kids use, you know, when men leave it to the schools and get back to focusing on what really matters here? Why isn’t this issue? Getting the attention it deserves? Yeah, if I was going to be really cheeky, Gene, I’d say, well, why don’t you use your clout to assemble a group of Australian policymakers and let’s do some sort of webinar and test the waters on it, because sooner or later, somebody who can move the dial is going to come across all this, and kick the tires and realise there’s something here, you know, us at this end may not have got it completely, right. But this notion that government could now initiate platforms for economic activity that would solve so many problems that are out there at the moment, isn’t going to go away, somebody is going to do the political land grab and get the kudos for it. And we’re just looking for that person plus, just to be completely transparent and honest, we’re also looking for resources. You know, this is a very cash strapped operation, because people typically don’t really don’t understand what we’re doing. They would rather be pouring money into fighting Silicon Valley. Yeah. So they aren’t. Let me ask you, what could you do? We’re ready to explain it. We, we, we’ve had the tires kicked in multiple scenarios, we have not connected to the right people yet in terms of policy leaders, or the people with the resources to say, You know what, here’s a million dollars, just go and talk to the world, you know, get a team together and go and talk to the world’s governments and start to move on this.

Gene Tunny  58:11

Yeah. I like the idea of a webinar to start with. And there’s certainly people I know who would be interested in this. One of my colleagues, Nicholas Gruen and has written a lot about digital public private partnerships. So I think he is of a similar mind, in the potential of, of the web, have the technology just been underutilized at the moment? So I think, I think you’d have a lot of potentially a lot of interest in this. So yeah, but it’s something you’ll have to leave with me

Wingham Rowan 58:49

I’ve completely put you on the spot.

Gene Tunny  58:51

That’s fine. I think it’s a good question.

Wingham Rowan  58:54

There is this tendency to say, Oh, that’s really interesting. And we’ll talk about something else next week. And what I’m trying to find is the people who say, actually, this is really interesting. And we need to seriously get the people together who can do something about it. Because otherwise it just stays in obscurity. And we’re all fighting the old battles and trying to battle with the Silicon Valley behemoth. And we’re not getting anywhere.

Gene Tunny  59:21

Yeah, yeah, I think it’d have to be this concession model that you’re talking about. And because I think if the proposal came up, that we’d have this new platform and the government had something to do with it, then people would be concerned because we haven’t had a great history in Australia in the last couple of decades of governments building platforms like that.

Wingham Rowan  59:45

You absolutely don’t want government building, running or funding the platform. It would be terrifying. It’d be like government running broadcasting. You just don’t go there. You absolutely want the government to use its leverage to create a new private sector organisation consortium that hasn’t, but the legislation that creates it has to make sure it has no incentive to do anything other than massively grow economic activity at the economic base. That is the only way they can make their return. You’ve got to block off air all the dirty tricks that Silicon Valley plays at the moment. They’ve just got to grow the economy. And if they get very rich from getting everyday Australians more and more employment and opportunity and monetizing their household assets, good. We’re very happy for them. And if they can’t make it work, they’re gonna lose a lot of money. But frankly, who cares? It’s not Australia’s problem.

Gene Tunny  1:00:45

Yeah. Okay. So we’re gonna, how can we find more about your work? So I’ve got I do have listeners all around the world, but I do have a lot here in Australia. That’s probably in terms of any one country I’ve probably got the most from Australia, followed by The States. How can people learn more about what you’re doing and connect with you if they’re interested in having a further conversation?

Wingham Rowan  1:01:06

Modernmarketsforall.org. Modernmarketsforall.org?

Gene Tunny  1:01:12

Okay, very good. Well, okay, so we can all get onto that. And yeah, I’ll, I’ll see what I’ll be certainly talking to people about this and sharing the episode, and we’ll see what comes of it. So that’s, that’s been terrific. So Wingham Rowan, thanks so much for your time. I really enjoyed that conversation and, and learning more about your proposal, and I thought that was great. I thought we got into quite a lot of the tricky things I was always concerned about. So I really appreciate that. Thanks so much.

Wingham Rowan  1:01:45

Not at all, likewise.

Gene Tunny  1:01:48

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. Till next week, goodbye.

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

The Progress Illusion w/ Jon Erickson – EP166

Professor Jon Erickson is an ecological economist and advisor to policymakers including Senator Bernie Sanders. In his new book The Progress Illusion, he criticizes what he calls “the fairytale of economics” and argues we are failing “to design an economy that is socially just and ecologically balanced.” Show host Gene Tunny discusses Prof. Erickson’s new book with him in this episode of Economics Explored. 

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

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: Jon Erickson

Jon D. Erickson is the Blittersdorf Professor of Sustainability Science and Policy at the University of Vermont, faculty member of the Rubenstein School of Environment and Natural Resources, and Fellow of the Gund Institute for Environment. His previous co-authored and edited books include Sustainable Wellbeing Futures, The Great Experiment in Conservation, Ecological Economics of Sustainable Watershed Management, Frontiers in Ecological Economic Theory and Application, and Ecological Economics: a Workbook for Problem-Based Learning. He is also Adjunct Professor at the University of Iceland, and has been a Fulbright Scholar in Tanzania, Assistant Professor of Economics at Rensselaer Polytechnic Institute, and visiting professor in the Dominican Republic, Norway, Germany, and Slovakia. Outside of the university, he is an Emmy-award winning producer and director of documentary films, co-founder and board member of numerous non-profit organizations, past-President of the US Society for Ecological Economics, and advisor to state and national policymakers. Jon lives in Ferrisburgh, Vermont with his wife Pat, their occasionally visiting sons Louis and Jon, and a menagerie of dogs, cats, horses, chickens, and donkeys.

Links relevant to the conversation

You can buy The Progress Illusion and if you listen to the episode Jon will reveal a discount code:

https://islandpress.org/books/progress-illusion

Transcript: The Progress Illusion w/ Jon Erickson – EP166

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

Gene Tunny  00:00

Coming up on Economics Explored.

Jon Erickson  00:03

Since at least the night, late 1970s. For a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown, grown. But these alternative metrics, whether it be GPI, or surveys on quality of life, or the ecological footprint, these things have not improved. They have not kept up with the pace of growth, right.

Gene Tunny  00:25

Welcome to the Economics Explored podcast a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 166 on the progress illusion, a new book from Jon Erickson, Professor of sustainability science and policy at the University of Vermont. Professor Erickson is past president of the US society for Ecological Economics. And he’s an adviser to state and national policymakers, including Senator Bernie Sanders. Please check out the shownotes for relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Jon or I have to say in this episode. I’d love to hear from you. Right oh, now for my conversation with Professor Jon Erickson on his new book The Progress illusion. Thanks to my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Professor Jon Erickson, welcome to the programme. 

Gene Tunny 01:00

Thank you so much. 

Jon Erickson  01:03

It’s a pleasure, Jon to have you on. I’ve read your new book, progress, the progress illusion, reclaiming our future from the fairy tale of economics. So given this as an economics podcast, there’s definitely a lot to talk about with your new book. Yes, yes. So can I ask you first? Why do you think progress is an illusion? What are you trying to communicate in this book, please?

Jon Erickson  01:56

Sure. Sure. Yeah. So the progress illusion is really a reference to a fairy tale of humanity’s place and purpose in the world. Certainly, economics isn’t the only discipline that is subject to the solution, but it’s the one that I’m trained in. It’s a story that economists like myself have been teaching and practising for decades, decades that, you know, every time we see the size of the global economy double, which doubles every 25-30 years at current growth rates, that we erode the very foundations of life and human societies in the process. So, in this book, I questioned that, that reigning logic, that reigning story, I unpacked various dimensions of this grand illusion of economics, you know, which I see as an illusion of history and a lot of economics programmes, mine included, we don’t teach the history of economic thought we don’t discuss the debates of, of economists of the past. It’s an illusion of the individual, me, so much of the focus of economics is on the individual and what’s best for the individual in the assumption that whatever’s best for the individual is best for society. So I unpack that and think about the debates over that question. It’s an illusion of choice. I mean, economics sort of sets itself up as the science of choice. But it’s always framed this choice at the margin, right, the choice of the next incremental decision. Yet, when you add up all those decisions together, we very often get into situations that the original decision makers never would have voted for. Right. And ultimately, it’s an illusion of growth and illusion of, you know, a sort of fairy tale or dream of infinite economic growth on a finite planet.

Gene Tunny  03:52

Gotcha. I think it’s interesting. You mentioned that there were these debates, and they’re not always well covered in economics. I remember. I remember learning at least about Malthus, and there was the Malthusian prediction or his his view that, well, we’re in trouble because any economic growth we had, we just ended up having more children, and we’d be back to subsistence. Whereas I think the way that economists started to view that was all well, we solved that problem with technological progress. And, but I mean, look, I understand the point that that’s in a few 100 years or over the last couple 100 years say we’ll be able to do that. Who knows if that can continue indefinitely? I mean, who knows what shocks are coming? So, I mean, maybe, is that what you’re arguing? We could be we could be too optimistic based on recent history.

Jon Erickson  04:48

Well, look, I mean, we’re recording this in the second week of November during that latest Conference of Parties for the UN Framework Convention on Climate Change. And there’s ample evidence to show that this economic system we’ve created is putting dangerous strains on the global climate system, right? A climate system that is, is increasingly called as chaos as in danger of, you know, collapsing the whole experiment of the economy. So, you know, we can go back to Malthus if you’d like. But we’ve always seen that a growing economy creates benefits, and costs. And what we’ve seen, particularly over the last three or four decades is as those benefits have become super, super concentrated. And the costs have been spread out on more and more people, and especially on future generations. So we’re in kind of, you know, yet again, a kind of Malthusian tragedy.

Gene Tunny  05:51

Right. And so is that your biggest concern at the moment, climate change, or other other concerns,

Jon Erickson  05:58

tThere are plenty of concerns to go around. But having a habitable planet is a big one. It’s a big one that fellow economists are concerned about. You know, economists have been part of various signatures, signatories to various pledges of action. It’s a concern that’s related to mass extinction. It’s a concern that’s related to growing inequality and persistent poverty and declining quality of life, even in the richest countries. You know, I think it was, I think it was Alcoholics Anonymous, right, that said, you know, when you do the same thing over and over again, expect something different. You know, that’s the kind of insanity. And that’s what this book is about.

Gene Tunny  06:39

Right? Now, you mentioned, well, you talk about the fairy tale of economics, you mentioned you were trained in economics, do you still consider yourself an economist?

Jon Erickson  06:50

I mean, I often describe myself as an ecological economist, because I’m really trying to understand interdependencies between the economic system, and society and culture and the social system and the environment. I see this work as reforming economics for sure. I’d love someday, where we didn’t have to have all these kind of competing camps and different flavours of economics, we could just call it economics. But since I really don’t identify with the mainstream of economics, I tend to call myself an ecological economist.

Gene Tunny  07:22

Right? And you tell a story in the book about how just something like that was it the JEL, the Journal of Economic Literature codes, and you were stunned? Yeah, the way that Yeah, could you tell that story because of those fascinating, I’d never thought the JEL. Yeah, would be so controversial, or yeah, but please tell the story. I thought it was a good one.

Jon Erickson  07:47

I don’t know that they were controversial it just it just gave me pause. When I saw that ecological economics was given its own code, and treated as a sub discipline of a field that we were trying to overturn or be the alternative to. And this really is, you know, this, this is, you know, reflect on kind of why I wrote this book. You know, it’s a reflection on my career in Ecological Economics, when ecological economics was formalised in the late 80s and early 90s, before it got to JEL code, books and journals and organisations and degree programmes, and folks like me were supposed to be created to try to question the mainstream and reform it. So in many respects, this book is kind of my midlife crisis book, where I take a critical look at the history state and fate of this movement of ecological economics as an alternative to the mainstream. Funny story about 10 years ago, I was the president of the US society for Ecological Economics, and one of these professional societies that have emerged to support this field. And I was at our conference at Michigan State University, and I had thrown my back out. So I was like, during most of the meeting, I was horizontal in my hotel room, just miserable, just really grumpy. I was laying on my back, trying to write notes for my presidential address right, to the society’s membership. And I just was so grumpy, so grumpy, so grumpy. And it really got me thinking about the state and fate of ecological economics, and made me think about like this code, Q 57. Right, the seven hundreds plus subject areas of economics, and how ecological economics was increasingly being absorbed by the mainstream, including by folks who call themselves ecological economists. In fact, at that meeting, there were just, you know, all of these sessions on monetary valuation of ecosystem services, which I saw as, you know, a real slippery slope, you know, can we sort of challenge the mainstream with the logic of the mainstream and commodify nature. So, in a lot of ways that kind of grumpy week in Michigan, set the stage for this book, and, and my desire to really critique my own field.

Gene Tunny  10:16

Right. Okay. So I probably should provide some background on so these JEL codes, they’re the codes that you would put at the bottom of an abstract for a journal paper or a conference paper to signal this is the field or that the field of economics are the sub discipline of economics that it’s in. And so that helps them identify where it should go in conferences, for example, which session. Now, it’s interesting you mentioned how environmental economists have come to start valuing nature or to quantify environment, environmental damage, or to value what a wetlands are worth or in I mean, as a, as an economist, I’ve done various exercises like that in the past. I just want to understand where you’re coming from, do you think that’s the wrong way to go about it, to think about the the economy or the environment to think about? Well, we’re doing this many dollar dollars of damage to the environment, and therefore we need to impose this, this cost this charge on people who are damaging it, and to make sure we have, you know, where I’m going, what we’re trying to get ya get some sort of, we’re getting some solution by having the right taxes and charges in place or Pigovian tax, for example, what do you what are your thoughts on that, Jon?

Jon Erickson  11:43

Yeah, that the field of environmental economics and and before that natural resources, economics, really preceded this field that I’m describing of ecological economics, really treating the economy as an ecosystem, and environmental economics has its roots in the late 1960s, early 70s. And, you know, reaching back to Pergo, in the 20s, and 30s. And fitting the environment inside the marketplace, right, using prices to correct the so called market failures of what were framed as environmental externalities. So that’s how I was trained at Cornell University, I was in an agricultural economics department, learning natural resource, environmental economics, and kind of, you know, buying into that logic of, of the environment is just a failure of the marketplace. Ecological Economics. So that’s valuable. And that’s pragmatic. And I’ve done my share of work that is trying to make the case the economic case for environmental protection. The challenges is when that tool when that approach, when the sort of expansion of cost benefit analysis to environmental concerns, when that rises to a worldview, right? When you commodify all of nature and when you reduce all social relations of humanity to market logic, we start to run into what economic historians or people in the 40s and 50s The Economist name is escaping me right now, the fellow who wrote The Great Transformation, Karl Polanyi. Yeah, the Karl Karl Polanyi warned of the merging market society, right. Whereas the rules and priorities of a market system that envelop the democratic system, that envelop our social and environmental values. So I’m okay using economics as a tool and treating economists as mechanics or janitors to sort of tune the market system. But when economists are sort of framed as overlords of the social environmental system, right, or conveyors of a master worldview, that’s where my hairs go up. And that’s, that’s largely what this book is about, and thinking about the progress solution of economics.

Gene Tunny  14:08

Right? Is the problem that we have this objective of maximising economic growth where we’re concerned about GDP, are you arguing? We’re not as concerned about these environmental measures? How do you what do you think we should be concerned about? Or how should we be making decisions as a society?

Jon Erickson  14:30

I’m making the case that 21st century economics should reflect 21st century problems and values. I think when the mainstream of economics or what we often call neoclassical economics was formed in the late 1800s, early 1900s. Maybe the focus was well placed on growing an economy of the efficiency of market system right, of taking power away from the church and state and putting it into the hands of the consumer. and producer. You know, it’s much like thinking about an ecosystem at the early stages of any ecosystem. It’s the pioneering species that are prioritise its growth and competition and resource exploitation, that is prioritised. But as the system matures, as the system grows into a fixed, fixed environment, the goal should change, right, the goal should move away from growth and towards maintenance, bitterness, towards durability, towards resilience, away from competition and towards cooperation right away from sort of thinking about the number one priority is to grow our way out of problems, to realising that growth itself creates problems that growth can’t fix. So Ecological Economics reflects a maturing of economic thinking, that reflects the challenges of the 21st century.

Gene Tunny  15:59

Right. Okay. So it seems you’re, you’re concerned about the problems that growth can’t fix. Okay. You don’t think regulations can help? I mean, because we’ve got cleaner air?

Jon Erickson  16:12

Not exactly. I mean, I think we need to move beyond just economic instruments to fix things using the market to fix market failures, right. But really trying to find that balancing act between market mechanisms and government regulation between improving and making government work better, instead of the opposite narrative of, you know, government is the problem, not the solution. No, in this book, I reflect on kind of my own upbringing in the United States, and my parents generation, you know, and growing up in the Kennedy years, where the narrative was, you know, you know, ask not what your, what you can, what your country can do for you ask what you can do for your country. And I grew up in the Reagan Thatcher generation, right. And the Reagan narrative was, you know, it’s all about the individual, it’s greed is good. Don’t ask what you can do, you know, do for your country, get government off our backs, you know, that’s what we need to do. So, I think in an age of climate chaos, in an age of the sixth mass extinction, and an age of growing inequality, the narrative has to change, the story has to change, we have to recognise that a system and an economics that was created in the context of a 1940s 1950s expansion out of the Great Depression had its day. And now, the realities of our time, need to need to start to shape a new reality.

Gene Tunny  17:44

Okay. And so what does that? What does that mean, Jon? Does that mean, we need? Do we need redistribution policies? Is that what you’re arguing for to address inequality? We need greater environmental? Well, we need to prioritise the environment. I mean, that’s gonna be I mean, obviously, the environments important, I’m not denying that. I’m just thinking in in Australia here. I mean, it’s we’ve got very stringent environmental regulations already. And if we have more stringent environmental regulations, it’d be very difficult to develop anything. So I’m just wondering what it all means is it? Does it mean, we have to accept a lower standard of living in the future? are you pessimistic about technological change or ability to to innovate our way out of these constraints? Could you talk about that, please?

Jon Erickson  18:38

Yeah, I think that’s too narrow of a frame. When you think about economy environment, and what I’m concerned about, there is reams of evidence show that so called advanced economies, such as the United States and Australia, built on hyper individualism, built on the legacy of a social disease that sociologists call affluenza, right, or this addiction to consumerism, that this model of progress has leaves a little lot to be desired. And that in fact, maybe we’ve been in a progress recession for some time now. Scholars in the United States and Australia and dozens of other countries around the world have been estimating for years now. What’s called the genuine progress indicator, something that is meant to be compared to the more common gross domestic product. And what this indicator does is it recognises that a growing economy has benefits and has costs. In fact, I first discovered the GPI when I was in grad school in the early 1990s. And in the US, we were in in the the bush one recession. And there was a beautiful article written in the in the Atlantic and it had the title of something like if GDP is up. Why is America so down? Right? We were kind of in this recovery state. And people were, you know, economists are saying, hey, the economy’s growing, we’re all good again. And the average American, I’m not good, I can’t make ends meet. I’m miserable. And the same narrative has popped up at the tail end of every recession ever since ever since. In fact, it started working on this book at the tail end of the so called Great Recession. And the same thing was happening, we were using the instruments of economics using mainstream thinking to grow our way out of problems. And the average person was saying, who is benefiting? And who does who? Who’s paying the cost? Yeah. So the GPIO through this series of 26, some odd calculations and says, What are the true benefits of a growing economy? And what are the costs? What are the environmental costs? What are the social costs, and have shown quite convincingly that since at least the night, late 1970s, for a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown grown. But these alternative metrics, whether it be GPI or surveys on quality of life, or the ecological footprint, these things have not improved, they have not kept up with the pace of growth, right. So we have to start asking at these kind of higher levels. What do we do with this for right? What’s, what’s the new balancing act in a maturing economy? How should we reprioritize what is the good life? And how should we I mean, you frame it as accept the lower standard of life, the standard of living the material standard of living, I frame it as as asking the question, how do we live better? How do we how do we live well, within our means?

Gene Tunny  21:47

Yeah, sure. I can, I can understand that. I guess what I’m thinking, Jon, is that at the moment, in Australia, one of the big issues is, well, the rising cost of living, high inflation relative to wages, and the lack of housing, I mean, we’ve got a dire shortage of housing here in Australia. Now. I mean, look, there are a variety of reasons for that, possibly. But I mean, at the moment, when I’m looking at things, I’m thinking a bit more economic activity to construct houses would have been good over the last 10 to 20 years. And, and we’ve got rising cost of energy. So yeah, I take your point, I think I think a lot of people out there would be concerned though, about this. Yeah, that they that, yeah, I’m not I’m not necessarily wanting to criticise what you’re saying, I understand where you’re coming from. I’m just yeah, that’s where I’m coming from, if that makes sense.

Jon Erickson  22:51

Yeah, that makes perfect sense. And that’s the big question, right? Like, can the same kind of thinking that got us into these current messes? That is making the billionaire class hugely, hugely more material well off, while the rest of us feel like we’re on a treadmill, just barely getting by? Can the same kind of system, right? That has privatised the benefit of growth and socialise, the costs? Can that continue? Or should it continue? Right? Should we sort of create a social movement and start to ask, what is the economy’s purpose? Who is the economy? And growth for whom and for what? Now, you know, when I debate economists, they always say, like, come on, come on, you know, you’re not being fair economics is just a model. It’s a model of progress. All models are wrong, some are useful, right? They quote George George Box. Right? All models are wrong, some are useful. And I said, Yeah, I, I agree, all models are wrong, some are useful. But what box didn’t ask is useful for? Right. So in the US, we’re seeing these energy prices, and we’re seeing record profits to oil companies. In the US, we’re seeing housing shortages, right? Yet we’re seeing record rents to the ownership class. In the US, we’re seeing families, you know, struggle to get by in these kinds of post pandemic months and year. And kind of returning to, you know, try and train as quickly as we can to get back to normal, right? Pre pandemic years. And a lot of us, and a lot of folks that are most vulnerable in this current system, are saying we don’t want to go back to normal normal was already in crisis.

Gene Tunny  24:47

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

Female speaker  24:55

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Gene Tunny  25:24

Now back to the show. Okay, can I ask about that genuine progress indicator? Who’s producing it? And can I ask him about what, what some of the the variables that go into? It are? Please, you’re really interested in that? Because look, I understand the criticisms of GDP. And I mean, at least if we’re destroying, or we’re subtracting from the environment, or we’re, we’re damaging the environment that you probably should recognise that as some sort of disinvestment or a loss of capital stock. So yeah, would you be able to explain the genuine progress indicator, please?

Jon Erickson  26:04

Sure. I mean, it starts with the basic premise, right, that the economy is subsystem of the environment, and that when the economy grows, it has opportunity cost. So I mean, it’s a basic, it’s built on basic economic system has benefits and has opportunity costs. So with GPI, we start with consumption, the biggest part of GDP, and we say, Okay, let’s take consumption, and then let’s correct it for income inequality, to recognise which what Pergo recognised in the 1920s and 30s, right, that growing incomes grow and give diminishing returns, right, that the next unit of of income to a rich person creates far less welfare society than the next income, a next unit of income to a low income family or a low income person. So we correct for income inequality. We then go through a series of calculations that for example, take consumer durables and GDP and say, you know, a society a GDP benefits by building a throwaway society. With durables, washing machines, automobiles, long lasting expenditures, if they were out often have to be replaced. That’s great for GDP. Right. But is it good for progress? So we say, Okay, here’s the expenditure of durables, and here’s the benefits of durables, right? Over time, these things are supposed to last more than a year or two or three years. So there’s economic adjustments, there’s an adjustment for over for underemployment, right. Idle work, people who wish they could work more. So it’s got that kind of basic economic logic built into it. But then there’s a whole category of depletion and pollution costs, right? We shouldn’t be treating depletion of our soils, our water, our air, as income. In fact, any business that treated depreciation of capital assets as as income instead of costs wouldn’t be in business very long. But that’s exactly what we do in our economic book keeping for nation states. Then there’s a whole series of interesting calculations on the social side of thing, right, we have to recognise that the GDP only recognises the value of your time in a market, earning income, earning wages earning profits. And so what the GPI the genuine progress indicator says is that there’s, um, use trade offs, right? Every hour extra hour work, the opportunity cost of that is an hour, not with your family, an hour, not in your community. And now we’re not leisure. So rather than feeding every single hour at work as a benefit with no costs, GPI goes through and says, let’s be honest here, right? Work is good, up to a point, income is good, up to a point consumption is good, up to a point. But we have to recognise that consumption and income and growth have diminishing returns. And at some point, at some point, the growth of an economy creates more costs than benefits. What Herman Daly, one of the founders of ecological economics, who, unfortunately passed away a couple of weeks ago, called an economic growth, right, a growing economy that creates more cost and benefits. Okay, we could do a whole podcast just on GPI, so don’t get me going.

Gene Tunny  29:40

Yeah, that’s fine. I might. I’ll have another look at it. Because, I mean, it’s one thing that comes up in various conversations I have, and I’ve been looking at the national accounts recently, I’ve had people on talking about that and their conceptual foundations and we’ve, we’ve we’ve mentioned that every

Jon Erickson  29:58

time we have a recession Yeah, the critique of GDP comes up, right? Yeah. Like, hey, wait a second growth isn’t providing what’s going on here. And every time coming out of recession, we question the metric. And then we kind of start growing again and says, Okay, let’s go back to normal. Yeah. But we have to kind of keep revisiting these alternatives. You know, the original architect architects of GDP back in the 30s, and 40s. Were very careful to say this is not a measure of human progress, human welfare. This is a measure of economic activity, which contributes to human welfare, but is not in and of itself. human welfare.

Gene Tunny  30:40

Yeah. Yeah. I agree there. Now, what about what can be done? Do you have a set of policy recommendations? Jon, are there? What would What do you think needs to be done? Are there things that there will be things that need to be done by governments? Are there things that need to be done by individuals? I mean, it sounds like, Well, okay, maybe you tell me if I’m wrong here. But when I read your book, and I heard about the progress, I was reading about the progress illusion that concerns about how we were consuming too much, I mean, do we need to show that we as individuals be consuming less Is that is that part of your argument? We should we shouldn’t be going on as many overseas trips, we shouldn’t be using the car as often we should think about our purchasing decisions, not get a new washing machine or get a I only get one, when it breaks down, try to repair things. What are you arguing in this book? Is the solution?

Jon Erickson  31:40

Well, what would an economy look like? That was built on maintenance resilience and cooperation is that growth, efficiency and competition, right, a late stage maturing economy like yours in the Australian ours in the US? That’s, that’s what I’m asking, you know, an economy, a mature economy should have different goals than an economy at pioneering stages. So it really is about a reprioritization of our goals, especially on consumption, right? Because there’s ample evidence to show that we in the West are over consumers, and our kind of addiction to consumption is creating psychological problems, social problems, that consumption has been kind of become a cure for social ills, right? Like, it’s a distraction. I mean, the whole advertising industry is designed around the idea of kind of making you and I feel bad about ourselves, right. And to sort of fill the void with more consumption. And I actually think this is one of the lessons coming out of COVID. Right, as sort of people were, especially, you know, high income people who, who could weather the storm, better than most, were forced to slow down, were forced to pee at home, were forced to kind of reevaluate life’s priorities, and found out that, you know, this kind of ever, burning hamster wheel of economic growth isn’t all that it’s cut out to be. So it’s the reprioritization of goals, which is going to have to reprioritize policy instruments. Daily Herma, daily use the analogy of a plinth Plimsoll line, I’m not sure I’m pronouncing that right, of a cargo ship. Right. So this is the line that’s painted on a ship, very easy technology. And as the as the cargoes ship is loaded, it sinks into the water. And when it gets to the line, you’re supposed to stop, right, because you’re in, you’re in danger of overloading the ship. So if we sort of reprioritize and think about the principle line of an economy, we can’t just more equally or equitably distribute the cargo of an overloaded ship and expect it to be resilient. We can’t just more efficiently load an overloaded ship and expect it to weather the storm. As the pump, some land goes underwater, right. And there’s ample evidence to say that we are kind of in an overshoot on a lot of environmental parameters. You’re in danger of sinking the ship, especially in stormy waters. So this analogy implies that as we run up against planetary boundaries, planetary limits to growth, the scale of the economic system is way more important to stress than distribution or efficiency. And if we can’t count on a growing system to solve distribution problems, then we’re gonna have to quickly think about the fairness of this distribution of benefits and costs of that system. And then it only then can we get to efficiency, which is the priority of economics. So this means that you know, new policy instruments stuff that focused on scale distribution, then efficiency is the way to go. And I talk a lot about this in the last chapter book, as I kind of wrestled with the idea of how did I put it radical pragmatism? Right? Yeah, that’s a pragmatic things that we can do now, for example, to wean ourselves from fossil fuels, you know, home weatherization, and carbon taxation, and, you know, maintenance of our systems, electrification of transportation, transition to renewable energy. But all of these are really hard to do in an economy that continues to bloat an economy that continues to grow. So we have to be thinking about the scale of a system. And that’s probably the radical part of radical pragmatism, right? What’s it going to take to rein power away from the status quo, that part of the system that’s benefiting from this growth model, and create an economy that works for all?

Gene Tunny  36:05

Okay, so I’m just wondering what exactly that involves? And is this part of this whole idea of D growth? Is that what you’re arguing for? I’ve heard about this concept of D growth, that that’s coming up, and there was an article in the FT about it the other day. So you’re just wondering, what needs to be done? I mean, do how do we, how do we have that, though? How do we recognise those constraints? I mean, you mentioned carbon tax. I mean, that’s something that, but you’re also saying that that’s not going to be enough and mean, given current magic

Jon Erickson  36:41

bullet, but it changes that changes the system? Yeah. Yeah. I mean, degrowth is the sort of social movement side of ecological economics, if you will. It’s a question of, how do we orchestrate a just transition to a right sized economy. Now in some parts of the world, and for some people in the world, you know, growth still creates more benefits and costs. But there are plenty of parts of the world and plenty people in the world where growth, Grace, more cost and benefits, right. So we have to orchestrate a kind of Race to the middle. And in fact, if you plot something like the HDI, the Human Development Index, which is a UN level index, this used to sort of monitor, you know, the benefits of development. If you plot HDI at national levels against energy per capita, you get this curve, right that the initial development improves considerably, with just a little bit more energy use per capita a little bit more than final impact per capita, Right. but only to a point that we get into this kind of club of countries, where continuing use of energy continuing depletion of the environment, continuing materialisation of the economy, doesn’t improve development doesn’t improve the HDI. And you get this long tail with countries with the same HDI of countries that that consume 20 or 30, or 40, or even some cases 80% less energy and material. So countries like mine, the US were way out on this tail, where we’re not getting improvements in human development. Yet, we’re consuming way, way, way more energy than the average human right. And way more energy in the countries that have similar levels of development, similar qualities of life. So what are we doing? Right? We’ve got to orchestrate a race to the middle and whether you call that d growth for the rich countries, and to be more agnostic about growth for everyone else, like grow, where it makes sense and shrink where it doesn’t. That’s the kind of century that we’re in. That’s the biophysical reality of the new economy.

Gene Tunny  38:57

So Jon, do you need a command economy to actually to orchestrate this transition to a right sized economy? I’m just trying to think about how this would happen. Because I mean, people, a lot of people out there, just, you know, they’re trying to live their lives and do the best they can. And a lot of people have to a lot of families, the couple have to work two jobs. They’re trying to make ends meet. I mean, they Yeah, they probably wouldn’t see themselves as as living a hugely materialistic lifestyle, but then compared with other parts of the world. Yeah, sure. It probably is. Yeah, I’m just wondering how we how we can do that. I mean, I’ll

Jon Erickson  39:37

yeah, yeah. My trainer has economists. I assume you’re trained economists. We were sort of taught these, these two different DS, roughly two different models, market economy and a command and control economy. And we were taught that this command and control thing is inefficient and unfair and results in a kind of an over regulated world and we need to the market economy is not perfect, but may Is it better than command and control? I’ve come to realise that that’s a load of BS. The market economy is also a command and control economy, right? Markets are designed by those and power markets are social constructs, especially the last three or four decades of neoliberalism has created a kind of free market experiment, right? That is concentrating the benefits and widely distributing the costs. So talk to the average guy or gal on the street and ask them, Is this economic system working for them? And if they say no, do you say, well, let’s double down on the logic of the system? Or do we try something different, right. So we’re finding that more cooperative forms of of economies are resulting in more shared benefits and shared costs. Were working with a group called the next systems project that has been sort of systematically cataloguing different political economics systems, local skills, community skills, United States that have dramatically different outcomes and dramatically different structures. It’s not just either or of command and control of free markets. It’s blending things in between, it’s the continuum in between, that is the secret sauce. So I don’t buy that we immediately just have to go to command and control. Although in crisis, what we learned from COVID is what happened is the world’s government goes goes to command and control, right? If climate is a crisis, if, if environmental depletion is a crisis, we might be using the very system of free market thinking, to push us into a state where the only option is going to be command and control. And I don’t want that you don’t want that. People don’t want that. We want our basic liberties and freedoms. But we want to do it in a way that creates an economy for all for children and for for future. I also kind of reject the the narrative of economic freedom, right? Because that’s awesome. That’s also painted as freedom to do things. And instead of freedom from tyranny, right, freedom from the impacts of, of the environmental costs of a growing system, freedom from the social inequalities, of a system that’s geared towards making the billionaire class even richer. Freedom from the costs of growing economies, what we should be thinking about, not freedom to do things to our neighbours, to our environment, and to future generations that ultimately are going to come back and bite us in the tail. Yeah, a buy in any of this.

Gene Tunny  42:58

Well, I’m interested in the new systems project. I’ll have to make system next systems project. I’ll have to look into that. I mean, do you have any examples of those communities you’re talking about?

Jon Erickson  43:10

Well, it’s examples of of. So you take the US and you think that we’re this kind of, you know, outside looking in and the narrative on the mainstream news channels is that, you know, we’re this free market, capitalistic system. It’s actually not true. So much of what makes the US economy work is cooperative ownership, collective ownership, state run, companies, state state run banking systems, state state runs systems of have that make the the economic system work. Take the banking sectors, trillions of dollars and coops where the depositors get votes on the matters of their banks. Take agriculture and education, and even energy and electric utilities. So much of those industries are run by cooperatives. In fact, electricity cooperatives deliver electricity, the United States, to a well over half of the geography of the high states, to rural communities, where the sort of economics doesn’t work for for industrial companies. There’s experiment after experiment, after experiment of different kinds of political economic institutions that have that we have lots of lessons to learn from. And this is what I meant in the beginning, when I talked about you know, economics, part of the Progress illusion is this kind of illusion of history right. To think that the current economic system, the neoliberal system, the free market, system, is is is the only one is has been perfected, right? Is the kind of logical inclusion of everything along the way, and that we don’t have to learn from our history. We don’t have to revisit the debates. We don’t have to consider the morality of our economic choices, or their biophysical consequences. And yeah, there’s a lot. I mean, I speaking mostly as a, you know, from the perspective of an American, maybe it’s different in Australia. But man, we have this sort of US centric view of the world, that everything we do is right. And every thing that we do is the best that ever was. And we don’t need to learn from our history. And we don’t have to need to learn from other other experiments around the world. And where I land is, that’s some pretty insular thinking,

Gene Tunny  45:45

huh? Yeah. Yeah. Okay. We’ll start wrapping up soon, Jon, this has been Yeah, really thought provoking. So it’s good to have you on the show. could ask you about neuro neuro economics. So you talk about that in the book. This is a new field, I’ve only learned about recently, what what’s that? What’s your interest in that field? And what’s it broadly trying to tell us? Or what’s it found?

Jon Erickson  46:11

Yeah, sure. Well, so this is where, you know, I’m kind of researching the book, like, what are some alternative ways to think about the human agent and our economic models? Because the economics, we’re taught a very, very, very narrow version of humanity, right, which is sometimes called like a subspecies of human homo economic is, yeah, isolated individual at a point in time, right, who

Gene Tunny  46:36

just wants more? The rational utility Maximizer? Yeah,

Jon Erickson  46:40

exactly. Exactly. And both within economics and outside of economics, you know, we’re learning that when we test our theories, with real data, and not just abstract mathematics, that this sort of foundations of this rational actor model, unravel. So what I do in the book is I explore what you might call borderline disciplines, right? Where economists have cooperated with other disciplines, especially other natural science disciplines. And so neuro neuro economics is one of those examples where economists have collaborated with neurosciences to ask questions of proximate cause. Right. So in science, we think of proximate cause and ultimate cause. And then the case of economic decision making proximate causes asking how we make decisions, whereas ultimate causes more a question of why do we make decisions that we do? Neuro economics is an example of a borderline disciplined, proximate cause where, literally economists are taking tests objects, with their neuroscience colleagues, asking people to solve economic puzzles, or make economic choices that are watching their brain light up, right, and trying to understand where and when do the kind of precepts of the rational actor model hold up? And where don’t they? So it’s one of these Borderlands this was, such as neural economics is an example. But also behavioural economics, experimental economics, where we’re trying to kind of understand the brain in the case of economics, the whole human case of behavioural economics, groups of humans in the case of experimental economics, groups of groups in the case of institutional economics. And then there are entirely evolutionary history as a species in the case of evolutionary economics. So these are all examples of, of the isolated discipline of economics, starting to cooperate with other fields, and building what I call in the book, borrowing from the biologist, EO Wilson, a more conciliate form of economics, where we find the jumping together of knowledge to really watch it watch the 21st century version of this field.

Gene Tunny  49:13

Right now. Okay. Well, yeah, oh, it’s something I want to have a closer look at, because I definitely recognise the limitations of that. That standard economic model. I mean, for years, economists were saying, Well, it’s, we recognise that all the assumptions are a bit unbelievable. But as long as it makes good predictions, and it’s, then it’s fine, but it turns out, it may not actually make good predictions. So,

Jon Erickson  49:39

I mean, I gotta go through the history of you know, the running joke, of course, right is that economists have successfully predicted seven of the last three recessions. So it’s, this this model of the rational actor model turns out to be not a very predictive model, or a model. Again, all models are wrong, some are useful. But we should start asking useful for whom? And it turns out this this isolated model is useful for the billionaire class but not useful for the rest of us.

Gene Tunny  50:10

Right I so we might start wrapping up, I’m keen to just learn about, what are you hoping this book we’ll achieve? Jon, what’s your What are your hopes for this, this book,

Jon Erickson  50:22

my generation, I’m 50 birthday this month, I’m 52 going on 53 My generation was inspired by the works of a number of like, you might call a renegade economist, right? Who sort of solid different path. Folks like Herman Daly, who I mentioned to, we just recently lost that 84 years old. I mean, Herman was on a similar journey that I was he started out with aspirations to be a growth economist, he thought that the logic and approach of market fundamentalism could be sort of bred when he was training to be an economist in the 50s and 60s, to solve problems, particularly problems of poverty, right to grow the economy, lift people out of poverty, but in his own educational journey, set against the aspirations of the Great Society in the US in 1960s, the civil rights and environmental movements of the 60s and 70s You know, he was inspired by inspired, inspired by the work of earlier group of renegades folks like Nicholas Dzerzhinsky regime who wrote on energy and the economic problem, bringing the principles of physics into economics, Kenneth Boulding, who wrote the infamous article, the economics for the coming Spaceship Earth that was really coming to terms with the opportunity costs of a growing economy inside of a fixed ecosystem. John Kenneth Galbraith, who, whose social critique in the affluent society really sort of, you know, early on question a society built around, creating more and more affluence into an affluent class. And, of course, the 1962 book by Rachel Carson’s Silent Spring, which was really impactful on Herman’s thinking, and design of an economic study of economy inside environment. So, you know, these sorts of scholars were also inspired by long standing debates about the function and purpose of the economy, you know, really going back to the classical era of economics, when economics was seen as as a branch of moral philosophy, right. Not not a pseudo science hiding behind abstract mathematics. So Herman’s work was another kind of link in the chain. His work on economics, the life sciences, first big published article, his work on steady state economics in 1977. Book, his work on for the common good that he wrote in 1989, with a theologian, John, John Cobb, you know, he was created another link in the chain that was trying to build a study of economics as if people and planet mattered. So I hope, you know, this book is yet another link in this chain of link that comes from my generation, that can continues to build a kind of more modest, more humble economics that can contribute to social well being and environmental, environmental protection, and not just simply,

Gene Tunny  53:39

okay, well, I’ll put a link in the show notes. So if you’re in the audience, and you’re interested in, in the in the progress, illusion, and look, it’s got a lot of, it’s got a lot of great information in it. Lots of lots of great analysis, and it’s very thought provoking. So I certainly enjoyed or I learned a lot reading it. I thought it was good. I liked how you went through the evolution of of economic thought and all the debates and even what I was struck by was, I didn’t realise that was Tinbergen, the famous Dutch economist. Yeah, he had a bit of a Nobel Prize winner. Yeah, he ended up he started to question the whole the the economic growth narrative in the was it the 80s or 90s? Are some of the you tell the story along those lines, I thought was interesting. Yeah. Yeah. So I think there’s a lot of good stuff in there. Okay, Jon, any final thoughts before we wrap up?

Jon Erickson  54:42

Look, I really appreciate this. Thanks so much for your podcast. I was listening to a bunch of your past thoughts in preparation for this and this is such a great show. Very valuable show. And yeah, folks are interested in this book. It’s, it’s been published by Ireland press which is One of the bigger nonprofit publishers of environmental books in the US and give your listeners the secret code. If they order a book from Island Press they get 20% off if they answer the enter the code illusion so but on my capitalism have there for a second

Gene Tunny  55:17

okay, is that all is that this capitalization matter is what did you just tell me that and I missed it sorry was

Jon Erickson  55:24

no I don’t know that it needs to be capitalised. But it’s the word illusion is the code for 20% off.

Gene Tunny  55:30

Okay, good one. Well, I guess people try it and if, yeah, hopefully it doesn’t matter whether you capitalise it or not, or try and capitalise that, that doesn’t work. Without caps. Okay. Very good. Okay. Jon Erickson. Thanks so much for your time. I really enjoyed the conversation and really appreciated your insights. So that’s been terrific. 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 explored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

Innovative cities, coffee shops & entrepreneurs w/ Christopher Hire – EP165

Cities worldwide want to be more innovative because innovation is a driver of economic growth. The Innovation Cities Index shows cities where they’re doing well and where they’re doing badly relative to other cities. Hear from Index creator Christopher Hire about the importance of having policies that are good for entrepreneurs and just how bad red tape is for innovation. You’ll also learn how the prevalence of coffee shops is a good predictor of innovation. And you’ll hear from Christopher about what cities are hot right now. 

Christopher Hire is Director of Data at 2THINKNOW, publishers of the Innovation Cities Index, a ranking of 500 cities for innovation, published since 2007. Christopher has given talks on cities and innovation to the OECD in Paris and the UN in Geneva. He’s a globally recognised expert on what makes cities innovative. 

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

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

Links relevant to the conversation

See and download the Index in Excel:

https://innovation-cities.com/indexes

Substack Innovation Cities Gazette Newsletter:

https://innovation-cities.substack.com/

Get the data – Answer your research question with city data points:

https://citybenchmarkingdata.com

Connect with Christopher HIre on LinkedIn:

https://linkedin.com/in/christopherhire

Other Links:

https://Linktr.ee/Christopherhire

Transcript: Innovative cities, coffee shops & entrepreneurs w/ Christopher Hire – EP165

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

Gene Tunny  00:00

Coming up on Economics Explored.

Christopher Hire  00:02

Coffee shops are a driver of innovation because how many people who right now probably listening to the podcast or how many people that are writing a paper or working on something or new ideas are sitting in a coffee shop.

Gene Tunny  00:18

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny broadcasting from Brisbane, Australia. This is episode 165 on innovative cities. My guest is Christopher Hire, director of data at two things now, publishers of the innovation Cities Index, a ranking of 500 cities for innovation published since 2007. Christopher has given talks on cities and innovation to the OECD in Paris, and to the UN in Geneva. He is a globally recognised expert on what makes cities innovative. So I’m really glad he’s come on to the show to share his insights. Cities worldwide wants to be more innovative because innovation is a driver of economic growth. Christopher’s innovation Cities Index shows cities where they’re doing well, and where they’re doing badly relative to other cities. Hear from Christopher about the importance of having policies that are good for entrepreneurs, and how bad red tape is for innovation. You also learn about how the prevalence of coffee shops is a good predictor of innovation. And you’ll hear from Christopher about what cities are hot right now, including Dallas, Fort Worth and Seoul Korea. Please check out the show notes relevant links and clarifications and the details of how you can get in touch with any questions or comments. I’d love to hear from you. Right now for my conversation with Christopher higher on innovative cities. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Christopher. Hi, welcome to the programme.

Christopher Hire  01:49

Thanks a lot for having me on your economics podcast. It’s a real pleasure Gene.

Gene Tunny  01:53

excellent. Yeah. Great to have you on. Christopher, one of my listeners, Dave attended a recent talk you gave. And he mentioned that you’ve done a lot of really interesting work on cities, you’ve got an innovation Cities Index. And I’d like to ask you about that today. But first, would you be able to give us a sense of the broad range of work that you do, please, Christopher?

Christopher Hire  02:18

Yeah. So currently, for the last over a decade now I’ve been working, running a small group analysts doing data about cities. So basically, we gather data from cities and we answer research questions. Now anybody who’s in economics or in the data field, and and I’m sort of I’m a combo I’m like, data math guy, and also a data science guy, but I was data science before they invented the term data science. Many of your listeners probably remember analyst programmers, yeah. Power, before Power BI it was Cognos, all those sorts of things, you know, the old, old stuff that it’s really the same thing. The Emperor with a new set of pyjamas some days. But yeah, so So basically lots of different data gathering about cities, difficult research questions, and usually who we help is if somebody has a research question about how to compare cities globally, there’s lots of data on how to compare Australian cities on the abs. But there’s not a lot of data on how to compare cities globally. And if you try to dig into the French system, you’ll hit some walls. And then if you dig into the Spanish system, you’ll hit some walls. And we’re sort of good at that. So we go through and we standardise global data kind of thing for cities. And it’s about 500 cities. And we do answer research questions. And we’d like to, you know, we’d like to do interesting things. So somebody gives us an interesting challenge. It’s quite fun.

Gene Tunny  03:40

Great. Yeah. keen to chat about cities. The one the indexes that I’ve noticed in the past are the rankings I’ve noticed in the past. The Economist, The Economist has a or maybe they, I’m pretty sure they still do a cost of living survey or across different cities in the world that’s aimed at I think it’s aimed at executives or professionals, what’s the what’s their cost of living in different cities. And also Monocle has a city’s index, what’s the best city to live in and that’s based on the Monocle, Tyler Brule’s magazine, exactly how cool they think the cities are. And one thing that’s interesting is that there was another index or another ranking of suburbs I saw the other day, which had Fortitude valley where my office is, which is one of the top 50 suburbs worldwide. But I think that’s in terms of some measure of coolness. But anyway, I want to ask you about your, your, your ranking or your index you you’ve got this innovation Cities Index. Could you tell us a bit about that, please, Christopher?

Christopher Hire  04:49

Sure. Look, most people know cities rankings as the livability indexes, and they are actually as you correctly identified, in the case of The Economist, more related to cost of living for wealthy expats, then really livability, but the marketing departments of cities love, just churning it out as were the most livable. But it’s really about cost of living a lot of the time. So Mercer and The Economist make those two. And then there’s a series of other rankings that we’ve often sometimes worked on, we’ve worked on Smart Cities rankings for IESE, and a couple of other rankings published by consulting firms that use our index as an input. So ours is a bit different. Because it’s not based on a utopian idea of cities. It’s based on the idea that you do the best you can with what you’ve got. And you try to create innovation. So in 500 cities that we measure, and we started off with 22 cities in 2007, because 500 is a heck of a lot. And we never thought we’d actually get there anyway. But the 22 cities we started with, we expanded it to 500. That kind of gives you a pretty good barometer of what’s happening in the world. And it’s a broad base concept innovation. So in other words, it’s looking at where you would like to live, where you might belong, where you might work or play, it’s sort of a broader space sense of innovation on what places are dynamic and water really good. But it’s answering that in a more systemic way than just, I happen to think this city is cool or not. And I think there’s a lot of newspaper ones, they really are all about who’s cool, who’s not. And it’s more about should be more about data. So we use data and quantitative and qualitative methods, but we use quantitative methods to create the index. So we have an algorithms that basically create the rankings.

Gene Tunny  06:42

Right. Okay. And what does it tell us? Christopher? What are the cities that are at the top of it? And How stable is the index? So the ranking? Is this something that is relatively stable over time, that you mentioned that it’s not just what people you know, what the analysts think is cool, it says its based on data, so these are these? These are data that have a lot of reliability? Or they don’t? You know, they’re not they’re not moving around a lot over time? Is there a? Yeah, what are your thoughts on that as well? As well as what’s the what are the ones at the top? Sorry? Yes,

Christopher Hire  07:20

yeah. So I’ll go, I’ll sort of unpack that in a few parts. And if you want to interject with a clarifying anything, if, if it doesn’t make sense, one of the things that many of us in this field suffer is reading too many PDFs. And with the $50 words, with a $5 word we’ll do and it rubs off on you after a while. So I’m trying to get out of the $50 words. So basically, the main thing about it is, is that the, you’re really comparing cities on their potential for innovation. And the way that you’re doing that is if I answer the second part, about the how we do it in a moment, but basically, you’re comparing the cities for innovation, based on looking at the conditions for innovation in those cities. And to do that we gather 162 indicators, and they have around 800 data points that we gather, and they’re very, like the indicators, the way the design is quite stable. So in other words, I have to put a little asterisk next to that. So the answer is it depends. But certain cities like Singapore, are highly stable. So cities that do very, very well in our index over time, don’t vary a lot. And you’ll see the same cities towards the top as long as they don’t shoot themselves in the foot. For example if they keep good government policy on innovation, like Malcolm Turnbull’s, federal government policy was very good. And I haven’t, I won’t go into that yet. But, but in effect, good policy on innovation, they keep a structural sort of a series of conditions for innovation, and they help encourage it, then they tend to be stable. So Singapore has done a very good job. Now, the first thing somebody in government said here is when I say Singapore has done a good job, how do we copy Singapore. And so that’s where our index is a bit different. We don’t say you should copy Singapore, we say you should be the best version of yourself. So Tokyo has also done an excellent job. But Tokyo is tied up in its culture. You can’t take Tokyo and just take some part of Tokyo say like, right, we’re going to copy all the vending machines in Tokyo and their robotics department. And we’re going to become Tokyo, a Sydney cannot be Tokyo. It doesn’t have the same structure doesn’t have the same culture doesn’t have the same transport system, spatial geographics, all these things, you just can’t be like that. So what we would say is each city should be the best version of itself and the cities that do the best that over time, like Barcelona historically has done very well except thing COVID basically cities like Singapore have always done very well. Seoul has been doing really well for a long time. Now. Dallas Fort Worth is another city that’s been climbing up our index for a long time. And I’m not mentioning Australian cities because people get into the Sydney Melbourne debate. So I’m just saying globally, Austin is doing very well, it has been for a long time. So our index picked up Austin early on in the piece. And we see it sort of cresting now. So Dallas is hotter than Austin in some ways. And Miami is another city that’s doing well with the exception of property prices. So each of these cities have a balance of factors. And if they do that, well, they remain remarkably stable. If they go off into left field and start creating dramatically bad policy, and I would say some of New Zealand’s cities are an example there, where they haven’t, they have the potential to be really great world leaders. And on a per capita basis, they’re amongst the best in the world. But they haven’t been doing good policy for a little while. And so they’ve lost their momentum. You know, it’s really, it’s a bit of, it wouldn’t take much to get him back. But it’s just that they, I think the, you know, when without the COVID thing, they’ve lost a bit of momentum. And the same with some Canadian cities, although the French speaking parts are doing quite well in Canada is bouncing back a bit now. So it’s hard to keep candidate down. So in effect, we’ve got these sort of great cities around the world. And if they get all their policy settings, right, but not perfect, then they go up. If they get their policy settings, bad, then they go down. And so in effect, our index over time, it has a thing called a five year average. And that five year average is pretty consistent. And so and it doesn’t matter how we run the algorithm, it can run, we run the algorithm to get a stable result, basically, relative to last year, we ran it 31 times. And at the end of 31 times we’ve got a pretty stable result. Bearing in mind there was COVID happening. So that’s a lot of answers to your question, sort of a junked points, but I’ll let you led on from that.

Gene Tunny  12:07

Yeah. I was just wondering how it comes together. You mentioned Tokyo was Tokyo at the top of your most recent index.

Christopher Hire  12:17

It’s been at the top a couple of years in the last few. So it’s one of the cities perennially has won. We’re the first index, I think put an Asia city at the top. We’ve also got Seoul near the top, and Singapore near the top.

Gene Tunny  12:30

And Sydney. Sydney’s top five at the moment?

Christopher Hire  12:34

Yeah, yeah, at the moment. That’s an outlier year, that’s largely COVID related. At the time we were doing the data, they were doing the best on COVID. And that sort of affected the COVID variables affected that but Sydney should be top 10 in the world. And Melbourne should be in there in the mix, too. But it depends on policy settings. And, and it’s complicated, because there’s not just councils and state governments often responsible for different things, and there’s community organisations responsible. So it’s a multi stakeholder thing that makes a city, whereas Brisbane has one council, which is much easier.

Gene Tunny  13:12

Right, What are the most important indicators, Christopher? Or what are the most important? Yeah, the most important indicators that distinguish between different cities? Is it governance? Or is it the amount of skilled labour you have? Or is it the museums or the art galleries? The what would you call them trying to think what you’d call that? I’m trying to think about? Cultural? Cultural? Exactly. Yes. Yes, those factors? Yeah. What are the most important? Are there a few that are much more important than the others? I mean, you’ve got it sounds like you’ve got a huge range of data. Perhaps what I’m getting at is what are the common factors? What Look, you’ve got all of these different indicators? A lot of them are going to be highly correlated or getting at the same thing. Can you give us a sense of what the most important data items are?

Christopher Hire  14:04

Well, the indicators don’t necessarily. So the indicators overlap in different ways. And so they’re designed to make it difficult to game. The problem with a lot of rankings is they can be gained easily by just announcing filings. And you’ll see this where cities that are capitals nationally become very prominent, you get these weird outlier cities and the outlier cities you think how did that make the list? That outlier city sometimes is caused by data, for example, for the whole country being filed in one city. So you get these sort of weird data problems? I think, realistically speaking, it’s best way to look at it is to look at what does it mean underneath and it means that individuals and businesses and stakeholders are broadly decentralised into different categories. So in a sense, it’s, it can be a central city if it’s a small place, like Singapore. But in many cases, there’s a lot of entrepreneurship happening in Singapore. And so you have to bear that in mind. So, in general, the correlation is to dynamic, entrepreneur driven cities, not centrally planned resilience. For those from an urban planning, background, Brasilia was a wonderful looking city from a from a photograph. But it didn’t work as an urban planning city. And just centrally planning everything, you can’t make a perfect city, what you have to do is you have to devolve some elements to different indicators. So by taking all the indicators, and looking at them broadly, there are some certain commonalities. So for instance, we have 14 transport related indicators, which would indicate the transport or mobility, and most of those are public transport. And so mobility is extremely important, as we saw during lock downs. So there is a correlation between mobility and creativity. If people stay in their cubicle, you don’t get many creative ideas. You don’t get creative ideas sitting in a cubicle. Most people, if we asked a group of people this question, they’ll say, Oh, I get a creative idea from going out into the bush, that’s one of the common ones. In the shower. The other one is that I get a creative idea of museums and art galleries. So that’s the that’s where the ideas come from. So if you don’t have those ideas, how are you ever going to keep up with China where they, they think tanks have IQs of an average of 150. And they select the very, very best and brightest people to go in their think tanks, yes, they might have procedural things. But they do give some leeway within their think tanks. And they have 150 IQ emission standards or some of the think tanks. So, you know, I don’t see some of our media, Talking Heads competing with the Chinese on the intelligence level, that they have their analysis, but they can compete on the creativity level. So that less we and one of the biggest, biggest, most annoying things you see when media talk about innovation is they keep talking about control and centralization. The problem with that is you kill the goose that lays the golden egg. It’s actually you have to decentralise the non strategic parts of it in order to allow it to function. If you centralise everything, you’re really just going to you control it, but you end up controlling less and less innovative economy. So, in effect, the main things driving this decentralisation in some respects, and centralization and others is okay. It’s a kind of interplay between all these things. And there’s lots of research into various things. Like, for instance, coffee shops, are a driver of innovation, because how many people who right now probably listening to the podcasts, or how many people that are writing a paper or working on something, or new ideas are sitting in a coffee shop, how many people are doing that, and coffee actually inspired the whole age of enlightenment, and was coffee houses that inspired all that. And there’s a lot of interesting texts, which I’m sure we’ve, we’ve we’ve read or videos we’ve watched about that. So coffee is a very important part of the Enlightenment, and coffee houses and Lloyds and all that sort of thing. So I think coffee houses incredibly important innovation, but they’re not really considered very often. So that’s a small indicator in our mix of indicators. But it clusters around people coming up with ideas and making the environment conducive for the person that’s, that’s, that’s ready, who has the means to come up with ideas to create innovation, and to develop things. You know, the best ideas often don’t come from the expert in the field. The best ideas come from, from random people who basically have some part of the expertise they need. And they invented. I mean, what the steam engine wasn’t invented by wasn’t invented by a professor was invented by a boiler maker, you know, it’s often but he was in that university environment is a boilermaker. So it’s often you need randomness for things to work, you know. And so, our index is designed to measure conditions for creativity. And it builds on a whole series of texts and papers and things that people wrote over, you know, from the period of about 1990s till about 2008. A lot of it. And there’s lots of great stuff out there. I mean, this. Thomas Stewart wrote a great book, Joel Kotkin writes some great stuff. There’s a whole series of papers by a guy called books by Nigel Harris, David Landis from Harvard. There’s a whole series of interesting things you can take, and you can extrapolate it, but our model kind of saves time and puts it into one place. So it’s not so complicated. I mean, you can read 5000 books or you can read use a model.

Gene Tunny  20:02

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

Female speaker  20:07

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you frank and fearless economic analysis and advice, we can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world, you can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  20:36

Now back to the show. Christopher, can I ask? Are the the indicators that you use? Have you got a list of them somewhere? Or is it proprietary?

Christopher Hire  20:49

Yes, the indicators are all on the website. And people can order the data. Okay, so it is possible, we don’t sell the data, we don’t provide the data for free. Because we wouldn’t exist if we did. But we sell the data. And we also sell the data to city governments to benchmark themselves. So that’s how we get some money for doing the index. Otherwise, it would be the world’s greatest charity project. Well not the world’s greatest but it would be a big charity project. So you get some infamous revenue from selling the data to cities and benchmarking cities. And corporations use it like insurance companies and, and banks and those.

Gene Tunny  21:28

Oh, good. And so you’ve got coffee shops, per square kilometre, or cafes per 10,000 people or something like that. It sounds like.

Christopher Hire  21:39

There’s about four or five Cafe variables, the cafe indicators. And we have a special algorithm that say forget outliers and cafe shops per square kilometre. And you can get outliers and total number of coffee shops. And you can get outliers in there’s no matter which variable you use, you can get an outlier in it. So we have a way of sort of kind of nutting that down to what’s a good score from that and then giving a score for cafes. And I was just looking at the cafes data this morning. That’s why I had primacy in my mind. Yeah. And it was interesting to note that the lockdowns saw some cities reduced one in five coffee shops, one in five coffee, close, you think about the flow on effect of that through the economy. It’s one in five coffee shops shops in some major European cities. Interestingly enough, some cities grew by 12%, which means one in eight coffee shops open. So that’s really interesting. And it’s not it’s an it changes the narrative about so it tells us something about the economy as well as coffee shops. So it’s all their small businesses and that and that their economic activity and how confident people are when people don’t buy coffee, if they’re not feeling relatively confident. They might cut back on their coffee. Yeah, avocado toast, as it became, yeah, smashed avocado. We don’t buy them anymore or something. So what was

Gene Tunny  23:01

So what was that time period you’re talking about there you mentioned? Some cities actually, there are more coffee shops. I’m just trying to remember this year. Okay. So post COVID.

Christopher Hire  23:12

So as of now, as of now, last month, okay, yeah. And more coffee shops opened, but they’re not. They’re interestingly ones that didn’t lock down as much or they went into the lockdown sooner and came out sooner. So that’s the sort of thing or they have. There’s a couple other explanations, but yeah, its interesting.

Gene Tunny  23:33

What are some of those, you know, off the top of your head what some of those cities are.

Christopher Hire  23:38

So I don’t want to misquote because I just looked at the data. There are cities in a couple of most that London has suffered from, the UK has suffered not long, I can’t say for sure London, I don’t remember the number. But UK has suffered shrinkage. And in generally in the coffee shops. And a lot of the French cities have suffered shrinkage in their cafes, but growth in some Swedish cities and want to say, East European countries. So Sofia has had some growth, Tallinn apparently. But that can also be that some people have decided that casual dining now is more profitable. So there’s a shift from some of the cities have shrinking numbers of bistros and growing numbers of cafes. So what they’ve done is they’ve converted to a cheaper business model where they can operate coffee shops, so they they sell coffee once upon a time we would have sold only meals. Yeah, so they convert their classification to a coffee shop, but continue trading rather than closing their doors and they get rid of all the white tablecloths and napkins which happened in Melbourne. You know, a couple of decades ago. So it’s it’s sort of an interesting thing that’s happened in but there’s growth in a lot of Eastern European cities per coffee shops, and shrinkage in a lot of West European cities. And a couple of German cities have grown, I think Dresden has grown a little bit, but I can’t have been a huge amount. But most of the rest have shrunk. The lockdown has really affected the small to medium sized enterprise, which has a flow on effect to the money multiplier through the economy and a whole series of other stuff. So it’s really, it’s not just coffee shops, it’s like there are bellwethers for small business and startups and all that stuff.

Gene Tunny  25:22

Yeah. One city that people have been concerned about is New York City, because it was very badly hit by the pandemic. And I don’t know, one in five small businesses or something like that closed down, maybe that’s an over estimate. That’s the number I think James Altucher quotes on his show. And he was basically saying New York City’s dead, right. It’s all over. And I don’t know if you’ve got any thoughts on what’s happening with New York, how it’s performing in the index?

Christopher Hire  25:53

Well, we’re doing look, the interesting thing is, I believe that narrative as well, to some extent, because there are some very strong numbers that showed people leaving New York prior to the pandemic. So one year prior, people were leaving New York, and people had continued to leave New York throughout the pandemic. And when I say New York, I’m referring to the five boroughs definition. But then you have to consider that some of those people have moved out to metropolitan New York, and then move back to the five boroughs. So it’s, it’s not as clear cut as all that. So New York still continues to do well, which surprises me greatly. And it may be that there’s just some lag in the data, but we are getting the data we’re getting in his COVID data, and COVID period, data’s 2021, some 2022. And it’s really quite interesting that, that they’re still they seem to be, it always bounces back. I mean, it’s one of those cities, it’s a perennial city like Paris, London, New York. And I think that always bounce back, you know, they don’t seem to ever stop being the great cities of the world. And you may think the data may do something, but then some other indicator compensates for it, they seem to be like a magic machine. I don’t know exactly how to describe them. But Melbourne has this attribute as well, to some extent, in the end, it bounces back. But, you know, New York is still up there in our list. And it’s not, it’s not totally and utterly. I’m surprised when I’m looking at the data because I expected to for more. And I made the point that I think there was so much movement to my hand Miami of capital and things during the pandemic. But that seems to be a biting now. And Miami does very well. I mean, we did this thing of industry diversity. And Miami is amongst the most diverse. There’s a certain way we measure this, but it’s showing up as a bellwether sort of happening economy, but the property prices are very high. So that might be putting a cap on it. And it’s I’m interested to see what will happen next year with that I don’t know what’s going to happen way. I mean next year, but Miami has been climbing our index and everybody says Miami, Miami, but it’s been climbing to index well before people started noticing and moving there during the pandemic. So it’s got a very good free enterprise and entrepreneurship vibe and in Florida in general, and Texas also, of course, they both support entrepreneurship. So surprised they do much, much better than cities of equivalent population. They do much better than they should basically, because they’re open to entrepreneurship, and cities that are kind of being you know, everything under control. And the Karen’s are in charge for lack of a better word, Karen’s with clipboards, measuring and monitoring everything. They’re killing the economy, and they’re killing. They’re killing their own wealth in the long run. So it’s not exactly intelligent. You know, how do you how do you take a how do you make a two bedroom house? You take a four bedroom house and divide it in two? Did you soak up your wealth and be more wealthy no matter what you do? Yeah. Eventually your tennis court gets cut down. So it’s sort of like you have to you have to let the economy run.

Gene Tunny  29:17

Yeah. So in terms of indicators, then you could have things like tax rates, you could have things like that. Yeah. How easy it is to start up a business or how quickly you can start up a business economic freedom. Yeah, yeah, that sort of thing. Okay, that’s all good

Christopher Hire  29:32

Company, we’ve got a really good company set up indicator that’s better than the World Bank’s one. It does use World Bank as an input. But when I say that is a lot of people have problem with the ease of doing business index. There’s been a lot of complaints about it. It’s kind of methodological black hole in there. And so we have a better way of capturing that. We do manually, and we’ve been doing that for a while. And we sell that quite a bit of that one. And the also, as you mentioned, The economic rights of what you consider as city level economic growth could calculate some version of that. And or estimate some version of that. And we have whole series ones around the setup of companies and different things. Yeah, the sort of things you mentioned.

Gene Tunny  30:17

Yeah. Okay. Now, you said before New Zealand has had some New Zealand cities have had some bad policies, what type of things? Would you say there are bad policies in those New Zealand cities?

Christopher Hire  30:30

Well, there’s a lack of focus on growing the economy. And there’s been a whole series of aborted social programmes that haven’t achieved. I mean, the housing initiative that was federal government in New Zealand just didn’t achieve anything. I mean, so the problem is, it’s not enough to say chair in policy and expect chair to happen. You know, a lot of people who are naive on policy, they think you can say something hasn’t happened. And something’s just not possible. You know, you can say that your concern no child wants is going to live in poverty, poverty, as Bob Hawke or and Bush have said, but whether it’s achievable or not, what you’re better off doing is making some incremental improvement. So an incremental improvement is making sure that 100,000 kids get laptop computers. So that’s a good policy, right? That’s a policy that is tangible, measurable, and you can say, well, we’ve got 100,000 Kids laptop computers, as long as they’re reasonably recent laptop computers and Celoron’s from five years ago. But so you’re better off focusing on stuff you can achieve and grandiose statements that just just don’t get anywhere. And I think New Zealand’s had a lot of grandiose stuff, and it hasn’t really, it’s that desire to be the most important and, and, sort of, you know, little is that is the tyranny of distance. It’s that Australia gets into it, too. We want to be the world leader in something and then you go over to France and, and Spain and you talk to them and they don’t care. They’re like, what we don’t care. You know, a lot of stuff we do, they don’t care. We think we’re impressing them with they don’t care. The French and the Spanish don’t care, European Union don’t care, the OECD don’t care. They might we think we’re impressing them by being this great leader in something, when we’re actually just talking to an echo chamber of ourselves and a bunch of media talking heads. I mean, we really, we just, sometimes I feel like you turn on the TV 20 years ago, you hear the same conversation, don’t you about, about everything, and it’s still the same now, you know, you’re still having the same conversation about the same issue going on about same thing. And you just think, well, I just turned it off and 20 years later to see if it’s still there, and nobody’s done anything. So it’s better to do small incremental changes that help. It can help people like so if you know, do something about domestic violence phones is that programme is doing that’s a practical thing, you know, practical stuff helps. And I think airy fairy stuff, you know, airy fairy announcements that never can be achieved or never be verified or loved by politicians, but, but not much used to the average punter.

Gene Tunny  33:00

Yeah. So Chris, you mentioned that your indexes of the data and your behind your index has been purchased by many different customers by city governments, presumably? Do you have any examples? Or have you noticed? Well, has it been a wake up call to any particular cities the data and has that inspired action? Have they changed things on the basis of this index?

Christopher Hire  33:31

We have, we don’t always know 100%. Because sometimes we do work by consulting firms. And so we’re not always sure of who the customers are. We know we had a lot of input into the UK’s innovation strategy, because we went through a consulting firm, and it got soaked up by that consulting firm, and it got passed into their innovation strategy. So we know we had a lot of input into that. A lot of input came in, we had some input from Australia’s innovation strategy at times because various policy things that I wrote, got picked up and implemented, but we don’t always get credit for it. But specifically, where we’ve helped, we’ve got credit, we’ve we’ve had done quite a bit of good work in the Emirates, and in the United Arab Emirates, we helped with some innovation policy there and they’ve, they’ve really run with it, and particularly in things like safety and, and areas such as road toll and things like that. A number of years ago, we had workshops that help them innovate, and they came out and then met some Australians who reduce the road toll here and we helped connect them up and we gave them a process for innovating in that area. So they rode top fell, it has stabilised, but it’s not as good as it should be. I mean, you can literally see people dying on their roads, still, but it’s better than it was. So that’s something where we provided the data. We provided innovation methodologies that helped them and we developed we work with them on, not specifically on that, but on the innovation methodologies that help their the government. And yeah, so we find that that’s been a really good, was a really good example from the past. And a number of clients, a number of people who attended training I’ve done have won awards in their particular for innovation in their particular finance related or insurance related roles. So we’ve done that sort of thing as well.

Gene Tunny  35:28

Okay, but it’s not just one more question if you’ve got time, Christopher, I’m interested in this. Yeah. What makes for a thriving or prosperous cities? I’m just trying to understand your insights, what you’ve discovered from your analysis, and you mentioned decentralisation. So you mentioned entrepreneurship. So I’m guessing you’re low. Low taxes and charges, I’m guessing. Yeah, the we talked about ease of doing business.

Christopher Hire  36:02

Yeah, yeah, there’s low taxes and charges. So that’s, that’s where we get into trouble. Because what it is not a pure policies, policy prescription. So for example, if I was a full on Republican, I’d say, get rid of all taxes and charges and the economy will do better. And if I was a full on, Democrats say, No, we have to have social programmes and social programmes will create the great economy. And if we don’t have the great society won’t have the great economy. And in truth, I think there is an element of yes, Dublin, for example, has done very well in our index, but they’ve hit a ceiling in some respects. And that’s because they did reduce their tax rates. So I don’t I don’t think we’re really saying reduce a purist would say reduce tax rates to zero. And yes, that’s one way you could do it. And that might work for, say, Dubai, or an Gulf country. But they have a resource backing for that. So we’re not sort of being idealistic, we’re saying, it’s a balance of things. And one of the things so if we’re talking about Australia, for God’s sake, get off people’s backs about entrepreneurship and mid sized corporations allow midsize corporations to grow. There’s an element in Australia where we favour large corporations constantly in every area, and that creates an issue where we don’t have, we just don’t have new companies being added to the ASX, we just don’t have that growth that we should have. And we can do that. But we just got to allow the policy settings to do that. We’ve got to allow manufacturing, we’ve got to encourage manufacturing, not follow this silly notion that we shouldn’t manufacture stuff. I think we’ve I think we’ve been disavowed of that, after during the pandemic, when you couldn’t get toilet paper, and you couldn’t get a face mask, and you couldn’t get medication. If someone I know couldn’t get their heart hasn’t been able to get their heart medication for three months and has to take a generic, the generic doesn’t work. It doesn’t reduce blood pressure. So I mean, it’s really problematic that we don’t manufacture things. And so if I was talking specifically about Australia, we need to in that particular situation, we’d need to keep our tax rates reasonable and increase our reduce the bureaucracy. And the problem we have is we have too many things the government is controlling and monitoring. And the problem with that is that takes up too much time from the business owner, therefore they can’t focus on innovation, they’re focused entirely on compliance. The only companies that survive compliance are big companies, where compliance is a much smaller percentage of the operating cost of the business. So if you’re, you know, you’re turning over 6 million a year or more, then it’s still a pretty big burden. If you’re turning over a billion a year, then compliance is just something you outsource to KPMG. And you can get away with that or someone similar or VAs or something. So you can outsource it to a middle small or large accounting firm, but, but to some extent, we just we put too much burden on business in Australia. And that really is the thing that does damage. And we need to encourage people to think outside the existing power paradigm of businesses, you know, we need to think of new and interesting types of businesses and create new and interesting business. And we need to just enable those conditions. So the conditions really are that you basically give people a little bit less bureaucracy, but it’s not just you can set a tax rate of 21%, you can set a tax rate of 28%. There’s pluses and minuses. But increasing sales tax, for example, would be very bad for the economy. But on the other hand, you could do that if you reduced compliance burdens elsewhere. So there’s always trade offs and everybody who’s in this field. Probably sympathises empathises and feels pain you say to her trade offs, but but that’s what it is. There’s trade offs, but Australia should basically encourage more dynamic manufacturing related industries and not promote so much very single minded large corporations controlling everything we have. We have a bit of a problem with that we’re going to we’re going to hit a hit a wall one day if we don’t watch ourselves.

Gene Tunny  40:16

Right, I’d like to ask also about how housing policy or urban development policy is one problem in Australia, and also some other cities while other countries and their prominent cities around the world. It’s becoming so expensive to live in them. And some economists are saying, well, that’s because of zoning policies which prevent developing redeveloping existing properties. There’s all this protection of existing a world heritage or character properties. Is that an issue?

Christopher Hire  40:48

I’m not so knowledgeable in that I’m not so knowledgeable in zoning, I did attend an excellent presentation. I can’t remember his last name is Italian gentleman, you should have him on the show. Sergio. He from where he’s from, I can send you his details. He’s written a book called The End of the Australian dream or something along those lines. And I’m sorry to say, Gee, I can’t remember the exact title it is sitting on my desk, but I haven’t had an exact title or something like that. He talks about greater density housing and things like that, I think I think more I would probably lean his understanding of that. I would say there’s an optimum rate of density. And there’s an optimum population size for cities before you get problems. So when cities go over 4 million pop, they hit problems. And I think there’s rings a population that makes ideal size cities. And so Melbourne’s problem started once it got a bit above 4 million, and didn’t have the infrastructure to support the extra million. And that’s sort of course Melbourne. transport infrastructure, you drive three kilometres and it takes you 45 minutes, you get a transport three kilometres, it takes you 35 minutes, it takes you 37 minutes to walk. So you’re almost better off walking if the tram breaks down. So if you’ve got to walk, if you cycle, but you’ve got to change clothes, and you’ve got to, you know, have a shower probably, or at least end of trip facility size, it’s very becomes a very difficult problem for when you hit that extra million. I don’t envy the public servants got to solve it.

Gene Tunny  42:23

Yeah, gotcha. Okay, Christopher to wrap up, is there anything we’ve, we’ve missed it or anything important that you’d like to, to explain or to talk about, regarding your innovation Cities Index?

Christopher Hire  42:36

Yeah, I’ll probably just give a summary because there’s a lot in it to unpack. But I would say that it’s an index that basically measures the ability of cities to have conditions for innovation. So it’s sort of correlates to where you would want to live, where you might want to work and play. And if you’re using it just in a general way, you’d look for cities where your language that you prefer, if it’s not English, is dominant. So if you were Spanish speaking, you might move to Barcelona, you might look at Barcelona, if you were speaking various dialects of Chinese, you might look there’s a list of Chinese cities in there, which are favourable, and and might depend on a whole series of characteristics. But =in the end, you might look at the politics to say, well, I want a Democrat city or a left leaning city, then you end up in Chicago. But if you are New York or something like that, but New York’s a bit more complicated, but if you want a more right leaning city, you might end up in Miami, or you might end up in Dallas, Fort Worth so so it’s sort of it’s there’s a balance for everyone in there. And we’re not trying to judge too much. And force anything, we’re just saying, there’s a general tendency mathematically, for cities that do a bunch of things. Well, but not best. You don’t have to be perfect. You just do them well enough, you will actually get ahead and the cities will become better places. And that’s really what we’re saying is they’re the sort of perennial cities like Paris and London always do well, because hey, everybody moves there, no matter what happens, you read a book about 1940s Paris, and pay it how horrible it was. You read a book about 1980s, Paris 1990s. There was a period in the 90s when Paris went for route, dark decade, I think, and then bounces back you know, so people will move to New York again, people will move to London again, their perennial cities and just the same as Tokyo is the Japanese perennial city and I think Seoul is becoming a perennial city now. So and I think Sydney and Melbourne will eventually be perennial cities as well. So Brisbane is on its way.

Gene Tunny  44:38

Yeah, because they get that critical mass you get the or the accumulation of knowledge and know how in the city, you get these established businesses and yeah, and so it’s a matter of population and skills and and the right policy settings. So, yeah, okay, well, that’s great, Christopher, I’ll put a link in the show notes to innovation Cities Index. And I’ll have another look through the, well, I’ll have a look through the, the all of the different indicators that go into it.

Christopher Hire  45:18

I could send you some links that people can download the actual indicators, not the data, obviously, we sell that, but the list of indicators. And also, I’ll send you a link to a newsletter we putting out we’ll start putting out on substack. So oh, it’s much easier to put it out in a newsletter format. It’s still early stages in the newsletter, but it’s just that we’re putting that out in stages, because it’s better than trying to put it out as one big block. Once a year sort of thing. So we think it’s better to trickle it out. And we go.

Gene Tunny  45:49

What’s your substack newsletter called?

Christopher Hire  45:53

Innovation cities. innovations.com hasn’t got a dash in that line, because they won’t allow a dash in that one. So and websites got innovation-cities.com, but the substack just innovationcities.substack.com

Gene Tunny  46:06

Good one. Okay. So, Christopher Hire, thanks so much for your time. I’ve really enjoyed talking about innovation cities. It’s been terrific. Thank you.

Christopher Hire  46:15

Thank you very much, Gene. And thanks to your listeners for listening to the podcast to the end. So I’ve heard this message, they heard the end. Thanks a lot. If anybody’s got any questions, they can hit me up.

Gene Tunny  46:26

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

Thanks to Josh Crotts for mixing 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 PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

Structural budget deficits – EP164

he governments of many countries have structural budget deficits, so even as their economies recover from the COVID-recession they are still running deficits. In many countries, the fundamental structure of the budget is bad. There is too much spending relative to revenue, even in normal or good times, not just in recession. In this episode we explore how economists can calculate structural budget balances. We look specifically at what the Australian Treasury does, given that a new Australian Budget came out last week.

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

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

Links relevant to the conversation

Australian structural budget balance indicators available here:

https://budget.gov.au/2022-23-october/content/bp1/download/bp1_bs-3.pdf

Australian Treasury methodology for estimating structural budget balances:

https://treasury.gov.au/publication/economic-roundup-issue-3-2010/economic-roundup-issue-3-2010/estimating-the-structural-budget-balance-of-the-australian-government

IMF Fiscal Monitor which contains cyclically-adjusted budget balances (Tables A3 and A4):

https://www.imf.org/en/Publications/FM

Media coverage of Australian budget:

https://www.theaustralian.com.au/nation/politics/jim-chalmers-takes-forensic-approach-to-tax-concessions/news-story/25c4e1be826abb87f27c918532a69614

https://www.theaustralian.com.au/nation/bill-shorten-admits-push-to-curb-ndis-cost-growth/news-story/8a15cb3daabd55961e35df957f206bcf

IFS analysis of UK mini budget:

https://ifs.org.uk/articles/mini-budget-response

Transcript: Structural budget deficits – EP164

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

Gene Tunny  00:00

Coming up on Economics Explored. 

So I think this is a really neat methodology that the treasurer is trying to break down the different influences on the budget to see what’s really going on. And what it reveals is that there’s this structural problem with the budget. 

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 164 on structural budget balances, government budgets around the world was smashed by COVID-19. With countries recording huge deficits and big increases in debt. The governments of many countries have structural budget deficits. So even as their economies recover, they are still running deficits. In many countries, the fundamental structure of the budget is bad. There is too much spending relative to revenue, even in normal times, not just in recession. For example, the IMF estimates the United States will have a structural or cyclically adjusted government budget deficit of five to 7% of GDP over 2023 to 2027. In this episode, we explore how economists can calculate structural budget balances, we consider the different components of budgets, the structural, cyclical and temporary. We look specifically at what the Australian Treasury does, given that a new Australian budget came out last week. Joining me for the conversation is my Adept Economics colleague, Arturo Espinoza. Please check out the show notes relevant links and clarifications and for details where he can get in touch with any questions or comments. I’d love to hear from you. Righto, now for my conversation with Arturo on structural budget balances, thanks for my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Arturo, good to be with you again.

Arturo Espinoza Bocangel  01:49

Hi Gene. My pleasure to be here.

Gene Tunny  01:51

Excellent. Arturo, so I thought today we could have a good chat about this concept of a structural budget balance. So we had our federal budget, the Australian government budget was released last week. So for 2023, the financial year. And this was because we have a new government. So there was an election in May. And there was a change of government, we now have a Labour government. So a more left wing government than the previous government, which was the Liberal National Government, the coalition government, and in Australia, a Liberal government is actually a conservative government. It’s all very confusing. Right, so we had a change of government and there was some improvement in the current year budget balance because of higher commodity prices, which flow through to, to earnings to and to tax revenue, that the federal government pulls in, particularly from the big mining companies. So there was an improvement in that underlying what they call the underlying cash balance. But this federal government is still running quite significant deficits. So it’s still running a deficit of some $37 billion, this financial year, the previous government did its budget back in May, I think they were projecting that up around must have been nearly 80 billion, I can’t remember exactly. But it was an improvement on that. But it’s still one and a half percent of GDP at $37 billion. And then over what they call the forward estimates, which is out to 25-26. We’ve still got deficits in the range of 40 to $50 billion, approximately, and, you know, up to 2% of GDP is in 24-25. So we’ve still got significant deficits. And the problem that we’re seeing in Australia, and this is similar to in other countries, too, is that governments are just spending much more than they’re bringing in in revenue. I mean, I guess that’s what a deficit is, right? I mean, that’s, but but there’s a problem that, that because of politics, because no one wants to pay taxes, politicians don’t want to put up taxes, and they want to deliver the goodies, they want to fund a high level of services for the population, and that helps them get elected. And so we’ve got this, this problem, this imbalance between what they’re spending and what they’re bringing in in taxes. And this is where I think this structural budget balance concept is of great use. And I just want to talk about that. So does that make sense Arturo, what we’re going to cover today?

Arturo Espinoza Bocangel  04:45

Yeah, that makes sense. It also is a very interesting topic related to government debts and this structural budget.

Gene Tunny  04:58

Yeah, yeah. So It’s always a concept that’s fascinated me. So I used to work in the Treasury in the budget policy area. And when I was there, we didn’t produce this structural budget balance estimate, and there was a big debate about whether Australia should have one and whether it’s feasible to develop one because as we’ll discover, you have to make all sorts of assumptions to generate it. It’s it, there’s a there’s a bit of, you know, there’s there, there’s a bit of number crunching that goes into it. And you have to make all sorts of assumptions regarding, well, what’s the normal state of affairs, because one way of thinking about this structural budget balance is that it’s what the budget would be if you took away the cyclical or cyclical factors. So if you if you’re able to abstract or control for the business cycle, so whether the economy is booming, or whether it’s slumping, then it gives you the budget balance that you would get in that situation, because one of the problems with the standard budget balance as a, as a measure of how the gut of the government is performing in a fiscal sense is that it is what economists call endogenous, it’s determined, partly, it’s determined or largely as determined by the state of the economy is determined within the system, it’s endogenous. It’s not something that the government can, can totally set, exogenously or it doesn’t have full control over it. Because your level of taxes depend on the state of the economy and commodity prices in Australia, if the iron ore prices is really high, or the coal price is high, then BHP, Rio Tinto, et cetera, the big mining companies, they’re only more profits and the federal government, it gets a share that it gets about 30% of their profits. So yeah, that can have a, you know, that can mean billions of dollars to the budget bottom line. And so that’s why we see the budget balance, it’s, it moves with the economic cycle, and so your government could be running a deficit. But that could be understandable, given the state of the economy. And so the underlying budget is okay, the structural part of the budget is okay, that’s not the case with Australia, but I’m just using that as an illustration. So it may be useful. Well, I think it is very useful to adjust for those cyclical factors. And that’s what the Australian Treasury has done in what I think is one of the most useful charts in the budget, which is in their statement on the fiscal outlook chart 320, the structural budget balance. And that really tells a story, it tells a story about how within the federal budget, because of this, this gap between what the government is spending money on and what we’re paying in taxes. So if government spending is at a level of around 26% of GDP. And revenue is under 24% of GDP. Or maybe it’s 25. And 23. It’s sort of that sort of order of magnitude, or it’s those are approximate figures, I’ll put the right figures in the show notes, we’ve got this gap. And this is a permanent gap. It’s a structural gap. And this is what this chart shows of two percentage points of, or 2% of GDP. And this is baked into the budget. And this is what this structural budget balance chart shows. So what they’ve, what they’ve done is the they’ve worked out that structural factors, leading to a deficit of about 2% of GDP, cyclical factors, so the state of the economy, the state of commodity prices, the fact that the iron ore price is super high, the fact that the economy has been booming. What that’s doing is pushing up, or that’s improving the budget balance by looks like 1.8 or 1.9%. If you look at the chart, and what that is telling me and what that is, this is for the current financial year 22-23. What it’s telling me is that, well, if we didn’t have that, that structural problem in the budget where we’re just spending more than we’re, we’re bringing in, and that’s the case and that would be the case in a normal year, in an average year. If we just control the economic cycle. If we didn’t have that structural problem. And if we looked at what the strength of the economy is commodity prices, and the government should be running a budget surplus of nearly 2% of GDP, and in actual fact, it’s running a budget, a budget deficit of what is it, one and a half percent of GDP. So there’s this big, there’s this big gap, which, in a way, represents the additional demand that the government is generating in the economy that isn’t warranted, given the economic circumstances. So the government budget is highly stimulatory to the economy and that is arguably a problem for Well, I think it is a problem, it’s contributing to the inflationary situation that we have in the Australian economy at the moment. And likewise, governments around the world that are running large budget deficits, such as the US government, such as the UK Government are contributing to the inflationary situations in in those countries, because if you looked at what the budget should be, given the state of the economy, it should be in a lot better state than than it is now than then those budgets are now and that’s what this cyclically adjusted budget balance or structural budget balances is approximating. Okay, one of the other fascinating things in that chart, I should note, the Treasurer is prepared on the structural budget balance for Australia, is that in 22-23, there’s still a sizable impact over 1% of GDP coming from temporary fiscal measures. So these are things that are related to COVID 19, to the pandemic response. So even though, I mean, look, I know that COVID COVID is still around, and apparently we’ve got another wave coming. I mean, the worst part of the pandemic is over, but still there is a, we do have these temporary fiscal measures occurring. And so what that means is, yeah, so that’s, that’s something that’s contributing to the, the deficit here in Australia. So what that chart is telling us is that, look, the structural budget, the structural problem in the budget is around two percentage points, or 2% of GDP. The cyclical, the benefit to the budget from the improvement in the economic cycle and higher commodity prices is, is just under 2% of GDP. So what that would suggest is that, that would mean we’d have a budget deficit of just a fraction of GDP, like maybe point one or point 2% of GDP. But then we’ve got these. Actually, it might be point three or point four, I’ll have to check the numbers that don’t put the exact numbers in the charts. I’m just trying to eyeball and I’m not wearing my glasses. But then we’ve got this temporary fiscal measures, which is, which is worsening the budget by over 1% of GDP. And how these all sort of add up is that we end up with a budget deficit in 22-23. Of what was it, one and a half percent. So I think this is a really neat methodology that the treasurer is trying to break down the different influences on the budget to see what’s really going on. And what it reveals is that there’s this structural problem with the budget. And, you know, this is something that all treasuries and finance ministers should do, in my opinion. There are some IMF estimates for other countries we’ll talk about later, the Australian Treasury seems to be doing a really good job at its estimates, and it’s discovered this structural problem, this big hole in the budget. Okay, so does that all make sense Arturo?

Arturo Espinoza Bocangel  14:01

Yeah, that makes sense. That was very clear. This is incredible how Australia is spending around this, because you, you mentioned around two or 3% is spending more than what they receive in terms of revenue. But let’s explore what are the main components of that structure, structural deficit?

Gene Tunny  14:33

Yes, well, a big component, or one of the major contributors to it in recent years, has been the National Disability Insurance Scheme. So it’s this expansion of the welfare state. Now I’m not making any judgement about whether that’s a good idea or not, because it’s very popular, and it’s well intentioned and there are clearly a lot of people out there in need. One of the challenges with it, though, is that it is growing at a very high rate. So it’s not the total structural deficit, because it’s at the moment, I think it’s around $30 billion. So it’s not just the NDIS. It’s other things. And then we have, we’ve had various tax cuts in the past, there’s a stage three tax cut that’s programmed in. So there’s going to be a tax cut in 2024-25, which aims to get rid of one of the tax brackets and to flatten the progressivity of the tax system. And that’s going to cost the budget revenue. So it’s a combination of spending new spending programmes and spending programmes that are costing more money than were expected. Also, we’ve got rising interest, a rising interest bill at the moment because of higher interest rates. And then people on the left of politics would argue, Well, look, the the problem is, we’re just not raising enough in taxation, if you’re going to spend this and that, look, that’s one legitimate perspective. If the government is going to spend this much on a permanent basis, if we are committed to an NDIS, National Disability Insurance Scheme, then we will have to have higher taxes to make the budget sustainable in the long term. I mean, personally, I’d prefer that we’d have lower taxes, we would, we would, we would get spending under control. But look, if we can’t get spending under control, then we may have to, we may have to put up with that. So because ultimately, we do need a sustainable budget, we’ve got to keep that debt to GDP ratio under control. At the moment, the projections are that for Australia, it’s not looking catastrophic yet, luckily, I mean, it’s on the current budget projections, it’s going to get up to around 48% of GDP. So it’s going to plateau around that, by the What is it 2030 to 2033. There’s another chart where they’re projecting that in how that’s going to perform. So this is the debt to GDP, which is one of the critical ratios that commentators, economists, ratings agencies, like S&P and Fitch and Moody’s, what they look at. And I mean, Australia’s lucky we started off with so what we started off with no debt to begin with, in 2008, we had, we had negative net debt, and we only had $50 billion of bonds on issue. So we’re in a good position to start with, so we’re at, we’re only gonna get up to about 50% of GDP at the moment compared with you look at the states, which is the US it’s over. We had a look the other day, didn’t we? I mean, it’s up 120 to 130% of GDP or something. Yeah. Okay. It’s very high if you look at projections for actual data and projections for the US. So we’re, we’re nowhere near that what’s happening is that the outlook is worsening. So if you look at that Treasury chart and the budget, compared with where we were back in May, or back in April, when the government released its last budget, that’s right before the election, and then the Treasury put out the pre election, fiscal, economic and fiscal outlook, the instead of the gross debt to GDP ratio, peaking around 24-25 and then falling as the economy grows, and the debt doesn’t, doesn’t grow as fast, which was what they were previously forecasting back in April. And they had the gross debt to GDP ratio going to 40%. Instead, it’s going to continue to grow over this decade, and then start to flatten out around 2032 to 33 at around 48%. And I mean, who knows that could get worse. I mean, this out. So much depends on what happens with interest rates and a big part of this change, why things are worse now than they were back in April is one, it’s because this NDIS is growing, the cost of that is growing faster than expected. And also because of the higher interest burden. I think that’s really shocked people and this is something I’ve been calling out for a while I’ve been identifying for a while that this as interest rates rise, that’s going to have a big impact on the budget, because we’ve got so much debt already not as much as other countries but still more than we’ve had in the past. So well in the last few decades, okay, so does that answer your question Arturo? You’re asking about where’s it come from? And yeah, where’s that structural deficit come from? And look, it’s a, it’s a variety of things. It’s just our willingness to bear the taxes. It’s either you can either look at it as our unwillingness to pay the taxes that we need to to fund the level of services. That’s one perspective. That’s the perspective of people like The Australia Institute, they would argue that all these things we’re spending money on. So from a left wing perspective, I’m not making any judgments at the moment about, I mean, I’ve got my own personal judgement, but I’ll just present both sides of the story, they would argue we’re not, we’re not raising revenue. And then the people on the other side, they would like the IPA or whoever the right, they would argue, well, we’re actually spending too much relative to what we’re paying in taxes, the level of taxation is fine or should be cut even further, let’s cut expenditure. And the government itself is very conscious it, it doesn’t want to raise taxes, right, because raising taxes is politically unpopular. No one wants to buy any more tax. So it looks like the government itself recognises that it will have to cut spending. I mean, maybe it’ll try and tweaks and tax policy settings or, or cuts in tax concessions. Jim Chalmers, the Treasurer here who he’s talking about taking a forensic approach to tax concessions. There was a story in the Australian today, so it looks like they’re gonna have a look at some of those tax concessions, so who knows they could look at tax concessions for superannuation, and they could look at our concessional taxation of capital gains, things like that. So we’ll have to wait and see what happens there. But look in the IRS is the one that they really need to look at because it’s just growing at a very high rate. So let me try to illustrate that with some figures. So last week’s federal budget so I’m quoting from a report in the Australian day today revealed the NDIS which will cost the federal and state governments $35.5 billion this financial year is on track to hit 52 billion by 2025 26, dwarfing the costs of both Medicare and aged care. So long term Treasury forecasts suggests the federal government’s contribution to the scheme will grow by almost 14% a year for the next decade, with total scheme costs approaching 100 billion by 2030 to 33. It became operational in 2013. It currently has 555,000 participants. Its annual financial sustainability reports suggest numbers will reach almost 860,000 by 2030. More young people with diagnoses of autism and psychosocial disorders are entering the scheme. Almost a third of current participants have an autism diagnosis. And four and 10 are age 14 and under. So this is an illustration of one of the challenges of public services. I think because there is a lot of need out there are a lot of people who are doing it tough or there’s a lot of need in the community. And as soon as the government gets involved, there are a lot of pressures on the government to expand the level of service to increase the level of service. This is a great challenge for the government. I remember when I was in workplace health and safety here in Queensland, it’s nearly 20 years ago now. I remember the policy discussions around the need to look after people who are catastrophically injured. This NDIS has come out of a need to at least look after people who fell through the cracks of the previous system. What happened years ago was if you were catastrophically injured say you had a diving accident. And it was recreational diving. You weren’t covered by any insurance. Okay, there’s, it’s it wasn’t a motor vehicle accident. It wasn’t a workplace accident. And there would be very high costs of care if you were made quadriplegic, for example, but there’s no insurance to cover you. And so there was this concern that there are these people who are missing out. And so there’s clearly some sort of there was a need definitely to do something to help those people out. And this whole NDIS from what I can tell grew out of that conversation that was occurring around the early 2000s because I remember being part of the conversation at the Queensland Government level and some of the policy development there and then it came out of this 2008, the 2020 summit that Kevin Rudd organised his ideas fest that they had in the talk fest that they had at Parliament House and, and they invited 1000 of the best and brightest from around Australia. And this was one of the ideas that was advanced at the summit. And, this was one of the ones that progressed and then the Gilad government introduced that I think in 2013. And look, it’s a really valid thing. There is certainly cases, people that needed assistance. The problem is where do you draw the line, and this is a problem that governments often have. And here, the line has become, the circle has expanded even more. And I mean, people or families with autism, and with developmental delay, certainly need assistance. And I’m on the board of a non-for-profit that advocates for families where a child has a developmental delay, so I fully understand the concerns. And the need. The issue is that there’s a big cost to the budget from having this expansive definition. And the government is currently I mean, we’ll have to wait and see what it what it does about it all. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  26:23

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Gene Tunny  26:52

Now back to the show. So any questions or any thoughts on that Arturo?

Arturo Espinoza Bocangel  27:01

No, at the moment..

Gene Tunny  27:02

Good. So yeah, that’s essentially where we’ve got this structural budget balance problem coming from Australia. And I thought it might be good just to go over quickly, what the different sources or the different ways that they adjust for the state of the economy. And what it comes down to is coming up with estimates of how the economy would have performed, what it would do in the absence of a business cycle. So you have to work out what a trend level of GDP is. So the if you think about macro economics, one way of thinking about how the economy evolves over time is a cycle and trend. There’s the economy. Over time, we know that the economy expands. So the economy today is much larger than it was 10 years ago, it’s much larger than it was 20 years ago, 30 years ago. So over time it grows, there’s trend growth, it’s on an upward trajectory. But it will cycle around that trend. So you can have periods where you’re well above that trend when the economy’s booming. And then you can have periods when you’re, you’re well below you’re in a recession, for example. And so what these structural budget balance estimates, what they do, is they will they based on an estimate of what that trend level of GDP would be. And so what they will do, what the Treasury will do, if they will look at, well, what’s the underlying population growing at? What’s productivity, on average growing at? And are there any trends in labour force participation that we need to take into account? And this is this supply side model, underpinning these trend GDP estimates? So these are what you would expect in the absence of a business cycle. And so that’s one of the core parts of it, they’re trying to control the business cycle. And then they also have to control commodity prices. So they’ll look at well, how much higher than we normally are commodity prices, the iron ore price or coal price, how much higher are they than we normally expect them to be? And let’s discount that, let’s, let’s, let’s assume that they’re not so high. And so the Treasury will have these parameters. They’ll have these sensitivities of different types of these revenue, items of income tax and company income tax, two different commodity prices they’ll have, and they’ll have an estimate of how sensitive the unemployment benefits that are paid are to the state of the economy to where GDP is relative to its trend. And I think that’s the one item that the Treasury adjusts. So it tweaks it adjust revenue on the revenue side and adjusts income tax and company tax. And I think capital gains tax, if I remember correctly on the expenditure side, it just adjusts unemployment benefits. We know that unemployment benefit payments are going to be higher if the economy’s in recession, lower if it’s, if it’s booming. And so there’s an adjustment that’s made there. And there’s a whole bunch of assumptions that go into these estimates. Does that all make sense Arturo?

Arturo Espinoza Bocangel  30:39

Yes, it’s all clear.

Gene Tunny  30:42

Okay, so what I’ll do is I’ll put a link in the show notes to a paper estimating the structural budget balance of the Australian government that was by three of my old colleagues. So Tony McDonald, Yong Hong Yan, who I don’t know, Blake Ford and David Stephan, I worked with Tony, Blake and David. So all good people. So that’s a great paper. I’ll link to that in the show notes. And I’ve noticed that the IMF also produces some estimates of these structural budget balances, although they call them, they use the other, the other name for them cyclically adjusted balance, and you can find these at the back of what’s called the IMF fiscal monitor. And I’m looking at the one from October 2022. So check that out. There’s a whole range of interesting estimates there. So if for example, you look at table A3 for advanced economies, general governments cyclically adjusted balance 2013, to 27. So it’s got historical data, it’s got forecasts in it. For Australia, they’ve got their own estimates of what the structural budget deficit is, they’ve got estimates that go from around, or three and a half percent in 2022. So that’s a calendar year 3.1%, deficit and 2324 to 2.6%. And it gets down to about .7%, deficit in 2027. So not as bad as the Australian Treasury’s estimates, which are, which have the structural deficit maintaining around 2%. There are reasons why the IMF figures are different from the Australian Government’s because the IMF, the IMF doesn’t take into account as many factors. It’s on a calendar year basis, the Treasury and I think in one of its papers, it goes through why it’s estimates are different from say, the IMF or the OECD, I think for Australia, the Treasury are probably doing a better job at it just because the IMF and and the other agency, international agencies, they have to do it for all the countries and they’re not experts in any particular country. I think the Australian Treasury’s estimates are probably better for getting a sense of the structural problem in the budget, the Treasury has got access to, to much better info, much better data on Australia, then the IMF, it’s got much better insights, I should say, into what’s going on. And its model for the structural budget balance for Australia is much more precise. It goes into more detail than the IMF. So all I’m saying is I think the, I think the Australian Treasury numbers are better than what the IMF is, is estimating there. And I tend to agree that there is that structural budget balance of, of 2% of GDP, which is a challenge for this current government, and will probably be a challenge for future governments. And it’s going to require either large cuts in spending. So getting the NDIS under control, which is going to be hugely unpopular, because it’s a very popular programme and well intentioned. And I know people are benefiting from it. And you know, it’s, it’s, it’s giving people a sense of dignity and improving people’s quality of life. So look, who knows, I mean, this government, because it’s a government from the sort of left wing I mean, it’s not as left wing as some other governments you’d see around the world. It’s not left if you think about what left, left wing governments are in South America, for example. But it’s not. It’s going to find it difficult because it is more left wing than right wing. So the Liberal National Government is going to find it difficult to cut something like NDIS or cut welfare benefits, and hence maybe it does have to look at some tax measures. Maybe it does have to cut it tax concessions heavily. Maybe it does have to adjust that stage three tax cut that’s programmed in, maybe not give us much of much, maybe not have such a big tax cut. We’ll have to wait and see. Okay. Anything else Arturo, that we should cover before we wrap up?

Arturo Espinoza Bocangel  35:21

Yes, I think I wanted to highlight that it should be a good discussion was a good topic to see which of those programmes social programmes are working? Good in terms of indicators. So in terms of the results on population, you’re in to see if there is any problem there. But because we know that not all the things are all the social programmes are working well. Perhaps that will be a good topic to discuss, to discuss in other episodes.

Gene Tunny  36:04

Yeah, look, I think you’re right there. And what this is highlighting I think, Arturo is yes, the need to, to really delve into whether these programmes are working or not, because we’ve got these programmes that are well intentioned, that governments they hope to do some good to achieve outcomes, but how do we know that they are actually achieving outcomes? Are they doing it in the most cost effective way? And that’s why something like this evaluate a general concept could be so valuable. This is an idea that the first person I remember proposing it was Nicolas Gruen. And so Nick’s been on the show before, well known Australian economist, CEO of lateral economics, I do some work with Nick from time to time. And, you know, he’s been involved in public policy for decades, he was involved with the button car plan back in the 80s. He was involved with your work for the treasurer in the 90s, very lateral thinker, and he came up with this idea of the evaluator general, which would have a, it would have a brief of going across the Australian Government and figuring out which programmes work, which don’t, are there other ways we do things, other innovative ways we can do things to, to solve problems. And it looks like this government is going to go ahead with some sort of evaluator general. So Jim Chalmers has pledged to put in place an effective and rigorous evaluator general and new offers based within treasury and flagged by Labour before the 2019 election, which could work with other departments to access to assess the effectiveness of government programmes. Okay, great stuff. So this is in an article by Joe Kelly in the Australian, I’ll put a link in the show notes that I was quoting from there. I think one of the issues Nick has with that proposal, though, is that it’s located within the Treasury, I think he would prefer that it has its own life, it’s outside of the Treasury. It’s a statutory authority, it has some degree of independence granted by the parliament. So yeah, I don’t think Nick’s actually I can’t speak for him. I should have him on the show to talk about that. But I’m guessing he’s probably thinks that that’s not exactly what we need. But look, I should let him. Let him speak about that in the future. So that’s the evaluator general. So I think that’s the sort of thing you’re driving at is it Arturo? That we, because we need to evaluate these programmes. The evaluator General’s one way of doing that. Exactly. So one thing I thought I should cover before we wrap up, is just what happened with the UK earlier. When was it last month? Or remember, they had their mini budget, maybe it was in September now? They had the mini budget, Liz Truss the new PM, no longer PM, shortest reigning PM in British history. And the chancellor Kwasi kwarteng, I think it was, and they released that mini budget with a big tax cut, and the markets just absolutely went nuts. The pound crashed. We had yields on UK bonds spike, because everyone there and this is the recognition that there was a structural problem already with the UK budget, the UK couldn’t afford to have a tax cut, who was going to spend, go on spending what it was spending, and it’s just quite extraordinary the way that the Institute of Fiscal Studies describe that and I’ll put a link to this in the show notes, I think it’s a great note and some really good take on it. The way they describe that mini budget, which has been reversed because the current, there’s a recognition that it was unsustainable, so we’ve got a new PM now and a new chancellor, and they’re, and they’re, they’ve reversed that. I think Liz truss, had even reversed it. And she had sacked her Chancellor, but okay, so it’s gone. But for a short time it was in place and the markets absolutely freaked out. And yeah, this is the IFS take, which I think is great, which was made at the time the chancellor announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up. That is just brutal. Goes to show just how important it is to actually care about this stuff. And I mean, I’ve been saying this for years, I used to work in the Treasury in the budget area, and I know how important it is to get this stuff right and not to go and do silly things. And so I understand where IFS is coming from and understand why the markets really just hated that mini budget. And there’s a great, there’s a great chart and that IFS analysis, which showed that if you look at what was happening to the, to the national debt or the the UK public debt, if you compare that mini budget, what would have happened with the mini budget was what was expected before so instead of the debt as a percent of national income, staying in the range from 80 to 85%, of GDP going down gradually, over the next five years, from around 85 to 80. Instead, it was going to end up going from a bit under 85% to nearly 95%. So it’s just a really bad policy. So understandably, that mini budget was absolutely. Yeah, I mean, the markets just reacted very badly and essentially brought down the Prime Minister and the Chancellor, just because, yeah, it was just very irresponsible fiscal policy. And that’s what we’ve always got to guard against now. We’re not there yet in Australia because we started off in such a good position, debt to GDP is still relatively low compared with other countries. We’ve got a bit of room, still we’ve got time, we’ve got time to turn it around. But we’ve got to start doing something because we just can’t be in a situation where we keep accumulating debt. And we know, we know there’ll be another crisis of some kind, there’ll be a downturn, hopefully, we don’t have another pandemic, but there’s going to be another crisis, there’ll be a period when we end up adding lots of debt in a short period of time or a few years. And that will mean a higher interest burden, these projections of our debt to GDP, starting to flatten out around 2032 to 33 at 48% of GDP. Okay, that could give us some comfort, but we just don’t know what’s coming down the track. My worry is that interest rates could go higher. There could be another downturn or a crisis and then we add more debt on and then that gross debt to GDP, instead of flattening out it goes on an upward trajectory. That’s a risk I worry about and why it’s so important to get the budget under control. Okay. Final thoughts, Arturo?

Arturo Espinoza Bocangel  43:39

No, thank you for all your explanation Gene.

Gene Tunny  43:43

Very good. Well, it’s been great chatting with you, Arturo. And I’ll look forward to chatting again. And if you’re listening in the audience, if you want to look at any of these, these articles I’ve mentioned, I’ll put links in the show notes. Please get in touch with any questions or comments. Let me know whether you agree or disagree. Let me know if they’re things you want to know more about, and I’ll do my best to cover them in a future episode. So thanks for listening. And Arturo, thanks for joining me.

Arturo Espinoza Bocangel  44:14

Thank you for having me, Gene. Bye.

Gene Tunny  44:17

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

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

Slouching Towards Utopia w/ Brad DeLong – EP163

Slouching Towards Utopia is the new book from Brad DeLong, Professor of Economics at University of California, Berkeley. Professor DeLong joins show host Gene Tunny to discuss the long twentieth century from 1870 to 2010. The conversation considers the three factors which came together to massively raise living standards post-1870, and how nonetheless we’ve struggled to achieve the Utopia that once appeared possible. The “neoliberal turn” beginning in the 1970s and 1980s is considered, and DeLong explains why he writes that “Hayek and his followers were not only Dr. Jekyll–side geniuses but also Mr. Hyde–side idiots.”

You can buy Slouching Towards Utopia via this link and help support the show:

https://amzn.to/3TK4evm

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

Highlights

  • The big story after 1870: technological progress becomes rapid, the technological competence of the human race globally doubles every generation. [6:50]
  • The importance of industrial research labs in the big story since 1870 [16:35]
  • The role of the modern corporation [18:23]
  • Globalization in the late nineteenth century and pre WWI [23:25]
  • How bad governance can make a country very poor very quickly [29:09]
  • The neoliberal turn [35:56]
  • Prof. DeLong thinks the big lesson of history is that trying to maintain social and economic systems past their sell-by date doesn’t work [58:28]

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: Brad DeLong

Brad DeLong is a professor of economics at U.C. Berkeley, a research associate of the National Bureau of Economic Research, a weblogger at the Washington Center for Equitable Growth, and a fellow of the Institute for New Economic Thinking. He received his B.A. and Ph.D. from Harvard University in 1982 and 1987. He joined UC Berkeley as an associate professor in 1993 and became a full professor in 1997.

Professor DeLong also served in the U.S. government as Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995. He worked on the Clinton Administration’s 1993 budget, on the Uruguay Round of the General Agreement on Tariffs and Trade, on the North American Free Trade Agreement, on macroeconomic policy, and on the unsuccessful health care reform effort.

Before joining the Treasury Department, Professor DeLong was Danziger Associate Professor in the Department of Economics at Harvard University. He has also been a John M. Olin Fellow at the National Bureau of Economic Research, an Assistant Professor of Economics at Boston University, and a Lecturer in the Department of Economics at M.I.T.

Links relevant to the conversation

Brad DeLong’s substack:

https://braddelong.substack.com/

DeLong on Hobsbawm’s short 20th century (1914 to 1989) compared with his long 20th century:

https://www.bradford-delong.com/2016/12/the-short-vs-the-long-twentieth-century.html

Re. Yegor Gaidar’s analysis of the collapse of the Soviet Union:

https://sites.dartmouth.edu/asamwick/2007/06/08/the-soviet-collapse-grain-and-oil/

Lant Pritchett’s book Let Their People Come: Breaking the Gridlock on Global Labor Mobility:

https://www.cgdev.org/sites/default/files/9781933286105-Pritchett-let-their-people-come.pdf

Transcript: Slouching Towards Utopia w/ Brad DeLong – EP163

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

Gene Tunny  00:00

Coming up on Economics Explored.

Brad DeLong  00:02

2008 you seemed to see the engine of technological progress itself drop into a lower gear slow down by half or more. Starting in 2012-2013, we see the rise of anti democratic movements all over the world.

Gene Tunny  00:23

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 163, on Slouching Towards Utopia, the new book from the renowned US economist, Brad DeLong. He joins me this episode. Brad DeLong, is professor of economics at the University of California Berkeley. From 1993 to 95. He was deputy assistant secretary of the US Treasury for economic policy, and slashing towards utopia. Professor DeLonge explores why, despite the incredible increase in our productivity since 1870, we have failed to achieve a utopia. DeLong argues that what he calls the long 20th century began in 1870 mended by 2010, after which a productivity slowdown and stagnant wages have contributed to political discontent around the world. Please check out the show notes, relevant links and details of how you can get in touch with any comments or suggestions. I’d love to hear from you. If you’d like to buy Professor Long’s book, very grateful if you could do so via the Amazon page link in the show notes. By doing so you’ll help support the show. Right oh, now it’s my conversation with Professor Brad DeLong on Slouching Towards Utopia. Thanks to Nicholas Gruen for connecting us and to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Professor Brad DeLong thanks for appearing on the programme.

Brad DeLong  02:02

It’s wonderful for me to be here. Right. Might help me sell some books. Excellent. Something I’m very, very interested in right now.

Gene Tunny  02:09

Excellent. Yes, yes. I hope to help you do that. And hopefully if people in the audience if they enjoy the conversation, and I’m sure they will, I’ll put a link in the show notes for sure for to your book. So I’ve been I’ve been reading your book and enjoying it.

Brad DeLong  02:20

Thank you very much. 

Gene Tunny  02:23

Yes, I’m the Kindle. Nicholas Gruen put me on to it. So Nick’s a big fan, too.

Brad DeLong  02:33

Yes. Yeah. So I’m very grateful to him for spreading the word.

Gene Tunny  02:37

Yes, yes. And it’s Slouching Towards Utopia in economic history of the 20th century. Brad, I’d like to kick off by asking, What motivated you to write the book? And what message are you trying to convey with the title, please?

Brad DeLong  02:53

Well, I suppose I started. I guess it really was reading Eric Hobsbawm’s, Age of Extremes, you know, back in 1994. And thinking that the story he was telling wasn’t the big story, that what he was telling was only a relatively small part of the big story. And that someone should write a book that told the other big story of history after 1870. And so I grossed about that for a couple of years. And in 1998, I thought, since no one else was writing it, maybe I should write the big story. And so I wrote a chapter to kind of put a stake in the ground and started showing it around, but you didn’t do anything else. And then maybe a decade, a decade and a half later, an editor from basic Tim Sullivan came around and said, You know, someone should write this, that someone should be you, you’re clearly not, why don’t we put you under contract. So I can call you once a year and yell at you about where the manuscript is. Um, and, you know, he did that. And to get into that once a year, that was a call and so forth. And then eventually, I just kind of buckled down and wrote the thing. Then, after writing the first draft, I had to take the chainsaw to it, because it was twice as big as the book that was published. And then after that, we had to polish it, and was out there in the world, you know, spiffy and polished and shrunken down considerably from the project I originally attempted. But it’s out there in the world. And I’m, I actually like it a lot, which I didn’t expect to at this point. At this point. I expected to be sick of it and thinking there was a lot wrong with it, then I find but I’m not thinking that way.

Gene Tunny  04:45

Okay. Yes. Well, that’s good. I mean, I think it’s, I think it’s terrific. And, I mean, it’s still a big book, it’s still 600 pages or so. So it’s still very, very meaty. I was impressed by all of the examples. In history, I didn’t know things that I found fascinating. So thank you. Yes. One thing I didn’t appreciate until I read your book. And maybe I’ve just missed this in other places, but the role of the Saudis in ending the Soviet Union, I didn’t appreciate how much when they increased oil output in the 80s. I think that’s the story, isn’t it? That meant the Russians or the Soviets weren’t earning as much income from their own production and that effect. Yeah. Yeah. I thought that was.

Brad DeLong  05:32

This was this was what the late Yegor Gaidar always insisted on, you know, that as long as the Soviet Union could trade oil for grain, the fact that the system was so sclerotic, they were unable to figure out a way to grow more grain at all was, you know, a problem, but not a crisis. But then the price of oil falls by two thirds and 1986, you know, as the Saudis react to with current, what’s currently going on in the Iran, Iraq War, and other things, and all of a sudden, the Soviet Union has to start borrowing if it wants to import its grain, and it starts borrowing from banks. And then the banks begin to say no. And then it goes and starts borrowing, starts asking for loan guarantees from Western governments. And then the demands come for well, we’ll guarantee these loans, but we want you to kind of be cooperative and open with respect to politics and democracy and things. And then the whole system simply collapses. It’s really quite an interesting story. Yegor Gaidar, Gaidar has a short speech he gave, I think, at the American Enterprise Institute called something like grain and oil. It’s very much worth reading,

Gene Tunny  06:50

RIght. Okay. Well, that’s good. I’ll see if I can track it down and put a link in the show notes. I mean, that’s one of many examples of, of good stories in the book, I look, I’d like to go back to what you mentioned about Eric Hobsbawm, who’s a Marxist historian, if I remember correctly, and you’re saying that you think he got the he missed the big story of what happened after 1870? Could you please explain what was he saying? And how is what you’re saying? What what do you think the big story is, please,

Brad DeLong  07:19

Eric’s big story is that you know once upon a time, there was Vladimir Lenin, there was the Bolshevik Revolution. And it created world communism, which was the world’s only hope for utopia. And in the end, world communism was betrayed by exterior enemies outside it, and by interior enemies inside of it, and it expired. But before it expired, I managed to defeat the worst tyranny in human history, the Nazis, because without the Soviet Union, the Nazis would probably still be ruling Europe. And when it expired, that brought the end of human hopes for a really good society. And, you know, from my perspective, this is a story. It’s kind of the story of the Soviet Union as tragic hero betrayed internally and externally is, you know, it’s a story that is, in some ways, simply total bonkers. Unless you’re a strong believer in world communism, as it was formed in the middle of the 20th century, you know, and Eric was right, Eric was, you know, a young Jewish teenager in Berlin in the early 1930s. You’re watching The Nazis marched past calling for the immediate death of himself and all of his family in a time when everyone else was pussyfooting with the Nazis. And you know, only the Soviet Union and the Soviet Communist Party, Soviet led German Communist Party was willing to say, these are horrible people, we need to fight them. And so he made that political commitment as a teenager and you know, was never really able to outgrow it. I’m told that even at the end of his life, if you got a couple of drinks into him, you could get him to say that, you know, Stalin had been too harshly judged by history. And a very smart guy, you know, very learned historian, desperately trying to get it right. Yeah. And the fact that someone like me thinks he could still get it so wrong is very much a cautionary tale about how I should not be proud. And be aware that other people are likely to judge me in the future the way I judge Eric.

Gene Tunny  09:30

Right. And so what do you think is the big story after 1870? So you’ve got to, you’ve got a more optimistic view of history, obviously.

Brad DeLong  09:39

Yeah. Yeah. Well, maybe that 1870 really is the hinge of history. Right. But, you know, before 1870, your technological progress is slow. And you know about infant mortality is extremely high. You’re going to see half your babies die before you’re five. And do something like 1/3 of women are going to wind up without surviving sons, should they be lucky enough to reach 50? themselves? And do you know when the pre 1870 high patriarchy world you reach 50 without a surviving son, you have no social power whatsoever, you know, you have absolutely no account, you have no one to advocate for you. And so before 1870, pretty much whenever there was an improvement in human technology, the response was, oh, great, now I can try to have more kids and raise the chances I’ll have surviving sons above two thirds. And so you’ll from minus 6000, BC, on up to 1870. There is a lot of improvement in technology. Yes, and the upper class lives better, yes. But for most people, you know, you simply have 100, and you simply have a farm size only 102 50th as large potentially at 1870, as your ancestors had back in minus 6000. And you know, you’re still living at something like $3 a day, you’re spending 60% of your income on just getting your 2000 calories plus essential nutrients. And there are a lot of days when you can’t think about much other than you’re very hungry. And that’s the state of the world before 1870. And that means that unless you’re in an extremely lucky place, or like Australia, or an extremely lucky class, that life is going to be kind of brutal, short, and without very many options, which means that in most times in most places, governance is going to be how does an elite figure out how to grab enough for itself and maintain its rule over society. And after 1870, everything changes, technological progress becomes rapid. The technological competence of the human race globally doubles every generation, you quickly get a world in which people are kind of rich enough that infant mortality falls substantially. And with that falling infant mortality, and with the erosion of patriarchy, all of a sudden, you don’t have to concentrate a lot of effort on having children, to be confident that if you reach the age of 50, you’ll still be able to run your own life. And so you’ll we get the demographic transition, now headed toward a stable world population of 9 billion. So for the first time after 1870, technology wins the race with human fertility. And we begin to look forward to a time when humanity will be able to bake a sufficiently large economic pie so that everyone can have enough. And you know, people back in 1870, and before, you know, they thought most of the problems of society came because incomes were low, and technology was underdeveloped. And you had this elite running a kind of domination and exploitation game on everyone. And once you can bake a sufficiently large economic pie for everyone to have enough, those things should fall away. And the problems of properly slicing and tasting the economic pie, right? Have equitably distributing it and then utilising it so that people can feel safe and secure and live lives in which they’re healthy and happy. Yep, those should be relatively straightforward to solve. And so we today at least we today in the rich countries should be living in a utopia, which we are manifestly not. And so the story of history after 1870 is how we’re well on the way to solving the problem of baking a sufficiently large economic pie. While the problems of slicing and tasting of distributing and utilising it continues to flummoxed us.

Gene Tunny  13:57

So with 1870, that’s several decades after what is traditionally thought of as the start of the Industrial Revolution, is it and in there are a few things that come together. Around that time, would you be able to explain that please?

Brad DeLong  14:13

Well, I’d say that the industrial revolution itself, you know, that steam power and metallurgy and early engineering, you know, they were really really weren’t quite enough that they get the average rate at which technology improves along the world up to about half a percent per year. And of that maybe, maybe a third comes from the fact that you’re concentrating on that you can cut that you’re suddenly concentrating all the manufacturing of the world in the districts, most of them in England where manufacturing is most efficient. And you know, 1/3 of it comes from the underlying engine of science and discovery and engineering. And 1/3 of it comes because we were lucky enough that the last round of glaciers, that they scraped all the rock off of the coal around a huge chunk of Northwest Europe, which left you with a lot of coal at sea level that you could just pick up off the ground and ship it out. But come 1870 you’ve concentrated all the manufacturing and you know, you’re pretty much mining out the really easy coal and you have to go deeper, which is more expensive. But the possibility was that, you know, the industrial revolution would be not completely but largely over, except that in 1870, we got the development of the industrial research labs to rationalise and routinized the discovery and development of new technologies. And then the modern corporation, the modern corporate form to rationalise scrutinise, the development and deployment of technologies plus full globalisation, which provides us enormous incentives to deploy and diffuse technologies. And so all of a sudden, instead of half a percent per year, you had a 2% per year rate of global technological change. And while it was possible for human humanity to be fertile enough to kind of offset the half a percent per year technology growth before 1870 with greater fertility and a population explosion, after 1870, even the population explosion could not keep us poor. Yeah. And then we go through the demographic transition and the population explosion reaches its end.

Gene Tunny  16:35

Yeah. So this is the industrial research lab. So you’re talking about Thomas Edison in Menlo Park. 

Brad DeLong  16:41

Yeah, Menlo Park and others. You know, I like Nikola Tesla. Because, you know, Nikola Tesla was, I suppose today, we’d call him neurologically divergent. He’s definitely not neurotypical. Which means that unless you can slot him in exactly the right place, you know, where he has lots of people surrounding him who will tolerate him being in A-hole, and pickup which of the crazy ideas he has that might actually be useful unless you have George Westinghouse to build an industrial research lab, to surround him with and then the Westinghouse corporation to deploy his technologies. While Edison is General Electric, and others are frantically trying to keep up because, you know, Tesla knew how to make electrons get up and dance in the way that nobody else did. Without that Nikola Tesla would have been no use to humanity at all, as it was he personally pushed the entire electrical sector forward in time by a decade. And that’s a wonderful set of things. That’s a wonderful set of meta inventions. You know, that turns the process of technological development from being a difficult one in which you have an idea, but then you need to be a human resource department and a executive, a marketer and impresario, an advertiser you know, a well as an engineer, in order to get anything done to one in which engineers can engineer and find people who are good at the other things, to kind of surround them and do all the things you need to do to actually deploy a technology and make it useful. And that really only falls into place around 1870.

Gene Tunny  18:23

Right, okay, yep. And what about this modern corporation or the modern corporate form? So corporations have existed in some form since well, the first few centuries? I mean, the East India Company, the Dutch East Indies Indies Company, yes, yeah.

Brad DeLong  18:40

No, no, but still, they were relatively, they were relatively small things and they were tight have very special the fact that anyone could kind of organise a form in which us have a special royal charter as well. And the idea that anyone could set up a framework which would be a a large, internal, centrally planned division of labour, which could expand and copy itself, but also which had all of these interfaces with the market economy so that it was focused on producing the things that people wanted or at least that people with money wanted. This is something that allows once you have a good idea, and once you’ve built it in one factory, you know, it’s then very natural for the corporation to say, Okay, let’s build it over in the next town. And let’s expand the factory, let’s licence it, let’s move it to another country. You know, all of that only happens to all of what you know, management. The Business School professor Herbert Simon used to call these red islands of central planning, you know, in mesh to connected with the green lines of market exchange. Those are very characteristic of the modern economy. And we really need to have those islands in there and working very well, you know, in order to be even nearly as productive as we are.

Gene Tunny  20:09

Right, and what would be the exemplars of that modern corporate form Brad, are you thinking of General Electric or DuPont of those sort of companies

Brad DeLong  20:18

In the early days, in the early days, it was things like the great farm machinery producers. Were I think the first because, you know, once you figure out how to make a Reaper or a harvester, or later on a combine, you know, demand for it is absolutely huge. And so you don’t want to have one small workshop, you know, one small workshop in some small town in Illinois or something, you know, making a Reaper when the Reaper can be put into use from the Murray Darling River Valley all the way to Argentina and up there. Yeah. Later on, it was Ford Motor Company and General Motors that were the classics. And now of course, I think it is, you know, Apple Computer, which is simultaneously the most to market economy and capitalist driven thing in the world, but also the orchestrator of this enormously complicated, and centrally planned division of labour all over the world with all of its suppliers, in which a relatively small number of people in Cupertino, California, can conduct an economic division of labour, that dwarfs that of the centrally planned Soviet Union at its most prosperous, in terms of how much money and resources are moved around in a way in which in response to commands and to requests issued by Cupertino, to produce the more than a billion iPhones that currently populate the world.

Gene Tunny  22:01

Yeah, yeah, absolutely. It’s extraordinary for sure.

Brad DeLong  22:04

And, you know, we haven’t even gotten into its role as the pusher forward of electronics technology of modern semiconductor, whereby your Apple Computer pays the Taiwan Semiconductor Manufacturing Corporation $30 billion each year, which it then turns around and uses to invest in pushing semiconductor technology forward to make circuits smaller and chips faster and bigger, which it then sells to Apple, which then puts into iPhones so it can earn the $30 billion it needs for the next round.

Gene Tunny  22:40

Yeah, yeah, for sure. And I mean, Apple is still innovating even though Steve Jobs is no longer around.

Brad DeLong  22:47

Jobs is gone. Yeah, yes.

Gene Tunny  22:51

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

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Gene Tunny  23:25

Now back to the show. Can I ask you about full globalisation? You talk about that? And then you talk about what happened later in the 90s with what you call re globalisation, I think and then there’s hyperglobalisation. What I think what your book reminded me of was just those the large flows of people, and also capital that occurred in the late 19th century and before World War One, and that’s something I think Polanyi wrote about, could you talk about that please Brad?

Brad DeLong  23:54

Oh, well, one thing is to say that, that kind of from 1870 to 1914, 50 million people leave Europe and also 50 million people leave Asia. The people who leave Europe by and large go to you know, Argentina, Chile, southern Brazil, United States, Canada, Australia, New Zealand. They go there they bring European biotechnology crops and animals and so forth. In Australia, they find at least before the great drought of the 1890s that there is not a better place for European sheep than Australia. And so Australia before the drought of the 1890s becomes the place with by far the highest standard of living in the world. As you know the equivalent of the equivalent of OPEC instead of oil. It’s sheep. And instead of shipping petroleum and container ships, they ship out wool in steam powered ocean going ships and they produce the you know an amazingly rich and prosperous middle class civilization of its day, something that I don’t see know very much about. Except for the things I see are the backgrounds I see on Mrs. Fisher’s murder Mr. Rene Fisher’s Murder Mystery Show, which my wife says the clothes the clothes at does extremely well. And then Australia with its large middle class, you’ll powers the demand for Australian factories and Australia industrialising and becomes and remains an extremely rich and prosperous country. Brazil might have seen the been on the same trajectory. You know, Australia has land that’s wonderful for sheep. You know, Brazil in the second half of the 19th century was the best place for rubber. It was the place rubber came from. And so you know, you have the rubber tappers of Brazil making a good living, you have the growth of the Brazilian economy, you have the construction that European singers like Enrico Caruso or Jenny Lind, when they went on world tours, they would go up to Amazon to Manassas and performing them in Manassas Opera House and things worked very, very well, except that the British arrived and they grabbed some rubber plants from Brazil and they carried them back to Kew Gardens. And then the Belgians got a hold of them and they took them down to the Congo and then King Leopold began cutting off the hands of people who didn’t bring in enough rubber from the villages. And in Malaysia, the British Empire brought down workers from China combined it who were desperate to get out of China, given how small farm sizes were and how poor China was, combined it with British capital, and this Brazilian biotechnologies, so that Malaysia, Malaysia, the Malay Peninsula becomes the world’s biggest rubber producing centre in the world by 1914. And the enormous crash, and the enormous crash of the Brazilian rubber industry as well, because the rubber plant had left all its pests and parasites behind in Brazil. And so it grew like a weed on the Malay Peninsula. And, you know, the Chinese plantation workers brought down from the Pearl River Delta, were extremely happy that the British could pay them a quarter of what the Brazilian rubber tappers were used to getting. And they would still say we’re much better off than they would be back in China. That is, and this transfer of all kinds of tropical goods and plants around the world, right that Yemen finds itself suddenly faced with enormous competition from coffee grown in Indonesia, and in kind of Costa Rica as well. Which means that if you were in the tropics between 1870 and indeed, up until 1950, you’d find that whatever you export, its price was dropping like a stone because there was all of this extra competition from all of these extra sites for production opened up by this Asian migration. Well, the rich first world countries did quite well and did quite well in large part because immigrants from India and China were by and large kept out of Australia and the United States. And so wage levels in Australia and Australia and the United States stayed very high. And they got the middle classes in the middle class demand needed to provide the demand so that they could industrialise you know, while Brazil or Malaysia or Congo really didn’t have a chance to industrialise because, you know, no middle class large enough to buy the manufactured goods and no ability to export given how cheap and how good at manufacturing Britain was back then and how eager Britain was to export. 

Gene Tunny  29:09

The story we tell ourselves is that it’s, it’s all about it was all about good governance as well. I mean, in good institutions.

Brad DeLong  29:17

Yeah, no bad governance can make something very country very poor very quickly. That and indeed, Arthur W. Economist, Arthur Lewis, you know, all those used to say, look, Australia and New Zealand are not just cousins of Canada and the United States, but also of Argentina and Chile, and in some ways South Africa. And, indeed, come 1914, Buenos Aires looks a lot like Melbourne. But then governance falls apart in the 1920s and 1930s. And even more so after World War Two. And now, you know, no one thinks of Argentina as being a country that is kind of on the same level of development of the Earth, Australia or Canada, because it simply is not. And yet, it certainly has the land, it certainly had the resources that had the education in 1914 it had the technology base, but bad governance can do terrible things. You know, you see this most with respect to communist, right that when the Iron Curtain failed in 1990, we could actually look, and we could see that those countries that had been ruled by the Communists were only 1/5, as rich as the countries immediately outside, immediately across the border. And you know, where that border was, was principally determined by where the Red Army had managed to march in 1945. Yeah, what’s the difference between Czechoslovakia and Austria? Yeah, yeah. Or Yugoslavia and Italy?

Gene Tunny  30:59

Yeah, very good point. I’d like to ask now about the what you call the is it the long 20th century? You talk about this period from 1870 to 2010? And is that the period where we were Slouching Towards Utopia?

Brad DeLong  31:15

Yeah, where every generation, we were doubling humanity’s technological competence. And it was really clear that we were solving the problem of baking a sufficiently large economic pie. And we were trying to figure out how to slice and tastes how to distribute and utilise it. And that was kind of flummoxed more sometimes than others. And people were trying various things. Some of them reasonable, and some of them absolutely horrible and genocidally destructive. Yeah, yeah. I’d say that’s what gives 1870 to 2010 its unit, you know, that we’re solving the what people thought was the big problem, but not at all solving what people thought were, but people back before 1870 had thought would be smaller problems.

Gene Tunny  32:03

Okay, and so 2010, that’s in the aftermath of the financial crisis. So that’s a pivotal event, in your view.

Brad DeLong  32:13

Except it’s not really a pivotal event, okay. It’s more like a pivotal 20 years. Maybe it starts on September 11 2001, when all of a sudden, a willingness to kill people because they worship God differently that we thought was over in 1648, at the end of the 30 Years War in Central Europe, after which people said, let’s not do that, again. We’re back. Maybe it continues in 2003, you know, when the United States stops acting like a relatively cooperative leader of the world, and instead says, We’re another great power, and we’re going to act like great powers do, maybe it’s 2007, when it becomes very clear that in the attack that an ideological attachment to the view that I’m rich, because the market has rewarded me, therefore the market must be a good thing. Had that that idea had hobbled the regulation of finance, and then come 2010 It’s clear, that same idea keeps people from responding to the Great Recession, by saying we need to get back to full employment rapidly instead, all over the globe, people are saying, well, you know, the market is a good thing. And the market has been doing this for a reason. And so you know, we shouldn’t artificially we shouldn’t artificially stimulate the economy. 2008, seemed to see the engine of technological progress itself to drop into a lower gear slow down by half or more. Starting in 2012-2013, we see the rise of anti democratic movements all over the world from you know, Modi’s version of national Hinduism to Viktor Orban and many, many others. And last, I’d say, come 2022, we have the return of major power war. Right, the idea that big wars rather than wars that are kind of a civil war component are a way to solve things. You know, even though if I wanted to convince the Ukrainians that they weren’t a separate nation, but only a Russian ethnicity, you know, I would send the Bolshoi Ballet and I would send orchestras to play the works of Tchaikovsky and I would send poets to read the poems of Pushkin in the general streets of Ukraine. I would not say send killer robots flying overboard to drop overhead to drop bombs and kill but you know the return of a major power war. Add to that global warming is now We’ll go not a distant threat. But lots of people were underwater in Pakistan early this summer and lots of people saying, Why is the Yangtze River five metres below where it’s supposed to be? It’s now a thing. And a thing for the three and a half billion people of Asia who live in the great river valleys and the monsoons and some with the coming of global warming. We have a different and more complicated and I don’t think we yet understand what the post 2010 story is. But it isn’t the technological progress is pulling ahead extraordinarily rapidly making us potentially all prosperous, and we only need to figure out how to distribute and utilise our wealth. Instead, the world faces other and probably bigger problems, and certainly more of them. So that’s why I bring it to an end in 2010.

Gene Tunny  35:56

Okay, okay. I’d like to ask you about what you call the I think it’s the neoliberal turn in your book. So you talk about how we changed or the philosophy the I don’t know, the dominant philosophy and government and politics change from social this, we’re talking about advanced economies change from social democratic, or whatever you want to call it to, starting in the 70s, and 80s, with Thatcher and Reagan. And we also had a variant of it here in Australia. You call it this neoliberal turn and would you be able to be good if you could explain what you mean by that? And also, I’d like to ask you about your this is great, one of my favourite quotes in your book, you wrote that Hyack. So Frederick Hayek, the Austrian economist Hayek, and his followers were not only Dr. Jekyll, side geniuses, but also Mr. Hyde side idiots, I love that. So if you could explain what you’re driving out there, please, that’d be great.

Brad DeLong  36:56

1945 to 1975 or so are absolutely wonderful years. peace, prosperity, the most rapid growth, at least in the Global North that has ever been seen before. Middle class society, everything seems to be going right. But come and after 1975, you know, there’s inflation, which leads to the general consensus that there’s something wrong with social democracy, that it’s handing out too many tickets to things more tickets to things than the economy and society can produce. And when you hand out more tickets, and there are seats, the result is going to be the tickets get the value that is also going to be inflation. And so social democracy needs to get a grip, and become, you know, more responsible and less willing to simply hand out tickets to anyone who asks, add to that the idea that it’s greatly over bureaucratized that the government is doing too much, and there are too many forms to fill out. Add to that, the idea that too many people have taken advantage of the social democratic system, you know, to grab benefits to which there were not in title. I remember in the late 1970s, as a young teenager, there were people who would come around with maps of where the people in Australia drawing unemployment benefits were. And the claim was that they were on the beaches. Yeah, you know, that you get unemployment benefit. And you say, Okay, I won’t look for another job for two months, I’ll go to the beach for two months, and then I’ll look for a job. That all kinds of things in which too many people were saying too many union members and welfare recipients were getting away with too much and not working hard enough. Yeah, that benefits for the slackers were too great than the taxes on the actual productive members of society were too high. And that the tax system was greatly discouraging investment. And thus, economic growth. And thus, the inflation and the slowdown of economic growth that we saw in the late 1970s. Were a result of the fact that social democracy had tapped out and it needed very much to be a rethink. And the rethink takes the form of Thatcher in the United Kingdom and Reagan in the United States. You know, the idea that taxes need to be lower, that the job creators need to be properly incentivized that, you know, the non rich need to be a little bit poor, so they’re a little bit hungrier and work harder. That sources of rent seeking, you know, people who have claims to income but who are not productive, need to have those claims erased , especially if they’re welfare recipients on the one hand, who haven’t been able to maintain a stable family, or if they happen to have lucked into a particular union that manages to have its kind of hands around the throat of some important part of the distribution system. You know, Ronald Reagan’s saying, I’m going to destroy the, Jimmy Carter in fact, Jimmy Carter was, in fact, launched the Airline deregulation effort in the 1970s. One big purpose of which was to make the lives of airline pilots a little less cushy. And Ronald Reagan followed that up by breaking the strike of the air traffic controllers. It was Jimmy Carter, who by deregulating trucking in the United States, you know, applied the same medicine to the then powerful teamsters union, saying, once deregulated trucking, you’re going to be exposed to all kinds of rail and non union competition as well, you know, in your ability to extract an extremely cushy life go. And the ability of the collected organised crime gangs of the United States to draw on the teamsters pension fund is going to be sufficiently reduced. So you have this great wheel around 1980. So much so that in 1994, Bill, Bill Clinton, who really is a Social Democrat at heart, wants to win another term, he feels he has to go out there and say that the era of big government is over. That just as Dwight Eisenhower, a very conservative person could only govern in the 1950s. By saying the New Deal, social democracy is a good thing, but I’m going to be a much better manager. Because I can say no to interest groups that are demanding too much while the Democrats are relying on those interest groups to turn out the vote. So you should elect me to be the president to run the new deal rather than let a Democrat. Yeah, so Bill Clinton was having to say that I’m going to be because I understand how valuable government can be, I’m actually the one who will do the best job of cutting it. So it’s so to do the most good. And that kind of lasted that kind of era in which neoliberal, this neoliberal view, that the market should be doing more, and the government should be doing less? You know, it really lasted up until the great recession since then, since then, we’ve had a time of confusion.

Gene Tunny  42:28

Yeah, yeah. Yeah, for sure. I’m just interested. I’m interested in your thoughts on the that neoliberal term? Because I mean, you’re someone you’ve got, you know, people who are very prominent in our time, and you worked with Larry Summers you’ve written and you’ve done research with, with Larry Summers, who was US Treasury secretary. I mean, how do you feel about all because Would you say there was some benefits to it? Because, I mean, Airline Deregulation, and I mean, that was good for consumers. How do you think about it now?

Brad DeLong  42:58

As they say, you know, in some ways Friedrich von Hayek really was Dr. Jekyll. Yeah, in that if you have a, you know, if you have a command and control system, you know, there’s somebody at the top, who’s issuing orders and everyone else is kind of not really using their mind that they’re kind of robots doing what the person at the top orders. And, you know, if you’ve ever worked in any large organisation, you know that the person at the top has very little idea of what’s actually going on down at the bottom. And will often be issuing commands about what you should do next that are best nonsensical, and that are worst highly destructive. You try to have a committee solve that problem of central command by establishing it by writing a rulebook. And then you have a bureaucracy because God knows the rulebook only covers about a third of the cases, it’s simply not possible for any small group to think about. But um, assign people private property and let them trade and exchange in a market. And all of a sudden, the people who are actually on the ground in the situation, you’ll have the ability to do things because the property is theirs. And also, as long as market prices are in accord with social values, they have a very strong personal incentive to do the right thing. Or at least the thing that makes money and then there’s the well, but our market price is in accord with social values problem, but if you can solve that problem, then a properly tuned market economy with private property is the best possible anti bureaucratic, you know, anti authoritarian crowdsourcing mechanism for helping people to organise themselves in order to do what is needed for the common good. Did you know much better to impose a carbon tax and say, you know, gas filling up your car was going to be expensive. Then too, as Jimmy Carter said to say, if your licence plate ends in an even digit, you can only fill your car with gas on even days and with an odd digit, you can only fill your gas on odd days. Friedrich von Hayek was a Dr. Jekyll positive genius and seeing this and seeing this very clearly. But as I say, he also was on Mr. Hyde style idiot. Because you’ll Hayek, having grasped on to this value of the market, he couldn’t think of anything else. And so he reached his position, which is the market economy will take modern science and technology and make us all prosperous, full stop, we need to be happy with that. We should not ask for anything else, we should not ask for an equitable income distribution or any form of social justice. Because if we do, we’ll find ourselves monkeying with the system. And when we monkey with the system, we will destroy the ability of the market to actually be productive and to make us rich. And ultimately, we’ll wind up on the road to serfdom. We won’t get social justice, and we will be at our we will make ourselves poor. And so the one thing we definitely need to do is whenever anyone starts talking about social justice, or income distribution or their rights to something that isn’t, that aren’t property rights, we need to tell them to shut up, you know that the only rights that matter are property rights, and that’s how it should be, you know, and yes, this is not social justice. You know, the market gives most things, not the people who deserved them, but instead of the people who are lucky enough to own the valuable pieces of property. But if you can’t accept that you don’t have any business doing politics or speaking in the public square. Yeah. And, you know, that’s profoundly unhealthy. That’s profoundly unhealthy in actually figuring out how we should utilise and distribute our wealth, but you know, Hayek stuck to that to the end. So much so that he was an enthusiastic supporter of Augusto Pinochet. Believing at some level that you know, Pinochet would reform Chile. And then once Marxism and Social Democracy had been stamped out, then you know, he could retire and the Chilean people could be allowed to go back to electing their governors again. But in the meantime, you definitely need it. You know, he called it the Lycurgan moment. And the myth of the semi mythical dictator, yeah, even though not a king of Sparta had established what people said was the Spartan system of government and war back in the Classical Age.

Gene Tunny  48:03

Yeah, I was shocked by that. Brad, when I read that in your book, I’ll have to go back and look at where Hayet wrote that because I mean, it’s quite shocking to think that someone who is a champion of liberty, and I mean, he’s inspired there’s a think tank in Australia, the Centre for Independent Studies, which I have a bit to do with which is inspired by Hyack. And so I mean, I’ve read Road to Serfdom, but I don’t remember anything like that, but I’ll definitely go back and look.

Brad DeLong  48:31

He gets cranky, he gets cranky or as he gets older. That, you know, in 1944, when writing the Road to Serfdom, he’s chiefly interested in trying to persuade a future British Labour Party government not to be really stupid with respect to nationalising everything in sight. But you know, he ages and as my father says when you get older, you discover that you are more like yourself and it’s not necessarily a good person. That back when you were younger and had to pretend not to be yourself and weren’t quite as much as yourself, maybe we’re better off right, Yeah. Yeah. There is a letter from Maggie Thatcher back to Hayet saying thanking him for one of his and indeed saying but you are recommending the use some Chilean and methods and do those are unacceptable given our constitutional traditions, and I haven’t been able to find out what this is in response to.

Gene Tunny  49:29

Right, okay

Brad DeLong  49:32

In the context of a world that is drifting towards Central planning and very heavy bureaucracy, it’s more understandable than as account. You know, Hayet’s, crankier parts are more understandable and useful as a counterweight than they are as you know, an accelerator, an accelerant for a kind of neoliberal era.

Gene Tunny  49:56

Yeah, I think you definitely make some I mean, a lot of what you’ve you’ve written I think is great. And I mean, I’ve been thinking about this myself, I think we’ve I feel it in Australia, we’ve probably managed things better than in the States. I mean, there’s definitely. And then the way I’ve thought about it is that some of the neoliberal policies we’ve enacted, I think, have been good for consumers, we cut tariffs, I mean, we used to have this very high tariff wall. So I think it was as late as 1988, or 89, we had a 57% tariff on motor vehicles. And so cars were, in real terms, much more expensive. So they benefited a lot. But there has been dislocation, but we seem to have manage that, because we’ve had a Social Security system and a public health care system. And I look at the states. And I mean, I mean, I think Americans, I think the US is a great country. But the lack of a public health care system, and the lack of a social security system, I think, is making things very difficult. And that’s meaning the politics becomes very, I mean, it’s just, it looks awful at the moment from over here. So yeah, that’s just a comment. But if you have any reflections, that’d be great.

Brad DeLong  51:09

Things are never as awful as they look on YouTube. Still, it’s still strong and rich, and you know the sense of a very, very strong sense of one nation, and we should all be pulling for each other. Which you won’t see if you go on YouTube or Twitter where it is indeed, the politics of you know, Ezra Klein says you get clicks only if you make enemies. And that’s really not how most people normally live their lives. But yeah, there’s a great book that’s getting some considerable play now by Elizabeth Berman called Thinking Like an Economist, you know, how efficiency replaced equality in the US public policy, which I think definitely could use a dose of the good Dr. Jekyll Hyatt, right. That says that demanding equality, demanding one size fits all rather than letting people crowdsource solutions on an individual level, is something that we should value greatly. And yet Elizabeth Popp Berman doesn’t value it at all.

Gene Tunny  52:21

Right. Okay. Okay. I’ll have to check that out. I might have to wrap up soon. But the final final question i’ve good is just referencing one of your quotes in your book where you talk about the power of some individuals, and you talk about the power of Keynes and FDR? Yeah. How do you think they would want to know it’s almost an impossible question, but how would they be diagnosing where we are today? And what needs to be done? Do you have any thoughts on that?

Brad DeLong  52:53

With respect to the Great Recession, Keynes would certainly say, I told you so. And with glory in it, because he was at some level of British upper class twit of the early 20th century. With respect to the rest, he would say that, by and large on my number with the predictions he made in a 1930 speech, he gave on economic possibilities for our grandchildren to have indeed come true. And that at least the global north is approaching the stage in which we do indeed have enough. And then our problems are that we’re kind of hag written by ideas and ideologies that were useful and essential in past poor age, you know, avarice, usery, and precaution. And that we’re also facing the prominent problem of the human race, which is how to take your wealth and resources and live life wisely and well. And he would say that he had hoped that we would have made more progress on learning how to live life wisely, and well than we have, and would have hoped that we were less hag written by you know, avarice, usury and precaution. By kind of not realising how wealthy we are. And you know, how broad open our possibilities should be, but being instead do to mean and ungenerous to ourselves and to others.

Gene Tunny  54:17

Yes, yeah. Okay. And what do you think? I mean, what would you have any thoughts on? I mean, what’s, what’s to be done, particularly in the US or in other? What other advanced economies? I mean, I mean, one of the challenges we’ve got here in Australia is how we pay for this National Disability Insurance Scheme. So we’ve got this permanent structural deficit in our budget now of about 2% of GDP. And the current government when it was in opposition committed to these what we call over here, these stage three tax cuts that are kicking in in a few years, where there’s, they’re more geared well, because the wealthier pay more tax just because of the way the system is set up. And the way these tax cuts work is that the bulk of the benefits go to the upper end. And there’s a big debate about whether it’s appropriate or not to have those tax cuts at the moment in Australia, but what are the levers? Is that you see, is it around? Is it taxation? Is that one of the levers for redistribution? Or is it regulation? What what do you see as the levers?

Brad DeLong  55:22

Well, you know, I think, I think the biggest and the best lever and in fact, the one in which the United States and Australia have historically been most successful, you know, is immigration, right. That over time, we have been very, very good at taking in people from elsewhere whose parents were not Americans, Australians, and making them into, you know, Americans and Australians. Like, I remember Maine Senator George Mitchell, you know, the guy who negotiated the Good Friday Accords in Ireland. And, you know, he looks like one of my great uncle’s, someone all of whose ancestors had been in Maine since 1750. And, you know, talked with an extremely strong accent, you know, um, and so actually, he’s simply a second generation immigrant, he’s half Irish, half Lebanese. He just looks and sounds exactly like my great uncles with their eight generations of, you know, hardscrabble time in the soil. But, um, we have enormously powerful and strong cultures, ideologies, and forms of Nash forms of national unity, that are actually not based on us all really being the descendants of our founders, and both countries willingness to take in large numbers of people from elsewhere. You know, Australia, taking in an enormous number of refugees after World War Two have been huge sources of national strength. And we are still largely empty countries, and you can move someone from Mexico to the United States, you know, from Malaysia to Australia. And you know, you are going to triple their productivity just by doing that alone. And that will generate a huge amount of potential wealth from a well we grow by immigration. Otherwise, the problem is that, you know, we had a steam power economy in 1870. And, you know, an electricity and diesel and chemical economy in 1900, and a mass production economy in 1940, and you know, a global value chain economy in 1990. And now we’re headed for info biotech economy and whatever worked in the sense of, you know, politics, economics and sociology, 30 years ago, back when the technological foundations of the economy are different, it’s probably not going to work well now. So anyone who says we need to go back to X is probably going to wind up unhappy. And so we should try to move forward into the future rather than trying to pick up models from the past. Although what those forward and the future models are, you know, that’s beyond me.

Gene Tunny  58:19

Okay. Okay. You’re telling the economic history story, the policy and then that’s, that’s for someone else.

Brad DeLong  58:28

But the big lesson of history is that trying to maintain social and economic systems past their sell by date as the technology changes underneath it just doesn’t work.

Gene Tunny  58:39

Right. Yeah. Yeah. Interesting point about immigration. We one of the one of the challenges in Australia we have is that, I mean, everyone wants to live in one of the big the three major capital cities. I mean, I’m in one of them, I’m in Brisbane, and Nick’s down in Melbourne, then Sydney is the, you know, the biggest, but the concern is that everyone wants to live in those cities. And there’s just not enough housing. I mean, we’ve got, I mean, I guess, it’s around. It’s in other advanced economies, too. But there’s a housing crisis and property prices have surged, although they are falling out, because the of the dynamics of the lending and what’s happened with the monetary policy, but they’re still very high rents are going up. So we’ve got concerns about housing availability. And in the short term, I think, if we’re bringing immigration back, I think that’s going to cause a lot of pressure. So we’ve got to manage that better and harder. No, there’s the environmental issues about allowing development. So I think, yeah, I agree with you about immigration providing benefits. So just see that in the short term. There are a lot of these absorption issues that we have to deal with.

Brad DeLong  59:48

A lot of people who think they have rights that things need to stay as they are. Yes, yes. And do you know to this, there’s a great Italian novel called I think Lampedusa, no written by Lampedusa, called Gattopardo, called The Leopard about Sicily in the 1860s, in which at one point, the young guy yells at his uncle, the count of Selena, you don’t understand in order for everything to stay the same. Everything has to change. Yeah, yeah. As the young guy goes off to join Garibaldi in the Italian revolution. And so I do think we need to look much more at the things that need to change. He says, sitting in a house built in 1897, we think, at a time, but it was surrounded by pear orchards. And now when it is half a mile or two thirds of a mile south of the university campus and two thirds of a mile north of the subway line. And so is a, that something so close to so many extremely desirable places, should house only three people right now. Rather than have been turned into a 10 storey apartment building is in some sense, an offence against land planning.

Gene Tunny  1:01:08

Yeah, well, I think we’ve got to find a better balance. I mean, who knows. That’s, that’s an issue for another episode, I think.

Brad DeLong  1:01:17

It is, you know, and we did actually build a cottage on our lot as soon as we were allowed to do so. But still. Yeah, so we did add to Berkeley’s housing stock. Yep. Still, you know,, the San Francisco Bay Area has seven and a half million people and looking back at the past 450 years of history, it’s easy to say how if we’d had a 1800s view toward development, we now have 20 million people, you know, we the size of Los Angeles in population. And it would probably be a better world I must say, because those other 12 and a half million people who aren’t here are in other places that are kind of less great to live in, and where they are likely to be less productive than they would be if they were here.

Gene Tunny  1:02:14

And just just finally, probably, you know, you’ve I don’t want to take too much of your time. But have one more question is, in your view, what are the most what’s the most important factor there is the governance, it always the agglomeration effects when they move countries because I know that Lant Pritchards crunched the numbers on this, and there’s this huge gain from moving people around the world. What’s the benefit? Where does it come from? Do you have thoughts on that?

Brad DeLong  1:02:38

A lot of it is agglomeration, thick market agglomeration effects that we don’t really understand that appear to be extremely large. And, but that also can very quickly turn into pollution and crowding effects if the local government is not competent at handling the process.

Gene Tunny  1:02:59

Yeah, I think that’s right. I think that makes sense.

Brad DeLong  1:03:03

And a lot more is that, you know, it is, throughout history, it’s always proven much, much easier to move people that where institutions are good, and where they can be productive than to somehow move institutions to where the people are, that attempts to build prosperity or build democracy in places where it does not seem to be strongly established, that those rarely go very well. And I would say, I do not really understand why that is the case. And I used to have a guru, a classmate of mine, who I went to about that, Alberto Alesina, to teach me. But alas, he dropped dead of a heart attack a few years. And I haven’t found another guru who I trust.

Gene Tunny  1:03:48

Okay, I might try and cover that in a future podcast episode. It’s a fascinating question. It just occurred to me then.

Brad DeLong  1:03:57

I love what Lant has to say about his numbers actually why his numbers are what they are.

Gene Tunny  1:04:05

Yes, yes. Yeah. I’ll put a link in the show notes to some of that work. Okay. Very good. Okay.

Gene Tunny  1:04:11

Well, I’m Professor Brad DeLong. It’s been a real pleasure. I’ve really enjoyed talking with you very much about your book and I’ll put a link in the show notes. And so if you’re listening in the audience, and please, I’d suggest getting a copy. Yeah. I’ve got it on Kindle. But I mean, it’ll be in bookstores and major bookstores in Australia I’m very sure. And yeah, Professor DeLong. Any final thoughts before we wrap up?

Brad DeLong  1:04:38

Just thank you very much. And I think be hopeful right that even though individually, each of us is just a jumped up East African plains ape who often forgets where he left his keys yesterday. Together, there are 8 billion of us and if we talk to each other together, we can be a very smart anthologie intelligence.

Gene Tunny  1:05:02

Absolutely. I think that’s a great note to end on. Professor Brad DeLong thanks so much. 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

Thanks to Josh Crotts for mixing 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 PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

How the Australian Bureau of Statistics prepares the National Accounts w/ Robert Ewing – EP162

The National Accounts is the comprehensive data set on a country’s economic performance. It gives us GDP growth estimates and a whole bunch of other important indicators. Australian Bureau of Statistics Principal Advisor Robert Ewing takes us behind the scenes at the ABS and provides some great info and insights into how the GDP figures are prepared. Learn about the huge range of economic data from households, businesses, and governments that go into the National Accounts, the roles played by algorithms and judgment, and how the numbers are crunched using the time series database FAME, short for Forecasting Analysis and Modeling Environment. 

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

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

Links relevant to the conversation

Robert Ewing’s LinkedIn profile:

Economics Explored EP153 which also considered the National Accounts

Transcript: How the Australian Bureau of Statistics prepares the National Accounts w/ Robert Ewing – EP162

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.

Robert Ewing  00:04

It’s the work of hundreds of people across the ABS once you count the people in the survey divisions, the data acquisition divisions, all the other publications such as the balance of payments, the capital expenditure, the business indicators publication, which all feed into the national accounts.

Gene Tunny  00:24

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 162 on how the national accounts are put together, my guest is Robert Yuen from the Australian Bureau of Statistics, the ABS. Rob is the principal adviser to the ABS statistical services group. In this episode, Rob takes us behind the scenes of the ABS and provide some great info and insights into how the GDP figures are prepared. While Rob and I chat about the Australian National Accounts, I hope this conversation is useful for you, wherever you’re living. statistical agencies around the world will be using similar data and procedures to the ABS as they prepare their own GDP figures. Please check out the show notes relevant links Information and for details of how you can get in touch. Please let me know what you think about either Rob or I have to say in this episode, I’d love to hear from you. Right now for my conversation with Rob Ewing on the national accounts. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Robert Ewing from the Australian Bureau of Statistics, good to have you on the programme.

Robert Ewing  01:42

Very happy to be here Gene, always keen to spread the gospel of the great work that the ABS is doing statistics and trying to tell people the story of what’s going on in the economy.

Gene Tunny  01:53

Excellent. Well, I’ve been really impressed, Rob, that you’ve been communicating on LinkedIn, you’ve been talking about the data and giving us some insights into how the ABS compile the data. And I mean, one of the sets of data I’m really interested in is the national accounts and GDP, which is the statistic that measures the amount of economic activity in a certain period of time. And I’d be keen to chat with you about GDP given that you’re at the ABS and you’re involved in, in collecting the data and, and crunching the numbers to create the GDP figures. I chatted previously with a colleague of mine, Brendan Marquis Taylor, we chatted about the three different measures of GDP, would you be able to kick off by telling us what those measures are, please Rob, why do we need three different measures?.

Robert Ewing  02:48

Sure, so I should just say at the outset that, you know, today, I’m going to skip over an awful lot of the technical detail. And so I’m sure that the more statistical methodology knowledgeable are going to be screaming occasionally. But it is very complicated. The manual for the national accounts is several 100 pages long, and you know, can take a lot to get into. I think to start with, I tend to think of the GDP as it’s one concept that you can measure three ways. So GDP, as you say, is the measure of all economic activity. But we have to get a bit more specific than that. One of the things I’ve been talking about on LinkedIn is this idea of the production boundary, we have to put boundaries around GDP, because really, anything you could think of could be economic activity, we have to narrow that down a bit. And so we focus on market activity. And we focus within market activity on production. So GDP is a measure of the total value of production for the market sector in an economy over a period of time. It turns out that the way that the national accounts frameworks are set up, and it very clever frameworks developed over you know, more than 50 years by international groups. You could also measure this two other ways. So the first way is to measure how much income everybody in the economy has gotten from these productive activities. So if you measure the total amount of money that goes to labour, what’s called compensation of employees in the national accounts, and if you measure broadly, the national accounts concept of profit, what’s called gross operating surplus. And so if you add those two together across the entire economy, then you also get a measure of GDP. And that’s because if you think about production, well the measure of production is how much what you produce is worth minus how much you had to buy, in order to produce it, or the two things that are left over after that are income and profit. So it’s quite easy to see how those two match up. The third way, which is the expenditure method of GDP, is to think about it from the other side and think that will, we know, in economies and in markets, that there’s both a supply the production, but also a demand the consumption of the goods. And so the expenditure approach looks at where all this production of goods and services in the economy gets used. And so it adds together, the total amount of money spent by households, the total money spent by governments, some of the things that we produce gets sent overseas. And so we count the exports. Some things go into a warehouse, even though be produced, so we count inventories. And then we didn’t produce all the inputs that we use. So we subtract imports. And so that also gives you that same measure of how much was produced in the economy. And so those are the three measures of GDP, which are normally called the E measure, the I measure and the P measure in Australia. In theory, if you have measured everything absolutely perfectly, they will be equal.

Gene Tunny  05:58

Yeah, conceptually, from the way that they’ve that just because of the theory, and there’s a national accounting framework, isn’t there. So you were talking about this has been developed over 50 years? I mean, that’s since the you’re talking about since the UN codified it, I think, did they try and codify it in the late 60s? And then there’ll be various iterations of that approach? And we follow that there’s an international methodology.

Robert Ewing  06:27

Yeah, that’s right. So there’s the system of national accounts. So I think the first one was 1968. And that was building off kind of a lot of international cooperation. But I believe 1968 was the first time they really sit down like a consistent set of international rules. There was an update to it in 1993, and update in 2008. And if you do the math between those, you won’t be surprised to know that there’s an update currently underway thinking about further changes to the system of national accounts. And that will be due out for hopefully for endorsement by the UN statistical commission in 2025.

Gene Tunny  07:04

Yeah, yeah. And I remember from my time being on ABS reference committees for different things, or the technical reference groups, just all of the the issues you have to think about and R&D is a tricky one. I remember that, but we don’t need to go into into that today. I’m keen to understand what sort of data go into this Rob. I mean, you mentioned there’s production, there’s, there’s income, there’s expenditure. So is the ABS collecting data on all of these different transactions? You’re collecting data from businesses, you’re collecting it from households? What sort of data go into the mix, Rob for GDP?

Robert Ewing  07:46

Well, I think the short answer is anything that you can get your hands on. So a good national accountant is a bit of a data scavenger, because we’re only ever looking through kind of little windows into the economy. Kind of weird, we only have these narrow snapshots. So probably the two absolute most core measures of that production side, firstly, the annual economic activity survey. And so that’s a quite a large survey that we do once a year. And we go out to businesses, and we asked them quite a lot of questions about what they produce, how much money they made, you know, kind of how their money was spent, and so forth. And that allows us, in particular, to do what is quite a complicated little fiddly job, which is to try and convert things from the world of business accountancy, into national accountancy, because there are some things where there are some very, very important differences between the way that GDP is measured. And the way that business accounts are put together. The two most important are probably the concept of profit, which can be measured quite differently to that concept of gross operating surplus I talked about before, and also the concept of depreciation, and the differences between economic depreciation and accounting depreciation. But, you know, there are a lot of very complex nuances about that. And so a lot of the economic activity surveys asking the questions that allow us to take the business’s accounting estimates and convert them into economic estimates. So that’s absolutely kind of a foundational piece of us understanding that business side of the economy. So at a quarterly level, then its equivalent will be the quarterly business indicators survey. So that’s a somewhat smaller survey and asks a much smaller set of questions was kind of trying to give us a bit of an idea about what’s happening quarter to quarter, as well. And that’s kind of a very important survey there but the range of inputs is enormous. I’m household final consumption expenditure quarterly uses something like 15 or 20 different input data series, including retail trade, data from APRA, data from various private sector organisations who provide information, data from the quarterly business indicators surveys. So there’s a, an absolute broad range, because things like those big economic activity survey or the quarterly business indicators survey don’t necessarily cover everything. And so we bring the other bits of information to kind of tell us about, particularly the expenditure side of GDP, but also thinking about the role of government, where we have a lot of data that comes directly from federal, state, territory and local governments and tells us about their activities. We have detailed trade information, probably some of our most detailed data sets on the trade side, which allows us to get a pretty good idea of what’s going on with exports and imports. We rely very heavily on the consumer price index and the Producer Price Index publications, because they give us an idea of prices in the economy. And they allow us to convert those current price numbers into volume estimates of what’s going into GDP. So the real GDP as it’s often called.

Gene Tunny  11:17

Right, okay, yep. And that’s, that’s what’s often reported, that’s the that’s seen, that’s the data set that are the item that is looked at to determine whether the economy is going into recession or not. It’s that real GDP number, that volume number where you’re trying to abstract or control for inflation that occurs? Okay, so you’ve got less data for quarterly GDP than annual, it seems, is that right? So you’ve got detailed estimates, annually, you’ve got this other survey, quarterly, you’ve got, I mean, you still got a whole bunch of data. And what are you doing? You’ve got all of these models? You’ve got I mean, Is it done in spreadsheets? Are we able to go into that, or is it in R or or Python? And then is there some way of describing what goes on?

Robert Ewing  12:10

Well, so it is, fundamentally, it’s a very large code base, in our language and computer stuff, piece of software called Fame. And if anybody listens here, knows Fame and doesn’t currently work at the ABS, please immediately make a job application, we’ll fast track you, we need as many people who know this fairly obscure computer language as possible. And so we have here that’s 1000s and 1000s, of lines of code across all sorts of different modules. The basic approach is we’re trying to build things up from the absolute base level estimates. So we’re trying to look at the lowest level of the information that comes in and when we build the GDP up from that, so it’s very much a bottoms up approach to estimating it. The approach that we take is quite different in different areas. So in some cases, we get pretty good information, quarter by quarter on what is happening in the economy. So exports and imports, as I mentioned, is a pretty good case. We know, not perfectly but you know, we have almost census level data, we know almost every transaction that’s happening with imports and exports, there are some complexities around imports and exports of services where we don’t have as strong information. But we have a pretty good idea about what’s happening there. And so all we really need to do is just make some conceptual and timing adjustments and add everything up at the other end of the spectrum would be something like imputed rent. This is a really interesting kind of concept here in GDP. So one of the really important parts of the overall economy is the service we all get from the houses that we live in. Now some of us pay for that to the rent that we send to our landlord, kind of once every week or fortnight or month. But if you own your own home, we still want to count that value, because it’s still an economic service that’s being provided in a market like environment. And so for that we have what’s called imputed rent. So we impute how much rent is there. The data set that we have for that is primarily the Australian census. So every five years as part of the census, we go out and measure every household in Australia. And that also gives us an estimate of how many households they are there are and in what type of houses and in what locations. And so putting that into a model allows us to estimate imputed rent. But between censuses, we don’t have a solid survey or a data point. And so we have to model that. So it’s really a form of nowcasting. We’re using the information that we have about changes in the population, information about household formation and information about kind of your building construction. estimates of how much demolitions are happening to us forget how the number of households are changing and we obviously have information about rents from other series. And so at that end of the spectrum, it’s really a model, which is using a bit of data. But it’s not a massive amount of data compared to like its base, which is set every five years with the census. And that will be something the team will be turning its mind to very shortly having just had the second set of census results released.

Gene Tunny  15:21

Yes, yes. Great, great work. Everyone’s excited about that. So I saw your boss, David Gruen who’s well, it was, I mean, we both worked for him and within the various times in Treasury when we were there, and you’re working for him again, at ABS. He’s been getting a bit of media on that on people working from home, which is good to see. So all very good. Rob, can I ask you about this quarterly data? So you’ve got all of these bits of data going into it? And you’ve got these different modules? And there’s all this code? Which was a revelation. So I’ll have to do some research on that. I found that fascinating. What’s the quality of the quarterly data like? I mean, I know you revise it in the future, and there’s a statistical discrepancy, isn’t there? Could you tell us a bit about what the quality of that is like first, and then we might go into the annual data and what you’re doing there? How you’re trying to, yep. If you can tell us about that, please. That’d be great.

Robert Ewing  16:20

Yes, sure. So I think that’s so I think there’s two answers given to the quality of the quarterly data. So this is all in the context of we kind of spent a lot of time and a lot of resources and a lot of effort on making the quality, the highest it can be. But inevitably, a lot of the systems and the data in the economy is fundamentally on an annual, particularly financial year basis. So if you think about the financial accounts of the company, they will be producing kind of view monthly and quarterly financial information. But it’s only at the end of the year, that they really do that complete process of producing a full set of accounts, and making all of the adjustments and thinking about all of the different bits and pieces they need to take into account. And no matter how well you’ve gathered the quarterly data, the annual data is always going to be better. So you’re always going to have this view of the world that is a little bit sketchy. And yeah, and I think that if you look at the revisions, the revisions, they will move the numbers around, they very rarely change the story of what’s going on. So GDP might move up a little point one or point two, down to point one or point two, but very rarely does the story of what’s happening to the economy change very substantially. The other element to that is that even the quarterly estimates get a bit better with time. So we produce the estimates for GDP, roughly nine weeks after the end of the quarter. So our June quarter is published in the first week of September, on the first Wednesday in September. So that is a pretty good amount of time. But there’s still information that continues to come in, there will be businesses that we surveyed, who didn’t have time to respond, there will be data sources, for instance, ATO tax data, some of that won’t even arrive until after the national accounts has been published. So our picture of each quarter gets better with time as we gather more data, and you know, some late returns come in. And so that’s part of what contributes. But the big story is that really, GDP is fundamentally an annual measure that we can do on a finer time horizon using really a combination of different approaches. And for some things, such as household final consumption expenditure, there’s not a massive difference in the quality between the quarterly and the annual household final consumption expenditure has pretty much the same sets of information. But if you’re thinking about production, it’s quite different. And yeah, you mentioned statistical discrepancy. I think this is probably a good, a good way to talk about how we actually measure those three measures of GDP in practice, and how we actually make them equal to each other as they theoretically should be. So when we measure GDP every quarter, we can. It is very rare that the three measures come out exactly the same. Probably has happened once or twice. We were probably very suspicious when it did happen. As of now that can’t be right. There can’t be equal. We do two things in response there. Firstly, we use the differences between them as a way of looking at the different components and models and data sources and thinking about, are there gaps here? Are there adjustments that we should be making? There are other pieces of information that we should be seeking that would allow us to bring those measures closer together, but we’re not going to arbitrate them all together without some source of evidence for that. And so the three measures will be a little bit different from each other. So in order to get the measure of GDP that’s published on the front page of the webpage, what we do is we average the three of them. And so we have what’s called GDP A for average. And that is really just literally you add the three measures, and you divide by three. And you know, for those who are fans of the details, you’d notice, now we’re doing that in terms of the level of GDP, not the percentage change. Now, of course, it would be nice to get rid of that statistical discrepancy. And to do that, we need that information set that we have for the annual publication. And this brings us to, I suppose, what is the core of kind of producing like the benchmark GDP estimates, which is a process that’s called supply use balancing. And so I talked before about the idea that we can match production to income to expenditure at that top level. But in theory, we can also do that for every individual product that’s produced in the economy, that we should be able to say, for every products, let’s say, mushrooms, just picking on that one, because it’s very early in the list. We know, you know, in theory, we know we’ve produced you know, this many mushrooms. And you know, we know this many mushrooms got used by restaurants and other people and food manufacturers, this many mushrooms got sold to households, this many mushrooms got exported. And so in theory, we know well, those two numbers, the supply of the product and the use of the product have to be equal. We’ve defined as the way we’ve defined GDP, of course, the way that we’ve measured everything, through all these different surveys, we haven’t gotten a complete survey of every single person in the economy, we haven’t asked every single household what they consume. So we know there are some errors there and they don’t balance. And so every year, we go through this process of supply use balancing where we look at products, we don’t look at it at the level of every single kind of view, 375 mil Coke can, and 750 mil Coke can, and we have about 300 products that we look at so that we broad categories, like legal services, or metal, steel manufacturing products, or things like that. And we look for each of those products. We want to balance, how much was produced, how much got used by households, by government, how much got exported, how much went into inventories, and how much was used by other industries in their own production. And we make sure across all of those products, the supply and use is balanced. And once we’ve achieved that, then we have the three measures of GDP will be equal, because we’ve now brought those two halves of the measurement of the economy together. And so that’s, I suppose that’s the really, that’s the big work that kind of goes on, after a year is completed. So once we’ve finished the financial year, then the work starts on producing those supply use tables and doing that balancing. And when you’ve done that, the reason that’s important is I suppose it gives you that foundation that you can build on. So when policymakers are looking at GDP, they’re mainly going to be focused on what’s happening to GDP. Right now, they don’t care about what happened to GDP a year and a bit ago, which is about how long it takes us to produce those supply use tables. But through producing them, we make sure we’ve got an accurate representation of how much every different industry and sector and product matters. And so when we take that information, that’s you know, kind of you know, that lesser information set that we have quarterly to update the numbers and say, well, this is how much this bid has grown. We’ve given GDP the best base to sense, put everything together and give you the most accurate information out of the most recent quarter.

Gene Tunny  24:14

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

Female speaker  24:19

If you need to crunch the numbers, then get in touch with Adept Economics. We offer you Frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adapteconomics.com.au. We’d love to hear from you.

Gene Tunny  24:48

Now back to the show. So this they supply use tables. That’s what you’d call an input-output table. Is that right Rob? This is an input-output table your developing, how these industries interact with each other, the flows of resources between them and then what goes to sales, what’s exported, etc?

Robert Ewing  25:09

It’s a very closely related cousin of an input-output table. So there are a couple of pretty technical differences between supply use tables and input-output tables. Importantly, in Australia, the input-output tables that we produce are a lot more detail. So I mentioned supply use, we’ve got about 60 industries times 300 products, when we get to the input-output tables, we’re able to expand that to about 115 industries and a bit over 900 progress. So we can give you more detail in the parameters as a couple of other technical details. But it’s broadly that same sort of concept. It’s trying to understand what is produced in the economy, and how it flows through the economy. And they’re a very powerful analytical tool.

Gene Tunny  25:53

Yeah, absolutely and Rob what I think’s interesting is you meant just, I mean, you’ve got all of this data and you’ve got these three measures that on a quarterly basis, you’re trying to get as close as possible. And you mentioned that, look, you have to make some adjustments. I mean, so there’s some judgement involved, but that’s going to be informed as much as possible by other data or whatever information you’re gathering. And you talked about he getting data from a huge range of sources, government and your own surveys, from the private sector. You probably can’t go into this. But what I’ve what I’ve been surprised at now is just how much real time data or up to date data that banks for instance, so the who else is Dun and Bradstreet, they’ve got whatever they’re called now, they’ve got more up to date data about how things are going into the economy, I presume the ABS is, is trying to get hold of some of that data.

Robert Ewing  26:52

Yeah, no, absolutely. And we have, for instance, on the bank data, we have a new publication, it’s been running since February this year, which is the monthly household spending indicator. And so that takes information from bank transactions, so credit card and debit card data. And it gives you a much broader picture of what’s happening to household consumption, then the retail trade survey does, the retail trade survey was a great survey. It’s one of the longest running surveys, and it’s very closely watched. But it only tells you about a third of consumption. Because today, in terms of things, you can walk into a store and buy or kind of buy through a retailer online, that’s only about a third of what households consume every day, when we’ve got the amount of the household spend indicator variable to expand out to more categories of consumption. And so that covers a little over two thirds of consumption of households. So that kind of finer grained data is definitely something we’re very interested in. Another example is the monthly business turnover indicator, which is another fairly recent publication. I think that started a little under 12 months ago, that takes ATO business activity statement data, and it gives you a month by month picture of how the turnover is moving in different industries. And so these are giving us that month by month picture of what’s happening in the economy. And that’s something which in the past, we’ve had to rely on the quarterly surveys and the quarterly national accounts for and I think that’s really exciting development with the data becoming more available. And, you know, the ABS showing its capability to transform that data into useful insight for people is definitely something we see is a growing kind of part of the business but going forward.

Gene Tunny  28:51

Yeah, absolutely. And it’s so important as we’re trying to monitor the economy as the RBA and the Treasury are monitoring the economy. And, and you know, that obviously feeds into policy. But yeah, that’s, that’s something for another another time. Right, on the supply use balancing, if you just got some a little bit, a few more minutes, while you’re trying to get these data internally consistent, it’s all about making sure everything adds up. All of these data are consistent. It’s the story makes sense. This balancing, I think I asked you about this on LinkedIn, what do you do, how do you do this, this a some sort of algorithm, is it..

Robert Ewing  29:31

So it’s a mix of things here? So for a lot of the large things, it is a human being looking at the data and looking at the whole picture and making a decision about all based on what I know, this is the bit here that must be wrong. So there’s a lot of it, which we’re not yet able to put into an algorithm. But if you think about I mean, I described that kind of 60 by 300 kind of matrix, you know, it’s an enormous number of cells. Once you’ve got to fill in, and so once we get past those things where you can reasonably make a human judgement. We use an algorithm, it’s a constrained optimization algorithm. And what we do is we tell that algorithm, the same things that we know from the national accounts framework. So we tell that algorithm, things like, Well, we know, you know, this supply has to equal this use. And we can also give it some other parameters, kind of like, it’s rare that the financial sector consumes many sheep directly, for instance, you know, so you can apply a bunch of constraints there, and it can then kind of go away, and it can algorithmically kind of find a sensible solution for you based on that. But the reality is that, you know, right, this second, there isn’t a good solution from a lot of this beyond a human being who can look at and just make a judgement about what makes sense here, you know, does it make more sense to kind of say that the excess rolled steel production is going to be going to export or to households? Because the algorithm is not going to have a view on that one, but the human is going to be able to say, no, no, we must have just mismeasured some exports there. Yeah, let’s have a look at that.

Gene Tunny  31:15

Yeah, gotcha. Okay. Yeah. So some constraint optimizations and judgement. Very good. And right so Rob, this is all fascinating. Is there any, any other points you think would be important for, for us to understand in detail to appreciate just the magnitude of this task? So I think I’m hoping we people understand how important these data are. And I’ve covered that in a previous episode. But is there anything else we should know, in terms of just the, the, you know, what, what are the challenges for ABS in doing this? Because it does take several months, doesn’t it, you do this on a quarterly basis, and it comes out, it comes out two months after the end of the quarter, doesn’t it? So there’s obviously a lot of work involved.

Robert Ewing  32:02

Yeah. And I think I divide that into two halves. So there’s about a month of data gathering and so this is kind of you the various surveys going out and measuring things. So it’s kind of, you know, working with partners, such as the banks and private sector, and governments, and so on to get the information streams. And then there’s about a month of what we call compilation, sitting down, running the pros, running the computer code, seeing how the numbers make sense or not. And then ultimately, you know, writing media releases and producing a publication and getting it onto the website. And just to put it in a plug, also, for our new product, which is, we are each quarter producing a nice little list of, you know, 10 to 15 things you should know about the national accounts. It’s nice and easy to digest. And you can just find that on the ABS web page. So if you find the idea of clicking on a GDP release a little intimidating, we’ve got some much more user friendly products available now. But yeah, it’s as you say, it’s about a couple of months to put it together. It’s the work of hundreds of people across the ABS, once you count the people in the survey divisions, the data acquisition divisions, all the other publications such as the balance of payments, the capital expenditure, the business indicators publication, which all feed into the national accounts, the communications team, the compilation team it’s hundreds of people across the ABS contributing to every quarter. And they are not to forget the 1000s of businesses and households answering surveys out there. I mean, the most fundamental thing is just how grateful the ABS is for the people who take the time out of their busy business and personal lives to kind of give us this data that we need to tell Australia about what’s happening.

Gene Tunny  33:57

Yeah, yeah, that’s a good point. Yeah, absolutely.

Robert Ewing  34:00

And one final point I’d make is, GDP is the figure that gets all the fun headlines. But the national accounts are a very rich publication. They tell you about a lot of different parts of the economy, they can take a bit of expertise to understand. But there’s a lot of information in the national accounts beyond GDP. It tells you about how each state is tracking, it tells you about the consumption of different goods and services in the economy. It tells you about the balance sheets of households and governments and businesses. There’s a massive amount of information beyond that top level GDP figure in there and I think a lot of the criticisms you sometimes hear about GDP not taking into account depreciation or not taking into account other things. An awful lot of that is in there somewhere. But it is a very big publication. I know it can be a bit intimidating to try and find anything in it.

Gene Tunny  34:58

Yes, yeah, but you’re right there, Rob. And, I know that there is work going on. And it may not be in the national accounts, the core national accounts, we do have satellite accounts. I know you’ve, you’ve tried to estimate the contribution of different sectors like tourism. And I’m trying to remember if you’ve done natural, natural capital estimates. So I think there are some other estimates where you’ve tried to estimate them, I’ll have to check. I remember, this is one of the issues or one of the things people are concerned about is that GDP doesn’t take into account environmental degradation. And so but there are estimates, there are people who have looked at those sorts of estimates, I’ll have a look offline and just add something in the show notes if I need to. But I know that that’s one of the issues people are concerned about.

Robert Ewing  35:49

And it looks, it’s there. It’s not my area of expertise. But there’s a whole range of work that the ABS has done on environmental economic accounts, which is really bringing together those two data sources. And I think that’s one of the unique advantages of the ABS is because we kind of sit in the middle of this data architecture, we can bring together the data that we have from these different domains and put them next to each other. And we can see how the story of the environment and particular aspects such of water align with the story of the economy. And you know, it’s something which is still like an ongoing piece of work to fully develop all the products there, but something we’ve been actively developing over the past.

Gene Tunny  36:32

Okay, very good. Rob, in from the ABS. Thanks so much for your time. I really enjoyed that. And, yeah, I look forward to seeing more of your contributions on LinkedIn. I think that I’ve been learning a lot about the work that you’ve that you do over at ABS and I’ve got a renewed appreciation for that work. So thanks again, Rob. Very good.

Robert Ewing  36:53

Thank you very much.

Gene Tunny  36:55

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

Thanks to Josh Crotts for mixing 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 PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

White Elephant Stampede w/ Scott Prasser – EP161

Various projects worldwide have been labeled White Elephants. These projects include the Gold Coast desalination plant and the Berlin Brandenburg Airport, among many others. What exactly is a White Elephant? How can we identify them and how can we stop them from happening in the future? In this episode, Scott Prasser joins show host Gene Tunny to talk about White Elephants. Scott is a former academic and ministerial adviser, and is one of the editors of the new book from Connor Court titled White Elephant Stampede: Case Studies in Policy and Project Management Failures. 

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

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: Scott Prasser

Scott has worked in senior policy and advisory roles in Australian state and federal government public service. From 2013 to 2019 he was Senior Adviser to three federal cabinet ministers covering portfolios of education and training, and regional health, sport and decentralisation. In addition, Scott has held academic positions at five universities across four states and territories, the last at professorial level. Scott gained his undergraduate and master’s degrees from University of Queensland, and his doctorate from Griffith University. Scott’s most recent publication with Helen Tracey was Royal Commissions and Public Inquiries: Practice and Potential (2014); and Audit Commissions: Reviewing the Reviewers (2013). 

Substack newsletter: Policy Insights by Scott Prasser

Links relevant to the conversation

The new book from Connor Court White Elephant Stampede: Case Studies in Policy and Project Management Failures

Criteria for identifying White Elephant projects.pdf

Regarding the cost of the Gold Coast desalination plant, see Brisbane Times article:

The Brisbane Times article reports:

“The controversial $1.2 billion Tugun plant was closed in 2009 after a string of complaints including rusting pipelines  and mothballed from fulltime water production in 2010.

Normally it provides only three megalitres per day to Southeast Queensland’s water grid and costs between $12 million and $15 million a year to operate.”

Time Out article on fixing up the acoustics in the concert hall of the Sydney Opera House

Transcript: White Elephant Stampede w/ Scott Prasser – EP161

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,

Scott Prasser  00:04

The whole thing was driven by politics. Right, rather than by policy. Yeah, that’s the problem.

Gene Tunny  00:12

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 161. On white elephant projects. My guest is Scott Prasser, who is a well known commentator on public policy issues here in Australia. Scott is one of the editors of the new book, White Elephant Stampede, published by Connor Court, please check out the show notes relevant links, including a link to the Connor court website so you can get a copy of the book if you’d like to learn more about white elephants. The show notes also include a clarification that I need to make regarding the cost of operating a white elephant not far from me, a Gold Coast desalination plant. I couldn’t remember the actual cost while chatting with Scott. And I overestimated it. That said, it’s still a costly facility and arguably fits the white elephant definition. Finally, the shownotes contain details of how you can get in touch. Please let me know what you think about what either Scott or I have to say in this episode. I’d love to hear from you. Right now for my conversation with Scott Prasser on white elephants. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Scott Prasser, welcome to the programme.

Scott Prasser  01:34

Thank you very much.

Gene Tunny  01:35

It’s good to have you here. Scott, keen to chat with you about white elephants. So you’ve recently been one of the editors of a new book that’s coming out from Connor Court on white elephants, White Elephant Stampede case studies in policy and project management failures. So yes, looking forward to speaking with you about that. To kick off. Could you tell us a bit about your background in public policy, please, you’ve got an extensive background. And I think it’d be good to sort of let people know about that. I think it’s, it’s, it’s a really extensive, interesting experience. So if you could tell us a bit about that, please, that’d be great.

Scott Prasser  02:12

Sure. I’ve worked in federal and state governments, in state governments. I worked in state government, Department of Welfare Services, State Development and Premier and Cabinet in Queensland, under the Bjelke-Petersen government , and also under the Beattie government. Okay. So I’ve worked in those roles. I was basically running different policy units inside government. I also got seconded to minister offices in state government, and also in federal government. So immigration Minister’s office, I was Chief of Staff way back in the Fraser government days. And more recently, after serving, running a Public Policy Institute at the Australian Catholic University in Canberra. I work for three different federal cabinet ministers, Christopher Pyne, Simon Birmingham, and Bridget McKenzie, across education in regional services. And so, I’ve been in and out of the public service Minister offices and academia over the last 30 years or so, and writing on all sorts of things about Australian politics, public policy, Royal commissions, inquiries, and those sort of bodies. And I did teach project management at one university, which is how I got interested in white elephant projects because you run across a quite a wide a lot of white elephant projects when you’re teaching project management.

Gene Tunny  03:32

This was it was at University of the Sunshine Coast. Right. Okay.

Scott Prasser  03:36

So I’ve worked at RMIT, University of Sunshine Coast, University of Southern Queensland, Australian Catholic University, and also taught at QUT and University of Queensland. So as a sort of tutor, person, so I’ve done all those sort of things. So I’m interested in really what’s happening in the real world, okay, and how we can, how we can learn from mistakes and not so they don’t happen again.

Gene Tunny  04:01

Absolutely. Okay. So, Scott, can you say about this idea of this concept of a white elephant? Where does this why is it called a white elephant? What’s the story behind that?

Scott Prasser  04:13

Well really, the story really comes from Thailand or Siamese, it used to be called that if you were caught by the king, with your hands in the till, or committing fraud, instead of having your head cut off, or your hands cut off, which is one way of punishing people. The idea in Thailand is a very interesting place, which I like a lot. The king would give you a white elephant and a white elephant is sacred. And it means you’ve got to look after it. You can’t. In Thailand, elephants are work animals, you know, they live logs and things like that. You’re not allowed to make a sacred animal work. So this becomes a very expensive issue for you to have to look after. This gift from the king. You can’t sell the gift. You can’t kill the gift and you gotta maintain it and look after it. So basically bankrupts the person you give the gift to, that’s where the whole term comes from really, white elephant.

Gene Tunny  05:08

Right. And so when we’re talking about government projects, or I suppose any sort of project, we’re talking about a project, which is you can draw an analogy, or you can, it’s similar to this white elephant that the King of Siam would would give to you because it it’s not a good thing to invest in, it costs you money on an ongoing basis is that the idea?

Scott Prasser  05:34

Thats right, the white elephant project, or white elephant policy is something that doesn’t work properly, that something that’s too expensive to maintain, that something that often Looks good, looks good, but doesn’t, can’t, can’t do can’t perform. And it becomes very expensive maintain and therefore gives no return back to the owner or to the originator of it. That’s for a white elephant project, is it a very expensive thing, it costs more to maintain, and it doesn’t serve any utility, any particular function to do that, for the amount of investment you got to put in to keep this thing going.

Gene Tunny  06:10

Okay. And we’re typically talking about public sector projects, are we?

Scott Prasser  06:14

That’s right. We’re talking about public sector projects, there are no doubt in the private sector, white elephant projects and things that go astray. But the shareholder puts up the bill for that. And I don’t really care too much about the shareholders in the sense that I do care about the waste of public money. Since public money is finite, like everything. And I am concerned, in these days of sustainability, how we waste money on projects, and we repeatedly waste money on projects, that self Evon were going to become white elephant projects or are white elephant projects.

Gene Tunny  06:49

Okay, so what types of projects are good examples of white elephants? Scott, you’ve you’re looking at some in this new book, you’re editing the case studies in policy and project management failures, the white elephant stampede, what are some of the examples in that book?

Scott Prasser  07:03

Okay, well one of the examples close to home is the Queensland desalination plant. Okay. So this is rusting way down the Gold Coast there, it cost billions of dollars to do. And it was an overreaction to the drought we had a number of years ago right now. Now, from my point of view, all droughts come to an end, basically, as we are seeing right now. So we built a billion dollar desalination plant, but we haven’t built any dams in Queensland for a long time. And this basically, it was really a bad idea from the beginning. But it’s an example of what governments do when they got to be seen to be doing something. So that’s one example. The other one is close to my heart is the hospital payroll system we had in Queensland, which was going to cost you know, a couple of million dollars and ended up costing a billion dollars, we end up having to have a Royal Commission into this. It was such a monumental mess that should have been avoided. Olympic Games also tend to be white elephant projects, they always run at a loss there is one or two haven’t. They build infrastructure that serves only a short term timeframe. And since we’re in the Olympic game, game at the moment in Queensland, we’re suggesting and we’re seeing the issues about the GABA and the immense costs that this is a this will be a white elephant that’s going to grow before our eyes. So it’s we can grow up with it in the next 10 years.

Gene Tunny  08:36

Yeah, because Brisbane is the Olympic city and 2032 and the GABA at the cricket ground, the Woolloongabba at the GABA, which we abbreviate as the GABA here in Brisbane, they’re talking about just increasing the capacity by what, five or 10,000 people, but it’s going to cost $2 billion or something ridiculous, so they have to revisit that just on the desal plant. I think that’s a really good example and it illustrates how these things can be an ongoing burden because if they’re not using it, they can’t mothball it, you have to keep it in this Hot Standby mode or something. There’s some specific term they have for it you have to keep you have to turn it on every now and then. So the membranes keep fresh or something so they don’t dry out.

Scott Prasser  09:24

You can’t just let it sort of rot away. Yeah. So there’s the issue of a white elephant project that even after it become doesn’t serve its original purpose was not working. You they got to maintain them. That’s the problem. It’s a bit like having a Jaguar Car, its good when its going but not when its in the garage.

Gene Tunny  09:43

You have to get a good mechanic.

Scott Prasser  09:45

So it’s no use having these sort of things. You got to keep maintaining them. Yeah, that’s the problem about these things.

Gene Tunny  09:53

Yeah, exactly. And I remember I went to a presentation maybe five or six or seven years ago with our explaining this Hot Standby mode for the desal plant, I mean, it’s hardly making any contribution to our water reliability or water security. But yet, it’s costing, I don’t know, 50 to 100 million a year, I can’t remember the exact figure. But it’s a significant amount of money and for something that we isn’t really adding to our water security, it rained again. But this goes back to that time when in the 2000s, there was a view that, well, it would have, it didn’t we’d never have the rain we had in the past because of climate change. Tim Flannery was saying that and the government here was panicking about water supply and all of that. So that’s where it came from. It came in a time of crisis. So that’s one way we could get projects that aren’t really sensible. What are some other ways, Scott, that what why do we end up with these projects that are, that are white elephants?

Scott Prasser  10:52

I think there’s a number of reasons. One, I think that government is involved in too many areas. Okay, the government tries to do too much. Yeah. And the government is seen as the saviour of so many things. So if government could not be involved in so many things, and it’s focused on on the core business, where it should be, you know, good infrastructure, good roads, and that sort of thing so, government is often called upon to be doing things now politicians reaction to that, is, something’s got to be done. This is something we can do. Right. Okay. And they have no concept of our financial limitations. So governments, often we saw that during the COVID thing, where governments were running around doing all sorts of things, which were completely against the evidence this remember, in Queensland, we were formed by the Chief Health Officer we, and was mandated, we should wear a mask in our car. Think about this, and we should wear a mask walking around a park. Let’s think about this. Now, I didn’t do that, I refuse to follow the law. So that’s an example where governments are going to ratchet up activities to do things. Also, governments love to love to announce iconic projects, you know, I hear the word iconic, I run a mile, okay. This is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want governments to have visions. Thank you very much, especially the wrong ones. And so it’s this thing of meeting the electoral demands to be doing something instead of saying nothing can be done. Okay, that in some cases, is not government’s responsibility to do it. And if we do anything, it doesn’t, doesn’t have any effect. So, you know, it’s like, you know, why does the Commonwealth government spend $5 million on men’s work sheds? I mean, what has that got to do with the Commonwealth Government? There’s like a little mini, a mini white elephant, because they want to be seen to be giving out money for some minority group cause or something. So it’s politics in politics. The other factor is that all the organisational things inside organisations, groupthink happens. Yeah, okay. Now, if you’ve worked in the public bureaucracy like me, it’s sometimes very hard if you if you want to be the lone person who says I think that’s a dumb idea. Yes, right. Yeah, it doesn’t go well with the rest of the team and the hierarchy, which CERN you got to have in the bureaucracy, someone willing to say, No, right. Now, our public services have become politicised, that is people are on short term contracts. They give the government what they want, not what they need. So this sort of Once Upon a Time treasuries would have said, and that’s why under Joh, we had permanent public servants. Okay, Joh Bjelke-Petersen, Premier, they were permanent public servants. Queensland didn’t have a zoo. Queensland didn’t own a bank. Okay, Queensland didn’t do all the crazy things that Joh wanted to do because the treasurer, Leo Hilscher and crowd will say, no, Joh, you’re not going to have it right. Now, I don’t think that happens anymore. Because all the senior public servants are on five year contracts. They want to get their contract renewed, they will give into the political will all the time. So that’s one of the issues that helps help throughout why we’re getting more of these things. And why frank and fearless advice is no longer being given. I don’t want to sound too precious, but it is very hard in the bureaucracy, if you’re in the hierarchy, and you want to get a promotion in the future, and you’d write a memo to the premier. This is a really dumb idea. And I have done this myself and I have saved the taxpayer money. I can tell you right here. And that’s because I had a very good director general in the Premier’s department, but it’s hard all those organisational factors, the political factors and government in all the interest group pressures now interest group pressures on wanting to get something from government. Australia has always looked more to government than other countries. You know, we’ve always We founded by government Australia was founded by, you know, sending out convicts here. It was a government thing in America, America was founded by people trying to get away from government, they want to religious freedom. Okay, so there’s a difference. Yeah, sort of context. So all those factors have driving that. Plus, I think, economic theory, modern, modern monetary theory. So it says, oh, spend as much as you want, it doesn’t matter. It All right, you know, there’s no, there’s no limitation on what government can spend. So the idea of balanced budgets being careful, and frugal has sort of gone by the by, if you’d like. So all those factors are contributing to this sort of galloping syndrome.

Gene Tunny  15:45

Well if it was a good infrastructure project, or a good if it was delivering public benefits into the in the long term, then you could make an argument that it may make sense to borrow money to invest in it, it could be good debt. But the problem is, these are such bad projects. They’re, they’re not delivering that return. And they, they’ve got this ongoing cost, for hardly any benefit. And I think this is a point you make, and this criteria for selecting white elephant projects for identifying white elephant projects, which I think is really good. And I’ll put it in the show notes if that’s okay. I think it’s excellent, I think this was something you did for your public policy course at Sunshine Coast, etc. And one of the points you make is that, so while white elephant projects might produce some marginal benefits, the issue is they never cover the project’s real costs, and more often end up costing more, okay, so we’re not saying that these things are completely worth worthless that they don’t deliver some benefits, it’s just that they’re not enough to justify the large costs.

Scott Prasser  16:45

I think you see it in, you know, stadiums or things like that, or opera houses and so on, which you know, do serve a certain public purpose. And there’s a there’s a place for them, but they, they never really will cover their costs. So they’ve got to be subsidised. And the first indication that seems wrong, after things been developed, we need more funding, or we need more to keep it going, right. I’m in the Sydney Opera House, many of you are together as a white elephant, by the way, because A, it was a design that no one knew how to build. Yeah. The technology wasn’t there. It cost phenomenally more than I think 2,000% more than the original costs. Yeah, it costs 150 million bucks a year to keep, to keep going, right cleaning and all that sort of stuff. And acoustically, I’m told, not that I go to opera, everything like that. I’m told that it’s not that all great, you know, the there are better opera houses or sound places around the world and build a lot less cost than the Sydney Opera House. It looks fantastic. No one No one can deny that. It is a landmark. But there’s an example where it still serves some purpose. But okay, it, you’ve got to keep it. You’ve got to keep it up to the mark and only the public taxpayer can keep it up to the mark. No one’s going to buy the Sydney Opera House.

Gene Tunny  18:06

Yeah. Yeah, exactly. Amazing building, though. It is. So I’m trying to remember the issues. Yep. There’s an issue with a concert hall. So I think there’s, there’s the different shells of the Opera House. And I think there’s a there’s the Opera Theatre in one shell. And the problem there is that depending on where you sit, your view can be limited. So if you’re sitting on Yeah, so in some seats, you don’t get to, it’s not a full view. And the problem with the concert hall part of it. Yeah, that’s definitely an acoustic issue. And they’ve tried various fixes over the years to improve that I might put a link in the show notes. Remember, I’m trying to remember they had some some donuts hanging from the ceiling? I’m trying to remember correctly.

Scott Prasser  18:50

That’s right, there’s a book that came out in the 70s called great planning disasters. The Sydney Opera House was listed. Yeah. You know, but no, and as an example, it is it is pretty fantastic when you’re on the ferry to look at and so on. But you have to think, what this is costing you, and there’s lots of things like that all around the place where governments and what happens is a project or something which is developed for purpose x, it doesn’t meet purpose x. So gradually the purpose changes to purpose y. Okay, yeah, it’s not really a great opera house, but it’s a fantastic tourist attraction and you see what I mean. So you sort of transfer the goal from what it was originally to be to as a fantastic tourism attraction. Now how you measure the impact of tourism is pretty hard, as you know, the best of times, so they happen a lot, gold is placement happens a lot with with white elephant projects.

Gene Tunny  19:50

Yeah it’s a hard one because it’s hard to think of Sydney Harbour nowadays without the Opera House, but we know that it is one of the the most magnificent harbours in the world. Also it’s still be, you would expected to still get tourists there regardless of what you put there. You could put something up cheaper. That’s an attraction instead of the opera.

Scott Prasser  20:09

Yeah, look years ago when I was in the premiere department, the Roma street Parkland issue. What should we do with the Roma street parkland, and I read the project team to look at that. And we talked about getting the Smithsonian to try and build something there. We went to America, Premiere Beattie winter America, and we had a committee of the great and famous people of Queensland, I can tell you the great and famous of Queensland. And the trouble was, I could never get them to focus on the purpose of the building of a building and want to build some sort of building, everyone focused on the design of the building. And it was quite exasperating with this committee of great and famous people. And I had to get the Director General to go and actually talk to them in the end, because I couldn’t control him because everyone just came with their pictures of iconic buildings from around the world, you know, Bilbao and all that sort of stuff.

Gene Tunny  21:03

Which is a white elephant. Guggenheim.

Scott Prasser  21:08

Yeah, they all went through the design, but what are we going to put in the building, which was, to me, the important issue, what are we going to use the building for? Is it going to be and to build a proper museum type thing is you’re talking about 300 million bucks. $300 million. Okay. Yeah. And what’s it going to do? And it was impossible to get the great and good committee to look at function as distinct from design of the building. Okay. And it was a very interesting experience. To try. We had museum people in and we had all sorts of people discussing this. But fortunately, it wasn’t, it wasn’t tempted and eventually got dropped.

Gene Tunny  21:45

I need to ask you more about this, because I walk through there practically every day or every second day. I live near the park lands it’s this amazing space. They’ve got this beautiful floral garden there, the spectacle garden, there’s a lake, there’s a Well, I mean, it is a rain forest is part of it. There’s not a lot of rain forests, but there’s a little bit there. And there’s this canopy walk, which is great. I think it’s an amazing attraction. I couldn’t imagine anything else been there. But what ended up happening? Did they just think, Oh, this is all to hard redevelop or?

Scott Prasser  22:15

Smithsonian doesn’t do things outside the United States. That is the crux of the issue. Smithsonian is an American only and the money for the Smithsonian came from an Englishman, by the way, called Smithson, whatever comes from he gave money to America in the 1840s. The American government didn’t know what to do, in gold in gold, by the way, they didn’t know what to do with it. And then the idea was to set up the sort of museums, museums were run by governments in the 19th century to largely be places where you brought back your booty from your colonies. Okay, the English Museum, German Berlin museums. And so the Americans decided to build this museum complex, which anyone been there is fantastic. Because it’s multiple museums in Washington, DC, it’s fantastic place. And that’s what they did. And we brought Smithsonian people out to Brisbane, and all sorts of things to try and see if we could get interesting. We develop some sort of agreement and we develop some sort of interchange of scholars and people, I left the Public Service and that probably didn’t happen. Right. 

Gene Tunny  23:29

Okay, that is very interesting. Now, I had to ask because it’s so close to home. So yeah. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  24:11

Now back to the show. Okay, let’s go over some of these other criteria. Scott, I think this is a really great list. This was for your students, so they could come up with examples of white elephant projects. And this is when you’re teaching project management. And so first, they do not fully achieve their public stated objectives. So second, white elephant projects usually cost more than was promised or estimated and much, much more. So this whole thing about mega projects is this mega project risk. I think you refer that, the Oxford scholar who’s written a lot on mega projects. So you’re in that’s in your oval, overcoming the white elephant syndrome. Yeah, yeah. Good one. And fourth, they often so yeah, third, they might produce some marginal benefits, but they don’t cover their full real costs. Fourth, though, too often maintain past their use by dates. Okay and fifth, they were perceived as counterproductive in its own time, not merely by hindsight. So you’re talking about so your contention is that a lot of these projects, at the time were criticised as being potential white elephants and politicians went ahead anyway. Is that right?

Scott Prasser  25:27

Yeah. Politics like to say we’re doing it. Okay. Yeah, we’re gonna do it. Right. Peter Beattie was very big into we’re doing it sort of syndrome. And they don’t want to have a back down, because that’s a political embarrassment. Right. Okay. So I used to have a superior in the public service. And his slogan used to be let’s do it. And my slogan was, let’s think about it. This cause conflict, okay. I said, Why are we doing this crazy project sort of thing and that was also my view. And so I’ve and I’ve worked in ministerial offices in Canberra, why, Minister are we doing this project? You know, is this a good idea? And so, once this things gets going, it’s really, really hard despite all the contrary evidence that happens. Now, sometimes that evidence could be inaccurate and wrong. And that’s when judgement is required. We know and Prince Albert was building the Crystal Palace in England for the Great Exhibition, everyone said it was going to be a white elephant, and there’s going to be a disaster and people are gonna die. That Her Majesty Queen Victoria stuck by him and it got built in it was an exhibition was a financial success, you know, it built a whole stack of things afterwards, not for the money, the profit went. So, but you know, what is interesting is, is governments do not like to admit they’ve made a mistake. Yes, right. That’s now I think, it’s sometimes we can say sorry for lots of thing. But we don’t want to say sorry for the sort of mistakes. And we I mean, the other who want to see lots of mistakes is Defence projects, phenomenal amount. And helicopters that don’t fly. Tanks that are too heavy for our bridges, and so on, so forth, frigates that we don’t know where they’ve worked or not. Submarines, and we still don’t have, and so on and so forth. It just goes on and on.

Gene Tunny  27:19

So this submarine debacle or whatever you want to call it. This was intensely political, wasn’t it?

Scott Prasser  27:27

It was about saving Liberal Party seats in South Australia. Right. That’s the story. That’s really it. We, we could have bought, the German Germans have had pretty good experience of u-boat type things, okay. And we could have bought the German programme. And if we bought the German product, they were knocked down form, they would have cost $12 billion. The Germans would have come out and train people as they tend to do. Yeah. Okay. And they will now be operational. Right. We then went down, we then retrofitted nuclear French submarines, put diesel engine in because we can’t have nuclear power. Why we would want to build diesel submarine is beyond my comprehension. Yeah. And then to prop up the liberal seats in South Australia. Then we went down this track. And so here we are, in 2022. We still haven’t got a single submarine. And by the way, the Collins submarines have also been a bit of a disaster, too, in terms of their they’ve had to get refitted with lots of problems with them, and so on. So I don’t know it’s a real, it’s a real problem. And there’s an example where we really the whole thing was driven by politics. Right? Rather than by policy. Yeah, that’s the problem.

Gene Tunny  28:45

Yeah. So we were trying to get manufacturing jobs in South Australia for political reasons. So we were either we are, we were building submarines here, or what was it retrofitting French submarines. Yeah. And then we ended up having a change of course, a couple of years ago, because we signed this ORCAS agreement with the US and UK. Fair enough, but that’s upset the French.

Scott Prasser  29:10

Yeah, I think what we should have done is gone and bought a couple of nuclear submarines from America or, I’m sure had a couple lying around somewhere or and gone ahead with the debt. That’s what we could have done. So that’s an issue.

Gene Tunny  29:24

Yeah, yeah, absolutely. Okay, six, there were feasible alternative courses of action available. In short, the project chosen did not have to be adopted or take the particular form it did to tackle a perceived problem. Okay and certainly in that water crisis, when we went ahead and built that expensive desalination plant, a better option was possibly well, if we’d built dams in the past.

Scott Prasser  29:47

Just remember that the Goss government came in and canceled the Wolffdene dam. Dum dum, okay. against the advice of the coordinator General Affairs Department at the time. Um, so you know how during the drought, remember, there was all this incentive of buying, getting tanks in your backyard tanks, I didn’t buy a tank, because I have this very odd view that since I pay rates in water rates, I expect the government to supply me with water. Okay, it’s not my job to go and spend 10,000 bucks on a tank to be in my backyard. And so its the same with solar panels, we could use the same analogy. So the government’s don’t often sit down properly and say, how could we tackle this issue in a different way they jump to the obvious, most visible idea, right. The big project, the big deal, we’re doing this, we’re going to save everyone, if we go ahead of this big problem, when they’re often alternatives. And look, you know, this and I know this, most public policy problems are really caused by people’s behaviour. Okay. Okay. Why are there car accidents? Because a lot of people drink too much. Okay. Right. Okay. Why do people get sick lots? Because they have lousy diets and have bad lifestyle. Okay, hospitals pick up the residual. Now, we can’t change people’s behaviour, except by all sorts of incentives and so on things like that. But governments don’t really sit down. It’s like freeways. I mean, do we have to keep building freeways when maybe you have completely different urban development or you have different timescales for people to work and go home and all sorts of stuff. And you don’t have to go down the big spending alternative and sit down and think about, look, you’re hearing this in education at the moment. Ah, you know, we’ve got to we’ve been spending more money on education, by the way, by quite a large amount and our results are declining in Australia in a big way. Federal government more than the states, the federal government is actually now the biggest single spender on schools. Okay. Right. Okay. And where did that where did the money go? Largely goes in teacher salaries? Yeah. Because we got smaller classrooms. Okay. So is that really the appropriate thing to do? Or should we be thinking about? What are teachers? How are teachers properly trained? And things like that, you know, what’s, what’s the way to do it? Aboriginals have a poor education, but you talk to people, a lot of the problem is that they don’t attend school, right. The people don’t attend school, then there’s the problem. There it is. And they’re very hard things to tackle. But governments just jump to the obvious so often, and don’t end as in because of rushed decision making gotta be seen to be doing something. And the media, piling it on. What are you doing about this? What are you doing about this? This, like, when you see an accident, train accident or something? There’s some poor person, you know, dragging themselves to the train or the poor ambulance service dealing with people. What’s the government going to do about this. You know, give us a give us a bribe. And what I found is government rush too many things. rushed to meet the media agenda. Yes, yeah. Then yeah. The policy agenda.

Gene Tunny  33:30

Yeah. Right. So yeah, and this is where this is how we get white elephants. They want something iconic. I mean, you’re talking about. No, thankfully, that Smithsonian thing never went ahead. But they ended up with this idea of a there has always been this idea of a landmark or an iconic building in Brisbane, I think it probably will come up again with the Olympics. So we wanted something to sort of excite the world or make Brisbane distinctive. To an extent I think that GOMA, that Gallery of Modern Art that was they were trying, I think that one intention of that was that it could serve as a building that

Scott Prasser  34:07

Yeah, well, the art world is very big on that, mainly because so much art shown is so terrible. They’re got to have something good outside to look at.

Gene Tunny  34:15

Yeah, oh, yeah. Some of it’s difficult…

Scott Prasser  34:18

I’m obviously a Philistine. I don’t understand.

Gene Tunny  34:21

Some it is. It’s difficult to comprehend really, but but they’ve had some great exhibitions at GOMA. They had a great David Lynch exhibition many years ago.

Scott Prasser  34:31

I think Southbank which is basically developed by the National Party government, essentially, for the expo 88 is quite a successful sort of precinct in a sense. Yeah, without being too grand. The art gallery is a reasonable size, there’s the Queensland library we’re one of the few places that actually have a State Library, not everyone is very keen on those things. So there’s a lot of good things about the South Bank, I think it was developed and the government would push through and got that done. And there is a bit of style about it without it being over the top, over the top, not that it’s not a Guggenheim by any stretch of the imagination. So it’s, if you go over there, it’s pretty busy in this kid’s swimming and what sort of stuff. It’s got some things going for. But yeah, there’s one example where it’s at a scale that is confit in Brisbane, say where I mean, the, the iconic thing of, of Brisbane is the climate. That’s the iconic thing. And unfortunately, don’t build houses to suit the climate. We build houses of air conditioning systems, designed in Melbourne. Yeah, that’s another story.

Gene Tunny  35:41

Yeah. Yeah, coming back to the white elephant. So the last criterion that you specified, the decision to proceed with a policy or project should be that of a group, not an individual ruler. So all case study selected involves some form of collective decision making process in a democratic environment, not by tyrants, dictators or in authoritarian regimes. That’s because we just assume dictators will do crazy things.

Scott Prasser  36:13

Starling, yeah, you know, Hitler, and those sort of people. North Korea, you can look at lots of those sort of, yeah, sort of buildings, they can make it happen. Sometimes it’s, you know, it’s great. I mean, I suppose you could say Adolf gave us the German highways, which were brilliantly designed and, and still are pretty brilliant to drive on. They’re much better than American highways. But you know, that’s a big cost to pay. But I think all the things we’re talking about, were decided in this democratic system. That is there’s a so called independent public service, there was some sort of parliamentary approval, there’s some sort of accountability, there’s some sort of openness about them. They, I mean, Mr. Beattie, might have been a very powerful Premier, but he still had to get approval from his cabinet. One assumes for the things that went ahead, yeah, so we can’t just blame the premier, you know, the premier was part of a government. Yeah, therefore, we say, and we have a reasonable, you know, free press to comment on things. So that’s what we’re saying that you can’t just blame, you know, one person in our solar system. Our white elephants have been collective fair decisions, if you like, right, we’ve tried to point out.

Gene Tunny  37:29

So we’ve got to look out for them as, as citizens, or if we’re in government, then we should be looking out for these things. And because they’re not really, what’s your view on whether they’re actually politically sensible or not? Like if you’re if you’re just looking at completely politically? Do you think these things? Do politicians get a benefit from them, when they open? When they open the desal plant, or they open a new school that ends up running under capacity or a new hospital?

Scott Prasser  37:58

They think they do. Now, that’s politicians, I often have arguments in with politicians about grants and things, you know, why are we involved in giving out this grant of $5,000 to x project so the local member can hand over this check? Do which gets a tiny article in the local paper. Do you really, really, think, minister, that this is going to get votes for the government? Yes, Scott, you don’t understand politics. I do understand the politics. I’m saying it’s not very good politics.

Gene Tunny  38:33

Yeah. Okay. So as an advisor, you’ve got made a push back. Yeah. Okay.

Scott Prasser  38:40

I’m very proud that on a couple of things. There was one crazy idea going on in one office, about a moving government testing body to somewhere in the country. And the public servants said to me, Scott, this is going to cost $50 million to do . That is what it’s going to cost, what can we do? I said, we’re going to slow it down. And we slowed it down. And got so slow down, it didn’t get to cabinet, and it was too late for the election. Right. We didn’t do it. Okay. How are we all happy.

Gene Tunny  39:18

Right. Okay, so, going back to your book, just before we wrap up the white elephant stampede. We talked about the desal plant. You talking about the payroll system debacle here in Queensland, the state of Australia, we’re in other what other examples are there in this book? Are there international examples too?

Scott Prasser  39:42

Yes, there is one. Paul Hooper talks about airports. He’s basically, a what do you call him a transport economist? Yeah. And PhD has worked in, worked overseas. And he looks at how new airports often become phenomenal, disasters in one in Berlin became a disaster, one in Thailand. And he looks at how airports often develop with little thought about what it really gonna cost and how effective it will be. So, there’s when he looks at those sort of things, I think that’s a really good one to look at. So in his national one, if you like, the Olympic Games and looks in other Olympic Games, as we’ve talked about, so we’ve talked about those, the other one I like is the COVID Safe App, which people may remember in the Commonwealth Government, the COVID Safe App. Okay. And I had come in, I refused to join, join it, by the way, as I did on anything, I never tried to join and link up with government. And that’s been a complete waste of time and effort. Yeah. Right. And, again, the government rushing into it and sometimes technology makes government think, Oh, we can use this new technology for something. And again, that wasn’t wasn’t thought thought through. So there’s a very recent example, which is in the book being discussed by Professor Schwartz, who used to be Vice Chancellor of Macquarie University and so on and is an extremely bright person. There’s an example of that very, it didn’t cost a lot of money, but it still cost some money and took up a lot of time. And and expectations were just never met, it eventually just faded away.

Gene Tunny  41:35

That’s completely useless. So what was it it was an app on the phone at work through Bluetooth and if you passed, every time you pass someone who also had the app on and Bluetooth was enabled, there would be a communication that you you’d register that you were in close proximity one and a half metres within one and a half metres of this person. And therefore if they tested positive for COVID, you would then get notified or you are in close proximity of someone who had COVID and that was supposed to allow us to manage goes better.

Scott Prasser  42:07

Appalling, appalling authoritarian government scenario going on I mean, fact that it was it was a liberal so called Liberal government brought tortures up. Is even m ore repulsive. What’s the next bright idea coming from the powers that be in Canberra land?

Gene Tunny  42:25

Yeah, well.

Scott Prasser  42:26

I mean, Canberra is a white elephant by the way, the whole thing. That’s another story.

Gene Tunny  42:31

I know that it was in the top 10 policy mistakes public policy mistakes for Australia that the Institute of Public Affairs put out. I forget how many years.

Scott Prasser  42:43

Redfern post office or something was the other one where all the mail went through Redfern and Sydney exchange and got stuck if there was a strike. Means all the mail in Australia got stuck on something like that. I think it was Redfern, one of those sort of things. And see the other thing is government often put all their eggs in one basket. Yeah, another issue. And this is why a federal system of government is good because you can have different baskets going on. And if you over over capitalised, you turn over capitalise in your house, you have interpreters in your car, or government going over capitalising in spending money. Yeah, and they put all their eggs in this, this is the solution for the problem. And of course, you ought to have a couple of horses in the race rather than just one horse in the policy race. If you’re lying. There are many ways to policy heaven, I say. Yeah, so we all be careful about adopting just one thing as the magic solution.

Gene Tunny  43:46

I was just thinking, does anyone talk about is there a chapter on public transport projects in there?

Scott Prasser  43:51

No, not Not really. But that might be next book we what we’re wanting to do is, is have a series, another book coming out and have an annual White Elephant award. Yeah, that’s what we want to do. And we’re going to link up with project management institute and Master Builders Association, those sort of bodies, Master Builders, of course, I’ll build anything they sell me. They’ll build anything, downside, people pay, they’ll knock down as long as people pay. They don’t question the value of what they’re doing. If you give me money, we’ll build it. No matter how stupid and how bad the design will be. We’ll build it. That’s not our decision. Okay.

Gene Tunny  44:29

Yeah. Well, I was just thinking public transport because there’s a bit of a question about whether this new subway project we’re building here in Brisbane is economically viable, particularly now as the cost of it’s blowing out. It’s one of these mega projects Cross River Rail.

Scott Prasser  44:45

That’s right, blowing out. The Sydney light rail project is one that’s been very expensive and very disruptive and took longer and so on and so forth. And given that what we’ve learned from COVID. What have we learned about how lot of people can work from home. We don’t really need all these offices and buildings running around the place. And so Heaven has arrived, in a sense, you can work from home. And given that, you know, a lot of our people workforce works in white collar office type jobs, then that’s possible. When I was in the public service, it was very hard to work from home. Okay, it was very hard to let one of your staff work from home, there’s all sorts of forms that had to be filled out. And sometimes some staff could work more effectively at home, you’re not being interrupted by, you know, coffee halls, and I would let staff work from home sort of unofficially. And, okay, you got three days, I want, all I want to see is the paper at the end of the three days, and had that person stayed in the office, it probably would have taken two weeks, because of all the disruptions and meetings and, and rubbish that goes on. So now we can work more from home. So we need to think about, you know, when people travel, why they travel? And do we need a lot of the infrastructure, you know, coming into the city? For what purpose? And for how many?

Gene Tunny  46:13

Yeah, so I’m just thinking, what’s the how do we fix this? I mean, can we actually fix it? Or is it just a feature of our democratic system is, we’re always gonna have politicians being political. Could should our journalists be challenging the politicians to give us the to provide the cost benefit analysis before us bill? Should there should be rigorous scrutiny of that cost benefit analysis? Should we have competing cost benefit analyses? So you’re not just getting the view from Deloitte or the view from whoever that this is a great project and I mean, the government’s paid them a tonne of money tax, right.

Scott Prasser  46:48

That’s right, I certainly wouldn’t trust those people. Well, we’ve done this, haven’t we in other areas of government, I mean, the Productivity Commission. And it’s for run, the industries Assistance Commission, which which came out of the Whitlam government period, are examples where if you set up a process, and you have public reporting, and I’m not totally in favour of everything the Productivity Commission has recommended, but we know, don’t we, that if you want to keep x industry going, it is going to cost you $15,000 per employee to keep x industry going. You didn’t know that before. And now I’m, I’m all in favour of that information being in the public arena. But I’m also in favour of governments making democratic political decisions about keeping in industry costing $15,000. But I think the taxpayer ought to know what it’s costing in the trouble of so many of our projects, and especially state governments, which tend to be more secretive, is that we often are not told the truth about the cost of a project. It’s fuzzy, fuzzy figures. Don’t you worry about answers. Yeah. Okay. So in public policy, we often talk about speaking truth to power, that is, advisors, telling the leader, the King, the minister, the truth about what’s going on, highly admirable, if you don’t want to get shot or deported or whatever. The King of Prussia, Frederick the Great, he was a very hardworking king, he was absolute king. He worked from four in the morning till midnight, he had ministers, and they would have to report to him once a year of annual report. And but he did allow his ministers to tell him the truth, the one he put into jail for six months, he didn’t cut his head off. But he was telling him that the King’s idea was really a bad idea. And he released him because he said he was right. But I think the other problem we’ve gotten our democracy is that governments don’t talk truth to the people. We have so much political pallava going on. And we’re seeing it now, with the Albanese government over the defence projects, I’ll blame the previous government. Well, how about we have a real valuation of projects properly, rather than just jumping into the blame game sort of process all the time. How about telling us what the real alternatives that you came to government? You said that you could decrease energy costs that we need to spend more money on these things? Or how are we going to do it? How are we going to do it? And I think I would like some processes set up in Queensland, I’ve often recommended there should be a state priorities commission. And it should operate a bit like the Productivity Commission, we sort of have one. And anytime a government wants to do saying it should go to this body and it should release a Cost Assessment in the public arena. Yes, right. Yes. Yeah. It’s got to be independent, truly independent, not filled with political hacks or whatever, and then the government, then the government can make a decision, we’re still going to go ahead with the project because we think this is in the wider public interest. Yeah. So that’s what I think should happen. You’ve got to have processes. And you’ve got to insulate some of the advisory systems from the interference in the public. We’ve seen from Royal Commission, the Royal Commission to overseas doctors, in 2005, highlighted how the Premier’s department interfered in the release of quality reports about health. There was fixing of the hospital waiting list. Okay. This is all down to politics by the public. We had all we had all the body we had health Commission’s we had ombudsman, we had all sorts of rules that they weren’t insulated from political interference. I believe the biggest problem Australia’s got is not climate change is the politicisation of our public service, our judiciary, and our universities, where we people are appointed because of their political allegiances, not because of their competence. And because of that people are showing their allegiance to the governor of the day, and they’ll do what the government wants them to do.

Gene Tunny  51:20

Right. And that’s both sides of politics.

Scott Prasser  51:25

Newman missed a great opportunity in not fixing the problem. And his government was marked by just as many bad cases of cronies getting positions.

Gene Tunny  51:37

Right. Okay. Okay. Yep. There’s a lot of politicisation for sure. And that’s behind these white elephants. Absolutely. Okay. So any final points? Scott, what did you think? Were some of the highlights of this book? What are you most happy about with this, this edited volume?

Scott Prasser  51:58

Well, I think it was interesting how easily we got people to find examples. And then there was an as we could have been twice the size, okay. We didn’t think initially we would have a lot of interest. But a lot of people we’ve sent a flyer to, and we’re going to have a launch in November, in Brisbane and one in Canberra that there’s tremendous interest in this. And our job is to try and make people aware, what we want, we want we’re not against public funding. We want public funding spent more effectively. And if you’re talking about sustainability and the environment, surely we shouldn’t be wasting money on projects that are consuming resources and causing pollution in the construction or whatever it may be. When there are alternatives in the way, things could be done. That’s what we’re really on about. And we’re sort of surprised that the universities are letting us down on not being critical commentators on these sorts of things. There’s there’s very few people in universities writing about these sorts of matters.

Gene Tunny  53:12

Okay. Scott Prasser, thanks so much for your time chatting about white elephants has been terrific. Really enjoyed it. 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 Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

Regional divergence: why cities are growing faster than regions w/ Robert Sobyra – EP160

Why are cities growing faster than regional areas in many economies around the world, including in Australia, the US, and UK? Robert Sobyra of Construction Skills Queensland explains his recent research findings to show host Gene Tunny. Robert and Gene discuss what the predominance of high-skilled employment growth in cities means for regional economies, and whether policy measures to address the regional divergence would be desirable.

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.

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

Links relevant to the conversation

LinkedIn profile: Robert Sobyra

Rob’s LinkedIn article Why Regions Are Falling Behind – And What To Do About It

Rob’s research paper: “Unbalanced Growth in the Labourscape: explaining regional employment divergence”

Data mentioned by Gene:

Trend Deck 2021: Urbanisation (UK Government)

Urban population (% of total poulation) – United States (The World Bank)

World Urbanization Prospects 2018 (United Nations)

Transcript: Regional divergence: why cities are growing faster than regions w/ Robert Sobyra – EP160

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.

Robert Sobyra  00:04

So that agglomeration thing is the real reason why it’s happening so strongly in the big cities, the high skill employment growth because that’s always where it’s happened and so it feeds on itself. So it becomes a cumulative process of self reinforcement.

Gene Tunny  00:20

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 160. On regional economic divergence. This is a big issue in many advanced economies, including in Australia and the US. My guest this episode is Roberts Sobyra, Director of Research and Digital with Construction Skills Queensland. Rob recently wrote a great article about why Australian regions are falling behind and what to do about it. And I thought it would be good to invite him onto the show to ask him about his analysis. Please check out the show notes, relevant links, and for details of how you can get in touch. Please let me know what you think about what either Robert or I have to say in this episode. I’d love to hear from you. Right oh, now for my conversation with Robert Sobyra about regional economic divergence. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Robert Sobyra from construction skills, Queensland. Welcome to the programme.

Robert Sobyra  01:30

Hi Gene. Thanks for having me.

Gene Tunny  01:32

Oh, it’s a pleasure. Rob. I read your newsletter regularly, “The Flip Side” on LinkedIn.

Robert Sobyra  01:39

Thanks, you and my mum.

Gene Tunny  01:41

I think you think there might be a few more than that. I think it’s a great newsletter. It’s and in your last newsletter, you wrote about how you had some recently published research that showed jobs growth in Australian big cities. There was over, what was 2.4% annually, on average over the last two decades, and that was compared with 1% in regional Australia. Okay, yep. Yeah, that’s really interesting. And that’s, that accords with what I’ve seen, or the data I’ve seen and what you see if you go out to the regions and versus going to the big cities. I mean, clearly, that’s, that’s the case. And it looks like we see similar trends in countries around the world. So we could talk about that. And the point you make is that the economy creates more high skilled jobs, then middle skilled jobs. And these jobs are, well, the vast majority of them are in big cities. And you’ve done some research on that, that I think is really interesting. I want to chat about that. So yeah, it’s great. You’re on the show. To kick off I’d Yeah, I’d really be interested in I mean, what is the role of Construction Skills Queensland? What do you do here? And what’s your role there specifically?

Robert Sobyra  03:02

Yeah, sure. So CSQ is a pretty strange little organisation, a quasi government body and we collect the levy out of the construction industry. So any project that’s more than 150 grand gets levied .5%, or something like that, something of that order that goes into a fund, a training fund, and it’s our job to reinvest that money into the skills and training of the construction workforce. And, I run the research team here. So my job is kind of twofold. One is to make sure that we’re spending that money where it’s needed most. So where there’s labour shortages, where there’s gaps regionally, in skilled trades, and that sort of thing. And that helps us direct our investment. And, and then on top of that, we sort of do sort of original research that, you know, we’re in a pretty, pretty privileged position here, where we’ve got some revenue that allows us to do some, some research for the good of the industry. And that generally looks at issues around that sort of nexus between construction skills, labour, and forecasting labour shortages, that sort of thing.

Gene Tunny  04:04

Okay, so is CSQ helping people get into apprenticeships? Is that something you’re doing?

Robert Sobyra  04:09

Well, we do a little bit of that. We call that career pathways sort of stuff. So we do a fair bit of work with schools and helping people understand what a career in construction looks like, that sort of thing. But really, it’s mainly focused on existing workers. So if you’re a construction tradesperson, you might be a carpenter, you might be looking to upgrade your skills to say, get your builder’s licence, we can cover the cost of the majority of that training for you, if you’re eligible.

Gene Tunny  04:34

Oh gotcha. Okay, so you help people skill up. Okay. That’s great. Right. So let’s talk about your research or so it’s in this sort of field of regional economic development. What got you interested in this, this field to begin with are these types of issues?

Robert Sobyra  04:53

Yeah, so it’s broadly I guess you call it economic geography and regional, regional economics and regional economic developments have become a passion of mine. Over the years, as I’ve been working for CSQ, I do a lot of travel to the region throughout Queensland. And I think you know, I grew up in a big city, and like a lot of boys who grew up in a big city, you don’t pay much attention to the regions and, and there is this tendency to forget about them. And even a sort of thinly veiled contempt for regional issues sometimes I find in the big cities and so the more I travelled regionally, the more I realised how much that kind of forgotten places, and yet how much they contribute to the economy. You think about saying mining, for example, all of it comes out of regional Queensland. Yet the big policy discussions, the big planning discussions, almost universally, focus on Southeast Queensland, here in Queensland anyway, so. So my interest came out of a motivation, I guess, to correct that, and to put more of a focus on regions and to start trying to understand why it is that the outcomes in regions so often don’t diverge, or, or there’s so much so often a disparity of outcomes, whether it’s employment income, or whatever, between regions and big cities.

Gene Tunny  06:13

Okay, so you talked about economic geography, there’s a field of economic geography. And am I right that this is about the location of economic activity? How can we describe what economic geography is about broadly?

Robert Sobyra  06:26

Well, basically, the starting point is that, you know, there’s no such thing as a national economy, there really isn’t such a thing as a national or even a state economy, you know, economies happen in very particular places. So economic geography is really just recognising that and just just bringing the place back into the economy, rather than those sort of national abstractions that we get in the in the national accounts, you know, that smoothed over a lot of variation, and a lot of unevenness in terms of where, you know, real human beings actually live in work. So it’s about getting back down to that, to that to the roots of where economic activity really happens.

Gene Tunny  07:04

Okay, and so, one of the propositions and it accords with what is what the data tells us, or what real life tells us is that the regions are different, they don’t necessarily converge to the same industrial structure or level of income and output. So I thought, that’s one of the points I think you make in your paper that we’re going to talk about that there can be this divergence. So absolutely keen to chat about that. Now, have you done a PhD? Are you doing a PhD?

Robert Sobyra  07:35

Just in the examination phase at the moment. So all but done.

Gene Tunny  07:39

Okay. And is this what your PhD is on, this type of Research? Right. Okay. Terrific. And that which, which school is that?

Robert Sobyra  07:50

That’s at UQ, The University of Queensland, School of Earth, environmental sciences, with the human geographers there.

Gene Tunny  07:57

Okay, that’s great. And because it’s got a real economic aspect, this and I know you do a lot of economic analysis in your job here. We’ve presented at the same conference in Rocky. 

Robert Sobyra  08:09

Rocky as it was last year. 

Gene Tunny  08:13

Yeah, that’s right. Major enterprises conference. So absolutely. Excellent. Okay. So can you tell us about your paper? Please, Rob, what did you find in it? What? What were the main findings? How did you go about it? What was the techniques and then after that, we can talk about what it means even just tell us a story about the paper, please, that’d be great.

Robert Sobyra  08:34

Sure. So the, the original idea from the paper really came about, because up until around the turn of the century, there was quite a lot of interest in this area of regional economic divergence, and trying to understand, particularly in Australia, why it is that certain regions are outperforming others, particularly big cities are outperforming smaller regions. And, and sort of even just describing that, and mapping, that landscape was a big deal in the 80s, and the 90s. And then it kind of all went quiet around the turn of the century, and academic interest in this just really waned off, and we really got that almost singular focus on the national economy. And, and even even today, when the Reserve Bank talks about regions, it’s actually talking about states and territories, when you look at the stuff they produce, you know, and so, I was never comfortable with that, because, because just my observation of working across regions is that the outcomes can vary so much and the experience the lived experience on the ground of firms and workers in regions can be so variable. So I wanted to bring a bit of that place back into the, into the, into the discourse. So so my, my objective was to sort of update the record in the first instance and say, Alright, in the two decades since the turn of the century, what’s happened, and what I observed is that the patterns that had been picked up in the 80s and the 90s have actually been been continued, not only continued but intensified. And that’s broadly when it comes to employment. That’s my, my sort of main area is employment growth. The trend has intensified. And we’ve seen this sort of widening of a gap in outcomes in terms of employment growth between big cities and regional Australia.

Gene Tunny  10:21

Right. And so this is this statistic that all these stats that I mentioned before, Australian big cities have been growing at 2.5% trend term per annum over the last two decades. Yep. In trend terms versus 1%. In the regions, okay. And that’s going to over time that’s going to lead you know, the cumulative impact of that is huge, isn’t it?.

Robert Sobyra  10:44

Yeah. Yeah. And so. So that was sort of, I guess, the threshold question, or do we still have this thing called regional divergence and tick we do and, and it is, neoclassical economics holds that that should converge over time. So this, this, this divergence should actually shrink and we should find a sort of a nice equilibrium where outcomes equilibrate. But actually, we’re observing, and we’re observing this right across the world that outcomes seem to be diverging more and more. So my next question was trying to explain that. So why is it that we’re observing this phenomenon over cumulative pattern of regional divergence? So it’s ongoing and it’s compounding over time the wedges opening up? Why should that be the case? When, when neoclassical models suggest that the opposite should be happening?

Gene Tunny  11:35

Right? And that’s because if there is this divergence, then there’s obviously going to be that the available land available to people without jobs in these regions have massive investment opportunities. And so capital and labour should migrate?

Robert Sobyra  11:54

Yeah, that’s the theory, right? If you have excess supply in one area, then that should encourage firms to move there to exploit the lower rents, etc. And then, over time, that should equilibrate. Yeah. But that’s clearly not happening. It’s not happening here in Australia. It’s not happening in the US. It’s not happening in the UK, we’ve got this sort of observed pattern in most developed countries. So it’s, it’s been, I guess, my project has been to try to contribute to our understanding of what that’s all about. And there’s been some series in the past with some ideas around, you know, amenity. So one popular idea. The early noughties was that well, the reason why big cities are outperforming is more people want to live in big cities, just because, you know, the culture is better, apparently, you know, the food and the wine and everything is better in big cities. So that’s obviously why people are moving to big cities. And I never really swallowed that argument. And actually, it hasn’t stood up to any academic scrutiny in the last couple of decades. But that was a popular theory to begin with. But I really focused on the structure of the labour market, and just observing how, how our economy has been changing quite considerably in some pretty fundamental ways over the last couple of decades will really since the 80s, to be frank. And maybe there’s something in this that’s driving this divergence, you know, and I’ve really leveraged this concept of job polarisation, you’re familiar with this idea of job polarisation, where you’ve got you’ve got some high skilled jobs growth, and you’ve got some low skilled jobs growth, but the middle is getting hollowed out. Right. So middle skill employment is really shrinking. And low skill employment is growing and high skill employment is growing.

Gene Tunny  13:47

So what would you mean by middle skilled? So let’s say higher skilled, I’m guessing you mean tertiary educated professional jobs, middle skilled, is that the trades.

Robert Sobyra  14:00

They are middle skilled, but it’s actually broader than that. So, my favourite example is the finance industry. Okay, so once upon a time bank branches littered the landscape, yeah, and those bank branches were full of clerks, middle skill clerks, you know, my mum was one of them, sort of paralegal type person, did a lot of conveyancing, that sort of thing. Not tertiary qualified but you know, had the equivalent of a TAFE qualification. And anyway, you know, these were, these were thick across the landscape back in the 70s, and the 80s. And over time, what’s happened is a lot of those jobs have evaporated as, as you know, banking has become more digital. And that’s created a whole new set of occupations and skills. But all of those occupations and skills are mainly concentrated in big cities. Now they’re not in bricks and mortar branches across, across the state.

Gene Tunny  14:55

Yeah, exactly. Okay. And so what analysis did you do, Rob, how did you? In what proposition? Did you prove you, prove that there was this? There’s divergence and you’ve been able to prove what’s causing it isn’t right.

Robert Sobyra  15:12

Yeah so basically, it comes down to this, this job, polarisation theme. Okay, so what’s happening is effectively high skill employment growth is growing. Yeah, low skill employment growth is growing. But whereas low skill employment is uniformly distributed across the landscape, employment is not all of the high skill employment is basically accruing to the big cities. So they’re getting a dividend, they’re getting a sort of a growth premium. That’s not available to the regions. Because, you know, high skilled jobs just don’t land in regional centres, they land in big cities. And so there’s this extra increment of employment growth that you’re getting through this high skill economy. And that’s accruing disproportionately to the big city. So in aggregate terms, you wind up with overall, more employment growth in the cities than you do in the regions.

Gene Tunny  16:10

So is this because all the knowledge workers need to be co-located there are these agglomeration economies or whatever, and there’s also this Richard Florida stuff on the creative class, and they want to, they want to live in the cities to enjoy the bohemian lifestyle in the cities. But there’s also benefit, there’s benefits from them co locating. So I’m trying to, I thought that point you made at the beginning was interesting that there were these theories that people move to cities, because their lifestyle was better. I think Richard Florida was getting at that. But then he also recognised that there are benefits from the clustering together.

Robert Sobyra  16:46

Yeah. And that’s really the more important fact. And to put it in simple terms, birds of a feather flock together. Yeah. And that’s really what’s been happening. So it’s not new, that high skilled jobs concentrate in big cities, they always have. Yeah, the problem is when you high skilled jobs get created, they go to where there’s already existing agglomerations of high scale occupations, because it’s just easier if you’re setting up a business and that business requires a lot of data scientists, you’re going to go to where the data scientists are, you’re not going to go necessarily to wherever you think your customers might be, you’re gonna go to where your workforce is, if you don’t need to serve your customers directly. Like in the bank. Yeah. In the banking industry, right. So that long duration thing is the real reason why it’s happening so strongly in the big cities, the high skill, employment growth, because that’s always where it’s happened. And so it feeds on itself. So it becomes a cumulative process of self reinforcement.

Gene Tunny  17:49

Yeah. Well, one thing I was concerned about, say, eight, maybe seven or eight years ago was that when the interstate migration, the Queensland dropped off, it looked like a lot of professionals, a lot of the professional jobs were going to Sydney and Melbourne. So jobs in finance and, and we weren’t getting as many of them up here. But I think now, things have turned around a little here and within the people moving up here, so Queensland is picked up quite a bit, which is good. So I guess, the major cities you’re talking about where these professional jobs are growing in Australia, Sydney, Melbourne, Brisbane, Perth, Perth, really? Because of mining?

Robert Sobyra  18:33

Yeah, or just Yeah. And it’s just a growing agglomeration in general. You know, Perth, it’s the only obviously the only big city on that side of the continent. Yeah. So yeah, now what’s Melbourne, Melbourne, Sydney, Brisbane, Perth, actually, Sydney, Melbourne, Brisbane, Perth in that order, are the big growth centres.

Gene Tunny  18:51

Right. Yeah. And so in your view with this, this is the major factor. I mean, this explains the bulk of this divergence in outcomes between regions and in cities and regions, why cities are doing so much better because that’s where the, the employers of high skilled labour are, well, we’ve got governments, we’ve got administrations, we’ve got corporate HQ. And so that’s where the jobs growth is occurring.

Robert Sobyra  19:17

Well, that’s where that’s where the existing stores of human capital are. Okay, for that kind of work. So yeah, to take a live example. All the big miners as you’re probably aware of are automating all their fleets of trucks in their mines, right, so those miners historically would operate out of Mackay. You know, a lot of activity out there that truck drivers used to be essentially based in those sort of big regional centres and then they go out and drive the trucks on the mines. Now as they move away from driven trucks to driverless trucks, they set up these remote operation centres. Now those remote operations centres need to be staffed by a completely different category of worker not truck drivers anymore, obviously white collar professionals and where do you find those white collar professionals? In Brisbane? So where are they setting up the remote operation centre? In Brisbane?

Gene Tunny  20:10

Yeah, there’s a similar story in agriculture too, isn’t there? So, built over the years, agriculture has become more mechanised with these John Deere, cotton picking machines and things like that. And that’s reduced the labour requirement on the land. So yes, yep, similar story. And that’s affected the viability of a lot of these, these regional towns, many of which had more people in 1950 than they do today. That’s really extraordinary. Not the sort of major centres but in the regions. But yeah, if you drive through regional Queensland or regional New South Wales, plenty of towns like that, you get the sense that they were thriving much more 50 or 60, 70 years ago than today. Extraordinary.

Robert Sobyra  20:54

Yep. It’s, you know, the jobs numbers are one thing. So I focus on the quantity of the jobs that are being created. But there’s also an income element here, because high skilled jobs are higher income jobs. And so all of these higher income jobs are concentrated in the big cities, rather than the region. So it creates an income divergence, not just an employment growth divergence, which then has, obviously, feedback loops to the local economies. So the region ends up falling behind in income terms, not just in, you know, gross numbers.

Gene Tunny  21:30

Good point, I might just read out some of these stats that I found today when I was looking this up, because I had a sense that this was happening all over the world. Or at least urbanisation, we know that the world’s becoming more urbanised and might have been a few years ago, I remember when it when the stat came out, it was quite striking that for the first time in history, a majority of people live in urban areas, maybe it was 10 years ago, or whenever, whenever it happened, or remember when it was reported. The UN, or sorry, the World Bank, it has a world urbanisation Prospects Report 2018 and in 2018 55% of the world was urban. And that’s projected to get to 68% by 2050. It was 30% in 1950. Yeah. And so I think I mean, one of the big contributors to this growth is obviously China, or the people moving from regional areas to the bigger cities. And this is, this is, this is part of their economic growth story. Because, because people are less productive on the land, and they’re in cities. So to an extent, this is, this is a great thing that, you know, there is this there is this, this movement to the cities, because you can be more productive. But yeah, it’s, it can be hard if you’re in one of these communities and your communities are not not thriving, whereas there could be a lot of good things going for many of these regional communities’ livability, for example, have you thought about what’s happening? I mean, you mentioned in your piece that with COVID, there were some people looking at relocating to the regions, is this happening? Or do we know what’s going on there?

Robert Sobyra  23:13

Yeah, it doesn’t seem to be happening as much as many people think it’s happening. So there was a big uptick in net migration to the region net, an internal migration out of capital cities. But it seems like the main factor behind that lift in net migration is actually fewer people leaving the regions to come to cities rather than more people leaving cities to go to the region’s. I mean, I think that definitely is a bit of a trend in that area. There’s certainly an appetite for it. The regional Australia Institute did a really interesting survey. And they found that 20% of the people they surveyed just normal workers in big cities would be open to moving to a region if you know their work and lifestyle would allow it so I think that clearly is an appetite for it and this idea this sort of Floridian idea this Richard Florida kind of idea that you know, people only want to live in big cities these days, because that’s where all the best bars and museums are. I don’t think that stands up to scrutiny. I think for every person you come across who loves the big city buzz, there’s someone else who’s just aching for the peace and quiet and you know, the chill over regional sort of move and I personally know people have made the move.

Gene Tunny  24:28

Well, if you go if you’re close enough to a regional centre doesn’t have to be a big city. It could be a place like Bundaberg or, or somewhere that size. A city that doesn’t have any more than, what, 60,000 people but it’s got some great bars there. There’s the, yeah, there’s that beautiful beach Bargara and then there’s the Bargara beer company, the craft brewery which has a great place.

Robert Sobyra  24:56

Bundaberg

Gene Tunny  24:59

But there’s a lot going on over many of these regions. Yeah. Big shout out to Bundy. Bundy. And one thing I noticed too is that this movement to the regions some of it is to regions that are there close to the capitol or they’re sort of part of the same you could argue part of the same conurbation. Yeah. I’m trying to remember if in some of those states Gold Coast is considered regional

Robert Sobyra  25:28

Yeah, so in my research I absolutely did include Gold Coast Sunshine Coast in this broader metropolitan economy. I operationalize a big city as any region area four regions, sorry, but any any region within 100 kilometres of the inner city GPO. Yeah. So that that takes us to the Sunshine Coast, that takes us to the Gold Coast.

Gene Tunny  25:57

That makes sense, because I know that there have been, you know, if people do move to the regions or outside of Brisbane, the metro area, it’s, it’s often too, and they come from Interstate, it’s often to either Gold Coast or to Sunshine Coast and know Noosa and Peregian, they’ve done really well recently, but that’s sort of part of the whole 200 kilometre city. So I would think that’s really, in that urban area. And it’s those other regions that are further away, that don’t have the big corporate employers, the HQ, they don’t have state government or federal government offices. And one of the points you make is that there’s one strategy that governments could adopt to try to promote the regional moving offices, offices of particular agencies to regional cities.

Robert Sobyra  26:51

Yeah, I played with this idea a little bit. I was really interested to see if you remember, I think it was a year before last, Barnaby Joyce, when he was Minister for Agriculture. Yes. decided to move the Australian pesticides and veterinary medicines association to a regional, can’t remember where

Gene Tunny  27:08

Was it Armadale ?

Robert Sobyra  27:09

I think it was. Yeah. So move it from Canberra to Armidale. And he just did it by fiat. He just said, you know, he was now going to be in Armadale. And goodness, there was an uproar. It was so much pushback. So I think he did it, he still did it, but not without losing a fair bit of skin. So I think forcing it on people is problematic, you know, particularly when, let’s say you’ve worked in Canberra in this agency for 20 years and being told you got to uproot Armidale. It would be pretty confronting, and so they shed a lot of staff in that process. I think it’s, it’s problematic to force people to move, but I think governments can be doing a lot more to just open the option up and allow people to move if they would like to, you know, yeah, you and I, we both worked in government, we know what it’s like, yeah. It’s not many jobs, really in government that has to be done from William Street, you know, from Brisbane. Yeah. Lots and lots of those jobs could, could be done quite comfortably remotely from any part of Queensland.

Gene Tunny  28:10

Yeah, and I mean, what we’ve learned during this COVID period, is that there’s a lot more work that can be done remotely where you don’t, you don’t see each other personally in person for weeks or months. You just interact over zoom, if you’re in the same city, so it can work.

Robert Sobyra  28:27

It turns out the world still goes round. Yeah, I think that was another key lesson that, you know, the culture of presenteeism was really challenged during the pandemic, and actually people are productive when, when left to work on their own from home.

Gene Tunny  28:43

Yeah. So there could be some scope for governance to relocate or have some of their offices, satellite offices or, or even move the head office of an agency to a regional centre. That’s a possibility. I remember I once floated the idea that you could move Work Cover to Townsville. That’s, you know, that’s one thing I’d, I’d propose that that’s a possibility. And when you think, think about what you could move in, as I think in New South Wales, they moved the Word Cover head office, their Word Cover to Gosford or something like that North of Sydney, if I remember correctly. If not, I’ll correct that in the shownotes. What else can be done? Rob? If this is a problem? Well, one, do you think it’s a problem? And if it’s a problem, a policy problem, what should be done about it? What are the levers? What could governments do?

Robert Sobyra  29:37

Yeah, well, the The challenge, of course, is you know, we’re a free market dominated by private businesses. Yeah. We’re not, We’re not Russia or China. We’re not going to tell them where to go.

Gene Tunny  29:47

To Siberia. Yeah. Economic development of Siberia. So they go.

Robert Sobyra  29:53

Exactly. So it’s all about nudging and incentives which is always a little unsatisfactory. But certainly I think the framework or the mental model needs to change here, when it comes to state government and local governments in particular, when they’re thinking about what they need to do to generate jobs growth. So often I hear when I go to a region that, you know, the mantra is, well, we need to keep our kids here, we need to keep them here, stop them going to Brisbane to study and find work and stuff. And I feel like that’s a bit the wrong way around the mental model should be we need to get the jobs here. And then the kids will stay, if the jobs are here, you know, if the opportunities to, to forge a career in a professional sort of career path, or local, I think you’ll find people stay local. So for mining, the policy focus, and I don’t know what the right solutions are, but the policy focus, the principle needs to be on attracting high skilled jobs to regions. And I think the government can play a role in, in showing the way there by, as you say, setting up jobs or making regional jobs more available to public servants. I think that’s a real option available to governments that would be very low cost and very feasible, and would send a strong signal to the private sector that this can be done, and it can be done productively.

Gene Tunny  31:26

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

Female speaker  31:31

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Gene Tunny  32:00

Now back to the show. Is there scope for measures or support for regions to, to boost the amenity to boost the livability of the regions? I mean, one thing you’d want is good broadband, you want to make sure that your broadband is okay, so remote workers can locate there. I think in Australia, I don’t know. I mean, I think I know there are some black spots with all of these things. But I think generally, internet, I think it’s pretty good in most parts of Australia, because we’ve had we’ve got this National Broadband Network and they tried to roll it out as far as possible across Australia, so but I’m just wondering what if that’s an area that should be looked at the livability making it attractive investing and beautifying the streets? Yeah, I don’t know. I mean, there’s the investment climate too. You want to make sure you got low, low rates, you want to be as friendly to business as possible to make it easy to get development approvals. Yeah. Do you know?

Robert Sobyra  33:02

Yeah, I think all that is really important. I mean, the amenity side of things. I feel like local councils actually do quite well, throughout Queensland. Most of the places I go to in Queensland, there’s a huge focus on beautifying places, public realm, that sort of thing. I feel like that’s kind of in hand. I think the risk is that we kind of become that one trick pony. And we think that that will solve all our problems. But the more important things are those latter things you just mentioned, how do you attract investment to your region, and not just the investment, but the high quality jobs that come with that investment. So whatever settings, governments can put in place, local government can put in place to, you know, expedite building approvals and other you know, the state government, payroll tax, etc, things like that. Yeah, yeah.

Gene Tunny  33:52

Do we know anything about educational levels in regions? I remember when I looked at it last and I looked at this idea of a University High School in Townsville, there was one idea is that there would be a James Cook University High School, which would feed into JCU. One of the issues they had at the time, when we looked at it, was that there was already some under utilisation of existing high schools in Townsville. So there wasn’t at that stage at that point in time, there wasn’t the demand for it unnecessarily, but it’s a sort of that sort of thing might be useful in some regional centres because we know that there is a they do seem to have lower rates of retention to year 12. And then and then lower transition rates from high school into university. So if you can really invest in the schooling system, get high quality high schools, University High School where there’s a connection between the high school and the university. So students at the high school could do uni courses. They can interact with lectures, I guess, trade with high schools, too. I know in Townsville that there’s a trade school Tech-NQ ? I think it is. So there’s something like that. That is education, part of the story, improving education so that you’ve got this skilled, highly skilled workforce in the regions that could be attractive to employers to then set up and relocate.

Robert Sobyra  35:33

Yeah, no, I think you’re right. And it’s a bit of a chicken and egg thing here, isn’t that, you know, because the employer is really, really interested in coming to where the workers already exist. They don’t want to have to create a workforce they’re going to find existing labour pools they can tap into Yeah. So in one sense, yeah, we need to have the human capital creation happening before you can attract the industry. But at the same time, why would a university or an educational institution offer a degree in x, y, z, if there’s zero sort of career pathways?

Gene Tunny  36:11

Well, what I’m interested in is this new, this push for hydrogen and then renewables. And the state government here has this new energy plan, and it’s pumped hydro, and then we have to wait and see whether they can actually get these dams built. But, but yeah, there’s a lot of interest in, in energy and a lot of that, in new ways of generating energy. And a lot of that is going to happen in the regions, isn’t it? So is this on CSQ’s radar? Because construction is obviously involved in constructing a lot of this new infrastructure, isn’t it?

Robert Sobyra  36:46

Absolutely and the timing is impeccable, because just a month ago, we released a report examining this exact question, a piece of research, we asked one very simple question. If we want to get to net zero by 2050. If we want a hydrogen industry, how much stuff are we going to have to build? And where will we have to build it? How many solar farms? How many wind farms, and the short answer is a lot. Yeah, just staggering. And for me, as a regional economics sort of scholar, the most interesting finding is that virtually all of this investment lands in regional Queensland, yeah, central Northern Queensland. And, and so there’s a huge amount of demand coming for construction workers to build the renewable transition. You know, I feel like the last decade we’ve spent our whole time thinking about what our targets should be. And now this decade, we’re really going to be focused on how we’re going to deliver all this stuff. Because we’ve got to, we’ve got to build an Olympics, we’ve got to finish this housing boom. And then we’ve got to tackle this, this renewables transition, which will I think, make the mining boom look like a bit of a footnote in the history of this state. That’s the sort of scale of investment that we’re looking at, for renewables in Queensland. And for the region’s, it’s a great opportunity, because our modelling shows that the vast majority of the labour that will be needed to build these renewable projects, low to middle skilled labour. So we’re talking tradespeople and we’re talking sort of unskilled labour, semi skilled labour. So it’s well within the reach of the workforce already in , n the region. So as a structural adjustment sort of story.

Gene Tunny  38:29

 This is really, really positive. Yeah, I have to have a look at your report rather than that’s a, that’s an extraordinary claim. I’m not denying it at all and not being negative about it. I just want to look at it. Because to think that it could be larger than mining when we had $70 billion over a few years invested in Gladstone. I mean, are. You remember that? Yeah, that boom, we had a construction boom, nearly 10 years ago now. It’s just incredible. But yeah, if renewables, I guess they want to get to what they, their aspiration is, then yeah, perhaps you do need to build that much. And then you have to ask, Well, okay. Will this actually happen? I know. I’m sceptical but yeah, let me read your report. I haven’t looked at it yet. So I can’t really ask any informed questions on that. Right. Okay. So just to try and wrap this up. So you’ve talked about the last 20 years. And we had COVID, we had the pandemic and we’ve got more people working from home, and potentially who could work remotely? Okay, we haven’t seen as much. We haven’t really seen a lot of huge numbers of people moving to the regions. Is that Is, that what is that? What is happening, that the cities are continuing to grow? That’s where the growth is. You expect this to continue over the next decade or so you don’t know. It’s too hard to say.

Robert Sobyra  39:56

No, I think that’s exactly what’s going to happen. I think let Left unchecked, these forces just accumulate over time. So the skilled cities just get more skilled over time, and the region’s will continue to fall away in terms of employment growth, you know, left unchecked, it’ll, it’ll probably reach some sort of, you know, happy level. But there will be this ongoing gap between the regions and the big cities. I mean, there’s no doubt that the fundamentals of Queensland as an economy is very, very strong, so we’ll continue to attract more employment growth, more population growth, and probably anywhere else in the country. But how that’s distributed across the landscape in Queensland will be very, very uneven. And if all we do is look at those aggregate outcomes, we’re going to miss some pretty important variations across space.

Gene Tunny  40:51

Yeah, exactly. And probably want to wrap up on these points, I may have signaled wanting to wrap up before but there’s some more stuff I want to talk about what’s been happening in the States and, and in the UK. So I had a look at the data for the US. So the World Bank data on the urban population in the US, it’s gone from 70% in 1960. And it’s now up at 83%, in 2021. Okay, so that it’s occurring there. So it does looks like maybe that’s, that’s not as extraordinary as what’s happened worldwide. But worldwide, you had people moving out a lot of people on the land in China or in India, or wherever that’s, but it’s still an upward trend. And I found some data from the office for science, the UK Government Office for science, that trend Dec 2021 urbanisation. And so that’s showing that England’s urban population is growing faster than its rural population. Urban has been growing 6.2% over 2011 to 2019, rural 5.2%. But what you see is, it’s all sort of going to London are a lot of it is in London, 27% out of London 19% growth rate that’s over 2001 to 2019. Cities overall. So cities overal, such as well, other cities other than London cities such as Liverpool, Manchester, Birmingham, that 16%, the town’s 11%. So you’ve got that divergence there in the UK? Is this something you? You’re looking at it as well? I mean, are you, your research? You’ve done this for Australia? But are you? Do you think your findings are relevant to these other countries? Are you thinking of extending your research to these other countries?

Robert Sobyra  42:44

Yeah, it’s a good question. There’s no doubt that divergence is a really common feature of advanced economies everywhere you look. Yeah, we observe it, whether or not my particular explanation of the sort of the job polarising logic of our economy at the moment and how we’re stripping out all those middle skill jobs. And that’s starving, the region’s of employment growth, whether that’s a key driver or a key mechanism in other contexts, remains to be seen. Definitely something I want to look at. But yeah, as far as I can tell, if the economic structures are similar, you should expect similar outcomes. And in this respect, they’re very similar across all advanced economies.

Gene Tunny  43:22

Yeah well, I was thinking about what’s happened in the US. There’s the NAFTA shock, and then there was China joining the WTO shock. And what that meant was it it meant that the US lost a lot of manufacturing jobs and maybe their middle skilled jobs in the heartland in, in the Midwest or in Ohio, and places like that. And that’s had an impact on Well, that’s, you know, had a huge, very negative impact on some of those regions, particularly since they don’t have as good of social security or public health system as we do in Australia or in the UK. And then you’ve got opioid addiction, and yeah, all sorts of problems. And this is possibly fueling the political trouble that you’ve got in the States. And, yeah, all sorts of bad results there. And I know that there was research by David Autor from MIT, he looked at this, I think, did.

Robert Sobyra  44:25

Yeah, he’s one of the first people to observe this, this polarising tendency. And yeah, one factor is the offshoring movement. Yeah, that you mentioned. Another one is just technological automation. So that sort of banking story, you know, the middle skilled clerks have been pushed out by the machines, and now the highest skill, you know, data scientists and whatever, sort of the key workforce for the banking sector. So there are two factors at play that are driving that underlying process. And yeah, in America, it’s very, very acute as you say that so infrastructures are very different in terms of the welfare net, and that sort of thing over there. So it’s a very bad outcome.

Gene Tunny  45:07

Yeah. And so part of this, we’ve talked about job polarisation and talked about divergence between cities and regions. And then in an implication of all of this is this, this must be part of the inequality story or inequality in income and wealth. Now, again, Australia, we’ve had, well, there’s a big argument about whether income inequality is increasing wealth inequality certainly is income inequality, less, less clear. But in the States, certainly that inequality is increased and possibly that is, due this divergence story is part of that. So yeah. Okay. Rob, any final thoughts before we wrap up? This has been great. I’ve really enjoyed the conversation. But any final thoughts?

Robert Sobyra  45:56

No, nothing from me. Appreciate the invitation. It’s been a great chat.

Gene Tunny  46:01

I’ve appreciated it, Rob. Yeah, it’s terrific. And yeah, just hope you can keep up the great research and yeah, hope to chat with you again soon.

Robert Sobyra  46:10

Let’s loop back and talk about renewable sometime. Absolutely. Okay. Thanks, Rob. Thanks, mate.

Gene Tunny  46:17

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. Till next week, goodbye.

Credits

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

The future US fiscal crisis and how to avert it w/ Romina Boccia, Cato Institute – EP159

The Cato Institute’s Romina Boccia explains why she’s concerned about a future US fiscal crisis. She explains how entitlement programs such as Social Security and Medicare are the source of the problem. 

This episode’s guest Romina Boccia is Director of Budget and Entitlement Policy at the Cato Institute, where she specializes in federal spending, budget process, economic implications of rising debt, and Social Security and Medicare reform.

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

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

Links relevant to the conversation

Romina’s Cato Institute profile

Romina’s first post for the Cato Institution: Joining Cato to Restrain the Federal Budget Leviathan

Council on Foreign Relations article containing deficit projections which Gene mentions: The National Debt Dilemma

U.S. News article: How Much You Will Get From Social Security

Transcript: The future US fiscal crisis and how to avert it w/ Romina Boccia, Cato Institute – EP159

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,

Romina Boccia  00:04

The better solution is to realise that we are on a highly precarious fiscal trajectory even under the best circumstances. And now is the time to adjust our fiscal scenario to reduce the growth in spending.

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 159 on the US federal budget and debt. My guest is Romina Boccia, Director of budget and entitlement policy at the Cato Institute. Romina is concerned that the US is on a path toward a fiscal crisis. We chat about why this is so and what can be done about it. Please check out the show notes, relevant links and details of how you can get in touch. You can send me an email or a voice message. Please get in touch and let me know what you think about what either Romina or I have to say in this episode, I’d love to hear from you. Right now for my conversation with Romina Boccia about the US federal budget. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. Hope you enjoy it. Romina Boccia, a director of budget and entitlement policy at the Cato Institute. Romina, great to be speaking with you today.

Romina Boccia  01:26

Thanks so much for having me on your show, Gene.

Gene Tunny  01:29

Oh, it’s, it’s excellent. So you’ve joined Cato in recent months, haven’t you Romania. And I read one of your pieces in which you are introducing yourself at Cato. And you wrote that, today I am joining the Cato Institute, to do my part to prevent a severe US fiscal crisis by restraining the federal budget Leviathan. I’ll write and speak about federal spending, the budget process, the economic implications of rising debt, and Social Security and Medicare reform. So really big topics there. To start off with, could I ask you, what do you mean by a fiscal crisis? Just how bad do you think things currently are? How bad could they get in the US?

Romina Boccia  02:26

Yes, you know, the thing with a fiscal crises is a bit like when, whether you’re entering a recession or not that you don’t quite know if you’re in it until you’re in it. And in the United States scenario, there are quite a few factors that make it even more difficult to predict if our when a fiscal crisis might occur, because the United States, of course, as you’re aware, provides the US dollar, which is a world, the primary world reserve currency, which allows the United States government to get away with a lot worse fiscal policy than another nation state might. But that doesn’t mean that lawmakers in the United States can just rest on those laurels. And think that they can spend and borrow as much as they would like in order to satisfy their constituent spending demands, without facing any consequences for that. So what I mean by fiscal crises, and we’ve seen this in various countries over the course of roughly 800 to 1000 years of history. Carmen, Kenneth Rogoff and Carmen Reinhart did an excellent book on this, that, despite a small mistake they made in a research paper, which was corrected later on, still stands in its lessons. And that was over 800 years of history of public debt, and how that affects the countries that accumulate that debt. And so, in, in the scenario of US fiscal crisis, we could potentially face a sudden and very high rise in interest rates, much higher and much more sudden than we’re currently experiencing. And that could result in disrupting productive investments severely lead us into a significant recession. And this could also potentially precede an episode of hyperinflation, which is something that other countries have lived through in the past. I’m originally from Germany, that has a history of hyperinflation after World War Two. And, and that type of rapid accelerating out of control inflation would be very, very damaging to the country, disrupting employment, markets and causing a tremendous pain for US households. And even just, you know, the recent bout of inflation, which was quite severe and not something that the US population has experienced in a long time. Even that doesn’t come close to what we might potentially face in a hyperinflationary scenario. And in the long run, if the US is fiscal standing were to change significantly if the dollar were to lose its prominent status as a world reserve currency, if markets employment investment were severely disrupted, if inflation got out of control, and the Fed wasn’t able to put this genie back in the bottle, it could also have other unforeseen ramifications affecting the security and global standing of the United States as an economic powerhouse as a foreign powerhouse. And also, its, its attractiveness as a destination for immigrants, investment, etc. My point is that lawmakers are playing with fire. And the sooner they come to reckon with that fact and start making amends, the higher the likelihood that we will be able to avert such a fiscal crisis. But it’s it’s a tough pill to swallow because the programmes that are driving us into this large and rising debt, and that could potentially precipitate a fiscal crisis in the future, who knows when those are also the most popular federal government programmes, namely, Social Security and Medicare, which is why in my work, I want to be focused on making reforms to those drivers of growing spending.

Gene Tunny  06:57

Right. Okay, so you mentioned hyperinflation, and we had a, I had a conversation in the last episode about hyperinflation and you refer to the hyperinflation. So Germany had very extreme, it had hyperinflation after the First World War, when the Weimar Republic, and, I mean, there’s a certain set of circumstances that lead to hyperinflation, I mean, a breakdown of your economic system, really your tax, the ability to raise taxes, and then the government turns on the printing press. So that’s the worst case. But short of that your, I think, uh, you’re, you’re concerned about them? Are you concerned about them having to make rapid adjustments, cutting other programmes to be able to service the interest bill or having to raise taxes? Is that the type of scenario you have in mind.

Romina Boccia  07:54

I think that in a, in a lower severity scenario, what we’ve, what we’ll see is much higher tax rates in the United States in the future, which will negatively impact growth and standards of living, and could also undermine the United States as a, as a, as an innovation powerhouse. There’s also a scenario where the debt continues to rise, lawmakers avoid tax increases, and we find ourselves in more of a Japan like stagnation where the economy barely grows, or maybe growth is even negative for some period of time. That’s another, that’s another alternative, which is also not very desirable. Or in, a in a worst scenario. You know, I don’t, I don’t see lawmakers making rapid changes to Social Security and Medicare unless they had no other options left. Yeah, because their primary interest is to get reelected. So I could see us more likely entering into a high inflation scenario in an attempt to continue to pay these benefits, despite there not being the revenue for it. And, you know, the United States can, can and does print its own money. And we’ve seen several bouts of so-called quantitative easing, which are a version of that, where that unfortunately, to me seems more likely than significant changes to entitlement programmes unless we can strike some kind of a grand bargain, which has happened in other nations before. One scenario found quite illustrative is, Sweden went through some significant budgetary reforms. Many of its means tested and other social insurance programmes. And while Sweden still has much higher tax rates than the United States, they’ve, they’ve been able to get to a place where they’re roughly balancing their budget over time. And that is certainly a more stable scenario than the rapid. And at times accelerating increase in the deficit that we’ve seen in the United States. Of course, we’re coming out of a very highly unusual period of time, with massive supplemental spending bills due to the COVID pandemic, and unprecedented deficits. And those are now declining, because we’re not spending as much as we did during the pandemic, but still, us spending as a steep upward trajectory. And most of it, most of that growth will be financed by additional borrowing, which is, which is quite troubling.

Gene Tunny  10:50

Yeah. So you’ve got deficits projected out for the next few decades, if I remember correctly, I think there was a CBO. Or actually, yeah, Office of Management and Budget, congressional and Congressional Budget Office, there’s a chart from the Council on Foreign Relations, I’ll put a link in the show notes. But it’s got the federal deficit, going from several percentage points of GDP, wherever it is now. And then over the next 30 years, it goes, this is all business as usual, if you just assume nothing changes, and I mean, hopefully something changes, they’ve got it getting up to over 13% of GDP, this is the deficit by 2050. Are these the types of projections you’re looking at Romina. And that’s what’s informing your commentary on this?

Romina Boccia  11:42

Yes, so the Congressional Budget Office is a very reliable primary source in the US Congress. It’s a nonpartisan agency that provides information to Congress. However, they are somewhat limited in how they do projections as well. And there have been some questions about some of their assumptions pertaining to fertility and growth, and at times under estimating the potential increase in higher interest rates. So there are some alternative scenarios as well that we consider as fiscal scholars. So we have a range of potential outcomes that we look at. None of them are very good. The current Congressional Budget Office projections are also in many ways, too optimistic. Because the Congressional Budget Office is, is tasked with projecting the deficit and debt and spending levels based on assumptions of current policy. Now, there are many policies, especially tax policies, but also some spending policies in the US context that have been intentionally adopted for a temporary period of time, like certain middle class tax cuts that are slated to expire that were put in place by the Trump administration by 2025. And it seems highly unlikely that Congress will allow those to expire. Because of the families and individuals, middle class families and individuals that would be affected, it would seem like that would not be very politically popular. So if we run alternative assumptions, where those tax cuts get extended, the, the debt scenario going forward looks a lot worse. We’re going from 185% of GDP and publicly held debt over the next 30 years from the current 110% level, to more than doubling to 260% of GDP, and that, again, over 30 years doesn’t take into account that there might be natural disasters, that there could be another war, or the US might get involved in a current active war more so than it has in the past. Or that there could be another pandemic. I mean, lots of things can happen over the next 30 years. And none of those are taken into account with those projections. So again, the better solution is to realise that we are on a highly precarious fiscal trajectory, even under the best circumstances, and now is the time to to adjust our fiscal scenario to reduce the growth in spending. And because that’s what’s driving it, you know, tax revenues are above their historical average level, even with the economy slowing down. And so that’s not what’s driving the growth in the debt and the deficit. It’s it’s very much on spending and primarily spending on so called entitlement programmes and their entitlement programmes, because you don’t have to be poor, you don’t have to. Yeah, you don’t have to be in grave need in order to qualify. Medicare and Social Security are primary or really old age entitlements, with some contributions made by individuals over their lifetimes, but not contributions in the sense of contributions made to say a 401 K, which is the US retirement account that individuals contribute to, they make their defined contributions, and then they own those assets in those accounts. That’s not how these programmes work. There are tax and spend programmes or pay as you go programmes where current workers have financing benefits, health care and retirement benefits for the retire generation. And, of course, lawmakers were able to make promises to these individuals without concerning themselves with how those benefits would be paid. No provision was made to pay those benefits, even social security in the United States context where for some time, there were surpluses, that the programme was accumulating, but they were spend immediately on other federal government priorities. They weren’t saved for Social Security. So now that those bills are coming due, Social Security is already running deficits. Those those those, those prior surplus funds there, they don’t they don’t exist anymore. They would just spend on other priorities. And now Congress would need to raise taxes, or in this case, they’re borrowing more to make up for, for that discrepancy and what they’ve promised current beneficiaries, current retirees, and what they’re able to collect from current workers.

Gene Tunny  17:00

Yeah, I remember reading in the 80s. Or maybe I read the book in the early 90s, that the last time people were worried about the US deficit and debt. This was before the 90s, before Clinton and Gingrich struck some sort of accommodation struck, struck some sort of deal and then managed to get the budget under control for a while. I remember there was a book by Benjamin Friedman, who was at Harvard and day of reckoning. And, and the concern there was because of the tax cuts in the 80s, and the big spending on the, the defence, all of the defence spending, which I mean, arguably lead to the demise of the Soviet Union. So big tick there, but did blow out the deficit. I think the way Friedman described it was that there was a Social Security Trust Fund and the government just took the money out of it and put IOUs in it. So is that right that? Is that roughly right there there? What the I think this is what you were talking about. There was a surplus, but then that money was spent on other purposes?

Romina Boccia  18:12

Yes, the, that’s roughly right. The Social Security trust fund is mainly it’s an accounting mechanism. But it isn’t a trust fund, like you would think about it in the economic or investment sense. Because those trust, investment trust funds would hold real economic assets, could be a portfolio of stocks and bonds. Treasury securities, cash, you name it. The Social Security trust fund is an accounting mechanism for internal governmental purposes. It’s basically is a provision in law that allows Social Security to continue to pay benefits, even when current taxes are no longer sufficient to pay for those benefits. And to find the money elsewhere, in this case, from the Treasury through borrowing by selling more US debt in, in open markets. But those Yeah, those assets, there were no assets in it ever. The way it works is when employers pay payroll taxes or self employed individuals pay their payroll taxes, they go to the Treasury just with, with their income taxes and every and all other tax revenue that the Treasury is collecting. There’s no distinction made, whether those are payroll taxes that are supposed to be designated for Social Security or income taxes or, or corporate taxes. It all gets muddled at that point. And then that money just goes out for current government spending. The US federal government doesn’t have a policy of, say, of saving. And, and so that never happened. Now, the best way in my view, to establish financial security in old age for individuals, if you’re going to have mandatory government programme to, let’s say, help individuals to save for their, for the later years, because apparently, we don’t trust individuals to be able to do that for themselves, then the best way to do it is to do it in a defined contribution way, rather than the current system, which is more akin to a defined benefit system, where you qualify for certain benefit, regardless of what you paid into the system or, or how much money is in the system to pay out those benefits. So a defined contribution system, you would actually set up a savings mechanism, you might invest those funds in the market. Now, I’m not really comfortable with the federal government getting involved in that to a great degree, I would be much more comfortable with individuals being able to own and control the funds in their own accounts. Because the government, as always is subject to special interest pressure, we’re seeing this in the United States with pension funds in the state local level right now, where you have special interest groups, especially the environmental left pushing to disinvest, from fossil fuels and, and other areas of the economy that they disagree with, where there’s more concern for pushing a political agenda through these public investments, then the primary consideration which should be gains for the beneficiaries of these accounts, and I would see a very similar risk if the US government adopted a system of private social security accounts, but actually controlled the investments in those so much better for individuals to be able to control and own their own retirement funds. Though in the big picture, I don’t even think that that is necessary anymore in a way for the federal government to get involved with. I think that the best role the government could play as just to provide a minimum level of security in old age, with the goal of protecting older individuals from falling into poverty if they run out of their own, own resources because they live longer than perhaps they were expecting, or they had low incomes all their lives, and were never really able to save a whole lot, or maybe they fell on hard times their business went went bankrupt, you name it, there’s all sorts of scenarios why individuals can find themselves in need of help. But in terms of private retirement savings, we live in an era where it is so simple to set up auto enrolment savings, to have automatic investments through Target Date retirement funds and other index funds where you don’t have to be a financial whiz to manage your own retirement investments. You can, you can do so much more easily than was the case 85 years ago, when a Social Security first originated. So I questioned the need for a forced, a government based force mechanism for individuals to provide for their own security in old age. I think a minimum poverty level benefit, combined with private individual savings that are owned and controlled by individuals themselves, make much more sense and also take those funds out of the hands of the government which of course, spent the money when it was collecting Social Security funds. They didn’t go towards social security in the end, they went to defence, they went to other social programmes. They went to subsidies and corporate welfare and all sorts of places, but not for their intended use.

Gene Tunny  24:03

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

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Gene Tunny  24:37

Now back to the show. Can I ask about Social Security? So your ,Are you suggesting that the level of social security in the US it’s too generous and that those benefits should be cut? Is that what you’re suggesting? So and that would encourage people to, to save in their own way retirement accounts.

Romina Boccia  25:02

Yes, I’m very much suggesting this. And the benefits are too generous in a number of ways, one of which is that the eligibility age for Social Security has barely budged in light of significant increases in life expectancy. That means that the number of years that have been that individuals are eligible to collect social security benefits has risen significantly. While the number of years that they have to, they’re required to work to qualify for those benefits has not. And so you get an imbalance there, where when Social Security was first launched, the eligibility age was actually above the life expectancy of, of that age, such that very few individuals were expected to ever claim that benefit, it was primarily set aside for those lucky or poor souls who outlive their peers. But today, the Social Security aged early claiming ages is still 62. Right? And, and individuals now live to be roughly 78, which is the current roughly the current life expectancy in the United States. And so there’s many, many more years that individuals can claim those benefits, but they don’t have to work any longer. So that has made the programme more generous over time. And also more unaffordable. Another factor is that the highest income earners receive the highest benefits from Social Security. And they need those benefits the lease. Yeah, so one way to fix the financial picture and also focus benefits on those individuals who need the most. If that was the original intent of old age income support programme, would be to Means test those benefits. Now, I think a fairer way to do this would be by adjusting the benefit formula. So the Means Test doesn’t apply once individuals are in retirement, especially if they’ve done the right thing. They, they work their, their whole lives, they set aside their own funds, so they could enjoy a comfortable retirement. We don’t want to penalise those individuals for doing the right thing for saving for their own needs. But there are ways of making the benefit formula more progressive, that acts as a means test as well. Except it considers lifetime earnings rather than just income in retirement.

Gene Tunny  27:48

Yeah, I think that’s a really good point. Romina. It didn’t occur to me that was the case that the more you earn, the more the government pays you in Social Security after when you retire. So I was just looking on the web. And I’ll put links in the show notes regarding this. So the average social, social security benefit is $1,657 per month, that was in January 2022. So conceivably, there are people getting more than that from the federal government each month as in Social Security. And, yeah, I can see the logic in, in changing that formula.

Romina Boccia  28:31

You’re correct about the average Social Security benefit, but there are some higher income earners can collect up closer to $3,300 per month in Social Security benefits. And that doesn’t account for if you’re looking at a married couple, an additional spousal benefit, that, that would bring their security benefit more than 4500 to $5,000 per month range.

Gene Tunny  29:02

Yeah. And some of these households probably don’t need it because they’ve got other assets, they own their own home, they’ve got investments, etc. Okay. Now, that’s, that’s Social Security. Is that the big? That’s the big programme driving the future deficits, is it or to what to what extent is it Medicare and Medicaid? Do they play a role too?

Romina Boccia  29:25

Yes, Medicare is actually the elephant in the room. Because with Social Security, you’re primarily looking at a fairly predictable benefit formula where you consider demographic factors like fertility rates, the number of new workers in the United States, including immigrants, and then when do, when do people reach the eligibility age roughly in their mid 60s, and what is their life expectancy? And so right now we’re going through a big growth spurt in Social Security as the baby boomers started retiring at, at significant rates, I want to say it was 11,000 per day. 10,000 per day, I think it was 10,000 per day starting in 2011. And over a 20 year period of time, we’re moving through this big bubble of baby boomers entering the Social Security and Medicare systems. Once we’re through that baby boom, bubble, there’s a decline in fertility after that baby boom. And so Social Security roughly levels out at 6% of GDP. And then, you know, fluctuates around around there. But with Medicare, because you’re looking at a health insurance programme, and health care costs are rising steeply, and don’t seem to be slowing down. And what we also know is that health care is a luxury good, where as societies become wealthier, they desire to consume more health care. So wealthier societies tend to increase the portion of their budgets that they spend on health care, not all of which is is very well spend, we also know that much of healthcare expenditures are going towards the signalling or showing that you care, and paying for medical treatments for conditions that that don’t respond well to those treatments for a number of incentives. And that were spending the most during individuals final years of their lives, where perhaps that additional dollar of healthcare spending isn’t doing that much good anymore. But all of those factors are driving up the growth in health care spending. And that seems to be just going up with that with none of that leaving and inside, if you will, for where it will taper off, we can’t we don’t know when or if it will taper off. And so Medicare is the big elephant in the room. And there too, you have very similar issues where, again, the eligibility age is roughly 65 hasn’t gone up, as individuals are living longer. So increasing the retirement age and then indexing the age of eligibility to increases in life expectancy is a very common sense, change that would help alleviate some of the cost drivers. And the other one, again, is that you should consider how much of a health care subsidy you should be giving, if any, to to high income earners. Those individuals who are capable of paying for their own health care, and retirement should pay for a larger share of it. So that you can focus benefits on those individuals who need them to most means testing is one very, very common sense way of adjusting how much you know, the programme spends and who would spend that money on and to get more in line with what incoming revenues and not to drive up the deficit too much. But in the big picture, I think we we’ve come to over rely on a third party payment system where there’s a lot of treatments and even administrative costs are skyrocketing. Because there’s very little consumer interaction in this marketplace. So much is paid. The vast majority of health care expenditures are paid through insurance systems, I think the best use of an insurance system is to pay for catastrophic health care to pay for very expensive chronic conditions to pay for, you know, a big accidents that, that incur large medical costs for individuals, but not for routine healthcare needs. And that’s that’s where we’ve ended up over over several decades of shifting towards a system of third party payment. And, and one of the big reasons in the United States for that is after World War Two, the health care tax exclusion for employer provided health care has really driven up the cost of health care in the United States. And we should have fairer treatment for individuals who are self employed or who choose not to use their employer’s health care to be able to at least get the same tax treatment as their employer. Better yet. My colleague Michael Tanner at Cato has put forth a proposal where instead of employers buying health insurance for their employees, they could provide the funds that they would spend on their employees health insurance through a health savings account, and then the employees themselves could decide how much of that they want to allocate towards health insurance and how much of that they might want to keep in those health savings accounts to pay for out of pocket costs, such as getting A high deductible health insurance plan that’s primarily focused on those catastrophic expenses, while paying for routine health care needs, out of their health savings accounts, that would bring more consumer involvement into this marketplace, which would also help with price transparency, as consumers become more educated as healthcare consumers, and especially for routine treatments start shopping around. Of course, it’s not possible if you are being picked up in an ambulance because you just suffered from an emergency. But there are, there are other scenarios where becoming a more cost conscious patient and healthcare consumer makes a lot of sense and can help to reduce costs.

Gene Tunny  35:47

Hmm, I’ll have to look at Michael’s work. So Michael Tanner, you mentioned his work. Yeah. But I’ll have to, I’ll have to come back to health in a future episode, because I know it’s a very complicated area to look at. On Medicare Romina, do you have any figures on that? I mean, you mentioned it was at US Social Security will get up to about 6% of GDP. Did I hear that right? And do you have any comparable figures for Medicare?

Romina Boccia  36:17

I’m not going to top of my head, but the Congressional Budget Office provides those in their budget and economic outlook. I’m more focused on Social Security, because as you just mentioned, Medicare has its own complex bag of a variety of different policies. So we have a scholar solely dedicated to that.

Gene Tunny  36:41

Yeah, yeah. Fair enough. And I mean, my understanding is that the Social Security’s that’s the, that’s the big one. But then you’re saying that yeah, Medicare is a, it’s an important issue.

Romina Boccia  36:52

It’s approaching, yeah, the size of Social Security. So between Medicare and Social Security, more than half of the federal government’s budget goes towards these two programmes. Okay, gotcha. So they make up the vast majority of federal spending now, and they’re projected to grow significantly.

Gene Tunny  37:10

Right, do you have any concerns about defence spending at all? I mean, often one thing that’s often pointed out as well, I mean, the US spends much more than any other country on defence, of course, you’ve got an important role in the, the world economic or the world geopolitical order, or however you’d like to describe it. So have you looked at that? And do you have any thoughts on defence?

Romina Boccia  37:34

No, not just the fence. But so the way that the budget is, is allocated in the US context is that there’s a so called discretionary spending, which makes up roughly 1/3. And then there’s the so called mandatory or autopilot spending and the key differences that discretionary spending has to be voted on each and every year. For example, this week, the US Congress is voting on defence and non defence discretionary spending to avert a government shutdown because we’re at the end of the fiscal year. That is not the case for programmes like Medicare and Social Security and even Medicaid, which which which have authorizations, which have spending allocations that don’t expire, so they can just continue spending even when the resources aren’t there. But both non defence and defence discretionary spending has seen a large increases, especially during the pandemic, there’s been large increases in in nondefense discretionary spending for varieties of things including support for state and local government to weather the pandemic. Various handouts for special interest groups. We just recently saw the chips act pass for the semiconductor industry in the United States. And then the inflation Reduction Act, which had a lot of green New Deal policies to subsidise green energy and electric vehicles, etc. So there’s been a while that spending, it doesn’t get projected out over the extended periods, 30 years 50 or 75 years in the case of Social Security, Medicare, because Congress, allocates, appropriates it every single year. We are seeing a rise in discretionary spending also in the area of emergency and disaster relief with no budget or notional account to control that spending. So it’s often used as a as a loophole to fund other priorities without going through the regular budget process. And, yes, overall, I’m concerned about most aspects of the federal government being on a growth trajectory and defence and non defence discretionary spending very much in that in that sphere. are as well. One of one solution there is to adopt us spending caps and the US has adopted those, with some success in the past, with little less success in the recent past. But discretionary spending caps that set a goal or a level that then lawmakers have to fight over or the public can hold them to account for can be very helpful. We don’t have any discretionary spending caps right now. And I think it sets up a good discussion when you have those to say, Okay, if you truly believe that, that is not sufficient, you need to spend more, what can we cut instead. And then in more likely scenario, lawmakers are not going to want to cut anything. So instead, we get some discussion over offsetting spending cuts elsewhere, say in the mandatory portion of the budget. Or if they increase, it agreed to a spending increase, at least now we have something we can hold them to. So I do think it sets up a productive debate around the purpose of spending limits priorities for the federal government, what are true priorities and what they’re just want to have spore favourite lobbying groups, so that the public can do a better job also of holding their lawmakers accountable. And there is an opportunity for the US Congress, the new Congress in the next year to impose more spending restraint. The debt limit will approach again likely next summer and the summer of 2023. And the debt limit is often a very effective action forcing mechanism for fiscal restraint. Basically, lawmakers can make demands that they won’t increase the debt limit, unless there are offsetting spending cuts or a budget plan is put in place. And I think a spending caps over the entire federal budget would be, would be best so that Congress can budget within so called Unified budget, consider all priorities and needs within context and and make those necessary trade offs. But one, one good start and those are easy to implement would be discretionary spending caps on defence and non defence.

Gene Tunny  42:16

Right. Okay, I’ll have to look back and see some, look for some examples of those spending caps in the past that sounds really interesting.

Romina Boccia  42:28

So yes, we had the, the Budget Control Act of 2011, that imposed spending caps for a period of roughly 10 years, but they were, they were circumvented several times. But there were also some offsetting spending cuts to allow for those increases in defence and non defence. The other thing that has become sort of gimmicky in the US context, under President Obama and the Democrats are continuing to try and push this, this this idea of parity that the defence account and the non defence, domestic discretionary accounts should be getting the same amount of money, which is just a goal that they have set as if it this was some kind of a political game without any consideration for real needs, either in the domestic economy or on the defence side, the threats that the United States face, it’s just an arbitrary target, we just want to get as much money as the other guys. And that just doesn’t make any sense at all. And I think I think the public should, should call lawmakers out for that apparently doesn’t make any sense we should not be allocating any more spending than is, is necessary. And it should also be within the within the bounds of the US Constitution. Because that document has a has a purpose, which is to restrain the government and protect the rights of the, of the individual. And so that should be our guidance for what to spend money on and how much to spend not some arbitrary goal of we just want parody because it’s political.

Gene Tunny  44:06

Yeah, yeah. Okay, final question. Romina. Have you looked at what we do here in Australia or what’s done in New Zealand with retirement savings? Have you looked at our we have a compulsory.

Romina Boccia  44:18

A little bit? Yeah, I was reading up recently on, on the superannuation, I think it’s called. Yeah, I mean, I like the defined contribution aspect, but I also recognise that there’s a push to increase the amount that employers have to pay for their employees superannuation and, and that can create distortionary incentives for how many individuals to employ because you’re driving up the cost of labour, I would see, I would think that that would be an issue, but what are your thoughts on how how the system’s working?

Gene Tunny  44:53

Oh, well, I think overall, it’s, it’s better to have it than not have it. So we did have the problem that people were too reliant on the aged pension here. So you’re, well, what our Social Security programme for the elderly, although there are differences in the, in the the rate and it doesn’t. It’s not, it doesn’t increase if you contribute more over your, your lifetime. So if you have higher earnings over your lifetime, so it’s different in that regard. And yeah, so I think it’s, it’s good that we’ve got a system that takes some of the pressure off the age pension, but we’ve still got rising age pension costs, it hasn’t removed that problem entirely, the future imposed on the budget of our age pension is a lot lower than your Social Security system from what I can just from my quick, the quick look, I’ve had the figures. Yep. So I think it’s good in that regard. But yeah, you’re right, there is that issue of the fact that in the short run the can hit employers, so we’ve had an increase in the contribution rate, it was 9%. And they’ve been increasing it, I think half a percent every couple of years. And now it’s up at 10 and a half percent, if I remember correctly. And so initially, the employer has to pay more each quarter to the Australian Tax Office, I’m an employer. So this is something I’m very conscious of. So I’ve had to increase the superannuation contributions. But over the long term, I think what the expectation is that it will come out of wages of the employees, so the employees will end up paying for it, because it is a form of compensation. That’s how it was initially sold in the 90s, when it was introduced. So it was a trade off. The treasurer at the time, Paul Keating, who was on, he was part of the Labour Party, he was on the, on the left of politics, but it was a very sensible, very moderate government, and highly praised around the world for economic reforms. And the way that he sold it was that you will get this super so you’re getting the super, but it means you have to have wage restraint at the same time. So that trade off was explicitly recognised. So yeah, but in the short run, there’s a, there’s certainly an impact on employers. But there’s a recognition that over the longer term, it really is the employees who will be paying for it. Look, there are a couple of issues with the, the design of, of super, there’s a concern that these industry super funds control, they have too much control or they’re controlling too much money and they’re too dominated by unions. There are people who are concerned about that. There are other people that are arguing that oh, look, it’d be better if people had access to this money. So they could buy a house, there’s a big debate about whether people should be able to withdraw from Super to buy a house. What else? Yeah, and clearly, some people might be better off if they were able to use that money while they, were while they were young. And when we had COVID. During the COVID period, the government did allow people to withdraw from their super accounts. And we saw a lot of people take that up. And I think they pulled 10 or $20,000 out, if I remember correctly, that was very popular. So yeah, overall, I think it’s a good thing, even though, as a someone who’s very sympathetic to classical, liberal views, I think, Oh, well, it’s not good that the government saying you’ve got to do this, but on the other hand, I recognise that for a lot of people, they might not be saving enough for retirement, and therefore in that case, the government would have to pay for it. So look on balance, I think it’s good. We’ve got it there and are some issues with it. Sure. Yep. So that’s my general, Yeah, that all make sense or any questions.

Romina Boccia  49:17

It’s, it’s certainly an improvement over the US Social Security system where it’s the government handling the entire thing, even though there are contributions by workers and their employers. I did read that individuals who pulled funds from their super accounts during COVID on average, spend longer unemployed than individuals who didn’t choose to tap their super accounts. So it indicates just like in the US, we saw that extended unemployment benefits tend to incentivize people to stay home longer and go back to work later. Even in the context of super, that seems to have had a similar effect.

Gene Tunny  50:07

Yeah, I think that’s that’s probably true. We’ll have to look up that, that evidence of that sounds right to me. Right. Oh, well, remember, this has been fantastic. I think that’s been a great overview of the fiscal challenges facing the US. I hope that you’re, they’re inviting you to appear before Congress at some time to testify to get your views because I think they’re really well informed and important views. So that’s terrific. So yeah, if there’s any final points, anything else to add?

Romina Boccia  50:42

Thank you. I just wanted to just looked up Medicare as a percentage of GDP and it’s roughly 4% right now. Going up.

Gene Tunny  50:49

Okay, gotcha. Right. So that is a big deal. Okay Romina Boccia from the Cato Institute. Thanks so much for your time. I really appreciate your insights and really enjoyed the conversation.

Romina Boccia  51:02

Yeah, so fun chatting with you, Gene. Thanks so much for inviting me on your show.

Gene Tunny  51:06

Okay, thanks Romina. 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. Till next week, goodbye.

Credits

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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Podcast episode

Hyperinflation: what causes it and what to do about it – EP158

What causes hyperinflation and how can it be avoided in the first place or stopped if it occurs? What characterizes countries which fall victim to hyperinflation? A conversation between show host Gene Tunny and his colleague Arturo Espinoza which explores the economic theory and evidence around hyperinflation, and discusses peculiarities which can arise in hyperinflation-afflicted economies – e.g. pensions denominated in cows in Zimbabwe.  

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

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

Links relevant to the conversation

Current inflation rates around the world (Trading Economics)

What is hyperinflation and should we be worried? (WEF article from June 2022)

Wikipedia entry for Alberto Fujimori

Why a Zimbabwean firm offers pensions denominated in cows | The Economist

The Modern Hyperinflation Cycle: Some New Empirical Regularities (IMF Working paper from 2018)

Chris Edmond’s note on Cagan’s model of hyperinflation

Alberto Alesina and Lawrence H. Summers’ paper Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

Bitcoin Could Solve Zimbabwe’s Hyperinflation Problem—Instead, The Country Is Telling Impoverished Citizens To ‘Just Buy Gold’ (Forbes article)

Inflation is spiking in Zimbabwe (again). Why high interest rates aren’t the answer (Conversation article by Jonathan Munemo): 

Transcript: Hyperinflation: what causes it and what to do about it – EP158

Gene Tunny  00:00

Coming up on economics explored.

Arturo Espinoza Bocangel  00:01

That, of course, affected or negatively affected people’s economic decisions, because my parents are all the people who live at the moment who are subject to new higher prices every day.

Gene Tunny  00:18

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 158 on hyper inflation, what causes it and what to do about it? In this episode, I chat about hyperinflation with my Adept Cconomics colleague, Arturo Espinoza. Please stick around until the end of the episode for some additional thoughts from me on hyperinflation. I’ll be interested in your thoughts on this episode. So please get in touch and let me know what you think. In the show notes, you can find my contact details along with relevant links, info and clarifications. Please note that alas, I made some Clangers by miss speaking at a couple of points in my conversation with Arturo, the Weimar Republic in Germany came after World War One obviously, rather than World War Two, and the so called Fuji shock happened in Peru rather than Japan. Silly me for misspeaking. Righto. Now for my conversation with Arturo about hyperinflation thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Joining me today is my adept economics colleague, Arturo Espinosa, Arturo, good to be chatting with you.

Arturo Espinoza Bocangel  01:40

Hi, Gene it’s my pleasure to be here.

Gene Tunny  01:44

Excellent. Arturo. So one of the things we’ve been chatting about a lot lately is inflation. And we’ve been looking at inflation and unemployment. And that’s for a project that we’ve been working on. And back a few months ago, we did chat about stagflation, a particular type of it’s a nasty combination of unemployment and inflation. That was episode 143. And I thought, based on what we’ve been looking at, and you showed me, or you alerted me to some data from Peru, in the 1990s, about a hyperinflation they had, I thought it’d be good to chat about hyperinflation is one of those economic calamities, because there are, well, it’s fascinating. It’s not something that happens a lot. And it’s, it’s awful when it happens. And it’s good to know, well, what are the things that lead to hyperinflation? What are the circumstances? How can we avoid it? And if it starts, how can we stop it? So I think it’s an important thing for us to talk about on the show. So yeah, if you’re happy to chat about hyperinflation, I think we should we should get into it. So. Yes. Yep. Let’s start. Okay. Very good. Right. So I guess where this started, was, we had a look at. But what prompted me to do this episode was I forget how it came up. But we were talking about high rates of inflation. You mentioned that in Peru in the early 90s, you had this hyperinflation and caused all sorts of all sorts of problems. And when I looked at the data on macro bond, it had an inflation rate in one year, I think it was over 10,000%. It was huge. It was it was massive. I don’t know the exact rate, I’ll have to put that in the show notes. I can’t recall it off the top of my head, but very high inflation rate. And then that reminded me Okay, well, this is something that happens from time to time, it’s hyperinflation. At the moment in advanced economies, we’ve got inflation rates of, you know, five to 10% or so. So Australia through the year, a bit over 6%, US eight to 9%. And we’re not in that sort of hyperinflation and territory, the way that they typically define Hyperinflation is where you have a monthly inflation rate. And this is prices, on average, increasing by 50% a month. So that’s a standard definition of a hyperinflation. I think that comes from an article by us economist, Phillip Kagan, I think in the 50s on hyperinflations. But there’s no commonly or there’s no widely accepted definition. As far as I can tell, I mean, there’s no official definition and Dornbusch and Fischer, so Stanley Fischer and Rudiger Dornbusch, who wrote this great macro economics textbook, back in the 80s. And, and, I used it in the 90s when I was studying, they defined it as a, an annual inflation rate of 1,000%. So whether it’s 50% Monthly, which if you looked at that on a yearly basis, that it’d be nearly 13,000%, or whether it’s 1,000%. Annual, it’s still really bad. So 1,000% annual inflation rate, where prices go up, basically 10x, isn’t it? I mean, that’s, that’s a huge. That’s a huge, impressive inflation rate. So you’re challenging for people to, to deal with? And, yeah, so I’ve got some data on the what inflation rates that we’ve seen at the moment, and it looks like, while in recent history, we have had some hyperinflations in places like Zimbabwe and Venezuela, which we’ll talk about in a moment. When I look at the trading economics websites, I’ll put a link in the show notes to this, we look at inflation rates around the world, the highest at the moment. So in annual terms, it looks like we’ve got well Zimbabwe coming in at looks like 285%. Lebanon 168%. So the very high inflation rates, but not in the hyper inflation range just yet. Okay. But it had they have had that sort of experience in the past. And we might cover that in a moment. So I thought this would be good to talk about, because, I mean, it’s something that people are aware of this can happen. And we all know that there are concerns about government, money printing and all of that. And it’s, if you’re a member of the public, and yet perhaps you haven’t studied economics, it may not be obvious what leads to these hyperinflations I mean, is this a risk for countries such as Australia, or the United States or, or Britain? And you know, what would lead to this eventuality of hyperinflation? And so what what I want to do in this episode, Arturo is just articulate. What are those conditions that lead to hyperinflation and when should we worry about it? There was an interesting article on the World Economic Forum website, what is hyperinflation? And should we be worried? I’ll put a link in the show notes to that I think that provides some interesting stories about inflation, I might kick off by talking about hyperinflation, I might kick off by reading from that. So it notes that it’s, it’s readily accepted that France and you are the world’s first recorded instance of hyperinflation during the French Revolution in the late 18th century, when monthly inflation topped 143%. Okay, so recall, at the moment in advanced economies, were concerned about inflation rates of between well between five and 10%, over through the year over a year, whereas when you’re in hyperinflation, you’re getting monthly inflation of could be 143% in France in the late 18th century. They go on to say that nevertheless perhaps the most well known example of hyperinflation incurred in the night occurred in the 1920s, when following World War One and crippled by reparation debt, Weimar, Germany saw its monthly inflation rate reached 29,500% in 1923, according to the Cato Institute, more recently, Zimbabwe was bound by hyperinflation, recording a staggering monthly inflation rate of about 70,000,000,000,  79,000,000,000% in november, that’s just insane. So I guess what those examples illustrate is that you’re dealing with countries where there’s an underlying problem, there’s some sort of deep crisis and or there’s a big disruption that occurs. So French Revolution, obviously, the end of the ancient regime, the new revolutionary government, executions, people getting detained, the end of the old regime, and huge disruption. And then following World War Two, we’ve got the Weimar Republic. And I mean, there was that you’re familiar with that the peace deal at Versailles that they struck, which was very hard on Germany at the time. So the reparations debt so the the victors the the allies, so well, outside or Britain and Australia and the US. We imposed a very tough, yes. Yeah. And so it meant that they really struggled. The Germans really struggled to pay that back and that meant that, you know, they’ve put a lot of pressure on their budget. And, well, this is where the problem comes from, essentially, your budget is in such dire straits, your deficits are so large, you have to resort to the printing press, you have to basically, well monetize your deficit, you have to create the new money yourself to be able to, to pay the bills. And that’s where you end up with, with really well, really high inflation and hyperinflation when things get out of control. And in the public, don’t trust the government anymore. They don’t want to hold the currency and the government keeps having to print more and more to try to get enough currency to pay the bills. And it just all ends really badly, you end up with these very high rate well hyperinflation 1000% plus inflation rate per annum. And you need to take really drastic measures to to get that under control. Right. So what causes it? And I think we’ve, we’ve alluded to that it’s the, it’s the fact that there is this, this printing of money to finance deficits that, for some reason or another, the government of the day can’t raise the money it needs via taxation, or it can’t borrow the money from the bond market, it can’t borrow the money from the private sector. So one of the reasons that a country like Australia or the US or Britain, why they don’t usually have to worry about inflation, or why we haven’t had a sorry, a hyperinflation. And why we haven’t had a hyperinflation here is because, well, we generally don’t resort to the printing press to finance deficits at times in the past, we have to a significant extent, but now what we do is we sell bonds into the market, the government sells the bonds, and it gets the money it needs that way. And we also don’t have the big disruption that tends to lead to hyperinflation. So what you have to have really is this combination of, well, you’ve got the there’s the money print ing going on, but that’s, that’s going on, because there’s some underlying disruption, that means that the government can’t get the money it needs, or it’s in some sort of crisis. And it needs to spend a lot of money, such as what the Germans faced in the aftermath of World War One when they had these heavy reparations payments to make. Okay, so what we see Dornbusch and Fisher note in their textbook, that classic hyperinflations took place in the aftermath of of wars. So that’s one thing we know there’s this disruption. And that’s going to affect the government’s ability to to raise money. And one thing that Dornbusch and Fischer noting, in their textbook is that hyperinflationary economies all suffered from large deficits in many cases, that was because of the war, you ended up with this large national debt. And if you end up with a lot of debt, then you’ve got the interest payments associated with that. And also, it just wrecked the country’s ability to raise taxes. Okay, because, you know, it’s destroyed businesses, for example, or perhaps it’s wrecked your, your tax collection capacity. You don’t, you don’t have the, the administrative capacity anymore to be able to collect the tax. So it’s, it ends up being a two way interaction, as they describe it. They talk about how large deficits lead to rapid inflation by causing governments to print money to finance the deficit, and then high inflation then increases the deficit. And that’s because there are two things going on. The nominal interest rates are increasing, because there’s higher inflation expected. And also because if your taxes if you’re calculating them based on what’s happened over the last 12 months or so, and prices have risen since then, then you’re going to lose out in real terms. So there’s this lag in both the calculation and then, the, the collection of the taxes and this is called the Tanzi-Oliveira Effect. So Tanzi, after a famous economist who was at the IMF, Vito Tanzi, okay, so what you have is that you’ve got this two way interaction. You’ve got, you’ve got large budget deficits that have to be monetized. And that ends up being inflationary. But then you have inflation, increasing the deficit that you’ve got, and this thing becomes a vicious circle, or it’s or it’s reinforcing. And this inflation gets a momentum, it gets a life of its own, and you can end up if you’re not careful. And if things get really bad, you can end up in this hyper inflationary situation. Right. And, I mean, the amazing thing is, I mean, we talked about, we talked about Germany, and then that’s the classic, or the infamous case of hyperinflation. And the stories that come out of these periods are just, they’re unbelievable, and they just illustrate the the hardship that’s occurred by people in these in these hyper inflationary periods, which is why we need to really guard against it and why we, we need to ensure that our monetary and fiscal policies are as sound as possible, because this is a this is a pathology, that you get this is a problem you get when you’ve got both bad monetary and fiscal policy, isn’t it? Because you’ve got the fiscal policy, which is there’s a budget deficit. And there’s also the monetary policy, which, which is financing the budget deficit by money printing. So you need the monetary authority, the central bank, or, well, perhaps it’s the Treasury, you need to have this hyperinflation go on, you need them to be doing the wrong thing there, as well as running the budget deficit, you need them to be monetizing it. So there are a lot of things that have to go wrong before you get into this hyperinflationary situation. And what happens is, you end up with massive hardship. And one thing I find I find extraordinary, there’s that story about the hyperinflation in Austria, after World War One. When, and this was a story that Keynes told, and it’s recounted in Dornbusch, and Fischers textbook. And he, they noted that people would order two beers at a time because they grew stale at a slower rate than the price was rising. So you’d go to a bar and you’d order two beers. Because the next time he went to the bar, the price would, would be high. Prices were rising. So fast, I mean, just terrible. Absolutely extraordinary stories like that. And there’s another story from Zimbabwe, we might tell in the moment, but what I thought would be good to do is we might consider some examples of some hyper inflation’s throughout the world. And because this conversation was motivated, partly by what you’re telling me about what happened in Peru, could you tell me a bit a bit about what happened in Peru in the it was it late 80s, early 90s. And then and then how that was resolved, please,

Arturo Espinoza Bocangel  18:08

In Peru, in my case, my parents, they live through that harsh time, in terms of in terms of economics and social. So basically, in the case of Peru is a particular case where some components, social, economic, and all models converge to this economic result or economic event that you have mentioned about hyperinflation. Let me give you a little bit of context about the Peruvian economy in the decade of 1980s or last decade in Peru, basically was, as I mentioned, marked by hyperstar stagflation, where is the son of hyper inflation plus recession. During those years. In Peru, the government took bad decisions. They started to spend a lot of money printing money, particularly the government of Ireland, Garcia, the first government between 1985 to the end of 80s, 90s.

Gene Tunny  19:31

Was this a socialist government?

Arturo Espinoza Bocangel  19:33

Yes, it was a leftist government. But at that moment, the political decision were the words, they they wanted to do the best. The the results told something different. But during that moment, the Peruvian Economy experience for our unfavourable terms of trade wars credit conditions for public debt and also some work condition, which caused floods, also many economic loss in during that time. So all these factors contributed towards in real economic growth.

Gene Tunny  20:23

Right. So you had this triple whammy, didn’t you? You had the declines in commodity prices, I suppose. So lower commodity prices, which affected your terms of trade, and then you said worse credit conditions for, for debt. So, higher interest rates was it at higher borrowing costs. And then you had the bad weather so, okay, yeah, pretty awful.

Arturo Espinoza Bocangel  20:47

And also is the government of Ireland, Garcia decided not to pay those public depths. So Peru also had some consequences doing that. So in response to that, the Peruvian government implemented a group of heterodox measures. So including the use of price controls, or multiple exchange rates to reduce inflation. So during that decade, Peru faced period of high inflation, so between 20% to 50% K per year, but the wars are pure in September 1988, when Peru faced its first episode of hyperinflation, the second episode of hyperinflation occur between July to August in 1990. So that, of course, affected or negatively affected people’s economic decisions. Because my parents or all the people who live at that moment, were subjected to new higher prices every day. Yeah. So imagine that. So as you mentioned about the viewers, if you want to buy milk, when milk, a jar of milk one day, the next day is, the price is higher also. So imagine that effect. So basically, those relatively poor people were the most affected. Because some of the Peruvians, they started to buy dollars, American dollars in order to avoid all the negative effects of inflationary pressures. Yeah, yeah. So that was the context. Yeah, what happened in Peru.

Gene Tunny  22:48

Um, I might just give you a break there Arturo, because I’ve just found the relevant table in the Dornbusch and Fisher textbook, my old university textbook, and then the estimates they have of the inflation rate in Peru. So if you look at 1985, I mean, it was it would have been higher from our perspective, 163%. And then it got down a little bit in 86, and 87, to 78.86%, in 98 82.5%, 1989 3,399%, 1999 7,482%, before dropping to 410% in 1991, and 88% in 1992. So, you know, just awful numbers would have been difficult for people to plan anything. And if you’re, if you’re holding your wealth in the local currency, I mean, it’s just wiped out. It’s just, you’re just losing all of that, that wealth or if you’re holding government bonds, you’re right. Yeah. You’re in deep trouble. Yeah. Yeah. And so what happened? I mean, the, there was, was there a new government and it implemented new policies.

Arturo Espinoza Bocangel  24:06

Yes, these new governments implemented heterodox policies like they wanted to control prices. And also they implemented multiple exchange rates. And I remember that impor for example, you want to import something at that moment they were restricted so import was controled as well. It was was a very dark moment in Peru.

Gene Tunny  24:36

Right. Okay, and that so that didn’t go well, that period that the initial that their response was not really the best way to tackle this was

Arturo Espinoza Bocangel  24:45

They wanted to do the best, but they think, they didn’t follow the correct prescription. Yeah, for that moment. Yeah.

Gene Tunny  24:53

And so what happens is a is it Fujimori comes in and then he’s got a different way of resolving it.

Arturo Espinoza Bocangel  24:59

At the beginning of 90s, with a new government for the Fujimori government implemented policies to stabilise the economy. So, basically, that kind of package or general economic package in order to combat the, those economic problems also social problems rely in two pillars. The first was related to cut inflationary fiscal financing. Also, the Peruvian central bank became autonomous in 1993. So there was a good hit for tackling inflation. And the second pillar was related to enhance free market conditions to liberalise the Peruvian market.

Gene Tunny  25:54

Yeah, yeah. So that they’re important, aren’t they? Because, let’s, let’s look at it. So there’s the commitment to cut inflationary fiscal financing. So we’re no longer monetizing the deficits. And I’m not sure exactly the relationship between the finance ministry or the Treasury and the central bank there. The way that deficits are monetized, is going to be different in different countries. But I mean, having this autonomy, having this autonomous Central Bank as well as important because one of the ways that deficits are monetized is that the central bank just buys the bonds from the government issues and just credits them with the money in the government’s bank account of the central bank that’s necessary to that the government wants to pay the bills. So the central bank is important in getting rid of this monetization with the central bank is often part of the monetization. So having an autonomous central bank is important because an autonomous central bank is going to tell the government no, we’re not going to buy your, your bonds, you’ve got to sell into the private market, or you need to borrow from another lender and international lender, for example. And, you know, we’re not going to be part of this money printing and monetization of the, of the deficit. So yeah, that’s incredibly important. And there’s evidence to that this autonomy, or this independence of the central bank, that is correlated with better inflation outcomes. And I mean, that’s, that’s across the whole spectrum of, of inflationary outcomes, right? So it’s going to help you prevent hyperinflation. And even if you’re a country with lower levels of inflation, you don’t have hyperinflations, such as Australia, New Zealand, Britain, US, etc. Having a more independent central bank, you’re going to get better inflation outcomes there. And I think there’s evidence by from Alberto Alesina, that’s a commonly cited study from the late 80s. I’ll put a link about that in the show notes. Okay. Now, this was called the Fuji shock. Is that right?

Arturo Espinoza Bocangel  28:11

Yes. Yes, absolutely. Yeah. The combat. hyperinflation. Yeah.

Gene Tunny  28:18

And so what was it? It was a, like they cut the they, cut the deficit, where the harsh fiscal measures. And this is, this is where it gets really bad. This is why you don’t you want to avoid getting into a hyperinflationary situation in the first place. Because the medicine is harsh. It’s harsh medicine, isn’t it? I mean, really, because you’ve got to just cut that deficit. You can’t monetize it, you’ve got to, you’ve got to either raise the taxes domestically, or you’ve got to borrow domestically. But what if people don’t want to lend to you what if your own citizens don’t want to lend to you or they don’t have the capacity to lend enough money to you then then you might have to go to an international lender, or you might have to borrow from overseas and what we find I think, in stopping a lot of these hyperinflations it’s a it’s a combination of this fiscal austerity or getting your budget under control, not monetizing your deficits are getting better monetary policy and independent central bank, but also often it’s getting a loan getting some foreign investment or getting a borrowing from overseas to to help stabilise your exchange rate, for example, that can be part of the solution.

Arturo Espinoza Bocangel  29:41

To facilitate internationally in foreign investment.

Gene Tunny  29:45

Yeah, because there was a paper that you found where you pulled out inflation and the cost of stabilisation, historical and recent experiences and policy lessons by Andre Solimano. World bank research observer in July 1990. And, and in that paper, the author writes that the experiences of stopping hyperinflation provide examples of both rapid disinflation achieved through restrictive monetary and fiscal policies. Yep. So getting your money supply under control by not monetizing deficits, getting your fiscal policy under control. And then he goes on to say, and the key role played by stabilisation of the exchange rate in successful stabilisation. So you need to get your exchange rate stabilised so that you’re not getting inflation through the exchange rate. So if your exchange rate is deteriorating, and then the cost of imports is rising, that’s contributing to inflation, so you need to get that under control. Last but not least, the history of economic stabilisation has amply shown that the availability of adequate foreign financing as a support to the stabilisation effort is a crucial ingredient in the success of stabilisation plan. So I thought that was really fascinating on and that’s an important finding, right? So it just goes to show what you need to get in place to correct a hyperinflation if it if it occurs if you’re in that unhappy situation. Right. And it looks like Peru ended up getting some it ended up borrowing from overseas as part of that if I if I recall, there was a or the IMF ended up guaranteeing loan funding for Peru according to the Wikipedia entry on Fujimori. Fujimori, is it? Yeah, I’ll put it. I’ll put a link in the show notes. And what’s fascinating about him. So he’s, he has Japanese ancestry, and he became President of Peru. But he’s a controversial figure in the end, wasn’t he? There’s a story there’s

Arturo Espinoza Bocangel  31:54

a story about the birth certificate. Well, because in order to be a Peruvian President, you need to be born in Peru. But apparently he will. He was born in Japan, but something strange okay with her with his birth certificate. Yep.

Gene Tunny  32:15

Right. Yes. I mean, he got they seem to have got it under control. But I should know that he was accused of corruption wasn’t a Oh, yes, yes. Yeah,

Arturo Espinoza Bocangel  32:28

there is. He’s considered one of the wards, precedent or corrupted precedent in the world. Yeah.

Gene Tunny  32:38

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

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Gene Tunny  33:13

Now back to the show. So I think we’ve talked a bit about how you stop hyperinflation. It’s, it’s harsh medicine, it’s austerity, and that’s going to deliver pain, getting your monetary policy under control. And also stabilising your exchange rate, possibly through some foreign borrowing. Okay. The other example I wanted to talk about was, was Zimbabwe, because that’s an example of D monetization, isn’t it? So one of the one of the points that you made I remember when we were preparing for this conversation is that one thing you see in Hyperinflation is that people start avoiding the currency don’t they try not to use the currency, they might switch to US dollars, for example, if they’re available, they don’t want to use the local currency. or, in extreme cases, they might even use us commodities as as items at those units of account. So this is this this bizarre story. This is from the Economist magazine, I’ll put a link to it in the show notes and this was from earlier this year, and so may 14 2022. And the headline was wire Zimbabwe and firm offers pensions denominated in cows, okay. And there’s this this actuary, Mr. Chimp, Chairman, Norway, and an actuary trained in Britain started a company, the hacker life insurance, so apologies of mangled those pronunciations instead Out of this company to sell inflation proof pensions to Zimbabweans. The Pensions are not denominated in Zimbabwe dollars, since they quickly evaporate nor in American dollars since many Zimbabweans are struggling to obtain any. Instead, they are denominated in cows, which the government can’t print. This is what I love about the economist. I love these really clever, witty, witty lines in there. That’s great, isn’t it? So say there’s typically wage earners such as teachers, they chip in cash, which NACA immediately turns into cattle. So he, okay, the the assets grow by breeding, when a policy matures, clients can demand payment in cows or the cash equivalent, right? So, look, this is a sort of quirky thing that happens when you’ve got this really disruptive hyperinflation, you see people ordering multiple beers at the bar to avoid having to pay higher prices later. And you see things like this where you’ve got contracts denominated in capital. So it’s just an extraordinarily disruptive economic phenomenon that you really need to avoid, if you can, well, it can end up being incredibly costly to get under control, but you need to do it or otherwise you just end up with? Well, societal breakdown. Really. I mean, Hyperinflation is not something that that you can you can live with, you’ve got to get it under control. Okay. So there are a few other papers I just wanted or a few other studies I wanted to mention, before we wrap up, because I think they help illustrate what sort of economies end up in, in hyperinflation. And, you know, what are those characteristics? And why? When we consider that we start thinking, Well, okay, we’re probably not there yet. It’s not yet a concern for countries like Australia, or the US, or the UK. I mean, we’ve got, we certainly have issues in our countries, but it’s, we’re nowhere near the situation where you could end up in some sort of hyperinflation, you need to have some sort of massive political turmoil, a government that just loses control of things and starts turning on the printing press to finance this deficit. So if we think about mid 80s, Bolivia, this is an example that Dorn bush and Fisher Fisher given their textbook, they had a budget deficit of 26.5% of GDP in 1984 10.8%, and 85. And inflation in those years was 1,282%, and 11,750%, in 84, and 85. So you’ve got very large deficits, like crazily high deficits, and then there’s money growth associated with that, because you’re financing it by the printing press. And you end up with the high inflation, too much money chasing too few goods. Right? Oh, they do give an example of how the sharp cut in the deficit, the fiscal austerity can stop the hyperinflation, but at a high costs, so Dornbusch and Fischer go on, they talk about how, as a result of austerity, and and poor export prices, again, in economics is multiple factors at any one time, you can you can’t run control experiments. If you listen to the show regularly, you’re aware of that Bolivian per capita income in 1992 was 30%, less than it had been 10 years earlier. So they really suffered, again, the lesson is avoid hyperinflation in the first place. have made sure you don’t have that societal disruption and, and you avoid the political turmoil that could lead to a government that, you know, enacts policies that are well, not good and need to be financed with, with money printing, right? So yeah. Okay, so there was a study that was done by the IMF. It’s an IMF working paper from 2018, the modern hyperinflation cycles and new empirical regularities. And I thought this was an interesting study, they looked at multiple countries, they had a data set 62 variables, 496 countries over 57 years, they were looking at what are the characteristics of countries that ended up having hyperinflation, and the three big ones were depressed economic freedoms, deteriorated socio economic conditions and rule of law as well as high levels of debt. aesthetic conflict tivity and government instability. Okay. So it’s when you’ve got lots of political turmoil really and, and that’s why it’s, it’s more common or it has been more common in the last well over the last 50 years or so in either Latin American countries, or in some sub Saharan African countries where there’s just been more political strife for various reasons, whereas countries that have been more fortunate countries where there’s there’s been more established democratic norms, and we haven’t had populist governments generally that on either side, I mean, I guess there have been some But largely, we’ve avoided the the extremes in particularly in Australia. And I suppose in US and UK. What’s that? What that has meant is that we haven’t ended up in a situation where we’d have to worry about hyperinflation. But again, something to be conscious of, we want to guard against it, we want to make sure we know the lessons of history and know the lessons of economics. Right. Finally, I’ll also link to a paper by Well, it’s a note on Kagan’s model of hyperinflation. It’s a note by Chris Edmund, who’s a Queenslander who I went to UQ with really bright guy ended up getting a Fulbright scholarship studied at UCLA then worked at the NYU Stern School of Business, he wrote a paper while he was at stern Kagan’s model of hyperinflation, and he talks about the conditions under which you end up with a hyperinflation. So he goes into the maths behind inflation. And its relationship with the amount of money that that people in the economy want to hold. So it’s very technical paper. But a good one, it’s worth reading, if you can, if you can get through the all of the math there, I’d recommend it. And what he, what he concludes is that one of the important messages that economists take away from Kagan’s paper, so this is the famous paper which introduced the concept of hyperinflation, or defined it in the 50s. Or maybe it was early 60s, I’ll link to it in the show notes. One of the important messages that economists take away from Kagan’s paper is the need one for fiscal discipline, and or an independent central bank to prevent monetize deficits that can allow a hyperinflation to get started, and to the need for individuals inflation expectations to be anchored, and thereby relative Lee unlikely to lead to a momentum driven inflation breakout. Okay, so what Chris is driving out here is that when things get really bad, and no one wants to hold the local currency, no one trust the government, the government just keeps printing more and more currency to try to buy the goods and services it needs. And that leads to more and more inflation. And that leads to higher expectations of inflation. And you just end up with this vicious circle, that just reinforces itself, things get out of control, it gets explosive. Okay, so that’s what he’s driving out there. And then he concludes, of course, part of the trick to anchoring inflation expectations is for government policy to be credibly anti inflation, right. So and this is often why you need a change of regime, you need a new government that comes in a new broom sweeps clean, big shock, Fuji shock, for example, in Japan, it’s tough medicine, but sometimes it has to be done to get hyperinflation. Well to to get rid of it to reduce that inflation over over the coming years. And, look, there’s a bit of a debate in economics. I don’t think we’ll have time to cover it today. But it’s about how quickly you can stop these hyperinflations. And there was a famous paper by Thomas Sargent the end, the end of for big inflation’s, or the ends of for big inflation’s, I think it is Yep. And he argues that you can actually stop these hyperinflations relatively quickly. So it’s not it doesn’t have to be a drawn out process over over several years, where you’re losing all this GDP, you can stop it quickly, if you do have a very sharp and credible change in the policy regime. So there must be an abrupt change in the continuing government policy or strategy for setting deficits now and in the future that is sufficiently binding us to be widely believed. And this is related to his rational expectations theory. So if people believe that the There’s a new credible policy, then there are expectations of future inflation can drop massively, very quickly. And that therefore, that means inflation itself drops very quickly. And you save yourself a lot of pain by having to have a slower economy and higher unemployment for several years to get rid of it. Okay. Anything else? Arturo I know, we might have to wrap up soon.

Arturo Espinoza Bocangel  45:28

I think the these topical Hyperinflation is very complex. But you have provided a good summary. I think my final message is any government around the world must be aware of that it’s important to monitor inflation to target the inflation because that putting these this or that potential economic event would bring a lot of suffer, especially for poor people. Absolutely.

Gene Tunny  46:10

Okay. Tara, it’s been great chatting with you about hyperinflation. So thanks so much for your time.

Arturo Espinoza Bocangel  46:17

Thank you, Jim. Thank you for having me.

Gene Tunny  46:21

Okay, I hope you found the conversation about hyperinflation interesting and useful. As with many of the episodes I record, I feel I could explore this topic a lot more, and I hope to come back to it in the future, it may be useful to do a deep dive on some specific instances of hyperinflation, possibly the 1920s, German hyperinflation or more recent hyperinflations in Venezuela or Zimbabwe. I’d like to delve into exactly what went wrong in the first place. How did these countries end up with big government budget deficits that needed to be monetized in the first place? Please let me know if there’s a specific hyperinflation that you’d like to learn more about, and I’ll see what I can do. I should note that one point I think I could have covered better in this episode relates to D monetization. One way a hyperinflation can end is if the government abandons the currency and replaces it with a currency that people trust such as the US dollar. When this occurs, not only is there D monetization that is declaring that a currency is no longer legal tender, but there is so called dollarization as well. This happened in Zimbabwe in 2009. Eventually, the Zimbabwe government tried to reintroduce a new local currency in 2018 19. And hyperinflation started again. Governments of course, would prefer to have their own currency as it means they can partly finance themselves via the printing press A found a good article on what happened in Zimbabwe on the conversation website, and I’ll put a link to it in the show notes so you can check that out. One other issue I would have liked to have covered in this conversation is whether hyperinflation affected economies could abandon their currencies and adopt a cryptocurrency such as Bitcoin. There was an intriguing Forbes article in July titled Bitcoin could solve Zimbabwe’s hyperinflation problem. I’ll link to it in the show notes. If you’re a regular listener, you’ll know that I’m sceptical about the potential for cryptocurrencies to replace traditional currencies, particularly given the huge degrees of volatility in their values. But I will acknowledge that crypto advocates are right about the potential for fiat currencies to be debauched. Hyperinflation is the outcome of the most extreme divorcement of currencies. As always, I’m trying to be open minded and plan to come back to cryptocurrency and other crypto assets such as non fungible tokens in a future episode. I’m also keen to have a closer look at the concept of smart contracts which are enabled by Aetherium. Right, I better finish up now. I’d love it. If you could join me again next week for some more explorations in economics. Ciao. 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 writing 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. Till next week, goodbye.

Credits

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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