Is there a brilliant ‘Art of the Deal’ strategy behind Trump’s tariff policy? It has been a big failure for the US so far, as attested to by the 7% fall in the US share market since inauguration day (see the chart below) and a 12% fall in consumer confidence from January to March, according to the Conference Board. The US has inflicted more harm on itself than its trading partners.
Theoretically, there is the possibility a large country like the US, as opposed to a small country like Australia, can impose an ‘optimal tariff’, as Nicholas Gruen and I explain in an article published in Crikey: Why Trump’s tariffs are better than you think — and much worse. We note:
“When large countries trade, they move prices. That means foreigners do effectively pay some of their tariffs.”
A member of Keynes’ Cambridge Circus, Richard Kahn, wrote the best and most lucid paper on the so-called optimal tariff, Tariffs and the Terms of Trade, published in 1947. Based on Kahn’s optimal tariff formula and plausible values for the parameters, an optimal tariff for the US could be around 20%. However, this calculation is based on a theoretical model without retaliatory tariffs or macroeconomic implications. The benefits of the terms of trade improvement can be quickly outweighed by the costs of retaliation and a global trade war, as well as the fact that tariffs increase the tax burden on American consumers and businesses and will have adverse macroeconomic impacts. Nicholas and I aren’t defending the Trump tariffs. Indeed, we’re supporters of free trade, as you would expect economists to be, but we are pointing out that the terms of trade impact must be considered when assessing the tariffs. Based on the fall in the S&P 500, American investors have judged that the adverse macroeconomic effects of tariffs will outweigh any possible terms-of-trade benefits.
Earlier this week, I spoke about Trump’s tariffs, the federal budget, and the Olympics with fellow Queenslanders Damian Coory and Dan Petrie on Damian’s The Other Side Unplugged show. You can watch the interview here:
I’ve included the time stamps below so you can jump to my remarks on the latest federal budget, the Olympics, and Trump’s tariffs, if you’re interested:
Federal Budget Overview and Critique (0:00)
Jim Chalmers’ Values-Based Capitalism (5:38)
Structural Deficits and Bracket Creep (10:56)
Government Spending and Debt Concerns (13:55)
Olympic Games Plan for Brisbane (30:52)
Trump’s Tariffs and Their Economic Impact (41:15)
Alternatives to Promote Economic Growth (54:39)
Final Thoughts and Future Directions (55:57)
This post has been cross-posted at Queensland Economy Watch. Please comment below or email Economics Explored host Gene Tunny at contact@economicsexplored.com.
This episode explores the economic implications of Trump’s re-election, France’s political deadlock under Macron, and the future of global capitalism. Jean-Baptiste Wautier, a private equity investor and World Economic Forum speaker, shares insights on trade wars and deficits. He argues that short-term profit motives undermine the global capitalist system. Jean-Baptiste also discusses AI’s transformative potential. Please note this episode was recorded on 11 December 2024, before French President Macron appointed François Bayrou as the new PM.
Trump’s Second Term Risks: His proposed tax cuts and tariffs could reignite inflation and exacerbate the US federal deficit, leading to global economic consequences.
France’s Political Instability: Macron’s government faces gridlock, which could potentially destabilize the Eurozone due to France’s growing budget deficit and political deadlock.
Global Trade War Unlikely: Despite harsh rhetoric, economic interdependence makes a full-scale global trade war improbable, in Jean-Baptiste’s view.
Capitalism’s Short-Term Focus: Jean-Baptiste argues the current capitalist model prioritizes short-term profits over long-term sustainability, causing inefficiencies and negative externalities like mental health crises and economic inequality.
The Role of AI: AI is transforming industries at an unprecedented speed, raising concerns about job displacement and the need for economic adjustments, possibly extending to UBI (Universal Basic Income), depending on the scale of the displacement.
Transcript: Is DeFi the Future of Finance? Exploring VirtuSwap’s Vision w/ Prof. Evgeny Lyandres – EP262
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.
Jean-Baptiste Wautier 00:03
You look at all the negative externalities that our current system produced, they just gigantic. Think in terms of health, mental health, in particular, the younger generation. If you look at inequalities, not inequalities in the sense of, you know, morally, but inefficiency, the concentration of 10s of billions or hundreds of billions in the hands of a few individual means that they’re not going to be able to spend in a productive way this this amount of money. It’s yet another inefficiency when it comes to the economy. So there’s a lot of negative externalities that our system is producing and which is not making neither the best use of the resources we have, nor having the best impact on people’s well being.
Gene Tunny 00:56
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 and welcome to the show. Today, I’m joined by Jean Baptiste wartier, private equity investor, visiting lecturer and speaker at the World Economic Forum. We cover the economic implications of Trump’s re election, the potential for a global trade war, the challenges facing France and the state of Global Capitalism. Finally, we touch on the rapid advancements and the risks of job displacement associated with AI. Special. Thanks to Lumo coffee for sponsoring this episode. This top quality organic coffee from the highlands of Peru is packed with healthy antioxidants. Economics explored. Listeners can enjoy a 10% discount. Details are in the show notes. Now let’s jump into the episode. I hope you enjoy it. John Baptiste, welcome to the program. Thank you. Thanks for having me. Gene Of course, it’s great to chat. It’s such a interesting or what’s the word, suppose it’s challenging, and I mean, maybe vexing time for the global economy. There are, there are really some big things that are that are happening that it’s unclear what, what the ultimate impacts will be. So I want to chat about some of those with you today. And I mean, in brief, the election of Donald Trump to the second term, which I think has has surprised many, and that’s going to have implications. Of course, what’s happening in France is at the end of the Fifth Republic. What does that mean? And then also your thoughts on global capitalism? Because I know that’s something you’ve commented on. So to begin with, can I ask about the election of Trump to a second term. What are your thoughts on what that means for the global economy? Well,
Jean-Baptiste Wautier 03:06
thanks, Gene. I think it’s, as you said, it’s incredibly the objective I would use is consequential, because there’s going to be it’s not only a surprise, as you said, not not so much a surprise to some, because you could tell that the way the polls were measuring the real intention of votes for Trump was sort of not completely capturing what was going on and, and I think people were surprised by the popular vote in particular, but, but in terms of its consequences, first, you’re going to have major consequences on the US economy. And I think the first one that comes to mind is inflation, because all of the planned tax cuts and tariffs all have inflationary impacts. And as you know, and as probably most know, inflation is not completely tamed, and central banks are right now hesitating as to what they should do next. And there’s been a sort of a very surprising pose by the Fed and by other central banks, because, again, they observing underlying inflationary trends, and that’s before the Trump measures. So I think the first thing to watch is going to be certainly high. Inflation can be reignited, or will be reignited by those measures. And I would say the immediate second red flag in terms of the US economy is how they’re going to manage the deficit, the federal deficit. These numbers are now staggering. If you look not only at the debt service, but also at the total debt to GDP of the US and how it’s it completely skyrocketed over the last 20 years, we now at levels that we last time so right after World War Two, and we now have. A debt service, and we say that service, but it’s actually interest. So just the interest charge on the public debt, that’s already 20% of receipts, and could go up to 30% so we’re talking about roughly a trillion of interest that need to be paid every year, which even for the US, is a huge number. It’s bigger than the total spend on the US Army and total defense budget. So I think these are incredibly powerful forces that could be unleashed. And I don’t see an easy exit. Whether there’s, you know, some some new inflation trends in the next six to eight months, whether, suddenly, you know, you have all sorts of issues with the how deficits are being tamed. These are going to be major issues that US economy will face very soon. Yeah.
Gene Tunny 05:53
Yeah, absolutely. And what do you think about the potential for a global trade war? Is that a is that a real risk. I mean, we’ve had Trump threaten tariffs on Well, I mean, you know, tariffs against China, a big tariff against China, 60% or wherever, or 100% even 20% across the board, tariffs on Mexico and Canada, unless they control immigration. What do you see as the as the potential, all the risks there of a global trade war and consequently, global slump.
Jean-Baptiste Wautier 06:28
Yeah, I think this one worries me less, despite all the rhetoric that we’ve heard. And it’s not only Trump, it’s you hear that from China. You hear that from also the European Union, who’s talking about, you know, we need to protect our internal market more. We need to tax Chinese cars and all sorts of things. I mean, there’s, there’s, there’s a lot of rhetoric out there. Certainly, the reason why I’m less concerned is even though, you know, we should acknowledge that the world have a lecture at at transport Paris, which is called Global and multipolar world. And it’s indeed a multipolar world. So we have, for sure, exited this sort of Pax Americana and an economy that’s really dominated by the US economy, and where it’s all about globalization and free trade. I think now we have more regional powers. Now we still have a very global and interdependent economy. And despite all of the the efforts from the US, from Europe to try and relocate some of the supply chain, there’s still a lot of dependency. You know, if you look at the production of semiconductors, if you look at commodities, if you look at energy, there’s a dependency on very few places in the world. And I think it’s going to be very hard to really go aggressively with tariffs, even for the US and despite still the dominance that the US has. So I think it’s being used as a tool, as a threat, as a way of negotiating hard. And probably there will be, you know, a few things here and there which are going to be more symbolic than real, real tariffs that shut down the economy. I think it’s just not attainable these days for any economy, even the US,
Gene Tunny 08:21
yeah, yeah. Well, let’s hope sanity prevails. I like that point you made about just the connectedness of the global economy and the the importance of keeping trade open for critical, you know, for those crucial materials that are sourced from, you know, various particular parts of the world. And there’s a good book by Ed Conway recently on the material world, which I loved, which I think really illustrated that quite, quite well. Can I ask you mentioned a was it a lecture or a seminar in Paris, global and multi polar world? What was that? Again? What are the specifics, please?
Jean-Baptiste Wautier 08:58
Yeah, it’s, it’s, it’s a lecture I give to first year master students in Paris. And it’s really about trying to understand the new global economy, which, again, is a combination of exactly as you summarized. It’s global. Supply chains are global. This trade is at its peak compared to global trade at its peak compared to any time in history. But at the same time, there’s dependency on certain, certain parts of the world, on, you know, think of, I don’t know, batteries for electric cars, where all of those, those rare minerals, are only produced in one or two parts in the world, right? You know, in China, in Russia, like two or three countries, think, of course, oil, oil and gas. But also think manufacturing in general. You know, if you look at things like compounds that they use for many for drugs, those. Compounds. Half of the production is in India today, sort of the primary compounds that are being so this is what this seminar is about. It’s really about understanding how this interconnectedness, as you call it, is has become incredibly prevalent, and it’s very hard to revert, at least in short order. And that’s where sovereignty has become an issue for, you know, sort of regional economies like like the ones in Europe, but even for the US, again, you see this constant debate about the importance of Taiwan and the supply of semiconductors coming from, and how strategic this is, because there aren’t that many places that provide semiconductors, and at a time where it’s all about your ability to build data centers build artificial intelligence capabilities, you know, these are incredibly critical, not only to those to those industries, but also to your sovereignty. So it’s all about understanding this level of interdependency, and how, despite all the rhetoric in the world, there’s a limit to what you can do. I love that. There’s one. It’s a tiny example, but it’s so to me, it’s so telling. Which is the supply of natural gas from Russia that goes through Ukraine and then serves Europe is still functioning. So you have sanctions on Russia. You have a war between Russia and Ukraine. Ukraine has been invaded by Russia. And despite all of that, there’s still some gas produced in Russia going through Ukraine and, and, and, and being, being, being delivered to some European countries and, and it’s just because there’s no other way, you know, there’s this so that that tells you how this sometimes is a disconnect between the rhetoric and the actual dependency of the various economies.
Gene Tunny 12:00
Rod, hang on. So there’s a there’s a pipeline that goes through Ukraine, and so the Why don’t the Ukrainians sabotage it? Because the Germans are telling them, oh, you can’t sabotage that, because we need
Jean-Baptiste Wautier 12:16
so good question. It’s even worse than you think, because, because Russia is paying Ukraine for the pipeline, right? And, and they all interdependent. Russia needs to sell its gas. Ukraine needs the royalties from having the gas going through its pipeline and its country. And then the countries in Europe need, need, need the natural gas, and, and, and it’s, it’s a bit like, I don’t know it’s, it’s like Russian oil, you know, Russian oil, and ends up being recycled through a fleet, a ghost fleet, of tankers and ghost insurance companies, and that it gets acquired by in India or China, which To refine it and then sell it back to the European countries. It’s the same. It’s the same irony. There’s the sanctions, but then there’s reality of, we need, we need gas, yeah, and Europe doesn’t produce any, yeah,
Gene Tunny 13:14
it’s extraordinary. I mean, there are, there’s a story like that, I think, from the First World War, which is similar. And Ed Conway tells that in his book, I think there’s a story about how the British had to do a deal with Germany during the First World War, that it was in a bit of conflict with, you know, millions of men dead. And it did. It was, I think it was a range through Switzerland. It was a deal for for optical glass, but that they needed for binoculars. Because, yeah, the Germans were the leaders, you know, Zeiss and all of that in in optical glass. And I forget what the British maybe they provided them rubber, because the British had the plantations in Burma or so, yeah, just extraordinary. I have to look into that. That’s it is, yeah, incredible. So you’re, you’re teaching, you do some teaching in Paris. What’s happening with France? I mean, like I remember going to the the Bastille Day celebrations here in Brisbane, at the so Patel in 2017 which is a couple of months after Macron was elected. And there was so much enthusiasm about Macron and and so much excitement about what he could do for France, and it just all seems to have disintegrated, and now there’s a risk of talking about, is this the end of the Fifth Republic? Could you tell us a bit about what’s going on there? Please? Jean Baptiste,
Jean-Baptiste Wautier 14:36
of course, yeah. And it’s, you know, the French like to make it incredibly complex as always, but it’s, it’s, it’s, indeed, an incredible turn of event, because, you enthusiasm was shared by many people when Macron was elected as someone who was, you know, very modern, pro business, balanced and could really take, take the country further. Um. He did a few things, but not that many during his first mandate, then got re elected, and unfortunately, there’s two issues at play right now. The first one is Macron got elected, but it you know, we could say the same about the UK, probably, and other other countries in Europe. Macron got elected, not as a positive vote from the majority of the French voters, but it was elected against Marine Le Pen. Who’s this? You know, very extreme right, a very nationalist Populist Party, but which has, effectively, over the years, become the leading party in France. They today, they represent anywhere between a third and 40% of the total votes you take all of the last three elections. And she, she was always around around that mark. So that’s pretty high. And the second, the second party was probably elect Marcos party back back back in 22 during the presidential election, but it was far behind, like it was 10 to 15 points behind, and the only reason why he got reelected is because all of the other parties voted against my Le Pen and therefore said I don’t like Macron. I don’t like his policy, I don’t like what he stands for. I don’t like his personality, but it’s better than Le Pen. And so it’s, it’s, you know, you start off of wrong premise here, which is, it’s not, it’s not that people think is the right guy with the right ideas and the right program. It’s like, No, we just want to avoid the populist and the extremists. And then there was a European election in 24 earlier this year that Macron again lost, but it was just a reflection of if you if you looked at the first round of the presidential election, it was already pretty much the same numbers the one I just gave you. So Le Pen came in France with a third of the votes, and then it was not even Second. Second was a coalition of the left parties, and then Macron was third. So it was really a proper defeat. And and he had a very emotional reaction, you know, couldn’t believe that he was he was such a negative vote against him, and they decided to dissolve the assembly, which the President can do once a year, according to the Fifth Republic constitution. And so when you do that, you have parliamentary election. So even though there had been parliamentary election in 22 where already he had no majority. So keep that in mind, even though he’d won the presidential election, and that’s again, because of what I explained, that he didn’t really command a majority. Anyway, he lost again this parliamentary election, but by an even bigger margin, and now no party is commanding any majority in parliament. You have may Le Pen is still the biggest, but thanks to the way the voting system works in France, they don’t have 40% of the seats. Even though they had 40% of the votes. They have like more, like 2025 then the sort of Macron coalition of, you know, center right and center left have roughly another 30% and then there’s, there’s a large coalition of the left, but from extreme left to center left, which has another third. And so you have, you have a deadlock parliament. Is that nobody commands a majority, and everybody’s taking a very extreme position, like no one wants to work with one another. And this is the other very typical French thing at play here, which is France is a lot is long on the ideology, short on pragmatism, the opposite of the Anglo Saxon world. And so all of those three, those three thirds, if you wish, are really sticking to their guns in terms of ideas and programs and what they think should be done. So Macron thought, again, he could have the upper hand because he’s so smart and he’s going to manipulate all of these people, and he’s going to get them into a rhythm. But he actually failed, because again, the Prime Minister he appointed three months ago was was voted out by the parliament. Because again, there’s no majority, and there’s still no emergence of majority. Now is it the end of the Fifth Republic? I think not yet, because it’s a very high bar to change the constitution, and if you you can’t even pass a budget, which is right now, the dynamic at play in France, it’s going to be even harder to have a new constitution unless you put it to to a referendum. So I think you’re going to end up it’s going to be a bit like, like Belgium. Him as seeing for, you know, for two years, you’re going to go from one government to the next. Macro is never going to leave. I think it’s just too that’s his personality. I think he will never want to leave, and he doesn’t have to to be fair. And I think you’re just going to see trials and errors. Trials and errors probably budget never, really, never read, adopted, and they’re going to continue to function in that sort of very transitional mode until the next presidential election, which is in 27 so it’s not going to be it’s not going to be good for the country, because nothing’s going to happen. People are going to be very unhappy. Budgets are not going to be balanced, which is also bad because France is now running the largest deficit in the eurozone and needs to get its acts together, but without any majority in parliament, it’s going to be very hard to balance. So I think it’s, you know, it’s also a real threat for the European Union and the eurozone, because dysfunctional France for another two and a half years, it’s going to be a real issue for the for the entire region. Yeah,
Gene Tunny 21:05
yeah, that’s what I was wondering about. Just what does it mean for for the stability of of the euro, and whether there are any risks of of a Eurozone breakup at some stage? Is that actually a realistic prospect, or is that just something that you don’t think will ever happen.
Jean-Baptiste Wautier 21:23
So I don’t think it’s a zero probability, because again, France right now is running a deficit which is around 6% of GDP as a total debt to GDP of 120% and given the current political dynamic that we just talked about. It’s not going to balance its books anytime soon, and so far, because France is such a foundational country for the European Union and the Euro zone, together with Germany, the commission has been incredibly lenient, and as given France three years, and then five and now seven years, not not even to balance its books, to get back to 3% of GDP for its public deficit, which is the benchmark that you’re supposed to observe. But even if it does that in seven years, the debt is still, you know, it’s still spiraling. And so I see the risk of a Greek episode or a trust episode on France like a real possibility. So not necessarily the fact that the Eurozone is going to completely implode, that I think is a low risk, but I think there’s a real risk of sovereign crisis and the cost of the French debt suddenly spiking. It has already gone up significantly when you look at the spreads with Germany, but I think it could go much, much higher. When it starts to go much higher, you’re going to have to have like, like, in the case of Greece, back in the days, an intervention of ECB or IMF or both, which are going to force reforms on France in terms of balancing its budget, reducing its spending, so that, I think as a real probability. I wouldn’t say it’s, it’s, it’s certain, because there’s been a good amount of leniency so far, but I see that as a real probability of occurring. That would save the euro, but that would be a disaster for France.
Gene Tunny 23:28
And just briefly, what is the cause of the budget deficit? I mean, obviously too much spending relative to taxation and other revenue. But is it entitlement programs? Is it a an excess a blighted public service. Do you have any thoughts on that? So,
Jean-Baptiste Wautier 23:43
yeah, yeah, absolutely. I mean, first of all, if you to put things in perspective, Mark quandry during his seven years when he took over the French, total debt, total public debt, was 2000 billion euros. He added 1000 billion euros during his seven years, which is mind boggling. So when, when you try and disaggregate where this, this came from and and also to answer to your question on, on public deficits, of course, COVID is part of this, but COVID is only a third of this 1000 billions that were added. So a lot of money has been has been spent on two fronts. One Macron tried to make companies more profitable, more competitive, make France more attractive when it comes to investment. So a lot of money has been spent on reducing tax, both for companies and for wealthy individuals. So is introduced a flat tax wait when it comes to capital gains and on the corporate side, he’s reduced the overall tax rate, and he’s introduced a lot of exemptions, and that that is 10s of 10s of billions of euros. Yes, in terms of the spending, and then on the other side, the other source of deficit, and that was a lot of very, I was going to say generous, but crazy, excuse my term, but crazy spend on, you know, helping people with inflation, helping people with energy, helping people with all sorts of subsidies and public spending on things that would never have any structural impact. So you were just helping people for the next six months. But then, you know, and then what? And so they’ve been throwing, again, 10s of billions like this over the last two years, probably also help, you know, hoping that it would appease the country and it would help with people purchasing power and all the rest, but the budget was already in deficit, so you never had that money in the first place. And then the last thing that happened over the last 12 months, which frankly, is is farcical, is they made. They made mistakes in budgeting 2425 because they were hoping that their revenues, which follow the trend of the 2122 fiscal years, whereas these years were rebound from the COVID years. So they were not sort of a normative level. So again, then they didn’t size properly the spends, because they completely overestimated their revenues, and so that’s what created that huge deficit that that we’re seeing now, that’s been widening in less than a year, right?
Gene Tunny 26:31
Okay, yeah. I mean, we’ve had the energy subsidies here in in Australia, and yeah, I guess we’ve made forecast errors in the past, but not, not quite that sounds extraordinary, if they’ve ended up with a Yeah, it is seven, 6% deficit, extraordinary. Okay, well, that’s it is. I’ll keep an eye on what’s happening in France for sure. Yeah. Okay. We’ll take a short break here for a word from our sponsor.
Female speaker 27:00
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Gene Tunny 27:29
now. Back to the show. Last thing I want to cover Jean Baptiste is this question of capitalism. So you’ve you’ve been involved in World Economic Forum, and you’ve so you’ve been a in financial markets for decades, and so you’ve been a long term observer of what we you know, our capitalist system. And you’ve got some thoughts on like, what you see is the flaws in it and how it can be improved. Could you tell us what do you see as the flaws or the problems with our current system of Global Capitalism,
Jean-Baptiste Wautier 28:05
of course. I mean, the to me, the if you start at the very macro level, and you look at all the negative externalities that our current system produced, they’re just gigantic. Whether you look, I mean, the first one that, of course, comes to mind is, is global warming and environment and all the rest. But to me, it’s, it’s far it’s far bigger than this. Because I also think in terms of health, if you look at statistics, in terms of in terms of obesity, for example, whether it’s in the US or in Europe, if you look at mental health and how social media function, and how they impacted mental health, in particular the younger generation, if you look at inequalities, not inequalities in the sense of, you know, morally, but inefficiency, the concentration of 10s of billions or hundreds of billions in the hands of a few individual means that they’re not going to be able to spend in a productive way this this amount of money. So I’m not, I’m really not approaching this, you know, with a moral aspect and just it’s, it’s yet another inefficiency when it comes to the economy. So there’s a lot of negative externalities that our system is producing and which is not making neither the best use of the resources we have, nor having the best impact on people’s well being, simple as that, and and the planet well being so so that that is, to me, the issue right now. And when I try and look at the root cause, the root cause is, over the last, I would say, 3040, 50 years, capitalism has really shifted to becoming incredibly short term and becoming solely focused on profit maximizing, short term profit. And it’s not always been like that. If you if you go back in history, and you look. At the the great industrialist in the US, you know, the great billion of the Rockefellers of this world, the carnegies, the perspective was much more medium to long term. And we’re going to build companies to solve a problem. And if we solve that problem efficiently, profit will be the consequence of solving a problem, problem efficiently for the further society, as opposed to, is going to be the objective. And if you go even further back in history, and you look, you go back to Adam Smith, that’s exactly what Smith, you know, sort of theorized. So even if you go back to the father of liberalism and capitalism, that was already the way it was, it was conceived. So I think this is, this is the issue we facing right now. We’re trying to lay a regulation, you know, in the hope that, oh, we’re going to reduce carbon emissions, we’re going to reduce the use of plastic, we’re going to reduce energy consumption at its and it’s just not working. It’s not working. Because if you look at the global energy consumption in the world, it’s going up. If you look at where it’s coming from, it’s still coming 80% from, you know, fossil fuel. If you look at all the innovations, look at the energy consumption of a Google and Microsoft, it’s the size of a country consumption. You look at, again, you look at the impact on people of all the social media, you know, it’s not, you can’t argue that there’s a lot of negative there. And you look at obesity prevalence in the US or in most developed countries in Europe, it’s going up, up, up. And, you know, it’s, it’s, it’s neither good for the people, not for the society. So all of these things are not going in the right direction and and it’s, it’s not by regulation, by regulating, because we already over regulated, especially in Europe. It’s already impossible to know all of the regulation, and you can never capture it’s too complex. You know, the these, these are too complex to monetize, to measure, to regulate. It’s just impossible. So I think the only way is two things. One, to try and be longer term in terms of how company and investors make decisions, because again, time horizon does matter here. And the second thing is in terms of, again, investors, governance, the way we incentive boards and management, and it’s all about what is the problem which you’re trying to solve, as opposed to maximizing exported profit. And as long as we don’t turn this onto its head and and sort of make profit as a consequence rather than as an objective. I think we’ll continue to, you know, go in circles and observe negative externalities more and more and never come up with a solution. It’s still, you know, it’s a very, it’s a very fundamental issue. It’s not, it’s not one that can be sold easily, but it’s, it’s, I think it’s one we should be concerned with.
Gene Tunny 33:04
Okay, so just to understand, are you arguing that? Well, there are a couple of ways you could look at this. Should, should people have this in concept of enlightened self interest, where they they see beyond the immediate, and they see, well, we’d actually be better off if we thought longer term. So that’s one thing that so there’s that possibility, or are you arguing that they should take into account these wider social or environmental impacts, even if it isn’t of benefit to them directly, because they should have a wider concept of well being than just their company could. I’m just trying to understand what your position is precisely, please. Sean Baptiste,
Jean-Baptiste Wautier 33:49
yeah, no, of course. And it’s no absolutely, and it’s actually both. It’s both changing the time horizon and focusing on on a higher purpose, as opposed to just the bottom line and the profit that you’re going to generate for the fiscal year. So time horizon? Why? And this is something I’ve observed, you know, I’ve spent more than two decades in private equity, and private equity, despite what people may think is actually quite long term, because you invest in companies for 456, years, and then you need to sell this company to someone who’s going to hold it for yet another at least five years, if not more. So when you invest in a business, you need to think the next 10 years. And when you do that, I’ll give you a stupid example. You not going to buy a an incredibly profitable company that makes disposable plastic bags, because you know that the trend is not your friend. So you might look at amazing financials, amazing cash flow generation, amazing management team, blah, blah, blah. You know, great market position, but you know that in five years time, nobody would want to buy this of you. So. So that’s what having a long time horizon brings you, is you will automatically factor in those negative externalities that instantly may not necessarily impact your everyday profit, but in the long run, will, will will no longer be able to be monetized. And the second thing I’m advocating, because I’m trying to, I’m trying to, quote, unquote, see how we can save capitalism and liberalism, because I’m still a great believer in those two capitalism, because that’s the best way we found to create wealth for all you know, collectively, by rewarding risk taking and hard work. So I think we should preserve that, because that works, that engine works and liberalism, because that’s the world I want to live in where I have agency and freedom of starting my own company and freedom of speech. So I’m trying to see, okay, how do I save that? But by getting rid of all those negative things that you know, impacting our societies, and that’s where I’m thinking. Instead of layering regulation which is already impossible to navigate, let’s do this bottom up and have companies which now not only elongate the time horizon, but also focus on what problem are we solving and what is, what is our net benefit to society, not only how good is our product, but also, you know, the well being of my employees, of my suppliers, of my and the society around me, the community. So it’s, it’s what people call stakeholder capitalism. So you really factor in all of the the impacts that you have, direct or indirect, and that’s how you you manage your business, as opposed to what’s going to be my net income, net income for next year? Yeah.
Gene Tunny 36:51
Do you have any examples of companies that you think are doing this well, or could be examples to others?
Jean-Baptiste Wautier 36:57
So there are. There are fascinating examples of companies which are owned by foundations and which have been, you know, one that makes the headlines is Novo Nordisk, which, you know, has made this ozempic product that that is concurring the world. But you have, you have more and more companies, especially in Scandinavia and in the north of Europe, that are being owned by foundations, and those foundations are the shareholders and the way they look again at their businesses. I’m not obsessed with how much dividend can be paid up next year. I’m looking at my purpose, my competencies, my 1015, 20 years horizon, and profit will come if I if I’m doing things right, and if I’m doing things that really bring value to society, I’m going to be a profitable business. And again, that’s what Adam Smith theorized, and he was right. And so you’re seeing more and more examples of this, of, you know, this small, more inclusive capitalism, or companies which are so there are examples, it’s, it’s, it’s nowhere near the majority of companies today. But you know, if you combine those owned by foundations, those owned by families, or founders, very successful founders. I don’t want to it’s a bit of a funny example I’m going to use but, but if you look at musk, there’s a lot of negative things in terms of how much wealth is now being concentrated into his hands, granted. But on the other side, the way he’s built this business. Was never obsessing over next quarter profit. You know, he’s been people were saying, Tesla is going to go bankrupt because they’d been burning cash for so many years. And then when he launched SpaceX, people were like, what i How can you make a profit? You know, sending satellites and going to Mars, there’s no business for that. And Mesa is doing it better than you. And look at where we are today. So he’s an example of an incredible entrepreneur, whether you like him or not, you know you have to look at what he’s achieved. It was never thinking, I want to, I want to be worth 300 billion in 2024, which he, incidentally, he is now. So there’s more and more example that that, that one can can find of, you know, if, if we manage to really turn this onto its head, I think, I think there’s a there’s a path. It’s not an easy one, but I think there’s a path.
Gene Tunny 39:38
Yeah, absolutely, I think, yeah, certainly worth, worth considering, I think Musk is a, he’s a good example of that Bucha nearing capitalist. I mean, is the closest thing we’ve got say to someone, you know, I guess Howard Hughes many years ago, or, yeah, you know, I guess some of the great industrialists you mentioned in Carnegie and all of that. Yeah, absolutely, yeah, absolutely, right. Oh, this has been fascinating conversation. John Baptist, anything else before we we should go anything else that’s that you’ve been thinking about and things worth, worth covering before we wrap up,
Jean-Baptiste Wautier 40:13
right? Thank you, Gene. I enjoyed it. I mean, there’s so much, as you said in your introduction. You know, it’s not just these, these tectonic shift on the geopolitical front, and we only we talked about some of the hot topics, but talk about the Middle East. We haven’t talked about Russia, we haven’t talked about China, and there’s so many things happening there. So it feels like all of these tectonic plaques are moving right now at the same time, and just as if it wasn’t enough, I think artificial intelligence is the most, is the quickest, most far reaching industrial revolution of our times. So you’re overlaying on a world that’s sort of rearranging a massive industrial revolution, which is going to change so many things in our lives. I think we live really fascinating times, and I really enjoy talking about this, because I think we should all have eyes wide open and watch and learn. Yeah, absolutely.
Gene Tunny 41:17
I think just on AI, what are you most excited about? What are there some, are there some develop? I mean, we’ve seen chat, GPT and all of the large language models, but are there certain things that are that are exciting you at the moment? So
Jean-Baptiste Wautier 41:33
I think, well, what’s exciting me is, apart from things that really needs very human emotional intelligence or human presence. There’s so many and some element of judgment, but there’s so many jobs, so many things we do in our daily lives that are a few years away of being replaced by artificial intelligence is just mind boggling. And the only thing that was, you know, sort of delaying it is progress in terms of quantum computing. And you would have seen Microsoft announcement, I mean, the So, so we’re just a few years away of doing so many things with it in everything we do, I think humans will all will be social animals. So we’ll always need, you know, we’ll always need to meet in person. We’ll always need to share motions, to share ties together. When you try and think of care, and there’s certain industries or art investment where you need a lot of judgment at times they will, they will still be pockets where you need human input. But I don’t know, more than half of the things we do can be more or less replaced by by a computer tomorrow. And so that’s that fascinates me. And you know, medicine could be so much better. There’s so many things that could be so much better, but at the same time, it’s a revolution that has very little content when it comes to jobs, employment. All the previous industrial revolution, it was the creative destruction of Schumpeter, right? So they were sort of destroying some industries, but some others were being created. And the level of wealth and productivity was was going up this one not only is going faster than the previous ones, because it’s more like 20 or 30 years as opposed to 50 or 80, but on top of that, it’s not creating jobs. You look at the ratio of market cap of the largest tech companies to the number of jobs they have. I mean, it’s ridiculous. Yeah, we’ve never seen such a bad ratio and and that’s, that’s what worries me, on the flip flip side is, what are we going to do when we can replace, you know, so many things, and it’s not only that, it’s going to be efficient, it’s going to be very low on cost, so it’s going to be a no brainer to replace man by machine in minutes. What are we going to do with all of these job that we’ve destroyed and with all these people that become an employee? That’s that’s the one that worries me. Hopefully excited.
Gene Tunny 44:12
This is why some of my guests argue in favor of UBI So, yes, I mean, I’m not necessarily advocating that, but I think you know that if that scenario, if that’s what happens, and then UBI becomes, becomes more compelling, I’d say, so, yeah, absolutely okay. Thanks so much for the conversation. I really enjoyed it. You’re right. There are so many other issues we could have, we could have covered, but then I’d probably be talking to you for two or three hours, and we might have to have another schedule, another chat, subtitles. I found this very, very enlightening. And, yeah, I think, like the idea of that, course you’re teaching the global and multi polar world. I think that’s so important. This, this whole idea that, since certainly things are. Different from what we expected after the end of the Cold War. We saw the US dominant, but now we see Yeah, just yeah, the multi polar world, as you say, or even a G zero world as Ian Bremmer, yeah, says, Absolutely. I enjoyed it. All right. Thank you. Gene Thanks. John Burt, 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 explored.com, or a voicemail via speak pipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you, then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
Obsidian 46:00
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Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
Host Gene Tunny discusses significant economic issues from the year. He features clips from interviews with experts on various topics, including the economic consequences of Donald Trump’s re-election, the U.S. budget deficit, the gender pay gap, and environmental impact. President Reagan’s budget director David Stockman criticizes Trump’s policies for being anti-capitalist, citing a $8 trillion increase in public debt. Fiscal policy wonk Dan Mitchell argues that higher taxes are not the solution to the U.S. budget deficit, as spending is the primary issue. Leonora Risse (Assoc. Prof., University of Canberra) explains the concept of “greedy jobs” contributing to the gender pay gap. Marion Tupy of the Cato Institute discusses the long-term decline in commodity prices, and Daniel Lawse of Verdis Group emphasizes the need for sustainable, long-term thinking in business and policy. Daniel also reflects on the modest lifestyle of Warren Buffett, another Omaha resident. John August discusses the impact of immigration on Australia’s housing crisis.
Transcript: Is DeFi the Future of Finance? Exploring VirtuSwap’s Vision w/ Prof. Evgeny Lyandres – EP262
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
Gene, 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. This is the 2024 highlights episode, and this episode, I want to play some clips from some of my favorite episodes of 2024 Okay, to start off, we probably should cover one of the biggest stories of the year, if not the biggest story, which was the re election or of Donald Trump as US President. So that is going to have some very profound economic consequences. And I chatted with my friend and colleague, Darren Brady Nelson about it days after the news on the show. So that was a few episodes ago. Darren is someone who is supportive of Trump on the show, I’ve had critics of Trump and one of those prominent critics in the States is somebody by the name of David Stockman, who was Ronald Reagan’s Director of Office, of management and budget. So he was a budget official for Ronald Reagan, who is the celebrated Republican president of the 1980s and Stockman is one of the never Trumpers, and I had a very interesting conversation with him early In the year, and I wanted to play a clip from that episode, because I think Stockman is someone who deserves to be listened to, and I think, personally, I think he makes some good points. So without further ado, let’s play the first clip, and this is David Stockman on Trump’s war on capitalism. You argue that he is a clear and present danger to capitalist prosperity. Could you explain, David? How do you How can we reconcile these things? I mean, Donald Trump does seem to be the exemplar of a capitalist, but yet he’s a threat to capitalism. How do we reconcile these facts?
David Stockman 03:05
Well, those are great questions. I don’t think really he’s an exemplar of capitalism, and we can get into that. I think he’s an exemplar of getting lucky when the Fed created so much inflation and asset prices and made debt so cheap that if you were a speculator in New York City Real Estate or elsewhere, you possibly made a lot of book wealth. But I don’t think it was capitalist genius behind it. That’s the first point. The second point is that his policies were really almost anti capitalist in some common sense. Notion of conservative economics. To have a healthy capitalist economy, you need three things. One, fiscal rectitude. You can’t be running up the public debt, spending like there’s no tomorrow, and having the government grow and mushroom and impinge in every direction on the economy. You can’t have easy money and a central bank that is flooding the system with cheap credit and excess liquidity. You can’t have a government that is really anti free market, which is what trade protectionism is all about, and he’s the biggest protectionist in the White House, you know, since, I don’t know, Hoover signed smooth Holly in 1931 so all of his policies were really in the wrong direction. Now, I do concede in the book that the one abiding virtue that Donald Trump has is he’s got all the right enemies. Okay? The establishment hates him, The New York Times, The Washington Post, CNN, The Washington what I call unit party establishment, the leadership and the long standing careerist of both parties can’t stand him, but basically, it’s because he’s an outsider. Because he’s unwilling to conform, and he’s pretty obnoxious and unpredictable. That’s why they’re against him. The point of the book, though, is none of his power his policies were wrong, even if he had the right enemies, and nothing that he did help the economy or addressed the huge long term problems we have of a runaway public debt, of a government that’s way too big and too costly and too intrusive, and especially at the heart of the matter a central bank that is out it’s a rogue central bank. It’s out of control, and yet Trump was constantly on their case, demanding even easier money, lower interest rates, even more, you know, of the same that got us into, you know, the huge bubbles and troubles that came from them. So the point of my book was to say he had a chance. He’s got a four year record, we can look at it as terrible. It offers nothing in terms of remediation of our great problems and putting us in a different direction for the future. So, you know, don’t waste the opportunity. And you know, that’s about where I come out,
Gene Tunny 06:20
right? Oh, okay, so you write about what you call the Donald’s reckless fiscal and monetary policy. So we might talk about fiscal first. Now, among other things, you talk about the most grotesque act of fiscal malfeasance in American history. So that was something that Trump was associated with you argue, are you talking about the the big tax cut, the Trump tax cut in 2017 is that? Is that something you see as as reckless? That’s
David Stockman 06:51
part of it. But I’m looking at the overall picture and the data, the big top line data on spending, and borrowing on the public debt. Now let’s just take it down to the core metric, which is the public debt. I mean, if you’re running huge deficits and spending far beyond your willingness or ability to tax, it comes out in the public debt. When Trump became president in wrong terms, the public debt was about 20 trillion. When he left, it was 28 that’s 8 trillion of growth, 8 trillion of debt, public debt in four years. You let me ask the question, when did when did we get the first 8 trillion of public debt, and how long did it take us to get there? The answer is, in 203, it took us 216 years, 43 presidents, to rack up 8 trillion of debt. He did it in four years. That’s kind of the bottom line. It puts it in perspective, in terms of how big the error was. If we look at other more conventional measures, you get the same picture.
Gene Tunny 08:01
Okay, so that was David Stockman, who was President Reagan’s Director of Office of Management and Budget, and he’s certainly no fan of President Trump, certainly, I mean, Trump is going to have big consequences for the economy. There’s a lot of concern about a global trade war. There’s concerns about, I mean, really, will he be able to get the the budget into shape he has Elon Musk and Vivek Ramaswamy at the Department of government efficiency. It remains to be seen how much real influence they will have and to what extent they’ll be able to to get the budget under control. One of the challenges, of course, is the the role of the entitlement program, Social Security and Medicare, which are such big parts of the budget, and just they’re on autopilot. Really, they’re, they’re demand driven. They respond to people’s needs that the entitlements are dictated by the acts of Congress, so they’re very hard to change, right? Oh, so on the the issue of getting the budget under control, I’d like to play a clip from my interview with Dan Mitchell. So I spoke to Dan in episode 235 in April, and it was about his new book, The Greatest Ponzi scheme on Earth. So it’s about us, government debt. So Dan is one of my favorite commentators. He’s got a really great blog called International liberty. If you’re not subscribed to that, definitely check it out. I mean, Dan’s coming from a libertarian perspective, someone who’s skeptical of. Of big government. So I’m generally sympathetic with with with that. So yes, I think it’s a it’s a good, good blog. So yeah, regardless of your views. So it’s definitely worth checking out because it’s Dan has a lot of good facts and talks about empirical work, empirical studies. So definitely worth, worth checking out. Even if you’re you think you’re unlikely to to agree with Dan. Okay, so let’s, let’s play a clip from my conversation with Dan, the way I set up this. This part of it was, I asked Dan about why he thinks higher taxes aren’t the solution to the US budget deficit, this large structural budget deficit they have. I made the point that, look, you’ve got these entitlement programs that the government doesn’t want to reform, so maybe the government, I mean, I was implying that maybe the there’s no choice but to increase taxes. Not that I’d necessarily recommend that. But how are they going to repair the budget? So that’s the that was the setup. So let’s hear what Dan has to say? Well, I
Dan Mitchell 11:24
guess there are two things that are important to understand. The Congressional Budget Office, every year publishes a long run forecast. And by long run that they’re looking out 30 years, they publish this long run forecast of the US economy, and in that document, the most recent one came out just last month. I think it was maybe two months ago, but it showed that revenues are above their long run average, spending is also above the long run average. And if you look at the forecast, 30 years out, the revenue burden is going to climb to record levels because, mostly because of real bracket creep. In other words, as you know, even in a sluggish growth economy, you know, people are going to sort of, their incomes are going to increase, they’re going to go into higher tax brackets. So the government winds up getting bonus tax payments with even modest levels of economic growth. So the tax burden is heading to be at an all time high, but because government spending is projected to grow much faster than the private sector, it means that that that we’re falling farther and farther behind. So just as a matter of pure math, our problem is more than 100% on the spending side of the budget. Again, revenue is climbing as a share of GDP, but because spending is climbing much, much faster. Why on earth would we want to increase taxes on the American people for a problem that is more than 100% on the spending side of the budget? But that’s just a math argument. Now let’s look at what I call the public choice, slash economic issue, which is that if you put taxes on the table. What are politicians going to do? They’re going to increase spending. And not only that, if they get the taxes through, the economy is going to suffer. Now, I’m never one to say, Oh, you raised this tax or that tax, there’s going to be a recession. I worry more about if you raise this tax or that tax, the long run, growth rate will decline, and even if it only declines a small amount, maybe two tenths of 1% a year, that has massive long run implications because of the wedge effect over time and then. And I think that even left wing economists, the honest ones, are going to admit that higher marginal tax rates and work saving and investing are not good for growth. So as GDP gets smaller and smaller over time, at least in terms of compared to some baseline projection, that means work on tax revenue, because there’s less national income to tax. So what’s the bottom line? Politicians will spend more money because of the higher taxes, and the higher taxes won’t generate as much revenue. And you don’t want to know what the most powerful evidence for this is. I think I did the data for the for the 15 countries of the old European Union. Other words, the core Western European countries that would be most analogous to the United States, or, for that matter, Australia, you know, relatively rich by world standards, Western oriented nations, and what did I show in the European Union? You go back and I did a five year average. So nobody could accuse me of cherry picking just one year that was favorable to my analysis. I did a five year average for the last half of the 1960s and I looked at government spending as a share of GDP, taxes of the share of GDP, and government debt as a share of GDP and taxes. Between the end of the 1960s and the most recent five years, the tax burden in Western Europe increased by 10 percentage points of GDP. Now politicians in Western Europe, in these various countries, Germany, France, Belgium, Netherlands, et cetera, et cetera, they. Said, Well, we have to raise taxes, because we have red ink, we have deficits in debt. So I said, Okay, taxes went up by an enormous amount as a share of GDP between the late 60s and today. What happened to government debt? Did they use this massive increase in the tax burden to lower government debt? No government debt during that period doubled as a share of GDP. In other words, politicians spent every single penny of that new revenue, plus some. So when I debate some of my left wing friends, I tell them, show me an example anywhere in the world where we’re giving politicians more money to spend has resulted in better long run fiscal performance. It just doesn’t happen. By contrast, I’ve gone through the IMS World Economic Outlook Database, and I have found not a lot, unfortunately, but I found many examples of countries that, for multi year periods, had government spending growing at 2% a year or less. And what do you find in those cases when they’re spending restraint? And we talked about this, by the way, we have an entire chapter in the book where I cite some of these good examples. When you have spending restraint, deficits go down, the burden of government spending as a share of GDP goes down. You have success. Yeah, I couldn’t. We could have had some blank pages in the book and lift and entitled that chapter success stories of higher taxes, because there wouldn’t be anything to write.
Gene Tunny 16:33
Okay, that’s good stuff from Dan Mitchell, from Center for freedom and prosperity. I think it is He? He was, once upon a time, he was at the Cato Institute. He’s a well known commentator in the US on fiscal policy issues. He’s on CNBC, Fox Business, etc. And yep, he’s a he’s a good economist, and he’s a terrific commentator. And I’m really grateful that I’ve been able to have him on the show as frequently as he’s been on the show. So I’ll put a link in the show notes to to that episode and to the others that I play clips from. So yep, if you if you liked what you heard from Dan there, then definitely, definitely check out that episode. What I liked about that? I think he made a really good point about how politicians will, they will find a way to spend any additional revenue. I think we all know that’s that’s generally true. I mean, I suppose not always. There are times when politicians act responsibly, say, in Australia, from about the late 80s through to maybe yeah, I guess the Yeah, essentially, until the late 2000s we had very responsible Treasurers and governments, and then we seem to have abandoned that since then, unfortunately, and in the US, we had the period when you had Bill Clinton and the House GOP led by Newt Gingrich, they were cooperating on the budget and managed to repair the US budget. So there are times when politicians have been, have been, have done the right thing, but I think generally, they can find ways to spend any additional tax revenue, as as Dan Mitchell is pointing out. And I mean, they all the politicians. I mean, one thing you notice is that they love going to the openings of the the movies, hanging out with Chris Hemsworth and all of the the Hollywood stars. That’s something that we see here in Australia, where there’s very substantial subsidies to the film industry. Okay, so that was Dan Mitchell, thought that was a great clip. I think I’ve played parts of that in other episodes through the year on tax and government versus the private sector. I think I may have played a bit of Dan in that, but it’s good stuff. So it’s, it’s worth, it’s worth replaying every now and then. Right? Oh, let’s move on to another clip. And this is about another issue that I come back to every now and again on the show. It’s this issue of the gender pay gap. And, you know, this is a very, you know, it’s very political this issue. And there are a lot of people who say, Oh, well, it’s, you know, this is terrible, and it’s an example of discrimination, is exploitation. Then other people say, Well, hang on, it’s, this is a multivariate, uh, phenomenon, and it’s, it’s due to the the industries that. Women work in, or the occupations that they choose, but then you get the counter argument. Well, hang on, those industries and occupations, they were imposed upon women, in some cases, or women by the, you know, the patriarchy, or gender norms, etc. So there’s a big debate about the gender pay gap that I’ve tried to cover on the show in an objective way. So just hearing all of the arguments and just thinking critically about what the data, what the evidence tell us, and one of the people that I’ve really valued talking to about the gender pay gap, is Leonora Reese, and she is a an associate professor at University of Canberra. She’s also an expert panel member for the Fair Work Commission, and that’s the federal body that regulates industrial relations in Australia, and earlier this year, in March, I interviewed Leonora about a new gender pay gap report that the federal government released, and that generated a lot of debate within Australia. And I was just alluding, well, I was just going through what some aspects of that debate are, the the question of whether you’re comparing like with like, etc. There was a criticism of the report that was very strident by the well known economics commentator for the Australian, very good economist, Judith Sloan. And that is, that was, that was how I set up this part of the conversation with Leonora. I mentioned that that article by by Judith, which was critical of that report. So that is the context for this. This part, this clip in which Leonora and I talk about this notion of greedy jobs. So greedy jobs, this is one possible explanation for part of the gender pay gap. So let’s hear from Leonora. I want to ask about Claudia golden because Claudia golden, she won the Nobel Prize for Economics last year. Judith Sloan quoted her work in so in Judas article and Judith because Judith is saying, Well, this is all nonsense, because this is just all Yes. You’re not comparing like with like. It’s it’s all just explained by difference, differences in composition, different choices people make, and she was interpreting Claudia golden. So this Judith is interpreting Claudia golden as saying that the gender pay gap, it’s mostly due to the fact that there’s this premium for long and unpredictable hours, and men are more likely to work those jobs, pursue that pursue those jobs because women are more likely to be carers and they don’t have the Yeah, they they’re more Yeah, they’re less likely to want to pursue those jobs like as males, pursue them so disproportionately. So what do you think about that as a theory. I mean, what? And because I only were chatted about Claudia Golden’s work before or since the Nobel Prize was announced. So would you be able to comment on that? Please?
Leonora Risse 23:51
Sure, absolutely. So Claudia Golden’s the concept that she’s coined here is greedy jobs to reflect these particular jobs in the workforce that demand a lot of you as a worker to work long hours, to be on call, on weekends, on late shifts, and to be rewarded for that. That’s the important part. So to be paid overtime rates, to be fast tracked your promotion, to get bonuses in reward for for being, I guess, more available to your employer. I think it’s partly a symptom of capitalist society as well. You know, to really, to really draw as much of the worker that you can out in terms of their time, their loyalty, their commitment. And so Claudia Golden’s work brings the gender dynamic into that. This concept brings the gender dynamic into that, because the way that society and policy is structured is that it forces couples, if we’re looking at a male and female couple, to make a choice. Services with as a household as to which of them are going to be that particular worker and be on call, and which of them are going to attend to caring responsibilities, to household tasks at home. So collectively, they’re maximizing or optimizing their total income and trying to balance, you know, both both spectrums. So the way that gender norms give rise is that it tends to be, on average, the male partner who will put their hand up for those greedy jobs, and females who who would opt to, you know, be on call at home, basically. And so the gender pay gap widens, even on an hourly basis, because this, there’s this premium attached with those types of jobs, and they’re rewarded, you know, it’s, it’s seen as a positive thing in workplace culture. And so the my, you know, the way that I interpret Claudia Golden’s work, and she articulates this, I think, pretty clearly in her book, career and family, is that unless you have gender equity at home, it’s very hard to achieve gender equity in the paid workforce. So as long as there’s some sort of gender division at home, you just don’t have that time availability in the paid workforce. So she’s actually advocating for for gender equality. She’s not saying this rationalizes or legitimizes the existence of the gender pay gap. She says it’s a an explanation that needs attention and that we should be looking at. How do we look for ways to reduce this culture of expecting workers to be working such extensive hours and to be on call? How can they be more substitutable with each other? So you know, if you’re not available, it doesn’t matter, because your colleague can step in, and she gives examples from the industry of pharmacy, the pharmacy industry, where that that is, is a change in cultural practice, and that allowed more women actually to advance in that industry. So her, you know, the action or the policies that emerge from that are ones that start to address that existing inequity in the system and steer us towards something that’s more equitable, and I would say, also healthier as well. Now, other people might interpret that differently, but I think that’s a very, very firm and widespread way of expressing Claudia Golden’s work. I did write a book review of her book, and it’s published in the economic records. Yeah, I’d be very pleased for people to have a read of that and see what, see what they think of the points that Claudia golden has expressed. And of course, yes, she did. She was awarded the Nobel Prize in Economics in recognition of decades and decades of work looking at women’s participation in in the workforce, and how that has changed over time from an historical perspective right up to contemporary time. So she is a big advocate and champion for working towards a more gender equitable economy.
Gene Tunny 28:35
Okay, so that really gives you something to think about, doesn’t it? Least, that’s what I thought. I thought that Leonora is explanation of the concept of greedy jobs and how you interpret that in a policy sense. So Leonora summary of what Claudia Golden’s position is. I thought that was, I thought that was very good. So I will put a link in the show notes to that episode. I’ll put a link to that, that book review of Golden’s book that Leonora wrote, and it was in the economic record. Hopefully it’s not pay wall, but it may well be which you would be disappointing. But anyway, I’ll look into that, right? Oh, we should move on the next two clips for this highlights episode, they relate to the theme of the environmental impact of economic activity, so we’re looking at environmental issues. And you know that if you’re a regular listener, you you’ll know that I speak with a wide variety of guests on the show, with a wide variety of opinions. I mean, often in stark COVID. Contrast in opposition, and this is certainly the case on environmental issues, or at least the issue of how much we should be concerned, how much we should sacrifice the economy, economic growth for protecting the environment. Of course, I think we all want to have a clean environment, and we want to protect the environment as much as we can. At the same time, we want to make sure we have a thriving, prosperous economy that keeps people employed, that provides high living standards. So there certainly is some trade off. So I’ve had, I had two really good conversations about this trade off, as I see it, this this year, at least two really good conversations. One of them was with Marion tupy, who’s a, he’s a senior fellow at the Cato Institute. So that’s a a leading economic think tank in the US. It’s, it’s on the well, you’d say it’s a libertarian or classically liberal. And Marion co wrote a very interesting book that came out last year called super abundance, and he has a very optimistic view regarding our impact on the planet. So I’m going to play a clip from my discussion with Marion earlier this year. Okay, so let’s listen to that. I’m very sympathetic to the argument about about super abundance. Can I ask? Is this a continuation of the work that Julian Simon has done is this because I see on your CV or your buyer, you’re part of something called the Simon project. Could you tell us what that is and whether this is continuing his work? Yes,
Marian Tupy 32:15
yes. Yes, absolutely. So Julian was a, obviously, a huge inspiration, but so he was actually a senior fellow at Cato before I joined the Cato Institute. He died in 1998 but he was senior fellow there, so we never met. But what I wanted to do back in 2017 is to look at his work and update it, you know, to the present and I found that his bet with with Ehrlich, he would still win. In other words, commodities continued to get cheaper, at least the ones that Julian looked at. But I was using the old methodology. I was just looking at real prices of commodities. And my co author, Gail Pooley, got in touch with me, and he says, well, let’s turn them into time prices. Let’s look, let’s look at the price of commodities relative to wages, how much more you can buy for an hour of work than your ancestors could. And then we published a paper in 2018 with this new methodology. And indeed, we found, once again, that Julian was right. And then we decided to turn into a book which goes back to 1850 and basically what we find is that commodities, relative to wages, are constantly getting cheaper. If it’s a long enough period, everything is getting cheaper, including gold. The only thing that continues to become more and more expensive over the centuries is human labor, essentially the human input, and we might as well talk about Simon and early quag, yes,
Gene Tunny 33:46
yes, yes, yeah, please.
Marian Tupy 33:48
So Julian Simon, since we mentioned him, he was an economist at the University of Maryland, here in the United States, and he was basically looking at the data, and he was noticing that things were getting cheaper, even though population was expanding whilst over in California, at Stanford University, Paul Ehrlich, who is still alive, he’s 93 years old now, was predicting doom and gloom. He was basically saying, you know, as population increases, we are going to run out of everything, and there’s going to be mass famine. And, you know, starvation of hundreds of millions of people. And so they had a bet between 1980 and 1990 on the price of five commodities, nickel, tungsten, tin, chromium and copper. And basically they made a futures contract for $1,000 and when the period came to an end in 1990 Ehrlich had to send a check for $576 to Simon, because commodities became 36% cheaper. Had Simon implemented our methodology, he would have won even bigger. He would have won by about 40, 42% rather than 36
Gene Tunny 34:55
very good. Okay, so. I must say, always do enjoy hearing or reading about that Simon Ehrlich wager, because it’s a reminder that we should generally be skeptical about predictions of doomsday. I mean, you know, certainly it could occur. I’m not going to be naive, but generally, I think, you know, we’ve got, you know, multiple predictions of of Doomsday, and maybe we should just think more rationally about these things than we are or than we have been. So I thought that was a very good clip. So really grateful for Marion his appearance on the show. I think Darren Brady Nelson connected me with him. So thanks to Darren. And yes, I’ll put a link in the show notes for that episode too. Also, having listened to that, I was reminded, I’ve been reminded that I did a podcast episode, or I recall I was on the principle of charity podcast, which is hosted by Emile Sherman, who is a very distinguished film producer. He produced The King’s Speech and lion. And also, I was surprised to see the other day, I was watching one of my favorite new shows, which is on Apple TV, slow horses, the show about MI, five agents in in London with Gary Oldman, love that show, and Emile is one of the executive producers I was on his podcast. So Emil hosts that and also Lloyd vogelman. They have a really interesting show. They like to have guests with opposing point of views, points of view, and the idea of the principle of charities you’re supposed to, you know, steel man, the opponent’s argument, or under try to understand where they’re coming from. So have a good, you know, think that have the go into the conversation, assuming they’re acting in good faith and give them the respect that they deserve. And so look, I think it’s a, it’s a novel concept for a podcast, given how most podcasts are, so I think it’s, it’s interesting. I’ll put a link in the show notes so that that that was a conversation on degrowth. And, yeah, that was something that, yeah, that yeah, that was an interesting experience that I had earlier in the year. So I’ll put a link in the show notes to that, right? Oh, now for someone with a different take on how we’re we’re going environmentally and going to Well, the the other guest I’m going to feature in this highlights episode is Daniel vert Daniel lossy from Vertis group. And Daniel is based in Omaha, Nebraska, and that becomes highly relevant, as you will notice in this in this clip that I play, and I really enjoyed talking to Daniel, his company does a lot of very interesting work. So they work with organizations such as Seattle Aquarium, and they’re helping to make those organizations more sustainable, helping them meet their or get on the path to meet their net zero goals? So he’s someone who’s a practitioner, and I thought he had a lot of really valuable insights. Okay, so now I will play a clip from Episode 242 helping Seattle Aquarium and others go to net zero and beyond. So that’s from May this year. I hope you enjoy this clip. Before we go, I’ve got to ask given you’re in Omaha, and this is a economic show. Do you ever see Mr. Buffett around town? Have
Daniel Lawse 39:25
I seen him? Personally, I don’t think I have, but I’ve been in one of his favorite restaurants before, where he eats pretty regularly. And you know, we host the Berkshire Hathaway every single year. So see all of the the tourists who come in for that, the shareholders who come in, and my wife owns a little tea shop, so that always gets a little bit more business during those Berkshire days. But I’ve not bumped into Warren myself. Personally, that’s
Gene Tunny 39:53
okay. I just Just thought I’d ask given when, when people hear Omaha, they’ll think that, you know, that’s often the. First thing, rightly or wrongly, people, people, people think of in their minds, particularly if they’re in economics or finance. So just sort of ask,
Daniel Lawse 40:08
well, on some levels, I think Warren’s actually a pretty sustainably minded person. We can argue lots of other things, but here’s the example. I drive past his house on a regular basis, right? He does not live in a gated community mansion. He’s lived in the same house, I think, for over 50 years, and he’s done some upgrades to it and at a few additions, but it is a very what I would call a modest house in a nice neighborhood of Omaha, but like probably hundreds of 1000s of people drive past this house and would never know it’s even his.
Gene Tunny 40:42
Wow. So the fact that
Daniel Lawse 40:44
he doesn’t go and just consume and build a big house because he has the money and he could, and I don’t, I don’t believe he owns that many homes, or second homes or third homes. He owns a couple different locations. But there are some people who have a lot of wealth, who own a lot of homes that they travel and vacation to. So in that regard, he’s making a sustainable choice by living in a in a modest house that he’s had for decades, and maintaining it and regenerating it. Perhaps we might, if we want to throw that in there, instead of tearing it down and creating something new and bigger.
Gene Tunny 41:18
Oh, it’s, that’s a good story. I mean, he’s embodying the, you know, the virtues, or the the the high point, or what’s the right word to describe it. He’s in, he’s embodied. He’s embodying those, the real great values of capitalism, or where it’s about saving and investing. So, so that’s terrific. Good last. Yeah, make it last. Good on Warren Buffett, very good. Okay. Daniel Lawson, this has been a great conversation. Any final points before we close?
Daniel Lawse 41:49
I love your questions. Gene, I think it’s so important to be aware of how we think, because it really does matter. And there are four critical shifts that I see at play, and all the sustainability work that we do, and I’ve talked about, probably all of them, but shifting our mindset from a closed system to an open system, right? We’re not alone in this world, and so let’s acknowledge the impact that other organizations and communities and businesses have on us, the shift from like this mechanistic worldview to a living and dynamic world, view like Change is the only constant thing in life, and when we recognize that I’m a living being, and organizations are made up of humans, so we’re more living. We’re more like a garden that needs nurturing and tending than a business as a machine that you just take a part out and replace it, right? Let’s, let’s humanize our organizations instead of dehumanize them. The third is the shift from really feeling like and thinking like we’re separate from everybody else, and shifting more to this interconnected way of being, recognizing that my actions have impacts on you, whether intentionally or not. When we do an organizational policy, it can shift things in good ways, unknown ways and unknown ways. And then the last one is the short term thinking, the long term thinking. I’ll end with this. The seventh generation principle comes from the Iroquois nation, the first peoples of the US or of North America. I apologize, and they said the decisions that we make for our community, we need to think about, what is the impact going to be on seven generations, which, you know, it’s about 150 years. You can’t even predict that far out, but it forced them to think about, what’s the long term impact of the decisions they made at Council. And I, I challenge your listeners to imagine a world where their elected presidents, council members, representatives, didn’t think about the next election cycle and being re elected, but thought in seven generations, what would be different? Yeah, and what would be different if our business leaders weren’t thinking about quarterly profits, short term feedback loops, and instead thought forward seven generations, what? How different would our businesses look, and how different would our communities be if we had leaders who were thinking in seven generations, changes everything in, I think, pretty good ways.
Gene Tunny 44:10
Okay, so that was Daniel lossy, who is the Chief century thinker at Virtus group in Omaha, Nebraska. So they do environmental consulting work all over the US. So yep, I’ll put a link in the show notes to that episode. I think it’s definitely worth a listen. And I think Daniel has some Yeah, really interesting. And yeah, really interesting, interesting perspectives that make me think and Yeah, certainly saying things that that are challenging to economists. Okay, final clip, this episode and this. This clip is from the episode that a. According to Spotify wrapped. So Spotify wrapped is the summary that Spotify puts out every year, and it’s actually what inspired me, in a way, to do this episode. According to Spotify rap, the most listened to episode of my show in 2024 at least on Spotify, was episode 236 the housing crisis in and immigration Australia’s tough choices with John August. So it, it may well have been the most listened to episode because John’s very good at sharing and, you know, material, and he’s got a good network. John has a radio we had a radio show in Sydney on radio Skid Row in Marrickville, and he’s heavily involved in the Pirate Party. And I’ve had John on the show several times, and if you’re a regular listener, you’ll probably appreciate that he always has very interesting and well thought out things to say. So he no longer has a radio show. He’s had to step back from that and but, but he’s will still be able to hear from him. Next year, he’s going to be putting out a podcast, and I look forward to catching up with him, either on this show or on his new podcast. So once I find out more about that, I’ll, I’ll pass on the details. Right? Oh, the clip I’m going to play is, again, it’s from this episode that on housing and immigration. And these are really big issues in Australia at the moment. I mean, we had that huge surge in immigration post COVID And there’s a lot of debate about, to what extent is immigration driving the housing crisis that we’ve had? To what extent is immigration behind the the economic challenges we face? And there’s a lot of talk about the per capita recession, the decline in household living standards. So yep, if you’re in Australia, you’ll you’ll be well aware of this debate. And I suppose it’s a debate that is occurring in in many, in many economies around the world. And certainly immigration was was one of the issues that that swung the election in Trump’s favor. That was the view that Darren expressed on my show, and I’ve heard others express that too. Okay, so let’s play the final clip, and this is from my conversation with John August on housing and immigration.
John August 48:06
Well, keep in mind, I think I’ve already said this, that I do not believe that, you know, just reducing immigration is going to be a magic one. We have to, in some sense, aggressively pay catch up on our infrastructure. And another thing I’ll point out is, I don’t know what it’s like in Brisbane, but certainly in Sydney, you’ve got the issue where you’ve got the rich suburbs, and the people who are like the nurses, the fire is the police officers, the people doing cleaning, the people doing whatever. Can’t afford to live there, so they’ve got to basically travel all the way across Sydney, and they’re putting a needless load on the road network that doesn’t really need to be there. And for the rest of us that are not in that situation, we’re obviously coping with congested roads. So you know, for me, that’s a side effect of that sort of asymmetric wealth distribution. And one of the things that may be happening in Brisbane, I know some councils in Sydney are looking at getting into public housing, not in a grand sweeping way, but key worker accommodation. This is, this is accommodation that will be there for the police officers and their families, for the nurses and their families, for the fireies and their families, and perhaps for the cleaners and their families that are actually servicing that area. And, you know, you’ll basically have to say, look, either I have a job or I will be getting a job in the area, and I’m in one of these professions, so the council will then give you some subsidized place to live. And, you know, that’s interesting, that councils are even contemplating doing that. I mean, I mean, I guess this is a, this is sort of a guess. It’s a bit of an issue around infrastructure and housing. I guess a few steps from New from your original question. But never mind. Can’t help myself.
Gene Tunny 49:49
I can understand the logic of it. So I’ve seen that in in rural towns in particular. So you’ve got a visited a potato process. Facility in one of the Riverina towns, and they actually own some houses in the local town, so that they’ve got places for the I think, you know, the migrant workers who come in to work at their processing facility, so they’ve got somewhere to live when they’re when they’re in the area. So I can see the logic of that and why it might make sense for some councils to look at that awesome. Well,
John August 50:24
I know that, you know, just traveling around country towns, it’s interesting when there’s some sort of development, and all the tradies have taken all the motels or or there’s some sort of running festival or something like that. You by golly, you know, you notice it when you, when you go to a country town thinking, Oh, this is just a quiet, sleepy country town. There’ll be lots of vacancies at the motel and, well, there aren’t anyway.
Gene Tunny 50:49
That’s very true. Okay, I want to go back to those numbers. So migration program. So there are in the permanent migration program. So remember I talked about how our net migration has been running at about 550,000 Okay, the permanent Migration Program, which is what you’re talking about, which is refugees, or the family reunions and skilled migration, that’s set at 190,000 places. So that’s just a fraction of the total net overseas migration, and a big part of it are students over foreign students come in universities. And also the, you know, students who stay on, they get an extension, so they do a degree, and then they stay here for a couple of years after that. And you know, some of them will have work rights, and they’ll be, they’ll be in our labor force. So I’ll end you know, a lot of it is that, and so we’ve got this big temporary migration number. So I’ll put a link to Leith post in the show notes, because I think it’s a nice summary of all of the relevant data. We’ve got around 700,000 student visa holders in Australia, but in terms of temporary visa holders. So that could be students, their families, people who are who did a degree, and then they’re still staying here. That’s at, is it 2.2 to 2.4 million people? So depending on whether you use the so there’s a quarterly, seasonally adjusted number, that’s about 2.3 million. It looks like. And I’ll put that in the show notes. So is
John August 52:23
that that at the moment, or per quarter, or per year, or what do we what are we saying here? Yeah,
Gene Tunny 52:28
that’d be at the moment. So that’d be the stock of them, yeah, at a point in time, yeah, yeah. And so we’re well above where we were at COVID, and you could argue that we’ve actually, you know, so some of the people will say, Oh, actually, it’s just catch up and we’re just on the same trajectory. Okay, maybe so. And this is something that Leith addresses here, and his his point is that, well, okay, this, this argument. The he refers to a tweet from a bull. Is it a bull Rizvi, who was a former immigration bureaucrat, where he was saying, Oh, look, we’re just we’re actually where we would have been if we were on the same trajectory pre pandemic. And then so Leith goes risby arguments ridiculous, because the pandemic completely constipated the supply side of the housing market by sending material costs through the roof, sending builders bus so you were talking about this before John and reducing building capacity by months of lockdowns, deliberately engineering a record immigration rebound into a supply restricted market was the height of idiocy, and is why we are suffering from the worst rental crisis in living members.
John August 53:37
Well articulated position, I suppose I’d have to think about it much more carefully to say, look, is it right or is it wrong? But it sounds very reasonable on the face of it. You know, prima faci is the legal people would say. But my broad position would be, look, we were playing catch up on infrastructure before, if we’re actually going to get some breathing space, we’ve got to have a commitment to catch up on infrastructure at the same time as we limit immigration, so we can actually get ahead of the curve. Because I think a lot of this, this silly bugger games of like, here’s a development will divert some of the benefits from that to building infrastructure that’s not getting ahead of the curve. And like, look just a bit of an anecdote from like, history of Sydney is way back when our first rail lines went out of Sydney to service the farmers, okay? And that was why they were built. So if you wanted to build a settlement, you know, 10 or 20k is out of out of the city center, or what would have then been the city center, you just build a railway station on some part of the railway track, and boom, boom, there’s the start of your community, your infrastructure has led your community, rather than the infrastructure coming sometime later, based on some deferred payment schedule, you know? So you know where, where? Yeah. I mean, Lisa van Olson may well have a good point. I’m not going to disagree with it, but my position is we were paying catch up. Four, and if we’re going to be serious about playing doing actual, proper catch up, then we can’t just do business as usual like it was however many years ago. So, but, but, yeah, he may well have a good point there.
Gene Tunny 55:13
Okay, so that was John August from my episode on housing and immigration. So yep, if you liked what John or I had to say in that clip, then Yep, and you haven’t listened to that episode, then please check it out. Okay, so as you’ll as you’ll gather. I mean, we cover some fairly controversial issues on this show, and I appreciate that you know these are issues that people may well have different views from me on, and I’m happy to hear other opinions. Happy to hear your perspectives on these issues. So yep, if you’ve got any any thoughts positive or negative, or get in touch. Let me know whether you agree, whether you disagree. What do you think about these important issues that we’ve covered today, so issues or about the environment, about housing, immigration, the gender pay gap and the US budget and what the return of President Trump means for the US and for the rest of the world. Please feel free to get in touch. You can email me at contact, at economics, explored. I’d definitely love to hear from you. I want to know what you’re interested in. I want to know how I can improve the show so I can continue this go. I can continue the show. I can make it even better and make it make it a really strong show. In 2025 so we’re, we’re getting very close to the new year, right? Oh, again. Thanks for listening. I hope you enjoy it, and I hope to catch up with you in a future episode. Thanks you.
Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
Economist and returning guest Darren Brady Nelson shares insights from his time as the top door-knocker for the Trump campaign in the battleground state of Wisconsin. He explains why Trump’s messages on inflation, immigration, and cultural issues resonated with voters. He breaks down Trump’s economic vision for the second term, including plans for Elon Musk to lead a government reorganisation. Show host Gene Tunny and Darren discuss the prospects for repairing the US budget and the possible economic implications of Trump’s fiscal and trade policies.
Transcript: Trump 2.0 w/ Top Wisconsin Door Knocker & Economist Darren Brady Nelson – EP261
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 00:05
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. Darren Brady Nelson, welcome back to the program.
Darren Brady Nelson 00:38
Thank you. Good to see you again.
Gene Tunny 00:39
Good to see you again, Darren, you’ve been busy these these last few weeks, so you’ve been campaigning in Wisconsin and keen to chat with you about the result, obviously, the Trump victory. And yeah, there’s been a lot of commentary about it. Lots of people surprised. I mean, you’re someone who probably isn’t surprised. But to begin with, I’d like to ask, yeah, what
Darren Brady Nelson 01:07
was your How did you guess that I wasn’t surprised? Yeah,
Gene Tunny 01:11
with your Make America Great Again. Cab, very good. So what was the experience like for you? What was it like working for the campaign? Can you tell us about that place.
Darren Brady Nelson 01:22
Yeah, well, as as you know, you know, and I guess anybody who’s watched this show before and seen me, I’m an economist like you, so, you know, the past couple of months, though, I’ve just been, you know, just a grassroots door knocker, you know, I can tell you more about how that happened, but so that’s what I’ve been doing in Milwaukee behind me. That’s kind of what the the little sort of setting in the background is, is a view of Milwaukee. I am actually in Milwaukee. It’s not just a computer hologram in the back. And, yeah, that’s, you know, what I’ve been doing for the past two months, you know, trying to do my part and help Trump win Wisconsin. As you may or may not know, you know, whoever actually gets one more vote in the state of Wisconsin wins all the electoral votes for Wisconsin. And that’s the way it works for most states, except for, you know, I think Maine and Nebraska are almost that, but not quite that they have, you know, kind of they split up the state, their states a little bit. So, you know, no one, you know, sometimes you see this commentary where, you know, be it CNN or Fox, and they’ll, they’ll break it down by like, county or something like that. You know, that’s interesting, and that’s kind of useful information, but it’s not actually no one wins Milwaukee County or anything like that as such. So, but you know, you know, the more obviously votes you can get out for Trump in Milwaukee County, the better. Helps the state total. And that’s what I’ve been doing. And interesting enough, you know, I actually finished as the number one door knocker in Wisconsin. I knocked on more doors than anybody else in the state on behalf of Trump. I don’t, can’t speak for Kamala side, but for Trump’s side anyway. Okay,
Gene Tunny 03:01
did you have an unfair advantage because you’re in downtown Milwaukee, you’re in a high density area?
Darren Brady Nelson 03:08
No, actually, I had the opposite. I had the disadvantage because everywhere that was actually within walking distance from me was was secured apartment blocks I couldn’t get into, right? Yeah, so full of, you know, sort of high rise hipsters. So look, I got to thank, you know, some of my colleagues who, and actually some church friends too, who actually would drive me out to what they call walkbooks. And both sides kind of do a very similar approach. We have an app. We have, like, you know, 100 or 100, 150 doors to knock on that day, and the app just leads us to those doors. So both sides are trying to target our voters. We’re trying to target mainly low propensity voters. So like, you know, someone who is a republic, who’s voted at some stage right, for president or something as a Republican, but they don’t do it all the time, right? So they’re not necessarily lazy, although sometimes they can be. So we just try to get out, you know, our party’s voters, but the databases aren’t great for either parties. And you get, you get a lot from the other side. You get a lot of under, you know, at least some undecided people. So it certainly makes for an interesting, you know, time when you get out there and you you think, or you hope, you’re knocking on a Republicans door, but you get a dirt Democrat, or you get it undecided, which is kind of interesting, yeah, yeah,
Gene Tunny 04:31
okay. Like to Yeah. Before we go on to how, I’m interested in how some of those conversations when, but first we you, were you employed by a Super PAC? Was it a super PAC that employed you? I mean, I, I’m not fully familiar with the system over there. Could you tell us about that, please?
Darren Brady Nelson 04:48
Yeah, both, both parties really rely on these packs, the political action committees, so they’re under the tax law. You know they’re different from, say, a c3 which is a three. Think Tank, you know, where you get a tax exemption all that there are c4 so C threes can’t be political. I mean, there’s some wiggle room. But, you know, you don’t see the Heritage Foundation or or Cato saying, you know, vote for candidate A, you know, sort of thing c4 is, can literally do that. So, so I was working for kind of an unusual arrangement. I was working jointly for 2c fours at the same time, which was turning point action, which is ultimately run by Charlie Kirk and America pack, which is ultimately run by Elon Musk,
Gene Tunny 05:36
right. Okay, so, I mean, you know, clearly Elon Musk has had a huge influence on the campaign, and will have a huge influence on the administration, it appears, at this stage, unless he has some falling out with Trump, which isn’t beyond the realms of possibility. This is the mood, just hypothesis. We can talk about that a bit later, and what Musk has role in the administration could be but so what
Darren Brady Nelson 06:01
was, to be honest, though, the people who fell out where Trump were kind of like backstabbers and people who weren’t really Trump’s in the first place, there might have been the odd exception, but, you know, and I think there was, you know, like, Well, that’s true. I’d say 8020 was people that shouldn’t even been this administration in the first
Gene Tunny 06:20
place. Yeah, yeah, that’s probably right, if you think about what Trump’s views are, and where he comes from, and the types of like he got sort of traditional repub people you’d see in, say, the Bush administration, like, either the Bucha administrations, right? And that probably didn’t suit Trump, whereas, yeah, Musk is, yeah.
Darren Brady Nelson 06:40
Well, to be honest, people in the Bush administration, one cert, the when, you know, wouldn’t actually be go, well, in a Reagan Administration either. So put that context in there. So it wasn’t just Trump, you know, the Neo cons, those sort of, Oh yeah,
Gene Tunny 06:53
yeah, yeah, very, yeah. Good point. Okay. And what would, how did the conversations on the ground go. I mean, you mentioned that where you were in Milwaukee, or parts of Milwaukee there, you know, it’s more for one of a better term, hipster, more like inner city, you know, new farm here in Brisbane, or, yep, so how did it or fortitude Valley? How did it go? How did you how did those conversations go? Were people generally receptive? Like we get the impression over here that there’s a, you know, there’s huge conflict over politics in the States, and people are just aggressive. No one wants to talk with people from the other side. How did it how did you feel on the ground? How did it all go?
Darren Brady Nelson 07:37
Look, that’s actually largely correct, sadly. But put it into other contexts. I was going throughout Milwaukee County, which is, you know, more than just walkie city. And even within Milwaukee city, the hipster areas don’t account for most of the city. So there’s, there’s heaps of, you know, working class and middle class sort of areas where you’re, you know, the more working class it got, the more trumpet got, right, and the more middle class, but then starting to get away from the city, also, the more trumpet got. But what surprise, you know, that wasn’t obviously surprising, although it’s still kind of to some extent surprised me, particularly amongst migrant groups. Boy, they were just like, even, on average, more Trumpy, you know, than than you know, like a white suburbanite would be, or, you know, I didn’t really go in the rural areas, so you know, that would probably be even more sort of Trump again. But what all you know, what surprised me was, you know, even some of these hipster neighborhoods, or these, you know, quite avant garde sort of suburbs, you know, you mentioned, kind of like fortitude Valley. But I guess you could have mentioned a new farm, but you could have mentioned, oh, what’s the place we went to dinner in? What’s that, you know, in South Yeah, West End. You know, there’s kind of West End type suburbs here, obviously, in Milwaukee as well. So there you wouldn’t, obviously get a lot of Trump, but then you would, but there would be some, you know, like there was, you know, to me, I went in thinking, I’m not going to meet one person, you know, that’s going to be going for Trump in a suburb like that. And you’d actually see the huge Trump signs here and there, and those sort of sub suburbs, which surprised me. And so the conversations, you know, there was certainly, you know, look, overall, the Democrats I came across, you know, were at least somewhat polite, which to say that there was somewhat polite. So my stick was basically, you know, we were getting out the vote for Trump. So we weren’t even getting out the vote for Republican Senate, Senate candidates or Congress candidates, much less state level stuff, right? So we were very laser focused on Trump. That was all our mandate was. There are other groups who are doing something broader. Sure. So my shtick was basically, you know, I knock on a door. Someone answers, you know, I smile. I politely say, Hello, I’m getting out the vote for Trump. Are you considering voting for Trump? That’s it. That was my whole shtick. And usually, even before I got to the end of that, I could almost see in their eyes. They were like, you know, kind of light up, like happy, or whether, you know, sort of staying, or anger was it was in their eyes, I usually got from the Democrats, kind of, at least a kind of semi polite disdain. They would often say, Absolutely not. They make they may have some pleasantries at the end, like goodbye, or they might just simply slam the door, right, yeah. But sadly, I got some, like, really mean Democrats who just would basically swear at me, yell at me, tell me getting off their property just in the wake of my point stick right? And I had like, a little badge, you know, with Trump, blah, blah, blah, and, you know, speaking to, you know, people out there who are Trump supporters in Milwaukee, it doesn’t actually go both ways. It doesn’t actually go both ways. You know, like at least 8020 when a Democrat comes up to Trump’s house, they don’t get that sort of level of hate and vitriol and return, they might kind of laugh at them, like, really? Kamala, you serious? You think? You know, there might be maybe an impolite sort of, like ribbing of them, or something like that, but it doesn’t actually go both ways. So the division shouldn’t be portrayed as though it’s equal 5050, it’s not rod
Gene Tunny 11:39
Okay, okay, I’d like to ask you about why you think Trump won, because it’s come as a great Well, I mean, it wasn’t a surprise to you, a surprise to me, and I think to many around the world, because, I mean, we got the impression that he’s upset so many constituencies as concerns about reproductive rights or access to abortion there. There are concerns about what he means for, you know, various different different groups in the community. There are concerns about just his, you know, perceived, you know, instability, I suppose, concerns he’s the fact he’s been convicted, the fact that he allegedly launched a insurgency on January 6. So you know, all of these concerns about about Trump. And so a lot of people are thinking, how on earth could he get reelected? But he was. And so the the hypotheses that have been advanced, that I’ve seen are the major issues are inflation, incumbency, the fact that the Democrats have been in and things haven’t been you know, people perceive that things haven’t been going well. I mean, there’s, there’s clearly a lot of signs of that, and then also concerns over cultural issues, about this concern about wokeness and dei What’s your take on what were the issues that really changed the situation and really meant that Trump had quite an emphatic victory after all?
Darren Brady Nelson 13:11
Look, yeah, those concerns have been basically trumped up on one side. Basically, there’s plenty of evidence to suggest all those issues you mentioned are at best, exaggerated and exaggerated, obviously for political purposes. As you know, the media is not neutral. You know, you know, be something different if there this was a world of neutral truth seeking media. And then, you know, if those, if the media was talking about those as, Oh, these are my concerns, that would probably have more weight. But as we saw it, over the course of the, you know, the the first Trump administration, I think the whole sort of, you know, the whole elitist Industrial Complex has been exposed. I think for what they are, they’re not neutral, they’re not truth seekers. They have an agenda. This guy is a big threat to them. So to get back to your kind of more tangible points, yeah, I think, you know, look, a lot of you know, sort of Trump supporters don’t buy any of that stuff you just mentioned, right? And the people in the middle are focusing on those kind of, like, bread and butter issues, you know, like, yeah, inflation has been terrible under the Biden administration, and Harris has been there the entire time, so she’s in a comment, so I’m, you know, running on as though, like, you’re going to be some change. How do you how do you do that? Like, she goes, like, you know, as you know, that famous, you know, line of hers where, you know, what would you change? And she couldn’t think of anything. So what? Okay, so you support everything Biden did, but then you’re a change so that, you know, that doesn’t add up, obviously, for people who are kind of on the fence, and interesting enough, I was surprised how many people were on the fence. You know, it just in my campaigning. It’s like, I kind of figured there’d be next to no one on the fence, either you kind of loved Trump or you hated him. And sure that. That was also my experience as well. So you’re right, cost of living, you didn’t mention illegal immigration.
Gene Tunny 15:08
That’s right, yeah, yeah, yeah, that’s the one I forgot it correct, yep,
Darren Brady Nelson 15:12
big, big issue, just for law and order, but also for things like housing prices and all that sort of stuff, too, and jobs and, you know, sort of coming in and undercutting what Americans could actually legally do, you know, like they can’t even work for those the rates that some of the legals were working for so and, you know, law and order more broadly, and the whole sort of cultural issues, but, but also how the cultural issues actually tangibly impact, you know, the people’s ability to have jobs, you know, the DEI stuff, you know you’re not meritocracy flies out the window sort of thing. And you know, so that those are all but huge issues. And the wars you know, like, you know under the Democrats, that you know, there’s just they’re either fueling the Ukraine, Russia war, which I think, or at best, they’re just not, they’re very incompetent at doing anything to, you know, what’s resolved this somehow, you know. And you know, the Hamas stuff and Hezbollah stuff took took off under their regime, in part because, you know, Iran was on its knees, you know, at the end of the Trump administration. And they just basically threw a bunch of money at them to revival, you know. So revive them for, you know, around the you know, cause trouble, not just in Israel, but, you know, as you probably well know, the Arab states are not very happy with with that, either. So you know, which is, you know, why, obviously, at the end of the end of the Trump administration was able to get the Abraham accords. You know, even if the Arabs are in love with Israel, they were, at least, you know, realizing, if nothing else, there’s a bigger threat from Iran, and from their perspective, yeah,
Gene Tunny 16:54
gotcha Okay. On immigration, I’ve heard some, some incredible numbers. I don’t know whether they’re even plausible, but are they saying there’s something like here, Trump was claiming this up to 20 million illegal immigrants in the US and and there’s going to be he’s aiming to deport a lot of the illegal immigrants. Do you think that’s even plausible, that sort of level of immigrants? Do you know, I mean, how, like, you’re mentioning that that was an issue. How do you see it on the ground? What are the impacts of it? Do you what sort of level of illegal immigration do you think is, is credible?
Darren Brady Nelson 17:31
Um, look, you know, I don’t, I don’t know for sure, the numbers, they are big though, you know, they’re that. They’re, you know, it’s not like on a level that hasn’t been seen in the US ever, you know, and it was intentional. It’s not as simple, like, oh, Kamala just dropped the ball. So anyway, putting, you know, they’ve lost their out, whether it was intentional or unintentional, the numbers are huge and they has tangible effects. I mean, our friend Tim one off has seen it personally in Denver, because that’s one of the places where, you know, if you like, sanctuary cities, where they’ve, you know, and it’s caused all sorts of law and order, sort of chaos, you know, also the drugs that come come in with it, as well, heaps of child trafficking, and then again, just the tangible stuff, like, Well, you know, you know. So we have all the these governments that make it very difficult, you know, for new housing to be built, just like in Australia. Yeah, they know. You have new people, okay, let’s say they were all fine citizens. We still have, we’re going to stick them all right. So you have all sorts of problems. And, you know, look, I, you know, from what I heard, like, I went to Trump’s rally in Milwaukee, you know, I think it was, yeah, last Friday or Saturday, I can’t remember. And the focus for deportations is going to first and foremost be the people who’ve been committing crimes in the country. And that’s very tangible to do something about that. Yeah, the numbers are big. But, you know, ice is actually quite big. They just haven’t been allowed to do their job, right? So and so they have a lot of intelligence on who these people are, where they are. I think Trump will soften his stance on the law abiding people the company. I don’t think they’re gonna give them immunity and just let them stay. But they might be come up with some arrangement, you know, that’s not like actual full on deportation, you know, they might be able to get, you know, you know, maybe there is some solution where they can maybe physically stay in the country, but, you know, but they’ll have to be a process, you know, behind it, you know, before they can actually be allowed to legally stay, maybe they could do a deal with Mexico. Because, you know, Mexico has been, you know, basically part of the problem. They’re not Mexicans coming in, but they’re the ones who’ve actually allowed them to all kind of come into the southern border. So, you know, Mexico has really got to, they’ll be under pressure to at least come up with an arrangement. You know, be it Australian Christmas Island type of arrangement or whatnot. So I think there’ll be a, certainly, a softer stance on, you know, basically law abiding illegal immigrants, but with the ones who’ve committed crimes, it’s going to be harsh, and it should be, yes, yeah,
Gene Tunny 20:18
I’ve just looked up some some stats. And yeah, it looks like it is a large number. So there’s a a report or a on the the web page of Congressman Doug lamborn from Fifth Congressional District. He’s quite quieting a figure of 17 million illegal immigrants in the US. There was a something from the Center for migration studies of New York, that it had 11.7 so a lower figure. But I mean, yeah, it’s clearly, yeah, it’s over. Looks like it’s over 10,000,010 to 20 million is probably a reasonable estimate. So yeah, really, yeah, obviously, very significant. And what does that mean for the the economic impact of it? Is it the case that the American economy does rely to a significant extent on, I mean, immigrants and illegal immigrants, people working in in agriculture or in domestic service? Do you have any thoughts on that? Darren,
Darren Brady Nelson 21:19
look, well, that, you know, that’s kind of the allegation, if you like, that, that, you know, one of the reasons, you know, the corporates, if you like, go woke, is to cover their their love of having as cheap a labor as they can kind of get a hold of, you know, inside the country, or through deals with China, where, you know, obviously in China, There’s some people who are literally slave labor there. So look, you know, that’s kind of not my area of expertise as such. But, yeah, I mean, you have those sort of numbers coming in, you know, and that’s going to sort of like, certainly put some downward pressure on at least certain categories of wages that may have not been pushed down if they didn’t come in. And, you know, which is obviously, of concern, obviously, if there’s jobs that could have been had, because the Biden administration is not, has not been a, you know, if you like, a pro market sort of government, right? So, you know, sure they’re happy to help their their corporate buddies out, but they’re not so sort of people like open up the economy to more competition and economic growth in general. So, you know, so there’s, you know, people are competing for, you know, less jobs than there would be, I suppose, if then we saw, for instance, you know, under the Trump administration, where things really did take off and people didn’t have jobs before. You know, who you know, for instance, like African Americans, who may have normally had, you know, been on welfare also, and had these jobs, you know. So I think that’s going to return as well. You know, you mentioned some of these concerns, as though, like, you know that just, it’s just completely false, as though, like, you know, Trump supporters are just a whole bunch of angry white men. That’s not at all. And I see the statistics now make it blatantly clear, you know, he really, unlike the Democrats, he really did have, if you like, a multi racial, multi cultural, multi background, multi income coalition, more, far more than the Democrats. The Democrats taking out Joe Biden is like a party on the decline. You know, they’re increasingly, you know, just some rich white ladies and and some welfare blacks, basically, and even. And they’re losing the welfare blacks, thankfully. You know, as we we’ve saw, you know, Hispanics are totally moving in the direction of Trump, as are all you know, most migrant groups, be it Indians and and Muslims too. You know, we saw that. Obviously, you know, Trump went to Michigan and spoke to Muslims. You know, the Harris campaign didn’t, and I saw that in my travels around Milwaukee when I went into these, you know, migrant neighborhoods of you know, particularly Hispanics, Indians and Muslims. Also throw in the Eastern Europeans to as you would guess, if they came from former communist countries, they were like the most rabid Trump supporters that I met along my sort of campaign trail. So it was interesting to see, you know, what kind of what I thought, you know, as an economist and a policy person, you know, dovetailing pretty well with what I saw on the ground, and actually on the ground, actually reinforcing things, if you like, even more so than I thought,
Gene Tunny 24:36
just on I want to get to Trump’s economic policies. You mentioned that you didn’t think the Biden administration was doing enough on competition policy or something along those lines. But what about Lena Khan at the FTC? Isn’t there a concern about is there a concern about her future under under the Trump administration? Because if anyone’s do it seems to be. Doing positive things in the Biden administration as her, she seems to be going after big tech. She seems to have an agenda to promote competition. Do you have any thoughts on that? Darren,
Darren Brady Nelson 25:11
none her specifically, I must admit, I haven’t really been following her. I guess I mentioned competition in the context of, you know, like the discussions we’ve had in the past on national competition policy Australia. So not like, you know, using, using the sort of, like the American equivalent of the ACCC with a big stick. I personally don’t think that’s a you know, that really makes no great difference in terms of actual, you know, like, broad sense competition in the economy. It’s basically getting government out of the way. And I think, you know, Trump doesn’t have like, a, like a, literally, a policy on competition, you know, look, I would love to, obviously, you know, get a job administration and maybe do something on that front, because I think there’s a lot of stuff, but, but it’s, it’s, it’s mainly like, you know, back in the 1990s to the early 2000s it’s government getting out of the way. It’s not government going in with a big stick to target this company or that company. I mean, okay, fine, I guess you got those laws. What’s at least use them in a more because in the US, they tend to be just politically driven. You know, they tend to go after a company that’s kind of lost political favor more so than under some legitimate, you know, sort of like anti trust reasons. So look, I don’t have any particular strong feelings on that person, and you know what should happen under the Trump administration. So I think brought more broadly, as you know, Trump may not have as an explicit a policy to get government out of the way, as like Reagan did, for instance, or even, you know, maybe even Bill Clinton eventually, you know, with his sort of joint partnership at times with Newt Gingrich, were doing that sort of stuff, even if, you know, Bill maybe wasn’t necessarily fully on board with the philosophy he certainly, you know, helped put in place those sort of policies in the in the 90s, as Reagan did in the 80s. But there’ll be some quite good people with Trump, I think, who will be looking to do that? Obviously, you know, trying to cut government spending, hopefully with Elon Musk, and, you know, an efficiency commission or efficiency department, certainly lowering taxes of various sorts. And they certainly recognize, you know, sometimes, you know, Trump’s kind of like, not as clear sometimes on, you know what monetary policy is, but, but I think you know, certainly he recognizes, you know, the Feds printed a lot of money, you know, since, in particular, since 2020, and actually, unlike, say, some of the other central banks haven’t ratcheted back as much as some of the other Western countries have. You know, they’ve done it some, but not as you know, you know, particularly m zero, for instance, they, you know, they’ve, you know, ratchet that back some, to some extent. You mean the money, do you Yeah, sorry, sorry, yeah, money supply, m zero in particular, which is kind of the, you know, the more very central bank oriented calculation, as you know, you know, whereas you start bringing in, yet, the banks and stuff, you start going to, you know, M, 123, so, you know. But if you look at what they’ve unwound compared to, like what Volcker had to do in the 80s, it’s, you know. Whoa, you know, you know. So in the meantime, they better get some pretty growth, pro growth, greater private sector policies, which can, you know, that can also offset a lot of that. And thus, you know, I guess there might be less reason or need to unwind some that money supply, although they will have to deal with to some extent. And you know, there’ll be a fight, I think, you know, because Trump definitely wants a new head of the Federal Reserve, and the current person said he’s not going to resign. So, yeah, that should be an interesting battle. I don’t really, don’t know how that’s going to play out exactly. I mean, that’s not very good. I mean, you know, if the new president because that the chairman is definitely a political appointee, everybody knows that. So, you know that’s, that’s, it’s not good, you know, it’s pretty bad form, or worse. You know, for the chairman to say, blatantly, I’m not gonna, I’m not gonna leave, even though the new president doesn’t want me.
Gene Tunny 29:30
So it’s interesting what you’re saying. I mean, yeah, clearly they have to unwind. I mean, you know, keep shrinking the the Fed balance sheet. Now that is a quantitative tightening, so to speak. That’s what I think, how they’re describing it. Now, I thought the impression I got is that the concerns are that Trump would want to interfere. He’d want to interfere with the Federal Reserve and and more likely. And then under Trump, we would have easier monetary policy, wouldn’t we, because Trump would want to keep interest rates low, to keep the you know, to promote economic growth. So isn’t the concern under Trump that we would end up with higher inflation and hence higher interest rates?
Darren Brady Nelson 30:18
Um, but look, that concern, to some extent, is, I think, legitimate, because, you know, Trump hasn’t been, you know, he’s not Ron Paul, right? He’s taking, like, a pretty clear stance on on money printing and sound money and all that. He’s sometimes kind of been there, and other times he’s kind of easy money. But look, you know, it depends on what the demand for money is. So if the economy takes off, you can kind of, to some extent, not have to unwind the money supply to the same extent or tighten things up. You know, I would dismiss every President has a big influence on on money, a bigger influence on monetary policy then, you know, people really quite realize all the you know, they’re like I said they’re the chairs are political appointees. Yellen was not going to be doing something vastly different from what the presidents that she were was under wanted, right? I mean, you know, they’re nominally independent, but they’re, it’s semi independent, right? So I don’t think Trump’s any different from from Biden or Obama or anybody else. He’s not going to come in and be something, oh, wow. That’s different. You know, he’s going to try to influence the Federal Reserve they all have, right? They’ve all had done that wrong. But I think with, you know, I think you know the big difference, you know whether he’s kind of not going to be, if he’s going to be not that different on monetary policy from from the Biden administration, he’s going to be vastly different on, on his his pro growth policy, he’s going to, he’s, obviously, he’s gonna be expecting the private sector to be the one who drives growth, where the Biden administration explains the government to grow, and okay, you can kind of get away with that in the GDP statistics, because government’s such a huge chunk of those statistics. But it’s smoke and mirrors. You know, government doesn’t create its own wealth. You know. So, whereas, you know, and also, if you want to say, inflation, will see what happened in the first administration with Trump, you know, CPI didn’t grow very much at all. So I expect that to be the case under Trump as well. Yeah,
Gene Tunny 32:36
look, I agree with you that if, if the economy is, if your measured GDP is only growing because you’re, you’re undertaking activities in the public sector that are, you know, are inefficient or really of low value, then that’s not good for your living standards. I agree with that, and not good for your the productivity or economy. I think that’s a that’s a fair point. Can I ask about fiscal policy. I’d like to move on to that, because you made the good point about how you know Elon Musk is going to be involved in some sort of efficiency commission. I mean, I think this is one of the, this is one of the positive things that could come out of the Trump administration, if Elon Musk can reimagine what government looks like, right? I mean, this is quite incredible, right? Like to have someone who’s who doesn’t have that sort of standard model of what government does, or what the political constraints are that say I have because of an ex Treasury man in Australia, so I’ve got an idea of what’s achievable, what’s not how the government works. He’s just gonna, he could come in and just completely, you know, reimagine things. I mean, it could be the biggest reorganization of the US government since FDR, I mean, in the other direction. But so what are your thoughts on what Musk could do and what he should do?
Darren Brady Nelson 33:55
Yeah, look, I totally agree with you. You know, basically, you know, the way you set this up, you know, like, that’s, that’s, you know, in some ways, that is the most exciting prospect, you know, to bring in, you know, I guess a guy who’s considered a business genius. We know, business and government are not exactly the same thing, but there’s, there’s overlaps, there’s things that can be learned, obviously. I mean, Trump’s a business person, obviously. And, you know, I think overall, his first first term, except for, you know, when COVID and BLM and all that hit, it was a great success, you know, up until then, certainly economically, you know, putting aside, you know, you know, the other stuff. So that is very exciting. I would love to, you know, be a part of that, if I can somehow be a part of that. You know, obviously you work to me on, you know, when we first did that CPI minus x for the state of Maine, and then I kind of took that idea and applied it to the federal government on behalf of the Heartland Institute. So, you know, there’s a report or a plan, there’s really something. You know, if, if I can somehow get that in front of an Elon Musk or Trump’s people, doesn’t mean that’s the way you have to do it. But, you know, that’s just, you know, at least part of the toolbox. You know, I’m happy if, like, you know, Elon’s got an even better idea, or if he’s maybe comes in, like the president of Argentina almost, although, you know, maybe even maybe that’s a bit, you know, sort of a bridge too far, perhaps for a Western country, if you like, or for the US. But I think you know if anything big is going to happen, as you said, you know, like something huge, like, sadly, FDR, did in the opposite direction, because most of the federal government of right now, was set up under FDR, yeah. And, you know, including all the agencies that even the federal government doesn’t know exist, you know, because that was the big surprise when I did my Heartland reports. Like the Treasury, the US Treasury, doesn’t know all the agencies. Like, how can they not know how many agencies there are? Yeah, and who they I mean, we obviously know the big ones, like the top 20 or something like that, yes, but there’s all these. And when was facing that’s most of the the budget, obviously, is, is the ones they do know, obviously. But there are all these other little ones too, you know, which is just a little bit of a worry. Now, you know they’re not going to be, for the most part material. It’s not like you’re going to find, well, 50% of the federal government’s in this agency I’ve never heard of. You know that? You know, it’s not that bad, but, yeah, but you know, at least the Australian Government knows the agencies they have, you know. So that’s kind of a good start. So Elon, you know, someone like me or whoever can at least be a help to Elon going like, you know, I’m not going to slow you down. I want to cut the government like you do, but be aware that even the Treasury doesn’t necessarily know all the agencies are there. So you kind of know you need to know that as part of the process. So, you know, there’s going to be some hurdles putting aside, you know, all the weird sort of processes and protocols in the Senate and stuff, you know, on budget but, but now they control, you know, the Republicans control the House, they’re on board with the Trump agenda. They control the Senate. They’re going to have to push out Mitch McConnell, basically, and then get someone in the Senate who’s going to also facilitate what, you know, Elon might want to do, yeah. I mean, there’s obviously, you know, in the US, you know, there’s obviously, there literally, is a separation of powers, you know, obviously, you know, in Australia, the Prime Minister is the head of the executive. He’s also the head of the legislature at the exact same time. Yeah. So things, whereas you know that, you know, the Congress is in charge of the purse strings.
Gene Tunny 37:36
So the G the GOP has got control of the Congress, has it? Is that correct?
Darren Brady Nelson 37:40
Yeah, you know. And they got, they really got, not just in charge of the Senate, they, you know, they really did way better than I guess a lot of people expected. So they’ve, they’re totally in control of the Senate. They’re still in control. I think they’ve that. I could be wrong, but I think they increase their lead in the house as well. So they’re, yeah, it’s definitely in control of both houses, you know, they’ll need to, you know, push McConnell out the door gracefully, or not so gracefully, and then, you know, Congress needs to work, obviously, very closely with the Trump administration. Hopefully, you know, Elon Musk will be in charge of, you know, I think he wants to call it the Department of government efficiency for whatever reason, because he had that doggy. I’m not sure if it’s doggy or Doge, but so look, I’m sure he’s not gonna, like literally be running stuff on a day, but although maybe I could be wrong, maybe he will take time off to literally, you know, put his energy into this, you know, whether you know, I end up working for him or not. I hope he gets a good team, you know, can help him out. And certainly no one who’s going to try to get in the way and constantly say, You can’t do this. I can’t do that.
Gene Tunny 38:58
Yeah, well, you can send him a note and say that you’re is you were his number one door knocker in Wisconsin, weren’t you?
39:06
Yeah? Well, yeah, I was absolutely
Gene Tunny 39:08
and you got a lot of good, well, you got some, yeah, you got, you got some good ideas in terms of forcing them to make efficiency gains each year. So I mean that we can have a discussion. We had another discussion, another time about exactly how you’d make that work. I mean, there’s a, and you mentioned that, you know not, you don’t necessarily. I mean, your models one, there are other models that the idea is to have some type of, yeah, it gets some type of mechanism. Or that just works against the general tendency of government to keep expanding, right? To just keep growing with population and inflation. So I think that’s a that’s worth considering. I want to ask about before we wrap up, there are a couple of things I want to ask you about the deficit, and then we should just chat about trade and what Trump means for trade. How likely is it that Trump’s going to get the budget under control? Because. A the budget, the US budget, is currently in a structural deficit. Is it? I mean, is it a trillion dollar deficit? I don’t know the exact figure, but it’s massive. And you know, one of the figures Niall Ferguson is talking about. Now, I saw him at the ARC conference here in Sydney, and he was talking about how interest expenses on US debt are projected to exceed defense spending, right? And Trump’s want to he’s going to have a big tax cut. How? What are the prospects for him actually getting this under control the budget and limiting the growth of debt? Do you have any thoughts
Darren Brady Nelson 40:35
on that? I mean, you know, besides breaking my CPI minus x, which actually eventually takes debt down to zero and and gives, you know, over, this is over the course of 12 years, by the way, so that was like, it’s be assuming that Trump’s in for four years, and then Vance can actually be in for eight, you know. You know, obviously, that’s maybe stretching things a bit, but, but, you know, and then allows people, you know, he could get the just using my CPI minus x, and I think Elon Scott probably, I’m guessing, something even more heroic than what you know, I was doing with a CPI minus x, but simply under CPI minus x, which is focused on spending. Obviously, you know, I’m going to circle back eventually, but that would get rid of all debt. And, you know, some economists obviously go, Look, you should have some debt, and that’s fine, but you just like, theoretically, you could get rid of all the debt and also get back every average taxpayer every year, 19 grand. So that’s not bad. So you could do both at the same time. And I think so whatever happens on that front again, I’ll come back to really, you know what your question was, but you’ll need to, as you go along, not be obsessed with just getting debt and like, give no relief to taxpayers. You need to combine the two together somehow. But of course, now to get back to your question, it’s going to be what say Elon Musk or someone could do, because spending is the problem. Spending no problem. So if you can get spending under control in a big way, not just kind of play around at the edges, like they have often done over the years, like, Oh, we’ve slightly reduced the growth of spending. No, no, you got to. Can’t just reduce the growth of spending. You got to reduce the actual spending, right? And defense isn’t the problem. Really. Defense is like 10% of the budget, right? You know, we start adding up. You know, both social and corporate welfare. That’s where the biggest problems are. And then you throw in as as Trump called it many times, the green scam. That’s also a huge pile of money as well. So that’s, that’s where the work needs to be done. And and then just throwing the fact that, you know governments, in particular, it seems federal or national governments tends towards a lot of waste, right? Just a lot of a lot of fat, a lot of unnecessary, even if they’re doing something that you think is a core thing they should do, they often do it really badly and inefficiently, right? So there’s that too. So, so it’s basically spending, spending, spending, spending, and then also, you know, particularly in the 2020s but maybe also, to some extent, since 2008 that’s, that’s really what the Central Banks has been printing a lot more money for, really, is to for government at the end of the day, going through the the kind of, I think, somewhat pretend process of, you know, bond markets and whatever else fine, but ultimately, they’re just printing money for government, right? So, and particularly, you know, since 2020, onwards, and like I said, the the US Federal Government hasn’t ratcheted back that that kind of printing as much as some of the other Western governments have, right.
Gene Tunny 43:44
So just on the I think you make a good point about spending being the issue. And I’ve chatted with Dan Mitchell, who you know we both know. You know Dan. Well, you introduced me to Dan, I think, and Dan worked on that thing for me, you had
Darren Brady Nelson 44:00
actually introduce me to Dan, to the economic society that
Gene Tunny 44:04
may be the case. Oh, when John Humphries brought Dan over for the Oh, Wow, incredible. Oh, very good. Well, anyhow, what I remember Dan telling me once on one of the interviews I did, that there was a situation where, if you look in Europe, they increase, they brought in the value added taxes. And you’d think that having the all this additional tax would improve their fiscal situation, but 20 years after they introduced it, they’ve actually got more debt or something like that. Or maybe, you know, decades after they’ve introduced it, it didn’t improve their fiscal situation one bit. So I thought that was a fair point. So yeah, it’s definitely, you’ve got to keep the spending under control. I mean, you make the point about the social security, corporate welfare, etc. Now, the issue with the the entitlement program, so to speak, is that, I mean, they’re, they’re legislated, okay, people have entitlements. So it’s, I’m struggling to see how you apply. Your CP, CPI minus x, whereas you’re essentially saying government agencies have to apply this percentage reduction in in spending each year, which would be great if they could do it however, that it comes up against the issue that a lot of this stuff is legislated, so you need to have Congress make changes, don’t you to achieve what you’re after?
Darren Brady Nelson 45:21
Yeah, you’re right. And I think, like, Social Security in particular will just have to be tackled separately, right? And I’m not sure if we ever talked about this, but I think, I think Australia has got a great model, you know, like, what, what they did in the night. I mean, it’s not perfect, the superannuation system, but it’s like, light years better than the US Social Security system, right? So, yeah, I think there’s, you know, I think Australia is, like, an ideal model, at least, you know, a jumping off point to where you could reform Social Security and maybe that. I think that might have to be something different, you know, that might have to work hand in hand with, you know, Elon Musk’s outfit, but it should be something separate. And there’s some, I can’t remember the fellow’s name, but there’s a guy at the American Enterprise Institute in the US who’s also a big fan the Australian superannuation system. And by the way, Dan Mitchell, who you mentioned, yeah, did his PhD on Australian superannuation and how that could be, yeah, you know. So, you know, be awesome to bring Dan, you know, and maybe the guy from AI to kind of tackle superannuation separately, tackle social security separately. There’s a lot of other entitlements too in the US federal government system, but Social Security will have to be tackled separately, and obviously in a more sensitive manner, and in a way where you obviously grandfather people in who you know you can’t, it’s too late for them to you got to make it so no one’s worse off. You know, whatever there is, over time, it’ll probably take, you know, a more gradual reform than than you know you could with sort of other government related expenditures. So that had to be just tackled separately, I think. But I think Australia offers a great model for that, as I think it also does. It wasn’t much of a campaign thing for either side. But, you know, infrastructure, I think Australia also, particularly, you know, under national competition policy was a great model as well. And I wrote a Heartland paper on that in 2020 you know how that could work in the US? You know us being a federal system as well, you could put something similar as Australia did,
Gene Tunny 47:32
yeah, yeah. I’ll put a link in the show notes to that chat. We had a chat on infrastructure, but also spoke with Dan about his book, The Greatest Ponzi scheme on Earth, where we had a chat about superannuation as well. And you’re right, our system in Australia is not perfect. There are lots of debates over how we can improve it, and whether tax concessions for Super are too generous, whether people should be allowed to access their super for housing. I think they should. But there are other people who think that, Oh no, it’s the best thing is to leave it into it, let people leave their like, lock it up until they retire. I’m not sure about that. So there’s a big debate about some of the parameters of it. Right before we go, Darren, I should ask you about trade, because this is one area where there could be some big changes. I mean, Trump’s been threatening. Is it a 60% tariff on China, 10% increase in tariffs across the board, or something like that? Was it 20% what’s the potential for, I mean, this to be to have an adverse impact on us consumers. What’s the potential for a global trade war. How do you think about what Trump’s impact on the economy via trade policy is going to be?
Darren Brady Nelson 48:48
Yeah, look, that’s, that’s gonna be, that’s gonna be a tricky one, you know? So I’ll start out with, I’m not sure if you ended up having him on your show. Did you have Mark Calabria on your show? Not
Gene Tunny 48:57
yet. I haven’t managed to line him up. Yep, yep, yeah. Okay. Well, look,
Darren Brady Nelson 49:02
you know, if you do, I’m just going to kind of, hopefully I’m not giving away trade secrets. Hopefully he’ll talk about this too, if you can get him on. Is he, you know, he was the chief economist for Mike Pence during the first Trump administration. Then it towards the end, you know, he was appointed as, you know, headed, I can’t remember, because there’s multiple financial regulators of various sort. He’s one of the financial regulators, but, but the point was, he had been a number of meetings in the oval of office over the course of the four years. And, you know, unlike, say, Dan Mitchell, who, you know he he thinks Trump is, like, you know, philosophically a protectionist, right Mark, who also was a colleague from Cato with Dan, had the opposite view. He goes, Look, Trump’s not philosophically a protectionist. And I think bears it out like when that one time when he challenged when the g7 were upset with him about his tariffs. He goes. Right? Let’s all get together. Let’s lower, or even get rid of all our tariffs, you know, between us. You know, the in the g7 um, because there’s lots of terrorists that are, you know, allies are putting on each other, right? So it’s not just China, places like that. So I think for I understand Trump, it’s a strategic sort of approach to eventually get, if you like, less tariffs, but also not just tariffs, but, you know, just kind of overall, if you like, you know, trade agreements that aren’t slanted and massively so towards one partner, like, you know, like the ones that seem to be slanted towards China, and that would include all regulatory barriers and all the other stuff. And you know, the Chinese, even more so than the Japanese, once upon a time, are like masters of non tariff barriers to trade, right? So, you know, to sort of attack that sort of stuff. And I think if you kind of take, like a cost benefit or discounted cash flow approach, it can make sense, because it’s not like we’re in a world where there’s no tariffs, and also Trump throws these tariffs on, right? Not in that world. You know, we’re, sadly, in a world with with, not only plenty of tariffs, way too many sort of, if you like, non tariff barriers, as well. So I think, you know, I understand Trump. It’s a strategic way of getting a better deal out of a China or Europe or even Canada, you know, like I, you know, as a free market oriented economist, yeah, my natural instinct is, obviously, I don’t love tariffs or other barriers to trade, but at the same time, you know, I’m kind of skeptical of, you know, you need to at least take, you know, Ricardo model of comparative advantage with a grain of salt in a sense of the logic is sound, except for the fact that nations are not equivalent to individuals or businesses or even industries. You know, they’re not exact. They’re political entities. That what? That’s what makes them very different from comparing them to these other entities. So the model has a certain amount of usefulness, but you can take it too far if you forget that nation states are political entities, and they’re not they’re not like you know, businesses are humans freely trading with each other. They’re just different. They’re just different. They have different incentive structures. And you can take the traction a bit too far. So I’m very given, you know, how badly I think the WTO etc has performed compared to maybe their earlier years under, you know, GATT and all that sort of stuff there. I’m very open to bilateral trade agreements, because I think a lot of these trade agreements were terrible, you know, I’ve looked at the the Trans Pacific Partnership. It’s, you know, 8000 pages of, not so great, right? You know, first of all, why is it 8000 pages, you know, like, that’s just, yeah, yeah. That’s what a free trade agreement, you know, used to look like once upon a time. You know, they used to, it’s too much given favors your buddies, basically. So that, to me, they’re just putting in place a lot of, you know, barriers to trade. I mean, for every one they take out, they may be putting in two new ones. So, so look, I’m kind of, you know, more optimistic. I suppose you know, I’m wary of tariffs. But you know, if ultimately, we can then get, you know, to a point where we get China, or whoever, even Canada at the trading table, to like, hey, all right, let’s, let’s, let’s start to sensibly and in a more equitable way, lower tariffs, lower non tariff barriers to trade over whatever sort of time frame, then I think you might have to use that because, you know, China does not play fair at all. When you’re dealing with with businesses in China, you’re always dealing with the government. Yeah,
Gene Tunny 53:53
yeah. I’ve chatted with some people on my show about that, that enterprise China model, or China Inc, yeah, absolutely, with the non tariff barriers, you’re talking about things like, uh, quotas or inspections or, you know, just require, difficult requirements, difficult regulatory hurdles to get over to, to get into the market. There’s a, I found a briefing on Stanford Center on China’s economy institutions that I’ll, I’ll put a link to in the show notes, just for listeners who are interested in learning more about
Darren Brady Nelson 54:23
dei and climate stuff alone. The West, you know, China’s not doing it. China’s not doing it. Brazil’s not going to do it. Obviously, we’re not really having a whole lot of trade with Russia at the moment, but they wouldn’t be doing it. India. The BRICS, obviously, the BRICS nations, you know, having all these onerous regulations that you know only kind of you know, certain corporate elites in the West can meet, but no one else can. You know that you know, particularly small and medium sized businesses who aren’t benefiting from this stuff are often hurt by these things. So I think you know that’s going to. Of massively changed too, in the US is, you know, the DEI stuff is going to be it, you know, if it doesn’t like, literally, be go away completely. It’s, it’s going to be hugely de emphasized as our, you know, climate things as well. All right,
Gene Tunny 55:15
okay. Tara, this has been a fascinating conversation. Yeah, it’s good to catch up and, yeah, get your perspectives. I mean, again, like I said, I was, I was surprised. I mean, I guess I always thought there could be a possibility of Trump winning, but I didn’t think that was the most likely scenario, and now that he has won, yeah, we have to think about what those implications are for us. Economy, global economy. There are some pessimistic projections, forecasts out there from various economists like Warwick, McKibben. Warwick’s done some modeling of what the adverse impacts are on US consumers, on the US economy, on global growth. But then, at the moment, it looks like the markets aren’t seeing that. The markets have responded rather favorably to Trump with increases in the various stock market indices. And, I mean, we’ve got Bitcoin going up, I think I saw so I think actually, crypto is one thing we didn’t chat about. But I think there are a lot of people are excited about what Trump could mean for crypto. I don’t know. I’ll have to talk to I’ll have to try and cover that on another episode. So yeah, it looks like the market is is relatively positive. And one theory I heard is that might have been on Bloomberg or or CNBC, that Goldman Sachs has a view that, like it is just a negotiating position that the whole threat of the 60% tariff will it won’t quite be that at the most it end up being 20% or something, so would have a lesser, a smaller impact. So I think that’s their their view there. They seem less concerned about what the the possibility of a trade war than than others might be.
Darren Brady Nelson 57:03
But anyway, I would, before you finish, I would add, you know, let’s not forget, everybody’s got a world view. So, you know, Mckibben has got a very strong worldview, which is like, in the opposite direction from Trump. And you know, economists are never value free. Never had been. Sadly, they’re just, you know, they’re even further away from value free nowadays. So it’s easy to put together, you know, a paper with 100 you know, economists and Nobel Prize winners who say Trump is horrible and he’ll destroy the world, you know, I think that’s just, you know, it’s just nonsense. You know, he’s going to be the economy is going to be far stronger under Trump than you know, would have been, you know, under Harris, by far. And I think that’ll be good for Australia too, because, you know, Australia, obviously, a lot of times, just writes the coattails of the US, whether even if labor is in power and not being all that business friendly in the first place. So I think things can be, you know, happy days are here again.
Gene Tunny 58:05
Okay. Well, you’ve made a strong prediction there. Darren Brady Nelson, so I’ll have you back on at the end of the extra administration. See how the prediction, yeah, see how it goes. Yeah. Well, I think yeah, absolutely right. Everybody. Nelson, thanks so much for your time. I’ve really enjoyed the conversation and learning your perspectives. It’s Yeah, huge week of news, and you’re someone who’s been on the ground, and you’ve had some you’ve got some valuable insights for us. So thanks so much.
58:37
Thank you. Bye.
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Credits
Thanks to the show’s sponsor, Gene’s consultancy business, www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts and other podcasting platforms.
This episode explores the resurgence of industrial policy in the US and Australia. We critically analyze whether government interventions can truly shape industries or if they are doomed to repeat past mistakes, such as those experienced during the 1970s and with the Concorde project. The episode includes clips featuring Saxon Davidson from the Institute of Public Affairs and Eamonn Butler from the Adam Smith Institute.
Introduction to Industrial policy and its potential consequences. (0:00)
Budget, inflation, and economic policies in Australia. (8:34)
Climate change policy and government incentives for renewable energy. (13:59)
Australian economy, productivity, and government intervention. (19:44)
UK’s economic struggles in the 1970s, including strikes. (29:41)
The failure of the Concorde supersonic jet project. (35:59)
Failures of activist industrial policy – e.g. in Australia’s car industry. (49:16)
Takeaways
Revival of Industrial Policy: Governments in the US and Australia are reintroducing industrial policies to shape their economies, sparking debate among economists.
Historical Lessons: The economic turmoil of the 1970s and failures such as the Concorde serve as cautionary tales against heavy government intervention in industry.
Climate Policy Challenges: The push for renewable energy in Australia raises concerns about the rapid transition and its impact on the economy and energy grid reliability.
Productivity Focus: Effective economic policies should enhance productivity through structural reforms rather than picking winners.
Government’s Role: While there is a place for government to address market failures, extensive intervention often leads to inefficiencies and unintended consequences.
Transcript: The Revival of Industrial Policy: Should Governments Pick Winners? – EP243
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.
Eamonn Butler 00:04
Mrs Thatcher realised that we couldn’t go on like that. She knew it would be painful and but she was determined enough that the country would go through that pain and it will come out better the other side, which it did.
Gene Tunny 00:23
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist 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, and welcome to the show. Before we get started, I want to give a big shout out to our sponsor for this episode Lumo coffee Lumo is seriously healthy organic coffee that you don’t want to miss out on. You can use the promo code 10 explored in all caps to get 10% off. But hurry, it’s only for a limited time. Check out the details in the show notes. K. Now let’s get into the episode. Something I’ve been thinking a lot about lately is the revival of what’s called industrial policy. In the US, the Biden administration, it’s introduced the chips Act and the inflation Reduction Act. They’ve featured activist industrial policy measures designed to promote domestic microprocessor manufacturing and green industries. In Australia, the Federal Labour government has introduced a future made in Australia plan and that was highlighted in the latest federal budget which was handed down a few weeks ago by the Australian treasurer Jim Chalmers, as a former Treasury official, and indeed, as one who managed treasuries industry policy unit for a little while. I have some fairly strong views on industrial policy. So I thought it would be good to cover the rise of industrial policy or the revival of it on the show. So just to clarify industrial policy, that’s where the government tries to deliberately shape the structure, the industry mix of the economy. So forget about comparative advantage, the invisible hand, the government’s attitude is that the market is failing to give us the highly productive industries that we need. So that the government is going to pull the policy levers to change the industry mix. So that’s the idea and it’s going to use various tools at its disposal. It’s going to use tax policy, tax incentives, subsidies, regulations, etc, to bring about the industry mix that that it desires. Historically, I mean, one way of doing that was through protectionist measures, such as tariffs to, to protect domestic in industries, particularly so called infant industries, but tariffs have fallen out of favour. And increasingly, we’re seeing other types of measures used, so particularly tax incentives, they tend to be a feature of modern activist industrial policy. Now, all this sounds terrific in visionary speeches by politicians. But when you think about it a little, especially using economic logic, and when you consider the historical experience, you’ll realise that activist industrial policy isn’t a great idea, after all, which is that’s going to be the basic message of this episode. And to help demonstrate that, in this episode, I’m going to feature some clips from conversations that I’ve had on industrial policy. Some of the clips are from outside of the show. They’re, they’re from a conversation I had with my colleague, John Humphries, John is at the Australian taxpayers Alliance. And we occasionally do a live stream on YouTube and Facebook, where we talk about economic and budget issues. So I’ll feature some clips from that. And I’ll also feature a couple of clips from previous economic system explored episodes. And finally, I will wrap up with some of my thoughts on industrial policy. Okay, now, the first clip I want to play, it’s from that conversation that I had with John Humphries from Australian taxpayers Alliance. And we also had Saxon Davidson from the Institute of Public Affairs on the show. Now, the full conversation, we had the full budget chat, this was the day after the 2024 25 Australian federal budget. So it was around mid May 2024, the full conversation is on YouTube. And I’ll put a link in the show notes if you’d like to watch the whole thing. It’s, it’s a great conversation. Unfortunately, John’s audio was a bit a bit distorted at times because of internet connectivity issues. But it’s still a great, a great video to watch. And we had Senator Malcolm Roberts and also Senator Matt Canavan on as as guests for part of it. So definitely worth checking out. Now, because John’s audio was distorted, I couldn’t reply the bit that sets up this clip, that what John was saying in in it was that the Australian treasurer, Jim Chalmers, has adopted a Shi Jing ping model of the economy. So John being very provocative there. Now, at the same time, John says that the that’s the vision that the treasurer is setting out for the spending for that is largely going to occur in future budget year, so not the current budget year 2425. But beyond that, and so therefore, in John’s view, the current budget itself wasn’t particularly in this interesting. So with that context, let me play the clip.
John Humphreys 06:59
That’s me being a black pill. Maybe there’s a downer here. What am I missing?
Gene Tunny 07:07
Oh, look, I think you’re missing quite a lot. Yeah. I mean, I think this is quite a consequential budget. I mean, I wouldn’t be compare a job as to shooting pig or to whoever else you did, quite yet. I mean, maybe actly. I mean, I think we’re talking about the sort of post war, you know, semi socialist governments of that Li, et cetera, where they wanted to take over the commanding heights. And I think we’re going back towards that maybe not full on communist but, you know, certainly a greater role for government in the economy than we’ve seen. So I think this is where he’s really implementing it. And it’s also, you know, this is his big play. I mean, this is his big play for the leadership. If he pulls this off, he’s going to be seen as a political genius. I mean, he’s got this really clever way of are I so clever, I’m going to bring down CPI arithmetically. And, um, you know, hopefully that convinces Michelle Bullock to cut rates later in the year or just before the election. So look, he’s, he’s playing, he’s making a big play. This is his play for the leadership. I think he could be too clever by half for the reasons we’ve, you know, alluded to already. But yeah, I think this is a very consequential you know, it’s a stark break from the past from previous, even previous, you know, recent from the Rudd administration or from certainly from Paul Keating, it’s a big change.
John Humphreys 08:27
I just clarify that. Xi Jinping is a communist. I think he’s a different sort of non capitalist, but that’s a different issue. Sorry.
Saxon Davidson 08:34
I think I agree with Jane. I think this is a an outline, for the vision for the future of how Jim Chalmers or perhaps even Anthony Albanese views it, you know, where this is rethinking it. This was all in his essay that he wrote about 18 months ago. This is a rethinking capitalism and vision for the future. It’s no mistake, that when the future mate for Australia policy was announced that Albanese referenced the different models from overseas, you know, the IRA, the European Economic defence strategy. Same with the Japanese economic security idea, the SBR act, whereas the Japanese say it’s rethinking capitalism. It’s a new way of capitalism. And this is actually how Jim Chalmers views it as well. This is a vision for the future of budget. This is why it’s an interesting budget is I do have to leave soon, but I’ll leave it at that and say, it’s a instead of Wait, it’s a vision for the future. This is if you have to lose vision for the future.
John Humphreys 09:37
If you have to leave soon. I take that as not immediately. So one last question if you’ll indulge me his vision of the future, but why is it wrong? If we need all these investments, and the money is lack ing and we need to go in a direction? What’s wrong with this policy? The future made in Australia.
Saxon Davidson 09:53
Well, because we’ve seen it before. This is you know, the 1970s protectionist policies have gone back to the few Chuck, like, we’ve seen it before it entered the era of stagflation. And then that’s why that’s how the great economic free thinkers emerged. In the 1980s, we’ve seen this happen before, we’ve seen this movie before. And when productivity is such a such a low in productivity growth is so low and private investment is so low in the economy. You know, as I said, before, rising tide lifts all boats, there are going to be plenty of Australians left behind in this new capitalist netzero future. And we know this, because, you know, no matter how many how much more green energy is brought into the market, or into the energy grid, how I mean, electricity bills are still up, power bills are still up, people are still suffering, this new vision is not a vision that is sustainable. And what actually concerns me more is the is the idea that, you know, after this election, we might be in the, we might be experiencing a very unstable government, which could actually bring forward these policies further to the left if they are in cohorts with the teals and the greens.
Gene Tunny 11:06
Okay, that was that was good stuff from Saxon. I particularly liked his point about the problems in the 1970s. And we’ll return to that soon. One thing I should clarify, in that clip is this point, might the point I was making about how I think Jim Chalmers has been too clever by half now, one of the features of the budget was this $300 electricity bill rebate that was being offered across Australia, and this is on top of some assistance that’s been provided by Well, the Queensland Government and possibly another, or maybe some other state governments will provide assistance. So Queensland Government’s providing the $1,000 rebate. And the idea is that these, these rebates or these subsidies for electricity, that’s going to reduce the the electricity bills of consumers, and it’s because of that it’s going to reduce CPI inflation. And, you know, this is a bit of a hatch. This is what I call that in the note I wrote for the Centre for independent studies with, with Rob Carlin that I’ll, I’ll quote from later. And I mean, it’s a bit of a trick. It’s not really doing anything to address underlying inflationary pressures. And I mean, this, you know, no, no economists have any credibility actually backed? What, what the government was doing here? I mean, I think, I think most economists, I mean, it well, we’re all sceptical, I mean, how, how is spending more money, the solution to inflation, it just doesn’t make any sense. So that’s what I was. I was referring to there. So you can check out that cis issues analysis paper on the budget, I’ll put a link in the show notes for more on that. Another point, I should note regarding what Saxon was saying there, and he was, you know, he I think he was alluding to, or referring to a conversation or point that Senator Malcolm Robertson had previously made, there’s this concern that in Australia where, you know, arguably, we’re pushing too fast in the direction of renewable energy. And that’s been driven by a lot of the policy measures that are really, you know, heavily pushing us in that direction. And, you know, I’m not saying I wouldn’t want to say that we shouldn’t respond to climate change. I do think climate change is, is something that we do need to respond to. But I think there is a legitimate debate, however, about how quickly we do that and what the right policy response is. Now, the way economists think about it, and this was certainly the view in Treasury when I was there is that we shouldn’t be picking winners are picking in particular, or favouring particular types of technology or trying to direct it. The, you know, the response or micromanage the response. What governments should be doing is to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality which is the idea of a carbon price. And you can do that in various well. I’ll come to In ways you can have an emissions trading scheme, you can, you can create a market, and then you have a carbon price that falls out of that or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions or co2 equivalent emissions. Now, you know that most economists would say that is the best way to do it, if you’re going to do something about it. And, you know, that’s sending the signal to the market, that there’s a cost to the environment of, of this pollution. And you leave it up to the industry to sort out the most cost effective way to reduce those emissions, you don’t go and, you know, actively promote particular solutions. And in in Australia, there’s a, there’s a growing concern that maybe we’ve been pushing too hard on renewables policy, measures and subsidies etc, have favoured renewables. And we’ve had, we’ve had to faster pace of development. And that’s creating issues for the reliability of the electricity grid. Now, I’ve talked about these issues with with previous guests. So I might put a link in the show notes, where I’ve I’ve covered that. So just just saying, I don’t want to be accused of being a denialist not caring about climate change, I recognise it is an issue. I’m just saying we need to think intelligently about how we respond to it. And in my view, we’re probably we’re probably not adopting the right measures. And certainly all of these new industrial policy or in measures, particularly some we’ve seen in this latest budget, where we’ve got these generous tax incentives for hydrogen production in critical minerals. Where the government is is, is saying, Well, we think these are the industries of the future. I mean, they may well be but hydrogen, renewable hydrogen, that certainly you could say it’s an unproven technology, or commercially unproven, we’re not sure whether we will be able to develop a commercially viable hydrogen industry. And does it make sense for the government to have this tax incentive just for that industry to try to promote the growth of that industry, the movement of resources into that into that industry and away from sectors which actually could be more productive and which aren’t receiving the subsidy? That’s what I’d be wondering. And there has been a bit of criticism of, of this measure the particularly the hydrogen production incentive, because there are some and critical minerals to because there are some well known billionaires who will likely benefit from those measures. And one name that comes up is Andrew Twiggy, Forrest. And there’s been accusations that these tax incentives are millions, for billionaires. So there’s a really interesting debate going on about that at the moment. Right. Oh, I mean, one thing I should note is that those incentives are worth a lot of money. And I’ll put some links in the show notes regarding that. I mean, they’re talking about billions of dollars of subsidies. So check out the show notes for all of the details. Okay, now, let’s hear some more from Saxon about the budget and what he thinks it should have done rather than pursuing these industrial policies. And as you’re listening, just note that the ringing that you can hear that was a bell ringing in Parliament House in Canberra, that was telling members of the House of Representatives to get back to the chamber. So it’s on the audio, we can hear it, because one of the people on the call was Queensland Senator Malcolm Roberts, he joins us from his office in Parliament House and the bell was ringing in the background. So it’s very loud. He’s in the Senate, but he could still hear the bell. Right. Oh, let’s, let’s see this other clip.
Saxon Davidson 19:43
This budget is interesting because it actually lays bare the lack of a productivity agenda that the current government have, you cannot deal with inflation and the anaemic economic growth that we are currently suffering unless you have a productivity agenda because our rising tide lifts all boats. That is actually how you deal with the cost of living, not with handout how to hand out inflationary spending after inflationary spending, and the lack of productivity agenda is really laid out with this future, this protectionist future made in Australia policy. It is shovelling money out of, well, essentially shovelling money out of our other industries, to put to pick winners and to put into the production of solar panels and other subsidised green energy policies. Senator Roberts was correct that a lot of our productivity issues can be solved by removing a policy of net zero emissions by 2050. You know, this government repeatedly over regulates and overburdens our most productive industries that being mining agriculture, gas, coal, iron ore, and then get them to basically create these previous two surpluses about but they’re not structural surpluses, they’re actually we have entrenched deficits, which the government is hiding behind the political euphemism, unavoidable spending. Besides servicing the debt and national defence, I don’t believe there is actually ever such a thing as unavoidable spending. But I’ll leave it there because I know we’re short for time, but we can sort of Yeah, go on from there. Sex.
Gene Tunny 21:19
And can I ask about your productivity agenda? So you identified you think energy is one of those areas, you’re you’d be against all of these net zero emission policies to get to that target? Is there anything else that your productivity agenda? Well,
Saxon Davidson 21:35
I’d reverse a lot of the industrial relation laws that have been passed in the past couple of years, particularly because we actually got a worker shortage, we don’t actually, it is actually counterintuitive to make our labour laws more rigid than they currently are, especially when they were already rigid before this current government entered power in May 2022. For example, there are bountiful of red tape and tax laws that apply to Australians who wish to work but cannot, such as Australian veterans pensioners and students on the Youth Allowance. people receiving those benefits face a tax rate as high as 66% Starting July one thanks to the stage three tax cuts. And that’s because their their benefits and combined their combined benefits and income is is automatically bound to the lowest tax threshold. But also, if a pensioner for example, if they work a day and a half or minimum wage, they’re all of a sudden caught by a 50% taper rate to their benefits, which means they pay a start in July won a 66% effective marginal tax rate for working. This is why only 3% of pensioners are currently in the workforce. And there was no plan to address this in this current budget. When I play research looked at New Zealand and their equivalent tax system where pensioners are not accountable under the same tax rate. They actually pay a minimum tax rate of about 10.5%. Should they choose to work on their combined pension and their income. And this IRS had found that this was the major reason why, why they haven’t suffered a worker shortage crisis. Since COVID. Our worker shortage and productivity sort of solution is actually mass migration. And it simply hasn’t worked. We still have a worker shortage. And as Senator Roberts alluded to, we’re in a per capita recession. The slice of the pie is getting larger, but the slice of the pie is getting small.
Gene Tunny 23:38
Right? Oh, that’s more great stuff there from Saxon so well done Saxon. Saxon is definitely an Australian economist to look out for in the future. And I what I thought was good about that is I think, Saxon highlighting an area where New Zealand is doing something better than Australia. I think that’s, that’s very effective in an argument because nothing is going to annoy Australians more than hearing that New Zealand is doing something better than us. So given our friendly rivalry, I should say with our Kiwi cousins. Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 24:58
Now back to the show. So what I also like there is Saxons talking about productivity. And he’s emphasising that, well, we shouldn’t be trying to pick winners and, and, you know, have the government favouring one sector over the other. I mean, we should be looking at these more fundamental what we should be looking at what economists would call framework policies or structural policies. And this was always the view we had in, in Treasury. I mean, yeah, sure, you can have policies that price externalities or policies that promote something that is generally beneficial, such as innovation where there might be a market failure, which means you don’t get enough of it. But these policies should be economy wide, you shouldn’t be favouring one industry over the other, what you should be doing is getting the right economic framework policies in place. And so those are policies that promote competition, those are policies that that you know, promote a efficient or flexible labour market. So I mean, we want you know, we need some basic protections in the labour market, I mean, we don’t want people exploited, but at the same time, the more you regulate the labour market, the more difficult you make it, the more expensive you can make labour, particularly low skilled labour, and the more difficult it becomes, and, and particularly if we have all of these rules around, unfair dismissal, etc, it can make employers reluctant to, to hire workers. And I think, I think sextons Making some, some fair points there about the tax system. And the welfare system, we’ve got to be careful how we design those policies. I think that’s good stuff from Saxon, he’s pointing us in the direction of what we should be looking at when we’re thinking about how do we make our economy more productive. So very good. Now, recall from the previous clip, not that one, the one before that Saxon mentioned how we’d seen this movie before. So this movie of heavy government intervention, and Saxon mentioned the economic turmoil of the 1970s, and how that was related to the interventionist policies of governments. Now, that brought to mind a conversation that I had on the show in late 2020, with Amon Butler, co founder of the Adam Smith Institute. We talked about how Margaret Thatcher so the UK Prime Minister, how she came to power after the post war, UK socialist economic model broke down in the 1970s. So let me play you a clip from that episode for you. After I watched the season four of the crown, so the Netflix series on the royal family, and Gillian Anderson plays, Margaret Thatcher, the pm the Iron Lady, and I think her performance is amazing. She really, I think she nails the mannerisms of Margaret Thatcher and the voice. But the depiction of fascia seems a bit slanted or bias to me. It focuses on a lot on the social dislocation that the series suggests were was caused by her policies. People are unemployed and struggling. And it contrast that with well, that Thatcher and also the Queen, and they, it suggests that they’re detached from it all. And there’s this episode where Fagan who was the the unemployed man, I think he was who broke into Buckingham Palace and ended up speaking with a queen for 10 minutes, it paints a very sympathetic portrait of him, in contrast to Thatcher. So I wanted to speak with someone in the UK about just what the situation was like in Britain in the in the 70s. Would you be able to describe that, please, amen. So we can understand how Facha got into power. What What was she trying to, to address?
Eamonn Butler 29:40
Well, I can I can describe that very easily because I wasn’t the only one. What am I? Well, two of my colleagues did exactly the same. In the mid 1970s, I joined the brain drain, because I went to America, because I thought there was no future in The UK that the trade unions were running country, people were seriously saying that it was going to end up nearer to an Eastern European country as they were there, rather than a Western European country. And a lot of us thought that there’s no point in sticking around here. And so a lot of us immigrated, large numbers of people simply left the country. And of course, large amounts of money left the country as well. But investors thought there’s no point in keeping your money in Britain. It’s a big world and your investments in Britain look dire. But I mean, in 1939, when Mrs. Thatcher took office, the state controlled everything. When you woke up in the morning, obviously, you wake up to or the BBC, which is a state organisation, of course, you still do. But you wake up to that on perhaps your alarm radio, which is powered by electricity, which was produced by the states, you go downstairs and you, you put your state produced egg into a state produce saucepan and you fill it with state produce water, and you will put it on your state produce gas oven, using state produced gas and so on, you would take your kids to the school in your state car or your state bus. And every part of your life was run by the state because they control all of the key industries, coal, shipbuilding, steel, transport, everything. And of course, the trouble is that when you give people monopolies, they abused them. And these were state monopolies and they were abused. And the the product was expensive, particularly for taxpayers who had to pay for all these things. And everything was run through the convenience of the workforce. And so the trade unions became exceedingly powerful. And of course, they had special legal privileges as well that had been granted them so they could, they could have wildcat strikes and secondary picketing, and nobody could do anything about it. If you pick it came around your your factory, there was nothing you could do, even if you weren’t involved in the dispute. So they they knew that they could bring the entire country to a halt. And, you know, they, during Mr. Sanchez time, they very nearly succeeded. But she realised that that had to be taken on that. People blame her for unemployment, particularly in the north of England where coal mines were closed down and steel mills close. But that wasn’t her fault. The problem was that we had wasted our time and energy and money on these industries decades before, that it was cheaper in 79, to load coal from take coal from Australia, and landed in Southampton than it was to pull it out of the mines in South Wales. It just made no economic sense at all. So Mrs. Thatcher realised that we couldn’t go on like that. And she knew it would be painful. And but she was determined enough that the country would go through that pain and it will come out better the other side, which it did, yes,
Gene Tunny 33:16
yes. So do you remember or were you in the States at the time the so called Winter of discontent, there’s a there’s a photo in this book, the commanding heights by Daniel Yergin, and a co author is a photo of Leicester Square. In the West End in London, it’s been used as a garbage tip, in this so called Winter of discontent. 1978 79. So before Margaret Thatcher was elected, was that because of the gobos, the garbageman were on strike, whether it just strikes across the country, before Thatcher got in.
Eamonn Butler 33:57
Everybody was on strike because the Labour government which lasted until the middle of 1979, realised that it had run out of money, and that it couldn’t keep on paying higher and higher wages to public sector workers, which was most of the workforce. And the Prime Minister James Callaghan famously said that at the Labour Party Conference, and there was an outrage that and so the trade unions, protesting that they weren’t getting pay rises, basically knew that they could bring the country to a halt so that they would put that pressure on the government in order to get higher wages and better conditions. And the government simply said, No, we can’t do that. There isn’t any money. So then, everybody went, I mean, that the whole public sector was was hit by strikes and it wasn’t just garbage in Leicester Square in the middle of London, which I remember very well. And in fact, I think we did a little report on, on how to get out of that crisis. And we use the same photograph of the garbage and rats running around in in the centre of the tourist centre of London, if you can believe that. And then went on Barrett. And there was a famous case where somebody was being transported to hospital over the Yorkshire Dales, in the snow. And the the ambulance drivers got a message that they were now on strike, they had to down tools. So this was he stopped out, make her way home. And it’s that sort of feeling. Business and so it was a winter of discontent. And it was it was a dire period. And I think that convinced the British public, we couldn’t go on like this, we actually had to, to do something else. And Mrs. Thatcher was clear in her vision that something needed to be done and, and so that’s why people voted for it.
Gene Tunny 36:07
Okay, so I think that’s a good reminder of why there was a change, of course, in in economic policy in the 1980s. In Britain, under Thatcher in the US under Reagan, and in Australia under Hawke and Keating, the old interventionist why that wasn’t working? Well, arguably, it never worked. We should remember that. We should remember that when we hear all of these growing calls for more government intervention for industrial policy in particular, which is the topic of this episode. Now, another clip, I want to play, it relates to one of the great failures of of industrial policies. I think there are many failures. There, there are too many to go through this episode. I mean, maybe I’ll come back. I mean, you know, I should probably mention, you could argue there are some successes, but I think the the failures are more numerous. And, and probably more likely, because if if something is commercial, if it’s economic to invest in, then the private sector is probably going to be undertaking it already. It’s going to be investing in it. So you have to argue that are there some market failure that’s preventing that and, I mean, you know, that can be that can be difficult to argue. So yeah, I mean, generally I’m very sceptical and I think the evidence is weighted toward the failures and one of the great failures of industrial policy was the Concorde. Supersonic aeroplane. So the Concorde supersonic aeroplane, as we know, it was an economic proposition. It, it flew for maybe, well, a few decades, it’s no longer flying. It just wasn’t commercial for either British Airways or, or Air France, I think it was. Now Concorde. It was developed in an era when there was a great belief that governments could shape the future of industry, particularly by encouraging r&d and the take up of technology. The UK Labour leader, later Prime Minister Harold Wilson, he gave what was by all accounts and electrifying speech in 1963, to the Labour Party Conference, about how his government would use the white heat of technology to transform Britain’s economy. It was a grand vision and Concord was an important part of that vision of that vision to transform Britain’s economy. So, you know, this was a vision that was you know, it started before Wilson, but, you know, there was almost a pre war Well, sorry, there was almost a post war consensus between the Conservatives and labour regarding the role of government, the role of government to steer the economy but Wilson really crystallised that, in that that famous speech of his and Concorde ends up being overseen by Wilson’s government for during the late the mid to late 60s. And and so I think it’s it really is an important part of that, of that vision of, of the white heat of technology, trends forming the economy. Okay, I spoke about Concord with my adept economics colleague Arturo Espinosa in a march 2022 episodes. So let’s take a listen to this clip. And if you want to learn more about Concord, then definitely check out this episode. But let’s hear the clip. We might chat about what Concorde is, I just want to make sure that if you’re listening, and you’re unfamiliar with Concorde, and I’m guessing you probably know a little bit about it, because it’s such an iconic aircraft, and it’s such a beautiful design really sleek and the delta wing. And that, that knows that. That it’s like a beak, isn’t it like the beak of a bird? I think they call it a droop nose, because it can, it can move around. So depending on what stage of the flight you are, it will either be in the rock than the standard position or it will drop down. So I think when they were coming into land, they would they would drop it down just to improve their visibility. So yeah, it’s got a it’s got an interesting nose there. And yes, it’s, as you mentioned, it’s supersonic. So it can travel faster than the speed of sound. And I think actually travel about two times the speed of sound. So at Mach two, so supersonic when I was chatting with Tim, I said, Oh, is it hypersonic? And now it’s not hypersonic. So Tim corrected me it was supersonic. So supersonic is faster than the speed of sound. And hypersonic is five times the speed of sound, at least I think there are some hypersonic missiles that have been developed that have that I’ve seen while I’ve seen in the news reports. Okay, so yeah, Concorde was it was a joint project, it was a joint venture in a way between the British and the French governments. And the name for it came from an agreement that they reached in the early 1960s, I think was a treaty was signed on 29th of November 1962. And so what you had was, this is something that came out of the 1950s. And you had both there were British and French companies that were investigating supersonic, air travel, and I think the Americans were looking at it too, but the British and French, they reached an agreement whereby there would be a joint project because there was a British company that was looking at it, the British Aircraft Corporation, and that was being funded by the British government. So they were providing funds for research and development by that British Aircraft Corporation. And there was also a French company, which was state owned sued aviation, which later became Aerospatiale. They were looking at it too. And so the two governments got together and decided to enter this joint venture for Concorde, whereby they would jointly develop this aircraft that shared the development costs. And they would also they would split the production of it across Britain and France, too, with a view to creating jobs and all that. So it was a British and French government project. And I mean, I would argue that this is a good example, that there’s there’s a few economic principles which come out of the whole Concorde experience. And we talked about the sunk cost fallacy. Well, the fact you should ignore sunk costs. One, one principle, or close to a principle, I would argue is that governments need to be very careful about going into business. I mean, governments really, governments really shouldn’t be picking winners or picking projects. They should be doing the core business of government, I mean, National Defence and the justice system and mean, arguably some assistance for health and education, rather than trying to develop a new supersonic aeroplane. I mean, when you’ve got governments making these decisions and funding r&d for this sort of thing. I mean, it’s, it’s probably more likely it’s not going to be a commercial proposition, and it’s going to be a waste of money. So that would be one thing. I would argue Do you have any, any thoughts on that tomorrow, of course,
Arturo Espinoza Bocangel 44:37
and that there is an interesting point. So in order to see what is the real scope of the government, right, definitely the government should focus on other issues that are more relevant for people instead of promoting this kind of embarrassment that as we We have seen is worth a failure in terms of economic business perspective, right. So, I think,
Gene Tunny 45:11
yeah, I mean, it’s the sort of thing I mean, it could have, who knows? I mean, maybe, maybe if things weren’t right, and the oil price didn’t increase three or four times over what it was previously, after 1973. Maybe the the economics of the whole project would have been better. And it could have been, it could have been more of a mass proposition. I think the mass market proposition, I think the problem that they ended up having was that it became a real niche product. It was really only wealthy people, pop stars and, you know, CEOs of Fortune 500 companies who could actually afford to fly on Concorde. As we can talk about LIDAR. I mean, I think tickets ended up being about in today’s dollars, I mean, I think over 10,000 US dollars, really, I mean, expensive tickets. Yeah. And so you really have to have a you really have to have deep pockets either don’t you have to be someone who really doesn’t care how much they’re spending, or it’s just absolutely time critical that you need to get from New York, New York to London or the other way or Paris to New York, you need to get there in three hours or so. It was a good fly incredibly quickly. Now, I think the figures I’ve seen is that, so this thing’s flying it basically two times the speed of sound, whereas a Boeing 747 flies at point eight four times the speed of sound, so it’s not supersonic. So it can fly about to the Boeing 747 can fly about 900 kilometres an hour, whereas the Concorde could fly at 2172 kilometres an hour. So just incredible. And it’s 60,000 feet too, so Wouldn’t that be amazing to have been to have been up that high? And so it really ended up just becoming a transport option for the rich and famous in a way. And I mean, one example of that, Have you have you heard the story about the Live Aid concert and Phil Collins, how he used Concorde to fly from the Live Aid concert in London at Wembley Stadium. And so he performed at Wembley, and then he hopped on the Concorde. He got a chopper from Wembley to Heathrow Airport, and helped on the Concorde and then got the Concorde. The JFK, and then he ended up getting it was. It’s pretty, it’s a huge logistical job. Where is it? Yeah. And he took a British Airways Concorde flight to New York City before taking another helicopter to Philadelphia, just so he could perform at at the stadium and in Philadelphia, which I think might have might have been JFK Stadium in Philadelphia. That was in 1985, July 1985. So the big Live Aid concert for I think it was to raise funds for to help address or alleviate the suffering of people in famine in Ethiopia, if I remember correctly. So yeah, that’s one of the famous examples of the use of the Concorde. Que so, yes. The Concorde. I mean, it was such a beautiful aeroplane, but just didn’t stack up. Unfortunately. I mean, maybe one day we will have commercial supersonic travel. That would be amazing. But it didn’t work out. For for the Concorde. Right. Oh, to wrap up, I would like to first quote from that issues analysis paper for the Centre for independent studies that I talked about before. This is a paper I wrote with Robert Carlin. And in that paper, we wrote that activist industrial policy has chalked up numerous failures in history, including a domestic car industry that ultimately was unviable despite decades of tariff protection and billions of assistance with his embrace of activist industry policy. chamas is ignoring history lessons, both here and overseas. So yep. I was referring to the car industry in Australia, which is was, you know, Australia was proud of its current history. And we produced some great cars at times, particularly in the 1970s. And there was, you know, there was a great rivalry between Ford and Holden, at that was featured in the famous race at Mount Panorama in Bathurst. But alas, we just the policy settings weren’t the right policy settings. And we didn’t get a sustainable car industry, we had a car industry that could only be viable with with government support, and ultimately, even the government support that was being provided was insufficient to keep the industry going. So we don’t have any of the major car manufacturers here in Australia anymore. So that’s, that’s a lesson about, you know, the challenges of industrial policy, just how well, if you’ve listened to this episode, you will understand that I don’t think it’s a good idea at all. I’ll end with another quote. And it’s from no less than authority, then Adam Smith, walk a lot of passages in Adam Smith’s writings, this one is still fresh. It’s one of my favourites. And it’s one that I think that everyone in political office, they should ponder it every time that they consider some new intervention in the economy. So this is what Adam Smith wrote over 250 years ago. Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things. All governments which thought this natural course which force things into another channel, or which endeavour to arrest the progress of society at a particular point, unnatural and to support themselves are obliged to be oppressive, and tyrannical. That’s brilliant, isn’t it? I imagine that economists will still be quoting Adam Smith in 250 years time, and will have accumulated many more examples of the failures of activist industrial policy. Although I should be hopeful that economists will eventually win the argument against politicians with their grand visions of transforming the economy. I live in hope 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 at economics explore.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 later writing. Thanks for listening. I hope you can join me again next week.
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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 Podcasts, Google Podcast, and other podcasting platforms.
Economics Explored host Gene Tunny speaks with David Stockman, who was President Reagan’s first director of the Office of Management and Budget. Stockman discusses his new book, “Trump’s War on Capitalism,” and shares his frank and fearless commentary on the former president’s economic policies. In his foreword to the book, Robert F. Kennedy Jr wrote, “Stockman has become one of the nation’s most steadfast and eloquent crusaders against the corrupt merger of state and corporate power.”
Government spending and lockdowns during the Trump presidency. (10:04)
Trump’s handling of the COVID-19 pandemic and its economic impact. (15:06)
COVID-19 response and blame game. (20:05)
US economy under Trump, job growth, and performance. (25:51)
Economic growth and tax cuts during Trump’s administration. (30:10)
Monetary policy and inflation during Trump’s presidency. (36:26)
Corruption in US government and military spending. (41:56)
Alan Greenspan’s legacy and economic challenges. (49:54)
Takeaways
David Stockman argues that while Trump portrayed himself as a capitalist, his fiscal and monetary policies like large tax cuts, increased spending and pressure on the Fed to keep rates low were reckless and a threat to capitalism.
According to Stockman, the data shows the US economy was not in its strongest position ever pre-COVID, as Trump claimed, with key metrics like GDP growth, job growth and investment lower under Trump compared with some previous presidents.
Stockman believes Trump bears responsibility for the unprecedented pandemic spending and deficits, as he could have resisted lockdowns but instead endorsed huge stimulus packages.
Stockman views Trump as the worst president for sound money policy due to his pressure on the Fed to keep rates low.
Transcript: Reagan’s Budget Boss David Stockman on Trump’s Economic Policies – EP224
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.
David Stockman 00:04
He’s campaigned against the Fed, but he wants an easier fed, okay, I want to read the Wall Street doesn’t like totally different I want a Fed that’s proven that pursues sound money policy Trump wants a fed that prints even more money than the flood we already have.
Gene Tunny 00:28
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. My guest this episode is David Stockman, who was President Reagan’s first director of the Office of Management and Budget. Prior to the Reagan administration, he had served as a congressman. And after he left the administration, he had a career in private equity in business. David has a new book out titled Trump’s war on capitalism, and I was delighted to speak with him about it. David is a frank and fearless commentator, and I was never left wondering what he really thought about the former President’s economic policies. Indeed, David has a long history of Frank commentary. He first became famous for some frank remarks he made in 1981, to journalist William Greider about the Reagan administration’s budget strategy is also tangled with Paul Krugman, among other prominent commentators in the US. I really enjoyed this conversation with David and I hope you do too. Regardless of whether you agree with him or not, I think you have to respect his ability to argue his points. And he will demonstrates that ability in this conversation. I get the sense he is incredibly resilient as he’s copped a lot of criticism over the years, he’s had to make a multimillion dollar legal settlement with the SEC. He’s even a defender of criminal charges, they did end up being dropped by the SEC, I should note, all of this is to say that he’s had a very interesting career and life experience. And he’s someone worth hearing from, in my view. Now, David expresses some very thought provoking views in this episode, and I expect you’ll have some thoughts on what he says and you may have some thoughts on some of the things I say. So please get in touch and let me know your own thoughts. My contact details are in the show notes as our links related to the book and about David Righto. We’d better go into the episode. I hope you enjoy my conversation with David Stockman about Trump’s war on capitalism. David Stockman thanks for joining me on the programme.
David Stockman 02:46
Very happy to be with you got a lot to talk about here, I think. Absolutely.
Gene Tunny 02:50
Well, you’ve written a very provocative book a very, very in depth book looking at the policies of the former President Donald Trump and prospects for a new term if the minute is looking very possible that Donald Trump could be in the White House again next year. So your book is called Trump’s war on capitalism. Now, this is, this is interesting because too many of us, Donald Trump is the exemplar of the American capitalist. And yet you argue that he is undertaking a war on capitalism. And even more strongly, well, strongly. You argue that is a clear and present danger to capitalist prosperity. Could you explain David, how do you how can we reconcile these things? I mean, Donald Trump does seem to be the exemplar of a capitalist, but yet he’s a threat to capitalism. How do we reconcile these facts?
David Stockman 03:58
Well, those are great questions. I don’t think really, he’s an exemplar of capitalism. And we can get into that. I think he’s an exemplar of getting lucky when the Fed created so much inflation and asset prices and made debt so cheap that if you were a speculator, in New York City, real estate or elsewhere, you possibly made a lot of book, wealth, but I don’t think it was capitalist genius behind it. That’s the first point. The second point is that his policies were really almost anti capitalist in some common sense notion of conservative economics. To have a healthy capitalist economy. You need three things. One, fiscal rectitude, you can’t be running up the public debt, spending like there’s no tomorrow and having the government grow and mushroom and impinge in every direction on the economy. You can’t have easy money and a central A bank that is flooding the system. With cheap credit and excess liquidity, you can’t have a government that is really anti free market, which is what, you know, trade protectionism is all about. And he’s the biggest protectionist in the White House. You know, since I don’t know Hoover set, and Smoot Hawley in 1931. So all of his policies were really in the wrong direction. Now, I do concede in the book, that the one abiding virtue that Donald Trump has is he’s got all the right enemies, okay. The establishment hates him, The New York Times The Washington Post, CNN, The Washington, what I call you, in a party establishment, the leadership and the long standing careerist of both parties can’t stand him. But basically, it’s because he’s an outsider is because he’s unwilling to conform, and he’s pretty obnoxious, and unpredictable. That’s why they’re against him. The point of the book, though, is none of his power. And his policies were wrong, even if he had the right enemies. And nothing that he did help the economy or addressed, the huge long term problems we have of a runaway public debt of a government is way too big and too costly and too intrusive. And especially at the heart of the matter, a central bank that is out, it’s a rogue Central Bank, it’s out of control. And yet Trump was constantly on their case, demanding even easier money, lower interest rates, even more, you know, of the same that got us into, you know, the huge bubbles and troubles that came from them. So, the point of my book was to say he had a chance he’s got her four year record we can look at it is terrible, it offers nothing in terms of remediation of our great problems and putting us in a different direction for the future. So, you know, don’t waste the opportunity. And you know, that’s about where I come out.
Gene Tunny 07:13
Right. Okay. So you write about what you call the Donald’s reckless fiscal and monetary policy. So we might talk about fiscal first. Now, among other things, you talk about the most grotesque act of fiscal malfeasance in American history. So that was something that Trump was associated with you argue? Are you talking about the the big tax cut the Trump tax cut in 2017? Is that Is that something you see as as reckless,
David Stockman 07:44
and that’s part of it, but I’m looking at the overall picture, and the data, the big top line data on spending and borrowing on the public debt. Now, let’s just take it down to the core metric, which is the public debt. I mean, if you’re running huge deficits and spending, far beyond your willingness or ability to tax, it comes out in the public debt. When Trump became president in round terms, that public debt was about 20 trillion. When he left it was 28. That’s 8 trillion of growth, a trillion of debt, public debt. In four years, you let me ask the question, when did when did we get the first 8 trillion of public debt? And how long did it take us to get there? The answer is in two or three, it took us 216 years 43 presidents to rack up a trillion in debt. He did it in four years. That’s kind of the bottom line. It puts it in perspective, in terms of how big the air was. If we look at other more conventional measures, you get the same picture, the average deficit to GDP and that’s another good ratio, you know, how big is the deficit or surplus relative to the national economy? It will the deficit average two and a half percent of GDP for all the presidents from the early 50s through 2016. The deficit under Trump’s four years average 9% of GDP, almost four times more than it had been the average going back for. If you look at spending, I think that’s important. And again, let’s take the inflation out of the picture and looked at it in inflation adjusted for real terms real spending. Trump average 7% per year during his tenure, for instance, big spending Obama right before him was 2% per year in real terms. Reagan when I was there was 3% per year. In real terms, the average was two and a half. So again, Trump was you know, three times, in some cases four times more In terms of the growth rate of spending then haven’t heard historically. So you know, if when you go through those kinds of measures, and then of course, it all culminated, I just want to put this last point. And in 2020, when he made the huge mistake of shutting down, locking down the economy based on very bad advice from some very bad doctors that worked for the federal government, if he had any principles about, you know, property rights and personal liberty and constitutional due process, he never would have ordered a lockdown to the economy. But in any event, he did that in 2020. And as a result of that, we had just an explosion of spending to bail out the economy that the government had ordered to close. And I’m talking about the 2 trillion worth of stimulus measures that were passed with his urging, you know, with his support in 11 days, I mean, this was an $800 800 page, I mean, Bill that contain 2.2 trillion, where the so called Cares Act, you know, banned unemployment insurance benefits, that checks 200 million households, massive amounts of money to education, health, other institutions. The point is, they passed 2.2 trillion in spending and 11 days, nobody read the 800 pages. And that was just the warm up. He then, you know, insisted on the second stimulus or COVID Relief bill in December that he signed right before he left, that was another 2 trillion. And it paved the way for the last 2 trillion that Biden put on top of it, when he came in, basically to implement an extension of all of the freebies and free stuff and giveaways that Trump had put into place during 2020. Well, the reason I’m dwelling on this is it added up to $6.5 trillion of spending, almost sight unseen in terms of legislative review, and scrutiny, it happened in 12 months, march 2020, to march 2021. And that in itself was equal to 150% of the pre existing budget. In other words, in 12 months, they passed the emergency spending that was 1.5 times bigger than the entire federal budget, defence, Social Security, interest payments, student aid and all the rest of it. This is how far it was out of control. And he was sitting in the Oval Office with a veto pen in his hand, theoretically, but obviously, his stubby little fingers never gotten here, the veto pen, he didn’t veto anywhere in either he waved it on. And so therefore, you have to blame him for the most outrageous edge Regis outbreak of fiscal madness that we’ve ever seen in peacetime or wartime in this country. And when you prove that’s where, you know, that’s where you come out that you know, as his record is undeniable, the facts are all there. Why in the world, the Magga fans and Republicans or the Republican rank and file, want him to have another chance is really beyond me. But I wrote this book test, just in case someone cares about, you know, the reality and about the facts, that if they do put him back in, they’re probably going to put him on the ticket. And if the country puts him back in the Oval Office, there is no, it should be no confusion about what you’re getting, you’re getting a worse, you’re getting a exacerbated case of all the problems that we have already today. Rod,
Gene Tunny 14:05
okay. In terms of that spending, I thought that was interesting. You compare the growth rate of spending under Trump versus other presidents, including Reagan. And I was surprised it was. Yeah, there was that stark difference that’s due to that, that pandemic stimulus is that that, you know, one and a half times the budget that was approved in whatever, 11 days or however many, there was an extraordinary fact you mentioned there. Now, one thing I’d like to ask you about because I’m in Australia, so I’m less familiar with exactly what happened in the States than I am here. I mean, I’ve seen it, you know, I saw all the commentary and but you said that you blame Trump for the lock downs or partly, you blame Trump for the lock downs. i The impression I got was he was king piny against the lock downs. Am I wrong on that? I thought it was done by the states.
David Stockman 15:06
No, but yeah, it’s a great question. But if you go back and look at the calendar, the Tick Tock day by day, week by week, it’s very evident that another reason why Trump is on Fit is that he doesn’t have any principles. He doesn’t have any guiding philosophy, he flies by the seat of his ample britches, and whatever seems to strike is fancy at any moment in time, he goes with me because he’s so damn arrogant, that he doesn’t even begin to understand what he doesn’t know. And basically, when it comes to economics in the world, and governing a $26 trillion economy, he knows very little that maybe he sees basically ignorant. So when when the COVID came along for a few days, he was saying, Well, you know, the flu every year to X number of people, 38,000 50,000 people succumb to the flu one way or another, we’re used to this very, what’s the crisis, six days later, as a result of a lot of pressure that came into the Oval Office led by, you know, his son in law, Jared Kushner, bringing in a couple of scientists who wanted a chance to really exercise some power, I convinced him that it was not only not the flu, but it was something like the Black Plague, and that every all stops had to be pulled out. And that’s on the 16th of March, he gave this speech, you know, two weeks to flatten the curve and turn Dr. Fauci and Dr. Burks and the rest of that crowd of Mal practising doctors loose on the country. And before we know it, the entire economy was on its knees and I got data in the book that lays out how severe this was. Two measures, I think, give you a dramatic a pretty dramatic indication of the hammer that Donald Trump brought down on the US economy and therefore the world economy at the end of the day, on March 16, when he authorised you know, two weeks to flatten the curve and turn the CDC loose on daily economic life. First in the second quarter, when it hit that was ground zero of the lockdown second quarter 2020 GDP in the United States declined at a 34% annualised rate, what does that mean? Well, in the worst recession that we’ve had in the post war period, which is the Great Recession, you know, in 208, the annualised the redonk, fall in GDP was 8% during the worst quarter, okay, the worst quarter was 8%. And in the second quarter of 2020, because of the government ordered lockdown, not some kind of cyclical, you know, tumble of the economy, the government ordered the Trumpler lockdown, GDP declined at a 32% rate just, you know, startling, you know, on precedent. Now, the other measure I use a lot in the book is if you look where it hit the hardest lockdowns, it was obviously in my I call the social interaction venues, restaurants, bars, sports, arenas, gyms, malls and the rest of it. in that arena, that area of the economy in the BLS statistics, Labour department’s statistics is called leisure and hospitality as you know, all those industries are in that grew in April 2020, which is ground zero, the heart of the lockdown hours worked in the leisure and hospitality sectors declined by 56%. Compared to the previous month, half of the employment half of the out and not just headcount answer people but actually hours worked, disappeared. Now how big is a 56% decline in employment in that core sector of the economy? Well, it’s so big that it reduced the actual working level. In other words, the hours work the number of people on the pay pay clock to a level not seen since the spring of 1979. In other words, it rolled back the clock 43 years in terms of the slow and steady and relentless growth that occurred in that sector. Are was wiped out in 30 days and it’s taken years to recover. And we’re still not back to where we were in February 2020. So the lock downs are fading, you know, because as time passes things that seemed pretty bad, right at the moment they were happening suddenly, you know, see maybe not so bad, but the lock downs were dramatic. Yeah, they were, you know, the biggest, you know, Thunderbolts to hit the economy. I think it ever at least in the United States, so, he that was the consequence of Trump. swivelling on a dime from nothing to worry about to the sky is falling. And then And here’s where I really put the pin the tale of the donkey, so to speak. He created this thing called the White House Coronavirus, Task Force. And it met day after day and they had a big press conference. At the end of the day. It was like a reality show from the White House Press Room day after day in which Fauci was up there. Burks was up there, and it Hance Vice President Pence and others. And they just scared the living daylights out of the country, even as all of these orders from the public health departments were being implemented at the urging of the CDC and the White House. So this, this whole lockdown catastrophe, was born, bred and perpetuated from the Oval Office, and I go by the famous aphorism you might not be as an Australian might not be aware of it. But Harry Truman, famous president, you know, at the end of World War after World War Two, and had this had this slogan on his desk that said, the buck stops here. In other words, I am going to take responsibility for what happens? Well, in this case, the buck stops with Trump on the whole disaster of the COVID response to pandemic response to lock downs, the damage that it did to the economy and the costs that were generated in terms of borrowing and deficits and the public debt, you know, all of it, you have to ultimately put on his doorstep. Because if he had stuck to his guns, listen to this, this is unbelievable. If he had stuck to his guns of March 11, when he said, you know, this will be handled in the normal way. We’re used to these, you know, viruses coming along, and we can handle it. If he had stayed with that position. None of this disaster would have happened, right? It wasn’t the virus that caused the economy to plunge into a black hole. It was the lockdowns.
Gene Tunny 23:08
Right, just on the what Trump could have done. I think this is an interesting perspective. And it’s Yeah, I think this is probably this might be the perspective that gets you the most pushback or reaction. I think it’s an interesting proposition. What I’m interested in is whether like, say Trump just said, Okay, we’ll ignore the we think there’s a minor virus. I’m not saying necessarily it is. Let’s say Trump says that. Could he have actually directed the states? Could he have directed? Who was at Andrew Cuomo and Gavin Newsom to open up? Could he have done anything? Did he have the levers to be able to do that? Yes.
David Stockman 23:50
Because they responded, I don’t think they were sitting there in Albany, New York, where Cuomo was where Sacramento and said, hey, you know, this, these reports, we’re getting sound like this is a pretty terrible virus. We’re gonna start systematically closing bars and restaurants and malls. And they were doing that in response to the guidelines, the recommendations, and the pressure from the CDC, which was the federal government, and it was controlled, obviously, by Trump, and the CDC and in turn was responding to the White House Coronavirus Task Force, which was being run by Fauci, which was being run by dance is as delegated by Trump. So it was all coming right out of the oval office there. They wouldn’t. I don’t think and I’ve been in politics since the 1960s in America. So I think maybe my judgement is not totally bad. But I’m absolutely certain that without the imprimatur without the urging without all the hysteria, coming from Fauci in that White House Task Force, these people would have not, they wouldn’t have stuck their neck out and closed down their economy, because every one of them was creating political problems for themselves. It wasn’t you know that this was like some great winning political opportunity. Let’s close down all the gyms and in the state, like they did New Jersey and New York, and let’s shut down the malls and let’s put the restaurants out of business. They’re sitting there saying, Yeah, this would be some real good politics for us and forced that the governors weren’t saying that. They were doing it all ultimately, because they were being pressured. They were being encouraged by the federal government and particularly by the Trump White House.
Gene Tunny 25:51
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 26:26
Now back to the show. crass now about one of the things that President Trump would claim was that he had the greatest economy ever the economy was in the strongest position ever. And then it was the virus that COVID that came along and, and wrecked everything. But you, you actually question that you don’t think that the US economy was the greatest economy ever pre COVID? What What’s your what is your analysis? Show you there? You haven’t What do you conclude there?
David Stockman 27:00
Yeah, good question. I don’t question it myself. The data proves it. In other words, I just did a lot of research and served up the data that comes out of the statistical mills of the US government. And you can measure it seven different ways. And you get the same answer. But let’s start with real growth. After all, that’s the big, you know, summary metric for economic performance and health. And real growth of the economy was grew at 1.5%. During Trump’s four years, the lowest rate of any presidential term, going back to Harry Truman, again, to 1950, the average over that entire period, no, nine presidents 11 business cycles during that period, recessions and recoveries, we had a couple of wars during that period, we had any number of crises. So in other words, what we’re talking about here is the long term trend performance of the US economy from 1954 to 2016. Right before Trump got in it averaged 3.04% Or double the growth that occurred during the Trump period. So you can on that on that summary, you can’t make that statistic go away. That’s that’s the major the whole ball of wax. And his growth rate was half of the norm. It was a third, basically, of the highest performance with Kennedy Johnson was 5%. It was maybe 40% of what I remember during the Reagan period, when the growth rate was 3.5%. So the idea that he kept Tweety and keeps to this very day complaint, you know, talking about the great Magga economy that he brought the greatest economy ever is totally refuted contradicted by the facts. Now that’s one of them. We can look at job growth. And of course, the answer there is pretty interesting. He’s the only president since Herbert Hoover, in which there was no job growth. You’d never know that from listening to Donald Trump’s boisterous speeches, but the fact is, when he took office in January 2017, there were 145 point 5 million jobs, non farm jobs in the US when he left office in January 2021. There were 142.5 in other words, the job shrunk by 3 million jobs during his term nothing like that ever had before every other president, there’s more jobs than when they start, not because of their virtue. Do necessary or are there policy is because a capitalist economy unless it’s really thwarted, tends to expand and grow and create more jobs. Trump was the exception. Now you can say, Well, again, it was the lock downs, and it was the spring of 1920 20 catastrophe. But even if you take that out of the picture, and you look at Trump and pretend his, his administration handed in February 2020, which is, you know, the month before the COVID, the pandemic hit, he averaged 145,000 new jobs a month, in that period, until the eve of the COVID, or pandemic hit to the economy. Obama had 215,000. So he was a third shorter than Obama. And Obama was considered pretty bad. If you look at overall employment growth, even taking the pandemic period out, the growth rate under Trump was about 1.4%. And it average two and a half percent in the decades and decades before. In finally, I think the, the, you know, the bottom line measure of economic health. And, you know, the this standard of living on Main Street, you know, for the broad middle class is really per capita, GDP, real GDP per capita, if it’s rising, that means the living standards are rising. And if it’s not, you have a problem. But the average again, during the 60 years post war was 2.5%. And during Trump’s period, it was 1%. In other words, the growth rate was, you know, barely two fifths of the normal rate on this basic metric, which is real GDP per capita. So when we can look at other things to the savings rate collapsed during his administration, despite the big tax cut, we haven’t gone into in detail yet. But despite that, investment growth was lower during the Trump period, than in any other administration going back again to 1950. So, you know, when you ask the question, Where’s the proof? Is it in the pudding? The answer is no. There’s there’s no proof whatsoever of his boast. You know, about the greatest economy ever. So what I say in the book, is it wasn’t the greatest economy ever. It was really the greatest con job ever. Right.
Gene Tunny 32:47
Okay. So on the tax cut, you mentioned the tax cut before you mentioned that this didn’t. In your view, it didn’t lead to, you know, a, an economic surge or surge in investment. And can you explain what happened with that tax cut? And where did you where did the money go? You talk about that in the book?
David Stockman 33:10
Sure. Well, if you want to look at the tax cut, you have it was clearly skewed to encouraging reinvestment by business, both corporations and, you know, individual proprietors. That’s why the corporate rate went down from 28 and 21. Why they put in the equivalent 20% deduction for unincorporated businesses. Now in Aw that cost 1.7 trillion over the first 10 years in revenue loss. And that was supposed to then, you know, cause a surge of investment. But if I look at the investment rate, by that I mean, real investment in the business sector, in the five years before the tax cut became effective in 2018. It was actually well higher than the growth rate in the next five years after the tax cut took effect. So if you spend $1.7 trillion that you don’t have, because it was all deficit, finance, they didn’t cut spending to pay for the revenue loss, and you get not no gain at all, but actually a worse trend performance in real terms, inflation adjusted terms, then you have to ask, how could you possibly justify that if you were borrowing money for a huge rate of return? You might argue, well, let’s let’s try that. But if the rate of return is even smaller than what was already built in, it’s dubious now where the money went them because clearly, corporations and individual proprietors paid a lot less in taxes. The answer is into a record surge in stock buybacks, and in corporate m&a deals and in other forms of, you know, leverage recaps and so forth other forms of financial engineering that basically flow money to Wall Street and to the top of the economic ladder, because that’s where all the stock is owned. In other words, 93% of the stock in the United States is probably true in Australia as well, I’m not sure. But 93% is owned by the top 10% of households, and bout 48% is owned by the top 1%. So if you have a huge corporate tax cut 1.7 trillion, that produces no gains in investment and therefore, future growth and job creation, but instead ends up being flushed back into Wall Street, you know, in the form of stock buybacks and other financial engineering, which then flows to the very top of the income scale. You know, you’ve got a double bad, okay, you added to the debt that the whole public is going to be paying service charges interest on forever, and you put the money, you took the money out of the economy and Senate, to the top of to the very wealthy and to the most affluent people next. Oh, sense. Raw.
Gene Tunny 36:27
Okay. I’d like to ask you about a go back to this point you made in the book about the Donald’s reckless fiscal and monetary policies being doubly bad. We’ve talked about the fiscal policies, what were his monetary policy? So monetary policy is handled by the Federal Reserve, isn’t it? What’s what’s, what was Trump’s role there?
David Stockman 36:49
Okay, though, that’s, again, another important topic. As far as I’m concerned, the number one, number two, and number three policy problems in the United States today, and the world is the Fed and the other central banks, they’re out of control, they’re printing presses have been running red hot. For decades and decades, one measure that I think is startling, if you take all the central banks of the world and add their balance sheets together, in 20, in the year 2000, it was 3 trillion. Now, why is it important to take the balance sheets, look, because that’s just a measure of how much money they printed? Okay, you know, when they print money, they buy assets and put it on the balance sheet. That’s a good simple metric to measure how much money they’re printing, it was 3 trillion at the turn of the century is 44 trillion today. All right. So in barely two decades, they have, you know, they’ve just flooded the world financial system, you know, with freshly minted credit, that, you know, ultimately created bubbles and inflation of every time. So the question then is, what about Fed policy? Now, given that backdrop, and my point is yes, in nominally, the Fed is independent, and they make their own decisions. But my quarrel with Trump is twofold. One, he made enormous put enormous public pressure on them, you know, practically week after week, to lower interest rates, and to make money even easier than it already was. So he was making the wrong advice. And secondly, he was doing it at a time in the business cycle, when it was desperately important for monetary policy to be normalised. I never agreed with all the huge money printing that Bernanke undertook in 208209 to 10. But you know, people argued it was an emergency, it was a one time thing, and even Bernanke himself, said in 2011, we’re out of the woods now. And we’re going to normalise the balance sheet, and we’re going to shrink it back to something reasonable, because it was 900 billion when the, you know, great financial crisis started struck the Wall Street meltdown in September 208. And by the peak it was 4.4 trillion. And, you know, everybody agreed that it needed to be normalised and interest rates were being held practically to zero for years and years and years, and I document a lot of this in the book, and that they needed to normalise as well, because when you make money dirt cheap, you’re just inviting speculation on Wall Street and you’re inviting Congress to spend money it doesn’t have because it’s so cheap to borrow down in Washington. So it was time for normalisation the Fed was trying to To do that by slowly raising rates, and by getting out of the Qt business and actually our QE business and actually shrinking its balance sheet they had initiated before Trump got through something called Qt quantitative tightening, and they were slowly trying to shrink the balance sheet back, just like Bernanke had promised they would. And Trump was constantly on their case, not to do either. And as a result of that the Fed just kept interest rates at zero. It kept the balance sheet, massively, bloated, still around $4 trillion. And that paved the way for the huge inflationary mourning after that we had in 2020 2021 and up into the present. So it the timing of the cycles screamed out because we were well into the recovery, the longest recovery in history. It was it screamed out for normalisation get back to something that was sustainable. And Trump was pounding the table, you know, day after day, don’t you dare do it. And even you know, leaking to the press that he was investigating whether he could fire Powell or whether he could, you know, clean house at the Fed and so forth. So therefore, when it comes to something as fundamentally important as sound money, Trump is the worst president and I say this advisedly, that we ever had the very worst, you know, far worse than Jimmy Carter far worse than Lyndon Johnson. Far worse, as far as I’ve studied it, than FDR, he may be even William Jennings Bryan if he had been elected president. So you, that’s another big black mark on the record.
Gene Tunny 41:56
Okay. You don’t blame Richard Nixon for taking us out of Bretton Woods. off the gold standard? Yeah,
David Stockman 42:04
no, I do. Yeah. And I’m I don’t know how I missed that one. But he was he was he was even worse than Richard Nixon and Tim was bad enough. Right.
Gene Tunny 42:14
Okay. Okay. That’s a it’s a Yeah, that’s a lot. I think your discussion of the Fed and fed policies, it’s definitely worth reading. So thanks for that. David. One last thing. In the foreword to the book by you’ve got Robert F. Kennedy, Jr. He says that you’re a crusader against the corrupt merger of state and corporate power in the US. Is that? Is that? Is that how you see yourself? And like, How bad is it in the States? I mean, you’ll see here the talk about the swamp and you hear about the power of lobbyists and all of that, and, and the corruption. I mean, how bad is it, in your view in the US at the moment?
David Stockman 42:59
I think it’s, I think is terrible, because the two worst things we have going are the military industrial complex, this massively bloated defence budget, and the pretentions of Washington that were the hegemony of the world with bases all over, will forever wars all over it interventions everywhere. That is due to the capture of policy by the military industrial complex, that’s corporate power, merging with government power, that’s the first one. The second one is the Fed is a rogue institution that is basically captive of Wall Street. That’s why they keep you know, printing money like they have been doing for decades now. And, you know, that’s exactly what Robert Kennedy is talking about there as well. Total capture of government institutions, in one case, the national security apparatus, in the second case, the basic Central Bank, by private interests, and it leads to some very, very bad outcomes, both domestically and internationally.
Gene Tunny 44:11
Gotcha. These are things that these are things that Trump himself has been campaigning against, hasn’t he or he made he these are things that he uses in his
David Stockman 44:22
arguments. Yes. And no, that is a good point. He’s not campaigning against the Fed. He’s campaigned against the Fed, but he wants an easier fit, okay. I want to send a Wall Street doesn’t like it’s totally different. I want a Fed that’s proven that pursues sound money, but obviously Trump wants a fed that prints even more money than the flood we already have. When it comes to defence is weird. He talks about America First he talks about, you know, NATO should pay its fair share of the tab and all that. But when he got in, he inherited a defence budget of 600 billion which was already way too big bloated, beyond anywhere. Rational need, and he took it up date other than 50 billion. In other words, he never saw a request from the defence department from, from the generals for money that he didn’t like that he wasn’t ready to embrace lock, stock and barrel. Now, why was that? Well, because Trump fancies himself as the greatest negotiator to ever come down the pike. I guess he learned that in the Queen’s as a real estate developer in his early life. And if he hasn’t, you know, an $850 billion defence budget behind him, even if it’s a big waste unnecessary. He thinks he’s accomplished something. But he’s so wrong. Because when you give the defence department and national security apparatus and all those agencies, all that money, they use it to buy political support. That’s right. You know, they use it, basically to perpetuate their missions, their manpower, their budget levels, and so forth. So, you know, Trump isn’t very smart. To tell you the truth, when it comes to how the world works. You know, he may have been a street smart gambler from Queens and got lucky in the real estate business. But he’s never studied. He’s lazy. He’s uninformed. He’s impetuous. He’s fairly dangerous.
Gene Tunny 46:27
Okay. Brought up Wow, man, this is, yeah, it’s been a real. A really great conversation, David, and very, very forthright. And I expect you’ll get a lot of reactions to your book for sure. I suppose one thing I’d like to ask before I leave. So you’re someone that you’ve, you’ve worked, you’ve been in Congress, you’ve been a representative, and you’ve also you’re a director of the Office of Management and Budget, management and budget in the Reagan administration. Correct. What was what was that? Like? I mean, what I mean, that’s, that’s a celebrated administration. I mean, obviously, one of your most distinguished or famous presidents and, you know, lots of really good people in that administration. What was it like on the ground working in it? Well,
David Stockman 47:18
it was a pretty exciting time, at least an effort was made to try to contain the behemoth that it build up on the banks of the Potomac. And it’s interesting to note that when Reagan was sworn in, in January 1981, I became budget director, the first thing we had to do, because we inherited this mess from Jimmy Carter, was to raise the national debt limit above a trillion dollars for the first time, we didn’t have any choice. But where are we today? Go public debt is 34 trillion. And we were struggling with one and we thought, you know, it was a world was going to come to an end. That’s how far things have drifted. Now, of course, the economy is three times bigger, but the public debt is 34 times bigger. So you know, it’s. And then during that period, we had our ups and downs. But at the end of the day, only some minor progress was made in shrinking the size of the federal budget, we cut taxes deeply. We were going to cut spending to match the tax cuts, the spending cuts didn’t happen, because the Republicans really, were not willing to walk the plank in Congress. And because defence spending, got totally out of control and ate up all the savings that we were getting domestically. So essentially, the fiscal calamity that the country is struggling with still today, and the Trump made infinitely worse, originated in the early 1980s, not by purpose, not by intention. But, you know, by the result of the political and policy battles that occurred in the Reagan era, but the one thing that was different is we had Volcker as chairman of the Fed. Volker was the last of the sound money Fed chairman. And he said, You know, I’m not going to finance the federal deficit. You guys want to run up the ready, then you’re going to fund it honestly, in the bond pits, interest rates are going to go up and it’ll be on your watch. And so he did bring inflation to heal, but he was the last of them and in fact, he was so unpopular with the Republican politicians who ran Reagan You know, by the end Reagan wasn’t with it that much of the last two years. They convinced him to not reappoint Volcker and put it Alan Greenspan instead. And, you know, the rest is history. Greenspan was a disaster.
Gene Tunny 49:53
Yes, I mean, he he certainly is his legacy initially After he retired he was seen as the the maestro, but then the financial crisis and there’s been a big reassessment of Greenspan’s legacy since then for sure, absolutely. I might have to cover that on a future show because it’s Yeah, it is a it’s a you know, there’s a lot of history a lot of to go over there. But then Stockman has been terrific. I really enjoyed talking about your new book. I think it’s an important book. It’s, it’s thought provoking. I expect it will be controversial and will should there should be prominent in the the upcoming debate over the rest of this year. So thanks so much for for participating. I’ll put a link in the show notes to your book. Is there anything you’d like to say to wrap up?
David Stockman 50:47
Well, I think we’ve covered a lot of good ground. But I think the answer is, you know, people really need to look beyond the headlines and what the mainstream media is telling you or what the politicians are boasting about, and get a grasp on the facts because we’ve got some pretty difficult economic times to grapple with as we go forward.
Gene Tunny 51:10
So David Stockman thanks so much for your time, really enjoyed it.
David Stockman 51:14
Very good. Thank you.
Gene Tunny 51:18
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 at economics explore.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.
52:05
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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 Podcasts, Google Podcast, and other podcasting platforms.
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.”
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]
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
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
While in Hobart, Tasmania for the 2022 Australian Conference of Economists, show host Gene Tunny caught up with Dr Leonora Risse and Dr Cameron Murray to reflect on the big economic issues covered at the conference. The Conference was framed in the context of adjusting to the so-called new normal. It dealt with issues such as government wellbeing budgets, the housing affordability crisis, the pandemic, and nowcasting, among others. Hear from Gene, Leonora, and Cameron regarding conference highlights and takeaways, including the risk of unintended consequences of government policy interventions.
About this episode’s guests – Leonora Risse & Cameron Murray
Dr Leonora Risse is an economist who specialises in gender equality. She is a Research Fellow with the Women’s Leadership Institute Australia, and recently spent time in residence at Harvard University as a Research Fellow with the Women and Public Policy Program. Leonora is a co-founder of the Women in Economics Network (WEN) in Australia and currently serves as the WEN National Chair. Leonora earned her PhD in Economics from the University of Queensland, and previously served as a Senior Research Economist for the Australian Government Productivity Commission. She is currently appointed as a Senior Lecturer in Economics at RMIT University in Melbourne, Australia. Her Twitter handle is @leonora_risse.
Dr Cameron Murray is Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney. Cameron has taught a number of courses including UQ’s MBA economics course, macroeconomics, globalisation and economic development, and managerial economics. He writes for MacroBusiness, IDEA economics and Evonomics. Cameron has a PhD from the University of Queensland on the economics of corruption. He hosts the podcast Fresh Economic Thinking and his Twitter handle is @DrCameronMurray.
Links relevant to the conversation
Greta’s articles at the Lowy Institute Interpreter:
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored.
Leonora Risse 00:04
I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel-good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation.
Gene Tunny 00:17
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues.
I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 148 on the 2022 Australian Conference of Economists, or ACE as we call it. The conference was held on 11th to 13th July in Hobart, Tasmania.
In this episode, I reflect on the highlights of ACE with my colleagues, Dr. Leonora Reese, and Dr. Cameron Murray, who I was lucky enough to catch up with at the conference.
Leonora is the chair of the women in Economics Network, and she’s a senior lecturer at RMIT, the Royal Melbourne Institute of Technology. This is Leonora’s third appearance on the program.
Cameron Murray, however, is appearing on the program for the first time, and I’m delighted that he agreed to share his thoughts on the conference with me. Cameron is postdoctoral research fellow in the Henry Halloran Trust at the University of Sydney.
One of the big takeaways for me from the conference was the risk of unintended consequences from government policy interventions. And I give some examples of those in this episode.
The show notes, you can find relevant links and details of how you can get in touch with any questions, comments, or suggestions. Please get in touch and let me know your thoughts. I’d love to hear from you.
Right oh, now for my conversations with Leonora, who’s on first, and Cameron who’s on second on ACE 2022.
Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.
Leonora, good to be chatting with you again.
Leonora Risse 02:00
Thanks, Gene for having me.
Gene Tunny 02:02
Oh, it’s good to catch up here at the conference in Hobart. So, how have you found the conference so far?
Leonora Risse 02:10
It’s great to be back in person. This is the first Annual Conference of Economists in Australia since the pandemic. So, it’s wonderful to be surrounded by people again, seeing people face to face, hearing the latest research. In some ways, it feels like time hasn’t really passed. You know, we’re seeing everyone again. And there’s some great research that’s really timely reflecting on COVID. But also thinking about climate change, politics, immigration, the labor force, So, many highly topical issues are being covered.
Gene Tunny 02:49
Absolutely. And we just had this amazing presentation via Zoom last because he couldn’t make it by Martin Wolf, one of the editors at the Financial Times. And he was talking about a number those issues and the crisis of democratic capitalism, which I found really a fascinating presentation and gave us a lot to think about and their issues I’ve tried to cover on the program in the past. I was grateful for that presentation. Were you involved in the organization of this conference?
Leonora Risse 03:19
This year, I wasn’t. So, the way that the conference works is each state or territory branch usually takes carriage of organizing it. So, this year, a big shout out to the Tasmanian branch of the Economic Society who organized it. I’m part of the Economic Society Central Council, a representative of the Women in Economics Network. So, we were involved in organizing the wind sessions of the conference. So, I was involved in that part.
Gene Tunny 03:48
Okay, good one. So, what were those sessions, Leonora?,
Leonora Risse 03:52
Each year, since WEN was created, that’s the Women in Economics Network, that was created in 2017. So, WEN has been a part of the program, we’ve held a special session where we’ve discussed some of the issues that are confronting women in the economics profession.
This year, we talked about what WEN had achieved in its first five years. We looked back at what action we had taken to deal with this problem of women’s under representation in economics. So, we were sharing some statistics as well as some examples of the initiatives that WEN had embarked on in that session, and it was more it was broader than just talking about gender inequality. It was talking about diversity and inclusion in the economics profession. So, we held that special session.
We made sure that there were females amongst the keynote speakers, we had Angela Jackson, talking about the well-being budget. And Angela is a member of our WEN committee, but a very distinguished speaker in her own right and that was wonderful to make sure we had females amongst the keynotes. And tomorrow, we have a lunch for WEN members to come along and network and meet and talk about some topical issues.
Gene Tunny 05:12
Oh, good one. And So, Angela is a co-author of Yours. On a paper, I’d like to talk with you about; so, you had a look at how COVID affected the economy here in Australia and how it had differential impacts by agenda. So, would you be able to tell us about that, please, Leonora?
Leonora Risse 05:32
Thanks so much for the opportunity to share this with you, Gene. We looked at the workforce impacts of the first year of the COVID pandemic in Australia, where we had very strict lockdowns as well as the direct effects of the pandemic. And at the time, there was obviously a lot of interest from the news, from the media, from the government, what exactly were the impacts, and we knew that women were generally being more severely affected on average than men, because of the gender patterns that exist in industries of employment. So, we know that the types of industries that women are employed in, they tended to be the ones that were most affected by the direct lockdowns, particularly in the state of Victoria. But then, also women were potentially dropping out of the workforce, because they were responsible for homeschooling; schools were closed. Childcare wasn’t necessarily available through out that duration.
So, we wanted to produce a systematic and statistical based analysis of what exactly happened in terms of labor force indicators. So, employment, unemployment, labor force participation; and break it down by gender, because I think there was a lot of talk, and there’s potentially some misinterpretation about what exactly those effects were, and generally, we saw a dive, a plunge in women’s employment, that was steeper than men’s. Then towards the end of the first year of the pandemic, women’s jobs did start to pick up again, which was a positive thing. And we were concerned that that was giving the impression that things were okay again, and even though there were huge numbers of women who dropped out of the workforce, just looking at those numbers climb again, it potentially led to people assuming that that time out of the workforce hadn’t caused any damage for women being detached those interruptions losing your job, and perhaps coming back again, but not being the same job that you had before; losing potentially, your eligibility for leave entitlements. It’s what we call scarring effects of economics.
Gene Tunny 08:05
Is this hysteresis? Is that the old term for it? Or am I thinking of something else? Was that related to it? There was that idea that if you had a period out of the workforce that reduced your; well, you lost the attachment, it can affect your marketability in the future, So, it can have these long run consequences.
Leonora Risse 08:27
Yeah, that is a concern about people sort of, getting stuck in that state of unemployment or labor force detachment. That’s exactly right. So, we were looking at net numbers, aggregate numbers. We weren’t necessarily following the same individuals to see potentially, people who dropped out of the workforce who lost employment and didn’t reenter. But that would have been a concern behind the scenes. When I presented the paper here at the conference, there was an excellent question about long term unemployment, people would become entrenched in unemployment or drop out of the workforce and don’t reenter. So, that’s part of that concern about hysteresis as well, people getting stuck. And that skill erosion and perhaps that lack of confidence to reenter again, some of the dynamics that can explain what you’re describing there.
Gene Tunny 09:14
Right. So, I’ve got a couple of questions. You looked at the Australian data, do you know if this happened in the US and the UK as well? Was this the xi session that they talked about?
Leonora Risse 09:26
Yes. This was very much a global picture. You’re right. We were hearing this from the US, from Europe and the UK, from many other countries throughout Asia, Canada; that there were terms like it was a she-session, a play on the recession, but emphasizing the gender element of it. And the thing is that this is very different from past economic downturns. So, in our analysis, we look at what happened with job losses during the 1990s recession in Australia and during the global financial crisis around 2008. And what you see with the economic downturn, the recession that occurred as a result of COVID, women share those total job losses was a much higher proportion than what had occurred in previous economic downturns. And why that matters is because, it meant the policy responses needed to be different.
Gene Tunny 10:24
That was stunning. So, I was struck by just the proportion of the jobs lost in the early 90s recession here in Australia that were lost by men; what was it? 90% or something. I guess that makes sense because at the time, the industries that suffered were manufacturing industries or construction, because we had the colossal property boom in the 80s, and then the crash. So, they were industries dominated by men, but this time, and this is what you found, I think, isn’t it? that it was those sectors where women were disproportionately employed such as hospitality.
Leonora Risse 10:58
Yes, that’s right. So, it was the preexisting patterns of employment. For instance, at retail trade, what are the types of jobs within retail trade that women tended to be employed in things like clothing stores, Ford fronting customer service roles, waitress or waiter jobs in hospitality, whereas males tended to be employed in things like in retail, but in electronic stores, or building supply and hardware stores, which actually were all booming during the pandemic, because of all the incentives for people to stay at home or invest in these other things and things like shell fillers, or deliveries and transport behind the scenes rather than face to face customer service.
So, these preexisting gender patterns of employment, as well as who’s doing the bulk of caring duties at home and who takes on the majority of the homeschooling responsibilities, meant that there were demand side factors as well as supply side factors, putting a lot of pressure on women’s capacity to retain their attachment to the workforce as well.
Gene Tunny 12:12
Okay. I might ask you about your highlights of the conference. I can tell you mine so far. I mean, one highlight was definitely Martin Wolf’s presentation, which made me think a lot about, how do we get that balance between having a market system which provides the goods and services we want that’s dynamic, that allows for you know, that is compatible with individual liberty, but at the same time, avoid a system where we have monopolization, where we have money getting into politics and corrupting it and inequality widening for various reasons, including monopoly, because of the big tech platforms, the big tech giants, people being able to earn money globally because of these platforms. And then if you’ve got an advantage that can be magnified by the technology, also skill biased technological change all those reasons. How do we deal with that in a way that keeps the incentive to innovate, but means we don’t have inequality that could be politically devastating? And I mean, I don’t know the answer to that. But I’m just saying that I thought that was a great presentation and Hal Varian, I mean, that was amazing. Talking about how they’re using all of the Google Trends data to Nowcast the economy, so, unemployment claims just based on people searching, where’s the local unemployment office in Michigan or wherever. So, I thought that was great. But how about you, Leonora? What were your highlights?
Leonora Risse 13:41
Oh, I haven’t been able to see everything on the program, which is frustrating when there’s so many options, you can’t see them all. The keynote speakers have been fantastic this year, because they’ve been so timely. The topics, the issues that they’ve been delving into, I thought hell variants, illustration of how we can use Google data for economic analysis, really enlightening. There’s so much capacity there. I’m looking forward to hearing Joseph Stiglitz speak tomorrow. So, we haven’t come to the end of the program. And he’s, he’s obviously an eminent voice in terms of inequality issues. I really enjoyed Angela Jackson’s keynote address at the start of the conference. And Angela talked about a well-being budget and put a lot of thought into what would be the dimensions of well-being.
And also, she brought up some really potentially confrontational issue. She did talk about how do we handle domestic violence and family violence? And I think that was an indication that these are some hard topics that economists and policymakers and researchers need to deal with. And I mentioned that as a highlight, because I really don’t think in past conferences, we’ve been empowered or bold enough to bring up some of these confrontational topics.
Gene Tunny 15:02
I think that’s true. I want to see how this wellbeing budget is implemented in practice. I mean, as a former Treasury bureaucrat and someone who worked in Budget Policy Division, I’m just not sure what it’s going to mean. Is it just another chapter in the budget, enhance more work for Treasury analysts? Or is it a fundamental rethinking of how the budget process works and how the all of these policy measures are assessed? Will there be an explicit wellbeing score? I don’t know; we have to see exactly how the government is going to implement it. And whether it is something that really will mean that the budget is reformulated or rethought of as something that’s explicitly dedicated to improving well-being and therefore you would look at the whole range of government expenditures and activities.
Is it that or is it just something that is just going to be another glossy budget document or something that the government of the day can sort of, wax lyrically about, but doesn’t have any real practical implications? That’s just my natural skepticism. So, I’m not knocking it. I just want to see how it’s implemented.
Leonora Risse 16:10
Yeah, I think that’s a really healthy degree of skepticism to have with any government. I sense that this government is really sincere and actually quite well informed by the research because as your listeners have known, there are very deep and comprehensive streams of research looking at measures of multi-dimensional poverty or disadvantage, which is really part of that literature on what constitutes a well-being and life satisfaction. And I think the takeaway here is when we think about a well-being budget, it’s about broadening the suite of indicators that we monitor, and we care about. So, it’s not just GDP, or inflation or wage price index. But we include a wider and fuller list of economic indicators, including measurements of inequality. So, I imagine that if you’re constructing a well-being budget, you’d want to compute a Gini coefficient, for instance. So, at least inequality is going to be on the minds of your policymakers, it becomes more salient, so that when they’re developing their policies, they’re not just thinking about how do we increase GDP, but what is the distribution of those prosperity benefits?
Gene Tunny 17:19
So, they could ask how do these particular budget measures affect inequality, affect the Gini Coefficient? Is that what you thinking?
Leonora Risse 17:26
Potentially along those lines, that’s right. So, it’s thinking about measuring success along a broader spectrum or dimensions of real world impact.
Gene Tunny 17:37
Yeah. Okay. So, every budget, as well as providing the economic outlook in terms of GDP and talking about what the budget aggregates are, you could have a reflection, the government could reflect upon what’s happening with some of these other indicators, such as inequality. Angela mentioned a whole range of things they could be interested in targeting in the interests of well-being, mental health, reducing domestic violence.
Leonora Risse 18:04
The budget contains a lot of that already. And it’s about pointing out; actually, a lot of that contributes to GDP, which we know like, if you invest in your mental health and physical health and community inclusion in your population that are all in federal ingredients was making people or supporting people to become more productive as well. But I think it will probably find that there are a lot of government initiatives that are in place that are supportive of well-being and this is, I guess, perhaps justifying that expenditure in a broader set.
I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation. So, you could say, well, let’s not go ahead with this hypothetical, say tax cuts for a higher income bracket, because that’ll have a negative effect on the Gini Coefficient. It will detract from income equality.
So, we then have another benchmark of impact you consider some of these redistribution or reallocation decisions, it doesn’t mean spending more, it just means spinning things in different ways.
Gene Tunny 19:23
Yeah, fair point. Okay, Leonora thanks so much. Great to catch up with you here in Hobart.
Leonora Risse 19:27
Thanks, Gene. And thanks for running such a great podcast.
Gene Tunny 19:30
Thank you.
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 20:07
Now back to the show.
Cameron Murray, good to be chatting with you.
Cameron Murray 20:13
Thanks for having me,Gene.
Gene Tunny 20:14
It’s a pleasure. We’re both finished the Conference of Economists for 2022, here in Hobart. We just had the lecture by Joseph Stiglitz. And, yes, it’s been a busy, few days. How have you found the conference, Cameron?
Cameron Murray 20:30
Yeah, pretty good. Pretty broad range. I’ve been to this conference many times, I like it because you, you will find a few people that study related topics, and you can catch up with your mates who researched your area, and then you can sit in on the random ones. Your session was called what, Miscellaneous? Which is actually pretty good. I think most people enjoyed, you know, a variety of discussions that you just don’t really get a lot of smart people in one room to chat about that often. Yeah, it was a good time.
Gene Tunny 21:01
Thanks. Yes, that was an interesting session. And we can touch on that a bit later. I thought it’d be good to chat about highlights of the conference and also what the themes of the conference have been. So, I guess on the themes, there was a big theme, it seemed to me of Economics in the New Normal; I think that was actually the designated theme of the conference, something about the new normal. And there was that speech by Martin Wolf, where he’s talking about the crisis of democratic capitalism. And then Joseph Stiglitz, today was talking about the Post-Neoliberal Order. So, there seems to be this general recognition that things need to change. I still don’t know exactly what they’re proposing.
Cameron Murray 21:54
Yeah, I got the same impression. There’s a lot of; we’re at the end of some era, and something’s happening. And I wasn’t clear what specifically is not working? I’m not a big believer in labelling of things; oh this is proper capitalism. I’m like, well, you can have capitalism and a good welfare state and good public services and, you know, all of those functions well, together. It’s not clear that we need a new label. I think we do have a lot of things right. I found that a little bit unusual, I thought Stiglitz was right, in terms of Economics as a discipline evolving. And I can observe that I’ve been involved after the financial crisis in that rethinking economics and those groups trying to add some color and flavor to your economics education, because it can be a bit dry, like it’s straight with the neoclassical view on things. But in terms of actual policy, yeah, it’s wasn’t super clear to me where it’s going, but it was kind of unusual to get that feeling that everyone thinks there’s some change happening..
Gene Tunny 23:03
So, you’ve got a blog, haven’t you? Fresh Economic Thinking, and I found that interesting, what you were saying about the teaching of Economics and you said that you’ve tried to give it a different flavor. What sort of things have you done? What have you tried to emphasized in your teaching and your writing?
Cameron Murray 23:20
Yeah, well, maybe let me give you an example. Because Joe Stiglitz, one of the last things he talked about was, well, we use Robinson Crusoe as this example of production. And when Friday comes, we talk about specialization. And I use that to say, well, that’s one element of the coordination problem when you’ve got two people. Someone pick the coconuts and someone go fishing. That example allows us to think more broadly? Why is someone better at picking coconuts? Who taught them? Who has the fishing net? And why do they have it and not the other person? Can they be more productive if the two of them go fishing on one day using a net holding one end each, and then the two of them pick coconuts the next day by helping them climb the tree? Like these, the coordination problems are much broader than I guess the way we’re trying to think about it. And I think in Economics training, we can think more broadly as issues come up, we can maybe see where there’s these net improvements on the status quo. And that’s kind of, what my blog is; is there a different angle to this problem? Is this really a coordination problem? Is it really specialization? Is it this? Is it that?
When I look at housing, for example, I was writing about the Shared Equity proposal, I’m like, well, is this the best option? Why isn’t a 100% equity better? This is the proposal where the government will buy 30% of a house for you as an equity partner for first home buyers.
Gene Tunny 24:46
Are they going to go ahead with that, aren’t they? Because they want government here in Australia, right.
Cameron Murray 24:51
And someone at the conference was telling me that the details are being worked out, can’t say anymore. I think we got to think well, that’s one policy, and we can look at it. But we should be tweaking at the edges as well and going well, if 30% is good, why isn’t 40% better? And if 40% is better, why not 100%. And if we’re at 100% equity, where sort of the government owns your house, that’s public housing. Like we should be a bit more expansive in thinking about how things fit together. And that’s what I tried to do.
Gene Tunny 25:22
So, we’re reportedly having a housing crisis here in Australia. And you’ve previously commented, or you’ve recommended a Singapore model, haven’t you? Is that what you’re driving at with a 100%?
Cameron Murray 25:37
Oh, well, my example, for example, in that blog post was the Land and Housing Corporation in South Wales that owns all the public housing stock. And the value of that housing stock went from $32 billion in 2012, to $54 billion in 2019. And like, that’s a really good return on equity for government, if we consider that as an independent entity, making $20 billion in seven years in terms of the value. So, that was my example of well, you know, we’re going to start another fund over here, and it’s going to buy equity in people’s houses; we have a fund here, that’s buying equity, we’re just not conceptualizing it this way, we’re only looking at the costs, and we’re ignoring the fact that what public housing is is an equity investment. So, that’s the expansive way to think about it.
Gene Tunny 26:24
Right. Okay. I’ll put some links to your blog in the show notes, and also some of the reporting on your recommendation regarding that Singapore model.
Okay. What I found were the highlights, and I can ask you about yours. Papers that really struck me as something I wasn’t expecting, or that made me think differently, it was an analysis by this recent master’s graduate from Harvard, Nicole Kagan, not so super. And what she showed was that, that policy during the COVID period here where they let you withdraw $10,000 from your superannuation balance, and it was a lot easier than the normal requirement where you had to demonstrate hardship. And she was making the point that it could actually backfire on the government in the long term due to the fact that it’s reducing their super balance, and therefore the government would have to pay them more pension in the future. She had some calculations that illustrated how that could occur. I thought that was a good analysis, a good paper, and it just shows those unintended consequences and just how there, whenever you’re designing a policy, there’s probably or there’s possibly a lot better way to do it. And So, you should be thinking laterally about the types of policies.
Cameron Murray 27:58
I thought hers was very good as well, because she didn’t just say, this is the result of this policy. She said, oh, here’s another policy of an interest free loan. And what was the other; that she had a third one as well and said, here’s something else. And now I’m going to compare all three of them. And I feel like that’s a really fundamental economic approach of saying, well, this is a good policy I showed you, it’s like, no, what are all the alternatives? And we should be picking the best one, because if we can beat this, we should. Right. So, I thought that was very good. And that was my comment to her as well, there was another. And it might be related to your presentation as well, that the government could have let you take your super or it could have bought your assets from your super and given you the cash and held those assets in its own fund and got their compound growth or whatever. And, therefore, the government would have had those future assets to pay you back when you got the pension, if you know what I mean. So, you could sort of draw a little circle around the super early release program, and take that forward through time by the government owning those assets in its own federal treasury super account, and then paying the extra pensions to you in the future out of that account if it wanted to. So, you know, that’s just another alternative. And she evaluated three and I really liked that approach and was enthusiastic to look at more.
Gene Tunny 29:25
Yeah, I thought it was good. The other papers I liked; Stephanie Schurer who won Young Economist of the Year Award, she looked at a paper, while her paper looked at these anti interventions of various measures in the Northern Territory to a world to reduce alcoholism or to reduce domestic violence and sexual abuse in the indigenous population there. She had this, I think it was some differences model share this methodology to identify what happened in Alice Springs when they introduced a minimum price of alcohol to try to reduce the drinking and the cost of wine. It didn’t have the effect that they necessarily expected. When they looked at what did it mean for babies with the birth way of babies? And what seems to have happened is, well, there was some substitute; they did stop drinking cask wine. There was a big drop in the consumption of that. But then, there was an increase in consumption of beer and other alcohol, to an extent. So, there’s sort of substitution there. But also smoking, smoking increased.
Cameron Murray 30:43
Yeah, it did. That was pretty clear and one of the main results, wasn’t it?
I think that’s actually a result I’ve seen elsewhere of trying to change behavior with the sort of syntax approach where you tax the behaviour you don’t want to get. And I think we get that in cigarettes and marijuana and things like that, if there are substitute ways to get the broader consumption good. Then you’ll find them.
Gene Tunny 31:12
Yeah. I thought that was a good illustration of the possibility of unintended consequences that you can get with policy and as was Nicole’s paper, too. Okay. The other one I thought was great was Warwick McKibbin’s paper on COVID. So, he went over some modelling results of his early in the pandemic. And I mean, Warwick was claiming, I think he’s probably right about this, that he got reasonably; I mean, his estimates were probably better than any ones in terms of the ultimate economic impact. And a lot of it came from voluntary, people voluntarily withdrawing from the labor market.
Cameron Murray 31:58
I wasn’t in that one. Can you? What did he predict? And why?
Gene Tunny 32:03
This was a paper he released in February of 2020. He saw that COVID was spreading in China. And it was going to come to the end; I think it was in Italy at the time. And he used his, what is it, the McKibbin Sachs Global model – MSG model he’s got some global economic model originally built with Jeffrey Sachs at Harvard. And he’s sold it; to all of these finance ministries, I think Treasury had a copy when I was there. How would you describe it? Well, it’s a general equilibrium macro-economic model of the global economy. And he was projecting; he calls them simulations, he’s not calling them forecasts. He made a joke today about how he doesn’t like doing forecasts, because you’re only ever going to be wrong, you never forecast know precisely.
Cameron Murray 33:10
I think that’s very wise.
Gene Tunny 33:12
So, I think that’s very clever of Warwick to do that. And he was showing what GDP deviations he was getting from his assumptions around how COVID would spread. Then he had endogenous policy responses, or actually, they may not have been endogenous, he must have assumed what policy responses would be in terms of fiscal policy, and then monetary policy. He knew that governments would respond and that would help the economy recover. And he was showing that he had the big GDP losses to begin with, but then the V-shaped recovery or the rapid recovery. So, Warwick was claiming that; and it’s probably right.
Cameron Murray 33:56
Did you get the inflation element as well as it’s sort of second half of last year and this year? Because the V-shape recovery; remember, there was a big debate, V-shaped recovery, W-shaped recovery. There was a lot of chatter, and I think obviously he was right on that. But what about the inflation part?
Gene Tunny 34:19
I think he was. He may not have got it to the; he may not have predicted as much as it has occurred, but I’ll have to check that. I think he did say something about that. I just can’t remember off the top of my head. I’ll put links in the show notes to that paper. I found that fascinating.
One thing he didn’t predict and he was surprised by; he was really surprised by just how badly the United States did. But he was modelling the COVID infections and mortality, the COVID deaths, and his prediction for the US was too low. And because in his model he was basing the health response. So, he had the epidemiological development of the disease, the infections and the deaths. He had that related in part to the public health system or the public health response. And because the US, because of the CDC, it came out high in terms of public health effectiveness. So, in his model, US had high public health effectiveness. So, that was reducing his estimate of what would happen in the States. We all know that it just didn’t work. I mean, they may have had the CDC, but for some reason or another, something didn’t work.
Cameron Murray 35:49
Well, you know, the assumptions matter don’t they? One of the standout presentations for me was Hal Varian, the Chief Economist at Google. And I think, simply because he’s got the inside run on all the data, he had a great method of augmenting your traditional time series forecasts that have seasonality and trends with an additional regression that selects for the most useful search terms out of Google Trends, and then uses them as predictors in the regression part of the overall model. And was pretty good at predicting a lot of economic outcomes from Google trends search data, which I thought was pretty impressive, but I guess we kind of, accept that that happens. But what impressed me more is they have a Google survey tool that you can put as like an ad on the news item. And people get credit on Google Play or something if they fill in surveys. So, you can do these really rapid surveys, and it will distribute them to readers of news that meet certain criteria. And it replicates really well, these well-done official surveys that sample representatively across society based on census records of types of people and where they live, it replicates a lot of findings by being completely non representative, and just flooding the internet, essentially, with the survey.
So, the message here is sort of saying is we don’t know if representativeness is that important, but you can find out cheaply and quickly by just doing a Google survey to augment your official survey where you’ve got representative samples from different parts of the country, in different age groups and so forth.
We’re obsessed about sampling and he’s now saying, well, as long as we throw it out to the internet, sometimes it doesn’t really matter.
Gene Tunny 37:54
It’s good enough, the results are good enough. It may not be as precise as a random survey, or a survey done by Roy Morgan or Gallup but it’s got to be good enough for what most people need it for.
Cameron Murray 38:07
Especially picking the trends, right? Is this declining in interest or rising interests, you’ll get that sort of stuff very quickly and cheaply. So, I immediately went back to my computer after that session and looked at housing markets and predictions and tried to catch up with the state of the literature on that, and it’s booming right now. So, I think that’s going to be something we’ll hear more about. And I expect, for example, in the next five years, we’ll probably have a new house price index that is informed by daily Google search trends. Like a live modelled index from this type of stuff, that would be my expectation, given that people are already trying to do that.
Gene Tunny 38:46
Yeah, because CoreLogic put out a daily House Price Index, I think, don’t they?
Cameron Murray 38:52
They do put out a daily index but there’s a lot of assumptions because you don’t know sales data until the settlement and the price was 30 or 60 days beforehand. Over a longer term, it works well. And it seems to pick turning points well. But I think if you’re in the market for producing high frequency index like that, and you can augment that with Google Trends, I think you would dominate that market because people would put more stock in yours, you’d get more press coverage, you’d become very; So, I’d be very interested in if CoreLogic has got people looking at this. They obviously have a lot of data nerds. You might see live daily trackers of many things; could be an interesting new world at the next conference.
Gene Tunny 39:40
Yeah, absolutely. That was great, that nowcasting session and I chatted about that with Leonora. I’ll put a link in the show notes regarding that, too.
So, on housing, Cameron, you presented a paper on housing, didn’t you? Would you be able to tell us about that, please?
Cameron Murray 39:56
Yeah. So, it’s pretty straightforward. There was a lot of very detailed statistical modelling at this conference and mine was the exact opposite. Mine was just, here’s the data on the rate of production of housing from new major subdivisions in Australia. Because the argument that we have at the moment, are planning regulations, stopping supply and keeping the price of housing up. And my question was, how are planning regulations stopping supply? Because we can observe in practice, all these major approvals with three to 20,000, approved housing lots, and we can observe how quickly they supply after the approval. And what you find is that during an economic boom, these property developers will sell at a rate that’s 30 to 50 times faster than when it’s not a boom.
So, they’ll sell five a month, and then they’ll sell eight a month for a few months when there’s a boom. So, if you look at land sales in major subdivisions around Melbourne, when there was that 2015 to 17, boom, you can see, not only did the price rocket, but the sales rocket, and then when the price is up, typically, supply and demand say, well, at higher prices, you sell more, but then it stops once price gets up. So, as prices start rolling over, they stopped selling again.
The main point of that is, there seems to be a built-in speed limit. And then in addition to that, I looked at aggregate company data for listed companies across states where they had eight to 12 different projects. And the question there as well, is that variation I’m observing; does it average out across different areas, if we diversify? And it does, but only to a small degree. And then I looked at council level data for the different councils in Queensland and showed that actually, the variation, even at a whole council level is much the same. So, the point of all that is that there’s some kind of built in speed limit that the market will supply, regardless of planning restrictions. So, if you want to talk about the effective planning regulations, it has to go via this market absorption rate, this optimal rate per period that you would produce new housing.
Gene Tunny 42:20
Yeah, I see what you’re arguing there. So, at any point in time, there is going to be a speed limit. I think that’s fair enough. It’s like with the sale of government bonds, for example. So, they don’t just go and auction off the whole years in one day.
Cameron Murray 42:42
Yeah. The market has a finite depth, right? Especially in property, your local market has a very; it’s very competitive. But in your local area, if there’s only a few buyers rocking up each week, you can’t really sell faster than that. And if you did want to, you’d have to reduce the price dramatically. And that itself might not even work, because who wants to buy something that’s falling in price? Right? You’ve just showed me this is a terrible property asset to buy, because you keep decreasing the price on me. Right? I think property markets function like other asset markets, property developers aren’t in the business of panicking, and to reduce price and selling very quickly. So, if we want to talk about cheap and affordable housing options or systems, we’ve got to acknowledge that limit.
We can’t go around saying oh up zone, and it’ll all be fine, because we’ve got a property boom in the whole world, regardless of local planning conditions. There’s almost no city you can name right now, Regardless of whether they’ve got very generous planning, whether they’ve got height limits, where they’ve got no height limits. Auckland, famous in 2016 up zone the whole city, and then had the biggest boom, I think just about in the world between 2016 and 2021.
So, that was mine. Yours was one of the last sessions of the day, that was just before Joe Stiglitz. I actually really liked your topic because, I have a strong interest in privatizing public assets and accounting trickery.
Gene Tunny 44:26
Yeah. Well, what I thought was bizarre about what Queensland Government did. This is the state government, where Cameron and I both reside; it’s the state government where Brisbane is the capital. What I found odd about what they did was they actually didn’t privatize it, they pretended they privatize it. They said if we did privatize it, we could sell it for $8 billion, and therefore, even though it’s still doing the same thing it did yesterday, we’re now going to treat it as a well; we’re creating this private company, we’re converting a government.
Cameron Murray 45:08
This was the property title’s office, right where you change, when you sell a house, you register the change in ownership. It’s the Torrens title.
Gene Tunny 45:16
Yeah, that’s right. Sorry, I should have mentioned that. Well, this is actually a private company, and we own shares in it. So therefore, we’re going to take it out of the general government sector. And we’re going to recognize this $8 billion asset on our balance sheet and use it to offset our $40 billion worth of debt or whatever it was, and that reduces our net debt.
Cameron Murray 45:47
That’s an accounting trick. I did think it was very interesting that we’re going to privatize, we’re not going to change the ownership. We’re just going to say that it’s; and I guess my point to you was; The other point you were saying is that Queensland has a future fund that does investments in private companies. And they were saying that we’re not putting it in that fund is that?
Gene Tunny 46:14
I know they did. So, it is in that future fund? Yeah. It is in there – the debt retirement fund they’ve got.
Cameron Murray 46:22
Well, and I think one of the questions in your comments was that New South Wales got a lot of flak last year for doing the same thing. And they created this thing called the transport asset holding entity. Did you follow that news?
Gene Tunny 46:38
Yeah, I’ve got to look more into it.
Cameron Murray 46:4
The basic gist was the same thing. They said, well, this is the Department of Rail or whatever it’s called. But actually, we’re going to corporatize it and say it’s a private company. So, when we subsidize it, that’s an equity injection. So, that’s actually an investment, not a cost. So, there was this great big accounting trick to get around there other standard measures of government spending and standard ways that they produce the budget. They’re like, well, no, that’s not a cost, that’s an equity injection, which of course, you could do for anything.
Gene Tunny 47:19
I have to have a closer look at that. I guess the point I was trying to make is that I thought this was a good example of just the financial or the public accounting trickery that can go on. And I think as economists, we need to be mindful of that.
Cameron Murray 47:40
I think your point; you said at the beginning that we’re meant to be sort of, reporting in a standardized way. And you’re comparing governments between countries and budgets and debts. How much does this accounting trick matter? And we’re comparing Queensland and Western Australia or Australia to New Zealand to Canada.
Gene Tunny 48:01
Yeah. It’s difficult to know. And while any one of them, you might think in the greater scheme of things, okay, maybe that’s not the biggest deal but they just all add up and you just don’t know.
I remember what I was saying about what was going into the future fund. What I was trying to say is that originally, they were going to put in liquid assets. So, the original idea was, we would have, I think it was 4 billion or whatever it was, from the defined benefit. The funds set aside to meet the defined benefit superannuation liability, and they were going to take that out, because they were saying, well, we’ve got excess there, we don’t need that much to pay the pensions. We’ll put that into this future fund, but they would have been liquid financial assets. So, cash or shares or whatever. But then, they didn’t have as much as they expected. So, they couldn’t actually put in liquid assets. What they then did was said, well, oh, we’ve got these $8 billion titles registry, let’s stick that in the future fund. And is not the same thing, because it’s not actual ready money. It’s not a liquid asset.
Cameron Murray 49:13
No, it’s definitely not. Although, we did later discuss before we recorded that, a cynic might say that the government is wedged right now in not privatizing any public assets. And they’re literally setting this up. So, when they’re out of power, they get the result they want because the next government, it makes it easier for them to then privatize and sell this off, because the structure is already changed.
Gene Tunny 49:42
It certainly does do that.
Cameron Murray 49:45
It depends how much you think these political games are being played behind the scenes.
Gene Tunny 49:50
Yeah, I’ll put a I’ll put a link to both of our papers in the show notes. I’ve got to think more about your housing article because I think that’s a fair point about the speed limit at a point in time. And I’ve had Peter Tulip on the show before. Peter is someone that you’ve debated or you have a lot of interactions on Twitter and
Cameron Murray 50:15
and in person every time. Yeah.
Gene Tunny 50:19
So, Peter was here at the conference too. And I think Peter’s point is that; I think he acknowledges that, like, you’re not going to solve the housing supply shortfall overnight by relaxing restrictions, because there’s just so much construction or so much building that would have to occur. I mean, have to occur over many years. And I think his point is that, well, the problem is we’ve had these restrictions in place for decades. So, there’s been a whole lot of under building.
Cameron Murray 50:51
We had a good conversation last night with Peter. I think there’s a hidden mental model that we both have that I can’t quite articulate with both tried. One of the components of that is this competitive element in the property market, like how fast would we supply? What’s the real counterfactual? Because his argument, and it’s a common argument, is that we’ve had supply constraints for a long time, therefore, we don’t have enough houses. If we didn’t have a supply constraint, we would have more dwellings per person and more space than ever before. And yet, that’s actually what we have.
Although prices are high. Part of that’s the interest rate, right? Rents compared to income in the private market are 20%. They were 20% in 1996. So, we’re talking, what’s that 26 years ago, quarter of a century. So, not only are rents the same proportion of income, and we’d probably expect people to spend roughly the same proportion of income on housing as they do, you know, there’s a fixed budget share results in the Cobb Douglas function as your income grows. But we have bigger houses, we have more bedrooms and more area and fewer people. And we actually saw that in the recent Census. Census was interesting, because last year, the week that we filled it out in August 2021, I predicted that the homeownership rate in the census would go up. Because it was 65.4%, in the 2016 census. And when the data came out a month ago, it was 66.0. So, a 0.6% increase. So, we got more homeownership. And we saw that the number of people per dwelling fell quite a lot as well, partly because of COVID. People sort of spread out a little bit more. Yeah. And we had a bit of a building boom as well, in that period. And So, we’ve got bigger houses, fewer people in them. So, the question is, why isn’t this the market outcome? Like, surely, you’ve got to tell me why the market outcome is something of even bigger houses and fewer people than what we have. And why would that be the case? That’s where we still disagree. Myself and Peter Tulip as the most active housing supply debaters on Australian social media.
Gene Tunny 53:27
Absolutely. Love to have you both thoughts for a chat in the future. But anyway, we’ll have to leave it there. Because we’ll wrap up soon, because we’ve got the State of Origin game between Queensland and New South Wales coming up.
Yeah, I thought that’s been a great discussion. I just thought of something with Nicole Kagan’s paper.. So, you’ve got that idea that the government could have bought the shares off or it could have basically bought the super assets…
Cameron Murray 54:05
From people if they want to cash out their super, then the Superfund says, okay, we’ll give you cash but the government’s got to give us the cash to take a claim on their same assets.
Gene Tunny 54:15
Yeah. So, the government would have to borrow to buy or to let them cash out. But your argument would be they would be earning more, the government would be earning more from those assets than the cost of the borrowing, giving borrowed and was so cheap.
Cameron Murray 54:31
Yeah. And also, that whatever they earn on those assets is exactly what the people who took the money out of super would have earned. So, if you’re thinking about a cost to the age pension in the future, well, the government now got those assets, exactly the same amount of assets that it can use to spend on your age pension. Do you know what I’m saying? Because you don’t have the super, the government has it. And if you need the age pension, they’ve got exactly the same amount of money that they can give back to you if you qualify for the age pension.
Gene Tunny 55:00
I’ll just have to think that through because I’ll also have the debt one day to a border. Although you could think about the Reserve Bank doing it, perhaps. I mean, that’s one thing that could have;
Cameron Murray 55:14
I mean, it’s a balance sheet expansion for the government. And it’s a contraction for the person who took the cash and doesn’t have that other asset. I might write a blog on this;
Gene Tunny 55:25
I think would be good. I’d love to see.
Cameron Murray 55:27
Nicole was the author of the paper? I’ll reach out because I thought she had the right idea of testing all these scenarios. There you go. That’s what conferences are for; meeting people and sharing ideas.
Gene Tunny 55:41
Absolutely, very good. Cameron Murray, from University of Sydney. Thanks so much for your time. It’s been really great chatting. And it’s been amazing catching up with you at this conference. It’s been great.
Cameron Murray 55:52
Yeah, I know, it has been great to hang out, Gene.
Gene Tunny 55:57
Thanks, Cameron.
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.
Credits
Thanks to this episode’s guests Leonora and Cameron for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
In Risk and the State, Professor Phillip LeBel argues the political legitimacy of governments worldwide is “under trial from questions of borders and national identity, from rising economic inequality, from the way in which information is gathered, managed, and disseminated, and from varying perceptions of risk.”
Phillip LeBel is Emeritus Professor of Economics at Montclair State University, NJ. With a career combining academic research and teaching with professional consulting, Professor LeBel has accumulated a record of economic expertise in a variety of domestic and international fields. Over the years, he has lived in and/or worked in 30 countries, including Africa, East Asia, Central America, and Latin America.
Rachel Nolan, a former Queensland Government finance minister, speaks with Economics Explored host Gene Tunny about how government budgets are developed and just how much flexibility governments actually have.
Rachel Nolan is Executive Director of the McKell Institute and is an honorary Senior Lecturer in Philosophy at the University of Queensland. Rachel was a member of the Queensland Parliament for eleven years from 2001, when she was elected as the youngest woman ever. She is a former Minister for Finance, Transport, and Natural Resources and the Arts. Rachel was a member of the Queensland Government’s central budgetary decision making body, the Cabinet Budget Review Committee.
