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Trump’s Tariffs: Art of the Deal or Economic Disaster? w/ Darren Brady Nelson – Bonus Episode

Are Trump’s tariffs a masterstroke of economic negotiation or a blunder with global consequences? Show host Gene Tunny and returning guest Darren Brady Nelson debate the rationale behind punitive tariffs, the backlash from markets, and whether this is all part of a broader deal-making strategy. They also discuss Elon Musk’s DOGE initiative and Darren’s run-in with a wild turkey on Wisconsin’s special elections campaign trail.

Please let Gene know your thoughts on Trump’s tariffs and any questions or comments regarding this episode by emailing Gene at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps

  • Introduction and Market Reaction to Trump’s Tariffs (0:00)
  • Darren Brady Nelson’s Run-In with a Wild Turkey (1:45)
  • Assessment of Trump’s Tariffs (6:51)
  • Formula for Calculating Tariffs (12:26)
  • Impact on Consumers and Businesses (19:59)
  • National Security Considerations (37:06)
  • DOGE’s Role in Identifying Waste and Fraud (44:07)
  • Wisconsin Special Election and Voter ID Law (55:14)
  • Australian Election Predictions (1:00:42)
  • Final Thoughts and Closing Remarks (1:05:44)

Links relevant to the conversation

Trump’s Executive Order “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits”:

https://www.whitehouse.gov/presidential-actions/2025/04/regulating-imports-with-a-reciprocal-tariff-to-rectify-trade-practices-that-contribute-to-large-and-persistent-annual-united-states-goods-trade-deficits

Statement by IMF Managing Director Kristalina Georgieva:

https://www.imf.org/en/News/Articles/2025/04/03/pr2587-statement-by-imf-managing-director-kristalina-georgieva

Darren’s 2018 article “Trumpʼs tariffs: free, fair or foul trade?”, in which he discusses Adam Smith and free trade: 

https://drive.google.com/file/d/1xQEt4n1bJ-W3RN2-H7_0w3q6vcI3eBCc/view?usp=sharing

Dan Mitchell’s “Six Visuals to Understand Trump’s Suicidal Tax Increase on Trade”:

https://www.imf.org/en/News/Articles/2025/04/03/pr2587-statement-by-imf-managing-director-kristalina-georgieva

CNN reporting, “This is the dubious way Trump calculated his ‘reciprocal’ tariffs”:

https://edition.cnn.com/2025/04/03/economy/reciprocal-tariff-math/index.html

Axios reporting, “Trump’s surprisingly simple tariff math”:

https://www.axios.com/2025/04/03/how-trump-calculated-tariffs-trade-deficit

CNBC reporting, “Trump open to tariff negotiations, contradicting White House aides”:

https://www.cnbc.com/2025/04/03/trump-tariffs-live-updates-stock-market-trade-war.html

Note this reporting: ‘Top Trump trade advisor Peter Navarro denied that Trump’s new tariffs are being used as a tool to negotiate better trade terms with other countries.’

Great Reset discussion with Darren from 2020:

https://economics-explained.simplecast.com/episodes/the-great-reset

DOGE’s reported savings:

https://doge.gov/savings

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

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Transcript: Trump’s Tariffs: Art of the Deal or Economic Disaster? w/ Darren Brady Nelson – Bonus Episode

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 and welcome to the show. This is a special bonus episode of economics explored to talk about, among other things, what else but the new reciprocal tariffs that President Trump announced in the Rose Garden earlier this week. We’ve seen the S and p5 100. It’s fallen around 10% ASX 200 it’s down 4% over the week. So big impacts on global markets. The IMF Managing Director has called the tariffs a significant risk to the global outlook at a time of sluggish growth. Before we get into it, I should say this episode sponsored by Lumo coffee, they’re high quality, organic coffee from the highlands of Peru. It’s jam packed full of antioxidants. So economics explore. Listeners can get 10% off. So check out the show notes for that link. Now, back to the show. We’re going to be talking about the tariffs. We’re going to be talking about Doge, and also elections that we’ve had in recent, elections in the US, in Wisconsin, the upcoming Australian election. My guest who else? It’s my good friend, Darren Brady Nelson, who’s joining me from Milwaukee, and he’s just he’s had some recent run ins with Turkey, Turkeys on the campaign trail in Wisconsin. Darren, good to have you back on the show.

Darren Brady Nelson  02:06

Great. Yeah, good to see you too. Thank you. First, you got to

Gene Tunny  02:10

tell me what happened with that Turkey. I heard you had a run in with a turkey on the campaign trail.

Darren Brady Nelson  02:15

I did. I did. Yeah, I’ve been doing sort of, you know, you know, like you, well, a little bit similar to you. I mean, you, you actually set up your own firm, and all adept at economics and all that sort of things. You You certainly taken, you know, being, if you like, a freelancer, independent, to sort of higher levels than I have, I’d kind of just go fly solo. And that’s what I do, kind of economic stuff, mainly. But sometimes I get weird stuff, like elections. So, you know, I did the, obviously, the Trump election, I think we spoke about that, you know, last year at some stage, or in the wake of last year, and then more recently, I got, you know, kind of involved in the Wisconsin Supreme Court election. So in the US, pretty much most of the courts, the judges run for office like, you know, politicians, the only exception being the US, you know, Supreme Court. So anyway, so there’s a big election for one, you know, one, one seat was up for contention in Wisconsin, and so, you know, I’ve been doing that for the past five weeks or so, you know, literally going out there and knocking on doors and speaking to people and, you know, handing out literature. So, you know, I’ve become, the past couple of years, the door knocking economist, but as you mentioned, I’ve also become the turkey fighting economist as well. So what happened is there’s a suburb called Wauwatosa in in Milwaukee County. So Milwaukee County’s got the City of Milwaukee, which is dominates, but it has a bunch of other kind of subsidiary cities or suburbs, including Wauwatosa. And just just one morning, when I meet on the second house, I went to Wauwatosa. You know, just after 9am I was walking up to go knock on the door, and I heard this hissing behind me, you know, you know, I don’t know what I was thinking, I guess. I thought maybe cat or something, I suppose. And then I turned around this really huge Turkey. I didn’t even know turkeys could get this big. Was kind of like chasing me. Essentially, I didn’t even know it was until I got up to, you know, nearly to knock on this, this person’s door. And, you know, it was a big male Turkey and all puffed up and all this sort of stuff was like, you know, like, about four feet tall. The thing was huge, you know, a meter. And obviously they puffed themselves up. So, you know, obviously it took me a little bit unawares. And, you know, I tried to shush it off and scare it off with loud noises, but it was not going down for that. And fortunately, there was like a, you know, winter is, you know, pretty much over. But, you know, they had, like a kind of a plastic shovel. Lot of Wisconsinites just keep their shovel just sitting outside. I say most people don’t just steal people’s shovels, I guess. But anyway, it was there. It was, it was, it was plastic, so it wasn’t like a big metal one. So I grabbed that ice, tried to, you know, like, you know, poke it and, you know, have it scare away. But I sat there for like, up to 10 minutes, literally fighting this turkey with a shovel, it would not it kept on coming. In fact, I hit it like several times. Usually when you hit something once it runs off, right? But this thing would not run off. And I actually got saved by just some retired lady and her rather large dog cut me going for a walk, and she sicced the dog on on the turkey, and it finally took off. So, yeah, there’s my weird story about, you know, getting attacked by a turkey, obviously, um, you know, I certainly wanted, um, you know, Brad Schimmel to win pretty badly, but I’m not sure about, you know, fighting a turkey for him, right?

Gene Tunny  05:58

Okay, so Turkey’s protected. I mean, you didn’t harm the turkey, did you? I mean, you just sort of

Darren Brady Nelson  06:05

harm that Turkey because it because they have these, these, you know, really, I mean, they’re not going to kill you, but they could, they have these spurs on their, on their, you know, their feet, so they could, you know, you know, cut you up pretty nicely. So they’re not harmless birds, right? They’re not like, you know, maybe not like an emu or something like that, which is obviously far bigger and, you know, can probably, you know, break your ribs or something if it kicks you. But they’re not, they’re not harmless. They’re not like, gonna kill you, but they’re not harmless, right? So, no, they’re not protected. In fact, while with toast, has had a problem with wild turkeys for quite some time. They need to probably call them actually,

Gene Tunny  06:45

okay, well, thanks to that old lady and a dog. So, yeah, the

Darren Brady Nelson  06:51

dog, the dog was great. So it was a really large sort of golden retriever or something. So, yeah, okay, so

Gene Tunny  06:57

you’re, you’re able to answer my questions regarding Trump’s tariffs, among among other things. So, Darren, first, what’s your assessment of the market reaction? I mean, the market reaction has been pretty bad. It’s it looks like a mark of disapproval for the tariffs. What’s your assessment of it, please?

Darren Brady Nelson  07:15

Um, yeah, that’s not, yeah, that’s a reasonable assessment. Do I think it’s going to be some sort of like even medium term thing for the markets. No, I think they’re going to bounce back fairly quickly. So, you know, my, you know, we’ll obviously get into a bit of, you know, I’ve been kind of like changing my views on tariffs in recent times, not to the point of being like pro tariffs or pro protection, or anything like that. But, you know, I mean, I think that the White House statement, the executive order, and the accompanying statement, you know, sets it out pretty well. I think, you know, the reasons for it, and the whole backdrop, I think it’s actually a and, you know, it’s actually one of the best written executive orders I’ve actually seen, you know. So I don’t know who actually wrote that, but you know it certainly, you know, doesn’t it’s not, you know. I mean, Trump talks in terms of, and sometimes he speaks and he and he trolls people talking about beautiful tariffs and, you know, that sort of stuff. And but you know, I know people have been in the Oval Office with him, and I don’t think he he is a protectionist, nor does he think tariffs actually, you know, ultimately, if that’s all you’re doing, it’s not going to, you know, really create wealth. It’ll help domestic industries, for a time, certain domestic industries, but you know, at the end of the day, it’s not going to, obviously, we’ve seen what happened to, you know, the the automobile industry in Australia, eventually, you know, tariffs and subsidies and all the right and regulations that all directed to help them, eventually they collapse and fail. But that’s what, what Trump’s trying to do is really more art of the deal, and I’ve kind of first started to get a feel for that. You know, that that’s what he was trying to do in, I guess, probably 2018 particularly talking to, you know, a a former Cato economist, who, obviously Cato is, you know, like kind of the libertarian think tank in Washington, DC. So if he was convinced that that Trump wasn’t a protectionist and was just doing it for Art of the Deal purposes. You know, that’s that’s pretty good evidence, on top of what I’ve also seen since then as well,

Gene Tunny  09:29

right? Okay. Now, who do you think drafted that order? Was it Peter Navarro? Is Peter Navarro still involved in in the White House?

Darren Brady Nelson  09:41

I understand he is, I don’t look it’s hard to say who actually, literally drafted that I’m sure was, you know, I’m sure if someone drafted it, and there was a team with input, but you know, it just like, you know, I’ve seen a lot of government stuff across multiple countries, and it just, you know, you know, particularly, I guess, you know, Trump has, you know, him. Self, obviously, what’s what the weave? You know, how? Obviously he does the weave when he’s actually speaking. You heard that term, the we, yes, yes, yes, yeah. You know, he kind of, you know, wanders around and goes kind of off on tangents and comes back and all that, you know, like, you know, I’m not sure how he writes, To be honest, I’m, you know, but I doubt he wrote that, but, so, you know that, I mean, in a nutshell, what I understand, and I remember this, you know, particularly after a g7 meeting, I think in 2018 and I wrote an article about it, which I sent to you. You know, we’re, you know, basically the the g7 leaders were complaining about, you know, some of the tariffs, obviously. And then Trump, you know, hit back with, like, you know, hey, Canada, you’re doing this, you know, these partners are doing these ones. Okay, fine, let’s all get in a room and let’s get rid of all our tariffs, or, you know, or at least significantly reduce them down to, you know, very small numbers. And of course, Trudeau and everybody else backed off from that idea, you know. So that tells me, you know, these criticisms aren’t really necessarily some big stance on principle about tariffs, and not even just simply, hey, you’re harming us with this tariff, which, of course, yes, you know, there’s, there’s that, but I think, I think there’s some broader stuff and bigger stuff going on we can get into later, but, but, you know, at a simple level, I think, again, it’s art of the deal. I think Trump’s doing this. And, you know, as Dan Mitchell, who’s, you know, and you know, essentially, I’ve seen ardent opponent of terrorists, but he’s kind of a little bit of an ardent opponent of Trump, no matter what he does. But he, you know, he says, you know, he points out rightly, these aren’t simply reciprocal at times, like, you know, not just the same level as, you know, China or Canada or the EU that’s true, as far as I understand. But they’re punitive. But they’re punitive with a point to get these people into a room, basically to do a deal, to ultimately, you know, sort of get better trade arrangements, lower tariffs, and not just tariffs, but other non tariff barriers to trade, which there’s plenty of. And because, you know, the US, you know, certainly seems like they’ve kind of allowed countries to kind of hit them harder with stuff over the years, and the US not sort of retaliating, and now they finally are, and they’re making up for lost time.

Gene Tunny  12:25

Yeah, look, Darren, I think you there’s some interesting points you made there. Now the issue about Yeah, you rightly acknowledge these tariffs aren’t genuinely reciprocal. They are. Some of them are punitive, and a lot of economists and market commentators have been shocked by the formula that was used to calculate them. So it’s it’s either 10% or it’s the if there’s any sort of restriction on any imports, then it’s a minimum of and that could be for biosecurity reasons, as in Australia. So one of the things they’re concerned about beef, and I mean, we’ve got very strict regulations on food that can be imported. And so that’s one of the points of contention. But it’s basically, what was it? It was the trade deficit with a country divided by the the exports of that country to the US. And that’s a that’s a percentage, and they divide that by two, and it’s, it’s either that or 10% whichever is greater. So an economist are just sort of scratching their head, how does this make any sense? So that’s one of the, one of the concerns. You mean, where’d you get this formula from? Well, that’s the formula. That’s how that’s basically what everyone’s what everyone’s reporting, how they figured out, how they

Darren Brady Nelson  13:39

actually I contend whether that’s actually in the executive order. But anyway,

Gene Tunny  13:43

that’s, you can work that out from the chart that, you know, the chart he held up on the, yeah, the Rose Garden. So that’s, that’s essentially how he’s come to this. There’s this bizarre formula that that no one can figure out. So that’s one of the concerns. But I think that’s good. You’ve acknowledged that these are punitive. You think this is about the the art of the deal. Now, this is what Scott Besson, the Treasury Secretary, was saying. He was trying to hint, oh, okay, this is, look, we want to have a negotiation with these countries. But then Caroline Levitt, or someone from the White House, has come out and said, Oh, no, this is final. So, I mean, what’s your so is your? Is your view that this is the start of a negotiation with different countries, and so we will have lower tariffs eventually. Or how long is this going to last? How do you see this playing out?

Darren Brady Nelson  14:32

Look, you know, it’s obviously hard to say how long, and it’ll probably be be on a country to country basis. I think some will kind of go all right, you know, like, let’s we’ll come to the table pretty quickly. I didn’t hear the comment by Levitt that you’re saying that doesn’t sound accurate. That doesn’t sound in keeping with, you know, not just Trump over, you know, his previous presidency in the start of this one, but obviously he’s famous for the art of the deal, his book. So. I don’t think Trump’s change on that that, you know, I think he’s changed in terms of the art of the deal, with dealing with Democrats and and the kind of the his ardent left opponents, I don’t think he’s given up that you can’t do a deal with them, right? But that’s not applying this. That doesn’t apply in this setting. I don’t think and, and, you know, in terms of, yes, I think you can do a deal with any country, you know, Canada, China, EU, all that, even though there’s obviously people there who you know, are reluctant to do any deal with with Trump, because they just don’t like him, right? They don’t like what he stands for. They don’t like his style, etc, etc. And then there’s kind of that long standing and growing kind of European disdain for the US anyway, that that’s a separate issue, I suppose, but so, yeah, I totally see it as art of the deal. You can find a statement or something, but that’s not I think that the weight of evidence suggests it’s art of the deal. It does get more complex, because Trump is a bit of a troller, and he and he’s, he’s loose with language. But, you know, I was thinking that too. And I was thinking, Wait a second, maybe not so much, because if you’re doing the art of the deal, if you make it explicit that, well, this is the art of the deal. I don’t actually believe in tariffs, and I don’t really want to keep them on, you know, people might balk and go, all right, we’ll just wait it out for a while, because, you know, you know, he doesn’t really believe in this, and he’ll eventually just get rid of him, right? He’ll, he’ll, he’ll bow to the, you know, the pressure, if the markets don’t recover quite the way we think they will, or, or of the political pressure, or, you know, Republicans in Congress, you know, get weak knees. So I think, you know, actually, to give him a little bit more credit, I think sometimes this trolling also does have a purpose besides the fact he may enjoy the trolling in the first place because you let your opponents note leaner, you know, or your negotiating partners, know, look, I’m not really serious about my position, then that that really undermines your art of the deal. Basically, does it not so. But I think ultimately, you know, he’s not a believer in protectionism, or, you know, like tariffs are somehow the long term path to even domestic growth of industry. So, you know, I think the way to the evidence is, you know, in that and you could certainly, you know, I, you know, I haven’t looked at their formula that you, that you suggest they’re using, and if maybe that is true, I didn’t see that in the executive order doesn’t say that it doesn’t exist, just because it’s not an executive order. But I didn’t get that impression from the executive order. And, you know, ultimately, you could certainly make a cost benefit analysis, you know, case, you know, like, obviously discounted over time, if Trump is doing an art of the deal and he gets a lot of these lower tariffs and other non tariff barriers to trade, putting side, obviously, we can talk about the defense argument too. I think you could certainly make a case, because I think that the world, the WTO and all these things, have just not been doing. They’ve been doing a very bad job, you know, over not just years, but probably decades. Actually, it just hasn’t been really particularly when it comes to non tariff barriers to trade in particular, that I think there’s a reason why Trump and some others are just starting to move to these bilateral trades, because the WTO is just kind of captured by dei and green stuff and all the rest. You know, it’s no it’s no longer devoted to free trade as such,

Gene Tunny  18:37

right? And so do you think that these the failure of the WTO, this is behind the large trade deficits that the US has with China and other countries. Is that the is that the contention definitely

Darren Brady Nelson  18:52

with China, I think, I think it’s huge. I think, I think these trade deals, you know, particularly when they’re like, 8000 pages long, etc, like the, you know, the Trans Pacific Partnership. It’s just a lot of just like, Yeah, you know, we’re gonna help my friends over here. We’ll help your friends over here. We’ll help my friends over here. Blah, blah, blah. They’re not free trade agreements. They’re not even vaguely like, free trade agreements used to be done, you know, once upon a time, I’d argue, you haven’t even had a free trade agreement. You know, maybe you could say, in the early days of these, of these multilateral, you know, gat and stuff, maybe there was some, you know, a period of time where you really were, you know, and probably were moving the in the direction, back in the direction towards free trade. And I say back, because really, since World War One onwards, you haven’t seen much in the way of actual free trade agreements, which used to be very small and didn’t have to say a whole lot, you know, as you’d expect, a free trade agreement too. You know, you’re not sitting there picking winners and losers, which is what they do now. And sadly, you know, they were so keen to get China into the WTO, they just threw all sorts of, you know. Unfair sort of advantages their way. There’s no way Communist China that could do nothing well, all Sun is this, you know, turns into this powerhouse of capitalism purely because they were really good at stuff, or even purely because they had cheap labor, because a lot of stuff that’s going over there is even capital intensive sort of manufacturing and other items, which you know, obviously, over time, China got better at this and that, no doubt, but you know, to suggest, all sudden, almost overnight, China is super awesome at all these things. I know I don’t think so well, what

Gene Tunny  20:37

are some of the unfair advantages you do? You think that China has had thrown its way that, you know, that the White House would be concerned about, what do you think? What is it specifically the Trump administration is concerned

Darren Brady Nelson  20:50

about? Well, clearly, they’ve bought off a lot of politicians. I mean, you know, over the years, you know, to get these sweet deals. They’ve been, you know, the Bidens, the Clintons, the Bucha, over the years, they’ve thrown a lot of money at these people to get kind of sweeter deals. And it’s not always, yeah, it’s not always the stuff you can just pick up the Trans Pacific Partnership and see the bias in there, although you can still see it in there too. But I think it’s, kind of, kind of, if you like, the shady stuff behind the scenes that have been done,

Gene Tunny  21:28

yeah, yeah. I mean, it’d be, I mean, I’m, no doubt there are. I mean, I’ve had guests on this show

Darren Brady Nelson  21:33

labor in Australia, too. I mean, it’s just like, there’s a lot of stuff that’s gone down that’s, you know, it’s been documented. Some people have actually been prosecuted for saying something. Some people have not. So, you know, some stuff, you know, obviously hasn’t gone to court or trial. So you could say, well, that’s just conspiratorial, yeah, yeah, maybe, maybe not. You know, the world’s not sort of, you know, there’s a lot of nefarious things that happen this world, you know, I don’t know why people seem surprised as though, like, this is, you know, everything’s above board, you know. I mean, China’s clearly set out its strategy, and it’s not, oh, we just want to be, you know, just compete in free trade agreements with the world and just be a part of the international community. They fairly well documented their grand strategy in particular, you know, China, I’ve seen particular has so they’re not, you know, they’re not, sort of like, Oh, we’re not going to do shady deals, because, you know, that’s beneath us,

Gene Tunny  22:36

right? Okay, what I would, what I’m wondering about, Darren is, what does this mean for us, consumers and businesses? Because China has become the new workshop of the world. Our mutual friend Dan Mitchell, who you mentioned before, he’s pointed out the tariffs there are tax so you can argue about to what extent the the tax is borne by by foreigners, by by exporters, who might have to cut prices to be able to keep selling to the US or to sell elsewhere. But there’s no doubt that they are a tax, and us, consumers and and importing businesses, will pay more Dan quotes, some estimates that it could cost Americans 2000 to $4,000 reduction in disposable income. What do you think will be the impacts on consumers of the Trump tariffs, please? Darren,

Darren Brady Nelson  23:34

yeah. I mean, I would say that analysis sounds fairly incomplete, because you have to take in in account the whole sort of, you know, gambit of taxes, like the ones that the people who are now paying more tariffs weren’t paying in terms of domestic taxes, you also have to take into effect, obviously, you know, Trump has a huge tax reduction package that’s that’s going to be coming up, so you have to factor that in as well. So to just suggest that it’s just purely tariffs, and there’s going to be no changes to other taxes. So Dan’s right, it is a tax, which means you have to look at the whole sort of like, what’s Trump doing on all the taxes, basically, that are obviously under his disposal at the federal level, of course, and includes, obviously international as well. So again, you could certainly make it a case. I think it’s not unreasonable to, you know, particularly if you’re going to have a trade off and you’re going to have lower income taxes, lower corporate taxes, maybe lower capital gains taxes and that sort of thing, and then you you know, I’m not going to talk about these particular punitive tariffs, but I can see, you know, you know, a sensible level, obviously much lower, once you get, hopefully, people in the room, and you start getting tariffs and non tariff barriers lowered, at least on a bilateral basis, bilateral, bilateral, bilateral, that you could end up with an actual lower tax burden on American consumers over time. Even though you putting aside, like the spike, obviously right now with tariffs. And also you have to throw in the fact the US, unlike a lot of countries, is less reliant on foreign trade than it has historically been. It’s got a huge domestic market, and there’s competition domestically now, again, like I’m saying, in principle, I don’t favor like, hey, we’ll just throw tariffs on because, you know, we want to help out industry a over industry b. Or, you know, domestic industry a versus its its foreign competitors. Like I said, I think in the context of this, I believe this is Art of the Deal. It’s not, they’re not going to keep these in place, they’re going to, you know, massively lower them when they get deals, you know, with each country, China and the EU will probably be the last to come to the table. In fact, I would argue EU will be the very last China will come to the table, much quicker than the EU will, actually, because I think China is so reliant on, you know, you know, sort of, according to the US, I think it’s, it’s, you know, G, G’s pride. At the moment, the EU is a bit different. They, like I said, there’s such a, weirdly enough, I don’t think G. And oddly enough, the Communist Chinese, even though they obviously want to ultimately be the number one power in the world that, weirdly enough, there’s not at the same time, there’s not this kind of decades grown up anti Americanism that you have the EU. So that’s kind of interesting kind of dynamic that’s going to make doing a deal with the EU probably the most difficult. I think, ultimately, weirdly enough, yeah, I know it’s weird. It’s kind of, in one sense, China should be the most difficult, because obviously they want, they want to, you know, supplant the US as the top strategic power. But then you have the EU, you know, with its long standing disdain for American culture, and particularly, obviously, for Trump and mega, Chinese probably don’t, you know, they kind of have, probably have a weird respect for Trump and mega that the EU does not. That’s interesting.

Gene Tunny  27:12

Who is it the Chinese blame for the century of humiliation? I mean, would that be primarily the British because of the Opium Wars? Probably is, I guess

Darren Brady Nelson  27:21

so, yeah, I guess so, yeah, you know. And look, let me put this all in the context of, you know, you know, I was straight up Dan liberty, Dan Mitchell, Libertarian, slash, classical liberal view of tariffs. But the thing is that what I’ve noticed is a lot of people like Dan, and he’s my friend. He’s, you know, he’s turned into a religion, as though, like, you know, like he won’t complain about other taxes so much, but tariffs are, like, sacrosanct, you know, like they’re not, they’re a tax, you know, like they’re not a super special tax, in some sense, you know. You know, they behave like a transaction tax for the most part. And as you mentioned, yes, they get shared between producers and consumers, whether they’re domestic, and in this case, obviously the producers will be the foreign ones. Whereas, you know, normal transaction tax analysis, you’re thinking in domestic context. But that’s fine. It’s, it’s, it’s pretty much the same thing. Well, it’s been on elasticities of supply and demand, obviously, you know, in particular markets, you know how much, which will depend, obviously, on competition versus, you know, how, how much of a cartel type of industry it is, etc. And what you mean, what are the substitutes and compliments, etc? But yeah, I’ve noticed this weird thing. And I think I also had this once about time, like, tariffs, oh, they’re the special tax that you can never, ever do, any ever put on for any reason whatsoever, even if you actually lower taxes elsewhere. You know. So, no, I think, I think that’s kind of ridiculous sort of stance. Well,

Gene Tunny  28:53

I think the point you make about you talked about elasticities. And I mean, if the Trump tariff formula actually had an elasticity or two in it, then you might think, oh, okay, there’s some logic to it. And there is that concept of the optimal tariff for a large country like the US, which can actually affect the terms of trade. So but, I mean, my concern is just how, just the formula that’s been applied, how wide ranging it is. It doesn’t seem I mean, I can’t understand it. I mean, I don’t think they’ll last either. I mean, I think we both agree this is, this is temporary. I have a different hypothesis to why it’s temporary. I think it’s it’s going to be temporary because the people on Wall Street, the people in Connecticut who had got the hedge funds, they’re going to be knocking on the door of the west the West week, saying you’ve got to stop this. This is, yeah, this is costly this week.

Darren Brady Nelson  29:48

Yeah. What’s the sorry, forget the name escapes the who’s the UK Prime Minister that these sort of people pushed out the door fairly? Liz truss, sorry, yeah. Let’s trust Trump is not. Liz truss. They’re not going to be able to to they can come knocking on the door as much as they like. First of all, Trump knows the game as well as they do, right? So he’s he, you know, I’m not sure Liz really understood it as much. And I’d say the US is a much bigger, more powerful country, etc. But also, Trump has almost been killed. I don’t think the hedge people are going to be able to pressure him like you know, maybe they could have in 2017, 1819, but they’re not going to be able to this time Trump. Trump’s sticking to his guns on all these things. Obviously, we’ll talk about Doge as well, but he’s sticking to his guns. I The hedge fund people in Connecticut? No, they got zero influence on Trump. Well, the

Gene Tunny  30:44

benefit, the the what Trump has in his favor is that there’s still a huge demand for US Treasuries, right? There’s still, you know, they talk about the safe asset shortage, so people want to hold US Treasury bonds, because they’re seen as safe. And even, like, if you have global turmoil, people still want to hold US Treasury bonds because they’re seen as safe. So whereas with the UK, I mean people, you know, the people in the markets, go, Oh, we’re, we’re concerned about their ability to repay all this debt, and yeah, we’ll punish them in the in the bond market. So yeah, that’s, that’s really what, what brought down Liz truss? So, yeah, I think he’s a lot in a lot firmer position than than trust. I think he can, yeah, I don’t see any threat to him. I mean, he can’t be kicked out, like Liz truss. I mean, he doesn’t have a he’s in for the next, next four years, isn’t he true?

Darren Brady Nelson  31:38

And it’s actually have said, or the, you know, like, you know, some of the stuff, you know, I mentioned, you know, the kind of the dirty deals and the that are done, you know, I never thought about these things much prior to the 2020s and I probably would have been like, you like, oh, you know, like, you know, kind of like, oh, I don’t know about that. But now here’s the other context, the West globalists. There’s a war against Trump and people like Trump. So this is also and a lot of these people are hedge managers, so there’s that. So they’re trying to make the markets look tanked and make Trump look bad as much as they can as well. So it’s not just purely, yes, there are people literally are scared and whatnot and but there’s also people because, you know, we have BlackRock. It’s not like these markets are. There’s sort of cartel elements to these markets. They’re not these purely competitive markets, and no one’s really influencing it. And this is purely just a sensible market reaction to stuff it. It’s partly that, but it’s also partly people trying to make this happen as well, the black rocks of this world as well. They who are just ardent opponents of Trump, right? And they’re opponents of Trump, they’re opponents of, you know, me lay their opponents of Orban. They’re opponents of all these, you know, these Trump like movements. I know Milo is a bit different, but he’s also, you know, he’s a strong ally of Trump as well, even though, obviously he takes kind of a more libertarian approach that Dan Mitchell would approve of in Argentina. But they’re both on board with fighting, sort of the globalists, right? The Black Rocks, the the weft and all that sort of stuff.

Gene Tunny  33:19

Darren wasn’t Wall Street, weren’t BlackRock and Ray Dalio and all the hedge funders. I mean, maybe not Dali. I can’t speak about him specifically, but my impression was that they were all in favor of Trump, and the didn’t the stock market have a bit of a boost when he got elected. So, I mean, people, people that you’re talking about, were actually excited about Trump, but now they’re not, because they see that the diet, the adverse consequences these tariffs. Did you see Jim Craver Cramer was on with Aaron Burnett on CNN the other day, just saying, What madness it is. I mean, the I just can’t understand that argument. I mean, wasn’t

Darren Brady Nelson  33:54

Wait a second. When were they on board? I don’t I never heard them release statements Well,

Gene Tunny  33:59

I mean, well, the markets were, the markets got a boost when Trump was elected, and when he and he is Trump, was actually claiming that. Well, he was claiming credit for the markets going up when they were starting to think that he could get elected. So, yeah,

Darren Brady Nelson  34:13

look, he does, you’re right. I mean, all politicians start doing that. They claim, you know, markets go up purely because of them, and then when they go down, that’s not to do anything with them. Obviously, it’s a mix of both. But no, there’s the black rocks. And people have never been on they didn’t also turn to Trump, you know, this time around, he has, you know, this is like a drop dead war to the death, almost, you know, actually, literally, maybe also death, you know, between sort of globalists and the kind of, like the nationalist sort of movements of Trump and Orban and Milo and people like that. I don’t know why you’re smirking at me. This is fairly

Gene Tunny  34:53

honestly, Darren, I don’t, I don’t understand. And I mean, most of these people just want to make money, don’t they? I mean, I don’t know about this. Whether you how you can call them. Maybe they they’re more, yeah, definitely, they’re going to be more in favor of, you know, free or globalization, than, say, the people in the current White House. But I just, I just can’t understand this well, I think deliberately crashes the market. That doesn’t make any sense to me. We’re talking

Darren Brady Nelson  35:19

about Soros did the exact same. Soros, back in the day, did the same thing, not for some market driven purposes, for his political agenda. Soros did this, you know, once upon a time. So these people, I mean, Bill Gates, is long removed from like, Oh, I’m just trying to make a profit at Microsoft. I mean, they’ve moved on from this. They have other agendas that they’re using their wealth for. This stuff’s pretty well documented, and it’s not documented on fringe websites. It’s documented fairly well, you know, maybe not on CNN, but it is documented on Fox Business and plenty of other sort of websites like that.

Gene Tunny  35:59

I think if you can send me some links to that. Darren, I’d appreciate it. Yeah, honestly, I’m, I’m skeptical. But look, it just doesn’t, it just doesn’t appear that. It just doesn’t make any sense to me that they would want to crash the market in that way. There are a lot of people who, from what my impression is that there are a lot of people on Wall Street who are mad at Trump at the moment because of what’s happened in the markets due to his tariff announcement. So these

Darren Brady Nelson  36:27

people support, you know, the COVID restrictions that I mean, this little mini crash from Trump and his tariffs is nothing compared to what happened, you know, under the very end of Trump and, you know, for another, you know, the first year or so, Biden and these people were very supportive, yet they were getting smashed in the pocketbook. Were they not? So people aren’t just motivated purely by profit, and even people in Wall Street and et cetera, aren’t just purely profit, particularly if they have kind of, you know, obviously, if they’re not in a position where, if they lose right now, they’re gone. You know, as long as they can recover and they have other purposes, and they can have other influences and and hopefully make a buck, obviously, as well as, you know, pursuing, you know, what are their sort of broader goals they have, like a Bill Gates or, or George Soros or, you know, Larry Fink, because they all have broader goals and, and, you Know, weff in particular, you know, their website sets out those goals, and they’re not just to, oh, let’s we want more free trade. That’s not their goal,

Gene Tunny  37:29

right? It’s the great reset you’re talking about. We had an episode on the the great reset a while back. People

Darren Brady Nelson  37:34

always go like, they go like, Oh, I’m skeptical. And then I immediately send them the link to their actual website that talks about the great reset. It’s like, it’s that it’s not like a crazy conspiracy theory. They set it out quite clearly. What they’re trying to do,

Gene Tunny  37:46

what I’ll do is, I’ll put a link in the show notes to our chat about the great reset, and because I think we had a good conversation about that a few years ago. So just finally, on the tariffs, Darren, you you mentioned, you know, other considerations, or other considerations, I presume you’re talking about national security. What do you see a national security aspect to these tariffs?

Darren Brady Nelson  38:12

Yeah, I think there is. I don’t think that’s the main one. Obviously, if you go through the big list, you know, there will be for China, without a doubt that that’s actually with China. It’s, that’s, that’s actually maybe the number one reason, actually with China. I think you can probably, you know the notes, you know where Adam Smith sets out the three exceptions defense is not before he tried to free trade. Yes, yeah, where he sets out the exceptions to free trade, you know, where it is legitimate to do, you know, tariffs or whatever else, right? So defense is number one, and then the next two are almost kind of the same thing, a little bit different. The second one’s the reciprocal, you know, straight up reciprocal. And the third one is the punitive one. And he sets out for a goal, though not punitive, just to be punitive, obviously punitive to then get them back to the negotiation table, and then, you know, open up both markets, if you like. Are, you know, more than just two markets, perhaps. So Adam Smith sets out the himself, sets out the reason for the punitive tariffs, right? So, you know, which we obviously spent a lot of time on previously. So you know, Adam Smith himself, who is obviously against mercantilism, if you like mercantilism, obviously thought like this was a good long term strategy, right? You know, mixed in with the concept of, like, we want lots of gold and all that sort of stuff. But that’s obviously not an issue nowadays. So, yeah, defense definitely it. You know, I’ve surprised in recent years to learn that just the amount of stuff that, you know, the US military relies on China for, you know, inputs, it’s that’s just like, No, it’s like, it’s one thing to rely on Canada or Australia, obviously, or even like countries that may not be your allies, but aren’t literally. Your rivals and could be your enemies overnight, you know, if something went, you know, you know, in Taiwan, if something happened, for instance, which, of course, the US doesn’t rely on Russia in any way, for, for, you know, defense related inputs, but it does for from China,

Gene Tunny  40:17

right? Okay, so national security. I mean, this is interesting that you think that’s, I mean, that’s part of it. But the the biggest story is you think that you agree with Trump, that you think America is getting ripped off. I mean, I’m just trying to understand what the what is it? How are they getting ripped off? I mean, what’s, what are the consequences of that, that jobs and factories have gone overseas, and the idea is to reassure those jobs and factories, is that the idea? Well, look,

Darren Brady Nelson  40:43

you know, I think it’s partly that. I mean, I’ve just purely as an, you know, you know, the evidence I’ve seen, you know, has looked like the US has done a lot of bad deals that that have, if you’ve like, skewed things in favor of Mexico, in favor of Canada, even in their, you know, their overall North American agreement. But more importantly, obviously, you know, through the WTO, things skewing towards China and other agreements. So, you know. So I think they are trying to rebalance, you know, basically, in a nutshell, to others like, you know, look, I can’t speak for Navarro. And all his views, I think you seem to know a lot more about you know him, and you know where he comes from than I do. Maybe he’s got something, a grand strategy that’s beyond just, hey, let’s kind of, you know, level the playing field, you know. I think this is ultimately just kind of aimed at that, because I don’t think you know Trump, or you know, a lot of Americans don’t feel as though they can’t compete if the fields you know more level than it has been in recent decades you know, particularly from you know, probably Clinton onwards, perhaps longer, but at least since then. So you know, that’s, that’s my take on it, that, you know, ultimately these punitive tariffs and putting again, defense to the side for the moment, defense is a different issue, and I think you’ll have to treat it separately. But of course, you know, you can get, you know, obviously the there’s a danger the military industrial complex claiming things are skewed. You know, you know that things are important to them when maybe it’s not. So there’ll be a lot of you know that obviously this will have to be looked at closely to make sure that it’s not just you end up just protect, if you like, really end up just protecting industries over a longer period of time, rather than, you know, having really good, you know, national security reasons for, for, you know, sort of like taking, you know, so making it hard for China to have an input into, you know, this or that particular, you know, crucial security or defense aspect,

Gene Tunny  42:50

yeah, okay, okay, Darren, I think we’ve chatted plenty about tariffs for the time being. Let me it is totally out of the deal. Yeah,

Darren Brady Nelson  43:04

go ahead, yeah. Look, I think this is, you know, something about this tells me I’m right when, when people get, like, just overly emotional about it, like, particularly economists. I kind of kind of not saying you but, you know, but I’ve been talking to libertarian and classical liberal economists, and they don’t even want to consider that. You know, that maybe these trade deals have not been very good and skewed. They don’t want to consider that. They don’t even want to consider that this is Art of the Deal. They don’t want to even consider that the Trump is anything but a protectionist. They don’t want to consider that tariffs, oh, yeah, their taxes. Remember, their taxes, you know. Thus, let’s look at the overall tax mix, including tariffs. They just have, like, this is like a sacred cow. You can’t ever put a tariff up for any reason or put a tariff on even if you can actually say, you know, these Adam Smith reasons, defense, reciprocal, punitive, to then recapture a more free trade arrangement. I’m surprised at the amount of people who they have such emotive responses to it. And they’re not. They don’t go, oh yeah, okay, let me consider this, you know, or you know. Okay, fine, show me some of the evidence for that, etc. No, there. It’s usually a very visceral reaction right away. Perhaps 10 years ago, I might have had the same or maybe seven years ago, I might have had the same reaction too. Well,

Gene Tunny  44:29

that’s what I’d like to see. I’d like to see what is that evidence that that is being claimed, that of these skewed trade agreements, I think it would be good for for the White House to put that out and then have more targeted. I mean, if the genuine reciprocal tariffs, or if they’ve got a beef with a specific country, then then actually, you know, provide the evidence for that, and rather than just what they’ve done. But look, if you’re saying, look, I mean, maybe it is out of the deal, well, I don’t. Know what’s going on in Trump’s head? Yeah,

Darren Brady Nelson  45:02

look, I would, I think, I think, I think you may have relied too much on reporting and what they’ve done. I think, look at that, go, go to the source, and I sent you the link to the White House, their whole, you know, the executive order, plus their whole rationale for that order. And then, you know, judge that alongside of the commentary of whoever else.

Gene Tunny  45:24

Okay, right? Oh, Darren. I think we’ve chatted plenty about tariffs before we better get on to Doge. Elon Musk is, I think he’s finishing up his what was it 130 days as a special government consultant. And I mean, what’s your assessment of how Doge has performed? It’s been controversial. There was a whole, I mean, USA ID was shut down. There are concerns about what that means for Well, for the countries that it used to support, there are concerns about what it means for us soft power around the world. What’s your assessment of how Doge has performed,

Darren Brady Nelson  46:03

they’ve actually opened my eyes. They’ve actually performed better, you know, even though they don’t, you know, it’s not like, you know, typically, you know, if they, if the White House would have asked us, you know, hey, you know, you know, let’s see. We probably would have got a team of economists or whatever. And there’s nothing wrong with that. Of course, that’s typically how it would be done. But it’s interesting in this, you know, given, yeah, it’s interesting that they’re the tech people, the tech gurus that they got, and they AI wizards, I’ve been, you know, and I’m not a, you know, I’m a skeptic of AI like, you know, and this kind of tech in general, you know, like, I’m kind of like, you know, sure, I have to use tech, and I’m not like, against AI or anything like that, but, you know, I’m skeptical. And I’ve been like, they’ve kind of opened my eyes, like, wow, the stuff they found and how quickly they found it, and how broadly they found it. And then, you know, I was also like, you know, when the first thing they went after it was us a ID, and I’m glad you pronounce it that way, because I used to go USAID, and because it gives it, it gives it a sound of because it isn’t really a foreign aid organization. That’s the thing. I thought it was too It isn’t that, you said soft power. That’s being kind, that’s being very kind to what they do, you know, the, you know, Clinton Foundation and all the other stuff that they fund. I’m not sure. You know, it’s not quite the foreign aid organization that people kind of thought it was, including me, the the amount of Basic Black Ops, political black ops that this thing funds is like that surprises me, too. I didn’t realize that’s what it largely does. You know, for every mosquito net that it may provide in Africa, it’s that’s like, that’s mini skill for what it actually really does. So it’s not just that it’s inefficient and waste, if you like, wasting taxpayers money. It’s, again, it’s far more nefarious than even I kind of thought it might be, to be honest. So now understand why they went after it first. It wasn’t purely like, yeah, you’re wasting taxpayers money on this or that, including, you know, political donations and all these things. And of course, to only one side, it’s far worse than this. So I’m impressed by that, and also things like, you know, finding even though, obviously, social security isn’t really something that you know was going to be a reform target for the Trump administration, in fact, they kind of said the opposite. And obviously, pretty much Republicans and Democrats have said this for decades. We can get onto this, and I think they should just copy the Australian reforms in the 1990s they’re not perfect, but, boy, they’re pretty darn good by comparison. But anyway,

Gene Tunny  48:53

this is, you mean, the individual retirement accounts, superannuation, superannuation, yeah, it’s not

Darren Brady Nelson  48:59

perfect, you know? And then there’s the labor unions and all the, okay, it’s not perfect, obviously, but, you know, it’s, it’s, you know, the US Social Security Systems, clearly, the worst system in the Western world, it seems, as far as I can understand, but, but, you know, Doge is just targeting the the weird stuff, like, Why do you have people on the rolls that are 160 years Old? Clearly, no one is 160 years old, right? So, you know, all that sort of stuff, you know. And as if we went in there, we probably it would have taken us forever to get to that sort of stuff, right? You know. No, no, I think you know, over time, you know, Doge, if they keep it around, I think they need to, obviously, bring in economists and you know, and hopefully they’ll work closely with OMB, which they probably are, I’m not, you know, I don’t know, in Treasury, although the US Treasury doesn’t quite have the same broad role that the Australian Treasury does. You know, it’s very much focused on tax and debt, not so much spending, which is weird. I kind of was surprised to find that the US Treasury doesn’t. Even though they dole out money, they they leave it to OMB to do that, right? So that’s kind of what OMB kind of focuses on, spending and stuff like that. Well,

Gene Tunny  50:10

yeah, I’ll have to look at the specifics. I thought, how they how Doge has been so successful, is that they actually, no, I’m saying that it’s part of Treasury.

Darren Brady Nelson  50:18

Your Treasury doesn’t focus on, they have the data, but they’re not like the way that you’ve worked in the Australian treasury, yes, and state treasuries, you know, they’re heavily involved in what gets spent, right? You know,

Gene Tunny  50:33

yeah, to an extent. I mean, you

Darren Brady Nelson  50:35

know, by agency, by agency, there’s a, there’s a negotiation process, yes, yes. They don’t do Treasury doesn’t do that. It’s they kind of leave it to OMB to kind of do that in along with the Congressional Budget Office. And, you know, it’s kind of a, it’s a, kind of a different sort of system. But yeah,

Gene Tunny  50:52

from what I saw, that they were able to tap into some Treasury system that gave them really amazing data on all of the payments going out from US government. It’s quite extraordinary, and that’s how they’ve been able to be, you know, do as much as they’ve done.

Darren Brady Nelson  51:07

Yeah, Treasury has got data, but it’s weird. It’s like they have it, but they’re not like, they don’t actively use it, and they’re not involved in the process of spending like an Australian Treasury is, or even the Queensland treasury. So, but you’re right, yeah, they, yeah, I understand, you know, I’ve seen some of their data, which is public, obviously, and obviously, Doge has got access to much deeper, and I’ve data than, than what we can get at the public level. Yeah, yeah. Okay. So I’m impressed by just, you know, just the way they get, you know, even when, when, when, you know, the the Republicans in Congress were going to go along with this ridiculous, you know, spending budget. And, you know, Doge got onto it really quickly and went, Wait a second. They found all this stuff really quickly, you know, like the speed and the depth and this, you know, scale and scope. It’s like, it’s fairly impressive. Now, ultimately, when they kind of do the report, you know, by the Fourth of July next year, maybe it’ll probably come out on the Fourth of July, I suppose, you know, it’ll be a grant, you know, kind of a ribbon cutting exercise, maybe, type of thing, you know, if they continue to carry on, or whatever, however they hand us over, maybe to OMB. Then, obviously, OMB has got plenty of economists, you know, but I’m impressed by the tech people, and I still think they should be involved and rolled into an OMB and a Treasury or whatever CBO, because, you know, they’re, you know, quite impressive. What they can do so quickly, just on going

Gene Tunny  52:43

back to us a ID, what evidence is that they is there that they are running Black Ops? Is that just a Is that for real, or is that just a talking point from the doge folk?

Darren Brady Nelson  52:53

No, they said it out. They said they put out a great detail. They give you the numbers and stuff. You know, you mentioned the Treasury data stuff. They weren’t, yeah, they’re not. Such as a talking point. Obviously, it gets turned to a talking point for both sides, you know. You know, one side who says, yeah, and then the other side goes, no, that’s not the case. No. Doge, I found that, you know, they don’t just talk they they provide data, you know. And yeah, like I said, I didn’t, you know, like, six months ago, I didn’t, you know, I didn’t have a particularly strong view one way or the other, towards USAID, to be honest, you know, you know, except for, like, just the broader argument that a lot of economists have made, how foreign aid just doesn’t really work. It’s not, you know, East Asia and other places. You know, using market reforms has done way better than Africa, South America, etc, through this, this, this foreign aid. You know, plenty of economists have documented that, you know, conceptually. So, you know, I guess I had that view of it. But, you know, I was surprised that it really wasn’t really much of a foreign aid, you know, outfit, which is why it’s officially called a ID and not actually aid. You know that lot of people are careful not to call it US aid, to make it sound like a straight up foreign aid organization, which I didn’t know really, to be honest, I was kind of surprised too, you know. So they kind of opened my eyes at the, you know, corruption, which is beyond just inefficiency and waste, you know. I think you know, when it comes to corruption, that should certainly be the number one target. Then, you know, waste, and then you know, just kind of efficiencies, if you like, third. And I kind of miss that. I missed that kind of the corruption element of things, I suppose, I guess I realize that there’ll be elements of government that are corrupt to whatever extent, and fraud too. Obviously, that’s what they’ve been highlighting at the Social Security Administration, not suggesting the Social Security, you know, the SSA are fraudulent in them. Cells, but they’re being taken for a ride at times, I think, is what Doge was suggesting, right? It might

Gene Tunny  55:08

have to come back to Doge and have do a bit of a deep dive on some of these, yeah, some of these issues. Just, just so, yeah, I better do, sounds like, I better have a closer look at some, you know, some of what it’s found, and just try and figure out what’s going on. All right, just before we go, Darren, I gotta ask you about the Wisconsin special election. So the Democrats won is the US falling out of love with Maga

Darren Brady Nelson  55:32

no Wisconsin’s kind of Wisconsin’s always weird, but it’s a purple state. It does these weird little swings. It’s not a referendum on Trump. I mean, two things, it’s certainly, I guess it’s a silly referendum on some of Trump’s supporters of Wisconsin who couldn’t be bothered to get out to vote. And I think it’s also a referendum. The weird thing, because I was involved, you know, I did the Trump sort of campaigning stuff last year, and it was all hands on deck by, you know, all sorts of organizations. It wasn’t all hands on deck this time for the Supreme Court, even though it’s very important, because it has national consequences. Basically, the Republicans could maybe lose two seats in the house because of this? Right? Yeah, right. Two seats in the house, in the House of Representatives, not talking about the state legislature. Talk about the in Washington, DC, right? So, and some other stuff too. There’s other things, important things that you know, the Wisconsin Supreme Court will decide on that that have, obviously, state significance, but they also will have, you know, some federal significance too,

Gene Tunny  56:42

because of the boundaries. Is it the electoral Yeah,

Darren Brady Nelson  56:45

you know, gerrymandering? Yeah, both parties do it, but you know, that’s Australia did the same thing. It’s not like no one’s clean on the gerrymandering thing, but so, yeah, gerrymandering, essentially,

Gene Tunny  56:59

we turned it into an art here in in Queensland, I think we were the best at it for a while. Some of those large, all of those regional like we had these huge electorates in the cities, but the these electorates in the in the regions with far fewer people, and so, yeah, there are many more regional members that are the city. It’s

Darren Brady Nelson  57:19

exactly the same thing Wisconsin. That’s the Democrats complain that that that’s the case. The Republicans are, you know, making it a bit too suburban or rural and not urban enough. And, you know, so, yeah, so, yeah. So, so, basically, so, two things, you know, the trump the mega supporters, they didn’t take the election seriously enough. They didn’t come out. And also the various groups, even the one I was involved with, we didn’t get started till the end of February. This is something that should have jumped in by the bare minimum, the beginning of January, probably really mid November, you know, like once Trump won, get stuck into it, because this was such an important election, I’m not gonna, you know, I won’t blame the Schimmel campaign, because, you know, they only have, you know, they certainly attracted a decent amount of money, you know. And obviously more money was poured into Schimmel and Crawford. These were the two opponents, Brad Schimmel and Susan Crawford. So Brad Schimmel was the Republican, Susan Crawford was the Democrat, with the weird caveat of, they don’t actually officially run as Republican and Democrat. You know, kind of how they do at, you know, like City Council like Brisbane, yeah, and in the US, they had the same convention that council level, they don’t officially run as Democrat or Republican. But you kind of figure them out fairly quickly. Although you do get at council level here, you do get some people literally aren’t either party, you know. They’re just people who’ve been in the community, like I mentioned, wabatosa. There was this guy I kept on seeing his sign up, and he was the only person I saw his sign up next to Schimmel and next to Crawford. At times it’s like, Who is this person? Like both sides, like him, you know. So he’s got to win. He was just kind of a local guy sort of thing, you know. So, so anyway, so it was combination of, yeah, they didn’t get out the vote early enough. They didn’t make, you know, an effort. They poured a lot of money into stupid TV ads. I think that everybody on both sides complained. Were just awful. You know, from both sides, everybody, like that was the feedback I was getting. It’s like, no one liked anybody’s TV commercials. They just weren’t very good. So, anyways, yeah, but, but what did get up is the voter ID constitutional referendum, the Wisconsin State Constitution. So that will be in the Wisconsin State Constitution that you will have to have voter ID. Now it’s also in the context of there already are voter ID laws here, right? Yeah, you can change laws, right? So, and the Democrats were looking to change those laws to not have voter ID. Basically, um. Which, you know, does seem weird, because, you know, even labor, I don’t think has ever suggested that you shouldn’t have voter ID, have the greens. I wonder if the Greens have ever suggested that.

Gene Tunny  1:00:10

I’m unsure. I honestly don’t know. I mean, the greens are more I mean, they’re, yeah, they’re focused on the big issues for them are obviously the environment, but also housing affordability. I mean, housing affordability is pretty dire here in Australia at the moment. And I mean, the Greens have a lot of policies on that. I don’t think they’re the right policies, but at least they’re, you know, they’re concerned about it, and they’re and they’re, you know, they’re making a lot of noise about it. So, yeah, I mean, we’re having an election that’s coming up on third of, think it’s the Third of May. It’s early May. So, yeah, I don’t know if you’re keeping an eye on that, Darren, if you have any thoughts on what we’re in for over here.

Darren Brady Nelson  1:00:50

Yeah, look, I don’t have strong thoughts on it. I have, you know, kind of fairly shallow thought because it, you know, it’s like, I mean, obviously, even in the internet age, obviously, I have access to all the same information as you do sitting in Australia as you do with the US. But it’s funny, when you’re not sitting in the country, you just, there’s kind of you just don’t soak the stuff as much. So, you know, look, I obviously listen to, you know what? You know friends like you or or mutual friend, Alex Robson has to say about, you know, what he thinks about the election and others. So I understand it’s, well, I don’t know. It’s kind of going back and forth, is it not? My feeling is Dutton will win, or, you know, Dutton, it’s not like Dutton literally wins, obviously, but the Dutton government will win. But, you know, maybe scraping it in, I guess it will be a landslide mandate sort of thing. Anyway, it’s

Gene Tunny  1:01:43

actually swung back to the government, to the Labor government, being returned, at least as a, probably as a minority government with support of TEALS, those, you know, those independents.

Darren Brady Nelson  1:01:57

I think dun will still win. That’s all I’m saying. Yeah. Okay, interesting. I think you’ll still win, because the poll, the polls, they’re always a little bit biased against conservatives. Right now, that’s on steroids in the US, right particularly when Trump’s on the ballot. You know, the polls are just like they were wrong. They were dead wrong. They were, they weren’t even close in the US right now, I’m not saying they’re like that in Australia there, but they are skewed and biased a little bit away from conservatives in Australia as they are, I believe, in UK, Canada. So I think you need to factor that in a bit. It was scomo. I mean, like scomo the other he’s got, you know, really not much of a chance. You know, now,

Gene Tunny  1:02:42

was seen as a bit of a disappointment in the end, I think so. Oh no, no,

Darren Brady Nelson  1:02:47

I agree. I mean, I’m not depending scomo How he performed, what he actually won, yeah, but he was, he was not, he was not, you know, favored in the polls very often, right in the lead up to that election.

Gene Tunny  1:02:59

Oh, not to for 2019 That’s right. He, that was a, that was a real surprise. He, he had a good campaign in 2019 but in 2022 I think

Darren Brady Nelson  1:03:08

everyone, well, I’m talking 2019 sorry, yeah, early 2019 Yeah, yeah, just Yeah. I mean, the mainstream media is left leaning. It just is, you know. And their biases, you know, come through, you know Murdoch? Yeah, Murdoch’s in the middle. He’s not right wing, he’s not left wing. He’s murdered Rupert Murdoch, that is, I’m not. His kids are left wing, lock Lachlan and all the rest. But, you know, give Rupert credit, you know, he’s a, you know, he talked about, you know, he said, Oh, Wall Street, you know, these people just want to make a profit. But that’s Rupert Murdoch, to be honest, you know, like he’s backed left and right over the years. I don’t see him as an ideologue. He owns more left wing publications than he does right wing ones, you know. And it was Roger Ailes, you know that, you know, kind of was the brainchild behind Fox News. Murdoch just saw an opportunity. Like, wait a second. I mean, he’s not blind. Freddie, you can see all the mainstream media was all left, left wing, right in the US at the time, and the new cable. Well, CNN wasn’t all that left wing back then. To be honest, they were. They kind of did actually have a decent mix back in the day CNN, but he certainly saw a market for a rate leaning cable TV, Fox News, you know. So I’m not

Gene Tunny  1:04:27

sure what left wing publications you think Murdoch owns, unless you’re claiming the Times and the Wall Street Journal are left wing. Oh,

Darren Brady Nelson  1:04:36

he owns lots of stuff around the world. He still own a lot of stuff that lean left. You know, I’m not sure if he, if he’s divested of some of that stuff over the years, the times, sorry, what did in London? Yeah, he owns the times. That’s, that’s that leans left. Yeah, definitely. And the Wall Street Journal is, at best, a neocon sort of Reg, um. Of it’s basically a combination of neocons and Neo Neo liberals. So whether you call that left or not, I don’t know, but it’s certainly there hardly free marketeers at the Wall Street Journal.

Gene Tunny  1:05:13

Certainly everything’s nothing’s like it once was Darren. I mean, it’s we live in, live in interesting times, don’t we? Right? I think we’ve, we’ve had a we’ve had a good chat of, I think it’s, it’s good to catch up with you on tariffs, and what’s been happening with with Doge, and your experience in Wisconsin, your your story about the turkey, I’ll have to look out for them. I mean, we have those little bush turkeys in here, scrub turkeys in Brisbane, you’d be aware of, but you wouldn’t get cornered by one of them for 10 minutes.

Darren Brady Nelson  1:05:49

I’ve seen, you know, my, my, my niece’s cat chases those things around. So no, you know. Do you have any, you have any views on the the Canadian election?

Gene Tunny  1:06:00

No, I think it’s extraordinary. Mark Carney was it was parachuted in. I did, didn’t see that coming. I don’t follow Canada closely enough. I know that he could get a benefit from the spat with the dispute with the US. I mean, that could actually help him out, couldn’t it? I mean, that could help the liberals in in Canada, yeah, yeah.

Darren Brady Nelson  1:06:22

Actually, the person who saw that, apparently, and probably not the only one, but, you know, some years back, was a Tucker Carlson, how’s that, right? Yeah, yeah. He saw that, yeah. He saw that, that he’d probably be parachuted in for Trudeau at some stage. Yeah. But interesting enough, it seems that the, you know, the opposition leader there is, he’s, he’s doing an uncomfortable game of, you know, trying to be, I’ve seen the conservative alternative a little bit Trump, like on certain issues, but on tariffs, not like Trump, you know. So it’s, it’s not going to be an easy balance for him to do, I imagine. Yeah, well,

Gene Tunny  1:07:00

lots of fascinating, fascinating things to always talk about with you, Darren. I really enjoyed the conversation. Anything you want to say before we wrap up, you can have the final word.

Darren Brady Nelson  1:07:11

Okay, well, look, you know, I predicted shimmel And I didn’t get that right, you know, hopefully I’ll be better on Dutton and the Canadian election. Because, you know, yeah, I hope, I hope those two governments win, but we’ll see what happens.

Gene Tunny  1:07:26

Well, I hope you’re right about the art of the deal, that’s all. I just hope this is part of his negotiated strategy.

Darren Brady Nelson  1:07:32

Well, yeah, I am too. I’m no supportive, like you have tariffs for tariffs sake. No,

Gene Tunny  1:07:38

yeah. Okay. Very good. Darren Brady Nelson, thanks for joining me. I really enjoyed the conversation. Thank 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.

Categories
Podcast episode

Gallium, Hafnium & the Strategic Metals Shaping Our World w/ Louis O’Connor, Strategic Metals Invest – EP276

Show host Gene Tunny speaks with Louis O’Connor, CEO of Strategic Metals Invest, about the increasing demand for strategic metals like gallium, hafnium, and indium—essential for modern technology. They discuss China’s dominance in rare earth processing, the geopolitical stakes, and how supply chain vulnerabilities could impact global markets. Louis also shares insights into investing in these scarce resources.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps

  • Introduction to Strategic Metals and Geopolitical Implications (0:00)
  • Overview of Strategic Metals Invest (2:53)
  • China’s Dominance in Rare Earths (4:00)
  • Characteristics and Importance of Strategic Metals (14:55)
  • Investment in Strategic Metals (16:11)
  • Geopolitical Risks and Supply Concentration (23:33)
  • Private Investment and Market Opportunities (32:45)
  • Historical Context and Future Outlook (43:09)
  • Market Volatility and Investment Strategies (46:49)
  • Partnership Opportunities and Future Growth (49:46)

Takeaways

  1. Strategic metals are crucial – Essential for semiconductors, defence, and energy transition, these metals are essential for modern technology.
  2. China dominates rare earth processing – While reserves exist elsewhere, China leads in refining, creating supply chain risks.
  3. Investing in scarcity – Private investors can own and store strategic metals, profiting from increasing demand and limited supply.
  4. Geopolitical tensions impact prices – Trade restrictions and conflicts can drive scarcity-driven price spikes.
  5. The West is racing to catch up – The U.S., Australia, and Europe are working to develop independent supply chains, but progress is slow.

Links relevant to the conversation

Strategic Metals Invest website:

https://strategicmetalsinvest.com/

Lynas Rare Earths (Australia’s Leading Rare Earth Producer):

https://lynasrareearths.com/

US DoD article “Securing Critical Minerals Vital to National Security, Official Says”:
https://www.defense.gov/News/News-Stories/Article/Article/4026144/securing-critical-minerals-vital-to-national-security-official-says/ 

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Transcript: Gallium, Hafnium & the Strategic Metals Shaping Our World w/ Louis O’Connor, Strategic Metals Invest – EP276

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.

Louis O’Connor  00:03

This year might be the year where we see a lot of sort of strategic sort of stockpiling beginning as well. The US Department of Defense needs these raw materials. The geopolitical situation also can have an effect, like I said, China in retaliation for the US block and some of the semiconductor technology to get into China is restricting. So the West, you could say, has the technology, but Chinese have the raw materials.

Gene Tunny  00:36

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 thanks for joining me. I’m really looking forward to sharing this conversation with Louis O’Connor, CEO of strategic metals, invest in this episode, we dive into the world of strategic metals, resources like gallium hafnium and rare earths that are essential for everything from smartphones and semiconductors to electric vehicles and space technologies. We discuss why China dominates global processing of these metals and what that means for international supply chains, geopolitics and the prices of our favorite gadgets, like smartphones. Louis explains how his firm helps both manufacturers and private investors navigate the complexities of buying, storing and selling strategic metals. If you’ve ever wondered about the hidden backbone of modern technology and where it all comes from, this is the episode for you. Before we get started, I want to give a quick shout out to our sponsor, Lumo coffee. This top quality organic coffee from the highlands of Peru is full of healthy antioxidants. As a listener of economics explored, you can get a 10% discount. Details are in the show notes. Now let’s jump into the conversation. I hope you enjoy it. You Louis O’Connor, CEO of strategic metals, invest. Welcome to the program. Thank you. Gene, happy to be here. Excellent. And you’re joining us from Ireland. That’s, that’s terrific. I think you might be the first guest I’ve had on from from Ireland. That’s, that’s great that that you can join us from, from Ireland. So can you tell us a bit about the company? It seems sounds like a real multinational operation. There’s quite a Yeah. Anyway, please, please tell us about the company. Please. Louis,

Louis O’Connor  02:53

sure, sure. So we had our core we’re based in Central Europe, so I’m, I am in Tipperary in Ireland. But our main office is in Frankfurt in Germany. We’ve got 3540 people there. We’ve been in business since 1999 and our main, our core business is we were a supplier of technology, metals, rare earths, to industry, to manufacturers. So we’ve probably more than 4000 clients in 7475 different countries. That’s our core business. We also have a evolved storage facility in the banking district in Frankfurt, and we also, we still, we have an inventory there, but we also allow some of our industry clients to store the metals there, and then we also invite private investors to participate in the supply chain. So strategic metals, I suppose I’ll just just explain gene it’s not an academic term. It’s more of a an umbrella term for the metals that are basically the backbone of manufacturing in the 21st century. So all modern technology, energy transition, aviation, military applications, but the ones we sort of we sell about 4045, maybe 50, to industry, and then as if we only offer about maybe 10 or 12 to private investors. And the characteristics of those ones are, you know, where does sort of supply, concentration, risk and stuff like that. But essentially, at our core, we’re supplying manufacturers all over the world with raw materials, right?

Gene Tunny  04:39

Okay, so you’re buying them from the mines, are you’re buying them from the miners, and then you, you then sell them to manufacturers that need it. Is that right?

Louis O’Connor  04:49

Correct? Yeah, we, we buy them directly from producers, suppliers. In a lot of cases, you know, there’s a supply concentration risk, like China, it’s. Funny we’re talking this week, because in the last probably two weeks, I have, I’ve never heard rare earths, which is our product, mentioned, as much in the media, or by, you know, heads of state. You know, President Trump in America is talking about rare earths in Ukraine. And of course, their interest in Finland is the same thing. Australia actually would be the second largest producer outside of China. China pretty much dominates, you know, a lot of these, not all, but a lot of you know technology, metals and rare earths, China is about a generation ahead of the rest of the world with the processing technology. So in a lot of cases, I’ll just explain, these metals sort of differ from base metals in the sense that they don’t occur naturally in the Earth’s crust, so they’re always a byproduct of another raw material. For example, gallium is a byproduct of aluminum, and halfnium is a byproduct of zirconium. So for every 50 tons of zirconium, you just get one ton of Hafnium. So it’s very, very limited in what’s available. But at the same time, hafnium is in the industry. Some people call them the spice metals, which is a good analogy to use, like if you think of the spice added to a bit of food. So although they’re used like, hafnium is like a super alloy in jet engines and rocket engines and nuclear reactors. There’s only a small amount, you know, applied or needed, but it’s critical. You couldn’t fly a jet engine won’t work without half Tim in there because of its ability to withstand extremely high temperatures. So on the one hand, they recommend a sort of a small economic they have a small economic visibility, visibility. But on the other hand, they’re critical. They’re absolutely critical. You You couldn’t swipe your phone without indium, you know, I could go on and on. But they’re, they’re, they’re basically the upstream raw materials that become trillions of dollars in in Downstream GDP, right. Okay,

Gene Tunny  07:01

now you mentioned strategic metals, and then there are rare earths. So a rare earths, rare earths are different from strategic metals. Are they?

Louis O’Connor  07:12

No, I would say the best probably description is strategic metals are an umbrella term for all all all metals, let’s say that are critical to all nations, economic prosperity and military applications. Now probably a good way to explain it would be on the in Europe and in the US, the Geological Society or association in the US, they have a list of what they deem 40 critical metals that are critical to their nations, and those would probably be the best description of what strategic metals are. They’re they’re critically needed, and in some, lot of cases, there’s a supply concentration risk, or there’s a heavy localized production, as you know, with gallium, 98% of the world’s gallium is coming from is being processed in China. That’s why, you know, President Bush and the EU and even yesterday, South Korea is maybe going to do a cooperation with Mongolia. Some countries have the resources and others have the demand, sort of because of China’s sort of domination. A lot of there’s a lot of cooperation gone on outside of China. That’s why Trump is after the wrong materials in Ukraine. That’s why Putin, actually a lot of that territory they’ve taken has these In fact, the EU President recently said that these rare earths are fast becoming, or are already more important than oil and gas. So they’re hugely important, yet they sort of have a sort of relatively small economic visibility, right?

Gene Tunny  08:54

Okay, so you, it’s, it’s President Trump, you, you’re talking about, I think you might have accidentally mentioned Bush earlier on, but you’ve been Oh, Donald Trump, yeah, President Trump, just okay, yeah, right. Oh, so you mentioned gallium, and that is, so it’s a soft, silvery white metal, similar to aluminum, and what’s it used in? Or it says it looks like it’s used in semiconductors, is that, right? Is it used in microchips? Indeed,

Louis O’Connor  09:23

it is, yeah, yeah, semiconductors. But it also has, it’s, it’s got, sort of, most of these raw materials are have multiple applications. So it’s used in semiconductors. It’s also considered, as well as an energy transition metal. So for, you know, electric cars, solar, wind, it’s using military applic or, sorry, medical applications and military applications, actually. And 98% of the world’s gallium is processed in China. And that’s, you know, a. Sort of an unusual situation to be in for Europe. Basically what happened gene was when rare earths were first discovered, or, sorry, when we first began to use them. So until the 60s and the 70s, they were really waste materials. And you could have considered them recycled materials, because, as I said, there are by galliums of byproduct of aluminum mining. So it was white. But when we went from black and white TVs to color TVs in the 60s, that’s when we began to have a use for these raw materials. Then in the 1980s in fact, the premiere of China at the time, Deng Xiaoping, who’s considered the modern the architect of modern China in 1987 you could Google this, you’ll see he made a very shrewd prediction. He was standing at a rare earth mine, and he said the Middle East has oil. China had. China has rare earths. And it looks like now that China sort of understood, maybe quickly, or before Europe and the US and the rest of the world how important these materials would be. Because, from that date, the 1980s to now, at that time, China was producing, responsible for maybe 12, 15% of the world’s rare earths. Now they completely dominate the market. So they sort of understood before everyone else, how important they would be in the you know, like China, they do. They made a very, very, you know, long term plan. Now, at the same time, during the 80s and the 90s, the US and Europe and other countries sort of allowed China to do that, because, number one, they could produce them for less money, and it’s a bit messy, it’s a bit complicated. And they said, well, we just let China make them, and we’ll buy them, you know, inexpensively from them for the cars. But, you know, it just sort of, you know, wasn’t, maybe, watched as carefully as it should be, because now all of a sudden, you know, somebody in Europe recently said, we’re in the middle of a Cold War 2.0 and it’s not a race for arms, it’s a semiconductor race. I mean, semiconductors are literally the most critical technology needed in the world today. You know, we needed steel and sort of armor in World War Two. In the Cold War, it was the atomic threat. And today, it’s precision and semiconductors that are in all these military application. So they’re hugely important and usually critical to military and to economic prosperity. Gotcha.

Gene Tunny  12:27

And so what are the top I mean, what are the top five strategic metals? Can you just give us a sense of what the major ones that you’re trading in?

Louis O’Connor  12:36

Yeah, from a because I work mostly with private investment and private investors. So which ones would be the most relevant as a physical asset? Because despite the name, like rare earths, they’re not all that rare. There’s 17 of them, but there’s only four we would we would deem relevant. Now we sell all 17 to industry. They all have in Indus industrial applications. But there might be not that rare. There might be no problem at all with with supply. So out of you know, we also so categories, architect technology, metals, and say, platinum group metals. So we offer about 4550 to industry, but to private investors at any given time, we’re never recommending more than eight or 10. And I’ll give you the eight that we currently recommend is there’s gallium, germanium, indium, rhenium. They’re all technology metals we sell in ingot form or in bar form. And then there’s the rare earths, which are the powdered or the oxidized form that be dysprosium, neodymium, for seidymium and terbium, and all of those eight, six of those are 100, were pretty much 100% dependent on China. And that’s why they’re relevant as physical assets. So gallium germanium were completely dependent on China. In fact, China is banning, well, restricting, the export of gallium and germanium to the US. At the moment, you know, they’re in a trade dispute technology, I suppose, war more than anything. So you know, that’s why they’re relevant as physical assets. China. Can they have us what you might call a smart tap, they can push, put it on and off, and at the moment, there’s restrictions the other characteristics that determine why we deem them relevant as physical assets. One I mentioned is China. There’s a high, localized concentration risk. The other one is we look at what which ones are the most, I suppose the quantitative approach, which is which ones are actually the rarest, and hafnium, it’d be a good example. There’s only 70 to 90 tons of hafnium produced every year, which you could literally fit in the back of a big truck. But hafnium is critically needed in nuclear reactors, in jet engines and space. Technology, our space exploration is becoming a fully fledged space industry. So, so hafnium is critically in demand, yet there’s only 70 to nine tons a year. And then the other thing we look at is qualitative which is just, you know, which ones are most in demand? You know, I mentioned Indium. You can swipe your phone because of indium. So the most in demand at the moment are technology metals for, you know, all semiconductors and phones and computers. You know, one smartphone has probably 12, maybe 13 semiconductors in it. It has probably 12 or 13 of these metals. And yeah, you know, we touch them and see them and feel them every day and and don’t realize, oh, we can. We can own these metals, just like gold and silver, and profit from owning them. So, so those are the main characteristics, the the supply concentration, the qualitative and the quantitative approach,

Gene Tunny  15:56

right? Okay, this is fascinating. And are you helping your investors store the strategic metals? Yes,

Louis O’Connor  16:03

we do. And that’s very, very important question. Actually, Gene because, you know, if we weren’t active in the industry, like we’re in business since 1999 and we 85% of our business activities on a daily basis are, we’re buying and selling metals. So we have a logistics and distribution platform in Frankfurt, and on any given day, I mean, we’ve over 4000 clients in 74 different countries around the world. We’re also like a tier one supplier to companies like, let’s say, Siemens in Germany. What that means is they buy metals every single month from us, and have done for the last 15 years. In exchange for that, they audit us once a year. They come in to the office and to the distribution platform. Well, they hire somebody to do it. But the reason I mentioned that is, if we weren’t active, or not only active, if we weren’t in the middle of this industry, it wouldn’t make sense. I mean, if I was, I don’t know if this was just a sales and marketing operation, there’d be red flags everywhere for investors, because, you know, one like, obviously, because we’re selling to manufacturers, we know what the industry demands. We know what Siemens need, what BMW want, what Apple wants. So we know what purity levels to buy and that we can resell. And to when a investor wants to sell, we’ll mediate a sale immediately to one of our our industry buyers. So, so that’s very, very important, is that what we call the chain of custody. If these raw materials are not in the chain of custody. They’re really useless, no and buyer will. So we’re basically inviting investors to participate in the industry. We can offer them a safe entry and a safe exit from the supply chain. Gotcha,

Gene Tunny  17:53

okay, that’s That’s fascinating. How did you get involved in the industry? Louis, are you a geologist? Did you study geology or how did you get involved? No,

Louis O’Connor  18:03

actually, I’m quite recent. I’m on board like my my sales partners are, the supplier is a German company. I just worked exclusively with them. And, you know, I was, I was actually living in Central America until about five years ago, and I was planning to come home to Europe for my kids to go to school. And I was looking for some sort of, you know, I’d lived in Germany before, for 10 years, I’d lived in in the Americas. And I was coming home and was looking for something interesting to do. And, you know, I sort of, you know, I know Germany. Understand Germany well and and I heard about this company. I was up in the US at a precious metal sort of a conference and investment conference. And somebody told me all about them, and I went to visit them. And I initially was an investor, myself, interested as an investor, this is about 2015 and then I came, when I I immediately was interested in becoming sort of involved, but it took until about 2020 to, you know, to go through the process of becoming a part of of the business Gotcha.

Gene Tunny  19:17

And what type of price growth have we seen in strategic metals? So your, you know, your investors are investing in them, then they’re obviously, you know that? Well, your tagline is, profit from scarcity and growth. So, yeah, yeah, that’s what you’re you’re aiming for. You’re aiming for all the factors these things are in, in short supply, and there’s, you know, there’s a steady demand, or a growing demand for them, and so we’re going to have price rising prices, I imagine. Can you tell us what’s been happening with the prices of these metals, please. Louis,

Louis O’Connor  19:52

yeah, that’s exactly it. Gene, we have what we call scarcity driven price increases. And then. Is also growth. I mean, I think when you look at all the applications and you know, our sort of now, first of all, when I tell you it is a speculation, prices go up or down, yeah, I if I was to say to you now, you’ll make this amount of money. You know, that would be morally wrong, and I’d be telling a lie, because we don’t know. But the truth of it is that the equation we work from is that when there’s, you know, increasing demand, supply can be limited, also subject to disruption, you’ve the potential for profit. Now, historically, we can shoot, we can prove, you know, they they do, they have gone up in value. But one thing we say to our clients is, look, we’re not financial advisors. Our poor our DNA is We buy and sell metals, and we’re inviting you to participate. But we do have an investment strategy, and we say, don’t buy unless you’re not aligned with this strategy. The strategy is simple, buy them and keep them for five years, and you’ll make money. And historically, that’s proven to be true. But what happens, for example, if you look on our website, you’ll see, on average, the metals are up about 34% a year. But I’m just going to give you two examples. If you look at terbium, you’ll see, in the last four years, it’s up 100% so it’s up about 25% a year. But that doesn’t tell the whole story. The whole story is, if you look at the price charts, you’ll see that when we went into lockdown, the terbium is used in semiconductors. When the whole world, you know, when we had COVID and the whole world went into working from home, there was a surge in demand for computers and laptops and stuff. So how a terbium went up 500% in three years, and that’s what we call a scarcity driven price increase. And the reason for that is terbium is a byproduct of another raw material. So just because demand increased for terbium doesn’t mean supply can it can’t. And that’s where we recommend, or, you know, investors can make a profit is if you know, depends what your goal is. But I honestly think if, if you’ve invested 10,000 or 25,000 euro, and it’s double in value, maybe that’s a good time to sell your initial capital, at least. So that’s what happened with turbine. Then when terbium, sort of the prices will correct themselves as well. Then, when we came out of COVID, you know, Boeing and Airbus put in all these orders for airplanes again, so hafnium went up 250% why? Because demand increase for hafnium and supply cannot be increased. So, you know, when does an increase in price? The manufacturers just absorbed the price because, you know, let’s say use Apple as an example, it will be far more catastrophic for the production of the iPhone to stop than for Apple to pay a 50% increase in Indian which is needed to swipe the phone. So anytime there’s increases like that, you know, I mean, companies and nation states do stockpile if they can and when they can. But invariably, from time to time, we have these, what we call scarcity driven price hikes, and then in terms of growth, you know, I don’t think anybody would argue, if you look at where we’re heading with electric cars, wind, solar, space exploration, or space industry, nuclear reactors, we’re going to have more nuclear energy technology. I don’t think anybody would argue that demand will not only continue, but will will probably grow absolutely

Gene Tunny  23:34

this supply concentration risk. I think that is so important. And you, I think you explain, you explain that, well, just how reliant we are on China. What do we know about alternative reserves around the world? I mean, presumably there’s a lot of exploration activity going on. What do we know about attempts to diversify, to find other sources of these strategic metals. Yeah,

Louis O’Connor  24:05

it’s, it is the hot topic at the moment. I mean, as I said, as President Trump highlighted in the last two weeks that these rare earths are, they’re very, very important to the US, and they us needs to wean its dependence off China and Europe as well. I mean, they’re that important that they might use them as leverage to end that war, you know. So there’s no question that you know Europe, the US, Australia, all of any you know nations are seeing. How can we wean our dependence off China? But it’s just, I suppose I’ll give you a good some context there the process. It’s not really mining, it’s metallurgy. And what that means is, because they’re a byproduct of another raw material, you have to first extract them, then you have to separate them, and you have to re metallize them. Yeah. So it’s a very complicated sort of specific, you know, precision driven process. China has about 28 universities that graduate degrees in metallurgy, in, you know, geology and, you know, the technology needed. So China has been graduating probably about 200 metallurgists a week, every week for the last 30 years. You know, there’s maybe 10 to 14 universities in North America that you know. The other thing is, not many of the kids in in US or Europe are interested in in geology or mining as well. So there’s very little. So even if, like, for example, there’s plenty of rare earths in Australia, they’re in North America, they’re probably, you know, they’re not that rare in a lot of cases. However, the engineering expertise does not exist in Europe or the US or Australia actually would be the second biggest, or after China would be producing the most, and probably the most technologically advanced Linus Corp in Australia. So you guys are sort of right behind China, Europe. Us. We’ve a long way to go.

Gene Tunny  26:13

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Gene Tunny  26:48

now, back to the show, right? Oh, well, that’s that’s good to know about Australia, okay, yeah, but yeah, just very concerning. I mean, is, are we just so reliant upon China now that, I mean this idea of decoupling, that we were talking about decoupling several years ago, or there was a lot of talk about that, and I’ve had guests on my program who are very concerned about China, and they’re, they’re advocating, yeah, they advocate that decoupling, or having a very strong strategic stance against China, pushing back against China. But it sounds like we’re just, we’re just so incredibly dependent economically now on on China that we need to find, we need to find some way of of dealing with with China, resolving our differences peacefully. I mean, I think that. I mean, we all want peace just because we’re just so incredibly dependent and anyway, that that’s more of a comment on my part. I’m just thinking through it all. But if you have any reflections on that, please, Louis, I’d be grateful. Yeah,

Louis O’Connor  28:00

I suppose I mean China. Its main focus is China, you know, you know, for example, let’s use the rare earth sector as an example. You know, they have China has big plans for energy transition, for for wind, for solar, for electric cars. That’s now becoming apparent. So, you know, it looks to me like now that they’ve sort of, let’s say, are the dominant market leader in technology, metals and rare earths. Now they’re going to move up the value chain. And for, you know, for to to serve China, first and foremost, but then also to export so, you know, they’ve always made, you know, helping planning, maybe, maybe further ahead. But I think we will see alternative, independent supply, because, as I said, these raw materials are not, you know, China does have about 50% of the world’s reserves. But, you know, there’s Africa and there’s South America, you know, Afghanistan, you you’ll hear a lot of countries all of a sudden going, oh, yeah, we’ve got, like, a trillion, a million tons or a trillion. But, you know, it’s just like anything else, it’s, it’s, it’s more complicated when you delve in a little bit. And for example, let’s suppose, like, even in North America, there’s about 500,000 abandoned coal mines that have what we call tailings, mine tailings, that there are rare earths there, but the technology isn’t there to to re metal, eyes them, and so I think we’ll see over The next 1015, 2025, 30 years independent more supply from from other areas, but it’s just going to take time and again. That’s why my focus is on private investment. Is there’s a window of opportunity over the next 1015, 20 years, even, where investors can own these raw materials and profit from the. Scarcity driven price, like we’re about to head into a cycle. We believe it’s already begun, but it’ll really kick in 2027 and then 29 and 30 and 32 where there won’t just be periods where there’s limited amount, there’ll be periods where there’s there’s none available, and the most important thing to have then will be inventory. And that’s our goal, is to continue to build the inventory. And we also think as well, this year might be the year where we see a lot of sort of strategic, sort of stockpiling beginning as well, the US Department of Defense needs these raw materials just depends on things. The geopolitical situation also can have an effect. Like I said, China in retaliation for the US block and some of the semiconductor technology to get into China is restricting. So the West, you could say, has the technology, but Chinese have the raw materials.

Gene Tunny  31:00

Yeah, gotcha. I mean, that stockpiling point is, is interesting. I mean, certainly. I mean, if you could corner the market, so to speak, then, yeah, you could, really, I mean, you could drive up the price quite significantly. So, yeah, if you get, if you end up being the holder of a, you know, a large quantity of this, of these strategic metals, at a time when there’s a otherwise limited supply, certainly, yeah, that could be very lucrative.

Louis O’Connor  31:33

Yeah. And it does happen, as I said, just, you know, every within every three to five year cycle, there are scarcity driven price hikes. You know, in 2012 the Japanese detained a Chinese trawl, a captain of a fishing trawler for fishing in disputed waters, and in retaliation, China blocked the export of rare earths to Japan. And, you know, right, yeah, prices went up, and things were have been relatively peaceful from about 2014 2015 until COVID. And you know that just that was just an not geopolitical, that was just, you know, this, you know, life or reality and that cause. But now what we’re seeing is this sort of Cold War, 2.0 Yeah, and also the rise in demand. I mean, nobody will argue like, you know, I think we’ll always have fossil fuels, but we’ll also have more nuclear power, and we also have more what we call green energy. I don’t know if that’s the right word, and we like to consider it green energy. But you know, electric cars, solar, wind they, you know, like the magnets in in your smartphone is, is, is similar to the magnet in in the electric car or wind turbine. So there’s raw materials are needed for this energy transition. Yeah,

Gene Tunny  32:59

absolutely. And how are your investors without naming them, obviously, I mean commercial, in confidence and all that. But are we talking? I mean, what are the types of investors? Can you just give us a description, like broad categories, please?

Louis O’Connor  33:13

Sure. Well, I mean, our minimum investment is only $10,000 or 10,000 euros. So when we initially started, it was very much organic and word of mouth, and most of our clients were in the sort of German speaking region of Europe, so Germany, Austria, Switzerland. And, to be honest, we didn’t, that’s why I was able to come on board in 2020 it was, it’s been very successful. And initially we, you know, we didn’t think that, you know, somebody, maybe in Australia or America, would buy metals and store them in Germany, because in order for it to make sense, you need to it is record. You should store them in our city. You do own them, but you store them in the custody of our facility, because that’s what keeps them extremely liquid. That’s what’s give you access to error, 4000 lines in 70 different countries. And it’s not like gold and silver, where, if you, I mean you to be honest, if somebody wants to move them, they welcome to, but they’re, I want, I don’t want to say they’d be worthless. But who’s going to buy them from somebody? Nobody. No manufacturer will buy a small amount anyway. The point I’m making is it started quite small, organically, and we, we haven’t, we don’t really do any marketing directly to private investors, because it, you know, our core business is most important. We don’t want to be seen, to be, you know, marketing to private investors. So, so we’ve just grown it very organically, and until very recently. You know, outside of the outside of Europe, you’d have to, you would have to be pretty on the ball to have found us. But I’d say most of our clients, a lot of them would would understand like there might be engineers or surgeons or people who are. Probably using these raw materials, and a little bit more about them and their capabilities than most people. And then I would say people who are sort of impressed have a curiosity for alternative investments. You know, what’s the next? Not the next big thing, but what’s the thing I don’t know about that’s going to be very important in three years from now, or in five years from now, some crypto people, people who’ve made money on crypto, are looking, you know, when they when they when, when they’ve made some money. They’re looking to diversify and cash out a little bit. So it’s still in its infancy in terms of private investment. Because, you know, somebody asked me recently, Gene What, give them a profile of what our private investor looks like, and I really couldn’t, because I’d say it’s the biggest obstacle to private investors profiting from owning these raw materials are just simply they don’t know they can. And that’s sort of changing. I mean, we’re the only supplier that invites in private investors. I’d imagine it won’t remain that way forever, but again, one has to be so careful, because the only reason we can do this is we’re in the industry. We’re we’ve turned over a billion dollars in in transactions already on the industry side. So we know we can liquidate for our clients, you know, if we, yeah, you know, and it’s not a financial instrument. I mean, we offer, we allow private investors to buy these raw materials. We offer storage in a sister facility, where it’s also a distribution platform. And then we also have a practice when somebody wants to sell that will buy them back from you, and we’ll resell them to a manufacturer. Yeah,

Gene Tunny  36:45

that’s fascinating, fascinating business. And it’s a it’s part of the market that maybe people don’t often think about. Or I think what you’re doing is, I mean, it’s, you know, it’s an important service you’re offering. Are there other companies, I mean, that are doing, that are doing similar things, or, like, where are you in the in the market? I mean, are you sort of on your own offering this, or are they you have competitors? Presumably, what’s this market situation like?

Louis O’Connor  37:18

Well, on the industry side, it’s a very competitive industry. I mean, there’s probably in Europe, 2025 companies, very similar to us, yeah, all over Europe, probably a similar amount in in North America, I’m not too sure, to be honest. And most, you know, thankfully, most of the suppliers like us. You know, stay in their lane. They focus on what they do best, which is they buy and sell metals. That’s what they’re good at. It’s what they know. Our business is. It’s 100% owner operated. It’s a family business, and there’s a little bit of an entrepreneurial flair. And I’ll tell you how what happened. Gene is about 2010 2012 the CEO Matthias route decided that it’d be a good idea to build an inventory, not to be just a middle man, not to just broker in deals. And so they looked for our premises to store metal so they could keep an inventory. And they found a place that actually was a bunker in World War Two. So it was a shelter two levels below ground in the banking district, and Frank converted it to a bank level ball. Now it has a third level above ground and offices and atrium. And at that time 2012 the idea was they begin when prices were low. They they buy inventory for themselves, and then some of their manufacturers, like, there’s one example, there’s a thermometer maker in Easton, north of Frankfurt, who have been a client since day one. They need a regular supply of gallium or germanium, whatever it is. They wanted also to buy, maybe when prices are low, when they could buy some more and have it in storage. So they began to offer the industry clients storage, and then they just said, Well, why don’t we offer it to private investors? It’s the same thing. So the idea was it wasn’t just a direct thing. It was just evolved over time. So since about 2012 they’ve been offering it, mostly in the German speaking region of Europe. But it’s, you know, again, it’s, it’s a success. I mean, people who are interested in gold and silver are interested in these metals as well.

Gene Tunny  39:30

Oh, that’s great. I mean, that’s fascinating. You’ve got an old World War Two, a German World War Two bunker. I mean, there must be some stories there. I mean, I imagine the Americans must have captured it when they rolled through in the in after, you know, D Day, yeah, so, yeah. Well,

Louis O’Connor  39:49

I mean, Frankfurt. If you look at Frankfurt, Frankfurt has always been known as the crossroads of Europe. And if you look it’s smack bang in the middle of all of Europe. So it’s always been a. A busy sort of a thoroughfare. And Frankfurt was of any city in Germany. It was leveled in World War Two. There was, if you look at photos of Frankfurt after in 1946 47 leveled, and it’s just a question as well, like somebody was saying, you know, it’s funny that, you know, even with the Japanese, if you look at America today, it’s, we’ve sort of a short memory, and history moves on very quickly. Because if you look at, you know, how many, you know, we’ve clients from the US who store the metals involved that maybe you know their their granddad was, you know, flying over not too long ago and dropping bombs on it. Or, you know, if you look at Japan and America as well, that it’s all, you know, it’s economics nowadays, the most important thing is that is the business. And, you know, everybody’s doing business together. So, yeah,

Gene Tunny  40:51

yeah, absolutely, yeah. Pass that in. What conditions do you need for that bunker, for the to store the metals are the other special atmospheric conditions that you need? Yes,

Louis O’Connor  41:04

for some of them. For precious metals, no. And for technology matters now you can store them almost indefinitely, just about anywhere they’re in that metal form. But for we have a facility has a reach certification, which is an acronym, and we’ve a lot of bureaucracy, obviously in Europe. So we were regulated. Buying and selling metals is not a regulated industry. Anybody can do it. But the storage like we sell in metal form, oxide, nitrate, even liquid form sometimes. So, so yeah, some of the rare earths that we offer to private investors do need special conditions. But you know, as I always say to my clients, is once you when they complete the purchase, they have a safe keeping receipt to show what’s stored for them, what’s, you know, an account statement, and that shows the facility is reach certified. And once you have that certification, your raw materials are extremely liquid. What that means is, any manufacturer won’t hesitate to buy them, because they were bought from a recognized supplier, and they’re stored in a recognized facility. Gotcha.

Gene Tunny  42:14

Gotcha. Okay, so finally, Louis, there’s a lot of I mean, market volatility at the moment. I mean, we’re recording this on 13th of March, 2025, and I mean just extraordinary. I mean very extraordinary time with what’s happening with tariffs and and all sorts of, all sorts of threats. And the market has, you know, reacted, and it’s, it’s down. The market’s down. Stock markets, is that affecting you at all? Are you? Do you have concerns about, about the future, about your business at all, but with what’s going on, although all the volatility that’s coming out of the United States, well,

Louis O’Connor  42:53

I mean, just purely, I’m not going to say I’m happy with what’s happening in the world. It’s, it’s, we seem to be in dark time. But from from an investment perspective for these metals. I mean, like gold, for example, metals in general have, have not faltered in three, you know, 3000 years as a store of wealth, as a physical asset and and these raw materials survive all economic cycles. I mean, there’s four economic cycles, and metals have proven always to be a good store of wealth during them. But it’s funny gene, I would say now that, you know, we’ve shared a lot of information, and you’ll probably, you know, you know, the way, once you hear about something, you’ll start to notice more. But watch what’s happening over the next few weeks and a few months. I mean, I think possibly even as early as this week, China is going to retaliate to these tariffs, and one way, because I mentioned to you earlier on, China is restricting the export of gallium or germanium in the for the last 18 months. Now. What that means is, prior to this restriction, producers of gallium could sell gallium to whoever they want it. They could export anywhere after the restriction. If you’re producing gallium, you have to apply to the Chinese government for a license to export. And what that means is the Chinese government wants to see who the consignee is. They want to see where it’s gone, and then they can say, yes, we’ll give you the license. So they’ve in the last 18 months, the Chinese have put in a system, and it’s like a tap that they can turn on and turn off of who will receive. I have a feeling, possibly as early as this week, but certainly watching the next four to six weeks, China might say they might put in an outright ban on gallium, germanium and the four rare earths I mentioned the sprosium, neodymium, for serodyne and Terbium. And if they do, you know the likelihood is we’ll see prices we go into a scarcity driven price increases. Yeah,

Gene Tunny  44:56

absolutely, absolutely, yeah. It’s fascinating learning about. About this, because this is, it’s going to become a, well, I presume it is a focus of policy now at the mean, the White House, they’re thinking about it. Our administration here in Australia is presumably concerned about the supply of these, of these strategic bills. I mean, mate, well, I mean, we’re not manifest. We’re probably not, I guess we, you, you said you’re selling some of these metals, strategic metals, to Australia, aren’t you to some of our manufacturers? Is that? Ryan,

Louis O’Connor  45:30

correct? Yeah, we, we’ve, you know, yeah, globally. We sell them globally. But yeah, like, or, sorry, Australia is probably the most advanced in terms of the processing of any country outside of China. In fact, I think Linus Corp is signed up with the US Department of Defense to build a processing facility in either Florida or Texas. Like, unbelievably, Gene Yeah, there’s one plot. There’s one mine in in North America, in California, MP raw materials, producing rare earths, but they have to sell most of their ores, most of their product, to China for processing, because they have no processing capability in the US, and that’s why, you know, it’s funny you hear politicians talk, oh yeah, you know, just because there might be raw materials in Ukraine and in Greenland doesn’t mean you’ll have them in three to five years in smartphones you’re looking at. The average time in America is 29 years from discovery to production of a mine. Not, not you know, it’s, it’s just the industry has dwindled so, so, but Australia has been on it longer than you know anybody else, and they’re sort of way ahead of Europe and the US,

Gene Tunny  46:56

right? So, I mean, this is, I know that critical minerals are part of the discussion between our government, or our and the US administration at the moment, because I don’t know if you saw the news. I mean, well, I guess you know, Trump’s put on the 25% tariff on steel and aluminum, and we thought that as a long standing ally of the US and, I mean, we thought we would get exempt from it, and we haven’t been exempt from it. We’re being accused of dumping. And I think our strategy now is to say, Well, look, we’ve got these critical minerals. We call them critical minerals over here, that that are important for for the US. And so I think I can see now how that can be part of the discussion, given, you know, the conversation we’ve had just, you know, how how critical they are, how much in shortage, how China can actually control the supply of some of these, of these strategic metals. So I can see how this all comes into the negotiations.

Louis O’Connor  48:01

Yeah, and Australia would definitely have some leverage there because of their how far advanced they are in terms of the metallurgical side of it, as well as the production so, yeah, yeah, that’s the thing. I mean, I don’t think most politicians wouldn’t understand Resource Economics. Or, I think President Trump is mixing up rare earth minerals with critical minerals, right?

Gene Tunny  48:28

Oh, yeah,

Louis O’Connor  48:29

not even getting sort of and it seems to be complicated. I mean, you know, we, as I said earlier, strategic metals is not an academic term. And then, like, for example, energy transition metals, defense metals, green metals are sort of, gallium is all of those three as well. But the thing to look at is, is, you know, what’s the most critical technology we have today, semiconductors, and that’s sort of, you know, if you start from there and work your way up, you’ll, you’ll figure it out, you know,

Gene Tunny  48:58

yeah, I think, I think that was really good, Louis, I think there’s really good briefing on no strategic metals, and their importance and and the supply potential, supply problems, what that means to prices. I think that’s, that’s all, all very good stuff before we wrap up any further points you think would be worth, worth us knowing, with people in the audience knowing? No,

Louis O’Connor  49:25

I might. I might just add gene. As I said, until recently, all of our sales partners were in Europe. And you know, if anybody’s listening, who’s who’s involved in precious metals or wants to maybe not. No, I’m not pitching for a customer or an investment, but that’s always welcome. But yeah, we might be interested in talk with somebody about an affiliate and a partnership, an affiliate partnership, if somebody knows a little bit about battles and is entrepreneurial and like, you know, I’m what. We’re open. Into partnerships globally. We have no problem on the industry side, but we, you know, as I said, without doing any marketing, we’ve clients all over the world, private investors, and somehow they’re finding us. But you know, it’s our business is doubling every year on the industry side, so we may as well bring in more partners to work with private investors. So there could be an opportunity there for somebody, if they want to contact me, they can go to the website strategic metals invest and leave an email, or actually, I’ll just give you my email. It’s Louis l, o, u, i s at strategic metals invest.com if anybody wants to get in touch, as I said, I’m not necessarily, I’m definitely not looking. Look. If somebody wants to explore, I’m happy to assist, but, but, yeah, you never know. Business wise, somebody might be interested,

Gene Tunny  50:52

right? Yeah, absolutely not all, all good stuff. Okay? Louis O’Connor from strategic metals, invest. Thanks so much for your time. I really found that fascinating, and I learned a lot about about the market and what that you’re in and some of the risks that we’re facing in the future. So I found that really valuable. So again, thanks so much. Thank you, Gene. Thank you, right. Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact 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 leave a rating. Thanks for listening. I hope you can join me again next week. You

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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.

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Podcast episode

The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259

Ken Wilcox, former CEO of Silicon Valley Bank, discusses his book “The China Business Conundrum” and the challenges of doing business in China. He explains the concept of “one bed, two dreams,” highlighting the disparity in goals between western and Chinese joint venture partners. Wilcox details his bank’s entry into China, emphasizing the strategic invitations and control exerted by the Chinese Communist Party. He recounts the extensive regulations and control mechanisms, including a three-year restriction on using Chinese currency. Despite the challenges, Wilcox values the experience, noting the complex interdependence between the U.S. and China.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

About this episode’s guest: Ken Wilcox

Ken Wilcox was the CEO of Silicon Valley Bank (SVB) from 2001 to 2011, then the CEO of SVB’s joint venture with Shanghai Pudong Development Bank (SPDB-SVB) in Shanghai until 2015, followed by four years as its Vice Chairman. He currently serves on the boards of the Asia

Society of Northern California, the Asian Art Museum, and UC San Diego’s 21st Century China Center, as well as Columbia Lake Partners, a European venture-debt fund. He is on the Board of Advisors of the Fudan University School of Management in Shanghai and an Adjunct Professor at U.C. Berkeley.

Ken holds a PhD in German from Ohio State University and an MBA from Harvard Business School. He has given numerous speeches in both English and Chinese, published a variety of articles in the banking press, and recently wrote the management book Leading Through Culture: How Real Leaders Create Cultures That Motivate People to Achieve Great Things (Waterside Productions, 2020) and its accompanying workbook, How About You? (Waterside Productions, 2023). His account of establishing an innovation bank in China, The China Business Conundrum: Ensure that Win-Win Doesn’t Mean Western Companies Lose Twice, is forthcoming from Wiley.

To connect with Ken, please visit: www.linkedin.com/in/kenwilcoxsvb/

Timestamps for EP259

  • Introduction and Overview of the Podcast (0:00)
  • Ken Wilcox’s Journey into China (4:40)
  • Challenges and Strategic Invitations in China (8:10)
  • Guanxi and Corruption in Business Relationships (14:13)
  • State Control and Joint Venture Challenges (20:42)
  • Impact of SVB’s Collapse and Final Reflections (40:02)

Takeaways

  1. Joint ventures in China often suffer from differing goals between Western companies and their Chinese partners, a phenomenon Ken Wilcox refers to as “One Bed, Two Dreams.”
  2. The Chinese Communist Party (CCP) holds significant control over both private and state-owned companies, making it difficult for foreign businesses to operate independently.
  3. Guanxi, a system of mutual obligation and trust, plays a critical role in business relationships in China, but it often involves navigating corruption and complex social expectations.
  4. Foreign companies entering China are often targeted for their intellectual property, and the CCP uses strategic partnerships to gain technological insights.
  5. Ken Wilcox’s experience with Silicon Valley Bank in China illustrates the frustrations foreign firms face due to slow regulatory processes and overwhelming state control.

Links relevant to the conversation

Ken’s book “The China Business Conundrum”:

https://www.amazon.com.au/China-Business-Conundrum-Win-Win-Companies/dp/1394294166

Previous Economics Explored episodes on China:

China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253 

https://economicsexplored.com/2024/09/17/chinas-economic-future-under-xi-the-australia-china-relationship-w-emmanuel-daniel-ep253/

Enterprise China: what western businesses need to know w/ Prof. Allen Morrison  – EP171

https://economicsexplored.com/2022/12/26/enterprise-china-what-western-businesses-need-to-know-w-prof-allen-morrison-ep171/

Why we’re in the Decisive Decade with China & what the West should do w/ Dr Jonathan D. T. Ward – EP182

https://economicsexplored.com/2023/04/09/why-were-in-the-decisive-decade-with-china-what-the-west-should-do-w-dr-jonathan-d-t-ward-ep182/

China, Taiwan & the Indo-Pacific w/ Dr Greta Nabbs-Keller – EP146

https://economicsexplored.com/2022/07/04/china-taiwan-the-indo-pacific-w-dr-greta-nabbs-keller-ep146/

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Transcript: The China Business Conundrum: One Bed, Two Dreams w/ Ken Wilcox, former CEO, SVB – EP259

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.

Ken Wilcox  00:03

I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to.

Gene Tunny  00:34

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist 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. In this episode of economics explored, I’m excited to have a conversation with Ken Wilcox, the author of the China Business conundrum. Ken has an impressive background as a former CEO of Silicon Valley Bank, where he played a significant role in expanding the bank’s reach into China. Ken, in the conversation, also gives us his perspective on what happened with SVB last year. Ken refers to the Chinese expression, one bed, two dreams to illustrate the challenges of joint ventures in China, he explains that businesses often enter partnerships with different goals, especially in China, where government interests can add complexity and challenges. Join us as we explore the intricacies of doing business in China with our amazing guest, Ken Wilcox. A 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. Ken Wilcox, welcome to the program.

Ken Wilcox  02:16

Thank you very much. I’m happy to be here.

Gene Tunny  02:19

It’s excellent to connect. Ken, you’ve got a new book out the China Business conundrum. Ensure that Win Win doesn’t mean Western companies lose twice. So I’m going to be very interested in your perspectives on what that that conundrum is. So just simply, is the conundrum that I mean, China’s a huge market, but there are risks going into it, and any business going into it has to be aware of those risks.

Ken Wilcox  02:45

That’s exactly right. Actually. That’s the title that was assigned to the book by Wiley, our publisher. My original title, my working title, was a little different, and I thought it was a pretty good one as well. It was based on a phrase that’s used in China by almost everybody at some point in time or another. The phrase is one bed two dreams, which, in my opinion, adequately describes why most joint ventures don’t work actually anywhere, not just in China.

Gene Tunny  03:20

Okay, can you explain that one bed two dreams?

Ken Wilcox  03:24

One bed two dreams? Yeah, another way of looking at it is it probably explains the high divorce rate in the US as well, meaning people get together and but they each have a different vision of what they want to happen, how they want the relationship to evolve, what their goals are. And that’s, I think, really true with joint ventures, and especially so in China, exactly,

Gene Tunny  03:53

yeah, that makes perfect sense now that that’s, yeah, that’s, that’s interesting. Okay, and can you tell us how, how did you get involved in in China? Can you tell us a bit about your journey from because you’re in you’re in business, you’re in the financial sector at Silicon Valley Bank. Can you tell us how you ended up getting into the Chinese market? Please?

Ken Wilcox  04:13

Sure. Absolutely. So. I was with Silicon Valley Bank, fundamentally, for 30 years. You’re probably aware of the fact that our bank doesn’t exist anymore, as of about a year and a half ago, because of a huge mistake that was made by the CFO and not corrected by the board, at least not in time. Be that as it may, our business model was a really good one. Take some pride in that, because I was, in a sense, the author of the business model when I became CEO in 2001 at that point in time, our bank worked with technology companies, maybe 30% of our portfolio. We worked with real estate developers and we worked with small business. Business. And the big decision that I made in 2001 was this. I felt that, you know, there at that point in time, there must have been 13, 14,000 banks in the US, and all of them worked with real estate developers, and all of them work with small business, but we were almost the only one in the entire country that worked with technology companies, and in particular with early stage technology companies. So that was where we had a leg up on everybody else. And my feeling was, why compete against 13,000 other banks when you don’t have any specific advantage over them. Why not focus on what we do better than anybody else? So my first big decision I only made a couple in 10 years as CEO, was to ask two thirds of the portfolio to find another bank over time, and then we filled up that empty two thirds with technology companies. And then the second thing I wanted to do was go global. Because we were we had pretty well penetrated the US. At that point in time, we had, by far and away, the biggest market share going global for us, included, initially Israel, India, London in particular, but Europe in general, and finally, we set our sights on China. I was in China with a group of people from our bank in the year 2000 giving a speech at the first meeting of the Chinese Venture Capital Association. We spent a couple of weeks after the speech touring around, and it was pretty clear to us that there were budding innovation centers in China, that if the trajectory continued, would be huge. So we decided we really wanted to be there, and then ultimately, it takes a long time to get started in China. Ultimately, we were able to position ourselves in such a way that China was asking us to come and build a technology oriented bank, just like the one that we have here in the US, in either Shanghai or Beijing, and that was the invitation, more or less coincided with my stop date, meaning already in 2001 when I became CEO, I knew that I was going to retire at the end of 2010 would it be 10 years in that position, that’s sufficient. I was already of retirement age. We got the signal from Beijing to come to China, and when the board made the decision to accept the invitation, and looked around, unfortunately or fortunately for me, they couldn’t find anybody who wanted to go, except for me, so I talked to my wife, and she was as excited as could be. She said, that’s an adventure you can’t miss. So let’s go.

Gene Tunny  08:12

Gotcha Okay, and I’d like to explore what you found in China, because from your book, I get the sense that you’ve got to be wary of these invitations. It seems that they’ve they’re strategically trying to find business partners that they can get the IP of, they can, you know, get some technology or knowledge transfer from. And so you were, it sounds like you’re actively targeted. Is that, am I reading that correctly?

Ken Wilcox  08:41

Yeah, that’s exactly right. Exactly right. That’s one of the main points. In fact in my book, somewhere around the beginning of 2009 fully two years before I moved to China, I was encouraged to get together in a meeting with the person who was then party secretary of Shanghai. His name was Yu Jung Chang. When Xi Jinping came to power at the end of 2012 Yu Jung Chang was elevated from party secretary of Shanghai to a member to being a member of the Standing Committee, meaning one of the seven most powerful people in China. I had, I believe, four meetings with you, Jung Cheng in 2009 and during those meetings, he laid it on heavy. This is, honestly what he said. You may think I’m exaggerating, but he said, you know, Ken, you’re you’re one of the smartest people I’ve ever met. You really understand China better than almost any Westerner I’ve ever run into. We’ve scoured the universe and we’ve found your bank. It’s the one that we where we most. Higher then he explicitly said, more than Goldman Sachs, more than Morgan Stanley. We have to have you here. We’ll pave the way. And of course, I didn’t realize that this is all part of the process, meaning there were probably similar such meetings going on in other places in China, maybe even that same day, because flattering you beyond belief is the first step in the process. And of course, I’ll admit that I was more naive than would have been desirable. On the other hand, I wasn’t so stupid that I didn’t realize he was laying it on too thick, but same time, you know, it felt good. And I really wanted to build a bank in China, so we accepted the offer.

Gene Tunny  10:50

Okay? And then how did it go? So what was their your ongoing relationship with the officials, and how did they facilitate or hinder the setting up of the bank. How did the actual relationship progress, and what did they get out of it? You know, What benefits did you get from the relationship? And, yeah, I just want to understand how it evolved, and how you came to this view that you express in the book about the just the this China Business conundrum, please. Ken

Ken Wilcox  11:22

Sure. First of all, it was a very long process. Again, those conversations, as I said before, at the beginning of 2009 by 2010 we were in active conversations with the bank that would ultimately be our joint venture partner, kind of a shotgun bride, if you will. They were selected for us by the Chinese Communist Party. And the way it was described to me at the time was, of course, you realize, Ken, you’ll need to have a joint venture partner, but understand this is for your benefit, not for ours, because China is a risky place, and it’s so much different from what you’re used to, you’ll need a joint venture partner. And of course, that made perfect sense to me, and frankly, the conversations over about a year and a half period with our wood joint venture partner, went swimmingly. It was all very, very nice. And once I arrived in China, though, at the beginning of 2011 there were a lot of mixed signals, and there was a lot of hurry up and slow down. Hurry up and slow down. It became really quite confusing for me. In retrospect, I believe that I would have benefited by spending a couple of years, of course, I’d been in China at that point in time, probably at least 20 times by the time I moved but visiting and living are two different things, and it probably would have been better if I had spent a couple of years in China before we even embarked on this process understanding China from a political point of view, from a governance point of view, from a from A cultural point of view and from a business climate point of view. And I might not have been so naive, right?

Gene Tunny  13:27

Yes, you mentioned there’s this concept. I’m not going to pronounce it properly, is it Guanxi? How do you pronounce that? And could you explain what that is, please?

Ken Wilcox  13:37

Yeah, guanxi is probably maybe with the most commonly used word in the literature about how people do business in China, and all it really means, I think, is mutually beneficial relationship. In fact, I’ve gotten more than one lecture by members of the party on what guanxi is the benefits of Guanxi. The concept is, let’s say that gene that I want to develop a relationship with you, and you’re interested in developing a relationship with me. Every time I see you, I’ll bring you a small gift, and I’ll be constantly looking for opportunities to do you favors, and you’ll be doing the same thing for me in my direction. And over time, we build a relationship that is allegedly at least based on trust, it’s certainly based on mutual obligation, because I’ve given you so many things you owe me, and you’ve given me so many things I owe you, and in a sense, it’s be it’s even more important in today’s China. It’s an ancient concept, I believe. But it’s even more important in today’s China because the level of trust in today’s China between individuals is really very low. World as a result, I would say, of the way in which the Chinese Communist Party has governed since it came to power in 1949

Gene Tunny  15:12

Okay, so this guanxi, this is interesting, and you’re bringing these gifts. Are you bringing gifts to, at times, party officials or officials of state owned enterprises. I just want to understand how this, what’s the role of the state in in this, and does that mean that there’s some is it corruption in a way? Can you elaborate on that? Please? Just want to understand this whole system and whether there is any corruption involved in it.

Ken Wilcox  15:39

Sure. No, there’s, frankly, a huge amount of corruption involved in by the way, Gene I don’t mean to imply that there’s no corruption in the US or in Australia, but corruption takes many forms, and it’s often informed by culture. So it’s as I’m going to describe it, I would say it’s shared by many other countries, but somewhat unique in China and yes, I was dealing constantly with government officials. Because one thing that we don’t appreciate, we Westerners and Americans, maybe in particular, we may be more naive than most Westerners. We don’t appreciate is the extent to which other countries have different cultures. I think we operate under the assumption that people are pretty much the same all around the world, and of course, there’s an element of truth to that, but it’s also true that there are significant differences in culture, governance and the structure, the financial systems that can make a huge, huge difference in the way you conduct business. So certainly, one aspect of the party’s behavior is to shower favors and gifts on people like me. Frankly, I and I think that it’s it’s somewhat manipulative in the sense that it puts us in a position where we first of all feel obligated, and secondly, if we’re not careful what kind of gift we accept, we may actually end up feeling compromised, which may be one of the reasons why business people who end up being played and I would argue that almost all Western business people are played in China, largely by the government, meaning the Chinese Communist Party. One of the reasons that they don’t like to talk about it afterwards is many of them have been compromised to one degree or another. Yeah, I believe.

Gene Tunny  17:53

Yes, yeah. Oh, plausible for sure. And what sort of gifts are we talking about? Are we talking about bottles of wine? Are we talking holidays? Are we talking Rolex watches? What type of gifts are we talking about?

Ken Wilcox  18:06

All kinds of things, yeah, but I’ll give you three examples, and these are representative examples. One of them would be my conversation partner at our joint venture partner, the man who was the president of the bank at the time, I think about five or six months into our stay, after we arrived, he almost sheepishly asked me one day, he said, Ken, is it common in the United States for people to invite their business partners to dinner at their house. And I said, Yeah, that happens on occasion, for sure, it’s I actually somewhat rare in China, you don’t get invited into houses. Often you get invited to restaurants, but sell them into houses. So he said, Well, would you mind inviting me and my wife to dinner at your house? And I said, No, that’d be great. So we set it up. And my wife was shocked. She said, I don’t know how to cook Chinese food. We’ll have to get a caterer. In any case, he brought a gift with him. In fact, I I have it here somewhere. It’s a mythological creature made out of glass. It’s about 10 inches long. It’s kind of part lion, part dragon. In any case, I thought I’d seen that in a shop sometime in the month or two prior, and I thought this is a pretty expensive gift, so I checked it out the next morning, and it was, it was worth about $800 retail Well, our board, meaning Silicon Valley Banks board the interpretation of the Foreign Corrupt Practices Act precluded me from accepting this gift, right? So in a pickle there, that’s one example. Another example would be in Shanghai. There was a a. Woman who worked in the financial services department of the municipal government of Shanghai, who was in charge of what they call the Little Giants, and these are the government spends a lot of time studying the market, trying to figure out which startups are likely to be successful, and then nurturing them in one way or another in order to enhance the probability that they’ll be successful. And she wanted to develop a relationship with me, so she and her husband invited my wife and me on a trip to go to Shandong Province to Confucius’s grave, which is that’s an attraction. People like to go there. So we went. As soon as we got there, we were delivered by this couple into the hands of high level party officials. And I really we ended up not even seeing the couple for three days. And for three days, high level party officials were were taking care of us, and they wanted to pay for everything. They wanted to pay for the hotel and every dinner. And these were expensive hotels, I refused, and it was interpreted as somewhat of an insult. And the third thing that I’ll mention was in my second and third year there, I believe this is my strong recollection two times. Anyway, the head of HR in our joint venture, who was a member of the party, came to me with the good news that the party had decided to give me a bonus was about close to a half a million dollars, and it was meant for me. It wasn’t for anybody else. It was meant for me, and it was just for being such a good citizen. So what I did with it? I didn’t I didn’t want to forfeit the opportunity to add a half a million dollars to our equity base in the bank. So I took it and funneled it into the bank, which was contrary to their wishes. They wanted me to keep it for myself. But I also wonder how many people actually do that. My suspicion is that a number of people stick it in their own bank account. And I’m not saying that it’s always the case that they feel compromised to the extent that they don’t want to talk later about the way in which they’ve been played, but I will guarantee you they’ve been played, and that most people would not want to, would not want to complain about it in public, because they would be afraid of potential repercussions.

Gene Tunny  22:50

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Gene Tunny  23:24

now back to the show. So yeah, a few things to explore out of that. Can we just go back to the joint venture partner that you had? Was this a? Was this a private sector, a bank? Is it? Was it another bank? Was it a was it state owned? Was Was there involvement of the Chinese Communist Party? Somehow? Can you just tell us a bit more about the that the partner?

Ken Wilcox  23:51

Yeah, I will. And let me also at the risk of something like I’m picking on your language, which I don’t intend to do, but I want to mention something else before I answer your question, and that is one of the reasons that we we have such difficulty, we Westerners, and maybe in particular, we Americans, is that we tend to we have mental models. We’ve got ideas in our head about the way things work based on our own experience of the US, we take those with us to China, and then we just superimpose them on China, and we begin to interpret what we see through the lens of these mental models. So that’s what you happen to accidentally mention one of my favorite between state owned and private I know American business people who have done a lot of business in China over time, and they still cling to this notion that China has state owned companies and it has private companies. Well, it does, in a sense, but their distinction is not the. Same as the distinction in the US, meaning the Chinese Communist Party controls anything it wants to. And you can be a so called private company, but they may very well. It’s highly likely if you’re the least bit successful own part of you, sometimes clandestinely through shell companies, they definitely will have a party committee which can supersede your own personal wishes or the decisions of the board. So you may be a private company, but you from by our US definitions, you’re sort of gravitating into being state owned. Now back to your question. Virtually all banks are primarily state owned in China. So yes, our joint venture partner was state owned, actually owned by the municipality of Shanghai. And because we’re I negotiated 5050, which is rare. It’s usually when you enter into a joint venture with a particularly, a clearly, unequivocally state owned Chinese company. The most you get is about 20% and I was so proud of myself because we negotiated 50% I didn’t realize at the time that it’s irrelevant, because in the end, the CCP will control you whether you own 10% or 50% or 80% so yes, our joint venture partner was a state owned company, and by virtue of the of that fact, our joint venture was functionally a state owned company,

Gene Tunny  26:51

gotcha, and what’s the status of it now? Is it? Is it ongoing? And what was it impacted by the collapse of SVB?

Ken Wilcox  27:00

Yes, it was impacted by the collapse of SVB. So I’ll tell you this, when we got permission to enter into this joint venture, we were literally the first western bank, I believe, to be given permission to enter into a joint venture with a Chinese commercial bank. I need to stick the word commercial in there, because it wouldn’t be true of investment banks. Morgan Stanley, years before, had been given permission to do a similar such thing, but we were the first western commercial bank given permission by the party to enter into a joint venture with a Chinese commercial bank. Our status meaning that permission and the banking license that went with that was as good as gold when we got it. A lot of people would have liked to have had it, and I’m sure we could have sold it for a pretty penny. Having said that, by the time SVB disappeared, which was a year and a half ago, on the one hand, our joint venture bank in China was, if not flourishing, certainly doing well enough to be desirable. On the other hand, relations between the US government and the Chinese government were at such a low ebb and continue to be, that nobody would have liked to have had it so when SVB was taken over by the regulators in the US in March of 2022 the regulators disassembled the bank in all of its parts and put them all on the auction block. And the US commercial banking operation was snatched up almost immediately by a bank from North Carolina Culver citizens and then other parts of the bank were bid on in the fullness of time. To the best of my knowledge, there is only one part that was never bid on by anybody, and that was our 50% ownership in the joint venture in China. And as a result, I think that the Chinese government, understandably, I can’t fault them for this, gave up on its being purchased by anybody and simply absorbed it about five or six weeks ago into our joint venture partner. So it just disappeared. Rod,

Gene Tunny  29:40

so the bank continues, right, okay, but the the SVB stake is gone, okay. Can I ask what you meant? You talked about control by the officials or the the Chinese? What? What did control involve? What are some, some examples of that?

Ken Wilcox  30:00

That I’ll speak about control in three different ways to give you a better sense, the first thing I want to say, which is arguably the most important, is that when we they granted us the license, meaning we talked about it for two years when I moved to China, we began putting the parts together. That was at the beginning of 2011 we finally, actually got the banking license at the end of 2011 so it took almost a year to put it once I was on the ground, it took almost a year to put it together, and putting it together mean, meant creating a bank from scratch and hiring people to fill all the positions. So by October of 2011 we had 62 positions filled. I believe there were only two or three Americans, I being one of them, the rest were all Chinese nationals. We finally got that, that license, the banking license. But when we got the banking license, they told us, the government told us, we’re so happy. This is a wonderful day when you get your banking license today. It’s a big success for both of us. However, there’s one thing that you probably aren’t going to like, but not don’t worry about it, and that is, there’s been a law on the books now since the end of the Mao era. You know, Mao was from 1949 until 1976 he basically dismantled the banking system. There were no banks in China for all that period. Then Deng Xiaoping came to power, late 70s, early 80s, and he ordered the RE establishment of the banking system. So what they told us in October of 2011 is, you know, we’re sorry that this is the way it is, but there’s a law in China that’s been around since Deng, and the law says that if there’s any new bank, and that your joint venture Bank is a new bank that has any foreign ownership, and your joint venture bank has foreign ownership because 50% of it is owned by SVB, and only 50% of it by the Chinese government. That new bank cannot use Chinese currency for the first three years. So that is definitely a form of control to the extent that we really didn’t have any business to do for three years, it would be gene like somebody saying to you, we’re so happy we’re giving you a license to open a restaurant, but sadly, and we’re sorry, this is the case. We wish we could undo it, but sadly, you’re not going to be allowed to be allowed to use food for the first three years, because without Chinese currency, there wasn’t much we could do. And so that was that is a major form of control, correct. The second thing that I will mention is that the situation in China is different from the situation in the US when it comes to banking licenses. If you get a the Federal Reserve or the Controller of the Currency granted you a banking license, you could do anything any other bank could do, starting on day one. And what I found out in November, in October of 2011 is yes, we got this banking license, but all it permits us to do is to call ourselves a bank, have a front door and welcome people to come in. It doesn’t allow us to do any banking business, per se, meaning, even if we had been allowed to use renminbi, Chinese currency, we couldn’t have opened deposit accounts, we couldn’t have made loans, we couldn’t have exchanged currencies, we couldn’t have done anything, because every single discrete banking activity requires A separate and discrete license. So to run a bank like ours, which is be true of almost any other bank for that matter, would require 2030 licenses. We by the time we disappeared, we still didn’t have all 2030 licenses. So that’s another form of control, correct? Yes, yes. The third thing I would say is the Federal Reserve came into existence a little over 100 years ago, I think 115 years ago, and in the last 150 years, let’s just say it developed a. Let’s just say, arbitrarily, this is a made up number, but 1000 regulations for banks. If the Federal Reserve has 1000 regulations for banks, the CBRC, which was then the regulator in China of banks, has 50,000 regulations, and they’ve only been in existence since 2000 and either one or two I forgot which so in, you know, in a little over a decade, they developed vastly more regulations than our Federal Reserve was able to develop in over 100 years. And interestingly, we had to report to the Federal Reserve about monthly. We had to report to the CBRC, our joint venture bank in China had to report to the CBRC daily. It was like running a McDonald’s where every night, you plug in the information of the day and it goes immediately to Chicago, where it’s interpreted, and then directions are shot back to you the next morning. And that happens daily in McDonald’s, and that happens daily with banks in China. So that’s a third level of control, which it’s utterly mind boggling, isn’t it? Yeah,

Gene Tunny  36:21

it sounds mind boggling. It’s quite, quite extraordinary. Just want to understand what did they end up getting out of it? Or like this, I get the sense that you think that the SVB got it, didn’t get the as good a deal as it as it could have, or that there was, you know, the the Chinese took advantage of SVB in a way, what did they end up getting out of it that you think was unfair in a way.

Ken Wilcox  36:54

Let me steer clear of words like unfair. Okay, although I feel that way down deep, don’t want to use that word. I this was. This hearkens back to what I said at the beginning about my original title, one bed, two dreams. Yes, our dream, I can tell you what our dream was, very brief. We wanted to be, and were until we disappeared a year and a half ago, we wanted to be the most important player in the financial services arena, with respect to technology companies, and in particular, early stage venture backed technology companies. And we fundamentally achieved that we had about 60% market share in the US, and we had growing market share in innovation centers around the world. And we felt that innovation is a global industry. Unlike many other industries, you can have a mining industry that’s fundamentally local. You can have a farming industry that’s fun, agricultural that’s fundamentally local. But technology is global, inherently global. If you’re cutting edge, you have to be cutting edge everywhere, because technology is an abstraction, and as you well know, it travels around the world. No president can build a wall high enough to stop it. So that’s the role we wanted to play. And the other thing, of course, was we were hoping to make money for our shareholders. So that was our dream. What was their dream? Their dream was to understand our business model and how it worked, and that was first and foremost their dream. They didn’t, I don’t think they cared one wit how much money they made off us. I think they simply wanted to understand our business model. I think we were a great disappointment to them, because with by the end of the first year, I was able to discern that they had been operating under the mistaken perception that we had an algorithm that would enable us to differentiate between early stage technology companies that would ultimately be successful and those who wouldn’t. And when I, when they accused me at the end of the first year of bad faith because I hadn’t disclosed the algorithm when I explained to them, you know, I’m I’m shocked that you would think that we don’t have an algorithm. Ours is good old fashioned hard work and pattern recognition. To be a lender in our bank, it takes about 10 years. You have to go through an extensive apprenticeship, and that’s the way it works. There’s no algorithm. They were shocked in the same way that I was shocked. I. Uh, so that we were a disappointment to them, I think, and I think that that caused them to become increasingly less interested in our success as time went by. But that’s the the difference I would do want to explain one more point in time, because it’s so pertinent to the experience, and that is that when I found out in October of 2011 that we weren’t going to be able to do much business in the next three years anyway, because we wouldn’t be able to use, um, Chinese currency, I assigned what, what few banking activities we were able to engage in to other people, and I spent three years trying to find a path to Xi Jinping, because ultimately, in a society as authoritarian as the PRC, big decisions emanate from the top all the way down. And if anybody was going to give us an exception to allow us to begin using renminbi, it would have to come from the likes of Xi Jinping. So I sat down with myself and charted several paths from my humble station up to the top and worked those paths for three years, and I made some progress. There’s evidence that I made progress and that my plight and my story was known by people at the very top of China by the end of the three year period. However, I did not succeed in getting the exception. But here’s what did happen after three years, the government, slash party, came to me again and they said, this is such a happy day. Everything’s a happy day. That’s such a happy day because this is the day we can grant you permission to use renminbi, so it’s what we’ve all been working toward. And then they said, By the way, there’s one other request. We admire your business model so much that we want we’re starting next week, a brand new bank here in Shanghai, and we’re going to use your business model. And would you mind spending some time with the management team of this new bank, helping them to understand some of the things that they were not able to understand? Why? Watching you fundamentally doing nothing in the last three years? Yeah, so that’s how it played out.

Gene Tunny  42:45

Yeah, yeah. Go ahead.

Ken Wilcox  42:47

Let me just say one other thing, and that is when we got the license in October of 2011 they said to me, um, it it’s sad that we can’t let you use renminbi, but you can do what we would do, meaning here in China, we all help each other because we’re trying to succeed as a country. And you can teach your business model to Chinese banks in the next three years. That would be a good use of your time. And we will. We know that you’ve got a heavy burden with these 62 employees. We don’t want you to lose too much money, so we’ll give you subsidy for the next three years, not enough to be profitable, but enough to lose as much as you might otherwise. And they were constantly in the further the three year period, asking me to send groups to different banks in China to teach them how to how our business model works, so that they could begin to emulate it as quickly as is possible. And frankly, I wasn’t willing to do that. That would be what I call, in my book, The Green Hat award. And what I mean by that is there’s a belief, a common belief, in China, that you men shouldn’t wear green hats, because if you wear a green hat, it indicates to others that you’re being your wife is cheating on you, and I felt they should be wearing a green hat, because I I gotten our board support in building this new bank in China, and it was really so that I could teach my competitors the our business model, with which I hope you see the connection, if you don’t just uh, ignore

Gene Tunny  44:47

it, yeah, yeah. I mean, it’s, uh yeah, it’s extraordinary. So they’re wanting to, wanting you to teach competitors of of the bank, it’s just bizarre.

Ken Wilcox  44:58

Honestly. Faci. Board and say I was I taught a whole bunch of competitors how to use our business model. And so I want to underscore one thing you haven’t asked, but I’ll answer anyway. And the one thing I want to underscore was it didn’t work, but I really valued the four years in China was exhilarating. It was fascinating. With the most interesting four years of my life, my wife would say the same thing, that’s on the one hand, on the other hand, I do believe that the Chinese Communist Party is beyond a shadow of a doubt the most problematic business partner, joint venture partner that you could imagine? Yeah. Oh, it was a very mixed experience.

Gene Tunny  45:52

Yeah, I can I can understand. I’ve had a guest from Arizona State University on the show before, Alan professor, Alan Morrison there, and he’s written a book enterprise China. And he, you know, we talked a bit about the specifics of it and the involvement of the party and in businesses across China. And, yeah, similar, similar theme to to your book, I know you call it something different, don’t you call it, is it China rink you call the model,

Ken Wilcox  46:21

is the phrase that I use because think about it this way, and I’m sure it sounds exactly like what your other acquaintance in Arizona is pointing to. Think about it this way. If Cisco goes to China, it’s hardly likely that any other American technology company is going to assist Cisco in its attempt to compete in China, and the US government is unlikely to assist Cisco in its attempt to compete in China. I just picked Cisco arbitrarily, but Chinese banks sometimes help each other, and the Chinese government definitely steps into this fray, and through its many levers, helps Chinese companies succeed when we were, when I was at the absolute low point, thinking, this is never going to work, I had been, by the way, by way of background, I’d been on the board of the San Francisco fed for seven years, starting somewhere around 2005 I was on that board. And even after I went to China, I went back once a month for a day to attend those Federal Reserve Board meetings. So when I was at a low point in China, sort of midway through the four year period, I went during one of my monthly visits to the Fed, I took the opportunity to talk to the people in charge, and I said, Well, I don’t understand why. In 2011 I believe it was you granted three Chinese banks licenses to operate in the US, and they’re allowed to use American currency. Why on earth aren’t we? Aren’t we reciprocating another word for tap? And you know what their response was? Yeah, that’s not our job. You chose to go on your own. We didn’t send you, and our job is to ensure the safety and soundness of the American banking system. It’s not to succeed in China, or it’s not to discriminate against Chinese banks in order to balance the equation. And that say that in a means burdened way, it’s just there, yeah. So it is different, yeah, yeah,

Gene Tunny  49:04

absolutely. Ken has been a great conversation. I’ve learned a lot. And, yeah, it was good to explore your experience. I mean, I could probably talk to you for another hour, but I’m gonna have to, I’ll have to wrap it up, because you’ve got, you’ve got things to do, and for sure. And, yeah, it’s been, it’s been amazing. I think there’s that bigger conversation about policy toward China, and there’s that whole notion of decoupling and all that. And now there’s me, there’s very, you know, there’s the debate about trade policy towards China, but that’s, you know, that’s another, an issue for another another day, I suppose. Is there anything else you’d like to mention before we wrap up? Please? Ken, no, I

Ken Wilcox  49:48

think I’ve pretty much said it all. I very much appreciate the opportunity. We are in somewhat of a pickle here in the US. And for that matter, in Australia, because we are not withstanding the disengagement that we believe we’re executing right now. We are inextricably tied up with China and undoing those those ties is is not an easy thing. It’s an extremely complicated thing.

Gene Tunny  50:28

Exactly. I think that’s a great point to end on. Very good. Ken Wilcox, author of The China Business conundrum. I’ll put a link in the show notes to your book. I recommend people read it, because it’s great. Yeah, I love that brain hat story, or that mention of that and the guanxi learning about that as well. That was that’s been very useful, very good. Ken. Thanks so much for your time. Hope the book sales go well and yeah, hopefully we’ll connect sometime in the future.

Ken Wilcox  50:57

Thank you so much. I really appreciate the opportunity. Good luck to you,

Gene Tunny  51:02

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. You music.

Obsidian  51:49

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

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Podcast episode

China’s Economic Future Under Xi & the Australia-China Relationship w/ Emmanuel Daniel – EP253

Show host Gene Tunny talks with Emmanuel Daniel, founder of The Asian Banker, about China’s evolving economic policies under Xi Jinping. They explore China’s state intervention, the country’s property sector, and the global implications of Xi’s economic vision. Emmanuel also shares insights into Southeast Asia’s rise, focusing on Indonesia’s growth prospects. The conversation concludes with a discussion of Australia’s role in the region, its economic ties with China, and its alliance with the US and UK.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

What’s covered in EP253

  • Introduction (0:00)
  • China’s Property Sector and Economic Challenges (6:32)
  • State’s Role in Economic Development and Social Infrastructure (15:20)
  • China’s Economic Growth and Productivity (29:15)
  • China’s Geopolitical Challenges and US Relations (35:58)
  • Southeast Asia and the Rise of the Rest (44:50)
  • Australia’s Role in the Region and Economic Ties with China (53:38)
  • Final Thoughts and Future Directions (56:07)

Takeaways

  1. China’s State Activism: The Chinese state has reasserted itself in the economy, implementing policies restricting private sector growth with the objective of promoting long-term social stability.
  2. Challenges of State-Led Development: There are limitations to what the state can achieve compared to the dynamism of private markets, especially in frontier technologies.
  3. The Socialist-Capitalist Tension: China’s current policies reflect a unique blend of socialism and capitalism (aka socialism with Chinese characteristics), with the state playing a more prominent role than in Western economies.
  4. Global Implications: China’s economic trajectory under Xi Jinping will profoundly affect global markets, particularly as the state asserts more control over private companies.
  5. Rise of Southeast Asia: Countries like Indonesia are emerging as economic powerhouses, with domestic consumption and political stability driving their growth.

Links relevant to the conversation

About this episode’s guest Emmanuel Daniel:

https://www.emmanueldaniel.com/biography-and-contact/

Economics Explored ep171 on the Enterprise China model:

https://economicsexplored.com/2022/12/26/enterprise-china-what-western-businesses-need-to-know-w-prof-allen-morrison-ep171/

Reuters report “Indonesia minister says Musk to consider offer to build EV battery plant in country”:

https://www.reuters.com/business/autos-transportation/indonesia-minister-says-musk-consider-building-ev-battery-plant-country-2024-05-20

Lumo Coffee promotion

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Transcript: From Academia to Impact: TFranchising Fitness: Lessons from the Expansion of Spartans Boxing Clubs w/ Russell Harrison, CEO – EP252

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.

Emmanuel Daniel  00:03

So the funny thing is that China, the state has become increasingly competent, and therefore became a lot more activist in the way in which the private sector is structured and the role it plays in the economy. I gene,

Gene Tunny  00:27

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 us 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. In this episode, we’re taking a close look at what’s happening in China and Southeast Asia with Emmanuel Daniel, founder of the Asian banker. Emmanuel is very well informed about the region. He’s got some interesting perspectives that have really given me something to think about. Among other things, we talk about the direction of economic policy in China under Xi Jinping. Emmanuel alerted me to the fact that the Chinese Communist Party recently had a very significant policy meeting. In the communique from that meeting, they affirmed their support for fully implementing Xi Jinping thought on socialism with Chinese characteristics for a new era. What on earth does that mean? After talking to Emmanuel, I have a much better idea of what the Chinese administration has in mind. I think it’s worth hearing from him what he has to say. Okay, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, without further ado, let’s dive into the episode. I hope you enjoy it. Emmanuel, Daniel, welcome to the program.

Emmanuel Daniel  02:10

Thanks for having me on, Jim. Looking forward to this conversation, and good morning, by the way. Oh

Gene Tunny  02:15

yes, yes. It’s 8am here in Brisbane, and you’re Are you in Singapore or Beijing or somewhere? Well,

Emmanuel Daniel  02:22

today I’m in Beijing, and it’s, you know, it’s 6am I think, so, you know. So I got up for this call, and I’m looking forward to this conversation.

Gene Tunny  02:33

Very good. Yes. So, I mean, you’re someone who has a having a close look at the global economy, and in particular the East Asia, Southeast Asia, and I’m keen to talk to you today about what’s going on there. It seems that there’s been some big news out of China recently regarding their approach to economic development that you alerted me to. Would you be able to tell us what’s going on their place. Emmanuel, well,

Emmanuel Daniel  03:01

you know, I’ve been in China, by the way, since 2000 as in, my first time visiting China was 1994 and then I started a business called the Asian banker. It’s a research publishing business and so on. And so I’ve had a very close view of developments in China, especially the economic, banking sector. And, you know, I’ve seen China make very important decisions that were, you know, like not taken seriously. You know, in the West, I guess, and I’ve seen them benefit from it, you know, like good things happen, you know, after, after a while, and you you see how it all comes together. And I guess that right now, they’re in the process of making yet another very important decision, and I’m now putting together all the elements that you know, will give me a very clear, a much clearer picture of where they’re taking this, you know. So you know, just to give you a background, like in the early 2000s 2001 was when China joined the WTO, you know. And I remember a conversation in 2003 in Washington, DC, where I was with a senator and a lobbyist, and they were saying that, you know, the US could afford a billion dollars a month, you know, to pursue the Iraq war, but that they were very concerned about the non performing loans of The Chinese banks. And I said, Okay, I put it at the back of my mind, and then 20 years later, you see which country actually had economic you know, or a banking crisis, or several banking crises, and which country kept growing quite strongly, you know. And then I look back and say. What were the elements that enabled China to grow strongly from, you know, about 2001 and it grew, you know, unabated until about 2014 you know, and then it started on to a decline. So right now, I think we all are, all of us are familiar with the fact that the party in China has come in and put lots of curbs on the private sector, you know, and and then we see that on from the surface, it looks reactionary, but when we look at the decisions that they made at the Third Plenum of the 20th Party Congress just a few weeks ago. It looks very deliberate, very well thought through and, you know, and very structured. So the one thing that I’ve come to realize about China is that whenever I say this, my my friends in the West, you know, like, like, raise eyebrows, which is that China is actually very transparent in its policies, at least in its economic policies. So it bears well to read what the decisions that have made and so on. So the third premium, they added more structure to where they want to take this economy. I think, about four years ago, the leader, you know, Xi Jinping, made this comment that houses are meant for living. And, you know, and there are three red lines that we cannot cross in terms of the property sector and so on. And at that time, even within China, the property developers thought that, you know, it was just wishful thinking on the part of the state. But as you can see, they have, you know, been very recorded in terms of the way in which they dealt with the property sector, you know. And then you’d think that, like in most countries, they would be more concerned about revitalizing economic growth and so on, but they were not in any hurry. And that’s that was the actual that was actually the feedback that lots of economists and analysts had outside of China to the decisions made in the third plenum that was just helped, which is that, hey, I thought that you’d be serious about revitalizing economic growth and so on. You know, I spend lots of time in China. I’m a friend of a number of the economists who actually contribute to national thought and, you know, to the State Council. They, you know, present papers and so on. And there are many different, you know, opinions floating around in the marketplace, but the state has taken the view that it has the resources to, you know, to take a socialist approach to creating an equitable society, you know, and it’s paying the price for it right now. And I think that for the rest of us, it bears to take a look at the decisions that they’ve made and, you know, the options that they have given themselves and what they’ve not given themselves, and see how far they can go with it. You know, I think that what they’re really trying to deal with is that blatant capitalism is not good for China. You know, that’s that’s a policy decision that the politicians have made. In fact, a couple of the economists have told me that there’s a big difference between what the economist think about, you know, spurring growth and creating a sustainable society and all that should, how that should work out, and what the politicians think. And it’s a there’s a big divide between the two. So the big question that we need to set for ourselves now is, will the politicians be able to afford the kind of economic system that they, you know, that they’re working on, you know? And you know, what will work and what will not work going forward,

Gene Tunny  09:13

right? Okay, look, there’s a lot to a lot to talk about there. Manuel, I think that’s, yeah, that’s a terrific setup for this conversation about China. A few things just to just so we establish the facts. First, you mentioned there were, was it three red lines for property, for construction, or did I miss

Emmanuel Daniel  09:40

it ago? Now, like you know that, that I forget what they are now, but one of it was that, you know, the property sector cannot borrow extensively from the banking sector and, and I can’t remember the other two. But so basically, you know, the state put out. Uh, guidelines in terms of what the property sector needed to do. The interesting thing with the property sector is that it was, until recently, the, the only, or the most important source of revenue for the provincial governments. So China operates, you know, in a centralized economy, but with a federated system, where the central government expects the, you know, the provincial government to generate their own sources of income. And so when the property sector just grew out of air, meaning, you know, it borrowed extensively from the from the banking sector, there was oversupply in some places, and property prices went up because property was basically the only asset class that most Chinese could invest in. China’s financial sector is not as broad based and as liberal as much of the rest of the world. So all these factors contributed to overheating in the property sector. And when the state put curbs on it, they did it did not give the provincial government, you know, much other options in terms of new sources of income. And so what you see now happening in China is that a number of the provincial governments have problems raising revenue and and then in turn, you know, has an effect on state owned enterprises, jobs and stuff like that right now. Gotcha.

Gene Tunny  11:38

Okay? And and, so what, what did the state do? So, you mentioned they put curbs on it, and what was going on with the property sector? I mean, we saw that there were, there was a whole bunch of development. I mean, you had ever grand, and it looked like there were, there were cities being developed, that were ghost cities, that, at least, that was the, you know, what was being talked about over here. I mean, what actually, what actually happened was it just a mania, a construction building boom. Was the state behind it? What was actually driving it? And then, how did they, how did they curb it? Well,

Emmanuel Daniel  12:14

they basically went after the biggest property developers and and curb, you know, the ability to borrow from the from the banking system, because they were very clear that if this, you know, if this sector overheats, it will have a reproduction on the banking system. But as I said, the real issue in the property sector was that property was basically the most important source of revenue for Provincial Government. So what they do, what they did was, you know, acquire land and hand it over to the developers, who then borrowed money from the banks to develop that and resold that, and that became a source of revenue for the provincial government, you know. And the thing is that you know this narrative alone, the idea that you know there were ghost cities and so on, belies the fact that there were good things that were achieved, you know, in the property sector. China today has easily 20 to 30 a grade cities, you know, relative to the rest of the world. I mean, in that it built very, very good cities in as many ghost cities that you find that were created in provinces that were either underdeveloped or, you know, where sources of income and jobs were not as well developed as the property. That’s where, you know. And then, because of rural urban migration, the concentration of population moved to the a great cities, and then leaving these other small towns emptied out. And I think that’s actually what happened. But if you look at the overall figure, the urban population of China is actually still underdeveloped relative to what you see in the West, in the US, I think in the US, I think about 80% of the population lives in urban centers. In China, it’s still about 60 something percent. So it’s still got a way to go. It’s just not well distributed, you know, and they are capable of working it through over time, you know, if this was the US, what we will be seeing is widespread bankruptcies, and you know, fallout from the from the parts of the country which economically not viable, in favor of the part of the country that where the concentration of jobs and in. Streets are so I think so it’s in my view, because I live here, I spend time here. That’s the redistribution. That’s what’s happening in China on the property front.

Gene Tunny  15:12

Gotcha, okay, can I ask about this, this new Well, what the Chinese administration is what it’s saying about economic development. It’s saying blatant. Well, this might have been the president blatant. Capitalism is not good for China. So to what extent is that? I mean, that’s self serving rhetoric in favor of the existing party, or is it? I mean, what’s the basis for that statement? Do they have any factual basis for it? I mean, capitalism, to the extent that they’ve embraced the market, hasn’t that been behind their economic development? Could you just tell us a bit more about what their what their justification for that statement is? Please. Emmanuel, the

Emmanuel Daniel  15:55

single most important justification is that the Gini Coefficient of China is almost the same as that of the US, so the rich getting richer and the poor being left behind is as much a phenomenon in China. In other words, it’s just as capitalist as the US, and they’re trying to reverse that and make it more equitable. But the way in which they’re doing it is that the state has become a much more, you know, dominant, capable force. And here’s, you know, here’s my structure by which I think through what the state wants to achieve and where it is in that evolution, you know, between 2001 and 2014 the state was putting in place very interesting policies that facilitated private sector growth. And you know, by the time you get to 2004 after China joined the WTO Goldman Sachs started to put out reports saying that, you know, the future is China. Is the future is the large populations the world, and then they come into China. And at that time, the platform players like Alibaba were just coming on on stream, and the Western, you know, capital markets funded these platform players dramatically, you know, and from the time that Goldman Sachs and Masayoshi Son, you know, the private equity the venture capitalists came in and took, You know, stock of potential winners in China. They led some of these to incredible growth. So at the height of its being listed in the US company like Alibaba, was able to be the capitalization was like $830 billion and when you’re capitalized to that extent, you visit a city like Hangzhou in Zhejiang province in China. And the, I call it the cascading effect of capital, the capital comes back into the city, and Alibaba invests in, you know, second tier startups which were, you know, which were the size of a few billion dollars, and those invested down the downstream to other startups. And you have a whole ecosystem of very good players. Now today, Alibaba is about 150 160 100 and $70 billion dollars in market cap and and that shows up in Hangzhou. Again. You go to Hangzhou today, there is widespread joblessness, and you know, and it’s very difficult to pick and choose which frontier technologies that they want to invest in and so on. And the state is saying that that’s okay, because not to worry. We will, we will fund you. We will, you know, guide you. And we will, you know, we will lead the economic growth. And there’s this huge debate whether you know how much of the next phase of economic growth in China should be led by the state, and which phase should be led by the private sector now, so between about 2001 and 2014 the state was happy with The role of facilitating some structure so that the capital markets, and especially the foreign capital markets, can, you know, can create winners out of the private sector companies like Alibaba. And after 2014 the the state started to become, I call it competent, uh. You know, the funny thing is that, and I think this phenomenon, by the way, is repeated in every other country in the world, including highly capitalized, capitalistic countries like the US. When the state becomes confident it creates gets a handle on how to manage, you know, huge infrastructure companies like Amazon and so on. It becomes intrusive. It becomes important, you know, it becomes involved in the in the structure that it’s creating. So between after 2014 the state put in place laws like, you know, data privacy rules, and then also took assertive influence in terms of where these companies go out to raise capital and so on. So the funny thing is that China, the state has become increasingly competent, and therefore became a lot more activist in the way in which the private sector is structured and the role it plays in the economy. Now the status other two other functions to play. One is to provide the social infrastructure, the, you know, the education, the healthcare and all of that. And it does that really very well, you know. And we shouldn’t undermine what China has achieved on that front. In fact, if you come visit China, you’d be, you know, you’d be very impressed with the quality of life in China. And then the second pillar, as I think, as I think about it, is the way in which the state funds or subsidizes frontier technology. So this is not the US capital market. Is the Chinese state looking out for, you know, next generation technologies and and infrastructure that it needs to invest in. And there it had. It had invested in a number of areas. So 5g for example, you know, China is one of the first, was one of the first countries that went veg. The state invested in it. But today I’m actually hearing a few speeches given by former ministers in China saying that, you know, we hurried up and built all this infrastructure for G but there are no applications, and a veg base station cost three times more to run than a base station, and if the applications can’t come on stream as quickly as they should, you know, the telcos don’t benefit from it. And, you know, the investment is way ahead of its time, you know, and and so the thing is that, when, when China, then, you know, says that, look, our EV car business is doing very well. It was the result of the state subsidizing 1000s of EV car initiatives in multiple cities. And then, you know, and that becoming affiliate, you know, a it takes up momentum, and it becomes takes a life of its own. So you can point to a few things where the subsidies have generated new technologies and new industries that didn’t exist before and become world players on top of it. But you can also point to industries that floundered and, you know, being left behind or being quiet. So now the state wants to be the, you know, most important investor in AI technology, you know. But the thing is that on the AI front, the capital that does the Chinese state can put into it, it pales in comparison to what the US is doing. So if you look at the top six AI players in the US, the capital that they are able to garner is about ten trillion I think, and that’s the entire capital market of China. So there is a limit to what the state, any state, can do. It’s not just China, but even the US is not able to fund its own frontier technologies. Is the, it’s the US capital market, which is the giant in this, in this, in this area. And then comes the role of the private sector. No, why can’t the private sector go out and raise its own capital and all of that? So that’s the lay of the land. That’s the, you know, the issues that China is facing. And the big question I’m asking myself, as I put all this together, is, will the state be able to afford the kind of economic structure that is trying to build?

Gene Tunny  24:59

Yeah. Yeah, okay, so I just want to, you know, talk a bit more about, you know, the nature of the Chinese economy. Because the just sort of, I guess I’ve reacted a bit to this statement, blatant capitalism is not good for China. I’m not sure to what extent they’ve had blatant capitalism. Because, I mean, my understanding of China, I mean, this may be wrong, but it’s, you know, it’s state directed capitalism or or it’s socialism with Chinese characteristics, as Deng Xiaoping described it, you know, many years ago. So, I mean, the state’s been heavily involved, and that brings all sorts of complications. You’ve got all these SOEs, state owned enterprises. There’s this enterprise China model that one of my guests was talking about a couple of years ago when I had him on. I’ll have to link in the show notes to that, the idea that, you know, once you get to a certain size that there’s a party official, you have to have someone on your your staff, who’s, you know, connected to the party. I mean, it just seems that the state is already very heavily involved in in business in China, and the idea that it could be getting more involved, I’m not sure that’s the that’s the recipe for for economic success, but that that’s just my my view, just That’s my reaction to that statement. So just interested in any reflections on that, or we could move on, please, up to you. Emmanuel,

Emmanuel Daniel  26:28

yeah. I mean, you know, thing is that the idea of the state becoming competent enough so that it has the confidence to involve itself in the private sector. That’s where China is today. For large state owned enterprises, they’ve always had a Communist Party official in there. The whole picture is one of the competency of the socialist state. And for the longest time, we’ve never had that, you know, the during the Cold War, the socialist state wasn’t competent. It wasn’t a good allocator of capital. You know, it didn’t motivate individuals to to be self reliant and you know, and generate capital, you know, and there, you know. It was just an inferior form of creating economics relative to patent capitalism. But when we put it alongside each other today, patent capitalism did has is destroying the US right now. You know, it’s, you know, it causes this great divergence in terms of the ability to, you know, even look after yourself. You know, the the rise of homelessness in the US and all of that, and the divergence in salaries. I mean, you got CEOs who earn hundreds of millions of dollars in salary for the same 24 hour work that that the last worker gets paid. So you get all these, you know, these courts in in capitalism, which is what China is trying to deal with, but you have a state that has come to a level of competence, that it thinks that it can pull this through. So, you know? So now I’d say we take a wait and see attitude. Now, what I say to myself is I missed the big picture in about 2003 2004 when I doubted China’s ability to generate economic growth given the non performing loans that set in the banking system. But they averted that by by hiving out all the bad, bad debt and putting it into two huge asset management companies. And as the economy grew, they were able to deal with that NPL situation. So now, with the slowing economy and geopolitics up against them, some of those options are not available anymore, so we will have to see. But however, given the fact that China has now come to about $12 trillion in GDP. It has sufficient internal momentum to keep growing, you know, but not in with the at the rate at which it was growing when it was, you know, much it was benefiting a lot from the global capital markets.

Gene Tunny  29:40

Yeah, and was the Chinese economic development story. Was a lot of it the migration of people from rural areas into the cities. I mean, it’s the old Arthur Lewis economic development story. You’ve got people underutilized or, you know, not very productive on the land. They move to the cities. You get a big bump up. Productivity is that, is that still occurring? That migration? Yes,

Emmanuel Daniel  30:03

well, the migration was a reallocation of human resources, you know. And China invested in 40,000 kilometers worth of high speed railway, you know. And and China Railway cooperation, and its, you know, related organizations about $800 billion in debt right now, but it’s a debt that they are able to absorb, because as long as the economy keeps growing, you know, it will be able to ameliorate the debt over a period of time and but as an infrastructure, it’s amazing. It’s going to stay for a long time to come, you know, but all of that did not really result in higher productivity gains, and China is the one economy that grew dramatically without a commensurate growth in productivity, and that’s interesting part of the story that it’s not very talked talked about. So, so now you have wages rising, you know, well beyond sustainable levels. And the state has come in and said, No, we can slow down a bit now, so that, you know, we spread out the wages to the rest of the economy, and bring up agriculture, for example, and revitalize the small towns this urban, rural urban migration was necessary at a time when, you know, China’s urban population was not developed enough to, you know, to take advantage of a lot of the export led, you know, industries. So they needed to create jobs in the big cities. But right now, they want to spread it out a bit more. And the cities that benefited were, you know, were not, were not universal. It wasn’t all cities that benefited, and that’s why we see the ghost towns. The there are many cities that try to become more urbanized, more industrialized, but just didn’t have the means to

Gene Tunny  32:16

so what is the Chinese economic growth story? Is it? I mean, is it foreign investment, or is it, it’s domestic investment in a supposing capital? What is it? What’s the story? So,

Emmanuel Daniel  32:31

exactly as I indicated earlier in this conversation, which is, there are three pillars of economics, okay, one is the state spending and building infrastructure. The second is the state subsidizing industries, and the third is foreign capital. And so what has drawn back now is the access to foreign capital, and the state thinks that it’s able to make up for that by, you know, by supporting private sector companies, which, as you indicated just now, have got Communist Party officials sitting in the company, you know, and second guessing the decisions that need to be made. You know, it’s this is as far as socialism has come as being a viable alternative to capitalism, you know, and they’ve taken it very far, you know, it’s a working system. It’s just that they now have the confidence to think that they can take it further. So like in the main cities, for example, in Beijing, in Shanghai, investment bankers used to be paid the same as investment bankers in the West, which is you try and second guess how much capital you’re able to raise for your client’s company, and you get paid on a success basis, and on a success basis, they paid incredible amounts of bonuses. And now the state has come in to say that investment bankers cannot be paid as they used to be, that those bonuses are illegal under, you know, Chinese style socialism and the capital market here is reverberate, reverberating from those decisions. Saying, Wow, okay, let’s see where you going to take us now. So it’s it’s work in progress, and when you look at states that eventually centralize the economy, a lot everything from Germany before World War Two to Japan in the last 30 years, the capacity of the state to to hold an economy together, especially a large state, can go a long way. You know, it won’t be the same as a, you know, a openly capitalist country, but, but it still can. Um, you know, this story can go go on for another 10 to 15 years.

Gene Tunny  35:05

Okay, what about this socialist approach to creating an equitable society? What types of measures do you think they they have in mind?

Emmanuel Daniel  35:15

It’s every facet of society, everything from the time in which they they banned, you know, educational institutions outside of this, you know, formal school structure, there were online learning systems that, you know, that were making lots of money. You know, people generally spend a lot of money on on things that they’re afraid of, healthcare, you know, education and so on. And you had this, this making, you know, a lot of money from parents, you know, fearing for the future of their kids and so on, you know. So it’s in every facet of society, the building of affordable housing, you know, access to health care. You know, China has got one of the best public sector health care system in the world, you know, and it’s, it’s getting better, Social Security, putting that into place, and ensuring that that, you know, people have income for the rest of their life, which is not pension, you know, in the like in the old days and so on. So I think that just touching on every facet of society, you know, right down to how much time a kid can should spend on on gaming, online gaming, you know? So, so then for the rest of us, looking in, we’ll think that, well, that’s a bit intrusive. And the state making lots of decisions for everyday life, which is, which is what it’s doing right now. So you know how far they’re able to take. That will remain to be seen.

Gene Tunny  37:01

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

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Gene Tunny  37:35

now. Back to the show. I’m sorry to keep talking so much about China, it’s just that it is so. I mean, it’s such a pivotal part of the global economy now, and that it’s it’s hard to talk about anything else so, and I have so many questions. I mean, I like, I agree with you. I mean, it’s been an incredible success story. I mean, it’s within our lifetimes that, I mean the predominant, like when we were young. I mean, they’ll, you know, the predominant mode of transport in China would have been bicycle, wouldn’t it? I mean, like, the amount of economic progress that they’ve had, particularly since, you know, Deng Xiaoping opened up, start open up progressively from the late 70s and the 80s is just absolutely extraordinary. So, yeah, just just incredible progress. What I want to ask is about the, you know, I have, I’ve had a few guests on my show, or maybe two, or maybe a couple, who are very concerned about, you know, the whole China, Taiwan. They’re concerned about China being aggressive militarily, and it looks like there are some very hawkish there’s a very hawkish pivot, or a tilt in the US State Department towards China. There’s more, rather than seeing, you know, 20 years ago, we had this view of cooperation, or, you know, the gains from trade and all of that. Now there’s a lot of concern about national security. Do you have any thoughts on that? I mean, how is, how do you see that as playing out over the next decade or so?

Emmanuel Daniel  39:09

You know, from about 2010 I guess I started coming across commentators who were, you know, putting China on and making it believe that it will become the next leading nation of the world, and all of that since Xiaoping’s economic direction and economic model did not include grandstanding and did not include trying to project itself as as a world power and all of that. In fact, there was a lot of work to be done in China. Was very happy to be, you know, a work in progress. In fact, one of the reasons I am in China is because they invited people who are experts in all kinds of different growth of the country. Three but after 2010 there was this growing assertiveness, and I guess the Americans reacted to that right and and China’s economic growth would not have been possible if the US didn’t allow China to join the WTO in 2001 and that that entry process itself was a long iteration before that. So you get a situation where, you know, the country that used to, you know, just provide the rest of the world with manufactured goods and so on, is asserting itself as a world power. The thing is that China is dialed back a little bit on that, on that narrative, because, from a business point of view, why would you, you know, get on the heckles of your most important client. You know, the business that China does with the US is larger than the business than that China does with any other country in the world, almost put together, right? So, so China has to figure out, you know, how to continue doing business and selling to the US. In fact, you now start hearing that there’s an effort to, you know, to soften that relationship with the US. But at the same time, there’s this thing called Xi Jinping thought which he’s promoting kids in school right up to presidents or banks have to study it, and the way in which it’s been put together is that he’s firing on all cylinders. He’s he’s working on all objectives at the same time, you know, so you get situations where he’s trying to promote regional trade and, you know, forming trade associations and trade alliances, while at the same time having border problems with, you know, all 14 of its of the of the countries on China’s borders. So you know, how will he, or how he will be able to, you know, build a sustainable narrative from, from, you know, pursuing all objectives at the same time will remain to be seen. I think that he will achieve a few of his objectives well, and some will have to, you know, he needs to stand down on them if he’s going to get any good will out of not just the US, but, you know, any of the other countries, with the Philippines, with Vietnam, with India, you know, and so on. So. So I think that he’s being incredibly ambitious. And I anyone in his shoes, will say that, yeah, we will not be able to achieve all our objectives, you know, and and some will have to go by the wayside. The thing about Taiwan is that when China sets itself up as a as Taiwan being a non negotiable, you know, item, it also sets itself up to be ridiculed by countries that want to find the soft spot of China. So, so it’s not, not surprising that the US would use Taiwan as a, you know, as a sore point that on which it could raise the heckles of China. So, you know, and by the way, don’t sell, sorry. Xi Jinping has has has given a mandate that by 2049 which is the 100 years you know of 2049 that that that that should be re reunification, so, so by giving himself a deadline, he reduces the number of options available to, you know, to make this possible. So, you know, I think that some form of military, militaristic approach is inevitable just by reducing the options given to themselves. So it’s, I’m not a, I’m not a, you know, military person, so I wouldn’t comment on how exactly that’s going to be carried out, but it’s the rhetoric that gets them there. Yeah,

Gene Tunny  44:30

yeah. I mean, it’s, it is a great concern. I mean, that certainly could be a, you know, huge Flashpoint globally. But yeah, I mean, yeah, I’ve had, had a few conversations about about Taiwan and the issues there. It’s all fascinating. Emmanuel, that’s been great on China. I really appreciate your insights. I think we’ve got a little bit more time. I’d like to ask you about the, what you call the rise of the rest. I mean. One country I’ve had a bit to do with is Indonesia. I’ve done, done courses for finance ministry officials there and for their economic development agency, I think Baba NAS, if I remember correctly, what’s happening there. At the moment, we’ve got riots. I mean, there’s a whole bunch of instability. What’s the outlook for Indonesia?

Emmanuel Daniel  45:21

I mean, Indonesia has been a success story for Southeast Asia. It’s a $1.3 trillion economy, so it brings it up to the level of the large countries in the world. But even as we spend time thinking about US China relations and the US, China, dynamics, and the rest of the world. I think what we’re seeing now is the rise of the rest, and not just in Southeast Asia, in different parts of the world, in in the Balkans, I see Serbia coming up pretty strongly in, you know, Latin America, you have Brazil, and these are what I call the middle income, the middle power countries, you know, not, not the the, you know, the Cold War belligerents, but the the second tier players. And Indonesia also has had the most successful, you know, move into a sustainable, democratic, you know, structure since the 1997 1997 Asian financial crisis, 1998 Asian financial crisis. It’s come a very long way, except that it’s now, you know, solidifying into a political structure which is sustainable now in the US, outside of the Democratic and Republican parties, there is no chance for independents to come on and and provide a different political agenda. You know, there’s no platform that makes any independent or a third party viable, despite many attempts to build that. And I think that all that is happening in Indonesia right now is that the incumbents who have become successful in, you know, in building their own political asset are now trying to, you know, centralize the assets and and to become, you know, the deterministic force in Indonesia, and this, essentially is Widodo political party and his family and his friends and the people that he wants to work with. So the as even as the new president is taking over, in fact, the in the best indicator of a very successful political process is one where you don’t remember the last six presidents. You know, in other words, the transitions have been going very well, but I think that there’s enough political assets that have been created where the political players want to solidify it by putting in place laws that that favor them. And people are going out on the streets and saying, No, we won’t let you do that, because we want to have a political system where new players can come on stream and challenge you if they wanted to. So I think that in some ways, it’s a natural evolution of stable political system, but on another level, it’s it threatens democracy because it reduces the number of players and entries into the democratic process. But at the same time, economically, Indonesia is doing profoundly Well, I think that we forget that it’s got a viable domestic consumption market, in fact, much more successful than China. And because of that, there is a desire for foreign investors to be invested directly in Indonesia. The Indonesian stock market is now bigger than that of Singapore, which is a regional finance supposed to be a regional financial center, and is, and just by the sheer size of the economy, is the most attractive economy in that part of the world, and so and in the same way, when we look at countries where populations on the increase, like like Vietnam, Philippines, Thailand, they GDP growth is being driven not by productivity gains or shifts in industries and so on. It’s just by the sheer size of the growth in the population. And as they do that, they need the political system to hold you know, the kind. Country together. So, so each of these countries have different problems that they’re facing and and they’re finding their way. And, you know, so it’s a work in progress, as it were, now. The The upshot of all of that is that some of the older developed countries in the region, Singapore, being one of them, are floundering because they are losing the role that they used to play, which is the regional, regional financial center, and they have to reinvent themselves to to be relevant to the rest of the region.

Gene Tunny  50:34

Okay, okay, yeah, that’s, yeah, that is a bit of a concern, like what you’re saying about Singapore, because it has had that reputation and, but, I mean, now it’s got a flourishing tourism sector, hasn’t it? I mean, it’s got a lot of advantages to it. And I guess there’s a domestic, you know, the services economy there. I mean, what are the prospects for Singapore and, and, I mean, other other countries in the region,

Emmanuel Daniel  51:01

it used to be the, you know, the financial center in which you raise capital, and today it’s got a capital market that’s smaller than, you know, several of its neighbors, smaller than Indonesia, smaller than Thailand, and less active than even Malaysia, which has had political problems. So what’s interesting is to see, you know, countries where the politics is unstable, but the economics is pretty good, and the economics is, you know, growing from strength to strength. And when I look at the numbers, and I try to figure out what the drivers are, on the onset, the most important driver, really is population growth, and then comes everything else. So if you’re going to be invested in Indonesia, you should be invested directly in Indonesia, and not, you know, come to use Singapore as a regional center and then get into Indonesia. So that’s where industries are right now, and everyone from Elon Musk to, you know, fund managers are directly invested in the countries that they are interested in. And so to that, Singapore has to reinvent itself. And you know, there are industries where by just being marginally better than the rest of the region, like ports, for example, or airports. It has the up effect that is, you know, you land in Singapore before you go to go off to any of the cities. But as the cities themselves improve their infrastructure, they become direct destinations themselves. So Singapore is, you know, has to work very hard to figure out its relevance. Now, having said that, it doesn’t mean that Singapore is going to be left behind. I think a rising tide, you know, raises all boats. So Singapore’s own GDP continues to grow, but not on the same elements that gave it the growth 10 years ago. You know, it just needs to be more relevant and more plugged in with to the rest of the region. Yeah,

Gene Tunny  53:09

yeah. I just pulled up of that’s an interesting point you mentioned about Elon Musk. So I’ve just noticed Musk to consider opening battery plant in Indonesia. So it looks like there’d be some deal done with the the administration, and probably some subsidy of some kind, so that, yeah, that’s interesting. I’ll put a link to that in the show notes. Okay. I mean, you’re, I think this has been terrific. I’m going to have to have you on again. I think, I mean, there’s so much to talk about, and you’re such a wealth of, wealth of knowledge and insights into the region. So I think we’ll have to wrap up for now. But any final words before we we do wrap up, and hopefully I can chat with you sometime in the future.

Emmanuel Daniel  53:49

Yeah. I mean, I’m very interested in how the world looks like from Australia looking out, you know, and Australia’s own, you know, role in the rest of the world. I think that Australia is a, you know, the largest exporter of commodities to China, and now that the relationship has been, you know, put on a more even footing, we find Australian wines back in the stores in Beijing, you know. So Australia is the middle tower, which has a very different dynamics from, you know, from the Geo, geographically centric model, which is, you know, if you are in Southeast Asia, it’s Indonesia. If you’re in the Balkans, in Serbia, if you’re in North Africa, it’s Morocco. But Australia sits outside of the of the ring of influence that it wants to play in. So, so that’s, that’s another conversation, and another day, yeah,

Gene Tunny  54:51

I think so. I mean, you’re right. I mean, we are so like, yeah, we’re such a big commodity exporter, and now our economy is so. Are tied to China’s at the moment, and, you know, it affects the the iron ore price and the coal price. It is extraordinary how connected we are and and yet, that’s why we’re having a big debate at the moment about, you know, they’re the orcas deal. Maybe we should talk about that another time. But there’s a big debate about whether us aligning so closely with the Americans and the British in this aukus nuclear submarine deal, possibly antagonizing China. Actually, I think we are antagonizing China doing that. What are the implications of that? We’ve, we’ve had a, I mean, while, I mean, I think there’s a lot of sympathy for the Americans. I mean, we’re, we have a very, very strong links with the United States, particularly because of the wartime relationship. I mean, I’m in Brisbane, here where we had Douglas MacArthur based, okay, and so we’re very grateful for for the Americans. But, yeah, at the same time, we’ve got a prime minister, Paul Keating, who was very, you know, very strongly, fervently nationalist Australian, very, and he was, he’s become very critical of that orca steel. So I think it is something to that we need to talk about some more in in this country, that’s more of a, more of a comment from me. Any any reactions to that before we close. Yeah,

Emmanuel Daniel  56:21

so it comes back to my the first point I was trying to make in this conversation was that if we take the labels off and, you know, and not deal with the desire of countries to build working economic systems and not call it, you know, capitalistic or socialist, we were able to evaluate them much more equitably and then understand the baselines from which they work. So China’s baseline is that it’s, you know, it’s the momentum that’s created for itself in the economy. It can go for a while yet, you know, despite, you know it being, you know the areas in which it’s made some mistakes, or it’s slowing down or or de prioritizing at the moment. So so let’s see where they go with that.

Gene Tunny  57:13

Very good Absolutely. Manuel, Daniel, thanks so much for the conversation. I found it really informative, and yeah, love your insights. Certainly want to chat with you some more. And yeah, keep up the great work. So thanks again for coming on the show.

Emmanuel Daniel  57:28

Thanks gene for having me on. And great conversation,

Gene Tunny  57:33

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

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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.

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Podcast episode

John Cochrane on Free Markets & Economic Growth and the Fiscal Theory of the Price Level – EP214

Professor John Cochrane of the Hoover Institution discusses the importance of free markets for economic growth and highlights stagnating growth as the biggest economic issue of our time. John talks about what may be his next book, “Free to Grow,” which aims to update Milton and Rose Friedman’s “Free to Choose” for today’s world. After John speaks, show host Gene Tunny interviews him about his views on growth and his controversial Fiscal Theory of the Price Level. This is a recording of a live event at the Centre for Independent Studies in Sydney on 26 September 2023. 

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

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

About Professor John Cochrane

John H. Cochrane is the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution. He is also a research associate of the National Bureau of Economic Research and an adjunct scholar of the CATO Institute. 

Before joining Hoover, Cochrane was a Professor of Finance at the University of Chicago’s Booth School of Business, and earlier at its Economics Department. Cochrane earned a bachelor’s degree in physics at MIT and his PhD in economics at the University of California at Berkeley. He was a junior staff economist on the Council of Economic Advisers (1982–83).

For more on John, check out his bio here:

https://www.hoover.org/profiles/john-h-cochrane

What’s covered in EP214

  • 00:03:36 Importance of economic growth.
  • 00:16:06 Incentives drive productivity and growth.
  • 00:17:12 Regulation hinders economic growth.
  • 00:22:59 Fixing problems requires better solutions.
  • 00:28:53 Fixing social programs by embracing free markets.
  • 00:39:28 Regulatory state causing innovation slowdown.
  • 00:46:24 Free market healthcare benefits the poor in John’s view.
  • 00:48:47 Fiscal Theory of the Price Level: Inflation caused by government debt.
  • 00:53:56 Avoid old left-right division.
  • 01:05:21 Government debt may lead to a sovereign debt crisis.

Links relevant to the conversation

Video of the Free to Grow event on YouTube:

CIS web post about the Free to Grow event:

https://www.cis.org.au/event/free-to-grow-unlocking-economic-prosperity/

Transcript: John Cochrane on Free Markets & Economic Growth and the Fiscal Theory of the Price Level – EP214

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked at by a human, Tim Hughes from Adept Economics, who did his best to decipher some tricky dialogue that otters understandably missed. 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  00:03

Yeah, John has written this immense book. It’s fascinating. I’ve picked it up but then I discovered I had to buy three more books to be able to, to interpret it. But it’s it is it’s, it’s terrific.

John Cochrane  00:17

Get past, past, just ignore the chapters to the equations and get to the fun stuff…

Gene Tunny  00:26

I’m getting through it!

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 late September, renowned US economist Professor John Cochrane spoke at the Centre for Independent Studies in Sydney. I’m an adjunct Fellow at CIS and I was lucky enough to interview John after his talk, and I also moderated the Q&A session. John is usually based at the Hoover Institution at Stanford, but he was visiting Australia and New Zealand to attend conferences held by the central banks of both countries. The theme of the event that CIS held was “Free to Grow”. John emphasised the importance of free markets for economic growth, and how stagnating growth is the big issue of our time in his view. After his talk, which I’m replaying entirely because it’s so good, I asked John about his views on economic growth and about his controversial fiscal theory of the price level. So stay listening to hear what he says about that. If you’d like to watch the video version of the CIS event, it’s available on YouTube. And I’ll put a link to it in the show notes. I’ve edited the audio so it’s a bit shorter. But if you’d like to hear the whole thing, including a great introduction of John by the CEO of CIS Tom Switzer, then check out the video, I’d be interested in what you think about what either John or I have to say in this episode. So please get in touch. Contact details are in the show notes. Okay, let’s get into the episode. I hope you enjoy it.

John Cochrane  02:24

Thank you. Thanks, it truly is a pleasure to be here. You may ask why, why do I visit central banks rather than just coming to talk to you? The answer is because central banks pay business class, you know, you know who pay, who prints the money. So I want to tell you a little bit about a project that I’m on. I call it Free To Grow. I hope it’s the next book, you’ll notice the allusion to Free To Choose. But Free to Choose was nearly 50 years ago. And it’s time to update it for today’s world and today’s problems. And it really amounts to I’ve been blogging and writing op eds, and so forth for about 15 years now. It’s time to put all that together in one place, which I discovered is not as simple as copy paste. Because you copy paste and you get immense amounts, it means copy, paste and boil down. And that’s much much harder than I thought. So part of that process is to come to talk to people like you where I have to boil it down, because after half an hour, you’re gonna fall asleep. And we can’t go on and on too far. So thank you for coming. What is the most important economic issue of, you know, facing us or the globe or anyone else? Is it climate change, inequality, unemployment, recession? The answer is none of the above, long term growth, the one that nobody talks about now, to get you to think about growth, why it’s a problem and why we need to do something about it. Let me ask you another quiz question. When was the best economy ever? Now a lot of my left wing friends, they’ll point ah the 1950s were just wonderful because, you know, the economy was growing and middle class jobs and so forth. 1950 the average American income was $15,000 in real terms, today it is $60,000. 15 versus 60. Which do you want? It’s not even close. The absolute best economy ever, in all of human history is right now. by a long shot, unless you want 15 versus 60. Now gee, this is GDP per capita and it evokes yawns, but I want to get you excited about it. GDP per capita is not just about more stuff. It’s about first of all better stuff. That household in the 1950 at a tiny house badly insulated, terrible cars that rusted immediately. One maybe black and white TV, health care. You know, they they all smoke. But you know most things you know if you got cancer in 1950 well, they you know, it’s cheap and then they’ll send in the priest. GDP per capita is health, environment, education, culture, defence, social programmes or any hope of repaying government debt, GDP per capita, that people look down on it, but it correlates with everything else. I’m trying to appeal to the progressives in the audience, which might be a few, but we nonetheless, we have to listen. You want to eliminate extreme, you know, extreme poverty, health, child mortality, clean water, all of those things are just collapsing the number of people who live in extreme poverty around the globe is is fallen dramatically. Child mortality what our ancestors even 100 150 years ago, many of their children died. And as a father and grandfather, I cannot imagine that heartbreak that’s just practically unknown, that comes from GDP that comes from economic growth that comes from it’s all part of it. Even you know, things like parks and a clean environment that that all cool, you have to be able to avoid that stuff. One of the things I find most shocking is the new degrowth movement. A lot of the climate movement will admit that it’s really not about the climate, it’s about an excuse to stop growth, and go back to some idea of the farm. These people have never been on an actual farm, say in India, and had to go get the water by hand first thing every morning. It’s just and it’s also annoys me because how much how much does the world economy have to grow before everyone can enjoy the standard of living of say, a social justice activist who likes to fly private jets to Davos we got along great growth before that, for that can happen. GDP is actually a vast undercount. People say, Oh, it doesn’t include, you know, parks and so forth. But it’s a vast undercount of how much better off we are now than than in the past. Among other things, it’s you know, it’s at market prices, it doesn’t count willingness to pay. If you remember, your your economics, the willingness to pay is always much greater than the market price, we get Google Maps for free, that’s worth a lot GDP counts it as nothing, and no medicines, medicines may be expensive. But if you’re about to die, you’d be willing to pay a whole lot more than that $10,000 it costs. A lot of our progressive friends worry about, oh, you know, we’ll run we can’t keep growing forever. That’s wrong. GDP is not just more stuff. First of all, we keep forecasting the end of resources, and it keeps not happening. But where we’re going GDP is the value of things, it’s producing valuable things for your fellow citizens. You know, it’s it’s funny, they say, oh, it’s immoral to go make a profit, you should go do social justice, the most moral thing you can do is to get up in the morning work hard for your fellow citizens. And and and they pay you for it, which shows you how valuable it is to them. But what we are doing, you know, where we’re going is the services economy, the economy of the future, the GDP of the future, will be for example, health, it will be the ability to to live longer and to conquer diseases and to live happier that that doesn’t take a lot of materials. Now I emphasised across time 15,000 in … from like 1,000 in the 1800s 15,0oo in the 1950s, 60,000 today, this is just an enormous increase in prosperity. Let’s look across countries. What’s the economic problem for India? Should they worry about recession? Should they worry about inequality? Well, their income is 2000. Our income is 60,000. The number one question for India is how to be more like us. That’s just orders of magnitude more important. Even China’s only only 20,000. This swamps these kinds of numbers 15 to 60, 2,000 to 60,000, that swamps every other economic issue. A recession is maybe a fall of 2 to 5%. We’re talking orders of magnitude. Climate is as you know, in the news, let’s just take the IPCC reports that say this will cost us 5% of GDP in 100 years, 5% of GDP versus, you know, doubling tripling, quadrupling, the process of growth. India $2,000 plus or minus 5%, or $2,000 to $60,000. And this is just the swamps, that that kind of issue. Now the question is, will this continue? As long as we’re thinking climate change and the economy of 100 years from now, instead of 5%? better off, will growth continue at say 2% a year? Well, then it’s 200% better in 100 years or three times better than today? If it was 4%, we would be five times better than today. That’s Those are big numbers two times better than today four times better than today or just like today that the the end of growth. So the question I see for Western society is will that continue? And the danger is the creeping stagnation, but it may not continue. The US from 1950 to 2000 grew per capita three and a half percent a year. Since 2000. It’s been 2%. We’re cutting the growth rate nearly in half. And the US as much as I will bemoan it is doing better than everywhere else, except maybe Australia, you guys are catching up. But Italy, my favourite country to go visit stopped growing in in 20, in 2010, just a disaster, Europe, Europe is falling behind, the UK, mother country to us both the UK is half as well off as the US in GDP per capita. And it’s just it’s stagnating and going nowhere, you know, half again, I’m going to I’m going to pick on climate, not because climate isn’t important, but just to get a sense of proportionality of what’s important relative to other things, the crisis of climate change 5% of GDP in 100 years, relative to doubling the UK GDP per capita, if they could just be like the US, you know, so climate change is, you know, that UK versus us is 10 times worse than the damage of climate change, we should be paying attention to long term growth and that and that convergence. So for us, the issue is is stagnating growth, and if it keeps going whether our children and grandchildren will experience what we did relative to our grandparents, of course, for for India, for China, for Africa, the ability to live lives like we do in 100 years, rather than be stuck in grinding poverty forever. That is the most important issue. So where does growth come from? Productivity. In the end, it’s all about what can each person produce per hour. It’s about supply. It’s about efficiency. It’s not about stimulus demand, central banks sending money out. It’s not about it’s not about unions. So why are why are we all wealthy? Because our grant, say your grandfather likely worked in a mine. And it’s 1890 and kaboom with a pick? Did Did we get richer because unions made the profits of the mine go to the worker, and now he gets, you know, 50 cents an hour rather than 25 cents an hour at the pick? No, it’s because now the mine is run with some enormous machine. And everybody else moved to the city and got nice jobs like we have. It’s about productivity. In turn, it’s actually, something is really stuck in our in our policy discussion. It’s always 1933. It’s jobs. It’s stimulus. No, Keynes is dead. We’re stuck with the long run. And the long run is about growth and supply. Where does productivity come from? In the end ideas, ideas, not just products and inventions, the you know, the iPhone, we all we all understand that’s an idea. But the little ideas of how to run businesses better. My my favourites is I spent a lot of time Southwest Airlines if you ever travel in the US, they figured out how to board an aeroplane in 10 minutes, United still takes us 30 minutes because we’re all going there fighting for the overhead bins then you swim upstream to check your bags. That is productivity growth. 10 minutes to board a plane versus 30 minutes to board a plane. Every little thing, you know old fashioned businesses like steel, steel I just found out in the US is is cut by at least in half how many man hours it takes to make us a tonne of steel, the yields on boring things like wheat, are just boom, boom, boom up every year. That’s the slow improvements in how do we do things. So it’s ideas. And ideas are very tricky, economically the crucial event and I’m gonna say something that you probably won’t like. The crucial thing about an idea is that it’s what we call non rival, its intellectual property. iPhone property, real property if you use, take my iPhone, I can’t use it anymore. If you take my wonderful recipe for spaghetti alla Puttanesca I can still use it. It doesn’t hurt me at all for you as you use it. Now, why are we all upset about intellectual property? Intellectual property, Once created, should be used by everybody immediately and then we’re all more productively. Why are we so upset about intellectual property? Well, you do need the incentive to create it. But you only need the incentive to create it. It’s it’s tricky that way. Universities you know, my business is creating intellectual property and giving it away for free. That is the good thing. Now that leads you to say, well, we should subsidise research. We should subsidise new ideas. No, no, no, don’t jump to that fact many of my growth theory economist jumped to you know, subsidised research. That’s the answer to producing new ideas. The problem is and let me tell you for sure because I work in a university. It is very easy to subsidise terrible ideas. You know in In the past, there used to be theology departments, whatever, I don’t know what you think religiously, but that doesn’t improve productivity. Now, it’s called departments of intersectional studies, which is the same thing. But it does not lead to productivity gains is what what matters with us whether you want, it is easy to fill academic journals with BS. So we need ideas. And for us, we need new ideas and better ideas. It’s much easier for China, India and Africa, because the ideas are there, they just need to copy. The only reason, the only reason India is not as productive as the US is they don’t do things the way the US does. Their technology, their productivity is not as high, which is a whole bunch of things, education, legal system, management, all the rest of it, but they don’t have to invent anything new. They just have to copy ideas, and it’s not going to hurt us, for them them to copy them. Ideas need to be embodied. So ideas, not just ideas, lots of inventions that are that they need to be embodied, usually a new products, new businesses, new ways of doing things. So they need incentives. And that is, I don’t really call it free market economy, economics, I call it incentive economics. That is the one thing we have to offer. Nobody else pays attention to incentives. Our job is to pay you need the incentives to take those ideas and implement them in new products, new businesses, and every step is hard. We think of growth as 2%. For years just gonna happen. No, every one of those 2% is is is is hard work to do things a little better, and to upset the established order. The problem is, every step is disruptive. So think about Uber and taxis. Easy example, Uber comes in, obviously better, right? We get cheaper rides, cars get used, people get employment opportunities, part time work, and who hates it? The taxi companies. Now I don’t know what happened here. But what happened in the US is just an unholy mess. The taxi companies had been protected forever. They, they they don’t like it. Nobody, don’t count on businesses to be for free markets, businesses hate free markets. Businesses want protection from competition and an easy life. And that’s the problem. This process of productivity enhancement has to be embodied in new businesses that disrupt the existing order. So all of regulation is designed to stop growth. Think of economic regulation, what does economic regulation do? By and large, it says I protect you from competition from him in order to keep the existing way of things going. A lot of it is about transfers, I’m going to take money from you and give to him but we’re going to do it very inefficiently by making you charge by forcing you to charge a higher prices. This regulation is designed to stop growth, not to get it going to preserve jobs, businesses always of doing things. Why? Because we live in democracies. Democracies are responsive to the needs of their citizens. And when the citizens come come screaming to stop competition and preserve my way of life. Democracies give them what they want good and hard as HL Mencken used to say, My ancestor I have an ancestor who came from Germany to the US and he came to the US. They hated Germans at the time, he went to New York, didn’t speak English. He wrote back come to America, the streets are paved with gold. Why? They were in a business they they made furniture and they wanted to move into pianos. But the guilds in Germany didn’t like this. There’s no damn guilds here stopping us from doing what we want to do. That’s what it needs. So why how do we how do we get around that? Well, we have property rights. We have rule of law, the institutions that protect our ability to innovate and and to and to cause problems for the existing people. So why are we stagnating? In my view, the answer is simple. We got people we got ideas, we’ve got entrepreneurial spirit, we have abundant investment capital, we just can’t get the permits. Now my notes say US regulatory nightmare insert horror stories. And you can we have all heard horror stories of regulation gumming up the works of doing things. Good ideas include public institutions. Now I’m I’m a good libertarian with lots of adjectives in front and one is a rule of law in libertarian. Property lights a rule of law and efficient legal system, that the the prep protections against depredation against the ability of your neighbours to go and demand competition that’s really important. And we see that good institutions are one of the most important things to get into growth, that’s why. So how can we get going growth again? Well, let’s we gotta fix the all the sand in the gears that’s getting in the wing. Can this help? There is a strain of thought and economics that says we have just run out of ideas. That’s the end of that, you know, growth is bound to end. I don’t think that’s true. But let’s let’s fix what we can, we can look and see lots of sand in the gears and we can certainly improve the level and, and I think we can do an enormous amount. When you look across countries, the GDP per capita from the Central African Republic, which is about 200, to India, 2000, China, about 20,000. UK about 40,000 US 60,000. There’s a very strong correlation between our incomes and ease of doing business index rule of law index, those kinds of institutional indices, so we know what’s good. What’s amazing is is how big the effect is, from 200 to 60,000, is really just institutions that my favourite is the my colleague, Chad Jones has a textbook on growth theory. And the cover is is a picture of Korea from a satellite, North Korea dark South Korea light. Now, now the good Lord has given us a controlled experiment, I’m sorry for the people of North Korea, but you want same background, same culture, same language, same everything. In fact, North Korea was the wealthier part in before the for the war, you want a controlled experiment on what government can do, it’s just amazing that it can do so much damage. But But there it is, for you, well, continue that regression line, the ease of doing business index puts the US at 82, 100 is possible. 100 just means the best observable everywhere, as I run that regression line out that puts the US 400% higher than it is today. Well, that seems possible that that is I think, a struggle. So how do we do? Erm fixed regulation sounds, you know, like pie in the sky. And the bulk of what I have to offer is, you know, concrete ideas of how we do it. The problem is, here’s there’s a political problem, stimulus is so attractive, stimulus is, ah, I the great politician will give you money and this will float all around, say yay give me, write me a check. Fixing things is a reform effort. And every market is screwed up in its own way with a bunch of vested interests, I call it what we need is the Marie Kondo approach to our public life. You can’t just stimulus, you can’t just go down and buy a lot of containers. You got to fix the sock drawer, and then the underwear drawer and my god the garage is waiting for us the tax code?.Well, that’s the way it is, you know, you have to know where you’re going and and, and start that reform effort. So I want to give you some examples. You’re not going to get in the next 10 minutes programme for everything, but it is the Marie Kondo approach. How can we get out though of the debate, you can see there’s sort of stuck. And I, what I’ve been thinking about mostly is I don’t want to call it out of the box, because that’s so trite, but a way beyond sort of the standard left right dilemma. And I think that’s right, I think there is an answer to air, to most of our problems, that is not just one or the other side more of this. What do you have to do first? Many regulations actually have some reason to them. So understand why, but then do a better job of what they’re doing. One important exercise is what’s the question? As you look at policies, most are answers in search of a question. My favourite being like tax the rich, it’s always tax the rich, but why keeps changing over the time? Well, let’s get the question. And then we can find a better answer. Regulation, regulation is not more versus less. Regulation is better, worse versus worse, well crafted versus not well crafted, full of unintended consequences and bad incentives or not. The the game is to fix, not just more or less, that’s harder. Another important principle, think of the overall incentives, the overall system, not just parts in isolation. And above all, think about the incentives. No one else is thinking about the incentives. It’s politics is just about taking from you giving to him. Nobody’s thinking about the incentives. If you think about the incentives, you’re away from the political wrangling about about who gets what. So for example, let’s think about let me start with an easy one, taxes. What should we do about taxes? Well, what’s the question? If the question is raise revenue for the government with minimal damage to the economy? I said the question once you say the question, the answer is very simple. That the answer to that question is eliminate income taxes, corporate taxes, state taxes, taxes on rates of return, basically just a flat sales tax on absolutely everything. That raises the most revenue for the government with with least cost and and now the objection what’s what’s wrong with that? First objection is, wait a minute, that’s gonna be like a 50% tax rate. Yeah. If GDP if if The government spending 50% of GDP, the tax rate average tax rate is going to be 50%. And if you don’t like that, you need to spend less. The it’s the same tax rate now it’s just raised in a different way. What we do now is we, we put it in lots of different places, so people don’t know. But the idea is simple. What about inequality? Well, number one, get the rich at the Porsche dealer. If you have a flat sales tax, you’re gonna get them you’re just gonna get them at the Porsche dealer, not when when they make the money, and it’s vastly simple. But what about inequality? Oh, you mean that wasn’t the question? The problem with our tax code is it’s trying to do and this is the US, by the way, I should say, I don’t know anything about Australia, and I hate Americans who wander around the world telling other people what they should do. So but I’m gonna seem parochial as a result, because all my stories about America, we’re trying to do 15 things. We’re trying to raise revenue, we’re trying to transfer income, we’re trying to subsidise all sorts of stuff, like my neighbour in Palo Alto lives in a $5 million house got 7500 bucks from the government for his new Tesla. That’s nice. We’re trying to and we’re trying to subsidise all sorts of things off budget without actually, you know, we’re taxing and spending without taxing spending? Well, you’re trying to do too many things. No wonder you get a mess. Let’s separate these. So the way I’d like to do it is let’s put all of that stuff on budget as expenditures. The flat taxes said, Oh, it’s not progressive. But what is the taxes don’t matter. What matters is the whole system. If we raise money efficiently with a flat tax, and then spend checks to whoever you want to spend, the whole system can be as progressive as you want. And as progressive as the voters will like, or as less progressive as you want. But it doesn’t matter. There’s this focus on each one individually, no, look at the whole system. And that can be as progressive as you want. And that you know, but if you put it on budget, then it’s up to the voters. I’m gonna follow principle, I got nothing to say about transfers, all I got to say about is incentives. And I want the lowest possible marginal rates, with the highest possible revenue for the government, that fixes the incentives, how high those rates are? up to you how much you want to spend, how much gets transferred up to the voters? how much they’re happy to do. Let me talk about social programmes. We are in the US at least, we’re running 5 to 7% of GDP structural deficits. And here come the retirement of the baby boomers. That’s our that’s our debt problem. Well, here’s a classic of left versus right. Right, oh, we gotta cut social programmes, we’re gonna go bankrupt. Left, you heartless whatever, you’re gonna throw grandma from the back of the train, how can you do that? How can we break out of this one? Let’s look at incentives. What’s the real problem with American social programmes. The real problem is not how much money we spend. The real problem is the disastrous incentives and it’s incentives that the programmes all put together. You take the average American between zero and $60,000. They if they earn an extra dollar in legal income, they lose $1 of benefits. And that’s on average, there’s many cliffs where you earn $1 And you lose all your health insurance. Make sure not to earn that extra dollar. If you have, if you have affordable housing with an income limit, earn an extra dollar, you lose your house, people are very smart, they respond to incentives. The other problem we have is that low income Americans basically don’t work. The labour force participation is just catastrophically low. Well, duh, why don’t they work? Because if they earn extra, do you want to cheer after me? If you earn an extra dollar, you lose $1 of benefits. So why don’t we work on fixing the disincentives of social programmes? What will happen then, what will happen is more people work, so they won’t need so much social programmes just save money, you’ll help people who actually need help much more effectively. And you reduce the cycle of poverty and dysfunction in a lot of our neighbourhoods. How can we do that? Well, one of the most important ways is that the problem comes from all programmes together. It’s the the food stamps you it’s only like a 50% implicit tax rate. But if you add the food stamps, the Social Security, the low the earned income tax credit, the the low income bus pass, that actually exists, I mean, all the things that are income limited, you put those together, so why don’t we put those all together instead of having 15, 150 actually different different programmes, remove the cliffs. One of the most crazy things in the US if you get another dollar of income, we lower your benefits. If you go get out and get another programme that gives you another dollar of transfers. We don’t lower your benefits. Well we can fix these things. Control the disincentives. Banking, oh boy. banking regulations. This is a classic one of disincentives. And there’s we have we’re in we’ve just done this again. We’re in this cycle of, the crisis comes, bail everybody out, promised to fix it. It doesn’t work. Great. Run comes again, bail everybody out. Again, this is a ne.., this is an important one because there’s remember the little old lady who swallowed the fly, just swallowed the spider to catch the fly and so on and so forth. This is when you think about how things got bad is not just dumb people. It’s smart people patching up a dumb system. And that’s what happened a run happens. What do you do? You got to bail out the creditors to stop the runs. Now you have moral hazard. A bailout deposit insurance is like giving your uncle Luigi your credit card on his way to Las Vegas. That’s what we economists call moral hazard. So we write rules, okay, no double down on 16. No spinning double black or whatever. Luigi figures out, I have an Italian family so I get to use this. Luigi figures out and goes to the craps table and next thing you know you got another crisis. We have the answer. It’s it’s a sensible thing. But now it’s it’s it’s falling apart we have the answer, which is was put in place 1992 but it requires tearing the whole system down and starting from scratch. And that’s the hard part, the answer, by the way is banks should get their money by issuing stock. And then deposits should just flow into flow into trade. It’s called narrow banking. It’s been around since the 1930s. There’s a lot of money people making money in the current system. Housing, you have a housing problem, we have a housing problem, let them build. And I’m only beginning, health, oh boy, healthcare. This one always causes me problems. But I got to tell you so healthcare in the US is one of the most dysfunctional things around. It’s actually possibly worse than socialised health care. Fully private health care can work. Now here and in 30 seconds, I’m not gonna give you the programme. But health is a complex personal service. It’s like lawyering, accounting, architecture, construction, aeroplane pilots, car repair. It’s a complex personal service, all of those we leave to the free market, there is no reason that healthcare can’t be left to the free market as well. And then a brutally competitive market can give us better service and lower prices. Oh my goodness, I haven’t even gotten to horrible publication, public education, labour laws, occupational licencing laws, immigration restrictions, regulatory barriers, lawsuits, prevailing wage, domestic content rolls, the sand in the productivity gears. What are we gonna do? Well, that’s it, those are all out there. But you can see the general principle can, can be used to fix all those if we want to, you know, free, free markets is still a vital way to fix today’s problems. And that’s just today’s economy. Well, you know, new ideas are also the the sand in the gears is there too. You know, there’s a possibility of factory built mini nuclear power plants. Why don’t we have those in the US? Because the Nuclear Regulatory Commission has not licenced a single new plant since 1975. AI, we live in a moment of a spectacular technological advance. It’s like Gutenberg. It’s potentially like like Gutenberg’s movable press. And immediately what do people want to do? Run to Washington to regulate it. And where’s this, it’s not just coming from fear the robots will take over. There’s a strong demand to regulate it because this is information. We are we’re living at the outbreak of the technical censor the censorship state, and boy, oh boy who has control over ChatGPT3, has control over politics, especially biology I see great advances in biology, better health, longevity, that what we’re learning about about the fundamentals of life is fantastic. But good luck getting FDA approval, or increasingly politicised research funding. So let me summarise here we can’t just bemoan, there’s a tendency among us free marketers to have a beer and just say, Oh, how dumb Why are their zoning zoning laws are so dumb, they’re stopping that. But if you understand where they came from, and what the disincentives are, I think you have a better chance of fixing you have to understand where they came from. That patchwork the old lady and the fly, how to how to ask the right questions, to get the answer. You have to examine the whole system, you have to examine the incentives. And you have to make your opponents state the question. And then often there’s a very simple answer. And then they go duh, that wasn’t the question I asked. It’s okay, now we’ll have a better conversation. There’s a way to do this. Economists are quite a bit at fault, my fellow economists. What you’re taught in economics school, is how to look at every problem, diagnose some failure of the hypothetical totally free market, and then advocate new rules that the benevolent omniscient planner will do to fix the problem. But we don’t live in a free market. When you see a problem. Look first, not at a hypothetical failure of some free market look for the regulation that caused the problem, as you can see with zoning and housing, it’s not a failure of the market, it’s regulatory. Now I have to close on a optimistic note. You know, people often tell me, Oh, if only we could get leaders who will listen, They all believe in democracy. How does this happen? Things things will get better when the average person understands how it works and votes for sensible policy. I know a lot of politicians, they, by and large, understand perfectly well how things work. And they understand they won’t get voted in office for it. So when the average person sees, you know, when the average person sees too high house prices, and says, Well, why don’t we let people build more houses, you’ll get politicians who understand that. So really, the way things work is there’s leaders, there’s the chattering classes around them, and there’s the vast amount of sensible voters around that. If you operate in the world of ideas, then the politics will follow. And that’s why institutions like this one exist, we exist to help the ideas that then will make their way into policy. The idea that you can just whisper into the into the great emperors ear, that’s not how a democracy works. And thank goodness, that’s the way our society works. Okay, thank you.

Gene Tunny  36:19

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

Female speaker  36:24

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Gene Tunny  36:54

Now back to the show.

36:59

John, thank you. And now it’s time for our Q&A session with our friend and colleague leading proceedings, Gene Tunny is director of Adept Economics in Brisbane. And he’s the author of a recent CIS publication that I’d encourage you to read, Debunking Degrowth. Gene Tunny, over to you Gene.

Gene Tunny  37:17

Thanks, Tom. And thank you, John, for that excellent lecture. That was terrific. John, I’d like to start with this idea of the age of stagnation or the risk of stagnation. And it seems like you’re attributing that to government, I’d like to understand what evidence there is behind that. So we’ve, if you believe the people on the left, we’ve had an age of neoliberalism, we had the reforms of Thatcher and Reagan and in this country, we had Hawke and Keating and then Howard. And there’s an argument that we’ve deregulated too much. But you would push back on that, could you tell us a bit more about why you’re so confident, it’s it’s government regulation that is driving that slowdown?

John Cochrane  37:55

You got an alternative for me? I mean, just look out the window, and you know, try to run a business and and see how hard it is to get anything done. So Reagan and Thatcher were great, but they just scratched the surface. They sort of talked about deregulation, but you know, how many federal agencies did Reagan actually get rid of? You know? So there was a little bit of a pause. But the regulatory state just kept adding more and more. And I see it’s a larger issue, not just of the size of regulation, but the nature of it, our public institutions in the US are fraying. I actually am a free marketer, I look back with nostalgia at the era of regulation. And by which I mean, when our regulatory agencies had rules and cost benefit analysis and public comment and proper procedures. Now, it’s just an executive order and a Dear Colleague letter, you know, and so that that’s in many ways worse as an example. Also, it’s getting more and more politicised. I was shocked. So you may or may not know what’s going on. There was a case, Missouri v Biden that revealed what was happening the censorship of the internet during the COVID era, and went unremarked. The Biden administration was simply threatening businesses like Twitter, we’ll close you down. We’ll send the EEOC, the NLRB, the EPA, you know, this alphabet soup of agents, we’ll send them after you. But by saying that, you know, you see right there, it’s taken for granted. This isn’t rules. This isn’t law. This is just we arbitrary power to close things down. So I see the regulatory state getting bigger, the the legal system in the US, you know, you can’t get anything built because you’re gonna get years of environmental suits. And it’s part of sort of the scorched earth politics. That may not be the answer to the question you wanted, but that’s what I see.

Gene Tunny  39:45

No that’s okay, I just wanted to ask because the the alternative view is that there has been that slowdown in the rate of innovation that you mentioned the the Robert Gordon thesis of the rise and fall of American growth. I think it’s, yeah to me, it seems like a difficult thing to be able to prove one way or another,

John Cochrane  40:02

It is no, what you’re asking me is not just my view but what I think of those views. Yeah. So these views, we got to take this seriously. Gordon basically said, our growth was an SJ thing, it was a one time thing, we learned to use fossil fuels. And that’s over, just, you know, that the possibilities are over. And there is evidence, you know, it’s taking more and more in resource, find an invention. But in part, that’s always been the case. So there’s a great study of the steam engine, steam engines invented, it wasn’t, you know, 18, if you’ve been to the museum’s, it wasn’t like the final steam engines 100 years of making it better and better, and it gets harder and harder to harder to make it better. And we’re kind of running out of ways to make steam engines better. And then someone invents the diesel engine, and then someone invents the aeroplane. So I think we’ve been in a period of sort of, there was a new invention, we kind of work and all that, and you’re waiting for the next new thing to come, which I think is potentially biology or AI. So just wait. But who knows, you know that that’s a possibility. We but we also know, the regulatory state is causing tremendous problems. So you know, maybe we can only raise GDP by a factor of four, before we run in, run out of ideas, factor four will be pretty good. And to let India and Africa have our way, know how to do things the way that will be pretty good, too. And if 200 years from now, that’s where we plateau. Okay, we’re done.

Gene Tunny  41:20

What do you think the risks are with? With AI? I mean, there’s a lot of potential there with biotech is that is the risk that we’re going to be too timid, that we’re going to over regulate, because of the precautionary principle, for example, how do you see that? And what alternative would you offer? What, would you have a principle that you could apply for there?

John Cochrane  41:38

The last big thing on the internet was was, you know, social media sorts of things and Google, and then they’ve been kind of looking for what, I live in Silicon Valley, they’ve been looking for what to do for 10 years. And I talked, everybody wanted crypto for a while that was kind of going nowhere. Not that kind of hard. But the old tech companies have turned into regulatory regulated utilities with remarkable speed. And I worry that this, this is really a demand for the new stuff to do that I don’t, the idea of the robots will take over. They’ve been worrying about that since 1850. I think just technically, that’s silly is just complete sentences, it completes your sentences. Don’t worry about that taking over. I think the demand for regulation is the demand to control the flow of information that we get, and we’re worried about tech is there’s no monopoly that doesn’t get enforced by the government that lasts very long. People say tech’s a monopoly? Oh, yeah, Netscape, AOL, Yahoo, they got that one wrapped up, don’t they? And the same thing is happening to the big tech tech companies now. So the demand I think, really is the danger is the danger of the surveillance state. And, and so, you know, there’s you can see the political demand for regulation, and people like to keep their profits up. So that’s the demand for regulation. Not that the robots are gonna come get us.

Gene Tunny  42:57

Okay. I’d like to ask, again about, well about government. And you mentioned the, the Marie Kondo approach to fixing government and if I remember Marie Kondo correctly, it’s you pick up an item and if it doesn’t bring you joy, you toss it out. Are there parts of the government that don’t bring you joy, that you would toss out?

John Cochrane  43:16

I think the converse of that question is going to be harder or easier to answer. Yes. What what do I like about the government? I think the US is vastly underfunded the legal system, that it takes years to get to get something through the courts is just a shame. That’s part of public infrastructure. You know, where roads, bridges and efficient courts. So that’s why as much as I hate lawyers, and environmental suits and all the rest of it, nonetheless, that’s, you know, that’s a part of the work that we can have some public infrastructure there. Is there anything else that we actually like? What do we like in the government?

Gene Tunny  43:54

That’s okay.

John Cochrane  43:56

Sorry? Yeah, National Defence. That’s a big inefficiency that we put up with. Thank you. It is remarkable. I’m a good libertarian and free marketer, that the military is so efficient at what it does. I mean, it’s a big inefficient waste, but that it actually wins wars is pretty amazing. You know, given given the structure that they’re really amazing people.

Gene Tunny  44:17

Okay. John I’d like to ask about health care, for example, and you’re a proponent of free market, in health care. A lot of the other advanced economies or most of them would have large public health care systems. And the concern is that if you have the free market in health care, there’d be some people that would miss out, they’d be left behind, there’d be people who couldn’t afford it, people who wouldn’t be insured. How do you deal with that objection given, if you look at the US system, US life expectancy is significantly lower than other advanced economies. How would you cope with that objection? How do you, I know it’s difficult to unscramble from where we are and you do have regulation intervention already, but how would you deal with that, that objection?

John Cochrane  45:01

Yeah the US already has a public health system that’s just a remarkably inefficient one. So most of the population is on some sort of government thing, whether it’s Obamacare or federal employees, and the US, you know, in other countries they say, You’re we’re paying taxes, you’re gonna pay some taxes to pay for his health care. In the US, the government says, well, we don’t want to tax and spend instead you business are going to provide her health care, and is that any different than taxing and spending? But then we have this horrible system of cross subsidies, which is what kills the competition? You know what, so government doesn’t want to pay that much. So we say, well, you hospital, you have to provide free health care, and the hospital says fine where are we making up the difference? Well, we’ll let you overcharge everybody else. Okay, but now you can’t have any competition. That’s where the whole homeless comes from. Now, now the left behind issue. So US life expectancy is lower. That’s because we shoot each other. And we and we do a lot of bad drugs. But US life expectancy, if you have cancer, it’s a whole lot better than anywhere else in the world. So it’s horrendously expensive, but but not that bad. You know, the poor people have cars and houses and lots of things, they don’t get great health care, by the way, anywhere in the world. Everywhere in the world, rich people have ways of getting really good quality health care, and we sort of have a fig leaf that that everybody else is, is getting great stuff. So I don’t see that free market health care, because it’s going to be so much more competitive, so much more cost effective. I think it’s gonna serve poor people, poor people, you know, have money just like anybody else. They’ll they’ll buy health insurance and it’ll be cost effective. And, and I don’t mind subsidising it. So you want a subsidy, so we can have transfers, I said, do you know all the transfers you want? I just I’m gonna give you a voucher, you can have a voucher for 5000 bucks, 10,000 bucks here, I don’t care what it is. Go buy your health care on a brutally competitive insurance and healthcare market. You’re going to come great because you got a $10,000 voucher.

Gene Tunny  47:00

Okay, okay. Might be good to ask, go to the audience soon. ButI’ve got one more question…

John Cochrane  47:04

I’ll try to shorten up my answers. Stop asking such good questions.

Gene Tunny  47:08

No, I’ve got one more question about your fiscal theory the price level, which is, yeah John’s written this immense book. It’s fascinating. I’ve picked it up. But then I discovered I had to buy three more books to be able to, to interpret it. But it’s it is it’s, it’s it’s terrific…

John Cochrane  47:27

Get past the, past, just ignore the chapters of the equations and get to the fun stuff…

Gene Tunny  47:31

I’m getting through it. But John, how do you distinguish this from, say, the Milton Friedman view that inflation is always and everywhere a monetary phenomenon, you’ve got a fiscal theory of the price level. We look at what happened during the pandemic, when we had this massive monetary expansion in the Western world and in Australia and the United States, UK. And then we see the inflation following that. And we think, Well, this is what Milton Friedman was telling us. But you’ve got a theory of inflation that is different. You’re saying it’s to do with fiscal policy with government debt? What do you say about Friedman’s theory and how is yours different how does yours add to it or reject Friedman?

John Cochrane  48:08

That’s not a question that’s gonna get you a short answer. 600 page book in 30 seconds, here we come! The fiscal theory of the price level says that where does inflation come from fundamentally? It comes from more government debt than people think can be repaid by future taxes. Government debts and assets just like stocks and bonds. If you think the stock doesn’t have is not doesn’t have any dividends coming, what do you do you try to sell the stock the price goes down. If you hold government debt, and you think, you know, these guys are never gonna pay this off. What do you do? You try to get rid of the government debt? How do you do that? You try to buy stuff to try to sell the government debt, but we can’t all sell it. The only the you know, what is if we try to sell the government debt, we buy stuff, prices go up. That’s where inflation comes from. Now, what about Milton Friedman? I love Milton Friedman. Milton Friedman was 99% right. Wrong about one little thing. So Friedman, he said money causes inflation, not total government debt. Now, how do we agree and disagree? Suppose you take $5 trillion of money and hand it out from helicopters, as Milton said, that’s gonna cause inflation. I agree, because money is one form of government debt. And when you drop money from helicopters, you’re telling people here’s debt, we have no intention of paying this off with future taxes. So we agree that is, it’s an expansion of government debt is money that finances a deficit. But suppose the government drops $5 trillion of money from helicopters. And simultaneously the government burglars come and take $5 trillion of treasury bills out of your safe, you have no more wealth, you have lots more money, but we took away your treasury bills. Now monetarism would say that causes exactly the same inflation as just giving you the debt. And I say ah ah ah, what counts is overall amount of government liabilities and as proof, yes, in the pandemic, the government did drop a lot of money and debt on everyone and got inflation. It was financing huge deficits. That was a fiscal expansion. The government also did $5 trillion of giving you money and taking back debt. That was called quantitative easing. And what did that do? Nothing. So 5 trillion in quantitative easing designed to increase inflation, absolutely no effect whatsoever. 5 trillion of deficits, which could have been money could have been debt, 5 trillion deficits, we got inflation. That’s actually Episode One for the fiscal theory.

Gene Tunny  50:27

Okay. Thanks, John. That explains it better to me for sure.

John Cochrane  50:31

And Milton was great. Now many not that many episodes of money causing inflation, and they were almost all governments printing money to, to cover deficits. So we agree on all those episodes.

Gene Tunny  50:43

Very good. Okay, Tom, should we open up to the floor for questions? And question I’m going to enforce the questions must be questions rule. Gigi Foster?

John Cochrane  50:54

I welcome speeches. Short speeches.

Gigi Foster  50:56

I’m Gigi Foster. I’m a professor of economics at UNSW, one of our local universities. And thank you so much for your lovely talk, which I will be trying to get somehow for my students, hopefully CIS will make that possible. So I really agree with you know, 99%, of what you said. But towards the end, I thought maybe your optimism about being able to fix this through democratic processes may be a little bit overstated. And my worry is that what we have now is this sclerotic mess in not just in government, but in organisations as well, including universities. And it is sustained by poor incentives on the part of the people in the state and the bureaucracies that are not accountable, and the politicians themselves who are career incentives. And what we face is a situation similar to what Kafka saw, similar to what we had in the USSR before it fell. And we know that how those bureaucracies end is they they either have wars that defeat them, or they come crashing down under the weight of their own inefficiency. And right now, our democratic mechanisms are not very strong. A few elections, sometimes, to me, it’s just not a strong enough force. So I’ve been advocating for a lot of direct democratic revival in the resistance and restoration movement here in Australia. And I wanted to know what you thought about the need for that. And if we don’t think it’s necessary, how is this going to come to pass?

John Cochrane  52:08

In the past, democracies, especially actually, small countries, who seem better able to do it than the US are capable of reform. Even the US we’ve had a social security reform, we had a tax reform there, you know, historically, we’ve been able to fix things. I worry as you do, that the institutions are fraying that we are we are in the US having, the government is so powerful, that it’s worth scorched earth tactics, to destroy the institutions to grab power for the next round, because then you get control of the Justice Department, the surveillance state, the taxes and all the rest of it. There is a limited government allows you to lose elections and go lick your wounds and try again. So and I, I’ll be a little political here. I think our big, one of our biggest challenges is we face a political religious movement on the far progressive left, that is understood the march through the institutions. It’s a small fraction of popular opinion, but they know they grabbed the educational institutions, they grabbed the bureaucracies they grabbed the philanthropies, they have the universities, they have the institutions of civil society in their grasp. And they are profoundly undemocratic. They they are, they call themselves save our democracy, but they are Maoist in their in their policies and that and with the fraying of institutions, and the rise of a technical surveillance state, that, you know, that is a genuine threat to democracy and growth. So I was trying to close optimistically, I’m making your point. I am, you know, very worried about that, and our freedom to have events like this.

Gene Tunny  53:47

Righto, Peter Tulip, at the back and then over here… Thank you, Chief Economist at CIS, yes.

Peter Tulip  53:54

Thank you. I’d like to ask about you’re talking about avoiding the left right division, that a lot of the regulations you want to get rid of have a strong constituency within the economics profession. But that’s not true of all of them. There are some views and in particular, free trade, or housing policy, you mentioned where left wing economists, like Jason Furman or Paul Krugman, have almost exactly the same agenda, as you do. But the general public is on a different planet. And part of that is that the public just doesn’t trust market forces. I was wondering if you have views, how do we prosecute those other issues where economists across the spectrum agree, and we’re against the general public?

John Cochrane  54:43

Boy, that’s a hard one, by the way, Econ profession is in many cases very interested also. You know, how do you get consult like health economists, you know, they live to consult for the for the big health either, they’re not gonna say free market. They live to provide advice and benevolent dictators, they tend to be pro regulation as well. How do we get, boy, basic education on basic things that support the institute? I get to think about that one and come back after another question, but because those are fairly straightforward, and of course, the far left doesn’t believe in the far right doesn’t either. You know, Trump has 25% tariffs on everybody. In fact, I was so disappointed in California. There’s a there’s now a yimby movement where progressive lefties they’re saying, You know what, I get it. The only way to bring down housing prices is let people build housing and market rate housing, not just government subsidised housing. And instantly the Republican Party said, no, no, no, no, we must have zoning control and local local. Don’t Don’t count on the right to be free market either.

Gene Tunny  55:56

Over here, and then we’ll go over here. Yes, if you could just…

Michael Potter 55:59

Yes, Michael Potter. So I just wanted to ask about you mentioned I think a when you were talking about health care that the US system is actually worse than a socialised system was just wondering if you could expand or develop on that idea. Why is the system which is sort of partly free market and partly regulated or socialised, why is that actually worse than a fully socialised system?

John Cochrane  56:23

Well in part I was making a joke. But you know, what, there’s a couple of original sins in US healthcare, and one of them is this idea that we’re going to do, we’re not going to tax and spend, we’re going to do it by forced cross subsidies. Because if you tax and spend, you can still have a competitive system. When you do it by forced cross subsidies, you you have to stop competition, and then just the price just explodes. So, you know, we have better health care than most places, but we pay we have twice as good health care at five times the price. And actually, you know, there is this issue, what do you do about poor people? And I said, vouchers is one way to do it another way is, let’s just, if you want it, you know, deal with the homeless people shouldn’t die in the gutter, why don’t we pass some taxes and give them whatever health care you think is a compassionate society deserves the least fortunate. And then the rest of us can be left to the mercies of the free market. And one of the crazy things is that my health care insurance has to be so screwed up, just because to provide health care to the bottom 5% of the homeless person in the gutter, that’s silly. You know, we, we need, you know, I can still go to a private hotel. And we don’t, you know, we don’t we don’t try to socialise that in order to solve the homeless problem. So there is, you know, I assume a government provided system all one in is pretty horrendously inefficient. But a system a crony capitalist system can be as efficient as a, as a well run, government provided system. And I’ll say it I would be for taxing and spending, you know, one way to, you know, tax and provide a a community hospital for the poor, and then we get the free market.

Gene Tunny  58:07

Okay, with some questions over here. And then we’ll go to you, we’ll go to this gentleman. Thank you. Thank you. Thanks.

David Tregenza 58:14

Hello, my name is David Tregenza. I was just wondering, when you talked about development economics. I’ve read arguments from maybe more progressive that the reason America has such all those ideas booming is from their large spend on military, which then leaks to entrepreneurs. And that’s where computers, internet, rockets, satellites, and all that come from? What do you say to that?

John Cochrane  58:38

Well like, China seems pretty good at taking our military ideas and implementing them. You know, those ideas are available for anyone. Now, to what extent was, you know, to what extent the idea is that the most efficient way to produce new ideas, you know, Apollo programme was 1% of GDP, we got Tang and Teflon, you know, maybe we could have gotten that cheaper from from other ways. So some of the basic ideas did come from the military. But the hard work is not the basic idea. The hard work is the implementing it and starting the new company, you know, famously, Xerox, created the mouse and didn’t know what to do with it. Steve Jobs saw the mouse and boom, that, you know, he knew what to do with it. So I’m not sure that we have a dearth of basic ideas. We have as the dearth of is the ability to take new ideas and implement them in new companies, which then challenge the profits and ways of doing things of the old companies.

Gene Tunny  59:36

Nicholas Moore is it? Has the microphone.

Nicholas Moore 59:37

Thanks, thanks for the presentation. It’s been terrific. I’m, of course a subscriber to to, as you say, 99% of these views, using a natural experiment US versus the UK I think is a good test. But I always used to get confused when I looked at France and the UK because the French obviously wouldn’t embrace the sort of ideas we’re talking about, whereas the UK, typically would have, and again, looking at the US, you know, the contrast between California who arguably embrace all the wrong ideas. And when we talk about AI, you know, Where’s that coming from? So, so there does, you know, the natural experiments throw up a bit of challenge don’t they in terms of where GDP per capita ends up where ideas come from?

John Cochrane  1:00:23

I don’t know are France, France and the UK that different in terms of overall level of so…

Nicholas Moore 1:00:28

That’s a point so their GDP is per capita is the same, one’s more open and one’s more closed

John Cochrane 1:00:33

France spends 55% of GDP the UK spends 50% of GDP on on government stuff. There’s sort of this de industrialised, the UK is a financial centre and then tourist de industrialised wasteland, France has a certain efficient technocracy. So they they may be socialist, but they kind of they send people to the Ecole Polytechnique, and then they build nuclear power plants and we don’t kind of let you I don’t know what it’s like in the US. There’s kind of anything we want to build in the US there’s just this chaos of regulatory nightmare. And, you know, can you get stuff built in the in the UK the way it can, you know, you get the technocrats in France to build something they build something you know, they can build a high speed train, the US can’t build a high speed train. SNC, I don’t know if I told this story SNCF bailed out of the contract to build the California High Speed Trains. They said you guys are crazy. Not even socialist France works like this. I don’t see a great. I wish the UK had taken Brexit and become Singapore on Thames. But they don’t seem heading that direction.

Gene Tunny  1:01:44

Very good. Michael Brennan is it Michael?

Michael Brennan 1:01:46

Thanks yeah, Michael Brennan, used to be the chair of the Productivity Commission in Australia up until a couple of weeks ago, I wanted to ask about the economics profession, and where you see the role that it has played. I mean, I hate to indulge in nostalgia, but it does feel as though in your country and ours the economics profession had and played a much stronger role in the economic policy debate but had a much stronger feel for markets, institutions, the broad sweep. We feel it feels to me as though a lot of economists have gone down different rabbit holes, either very abstract, or ultra empirical, but involved in very narrow questions rather than the sorts of big questions that that you’re posing and answering.

John Cochrane  1:02:31

You know, to the extent that economists want to waste their time on technical stuff, they’re not harming anybody. So enjoy it. The economics profession has actually always been quite left wing and statist and, and serve and view their job as sort of advancing progressive goals. The American Economic Association was was founded that way, there’s kind of a, you’re thinking Milton Friedman, University of Chicago, but that was a very small number of people for a very short window of time. And now mostly, they’re in their advancing progressive agendas. You know, you can’t even you can’t publish a paper that says raising raising minimum wages, lowers employment anymore, so it’s kind of going a way of the other sciences as well. So we’re really the danger I see is that it is becoming part of the ideology production machine for the progressive narrative, and becoming less open to critical empirical work that challenges that that narrative, and you know, well, when you work for the government’s guess what you tend to say that the government’s good things?

Gene Tunny  1:03:36

Okay. There’s one question over here.

David Murray 1:03:39

Yeah. David Murray. How do you help people understand these concepts of corporate social responsibility and social licence?

John Cochrane  1:03:47

Do I want them to understand those concepts? With Friedman, your job is to to make profits for your shareholders. Unfortunately, right now, the way you make profits for your shareholders is to keep the regulator’s out of your hair. And the way you do that is to echo whatever political blather is in the regulator’s minds these days. So never count on big businesses to challenge the regulatory state or argue for free markets. They’re in business to get good regulatory treatment, and maybe you can protect us from your markets, and that means they go along with whatever nonsense is coming out of Washington.

Gene Tunny  1:04:21

Okay John, I might ask one more question. I’ve had a gentleman on my podcast who produces these things called Goldbacks. So there, there are a lot of people maybe, still, maybe, I don’t know, it’s under 10% of the population. But there are a significant number of people who are worried about the future of the US and the future of the global economy. And, you know, worry about fiat money. Is fiat money a problem? Do we need to go back to something like a gold standard or goldback currency? What’s your view on that before we wrap up?

John Cochrane  1:04:51

Fiat money is now a share in federal government. It is not, fiat money means money that’s backed by nothing but our money is backed our money is backed by the willingness of our government to raise taxes to soak up the money if necessary, I’m giving you fiscal theory the price level. So it’s a great system, so long as our governments maintain the fiscal space to always back their money with taxpayer, that’s a good system, so long as governments are fiscally solvent, I think the danger of the of the current, not fiat money, so the current system of money backed by the present value of fiscal surpluses is that it might not be backed anymore. And that therefore I do see a possibility of a of a sovereign, a grand sovereign debt crisis. When do you get a crisis? Nobody ever sees a crisis coming, right? Because if you knew the crisis was going to happen tomorrow, then it would have already happened today, you’d run and get your money out. What is the one cl.., and crises always happen when there’s money that can’t be paid back, shady accounting and nobody doubts that this is good stuff yet. Have I just described government debt? So I think, you know, in the next crisis, there is a possibility that our, we reveal our governments to have debts that they have no way of repaying and you could have a global inflation a default on you know, Italy, in some of the EU states, basically, a run on sovereign debt is possible. I don’t, we’re not there yet. But that’s kind of where the end of Western civilization goes. And then you got a problem because our monetary system is all built on the idea that government debt is sacrosanct. Now really any idea of history and you think government debt is the safest assets since the since the Henry the Henry the Third, I think defaulted on the Petruzzi government debt has been the riskiest asset around. And so we live in this kind of golden age. So to your question. I think if that happens, not, I mean, we’re in smoking financial ruins, but you might want some monetary system that doesn’t depend on the value of the government. And, you know, we all have our free market fantasies about that’s the one one place I’ve kind of stuck with the government we have a decent system of short term government debt is long, you know, it works okay. In free market fantasyland. And, you know, after we’ve had our third drink, we should talk about private monetary systems for the moment I kind of put it in, you know, airline pilots. Yeah, pilot licences should be privatised. Okay. Maybe that’s not the first thing we want to do. It’s kind of thing you talk about at the third rank of the Cato. So the same thing? Now gold is not the answer. So a gold standard is a government promise to deliver gold. So you haven’t gotten rid of the government. And a gold standard is a fiscal commitment. No government’s ever had enough gold to back their currency. So what is the gold standard, a gold standard, the government says I promised all these notes. One for one with gold, I know that the gold so what keeps that afloat? What keeps that afloat is the Government’s commitment, that if you start coming to ask for gold, I will raise taxes, and I or enough to get or borrow the gold to give you it’s a commitment to running the fiscal theory the price level. And it’s a bad one because the relative price of gold and other stuff fluctuates, it just would not work in a modern economy, because we don’t use gold coins. So So gold isn’t the answer. And gold doesn’t obviate the problem of if the government’s are bankrupt, they’re not going to be able to give you a gold standard. Is there something in the Bitcoin space that could maybe do it? We need to Yeah, I believe money has to be backed. So you need to find a security that’s backed by real assets that has a steady real value that there’s a lot of it, and that in and that people could use, we could devise such a system but you know, why don’t we just have our governments not default and have to build this from the smoking ruins anyway.

Gene Tunny  1:08:46

Very good Professor John Cochrane. Terrific, thank you. John’s gonna move a vote of thanks. Very good.

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

56:06

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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 PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

US debt ceiling & Gene’s Aussie debt ceiling experience in the GFC | Emerging economies debt crisis – EP190

Host Gene Tunny discusses the US debt ceiling and the emerging economies debt crisis with his Adept Economics colleague Arturo Espinoza. Gene shares a memory of his own experience with the debt ceiling the Australian Government had at the time of the 2008 global financial crisis (GFC). 

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

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

What’s covered in EP190

  • [04:35] US debt ceiling negotiations. 
  • [09:18] US hitting its debt ceiling.
  • [14:51] The trillion-dollar coin as a possible workaround. 
  • [16:14] Spending and revenue challenges. 
  • [26:05] Australian debt ceiling legislation in 2008-09. 
  • [29:05] US debt limit and consequences. 
  • [33:25] Argentina’s economic struggles. 
  • [40:02] IMF’s Nightmarish Identity Crisis & emerging economies debt crisis. 
  • [42:27] China’s role in emerging markets debt. 
  • [45:13] PNG and China. 

Links relevant to the conversation

Links relevant to the conversation

Noah Smith’s Subtack post:

https://open.substack.com/pub/noahpinion/p/the-debt-ceiling-deal-what-was-the?r=2hwg1&utm_campaign=post&utm_medium=email

Treasury to take ‘extraordinary measures’ as US hits debt ceiling | Financial Times 

Michael Knox’s note on the debt ceiling:

AUS_ESQ_230523_US government shutdowns and why US treasuries never default.pdf

https://www.whitehouse.gov/cea/written-materials/2023/05/03/debt-ceiling-scenarios/

Federal Spending | U.S. Treasury Fiscal Data

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

The IMF faces a nightmarish identity crisis

How China changed the game for countries in default | Financial Times

There Is No Chinese ‘Debt Trap’ – The Atlantic 

Fiscal Monitor April 2023

Argentina raises interest rate to 97% as it struggles to tackle inflation | CNN Business 

Argentina inflation smashes past every forecast to hit 109% | Reuters

Transcript:
US debt ceiling & Gene’s Aussie debt ceiling experience in the GFC | Emerging economies debt crisis – EP190

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 my adept economics colleague Arturo Espinosa about the US debt ceiling in the emerging economies debt crisis. We recorded this episode last week on Thursday the 25th of May. A few days before we learned the White House and the Republican leadership have agreed to a deal to avert the US government from running out of money and having to choose between paying bondholders or Social Security recipients. So please keep that in mind when listening to this episode. I thought the Republicans would hold out longer than they did and I was surprised they reached this agreement over the weekend, particularly given the new estimate of when the government will run out of money is June the fifth. That is Monday next week. They may have been worried about how the financial markets might react if an agreement wasn’t breached. And they wanted to avoid suffering politically for any market falls. Also, House Speaker Kevin McCarthy probably figured he needed to reach agreement with the White House over the weekend. So we could get the debt ceiling lifted by Congress this week. Apparently things can still go wrong, as the debt ceiling does need to be lifted by Congress. And it’s up to Speaker McCarthy to ensure his deal is backed by his Republican colleagues. From what I can tell the agreement between the White House and the Republican leaders doesn’t go far enough to fix the structural problems with the US deficit, which I’ve talked about on the show before. Prominent substack analysis Smith is written a manufactured crisis leads to an ineffectual solution. I’ll link to his post in the show notes because it contains a good summary of what the deal covers, including a freeze on discretionary spending in 2020 for 1% growth in 2025. And this will amount to a significant real cut in discretionary spending given inflation. However, as Arturo and I discussed in our conversation, the problem with the US budget is that a large part of it is non discretionary. Around two thirds of it is mandatory as a result of legislation and regulations defining eligibility for different government benefits. That’s an issue for budgets around the world. I should note of course, and we have a similar issue here in Australia. The point I’m making is that it’s very difficult to actually fix these budgetary problems without getting stuck into some major welfare programmes that that can be quite popular. So the Republicans got some concessions from the White House such as a spending freeze and expanded work requirements for food stamps. But I expect the US government will still have a sizable budget deficit and it will keep on accumulating debt. Again, the can has been kicked down the road, as they say. However, at least we may have avoided what could have been a new economic crisis for now. I’d be interested in your thoughts on the US debt ceiling? Do you think having a ceiling is good or bad? How can the US get its budget repaired? You can email me via contact and economics explored. I’d love to hear from you. As always check out the shownotes relevant links and information. I’m recording this introduction around 24 hours before this episode gets published. Anything major happens between now and then I’ll mention it in the show notes. Right oh, now on to the show. Thanks for tuning into the show. In this episode, I’m going to have a conversation about some topical global macro economic issues with my colleague at adapt economics. Arturo Espinosa, Arturo, thanks for joining me again on the programme. Hey, now happy to be here. Excellent. Out here. I thought given all of the the news around the US debt ceiling and the it’s unclear what these negotiations will bring that there’s a possibility the US Treasury could run out of money on the the first of June, according to Janet Yellen. So in early June, there are other estimates of when that will occur. But there’s a general view that things are going to be very difficult for the US Treasury in well next month. So yeah, we’re really at the The point in the negotiations was something has to happen, or else we’re going to have a real serious problem, aren’t we? So I thought we could have a chat about the US debt crisis first, then we might talk about the developing economy, debt crisis. And then if we get time, we might touch on what’s been happening in in Argentina with inflation and interest rates. There’s some big news coming out of there. So does that sound like a good approach? Good thing? Good agenda?

Arturo Espinoza Bocangel  05:29

Yes. It sounds interesting.

Gene Tunny  05:32

Very good. So when we’re talking about the US debt ceiling? Well, given we’re talking about I should know that we’re recording this on the On Thursday, the 25th of May. Now when this episode comes out, the week after, who knows? I mean, something could have happened, there could have been some development. I mean, I’m expecting they’ll just go right down to the wire, though. The Republicans, they will just hold out as long as they can. Before they agree to some package or some they make some compromise with the White House, with Biden and with the Democrats. Just because it’s politically advantageous for them to do this. And so there’s politics involved. And it’s very difficult to, to see how that how this, how this will play out. My view is that we won’t have the US government defaulting, there may be some sort of shut down for a few days, a week, a couple of weeks. The US government has shut down in the past. I mean, it’s shut down some agencies that shut down some national monuments you couldn’t get in to see them. And there were public servants that were temporarily laid off. But generally the US government does meet its its obligations to bondholders. It hasn’t defaulted. In fact, there’s a clause in the amendment to the Constitution that says it has to respect the the I think the executive has to respect the full faith and credit of the US or make sure that that is implemented. Was it the 14th Amendment, I’ll put it in the show notes. But I think it’d be it’d be such an extraordinary situation to see. This era, the US government effectively run out of money, and then not have to pay bondholders. And this is, this is something that Michael Knox has written about in a really good note that I’ll link to in the show notes, where Michael writes that he’s written this note US government shutdowns and why US Treasuries never default. And what Michael’s written so Michael is Chief Economist at Morgan’s here, a major financial advisory firm in Brisbane here. So they, while a stock broking, they do stock broking wealth management. He said in practical terms, the first right of payment for US Treasury bonds continues when the government shuts down us taxation revenue is used to pay the money owed on US Treasury bonds first, and US government employees second, this system has continued from 7091 until this day, this is why US Treasury bonds never default. So, Michaels fairly optimistic about how this plays out. Michael’s a keen observer of, of what’s happening in the States. And I think he’s someone that I respect a lot. So let’s hope he’s, he’s right there. Because I mean, it clearly would be a really extraordinary thing if the US Treasury couldn’t pay or couldn’t meet its debt re payments or couldn’t pay the interest on Treasury bonds, it would be extraordinary. And this is all come about because they have a limit, a legislated limit on how much the national debt can be what the total amount of bonds on issue can be. And that was around I think it’s around 31 trillion. I had that. I’ve got that in the notes somewhere. I’ll put it in the show notes. And they basically hit that limit earlier this year. So around around January, so January 19, the US hit its debt ceiling of $31.4 trillion. And since then, what they’ve been doing, they’ve been taken what Janet Yellen, the Treasury Secretary has called extraordinary measures. So they’ve been not making certain payments that they would into trust funds and so forth. I think retirement benefits for public servants have I remember correctly. So there are certain things that they’ve they’ve been doing to delay the the inevitable when you you run out of money. This is a sort of thing you can do if you’re in a Treasury or a finance ministry there. There is some flexibility there but you you can only do that for so Long. Yep. So I’ll put this in the show notes. There was a great article in the Financial Times earlier this year, which explained this. And it wrote that in order to create additional borrowing capacity, Yellen on Thursday said the Treasury would cease investments into the civil service retirement and disability fund, as well as the Postal Service retiree health benefits fund. So that’s one of the extraordinary measures that they’re being taken to, to really just delay the inevitable when that lack of ability to borrow new money from the market, so the ability to issue new debt, I mean, eventually, you’re going to need to do that. And, and Janet Yellen has previously said that, that critical date is essentially first of June or early June. So as you said that before and we’re fast approaching that date, aren’t we? So? Any thoughts so far, Arturo?

Arturo Espinoza Bocangel  11:02

Well, he’s a very important issue, the in well, in the worst case, or worse scenarios, one effect on the global economy.

Gene Tunny  11:15

Right. So you’ve found there’s a note from the White House, isn’t there? They’ve done some analysis? Yes,

Arturo Espinoza Bocangel  11:21

yes. In the White House, they have published I article, which is a potential economic impact of various debt ceiling scenarios provided by the CEA, the Council of Economic Advisers. The point to be highlighted here is that, for example, there are some estimates about economic effect of debt ceiling standoff for the third quarter 2023. For example, in terms of jobs, the American economy would lose around a point three millions of jobs, just in terms of real GDP, annualised growth, they will lose 6.1. And then deployment will reach almost 5%

Gene Tunny  12:13

G. Given Yeah, okay, I’ll have to I’ll have to look at the night to see how they’ve calculated or given those job losses you reported, I would have thought unemployment would would end up being higher than that in that scenario. Now, a couple of things to think about. It’s from the White House. So it’s they’ve got an agenda clear. They want the debt ceiling increase, they want the Republicans to agree to that with very few conditions. So we’ll come in, it’s going to be self serving to an extent. And I mean, it’s one of these things, how do you actually model this? This scenario? We haven’t really seen it before. We’ve seen plenty of government shutdowns. before. I think Michael had an estimate in his note that there’s been a it’s been over a dozen since 1980. If I remember correctly, I’ll put a link to that. I thought, Michaels No, it was really, really great. So yeah, I mean, it’s clearly would be bad. I mean, it’s a US government just completely was unable to function effectively, because it couldn’t borrow any new money, but it still had to make it was still obligated legally to pay Social Security benefits Medicare, and it also still wants to fund defence and all the other things the US government does, there. Yes, it’s got a problem there. And there have been various ideas floated for how the government could possibly get around it, but the legality of them is a bit suspect. There’s a view that Well, Congress is effectively saying, one view I’ve heard is that, because Congress is sent two different sets of instructions to the White House to the executive, it’s up to the executive to the White House to choose which set of instructions to follow. So on the one hand, Congress is saying you can’t borrow any more than $31 trillion, you are sorry, you can’t have that as your total debt, anything more than that. So once you hit that, bad luck, you’re not going to get any new funding. But then, at the same time, Congress has also told the White House has told the executive government that you have to fund these social security benefits, you have to pay this in Medicare, etc. And so there’s this conflict there. And and so one view is that we’ll the Biden administration should just ignore the the debt ceiling, but then yeah, then it’s operating in a very legal grey area, or probably a red area or however you describe it, it’s possibly illegal. The other idea is is trillion dollar coin. Have you heard this idea that the because the US Mint has the power to well, the US Treasury, the US Mint can mint coins, it has the power to do that it could essentially meant a $1 trillion coin, like a platinum coin would stay $1 trillion. This was one. This was one idea this was floated over 10 years ago, the last time they had a debt crisis. And the idea was your walk that trillion dollar coin after the Federal Reserve, and then say, Oh, here’s our deposit, can you put this in our bank account? So suddenly, we’ve got an extra trillion dollars. And that’s another thing that the legality of it was probably questionable. And, and look, it doesn’t, it doesn’t solve the problem. And in that sort of getting into the modern monetary theory, approach, where the government’s just printing money, creating new money, whereas what you want to be doing is, you do want to be selling the bonds into the private market so that you’re not adding to the money supply with your fiscal policy. So it’s important to be able to borrow from the market if you are going to run deficits. So yeah, really, really tricky. tricky situation there. Any any questions on that? Arturo?

Arturo Espinoza Bocangel  16:14

Probably the equity or the share market is like, quite volatile at this moment, given this, this issue.

Gene Tunny  16:22

Yeah. And imagine what would happen. I mean, the markets would just go crazy if they don’t resolve, which tends to suggest that they will resolve it somehow, because the Republicans there. They believe in America, they don’t want to harm America, they’ve got donors who, who don’t want the economy to crash. And so I think ultimately, there will be some sort of compromise, but it’s a bit of a game at the moment. It’s brinksmanship, as they call it, they want to get as much as they can. The problem is, and there was a great conversation I had last year in October last year, with Romina Bochy, she is a fellow at the Cato Institute in Washington, DC. And she was explaining how this is, it’s about it’s a spending issue. It’s that they’re spending too much relative to their revenue. And we talked about the structural deficit in the States, as in Australia, we’ve got this structural budget deficit, we’ve got this gap in sort of normal times, or if you think about trying to abstract from the economic cycle, try to control for that you’ve got this gap between revenue and spending. And given that tax increases are unpopular, and it’s so difficult to for governments to raise taxes, and there is an economic efficiency, cost with taxes. So you do want to keep taxes as low as possible. That’s not something they can adjust. But then at the same time, they’ve got these entitlements, such as Medicare and Social Security, that mean that government spending is just going to keep increasing. And it’s a big challenge. And they’ve also got the military now that could argue that I mean, does the I mean, America does spend a lot on the military. I saw the numbers from the US Treasury, the US Treasury fiscal data. I’ll put a link to this in the show notes. And you can see where the the federal government is, is spending its money or spending the money of US taxpayers, I should say, That’s stopped working on my machine. But it was a great chart. I’ll put a link in the show notes that I think it’s about $800 billion or something is it that’s spent on defensive you got it there, Arturo.

Arturo Espinoza Bocangel  18:45

You talk about the national defence? Yes. Is 767 767

Gene Tunny  18:54

billion was that in 2022 2020? Yeah. So there’s a lot there. Now, the US spends much more on national defence than any other country, but at the same time, it is one of the global superpowers and plays an important role in global security. So that’s a big, that’s a big challenge. Maybe you can get some efficiency gains in the Pentagon, there is a bit of concern about the efficiency of spending of defence spending. There’s concerns about the Pentagon failing audits. I don’t know if you’ve seen that John Stewart really ripped into one of the Pentagon officials department.

Arturo Espinoza Bocangel  19:36

So the problem there

Gene Tunny  19:39

are essentially she was asking her well, should we? Is it good enough? It’s been he’s employed, implying is not good enough that the defence department can’t account for all the all the money that it’s spending and it’s failing audits. So then she was saying, yeah, it is a problem. We’re trying to fix it. And he was really going after it. And rightly so they’re spending nearly $800 billion. But guess what, what if you look at the spending data, what I’m trying to say is that it’s difficult, given what they’re spending money on, and the big ticket items are health, Medicare, Social Security defence, you can’t really make the budget adjustments without touching some of those spending areas if you don’t want to raise taxes. And that’s probably not going to happen. But then if the problem that they’ve got in the US is that all of the the way you would fix this is by modifying programmes that are popular or going after the defence budget, and that’s going to be difficult because of the concern about the conflict with grants, growing risk of a conflict with China, so they won’t be able to do that. And politically, it’s very difficult to do anything about Social Security and Medicare, and Donald Trump came out and the other the other month, I think, a month or so ago and said, Look, I’m not going to touch it. So given Trump has declared that other Republican candidates, they won’t be able to, to propose any changes. So it’s, it’s going to be very difficult that they might be able to make some savings in, in other areas, but then you’re talking about things like the Department of Transportation or, or the EPA, other agencies like that Housing and Urban Development, perhaps, if that’s still around. So it is, it’s going to be very difficult for the US. Okay, yeah, yeah, HUDs. Housing, urban development certainly does still exist as an agency. Okay, so that’s the debt ceiling. I mean, we don’t really know how it’s going to play out, I think most likely, they’ll come up with some deal. So they will have to be some cuts to non core, maybe non core is not the right word. But they’ll have to be some cuts to agencies within programmes which are less popular. So that’s what we’ll we’ll end up seeing the Republicans will declare a win of some kind, maybe they’ll get some commitment that over five or 10 years, there’ll be there’ll be particular reductions relative to the baseline. But I mean, some they’ll have to, they’ll have to lift the debt ceiling, because the alternative is just so unknown, and new cause such global uncertainty, really, and potentially, lots of economic, economic pain for the US and for the world, given the role of the US and the global economy. And he thought so to her

Arturo Espinoza Bocangel  22:49

while thinking about the when I talk about when we talk about a ceilings of any timing economics. I think that individuals tend to spend spare, for example, if you say to your friend, you, you’re allowed to spend $100, yes, some maximum money they can pay you in order to pin one, let’s say to buy alcohol or drinks. Of course, the the train is gonna spend $100, I think that kind of ceilings are not optimal in economics, because people tend to reach that point, every time they have the opportunity.

Gene Tunny  23:37

Right. I think I understand what you’re saying. So psychologically, but wouldn’t that be suggesting that there could be a benefit from a ceiling? I mean, I don’t I don’t think that I don’t think there should be a ceiling on on this sort of thing, because I don’t think it’s helpful. And it does lead to situations like this. But if you’re saying like, psychologically, that this is, I think, in some cases, like, if there’s someone who has impulse control problems, then maybe they need to have some ceiling to control their, their, their behaviour. So I think, part of the logic for having the ceiling in the first place in the States and we had one in Australia, I’ll talk about that in a moment. It was the limit the the potential of the President to go and borrow a lot of money because there was a concern 100 years ago, or something that the President could go and borrow a lot of money for the to, you know, fund their own programmes and, and get around the Congress. And so they imposed a debt limit of much lower than it is now because it’s been increased over the years as the economy has grown, the federal government’s grown and they’ve, they’ve have needed to increase it. So you can see why they they might introduce it. The problem comes when you’ve got legislation that tells the government to spend money on other things and the spending is mandatory. There’s not there’s no discretion there. It has to provide the Social Security benefits by law or Medicare based on the legislation. And so you’ve got one active congress this priorities. Yeah, that’s conflicting with the other legislation. So this is why I think there is some logic to this, the concept that the Congress has sent two sets of instructions that are incompatible with each other, and therefore the White House should have some discretion in how in how to deal with it. I mean, I’m quite sympathetic towards that argument. I just think legally, it’s, it’s, it’s problematic, it’ll, it’s most likely problematic. So yeah, but one thing I would have thought I’d mention is that we had this issue in Australia here, about 14 years ago, when I was in the treasury, and this was one of the things I was responsible for, we had to amend the, what was called the Commonwealth inscribed STOCK Act. This is quite amusing. When you think about where federal debt is now. I mean, maybe it’s not amusing, or it’s amusing. It’s black humour. It’s, it shouldn’t laugh about this. But prior to the financial crisis, we only had $50 billion of government bonds on issue, because we’d pay down all this debt, partly because we sold off some public assets or government owned businesses like Telstra. And they set in the legislation in Section five, I think it was at the Commonwealth inscribe STOCK Act, they set a limit of $75 billion for government bonds on issue. Okay. And then as soon as we have the, we get into the financial crisis, and they only I think they set this limit in 2007. Okay, so come, we get to the end of 2008. And this is when I’m in budget policy division in the treasury. And we do the forecasts as to, you know, what’s happening with revenue. And then what’s happening with with the borrowing requirement, I mean, we suddenly had to start borrowing new money, we had to start increasing debt, because we’d have to be running deficits. We this federal government wasn’t running deficits. But now with the collapse in revenue, and the possibility of, of stimulus spending that the government wanted to enact or bring in, then we’re going to be running deficits would have to borrow, borrow money, and add to the debt. And this was going to be difficult, because there was a $75 billion limit. Now, when we did the budget update over the next month or so. And we published it in early February. And it was clear that the debt was heading toward 200 billion. So we had it was 50 billion before the financial crisis, then and the debt limit was 75 billion. But when we did the projections are the forecasts in Wait, oh, eight, early Oh, nine, we ended up figuring out we needed to lift that limit to 200 billion. And so we had to change the the act of parliament, it’s just changing one number, we had to change 75 to 200. But our cause such a political mess, and Malcolm Turnbull, the opposition leader decided to oppose it. And yeah, and the government got it up with the support of the crush the crossbench senators with the greens, I actually remember going with David Parker, who was acting treasury secretary at the time, and we had to go and talk to Bob Brown and his staff. He was he was head of the greens in Parliament House, we had to say why this was important? Well, it’s the same thing. I mean, the government has these commitments, it’s required to spend money on these different programmes. And you then can’t say that they can’t borrow the money to meet that to actually meet those commitments. It’s, it’s inconsistent. It’s not, it’s not right, you should lift the you need to lift the the debt limit, or there’s going to be bad consequences, the government might be able to pay to make payments or it won’t be able to enact stimulus measures. Now, there’s a debate about whether stimulus measures are unnecessary or desirable. And I’ve had some episodes on that. I might link to one with Tony Macon. So that’s an that’s an issue for another another day. What I was just emphasising is that the US is now I think I’ve heard it expressed that it’s the only country which has this actual debt limit, or it’s got this conflict between what the debt limit is and what other legislation tells the government to do. But we did have this in Australia about a well over 10 years ago, they amended it they got rid of this legal was about 10 years ago or so now, but we did have this issue. So I just thought I’d note that was that something I was personally involved in in Costa It caused a little bit of angst at the time, it was a huge political issue. Yeah. So yep. So there’s a again, we’re recording this on the 25th of May. So who knows? It may be resolved by the time this episode is published, but I doubt it. I think there’ll be negotiating right until the last minute and the Republicans will be trying to extract as much as many wins or gains as they can. Now, I’m not saying they’re badly motivated. I think they genuinely believe that there’s too much federal government spending and, you know, they, they do want to make savings there. But, look, it’s so difficult politically, because the programmes they probably need to cut according or to adjust, according to Romina had that great conversation with her last year. They are politically popular programmes, so it’s going to be very difficult. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  31:00

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

Gene Tunny  31:29

Now back to the show. You’ve been looking at what’s happening in Argentina, I saw a news report the other week that the as a central bank have to they’ve had to put the interest rate up to 98% or 90%. Yeah, that’s, yeah. So what’s going on in Argentina? Well,

Arturo Espinoza Bocangel  31:49

I think Argentina in the last decades, is facing these problems, economic problems in terms of inflation, and also exchange rates. Both problems are the most important that Argentina are not able this case I’m an internet is not able to deal with it, or solve it. Currently in Argentina, there they are facing a soaring inflation. Also, there is a what there is a lack of USA dollars,

Gene Tunny  32:26

or on what’s the inflation right there.

Arturo Espinoza Bocangel  32:28

In April, the monthly inflation rate reach 8.4% 8.4%. Monthly. Yes. And the annual inflation rate was more than 100%. More than 1%.

Gene Tunny  32:42

Yeah. And is it the problem we talked about in our episode on hyperinflation? I mean, it’s not a hyperinflation yet. Technically, because then you Hyperinflation is when you have 50% a month, I think, is it just bad government? Fiscal policy? Is it money printing?

Arturo Espinoza Bocangel  32:57

The main one of them employment or mayor permanent is? Lack of fiscal rules at the school? What sorry? Rigorous?

Gene Tunny  33:07

Do you mean, they don’t follow good public finance practices? Yeah. Right. Yeah. Yeah. Okay, I might have a closer look at that. But I was just really stung by the what’s been happening there with the inflation and the interest rate, because it’d be there a country that in the past, they’ve had, you know, problems have borrowed too much money they’ve had to default effectively, and, you know, renegotiate with creditors. Yeah, I’ve

Arturo Espinoza Bocangel  33:35

found also that this inflation, has pushed one in four people into poverty in our country, in this case, Argentina that has battled for decades with high inflation. Yeah. And also, if we had another problem, which is the historical the historical drove, seen last year, which has damaged the Argentinian soybeans because they are the major producer of corns with and soybeans and they rely on on the export of those. Yeah, also, they are not receiving enough use of American dollars. So there was there’s no problem there.

Gene Tunny  34:17

Yeah. The extraordinary thing about Argentina is that it was once one of the richest countries in the world wasn’t it in the late 19th century? During the gold during the gold rush? Yeah. Yeah. And just bad policy over the 20th century. Was it? Was it the bronze who are in Argentina Yeah. Why and Aveda Braun? Yeah, yeah, just really beyond bad economic management. So yes. Anything else on that odd zero on Argentina,

Arturo Espinoza Bocangel  34:50

just to that there is a mediatic presidential candidate named Emily has allowed to burn to burn The central bank so they, they want to Oh, he wants to shut down the Argentinian cell from bang. If he assume HIV takeover the president, she’ll office.

Gene Tunny  35:11

So what did you say he’s a candidate is? Did you mention his party? Did you or?

Arturo Espinoza Bocangel  35:16

No, I haven’t mentioned the party, but he’s leading the boring.

Gene Tunny  35:22

Right. So he wants to get rid of the central bank. Does he want to replace it with a new central bank?

Arturo Espinoza Bocangel  35:27

Probably? Yeah, sure.

Gene Tunny  35:30

Well, given the given the problems that have gone in Argentina, I mean, who knows? I mean, maybe you need some radical approach like that? I really don’t know. I’d have to look more closely at it. It’s, yeah, it’s a bit of a mess. Right. Okay. Well, I mean, luckily, in Australia, and I mean, even in the US, we’ve, I mean, despite all the problems we’ve been talking about, we do have, we have had generally better management than, say, Argentina. But but let’s say they sorted out because you I think you made a very important point that the, the misery that this causes the misery that comes from bad economic policy, was it one in four people who’ve gone and been thrown into poverty? And that’s what inflation does, right? It erodes the value of, of the money that you’re holding? And, yeah, it’s really bad. And if you’re on a fixed income, or if you’re on a pension that’s been paid in dollars, a certain amount of dollars, then inflation goes up, you’re in a whole lot of trouble.

Arturo Espinoza Bocangel  36:33

They’ve retired. Suffering from

Gene Tunny  36:37

Yeah, and I mean, our pension is here in Australia, as suffering from the inflation we’ve experienced. And now we’ve just learned about 22%, or whatever it was increase in electricity bills. Right. Okay. So that’s, that was Argentina. The other thing I wanted to talk about Arturo, is this, this developing market or developing economy, emerging market, debt crisis that we’ve that’s become quite prominent and was talked about at the the IMF World Bank spring meeting that they have in, in DC, and this was in April, but it’s still still going on. This is something that an issue which will be with us for some time. And what we’ve seen is that there’s been this big increase in, in debt of many developing economies over the last decade or so. And China’s playing a part in that. And this whole debate about China debt trap is China and trapping countries, by lending the money and then seizing their assets when they can’t repay as at lending them for and knowing that they’re not going to be able to repay. Now there’s a big debate about that. I might have to cover that in a specific episode, because I know one of the things we’ve been looking at on this show is, to what extent should we worry about China? To what extent is China a threat? What does that mean for the global economy? And I mean, I’ve been trying to get a wide range of views on that. There was a paper in the wall, there was an article in The Atlantic Monthly from some quite prominent academics in the States. So Deborah Browder, gam from the China Africa Research Initiative. And she’s a professor at Johns Hopkins, very famous school over there. And Meg rothmeyer. Meyer, who is a associate professor at Harvard Business School, so an equally famous school. And they argued that the Chinese debt trap is a myth. So I’ll put a link to that. And they go over all the complexity of what actually happened in Sri Lanka when, when the Chinese bank, I think it was took over that, that port. So there’s a bit of a debate about that. But there’s no doubt that there is this developing economy debt crisis at the moment, we’ve had large increases in debt to GDP. And one of the things that the managing director of the IMF pointed out in the, in her opening remarks is that of this very high percentage of well, not well, you could say it’s, it’s high, if you think about what it means. So 15% of low income countries were already in debt, distress. And so we’re talking about countries like Zambia is is one of those countries in various other African countries. And they’re having they’re having problems paying back their debts. And then there’s this need, potentially to restructure their debts reach a new agreement with their creditors. And one of the one of the issues that we’re we’ve, we’ve discovered, and this is something that’s concerning commentators, and it’s also concerning the IMF because they’re caught in the middle of this. The Economist has called this a nightmarish identity crisis. For the IMF, it said it’s caught between America and China, its purpose is unclear, because an increasing amount of the debt that that has been accumulated by emerging economies, it’s coming from China. And that’s, and that was before Belt and Road Initiative. But it’s also associated with this new Belton Road initiative that Xi Jinping has introducing that is introduced, because a lot lot more of it’s coming from China, then it’s, it’s difficult because the IMF when it wants to assist countries, if they get into trouble, because the role of the IMF is to try and guarantee financial stability and one, one thing they do is to provide emergency lending, Short Term Lending to countries that get into trouble. But what we’re finding now is that because China is involved, it’s one of the creditors. Usually the IMF wants the country to renegotiate its, its debts with its its creditors. It wants to make sure it’s sustainable. It can it’s got sustainable debts, that it’s it’s going to be in a good position to to repay the IMF, if the IMS gonna lend to it, it’s going to provide some emergency assistance, that that countries might need to help shore up their exchange rate or to help them actually meet their their debt obligations. Because part of the problem is that if you’re an emerging market economy, you typically have to borrow in foreign currency you have to borrow in US dollars. For example, actually,

Arturo Espinoza Bocangel  41:50

Argentina has received almost 44 billion from the IMF,

Gene Tunny  41:54

sorry, Argentina has received 44 billion Yep. So Argentina is part of this part of the story. Yeah, but what they’re finding, and this is, this is something that is really a concern to the people in in DC and London and the other, the other Western capitals. The problem is that China is playing hardball in the negotiations, and it’s been difficult in terms of the renegotiation of the debt. I mean, support is a China also has just been like any other creditor in the past, like US banks may have been in the past. But it’s essentially saying that if the US or if the IMF is gonna come in and lend money, then they have to lend on concessional terms to they have to share the pain with with China or with other creditors. So historically, the IMF has been superior to the IMF and World Bank, they’ve been superior to other creditors. But now that China’s involved there, China’s pushing back. And yeah, it’s a rather fast, fascinating story. I’ll put some links to these articles from the economist in the FT but possibly paywalled. So maybe I’ll also try to find some some articles that don’t have a paywall. But basically, this is part of this new conflict that we’re seeing between the US and its allies and China. So we’re seeing, you know, this is another area of tension and other another aspect of that, that conflict. That is that’s heating up. So I just found that really fascinating that we do have this emerging market debt problem again, I mean, this was a huge issue in the in the 80s, then it was Latin America. And now it’s a wide range of countries, including Papua New Guinea to our north, apparently, I saw that they’re a country that’s high risk of fiscal distress where they, they need to, yeah, they may need to renegotiate their debts. So it’s countries in Africa and

Arturo Espinoza Bocangel  44:11

in the case of PNG, Australia, would play an important role in case they they fail in some economic indicators, or

Gene Tunny  44:23

Yeah, I mean, we do provide assistance already to PNG and I think yeah, worst case scenario, we would have to do something because it’s, it’s to our north,

Arturo Espinoza Bocangel  44:33

but now with the Chinese presence is that is gonna be different.

Gene Tunny  44:39

Well, I know they’re in the Solomons ought to look at what China I mean, I guess China is trying to get influence all around the Pacific. But yeah, I mean, I think we would try to, you know, make do it. Do as much as we can for to, you know, to help out p&g Given that it’s to our north, and it’s strategically important. I mean, when we fought the Japanese during World War Two, there was fighting in PNG. Right. So that was a battlefield. Okay. So, yeah, it’s strategically important. Now, yeah, I’ll put a link to some information about PNG and this, you know, how it figures in this conflict with China or this geopolitical tension, maybe not maybe conflicts around work, because I’d like to, I’m hoping that that we are going to be able to, to maintain peace. The alternative is just so horrific at the same time, we need to we do need to protect our national interests, and be conscious of any attempts to go against that. Yeah. So yeah, China’s Yeah, the Chinese President Xi Jinping visited Papa New Guinea four years ago, there was no doubt about China’s green ambitions in the region. This is saying that much of China’s promised aid and investment never materialised. So Beijing is trying to ingratiate itself with PNG. It’s a great defund construction of a hospital for PNGs. Military. So I guess it is an issue that we do need to watch. But we’ve got a star, we’ve got historic links with PNG, Australia is very close to PNG, the Australians living over there. And so I’d like to think that PNG is not a country, we need to, to worry about. And I’m confident that maybe there’s a bit naive, but I expect that we would be able to work, we will be very conscious. And we will we will make sure that we don’t lose png if it if it comes to any sort of any sort of conflict with China. Okay. So there, my thoughts are, I’ll put links to relevant data, there’s a great statistical annex that the IMF puts out, and it’s public debt monitor that shows just how much these public debts have been going up. There’s some great material on what’s been happening with the IMF and how it’s facing this identity crisis. And it’s part of this whole. The problem we’ve gotten now is that, well, we had a post war world, which was essentially underpinned by American preeminence. And I’m talking about the Western world, the communist world did its own thing. But then it collapsed in 89 to 91. So that’s no longer an issue. You know, Russia, of course, is a threat and of its, its decoupling from the West, China, I mean, very difficult, because it’s such an it’s a very populous nation. There are great benefits from trade. But there is this growing tension that we’ve talked about on this show. And one of the aspects of, of this tension is in the international financial system, and it looks like the the preeminence of will, the massively important role the IMF and the World Bank have played in the past. Now they’re in competition with, with China and China’s making life difficult for the IMF, it appears from what I’ve been what I’ve been seeing. And the IMS seems to be failing in this mission, really, it’s had all of this additional, what’s got all this capital that will finance or these got these financial resources that could deploy, that it’s been unable to deploy? So the effectiveness of the IMF is in question. So the economist talked about how nearly $1 trillion so 1000 billion has been injected into the funds since COVID. began to spread, but its loan book has grown by only $51 billion. So yeah, the the economist is painting this picture of the IMF is as really not as effective as it can be. It’s and caught between America and China. So Well, I mean, we may need a we may need a rethinking or re creation of these international financial institution. So that might be something we find some international expert on and talk about on the show in the future on on Argentina, we’re going to try and get a local expert on Argentina to talk about that. So yeah, Julie, so that was a bit of a whirlwind tour of some major macro economic issues that we’ve been monitoring. Arturo anything before we wrap up anything else?

Arturo Espinoza Bocangel  49:57

No, I think this Question was very informative.

Gene Tunny  50:01

The one takeaway I would, I would suggest, as a takeaway I always like to make is that it’s so critically important to get those your government budget under control to get your institutions, right. And, yeah, really, really try and avoid accumulating unnecessary debt. I mean, you can borrow to build arguably, but when you’re in a situation when you’re borrowing money just to to meet recurrent expenses, which is essentially what’s happening in the states now. And you know, it’s happened in multiple countries around the world, when you you’re not getting a return on that investment, then you’re gonna get into trouble. And we just see this time and time again, unfortunately. So just the main takeaway, I think, is just be very conscious of, of what you’re spending if you’re, if you’re in government, if you’re a policy advisor, just be really cautious. And that’s, that’s what I’d say there. And that’s what you’d probably expect a former Treasury person to say. So. Very good, Arturo. Again, thanks so much for your time, and thanks for listening. If you’ve enjoyed this, if you have any questions, let me know. I’d love to hear from you. Contact at economics explored. Thank you. Right Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets 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

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Podcast episode

The Invisible Hand: economic, religious, or mystical concept? w/ Dan Sanchez, FEE – EP185

The Foundation for Economic Education’s Dan Sanchez argues that the invisible hand is a legitimate economic concept and not a religious or mystical one, as some critics of economics claim. Dan and show host Gene Tunny discuss the efficient organization of economic activities by the market mechanism in a decentralized way, without the need for a central planner. The conversation turns to TikTok and economic engagement with China. 

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

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

What’s covered in EP185

  • Introduction to this episode [0:06]
  • Dan’s article on the “invisible hand” [2:06]
  • The production of a pencil is like an orchestra without a conductor [5:25]
  • Is the invisible hand the hand of God? [8:34]
  • What is the problem with central planning? [12:27]
  • Central planners don’t like the idea of economic laws because they circumscribe their utopian dreams [15:45]
  • Dan’s views on big tech [19:23]
  • Is there a case for regulation or a ban on TikTok? [23:32]

Links relevant to the conversation

Dan’s bio: https://fee.org/people/dan-sanchez/

Dan’s Twitter handle: @DanSanchezV

Dan’s article on “How Atheist Anti-Capitalists miss the point”:

https://fee.org/articles/how-atheist-anti-capitalists-miss-the-point/

Von Mises book on the economic calculation problem

https://mises.org/library/economic-calculation-socialist-commonwealth

Article about problems with Soviet shoe production:

https://www.econlib.org/archives/2009/09/soviet_shoes.html

Bio of 19th century British free trade advocate Richard Cobden who Dan mentions:

https://en.wikipedia.org/wiki/Richard_Cobden

Transcript:
The Invisible Hand: economic, religious, or mystical concept? w/ Dan Sanchez, FEE – EP185

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dan Sanchez about the invisible hand, the efficient organisation of economic activities by the market mechanism in a decentralised way, without the need for a central planner, the great Scottish Enlightenment economist and philosopher Adam Smith observed, every individual neither intends to promote the public interest, nor knows how much he is promoting it intends only his own security and by directing that industry in such a manner, as its produce may be of the greatest value, the intense only his own gain. And he is in this as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Is the invisible hand a legitimate economic concept or is it instead of religious or mystical concept as some critics of economics argue? My guest this episode, Dan Sanchez argues vigorously against those critics. Dan is the director of content at the Foundation for Economic Education. The foundation is one of the world’s leading pro free market think tanks, and it’s been operating since 1946. Okay, let’s get into the episode. I hope you enjoy my conversation with Dan. Dan Sanchez, from the Foundation for Economic Education. Welcome to the programme.

Dan Sanchez  02:06

Thanks, Gene. It’s great to be here.

Gene Tunny  02:07

Excellent. Dan, I was keen to get you on the show to chat about an article that you wrote for fi recently in the world in the last few months. So how atheist anti capitalists missed the point why they’re wrong, to sneer at the invisible hand and, and our pencil. To start off with Dan, could you just explain what you were reacting to? So what was the sneering that was being done at the invisible hand? And, and eyepencil, please,

Dan Sanchez  02:40

yeah, well, I tried to make it evergreen, partially because this is a criticism that is levelled at eyepencil and about free market economics in general, a lot. And another thing is that I just didn’t think that the I don’t even remember the author of the book that was in the latest smear, and the latest attack on Leonard Reid’s eyepencil was then I just wanted to sort of make a blanket case against that kind of line of attack. And what the line of attack is, is that is that free market economists believe in the invisible hand, that there’s a line and a pencil that says, Since only God can make a tree, I insist that only God can make me. And therefore free market economics is invalid, because ultimately, it is based on faith instead of reason. And that it relies on some kind of a supernatural divine intervention for the free market to work. So it was that line of attack that I wrote my article to counter attack.

Gene Tunny  03:55

Rod, okay, I didn’t realise there was that line in eyepencil, I’ll have to go back and have a look at it to see the context. eyepencil is a great article that explains how no one no one person knows exactly how to make a pencil. There’s all of these, you know, hundreds of or however many people 1000s of people involved in the supply chain and the production from the growing of the timber, and the mining of the graphite, and the assembly of all the components into into a pencil. And that’s all coordinated by the market system. I mean, what Adam Smith and you know, the, the invisible hand, this is this metaphor from Adam Smith. That’s about how he sees as there’s, it’s almost as if there’s an invisible hand at work in how the market coordinates people and we owe our DNA to the self interest of the butcher and the baker. So yeah, that’s what that’s broadly speaking, correct. isn’t enough characterise that, right?

Dan Sanchez  04:57

Yes, that’s exactly right, Leonard. Reid is actually the founder of the organisation that I work for the Foundation for Economic Education. And he wrote this classic essay I pencil. And really what it is, is it’s a, written from the perspective of a pencil, like the pencil is the narrator. And the pencil is giving his family tree, his ancestry. And the point that he has to make is that, as simple as he is, like a pencil is not a super high tech product. But as simple as it is, its production is vastly complex, really, involving millions and perhaps 10s, and millions and hundreds and millions of people in its production, because you might think that the components are relatively simple, because there’s wood, and then there’s the lead and the eraser, but each one of those components had to be manufactured. And oftentimes, those the capital goods that were used to manufacture that they have to be manufactured, and it just keeps radiating out and out. And when you really trace what it all that goes into the production of a pencil, it is an orchestration of millions of people. But it’s an orchestra without a conductor. And that’s the, that’s the marvel that eyepencil really reveals is that there’s no mastermind, there’s no central planner, a lot of people would like to be central planners, they’d like to centrally plan pencils, and they’d like to centrally plan everything, but it is way too complex for them to be able to do that. And yet it happens every day without a central planner, because of the market price system. And, and that market price system is very orderly. But it’s not order that comes from the mind of any single participant of it, that that it’s an order that emerges out of the interactions of all these people pursuing their own little corners of order. And so there’s a transcendent order that emerges out of that. And so Adam Smith and Leonard Reid characterise that as, as sort of like an invisible hand, because all these wonderful things are coming out of the market, like a pencil, that wasn’t the intention of any single participant of it, a lot of people involved in producing things that go into producing a pencil, don’t even realise that they’re contributing to a pencil. So like someone who is, you know, manufacturing an axle that goes onto a truck, that ships the wood that ends up in the pencil. That person never thinks about his work as contributing to pencils. It’s not his intention, it’s not his order. But the market price system coordinates that all so that he actually does very effectively contributes to a pencil. And so like Adam Smith said, that it’s as if an invisible hand is ordering people’s actions to yield results. That was not any intention of their own. That you could see that that Leonard Reid and Smith and and also Frederick Basia that you could see like the hand of God in that, and that’s where the critics pounce because the critics say, Aha, you’re talking about God so therefore, everything that you’re saying is invalid. But in my article I explain how, how that actually is not a valid criticism.

Gene Tunny  08:57

Broad Okay, so we’re Smith and last year and read with a religious Did they say they compared the market mechanism to the to the hand of God is that what is that correct?

Dan Sanchez  09:09

Yes, they were all they were all Christian. And Leonard Read had that line that I mentioned, Frederick Basquiat in one of his essays warned against, quote, rejecting the order, God has given it, referring to the market and cautioning against social schemers who, who want to reject that order. And so a lot of free market thinkers see that there is something divine in it, that the order of the the world including the social order, is because of God it was created by God. But the thing is, is that even people who maybe are atheists and who who disagree with with Basquiat and read, they have no cause for disagreement with their conclusions, because as I explained in the article, the way that they reach their conclusions, was not through recourse to any kind of divine intervention. And it was not like God exists, therefore, the free market or anything like that, they reach their conclusions through economic reasoning, and through observations about human nature. So when, when Adam Smith explained the invisible hand and the workings of the market, he talked about the division of labour and exchange and prices and incentives and, and the logic of the market, resulting in that. Similarly, when Leonard Reid talks about eyepencil, and the wonders of the market, again, it’s all about about human action and exchange and the prices that result from it and the coordination that results from that same thing with with Bostian. And they think of that order as having been created by God, but, but they don’t say that, like, it relies on continuous divine intervention all the time. And they don’t rest their conclusions on, you know, holy scripture or anything like that. And so, in my article, I compare it to Sir Isaac Newton, Isaac Newton was also Christian, and was also religious, and also saw something divine in the physical order that he was describing. And that, I think there’s a double standard here, because these, these critics, they, they wouldn’t then say that, you know, Isaac, Newton’s physics were invalid because of, of his, you know, religious perspective. Because his optics and His laws of motion and everything that they were derived from using reason and using experiments and using observation, and they don’t have that criticism for him, because they don’t have an axe to grind against physics, they have an axe to grind against capitalism. And so they’re going to level this unfair attack, in this case and not in the other.

Gene Tunny  12:27

Yeah. Yeah. I was just thinking, Dan, I mean, I first came across eyepencil, I think it must have been in one of Milton Friedman’s books, because Friedman might open one of the chapters in Free to Choose talking about it, I can’t remember exactly. And Friedman love that example. I mean, the way Friedman always explained it in terms of the market, it provides us clear signal is that price signal that, and that’s all you need to observe in the market. And if if there’s a shortage of say, timber than the price of timber is going to increase, and that’s going to send a signal to the loggers to, to harvest more, more timber. So, yeah, he talks about that efficient signal. And, you know, 30 or 40 years ago, there were, it was much clearer that that was a better approach than central planning, because we had real life, socialist economies, the centrally planned economies still, that were failing to produce the goods and services, the consumer goods that that people wanted. And I might try and dig up some of those examples of those, you know, just the inefficiency of production, the failures to when you got central planning, and you don’t have the market to tell the factories, what needs to be produced, you have all sorts of bottlenecks and problems in production. So yeah, but we seem to lack that now those it’s not as clear anymore, because we’re not in that. There’s not there aren’t in real life. I mean, maybe there are some in Cuba and North Korea, but we don’t see we don’t hear a lot about them. But we’re very conscious of what was happening in the in Eastern Europe and Soviet Union back in the day. I don’t know if you have any reflections on that at all.

Dan Sanchez  14:12

Yeah, and even in those cases, the Socialist quasi socialist economies aren’t really fully socialist because they have recourse to market prices that are generated from capitalist economies. So the problem about socialism that you can see in eyepencil, in Leonard Reid’s discussion of central planning and my pencil but also in Ludwig von Mises is explanation of the calculation problem is that without market prices, production is just arbitrary that that there’s there’s no way of balancing one production course of action against another course of action because you just don’t have prices and you don’t have the the gun either profit and loss to know whether, you know whether one line of production is any better than another. And so it’s just arbitrary. But but at least if, if you have a socialist economy and the capitalist economy exists elsewhere, at least you can use those prices as a as a rough metric to have some kind of rationality in your production. But in a completely socialist world, it would be utter chaos, like there wouldn’t even be that so it would be even worse.

Gene Tunny  15:34

Yeah, you know, it’s good. You reminded me of that. Sorry, Ludwig von Mises the calculation problem, I’ll have to refresh. My understanding of that. It’s a very good point that that he makes there. Okay, there’s one thing I wanted to dive into with your article you write that those who try to dismiss eyepencil do not want to admit that they or their favourite social schemers cannot outsmart or outdo the transcendent order of the market, those who sneer at the invisible hand won a free hand to remould society as they please. Okay, I largely agree with you what I just want to ask you about your thoughts on, there’s a lot of concerns. Now. I mean, there’s concerns about inequality, and housing, I mean, we’ve got their housing prices are out of control, a lot of young people are concerned about whether they’ll be able to afford a house, there are a lot of particularly the millennials and the Gen z’s. They’ve got a more favourable view of socialism than then older generations. And I’m always conscious, I don’t want to have a not that I’m a boomer. But I don’t want to have that burger mentality. Like there are a lot of people who are so try to see where people are coming from. There are a lot of people who think that the market, this is a problem with the market. This is why we’ve got all of these issues. How do you respond to that? Do you think it is such a transcendent order? If we do have this perceived issue of inequality and lack of housing affordability? How do you respond to the people who are critical of of capitalism, or neoliberalism or whatever you want to call it for delivering these outcomes.

Dan Sanchez  17:24

So a lot of the times what central planners or would be central planners, what they want to do is they want to basically pander and demagogue to people to pretend that they would be able to outdo the market, and provide them with more goods and services than then the market would provide. And so they don’t like the idea of economic law, because it puts a crimp in their plans, because it it shows that there are just some things that can’t be done, just like in the realm of physics that, you know, there’s a law of gravity, a president can’t walk off the presidential palace and expect to be able to fly. Similarly, a president can’t impose price controls, and expect there to not be shortages. It’s like these these economic laws, circumscribe the utopian dreams of these demagogues and the central planners, you know, that relates to housing as well. So for example, rent control, central planners don’t want to believe in economic law, because economic law means that they can’t impose rent control, without creating housing shortages for the very people they pretend to want to be able to provide for. So that’s why they are really averse to any kind of notion of a transcendent order any kind of order that that is beyond what a central planner can can encompass, or some kind of an ingenious social reformer can’t outdo, but they do get away with it to a large degree, they are able to put one over on the people to make them think that they can outdo the market. And so they do manage to do a lot of interventions. But then those interventions create a lot of these shortages. They blame that on the market, and then that buttresses their case for even more intervention if people don’t actually understand economics. And so So yeah, it’s true that there are housing shortages, there’s lack of options for living, housing is unaffordable, but it doesn’t make any sense to lay the blame on the free market. Because when you when you trace what is causing these problems, especially in in certain areas in particular is that you, you see policies like rent control, and you see policies like zoning restrictions and all these anti production policies that that put a strict limit on the production of new houses. And if you have fewer houses, then they’re going to be more expensive. Again, it’s an economic law of supply and demand.

Gene Tunny  20:22

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

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Gene Tunny  20:57

Now back to the show. One of the other concerns I hear expressed from people who aren’t sympathetic to Foundation for Economic Education, is this point about monopoly. There’s a growing concern about monopoly in well, in tech, in particular, surveillance capitalism. How do you think about that? I mean, is that part of the transcendent order? Or is that is that something malignant? There needs to be policy action, perhaps antitrust action against? How do you think about that?

Dan Sanchez  21:29

Yeah, I think a lot of the problems that we’re seeing with big tech, again, can be traced to government intervention, we saw with Twitter files, how much the FBI has been in Twitter’s DNS. And I’m sure if we ever had the YouTube files or the Facebook files, that, you know, we’d see the same results. I think that it is really short sighted, especially for conservatives to want to use the power of government and antitrust policy, to give the government even more power over these big tech companies, and expect that to solve the problem when when, if anything, that’s just going to give the government more leverage to be even more censorious against critics of the government. And so it just seems really, really short sighted to me. And the answer is to free big tech in the tech industry and social media and media in general of government and influence. Because if there wasn’t so much intervention, a lot of these behaviours, they’re doing it because of government pressure. It’s not because of, like a market demand for it. And if that government pressure was was released, I think people like freewheeling conversation and don’t like censorship. And and I think market demand would leave these these big tech companies to either them or their competitors and their successors, to not be abusive in their practices. And a lot of times big tech companies, like incumbent, like already dominant big tech companies, they actually like regulation, because it places a heavier burden on upstarts than it does on them. Yeah, even if you want, you know, giants, like like Facebook and YouTube to go under, again, you know, because of abusive practices. Again, the answer is to get government out of it. So that there’s less regulation, and there’s more room for competition.

Gene Tunny  23:32

Yeah, fair points, has feed on any thinking on tick tock, because it’ll mean tic TOCs, a company that there’s a bit of concern about in terms of privacy and security issues has feed on and you thinking on that? Is that is that a special case where there might be case for regulation, or a ban of some kind?

Dan Sanchez  23:50

Tick tock? Like, really, I think the reason why there’s so much pressure on banning Tiktok. For one thing, again, it’s anti competitive. The biggest supporters of a ban on on Tik Tok are Facebook and YouTube, because basically, they want to crush the competition. But the actual bill that would ban Tiktok doesn’t only ban tick tock it gives the government sweeping powers over monitoring and censoring the internet in general. And really, I think it is a a Trojan horse, on one hand for these big tech companies to to eliminate competition and on the other hand for governments to have even more power regulating speech, because ultimately, the biggest threat to our own civil liberties is not China. It’s the American government. Thankfully, it’s the American government that that is having this constant siege on our liberties. And this is just this is just part of that really.

Gene Tunny  24:56

That’s an interesting perspective. I thought I’d ask you Here’s it’s I mean, one of the things I’ve been trying to figure out through my conversations with people is, is China and how big of a threat is China? And does that mean we need to decouple from them? No, that’s not what we’re talking about today. I’ve had conversations with different people. And I know that the it’s a huge concern that a lot of people are really concerned about national security. But yeah, I think that’s a that’s a good point you make about the legislation and the wider reach that it could have. So I might have a closer look at that. That’s been great. Dan, thanks so much for your time. Are there any other points about your article or what you’ve been thinking about lately, you’d like to get across before we wrap up?

Dan Sanchez  25:44

Yeah, I mean, something that about I pencil that is brought to mind by the whole question of decoupling from China is that, you know, what the eye pencil story is, is a story about this vast division of labour, that is at the root of our prosperity, that millions of people are coordinating through the market system. And because of that vast coordination, that vast division of labour, because of the efficiencies of that, that is why we have hot, such high living standards, that we can have this huge population, but living better than any time in human history. And China is a big part of that. Because China, and having integrated with the global economy, that contribution to the division of labour, That is a big reason why we are as prosperous as we are. It’s also a big reason why the relations with China aren’t even worse. Because when peoples are interconnected through trade and through exchange, then that does create an interdependence. But that’s actually a good thing. Because that is what prevents wars, like once people are completely separate, then the only way that they can benefit from each other is through violence is through war. It’s like, there’s a saying that if if goods don’t cross borders, armies will, and that kind of separation, if anything, it would lead China to become even more totalitarian. Because it would create such a like a crisis situation and in times of crises, like the tyrants get are able to gain even more power. And so one thing that, you know, Leonard Read and people like Richard Richard Cobden talk about is that the more that exchange and the diverse division of labour knits people together, the more peace and cooperation and harmony and prosperity it creates,

Gene Tunny  28:00

here so Richard Cobden, an English radical and liberal politician, manufacturer and campaigner for free trade and peace. Yep. Okay. So very good. I’ll put a link in the show notes. So I remember, I’ve read some of his stuff many years ago, but it was a good, good reminder. So very good. Dan, thanks so much for your time. This is this has been really great. And I loved your thoughtful piece on on Smith, and Bastiat and what the the atheist ad capitalists get wrong. So that was excellent. And yeah, again, thanks again and keep up the great work and yeah, hope to see more of your stuff in the future.

Dan Sanchez  28:40

Thank you, Gene. I really appreciate it. Very good.

Gene Tunny  28:49

Okay, I hope you found that informative and enjoyable. I was really impressed by Dan’s insights into the invisible hand and his passionate defence of the free market. I think the main takeaway of this episode is the efficiency of the market mechanism in organising the production of goods and services. The invisible hand is a beautiful thing. Dan describe the market is bringing about a transcendent order, because the results transcend the intentions and efforts of particular individuals in the economy. As Dan noted, Smith, Bastiat and read demonstrated that transcendent order using economic reasoning and empirical observations about human nature, that demonstration did not rely at all on religious premises. Whether those men saw in that transcendent order something literally divine has no bearing on the validity of their reasoned demonstration of that order. I fully agree with Dan on that point. Dan has certainly given me some ideas for future episodes. It’s probably worth talking about the economic calculation problem posed by von Mises in a future episode. Von Mises argued socialist economies would fail because of the huge computational problems they faced They will have to centrally plan and direct the flows of resources across various industries and the distribution of products to consumers. Something the market mechanism does in an efficient decentralised way. In a future episode, it would also be useful to explore some of the failures of central planning in the former Soviet Union. There are various stories about recurrent shortages of bread and toilet paper and about uncomfortable and unfashionable shoes no one would wear but it would be good to delve into some specific well evidenced examples. I’ll see what I can do. What do you think? What either of those future episodes interests you? Let me know. And please let me know what you think about what either Dan or I had to say this episode. You can email me via contact@economicsexplored.com. Thanks for listening. rato thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

31:33

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Credits

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Categories
Podcast episode

How to Defeat the Dictators w/ Charles Dunst, Asia Group – EP180

Have democracies failed and is authoritarianism winning? How can democracies reinvigorate themselves? Does the West need to decouple from China? These and other questions are considered in Economics Explored episode 180. Foreign affairs expert Charles Dunst talks about his new book Defeating the Dictators with show host Gene Tunny. Among other things, Charles and Gene talk about the potential benefits of Public Private Partnerships (PPPs), such as Operation Warp Speed, the Trump administration’s COVID-19 vaccine plan. 

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

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

About Charles Dunst

Charles Dunst is deputy director of research & analytics at The Asia Group, an adjunct fellow at the Center for Strategic and International Studies, and a contributing editor of American Purpose. He is the author of Defeating the Dictators: How Democracy Can Prevail in the Age of the Strongman (Hodder & Stoughton, February 2023). 

For further information about Charles, check out https://www.charlesdunst.com/

What’s covered in EP180

  • What is the Asia Group and what does it do? [1:35]
  • Is democracy no longer seen as the path to prosperity in developing economies? [5:28]
  • What are the most important organizing principles for a democratic system? [11:38]
  • Accountability and the lack of trust in government [16:34]
  • Best practices for running a democratic country in the 21st century [21:36]
  • Too much money in politics in the US [25:41]
  • Does the West need to decouple from China? [27:37]
  • The role of public private partnerships (PPPs) such as Operation Warp Speed [32:27]
  • How will dictators be defeated if we govern ourselves better? [34:59]
  • The importance of engaging in the conversation through social media and local governance [38:32]
  • Inequality and the Dream Hoarders [39:00]

Links relevant to the conversation

Defeating the Dictators (Please buy the book via this link to support the show):

https://amzn.to/3liQrjx

Matthew Engel’s FT article “The foreign states that own Britain’s railways”:

https://www.ft.com/content/e57c5fd0-bf54-11e9-9381-78bab8a70848

Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It

https://amzn.to/3LvCOrL

Track Nancy Pelosi’s stock portfolio:

https://www.capitoltrades.com/politicians/P000197

https://twitter.com/PelosiTracker_

Transcript: How to Defeat the Dictators w/ Charles Dunst, Asia Group – EP180

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. This is episode 190 on defeating the dictators that’s the name of the new book by up and coming Foreign Affairs expert Charles danced, who joins me this episode. Charles is deputy director of research and analytics at the Asia group based in Washington, DC. I thought Charles’s book would be good to cover on the show, because the revival of authoritarianism around the world is not just a political and human rights issue. It’s an economic one, too. It has profound implications for our trading relationships with other countries. And as we’ve seen with the invasion of Ukraine, the actions of authoritarians can massively disrupt global markets. Please stick around to the end for some additional thoughts from me. Okay, let’s get into the episode. Charles danced, welcome to the programme.

Charles Dunst  01:35

Thanks for having me on.

Gene Tunny  01:36

It’s a pleasure Charles. Nicholas grew and passed on your details to me, regarding your new book, defeating the dictators and yes, very keen to chat about that. I understand you’re the deputy director of research and analytics at the Asia group. Could you just tell us a bit about the Asia group and your work there first, please.

Charles Dunst  02:00

Sure, the Azure group is a strategic risk advisor, essentially, for companies looking to do business in Asia, and we’re headquartered in Washington. But with offices in Tokyo, we have an office in Vietnam, we have an office in in New Delhi, I think we had one or one or two advisors at one point in Australia. But basically, it’s mostly companies looking to do business in Asia on things like how do I start selling cell phones in Vietnam? Or how do I start manufacturing something in India and kind of understanding those marketplaces given just challenges of doing business in those markets. And basically, people come to us looking at former US diplomats, people with longtime business experience in the region, who just need a new knee to help and we can kind of provide that expertise. And at the research team, I kind of said to denied point of the firm where I’m not super client facing in terms of on a day to day basis, I’m not necessarily engaging with, you know, X, X company or y company. It’s more so we look at pan indo-pacific issues. So we Lee, I write a daily news wire that goes to clients, that’s basically four stories from overnight, overnight us time, that happened throughout the region that matter for either business, economics or politics. So we do that we lead coverage on things like the Indo Pacific economic framework on the quad issues that don’t directly fall in one country team baskets, there’s something that’s not China’s specific or something that’s not Australia specific, we kind of handle the pan regional issues. And I handle a lot of the public facing media stuff, just given my given my own background as a journalist. So it’s a really interesting, firm really dynamic. And we just, I think our New Delhi office is now under a year old. So really, lots of lots of movement.

Gene Tunny  03:42

Raw. Yeah, absolutely. Okay. That’s very good. And depending on I mean, it’s hard to know what the right stats are. But India could well be the largest country in the world at the moment. I mean, given China’s declining population, so yes, makes sense to be boosting that Indian presence. Absolutely. Okay. Well, we better talk about your book. It’s getting some it’s got some good testimonials, is really impressive. You’ve got a testimonial from the current UK Chancellor of the Exchequer, Jeremy Hunt, you’ve also got one from? Is it McMaster, a former national security adviser? Yep. And then yes, yes, very good. So defeating the dictators. What motivated you to write this? Charles, why did you think this was an important book to write?

Charles Dunst  04:31

Sure. I mean, I’ve spent a lot of time living in non democracies or kind of countries on the on the cusp, as one might say. So I lived in Hungary when I was still in university. And I remember I was kind of a quasi young journalist at the time, and it was writing articles and pitching around articles about Hungary and writing academic work about Hungary. And it wasn’t getting so much attention because it was this was 2017. So kind of right before Orban became an internationally known figure, precisely because of his his illiberal ism. Ah cracy his notion of kind of setting the stage for folks who win elections legitimately come into government, and then do away with the liberal institutions within. And I basically lived in Hungary I then lived in Southeast Asia and I lived in London and I kind of travelled all throughout Eastern Europe, all throughout Southeast Asia spent a lot of time in the Middle East. And something that kept coming up, when you talk to the intelligence is of say, Hanoi, or the intelligencia. In Kabul, maybe less so Cairo, but the intelligence is certainly in the Gulf. There is this notion that democracy is no longer the path to prosperity, there is a sense that you can follow the models of the Singapore’s of the world that you can follow the model of China that you can follow the model of Saudi Arabia. And I think more and more when I travel around the developing world, that was something I heard, and particularly in our little Western bubbles, sometimes, particularly in the US and the UK, I think we don’t do such a great job of communicating the virtues of democracy, and basically answering the question why democracy for people in the developing world, because if you are Vietnamese, and you’ve seen your country’s GDP, and you’ve seen it grow so much, and you’ve seen your, your life expectancy increased so rapidly over the last 3040 50 years, it’s not entirely clear to me why you might look around and say, well, this system’s not working, we need a democracy, when you see January 6, there when you see three prime ministers in three months in the UK, so I wanted to write a book to make a very affirmative case for democracy. Because there are many books, I think, in recent years, kind of lamenting the decline, the decline of democracy and the rise of the Viktor Orban types. But I wanted to say, write something a bit more affirmative. And saying, well, here is what can be done to actually make sure democracy works once again. And when democracy works, once again, most importantly, you can keep democracy where it already exists. democracy works better in the United States. So if democracy works better in the United Kingdom, you’re going to get fewer elections of people like Trump, who may not necessarily be the biggest believers in the democratic system. And once you can kind of tamp that discontent at home, it’s my belief that democracies can serve as a better model for countries in the developing world, well, maybe this, they might not look at the United States and look at Australia, and look at the United Kingdom in five to 10 to 10 years and say, well, those systems are more innovative than the one in China that they’re more solid. I mean, that right now, I think, if you’re sitting in Vietnam, that might not appear to be the case. So I wanted to write a very affirmative case for democracy and looking how do we can advance our values and really practical ways?

Gene Tunny  07:32

Sounds? And we’ll use that affirmative case for democracy. What do you think are the key points in favour of democracy?

Charles Dunst  07:38

But key point for me is study after study still shows, despite the kind of discontent in our democracies that if you live in a liberal democratic society, or even just the democratic society, you are likely to live longer, you are likely to make more money. And I know there are no studies that can necessarily show this, but it is my belief that you’re likely to live a richer cultural life, and you are more likely to innovate, that is true as well, that the world’s best generally still comes from democracies. And this is not to say that Singapore and China cannot innovate. Of course, of course they can. And of course, great art and great movies and all that can come out of non democracies. But there is a reason why when you travel around the developing world, particularly in Asia, that the media is the the music people listen to his Japanese and Korean democracies, or the movies on TV are mostly American, maybe British, maybe Australian, but it’s not like Chinese, Chinese culture has become predominant in the developing world. And that is kind of a silly example. But it’s indicative to me, of the ways in which democracies embrace the kind of tumult and chaos of our systems and we are better for it in the long run. So it’s just about making sure that we are making sure that our systems are providing for our people, while also embracing this chaos that allows for a Jackson Pollock painting, or allows morikami to write when a cue for these are not works, that someone will be able to conceptualise in a non democracy and think that’s a very, very key point that the art and the innovations that are going to be really necessary for the future particularly think about things like climate change. Well, the Evie transition is going to be fixed by innovations that are primarily coming out of democracy, or democracies. And it’s the same thing on healthcare innovation. I mean, where did where did the COVID vaccines come from? Exclusively democracies, not only the United States, Germany as well, of course. So that was my affirmative case for democracy was starting at this point of saying, well, even the things look really messy. Right now, if you look around, you would rather be the citizen of a democracy than an autocracy bar, not

Gene Tunny  09:41

just on Vietnam, and that was an interesting point you made. Do they recognise that? I mean, a lot of their prosperity does come from embracing the market, doesn’t it from embracing the market and as someone who I mean, I’ve read a lot of Milton Friedman when I was younger, and I mean, Friedman used to make the case that the market and democracy were very closely entwined. Or that you can’t have one without the other. I think Friedman’s argument was. So the people in Vietnam recognise that the importance of the market, and then the importance of freedom more broadly,

Charles Dunst  10:17

I think not so much the notion of freedom more broadly. But I think there is a recognition of the need to have liberal ish economics, I mean, Vietnam, China, Singapore, these countries all got richer. I mean, certainly Vietnam is not rich, like Singapore is, but they all got richer by embracing liberal trade. And I think what’s really not troubling, but a little concerning if you’re in a democracy is that those countries and others have proved that you can have mostly liberal trade without liberal politics. And that is a very different scenario than with the Soviet Union, or the kind of Soviet bloc writ large, or China before dung XIAO PING, where essentially, these were the countries that were illiberal politically, and also illiberal economically, so they couldn’t really grow in any meaningful way. So those systems never had a tonne of legitimacy, because they never worked. Whereas now, I’d be hard pressed to say that the Vietnamese system has not worked, or that the Singaporean system has not worked. Clearly, you can get rich without democracy. And that’s a new relatively new point over the last 180 years. It really was this notion that the way to get rich in the post colonial era was to be a democracy. So the fact that you can actually decouple liberal values from liberal trade is definitely a concern. And part of the reason why why I wanted to write the book,

Gene Tunny  11:38

yeah, just on Singapore, you mentioned Singapore quite a few times in the book. And that’s an interesting example. And probably, I mean, that relied upon just that extraordinary figure of Lee Kuan Yew, didn’t it and someone who was, you know, almost just by his background, and by his education could be that benign dictator or authoritarian, that he was an exceptional individual and probably someone you can’t count on having another another kind countries. So I thought it was interesting. You did tackle that question of Singapore, head on in your book. So yeah, just an observation just while I remembered it on Singapore. Okay. In your book, you give a really good summary of your argument early on, and you’re talking about a No BS approach to the future, committing to our values and, and also to the practices but not buying into utopianism. I really like this, but you go that we must convince the world in practical terms why our organising principles remain preferable to those of autocracies both at home and abroad. We need to look our own failures in the eye while learning from the successes of others. You talked before about the affirmative case for democracy, but could you just restate or reiterate? What are those organising principles? What are the most important ones, Charles,

Charles Dunst  13:03

when I was talking about liberal organising principles, I’m really thinking about the things that are necessary to be a democratic system. So things like freedom of speech, things like free and fair elections, broadly open societies space for civil discourse, space for civil rights organisations, for civil society organisations, this notion that it is actually good to have a dynamic and open society where there can be really aggressive, loud debate and disagreement. And that’s not I don’t think that’s a bad thing. I don’t think it’s a bad thing that we can have really heated political debates. I’d rather that than the opposite of kind of no debate at all. So but I think we really do need to convince countries of well, why should I have? You know, why? If you’re Vietnamese, or your, you know, rich, Chinese rich, rich Chinese person, you turn on CNN, you’re gonna say, Well, why would I want that? Why would I want two people kind of debating angrily at each other over on TV? I mean, how is that helpful for my government? So I think we really need to say, well, here’s why. Because that loud debate tends to lead to a society that’s open enough to produce really strong innovations that’s really good, strong to produce the best kind of art. And these are all things that are vital to the future, but clearly just kind of walking around and dropping into annoyance. And well, you shouldn’t be like us, because our systems are open, and they’re so great isn’t enough, when there is a need to demonstrate very practically, well, why is the United States or why is Australia? Why do we offer a better path for prosperity broadly, than do China or Singapore? So that’s really how I how I thought about it.

Gene Tunny  14:41

Gotcha. Right. And what do you think the failure is? You talk about the failures, so we have to look at our own failures in the eye. What failures do you think are most significant?

Charles Dunst  14:53

I think honestly, one of the biggest ones that I talk about very frequently is this is more of a problem I would say in the US in the UK than Australia, but broadly kind of the mismanagement of globalisation in the sense of thinking that we could essentially export manufacturing to places like Vietnam and China without experiencing any domestic discontent at home, that people who would had who’ve had who have had these manufacturing jobs for generations are mining jobs for generations, would lose them turn around and say, I’m all good. Okay, and wouldn’t revolt in one way or another, and particularly in the US the it is this programme designed to kind of ameliorate that loss with some economic assistance, but it’s kind of a mess and doesn’t really work effectively. And that, to me is so indicative of the problem that the United States China, the UK comes through this free trade through globalisation, we all got richer, but the average person did not get as rich as their as the god the government did, or as the kind of top 1% did. So I think there’s this increased frustration, it’s saying, well, people turn against globalisation, because they turn away because they’re mad or with the way globalisation was managed. And I think really pushing back against that is really important and saying, Well, trade isn’t the problem, or liberalism isn’t the problem, the problem was the way it was managed. And that gets into the broader question of inequality, where, particularly in the United States, particularly in the United Kingdom, inequality is one of the major fuels beyond anti immigration politics beyond I would argue, kind of very strong, populist politics, that lead to things like Brexit or elections of people like Trump. So that those are kind of two big ones. And the other, I think, really, really vital. One is a relative lack of accountability and which is fueled a lack of trust. I think there was a notion if you talk to enough people in the UK or the US and even even Australia times, that there are two sets of rules that there’s a set of rules for normal people and a set of rules for everyone else, me everyone else who kind of that top 1% of rich people and rich people in the government. And that view in the US, I think about the example of the fact that there are so many Congress, people who trade stocks, I’m sure some of them are I’m sure many of them are not doing it illegally, technically. But clearly, you’re privy to some kind of information as a lawmaker with a certain type of security clearance that you probably should not be allowed to turn around and trade stocks. And even when a lawmaker is caught either not filing their stock disclosures on time, nothing seems to happen. They pay a little slap on the wrist fine, and then they’re done. And that’s fuel this notion that if that’s a normal person, that person is getting punished very severely. And I think making sure that we’re restoring accountability is key. So it’s about economics, but it is also about things like accountability, which leads to distrust in government. And when when your government lacks trust, it’s really hard to do just about anything.

Gene Tunny  17:50

Wrong. Yeah. Yeah. Good point. I’ll put a link. I think there’s a Twitter account that tracks Nancy Pelosi stock portfolio. So Pelosi has been one of the strongest performers in the Congress. And I don’t think she’s the top performer. But I’m sort of stuck fix, which is, you know, far exceeds market performance. So yes, does does raise some questions there. Charles, do you have any reflections on how democracies fared relative to autocracies during the pandemic?

Charles Dunst  18:22

Yeah, I mean, I think certainly the US performance was was quite poor. And I don’t think that’s anything intrinsic to democracy. And that’s kind of how I would approach the UK as well as there was nothing intrinsic to democracy that made them fail on the pandemic, it was more so we were just the two of those two countries, my country and then the United Kingdom, kind of had not great leaders for pandemic management when a pandemic happened. Whereas certainly, there are other democracies that did much better, certainly South Korea did much better. Certainly, Taiwan did much better. Certainly, Japan did much better for a period. And when you think about the autocracies, Vietnam had a very strong performance for a while. And again, that’s not because Vietnam was an autocracy, it’s because Vietnam had an extremely high level of social trust, that this is trust in government and social trust between one another so in the government, the government was extremely blunt, and extremely honest with its people and said, This is going to be very painful economically. But please stay home, stay off the streets, and we’ll get through it. We’ll get through it as a country and there was really smart messaging of talking about it like it was another war like the Vietnam wars, the another foreign invader was gonna be kind of overstating, but it was another war, the long line of wars against the Vietnamese people, and they banded together. And for a long time, Vietnam, controlled the pandemic extremely well, kind of until the Omicron variant showed up which no one could contain. So Vietnam performed quite well. And I think the the example people go to all the time, and I think kind of wrongly, to talk about COVID and a COVID. Management in a positive light is China where people say, well, zero COVID policy was great. And I think the irony is that The zero COVID policy was maybe very effective and could have been more effective for like a year, in the sense of if you can manage to have these strong lock downs, where you kind of say, well, you know, please stay home, whatever, whatever. And then you get vaccines and you get good vaccines, the Western vaccines and you get your way out, maybe I would sit here and say, well, that’s not a policy I would sign up for. It’s too restrictive, keeping people at home that long. I mean, as a as a democratic citizen, I am not in favour of giving your government that much power. But I do think the irony of the Chinese approach was they kind of demonstrated the efficiency kind of quote, unquote, efficiency of autocracy of saying, well, we can because we have so much power, we can shut everything down for a year, and then we’ll open up it’ll be fine. But the irony is that autocracy was then the reason she didn’t things her personal disdain for the West, was the reason why China didn’t accept the COVID vaccines from the West, that there was no way of reopening, without what models they were probably a million people who died when China reopened. And certainly that’s a lower death fold in the United States. But most of the US deaths took place before the vaccines were if it were available. So I do think at this point, it’s very hard to sit here and say, well, the autocracies managed COVID. So much better than democracy. did. I just don’t think that’s the case. I think it is. Countries with a large amount of social trust in their governments managed COVID better than others. And that’s kind of the Taiwan case. That’s the South Korea case. Those are both democracies, and they manage COVID better than most countries because, I mean, in Taiwan more so people do trust the government raw,

Gene Tunny  21:35

okay. Are they places to learn from? Are they countries and economies to learn from? You mentioned that in your book, you look at examples of good governance from everywhere past and present to detail best practices for running a democratic country in the 21st century could? What do you think those best practices are? And what examples Could you point to Charles?

Charles Dunst  21:58

Yeah, I mean, in Vietnam, I think one example, I’d point to a lot of government’s focus on winning social trust, and the focus they spend on being communicative to their people. And even in a one party state, I think there’s a recognition of what because there are not elections are not real elections, you need to win over that social trust much earlier. And you need to kind of maintain it much earlier, because there is no way at the ballot box of kind of seeing how citizens actually feel. So you need to be a little more transparent and communications at times. And some of the other examples I think about where I would like if democracies had more put on paper and more of these long term plans. People like to make fun of China’s five year plans because they are modelled off the Soviet five year plans, which of course, set these targets Soviet Union was never going to hit. But I do think the idea of democracies happening, well, maybe let’s have a 10 year critical minerals plan, or a 10 year health care plan. Because far too often, those plans are very much focused on security and defence, which are important. It’s important to have maybe a four or five year review of the state of your country’s defence infrastructure, or of your security infrastructure, what are your cybersecurity infrastructure, but I would like that apply to other things I’d like that applied to things that actually matter to normal citizens on a day to day basis. I think the idea of saying, Well, what’s our healthcare sector looking like right now? What’s our infrastructure looking like right now? On what do we want it to look like in 10 or 15 years? And I think that’s something that there are a few autocracies, particularly China and Saudi, spend a lot of time putting out these reliefs, five years to five year plans, or in Saudi Arabia, kind of the vision 2030 plan, and of course, because they’re autocracies, I would argue that they’re probably less likely to actually fulfil many of those goals. And certainly I don’t think Saudi Arabia is on perhaps the greatest trajectory. But I do think the idea of putting things on paper can be really beneficial. And one other example I don’t, I’m not gonna run through all of them. But one good one that I thought the UAE has pulled out in recent years, is they ranked every health care centre in the country, and then publish the results, and said, you know, this one in Dubai is great, this one in Sharjah is terrible. And it I really do think that’s not the worst idea, particularly in a smaller, smaller countries, you can do it state by state or city by city, where I’m from New York City, I can only imagine if New York City, the New York City government, basically brought in an unbiased agency and have them rank the New York City hospitals, and the ones that are at the bottom, clearly, you’re going to be motivated to perform better, because nothing motivates people like a fear of being embarrassed. So I do think that is this kind of odd way of being accountable and transparent. Of course, as a democracy, you can be more transparent in those rankings and and you can be more accountable than an autocracy ever could. So that was kind of the main thesis of the book was well, there may be things that autocracies put out plans or they look to build social trust, kind of in ways that I think are, are okay are kind of they’re interesting, but because democracies are a kind of a superior system, any of those reforms that we look to put in place into a liberal democratic system, I think we can do better.

Gene Tunny  25:09

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

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Gene Tunny  25:44

Now back to the show. Just thinking in the States, one of the things I hear a fair bit is that there’s too much money in politics in the US. And that’s related to that was at Citizens United that decision. Do you have any thoughts on that? Is that an issue that the lobbyists have too much power to sway the the people in Congress, and they’re, you know, they’re looking for donations and all of that. So do you have any concerns over that?

Charles Dunst  26:13

Yeah, I mean, I think I definitely do have concerns about it, even if at times, it’s slightly overstated. I think maybe in the media of how much power lobbyists actually have preside over the reality is perception at one point or another. And people do think that the lobbyists do have so much power in one way around that. And something I suggested in the book is to essentially, make sure you’re being much more transparent about where the money is coming from and who it’s going to where if the Supreme Court made a ruling, clearly the money is going to keep flowing. There’s no way around that at the moment. But what a government can do, what the US government can do is create a really accessible online database that very clearly demonstrates, well, where’s the money going? Who is it going to, and there are efforts to do that. But you know, the current system is so not user friendly, it’s so difficult to go online and actually look at who’s donated to who, there’s certainly some kind of dark money that doesn’t come that doesn’t isn’t clearly registered. And I think it would be very helpful just to have this transparency, it’s a way to kind of mitigate the problem. Because if you’re a politician running for Senate or running for Congress, and you know that every donation you accept from they come from a big corporation, or every lobbyist to meet with is going to be very much public, it’s going to be a very easy to access database, you might be a little bit more hesitant to take those meetings. Whereas now you do have to register those meetings, but no one knows where to find them, and no one’s actually looking. So that’s not a wholesale solution, but I think we could mitigate the problem.

Gene Tunny  27:37

Okay, a lot ask you about how do we think about and how do we deal with authoritarian countries? So at the moment, the major ones are China and Russia? I mean, obviously, we’ve cut off a lot of ties with Russia due to their invasion of Ukraine. But what about China? I mean, in the last five years, there’s this new concern about China as a strategic threat. And they’re increasingly calls to decouple to. I mean, there are some rather extreme proposals out there, almost trying to cut ourselves off from China and not trade with China. Which, you know, in Australia, we’ve actually had some retaliation from China. And that’s affected some of our exports. But I mean, China has been a major destination for our exports. So that would be very difficult for us. How do you think about that? How should we engage with these authoritarian regimes in the future?

Charles Dunst  28:38

Well, I think it’s important not to, of course, lump them all together, where I think approaching China is very different. We’re approaching Russia at the moment, where certainly, I’m in favour of the broad sanctions policy against Russia saying, Well, this is a country that invaded its neighbour, I don’t know if there’s anything wrong with setting this precedent of Oh, you don’t get to evade your damper. I just kind of continued business as usual, at least with with the broader West. When it comes to China. I think the question is, how do you compete responsibly? I don’t think the idea of complete decoupling is, is really workable, if you’re the United States, if you’re the United Kingdom, if you’re Australia, because the economies are too intertwined. I mean, this is not the Soviet Union, where basically our economy didn’t really touch theirs. Whereas every basically every field is these overlap again, do I think there’s anything problematic about selling a refrigerator to China? or selling shoes to Chinese consumers? No, I that’s not a concern for me. But I do think there was a question of, well, where do you draw the line? What kind of tech is to sell what kind of goods are too sensitive to be sold to to a one party state in China, in which basically, the government does kind of oversee everything and it does seem like if you are selling some type of technology to a private firm, you could never be just how sure how private that firm actually is. And if the government could step in and kind of take that tech in one way or another. Every country is going to define a different only, but basically do I think there’s anything wrong with not selling military applicable semiconductor technology to China? No, I think that’s fine. I think basically recognising that this is a country helmed by a government that does not, frankly seem super interested in positive ties with the West. And that, of course, has been more aggressive in the broader Indo Pacific in recent years. Think about the South China Sea, you think about the drills around Taiwan, I think it makes a lot of sense to deny them certain technology. But the broad way I think about relationships with autocratic countries is just to make sure they’re in our own benefit. Where when you think about us ties with Vietnam, the current state of us Vietnam ties seemed very much in America’s interest. You know, you get a trade partner, you get, broadly a security partner, we raised human rights with them privately. I think we’ve successfully made some advancements on LGBT rights in Vietnam has been broadly kind of a success. Certainly Vietnam is not just liberal society, or is Liberal government as we would like them to be. But we don’t have the luxury of saying we’re only going to engage democracies, there are more autocracies than there are democracies today. So we do have to engage Vietnam, we do have to engage Saudi Arabia, we do have to engage Oman, and we do have to engage Rwanda. It’s just making sure that those relationships are in our benefit, and that we’re using them in our national interest, whether that’s trade, whether that’s security, and making sure that we’re not, we’re not giving the autocrats too much credit, if that makes sense. So we’re not overstating well, how important is the US, the US Saudi relationship, when I don’t think we should just sweep, sweep things under the rug, because we think that relationship is important. I think it requires a real reevaluation of well, how important is that relationship? Actually? How much how much do we actually care and it’s gonna be different for every country, it’s gonna be different. Of course, Australia has a different relationship with Vietnam, United States does, but I think that my broad sentiment is, it’s not reasonable to cut off all ties with autocracies, but it is about managing those relationships carefully.

Gene Tunny  31:59

Okay, Rod, I’ve got two more questions, if that’s okay, I’ve got a question about PPP, public private partnerships. One thing I really liked about your book is, is your openness to the potential gains from these arrangements, these cooperative arrangements between public and private sectors? Could you tell us a bit about PPS, please, Charles, and what you see is their merits?

Charles Dunst  32:27

Sure, I mean, I’m in favour of public private partnerships, only when the goals match at the beginning. And one example I talked about here very frequently, is operation warp speed in the United States, which was the development of the COVID 19 vaccines. And basically, the government gave out a pot of money to companies to develop the current vaccines as quickly as possible. And certainly, while some of these companies share, they probably had a profit motive very well. So thinking, well, this is a terrible pandemic, we need to get our vaccines out as soon as possible. And that was the government goal as well. So clearly, the goals were very meshed from the beginning. And even if the companies in the end are going to make profit, the goal was not necessarily on profit, the goal was then actually delivering. Whereas some of the examples that I’ve other people have raised, particularly when I talked to British media, as well, our our PPVs haven’t necessarily worked as well. And I would argue, well, that’s because the goals weren’t aligned from the beginning, where the government wondered one thing, and the other party was much more focused on profit than anything else. So making sure that you’re partnering with responsible private sector actors, he’s really key. I mean, he should not just be throwing money at private sector firms hoping they’re going to deliver, it needs to be a 5050 partnership goals need to be aligned. But when PPP is work at their best level, I think they serve to actually boost trust in democratic governments, because poll after poll shows that and I showed it for last three or four years, that the private sector is actually more trusted than the government. And that’s true across Europe. It’s true in the United States are basically people look at their governments think of them as sclerotic, and think of them as old and not super effective. When they look at Tim Cook and Apple, they look at the company at Tim Cook, they look at something someone like Pfizer and say this, these are great look at these great innovations they’re doing, look at the iPhone, look at the vaccines, look at the pharmaceuticals. And people do tend to trust the private sector more. And I think governments would be wise to leverage that trust in a way that also helps the government’s deliver. And I think it’s just a question of making sure you’re doing that in a responsible way. And I think there’s this irony, I raised it all the time. That’s the study from a few years ago showing that in the United States, when Americans get good public service, they actually believe that it’s coming from the private sector, because the idea of effective government service is like incomprehensible. Because our system doesn’t work. So well at times that people think, well, of course, you know, I got this, I got this great assistance, I got this homeowners assistance, or I got this vaccine, it must be from the private sector, even when it’s actually from the government. So it’s just one way of basically saying well, publicising, that cooperation, I think can actually help boost trust.

Gene Tunny  34:59

Yeah. Yeah. Okay. And you mentioned that there have been failures of P PPS in Britain that have meant that people in Britain have been negative about them. And we’ve had some notable ones here in Australia too. But what I found interesting is you noted one of the great successes or most successful PPS in the book. So I’ll, I’ll put a link in the show notes to your book, Australia’s upgraded the Ballena bypass highway, completed in 1996, along with four private firms, as in conjunction with the government seven months ahead of schedule and for USD 100 million less than estimated. So that’s an impressive example. And so one I’ll probably use in the future. So yeah, good, good work finding that one. Excellent, Rado? So my final question, Charles is, I mean, how do you think this will will actually work? I mean, how, in what ways will the dictators be defeated? If if we in the democratic countries govern ourselves better? What’s the mechanism here?

Charles Dunst  35:58

I think the mechanism works twofold. Where primarily, if democracies are working better at home, you are less likely to elect people like Viktor Orban, or like Donald Trump, or like ei or Bolsonaro, who come to power through liberal democratic means, and then don’t necessarily govern in a liberal, democratic way, who have little concern, I would argue, in most cases for those liberal institutions, particularly in thinking about Orban Bolsonaro, where there’s no sense of respect for freedom of the press, there’s an effort to stack the judiciary, these are all things that can hollow out democracies from the inside. My argument is that if democracies are delivering better on economic issues on issues like the social safety net, and issues like infrastructure, if people feel optimistic about their future, which many people in democracies Do Not at the moment, they are less likely to vote for reactionary people like these that can erode democracy internally. So that is way one to defeat the dictators at home. And point to is only if you can defeat the dictators at home and prevent that autocratic impulse from taking root at home. Only then can you turn around and actually say, well look at how good we are, as a model. Look at how the United States is outperforming China or look at how Australia is outperforming Singapore, and more people in the Vietnams of the world, or people in I don’t know in a rock or in Egypt might actually look and say, well, we would like to be a democratic system. Even if we don’t agree the United States of the West, then everything. We see how well Australia is functioning, or we see how well Taiwan is functioning. Were looking at how sclerotic Saudi Arabia is their kind of messy, messy internal politics, that corruption scandals, we don’t want that. But it’s making sure that we are working well enough to fend off the autocratic impulse, and simply just that we can be the world’s model once again. Gotcha.

Gene Tunny  37:45

Okay. So showing that you’re the world’s model. Okay. Yeah. Any final thoughts? Charles, before we wrap up? Yeah,

Charles Dunst  37:55

the one thing I would just say briefly is one thing is the line, I keep using it over and over again. But I think it’s important is the lack of faith in democracy right now is really troubling to me. But something I want to say that’s positive is faith in democracy is not necessarily the problem. We all should believe in democracy and work for it. The problem is faith and democracy is automatic functioning, and the sense that everything will work without our engagement. I think the key message of the book for citizens for people who are not lawmakers, not politicians, not in government is just make sure we stay engaged. And we keep pressuring our politicians to actually make democracy work for us.

Gene Tunny  38:31

Got you. And that’s through, I suppose social media or in through, I guess, you’re engaging in the conversation? Is that what you mean?

Charles Dunst  38:40

engaging in the conversation, making sure you don’t miss elections, engaging in your local governance? I mean, it can be on a school board in the United States, you can be in your city council, you can all these local thought their town council, I think far too often we look at our messy politics or messy governments, they just write it off and stop being engaged. But I think engagement is really key to making anything work down the line.

Gene Tunny  39:01

Okay, very good. I guess one more thing, just looking back on my notes. You mentioned one of the big issues with inequality was inequality, I should ask before we go, I mean, do you have any thoughts on how that can be addressed? Or use proposing specific measures to address inequality in your book?

Charles Dunst  39:17

Yeah, one of the things I talked about was inequality in terms of education. And the notion that, basically, I think far too many democratic governments are not starting or not looking at the unequal starting points of children. And basically saying, Well, you know, once you get to university, it’s meritocratic. Its meritocratic when you get into your universities. But of course, if you are born into a lower income household, you’re less likely to have certain academic achievements that gets you into one of those schools. And if you don’t get into one of those top universities, you’re less likely to earn as much money as those who do. And I think there’s this increased need to actually look at starting points and say, Well, how do we make sure that we are doing all we can to let the talented children from lower income households actually rise? Is to top tier universities. And that’s how I think about inequality. There are certainly broader economic reforms that other folks have proposed. But I think about inequality in terms of the lack of meritocracy in the way that basically it does seem like we’re perpetuating kind of an elite with the same people and go to the same schools, their kids go to the same schools, because they have a nice starting point. But I want to make sure that we’re kind of giving more believing and more active inequality of opportunity.

Gene Tunny  40:28

Yeah, and there’s probably another episode in that, talking about how we improve that. But yeah, just wanted to check on that. Because that’s, that’s clearly one of the big issues. Yeah, but I hear about the dream hoarders Is that what you call them in the States? Of hurt? That’s one of the terms that’s been applied to your just that self perpetuating elite or whatever? Have you referred to it? So yeah,

Charles Dunst  40:52

I’ve never heard that one. But that’s a good one. Yeah,

Gene Tunny  40:54

I think that’s what yeah, I’m trying to remember who wrote that book. I’ll put a link in the show notes. So yes, it seemed a bit overly negative to me. But, but I think the data do show that the US is not as there’s not as much social mobility, as people might think, and not as much intergenerational mobility as you might like, relative to some other countries. So I think that’s an uneven in Australia, and in Britain, it’s not as high as as we would hope so. Absolutely. Good point. Okay, Charles Dance from the Asia group. Thanks so much for your time. I really appreciate it. And good luck with the book. I’m sure it will go. Well, I think the message is an important one. And I really enjoyed reading it. So thanks so much. Thank you. Okay, I hope you found that informative and enjoyable. I think Charles is someone we’ll be hearing a lot more from in future years, so I’m very glad I could interview him about his first book. I must say I was impressed by Charles’s passionate advocacy for democracy, and his call for existing democracies to provide better examples to other countries. I hope that Charles is right that we can inspire movements for freedom in non democracies by improving our democracies at home. Maybe that’s a vain hope, but at the very least our own countries will be better run. In our conversation, Charles and I touched on a few ways that democracies could be strengthened. I liked how he talked about improving our education system so that all children get the best start in life. I found a link to the book on the dream hoarders that I was reminded of while chatting with Charles and I’ll include it in the show notes. I think it’s worth having a look at. As always, feel free to email me at contact at economics explore.com. I’d love to hear from you. Thanks for listening. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

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China’s falling population & global population update   – EP174

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

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

What’s covered in EP174

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

Links relevant to the conversation

UN World Population Prospects 2022 data

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

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

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

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

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

China’s old-age dependency ratio

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

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

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

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

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

Gene Tunny  00:07

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

Tim Hughes  02:01

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

Gene Tunny  02:15

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

Tim Hughes  02:46

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

Gene Tunny  03:01

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

Tim Hughes  03:56

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

Gene Tunny  03:59

Yeah, around then I think. Yeah.

Tim Hughes  04:03

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

Gene Tunny  04:24

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

Tim Hughes  05:56

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

Gene Tunny  06:33

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

Tim Hughes  07:24

No,

Gene Tunny  07:25

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

Tim Hughes  07:43

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

Gene Tunny  08:19

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

Tim Hughes  08:33

Those German chemists, yes.

Gene Tunny  08:34

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

Tim Hughes  09:42

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

Gene Tunny  09:58

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

Tim Hughes  10:08

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

Gene Tunny  10:49

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

Tim Hughes  11:12

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

Gene Tunny  11:15

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

Tim Hughes  11:30

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

Gene Tunny  11:39

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

Tim Hughes  11:52

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

Gene Tunny  11:58

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

Tim Hughes  12:53

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

Gene Tunny  14:09

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

Tim Hughes  14:47

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

Gene Tunny  15:00

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

Tim Hughes  16:14

So was the baby boom, in 1950, yeah?

Gene Tunny  16:18

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

Tim Hughes  17:01

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

Gene Tunny  17:11

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

Tim Hughes  17:33

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

Gene Tunny  17:42

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

Tim Hughes  17:59

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

Gene Tunny  18:08

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

Tim Hughes  19:27

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

Gene Tunny  19:37

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

Tim Hughes  20:16

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

Gene Tunny  20:19

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

Tim Hughes  20:25

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

Gene Tunny  21:18

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

Female speaker  22:57

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Gene Tunny  23:27

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

Tim Hughes  23:35

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

Gene Tunny  23:41

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

Tim Hughes  23:48

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

Gene Tunny  24:45

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

Tim Hughes  24:47

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

Gene Tunny  24:57

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

Tim Hughes  25:20

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

Gene Tunny  25:38

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

Tim Hughes  26:02

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

Gene Tunny  27:07

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

Tim Hughes  27:36

I haven’t heard that.

Gene Tunny  27:39

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

Tim Hughes  28:34

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

Gene Tunny  29:15

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

Tim Hughes  30:09

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

Gene Tunny  30:21

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

Tim Hughes  30:36

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

Gene Tunny  30:42

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

Tim Hughes  31:37

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

Gene Tunny  32:16

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

Tim Hughes  32:21

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

Gene Tunny  32:42

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

Tim Hughes  32:58

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

Gene Tunny  33:01

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

Tim Hughes  34:18

I still get my fusion and fission mixed up. So

Gene Tunny  34:21

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

Tim Hughes  34:26

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

Gene Tunny  35:22

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

Tim Hughes  35:48

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

Gene Tunny  36:30

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

Tim Hughes  36:48

You’re still hurt about that one.

Gene Tunny  36:51

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

Tim Hughes  38:37

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

Gene Tunny  38:42

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

Tim Hughes  39:42

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

Gene Tunny  40:36

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

Tim Hughes  41:27

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

Gene Tunny  42:07

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

Tim Hughes  45:21

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

Gene Tunny  45:24

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

Tim Hughes  47:25

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

Gene Tunny  47:32

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

Tim Hughes  47:39

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

Gene Tunny  48:25

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

Tim Hughes  49:00

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

Gene Tunny  49:16

67 in Australia now.

Tim Hughes  49:19

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

Gene Tunny  50:04

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

Tim Hughes  50:13

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

Gene Tunny  50:57

Podcasting.

Tim Hughes  50:58

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

Gene Tunny  51:05

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

Tim Hughes  51:13

Maybe that’s the way we merge the two.

Gene Tunny  51:17

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

Tim Hughes  53:44

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

Gene Tunny  53:47

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

Tim Hughes  53:52

Someone, somewhere will be making those calls.

Gene Tunny  53:54

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

Tim Hughes  54:14

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

Gene Tunny  54:57

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

Tim Hughes  55:15

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

Gene Tunny  55:22

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

Tim Hughes  55:27

So they say?

Gene Tunny  55:31

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

Tim Hughes  55:45

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

Gene Tunny  56:39

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

Tim Hughes  56:49

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

Gene Tunny  57:09

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

Tim Hughes  57:22

Thanks, Gene. You’re welcome.

Gene Tunny  57:25

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

1:01:30

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Podcast episode

Enterprise China: what western businesses need to know w/ Prof. Allen Morrison  – EP171

Professor Allen Morrison has been studying China for over three decades, and he’s an expert on the Enterprise China model, the close relationship between business and state in China. Chinese companies take the lead from Beijing to help meet state objectives, including reduced dependency on the west. In return, they get competitive advantages over western businesses trying to break into China. In this episode, Prof. Morrison, from the Thunderbird School of Global Management at Arizona State University, talks to show host Gene Tunny about his new book with INSEAD’s Prof. Stewart Black on Enterprise China. 

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

What we discuss with Prof. Morrison

  • How the business model in China differs from the model in the west [01:50]
  • How the Chinese Communist Party oversees businesses in China [10:20]
  • What western businesses need to know when doing business in China [12:40]
  • Does China have an imperial ambition? [17:28
  • Companies which have done well and those which have done badly in China [22:29]
  • Challenges to the Enterprise China model and the CCP [27:48]
  • Gene’s takeaways from the episode [39:30]

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

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

About this episode’s guest: Allen Morrison

Allen J. Morrison is professor in the Thunderbird School of Global Management. Morrison previously served as CEO and director-general, senior advisor for global management education and executive education initiatives at Arizona State University. Before joining ASU in 2014, Morrison was professor of global management and the holder of the Kristian Gerhard Jebsen Chair for Responsible Leadership in the Maritime Industry at IMD. Professor Morrison was also director of the IMD Global CEO Center, which focuses on the challenges CEOs face while leading their companies in the global economy.

For further information about Prof. Morrison, check out his ASU page:

https://search.asu.edu/profile/2551923

Links relevant to the conversation

Get a copy of Enterprise China: Adopting a Competitive Strategy for Business Success:

https://amzn.to/3YMb1aI

Prof. Morrison’s article “Competing with “Enterprise China” vs. Chinese Enterprises” on the Thunderbird School of Global Management website:

https://thunderbird.asu.edu/thought-leadership/insights/competing-enterprise-china-vs-chinese-enterprises

William Kirby’s HBR article “The real reason Uber is giving up in China”:

https://hbr.org/2016/08/the-real-reason-uber-is-giving-up-in-china

Transcript: Enterprise China: what western businesses need to know w/ Prof. Allen Morrison  – EP171

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

Gene Tunny  00:00

Coming up on Economics Explored.

Allen Morrison  00:03

The Chinese model is the enterprise China model. If you want to do business, you will wait for the signalling and the support of the government, the government or the there that like the puppeteer is controlling this.

Gene Tunny  00:16

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny, broadcasting from Brisbane, Australia. This is episode 171 on enterprise China. My guest is Professor Allen Morrison of the Thunderbird School of Global Management at Arizona State University. Allen is the co-author of the new book enterprise China, adopting a competitive strategy for business success. In this episode, I chat with Allen about the close relationship between Chinese companies and the Chinese government and what that means for businesses wanting to compete in China. I also ask Allen about just how worried we should be about China’s global ambitions. Please check out the shownotes relevant links and information and for details they can get in touch with any questions or comments. Let me know what you think about this episode. I’d love to hear from you. Right now in my conversation with Professor Allen Morrison on enterprise China. Stick around to the end of the conversation for what I think are the big takeaways. Thanks to my audio engineer, Josh Crotts visit assistance in producing this episode. I hope you enjoy it. Professor Alan Morrison, thanks for joining me on the programme. 

Allen Morrison  01:30

Great to be here. 

Gene Tunny  01:33

Excellent. Allen, I’m keen to chat with you about your new book, Enterprise China. Could you begin please, by explaining what motivated you to write this book? And then what do you mean by Enterprise China, please?

Allen Morrison  01:50

Right. Right. Well, thank you. It’s good to be here. Thanks for having me. So I’ve been working in and around China for my entire professional career, well over 30 years. In fact, I was in China in Beijing in Tiananmen Square when they declared martial law. I’ve been a visiting professor several times in China, I’ve spent well over a year living in hotel rooms in China, advising Western companies, Chinese companies, also state enterprises in China. So my interest in background in China goes back more than three decades. What has fascinated me about China is that the story about China is very different than anywhere else in the world. And the business model is very different, how the approach to business is very different. In the West, we have long held the belief that if we invest in China, China will grow and it has grown. If we help them with technology, China will grow, and it has grown. And we have believed based on our own experience and values that as China advances up the per capita income curve that the public would hunger for democracy, China would open up would befriend everyone in the West. We also believe that as capitalism flourished, the role of the state would diminish. China has flourished, the economy has prospered the people are richer, 800 million people have been taken out of poverty. But the system didn’t change. In fact, the state is doubling down. And what has emerged is a very successful model we call the enterprise China model, where the state and the enterprise in a free market environment, a free market background, if you will have come together to create a very different model of competing, the model has enabled China to prosper. And we in the West are a not we’re not accepting of the model. We just don’t understand it. We are convinced it’s going to fail. It hasn’t failed and may not fail, and we don’t have a good solution for it. So that really prompted us my clue my co author, Professor Steward Black, was affiliated with INSEAD great business school, that really prompted us to better understand how the Chinese model works with the state and companies working together and how we in the West can best respond.

Gene Tunny  04:40

Gotcha. What I think is great about the work you’ve done, Alan, is that you’ve highlighted just how extraordinary this change has been just what’s been happening with China and there was an article that you wrote a couple of years ago Competing with Enterprise China versus Chinese enterprises, which summarises this, and I might just read this out, because I think it’s fascinating. In 2020, China dethrone the US from the top of the Fortune Global 500. In 2021, China extended its lead with 13 more firms on the list than the US, 135 versus 122. And I think that would, that would surprise a lot of people. So could you tell us a bit more about this enterprise China model, please? How did you learn about it? What is there a framework? I mean, are they are these companies? Are they been directed by the administration? I mean, how does it work?

Allen Morrison  05:39

Yeah, so enterprise, China consists of three types of Chinese enterprises, which captures most of the economy. Okay. On the one hand, we have state owned enterprises owned by Beijing, we’ll just say 100 of these firms. Not many of them. Many of the biggest firms in the world on that Fortune list are these firms. They are owned by the state, they’re an appendage to the state. The second level of firms are also state owned enterprises. But they’re owned by provincial governments, municipal governments, there’s 150,000 of these firms. Some of the big firms on that list are also in this set. But there are a lot of these firms out there, the third set are privately owned enterprises. These are firms like Alibaba, Tencent, and so on. But these firms are also heavily influenced by the state. And that owner influence comes in two ways. One is the state typically owns a small piece of these enterprises. They own 4% or 8%, or 12%, either of the parent or subsidiary organisations. So you scratch the surface of we’ve been quite, quite rigorous and looking at a whole swath of mid sized and large Chinese firms. Every single one of them has some component of Chinese ownership, albeit 4% 6%. So the second way they influence these firms is simply by, you know, through regulation or through signalling. So for example, you know, we go back to 2020, when, when Alibaba Jack Ma, Alibaba has, you know, market cap was $665 billion. Jack Ma himself personally was worth about $50 billion. And part of Alibaba is ecosystem is this company called Ant Financial, Jack Ma wants Ant to go public, it would bring in about 300 would value at $315 billion and bring in about $35 billion from the IPO, that would value add at more than Deutsche Bank, Credit Suisse, Barclays, ING, Goldman Sachs, together, huge. But then Jack Ma makes a few comments that this state viewed as disrespectful, shall we say? The IPO is shut off. Jack Ma is basically exile, the stock plummets in value. And this is just a signal to other tech companies that who’s in charge. It’s the state. And so the state can influence these and they influence them directly and indirectly, that what is very typical with these firms, even the privately owned firms are those that are traded in Hong Kong or those that are traded in the NASDAQ. These firms will partner with a state enterprise or a municipality, and they’ll say look, you know, municipality will say here’s the deal, we’ll give you the factory, we’ll give you the land. We’ll provide infrastructure, we want 6% ownership of your company. And we’ll give you discounted finance. So the Chinese partner, the Chinese, privately owned enterprise, they work with the state, then the state will say we’d like you to work with another company, a sister company, and so they’re matchmakers that put it together. This is this kind of ecosystem. If you want to compete in China, you have to be part of that ecosystem. And that we kind of refer to as the enterprise China It ecosystem. Right. Okay.

Gene Tunny  10:03

Now, this is yeah, this is interesting. I think I understand how they’re getting a competitive advantage. It’s because they’re getting some support from the state. Is that right? You mentioned that they might get land for a factory or there could be some rights, some incentives.

Allen Morrison  10:20

Right, but it’s more than that. It’s the ability to play in it to be in the game. Okay. So if you want to compete in China, you will be part of this ecosystem. You know, the, the Japanese had their model, the Keiretsu Model, the Koreans had the Chaebol Model, the old Hong’s of Hong Kong, it’s these interlocking ownerships and so on, the Chinese model is the enterprise China model. If you want to do business, you will wait for the signalling and the support of the government, the government or the there, they’re like the puppeteers controlling this. So it’s not just that we’ll give you a little discount on the financing, it’s not just that we’ll give you an old factory, it’s that if you want to play the game, here, you will listen to take direction from the subordinate to the state. One other thing many in the West don’t recognise is that companies in China with 50 or more employees must have on site and office of the Chinese Communist Party. They have a representative on site, medium companies, well, any company over 50 employees. So they’re all listening waiting for the signalling of the state. So it’s a matter of, you know, come almost arranged marriages and partnerships, that, that and I don’t want to say that that government is always, you know, always has tremendous foresight, they don’t. But even if the initiative is taken at the company level approvals, and a wink and a nod from the government, at the state, municipal level, are, are essential. Now I have to say, that’s a Chinese from a Western perspective, you have to think so what are we as are, what do we do about that? We want to do business in China? How do we integrate ourselves with that model? And that’s what much of our book is focused on? What do we in the West do about this?

Gene Tunny  12:29

Okay, okay. Well, I might ask about that, then, Alan, what do we do about it? I mean, I guess when you’re in Rome, you have to do as the Romans do, is that what you’re arguing in your book.

Allen Morrison  12:40

to some degree, it’s obviously not black and white. The first thing we look at in our book is, is we create a model or identify a model for strategy involving China. And on the one hand, one kind of strategy for China involves companies that are primarily focused on accessing China as the factory of the world. So I want to do business in China because I can buy, you know, my cheap couches or coffee pots, or whatever that is they become the factory that was so I’m interested in. That’s my, that’s my focus for China. There are other Western companies that are focused on the Chinese market. So I want to be in China because I want to access corporate or individual customer accounts. And in many industries, China is the second largest market in the world. And in many industries, it’s the biggest market in the world. So your approach to China depends in part on why you’re there. Most companies in the West there’s over a million companies in the West, doing business in and with China today, a million companies. Most of them are small, have a small, relatively inconsequential presence. They’re basically buying an option. They’re there, they don’t really understand why they’re there. They kind of burned the box checking business. Those companies are at risk. They’re at risk. So number one is understand why you’re there. Secondly, is to think very carefully about the industry you’re in because China has targeted 10 industries. Where if you’re a Westerner you’re going to be in deep, deep trouble. If you don’t think you know two or three steps ahead of the Chinese. These are the industries we typically think of associated with the Fourth Industrial Revolution, the kind of the industries of the future, robotics, pharmaceutical, aerospace, advanced materials. The Chinese have put a big umbrella up You know, and they keep reading, readjusting the definition. But these are the industries most in the West who would say, look, we’d really like to be there. In those industries, if you’re a Western company competing in those industries, the Chinese have been clear about this. They have identified market share levels, hurdles, and they go from 70, to 80, to 90%, domestic production domestic market share in these industries. So if you’re an aerospace, it’s going to be about 80% of the industry must be controlled by Chinese enterprises, period, doesn’t matter how good your technology is, doesn’t matter how good your service is, your market share it has been determined will be reduced to at most that 20%. But you’re gonna have to cut that up and share it with other Western firms. So be very cognizant of what the Chinese are after the Chinese are, after three things, they’ve been very clear about this, it’s been published, it’s not, you don’t have to be a spy and go in there and take pictures of their, you know, secret ID documents, their strategy is based on three steps. Number one, we want to become less dependent on the west, we want to reduce our dependency. Number two, they want to dominate domestically. And number three, they then want to go out into the world and lead the world to flip that dependency relationship. So we in the West are dependent on China. That’s that’s their approach. And they’ve been doing this for 30 years. And they have articulated it since the early 2000s. And so in the West, we need to be very aware of, of what we’re up against. That does not mean that China wants to decouple from the west. I think the worst thing that could happen to China is it would decouple from the west. And by the way, it would not be a good thing for the West to decouple from China. But they clearly have an engagement strategy and a strategy. That’s whose objective is to ultimately win and flip that dependency relationship.

Gene Tunny  17:28

So do you think that’s the main thing thereafter? It’s, it’s reducing that dependency, rather than? I mean, to what extent do they have imperial ambitions I suppose you could call it was one of the concerns we’ve had in or people in Australia have had is that there are concerns about espionage. And we blocked the telecommunications company, Huawei from being involved in our 5g rollout. So to what extent should we be concerned about that? It’s not just about them, wanting to become more independent. It’s a broader, it’s a bigger game.

Allen Morrison  18:08

You have a former, well, relative of mine, Morrison, who was the prime minister who lashed out on some of this. So yes, by the way, if we’re not closely related, okay. Don’t blame me. So look, I think that the Chinese to understand the Chinese you understand need to understand the history. Every country has its history. But China fresh in China’s memory is what happened in the 19th century when China was subjugated by the West by Britain, to a lesser degree, the US, but you know, that particular animosity visa vie, the Japanese, it was a last century is the century of embarrassment for them. A humiliation is what they refer to it, as they do not ever want to go back to that. They that is, even though it’s 150 years old, it is still part of the Chinese psyche. So they, rather than think of them as imperialist, I would think of them more than seeking respect and seeking a return to what they we all refer to as the Middle Kingdom of China. You know, for 900 years, China led the world as the world’s biggest, most influential, most prosperous economy. And they want to return to that. And so, you know, to the degree imperialism, you know, helps, sure, they’re not going to push back on that, but it’s not. They’re not culturally, an imperialist by mentality, as opposed to say the Russians. So it’s about respect. It’s about power. It’s about control. It’s about influence. More than I would think it’s about imperialism. Now, does that mean we shouldn’t be a lot smarter about it? We should be a lot smarter about how we think about China. And we’ve been, I think, pretty naive about the Chinese. And we’re starting to wake up in the West about what it means to contain the ambitions of China.

Gene Tunny  20:26

Right? And what does that mean for a company say that? I mean, there are plenty of Chinese companies that are operating in the West, does that mean we need to have closer there needs to be closer scrutiny? There’s a lot of talk about tick tock in the US, for example. Do you have any thoughts on that?

Allen Morrison  20:45

Yeah, I mean, that what you need, just think about the kind of mindset I hope we can communicate with with this book, is when you think about China do not think about it as Chinese enterprises, as individual entities, think of them as having an umbilical cord back to the state. So when you do business with Chinese enterprises, you are ultimately doing business with this whole ecosystem, and ultimately, with the state, so it doesn’t mean you can’t do business with them. But you have to recognise that whatever you share, whatever you give them will be absorbed and spread throughout the Chinese eco ecosystem. In terms of best practices. I think that one of the keys to the you know, for the West, is to understand how that model provides big advantages to China, but also provides some significant barriers and problems for the Chinese.

Gene Tunny  21:55

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

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Gene Tunny  22:29

Now back to the show. Allen, do you have any examples of companies that are engaging with China? Well, and then perhaps some that have been burned or that are doing it badly?

Allen Morrison  22:42

Yeah, absolutely. So the companies easily that had been burned or doing it badly. I think they come in a couple of different categories. The first stars are many of these tech companies, which have been pushed out of China. These are companies like Amazon and Uber, typically tap tech companies that have through because they’re threatened because of their target industries, their initial investments have been wasted, and they’re out of the country. So it’s not difficult to find those examples. Companies that have done it well, in China. I think I would, first we and we do this in the book identify kind of a continuum of what that means and how they’ve done it. But on you have companies like for example, Honeywell, Honeywell is approach to China has to basically go in with the following premise. That is, they want to be in China, for China. They’re not in China, you know, to suck profits out to invest in another part of the world. They are in China to look after the Chinese to as best they can to become an insider in the Chinese market. And because of that they’ve had a CEO who has become fluent in Mandarin. He just recently retired. They’ve been fully engaged with Chinese partners, ingratiating themselves with the Chinese ecosystem. And so other companies like Coca Cola have done the same. They have a myriad of partnerships in China. They every one of these has some tie in, typically with a municipal government. Their approach to China is to be in China, for China. Then you have a company like Yum brands, these are the guys who are Kentucky Fried Chicken, Pizza Hut. They went so far as to say if we’re really going to be in China for China, we cannot have ties back to the corporate parent.  And there are some reasons for that because of public relations because of oversight. And so they have determined that for them, they need to create a separate publicly listed company, Yum China, which is only focused on China. And there are some good reasons for that. By the way, it does protect the parent company, from Chinese behaviours that many in the West will find embarrassing. So we’re seeing companies that are having problems in China, are the ones who, despite making lots of money in China, are compromising some of their values to be there. We’re seeing examples, left, right and centre, whether it’s Daimler Dolce and Gabbana, or the NBA National Basketball Association, whether it’s Apple, Apple, which has a heavy overhang in China, heavy exposure to China, they have made in many ways deals that would be unacceptable were they to be brought to full light in the West. One of those, for example is their iCloud, basically data farm, in that they’ve created with a Chinese partner, which they had to do to bring on a partner in order to do this. But they then stepped out to let the partner manage it gave them the encryption codes. And this partner has ties to the state. So if you are using Apple in China, the state can access all of your data. And by the way, that includes a data that could compromise potentially your identity and your and your personal security. In the West, Apple would never engage in this kind of behaviour. Nor if it was really made public. With China, would Apple be able to survive? I think the torrent of negative press that that would overwhelm it. So I think you’re seeing a lot of these deals going on, to make peace with China, through apology tours, that in the West, are going to cause some problems. So working in that, you know, that model of in China for China is going to require Western companies to rethink some of their global values and the degree to which they need to cut the umbilical cord, just like we’ve seen with young China.

Gene Tunny  27:48

Yeah. Okay. One last question, Allen. Can I ask you about how sustainable you think this enterprise China model is given that economists would argue that this is not the best way to run a company or that it’s going to you’d have less efficient corporations? I mean, how sustainable is this and also, there are the issues with the lack of democracy in China, just how sustainable is this whole model in the next, over the next decade, two decades, etc.

Allen Morrison  28:23

You know, we have been more than happy to interpret China through the prism or the lens of the West, which may not be the most effective lens out there. And let me add the other caveat, we’ve been wrong about China too many times to to do predict with any accuracy, what’s going to happen. So here’s a couple of things that the Chinese have to deal with, which are significant problems. Problem number one is the shift from what we call vertical China to horizontal China. Vertical China’s a command and control going back to Mao the state controls everything, you know, why did your factory makes shoes you know, pairs of shoes because we’re only told to make the left shoe and not the right shoe. Just stupid things that come when the state controls everything. That’s traditionally been the model, horizontal China’s where we have empowered consumers educated informed with resources with money, the ability to travel, the ability to think for themselves. And horizontal China also includes municipal you know, mayors and governors, which are pulling and tugging, you know, and trying to fight the horizontal model of Xi Jingping. So there is that pressure out there. And that pressure is not going away. If anything, it’s going to get worse. Number two, despite China’s efforts to break the dependency curve, the dependency cycle, they have not been able to do that in the areas of highest technology, which, you know, I’m thinking semiconductors microprocessors, for their most advanced three nanometre chips. They are wholly dependent on Western technology, including Taiwan Semiconductor, which is, you know, across the straits. They don’t have the capability to do they barely have, they certainly don’t have enough capacity by indigenous Chinese firms even handle five nanometer technology at a level that would satisfy demand. They have not been able to do this. They’re several generations behind. They have committed $250 billion to kick starting this. But there are some reasons why I’d be concerned that they’ll be able to do this, I’m not sure they will be able to do this, because we in the West have increasingly stopped allowing the shipping of tools, foundry tools and so on for these plants. Number three, there are some phenomena in China called a byline, which translates to let it rot. That’s it. That’s this kind of younger millennials, the Gen Z age who are, you know, 28 years old, who are because of the clamp down on technology in particular, finding themselves unemployed, underemployed, and spend their days playing video games, and fighting and chafing against the state, the state with the motto in the West, translated, let it rot, we hope the whole system burns down. So there’s this anger palatable. I would also argue demographics are, are probably China’s worst enemy. We saw this exact model play out in Japan, where we saw the Chinese population peak in the 90s, has been on a steep decline. It’s paralleling that in China, Chinese population reached its peak in about 2007. Between now and 2050, China’s slated to lose about 230 million people, 230 million people, when the economy shrinks by that amount, the only way the economy can keep its own, if you will, is by dramatically increasing its productivity levels to offset declining population, or they can open the door and have all kinds of immigrants coming in. There’s not a chance of the second happening. And, so can they increase productivity? Not like they have in the past. They have many internal problems, those agrarian farmworkers who left to come to the cities, that’s all played out the ability tp increasingly used capital, that’s to drug jackup product that is decreased, particularly as the economy gets so big, this issue of the challenge of numbers. So China is facing some serious headwinds. And we haven’t even talked about the political blowback from the west restrictions increasingly blocking the transfer of technology. Huawei, you mentioned earlier, Huawei is in many ways, yes, absolutely world class company. But pretty much every major technology advanced made by China made by Huawei, was made outside of China at Huawei facilities outside of China. So China’s seem very adept at importing expropriating technology from the West, not the greatest at doing it in house. They are facing a lot of headwinds, China.

Gene Tunny  33:52

Right. Okay. So I mean, are you saying that we’ll look at there are a lot of challenges. So look, I mean, who knows what could happen? I mean, there is there is this growing dissatisfaction. That we’ve got the demographic issues. So yeah, the whole, so the legitimacy of that administration. Am I right, that it was based on strong economic growth since the 80s. Since the liberalisation and bringing hundreds of millions of people out of poverty that underpins the legitimacy of the administration. Right.

Allen Morrison  34:30

right. Yeah, it does. And, of course, COVID crackdown hasn’t helped. Yeah, I’ll just share one story with you. And maybe the the audience would be interested in this in the late 1980s, when I was in in Beijing, and we had all those demonstrations and martial law. I had dinner with a very senior university administrator, very senior, I don’t want to embarrass him or implicate him. And we were talking about These demonstrations and the tanks rolling and so on, I asked his opinion, his opinion it kind of shocked me, very informed guy. He said, first off, I doubt that the demonstrations really took place the way they’re portrayed in the West. Like, really? Secondly, he said, but even if you’re accurate, he said, What you fail to understand in the West is that in China, we don’t care particularly about democracy. I said, Really, that’s shocking to me. He said, Here’s the reason what I am one vote. In a country with over 1.2 billion people. My vote has no impact on anything. What I care about, is economic prosperity. That’s what I care about. And so when you look at this, from that perspective, where that stability and prosperity, what will propel the regime forward is prosperity, economic growth, and so on, when you start to make compromises, and when you start to say, no politics trumps prosperity, politics trumps economic growth, then you’re going to see this, you know, empowered middle class and upper class begin to change more and more and more, I’m by no means predicting that, you know, that we’re going to see a change in regimes in Beijing, what I am predicting is that tensions within China are going to continue to rise. And either the government will clamp down on that, or we’ll have to become more open. And I’ve taken great, you know, satisfaction and seeing Xi Jinping relaxed, some of those COVID restrictions, based a week or 10 days ago on kind of this groundswell of, of opposition. So I think the Chinese are in for a very interesting 5,10, 15 years going forward. I’m not predicting that, you know, we’ll see a groundswell of change. But I do think that the Chinese model will evolve. One final thing I will say about this is that, it would be a mistake to think that Western companies, by in large, are losing money are getting somehow hammered in China. Some of Western companies, most profitable businesses, one of the kind of ugly secrets out there, they’re coming out of China. There many companies are making embarrassing amounts of money in China. And the Chinese are fine with that. The Western companies are kind of hiding that obfuscating that through transfers, through creating, you know, trading centres in Malta or something, and funnelling money, very smart about this. Where the Chinese will get very upset is if you’re in one of these targets, very upset, and focus is your one of these target industries. And if you refuse to play in their sandbox in their ecosystem, you can figure out how to do that. And you can get out of the way of these strategic industries, China can and will remain or can be and will remain a very viable market for Western firms into the decades ahead.

Gene Tunny  38:37

Okay. Oh, that’s, that’s been great. I think it’s a well researched book, published by Wiley. Is that right? So very reputable.

Allen Morrison  38:46

Wiley and yeah, thank you. We love the book.

Gene Tunny  38:50

Yes, absolutely. So I’ll put a link in the show notes to it. So people who can get a copy. Any final thoughts before we wrap up?

Allen Morrison  38:58

No, I’m delighted you’re you’re talking about this. China’s a huge issue of the day. I will only say that our book steers clear of politics, and focuses on what’s happening with business and what business leaders can do to prepare their companies better in a world where China is not going away.

Gene Tunny  39:19

Okay, gotcha. Righto. Well, Professor Allen Morrison, thanks so much for appearing on the show. I really enjoyed the conversation.

Allen Morrison  39:27

Thank you so much.

Gene Tunny  39:30

Okay, so what am I big takeaways from my conversation with Allen? My first takeaway is that enterprise China, this close relationship between business and government has a wide reach, and it has huge implications for companies wanting to do business in China. In the words of Allen and his co author, enterprise, China extends far beyond this core cluster of state owned enterprises and includes virtually all privately owned enterprises of any significant size or importance. That’s pretty concerning if you’re trying to compete in China. This leads into my second takeaway, but it is very challenging for Western businesses to do business in China. Various Western companies such as Uber have lost a lot of money trying to break into the Chinese market. It couldn’t compete against enterprise China. I found a great quote from Harvard Business School professor William Kirby in 2016, about what happened with Uber. Uber is leaving China, not because of interference from its rivals, but because of interference from the state. It was worried about the prospect of unfavourable national regulations that would damage its business in China. Disney is another prominent example of a company which has had difficulties in China. As Allen and his co-author noted the book Disney’s 2020 Milan film was not only bad for Disney’s reputation in the West, because it was filmed in a region where Uighurs are oppressed. But the Chinese government shut down coverage of the film in China, so very few Chinese people ended up seeing it. The government apparently was concerned that a lot of the media coverage drew attention to China’s human rights abuses. Reflecting on what happened with Disney, Allen and his co author write in the book, beyond appeasing the Chinese state with carefully chosen words and at the ready heartfelt apologies. Western companies face an even larger challenge, responding to rules and regulations that are inconsistent with their home country values. Many of these rules govern the collection and sharing of sensitive data with the Chinese state. As an example, many Western executives in China report being pressured to facilitate China’s social credit system that uses data on such things as credit scores and parking tickets to determine social benefits, and even employment opportunities for Chinese citizens. Okay, that’s very concerning for sure. My third takeaway is that China faces some big headwinds, which will challenge the enterprise China model and the regime in the coming decades. These include China’s ageing and declining population, demographic changes will reduce the rate of economic growth. As I discussed with Allen, economic growth in recent decades has helped the regime stay in power. And I expect that as growth slows, the regime will become even more unpopular as an economist to expect that the enterprise China model will ultimately deliver inferior results to our more free market style of capitalism in western economies. Okay, those are my big takeaways from my discussion with Professor Allen Morrison on enterprise China. Do you think I pick the most important ones? Do you agree or disagree with my takes? If you’re willing to share your own takeaways from the episode, please send them to me via contact@economicsexplored.com or send me a voice message via SpeakPipe. You can find the link in the show notes. Thanks for listening. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye

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

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