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Slouching Towards Utopia w/ Brad DeLong – EP163

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

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

https://amzn.to/3TK4evm

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

Highlights

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

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

About this episode’s guest: Brad DeLong

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

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

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

Links relevant to the conversation

Brad DeLong’s substack:

https://braddelong.substack.com/

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

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

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

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

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

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

Transcript: Slouching Towards Utopia w/ Brad DeLong – EP163

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

Gene Tunny  00:00

Coming up on Economics Explored.

Brad DeLong  00:02

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

Gene Tunny  00:23

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

Brad DeLong  02:02

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

Gene Tunny  02:09

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

Brad DeLong  02:20

Thank you very much. 

Gene Tunny  02:23

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

Brad DeLong  02:33

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

Gene Tunny  02:37

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

Brad DeLong  02:53

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

Gene Tunny  04:45

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

Brad DeLong  05:32

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

Gene Tunny  06:50

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

Brad DeLong  07:19

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

Gene Tunny  09:30

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

Brad DeLong  09:39

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

Gene Tunny  13:57

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

Brad DeLong  14:13

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

Gene Tunny  16:35

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

Brad DeLong  16:41

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

Gene Tunny  18:23

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

Brad DeLong  18:40

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

Gene Tunny  20:09

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

Brad DeLong  20:18

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

Gene Tunny  22:01

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

Brad DeLong  22:04

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

Gene Tunny  22:40

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

Brad DeLong  22:47

Jobs is gone. Yeah, yes.

Gene Tunny  22:51

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

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Gene Tunny  23:25

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

Brad DeLong  23:54

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

Gene Tunny  29:09

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

Brad DeLong  29:17

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

Gene Tunny  30:59

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

Brad DeLong  31:15

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

Gene Tunny  32:03

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

Brad DeLong  32:13

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

Gene Tunny  35:56

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

Brad DeLong  36:56

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

Gene Tunny  42:28

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

Brad DeLong  42:58

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

Gene Tunny  48:03

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

Brad DeLong  48:31

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

Gene Tunny  49:29

Right, okay

Brad DeLong  49:32

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

Gene Tunny  49:56

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

Brad DeLong  51:09

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

Gene Tunny  52:21

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

Brad DeLong  52:53

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

Gene Tunny  54:17

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

Brad DeLong  55:22

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

Gene Tunny  58:19

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

Brad DeLong  58:28

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

Gene Tunny  58:39

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

Brad DeLong  59:48

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

Gene Tunny  1:01:08

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

Brad DeLong  1:01:17

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

Gene Tunny  1:02:14

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

Brad DeLong  1:02:38

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

Gene Tunny  1:02:59

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

Brad DeLong  1:03:03

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

Gene Tunny  1:03:48

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

Brad DeLong  1:03:57

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

Gene Tunny  1:04:05

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

Gene Tunny  1:04:11

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

Brad DeLong  1:04:38

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

Gene Tunny  1:05:02

Absolutely. I think that’s a great note to end on. Professor Brad DeLong thanks so much. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

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

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

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Podcast episode

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

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

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

Links relevant to the conversation

Robert Ewing’s LinkedIn profile:

Economics Explored EP153 which also considered the National Accounts

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

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

Gene Tunny  00:01

Coming up on Economics Explored.

Robert Ewing  00:04

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

Gene Tunny  00:24

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

Robert Ewing  01:42

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

Gene Tunny  01:53

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

Robert Ewing  02:48

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

Gene Tunny  05:58

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

Robert Ewing  06:27

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

Gene Tunny  07:04

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

Robert Ewing  07:46

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

Gene Tunny  11:17

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

Robert Ewing  12:10

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

Gene Tunny  15:21

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

Robert Ewing  16:20

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

Gene Tunny  24:14

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

Female speaker  24:19

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Gene Tunny  24:48

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

Robert Ewing  25:09

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

Gene Tunny  25:53

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

Robert Ewing  26:52

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

Gene Tunny  28:51

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

Robert Ewing  29:31

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

Gene Tunny  31:15

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

Robert Ewing  32:02

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

Gene Tunny  33:57

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

Robert Ewing  34:00

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

Gene Tunny  34:58

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

Robert Ewing  35:49

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

Gene Tunny  36:32

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

Robert Ewing  36:53

Thank you very much.

Gene Tunny  36:55

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

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White Elephant Stampede w/ Scott Prasser – EP161

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

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

About this episode’s guest: Scott Prasser

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

Substack newsletter: Policy Insights by Scott Prasser

Links relevant to the conversation

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

Criteria for identifying White Elephant projects.pdf

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

The Brisbane Times article reports:

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

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

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

Transcript: White Elephant Stampede w/ Scott Prasser – EP161

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

Gene Tunny  00:01

Coming up on Economics Explored,

Scott Prasser  00:04

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

Gene Tunny  00:12

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

Scott Prasser  01:34

Thank you very much.

Gene Tunny  01:35

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

Scott Prasser  02:12

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

Gene Tunny  03:32

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

Scott Prasser  03:36

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

Gene Tunny  04:01

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

Scott Prasser  04:13

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

Gene Tunny  05:08

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

Scott Prasser  05:34

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

Gene Tunny  06:10

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

Scott Prasser  06:14

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

Gene Tunny  06:49

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

Scott Prasser  07:03

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

Gene Tunny  08:36

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

Scott Prasser  09:24

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

Gene Tunny  09:43

You have to get a good mechanic.

Scott Prasser  09:45

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

Gene Tunny  09:53

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

Scott Prasser  10:52

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

Gene Tunny  15:45

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

Scott Prasser  16:45

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

Gene Tunny  18:06

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

Scott Prasser  18:50

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

Gene Tunny  19:50

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

Scott Prasser  20:09

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

Gene Tunny  21:03

Which is a white elephant. Guggenheim.

Scott Prasser  21:08

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

Gene Tunny  21:45

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

Scott Prasser  22:15

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

Gene Tunny  23:29

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

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Gene Tunny  24:11

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

Scott Prasser  25:27

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

Gene Tunny  27:19

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

Scott Prasser  27:27

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

Gene Tunny  28:45

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

Scott Prasser  29:10

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

Gene Tunny  29:24

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

Scott Prasser  29:47

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

Gene Tunny  33:30

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

Scott Prasser  34:07

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

Gene Tunny  34:15

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

Scott Prasser  34:18

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

Gene Tunny  34:21

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

Scott Prasser  34:31

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

Gene Tunny  35:41

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

Scott Prasser  36:13

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

Gene Tunny  37:29

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

Scott Prasser  37:58

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

Gene Tunny  38:33

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

Scott Prasser  38:40

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

Gene Tunny  39:18

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

Scott Prasser  39:42

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

Gene Tunny  41:35

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

Scott Prasser  42:07

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

Gene Tunny  42:25

Yeah, well.

Scott Prasser  42:26

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

Gene Tunny  42:31

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

Scott Prasser  42:43

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

Gene Tunny  43:46

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

Scott Prasser  43:51

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

Gene Tunny  44:29

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

Scott Prasser  44:45

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

Gene Tunny  46:13

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

Scott Prasser  46:48

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

Gene Tunny  51:20

Right. And that’s both sides of politics.

Scott Prasser  51:25

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

Gene Tunny  51:37

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

Scott Prasser  51:58

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

Gene Tunny  53:12

Okay. Scott Prasser, thanks so much for your time chatting about white elephants has been terrific. Really enjoyed it. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

Credits

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

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Podcast episode

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

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

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.

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

Links relevant to the conversation

LinkedIn profile: Robert Sobyra

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

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

Data mentioned by Gene:

Trend Deck 2021: Urbanisation (UK Government)

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

World Urbanization Prospects 2018 (United Nations)

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

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

Gene Tunny  00:01

Coming up on Economics Explored.

Robert Sobyra  00:04

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

Gene Tunny  00:20

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

Robert Sobyra  01:30

Hi Gene. Thanks for having me.

Gene Tunny  01:32

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

Robert Sobyra  01:39

Thanks, you and my mum.

Gene Tunny  01:41

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

Robert Sobyra  03:02

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

Gene Tunny  04:04

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

Robert Sobyra  04:09

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

Gene Tunny  04:34

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

Robert Sobyra  04:53

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

Gene Tunny  06:13

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

Robert Sobyra  06:26

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

Gene Tunny  07:04

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

Robert Sobyra  07:35

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

Gene Tunny  07:39

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

Robert Sobyra  07:50

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

Gene Tunny  07:57

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

Robert Sobyra  08:09

Rocky as it was last year. 

Gene Tunny  08:13

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

Robert Sobyra  08:34

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

Gene Tunny  10:21

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

Robert Sobyra  10:44

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

Gene Tunny  11:35

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

Robert Sobyra  11:54

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

Gene Tunny  13:47

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

Robert Sobyra  14:00

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

Gene Tunny  14:55

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

Robert Sobyra  15:12

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

Gene Tunny  16:10

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

Robert Sobyra  16:46

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

Gene Tunny  17:49

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

Robert Sobyra  18:33

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

Gene Tunny  18:51

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

Robert Sobyra  19:17

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

Gene Tunny  20:10

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

Robert Sobyra  20:54

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

Gene Tunny  21:30

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

Robert Sobyra  23:13

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

Gene Tunny  24:28

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

Robert Sobyra  24:56

Bundaberg

Gene Tunny  24:59

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

Robert Sobyra  25:28

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

Gene Tunny  25:57

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

Robert Sobyra  26:51

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

Gene Tunny  27:08

Was it Armadale ?

Robert Sobyra  27:09

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

Gene Tunny  28:10

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

Robert Sobyra  28:27

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

Gene Tunny  28:43

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

Robert Sobyra  29:37

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

Gene Tunny  29:47

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

Robert Sobyra  29:53

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

Gene Tunny  31:26

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

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Gene Tunny  32:00

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

Robert Sobyra  33:02

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

Gene Tunny  33:52

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

Robert Sobyra  35:33

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

Gene Tunny  36:11

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

Robert Sobyra  36:46

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

Gene Tunny  38:29

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

Robert Sobyra  39:56

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

Gene Tunny  40:51

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

Robert Sobyra  42:44

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

Gene Tunny  43:22

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

Robert Sobyra  44:25

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

Gene Tunny  45:07

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

Robert Sobyra  45:56

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

Gene Tunny  46:01

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

Robert Sobyra  46:10

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

Gene Tunny  46:17

Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

Credits

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

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Podcast episode

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

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

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

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

Links relevant to the conversation

Romina’s Cato Institute profile

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

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

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

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

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

Gene Tunny  00:01

Coming up on economics explored,

Romina Boccia  00:04

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

Gene Tunny  00:21

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 159 on the US federal budget and debt. My guest is Romina Boccia, Director of budget and entitlement policy at the Cato Institute. Romina is concerned that the US is on a path toward a fiscal crisis. We chat about why this is so and what can be done about it. Please check out the show notes, relevant links and details of how you can get in touch. You can send me an email or a voice message. Please get in touch and let me know what you think about what either Romina or I have to say in this episode, I’d love to hear from you. Right now for my conversation with Romina Boccia about the US federal budget. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. Hope you enjoy it. Romina Boccia, a director of budget and entitlement policy at the Cato Institute. Romina, great to be speaking with you today.

Romina Boccia  01:26

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

Gene Tunny  01:29

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

Romina Boccia  02:26

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

Gene Tunny  06:57

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

Romina Boccia  07:54

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

Gene Tunny  10:50

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

Romina Boccia  11:42

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

Gene Tunny  17:00

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

Romina Boccia  18:12

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

Gene Tunny  24:03

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

Female speaker  24:08

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Gene Tunny  24:37

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

Romina Boccia  25:02

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

Gene Tunny  27:48

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

Romina Boccia  28:31

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

Gene Tunny  29:02

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

Romina Boccia  29:25

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

Gene Tunny  35:47

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

Romina Boccia  36:17

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

Gene Tunny  36:41

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

Romina Boccia  36:52

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

Gene Tunny  37:10

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

Romina Boccia  37:34

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

Gene Tunny  42:16

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

Romina Boccia  42:28

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

Gene Tunny  44:06

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

Romina Boccia  44:18

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

Gene Tunny  44:53

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

Romina Boccia  49:17

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

Gene Tunny  50:07

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

Romina Boccia  50:42

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

Gene Tunny  50:49

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

Romina Boccia  51:02

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

Gene Tunny  51:06

Okay, thanks Romina. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

Credits

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

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Podcast episode

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

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

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

Links relevant to the conversation

Current inflation rates around the world (Trading Economics)

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

Wikipedia entry for Alberto Fujimori

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

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

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

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

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

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

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

Gene Tunny  00:00

Coming up on economics explored.

Arturo Espinoza Bocangel  00:01

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

Gene Tunny  00:18

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

Arturo Espinoza Bocangel  01:40

Hi, Gene it’s my pleasure to be here.

Gene Tunny  01:44

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

Arturo Espinoza Bocangel  18:08

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

Gene Tunny  19:31

Was this a socialist government?

Arturo Espinoza Bocangel  19:33

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

Gene Tunny  20:23

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

Arturo Espinoza Bocangel  20:47

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

Gene Tunny  22:48

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

Arturo Espinoza Bocangel  24:06

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

Gene Tunny  24:36

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

Arturo Espinoza Bocangel  24:45

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

Gene Tunny  24:53

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

Arturo Espinoza Bocangel  24:59

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

Gene Tunny  25:54

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

Arturo Espinoza Bocangel  28:11

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

Gene Tunny  28:18

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

Arturo Espinoza Bocangel  29:41

To facilitate internationally in foreign investment.

Gene Tunny  29:45

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

Arturo Espinoza Bocangel  31:54

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

Gene Tunny  32:15

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

Arturo Espinoza Bocangel  32:28

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

Gene Tunny  32:38

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

Female speaker  32:43

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Gene Tunny  33:13

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

Arturo Espinoza Bocangel  45:28

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

Gene Tunny  46:10

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

Arturo Espinoza Bocangel  46:17

Thank you, Jim. Thank you for having me.

Gene Tunny  46:21

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

Credits

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

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

Categories
Podcast episode

Bitcoin & books w/ author & ex-fighter pilot Lars Emmerich – EP157

Author and ex-fighter pilot Lars Emmerich explains why he’s so excited about the future of Bitcoin. And you’ll hear how he responds to the criticism that Bitcoin mining wastes a lot of  energy. Lars also tells show host Gene Tunny about his experience as an author operating in a disrupted book industry. Lars explains how the internet can give authors a better deal than traditional book royalties, and he tells us about the importance of Facebook Ads for acquiring new readers.   

Notes:

a) This episode was recorded on Tuesday 13 September 2022, two days before the Ethereum Merge with Lars and Gene discuss in this episode.

b) This episode contains general information only and nothing in this episode should be taken as financial or investment advice. Please see a professional financial adviser regarding investment decision making specific to your needs. 

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

About this episode’s guest: Lars Emmerich

Lars Emmerich is a retired fighter pilot, entrepreneur, investor, and musician. He writes about good guys with a bad streak and bad guys with a few redeeming qualities.

He is the author of the million-selling Sam Jameson series. He lives in Colorado with his family and his neuroses. He’s either hard at work on the next novel in the series, or he’s procrastinating. Usually the latter.

Stop by Lars Emmerich Books to pick up a free digital copy of The Incident: Inferno Rising, the first installment in the Sam Jameson series.

Check out Lars’s author page on Amazon

Links relevant to the conversation

The controversy over Tim Ferriss’s deal with Amazon Publishing for the 4-Hour Chef: Timothy Ferriss’ ‘The 4-Hour Chef’ stirs up trouble

What is hash power and why would anyone buy it?

Financial Times article – The Merge: a blockchain revolution or just more hype? (pay-walled)

Book on Bitcoin recommended by Lars: The Bitcoin Standard: The Decentralized Alternative to Central Banking

Transcript: Bitcoin & books w/ author & ex-fighter pilot Lars Emmerich – EP157

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

Gene Tunny  00:00

Coming up on economics explored.

Lars Emmerich  00:01

The bull case for Bitcoin is that at some moment in the future, we will have given the world the last dollar the world cares to have, cares the hold…

Gene Tunny  00:18

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is episode 157 on books and Bitcoin. My guest is Lars Emmerich, a popular author and investor in Bitcoin. His bio on his Amazon page reads, Lars Emmerich is a retired fighter pilot, entrepreneur, investor, and musician. He writes about good guys with a bad streak, and bad guys with a few redeeming qualities. Is the author of the million selling Sam Jamison series. He lives in Colorado with his family and his neuroses. In this episode, you’ll hear from Lars and why he’s such a supporter of Bitcoin. You’ll hear how he responds to the criticism that Bitcoin mining wastes a lot of energy. Lars provides some great information and makes some thought provoking points. Nothing in this episode should be interpreted as financial or investment advice specific to you. Obviously, you’d want to think about whether it makes sense for you to invest in something so risky and so difficult to value. Do you believe the story that Bitcoin enthusiasts tell about it potentially becoming a global reserve currency? Let me know what you think. I’d love to hear from you. Please get in touch, either by email or voice message. You’ll find my contact details in the show notes along with relevant info and links. Right oh, now for my conversation with Lars Emmerich. About online book publishing in Bitcoin. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Lars Emmerich, welcome to the programme.

Lars Emmerich  02:04

Thank you, Gene. Pleasure to be here.

Gene Tunny  02:06

Yes, good to be chatting with you, Lars, I’m keen to speak about a couple of things, at least that your you’ve been involved in. So you’re successful author, so I’m keen to chat with you about your experience in the book industry, because that’s an industry that’s been disrupted substantially over the last few decades because of the internet. So I’m interested in how you thrive in that industry. And also, I’m keen to get your thoughts on crypto and Bitcoin and, and other cryptos to the extent that you’ve been involved in them, because that’s, that’s a sector in which a lot is happening. And there’s been a lot of big news lately. So be keen to keen to chat with you about those things. So, to begin with, could you tell us a bit about your experience as an author, please Lars.

Lars Emmerich  02:56

I think I formed the idea of becoming an author when I read my first Tom Clancy novel, back when I was probably 20 Years Old. I was just fascinated by the way these seemingly mundane and separate storylines, wove themselves together into this amazing, multifaceted story. And fortunately, I had nothing to say at 20 or 23. So I was off doing other things, flying fighters for 20 years and, and learning about life. And I came back to it at a time when I was spending most of my days in airports and hotel rooms. And so I wanted something productive to do with my, quote unquote, free time. And I just started writing, I had writing professionally. Not as a novelist, but for business purposes. And I, I think I was writing a piece on a particular bit of sewage processing equipment. And I had one of those, what in the world am I doing with my life moments, and I decided if I was going to write words, I was going to write my own stories. And I dove in and really enjoyed it. And I quickly discovered that the publishing landscape was definitely in the process of being disrupted by at the time, nearly Amazon but Barnes and Noble and a couple of other retailers had a significant online presence as well. And I never, I never had it in my mind to pursue a traditional publishing deal, because it just didn’t seem like a good deal. The royalty percentage, the effort was the same. You were very much beholden to the degree of interest your publisher took in your work or didn’t take in your work. And generally speaking, if your author career is to go anyplace, you’re going to be the one pushing, you’re going to be the one doing the work. And so if that’s the case, I would much rather be on the 94% and of the revenue stream than on the 6% end of revenue stream, as it were,

Gene Tunny  05:08

Sorry, what do you mean exactly by that exactly Lars. Sorry just so I understand that you’d rather be on the 94%, than the 6%, oh, you get 94% of it rather than just 6%.

Lars Emmerich  05:19

That’s an a normal publishing deal like a traditional publishing deal, author royalties, and this changes per deal, for sure. But at the time I was making this decision, the number in my head that I had researched was about 7% of the book, royalties would find their way in your pocket, at some, some moment, well beyond when the books were sold, and the tallies were conducted. And all of the rights subtractions were, taken from your royalties. And the way that I had approached it originally was just to publish directly via the online retailers. I realised quickly that this was just a slight adjustment to the existing agreement, they paid you a bit more, but you’re still pretty much at their whim. And it was still up to you. And so I believe in 2018, I decided to sell directly to readers. And so while my books remain available on Amazon, they’re also mainly sold directly to readers, readers just buy directly from my website. That’s where the 94% revenue comes in. There are some there, there are some realities associated with credit card processing, and a few other services that are mandatory, that take it take their cut, but by and large, the, the gross revenues are yours. Now against that is the advertising costs, that’s required to make any business enterprise go. And that becomes that can become, it’s extremely time consuming. And it also consumes a huge portion of the revenue. So the margins in business are no better than they really ever have been. For most authors. But the landscape as you as you’ve alluded to, has definitely changed.

Gene Tunny  07:17

Yeah. Look, there are a few things I want to follow up on. And this is, it’s so fascinating stuff with advertising. What’s the best channel for you? Or for authors? In generally, I’ll just say anything about that? Is it Facebook? Is it is it is a Google ads, do you have any thoughts on that?

Lars Emmerich  07:38

I do, absolutely. I’ve tested, if there’s a place you can advertise and sell books are most likely tested. And far and away the most profitable, has been historically Facebook ads. And this is changing now. Because the way that Facebook worked, relied on very granular user preference data, Facebook was able to see a good bit of what you bought as a consumer. And so it could, it could understand Facebook could with a good bit of detail which authors a person liked to read. And you could and we’re talking about the big luminaries in each genre, the big names, the biggest names in the genres. And if your books were similar to those other authors’ books, you could reach fans of the big names in your genre, via the data that Facebook had on the number of people and who they were who really enjoyed these authors. Now, last year, at some point, Apple said, Facebook, you’re very welcome for all the data you’ve been getting for free and building this billion dollar business on top of, however, we’re building our own advertising platform, and we’re, we’re cutting you off. We’re producing data that you’re that you’re able to use and profit from. And when this happened, we’ve lost a lot of the detail that we used to have about we can tell generally who likes to read, it’s much more difficult to tell what those people like to read. And so that has, that’s the first thing that has changed the profitability of Facebook, it’s still profitable, not not as much as it used to be. The second thing is that it is an auction market for advertising. And all of the excess profit margin in any industry accrues to the advertising, the advertising platform, because I’m always competing with the next person who’s trying to get attention to sell books, and I compete all the way up until I have just squeezed the last bit of margin out of my business and I either quit, or I took another take another channel and all of that excess profit, all of that excess margin accrues to Facebook and to Google. And there was some interesting report where 40% of all venture capital investment went to Facebook ads.

Gene Tunny 10:21

I’ll have to look that up. Yeah, I believe it. Yeah.

Lars Emmerich  10:24

You know, don’t take that number to the bank. It’s an interesting, you know, it’s an interesting, it’s an interesting concept. And, and certainly, having been deeply involved in Facebook advertising and Google ads and other mechanisms, I can see that it does not sound false to me.

Gene Tunny  10:42

Yeah, it’s that point about, the, the the auction mechanism, that’s one that Seth Godin has made, and how that means a lot of the money ends up with Google or Facebook. So I think that’s a very good point. Just on. So you mentioned Tom Clancy. So this is the Jack Ryan series of novels, is it? Is it clear and present danger and Patriot Games and Hunt for Red? October is that’s what’s inspired you, is it? And then how did, what is your series of books about you write thrillers in that? Well, I mean, I’m not necessarily saying you’re trying to emulate Tom Clancy, but you write thrillers you’re trying to write in that sort of genre, so to speak.

Lars Emmerich  11:25

Yeah. Alright. So I spent a long time in the national security business. And I don’t write directly about those for various reasons. But I write peripherally about them. And they, I basically write edgy spy novels. And so Clancy was this intersection of espionage and statecraft and whatnot. It’s interesting that it’s interesting thinking about Tom Clancy now, because several years ago, I went back and I started rereading one of the novels, the cardinal of the Kremlin, and I got about 60 pages in. And it struck me that it was going so slowly. The pace of the narration was so slow, I couldn’t finish it, I stopped, I put it down. And I think our standards for what makes the story interesting have definitely changed, there needs to be much more movement, and much more. It needs to be much twister and turnier then some of those old masters. Another one along those lines is another one along those lines is the Bourne series. Yeah, they’re amazing movies, the books not so much. But they’re classics. And at the time, they were revolutionary, but our taste for story has changed, the pace at which we consume concepts has changed, we’re smarter. Generally, we have access to so much more information. So there’s less description required for any particular scenario, that’s another interesting phenomenon that my inspiration was now so slow as to be unreadable for me. But interesting, how that’s changed your I suppose what’s now been 30 years.

Gene Tunny  13:21

Yeah, but could you tell me, could you tell me about the series that you’ve developed? You’ve got a central character, haven’t you? You’ve got a central, you’ve got someone in sort of an arc or whatever you call it. Can you tell us about that process?

Lars Emmerich  13:35

Yeah, the Sam Jameson series. And by the way, these are the best deal I have at any given time available at Lars.buzz, if this is of interest to anybody, large.buzz is a great spot to go get the best, the best deal currently. But the SamJameson series is centred around a female protagonist, Samantha Jameson. And her, her stint in the series begins as she’s a counter espionage agent for Homeland, some made up office in a, in a real bureaucracy. And I did that to avoid the inevitable letters about oh, no such and such reports directly to so and so in the real world wanted to avoid all of that by creating a fake office inside of the Department of Homeland Security. And I have a lot of fun exploring all sorts of different kinds of themes that relate to the relationship of the individual to the state, the big macro kind of way and that leads us directly into the cryptocurrency discussion that I think is around the corner. The other thing that is really interesting is how do you discover what’s true in a business where everybody is lying. Yeah, everybody is deceiving somebody in some way. Many people are deceiving everybody in some way. How do you find what is true? Not I don’t mean like metaphysically true. I mean fact, how do you discover what’s factual and act on it? And that’s a really interesting set of really, interesting set of situations.

Gene Tunny  15:27

Yeah, well, I mean, in real life, there was the concern in the 60s and 70s that there was a high level mole in think it was in British intelligence or even in US intelligence and the counter counter espionage people I think was a James Jesus Hangleton in the US and yes, yeah, but he was just obsessed with finding that mole whether or not they existed and, and John, the John le Carre, in Smiley’s People and tinker Tailor, Tinker Tailor Soldier Spy, I think it was I mean, he’s very good at just explain, just telling that story about how difficult it is to figure out what’s going on. And you don’t know who you can trust. I love those. Those novels. Right. Okay, so yeah, I’ll put links to your, to your books to the Sam Jameson series. So, so yeah, that sounds that sounds great. Just on the book publishing can ask you’ve, you’re selling direct. And you’re also selling via Kindle. Is that right? On the Amazon store?

Lars Emmerich  16:29

I am. Yep. So I’m always testing, testing, right? What’s the, what’s the best way to get books to readers that have a value that they are pricing in a way that meets their value expectations, but also allows allows us to run a profitable business? That’s a constant evolution as big landscape changes, and it changes quite quickly.

Gene Tunny  16:54

Yeah, and the best deal for you is obviously if they buy on your website, because is it the case that Amazon takes a substantial cut on Kindle,

Lars Emmerich  17:04

Your royalties are either 70% or 65%, depending on the way it is set up. 70% is a terrific royalty rate, it represented a 10x improvement in the deal that authors generally otherwise got. And, and so they, they disrupted the industry in a way that, that really allowed a lot of very talented folks to find an audience who otherwise would not have done. But there’s a level of bureaucracy that comes with having to curate a library, that’s, I don’t know, 20 million volumes old and are large. And they’re not always well behaved, about how they do that. So within, you know, within the Amazon community, there’s a lot of unrest on the part of authors regarding the way that we’re treated. And, you know, we’re, there’s always some dissatisfaction about how royalties you calculated, or discoverability on the platform, or the way that your rankings are calculated, which influences your discoverability on the platform. And these things are always in flux. And you occasionally come to realise that Amazon, they’re actually serving their shareholders, which is the way that American businesses constructed, but you’re not a shareholder, you’re a supplier. And they’re overtly and aggressively looking to replace and vertically integrate suppliers. So the price pressure, and a bunch of other aspects of the way the book business has developed under Amazon’s auspices, it’s not appreciably better for many authors than it was under the old system, in spite of a better route.

Gene Tunny  18:55

By the vertical integration, what do you mean, exactly? Do you mean they’re trying to get them have people as dedicated Amazon authors, I’m just trying to understand what your what you mean by that, 

Lars Emmerich  19:08

Their business model as as they in order by being the marketplace, you have a terrific understanding of what where margin exists in the marketplace. And when you find that, you can just either use your own manufacturing techniques and technologies to replace the merchants so that you don’t have to pay them. You don’t have to pay them a cut you. You are the merchant as Amazon, and they’re doing this in a lot of other industries. And they’re, they’re definitely looking at looking into it in, in the book business as well. And there are some interesting projects underway related to artificial intelligence, writing stories and and whatnot. We’re not there yet. Wow. But as a position as a position. They’re interested in paying suppliers less and less and less and having fewer and fewer and fewer suppliers to have to pay. There are reading that writing on the wall, you have to make your own way. You can’t, you can’t rely on it for your, you know, for your meals.

Gene Tunny  20:08

Okay. Yeah, I’ll have to look more into that. I remember, I think it was Tim Ferriss got into trouble. Well, he had an issue, maybe 10 years ago or so with his Four Hour Chef book that he was developing. I think he developed it for Amazon. And it was going to be sold through Amazon and then some of the traditional booksellers, I think Barnes and Noble, were unhappy with him about that. I have to look up the details and put it in the show notes. Fascinating developments. It looks like yeah, this is the, this is the wider guide and the extent that you can do it yourself. And the technology’s there, and why not? And I know that there was a lady who wrote 50 Shades of Grey, who think she started off as a self published and just selling it, using the platforms that are available to sell it rather than having a traditional book and is able to say whether that you’ve you’ve been, have you been approached by anyone in the film industry? Has your work been optioned at all?

Lars Emmerich  21:08

No, not at the moment. We’re not under option for anything. You hear rumblings and such.

Gene Tunny  21:15

Oh, yeah, I was just gonna say it sounds like you’ve got a good concept and, and, you know, people that people are looking for new content to develop and that I think that Jack Ryan series on Amazon Prime was popular. I think that’s, that’s a good example of how everything’s sped up, right? Because the new Jack Ryan is much more he’s much younger, he’s much more, there’s much more action than in the traditional Harrison Ford films. Okay. So I might ask you about crypto now, Lars, you were talking about how one of the themes you explore is the relationship of the individual to the state. Now, it’d be good to unpack that exactly what you, you mean by that? And how then that influences your views on? Well say traditional money, fiat money? And, and crypto like how, why did? Why does that lead you to be a supporter of crypto? Could you tell us a bit about that, please?

Lars Emmerich  22:13

Sure, I noticed that the money that I was saving was worth less and less over time, I became aware at some moment that there was an inflation target. Not more than but also not less than. And I think when you print more and more of anything, the sum the total, individual dollars that you print each become less valuable over time. So it struck me as weird that you couldn’t just hold your money, because it would lose its value by virtue of just being held. And that was, I mean, it’s part of the it’s part of culture, it’s part of just the socio economic background, the water that we’re swimming in, we all take it as a given, you must invest your money, otherwise it would disappear. And I started wondering, gosh, who does it really serve? process. And it turns out, I think that a fiat system, it has a lot to recommend. There’s a there, there’s a lot in terms of being able to organise and focus, human effort and energy in a particular direction, you can do that very, very quickly. With a loan. Those dollars don’t generally exist before you go take out a business loan to open a gas station or whatever. It’s a very quick way, at the point of need to deploy capital. I think it exists mainly to ensure that the authority that issues that remains the authority remains viable remains in charge. And they, the agreement is, hey, we’re the state we have the monopoly on violence. And we decree that all transactions will occur in our currency will control the supply of that currency. And that’s for your own benefit. You know, when times are tough, we’ll be there to help. When it gets a little too crazy. We’ll be there to ease back, right. Inherent in that is that we have both the wisdom and the judgement to do that effectively. And I think that’s the great weakness of the fiat currency system is that the temptation is, is overwhelming to irresponsibly print. And, and I think, where you get into trouble and when it seems to happen, it seems to happen with a very large percentage of fiat currencies. Something will happen where the state feels the need to have it really amounts to an abuse of this agreement, like the estate says, Here’s the money, your job is to pretend it’s valuable. And we’ll control the supplies such that we don’t flaunt your trust. It’ll, you know, we won’t just flood the world with so many of these things that you’re pretending it has value, these little green pieces of paper are these numbers in a spreadsheet, you’re, you’re pretending that they’re valuable. It’s sort of relies on the state’s good behaviour. But something inevitably comes up, somebody wants to start a war, how do you get it? How do you start a war? Well, you don’t save a trillion dollars, and then go buy a war, you start a war, and print your way to the hardware and payroll that you need to execute this war. So that’s one way that it’s, it’s sort of abused. In other ways, when you’re looking to be reelected, or you’re looking to quell any kind of an uprising, you can very easily pander and purchase the loyalty that you need, with printed money that occurs at like an accelerating pace over time, either to the point where people recognise that whatever was supposed to have been backing the currency, for example, gold, there’s no longer any real relationship between some quantity of currency and a different quantity of gold. That’s supposedly back into currency. That’s the first way that people lose confidence in a currency. And I think a second way is when the rate of inflation is visibly painful. It’s personally painful. It’s causing hardship in a way that it wasn’t before. It’s just under the radar until it is until you’re thinking my gosh, I’m having trouble affording my food and my energy costs. And that’s the second major way I think that people on mass, lose confidence in occurrence. Yeah, ultimately, that’s what it is. It’s an agreement, we’re all going to agree to pretend this is valuable, until pretending it is so far farcical that we have to start doing it. And then the currency collapses.

Gene Tunny  27:16

Yeah. So I think what you’re describing when you’re talking about, oh, well, we want a war or we want to, you know, we’ve got a reelection election coming up, then we’ll just spend up big and we’ll just turn on the printing press to fund that. I think that’s something that’s been, you know, that’s occurred in some Latin American countries or some kleptocratic African states in the past. And you’ve seen the results of that. We mean, I was just looking the other day, at the inflation rate in Peru in the early 90s. That got up to I think it was 10,000% over the year, or something like that, just absolutely insane. And, and you’ve seen that in some other Latin American countries in the past, I guess, in the US and Australia and Britain, we, we haven’t had inflation that bad, thankfully. And we’ve we’ve managed, we haven’t we typically haven’t financed, or we’ve been careful with how we have finance budget deficits, where we can we do try to borrow from the bond market, so that it’s not as if we are turning on the printing press to to fund that. But one of the big changes in the last well, since the financial crisis, and this is something that economists are still debating and something that, you know, I personally, I used to work in the treasury here in Australia. And you know, it’s something that has started to concern me is just this now that quantitative easing, or this large scale purchase of assets with newly created money by the Central Bank, that’s something that, I don’t know, 20 or 30 years ago, we thought we would never do that. I mean, that’s sort of, yeah, that’s really, that that unconventional monetary policy is that’s, that’s a bit out there. We wouldn’t go there. But now it seems to be part of the standard, macro economic playbook. And I think we’ll be debating that for the wisdom of that for decades to come. So yeah, I think I think you do make some some good points there. Lars. And so is this what has led you into being a crypto investor? Could you tell us a bit about that, please?

Lars Emmerich  29:28

Yeah, I like the idea. I think it’s important here to make a distinction. Cryptocurrency is has become a fairly broad term. I view it this way. There’s, there’s Bitcoin and there’s everything else. And the distinction there is the degree of decentralisation which makes Fiat type printing extremely difficult to do with Bitcoin. And exceptionally easy to do with the other projects, which amount to very centralised. They’re basically unregulated unregistered securities. They’re, they’re a project run by founders, in the best cases, the feathers of CEO and a CEO and a board of directors not vetted to the same extent that you would find on a stock exchange, for example. In the best cases, you’re, you’re investing in a legitimate business. And the worst case is you’re investing in vaporware. And you have a rogue pool in your, in your future, where and how Bitcoin differs is that the supply is algorithmically controlled, which means nothing if one person can change the algorithm, but spread around the globe are something on the order, somewhere between depending on whose numbers you believe 15,000 and 100,000, individual verifiers if you will have every transaction. So if you suddenly want to change the rules, you can do so if and when you convince 51% of everybody globally, involved in the project, that it’s a good idea to devalue the currency. So from a practical standpoint, it’s it’s not likely to happen. And what this ensures is scarce. And so it’s it’s very, it’s unlikely that there will be runaway inflation, or even inflation of any sort that’s beyond the programme to mount that. That exists in Bitcoin as the minting and mining that the total number of planned coins, which is 21 million. So that’s the part one, it’s scarce, nobody can abuse, no individual, no small group of people, no even large group of people are likely to be able to abuse your trust in the currency. On the first hand, on a second hand, there’s no third party risk. Meaning when I put my money in a bank, that’s a building full of people doing things. And they’re in between every transaction that occurs, I give them money that I have, they dole it out to whoever I say, I want them to pay it to, they’re the trusted third party that makes the whole thing go. And trust like that can and is abused. And it’s most obvious and most prevalent in the cases where nations undertake capital controls where suddenly the money that was in your account is not. The state took it, okay, it’s part of living here, sorry, times are rough, we’re taking your money, or we’re going to ensure that you can’t, you can exchange your money and take it out of country. Bitcoin allows you to move millions of dollars all across the globe, inside of 10 to 15 minutes for fees under 10 bucks. So the degree of participation available now, economic participation is much higher than it was before when there was a third party gate gatekeeper standing between you and whoever you were trying to pay or receive money from. So this, is this has just dissolved economic borders. And it has a huge impact for things like remittances. But it also has a huge impact. For things like personal sovereignty. We’re less beholden to the good behaviour of the state in order to earn a livelihood in order to provide for your family. If things become politically untenable, where you live, you have the you have a real option by memorising your private key to carry all of your wealth with you out the door with nothing in your pockets. So the degree of personal sovereignty and individual liberty that comes from having this a construct like that. It’s quite important in many, many parts of the world. And I think those two things scarcity and this global transaction capability, they’re going to prove to be quite transformational.

Gene Tunny  34:39

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

Female speaker  34:44

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Gene Tunny  35:13

Now back to the show. With that private key this is your password to your, your wallet, is it? Is that what you’re talking about? And is that just that’s a string of characters? Is it? Is it something that you can memorise it, because I know that some people have lost that in the past, and then they’ve lost their, their access to Bitcoin that would be worth, you know, large amounts of money. So you got to make sure you keep hold of that.

Lars Emmerich  35:40

Yeah, there ain’t  no free lunch. So if you are responsible, if you think of it as you are your own banker, so you have to learn how to take take care of your private keys. Now you can leave them on an exchange, but now it’s just like leaving it in the bank, you’re trusting the third party? So yeah, it’s, it’s, it’s a way to get your foot in the door in to the space, but the best practice is to, is to be the custodian of your own private keys, which are like your password to spend the money that is yours.

Gene Tunny  36:13

Gotcha. And can I ask you about the volatility? So you were talking about look, the problem with fiat money is that inflation will erode the value of it. And you’re concerned about our monetary and fiscal authorities and their policies and what that means for, for inflation. I mean, I think we’ve seen that in the time of the pandemic, and then we had the big monetary expansion and then followed by the inflation that probably should have been predicted back then, when they were undertaking those policies. That if we look at what’s happened with Bitcoin, I mean, it’s fallen in value by almost 50%, or something this year, or over the last year. So

Lars Emmerich  36:54

More than that, I would imagine.

Gene Tunny  36:56

Yeah, I mean, crypto is, crypto is quite, it’s volatile, because we’re still trying to figure out what the true value of it is. So how do you how do you deal with that? Is that something you just accept that just comes with, with crypto assets?

Lars Emmerich  37:14

Well, in in the case of in the case of Bitcoin, that relates to sentiment, news cycle, whatever’s in the news, I think it also relates to the fact that the supply is really quite, quite inelastic. So you get wild price swings as sentiment changes, I think the other thing at play is the available availability of investable cash. So I think it has become known at the moment as an inflation hedge and an asset to invest your dollars in, in the hope that you can exchange them for more dollars in the future. I think the bull case for Bitcoin is that at some moment, in the future, we will have given the world the last dollar the world cares to have cares the whole. And I think we because the SWIFT system settles in USD, because for years, we’ve been forced militarily, the petro-dollar concept where whoever buys oil anywhere from anybody pays in US dollars, that has given us carte blanche to print in a way that, you know, small countries, there’s only so many of the units of currency you can print before they spill over. And this spilling over is what we can think of as this as the crisis causing loss of confidence. But that the entire globe is now the reservoir of dollars, everyone is kind of infected with dollars everyone is whether they know it or not. They’re deeply exposed to the US dollar. So what that means is we can print a lot more dollars for a lot longer before the crisis occurs. But when the crisis occurs, because I think these things tend to have this kind of cycle, there’s likely to be some moment where we’ve, we’ve just pushed it too far. And people have finally said, it can’t be worth all this if you’re just printing it at this pace, right? If and when that happens, what I think will be a very strong candidate for the global, global reserve currency is something like Bitcoin is relatively free of politicisation. I mean, all of all the miners were kicked out of China, get out, beat it. And Bitcoin didn’t skip a beat. The network ran, transactions settled. This was an entire block, a huge block of mining entire operations just overnight, decimate and and yet, functionally, and practically. Yes, there were price fluctuation associated Bitcoin to dollar exchange rate that fluctuated, of course, but the way the network function, completely oblivious to this loss of hashing power and this giant political upheaval, I think that will make it very attractive as a reserve currency. So, in the moment, we’re comparing, how many dollars is a Bitcoin worth? And we hope it’s worth more in X number of months or years. I think the long case is this is this has some likelihood of being the reserve currency. So you’re, you’re purchasing today, what will be the money going forward? And so from that standpoint, if your horizon is that length of time, whether it’s a decade or two, or three, who knows? If that’s your horizon, you’re far less concerned about the volatility than if you’re trying to put in a good result, result this quarter. Yeah, my argument is if you want to invest in this space, take the longest view possible. And make your decision based on the longest you don’t, don’t, don’t expect that you’re going to be able to, A predict the right project and B predict the right timeframe, an entry and exit points to get in and out to make a bunch of dollars off of your crypto investment. But that’s, you know, people will make a lot of money, but a lot more people will lose a lot more money.

Gene Tunny  41:20

Yeah. So you talked about a loss of hashing power. So I’ll put a link in the show notes about hashing power. I think I know what you mean. But this relates to the process of, is this the process of solving the puzzles of proving whether a transaction is legitimate or not, broadly speaking?

Lars Emmerich  41:40

Yeah, this is, so it’s the marriage of how Bitcoin is created. And the pace at which it’s created, the way it’s set up is that every 10 minutes or so a new block. And a block is nothing but a list of all the transactions that have occurred in the last 10 minutes, plus the hash. So the cryptic cryptographic code that summarises every prior transaction. And this does two things. The way this hash is determined, you, you can’t calculate it in advance, but it’s trivial to verify it in reverse. The way the math works, it’s, you couldn’t with massive amounts of computing power, you couldn’t trick the system and guess faster than everyone else. So the way mining works, is that these processors, they’re guessing millions of times a second, the hash, and the world is literally guessing what string of characters will solve this hash of the summary of the last 10 minutes worth of transactions plus the hash that represents cryptographically, every other transaction that’s ever happened. And so because it’s trivial to verify, its takes no, almost no computation power whatsoever to verify that the right hash has been found. But it’s very, very difficult to guess it, you have to roll a 36 sided dice correctly, 100 times in a row, that’s what mining is. Now, that’s when your computer or your mining pool guesses correctly, you get rewarded with some number of Bitcoins. That’s the incentive for mining. But what mining represents, is when you, you take the list of transactions and package them together and create a hash function out of them. What you’re saying is if anybody tries to go back and change any one of these transactions, no words, if anyone tries to commit fraud, the entire world knows about the entire world rejects the fraudulent transaction, because the entire world can tell cryptic, cryptographic, if one thing has been changed at any point along the line. And so this is the real value of mining operation, is that it it prevents fraud. It prevents theft, it prevents double spending in a way that takes entire police apparatus and, you know, buildings full of banks and all sorts. It’s a beautiful solution to a really intractable, intractable problem prior to this, prior to this innovation that reason. It’s remarkably immune to political and criminal intervention. Right.

Gene Tunny  44:52

It sounds like they’re using a brute force approach as you were describing it. So there’s no algorithm that allows you to quickly get to the right solution to solve this, this hash or figure out what it is. And that’s why you need all of this computing power. Now, there’s, if I’m interpreting this all correctly, and there was an article in the Financial Times that I didn’t get a chance to send it to you before, because I just, I just read it this, this morning, my time in Australia, and they’re talking about how the amount of energy that’s consumed by Bitcoin mining or the, you know, all the Bitcoin operations around the world is equivalent to the energy use, or the electricity used by the country of Belgium, I think it was, and this was in an article.

Lars Emmerich  45:44

Its about 1 half of 1%, I think of current global energy supply. So there’s a lot in that figure that we can, we can pull apart, the first thing I think we would say about that is given that every transaction is visible and verified by the entire globe. That removes what you’re, what you’re buying by expending that energy, is the security of the global financial network and the integrity of the global financial network. And what you don’t have to buy is the military intervention for 30 years in the Middle East to ensure that all petroleum transactions settle in US dollars, you don’t have to pay the energy for all of the buildings and humans it takes to run the global banking system, which is just a series of of parochial, third party, you know, intermediaries, and you don’t pay the cost of a fraud and theft. And you also don’t pay the enormous cost of inflation. When you’re, even if inflation is 3% per year, you’re you’re, you’re spending 3% more energy every single year, just to keep your nose above water to keep your productivity to keep your standard of living. So that’s what you’re, that’s what’s on the other side of this energy equation. I don’t know how much energy that amounts to. I know that, by many estimates, we, we’ve spent between six and a half and $10 trillion, since 2001 prosecuting the global war on terror, which has been conducted largely in the oil producing countries on the planet. And you know, someone somewhere on the order of, of a million lives, you have to think that those kinds of things are less necessary, when the currency has its own integrity. The other thing that is difficult to quantify is and we’ll get to the actual breakdown of that, that number one half  of a percent, in just a second, there’s more there than, than their first appears. The other thing is that when a currency is scarce, and you can’t just print it up, when you’re ready to go fight a war there’s likely to be fewer wars, there’s likely to be less military action, when when it’s an it’s always always destructive, you know, that the real cost of military action is just astronomical. And it’s far less feasible when you can’t just print up a war like you, like you can now. So I think those are costs that are that are on the other side of the ledger that that people don’t necessarily appreciate. That’s what scarce and sound and and forcibly scarce and and forcibly sound money buys for you. The second thing is it’s an exceptionally competitive industry mining Bitcoin, super competitive, the salient variable, are two. Chip production and these are application specific integrated circuits, their their purpose in life is to mined Bitcoin period. When you produce a new semiconductor, that’s an expensive process. The second and this ends up being the dominant cost in Bitcoin mining is the price of energy. So what this means is that the Bitcoin mining operation automatically flows to those places where energy production is cheap. And so you can think of it like the aluminium industry where it takes a massive amount of electricity to smelt aluminium. And so, aluminium, put production migrated to those places where geothermal energy is cheap or other sources of energy. So Iceland, a couple of places that have a high geothermal energy output? Well beyond what people, what people can use in those areas, and there are places in China where seasonally, and places all over the Earth where seasonally, the hydroelectric power that’s available in the rainy season is astronomically more than the population consumes. And more than current battery technology lets you hold. So the hashing power goes to these places where excess electricity is produced largely sustainably. And so a good portion of the energy that secures the Bitcoin network is pretty green. Another area is that as petroleum is processed in the world runs on petroleum, that’s not going to change overnight. It’s not going to change in several decades, because it’s it’s so deeply entrenched in everything that we that we do. It’s just a fact of life. But the process of it, you have to burn certain amount of, of gas, that’s a byproduct. So these are refineries all over the earth, you see these bright orange flames, just shooting energy into the ether, because there’s nothing else that they’re doing with that gas. Well, what Bitcoin and Bitcoin and energy production, they’re, they’re coming together, because Bitcoin helps stabilise the production profile for power plants, number one, number two, it gives a bit the burn, that refineries do just burning off this waste gas, that thermal energy can produce electricity on site that can be used for Bitcoin mining, and there are several places where those agreements are, are being implemented now. So that’s, that’s energy that is just currently being absolutely full of waste, that will no no longer be wasted it will be put to put to use. So it’s not clear. It’s not this clear case where we’re irresponsibly securing the Bitcoin network, which in and of itself, I think is a mean, what else you’re going to spend energy, if not to secure the financial infrastructure of potentially all sorts of nations on Earth, and maybe even at some point, what may become a global reserve currency in the way that the US dollar has become a global reserve currency. You know, it’s not quite the soundbite that the reality of the situation is not quite the soundbite that you hear, Oh, gosh, it’s terrible. It’s kind of warm the earth up to whatever and it’s evil? Not so much, you know, not so fast. Yeah, there’s, there’s been a bit a bit of thought put into it.

Gene Tunny  52:56

Yeah, I’ll have to look more into those, those opportunities you were talking about to to use energy that would otherwise be wasted for for crypto. So I’ll have to look at that. That’s interesting. You’ve got an interesting hypothesis there about how crypto could mean less military intervention worldwide. So again, yeah, I think I have to get my head around around that. And but I think yep, you know, if that’s, if that’s, that, that’s, that’s a hypothesis. So I’m happy to accept that as a as a hypothesis. Can I ask about a theory? Um, if you’ve been following what’s been happening with a theory? Are you mainly in Bitcoin laws

Lars Emmerich  53:42

with a great deal of interest? Yeah. I want to circle back Yeah. It’s not nearly crypto. That is, like, not all crypto is good in the way that I have described bitcoins virtues, okay. Because if, if it is just down again, to a central authority to govern the supply, whether or not it’s cryptographically secured, once you’ve issued the new supply, doesn’t really matter. If I can print more of these tokens whenever I desire, then I lose the scarcity. I’m just an all I am is an updated digital fiat currency and the central bank, digital currencies that that are. I think, in autocrats, you know, dream. They’re, they’re really, they’re really just digital forms of the existing system. There’s not there’s not any advance not any revolution, not any evolution there. And in the case of Aetherium this is a really interesting case because Aetherium is a project that you know that eath has some some value. eath is also used to power it’s a substrate a commodity used to To power computation in Aetherium, related applications, or business. In other words, it, you can think of it almost like a programming language that requires fuel. And eath is the fuel. And they are currently on a proof of work system. And that’s what Bitcoin is proof of work. They’re talking about moving to a proof of stake, meaning who makes the rules, the people who have the most eath make the rules, they have the greatest stake in the game, and therefore they have the greatest authority over the governance. And this is, this is basically fiat currency. It’s, it’s basically the same thing as the fiat currency, you know, the, the, the Board of Governors or or whoever’s whatever small collection of people is in charge at Etherium. They will ultimately decide how many tokens or print Yeah, and, and the proof of stake just you’ve automatically instituted an oligarchy. As you go proof, you the only people are the people who have the most say, over the way our money is handled, if that comes money, or the people already have all the money, or most of the money. That doesn’t seem like an improvement. To me, that seems like more of the very same. And the bumper sticker is oh, we’re going green. Yeah, we’re not gonna do this evil energy thing. Instead, we’re just gonna hand the keys to the kingdom to the people already, who already own the kingdom.

Gene Tunny  56:40

Yeah, yeah, that was. That was. I think that was the sentiment from some of the critics of this, that were quoted in the Financial Times. I’ll put a link in the show notes. Yep. So they’re saying that look, this is going away from what crypto is all about? So yeah, it’s it’s not the right direction, according to them. Okay. Lars has been great. Pick your brain for the last nearly an hour or so. Is there anything? Before we wrap up any anything we’ve missed? Or any any important points you think would be good to? To get out there to my audience? Before we wrap up, please?

Lars Emmerich  57:21

Sure. I think there’s been a, we’ve talked a lot, a lot of it is technical. And there are some technical details to digest. For sure. I think the most important thing to say on this particular topic is there’s there’s a lot out there that you can, that you can educate yourself on, you won’t fully understand it unless and until you bite the bullet. And just get into some of the more technical discussions. Until you do that. You’re completely at the mercy of the interpretation of whoever’s writing the news article, and whatever slant has been taken on it. So if you want to make a real decision, I would say look at how the technology actually works. Whether you’re thinking of a project that’s that’s not Bitcoin, that’s more of a security or a stock, or a new investment, or a new startup that you’re thinking of investing in that’s issuing a token? Or if you like, what you’ve heard about Bitcoin, go look at how it functions, and then make up your mind from there and stress tested, think about edge cases, think about who can manipulate it, and how what would it take to manipulate this particular venture. And I think that’ll go a long way toward also, think about your time horizon. If you’re looking to get in and get out with a quick book, join the club, everybody wants to do that. And there’s enough lottery ticket winners to just keep us off frothing at the mouth, but you’re gonna lose your shirt, most likely. Think really long term, and think about all the edge cases and arrive at a sober you know, well considered position on

Gene Tunny  59:07

rod and were there any good resources from your perspective that I could link to in the show notes? If there are if you do have any I can. I can link to them in the show notes for people.

Lars Emmerich  59:17

Yeah, there’s there’s a, I recommend this with reservation safety and almost the Bitcoin standard. There’s a few digressions in there that are that are worrisome, and that detract from the central argument that he makes, he goes on a few tangents that are not helpful, but he does a really good job of describing the fundamentals of how the network works and how how the Bitcoin, the Bitcoin network works. So if you can ignore the rant on modern art. I mean, just completely skip the chapter. And if you can, you know, just focus on the way he describes the functioning of network that’s really quite useful.

Gene Tunny  1:00:02

Good stuff. Okay, last anyway, thanks so much for the conversation. I really enjoyed it. And yeah, it’s made me think think a bit more laterally about these issues. So that’s great and yeah all the best for your, your publishing career. I think it’s terrific. You’re, you’re doing well in that area. So that’s great. And yeah, Lars, really appreciate it. So thanks so much for your time.

Lars Emmerich  1:00:28

Thank you, James. My pleasure.

Gene Tunny  1:00:31

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

Credits

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

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Podcast episode

The Aussie electricity market malfunction of June 2022 – EP156

Australia’s National Electricity Market was suspended by the market operator for nine days in June 2022. For a brief period, authorities were worried there would have to be widespread blackouts to balance supply and demand. In this episode, Andrew Murdoch, Managing Director of Arche Energy, explains what went wrong in June, and he talks to show host Gene Tunny about whether it could happen again. Are renewables coming into the system too quickly? What’s happening with batteries? Will Australia be able to cope with the retirement of coal-fired power stations? And what about all the EVs that will need charging? These and other questions are tackled in a frank and fearless conversation.  

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

About this episode’s guest: Andrew Murdoch

Andrew Murdoch is Managing Director of Arche Energy, a Brisbane-based consulting firm specialising in energy projects.. He is an experienced general manager, project director and engineer operating in renewable power, power generation, energy, ports and heavy infrastructure. For more on Andrew’s experience, check out the Arche Energy website.

Links relevant to the conversation

Australian Energy Market Operator (AEMO) report into market suspension in June 2022

AEMO’s Integrated System Plan

NEM suspensions costs lower than expected – NB when they were directed to supply gas to the market at an uneconomic price for them at the market price cap of $300/MWh, the generators became eligible for compensation

AEMO’s Electrical Statement of Opportunity

Some large-scale Australian renewable and battery projects: 

Lockyer Energy, Supernode

Global coal demand as high as it has ever been (IEA report)

Transcript: The Aussie electricity market malfunction of June 2022 – EP156

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

Coming up on economics explored…

Andrew Murdoch  00:01

Reflecting on the events of June, more energy would have been handy. So it was the cost of energy issue that created these extreme prices. So whether that energy came from renewables or from gas or from coal, any additional gigajoules or megawatt hours generated onto the system would have had downward pressure on prices and certainly would have helped.

Gene Tunny  00:26

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 156 on Australia’s national electricity market, the NEM. In June 2022, the NEM was suspended by the market operator for nine days. For a brief period, authorities were worried there would have to be widespread blackouts to balance supply and demand. My guest this episode explains what went wrong in June, and we talk about whether it could happen again. My guest is Andrew Murdock, Managing Director of RK energy, a Brisbane based consulting firm specialising in energy projects. Andrew has a background in engineering, and he really knows what he’s talking about when it comes to electricity. So standby for a deep dive into Australia’s NEM. Please check out the show notes relevant links Information and for details of how you can get in touch. Please let me know what you think about what either Andrew or I have to say. I’d love to hear from you right now for my conversation with Andrew Murdock on the NEM. And we also chat briefly about electric vehicles toward the end of the conversation. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Andrew Murdoch for a market energy. Thanks for coming on to the programme. Thanks, Jane.

Andrew Murdoch  01:55

Good to be here.

Gene Tunny  01:56

Yes. Great to have you on. So you got in touch after a recent episode where I was talking about EVs and I mentioned that you really love to talk to someone who’s familiar with energy with electricity. And you got in touch and yeah, it seems like you’ve got a great track record. Great experience. Could you tell us about what Arche Energy does and your experience, please?

Andrew Murdoch  02:22

Yeah, sure. So Arche Energy is an energy advisory firm. We’re a small firm based here in Brisbane, Australia. We help people develop energy projects, we help people solve strategic energy related problems. We help people with decarbonisation and developing strategies to meet their netzero goals or other other related goals. We do project management, project development, strategic engineering, owners engineering, etc, in the energy and infrastructure industry.

Gene Tunny  02:54

Right. So in terms of meeting their decarbonisation goals, are you advising them about what renewable energy options they’ve got? I mean, what sort of things would you be advising them?

Andrew Murdoch  03:06

Yeah, absolutely. So I guess a typical decarbonisation job will be a for us will be an industrial mining facility with a significant energy consumption need. And we will look at what what their energy consumptions is, what their, what their physical processes are, and look for opportunities to either make better use of the resources that they’re using, whether that’s gas, coal, heat, power, etc. And then also look at opportunities for integrating renewables and other low carbon sources of energy into their into their processes.

Gene Tunny  03:45

Right. Okay. Are there any examples of clients you can talk about or jobs you’ve done?

Andrew Murdoch  03:51

Yeah, so one particular job was a mining clients, they they developing a greenfield mine, lithium mine over in Western Australia, they guessed the way that you would power a mine 20 years ago was when you would just get a half a dozen big diesel generators, truck diesel, the site and the way you go. These days, you look at some more complicated, complicated processes. So you might integrate some solar into the into the system, you might, you might also integrate some wind into the system and certainly batteries are very valuable for mine supplies. Mine power supply systems now because it allows you to if it allows you to run your engines more efficiently, allows you to have less engines and allows you to deal with shocks to the energy system when a cloud goes over your solar farm or the wind stops blowing etc. So those technologies that are available now are we’re seeing those in most mine supply power jobs that we’re doing these days, right

Gene Tunny  04:56

but would you typically have some diesel generators, they’re just in case.

Andrew Murdoch  05:02

Yes. So system has to be robust enough to deal with a wet week or a week without rain, when the batteries can’t recharge, nighttime evening peaks, etc. So, but we’re seeing, you know, we’re seeing in the studies we’re doing these days, we’re seeing renewable energy fractions going up to sort of the 60s and 70 percents, which is, which is fantastic and wouldn’t have been achievable 20 years ago on mine sites.

Gene Tunny  05:27

Wow, that’s incredible. Okay, that’s, that’s good to know. We want to want to chat about as this whole issue of integrating renewables into the system. And, look, there’s a lot of debate about this. And there are people who are very pro renewable. And I mean, I understand that we have to get there eventually we need to decarbonize. I mean, I’m not arguing against that. But one thing I’ve been concerned about is just just how not, are we doing it too quickly? I think that’s still that’s a legitimate question. What are the risks to the system? We had this situation earlier this year, when the Australian energy market operator had to intervene in the national electricity market? It because it looked like there were concerns about the reliability of supply. Could you tell us about that? What’s your take on what happened there, Andrew?

Andrew Murdoch  06:19

Sure, we might just rewind a little bit and start with a little bit about how the market works. And the physics involved. It’s an incredibly complex system, both physically and commercially. So what we have essentially is a market that needs to match supply and demand almost instantaneously. We have very, ah, it’s not possible to store electricity as electricity. So even batteries are chemical storage, not not, not electrical storage. And so there’s a constant need to match supply and demand as accurately as we can. When demand exceeds supply frequency goes down, everything starts spinning a little bit slower. And when supply exceeds demand, the opposite happens. Everything speeds up a little bit. So there’s a constant need to match supply and demand.

Gene Tunny  07:09

Right? So I mean, what does this mean? Could this mean that it could damage some of our equipment, our appliances connected to the grid,

Andrew Murdoch  07:17

The system in Australia is very, it’s very geographically dispersed. We have power stations that are in the regions. And we have centralised demand in the major cities, capital cities, and also industrial cities like Gladstone, Newcastle, Illawarra, for example. And we need to manage the flows between the generation sources and the loads without overloading a particular network elements. So if we get too much power trying to flow through a particular part of the network, then we start to melt things. And so the market has to manage that. The national electricity market, the NEM, was established just over 20 years ago. And so, it, it has the objective of supplying power in the most economically efficient way to the consumer. Yeah, without breaching any of the technical constraints that it has to work with. So NEMO, the Australian electricity market operator operates a dispatch engine and the name dispatch engine. And that dispatch engine takes bids from each of the generators, builds a bid stack for each of them, and each of the each of the NEM zones, and the NEM zones roughly correlate to each of the states. And then that dispatching engine matches supply and demand and sets a marginal price based upon where the supply demand curve crosses,

Gene Tunny  08:45

Right. So this bid stack, your ranking the bids that come in, so see us energy or whatever, or the other generators say we will supply, what is the bid in terms of is it megawatts? Yeah, megawatts over whatever, particular period?

Andrew Murdoch  09:01

Yeah. So the unit of sale is megawatt hour, so that megawatt hour, one megawatt for an hour. But the bids are done on the bids are done every five minutes on a megawatt basis.

Gene Tunny  09:13

We will supply this much electricity at this price, correct? Gotcha.

Andrew Murdoch  09:19

And then the price is then set at the marginal, the marginal, the marginal bidders price, and everyone, everyone who gets everyone who bids below the marginal bidders price gets dispatched, and they and they they receive that price modified by their loss factor. And then anyone who bids over that price, then doesn’t get dispatched.

Gene Tunny  09:37

Okay, so it’s the marginal bidders price. So that’s the price that was offered by the bidder that they need the last bidder, the marginal bidder, to make sure that the supply of energy matches the demand. Correct? Yeah. Okay. Gotcha. And so everyone, all of the energy supplied, up to there that all gets the market price.

Andrew Murdoch  10:06

Correct. Now the bidders can bid anywhere between negative $1,000 and $15,100 per megawatt hour. So there’s quite a large range of permissible bids. Yeah, the reason for the negative bids is so that if you’re a thermal unit, a coal plant, you have a large cost associated with coming offline. And coming back online, so you will accept for short periods, you’ll accept the cost of having to stay on and receive negative prices for your power. The purpose for the extremely high prices are there to provide an economic incentive to construct peaking plants. So, peaking plant might be something like a gas turbine that only runs maybe 2% of the Year, 3% of the year. So it needs those extreme prices to be able to cover its costs for the rest of the year when it’s simply on standby. In parallel with the physical market, there’s also a contracting market, which is essentially an over the counter market where a generator and a retailer will enter into an agreement to swap exposure to the pool price. So essentially, they that’s what agreements that synthetically generates a fixed price netting out the generators exposure with the with the buyers, the buyers exposure. The larger gen-tailers also tend to vertically integrate as well to manage their risk.

Gene Tunny  11:28

So gen-tailers their generators and their retailers as well, because we’ve got this. Yeah, we’ve broken up the market in Australia, haven’t we? We’ve got we’ve split generators from distribution and from retailers. And once upon a time they were all integrated, weren’t they? We had these electricity boards. We had southeast Queensland electricity board, and yeah,

Andrew Murdoch  11:52

Yeah. So back in the 90s. Yeah, the, the industry deregulated and competition was introduced at a wholesale level. And now we have retailers competing for our, our, our, our retail contracts. And then we have the wholesalers competing to supply to the, to the retailers.

Gene Tunny  12:12

So Andrew, this is fascinating. We’ve got this complicated market, where there’s generators bidding into supply electricity at particular prices, and we’ve got these, this wide band over which they can bid and there’s a negative. There’s a possibility of negative bids. So that’s something we’re seeing more of lately, we’re seeing these negative prices. And that might strike people as very strange, why we see negative prices. So we’re going to just sort of chat about that in a minute. But also, you mentioned that it could go up to what was it $15,000 a megawatt hour. But what happened recently was that they said no bids over what was it? $300 a megawatt hour?

Andrew Murdoch  12:52

Yeah, that’s That’s correct. That’s correct. So I might I might go through what happened in early June. Yeah, fascinating. It’s a fascinating story. So so it all, it all began when Russia was demanding payment for their gas in rubles, and that shell and Orsted and others refused to comply and Russia then made significant cuts to gas supply into Europe, which then obviously had an impact on the the global LNG prices. And because most of these cases of this gas is is connected to the LNG market through the the LNG plants in Gladstone. And we’ve seen netback prices on the East Coast go up as well. So if I reflect back to sort of 2011 2012, we had a spot price of gas that was largely following the cost of supply around $5, $6, $7 dollars a gigajoule. In in March, sorry, in June, we saw prices ranging from between $15 and $43. A Giga Joule for gas, so quite a significant increase over the over the cost of supply for for gas on the East Coast. Right. So

Gene Tunny  13:59

we’re talking many multiples of cost of supply and multiples of many multiples of what it was trading at previously.

Andrew Murdoch  14:06

Correct. Yeah, right. Meanwhile, we had a very wet summer, and that wet summer had the impact of restricting coal supply. So for example, Millmerran wasn’t able to mined coal for a significant period, period of time. And global coal prices also followed energy prices upwards which coal difficult to get and expensive. So last time I checked, thermal coal was trading at around $400 a tonne, which is which is incredible. Now concurrent with that, we had a third factor which was that a large number of plant was out of service throughout, throughout the country. So we had outages that are raring Bayswater, Loyang Liddell and keloid Sea. See, I believe there’s also an outage, just one vacay at the same time as well. So that was about 30% of the call fleet was out of service in in in June. So we do have significant capacity be taken out of the market.

Gene Tunny  15:01

So one thing that’s brought up and I don’t know, I should be careful not to necessarily attribute this to Matt Canavan because I’ve had Matt on the show before Matt, someone I chat with from time to time about these issues. And I’m hoping to get him on the programme again. But it may have been Matt that said that, look, they’re just not investing in this old coal fired power generation, because there’s a push to decarbonize. There’s all of this excitement about renewables, and they’re not doing the maintenance, so they’re not refurbishing the old coal fired power generation capacity. Is that do you know if that’s true, or do you have any views on that?

Andrew Murdoch  15:39

I do have a view. And I guess I take the view that we’re currently using a lot of coal in the country. And it’s great to decarbonize, and it’s great to reduce our reliance on coal, but it’s not going to happen immediately. Yeah. And my personal view is that there was a lot of decarbonisation to be gained simply by making coal plant more efficient, and more reliable. So I’m talking about things like, for example, reducing our reliance on Victorian lignite and transforming it that to higher quality Queensland black coal will have a significant impact on carbon emissions, just by the higher quality of the fuel being burned. The other thing we can do that is, in my view, an easy win is to transfer from 1960s 1970s subcritical technology to 2020 Ultra supercritical technology, or even better integrated combined cycle gas turbine technology.

Gene Tunny  16:38

What’s the difference? Is there an easy way to explain what the difference between those two different types of the whatever it is, it depends on its level of criticality or something

Andrew Murdoch  16:49

Subcritical versus super critical. So, So essentially, if you imagine a little paper wind turbine that you’ve made that in primary school, for example, and you blow on it, and it spins, now the harder you blow on it, the faster it will spin and the more energy that it takes. Yes. So essentially, what we’re trying to do in terms of making a steam turbine more efficient is to increase the pressure at the, at the steam turbine inlet. So essentially, the more energy we can put into the steam before it gets into the turbine, the more efficient the turbine will be. Now, the difference between subcritical and supercritical, interesting little point of physics is that subcritical boilers, the pressure is relatively low, and we we heat up and boil water, similar, similar to the way that the kettle works at home. We bought boiled water to make steam, a supercritical plant. So supercritical plants, there’s not a distinct boiling phase, we simply just heat it up, and it gets thinner and thinner. And that steam because it’s such high pressure has the properties of both a gas and a liquid at the same time. So okay, that’s so much. It’s not so much irrelevant to the physics of efficiency. It just has to do with how we designed the boiler and the steam processes.

Gene Tunny  18:09

Okay. So it’s good to know that, that this technology that came out of the 19th century or possibly even before it can be improved and yeah, okay. That’s good.

Andrew Murdoch  18:21

And then the other dimension to, to decarbonisation of coal generation is, is is carbon capture utilisation and, and storage. And my personal view, and I know, people have some very strong views on this, but my personal view is that there’s more to be gained in carbon capture and storage. Okay. Okay, good. Good. Yeah. So back to June. And I guess the next factor that we have to consider was that June was unusually cold. So we had the ninth of June, the low at Archerfield, was 7.9 degrees against the June mean of 11.8 degrees. So it’s not super cold, but just a little bit colder than usual. And that what that led for us all to do was at home turn on your air conditioners. And in Queensland, on the ninth of June, we reached a new record maximum demand for Q2, for quarter two of just over 8000 megawatts, which is 8.2%, higher than the ninth of June of 2021.

Gene Tunny  19:18

And was this the day that they were warning that they might have to restrict supply? They might have to be blackouts in some areas,

Andrew Murdoch  19:26

correct? Yeah. So that was when we got the loss of reserve notices from right. So and So. Yeah. So I guess moving to that. Obviously, as that demand supply balance started to started to move into, the into the zone of scarcity. The prices went up and hit the market cap of $15,100 per megawatt hour on a number of occasions. As I said, you know that that very high market cap isn’t for our current market design and necessary factor to encourage investment in peaking Last. However, there’s a, there’s a safeguard, there’s a bit of a safety valve on the on the on the system so that we’re not exposed to $15,000 a megawatt hour for too long. And that’s the cumulative price cap. So the cumulative price cap is just under $1.4 million. And that’s taken as the sum of the price in each of the five minute periods over the seven days preceding. So essentially what that does is it gives you a maximum exposure that, that, that that for, for energy buyers, and on the rationale that okay, you’ve had $15,000 for a little while, you’ve paid your operating costs for many years to come. That’s enough.

Gene Tunny  20:41

Yeah. So do we know? I mean, I don’t expect you to denote that I’ll be here. But do we know which was the plan? Or the bidder the marginal bidder? Do we know who was the marginal bidder and what they were bidding into? To meet the supply? Yeah, well, that showed to meet the demand to provide the supply.

Andrew Murdoch  20:59

So yeah, that’s publicly available information and can be achieved, can be obtained through an email. Now it changes for every five minute period. Yeah. Maybe a different person to tomorrow. So there is a lot of data to get through to to identify that. And yeah.

Gene Tunny  21:17

So sometimes, so sometimes it’ll be renewables will let in the during the day, and sometimes it’s coal, and sometimes it’s gas. Do we know?

Andrew Murdoch  21:23

Yeah, so typical, a typical day. So back when when energy prices were normal. Yeah, the marginal the marginal operator during the middle of the day would be either coal or renewables, depending upon depending upon how sunny it is or how windy it is. So on a, on a sunny, moderate day, in April or September, you might find that that solar is is is the marginal bidder, and they may be solar has a negative short run marginal cost, because every month for every megawatt hour of renewable energy that you produce, you also produce a large scale renewable energy generation certificate, which you can then sell for $30, $40, $50 a megawatt hour to to your retailer so that your retailer can meet their renewable energy target obligations. Or you might sell it to a customer who would like 100% Green Power, okay, so so they have a negative a negative short run marginal costs and can afford to operate with a negative spot price.

Gene Tunny  22:28

So they can bid into the NEM at a negative price so that they can sell that power, and then they get this certificate, which meant, so this is a subsidy from the government. Is this right?

Andrew Murdoch  22:41

It’s a subsidy from the energy consumer. So yeah, okay. So so our retailers are obligated to, to surrender a certain number of renewable energy certificates based upon our consumption. Yeah. And we obviously pay for that through, our through our electricity bills.

Gene Tunny  22:56

Gotcha. Yeah. Okay, that makes sense. Okay. Yep. Yep.

Andrew Murdoch  23:00

Then on a more moderate day, the coal plant will be the marginal, the marginal, bidder. Yeah. And they typically have a short run marginal cost in the order of anywhere between $15 and $30 per megawatt hour when the price is normal. Yeah, maybe not today. So then in the evening, you might see some of the gas plant come on. And again, sort of back to normal energy prices, they might have a short run marginal cost somewhere in the order of 80 to $100 a megawatt hour.

Gene Tunny  23:28

So we’ve got, we’ve got solar potentially bidding in negative, you’ve got coal coming in sort of at a you’re at a positive level, and then gas at a higher rate they’d be bidding in during the evening. Yep?

Andrew Murdoch  23:43

Correct. Yeah. So you’ve sort of got those natural price bands that fit around short run marginal costs. Now, then you can sort of add to that and elements of profit maximisation. So. So to actually obtain those high prices, you might not be all of your volume at your short run marginal cost, you might reserve some of that to try and encourage the price up a little bit higher. So yeah, so, essentially, yeah, your goal is profit maximisation. And if you’re, if you’re a gas plant, and you’ve got so many territories of gas to burn every evening, you’re going to try and bid them into the network at at at a at a price where essentially you, you’re going to use up all your gas for the maximum amount of revenue that you can possibly obtain in that evening.

Gene Tunny  24:33

Yeah, yeah. Okay. So they’re being strategic about when they bid into the market to maximise their profits and Okay, so if we go back to June so there was you talked about this cumulative price cap and did that kick in in June did it Yeah, correct.

Andrew Murdoch  24:49

So, yeah the cumulative price cap kicked in. And, and what what that did was forced amo to, to cap the spot price to $300 a megawatt hour. So, so we ended up going from a market operating as it normally would to a strict $300 cap. So which which sounds okay, however, the price of gas was $40 a megawatt hour, I beg your pardon, the price of gas was $40 a giga joule. Yeah, now, the short run marginal cost of a gas turbine is approximately 10 times its gas price. Okay, so, so essentially a megawatt hour of for gas turbine to produce a megawatt hour of electricity, it will it will consume, it will consume 10 Giga joules of gas. So, so 40 times 10 is obviously $400. So, if you’re a rational operator of gas turbines, you’re not going to be dispatching at a cost of $400 to to only receive $300 in revenue. So, so the gas turbine operators, rationally withdrew capacity, which was, which was not in itself sounds like a selfish thing to do, they needed to do that to allow a new AEMO to issue a lack of reserve notice, which then allowed AEMO to force the gas turbines back online. So, without that lack of reserve notice, they wouldn’t have been able to, to order the gas turbines back online, which is, which is what they do.

Gene Tunny  26:18

So they essentially they intervened in the market, they said you, you’ve got to supply this, we will direct you to supply this into the market. Correct. So the market and this is why people at the time were saying the market is essentially failed. And I mean, is that a fair thing to say that, look, the national electricity market, as it was originally designed, is no longer fit for purpose. I mean, if if you’ve got a situation where the the operator has to intervene and essentially take over and go into command and control, central planning style, is that, does that mean that whole system has failed? And we need to start it again?

Andrew Murdoch  26:55

Look I think I think, I think it’s a bit harsh to say that the market has failed, the market has operated extremely well for for over 20 years. And, and has has done an excellent job of balancing supply demand and, and facilitating private investment into the, into the market. And, and I guess modernising beyond state controlled power systems. It’s not perfect, though. And we have this situation, this extreme situation of four unusual events that happened that that was not foreseen. What was the scene was that these types of events will happen. And therefore we give, we have the cumulative price cap to act there is a safety valve to to allow a AEMO to intervene and suspend the market when when it’s appropriate. So yeah, so after a week, of, of regulated $300 A megawatt hour cap, then at most suspended the market and then set the price based upon previous bidding behaviour. But yeah, and that was essentially, essentially just to give time for people to go and have a few deep breaths and, and, and Reset, reset themselves and reset, how they were going to bid. In same way that, you know, in the share market, for example, a company might say, Okay, we need to have a market, we need to suspend trading of our shares, because we’re dealing with this issue, or we’re dealing with that issue. And every system has crisises, from time to time, and it is appropriate to suspend markets from time to time.

Gene Tunny  28:36

Yeah, I think that’s a that’s a fair point. Now, it looks like there was a close run thing, we didn’t end up having blackouts, which was good. I think they had some big industrial users reduce their demand quite substantially, didn’t they? But yeah, we did avoid blackouts of residential areas. I mean, I was concerned and I thought, what a terrible night because it was very cold at the time. Like, what if you couldn’t run your heater? That would be awful. So do you think could this happen again? I mean, how concerned should we be about this? Or do you think that the people running in the people in AEMO the people in the other agencies are overseen energy policy? Do they have this under control? How concerned should we be Andrew?

Andrew Murdoch  29:23

Well, I think look, I think it’s important to note that we didn’t have load shedding Yeah, and and you know, aside from some, some negotiated reduction of industrial load, AEMO were able to keep the lights on and the market participants were able to keep the lights on so. So that in itself is is a tribute to the to the people involved that hey, we we can as a as an industry collaboratively, do our job during, during these extreme extreme periods. Now, I guess, could the factors happen again, could the, could we find ourselves into in a situation where AEMO has to has to suspend them again? Well, the answer is yes. Because if you look at the four, the four factors, could we have very high gas prices? Again? Well, well, yes, they haven’t gone down, prices are still still expensive and Nord streams would drop to drop two to two, no deliveries into Europe. And the headlines coming out of Europe are more and more exciting. From day to day, and particularly as we move into the European into the European winter and into our, our summer, which is our our peak peak demand, very concerning. I feel that we’re globally under invested in gas exploration. We have very long lead times for project development from exploration all the way through to production is many, many years. There’s a reluctance by governments, policymakers, insurances, insurers and banks to support hydrocarbon projects. And so yes, I think gas, high gas prices will happen again.

Gene Tunny  30:55

Where would that be that exploration? Is Australia, one of the prime places you’d be exploring for for gas?

Andrew Murdoch  31:02

Oh, absolutely. Yeah. So so as I think, you know, we’ve seen We’ve seen Moratorium on on gas exploration in Victoria and New South Wales, which is reduced supply into, into into the Australian East Coast grid. There’s certainly a lot more gas in Queensland that that can be developed over, over time. So, so yeah, there’s there’s there’s, there’s a lot there that we have, we can we can contribute there. Yeah. Likewise, with coal. I don’t see. I don’t see global coal prices restoring to levels that we’ve seen in the past. I don’t think they’re going to take $400 a tonne forever. But like gas, you know, there’s reluctance in an even greater reluctance to develop and approve coal projects. Notwithstanding that, globally, we’ve consumed as much coal in the last 12 months as we’ve ever consumed. And that’s a reflection of increasing energy demand from developing economies, who are building coal fired power stations.

Gene Tunny  32:09

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

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Gene Tunny  32:43

Now back to the show. Right, so what about this concern about renewables? Is there a big challenge integrating them into the grid? Does that make the grid more unreliable? If we don’t have the backup the storage capacity, and it looks like we don’t at the moment, we’ve got coal fired power stations, they’re going to be progressively shutting down over the next couple of decades? How confident are you arecan manage that transition? And if you know, what are the what are the things we need to do to make sure it goes well, and we don’t end up with with loadshedding with blackouts from time to time.

Andrew Murdoch  33:32

Yeah, so renewables are complex. And the obvious thing to say on renewables is that, you know, solar doesn’t work when the sun’s not shining, and wind doesn’t work when the winds not blowing the challenge for us. I guess the the key challenges is number one, accessing the resource number two, matching supply and demand, making sure that we’ve got the transmission infrastructure in place to connect the generation to the to the to the load centre, noting that the generation is going to come from your is coming from different places to where it has come from in the past. And then, you know, dealing with storage, so I guess, to, to develop a system where we have the equivalent of baseload power from renewables, you first got to generate the power. Yeah, then you’ve got to store it, then you’ve got to dispatch it. So you’ve got three elements, where we where we would once have had one so so it is it is quite, quite complex. I guess in terms of accessing the resource and there’s a there’s a lot of really good work being done. If you look at the the growth statistics in solar and wind over the last five years has been fantastic. In terms of the, the the number of megawatts that has been added to the grid. It’s still it’s still not easy to develop these projects. You’ve got landholder interest to deal with. You’ve got the interests of traditional owners, you’ve got community interests and expectations. Some people love wind farms, some people don’t. And we each have a different, different view on that. And competing, competing land use is is another another issue. So moving moving through that, I guess, you know, land land acquisition and development approval environmental approvals is complicated for, for renewables projects are land intensive projects. And so and so therefore, therefore complicated from a renewals perspective in matching supply and demand. We have very limited opportunities for baseload renewable says obviously, hydro, but between snowy and Tassie hydro, pretty much tapped all of the hydro resources that we have in the country, there’s a little bit of biomass, particularly integrated with sugar mills, I think we can make better value out of waste to energy projects. So that is using the energy in waste to generate, to generate power. And we’re going to need to to develop massive, massive amounts of storage to cover an average 24 hour load cycle. So yeah, so pumped hydro, large battery projects, and we’re working on on on a very large pumped hydro project, and two very large battery projects that will contribute to, to contribute to solving some of these problems. Yeah.

Gene Tunny  36:18

Do you have any thoughts on what this bet the future with batteries will look like? Well, well, we all have to have something like the Tesla Powerwall. At home, will there be larger batteries? on street corners? I mean, houses going to? How’s it going to play out? What are your thoughts on where the technology is out at the moment? where it’s going? Yeah, are we actually going to have the, the the improvements, the technological improvements that we need? I mean, I remember reading might have been in Bill Gates his book on on the climate change challenge. And I think you were saying we need some, you know, multiple improvement in the efficiency of batteries. I don’t know if it was 20x was some big number in that we need to improve batteries by

Andrew Murdoch  37:03

Yes, I think I think we’re going to see a mix of projects. And we’re working on some very large projects, gigawatt scale battery projects. And, and these batteries are a two hour duration. So they’ll they’re really they’re these projects are really designed to harvest solar energy generated during the middle of the day, store it and then put it back onto the grid in the evening. And essentially dealing with that dealing with that peak load, I think you’ll see, you’ll see a lot of batteries at at a at an industry level as well, we’ll see projects on the fringe of grid utilise batteries a little bit more. So for example, a mine that is in an Outback community that might be supplied by a long skinny transmission line that doesn’t quite have the capacity to serve the mind. So the mind will put a battery in trickle charge the battery during the day and then use that battery to use that battery to cover the peak demands that the mine might have, they might also integrate their own solar in there as well to to self generate a little bit so so so we are seeing a lot of batteries within industry there for for energy management also helps with things like peak demand tariffs and other related energy costs. We’ll also see batteries at a household level participators as virtual power plants, so essentially what happens there is that you’ll you’ll go and have a battery that that you’ll instal in your house and your retail supply agreement will allow your retailer to control your battery and that will allow your retailer to use your battery capacity to trade a little bit of energy. They’ll they’ll harvest the harvest the solar from your roof and then dispatch, dispatch it to your house and then whatever’s whatever the Enders and overs are they can then trade onto the grid. So I think I think we’ll see them at all all levels are at wholesale level that at large industrial level and also at at the household level.

Gene Tunny  38:59

Right. Can we talk about that gigawatt battery? That sounds fascinating. And it gigawatts obviously, a huge amount of energy. So what would that actually power? Do you know? I mean, that I mean, I guess you you could estimate it based on household electricity use, but are we took like what sort of sized town are we talking about?

Andrew Murdoch  39:22

So to put it into context, the the Peak Peak Demand in in Queensland is somewhere between eight and 10,000 gigawatt hours. So let me start that again. So to put it into context, the peak demand in Queensland is somewhere between eight and 10 gigawatts during during high high demand. So essentially, it could contribute roughly 10% of the peak demand to the state.

Gene Tunny  39:51

Right. So that’s now this is going to be in precise because industrial use is a big part of demand but 10% of Queensland. So we’ve got about 5 million people. So that’s about that’s 500,000. People. So we’re talking. Yeah, I mean, that’s a that’s a city. Right. That’s a reasonable sized city. I mean, yeah. I mean, we don’t have any main gold coasts, for example. 500,000 people. Right. So that’s a big battery, then. That’s impressive. Yeah, it is a big battery. Yes. Okay. And so that’s the sort of thing we’d be, we’d be looking at, we’re looking at large batteries to back up the grid. And so without naming names, it looks like the people who are sort of involved in this, the the companies involved in this are looking at options like this.

Andrew Murdoch  40:43

Yeah, absolutely. Yeah. I mean, investors look for opportunities to solve a problem. And yeah, that’s, that’s, that’s how capitalism works, of course, is that you, you know, you add value to the community, by by solving a problem, and then you get paid for it. So yeah, we have some some very smart clients who, who, who can identify these types of opportunities, and then deploy their capital to solve

Gene Tunny  41:06

them. Okay, because they know they can store the energy in the battery and then sell it into the grid when it’s needed. Correct. Okay. Uh, one thing I forgot to ask was about, if you’ve still got time, I know a token. Yeah, that’s right. Do we need something like a capacity mechanism in the national electricity market to to keep this coal fired power and gas fired power online? Because one of the complaints I hear is that with the way the markets been set up, and these, these certificates that mean that renewables can get beat in at negative prices, This undermines the viability of the coal fired and the gas fired generation, but we actually need them from time to time to be able to provide that was it peaking to do the peaking to provide that, that that energy when we really need it?

Andrew Murdoch  42:02

Yeah, well, I guess, yeah, we don’t specifically need coal or specifically need gas. To provide that firming capacity. We need dispatchable power. And traditionally, we’ve gotten that from from coal sources, and yeah, from gas sources. So so it’s not so much that we we need, we need coal, or we need batteries, are we need gas, or we need pumped hydro, we need something. Yeah, that will provide that, that, that, that peaking capacity, then if you overlay a climate change lens on it progressively over time, we need the carbon intensity of that capacity to reduce. Yeah. So back to your question about, do we need a capacity mechanism? It’s hard to see a market restructure being able to address the combination of geopolitical meteorological and physical issues that were were present in early, early June, those four factors still would have been the irrespective of what the what the the, the, the, what the market structure was, I think there are some tweaks we can make to the, to the system, for example, that market cap of $15,000 a megawatt hour, perhaps that should integrate down once it’s hit the cap a few times as you integrated down over time. So the cumulative price cap is not, is never, is never is never exceeded. And I think if you took a control systems engineering view to to how that price cap operates, you could put a feedback system in there that has integrated control down to a to an equivalent of that, of that price cap, which is averages out at about $800 a megawatt hour. So which is good money, if you’re if you’re

Gene Tunny  43:49

I think I understand what you’re saying. So you’re, you’re saying that maybe don’t let it get up as far as 15,000 or maybe once but then start scaling that, like just start reducing that so that they’re still getting the high prices when the market really needs energy, but they don’t get such high enough prices, that it ends up exceeding their cumulative cap, which means that I am asked to intervene and yeah, okay, great. Yeah. Okay.

Andrew Murdoch  44:18

Now, we also have another, a few other, let’s call them quasi capacity mechanisms that are in the system already. And that, as I said that that $1,500.15 $1,000 A megawatt hour is a significant incentive to make sure that you’re well invested in in pacity. And those that weren’t lost a lot of money. So the the other the other thing we have is we do have the contract market on the side. So if you’re an energy retailer, you can go and contract with with the power station to to provide you to provide you with with coverage and essentially they’re providing a physical slot. So every time that the pool price goes up, they will generate on your behalf and you’ll swap that exposure. So so that’s, you know, that’s a A non let’s call it a voluntary capacity market that already exists. And email also has the reliability and emergency reserve trader. And that’s a short term mechanism that whenever a emo feels that the based upon it’s more than just feeling it’s based on some some very sophisticated modelling that the the probability of unserved power exceeds point oh 2%, then they’re able to go and contract with generators to, to provide emergency power during a particular period. And that led to some some temporary generators being being installed in various different locations around the country over the over the past few years.

Gene Tunny  45:42

Temporary generators are they diesel generators? Oh, they

Andrew Murdoch  45:46

could be diesel could be gas. So yeah, so you can you can go to GE and order some trailer mounted 30 megawatt trailer mounted gas turbines. And there’s there’s fleets of these owned by hire companies that that go around the world? And, and, and plug holes in power systems here and there. So

Gene Tunny  46:05

very good. Okay. Yeah. So we were chatting about the capacity mechanism. And I think you’re saying that it’s not going to solve all the problems that that could that could arise, which would, which would cause which would cause issues? So I mean, what, what do we need to do? Do you have any thoughts on what needs to happen with the NEM.

Andrew Murdoch  46:28

So I guess, reflecting on the events of June, more energy would have been handy. So it was a cost of energy issue that that created these extreme prices. So whether that energy came from renewables or from gas or from coal, any additional gigajoules or megawatt hours generated onto the system would have had downward pressure on prices, and certainly would have helped. So there’s a couple of tweaks you can do to the you can do to the to the to the rules to perhaps prevent the accumulated price stress on ever been ever been breached? And that’s just, that’s just a function of mathematics.

Gene Tunny  47:07

That was what we were talking about before. Yeah, yeah, yeah,

Andrew Murdoch  47:10

looking forwards. We’ve got 8.3 gigawatts of coal plant sheduled to be taken out of the market between now and 2029. It’s like 2022. Now. So that’s a lot of a lot of firming capacity needs to be developed in that timeframe. If I look at the various different committed projects that are that are in the system, at present, I only get that only adds to 1.32 gigawatts of dispatchable generation required to cover that 8.3 gigawatts of retiring capacity. So so there is a bit of a deficit there in terms of project firming projects that are available. Now more projects will be be committed between now and then. And those projects I mentioned before, aren’t included in that 1.3 gigawatts. But yeah, these these projects we’re working on are in the development phase development phase for projects is, is very long takes many years. There’s a there’s a lot of hoops to jump through. Some of them necessary, some of them not so necessary. So it’s a bit like the argument in house prices and housing demand is, you know, is extreme high house pricing being caused by the the complexity and speed of approvals, or are there other factors that played personally my my view in power is that we could, we could certainly work a lot faster in terms of bringing these projects onto the onto the grid. If the approvals process wasn’t so bureaucratic and slow. Now, I think it should still be thorough. We certainly, we certainly want to have a thorough EIS process and a thorough technical review of of the contribution that these plants have on the grid. But I think there’s a lot we can do to make it a lot more efficient and perhaps remove duplication. And yeah, and and yeah, I guess add a little bit of I want to say common sense, but that’s not quite the right word for it, but

Gene Tunny  49:23

we do maybe a sense of urgency among some of these regulatory agencies. So you mentioned the EIS environmental impact statement. And I guess, yeah, trying to respond to the environmental issues that that’s obviously a major part of the whole process. Trying to satisfy the environmental regulator that you’re not going to damage the environment. You’ve got a plan, like if there’s a particular there’s foreigner that’s threatened, you’ve got a plan to manage that. So yeah, yes,

Andrew Murdoch  49:53

essentially. Yeah. And I guess, you know, to be fair to this is not just one one agency that the could improve. We see it across all all, all agencies. The the, I guess is there’s a desire for perfection, that that whether whether it’s whether it’s a technical approval or or a planning approval or a or traffic or whatnot, every, each of the departments come wanting to see a level of perfection in every every area, and sometimes it’s just not practical.

Gene Tunny  50:29

Yeah. Okay, I’ll, I’ll put something to you. And I’d be interested in your reaction. I’m looking at what’s happening with energy in Australia at the moment. And I see, we need all of this firming capacity, or we need to be able to back up the grid because we’re bringing in all these renewables. We’re coal fired power, leaving the system. And I mean, I look at this, and I’m very worried about whether we’re actually going to have sufficient power in five or 10 years time, I’m really worried about the reliability of the system. And partly, that’s because I’m concerned that we’ve promoted renewables into the system at a very high rate, but faster than the system can can handle it and not in conjunction with the storage. And we’ve done that for Well, we, I mean, I think, you know, the people are doing it for reasons that, you know, I think they, they think they’re doing the right thing, because it’s for the environment, it’s to tackle climate change. But I’m worried about what that means reliability of power in five or 10 years. And what that will mean for prices, How worried should I be? Am I just am I overly concerned? Am I too concerned? Or is that there might be an irrational, am I being biassed myself in analysing this issue? yet? So

Andrew Murdoch  51:51

I think we can’t oversimplify, or we shouldn’t be oversimplifying the debate. We are talking about complex physics and complex economics. And whether it’s in the media or in politics, there’s these oversimplifications of the answer is x. And depending upon what your political view or your commercial view is your put whatever noun you’re after the answer is to to suit your needs. I try and take a balanced view. Now, in terms of, Should we be worried at a technical level? So I’ll get back to those numbers. Again, there’s 8.3 gigawatts being retired from the fleet between now and 2029. So we’ve been through an incident where, essentially, yeah, it was more of an energy related issue than a capacity related issue, but capacity wasn’t far behind. So we, we have kind of almost just enough right now. Okay. So when we retire 8.3 gigawatts, and we increase peak demand, because peak demand continues to grow, you’re on. And we want to we want to continue to to industrialise and we want to continue to grow the population and grow the economy. And there’s a strong correlation between energy consumption and GDP. So that, you know that that margin is probably going to go negative. And so we should, yeah, we should certainly be prioritising firming capacity. And as I said, previously, whether that firming capacity comes from batteries from gas turbines, from pumped hydro is somewhat somewhat irrelevant. There’s probably still a role for coal to play, but it gets a little bit harder for for, for coal plant to, to provide, provide firming, in terms of, you know, should we be worried about capacity in the future? That’s, the answer is yes. And or just scroll down here to have a look, I was reading over the weekend, the HMOs. Electrical statement of opportunities, which essentially is a forecast of off demand that they use to inform the market. So they’re forecasting that the reliability standard will be breached. If there’s no further investment, that the reliability standards will be breached in New South Wales in 2025, and then Victoria in 2027, and Queensland and South Australia shortly thereafter. How web are if the FA Mo’s recommendations in the integrated system plan, which is a Mo’s map of the projects that they feel should be progressed, then that situation improves a little bit we don’t see the reliability standard being breached in in Victoria until 2027 28. And then, New South wails 2029 2030 But again linked to coal plant retirements,

Gene Tunny  55:05

I have to look at this integrated system plan, what are they? What are they saying in that are they saying, you know, these are these are the investments that are needed in what capacity and in storage and distribution. So,

Andrew Murdoch  55:17

so it deals, the integrated system plan deals with the transmission network more so, than the generation network, they do look at where they believe the, the more, the better renewable energy zones are on the grid and, and that informs a lot of the infrastructure. So that allows them to forecast where the energy is going to be coming from in future years. So it’s essentially feed into the regulated process. So once I emo identify a project that then allows the network service providers, so the power links the trans grids, to start the regulatory investment process, which then allows them to invest in these in these upgrades. But yeah, the timeframe between amo raising a project in the in the ISP and then a network service provider to actually construct and commission a plant is many 510 years in the making. So So these these are big infrastructure projects that take a long time to develop and construct

Gene Tunny  56:21

good one, I’ll check that out. I’ll check out this ISP and put a link in the show notes. One thing that one thing that’s occurred to me is that I mean, one, one possible way to avoid this, this deficit that you’ve you’ve described is, well, we just don’t retire these coal fired power stations, we keep some of them open or longer than is intended or was initial longer than amo thinks that other companies themselves think they will be currently be kept open for. But what that might mean is that’s where that capacity mechanism could could be useful, possibly, but then that means that we’d be paying then just to have the generation available if it’s needed. And that’s why there are accusations that our capacity mechanism would be coal keeper. Have you heard that? Yeah. So

Andrew Murdoch  57:06

I’ve certainly heard the call keeper fever slogan. Yeah, look, it’s it’s interesting. I’d have to think about that a little bit more as to what would a capacity credit encourage a coal plant to stay open more so than the current market structure? I guess the economics of ongoing operation of coal plants on one hand, you’ve got back to a world where energy prices are, quote, unquote, normal. On one hand, you’ve got a very low cost of operation, then you’ve got four, seven production. So you’re you’re it’s true baseload and the volumes are higher. On the other hand, you’ve got ongoing refurbishment costs. So I think callide spent $130 million or so on the refurbishment of one of the B units recently. Yeah, that’s a lot of money. And so you know that that’s an that will keep that that plant operating for another five years for argument’s sake. So it’s always it’s always that economics of, you know, when you’re between major overhaul cycles, and you keep going until the until you hit the next major maintenance. And then and then you make a decision. Do I spend $100 million? Upgrading? Yeah. refurbishing, economy or economy economizer tubes or whatnot? Or do you or do you at that stage retire the plant?

Gene Tunny  58:29

Okay. Okay. Look, I better I only ask one more question, because I’m so long, because this is fascinating. And I really liked the point you made about how, look, let’s not look at this, simplistically, it’s too easy just to come up with some simple diagnosis of what’s going on. And as economists we like to do that, because we like to cut through the complexity. We like to have a simple, elegant model of what’s going on. But I understand Yep, you’ve got to think about the physics and all of this as well as the economics that makes perfect sense. My final question is about EVs. Are we ready for EVs in the network? Will we be able to provide the power? Will we be able to provide the necessary charging infrastructure? And one thing I should I’m interested if you’ve got any thoughts on it is how can EVs help us have a smarter grid? Because I’ve seen that in I think it’s in California? Is there a company that lets people who have EVs they can have that use them as a bit of a mini as battery? And then they can they can even start selling power to other people? I don’t know if you’ve seen that sort of thing. So if you could just talk about EVs?

Andrew Murdoch  59:38

Sure, certainly certainly. Great. I just want to go back to the Nikah the the complex physics and complex economics. I just want to make one other point. There’s also an ecological impact as well as your Yeah, is it every choice we make, it has an impact on cost. It has an impact on reliability, but it also has an impact on carbon emissions. So truth is balancing the three and three issues are all common. looks. So back to EVs. Yeah. So, so So yeah, fascinating stuff. And, and obviously, you’ve had a couple of guests over the last couple of weeks who have had some some interesting things to say on EVs. But yes, so there are there are companies who are planning on using the battery capacity in your Eevee, as part of that virtual power plant mechanism that I was talking about, yeah, with a battery on the wall, that you can also extend that by plugging in your Eevee and allowing them to use that charge. So maybe you’ll come home from from from work, you’ll drive into your garage and about this time of evening, that’s, it’s 6pm, here and in. So you might come home and plug in in the evening, and you might still have 80% of your battery charges there. So the the your retailer might use that to cover peak demand during the evening, rather than drawing from the grid. And then later in the night, when peak demand goes off, and power prices get a little bit cheaper, maybe the wind starts blowing a little bit, then your your retailer will then fully charge your car. So the next morning, you get up and unplug and away you go to work, and you don’t even know that it’s happened. So So yeah, so these kinds of things can be can be done, I noticed, I was reading on LinkedIn, I think this morning, the the Tesla’s in in California, over the last couple of days have been setting you people will go home and the Tesla comes up on the on the Tesla display. You know, the California grid is about to experience peak demand, you might like to charge your car later in the later in the evening. And the Tesla system has an ability for you to time to essentially tell it when you want to leave and it will optimise the charging process a to maximise battery life and also to minimise power costs and impact on the grid. But I guess in terms of physical impacts, look, if we all go home in the evening and plug in our EVs in the evening, then that’s going to contribute to peak demand. And that’s not going to be particularly helpful when it comes to reliability of supply. Yeah. But if we time the charging of the car to be a little bit later in the evening to in the morning, three in the morning, and as I say the Tesla’s can do it. And I’m sure the other EVs can do it as well, with smart charging, then, then the impact on the grid will be will be minimal, because we’re making better use of matching, we’re using the cars to to maximise supply and demand.

Gene Tunny  1:02:31

Right, based on so how does it work? So the you mentioned Tesla, so they’re looking at what the the power prices are, they’re getting a signal from the market. And they’re saying, Oh, look, you might you might want to charge later. Because there’s a lot of demand for power at the moment. And prices are high.

Andrew Murdoch  1:02:53

Yeah, so in the case of the California one it was it was more around reliability. So okay, as I understand it, California is going through a situation that was similar to what we went through June, where they’re, they’re issuing lack of reserve notices, or whatever the California for the lack of reserve notices. And so it’s more so more related around around system system reliability, rather than rather than price. Okay, but there’s no reason why it couldn’t also respond to price if it’s integrated with the with your retailers.

Gene Tunny  1:03:23

Okay. That’s, that’s cool. And just finally, so yeah, so I guess you answered the question. You’re saying that, if we do it intelligently, if there’s some if there’s some way with a possibly buy it, that, I guess it would be via it that these things are charging at the right time? During the night? They’re not all charging when we get home? That they’re delayed, then yeah, it’s possible we we should be able to handle it in your view.

Andrew Murdoch  1:03:54

Yeah, yeah. Yeah. So that’s not to say that won’t have any impact that will have an impact, because there’s more energy that the power grid needs to provide. So if it is all coming from from renewables, and that’s more solar farms and more wind farms, because we still have to produce more megawatt hours of energy and transmit them. Yeah, so it all contributes to load growth. And there will be there will be EVs that do have to be charged during the peak because I’ve just come home or maybe I’ve driven home from a couple 100 kilometres away. Yeah, 2% left in my battery. And in an hour’s time, I’ve got to pick the kids up from school. So I’ve got a charge now. So there will be a contribute contribution, but it won’t be won’t be everyone most of the time for most of your daily cycling will be able to charge during during periods. When when it’s not peak demand. And do

Gene Tunny  1:04:39

You think this will be done automatically? Will there be the computer the in on the in the car or and it connects to the grid and then this will all be managed and coordinated across all of the EVS out there and yeah,

Andrew Murdoch  1:04:51

Yeah, so So Rena did a study. And they found that when people were just left to their own devices, people would come home and plug in Yeah, 30% of all charging happens during peak periods. Yes. Because that’s when you come home. If they, if they then get gave a 10 cent per kilowatt hour incentive, this dropped 10%. So people started thinking about it, I want to save some money or save some money on my power bill. So I’m not going to I’m going to programme car did not start charging into after peak period. And then if they handed over control of the charging to the retailer, then that peak demand use dropped to 6%. Yeah, so Gotcha. So automation is definitely the way and who wants to come home and think about oh, what time should I charge the car? Yeah, I can just plug it in and have have the AI work it out for me. And as long as I don’t know, if I don’t have to think about it, it’s easy.

Gene Tunny  1:05:44

Yeah. Extraordinary. Okay. We’ve, I think we’ve probably come to time because yeah, we’ve had a great chat, Andrew. And, yeah, I’ve really enjoyed this conversation and learned an incredible amount. So it’s been incredibly valuable for me. Any final words before we wrap up? Oh, no. Look,

Andrew Murdoch  1:06:04

thank you for the opportunity to talk. As I say it’s a complex system. We’re balanced. We’re balancing our contribution to climate change. We’re balancing economic development. We’re balancing physics, we’re balancing reliability, and we’re balancing affordability. So it is it is, it can’t be over simplified.

Gene Tunny  1:06:20

So I think that’s a really good way to to put it. Andrew Murdock, Managing Director of RK energy. Thanks so much for your time. I really enjoyed that conversation. Thanks,

Andrew Murdoch  1:06:29

Joan. I appreciate the opportunity.

Gene Tunny  1:06:31

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

Credits

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

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Podcast episode

EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill  – EP155

An electrified vehicle fleet will mean lower fuel tax revenues for governments and possibly greater traffic congestion as EVs are cheaper to run. Governments around the world are having to reassess how they charge for road use and one Australian state, Victoria, has introduced an EV tax based on distance traveled. In Economics Explored EP155, Marion Terrill from the Grattan Institute discusses what a rational road user charging system would look like. She also talks about Grattan’s truck plan, which is designed to get high polluting old trucks out of major Australian cities.  

This episode’s guest Marion Terrill is Transport and Cities Program Director at the Grattan Institute. Marion is a leading transport and cities expert with a long history in public policy. She has worked on tax policy for the federal Treasury, and led the design and development of the MyGov account. She has provided expert analysis and advice on labour market policy for the Federal Government, the Business Council of Australia, and at the Australian National University.

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

Links relevant to the conversation

Marion’s bio: https://grattan.edu.au/expert/marion-terrill/ 

Grattan Institute on Twitter: @GrattanInst

Marion’s Australian Financial Review article “Electric vehicles: Feds should pave way for gold standard road user charges” (pay-walled)

Grattan’s 2019 report Right time, right place, right price: a practical plan for congestion charging in Sydney and Melbourne

The Grattan truck plan: practical policies for cleaner freight

Previous episodes featuring Marion:

Megaprojects with Marion Terrill from Grattan Institute | Episode 62

Unfreezing Discount Rates with Marion Terrill of the Grattan Institute | Episode 42

Transcript: EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill  – EP155

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

Gene Tunny  00:00

Coming up on Economics Explored.

Marion Terrill  00:01

As we get more and more electric vehicles, great in many ways, and they’re much cheaper to run than internal combustion engine vehicles. But if they’re cheaper to run, it means people will be inclined to drive more. So I think unless governments take some kind of action on congestion, this is a recipe for gridlock.

Gene Tunny  00:26

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 155. On road user charges, what’s the right way to charge for road use, particularly as we switch to electric vehicles and governments lose revenue from fuel taxes. My guest this episode has been thinking a lot about this. It’s Marion Terrill, who was transported cities programme director at the Grattan Institute, a leading Australian Think Tank. You may recall I previously spoke with Marion and on the podcast, we spoke about mega projects in Episode 62. And about discount rates in Episode 42. I’ll put links to those episodes in the show notes along with other relevant links. In the show notes, you can also find out how you can get in touch with me. Please let me know what you think about either Marion and I have to say in this episode, I’d love to hear from you. Right now from my conversation with Marion Terrill on road user charges. And we also chat about Grattan’s new truck plan for Australia. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Gene Tunny  01:47

Marian Terrell from the Grattan Institute Good to have you back on the show. 

Marion Terrill

Hello, Gene. 

Gene Tunny 

Yes, good to see you, Marian. I’m keen to chat with you about the piece you had published in the financial review last week on road user charges. And also I know that Grattan released a new truck plan. So I’m keen to, to chat a bit about that as well. Now in the financial review, last week, you had a piece that was titled, Feds should pave way for gold standard road user charges by and by feds, you mean federal government. And there’s a sub heading here, which may have been written by their sub editor. I’m not sure. But we can. I’d like to sort of launch off from this. It says that regardless of what the High Court decides, fuel excise duty, should be killed off quickly and give way to a smarter way to pay for roads. By mentioning the high court you’re referring to this. There’s a challenge isn’t there that some people are challenging? This new Victorian electric vehicle tax and the Commonwealth has got involved? Can you tell us about that, please?

Marion Terrill  02:58

That’s right. So Victoria introduced new charges on electric vehicles in July of last year. So, the rate that they pay is 2.6 kilometres, or sorry, 2.6 cents per kilometre for an electric vehicle and 2.1 cents per kilometre for a plug in hybrid. And New South Wales is also planning to impose similar charges from 2027, or whenever electric vehicles make up 30% of new car sales, whichever comes sooner. And there was a plan to do this in South Australia. But when the government changed, I understand it’s been canned. So but I think there is, there has been, some coordination across the states to do this. That’s what the charge is. And then what’s happening here in Victoria, is that electric vehicle drivers have been up in arms about it. And two of them are challenging it on constitutional grounds. And so they’re saying, as I understand that this the argument is that it is a tax on kilometres is actually an excise or ad valorem tax, if you like for your business. And so this all hinges on how broadly or narrowly you define an excise because only the Commonwealth can charge an excise. So that’s the basic argument. I don’t know how that will play out. There would have been other ways to implement this tax or this charge this charge on electric drivers but this particular method of charging it does permit space for this constitutional challenge.

Gene Tunny  04:54

Right and what was the justification that these EVs aren’t paying, well, there’s no fuel excise paid by the owners of the EVS because, well, they, they’re powered by electricity. And presumably, this is the reason why the hybrid charge is lower because the they would be saying, well, they are at least contributing somewhat in terms of the fuel excise the 44 cents a litre. Yeah, so that must be the justification. But it is a bit cheeky, isn’t it? Because it’s the federal government that collects the excise, isn’t it? Is that right?

Marion Terrill  05:31

That’s right. That’s right. It’s a little bit of a rat’s nest here. So the, the rationale is, as you say that these drivers are not paying fuel excise, therefore, they’re not contributing, some people say contributing to the upkeep. But it all goes into one big pot really. But the other the other way of making that argument is a fairness argument to say, Well, how is it fair for this driver over here to be paying like this, and this driver over here not to be paying? So those are the arguments, but I think there is a further argument that doesn’t get so much of a public hearing. But that, and I guess this is what I’m pointing to in my, in my article that really, you would imagine that fuel excise is a even though it’s kind of not declining. Today, it is in structural decline as the fleet electrifies. And so it will become increasingly unfair because the because electric vehicles are more expensive to buy, the people who most quickly get out of paying it, those who can afford a more expensive vehicle and, and that I think that will become acute as a political pressure. And so the federal government has got the option to let it just wither on the vine, and become kind of increasingly unpopular. Or another option is just to say, Okay, we’re gonna kill it off now. And we’ll hand over the responsibility for taxing the taxes on driving to the States, but we’ll also hand over a funding responsibility to go with it.

Gene Tunny  07:17

Yeah, yeah, I think that could be there could be some attraction there or there could be an attractive option. I mean, it’s good to have that funding, the ability to fund it and the spending responsibility in the same place. Okay, so yeah, I guess it is a big issue, isn’t it? Because the is it 11 billion a year or something is is raised in fuel excise by the Commonwealth? Yeah.

Marion Terrill  07:41

That team in net fuel excise. It’s the actual amount is somewhat higher. It’s about 19 billion, I think. 18 or 19. But then seven, and a half of it is, is rebated throw the fuel tax credit. So the net amount that 10 million, so it’s, it’s about five? Well, yeah, it’s sorry, it’s about two and a half percent of Commonwealth taxman news, the net amount?

Gene Tunny  08:10

Yeah, and you mentioned all goes into the same or a bit the big pot of money that is consolidated revenue, so it’s not earmarked or hypothecated. Is that correct? That’s right.

Marion Terrill  08:21

Not in any meaningful way. It was last hypothecated in 1959. Right. 59, it was hypothecated. There is a little bit of it, that’s hypothecated. So this is getting a bit in the weeds, but basically, it wasn’t indexed for a period from 2001 to 2014. And when the indexation restart, and the index amount is hypothecated, but it’s gonna not meaningful, because it’s such a tiny amount and far less than what the current spends on roads.

Gene Tunny  08:58

Okay. Yeah. I’ll have to just look at that that small bit, just to make sure I’m across all the detail. Yes, because there is that common understanding. People seem to think that well, this pays for roads. And I mean, I guess it does go into the pot. And so it does help pay for roads, but then you can’t say that any that particular dollar raise from fuel excise is what actually pays for roads, because money is fungible, as they say,

Marion Terrill  09:22

Because the amount that is raised through fuel excise and about 10 billion is more than the Commonwealth spends on transport infrastructure, which is usually it’s lumpy, but it’s usually seven to eight. So, I mean, kind of where you draw those lines, I think, is an open question. But yeah, the amounts Don’t bear any relationship to one another.

Gene Tunny  09:44

Yeah. Have you looked at whether the fuel excise and motor vehicle registration fees at the state and territory level combined? Do they add up roughly to what is spent on roads by federal and state governments? I heard that some One quarter that I’ve heard or quoted in the last few months, but I’ve never been able to verify whether that’s the case or not I’ve ever seen that

Marion Terrill  10:08

We have been looking at that sort of thing. And the short answer is no. Okay. What we have noticed those and as a trend is that the the share of road related tax revenue raised by state seems to be rising. But it’s harder to discern a trend on spending, because it is so lumpy, from, as you know, from one year to the other, to the next, it does jump around a bit. So, which would be a problem if you did try to hypothecated? Actually, because they’d be it’d be quite difficult to predict how much you’d have to spend, but you do need to predict because the roads take time to plan. So yes. They there’s, there is a lot of, or there’s a lot of reasons why Hypothecation isn’t a great idea, but people do really believe that. It’s hypothecated. And even if not formally, that it’s somehow it is informally hypothecated.

Gene Tunny  11:12

Yeah, yeah. Yeah. I’m not a big fan of earmarking, because it reduces your, your flexibility with your budget. Okay. Do you know what’s happening in other parts of the world? Marion? I mean, you look, you mentioned Victoria’s, it’s tried to impose this. EV tax. Sa was going to but then there was a change of government, New South Wales is considering it. Are we leading the world on this? So do we know if other countries are looking at this sort of thing as well?

Marion Terrill  11:43

I’m not too sure. Who is I think, at the time when the Victorians announced this tax, there was a lot of media. And it’s sort of painting in quite extreme terms, even calling it the worst EV tax in the world. That I think a lot. I mean, we’ve been looking at the different fuel excise type regimes around the world. And, and sort of, I think, by global standards, a couple of things I’d say on this and one is we don’t charge much in fuel excise or similar types of taxes compared to other countries, particularly similar countries to us. And we see genuine the like, and we also don’t have any congestion charging or that kind of thing. So on the whole driving, is, appears to be relatively lightly taxed here, compared to in many other countries.

Gene Tunny  12:42

Yeah, I’ll have a look for whether there’s any OECD table. I seem to remember one years ago. Is it the case that, UK has high excise or taxes on fuel? I’m guessing the Germans probably do.

Marion Terrill  13:00

Yeah. Continental Europe does. Yeah. Sorry. I don’t know off the hoof.

Gene Tunny  13:06

level. I’ll have a look. Yeah, I agree with that general point you made? I think that yeah, I have seen some data on that. So that’s good. might be good to go on to what you’re arguing in that piece? Because you said that? Well. Yeah, this EV tax? Well, it’s probably not the way you resolve this problem we’ve got with this The problem we’ve got with fuel excise duty disappearing. This EV tax probably isn’t the right way to go about addressing what you might see as a an issue there. Could you explain what your argument is, Marion? I mean, what do you think would an optimal policy would look like and first, am I right that you don’t agree with this EV tax just for just to be clear on that.

Marion Terrill  13:56

I don’t think it’s the worst tax in the world. I think it’s fair enough for the states to raise this revenue. And I would also say, given that you’re running an economics podcast, perhaps I can make the point that the people’s, like if you think about fuel price, elasticities, they’re pretty low, are not likely to change their behaviour much in the presence of a modest tax. And this is very modest. I think the estimates are that the typical driver might pay $300 a year. So I would have thought it was a reasonably efficient base. And I think it is arguably laying the groundwork for it to become to spread to other types of vehicles and to be paid at a higher rate over time. So I think all of that is fine. I guess I think well, if you just think about it as a revenue base, that you know, this low elasticity is a good thing. But I think a lot of the debate does sort of invoke the fact that EVs are better or better for the community because they aren’t producing the carbon emissions. And so they should be advantaged not disadvantaged. And I think that that’s in the absence of an economy one carbon price. That’s absolutely right. But I think in the the point of taxing driving, that I think makes the most sense is to try to bring about an efficient use of the road network. And by that, I mean that you should be charged, little or nothing, if you’re driving at a time of day in in a place where there’s no congestion. But if you want to contribute to congestion in peak hour, then you should be paying for it. So here, it’s an externality argument. So what you really want to do is set it at a low rate, so that you just deter that driver who can be most flexible, who cares the least about being there, they’ll put their trip off or take it another way. And that’s an efficient outcome. But if you do that, you won’t raise much revenue. So I think that governments are confronted with a choice. But I suppose I think in the road network is so important to the economy and society that what you really want is the latter. So I would like to see road user charges that vary by time of day and location, and vehicle size. So the Commonwealth can’t impose that kind of charge, because it cannot charge different Taxs, to different parts of the country, under the Constitution. So this has got to be in state based charge. And so that’s why I think, well, perhaps it is time for the governor for the federal government to step out of its role in taxing driving and hand that job over to the States because the technology has now improved. And it’s it is now much more realistic for states to do sort of fair and precise charging in a way that probably wasn’t feasible, even 10 years ago.

Gene Tunny  17:23

Right. So by the technology has improved. You mean that there are ways of tracking people. I know that if you’re going on toll roads here, in Queensland, you’ve got a tag or something that pings or that that tells the toll road company when you go on the toll road? So imagine there’d be some device, is that what you’re thinking?

Marion Terrill  17:47

Or you can do that, I think, look at the I think the most foolproof way is to use number plate recognition cameras, which are more up to date technology really than those tollgate. But I think people are foreshadowing when we’ll be able to use GPS to do this. Now, my, my feeling that that is it will happen. But we’re not really there yet. That no country has used GPS to introduce a road pricing scheme across the board. But they’re so let’s sort of see what Singapore does, really, but I think that that is becoming increasingly likely, but number plate recognition cameras, much less kind of unsightly and obtrusive than Tollgate entries. And so that that’s definitely a way that you can do it. In the shorter term.

Gene Tunny  18:45

I should have thought of that because I’m a big fan of British crime shows and often they will catch people with that, that number plate recognition, technology or they’ll know where they’re going. So I should have thought about that.

Marion Terrill  19:00

It has improved a lot and become that technology. So yeah.

Gene Tunny  19:03

Okay. And one point that one of my guests will Tim who was on the show, last week I was chatting with about EVs. One thing he was concerned about is this issue of well, it’s surveillance where our privacy is being compromised. Have you thought about that at all? Is that often raised as an objection to this sort of thing?

Marion Terrill  19:25

Yeah, I think it’s, I agree with him. I think people are very quick to dismiss it. It is actually another reason why I’m dubious about GPS technology, because there’s sort of a few different ways in which Surveillance can be a problem. One is that the government can surveil you. The other one is the company can surveil. Yeah. And maybe market at you or, you know, interact with you in a unwelcome way. So both of those are concerns I think. So really what you want is the, you need to set up a structure I think where you have the information, that’s the image of you, or image of your vehicle is sent to a place in the encryption key that links that image to you is in a different place to protect people’s privacy, but I do think in this country, we do have, we have had a long history of the, of the, of privacy. The Privacy lobby, I think, is quite effective at unraveling government ideas, too, to act in ways like to make use of technology in ways that could be prejudicial to people’s sort of freedom to go about their lives anonymously.

Gene Tunny  20:52

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

Female speaker  20:57

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Gene Tunny  21:26

Now back to the show. So Marion, have you looked at how this is working? Or how road user charges have worked in other countries? I mean, you mentioned? Well, I mean, there’s the UK. I mean, there’s the the infamous congestion charge in central London. That’s probably the only one I’ve experienced. But I understand. Well, I’ve heard that there’s this sort of thing is there this sort of thing in Singapore and is it germany you mentioned?

Marion Terrill  21:55

Well, it’s interesting this, there’s established congestion charging in quite a few cities around the world. So Singapore was the first London, Stockholm and other countries, other cities are thinking about it. But what’s happening these days is now low emission zones are coming in. And so in London, for example, the low emission zone is layered on top of the congestion zone. And really these many, many, many cities are doing low emission zones. And they kind of like a coordinate around the central part of the city, that now the motivation, we’re recommending that for the major capitals here in Australia, because the the effect of exhaust pipe pollution from trucks is so terrible for health. But it’s interesting, because in some cities like Milan, for example, there is a low emission zone, but the reason for it is to preserve the beautiful buildings rather than to preserve people’s health. So there’s, I think there’s certainly a significant, a significant global movement towards this sort of thing. And it can usefully be combined with congestion charging, because what you’re really doing is you’re trying to deal with two externalities at once. And you can calibrate your instrument to do both of those things. Because where there’s a concentration of vehicles, that’s where you get obviously, congestion, but also concentration of exhaust pipe pollution.

Gene Tunny  23:28

Right. Okay. Okay. Yep. So with the congestion charging, that’s almost like a syntax is it or it’s a form of corrective taxation, or you’re making the driver face the marginal social cost of them going on the road network at that particular time in that particular place?

Marion Terrill  23:50

Yeah, that’s right. And people have different sort of strength of desire to use the roads at peak periods. And so it would be a poor result, to put off too many people. So don’t want to set your charge too high. And you certainly want someone who’s going to a job interview or an important appointment, you don’t want to put them off. But if you are thinking about someone who’s perhaps a retired person going to a medical appointment, for that person, it may be very low cost to do it at 11am, not 9am. And so to send a signal to such a person, to that gets them to take into account their contribution to slow it not only being slowed down by everyone else, but also to slowing everyone else down. And I think this is going to become more acute Gene because as the as we get more and more electric vehicles, great in many ways, and they’re much cheaper to run than internal combustion engine vehicles. But if they’re cheaper to run, it means people will be inclined to drive more. So I think unless governments take some kind of action on congestion. We really are. This is a recipe for gridlock. I think is very strong for governments to act on congestion charging, and preferably to do so early. And so that to go back to the we were talking before about our electric vehicle chargers. Yeah, I think, you know, this is the side of it that the current charges in Victoria and on the table elsewhere, don’t really take account of at this point 

Gene Tunny  25:31

Right Yeah, I look, I think what you’ve, what you’ve said, and what you wrote in that piece is great. I mean, as an economist, it definitely appeals to me. I’d like to see the model, though, of course, as you would do, you know, if anyone’s developing this, what this could look like, what the parameters would be, what those charges would be. When, I mean, how would the prices be set? Would it be? How regularly they would they be reviewed? Is there some algorithm involved? Have you thought about how this would work? In practice? Is anyone developing a model for this, Marion?

Marion Terrill  26:08

Yeah, we’ve developed a detailed model for it, actually. So yeah, we published it in 2019. So we designed in detail, a congestion charging scheme for Sydney, and Melbourne and one for Melbourne. And what we did was we in terms of phasing, just start with a cordon around the CBD. And we worked out exactly where the cordon would go, and how many detection points you would need. Look through all the different technologies that’s really rare came to the view that number plate recognition was the way to go. And then we looked at the, we looked at traffic data and worked out when peak hour and when the shoulder period should be. And finally, we worked out the what we thought were the appropriate charges to levy taking into account the cost of public transport into the CBD. And then we worked with Veitch Lister Consulting who did the demand modeling for us to see what the impact on congestion would be? So all of that detail is in a report called ‘Right Time, Right Place, Right Price’ up on the grattan website. So we did do that. And so that was on congestion charging. I guess. This week, we put out a report on trucks, Grattan truck plan, and one of the recommendations was to introduce a low emission zone. And we didn’t scope that up in detail, because I think it is the subject for reporting its own right. It’s quite a complex area. But we are, we’re planning to do that report and publish in 2023. With detailed design for how to, and this takes into account, things like how much proximity matters to a main road. How much sort of how much difference it makes when when you’ve got a more vulnerable population in one way or another. So and what kind of mitigations you can take in terms of sort of greening and that sort of stuff, so that we can come up with a detailed design, but at this point, our recommendation is that trucks manufactured before 2003 should be banned from the densely populated areas of the major cities.

Gene Tunny  28:30

Yeah, I wondered about that. And I was stunned. Looking at the figures you had in that report regarding how much worse they were or trucks that were, you know, over 20 years old, how much worse they are in terms of the the toxic particles that come out and the in the exhaust? Or how much worse than more modern trucks? Is there some reason you chose 2003? Was there some change in technology?

Marion Terrill  28:58

There was. Yeah, so the pollution levels for trucks are the international standards and known as Euro standards. And before 1996, there were no standards at all, so anything goes and those trucks are the worst. So a pre 1996 truck emits 16 times as much particulate matter, and eight times as much of the poisonous nitrogen oxides as a truck sold today. And then in the when the Euro standards were first adopted in Australia, Euro one the first level, operated until 2003. And that is better than nothing but still, by today’s standards, very lenient standards. And so, the reason all this matters is that more than a quarter of the trucks on the road today 2003 or earlier, and 14% of them are these pre 1996 ones which are particularly toxic. And that’s if they’ve been properly maintained, some of them will be worse. So, over time the standards have increased have become more stringent. At the moment, we’re on Euro five standards, we have been since 2011. We’re a decade behind kind of most major markets, which have been on Euro six for a long time. And so we’ve been agitating to get on to Euro six. But even this year, Euro seven is coming out. So we’re, we’re so far behind. And so of course, the track operators don’t really have an incentive to adopt these standards, because it costs money. So it really is a matter of for government regulation to prevent the interaction of really dirty old trucks with densely populated areas.

Gene Tunny  30:51

Yeah. So have you thought about how this would impact the industry? I’m sure you have. I’m just interested in your thoughts on it. Because I mean, there could be significant short run costs, you could have a lot of probably smaller operators, leave the market if they can’t use their truck anymore. I mean, imagine that the bigger operators have more a more modern truck fleet, but then there’s a lot of smaller operators that have the older trucks. Could this impact our supply chains? I mean, we’ve had all the logistics problems this year and associated with people being off work or in isolation due to COVID. Things haven’t been turning up at the supermarket. Have you thought about how this would? What impact would have on the industry and how that could be mitigated Marion?

Marion Terrill  31:36

Yeah, we have some I’m very alive to this. I think you’re absolutely right, that the big fleets of trucks are generally pretty new. And they’re the ones that kind of get sold on and feed through the chain. So at the at the oldest end of the spectrum, it is a lot of operators who might struggle to get them to upgrade the truck. So a couple of things, I’d say. One is that we don’t really the compromise that we thought was reasonable was that these trucks would be able to operate but not in the densely populated area. So, for example, a lot of trucks that do farm runs can be quite old. And it’s if they’re in an area where there aren’t many people will, the harm is much less. Now that’s not any good if you’re the actual driver, but it’s some some mitigation, that you’re not going past childcare centers and spewing out poisons at the kids. So there is one comment I’d make. The we did. We did recommend, though, that the government should assist by sort of with a track replacement fund or scrappage fund. Basically, we thought it should have a tender based programme where truck owners can make a binding bid for how much they’d be prepared to accept to scrap their truck. And because government’s got to be bit careful not to overpay for this stuff. In the end these traps have been allowed perfectly legally, to create quite a public health hazard. And we think that should stop, but we, you know, recognising that there are implications and that the government might want to assist with the scrappage fund.

Gene Tunny  33:39

Yeah. And so are you confident that this would pass the cost benefit analysis tests, if there was a regulation impact statement arrears on this, you’d be able to demonstrate that the avoided costs of the community through the fact that these particulates were causing an elevated level or incidence of disease in the community? And if we tried to put some, you know, put a figure on that, what you’d be willing to pay to avoid that? What it’s costing the economy in terms of the well, having to replace that truck fleet, any disruptions associated with that. Are you confident that that equation would be in favour of this measure? Have you done any numbers yourself?

Marion Terrill  34:26

Yeah, look, the government’s done a raise. And, and there are clear social benefits to doing it. So we’ve updated that and I think the, the basic figure is like the health benefits or health costs avoided, if you like, like by 2014, would be of the order of 1.7 billion in a year. Yeah. So yeah, very considerable health benefits. And just just to clarify for your listeners by health benefits, or health costs, avoid I don’t mean In the costs of treatment in hospitals, it’s the pain and suffering of, of getting the disease. Like, they’re the diseases that you get from these poisons, or you get, obviously, respiratory illnesses. But because the particles are so fine, they get into your bloodstream. And so you can get cancer type two diabetes, stroke, can affect it affects children in particular and vulnerable people, even in children in the womb. And it also even when it’s not causing diagnosable disease can impair cognitive function. Then every time the World Health Organisation or researchers do research on this, they find Oh, it’s worse than we thought

Gene Tunny  35:41 

Right? Yeah, yeah. So this really is I’ll have to have a look into this. So this has already been done. Do you know how recent it is? I mean, is this on the agenda of governments to do something about?

Marion Terrill  35:54

Yeah, it’s been on the agenda of governments for quite a while. The I think the reason is about five years old, yeah. So we, we’ve updated that. But it’s, if anything more compelling now than it was then.

Gene Tunny  36:13

Yeah. Yeah. But they’ve obviously that there, someone in government has been concerned about what it mean for the industry. Maybe they’ve been lobbied on it. I’m just wondering why they haven’t done anything. But it looks like you’re, you know, have been I mean, I guess, assuming that these numbers are right, I mean, hopefully, your report does motivate some action in this on this issue.

Marion Terrill  36:39

Yeah we are really hoping so. And I think by doing some follow up work in 2023. We’re working with some students at Monash to get more sort of air quality data, and to just enrich our understanding so that we can do detailed design, that that should be pragmatic and practical and effective. So it’s it. I think it’s a big issue. And it’s, I think it’s an under researched issue, actually.

Gene Tunny  37:10

Yeah. Yeah. Okay. Just final question. When I read the press release, and I had a quick look at the report, it looks like you’re focused on Sydney and Melbourne. Why not Brisbane, one at the third largest city in Australia.

Marion Terrill  37:26

Oh, we had a lot of debate about this actually, Gene. And I absolutely think that Brisbane should be in this, Adelaide in particular has got almost it’s got 45% of its trucks, pre 2003. So, so. And people have said to me, Well, what about Wollongong? And what about Newcastle? Absolutely. So in Europe alone, there are 250. More than 250 Low Emission zones. This is not a big deal. But we, yeah, we’re so we do plan to unfold more on this, but I think you’re absolutely right that Brisbane has got I forget the exact figure but approximately 20% of trucks. Pre 2003. It’s too many.

Gene Tunny  38:13

Yeah, yeah, I wouldn’t be surprised. I mean, there are still a lot of old trucks out there for sure. Okay, Marion, this has been fantastic. I’ll put links to all of these reports that have been mentioned in the show notes. I’ll put links to your social media. Anything else before we wrap up?

Marion Terrill  38:32

Oh, no, I reckon that’s about it for now.

Gene Tunny  38:35

Great. Yeah. Well, thanks, Marion. And that’s been terrific. Good. A good summary of all of these issues, and I’ve learned a lot. I mean, I always think I’m keeping up to date with what different think tanks are putting out and including Grattan’s. But maybe I sort of in the back of my mind, remember that that congestion charging one but I’m gonna have to revisit it this ‘Right time, Right Price, Right Place’. Yeah. And, and have a close look at that. So that’s terrific. So yeah, again, thanks so much for your time. I really enjoyed the conversation.

Marion Terrill  39:13

Me too. It’s always a pleasure. Thank you, Gene.

Gene Tunny  39:17

Okay, that’s the end of this Episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

Credits

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

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Podcast episode

Fuel prices & electric vehicles (EVs) – EP154

A wide-ranging conversation on petrol/gasoline prices and electric vehicles (EVs). The conversation explores the peculiar economic phenomenon that is Australia’s petrol price cycle. What drives it and how can consumers make it work for them? Show host Gene Tunny and his guest Tim Hughes then discuss the big issues around replacing petrol-powered vehicles with EVs. What does it mean for total electricity demand and what challenges do we face in adopting EVs?

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

Links relevant to the conversation

Australian Financial Review article (paywalled) quoting Ampol CEO saying EVs have to be 50% cheaper before widespread take up

Recent oil price news

Brent crude oil price (ABC news)

Australian Competition and Consumer Commissions (ACCC) monitoring of Australia’s petrol price cycle

Information on Queensland’s electric superhighway

Queensland Government website on environmental benefits of EVs

The Grattan Car Plan which includes lots of useful data on EVs

John Freebairn on fuel excise in Australia

Drive magazine article on impact of EVs on electricity use

Australian Energy Market Commission (AEMC) paper on integrating EVs in the power grid

Economics Explored EP113 – Lithium and the new energy revolution with Lukasz Bednarski

ABC News report As EVs drive a mining revolution, will Australia become a battery minerals superpower?

Transcript: Fuel prices & electric vehicles (EVs) – EP154

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,

Tim Hughes  00:04

But you can maximize your chances. And you can sort of, play the game over that four-week cycle to keep your fuel costs down.

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 154, on fuel prices and electric vehicles. I’m joined this episode by Tim Hughes. Tim has been doing some business development work in my business, Adept Economics. Tim’s not an economist, but he’s very interested in economic issues. And in my opinion, he asked very good questions, so I thought it’d be good to have him on the show again to chat about some big issues regarding fuel prices and electric vehicles.

On fuel prices, Tim and I have a close look at a regular cycle and fuel prices that we see in Australia. On EVs, one of the important takeaways from the discussion, is the big challenge we face in replacing petrol powered vehicles with EVs. It’s not impossible, but we’ll need to generate much more electricity and spend a lot of money getting the necessary infrastructure for EV charging in place. 

Please, check out the show notes for relevant links and clarifications and for details of how you can get in touch. If you’re outside Australia, please let me know if there are any patterns and how fuel prices behave where you live. Also, please let me know your views on EVs and any useful info you may have. I’d love to hear from you. 

l’ll come back to EVs in a future episode for sure. I know that I need to look more closely at all the resources needed to build EVs such as lithium, nickel, cobalt, and copper. Australia looks well positioned to supply many of these minerals. But will there be sufficient supplies worldwide to meet the growing EV demand? We’ll aim to cover that issue in a future episode. 

Right oh, now for my conversation with my colleague, Tim Hughes on fuel prices and EVs. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode, I hope you enjoy it. 

Tim Hughes, welcome back onto the show. 

Tim Hughes  02:16

Gene Tunny, good to be back.

Gene Tunny  02:17

Excellent, Tim. Now, Tim, you actually suggested the topic of today’s conversation. So, could you just tell us please, what are these issues that are turning over in your mind at the moment? What are you interested in speaking about today?

Tim Hughes  02:33

So many things Gene, but we’ll settle with; for today, we’ll talk briefly about the price cycle. We’re in Brisbane, in Australia, we have this price cycle of roughly month fuel prices, yes. So, it was in relation to that when we got chatting. There’s a lot around this that we did discuss that we won’t go into today around, you know, the future with electric vehicles and that kind of thing. I don’t know if we’re going to talk about that too much. 

Gene Tunny  03:05

I’d like to chat about that, because I’ve done some research on that.

Tim Hughes  03:09

So, it did set us off around fuel prices. And then, we did talk in broader sort of, ways about the future of what that fuel cycle might look like with the rise of electric vehicles, and then how they’re going to be paired. So, we’ll talk about that in a bit shortly, I guess. But fuel prices otherwise, yeah.

Gene Tunny  03:31

Exactly. I mean, there is a logical connection there isn’t there. Because with the higher fuel prices that’s making more people think about electric vehicles. The problem is electric vehicles are still so expensive. And the Chief Executive, I think, was Ampol. The other day, I saw it in the financial review, I’ll put a link in the show notes. He came out and said, look, basically they have to half in price, you need to get those EVs prices, which I think start in the 40,000s and if you want a Tesla, it’s above 50,000. You need to get them into the 200 to 300 range for there to be widespread take up of EVs in Australia. And I suspect I mean, there’s going to be a similar issue in the States as well and in other countries. 

Although Scandinavian countries, they seem to have higher rates of take up and yeah, but here, I think the price is a barrier and also the so-called range anxiety. We can talk about that a bit later.

Tim Hughes  04:28

There are so many things that would be interesting to talk about with that. And of course, there’s a cost, an ongoing cost to me, the amount that for instance, you might pay, on petrol or diesel now, over a year compared to what your costs might be to charge an electric vehicle and the running costs of any vehicle, which seems to be at the moment far less if you have an EV.

Gene Tunny  04:56

Exactly. Well, you’re not paying for the petrol.

Tim Hughes  05:00

You’re paying for the power, I mean, at the moment, you charge these not from home, it like, there are certain stations that you charge the EVs at. Is there a cost to those? I haven’t actually checked that. I understood that Tesla didn’t charge for recharging the car. I don’t know if that’s correct or not.

Gene Tunny  05:18

That’s a good question. I’m not sure if it’s made it or not. I’ll have to look into that. I know that the Queensland Government has; it’s built this EVs super-highway across Queensland. So, it’s set up charging stations in different cities, I think there must be over 20 of them. I’ve got a link somewhere I can put it in the show notes. They’ve got them in places like Port Douglas and there’d be some places in Brisbane and Cairns Townsville.

Tim Hughes  05:45

I mean, this is an area, because I know that we were speaking broadly today. So, we’ll go into a deeper dive into that part of the infrastructure and the costs. Because I can only imagine that if it’s free at the moment, that it won’t stay that way. I mean, it doesn’t seem to be tenable to not charge people. And also, it’s not the way that it normally works. Obviously, if there’s energy being used, somebody’s got to pay for it somewhere. 

Gene Tunny  06:11

Well, I think there’s a big issue with apartment blocks. So, if you, if you’re doing it at home, then you’re paying for it. The question is, what happens with apartment blocks and some of the evidence I’ve seen, and I’ve got, when I was doing the research, I found these experts talking about the challenges in some apartment blocks of getting the right infrastructure in there, and making sure that the apartment block can support the EVs that are drawing all that power, given they’ve already got lifts and things that are also drawing on power. So, that’s a big issue there. So, there’ll be cost associated with that that’ll have to be met by the body corporate.

Tim Hughes  06:50

Well, we might as well dive as deep as we can on this now, because that is such a big part of what that future of EVs will look like, I mean, obvious time for people to charge their vehicles is overnight, most people, you know, working sort of, during the day. So, to charge overnight, you’d want to be able to charge from home, if you’ve got a house, that’s going to be more likely. Clearly, you’re going to be using power. If you’re in an apartment, like you’re saying there’s going to be an infrastructure challenge there to make that available to the cost basis. And if you’ve got street parking, you know that’s going to give you another challenge, as well. But all of that energy as well, it’s got to come from somewhere. So, we’re going to have to produce more energy than we currently do for electricity to basically replace what we use fuel for, petrol and diesel to have electricity. And then the conversation around the likelihood of where that energy is going to come from, again, infrastructure would be something to consider. But clearly, at the moment, we can’t do that through clean energy. So, the drive towards clean energy is also then part of that question. I don’t know, we’ve talked about the importance of coal, in a transition phase from current coal supply or coal supply power to clean energy.

Gene Tunny  08:20

Well, at the moment, we really don’t have much of an alternative, because we’re still generating the bulk of our electricity from fossil fuels, than coal and gas. Now, the idea was that gas would be the transitional fuel that we would move out away from coal fired power much quicker than we have. But I think we’re discovering now just how hard that is and what that means for the reliability of the network. A lot of the problems we’ve had in the electricity market here in Australia this year, have been because we’ve had some coal fired generators offline, the Callide generator up in Queensland, part of that which was shut down for they had some incident there last year, if I remember correctly, and there are other coal fired power stations that have; there was a big one that closed down in Victoria. And that means that there’s not as much capacity as there once was. So, that’s a big issue. 

And when you have a winter, that was unexpectedly cold, there’s a big demand. There’s not enough supply, the renewables are intermittent. We don’t have enough battery technology to store the power. We don’t have enough pumped hydro. Yeah, this is it’s a big problem.

Tim Hughes  09:35

Well, I mean, the thing is, like, it clearly seems to be moving that way. Personally I’m fully supportive of. I think the drive for clean energy, and electric vehicles is good. One of the things I wanted to talk about was, from your perspective as an economist, you know, to look at just how clean the making and running of electric vehicle is because obviously, there’s an environmental cost to anything that gets produced, and then whatever waste products come from that. But the move towards that seems to be, it’s quick. And so, in some ways, I guess it’s not a problem unless we’re just trying to move too fast. You know, like, clearly there’s a transition period that’s needed with the available infrastructure and fuel supply that we have currently. But that’s going to change significantly over the next 5-10 years. 

So, as that move towards electric vehicles, as the infrastructure does catch up, and as the cost of the vehicles comes down becomes more attractive. I can only imagine then that, we can only move as fast as we can move. So, if there’s a holdup with the infrastructure, or the power supply of electricity for EVs, that’s going to just slow down the rollout of EVs and lengthen the period of time that we might have fuel powered cars. 

Gene Tunny  11:03

Yeah, I think maybe we’ll save this discussion for later on in the program, because you’ll get on to the fuel prices. I think that’s a very good introduction. I agree with you regarding those challenges that we face, I think you’ve actually captured that or presented that quite well. That’s good. Very good, Tim. 

So, you got me thinking about these issues myself. 

Tim Hughes  11:31

Yeah. And there are big areas as well. And we will have like, a lot of this, obviously, like I said, we can dive as deep as we can. We have got some guests and friends and colleagues that we’ve been talking to about coming on here who can dive far deeper than us on these individual issues. But this is more of an overview. I guess, at the moment. 

Gene Tunny  11:53

I had Lukas Bednarski from, well, he’s over in London, he’s wrote a book on lithium. He came on the show last year, and just talking about all the opportunities with electrification and making use of, of lithium batteries. So, we had that conversation. So, I’ll put a link in the show notes. So, that was good. 

So, there’s a lot of potential there. It’s just a matter of, you know, how’s all this going to come together and play out? And if you’re an optimist, you think, oh, yeah, we’ll solve it all with technology. And we’ll, get the policy settings right. But then if you’re an economist who has been around a while, you might be thinking, no, it looks pretty risky. And, I’m not sure we will get those policy settings right. We will eventually, but there’ll be a lot of messiness in the meantime. And that could last decades. 

Tim Hughes  12:49

It’s really interesting, because we’ve obviously headed in this direction of electric vehicles, because hydrogen powered vehicles are still in the conversation and all sorts of other options, I guess. And it’s going relatively fast in the EV direction, and where it had been talked about for decades prior to it really happening. So, this is really quite fast. And I guess technology is just driving that little bit further ahead, of course. And so, we’re just following the available technology. And as they get better, the rollout of EVs is getting quicker. So, it’s that, I guess, we have all of these industries, working like crazy to get ahead of the demand to try and make it possible. So, it’s an interesting time. It’s a fascinating time to see all of this change happening globally, extremely fast. It’s very quick.

Gene Tunny  13:45

Talk about how fast it’s going. It’s going faster in other parts of the world than it is in Australia.

Tim Hughes  13:53

Always fastest in Scandinavia. They always seem to be ahead of the curve over there.

Gene Tunny  13:58

Yes, yes. Yeah. That’s a whole different; that’s another podcast episode, possibly. What is it about Scandinavia? What is it about Sweden? I mean, from the outside, it looks like they’ve got a lot of things right. And we look at it from our Anglo-Saxon perspective and we think oh, well, we really wouldn’t do things like that but it seems to work for them and they seem to be very happy.

Tim Hughes  14:27

The Viking mentality tribes.

Gene Tunny  14:33

We’re gonna chat about that in another episode. Let’s begin with fuel prices. So, everyone’s noticed petrol prices are so high. I mean, what are we paying? Is it nearly $2 a liter or something? 

Tim Hughes  14:47

Well, so we’re in August 2022 in Australia, so this is going to be not an evergreen episode for this part of it. Currently, the cycles just finished in the last week or so. So, it went up to $1.95. So, I’m going to come clean here, I’m a complete fuel nerd. Like when it comes to prices, I’ve sort of, tried to maximize everything, which is I think, where this conversation started with us. The previous peak of the cycle went to around $2.25. So, which is about as expensive as it has ever been? I think it was hitting new heights that was just a couple of months ago.

Gene Tunny  15:23

Was that before they cut the fuel excise?

Tim Hughes  15:27

That was after. So, we were still with the fuel excise in place, which I think is 22 cents a liter. Is that right?

Gene Tunny  15:33

Yeah, it’s normally 44 cents a liter. And they halved it temporarily and

Tim Hughes  15:37

So, the Morison government put that in place. We had an election over here, of course, and new government, but that is still in place, and has been extended until the end of September, I believe.

Gene Tunny  15:49

Yes. So, finishes in late September, September 29, or something like that, and it’s going to be a big deal when the cut is unwound, and there’s another 22 cents a liter added to your fuel bill.

Tim Hughes  16:04

From the consumer’s perspective, we can only imagine that when we were paying $2.25, we should have been at the top of the, you know, the most expensive part of the cycle, effectively, we would have been paying $2.47. Without that fuel excise cut, you know, an extra 22 cents. So, in the cycle, it’s just been, we’ve dropped down to as far as a dollar 53 was about as low as it went. Which was great, you know, so for the consumer, it’s really good. It’s just going up to $1.95. So, it’s about a 40-cent jump whenever it seems to jump. The cycle seems to be around a 40-cent cycle. So, we’ve gone a lot deeper than before, without any real understanding of why there’s still a war in Ukraine, which apparently has an influence on fuel prices here.

Gene Tunny  16:55

Yeah, because Russia was producing oil and also, the gas supplies have been compromised. And so, there’s some substitution between gas and oil in our generation. And so like, everything’s connected, and so when Russia gets taken out of the market, and there’s still the demand for it, because the global economy has been recovering from the COVID recession, prices really,

Tim Hughes  17:24

Which made sense. I’m saying, like, it supposedly affects us over here, because it doesn’t explain why we got so low at the bottom of our last cycle, which was down to like $1.53.

Gene Tunny  17:38

Okay, so the global oil price was coming down, it’s going back up now. So, if you look at the Brent crude oil spot price, and I’ll put a chart in the show notes, it got up to about $125 a barrel earlier in the year, it fell back down to maybe about 95, or something it’s been at, and it’s going back up now. 

So, there’s a report from Reuters. So, this is a 23rd of August report, 2022. Oil prices surged by nearly 4% on Tuesday, after Saudi Arabia floated the idea of OPEC plus output cuts to support prices in the case of returning Iranian crude and with the prospect of a drop in US inventories. Okay, so prices are starting to go back up. Yeah, they reached almost $130 A barrel in the US earlier in the year. So, they’ve been down a bit since then. But they’re much higher than they were a few years ago. 

Tim Hughes  18:45

Yeah. So, the thing being is like, I find it really interesting as to why there’s such volatility in these little four-to-five-week cycles that we have here. So, for instance, we’re up at 2.25 just a few weeks ago, with the 22 cents cut. So, that’s dropped 30 cents, if we’re talking the peak of the cycle. So, we’ve just gone back to the start a new cycle, and it went up to $1.95. So, that’s still 30 cents less than what it was. As a consumer, it’s great, you know, like, obviously, we love the low prices, but that volatility in the local cycle doesn’t seem to match other cycles. That’s not linked, that kind of volatility that doesn’t seem to be linked to the price of crude oil.

Gene Tunny  19:33

Okay, so what’s interesting I think about the Australian market and we’ve studied this extensively in Australia, the ACCC, the Australian Competition and Consumer Commission keeps an eye on it. I think I’ll have to look more closely at other markets but I think this really isn’t Australia phenomenon that we’ve got this price cycle. I don’t know if you noticed it when you’re in England.

Tim Hughes  19:54

They’re pretty stable over there. Like it doesn’t seem to move around very much. I mean, I have to say it’s actually a bit of a game. It is a game over here, which kind of you know, like putting fuel in the car is pretty dull. So, it’s a little bit more spice to doing that, because you can, which we’ll talk about at some point. I know, this is one of the things we talked about, which got us on to this conversation, but you can maximize your chances. And you can sort of, play the game over that four-week cycle to keep your fuel costs down.

Gene Tunny  20:24

So, we can talk about how it is a game and one way that economists have analyzed fuel prices is as a game. So, there’s a field of study called game theory. So, you’ve seen A Beautiful Mind, haven’t you, John Nash, the great mathematician who, you know, had a few issues, but was, obviously a genius. He made major contributions to game theory. So, game theory is a theory of how do people interact? What’s their best strategy, and you can apply that to businesses. And you can apply that to say, fuel retailers, I mean, what’s turned out to be the optimal strategy that they’ve all figured out works for them, and no one really deviates from it. Because it’s just going to make life worse for everyone. If they get into some fuel price war, that is figure out, let’s not do that, let’s not rock the boat, let’s just go along, and we’ll will benefit from this cycle. And they’re making this cycle work for them. So, there’s no real collusion, they’re not ringing up each other. They just sort of, all know how the games play; this has developed over the years. 

Tim Hughes  21:30

They’ve got a mode of behavior that they all follow. They just have to do the same thing at the same time.

Gene Tunny  21:40

Yeah, it’s, it’s funny, isn’t it? You can explain that with Game Theory. So, there have been various different models of this proposed over the years with fuel prices. I’ll have to revisit it, I remember learning about it in the 90s. This was a topic of conversation in one of our micro economics lectures, I remember Harry Campbell is a professor at UQ. He would often talk about fuel prices. 

Now, the way I think about it is how this benefits the petrol retailers is that they’re able to segment the market, they’re able to divide the market into different segments and charge different prices to both segments, and this is going to maximize their profit. Now, one of the challenges that firms have when they’re selling to the public is that they can’t distinguish between different customers in terms of their willingness to pay, how much were they actually willing to pay for this their product. And so, what they end up doing is, well, if you can’t really discriminate, every customer has to pay the same amount, then the price you charge is just enough to cover the costs of production of the last unit, the last sale that you’ll make to the last consumer that is profitable to sell to. But what that means is that you’re missing out on a lot of the upside from customers who would have paid more. And, well, what you can do is have a strategy of price discrimination, if you can separately identify different groups of customers, you can discriminate amongst them charged at different prices, depending on their willingness to pay. So, that’s why for years I mean, well, look, that could be another explanation. But one explanation for why nightclubs used to charge lower cover charges for females, relative to males is that males typically had more money, they made more money on average, higher income, higher willingness to pay to get into the nightclub. 

Tim Hughes  23:41

I thought that was to encourage, because it was better to have women in the nightclub.

Gene Tunny  23:46

I think so, that’s part of it. But it could also be because men have a higher willingness to pay to get into the nightclub than women. So, yeah, it’s in the interests of the nightclub to attract the women in;

Tim Hughes  23:59

And to get the men in who want to pay more to get in.

Gene Tunny  24:03

Yes. To the attract the right ratio, or the right numbers of women, and they have to lower the price for females. And then they charge the males more. Males have a higher willingness to pay to get into the nightclub.

Tim Hughes  24:17

And then we’re known as meat markets, which sort of, explains that approach, I guess, because that was part of that scene, I guess.

Gene Tunny  24:29

Yeah. Don’t think as many places have covered charges now.

Tim Hughes  24:35

They do apparently, someone also tells me

Gene Tunny  24:38

I guess I’m not going to;

Tim Hughes  24:41

You can get in free before 10 o’clock at certain clubs. But back in the day.

Gene Tunny  24:48

I’ve just noticed that there seem to be fewer places with cover charges. I think maybe it’s more competitive now, who knows. Anyway.

Tim Hughes  24:54

We should do some research on that.

Gene Tunny  24:59

So, how I think this plays out in the fuel market with the fuel cycle that goes over several weeks is that they figure out there’s a group of customers who are really price conscious, they’ll buy when the fuel price is cheap, we’ll get them in. So, they’re a group that we can’t really get out. Or we can’t charge the high price to. They are the savvy consumers, they’re like you, Tim. They’re monitoring the, what are you doing? Are you monitoring or not?

Tim Hughes  25:45

Yeah, we’ll go into that in a bit. I’ll let you finish what you were saying. I’ll go into that.

Gene Tunny  25:49

Okay, you’re the savvy consumer. They know that there are some consumers they have to charge this lower price, too. But then there are the less savvy consumers or the consumers with deep pockets who don’t really watch the fuel tank, who aren’t thinking about when should I fill up what’s the optimal time, they just don’t care, there’s a high opportunity cost of their time. And the fuel retailers know that it’s sometimes, we can really charge them the maximum that we can get away with.

Tim Hughes  26:18

So, they are the only ones who are going to be filling up.

Gene Tunny  26:21

So, what they’ve done with this fuel price cycle, it allows them to segment the market into the high opportunity cost people who don’t care, people with deep pockets, let’s charge them as much as we can get away with. And then another market segment; that’s the savvy consumer, the cost-conscious consumer, the consumers who are paying attention to this price cycle, the fuel nerds, they might be monitoring the ACCC website, and the ACCC website is amazing. It has buying tips. I’m going to have to follow this now. Buying Tips, prices are decreasing, but they are likely to decrease further. So, this is what you were saying before, we were at the peak of the most recent cycle, is that right? And so they’re coming down now.

Tim Hughes  27:08

So, it went up to $1.95, which is a peak, is lower than it has been. It was going up to 2.25. That was the peak just a few weeks ago, maybe, one or two cycles ago; the top of it was 2.25. And that’s with the 22 cents cut in in the excise.

Gene Tunny  27:26

Yeah. Okay. And they recommend, if possible, motorists should delay by and petrol until later. I wonder if anyone’s ever complained to the ACCC about their advice. But I guess their advice is based on the cycle, and the cycle is just built in now. Because everyone’s playing the game; all the fuel retailers know that this is in their best interest, all the customers come to expect it.

Tim Hughes  27:48

There’s very little said about it, because it’s just accepted. That’s just how it is, but you can see, when the when the cycle does change. Because it happens gradually, it’ll happen over a seven to 10 day period from the first one you see, changing all of a sudden, that’s 40 cents difference, no one’s going there, it’s empty. So, very few people are going to be at that first one. And then it trickles down over the next seven to 10 days, until the last ones there. And when you get to that pointy end, those last ones normally have quite a few cars in there filling up. So, you can maximize your chances obviously, by keeping topping up or go through.

Gene Tunny  28:29

Yeah, you know, you go through it, but just tell me, did my explanation makes sense?

Tim Hughes  28:37

It did, because it was one of the questions why did they do that? But that made sense as to why they do it because they’re looking to charge as much as they can for those who don’t care as much.

Gene Tunny  28:50

That’s my as to why they’re doing it. It makes sense in terms of price discrimination, which is something you learn about in first year economics or micro economics. It’s a strategy that a firm will employ if it can distinguish different market segments and charge different prices to different market segments.

Tim Hughes  29:12

I guess it’s interesting. I’d like to say I don’t mind it, it’s a bit of a game and you play the game, or you don’t care. And it’s it doesn’t really matter. But I wouldn’t be interested; like my other experience really is in the UK, where I’ve been for longer periods and not noticed the cycles. And I would imagine with anything like this, if there’s a benefit that that will catch on and get done around the world. So, it’s kind of like side thought, but it’s it would be interesting to see if it’s unique to Australia to have this kind of volatility in a four-week cycle, or if that’s common in other parts of the world.

Gene Tunny  29:47

Yeah, I’ll have to look more into it. But it’s my understanding that it is. This is an Australian phenomenon. We’re examining that there might be elements of it in different countries, but for some reason it is baked in here. Our retailers have figured out, this is in our best interests.

Tim Hughes  30:04

Because it’s a big step, I mean, 40 cents out of it. Like, even if we average $2 at the top of the range at the moment, you know, that’s a 20% difference, which is big.

Gene Tunny  30:19

Anyway, okay. I want to hear about how you’re playing the game, Tim. Could you tell us how you’re playing the fuel price game?

Tim Hughes  30:26

It’s great, because technology really helps with this. There are several apps out there, for instance, again, this is Australia. So, for other countries, it’s going to be different. But there are; RACQ have one, there’s another one called fuel track, I think it is. And if you just look up fuel app, you’ll come up with all these different ones. And they will tell you, or you can search your local area to find out what’s the cheapest and you get a good idea as to, once you hook into the cycle, you can start to see when they’re starting to go up. There’s normally a couple of, for instance, here in Brisbane, around Kenmore, there’s a couple of servos there that are like the first to adopt; but that changes around too, you know. So, you can find that where it used to be the first place to go up isn’t always the case, I don’t know how that works. And again, that’s going to be stuff that we may never know about. But it doesn’t seem to be absolutely predictable. 

But what is predictable is once you see one go up. And so, if you can search an area around you and you see the first one go up, then you know you’ve got maybe a week before that disappears out of the realms of being able to get that lowest price. And so, when you know you’re at the bottom of the cycle will you fill up, you know, you fill your car up, and you keep topping it up until the cycle is completely gone. There’s a further thing you can do, which I’ve got, which is from the 7-11 app, it’s called My 7-11. And so, 7-11 and Mobil have joined forces. So, it’s basically a Mobil servo with the 7-11 shop attached to it. And the My 7-11 app allows you to do a fuel lock, which is fantastic. So  So, when you when you know you the end of that, and again, this is a real game, because when you do your fuel lock, it’s locked in for seven days. So, you can do it, but effectively, you’ve got seven days before you can then put another fuel lock in. I did a fuel lock, and it was a long time before it all disappeared. So, I filled up on my sixth day, and it reset. So, it looks like if you do your fuel lock, I might be hard to follow with this. I’ve realized but, if you do a fuel lock and then you buy some petrol. What happens is you show your app and the little barcode of when you did the fuel lock and it’ll lock in the price that you locked in. Then it starts again. So, that seven-day cycle does actually start again. So, you don’t have to wait seven days until you can do your fuel lock again.

Gene Tunny  33:05

Is there a transaction fee if you’re locked? Do you have to pay for fuel lock?

Tim Hughes  33:09

No, nothing. So, it’s really good. So, obviously, if you don’t use a full tank in those seven days, you stretch out until the seventh day, you’ve got a time on your fuel lock, which says it’s only up until this point. And then you can go to a 7-11 or Mobil station, fill it up and show them that fuel lock barcode on your app, and it’ll charge you, so for instance, instead of paying $1.95, I paid $1.55 for the tank full I got yesterday. There’s one little tip there, which I got wrong. The first time I used it is you have to specify what kind of fuel you’re going to use. So, I just had unleaded and I filled up with the 10 and they wouldn’t honor it because you can only do it for the fuel lock of the fuel that you’ve locked in anyway. Nerdy stuff but you can get you can get another week’s worth or another full tank of discount fuel once everyone else is paying top dollar.

Gene Tunny  34:12

Yeah, so tell me about that. I mean, you’re not going to get from trough to trough of the cycle with one tank of fuel, are you?

Tim Hughes  34:21

It depends what you do, what car you’ve got. And for me, I use about a tank full of fuel every week. I do a lot of running around. Like for you, you’d be okay.

Gene Tunny  34:32

I Hardly use any;

Tim Hughes  34:36

But you don’t do a lot of driving with it. So, you probably fall in the category where you don’t really care because you don’t use much anyways. You just get fuel when you need it. Yeah, but using a tank a week with a lot of running around, it makes a big difference. So, I never pay top price. And so, the rest of my strategy, I’ll just finish my thing there. So, I’ll do that, I’ve filled up at the cheapest, I’ve put my fuel lock on, or go for another week, and then fill up again at the last opportunity, either the weeks running out, or I’m running out of fuel, fill up again. And then you run that all the way down. So, you basically run that extra tank out, by which time, more than halfway through the next cycle. So, you should be heading towards a reasonable price anyway. And at that point, you just put in 20 bucks, $30 at the most to top up until it gets to the bottom of the cycle, then you fill up and go through it all again.

Gene Tunny  35:30

Yeah, I find it interesting that they don’t charge you for that privilege of having fewer lock, because if you think about it, there’s a correspondence to something in financial markets called a call option. Okay, so this is the Investopedia definition, a call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period. So, you might have a call option on a share. Now they’re giving you something of value and you’re not paying for it because you got the right to buy that; maybe they figure out some people are going to make the wrong call. Or it’s a way of them segmenting the market even further, because they realize it’s the real savvy, the super savvy customers who are going to fuel lock, that will do enough research to figure this out. And yet we know we can’t rip these guys off.

Tim Hughes  36:35

Well, it’s an interesting point and they’ve obviously got reasons for that one of it. One of the reasons with 7-11 is that you have to go in their store, which is effectively a 7-11 shop, to pay for your fuel, and they have all these other rewards and incentives for you to buy stuff in there. So, the more often they can get you into that shop, the more often they can get you to buy things from them.

Gene Tunny  37:00

So, they’re hoping you get the connoisseur cookies and cream ice cream?

Tim Hughes  37:04

That’s just a rumor, Gene. That wasn’t real.

Gene Tunny  37:06

that was stuck. At 7-11.

Tim Hughes  37:12

They had this brilliant thing with a $2 Pies sometimes ago, which were okay. But yes, so there’s other incentives and other marketing schemes for doing that. And I think 7-11 is one of those that doesn’t take part; my understanding is they don’t take part in an ongoing rewards offering. So, for instance, part of my strategy is using Puma for that interim time. So, once I’ve used my fuel lock, when I get my fuel from that point onwards, I go to Puma, because I can use my RACQ card and I get four cents off a liter, so that drops it down again. This is another retailer, so, my understanding is I don’t think there’s one out there for Mobil. And so maybe they just sort of, like balance that out with being able to offer fuel lock, but they don’t do the four cents off. Because that’s another point worth making in my world of fuel nerdery that there are certain ones; the Woolworths one I think is one, I haven’t checked that, but you get four cents off for having rewards card. I think it’s Caltex that are linked with Woolworths, and you get a further four cents off if you spend $5 or more in store. But normally, that sort of, doesn’t pay out whenever you have to buy something in store, the elevated prices of whatever you’re getting in store normally, cancel out any kind of financial advantage of having that four cents off a liter. So, the little things like that play into it and it was funny. 

One of the things we did mention so through all those cycles, occasionally you get somebody who sticks out as not playing the game. And here in Brisbane, there’s one that I know of, which I have used if I’ve run out of fuel. And if the false sense of Puma is still higher than Keith Mackay at Red Hill, who does his flat, he has a flat level price that he tries to change very infrequently. And so sometimes, he’s for instance, is $1.79 At the moment, so he’s a good 16 cents less than most. And so that’s the place to go for fuel if you feel conscious and having to fill up at this time. So, I want to give a shout out to Keith Mackay for sort of, being an independent out there. 

Gene Tunny  39:36

What’s the problem? I mean, because it’s on a busy road and not everyone’s going on Waterworks road, you sort of, have to be going past Keith’s place for it to work for you to get there. Is that right for it to be economic for you or optimal? No, for anyone else?

Tim Hughes  39:52

For anyone, you have to go in person. You have to be going the right direction for that particular, I guess is the same for a lot of all analysts shorter corner. That’s pretty much the same for anybody getting fuel. If you’re on the wrong side of the road, you’re not going to go there.

Gene Tunny  40:06

But there are fewer servos here in Australia than there were 20 or 30 years ago. That’s a fact. I mean, I remember seeing a chart and in an ACCC report years ago when I was in Treasury, and I think, I don’t know the exact numbers, but at one time, there would have been 15,000, maybe, and then it’s well below 10,000 now, in terms of retail outlets in Australia.

Tim Hughes  40:29

Well, we can get onto that in a sec, because I imagine will change with part of the landscape, moving towards EVs that’s going to be impacted, massively. 

Gene Tunny  40:41

Oh, yeah, well. That’s right, all of that space that’s currently devoted to petrol stations to their forecourts, we may not need that anymore but let’s see. We should move on to that. Because we’ve had a good 41 minutes or so, so far of chat. So, we’re going to get on to EVs, which was one of the key things you’re interested in. But that fuel price cycle stuff, that’s fascinating, isn’t it?

Tim Hughes  41:09

Yeah. I just want to add with Keith Mackay, his main gig is tyres, which I think, he’s not there as a fuel guy. But it’s interesting and nice to see that somebody isn’t affected by the, the cycle as much or as standing up to the cycle and just sort of, leveling out.

Gene Tunny  41:27

Yeah, so it sounds like he’s willing to; he wants to offer a service to people in local area. He’s not as motivated by profit as a lot of the other retailers, or maybe he’s trying to profit in another way.

Tim Hughes  41:44

I think it’s his main gig. So, it’s just part of what he does, but like, it’s not a main one. But we’ll have to get Keith on here one day to explain.

Gene Tunny  41:53

I’d be interested in his logic and also, what does he think of this whole fuel price cycle? How does it work? Does he have any insight? We’d like to know. 

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

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Gene Tunny  42:38

Now back to the show. 

We better move on to EVs, Tim. Okay, so you had some questions about EVs. So, do they reduce greenhouse gas emissions? I mean, it’s a key one. 

Tim Hughes  42:53

I think what it was is like, looking at the whole process, from the making of the EV, to any waste products to them, the end life of an EV. So, the amount of, lithium being one, there’s a lot of resources needed; a lot of resources that go into making an electric vehicle. Yeah, they still have to be dug out of the ground, like, you know, 200 kilos of

Gene Tunny  43:19

Copper too, it’s got copper in there?

Tim Hughes  43:23

Yeah, I’ve only seen this from one source. So, this is unverified and people will know far more about it than I. But clearly, there’s an environmental cost of building an electric vehicle. There’s an environmental cost of running an electric vehicle; obviously we’ve discussed, you know, the fuel source of producing that energy, and in this transition phase, and that’s going to be coal or gas, or whatever, it may be some, you know, part of it would be solar or clean, but certainly not all of it. We’re not there yet with that capability. 

I imagined that the future, ideally, would be a point in the future where we can do all of our electricity needs, and including the ability to power electric vehicles from clean energy. So, that I imagine is, you know, that’s a worthy place to head towards. And that transition phase is going to be a certain period of time where we do need fossil fuels of some sort, like coal and gas or whatever to get us to that point. And that infrastructure is going to change massively in that period of time.

Gene Tunny  44:26

Yeah, okay. So, just on EVs, I think it’s difficult to say but all of the credible studies I’ve seen suggests that they do result in lower emissions and then, they’re better for the environment than petrol driven vehicles. I think we can confidently say that. 

There’s a Queensland Government website shifting to zero emissions vehicles. I’ll put a link in the show notes and it says across Australia, battery electric vehicles, so, your Tesla’s, emit on average, 29 to 41% less lifecycle emissions than a typical fossil fueled vehicle for every kilometer driven in Australia. And then the extent to which electric vehicles can lower emissions varies depending on which state and territory you live in, much depends on how much electricity is generated from renewable sources, such as solar, wind, and hydro. So, my interpretation of less lifecycle emissions means that they should have taken into account the manufacturing process, but look, that’s not guaranteed. So, I’d have to dig more into their sources. But I’d be fairly confident in saying that they’re better for the environment than petrol powered vehicles, I think that’s pretty clear. The problem is that they’re still so costly, and they’re just not economic for most consumers yet.

Tim Hughes  45:45

Yeah. And the thing is also that we would hopefully become more efficient in the manufacturing of electric vehicles, you know, in the manufacturing of batteries, and the disposal of batteries and other parts of that whole process when it comes to it.

Gene Tunny  46:03

I think all those costs are coming down. Before battery technology, I don’t think it’s improving fast enough. Maybe it is for cars. But one of the issues with batteries is that we really need them to back up the electricity grid, we really need them to be able to absorb the solar energy that comes during the day, and then allow us to power the country during the peak periods. That’s one of the big challenges we’ve got at the moment. I mean, we need more Tesla power walls, and we need big sort of, batteries across the suburbs. Really, we need big Tesla Powerwall type batteries in local areas.

Tim Hughes  46:50

And the charging time as well. Obviously, when you fill up with fuel, it’s relatively quick, five minutes and you normally done; 10 minutes tops, if you’re getting a cookies and cream connoisseur from the freezer. But I know I’m fully behind this move towards greener energy. And I think it’s really exciting to see how quickly it’s moving. But it’s that transition phase we’ve mentioned, which seems to be happening organically anyway, because it appears that people are able to charge EVs at the moment and that sort of, they’re selling more EVs. So, it seems to be the way this is happening, you know, appears to be working, but for everyone to be expected to have an EV or the majority of people. Clearly the infrastructure is a long way from being what it needs to be.

Gene Tunny  47:43

Yeah, we could talk about that in a minute. So, just on this is happening quickly. Look, the growth rate is, is high. I think they’re growing; I don’t know 200%. EV sales have grown by some really high rate over the last few years in Australia. But, so in the first half of 2021, there were 8,698 EVs sold in Australia. That compares with 6900 EVs sold in 2020. I think a stat I saw was that there’s been 40,000 electric vehicles sold in Australia since over the last 10 years or whatever the period was. But look, we have to compare that with 20 million registered motor vehicles in Australia, right? So, it’s really small relative to the total stock. It’s going to take a long time, decades for EVs to become the predominant vehicle type in Australia. And we’re actually a global Lagarde. This is according to a Grattan Institute report. The Grattan car plan Australia is a global laggard on electric vehicles. So, electric vehicle sales as a proportion of new vehicle sales in 2020. Australia was 0.78%, United States, 2.3%, global average 4.2% China 6.2%, Sweden 32.2%, Iceland 45%, Norway 74.8%.

Tim Hughes  49:15

Iceland makes sense. So, because small place, they can be far more agile with this kind of infrastructure and technology. And the energy that they have at their disposal with geothermal energy is just enormous. I mean, that just drill down and away you go.

Gene Tunny  49:31

Well, that’s better as a renewable, is it renewable, or whatever it is. I mean, it’s greenhouse friendly. It’s better for the environment than fossil fuels. But that’s a more constant source of energy, isn’t it? than say, wind or solar, the problem we’ve got is, the renewable energy sources, we’ve got are intermittent

Tim Hughes  49:52

Yeah, and the geothermal, from what my understanding is very stable and it’s 24/7.

Gene Tunny  50:00

Yeah, I need to get an engineer on here to explain it all. But this is a challenge with trying to understand what’s going on and this whole debate. There are all these engineering issues and scientific issues that it’s challenging for any economist to comment on.

Tim Hughes  50:17

And also, after so with Iceland, they do have the possibility of something cataclysmic happening as well over there. I think anywhere where you’ve got geothermal availability, you’ve got the possibility of something crazy happening.

Gene Tunny  50:30

And I think the fact that it’s a small place to means they don’t have that range anxiety, which is a big issue in Australia, where you could be driving hundreds of kilometers to your next destination, particularly if you’re in the outback. Or if you’re in regional Queensland and New South Wales, you might have to travel 200-300 kilometers to the next town. And you’d probably rather have a petrol driven vehicle with a big tank than an EV which, I mean, what’s the range? Is it 300 kilometers maybe? I’m trying to remember; I hope to look it up. But I know that’s an issue here in Australia. I know that EVs are getting better at that. But there are some people still are concerned about whether they can go the distance, so to speak. But then look, Norway is a big place and they seem perfectly comfortable. So, they’ve obviously set themselves up well, with the necessary infrastructure.

Now there are two more issues I want to chat about, because we’re sort of, approaching the time limit. You want to talk about how much more energy is required? There is just quite a bit more. There was a report in Drive Magazine that suggested that it could be equivalent to 12 million more houses. So, like one new electric vehicle is equivalent to a house. And I was struggling to find a good figure for the proportion of electricity that’s consumed by households compared with business and industry. But it’s going to be a fraction of the title. So, it’s not as if we’re going to double the amount of electricity needed. But it could be 50% or something. Yeah, I think it’s probably Yeah, maybe 30 to 40%, I think I saw an estimate. So, we’ll need 40% More energy, electricity. And yeah, the challenge is that at the moment where we’ve got all of this coal fired power stations that are retiring or projected to retire over the next two decades, and we’ve got a challenge, just replacing that capacity with renewables. And doing that in a way that we don’t screw up the liability of the energy system, where we’d end up having blackouts and all that; we need to avoid that with the firming with the battery power. If battery technology gets cheap enough that everyone can have a Tesla Powerwall, or whatever the competitor’s product is, if we can have grid level storage, big batteries dotted around the suburbs, or if we have more pumped hydro, that’s a challenge because environmental considerations, raising dam walls building new dams, I mean, that’s, that’s not going to be popular.

Tim Hughes  53:16

All comes back to energy at that every point really, isn’t it? We’re going to get our energy from and what’s the most efficient and clean way of getting that energy? And to be able to increase the capacity.

Gene Tunny  53:28

But we do need more, we’re going to need more energy for EVs. The authorities are aware of this. So, the Australian energy market commission published a paper in 2020, that dealt with this issue. And I’ll put a link in the show notes. They had a paper integrating electric vehicles into the power system. And its press release to the AMC says Australia needs a forward-thinking plan to get the energy system market ready for an electric vehicle future. Now, are we going to get that forward thinking plan? I don’t know. We’ve had a lot of problems in Australia getting an energy policy that makes sense; that sensible that everyone agrees on. I mean, we’ve had the climate wars, the big debates over climate change policy. This is going to be a big challenge. But look, people are aware of it. They know it’s an issue. There’s an issue with apartment buildings for sure. So, in that drive magazine article I mentioned, electric cars could have big impact on Australia’s energy supply. They quote this Mark Hartje, who’s CEO of charging installation company, Harman electric. His business regularly encountered developers who are unaware of the demands electric car charging good place on energy supply. One of the issues in this building we’re working on is the amount of power they have available. It sounds like a lot, but it’s running lifts, a lot in aircon, so the building doesn’t have the capacity to provide any more energy and we could burn the substation down. So, not good. 

So, he claimed the risks are high developers and body corporates were dealing with don’t really realize it’s an issue until we tell them. It will be like the pink bats cladding issue, once a couple of buildings go up in flames, they’ll do something. And then what he’s saying is that as a result, our chargers have automatic load management. So, if demand gets too high, like when all the air cons on the Chargers will throttle back, how we notify owners, we’re still not entirely sure about I think what he’s saying is that, yeah, basically what’ll happen is if there’s always EVs getting charged the system, there’s some intelligent system that is, an IT there that will just throttle, that turn the power down. So, it’ll shut down some of the EVS or the charging or shut down some air cons, or they’ll have to manage that it’ll cause all sorts of problems.

Tim Hughes  55:55

And, of course, this is a problem that’s not currently there. So, it’s, like, you know, the general population, we’re not great at dealing with new problems, like we, you know, like things to get easier and better. So, it is, I mean, I can only feel that whatever these issues are, that they will get sorted out, you know, it seems to be that we’re on this path towards electric vehicles. And, you know, we’re moving fairly quickly in that way, even though those percentages that you talked about are really very small. Well, percentages of how many electric vehicles we have actually have here. It’s not a lot. So, like, we’re massively predominantly having fuel driven cars. But the changes that we’ll need to make, I mean, of course, all of this stuff doesn’t happen with everything in place, you know, like it evolves and the challenges get met along the way. So, clearly, there are some big challenges here. And I’ve got no doubt that they’ll get met, which will be really interesting to sort of, see, because there will be some challenges, as we’ve outlined, with getting these EVs powered for everybody.

Gene Tunny  57:04

Yeah, and bringing them down. So, they’re cost effective, and people can purchase them. One of the challenges, or one of the reasons that they’re so expensive, is that these companies are making the EVs are trying to recover all of the R&D that they’ve spent developing the EV.

Tim Hughes  57:22

The last two years have been felt, of course, with supply of any new vehicles. That is still getting caught up with that.

Gene Tunny  57:30

Title mess, supply chain problem;

Tim Hughes  57:33

It will be really interesting to see how this changes and just want to briefly mention on that, like, we’re talking about the infrastructure changing. And the amount of fuel stations that there are here at some point, those fuel stations just become charging stations, then that infrastructure doesn’t necessarily change too much, but they’re just going to be selling, because they’ll have to sell it at that point to recharge, you’re not going to get free electricity to charge your EV as an ongoing basis. I think that’s just a bit of a perk to get people. Right. So, Tesla are doing it’ll happen at some point. That’s not going to continue. 

Gene Tunny  58:10

Well, if you’re offering that if you’ve got your recharging station, then that’s taking up land. And yeah, you’ll need to;

Tim Hughes  58:16

Somebody’s got to pay for that, no matter how its generated. But I’m sure it’ll get worked out. But it’ll be interesting to see how all of all of this unfolds.

Gene Tunny  58:25

Exactly. Okay. Just one more thing. One of the issues that economists are thinking about at the moment is, as we move away from petrol driven vehicles, we’re going to get less revenue from fuel excise here in Australia. So, that’s currently bringing in, well, before we cut the rate temporarily, I think it was running at about 10 billion per annum or something like that. I mean, it’s, it’s a big amount of money. I’ll put the exact figure in the show notes; might be 11 billion, there was a great article by John Freebairn an economist at University of Melbourne. What is petrol excise? And why does Australia have it, anyway? I’ll link to that in the show notes. 

So, there’s a big debate about well, how do we make up for that revenue? Should we have an electric vehicle tax, as Victoria has implemented? There’s currently a high court case on that. I think the Commonwealth is taking them to court and say no, we don’t want you to have that. That’s not the right way to go about it. And where economists are going is that, that’s probably not a good idea. Because at the moment, we want to encourage people to take up EVs. So, you don’t want to go and tax them. But there is a legitimate debate about how we charge for the use of roads and the damage that’s done for roads and the fact that roads can be congested at times. So, there’s a big debate about road user charging. And so there’s a lot of thinking going on about that. And that’s something I’ll try and cover with Marian Terrell from Grattan Institute in a future episode. She’s written a great piece in the financial review this week on that. She’s opposed to that EV tax in Victoria as I am, I think we should take the opportunity to think, more laterally; think about what’s the appropriate way to pay for the roads. And so, what John Freebairn writes in his article is that in an ideal world, we would charge explicitly for road use pollution and congestion in the cities during peak hours. Fuel excise is an increasingly inappropriate way of charging for road use. Because more and more cars, including hybrids are using less fuel per kilometer, and some, including all electric vehicles are using none. So, look, I don’t know how we do this, we probably need some sort of, chip or tag to keep track of you. 

And then the one of the ideas is that on a really congested road, you could charge people if they’re driving on that road. You know how there’s the congestion charge in London? I think we were probably talking about that before you got standby. 

Consider a London and getting the thing. Yeah. So, yeah. So, there’s a lot of thinking going on about what’s the right way to charge for roads. So, I’ll cover that in a future episode. Does that makes sense because we are losing fuel excise and a lot of people will point to the fact, that’s partly paying for the roads well sort of, I mean, it goes into the big pot of money. That is a whole bunch of things. Money is fungible that. Okay, it’s a legitimate thing to be to think about that. Yeah, we’re going to be getting less revenue to pay for services, including roads, goods and services.

Tim Hughes  1:01:53

Because it gets complex, doesn’t it? Like HGVs and obviously, you know, different size vehicles and heavy vehicles, potentially do more damage to the road. 

Gene Tunny  1:02:07

There’s a system for charging heavy vehicles. We’ve got that. Yeah. 

Tim Hughes  1:02:11

So, it makes sense that it would be done on a per kilometer basis. I don’t know. I mean, I’m also in favor of less, certainly personal tracking, you know, over the last two years, the whole of the pandemic and throw no liberalism and freedoms. That’s another conversation as well. I think it’s really hard to give up ground on personal movement and you know with your vehicle, although that would be the fairest way. If you travel a kilometer, you pay X amount per kilometer.

Gene Tunny  1:02:43

Very good, Tim, I should have thought about myself. As someone who just went to the Friedman conference, in July in Sydney, as someone who’s had a long-term association with center for Independent Studies, which is a great proponent of liberty in Australia. I think I should have thought of that point myself. It’s a very good point. I mean, it’s tracking to be able to implement this road user charging system, you need to have some way of tracking people as they drive. 

Tim Hughes, we better wrap up. Any final words before we close?

Tim Hughes  1:03:12

No. Just that it’s a fascinating subject that I know a lot of people talk about, it comes up in conversations everywhere. We’ve done just a broad overview of this, to the best of our knowledge at the time, but these are individually little areas that we’ve talked about, that will dive deeper with industry representatives, or colleagues or people.

Gene Tunny  1:03:35

And experts, yeah. I’ll try and get some EV experts on charging the energy network. Because, there’s so much complexity here, you almost have to be an engineer, an economist, a philosopher in a way as well, to try and grapple with these issues.

Tim Hughes  1:03:51

And as a consumer, you sort of, like, see this unfolding. And it is really interesting. And my driving principle, for me, personally, is about, you know, the environment and what’s best for the environment. So, I’m interested to see that discussion further, with the greenest possible solution to how we move from A to B and back to A again.

Gene Tunny  1:04:13

Okay, so long as it doesn’t cost us too much. We want it cost effective, but, we want to look after the environment, that’s right. We want to make sure it’s done in the most cost-effective way. We want to minimize the pain going forward. 

Tim Hughes  1:04:28

It’s got to be practical, you got to be able to do it, you know, like the green options now, which is to walk or cycle, you know, but that’s not practical for me to by the time we get to work, I’d have to turn around and go back again. 

Gene Tunny  1:04:41

All the way was set up as cities. We’re all living in these big cities, and we’re all time constrained. Yeah. 

Tim Hughes  1:04:48

So, the overriding principle for me anyway, like is, what’s going to be best for the planet in our hippie at heart, and, but you got to be realistic as well. But I’m excited because that’s the way that EVs seem to be heading. And that can obviously be tweaked and fine-tuned to be better and better and more efficient and less impact on the environment as we move ahead.

Gene Tunny  1:05:13

Okay. Tim Hughes, is it’s been great chatting with you. We always enjoy our conversations. I think you’ve raised some really important issues here. And yeah, really enjoyed our conversation. And we’ll try and get some experts and other industry people on in the future and we can have a further chat with them. So, thank you. 

Tim Hughes

Thanks, Gene.

Gene Tunny

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.

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