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Podcast episode

Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

Show host Gene Tunny talks with Dr. Nicholas Gruen, CEO of Lateral Economics, about the increasing focus of governments on wellbeing. For instance, former NZ PM Jacinda Ardern rebranded the national budget as a Wellbeing Budget, Wales has a Futures Generations Commissioner, and Australia is developing a new wellbeing framework, Measuring What Matters. Gene and Nicholas discuss the limitations of the current top-down approaches and platitudes, and consider potential solutions for better integrating wellbeing into policymaking. 

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What’s covered in EP187

  • What is the “well-being agenda”? (2:44)
  • The “Easterlin paradox”. (5:08)
  • How do you make these judgments? How do you measure well-being? (10:50)
  • How is this relevant for policy? Should governments be tracking this broader measure? (28:36)
  • Is complexity a plus or a minus in the Treasury wellbeing framework? (33:39)
  • Why do you need a framework? (40:02)
  • Good examples of programs which could improve wellbeing. (44:29)
  • The importance of being connected to family and friends. (53:42)

Links relevant to the conversation

Nicholas Gruen’s YouTube channel:

https://www.youtube.com/@NicholasGruen

Video version of this episode on Nicholas’s Uncomfortable Collisions with Reality podcast:

Wellbeing: can we escape the iron law of business-as-usual 

Measuring what matters — second consultation process | Treasury.gov.au

Fairfax Lateral Economics Index of Australia’s Wellbeing Final Report (the HALE index discussed in the conversation).

Transcript:
Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

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  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dr. Nicholas grilling about the growing interest of governments in well being something broader than living standards or GDP per capita. Former New Zealand PM Jacinda Ardern, rebranded her national budget as a well being budget, Wales as a future generations Commissioner. And now Australia is going to produce a wellbeing framework called measuring what matters. As you’ll hear in our conversation, Nicholas is highly supportive of bringing wellbeing into policymaking. But at the same time, he’s sceptical of the way we’re going about it. He breaks down what’s wrong with the way we’re doing it. In short, there’s too many platitudes and too much top down thinking, and he explains how we could really make a difference if we did it right. Nicholas is CEO of lateral economics. He’s an angel investor, and he’s headed various government inquiries, including the Australian Government 2.0 Task Force, according to the Financial Times as Martin Wolf, Nicholas is a brilliant man who deserves to be better known, although he’s widely known within Australia, and he has an ever growing international reputation. This episode is at joint production with Nicholas as YouTube show uncomfortable collisions with reality. So please consider checking out his other content on that channel and you get a chance, a follow up to the conversation, this episode will be available on that channel brought out now for my conversation with Nicholas grown on well being. I hope you enjoy it. Nicholas, thank you, good to be with you. So I mean, you’re aware that New Zealand has a well being budget doesn’t it? And our own government here in Australia, it’s going to be releasing a measuring what matters statement. So it’s looked at what New Zealand’s done and it’s been? It’s excited by that. There’s a lot of interest in well being at the moment. What do you attribute that to Nicolas?

Nicholas Gruen  02:43

It comes goes, Gene, I think this, this urge, it’s an anti agenda. In other words, it comes from a frustration with the idea that we are obsessed with economics, we’re obsessed with dollars and cents, we’re obsessed with a single measure. And that single measure is GDP. And there’s a lot to be said for that. GDP is in fact, a much better measure of human wellbeing than we think. But that’s a little bit like saying democracy is a terrible, it’s a terrible mess. If you have to have a single measure, it’s, you know, I think you we can improve it somewhat. But there are all kinds of ways in which GDP is a much better measure than you might think. And that’s kind of partly because you can’t get rich without attending to basic social facts. And social institutions like schools, hospitals, families have to be in reasonable functioning order, if you’re going to have a wealthy society. So in a kind of an indirect sense, measuring how wealthy countries are, does help you distinguish between societies that are relative functioning relatively well, and societies that are not functioning relatively well. Please don’t think that that’s me saying we should put down our classes and forget about the deficiencies in GDP. So Bobby Kennedy put it best many years ago, 1968, when he said that GDP measures all those things in life, except the things that matter most to us, how well we bring up our kids, how beautiful our cities are, how kind we are to each other, how we manage how effective we are staying out of wars, GDP doesn’t measure any of those things. And it doesn’t measure a whole lot of other things as well. So that I think quite a good way to think of the well being agenda is to say that it’s trying to draw our attention to those deficits. And I’m very happy to say that it should live or die by how successful it is in addressing those deficits.

Gene Tunny  04:59

Okay. So wellbeing is going to be correlated with GDP per capita to an extent and is it the case?

Nicholas Gruen  05:08

And we see that in the there’s this famous thing called the Easterlin paradox. Why don’t you tell us what these? Oh, well, I

Gene Tunny  05:15

Was gonna ask you that. The way I the way I remembered if I’m remembering correctly, is that up until level of Is it personal household income, which years ago, I think was about 75 or 80,000. US dollars,

Nicholas Gruen  05:31

it was quite a lot less. Was it a lot less? Was it? Yeah, yeah. So you get a strong correlation between GDP and subjective well, and people telling you that they think their lives are working out relatively well, if you go, and it’s not very surprising, you go and ask people in war torn Sudan or somewhere like that a lot of highly corrupt and poor places. Well, being is low and GDP is low, and they climb together, and then they tie a lot and then the relationship tails off. And I think it was about $20,000 per annum, where you get that tail off. We remember this is maybe even less than that, because remember, I think it’s dates to 1974, the Easterlin paradox. And in many ways, it probably comes out of the kinds of sentiments that Bobby Kennedy was giving expression to in 1968. And it’s it says, Look, after you get tolerably wealthy, other things seem to matter more to people than how much more wealthy they’re getting.

Gene Tunny  06:37

Yeah. And what’s this idea of well being is so I’d like to ask is this happiness? Is it utility? To what extent is governments when they’re promoting well being is that about promoting the greatest good for the greatest number as Jeremy Bentham expressed it? How do you know?

Nicholas Gruen  06:54

I mean, I like to be vague about this. And I like to be vague, constructively invasions. And what I mean by that, in fact, if you’re vague, then you can honour the well being agenda as and when I called earlier, a kind of anti agenda, it is saying, hang on, where we’re never, it’s pretty unlikely we’ll ever not managed for GDP, but that leaves out all these other things. And the thing is that if you try and same, you can use words, I mean, Bentham had this problem himself, when he said the greatest good for the greatest number, he could never quite say what good was, he would sort of associate it with pleasure or whatever. And, as you know, what economists did in the, towards the end of the 19th century is that they did a little bit of on the spot, metaphysics and said that economics was about utility, that the ultimate out quote from the economy was not money, can’t take it with you, and you can’t eat it. It was money existed to improve utility. And I think utility is a nice word, it anchors the activity to what we all think of what uncertainly we did in the late 19th century and early 20th century, as all the useful things about life. Today, our lives are much more postmodern, they’re much more saturated with fantasies, entertainment, advertising, and so on. And that’s created all I mean, it’s right, why rather like that, the the, this is an Australian word for people overseas, but I’m going to use it anyway. The Daggy if you like nerdy sense of the word utility, it’s saying how can we be useful and we get a lot of utility. A poor person who is a paraplegic gets a lot of utility out of a wheelchair, or hundreds of 1000s of dollars worth of utility. If you want to get that much use that much usefulness to someone who is able bodied and has plenty of money, you’d have to do an awful lot to be more useful to them than a wheelchair is for a paraplegic person. So I think of it as quite an anchoring quite an egalitarian idea. So to Bentham, and this is one of the things that’s one of the characteristics of economics during its period of what I call clarified common sense. People like Alfred Marshall, Cecil Pigou, who were working toward in the turn of the 20th century, they built their idea about what the economy about was about around usefulness. And one of the upshots of that was that if you’re just focusing on usefulness $1 to a poor person or a pound to a poor person buys much more usefulness by It supplies them with much more urgent needs. If they spend it halfway wisely, then it can provide to a wealthy person. So that injects into our thinking a degree of egalitarianism in the guise of scientific thought, or if you like, economics has clarified common sense. So I see the well being agenda as reviving some of those ideas. And one of the people who’s responsible for it, Richard Layard, at the London School of Economics has written very much in that in that kind of tradition.

Gene Tunny  10:38

Right? Okay. So you talk about this idea of $1. In a poor person’s hand, the more valuable than in a wealthy person’s are the utility that comes from it? Yeah, but how do you make these judgments? I mean, can you do this scientifically? How do you measure well being for example, can you actually put a number on it? How do you think about that,

Nicholas Gruen  11:00

and you can’t measure utility either. So So modern economics, after that period got mesmerised by the idea of being scientific. And it didn’t get anywhere. All it managed to do is to we had a, if you like, a blurry vision of what was true, because I think almost every person listening to this will say, yes, yes. In general, on average, it’s strongly true, that money going to poor people, right now, with a budgets being prepared, and people are talking about increasing the dole for people over 55. Well, there will be some people who take it to the casino. But most people and I don’t know whether that buys anything, probably buys less, they probably buys less utility, less well being than money to me or you. But most people will spend it on things that are much more useful. So I don’t want to say Oh, well, we can’t be scientific about that thought, therefore, we’re just not going to have it. But that’s essentially and we can talk about this more if you want to, but what you can just agree with. That’s essentially what happened in modern economics from about the 1930s onwards, where we moved from a criterion of well being, which basically said, everyone’s wellbeing can be presumed to be everyone can presume to count the same. And therefore, if we’re just focusing on well being, and of course, we can’t just focus on well being, we’ve also got to think about incentives and stuff like that. But abstracting from that, ignoring that it’s a powerful, stylized fact, that money to the poor, is urgently needed, and money to the rich is not. And that basic idea kind of disappeared from the methodology of economics, in the pursuit of making it more scientific. And so we watered down the idea of what a improvement in the well being of a population was. And all we said was something which is sort of useless for practical purposes, it’s okay for modelling and that’s called Pareto, making a Pareto improvement, named after bill for a great thinker, Vilfredo Pareto, who ended up being rather sympathetic to Mussolini towards the end of his life. But he was he didn’t like the idea that you could compare any one’s subjective, state with anyone else’s, he produced Pareto wellbeing, which says, you get a Pareto improvement only if you can show that you can improve one person’s well being without harming anyone else’s. Well, that rules out progressive taxation, it rules out actually pretty much anything you’ve worked in the treasury, it’s almost impossible to do anything in policy without fight without some losers turning up. And then economics has nothing to say about that. And I don’t think that’s good news. And I think the well being agenda is one way to remind ourselves of that lack that absence. And it’s an excuse to try and bring back some of this not to, and maybe we’ll get to this not to erect a kind of big alternative approach with a big brand new thing, but a correction to some of the obvious moats in our eye on this in the sort of ways economists are thinking at the moment.

Gene Tunny  14:39

Okay. So how can we measure this? You’ve done some work on this Hale index? Is that a way of measuring well being can that be useful for assessing whether our well being has increased or

Nicholas Gruen  14:52

moving into that? That’s a good illustration of what I’m trying to say because I guess you could mark at the Hale index. I’ll explain what it is in a minute, as a sort of brand new way to conceptualise well being. But that’s not how we thought about it. We started with GDP for some of the reasons that I’ve outlined earlier. And then we said that there are some obvious ways in which GDP doesn’t tell us, that doesn’t give us what we can correct this in big, ugly ways. Where there are big ugly deviations from common sense. And then we know that we’ll, we think we’ll have a better measurement of well being, and it won’t be perfect. And it’s not something we want to run away with. But it will help us think about policy priorities, and talk about whether we’ve been getting richer or poorer as a society. So let me give you some examples. GDP is blind, to whether young people from 15 to 25, are spending their extra money going on holiday, or going to TAFE going to uni, going to school, and building what economists call human capital. We take that into account because we say that if you are spending this money, on your education, your knowledge, your training, your capability, then you are investing it. And so we put that back into GDP. And of course, if you think about how long in our lives we educate ourselves, well, 12 years is a kind of minimum for people pretty much now. And a lot of us have at least another three or four or five or six years. That’s a huge amount of your life. And therefore it’s a huge part of the economy. And so when we started, when we put that in, we changed the you know, you could see that as Australia invested in increasing retention in schools, which happened quite in a big surge during the whole government. And then, as we as we got more and more people with cert three and above qualifications, that that produced a large surge in benefit. And that would be a good thing to think about. That’s something we should congratulate ourselves on when we when, when it’s working and, you know, give ourselves a talking to if we’re not making those things happen. And another way to think about this is to say that the business will alter in this period, the business community, we’re obsessed with talking about workplace relations and workplace relations are quite important. But that’s the interface that businesses have with policy, that’s the one that they think about. And it’s vastly less important. I mean, if you do a really bad job of either, you’ve got a lousy economy on your hands. But if you are doing a halfway tolerable job of either, then human capital is vastly more important than exactly how you configure workplace relations. And anyway, no one’s ever worked out a perfect way to configure workplace relations. So one way to think about this is to say that the Hale index, this index that we built, tells you what’s important and what’s not. And some other big differences, that reflecting the comments I made about money in the hands of poor people buys you more urgent needs than money in the hands of wealthy people. During the last 20 or 30 years, Australia has become somewhat more unequal, it’s it’s a little overstated. People tend to overstate it, they tend to think we’re nearly there were as bad as the United States or the or Great Britain. And we’re not by quite a long chalk. But nevertheless, there’s an effect there. And so that that should go in. And if we have become richer, but more unequal, it’s not clear that we’re better off. And so, you know, I think quite a good, quite a good measure of a just a single measure of economic well being is median income, and median income has not grown as much as actually I’m not sure about that median income. No, I think median incomes not grown very strongly, you might be able to correct me on that. But what we’ve done well as we’ve looked after people at the bottom quite a lot better than they have in the United States. And the PR people at the top have been very well looked after, but not nearly as well looked after as they have been in the United States. Anyway, so it takes into account inequality. It tries to take into account natural capital and the result that natural capital is you know, the quality of our air and our streams and, and the amount of minerals that remain in the ground. One Upshot from that which I’m not, I’ll just tell you about it is that we, the methodology we arrived at We certainly didn’t try to come up with this result. But the methodology we arrived at told us that natural capital, at least in terms of diminution of natural capital, at least in terms of what’s happened so far was pretty minor. And that even took into account greenhouse. But of course, that depends on the trajectory that greenhouse takes. So that at least gives you something to argue about that, you know, you’re not just waving your arms around, as I’m doing right now. And then the other thing we did is we talked a few areas of mental health, which have, which are common, and have large impacts on well being. And they were depression, and anxiety and obesity. Well, obesity is a physical condition. But that has a notice that is correlated with large reductions in self reported well being. And so we threw that in the mix. And as obesity has been rising, that’s been taking 10s of billions of dollars off our GDP. So that’s what it looks like. And that to mention what I said before, I don’t want to con anyone into thinking this is a comprehensive measure of well being even though sometimes it gets reported in the press is that, but I want to say, look, it’s GDP, and then we’ve made some big changes where the worst problems of GDP exist. And that’s got to be a good thing. It’s, it’s the old clarified common sense idea, rather than welcome to the new paradigm.

Gene Tunny  21:32

Okay, so the Hale index, Harold age, lateral economics index, on well being Yeah, well being just so clarification, you talked about human capital. So are you valuing the time input that people are spending in education and training because the the actual resource cost of the education and training or the value added, that’s already counted in GDP are

Nicholas Gruen  21:58

correct. So what we say that if you go to TAFE, you go to uni, you build your human capital, the resource cost of doing that as already take is already measured in GDP, we paying your tutor as your lecturers, we’d pay for the buildings if you go to them, and, and so on. And but then we say that at the end of this process, you have invested in an asset and that asset and so and we do the same, you see GDP doesn’t contain depreciation. So it’s a basically, it’s purely recurrent. And it has no way to conceptualise the capital account, it has no way to conceptualise whether you’ve made yourself richer for the future, or poor for the future. And so it tries to do that. Does that make sense?

Gene Tunny  22:55

I’ll have to have another look at it. Yeah. Because I mean, the, what I’ve seen in the past is that people have adjusted GDP for the depreciation. So part of the That’s right, well, yeah, yeah. Part of capital expenditure that occurs is just to replace existing capital. So, you know, some people argue, well, you should actually look at net domestic product or net rational product. And

Nicholas Gruen  23:21

we do that in. So we start at that. I mean, I didn’t mention that because I just thought it was too technical, but we start with NAMI national income. Okay. So we got depreciation in there. So we put capital, so we need to put capital appreciation in as well.

Gene Tunny  23:38

I see what you’re driving at. Yeah. Okay. Capital appreciate. Yeah. Okay. Right. Well, I’ll put a link.

Nicholas Gruen  23:44

I mean, let me just let me just so people can conceptualise it. So you start with GDP, which has no measure of depreciation, your point, but the buildings you had this year, are worth less at the end of this year than, let’s say plant and equipment. Yeah, the cars you own are worth less at the end of the year than this year. So we take that out of GDP. And if you’re going to do that, by exactly the same token, you would put back into GDP all the ways in which you’ve built capital. And the main ways in which you built capital is through human capital. There’s sort of three four times as much human capital in the economy than there is physical capital.

Gene Tunny  24:27

Okay, okay. The big effect

Nicholas Gruen  24:29

two big effect.

Gene Tunny  24:32

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

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Gene Tunny  25:07

Now back to the show. Like what I wonder, is whether we are actually much better off than we were, say, in, in the 80s or 90s. Because, I mean, clearly the technology is just incredible that we’ve got now I mean, I remember having a Commodore 64 When I was in high school, with 64 kilobytes of RAM. And now I mean, everything you’ve got now, it’s just I don’t know how many 1000s of times better it is. But it’s just an incredible improvement. But yet, I don’t know how much better the quality of our life is, particularly with all the smartphones and the distraction? And do you know what the evidence is on that though? What is it?

Nicholas Gruen  25:50

Well, my style? Well, I mean, leaving the smartphone, the distraction point out, because that’s a very different sort of thing you’re thinking about, we can talk about that. But my kind of guess from scanning the literature on that is, so I think one of the main things you’re talking about is that a lot of the streams of benefit that we get from technology of free, or you go to Google, we go to Facebook, if you call that a benefit, there are just all these free services and free doesn’t work with GDP, GDP to GDP, it’s just invisible to GDP, because GDP, put your binoculars on and then whenever someone’s paying for something, you work out, you know, you say, Oh, that was $2, that’s $2 to GDP last whatever they paid for it. And anyway, it’s a, it’s an process of serial accounting, working out how much value has been added with each transaction. And in this process, the value that’s added is not counted, some of the commercial value that added is counted, and that is the advertising revenue. But so so again, it’s it raises the question of the household economy as well. I didn’t mention one of the great weaknesses of GDP is that GDP goes up. If you go out to dinner, and it doesn’t go out, if you if you get someone else to pay for your dinner, or you know, to cook your dinner and pay for them, that that GDP rises, but if you cook it at home, GDP doesn’t rise, I could give you some more striking examples, more sexual examples. They’re a bit more striking, which is that most people’s sexual activity doesn’t contribute to GDP, but going into a prostitute does. So that doesn’t seem to be a very good way of measuring human wellbeing. So there are anyway, we haven’t tried to correct for those things. But those are the those are some of the sort of paradoxes of GDP. Yeah. But I don’t mean to be too critical of GDP because of it. Clearly, we are, we are wealthier. And

Gene Tunny  28:06

to an extent, I mean, just given the expansion of I mean, houses are much larger, on average than they were 30 years ago. We’re probably I mean, the quality of cars is better. We can you know, then they’re cheaper in real terms, I think. And partly that’s because we’re brought down the tariff wall here. But yeah, I guess we are better off in a material sense. But it’s not as much as you might think, if you just look at the GDP per capita numbers, because there are these other things we should be taking into account. Yeah,

Nicholas Gruen  28:36

yeah, that’s right. That’s right. I mean, the other thing is, I’ll just tell you, I went this afternoon to somebody who was looking at an MRI of my shoulder, which is sore and tingling. Now, I’m pretty confident that I mean, there are various ways various pathways, you can imagine that the existence of MRIs is picked up in GDP, I mean, you pay money for the for the MRI, but the fact that the fact that he can look inside my shoulder and look at where the bone is, and where the where the sinews are on sale, there’s a spur there. And we couldn’t do anything remotely like that. As an economist sitting there, very few people would have this reaction when they’re doctors looking at an MRI. But that was what I was thinking about. I was thinking, well, I doubt if that is properly reflected in productivity statistics. And in GDP. It’s an incredible thing to basically have your doctor be able to look right inside things and you know, that that’s a very powerful thing.

Gene Tunny  29:43

Yeah, yeah. Okay. Okay. So I think basically, the takeaway is that well being is this it’s much broader than than GDP. It’s challenging to measure. How is this relevant And for policy, Nicholas, I mean, should should governments be tracking this broader measure? Should they be tracking something like the Hale index? Or the ABS be producing it? And should they therefore then adjust their policies to address this if there’s a deficiency? And yeah,

Nicholas Gruen  30:15

so So that’s, that’s the nub of the question. So there are various lots of people say how wonderful it is, you’ll hear this it’s almost a cyanide, I will hazard to guess it’s a sign that you’re listening to someone who hasn’t really thought about these things very carefully, or sceptically when they start talking about Bhutan. So Bhutan made a really big splash by saying that it was managing its economy for gross national happiness. But if you take it seriously, and you look how they do it, it’s a bit of a joke. No offence to Bhutan, good on them. And they’re doing quite well. So you could argue that it’s all because of well being. But if you try to look at what they’re doing, I mean, it’s very hard to get anything published after about 2009 on the subject anyway, from Bhutan. So it’s a cart that people love the idea that they’re managing for wellbeing. I’m not sure exactly when, but probably in the, the tooth, the, you know, the 2000 to 2010. But maybe earlier than that fair bit of pressure was put on the Australian Bureau of Statistics to produce a wellbeing measure. And I basically pushed back and said, Look, we will produce a thing with series of indicators called measuring Australia’s progress is that it, of course, and we will not aggregate it all and pretend that we can put this all in a single measure. And so you know, they look at natural capital, they look at equity, they look at the environment, and they produce rich data on this stuff. But the calls keep coming, oh, we need to. So in other words, if we had this big demand to manage for well being, then that’s fine, the ABS could produce this data. And then our politicians and our senior thought leaders will put inverted commas around that. They’d be saying, Good, we’ve got the data. Now we’re going to manage for wellbeing, but that’s not what happens. So that’s a sign that something funny is going on. And so around the world, we hear this idea that we’re going to, we’re going to manage for wellbeing. Now, we might be able to go into this in more detail in the next podcast that we’re going to have on this where we’re going to have a closer look at some of this. But I think that is a mistake. I think it is a mistake to go running around creating, quote, wellbeing frameworks, if there are a wellbeing framework of a particular kind, because so New Zealand has done that. Well, let’s go through what’s happened. The Treasury announced that it had a well being framework. And this was announced in a speech by a senior Treasury official, who shall remain nameless, but is closely related to me. And it was announced that there were these five principles in the treasury Wellbeing Framework. And you can imagine, you know, we can work out what they are the first, you know, the top three or four are going to be prosperity, equality of some kind, and we’re going to read a reference to equality. Another one will be a reference to the environment, you know, health, happiness, stuff like this. And the fifth one was happened to be complexity, which was intriguing. And I sort of looked at this and thought, Well, that’s it that’s on what’s like, I can see how complexity is sort of important. But is it a plus? Is it a minus? What’s it doing that? Now, the Treasury Wellbeing Framework or so it was called a well being framework? I think it was quite obvious at the time that it was not a well being framework. It was a set of talking points. Is that a bad thing? I don’t think it is a bad thing. Can Henry wanted the Secretary of the Treasury at the time wanted to make the point or wanted Treasury officials to think more broadly about what the Australian economy was about? No problems there. But it wasn’t a framework because of framework constraints. You and it’s it, you will be applying this framework. Wherever you do work, wherever it’s relevant. I can prove that that didn’t happen, because the Treasury wrote a submission to I think the a triple C on Consumer Policy and another submission on regulation of financial instruments. Now, if that doesn’t raise the question of complexity, nothing does and the word complexity did not appear in those submissions. I’ve documented this So, so it wasn’t a framework. That’s okay. But it’s a very good illustration of a number of things, which is that, you know, it’s very easy to grandly talk about visions. And we should be suspicious of that, we should be suspicious of that for lots of reasons. But without going into, like, if you’re serious about that, I’d be suspicious, because I don’t think it can be done, I don’t think it’ll be helpful. I think it’ll all fall over. But in fact, you don’t really have to worry, because when you get suspicious, what I’m mainly suspicious of is that this is what I call a re skinning operation. And we will get business going on more or less, as usual, with some new words dotted around. And I think that that’s clearly demonstrated in the, in the case of the Australian treasury. And And to top it all off. John Fraser, when he was the Treasury Secretary, just got rid of it. And a number of people were quite upset. I think you were a bit upset. And you said you were sad to see it go. And I said, Well, I’m sad to see it go. But it will it made no difference and making everything go will make no difference. And and I said, Can you tell me anything? Any thing, any piece of work that was changed for you in the treasury by the framework? And I think you had nothing to say then. But you might have more to say now?

Gene Tunny  36:24

Well, I think what I said at the time, Nicholas, was that I think it was designed to change the mindset. There authorising words. Yes, yes. And I don’t think you could ever say, Well, as you mentioned, there was a a submission that it appears wasn’t informed by the well being framework at all, which I think is a really, that’s a that’s, that’s not very good. I mean, I’m surprised that complexity wasn’t, wasn’t mentioned in that. But yeah, you’re right. I mean, it’s very hard to operationalize these things. I mean, because you know, these things come from, you know, the senior executive, or I think it was either Ken Henry, or Blair calmly or someone like that very senior in the treasury. And I mean, you know, that they wanted to have it permeate through the organisation, they wanted people to change their, their mindsets from because there was a concern treasury, or we’re just all the corner Kratts. And all we care about is GDP and the the economic numbers, we’re not concerned enough about broader well being. So I think it was well motivated. It just didn’t, it’s hard to change practice

Nicholas Gruen  37:32

being stuff is well motivated. And that’s my point. Let’s, let’s have a little D tumescence, about how well motivated we all are. And let’s attend to the difference that we’re making. So that’s the Treasury, that’s the Australian treasury. Now the New Zealand Treasury is a very different story than New Zealand Treasury, actually kind of contacted me I’d written some stuff on well being and they contacted me. And I was amazed when I had a look at what they’ve done. They’ve been working away before Jacinda Ardern, turned up and said, Let’s have a well being budget. The New Zealand Treasury were actually doing a great deal of work, trying to reconceptualize the national accounts, and all this kind of stuff. And they were pretty serious about doing it. But I’ll tell you what’s happened. We can talk a bit about this, about their well being budget in a minute. But what’s happened is they have put a lot of work in and the result is that at least in principle, whether they’ve got to this stage or not, I don’t know. But in principle, they would be able to tell you, the world self reported well being of Maori in Rotorua. Now, isn’t that impressive? Well, actually, it’s not impressive, because what’s not impressive about it is that you’ve you’ve put a huge amount of effort and resources into something and thinking resources. And what are you missing out here? Well, what I’m arguing you’re missing out is, you know, what the Mary well being in Roger or is and you’ve got no further information about how to improve it. And that’s what matters. So I want to use well being frameworks. Well, this this hankering for well being as an authorising environment, to start finding some things where wellbeing and GDP deviate the way they were something where there’s a big problem with the well being and GDP is ignorant of it is it’s invisible to GDP, there’s suffering. And I would like to, I would like the well being thinking to start being used to authorise this and I was talking to a state government a treasury, actually, Treasury state government this year, and and I was saying this to them and they said, Well, you Yes, but we need a framework. And I said two things. I mean, firstly, why do you need a framework, it’s not going to help you achieve anything. But I said, I can give you a framework, the framework will be not on how to measure wellbeing everywhere for no apparent reason. But how to build a framework which will deliver wellbeing benefits. And we already have a bit of a, we already have a bit of a picture of that, because we’ve done it conceptually, in another area, which is sort of simpler and more technical, and therefore doesn’t involve the human element so much, and doesn’t therefore engage our feelings in quite the same way. And that is greenhouse. So we have cost curves are very basic, the firt, the first language we ever developed about greenhouse before, even before Kyoto, which I think if I’m correct is 1997, we develop the concept of no regrets measures, what are no regrets measures, they’re things that are good for the economy, and good for greenhouse. And there are quite a lot of those. The classic case of trying to improve the efficiency of at small levels, that management don’t pay a lot of attention to the installation of warehouses and factories, the energy efficiency of electric motors in those things. And they’re actually quite large economic benefits. And they come with greenhouse reductions, and there are still some of those around so I think so the very first thing you go looking for is wellbeing benefits that are no regrets measures, things that have a big impact on the work on wellbeing, while they actually do no harm to the economy. But if that’s the case, is highly likely, given that people who feel good about themselves are more productive and less fractious, and less likely to try and pinch, you know, try and blame other people for their problems and so on. That is that something that could be we could do something very exciting. Now, let me give you a very small illustration, my best illustration of this, it’s actually happening now might have happened earlier, if we’d taken this seriously. In hiring, there is a bit of a craze, you can call it a bit of an ounce, maybe one of the best part best outcroppings of the the woke stuff, which I’m not terribly fond of in lots of guises. But here, if you go to an interview, and you don’t, one way of presenting well you’ll tell most people is you, you aren’t afraid to make eye contact, you make the right amount of eye contact. Well, autistic people find that extremely hard. And autistic people can be extremely productive. So your HR people, the people doing interviews need to be aware of this. And if you’re running an organisation that has lots to do with computer programming, statistics, various kinds of management probably pretty much anywhere, people who who are somewhere on the autism spectrum, not wildly over so that they become socially dysfunctional, but people on the autism spectrum can be if you know that and you manage for that you can massively improve their well being you can massively and you can go do yourself on the productivity benefits that this produce. And so that problem I just mentioned is a large problem. It’s not you know, it might it might affect 234 percent of the population. And it’s in some way, I think, another large problem is that carers, older carers, so I get a bit older and my wife looks after me or vice versa, they tend to be socially isolated. Now Australia has got some quite good policies on this. And we have, we were an early innovator in funding people to go round to older people’s houses and make them a cup of tea, have a chat and then move on or put their dinner on and things like that. But there are lots of things we could do to improve the social connection between carers and of carers and their community and so on. So that’s another area. Another area I would argue would be teaching and probably kids on the autism spectrum, teaching and dyslexia. There are all kinds of things that we don’t manage for these things. Well, well, these things massively depressed, the well being of the particular kids with those with who who have those characteristics. So that’s just a bunch of they’re right at the no regrets area. Yeah. And then I’d like to see some real curiosity about what other kinds of things can we do, which have very low, low short term costs and improve well being. Because a lot of those are actually going to be over any reasonable period of time, no regrets measures, they’re going to contribute to GDP, and they’re going to improve well being. But other than our kind of broad sympathy for such things, you don’t see these types of this type of thinking and those types of initiatives being very high up on the agenda. For in in, for instance, just interact Dan’s wellbeing budget. And if you ask the right question, I will then opine on the well being budget. I just feel I need to give you a word in edgewise.

Gene Tunny  45:51

Okay, okay. Well, I do have a, at least one more question. And but yeah, it would be good to talk about just in the well being budget, too. I was gonna ask, I mean, how are you gonna go about this, but without it being? Like, one of the concerns I have about this whole? Let’s try and, you know, I guess governments have a role of, you know, they’ve got to look after the population, but you don’t, you don’t want it to go too far. Because you don’t I mean, in my view, this is my opinion, you don’t want to reduce the capacity of people to look after themselves. I mean, we should be encouraging Self Reliance to an extent. To what extent does this become paternalism? I mean, how do we do this without public servants becoming busy bodies without interfering too much? How do you go about this? That’s what I’m doing. So I’ll

Nicholas Gruen  46:41

give you an example with Yeah, with I mean, I completely agree. I mean, the idea of public servants fixing that problem, you know, with a hub and spoke model with Canberra bureaucrats or Sydney and Melbourne bureaucrats is just take just take me out and kill me now. What Yeah, this sort of thing is an example I chaired a thing called the Australian Centre for Social Innovation and they have a programme called weavers and weavers is an I call it place base. That’s a term that a lot of people understand. And essentially what it does is there’s a little bit of money there and it engages carers it so it sort of is engaging carers in a local community. A particular care might be my get an honorarium for being a weaver and a weaver will be weaving together, we’ll be running some activities, keeping in touch with local carers, etc, etc, etc, just realising that, because of the circumstances they find themselves in, they need a bit of help and resourcing in maintaining social connection. So it has to be and it’s very cheap. And, you know, and also your some of that money will get wasted, and it won’t work very well and others, it will do terrific things. And it can be, it can provide sort of different kinds of sinews for a community. I’ll give you another example. My wife set up an organisation, my wife and a friend of hers set up an organisation in Seymour called I Wish I’d asked, it was based on it began thinking about oral history. And the idea was to connect school kids and people in aged care homes and older people in the community to record our oral histories. But it turned into a much bigger programme than that. And it was, was it conceived of itself as a multi generational, well be a multi generational anti loneliness programme. They didn’t actually use the word well being. But and it was a, it was a fabulous programme. And I’ll let me just give you an example of because it does go to the connectedness of things. And this is something which maybe we’ll talk a bit more about when we when we look at when we talk about this again. But one of the things that people involved in well being boys talking about is the way things are connected up. And I think so many of those connections are serendipitous, that they’re very difficult to manage for but let me tell you that in Seymour, one of the app camps of this was that young boys so they’re 14, they’re going they’re thinking to themselves, I’m going nowhere, probably they’re not that good at school, their inseam or they’re not quite sure, you know, they’re thinking I might just end up unemployed I don’t really want to end up unemployed and they get in they get involved in this programme. Now some of them are gonna think all people don’t want to talk to old people, and they get in their various the programme have various ways of ensuring that these introductions worked out as well as possible Anyway, they start making friends with these old people. And they saw one autistic kid, we saw an old RSL guy. And they, and the autistic kid became very obsessed with the metals that the old guy or the old guy had. And they talked about these metals and the battles that he’d had every week. Now, that was fantastic for both of them. That is, we’ll be back, let me tell you something else that happened, you know that three of seven or eight boys who were about 14, you know, what they decided they wanted to do for a job. They wanted to work in aged care homes. Wow, you don’t think of young 14 year old boys wanting to do that. But because because we’re brought up in silos. Because, you know, this is reintroducing into the community stuff that existed on its own 80 years ago. And I don’t think, well, I don’t think what happened is that these three kids thought, Oh, I’ve always wanted to do tarot, that’s, that’s me to a tee. I think they thought I can do that. And I won’t be unemployed. And I’ll be useful. And I like these people. And I’ll feel useful. And I’ll have a decent life. And we’re sitting around in Canberra worrying about how do we staff our aged care homes?

Gene Tunny  51:24

That’s a great example.

Nicholas Gruen  51:25

Yeah. So you could justify that. But you could justify this programme, which is run, that wouldn’t cost. It doesn’t cost nothing. But it’s run on the smell of an oily rag, you could use it. I mean, one of the things that the institutions, the aged care homes and the schools, I won’t call them resistant to doing this. But some are. And of course, all of them are subjected to strong regulation, which has been put in place for completely other reasons. So safety checks, police checks, insurance. And it’s not that you want to ignore the issues that those that that regulation is trying to address. But you do want to say that this is a valuable thing. And if it’s getting in the way we want to know about it. And then we want to think about the costs and benefits and whether we can do this in a better kind of way. And so it’s those kinds of things that the the well being agenda, could could address, but really only by making stuff happen and then watching the ripples come out and working out where government’s getting in the way where it can help, generally speaking, not with large amounts of money.

Gene Tunny  52:41

Yeah, yeah, I like that. Good ask what we’re seeing more is that a disadvantaged area in Melbourne as it is

Nicholas Gruen  52:48

pretty disadvantaged, it’s the place where the Australian would furphy comes from see more and further for fees, which have now make money selling their name as a beer, and they give that money to charity. And, and I wish I’d asked picked up some of that money. So shout out to Murphy’s. But so so it’s about 120 My best guess out of Melbourne up north, just getting into Kelly country. And yeah, and it’s where a lot of canned fruit came from, and the firt and the further fees made boilers. And a furphy. In the Australian idiom is what soldiers the story soldiers told, I think this was in Gallipoli, sitting around the boiler and having a cup of tea. I think that’s roughly the story. And that’s where Seymour’s very good learn something.

Gene Tunny  53:41

And I was just thinking that shows the importance of connection and, and connections and important part of well being being connected to family or to friends. And, and that’s, and a lot of people would argue that’s what we’ve lost. We’ve got more people living alone. Yeah. And people just aren’t connected generations as generational divide. Yep. So yeah, I think you’re highlighting that that’s a such a great example of highlighting how you can improve well being with something simple. Now, this might this might have to be the last question for this. This part one of this conversation. You talk about these could be cost effective. This could be low cost is this where something like Andrew Lee’s evaluation unit could be an important part of this story and figuring out okay, we’re spending billions of dollars on these big welfare programmes. And you know, that it could be that it’s better, we’re better off spending a small amount of money on little interventions like this. Yeah,

Nicholas Gruen  54:37

yeah. Yeah. Well, one would hope that some nows about evaluation would enable us to get counterfactual snapshots. I wouldn’t want to say let’s do away with welfare, I would want to say welfare costs us an absolute shedload of money. And for a tiny fraction of that money. We could be doing these kinds of things which are broad health benefits and by health I mean in the broadest sense physical, mental, and community and the health of the community. And we could try to be, I won’t use the word rigorous because that conjures up people with clipboards and bureaucrats, and I just and mathematicians and economists, and I’m not talking about that. I’m talking about trying to be trying to be evidence based, trying to work, trying to notice what works, doubling down on what works and just doing less of what’s not working so well. So I think that’s a great place to finish up. We didn’t get to talk about New Zealand’s well being budget and we can certainly fit that into the next exciting episode.

Gene Tunny  55:42

Excellent. Okay, thank you, Nicholas. Fantastic.

Nicholas Gruen  55:45

thanks very much, Gene.

Gene Tunny  55:47

rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

56:34

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Credits

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Categories
Podcast episode

A new Monetary Policy tool to end Inflation and avoid Recession w/ Prof. Larry Marsh, Notre Dame – EP184

In this episode of the Economics Explored podcast, host Gene Tunny interviews Professor Larry Marsh about his proposal for a new monetary policy tool that uses a central bank digital currency (CBDC) to end inflation without causing a recession. They also discuss the disconnect between the financial sector and the real economy. Larry Marsh is Professor Emeritus in the Department of Economics at the University of Notre Dame and author of the book “Optimal Money Flow.” 

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.

What’s covered in EP184

  • What is optimal money flow according to Prof. Marsh? [1:28]
  • What is the role of government in controlling the economy? [6:24]
  • A helicopter drop of money [13:58]
  • What is the idea of a Federal Reserve/central bank digital currency (CBDC)? [18:56]
  • Fractional Reserve Banking [23:08
  • Narrow banking as a solution to the banking sector problems [24:55]
  • A good example of an all-employee owned company: Burns & McDonnell, Kansas City, MO [31:31]
  • What Larry describes as a winner-takes-all economy [34:37
  • The invisible hand of the market [37:43]
  • Gene’s wrap up: How the current monetary policy tightening is causing hardship in many economies, it may well be worth experimenting with a new monetary policy tool [43:47]

Links relevant to the conversation

Larry Marsh’s Optimal Money Flow website:

https://optimal-money-flow.website/

Where you can purchase Larry’s Optimal Money Flow book:

https://www.avila.edu/optimal-money-flow/

AEA conference session in which Larry presented his idea for the new monetary policy tool using a CBDC (presentation available for download):

https://www.aeaweb.org/conference/2023/program/1335

Australian ABC News article referring to Nicholas Gruen’s savings policy proposal mentioned by Gene in the episode:

https://www.abc.net.au/news/2023-02-12/raising-interest-rates-reserve-and-bank-and-inflation-management/101952926

Nicholas’s 1999 paper outlining the policy proposal:

https://lateraleconomics.com.au/wp-content/uploads/2014/02/AvoidingBoomandBust.pdf

Links to videos on China a listener sent me in response to EP182 with Dr Jonathan D T Ward: 

Prepare for Armageddon: China’s warning to the world | 60 Minutes Australia

Two Davids & Goliath | David Matas & David Kilgour | TEDxMünchen

America Just KILLED China’s Tech Industry 

Transcript:
A new Monetary Policy tool to end Inflation and avoid Recession w/ Prof. Larry Marsh, Notre Dame – EP184

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  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning in to the show. In this episode, I chat with Professor Larry Nash about his idea for a new monetary policy tool which uses a central bank digital currency, a cbdc. Larry argues that this new tool could end inflation without causing a recession. Larry is professor emeritus in the Department of Economics at the University of Notre Dame. In the episode, Larry and I also discussed the disconnect he sees between what’s been happening in the financial sector and in what’s often labelled as the real economy or Main Street. Okay, let’s get into the episode. I hope you enjoy my conversation with Professor Larry Marsh. Professor Larry Marsh, welcome to the programme.

Larry Marsh  01:27

Well, thank you, Gene, this is a great honour to be on your programme.

Gene Tunny  01:31

Excellent. Larry, I’m keen to chat with you about your book optimal money flow. And also a proposal that you presented at the American Economic Association meeting earlier this year. Now this is all very topical, given what’s been happening in the US and in Europe, with banks, we’ve got this age old problem of the stability of the banking system that we really haven’t resolved after many centuries. So I think, I think your book and your work looking at the role of money, the role of credit in the economy, I think that’s, I think that’s highly relevant. So to begin with, Larry, could I ask you about your book, optimal money flow? What do you mean by optimal money flow? And what’s your argument in that book, please?

Larry Marsh  02:28

Well, it’s primarily about the role of government in our economy, and that there’s, in order to have a efficiently running free market economy, government plays a critical role in certain realms where they need to be able to match the marginal cost with marginal benefits. And so you got some that are fairly obvious negative externalities, water pollution, air pollution, positive externalities, where you can talk about a vaccine for a highly contagious disease. So if it was not contagious, and it would be up to the individual to pay for the whole thing. But if it’s a contagious disease, then there’s a common property resource aspect to it. And so you have also you have public goods, and then you have things like highways and so forth. But there’s there’s a lot of areas that people have neglected and not fully recognised. Then I do get into the book into the role of the Federal Reserve, and propose a new policy tool to the bigger the fundamental problem is the the financial markets have become more and more separated from the real economy. No, my father was a Wall Street investment banker. So I learned as a little boy, how the markets worked, and how to invest the money and all of that. But the thing is that the real economy, the GDP has been growing on average, over the decades, about 3% In recent decades, whereas the stock market has been growing by 10%. There’s over three times as much. Well, how can it be that these financial markets are growing so much faster than the real economy? And part of it is the back in 1996? I believe it was that our Federal Reserve Chairman, Alan Greenspan, was talking about irrational exuberance. He said, All these people are pouring money into these financial markets and but then instead of doing something about it, he contributed to this and then other fed chairs and fed boards have contributed to pumping money into the financial markets, whatever they thought the economy was a little bit on the weak side. So part of the problem is that so much money has been diverted, from the real economy, from employees and so forth, that they can no longer afford to buy back the value of the goods and service that they’re producing. And so they go up to their eyeballs in debt they get the private debt is just mushrooms tremendously. So there was this large buildup of private debt as more and more money went into the stockpile. And then I kind of discovered this personally, when I invested in a company and kind of forgot about it, and later discovered that I got a 7,000% return on my investment. I thought, wow, I thought why deserve a decent return, but not 7,000%. You know, I thought free free markets and free enterprise is all about incentives and giving people incentives. So hard work pays off, but not for the person doing the hard work hard work, hard work pays off for the shareholder. And so you really want to see people like Steve Jobs at Apple Computer, you know, when he created Apple Computer to get rewarded strongly, all the hard working employees, the company that I had invested in was Adobe. And they were very creative, and imaginative people, but, but I was getting all this money. And what did I do all 84% of the stock market is owned by the 10% richest people. And when you get a certain amount of money, it gets to the point where you’re not quite sure what to do with it, you can only wear one pair of shoes at a time or buy one car at a time, you may have a couple of summer cottages and you know, maybe you have three or four cars. But after a while it gets to be a burden to deal with all these things. And so you basically just find that you have to invest the money somewhere. I mean, you couldn’t just take it home and stuff in your mattress. So it makes sense to reward entrepreneurs and creative people. But because the stock market has been ballooned by so much money going into it, and then Chris Leonard wrote the book, The Lords of easy money about how the Federal Reserve was pumping money. And then Karen Petroff, has written the book the engine of inequality, about how the Fed is pumped so much money into the give the money to the wealthy people through the financial markets, and then trickle down with the idea that it would trickle down to the real economy. And unfortunately, doesn’t trickle down all that well. And it just builds up and the markets just growing up, up and up without the money. And it’s gotten so bad that non financial firms have discovered that they can actually make more money investing in the stock markets and investing in their own business. So instead of creating new products, or enhancing the products already have or improving their productivity, they say, Hey, we can take this money and put it into the stock market and get a better return than just investing in your own business. And this is really hurt productivity in America and in other developed countries as well. And money flows from around the world into New York financial markets. And sometimes it’s detracts from real investment in the real economy. And so, in retrospect, I think maybe I should have bought my book distorted money flow, or money flow. You know, I was trying to say where we should be going. But I probably should have spent more time laying out where we are, and what what needs to be done than just laying out an optimal world as to what the role of government should be in that in that situation.

Gene Tunny  08:06

Okay. So Larry, in your view, what does need to be done? Well,

Larry Marsh  08:11

as far as the Federal Reserve is concerned, I think it’s very important to recognise that there’s two tools that one could use in controlling the economy. The tool that the Federal Reserve uses exclusively is the cost of borrowing tool. But there’s also a return on savings tool, which the Federal Reserve has ignored. Well, of course, part of the reason it’s ignored it because it hasn’t been authorised by Congress to make use. So I can’t really blame Jay Powell and the others in the Federal Reserve Board for not using a tool that they have been authorised to use. But I talked about this in the book, and why they need to have accounts for everyone with a social security number in the United States would get an account with the federal government. And these could be interpreted as part of a central bank, digital currency, to be a true central bank digital currency, you would have to allow anybody in the world, say somebody in India or Australia, who had US dollars, to set up an account with the US Federal Reserve Bank. And so if anybody anywhere in the world could could set up an account, and then transfer money in and out of their account that account when in fact be a digital currency. That’s the kind of the idea behind digital currencies. Now you the alternatives is have a coin based or per token type base, like Bitcoin, but then you would be supporting money laundering and a lot of legal activities. So one of the ideas I had to protect people’s privacy was to have two separate files. So transactions file, where you keep track of all the transactions that take place, and then a personal identification file. There may be a few transactions that need to go on the personal identification file because it’s becomes too obvious who the person is. But basically, you want to have a situation where government agency, government authorities can look through the transaction file all they want. If they find something that looks suspicious, that looks like criminal behaviour, then they go to a judge and get the authorization to access the Personal Identification file. So this would hopefully satisfy some conservatives that were concerned about the government having too much oversight or control over their accounts and what they were doing and so called spying on them. I personally knew that I’m happy to have the government spy on me as long as I can spy on the government, but you know, happy to have the police spy on me as I can, I can spy on the police. So I don’t have a problem with with the privacy issue, but some people do. And so I did propose that as part of this idea. The other idea is to use these accounts, so that you could intervene directly into the real economy, and not have to go through the financial economy. And so if you were able to offer say, if they have a six or 7% inflation, if you’re able to offer 10%, return the 10% savings interest rate, then this, this would target the marginal saver where you don’t know it’s only on the first say $10,000. Or you can even limit it to 5000, you want to target the marginal saver not the wealthy who are just moving their money around, not the poorest of the poor that can afford to save anything. But the marginal saver who’s probably making about 50,000 US dollars a year and could be saving more. Because the whole problem with inflation is you’ve got too much money chasing too few goods, the demand is too strong and the supply is too weak. The problem with the way the Federal Reserve does it now is when they raise the cost of borrowing. Yeah, they do raise the cost of items that require getting a loan, for example, automobiles or housing. But it doesn’t affect the items that don’t require getting a loan. So you’re really just shifting the inflation from the items that require loan to items that don’t require a loan. But where the Fed is able to be effective is through the supply side. Because there’s a lot of businesses that have to borrow. Some are retail businesses that operate in the red most of the year until they get to the holiday season, where they cover their costs and make a profit is farms that may operate some marginal fields where they have to put a lot of money in in the spring, and they don’t get any money until harvest time. So there’s all sorts of businesses that have to pay for their inputs before they ultimately work to the point where they have outputs to sell and get the money. So if you raise the cost of borrowing, this, this puts the brakes on to some degree, it means that the these businesses cut back hours layoff workers and close outlets. And this ultimately suppresses demand because the workers aren’t getting the money, and you can’t spend money you don’t have. Yeah, so ultimately, that’s what slams on the brakes, and causes us to suppress the inflation, but it does so at a great risk of having a recession. Whereas if you offered the 10% on savings, and targeted the marginal saver, and of course, prices are set on the margin, not on the average. So it’s actually the marginal saver that sets the prices and determines the inflation or not. And in times of recession, you can inject money directly into these accounts, the central bank digital currency accounts for everyone with a social security number within the United States. Now, you can offer the 10% savings on the first say $10,000, but only for those that had a social security number. So if you’re in Australia, you wouldn’t get the 10% return on the money in the accounts because you didn’t have the social security number, your social media, because the US would be targeting its own country, you know, the US in terms of inflation or recession? And then presumably, Australia would have its own central bank digital currency could do something similar. In that respect. Yeah,

Gene Tunny  13:58

that it makes the so called helicopter drop of money a bit easier what it is, that’s essentially what it is you’re injecting an additional 10% into all of these accounts in the States.

Larry Marsh  14:10

Yeah, there’ll be different ways of doing this. So if you’re trying to fight inflation, you offer 10%. But if you’re trying to stimulate the economy, you can inject money directly, and just put it in the people’s accounts say, okay, and which, which they’ve done to George W. Bush, they did, they did inject money, you know, gave people the money. So there’s certainly a more direct way of doing it, then doing it through the financial markets during trying to trying to control the real economy through the financial markets, which has not been working very well.

Gene Tunny  14:38

Well, and it certainly, I mean, people are asking a lot of questions about I’ve noticed that so that, I don’t know if you saw the interview that Jon Stewart had with Larry Summers, and I mean, he absolutely ripped apart Larry Summers it was it was quite extraordinary. And it just shows the popular. Just how the Federal Reserve’s going about it. monetary policy, it’s difficult for it to explain and it’s difficult for the, for it to convey to the public why it needs to do this. And you may have seen the other exchange that was at some of the senators with Jay Powell, and he was trying, they were trying to get him to say that he was, you know, he basically wanted unemployment to go up to slow inflation. So it’s a very, it’s very difficult for the central banks to explain what they’re doing. And perhaps Yeah, this could be another tool for them. But Larry could ask about the feasibility of this, what do we know about the responsiveness of savings to interest rate changes to the returns on saving? Well, that’s

Larry Marsh  15:39

a good question. And this, I would agree that I am not very precise on this. And so we would have to do some experimenting to find out what level of interest rate may work. Now we know that when things get too extreme, people will respond. So we know for example, when inflation starts getting faster and faster, people will start spending money faster and faster. And then sometimes they’ll get their paycheck, and they need to spend it within hours in Zimbabwe or, or Venezuela, where you get this horrendous inflation. So we know that people do ultimately respond to financial incentives. It’s just a question of how extreme you have to go. And so we would experiment I’ve said 10%, right off the top of my head without any empirical evidence to support it. So I would be the first one to admit or to agree that there needs to be a great deal of econometric research to determine what the appropriate levels would be, and how effective they would be.

Gene Tunny  16:37

Yeah, yeah, I had to look at what the literature says, doesn’t mean people. consumption spending will be influenced by in savings will be influenced by the way, those interest rates to an extent, but then they’re influenced heavily by your, your level of income. So I might have a look, I might do some digging myself. It’s an interesting proposal, for sure. Can I ask you about the Postal Service? Yes. Can you tell us that story, please.

Larry Marsh  17:09

So I talked about using a central bank digital currency to influence the problem and inflation or the problem where the recession, but one could also do it through the postal bank accounts, which we used to have in the United States under the postal banking act of 1910. So for over 50 years, when I was young, over 50 years, people could go to their local any post office and cast a check or set up a savings account. And Canada also did this. And we continued until 1966, when they terminated this postal savings accounts. And Canada went for a couple more years, and they terminated theirs in 1968. But Canada now in 2022, has reinstituted the postal banking, they they’re focused somewhat on concern for the disadvantaged to get into an automobile accident or a medical emergency or the rent goes up and they go to pawn shops or payday loans, and they get exploited where they they get deep into debt and then can’t get out of debt. So there’s been some political concern for these people in the in the United States with the end in Canada, as to how you could make loans available at a reasonable interest rate small loans, and Canada has now started their their postal banking back and are making these loans available to people who are in a tight situation and don’t have much income and need need some help with the over the short term without having an exorbitant interest rates.

Gene Tunny  18:56

Rod. Okay. So with your your proposal, you’re proposing that people could have accounts, essentially with the Federal Reserve, so you have this CB DC, does that do away with the need to have a bank account or to deposit money into? I don’t know what’s what the I mean, what are the banks had put money in in the states would have been Chase Manhattan? It was at an investment bank. I’m just thinking in Australia,

Larry Marsh  19:27

Bank of America, Bank of America an example. Okay, yeah. So this is a very interesting gene, because there’s been a lot of people have been raising questions about this, and saying, well, maybe there’s a better way to do it. And I would agree that it’d be interesting to have intermediaries to access your fat account so that the referring to it as the Fed account in the central bank, digital currency, United States is the Fed account. And so you could go through your regular bank and they would be paid a fee for allowing you access to your central bank digital currency. So it might be that instead of by going directly to the Fed, you would be operating through PayPal Venmo, you know, digital wallets. And part of the idea behind that is the feeling that the private sector has a tendency more creative than to come up with other financial tools and things that are valuable to consumers. And so rather than trying to exclude the private sector, from the central bank, digital currency, we might even pay them to help carry out some of the work and, and the the access by individuals and, and how to access their account and how to use their financial situation more efficiently in this context.

Gene Tunny  20:45

Yeah, yeah, there may be some benefits in that rather than having the central bank having to manage all of that. So yeah, I can see the logic in that. Larry can ask you about the banking system. So one of the things I’ve talked about in a previous episode, is this idea of narrow banking, which has been one of the proposals to address this fundamental problem that we’ve got with banks that rely on deposits. There’s this mismatch in the the maturities of their assets and liabilities. Have you done any thinking on this? What was called the Chicago Plan, this narrow banking concept? And is that a way that some of these problems could be solved? Could it fit into your framework? Could you tell us about that, please?

Larry Marsh  21:36

Yeah, people don’t realise that. Over 90% of the money in the United States is actually not created by by the Federal Reserve is created by banking system, that that people sometimes have the mistaken belief, and it’ll be called the loanable funds theory that you put money in the bank and the bank loans that money out? Well, that’s not what’s happening. Then other people think, okay, I put $1,000 in the bank, and the bank leaves $100 And they loan out $900? Well, no, that’s not the way it works. either. You put $1,000 in the bank, let’s say you put a 10 $100 bills, okay, so that’s, that’s real money, or whatever you want to call it. And then the bank would that $1,000 can then create $9,000 out of thin air. That because then that, that 1000 is 10%, which is the wonder the quote, so called fractional reserve banking, but it really the the term fractional reserve banking is a little bit misleading. It should be called Creative creation, banking, or something like that. But so part of the problem is that you are, as you point out, if you’re allowing people or banks to create all this money out of thin air, just on the basis of deposits, especially checking deposits or deposits, that can be withdrawn almost immediately, then that makes for a very shaky situation. And not only does it make it for a shaky situation for individual bank that might get into trouble as we’ve seen. But it also creates a situation where when, when the economy is doing well, the economy starts expanding and really looking great, then these banks have a tendency to make lots and lots of loans, because they have all these excess reserves, so they can they exacerbate the situation so that the irrational exuberance carries over into the loan market. And it’s become even worse now that they can securitize these loans. So it used to be that the local banker was very careful in making loans that be pretty certain things would be, and they would know about local conditions, much better than any one out any other banks or outside the local area. And so but nowadays, they can securitize the loans, they can make a loan. And it’s a little bit shaky. Yeah, what the heck, I’ll just sell it off to the markets. And so this securitization has made it even more shaky. And then when the economy starts to slow, or when they think, for example, that the Federal Reserve is trying to slow the economy and might push us into a recession, then they say, Oh, we better cut back on our loans. So they cut back. And that makes things even worse, and especially during an inflation, the banks don’t want your money, when they think the economy is going to be slowing. Because they don’t, they’re not going to use it. And they just have to pay you some interest rate. They’d like to set the savings rate at zero at that point that would freak everyone out. So they’re not going to do that. But they really don’t have use for your money. And but you’re putting money in the bank that just causes them a liability of having to pay you on your account for money they don’t need and don’t want. So that’s why it’s necessary for the government to step in and offer say 10% on savings in order to slow inflation those times because the banks aren’t going to do it.

Gene Tunny  24:55

Okay, and I mean with this. So with narrow banking do Do you think there’s merit in that concept?

Larry Marsh  25:02

Yeah, I think there’s some merit in that, because you could limit it to a savings account. So in other words, don’t allow checking to serve as the basis, but you could use any discounts or you could use certificates of deposit, they’re even more solid. Because you can’t withdraw that is readily. So yeah, you could do narrow banking, where you focused on savings accounts and certificates of deposit and not on checking accounts. So that would certainly reduce the irrational exuberance, if you say, you know, the, the generating getting too far out on the limb for the individual banks and, and exacerbating the problems of the economy, for the the banking system as a whole contributing to problems and for the economy. And so, you know, there are definitely both individual bank problems, and the economy wide problems that come about through this fractious so called fractional reserve banking, which I which, as I said, really should be called very credit creation banking. Yeah. And then narrow banking would help reduce these problems, both for the individual banks and also economy wide. So now banking would certainly be better than what we’re doing now.

Gene Tunny  26:17

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

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Gene Tunny  26:52

Now back to the show. I wanted to ask you, how was your your presentation at the AAA meeting receive Laurie was it was a positive reception?

Larry Marsh  27:08

Well, I think so now, my discussing. You know, there’s an old joke, I don’t know if you know this, the difference between a British discussion and an American discussing the British discuss it, we will say a few nice things about your work and then proceed to tear it to shreds. The American discussion will summarise your work, and then proceed to spend the rest of the time talking about their own research. But but so my discussion did point out, which I think is perfectly legitimate to do so that if you want something to serve as as purely a medium of exchange, you shouldn’t introduce the interest rate, either positive or negative interest rate, you should just make $1 be $1. And you don’t gain anything, you don’t lose anything. It’s just like the dollar bill in your pocket. A US dollar bill in your pocket. So he felt that to be a medium of exchange, you wouldn’t. And I can say well, okay, but then we could do that through the post office as I’ve, as an alternative, instead of saying, well, your central bank, digital currency will earn you 10% interest, I can say, okay, an account with the post office loan you 10% interest, so we can do it in a separate way. So I did run into the idea that maybe there’s different objectives. And you may want to have a central bank digital currency that doesn’t get you involved in the offering the return on savings and do that through the post office instead. Now that’s a possibility.

Gene Tunny  28:41

Rod. Okay. I’ll have to check whether the discussing prepared any remarks or or a PowerPoint, just to see what they are. They’re driving it there. Right. Okay. Larry, you mentioned about the just this disconnect, or this apparent disconnect between what’s been happening in the real economy. So what’s been happening with GDP, and then what’s been happening in the stock market, and then you talked about the disproportionate returns. Do you have any thoughts on what needs to be done there? Do you have any proposals there? I mean, yes. You mentioned the Federal Reserve’s probably

Larry Marsh  29:20

there’s interesting problem in that. Right now. The way our corporate boards work, is the CEOs tend to get other CEOs on their board. So it’s basically the CEO and his golf buddies or their corporate board. And so I’m on your board and you’re on my board and I maximise your compensation, you maximise my compensation, and we’re all concerned with the short term share price. But the problem is, you want an innovative economy, you want a board that’s really knows what’s going on in the company, and the CEO basically gives the board all these reports about what a great job the CEO is doing, you know. And really, you want representation from product development, you want representation. From sales, you want representation from marketing, you want representation from distribution you want to get. So Germany has come up with an approach where they require a certain proportion of the corporate board be elected directly from the rank and file employees. And this gives representation of what’s actually going on in the company. And not some hypothetical theoretical stuff that the CEO comes up with to show the corporate boy, what a great job they’re doing. And so this problem is that the maximising of shareholder value has diverted the attention to the short term share price. And an example of this would be Apple Computer, Apple Inc, as it’s now known for Steve Jobs is a very creative, innovative guy who came up with all these great ideas and then this, and then John Sculley came along and said, You know what, Steve, you need a professional manager, you need someone that knows how to maximise the margin and get the profits up, and let’s get our share price up. And so John Sculley came along and kind of pushed Steve Jobs aside, and took over. And then after a while, they became to realise that Apple was losing his competitive advantage against his Microsoft and other companies. And they said, no, no, no, we need to get Steve Jobs back in here. Because you’ve gotten off on the wrong track, you’re no longer focused on the customer, you’re no longer focused on innovation, creativity. And so we need a system. And I found out here in Kansas City, there’s a company called Burns and McDonnell, and a former CEO of burns. McDonald just wrote a book called create amazing. And what it is burns in McDonald’s started as a small construction company in Kansas City, then it grew to a nationwide us wide construction or an engineering company. And now it’s a worldwide engineering company. Well, it turns out that Burns and McDonnell is all employee owns, when you retire, you have to sell your shares and get the money, but only the employees own the company. So you This is recognising the agency of employees, employees are not just another factor and put like steel or glass or plastic, these these people have agency. And when they work together, and they say, Okay, we benefit when the company benefits. So it’s not just that individuals are motivated, because they’re gonna benefit as an individual, but because their teammates need to do their job. So it’s like being on a football team or you know, on any sort of athletic team, that it’s not just you’re doing your job, you got to be on the case of your compatriots, your colleagues to do their job. And so this is really we’re talking about free enterprise, you talked about incentives, the proper incentive structure, and getting employees involved in the corporate operation, and getting them rewarded for their involvement in the proper operation. Instead of giving that 7,000% return to you know, that Adobe, I invested in Adobe and got that 7,000% return while I was a deadbeat, I’d forgotten that invest in the company. I was like getting this money, please creative entrepreneurs, these these employees, these hard working people that create this new software, they should get the money, not me, I should get some return on my investment, but not 7,000%. That was just too much.

Gene Tunny  33:22

Well, yes, I mean, well, Dan Mitchell, I don’t know if you know, Dan, at all, but Dan is former Cato Institute, on his on his website, he often links to, I think you can make voluntary donations to the US Treasury. But now he puts that as a bit of a joke. I don’t think anyone would like to do that. But what I would like to ask you about Larry is if there are these outsized returns, or returns that people really, you know, they may not have needed those returns to have actually inspired them or induce them to invest or to save or invest? Do you see any role for tax policy? Do you see any tax policy changes? Would they be desirable in the US?

Larry Marsh  34:05

Well, that’s a good question. I was actually inspired and reading my book by a book by George Cooper was recently called Money, bloody revolution. And later, he really issued it as sort of a second round revised edition called fixing economics. And he points out and I remember the chair of the economics department, Sherwin Rosen back in 1981, I believe was wrote an article in American Economic Review called superstars. And he’s basically pointed out and George Cooper picked up on this idea that this there tends to be a winner take all approach in our economy and you know, athletics, it’s pretty obvious entertainment is pretty obvious, but it’s also obvious. I’m trying to think about an Amazon I think the average pay was something like 33 $1,000 That year, and the new CEO, I’m trying to remember his name is now getting $214 million a year. I mean, you know, the question is, you know, is this is this the free enterprise system? But no, and the the interesting book by Steven Clifford called the CEO pay machine. Steven Clifford was on these boards. And he came to realise that this was not free market that competing to get the most capable CEO. This was a rigged system, where the CEOs maximise each other’s compensation. And so, you know, when we talk about free enterprise and incentives, we need to be realistic about what we’re talking about. And not imagine a hypothetical world, a theoretical world where there’s full information and one of the things I talked about in my book is that economics is based on rational independent decision makers. When we’re talking about rational expectations and all this rational list and rational down that on average, people should be rational. And then Dan Ariely wrote the book, predictably irrational, but not only are people irrational, but they’re predictably irrational, why is taken out now, of course, the field of behavioural economics and economics has come about to explore some of these possibilities that people are irrational and predictably irrational. But why it took economists so long to figure this out. But the people in marketing have understood this and exploited this for hundreds of years. To kind of uncivil very slow and facing the reality that we don’t have this perfect information, perfect efficiency in the markets don’t solve all of our problems, we need to be realistic about what the markets can do and what they can’t do. And they work very well, for goods and services up to a point, although in reality, Adam Smith, really there was really two invisible hands, people, people talk about the first invisible hands were businesses compete with one another, to produce better quality products at lower prices. But Adam Smith implicitly had a second invisible hand, and in his second invisible hand, is that businesses conspire with one another against the public to raise prices. So you have the second invisible hand of market power, you have the first play of a competition, but then the second invisible hand of market power, and these invisible hands are in constant struggle with each other. And it’s government it has to be has to play a role in making sure that the invisible hand of competition wins out, and that the head of market power doesn’t corrupt and undermine the system.

Gene Tunny  37:43

Raw and okay, I’ll have to look back. I know that there are I know that famous passage in Adam Smith about how seldom do men have the same trade gather together? And the the conversation does not eventually get on to some conspiracy to fix prices or something like that. Exactly. That’s exactly, yeah. But did he was he? Was he suggesting that was another invisible hand? Was he did he do that explicitly? I’ll ask well, I

Larry Marsh  38:09

don’t think he did that explicitly. No, no. So I’m basically proposing that, you know, but I think others may have proposed that as well. So say there’s really two invisible hands.

Gene Tunny  38:17

Gotcha, gotcha. Because he did actually talk about the invisible hand of the market or the price mechanism. And then your suggested or and others have suggested that there could be this other invisible hand. That’s that’s an interesting concept. But yet he certainly he was, he was concerned about market power. I like that example of what was it Burns and McDonnell. City. So to look at that, it is challenging to find, I mean, I know there are examples of these of a worker cooperatives or cooperatives more generally, in the world, and either asset, some successful examples, but they’re, they’re often special circumstances, or it can be something that’s hard to get, right. But that’s it sounds like they’re doing something right. Or they’ve got a very good culture, they’re in their business that enables them to be successful, and then how to look on their website looks like they’re doing all sorts of incredible things in aerospace and in, in clean energy, etc. So I’ll put a link in the show notes to that operation. Okay. Couple more things. Larry, there was a proposal in Australia here from an economist, Dr. Nicholas grew and which, when you were talking about your, your idea of these accounts with the Fed, and then you could use, you could use this borrowing rate to encourage saving and that can pull you know, that means that there’s less money chasing those few goods and that can pull back on inflation. There was an idea from an economist to Dr. Nicholas grew and he was suggesting that in Australia, we could use the there’s a compulsory superannuation system so what you could do is If there is a inflationary time, you could require more contributions into that. So that’s another. That’s another concept. I don’t know whether you’ve seen that idea at all whether you have any reactions to that. I know I

Larry Marsh  40:14

need to understand that a little better. Okay, I’ll might I

Gene Tunny  40:17

might send on a link to the to that that idea, because probably should have given you a heads up on that.

Larry Marsh  40:25

Very interesting. I’d like to look at that. Yes, absolutely.

Gene Tunny  40:28

Yeah. So because there’s a bit of discussion about this in Australia at the moment, too, because these interest rate increases are starting to affect households. And I think unlike in the US, the large majority of you know, people who borrowed for Home Loans here in Australia, mortgage holders, they’re, they’re on variable rates. So they’re really affected when those interest rates change when they increase and so there are people who are now paying $1,000 or more a month, on their, on their home loans. And that’s really starting to affect budgets. Okay, Larry, before we wrap up any final thoughts on optimal money flow, or how we can make things better?

Larry Marsh  41:16

Well, let me first just say that if one purchases Apple mindset, or directly to Apple University Press, then all $24.95 goes to student scholarships, I pay for the production of the book and the mailing of the book. On the other hand, if you’d prefer to listen to Apple money flow for free, Bupa digital.com, is used by many public libraries. And it’s actually better in my average humble opinion than Libby or some of the other ones where they where the public library just gets a couple of copies of an e book or, or an audio book, where and then then you have to go through a hold period to wait until one becomes available. But in hoopla digital, it’s a rental system. And if 20 People suddenly want this book, big, all 20 Again, so there’s no hold period. So it’s free to listen to through your public library, or your Public Library’s paying for it, and you’re paying for it in your taxes, which is important. And that’s something I also wanted to point out was the public libraries. And public education in general is so important, because our most valuable resources are people. And too often, conservatives overlook the important role that government plays in making sure that we get or as close to equal opportunity as we can. Because they say the most important decision you make in your life is your choice of parents, you want to choose rich, well executed parents, well, you haven’t been able to do that, then the public library and our public education system is designed to give you a fighting chance. So I think that we need to recognise how important it is to make sure that all children and I like to say I think the solution to crime in the inner cities is college, get these kids out of that crime laden area and get them into college, we have a number of colleges now, because of the low birth rates and the fewer people coming to college, who are really trying to help get scholarships, funding for disadvantaged students, and get them out of those prime laden inner cities and get them into nursing, accounting, chemical engineering, anything other than shooting it out in the inner city. So, you know, I like to say the solution to crime is college.

Gene Tunny  43:41

Yeah, yeah. Yeah, absolutely. I think education is incredibly important. Okay. Yeah. First, Larry Marsh, thanks so much for your time, I really enjoyed talking about optimal money flow and learning about your proposals. So I thought that was great. And yeah, really found some of those examples. Valuable, though, particularly burns. And McDonnell, I’ll look into that a bit, a bit more. And you gave some good references there, this idea of the co pay machine, that’s something that I find I’m interested in looking at a bit more, because there’s definitely the potential for co pay to get out of proportion to what is optimal, given there is that principal agent problem in companies? So the fact that the people who run the company are acting as agents of the principals who are the shareholders and so yeah, that’s that’s certainly a problem. Yeah, very good.

Larry Marsh  44:52

If I could mention another book by Lynn stout called the shareholder value myth. And so she’s actually a I’m lawyer who has really investigated this whole concept of shareholder value, and found that there’s a lot of flaws in the way this shareholder value concept has been presented. And she really explains that well, and it’s worth looking at the shareholder value event. So I know your guests probably don’t spend all that time promoting other people’s books. But I found so many books that are so valuable. And I mentioned the Greg graves book create amazing another, which is also on hoopla digital. So it’s easy to access to your public library.

Gene Tunny  45:35

Very good. I’ll definitely put a link to to your book, Larry, and to optimal money flow and also to your AAA presentation, which I thought was was was great. Yeah, lots of lots of good illustrations in it. So well done on that. Very good. Well, Larry, I’m pleased that things are getting warmer there. For you in in Kansas City. And thanks so much for your time. Really appreciate it.

Larry Marsh  46:06

Ron Frank Eugene, you have a wonderful podcast. I was very excited when I’ve learned about it. And you’ve covered some wonderful topics. I’ve been going through your podcasts and learning a lot from your guests. So I encourage people to check out your podcasts and take advantage of all their wonderful information that you’re making available.

Gene Tunny  46:26

Excellent. Thanks. Thanks, Larry. And yeah, have a great day. And I’ll see who knows, maybe I’ll chat with you again soon. Really appreciate it.

Larry Marsh  46:35

We’re okay, great, thanks to.

Gene Tunny  46:41

Okay, have you found that informative and enjoyable? Given all the hardship that the current monetary policy tightening is causing in many economies, it may well be worth experimenting with a new monetary policy tool along the lines suggested by Larry. As I noted in my conversation with him, I’m unsure just how responsive household savings will be to the interest rates on cbdc accounts. But I’d be interested in seeing the results of a pilot study of the concept. That said, I know concerns have been expressed about CBDCs by many people, including libertarians and crypto advocates. For instance, there’s a concern that a cbdc could allow central banks and governments greater control over our lives. I probably need a full episode to explore the pros and cons of cbdc. So I’ll aim to do that in the future. I should note here that a previous guest of the podcast, Nicholas grown an Australian economist that I’ve worked with from time to time, he’s previously proposed that the RBA provides digital bank accounts for Australian so a proposal similar to what Larry is proposing for the US. He’s also offered his own interesting alternative to conventional monetary policy. And this is something that the ABC journalist Gareth Hutchins is written up in a recent story of his and I mentioned that to, to Larry, in my conversation, so I’ll put a link in the show notes to that ABC article. In a 1999 paper for the Business Council of Australia. Nicholas proposed very in the superannuation contribution rate. So that acts as a counter cyclical macro economic policy instrument. I’ll link to that paper in the show notes, and I might try to get Nicholas back onto the show to discuss the idea with me. Overall, I’m not sure about the feasibility, economic and political of various alternatives to the existing monetary policy approach to fight inflation. But given the downsides of the existing approach, I’m open to exploring and testing alternatives. Okay, I’d be interested in your thoughts on this episode. For instance, Are you positive or negative about CBDCs? What do you think? And what do you think about employee owned companies such as burns, and McDonnell and Kansas City? Can they work? Have you seen any good examples of them? Please send me an email with your thoughts, you can reach me via contact at economics explore.com. Recently, I’ve had a listener send me links to several videos on China after he listened to my recent conversation with Dr. Jonathan DT ward. Those videos included some rather troubling evidence which would support Dr. Ward’s arguments. So I’m very grateful to that listener for having sent links to those videos because they’re forcing me to think more deeply about the West’s relationship with China. I’ll include the links in the show notes. Finally, if you enjoyed what Larry had to say this episode, please consider getting a copy of his 2021 book optimal money flow, also linked to in the show notes. Thanks for listening. Right Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com or Smile via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

50:34

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Credits

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Categories
Podcast episode

Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

The Australian Government has been having trouble getting its proposed Housing Australia Future Fund (HAFF) passed by the Senate. The policy looks odd. With some justification, the Australian Greens have commented: “In its current form the Housing Australia Future Fund (HAFF) legislation will see the housing crisis get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteeing a single cent will be spent on housing.” In their dissenting report on the bill, the Greens’ cited the views of this episode’s guest, Dr Cameron Murray. Cameron is a Post-Doctoral Researcher at the Henry Halloran Trust at the University of Sydney. 

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 Dr Cameron Murray

Dr Cameron Murray is Post-Doctoral Researcher at Henry Halloran Trust, The University of Sydney. He is an economist specialising in property and urban development, environmental economics, rent-seeking and corruption.

Book: Rigged: How networks of powerful mates rip off everyday Australians

Website: https://fresheconomicthinking.substack.com/  

Twitter: @drcameronmurray 

What’s covered in this bonus episode

  • Cameron’s submission to the Senate Inquiry into the Housing Australia Future Fund Bill [2:39]
  • What’s going on with the Housing Australia Future Fund [5:02]
  • The only reason you can make a premium is if you take risk [8:57]
  • Why you need to separate the funding and the spending [10:36]
  • Why doesn’t the Future Fund just directly invest in new houses? [14:21]
  • How governments are increasingly doing financially tricky things that don’t make sense [19:23]
  • Cameron’s thoughts on the impact of the bill on the level of investment in housing [23:14]
  • What’s going on behind the scenes at Parliament House [26:18]

Links relevant to the conversation

Cameron’s submission to the inquiry into the Housing Australia Future Fund:

https://fresheconomicthinking.substack.com/p/australias-housing-future-fund-my

Direct link to Senate Committee inquiry report:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills/Report

HAFF inquiry home page:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills

Transcript: Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

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  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, welcome to this bonus episode on the housing Australia Future Fund. The H A double f or half. It’s Saturday the 25th of March here in Australia and throughout the week, the Australian government has been having trouble getting the half passed by the Senate. That’s probably unsurprising because the policy looks like a bad one. With some justification the Australian Greens have commented in its current form the housing Australia Future Fund legislation will see the housing prices get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteed a single cent will be spent on housing. That paragraphs from the Greens dissenting report on the housing Australia Future Fund bill. In that dissenting report, the greens relied significantly on testimony to the inquiry from my guest this episode, my fellow Brisbane based economist Dr. Cameron Mary Cameron is a postdoctoral researcher at the Henry Halloran trust at the University of Sydney. I recorded this conversation with Ken Friday last week on the 17th of March 2023. I’ll link in the show notes to Cameron’s submission to the inquiry into the half cam submission as a great example of the application of economic logic to an important economic policy issue. Cam sees through the accounting trickery and the financial engineer at behind the fund. He shows how the Australian government has been too clever by half. It’s trying to get credit for doing something about the country’s housing crisis. But what it’s proposing could be next to useless. Right. Let’s get into the episode. Please let me know what you think about what either camera I have to say by emailing me at contact at economics explored.com. I hope you enjoy my conversation with Cam Dr. Cameron Murray, welcome back to the show.

Cameron Murray  02:39

Thanks for having me again, Gene.

Gene Tunny  02:40

Oh, it’s a pleasure, Cameron, I read with much interest your latest post on fresh economic thinking. And it’s about your submission to the Senate inquiry into the housing Australia Future Fund Bill 2023 and other bills. Could you tell us a bit about what that involves? So you’ve written a submission to this inquiry? And you’ve also presented to the inquiry you gave testimony? Did you?

Cameron Murray  03:07

Yeah, that’s right. So this bill was passed their house, the lower house, and now the Senate is reviewing it. And what they’ve done is held this inquiry asked for public submissions, and had people who made submissions come in for a day of expert testimony so that their senators can ask specific people, you know, technical questions, what do you think about this? What about this design element? And so I was part of that on on Wednesday, this week. And yeah, so the bill itself is called the housing Australia future funding bill. And the basic idea is the government has decided to address Australia’s current housing problems. We’ve seen rents rise, we’ve seen rising homelessness, we’ve seen longer queues in public housing waiting lists, they’ve decided the best thing for them to do is take $10 billion from the Treasury and give it to the Future Fund, which is a sort of publicly managed investment fund, and cross their fingers and hope that that fund makes a return that’s higher than their opportunity cost, you know, the cost of the government’s dead and use that margin on the risk to fund something in the future, some unspecified, granting in relation to what in the text of the bill is called supporting housing need. So that’s what it was all about. And, and yeah, I gave some testimony on Wednesday.

Gene Tunny  04:35

So the federal government’s claiming that this is going to help them build I think 30,000 social housing dwellings over the next five years or so. So that’s their that’s the plan. But I think what I like about your submission is it essentially talks about how this is a rather roundabout way of going about it, which doesn’t actually guarantee you’re going to deliver it to you As in,

Cameron Murray  05:00

this is the mad thing. And this is. So let me start by saying, to be clear what they’re doing to build houses is taking $10 billion and buying all sorts of assets in the future funds that are not houses. Right? So that’s what they’re trying to do. And it’s really funny because there’s an actually an episode of Utopia, you know, the comedy show about the bureaucracy in Australia, where Rob switches character, who’s the sane one, amongst the insanity is explaining to a political staffer who says to him, What about an infrastructure? Future Fund? Yeah, don’t you get it, it’s about the future, he says. But spending the money on infrastructure today solves the future, we don’t need a fund. We don’t need a new office, we don’t need these fund managers. And you know, when we watch utopia, we all laugh and think we’re the same guy in the room. But what happened at the Senate inquiry is that I was the only guy and everybody else who laughed at Utopia when they watched it was the crazy guy who thinks that spending money on not houses is the best way to spend money on houses. And so there was this really perverse political slogan that kept creeping in, which was, this is going to secure funding for the future and insulated from future political decisions. And I just sat there going, I don’t, I’ve read this bill, because this funding is riskier, because you’re investing in a risky asset and the current Future Fund loss $2.4 billion last year, and spent half a billion dollars on fund managers to achieve that outcome. So we almost lost $3 billion last year. So it’s possible that we put 10 billion in this fund and have 9 billion next year. And then that’s the way we’re securing the future funding. The legislation is also written such that the future Minister has the discretion of how much from the fund to spend, and on what projects. And it also introduces a cap of 500 million per year that a future minister can withdraw from the fund. So what you’re actually doing is providing a great excuse for a future minister to spend less than 500 million. And in fact, zero if the fund is losing money. So there’s this weird disconnect between the political slogan of securing long term funding insulating it from politics and the reality, which is adding risk to a fund compared to just having 10 billion in the bank or at the Treasury where it is, and not insulating at all, and just still relying on future ministers discretion with no commitments. So that 30,000 dwellings you said, is not enough. There’s no, it’s not written in their rules. It’s written in the guideline as a hypothetical of how much, you know, if all went according to plan, and we would expect this, and I’m like, but there’s like, like many housing strategies and plans that the federal government and state governments have had in the past, there is nothing holding them to account on those promises. So yeah, it’s, it’s a really, really strange one. And I felt like there are about 20 or 30 witnesses or experts at the hearing. Now, only two or three of us actually calling this out the majority of the industry. And the researchers had really, I don’t know, bought the line that this is something that it’s not.

Gene Tunny  08:16

Yeah. So what’s going on, it appears to me is they’re essentially that borrowing, they’re going to be borrowing this money, or it’s going to increase the borrowing requirement by $10 billion, because we’re currently we have been running budget deficits. So it’s going to increase that, that borrowing requirement, we’re going to put that into this the future funds, so we’re essentially borrowing money to then invest in the share market or Enron’s Yeah, well,

Cameron Murray  08:45

if we’ve invested in bonds, we’re borrowing money to buy the bond back off ourselves. If this fund, if this fund is like eight or seven or 8%, government, Australian government treasury, that’s just pure accounting. Yeah, you know, trickery, you know, and that shows it but the whole thing is accounting trickery, right? Because, you know, you’re just recycling the money via the current shareholders of BHP into Telstra and Commonwealth Bank, right, by buying the shares off them and then later selling it back to them. And the only reason you can make a premium with this fund over the over not borrowing it, right, because you still gotta pay interest on the Treasury borrowing. The only reason you can make a premium is if you take risk. Yeah, if you’re taking risk, then it’s not a secure, long term funding thing. You’re just adding risk unnecessarily, and delaying spending money on building houses. And, you know, it took a little bit of explaining to get that through at the hearing. But ultimately, I had, for example, John Corrigan, you know, back me up on that argument, and I think Brendan Coates from the Grattan Institute who is a big supporter, the policy sort of had to concede that Yeah, at the end of the day, you’re adding risk in the hope of increasing the funding. But risk is real, right? We just can’t count on winning In the next few years,

Gene Tunny  10:02

right, so Brennan was buying the government’s line that this is about getting a secure funding source. He, I mean, I know you can’t speak for Brendan, I’m just wondering where he was coming from?

Cameron Murray  10:13

Well, actually, the idea is actually from one of our Grattan Institute report, and they proposed a $20 billion social housing fund. And, and, and, you know, I’m not averse to the government sort of diversifying the capital side, right on its balance sheet. Yeah. And and owning some high risk assets? I don’t, I’m not averse to that, in principle, right. But you’ve got to separate the funding and the spending idea. So the way I try to tell people, if the government’s saying we don’t have the money for it, it means we don’t want to do it. Because look at the submarines look at every other big look at the Olympics, right, no one’s has gotten the Olympic Future Fund, no one’s got a submarine future fun. We spend on what we want. And if someone’s saying where’s the budget, or where’s the funding, you sort of missing the idea, but but even more fundamentally, you know, if you go and raise money in the share market, from new investors for your business, each investor doesn’t say, I’ll give you this money, but you can only spend this money on, you know, cleaning your office and and the other shareholder says, no, no, but I only want you to earmark my money for doing this, right. What we do is we pool that money together and spend it the best way we can on the operations we need to do and it’s the same for the government, you need to separate Well, we’re gonna raise money, the best way we know how, whether that’s different types of taxes or borrowing, and we’re going to spend money the best way we know how and tying two things together is bad. Operationally, it’s just like, it’s bad for my business to promise one shareholder that their money goes to one type of spending, and another shareholder that I’ll only spend yours on new trucks. You know, it doesn’t really make sense it and it’s very hard to break through this kind of weird, I don’t know, budget illusion that we’ve all got that, you know, we must do this. For this, we must raise money in this way for this spending.

Gene Tunny  12:06

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

Female speaker  12:12

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

Gene Tunny  12:41

Now back to the show. I liked how you wrote about this off balance sheet trick or the off balance sheet tricks, the basic idea of the half. So that’s the housing Australia Future Fund is to create an off balance sheet accounting trick whereby the debt associated with the fund and the assets in the fund are considered as a bundle and hence not counted in measures of public debt. So I mean, I haven’t seen exactly how they’ll what the accounting treatment of this will be in the budget, it seems to me what they’re doing is they’re setting this up as a, it’s an SPV, or some sort of public Financial Corporation so they can get it outside of the traditional balance sheet measures. They put in the budget, which is for they have it for general government, but then they also have public non financial corporations, but they don’t have public Financial Corporation. So I’m wondering if that’s what they’re going to categorise it as

Cameron Murray  13:34

I think, yeah, that’s part of the intention. And we actually see those types of budget tricks a lot, I think, New South Wales rail, you know, they tried to shift things off balance sheet, but at the end of the day, you know, we as economists should be looking through that, right. Oh, yeah. And saying, Look, you know, debts debt, but, you know, these are all assets, we can bundle them all together, you know, doesn’t matter where you’ve accounted for them. And the way we’re going to assess whether that debt was, you know, justified or efficient or productive is what, you know, what the investments made in general are, so whether it was on budget or off, you know, it should be the same, right, and you’re borrowing money to buy these assets. Doesn’t matter how you account for it. And that’s the that’s what sort of leads me to my other point is that houses are assets. Yeah. Australia’s property market is the hottest market every property every investor wants to own some. Yeah. So why doesn’t the Future Fund build new houses to expand this pool of property assets in the process, that equity can be on its balance sheet, but instead of, you know, bumping up the prices of BHP shares that you’re going to buy, you actually expand the housing stock in the process, and you can still have your off balance sheet tricks. I actually looked historically and since the Future Fund started in 2006, that’s the current investment fund Australia hands. They’ve made 7.8% average return annually, the average Australian dwelling increased in value by 7.7% per year since 2006. So just the capital value increase of owning a representative sample of Australian property would have got you the same returns as the Future Fund. So it’s not clear to me why we’re recycling this money via other assets, before we build housing assets, we can look at the balance sheets of state, public housing managers. Yeah. And when they value their land and their property portfolios every year, they got to bump it up, you know, 5 million billion. So here 10 billion here, because all this portfolio of properties they own, you know, it’s a valuable asset that rises in value. So So I’ve proposed quietly to a lot of people involved that if you want to have your financial trick and your Future Fund, get the border of the future find to only spend the money, building new dwellings, and then put the equity that you have, yeah, into the fund, you can keep your financial track, but at least you’re you know, keeping the housing construction going. And you’re immediately accumulating a pool of houses that you can allocate to the people who need it at a cheap price.

Gene Tunny  16:13

Yeah. And so is this been driven by the State of the Commonwealth budget, they, they want to make sure that they think they’re gonna get some earnings from this housing Australia Future Fund that can then offset the spending that they’ll have to make on public housing. So they want to get that they’re hoping they can get that. Because if they just go ahead and start building public housing, then they don’t have that revenue to offset that. Is that what they’re thinking?

Cameron Murray  16:39

I think you’re right, I think that’s what the thinking is. But at the end of the day, you know, having those houses supplied to people at a cheap price offsets are the spending on those people already. So the benefit is there, either in the form of the rental, or in the form of the income from the other assets. So, if I was to put on my cynical, political economist hat, I would say the reason this programme has gained so much traction and is probably going to be the law few months, is because it doesn’t change the housing market, it’s going to pass because it doesn’t achieve anything. And that’s what is truly desired. By, you know, the political parties involved is that they want to look like they’re doing something without actually doing it. I’ve had conversations with politicians who’ve told me what’s wrong with the housing market? You know, prices went up, because we dropped the interest rate, that’s good. And rents went up, because incomes went up. That’s good. There’s no market failure here. government shouldn’t do anything. So if that’s what they say to me, how is it then that they passed this bill that’s meant to do something, the only coherent story there is that this bill is to look like you’re doing something, but not doing something because you genuinely think the property market is doing what it’s doing? Well? Yeah, that’s my super cynical. Political Economy hat.

Gene Tunny  18:08

Yeah, you may well be right. I mean, it’s the Sir Humphrey Appleby type of approach where people actually don’t care about whether a problem solved, they just want it look as if something’s being done.

Cameron Murray  18:21

I’ve had a lot of people message me since my testimony to tell me their experiences of this. And I don’t know what I’m going to call this pattern, you know, does it have a name? I’ve tried to call it something like pre compromising. Where you take a good idea, you turn it into a bad idea, but it’s still got the same words in the bill. While so it looks like you’re still doing something. Yeah, you push that. And you’ve totally compromised the content, or the effectiveness, just so you can keep the name because the name is what people will talk about. And it looks like you’re doing something. It’s a what’s it called housing Australia Future Fund? Yeah. Sounds like something important is being done. Right. Yeah. And the more that gets in press headlines, the more we give credibility to the current government, who is trying to, of course tread this line of keeping prices up for people who own property, and pretending they want to keep prices down and rents down to people who don’t own property. And that’s a real interesting political tightrope. That happens a lot in this country.

Gene Tunny  19:23

Yeah, I really liked your submission, Cameron, because I thought it. I mean, it highlights our governments are increasingly doing these sorts of things. And they don’t really make a lot of sense when you think about it, because I remember when I was in Treasury, we had to set up these buildings Australia fund education investment fund, that’s I forget the name of the other one. And it didn’t really make a lot of sense because you’re just taking money and we ended up I think we ended up having to borrow money to put into them, because of the time you know, but the original idea was that there was Yeah, and they were gonna stick them in these funds, but then by the time On had to transfer the money, it was the financial crisis. So the timing wasn’t very good. And then they we see they constrain your ability to get cash. I mean, because you’re saying, Okay, we’re going to lock up all of this money in these funds, even though we don’t need it at the moment. So it can it can constrain your budget flexibility. So I don’t like them for that reason. And the other point that you’re making is your your, if you end up having to borrow to invest in it, well, you’re, you’re borrowing money just invested in the share market. And it’s not necessarily achieving the public policy objectives that you that you want to achieve. So yeah,

Cameron Murray  20:43

that’s exactly the way to put it, you’re gonna borrow 10 million to build houses for people and give it to them below market? Why do you need to recycle that money through the share market? Why don’t you put it through the pokies, there’s also a chance of making more money there, you know, it’s high risk. Why don’t you just take your half million, that half billion that you want to spend each year and spend it for the next 20 years, and just start a construction programme? Like, the really bizarre thing? To me, I read this bill. And in Part Seven H or whatever it is, it says, The Treasury will credit the housing Future Fund with $10 billion. It just doesn’t. And I just think to myself, How does where’s this 10 billion coming from? Aren’t we having this fund to get the money that we don’t have a now you’re saying we have 10 billion? If we have 10 billion? We don’t need the fund? Right? Yeah. And, you know, no one else seems to pick up on that, oh, we just credit with 10 billion. I’m like, why don’t you just build houses, credit them? Credit, the builders is 10 billion. Yeah.

Gene Tunny  21:45

So this is where they’re hoping that by doing it, you know, essentially gambling or well investing with borrowed money, they can get enough of a return on that, to then help fund this additional expenditure. And that’s going to lessen the budgetary impact. So that’s essentially what’s going on. And I just think it’s interesting, because it’s an interesting example of one of these. These things, these clever financial vehicles, the Polly’s and the advisors, I think, in particular, they love it, they think they’re geniuses, but it’s not really solving the problem.

Cameron Murray  22:20

Yeah. And let me just talk you through what I think is the best case scenario. They put money in this fund, sometime in the middle of this year, after we’ve had a big asset market correction, and they they’re near the bottom. In the next 12 months, there’s a real big boom. And in 12 months time, the ministers say, Oh, look, we’ve been making all this money. I’m gonna make this happen. Yeah, that’s the best case. The worst case is, you know, we’ve just seen a bank collapse in the United States, and you know, Swiss government bailout the Credit Suisse bank, the worst case scenario is they put $10 billion into the Future Fund, start accumulating assets in the next six months. And then come September, October, you know, popular time for financial market crashes, the fund loses 10% of its value. And next year, the minister says, oh, we can’t spend anything on public housing, because we just lost a billion dollars on the share market. Yeah, that’s, I don’t know which one’s more probable, but both are potential outcomes. And if the second one happens, you know, I hope the public and the press hold the government to account and say, Hey, this is what you wanted. You were told this is the risk you’re taking. And you still did it anyway. I really hope that opens people’s eyes. If that happens.

Gene Tunny  23:34

Yeah, that’s a good. That’s a good point. So you’re saying that the the level of investment in public housing could end up being dependent upon the returns on this fund

Cameron Murray  23:46

highly likely, implicitly, tells the minister only spend what you make, you know, for funds doing well spend money, if it’s not don’t spend money, the way it sort of described, and it’s got this cap in it as well. I would say there’s a sort of, you know, a built in excuse, yeah. Whereas you kind of want the opposite incentive. You want more public spending on housing during a downturn in the markets, right? You want to smooth out construction cycles. Yeah. Whereas I sort of feel this builds in the opposite political incentive. But the you know, the next 12 months are going to be very interesting if this bill is finally passed. And you know, the markets are very volatile at the moment. And the Future Fund, of course, lost a couple of percent last year, you went down the existing funds. So if that happens again, yeah. Who knows? Yeah.

Gene Tunny  24:40

Just before we wrap up, Cameron, can I ask you what was it like presenting to the committee? I mean, did anyone get it? Did any bells rang? Or what’s the expression? I mean, I imagined some of the Imagine that. There must have been, some of them must be sceptical, or I hope some of the people on this committee worse sceptical. But yeah. What was your impression?

Cameron Murray  25:05

My impression is that this process is a little bit of a charade. So that each political party in the crossbenches can get their sort of own experts on to provide excuses for the political bargain that they want out of this in the Senate. So I think most of the action is happening behind the scenes. And this is just each, each person in the Senate had a chance to call forth their own experts. And so that was done. My impression is that your committee is loaded based on the political party of the day, right. You know, I was cut off from my introduction, when I was saying, you get a few minutes to make introductory remarks. And I was explaining how I can’t believe you’re trying to describe this as a low risk secure, politically insulated funding stream when it seems the exact opposite. Yeah. And they’re like, oh, you know, we only allowed two minutes for these opening remarks get. And, of course, if you if you go and check the footage, everyone bloody rambled for five minutes. So you can sort of see that and, and, you know, I’ve spoken to a variety of Senators offices, as well. And they’ve obviously taken on board what I’ve said, but you don’t see minds being changed. Live during this process. That’s not where it happens. It’s all happening with phone calls and meetings and negotiations amongst each party and independents are

Gene Tunny  26:36

all behind the scenes. Okay. Because I was just wondering, I imagine that the, the greens would probably be pushing the for the government just to build public housing. Right. Yeah. Well, that must be in there. That’s right. So

Cameron Murray  26:50

I think it’s Nick McKim is the green senator from Tassie. And he was, you know, onboard when I started my opening remarks by saying, you realise there’s a scene in the comedy show utopia, right? We started today. That is exactly what you’re doing. But you all laughed with the other side of the joke. And now you’re you are the joke. And so he got a few chuckles But you know, the other the other people didn’t really like it. So yeah, the greens are definitely not keen on these off balance sheet financial tricks at all, which is really puzzling, right? It’s really puzzling to me. I don’t know what the Liberals should be sort of have a similar mind being a bit more honest financially and say, let’s focus on what’s a waste of money and what’s not. Let’s not focus on where you record it in the accounts. So I don’t I don’t know what their views are. But my impression is the Labour Party, you know, they’ve almost got this superannuation brain, or this Future Fund brain like this sort of, yeah, it’s inhibited their ability to go, you know, this is not magic. It’s not a Magic Pudding. It’s just buying different assets.

Gene Tunny  27:57

Yeah, yeah, exactly. So I’ll put a link to your submission in the show notes. I think it’s really good. And you make a good point about how, yeah, I didn’t realise the fees paid by the Future Fund for funds management was so high, but I guess it makes sense, given the amount of funds under

Cameron Murray  28:13

point 2% of the funds under management. That is still half a billion dollars a year, which is of course, again, the maximum that this Future Fund for housing can actually spend on housing subsidies or housing construction. Yeah. So the maximum they can spend is roughly what the average management fee is for the existing Future Fund. Yeah, just to get your orders of magnitude straight of what’s involved.

Gene Tunny  28:40

Okay. And, yes, it has been passed by the lower house, it’s going to it’s being considered by the Senate at the moment, and it’ll probably be passed, I imagine, based on what you were saying,

Cameron Murray  28:51

my understanding is the cross bench has a lot of power in the Senate here to get things changed. My suspicion is that if there are key crossbenchers that take my argument seriously and a couple of other of the submitters as well, they may, for example, put in the legislation a minimum amount of spending out of the fund instead of a maximum to sort of guarantee it. And they may, you know, and that might just be a way of diverting instead of buying bhp shares and Commonwealth Bank, you know, build houses with it and own the equity of those houses with your public housing developer or however you account for that. So that that that may be a realistic change. I don’t think it’s gonna get thrown out or go back to the drawing board.

Gene Tunny  29:38

Right. Okay. Well, again, well done, Cameron. Yeah, excellent submission, lots of very sound, economics and public finance in there. Any final words before we wrap up?

Cameron Murray  29:49

No, I just want to, you know, cross my fingers that the best case scenario turns out if this fun gets passed.

Gene Tunny  29:55

Very good. Okay. Cameron Murray, thanks so much for appearing on the show.

Cameron Murray  29:59

Thanks for having me, Gene.

Gene Tunny  30:02

Righto, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

Cameron Murray 30:49

Thank you for listening. We hope you enjoyed the episode. For more content like this or to begin your own podcasting journey. Head on over to obsidian-productions.com

Credits

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

Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

Australian Treasurer Jim Chalmers argues for values-based capitalism and against neoliberalism in a January 2023 essay in the Australian Monthly magazine. In this episode, show host Gene Tunny discusses the Treasurer’s essay with Dr John Humphreys. John is the Australian Taxpayers’ Alliance (ATA) Chief Economist and the founder of the Australian Liberal Democrats. Gene and John discuss just how literally we should take the Treasurer, the risks of the so-called co-investment approach, and whether the Treasurer is arguing for socialism (or a different -ism).      

This episode features audio from an ATA Econ Chat livestream broadcast on 31 January 23. You can watch the whole thing here:

https://www.facebook.com/AusTaxpayers/videos/509950911277607

You can follow the ATA on various platforms including Facebook and YouTube.

You can follow John Humphreys on Twitter.

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.

What’s covered in EP175

  • Jim Chalmers’ idea of co-investing with the private sector [4:21]
  • Regarding superannuation funds increasingly having social goals that they aim to meet as well as financial goals [9:12]
  • The Australian stage 3 tax cuts and values-based capitalism: are they compatible?  [12:37]
  • ESG, stakeholder capitalism, and socialism [15:24]
  • How does the Treasurer intend to direct investment? [23:28]
  • How a poor government policy can lead to another poor government policy [27:31]
  • The social impact investment bank expected in the 2023 Australian budget [32:34]

Links relevant to the conversation

Jim Chalmers’ essay Capitalism after the Crises

Clean Energy Finance Corporation Financial Outcomes 2021-22

Australian Government principles for social impact investing | Treasury.gov.au

Impact Investing Won’t Save Capitalism  

Transcript: Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

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  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I discuss so-called values based capitalism with John Humphreys. John is chief economist of the Australian taxpayers Alliance, and he’s President of the Australian Liberal Democrats. The idea of values based capitalism has been injected into the Australian policy debate by the Australian treasurer of Jim Chalmers. In a monthly magazine essay, the Treasurer argues we need greater coordination between the public and private sectors, and we need co investment. He argues that government business philanthropic and investor interests and objectives are increasingly aligned and intertwined. The Treasurer is the top economic official in Australia. He’s the equivalent of the US Treasury secretary in the UK Chancellor of the Exchequer. So obviously people pay attention when he tells us what he thinks. The audio of my conversation with John Humphreys is taken from a live stream I did with him on the 31st of January 2023. I’ll put a link to the full live stream in the show notes. Okay, let’s get into the episode. Please stick around to the end, because I have additional thoughts after my conversation with John. Well, I think we have to chat about this essay by the treasurer Jim Chalmers capitalism, after the crises, rather extraordinary for the treasurer to publish something like this. I mean, although we had the former PM, Kevin Rudd, publish something similar about how he was going to save global capitalism in I think it was around February 2009. While we’re all busy in Treasury, with actually managing the budget and all of that, somehow, the pm found time to write a 8000 word essay. And now, I mean, Jim Chalmers is done. Well, I think is 6000. It may not be as long as the one Rudd wrote. And Jim Chalmers wants to remake Australian capitalism. I don’t know if he necessarily wants to remake global capitalism. But he does have a critique of neoliberalism. So that’s the new thing that everyone hates. And I mean, it’s similar to a lot of critiques of so called neoliberalism that, you know, we we’ve gone too far in the direction of the market, and we don’t care about society as much anymore and isn’t as all dreadful. And isn’t all this inequality, terrible. It’s causing problems for Democracy Now look, okay. There’s certainly issues and in some countries, inequality has certainly increased, there’s no doubt about that. Overall, it’s this very simplistic analysis. And look, it’s Jim Chalmers is views. I mean, you know, fine. That’s his philosophy, it’s probably what you’d expect from Jim chamas. He’s entitled to those views. I mean, my personal view is you should be looking at specific policies. I mean, what exactly do you think we did wrong? Okay, let’s look at specific issues and see how we can fix those up. I mean, is it tariff cuts? You don’t approve of them in tariff cuts that the whole Keating government supported? I mean, what is it precisely that you think is the problem? So there’s this general critique of neoliberalism, which is no different from a lot of stuff you see online by various progressives? And, look, I mean, I’m not necessarily going to defend everything that that’s been done in economic reform. I mean, there certainly been like, I think there have been some great successes. But there have also been areas where the insert less than stellar results. There’s no doubt about that. But I think what’s important is to get it all. Okay, let’s understand what he actually wants to do because he’s got this general critique, okay. But what do you want to do? And his main idea seems to be this idea of co-investment. That’s the real substantive thing. That seems to be how he’s going to define his time as treasurer or his time as PM if he later becomes PM, because in a way, this is job application for PM he wants to be Labour leader. He sees this as defining his philosophy as a labour treasurer. We’re going to fix capitalism. He talks about values based capitalism, he thinks capitalism, we want to move away from a system where it relies upon people beings If interested in greedy and the private sector alone, we want to have a cooperation between the private sector and the public sector. We want the public sector, getting the policy settings right and and then co-investing with the private sector to provide some, some ideas about how that will occur. He talks about the Clean Energy Finance Corporation, which is designed to provide finance for various renewable energy projects. He sees that as a success, even though it doesn’t appear to be meeting its investment mandate. So I had a look at that, because I found it interesting that that was his one, the example that he gave, so he talks about co-investment as a powerful tool at our disposal. The Clean Energy Finance Corporation has been a great success, partnering with investors to direct capital where it can have the greatest impact, not by subsidising returns, but by helping structure investment vehicles in a rapidly emerging economic sector, we will employ this co-investment model in more areas of the economy, with programmes already underway in the industry, housing and electricity sectors. Okay. So they’re looking at providing some type of framework, having these entities like the Clean Energy Finance Corporation, and I think they’ve set one up similar to that in housing, it’s to encourage investment by the private sector and by I guess, providing more accessible finance, or making creating financial products, perhaps with some government guarantee, I don’t know, we have to wait and see what exactly the treasurer is, is talking about here. So yeah, that’s where I think we’ve really got to focus. This seems to be his idea of how he’s going to be this innovative, new wave labour treasurer. Yeah, Nick’s made a good point here in the comments that they want the super funds to, to invest in some of these areas such as housing, or an infrastructure. But again, I mean, we’ve got to ask exactly how are they going to do that? There’s, what I see is the risk that the government provides some sort of guarantee or does provide financing, he’s saying it’s not subsidised. But, I mean, you’ve got to wonder about if it isn’t subsidised? Or if if the government’s not making finance more readily available in the market within the banks would then what exactly is the market failure they’re addressing? Why wouldn’t the private sector do it? So I think there is going to be some sort of subsidy or, or risk taken on by the public sector that’s not compensated for. And so when I looked at the Clean Energy Finance Corporation webpage on financial outcomes, I discovered that and this is what this is a an institution that the treasurer claims has been a great success is its return its lifetime annualised portfolio benchmark. Return. So this is, this is a return that they’ve earned. So 4.38%, which is, you know, hardly anything, really, if you think about what you’d really want to be earning as an investment vehicle like that. So I think there is a risk that this sort of thing is subsidised. I think there’s a risk that they’re taking too much risk onto the government balance sheet. And there’s a potential to fund projects, which are uneconomic. So if that’s the big idea, I mean, okay, well, let’s see the specifics, and let’s analyse exactly what you’re, you’re recommending, and we can talk about that. Yeah. And there’s that point about, yeah, they do want access to the super funds, money, they will have to make sure that it’s a compelling investment opportunity to actually get that money. And, and that is a big risk. I mean, we don’t yeah, that those super funds, if they just invest in something because the government wants them to invest in it, then they are breaching their fiduciary duties. That would be a terrible thing if the government does direct where that money should go.

John Humphreys  09:12

Interesting points on that today. I think this is part of the problem that we’re sneaking up on the situation several ways. Super funds increasingly have social goals that they need to meet, as well as financial goals. You make a good point that, well, that needs to show that they’re going to meet the financial needs of the super investors. Increasingly, the super funds feel the need to meet their social KPIs, rather than their financial KPIs. And if they are required to meet social KPIs, then they’ll very easily get away with it. Remember, it’s not like this super is optional. We’re forced to give it and if the government gives the super funds who have guaranteed access to our money, social KPIs, you must do something social. By the way, here’s something social we want you to do. You can imagine it happening, even if it doesn’t have financial risk. I think the point Nick can correct me if I have not expressed her concern accurately, please jump into the chat again, Nick. But that’s my understanding of your point.

Gene Tunny  10:09

Yeah. So the whole thing with this values based capitalism, one of the concerns is that you end up with this very odd relationship between the government and banks and super funds. And in a way, it’s very odd for a Labour leader or an aspiring Labour leader. And this is a point that Matt Canavan made that he was very critical, as you probably would expect of this sort of thing. And I mean, he was saying that the treasurer seems to have been spending too much time in the boardrooms of banks and super funds. So yes, it’s, it’s very strange, but what I think might be going on, and this is, this is one thing that I’m wondering is, is this because he really doesn’t have many other options due to the state of the budget due to the high amount of debt, and due to the fact that he’s committed to the stage three tax cuts? Katherine Catherine Murphy on the Guardian podcast asked him, Okay, if you’re talking about values based capitalism, does this mean or she, she was basically asking me if you actually, given what you’re professing about values based capitalism and your concerns about inequality, etc? Does this mean you’d revisit those stage three tax cuts? And other there was a good question, and he just gave the standard line? I look, we’ve already dealt with that. And we’re, you know, my position on that. I think she probably could have pressed him more on that because it is a legitimate question, if in terms of traditional Labour government, some people have been saying that with this essay, Jim Chalmers is channelling Whitlam or it’s going back to the Whitlam government, I’m not entirely sure about that, because the Whitlam government was big spending on social welfare programmes, I really ramped that up. I mean, I know now we are spending more on that sort of thing. But there’s, I don’t know if there’s a capacity for this government, given the fiscal situation to really increase those welfare payments, or expand the welfare state much at all. And so he’s really falling back on this sort of thing, because he may not have any other option. And to an extent, that’s because the government’s had to go along with the stage three tax cuts for political reasons to win the last election. And now they can’t go back on it. So you know, this could be the only shot he’s got in the locker, so to speak. That’s one thought I’ve had on this, this essay.

John Humphreys  12:47

It will be interesting to see what they do in the next budget in terms of tax, I suspect, I’ll sneak that tax rate up, they are going into that. Look, I think that was politically hamstrung with their previous commitments. And quite frankly, I think they made the right decision to stick to their promise, both because I’m a big advocate of the stage three tax cuts, but also politically, if you want to keep any political capital, you can’t just line up lie after lie after lie in your first year in power. So I think it was the right political move and the right economic move. I suspect they also know it’s the right political move. They think it’s the wrong economic move, but they’re stuck with it. And so I’m happy about that. You’re not just a couple of quantifications. I haven’t thought about this article as long as you have, but I think you’ll write in one very important point. There’s been a lot of furor about the words. And I think the words of what Jim says, if taken literally, we shouldn’t be worried if they can, literally. But you pointed out, I think that it’s not necessarily true that we should take it literally, because there’s a lot of fluff and waffle in the middle there, that could be interpreted multiple ways. And to a large degree, what we have to do is go back to them and say, what does that mean, exactly? Exactly what I’m suggesting here. And I suspect what’s happening is there’s two things it’s worth responding to both. I suspect he’s the policy recommendations coming out of this, I suspect will end up being tinkering. I don’t think it’d be good tinkering. But this is probably a lot of grandiose statements. I’m not sure if they’re going to follow through on grandiose actions. I gotta say, as I say that, if I’m right, that would be a good thing. Because if they followed through on all the grandiose statements, I think it would be a supreme mistake for the future evolution of our country. So I am hopeful that this is a lot of bluff and bluster. But also if history is anything to go by, politicians are often full of bluff and bluster and grandiose statements. And then once they actually sit down and work out, what does this mean? It can be a tweak here and tweak there.

Gene Tunny  14:46

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

Female speaker  14:51

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Gene Tunny  15:21

Now back to the show.

John Humphreys  15:24

I do worry about them targeting the super funds, I do worry about what they when they say race, it just sort of interaction cooperation between the government in the corporate sector, that could be done in several different ways. Some of them supremely damaging, and some of them rather mild. And some of them perhaps useful, we really need to know the details first, but I worry that what he’s talking about is not the mild version. But hopefully what he does is the mild version. But what he’s talking about here has echoes of a lot of things that have been growing over the last couple of decades. Some people have actually said it in the chat and see if I can find some here. I think Percy said this twice. It’s the ESG goals. A lot of the language here is also the language of ESG, the environment, the social and governance systems. And it’s steadily in being embedded through several different means fair and foul into the goals of a lot of companies sometimes basically being shoehorned in there by governments, sometimes by industry super funds, which as was also pointed out by Percy, I think, that they are closely related to the union’s so you are getting lots of deviations from normal capitalism for ESG. Another term that’s been thrown around a lot by people that are it looks like Jim Chalmers is influenced by the stakeholder capitalism, and stakeholder capitalism, it sounds so benign, but if you scratch the surface, it’s a very worrying idea. The whole point of capitalism is that corporations are supposed to represent the owners and benefit the owner, it is capitalist who make a profit and the profit goes to the people who made the investment. That’s the idea. Stakeholder capitalism basically means all you know that ownership thing we told you about, yeah, not so much. Right? I mean, you don’t have to be an owner to have a stake, you could be a consumer, or a worker, or a neighbour or just anyone with a pet dog that ran across someone’s front yard. And that basically means society, if society is the owner, where that’s not a real thing, right? That’s always code word for government. If society is the owner of the business, i.e. government is the owner of the business. That does not, that system and economics does not have a good track record at work. There’s a couple of things here. The Chalmers thing has been likened to out and out socialism. I don’t think that’s quite right, because what he’s talking about is this incestuous relationship with big business and big government and big unions. And now socialism, just what’s the leaders of big business up against the wall, shoots them and takes their property. This is like traditional socialism. It’s been likened a bit to Whitlam. And you already mentioned that before, but it’s not quite that either. Because what Whitlam wanted to do was have the government take over all of the realms of how you help the massive welfare state, massive redistributions. He’s not really talking about changing the welfare state. He’s talking about changing the way business operates. So it’s not quite socialist. It’s not quite Whitlamisk, what I call it an eco socialism. It’s instead, this incestuous mix of big government, big corporations, big unions, and we need another word for that. There was a word for that this is not a new idea. This is the thing I’m seeing showing up by some of the op ed writers look at this wonderful new idea. It’s not Whitlam. It’s not Marx, it’s a new idea. It’s actually not a new idea. These ideas have been around for quite a while they were quite prominent, about 100 years ago. I believe, Jim Chalmers is the follower of an Italian economist at the moment. These ideas were very popular amongst a certain Italian politician. From about 90 years ago, if anyone knows their Italian history, El Deus, the Mussolini ideas were basically exactly this. But we don’t need to get rid of business. What we do is we need to have a really close relationship between big government, big business, big unions, we all work together. It may be better than for more efficient for socialism, but it’s a bloody dangerous system. And of course, if you actually call it fascism, everyone gets upset because they say no, no, no, Jim Thomas doesn’t hate the Jews. But fascism isn’t only the economic system of fascism isn’t just about being a Nazi. The economic system of fascism was quite literally the idea that big business can exist, but they just have to cooperate in bed with big government. That was literally the idea of the fascist model of the economy. And it’s not a new idea. I don’t think it has a good track record is actually working as an economic idea. And I’m not trying to say Jim Chalmers is a fascist, I’m just simply saying that we can look at how this has worked in the past. And I don’t think it’s been pretty. The other thing to note about this is they talk a big game about how much they want to cooperate with big business and integrate with them. It’s as if they that they’re unable to draw a distinction between the markets and a business. Right. I mean, most people on my side of politics we believe that a market is a better way of cool donating things, then bureaucrats and politicians. That’s true. That’s not from a love affair with business. Indeed, business are often also the enemy of markets. Like I am not pro business, I am pro markets and markets happen to have business in them. And it seems when a lefty stumbles across this idea and sees markets working, they think markets work, because there’s a couple of nice businesses. So they Co Op those businesses. But it’s not the existence of those businesses that make the market work. It’s the nature of the dynamic nature and the competitive nature of the market. That helps the market system to work. And sometimes a good market needs businesses to fail. If businesses make enough bad decisions, they fail this idea that markets defending markets are about defending businesses. Some people on outside of politics need to get out of that way of thinking, bad businesses should fail. We’re not here to defend businesses, I’m happy to defend people who make good decisions and get ahead and are rewarded for that, whether they are in any field of Endeavour. But it’s not just about defending businesses. And this approach the Chalmers has seems to be pro business anti markets, whereas I am pro market and indifferent to any individual business. And that’s some of the things I do notice in some of his language. He talks about redesigning markets, and that markets need to be carefully constructed. So I think once again, that shows a fundamental misunderstanding of what we mean with markets. Markets are evolutionary concepts. They’re not design. They’re not constructed at all. They happen sort of spontaneously out of the interaction of a bunch of voluntary interactions between consenting adults, it is a it is an evolved system. And one of the most dangerous things we have is these politicians that lack the humility to realise that they can’t design such a complex system meddling in a hugely complicated evolved system that is probably beyond their capacity, it’s beyond their can to actually understand the dynamics. It’s beyond the understanding of most people. Leonard Reed famously wrote a book saying no one knows how to, it’s called “I pencil”. And he pointed out that no one knows how to make a pencil, seems like a crazy statement. But if you unwrap each part of making a pencil, someone has to know how to cut down the wood, which means they have to know how to use a chainsaw, which means they have to know how to make the chainsaw, which means they don’t have to know how to get the metal for the chainsaw, which means they have to know how to make the iron, which the steel which comes from the iron, which comes from the mining. So you go back through all the parts of making a pencil, no one person can do it, but it comes together spontaneously, seemingly spontaneously without any central controller. That’s the important point. There’s no central controller in that. And yet, you can go and buy a pencil now for 10 cents. It involves the cooperation of literally 1000s of people around the world who speak different languages, and may not even like each other, they may hate each other. And yet 1000s of people around the world all coordinated and managed to bring you a pencil at your local store for 10 cents. That is insane. And there is no controller. It wasn’t designed, it wasn’t carefully constructed, as Jim Chalmers seems to think, it was a spontaneous order coming together. And that is the dangerous thing. I think there is when these politicians decide that they need to redesign markets in their own image. And often they have wonderful goals, right? I mean, their vision of the world, that vision of the future is not some dystopian nightmare. That’s just the accidental byproduct of their arrogance and their lack of humility. So anyway, that’s my rant on this. Now, I haven’t spent as little thinking about it as you, so maybe I’ll have to duck into it a bit more over the next week.

Gene Tunny  23:28

But I want to have a closer look at just what these vehicles are and how they intend to direct investment. I mean, he talks about, well, we’re not going to pick winners. Okay, that’s great. Oh, but we’re just gonna set the priority. So it’s like this state directed model that the French had, I think in the 50s or 60s, I wouldn’t call it fascism. I’d call it corporatism, or, or whatever the French used to call their system back in the day, the government’s got an idea of where the investment needs to go broadly. It’s sort of national economic planning. That’s the type of mindset and one thing I’m waiting to see is will they try and revive this idea of an infrastructure bank? So this was something that was raised during the time of the Rudd Government but got knocked down. Turnbull criticised Kevin Rudd has been Kev Lonnie, with reference to Kim Lonnie and there was the people were talking about well is this gonna be the new transcontinental I don’t know if you remember it was it transcontinental, the tri-continental, the, the Merchant banking arm of the state bank of Victoria that went bust in the late 80s. Victoria, when it just got into, you know, just made all these crazy loans during that, that colossal boom in the late 80s. There’s a real risk to government balance sheets here, and I just want to wait and see just what they’re proposing. And whether there is some bold scheme like that, that the treasurer could be announcing. That’s what I’m going to be looking out for.

John Humphreys  24:58

I think on the retail politics that is the right thing to look for I should reiterate, I don’t actually think Jim Chalmers is intended to be a fascist, because I don’t think he intends to follow through on the logical consequences of his own article. But I still think it’s worthwhile pushing back on the substance of the article, even if I don’t think you’ll follow through on it. I don’t want people to think of it as an ideal, because I still think the ideals in there are very dangerous. And look, I also take your point, in reality he’ll be whether it’s fascism, or corporatism, it’ll be a watered down version of that. And we need to see the details I agree. But still, the steel man version of that is worth addressing, in case it seduces the thoughts of any young people that stumble across these ideas. You make a good point that perhaps corporatism is the better word for it than fascism. I’ve thought about that a bit lately, that could work. I wonder though, whether there is a difference between the two, they both involve this incestuous relationship of big business and big government. Perhaps the difference is who has the upper hand. And I think in corporatism, perhaps the idea is that big business has the upper hand, and they kind of use big government as their tool for success. And in fascism, it’s the government has the upper hand, and they use big businesses, their tool for enforcement, or getting things done. But anyway, that’s a thought bubble there on what the potential difference could be. I don’t know which one Jim Thomas hopes he would achieve. Probably not corporatism. But I’ll cheekily put that aside for the voters. What he

Gene Tunny  26:17

wants to achieve is he wants to get enough votes from the labour left by imagining he’s can remake capitalism, where, really, he’s going to get some he’s going to create some investment vehicles. There’ll be some additional money into into renewables and housing. But is it really going to make much of a difference? And I don’t know, I mean, in housing that, you know, that’s one of their big challenges. I mean, that housing affordability is a massive problem now. And the number of people who can’t find accommodation, particularly in Brisbane, I mean, I go for a walk along Wickham terrace in Spring Hill. And I mean, the usual homeless people, you see, but now you see there are people living in cars, they’ve got all their worldly possessions, in, in the back of their vehicles. And it’s just tragic. And it’s because for years, we’ve just stopped people from building houses where people want them. So we’ve got, we’ve got problems that have been created, in part through government regulation. And now that’s going to be used as one of the excuses for remaking capitalism and providing, I don’t know, whatever, they’re going to do subsidised housing, there’ll be some money for that social housing, but it’s not really going to be enough to solve the problem, in my view.

John Humphreys  27:30

But it’s so often the theme, isn’t it? A government programme goes wrong. And the lefties turn around for capitalists to say, Why did you do that? And then they use that to justify another government programme that also goes wrong. And the whole cycle repeats itself. I do like the fact that every time I try to get us distracted in a conversation about the grandiose philosophy of the implications of Jim Chalmers article, he brings us back to the real retail politics, which I think is entirely correct. I think your read on this is true that his grand philosophical statements, they’re mostly just fluff and waffles so that he can try to get the Labour leadership and it’ll mean a bit of tinkering. I think you’re right. I just still enjoy rebutting the actual words. Anyway, that this has been a fun discussion.

Gene Tunny  28:13

Definitely John. Okay, I hope you enjoyed my conversation with John Humphrys about the Australian treasurer’s essay on values based capitalism. I’d say the takeaways from the episode include firstly, that there’s clearly been a big change in the intellectual climate since the financial crisis, and treasurer Jim Chalmers has picked up on this making some of the standard criticisms of so called Neo liberalism. Secondly, it’s important to consider specific policies and to weigh up their costs and benefits and the likelihood that claim benefits will be achieved in my view. If we do so it’s understandable why there’s been such a negative reaction to Jim Chalmers essay by economists and financial commentators here in Australia, I should say, I don’t want to be too negative. I have met Jim Chalmers in the past when he worked for treasurer Wayne Swan, and he struck me as a nice person. He clearly thinks a lot about economic issues, and I respect that. And the treasurer did say some say on things in the essay, for instance, he writes, in the wider world, the contest between democracies and autocracies is economic as well as military. Despite deep disquiet about our own economic models. The reality is that democracies largely work. As of 2021 GDP per capita is around 60%, higher in democracies than in autocracies and the gap isn’t closing. Thankfully, Chalmers is a Social Democrat rather than a revolutionary. But he argues that to protect democracy, we need to have greater economic inclusion. That’s fair enough, but we need to think critically about the measures he proposes to promote it. obvious questions include, will they actually achieve greater economic inclusion, what will they cost? What are the risks to the government’s balance sheet and to taxpayers who will ultimately bear the cost of any bad investments? As I suggested in my conversation with John, history tells us we should be wary of governments owning banks or other financial institutions that don’t have a great track record. The failures of the state banks of South Australia and Victoria were big news in the early 90s. But now three decades have passed and the lessons may have been forgotten sadly. Also, as I noted, when chatting with John the results of the body that the treasurer calls a great success, the Clean Energy Finance Corporation, well, they’ve been pretty ordinary and they don’t appear to be meeting the target of return. The presentation of the financial results for the corporation is rather confusing, but it looks to me that they’re underperforming. I’ll put a link in the show notes so you can see for yourself. One thing I should have covered in my chat with John is the concept of social impact investing. This is an investment where there are both financial and social returns, such as in a profitable social housing development. Social impact investing is one of the concepts that Jim Chalmers is fond of. In a recent financial review article, John Keogh referred to an example from New South Wales in 2013, a social impact bond which raised $7 million from investors to finance the new PIN programme. N E W P I N. New PIN stands for New Parent Infant network. It appears to be a programme to support new parents so they look after their children properly and the children don’t end up in foster care. It looks like the Queensland Government has tried something similar. Typically, impact investments require government involvement of some sort to ensure that the private sector investors get a return. For instance, governments could pay performance bonuses if certain social outcomes are achieved. There’s a handy note from the Treasury which summarises the Australian Government’s principles for social impact investing, which I’ll link to in the show notes refers to such things as payments by results, contracts and outcomes focus grants, that’s how the investors will be rewarded if the investment achieves its social objectives. These payments could be justified because successful programmes could result in budgetary savings in the future. For example, if programmes result in healthier children, that could reduce health costs in the future. You could also imagine programmes resulting in savings in welfare spending, or cost of the justice system. I’d say that such savings are possible, but we should think critically about the likelihood of such benefits and follow up to make sure that they do actually occur. That is, so we’re not paying nonprofits and investors additional money for results that they don’t actually achieve. It looks like treasurer charmers might end up announcing a social impact investment bank in his next Australian government budget in May 2023. James says that the Financial Review gave a good summary of what this bank could do in an article in October last year, which I’ll link to in the show notes. He wrote, the new body would work with investors to supply capital to intermediary funds, which would direct private investment into social housing, aged care, early education or disability services alongside government funding. This could take some pressure off the government budget for providing these services alone. Okay, that’s the point I made in my chat with John, that some of the motivation for what Chalmers is proposing is the poor state of the government budget, they just don’t have the money to undertake traditional programmes. He’s talking about impact investing because he doesn’t have a lot of options. With his social impact investing bank, he can support things that he wants to do off budget, so to speak. James Ayers continues, the institution would make returns when service providers who would typically be receiving some government funding make predetermined improvements to social outcomes such as housing, education or caring for more people under agreed service standards. Apparently, there’s a body like this already in the UK called Big Society Capital. There’s a fair bit to explore with impact investing, so better return to it for a closer look at a future episode. There are a lot of players involved and I’ll do my best to get someone familiar with impact investing on the show for a deep dive. In the Australian model, it looks like there’ll be a government backed social impact investment bank referred to as a wholesaler. Major commercial banks could also provide capital for this bank. It appears based on reporting from the financial review. There’s talk about 200 million coming from the government and 200 million from the private sector. I expect the social impact investment bank will provide finance at lower than market rates for social impact investing funds. These funds then invest in nonprofits or so-called Social Enterprise causes which are delivering programmes under government contracts. An example of a social impact investing fund is the $91 million social impact investment trust, established by social ventures Australia, a nonprofit and Hester a superannuation fund. How the performance bonuses are shared by the nonprofit, the investors and the government back bank will need to be defined by various contracts between the players. This all seems very elaborate to me. There are no doubt a lot of investment bankers and fund managers earning healthy fees along the way. Does this lead to better results? It may do so if the investors push the nonprofit to deliver superior services. As always, I’m open minded but sceptical. I’ve seen that the consultancy firm Airbus has undertaken a positive evaluation of the New South Wales new ping programme. So it could be good to go through that in a future episode. I haven’t had a real chance to dissect that one yet. I do wonder just how much we can rely on impact investing to solve social problems compared with other measures. As I noted with John, I doubt it will solve the housing availability shortage, which to me appears related to restrictions on housing developments. And it’s not going to replace welfare state programmes such as Australia’s various support payments and the National Disability scheme. Maybe you can do positive things at the margins, we have to wait and see because it’s still early days when it comes to impact investing. For a sceptical take on impact investing, which I’ll link to in the show notes, I’d refer you to a 2020 Harvard Business Review article by Ruben Finnegan, who I know well and Alan Schwartz is a prominent Australian businessman. Impact Investing won’t save capitalism. Okay, that’s all from me on values based capitalism for now. If you’d like a closer look at impact investing or any other topic, please let me know. Thank you. Right oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

37:41

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Podcast episode

China’s falling population & global population update   – EP174

The world’s population keeps growing and passed 8 billion in late 2022, but China’s population is now falling. There are concerns over what that means for its economy and the wider global economy. Is Paul Krugman right that a falling population means a weak Chinese economy? Show host Gene Tunny and his colleague Tim Hughes discuss the possible implications of a shrinking China, as well as global population projections out to 2100. The conversation touches on the environmental impact of a growing population and how well-placed we are to manage environmental challenges.    

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.

What’s covered in EP174

  • The world’s population is on the rise and passed 8 billion in November 2022 [4:24]
  • Why post-war population growth was so strong [7:43]
  • What does a declining Chinese population mean for the Chinese and global economies? [14:09]
  • The importance of immigration in Australia population growth [19:27]
  • How the world’s population will eventually level out toward the end of the century [23:35]
  • Can governments solve environmental challenges? Discussion of the hole in the ozone layer and the Montreal Protocol [30:09]
  • Paul Krugman vs Dean Baker on the future of China [42:07]
  • Tim asks how do you maintain a growth mindset in a declining population? How do you make it work? [47:25
  • Will demographics and a weaker economy bring down the Chinese administration? [53:06

Links relevant to the conversation

UN World Population Prospects 2022 data

https://population.un.org/wpp/

Paul Krugman’s article “The problem(s) with China’s population drop”

https://themarketherald.com.au/the-problems-with-chinas-population-drop-2023-01-19/

Dean Baker’s article “Paul Krugman, China’s Demographic Crisis, and the Which Way Is Up Problem in Economics”

https://cepr.net/paul-krugman-chinas-demographic-crisis-and-the-which-way-is-up-problem-in-economics/

China’s old-age dependency ratio

https://population.un.org/wpp/Graphs/Probabilistic/Ratios/OADR/65plus/15-64/156

Stanford Business School article “Baby Bust: Could Population Decline Spell the End of Economic Growth?” discussing Charles I Jones views on the link between population, innovation, and economic growth

https://www.gsb.stanford.edu/insights/baby-bust-could-population-decline-spell-end-economic-growth

Transcript: China’s falling population & global population update   – EP174

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  00:07

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. This episode, I discuss China’s falling population and other global population issues with my good friend, Tim Hughes, who helps me out in my business Adapt Economics from time to time. Tim is not an economist, but I always enjoy chatting with him and hearing his views. And I think he asked very good questions, please check out the show notes, relevant links and for some clarifications, for instance, I need to clarify that the fertility rate for Hispanic women in the US has fallen over the last decade, and is now lower than what I remember it being although it’s still higher than for non-Hispanic women. The general point I make about Hispanic fertility contributing to a higher than otherwise, total fertility rate for the US is correct. I think about doing a deeper dive on fertility rates and other demographic issues in a future episode. Please stick around to the end of my conversation with Tim for an afterword from me. Okay, let’s get into it. I hope you enjoy the show. Tim, he is good to have you back on the show in 2023. Good to be back gene. Yes, Tim. Lots to chat about this year for sure. And today, I thought we could talk about one of the big bits of news that’s already come out this year is the news about how China has had a falling population. The population started to fall for the first time. So that was over last year. Did you see that news?

Tim Hughes  02:01

I do. Yeah. And it’s sort of in line with previous conversations we’ve had about world population and declining growth in a lot of countries. But that’s been mainly in the Western countries. So I think it’s the first time we’ve seen this in China.

Gene Tunny  02:15

Yeah, and this is one of the big concerns for China that China could get old before it gets rich. So it’s got an ageing population. And now it’s got a falling population. And there’s concerns about what that means for its economy, its economic dynamism, its ability to look after the elderly people. So that’s one of the concerns, you know, there’s concerns over the dependency ratio and the number of people of working age to support those.

Tim Hughes  02:46

So that’s the same principles. Because I know we’ve talked about a lot of the Western countries have declining, population rates are declining growth rates. So there’ll be the same challenges that those countries face as well, then yeah.

Gene Tunny  03:01

To an extent, it’s much worse in China than in many Western countries, because China really shot itself in the foot, really, if you think about it with that one child policy. And it seemed like a good idea at the time, because at the time, we’re concerned about, well, how do we feed a billion people or so. And so there was a government policy, instituted late 70s, early 80s, that each family can only have one child. And that seemed like a good idea at the time, to help improve living standards, and help feed the population. But what it’s meant 40 years later, is that they’ve now got a declining population. And while they’ve relaxed that one child policy, what they’re finding is that Chinese couples, they’re quite happy with one child, because you know, that’s been the norm for four decades or so.

Tim Hughes  03:56

Yeah, because that was in place until 2016, I saw,

Gene Tunny  03:59

Yeah, around then I think. Yeah.

Tim Hughes  04:03

So I mean, it’s pretty radical, because I guess China is one of the few countries that could implement that – that kind of law. I can’t imagine many countries being able to do that. So it’s interesting seeing it pan out, because it’s interesting that Western countries have a declining growth rate anyway. So without that being put in place.

Gene Tunny  04:24

Yeah. And one of the other big challenges for China, which is less of a challenge for Australia, and for the US, for example. Immigration is a that helps us alleviate some of the challenges from an ageing population, not completely. We’ve got a really strong immigration programme here in Australia, the US gets a lot of immigrants from all around the world. And also because the US has got the benefit of having a large Hispanic population and the fertility rate among Hispanics. So people from Mexico or from South America or wherever Puerto Rico, it’s, I don’t know, it’s over 2.1 For sure, which is the replacement rate. And so what that means is that the US, their fertility rate is not as low as in other other economies. And so they’ve there not the pressure doesn’t come a lot from that source. I mean, in Australia, we’ll end up having that that natural increase turned to a natural decrease eventually. And then we will have to start relying on immigration for additional people at the moment, we’ve still got some natural increase, because we’ve got, because the baby boomer cohort was so big, and then their children, there was plenty of them. And so there are still more people being born in Australia than dying. You get a problem if you don’t have people being born and you got everyone die in, that’s when you know, you don’t have immigration. And that’s what’s happening with China.

Tim Hughes  05:56

immigration has been a big part of national growth for so many countries for since forever. Like, that’s always been the case. And so certainly, places like Australia has count on that massively. Zooming out to a macro level. We’ve been talking about the cause, I remember we had this conversation years ago, and I was open-minded at the time but I was wondering, like, what happens, you know, if world population gets out of control? And you mentioned at the time that the thinking was it was going to level off around 2050 at around 10 billion? I think that might have been raised?

Gene Tunny  06:33

Yeah, it’s been revised. So if we look, we might go to the World Population Prospects. So I’ll put a link in the show notes to this. This is the really authoritative set of projections from the UN. And I mean, they’re really good. They essentially, they were forecasting that China’s population would start declining around now. Yeah. And, you know, India’s, the mean, India’s population is going to overtake China pretty soon, if it hasn’t already overtaken China’s population that we chat about that a bit later. There are some good references I found on that. They’re on the 8 billion mark now. Yeah, I think we crossed 8 billion last year. If you look at the world population, Prospects report, they’re released last year. So the world’s population is projected to reach 8 billion on 15 November 2022. Can you remember what you’re doing that day, Tim?

Tim Hughes  07:24

No,

Gene Tunny  07:25

No. But that was back to the momentous day for the world. So you know, 8 billion amazing. I don’t know what it was, when I was born, it might have been in the 70s. It might have been put it in the shownotes. But I remember when I was at school, it was 5 billion or so

Tim Hughes  07:43

This is a thing that I saw, I remember at the time when we first had this conversation, because the rate of the doubling of the world’s population was so fast. I mean, the turn of the century around the First World War turn of the previous century, is around the 2 billion mark, I believe. And so to get where we are now is like a billion. I mean, that’s a huge growth. And this is the history of the universe, for instance, like for our species on this planet, any planet, you know, to be this money. So it’s a really, it’s a really fast growth.

Gene Tunny  08:19

So why that occurred? It’s because of improvements in agriculture is because of the fertiliser, the ability that’s that process the was invented by those German chemists.

Tim Hughes  08:33

Those German chemists, yes.

Gene Tunny  08:34

I’m not going to pronounce it. I’ll mispronounce it for sure. But there’s a there was a process that to artificially or create ammonium, I think for fertiliser, if I remember correctly, so there’s a something like that there’s a there’s a chemical process that was perfected in the early 20th century by some German chemists. And that meant that we were able to produce, you know, fertiliser artificially, and then that meant that our agriculture could be much more productive. And all of these, you know, we could support much larger populations in India and Bangladesh, and all over Asia, in Africa. So that’s a big part of it. And the other part of it, of course, is just improvements in public health and understanding of germs and bacteria and viruses and all of that eradication of smallpox, all sorts of things that have that mean that billions of people who wouldn’t have been born or wouldn’t have survived beyond infancy, are able to survive and now we’ve got 8 billion people. It’s just incredible. When you think about it.

Tim Hughes  09:42

Infant mortality at that time was terrible, like, it was very common for families to have any number of kids who didn’t make it through to adulthood. And that has definitely improved.

Gene Tunny  09:58

Well, just got any I mean, you got any cemetery and yeah, any older cemetery and you just see all the graves and memorials to infants. It’s incredible, isn’t it?

Tim Hughes  10:08

But go back to the conversation that started this? Well, certainly, as far as I was aware, because so I was of the mind, like, you know, what happens if we just get more and more and more, there’s a massive problem, and it just gets out of control. But you mentioned that this was actually foreseen that there will be a levelling off. So this extreme growth that we’ve seen from so taking that 2 billion mark around the 1900 mark, 2 billion to where we are now 8 billion. I mean, if, you know, I’m thinking, Well, what happens at the point where we can’t sustain any more people, but it was foreseen that we would have this levelling off around 2050. And then 2100, not much growth between 2050 and 2100. Is that still the case?

Gene Tunny  10:49

Yeah, yeah. So if I’m looking, I’m looking at the UN, the world population projections that were put out last year, the latest projections by the United Nations, suggests that the global population could grow to around eight and a half billion in 2039. 9.7 billion in 2050. And 10.4 billion in 2100.

Tim Hughes  11:12

So that’s a real that’s slowing down a hell of a lot from where we are now.

Gene Tunny  11:15

Yeah, yeah. And that’s because of that demographic transition they talk about. So I think we talked about that last time. How as economies get wealthier, as people get wealthier, public health improves, then they have fewer children.

Tim Hughes  11:30

That’s interesting to me, because you would think it’d be quite logical to think it would go the other way, that people would have more children under those circumstances. But there’s actually fewer.

Gene Tunny  11:39

Yeah, yeah because in poorer economies in poorer countries, children are in insurance policy. And they help look after their parents in old age. Yeah, So that’s, that’s how it works.

Tim Hughes  11:52

 I’m thinking that my kids, I might have to mention that to them.

Gene Tunny  11:58

Yeah, so that’s why. And historically, yet, so you’d have that have more children, of course, birth controls, and other another thing, too, right. So birth controls part of the story. But I think largely, it’s, it’s due to the fact that if you’re in a more if you’re in a poorer economy, then it’s probably more likely to be agrarian, or you have lots of people on the farm. And you know, having children’s that’s, that’s your workforce. Right. Okay. Yeah. So, I mean, that sounds harsh, but that’s what it is, right. So that’s  your workforce, it’s to help you out in the home, and it’s to look after you when you’re old. And so that’s why in poor economies, they have more children, and there tends to be this demographic transition, that’s well observed that countries really have this sharp or this big drop in fertility, as they get wealthier.

Tim Hughes  12:53

It’s a really interesting, I mean, I think it’s a good thing, like, you’d have to say, you know, I mean, I was, I was pleased and relieved, to see that that was going to level off, you know, because it’s obviously, you know, if we think of like, a parasitic kind of relationship, you know, and the planet, if we’re a parasite on this earth, and just gonna get too many of us, and potentially, like, trash it, which is still possible with 10 billion people. But it looks like everything’s turning around there to make better choices towards the future generations. So hopefully, that works out. But if the population was going to keep growing, that was certainly going to be a bigger issue. But hopefully, that will make it easier for us to manage the planet and our lives on it in some more sustainable way, you know, that we can sort of level out and do something. And I know, this then brought us to another question of, you know, sustainable growth being constant. Always more, always more. What would that sustainable contraction look like? Or D growth or flexible growth, that we’ve got a few different terms for it that we’ve come with for it. But it’s an interesting sort of concept of like, well, you know, not everything is going to grow, grow, grow. So how do we sort of like, manage that levelling out, you know, as humans on this planet?

Gene Tunny  14:09

Yeah. Well, this is one of the big questions about the Chinese economy and what that means for the global economy. Paul Krugman wrote a really provocative, I mean, really well written piece in The New York Times following that news, or might have been earlier actually a better check when he released it. We might cover that in a moment because there is a question about what a declining population in China or Japan what that means for the dynamism of the economy and your ability to keep everyone employed. So we might talk about that. Just wonder if we need to go back over those world population implication?

Tim Hughes  14:47

Yes. Because that’s in China, for instance. That’s what implications already hasn’t it with what’s going on there. So there’s a lot to unpack just with China, let alone the rest of the world.

Gene Tunny  15:00

Yeah, so these are the big takeaways from this World Population Prospects report. So population growth is caused in part by declining levels of mortality as reflected in increased levels of life expectancy at birth. So globally, life expectancy reached 72.8 years in 2019. So that 72.8 years, that’s a globally that’s not that’s across the whole world, right, not just in the wealthy countries an increase of almost nine years since 1990. So that’s a huge achievement. The other thing I think’s really interesting, in this UN report, this is this demographic transition we were talking about. In 2021, the average fertility of the world’s population stood at 2.3 births per woman over a lifetime. So that’s above the replacement rate of 2.1. Because you need that extra point one to account for the fact that some children won’t make it out of childhood. So that’s 2.3 births per woman over a lifetime having for having fallen from about five births per woman in 1950. Wow, that’s extraordinary, isn’t it? Global fertility is projected to decline further to 2.1 births per woman by 2050.

Tim Hughes  16:14

So was the baby boom, in 1950, yeah?

Gene Tunny  16:18

Yeah, I mean, a lot of that’s going to be in the reason, it was five births per woman. A lot of those births would be occurring in the developing economies in the emerging economies in India and China, because I think China had a big baby boom. And in Australian trying to remember what our fertility rate got up to, I think it peaked in the early 60s, because I remember looking at the data, because we will look when we were working on the intergenerational report in treasury, we were all over this data, I think, maybe got to three or three, between three and four. In Australia, which was pretty high for Australia. Now it’s under two. So it’s below replacement, if I remember correctly.

Tim Hughes  17:01

That reminds me because wasn’t it Peter Costello, who said, have one for each other and one for the country? Yes. So that was the opposite of what China were doing. So Australia was like popping out? Well.

Gene Tunny  17:11

Because we were determined that we need people. Yeah, so it’s interesting. So historically, we wanted to grow Australia’s population for defence reasons. I think Arthur Cornwall who was a minister under Chifley I think that was his he wanted and that’s why he encouraged migration. Isn’t that how you got over here?

Tim Hughes  17:33

Do not tell the authorities, will you. No, my mom’s Australian. So that is my connection.

Gene Tunny  17:42

Oh, that is right, I am just kidding. We encourage, we encourage migration after the war to try to build up the population, I guess, because we thought there’s a limit to how many you know how many how fast you can grow the population just relying on the fertility of, of the population.

Tim Hughes  17:59

I know there was a big like that there’s been a constant source of people from the UK anyway, like, the Ten Pound Poms and all of those guys who came over.

Gene Tunny  18:08

BJs. Yeah. And it’s so I guess we were relying on immigration quite a bit. And even with immigration, we will still have facing this ageing population challenge. And then Treasury crunched the numbers, and it looked like, Okay, this is going to be bad and 30 or 40 years time, because there are going to be fewer people of working age supporting the people of the elderly people also children in the dependency, like, I can’t recall the figures off the top my head, but you’d often see figures, which would suggest that whereas once there were five working people, for every dependents by, some data, there’d be two and a half or whatever, they’d be those sorts of scary statistics, and the budget deficit would end up being 5% of GDP if we didn’t correct this. And so then they the government of the day developed a strategy to try to boost population, or boost the fertility rate and the baby bonus and there’s a huge debate over whether it was effective, whether it was whether it made sense to spend that money, because a lot of people just got the whatever it was $5,000 baby bonus and went out and bought a plasma TV.

Tim Hughes  19:27

We had a baby at least one baby in that time, maybe two, we had three altogether, but I think two of them had a baby bonus. Yeah. So we’re very happy with that.

Gene Tunny  19:37

Yeah. Totally, but the fertility rate did increase over that period. And which, which meant that there was all this talk about Well, Peter Costello’s being the only minister in the Western world, has ever managed to increase the fertility rate or something like that. So we got a lot of praise over that. And there’s that famous photo of him with all the babies surrounding him. Yeah, so I guess we work tried to address our concerns about ageing about declining population, well, we don’t I mean, we’ve still got a growing population, we’ll end up where 26 million now, I think and we’ll end up at 40 million by 2050. Possibly.

Tim Hughes  20:16

So the reality of that is that that’s going to be mainly from immigration.

Gene Tunny  20:19

Yeah, there’s still they’ll still be some natural increase, but a lot of it will be immigration. That’s correct.

Tim Hughes  20:25

I think it’s a really good. I don’t think it’s widely known by everybody, of the importance of immigration, like it’s it, as far as like feeding that growth and like, supporting the ambitions of a country, immigration is essential to have that growth. You know, it’s a big part of it. I know, certainly, in the UK. I know, people from West Indies and, you know, the Caribbean, India, Pakistan, you know, massive influx at different times to be invited over into work, you know, it. And, of course, then there were thriving communities of generations now of people who are British and add to the whole vibrancy and diversity in the country. And that’s part of I mean, I know, it’s a very controversial subject in many countries. You know, we’re not going to cover here. But the fact is that immigration is needed for that growth. Yeah.

Gene Tunny  21:18

Yeah, there’s one way that you can get around this, this challenge in particularly in the western economies, which are projected to have falling populations, you can take advantage of the fact that, well, the population is not falling in other parts of the world in the emerging economy. So there is that opportunity for migration. And we’ve got to look at better ways of allowing people to, to migrate, including on a temporary basis, a lot of the concerns about migration or about people migrating for work purposes, and then settling there permanently and bringing their families. So there’s a lot of concern that. So countries like Germany, which have had bad experiences with or they do them perceive the perceived that they’ve had bad experiences with guest workers in the past, that they’d want to make sure that any migration is temporary. So I think countries are looking at ways that they can have temporary workers schemes that I mean, we’ve got all sorts of visas for temporary workers now. And we’re getting people over from the Pacific where we were before COVID, to help pick fruit here in Australia. So that’s, that’s, yeah, I think migration, certainly part of the solution. At the same time, you want to make sure that it’s, it has community acceptance, and you’re not putting too much pressure on community services, you want to make sure you’ve got the infrastructure to support the population. Yeah, so a bit of a challenge there. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  22:57

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Gene Tunny  23:27

Now back to the show. Let me just check that Australian population forecast Tim.

Tim Hughes  23:35

So I was gonna ask you Gene like, with that levelling out, frustrating gets around 40 million.

Gene Tunny  23:41

That’s what I wanted to check. Yeah. Right, because that’s the number I had in my head. But let me just check with that. That, but go ahead, keep going. 

Tim Hughes  23:48

Yeah, I was gonna say, I mean, I guess Western countries are already there, where they’re starting to level out and have a very slow rate of growth, or in decline. And so it’s just with infrastructure, and all those different things like at some point, you can imagine that people will still want to move around the world. So even with 10 billion, 11 billion, it might be a case of people leaving one area on mass to try and get into other areas, which happens all the time. I guess it’s certainly happening now. Yeah. And so a big part of that is just managing the amount of people that are on this planet, but with the sustainability sort of question, you know, it’s that up until now, everything’s been about growth, you know, population growth, and more, more and more, to getting back to the point I was talking about earlier, like, you know, it’s gonna get to the point where it’s like, well, this is we have to manage this the best way we can. And so yeah, it was going back to those areas of D growth or flexible growth, sustainable contraction.

Gene Tunny  24:45

Yeah, sure what you mean by that, Tim. And well.

Tim Hughes  24:47

I guess, I guess it’s the kind of thing because of, with that levelling out of the population, I mean, like I said, I think it’s a good thing, you know, because there are enough of us.

Gene Tunny  24:57

Yeah. If you’re concerned about the ability of the planet to support the population and there are plenty of people who are who are saying, Oh, well, we’re actually exceeding the planet’s carrying capacity at the moment, which I don’t believe because if we were, I mean, we wouldn’t be able to keep growing our population, and obviously, where we’re able to support the current population, just by the fact that we are supporting it, right,

Tim Hughes  25:20

I guess at some point as a planet, they’ll still be moving people moving around, like I mentioned, like, yeah, that’s understandable. But the growth mindset, as far as population goes, will have to change at some point, you know, like, you know, it’s not just going to be more and more, it’s a case of like, doing better with what we have. Does that make sense?

Gene Tunny  25:38

I think we should always be trying to do better with what we have. I mean, as an economist, as an economist, I think, yeah, I totally agree with that. We’ve got to be more efficient and do better and, and make sure we’re not we’re properly pricing our impact on the planet. So we’re talking with, we’re not polluting too much, or we’re managing the environment as best we can. Yeah,

Tim Hughes  26:02

yeah. I mean, I see good things coming from it. Like, I think it’s a good sort of place to be, because everything up until this point, like it’s, you know, from 2 billion in 1900, to a billion now to 10, or 11 billion. This is, I would imagine that things will have to change in the way that the world is looked at, as far as its population goes and said, Well, this is, this is, how many of us are going to be putting, you know, waste into landfill? How many of us are going to be, you know, how we deal with our own sewerage, and all that kind of stuff? You know, what I mean? Like, the stuff that ends up in the oceans, how we treat our soil, all of that, like as a global sort of, like management of, okay, how do we do this to the best of our abilities, so we can keep doing it indefinitely. And if we have if we had an exploding population that was getting forever, and that was going to be a scenario that would be potentially catastrophic. And so that’s, I guess, we’re looking at it’s like a macro sort of like view of the whole planet, it’s okay. Well, you know, what can we expect to do better? Where we’re not just constantly expanding? As far as like the population goes?

Gene Tunny  27:07

Yeah, I think why is this definitely an issue to manage? How do we deal with all of that, and greenhouse gas emissions? We’ve got to, we need to get them under control sometime, and then you can debate how quickly or not in the Greta Thunberg, we’re all going to die in 10 years, or there’s a climate catastrophe. I think we’re gonna I can’t say, well, basically,

Tim Hughes  27:36

I haven’t heard that.

Gene Tunny  27:39

Oh, yeah. I think so, I mean, we’ve had 30 years of blah, blah, blah, not doing anything, which is actually true, right? I mean, the government’s leaders around the world will talk about how they’re doing all of this, all of these great things to reduce greenhouse gas emissions and get climate change under control. And meanwhile, global emissions keep rising. And so this is one of the points that are the conservative critics of Jacinda Ardern pointed out was, she’s very popular. She’s a progressive politician. She’s very popular among progressives worldwide. And yet, before COVID emissions were rising in New Zealand, according to these commentators, I probably should fact check that one. It’s a big challenge, because our whole industry of our industry, and our economies have been reliant on fossil fuels for so long. And it’s like turning the Queen Mary around. Right?

Tim Hughes  28:34

Yeah, because I know, we’ve talked about that with the energy sector changing massively, yeah, at the moment, and there are good things that potentially can come from it, it seems to be heading in the right direction, but it’s, you know, obviously, in a transition period, at the moment. And I wonder how much of that, you know, is down to having short term governments, who, you know, we’re expecting too much from governments, with a limited term of three or four years to be able to make these changes, you know, like, because obviously, this is a long term view that we need to take, I don’t know, 2050. Net Zero, are these sort of like goals that get put in? But sometimes I think with the longer goals, it’s easier for people to say, Yeah, we’re gonna do that. And then the action is less than what it needs to be.

Gene Tunny  29:15

Hmm. I think you’re right. I mean, the system we have the democratic system, the three or four year electoral cycle, yeah, I think that makes it harder. But I think it’s better than the alternative. I mean, we wouldn’t want to have a dictatorship was I mean, they could end up imposing, you know, a very rapid decarbonisation or that is incredibly costly on us if they thought that that was the right policy, like look what China was doing with the lock downs with the COVID zero until I realised that okay, we’re going to have a revolution on our hands if we don’t relax this policy. I think you’re right I mean, I think the democratic system we have this short term focus. Yeah, the fact that it is easy to always point to the cost the short term costs of any action. Yeah.

Tim Hughes  30:09

I mean, because I have to say like, you know, at times it seems that with governments, it’s hard to know how much difference they do make, or they can make, you know, even with the best intentions in a term, which goes very quickly.

Gene Tunny  30:21

Well, I think they can make a lot of difference. Look at problems we have solved, look at the Montreal Protocol, which meant that we eliminated the use of Chlorofluorocarbons. The ozone hole.

Tim Hughes  30:36

I saw that that was that had improved that that was a Yeah, a good improvement from what it had been.

Gene Tunny  30:42

So 1987. I think that was the Montreal Protocol. Where all the governments, particularly all the governments of the world agreed that yet we’ll phase these things out. Now. That’s different from the climate change challenge, because there were easy substitutes or substitutes, which weren’t too expensive for CFCs. Yeah, that we could replace them in the aerosols. But I think, yeah, I think governments can make a huge difference. The problem with the current mean, there are all sorts of problems is the issue of, well, for Australia. I mean, the view I’ve always had is there’s no point us doing, doing much of if China and India are still going to keep increasing their emissions, and also the states. I mean, we need ultimately, you need the major economies to be leading this. Otherwise, it’s not, it’s not really going to happen.

Tim Hughes  31:37

Well, it seems clear that innovation is going to drive it, you know, because and I get that, yeah, because it’s hard to put yourself at a disadvantage when everyone else is able to take advantage of that, you know, so that argument, for instance, here in Australia, where we’re smack fairly small country, but not necessarily been supporting too many of the netzero sort of ambitions around the world, you know, because of what you’re saying, like, let the big guys lead the way. But innovation, I think we’ll do that as soon as it gets to the point where the energy is cheaper than digging coal out of the ground. If there’s a clean way of producing that energy, then everyone will follow.

Gene Tunny  32:16

Oh, exactly. And that’s what we need. We need that technological innovation.

Tim Hughes  32:21

And the market, like from our discussions before with people in the energy sector, has been that the market is driving this. So we don’t have to, I mean, governments can help by making it easier and sort of greasing the path towards encouraging those changes to happen. But certainly the market is driving it and innovation is providing the opportunity for the market to take up those options with renewable energy.

Gene Tunny  32:42

Yeah, you’re thinking about that conversation we have with Josh. Yeah, yeah, that was interesting. Or he’s talking about the fact that the nature of this transition of any transition really is it’s going to be disorderly, it’s hard to get these things done in an orderly fashion.

Tim Hughes  32:58

I always manage to steer it back to this, don’t I Gene. It doesn’t matter what we talk about.

Gene Tunny  33:01

It’s important. If I’m thinking about, well, what’s the big potentially the big risk to I mean, other than nuclear war, I mean, it’s always a threat, particularly with what’s happening in Ukraine. Now I’m in the risk of that elevated, but the other big, potentially existential risk. I mean, you’ve got to put some probability on it. I’m not as concerned about it as some other people. I’ve got the Steve Koonin view of it, he used to work for Barack Obama, he was in the administration, I think it was in science, one of the I don’t know if he was in cabinet, or he had a, he had a senior position in the Obama administration is a scientist, he was at Cal Tech. And his view is that Yep, this is something we’re going to deal with. But we’ve got decades to deal with it. So what we’ve got to do is to start putting in place agree on some policies globally that are going to get us on this smooth transition path and, and also fund innovation trying, you know, it’d be great if we could find the cost effective solution, perhaps nuclear fusion, that there’s, there’s a lot of excitement about that. But then you got to deal with the nuclear waste. And what was that? What was actually, maybe there isn’t waste with nuclear fusion? Maybe that’s one of the advantages of it. Well, there’s less waste.

Tim Hughes  34:18

I still get my fusion and fission mixed up. So

Gene Tunny  34:21

Fusion is more powerful. Fusion is what the sun does.

Tim Hughes  34:26

Yes, right. Yeah. Fission is the separating of fusion is the joining. Yeah. Yeah. But so and with and there was a breakthrough with Fusion then yeah, just the other week, but it was still claimed that that could be decades away from it being useful for an energy source on a commercial scale. However, if it’s decades where that’s significant in the history of humans, however, with that, especially with that conversation with Josh, it was record notion that, you know, having a suite of different options for clean energy makes a lot of sense. You know, we don’t have to put all our eggs in one basket. And, you know, one choice so, and clearly those things are happening as we speak. And quite successfully. I mean, like the, you know, there’s still a lot of clean, renewable energy is getting more and more prolific.

Gene Tunny  35:22

Oh, no doubt about that. I mean, aren’t they turning the North Sea into a wind farm in? Have you seen that in? Because the North Sea is really good for the wind turbines. Well, it’s I mean, it’s not shallow, but it’s it’s not very deep the North Sea? Was there’s bits of the North Sea that are only a few 100 metres deep, I think, isn’t there?

Tim Hughes  35:48

I mean, obviously, it must be, you know, viable. But it seems odd to me that a wind farm in an ocean, you know. But, obviously, there’s, you know, there’s something in it. Yeah, yeah. It’s extraordinary. It’s a really interesting time. So because all of this is coinciding with this levelling out of the population. So it seems to be a, I don’t know, it feels like it’s a good place to take stock and see how we can sort of really manage this planet. Well, you know, and cleaning it up is the first way to do it, you know, so how we can keep the oceans cleaner than they currently are, like, clean them and stop polluting them and how we can manage our waste, you know, 10 billion, it’s a lot of foods.

Gene Tunny  36:30

Well, I guess this is what’s part of this is what’s motivated all of these measures or measures we’ve had in Australia to reduce plastic waste, and then I was growning about it when they initially announced it. But I guess you adapt. I mean, you can’t get the single use plastic bags any more at the supermarket.

Tim Hughes  36:48

You’re still hurt about that one.

Gene Tunny  36:51

You can’t get the single use plastic cutlery Well, anyway, we should get back to this population stuff. It is important. I do recognise the importance of what you’re talking about. The population of Australia is projected by the Treasury, this was last year, or this was 2021, I mean, who knows. But if they updated and they’ve got different migration projections, these numbers could be significantly different. But they were forecasting the population would grow from around 26 million, around 2021, up to 32 million in 2041, 36 million in around 2050-51 and then 39 million by 2060-61. I think I’ve seen previous, I think I hadn’t had in my head the idea that it’d be about 40 million by 2050. And yeah, it’s hard. It’s hard to forecast. It depends on fertility, it depends on migration, and then all of that sort of thing. So and life expectancy. So quite a few moving parts there. Right. The other thing I want to talk about, Tim, if you still got time, yeah, it’s this issue of what does the declining population mean? So what is China’s declining population mean for its economy and therefore the global economy? One thing to keep in mind, of course, is that I think, what were we talking about a reduction of a population of 850,000 people. So that’s under 1 million, the Chinese population is 1.4 billion. So in percentage terms, we’re talking. What’s that less than point one of a percentage point? Yeah. Does that make sense?

Tim Hughes  38:37

Yeah, I mean, it’s. So it’s level that basically.

Gene Tunny  38:42

I guess that’s one way of looking at it is that it’s yeah, it’s hardly you’d have like, really noticed that on a chart, if you drew the population. The thing is, it’s a sign of things to come, because we all know that it’s expected that the Chinese population would, is going to start falling. And there are all sorts of projections as to where it could get to. By 2050-2100, I think I’ve seen an estimate somewhere that their population by 2100, could end up being, I don’t know, 700 million or so. Yeah, it’s a really big reduction because of that one child policy. I’ll put the actual figure in the show notes, but it’s quite dramatic. Just looking at what that impact of that one child policy, ultimately will be on their population in the future, because you’re not replacing your population. Right. So that’s, yeah.

Tim Hughes  39:42

So it’s funny actually, China is like a microcosm of the globe in a way, isn’t it? Because it sort of has fairly tight borders. And so the decline that that would be for China, would be an example of like, how do you manage that sustainably, how do you sustainably contract successfully from 1.4 billion to 700 million. And yeah, the thing is like, you know, China is extreme in many ways. They may manage it very well. Now, I’ve got no idea how but I think that’s a really interesting sort of point. I mean, they’ve had massive change. Was it 1962 to see the great leap forward? You know, I mean, certainly from 1980. They’ve made in the last 20 years, 25 years, they’ve made themselves this sort of, like, workshop of the world, you know, they’ve produced so much stuff. And they’ve become very wealthy in that time.

Gene Tunny  40:36

Well, the wealthier and some people have become very wealthy, their per capita income is still I don’t know, it’s under a third of what it is in the States. It’s gone. It has gone through big changes. I mean, yeah, considering that once but I mean, I don’t know when you were young and when I was young people were saying, well eat your food, because there are people starving in China. Right. I don’t know if maybe that’s an Australian thing. Yeah. I mean, yes. It was probably still true when I was when I was young. Right. But it’s not, I don’t think it’s true now. Or it’s only in small pockets. Right. Whereas famine used to be a huge problem. And you know, people were incredibly poor. And most people lived on the land. But now I’ve had all the shifts of hundreds of millions of people from the agricultural areas in China into the cities. And it’s just, it’s just amazing.

Tim Hughes  41:27

It is fascinating, because made in the 80s, like you couldn’t go to China, like it was closed off to I think it was around the mid 80s, that they sort of opened up or towards the end of the 80s. You know, and it was a new thing, like tourism in China was a new thing. And of course, it’s really well, I mean, COVID aside, you can travel there freely now. But it’s gone through massive change in a very short period of time. It’s really, you know, I don’t know, if they’ve come to a critical point in their sort of growth as, as this powerhouse of production. With a declining population, I guess that’s going to make a big impact.

Gene Tunny  42:07

Yeah. So a lot of the discussion that pundits and commentators and economists having at the moment is around well, what does this mean for their economy? What does it mean for their society? Paul Krugman had a great article. I’m not sure I entirely agree with it, because there’s a really excellent response from another American economist, Dean Baker, which I’ll link to in the show notes. But so Paul Krugman in the, in the New York Times the other day wrote, a declining population creates two major problems for economic management, these problems aren’t insoluble. But will China rise to the challenge? That’s far from clear, the first problem is the declining populations, also an ageing population. And so you’ve got this issue of the dependency ratio, paying for looking after those people. The other thing Krugman is worried about is that a society with a declining working age population tends other things equal to experience persistent economic weakness, Japan illustrates the point. Now there’s a debate about just how badly Japan’s fared relative to other countries, it certainly hasn’t grown as fast as the US or, or the Australia. But it hasn’t collapsed either. I mean, it’s managed to maintain reasonably low unemployment, it’s kept people employed. But at the same time, they’ve been the government’s had to try to prop up the economy, it’s accumulated a huge amounts of debt. So there are certainly challenges with Japan. And partly that is because it’s, it does have that declining population, as Krugman notes. So the point Krugman is making its a Keynesian point, in a way. What he’s saying is that if you’ve got a growing population, then that, from that, for what follows from that is the need for additional capital investment in your economy, additional spending that helps keep people employed. Yeah, so that’s the that’s the point he’s making, and that if you don’t have that growing population, then you’re at risk of what Japan experience with his last decade or so and potentially at risk of deflation. So I’ll put a link in the show notes here, because we’re getting up to near the time we set for ourselves. This might take a while. Yeah. It’s incredible. And so Krugman is concerned because he thinks that what this declining population could mean ultimately is that China has a period it ends up being economically weak. And there’s also some evidence or there’s an argument from this, this economist at Stanford School of Business, Charles Jones, he argues that we’ll get a declining population is problematic because then you’ve got fewer people to solve problems, it’s less likely you’ll get an Isaac Newton or Albert Einstein, etc. So that’s one of the concerns. When who knows if that’s, I don’t know how valid that is. That’s enough. That’s a hypothesis. I mean, we’ve still got billions of people, right?

Tim Hughes  45:21

I mean, you can say those guys came around when there’s a far fewer people on the planet.

Gene Tunny  45:24

Exactly. So who knows if that’s actually a legitimate concern or not. But that’s quite a, that’s a, I should have him on the show just to talk through. It’s no Charles Jones, you know, and get him on the show rather than just say, I don’t agree with it, or maybe I haven’t done the the concept justice. But there’s certainly I can see the logic, but there are concerns that the dynamism of your economy would be at risk. If you have fewer people. There are concerns about well, how does your economy adjust to this in the short term as you’ve got declining population, and you’ve got less need for investment? We’ve got all of these buildings that have been, you know, what we don’t have as much need for new housing or new construction, which does help employ people? How do we how do we manage that? And that on the other hand, there’s this great critique of Paul Krugman by Dean Baker, who’s an economist and co founder of the Centre for Economic Policy Research, which is DC Think Tank, it’s a progressive Think Tank. I really thought this is a clever critique. And Dean Baker, apparently, his Wikipedia entry claims that he was one of the first people to have foreseen the subprime mortgage crisis in the States. So yeah, I think he’s, he’s got a good reputation. He makes the point that well, Japan’s not really as bad as you think. And then it hasn’t collapsed. They seem to manage to muddling through in some way. And then it’s not, obviously they’ve still got problems because of all the debt. But he’s saying look at something you can you can manage, and there are actually benefits from a declining population. He, he notes that Japan cities are less crowded than they would be if its population had continued to grow. This means less congestion and pollution, less time spent getting to and from work and less crowded beaches, parks and museums, these quality of life factors don’t get picked up in GDP. I’m actually not sure. Does Japan have many beaches? I mean, I understand his point.

Tim Hughes  47:25

Yeah, Echo Beach, yes that is in Japan. That’s one beach that I know.

Gene Tunny  47:32

I was just wondering, I don’t know, never haven’t been to Japan on an island. So I guess it’s yeah. Oh, of course, they have beaches. Yeah.

Tim Hughes  47:39

But that’s actually a really good way of putting, I guess one of the things that we’re talking about is like, you know, declining population doesn’t have to be bad news. I mean, I guess, you know, the, the challenge would be how do you keep maintain a growth mindset in a declining population where can you make it work to your advantage? Or, you know, how can you do the best, you know, with, because part of it would be in a declining population. Once that first surge of older people goes, then it should level out with the number of older people as opposed to the number of younger people, I guess, because as you’re peaking towards your peak population, you’d have the most amount of old people is that right? I’m sort of thinking out loud here. But I’m just wondering,

Gene Tunny  48:25

Tim, is a good question mate. I mean, you’re asking does the as if as your population declines, what happens to the age composition of the population? So I’m gonna have to take that on notice. I mean, I think that’s a hard one. I mean, there could be a point, there could be a time when both the dependency ratio gets worse and your population keeps falling? That’s a good question. I don’t know, let me put something in the afterword about that. I don’t know, conceptually, I can’t figure it out right now on the fly. That’s good question. 

Tim Hughes  49:00

But it’s that thing of like, I imagine, like the you know, because the challenge is this is to manage that. Well. Yeah. And like, so. I mean, one thought that comes to mind with that is, like, the whole thing of retiring at 65 has been around for a long time and around 65, whatever it is now.

Gene Tunny  49:16

67 in Australia now.

Tim Hughes  49:19

Y eah, this thing of like, it’s not necessary for people to stop doing what they do, you know, there’s so much wisdom and, you know, a good life experience that gets lost with that mindset of like, see you later at 67. You know, and I think opening up the opportunity for people to stay in a lower capacity timewise you know, because I think it’s important for people to wind down or do something different or start a new career, you know, like whatever it may be. So, I think maybe the way that you know, we approach ageing or the way we look at ageing, could be one of the factors that changes that declining population as to no right this could actually be looking at how do we manage a declining population better you know, maybe it’s our attitude towards all the roads that we can start with.

Gene Tunny  50:04

Yeah, I think it has to start changing because all the baby boomers are nearly retired, aren’t they? And then Generation X will start retiring.

Tim Hughes  50:13

But it’s that thing of like, you know, as we live longer, we can expect to have more good years, you know? Yeah, hopefully, yeah. And they can be, they can be good years to contribute back towards society as well. It doesn’t have to be just a retirement where you don’t pay any tax at all, because that’s part of the problem isn’t like we’re fewer people paying tax to support an ageing population. You know, so I guess and it’s not just making people work later unwillingly. You know, to give people the opportunity to have different options, different levels of engagement, you know, so they don’t have to do 40 hours a week, of course, but yeah, doing something different stimulating that, you know, people could enjoy doing for longer.

Gene Tunny  50:57

Podcasting.

Tim Hughes  50:58

Podcasting. Exactly. Everybody wants it to be a DJ, everyone was a DJ in the previous life.

Gene Tunny  51:05

Yeah, exactly. I don’t have the turntable, give it time, give it time and we can bring that into the show. Cable

Tim Hughes  51:13

Maybe that’s the way we merge the two.

Gene Tunny  51:17

See how we go. Okay, so I’ll put a link in the show notes to this, these articles by Paul Krugman and Dean Baker. I mean, I don’t know. I mean, some hours of the day I think Krugman is right, then I think I actually Dean Baker is making some great points. I’m still processing it all myself. So Dean Baker, I’ll put a link to this article. It’s on the Centre for Economic Policy Research website. One final point, I thought that well, I thought I should make that Dean Baker may not that was a good one is that? Well, actually, I mean, see it as an opportunity. I mean, China’s got a, it’s got an ageing population, still, while its population is starting to decline, you can put people to well, you’ve built all of that’s right. He’s saying one of the issues that Krugman identifies is that they were building all of this, all of these buildings that, that they may not need these ghost cities. Well, you could use them for aged care accommodation. Or, you know, I don’t know how feasible that is. But that was one of the points that he made. So I thought that was that’s potentially interesting. I mean, there will always be things people can do that the challenge is, can your economy adjust to employ them? So do you have a flexible economy? Gotta make sure you’ve got you’re not regulating business, there’s not the burden on businesses and to hire so that there can be that that adjustment, you don’t have rigid wages or rigid, rigid IR policies that prevent people moving into to new occupations? Yeah, so Dean Baker’s quite positive about what could happen in China. And I’ll encourage, if you’re listening, please read his article. I probably haven’t done it, done it justice. With that, that quick summary there. So yeah, I’d recommend reading that I thought that was really good. And Oh, one other thing we should talk about is that there’s one other concern with the declining population. And the issues with ageing population in China lack of dynamism and what it could mean for their economy, the stability of the whole country, right, the political issues. So Peter Zeihan, I think that’s how you pronounce it. He’s a academic over in the States, he’s come out with his controversial view that the Chinese system as it exists now, that Communist Party regime can only last another 10 years out.

Tim Hughes  53:44

And I mean, it’s been speculation, but it could be true.

Gene Tunny  53:47

If it turns out to be right, he would be held as a genius, the genius.So who knows.

Tim Hughes  53:52

Someone, somewhere will be making those calls.

Gene Tunny  53:54

I mean, my feelings is what I was talking about with Alan Morrison in this chat about enterprise China toward the end of last year. And I think ultimately, that there has to be a regime change in China. I think as economies get wealthier, then there’s naturally more support for democracy.

Tim Hughes  54:14

There seems to be a bit of a paradox with ideology in China at the moment. I mean, we’ve communism is the main ideology, of course, but they’ve embraced capitalism, to the point where individuals are getting mega wealthy, but then they’re sort of getting called into the headmaster’s office and sort of like, you know, put in detention for a bit to sort of keep them in line Jack Ma, from Alibaba, and different people who sort of like disappear off the, you know, public space or forums. And so there seems to be a bit of a tussle there going on, and you wonder how long that can go for. But yeah, there certainly, I think it’s fair to say that there would be an expectation of change coming sometime in the next 10 years. I mean, it’s really everywhere. I mean.

Gene Tunny  54:57

I guess change of some sort. I mean, let’s hope it’s a peaceful change. And there is, uh, you know, maybe the I mean, I don’t know whether they’re going to relinquish power will Xi Jinping I mean what what are the chances of him relinquishing power? I mean, given he set himself up as Emperor for life or whatever it was, I mean.

Tim Hughes  55:15

There’s only Jacinda Arden that I can think of this relinquish power. Yeah, it’s it’s pretty rare thing.

Gene Tunny  55:22

It is very rare because power is seductive, isn’t it?

Tim Hughes  55:27

So they say?

Gene Tunny  55:31

Tim, that’s been an amazing discussion. That’s been fun. Yeah, it’s been good. I’ve really enjoyed that. As always, we managed to go much longer than we expect to or prepared for. Any final thoughts?

Tim Hughes  55:45

No, I mean, it’s funny because it does crossover. I mean, I guess that’s why other things come into it, you know, because they’re all connected. And they, it’s a really fascinating time to be going through this. I mean, like, you know, we’re at a really interesting time, for anywhere in humanity’s history in our like, we’re at these sort of peaks that haven’t been reached before. So yeah, I’m really, and I personally enjoy the direction that things are going in for, you know, the environmental future of the planet, you know, like, I think it’s the right way to go. And I think that’s the overriding direction that it has to get when because otherwise, potentially, yeah, we’re gonna end up in a situation that’s going to be very difficult to reverse. And so seems to be heading that way, which I think is a really good thing. And hopefully, we’ll get there as quickly as we can. Safely.

Gene Tunny  56:39

Yeah, yeah. I mean, I’m optimistic. I think the biggest threat we’ve got is nuclear annihilation. So see how that goes.

Tim Hughes  56:49

It’s still it’s funny, isn’t it? Because that was those threats come and go. But I think our capacity to have our attention on it sort of comes and goes, I mean, it’s sorry, the threats always been there. But our focus on it sort of comes and goes with different things. It’s hard to live under that existential threat constantly.

Gene Tunny  57:09

Yeah, very true. Very true. Okay, Tim Hughes. Thanks so much for your time. I really enjoyed that conversation. I thought that was really he really enjoyed it. We got through a lot, and it was a good discussion to kick off the new year. So thanks so much. Yeah.

Tim Hughes  57:22

Thanks, Gene. You’re welcome.

Gene Tunny  57:25

Okay, I hope you found that informative and enjoyable. In my view, the main takeaway is that China’s declining population is a big challenge to the Chinese economy. And by implication, the global economy, it will be difficult for the Chinese regime to manage this declining population. And indeed, it could even contribute to the end of Communist Party rule, if the declining population actually does lead to a weaker economy and hence an erosion of support for the party. Arguably, one thing that Chinese administration could do to help partly offset the problem of a falling population is to have a more liberal immigration policy. Of course, the administration may worry that bringing in too many foreigners may create political instability which could cost at power. I’d note that for countries which are more open to immigration, and also which didn’t have as bigger collapse in the fertility rate as China did, I’m talking about countries such as the US and Australia, those countries are much better able to cope with demographic challenges. And indeed, they’re actually projected to grow over the future decades. For example, the UN projects that the US will have a population of 375 million in 2050. And between 390 and 400 million in 2100. That’s up from 335 million or so today. Before I go, I better respond to a question that Tim had in the episode. Paraphrasing, Tim asked a question about what happens to China’s old age dependency ratio as the population peaks and starts falling? To answer this question in the shownotes. I’ll put a link to a chart from the UN showing the projected old age dependency ratio for China. That is the ratio of the number of people aged 65. And over to the number aged 15 to 64. The chart shows the old age dependency ratio in China will keep rising for several decades, probably into the 2080s. So in China, we’ve got a falling population, and we’ve got rising old age dependency. So that ratio will increase from around 20 People age 65 and over per 100 working age people. So that’s today it will increase from 20 to 90 people aged 65 and over per 100 working age people in the 2080s. It’s expected China will eventually have almost as many old age people as working age people. That’s the median projection from the UN and everything depends on how closely reality complies with the UN’s assumptions of course, that said there’s no doubt The dependency ratio is increasing and China has a big problem. China’s one child policy has meant that too few people have been born in the last few decades, nowhere near enough to keep the population growing and to look after an increasingly elderly population. Many of the Chinese born are the big cohorts after the 1949 revolution, and before the one child policy was introduced in 1980. They’re still alive and they’re ageing. Right? Oh, I must confess that population dynamics are complicated. And I might try to get a demographer under the show and a future episode for a deep dive. If that’s something you’d be interested in, please let me know and I’ll see what I can do. Okay, thanks for listening. rato thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets, you then place router review and later writing. Thanks for listening. I hope you can join me again next week.

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Podcast episode

Structural budget deficits – EP164

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

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

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

Links relevant to the conversation

Australian structural budget balance indicators available here:

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

Australian Treasury methodology for estimating structural budget balances:

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

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

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

Media coverage of Australian budget:

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

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

IFS analysis of UK mini budget:

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

Transcript: Structural budget deficits – EP164

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

Gene Tunny  00:00

Coming up on Economics Explored. 

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

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

Arturo Espinoza Bocangel  01:49

Hi Gene. My pleasure to be here.

Gene Tunny  01:51

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

Arturo Espinoza Bocangel  04:45

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

Gene Tunny  04:58

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

Arturo Espinoza Bocangel  14:01

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

Gene Tunny  14:33

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

Female speaker  26:23

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Gene Tunny  26:52

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

Arturo Espinoza Bocangel  27:01

No, at the moment..

Gene Tunny  27:02

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

Arturo Espinoza Bocangel  30:39

Yes, it’s all clear.

Gene Tunny  30:42

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

Arturo Espinoza Bocangel  35:21

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

Gene Tunny  36:04

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

Arturo Espinoza Bocangel  43:39

No, thank you for all your explanation Gene.

Gene Tunny  43:43

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

Arturo Espinoza Bocangel  44:14

Thank you for having me, Gene. Bye.

Gene Tunny  44:17

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

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

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

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

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.

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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.