Author: Gene Tunny

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Podcast episode

Why GDP Ignores So Much Productive Work

In a recent episode of Economics Explored, show host Gene Tunny spoke with American economist Misty Heggeness, author of Swiftynomics, about a deceptively simple question: what do we actually count as economic activity? The discussion quickly moved to a deep issue in economic measurement — the fact that large amounts of productive work, particularly unpaid care and household work, sit outside our headline statistics.

This raises an obvious follow-up: why does GDP ignore so much productive work?

What GDP Was Designed to Measure

Gross Domestic Product measures the value of final goods and services produced and sold in markets. It was developed in the mid-20th century to help governments understand economic capacity, manage fiscal policy, and stabilise economies during shocks.

GDP was never intended to measure wellbeing, total effort, or social value. It is a measure of market production. Misty Heggeness’s critique is not that GDP is mis‑measured, but that it is conceptually narrow and nonetheless widely used as a proxy for broader economic and social well‑being that it was never designed to capture.

The Steel-Man Case for Excluding Unpaid Work

There are strong reasons to exclude unpaid work in the home from GDP.

First, valuation is inherently difficult. GDP relies on observable prices. Unpaid care and housework have no market price, so any valuation must be imputed. Whether we value home cooking at the wage of a chef, the wage of a cleaner, or the opportunity cost of the person doing it makes an enormous difference to the final number.

Second, comparability matters. GDP works because it is broadly consistent across countries and over time. Household norms, family structures, and caregiving arrangements vary widely. Including unpaid work risks undermining that comparability.

Third, there is the risk of double-counting. Household production often uses market inputs—groceries, energy, and appliances —already included in GDP. Without careful boundaries, measured output could be inflated.

Finally, GDP aligns closely with fiscal capacity. Governments tax market activity, not household labour. In macroeconomic management, GDP remains closely tied to what governments can realistically afford to spend.

From this perspective, GDP excludes unpaid work not because it lacks value, but because including it would weaken GDP’s usefulness as a clean, reliable macroeconomic indicator.

What Gets Lost by This Choice

Still, as Heggeness argues, the exclusion has consequences.

Time‑use data show that, on average, once unpaid work is included, women perform at least as much and typically more total work per day than men, particularly in couples with children and many dual‑earner households. Official labour market statistics can obscure this reality.

In Australia, Dr Leonora Risse, an Associate Professor of Economics at QUT, has estimated in her new research that unpaid labour is about $688 billion annually (equivalent to one-third of Australian GDP). That is a substantial amount of productive activity to exclude from the headline measure, and it may influence policy debates around parental leave, childcare and aged care.

What the Stiglitz–Sen–Fitoussi Report Said

These concerns were central to the Stiglitz–Sen–Fitoussi Commission (2009), which argued that GDP should not be treated as a measure of wellbeing. The Commission explicitly noted that household production and unpaid work are economically meaningful, even if they are not captured in GDP.

Crucially, the recommendation was not to cram everything into GDP, but to develop complementary measures that better capture living standards, sustainability, and distributional outcomes.

Misty Heggeness’s work fits squarely in this tradition.

Why Not Just Add Housework to GDP?

Many economists and statisticians remain cautious. According to a national accounting expert at the Economic Statistics Branch of the United Nations Statistics Division (UNSD) 

“… there’s one key reason why nation states invest in something like the national accounts. And to me that’s primarily because they care about employment and they care about taxation…” “…The informal economy, the household sector, they’re important to understand for other reasons, but you’re not going to be designing your monetary or fiscal policy to impact on those…” (Interview with UNSD statistician, New York, 2019).

As a result, many statistical agencies — including the ABS — prefer satellite accounts that estimate household production alongside GDP rather than including it in GDP. However, the ABS not yet produced a household production satellite account (see Chapter 23 Satellite accounts | Australian Bureau of Statistics, para 23.8). It noted: 

“The ABS has not produced a household satellite account as such to date. A number of conceptual, methodological and funding issues would need to be resolved prior to its production, given there is no agreed standard for a household satellite account.”

The ABS is right to point out these issues. Regardless, other statistical agencies have forged ahead. Examples of national statistical agencies that have implemented household-production (unpaid work) satellite accounts:

  • Office for National Statistics (UK) – publishes an official Household Satellite Account that values unpaid household services alongside core GDP measures, reporting that unpaid household work is equivalent to around 62% of UK GDP.
  • Federal Statistical Office (Switzerland) – produces a Household Production Satellite Account to quantify unpaid work within the extended economy.
  • Statistics Canada has developed extended satellite accounts that include the value of unpaid household work and other non-market activities.

Despite the methodological challenges, an Australian household services satellite account would be a useful contribution to the Australian policy discussion. 

Counting Housework and Care Without Breaking GDP

GDP ignores much productive work by design, not by accident. That design choice is defensible — but consequential. Swiftynomics challenges us to recognise those consequences without discarding a tool that still does an important job.

The real task is not to replace GDP, but to stop treating it as a measure of everything that matters.

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Podcast episode Uncategorized

What Would Adam Smith Make of Modern Australia?

“Capitalism has been hijacked by capitalists.”

That was one of the striking lines from my recent conversation with Joseph Healy, former CEO and co-founder of Judo Bank and author of What Would Adam Smith Make of Modern Australia?

It’s a provocative claim. But Joseph is not anti-market — far from it. He describes himself as “unashamedly a capitalist.” His concern is not with markets per se, but with what happens when competition weakens, incentives distort behaviour, and the moral foundations that underpin a market economy erode.

The question he poses is a useful one: what would Adam Smith — often invoked as the intellectual godfather of capitalism — make of Australia today?

Book cover for 'What would Adam Smith Make of Modern Australia?' by Joseph Healy, featuring a crowd of diverse people forming the shape of Australia, with the title prominently displayed in colorful text.

Adam Smith: Economist and Moral Philosopher

Smith is best known for The Wealth of Nations (1776), which defends trade, competition, and the famous “invisible hand.” But 17 years earlier, he wrote The Theory of Moral Sentiments, a work that explored sympathy, virtue, and the ethical foundations of society.

Healy argues — and many scholars agree — that these two works must be read together.

Smith believed markets were powerful mechanisms for allocating resources and promoting prosperity. But he also believed that markets operate within a moral and social framework. People, he wrote, desire “to be loved and to be lovely” — that is, to be respected not only for their success, but for having achieved it honourably.

That distinction matters.

In our discussion, Healy made a simple but powerful point: there is a difference between asking “Is this legal?” and asking “Is this right?” The legal test is a low hurdle. The moral test is higher.

A market economy depends not only on price signals and profit incentives, but also on trust, reputation and norms of fair dealing. When those weaken, something important is lost.

Where Might Australia Have Drifted?

Australia remains a prosperous country by global standards. We are a successful trading nation, strong in resources and agriculture, and we have avoided many of the economic crises that have hit other countries.

But Healy argues that, beneath the headline numbers, structural concerns are emerging.

1. Weak Competition and Economic Rents

One concern is market concentration.

In sectors such as banking, airlines, food retail and energy, Australia has a small number of dominant firms. These industries are often highly profitable — in some cases, among the most profitable in the developed world.

High profitability in itself is not a problem. But if it stems from weak competition rather than innovation and efficiency, it may signal the presence of economic rents. Economic rents are extra profits that arise from market power or limited competition rather than genuine productivity or innovation.

Healy argues that when firms operate in “cozy” market structures, the incentive to innovate diminishes. The focus shifts to protecting profit pools rather than engaging in creative destruction. Consumers may face higher prices and fewer choices. And lobbying efforts can reinforce the status quo.

This is not an abstract issue. We discussed examples ranging from the banking sector to the debate over airline competition, where government decisions can materially affect market structure.

The broader question is whether Australia has been sufficiently pro-competition in its policy settings — not merely preventing further consolidation, but actively encouraging entry and contestability.

2. Banking, Housing and the Allocation of Capital

A second issue concerns the allocation of credit.

Healy noted that over the past two decades, Australian banks have shifted significantly toward household mortgage lending, with comparatively less lending to small and medium-sized enterprises.

From a private bank’s perspective, mortgages can be attractive: they are often perceived as lower risk and collateralised by property. But at a system level, this shift raises questions.

Australia now has one of the most highly leveraged household sectors in the world. While much of this debt is backed by assets, there is still exposure to housing market cycles and interest rate shocks. Moreover, when a large share of credit flows into property rather than productive business investment, it may affect long-term economic dynamism.

Banks play a privileged role in the economy. They are critical for capital allocation. Healy asks whether current incentives are leading to the most productive allocation of that capital.

3. The Disconnect Between Economy and Society

Healy’s most ambitious claim is that the health of the economy and the health of society may be drifting apart.

Economically, Australia performs well, with a relatively high standard of living. But on social indicators — educational outcomes, domestic violence, gambling harm, substance abuse — there are areas of concern.

Smith believed a prosperous economy should be matched by a healthy society. If economic growth coexists with widening inequality, declining educational performance, or erosion of social trust, that mismatch may not be sustainable.

Toward the end of our conversation, I asked Healy to give Australia a “scorecard” from an Adam Smith perspective. His verdict: an A for trade, but a D for competition and a C+ overall — with a warning about the trajectory.

That is a sobering assessment.

Complacency vs Crisis

Without underplaying the significance of the productivity and cost-of-living concerns in the last few years, Australia has performed remarkably well economically over the past few decades. We are not in an economic crisis, and our institutions are holding up for now and are certainly under less strain than in the US. 

But Healy sees a risk of “sleepwalking” into deeper structural problems — the proverbial boiled frog, unaware of gradual changes until it is too late.

I’ll admit that over the years I’ve become more open to the idea that issues such as weak competition and market concentration deserve greater scrutiny. That doesn’t mean embracing alarmism. It does mean being willing to examine whether our institutions and policies are evolving in ways that support long-term prosperity.

Where to From Here?

Healy outlines several areas for reform: 

  • strengthening competition policy, 
  • reassessing the scale and complexity of regulation, 
  • tax reform, 
  • rethinking corporate governance (which has been weak in Australia in Healy’s view), and 
  • investing in education and training.

Reasonable people can debate the details. But the broader question he raises is harder to dismiss:

Can a market economy thrive if its moral and competitive foundations weaken?

Adam Smith was not a simplistic cheerleader for business. He was a careful observer of human nature and institutions. His defence of markets rested on assumptions about competition, virtue and social norms.

A portrait of a man with 18th-century fashion, featuring a powdered wig and a dark coat, set against a dark background.

Adam Smith

If those assumptions no longer hold, it is worth asking what needs to change.

I explored these issues in more detail with Joseph Healy on the latest episode of Economics Explored. If you’re interested in how Adam Smith’s ideas might illuminate modern Australia’s economic challenges, you can listen to the full conversation on podcast apps (e.g. Apple Podcasts) or using the web player below. 

Please let me know what you think of the latest Economics Explored episode by commenting on this post or emailing me at contact@economicsexplored.com.

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Podcast episode

AI, Productivity, and “Infinite Intelligence” – Conversation w/ Chris Berg & John Humphreys

On Thursday, I joined John Humphreys of the Australian Taxpayers’ Alliance and Professor Chris Berg of RMIT University for an ATA livestream discussion on productivity (see Productivity ideas with Chris Berg). One of the most interesting parts of the conversation was on artificial intelligence (AI), which I’ve repurposed for my latest Economics Explored podcast episode.

Thankfully, the Australian Government has so far resisted pressure—particularly from unions and lobby groups—to introduce heavy AI regulation. Instead, it has adopted a wait-and-see approach, unlike Europe, where regulation is already slowing the rollout of new AI tools. Chris welcomed this hands-off stance, seeing it as giving Australia a chance to capture the benefits of AI adoption more quickly.

One of the more provocative points from Chris was his description of AI as providing “effectively infinite intelligence.” I challenged this idea, suggesting that while AI can synthesise vast amounts of existing knowledge, true intelligence involves solving new problems. Nonetheless, I share his view that AI represents an extraordinary advance.

We also discussed who wins and who loses in an AI-driven economy. Contrary to the usual automation story, Chris argued that it may be highly educated professionals who face more disruption than low-skilled workers, since AI excels at writing, analysis, and other cognitive tasks. At the same time, concerns remain about those unable to use the technology being left behind effectively.

Beyond work, AI raises broader social and ethical questions. We talked about AI companions, therapeutic uses (such as support for people on the autism spectrum), and risks of parasocial relationships or loneliness. The potential benefits are real, but so are the challenges.

Finally, one of the more imaginative suggestions was that low-skilled work in developed economies could in future be done by humanoid robots remotely operated from overseas. This would create a new twist on globalisation and migration policy—an idea worth thinking through further.

Overall, it was a fascinating conversation, with plenty of optimism from Chris about AI’s productivity potential, tempered by my own caution about the risks and unknowns.

If you’d like to watch the whole conversation with Chris, you can check it out on the ATA YouTube channel. In addition to discussing AI, we also discuss Australia’s Economic Reform Roundtable.

This article is cross-posted at queenslandeconomywatch.com. Please send any comments or questions to show host Gene Tunny at contact@economicsexplored.com.

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Economic update

How Office Design Impacts Productivity in the Hybrid Work Era

As hybrid work becomes the new normal, organisations are rethinking what makes a productive workplace. One surprising insight? It’s not the ping pong tables or open-plan lounges that matter most—it’s control.

In a recent episode of the Economics Explored podcast, award-winning American architect Kevin Kennon told show host Gene Tunny that what people truly value in an office is the ability to shape their working environment. “We all want greater control over our environment,” Kennon explained. That desire for autonomy, he argued, has a more profound impact on productivity than any trendy workplace perk.

Kennon’s experience designing large, complex buildings—from corporate headquarters in Manhattan to adaptive reuse projects—gives him a unique perspective. He emphasised that productivity-boosting design isn’t about adding bells and whistles, but about providing workers with environmental control over temperature, lighting, space, and air quality.

One key issue is thermal comfort. Office workers often complain about offices being too hot or cold—rarely right. Kennon argued that this stems from overly centralised heating and cooling systems. Smarter design allows different zones within an office to be independently adjusted, allowing occupants to fine-tune their surroundings to suit their needs. This flexibility can reduce discomfort and distraction, enhancing concentration and well-being.

Lighting is another factor. Access to natural light is known to support circadian rhythms and reduce fatigue. Kennon suggested designing workspaces that maximise daylight exposure and enable users to adjust lighting levels within their immediate environment. These adjustments, though small, can cumulatively improve focus and reduce workplace stress.

Beyond lighting and temperature, the layout of office spaces also plays a critical role. In hybrid settings, where not all employees are present daily, offices must offer a mix of quiet zones, collaborative areas, and shared desks. Giving workers a choice of where and how they work within the office helps replicate some of the autonomy they enjoy at home, making them more willing to return.

This flexibility extends to building infrastructure, too. Kennon highlighted that operable windows or semi-outdoor spaces in some climates can enhance comfort and reduce air conditioning costs. Such designs can also help reconnect workers with nature, an increasingly important consideration in post-pandemic office design.

According to Kennon, from an economic standpoint, these features are not luxuries—they’re investments in productivity. When workers are comfortable and empowered, they perform better. Businesses benefit from higher output, and decision makers should take note. As Kennon observed, architects can offer valuable insight into how people interact with space, and should be included in conversations about workplace design and economic performance.

Recent research from Japan reinforces the importance of thoughtful office design on worker productivity and well-being. A 2023 study published in Building and Environment by Japanese researchers analysed data from 1,644 workers across 29 Tokyo office buildings to quantify the economic benefits of optimised office environments. The researchers found that interior furnishings, airflow, and overall building sanitation had the most substantial impact on perceived work efficiency, while desk lighting was most strongly associated with reducing presenteeism–that is, where employees are physically present at work but are not fully productive due to illness, injury, stress, exhaustion, or other health-related or personal issues. Their findings suggest that improving—or even just removing negative elements of—the office environment can generate substantial economic gains, with benefits exceeding ¥200,000 (approx. AUD 2,000) per employee annually in some cases. These results align closely with Kevin Kennon’s observations on Economics Explored, further highlighting that investing in user-focused design is not just about comfort—it’s also good economics.

In short, better design leads to better business outcomes. As hybrid work reshapes how we think about offices, thoughtful architectural design prioritising user control, comfort, and flexibility can help bridge the gap between home and office—and ultimately, support higher productivity.

Listen to Kevin Kennon’s full interview with Gene Tunny on the Economics Explored podcast:

This article is cross-posted at adepteconomics.com.au. Please send any comments or questions to show host Gene Tunny at contact@economicsexplored.com.

Transcript: Rethinking Property and Taxation: The Georgist Approach w/ Kevin Kennon

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.

Kevin Kennon  00:03

The misconception about architects is that we just sort of solve spatial problems or esthetic problems. But I think that if you, if you really sort of broaden that and understand that, I think what we do best sometimes is imagine the future. And if that sounds a little utopian, on my part, I am guilty as char I think we need a better future.

Gene Tunny  00:30

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show.

Gene Tunny  01:02

I Hello and welcome to the show. This episode is all about the future of cities, housing affordability and the role that architecture plays in shaping urban life. My guest is Kevin kennen, an award winning architect. He’s known for landmark projects, especially in New York City, including the Sotheby’s and Barclays headquarters and the renovation of Macy’s Herald Square. In our conversation, Kevin highlights the importance of a smarter approach to density, the strategic blending of residential, commercial and community spaces into vibrant, integrated neighborhoods. He challenges traditional zoning practices that segregate city functions, arguing instead for flexible, mixed use developments that foster both livability and economic vitality. In our conversation, Kevin also shares his insights on the economic forces influencing urban design, the challenges and potential of modular housing and why architects should have a greater role in shaping public policy. Special. Thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants, economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it.

Kevin Kennon  02:20

Kevin Kenan, welcome to the program. Thank you, gene for having me. It’s a pleasure to be here. Of course,

Gene Tunny  02:25

Kevin, it’s great to have you on the show. You’re a very distinguished architect, so you’ve won various awards, and you’ve been finalists in important competitions, such as for the redeveloped World Trade Center, the start of the World Trade Center in New York City, and I’m keen to get your thoughts on what drew you to architecture in the first place. To start with, I’m interested in that because I mean architecture something I think a lot of us, we get interested in, but I’m just wondering what, what got you interested in at a at a young age, and what led to your career?

Kevin Kennon  03:01

Well, you know, I, even though I’m headquartered in New York City, I grew up just outside of Los Angeles, and I think that I was always fascinated by these houses that were built kind of right on the edge of cliffs and and just the the magic that that it took to do that, and living in that sort of landscape, which is certainly not dissimilar to the east coast of Australia, in many ways, it’s the same general Geography and Climate. But you know, just that idea of kind of Building With Nature and sort of on the precipices was one of the first things that drew me to architecture. And, you know, I kind of continue to develop that. I went to college here on the East Coast and have stayed in New York, even though my foundation was sort of in that sort of more of a agrarian, almost rural type of landscape, I just was fascinated by New York City for different reasons. And have, you know, built my career, you know, really first in New York, but also all over the world, and I’ve been fortunate in that regard. Yeah, yeah,

Gene Tunny  04:25

just on the difference between saying, I mean, New York’s obviously very dense, and, LA, you’ve got more room to how important are the economic considerations in the design? Can you speak to that at all, please? Kevin, well,

Kevin Kennon  04:38

well, New York, if you understand anything about the city is really, it’s almost built like a chess board for real estate. It’s it’s meant, it’s a very rationalized sort of system. And, you know, it’s so economics. Is the primary driver here. You kind of understand that, especially working as I do, and mostly into the commercial part of architecture. So you’re attuned to how that works. But at the same time, in order to make that work, you have to be able to navigate a lot of different community issues, regulatory issues, understanding who exactly is going to be occupying the buildings that you do. And then I think even a larger purpose. You know, what are the goals to make New York a better city, or in the case of LA, where I’ve done, actually done some work as well. You know how to understand what those conditions are. And then they vary, obviously, by location. Yeah,

Gene Tunny  05:53

gotcha, gotcha. And what are some of the buildings that you’ve designed in New York City? For example, is it? Is it Sotheby’s? Did I get that right? You’ve got some

Kevin Kennon  06:01

of these headquarters, the Auction House. Actually, the world headquarters is in New York City. I’ve done that building, Macy’s Herald Square. I completely redid that from top to bottom, and it was kind of an interesting job, because we had to keep that building running at all time. It could never go dark. And and then the Barclays North American headquarters in Times Square, which is a large skyscraper here. And I’ve also done some more sort of smaller projects. There was the original American Express building, which was built in 1864 as a historic building in Tribeca. And then we completely, I co developed that, reimagined that entire building for a kind of bespoke group of investors who actually became the occupants of the building. And we designed those as luxury apartments.

Gene Tunny  07:02

Gotcha, gotcha. And I don’t know if you’ve Have you, uh, read, or the the fountain head at all, or seen the film. I just thought I’d ask, given that it’s a, you know, economic show, and I’ve there are a lot of people who are a lot of economists, who may not necessarily be fans of Ayn Rand, but are familiar with Ayn Rand, and I just wonder, as an architect, how much, how much freedom do you have to bring in your own individuality and creativity, given that you have to do work for clients and you’ve got the economic overlay, like, how do you, how do you think about those, those considerations?

Kevin Kennon  07:39

Well, from the perspective of somebody who designs large, complex building projects across multiple different types, I can attest to the fact that it is very much a collaborative enterprise, despite how it’s portrayed in the movies, the founder being the first and then lately, the one that people probably are most aware of would be the brutalist. And it’s not a solo sort of enterprise. Now, I’m typically the guy they bring in at the very beginning of projects as design architect. I’m the sort of point of the spear, so to speak, and then. But, you know, there are 1000s of people, obviously, who are involved in a building, say, the scale of Barclays headquarters, which is a million a half square feet and over 600 feet tall. You know, to do that kind of project, there’s a cast of 1000s, and so you have to be able to understand how to work with a variety of expertise, both in design and construction engineering, economics. You know that that obviously, when you have a financial firm as the client, that building was actually originally designed for Morgan Stanley, when they they sold it to Lehman Brothers, which had been displaced after the World Trade Center. And of course, we know what happens to Lehman Brothers. So it is, it is, it is. It became sort of the, essentially, the poster child of the financial crisis. And so every time they show footage of that time, it’s usually people coming out of the building, repairing cardboard boxes. Yeah. So anyway, so it so understanding the complexities of all the different ways in which that goes together has given me kind of a unique perspective, not just on architecture, but really the architecture engineering, construction and development industry. Yeah,

Gene Tunny  09:57

that makes sense. I wish I’d seen the brutalist before i. I had this interview, I have to check it out. I haven’t seen it yet. I mean, brutalism is, is something I have mixed feelings about, because I think we’ve like in Brisbane here, we’ve got some great brutalist buildings, particularly on the south bank. We’ve got our Performing Arts Center and our museum, which I think is one of the really great examples of brutalism. But then there are other sort of buildings, particularly at our universities, which are just ugly really, or they haven’t lasted. They haven’t sort of stood the test of time. So yeah. So yeah, what are your general thoughts on brutalism? Kevin, well,

Kevin Kennon  10:37

you know, I mean, I think I like to think of because I’d like all kinds of architecture, I having re imagined a really prominent historic building in the city, actually, to Macy’s was from 1902 which in New York is pretty old, and obviously this 1864 building the American Express Company, was also quite interesting and challenging. So I like working with those types of buildings, and I think you have to assess each building on its own merits. There are lots of terrible historic buildings, there are lots of terrible modern buildings, and there’s certainly a lot of terrible brutalist buildings, but you know, occasionally they can be repurposed and reimagined in ways that I think you know, kind of transcend just the stylistic definitely.

Gene Tunny  11:35

Okay, great. Now, recently, you’ve become concerned, or it seems you’re concerned about housing, of affordability, the availability of housing. What can you? Can you tell us, what are your thoughts on, what’s the current housing situation? What is What have you been thinking about recently? Please. Kevin, well,

Kevin Kennon  11:55

I think obviously top to mind with everybody these days are tariffs and the impact that there have on on housing. And, you know, it’s, there’s a lot of similarities to the automobile industry and or aviation in that, you know, a great deal of materials that we use here in New York come from other places, and, you know, we essentially have had a more or less free market, and that’s been one way we’ve been able to control costs. You know, the the impact is potentially has on interest rates and inflation. You know, that’s also part of the equation, because, as as developers and housing any anything that, especially having to do it on a sort of mass scale, you know, the slide is tick one way or the other, and interest rates can make or break a project, because it’s all done with leverage. And, you know, and I I understand that in Australia, you know, a lot of the private houses go through auction, which is quite different than the way which we tend to broker housing here, you know, which I think has its sort of, you know, pluses and I guess minuses, and that, at least it sort of has a transparency to it, which I can appreciate and like, but we’re just talking in general, just housing. And how can we increase the affordability of housing? You know, I think that really has to do with making, in my mind, it has a lot to do with sort of free trade and keeping those avenues open to allow people who are in that space the maximum ability to at least make some kind of a profit, And at the same time be able to produce market rate or below market rate affordable housing,

Gene Tunny  14:07

right? Yep. So are you already seeing? Have you seen the impact of the I mean, these tariffs, the we had, the Liberation Day ones, and then I think, I can’t remember the timing, but he’s also imposed tariffs on Canada and Mexico. So have they started to affect the cost of inputs, and that’s been factored into building projects? Kevin, have you seen that? Well,

Kevin Kennon  14:30

you know, we already had a problem with supply to begin with. So it’s a complex, you know, problem, because we had had so historically low interest rates for quite a while, since, really about 2011 and a lot of people who bought homes at that point were paying, you know, three, three and a half percent interest rates. So all of a sudden, you. Even though they may have been looking, you know, to sell or and they weren’t necessarily looking to refinance, and they weren’t necessarily looking to to sell and then go into a higher rate mortgage. So, you know, there was a sort of a pause in general, buying and selling, where there wasn’t a lot of movement. And then the problem, of course, is like there’s a phenomenon housing, and I’m sure it’s the same in Australia, where, if you have a housing development, and let’s say it’s mostly done on spec, and there’s some kind of a pause, and people’s demand. You know, if you wait too long, that housing goes scale. Nobody wants it anymore, because they feel it’s, it’s already, you know, if I’m going to buy something, I want to buy something new, yes, and, and so it’s a, it’s a tricky thing to do to be able to control inventory, make sure you’re, you know, purchasing the right way. And then, on top of all this, we’ve had a huge influx of private equity capital into the housing market, where essentially they would base look for for deals and just buy up the land and essentially freeze a lot of buyers, you know, smaller buyers, out of the market. So it’s, you know, it’s a strange, strange conglomerate of different forces here that have really to some degrees, but put a toehold on the market. And of course, now it’s everybody’s sort of sitting around waiting to see what’s happened. So you know, when you have an environment where already things are slowing down, there was the, just the logistics of getting material, we kind of just sort of managed to get over that hump. So the lead times on building materials wasn’t quite as long. And then also you slap these tariffs on and and then you take them away, you know, it’s, it’s, it’s very, very difficult as a certainly, as a developer, to know exactly what to do. Yeah,

Gene Tunny  17:26

yeah. There’s a lot of uncertainty at the moment. I think there’s the point Paul Krugman and and other economists have made, and just how disruptive that is, how, how negative an impact that will have on investment, on capital investment. So absolutely, and you mentioned the disruption. So the disruptions associated, the disruptions to supply chains associated with the pandemic, I presume you you’re talking about,

Kevin Kennon  17:52

yeah, yeah. And I you know, so we get a lot of lumber from from Canada, a lot of aluminum from Canada as well and so. But, you know, there’s the whole host of other products that we rely on the supply chain, but in order to, you know, put our houses together. And that, when I say houses, I mean everything from multi family housing that you find in more urban and denser neighborhoods and to single home family that you find more in places like Los Angeles, yeah,

Gene Tunny  18:32

our restrictions on development, restrictions on the Growth corridor of cities, restrictions on what Greenfield developments you could have, and also character restrictions or heritage protection. Are they? Are they factors affecting housing supply in the US? Kevin, well,

Kevin Kennon  18:53

you know what we call NIMBY issues, not in my backyard, those, those those play into a lot of development. So not only do you have sort of regulatory issues and zoning restrictions that, for example, New York the zoning is quite complex. And if you cannot invest in New York City, if you don’t know what you’re doing, or you don’t hire experts who understand the zoning in New York although, you know, one of the good things about New York City is that, over the historic long run, it’s a very valuable investment, and usually a safe harbor For international investors as well. So that plays a huge factor into timing and knowing how to to essentially navigate those regulatory environments. Is is really key. Now, what’s happening in places like Los Angeles is. Or in Miami and Florida, I think certainly places near Sydney Australia right now is probably have insurances coming in, and those areas where there have been catastrophic damage. And essentially, either, you know, making the premiums so out of reach that most people can’t afford it anymore. Or, you know, putting some so many restrictions on that that that has an impact on where people are able to afford to live. Yeah,

Gene Tunny  20:36

that’s definitely having an impact on in North Queensland, the insurance premiums have just risen massively because they’re they’re more subject to cyclones. Sydney has had some significant flooding. So yeah, I’ll have to see. We’ll have to see what that does to their insurance premiums. But yep, that is definitely one of the big issues, as is the, you know, just the high, high price of land. Kevin, can I ask us, as an architect, how can you, how can better architecture, better design, or better urban design, improve housing affordability, please?

Kevin Kennon  21:10

Well, you know, I think the the thing about, and this is where I would say my colleagues who were working in Los Angeles now are doing some very interesting development there. That is, you know, I think there’s a number of factors that that work very well if you have a climate that is fairly temperate like Los Angeles, is it’s easier to create, I think, kind of more livable spaces where there’s a connection between indoors and outdoors, and that allows for, you know, the It gets around the kind of big urban block, sort of eyes stores that we think of, especially sort of brutalist examples of urban housing that we know they don’t work, and they become, ultimately, sort of places that people really don’t want To live, and if they do, they’re usually not managed well. So there’s a lot of examples of that. I think the best housing tends to be some kind of a blend of what we call public and private. There are certain relaxations and say, regulations in exchange for private development to make at least the margins work, so that if you know what you’re doing and you can plan it the right way, you should be able to create better, better housing, more livable housing, And in particular, what we are all looking for as architects these days is finding ways to connect people to the outdoors. There’s an effort right now to especially New York City, and there’s incentives in that regard to create more green areas make our streets less dependent upon cars, more pedestrian friendly, you know, and as we do that, I think the opportunity to connect to nature and really turn the whole city into much more of A kind of landscape than just a concrete jungle, not to mix my metaphors, but yeah, I think you understand what I’m saying. Yeah,

Gene Tunny  23:48

gotcha. Gotcha. So that’s interesting. So does that mean lower density, in some cases, in New York City? Is that what you’re pushing for?

Kevin Kennon  23:57

Well, I think it’s it’s smarter density is pushing. The biggest problem that we have in New York City with our zoning code is it’s very it just it takes certain areas of the city and defines them as, these are residential areas and these are commercial areas, and sort of, to some degree, segregates the living areas from the more commercial. This happened with a lot of cities. And, you know, I think the thinking nowadays is that now the best and most vibrant communities have a mix of everything, you know, sort of shops, people can buy and galleries and and then also smaller offices, small manufacturing, co working spaces, different types of living conditions, green areas. You know, the sort of a more vibrant mix that happens. It can happen across the streets. It can happen adjacent, you know, but to each other. Or it can even happen if you have a building big enough in the single building where, you know, you might have a variety of uses, but actually occur within one building. And those are the things that I’m most excited about, not just for New York, but all over the world, where we can sort of build in to any development that sort of more vibrant mix of different uses.

Gene Tunny  25:35

Gotcha. Gotcha. So that that makes sense, because I was just wondering, hang on, we because we’ve got, we’ve got growing populations, then we don’t want to necessarily decrease density. What we’re talking about a lot here in Australia is, well, there’s a movement I’ve had one of the guests on the people involved in it, Natalie Raymond. She’s part of this group called yimby Yes in my backyard. And you know, she talks about gentle density. Have you heard of that concept? Is that compatible with what you’re talking about? Yeah, I think

Kevin Kennon  26:07

it’s a, it’s a, it’s a, it’s another sort of offshoot of what I’m talking about, which is, you know, being smart about density. And there are areas in New York City where, frankly, are hyper dense, but, you know, but because they’ve been treated a certain way, there’s a certain sensitivity to it there, there. You don’t really feel overwhelmed by the density. You just have to have the right infrastructure for it, and you have to understand the you don’t want to throw out really, what might be very good bones are great buildings that may have been us their utility as a particular type of use, but can be reimagined into something, you know, vibrant and new. I mean this the American Express building that I keep referring to had been, over the years. It started as the American Express. Is like the Pony Express you’ve ever read anything about the Wild West, which was it? You know, the base of it was a stable, so all the horses above that were offices, and that had had, you know, by the time we started develop it, it was, it was virtually unrecognizable, almost as ability had become, you know, painted on with graffiti. It had been used a long time as the studio of the mid century modern artist Alex sculptor Alexander Calder. That was his studio. And, you know, it was just that kind of rediscovery of some really amazing architecture that more or less almost hidden, so that, that kind of, you know, priority of well first, before we decide to build something new, let’s see if we can’t simply re imagine what’s already there.

Gene Tunny  28:09

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

Speaker 1  28:14

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Gene Tunny  28:44

now, back to the show. I liked what you’re saying about mixed use, or not having these rigid if I’m interpreting you correctly, not having these rigid definitions or delineations of what should go, where in a city. And I think one of the issues we’ve got here, and I know you, you haven’t been to Brisbane, so you may not this is good, but I’m interested in generally, like, What the What principles we should be thinking of, rather than you diagnosing. Well, this is the problem with Brisbane, and this is what I recommend, like, we’ve got, it’s not very dense outside of a few little few areas, so in our CBD. And then there are some former commercial areas that we’ve allowed intensive high rises in. And then there are these other suburbs. It is city suburbs. We’ve got these old Queenslanders. There’s this iconic style of house, a tin and timber house in Brisbane with verandas and and which I think is is good from the point of view you’re talking about, about connecting you with the outdoors. I think they’re wonderful for that. The issue is that there are a whole bunch of them, and we’re protecting they’re very hard to it’s very hard to redevelop those sites. And it means that we’re you. There’s a lot of there are opportunities for increasing density, even just to a mild sort of level of general density that we’re missing out on in Brisbane. So I’m just wondering, how should what are some without asking you specifically about Brisbane? Well, what are some principles we should be thinking about if we’ve got this situation where we’ve got a growing population and we’ve got very scarce land. Well,

Kevin Kennon  30:23

yeah, I mean, that’s a, it’s a, it’s not an easy, you know, problem. And I would hate to over generalize, because I always believe that fundamentally, real estate is local and has its own sort of conditions. And understanding what those needs are, understanding also what the response is from the community as a whole. But you know, so the and the thing you have to watch out for is, you know, you could say, well, we’re going to preserve some of that, and we’ll keep that, but you don’t want to turn it into sort of a, sort of a museum or artifact or life list, you still want, you know, those things to be vibrant. But, you know, I think that the way to do something like that is you start to sort of nibble a little bit around the edges and carefully insert some sort of larger scale buildings that that serve, you know, the needs of the community. And then ultimately, I think, you know, you can start to to help to generate something that’s positive in there, you know, by by, simply by trying to provide the right kind of housing for the kind of the demographics that you’re looking for, the demographics there, you know. So if it’s younger people coming in and and entrepreneurs coming in to set up vibrant not just, you know, to live there, but also invest in that community, help it grow. Those are the kinds of incentives that would be, you know, I think very useful. Gotcha, are

Gene Tunny  32:12

there any examples that come to your mind, Kevin, about of developments that have been done well, of cities that are that are providing the right incentives, or the right policy settings.

Kevin Kennon  32:22

I think Austin is probably the one that most comes to mind, you know, which is it was always a very interesting city to begin with, and I think the fact that it has a connection to the university, University of Texas there, but they, you know, they’ve done a lot to attract startups and technology and those types of enterprises and so, you know, research center areas where there is that connection, tends to be places that I see, I think the most exciting kinds of newer development happening. Same thing around in Silicon Valley, there’s been some Santa Clara, the city I know pretty well. In California, there’s, you know, that that same, similar type of thing was some fairly low density areas, but increasingly have densified in I think, a thoughtful way that that generally enhances the the Community and brings more investment that benefits not just the immediate location of wherever you’re building a development, but in the general area as well. Gotcha,

Gene Tunny  33:51

okay, I have to try and check out some of these, some examples of residential developments that are that are doing it well. Do any come to mind? I mean, you mentioned a couple of cities, but are there any specific developments that are worth checking out?

Kevin Kennon  34:06

You know, that’s a good question. I don’t you know. I know, just in general, and so you kind of put me on the spot, specific ones, but I think I there’s a lot of interesting work being done in Austin right now. And and Texas tends to be an area that’s the at least the governmental regulations are a little more relaxed. And, you know, as a result, it’s, it’s, you know, I think that it’s grown very rapidly over the past 15 years, and more or less consistently. And, you know, so it’s if you wanted to look, you know, at what I think is a successful model, I think that’s a really good one. Okay, I’ll have a look. It sounds a lot like what you’re how you’re describing. Of investment,

Gene Tunny  35:00

right? Okay, okay. I’m wondering about social housing, or in the UK, they’d call it council housing. I don’t know what the term is in in the States, well, to what I’m not sure to what extent is provided, but we’ve got a growing homeless problem here in Australia, and we’ve never really had significant homelessness. Well, we didn’t historically, at least for the in the 70s, 80s or 90s, and suddenly it’s become a problem. And I’m wondering to what extent do we need public investment in in social housing to try to help the people who would otherwise not be able to get get housing in the private market. And do you have any thoughts on that and how design principles for social housing? Yeah,

Kevin Kennon  35:49

again, I would look New York is a challenge, and mainly because, in order to do what we call low income housing, it’s is typically has to be done at scale before actually makes any economic sense. So major investments, whereas I think in in places like Brisbane or other places I know more specifically so outskirts to Sydney or Melbourne. You know where you have it’s, it’s a little bit more like LA and I think there’s some amazing examples of really very, very good low income housing that’s been and sort of medium low to medium density, low income housing. That’s been done very, very well, and La embarked on, but it’s very been a very ambitious project where they insisted that the developers there in exchange for government assistance. I think it’s mostly tax abatement. Is tax credits. Is how it works that they hire very top level architects. And architects work at a below rate, you know, their normal rate. They said there’s a sort of a trade off there, but that’s really helped a lot. And what’s interesting is, because you have so many fantastic architects in Australia, I’m always jealous, because i i Look, I tend to look at a lot of architecture AU, so the you know, so I, and I see so many fantastic things going on there. I’ve always wanted to do something in Australia, because it seems like such a great place to work, but, but you have so many amazing architects there that I think if you were to really look into the same program that they have in LA for low income housing, it was. It’s a definite model that you could follow. Okay,

Gene Tunny  38:04

I have to check that out. And what’s the role of of urban transport, of public transport in in better design. How do you think about that? How do you think about the cost of it? What the right, you know, I mean, is that just something that is exogenous to what you’re doing, or do you like, how does it come into your to your thinking?

Kevin Kennon  38:28

Well, you know, the New York just changed its own in recently, and it’s it has allowed for greater density in certain areas, depending on your proximity to local transport, and specifically the subway lines or rail lines. And, you know, so it’s it does it kind of the two are tied together, you know, because if you’re trying to attract sort of new, new blood and new talent into those areas. Generally, they’re not people who have a lot of money, but, you know, they have a lot of ideas, a lot of energy, and so, you know, if you can provide lower income housing and connect that to transportation that’s going to ensure better success for those developments, because more people are going to be, you know, looking for places to live that’s near a place that they can easily commute into wherever they Need to go around the city,

Gene Tunny  39:40

yeah, yeah. Just wondering about it, because it’s one of the big issues seen in the cost of of housing or apartment buildings. Here in Australia, is the cost of providing car parks. And this is it’s become contentious. So in Melbourne, in Melbourne, in I forget if which Council it was. I. In the Melbourne area, they they lowered the number of car parks that you needed for development to go ahead, which is lowered the cost, and meant that you’ve had additional development in places like, I think it’s Richmond in in Melbourne, but then you’ve got a lot of the locals say, Well, hang on. Well, they’re going to end up parking on the street, and that’s no good. There’s a reason we have those, those restrictions. Do you have any thoughts on car parking and how we handle car parking? Well,

Kevin Kennon  40:28

la had the same problem. You know, I remember, I did a project for a major department store that was going to be located in Beverly Hills, California, and in order to make this work, we were going to have to build a five level underground, you know, multi level garage, and have all the loading and everything. Yeah, it just become cost prohibitive to do that. So, yeah, it’s, I think, you know, easing the restrictions on development of car parts is a big plus. A lot of what I’ve seen, the solution to what you’re talking about is, you said, essentially building off site community garages, you know, so that to take care of those, you know, additional parking. And these can, again, we always think of these as being large, but they can actually, you know, be a relatively small size, as long as you have enough of them that are sprinkled around so they don’t become, you know, cumbersome, and they’re not essentially creating more traffic problems or environmental problems than you already have today.

Gene Tunny  41:49

Yeah, that’s an interesting idea. So would you have several developers? Would several developments use the same off site community garage, so they’d all contribute to the cost of it, or the construction costs, right? Okay?

Kevin Kennon  42:02

And usually, if they’re and just having done my fair share of parking garages, yeah, is that a small paper to build above ground than it is to dig into the ground for just about anything or anywhere? And obviously, if, if the ground consists of bedrock, which is a lot of what New York is, it becomes prohibitively expensive. Interestingly enough, in Manhattan, there are no parking requirements for new building. So Ron sometimes it’s demand, but there’s nothing that says you have to build parking, to build a new building this moment, yeah, gotcha.

Gene Tunny  42:46

Gotcha. Okay, has New York instituted a congestion charge? Is that something that’s coming? It has, yeah, because London has one. How’s that gone? What do you have any thoughts on that?

Kevin Kennon  42:57

Well, somebody who was a pedestrian and a car owner, yeah, and it was in the congested price area. It there’s definitely less traffic. So it’s noticeable. And so I think to some degree, it’s a it’s a good thing. I and so far as I can tell, people aren’t really complaining about it too much. They were a lot beforehand. And I do think the people that penalizes are generally people who, you know, they’re more moderate income, individuals who live outside of the city and are dependent on driving their automobile into the city. But even those people that I know who do that are now parking their cars, but they live in New Jersey, they park it on the other side of the river and then just take the train and from there, and that’s usually five, five to 10

Gene Tunny  44:06

minutes. Yeah, gotcha. Gotcha. Okay. Now, just to finish up, I’d like to ask, Have you done any work, or do you have any thoughts on modular housing, for pre fabricated housing that’s seen by some as a bit of a a magic bullet for housing affordability. Is that true? Do you have any thoughts on modular housing, please? Kevin, yeah, okay,

Kevin Kennon  44:31

so there’s two things I want to separate on this. I have a lot of thoughts, and I have studied it extensively, and mostly from an economic perspective. So the problem with modular construction and and, you know, there’s, it’s, it’s certainly come a long way from, you know, what we, I think, in the US tend to have thought of modules being equivalent to mobile. Homes. These are, these are essentially almost complete houses that are fabricated inside of a factory. So the benefits are, you know that your workers can work year round, under control conditions you have theoretically better quality control. The only disadvantage of them, and it’s a big disadvantage, is they have to be able to fit on a lap bed tractor trailer and and typically, they have to be located within a I think it’s, it’s almost like a 300 mile radius from where the factor was. So it actually limits the service area that they can where they can build the the other thing that I like are prefabricated components of housing, which are also delivered on flat beds, but they’re all in packs, and so it’s all the components are sort of stacked, and they’re delivered at the site. There’s a lot more site assembly, but you the range is much longer. The time is actually shorter. And typically, these things go together pretty easily, so you don’t need a ton of skilled labor just to assemble those units. Yeah, yeah, I like the component type of prefabrication better than just the complete modular verification, yeah,

Gene Tunny  46:46

yeah. Gotcha, okay, yeah. Because I think they’re seen as a bit of a Yeah, magic bullet. But yeah, from what my investigation show, that look, they’re not, probably, they’re not going to make the big impact that that you think here in Australia, at least. I think that’s that’s reasonable. One question. There was one more question that just occurred to me that I think I’ll regret not asking you if I don’t ask you, because economists always sort of talking about productivity. And it’s occurred to me that, and it’s occurred to me that the design of workplaces, or the design of of offices, or, I guess factories, is more obvious, how the layout can contribute to productivity. What are your thoughts on that? I mean, how do you how do you think about the design of of buildings, of workspaces to try and improve productivity, is that? Is that top of mind? And also, there’s the new issue of like, how do we get people back to the office? How do we encourage? How do we make people want to come back to the office, given so many people are working from home now, do you have thoughts on that to wrap up, please? Kevin, yeah, no,

Kevin Kennon  47:57

I think, I think people have to lie. And here’s the trend, we all want greater control over our environment period. You know, it doesn’t matter. You know, if you’re at home, you want better control, and we have better technology that, you know, that allows us to do that. I think. You know, if you start from that basis, you don’t need to throw in ping pong tables or coffee bars, or you just need to give people greater sense of control, and that’ll help always help productivity more than anything else.

Gene Tunny  48:32

A greater sense of control got you so does that mean not having, well, providing people with spaces that they can break. They can go to to work on their own, to, yeah, okay, there’s

Kevin Kennon  48:47

that, but also providing them the ability, you know, if there are certain areas, they can control the temperature directly, they don’t have to worry about, I’m in this area, I’m cold, and we’ve got to, we suddenly have to kind of crank up the entire air conditioning, or, you know, for the entire office, that we can actually locate these in different places, anything that allows me to have at least some greater sense of that. Same goes for lighting. Is another thing. How much daylight I have in can I control the sunlight directly around my space. Yeah, my so yeah for myself, or my teams, or whatever that nucleus is, that we’re able to do that, I

Gene Tunny  49:34

have to ask a follow up on the control in the temperature, because this is a perennial problem, because we were in a subtropical climate here in in Brisbane, and we need to use, well, a lot of I mean, we use air conditioning extensively in our commercial and our office buildings. And every office that you tend to go to, there’s an area it’s either too warm or it’s too cold a. It’s almost impossible to to get it right. I don’t know what’s going on. I mean, it just seems to me, it seems to be an intractable, unsolvable problem. But are you saying that there’s a way of designing buildings so you can get that so it can be tweaked, as you were talking about, so people are comfortable? Oh,

Kevin Kennon  50:20

yeah, oh, yeah, absolutely. You know, it’s really just how, how you deliver the various mechanical systems, or in some cases, they can be natural systems. You don’t need a lot of fans and things like that to control it. So there it starts with, fundamentally, how do you design that space? Increasingly, you know, people like being able to say, if it’s on a nice day, open the windows, you know, or have an area where you can sort of flip over the wall and you can just have sort of, you know, a nice summer breeze, you know, coming through your space. That doesn’t always happen in in, you know, humid climates, but I’m sure there are amazing days where you live that, yeah, and wouldn’t that be great if you could just have these, you know, a certain lounge or conference area that you could just open the window. Yeah,

Gene Tunny  51:22

I think we want, yeah, I think that’s a good idea. I’ve just noticed that there are a lot of lot of buildings where, yeah, the air con. I mean, it’s, it’s good. I mean, we need it in in the summer particularly. But you know, sometimes it’s either too cold, it gets too cold, or it gets too too warm, it’s just not doing the job in particular parts of the building, whereas in others, it’s fine. So yeah, but yeah, I’m sure there are ways to engineer, to design around that. Kevin, thanks so much for your time. It’s been terrific. Are there any thoughts, anything you’d like to leave us with, anything you think would have been good to cover in the conversation. Oh no,

Kevin Kennon  52:03

I listen. I This has been a fascinating conversation. And, you know, I think, I think the thing that I’d like to leave your listeners with is hopefully a different understanding of what architects actually do and the the are, are able, you know, we’re able to contribute to a lot of thinking about how to adopt, really, how to sort of imagine the future and and Actually, we have a lot of tools at our disposal to help make all of our lives a little bit better. And I think if we start to understand that that’s a value that we bring, that is not just simply an esthetic value, but basically one in which we can increase things like the topic we were discussing about productivity, or more affordable places to live, and that’s all part and parcel about how we make our future a better place for all of us. Absolutely.

Gene Tunny  53:14

That makes me wonder, I mean, to what extent I suppose that you know, top architects are being dealt into the policy conversations. I have to check. I’m pretty sure they are. But is that what you’re talking about? We need to have architects talking to the policy makers, to the to the bureaucrats, to the politicians, so make sure you’re in your part of the conversation.

Kevin Kennon  53:36

Yeah. I mean, I think that’s I think that’s true. I think you know, we know what, how bureaucrats design our city, not very well. And I think that the misconception about architects is that we just sort of solve spatial problems or esthetic problems. But I think that if you, if you really sort of broaden that and understand that, I think what we do best sometimes is imagine the future. And if that sounds a little utopian, on my part, guilty as char, I think we need a better future.

Gene Tunny  54:12

Yeah, absolutely, I totally agree. Kevin Kenan, thanks so much for your time. Really enjoyed the conversation, learning about your perspective as an architect and talking through a lot of these issues, I think I’ve got some great insights, so I’ll definitely share with with people around around Australia. And yeah, because I think they can get a lot out of them. And yeah, thanks. Thanks again for your time, and look forward to connect with you again in the future.

Kevin Kennon  54:39

Oh, that’d be great. Gene, I’m happy to come back anytime you want me to very

Gene Tunny  54:42

good. Thanks, Kevin, thank you so much. Bye, bye, righto. Thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com or a voicemail via. Speak pipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week. You

Speaker 2  55:33

thank you for listening. We hope you enjoyed the episode for more content like this, or to begin your own podcasting journey, head on over to obsidian-productions.com, thank youyou.

Credits

Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.

Categories
Economic update

Oz Federal Budget, Brisbane Olympics, & Trump’s Tariffs Chat w/ Damian Coory & Dan Petrie

Is there a brilliant ‘Art of the Deal’ strategy behind Trump’s tariff policy? It has been a big failure for the US so far, as attested to by the 7% fall in the US share market since inauguration day (see the chart below) and a 12% fall in consumer confidence from January to March, according to the Conference Board. The US has inflicted more harm on itself than its trading partners.

Theoretically, there is the possibility a large country like the US, as opposed to a small country like Australia, can impose an ‘optimal tariff’, as Nicholas Gruen and I explain in an article published in Crikey: Why Trump’s tariffs are better than you think — and much worse. We note:

“When large countries trade, they move prices. That means foreigners do effectively pay some of their tariffs.”

A member of Keynes’ Cambridge Circus,  Richard Kahn, wrote the best and most lucid paper on the so-called optimal tariff, Tariffs and the Terms of Trade, published in 1947. Based on Kahn’s optimal tariff formula and plausible values for the parameters, an optimal tariff for the US could be around 20%. However, this calculation is based on a theoretical model without retaliatory tariffs or macroeconomic implications. The benefits of the terms of trade improvement can be quickly outweighed by the costs of retaliation and a global trade war, as well as the fact that tariffs increase the tax burden on American consumers and businesses and will have adverse macroeconomic impacts. Nicholas and I aren’t defending the Trump tariffs. Indeed, we’re supporters of free trade, as you would expect economists to be, but we are pointing out that the terms of trade impact must be considered when assessing the tariffs. Based on the fall in the S&P 500, American investors have judged that the adverse macroeconomic effects of tariffs will outweigh any possible terms-of-trade benefits. 

Earlier this week, I spoke about Trump’s tariffs, the federal budget, and the Olympics with fellow Queenslanders Damian Coory and Dan Petrie on Damian’s The Other Side Unplugged show. You can watch the interview here:

I’ve included the time stamps below so you can jump to my remarks on the latest federal budget, the Olympics, and Trump’s tariffs, if you’re interested:

  • Federal Budget Overview and Critique (0:00)
  • Jim Chalmers’ Values-Based Capitalism (5:38)
  • Structural Deficits and Bracket Creep (10:56)
  • Government Spending and Debt Concerns (13:55)
  • Olympic Games Plan for Brisbane (30:52)
  • Trump’s Tariffs and Their Economic Impact (41:15)
  • Alternatives to Promote Economic Growth (54:39)
  • Final Thoughts and Future Directions (55:57)

This post has been cross-posted at Queensland Economy Watch. Please comment below or email Economics Explored host Gene Tunny at contact@economicsexplored.com.

Categories
Podcast episode

From the Vault: Antitrust with Danielle Wood, now Australian Productivity Commission Chair

In this installment of “From the Vault”, we revisit a compelling 2019 episode on antitrust featuring a conversation with Danielle Wood. At the time of the interview, Wood was a director at the Grattan Institute, a leading Australian public policy think tank. Since then, she has ascended to the influential role of Australian Productivity Commission Chair, marking a significant journey in her career dedicated to economic reform and policy innovation. You can listen to the interview wherever you listen to your podcasts (e.g. Spotify) or via the embedded player below.

This episode dives into the intricate world of antitrust laws, fueled by a renewed interest in scrutinizing the massive market power wielded by big tech companies such as Google, Facebook, and Amazon. Danielle Wood, with her expertise as a former principal economist and mergers director at the Australian Competition and Consumer Commission (ACCC), offers invaluable insights into the evolution of antitrust laws from their inception in the United States in the 1890s to their critical role in today’s digital economy.

The conversation illuminates the historical roots of antitrust laws, born out of a desire to combat the influence and economic power of “trusts” in sectors like railroads, energy, and steel. This backdrop sets the stage for a deeper exploration of the challenges and complexities facing contemporary antitrust enforcement, especially in an era dominated by digital platforms and the unique economic dynamics they present.

Wood’s analysis provides a nuanced perspective on the “hipster antitrust” movement, which advocates for a broader interpretation of antitrust enforcement, beyond traditional economic harms such as price gouging, to include considerations of impacts on innovation, privacy, and political power. This movement, symbolized by figures like Lina Khan and Tim Wu, underscores a growing concern over the adequacy of current antitrust frameworks to address the multifaceted influence of tech giants.

Reflecting on Australia’s own regulatory environment, Wood highlights the work of the Grattan Institute in assessing market concentration and the effectiveness of competition law. Despite not identifying a systemic market power issue, Wood acknowledges sector-specific concerns, particularly in technology, where the enforcement of existing laws, rather than the introduction of new ones, might be key to addressing competitive imbalances.

This episode serves as a timely reminder of the ongoing debates surrounding market power, competition, and the role of policy in ensuring a competitive, dynamic, innovative, and fair economy. As we continue to navigate the complexities of the digital age, revisiting conversations like these provides valuable context and guidance for future economic explorations.

Transcript of Episode 22: Antitrust with Danielle Wood

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  0:08  

The Economist magazine published an article last October titled dismembering big tech. The massive market power of the big tech companies such as Google, Facebook, and Amazon has prompted a renewed interest in antitrust laws. To help us understand antitrust, I’ve invited Danielle Wood from the Grattan Institute onto the programme. The Grattan Institute is a leading Australian public policy think tank based in Melbourne. Danielle is the budget policy and institutional reform programme director at Grattan. Later this year, she will take up the CEO role at the Institute. Danielle is well qualified to talk about antitrust, as she once worked as principal economist and mergers director at the ACCC, the Australian Competition and Consumer Commission. I hope you enjoy our conversation.

Danielle Wood from the Grattan Institute, welcome to the podcast.

Danielle Wood  1:17  

Thanks for having me, Gene.

Gene Tunny  1:18  

Excellent. Danielle, today, we’re going to be talking about antitrust. And this is a topic that has had a resurgence of interest, particularly due to the market power of the big tech companies such as Google and Facebook. Could we begin with you explaining what is this concept of antitrust? And where does it come from, please, Danielle?

Danielle Wood  1:47  

Yes, sure. Well, this is a concept that’s been around a very long time, even though as you say, it’s recently had a resurgence, which is always very nice when something you’re interested in, finally comes to prominence in the debate. But people have been worried about the impacts of market power and concentration of big firms going back a long time. So the first antitrust laws were introduced in the United States in 1890. And at that time, there were a number of big firms known as trusts, they dominated particular sectors: railroads, energy, steel, and sugar. And people were worried about the power they had, their economic power. So because they were in a dominant position they were able to price high. 

They were worried about the impact that had on societies, and on groups like farmers who were suppliers, on inequality, and on the political power that those firms had. So, in response to that, they introduced some antitrust laws. And during the 20th, the early 20th century under Theodore Roosevelt, they started to be quite strongly enforced. So the government actually use the powers that were there in the laws in order to break up those trusts in a number of cases. 

So, from there, many other countries got on board. And now almost every major developed country, and most developing countries have some form of law that controls the actions of firms. So normally, there’s some component that says they can’t get together with their competitors and do things like fixed prices. And then there’s rules around firms with market power, how they behave. So essentially [there are] regulations to stop them misusing their market power.

Gene Tunny  3:25  

Okay. And the big concern back in the late 19th century and early 20th century in the US…you mentioned a number of industries, but particularly, big oil, is that correct? With Standard Oil? 

Danielle Wood  3:40  

That’s right. So the railroads and the oil companies were really a couple of the really big trusts. And they had almost entirely monopoly positions. There was particular concern. Theodore Roosevelt was very worried about the amount of political influence they held. And so breaking up those trusts was really one of the defining features of his presidency. He was referred to as a Trust Buster, and also an octopus hunter, which I love–the idea of these kinds of firms having their tentacles in all sorts of different markets and being being reined in by the exercise of these powers.

Gene Tunny  4:19  

Yes, yes. That’s a really good metaphor, isn’t it? And I think Standard Oil was broken up, wasn’t it? That was broken up into, I think, was it Exxon? Esso?

Danielle Wood  4:35  

Many of the companies that we still know today, were broken up from the original trust of Standard Oil.

Gene Tunny  4:42  

You mentioned an act in the US. I think it’s the Sherman Act. Is that correct?

Danielle Wood  4:51  

That’s right. So, the Sherman Act went through in 1890, and then it sort of sat there unenforced for more than a decade. And it’s one of those laws that could have just withered on the vine if someone didn’t pick it up and use it. But Theodore Roosevelt, who I mentioned before, was particularly concerned about the amount of political power that these firms were exercising. So he took, I think his first case was against JP Morgan and the railroad trust, but then went on to take on Standard Oil and a number of others. And I think he filed more than 40 cases, during histerm as president, so he really enlivened that law by using it very actively. And that, you know, really sort of set the precedent for future administrations.

Gene Tunny  5:40  

Right. Okay. Now, why I approached you on this topic, Danielle, was that you wrote an article on hipster trust busters last year, which I thought was very good. And I’d just like you to explain, if you could, who the hipster trustbusters are and what they’re concerned about, please.

Danielle Wood  6:07  

It’s one of those terms that really catches the imagination, but it was originally used, actually, as a pejorative. And it was simply directed at a group of young scholars that are the ones that have really led this push to revive antitrust laws. So there’s a group of them, Lina Khan is probably the best known. She wrote a very well known paper on Amazon and why she believed it was misusing its market power, while she was still at law school, and she got a huge amount of prominence for that. Tim Wu, who’s recently written a book called The Curse of Bigness, is another one that sort of gets lumped in as a hipster. 

And really, the main contention is that antitrust laws have not been enforced to their full capacity. They are particularly worried about the dominance of the big tech companies, as you mentioned in your introduction, and they would like to see a return almost to those early days of the Sherman Act. We were just talking about it. In those days, really, the laws were enforced quite strongly. And they were enforced, not just with reference to potential economic harm through market power, so that the normal things we think about there: no firms are in a dominant position, so they might be able to up their prices, somewhat. 

They say no, no, that’s certainly not the only harm we should be worried about. It doesn’t even make sense to talk about that kind of harm, particularly for products like Google and Facebook, where it’s free. You know, we should be thinking more broadly about the harm that these firms do to the competitive process. And even things like their sort of dominant political position, their impact on inequality. So they have a very broad ranging set of complaints about how the economy is functioning. And they would like to see a stronger antitrust policy help deal with those.

Gene Tunny  8:00  

Okay, so they think that we don’t have strong enough laws already. Do they give any examples? Are they able to point to cases where governments haven’t had the powers that they’ve needed?

Danielle Wood  8:19  

It’s less about that the laws aren’t there. And certainly, the antitrust laws are cast quite broadly. it’s more a critique of the way in which they’ve been enforced. So it’s a view that, in recent decades, that people have taken too narrow a view on what sort of harm antitrust law should be concerned with. And certainly the case they put, if you go back to the early case law, there was a lot more going on than concern just about price increases. So they say, you know, the law is fine, but it’s how we enforce it that needs to change.

Lina Khan, who writes a lot about Amazon, says we have this firm that we have allowed to become really dominant in terms of online and retail. Yes, it’s priced at a low [price] but if you look at things like its price-earnings ratio, it’s pretty clear that it’s buying market share and at some point in the future, people are expecting it to start upping its prices to take advantage of its dominant position. We’ve let it vertically integrate so now that it’s both a platform where people buy products, as well as a supplier of those same products, and this has all sorts of implications for how retail markets function. So the thesis there is we should have first of all stopped it taking over other competitors, we should have intervened early to limit its behaviour, or we should get involved at this point to try and break it up in some way just like happened with Standard Oil as well as a lot of the other big trusts back in the day.

Gene Tunny  10:04  

What did you mention with Amazon? Would that be an example of predatory pricing? Is that what you’d call that, that they’re charging a price that’s lower than the cost just to gain market share, just to try to crush their competitors? 

Danielle Wood  10:22  

I’ll say this is the challenge. So I mean, how does the behaviour fit into the normal economic models? And what the hipsters are saying is the normal economic models are broken. So if I was normally thinking about predatory pricing, it’s quite a specific conduct, which is really the firm setting the price below cost. It is making losses in the short term in order to drive out competitors in order to later up the price and it would recoup those losses. So normally, that’s the kind of framework that we think about something like predatory pricing in. 

Here, it’s difficult to say that it would meet that technical definition of predatory pricing. They are probably pricing close to costs, certainly not being a company that’s posted a lot of profits. But they’re not necessarily making losses. But they have clearly been aggressively chasing share. And clearly the market does expect some kind of recoupment at some point. But the sort of time horizons we’re talking about are pretty incredible. And it’s been doing this for more than a decade. Normally predatory pricing models expect a short drop in price, and a year or two later prices jump up again. It looks very different. And I think partly what they’re picking up there is the standard economic models have struggled to cope with quite a different paradigm.

Gene Tunny  11:48  

It would be good to talk about what economists have traditionally thought about antitrust. What have been the different schools of thought on it? Because opinion amongst economists has changed over the decades. Is it fair to say that there have been times when economists have been more in favour than less in favour, and maybe economists are more in favour again? Are you able to tell that story, Danielle, please?

Danielle Wood  12:16  

Yeah, sure. Look, so really, the resurgence of economics, really the point at which antitrust became a very economic discipline. And I’ve always said to people, I really think of it as where Economics and Law meet, was in the 1970s, with the emergence of the Chicago school. So the Chicago School, in an antitrust sense, was really almost a single person at the University of Chicago, Aaron Director who went on to lecture a lot of people that became prominent antitrust scholars in their own right, like Richard Posner, and Robert Bork. And the idea they introduced was that this was an economic law. So we shouldn’t be worried about all those other considerations I was talking about around political power, or the impact of market power on inequality, or other types of concerns. We should be sort of narrow, really looking at this question of market power through the lens of consumer welfare. So the only question we need to answer when we’re looking at conduct is does it enhance consumer welfare? Or is it hurting consumer welfare? And so that was very much an economic approach to bring. 

From my perspective, I think that was a good thing to introduce more of a structure and certainly put economic considerations foremost in the enforcement of the law. I think it’s arguable that in the decades prior to that, there was a lot of inconsistency in cases. And there were certainly some cases that by today’s standards would be viewed as very unusual, intervening in mergers where firms were going to reach 2%, market share and things like that. So they said, let’s focus on this, will there be consumer harm? 

The criticism of that approach is that, perhaps it was a little too narrow. So, in defining consumer harm, there was a lot of focus on price as an indicator of harm. What we know, of course, is that in markets where firms have market power, they may choose to exploit that through monopoly pricing, but there can be all sorts of other detriments as well and maybe poor quality. It may be that they are asking us to accept terms and conditions that we might not otherwise accept. So, for example, diminishing privacy would be an example. Or it can just be that they’re enjoying the quiet life. So they’re not pushing to find ways to cut costs or to innovate their product in a way that firms in competitive markets do. So there’s a whole lot of harms that I think are rightly considered economic harms that were perhaps not really emphasised by that narrower Chicago school approach. So I think the Chicago School was good at taking the discipline forward and putting economics front and centre. But at the same time, the criticisms that it’s too narrow in approach do have some validity.

Gene Tunny  15:22  

Okay. So you mentioned the risks of monopoly power. There’s also risks from oligopolies. When you have just a small number of companies in an industry, there are risks of the oligopoly companies coordinating their prices and effectively having some sort of cartel and conspiring to raise prices and rip off consumers. There’s that risk. Now, can I ask you about the view that came in the early 80s or late 70s, early 80s, from William Baumol, that contestable markets view. Was that influential in how we thought about monopoly power and antitrust?

Danielle Wood  16:07  

Yes, it absolutely was. So, previously, perhaps people were very keen to look at indicators of market concentration. So how many firms are there in the market? If there’s not very many, well, then we should assume that there’s a market power problem. So the idea of contestable markets is that, so long as there is a threat of entry, that could be sufficient to constrain the behaviour of the firms in the market. So even in a market where you might have only two or three players, if barriers to entry are low enough, if they tried to either get together, or they found a sort of non-cooperative way to increase prices, then they know that someone’s going to come in and compete those margins.So that kind of keeps prices down. 

So, when when economists are talking about market power, they always have an eye to that question of barriers to entry. 

But I think, perhaps we’ve, in a lot of cases assumed that barriers are lower than what they’ve turned out to be in practice. So often, I think it can be harder than people might expect for firms to enter the market. So if we look at the big tech firms as an example, what’s the entry barrier there? It turns out to be a lot about the data that they already have, and the fact that they’ve collected such deep profiles on all of us, it’s just simply harder for someone to come in and build an equivalently good product.

Gene Tunny  17:46  

Absolutely. And there’s that strong network effect, too, isn’t there, the fact that I mean, Facebook has 2 billion people on the platform already. So it’d be very difficult to set up a social media platform in competition with Facebook.

Danielle Wood  18:05  

Right. So, for some of the platforms, network effects really matter. And Facebook is definitely the most obvious example of that. So, network effects, really, that I get more benefit from being on that platform when other people are already there. So when I’m on social media, and I want to see what my friends are doing, the fact that they’re there on Facebook already adds value to my experience going on Facebook. The same arguments don’t necessarily apply in the same way on something like Google. You can imagine a new search engine coming in. The fact that there’s not a whole lot of other consumers or advertisers, that might not bother me if I’m just there for organic search. But we do know that people prove to be a lot more sticky than we might expect. So even something like changing your search engine, which is a pretty low cost thing to do, there’s literally zero price, you just need to go to a different website to what you’re used to. Even then people prove to be very kind of path-dependent in their behaviour, and they’ll tend to just keep going back to the one that they know.

Gene Tunny  19:15  

Okay, Danielle, I know that Grattan has done some interesting research on market power, the concentration in different markets. Would you be able to give an overview of that research, please? What you found in Australia in the US, I mean, what what industries are the most concentrated overall, how much concentration is there? And is it something we should worry about? So if you could just give us a flavour of what Grattan’s found, please, that would be great.

Danielle Wood  19:49  

Sure. So this is actually work done by my former colleague Jim Minifie and another former colleague Cameron Chisholm. And so they were sort of I’m interested in this claim that markets had got more concentrated over time. So they went to have a look at the data for Australia. And the picture is a bit more nuanced than I think a lot of people might expect. So, you know, they found that there were a lot of concentrated markets in Australia. And perhaps if you think about, supermarkets or insurance or a lot of manufacturing, that’s probably not going to be a surprise to people. 

When they compared market concentration in Australia by market to overseas, they found that we didn’t actually look that bad by international standard, although there were some markets in Australia that were particularly concentrated. So things like supermarkets, mobile phone networks and life insurance,were three that looked particularly more concentrated in Australia than elsewhere. 

In terms of concentration over time, there was no clear pattern. So some industries, like banks have become more concentrated over the past 15 to 20 years. In others, like supermarkets, its concentration has actually fallen. And nor could they really find evidence that profitability, had substantially increased over the last two decades. So sometimes, when you’re trying to measure market power, you look more at profit margins than market concentration, because of some of the limitations with market concentration as an indicator we were talking about before. 

The one thing that they did find, though, that I think perhaps suggests that all is not well is that, in more concentrated sectors, profit margins were higher, and that those profits tended to endure. So if you looked at the 20% of most profitable firms, a decade later, about a third of those were still in the top 20%. So, if you think that markets are contestable, you would expect to see these sorts of excess profits eaten away over time, by new people coming into the market. We seem to have a segment of markets where that didn’t occur over as long as a decade, and they were able to maintain high profit margins. So it suggests there might be parts of the economy where competition isn’t working as well as it should be.

Gene Tunny  22:20  

Yes. And in Australia, that’s probably in banking, is that fair to say? The big four banks have a privileged position in the marketplace, for, well, a variety of reasons. One of which might be the government of the day appears to favour the big four banks and gives them special deals. Remember, during the last financial crisis, for the big four banks, it was much cheaper for them to access the government borrowing guarantee, than second-tier banks. So is that an issue, that we have regulations that favour particular market players? Is that one of the things that’s driving concentration in some sectors?

Danielle Wood  23:14  

It certainly can be. So, we certainly found that firms in heavier, more regulated industries tend to have higher returns than those in less regulated industries. It can be a bit hard to unscramble that observation, because, of course, we tend to regulate more in concentrated industries. So natural monopoly industry is a good example. The reason governments are in their regulating is because it is, by definition concentrated, and it’s trying to sort of mimic competitive market outcomes. But there are certainly examples, and the banks might be a good one, of where the regulation itself can create an entry barrier, and are an advantage for a particular group of firms, which can increase returns. 

So high-regulation firms definitely stood out as tending to be more concentrated and having higher returns, as did innovative firms. This is a pretty consistent finding across the world. So a lot of the work in different countries has suggested that returns have gone up over time, but they’ve gone up only for a segment of the market. And that’s tended to be the firms that are heavily exposed to innovation. So tech firms, platforms, and pharmaceutical companies, tend to be the ones that have been making higher returns over time.

Gene Tunny  24:39  

Could that be a good thing, Danielle?The fact that these firms are being rewarded for innovation, that’s probably what we’d want to see, isn’t it? It might be necessary to have those higher awards to provide the incentives to undertake that innovation. What do you think about that? 

Danielle Wood  25:03  

Sure. I would say that this is the idea really that our law is based on. So, under Australian law, it is not illegal to have market power. And the reason it’s not illegal to have market power is you want market power there as an incentive. So if a firm has got there by competing on its merits, so it’s designed something better than its competitors, or it’s just done something, it’s played hard, or whatever it is, if it’s got there on its merits, and then it stays there on its merits, then it has done absolutely nothing wrong. And that is really the fruits of that work, and what creates the incentive for firms to innovate in that way. What the law says is that’s fine. 

But you can’t misuse that market power when you’re there to maintain your market position. So, if you are doing things like predatory pricing, or bundling your monopoly product with another product to leverage into another market, there’ll be certain circumstances in which those things are being used in order to maintain or grow a dominant market position. That’s when you’ve got a problem, not with the market power, per se.

Gene Tunny  26:16  

Absolutely. You just reminded me with that example of using your product, bundling it with something else. You’ve got a monopoly in one area, and then you bundle it with something else to try and get into another market. That reminded me of what happened with Microsoft in the 90s. And that’s why the US Department of Justice went after Microsoft, over the Internet Explorer browser, if I remember that correctly.

Danielle Wood  26:42  

Exactly. Right. So I mean, it’s interesting, another tech example. And probably the last time the Department of Justice went in really hard on a big company and a big tech company. And the browser was free. So it wasn’t an issue of price. But it was a question of leverage. Were they using their dominance in the PC market in order to get a dominant position? And what they saw was the next big thing, which was the browser market, and that really drove their major competitor at the time who were getting out of the browser market at the time, because everyone ended up using the Microsoft browser that came with the computer.

Gene Tunny  27:26  

Yes, I think it was Netscape if I remember. 

Danielle Wood  27:29  

I was trying to remember whether Netscape was Microsoft’s or the competitor. That’s right. Yes.

Gene Tunny  27:33  

Because I remember the first time I ever saw the internet, it would have been second or third year uni. And we were taken to the library and shown this wonderful new tool. And Netscape was the browser of choice at the time.

Danielle Wood  27:49  

It’s so funny to think back to those days as well. It was it was high school for me. And there was one computer in the library that you could access the internet from. And your librarian had to sit with you and supervise. And I always thought, Gosh, why would anyone want to use the internet when we’ve got this perfectly good library here? All these books. Goodness me!

Gene Tunny  28:07  

Absolutely, Danielle. Before I ask the last question, could I just ask you to tell us where we can find out about your work on the internet, please?

Danielle Wood  28:17  

Yes. So if you go to the Grattan website, and you’re interested in our work on market concentration, there’s a report called Competition in Australia: Too Little of a Good Thing? That’s the place to look. If you’re interested in the article that I wrote on the hipster trustbusters and how things are changing, that’s an article on the Inside Story website called The Hipster Trustbusters.

Gene Tunny  28:45  

Very good. Now, to wrap it up, Danielle, I’d like to ask how concerned are you overall about market power? And what do you think needs to be done? Do we need specific measures to rein in these big tech companies?

Danielle Wood  29:06  

Look, so as an overall proposition, I think it’s not clear to me that there is systemic market power issue, but I think there are clearly concerns in particular sectors, and Tech is one of those. Do we need special measures is an interesting question. And you know, the ACCC has just spent more than a year doing an inquiry on the power of the digital platforms. And my reading of their findings there is, really, that they’re not looking for new powers. They believe that existing powers will generally be enough perhaps with some tweaks. 

I mean, I think if we reflect back on how we got here, in terms of the tech companies, there may have been some decisions around mergers. that you would have hoped would go a different way. So if we look back, we know that Facebook bought Instagram, it bought WhatsApp, Google bought YouTube. I think there is a fair contention that perhaps the major US regulators were too relaxed about those acquisitions. And what looks to be, you know, acquisitions in different markets have actually helped enhance their power in the core markets in which they operate because of the sort of data advantages that we’re talking about. So I think we could be stronger. And this is largely for the US regulators, because obviously Australian regulators can’t control those types of mergers or future acquisitions. 

The ACCC has pretty clearly signalled that it will be looking very closely at all sorts of behaviour by the tech companies under existing laws. So things like trying to leverage power into other markets. So Google, using its search results to favour its phone product, and it’s already been taken on by the European competition authorities over that sort of behaviour. All of that can be done under existing laws. 

And probably the next question is should we see a break up? Again, that’s not a proposition for Australian regulators and Australian regulators do not have the same divestiture powers that they have in the US. Could you envisage a world where at least they reverse the impact of the mergers? A breakup only makes sense if you can kind of find units, self sufficient units to break these companies into, but I could certainly see an argument that you could go back and reverse some of those problematic mergers which occurred in the past. And I think that’s a really interesting proposition, whether a future US government and the US regulators will have the appetite to do that. And that’s certainly come up as a big issue during the Democratic primary race. Candidates are really expected to have a position on whether or not the big tech companies should be broken up, which I think is a pretty interesting development.

Gene Tunny  32:19  

Right, absolutely. Okay. I’ll have to go back and have a look at what some of those candidates have said. I know there have been a lot of debates on health care and on tax. Now that you have mentioned it, I am recalling some of that discussion. So I might go back and look at that. Thanks, Danielle. 

Danielle Wood  32:39  

Elizabeth Warren, in particular, as she has a very long history of advocacy around antitrust law. So she’s got very well-thought-out positions, but certainly, others have thrown their views into the races. 

Gene Tunny  32:54  

And before we conclude, Danielle, are there any other points you’d like to make? Is there anything you think we might have missed in our discussion, our broad overview of antitrust?

Danielle Wood  33:06  

Look, I would just say that I think even though this hipster antitrust movement has been very critical of both the courts and regulators in the US, it’s not clear to me that the problem is anywhere near as acute in Australia. I think we have a real history and a record of pretty robust antitrust enforcement. There’s a reason why the chair of the ACCC tends to be a household name in this country. They’re out there and pretty heavily using the law. The thing I think we should look out for in Australia is what further powers they might seek. 

So the ACCC has been pretty successful in campaigning for law changes where they don’t think they have enough power. And the kind of beefed-up misuse of market power provisions that came out of the Harper review is an example of that. At the moment, they are saying that perhaps the mergers laws aren’t sufficient to block anti-competitive mergers. So I think it’s ‘watch this space’ on whether we actually do get some further beefing up of our laws, but not necessarily to do with the tech companies, but to deal with the fact that the ACCC’s struggled to win mergers cases in courts.

Gene Tunny  34:26  

Okay. So it sounds like the ACCC, the Australian Competition and Consumer Commission, has been doing some great work, but you mentioned it has struggled to win in the courts. So I guess the big corporations can hire the top QC’s; perhaps that’s the issue. 

Danielle Wood  34:49  

Well, look, I think that’s probably partly true, although the ACCC’s got some pretty good QCs on the payroll as well. I think there is a particular problem with mergers cases that courts struggle with because it’s prospective, trying to work out what might happen in the future with and without a merger. It’s quite a different exercise to the normal exercise the courts are going through, which is trying to establish something that’s happened in the past. So I think there’s inherent difficulties in that prospective nature of the mergers tests, which has made it really hard for the ACCC to win. And I think the stat is that they haven’t actually won a mergers case in court in 20 years.

Gene Tunny  35:30  

Oh, no. Okay. Well, we might have to come back to that topic. I haven’t, haven’t looked at mergers for a while, but that doesn’t sound good. And that sounds like something we should look at in the future. 

Danielle Wood  35:43  

Yes, so the agency took one to court, the Vodafone Hutchinson one to court last year, and I think if they lose that, we’ll be hearing a lot more on the topic.

Gene Tunny  35:54  

Yep, absolutely. Okay. Danielle Wood from the Grattan Institute. That’s been terrific. I’ve really enjoyed our conversation, and I’ve learned a lot. So thanks again for coming on to the programme.

Danielle Wood  36:06  

Thanks for having me, Gene. 

Categories
Economic update

Does Quantitative Easing primarily benefit the wealthy?

Couple pouring champagne into wineglasses on yacht

With aggressive fiscal and monetary policy responses to the 2008 financial crisis and the COVID-19 pandemic, new evidence has emerged of the unintended consequences of activist macroeconomic policies. This article considers the impact of Quantitative Easing (QE) on wealth inequality.  It is cross-posted on www.adepteconomics.com.au. 

QE is an unconventional monetary policy used by central banks such as the US Federal Reserve, Bank of England, or RBA to stimulate the economy. It was widely employed in the aftermath of the 2008 financial crisis and during the COVID-19 pandemic. QE involves the central bank purchasing government bonds and other financial assets with newly created money and is intended to lower long-term interest rates. While it is designed to benefit the overall economy, there is a debate about its impact on wealth inequality. 

Some argue that QE has primarily benefited the wealthy, as it has increased the value of financial assets, such as stocks and bonds, predominantly owned by the rich.1 This has resulted in a significant boost to the wealth of the wealthiest individuals and households.2 However, proponents of QE contend that it has prevented a deeper economic slump and reduced income inequality by preventing larger increases in unemployment.3 The distributional effects of QE are complex, and its impact on wealth inequality remains a topic of ongoing research and discussion.

Professor Gerald Epstein of the University of Massachusetts Amherst is one of those who argues that quantitative easing primarily benefited the wealthy. At the same time, its effects on employment and the cost of capital for borrowing were relatively modest. Professor Epstein expressed this view in an interview on his new book Busting the Bankers’ Club in Economics Explored episode 226. You can listen to the conversation wherever you listen to podcasts (e.g., Spotify) or use the embedded player below. 

Professor Epstein suggests that the main impact of QE in the United States was an increase in the wealth of the wealthy. This is because the rise in asset values, resulting from the central bank buying up these assets, primarily benefited those who already held significant assets, such as banks and other wealthy individuals. On the other hand, the cost of capital reduction for borrowers and investors was relatively modest.

Did Quantitative Easing Increase Income Inequality?

Professor Epstein does not argue that the Federal Reserve intentionally pursued a policy to benefit the wealthy primarily. Instead, the impact of the policy was an unintended consequence of quantitative easing. The increase in asset values and wealth accumulation for the rich due to QE can further widen the wealth gap. At the same time, the modest impact on employment and borrowing costs may not effectively address the needs of the bulk of the population.

The findings mentioned in the podcast conversation align with studies conducted in other countries during the same period, which also found that QE had a greater impact on asset values and wealth accumulation for the wealthy than on employment and borrowing costs. The European Central Bank (ECB) published a study showing that QE in the Eurozone primarily contributed to an increase in the wealth of the richest 20% of the population.4 Additionally, a report by the UK Parliament’s House of Lords Library stated that QE is likely to have exacerbated wealth inequalities in the UK. However, it noted Bank of England analysis concluding the effect was relatively small.5 Research published in the Oxford Bulletin of Economics and Statistics found that expansionary QE via asset prices led to net wealth inequality increases on some (but not all) metrics for most countries under review.6

These findings suggest evidence broadly supports the claim that QE has disproportionately benefited the wealthy and exacerbated wealth inequalities. However, it may only be a small net impact as there are effects in both directions. While many households benefit from house price growth, those at the top of the wealth distribution disproportionately benefit from financial asset price increases. 

Regarding the Australian experience, the Housing and the Economy study by UNSW and University of Glasgow researchers surveyed experts and found that two-thirds of economists either agreed or strongly agreed that “ Monetary policy reliance on low interest rates and Quantitative Easing has exacerbated inequality by boosting the prices of housing and equities.” However, this was based on a sample of fewer than 50 economists, so we should note that it would be subject to substantial sampling error.

In a 2021 Agenda paper, leading Australian macroeconomist Stephen Anthony identified the contribution of QE to “the enormous widening of inequality across advanced economies.” Anthony saw some value in QE as an “expedient remedy for short-term crisis management”, but he was mindful of its adverse longer-term consequences, such as impacts on inequality and economic efficiency. The adverse efficiency impact can occur because cheap money can end up directing significant resources to “lower-valued activities.” These could include the activities of some tech companies that saw valuations soar as ultra-low interest rates meant that speculative gains in the distant future had higher expected values in the present (see Investopedia’s explainer How Do Interest Rates Affect the Stock Market?).   

While some studies suggest QE has primarily benefited the wealthy, some research has also found evidence to the contrary. For instance, a study by the European Central Bank (ECB) indicated that its QE program increased the net wealth of the poorest fifth of the population by 2.5 percent, due to QE lowering the interest rate paid by this group on their debts, compared with just 1.0 percent for the richest fifth.7 However, it’s important to note that the overall consensus from multiple sources and studies suggests that QE has exacerbated wealth inequalities and primarily benefited the wealthy.

This article was authored by Economics Explored host Gene Tunny. For further information, don’t hesitate to contact us via contact@economicsexplored.com.

Endnotes

  1. https://www.theguardian.com/business/2012/aug/23/britains-richest-gained-quantative-easing-bank
  2. https://www.positivemoney.eu/2017/04/ecb-shows-qe-benefits-richest/ and https://positivemoney.org/press-releases/qe-richest-gained/
  3. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
  4. https://www.positivemoney.eu/2017/04/ecb-shows-qe-benefits-richest/
  5. https://lordslibrary.parliament.uk/quantitative-easing/
  6. https://onlinelibrary.wiley.com/doi/full/10.1111/obes.12543
  7. https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2170.en.pdf, p. 17.
Categories
Economic update

Mounting evidence of Superforecaster success

There is mounting evidence of the superiority of the Superforecasting approach, which Economics Explored hosts Gene Tunny and Tim Hughes discussed with Warren Hatch, CEO of Good Judgment, on an episode earlier this year (see How to be a superforecaster, or at least a better forecaster). Superforecasting is an approach to forecasting that, as the blurb for the 2015 book Superforecasting notes, “involves gathering evidence from a variety of sources, thinking probabilistically, working in teams, keeping score, and being willing to admit error and change course.”  

The success of Good Judgment’s superforecasters in forecasting the US Federal Reserve’s policy decisions was profiled in the New York Times last month. Good Judgment has been asking its superforecasters an ongoing series of questions about the upcoming three meetings of the Fed, asking if they will cut, hold, or raise. For the four meetings so far in 2023, the superforecasters were spot on with their probabilities for three hikes and a pause. For the next three meetings, they forecast two hikes followed by a longer pause. 

Good Judgement data scientist Chris Karvetski has prepared an analysis showing the superforecasters extraordinary performance in forecasting the Federal Funds rate targeted by the Fed (see Superforecasting the Fed’s Target Range). He has calculated Brier scores of forecast accuracy, where 0 denotes perfect accuracy and 1 denotes perfect inaccuracy, for different sets of forecasts. The Superforecasters are doing 3x better than CME futures for the Federal Funds rate, with far less volatility.

Separately, superforecasting pioneer and Good Judgment co-founder Philip Tetlock and his research colleagues just released a study on existential risk with interesting approaches to generate forecasts for low probability but high impact events, such as an AI apocalypse (see Results from the 2022 Existential Risk Persuasion Tournament). This study was summarised by The Economist earlier this month: What are the chances of an AI apocalypse? Thankfully, as The Economist observes:  

Professional “superforecasters” are more optimistic about the future than AI experts.

For more information on the superforecasting approach, check out the Economics Explored podcast episode from earlier this year:

Superforecasting w/ Warren Hatch, CEO of Good Judgment – EP176 – Economics Explored

Several clips from the video of the interview are available via YouTube. The first clip is “What Makes a Superforecaster?”:

It identifies the importance of being cognitively reflective and having good pattern recognition skills. Incidentally, one way to identify people with good pattern recognition is to test them with Raven’s progressive matrices, as noted by Warren Hatch in this clip:

Another clip covers how we can overcome our own prejudices and biases to make better forecasts:

Tips from Warren in this regard include:

  • self-awareness;
  • getting feedback; and
  • forecasting teams in which members can interact with each other anonymously so everyone’s views are considered solely on their merits with no prejudices.
Categories
Podcast episode

Aussie Conference of Economists wrap-up w/ Leonora Risse & Cameron Murray – EP148

While in Hobart, Tasmania for the 2022 Australian Conference of Economists, show host Gene Tunny caught up with Dr Leonora Risse and Dr Cameron Murray to reflect on the big economic issues covered at the conference. The Conference was framed in the context of adjusting to the so-called new normal. It dealt with issues such as government wellbeing budgets, the housing affordability crisis, the pandemic, and nowcasting, among others. Hear from Gene, Leonora, and Cameron regarding conference highlights and takeaways, including the risk of unintended consequences of government policy interventions.

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

About this episode’s guests – Leonora Risse & Cameron Murray

Dr Leonora Risse is an economist who specialises in gender equality. She is a Research Fellow with the Women’s Leadership Institute Australia, and recently spent time in residence at Harvard University as a Research Fellow with the Women and Public Policy Program. Leonora is a co-founder of the Women in Economics Network (WEN) in Australia and currently serves as the WEN National Chair. Leonora earned her PhD in Economics from the University of Queensland, and previously served as a Senior Research Economist for the Australian Government Productivity Commission. She is currently appointed as a Senior Lecturer in Economics at RMIT University in Melbourne, Australia. Her Twitter handle is @leonora_risse. 

Dr Cameron Murray is Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney. Cameron has taught a number of courses including UQ’s MBA economics course, macroeconomics, globalisation and economic development, and managerial economics. He writes for MacroBusiness, IDEA economics and Evonomics. Cameron has a PhD from the University of Queensland on the economics of corruption. He hosts the podcast Fresh Economic Thinking and his Twitter handle is ‎@DrCameronMurray.  

Links relevant to the conversation

Greta’s articles at the Lowy Institute Interpreter:

https://www.lowyinstitute.org/the-interpreter/contributors/articles/greta-nabbs-keller

Greta’s articles at ASPI’s the Strategist:

https://www.aspistrategist.org.au/author/greta-nabbs-keller/

Greta’s conversation article on Australia’s relationship with South East Asia:

https://theconversation.com/how-well-has-the-morrison-government-handled-relations-with-southeast-asia-181958

Background reading on China and Taiwan:

https://www.cfr.org/blog/what-xi-jinpings-major-speech-means-taiwan

https://www.brookings.edu/on-the-record/understanding-beijings-motives-regarding-taiwan-and-americas-role/

Transcript: Aussie Conference of Economists wrap-up w/ Leonora Risse & Cameron Murray – EP148

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.

Leonora Risse  00:04

I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel-good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation.

Gene Tunny  00:17

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 148 on the 2022 Australian Conference of Economists, or ACE as we call it. The conference was held on 11th to 13th July in Hobart, Tasmania. 

In this episode, I reflect on the highlights of ACE with my colleagues, Dr. Leonora Reese, and Dr. Cameron Murray, who I was lucky enough to catch up with at the conference. 

Leonora is the chair of the women in Economics Network, and she’s a senior lecturer at RMIT, the Royal Melbourne Institute of Technology. This is Leonora’s third appearance on the program. 

Cameron Murray, however, is appearing on the program for the first time, and I’m delighted that he agreed to share his thoughts on the conference with me. Cameron is postdoctoral research fellow in the Henry Halloran Trust at the University of Sydney. 

One of the big takeaways for me from the conference was the risk of unintended consequences from government policy interventions. And I give some examples of those in this episode. 

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

Right oh, now for my conversations with Leonora, who’s on first, and Cameron who’s on second on ACE 2022. 

Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Leonora, good to be chatting with you again.

Leonora Risse  02:00

Thanks, Gene for having me. 

Gene Tunny  02:02

Oh, it’s good to catch up here at the conference in Hobart. So, how have you found the conference so far?

Leonora Risse  02:10

It’s great to be back in person. This is the first Annual Conference of Economists in Australia since the pandemic. So, it’s wonderful to be surrounded by people again, seeing people face to face, hearing the latest research. In some ways, it feels like time hasn’t really passed. You know, we’re seeing everyone again. And there’s some great research that’s really timely reflecting on COVID. But also thinking about climate change, politics, immigration, the labor force, So, many highly topical issues are being covered.

Gene Tunny  02:49

Absolutely. And we just had this amazing presentation via Zoom last because he couldn’t make it by Martin Wolf, one of the editors at the Financial Times. And he was talking about a number those issues and the crisis of democratic capitalism, which I found really a fascinating presentation and gave us a lot to think about and their issues I’ve tried to cover on the program in the past. I was grateful for that presentation. Were you involved in the organization of this conference?

Leonora Risse  03:19

This year, I wasn’t. So, the way that the conference works is each state or territory branch usually takes carriage of organizing it. So, this year, a big shout out to the Tasmanian branch of the Economic Society who organized it. I’m part of the Economic Society Central Council, a representative of the Women in Economics Network. So, we were involved in organizing the wind sessions of the conference. So, I was involved in that part.

Gene Tunny  03:48

Okay, good one. So, what were those sessions, Leonora?,

Leonora Risse  03:52

Each year, since WEN was created, that’s the Women in Economics Network, that was created in 2017. So, WEN has been a part of the program, we’ve held a special session where we’ve discussed some of the issues that are confronting women in the economics profession. 

This year, we talked about what WEN had achieved in its first five years. We looked back at what action we had taken to deal with this problem of women’s under representation in economics. So, we were sharing some statistics as well as some examples of the initiatives that WEN had embarked on in that session, and it was more it was broader than just talking about gender inequality. It was talking about diversity and inclusion in the economics profession. So, we held that special session. 

We made sure that there were females amongst the keynote speakers, we had Angela Jackson, talking about the well-being budget. And Angela is a member of our WEN committee, but a very distinguished speaker in her own right and that was wonderful to make sure we had females amongst the keynotes. And tomorrow, we have a lunch for WEN members to come along and network and meet and talk about some topical issues.

Gene Tunny  05:12

Oh, good one. And So, Angela is a co-author of Yours. On a paper, I’d like to talk with you about; so, you had a look at how COVID affected the economy here in Australia and how it had differential impacts by agenda. So, would you be able to tell us about that, please, Leonora?

Leonora Risse  05:32

Thanks so much for the opportunity to share this with you, Gene. We looked at the workforce impacts of the first year of the COVID pandemic in Australia, where we had very strict lockdowns as well as the direct effects of the pandemic. And at the time, there was obviously a lot of interest from the news, from the media, from the government, what exactly were the impacts, and we knew that women were generally being more severely affected on average than men, because of the gender patterns that exist in industries of employment. So, we know that the types of industries that women are employed in, they tended to be the ones that were most affected by the direct lockdowns, particularly in the state of Victoria. But then, also women were potentially dropping out of the workforce, because they were responsible for homeschooling; schools were closed. Childcare wasn’t necessarily available through out that duration. 

So, we wanted to produce a systematic and statistical based analysis of what exactly happened in terms of labor force indicators. So, employment, unemployment, labor force participation; and break it down by gender, because I think there was a lot of talk, and there’s potentially some misinterpretation about what exactly those effects were, and generally, we saw a dive, a plunge in women’s employment, that was steeper than men’s. Then towards the end of the first year of the pandemic, women’s jobs did start to pick up again, which was a positive thing. And we were concerned that that was giving the impression that things were okay again, and even though there were huge numbers of women who dropped out of the workforce, just looking at those numbers climb again, it potentially led to people assuming that that time out of the workforce hadn’t caused any damage for women being detached those interruptions losing your job, and perhaps coming back again, but not being the same job that you had before; losing potentially, your eligibility for leave entitlements. It’s what we call scarring effects of economics.

Gene Tunny  08:05

Is this hysteresis? Is that the old term for it? Or am I thinking of something else? Was that related to it? There was that idea that if you had a period out of the workforce that reduced your; well, you lost the attachment, it can affect your marketability in the future, So, it can have these long run consequences. 

Leonora Risse  08:27

Yeah, that is a concern about people sort of, getting stuck in that state of unemployment or labor force detachment. That’s exactly right. So, we were looking at net numbers, aggregate numbers. We weren’t necessarily following the same individuals to see potentially, people who dropped out of the workforce who lost employment and didn’t reenter. But that would have been a concern behind the scenes. When I presented the paper here at the conference, there was an excellent question about long term unemployment, people would become entrenched in unemployment or drop out of the workforce and don’t reenter. So, that’s part of that concern about hysteresis as well, people getting stuck. And that skill erosion and perhaps that lack of confidence to reenter again, some of the dynamics that can explain what you’re describing there.

Gene Tunny  09:14

Right. So, I’ve got a couple of questions. You looked at the Australian data, do you know if this happened in the US and the UK as well? Was this the xi session that they talked about?

Leonora Risse  09:26

Yes. This was very much a global picture. You’re right. We were hearing this from the US, from Europe and the UK, from many other countries throughout Asia, Canada; that there were terms like it was a she-session, a play on the recession, but emphasizing the gender element of it. And the thing is that this is very different from past economic downturns. So, in our analysis, we look at what happened with job losses during the 1990s recession in Australia and during the global financial crisis around 2008. And what you see with the economic downturn, the recession that occurred as a result of COVID, women share those total job losses was a much higher proportion than what had occurred in previous economic downturns. And why that matters is because, it meant the policy responses needed to be different.

Gene Tunny  10:24

That was stunning. So, I was struck by just the proportion of the jobs lost in the early 90s recession here in Australia that were lost by men; what was it? 90% or something. I guess that makes sense because at the time, the industries that suffered were manufacturing industries or construction, because we had the colossal property boom in the 80s, and then the crash. So, they were industries dominated by men, but this time, and this is what you found, I think, isn’t it? that it was those sectors where women were disproportionately employed such as hospitality.

Leonora Risse  10:58

Yes, that’s right. So, it was the preexisting patterns of employment. For instance, at retail trade, what are the types of jobs within retail trade that women tended to be employed in things like clothing stores, Ford fronting customer service roles, waitress or waiter jobs in hospitality, whereas males tended to be employed in things like in retail, but in electronic stores, or building supply and hardware stores, which actually were all booming during the pandemic, because of all the incentives for people to stay at home or invest in these other things and things like shell fillers, or deliveries and transport behind the scenes rather than face to face customer service. 

So, these preexisting gender patterns of employment, as well as who’s doing the bulk of caring duties at home and who takes on the majority of the homeschooling responsibilities, meant that there were demand side factors as well as supply side factors, putting a lot of pressure on women’s capacity to retain their attachment to the workforce as well.

Gene Tunny  12:12

Okay. I might ask you about your highlights of the conference. I can tell you mine so far. I mean, one highlight was definitely Martin Wolf’s presentation, which made me think a lot about, how do we get that balance between having a market system which provides the goods and services we want that’s dynamic, that allows for you know, that is compatible with individual liberty, but at the same time, avoid a system where we have monopolization, where we have money getting into politics and corrupting it and inequality widening for various reasons, including monopoly, because of the big tech platforms, the big tech giants, people being able to earn money globally because of these platforms. And then if you’ve got an advantage that can be magnified by the technology, also skill biased technological change all those reasons. How do we deal with that in a way that keeps the incentive to innovate, but means we don’t have inequality that could be politically devastating? And I mean, I don’t know the answer to that. But I’m just saying that I thought that was a great presentation and Hal Varian, I mean, that was amazing. Talking about how they’re using all of the Google Trends data to Nowcast the economy, so, unemployment claims just based on people searching, where’s the local unemployment office in Michigan or wherever. So, I thought that was great. But how about you, Leonora? What were your highlights?

Leonora Risse  13:41

Oh, I haven’t been able to see everything on the program, which is frustrating when there’s so many options, you can’t see them all. The keynote speakers have been fantastic this year, because they’ve been so timely. The topics, the issues that they’ve been delving into, I thought hell variants, illustration of how we can use Google data for economic analysis, really enlightening. There’s so much capacity there. I’m looking forward to hearing Joseph Stiglitz speak tomorrow. So, we haven’t come to the end of the program. And he’s, he’s obviously an eminent voice in terms of inequality issues. I really enjoyed Angela Jackson’s keynote address at the start of the conference. And Angela talked about a well-being budget and put a lot of thought into what would be the dimensions of well-being. 

And also, she brought up some really potentially confrontational issue. She did talk about how do we handle domestic violence and family violence? And I think that was an indication that these are some hard topics that economists and policymakers and researchers need to deal with. And I mentioned that as a highlight, because I really don’t think in past conferences, we’ve been empowered or bold enough to bring up some of these confrontational topics.

Gene Tunny  15:02

I think that’s true. I want to see how this wellbeing budget is implemented in practice. I mean, as a former Treasury bureaucrat and someone who worked in Budget Policy Division, I’m just not sure what it’s going to mean. Is it just another chapter in the budget, enhance more work for Treasury analysts? Or is it a fundamental rethinking of how the budget process works and how the all of these policy measures are assessed? Will there be an explicit wellbeing score? I don’t know; we have to see exactly how the government is going to implement it. And whether it is something that really will mean that the budget is reformulated or rethought of as something that’s explicitly dedicated to improving well-being and therefore you would look at the whole range of government expenditures and activities. 

Is it that or is it just something that is just going to be another glossy budget document or something that the government of the day can sort of, wax lyrically about, but doesn’t have any real practical implications? That’s just my natural skepticism. So, I’m not knocking it. I just want to see how it’s implemented.

Leonora Risse  16:10

Yeah, I think that’s a really healthy degree of skepticism to have with any government. I sense that this government is really sincere and actually quite well informed by the research because as your listeners have known, there are very deep and comprehensive streams of research looking at measures of multi-dimensional poverty or disadvantage, which is really part of that literature on what constitutes a well-being and life satisfaction. And I think the takeaway here is when we think about a well-being budget, it’s about broadening the suite of indicators that we monitor, and we care about. So, it’s not just GDP, or inflation or wage price index. But we include a wider and fuller list of economic indicators, including measurements of inequality. So, I imagine that if you’re constructing a well-being budget, you’d want to compute a Gini coefficient, for instance. So, at least inequality is going to be on the minds of your policymakers, it becomes more salient, so that when they’re developing their policies, they’re not just thinking about how do we increase GDP, but what is the distribution of those prosperity benefits?

Gene Tunny  17:19

So, they could ask how do these particular budget measures affect inequality, affect the Gini Coefficient? Is that what you thinking?

Leonora Risse  17:26

Potentially along those lines, that’s right. So, it’s thinking about measuring success along a broader spectrum or dimensions of real world impact.

Gene Tunny  17:37

Yeah. Okay. So, every budget, as well as providing the economic outlook in terms of GDP and talking about what the budget aggregates are, you could have a reflection, the government could reflect upon what’s happening with some of these other indicators, such as inequality. Angela mentioned a whole range of things they could be interested in targeting in the interests of well-being, mental health, reducing domestic violence. 

Leonora Risse  18:04

The budget contains a lot of that already. And it’s about pointing out; actually, a lot of that contributes to GDP, which we know like, if you invest in your mental health and physical health and community inclusion in your population that are all in federal ingredients was making people or supporting people to become more productive as well. But I think it will probably find that there are a lot of government initiatives that are in place that are supportive of well-being and this is, I guess, perhaps justifying that expenditure in a broader set. 

I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation. So, you could say, well, let’s not go ahead with this hypothetical, say tax cuts for a higher income bracket, because that’ll have a negative effect on the Gini Coefficient. It will detract from income equality. 

So, we then have another benchmark of impact you consider some of these redistribution or reallocation decisions, it doesn’t mean spending more, it just means spinning things in different ways.

Gene Tunny  19:23

Yeah, fair point. Okay, Leonora thanks so much. Great to catch up with you here in Hobart.

Leonora Risse  19:27

Thanks, Gene. And thanks for running such a great podcast.

Gene Tunny  19:30

Thank you. 

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

Female speaker  19:38

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Gene Tunny  20:07

Now back to the show. 

Cameron Murray, good to be chatting with you.

Cameron Murray  20:13

Thanks for having me,Gene.

Gene Tunny  20:14

It’s a pleasure. We’re both finished the Conference of Economists for 2022, here in Hobart. We just had the lecture by Joseph Stiglitz. And, yes, it’s been a busy, few days. How have you found the conference, Cameron?

Cameron Murray  20:30

Yeah, pretty good. Pretty broad range. I’ve been to this conference many times, I like it because you, you will find a few people that study related topics, and you can catch up with your mates who researched your area, and then you can sit in on the random ones. Your session was called what, Miscellaneous? Which is actually pretty good. I think most people enjoyed, you know, a variety of discussions that you just don’t really get a lot of smart people in one room to chat about that often. Yeah, it was a good time.

Gene Tunny  21:01

Thanks. Yes, that was an interesting session. And we can touch on that a bit later. I thought it’d be good to chat about highlights of the conference and also what the themes of the conference have been. So, I guess on the themes, there was a big theme, it seemed to me of Economics in the New Normal; I think that was actually the designated theme of the conference, something about the new normal. And there was that speech by Martin Wolf, where he’s talking about the crisis of democratic capitalism. And then Joseph Stiglitz, today was talking about the Post-Neoliberal Order. So, there seems to be this general recognition that things need to change. I still don’t know exactly what they’re proposing. 

Cameron Murray  21:54

Yeah, I got the same impression. There’s a lot of; we’re at the end of some era, and something’s happening. And I wasn’t clear what specifically is not working? I’m not a big believer in labelling of things; oh this is proper capitalism. I’m like, well, you can have capitalism and a good welfare state and good public services and, you know, all of those functions well, together. It’s not clear that we need a new label. I think we do have a lot of things right. I found that a little bit unusual, I thought Stiglitz was right, in terms of Economics as a discipline evolving. And I can observe that I’ve been involved after the financial crisis in that rethinking economics and those groups trying to add some color and flavor to your economics education, because it can be a bit dry, like it’s straight with the neoclassical view on things. But in terms of actual policy, yeah, it’s wasn’t super clear to me where it’s going, but it was kind of unusual to get that feeling that everyone thinks there’s some change happening..

Gene Tunny  23:03

So, you’ve got a blog, haven’t you? Fresh Economic Thinking, and I found that interesting, what you were saying about the teaching of Economics and you said that you’ve tried to give it a different flavor. What sort of things have you done? What have you tried to emphasized in your teaching and your writing?

Cameron Murray  23:20

Yeah, well, maybe let me give you an example. Because Joe Stiglitz, one of the last things he talked about was, well, we use Robinson Crusoe as this example of production. And when Friday comes, we talk about specialization. And I use that to say, well, that’s one element of the coordination problem when you’ve got two people. Someone pick the coconuts and someone go fishing. That example allows us to think more broadly? Why is someone better at picking coconuts? Who taught them? Who has the fishing net? And why do they have it and not the other person? Can they be more productive if the two of them go fishing on one day using a net holding one end each, and then the two of them pick coconuts the next day by helping them climb the tree? Like these, the coordination problems are much broader than I guess the way we’re trying to think about it. And I think in Economics training, we can think more broadly as issues come up, we can maybe see where there’s these net improvements on the status quo. And that’s kind of, what my blog is; is there a different angle to this problem? Is this really a coordination problem? Is it really specialization? Is it this? Is it that?

When I look at housing, for example, I was writing about the Shared Equity proposal, I’m like, well, is this the best option? Why isn’t a 100% equity better? This is the proposal where the government will buy 30% of a house for you as an equity partner for first home buyers. 

Gene Tunny  24:46

Are they going to go ahead with that, aren’t they? Because they want government here in Australia, right. 

Cameron Murray  24:51

And someone at the conference was telling me that the details are being worked out, can’t say anymore. I think we got to think well, that’s one policy, and we can look at it. But we should be tweaking at the edges as well and going well, if 30% is good, why isn’t 40% better? And if 40% is better, why not 100%. And if we’re at 100% equity, where sort of the government owns your house, that’s public housing. Like we should be a bit more expansive in thinking about how things fit together. And that’s what I tried to do.

Gene Tunny  25:22

So, we’re reportedly having a housing crisis here in Australia. And you’ve previously commented, or you’ve recommended a Singapore model, haven’t you? Is that what you’re driving at with a 100%?

Cameron Murray  25:37

Oh, well, my example, for example, in that blog post was the Land and Housing Corporation in South Wales that owns all the public housing stock. And the value of that housing stock went from $32 billion in 2012, to $54 billion in 2019. And like, that’s a really good return on equity for government, if we consider that as an independent entity, making $20 billion in seven years in terms of the value. So, that was my example of well, you know, we’re going to start another fund over here, and it’s going to buy equity in people’s houses; we have a fund here, that’s buying equity, we’re just not conceptualizing it this way, we’re only looking at the costs, and we’re ignoring the fact that what public housing is is an equity investment. So, that’s the expansive way to think about it.

Gene Tunny  26:24

Right. Okay. I’ll put some links to your blog in the show notes, and also some of the reporting on your recommendation regarding that Singapore model.

Okay. What I found were the highlights, and I can ask you about yours. Papers that really struck me as something I wasn’t expecting, or that made me think differently, it was an analysis by this recent master’s graduate from Harvard, Nicole Kagan, not so super. And what she showed was that, that policy during the COVID period here where they let you withdraw $10,000 from your superannuation balance, and it was a lot easier than the normal requirement where you had to demonstrate hardship. And she was making the point that it could actually backfire on the government in the long term due to the fact that it’s reducing their super balance, and therefore the government would have to pay them more pension in the future. She had some calculations that illustrated how that could occur. I thought that was a good analysis, a good paper, and it just shows those unintended consequences and just how there, whenever you’re designing a policy, there’s probably or there’s possibly a lot better way to do it. And So, you should be thinking laterally about the types of policies.

Cameron Murray  27:58

I thought hers was very good as well, because she didn’t just say, this is the result of this policy. She said, oh, here’s another policy of an interest free loan. And what was the other; that she had a third one as well and said, here’s something else. And now I’m going to compare all three of them. And I feel like that’s a really fundamental economic approach of saying, well, this is a good policy I showed you, it’s like, no, what are all the alternatives? And we should be picking the best one, because if we can beat this, we should. Right. So, I thought that was very good. And that was my comment to her as well, there was another. And it might be related to your presentation as well, that the government could have let you take your super or it could have bought your assets from your super and given you the cash and held those assets in its own fund and got their compound growth or whatever. And, therefore, the government would have had those future assets to pay you back when you got the pension, if you know what I mean. So, you could sort of draw a little circle around the super early release program, and take that forward through time by the government owning those assets in its own federal treasury super account, and then paying the extra pensions to you in the future out of that account if it wanted to. So, you know, that’s just another alternative. And she evaluated three and I really liked that approach and was enthusiastic to look at more.

Gene Tunny  29:25

Yeah, I thought it was good. The other papers I liked; Stephanie Schurer who won Young Economist of the Year Award, she looked at a paper, while her paper looked at these anti interventions of various measures in the Northern Territory to a world to reduce alcoholism or to reduce domestic violence and sexual abuse in the indigenous population there. She had this, I think it was some differences model share this methodology to identify what happened in Alice Springs when they introduced a minimum price of alcohol to try to reduce the drinking and the cost of wine. It didn’t have the effect that they necessarily expected. When they looked at what did it mean for babies with the birth way of babies? And what seems to have happened is, well, there was some substitute; they did stop drinking cask wine. There was a big drop in the consumption of that. But then, there was an increase in consumption of beer and other alcohol, to an extent. So, there’s sort of substitution there. But also smoking, smoking increased.

Cameron Murray  30:43

Yeah, it did. That was pretty clear and one of the main results, wasn’t it? 

I think that’s actually a result I’ve seen elsewhere of trying to change behavior with the sort of syntax approach where you tax the behaviour you don’t want to get. And I think we get that in cigarettes and marijuana and things like that, if there are substitute ways to get the broader consumption good. Then you’ll find them.

Gene Tunny  31:12

Yeah. I thought that was a good illustration of the possibility of unintended consequences that you can get with policy and as was Nicole’s paper, too. Okay. The other one I thought was great was Warwick McKibbin’s paper on COVID. So, he went over some modelling results of his early in the pandemic. And I mean, Warwick was claiming, I think he’s probably right about this, that he got reasonably; I mean, his estimates were probably better than any ones in terms of the ultimate economic impact. And a lot of it came from voluntary, people voluntarily withdrawing from the labor market.

Cameron Murray  31:58

I wasn’t in that one. Can you? What did he predict? And why?

Gene Tunny  32:03

This was a paper he released in February of 2020. He saw that COVID was spreading in China. And it was going to come to the end; I think it was in Italy at the time. And he used his, what is it, the McKibbin Sachs Global model – MSG model he’s got some global economic model originally built with Jeffrey Sachs at Harvard. And he’s sold it; to all of these finance ministries, I think Treasury had a copy when I was there. How would you describe it? Well, it’s a general equilibrium macro-economic model of the global economy. And he was projecting; he calls them simulations, he’s not calling them forecasts. He made a joke today about how he doesn’t like doing forecasts, because you’re only ever going to be wrong, you never forecast know precisely.

Cameron Murray  33:10

I think that’s very wise. 

Gene Tunny  33:12

So, I think that’s very clever of Warwick to do that. And he was showing what GDP deviations he was getting from his assumptions around how COVID would spread. Then he had endogenous policy responses, or actually, they may not have been endogenous, he must have assumed what policy responses would be in terms of fiscal policy, and then monetary policy. He knew that governments would respond and that would help the economy recover. And he was showing that he had the big GDP losses to begin with, but then the V-shaped recovery or the rapid recovery. So, Warwick was claiming that; and it’s probably right.

Cameron Murray  33:56

Did you get the inflation element as well as it’s sort of second half of last year and this year? Because the V-shape recovery; remember, there was a big debate, V-shaped recovery, W-shaped recovery. There was a lot of chatter, and I think obviously he was right on that. But what about the inflation part?

Gene Tunny  34:19

I think he was. He may not have got it to the; he may not have predicted as much as it has occurred, but I’ll have to check that. I think he did say something about that. I just can’t remember off the top of my head. I’ll put links in the show notes to that paper. I found that fascinating. 

One thing he didn’t predict and he was surprised by; he was really surprised by just how badly the United States did. But he was modelling the COVID infections and mortality, the COVID deaths, and his prediction for the US was too low. And because in his model he was basing the health response. So, he had the epidemiological development of the disease, the infections and the deaths. He had that related in part to the public health system or the public health response. And because the US, because of the CDC, it came out high in terms of public health effectiveness. So, in his model, US had high public health effectiveness. So, that was reducing his estimate of what would happen in the States. We all know that it just didn’t work. I mean, they may have had the CDC, but for some reason or another, something didn’t work.

Cameron Murray  35:49

Well, you know, the assumptions matter don’t they? One of the standout presentations for me was Hal Varian, the Chief Economist at Google. And I think, simply because he’s got the inside run on all the data, he had a great method of augmenting your traditional time series forecasts that have seasonality and trends with an additional regression that selects for the most useful search terms out of Google Trends, and then uses them as predictors in the regression part of the overall model. And was pretty good at predicting a lot of economic outcomes from Google trends search data, which I thought was pretty impressive, but I guess we kind of, accept that that happens. But what impressed me more is they have a Google survey tool that you can put as like an ad on the news item. And people get credit on Google Play or something if they fill in surveys. So, you can do these really rapid surveys, and it will distribute them to readers of news that meet certain criteria. And it replicates really well, these well-done official surveys that sample representatively across society based on census records of types of people and where they live, it replicates a lot of findings by being completely non representative, and just flooding the internet, essentially, with the survey. 

So, the message here is sort of saying is we don’t know if representativeness is that important, but you can find out cheaply and quickly by just doing a Google survey to augment your official survey where you’ve got representative samples from different parts of the country, in different age groups and so forth. 

We’re obsessed about sampling and he’s now saying, well, as long as we throw it out to the internet, sometimes it doesn’t really matter. 

Gene Tunny  37:54

It’s good enough, the results are good enough. It may not be as precise as a random survey, or a survey done by Roy Morgan or Gallup but it’s got to be good enough for what most people need it for.

Cameron Murray  38:07

Especially picking the trends, right? Is this declining in interest or rising interests, you’ll get that sort of stuff very quickly and cheaply. So, I immediately went back to my computer after that session and looked at housing markets and predictions and tried to catch up with the state of the literature on that, and it’s booming right now. So, I think that’s going to be something we’ll hear more about. And I expect, for example, in the next five years, we’ll probably have a new house price index that is informed by daily Google search trends. Like a live modelled index from this type of stuff, that would be my expectation, given that people are already trying to do that.

Gene Tunny  38:46

Yeah, because CoreLogic put out a daily House Price Index, I think, don’t they? 

Cameron Murray  38:52

They do put out a daily index but there’s a lot of assumptions because you don’t know sales data until the settlement and the price was 30 or 60 days beforehand. Over a longer term, it works well. And it seems to pick turning points well. But I think if you’re in the market for producing high frequency index like that, and you can augment that with Google Trends, I think you would dominate that market because people would put more stock in yours, you’d get more press coverage, you’d become very; So, I’d be very interested in if CoreLogic has got people looking at this. They obviously have a lot of data nerds. You might see live daily trackers of many things; could be an interesting new world at the next conference.

Gene Tunny  39:40

Yeah, absolutely. That was great, that nowcasting session and I chatted about that with Leonora. I’ll put a link in the show notes regarding that, too. 

So, on housing, Cameron, you presented a paper on housing, didn’t you? Would you be able to tell us about that, please?

Cameron Murray  39:56

Yeah. So, it’s pretty straightforward. There was a lot of very detailed statistical modelling at this conference and mine was the exact opposite. Mine was just, here’s the data on the rate of production of housing from new major subdivisions in Australia. Because the argument that we have at the moment, are planning regulations, stopping supply and keeping the price of housing up. And my question was, how are planning regulations stopping supply? Because we can observe in practice, all these major approvals with three to 20,000, approved housing lots, and we can observe how quickly they supply after the approval. And what you find is that during an economic boom, these property developers will sell at a rate that’s 30 to 50 times faster than when it’s not a boom. 

So, they’ll sell five a month, and then they’ll sell eight a month for a few months when there’s a boom. So, if you look at land sales in major subdivisions around Melbourne, when there was that 2015 to 17, boom, you can see, not only did the price rocket, but the sales rocket, and then when the price is up, typically, supply and demand say, well, at higher prices, you sell more, but then it stops once price gets up. So, as prices start rolling over, they stopped selling again. 

The main point of that is, there seems to be a built-in speed limit. And then in addition to that, I looked at aggregate company data for listed companies across states where they had eight to 12 different projects. And the question there as well, is that variation I’m observing; does it average out across different areas, if we diversify? And it does, but only to a small degree. And then I looked at council level data for the different councils in Queensland and showed that actually, the variation, even at a whole council level is much the same. So, the point of all that is that there’s some kind of built in speed limit that the market will supply, regardless of planning restrictions. So, if you want to talk about the effective planning regulations, it has to go via this market absorption rate, this optimal rate per period that you would produce new housing. 

Gene Tunny  42:20

Yeah, I see what you’re arguing there. So, at any point in time, there is going to be a speed limit. I think that’s fair enough. It’s like with the sale of government bonds, for example. So, they don’t just go and auction off the whole years in one day.

Cameron Murray  42:42

Yeah. The market has a finite depth, right? Especially in property, your local market has a very; it’s very competitive. But in your local area, if there’s only a few buyers rocking up each week, you can’t really sell faster than that. And if you did want to, you’d have to reduce the price dramatically. And that itself might not even work, because who wants to buy something that’s falling in price? Right? You’ve just showed me this is a terrible property asset to buy, because you keep decreasing the price on me. Right? I think property markets function like other asset markets, property developers aren’t in the business of panicking, and to reduce price and selling very quickly. So, if we want to talk about cheap and affordable housing options or systems, we’ve got to acknowledge that limit. 

We can’t go around saying oh up zone, and it’ll all be fine, because we’ve got a property boom in the whole world, regardless of local planning conditions. There’s almost no city you can name right now, Regardless of whether they’ve got very generous planning, whether they’ve got height limits, where they’ve got no height limits. Auckland, famous in 2016 up zone the whole city, and then had the biggest boom, I think just about in the world between 2016 and 2021.

So, that was mine. Yours was one of the last sessions of the day, that was just before Joe Stiglitz. I actually really liked your topic because, I have a strong interest in privatizing public assets and accounting trickery.

Gene Tunny  44:26

Yeah. Well, what I thought was bizarre about what Queensland Government did. This is the state government, where Cameron and I both reside; it’s the state government where Brisbane is the capital. What I found odd about what they did was they actually didn’t privatize it, they pretended they privatize it. They said if we did privatize it, we could sell it for $8 billion, and therefore, even though it’s still doing the same thing it did yesterday, we’re now going to treat it as a well; we’re creating this private company, we’re converting a government.

Cameron Murray  45:08

This was the property title’s office, right where you change, when you sell a house, you register the change in ownership. It’s the Torrens title.

Gene Tunny  45:16

Yeah, that’s right. Sorry, I should have mentioned that. Well, this is actually a private company, and we own shares in it. So therefore, we’re going to take it out of the general government sector. And we’re going to recognize this $8 billion asset on our balance sheet and use it to offset our $40 billion worth of debt or whatever it was, and that reduces our net debt.

Cameron Murray  45:47

That’s an accounting trick. I did think it was very interesting that we’re going to privatize, we’re not going to change the ownership. We’re just going to say that it’s; and I guess my point to you was; The other point you were saying is that Queensland has a future fund that does investments in private companies. And they were saying that we’re not putting it in that fund is that?

Gene Tunny  46:14

I know they did. So, it is in that future fund? Yeah. It is in there – the debt retirement fund they’ve got. 

Cameron Murray  46:22

Well, and I think one of the questions in your comments was that New South Wales got a lot of flak last year for doing the same thing. And they created this thing called the transport asset holding entity. Did you follow that news? 

Gene Tunny  46:38

Yeah, I’ve got to look more into it.

Cameron Murray  46:4

The basic gist was the same thing. They said, well, this is the Department of Rail or whatever it’s called. But actually, we’re going to corporatize it and say it’s a private company. So, when we subsidize it, that’s an equity injection. So, that’s actually an investment, not a cost. So, there was this great big accounting trick to get around there other standard measures of government spending and standard ways that they produce the budget. They’re like, well, no, that’s not a cost, that’s an equity injection, which of course, you could do for anything.

Gene Tunny  47:19

I have to have a closer look at that. I guess the point I was trying to make is that I thought this was a good example of just the financial or the public accounting trickery that can go on. And I think as economists, we need to be mindful of that.

Cameron Murray  47:40

I think your point; you said at the beginning that we’re meant to be sort of, reporting in a standardized way. And you’re comparing governments between countries and budgets and debts. How much does this accounting trick matter? And we’re comparing Queensland and Western Australia or Australia to New Zealand to Canada.

Gene Tunny  48:01

Yeah. It’s difficult to know. And while any one of them, you might think in the greater scheme of things, okay, maybe that’s not the biggest deal but they just all add up and you just don’t know. 

I remember what I was saying about what was going into the future fund. What I was trying to say is that originally, they were going to put in liquid assets. So, the original idea was, we would have, I think it was 4 billion or whatever it was, from the defined benefit. The funds set aside to meet the defined benefit superannuation liability, and they were going to take that out, because they were saying, well,  we’ve got excess there, we don’t need that much to pay the pensions. We’ll put that into this future fund, but they would have been liquid financial assets. So, cash or shares or whatever. But then, they didn’t have as much as they expected. So, they couldn’t actually put in liquid assets. What they then did was said, well, oh, we’ve got these $8 billion titles registry, let’s stick that in the future fund. And is not the same thing, because it’s not actual ready money. It’s not a liquid asset.

Cameron Murray  49:13

No, it’s definitely not. Although, we did later discuss before we recorded that, a cynic might say that the government is wedged right now in not privatizing any public assets. And they’re literally setting this up. So, when they’re out of power, they get the result they want because the next government, it makes it easier for them to then privatize and sell this off, because the structure is already changed.

Gene Tunny  49:42

It certainly does do that.

Cameron Murray  49:45

It depends how much you think these political games are being played behind the scenes.

Gene Tunny  49:50

Yeah, I’ll put a I’ll put a link to both of our papers in the show notes. I’ve got to think more about your housing article because I think that’s a fair point about the speed limit at a point in time. And I’ve had Peter Tulip on the show before. Peter is someone that you’ve debated or you have a lot of interactions on Twitter and

Cameron Murray  50:15

and in person every time. Yeah.

Gene Tunny  50:19

So, Peter was here at the conference too. And I think Peter’s point is that; I think he acknowledges that, like, you’re not going to solve the housing supply shortfall overnight by relaxing restrictions, because there’s just so much construction or so much building that would have to occur. I mean, have to occur over many years. And I think his point is that, well, the problem is we’ve had these restrictions in place for decades. So, there’s been a whole lot of under building. 

Cameron Murray  50:51

We had a good conversation last night with Peter. I think there’s a hidden mental model that we both have that I can’t quite articulate with both tried. One of the components of that is this competitive element in the property market, like how fast would we supply? What’s the real counterfactual? Because his argument, and it’s a common argument, is that we’ve had supply constraints for a long time, therefore, we don’t have enough houses. If we didn’t have a supply constraint, we would have more dwellings per person and more space than ever before. And yet, that’s actually what we have. 

Although prices are high. Part of that’s the interest rate, right? Rents compared to income in the private market are 20%. They were 20% in 1996. So, we’re talking, what’s that 26 years ago, quarter of a century. So, not only are rents the same proportion of income, and we’d probably expect people to spend roughly the same proportion of income on housing as they do, you know, there’s a fixed budget share results in the Cobb Douglas function as your income grows. But we have bigger houses, we have more bedrooms and more area and fewer people. And we actually saw that in the recent Census. Census was interesting, because last year, the week that we filled it out in August 2021, I predicted that the homeownership rate in the census would go up. Because it was 65.4%, in the 2016 census. And when the data came out a month ago, it was 66.0. So, a 0.6% increase. So, we got more homeownership. And we saw that the number of people per dwelling fell quite a lot as well, partly because of COVID. People sort of spread out a little bit more. Yeah. And we had a bit of a building boom as well, in that period. And So, we’ve got bigger houses, fewer people in them. So, the question is, why isn’t this the market outcome? Like, surely, you’ve got to tell me why the market outcome is something of even bigger houses and fewer people than what we have. And why would that be the case? That’s where we still disagree. Myself and Peter Tulip as the most active housing supply debaters on Australian social media.

Gene Tunny  53:27

Absolutely. Love to have you both thoughts for a chat in the future. But anyway, we’ll have to leave it there. Because we’ll wrap up soon, because we’ve got the State of Origin game between Queensland and New South Wales coming up. 

Yeah, I thought that’s been a great discussion. I just thought of something with Nicole Kagan’s paper.. So, you’ve got that idea that the government could have bought the shares off or it could have basically bought the super assets…

Cameron Murray  54:05

From people if they want to cash out their super, then the Superfund says, okay, we’ll give you cash but the government’s got to give us the cash to take a claim on their same assets.

Gene Tunny  54:15

Yeah. So, the government would have to borrow to buy or to let them cash out. But your argument would be they would be earning more, the government would be earning more from those assets than the cost of the borrowing, giving borrowed and was so cheap.

Cameron Murray  54:31

Yeah. And also, that whatever they earn on those assets is exactly what the people who took the money out of super would have earned. So, if you’re thinking about a cost to the age pension in the future, well, the government now got those assets, exactly the same amount of assets that it can use to spend on your age pension. Do you know what I’m saying? Because you don’t have the super, the government has it. And if you need the age pension, they’ve got exactly the same amount of money that they can give back to you if you qualify for the age pension.

Gene Tunny  55:00

I’ll just have to think that through because I’ll also have the debt one day to a border. Although you could think about the Reserve Bank doing it, perhaps. I mean, that’s one thing that could have;

Cameron Murray  55:14

I mean, it’s a balance sheet expansion for the government. And it’s a contraction for the person who took the cash and doesn’t have that other asset. I might write a blog on this; 

Gene Tunny  55:25

I think would be good. I’d love to see.

Cameron Murray  55:27

Nicole was the author of the paper? I’ll reach out because I thought she had the right idea of testing all these scenarios. There you go. That’s what conferences are for; meeting people and sharing ideas.

Gene Tunny  55:41

Absolutely, very good. Cameron Murray, from University of Sydney. Thanks so much for your time. It’s been really great chatting. And it’s been amazing catching up with you at this conference. It’s been great.

Cameron Murray  55:52

Yeah, I know, it has been great to hang out, Gene. 

Gene Tunny  55:57

Thanks, Cameron.

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

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

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Podcast episode

Charter Cities: A Public-Private Partnership (PPP) model w/ Kurtis Lockhart – EP147

In episode 147 of Economics Explored, Kurtis Lockhart, Executive Director of the Charter Cities Institute, tells us about the benefits of charter cities – cities with their own rules or charter, independent of national or subnational governments. Kurtis argues the best way to implement charter cities is via public-private partnerships (PPPs). Learn about the fascinating work the Charter Cities Institute is involved in around the world, particularly in sub-Saharan Africa, with a view to stimulating economic development and lifting millions out of poverty.  

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

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

About this episode’s guest – Kurtis Lockhart

Kurtis Lockhart is Executive Director & Head of Research at the Charter Cities Institute. Kurtis is also a PhD candidate in political science at the University of Oxford. His research examines the effect of institutional reforms on public goods provision with a regional focus on sub-Saharan Africa. At Oxford he has taught both quantitative methods and African politics. 

In the field, Kurtis has previously worked as a Research Manager for the International Growth Centre (IGC), for Warc Africa (both in Sierra Leone), and for the ELIMU Impact Evaluation Center in Kenya where he managed the implementation of several randomized control trials across many different sectors (health insurance, rural electrification, tax administration, and legal aid). Kurtis has also completed consulting projects with both Oxford Development Consultancy and with Warc Africa. He holds an MSc in Development Management from the London School of Economics where he graduated top of his class, as well as a BA in Economics and Development Studies (First Class Honors) from McGill University. 

Find him on Twitter @kurtislockhart.

Links relevant to the conversation

The Charter Cities Institute 

Podcast Archives – The Future of Development (Charter Cities Institute podcast)

Paul Romer: Why the world needs charter cities 

The Charter Cities Institute on Twitter: @CCIdotCity

Transcript: Charter Cities: A Public-Private Partnership (PPP) model w/ Kurtis Lockhart – EP147

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…

Kurtis Lockhart  00:05

As an organization, CCI’s vision is to empower new cities with better governance; to lift tens of millions of people out of poverty. So, we’re all about poverty alleviation.

Gene Tunny  00:17

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 147 on Charter Cities. We’re going to learn what Charter cities are exactly, and what progress has been made setting them up. My guest this episode, is Kurtis Lockhart, Executive Director at the Charter Cities Institute, and a PhD candidate at Oxford. One important takeaway for me from this episode was the importance of having a genuine partnership with host countries. So, Charter cities aren’t seen as Neo colonialism.

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

Right on, now for my conversation with Kurtis Lockhart on Charter cities. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Kurtis Lockhart, Executive Director at the Charter Cities Institute, welcome to the program.

Kurtis Lockhart  01:33

Thanks so much, Gene. I’m happy to be here.

Gene Tunny  01:36

It’s great to have you here. I’m keen to learn about what you’ve been up at the institute. As an economist, this is a concept that’s I’ve been fascinated by since, I think it was Paul Romer, famous Economics Professor Nobel Laureate, if I remember correctly; he had this great TED Talk, probably about eight years ago now on Charter cities. I’ll put a link in the show notes.

To begin with, Kurtis, could you just tell us a bit about the Charter Cities Institute, please? Where’s it located, what you’re doing, what your mission is, please?

Kurtis Lockhart  02:17

The Charter Cities Institute is a 501C3. That just means a nonprofit Think Tank and nonprofit research organization. We are headquartered here in Washington, DC. There’s a Zambian office of CCI in Lusaka, that we’re really proud to have opened late last year. That now has three full time staff there, so we’re ramping up quickly there. And I can break down CCIs activities around Charter cities into a few buckets. And they’re all-around building the ecosystem for Charter cities. So, one is around just research, right? So, we provide very nerdy, longer papers on academic jargon and that you’re more e-con inclined audience members would probably resonate with, around why Charter cities are an idea whose time has come. Why they are; we think they’re convincing from a public policy standpoint, to pursue, and why we think that they could be game changers in terms of economic growth, and spurring economic development. So, that’s research, in addition to this longer, more academic oriented pieces, we also, you know, we want to start a movement, and we want people to be involved. You also need to communicate it in other forms, like blogs, like media outlets in more popular press, and exactly like I’m doing with you here today, Gene, on podcasts. So, that’s the research bucket.

The second bucket is around events; we host various events and conferences and summits. One other things that we’re really excited to do, later this fall is co-hosting a conference, a two-day conference with MIT in Boston. They have a sustainable urbanization lab there. And we’re hosting a two-day conference with them, where the first day will be focused on academics; talking about this idea of Charter cities and new city developments as a way to grapple with really rapid urbanization that we’re going to experience as a species over this century. And then the second day, we’ll be less academically inclined and more focused on practitioners and policymakers and new city developers themselves.

So, we’ll go from, the abstract and the academic on day one to the practical and the real world on day two. And I think that’s really necessary in a new space like this with a new novel idea is to get those two silos talking to each other and that’s one of the key things that we see CCI doing in terms of building the ecosystem. So, first bucket – research, second bucket – events.

The third bucket of activities that CCI engages in, is around technical assistance and partnerships. So, engaging in and providing advisory to new city projects on the ground to get these things built in thriving new Charter cities out there in the real world.

Gene Tunny  05:24

Great. I mean, I’m keen to learn about new cities being built. And because this Charter cities idea, it’s designed to stimulate economic development to improve outcomes for people out there in the real world. So, you’re keen to learn what’s going on there? Would you be able to explain first, what is a Charter city? How do you conceptualize it? How would you describe it, Kurtis?

Kurtis Lockhart  05:48

Our simple definition of a Charter city is new city with new rules. And there are two pieces of that: the city component, which is the built environment, or the urban space, and the rules, which economists, have a fancy jargon word; institutions for rules. And economists of all stripes pretty much come to agree that the fundamental determinant of long run economic growth, long run economic development, is institutions and governance. And the issue is, across a lot of countries, low-income countries, lower middle-income countries in the Global South, you have poor governance and poor institutions. And they’re really hard to change. So, we see Charter cities as a mechanism to bring about deep reforms needed in governance and institutions that can then lead to increases in long run economic growth, which is, we think, the major way to lift masses of humanity, from poverty, to prosperity, in its short amount of time as possible. And that’s the main reason; I can go more into why we think that Charter cities are a great mechanism to bring about that institutional reform and institutional transition, if you want. But I’ll pause there.

Gene Tunny  07:17

So just first, why is it called a Charter city? The Charter, is there an actual charter that you give to the city? Is that the idea there’s a document or a set of principles, a set of rules? Is that the idea?

Kurtis Lockhart  07:32

Yes. So, I mean, it comes from history, where new jurisdictions being settled, were granted charters; and basically charter is a standing for the new rules that apply in this new jurisdiction. And it’s a stand-in for institutions. That’s what we mean by charter. And then city, I always break it down by those two words, because that’s what we’re all about at CCI is cities, which is about the physical, geographic space, and urban planning, and land use regulation, and how the city is kind of planned, it is super important. Transportation, urban infrastructure, the built environment. And then on the other hand, the charter, right? That’s what you could call the soft infrastructure of the city, which is the rules that govern different policy domains in a city. Both of the soft and hard infrastructure need to be right, in order for a city to thrive.

Gene Tunny  08:39

So, it’s a new city with its own rules. So therefore, you either need to carve out, or you need to carve out territory from an existing country. I mean, you’ve got to; most of the world’s is going to be covered by sovereign nations, isn’t it? Like, how does this work? I mean, you have to get the agreement of a government, is that right to get a new bit of land and have your own rules? Is that correct?

Kurtis Lockhart  09:09

Yeah. So, this is a great time to bring in Paul Romer, who you alluded to in the first question. So he had a TED Talk back in 2009, that you talked about, where he coined this term Charter cities and defined this concept to begin with, or at least early versions of the concept. And his model, Romer’s model of Charter cities is what we can call the foreign guarantor model to Charter cities where he advocated for a high income, well governed country like Canada to come into a low income poorly governed country like Honduras, and Honduras would cede a large city scale chunk of land to Canada. Canada would then effectively you know, import its good institution. And in that delimited chunk of land that it’s been ceded, and because of that institutional shift towards good institutions, and being administered by Canadians; I’m Canadian, so I’m kind of, patting myself on the back right now, then you would therefore, get economic activity, you’d attract investment, you’d get business formation. And those things would spur sustained rates of growth moving forward, and you get all these good outcomes.

So that was kind of Romer’s foreign guarantor model – a candidate coming into Honduras. As you’ve brought up now, that idea was seen as controversial by a lot of people because it has implications for sovereignty, right. A lot of Hondurans are going to say, wait a second, you’re telling me that we don’t have sovereign control over all of our Honduran territory, and we’re ceding that sovereignty to foreigners? Like no, I did not agree to this.

Well, I think that critique, that sort of, Neo colonialism critique is a bit misguided in certain ways, nonetheless, it’s real. And it rubbed a lot of people the wrong way and was seen as controversial. So Romer tried to implement this model in Honduras, and in Madagascar, and it didn’t work out so well, and then he sort of, receded from this charter cities movement. So, the Charter Cities Institutes, CCIs model is different from Romer’s, We advocate for Public Private Partnership, a PPP between a host country and an urban developer. And ideally, it’s an urban developer from that host country so that they know the context, they have appropriate connections and whatnot. And the reason we think that’s better is basically two reasons:

One is it sidesteps all of these issues of sovereignty that are implicit in Romer’s model, right. This space of land that the developer is going to build is not at all, a separate entity. It is part of the sovereign jurisdiction of the country, subject to its constitution, subject to its criminal law, subject to its international treaties. The only other things that it has kind of special control over is commercial law and everything else other than those three things; constitution, criminal law, and international treaties.

So, number one, it sidesteps these issues of sovereignty implicit in Romer’s model. Number two, we think that this PPP model does a much better job aligning incentives between the urban developer on the one hand, and both the host government and the population, the city residents on the other. The reason is because, urban developers make their profit from the appreciation in land values over time, right? And so that’s their main incentive; is to maximize land values. How do you maximize land values? Well, you attract as many people, as many residents and businesses to your city as humanly possible. How do you do that? You create a livable city, you govern that city well, you provide urban services and urban amenities to the businesses and residents of that city and you will attract more residents and businesses, and therefore see land values increased.

So, we think that aligning incentives is done much better under this PPP model than the foreign guarantor model. It’s a lot sort of, analogous to, you could say, the way a shopping mall is set up. I think that’s a good model in a lot of people’s heads, maybe your listeners. You have a shopping mall, where there’s the mall owner, and then they rent out storefronts, or store space to various shops. And the shopping mall owner provides public goods like lighting, garbage removal, and cleaning and security to the public space within the mall. And in exchange, they get rents from the various stores within the mall to the extent that it then therefore attracts foot traffic to those various stores, and therefore the force base within that mall increases. That benefits the shopping mall owner. So, it’s a very kind of similar model and you can use that as an analogous thing to the way it aligns incentives.

Gene Tunny  14:50

Right. You mentioned that Paul Romer had; there were some practical examples of this that he was involved in. He was advising them, was he? And they just didn’t work out. Do you know why they didn’t work out? What were the problems that occurred?

Kurtis Lockhart  15:07

His full involvement is still unclear; the extent to which was involved. I know that the Hondurans in particular saw the Ted Talk that both you and I have alluded, and I think he was the adviser to the President, really resonated with him. And so, he called Paul Romer and got the Presidential in support and they said, let’s go with these things. And there were a few, several iterations that I don’t want to go into all the history. But eventually, this new Charter cities law, you could say was passed called the ZEDE law, which basically stands for the Zone for Economic Development and Employment. And Romer, as part of this law was placed on the transparency commission. So, there was like an oversight board, that would make sure there’s not a lot of, abuse going on with these zones and the developers kind of, given a lot of powers within these special jurisdictions, these ZEDEs,

The issue then became that potential developers or deals started to arise between folks that wanted to govern these ZEDEs and the government that were being held without the oversight or input from the transparency commission. So, Paul Romer said, okay, I’m done with this, you’re kind of, not at all going about this in a transparent way that I had signed up for. So, he left the ZEDE project.

There have since been a few that he’s started. I think there are three in operation right now, including well known one called Prospera, on the Island of Roatán.

Gene Tunny 

Sorry, Roatán; where’s that? Sorry.

Kurtis Lockhart 

Roatán is an Honduran Island. Those were the first kind of, ZEDEs under this law, a socialist was elected president last fall in Honduras. And she was elected with one of her platform planks being the abolishment of this deadly law. The Honduran Congress just passed that abrogation earlier this year. And so that’s kind of a huge blow to this ZEDE regime.

I think the three ZEDEs that are currently in place, that were passed before that law came in or was abolished, aren’t going to be abolished, they still have the ability to function. But obviously, if you’re an investor, and you see a president in place, that is hell bent against this concept of a ZEDE, that’s going to likely give you pause about getting involved. So, it’s great for the space. But I think what the Honduran example goes to show you is that you need legitimacy. And you need buying from the local population. And I think the way that the ZEDE law was passed in Honduras in the early days, did not at all, have that legitimacy necessary for long term success.

Gene Tunny  18:19

Right. Did you mention Madagascar as well? I can have a look into it. It’s just fascinating, I wasn’t aware that that was happening. And I mean, if I can get Paul Romer, on the show in the future, or, I’d love to chat with him about that. But you did mention Madagascar, was that right?

Kurtis Lockhart  18:38

Yeah, Madagascar happen. I think Paul Romer met with the president whose name is long, and so I’m not even going to attempt to say it, but they had a conversation and the president, I think was on board. But for many other reasons in addition to this one, what was happening is I think a South Korean company was going to come in and get a large tract of land, and the local population didn’t like that idea. So, a kind of protests broke out. Again, this is somewhat related to the Romer presidential conversation, but there were other factors involved that spurred the protests and riots. So the reform didn’t end up going through. Both attempts, well-attempted and in the Honduran case, it did get implemented, t just hasn’t been very successful. They didn’t end up having an enduring impact and Romer has since receded.

Gene Tunny  19:39

I was interested in that point you made about the new; there was a new government in Honduras and it’s a socialist government. They’re not going to like a Charter city. If you think about it, because is the idea of a Charter city, it’s going to have more liberal or more free market institutions, lower taxes, lower tariffs, more business friendly regulations, is that the idea? That they want to try and replicate what Hong Kong was in a few decades ago. I mean, Hong Kong is still a prosperous place. But there’s concerns about the, the administration or the influence of Beijing in Hong Kong now. Is that the idea that it’s; you want to have a free market type of city state? Is that the idea?

Kurtis Lockhart  20:34

By our simple definition of Charter city being new cities with new rules, that’s a pretty politically agnostic definition, right. So, if you think about it, that could be taken on either end of the spectrum and ran with. I think the model that CCI advocates for is more in line with what you’ve been saying. So, liberalizing and introducing market-oriented reforms, just because if you look at history and how well you know Hong Kong has done and Zen Jen has done and Singapore has done and Dubai has done when they’ve liberalized, that would seem to indicate that that’s a good idea to do. And then you contrast that with reforms on the other end of the spectrum and how those worked out. And I think that effective option is pretty clear from history.

But that’s not to say that we have been approached by, for example, indigenous groups that are interested in this model of Charter cities, because they want as a group, and want to push for an advocate for more decentralized, and devolved authority and autonomy over the jurisdiction that their group resides in. And they see this Charter cities model as a potential way to do that. So, I wouldn’t label that as kind of libertarian or free market fundamentalism in any way; that’s more just an indigenous group seeking some more ability to control their own fates. And I think this is an interesting avenue of the Charter cities movement is around this kind of more traditional local groups that are pushing for more reforms or more powers over their areas.

One other things that; I’m from Vancouver So, I’ve been following this. I guess, developments around this section of Vancouver that’s reserved, a first nation’s reserve, it’s called the Squamish nation. And they own some very, the reserves on some very prime real estate within Vancouver, and just as other in thriving cities elsewhere in Vancouver, real estate prices are astronomically high. And so, what this Squamish nation decided to do was partner itself with an urban developer and say, hey, instead of letting this very pricy and scarce, urban land lay vacant, and just dedicating it to a park or something, let’s build some skyscrapers. Let’s build some housing and apartments for Vancouverites. We have an equity stake in this development. We partner with this urban developer that they bring in the technical expertise and the financing to get the project built. The urban developer benefits, we benefit as the Squamish nation, and each of our members can benefit and was voted positively, overwhelmingly by the Squamish nation. And now, this indigenous group is going to benefit immensely from an urban development project. It’s also going to provide a lot of housing that’s very sorely needed in the city of Vancouver.

So, there’s win-win situations. And I think the model of Charter cities can span the gamut between these helpful models that indigenous groups can like as they want more devolved authority, all the way to more libertarian like sea steading models or something like this have in the past.

Gene Tunny  24:10

I remember listening to an episode of, I think it was Ross Roberts econ talk show about see steady, it just sounded like something that couldn’t work. I couldn’t see how that would be feasible. You just have to give up too much of your lifestyle. I mean, like I often complain about regulations where I live here in in Brisbane in Australia, but I do recognize that there are a lot of good things about living in Brisbane and I couldn’t imagine as much as I am relatively free market and I do have some sympathy for libertarian views. I couldn’t imagine going on to; I don’t know what would you go on to, an oil rig or something or you’d have to buy an island somewhere, I suppose. But I mean the amount of investment you need to get a critical massive population, don’t you? I mean, they’re all these things that you’d have to get right.

But I guess we can talk about your Charter city model in a minute and how that’s going to work and how it’s going to grow and develop.

I want to ask you about this concept of institutions. So, you’re talking about institutions and how important they are to economic development, and then they facilitate trade, and they facilitate innovation. Now, there was a great book about, I don’t know, maybe a decade or so ago, why nations fail, and that really emphasized the importance of institutions. And the problem is in some many developing economies, the ones that can’t get beyond that, per capita income of a few or a few thousand US dollars a year or So, they’re trapped because those institutions are so bad, and they’ve got kleptocrats in charge, and they’ve got marketing boards, which are extracting surplus, and you’ve got all of these really bad institutions. I mean, Reimer gave an example of regulations that mean that electricity companies won’t, they’re not covering a lot of the population. So that’s where you really want the Charter cities, is it in developing economies, particularly in Sub Saharan Africa? Is that where your focus is?

Kurtis Lockhart  26:35

Yeah, I would say that’s accurate. As an organization, CCIs vision is to empower new cities with better governance to lift 10s of millions of people out of poverty. So, we’re all about poverty alleviation. And so our focus does tend to be on those places in low and lower middle income countries, because that’s where most of the poverty lies, almost teleologically. And so that’s where we focus our efforts. And, like, I want to go into the mechanism of institutional change that sort of our theory of change, because you kind of alluded to that we’re talking about kleptocracy and marquee awards and sort of incumbents that kind of dominate the current rule set in the current system. And I think this is really important.

Some of your listeners may be familiar with, not just Why Nations Fail, which is a fantastic book on institutions, but also a book called The Rise and Decline of Nations by Mancur Olson. And he writes about this phenomenon called, The Logic of Collective action. And in essence, you get collective action problems when you have concentrated benefits and dispersed costs. So, what do I need? Let me unpack that. I’ll give an example. So, the main example given in the book and in the States is around sugar tariffs. So, you have these Florida sugar farmers that because of this sugar tariff in the States, sugar therefore, in the US is a lot higher per unit than elsewhere. That tariff puts a lot of money and profits in the pockets of these sugar farmers. Because there are a few farmers, they’re really incentivized and mobilized to go lobby their politicians to keep this sugar tariff in place and not abolish it.

On the flip side, consumers of sugar like you and me that maybe go to the store to buy a bag of sugar once every year for like a few bucks, we are maybe going to have to pay 50 cents extra because of this tariff. And while the group of consumers that are impacted by that 50 cents is huge, much larger than the number of farmers, because that impact is so small at 50 cents is so sort, of trivial. We, I mean you are not going to get all mobilized and angry and co-lobbying our politicians to abolish this tariff. That is completely the opposite for the farmer, they are going to be mobilized.

And so, you get this bad equilibrium for these rules where despite the tariff being suboptimal for society as a whole, it is continued because of this dynamic of the logic of collective action. And you can apply this example with the sugar tariffs to institutions writ large. There are incumbent political elites that are currently benefiting from the status quo institutions, right. So, they have every incentive to see the status quo institutions continued and undermine attempts to reform them, despite reforms, potentially bringing these institutions into a much better and more optimal equilibrium. And because, on the flip side, everyone maybe, has to deal in that place with those institutions, maybe as to kind of, give a bribe once every three months or so. We’re not hugely, hugely impacted in our day to day lives, or perhaps we have other worries to worry about. We are less mobilized as a group of citizenry to push for institutional change on a national level, than the small group of political elites who currently benefit from the status quo are at mobilizing to keep those subnational suboptimal institutions in place.

So, we see Charter cities as a way to, instead of attempting to pass national level reforms, where you’re going to get and threaten all of these political elites interests, and therefore those elites are going to try and stymie and undermine reforms. We see Charter cities as a way to circumvent those interests in elites by situating themselves in a delimited, small geographic space. Ideally, greenfield space where it’s sparsely populated, so you’re not bumping up against any of these incumbent elites interests, and therefore, these spaces can get a lot deeper institutional reforms than otherwise possible. And so that’s the mechanism and theory of change, and why we think Charter cities are this great policy tool to get very deep and needed institutional reforms.

Gene Tunny  31:28

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Gene Tunny  32:02

Now back to the show.

So, could you now tell us please, Kurtis, where your institute is involved in new Charter cities? Like where are we talking about? Where will these cities be? Where are they in the development cycle? What’s happening? I’d love to know.

Kurtis Lockhart  32:22

So, we are an organization CCI, we were founded in 2017. So, we’re in year five, that’s in the think-tank world, we’re still a baby. And, it does take a long time to build driving new cities. So we’re talking on the timeline of decades, not years.

We are involved in several projects. They are nascent, so I’ll go over some of them. One of them is in Lusaka, Zambia, just outside Lusaka, Zambia, it’s called Nkwashi. It’s a Charter city, a new city development that’s aimed at 100,000 residents. And its anchor tenant is anchored around a university. So, what the model is, is to have this stem University of science, technology, engineering, math, attract really bright smart Zambians to this university, train them up in STEM subjects, and then connects those graduates that STEM graduates with remote work in either Europe or the states. And that does two things. I mean, you’re going to earn more being employed by these European and American tech companies – number one.

Point number two, these graduates are also going to earn in American dollars or euros and that allows them also to hedge against the volatility of the Zambian kwacha, which is really tied to copper price, copper price fluctuations, which can be it can experience really wide swings. And so that’s the model for Nkwashi. Nkwashi attracted its first few residents; I think it’s a few years in operation, the groundwork foundations have been laid for the building of the university. There’s also a feeder school, a high school that will attempt to feed students into the university called Explore Academy; that’s I Nkwashi.

The other ones worth mentioning are a Talent city, in Nigeria. The founder of Talent city, his name is Iyinoluwa Aboyeji. He is one of the most successful Nigerian tech founders in the country. He’s co-founder of Andela and Flutterwave, two or the more successful African tech startups and unicorns. So, he wants to give back to the Nigerian tech community that’s growing really rapidly. But he sees the biggest constraint on that tech ecosystem in Nigeria as tech talent. And so, he wants to establish this space, this jurisdiction with new rules that especially allow for freedom around things like crypto and more innovative technologies, and provide very reliable digital infrastructure, and power and electricity, and all those things that you need in order to function as a tech company in the modern world. So that’s talent city.

Another one in Nigeria is called Enyimba Economic city. It’s in the south west, not on the outside of Lagos like Talent city, but in a place called Abia State, and that’s in the Delta region. And so those familiar with Nigeria know that the Delta region is sort of the oil and gas sector, oil and gas region of Nigeria. This city is aiming for 1.5 million residents, it would in phase one, be oriented around logistics and processing around the O&G sector in the Delta region. But it envisions and phase two and phase three, to expand beyond that focus on logistics and O&G processing, to having a university and a world class research hospital, because some of the social sector provisions in the south and southeast of Nigeria are just really, really lacking. And so that’s probably our biggest and most ambitious, single project.

The other, and this is the most recent project that we’re engaged with is in Malawi. And we’re really, really excited. So, we’ve just signed an MOU with the National Planning Commission in Malawi, who have spent the last three years coming up with these secondary cities plan. This plan is really and this has happening across the continent. It’s aimed to address this challenge across a lot of African countries of really rapid urbanization. As it stands right now today, Malawi, is actually among the least urbanized countries on planet Earth. It’s about 17% urbanized. But what we’re going to see in the next 30 years, 28 years to 2050 is Malawi’s urban population is going to more than triple. And so very kudos and plaudits to the National Planning Commission, they see this trend and say, okay, well, we need to get our ducks in a row, and plan for this really, really rapid urbanization in advance. So, the secondary cities plan that they’ve created, and they launched on May 31, I spoke at the launch, it lays out eight new secondary cities, and lays out the spatial development plan for those eight cities.

Malawi is a North South country. So, the cities are spread out from the north, all the way down to the south. What we are going to do as CCI, after we’ve signed this MOU, and we’re now an official implementation partner of this secondary cities plan. We’re in the process with the National Planning Commission, the Ministry of local government, the Ministry of lands, the president’s office, writing up the special jurisdiction laws that are going to apply to these eight secondary cities across Malawi.

So, this, to me is one of the most exciting projects because we have, government buying across a slew of needed ministries, including the President. There’s already been a lot of resources and thought put into this over a sustained period of time. So, you have a demonstration effect that there is that political buying. The plan is already in place for these eight secondary cities. And we’re getting in at the ground floor to shape the legal jurisdiction around those eight cities. So, this is a huge opportunity for us. And we’re really excited about what we’re seeing in Malawi.

Gene Tunny  38:56

Yeah, that’s fantastic. Are you involved in getting any of the financing or any funding from say, World bank or other donors? Do they get any funding from those organizations? You mentioned PPP, Public Private Partnerships? So, there’s an infrastructure developer, or what did you call it? An urban developer or a development company that develops it and they’ve got some deal with the government that the government will not pay them for providing infrastructure? How does that work, Kurtis?

Kurtis Lockhart  39:30

One of the roles that we will play as implementation partner is to help facilitate financing. This is one of the constraints I think most African cities and towns face is this ability to adequately finance urban expansion, right. It’s the most rapidly urbanizing place on planet Earth. In Africa, the estimate is that almost a billion people are going to move into their cities over the next 30 years. So this is a huge transformation. Yet, African towns and cities are not able to issue municipal bonds to the same level that historically, European cities and American cities were able to tap in order to fund and finance urban infrastructure.

So we see these kinds of municipal bond markets in Africa are either kind of, really nascent, or more commonly just nonexistent. So we want to help number one, come up with a de risk model of municipal bonds. And number two, help fill that financing gap by not just kind of public sector debt in the bond market, but also deifies. Like you mentioned the World Bank; the IFC is a World Bank arm that invests in privates. I know, the Millennium Challenge Corporation was also at the launch of the secondary cities plan in Malawi on May 31. And they’re involved in work in Malawi. So, they would be great partners, because they focus on infrastructure growth and institutions.

You have the municipal bonds that need to be figured out, that’s on Malawi, you have the DFIs that will be involved in financing as well. And then the hope is that once those two financial pillars are in place, that a third financial pillar will be then convinced that this is a good idea, and that’s the private sector. Typically, in these new emerging frontier markets, it’s the government that needs to get its house in order, and then the DFIs that come in ahead of the private sector, and that’s a signal to the private sector that okay, this is now a place where I can do business and start offering different financial instruments to.

Gene Tunny  41:47

Can I just clarify Kurtis DFI, do you mean Development Finance Institutions, the World Bank, Asian Development Bank, etc? Is that right?

Kurtis Lockhart  41:58

Yeah, that’s exactly right.

Gene Tunny  41:59

That’s okay. I was just wondering, because I used to work in the Treasury in Canberra, we call them IFIs. I think International Finance Institutions, or I can’t remember. I remember there was some sort of abbreviation or acronym…IFIs.

Kurtis Lockhart  42:12

IFIs is more fun than DFIs. So, I’m happy to go by if IFIs.

Gene Tunny  42:18

Right oh, yeah. Sorry, I interrupted you there. We’re talking you’re going to help sort of, sort out financing and all that. One thing I’m wondering is about the deal or the relationship with the host country? Because I mean, one of the; and you would have thought about this. I know, and this is why I’m interested in your thoughts on it. How do you constrain or tie the hands of the host country of the host government? Because I mean, one of the risks is that you have this thriving Charter city, and the economy is going gangbusters. And, everyone’s wanting to move into it. And if you’ve got lower taxes, or it’s running itself, the host country, their finance ministry, they’re going to look enviously on this little Charter city, aren’t they? And, I mean, they’ll want to get a piece of the action. So, isn’t there a risk there that they could then impose? They could ramp up taxes, they could try and, take, extract some money out of the Charter city, and that threatens the viability of it. How do you deal with that situation?

Kurtis Lockhart  43:32

You hit on what I think of as probably the biggest risks to Charter city projects. And that’s just the fact that there’s a political risk. And, the urban developer is going to enter into a public private partnership in a point in time with a particular political regime. And because these city projects are decade’s long projects, the project is going to span multiple political regimes. And so how do you as the developer know that the political regime that’s agreeing to the public private partnership today, is going to also agree to that same public private ship, public private partnership tomorrow, when that political regime has changed or altered? How do you know that there is a credible commitment? So that risk of the government’s killing the birds that laid the golden egg is ever present.

We’ve thought of this, and there are several ways that we can go about trying to mitigate that risk, that political risk of expropriation, two of the simplest, I think, are just about, again, aligning incentives. One, I think, within that public private partnership, there should be a revenue sharing agreement that’s embedded. So, every year the developer within that jurisdiction collects user fees, they collect taxes, they collect land leases, right land lease rents, from those within that jurisdiction. And I think a proportion or percentage of those funds should be remitted to the host country so that every year, the country gains something in their coffers from the success of that Charter city. Therefore, it has less of an incentive to, see that pot of money that it gains every year, destroyed.

Another way to do exactly that is by giving an equity stake in the development company, to the host country, right. So, if the urban developer succeeds immensely, as has happened in kind of Sangen, and Singapore, and Hong Kong and Dubai, and the city grows, 5, 10%, on average year on year, then the post country also reaps huge rewards from that success. So those are two pretty simple ways to align financial incentives.

Another simple way is that there are organizations that do offer political risk insurance MIGA, M-I-G-A, I forget what the acronym actually stands for, but they are the entity under the World Bank Group of organizations that offers political risk insurance. A few other things that could be attractive to help mitigate this risk is floating the development company and publicly trading the development company. So, then you have big sort of institutional investors within that host country, like pension funds, for example, invested in the success of this Charter city, and whether we like it or not sort of business elites, and political elites kind of talk with each other and influence each other. And if the political elites are threatening to expropriate the Charter city, and that’s going to have adverse consequences for the pension fund folks. They’re going to raise a stink and say, hey, don’t do that, that’s going to hit our pocketbooks, and we might not support you in the next election. And so that could also be some cover.

Another way, and I think this is this is probably really effective, is to include sort of an objective, international organization in the project. You mentioned the World Bank. So, by including the World Bank in a Charter city project, whether that’s alone, or I don’t know, if they would do equity investments in a private company, that would more be IFC, which is their private arm. But including them in the project would mean that if the political elites decide to expropriate or jeopardize or threatened interfere with that Charter cities project, and the World Bank is involved, that means they’re also jeopardizing a bunch of other loans and projects that the World Bank is investing in their country. And they’re also jeopardizing their access to concessionary loans and finance that the World Bank offers their country. So, they would not want to, ideally, they would not want to do that.

So, there’s a bunch of ways to lessen the risk, to de risk, but you cannot fully get rid of that risk of political expropriation, just because, again, unlike Romer, our model doesn’t create a new sovereign, right? These are not sovereign entities, they are subject to the constitution, and criminal law and international treaties of the host country. And so that’s sort of an ever-present list. But again, I just listed off a bunch of ways you can help de risk and mitigate that risk such that it’s, it’s less, much less likely to occur.

Gene Tunny  49:01

I just wanted to ask, those examples you gave of how you can de-risk. Have they been any of those been applied? Or is that just your ideas of how you can de-risk?

Kurtis Lockhart  49:12

I know revenue sharing agreements are part of it. And I know for example, Enyimba Economic city, which I mentioned in Nigeria, both the state government, located in Abia state, as well as the federal government in Nigeria, have equity stakes in the Enyimba development company. And so that risk mitigation technique has been implemented there. There’s also a revenue sharing agreement embedded in the PPP.

When it comes to others that I recommended; it’s not a Charter cities project, but it was a pipeline project in Cameroon. And it was, oil was discovered in Cameroon and Exxon Mobil at the time. I think this is the late 90s or the early 2000s. Exxon Mobil saw an opportunity there to operate in the country. But there had been some protests in the past about the oil sector. So, ExxonMobil was worried about, engaging in all this upfront investment and investing all this capital only to have these protests breakout and then to have to, leave the country. So, they wanted reassurances, they wanted a credible commitment on the part of Cameroon and the Cameroonian government, that that wouldn’t happen. And that also the sort of funds, the revenues derived from the pipeline project would not be expropriated by the Cameroonian government. So, it is what both the Cameroonian government in negotiation with ExxonMobil agreed to, was there would be this escrow fund, that the revenues flowing from the pipeline project went to, and there would be a council approving disbursements from that escrow fund. And some of the spots on that council would be appointed by Exxon, some of the spots on that council would be appointed by Cameroon, but that basically, the tie breaking vote on that council would be the World Bank. It was seen as sort of legitimate from both sides from both Exxon and in the Cameroonian government. Any sort of dispute or kind of corruption or revenue issue was sort of mitigated by having the World Bank involved. Again, for this reason that I brought up earlier that the World Bank is involved in a lot of these low and lower middle-income countries in terms of a bunch of infrastructure projects, or health projects, or education projects, and gives loans of various sizes and numbers to a bunch of really important political projects across the country. If they’re involved, the host government is much less likely to interfere with and expropriate the project than otherwise would be the case. So, I use that example, as kind of illustrative of that, of that power of that risk mitigation technique.

Gene Tunny  52:15

Right. Now, I do want to just ask about special economic zones. This idea of a Charter city, this is broader than a Special Economic Zone, S-E-Z or SEZ because you’ve got people living there, haven’t you? You want to actually establish a city? It’s not just a sort of an export processing zone or whatever it says is, is that right?

Kurtis Lockhart  52:40

Yeah. So, there are a few main differences between a special economic zone and a Charter city. They’re kind of analogous in that both are delimited jurisdictions with different rules, right. But there are a few main differences that we think make Charter cities much more impactful than SEZs. One is just size, right? So Charter cities are cities scale, SEZs are usually much smaller and more narrow. And that just affects how many people and how many businesses can agglomerate within a particular area. Both you and I, being economics nerds, we know the importance of agglomeration economies, and this is why cities are fantastic, because of all these agglomeration economies. So, that’s number one is size.

Number two is SEZs tend to be focused on a single or one or two different sectors or industries. So, you have textile or manufacturing, or tech hubs, those types of zones that have one sector that they really want to focus on. Whereas, Charter cities are mixed use and multisector. They’re cities, right.  There’s not just an industrial component, there’s also a commercial component, and very importantly, residential component.

A lot of zones and industrial parks don’t have people living there, right? And again, that impacts this urban agglomeration potential, and we really, really want conglomeration economies to take off. So, the mixed use so multisector and the residential component are super key differentiator.

The third difference is around governance and the rule set. SEZ legislation, when it’s passed, is sort of, you could say setting stone; my whole thing is humility. So, we’re not going to get the rule set exactly perfectly right at the beginning of these things. And the zone operator or administrator is going to figure out that, okay, hey, we didn’t get this law that we wrote, five years ago, completely right. There are a few clauses that are causing us a lot of problems that we need to change pretty quickly, otherwise, these businesses aren’t going to like it. When that happens with SEZs, they have to go to higher tiers of government or Parliament even and get Parliament to pass an amendment or pass a new SEZ law. As you can imagine, that takes a lot of time and slows the reform process down immensely. And, usually the reform doesn’t even happen at all. And so that hurts business dynamism and the ultimate success of those zones. Whereas, Charter cities, we devolve that ability to change the rules over time, down to the city administrator and the city operator. And so instead of having to do that slow process of every time they need to change, they have to go up to higher tiers of government, they can make those changes really quick on the fly as needed within the Charter city. So, those are the four main differences.

Gene Tunny  55:44

Good one. Okay. Just finally, I’ll try and sneak this in. You’re doing a PhD at Oxford. Are you nearly finished? And is it on Charter cities?

Kurtis Lockhart  55:51

Yes, I have a year left. I mean, I’m knocking on wood right now. I am doing a Doctorate in Political Science at Oxford. It’s focused on political decentralization. So, a couple of the articles will be around New City developments and Charter cities, and the potential of these for economic growth and prosperity around the globe. So, that work really aligns with the work that CCI is dedicated to.

Gene Tunny  56:18

Brilliant. Okay, Kurtis has been fabulous. I’ve really enjoyed and I’ve been blown away learning about what you’re doing. And the sheer potential of Charter cities is something that excites me. So terrific work, I’ll put links to your institute and to your social media in the show notes. I really enjoyed the conversation. If there’s anything you want to say to wrap up, please do otherwise. Yeah. I’ve really enjoyed it. And thanks so much.

Kurtis Lockhart  56:50

Yeah, thanks so much, Jean. I will just say if people are hearing this, and they want to learn more and get involved in the Charter cities movement, we are starting and has started a coalition this year called the next 50 Cities Coalition. So, it’s really easy to sign up, you can sign up as an organization, or even an individual, and you’ll get notifications of upcoming events and conferences, you’ll get newsletters and all that stuff. So, I’d encourage you to go to our website, Chartercitiesinstitute.org. And it’s backslash nxt50. And you can join the movement that way.

Gene Tunny  57:26

Great. I’ll have to look into that. I mean, one of the things I found fascinating about this conversation, you talked about the indigenous people in Canada, we’ve got indigenous people in Australia. I don’t know whether any of the indigenous leaders in this country have been thinking about Charter cities, but that’s something I might follow up. Yeah, absolutely fascinating. Kurtis Lockhart from Charter cities institute. Thanks so much for the conversation, I really enjoyed it.

Kurtis Lockhart  57:51

Yeah. Thanks so much, Gene. This has been fun, appreciate it.

Gene Tunny 

Okay, ciao.

Gene Tunny  57:56

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

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