Renowned US financial advisor, author, and podcaster David Bahnsen argues the best way to defend human flourishing against dangerous economic thinking is to relearn time-tested economic truths. David talks about his new book There’s No Free Lunch: 250 Economic Truths with show host Gene Tunny. David and Gene also talk about David’s previous books on the crisis of responsibility afflicting our societies, Elizabeth Warren’s economic policies, and investing in a post-crisis world.
David L. Bahnsen is Founder, Managing Partner, and Chief Investment Officer of the Bahnsen Group. He oversees the management of over $3.5 billion in client assets. Prior to launching The Bahnsen Group, he spent eight years as a Managing Director at Morgan Stanley and six years as a Vice President at UBS. He is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times (2016-2021).
David’ Bahnsen’s 2021 book There’s No Free Lunch: 250 Economic Truths.
Transcript of EP132 – The virtues of the free market w/ David Bahnsen
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.
David Bahnsen 00:04
There’s no question that whether one accepts my religious assumptions or not, that the free market properly aligns incentives better than the Marxist or central planning, collectivist vision for society that strips away incentives and does not provide the framework for best serving a customer by meeting human needs.
Gene Tunny 00:34
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 132, featuring a conversation with economist and investment manager, David Bahnsen. about his new book, There’s No Free Lunch: 250 Economic Truths. We also talk about his previous books on Elizabeth Warren, his approach to investing, and what he calls the crisis of responsibility.
David is the founder, managing partner, and chief investment officer of the Bahnsen Group, a US national private wealth management firm, with offices in Newport Beach, New York City, Nashville, and Minneapolis, managing over $3.5 billion in client assets. David is consistently named as one of the top financial advisors in America by Barron’s, Forbes, and the Financial Times. He is a frequent guest on Fox News, Fox Business, CNBC and Bloomberg. And he’s a regular contributor to National Review.
Please check out the show notes for links to materials mentioned in this episode, and for any clarifications. One that I know that I need to make relates to the statesman Edmund Burke, who I shifted forward in time by a century. Silly me. You can find the show notes via your podcasting app. And please check out our website, Economics Explored, where I’ll post a transcript of the conversation as soon as I can. That’s economicsexplored.com. If you sign up as an email subscriber, you can download my recent e-book, Top 10 Insights from Economics. Please consider getting on the mailing list. If you have any questions, comments or suggestions, please either record them in a message via SpeakPipe – see the link in the show notes – or email me via contact@economicsexplored.com. Righto, now for my conversation with David Bahnsen, Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. David Bahnsen, founder, managing partner and chief investment officer of the Bahnsen Group, welcome to the programme.
David Bahnsen 02:53
Well, good to be with you. Thanks for having me.
Gene Tunny 02:56
Oh, it’s a pleasure, David. I’ve come across your work recently. A mutual acquaintance of ours, Darren Brady Nelson, mentioned you to me and I’ve been reading your great books, There’s No Free Lunch: 250 Economic Truths. You had a book on Elizabeth Warren, the Democratic presidential candidate, how her presidency would destroy the middle class and the American dream. And you’ve got a couple of others. I’m really keen to chat with you about your views on economics. You’re someone who has had a very successful career as an investor. And you credit that partly to your understanding of economics, so yeah, really keen to understand your views on economics as someone who’s really proven the relevance and the importance of economics. First, I’d like to ask, with your book, There’s No Free Lunch: 250 Economic Truths, what was your guiding principle for selecting those economic truths? How did you go about it? And what do you think of the major truths, David?
David Bahnsen 04:01
Well, I tried to divide the book up compartmentally by categories, and I start with the belief that economics is about human beings, and not fundamentally a mathematical science or a political science. And so out of the social realities of mankind, if we’re to understand economics out of that truth, then it forces us to discover or inquire what we believe about mankind. And what we know about the human person can then inform us more about economics, if we believe in the premise that economics is the study of human action.
I believe distinctly anthropological truths about mankind, about how he was made, about the characteristics he was made with. And those beliefs serve as a kind of starting point to what I believe about what we consider economics. And so you then go on to certain a priori assumptions that there is scarcity in the world. And economics becomes the study of how humans act around the allocation of scarcity, their scarce resources. And so I’m very convinced that most people are trying to get their economic opinions out of their political beliefs, instead of getting a lot of their political beliefs out of their economic worldview, and particularly in certain policy assumptions. And so the policy beliefs and biases and so forth, I think need to be informed by a coherent economic worldview. And that’s what I’m trying to provide in the book.
And for a lot of people, I think that the book will serve as a reinforcement of things that they instinctively believe, but there may be an impulse to some of these free market assumptions, but not necessarily rooted in a deeper belief system. And that’s what I’m trying to point people back to is those foundational beliefs that can help inform a comprehensive understanding of economics.
Gene Tunny 06:32
Yeah. Look, I found that fascinating. That was something I really found valuable about your book. I mean, you reference great thinkers in economics, such as Adam Smith and Hayek, and Mises. What I really liked was your commentary as well. You’ve got great quotes. And then you’ve also got your commentary. And one of the things you wrote, I found very profound. I want to make sure I fully understand it, because I’m not a deeply religious person. I think I know what you’re saying here. But I want to make sure I understand it. You wrote that, “Our case is not that mankind’s fall is suspended when he transacts in the marketplace, it is that the marketplace best tames are fallen nature. The fallen nature, is this what you’re talking about with understanding where we’re coming from, people fundamentally? But is that a religious concept or is it a psychological concept? Could you explain what you’re driving at in that passage, please, David?
David Bahnsen 07:35
Yeah, it’s entirely religious. It is entirely theological. And yet, I’m perfectly content for someone to interpret it only psychologically. But the underlying teleological meaning of it, the purpose is rooted in a belief that mankind does not come in the world perfect. Mankind comes in a world where they fall in moral nature. And this is, to me, the fundamental divide between most political divisions, philosophical divisions, and I also believe economic, is if we believe that mankind is fundamentally good, and then can be corrupted by injustices amongst race or class or gender, things like that, or those who believe that mankind comes in what we in the Christian tradition refer to as the doctrine of original sin, and that we want institutions, family, communities, church, synagogue, the marketplace, to provide a sort of moral formation, and that mankind cannot become perfected. The great socialist and utopian vision is rooted in a belief that mankind can become perfectible. And this is against my own religious assumption.
But the economic relevance to it is that we are trying to solve for a system of social organisation that recognises certain assumptions. And one of my assumptions is not only the imperfectibility of mankind, but also that mankind is created in a certain way, and that that creation that I am asserting involves mankind’s rationality, their reasonability, that there is both a physical, material, and a spiritual dimension. And so those things end up having significant economic implications, because I reject the belief that our need in forming economic policy is to merely meet the material needs of mankind, to give them some sort of water and food and sustenance and call it a day. I believe that mankind has that material dimension, and that to ignore it is wrong. But I believe that they also have a dignity, that mankind is superior to the animal kingdom, intellectually, morally, their use of rational faculties, their use of self-interest, and their capacity for problem solving. But fundamentally, as moral beings, mankind is capable of doing right or wrong and is accountable for doing right or wrong. This ends up inviting non-material dimension into economic wellbeing.
And so because I believe work is the verb of economics, is a line I use at the end of the book, I reject the Marxian notion that work is dehumanising. I think work is dignifying. But why do I care if mankind is dignified or not, let alone if work as an instrument for doing such? Well, I care because I view mankind as created in the image of God. And that’s a religious belief. That’s a theological belief. And if I didn’t believe that, I would believe something different about economics. And so my rejection of a Darwinian view of economics, my embrace of a Burkean notion that there is a moral dimension to how we cooperate in society, these things are rooted in some of these worldview assumptions that I don’t know how I can escape their religious nature.
Gene Tunny 11:40
Okay. Yeah. Burke, you mean Edmund Burke, the Anglo Irish statesman from the late 19th century?
David Bahnsen 11:50
That’s right. I guess sometimes doing American interviews I take for granted, because I consider Burke America’s foremost political philosopher, but of course globally, his name and reputation would maybe have a different context. But Burke, really known, much like Adam Smith as the Scotsman was a sort of religious or moral philosopher with great economic relevance in classical economics, and Burke was a political philosopher, but again, who brought a sort of moral dimension to his work.
Gene Tunny 12:25
Yes. I’ve been reading this great book, The Great Debate by Yuval Levine or Levin. I’m trying to remember. I might put a link in the show notes as well as links to your books, because Burke, he was involved in that great debate about what’s the goal of politic or what’s the best way to run society, and you don’t want to go and radically transform things, because there might be a reason that your institutions are the way they are in the first place. And so you have to be very careful with meddling.
I just want to chat more about this fallen nature idea. Is this related to the concept of self-interest? The great thing about the market is that it takes advantage of people’s self-interest. There’s a famous quote of Adam Smith, about how we rely on the baker for our meals and on the candlestick maker for the candles, not out of any social concern they have, but out of their concern for their self-interest. I think I’ve butchered that quite. But that’s the basic idea. Is that the idea, so it’s taking advantage of that and getting the incentives right? And if you’re in, say, what you had in the Soviet Union, then all those incentives are the wrong way. To get something for yourself, you don’t necessarily have to create value for another person. And that’s the great thing about the market. It’s that mutual exchange, that you’re creating value for the other person, for them to pay you. That’s roughly on the right track, is it?
David Bahnsen 14:12
Well, I think those things are all very consistent with the assumption, but one of the things that I’m doing from the worldview I’m speaking, which is different than the way Ayn Rand as an objectivist would approach it, and in fact, many secular economists. Secular economists would describe it descriptively, that descriptively one can do better for themselves by serving their customer better. And Adam Smith’s allusion to reference to that self-interest is what they’re referencing. And it’s almost indisputable. It’s the way the world works.
But what I’m adding is the prescriptive, not merely the descriptive, not just that you will do better by serving your neighbour better, but that you ought to serve your neighbour better, and that in so doing, we cultivate more trust in society. Commercial transactions are entirely dependent on trust. And so they’re not merely in micro transactions like the brewer or baker a candlestick maker with a customer. But on a macro level, the greater sense of moral sentiment in the society, which, of course, was Adam Smith’s other book, we couple these two coexisting realities of human nature together, which is mankind rationally working in their own self-interest, providing for their family, and at the same time, their need and requirement to have that sort of moral capacity of service. And so I think that Burke referred to this as enlightened self-interest. And I believe it is the ideal for what I’m after in a framework of economics.
There’s no question that, whether one accepts my religious assumptions or not, that the free market properly aligns incentives better than the Marxist or central planning, collectivist vision for society that strips away incentives, and does not provide the framework for best serving a customer by meeting human needs, providing goods or services that we believe people care about. But I do believe one can make an argument – and I think that this is the straw man that a lot of socialists today are arguing against – that if you don’t care about the moral wellbeing of society in your economic worldview, and that all you’re saying is that pragmatically your wellbeing will be best served the more you serve your neighbour, all we have to do is find a case where that isn’t true, and it would be okay. And most certainly, it sometimes isn’t true, because as long as you can get away with it, cooking the books can help you and hurt your neighbour. And again, you have to be able to get away with it. But a lot of people can get away with fraud, a lot of people can get away with theft.
This Darwinian view that is more driven by the best outcome for oneself, and only relies on serving others as a mere pragmatic supplemental convenience to the process, I think it falls apart in reality, because we apart from that framework that still honours service to others, then one loses the kind of holistic nature that has been the traditional case for free markets. And I would argue more or less that the outcome, that when we look at the great fruits of poverty alleviation and human flourishing that’s come out of free markets, we have never been in need of divorcing that from a moral framework. In fact, it requires a moral and a legal framework, rule of law, enforcement or private property. These are all concepts that have roots in the very 10 commandments of themselves. Coveting what someone else has is sort of the heart of Marxism. And believing in protection of private property is the heart of what we call capitalism. And yet those are moral commandments. Thou shalt not steal, Thou shalt not covet.
I think that that synthesis between the moral nature of markets and the aspirational vision of society and the self-interest that Adam Smith talks about are entirely consistent, and in fact, not only consistent, but they’re optimised. They work best in conjunction with one another. They each work with one hand tied behind their back apart from the other.
Gene Tunny 19:22
That’s great, David. It’s given me a lot to think about, because maybe I’ve approached economics too much as a technical field, and I need to think more about the philosophy. I really value your thoughts in helping me think more philosophically about it, so that’s great. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 19:55
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Gene Tunny 20:24
Now back to the show. I might move on to your book about Elizabeth Warren. I guess this follows on from some of the points you’ve made. Now, you’ve written that her presidency would destroy the middle class and the American dream. She’s not president, but there’s some of those ideas, they’re out there, and they could be picked up in the future, whether by maybe AOC one day if she ends up very senior position, in a position of power.
One thing that I’m wondering is, how do you think about the balance between market and state? There needs to be some role for government. And there are countries that seem to be doing relatively well with a more interventionist state, such as the Scandinavian countries, Australia to an extent. One major difference between Australia and the United States is that we have what you would call a single-payer health care system. And that is reasonably popular. Well, I think it’s very popular. No opposition party, nowadays they would no longer campaign against it. Once upon a time they did. Political parties would campaign against it. It’s widely accepted. How do you make that balance? And what do you think is so bad about policies just to inject a little bit of what you might call socialism into the system to try and make the political system more stable? How do you think about that?
David Bahnsen 22:02
I haven’t seen an example yet of where a little bit of socialism brings more stability to the political system. I don’t recall there being anything in my Elizabeth Warren book that I would take back or rewrite or don’t still believe. But I confess, it strikes me as a little less relevant because of the implosion of her candidacy, as it pertains to her. But as you say, people like AOC, Bernie Sanders, they’re meeting hard left figures in many other countries besides my own. She just happened to be a failed political candidate that I wrote a book about that became obsolete very quickly, because her candidacy imploded. But there does still seem to be some persistence in the idea of a Green New Deal, a wealth tax, forgiveness of student debt for all. And to the extent these ideas persist in the United States, or in other countries, they remain horrifically bad ideas, even if they’re not connected to the name of Elizabeth Warren anymore.
Now, with that said, when you ask why not just a little bit of socialism to come in and kind of maybe temper things a bit, we hear that expression a lot, to sort of smooth out the rough edges of capitalism. And I love the analogy, because it always sort of implies that capitalism is like a bowl of soup, and it can get a little bit too hot, and if you just add a little cool water on top – and that cool water, in this case, is the loving, all-competent arm of the federal government – then we can cool down the soup a little bit, still get a good warm bowl, and enjoy it and have it feed our appetite, but not scalding hot, burn our mouths. And of course, frameworks of thought and of governance and political and economic philosophies don’t work like a bowl of soup.
I am a Hayekian to the core. Friedrich Hayek told us why that can’t work, that the central planner, whether they’re coming in to do a lot, or whatever it is, a little – I would, by the way, debate the idea that they are ever content to do a little. But even apart from the very reality of slippery slope, there is the knowledge problem. And there is the incentive problem.
The reason why I cannot ask Washington DC to come in and smooth out transactions between me and another economic actor that would freely transact with me in business is that the government has no chance of having the knowledge and the time and place circumstances necessary to be a party in a transaction between me and another person. And the reason why I can’t ask the government to come in and smooth out the rough edges of two free human beings voluntarily transacting with one another is because the government can’t possibly have the incentives. They don’t have skin in the game. They don’t hurt economically if it goes poorly, and they don’t benefit economically if it goes well. It’s none of their damn business.
The government’s intervention on a macro level into the affairs of society must always be limited to its role in protection of private property, settlement of civil disputes, this very rare but nevertheless important function of a civil magistrate. The Warrens and Sanderses and AOCs of the world would have the government take on a role of a central planner. And the Keynesian vision of economics is that the government can play a role on a macro basis in smoothing the difficulties of a business cycle. But of course, my belief is that such interventions not only likely don’t solve the problem they seek to solve, but they inevitably create two new problems. And so the reason for rejection of that vision of government’s role in economic affairs is that I believe that government lacks the knowledge to transact or to have planning jurisdiction over transactions in a free economy.
Gene Tunny 26:36
Fair point. And, yeah, the whole slippery slope thing, potentially there is there is some sort of slippery slope, because the government just keeps ever expanding. And one of the problems we’ve got here in Australia now is that the government’s committed to having what we call a national disability insurance scheme, which is essentially trying to provide a level of care for disabled people, but the definition of that’s expanded a lot and the costs are blowing out. It’s a big challenge. You still got a little bit more time, David, or you got to –
David Bahnsen 27:08
Yeah, I’m okay. Go ahead.
Gene Tunny 27:09
Good one. Excellent. I’d like to ask, you’re also a host of a podcast, Radio Free California, is that right?
David Bahnsen 27:19
That’s one of my podcasts, yes.
Gene Tunny 27:23
Oh, you’ve got another. Great.
David Bahnsen 27:25
Capital Record is my podcast focused on free market, economics, defence of free enterprise, defence of capital markets. And I host. It’s a National Review podcast called Capitol Record. But Radio Free California is a more political podcast that focuses on the dysfunctions in the great state of California where I was born and raised and have lived most of the last 48 years.
Gene Tunny 27:53
Yeah. Could I ask, what’s your take on, just how bad are things in California for business at the moment? I’ve chatted about this with Dan Mitchell. And Dan pointed out just how many people and businesses are leaving. Is this something that you’ve thought about, or are you concerned about the policy settings for business in California?
David Bahnsen 28:16
Of course I’m concerned. Anybody who cares about the preservation of one of the largest economic bodies in the world, and obviously the largest economic body within the United States, should be concerned. I hear a lot from the political and economic left that they care about the middle class. Yet it sure seems that they are perfectly happy with a policy framework that hollows out the middle class. And a state like California is case in point, where very wealthy people can live in California quite comfortably, and very poor people might be fans of the welfare state or what have you, but there is a kind of middle ground by which policies, school systems, crime becomes very, very unpleasant. And California seems to me to be ground zero for this laboratory of America, what we call blue state policies. And that’s what our efforts are primarily focused on is exposing the folly of blue state policies. And then as Dan Mitchell and others have well documented, it is leading to an incredible migration of mostly middle-class people out of the state of California to go to more business-friendly environments. And I think it’s a tragedy.
Gene Tunny 29:53
One of your other books is Crisis of Responsibility: Our Cultural Addiction to Blame and How You Can Cure It. Now, what I found great about that book is you had a really interesting take on the financial crisis. I knew the basic facts, but I hadn’t thought about it in that way. But you argued that there was a failure of moral responsibility in a way, when people were simply walking away from houses where they had negative equity, which I found a really interesting take. And am I getting that right? Am I remembering that correctly?
David Bahnsen 30:39
You’re absolutely getting that right. And that, I would argue, was one of many moral failings in the financial crisis. But it was conveniently the one that was entirely ignored in the narrative. Ultimately, the desire for many of us on the right to put blame with the government, with Fannie Mae, Freddie Mac, the Federal Reserve, we were willing to look past Main Street’s faults, and the desire of those on the left to blame greed of Wall Street, of the banks, various familiar bad guys in their societal narrative, they were willing to look past the iniquities of Main Street. And I think it was entirely absurd set of stories told us about the financial crisis that chose to ignore Main Street’s culpability. And you reference those with negative equity. There’s simply no question that in the end, the pile on of foreclosures, and what really represented this purging of bad investment, that then had the domino effect into the overly levered credit and financial system. What the initial dominoes were to tipping that over-levered credit system over was the fact that people stopped making house payments when they were upside down on their houses.
And so although I would argue the very first act of moral culpability that led to the crisis was people’s Keeping Up with the Joneses mentality, and irresponsibility, and taking on a commitment they couldn’t keep, the lack of necessary protective equity in their home, dishonesty about their own income documentation. There are a whole lot of things that went into this game that was being played, that many people played well for a lot of years, until the music stopped playing. And when the music stopped playing, this house of cards fell.
And my book was attempting to say, I know what Wall Street did wrong, and I know what the government did wrong. But it is simply untrue that Main Street did nothing wrong, and in fact, that Main Street is a victim of this whole thing. That’s the way the story was being told. And I feel like five years later, my book has done a good job in telling the story that needed to be told about the financial crisis.
Gene Tunny 33:25
What do you see as the solution? Is there a solution? I think you’re right, in that there is a problem that that people are reluctant to take responsibility. I think you’ve you have diagnosed a problem. How do we solve this, David? Is there a solution to it?
David Bahnsen 33:49
Well, I think that the book goes into a whole lot of ideas. If I remember correctly, 10 of them are written to the individual person and sort of micro suggestions for a reaffirmation of personal responsibility, and 10 or macro, more of a policy level. I have a critique of the college student loan system, a critique of how we go about thinking about housing in our society.
Fundamentally, if you’ll allow me to go back to the kind of prior conversation about the religious and moral framework of a society, if people can get away with irresponsibly borrowing to buy a home and then walking away unscathed, if people get away with it without any moral compass, I don’t know why they wouldn’t keep doing it. But my belief is that fundamentally, we need a kind of restoration of basic cultural norms. This was really the whole point of the book, that people should be ashamed of what they did, but it isn’t just that they did it. It’s that they were proud of it, that other people congratulated them. Look how smart you are. You pulled one over on your bank. They could brag about it on Friday night with their friends, rather than being ashamed of the fact that they failed in their responsibility.
Paying back debts that one owes is the hallmark of a civilised person. And I think that we desperately need to restore the kind of traditional value system that would never tolerate someone being a degenerate and being so incapable of basic… I’m not referring to people in extreme hardship. We’ve always had that. We always want ways to help those who have genuinely run into very difficult times. But the notion of just simply being able to run away willy-nilly from things, heads, I win, tails, I don’t lose, this is no way to manage a society.
Gene Tunny 36:04
That’s another great example of a book where you’re thinking… Maybe economists wouldn’t normally think about these issues. I’d recommend that as well. Also, you’ve got a book on the case for dividend growth, and this relates to your investing. And I’ve just started that, but the way I’m interpreting it is you’re emphasising look for stocks with good dividends and don’t necessarily buy into all of the fantasies about you’ve got these stocks which will just grow ridiculous amounts in the future, the big tech stocks. I take it that that’s the general view in that book. Is that fair, David? Is that your philosophy in investing is looking for good earning stocks, good earning companies?
David Bahnsen 36:59
Well, dividends are simply what one is doing with good earnings. There are plenty of companies that don’t pay dividends that have wonderful earnings. But our belief is that not only do you want really good earnings, you want confirmation of the earnings, the legitimacy of them and the repeatability of them, and the growth of them, that is validated through the dividend payment to the shareholder. The dividend payment becomes a mechanical benefit. You’re monetizing your investment risk as you go. If you’re reinvesting those dividends, you’re constantly averaging and compounding your return. If you’re withdrawing the dividend for income, you’re satisfying a cash flow need, so that there are mechanical benefits to dividends. But then fundamentally, they represent proof of the profits and earnings of the company, and a vote from management in their own confidence about the sustainability of those earnings. And so dividends are just as much a benefit as they are a signal. And we want both and. That’s our view of dividend growth investing from a risk-adjusted standpoint, producing a much smoother result for investors over time.
Gene Tunny 38:22
Good stuff. Finally, David, I’d like to ask you about Alex P. Keaton, who you’ve identified as a role model. I remember watching Family Ties in the ‘80s here in Australia, and Alex was certainly someone who was very notable. What was it that you found inspirational, or I guess what did you learn from Alex? What are your thoughts on –
David Bahnsen 38:58
Just as a very young kid, I… Here there was this contrarian character on a sitcom on American television that was focused on ambition, on goals, on patriotism. He had a certain love of America, a love of self-determination. And so there was a lot of comedy associated with it and lightheartedness. And yet, at the same time, he was a character who just sort of had a personality that was similar to my own quirky personality as a young person. It’s many years ago now. It’s true, Alex P. Keaton and that character on Family Ties was a big part of my childhood.
Gene Tunny 39:53
Okay. Very good. Yeah. I think there’s a photo of you on your website as a young lad. You’re dressed as Alex P. Keaton or dressed in that –
David Bahnsen 40:04
This is true. I think I was probably nine or 10 years old. That’s correct.
Gene Tunny 40:09
Very good. Okay, excellent. David, this has been terrific. Are there any final points that you’d like to make, any thoughts on your book? Anything that you think it’d be important for us to take out of it?
David Bahnsen 40:24
I appreciate the time. I appreciate your thoughtful questions. There’s No Free Lunch: 250 Economic Truths, and it’s really intended to give people a little something to think about around the different major categories of economic thought.
Gene Tunny 40:38
Okay, thanks heaps, David, I’ll put links to your website and your books in the show notes. David Bahnsen, managing partner of the Bahnsen Group. Thanks so much for your time. Really appreciate it.
David Bahnsen 40:52
Thanks for having me, Gene. Really enjoyed it.
Gene Tunny 40:55 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Credits
Big thanks to EP132 guest David Bahnsen and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
The British-French supersonic airplane Concorde soared through the skies at Mach 2 in the years 1976 to 2003. Its history illuminates several important economic and business lessons. Is a supersonic airplane simply uneconomic or will commercial passengers fly supersonic again? In Economics Explored episode 131, show host Gene Tunny and his fellow economist Arturo Espinoza Bocangel discuss.
Transcript of EP131 – Concorde’s economic lesson: A closer look
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.
Arturo Espinoza Bocangel 00:04
In probably France and Britain, they wanted to show to the war that they are able to produce this kind of supersonic airlines.
Gene Tunny 00:16
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 131, a closer look at the Concorde. And joining me to chat about Concorde is Arturo Espinoza, research assistant at Adept Economics joining me for the first time. Arturo, great to have you on the show.
Arturo Espinoza Bocangel 00:50
How are you? I’m really glad to be here with you.
Gene Tunny 00:53
Excellent. Yes, Arturo, it’s good to have you on. Arturo, you’re an economist too. You’re helping me out with economic research on various projects. And you’ve previously worked in the trade ministry in Peru and you’ve got a master’s from University of Queensland in economics and you’ve also got a degree from the Catholic University in Lima, haven’t you?
Arturo Espinoza Bocangel 01:19
Yes, that’s right.
Gene Tunny 01:21
Excellent. Excellent. Yes, you’re well qualified to chat about economics, so pleased to have you on. Excellent. Why I’m looking at Concorde, Arturo, is because in a recent episode I did with Tim Hughes, who I occasionally chat with on the show – Tim’s not an economist, he’s providing the man on the street view of things – we talked about my top 10 insights of economics. And one of those insights was about sunk costs. One of the key lessons from economics is to ignore sunk costs. Bygones are bygones.
And in illustrating the sunk cost, what’s often called the sunk cost fallacy – the fact that people too often don’t ignore sunk costs, they throw good money after bad – an example that’s often given is Concorde, because it was colossally expensive to develop. And the British and French just kept throwing money at it, even after it looked like it wasn’t going to be a commercial proposition. Often, they talk about the Concorde fallacy.
Now, I mentioned this in the show, and Tim and I had a bit of a chat about it. And I said, look, I think Concorde was always going to be a difficult proposition. It’s probably something they shouldn’t have invested in just because of the economics of it. And then, in the conversation, it became clear that I probably needed to do a bit more research on what the underlying economics of Concorde were.
One of my listeners, so Todd, he wrote in and he sent me a passage from an article. Based on that it looks like the there are multiple issues affecting Concorde and the economics and viability of Concorde. This passage he sent me is, “Aviation regulations mandated that Concordes would have to fly more slowly overland to reduce sound disturbances over the ground. This hit French Concordes particularly hard after the post-9/11 dip in air travel. The already struggling birds were even less in demand and therefore less profitable.”
Okay, so I thought we could have a chat about Concorde and just all of the issues involved, because there are multiple issues. There’s regulations, there’s the actual operating costs, because of the cost of oil. There was the fact that there was the Air France crash in 2000 at Charles de Gaulle, where 113 people died. There are multiple issues with Concorde. Are you happy to get underway on the Concorde, Arturo?
Arturo Espinoza Bocangel 04:17
Of course, Gene. Given all those facts behind the Concorde operational activities, I think there is an important issue, which is an externality. When we talk about economics about externalities is when one activity transfer those calls to third parties. Those third parties, they are not involved in that activity. They must assume that cost. Definitely, if we talk about this case of Concorde, and the most important negative externality was related to the noisy. The takeoff of Concorde, very noisy. Also when this type of supersonic flies affected possibly private properties. For example, in USA they found that some properties were affected by Concorde flights in terms of broken windows.
Gene Tunny 05:24
Seriously?
Arturo Espinoza Bocangel 05:25
Yes, so that’s why at that moment USA government banned Concorde flights in between cities or inland. That’s why at that moment Concorde flights only focused on transatlantic flights between New York, Paris, and UK. That’s why I’ve seen behind that, it was a very important limitation for potential demand of Concorde flights or Concorde airliners. Definitely that was a huge impact on potential demand for Concorde airliners.
Gene Tunny 06:14
Yeah. There are those regulations which would prevent Concorde if it were still operating. Neither Air France nor British Airways, which were the two airlines operating Concorde, they haven’t operated Concorde since 2003. But there are regulations that would prevent inter-city flights across land. And so therefore, you are restricted. They were restricted to just those transatlantic flights, so from Heathrow or Charles de Gaulle in Paris, to JFK in New York City. That really meant that it just limited the scope of those Concorde operations. I think that’s a good point.
We might chat about what Concorde is, I just want to make sure that if you’re listening and you’re unfamiliar with Concorde… I’m guessing you probably know a little bit about it, because it’s such an iconic aircraft. It’s such a beautiful design, really sleek, and the delta wing, and that nose that… It’s like a beak, isn’t it, like the beak of a bird? I think they called it a droop nose, because it can move around. Depending on what stage of the flight you are, it will either be in the standard position or it will drop down. I think when they were coming into land, they would drop it down just to improve their visibility. It’s got an interesting nose there.
As you mentioned, it’s supersonic, so it can travel faster than the speed of sound. I think it actually travelled about two times the speed of sound, so at Mach two. It’s supersonic. When I was chatting with Tim, I said, “Oh, is it hypersonic?” No, it’s not hypersonic. Tim corrected me. It was supersonic. Supersonic is faster than the speed of sound, and hypersonic is five times the speed of sound, at least. I think there are some hypersonic missiles that have been developed that I’ve seen in the news reports.
It was a joint project. It was a joint venture in a way between the British and French governments. And the name for it came from an agreement that they reached in the early 1960s, I think. A treaty was signed on 29th of November, 1962. And so what you had was, this is something that came out of the 1950s. There were British and French companies that were investigating supersonic air travel. I think the Americans were looking at it too, but the British and French, they reached an agreement whereby there would be a joint project, because there was a British company that was looking at it, the British Aircraft Corporation, and that was being funded by the British government. They were providing funds for research and development by that British aircraft corporation. And there was also a French company, which was state-owned, Sud Aviation, which later became Aerospatiale. They were looking at it too. And so the two governments got together and decided to enter this joint venture for Concorde, whereby they would jointly develop this aircraft. They’d share the development costs. They would split the production of it across Britain and France with a view to creating jobs and all that. It was a British and French government project.
I would argue that this is a good example… There’s a few economic principles which come out of the whole Concorde experience. And we talked about the sunk cost fallacy, the fact you should ignore sunk costs. One principle, or close to a principle, I would argue, is that governments need to be very careful about going into business. Governments really shouldn’t be picking winners or picking projects. They should be doing the core business of government, national defence and the justice system, and arguably some assistance for health and education, rather than trying to develop a new supersonic aeroplane. When you’ve got governments making these decisions and funding R and D for this sort of thing, it’s probably more likely it’s not going to be a commercial proposition, and it’s going to be a waste of money. That would be one thing, I would argue. Do you have any thoughts on that, Arturo?
Arturo Espinoza Bocangel 11:18
Of course, and that is an interesting point. In order to see what is the real scope of the government, definitely the government should focus on other issues that are more relevant for people, instead of promoting this kind of investment that, as we have seen, was a failure in terms of economic business perspective.
Gene Tunny 11:53
Who knows, maybe if things went right and the oil price didn’t increase three or four times over what it was previously after 1973, maybe the economics of the whole project would have been better and it could have been more of a mass market proposition. I think the problem that they ended up having was that it became a real niche product. It was really only wealthy people, pop stars and CEOs of Fortune 500 companies who could actually afford to fly on Concorde, as we can talk about later. I think tickets ended up being about, in today’s dollars, I think over 10,000 US dollars, really. Expensive tickets. You really have to have deep pockets. You have to be someone who really doesn’t care how much they’re spending or it’s just absolutely time critical that you need to get from New York to London or the other way or Paris to New York, you need to get there in three hours or so, because it could fly incredibly quickly.
Now, I think the figures I’ve seen is that, so this thing’s flying at basically two times the speed of sound, whereas a Boeing 747 flies at .84 times the speed of sound. It’s not supersonic. The Boeing 747 can fly about 900 kilometres an hour, whereas the Concorde could fly at 2,172 kilometres an hour. Just incredible. And at 60,000 feet too. Wouldn’t that be amazing to have been up that high?
And so it really ended up just becoming a transport option for the rich and famous in a way. One example of that, have you have you heard the story about the Live Aid concert and Phil Collins, how he used Concorde to fly from the Live Aid concert in London at Wembley Stadium? He performed at Wembley, and then he hopped on the Concorde. He got a chopper from Wembley to Heathrow Airport and hopped on the Concorde, and then got the Concorde to JFK, and then he ended up getting –
Arturo Espinoza Bocangel 14:32
Wow, that was tornadic. Wow.
Gene Tunny 14:35
It’s a huge logistical job. Where is it?
Arturo Espinoza Bocangel 14:38
Wow.
Gene Tunny 14:39
He took a British Airways Concorde flight to New York City before taking another helicopter to Philadelphia, just so he could perform at the stadium in Philadelphia, which I think might have been JFK Stadium in Philadelphia. That was in 1985, July 1985, so the big Live Aid concert for… I think it was to raise funds to help address or alleviate the suffering of people in famine in Ethiopia, if I remember correctly. That’s one of the famous examples of the use of the Concorde.
And another example of the sort of rich and famous, there’s a photo. And I’ll put a link to the article in the show notes, if you’re interested in seeing it and some other photos of the Concorde in operation. There’s a photo of Sting, the rockstar Sting, pouring a glass of champagne for Piers Morgan, so the noted media personality, editor of various newspapers that Rupert Murdoch owned. He was on Good Morning Britain. He’s doing something in Australia at the moment. I’m not entirely sure what. He’s anti-woke or he’s trying to cancel cancel culture, if I remember correctly. Big personality. He flew on a flight that they had in, I think it was late 2001. It was the first British Airways flight that they ran with Concorde after the crash at Charles de Gaulle in 2000.
There was a terrible crash when it was taking off from Paris, in the airport in Paris, and 113 people in total, so all of the passengers on the Concorde that had 100 passengers and nine crew. Then there are four people on the ground who were killed as well. Just an awful crash. There was an issue with the Concorde that meant that they had to sort of stop flying them for a while and just check that everything was okay and do some modifications to ensure that sort of thing didn’t happen again. And so what happened after that, you had that incident, and that means that fewer people want to fly on Concorde. I think that’s really what then led to both British Airways and Air France just not running Concorde again after 2003.
Concorde was launched in early 1976, in January 1976, and the final commercial flight was in October 2003. And it looks like what happened, so according to The Economist… The Economist did a good article on this in 2003, which I’ll link to in the show notes, although it may be paywalled. It looks like in 2003, they figured out that there was this cost associated with refitting the Concorde aircraft. A study commissioned by British Airways of the case for a 17 million pound refit of the supersonic aircraft showed the viability had ended with the turn-of-the-century stock market boom at the start of 2003. Airbus, the modern incarnation of the Anglo French manufacturing partnership that created Concorde, told Air France and BA, the aircraft’s only operators, it could no longer provide technical support for the aircraft at anything like a commercial price. Air France, which never made as much from Concorde as British Airways, stopped flying it in May. But BA said it would keep Concorde going into October simply to please its fans.
I think what they’re alluding to with the stock market boom is that after the share market crash in the early 2000s… In the late ‘90s you had the dot-com boom, and then there was a recession or a downturn in the early 2000s, associated with the dot-com crash in the US. And I think what they’re suggesting is that that meant that after that downturn, companies and wealthy people were less likely to splurge on a Concorde. And then there was the Air France crash, and that meant that not as many people were flying Concorde. That really just destroyed the viability of it on an ongoing basis.
Now, what I think’s interesting is that – and this is something I didn’t know until I had a closer look at Concorde for this episode – is that for a few years, Concorde was actually profitable for British Airways and Air France. It didn’t look like it was making huge amounts of money, but it was actually profitable from about the mid ‘80s and possibly up until that Air France crash. It wasn’t profitable for the governments that had invested in it originally because the cost of it just blew out massively. If we go back to the development costs of it, the cost of the British and French government’s ended up being, I think it was over one billion pounds before it even went into service. And in today’s dollars, that’s over 11 billion pounds, because it was reported as 11 billion in today’s dollars in – sorry, pounds, 11 billion pounds in today’s pounds, in 2003 by The Economist. That was 10 times what was budgeted for. The cost of it was just colossal.
It would never have been a commercial proposition if you tried to recover those R and D costs. But what happened was that the governments essentially wrote off those costs. After they’d already invested all this money, they basically let the company, so Air France and British Airways, buy the Concordes at a discounted price, so that they didn’t have to pay back or they didn’t have to pay for the cost of having the Concorde developed. The R and D costs of the Concorde weren’t actually included in the sale price of the Concordes, as far as I can tell.
What you’ve got as a situation where this huge R and D cost, it’s written off by the government. In a way, that’s the other side of the sunk cost proposition, that yes, this has already happened, this money’s already been spent. In a way, the Concorde is a gift from the governments of Britain and France to the aviation industry. It’s already developed. The technology is there. Then what matters for the aviation industry is can it make a profit with those Concorde planes as they are now? The aviation industry never had to make substantial enough profit to cover the original R and D costs, and so in that sense, Concorde was profitable for several years from the mid ‘80s.
It’s extraordinary. There was there was an AP, so an Associated Press report in 1986. Where is it? It’s basically saying that Concorde is an unexpected success, but it’s only unexpected or it’s only a success if you do ignore the fact that all of that billion pounds of research and development costs are written off, that you just accept that taxpayers aren’t going to get that money back. It ended up being an unexpected success for British Airways and Air France for a while, although not for the governments of Britain and France.
“Concorde, an unexpected success, marks 10th anniversary. London, 10 years after its detractors branded it as an enormous white elephant, the Concorde is the fastest, most luxurious, and to many the world’s most beautiful airliner. It makes money too. After years of losses and a $2.8 billion government development costs that has been almost completely written off, financial winds have turned in the plane’s favour. The Concorde brought a $17.3 million profit to British Airways last year, and a profit of 8.8 million to Air France in 1984. British Airways didn’t record profits from the Concorde until 1982, and Air France and until 1983.”
I found that quite interesting, and that was something that I wasn’t aware of. And I guess it sort of makes sense, because they wouldn’t have kept operating it for a couple of decades – because it did operate from 1976 to 2003 – they wouldn’t have done that if it wasn’t at least making a profit for those airlines. That sort of makes sense, but there’s no way in which the Concorde ever recovered the R and D costs that were paid for by the governments. Therefore, if you were back in the ‘60s looking at this project, and you’re in the British and French governments, and you had perfect foresight as to what would happen, you would have gone, “Okay, we’re going to stop spending money on this because we’re never going to recover and costs the blowing out. Let’s just cut our losses now.” Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 25:47
Now back to the show. Does that all make sense, Arturo? Is there anything confusing there?
Arturo Espinoza Bocangel 25:54
It’s clear, everything about the factors behind unsuccessful operation of the Concorde. Perhaps the main objective of that project wasn’t to have the best economic successful in producing those airliners. I think probably France and Britain, they wanted to show to the world that they are able to produce this kind of supersonic airlines, that they had the best technology to share to the world. I think possibly that is another explanation and why they wanted to continue with operate.
Gene Tunny 26:48
That’s true. There’s that national prestige element involved. There was a cost-benefit analysis, a prospective cost-benefit analysis done in the early ‘70s before the Concorde was ever in operation. Do you know that study? And I think the economist who did that, was it Woolley, he was arguing that okay, there’s actually a loss in economic terms to the governments of Britain and France from Concorde, of I think it was a negative 100-and-something million pounds, I’ll put a link in the show notes to the study so you can have a look at it if you’re interested. But he was arguing that okay, this means that the governments of Britain and France value these other elements, all these intangible elements of the Concorde project, which could include the national prestige, national pride, they value those elements as at least this much money.
And this is a point I made when I was chatting with Tim. This is a time when the great superpowers… The superpowers at the time were the US and the Soviet Union. And they were the ones who, they were in the space race. Britain and France were probably never going to get in the space race. Britain and France were once the great powers in the world, in the days of Nelson and Napoleon, the great powers in the… And I guess Spain as well. But yeah, France and in Britain were once great powers. And this could have been a way, they could have seen this as a way of getting back into that game. I think that’s a really good point.
I’m just trying to think what I should… Other things I should talk about, the operating costs of the Concorde. they did have higher operating costs per passenger than say 747. I think what I saw is that even though you’ve got 100 or so people on a Concorde versus more than 400, 400 to 500 on a Boeing 747, I think you need almost as much jet fuel. The cost per passenger per mile on a Concorde… There are some figures. There are various sources for figures. Wikipedia has got a great article on Concorde I’ll link to, and it has some figures in that. From what I can work out, Concorde had nearly twice the operating cost per passenger than a 747. It was never really going to be a mass market proposition.
I think certainly the oil shock in 1973 when the Arab nations restricted supply of oil… I think that was in response to the Yom Kippur War, where the Israelis pushed back the Arab invasion. And I think what happened was, because those higher oil prices meant that it was never going to be a mass market proposition, what you saw was that through the ‘70s, all the aircraft companies, the airliners that had previously expressed some interest in Concorde, other than Air France and British Airways, they just said, “Look, we’re no longer interested.” Partly that was because of higher oil prices. It could have been that they’re crunched the numbers and just worked out, we’re not going to make money on Concorde. The Boeing 747, it came out in I think it was 1969. And it was just such a great aeroplane. You could fit so many people on it. It’s just such a fantastic airline plane for international travel. And so I think they just worked out oh, look, Concorde’s not really going to work. Qantas here in Australia, I think it was looking at getting Concorde at one stage, but worked out it wasn’t gonna work. The only companies that ended up running it were Air France and British Airways.
Because of the higher operating costs, you needed to have a higher ticket price. And so you needed to appeal to those wealthy buyers. What I found, and this is something you notice too, Concorde, it was super quick, you’d save hours on your travel time, but it wasn’t a really luxurious experience, was it, flying Concorde, from what I could tell.
Arturo Espinoza Bocangel 31:50
Yes, that’s true. It was not comfy. I think due the design of the airliner, the people must be seated closely. It wasn’t too much comfortable to be there. I think that was one of the problems. You compare that airliners against Airbus or Boeing, those airliner offer you a better experience as a passenger?
Gene Tunny 32:26
Yes. I think I was reading that they didn’t even have enough room for on-flight movies. You’re really enclosed. You’re really close with other people. And in a way, that could be good, if you’ve got Paul McCartney or Sting or someone on the plane with you. That’s pretty special.
Arturo Espinoza Bocangel 32:48
Of course.
Gene Tunny 32:49
But otherwise, it wasn’the super comfortable. And I guess they tried to compensate for that by having the freely flowing champagne and caviar. But look, there’s only so much that only goes so far. If you’re on a business trip, you need to watch how much champagne you’re consuming. The combination of attributes that had only appealed to certain types of wealthy people. They might have wanted to impress or maybe they really did need to get – it was just absolutely time critical that they needed to get from London to New York or Paris to New York. And I think we’re talking about a really elite segment of the population. And then what happened was that after the Air France crash, a lot of those people decided well, okay, look, I’m not really sure I want to fly on the Concorde anymore.
That Economist article I mentioned before, it writes… In The Economist article it has, “In its heyday, Concorde typically flew three quarters full, earning BA about 20 million pounds in operating profits from 35,000 passengers a year. When it returned to service, paying over 8,000 pounds to fly supersonic had lost its appeal. BA could attract enough business for only one transatlantic flight a day, instead of the previous two. And even then, the aircraft was often carrying only a couple of dozen paying passengers.” You’ve got more than half your plane unfilled. Actually, three quarters of your plane if you’re only carrying –
Arturo Espinoza Bocangel 34:40
That is a loss.
Gene Tunny 34:41
“Extra seats were often filled by upgrading subsonic first-class and business-class customers. Delays and diversions due to bits falling off and engines faltering began to tarnish Concorde’s image and emphasise its age.” That’s part of the problem.
Apparently Concorde was quite fragile. And I saw one estimate that for every hour, it was every hour of flight time, it needed 18 hours of maintenance or something like that. It had this issue of needing all of this maintenance, and then they would have needed to have done a refurb of it, a refit in the early 2000s. British Airways and an Air France just looked at the numbers and thought, ah, that’s not gonna make any sense, so let’s just discontinue operations.
That’s a fascinating story. You’ve got this combination of the oil price, you’ve got a combination of it being… It wasn’t a mass market proposition. It had to become a niche, luxury proposition or for the business elite and the entertainment elite. Then that market was compromised by a downturn in the economy, people being less willing to splurge, and also the Air France crash, which hugely concerning. You really worry about Concorde.
Maybe if it was more mass market, if there was a larger number of Concordes in operation, maybe they could get more efficiencies in the operations of Concorde. They wouldn’t have the problems finding someone to service the Concordes. I just wonder if that would have meant that it would have been more viable if there were more of these planes. Certainly the British and French governments intended originally that there’d be many more Concordes in operation. I think they thought they’d be selling hundreds of these Concordes. I think I saw an estimate they were expecting by 1980, 350 or 400. I may have misremembered that, but I’ll try and put it in the show notes. And that cost-benefit analysis we saw, it had projections based on Concordes in the hundreds, whereas there are only ever 20 Concordes built, ever built. And only 14 of them were an operation. Six of them were for testing, were prototypes. It’s quite extraordinary.
Arturo Espinoza Bocangel 37:21
That’s crazy. Wow.
Gene Tunny 37:23
I think economics ultimately defeated the Concorde. Certainly the crash and the regulations contributed as well. The regulations we talked about, the fact that it couldn’t go supersonic over the land, that certainly affected viability, particularly for the French, for Air France, because I think it had to travel further overland from Paris to New York than you probably would… Maybe I’m wrong about that. Anyway, apparently it affected the French Concordes particularly hard, as that passage from Todd quoted. Then there’s the fact that you can’t do the cross-continental. You couldn’t go from New York City to Los Angeles. You couldn’t go from London to say Moscow or wherever or Beijing or something. I don’t know. There’d be a whole lot of other routes that you could travel if you didn’t have to worry about the sonic booms.
Arturo Espinoza Bocangel 38:28
The thing told you that USA government banned those kind of inland flights of the Concorde.
Gene Tunny 38:34
Right, of supersonic planes, yeah.
Arturo Espinoza Bocangel 38:38
Due to those negative impacts on private properties and people as well.
Gene Tunny 38:42
Yeah, I’ll have to look up the exact regulation. That makes sense to me. A couple of other interesting facts I thought would be worth talking about is that the Soviet Union or the Russians actually had a supersonic airliner too, the Tu-144. It had a different design from the Concorde. It looks similar, wasn’t as beautiful though, wasn’t as elegant, but it had similar features. I think it had the delta wing too, and it had the drooping nose but it just wasn’t as beautiful or as smooth as the Concorde was. And one of the problems it had, it was using an afterburner through the flight to go supersonic. And that meant that the cabin was really noisy, about 90 decibels, which I think is equivalent to a hairdryer. I think I read that.
Arturo Espinoza Bocangel 39:37
Wow.
Gene Tunny 39:40
In contrast, the Concorde turbo jets, they only needed the afterburner at takeoff, to take off. That Russian supersonic plane, it didn’t last and so they don’t run that anymore. But I thought that was fascinating that they had they had a supersonic plane themselves.
Now, is there a future of supersonic aircraft? I was surprised. This really surprised me. I read that, so the United Airlines, the US airline company, it’s announced that it will buy up to 50 of these Boom Overture Supersonic jets. And the idea is to get them operating by 2029. Now, this is a company in Denver, Colorado, that’s developing supersonic aircraft. It claims it’s going to be using sustainable aviation fuel, and so that minimises concerns you might have about impacts on the environment, climate change, because airline travel is a significant contributor to greenhouse gases.
Arturo Espinoza Bocangel 40:57
Yeah, definitely.
Gene Tunny 40:59
They’re claiming it’s sustainable. They’re also claiming that they’re looking at the aerodynamics, they’re working on the aerodynamics of the plane to reduce the sonic booms. It’ll only have a thud of 75 decibels compared with Concorde’s 105-decibel sonic boom. We’ll see how that all goes, how that works out. That’s interesting that potentially, there is a company that’s been looking at reviving supersonic flight. Now, let’s see how that all goes. I guess you want to try and look through the fact that the oil price now is spiked because of what’s happening in Ukraine. Hopefully, that’s all resolved by then. Look, I think, a supersonic aircraft, it’s still going to face that issue of the regulation. There’s always a risk that maybe it can’t fly the routes it wants to, even if it does get that sonic boom down. I don’t know. I think we’ll have to wait and see there. But I found that fascinating that that there could be supersonic flight in the next decade or so, again. Have you seen anything along those lines, Arturo?
Arturo Espinoza Bocangel 42:20
No, I haven’t checked that. But I think from my perspective, it’s going to be difficult for those ventures in order to develop these kind of supersonic aeroplanes. And of course, these aeroplanes are going to compete with these two big companies, which are Airbus and Boeing. Of course, they will face that limitation in terms of competition as well. I think that is going to be complex for them. Even if we talk about, for example, the many tries of Chinese government to develop their own airlines, or to compete with those big multinational companies, but we have seen that the results were unsuccessful.
Gene Tunny 43:15
It’ll have to have tickets priced a lot higher than standard travel. Let me have a look at this. There’s an article in the conversation in June 2021. “Supersonic flights are set to return. Here’s how they can succeed where Concorde failed.” This is by Peter Thomas, who’s an aerospace engineering lecturer at a university in the UK. I’ll put a link to that. He’s written, “Boom will be optimistic that it can overcome fuel efficiency challenges by the time its aircraft begins carrying fare-paying passengers in 2029. Those fares look set to be high, with Boom anticipating a 3,500 pound price tag per seat. In 1996, British Airways charged around 5,350 to 8,800 pounds in today’s prices for roundtrip tickets from New York to London.”
It’ll be cheaper than Concorde, but it’s still going to be much dearer than a normal fare that you’d pay, probably about, I don’t know, three times or so. I’m not sure what the exact fares from transatlantic fares are in pounds. But I’ll see if I can put something in the show notes. It’s certainly going to be more expensive than the standard fare.
“This means that like Concorde before it, the Boom Overture looks aimed at the luxury market, beyond the reach of even business class passengers.” I think that’s the problem. If you’re aiming the luxury market, then maybe it’s too narrow a segment to try and run an airline on I don’t know. That would be one of the concerns that I would have about that as a proposition, but let’s see how it develops. I’d certainly like to fly supersonic one day, I think it’d be one of those so-called bucket list things to do, if you know what I mean.
Arturo Espinoza Bocangel 45:26
Yes, the same for me. I would like to do that.
Gene Tunny 45:30
Flying at 60,000 feet at Mach Two or whatever it is, just be spectacular. Some of the facts, or factoids you could say they are, that they have about, because who knows if they’re right or not. You just read these things on the internet. But I think one of them was saying by the time that the hostess or the stewardess pours your champagne, you’ve already travelled 26 miles or something ridiculous, in the Concorde. It’s flying that fast.
Arturo Espinoza Bocangel 46:02
Wow.
Gene Tunny 46:07
I don’t know whether that makes sense or not. You just think about how fast you’re travelling, and it’s just extraordinary. I wanted to end with my takeaways from this whole Concorde episode, or experience with the Concorde, because I think there are a lot of important economic lessons associated with Concorde. It’s more than that you should ignore sunk costs. This is the point that if the British and French governments were smart, or they were paying attention, or this thing wasn’t so caught up with their – it wasn’t such an exercise in national pride or national prestige – if they thought rationally about it, they would have cut their losses in the ‘60s sometime and just given up on it, but they didn’t do that. They ignored the key lesson, very important lesson from economics to ignore sunk costs. Bygones are bygones. Don’t throw good money after bad.
The other lesson, I think, is ultimately economics prevails. If something doesn’t stack up, it won’t survive. Even though Concorde was profitable for a while, over the long run it just wasn’t a commercial proposition. There the regulatory issues. There was the fact that it had higher operating costs than the standard aircraft because of the amount of fuel relative to passengers it needed. This meant it had to be a luxury proposition. That meant that the market was smaller, and more volatile, you could argue. I think that’s what happened. You had the Air France crash, and the downturn in travel associated with 9/11, and people being more budget conscious after the stock market fell, this perfect storm of things that happened that ultimately defeated Concorde.
Okay, my third takeaway is governments should be careful about going into business, i.e. picking winners. I think that’s something governments really need to be careful about. I used to work in the Industry Policy Division in Treasury and we would always cast a critical eye over any idea for government to get involved in business. I think you have to be really careful about that.
Number four, you need to think about those externalities. This is the point you made. There’s this externality associated with Concorde, the sonic booms. And if there is an externality, you need to think about what does that mean, what could governments do in response? And we saw that there was that regulatory response that the Concordes, they couldn’t go supersonic over land. And that really affected the economics of the operations.
Another externality, of course, is greenhouse gas emissions. And so you have to think about if you’re going to run a supersonic aircraft in the future, then what does that mean if there’s some sort of carbon tax or if there’s some crackdown on air travel because of people who are concerned about climate change? Of course, that’s why with this Boom technology company, which is looking at a new supersonic plane, that’s why it’s trying to get into sustainable aviation fuel. It’s looking at “Biofuels and synthetic kerosene that are manufactured using renewable and sustainable materials. It looks like it will mean an impressive 80%… ” This is what the author of the article is writing. This is Peter Thomas. He writes, “An impressive 80% reduction in lifecycle CO2 emissions is often quoted.” Then he goes, “The key word here though is lifecycle. It doesn’t necessarily mean less harmful emissions from the engine.” Who knows what it’ll ultimately mean for the emissions and what potential carbon tax or carbon price they’d have to pay? Anything else we need to chat about with Concorde, Arturo?
Arturo Espinoza Bocangel 50:46
I think today, all that you have mentioned are enough to have a better idea of what happened about the case of this white elephant case.
Gene Tunny 51:04
I hope if you’re in the audience, you’ve got something out of this. I’ll put links to these articles that I’ve mentioned or have quoted from in the show notes. Check them out. There’s a lot that’s been written about Concorde, I think because people find it fascinating just because it’s such a beautiful aeroplane, and I guess the celebrities that have been on the plane and there are such interesting stories when you got Phil Collins and going to Live Aid, doing two Live Aid concerts in one day. I think even the Queen, Queen Mother, they’ve all travelled on Concorde. The Queen Mother, she’s no longer with us, but they travelled on Concorde at different times.
One other story I forgot to mention, there’s this idea that you can get a pricing lesson from the Concorde. Part of the reason that the profitability of Concorde, it became profitable in the mid ‘80s, was because British Airways figured out that they could put their prices up, because the people who were flying on Concorde, they were busy executives, or they were senior executives, and their secretaries were booking the flights. The actual people flying didn’t realise how much Concorde was costing. They thought it was actually more expensive than it was. British Airways did a survey. British Airways raised their prices and they didn’t have a fall in demand. They ended up making more money, because they increased their prices. How would economists describe that? At that point of the demand curve for those consumers, the demand is in elastic with respect to price. Is that the right way to explain it?
Arturo Espinoza Bocangel 53:00
Yes.
Gene Tunny 53:03
That’s what British Airways figured out. And so therefore, they could increase prices and therefore increase –
Arturo Espinoza Bocangel 53:12
The demand for or travelling, it wasn’t going to change.
Gene Tunny 53:20
Yeah, or very little for that group of consumers, the people who really weren’t budget conscious. I think that’s fascinating. There’s a great article, A Pricing Lesson From the Concorde from The Adaptive Marketer, Gerardo Dada, and I’ll put a link to that in the show notes.
Wow, I think we had a pretty comprehensive discussion of the Concorde, Arturo. Thanks for joining me on this conversation. I think that’s been really good.
Arturo Espinoza Bocangel 53:55
Thank you again for inviting me.
Gene Tunny 53:57
Yeah, of course. And if you’re listening in the audience, and you have any thoughts, any comments, any questions, please get in touch. You can email me, contact@economicsexplored.com. I also have a speak note service set up so you can send me a voice message. There’s a link to that in the show notes. Thanks for listening, and hope to speak with you again soon. Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com, and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
In Economics Explored EP130, we explore a new book Thriving: The Breakthrough Movement to Regenerate Nature, Society, and the Economy, by Professor Wayne Visser of the Cambridge Institute for Sustainability Leadership and Antwerp Management School. Wayne is reassuringly optimistic about the future of the planet due to a variety of technological and business practice changes that mean we are approaching “tipping points”, after which we will rapidly reduce the stress we are placing on the environment – all going well, of course, as nothing is guaranteed.
In the episode, Wayne speaks about a convergence of positive developments, such as rapidly improving electric vehicles, cultured/lab-grown meat, blockchain and synthetic DNA to aid traceability of supply chains, green hydrogen, and Unilever committing to deforestation-free palm oil (by 2023, and whether it achieves that is still to be determined). You can listen to the conversation with Wayne using the embedded player below or via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps.
Here’s a short video clip from the conversation in which Wayne introduces the concept of Thriving:
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.
Wayne Visser 00:04
Being optimistic or at least having thriving as a lens is just a more effective way to be, no matter what the state of the world is.
Gene Tunny 00:13
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 130. In this episode, we explore a new book from a world leading expert in sustainability, Dr. Wayne Visser, who joins us from the UK via Zoom.
Wayne’s new book, published by Fast Company Press is Thriving: The Breakthrough Movement to Regenerate Nature, Society, and the Economy. Wayne currently serves as head tutor, fellow and lecturer at the University of Cambridge Institute for Sustainability Leadership. He is also Professor of Integrated Value at Antwerp Management School, where he holds the world’s first Academic Chair in Sustainable Transformation, as well as being a world leading authority on sustainability. Wayne is an accomplished poet, and he shares some of his poetry with us toward the end of this episode. Wayne’s new book Thriving considers issues with huge implications for our economies, so I was very glad to chat with him about it. His book contains lots of valuable examples of how businesses and communities worldwide are attempting to make themselves more sustainable.
Please check out the show notes for links to materials mentioned in this episode, and for any clarifications. If you have any questions, comments or suggestions related to this episode or the previous ones, please get in touch by SpeakPipe. See the link in the show notes or email me via contact@economicsexplored.com. I’d love to hear from you. Righto. Now for my conversation with Dr. Wayne Visser on his new book, Thriving. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Professor Wayne Visser, welcome to the programme.
Wayne Visser 02:23
Hi. Great to be joining you.
Gene Tunny 02:25
It’s fantastic to have you on, Wayne. Yes, very happy to be chatting with you about your new book, Thriving, which is on a topic that is of great interest to me, and I know to many of my listeners. It’s this issue of sustainability. Climate change is related to that, obviously a big environmental challenge. I’d like to explore what your book is about, why you wanted to write it, what those key messages are. First, I’ve just got a couple of questions about your work. You’re at the Cambridge Institute for Sustainability Leadership. Could you tell us a bit about that, please?
Wayne Visser 03:20
Yeah. Great pleasure to be talking to. The Cambridge Institute is a department of the university that was set up many decades ago actually, firstly, mainly, at the request of the Prince of Wales, Prince Charles, one day soon to be king, I guess, who’s always had a passion for sustainability. He set up a business and environment programme through the university, and it just evolved from that. And ow they it’s a very large office and runs many, many programmes, I head up their business sustainability management online programme, which is getting great traction. We have upwards of 900 students, taking that four times a year. We’re seeing the uptake. I’ve been associated there for nearly 10 years, and I really see how it’s changed. In fact, 20 years. Yeah, since 2003. Really, the interest levels are up, and the demand for solutions, especially from business, is really rising.
Gene Tunny 04:39
Right. You’re certainly right about Prince Charles. I remember visiting his country estate, just as a tourist, Highgrove in Gloucestershire, and before you go on a tour of the estate, you have to sit through a 10 or 15-minute video of Charles, of the Prince of Wales talking about the importance of sustainability. I think he’s into organic farming and that sort of thing. I’ve certainly seen his commitment to that, so very good…
Wayne Visser 05:19
He was way ahead of his time, especially on the organics side, or what they sometimes call in Europe, Europe bio. Many of the programmes have been very specific. We have very good climate legislation in the UK, for example, and also in Europe. That’s partly down to the Prince of Wales Business corporate leadership group that we set up at Cambridge on climate change, where we tried to be an intermediary between business and government, because business was saying they couldn’t be bold in their commitments, because they didn’t have clear policy guidance, and the politicians were saying they couldn’t be bold in policy, because they thought business would lobby against them. Playing that kind of role has been very, very effective in making the progress that we need to make.
Gene Tunny 06:11
I’d like to ask you later about good legislation in the UK. and EU. I’m interested in what you consider good legislation. That’s something we can chat about. Also, you’re a professor at, is it University of Antwerp, is it, in Belgium?
Wayne Visser 06:31
Yes, Antwerp Management School. It’s actually a sister organisation of the university, but it is independent. Yes, I have a chair there in sustainable transformation. It’s supported by corporate partners, BASF, Port of Antwerp and Ronstadt. I run the Sustainable Transformation Lab there, where we mainly work with corporate partners on advancing sustainability, but also on embedding it into all of the teaching for the full-time and the executive MBA students.
Gene Tunny 07:04
BASF, this is one of the biggest chemical corporations in the world, isn’t it? It’s a huge company, isn’t it?
Wayne Visser 07:14
It is, and right there, Port of Antwerp Zone, which goes for more than 30 kilometres, has one of the biggest chemical clusters in the world. And of course, it’s a great challenge, I must be honest, because the chemical industry has many, many impacts, and is one of the institutions, one of the sectors that has to transform, if you look at something like climate, and it’s not easy. There are massive technology investments that have to be made, whether that’s on using green hydrogen, to get their energy for their crackers, or even going for carbon capture and storage, investing in renewables, which they’re doing as well. But at least they’re one of the progressive ones, I would say, and they really are seeing that this is the future and they have to invest in it.
Gene Tunny 08:10
Okay, Wayne, what was that word you used? Was it crackers?
Wayne Visser 08:14
Yes, yes. Crackers are just the way that they get them, the molecules, the chemical molecules, how they break them apart. This is a very, very intensive, energy-intensive process, much like many other industries. Smelting I know is being done in Australia, for example, aluminium smelting, cement making. These are all very intensive industrial processes where there is no easy solution. For climate change, they really have to come with new technology, such as green hydrogen, where you get the renewable electricity to power the creation of hydrogen from water normally. That takes a lot of energy. But once you have that hydrogen, that can then create the heat that you need for these large industrial processes.
Gene Tunny 09:07
We might have to chat about that a bit later. I guess one of the things I’ve been fascinated by is just how a lot of these big corporations are… They’re seeing the future and they realise—well, many of them, I mean the more enlightened ones are realising, we probably have to get on top of this now, to start addressing this, or we could lose out in the future. I think that’s an example of that. Very good. One other thing I’ve saw in your bio, which I thought was really interesting, so you’re also a poet as well as a pragademic, if I’ve got that right, or pracademic. You’re a pracademic. You’re an academic and you’re also doing practical things involved in policy. You’re also a poet, and it turns out you’ve written 40 books. There are books on both environmental issues and also poetry? Is that right?
Wayne Visser 10:14
Yes, it is a mix. I must say, the majority of them are on sustainable business. And they range from the encyclopaedic, literally because I did an encyclopaedia the A to Z of corporate social responsibility, nd I’ve done a world guide on sustainable enterprise covering countries around the world, so that kind of reference work through to yes, even a fiction. Some poetry books, but also some fiction. There’s a parable on leadership, called Follow Me, I’m Lost, about a goose, a Scottish goose, who gets lost on the way to leadership school in London and ends up in Africa, travelling down and meeting strange creatures who each teach him a leadership lesson. There’s the full range.
Thriving is, I would say, in the middle. It’s really written for a broad audience. But it is about how we change society and the economy fundamentally. It includes some of the poetry actually in the book, as well as many stories, both personal stories, but also stories of the innovation that’s happening. I guess we’ll dive into that. But that’s one of the reasons I wrote the book is, there’s so much doom and gloom around now. Look at the statistics on many trends. Some of that is justified, even what’s going on in the world today with war breaking out in Europe. It’s hard not to be pessimistic, but you also have to take the bigger picture and see this global system that is in transformation and is actually speeding up. Many of the signals are all headed in the right direction. There’s so much innovation out there. This book was about capturing that innovation that’s happening.
Gene Tunny 12:09
That sounds great. That sounds great. With Thriving, so what you wanted to do, is basically you wanted to counter the doom and gloom. Is that what you’re saying? You think there’s too much doom and gloom? There’s actually a lot of innovation occurring out there, and are you trying to suggest, okay, given all of this innovation, this is what the appropriate policy settings are? Are you touching on policy settings at all, Wayne?
Wayne Visser 12:43
I touch on policy, but I would frame it like this. In fact, I start with something in the early chapter, called the Stockdale paradox. And this is named after Admiral Stockdale who survived a prisoner of war camp, I think he might have been in there for seven years, and came up with this philosophy that what you need to do to survive and thrive is to face the absolute reality, all the brutal facts, completely honestly. So don’t kid yourself about the state that you’re in. But at the same time, you can never give up faith or hope that things can change and can get better.
You’ll see in the book, it’s not a book of denial, or wishing things were better. I set out a lot of the facts on what’s going wrong, what’s really challenging, when nature, society, and the economy are breaking down. But then I look at the larger system and I look at how systems change, especially living systems, of which society is one nature is another, organisations as well. When you distil it down to the scientific principles of how those systems change and thrive, you actually see many signs that we are heading into a tipping point of change towards the better. It’s not that we don’t face these big challenges, but we’re seeing many transformational signals. And most people are not aware of that. And so yes, they get trapped in the pessimism or the doom and gloom.
It’s also that, you know, being optimistic, or at least having thriving as a lens, is just a more effective way to be, no matter what the state of the world is, because if you’re trapped in in pessimism, you’re disempowered. You sort of just give up before you’ve even made it a try to tackle the issues.
It’s a little bit philosophy, but it’s also backed up by some science of how change happens. And then lots of examples of where business especially, is really charging ahead and bringing the solutions that we need and starting to scale them, which is something that in my 30 years plus working in sustainability was always missing. We always had many of the solutions, but they weren’t scaling. Now they’re scaling. Tesla’s one of six trillion-dollar companies now, and its core mission is a sustainability mission. It’s to speed the transition to sustainable energy. That’s scaling. And it’s valued at more than all the other auto manufacturers, even though it makes less than 1% of the cars.
Gene Tunny 15:53
That’s extraordinary. That’s extraordinary. I want to go back to this point you made. You’re generally optimistic. However, you did note before that there are places where nature, society, and the economy are breaking down. Where is that, Wayne? Are you able to describe or tell us where that is most acute, because we hear all of these horror stories about bad things that could happen, tipping points, and all of that, but where are things breaking down? Could you tell us, please?
Wayne Visser 16:30
This gives a little insight into the structure of the book, really, because I structured into these six great transitions that we’re going through and that we need to go through. There are two breakdowns in nature, two in society, and two in the economy. I’ll briefly touch on each.
In nature, what we see is huge breakdown in ecosystems, so degradation of ecosystems. You’ve got the Great Barrier Reef on your shores there, and it’s literally dying, bleaching, just as one example. The loss of species is actually catastrophic right now. We are going through the sixth mass extinction. And we’ve lost 67% of wildlife populations since 1970. Something that took 3.8 billion years to build up on the earth, we’ve wiped out in one generation.
Yes, huge breakdown in ecosystems. But there is this counter movement of restoration, so protection and restoration of ecosystems. Yu start to see, there’s in fact a lot of work going on through the UN trying to create an equivalent international agreement to the Paris Agreement, which is on climate change, to have one on nature now. There is a widely promoted target for the world now to protect and restore 30% of our land and our oceans by 2030. Likewise, there’s a lot of work going on around deforestation coming out of the 26th Conference of Parties on Climate Change in Glasgow last year, where we have now more than 90% of the world’s countries committed, that have forests, committed to end deforestation and reverse it in the next few years. A lot of movement happening there, and a lot of big companies starting to actually put money into helping to protect and restore. If you look at the Bezos Earth Fund, putting more than a billion into the Congo, the rainforest in Africa, which always gets forgotten about because we know the Amazon, but the second largest tropical rainforest is the Congo. So that’s one example of a transition.
The second breakdown is depletion of resources. This is many, many nonrenewable resources, whether it’s water or timber or topsoil. All of these are being depleted at an alarming rate, nothing like what the earth can sustain. This has been going on—we call it the great acceleration—since about 1950, when we’ve had this exponential growth of economics, of economies and consumption, and of course, resources are finite.
The solution there is renewal of resources. This links to one of the market solutions I write about, which is the circular economy. How do we get it so that everything we use in our products and services either is made from nature and goes harmlessly back to nature—that’s one type of circle or loop—or is made artificially like chemicals and plastics and metals and so on, but continues to go back into manufacturing in an endless cycle. That’s the circular economy. Today, we’re around about 10% circular in the world. This is a massive transition. We have 90% of the economy that we need to change from a linear take make waste economy to a take or borrow, make and return economy. So that’s the second transition. Those are the two breakdowns and breakthroughs in nature.
In society, what we’ve got is disparity. Despite all of our economic growth over the last 50 years, inequality has gone up in almost every country. Even though we’ve had hundreds of millions of people coming out of poverty, the gap between the rich and the poor has gotten wider. And effectively, the rich are getting richer, faster than the poor are getting richer. And this has all sorts of social implications as well. If you look at a book like The Spirit Level, they do the research on this, and they find all sorts of social problems occur in the countries that have the highest inequality, including many developed countries.
The counterforce to that is responsibility. It’s actually to have what we call an access economy where we take care of diversity and inclusion. And again, there’s a big movement for that, but still a long way to go. If you just look at gender equality. If you look at the gender pay gap, according to the World Economic Forum, it will take more than 250 years to close that gap, if we continue on current trends, which is just ridiculous in the 21st century, but we still have a lot of progress to make there.
And then we have the second breakdown in nature, which is disease, which we’ve learned a lot about in the last few years with lockdown and everything else.
Gene Tunny 22:07
Sorry, Wayne, this is in society, you mean, is it? Second breakdown in society, disease.
Wayne Visser 22:13
The second breakdown in society is disease. We know all about COVID and communicable diseases, but the interesting thing is that 70% of people die from non-communicable diseases. These are things like heart attacks, strokes, diabetes, cancers. Many of these are lifestyle related. In fact, 40% are preventable because they relate to what we eat, especially how much meat we eat, in particular red meat, and also processed foods, and whether we live in toxic environments, polluted environments. Of course, there are things like stress as well that take that toll. What we want is revitalization, and so the well-being economy, which is again, a massive opportunity, lots of investment in innovation, lots of technology going in there, really exciting things happening, but plenty to do there. So those are the two breakdowns, breakthroughs in society.
Then if we look at the economy, I talk about disconnection. This is the technology piece. What’s happened is that we think we’re all connected, but we’re not. There is still roughly half of the world, maybe three or four billion who still don’t have an internet connection. Many, many billions still don’t have a mobile phone or live outside of mobile phone signal areas. The world is not all connected. And this refers to what we call the digital divide. It basically is an amplifier for inequality, because technology gives us opportunity. We have to really look at that gap and work on closing that gap. Meanwhile, of course, many are streaming ahead with the Fourth Industrial Revolution, and with 5Gg and artificial intelligence and virtual reality and all of those things, and so the gap potentially gets wider. So we have to address that.
Then there’s a second kind of disconnection, which is that the machines start to disconnect us. This is really about automation. 25% of jobs today are at high risk of automation, and another 70% at medium risk. It’s not that we want to go backwards, but we have to look at that and take care of that, start re-skilling people, upskilling people, to be ready for that hugely disruptive transition.
The solution there is all about, I call it rewiring. It’s really the digital economy, but it’s mainly about using all of those fantastic technologies, like big data, like 3Dd printing, like all of the other things, to be part of the solution rather than part of the problem. Artificial intelligence, huge potential there, but we very quickly found out that it’s racially biased. We have to take care of how technology is being used and whether it’s being used to solve the problems. I really believe that it does bring many of the solutions.
The last one is disruption. This has to do with crises and catastrophes, which we’ve also learned a lot about recently. This is where climate change comes in. If you look at the wildfires, you look at the storms and floods and the droughts, you know all about that in Australia, but also all around the world now. It’s costing the world hundreds of billions, of which roughly only a third is insured. You’ve got two thirds of the millions of people who are affected by this just left hopeless, so tackling this and other crises. By the way, COVID is another example of a massive disruption. You get industrial accidents, also disruptive. BP lost 50% of its value within 50 days after the Deepwater Horizon oil spill, just over 10 years ago, and has paid $65 billion since.
All of these have to be addressed. What do we want? We want to move to resilience. That’s the breakthrough. That means making our institutions but also our infrastructure more resilient. Some of that is physical infrastructure, like building flood walls and having buildings that can withstand earthquakes and lots of other very practical things we can do, but it’s also about how you build the economy, because what we’ve discovered is that our economy is very brittle in the crisis. Look at what’s happened with supply chains during COVID or during the Icelandic volcano a few years ago. There’s no longer any slack in the system to take the shocks. We think we’ve been very clever by making everything super efficient just in time, everything delivered, next-day delivery, everything like that. But actually, it makes us more vulnerable. This is all to do with a risk economy, everything that can reduce risk, but also help us survive and thrive through crises. Those are the six transitions.
Gene Tunny 27:28
That’s a very comprehensive overview. I’ve probably got comments on a lot of what you said, but I’ve got to ask you about that Icelandic volcano. That’s the one that no one can pronounce the name of, or certainly I can’t, if I remember correctly. Can you remind me what happened there? You mentioned that as an example of a disruption.
Wayne Visser 27:48
It was obviously just, they have a lot of volcanic activity there. But this one was so big that this cloud just spread across Europe and grounded everything, so planes couldn’t fly. As soon as you start messing with logistics, not only does it mean people literally stranded all around the world in countries, but also business grinds to a halt because of all of the trade that happens through logistics. It’s just an example of that kind of disruption. We’re starting to see more and more, the recent supply chain disruptions around COVID, but also to do with the oil price. Lots of these shocks just show us that… Even my book was delayed by over a month, because suddenly, there was no paper. They couldn’t get paper in the world. So we have to prepare for these kinds of shocks. This is the new volatile world, the VUCA world.
Gene Tunny 28:55
Yeah, well, it’s certainly taking a while for everything to get back to normal. I’m an economist, and I’ve got great faith in the ability of markets to adjust ultimately, but it takes time. We could have these sort of disruptions for another year or so. I think I saw one estimate.
Wayne Visser 29:21
And remember, the kind of COVID type disruption, earthquakes, volcanoes are a bit random, but COVID will most likely happen again. It still has a bit of course to run, but another type of infectious disease, we can expect those again. In fact, it’s linked to these risks we’ve been talking about because as we’ve wiped out nature, zoonotic diseases, which are these diseases that leap from animals to humans, also as we have this huge industrial agricultural system with livestock, the chances of, again, diseases going from animals to humans actually is going up. We can expect that kind of shock again. But all of the analysis that we’ve seen of climate change suggests that COVID is just a very mild dress rehearsal for what’s coming on climate change. The point is that we should be expecting to live in a world of disruption. We have to know how to cope with that, and how our economies can cope, how our organisations can cope, and personally, how we cope.
Gene Tunny 30:30
What will that disruption from climate change be, Wayne? What are your thoughts or what’s your expectation as to what we’ll see? You mentioned wildfires, and I guess flooding as well. We’ve just had some flooding here in Brisbane, where I am, on the east coast of Australia. Look, there’s a big debate. It seems to be it’s difficult to attribute any particular natural disaster or to say that that’s related to climate change. I’m not sure you can do that. But certainly, I understand that it could increase the risk of these things, so I accept that. What do you see as the potential future if we don’t stabilise the CO2 in the atmosphere?
Wayne Visser 31:28
You’re right, there’s weather, and there’s climate change, and weather changes. It’s hard to link individual weather events to climate change, although there is now a scientific centre that is doing exactly that through statistical analysis, showing the probability that this could have been just a normal weather event, without the climate driver. They can now very quickly, actually, on most events, give a rating as to whether this is likely to be climate related.
But essentially, what we’re going to look at is just more extremes, I think that’s one of the one of the mis-sellings of what was originally called global warming. People thought it’ll just get a little bit warmer, we’ll go to the beach a bit more. But actually, it is climate change. It’s more disruptive, because it’s hotter and it’s colder. The storms are more intense and more frequent. That’s for complicated reasons, largely that the oceans are warming up, which makes the weather more unstable. Just everything that used to be a very rare occurrence, like a massive storm or extended 10-year drought, will just become the new norm. Temperatures that we never used to see—Canada had its highest temperatures in the last 12 months—will again become the new norm.
This has impacts on all kinds of things. It has impacts on agriculture, of course, the food system, to survive those floods and droughts, but also the climate is moving. So if you’re in a particular area, and that’s no longer good for agriculture, because everything’s got warmer, then that becomes a problem. Tropical diseases will increase because we’re moving to a warmer world. So places that never had to deal with things like malaria or Dengue fever suddenly will be dealing with those. So there are health impacts. And also remember that for every degree, on average, warmer that it is, people are less productive. And there are statistics on that as well. You have economic losses as well, as the world gets warmer.
So lots of different impacts, but it’s all about the volatility and the extremes of climate and wheather our infrastructure and our organisations and even our homes are just ready for that. As I said, you know, only a third is insured of all the climate damage that we’re seeing year on year. So for two thirds of people, it’s not covered.
Gene Tunny 34:25
Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 34:30
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Gene Tunny 34:59
Now back to the show. Wayne, I think what’s terrific, what you’ve done is really good with these six great transitions, I think you call them, so two in nature, two in society, and two in the economy. And if you hear that, then you’re thinking, oh, okay, there’s some big challenges that the world faces. How are these going to be addressed? It sounds like you’re relatively optimistic. To what extent will they be addressed by what’s happening with business, business transforming itself with innovation that’s occurring right now? And then how much needs to be addressed by government policy, or changes in the household that could be encouraged by government policy—changes in households and business? Could you take us through that, please, because just looking at that, those six great transitions, it looks like we need some sort of, I hate to say great reset, because that’s become such a controversial term and really triggers people, so I don’t want to say that. But could you take us through, how are we going to get through this, please?
Wayne Visser 36:19
I don’t think it’s wrong to call it a great reset. It’s become a political term. But it is of that scale. We really are looking at reinventing capitalism and going through another industrial revolution that’s very different. World Economic Forum calls it stakeholder capitalism. Now, that’s a huge shift from shareholder capitalism.
But maybe I’ll give you a little insight into another part of the book, which is to look at the underlying science, because the science tells us where the change is happening. There are six keys to thriving, which is an insight into how these complex systems change. One is complexity. This is all about how many relationships there are in any given system. And what we see is the world getting more and more complex. Of course, we’re getting more and more connected. Social media can help; sometimes it can hinder. But just in so many ways, the connections are increasing.
One of the solutions we start to see more and more, partnerships, so companies getting into partnerships with government, with NGOs, and even getting into partnership sometimes with competitors to change the landscape. When Unilever decided to go for 100% sustainable palm oil, which is a big problem in the world today, if they did it on their own it’s useless. They had to convince their competitors as well to do it. The other big ones like Nestle, for example, Procter and Gamble, and so they went through the Consumer Goods Forum, and they got everybody signed up. We’re seeing far more of those kinds of initiatives. It’s all about creating more and more connections.
Then the second one is coherence. This is about having really big goals to aim for. Now we’ve got the sustainable development goals, which are certainly helping, these 17 global goals that all the world’s countries have signed up to, that has created a common focus. But we also see coherence arising around specific issues. Like I mentioned, the 30% land and water protected by 2030, or on climate change, consensus really has emerged around a 1.5 degree warming target, not even two degrees anymore, and net zero by 2050. That’s just become the new norm that everybody is going for. We see this coherence start to emerge in different ways. Policy certainly helps here, because that’s what good policy does is it sets the destination, and then lets business innovate to get there. And we’re starting to see more and more of that good policy. If we look at the Green Deal in the European Union, it’s a great example of that.
Gene Tunny 39:18
Sorry, the Green Deal. I’ve heard of the Green New Deal in the US, but that’s not been implemented. There’s just some sort of wish list from AOC and people of that sort of persuasion, but you mentioned a Green Deal.
Wayne Visser 39:44
Yep. EU Green Deal. It’s effectively Europe’s strategy on climate change. It’s very, very comprehensive and very ambitious. And it touches everything. It’s got a Farm to Fork area which touches agriculture. It’s got a mobility area, around electrification of mobility. It’s got a circular economy element. It’s got a finance element. It’s a very, very strong policy. In some ways, America is trying to copy that with the New Green Deal. Yes, policy helps with the coherence piece.
Then you’ve got creativity, which we’ve talked about a little already. For things to change, for all living systems to change, they need innovation. And that happens through diversity. Again, there’s something we’re working very hard on, but we are living in an age of innovation, no doubt about it. In many of our most difficult problems, we are seeing some amazing solutions coming. If we just pick on one, for example, we know electric cars. I’ll leave that alone, but just remember that that is changing much faster than people think. Norway is burning fossil fuel cars by 2025. That’s just around the corner. In most other countries, UK, it’s 2030. Within 10 years, it’ll really be something to watch.
But take food, for example. There’s a whole movement of course around going more plant based. That makes sense from a health perspective, because 20% of mortality can be reduced just by going more plant based, but also from a climate perspective, and a biodiversity perspective, and of course an animal welfare perspective. But here we see innovation. You’ve seen the Beyond burger and the Impossible burger. These are really engineered to look and taste like the real thing. I know that may be a hard sell in in Australia, but on blind tests, actually, they’ve done extremely well.
Not only that, but we’ve got cultured meat coming. This is grown in labs meat, essentially grown fermented, grown in fat, like you do for insulin. And this is this is going to completely change everything, because again, you don’t have the input of land and water. You have much lower energy input, and you’re not killing anything. You’re literally just taking cells, live cells from a cow, for example, and you’re creating that. In Singapore, you can already go to a restaurant that sells cultured chicken. This is innovation happening very fast. Massive amount of investment going into this.
Gene Tunny 42:41
Sorry, by cultured chicken, do you mean lab grown, do you?
Wayne Visser 42:46
Yes, lab grown.
Gene Tunny 42:48
Wow.
Wayne Visser 42:48
That’s the popular—
Gene Tunny 42:49
In Singapore.
Wayne Visser 42:50
For everything, for steak, and you can literally grow it how you want to try, so lean or however you want it. It is real meat. It’s just that it’s grown from cells rather than the living cow that you have to slaughter or chicken you have to slaughter. And it’s very sustainable, not only in terms of those impacts, but literally, if I remember the numbers correctly, if you’ve got a factory that’s making this, every two days that meat replenishes itself. It grows back. You’ve just got this endless supply of meat that is growing much faster than a cow that you have to grow for months and months, or years. It’s just an example of innovation happening. That’s the creativity piece of the underlying science.
You’ve got a really interesting one, which is convergence. Convergence is very linked to innovation. It’s really the perfect storm. It’s when things reinforce one another. We call this in the science, positive feedback loops. And this is what creates tipping points. And here again, if you look at what’s happening, there are many of these positive reinforcing tipping points. When you were asking do we need more policy, do we need more market forces, what do we need, this is where we’re seeing the convergence because in fact, what we’ve got are the breakthrough technologies, which are starting to scale, plus the policy, which has really been a huge amount of policy reform in the last five years. We’ve just had the UN agree, for example, now to also create a plastics treaty globally, similar to the climate treaty, which countries will need to sign up to. That will happen by 2024. A lot happening on the policy front. Plus the market forces are kicking in. The likes of a Tesla or an Ørsted, which many people don’t know the name, but used to be a fossil fuel company in Denmark, completely transformed to a renewable company and now is one of the largest offshore wind companies in the world. We’re seeing this kind of transformation really happening very quickly.
And then, in addition to that, so we’ve got the policy force, we’ve got the technology force, we’ve got the market force, and then you’ve got the social movements that are kicking in. This is whether it’s the climate strike movement, or the Black Lives Matter movement, or the Me Too movement, or the extinction rebellion, these are very, very significant, with millions and millions of people, especially younger generations of people, who are just starting to say, “We want a different world. We don’t want our future sold out.” All of these are reinforcing one another.
And if I throw in one last one, finally, finances come on board, coming out of the Glasgow climate agreement. From November last year, there was something called the GFANZ. It’s now the Global Financial Alliance. This is $130 trillion of assets under management that is lined up now from the 450 largest financial institutions in the world, top 10 banks in Europe, top 10 banks in America, all committed now to fund this transition to net zero carbon. Now, practically what that means is they have to go back now to their corporate clients and say, “Show me your plan to get to net zero not only by 2050, but how you’re going to halve your emissions by 2030.” It starts to put massive pressure right through the value chain. All of these things are reinforcing one another, which is why the change is speeding up and why I think on many of these issues, we’re getting to these positive tipping points.
Gene Tunny 47:03
You’ve got a lot of great examples in your book. I would recommend, if you’re listening in the audience, and this sounds interesting, then yeah, please, you should get a copy of the of the book. There’s lots of great examples in there.
I wanted to go back. You mentioned palm oil. That’s something of great interest to me. I’ve done a little bit of work with Indonesian ministries, and palm oils are a major commodity in Indonesia. And if you go to, I think it’s in Bogor, just south of Jakarta, if I remember correctly, there’s a botanic gardens near the presidential palace, and there’s an extraordinary thing. There’s a monument or a statue or a tribute to a palm oil tree I think it is, because it’s such an important crop in Indonesia. I think it was first they imported it to Indonesia from elsewhere in the world, maybe from Africa. I can’t remember correctly. But they tested it in Indonesia, in that the gardens there. There’s a large amount of deforestation, I think in Borneo, due to it. But you mentioned Unilever is now committed to, is it renewable palm oil? Is that right? Is that having a practical impact on deforestation?
Wayne Visser 48:35
Yeah. A couple of things happening there. And you’re absolutely right, I think Indonesia maybe supplies 60 or 70% of the world’s palm oil, along with Malaysia, which provides another 20 or so. It has been absolutely devastating for forests. Indonesia has the third of the world’s largest tropical forests, and that’s really under threat. So we’re destroying these lungs of the earth for commercial interests, because the demand is there. And often the demand is from us in the West, isn’t it, the rich countries, because palm oil is in one in 10 products that we buy, everything from detergents to food. It’s very, very useful.
Yes, quite some time ago now, they set up something called the Roundtable on Sustainable Palm Oil. This has a way of growing palm that doesn’t have the impact that the old commercial approach does, and doesn’t have the deforestation but also the biodiversity impact. Companies can get certified and supply chains can be certified to that RSPO standard. All the big players are on board, whether it’s Nestle or Unilever or Procter and Gamble. They’ve all committed to go 100% to that. It takes a bit of time, but there are large parts of the sector that are still not committed to that, and so it’s a partial solution right now.
But again, here you start to see the value of policy. Part of the EU Green Deal, one of the most recent things they’ve done in the last few weeks, they have a law being drafted now that they will refuse any export or import of commodities, of which palm oil is one, that can’t prove that they haven’t caused deforestation. The onus is on the supplier. If you’re Indonesia, and you can’t prove that this is palm oil that’s deforestation-free, you’ve just lost Europe as a market. This is going to have huge impacts. It’s not just palm oil, it’s coffee, it’s tea, it’s timber, and several others. This is how change really happens.
Gene Tunny 50:58
Yeah. One of the technologies you talk about in the book is blockchain. Can blockchain help us with traceability, with understanding the origins of or the history of the products that we consume?
Wayne Visser 51:16
Yes, blockchain has massive potential, and is one of those ones, it’s an early stage technology, which still has unfortunate unintended consequences. The upside is traceability. And there are companies using that, to show the sustainability of supply chains. A company called Provenance in the UK is a good example. They track and trace a whole value chain for fish or for gold, and they can show, in a very secure way, every step of that process. Another example is a company called Circularise that does this for plastics and can track all the… They actually even use artificial DNA, which they put into the plastic so that just by scanning it, you can tell at every stage of the supply chain, exactly what is in that plastic and how it needs to be recycled. That’s the upside.
The downside is the blockchain, like cryptocurrencies, takes massive amounts of energy. Until we can solve the energy problem—it helps of course if it’s 100% renewable energy—but so long as it’s largely fossil fuel energy, it’s just adding to the problem of climate change.
Gene Tunny 52:34
I’ll have to look up artificial DNA. I wasn’t aware of that. That sounds fascinating. I’ll put a link about artificial DNA in the show notes. Okay. Before we wrap up, Wayne, I want to ask you about a passage in your book. Now, you talk about economics. This is an economic show. I need to ask about this passage, because I’m not sure I entirely agree with it, but that’s fine. Look, I’m trying to be open-minded on this show.
You write that, “Contemporary economics is degenerative. It systematically disregards ecological limits and fails to ensure that fundamental human needs are met. Economy is good at creating jobs, product services and technologies, but what is the quality of these outputs? Do they create more harm than good? The impacts of economic activity are explained away as negative externalities, as if environmental integrity and social justice exist in some realm outside of the economy, but that is not true. Everything is interconnected.”
Look, I agree everything’s interconnected. My view is you’re probably being a bit unfair on economists. I think contemporary economics is trying to embrace the environment more. There’s a discipline of environmental economics, as I’m sure you’re aware, and even ecological economics, although that’s really sort of a minor discipline. My view would be that economists are increasingly conscious of these issues. I think externalities is an incredibly powerful concept. And it can help us think about potential policy solutions. My concern is that we’re not going to be able to get to net zero globally, because to do so you really need some sort of carbon tax. You need a carbon price of some kind. But to do that properly, you need to have that agreed internationally and you have to have it applying internationally, to the same extent. I just think that we’re just not going to get that international cooperation to be able to do that by 2050. I’m a bit pessimistic on that.
I just wanted to note that, that as an economist I probably… That was the one thing in the book I really reacted to. I’m not negative about the book because of that. But I just wanted to get an understanding of where you’re coming from there. Do you really think contemporary economics is really that bad?
Wayne Visser 55:19
Let me start by saying that I’m not anti-economics, I did a major in economics in my business degree. And I studied environmental, ecological and resource economics in my master’s degree. Economics is a tool that we use to better understand the world and to help manage our economies.
What I think we have to look at is what kind of economics system we’ve had, and what kind of behaviour it’s promoted. Certainly, since the neoliberal economics really took off, since the 1970s, and alongside that, the push for deregulation, it’s been a disaster for the environment. There’s just no other way to say that. It has externalised a lot of the costs. It’s gone for production in places where the environmental standards are the worst, where the social standards of the worst, labour standards are the worst. It has resulted in modern day slavery. We have more people in slavery today than we had when it was officially abolished in the 1700s. That’s all kinds of forced labour. It really hasn’t managed to create a system that is consistently good for all people and for the planet on which we depend. That’s the issue. It’s created an economy that is linear, that take make waste economy, where many of the resources are simply not priced right, they’re just too cheap. If you look at Virgin plastic, for example, it’s just too cheap. It doesn’t take into account those social and environmental costs that we have.
I do think the concept of externalities can be effectively applied to remedy some of this. If we do have taxes on carbon, for example, or on poor social labour standards, this can certainly start to rectify that. But we just have to ask whether those are strong enough.
I actually do believe that we will get a carbon price. It may not emerge as one global price, but I think it’s emerging in different places all around the world, lots of emission trading schemes popping up, lots of companies providing their own internal carbon pricing. I think a consensus will start to emerge on what that price is, and governments will start to impose it in different ways. They have to, because they can’t get to their net zero targets without imposing that restriction on companies and on citizens. It’s definitely coming.
Of course, we don’t get to net zero only by changing production. We also need to invest in nature. That’s the way that you also can draw down some of the carbon to make up… It’s a kind of a Pareto rule, like 80% you need to reduce directly from your lifestyle or your operations or your value chain, and then the remaining 20—or some say it needs to be more like 10%—should be in actually restoring nature, which makes up the balance.
I think all of those things are happening and will happen. I do think there is a brand of economics or a new understanding of economics that can get us there. If you look at Doughnut Economics, which you’re probably familiar with, Kate Raworth and her book, I think that’s the best coherently argued alternative to what would be more conventional economic thinking. All it’s really doing is saying, how do we better build and the ecological limits, or what we sometimes call the scientific planetary boundaries beyond which the whole system is in danger of collapse, and how do we build in those social foundations, the minimum requirements that people need. Economics has been dabbling with those things, but just hasn’t been very effective if you look at some of these trends we’ve been talking about. It’s just how do we improve economics and have a new version that is more effective than we have at the moment.
Gene Tunny 1:00:09
Wayne, you’ve written a really fascinating book with lots of great examples of what business and what communities around the world are doing to try to tackle these challenges to improve sustainability. Is there anything you’d like to say to wrap up, to conclude? This has been a great conversation, and we’ve gone over a lot. I could talk to you for another few hours, but we’ll probably have to wrap up for now. Is there anything you’d like to say in conclusion?
Wayne Visser 1:00:46
Yeah, let me just mention two things, and then I’ll have a cheeky suggestion. One is that there is a chapter on the book specifically on business and how business needs to integrate thriving, the practicalities of how they do that, and there’s six steps to that. That’s based on work that I do with companies, big companies like Johnson and Johnson, where we take them through these steps of integrating. It touches on all kinds of things, on how you consult with stakeholders, how you relook at your values, how you relook at your strategic goals, how you build in new and different metrics, how you redesign your portfolio of products and services. Just be aware that there is, if you’re coming from the business world there, besides all the innovation examples, there’s also this very practical, how do I do this on Monday morning.
There’s a chapter on leadership, because that is really crucial. We are seeing a different brand or a different type of leadership emerging, that is able to tackle these big challenges and turn them into breakthroughs and into thriving. I look at the different characteristics that those leaders have, obviously, with lots of examples.
The cheeky suggestion to end with—I’ve started to do this even in keynote speeches—is to end with a poem, since as you mentioned, I’m not only a professor, but a poet. I just find that it taps into a different part of the brain. With your indulgence, I might just end with one of those.
Gene Tunny 1:02:19
Please. Thank you.
Wayne Visser 1:02:21
I’ll do the one which actually opens the book. It is a poem called Thriving. It even has a stanza that is really all about markets and economics, so you should like it. But see what you think of this. Thriving.
Our life is so much more than a duty or a chore of merely getting by without a why or what for, the law of tooth and claw, the struggle to exist, to rally and resist against life’s slow decay, the way of entropy of living just to see another day, to stay, to endure and survive. No. Life is meant to thrive. In nature, all things grow from seed to tree. We know the cycle of living through giving of reap and so, the flow. Things come and go. The cycles of grooming from sprouting to blooming of stretching for the light, the bright palette of hope, the diverse ways to cope, to cherish and flourish, bursting forth and alive, for nature means to thrive. Society lives too. A melting pot we brew from cultures and crises with spices for flavour and kindness to savour, ideas for conceiving and goals for achieving, that stretch us and bind us, that find us together in all kinds of weather, wanting what’s fair, to care, longing to love and strive for society to thrive. The markets live and breathe in complex webs we weave. The synapses of trade have made the things we need, each deed a chance to lead. While tech is getting smart, yet still it needs a heart, a compass as a guide to tide us through the storm and find a better norm. A breakthrough to renew an innovation drive. Yes, markets too can thrive. All life is meant to rise, to reach up for the skies, to move beyond the edge, to fledge with hopeful cries. Life tries until it flies. It shakes and spreads its wings and trills each note it sings. While given time and space, the race of life is run, full powered by the sun, on land, in seeds, like bees’ sweet nectar from the hive. All life is made to thrive.
Gene Tunny 1:04:57
Very good. Excellent. Professor Wayne Visser, this has been terrific. I really enjoyed our conversation and your poem at the end and fully agree. All life and society and nature and markets are meant to thrive. What a great message to the end on. I’ll put links to all your social media and your website for the book in the show notes. This has been terrific. I really, really value your time and your thoughts and all the great insights in your book. Well done and thanks so much. Hopefully I’ll look forward to your future work. I’d really look forward to chatting with you in the future. That’s been great, learned so much. Thanks again, Wayne.
Wayne Visser 1:05:54
Thanks so much for having me on. Of course, I’m always happy to find an excuse to visit you down under. I used to teach also in Melbourne, and love it down there. I look forward to those opportunities. Just also to say for people, there are different ways to access the book, so not only e-book and hardback, but also an audiobook version, so whatever takes your fancy. Delighted actually that it’s already hit Amazon bestseller status, so really looking forward—
Gene Tunny 1:06:33
Wow.
Wayne Visser 1:06:34
That’s in its first week, and number one on the new titles in various categories, including several economics categories. I’m delighted with that. Just thanks very much for having me on. I love the conversation and I hope your listeners do too.
Gene Tunny 1:06:51
Oh, very good. I’m sure they will. Thank you, Wayne. Really enjoyed it.
Wayne Visser 1:06:55
Thanks a lot. Bye now.
Gene Tunny 1:06:57 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Credits
Big thanks to my guest Dr Wayne Visser and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
In Economics Explored EP129, show host Gene Tunny reviews his top ten insights from economics with Tim Hughes. These include insights regarding specialization and trade, opportunity cost, and the price mechanism, among others. Applications to traffic congestion and climate change, among other issues, are explored.
You can listen to the episode using the podcast player below or on Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps. A transcript of the conversation is included below.
The e-book which is the basis of this episode is available to subscribers of the economicsexplored.com website.
Transcript: Top 10 insights from economics – EP129
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. But can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.
Tim Hughes 00:11
It was. I remember the few times I was there, and it was like every European city. It was just chockers. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward.
Gene Tunny 00:25
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 129, which is about my top 10 insights from economics. And joining me today is my occasional co-host, Tim Hughes.
Tim Hughes 00:49
Hey, Gene. How are you?
Gene Tunny 00:50
Good, mate. Very good. Thanks for joining me for this mini episode in a way. I just want to go over my top 10 insights from economics. So I’ve prepared an e-book. And if you’re listening and you’re interested in getting it, you can subscribe to the website, the economicsexplored.com website, and you’ll get a copy of that e-book. So Tim, I just wanted to go through what I think those top 10 insights from economics are. And one thing I should note is we’re recording this on the 2nd of March, 2022. Currently, there’s a huge crisis in Ukraine with the Russian invasion. We’ve got no idea how that will play out.
Tim Hughes 01:36
Hopefully swiftly and peacefully.
Gene Tunny 01:38
Yeah. But look, I mean, huge, huge risk to the world. And yeah, just feel for the people of Ukraine who are suffering from that invasion.
Tim Hughes 01:48
Absolutely.
Gene Tunny 01:48
Just terrible. Okay, so should we get into it, Tim?
Tim Hughes 01:53
Yeah, let’s do it. Can I ask if this is one to 10 in any sort of preference or order? Is it just top 10 all round?
Gene Tunny 02:00
This is one to 10 in the order that they occurred to me as I was jotting them down.
Tim Hughes 02:05
Cool.
Gene Tunny 02:06
So I think I’ve tried to order them in what I think are the most important insights. But having said that, I recognise that there’s possibly insights that other economists would put ahead of the ones I’ve chosen, or maybe they don’t agree with what I think are insights. And so if you’re listening in the audience, and you have a different view, or if you think I haven’t explained something exactly correct, then sure, please get in touch. So you can send me a message via SpeakPipe, there’s a link in the show notes, or email contact@economicsexplored.com. We’d love to hear from you, as always.
So Tim, just to begin with, I mean, this is one that I often point out when we’re just chatting is that insight about how $50 bills or $50 notes aren’t just lying on the sidewalk, waiting to get picked up. There’s a famous joke about the two economics professors walking along the street and one of them sees a $50 note and says, “Oh, there’s a $50 note there.” He’s about to bend down to pick it up, and the other one says, “Don’t be silly. If it was a real $50 note, then somebody would have already picked it up.” So it’s the idea of opportunities for profit or gains from trade are rapidly exploited in a market economy. So it’s that sort of insight, this idea of arbitrage, so the fact that you don’t have exchange rates being out of alignment. If you think about what we trade, say Australian dollars for US dollars, and then US dollars for British pounds, they all sort of make sense collectively. You’re not going to get an opportunity to, say, take your British pounds, buy Australian dollars, then sell them for American dollars, and do better than if you just sold your British pounds for American dollars. So those gains will actually be arbitraged away.
Tim Hughes 03:58
So if there is a $50 note on the footpath, it’ll get picked up so quickly that it’ll be unnoticeable on the macro.
Gene Tunny 04:04
Well, yeah, exactly. And I guess it’s a philosophy for life too. It’s something that Seth Godin, world’s number one marketing guru, will often say, that look, someone’s going to be number one, or someone’s going to win in this game. Someone’s going to be the top YouTuber. Somebody’s going to be Joe Rogan.
Tim Hughes 04:24
It’s probably not going to be you. Still hope yet, Gene, there’s still hope.
Gene Tunny 04:32
So I’ve always thought that was an important lesson from economics. That’s a key insight. It’s important in economics, because we’ve got all of these models in which there’s optimising behaviour. So we’ve got businesses trying to maximise profits and consumers trying to maximise their utility or their satisfaction. And generally if you assume competitive markets, then businesses can try to maximise profits all they like, but the force of competition means that they’re just earning a reasonable return on their capital. I mean, they’re being compensated for their investment, for their assumption of risk. But they shouldn’t generally be earning monopoly profits. Of course, then there’s that issue about, well, what about if you’re Amazon or what about if you’re Facebook, and so clearly, there are some monopoly profits or supernormal profits being earned. But the way that some economists rationalise that is that they’re being rewarded for the innovation. And you really need those supernormal profits to stimulate innovation in a way.
Tim Hughes 05:40
Yeah, it’s an interesting one, because, I mean, there are so many of those big companies. Certainly Amazon is profitable, but a lot of the big ones who aren’t profitable, just to get scale Uber, and I don’t know if Airbnb are profitable, but you know, it’s those ones that are massive to market. Spotify, for instance so they’re actually making money. But they’re getting market share. So it’s interesting to see how that’s possible without turning a profit. And it’s obviously on the future promise of reward.
Gene Tunny 06:15
It’s all based on future earnings. And so this is what’s interesting in this world of low interest rates, because interest rates are so low, and you can borrow money so cheap and invest for the long term. If you look at what these companies such as Uber could be earning in the future, and you make assumptions about, oh, well, we could all be using Uber, no one will own a car anymore, and look at what the potential revenues could be. If you’ve got very low interest rates, then if you discount those future earnings back to the present, they’re worth a lot more. And that pushes up the value of those companies, because in a way, it could make sense to borrow a lot of money now and invest in those companies, because interest rates are so low, and these companies have such huge potential earnings into the future. So that’s why you’re seeing a lot of these tech companies having such high valuations. And as soon as interest rates start increasing, that could reduce the value of these tech companies, because well, people would rather get the money in the short term, because the opportunity cost of money is higher if the interest rate is higher. Does that make sense?
Tim Hughes 07:32
It does. Yeah. Yeah. I mean, is this still along the lines of the $50 note on the on the street?
Gene Tunny 07:38
We somehow got onto that issue of … You’d talked about the tech companies.
Tim Hughes 07:42
It was my fault. I guess what it is is that they all lead from one to the other, but without getting off that first one, because it is a thing, for instance, of like, yeah, if there is innovation, and if people can copy it, then it will be copied. And generally more people will be doing it, so that general movement away, so that opportunities get taken advantage of by more than one person, obviously. If it works, then other people will copy it and follow and it becomes more dispersed. That would naturally be how it works. So I guess we’re talking about exceptions to that rule with these big, massive companies that are all on the promise of future reward, whereas most companies can’t operate that way. They have to be more instantly profitable if they’re going to survive.
Gene Tunny 08:29
Yeah, look, I may have gone on a bit of a tangent there. But that’s insight one. We might go into insight two. And that is this concept of, there ain’t no such thing as a free lunch. Now a guest I’m having on in hopefully next episode or the episode after is David Bahnsen. He’s a fund manager over in the States. And he’s written a great book, There’s No Free Lunch. And this is the idea that, look, there’s always an opportunity cost with any action. And so my insight two is it’s opportunity costs rather than cash outlays that matter in economic decision making.
Now, I think the original idea or the original, is it a proverb or a saying about there ain’t no such thing as a free lunch, came from bars in the, might have been late 19th century or early 20th century USA, where they advertised as having a free lunch to get the patrons in the door. And they’d know that they could cover the cost of the free lunch by selling them drinks, or maybe they inflated the prices of those drinks a bit while having the free lunch. So there’s that idea.
But also, if you think about it, you’ve got an opportunity cost. Someone could offer to take you to lunch, but that’s an hour of your time and that hour is worth something Time is money. I mean, that’s one of the things we often do in economics in cost-benefit studies. We value people’s time and we work out well how much benefit could erode or a new bridge provide through the time savings. There’s an Australian government estimate. I think it’s $32 an hour or something, on average, you can value people’s time at.
Tim Hughes 10:11
I think it’s a good rule of thumb. You know, there’s usually some reason for something being given freely. Sometimes if it’s charitable, then that is what it is. But in many cases, I think it’s tied in the process of reciprocation, in the form of something else, the other party reciprocating in some form or other, or an opportunity to sell a product or service at some stage. So I think everyone’s aware of … I think that’s a fair one to have in there, Gene. That’s a good home truth, I think.
Gene Tunny 10:49
Yeah. And it’s important because you’ve got to recognise the opportunity cost of your own assets. If you’ve got assets, and they’re not being used, then you’re losing the income from that. So you’ve got to recognise that. It might make sense for you to offload something that’s just sitting around, like an old car or something, that’s costing you. You’re losing money on it through depreciation every year. So yeah, why not get rid of it? So I think that’s an important concept, this idea of opportunity cost, what are you giving up through your current course of action, your current actions.
Okay, insight three, comparative advantage and gains from trade. So this is the classic principle from David Ricardo, the British stockbroker, member of Parliament I think he was, economist from the 19th century, which is essentially arguing that there’s generally going to be gains from trade. Even if a country can produce most things, or in his model, it’s even if a country can produce everything better than another country, more efficiently, it still makes sense for one country to specialise in particular goods and services, relative to another country. Then that maximises the total amount that can be produced, and then you trade amongst each other. So it’s an argument in favour of specialisation and then trading.
Often the examples are given … I think they have the example of England trading with Portugal, and they use the commodities of cloth and wine. And there’s a numerical example that shows why it makes sense for, I guess it was England specialising in cloth and then Portugal specialising in wine. What’s neat about it is it doesn’t actually matter. If one country is superior in productivity to another country, it still makes sense to have specialisation.
One of the ways it’s often explained in economics classes is if, say, you’ve got a professor, and the professor has a secretary. And the professor could be as good as the secretary in administrative tasks, or even better. They could be an even better typist, or better at the admin stuff. But they’re also a great researcher. If the professor gives up an hour to do the admin stuff, that’s going to cost them a lot in terms of the great research output they could produce, whereas the admin person, they’re not going to be able to produce in an hour. If they gave up an hour, they’re not going to be able to produce anywhere near what the professor could in terms of research output. And it makes sense collectively. If you look at it collectively, it makes sense for specialisation to occur. So I’ve got some examples in the insight in the e-book. It’s essentially the benefits of specialisation.
Tim Hughes 13:56
And then maximising the available time within that sphere of specialisation as well, I guess. So for instance, like if you’re educated to a point of being a specialist in a certain area, like in your example there, so you want to be operating in that area of specialisation for the most amount of your available time.
Gene Tunny14:16
Exactly.
Tim Hughes 14:17
This would speak to scale though, I guess, as well, wouldn’t it? For instance, certainly around my part of the world, originally Manchester, and cotton or linen production around there was huge. And so if you do that to such a scale, then per unit cost or square metre or however you measure the product, that would be ultimately cheaper to produce than if everyone tried to do it somewhat on a smaller scale.
Gene Tunny 14:47
Yeah. I think it’s related. I mean, definitely the gains from scale, the economies of scale, that will come from specialisation. And this is I think what Adam Smith was getting at. He was talking about how just the productivity and efficiency gains from specialisation, the division of labour. Ricardo’s model, his theory of comparative advantage doesn’t depend on that though. It is related. That’s a good point. I mean, maybe I needed insight about increasing returns in economies of scale in this in this e-book. I haven’t got one at the moment. I think that is an insight. That’s an important insight.
Tim Hughes 15:33
For instance, I don’t know what Portugal’s opportunity or capability was to manufacture cotton or linen, but I know the vineyards of Manchester wouldn’t have cut it as far as supplying the local areas with wine. I don’t know if anyone’s tried, but I’m certain that we would have heard about it if it was any cop.
Gene Tunny 15:51
I’ll have to put some examples in the show notes, a link to them on comparative advantage, because there are neat little numerical examples. And, I mean, yeah, it’s just not going to work in the podcast, but I’ll link to it in the show notes if you want to check it out.
Tim Hughes 16:06
I’ve just googled Manchester vineyards and it’s just tumbleweed blowing across my screen.
Gene Tunny 16:13
What about with climate change? See what happens.
Tim Hughes 16:15
Maybe, maybe.
Gene Tunny 16:16
See what happens. I shouldn’t be joking about that sort of thing, because there was a new IPCC report that came out. Was it yesterday? Just saying, yeah, still urgent. Something has to be done. We’re not really doing anything.
Tim Hughes 16:37
As far as climate change and crops.
Gene Tunny 16:39
We’re not doing enough. I think that’s what the message is.
Tim Hughes 16:41
Yeah, absolutely. There’s a different podcast on that one. And I know we’ve talked about it. But absolutely, I think, just very quickly, urgency would be a good thing. No matter whether people believe in climate change or not, urgency in the right direction, of all the changes that would make this planet cleaner, would be a good thing. Anyway, I’ll stop it there.
Gene Tunny 17:05
We’ll have to come back to that. I mean, there is one insight where we could talk about climate change. Insight nine, we can use market mechanisms, taxes or subsidies to correct market failures. So climate change can be thought of as a market failure, because businesses aren’t … At the moment, unless they’re paying a carbon tax, or there’s an emissions trading scheme of some kind … There aren’t many of those around the world. There’s one in Europe. I think there might be one in California. I’ll have to put that in the show notes. If they don’t have that, then they’re not paying the cost of the pollution. They’re not facing that cost. So the idea of the emissions trading scheme or the carbon tax, they’re two different ways of doing the same thing. It’s a way of putting a price on the carbon dioxide that’s emitted. So forcing people to pay for it. So the polluter would essentially pay for it. They’d have to buy the emissions permits. So they would pay the tax based on their emissions. And then they’d pass it on to consumers, to an extent. That’s one of the insights.
So now, the challenge is, of course … That sort of makes sense. It’s a global problem. That’s the problem. So we really need a scheme that operates globally, or there’s some sort of compatibility or trading between different countries, the schemes of different countries. Otherwise, I’ve made this point many times about Australia. It doesn’t make sense for Australia to do much to reduce emissions if the rest of the world isn’t. If China and the USA aren’t doing it, what’s the point of us imposing these costs on our economy?
Tim Hughes 18:55
It’s a fair point, because it is that thing of like, why hobble yourself if other people … Then you’re just giving an advantage elsewhere, and making it harder. But here’s one of those things, it’s like one in all in, which of course, is different around the world, like people from different circumstances or Third World countries who are going to struggle to try and meet a matching scheme. But I’m certain that whatever the future holds in the way of making things better, I think technology and breakthroughs in cleaner energy and all these different things, they’re probably the areas which will get taken up, because if you can make it cheaper for someone to have clean energy, compared to digging fossil fuels out of the ground, or having something that’s not clean energy, as soon as it becomes cheaper, then you’ll have uptake naturally. You won’t have to have schemes or anything in place. That will be widely accepted and welcomed, because you’re going to be better off doing it.
And so those kind of breakthroughs, I think, I can only hope that that would be the sort of game changers. Of course we’re talking about future technology in most cases, but given the right intent behind doing that, and the right minds, the right backing, I’ve got no doubt that that would be a reality. And so that’s where the support globally could come from, if that’s supported, to go down that road and follow that opportunity, because there are opportunities there. Then that would be the global uptake, rather than … I think it would be too hard to try and expect everyone to join a global scheme. I think that is hard. And maybe that’s just an intermediate sort of measure. Maybe that’s an intermediate measure between those who can and that still would make a difference. But anyway, again, I don’t want to get off your top 10 here, Gene.
Gene Tunny 20:47
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 21:21
Now back to the show. Okay, we better rip through these pretty quickly, because you’ve got to get going in about five to 10 minutes. So far we’ve got through … I think we’ve done four insights now. I’m up to insight four, the magic of the price mechanism, or you can ration by price or by queuing. So this is another point I often make about how a lot of the problems we’ve got is because we don’t have appropriate prices, or we’re not charging for scarce resources.
And a classic example is car parking, the high cost of free parking, as Donald Shoup I think it was, who was a professor at UCLA, that’s what he calls it. And part of the reason you can never find a park is because the councils, at different times they’ll allow people to park for very little cost or for free on the streets. And so they’re not appropriately charging for the scarcity of that resource, the fact that yeah, street park is valuable, and it’s not necessarily going to the person who would be most willing to pay for it.
Tim Hughes 22:40
So going against the supply and demand model, you’re suggesting? Is that right?
Gene Tunny 22:43
Yes.
Tim Hughes 22:44
Because normally supply and demand would go to-
Gene Tunny 22:46
Economists, we’re great believers in supply and demand.
Tim Hughes 22:48
That makes sense.
Gene Tunny 22:49
Another example is congestion. And so economists for years have argued that there’s a lot of benefit to congestion charges. There’s a congestion charge in central London, and I think in Singapore. It’s terrible, isn’t it?
Tim Hughes 23:04
I got stung. I got stung. Don’t get me started, Gene. I haven’t got time to go through.
Gene Tunny 23:11
You get confused at Marble Arch and you end up in the centre of London.
Tim Hughes 23:17
Just very briefly, we were there for two days, like five years ago. And we left central London and paid. We knew there was a fee. We weren’t sure if we were in the central area or not. We were told we were just outside it, had a higher car, etc. But you’re supposed to pay by midnight the following day. And we did it the day after that, and it was 80 quid. It stung massively. It’s like, come on. It was not straightforward or easy to make those payments. And that’s my issue with any of this stuff. Happy to pay for … It was 12 quid a day, I think whatever. That sounds about right. But to then be fined 80 pounds in such a short period of non-payment, which by anybody’s standards, by midnight the following day was like, hang on.
Gene Tunny 24:07
Can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.
Tim Hughes 24:13
It was. I remember like the few times I was there. It was like every European city, it was just chockers, you know. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward. When you went across the Sydney Harbour Bridge 40, 30 years ago, whatever, you threw coins into the tollbooth, and off you went. It was very clear if you paid or hadn’t, etc. There was a little bay to pull over into if you couldn’t find the loose change or whatever it may be. Whereas now those costs are far less visible, I find. You just ticker over on these costs, which come out. I think there’s an element of rot in a lot of this, which I’m not so keen on.
Gene Tunny 24:54
Tim, I agree. That’s an implementation issue there. We’re dealing with the high level ideas here.
Tim Hughes 24:58
Sorry, Gene. I got sidetracked there. It’s a personal thing, and I said I wouldn’t talk about it, but I did.
Gene Tunny 25:02
It’s fair enough. Insight number five, ignore sunk costs. Bygones are bygones. Economics is forward looking.
Tim Hughes 25:11
That’s timely.
Gene Tunny 25:13
Well, it’s true.
Tim Hughes 25:15
That’s right, just forget about it, write it off.
Gene Tunny 25:18
But we often fall into the sunk cost fallacy and we just throw good money after bad. I mean, we spend a few billion developing a Concorde jet that we figure out pretty early on is not gonna be very commercial, or it’s just a money pit. The British and the French government just keep investing in it. And it turns out it just wasn’t commercially viable. Beautiful aeroplane.
Tim Hughes 25:41
Yeah, definitely.
Gene Tunny 25:43
Amazing technological feat, but the economics just didn’t make sense. You just couldn’t pack enough people on the Concorde.
Tim Hughes 25:50
I never knew the economics behind it. It was a tragic end to the Concorde era when it caught fire, which was awful, however many years ago that was. But I wasn’t aware of the economic cost of it at all.
Gene Tunny 26:07
I think the economics of it were bad, so never going to recommission them or to build new ones because I think the problem was you need so much jet fuel to get hypersonic. I mean, it was hypersonic, wasn’t it?
Tim Hughes 26:19
Supersonic.
Gene Tunny 26:20
Supersonic, that’s it. Supersonic, that’s right. And so you need a huge amount of jet fuel to get supersonic. Beautiful design, but it was very sleek.
Tim Hughes 26:32
It was stunning.
Gene Tunny 26:33
You couldn’t pack as many people into a Concorde as you could a 747, could you?
Tim Hughes 26:39
No. I mean, I guess looking back at the time, that was very soon after the lunar landings, and around that sort of time, so it was very much a modern forethinking sort of thing to get involved in. So there’s probably a bit of ego involved in the whole thing.
Gene Tunny 27:01
Yeah. It was British and French prestige. I mean, they wanted to play with the big boys. I mean, they wanted to play with the Russians and the Americans. There was a space race, and the Brits and the French wanted to, I don’t know, I guess they wanted to show that they were technologically advanced as well.
Tim Hughes 27:24
I was just a kid at the time. But I remember there was pride in the Concorde. Pictures of it were plastered everywhere. And it did, it looked amazing. You did take some pride in that in some way. And I guess that, yeah, maybe if they felt that there was other benefits from having that kind of visibility of something that modern looking. I don’t know.
Gene Tunny 27:50
Yeah. Well, it’s a shame. But anyway, it’s the example I give about sunk cost, because they just kept throwing money at this thing, even though it was a really bad investment. So you’ve got to ignore what you’ve spent already, and just think about, is the additional money you’re spending on this endeavour, is that going to be worthwhile?
Tim Hughes 28:09
So cutting the losses?
Gene Tunny 28:10
Exactly, exactly. We better rip through the rest of them pretty quickly. Insight 10, that’s an easy one. We’ve chatted about this one before. Inflation is always and everywhere a monetary phenomenon. So that’s something from Milton Friedman. I’ve chatted about that enough on this programme. So far, we probably don’t need to elaborate.
Insight six, redistributing via the tax transfer system can be superior to redistributing via fixing prices. What I’m talking about there is, a lot of times governments try to fix prices, try to set wage rates or try to fix prices of different goods and services. Rent control is one example, generally a bad idea, because that can discourage investment in new apartments. And that can make the situation worse for people. It’s good for the people who’ve got a rent-controlled apartment, but it’s not good for the majority. So economists tend to think that rather than trying to fix prices, you’re better off letting prices adjust, because there’s the magic of the price mechanism that economists talk about. And then if people, they’re doing it tough, because there are people who need help, then provide that through the welfare system. That’s an idea. That’s one of the insights there.
Tim Hughes 29:30
So now we’ve got something to talk about more in more depth in that area as well, coming up. It would be good to expand on that because it’s certainly an area where it’s getting very, very difficult for new homeowners to get a foot on the market ladder. And I know there are different schemes in place around the world. I know Singapore has got a scheme whereby the government buys the buildings and allows people to get homeownership through a scheme that they basically provide the building or the land.
Gene Tunny 30:08
It seems very interventionist to me. But yeah, we should chat about that in a future episode.
Tim Hughes 30:13
There were a few things. I know we never talked about having that. But it’s along the lines of this, because that still basically isn’t a fixed thing, but it’s more of an assisted service or assisted package.
Gene Tunny 30:26
Insight seven, collusion and monopoly power can be a concern and may require regulatory action. That’s probably pretty self explanatory. I mean, economists celebrate the market generally. We think the market system’s great. But of course, there can be situations where companies become extremely dominant, they can abuse their market power, and hence, you might want to have some antitrust action against them. I mean, we’ve got an Australian Competition and Consumer Commission here in Australia to do that sort of thing. The United States has got a Federal Trade Commission, I think, or they’ve got the Department of Justice. So there’s a lot of talk now about should we break up big tech companies like Facebook, like split Facebook proper from Instagram and WhatsApp, is there something that they should do with Google, should we break Google away from YouTube, etc. There’s all that debate going on at the moment. I’ve covered that on the show before
Tim Hughes 31:23
It’s a thorny issue, isn’t it?
Gene Tunny 31:28
It is. And I think what my takeaway from economics would be that, yeah, it can be a problem in some circumstances. And there’s some guidance in the literature. I’ve offered that as an insight. And I guess it’s a topic we should come back to in a future episode, because there are a lot of issues to consider pros and cons, because you don’t want to eliminate that process of creative destruction as Joseph Schumpeter, the Austrian economist, who is at Harvard, called it, because that’s important. We like that creative destruction. New companies are rising and innovating and offering services that everyone enjoys. I mean, Amazon. I’m not a great Facebook fan. Maybe Google’s a better example. I think Amazon and Google have certainly provided a lot of value to consumers and to people in the community,
Tim Hughes 32:25
it seems to come down to ethics, I think, and that’s maybe the direction to take. That would be my feeling on it, because it’s hard to put limitations on a free market. The less governance I think is always a good thing. But then there comes responsibility with these massive companies then to do the right thing and to employ people under good conditions, etc, all those kind of areas, you know. That money should be going back into society at some level. If the profits are so huge, then yeah, it would be, I think, a fair thing to tax those companies more, to give back to society.
Gene Tunny 33:07
Yeah. So there’s a big issue there on multinational tax avoidance. So that’s covered on the show with Pascalis Raimondos.
Tim Hughes 33:13
Outrageous, yeah.
Gene Tunny 33:14
Important issue. Final insight for now, inside eight, because we’ve already covered nine and 10.
Fallacy of composition and the paradox of thrift. So what’s good for the household is not necessarily good for the economy, so just the idea that in economics, you’ve got to think about how everything fits together, just how does everything connect together. And this comes from Keynes in the ‘30s. There are a lot of people who are negative about Keynes and think it’s a very … It’s the economics of depression, you could argue, but the idea is that it might make sense for a household to cut back on its spending if the breadwinner loses their job or one of the household members loses a job. But if everyone in the economy does that, it’s bad for the economy collectively. It’s less spending, less income, less production. So that’s the paradox of thrift, that what could be good for the household may not be good for the economy.
Now I’m not necessarily advocating a Keynesian viewpoint or Keynesian fiscal policies. But I think that is a key insight, that you’ve got to think about how everything collectively fits together. And if you think about governments, back in the ‘30s, when the revenues fell due to the Depression, a lot of the governments thought, we’ve got to tighten our belts, we’ve got to cut spending, to make sure we balance the budget. Sound public finance was what was going to help us in the Depression. But it turns out that wasn’t the case, because when they cut spending, that meant they weren’t spending as much on their public servants or on infrastructure projects. And that meant less activity in the economy. So it was a perverse fiscal policy.
Tim Hughes 35:13
That’s interesting, because now that’s happened more recently, when there have been cases of the government handing out money to people just to get the stimulus packages, for instance, just to keep money moving around and keeping businesses going in it. The first time it happened, it seemed like the craziest thing. I’d never seen that happen before. I’m trying to remember when it was.
Gene Tunny 35:37
2009, Kevin Rudd, the Rudd money.
Tim Hughes 35:39
That’s right. Yeah, it was the GFC, wasn’t it?
Gene Tunny 35:40
$900 checks.
Tim Hughes 35:42
Yeah. And it was just like, it seems insane. But it appeared to work, which is remarkable. But it’s exactly what you’re talking about, I guess, isn’t it?
Gene Tunny 35:51
I’d say it’s got a mixed record historically. But that’s the idea that comes from John Maynard Keynes in the 30s. That’s why Keynes is seen as revolutionising economics, because up until the ‘30s, in 1936, when he published the General Theory of Employment, Interest and Money, everyone thought that idea was crazy.
Tim Hughes 36:12
It seemed counterintuitive. We’re in tough times, and you start spending. But there was sense to it.
Gene Tunny 36:18
What’s counter?
Tim Hughes 36:19
Well, for instance, the stimulus package, like at the time, a GFC.
Gene Tunny 36:24
Oh, I see.
Tim Hughes 36:25
It would appear. And at a household level, you’d think, yeah, tighten your belts and sort of, like, hold on to everything, whereas like, it was completely the opposite. Here you go, put this into the economy, like keep everything moving. The value of that on the greater scale, on the national scale, was really effective. It was impressive to see.
Gene Tunny 36:52
Exactly. So I’m not in any way endorsing Keynesian fiscal stimulus, because there are all sorts of issues with it in terms of timing, are we gonna get the timing of it right. There’s a possibility you could actually add instability to the economy, that sort of thing. Crowding out impacts, all that sort of thing we can cover in another, or I’ve covered with Tony Makin in a previous episode. Tim, that’s been great. Thanks so much for sitting in, as I’ve sort of done this quick tour of my top 10 insights of economics. You’ve given me some things to think about. I want to add something in about economies of scale or increasing returns to a future addition to this. But at the moment, if you’re listening, you’re interested in this, please get on the website and subscribe so you can download it. Tim, thanks so much. Really enjoyed that conversation.
Tim Hughes 37:37
Thank you, Gene. That was great. It was really interesting.
Gene Tunny 37:39 Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com, and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Credits
Big thanks to my guest Tim Hughes and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
In Episode 128 of Economics Explored, Philosophy Professor Deb Brown helps us explore some big questions around risk, cost-benefit analysis (CBA), and public policy, particularly relating to the pandemic. Deb also explains what was so important about the Enlightenment.
You can listen to the episode using the podcast player below or on Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps. A transcript of the conversation is included below.
About this episode’s guest – Prof. Deb Brown
Deborah Brown is Professor, School of Historical and Philosophical Inquiry at the University of Queensland, Australia. During her time in the Faculty of Humanities and Social Sciences, Deb has coordinated a wide range of projects focusing on critical thinking. She has been instrumental in establishing connections and partnerships within the school sector, including with the Queensland Department of Education, as well as building partnerships across UQ and with international education providers.
As part of her role, Deb works to link the UQ Critical Thinking Project into relevant projects within the university to provide educators with an understanding of how to embed critical thinking in classroom practice and assessment and to maximise outcomes for students, particularly those from disadvantaged backgrounds. Deb has established a professional development program for educators, booster courses for school and university students and research collaborations with a diverse range of researchers from the broader UQ community.
Deb has a Bachelor of Arts from the University of Queensland and a Master of Arts and PHD from the University of Toronto.
Transcript of EP128 – Risk, Cost-benefit analysis, and the Enlightenment w/ Prof. Deb Brown
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.
Deb Brown 00:04
What is the Enlightenment is that the movement is about promoting intellectual autonomy, not just relying on what others or testimony or what authority tells you.
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 128, on philosophy, risk, cost-benefit analysis and the Enlightenment. This is part two of a conversation that my occasional cohost Tim Hughes and I had in January 2022, with University of Queensland philosophy professor Deb Brown. Part one of their conversation was broadcast in Episode 123, in which we chatted with Deb about truth and critical thinking. In part two, which is in this episode, we consider some big questions around risk and public policy, particularly relating to the pandemic.
Assessing government policy measures during the pandemic has been very challenging. In my view, there aren’t easy answers. Basic Facts are disputed and people are making different subjective assessments of what restrictions on our liberty are justifiable, for public health reasons. I found this conversation with Deb really helpful in clarifying some of the important issues for me. And I’ll aim to come back to the pandemic in a future episode soon with some further thoughts.
Deb also helped me understand just what is meant by that critically important period in our history known as the Enlightenment. Part of the way forward out of the mess that we’re in globally at the moment, in my view, surely has to be a greater appreciation and a recommitment to the values of the Enlightenment. Okay, please check out the show notes for links to materials mentioned in this episode, and for any clarifications and abbreviations, such as QALY, Q-A-L-Y, which stands for quality adjusted life year, that’s one of the abbreviations that Deb uses in our conversation. You can find the show notes via your podcasting app, or at our website, economicsexplored.com. If you sign up as an email subscriber, you can download my new e-book, Top 10 Insights From Economics. So please consider getting on the mailing list. If you have any questions, comments, or suggestions, then please either record them in a message via SpeakPipe, see the link in the show notes, or email me via contact@economicsexplored.com.
Righto, now for our conversation with Professor Dave Brown on philosophy, risk, cost-benefit analysis and the Enlightenment. Thanks to my audio engineer, Josh Crotts, for his assistance in producing the episode, I hope you enjoy it.
One thing that I’m always conscious of is that as economists, we do cost-benefit analysis studies. And we try to put everything in dollar terms. And we do this over the lifecycle of a project or over X number of years, 30 years. And we come to conclusions such as, well, the present value of benefits exceed the present value of costs, and therefore this is a good thing to do. But we’ve always got to bear in mind that there are some big philosophical assumptions we’re making when we’re doing a cost-benefit analysis. And in some cases, those assumptions are fine. Or if we’re doing a cost-benefit analysis of a bridge or a new raw railway tunnel or a road, okay, well, then, maybe that’s okay to put everything in dollar terms. But it’s difficult in the context of the pandemic, because we’re dealing with people’s lives and you’ve got – there are all the issues of like, can you quantify that in dollar terms? And then even if you did a cost-benefit analysis, there’s a utilitarian assumption underlying cost-benefit analysis in economics is Benthamism, this Benthamied approach. And I think if you understand that, as an economist, that helps you in understanding how much you should take out of any particular bit of analysis you do. You need to be honest about what it is and you need to have an understanding of this – I think it’s David Hume, his problem.
I find I’ve been thinking a lot about that during the pandemic and I’ve been tried to be less dogmatic or less – maybe it’s making me less confident in saying that if you’ve got a particular cost-benefit analysis result and that’s the right thing. That’s a bit of a ramble. Sorry, Deb, but do you have any thoughts on that or in response?
Deb Brown 05:01
Yeah. First of all cost-benefit analyses have their place. Sometimes I wish there were more of them driving decision making because sometimes I look at decisions and think that that isn’t even valid from a cost-benefit analysis. The fact the matter is, is that there are other considerations as well. There are considerations of ethics and equity and morality and so on. And I actually sort of do hold the view that morality has its advantages, and that we only get those advantages if we aim at morality, not if we aim at something else. And I think the problem with utilitarianism is that because it focuses on the consequences and maximising what’s perceived as utility, that other factors can be obscured in the process. So the pandemic is a good example.
I was part of a webinar series with the Chinese University of Hong Kong, which included virologists from UQ, and people in the medical faculty, and as well as people who worked in biomedical ethics, which is not a specialisation of mine, so bit out of my league there. But, I was looking at these quality based arguments against lockdowns and, I actually think that… There, the argument was that you should only lock down if the quality0adjusted life years of doing so from a cost-benefit perspective outweigh not locking down. This was back in 2020, and at the time, it was relatively older people who were dying. So the quality0adjusted life years saved by locking down compared to the $11 billion a week it was costing during lockdown looked like it wasn’t justifying locking down in terms of pure monetary value. But the problem with this is that quality0based analyses and decision making, they make sense in certain contexts. So, here’s where I think that cost-benefit analyses do have a point.
So if you’re a hospital, and you’re trying to decide whether to invest in in one medical technology over another, and you’ve got information about how much QALYs each one will save, then you should go for the one that has the highest return on investment, in terms of QALYs. But the thing is, there’s an implied ceteris paribus clause there. All else being equal, if you’re choosing between A and B, and A gives you the biggest return on investment, in terms of QALY, then B should go for A.
But what was happening in the pandemic is that it wasn’t the case that all things were equal. So there were certain communities who were more durable than others. So not just the elderly, but also migrant communities in the United States. It was African American communities and indigenous communities who are being adversely affected by COVID. Often, because they’re frontline workers they’re often living in more crowded housing, and all of these different reasons contributing to them being a more vulnerable group, than say whites, or in the US, Asians. Here in Australia we were seeing that we’re certainly affecting low SES communities more, and in the UK, same deal. And also in the UK we’ve seen recently that disabled people are more adversely affected by COVID than other communities as well. And so things are not equal. So in those kinds of circumstances, you can’t just rely on the cost-benefit analysis, you have to take into account these fundamental issues of equity.
Gene Tunny 09:31
Yeah, there are all sorts of issues to take into account. Equity is important. So I’m trying to think how Gigi Foster, who is someone who came out and she was against the lockdowns because of she thought it wasn’t justified. You couldn’t justify it with a cost-benefit analysis for the reasons you were just describing before. And I think that Gigi is associated with that view. She would probably counter that, well, we could take that into account in our cost-benefit analysis with weights. We could, we could weight the loss of life for particular groups, we would provide more of a weight to that or that there’d be some way you could adjust it, I’m sure she’d say.
The problem is, what I think is incredibly difficult in analysing policy during the pandemic is we just don’t know. Early on, we just didn’t know how bad this would be. And now, the pandemic keeps surprising us with Omicron. And it’s just incredibly difficult to know what the right policy is. And we’re going to have to assess this in future decades. Well, what made sense, what didn’t?
I think we also need to take into account issues of civil liberties. And I think one of the problems with lockdown as a policy, even if you did think that in a cost-benefit sense it maybe it did make sense, o if you took into account the effects on different groups in the community, maybe you could argue it made sense. But even if it did, there are people who value those individual rights, the civil liberties, and you could argue that well, this was a breach of that this is something that really – I don’t think anyone contemplated government would do what they did during the pandemic. I think it’s quite extraordinary measures. I never thought governments would impose those lockdowns and stay at home orders that they did implement. And they saw what happened in China. That’s one view, argument, that we imported this policy of lockdown from China, which is an authoritarian regime. So depending on what your values are, you could argue against lockdown, because you think this is such a breach of our individual liberty. Am I on the right track there, Deb? Is that an important value to consider too?
Deb Brown 11:52
Well, certainly liberty is an important value, but the concept of liberty and the , associated concept of a right is not unqualified or unconditional. So from the earliest discussions of rights, take for example, John Stuart Mill back in the 19th century, so, you only have a right, if the exercise of that right does not interfere with the liberty or rights of others. Okay, so this is often referred to as Mill’s harm principle. So I don’t have a right, I don’t have a right to drive on whatever side of the road I like, because that will deprive you of your freedom of movement and your right to life. So that’s always been a constraint on the notion of freedom and the notion of freedoms and rights is that you just do not have a right to something, if that right is going to deprive somebody else of their rights and their liberties.
The interesting thing to me about this whole discussion around lockdowns is that we accept all sorts of curtailments of our freedom big so as to avoid harming others, right. I don’t remember this kind of stink about not allowing people to smoke in public places. Right? So we ban smoking in bars and clubs and public places and buildings and so on. And we’ve all just sat that out, because, and the argument was, is that people are exercising their right to smoke whenever they like actually causes harm through secondhand smoking to others. And so it can interfere with the exercise of their rights, their right to health and life and so on. And the kind of mask mandates lockdowns whatever might be our infringement on what you might think of as our freedoms, but we don’t have the liberty to harm others. And that’s the justification for those kind of mandates.
Now, it doesn’t mean when you when you curtail somebody’s freedom or their rights, it doesn’t mean that you are you are not respecting the concept of a right or a freedom. Right. But as I say, right, it has to be measured against what are the foreseeable harms here. I think that’s very different from embracing authoritarianism and I think we need to keep a distinction there. Not every curtailment of our freedom means that we’re subject to authoritarian control, right.
But it was interesting. I don’t know whether either of you saw this this wonderful publication pre 2020 by the Rockefeller Institute. They do this scenario kind of planning. And, and one of the scenarios that that they discussed is called Lockstep and they anticipate a global pandemic, and, and what sort of behaviours it will drive. And one of the things that that they envisage there is that in some countries, it will drive authority an acceptance of authoritarian control, and it predicts that those countries will do better in terms of managing the managing the pandemic, but at considerable costs to the liberty of citizens or subjects in those countries. Right. And that that may have long term consequences that are not justified by the authoritarian control. It also predicted that there would be anti-authoritarian movements. So, you can read this document and think, oh, my gosh, they were reading the tea leaves on the pandemic, because all of those sort of anti-authoritarian anti Vax movements are also predicted as well where people , do feel that they are suddenly being thrust under authoritarian control. And that’s why it’s very important to distinguish between authoritarianism to not sort of operate with extremes, to not just think because we have to wear masks in public spaces we’re heading in the direction of an authoritarian regime. No, it’s more subtle and complicated than that.
Gene Tunny 16:38
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 17:13
Now back to the show. Did you have any thoughts, Tim?
Tim Hughes 17:18
Actually there’s so much involved in this whole in this whole talk. Could go on for hours. I’m cool with that. For instance, with the authoritarian lockdowns, etc. it is a very effective way of treating with contagious diseases and everything. So it’s been around for centuries that that whole thing. It’s an authoritarian measure, but it’s still very effective in locking down or containing contagious diseases.
Gene Tunny 17:52
I think quarantine or cordoning off particular areas.
Tim Hughes 17:56
Yeah, isolation.
Gene Tunny 17:57
Where there is infection. Yeah.
Tim Hughes 17:58
As far as measures go, it was a predictable measure that was going to come in. But I understand and agree. There’s this lively debate around how long and if it was the right thing to do, etc. I just hope that we get good modelling from this for whatever comes next, because who knows what may come in the future, but hopefully, we’ll be better prepared for it for what we’ve gone through with this.
Gene Tunny 18:26
Oh, absolutely. Let’s hope. We certainly will be. We’ll be talking about this and analysing this for decades. Deb, I was just thinking, this point about how we, you’re right, we don’t have a right to harm others, that’s right. The issue is what level of harm or risk or probability of harm, what’s the threshold, because every time we go out into the community, there’s a risk that we could be involved in a traffic accident, say, and we could harm someone else so there’s a level of risk that’s assumed, but this may be too big a question to deal with. This is where I think this whole issue of the lockdowns, that’s what annoys people. Some libertarians are thinking well, okay, well, what’s really the risk? I guess that the argument is that each person, anyone breaking the rules could actually start off a cluster and then that could grow in numbers. This is not relevant now in Australia, because it’s gotten out of control and it’s out there so that we’re not going to have any more lockdowns so there’s probably no point. But in the early days, the argument was that anyone doing the wrong thing could actually start off a cluster and so therefore, yeah, that could affect everyone else. Maybe I can see the logic there but that’s what I’ve been struggling with, what’s that level of risk to others in the community that would justify a restriction on liberties. And I don’t think we’ve got an answer to that. Has anyone been doing any thinking on that?
Deb Brown 20:07
I don’t know, although I think you’re exactly right, that we really need to, we really need to think about risks here, because you’re right, that there’s all sorts of things that we do. We assume normal risks, because the benefits of taking those risks warrant the risk. As you say, every time we get in the car there’s a risk that we could lose our lives, or suffer serious bodily harm. But overall, people agree to those risks, because driving has benefits, let’s say. Maybe less so as climate as climate change takes off. But for a long time, that’s what really justified people in assuming a level in that level of risks. And so then the question there’s been a lot of discussion.
I think, actually, Robert Nozick had something to say about this, and there were economists that he was drawing on as well, about the difference between a normal risk and an abnormal risk. Right. So we allow certain levels of normal risk in a society but we don’t allow, for example, people to play Russian roulette, right not for any amount of money, not for any benefit, right. And we regard that as, as an abnormal risk, it’s not justified and so on. And so the question is, like, where at various stages of the panic of the pandemic, … Panic pandemic, that’s interesting. Where at various stages of the pandemic, what kinds of risks are we actually facing here? And I think I think that underlying a lot of the policy changes that we’re seeing recently is just the assumption that we are moving more into that normal risk space. And because I’ve sort of gotten tired of hearing about sheer numbers of people with COVID. The relevant data is numbers of hospitalizations, numbers of deaths. Deaths and hospitalizations, per capita, those are the relevant figures. If it’s true, I think it’s probably too early to say, but if, if we are moving more with the kind of vaccination regime into to having fewer hospitalizations, per capita from the pandemic, then that will sort of shift the balance. And lockdowns won’t be as justified as they were when the risks were much higher, when it was a bit like playing Russian roulette in terms of number of people dying from the from the pandemic. So I’m not myself a risk analyst. And you in your field you’re kind of masters of risk analysis. So I would have to learn from you here. But conceptually, it seems to me that’s the sort of space we need to be in.
Gene Tunny 23:10
Absolutely. I haven’t seen an authoritative analysis along those lines yet, for the pandemic. Hopefully. I’m sure economists will be turning their minds to that. There have been some. Judy Foster’s done a cost-benefit analysis of a sort for Victoria. She presented that to the Victorian Parliamentary inquiry. Gigi and some of her colleagues have written a book on the great panic. You could consider it polemical, in a way, but we do need to have some sort of authoritative analysis along those lines, because these are big questions about just how do we manage these things and what regulations are acceptable, what level of risk are we willing to bear. I’m going to have to look up that, that work by Nozick. It seems to ring a bell, but I’ll look it up, the normal risk versus abnormal risk. That looks like it could be highly relevant.
Deb Brown 24:14
Yeah. It’s a chapter in Anarchy, State and Utopia. as I as I recall, though it’s been a while since I looked at it.
Gene Tunny 24:24
Okay, I’ll I’ll look that up.
Deb Brown 24:28
I’m trying to remember the name of the economist, whether it was French or something beginning with F. I’m not sure. Yeah, there was an economist on whom he was, I think drawing in terms of that risk. He was sort of particularly interested in compensation, so when is compensation warranted for risky behaviour? And of course, being very interested in… He’s a libertarian right. So he’s sort of interested in in when is it ever justified to restrict people’s freedom to take certain kinds of risks, and when is compensation warranted and so on. That’s what I recall from that.
Gene Tunny 25:07
Okay. Oh, yeah, I’ll look it up. But that may be of interest. I may try and cover that on the podcast in the future. We’ll probably have to wrap up soon, given how much of your time we’ve taken, Deb. Sorry.
Deb Brown 25:18
No, I’m having a ball.
Gene Tunny 25:19
Oh, very good. Okay. Oh, well,
Deb Brown 25:21
I was just going to talk about the media literacy issue because I think in terms of the critical thinking project, that’s, that’s a massive area. And I’ve been shocked learning from colleagues at Queensland University of Technology, and University of Western Sydney, and particularly Tanya Notley there is a specialist on youth media literacy. I’m kind of shocked at the data coming out about not just the general public, but also sort of academics capabilities, in terms of fact checking and checking the sources of media articles and being able to do lateral searches, and so on to see what different sites say about the same the same article. Then I’m also shocked that the youth, right, get most of their news entirely from social media, there’s very little engagement with mainstream media, very little engagement with credible news and media. So I think this this is another kind of – the lack of media literacy is another kind of pandemic, and it really does contribute substantially to that culture of, of confusion and mistrust.
Tim Hughes 26:45
I love you’ve said that because that was what I was going to come back to because way back and, we’ve touched on it with intention and trust. And I think it’s such a big area, and you’ve gone straight to it, which is great. And how do we trust the new sources? And this isn’t a present day problem. This has always been a thing for everyone throughout the ages. How do you how do you trust your source of any kind of news, whether it be from a person or from an agency, or whatever it may be. And so with that also comes a limited amount of time that we may have as individuals to make our minds up on these different things that come up to us where we form an opinion, and any opinion is only as good as the information it’s based on. So if we’ve got good information, we’re going to have a reasonably good opinion, the more varied information, again, better opinion. So all of these things, and like you’re touching on, for instance, people getting their information, information from just one source is going to be biased, or maybe not a full picture. There are all these different ethical sort of problems with … We form our opinions. And we find our trusted news sources. And of course, there are more and more coming out all the time. Where does this sit in with critical thinking and to try and do this in a in a reasonably quick period of time, knowing that most people only have a certain amount of time in their day to give towards forming an opinion on something in the new cycle? How can we do this better?
Deb Brown 28:31
I mentioned earlier we have this collaboration with the Impact Centre, which works with office forces and critical thinking to school students. And last year, one of my colleagues, who was the UNESCO Professor of Journalism at the University of Queensland, Peter, Greste – do you know Peter Greste, the foreign correspondent with that awful experience in in Egypt? So he approached me and he said, “I really want to work with schools to try and get a kind of journalism media literacy course going with schools. And I know you have all these collaborations with the Department of Education.” And, and he and I together, and other colleagues as well, and colleagues and the collaborators in the Impact Centre, put together this course on media literacy in journalism, and it’s offered to senior secondary students. And effectively what they’re doing is they’re learning about media literacy, but they’re also learning it in conjunction with critical thinking.
So often, when you look at the media literacy courses, they often concern tips and tricks for checking sources, right, finding out who the sponsor is of a page, doing lateral searches, but adding a layer of critical thinking over that. What you get is you get students thinking about how their thinking is framed, within, within an article. So what gets to be in the headline? The headline shapes how you’ll think about the rest of the article. How’s the information presented? What’s up front? Right? Is there an argument developed? Is there an analysis? Right? What justification is there for the things that are said in the article, so getting students to interrogate an argument, look within those practices of justification.
Then in conjunction with that media literacy course – and then there are teachers at the Impact Centre, particularly Dr. Luke Zaphir and, and Dave Thornton, who put together a fantastic course for school students, developing all those critical thinking and media literacy skills. It’s just amazing. In conjunction with that, the students also develop their own article. Sorry, they work with journalists from In Queensland, which is an independent news service in Queensland, and has a commitment to public service journalism. Journalists from In Queensland work with students in the, in the Media Academy to basically construct articles for publication in In Queensland. So if you look at the In Queensland website, they’ve got a Media Academy tab, and those are all the articles that were written by students in school. Fantastic opportunity for students to learn how journalism works, how it’s actually produced, and to think critically about the way in which information is presented in an article.
And I think , another big problem within media is that if you haven’t got a kind of blatantly biased media outlet, right, on the right, or on the left, whatever it might be, you’ve got this kind of bizarre assumption that all you need to do is to provide a balance of opinions. Right, and you’ve done your duty in critical analysis. First of all, there’s very little analysis. Often it’s just kind of putting together these polarised opinions and this assumption that as a journalist, you have to stay neutral. Neutrality will come through, if you actually do a critical analysis, right. I think that sort of presenting balanced opinions just contributes to the confusion out there, right. People think well, there’s this opinion and that opinion, and everybody has got a different opinion. So I can believe whatever I like. No.
Tim Hughes 32:52
Actually, one of the things with this, because we seem to, which isn’t a bad thing, but we look for certainty where we can. We’re always looking for definitives and absolutes. We like to know this is this is correct, and that’s wrong, etc, whereas, of course, the reality is, there’s a spectrum of likelihood or possibilities with so many things that we look at. And I love that in the article, the ABC article, you mentioned that one of the keys was being comfortable with doubt and uncertainty, and feeling free to change position if evidence or new information required it, which we touched on earlier. But it’s just such a great statement, I think, in allowing people to be okay being not so sure, this is the best yet, at the moment, this is the best information that’s out there is going to change and being open to that change and to changing opinions when things evolve now, so I think that’s a really … When we talk about polarisation, quite often, that’s because people have found a certainty maybe too soon or without researching it very much, whatever the issue may be, and, and then being sort of loyal to that certainty, regardless of what other information comes through, which of course, is a problem.
Deb Brown 34:17
I think being able to divest one’s ego from the argument of work is very, very important, but it’s very difficult for people to do because their identity is so much bound up with what they think and what they believe.
Tim Hughes 34:30
That’s right. And so to change their mind would be affecting… It’s a decision then to change their identity, or tribe, even. It can be part of the group that you’re in or the environment that you’re in, which you identify with. And so the incentive to change opinion or to change mind or to hear different views, of course, is not a welcome one.
Deb Brown 34:53
Yeah. It’s interesting that in collaborative reasoning environments, if they’re run effectively, you do see that behaviour shift, because the focus of the group is on the on the pointed issue, on the topic. And if you sort of don’t allow people to just make assertions, but to actually back that up with reasons very soon you start to see them giving and taking reasons where – not just giving out reasons, but taking them standing corrected. In children, you see that behaviour shift remarkably quickly. And then something happens to us, and we end up terrified to change our minds. Where did it all go wrong?
Tim Hughes 35:39
With this, with the critical thinking project, teachers and students, is it also open to anybody who might want to get in touch and learn from this? You might have mentioned this before, so apologies if you’ve mentioned it. But this is open to everybody? Is there something there for everyone? Because everyone I think could benefit from it.
Deb Brown 35:58
Oh do I get to do some product placement here?
Tim Hughes 36:02
You do. Well, you are God after all today.
Deb Brown 36:05
[unclear 36:05]. Of course, working with the Department of Education, that’s restricted to government schools. But we also, we also have contracts with other schools. Peter and I have both done corporate training, for example, in critical thinking. I had a wonderful time in India with fin tech capital of the Tata Group, Tata’s biggest company in India. Had a wonderful session doing critical thinking with them. It was it was really fun. Like I said, we’ve got contracts and done work with Singapore, and UCLA, University of California, Los Angeles. They actually included the media literacy and journalism course in their critical thinking summer programme last year. And it was a huge hit. And I think so I think that that course could easily be made available to anyone. And I think it should. This is not just for kids. We all need this.
Tim Hughes 36:18
Yeah, for sure.
Deb Brown 36:19
The other issue that the other issue that’s driving along misinformation is just the unavailability of peer-reviewed publication sites. So the more open source publishing, open access publishing we can do – I would love it if university libraries we’re open to the public again, not just coming onto campus, but actually the online edition, but there’s all sorts of issues there around publishing as an industry as well, right? So that’s what sort of impedes that. But the more information we can make accessible, and quality information, we can make this accessible, the better off we’d all be.
Gene Tunny 38:03
Yeah, you’ve got those big journal companies, such as Elsevier and – is it Springer, I’m trying to remember – but they make millions or hundreds of millions or whatever out of university libraries paying for subscriptions to journals. It’s, it’s a bit of a racket, arguably.
Deb Brown 38:25
It’s very strange. We do all the work, the writing, reviewing. We do all the hard yards, and then [unclear 38:33] business model that one.
Gene Tunny 38:35
Yeah, that’s true. Okay, I think we’re gonna have to wrap up at a minute. This has been great. I did have one question. We’re hearing a lot about the need for these Enlightenment values. More people are talking about the Enlightenment and the Age of Reason, because there’s this recognition that we’ve, maybe we’ve lost touch with that. And then I know you’re an expert on Descartes. And he’s associated with rationalism. Is rationalism, like, how does that fit in with the Enlightenment and the Age of Reasons. Is the Age of Reason the same as the Enlightenment? Is rationalism – is that a very specific part of the Age of Reason? Is that just a hyper or a total reliance on reason, or is the Enlightenment something broader? Is there a way for us to understand this, Deborah, or is it just such a big question that it’s not really answerable in this context in this podcast?
Deb Brown 39:29
No, it’s a great question. And I’m all for a renaissance in the Age of Reason. So I think those terms are often used interchangeably, Age of Reason and Enlightenment. And a lot of people trace the Enlightenment as beginning really with Descartes, the publication in 1637 of his Discourse on Method, which really was sort of that introduction to the new method of relying on reason and needing yourself to be intellectually autonomous, as opposed to intellectually heteronomous, where you’re relying on authority.
The Enlightenment was connected up with this metaphor of light that permeates discussions in the, the 17th and 18th century. So Descartes appeals to the natural light, and distinguishes that from the teachings of nature, right? Nature might teach you that things are hot and cold. But if you examine them from a scientific point of view, it’s more likely that that heat is certain motion of molecules, and cold is nothing at all.
So the light of reason will revise what nature teaches you, if you like, and one should be guided by the light of reason, not by what seems to want to be true on the basis of sensory apprehension. The light metaphor was common. So you get lumiere in French, and you get aufklaren, which means sort of clarity or light in German, as being in opposition to Aristotelian scholastic philosophy, which dominated philosophy, particularly in the schools and universities, up to the end of the 16th century. And it was perceived as being doctrinaire and authoritarian so, even though a lot of original work went on in the Middle Ages, there was always this deference to authorities as Aristotle said, as Augustine said, and so on. And with the advent of the scientific revolution, that begins in the late 16th century, with people like Copernicus, and Kepler, and Galileo sort of developing a heliocentric view of the universe and really starting to develop this new mechanical, scientific theory and doing a lot more sort of experimental work and observational work using telescopes and so on. That all sort of doctrinaire, the categories of Aristotelian scholastic philosophy were thought to be mysterious, occult and didn’t fit with the new science.
Also coming into the 17th century, you’ve got] the European humanist tradition, right, this reclamation of ancient texts, particularly the Stoics, but also the sceptics as well. And both Latin and Greek texts, and that revival of kind of classical as opposed to Scholastic philosophy. All that sort of feeds into the 17th century.
And then you get Descartes who thinks that we can’t just keep going with philosophy has to kind of catch up with these revolutions in science and also in engineering as well. And it needs a nice new face, and it needs a new message, right? And it needs to be grounded in reason, because only that will sort of, in a way fit the kind of mechanical mathematical science that that is really taking over the whole scientific space. And Descartes, of course, is also motivated to ground that new science in a system of philosophy that’s not antithetical to religion, but is really basing his connection to religion on reason, right? And I think when people talk about the Age of Reason, this is what they mean is they mean a sort of rational foundation for religion as opposed to faith, right.
And that goes all the way through to Thomas Paine’s book, The Age of Reason, which is really like a rationalist kind of attempt to sort of ground religion on reason, as well. But yeah, so the Enlightenment is sort of set in opposition to the so-called Dark Ages, which is a term that seems to be coined by Petrarch, who’s one of these European humanists in the 14th century, even though he’s embedded in that mediaeval context, but he’s sort of arguing against this kind of authoritarian aspect of philosophy in that period.
And so when you get to the 17th and 18th century, you’ve got a new method, you’ve got this method of doubt, you’ve got scepticism being taken seriously again, and that scepticism becomes part of the message. Again, that’s just subjecting what you believe to doubt and upholding the highest standards of reasoning and evidence. It wasn’t as if it was all rationalist. I don’t actually like the division between rationalism and empiricism myself because the so-called rationalists like Descartes and Spinoza and the Leibniz, Newton, these are often [unclear 45:06] people are doing experimental philosophy, and often the empiricists so the people like Barclay and Locke and Hume and so on, are often relying on philosophical reasoning as well, not just sort of observation and induction. And, of course, Hume famously problematizes the very inductive method of science anyway, so those kind of binary categories are not really helpful.
But I think in a way, Kant kind of encapsulates in his essay what is the Enlightenment, is that the movement is about promoting intellectual autonomy, right? Not just relying on what others or testimony or what authority tells you, but applying the the methods of reasoning and analysis, so that your own beliefs on the securest foundation they can possibly be.
Gene Tunny 45:57
Yeah, yeah, that’s, that’s a great explanation of that, Deb, I was just thinking, not trusting, don’t necessarily trust authority. And this is where we’re getting into problems nowadays, because we’ve got people who are thinking, oh, well, I’m doing my own research. Fauci says this, but I’m doing my own research, but often it’s on the internet. It’s on the net, and the source might not be that accurate. And you could argue that maybe they haven’t thought enough about the reliability of what they’re looking at, to justify their dismissal of what the certain authorities such as the CDC, or in our country, what different state chief health officers are saying.
I guess this is where it’s challenging, because there is value in being sceptical. And this is an important part of, of scientific method is being sceptical. Then the challenge is, sometimes there is something valid being said by some of these authorities, and you can take that scepticism too far. Particularly if you’re not relying on , good information, if you’re not, if you’re not fully embracing that critical thinking and you’re thinking critically about the information you’re getting and the points of view you’re putting across. So that that just occurred to me, then when you talked about the importance of being sceptical and not necessarily deferring to authority. I thought that was a really good point.
Deb Brown 47:36
Yes, it’s interesting. My husband and I spend each morning looking at World Metre. That’s what passes for fun nowadays. Let’s have a cup of tea and see how the virus is doing, darling. In general, I’m a little frustrated, just that you often can’t get the data. I think there’s an issue that maybe a lot of people are not going to be able to even interpret the data. And that’s certainly a problem. And that’s why everybody needs some training and statistics and critical thinking. But there’s a lot of data that you just can’t get like this data, I want to know, hospitalizations, I want to know deaths. Then there’s also this issue about how much of this is being reported. Make more data, make more information available. That’s sort of one thing.
And then there is also this question of trust. So who can you trust in this in this context? And one of the I guess the most important questions to ask is who has a vested interest in a certain kind of outcome being reported? I’m happy to trust Fauci because I don’t think that he has any vested interest in this. I’m less inclined to trust somebody who I think is spinning a yarn, because they’re only interested in being reelected or making their political party look good. Right. That’s an important question to always ask about any source. Then you do have to do those lateral searches, right, how is this being reported by these different organisations, what are their interests, who’s sponsoring this page and so on. You’re right, it’s a minefield, and the more information that there is out there that is just sort of polarised and politicised and all that, it just noise that interferes with being able to give an accurate assessment of the situation.
Gene Tunny 49:52
Absolutely. Okay. Deb, that’s been great. I think we’ve got to wrap up there. We’ve taken so much of your time. I’ve got so much tape here. I’ll have to think about whether release it as a whole episode or Imight have to split it up in two.
Tim Hughes 50:08
Six parts. Six-part series.
Deb Brown 50:12
I’m sorry.
Gene Tunny 50:14
Not at all.
Deb Brown 50:15
I’m just not getting out enough. This constitutes as getting out. I’m just so excited, I got a bit carried away.
Tim Hughes 50:21
Not at all.
Gene Tunny 50:22
That’s great.
Tim Hughes 50:23
We could completely carry on because it is fascinating. And they are very big topics. So really appreciate the care you’ve put into the responses there, Deb.
Gene Tunny 50:34
Yeah, thanks so much. Deb, really enjoyed chatting with you. And I’ll put links to as much of the material that you mentioned in the show notes so people can find that. Really valued your perspectives and your great knowledge of philosophy, which it’s given us a lot, given me a lot to think about, and a lot for Tim and me. I’m sure we’ll be chatting about this a lot in the future, these issues that came up today.
Tim Hughes 51:06
That’s the thing. They’re big issues that remain big no matter where you are in history, and important questions.
Deb Brown 51:18
Thank you. I really enjoyed your questions, and it was such a great conversation. Thanks for having me.
Gene Tunny 51:24
It’s a pleasure. Professor Deb Brown from University of Queensland. Thanks so much.
Tim Hughes 51:29
Thanks, Deb.
Deb Brown 51:28
Thank you. Bye-bye.
Tim Hughes 51:29
Bye-bye.
Gene Tunny 51:31
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Credits
Thanks to Deb Brown and Tim Hughes for their great conversation and insights, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
In Economics Explored Episode 127, Darren Brady Nelson of LibertyWorks spoke with show host Gene Tunny about the 40-year high US inflation rate, so-called Woke Capitalism, and China. In the second part of the episode, Brendan Coates, Economics Program Director of the Grattan Institute, explained the implications of the peculiar Australian tax rules relating to superannuation and company dividends. You can listen to the episode via Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps. A transcript of the episode is presented below.
Here’s a recent clip of video from the episode:
Transcript of EP127 on US inflation, Woke Capitalism, and China + weird Aussie tax rules
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored.
Darren Brady Nelson 00:04
For the viewers who saw me take a sip of coffee from my favourite local café, the past year, it was about $3.50, maybe $3.75 for a coffee and now it’s 75 cents to a dollar more.
Gene Tunny 00:22
Welcome to the Economics Explored Podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 127, which started out as an update on inflation, covering the four-decade high US inflation rate, but it ended up being a wide-ranging discussion, not only about inflation, but about so-called Woke Capitalism, and China as well. This is a longer episode than usual, because following the first part of the episode, we have a segment responding to a listener’s question prompted by Episode 112, on taxing the rich.
Our first guest this episode, returning for his ninth appearance on the show, is Darren Brady Nelson. Darren is chief economist of the Australian libertarian think tank LibertyWorks. He’s also a policy advisor to the Heartland Institute in the US. Darren has previously worked for an Australian senator, the New South Wales Treasury, and the Queensland Competition Authority. Right now, in February 2022, Darren is based in Milwaukee, Wisconsin, so he has firsthand experience with US inflation, as we discuss in this episode.
I’ll probably come back to the topic of inflation in a future episode soon, as I want to have a closer look at this question of whether the market power of big corporations is allowing them to jack up prices more than would be justified by cost increases. Darren and I start a conversation on this issue in this episode, but I want to return to it and have a closer look at the data and how economic theory may help us answer the question. I think this is a very important question to answer.
Okay, my second guest this episode is Grattan Institute Economic Policy Program Director Brendan Coates, who answers a question from regular listener James about a peculiar feature of Australia’s tax system. Please check out the show notes for links to materials mentioned in this episode, and for any abbreviations used and clarifications I need to make. I’ll include links to all the articles and charts that Darren and I discuss, and materials that I discuss with Brendan too.
Regarding clarifications, I need to clarify something I say about Amazon. I say it pays minimum wage, whereas I should have said that it pays low wages. It appears Amazon does at least pay above the US federal minimum wage, so sorry about that.
You find the show notes via your podcasting app, or at our website, economicsexplored.com. If you sign up as an email subscriber, you can download my new e-book, Top 10 Insights From Economics. please consider getting on the mailing list. If you have any questions, comments, or suggestions relating to this episode or the previous ones, please either record them in a message via SpeakPipe, see the link in the show notes, or email them to me via contact@economicsexplored.com. I’d love to hear from you.
Righto. Now for my conversation with Darren Brady Nelson, on inflation, Woke Capitalism and China, among other things. Thanks to my audio engineer, Josh Krotz for his assistance in producing this episode. I hope you enjoy it. Darren Brady Nelson, Chief Economist at LibertyWorks. Welcome back to the programme.
Darren Brady Nelson 03:51
Thank you. Thank you for having me.
Gene Tunny 03:53
Oh, it’s great to be chatting again, Darren, about an issue that we’ve spoken about quite a lot. We had a previous podcast episode on inflation. Inflation continues to accelerate around the world. We had a reading for the US the other day for January, if I remember correctly, and it’s a 40-year high. US inflation hit a 40-year high in January after food, electricity, and shelter drove a bigger than expected rise in the consumer price index and pushed financial markets to price in a higher chance the Federal Reserve will hike rates by 0.5 percentage points in just over a fortnight. that’s from Matthew Cranston, US Correspondent for The Australian Financial Review. Now, Darren, this is something you’ve… You’ve been expecting this, haven’t you? You’ve been expecting inflation to continue to accelerate, even though some people have thought it may only be transitory. Is that right?
Darren Brady Nelson 04:55
Yeah. It’s certainly in one of the episodes that we spoke. We used a kind of a jumping off point was an article that I wrote for Town Hall essentially saying that. Often in the mainstream media there’s, you know… From my perspective, they don’t quite get inflation for the most part. There are exceptions definitely. You mentioned Matthew Cranston from the Australian Financial Review, which I quite like his work. But I think even better, in terms of economics, would be Adam Creighton. I think you might also agree. He’s certainly someone in Australia, he’s part of the mainstream media, and he’s always been very good at tying it back to the most important factor, which is inflation of the money supply. There’s a lot of factors that obviously can exasperate that, and in a market sense, obviously, prices are ultimately responding to demand and supply situation. But people like Adam Creighton and myself and some others, we go a little bit deeper. Okay, right, demand, what’s driving a lot of what’s going on in demand, that’s where the money supply really comes in, because that’s where the money balances are coming into people’s possession through various means. That’s where you start getting the really, if you like, the demand pull side of inflation, more so than a supply push.
Gene Tunny 06:26
Yeah. This is because what we have is, what’s the old saying about too much money chasing too few goods?
Darren Brady Nelson 06:37
Yeah, that saying, that’s a good quote.
Gene Tunny 06:40
I think that might be from Milton Friedman. We get so many great quotes about inflation and money.
Darren Brady Nelson 06:47
For the viewers, he’s to the left on the top stream there.
Gene Tunny 06:54
Yes.
Darren Brady Nelson 06:57
It warms my heart.
Gene Tunny 06:58
I’m not necessarily making an ideological statement, but I am making a statement about… Friedman, to me, is the ultimate economist of the 20th century. He’s the economist who I think best combined theoretical rigour, a grasp of the empirical data. He wasn’t a great econometrician or mathematician, I don’t think. I don’t think he’s in that sort of league. But he is the person who best combined the theory with the evidence with the communication ability. He was just a master at that. Even though there’s a lot of debate about just how right he was about the monetarism and that policy recommendation with the constant money supply growth rule, there’s a lot of debate about that, but to me, Friedman is the… If I could be any one economist from history, this is gonna sound odd, but it’s probably a tie between Friedman and Keynes. I think they’re both great in their own way. Keynes, he was so influential in the policy circles in Britain. I think that was quite impressive. Yes. Then obviously he transformed economic theory. There’s a big debate about the Keynesian legacy. But he had a huge impact, too. Yeah.
Darren Brady Nelson 08:25
But look, yeah, I certainly can’t deny, in terms of the 20th century, I guess those two would be the most influential economists of the 20th century. Obviously we’re gonna talk about inflation. But I think in my article, I don’t actually have it close to hand, but I do quote both those people that you mentioned. Friedman and Keynes, they’re on the same page, at least to some extent, on inflation and it not being a good thing, and something that’s actually a policy outcome, basically. Whether you think it’s intentional or unintentional, that’s a separate issue. But it is something that’s under the control of the policy levers. They both agreed on that.
I think the third person I quoted, who is my favourite economist of the 20th century, is Ludwig von Mises. As you mentioned, Keynes was certainly very original. I personally think he’s wrong, for the most part, but he was certainly very original. That’s probably where Friedman isn’t. Friedman’s not on that scale of originality, whereas Mises and Keynes are actually, for me, the two most original economists of the 20th century.
But I would certainly agree that even though Friedman and Mises were certainly very close in the way they viewed economics, not completely, but the way they viewed economics and obviously what their policy prescriptions were were certainly not light years away. I’d certainly agree that Friedman certainly was a more powerful communicator to a broader audience or to the policymakers. I agree with you, with the caveat of Mises and Keynes as the two most original economists of the 20th century. All three of them obviously talk about inflation. That was an important topic.
Gene Tunny 10:10
Yeah, we’ll have to come back to Mises in a future episode. I’d really be interested in exploring his ideas. You mentioned Keynes, you quoted Keynes in that article. Were you quoting Keynes quoting Vladimir Lenin, was it? Is it Lenin?
Darren Brady Nelson 10:28
No. Not that. No. It’s just basic pointing out that inflation… One of the important things he pointed out, yeah, this is a bad thing, it’s something that’s under controlled policy, but the greatest thing that he pointed out there is, there’s winners and losers, important part is there’s winners. People sometimes, and even I in the past even just jumped to like, ultimately, we’re all losers from inflation. That’s not true. That’s not true. Ultimately, so far in the central bank era, what’s called in the US from 1913 onwards, it’s obviously a different date in Australia, that there’s winners. With any policy, even though you look at it overall, you go like, “Wow, this is really bad,” but there will be winners.
Then throw in, I guess, a different school of thought, the public choice school, which I’m also a big fan of. That’s where they come into play, to really highlight the fact that in the political marketplace, which inflation is also influenced by the political marketplace, there’s winners and losers. The winners are quite a small group of people compared to the losers, but they win big, relatively, compared to the losers, which is why the losers aren’t always fighting back very hard, because they can’t combine, they’re not as animated to combine, and it’s much harder for them to combine, compared to the small group of winners. That’s public choice economics 101, basically.
Gene Tunny 12:03
Let’s go over that. I think this is interesting. Let’s look at the losers first, because it’s more obvious who the losers are. That’s going to be people going to the supermarket. You’ll notice your prices are rising. If your wages haven’t been increasing, if they haven’t been increasing at the same rate as prices, and we know that in the States that is certainly the case. I think we were looking at some data the other day, where at the time inflation was up 7% through the year. Now it’s 7.5% through the year. The figure I found for average hourly wages growth was about 5.3%. There’s that real loss in having a real pay cut of 1 or 1.5% or something or whatever it was. Maybe it was 5.7% wages growth. I’ll put the exact figures in the show notes. But yeah, that’s costing households. There was some estimate from, was it the America First Policy Institute? You sent me some article they had. They were calling that an inflation tax. What I think they were talking about was the loss of real purchasing power for households. They estimated it was about $850 per annum. You’d have to compensate households by that much to make up for the fact that their prices have increased more than wages. I guess the first sort of group that’s affected is consumers. Is this is something you’re noticing on the ground there, Darren? You’re in Milwaukee, in Midwestern USA. Are you noticing those price rises yourself?
Darren Brady Nelson 13:40
Oh, very much so. For the viewers who saw me take a sip of coffee from my favourite local café-
Gene Tunny 13:48
Fairground Coffee and Tea.
Darren Brady Nelson 13:49
In the past year, it was about $3.50, maybe $3.75 for a coffee, and now it’s 75 cents to a dollar more, in a year. It’s in a year.I think there used to be, once upon a time, the Coca Cola. Wasn’t there a price index that you know was used to relate to just the average sort of person who’s not an economist. I still like Coke to some extent, but coffee’s kind of the thing I notice the most. I believe you’re also kind of a… You’re a coffee and cafe aficionado like I am.
Gene Tunny 14:24
Less so during the pandemic, but yes. Yeah, generally I am.
Darren Brady Nelson 14:30
Yeah, that’s another story obviously, another episode.
Gene Tunny 14:34
The cafe across the street from me, that we’ve had coffee at from time to time when you’re in Australia here, that shut down, because the hotels on the street where I live, they were so dependent upon interstate and international visitors. That all went away for a lot of the pandemic, and so that cafe couldn’t survive anymore, unfortunately. But I expect I’ll be back out and about again soon. We’ve just had the Omicron wave here, but that looks like it’s dying down, which is good.
Okay, so you’re noticing the price rises. I just thought I’d ask that because it does seem to be something that’s being noticed by a lot of people. I know there was one of the audio or the podcast… There’s a lad, Bandrew Scott, who has a channel on YouTube, Podcastage, and he does reviews of microphones and things like that. He was talking about inflation the other day, and I thought, “Oh, that’s interesting. It’s not the usual thing you’d talk about.” But he mentioned it. You hear it in the commentary of people, when they’re talking about just the general state of things. It seems like it is starting to impact people over there.
Darren Brady Nelson 16:00
The CPI figure, the way the CPI is calculated in the US is different from in Australia. It’s basically got less stuff in it, less important things than the Australian version does. The Australian version is pretty good, actually. You could say, yeah, there should be some more stuff in there, whatever, but it’s a lot better than the US version.
There’s this organisation called ShadowStats. They do really good work, but there’s a lot of paywall stuff. But the person who runs that recently said, basically, he did the CPI calculation, not in some really weird and wonderful way, he just did it the way they used to do it originally in the US for quite a long time. He said, using the way they did it then, we’re talking 15%. 15, so double what the current US CPI is saying. Even if you go debate, like, “Okay, that’s too high, blah, blah,” the point is it’s probably worse than 7%. That’s what you see just talking about my coffee, obviously. I go grocery shopping, obviously, like everybody does. I don’t do a whole lot of restaurants, but certainly groceries and going to cafe and and having my coffees. It is certainly even worse than the 7%.
I’ve seen different estimates of CPI. It clearly doesn’t represent all the economy. I’ve seen figures like it’s only 40%, and whatever, but obviously there’s the asset prices, which is hard. There’s no really good statistic that does an asset price. There’s also the Producer Price Index. Obviously the US and Australia has that. You got to look at that too, because that’s getting some other prices. You start to get the full picture of what’s going on, how prices are inflating all over the place. We obviously don’t do it uniformly. Then Australia and the US, you can dip down into things like, you mentioned energy, you can look at housing separately. That’s not to say that it’s a cause and effect relationship necessarily, because really, at the end of the day, the cause is the money supply. That’s the main thing.
But it can be exasperated by things, various things, including I think a topic you may want to discuss, I think, in regards to John Quiggin’s latest article, is to what extent does the degree of competition in the economy, whether you’re talking about competitive markets or monopolies or cartels, what role does that play? Does it make it worse, or is it more just moving the deck chairs around? That’s an interesting question.
Gene Tunny 18:44
We might come back to that. There are a few things I want to come back to, but I better go back to the winners and losers from inflation. We talked about losers. Now, who’s winning? It’s people who have borrowed money to invest in other assets. Is that right? The inflation is eroding… Go ahead.
Darren Brady Nelson 19:07
I’ll give you the quick logic sort of thing. It’s definitely from the Austrian School, Mises, Rothbard, Hayek, and all sorts of people, who talk about basically the people who get the money first. They get this inflated money first. Essentially, it’s a game of keep your income/revenues ahead of your costs/expenditures. That’s business and individuals. It’s the same logic, right? The people who get that, and really in the system, there’s kind of certain people who always get it first, obviously government itself, the treasuries, but then there’s Wall Street types and various other words, those sort of people, but then also you’re getting into the people who are attracting funds more easily in larger quantities anyways, like Big Tech, Big Pharma. That’s putting aside whether the monopolies or cartels are competitive. At any point in time, it’s not a universal thing that Big Pharma or Big Tech always get it first.
But in the recent economy, particularly in the COVID times and whatnot, Amazon, obviously, who was already doing extremely well in the world of what’s called retail, if you like, and then they killed it during COVID, whenever most everybody else was not killing it. Those are sort of people who can get the money first and stay well ahead of the bad aspects of inflation. Oh, and then throw in it may be some sort of… There was also a recent article about Woke Capitalism. That starts to cut into that. It cuts into the sort of people who could often get this money first, who often have monopoly power. That’s also an interesting aspect, for them to have the cultural, the censorship, and all these other interesting things that come into play as well. I raised a lot of different things.
Gene Tunny 21:14
Yeah, I’ll just go back over that. You get the money first. That’s an interesting way of looking at it. I borrow the money, and I buy an office building, or I buy some shares, and so they’re going to appreciate in value. The bank, which lent me the money, it’s lent me a million dollars or something, or whatever it is, or a couple of million to buy, actually I probably need more than that if I’m going to buy an office block nowadays, but however much they’ve lent me, they’re going to lose out with inflation, because I’m going to be paying them back, I’m going to pay back that $2 million with dollars in the future that are, in real terms, worth less than they were, than I borrowed them. If the bank hasn’t charged me a higher interest rate, in expectation of that higher inflation, then they’re going to lose out. It’s people who borrow money, who they can actually benefit from inflation, if they’ve used that to go and purchase assets that are going to appreciate in value. The people who lose out, consumers and anyone who’s just holding on to money, if you’ve just got money sitting in a bank account, or if you’re a retiree.
Darren Brady Nelson 22:40
The pensioners, all that, fixed income. But even taking what you were getting at, but there’s gonna be … Even that lending market, the Amazons, they’re gonna have lower interest rates than what we’re gonna be getting, and a whole lot of other businesses, not just individuals. They’re gonna be able to get a hold of the money quicker, in bigger quantities, and put it to use better to stay ahead of their cost curve, if you like, that ultimately everybody’s going to get impacted to some extent by the inflationary cost curve, but they can stay ahead of it, and then bigger, more quickly, and to a larger extent. Things like, as I said, the degree of monopoly power will factor into that, putting aside how you figure that out empirically. That’s a separate question. But yeah, that’s the basic logic, and I can’t remember who basically had that kind of terminology. It might have been Rothbard, actually. I would have to go back to find that out. But obviously, Rothbard learned from Mises and Hayek. They would have all agreed with that.
Gene Tunny 23:47
Right. We’ll go on to the causes of what’s underlying inflation. I think that’d be good to chat about it in a moment, but first, what do you mean by Woke Capitalism, Darren? Could you tell us what you mean by that, or what do they mean by that term?
Darren Brady Nelson 24:05
Yeah, look, I’m not sure exactly what the definition is. You can, like always, usually, I believe you share different articles, links. There’s a link that goes through the history of it and who originated that term. But essentially, yeah, look, it’s the Big Tech people who seem to care more about … Like Amazon. Look at Amazon. They have such big, if you like, monopoly type profits, that you can afford to do all this virtue signalling, you can throw money at campaigns, political campaigns, for one, but you can also throw all these virtue signalling campaigns. In the US, we’re getting them all the time, about how diverse they are and how they care about gender. They can afford to get involved in the culture wars, either directly through, they go like, “Oh, this is what we’re doing inside our company, and our hiring policies are this,” basically signalling that they’re not hiring on merit, essentially, they’re just hiring based on the colour of your skin, your gender is, or what you identify as, all that sort of culture war related stuff, that the corporates have really come out big in favour, the past two years in particular, but it’s been coming for some time.
I think in that particular article, and I would agree, that that’s a rich person’s game, basically. You have to have a lot of supernormal type profits to afford that. If you’re in a company and in a particular market where your profits aren’t supernormal at all, that’s pretty hard to sit there and really play that game, except look, you could probably afford a small marketing budget to say you’re doing that, but you’re not really doing it, whereas I believe Amazon actually is doing it, because our mutual friend, TimWonhof worked for Amazon, and he can confirm with the hiring practices and people who get promoted in there is not so much based on merit at the moment, or there’s a big degree of not based on merit. That’s part of Woke Capitalism, virtue signalling, and just like a competitive market place would suggest you would be doing.
Gene Tunny 26:18
Yeah, I’ve heard this term increasingly. We’ll get on to, a moment, what it means for or what monopoly power means for inflation. We’ll get on to that. I just want to spend a bit of time on this, because it’s interesting, because I’m hearing this term more and more. There’s that book Woke Inc, I think it was, and this idea of Woke Capitalism. Now, they’re woke in some ways, but not in others. Amazon’s renowned for how poorly it treats its workers in fulfilment centres, isn’t it? They don’t get toilet breaks. They’re having to pee in bottles. Tt least that’s what the stories are. They’re paying minimum wage. they might have these great diversity policies on the one hand, but on the other hand, working conditions at Amazon are pretty dreadful.
Darren Brady Nelson 27:06
Look, they’re probably not dreadful as such in the US, but they’ve got in the headlines in the US about just they’re fighting all these unions around the country to make sure that the wages don’t go up, for the people who are on the minimum wage. Obviously, that doesn’t impact people above minimum wage, which there’s plenty of people at Amazon like that. I’d highlight more of the fact that they source most of their stuff from China now. China is, rightfully so, infamous for its use of actual slave labour, not the pejorative, like, “Oh, I think you’re paying someone too low.” They’re the actual slave labour where they don’t actually get paid. They’re forced to do the job. I think that’s actually even more hypocritical than them fighting in the US against unions about whether the minimum wage should be $15 or $17, right?
Gene Tunny 28:01
Yeah. What are we talking about there, Darren? Are we talking about people in China who have been imprisoned for various different reasons? Look, they’re going to have a variety of political prisoners over there, for sure. There’s the oppression of the Uyghur people. Is this what you’re talking about?
Darren Brady Nelson 28:17
Yeah, that’s it. These people are often the sort of people who are making the things that then Amazon not only sell, but they actually promoted. This is what’s changed with Amazon. I’ve been a customer of Amazon since they’ve been around, basically. I think that’s something along the mid to late 90s. I’ve just totally noticed a very huge change. Even when you actually go to type in well-known brand that you want, yeah, you’ll get it, but it’ll be down the list. They’ll have all these Chinese knockoffs of various sorts. We don’t know, empirically know, who is who in terms of using slave labour in China. But it’s a common practice, and it’s certainly there. There’s a pretty good chance that you’re buying products that have been made with slave labour. That to me is far more, if you like, hypocritical or immoral than the questionable conditions in a US warehouse. That’s on quite a different scale. If you’re making the broader point that they’re hypocrites, yeah.
Gene Tunny 29:29
Yeah, I think that’s a point that, that I hear on some channels. I think it’s a point that people like Krystal Ball and Saagar Enjeti on their show, on Breaking Points have made. I think it’s a good point. We’ll have to come back to that topic of China in a future episode, because it’s fascinating. I’d like to know what the actual evidence is. Then there’s a question about what do we do with it. What are our obligations as consumers? What should the powerful countries in the world? What should the United States? What should Britain, to a lesser extent Australia? We think we punch above our weight, but who knows? What should we be doing?
Darren Brady Nelson 30:10
Australia does. Australia does, definitely. We won’t go into this, but even on the inflation thing. Maybe it’s a topic for another time, why the US gets away with a bit more, because it’s the reserve currency for the world, right? You have a lot of dollars just in other countries. Some of the inflation is being spread throughout the world from them, from their US dollar inflation, and surely it’s a top five trading currency, so they can punch above their weight. The reserve bank can get away with a little bit more than New Zealand can, for instance, even in a relative sense.
One thing to sow the seeds for a China discussion in the future, whether it’s with me or someone else, is it’s just completely illogical that somehow China, in such a short period of time, went from essentially a Soviet Union economy, where really, the people aren’t productive, they’re not very good at anything, even manual labour they’re not very good at, and they just attracted 80% of the world’s manufacturing. Really? There are those poor countries that in a free market… This is what I’m getting at is China’s rise is not quite as free market as it’s been portrayed over the years, but a lot of dirty deals done, basically, US, Europe, Australia, etc, to artificially throw trade their way, that they wouldn’t have actually won in a competitive marketplace in the world.
Gene Tunny 31:44
Okay, we’re gonna have to come back to that. There’s so many issues there that I’d want to explore. Let’s come back to that, in a future chat. We’ll go back to this question of monopoly, why we brought that up. You sent me an article earlier today, I think it was Woke Capitalism Is A Monopoly Game or something like that. That was, I’ll put a link to it in the show notes, from the Mises Institute, by Michael Rectenwald I think.
Darren Brady Nelson 32:19
He’s legit.
Gene Tunny 32:20
Yeah. I guess this Woke Capitalism, that’s a reflection of the fact that there are all of these monopoly profits out there. There’s arguably been an increase in concentration in monopolisation in the US economy and in other advanced economies, and this has been behind a lot of the calls for antitrust action. There’s been a renewed interest in antitrust. I chatted with Danielle Wood from Grattan Institute here in Australia about antitrust last year, I think it was. Why is this relevant to inflation?
One of the assertions that’s being made is that this inflation is partly being driven by greedy corporates taking advantage of this, all of this discussion about inflation, this inflation narrative, and using it to jack up their prices, and they’re taking advantage of their monopoly power.
I sent you an article by John Quiggin. I’ll put a link in the show notes to that. John did a blog post on this where he was criticising Larry Summers. Larry Summers was dismissing that he says, “Oh, there’s no sort of reason to think that just because we’ve got this monopoly power out there or this market power in some parts of the economy, that that would exacerbate inflation. John Quiggin goes, “No, that’s not quite the case. I’ve written this paper with Flavio Menezes that demonstrates in our model that this can actually be the case. Do you have any thoughts on that, Darren? What extent could this be due to monopoly power, due to market power, that companies taking advantage of this inflation narrative to jack up their prices, to the detriment of consumers?
Darren Brady Nelson 34:02
Look, that was actually a very interesting… It’s a very short article. For people who want to read it, it’s very short. Strangely enough, I’m something in between, I think, between what Summers and Quiggin are saying. I don’t usually have a lot of alignment with John Quiggin on economics or policy or much of anything else.
Gene Tunny 34:29
Just for clarity, John’s a self-described Socialist or Democratic Socialist, so yep, yeah, that’s what you mean there. I think John’s a very good economist. A lot of things I agree with him on, but there are things I strongly disagree with him on. I just thought I’d clarify that for people who are listening.
Darren Brady Nelson 34:48
Look, he’s Australia’s Paul Krugman in many ways. Look, on this point. I would think that ultimately, I think it’s going to be an empirical question. That’s not going to be an easy thing to figure it out, to be honest, because it’s basically going… We talked about who’s getting the money first or the order of how that’s coming in.
I would think, logically speaking, and we’ll even come back to the Woke Capitalism as well, but yeah, look, I would’ve thought that those companies with the monopoly power, particularly in these growing industries… It’s one thing if you’re a monopoly power in a utility industry, okay. They’re not the most dynamic, go-getter type industries. They got monopoly power. Then they’re also usually facing some regulators who are going to try to eat away at that and all that. We’re talking the Amazons of this world. I’m not saying they’re a monopoly as such. Under textbook definitions of monopoly power, they seem to have a fair bit of it. Those sorts of companies, yeah, why wouldn’t that money be attracted more to companies like Amazon, than to a utility, a non-dynamic utility with a regulator on top of them all the time, because the antitrust authorities, they’re kind of hit and miss. Actually, sadly, in Australia, too.
It’s very politically driven. It depends on who’s in power. Once upon a time in Australia, that wasn’t the case, in the good old days of Allan Fels, for instance. But the ACCC’s gotten a little bit more political over time, to be like the US’s Department of Justice, who are extremely political, for the most part, and they actually have been with antitrust for not just… It’s not under the Biden administration. They’ve been political for decades. I would expect places where the supernormal profits are there and they’re expected to continue or increase or at least not decrease too much. Yeah, why wouldn’t that money be attracted more to that? I guess, does that sound like I’m actually more in Quiggin’s camp, I guess, than Summers’s?
Gene Tunny 36:56
I’m not quite sure what you’re driving at there. The money is more attracted to that sector.
Darren Brady Nelson 37:02
Chasing returns, so obviously, monopolies are gonna have bigger returns, right? That’s investment 101.
Gene Tunny 37:09
Yeah. That’s right. the money’s going there. But we’re talking about the-
Darren Brady Nelson 37:17
Oh, they’re greedy.
Gene Tunny 37:18
The prices, yeah. Why does that monopoly-
Darren Brady Nelson 37:21
That argument has been made by the Biden administration. Did Quiggin actually make that argument in this paper?
Gene Tunny 37:27
No, no, he’s assessing that argument. That argument’s been made by the Biden administration, among others.
Darren Brady Nelson 37:34
Yeah, but Biden’s administration was doing two things at once, like talking out of the mouth one way and then the other way, like antitrust, which this what we’re talking about, the degree of competition in markets, and does that exasperate it. Again, it’s probably, I think, an empirical question. Does it exasperate it overall in the entire economy? I’m not sure. That’s certainly an interesting thing. That’s certainly an area worth exploring, because two things. Is it being attracted to monopolies and cartels more than it is to competitive markets? Then what does that look like overall in the economy? I think that would depend also on to what extent is your economy… How many cartels and monopolies are there in your economy versus competitive stuff. You’re touching on a lot of things. Greedy’s a separate issue. That’s making a almost nonsensical moral assessment. I think greed existseverywhere. Are there more greedy people in monopolies? Maybe. I don’t know. I don’t even know how you would go about assessing that. As economists we’re less concerned about what people’s intentions are, because greedy’s going… That’s your intention.
Gene Tunny 38:50
Oh, yeah. I haven’t characterised what they’re saying correctly and I was just using greedy to illustrate, to make it more interesting.
Darren Brady Nelson 39:00
No, you’re right, though. People are saying that right. The Biden administration is saying that. It doesn’t look like Quiggin is actually saying that, but he may agree. I’m not sure. But you said he’s a Democratic Socialist, so he might gravitate towards the idea that just capitalism in general is more greedy, even if it’s competitive. I’m not sure, but that’s a totally different question. Good luck trying to figure that out. Greed exists in governments. You’re telling me that bureaucrats on high salaries, with no threat of losing their job, that there isn’t greed amongst those sort of people? Politicians, I think most people could see how politicians might be a bit greedy, with their ridiculously large pensions and all that sort of stuff. I know Aussies certainly view it that way, even across parties. In the US is a bit more polarised. Democrats think their politicians are like saints for some reason, whereas Republicans seem capable of criticising other Republicans. But that’s a separate issue, of course. Quiggin and Summers, that’s a very interesting point. Yeah. I think it’s a legitimate area to be explored. I think the logic is, yeah, I’d expect more money to be attracted to monopolies and cartels. That would exasperate, certainly, in certain industries and for certain consumers. Does it exasperate over the entire economy? I’m not sure. I’m not sure. What do you think?
Gene Tunny 40:27
I think, potentially, it is the case that these… Look, to some extent, I think these companies could be getting ahead of what they see as the inflation that’s to come. It’s possible that yes, they could rise their prices more than maybe justified by the increase in their costs. If you’ve got monopoly power, that’s certainly possible. I think there could be something to it.
I think trying to characterise the inflation as just a result of profit-maximising monopoly companies or companies operating in perfect competition, I think that’s going too far, because underlying all of this, as we’ve been talking about for quite a while now, is that big monetary expansion that we’ve seen in the US and other economies, so there is a reason to be expecting the inflation that we’re seeing. It’s not just because of greedy corporations. But look, it could be part of it, as could the supply chain disruptions.
What’s challenging I think, here, Darren is that there are so many different things going on. We’ve had the disruption due to the pandemic. We’ve had the supply chain disruption. We’ve had a drought, which is affecting meat prices. Meat prices, that’s an important part of the CPI. That’s one contribution. Fuel prices have been increasing. Used cars, new cars. There are factors affecting these specific markets which are driving up prices. That’s led some people to think maybe it’s just this supply chain disruption due to COVID, it’s going to be transitory. Look, I really don’t know. It’s hard to say. But we know as economists that it’s that monetary expansion, inflation is always and everywhere a monetary phenomenon. That would lead us to think that this inflation is something that could be locked in for quite a long time, unless the Fed takes quite aggressive action. I just don’t know whether they’re going to do that or not. Probably we’ll start to see the federal funds rate increase this year. There’s going to be, what is it, the tapering they’re talking about with the balance sheet? I really don’t know. It’s just so hard to determine what the relative contributions of all these different factors are. Do you have any thoughts on that?
Darren Brady Nelson 42:58
I think you’re right. I would just add in that, again, coming back to, just as per my article and our previous discussions, CPI is not a measure of inflation as such, because inflation is the money supply. That’s a measure of the effect on obviously quite a few prices in the economy, but not all the prices in the economy. What’s been different is the inflation previously has been showing up in PPI. It’s actually been mainly showing in asset prices, the usual stuff, stock markets and property. Those are the classic places where the easy money shows up first. Pretty much every money inflation boom, if you like, that’s where it always goes. Then sometimes it goes to some other places too, new and wonderful places. It depends on where the economy is at. Obviously Big Tech’s a thing nowadays in social media. You have to keep on looking at…
It’s interesting how it’s really showing up in CPI. That gets the public’s attention. Obviously, as you said, even more so is literally the coffees and other things that people are buying. They’ll hear the CPI figure, but if they’re actually seeing it in the stuff they’re buying, that’s… That’s where it gets, if you like, definitely, the pressure will come on to the politicians who would otherwise like to keep on inflating. Then the Federal Reserve and the Reserve Bank and all the different central banks will also start feeling that pressure, because at the end of the day, they’re not independent of government. They’re quasi-independent of government. For instance, the Federal Reserve, obviously the head is chosen by the President. That clearly shows you that’s not a completely…
The Federal Reserve has a funny ownership arrangement where it looks like it’s private, but it in practice, it operates like a government agency. In Australia, it’s more clear cut. The Reserve Bank is a government agency, etc, etc, and we know it is. But that doesn’t really change the characteristic of how a central bank operates. I’ve never seen any difference. The Federal Reserve can operate differently from the Reserve Bank, not because of its ownership, but because obviously, it’s the world’s reserve currency. It’s got some different things at play that, if you like, it can hide that US dollar inflation, spread it throughout the world, and have it not hit quite as hard inside the US as it might if it was a different, like was New Zealand or something. New Zealand can’t get away with inflating their money supply like the US can. Even Australia can get away with it more than New Zealand can, because it’s one of the five top traded currencies in the world. Australian dollar’s not just sitting in Australia, it’s out there as well.
Gene Tunny 45:54
I think there’s a lot of speculation on the value of the Australian dollar.
Darren Brady Nelson 45:58
Yeah, it’s more a speculative thing, but there’s a lot of Aussie dollars that just aren’t in Australia, if you like, or it’s out there being used for other purposes and speculation and whatnot. Obviously, Australia is a big player in certain areas, like mining and agriculture and stuff, which also tends to have a very international flavour to it.
Gene Tunny 46:18
Yeah. Just finally, I thought we should touch on the government as a potential beneficiary of inflation. I think you were sort of suggesting that before. I guess there are a few different things to chat about there. Governments can have a… They would prefer the inflation, or they could prefer policies that are inflationary, particularly in the lead up to the election, because that can help people get jobs. Then the inflation could come later, and they can worry about that later on, or another government could worry about that. That’s one issue.
Then there’s also the fact that governments benefit from inflation, because of what I’ve always thought of as the inflation tax. People use that term in different ways. But one way that has been used is to talk about what’s the erosion of the federal debt, so the money that the government owes, and that’s denominated in dollars. The real value of that decreases with inflation, so the government’s getting a benefit in that way. It’s borrowed all this money in the past, and then it pays it back with money that’s worth less because of inflation. The economy is bigger in nominal terms, its tax take is bigger in nominal terms, so it gets a benefit from inflation.
Darren Brady Nelson 47:46
The bracket creep…
Gene Tunny 47:48
Yeah, that’s right. That’s another part of it. Yeah, governments can actually benefit from inflation, although if it gets too high… It looks like this is what’s happening in the States now. You see all the commentary. Even Biden, I think, at a press conference the other day, didn’t he make a comment about, just a sarcastic comment about, “Yeah, inflation, great,” or, “That’s great, isn’t it?” because someone asked him about, “Do you think this is a great… Do you think this is going to help you in the midterms, or what’s it gonna mean for the midterms?” Do you remember that comment? Was it Steve Doocy?
Darren Brady Nelson 48:24
Are you talking about where he did the thing under his breath and got caught?
Gene Tunny 48:27
Yeah.
Darren Brady Nelson 48:28
It was quite rude. Yes. There was a Fox News reporter.
Gene Tunny 48:35
Doocy. Was it Peter Doocy? Steve Doocy’s son? I’ll put a link in the show notes for people.
Darren Brady Nelson 48:41
Which one’s the son and which one is the father? I can’t remember their names.
Gene Tunny 48:44
I think Steve Doocy is the one on Fox and Friends, and Peter Doocy’s the one in the White House press pool.
Darren Brady Nelson 48:52
Peter Doocy’s good. He’s very good at… He asked a lot of uncomfortable questions, but in a very professional way. Biden’s response to him wasn’t particularly professional enough.
Gene Tunny 49:03
It was funny.
Darren Brady Nelson 49:05
It was funny. It was funny.
Gene Tunny 49:07
He said, “Yeah, yeah, inflation, high inflation, yeah, that’s a real asset for us going into midterms, you stupid SOB.”
Darren Brady Nelson 49:17
Look, I’m a little bit disappointed in Joe that he wasn’t as creative as that. What was that comment he had in the election to one of the people in the audience at one of his town halls? He called her, I think it was, a… It was something, it had pony and dog in the … Something-
Gene Tunny 49:37
You’re a lying dog-faced pony soldier or something. Was that it?
Darren Brady Nelson 49:42
That’s the one.
Gene Tunny 49:44
Whatever that means.
Darren Brady Nelson 49:46
I’ve never heard that term before. I’m disappointed he hasn’t used it more often since. He should have used that with Peter Doocy perhaps, rather than just going so lowbrow with what he said.
Gene Tunny 50:01
Yeah. I don’t know, it showed that he’s a real person. I thought that was quite authentic, that moment. Anyway. Inflation, right. We didn’t even get on to those charts, Darren. You had prepared some charts.
Darren Brady Nelson 50:20
Oh, exciting stuff. I hope this works for people at home.
Gene Tunny 50:25
I thought one of the charts you showed was really… They’re all interesting. There was one that showed that inflationary expectations are increasing, too. People in the markets are expecting, or people in the community are expecting this inflation, this high rate of inflation continue into the future.
Darren Brady Nelson 50:43
I think we’ve been…Apple’s telling me or Zoom’s telling me that I have to somehow go into some system and do security and privacy or something.
Gene Tunny 50:53
All right. I can put them in the show notes. I’ll just put the charts in the show notes. But I thought one of them was quite… It demonstrated that those inflationary expectations have increased. I’ll put that in the show notes for people.
Darren Brady Nelson 51:09
Oh, and so people aren’t confused, it has the word Michigan in it, and it’s not the inflationary expectations of the state of Michigan. The survey is done by an institution that’s in Michigan, basically. I think the one I had had the one-year-out expectations, but plus alongside a five-year expectation sort of thing. Are they only expecting it in the short term to be problem versus in a longer term sort of thing, and both weren’t looking good, basically.
Gene Tunny 51:44
Yeah, I’ll put that there. I thought that was a good chart for context, because as I said, there’s this debate about whether it’s transitory or is it just due to used cars and new cars and meat prices and petrol, all that, or is it something longer term. It’s looking like it’s-
Darren Brady Nelson 52:01
Then there’s also a chart in there with wages, too. That’s an important one to do, to what extent is wages versus inflation, if you like, people’s costs versus their income. Obviously if your expenditures are going to be higher than your income, in real sense, then obviously, that’s a problem.
Gene Tunny 52:22
Okay, Darren, this has been great. There’s so many issues we’re going to come back to. I’ve got to come back to you or to, say, John Humphries might be a good person chat with about this, but I want to chat more about China. Lots of important issues there. Also, we could do a deeper dive on Woke Capitalism. I might do some reading up on that, to what extent is this a real thing or is it just the cover for some unsavoury practices. I wouldn’t believe Amazon’s really a woke corporation, given some of their labour practices, what I’ve been seeing. But yes, I think we can come back to that. Any final thought? Go ahead.
Darren Brady Nelson 53:01
Another one, because I want to write a paper at some stage, or at least an article to start out with, is revisiting trade. I find most free market economists are garbage on understanding free trade. What I mean by that is they jump from the theory of free trade good to then look at China, everybody go, “That’s an outcome of free trade.“ They kind of miss the linking the two together.
Also, I’d go even a step further, that they rely too much on… A lot of these people who even specialise in international trade seem to be that their education in trade was nothing more than what they learned at their first year at university. They go like, “Oh, here’s the theory from Ricardo on comparative advantage,” okay, fine, without actually doing a deeper dive into it and go like, “All right, how valid is that?” Yes, comparative advantage of trade between businesses and human beings, yep, gotcha. How can you then jump to a political nation state and say that it’s exactly the equivalent, beyond a teaching tool? I’m fine with it as a teaching tool. But I think it’s completely overstated, because you’re dealing… A nation state is a completely different beast, and all the little things inside that nation state, particularly when you’re talking about China, because you’re never dealing with a private free market corporation in China, for the most part. You’re always dealing with government inside China. You’re talking a very different beast.
Then I’ll throw in the fact that they didn’t win all this business because they were actually better or in reality were offering cheaper products. They weren’t even offering cheaper products in a market sense, because not just the slave labour, but just all the government fiddling inside the country that goes on. Anyway, I’m just sowing the seeds for-
Gene Tunny 55:03
Yeah. I think we’ll probably have an extensive debate in that one, Darren, because I may be one of those free market economists that you’re talking about, or very pro free trade. Maybe not a debate, but I’ll want to explore what your contentions are a bit more.
Darren Brady Nelson 55:23
Oh, and by the way, I’m debating me from not that long ago as well. Again, just to be clear, I am totally for free trade.
Gene Tunny 55:34
Good.
Darren Brady Nelson 55:34
I’m not trying to argue that free trade is bad. I’d be happy to revisit the Trump tariffs and all that and the logic behind them, and bring in concepts we both obviously love, like cost benefit analysis.
Gene Tunny 55:47
Excellent. Any final thoughts on inflation, Darren, before we wrap up?
Darren Brady Nelson 55:51
Inflation bad? It’s gonna get worse, at least for a while. But it’s really a political thing at the end of the day, so it’s going to be heavily influenced by the midterms, in the US, just to look at a US picture, because there is a distinction between the Republican and Democrat Party on what they think about inflation, whereas in Australia, sadly, both parties are just kind of cool with it for the most part.
Gene Tunny 56:20
Okay, now, the Democrats are gonna get absolutely wiped out in the midterms.
Darren Brady Nelson 56:26
They should.
Gene Tunny 56:26
I’m not making a comment on whether they should or whether they shouldn’t.
Darren Brady Nelson 56:31
No, sorry, I’m saying like projections, that looks like… That’s what I’m talking about.
Gene Tunny 56:36
The GOP is going to be in power. What do you expect? The Federal Reserve’s ultimately the important institution, isn’t it, in controlling inflation in the States?
Darren Brady Nelson 56:48
Yeah.
Gene Tunny 56:49
How’s the midterms gonna matter? How are they going to matter, in terms of-
Darren Brady Nelson 56:54
They’ll be under pressure because they know… Look, internally, these are people who… There’s some of these people actually like things like MMT, or who would be happy to keep inflating, but not everybody in the Feds views it that way. Fortunately, the Feds actually kind of decentralised. It has a head. But there’s actually different Federal Reserves, and they have often very different philosophies on inflation and its importance and what you should do about it. That’ll be interesting.
They’re gonna feel the pressure, not directly, because they don’t really report to Congress as such. They’re supposed to be independent, but the head gets appointed by the President. I think they’re going to be feeling the economic and the political pressure, if it is a… The Biden administration’s gonna be able to do nothing, basically, once the Republicans… We might actually see, whether you agree with it or not, we’ll probably see a lot of, I’m expecting possibly impeachment proceedings. That’s probably what I’m going to be seeing. I think we’re going to see that. Then we’re going to see a Republican president, whoever that is, in 2024.
Gene Tunny 58:08
It’s quite possible, yeah, that with impeachment. This is an economic show, not a political show, but just from my observation of what’s going on in the States, certainly that could be possible if you get more of the Marjorie Taylor Greene, Lauren Boebert types into the Congress, then yeah, that’s certainly possible. Just on the House and others in the Senate or the Congress, what does that mean for inflation? The only way I could see that as having any impact is if there was the opposite of what’s going to happen, is if there’s a blue wave, and you have more AOC types coming in, and then you have a massively inflationary Green New Deal or something like that, but the prospect of that happening is absolutely… It’s almost zero.
Darren Brady Nelson 59:01
Look, no, it actually isn’t even that. If they just held on by one seat, the AOCs, etc, hold far more sway than you would think. Not only within Congress, but then in the White House as well. They just have to hold on by one. That’s all they have to do. They just have to, because they’re desperate. There’s a lot of things that they shouldn’t be doing, because they’re probably going to lose. But I think the psychology is like, “Hey, we’re probably going to lose, or at best, we might just hold on, so let’s get this stuff done now that we’ve always wanted to do,” for not just years, but sometimes even decades. The sort of things that the AOCs, etc, of this world want done. Look, there’s a small chance that, okay, let’s say the Republicans do, sorry, that’s not a small chance, that Republicans win and perhaps win big, but there might be even a chance that the old Joe Biden who used to actually do deals with the opposite side may reappear somehow, because we haven’t seen that guy so far. He did exist once upon a time, pretty much throughout his career actually, to be honest. This Joe Biden is actually quite different than we’ve seen over the decades.
Gene Tunny 1:00:14
Looking at what’s happened, Darren, you haven’t seen any radical policies being implemented by the Biden administration, have you, in terms of economics? But this infrastructure bill that was ultimately bipartisan, the larger Build Back Better Bill, was not bad.
Darren Brady Nelson 1:00:31
That infrastructure bill had no infrastructure in it virtually. It was all about the woke agenda on education and race policy and all that sort of stuff. Now, that’s extremely radical. Just because you got a couple Republicans who went along with it doesn’t mean it wasn’t a radical bill. It’s a very radical bill.
Gene Tunny 1:00:50
It was a lot smaller than what they wanted to implement, so the full Build Back Better, which some people on the other side we’re labelling Build Back Broke.
Darren Brady Nelson 1:00:59
Yeah, but the percentages of stuff that actually went to infrastructure stayed the same. It was a very small minority of actual physical infrastructure as we know it. They defined infrastructure to be something completely different, that bill.
Gene Tunny 1:01:13
I have seen that. I think that’s right, to an extent, yep. I’m gonna have to come back. Either you or another guest I’ll have to invite them on and unpack that. I’m interested in that. It’s probably too much to go over there. Darren, every time we chat, I just think about all of these other things we need to explore. But I think we better wrap out now because we’ve been chatting for quite a while. But yeah, I really want to thank you. Unless there’s anything else you want to say, to end with, we can call it a-
Darren Brady Nelson 1:01:45
Quick one. Because we’re both renaissance men, we don’t want to be pigeonholed into one little thing. We’d like to go off and explore different things.
Gene Tunny 1:01:54
Exactly right, Darren. Darren Brady Nelson, Chief Economist at LibertyWorks. As always, I’ve really enjoyed it. Thanks so much for your time.
Darren Brady Nelson 01:02:03
Cheerio. Thank you.
Gene Tunny 01:02:06
Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 1:02:11
If you need to crunch the numbers, then get in touch with Adept Economics. We offer you Frank and fearless economic analysis and advice. We can help you with funding submissions, cost benefit analysis studies, and economic modelling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.
Gene Tunny 1:02:40
Now back to the show. Brendan Coates, Economic Policy Programme Director at Grattan Institute, good to have you on the programme.
Brendan Coates 1:02:50
Thanks for having me on, Gene.
Gene Tunny 1:02:52
It’s a pleasure, Brendan. You’re gonna help me respond to this question from a listener, a really curly one. Now, in response to an episode I did with Miranda Stewart, we chatted about wealth inequality and taxing the wealthy. There’s a big conversation going on about that at the moment. James, one of my listeners, wrote in and said, “I’d be interested in hearing more on how low-income/labour tax rates and tax credits work together, to oblige the government to pay wealthy individuals. I instinctively start from a position that the least anyone can pay in taxes $0. I was frustrated by the conversation in 2019, around imputation credit refunds, that people could actually have a negative tax rate that creates a liability for government to pay. However, I also realised that the conversation is bound up in concerns around double taxation, and would be interested in hearing from someone unravel those threads in an upcoming podcast. “
You’re probably one of the best people in Australia to talk about this incredibly complex issue that ended up becoming… It was one of the contentious elements of the Opposition Labor Party’s policies at the 2019 federal election and possibly cost them some seats. Just to begin with, Brendan, would you be able to explain what’s actually going on here? I think James is on the right track. He’s talking about this interaction of the low-income labour tax rates and the tax credits. Could you sort of explain what’s going on, please?
Brendan Coates 1:04:42
Thanks, Gene. First of all, thanks to your listener, because you’re bringing back bad memories, nightmares even, of the 2019 election and trying to simply explain how franking credits work. In its heart, franking credits are… We have an imputation system in Australia for dividends for corporate profits. When you’re paid a dividend by a company, it has a franking credit attached, which represents the tax that’s already being paid on those profits by the company. They can be used to offset any personal income tax the shareholder owes to the Tax Office. So in a sense, franking credits represent the tax that’s already been paid.
Now, when the system was set up, back pre-Howard, basically you could only use those franking credits to offset your personal tax income, if you had a tax liability. If you had no taxable income, therefore, no tax liability, then you couldn’t use those credits. Now, what happened after Howard in 2001 was we essentially, and Castello, is they allowed people to claim those franking credits, the tax already paid, to reduce the tax, their taxable liability that they had to pay as a person. The whole point is to sort of look at an individual and the company tax systems collectively and say, how much does someone owe? What you should be paying is essentially a marginal tax rate on both your income from all your other sources, and the tax that you’re paying on any dividends you receive for owning shares in Australian companies.
Gene Tunny 1:06:15
Okay, so this comes from the fact that we’ve got this peculiar way of taxing companies in Australia, this dividend imputation system that we share… Do we share it only with New Zealand? I’m trying to remember if that’s right. It’s really a different system from the typical classical company tax system, whereby the company would pay tax, so it might be, say, 20% tax on corporate profits, and then you would get paid a dividend, and then you would pay income tax on that dividend. But that’s not what happens in Australia, is it? Although, actually, the company’s paying tax at a 30% tax rate on its profits. If you get paid a dividend, the tax office takes into account the fact that the company’s already paid, say, well, the 30%. If your marginal tax rate is higher than 30%, so if you’re one of the top, if you’re on the top marginal tax rate, and…
Brendan Coates 01:07:33
Then you’re paying 47 cents on the dollar so 17% [more].
Gene Tunny 01:07:37
Yeah, so you got to make that up. But on the other hand, if you’ve got, effectively a zero marginal tax rate, because you’ve got all of these tax-exempt earnings, so we’ve got a tax-free threshold of 18,000 or something, then the company’s paid all of this tax on behalf. Theoretically, well, there’s been too much taxation paid, because the company is, it’s really an aggregation of individuals. The idea is that the company is just the sum of the individuals. What’s relevant is all of the marginal tax rates, and so there’s been too much pay. That seems to be the logic. Am I on the right track there, Brendan?
Brendan Coates 1:08:25
Yeah, that’s right, Gene. But the basic idea is that every shareholder in Australia pays tax at their marginal tax rate on those dividends, like they do everything else. Now, the problem here, so Labor’s policy was to remove refundability, to reverse the change made by Costello and Howard in 2001, and to mean that if you had a marginal tax rate of… If you had no taxable income left, then there was no tax, there was no ability to deduct those franking credits, the tax that’s already been paid.
Now, the original sin per se is not actually refundability. Refundability is actually a relatively normal part of a tax system. The issue is that there are a lot of Australians, particularly a lot of wealthy Australians, that don’t pay any income tax, which is why when Labour announced the policy to reverse the changes they were gonna collect a lot of money. I think the revenue figures are sort of in the ranges of five, six billion dollars a year. It’s because superannuation earnings. You put your money in super. You contribute through your working life, you hit retirement, and during your working life, any earnings, any dividends super fund earns on your on your behalf, are taxed at 15%. But when you hit retirement, they’re tax free. You have hundreds of thousands of retirees, often quite wealthy, self-funded retirees, paying no tax at all, and then claiming these franking credits back as well.
Labour’s approach was, okay, instead of going after what is the key source of the problem, which is the tax-free status of superannuation earnings in retirement, the fact that it’s 0% tax rate, they instead went after the franking credits themselves, because it was largely only hitting largely the top 10, 20% of the earnings distribution of retirees. It wasn’t hitting their base. It was hitting wealthy people, who frankly probably should be paying more into the tax base than they are. But it was certainly a second best solution to a third best problem.
Gene Tunny 1:10:24
Okay, okay. Right, there are a couple of things I might pick up on there. Okay, with the taxation of super, so it’s taxed in the earnings phase, or when it’s in your super fund, so there, it’s taxed, but it’s at a concessional rate. Then when you withdraw it, when you get that sort of pension in retirement, then it’s not taxed. There’s an argument that your super is taxed highly concessionally in Australia and it’s a growing cost to the budget if you look at the tax concessions as a cost.
You mentioned this concept of refundability. That’s whereby if you get a tax credit you can have a negative liability with the Tax Office, and therefore they would pay you the money. Instead of you paying money to the Tax Office, they pay you. That was something that was brought in in 2000 or 2001 by the Howard government. This is where the issues come from. I think the opposition, they were pointing to the fact that this is a growing cost to the budget, is that right, the money paid out for these franking credits?
Brendan Coates 1:11:58
That’s right. You can think of the money…as a refund, as a refund of the tax already paid, right? It’s refund the tax that has already been paid on your behalf by the company, which took the tax out of the money it was going to give you and gave you a smaller dividend, because it paid the other 30 cents the dollar at the Tax Office.
Now, the issue here is that we have an aging population, which generates challenges in its own right, because health spending in particular rises with age. There are some long-term intergenerational challenges in terms of Australian federal government budgets in particular. The issue here, though, is that we also at the same time have retirees or older Australians who, because of the tax-free status of super, essentially opting out of the personal income tax system. The share of over-65s that pay any income tax at all has gone from just under 30% 25 years ago, to more like 15% today, even though they’re receiving larger benefits from the State because they’re receiving more in healthcare and the rest of it. You’ve kind of got a generation that’s paying a lot less tax than it used to, than the generation before paid at the same point in time. It’s also drawing more in services.
I think the ALP would argue that the franking credits proposal was a way of trying to right that wrong, because it’s particularly wealthier super annuitants with very large balances that were paying the most, that were getting the largest tax concessions from the superannuation system, because they’re not paying any tax at all on their earnings or on their withdrawals from superannuation.
Gene Tunny 1:13:38
Yeah, and so this is a function of clever financial planners basically getting people before retirement to just put all your money and assets into super because it’s going to be taxed concessionally in retirement, so that must be what it is. Whenever you create a rule, you’ve got all of these clever, I guess financial advisors and accountants and lawyers trying to figure out how to get the best for their clients out of it. It’s a function of that. Okay.
Now, I think we’ve covered this point of double taxation that James had. That’s the idea that, well, you could look at it as double taxation if you got rid of franking refundability or franking credits, because the company has already paid that tax on your behalf and you shouldn’t have paid any tax, given the rules and the system, the tax rules what your marginal tax rate is. I think that explains that point there. I think that’s a good observation you made. Rather than the opposition tackling the concessionality of superannuation, super earnings, they decided to address this refundability of franking credits issue. I guess a couple of things there. One, I guess tackling the super concessions, that would be politically courageous, very difficult. There must be a case, is there a case for some concessionality on earnings from superannuation, Brendan?
Brendan Coates 1:15:17
Like anything that involves the taxation of savings, there’s often a lot more complicated or there’s more to the story. It’s not necessarily complex, but there’s often a little bit of nuance to the story. It is certainly true that we should be trying to tax superannuation earnings in retirement more than they are. The 0% tax bracket we currently have on earnings is unsustainable in the long run, particularly as more money in the super system enters the retirement phase, because that concession takes off from the age of 60. People have got a lot of time left in their lives from the age of 60 onwards, where they’re basically opting out of the tax system entirely. But it’s fair to say as well that the tax rate on savings, on superannuation and the like, probably should be the marginal rate. It shouldn’t be 47 cents on the dollar for the top income earner, 32 cents on the dollar for the median. That’s because when you tax the return of savings, those tax rates compound over time. Basically, you get compounding at higher effective marginal tax rates if you tax the return to savings.
Now there are some that say, this is the UK, there was a public review for the Mirrlees Review that said the optimal arrangement is to have a 0% tax rate on the state, so you’re not distorting the choice between should you consume money today or consume money in the future.
I tend to fall on the… I think some of the other literature is pointing to the fact that the rates should be concessional relative to the marginal rate. It’s okay to tax return to savings a bit, partly because returns to the savings rates themselves don’t seem to be particularly responsive to the tax settings. People don’t tend to change their behaviour very much. If you tax the return to savings, they might. They’re not that responsive. If you’re going to tax that margin less, then to raise the same revenue, you’ve got to tax other margins like labour income more.
On balance, we think that the appropriate tax rate on savings, it might be 15, 20 cents on the dollar, rather than say 47 for the top marginal rate. Now, if you’re thinking of something like superannuation, look, you are still taxing that savings, because you’re taxing a bit on the way and the income that you’re earning is being taxed, so 15 cents on the dollar when you put those contributions in. It’s just that a 0% tax rate in retirement, it is too much. It is too high. if we’re thinking about shifting the balance of tax in Australia in a way that’s going to improve economic efficiency, the taxes on super savings probably should be a little bit higher, and maybe the taxes on other forms of savings like term deposits, which are taxed at full marginal rates, probably should be a bit lower.
Gene Tunny 1:17:59
Okay, just for clarity, Brendan, I better make sure I’m getting this right. We’re talking about this is the money you take out being tax-free, out of your super. What about the money or the funds that still remain in your super fund once you’re retired?
Brendan Coates 1:18:16
Let’s back up a little bit, Gene. There are three stages. There’s the money you put into super contributions. There’s the earnings on the dividends. Then there’s the fact that you can withdraw the funds. Australia under Howard and Costello in 2006 removed all taxation on those withdrawals. Taking money out of your super is tax-free.
The issue is that at the point when they took the money out, they removed that tax on withdrawals, which was a very complex tax. It was called the reasonable benefit limits. Anyone who’s an accountant or financial planner that listens to your show will agree that it was a complete pain in the ass. The issue, though, is that the taxation on those earnings is also tax-free from the age of 60. You’re paying no tax on the earnings as accounts, and then no tax on withdrawals.
Now, I should say that since some of the changes that the Turnbull government put through in 2017, look, if you’ve got more than $1.7 million in super, it’s only the stuff less than 1.7 million that’s tax-free. Anything above that is taxed at 15%. But most of the money is those people with less than 1.7.
Gene Tunny 1:19:26
Okay, it’s so complicated, isn’t it?
Brendan Coates 1:19:29
It’s just like pulling an onion apart. There’s layer after layer after layer.
Gene Tunny 1:19:33
If you’re listening, whichever country you’re in, regarding taxation, retirement income matters, please speak with a financial advisor, because they’re going to be the best people to help you. It’s just so complex. You and I both worked at the Treasury. You remember all of the hundreds of people in the revenue group dealing with these tax policy issues. It’s so incredibly complicated. Okay, Brendan, it’s been good. Anything else? Have we missed anything? Is there anything else we need to chat about? Oh, yes. I like the way you characterise this. You’re talking about abolishing franking credits. Did you say it’s a second best solution in a third best world or something like that?
Brendan Coates 1:20:22
That’s right. It takes us in the right direction. It’s not the reform I would have done. I would have introduced some sort of taxation on super earnings in the retirement phase, so that the dividends people are receiving from companies in which they own, that they pay some tax on those earnings, as they do before they retire. That would be the cleaner, neater solution to the problem, because you’re hitting all taxpayers, you’re not just hitting the ones that don’t have any income against which to offset their franking credits. That would be more efficient from a tax perspective, from say a tax economics perspective. But it’s just not the path that the governments or oppositions have gone down. We’re working on it. That’s obviously an area of grants research and advocacy. We think that is something that needs to change. But it’ll be a bold government that does go and take that step.
Gene Tunny 1:21:20
I think what’s interesting, Brendan, you made this point that the cost of these concessions, this concessional taxation and superannuation, that is increasing over time, and it’s increasing at a faster rate than government revenue, isn’t it? Is that right?
Brendan Coates 1:21:38
That is right, because you’ve finally got these compounding amounts of money. The super system has $3.2 trillion in it. I think the amount of money… That’s rising really quickly. In 2014, it was $1.4 trillion. then at the same time it’s more than doubled in that short period of eight years. At the same time, you’ve got, as population ages, you’ve got a growing share of superannuation assets hitting that age 60, were super earnings becomes tax-free. The size of those concessions is growing really quickly. I think the retirement income review that was done by the Treasury estimate that I think by about late 2050s, actually might even before that, it might be a bit earlier, the cost of the tax concessions themselves will cost more than the age pension.
Gene Tunny 1:22:27
Right. Okay, I’ll have to have a closer look at that. It just seems to me that with these concessions, and also the NDIS, there’s some cost issues to do with the National Disability Insurance scheme. Eventually, yep, there will have to be some hard decisions made somewhere in the Commonwealth Government regarding Commonwealth programmes and tax policies. Unclear exactly what those will be.
I think Grattan’s doing a good job at highlighting what all of the issues are and just crunching the numbers. I’d just like to say to you and your colleagues, keep up the good work. I’ve been lucky enough to chat with quite a few Grattan people on the podcast and always, always find it a really great discussion, and I learn a lot, as I have done today, Brendan. If there’s anything else, yeah, happy to hear it. Otherwise, I think that’s been great. I’ve certainly learned a lot. Thanks so much for your time.
Brendan Coates 1:23:34
Thanks very much, Gene. If I can leave you with one final thought, which is something I think you should think about for a future podcast, is with an ageing population, you tend to find that the services that people rely on are often provided by government, like health care. It does raise the question that if you want to provide these services with an ageing population, the size of the state probably ends up being a bit bigger than what it has historically, which means you need the tax revenue to fund it. Now, there’s always spending you can try to cut, but all else equal, it strikes me that that’s the direction you end up heading in, just as a matter of just the dynamics of ageing Australia. I think that’s something we’re just yet to grapple with in Australia, that it probably does mean tax to GDP, it probably increases from where we are today.
Gene Tunny 1:24:26
Yeah, yeah. If there is that political desire to have those higher expenditures, then naturally, you would need to have that higher rate of tax to pay for it. Personally, I may not support that. But look, I accept that that is the case, that if there is the desire from the public, if that’s how people vote, and they support that, then exactly, those expenditures have to be funded. Very good point. I think I will try and cover that in a future podcast episode, because Richard Dennis I’ve seen has written a book, Bigger, or Big, maybe it’s Big, from the Australia Institute. I don’t know if you’ve seen that. I think Richard’s making a similar point to what you’ve made. I’ve been meaning to get a copy of that and delve into it and see if I could get a podcast episode out of that. Great suggestion, Brendan. Great.
Brendan Coates 1:25:24
Thanks very much, Gene.
Gene Tunny 1:25:26
Cheers, Brendan. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
With US inflation at a 40-year high, who wins and who loses? Are greedy corporations to blame as some pundits are suggesting? Episode 127 of Economics Explored features a wide-ranging conversation with Darren Brady Nelson, Chief Economist of LibertyWorks, an Australian libertarian think tank, which also considers so-called Woke Capitalism and what’s going on with China. Here’s a video clip from the episode featuring Darren chatting with show host Gene Tunny about the 40-year high US inflation rate.
In the second part of the show, the Grattan Institute’s Economic Policy Program Director Brendan Coates explains the franking credits controversy, related to some peculiar Australian tax rules, to show host Gene Tunny.
Darren Brady Nelson is an Austrian School economist and liberty evangelion as well as a C.S. Lewis and G.K. Chesterton style Christian. He is currently the Chief Economist at LibertyWorks of Brisbane Australia and a long-time policy advisor to The Heartland Institute of Chicago USA. He is also a regular commentator in traditional and online Australian and American media. Check out his full profile at Regular guests – Economics Explored.
Brendan Coates is the Economic Policy Program Director at Grattan Institute, where he leads Grattan’s work on tax and transfer system reform, retirement incomes and superannuation, housing, macroeconomics, and migration. He is a former macro-financial economist with the World Bank in Indonesia and consulted to the Bank in Latin America. Prior to that, he worked in the Australian Treasury in areas such as tax-transfer system reform and macro-economic forecasting, with a strong focus on the Chinese economy.
Thanks to Darren and Brendan for great insights and conversation, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
Episode 126 of Economics Explored features a conversation about the pros and cons of a Universal Basic Income (UBI) with my old University of Queensland economics classmate Ben Phillips, now an Associate Professor at the Australian National University (ANU). Ben is one of Australia’s leading modellers of the impacts of tax and welfare policies on households, so he’s the perfect person to chat with about UBI. Here’s a video clip from the episode to give you a sense of the issues Ben and I discuss.
You can listen to the full audio episode using the podcast player in this post or via podcasting apps, including Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among others.
A transcript of EP126 is provided below.
About this episode’s guest – Ben Phillips
Associate Professor Ben Phillips is a Principal Research Fellow at the Centre for Social Research and Methods. He has nearly 20 years of experience as an economic and social researcher in Australia. Prior to joining the ANU Ben was responsible for a range of modelling projects at NATSEM including the STINMOD microsimulation model of Australia’s tax and transfer system. Ben managed several key projects including the distributional analysis of the Australian Government’s 2014-15 and 2015-16 Budgets.
Prior to joining the ANU Ben twice worked at NATSEM and has also had roles at the Australian Bureau of Statistics as a methodologist and economist, The Housing Industry Association as a senior economist and the Bureau of Tourism Research as an economic forecaster. Ben has a first class honours degree in economics and is undertaking a PhD through the Crawford School of Public Policy focusing on the tax and transfer system.
Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode.
Transcript – EP126 on UBI w/ Ben Phillips, ANU
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.
Ben Phillips 00:04
Well, I think there’s some ideas of UBI that we can borrow. I think a lot of the issues we’veidentified could be used to improve what we’ve currently got. I think a more realistic and practical approach is probably just to fix up some of the issues in the current system that have fairly minimal costs.
Gene Tunny 00:19
Welcome to the Economics Explored Podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 126 on UBI, universal basic income. The pandemic has amped up enthusiasm for a UBI, because people have seen government’s boosting various welfare benefits and paying new benefits. Would a UBI have been a better option? Does the huge spending on emergency support during the pandemic prove that governments could afford a UBI? These are intriguing questions.
My guest this episode is Australian National University Associate Professor Ben Phillips, from ANU’s Centre for Social Research and Methods. Ben is one of the world’s leading experts on micro simulation modelling. As background, here’s how the Urban Institute describes micro simulation. In the social sciences a micro simulation model is a computer programme that mimics the operation of government programmes and demographic processes on individual micro members of a population, people, households, or businesses for example. For each observation in the large scale survey, a computer programme simulates outcomes of interest, such as income tax liabilities or Social Security benefits, by applying actual or hypothetical programme rules to the survey data about that observation. This is what you need to do if you want to analyse the costs and benefits of a UBI.
And hence, I thought, Ben would be the perfect person to talk to about UBI. And indeed, he has done some great research work on a UBI here in Australia. I’ve known Ben for over 25 years. We’re both in the same honours year in economics at the University of Queensland. Ben’s worked at the world leading National Centre for Social and Economic Modelling, NATSEM, the Australian Bureau of Statistics, and the Housing Industry Association. His micro simulation work has been widely quoted in the media, and he’s the go-to expert in Australia on the impact of the federal budget on households.
Please check out the show notes for links to materials mentioned in this episode. And please check out our website economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new ebook, Top 10 Insights from Economics. If you have any questions, comments or suggestions, then please either record them in a message via SpeakPipe, see the link in the show notes, or email them to me via contact@economicsexplored.com. I’d be really interested in whether you have any suggestions of good people to talk to about UBI in the US, the UK or other parts of the world. While I think that the points I make in my conversation with Ben this episode generalise to other economies, I’m conscious that there are specific circumstances in each economy, which may modify the economics of a UBI somewhat.
Okay, before we get into it, I’d like to ask you to please stick around until the end of the conversation, after which I will follow up some of the points in the discussion with Ben. Righto. Now for my conversation with Ben Phillips on UBI. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Associate Professor Ben Phillips from the Australian National University, good to have you on the programme.
Ben Phillips 04:16
Hello there, Gene, how are you doing there?
Gene Tunny 04:18
Excellent. Thanks, Ben. Ben, I’m keen to chat with you today about this concept of universal basic income. So this has been requested by a listener of mine who’s just fascinated with this concept and suspects that given where the sort of views that are often expressed on this programme, he suspects I’m probably sceptical of it, and he’s generally right, but I’m sceptical of a lot of proposals. But I do remain open-minded and I want to understand what it would involve and just whether it could be feasible, what it would look like. And given that you’ve done some great work on this in the Australian context, so you’re one of Australia’s top micro simulation modellers. So you understand all the data about what people are earning, what they’re paying in tax, what welfare benefits they’re getting. And so I thought you’d be great to chat about this issue. So to kick off, Ben, I’d really like to sort of just establish, what is this idea of a universal basic income. So are we talking about a payment that goes to, everyone, so every adult in the economy, of a particular amount, so I don’t know, 10,000 a year or 20,000 a year? And that’s the idea to give a basic type of income? That’s essentially what we’re talking about?
Ben Phillips 05:47
Look, I think at its most simple level, there’s lots of different models of what it can be or what it might not be. But typically, what you’re talking about is, at the moment we’ve got a very means-tested system of welfare payments. So you say you have to be unemployed, or you have to be a single parent with young children or you have to have a disability to receive a certain payment. Those payments vary by your age, or what type of payment that you’re on. They’re relatively meagre, I suppose. Universal basic income, obviously, as I said, it varies. You’re typically looking at, as you say, of a payment of say at least the amount of say the JobSeeker Payment that we have in Australia at the moment, which is around about sort of $14-15,000 per year, and potentially higher than that. So I say maybe the age pension or even higher. I think the Greens at the moment, the Greens Party, are actually suggesting I think it’s about 1,150, 1,160 per fortnight, which is a fair way above even the age pension. So the age pension is about sort of nearly $1,000 a fortnight, and I think the Greens are after a payment of over 1,100 per fortnight, I think for all adults in Australia. So at the moment, current welfare payments might go to around about say, oh, with maybe around about 4 million people in Australia at varying levels, so JobSeeker, that 600 a fortnight, up to say, 1,000 a fortnight for the age pension, whereas if you had a full blown universal basic income, say as say the Greens are suggesting, you’d be looking at about, you know, a payment of 1,150 a fortnight or getting up towards $30,000 a year for around about 20 million Australians. So it’s a huge difference. And obviously, that requires some rather astronomical numbers in terms of financing. But of course, there are different models of basic income. That’s just, I guess, what we most commonly perceive as being universal basic income, everybody gets enough to get by. And obviously, someone has to pay for it, either through more personal income tax or wealth tax or some other form of tax.
Gene Tunny 07:41
Right. Okay. What are the different models, Ben? What sort of things are you thinking of?
Ben Phillips 07:48
Well, there’s various models in terms of, I guess, generosity. So the most generous one that I’ve seen is really what the Greens are currently suggesting. And that is where you’ve got about $30,000 per year for every single adult in Australia. Going down from that, there’s others who have proposed, I think Ross Garnaut, not that long ago, proposed a similar system where every adult gets a certain amount of money. I think it was more like the JobSeeker or the old Newstart payment, which is more like about sort of $13-14,000 per year, so a lot less expensive. And then going down from there, you have what I guess we’ve looked at a few different models that are much cheaper than that. And that’s where you’ve got more of a means-tested approach, or what in one of the papers we’ve called affluence testing. So that is, the higher your income or the more wealth you’ve got, the less you would receive. So it’s a little bit like means testing. There’s other versions that are similar. So things like a negative income tax, that’s where everybody gets like a tax refund, a full tax refund of say maybe $10,000 per person, that as your income increases, you lose some of that, and at some point, it goes to zero. So that’s another way of looking at it. Another one is sort of a guaranteed minimum income. So everyone has a sort of a guaranteed minimum amount that might be say you’ve got at least $10,000 per year. And again, that’s means tested. So the more you earn, the less of that you get, and obviously at some point, it peters out to nothing. So that’s sort of the basic models. Obviously, the full-blown basic income’s easily the most expensive, and I dare say the most unlikely to ever, evidenced to be so boring to legislation in Australia, or to the past legislation in Australia, whereas the guaranteed minimum income, that might be something that’s a little more realistic. Obviously, they’re all quite different to our current, very tightly means-tested system. We also have a lot of conditionality on our current payment system or current welfare system, particularly if you’re working age, obviously for an aged pensioner. If you’re under a certain income limit, certain wealth limit, you get that payment. But if you’re of working age, unless you’re disabled, there’s usually some sort of fairly strict sort of workplace sort of, I guess, work requirements that one must get through.
Gene Tunny 10:02
Yeah. And that’s allowed Australia to have a, well, a very cost effective welfare system, you could argue, or one that … I mean, arguably, the benefit of means testing is you can assist the people who really need it at a low fiscal cost, or that that’s the theory, isn’t it? So that you could argue that, well, you know, what’s wrong with that? Isn’t that a great idea? I mean, UBI is sort of moving away, a long way from that. It’s the opposite of means testing, isn’t it? Is that right?
Ben Phillips 10:34
Yeah, so the current system, Gene, just to put it in perspective, so we currently pay out about a little over $100 billion per year in welfare payments to adults. There’s another sort of 20 or so million in family payments, which is effectively for the cost of children. So you put that to one side, if you will. So about $100 billion dollars. So the most expensive welfare system under a UBI, say under the grand scheme, would be somewhere around about $500 billion per year. So you’re looking at an additional $400 billion per year. Keep in mind, Gene, the current federal tax receipt is about 500 billion. So you go from 500 billion to 900 billion. That’s an unbelievable amount of money. And as you probably remember well, Gene, we had a big argument, big fight about carbon pricing in say 2012. That was over about a $5 billion tax. Now, regardless of what we thought of the carbon price, we’re having a big argument over 5 billion, how would we go with an additional 400 billion? Having said that, of course, you don’t have to have the full-blown measure, the full-blown universal basic income. But even the more sort of the cheaper versions, say like the affluence-tested model that we’ve modelled was more like a bare minimum of $100 billion per year. So you’re still looking at having to sort of double the welfare system in Australia, and knock-on from that is to increase taxes by, you know, 20, 30% across the country. So I think in a current environment that’s very unlikely to ever happen. But still it’s an interesting idea to think about, I guess.
Gene Tunny 12:04
Oh, absolutely. Certainly interesting to think about. So a couple of things I want to pick up on there. Ben, you mentioned negative income tax. So that, I think that was associated with Milton Friedman, who I’ve got a poster on the wall there. So he was advocating that back in the 70s I think. There’s a great paper that you co-authored along with Miranda Stewart, who’s been on the programme before. We chatted about wealth taxation, and in a way this discussion sort of goes on, or it’s related to that discussion. So we’ll go into that a bit later. And with David Ingles, or Ingles, is it? Sorry.
Ben Phillips 12:44
Ingles, yeah.
Gene Tunny 12:45
Ingles, great. Yep. And it’s got an excellent intro where you go through just the history of this proposal, and you talk about how it was suggested by Bertrand Russell, this basic income concept. And then the idea was resuscitated during the 60s, when Milton Friedman, among others, they proposed this negative income tax you talked about, and there was an experiment. There were negative income tax experiments in Canada and the US in the 70s. I’m going to have to look up those, because that sounds fascinating. And George McGovern, who was a US presidential candidate, he was proposing a $1,000 demo grant to all citizens. And then what the paper does, which I like, is it says, well, okay, this idea is coming back, because there’s this growing concern about wealth inequality, and there’s this growing concern about AI and automation, and we won’t have any jobs in the future, there’ll be fewer jobs, even for accountants and lawyers possibly, and just given how good the AI is getting. And so you’ve got a lot of people in Silicon Valley even, they’re proposing this idea of a UBI. I think Andrew Yang, who is a US presidential candidate, has this idea. So from what I’m sensing, it’s come out of this concern about wealth inequality. You’ve looked at the possibility of a wealth tax paying for this UBI. Is that the sort of thing that you’d have to do? Because you mentioned, look, people would probably, you know, they’d push back on a big increase in taxation. Is there a way of sort of taxing the richest or the wealthiest, the billionaires? Is it possible to get more tax out of that group to be able to pay for this UBI? Have you looked at that, Ben?
Ben Phillips 14:42
I think no doubt there’s probably some there’s … I think most of the modelling I’ve seen around taxing billionaires is a little disappointing in that the amount of money you typically get out of billionaires isn’t usually as much as what people might want to think. I think the Parliamentary Budget Office has done some recent work around, it was a Greens proposal again for taxing billionaires. I’m not saying it’s a bad thing to do that, but the amount of money is probably not really enough to be funding these sorts of schemes. You have to have a revenue base that I think is a lot broader than just say billionaires, which we may only have, you know, a couple of dozen or so in Australia. And it’s a pretty precarious base anyway. During good times, it might be healthy money, and during bad times, well, who knows, you might not have too much at all. So you need to have a fairly broad-based wealth tax, if that’s the path you’re going to go down. And that certainly could be done. I think we probably don’t tax wealth as much as we probably could in Australia. We’re very income-heavy. And that’s something that we could look into changing. But if you’re going to find additional money, you’d have to have a fairly broad-based wealth tax. And it’s certainly true to say that saying superannuation at the moment, there’s a lot of concessionality there in superannuation taxation, which perhaps goes further than where it needs to do. And I guess beyond that there’s the family home. There’s no tax on the family home. And there’s other concessions around wealth in Australia, things like trusts and so forth. So there’s certainly money that can be found there. I think for the sort of scheme that David Ingles and Miranda Stewart were proposing, that was probably quite a sensible place to go. They’re also trying to minimise the effective marginal tax rates. So if you fund it through personal income tax increases, you go straight to increasing what are called effective marginal tax rates. And that’s sort of lowering your incentive to work, whereas wealth tax, you tend to get at those people who perhaps are not actually even working, and it returns a little bit of money to the state through that avenue.
Gene Tunny 16:35
Right. Could you tell me a bit about that proposal that you modelled for Miranda and David? So what did the wealth tax look like? Can you recall the threshold and what the impacts were, Ben?
Ben Phillips 16:49
So from memory, Gene, the amount of money that was being given out through this scheme wasn’t actually particularly large. I think it was roughly in line with the sort of amount of money that we give out to family payments, which is around sort of five or $6,000 per year. So in that sense, it wasn’t there to replace the current welfare system. It was really just as a very low base addition to what we currently have. So it wasn’t a large amount of money. We didn’t need to find nearly as much money say as a full-blown universal basic income scheme. And I think in terms of wealth, we just made a very simple assumption around I think it was non-housing-related wealth, and taxing that. So you’ve still got a fair amount of money. You’ve got about $4 trillion in Super. That compares to say that $10 trillion in housing, which much of which we weren’t touching, because it’s in the family home. I think it was just a flat rate of tax per year. I can’t remember the exact rate. It was at probably a small amount per year, which is enough to sort of fill out probably the several trillion, the several billion dollars worth of money you need to fund these sorts of schemes.
Gene Tunny 17:54
Right, okay. Yeah. Okay, so I guess it’s probably the politics of it that’s going to defeat it, from just based on this conversation. It sounds like, I mean, sure, if you’re going to implement it, and if you’re going to implement what people would generally perceive as a universal basic income when they think of a universal basic income. So I think Andrew Yang was talking about in the States, was it 1,000 US advance then? And that’s why I was thinking, well, if we had it in Australia, it’d probably be around maybe 15 to 20,000 a year. And if we’re going to have that, then that does imply a large increase in taxation. And there will be a lot of pushback, but in some segments of the community, particularly where they’re going to be paying more. And we saw what happened in the last election, the last federal election when there was a proposed change. I mean, you mentioned the carbon tax and then look at what happened when the opposition proposed doing something about the franking credits issue with the with the shareholders. So yeah, it seems like people, if you look at what it actually implies, it’s probably politically infeasible to bring it in. Do you have any thoughts on that, just how the likelihood or feasibility of bringing something like this in?
Ben Phillips 19:30
Look, to be honest, Gene, and I don’t really think it’s something that’s on the radar of say the major political parties at this point, not to say it won’t be at some point in the future if the world changes, but at the moment, I think as you pointed out, the potential of the requirement for such substantial tax increases would virtually rule that out. Ignoring whether or not it’s sensible or that it’s economically sensible, I think it’s the tax increases will just be too substantial. I think there are some problems with our current welfare system at the moment. But they really are only, they’re relatively small changes that are required to fix that. So for example, the JobSeeker Payment many would argue is a little bit too light, needs to be increased by probably a modest amount per year. So at the moment it’s about 630 per fortnight. It probably needs to be at least another couple of $100 a fortnight higher than that. The cost of that is only a few billion dollars per year. There’s a few other issues with the welfare system, particularly around say some of the conditionality, that’s probably a little bit too punitive on those on the payment. You could loosen some of those up, I think you can potentially improve the current system that we’ve got. That is very well targeted, I think. And you can improve it with only relatively modest amounts of money. So maybe, you know, as little as say $10 billion per year could really make a very large difference to that system. So $10 billion for what I think could give you a reasonable system compared to say having to spend potentially at least $100 billion on one of these more grandiose schemes of universal basic income. I think that shows the relative costs and minimal additional benefit, I think, where you end up a very big sort of a churn, additional churn in the system, for no particular great benefit. So I think there’s some relatively easy fixes that are relatively cheap. More people might disagree with to say $10 billion is relatively cheap or not. But compared to these other big schemes, I think it’s relatively cheap. So get a relatively simple fix for not a lot compared to these very expensive schemes. That’s probably where I would see it potentially going, if we are going to go down that path.
Gene Tunny 21:33
Yep. So it’s probably not. I mean, the big issue at the moment is that, well, arguably, some of the welfare payments are too low, and that therefore if you’re going to do anything with the welfare system in Australia, then you should look at increasing some of those payments. I was just thinking, I mean, in other countries, maybe that there are different issues. I mean, with the US, for example, I guess what’s attractive about the UBI in the US is that their welfare system is not as generous as ours, or it’s not as much of a safety net. So perhaps that’s why it’s more attractive in the States. Although I guess it does have a lot of support here in Australia. There was something reported on ABC, a majority of Australians would welcome a universal basic income, a survey found. But then I think that’s because people aren’t aware of just what it means for tax rates. And if anyone actually proposed that as a real thing, and they had to talk about how they funded it, how they would fund it, it will quickly become apparent it was … It’s not something necessarily I’d support, but it would involve some redistribution. I guess where some people, why they support it is that they, you know, there are a lot of people who think housing’s becoming increasingly unaffordable. And this could be seen as a way of supplementing their income. So could it be seen as a way of … Is it basically about more redistribution? So redistributing more from the top end to the lower deciles? How have you done analysis of what it means in a distributional sense, this universal basic income? I suppose it depends on the model that you apply. But what could it look like? I mean, could it actually improve the wellbeing of households in the sort of lower deciles? Not just the most disadvantaged, where we’re assisting them currently with welfare benefits, but households where they’ve got people in the house are working? Is it going to be a way of supplementing their incomes and, you know, making it easier for them to say buy a house? Could that be a benefit of it?
Ben Phillips 24:00
It’s certainly one benefit of it, Gene. Again, as you say, it depends exactly what sort of model you’re using here. It could vary wildly. But the models that I’ve looked at in the more sensible versions, they are funded usually through an increase in a wealth tax or increase in say, an income tax. And they usually tend to be quite progressive taxes. So as a result, you do tend to find that with most of the basic income schemes, at least I’ve seen, you do get a redistribution from the rich to the poor, effectively, and we end up having income inequality that looks a little bit more like Nordic countries, rather than our current system, which is fairly sort of middle of the road, I suppose, similar to the UK and a little bit better than the US, but more closer to the Nordic countries. So you do get that impact. A lot of people are concerned about why would you give say $10,000 to someone on $150,000 a year. Well, that’s understandable, but they’re probably paying even more than $10,000 in tax to fund it because we’ve got such a progressive system. So that’s true, it does redistribute the income from the rich to the poor. That’s probably one of the positives of it.
Gene Tunny 25:02
Right. Okay. Now, what does it mean for those effective marginal tax rates? Does it actually reduce them? Is this a way of reducing the impact or am I on the wrong track here, Ben? Sorry, I think I’m off.
Ben Phillips 25:21
Again, Gene, I think it really depends on the model. You could have one model where it would reduce them, one where it would increase them. I think, as a general rule, the more money that the higher the programme costs, the higher the overall EMTRs are for the country. The more churn you have, the more you more you give, the more you’re going to take as well. There having said that, I think what it can do is it probably does lower the effective marginal tax rates for certain groups, particularly low-income groups and say, single parents, where they do typically have quite high EMTRs, but it would increase the EMTRs from say the middle of the income distribution to the higher end of the income distribution, because they’re the people who are funding it. So for example, I did some modelling with some guys from Macquarie Uni in Sydney. And we had a relatively cheap form of basic income, which is costing about 100 to 120 billion a year. And I think what we found there is you have to increase the marginal tax rates across the board by about 15 cents on the dollar. So that means that say that the 19 cents becomes 34 cents in the dollar. And so the 45 cents becomes sort of, you know, around 60 cents on the dollar. So obviously, for those who are not in the welfare system, at the moment, they would have a much higher marginal tax rate. Those who are in the welfare system, probably what we call the withdrawal rates of that basic income are quite small. So you probably have a lower effective marginal tax rate down the bottom end of the income distribution. So it really varies where you are in the income distribution. But I think as a general statement, overall, if you’re giving more money out, you’re probably going to have a higher EMTR across the board. But for certain groups that do face very high EMTRs at say, 70, 80, 90 cents on the dollar, they probably would come down.
Gene Tunny 27:04
Right, okay.
Ben Phillips 27:05
When you’ve slanted out across the income distribution is one way of thinking better, but a little bit higher overall.
Gene Tunny 27:10
Okay, I’m just trying to understand how this would work. So it sounds like with some of these, that well, the age pension, it sounds like that’s probably at the moment higher than any, or what I was thinking would be a universal basic income, which is sort of in the 15 to 20k range. So does that mean, could there actually be some welfare recipients who would be worse off under some models of UBI?
Ben Phillips 27:42
Yeah. Look, I think mostly what they do, Gene, is they, they only apply it to the working age population. So they say, look, if you’re an aged pensioner, we’re not so concerned about you. Many of the issues that relate to universal basic income, as to why you might introduce the UBI, don’t apply to the age pensioners, so we leave them as they are on the age pension. It’s more about the working age first. So if you’re on JobSeeker or say you’re missing out on JobSeeker at the moment because of you know, the wealth, the liquid assets test or some other income test you’ve got, you would be better off under the UBI scheme. And also, you would be losing that money more gradually as your income increases, whereas at the moment, you might be losing say 50 cents, or 60 cents on the dollar, for every dollar that you earn. It’s people who are on the JobSeeker payment, who are working part time, they might be better off and face lower effective marginal tax rates as they increase their income. Where it would impact people is say those around say 80 or 90,000 a year, you might go from say being on 30 cents on the dollar to say 45 cents on the dollar. That’s a big problem, I think, as I see it, for these more expensive versions of the universal basic income,
Gene Tunny 28:50
Right, okay, what about single parents? Do you know how they would be affected by a UBI if it was brought in and it replaced the current suite of benefits?
Ben Phillips 29:03
Yeah, so some of the models that I’ve looked at, what we’ve tended to do on this, really, it’s where you start to make … One of the main reasons you have a UBI is to have it as it’s sort of simple. One of the big arguments is that the current system is too complicated. And it is complicated, no doubt at all. I would argue it’s complicated because it is complicated. The world’s complicated. You’ve got single parents, you’ve got disability, pension recipients, you’ve got all sorts of different people in different situations. This is one of the things I like about the current system, where it targets to those sorts of issues. But in terms of single parents, yeah, if they are on 15,000 a year, they will be worse off. And that’s where you might have some special clause where if you’re a single parent, you remain on the current payment, but then you’re going back to another complicated system. This is why I sometimes wonder about what the point of a UBI is, unless it’s I’d say at the age pension level.
Gene Tunny 29:58
Right, which is …
Ben Phillips 30:00
Which is about say about $25,000 a year.
Gene Tunny 30:05
Okay. And is that similar to what the Greens is proposing that’d be …
Ben Phillips 30:10
Thereabout 30,000 a year.
Gene Tunny 30:11
30,000 a year, right, okay.
Ben Phillips 30:13
So where that comes from, Gene, is when the JobSeeker was increased when we had COVID, it was increased to about 1,115 per fortnight. And I think the Greens have gone along with that number, which is closer to about sort of 28, 29,000 a year or 30,000 a year. I forget the exact figure. Which relates to the Henderson Poverty Line, which is, in my view, a fairly outdated version of … As you probably recall, Gene, it was constructed by the Henderson review into I think, probably in Australia back in the 60s and 70s. Yeah, so it’s very outdated.
Gene Tunny 30:50
Yeah. So UBI, I mean, it certainly would be a nice thing to have, just thinking about it. I mean, and one of the advantages that’s put all the pros or the arguments in favour of it is it would allow us to be able to choose our lifestyle. And I mean, we could take a few months off and devote it to yoga or to improving our wellness, that sort of thing or writing a book. So look, I can see the attraction of it. It’s just the fiscal cost of it and implementation. We’ve already got this welfare system in Australia, at least that seems to do a reasonable job at not too high a cost. But I can see the attraction. What about this, there’s this vision of the future where with AI on automation, we have massive job losses, even among white collar professionals? Now, I mean, you know, we’re economists, so we’re probably great believers in the market adjusting, and eventually people finding new jobs in this in the services sector. But do you have any thoughts on that, Ben? I mean, how big a risk is AI and automation? And to what extent does that improve the argument for a UBI, if that’s the case that we could see these massive job losses in the future?
Ben Phillips 32:26
Yeah, look, I would, probably a bit like yourself, Gene, be clouded by my economics background. I guess looking at history over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods of course, where you have some higher unemployment. But generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappear, and that there is the argument of, as you said, of basic income advocates that you have a UBI for that potential outcome in the future. But I’m sceptical of it, Gene. That said, I’m not a futurist, so I don’t really know what the future holds in that area. I could be wrong, but I’m a little sceptical, just given that we’ve had very large technological change in over the last century and people still remain in jobs. Yes, there are issues, you know, for certain people in certain industries. But that’s sort of part of the ebb and flow of the economy.
Gene Tunny 33:34
Absolutely. Okay. Well, just finally, this affluence-tested model, is that the one you recommend? Would you be able to go over that again, please, Ben? I’m just interested in what exactly that is.
Ben Phillips 33:50
The affluence-tested model, Gene, this is the model that some co-authors of mine, Ben Spies-Butcher from Macquarie University and Troy Henderson from University of Sydney, I guess it’s their model, their version of universal basic income. Obviously they’re well aware that a full-blown UBI is very expensive and politically difficult to implement. So it was an attempt to come up with a model that might be a little bit more politically possible within Australia. And that model really was, let’s look at the current JobSeeker amount. We’re a little bit higher than the JobSeeker amount, so that 15,000 or 18,000, two different models, 15,000 year and a more generous 18,000 a year and apply that to all adults. But it was in effect means-tested or affluence-tested, as they called it. So that was as your income increased, you’d lost some of that payment. So basically, up to about 10. You can earn up to 10,000 a year in income, and you’d receive the full 15 or 18,000 for the year, by that median income that have gone to about half and by about 180,000 you have none at all. So it still costs about 100 or $120 billion per year. So that’s still roughly a doubling of the current sort of welfare system. So it’s very, very substantial. But obviously, it’s a lot cheaper than a full-blown system. And it does have the benefits of, some of the benefits of the basic income. It sort of becomes a bit more like a guaranteed minimum income, I guess, rather than a universal basic income. So that was their model. I think it’s quite interesting. But again, it’s got that concern of being wildly expensive, and we didn’t need to increase personal income tax rates, I think it was by 15 percentage points to the more expensive version. And I think adding that on to the current personal income tax rate regime would scare a lot of people off and would be politically extremely challenging.
Gene Tunny 35:43
Yeah, yeah. Okay. So just for clarity, this was a proposal that the other authors, it was their proposal, and you were doing the modelling for that.
Ben Phillips 35:53
That’s correct. Yep.
Gene Tunny 35:54
Gotcha. Okay. Ben Phillips, any final thoughts on UBI before we wrap up?
Ben Phillips 35:59
Oh, look, I think we’ve covered pretty well, Gene. I think it’s a really, in one sense, it’s interesting. I think that people are talking more and more about these sorts of schemes. I do feel that there are some problems with the current welfare system and I think there’s some ideas of UBI that we can borrow. I think the a lot of the issues we’ve identified could be used to improve what we’ve currently got. I think a more realistic and practical approach is probably just to fix up some of the issues in the current system at a fairly minimal cost, as opposed to the full-blown versions of UBI that I think are interesting, but perhaps not really realistic in the current environment. Too much of a change for Australia, whether we like it or not.
Gene Tunny 36:41
Yep, yep. Absolutely. I agree with you. So yeah. Thanks, Ben. That was great, a really good overview of the issues in Australia. I’ll have to have a look at what it might mean in other countries, but I’m guessing that it would involve a similar high level of expenditure, additional expenditure, and therefore a higher tax burden. I will have to look into that. And, yeah, I thought that that point you made about how well it could be seen as a way of addressing some of these inequality issues. And then we’d look more like the Scandinavian countries. And perhaps we do. I mean, our inequality isn’t as high as in the US, but you’re saying it’s similar to UK. It’s lower in some of those Scandinavian countries. So that’s something I’ll cover in a future episode. Just, you know, what’s going on in those countries. Always fascinated with that sort of Nordic model they talk about. So I thought that was a really good point. So Ben, but just want to thank you so much. I think what’s great about your work is that you’ve really modelled all this out, you’ve thought about what this looks like, in a practical sense, how it could be implemented, what that means for all the different groups in the community. And so yeah, I can highly recommend your work. So there’s Basic Income for Australia: Exploring Rationale, Design, Distribution and Cost, that you co-authored with David and Miranda. I’ll link to that in the show notes. So Ben Phillips, really enjoyed that. Thanks so much.
Ben Phillips 38:26
Thank you, Gene. My pleasure talking to you.
Gene Tunny 38:29
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 39:04
Now back to the show. Okay, I hope you enjoyed my conversation with Ben on UBI and got a lot out of it. I certainly did. In this segment of the episode, I want to cover some issues that I didn’t get to chat about with Ben, particularly whether UBI will have a big negative impact on people’s labour supply. So their willingness to work. Will we see people dropping out of the workforce, drastically reducing their hours of work, and therefore reducing the capacity of our economy and the government’s capacity to raise money to pay for a UBI?
Now around the world, we’ve had several experiments of different types of UBI over the years. I intend to devote a future episode delving into the details of these experiments, and even into the negative income tax experiments in the 70s. I probably don’t have enough time at the moment to do full justice to those experiments, but I will try to summarise what I’ve found so far. One UBI experiment which received a lot of media attention happened in Finland, in 2017 and 2018. 2,000 randomly selected unemployed people received a 560 euro a month payment, which was similar to the unemployment benefit payment. But they received it for the trial period, and they didn’t lose it, they didn’t lose the UBI if they started working.
Now, I’m going to rely on a great article from The Economist. So one of my favourite magazines. This article was in March 2021, Might the Pandemic Pave the Way for a Universal Basic Income. I’ll put a link to that Economist article in the show notes, but it may be paywalled, and you may need an Economist subscription to access it. In the article The Economist reported evidence from the experiment was muddied by a change to a law in 2018, which tightened conditionality for receiving unemployment benefits. Even so, the results are intriguing. Among the biggest worries relating to UBI is the possibility that it might discourage recipients from seeking paid work. Yet, participants who received unconditional payments actually work more than those on the dole. Reported wellbeing was substantially higher. Recipients also registered less depression and stress, a higher degree of confidence in their abilities, and more social trust than did those in the control group.
The Finnish results are broadly consistent with findings from other experiments. Rebecca Hasdell of the Basic Income Lab at Stanford University conducted a review of 16 basic income studies published between 2009 and 2019, that covered rich and poor countries. The research provides consistent evidence of a positive effect on educational attainment and on measures of physical and mental health and reduce poverty. Effects on labour market participation are generally small. Half of the studies that assess its impact do not find a statistically significant effect. Most of the rest find a positive effect, she writes. Okay, so that’s really interesting.
Based on the experimental evidence that we have, and assuming the Economist is reporting it correctly, we may not have to worry about lots of people dropping out of the workforce if a UBI is implemented. However, as the Economist notes later in that article, these experiments don’t necessarily tell us what would happen if a UBI were available on a wide scale. They talk about the possibility of a social multiplier effect. Okay, so the Economist notes, some activities become more enjoyable as more people engage in them. So what they’re getting at there is that being out of the workforce is going to be much more enjoyable when more of your friends or family are also out of the workforce, they’re not working, so you can more easily spend time with them.
Possibly, you could even foresee a risk that you have sizable groups of people that maybe they can drop, they might drop out of the workforce at the same time and set themselves up in, well, for lack of a better word, communes. Perhaps that’s something that could happen. Are these legitimate concerns? I really don’t know.
But I do know a UBI would cost a lot of money. As Ben and I chatted about in our conversation. So the major criticism of UBI that it’s incredibly costly, and it would require much higher taxes, I think that is an important criticism and it still holds. On the work incentives issue, Ben Phillips’s view is that the net impact of a UBI is unclear. This is because of what Ben and some of his co-authors describe as a complex interaction of income and substitution effects. Okay, what do they mean by this? Here’s how I understand it.
The income effect that they’re talking about is the change in labour supply expected to be negative due to the change in income brought about by a UBI. So, a UBI, all other things equal, will boost income. And people might choose to spend that income on more leisure by working less in paid employment, okay. The substitution effect that they’re talking about relates to the substitution between work and leisure, as the relative price of leisure changes as the opportunity cost of leisure. So the loss of income, the money that you get in the bank, if you take an hour off work, or you, you take an hour in leisure, there’s a substitution effect. Because a UBI affects what is called the effective marginal tax rate, the EMTR. So Ben and I were chatting a bit about that, in our conversation.
Let’s remind ourselves that the effective marginal tax rate is the percentage of additional income that we earn, that we don’t get to keep. So it’s the percentage we don’t get to keep. And we don’t get to keep it because either A, the government takes it off us in tax, or B, the government reduces a welfare benefit that we’re currently receiving. And it does that because we’re earning money from working. If there’s a change in the EMTR, then the relative price of leisure changes, okay, so if the EMTR increases, so the government’s taking more off you in tax for an additional hour that you work, then that makes work less attractive to leisure, it means that the relative price of leisure has fallen, so the opportunity cost of leisure has fallen, because you’re getting less money for that additional hour of work. That makes leisure more attractive. And so you might work less, you’ll take more leisure.
Okay, I hope that makes sense and I explained that properly and I didn’t get lost midway. As you can appreciate, this is extremely complex. There’s quite a lot going on. As Ben and I discussed in our conversation, a UBI is expected to reduce the EMTR for current welfare recipients. So if you’re currently receiving a payment from the government, then your effective marginal tax rate is expected to fall, because the UBI wouldn’t be as aggressively taken away or clawed back as current welfare benefits are when people start earning money. Okay. So for welfare recipients, a UBI could actually result in additional hours worked, depending on their circumstances.
This gets really complicated, as Ben tried to explain in the in our conversation and as they go into in their papers. Okay, so Ben and his colleagues, David Ingles, and another colleague of his, previous show guest Professor Miranda Stewart, they wrote in a 2019 paper, which I’ll link to in the show notes, that the aggregate impact on work incentives is unclear. This is because the high linear tax rate required to finance the BI, so BI is what the authors are calling UBI in whatever model that … They go through a few models in their paper, but when they say BI they basically mean UBI. That high linear tax rate may increase work disincentives across the population.
Okay. So to finance the UBI, we’ve had to put up tax rates. And that’s going to increase the effective marginal tax rate for many people who are working and aren’t receiving welfare benefits. And so therefore, if they work an additional hour, they don’t get to keep as much. And so what does that mean? Well, that means that the relative price of leisure or the opportunity cost of leisure, if I take an hour off, then I don’t lose as much because the government, it wants to take more of that money I make, an additional hour. So it affects the work incentives for that group of people.
Now look, there’s a big literature on labour supply and how it’s affected by after tax earnings that we don’t really have time to go into today. I should cover it in a future podcast. I think it’s enough for now to say that look, this is very complex. This is the point Ben’s trying to make. The key takeaway is that the UBI will mean different people will respond to it in different ways. And it’s hard to know what will happen to overall labour supply unless, well, unless we actually introduce a UBI and find out.
Okay, I should note that Ben has used a static micro simulation model. So his modelling has been conducted using ANU PolicyMod. So he hasn’t explicitly modelled those work incentive effects or the impacts on labour supply. Now, my feeling is this, this is something that would be extremely difficult to model. Policy experiments are possibly our best hope of figuring out whether a UBI is simply a utopian fantasy that is unaffordable, or whether it is something that really is feasible, and that could improve our lives immensely.
As always, I’m trying to keep an open mind on these important policy issues. So that’s all I have to say on UBI for now, but I’m sure I’ll come back to it in future episodes. I know a lot of people are interested in it. So please consider this as a first instalment. I hope you enjoyed it and found it informative. Please get in touch with any comments or suggestions. I would love to hear from you. You can email me, contact@economicsexplored.com. And again, there’s a SpeakPipe service that can let you record a voice message if you’d like to do that. Okay. Thanks for listening.
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
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.
Gene Tunny 00:01
Coming up on Economics Explored.
Larry Reed 00:04
When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else. It’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion.
Gene Tunny 00:25
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury Official. This is episode 125 on price controls, which some commentators are suggesting could be used to reduce inflation. We also explore some other topics, such as whether Jesus was a socialist, why Joe Biden arguably should look back to the 21st president Chester Arthur, and why the separation of bank and state is so important.
My guest this episode is Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, a leading pro-free market educational nonprofit headquartered in Atlanta, Georgia. Larry has authored nearly 2000 newspaper columns and articles and dozens of articles in magazines and journals in the United States and abroad. His writings have appeared in The Wall Street Journal, The Christian Science Monitor, USA Today, The Epoch Times, and The Washington Examiner among many other places. Larry is frequently interviewed on radio talk shows and TV, including on Fox Business News.
Please check out the show notes for the links to materials mentioned in this episode and for any clarifications. You’ll find the show notes via your podcasting app or at our website, economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new eBook, Top 10 Insights from Economics, so please consider getting on the mailing list. If you have any questions, comments, or suggestions, please either record them in a message via SpeakPipe. See the link in the show notes or email them to me via our contact at economicsexplored.com. I’d love to hear from you.
Now, for my conversation with Larry Reed from the Foundation for Economic Education. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, welcome to the programme.
Larry Reed 02:45
Thank you very much, Gene. It’s a pleasure to be with you.
Gene Tunny 02:47
It’s great to have you on, Larry. I have been reading a lot of your writings lately. You’ve started off the year very well and coming on important issues, crazy proposals such as price controls. We might chat about that a bit later. But first, I’d like to ask you about the Foundation for Economic Education. Could you tell us a bit about what its role is and the type of activities it engages in place?
Larry Reed 03:16
Your listeners and viewers can learn a great deal more by visiting its website, which is FEE.org. The foundation was created in 1946 by a great man named Leonard Read. He was no relation to me. He spelled his name R-E-A-D. But after World War Two, he looked around and realised that there was no organisation in the world that was full-time devoting itself to explaining and defending how free enterprise, the profit motive, private property, how that system works. He created the foundation for the purpose of spreading those ideas.
Over the years, our message and our principles have not changed. But the focus of our message and principles has somewhat changed. It’s become a bit more focused on young people, specifically high school and college age. We do that through programmes in-person all over the country, in the US, and abroad, as well as the website videos, on the website courses, you name it. All designed to explain how freedom and free markets work.
Gene Tunny 04:31
You mentioned Leonard Read? Did he write that famous essay, “I, Pencil”?
Larry Reed 04:37
Yes, he did in December of 1958. That has had a remarkable impact on people all over the globe.
Gene Tunny 04:45
Absolutely. I think it shows how complex even products that we think of as simple are and there’s no way any central authority and this is what we discovered with the Eastern European socialist economies with the Soviet Union. You can’t plan this sort of thing. You need to rely on the market mechanism to be able to produce even something that we might think as mundane as a pencil. I’ll put a link in the show notes to that essay because I think it’s brilliant. I think Milton Friedman quotes from it in Free to Choose, if I remember correctly.
Larry Reed 05:23
After someone reads it, they are well-armed to take on a central planner type. Every time I run into somebody that thinks that he knows enough that he can plan an economy of millions of people, I always say, “Wait a minute. You don’t even know how to make a pencil, let alone an entire economy.”
Gene Tunny 05:44
That’s right. You got to think about it. You’ve got to get the timber, you’ve got to cut it, you’ve got to get the graphite, etc., combine them all together. A great essay. Is Hazlitt associated with the foundation? He wrote that book, is it “Economics in One Lesson”? Is that one of the books that you promote?
Larry Reed 06:07
Yes, it is one of the more popular offerings from FEE in the last 70 years. Henry Hazlitt was long associated with FEE. He was one of the charter members of its board of trustees, a good friend of our founder, Leonard Read, and was on the board for decades. I’m happy to say that I knew him personally for the last decade of his life.
Gene Tunny 06:33
That book has had a big impact too. He must have been pleased with how that was received.
Larry Reed 06:40
Yes.
Gene Tunny 06:42
Very good. We might get on to some of the topical issues. The big economic issue at the moment is inflation. We’re seeing accelerating inflation in advanced economies. In a way, this probably should have been expected, given the big expansion in the supply of money that we’ve seen in United States, United Kingdom, Australia, to a lesser extent, but still a substantial increase.
Now, we’re starting to see that in inflation. Some people are saying it’s temporary. There could be some temporary element, there’s a supply-chain disruption. Who knows? My view is that it is something we’ve got to worry about. People are starting to talk about, “What do we do about it?” There’s a monetary policy response. But there are people who are thinking, “Let’s be careful because we don’t want to constrain economic growth and cost jobs. Why don’t we look at price controls?” You’ve written a great article, “Price Controls: Killing the Messenger If You Don’t Like the Message”, could you talk about what you mean by that please?
Larry Reed 07:51
Yes, I’d be happy to. We should think of prices as conveying immense amounts of information. Prices result from the free interplay of supply and demand, which in turn reflect the individual choices, ambitions, opportunities, tastes, and you name it of endless consumers in the marketplace. Prices don’t accidentally arise. The notion that you can fiddle with them by government decree with no consequences is ridiculous. It’s anti-science. It’s anti-economics. Prices are what they are in free markets for good reason because they’re reflecting conditions of supply and demand and people’s preferences and tastes and so forth.
When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else, it’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion. It’s politicians, who on the one hand, have got their hand on the printing press cranking out easy money at low interest, easy credit, and pumping up prices. At the other hand, they got a club in their fist and they want to beat people for responding the way you would.
If at any time you massively increase the quantity of something, it will affect the value of every single unit and they’ve been expanding the money supply immensely. If they put on price controls to prevent prices from being at some higher level, all that does by treating a symptom not the cause, is to create economic problems of their own. It creates shortages, for instance, if the market price of something would be $10. But government says, “No, you can’t charge any more than $7.” What happens is at $7, more people want the stuff and fewer suppliers will provide it. That would be the case at $10. You got a double whammy. You got less of the stuff coming on the market and more people wanting it at that artificial price. Bingo! Long lines at stores and shortages. People who propose price controls are ultimately anti-economic science and oblivious to the effects that we have seen historically, literally for centuries with no exception.
Gene Tunny 10:22
One thing about this issue, it seems to be something that the vast majority economists seem to be in agreement on which is good. You quoted in your article, there was an Op-Ed in The Guardian. The title was, “We have a powerful weapon to fight inflation price controls, it’s time we consider it” and Paul Krugman responded, “I am not a free market zealot. But this is truly stupid.” Absolutely. You’ve had experience in the US in living memory of price controls? Was it in the 70s that Nixon’s Whip Inflation Now and then Carter, perhaps with their controls on the price of gasoline that did lead to these big lines at gas stations in the States?
Larry Reed 11:21
The Whip Inflation Now thing actually was Gerald Ford. That was a campaign to get people to wear buttons that said, “whip inflation now” as if that would somehow whip it. Before him, it was Richard Nixon, who actually imposed wage and price controls. First, in the form of a 90-day freeze on virtually all wages and prices and then followed by government directed prices that limited by how much they could rise.
Every economist worth his salt knows that that produced disaster. That was no solution to anything. It gave us long lines at the gas pump and empty shelves in the stores. It was ridiculous. I used to know a man, he’s deceased now, but he was chairman of the Council of Economic Advisers, Paul McCracken, great economist. He cautioned Nixon not to do this. He said it’s never worked in 4000 years, don’t even think of it. Nixon went ahead anyway and shortly thereafter, McCracken resigned.
We’ve had lots of experiences. Lots of countries have had experiences with it. Revolutionary France in the 1790s, the government imposed the so-called Law of the Maximum, which said that government will fix the maximum price of things and the penalty for violating that will be death. They guillotined a lot of people for that and it did not make anybody produce more of anything.
Gene Tunny 12:55
That’s a negative supply shock too, isn’t it? Killing your producers? Terrible. That’s some good stuff there. I take it your view would be that inflation is a monetary phenomenon. Therefore, the key to controlling it is to get your monetary policy, right? This isn’t about monetary policy, but I’m guessing that’s where you’re coming from. There’s a big debate about what that means and role of the Fed, etc. But would that be your view?
Larry Reed 13:33
Inflation, Milton Friedman famously said, “is anywhere and everywhere a monetary phenomenon.” I’m sympathetic to that but I also point out that there’s another dimension here. Prices ultimately reflect, to a great extent, what’s going on in people’s minds. There are extraordinary circumstances, but there are occasions when you could have soaring prices without an increase in the money supply. One of the examples I like to point to is the Philippines.
During World War Two, when the Japanese had occupied it, they imposed their currency on the Philippines. General MacArthur was attempting to ultimately take the Philippines and he was jumping from island to island, getting closer and closer. The Japanese weren’t dumping any more of their paper money into the Philippines and yet, prices would leap every time word came that MacArthur was now a few hundred miles closer. That’s because people’s estimate of the value of that money declined because they knew if he gets here and takes the Philippines back, the Japanese currency will be completely worthless. Given that prospect, we’re happy to pay any price to get anything now while it’s worth something. That’s a rare occasion.
We’re not facing that circumstance today. We do have to fall back on the fact that today’s inflation that we’re witnessing is not a Philippine-style rise in prices. It is a monetary phenomenon, reflecting the massive increase in money and credit that our Federal Reserve in the US has manufactured. Many central banks around the Western world have done as well.
Gene Tunny 15:21
That’s a great story about the Philippines. I’ll have to look that up. MacArthur is a great hero to many of us in Australia because there’s a view that he essentially saved Australia. He based himself in Australia after he fled from the Philippines and he had an office a little bit down the road from where I am here in Brisbane in the ANP Building during World War Two. That was one of the locations from which he waged the war in the Pacific. Great story. Very good. That’s a good discussion of price controls, Larry.
I’d also like to ask you; you’ve also written about whether Jesus was a socialist. I’d like to ask you about that. Also, I don’t know if you saw the recent controversy around Dave Ramsey’s comments. Dave Ramsey, the esteemed financial commentator in the US.
Larry Reed 16:21
Yes. Although I may not be aware of recent comments that you’re bringing up.
Gene Tunny 16:26
Essentially, someone asked him a question, “As a Christian, should I feel bad if I raise the rent on my properties to the market rent, and then that means that some of my tenants can’t afford to live in those properties anymore. It causes them financial hardship.” Dave Ramsey’s comments weren’t received by many, particularly on the progressive side of politics because he said, “There’s no problem with doing that because it’s not me that is evicting you. It’s actually the market.” He was appealing to the market. I’d like to ask you about that. If you haven’t seen his comments, and it’s probably worthwhile considering the whole context of them, feel free not to comment on that.
But I would like to ask you about your work on, was Jesus a socialist? Could you take us through what your analysis of that question has revealed, please, Larry?
Larry Reed 17:29
I’d be happy to, Gene. In fact, the best way to begin that is to tell the story from the New Testament that answers your first question. Along the lines of what Dave Ramsey apparently said. Jesus Himself told nearly 40 parables and most of them deal with things like eschatology and salvation and so forth. But at least three of them have very strong economic content.
One of them that’s relevant to what you’ve just raised is the parable of the workers in the vineyard. This is about a man who apparently owns a substantial vineyard and he needs to bring the grapes in, it’s harvest time. Jesus tells a story of how he gets a group of workers together first thing in the morning and he says, “I’ll give you each a denarius for a full day’s work.” They say, “Okay.” They go out and they start picking grapes.
Around noon time, the owner realises, “I’ve got to get even more out there.” He gets another group together, and he says, “Look, I know that the day’s half-gone, but if you’ll go out for the rest of the day and pick grapes, I’ll give you each a denarius.” Finally, at the end of the day, with maybe an hour before a dark and he still has grapes that have to come in, he calls another group of workers and says, “If you’ll take time out, go out for an hour and pick some grapes, I’ll give you a denarius.”
Later, according to the story, the owner gathers all these three groups of workers together to pay them. The first group is very angry, because they’re saying, “We worked a full day and you’re giving us the same as those guys who showed up at the later, even the ones that only worked for an hour.” You would think that if Jesus were a socialist, he would have the vineyard owner saying, “You’re right, this is unfair. I’m sorry about that.” But instead, Jesus has the vineyard owner say to these guys, “It’s my money. You signed the contract. I’m giving you what I promised. Now, take it and get out of here.”
That’s Jesus basically saying, private property, voluntary contract, keeping your word, honest dealings, and I think supply and demand all defend what the vineyard owner is saying. Presumably, he had to pay that last group of workers a hefty premium to get them. They probably worked for somebody else all day and now, they’re being asked to go for yet another hour, he has to pay them a premium to do that to bring the grapes in.
Jesus does not say, “Let’s be compassionate and give this group the same as that group or in proportion to their time.” Instead, he says, “Each man is getting what he was promised when he agreed to by contract.”
I think Dave Ramsey is essentially right. There is no obligation, moral or otherwise, for someone to endure a loss or to get less than he could for property that’s his when market conditions suggests that a higher rent is worth it. It’s the higher rent that will likely bring more housing units into the marketplace, which will solve the problem in the long run anyway.
Gene Tunny 20:47
By inducing more supply, more investment in rental properties. That’s a good point. I’ll put a link to the article on Dave Ramsey. I thought it was a fascinating discussion. Also, I’ll find something to link to that. Was it a parable?
Larry Reed 21:12
The parable of the workers in the vineyard. I discuss that in more detail in my book, “Was Jesus a Socialist?” if anybody cares to look at it from that perspective.
Gene Tunny 21:25
It’s an interesting question. I must say, I’m surprised that it is something that’s up for debate. Is this because a lot of people on the left side of politics have appealed to Christianity as a way to support what policy positions they’re advocating for?
Larry Reed 21:51
I think so. I don’t give the left much credit for their economics, but I do give them credit for their marketing, because they’re always out there saying, “Go with us because our way of thinking will produce more for people. We’re going to take care of people. We’re going to give them stuff. It won’t cost them anything, they won’t have to worry about where it’s coming from.” The rhetoric is always very promising, but the results and the outcomes are pretty dismal and miserable.
A lot of people come to this mistaken conclusion that Jesus may have been a socialist because He talks so much about helping the poor. But I think in capitalist countries, where more wealth is produced, you have more giving and more caring and more philanthropy than you have in socialist countries. In fact, even government-to-government foreign aid is primarily from the predominantly capitalist countries to the predominantly socialist recipients.
If Jesus came back today and spoke to a large audience of people and said, “I was interested in the poor. Tell me what you all did for the poor?” If you raised your hand and said, “I voted for all the politicians who said they’d take care of that.” I don’t think He’d be impressed. I think He would say, “You’ve resorted to theft? I told you not to steal and I told you furthermore that the poor are folks that you, from the generosity of your hearts and your own resources, ought to help. I never told you you could pass it off to politicians. If they solved the problem, it’ll be at 10 times the price.”
Gene Tunny 23:33
Yes, that’s a good point. I’ll have to come back to this in a future episode and looking at what are the best ways to reduce poverty of it if we’ve actually figured that out? Clearly, the welfare state that we’ve got in countries like Australia, the UK, to a lesser extent, the US, you could argue it has relieved some absolute poverty. But at the same time, it does, arguably, traps many people in poverty in a way.
Larry Reed 24:07
To make a long story short, you can’t solve poverty if the pie is shrinking. You have to make a bigger pie and there is no known system in the history of mankind that makes a bigger pie faster than the system of freedom and free markets.
Gene Tunny 24:24
Absolutely. We’ll take a short break here for a word from our sponsor.
Female speaker 24:33
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Gene Tunny 25:03
Now, back to the show. The other things I wanted to chat with you about before we wrap up are some recent articles of yours. There was a piece, “Why I Wish We Could Put Chester Arthur and Joe Biden in a Room Together to Talk Infrastructure Spending”. I’d love to hear about that, particularly about Chester Arthur, because he’s one of the lesser-known US presidents.
Larry Reed 25:34
Yes, he is one of the lesser-known ones. He served less than one full term. He took office as vice president, became president when James Garfield was assassinated in the middle of 1881. He served about three and a half years, the rest of Garfield’s term. He’s often written off as sort of—he was tied to the corrupt Tammany Hall machine in New York and so forth. On the good side, historians will remember that he did support civil service reform and made the federal government a little less corrupt. That was a good thing.
But he also understood the Constitution and appreciated it more than Joe Biden does. I wrote that article pointing out what Arthur’s view on infrastructure spending was compared to Joe Biden’s in America. We recently went through a national discussion, a bill passed, supposedly bipartisan. It was a massive, almost $2 trillion in infrastructure spending.
An equivalent bill was called a Rivers and Harbors Act and Arthur vetoed it. In his veto, he raised some great objections, all of which are applied to the bill that Biden recently signed. He said, “This is way too much. There’s no way that a government of our size can know where all this money’s going to go. It looks like a small portion of it is even earmarked for infrastructure. There’s a lot of pork barrel stuff in here. Quit doing this, loading our bills and all this other nonsense.”
That’s what Joe Biden should have said about the recent infrastructure bill. But he was all for it from the start. I think about 10% was aimed at infrastructure, the rest is pork barrel and progressive agenda stuff. I would like to put Joe Biden and Chester Arthur in the same room and say, “Chester, go at it. Tell this guy what infrastructure is and why it’s wasteful to spend so much on.”
Gene Tunny 27:46
At the same time, would you say that there is an issue with infrastructure in the US with the quality of infrastructure? This is something I’ve chatted with Darren Nelson about in a previous episode and Darren’s view was, “We need to get the private sector more involved in public-private partnerships, perhaps.” Do you have any thoughts on that, Larry? What is the quality of infrastructure like? Is there a problem to solve and how would you go about it?
Larry Reed 28:19
With infrastructure, I think there has always been some measure of problem, because government has assumed from the start that this is a legitimate profits of government. Once you do that, you have to at least expect that they’ll keep it up and do it right and keep an eye it to prepare for when it falls apart. But politicians come and go and they’re more interested in the flash in the pan. They show up to cut the ribbon at the start of a bridge that’s being built. But once it’s built, it’s no longer politically sexy to stand around and keep an eye on it in case it collapses because they figure, “If that happens, it’ll be a long after I’m gone. Why should I care?”
You do end up with politicians putting more focus on the construction of the stuff and less on its repair and maintenance. That’s where you can get a bigger bang for your dollars or if you will, by writing contracts with the private sector that require ongoing maintenance and inspection and so forth. I wouldn’t want the government with its own employees and its own infrastructure monopoly becoming a bridge builder. They don’t know about bridges. That’s best done by the private sector. They should be contracting with private sector providers to do it and monitor the contracts. Put all the provisions in those contracts that would require proper maintenance.
Gene Tunny 29:52
That’s a good point. It’s one of those great challenges, how do you get the infrastructure that you need cost-effectively? In Australia, one of the problems we’ve got, there’s a lot of government investment going into infrastructure at the moment that it seems to be at very inflated prices all over the country. There’s a powerful construction union, which is allied with the government in the state that I am, Queensland, which has ended up inflating the cost of any infrastructure project by 30% or 40%. It’s quite extraordinary and taxpayers end up wearing that.
Larry Reed 30:43
I wouldn’t be surprised if you have some of the same kind of history in Australia, as we do in the US. But there’s a lot of history in America of government spending on infrastructure that produced disaster, because it dangled subsidies in front of private contractors, who then went after the subsidies and cared little about how well the infrastructure itself was actually built. The best example is America’s transcontinental railroads.
There were five of them built across the country. Four of them got extensive federal government land grants and subsidies. Not only land grants, but they got subsidies on a per mile basis. Four of them threw down tracks just to get the goodies. And in fact, the two famous ones that met at Promontory Point, Utah, as they were getting closer, they were crossing over to the other companies’ territory and blowing up the tracks because they wanted to get more subsidies by laying more track down. There was only one transcontinental that got no government subsidies. That was James J. Hill’s’ Great Northern. It was not by coincidence the only transcontinental that never went bankrupt because they had to put down tracks when it made economic sense, not because the government was throwing money at them,
Gene Tunny 32:06
Another good example I’ll have to investigate. This is the last question; I’d like to ask about some of your other writings and it looks like you have been prolific or regular traveller. Obviously, COVID cut back on all of our travels, but you’ve written some great pieces. You’ve made observations on what we can learn from other countries around the world and in some places that you generally don’t hear about. One of your articles is, “The World’s Oldest Republic Reveals the Secret to Peace and Prosperity”.
Larry Reed 32:46
Yes.
Gene Tunny 32:48
You’ve also drawn lessons from economic history in Italy. I think it was in Italy, your article, “Why the Separation of Bank and State is Important”. Would you be able to explain what is that secret to peace and prosperity? How that’s revealed by the world’s oldest republic and also the point about the separation of bank and state, please.
Larry Reed 33:13
Both of these articles, you can at FEE.org and you can find them also on where I blog on lawrencewreed.com. With regard to the oldest constitutional republic, we published that last Sunday, it’s about the tiny country of San Marino. It’s the fifth smallest country in the world. It’s entirely enveloped by Italy. It’s in the northeast of the Italian peninsula. Right in its middle is this big rock called Mount Titan.
It’s the oldest Republic in the world, dating back to the early fourth century when that chunk of territory was gifted from its private owner, a woman in Rimini, now part of Italy. She gifted it to a Christian stonemason who had fled there to avoid the persecutions of the Emperor Diocletian. She said, “You can have this property.” He, in effect, declared the first, and now the oldest constitutional republic.
Only twice in its history has it been invaded. In both cases, within a matter of months, the pope ordered the invaders out, lest they be attacked by papal forces. They maintained their independence all these years. They have a GDP per capita that’s a shade below that of the United States. The secret is that they have kept themselves economically free.
Freedom House is non-profit that rates countries as to their degree of economic freedom and they rate San Marino as the 12th freest country in the world. Its capital gains tax is only 5%, which is a third of what ours is in the US. It’s much lower than it is in the European community. A great little success story in that quiet little enclave in the Apennine Mountains.
The other example or article that you’re referring to comes from Genoa, on the other side of northwest Italy. Genoa was, for hundreds of years, an Italian city state, much as Pisa and Venice and Gaeta and some others were. The secret to its success, more than any other single entity, was a private bank that was so private, it was in effect, a country within a country. It was called the Bank of St. George.
When it was chartered in 1407, the separation between the bank and the government of Genoa was as complete as it could get. It basically said, “We’re not paying any attention to you and you don’t have to pay any attention to us but you need us.” Because the bank consistently bailed out the state when it got in trouble. But the bank was very firmly on a gold standard, it had a policy of not issuing any paper for which you did not have gold coin on deposit. It was reliable, it was honest, and for hundreds of years, until Napoleon invaded and shut the bank down, it was a rock of stability and a big reason that Genoa became a maritime trading giant in the Mediterranean.
Gene Tunny 36:37
This wasn’t something positive Napoleon brought then. That’s interesting, I have to read more about it. How does it illustrate that the separation of bank and state is important? How does it illustrate that?
Larry Reed 36:52
The Bank of St. George exerted an anti-inflationary pressure on the government of Genoa. Governments love to inflate, and the moment they get in charge of banking, that’s what they do. They print the stuff and makes it easier for them to pay their bills and to run deficits and so forth. The Bank of St. George did not abide by that. They wouldn’t have recognised any coin or paper from the city of Genoa if it hadn’t been sound. Their example spoke volumes to the people of Genoa and across Europe. Here’s a bank that’s in great shape. It has to bail out the government of the region every now and then because they’re profligate, but the bank is not.
I think the separation of bank and state is an issue I wish we spent a lot more time on these days. We’ve assumed that government should be orchestrating the banking system, but the history of government and banking is not a positive one. They take over banking whenever they can because it’s their avenue to depreciating and debauching currency.
Gene Tunny 38:06
I think it’s a big concern when governments set up these banks or shadow banks to promote particular policy objectives. I remember, back in the late 2000s, there was a lot of talk about an infrastructure bank that was something the Obama administration was looking at but didn’t go through with. There were similar moves here in Australia that didn’t amount to anything because it reminded people of what happened in the 80s with the state banks of South Australia and Victoria, the Tricontinental merchant banking arm and they got heavily involved in speculative property development, if I remember correctly, and ended up going bust and costing taxpayers billions of dollars. People still remember that. There’s a risk if governments get involved in banking and financial shenanigans.
Larry Reed 39:06
Too often anyway, we judge government by the stated intentions rather than by actual outcomes and results. If a government came to me and said, “What do you think about us getting into the banking business?” I would probably say to them, “Aren’t you in the post office business already? Aren’t people complaining about that? Why don’t you get that right before you go into banking?” In US, everybody complains about the post office. What makes you think the same entity can manage a nation’s banking system?
Gene Tunny 39:38
Exactly, very good. Larry, any final words? Anything you think we should be thinking about or looking out for?
Larry Reed 39:48
I would say this thing that people everywhere should be thinking more than they are about the importance of individual liberty. We take it for granted in places where we’ve had a lot of it. But there’s nothing about it that’s either automatic or guaranteed, and it can disappear with bad ideas almost overnight. And yet, life without liberty, in my estimation, is unthinkable. We better think about it. I can’t imagine a life in which you aren’t living yours. You’re not making your choices, somebody else is imposing their choices on you. They’re living their lives through you.
I can’t imagine living in that environment as they, to a great extent, do in places like North Korea or Cuba. Liberty is precious, it’s rare in history. It’s never guaranteed and it deserves the conscious deliberation, and sometimes sacrifice of everyone wants to be a free person.
Gene Tunny 40:50
Absolutely. It just occurred to me, we probably should have touched on the pandemic. Feel free to respond to this if you like. Otherwise, we can wrap up. In Australia, we’ve had quite severe restrictions relating to COVID at times and they’ve raised eyebrows around the world. People have thought, “What’s going on there in Australia?” But what a lot of people in Australia say is that’s necessary for the public good.
You may bang on about civil liberties and I have, at times, think some of these restrictions have been excessive. But you get a lot of pushback and people say, “You think you’ve got the rights to do that but you don’t have the right to spread a deadly virus and spread the disease.” That’s how they push back. I agree, I think we’ve lost the original commitment, a strong love of liberty that we’ve had. I think we’ve lost that. People are terrified of this virus and they push back with that line, “You don’t have the right to spread the virus.” I don’t know how to win those arguments, to be honest.
Larry Reed 42:12
There’s something to be said for this and that is that this circumstance was unprecedented and it’s not over yet. That the jury may not yet be completely in with all irrelevant verdicts. I have a sense though, that the more we learn, the more of this we go through, the more experience we have with it, the more we’re likely to look back and say, “Those lockdowns were counterproductive. The mask mandates went on far longer than they should have, if they ever should have been in existence in the first place.” I think a lot of the tools that government employed will come under more scrutiny and questions.
If you’re a cheerleader for them now, I would say, “Why don’t you hold off because you may be embarrassed in the not-too-distant future?” But what concerns me the most is that all of this totalitarian impulse sets dangerous precedents because people who love power, who want it to be concentrated in government and think that the right people will do the right things, they don’t stop with the power that they get. They usually say, “It’s necessary now, I’ll hold on to it.”
In the long run, if we allow this COVID experience to set the new norm for government intervention, radical intervention in our lives across a broad front, we may look back and say, “We would have been a lot better off if we simply endured COVID.” Because one of the worst things that people can do is to consign their lives to politicians. There are a lot of things they end up regretting whenever they do that.
Gene Tunny 43:51
I think that’s a good point, Larry. We might end there. Thanks so much for your time. I enjoyed that conversation. Some great points and excellent historical examples that I’m going to have to look up and add to my arsenal of historical examples that I can bring up. Very good. Lawrence W. Reed, President Emeritus of the Foundation for Economic Education. Really enjoyed the conversation. Thank you so much.
Larry Reed 44:20
My pleasure. Thank you, Gene.
Gene Tunny 44:22
That’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to Contact at economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Price controls are being suggested by some commentators as a way to fight inflation. But price controls would be a really bad idea, as Lawrence W. (“Larry”) Reed, President Emeritus of the Foundation for Economic Education (FEE), explains in Economics Explored EP125. Larry also chats with show host Gene Tunny about whether Jesus was a socialist, why banks and the state should be kept separate, and why President Biden would benefit from lessons on infrastructure from the 21st President Chester A. Arthur. You can listen via podcast apps including Google Podcasts, Apple Podcasts, Spotify, and Stitcher or via the player below.
Here’s a video clip of Larry discussing the Parable of Vineyard Workers and whether Jesus was a socialist:
About this episode’s guest – Lawrence W. Reed
Lawrence W. (“Larry”) Reed became President of the Foundation for Economic Education (FEE) in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. He previously served for 21 years as President of the Mackinac Center for Public Policy in Midland, Michigan (1987-2008). He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.
In May 2019, he retired to the role of President Emeritus at FEE and assumed the titles of Humphreys Family Senior Fellow, and Ron Manners Global Ambassador for Liberty.
He holds a B.A. in economics from Grove City College (1975) and an M.A. degree in history from Slippery Rock State University (1978), both in Pennsylvania. He holds two honorary doctorates, one from Central Michigan University (public administration, 1993) and Northwood University (laws, 2008).
Reed has authored nearly 2,000 columns and articles in newspapers, magazines and journals in the United States and abroad. His writings have appeared in The Wall Street Journal, The Washington Examiner, Christian Science Monitor, Intellectual Takeout, USA Today, Baltimore Sun, The Epoch Times, Detroit News and Detroit Free Press, among many others. He has authored or coauthored eight books, the most recent being Was Jesus a Socialist? (a major expansion in 2020 of an earlier essay) and Real Heroes: Inspiring True Stories of Courage, Character and Conviction. Additionally, he co-authored and edited five e-Books. See the “Books” section of this web site for more info. He is frequently interviewed on radio talk shows and has appeared as a guest on numerous television programs.
Links relevant to the conversation
Larry’s article “Price controls: killing the messenger”:
