Australian Treasurer Jim Chalmers argues for values-based capitalism and against neoliberalism in a January 2023 essay in the Australian Monthly magazine. In this episode, show host Gene Tunny discusses the Treasurer’s essay with Dr John Humphreys. John is the Australian Taxpayers’ Alliance (ATA) Chief Economist and the founder of the Australian Liberal Democrats. Gene and John discuss just how literally we should take the Treasurer, the risks of the so-called co-investment approach, and whether the Treasurer is arguing for socialism (or a different -ism).
This episode features audio from an ATA Econ Chat livestream broadcast on 31 January 23. You can watch the whole thing here:
Transcript: Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:06
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I discuss so-called values based capitalism with John Humphreys. John is chief economist of the Australian taxpayers Alliance, and he’s President of the Australian Liberal Democrats. The idea of values based capitalism has been injected into the Australian policy debate by the Australian treasurer of Jim Chalmers. In a monthly magazine essay, the Treasurer argues we need greater coordination between the public and private sectors, and we need co investment. He argues that government business philanthropic and investor interests and objectives are increasingly aligned and intertwined. The Treasurer is the top economic official in Australia. He’s the equivalent of the US Treasury secretary in the UK Chancellor of the Exchequer. So obviously people pay attention when he tells us what he thinks. The audio of my conversation with John Humphreys is taken from a live stream I did with him on the 31st of January 2023. I’ll put a link to the full live stream in the show notes. Okay, let’s get into the episode. Please stick around to the end, because I have additional thoughts after my conversation with John. Well, I think we have to chat about this essay by the treasurer Jim Chalmers capitalism, after the crises, rather extraordinary for the treasurer to publish something like this. I mean, although we had the former PM, Kevin Rudd, publish something similar about how he was going to save global capitalism in I think it was around February 2009. While we’re all busy in Treasury, with actually managing the budget and all of that, somehow, the pm found time to write a 8000 word essay. And now, I mean, Jim Chalmers is done. Well, I think is 6000. It may not be as long as the one Rudd wrote. And Jim Chalmers wants to remake Australian capitalism. I don’t know if he necessarily wants to remake global capitalism. But he does have a critique of neoliberalism. So that’s the new thing that everyone hates. And I mean, it’s similar to a lot of critiques of so called neoliberalism that, you know, we we’ve gone too far in the direction of the market, and we don’t care about society as much anymore and isn’t as all dreadful. And isn’t all this inequality, terrible. It’s causing problems for Democracy Now look, okay. There’s certainly issues and in some countries, inequality has certainly increased, there’s no doubt about that. Overall, it’s this very simplistic analysis. And look, it’s Jim Chalmers is views. I mean, you know, fine. That’s his philosophy, it’s probably what you’d expect from Jim chamas. He’s entitled to those views. I mean, my personal view is you should be looking at specific policies. I mean, what exactly do you think we did wrong? Okay, let’s look at specific issues and see how we can fix those up. I mean, is it tariff cuts? You don’t approve of them in tariff cuts that the whole Keating government supported? I mean, what is it precisely that you think is the problem? So there’s this general critique of neoliberalism, which is no different from a lot of stuff you see online by various progressives? And, look, I mean, I’m not necessarily going to defend everything that that’s been done in economic reform. I mean, there certainly been like, I think there have been some great successes. But there have also been areas where the insert less than stellar results. There’s no doubt about that. But I think what’s important is to get it all. Okay, let’s understand what he actually wants to do because he’s got this general critique, okay. But what do you want to do? And his main idea seems to be this idea of co-investment. That’s the real substantive thing. That seems to be how he’s going to define his time as treasurer or his time as PM if he later becomes PM, because in a way, this is job application for PM he wants to be Labour leader. He sees this as defining his philosophy as a labour treasurer. We’re going to fix capitalism. He talks about values based capitalism, he thinks capitalism, we want to move away from a system where it relies upon people beings If interested in greedy and the private sector alone, we want to have a cooperation between the private sector and the public sector. We want the public sector, getting the policy settings right and and then co-investing with the private sector to provide some, some ideas about how that will occur. He talks about the Clean Energy Finance Corporation, which is designed to provide finance for various renewable energy projects. He sees that as a success, even though it doesn’t appear to be meeting its investment mandate. So I had a look at that, because I found it interesting that that was his one, the example that he gave, so he talks about co-investment as a powerful tool at our disposal. The Clean Energy Finance Corporation has been a great success, partnering with investors to direct capital where it can have the greatest impact, not by subsidising returns, but by helping structure investment vehicles in a rapidly emerging economic sector, we will employ this co-investment model in more areas of the economy, with programmes already underway in the industry, housing and electricity sectors. Okay. So they’re looking at providing some type of framework, having these entities like the Clean Energy Finance Corporation, and I think they’ve set one up similar to that in housing, it’s to encourage investment by the private sector and by I guess, providing more accessible finance, or making creating financial products, perhaps with some government guarantee, I don’t know, we have to wait and see what exactly the treasurer is, is talking about here. So yeah, that’s where I think we’ve really got to focus. This seems to be his idea of how he’s going to be this innovative, new wave labour treasurer. Yeah, Nick’s made a good point here in the comments that they want the super funds to, to invest in some of these areas such as housing, or an infrastructure. But again, I mean, we’ve got to ask exactly how are they going to do that? There’s, what I see is the risk that the government provides some sort of guarantee or does provide financing, he’s saying it’s not subsidised. But, I mean, you’ve got to wonder about if it isn’t subsidised? Or if if the government’s not making finance more readily available in the market within the banks would then what exactly is the market failure they’re addressing? Why wouldn’t the private sector do it? So I think there is going to be some sort of subsidy or, or risk taken on by the public sector that’s not compensated for. And so when I looked at the Clean Energy Finance Corporation webpage on financial outcomes, I discovered that and this is what this is a an institution that the treasurer claims has been a great success is its return its lifetime annualised portfolio benchmark. Return. So this is, this is a return that they’ve earned. So 4.38%, which is, you know, hardly anything, really, if you think about what you’d really want to be earning as an investment vehicle like that. So I think there is a risk that this sort of thing is subsidised. I think there’s a risk that they’re taking too much risk onto the government balance sheet. And there’s a potential to fund projects, which are uneconomic. So if that’s the big idea, I mean, okay, well, let’s see the specifics, and let’s analyse exactly what you’re, you’re recommending, and we can talk about that. Yeah. And there’s that point about, yeah, they do want access to the super funds, money, they will have to make sure that it’s a compelling investment opportunity to actually get that money. And, and that is a big risk. I mean, we don’t yeah, that those super funds, if they just invest in something because the government wants them to invest in it, then they are breaching their fiduciary duties. That would be a terrible thing if the government does direct where that money should go.
John Humphreys 09:12
Interesting points on that today. I think this is part of the problem that we’re sneaking up on the situation several ways. Super funds increasingly have social goals that they need to meet, as well as financial goals. You make a good point that, well, that needs to show that they’re going to meet the financial needs of the super investors. Increasingly, the super funds feel the need to meet their social KPIs, rather than their financial KPIs. And if they are required to meet social KPIs, then they’ll very easily get away with it. Remember, it’s not like this super is optional. We’re forced to give it and if the government gives the super funds who have guaranteed access to our money, social KPIs, you must do something social. By the way, here’s something social we want you to do. You can imagine it happening, even if it doesn’t have financial risk. I think the point Nick can correct me if I have not expressed her concern accurately, please jump into the chat again, Nick. But that’s my understanding of your point.
Gene Tunny 10:09
Yeah. So the whole thing with this values based capitalism, one of the concerns is that you end up with this very odd relationship between the government and banks and super funds. And in a way, it’s very odd for a Labour leader or an aspiring Labour leader. And this is a point that Matt Canavan made that he was very critical, as you probably would expect of this sort of thing. And I mean, he was saying that the treasurer seems to have been spending too much time in the boardrooms of banks and super funds. So yes, it’s, it’s very strange, but what I think might be going on, and this is, this is one thing that I’m wondering is, is this because he really doesn’t have many other options due to the state of the budget due to the high amount of debt, and due to the fact that he’s committed to the stage three tax cuts? Katherine Catherine Murphy on the Guardian podcast asked him, Okay, if you’re talking about values based capitalism, does this mean or she, she was basically asking me if you actually, given what you’re professing about values based capitalism and your concerns about inequality, etc? Does this mean you’d revisit those stage three tax cuts? And other there was a good question, and he just gave the standard line? I look, we’ve already dealt with that. And we’re, you know, my position on that. I think she probably could have pressed him more on that because it is a legitimate question, if in terms of traditional Labour government, some people have been saying that with this essay, Jim Chalmers is channelling Whitlam or it’s going back to the Whitlam government, I’m not entirely sure about that, because the Whitlam government was big spending on social welfare programmes, I really ramped that up. I mean, I know now we are spending more on that sort of thing. But there’s, I don’t know if there’s a capacity for this government, given the fiscal situation to really increase those welfare payments, or expand the welfare state much at all. And so he’s really falling back on this sort of thing, because he may not have any other option. And to an extent, that’s because the government’s had to go along with the stage three tax cuts for political reasons to win the last election. And now they can’t go back on it. So you know, this could be the only shot he’s got in the locker, so to speak. That’s one thought I’ve had on this, this essay.
John Humphreys 12:47
It will be interesting to see what they do in the next budget in terms of tax, I suspect, I’ll sneak that tax rate up, they are going into that. Look, I think that was politically hamstrung with their previous commitments. And quite frankly, I think they made the right decision to stick to their promise, both because I’m a big advocate of the stage three tax cuts, but also politically, if you want to keep any political capital, you can’t just line up lie after lie after lie in your first year in power. So I think it was the right political move and the right economic move. I suspect they also know it’s the right political move. They think it’s the wrong economic move, but they’re stuck with it. And so I’m happy about that. You’re not just a couple of quantifications. I haven’t thought about this article as long as you have, but I think you’ll write in one very important point. There’s been a lot of furor about the words. And I think the words of what Jim says, if taken literally, we shouldn’t be worried if they can, literally. But you pointed out, I think that it’s not necessarily true that we should take it literally, because there’s a lot of fluff and waffle in the middle there, that could be interpreted multiple ways. And to a large degree, what we have to do is go back to them and say, what does that mean, exactly? Exactly what I’m suggesting here. And I suspect what’s happening is there’s two things it’s worth responding to both. I suspect he’s the policy recommendations coming out of this, I suspect will end up being tinkering. I don’t think it’d be good tinkering. But this is probably a lot of grandiose statements. I’m not sure if they’re going to follow through on grandiose actions. I gotta say, as I say that, if I’m right, that would be a good thing. Because if they followed through on all the grandiose statements, I think it would be a supreme mistake for the future evolution of our country. So I am hopeful that this is a lot of bluff and bluster. But also if history is anything to go by, politicians are often full of bluff and bluster and grandiose statements. And then once they actually sit down and work out, what does this mean? It can be a tweak here and tweak there.
Gene Tunny 14:46
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 15:21
Now back to the show.
John Humphreys 15:24
I do worry about them targeting the super funds, I do worry about what they when they say race, it just sort of interaction cooperation between the government in the corporate sector, that could be done in several different ways. Some of them supremely damaging, and some of them rather mild. And some of them perhaps useful, we really need to know the details first, but I worry that what he’s talking about is not the mild version. But hopefully what he does is the mild version. But what he’s talking about here has echoes of a lot of things that have been growing over the last couple of decades. Some people have actually said it in the chat and see if I can find some here. I think Percy said this twice. It’s the ESG goals. A lot of the language here is also the language of ESG, the environment, the social and governance systems. And it’s steadily in being embedded through several different means fair and foul into the goals of a lot of companies sometimes basically being shoehorned in there by governments, sometimes by industry super funds, which as was also pointed out by Percy, I think, that they are closely related to the union’s so you are getting lots of deviations from normal capitalism for ESG. Another term that’s been thrown around a lot by people that are it looks like Jim Chalmers is influenced by the stakeholder capitalism, and stakeholder capitalism, it sounds so benign, but if you scratch the surface, it’s a very worrying idea. The whole point of capitalism is that corporations are supposed to represent the owners and benefit the owner, it is capitalist who make a profit and the profit goes to the people who made the investment. That’s the idea. Stakeholder capitalism basically means all you know that ownership thing we told you about, yeah, not so much. Right? I mean, you don’t have to be an owner to have a stake, you could be a consumer, or a worker, or a neighbour or just anyone with a pet dog that ran across someone’s front yard. And that basically means society, if society is the owner, where that’s not a real thing, right? That’s always code word for government. If society is the owner of the business, i.e. government is the owner of the business. That does not, that system and economics does not have a good track record at work. There’s a couple of things here. The Chalmers thing has been likened to out and out socialism. I don’t think that’s quite right, because what he’s talking about is this incestuous relationship with big business and big government and big unions. And now socialism, just what’s the leaders of big business up against the wall, shoots them and takes their property. This is like traditional socialism. It’s been likened a bit to Whitlam. And you already mentioned that before, but it’s not quite that either. Because what Whitlam wanted to do was have the government take over all of the realms of how you help the massive welfare state, massive redistributions. He’s not really talking about changing the welfare state. He’s talking about changing the way business operates. So it’s not quite socialist. It’s not quite Whitlamisk, what I call it an eco socialism. It’s instead, this incestuous mix of big government, big corporations, big unions, and we need another word for that. There was a word for that this is not a new idea. This is the thing I’m seeing showing up by some of the op ed writers look at this wonderful new idea. It’s not Whitlam. It’s not Marx, it’s a new idea. It’s actually not a new idea. These ideas have been around for quite a while they were quite prominent, about 100 years ago. I believe, Jim Chalmers is the follower of an Italian economist at the moment. These ideas were very popular amongst a certain Italian politician. From about 90 years ago, if anyone knows their Italian history, El Deus, the Mussolini ideas were basically exactly this. But we don’t need to get rid of business. What we do is we need to have a really close relationship between big government, big business, big unions, we all work together. It may be better than for more efficient for socialism, but it’s a bloody dangerous system. And of course, if you actually call it fascism, everyone gets upset because they say no, no, no, Jim Thomas doesn’t hate the Jews. But fascism isn’t only the economic system of fascism isn’t just about being a Nazi. The economic system of fascism was quite literally the idea that big business can exist, but they just have to cooperate in bed with big government. That was literally the idea of the fascist model of the economy. And it’s not a new idea. I don’t think it has a good track record is actually working as an economic idea. And I’m not trying to say Jim Chalmers is a fascist, I’m just simply saying that we can look at how this has worked in the past. And I don’t think it’s been pretty. The other thing to note about this is they talk a big game about how much they want to cooperate with big business and integrate with them. It’s as if they that they’re unable to draw a distinction between the markets and a business. Right. I mean, most people on my side of politics we believe that a market is a better way of cool donating things, then bureaucrats and politicians. That’s true. That’s not from a love affair with business. Indeed, business are often also the enemy of markets. Like I am not pro business, I am pro markets and markets happen to have business in them. And it seems when a lefty stumbles across this idea and sees markets working, they think markets work, because there’s a couple of nice businesses. So they Co Op those businesses. But it’s not the existence of those businesses that make the market work. It’s the nature of the dynamic nature and the competitive nature of the market. That helps the market system to work. And sometimes a good market needs businesses to fail. If businesses make enough bad decisions, they fail this idea that markets defending markets are about defending businesses. Some people on outside of politics need to get out of that way of thinking, bad businesses should fail. We’re not here to defend businesses, I’m happy to defend people who make good decisions and get ahead and are rewarded for that, whether they are in any field of Endeavour. But it’s not just about defending businesses. And this approach the Chalmers has seems to be pro business anti markets, whereas I am pro market and indifferent to any individual business. And that’s some of the things I do notice in some of his language. He talks about redesigning markets, and that markets need to be carefully constructed. So I think once again, that shows a fundamental misunderstanding of what we mean with markets. Markets are evolutionary concepts. They’re not design. They’re not constructed at all. They happen sort of spontaneously out of the interaction of a bunch of voluntary interactions between consenting adults, it is a it is an evolved system. And one of the most dangerous things we have is these politicians that lack the humility to realise that they can’t design such a complex system meddling in a hugely complicated evolved system that is probably beyond their capacity, it’s beyond their can to actually understand the dynamics. It’s beyond the understanding of most people. Leonard Reed famously wrote a book saying no one knows how to, it’s called “I pencil”. And he pointed out that no one knows how to make a pencil, seems like a crazy statement. But if you unwrap each part of making a pencil, someone has to know how to cut down the wood, which means they have to know how to use a chainsaw, which means they have to know how to make the chainsaw, which means they don’t have to know how to get the metal for the chainsaw, which means they have to know how to make the iron, which the steel which comes from the iron, which comes from the mining. So you go back through all the parts of making a pencil, no one person can do it, but it comes together spontaneously, seemingly spontaneously without any central controller. That’s the important point. There’s no central controller in that. And yet, you can go and buy a pencil now for 10 cents. It involves the cooperation of literally 1000s of people around the world who speak different languages, and may not even like each other, they may hate each other. And yet 1000s of people around the world all coordinated and managed to bring you a pencil at your local store for 10 cents. That is insane. And there is no controller. It wasn’t designed, it wasn’t carefully constructed, as Jim Chalmers seems to think, it was a spontaneous order coming together. And that is the dangerous thing. I think there is when these politicians decide that they need to redesign markets in their own image. And often they have wonderful goals, right? I mean, their vision of the world, that vision of the future is not some dystopian nightmare. That’s just the accidental byproduct of their arrogance and their lack of humility. So anyway, that’s my rant on this. Now, I haven’t spent as little thinking about it as you, so maybe I’ll have to duck into it a bit more over the next week.
Gene Tunny 23:28
But I want to have a closer look at just what these vehicles are and how they intend to direct investment. I mean, he talks about, well, we’re not going to pick winners. Okay, that’s great. Oh, but we’re just gonna set the priority. So it’s like this state directed model that the French had, I think in the 50s or 60s, I wouldn’t call it fascism. I’d call it corporatism, or, or whatever the French used to call their system back in the day, the government’s got an idea of where the investment needs to go broadly. It’s sort of national economic planning. That’s the type of mindset and one thing I’m waiting to see is will they try and revive this idea of an infrastructure bank? So this was something that was raised during the time of the Rudd Government but got knocked down. Turnbull criticised Kevin Rudd has been Kev Lonnie, with reference to Kim Lonnie and there was the people were talking about well is this gonna be the new transcontinental I don’t know if you remember it was it transcontinental, the tri-continental, the, the Merchant banking arm of the state bank of Victoria that went bust in the late 80s. Victoria, when it just got into, you know, just made all these crazy loans during that, that colossal boom in the late 80s. There’s a real risk to government balance sheets here, and I just want to wait and see just what they’re proposing. And whether there is some bold scheme like that, that the treasurer could be announcing. That’s what I’m going to be looking out for.
John Humphreys 24:58
I think on the retail politics that is the right thing to look for I should reiterate, I don’t actually think Jim Chalmers is intended to be a fascist, because I don’t think he intends to follow through on the logical consequences of his own article. But I still think it’s worthwhile pushing back on the substance of the article, even if I don’t think you’ll follow through on it. I don’t want people to think of it as an ideal, because I still think the ideals in there are very dangerous. And look, I also take your point, in reality he’ll be whether it’s fascism, or corporatism, it’ll be a watered down version of that. And we need to see the details I agree. But still, the steel man version of that is worth addressing, in case it seduces the thoughts of any young people that stumble across these ideas. You make a good point that perhaps corporatism is the better word for it than fascism. I’ve thought about that a bit lately, that could work. I wonder though, whether there is a difference between the two, they both involve this incestuous relationship of big business and big government. Perhaps the difference is who has the upper hand. And I think in corporatism, perhaps the idea is that big business has the upper hand, and they kind of use big government as their tool for success. And in fascism, it’s the government has the upper hand, and they use big businesses, their tool for enforcement, or getting things done. But anyway, that’s a thought bubble there on what the potential difference could be. I don’t know which one Jim Thomas hopes he would achieve. Probably not corporatism. But I’ll cheekily put that aside for the voters. What he
Gene Tunny 26:17
wants to achieve is he wants to get enough votes from the labour left by imagining he’s can remake capitalism, where, really, he’s going to get some he’s going to create some investment vehicles. There’ll be some additional money into into renewables and housing. But is it really going to make much of a difference? And I don’t know, I mean, in housing that, you know, that’s one of their big challenges. I mean, that housing affordability is a massive problem now. And the number of people who can’t find accommodation, particularly in Brisbane, I mean, I go for a walk along Wickham terrace in Spring Hill. And I mean, the usual homeless people, you see, but now you see there are people living in cars, they’ve got all their worldly possessions, in, in the back of their vehicles. And it’s just tragic. And it’s because for years, we’ve just stopped people from building houses where people want them. So we’ve got, we’ve got problems that have been created, in part through government regulation. And now that’s going to be used as one of the excuses for remaking capitalism and providing, I don’t know, whatever, they’re going to do subsidised housing, there’ll be some money for that social housing, but it’s not really going to be enough to solve the problem, in my view.
John Humphreys 27:30
But it’s so often the theme, isn’t it? A government programme goes wrong. And the lefties turn around for capitalists to say, Why did you do that? And then they use that to justify another government programme that also goes wrong. And the whole cycle repeats itself. I do like the fact that every time I try to get us distracted in a conversation about the grandiose philosophy of the implications of Jim Chalmers article, he brings us back to the real retail politics, which I think is entirely correct. I think your read on this is true that his grand philosophical statements, they’re mostly just fluff and waffles so that he can try to get the Labour leadership and it’ll mean a bit of tinkering. I think you’re right. I just still enjoy rebutting the actual words. Anyway, that this has been a fun discussion.
Gene Tunny 28:13
Definitely John. Okay, I hope you enjoyed my conversation with John Humphrys about the Australian treasurer’s essay on values based capitalism. I’d say the takeaways from the episode include firstly, that there’s clearly been a big change in the intellectual climate since the financial crisis, and treasurer Jim Chalmers has picked up on this making some of the standard criticisms of so called Neo liberalism. Secondly, it’s important to consider specific policies and to weigh up their costs and benefits and the likelihood that claim benefits will be achieved in my view. If we do so it’s understandable why there’s been such a negative reaction to Jim Chalmers essay by economists and financial commentators here in Australia, I should say, I don’t want to be too negative. I have met Jim Chalmers in the past when he worked for treasurer Wayne Swan, and he struck me as a nice person. He clearly thinks a lot about economic issues, and I respect that. And the treasurer did say some say on things in the essay, for instance, he writes, in the wider world, the contest between democracies and autocracies is economic as well as military. Despite deep disquiet about our own economic models. The reality is that democracies largely work. As of 2021 GDP per capita is around 60%, higher in democracies than in autocracies and the gap isn’t closing. Thankfully, Chalmers is a Social Democrat rather than a revolutionary. But he argues that to protect democracy, we need to have greater economic inclusion. That’s fair enough, but we need to think critically about the measures he proposes to promote it. obvious questions include, will they actually achieve greater economic inclusion, what will they cost? What are the risks to the government’s balance sheet and to taxpayers who will ultimately bear the cost of any bad investments? As I suggested in my conversation with John, history tells us we should be wary of governments owning banks or other financial institutions that don’t have a great track record. The failures of the state banks of South Australia and Victoria were big news in the early 90s. But now three decades have passed and the lessons may have been forgotten sadly. Also, as I noted, when chatting with John the results of the body that the treasurer calls a great success, the Clean Energy Finance Corporation, well, they’ve been pretty ordinary and they don’t appear to be meeting the target of return. The presentation of the financial results for the corporation is rather confusing, but it looks to me that they’re underperforming. I’ll put a link in the show notes so you can see for yourself. One thing I should have covered in my chat with John is the concept of social impact investing. This is an investment where there are both financial and social returns, such as in a profitable social housing development. Social impact investing is one of the concepts that Jim Chalmers is fond of. In a recent financial review article, John Keogh referred to an example from New South Wales in 2013, a social impact bond which raised $7 million from investors to finance the new PIN programme. N E W P I N. New PIN stands for New Parent Infant network. It appears to be a programme to support new parents so they look after their children properly and the children don’t end up in foster care. It looks like the Queensland Government has tried something similar. Typically, impact investments require government involvement of some sort to ensure that the private sector investors get a return. For instance, governments could pay performance bonuses if certain social outcomes are achieved. There’s a handy note from the Treasury which summarises the Australian Government’s principles for social impact investing, which I’ll link to in the show notes refers to such things as payments by results, contracts and outcomes focus grants, that’s how the investors will be rewarded if the investment achieves its social objectives. These payments could be justified because successful programmes could result in budgetary savings in the future. For example, if programmes result in healthier children, that could reduce health costs in the future. You could also imagine programmes resulting in savings in welfare spending, or cost of the justice system. I’d say that such savings are possible, but we should think critically about the likelihood of such benefits and follow up to make sure that they do actually occur. That is, so we’re not paying nonprofits and investors additional money for results that they don’t actually achieve. It looks like treasurer charmers might end up announcing a social impact investment bank in his next Australian government budget in May 2023. James says that the Financial Review gave a good summary of what this bank could do in an article in October last year, which I’ll link to in the show notes. He wrote, the new body would work with investors to supply capital to intermediary funds, which would direct private investment into social housing, aged care, early education or disability services alongside government funding. This could take some pressure off the government budget for providing these services alone. Okay, that’s the point I made in my chat with John, that some of the motivation for what Chalmers is proposing is the poor state of the government budget, they just don’t have the money to undertake traditional programmes. He’s talking about impact investing because he doesn’t have a lot of options. With his social impact investing bank, he can support things that he wants to do off budget, so to speak. James Ayers continues, the institution would make returns when service providers who would typically be receiving some government funding make predetermined improvements to social outcomes such as housing, education or caring for more people under agreed service standards. Apparently, there’s a body like this already in the UK called Big Society Capital. There’s a fair bit to explore with impact investing, so better return to it for a closer look at a future episode. There are a lot of players involved and I’ll do my best to get someone familiar with impact investing on the show for a deep dive. In the Australian model, it looks like there’ll be a government backed social impact investment bank referred to as a wholesaler. Major commercial banks could also provide capital for this bank. It appears based on reporting from the financial review. There’s talk about 200 million coming from the government and 200 million from the private sector. I expect the social impact investment bank will provide finance at lower than market rates for social impact investing funds. These funds then invest in nonprofits or so-called Social Enterprise causes which are delivering programmes under government contracts. An example of a social impact investing fund is the $91 million social impact investment trust, established by social ventures Australia, a nonprofit and Hester a superannuation fund. How the performance bonuses are shared by the nonprofit, the investors and the government back bank will need to be defined by various contracts between the players. This all seems very elaborate to me. There are no doubt a lot of investment bankers and fund managers earning healthy fees along the way. Does this lead to better results? It may do so if the investors push the nonprofit to deliver superior services. As always, I’m open minded but sceptical. I’ve seen that the consultancy firm Airbus has undertaken a positive evaluation of the New South Wales new ping programme. So it could be good to go through that in a future episode. I haven’t had a real chance to dissect that one yet. I do wonder just how much we can rely on impact investing to solve social problems compared with other measures. As I noted with John, I doubt it will solve the housing availability shortage, which to me appears related to restrictions on housing developments. And it’s not going to replace welfare state programmes such as Australia’s various support payments and the National Disability scheme. Maybe you can do positive things at the margins, we have to wait and see because it’s still early days when it comes to impact investing. For a sceptical take on impact investing, which I’ll link to in the show notes, I’d refer you to a 2020 Harvard Business Review article by Ruben Finnegan, who I know well and Alan Schwartz is a prominent Australian businessman. Impact Investing won’t save capitalism. Okay, that’s all from me on values based capitalism for now. If you’d like a closer look at impact investing or any other topic, please let me know. Thank you. Right oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via firstname.lastname@example.org 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. 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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.
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
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
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.
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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
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 email@example.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets, you then place router review and later writing. Thanks for listening. I hope you can join me again next week.
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Planet Earth Cleaning Co. and Ecobin founder John Engelander proposes that environmental and business sustainability can go hand-in-hand. Show host Gene Tunny asks John about the benefits and costs of businesses adopting more environmentally-friendly practices.
John’s final thoughts on the importance of being a conscious consumer [44:29]
About this episode’s guest: John Engelander
A true force of nature, CEO & Founder John was green way before it was cool. It was his belief in profit with a purpose that led him to start The Planet Earth Cleaning Company circa 1994, and he has been inspiring people and companies to be greener and better for the planet ever since.
In 2007, John completed his certificate in Sustainability Advocacy at Swinburne University. He believes, “when you look after the planet, you look after yourself”. When we influence others to take responsible actions, there is a ripple effect. And that’s part of doing good by being good.
Today, John works with people that are looking for a healthier alternative & genuinely cares about making a difference to the planet, whether that’s through The Planet Earth Cleaning Company, the EcoBin business, or his personal advocacy & public speaking. John believes “conscious consumption is a great way to start. After all, less is more, and your planet will be healthier for it.” Now that’s good for business.
Out of the office, John burns off some of his high energy levels with water sports, snow skiing, mountain bike riding, cardio pilates and enjoying time in nature. And when not running after his kids and dogs, he likes to tinker on the piano, watch movies and have dinner with friends.
Transcript: Do environmental and business sustainability go hand in hand? w/ John Engelander – EP172
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.
And I do believe that businesses that are purpose driven, people are attracted to that. And that attraction makes people happier and more productive.
Gene Tunny 00:15
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 172 on environmental and business sustainability. My guest is John Engelander, founder of the planet Earth cleaning company, and also the founder and CEO of Ecobin. In this episode, John and I discussed his proposition, but environmental and business sustainability go hand in hand. After my chat with John, I provide some reflections on the conversation, so please stick around for those. Also, please check out the show notes for relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either John or I have to say in this episode, whether you have any thoughts on environmental and business sustainability? To what extent are they aligned or in conflict? I’d love to hear from you. Before we get into it, I would like to let you know that I’m going to take a short break from the podcast over January and come back in early February. Righto, and now for my conversation with John Englander of Ecobin. Thanks to Obsidian Productions for their assistance in producing this episode. I hope you enjoy it. John Engelander, welcome to the programme.
John Engelander 01:26
Well, it’s an absolute pleasure to be here today, Gene. So, thanks for having me.
Gene Tunny 01:30
It’s it’s fantastic to chat with you, John. So you’re very keen to chat about issues around business and environmental sustainability. So you’ve had a very successful career as a business owner, with the planet Earth cleaning company. And also with you’ve been involved in Eco Bins. I’m keen to understand those businesses, what you’ve done there. To start off with, I’d like to ask you about this. This philosophy of yours, I think it is that environmental and business sustainability go hand in hand. I mean, what do you mean by that? What does that mean to you, John?
John Engelander 02:14
Okay, it’s a good one because often I feel incredibly fortunate that I’ve been able to combine sustainability, and commerciality almost as a cocktail. And ther is some perfection in that because you give a lot of thought, I give a lot of thought and consciousness to how we think about the products that we consume, or what we offer our clients. Because I feel that the impact matters. And I think the price we pay for something, let’s call it whatever it might be, dollars, whatever. And then the price we have on our planet require some kind of balance, because, frankly, we don’t have an economy without getting it right with the ecology. Wouldn’t you say?
Gene Tunny 02:58
No, I absolutely agree with you there. I mean, we certainly need the environment to sustain us. So yeah, absolutely, absolutely, agree there. And would you be able to tell us about the planet Earth cleaning company? How you got involved in that? How did you figure out that this was a way that you could have a business that that met these, you know, that was both financially sustainable, and also environmentally friendly?
John Engelander 03:28
I think the like most things that can work out well, is there’ll be a problem. And if you can solve a genuine problem, then there’s likelihood there’s an opportunity, I don’t think you can make up. Often an idea, I’ve done it many times, it’s a good idea should do it. But in fact, there’s no problem to really fix or it’s not going to give people a great deal of joy. And I think there’s a problem when people buy a mountain bike, they buy that for joy, that’s not a problem. So it’s two ways, you either look at it as joy or you’re solving a problem. From my perspective. So how did it come about? I think, purely, it was by accident. I wasn’t planning on going into the cleaning industry at all. In fact, I still don’t plan on getting into the cleaning industry. I plan on trying to resolve something that made sense, and that was that. For those who have heard my story before, it was that one of the cleaners were sick, like they didn’t show up, and I ended up rolling my sleeves and ended up in a toilet cubicle of all things. Cleaning a toilet bowl, which never imagined that would happen. And as I opened up, the cleaning chemicals, the fumes were intoxicating. I also thought I was gonna suffocate and then if I thought that was bad, my hands were starting to crack split from the stingingness, I felt stinging you know, it was like burning, and that was it. Honestly, there’s got to be a better way. How can you subject people to this who were cleaning every day when that happened, and I guess that was one would call an epiphany moment, you know, if there has, if I can look after a way of fixing it for people cleaners, then there’s a there’s possibly a business opportunity, hang on a minute, if it’s good for them, it’s good for the planet. And that was essentially the birth of the Planet Earth cleaning company. Totally. Now, that didn’t mean that three decades ago, people talked about sustainability, then you can talk about green, greens is a fairly new word, back then it was just a colour. So I guess, feeling and believing and having purpose in my day-to-day life all the time drove me. And I could actually lead my people. So they understood that I was actually looking for a way to make their lives healthier. And that was a huge thing, until people started to wake up. Probably more recently, and I say recently went out when Al Gore brought out the documentary Inconvenient Truth, there was a bit of aha moment. And then that slowed down. And that now it just seems, there’s a real inertia in terms of the word impact. And it seems like that the whole idea of impact has become a big topic around what I do and probably attract investors, you know, get the calls, you know, I’ve been doing it for so long that I must know. I do. So that’s it sort of come together. So yeah, it was by accident to see a problem, the problem made sense to fix. And then I figured this is a good business to get into.
Gene Tunny 06:40
Yeah, for sure. John, would you be able to tell us a bit about I mean, how, what your scope of operations mean, where you operate the types of clients or customers that you have
John Engelander 06:52
Sure, so our clients are boutique large, or not so large, when I say not so large, that can fall under the type of clients that that would work with us. we have clients like Katmandu, we have clients like realestate.com, seek.com built a whole lot of building companies, McConnell Dow, which ones largest structural engineering firms in the world, and so forth, just to name a few and Cricket Australia, and other ones. So just a little, few little companies that probably they have good branding, good identity, recognise the need to not just take on cleaning, but see that by having planet Earth, it’s a huge upside for them in terms of letting their people know, when think about what that does to culture when you know, you’re a values based organisation. And we do this in Melbourne and Sydney, we’re looking at Brisbane, but at the moment, it’s really, really the two main cities in this country.
Gene Tunny 08:00
Okay, could you tell me a bit about what you do your operations? I’m interested in this because you mentioned the, the fumes, you mentioned the chemicals that cleaners traditionally use? And I imagine there are companies out there that are still using these chemicals? I mean, what what precisely are they are there some examples you could talk about? And then what what are substitutes? And are they as good? I mean, the thing that I’m wondering is, okay, do you do get the same quality of cleaning is at higher costs. So is this something that is a bit is a bit of a luxury? Or is this something that businesses across the economy can afford? Could you just talk about that, please?
John Engelander 08:44
Great question. First of all, chemicals. What price do you pay for your people getting sick? When those fumes go through your air conditioning wafting through something must happen, can’t measure it. But something must be going on, if it’s happening to my cleaners, because they’re right there and then it’s going to be happening somehow, indirectly to the clients. Better cleaning. Okay, let’s look at acid. It’s really good, isn’t it? I mean, you think about it, you’ve seen urinals we all have as men go into toilets and urinals and the only way to clean a urinal properly apparently is with acid, really. And an interesting story was some years ago, one of my prospective clients who became a client loved the whole story about Planet Earth, but he thought he would prepare cleaning his urinal without telling us so he went out and bought acid and did it. And a very sad story. He suffered for years. Now he called on us I would have gone no way. I’d never give that to my own people. He’s a client. I really adored this person. He took us on board for the very right reasons. And yet, sometimes consciously, it’s possible not to think so his health got a price when he paid for that. Do we have enough money for it? Well, I’m sorry, if you can’t look after yourself and pay for that. There’s an issue, how much more you pay is interesting, right? So think about this, we use chem free, we have a system, which is chem free by planet Earth, we actually installed it in the building’s plumbing system, it converts water through an electrolysis process and turns it into a sanitizer cleaner. The Cleaners just turn up with their little spray bottle, push it in, plug it in, it does that good noise rush, and then it fills the bottle up. And they can use that to clean and yes, it’s effective. And it’s not toxic. It was water, water through electrolysis process. Now, not every body wants to invest in that. So could you say it just cost us not, can do. But are we interested in getting it right for our people? And let’s face it, when you throw away chemicals into your waterways, after you clean toliets or mop floors, do you think that’s really good, can’t be good for the planet. And so all of that, and the beauty of about chem free is that we don’t have the containers. Because when you have containers delivered, that’s transport emission, then you have great big plastic containers filled with chemicals. That’s transport not only transported, but the plastic it took to make it one use. Maybe not, maybe you can send it back to the factory and they fill it up. Well, it’s got to be sent back again, transport. But imagine all you do is plug a little spray bottle in and it fills that up. Now, sometimes you just got to use a little bit more elbow grease. But if you care enough, you’ll do that. Is the price higher? I doubt it. I think what, if anything, it’s really good value. And it all comes down to the effort you put into the job. So the beauty also of that is, if I may, is that, think about this? Is everyone complaining about not being able to get labour at the moment, in this time? It’s 2022. And it’s really hard to find labour. Why is it that a purpose driven company like us doesn’t have a problem, that has to have a great outcome for our clients, because you’ve got people that actually are doing something because it matters for them beyond a dollar, because you’d never pay cleaners enough money to come do their job. But purpose will drive. And purpose if the message is properly conveyed to our clients, people, it all becomes it starts to build culture in terms of value based. And I do believe that businesses that are purpose driven, people are attracted to that. And that attraction makes people happier and more productive. Can you put a price to that? You betcha. You spent $100,000 on cleaning, you’ll get an outcome of three, four times then in your culture development, if you make sure you promote that you’ve taken on Planet Earth Cleaning Company, because it’s a big deal to make the right choices.
Gene Tunny 13:07
Yeah, I think the point you make about health and safety is a good one. I’m not familiar with the data for cleaning, I’ll have to check it out after this. I mean, I’m not sure what the studies show whether there is a significant improvement in health and safety outcomes with using these environmentally friendly products.
John Engelander 13:35
Yeah, no, I’m saying the same thing I can’t measure. All I can say is it’s a good chance. But it’s good to know, if you’ve taken on a cleaning company they care enough about their people to you know, I mean, we go as far as even caring about their mental health, we have a service where they can call up if they’ve got issues. None of my management are allowed to know about it. So yeah, we’ve gone from product to people’s minds to actually having them, you know, on board with, with, with this whole idea of we’re getting it right, because let’s face it, we all have the planet in common.
Gene Tunny 14:13
John can ask you betting impact investing? I think you were talking about that earlier, you were talking about impact everyone people are interested or investors are interested in impact now. So does that. Have you been dealing with that in investment impact or what does it impact investing community? How substantial Do you think that is? Is? Is that going to help support or help grow a lot of businesses such as yours or other businesses and that are environmentally friendly?
John Engelander 14:43
I think that look I don’t know a lot about impact investing. I prefer to invest in myself. But the truth of the matter is that I do believe that there’s a there’s a whole movement towards looking at being ethical, and ethical and impact seems to have they complement each other, don’t they? So let’s, let’s look at it this way. My couple years ago, I think my brother in law showed me a return on investment with an organisation called Australian ethical. Did that year, he made close to 50%? I’ve never heard of that in my life. I fact, I was blown away. I don’t know if they continue to do that. Was that just a fluke that year? Either way, was it settled? It spoke volumes? Didn’t you look at businesses like? Well, if you bought Tesla a few years ago, just 2000. And I don’t know, let’s call it 2020 20, February to 2020. And that share price is $480. I know because I actually invested in that. And it got it went up and up and up and up, went to 2400 got split by five, what was that worth? Then it went up and up. And now I’ve got slipped by three, not doing so well at the moment, which is really interesting, because they’ve been more profitable than they ever have been. But they’ve actually led the field where they go to in the next 10 years. Who knows. Some have faith in it, and some don’t. But it brings a whole lot of other industries together about looking at what’s viable, both commercially and sustainably. Have To be frank, I’m not a big fan of the word sustainable. So which often shocks people, but I think we should consider the idea of being enabled enable the planet, the planets in trouble, we say it’s overheating the the blanket in the sky of greenhouse emissions that are just get thicker and thicker, holding the heat under. So our temperatures change on the planet. Is is that an interesting? An interesting idea. So I think, you know, when we consider the future we’re talking about so that the health of the planet, you know, with all these things, that people plan it all together pretty, pretty combined. I think there’s a good investment even to look after our children’s future that is enabling the planet, I think it’s an essential part of it all. So, you know, often I can call our teams and enablers, they’re proud of it. We recently had our tree growing programme, we do this, you know, half day tree grow, growing programme. And we’re actually looking to do that for our clients next year, too. So because the half day programme really enables a whole, I guess, one’s team to really come together and, and be connected, which is another part of it, too. We all feel connected, we feel better about ourselves and have something in common. So that whole thing has to be viable, I believe for the organisation. To give you an idea when we when we did the most recent one 30% of our staff actually weren’t working that morning. But they showed up to be part of it. What does that say? Yeah,
Gene Tunny 17:59
yeah, that’s a good culture. Yeah, not bad. That’s really good.
John Engelander 18:04
So that has to make, you know, if you have happy culture, and they’re more productive, which I mentioned earlier, that’s going to be a viable proposition for anybody.
Gene Tunny 18:11
Yeah, yeah. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 18:20
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Gene Tunny 18:49
Now back to the show. I think I may have asked you this. So I think you may have answered it before. But one thing, one thing I’m interested in is whether it does cost you money to do the right thing as a as a business owner. So does it make you less profitable than than otherwise? You may have answered that earlier. But if you can just reflect on that, please, John, that’d be great. Good.
John Engelander 19:13
Okay. So yes, it can and, and like anything, what you choose quality always cost more. But let’s look at it this way. If it’s not, if you don’t see it as quality, but you see it as doing the right thing. Can it cost more? Possibly? I don’t believe if you buy quality, like if we offer a quality service, you pay for it. If we provide green, I don’t believe we’d need to charge you more because we’re agreeing. I don’t think that’s necessary if we manage it fine, right. But when you can talk about what would you pay to drive your workforce? Because you’re purpose driven? What would you would you bring a you know the term people and culture that and companies bring people in and spend Lots of money, right? We don’t have to do that with us. And I think that’s a huge, huge tip, as is bringing in Sustainability Consultants, you don’t need that we, we can give it all eco been planning to go in and give advice on what to do next next year will be big plans to helping organisations transition to a green future. Because I really believe that’s the direction we need to take otherwise, why would you do business with companies that are destroying the planet, and then look at that. It’s not investment, it’s destroying the planet.
Gene Tunny 20:38
So this is a quote behind you. That whose it
John Engelander 20:42
by John, Dr. Vandana Shiva writes it.
Gene Tunny 20:47
not an investment if it’s destroying the planet? So look, I don’t think that that makes sense. What it’s suggesting, as an economist, the way I think about that, is that if you do have something that is degrading the environment, then if we were properly account doing if we were properly doing the economic accounts, then what we would do is we would, we would recognise the subtraction of value in the environment. And, look, I know that economists, you probably object to the way that economists look at this sort of thing, economists would put a value, they would try to put a value on the environmental capital stock, or the natural resources. And then to the extent that there’s degradation of that you could subtract from that. And we should be recognising that in our national accounts as a, as a negative investment as a disinvestment in that in that natural resource asset. So there is a, there are economists that are looking at how we can measure that environmental damage that’s occurring. And it’s a field called natural capital economics, if I remember correctly, or there’s an environmental economics field, and there’s ecological economics, which takes a different perspective. Yep. So it’s not as I mean, economists are thinking about these issues. So yeah, I think that’s that is an interesting quote, to reflect on. I’ll put a link in the show notes to while reproduce it in the show notes and link to put some links regarding it, because I think it is a it is a very good quote.
John Engelander 22:33
Look, I don’t blame economic, economical economists. I often believe that where I sit in this world is to be highly relatable. And you can’t do that without understanding others. It’s not enough for me to be persuaded and say, hey, you know, staunch Greenie and you guys are bad. I think that’s not the way to go. And nor is that the other way. Extreme. No one listens to extremist. Really, really interesting. I mean, look, I know both sides of the story. I don’t know if you’ve ever read the book, how the world really works. And it believes that we’re in such a heavy hitter, but
Gene Tunny 23:12
I’m trying to remember if maybe, maybe I haven’t read that one. I’ve read a I’ll have to look it up. I’ve read a book about maybe a thinking of a book about the deals that made the world I think I got confused momentarily. I don’t think I have read it. Sorry, John, can you tell me a bit about it’s okay,
John Engelander 23:29
so, look, all of us we don’t think about what we buy, we just buy it that way. And so don’t consider if we buy a plastic tub, how much oil has gone into it? Or we don’t think about whatever it might be. Oh, when was it the Climate March and I was wearing my planet Earth t shirt. And some young 21 year old came up to me and says, Hey, dude, I love your planet Earth T shirts. And hey, dude, I love your one use water bottle. And it went red. And I actually looked back at him. I said, Look, I’m really not looking at you. And judging, I just think we do forget not thinking. But when when you think about the different layers. For example, ATP is a good good case in point, we brought out a waste system for being able to separate your waste using different colours, red landfill blue for paper, green for food, yellow for recycling, and so forth for plastic recycling aluminium. And, and I’ll go back to the book in a second because it’ll all come together. And when I chose to do that, it’s really good that we’re able to help people sort waste because let’s face it when you change people’s ways, habits through colours, it’s much easier Yeah. Now it’s made in Melbourne, Australia. Not only is it Australia and I thought about what’s called an LCA, a lifecycle analysis, went through the whole thing and understood how much carbon we were able to find a plastic fabric, plastic, believe it or not, but a certain type of plastic that used to 80% less energy and its manufacturing of an equivalent sized plastic bin. How’s that? So the consideration was good, by the way, cost less to make. So I can charge less for other people use the no excuse. It’s quite affordable. So talk about is it costly? Do grain not in that case, but the separation of it means imagine, you throw a plastic whatever in there. And it turns eventually into plastic garden furniture. I mean, it’s it’s pretty phenomenal, isn’t it? I mean, you didn’t have to steal the resources out of Mother Earth. You actually did it, because it was available there and then and didn’t have to go back into it didn’t have to end up in landfill. It ended up converted, right. Good point, right. Here’s the thing. Look at this book. And it’s bizarre how the world really works. And it says, we’re addicted to plastic. We’re addicted to oil. We’re addicted to steel, we’re addicted to ammonia. How are we ever going to change? Then I’ve got another book on the other side of it called the carbon carbon Almanack. It’s not too late. So which one do you believe?
Gene Tunny 26:08
Which one do you believe the carbon Albert ACK or the how the world really works?
John Engelander 26:13
Yeah. Because the Almanack says it’s not too late. And the other one says are we’re in? We’ve got all these habits. Yeah. Plastic oil, you know, ammonia, concrete, you know?
Gene Tunny 26:25
Yeah. Well, I mean, I’d like to think it isn’t too late. I recognise that there is a need to decarbonize our economies? Our look, I think it’s, I mean, I’m, I’m of the view that we need to, I’d be probably advocating a more gradual transition, then then many others, including many other of my fellow economists, I think most economists would support a carbon tax or an emissions trading scheme, which imposes a carbon price, I think there’s a recognition that we need the right signal air to, so that businesses and consumers are considering the what you call the marginal social cost of, of greenhouse gas emissions. So that’s included in the in their economic calculation. So I think there’s there is a recognition that something needs to be done. I’ve just been concerned about the pace of it. And I think, with the issues over energy here in Australia at the moment, cost of energy rising. That’s, that’s something I’ve been concerned about. But I would like, yeah, so I guess I’m saying I’m probably more of a carbon Almanack view. Because I’m just trying to, I think we just need to understand that the world the way that economists think about this, and it is that with these resources, I mean, you mentioned these resources that have been depleted or being used. And you could say, you know, maybe they been used unsustainably. But the standard way that economists look at this is that to the extent that they are, then that’s going to be reflected in the price. And that will encourage conservation of those resources. So that’s the way the the economists tend to look at it. And the argument would be that we really haven’t run out of any essential resource globally. So that’s the that would be the economic argument there. So I guess what I’m saying is that if he asked me to choose between those two, those two books, what was the one that how the world really works?
John Engelander 28:44
It really works and the carbon Almanack Carbonell Almanack. It’s not too late. It says underneath it. Yeah.
Gene Tunny 28:49
Yeah. I mean, my, my view, or rather, my hope is that it isn’t too late. I think it’s something perfect. We can, we can sort out in time. I mean, a lot of these predictions of Apocalypse are coming from numerical models of the climate. Yeah. So Well, yeah. Okay. I know that there are there have been there. Definitely. There’s definitely change occurring. I’m not denying that. But my hope. And I guess my expectation, if I had to put if I had to make a best guess, my best guess would be that we have time. But look, I may be wrong. I’m not. I’m not 100% confident in that, that.
John Engelander 29:34
You don’t have to be Gene. I think the the point here is why wouldn’t we just do the very best we can? Yeah, there’s no harm in that sort of harm. And the other way, there’s no harm in that. And so you think we all live pretty well. Let’s look at look at Australia. How many TVs do we have in our house? How many cars do we drive? And what kind of is that quality of life or is there something else that’s actually hot at a higher value? I have to tell you I much prefer getting on my mountain bike in the country and writing that than then jumping into someone’s petrol car, you know? So it’s it’s those considerations, what is life? What is it? What is really the essence of the quality? That one would really require the kind of 140 square home carpark underneath? Or do we really need that much? Do we? I’m not saying it’s not a judgement call, by the way. Choices are there? But I don’t know, it’s like, I think it brings it down in my fundamental philosophy. And that is, if someone was to ask be you’re really passionate about the planet? And I’d say no. And so that shocks, but there’s a reason behind that. It’s not important for me to be passionate about that. I mean, I love my you know, I could have someone you ask someone, do you love your mother? Yeah, very much. Are you passionate about it? No. Love it. And so it’s those things that you kind of look at, it’s logical, I look after myself, do you look at yourself? Do you eat good food? Do you do all the right things for yourself? So you do it for the planet, wouldn’t you? You don’t have to be passionate, just passionate. From my perspective, live life fully is my passion. I do stuff, you know, I get out there enjoy the fresh air. I don’t want it to go naturally I want to look after and preserve what’s happening. And what price do you put to that? Now? $1 financial, you know, it’s not important. Entirely. Put it in perspective. But if you have very little it is important. But when you have more, how much more do you need? What is at what point do you say it’s enough? At what point do you tell your shareholders that, you know, we’re going to deliberately make this? It’s okay. But maybe it’s not? Because I didn’t come into business just on that basis, I need to be interested in what I do. And when I’m interested, that fuels me, and somehow Money takes care of itself. Not always. But most of the time, yes, I’ve made, we’ve all made mistakes, I brought out a product called Eco to life. Would it be 14 years ago, that in 14 years ago, while I was trying to and as we were building the product together, it was actually concentrate to sugar cane and corn made into a cleaning product. And there’ll be little little packets, he buys spray bottles. So once you once once you buy spray bottles, you’d have to buy them again, you have to go to the supermarket and get more, but you just add this little bit at the waters, you’re not carrying heavy loads of water home either. And I thought that would be a good idea. And I threw a lot of money into this idea. And it didn’t, didn’t happen. So the timing, you know, today I know what’s happening because I you can buy this, you can buy this. So in a sentence pioneering is it’s very painful. But I’m interested in the topic and it becomes part of my story. And I’m good with that. Instead of being sort of being a victim, you look at it and go, What have I learned? Where can i What, how can I use that moving going forward? And I do believe we’ve got a chance. And it’s a great story for all of us to come together and get it right. And there’s so much new technology coming out. It’s unbelievable. In terms of what we’ll see we’ll see people with solar on their roofs, sharing their power with other people. That’s a great example. Yeah. What about geothermal, and housing your home with heat and air conditioning from the natural substance of Earth, underneath us, and by the way, that could be economical to once we get the price down in terms of that technology.
Gene Tunny 33:54
I think the point you make about the local energy grids or whatever you call them, with the sharing of solar and if we can use EVs as batteries, and if we have smart metres in the household, I mean, there has to be a lot of investment that occurs before this all happens and you know more batteries around the place that Yep, EVS mean, everyone will need to get an EV they’re currently twice as expensive as they probably need to be to have widespread adoption by consumers.
John Engelander 34:27
Jane, question though, do we need to own cars? Ah, we currently use if you’re lucky one and a half hours worth of driving a day.
Gene Tunny 34:37
Yeah. Look, I agree with you there, John. And I mean, I’ve I myself have spent several years of my life without a car. But I recognise that the only reason I was able to do that was because I lived in the inner city. So I didn’t have to commute. I didn’t have a family to to ferry around. into. So I think I think it’s a fair point. And you know, we could look at mobility as a service, I think they call it. So yeah, yeah.
John Engelander 35:12
Call on it when you need it. And now that way, because battery technology, if it’s function properly, it can go a long way. Otherwise, we’re wasting a terrible resource. And we can have less cars on the road. And instead of people going, our batteries are bad. Well, maybe we can turn that whole notion to something that’s productive, as opposed to focusing on what’s wrong, rather than what’s right. You think?
Gene Tunny 35:42
Yeah, well, yes. I mean, I’m all for having fewer cars on the road. I try and walk wherever I can. I just, but that’s partly for self interested reasons. It’s not necessarily for the environment. I think it’s good that it is positive environmentally. But I, I look at it as incidental exercise. I mean, I think that I find that if I don’t, if I don’t walk, to go down to the shops then that I lose an opportunity to do a bit of exercise, and then I’ll go to the gym. But I find that if I can not take the car, I get a benefit that way. And yes, it is good that it is good for the planet. That wasn’t that probably wasn’t my first consideration, though.
John Engelander 36:25
But you know, you said something really profound is that you looked after yourself. Look at the planet, you look up.
Gene Tunny 36:34
Yeah, there’s a nice correlation. There are a nice coincidence of, of interest there. Yeah, yeah.
John Engelander 36:40
Yeah. I just, I just hope that the economists see the logic and the fact that, from what I understand is a sustainability scorecard that I that I believe will will come to come to businesses, whereby it’ll be just as important as your financial accounting, as it will be to show that you’re actually showing your impact.
Gene Tunny 37:04
Yeah, yeah. I mean, one thing I’m interested in it is, to what extent can this be led by this transition? To what extent can be led by business and consumers directing? Well, by their purchasing power, directing, production, directing the commercial activities of businesses and how they treat the environment? In particular, we have the scorecards, if there’s greater transparency, to what extent can change be led, in a bottom up way, rather than top down with government policy to have any thoughts on that? I mean, to what extent is a lot of this stuff already happening? Or does it? Or do we? Or do you need government policies such as carbon pricing as well?
John Engelander 37:53
Yeah, it’s, it’s, it can be, it feels a bit disappointing if you thought that’s what it would have to happen. Look, look at our young generation, they want to work for companies that are values based, they care that have this notion about the planet. So it could happen from the bottom up, down, right? Because you do attract. I’ve heard this so often attract and retain staff. I know, it happens, we do it. So if you, you can do it from the bottom up. And I don’t really want to see people forced to engage being engaged. It’s like leading a horse to water, isn’t it? So imagine if you just got people from a feeling of what would we call it excitement, or at least be happy and joyful about the fact that work for a company that actually cares put together green teams develop ideas together. It’s, that’s one of my missions next year, actually, is to help business transition to a green future. And there’ll be in this regard our membership base solopreneurs, coming together, and having evening discussions about what’s possible, and then see what of the possibilities we can actually put into action or influence others to put into action. But to I can’t have all the answers, but I can certainly bring the right people together in order to support the needs of of local organisations. And certainly one of the things I do find really of high value. And I mean, when you talk about bottom up, if I get invited as a speaker into an organisation, I’m talking with a level of enthusiasm that will that I’m believable, inspire everyone to actually feel like we can do this. We can all be planted enables. Because by that way, we enable the planet and they’re viable because they’ve got a sense of purpose when they come to work every day.
Gene Tunny 39:47
I think that does make sense. The challenge is, and this is this is probably obvious. It’s probably rather a trivial point. But the challenge is that you as a Business, you could be doing the right thing. But if your competitors aren’t doing the right thing, then they can get a competitive advantage by having a cheaper product. But then you’ve got the advantage that you’ve got, you can label well, you can promote yours as the clean green, the environmentally friendly alternative. So that could give you an edge in the marketplace.
John Engelander 40:20
I think it would accept that when you say that, and you have a cheap, cheap and nasty cleaning company, putting it together a quote, one needs to ask, what are you really getting for the money? Let’s put aside the green aspect. The Greens there to you know, from my perspective, you have that as a product, it better be good. Once it’s good, everything else should come together. I hope you know. And so I don’t, yes, it does give it does allow people to have their eyes pop out and go up, I’m going to listen to you because you’ve got a green way of doing things, but also gives you an opportunity to say how you’ll do it. And how you’ll do it better for them. If you get that chance that really shouldn’t have that boring conversation that most companies are, oh, you should use our business because we’re we give good service to our customers. And we do this and we do that. And you know, I’ve heard that everyone, everywhere. So what makes you really stand out? And it’s what you stand for. That makes you stand out?
Gene Tunny 41:27
Right? Yeah. And I mean, have you had? How do you prove that to to your customers? John, how do you are the fact that you’re the sustainability? You’ve got testimonials? And you’ve got? I mean, you got a track record now, haven’t you? I guess one thing that would be it seems like you’re talking about the service people trying to promote themselves based on superior service. And I mean, a lot of businesses will say that. How? Yeah, yeah, exactly. So I guess you do need to demonstrate that if you have this environmental commitment, you need you need some is that there’s a certification, I’m just trying to think how
John Engelander 42:13
it’s a great term certification, I think that does belong to some people who need it. And so when you’re born green, the birth of a planet back in 94. So essentially, that’s us were born green, we know it, we should be the ones giving the certification to others. And that’s why when companies take us on, they suddenly become greener, they, they have an opportunity to tell their people. And let me tell you that that’s a good news story for their for them. That’s, they want that message. And so when you offer eco bins, colour coded bins, systems, and you roll it out for no charge whatsoever, and then you give a morning tea talk on why we do what we do, and how they can also become plant enablers. The who does that, and then with, with all those other aspects about talking about chemical free cleaning, and then everything just comes together, you can’t find that just anywhere. You can’t. Even in the name planet Earth, we imagine this, you have the person who made the decision they send on their intranet, to their 500 cluster. We’d like to welcome to planet earth, their new caretakers around our building, starting on Monday, you can’t do that if you’re gonna make up a name Zen topless and Sons cleaning service, it just doesn’t feel it just it doesn’t register, right. And that’s more than ever, this whole idea, it has never been more relevant for what’s going on in business. And what’s and it’s relevant for what they tell the people, it’s relevant to attract people to your company. By golly, you know, all you have to do is ring up, see, all you have to do is ring up any of our clients. You know, it’s it’s a given. And in my decision, because I’ve done it for three decades, and know what I know and want to help and support organisations. How do you beat that? Warren Buffett has a great line. And he talks about enduring, competitive advantage. You can’t beat three decades. He can’t beat being born green. Can you?
Gene Tunny 44:29
Exactly John, that’s, that’s terrific. Any final thoughts before we wrap up?
John Engelander 44:35
Yeah, whatever you do, start to think about the choices. Because our choices do have impact. And being a conscious consumer makes a huge difference. And people notice you. They do they do when I when I bought my first TV seven years ago, boy, did they have a message. I didn’t just buy a car. So I think being conscious and other people watching you do what you do. You don’t even have to tell people, if they watch how you do it. Let them ask you the questions, but really, that don’t. I don’t think it’s a good idea to be an extremist. If you want to be listened to, and and hold an open mind, and we’d live with what’s possible, that’s what I do.
Gene Tunny 45:22
Okay, so a steady, can we take a steady approach? I mean, I’d like to be more conscious, more environmentally conscious. I’d find a difficult making radical changes at the moment. But I know that because I know there’s a movement for people to live off the grid. I don’t think I mean, I could never imagine myself doing that. But I mean, is that something you’d be considering? John?
John Engelander 45:43
Not? Yeah, I have solar and I have batteries. And very convenient. But depends. I like this term shades of green. Okay, where you sit, let’s just get, we don’t have to be perfect. Let’s you don’t have to be you just be better, not perfect. And if you just do one thing at a time and think about the one thing you can do today, I think that makes it simple. Otherwise, it becomes complex. And honestly, it’s not as hard as you think.
Gene Tunny 46:15
Yeah, I think that’s a great message to end on John, John Engelander. And that’s been great. I’ve really appreciated your, your thoughts and your insights into business and sustainability. So thanks much for your time.
John Engelander 46:29
It’s a pleasure, and I’m really glad that you’re able to catch up with me. So thanks, Gene.
Gene Tunny 46:36
Okay, so what are my big takeaways from my conversation with John? My first takeaway is that it’s clear that many business owners can have sustainable businesses and look after the environment to John’s businesses are great examples of how that can be done. As an economist, however, I wonder just how widespread this phenomenon can be. In the absence of regulation or policy measures covering all businesses, many businesses will probably choose lower cost and less environmentally sustainable practices. And many consumers will choose lower price options over more expensive, environmentally friendly ones. That said, public attitudes are changing and it’s possible consumer behaviour will drive more environmentally sustainable practices by businesses in the future. Following my chat with John, I found a really interesting study done for MasterCard and 2021. And I’ll put a link in the show notes to it. This study reported that more than half 54% of those surveyed across the world believe it’s more important to reduce their own carbon footprint since COVID-19. And more than three and 560 2% said it’s now more important than before that companies behave in a more sustainable, and eco friendly way. changing attitudes could have big implications for business in the future, and I’ll aim to have a closer look at consumer attitudes and behaviour in a future episode. My second big takeaway from my conversation with John is a reminder that we need to consider any degradation of our natural environment if we’re properly measuring the benefits of economic activities. The discussion I had with John in this point was inspired by a quote that John had on the wall behind him in our conversation over zoom. It’s not an investment if it’s destroying the planet. That quote is from Dr. Vandana Shiva, an Indian scholar and environmental activist. I would know that for several decades now, economists have thought a lot about how to account for any environmental degradation and cost benefit studies of projects. This is not something we’re ignoring or don’t care about. Economists have also thought a lot about how to augment the traditional national accounts to reflect environmental considerations. I’ll aim to cover how economists analyse environmental impacts in some depth in a future episode. For now, I’ll include some links in the show notes relating to the field of what’s called natural capital accounting. And I’ll also add some links regarding how economists have been trying to account for environmental impacts and cost benefit analysis. Okay, those are my big takeaways from my discussion with John Englander. The EcoBin, do you think I picked the most important ones? If you’re willing to share your own takeaways from the episode, please send them to me via contact at economics explore.com or send me a voice message via SpeakPipe. You can find the link in the show notes. Thanks for listening and Happy New Year. 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 firstname.lastname@example.org 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.
Energy market expert Joshua Stabler shares his views on the current Aussie energy crisis and how well placed Australia and other countries are to transition to net zero greenhouse gas emissions. Learn why Joshua thinks that transition could be disorderly, and learn about the role self-driving EVs could play and whether Josh thinks nuclear energy and hydrogen are realistic options for Australia.
Joshua Stabler is Managing Director of Energy Edge. He has extensive experience in supply-side market operations for the electricity and gas sectors, and as an advisor and system developer in the Australian energy industry.
Joshua is the architect of the Gas Market Analysis Tool (GMAT), which is utilised by gas producers, LNG participants, gas generators, end users, financial intermediaries and banks. Joshua is also the author of The Edge – Gas Market Update report.
Transcript: Aussie energy crisis & Net Zero transition w/ Josh Stabler, Energy Edge – EP170
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.
Josh Stabler 00:03
So we have a known urgency that we need to get rid of carbon out of the atmosphere because it is causing issues with regards to climate change, our ability to shift that rapidly, may be outside of our economic grasp. That’s the danger.
Gene Tunny 00:19
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane Australia. This is episode 170 on the Aussie energy crisis and the transition to net-zero, not just in Australia but around the world. I’m joined by Josh Stabler Managing Director of Energy edge. Energy Edge is a Brisbane based advisory firm specialising in energy markets. Also joining the conversation is Tim Hughes, who helps me out of my business adapt economics from time to time. It’s great to have Josh on the show because energy has been very topical lately. High coal and gas prices, largely as a result of the war in Ukraine that pushed up the costs of power generation worldwide. Also, a cutback in maintenance during the pandemic has compromised generation capacity. Also increasing prices as Josh explains in this episode, just how bad are things energy markets, Josh helps us understand what’s been happening and what’s to come. Please check out the shownotes relevant links and information and for details where you 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. In the show notes, you’ll also find a list of abbreviations. There’s a lot of them when it comes to Australia’s energy sector, including any M for national electricity market and our Zed for renewable energy zone. Righto. Now for our conversation with Josh Stabler on energy markets. Stick around for the end of the conversation for what I think are the big takeaways. Thanks to my audio engineer Josh Crotts is the assistance in producing this episode. I hope you enjoy it. Josh Stabler Managing Director of Energy Edge welcome to the programme. Thank you for having me. Oh, it’s great. Josh. Tim, who’s joining me as well. Tim, my occasional co host, recommended you as an expert on the gas market and energy in general. So I thought it’d be good to have you on the show. So Tim, thanks for that. And good to have you on the programme again.
Tim Hughes 02:18
You’re welcome, Gene. Good to be here. Hi, Josh.
Gene Tunny 02:20
Excellent. Okay, Josh would be keen to know about your role at Energy Edge. What is Energy Edge? What, what do you do at Energy Edge, please?
Josh Stabler 02:30
Sure, so we’re a small boutique advisory firm in the energy market, we have sort of two different arms of our business, one sides, our advisory sites. So that’s helping businesses in the wholesale energy market, understand their exposures, that’s with both traditional assets and renewable assets. And on the second side, we have our software arm of our business. So we have our own deal capture system, we have our own risk and analytical system. We have a gas market analysis tool, and we have our own edge report, which we talk about things that are going on in the industry.
Gene Tunny 03:02
What do you mean by exposures? What are they exposures toward?
Josh Stabler 03:05
Oh, yes, so the commodity exposure. So we we we delve deeply into understanding what the business are, how it makes money, how it pays for its energy, and then using that commodity exposure, where then we’ll say simulate out the exposures that they have on making a sort of at risk assessments of the money that they could make. And then from that you can go into deep sort of risk metrics. So you can work out a business’s probability of exceeding certain levels, and that’s known as at risk modelling.
Gene Tunny 03:39
This is Monte Carlo, Monte Carlo simulation modelling. Yeah, good one, using At risk. That’s one of the tools you can use. Right. And what sort of clients
Josh Stabler 03:50
Ahh yes, we’ve we’ve actually supported about 80 to 100 energy businesses on the East Coast, which surprised me sometimes I never wouldn’t think there’d be that many. But, you know, we help all sorts we help, you know, most of the Queensland Gox, we’ve really supported. So we’re actually heavily involved with the setup of Cliniko, which is the latest Queensland Government generator that took over all the renewable projects in 2019. So we came in, help them set up their risk systems and help them get started ready for day one, and then they flip went on and did their own things themselves.
Gene Tunny 04:25
Right. So this is one of the Gox the government owned corporations here in Queensland, that’s looking at renewable energy options for the Queensland Government. Okay. Right. That’s great. Sounds like quite a nice portfolio of clients. And that’s great. Yeah. Okay. Yeah. Tim, did you want to kick off with the first policy or economics question?
Tim Hughes 04:54
Yeah, absolutely. So it’s funny we’ve we’ve all talked about this at different times. So cobbling it together. We’re gonna start with Josh, a summary of how we got here, because I know you’ve talked about this before. And I think getting an understanding of this then helps with the conversation we will have about where we go from here.
Josh Stabler 05:14
Yeah, definitely. So how do we get here is such a, you know, an open-ended question, but in terms of, what are we looking at there. So during winter 2022, in Australia, we saw unprecedented levels of pricing. So the electricity prices settled at $300 a megawatt hour for the quarter, the highest ever previously was about 170. And this was across all the regions. So Queensland, New South Wales, South Australia, and Victoria, were all at record high levels. And this was an accumulation of so many different things that have happened over the last few years. And if we go back two years ago, we have to go through the traumatic experience, again, with going through COVID was that during COVID, we had travel restrictions and congregation restrictions, which means that you couldn’t bring expertise from international space, and put them together to do preventative maintenance. And because we didn’t do the preventative maintenance on coal generators on gas generators that lowered their reliability of those assets. Now, the exact causality of each of those is not perfectly known. But what we started seeing was a rising of unavailability of the coal generators. Now, as we move forward through time, we started seeing other international things starting to change. The, the war of Russia and Ukraine was in March this year, but they actually started reducing their supplies into Europe at the end of 2020. So by the time that they’d reached the point of the Nord Stream failure in July this year, they had actually stopped delivering mushroom to Northern Europe, had lowered their deliveries from 17 petajoules, a day to 1.6. Now, that’s 16 petajoules less now that seems like a big number. And it is a big number, it’s actually the equivalent of 95 million tonnes of LNG, which is 25% of the world’s LNG cargoes. So the extraction of one country’s deliveries to Europe was the equivalent of 25% of the world’s LNG. So it’s a it’s a big, big variation in terms of this is probably the largest shock in terms of supply shock, ever, like I know what the equivalent would probably be the 70s sort of oil shock conditions. So it’s an amazing sort of outcome. But it started happening well, before we actually got to the point of war, which meant that we actually started seeing gas prices in the international space rising from September 2021, six months before we actually had the the actual war. And that led to a scarcity of that of energy starting to appear across the planet. And by the time we got to April, in Australia, we’d actually been buffeted away from this, we weren’t seeing any of the higher prices until we started in April. And that’s when it’s first started seeing a rising of the of the energy prices. This is on two fronts, one was on the coal international coal prices which reached $450 a tonne, which is the equivalent of around about $25 a giga Joule in the in the coal pricing. So that means that coal was not cheap. Coal was very expensive.
Tim Hughes 08:24
What was the regular price?
Josh Stabler 08:27
Yes, for the first decade of the market, it was $1 a giga Joule for coal and $3 or Giga Joule for gas. So that’s in the early 2000s. And progressively gas prices have risen and fallen. But the coal prices have stayed in that sort of $1 to $3 range. So to see it go 10 times the level is really just driving up an underlying input cost. And then by the time we got to May, we had our first event, the event of the roundabout, the 28th of April through to the sixth of May, was when we first saw a sharp increase in the electricity prices. And that was primarily driven by a large reduction in availability of coal generators. And so we saw a spiking of sort of 30% of the fleet was completely offline during May. In New South Wales, we’re talking 40-45% of the fleet was offline. So this is an unprecedented level, like a AMO forecast 12%. So we are three, four times the height in terms of unavailability of the coal generators during that period that caused electricity prices to spike. Two days later, gas prices spiked. So it wasn’t a gas rose and caused electricity to price up. Its electricity went higher and that caused the input costs to follow it up. So we had and once that once the dam had broken once we had the gas prices jumped up to around about $30-40 it connected to the international price which coincidentally was around about $40 a giga Joule, but just pure coincidence. And when once it reached that point, we started having the prices remain in that area. Now, the coincidence wasn’t that the price joined up the coincidence is that in the late 90s, we decided that the market should have a cap, the market cap should be $40. Nobody thought about that $40 cap when thinking about the Ukraine war in 2022, she just happened to be in a note number that worked out very nicely. And once it came that $40, we’ve just had it stay that level. And we’ve had the market go into a price administered state. And then during that, that level, there we had very high electricity prices. But we didn’t have shortfalls, they weren’t customers that were losing the ability to consume. They were just paying a lot in the spot market for those for that generation, that consumption.
Gene Tunny 10:52
Right. So look, there are a couple of things I’d like to follow up on there. Josh, you mentioned that COVID meant that we couldn’t get people over to do maintenance on coal-fired power stations and gas-fired power stations too. Yeah, right.
Josh Stabler 11:10
An outage is literally bringing expertise and putting them really close to each other in a kind of confined space. So we couldn’t get them in because they couldn’t fly from overseas. And when they were here, they also couldn’t do the work. So what we did was a lot of the generators moved their outages just to the next slot. And the slots are normally the April, May or March, April, May. So the shoulder seasons in terms of weather. And the second slot is in the September, October, November period, where you also have a lowering of demand. So you’d normally fit the outages in there, and they didn’t. So they moved them into the next area. And eventually we just squeezed them all together, and then assets just started to fail.
Gene Tunny 11:50
Yeah, that’s interesting. Something that Tim and I are interested in for in terms of, it’s another one of these potential world costs of lockdown or costs of COVID policies that are on the year, the negative side of, of COVID, or the cost side in a cost benefit analysis. So I have to check with Judy Foster’s included this in, in her analysis because we went to an event a couple of weeks ago in Brisbane here on pandemic and managing the pandemic. And there’s a lot of discussion about the costs and benefits of lockdowns. I mean, that’s, that’s not for this conversation. But I just thought that’s interesting as another cost of those policies during COVID.
Josh Stabler 12:42
And it’s not just Australia, the French nuclear facilities are all having an unheard of levels of maintenance right now. Because again, they also had to delay their work. So there was just that there was just a period of and so that that created some of the false security because in 2020, nobody had outages. So everybody had extra supply to the market, which caused prices to fall. So it wasn’t just that we had a lot lower demand, we had a slightly lower demand because of COVID. But we had an incredibly high level of availability of assets. Because no one did any work. No one was doing any work. But the repercussions of that are that there’s an increased unreliability, but be they’ve got it then do that work. You can’t avoid it. There are statutory obligations, you have to actually do it within a certain time period. Otherwise, you’re breaking the law.
Gene Tunny 13:32
Josh, can I ask you what’s the connection between the domestic price paid for gas in Australia and the international price they’re linked?
Josh Stabler 13:41
They are at time. So we’ve we had a very, very strong relationship during 2019, 2020 and early parts of 2021. And then in mid 2021, electric the gas prices domestically jumped up very rapidly, primarily due to domestic issues, domestic supply concerns, and then the gas prices internationally started to rise and they rose steadily from 10-15, 20-25, 30, $40 a Giga Joule, but the Australian Government gas market after about October or September 2001, all the way through to April was only about $10 a giga joule. So we had this rising International and a very low flatlined was still higher than historical numbers, but it was very low in relative terms. And the relativity really matters for a lot of businesses. If you are a fertiliser business and you sell fertiliser, you are a price taker, you take what the international price of fertilisers are worth, and that is priced on international price of gas. So if you have a relatively low price that absolutely high, you are still in a strong position. Whereas if you are a domestic customer who sells domestically then the absolute price is a problem for you because you’re passing that on to a domestic an audience who have to take the higher price. And that will directly increase their, their outcomes, because there they are a price setter themselves. So that, that differential there matters, especially over the medium term in terms of what that does for certain businesses. Now, once we got to make we, that’s when it joined up, and we had lots of periods where the domestic and international were about the same. There are periods where it looks like the domestic is cheaper than the is more expensive than the international but the international price was jumping $10 a giga Joule, every couple of days. So the volatility was more to do with the when you sample the data more than it was to do with the market price it was moving between 40 and $60, depending on the international experience at the time. You know, when Russia first did that change in their availability, the market moved to $20 in a day. So it gets a bit hard when you’re trying to say, well, what is the exact outcome, in general for the year substantially cheaper than almost any other country other than, say, the US and Canada, Australia in terms of gas pricing. Because most other countries are highly linked, you have a Japanese Korea market, okay, yeah. And you have the TTF, which is the Dutch price for gas, both of those have been elevated in the 60s $70 for Giga Joule equivalents for the entire year. And Australia had 40 for about two to three months, and has had 15-10, 15 for the rest of the period. And long term contracts have been in and around about $12.38, I think was the number that the ACCC reported on so substantially below where the international prices are. Now there are some people who have offered very high prices. But that doesn’t mean that anybody traded there. It’s like going and saying, I asked a hotel. Well, I thought price for a night was and I asked a guy on the street, if I could buy his house, they came in at different prices. You’ve got somebody who doesn’t have any guests available to sell, and you ask them to sell you gas, and they’re going to obviously offer a very high price.
Gene Tunny 17:03
Okay, so I just want to make sure I understand what’s going on. So is it the case that the gas suppliers or the big gas companies, they’re they’re entering into these longer term contracts with their customers, and they’re doing that at a rate that’s much lower than the spot price, because they know that will that spot price is just temporary. That’s what’s going on.
Josh Stabler 17:27
And it’s just for short periods of time that those prices are at that very high levels. So you’re not seeing that pass through that long term contracts unnecessarily getting done at $4. There are, if you go to businesses that do not have any gas, yeah, it’s already in you ask them to give you a price, it’s going to be high. But that, but that post, that business doesn’t end up doing the deal. And that’s what we’re seeing. And when you look at the ACCC report they’ve got the price range was between 10 and 60. But the price ended up being 12. So it’s yes, there are some numbers that look, and they are frightening if you are a customer, looking at the deal like that, and trying to make it work. But most of the ones that were especially the ones that made the media were related to the accident of western energy, which went broke in late May. And the basically, businesses were then going out to so that that retailer had to give their contracts back to the retailers last resort. And that didn’t that those prices were back at the tariff rate. And they were very, very high. So there was some bad media around that. But in general, most customers who have gone to long term, producers have had prices in the order of 10 to $14 a giga Joule right, not on a weighted level. Is it anywhere in the 30s or 40s?
Gene Tunny 18:54
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 19:29
Now back to the show. I’ve got some more questions. But Tim, I should ask if you’ve got any questions for josh.
Tim Hughes 19:36
I know between the three of us we could talk for days. For us and for everyone else who might be listening, we should not. However, so if you did have any more questions with that Gene, what I was going to come to and we might want to move on to this after if you have any questions to finish, but basically, because we’re in this fascinating point in our history of our time with emerging energy markets to clean and green options that are coming, the opportunity or the challenge to get to net-zero. So that’s what I’d like to put forward for the next part of it. So if you’ve got anything to add from what we will do that first.
Gene Tunny 20:18
I might just ask you about the risk of what happened earlier this year, happening again, it sounded like that there were some specific circumstances the fact that there wasn’t this maintenance going on, in their catching up with maintenance, does that mean, we won’t see another repeat of what happened earlier this year?
Josh Stabler 20:42
Okay, so, I guess, there’s two parts to that we have the problems that we know that are deterministically at fault. Yeah, which is that we know that there is some coal supplies that are low, some of the local mines at say Mt piper, in near Newcastle, have reaching end of life, and they will need to get coal from train links. And the train links have a limitation in terms of the delivery. So we know there are some facilities that will be energy limited by the fact that their suppliers are constrained. That’s the deterministic issue. On the probabilistic issue, we had outage rates of three times what we anticipated during May and June periods. That of those were random events. So they weren’t failure, reliability failure, they are a probabilistic event, they there is a chance that those numbers could come back, there’s chance those those things, as we are getting closer and closer to the end of life are these assets that are less likely to spend the money to go and fix the power station to be ready. Because they don’t, they won’t recover the profitability. And that’s that there is so if you’re only going to survive five years, and you want to spend $100 million, you need to make an extra $20 million out of that asset every year in order for that to even makes sense. And if your input costs are high, then you won’t go and do that. So that’s why we’re seeing a whole lot of power stations, even in a very high price environment. But it’s also a high cost environment, are worried about what that means for them as they get closer to their end of life. And that leads us to that, I guess, if we can carry on to the next question is what happens in terms of as we get closer to transition. And the complication of transition is that it is by default, disorderly.
Tim Hughes 22:38
So this is transition to new energy sources.
Josh Stabler 22:40
As you transition anything from any old, anything old into anything new, you are going to hit this issue in regard to how you get somebody to give up their space for the next person. Now, if a power station has no goal, no plan for profitability over the next three years, then you would be better off to turn off rather than lose money three years in a row. So that means that you’ve got this, you don’t get an overlap in a transition. Normally, you get old assets who are there will want to exit because they see no path to profitability. But we don’t have a solution yet, because that hasn’t come on yet. So we have a renewable wave and a battery wave, and we have a decline of the coal. And if you don’t act to try and keep them so that they overlap, then there will just be a gap. And if you have a gap, then you’ve got an issue because then the power stations as they become less reliable, will fail. And in fact, when they fail, they will withdraw their capacity from the market, which will cause prices to rise. Making them the reason why the prices are high is because of their failure caused the event. So you actually have to that, and that leads you to part of the policy plan, which is how do you keep something online that doesn’t make money. And that’s where you had starting to talk about capacity markets or anything else to try and social licence. This is why a most said that you’ve got to give three now three and a half years notice before you can exit is because you need to tell them in advance that you’re going to leave. Now the obvious response was origins, which was if I had to tell you three and a half years, I’m just gonna tell you three and a half years and I’m just gonna make a different decision at a later date if I need to. If I get close, and I want to keep it online, well, you didn’t tell me I have to shut and three and a half years. I can just keep it on for another two years with a year’s notice. And I’ll just keep it going. But if I’m forced to make a notice then I’m gonna give it early. And then I’ll update it if I need to.
Gene Tunny 24:48
Yeah, good point. Good point. So amo was the Australian energy market operator. And yeah, it’s interesting. This I mean, I’m, as an economist, I’m rather laissez-faire. I’d prefer to just to rely on market hours, the market as much as possible. But yeah, with energy, you’ve got to take into account the fact that you need to keep the power on you need reliability. So we need, we can’t just rely entirely on the market. And that’s why we’ve got this Australian energy market operator that’s overseeing things and trying to get the right policy setting. So we do have, we don’t end up with unreliable power. And we don’t have to have blackouts in that horror show scenario.
Tim Hughes 25:32
I see. Am I right in? I think it might have been one of your podcasts Josh, or something I read recently, and it was a rant. There, there is gas that is used as a backup currently, for that kind of situation where it is expensive, but it kicks in and that can sort of cover any shortfall. Is that right?
Josh Stabler 25:52
Yeah. And it’s, it’s important to like, when sometimes when you think about what is the what is the idea, you can think globally, you’re like, Okay, well, nuclear is going to work for the world in terms of meaning things because of the problems that some countries have. But Australia has the situation we have, we have a lot of sun, we have a lot of wind, we have a LNG export capability that is delivering gas offshore, all the time. So if we get ourselves into a situation where we are short of wind and short of, of sun, we actually have this enormous amount of gas being delivered, that can be interrupted for a short period of time to deliver that energy back into the grid. And the amount that has been delivered is the equivalent of the entire electricity market. So the four petajoules, that goes off is approximately 100% of the net. So if you actually brought it all down, you could power the whole network if you had enough power stations. But what it does is it provides resilience. Now, not every country has an LNG export option. And it’s not saying that we need to use the gas all the time. In fact, we only want to use it when it’s required, because it’ll probably cost us more to interrupt them. So if we had a commercial arrangement where we could say, give me your gas when we need it, and we’ll pay you some money for it, well, then we almost never have a reliability issue. So long as we can get that gas where it needs to go.
Tim Hughes 27:21
I mean, that would obviously cause some problems with markets. So you’ve got to keep a consistent supply to the current customers overseas, etc. So that might be in a sort of like a short emergency sort of situation.
Josh Stabler 27:33
Yeah, a percent of theirs is a huge amount of gas for the domestic market. So a percent of a day is still 40. It’s like 150 megawatts, 24 hours a day. So it’s 1000 megawatts for six hours, it’s a huge amount of gas that can be moved through into power stations to meet the short term problem.
Tim Hughes 27:55
So with the broader view of where are we going, you know, what’s, what are the options open to us? What are the opportunities for Queensland and Australia in particular, but there was clearly a lot of choices about, you know, renewable energy is obviously growing very quickly. It appears to be green and clean, which I know is a little bit of a side conversation as well. You know, everything has some impact of some sort. But that’s the direction we’re heading. Net-zero is the term that we are all familiar with, that covers it all as in like, whatever we’re going to be doing, it’s not going to be harming the planet. That’s pretty much what the goal is. And so we’re in this transitional period that we’re entering now. So from gas and coal in towards these different areas, and like you say, gas may form a part of the contingency or the emergency supply. So we’ve got renewables, we’ve got wind, we’ve got solar, waves, hydro, all these different things, in your opinion, and your experience. What are your views on these new available sources of energy?
Josh Stabler 29:04
So if we separate it into two parts, one is can we get the electricity grid towards a greener environment? Yeah, we have moved a lot further than most people think. So when we signed the Paris accord in April 2016, so six years ago, six and a half years ago, we had an a carbon emissions for the electricity grid of 171 million tonnes per annum, 171. And this year to a couple of days ago, we were just below 120 million tonnes. So we have reduced our carbon emissions and our electricity grid by 40%. In six years.
Gene Tunny 29:41
Are we talking about Australia or Queensland? Australia?
Josh Stabler 29:45
Australia wide and so in the last couple of days, this is the gold period of the year is the golden period for renewables. It has great sun, no much demand, fair bit of wind. We are sitting in Most days at about 65% renewables during the day, and about 25 to 30% renewables every night.
Tim Hughes 30:06
So that 40%, so 40% reduction in six years. Yep. And that’s purely attributable to these renewable energy sources.
Josh Stabler 30:16
Yeah, it’s basically a one for one reduction increase in renewables, one for one reduction in brown coal fired power stations. So that was it, certainly for the first like four years, and then it’s progressively eaten out some of the black coal, that appears to be really first it’s very, very fast, quite a lot. We’re moving 10 million tonnes per annum reduction. That’s on the electricity side. And we are now we’ve now you know, we’ve got days when we’re more than 50% reduction in terms of our carbon emissions, which is, which is great. That’s really, really wonderful. The problem is, is that it’s not the only thing that our requirements our Paris Accord is not electricity market requirements, it is an economy wide, starts getting a little bit confusing, which is that you cannot use renewable solar panels to meet our agricultural emissions requirements or our industrial requirements. But there are still good news stories in it. As we bring in electric vehicles, we move away from inefficient oil to efficient electricity. And as our carbon emission of our electricity grid becomes cleaner and cleaner, it has a multiplicative effect. Now, five years ago, because the ratios change every year, five years ago, the ratio was 36% was our electricity, and 18% was out was transportation. Now, this is where I’ll jump into some of the numbers for this so EVs, we have 15 million cars on the road. Each EV is at two kilowatt hours, if you had them as a Tesla mum, Tesla Model three, just as far as an example, which makes it 1200 gigawatt hours worth of storage, which is about the equivalent of 250 Wivenhoe, and why Wivenhoe is able to support about 1000 megawatts worth of renewables.
Gene Tunny 32:03
So that’s if everyone in Australia had an EV. If we replaced all the cars, on the road with EVs, we would have how many Wivenhoe dams?
Josh Stabler 32:12
250 Wivenhoe’s in storages which can do 1000 megawatts, which makes it 250,000 megawatts worth of hydro of renewables, which is more than we use switches will far more than we use. So we actually only need about 15% of the equivalent of cars moving down in order for us to have a situation where we have enough storage from cars. But cars don’t plug into the grid every night, we need to have them absorb them the right time, there’s a whole lot of, you know, complications that come around that plan. But it’s just a point of what is an opportunity available to us, we have so much storage there that would need to be replaced. Because at the moment, we have all these cars with their engines, and all they do is drive people. Whereas if we had them being engines that were able to be electricity driven as well, they would have a they would have a role in this market. Now, that is a wonderful vision for 2040. Okay, but as a idea of the same problem they have with any bridge, if you start a bridge at one side and start on this side, you’ve got to make sure they meet in the middle, you can’t just have a dream of where you want to be in 2040 and go off and just hope it’s gonna work out. You have to aim the bridges at each other. And that’s where it gets complicated, is how do you transition across. And right now our danger, is it we’ve seen what happens when things don’t go right, and it’s unpalatable. It is politically unpalatable. Electricity is not run by the governments anymore. But it’s politically considered to be run by the governments. So having it move fast is something that people can not accept, that it’s not politically acceptable. So therefore, if you have these another event like this, then people will start giving up on wanting to transition because I think that that is the reason why it’s happening now. Is that the reason? Well, there’s it’s far too it’s not you can’t point to one thing and say there’s definitely been fault on multiple sides of the fence here because renewables have made coal, not make money which has made them unreliable and made them unreliable before they have to exit and renewables are not ready to take over the role yet because they haven’t got the cost structures in order to do it. So we’ve we’ve got one abdicating the role and the other one, a child who can’t take over it.
Tim Hughes 34:34
So what’s your feeling on that? Josh? Like? Because I mean, is it just the transition is happening too fast? Or is it? Are there other things that we need to consider?
Josh Stabler 34:42
We’ve we’ve, we have a known urgency. So we have a known urgency that we need to get rid of carbon out of the atmosphere because it is causing. It is causing issues in regard to climate change, our ability to shift that rapidly, may be outside of our Economic grasp. That’s the danger.
Gene Tunny 35:02
Okay, that’s a good point. I think I know what you mean. But what do you mean by economic grasp?
Josh Stabler 35:08
Exactly. So it’s the cost of solar falls 36% for the doubling of capacity. So if you wait until you’ve doubled the amount of capacity in the world, you get at 36%, cheaper, wait for your next installation. So that part of the deflationary learning curve that we have, right, so you are highly motivated not to invest now, right and wait for it to be cheaper, and then be beat everybody on the lower cost structure. All other things being equal, not all other things are equal, because initially, you have high income for being in a scarce market. So the initial investments of PV got paid 42 cents a kilowatt. And there was a really good incentive for those first people to invest in solar while it was expensive. Yeah, but eventually, you’ve got to compete in is this worthwhile in the long term. And that same applies to batteries, batteries are falling very rapidly. And if you invest, now, your income stream is high, but your costs are high. And eventually, if you don’t get the right deal in place now, then eventually, someone’s going to come along and eat your lunch. And that gets harder, because you’ve and that’s what does that lead to? It leads to, if you accelerate the process, it will cost money. Is that an unpalatable level of money? I don’t, I haven’t clearly worked out, it’s got better, if we had accelerated faster, five years ago, we would be a very expensive system. But we are accelerating now and batteries are coming on. And they are likely to have a heavy impact because we are having a under normal circumstances a very negative during the day price and a high evening peak, which gives a very large arbitrage, temporal arbitrage, buy low sell high. And therefore people are incentivized to put in batteries to meet that obligation. But as you bring on more batteries, that arbitrage shrinks, lowering your income. So therefore, you need to win on costs at that point, because the revenue numbers will start to decline. So it’s just a it’s a there are you know, there are assets that are getting built now that will make money. But if we built all the assets now at this cost, we will just have a high-cost system,
Gene Tunny 37:18
Right. Okay, yeah, good point.
Josh Stabler 37:21
And eventually that comes back because the customer the godly truths of our market is as the customer pays for everything. Yeah, everything has to be extracted from the end user.
Gene Tunny 37:31
Right. Okay. And what do you think about what the state governments here is proposing with? They’re looking at pumped hydro, aren’t they?
Josh Stabler 37:40
They are. So there’s some very, very large pumped storage hydro that they’re talking about. It’s gonna take a long time to get into the market. Yeah. pumped hydro is so when we’re talking about how solar drops in price, as we instal more pumped storage hydro increases every year, because it’s the civil project. It’s not getting smarter technology, its its its potential energy, gravity and height. That’s that maths still the same from 1950s, as it is, now it’s, we probably gained a couple of percents in efficiency. So we are we are getting more expensive, which is a problem, which is why the state’s doing it. Because the state can afford to do something like that, that has an 80 year life and take on that level of risk. Because the of the there are two outcomes, either it was not needed, and everything’s fine. And they’re happy with that, or it was needed, and they helped make it better. And they’re happy with that, as opposed to a private company, which would be unhappy with a scenario where they were unneeded. So iIt’s not that it’s warped. It’s just that they have greater vision in terms of what what is important to them compared to a private in private industry.
Gene Tunny 38:55
I liked the point you made about EVs and in just how many Wivenhoe dams the EVS could represent if Wivenhoe, Wivenhoe is not Hydro Electric is it?
Josh Stabler 39:06
It’s a pump storage. So it is a small drive to a big lake, okay, and it’s called split Creek. So it has the ability to move water up and down from the so an actual slide on the dam is not good for the power station, unfortunately. But it has about 20,000 mega litres of water. So it’s got a large area that it can fill. Yeah, this gives a you know, having all of those batteries gives a incredible capability to meet the rearrangement of data nine, right, we probably have too much, which means that we will, we’ll probably get to a situation where not everybody has to do it. Because we’ve got we’re going to have all these batteries and all these cars and we’re not expecting everybody to be doing this every night. We don’t expect you to get because the other problem is is that you have to fill during the day and then empty when you get home and your rooftop PV is on your roof and you’re not at home because you drove your car away. So if we’re imagining in 2040, we have an answer to that, which is when the car drops you off, it goes home again, because there’s an automated car, and it returns to the base and fills up. And then it comes and picks you up in the afternoon in the process, it’s filled. And when it arrives, it pumps power into the grid, and keeps everything’s sorted. Because it’s moving energy around, not just passengers.
Tim Hughes 40:24
I see this feeds into an area, which I think is really interesting, because the technology is moving so quickly. Yeah. Is that then a hindrance to adopting new technology because you know, you’re investing in infrastructure that all of a sudden becomes, you know, it gets superseded by the next shiny thing.
Josh Stabler 40:40
Oh yeah, especially big costs, like a great example is distribution networks, you’ve got these power grids, or these power lines, they are long, long, long life assets. But if you’ve got power that’s moving by car, you don’t need the distribution network anymore. You got this. So which leads you to the threat, which is known as a death spiral, which is that you have a large cost, but by structure, and you’re smearing it over customers that are getting smaller, which means that you need to charge them more. So eventually, we’re in a position where my, my mom needs to pay $250 million a year in order to keep everything on track. So because you know, it’s the last people obviously, regressive, the people with the most money exit first, and the people the least money exit last. And that means that you’re smearing more and more customers, people who can’t afford it. But that just leads you and that could be where we’re at, we could have some of these assets that are built that are a little bit stranded. But again, you know, some of these things need to get done. In order for us to get there,
Tim Hughes 41:41
You end up with a drawer full of Betamax videos and CDs.
Gene Tunny 41:46
This is fascinating. I’ve never, I hadn’t thought of that before. But if I’m interpreting what you’re saying correctly, we’ve got a car that drives us to work, it’s all automatic. And then it drops us off, and it goes home. So we have all these empty cars travelling on the roads to go home, so that they home when the solar PV is collecting the energy, and they’re storing it.
Josh Stabler 42:12
Yeah. Do you want to make it’s really crazy? They may not go back to your house.
Tim Hughes 42:15
I was gonna, I was going to say they go to the closest available home. Yes, you know, but the thing is also like so this, I mean, we’re getting into the speculative nature of this.
Gene Tunny 42:27
Imagine the IT or the AI that you need to organise all of it.
Tim Hughes 42:31
That is an exercise in efficiency. Yeah,
Josh Stabler 42:34
well, that’s, that’s the classic, I’m travelling salesman issue. So you got to got all these ones that you need to move on. Because once they select does, it does the first person who gets to choose it, because I’ll just choose the one next door for the next 17 years right now. So that it doesn’t every time. But you need to make sure that that is an equitable sort of delivery of energy. And when we get to that state, then, you know, if you’ve got this demand that can be moved, and can be selected as selective and discretionary in its consumption, then we can just keep on installing more solar, because it will find a find somebody who wants to buy because the power all the cars will come and fill it up. Which leads us then to a problem, which is what have we just built the world’s most expensive way of doing that. Because most of our energy that we need to have, we need to move from the middle of the day to the evening. If I put power into a car, I can come back 100 days later, and it’s still at 99%. So long as you don’t put on a sentry mode, then it will consume it all. But you got to you’ve got to technology, a wonderful technology that is able to keep this energy for long periods of time. But in fact, we don’t need wonderful technology, we need terrible technology that is highly inefficient. That just does it for nothing between the middle of the day and evening peak. And then we can just keep on plunking down more and more solar, because it’s going to solve the more and more expensive evening peak with gas issues or any other thing else or its competition is expensive other vehicles or other batteries. And you’re just trying to undercut them by buying for nothing and selling for anything.
Tim Hughes 44:11
So becomes a market sort of battleground if you like,
Josh Stabler 44:15
Well, I think we’ve over engineered the solution. We’ve there’s probably a much cheaper, easier, stupid engineering solution.
Gene Tunny 44:22
So what and what is that job?
Josh Stabler 44:23
One example would be let’s freeze ice and your roof and make your house cooled down when it does that. Now that one’s I’ve already been asked somebody I think it’s been debunked, but there are answers, which are to do with most of our most complicated times like today. We’re 37 degrees too hot and what we need to do is just move these copious amounts of sun because it’s hot, and it’s bright into the evening and just make cold and if we make it cold if you make the house cold, like in Germany, you have pipes throughout the house and you just heat up that and that hits that water heating keeps the house warm. Same thing We just need to know, is that economically viable? Do you need to go to every single house and water? You know, there are, these things start getting highly complicated when you start thinking about all the engineering and and there’s just a point of, we kind of don’t know what we are going to have. I can think of 25 ideas today on what could possibly happen. And none of them will be right in comparison to what we’re going to do. 20 years time is a long, long time, in a world where people are incentivized to reduce their costs, where something starts causing, you know, the old adage, high prices as a cure for high prices. Because when it starts getting up, people start finding different answers, they find, oh, I don’t need to use that much electricity, I can lower my consumption, I can make these changes. And once you start having those drives, correct drivers people follow, follow the economic behaviour, we, we underestimate our citizens. And that’s why we make our electricity tariffs so simple, in terms of the way that they’re done, the billings insane. But the actual methodology is very, is too simple. It’s, you have a flat price from 7am till 10pm at night, even though that you don’t consume that way anymore, because most people have solar, which means you don’t consume during the day, and then you consume a lot during evening. So we actually need more definition that will drive behaviour, if you were aware that these things were driving you and changing your behaviour, then you would do things slightly different. Anyway, that was it’s a nice little.
Tim Hughes 46:29
It is interesting, because, again, it’s an it’s a question of efficiency. Yeah. And yeah, and householders are interested in efficiency, especially when it’s gonna save them money, especially when it’s gonna save them money. I did have another thing I wanted to pop in there, because I don’t want to make it too speculative. Because I mean, it is fascinating. But solid state battery technology has been mentioned by a mutual friend of ours who John Atkins, who was on a previous show, previous episode. And he had come across this technology, I think Toyota are one of the leaders with this new battery technology, which ultimately could have the potential to charge your house. So it’s not just running the car, you can then plug it back into your house, and it can run the house in the evening. So one of the main areas of concern if you like, at the moment, obviously, it’s you can’t take a punt on future technology that’s not here, we have to go with what’s here. But this must be also a concern for not a concern. But like, governments aren’t always going to be the first to adopt this new technology. But it must make it harder for them to commit to putting infrastructure in for a technology that they think could be redundant fairly soon.
Josh Stabler 47:42
Yeah, and that’s where, you know, a lot of the res idea is that we’ve we have this expectation that we’re going to need large scale wind and solar, out in the out in the regions, that’s going to bring all the power in and that and therefore that’s where the energy is going to come from. And the biggest error in any of the forecasting for the last 20 years of electricity has been the forecast of rooftop solar, every one of them is like this year, it’s gonna be the same as next year quadruples. This year, it’s gonna be the same instead of quadruples, there’s just been this constant misunderstanding of how quickly people were going to invest in it. And they’ve and the and the forecasts have been just horrendously wrong. And now, rooftop solar as a market share is one of the biggest in the net, it is got a now a major part of the electricity grid is what happens from rooftops. And that is driven by mums and dads.
Tim Hughes 48:40
The market is driving this as we’ve had conversations with quite a few different people. And the common thread is that the market is driving these changes.
Josh Stabler 48:48
It is but do you get to talk? Do you get to go into the room and tell people that you’re going to go and do this? Are you going to tell people that you’re putting batteries in, or the big guys can? It’s easy. There’s only like 100 of them, we just go and ask them are you going to go and install batteries and they say sure, I’ve got this big plan to build this big battery out there. And I’m gonna build this wind fine over there. And this is where my solar farm is going to go. And they can tell the people who are going to make those plans. What it is, they didn’t go and interview 15 million households to find out who’s going to invest in batteries. So there’s a level of a lack of advocation on behalf of those customers on behalf of mums and dads in terms of what they’re going to do. They also don’t really get paid for it. Because when they installed batteries, they lowered the consumption during the middle of the day. For the first 10-15 years of this market. The middle of the day was the most dangerous part. It was the most worrying section was what’s going to happen at the hottest point of the day, two o’clock in the day. It’s the highest demand we have the hottest weather and the electricity grid starts failing power lines can’t move anything. And then we don’t have that problem. Because rooftop solar has completely carved out the amount of demand we have at what used to be the most threatening. Now we’ve built, the whole market has built all sorts of power lines, and extra things that need to handle hot weather to move really long, lots of power at certain points in time, that are completely unused now, because that requirement doesn’t exist. And then when we start thinking about what’s going to happen with people, when they put vehicle to grid, and they can move their own power between themselves, Well, no one’s getting asked. So we don’t know what they’re going to do. So there’s like a just an unknown when that starts happening. And what I suspect is going to happen is that eventually, a, someone like probably Macquarie Bank, because they’re the kind of people who would do it, which is they’ll work out that if they install a battery on your home loan, you are now better, you are now a better creditworthy person, because your costs have just gone down, so they can offer you a better deal. And at that point, it all starts changing when you can just put on your home loan.
Gene Tunny 50:49
Right? So you can buy a Tesla Powerwall.
Josh Stabler 50:52
Put it on your home, you are now you are now considered a bit less of a threat, because you don’t have an electricity bill anymore. So at that point, they’re like, oh, okay, well, yeah, you deserve to be I can, I loan you money if you know, whatever percentage lowest because I think that you’re in a better, better position. And you can put that money on to your on your home loan, and we’re going to accept that. And that’s all fine, because we consider this an investment, not a bad, not a negative decision. Once that starts happening, things start moving quickly. Once debt gets involved, the world moves changes very fast.
Tim Hughes 51:24
Yeah. And that technology is obviously good for a considerable time to come. Solar seems to be working really well, that 40% drop in six years that you mentioned down to renewables. Great news. Yep.
Gene Tunny 51:39
Yeah. Okay, so, Tim, I think we suspected we, we might be picking Josh’s brain a lot, we’d go on quite a while. So we’re at 50 minutes, I’ve got a few questions I want to make sure we get answered before we wrap up. So if I try and wrap up for the next 10 minutes or so. Okay, so first, what about nuclear or hydrogen? How much potential do they have in the future electricity grid?
Josh Stabler 52:07
In the world nukes have a very big role, in Australia. I think that that the moment, most of the discussion that is around nukes is probably not in good faith. It’s more in a let’s stop doing things and wait for this new technology. And then our didn’t work out? Well, you might as well stay with coal. I don’t feel like the discussion is necessarily in a in a with completely good faith. Your issue with nukes, which is the same ones that you have with coal is that you can’t get cheaper than solar in the middle of the day, when it’s delivered to your house on your roof. It is cutting through transmission distribution directly into the source of where the demand is, which means that is impossible to get cheaper. So that means that nukes will never be able to run 100% capacity factor, because they will be carved out by the six hours of sun every day, which means that their capacity factors will be lower, which means that their very, very high capital costs will have to be smeared over a smaller volume making their costs, every estimate of costs will be based on 100% capacity factor. That’s all impossible, which means that everything’s going to be more expensive than you anticipated, unless they plan on turning off solar. So they need to get rid of a better solution to make this other one work. So I just don’t see it really working on hydrogen. I am the biggest issue with hydrogen is economics. And it is an inefficient process to produce energy that can be moved. Now, if we have infinite free energy in the middle of the day, because we have so much solar, then having something that costs nothing to put into this energy. So if it’s inefficient, inefficiency doesn’t matter when it doesn’t cost you anything. Zero times by an efficiency of 30% is still $0. So so long as you can get to a point where there’s basic never ending spilling of the load of the solar that it would do nothing, it would literally be turned down and dig and shorted, then you’ve got something that can make sense there. Because then you can just the inefficiency doesn’t matter. So that’s what I was talking about before we you know, we have what is our engineering solution? I mean, that one there is a horrendously inefficient way of getting energy. I don’t know you might fit the bill. I it just doesn’t fit the bill now. Yeah, because the cost structures are $2 or $2 a kilo. That’s $15. If you could do, we’re not doing anything at $2 a kilogramme. Right now we’re doing things at six and sevens. We’re talking 80s and $90. A Giga Joule, you know, we’re having conniptions right now, because the gas prices are above $12. We, we can’t expect to move from something where the world goes in goes into crisis mode at the best possible price point of the future. Like that’s there’s there’s a there’s an issue there. So we’ve got to work out how we’re going to bring the capital cost down and then the marginal cost down so that the the dollars per kilogramme that was a giga Joule for hydrogen falls. But even with all of that, I don’t see how it beats EVs, like, how does it be just putting the power directly from the roof into your car? Like why introduced another thing between an inefficient thing in between there. So if you lose that market, you don’t have EVs are okay, maybe you’re going to get car trucks, because they might need the energy, well, there’s probably better answers to that one as well, why not just have replaceable batteries in your truck, because then you can just take it out, and then you don’t have the energy problem, you can just put a new one in moving energy to other countries so that they can use it that very much relies on the demand, wanting to pay more for it. We’re not, we’re not in charge of that. Japan’s in charge of that. And Toyota most recently, sort of can’t there or not can but they’ve di D prioritise their hydrogen cars, which is not necessarily a great sign for where that’s going. But there are other things green, green steel, you know, there’s always other things, there’s always other things that use hydrogen and making that green. Sure, that doesn’t seem to that seems like a great direction, because you need to build it anyway. Need to get the hydrogen somehow anyway. And your choices are using natural gas or using clean options. If your carbon has got a price on it, then you will end up with a clean one. Without a price. You need regulation to say you can’t do it that way in order for it to hurt. So that’s, that’s my concern is just it’s just economics. That’s that that’s worries me there. I just needs to get the economics. You know, the numbers are so big that it needs to be like have like, eight times. And things can get hacked. It’s easy, you do a lot of economies of scale, and suddenly you find something that’s half the price. But doing it eight times feels like a lot of steps that you need to make better.
Gene Tunny 56:54
Yeah, here there,
Josh Stabler 56:55
you know, yes, you can get a couple if anything’s out by four to one. And its initial stages. Yeah, that’s, that won’t take any time to fix. But, you know, 100, to one that starts getting to a point where you’d like we, there’s a lot of things that need to go right together.
Gene Tunny 57:10
Okay, so now some policy questions and probably haven’t left enough time to go through these complex issues. I’d be interested in your thoughts on the you mentioned capacity, capacity markets before paying for capacity. So you talked about the problems that nuclear and coal, they can’t compete with solar during the middle of the day? Should we be paying to the generators, the fossil fuel generators, or if it’s nuclear, paying them to make sure that they’re online, that they stay in the market, that they’re available? If we need them? Is there a need for some payment like that? So that’s one policy question. The other big policy question at the moment is regarding the and the one of the challenges we’ve got, as this episode will be released after the national Cabinet meeting that we’re having this week to decide on whether we have a cap on coal prices, whether we have a cat isn’t it is proposing a cap on gas prices and also a domestic domestic gas reservation policy. What are your thoughts on all of those,
Josh Stabler 58:10
please start on the gas cap one and then go back to the GST. So the gas coal caps, your biggest issue with any type of so let me start with gas gas one because and they’re all good, we got analogue across to call it the gas, the problem with the gas market cap is that you need to you are having a broad based market response to try and solve what is not a broad based problem. So your businesses a an example a coal mine does not need cheap electricity, because it is making more money than it knows what to do with. So charging it more for charging it an appropriate price for electricity, based on its cost structures end up its revenue stream is part of the reason why cost structures are so high, which is why electricity is high. So if you give them a discount on their electricity, then they’re just making more money. If you are a services business, I’m sure electricity doesn’t even make it or a percentage number in terms of a normal business or normal professional services business. So increasing the cost of electricity doesn’t make a difference. It doesn’t materially change your market, your value of your business. It doesn’t materially change whether or not you’re viable. However, there are businesses that where there is a clear difference, which is if you are a domestically focused manufacturer, and you have a implication of high absolute prices will cause you to pass on high absolute prices to the domestic market that has an inflationary impact, and therefore it needs to that has a legitimate claim to being fixed and to being resolved. Your other group is that mums and dads have paid two points to Extra 2.9% of the total costs for the last 40 years on electricity might be slightly higher right now, but the number is about the same all the time. It’s also not a lot with it, our cost of living has increased remarkably much this year, because of interest rates, not because of electricity. So we’ve had a massive increase in terms of people’s livelihood costs, because of because of the interest rates. And electricity is like a thing that is annoying because it’s on top of so. So for depending on which sector of the market, if you are a low income earner, then that 2.6 is not 2.6 is probably four or five, because your consumption doesn’t really change that much based on your, you know, your your money, you still have to do all these things to keep the lights on and to consume. And therefore that becomes a regret your recess, regressive sort of threats. So you need to manage low income, and you need to manage domestically focused manufacturers or consumers, energy intensive consumers, if you are the rest, which is a lot of the energy consumption, aluminium spouses, you know, your fertilised and everybody else, they are competing internationally, and they are competing in a high market international price. And therefore, their prices they’re passing on, I’m not even going to Australians, they’re going out into the world. And the most of us not even coming back to Australia anyway. So what that doesn’t, so doing a broad based outcome for that kind of doesn’t really fit the bill. So I think that’s where the problem is. Now when you take a look at coal, coal really only has one market in in Australia, which is thermal electricity, our, our meteorological metrological cold, there was stuff that’s used for coking coal, we don’t, we don’t make steel in Australia anyway. So all that stuff is going off to China where the iron ore, it’s getting turned into steel. So there is the implications on the coal market are purely on the electricity space, so long as you can still get the energy. Our problem in winter was not because coal prices were high is because the coal generators were offline. And the ones that were online had limited coal supplies, and you couldn’t give them more coal, because they’re not next to the coal mine. The ones in New South Wales are off the spur of Newcastle and you need to drive the train through a major city to get it to a power station. And you can’t deliver any more to that power station. So you get physical limitations. And just simply saying, your price of your coal is cheaper, doesn’t make them have better power stations, or find more coal, they are just limited by their energy. And that makes it a that that’s an that could return next year, we could have kept on the market, low coal prices, and no energy. And therefore prices are high, because we’re not actually keeping anything that fundamentally keeps the market under control. So our threats right now are not only input, the problem that I find is that everybody said the market is going up because of Ukraine, which makes it feel like it’s an external thing. And all we have to do is disconnect ourselves from there, and it’s all fine. But we aren’t we aren’t actually we’re not we’re in we’re in our own scarcity issue domestically, at the same time as the scarcity issue internationally. And when it goes bad, it joins the international market, which makes it feel like it’s all related. But it’s actually just joining whether they’re in a bad place, and we’re in a bad place. And unless we see some sharp increase in availability, then we don’t, we may just have the same problems again. So that’s, and that leads us to our other question, which is what do you do about capacity markets? How do you make a power station that is unreliable, more reliable? One way, definitely making sure it goes to be less reliable, is to not spend any money on maintenance, so that it will turn off. So if you are thinking that your power station has two years left to live, you’re not going to spend any money on your maintenance, just like you don’t spend money on that car, a clunker that’s about to break down, you don’t go and send it in for a service. When it breaks down, you leave on the side of the road and get someone to deliver it to their records. That’s the problem we’ve got with the power stations as we’re getting to the record stage. When they break, like realistically This is at the point in their life where they might have four units, one breaks, it becomes parts, it doesn’t get turned back into service, it just left to make sure the other ones survived through to the end. Right. So that’s where your capacity might do is it might give you an incentive to stay around for a longer period. Yeah. Which gives you the money to be able to do that to spend on the maintenance so that you can have an asset that will be able to survive until you’re no longer required.
Gene Tunny 1:04:50
Yeah, so we’ve been talking about this for for years now. Do we know if we’re gonna get one capacity? Okay.
Josh Stabler 1:04:57
I think now that we’ve got So many power stations planning on exiting over the next X number of years. It’s also about with we’ve rapidly changed our expectations. Yeah, even just two years ago, we were in a position where coals wood, coal was cheap. There was coal mines were losing money on what they were delivering in. So they stopped slowly stopped there, the supply, you had power stations that weren’t making money, because they were they weren’t, the electricity prices were so low, you know, we’ve, we have gone from $30 a megawatt hour to $300 a megawatt hour in two years. Like it’s such a variation in terms of the outcomes, it’s so quick that nobody has in a market that that builds its world over 10 years, you can’t respond in two. And, and that’s just where we’re, you know, when we’re, you know, we go into a price cap on gas on coal, it doesn’t fundamentally make doesn’t change the engineering just changes the economics. And then the hope is that the economics works. Because if, if you’re saying that’s the next year, anybody who sells coal only gets a lower price, then you just hold and you own it, and you have a stockpile of coal, well, then you just wait to the year after and some of the higher price economic theory is you just waiting there. Or if you can deliver to a boat and sell into $500 a time overseas, then you definitely do that. So you’re definitely getting this position where if you deflate the domestic one, you also need to motivate them to continue to supply because otherwise, you’ve just given them the exact opposite, which they don’t supply, because no one’s going to pay you anything that’s worth anything.
Gene Tunny 1:06:35
Yeah, well, I mean, is that what we’re going to end up with? If there’s a domestic gas reservation policy, where we say that you’ve got to supply this amount of gas to the domestic market at this price, I mean, is that where we’re heading,
Josh Stabler 1:06:49
it does appear that that’s where the direction they’re going. It it. The problem also applies to where that supply is coming from Australia is a lot the tyranny of distance. We with this usually said in the fact that it takes a long way to deliver things from Australia to other countries. But the tyranny of distance also works for our large country to deliver gas from Dolby to Moomba, to young to Melbourne is 2800 kilometres, yeah, which is the same distance as Edinburgh to Turkey. Yeah. So it’s very long distance in terms of of how far you have to deliver, which means that we don’t necessarily have the infrastructure to be able to deliver all the guests that’s required in the south via the infrastructure that we have we we have limitations on that, which means that we need to build up our, our storage in the south ahead of winter so that we can actually deliver it. Now if there’s a cap on the market. And it costs you $12 To buy gas, and it cost you money to put into storage so that you can take it out and get paid $12 What was the financial incentive there? So your cost $12? And then you get paid 12? So what are the $2? Or you just lost that? Okay, well, once if I deliver it from Queensland, where you buy it at two or $5, you’d paid $3 to deliver it down, and then you can sell it for $12. So you’re taking a financial hit there as well. So you, it’s not just so simple as to say that everything’s the same, because then you’ve got no incentive to do anything. If you’ve got gas in Queensland, and you’ve got no reason to move it to another region, other than regulation, that you must deliver excess capacity. It’s just this is when you start delving into how you want things to work. It’s the the problem with putting a cap in is you lose merit, or you lose who deserves to get the gas, who’s willing to pay more who’s willing, or has a higher need for that. So they can actually meet that meet their requirements. Because you don’t have the merit order, you then don’t have the volumetric assessment. So if I was somebody there, I’m just going to say, Can I have a billion petajoules of gas. And if we prorate or down, I’ll have 99.9% of it all, because I asked for the most amount, because there’s no difference between my $12 and your $12. Let’s just split it, split it down the middle of who bet in a billion versus one. I’ll have my billion and you can have your lunch. So it’s it just your problem. You’ve it’s there’s a lot of unintended consequences that need to be managed there. And it’s it’s difficult. It seems simple, but it’s difficult.
Tim Hughes 1:09:33
Yeah. Does that fall into the category of the infrastructure needed for that particular energy source? So for instance, you know, it’s obviously going to be expensive to deliver that, that amount of gas. One of the things I was going to say it was like clearly, not clearly, but it would appear that a diverse array of energy sources would be a wise thing to do. So we now have all of our eggs in one basket Solar has its limitations. Wind has its limitations, etc. Coal has its limitation has its limitations and gas has its limitations as you were saying there’s so like, a sort of array of all of these solutions that would get us towards Net Zero. Yep. would seem like a good idea. So hydro might be a good part of that.
Josh Stabler 1:10:21
Or we should definitely have every single piece of the puzzle that we can get, then the question I think has been slipping in regarding the Niccolo answer. The problem with the nuclear answer is there’s no way we’re getting a nuclear facility in, in Australia. 15 years. Yeah. So even even, you know, we can even have the conversation just so long as the conversation isn’t, we should spend more time talking about Nikola the, the the reality is, if somebody wants to go and do that, yeah, change the law, and then have somebody go and pay the money and spend the 15 years getting it organised. Talking about it now, and with it never been within, you know, not five election cycles away. That’s, that’s, that’s a long, long time. Now, and I guess that also leads to how quickly things have changed away from what we expected, our expectation of gas was that it was going to do nothing anymore, we were just going to have a little bit in Victoria, it’s expected to continue to decline every year, the gas storage two years ago, almost did nothing. The amount of gas that we should be expecting, you know, we, we ran near record levels during winter, but we ran an absolute record lows during spring. So that’s, you know, that’s like a 10 to one variation in terms of daily consumption between spring and winter. We’ve got this, it’s, it’s not just that we have a, an, a constant need is this we have this massive variations and our experts, the forecasts, then beforehand, were like, we’ll use 22 petajoules. And we ended up using 100. Like, we’re completely, we’re completely misreading how it’s going to occur, because things happen that we didn’t expect. And those unexpected things relied on certain technologies to solve it. Because you can’t ask solar to be brighter. You can’t ask wind to get more wind it, it can do everything it does, which it what it does, it does, it runs as hard as it possibly can. The problem with that part as possibly can is, is you can’t go more and go less solar conquer more can only carry less. Gas is already less, and it can do more. But our complication of that is that ends up costing money. Now that might be the cheapest money we could spent. Like that might have cost us a lot of money. And we managed to have no shortfalls. And we managed to keep society going on. And we had no other issues other than a whole lot of political noise around the outside of it. But in reality, we only had a small, very small marginal change in terms of people’s bills. And everything’s, you know, some people are bad, but you know, in general, we have worked our way through it. That cost us money. Yeah, could have been the cheapest option we had available, probably was the cheapest option we had available.
Gene Tunny 1:12:56
Right? I think we might have to.
Tim Hughes 1:12:59
It’s quite an it’s so good hearing your insights and your your from your experience, Josh. And, you know, we could go on and on.
Gene Tunny 1:13:11
I think we’ll have to have you back on again, Josh, because I need to digest. Yeah, this episode. And what’s what’s been said here, because there’s a lot of, there are many things to think about. And I mean, I’m starting to think oh, yeah, I mean, there could be some things that are really positive and make it easy. But then there are other things that are big challenges. And, and you mentioned how this is all uncoordinated. And yeah, I mean, it sounds to me like there’s a risk of some bad outcomes in the next decade or so potentially the non trivial probabilities of, of blackouts. And it just, I mean, I guess we will muddle through somehow. But could could be messy.
Tim Hughes 1:13:54
We seem to be doing remarkably well, like that. The figures you mentioned about reducing 40% In six years is is fantastic. Yep. And I was going to mention, of course, like, there’s a geographical advantage that we have in Australia, for instance, like with solar, like the other parts of the world. Yeah, they would love it doesn’t have, you know, I said so they might have different nuclear might be more viable for certain places, with all its, you know, issues that come with that too. But certainly as technology and this emerging technology, which is coming through very fast, you know, if they can get solar through to be doubly triply 10 times more effective, then it can make it more viable for different parts of the world. So it’s, it’s fascinating, where we’re going and it’s it’s amazing to move so fast. And I guess this transitional period that we’re in is really important that we not trip ourselves up. Yeah, on the way to net zero like, which, of course, you know, who wouldn’t want to be there? I certainly wanted to be there. But we want to get there with the lights on.
Josh Stabler 1:14:59
Yeah, we need to do it. with the least amount of, you know, this is an essential service. Yeah. And it, you know, society doesn’t function if this if this breaks and and transition will lose its lose its losers backing if it can’t keep the lights on. So it’s these are these are important parts. But it’s also I have one last point which is always very difficult to imagine the world different to the one you’re in. So right now we’re in a high market pricing, we’ve got all these danger, we’ve got all these conditions that are that are creating uncertainty where we are, but we have so much, you know, it can change so quickly in this space, we’ll just two years ago, we’re in 1/10 of the price. Yeah. And it can move very quickly against you in or not against you, but in very quickly into a different environment. And it you know, leaps of faith could leaps of technology change, or, you know, we could have, like, everything that’s basically happened in the last couple of years has been supply side failure, it’s just been everything that happened just happened to be on the supply side, we didn’t have a smelter go down. We didn’t have customers do large scale production, because they got their meeting, you know it the spot price was high. But domestically, they’re probably making pretty good positions that are able to pass on these costs. That’s why we’ve got such high inflation, these things are happening, which is allowing people to survive. But if these if we suddenly got lucky on the supply side, and things started getting better, and some things just started getting lucky, you know, we could really move that back away, and then we could leave the international space where it is solve our domestic scarcity issue. And then it won’t be Ukraine that’s holding us up, we were in, we’re in a we can return back to a a more settled environment, which is a little bit like the US us as far as you could your gas, because they are separated for physically separated and the ability to export more is not there. If we suddenly solve some of these problems, we can really pull back, we don’t use other gas for electricity, and that won’t set the price. And therefore we can see it dropping back down if we see some of these problems get resolved. So it’s just a, you know, it’s easy to be stuck in it and to feel the you know, the shadows, the darkness of the shadows in the times when they’re in there. But it’s also you can move past that and you know, we’re definitely at 40% down in emissions, we are on the right path and once we start bringing EVs that’s 54% of the emissions in two sectors, and if we can bring them down to full 4% That’s a long way in terms of where we want to go.
Tim Hughes 1:17:31
Well, I was gonna say I mean, because the way this is driven by the market is, is giving it is decentralising in its effective, like, yeah, if you’ve got rooftop solar, and ultimately you can be self sufficient. The consumers have more autonomy and, and that collectively around the world will make a massive difference. And so it’s, it’s a good direction, it appears, you know, like, I mean, who wouldn’t be happy with that, because you’re not going to have the bigger issues with those outages, you know, it’s going to be more of a localised
Josh Stabler 1:18:04
issue, and a 5% fault is 5% of a million, which makes it 50,000. It’s, it’s not 5% of 20. When you start becoming actually 5% means it’s probably those two, all which is probably the 1% of the time is four off, it’s like when it’s a million, it’s always the same, it’s you know, it’s distributed, the the law of large numbers kicks in, and it’s just 5% Haircut across all the time, on everything, as opposed to occasionally being a very large number, which is what we’ve had very large numbers of times where we’ve had coal fail at the same time as coal fail, same time with gas fail and the, in the in the misalignment of a couple of bad things at the same time, because they’re large, ends up creating large impacts. Lots of little ones and it all disappears.
Gene Tunny 1:18:54
Okay, Josh table, it’s been fascinating. Thanks so much for your time and for your insights have really appreciated that. And once we digest this and think about some more, I’m gonna have to chat with you again, since it’s been terrific. Thank you. Thanks, Josh. Thank you. Okay, so what are the big takeaways from our conversation with Josh? My first takeaway is that the transition to net zero will probably be a bumpy ride. I love the way that Josh described it. To quote Josh, the complication of transition is that it is by default, disorderly. my conversation with Josh confirmed my fear that we could end up with unreliable electricity in coming years. I’m still very concerned, we will have to start expecting the occasional blackout as we bring more renewable energy into the system. My second takeaway from the conversation is that the energy solutions of the future may not be obvious to us at the moment. We need to allow innovation and we need the right incentives in place. EVS could be a big part of the transition path in the conversation with jasha was blown away by the idea of self driving EVs returning home or going to other people’s homes to fill their batteries during the day after they drop us off at work. That’s just incredible. Okay, before I leave, I should note that the Australian Government legislated a highly interventionist energy market package earlier this week, I recorded this conversation with Josh last week when we only had an outline of what could be included in that package. I’ll aim to have a closer look at the specifics of the package in a future episode. 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 at economics explore.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
In his new book, Understandable Economics, Howard Yaruss from NYU argues “Understanding Our Economy Is Easier Than You Think and More Important Than You Know.” Howard is an Adjunct Instructor in economics and business at NYU. Previously, he was Executive Vice President and General Counsel of Radian Group, a mortgage insurance company. Howard lives in Manhattan and serves on his local community board.
Transcript: Understandable Economics w/ Howard Yaruss, NYU – EP168
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.
Howard Yaruss 00:03
I saw reason survey that the majority of young people don’t trust capitalism. That’s a catastrophe as far as I’m concerned. And I think what we need to do is give them a reason to have more faith in the system that has created more wealth than any system in the history of humankind.
Gene Tunny 00:23
Welcome to the Economics Cxplored podcast a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny broadcasting from Brisbane, Australia. This is episode 168. It’s on a new book I’ve been reading called Understandable Economics, because understanding our economy is easier than you think and more important than you know, the author is Howard Yaruss, and he joins me to talk about his new book this episode. Howard is an adjunct instructor in economics in business at NYU. Previously, he was Executive Vice President and General Counsel of Radian Group, a mortgage insurance company. Howard lives in Manhattan, and he serves on his local community board. I’m grateful he came onto the show to share his thoughts on how a proper understanding of economics can help people argue for better public policies. Please check out the show notes, relevant links and information and the details of how you can get in touch with any questions or comments. Let me know what you think about what either Howard or I have to say in this episode. I’d love to hear from you. Right now from my conversation with Howard Yaruss on understandable economics. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Howard Yaruss, welcome to the programme.
Howard Yaruss 01:38
Thank you, Gene. It’s great to be here.
Gene Tunny 01:40
Excellent. Good to be chatting with you. Howard, I’m keen to chat with you about your new book, Understanding economics, because understanding our economy is easier than you think. And more important than you know. So how would I like to ask you? Why do you think that understanding our economy is easier than you think? Can we begin with that, please?
Howard Yaruss 02:10
Yes, I think a lot of people are intimidated by economics. Virtually anyone who’s taking a course, taking a course in economics, has been confronted with a bewildering array of formulas, graphs, jargon, those of the people who’ve taken a course the people who haven’t taken a course, understandably, don’t know much don’t know much about it at all. So I think there’s a lot of misunderstanding about economics, but what is economics about? It’s about how society allocates scarce resources. And that’s not a science, like physics or biology, you could just plug some numbers into a formula and get an answer. There are value judgments involved in how we allocate our resources. Our resources involves value judgments. And so it’s, it’s a different type of discipline than a bit different from what most people think it is. And I think what it really is how human beings interact, is easier to understand than the typical economics course, leads people to believe.
Gene Tunny 03:18
Right? What do you think is wrong with a typical economics course, Howard.
Howard Yaruss 03:22
That they begin with a whole bunch of formulas and jargon and graphs. And what we’re talking about is human behaviour. It’s like if you went to a psychiatrist, and they said, Let me plug everything into my formula. The world just doesn’t work that way. There’s, as I as I say, in the book, there’s a reason why a downturn in the economy a severe downturn in the economy, is has the same word is called by the same word as a severe downturn, a psychological downturn for human being or depression. These are psychological phenomenon, they quickly have real world consequences. But again, you can test the industrial capacity of a country right before, lets say, something we’re more accustomed to a recession rather than depression. Fortunately, we’ve had very few depressions, you can test the industrial capacity of a country right before a recession starts. And right after it’s the same, you can test the skill level of the workers right before a recession begins. And right after it’s the same, what’s changed? Outlook. It’s an infectious gloom that takes over. So I think understanding economics requires thinking about human behaviour. And it’s somewhat different from what’s often taught in economics courses.
Gene Tunny 04:43
Rod, okay, we might delve into that a bit later. The other part of your the subtitle is it’s it’s more important than you think. Why do you think that is the case are more important than, you know? Understanding economics
Howard Yaruss 05:00
I was going to rewrite that part of the title, I’d say much more important than, you know, simply because people are told all sorts of things by politicians who have self-serving motives for making certain claims. And I think, because most people don’t take a course in economics, and those who do are, again, faced with a bewildering array of graphs and formulas, so they don’t really get a sense of it. I think people can easily be misled by claims of politicians and other people who have motives to support a particular policy that they want to see enacted. I think it’s essential for people to understand how the economy works a bit better, so that they cannot be as easily fooled, and so that they would support better policies that would make our economy better and more productive.
Gene Tunny 05:53
Okay. So what do you think they’re being fooled about Howard?
Howard Yaruss 05:57
Well I can give you a few examples, this one went off the top of my head. There are a lot of politicians in the US who claimed for years that giving tax cuts to wealthy individuals would increase employment and improve the economy. And if you think about it, why does a business expand not because there are more investors with money, it’s because they’re more consumers wanting to buy their product or service. So if you put more money into the pockets of middle and lower income people, they’re going to spend on goods and services, and businesses are going to be forced to expand and hire new workers to produce those goods and services. If you merely give it to wealthy people who tend not to spend as much of their money, they have a lower propensity to consume, the businesses are not going to expand because they don’t have the additional demand for their product. So that’s an example of something that’s that’s said, by politicians that often misleads people. And it’s not something you need complicated formulas, or very, very specific kind of knowledge to figure that out. You just have to not be intimidated and use your good common sense.
Gene Tunny 07:14
Yeah. Okay. Now, you’re saying that you think there are some issues with the way economics is typically presented? Is it just not presented in in an intuitive enough fashion? Because when I read your book, I saw a lot of good economics in there. I don’t, I just want to, I just want to understand where you’re coming from with this book. Is it that you’re you’re not saying that a lot of economics is bad, it’s just not well presented? What’s your actual position here? How could I ask you that, Please?
Howard Yaruss 07:49
I think you said it very well. It’s not taught very well. First of all, let’s start at the beginning. Most people, at least in the United States, don’t learn economics, it’s not required in secondary school here. What is required is trigonometry. Which to me seems to use a technical term crazy. And I have a lot of respect for math, I was a math major. So the fact that we require something like trigonometry, and don’t require economics is shocking, to say the least, when it is taken at the college level, it there are all these assumptions made perfect information, everyone’s rational 100% of the time, and the real world doesn’t work that way. I live on the Upper West Side of Manhattan, which is a fairly affluent neighbourhood, about 40% of the retail spaces are empty. Many retail spaces have been empty for decades, that, according to economist shouldn’t, just shouldn’t be. Why why are people greedy? We always assume landlords are greedy. Why? Why are greedy landlords seeking zero income? There’s a disconnect there. And I think a lot of people are confused by this phenomenon. And the answer is that the real world doesn’t work perfectly. According to these models with all of these assumptions, I know economic the economics profession, is trying to there’s behavioural economics now. But the point is, people people, it’s people should be able to make some of these judgments on their own, they should be able to understand some of this on their own, because if they, if they don’t, they can easily be manipulated or misled by people who have ulterior motives.
Gene Tunny 09:33
Right. Okay. Now, I saw in your conclusion that originally this book was titled, economics for activists it was its focus was the people who were troubled by our economic system, yet optimistic enough to engage in activism in the belief that change was not only possible, but also that they could play a role in making it happen. Okay, what sort of activists are you talking about here? Howard, are we talking About the Occupy Wall Street? Are we talking about, I mean, who exactly is this pitch at, this book?
Howard Yaruss 10:08
oh, all activists and what and what I had in mind is people who are fed up with the current system and those include Occupy Wall Street, the Donald Trump voters, the Tea Party, and I know Australia has has their equivalent of these groups, there are a lot of people frustrated with the way our economy is going I call it the winner take all economy in the book, that the people who are doing well are doing better than ever, and the people who are not doing well are stagnating at best. And these kinds of actions is exactly what I’m talking about. What happened to Occupy Wall Street, Donald Trump, the Tea Party, they haven’t made life better for anyone. And my hope is that by understanding how the economy works, people would support more constructive policies that would make life better. What originally was he title of the book was understandable economics, because you can’t improve a system you don’t understand. If people don’t understand something, they can’t work to improve it, or if they try working to improve it, if they become an activist that their efforts may be for not. So the goal is to arm readers with the tools to understand what in fact, would improve the economy. And what on the other hand is a false medicine, is a false cure for the economic ills we are suffering.
Gene Tunny 11:30
Okay. Can I ask you about the fact that you grouped tea party with Occupy Wall Street? So is it your view that they’re both coming from the same frustration that and but they’re both got different, those two groups have different prescriptions or different recommendations. I mean, they’re both after different things, aren’t they? But are you saying they’re both motivated by the same? The same concerns?
Howard Yaruss 12:02
Why is it said there are some similarities between the two groups and some differences? What are the similarities, they’re frustrated with our current system, they both clearly have that in common. And at the risk of sounding cynical, they both didn’t achieve very much. I think what they were different is Occupy Wall Street had a specific flaw in that they did not recognise that it’s the political system, that effects change. That’s the system we live in. Unless there’s a revolution and there hasn’t been one. That’s the system we live in. So they were particularly ineffective in that they did not have a mechanism for getting people who had views similar to theirs into the legislature to effect change. They basically shot themselves in the foot by not doing that. On the other hand, the Tea Party was extremely successful, getting people into the legislature, the problem is just cutting the government without giving thought to what is the government what the government does is use, what useful things the government does. And what non useful things the government does is not really helpful to the average person either. The point I make in the book is how I use highways as an analogy. Cars are great for getting people from one place to another. But if there were no rules on the highway, people could drive on either whatever side they wanted, if eight year olds could drive, drunk drivers could drive, if there were no speed limits, and people could do whatever they wanted on the road, the road would not work. There have to be clear rules. Obviously, rules that are overly burdensome, shouldn’t be there. But the highway just cannot function without rules. It’s the same thing with a market economy. If there aren’t clear rules, it can function.
Gene Tunny 13:54
Yeah, yeah. Can I ask you about this, this point you made before that, to be able to affect change, and to be able to, to really participate? You need to understand how the economy works. What do you think of the key principles? Do you set this out in your book? Could you What do you think are the big things that we should understand in terms of how the economy works?
Howard Yaruss 14:23
I read a survey and it was an international survey so I’m sure it included Australia, of economic students, and they asked them where new money came from, and the majority couldn’t answer it. How could you talk about resources or equality and not know where money comes from? Again, if you want to improve a system, you have to have some understanding of it. So I think what I tried to do in the book is give some foundational knowledge about how the economy works, how trade works, how the central bank in the United States, the Federal Reserve System, affects the economy and how they create new money. So people have a basic understanding of the foundational components of the economy. And then I talk about different aspects of the economy. And I hope readers reach their own conclusion as to what makes sense, but at least they do it in an informed and intelligent way. As opposed to, we’re talking about the people who supported Donald Trump or Occupy Wall Street, they’re expressing their frustration, but they’re not pointing people in the direction of something that would improve the lives of the average life for the average person.
Gene Tunny 15:40
I think it’d be good how, if you give a just a rundown of how you explain that, or just take us through that, that where money comes from, I think that would be really useful. I’d recommend. If you’re listening in the audience, I would recommend this book, I think there’s a lot of really good stuff in there. And I really loved your chapter on trade. I loved your chapter on industry policy, your, your criticism of the bailouts, and maybe we can chat about that later. But to start with, if you can explain, Well, how do you how do you explain to people where money comes from, I think that would be really useful?
Howard Yaruss 16:20
Yes, well, I have the quote in the book, that all money, all new money is loaned into existence. And again, the average economics student didn’t know that. And in the book, I tried, I tried in the book to make it very user friendly. To write with a sort of basic style, it’s supposed to read like, readable narrative nonfiction, but how money is loaned into existence is, as you know, is not the easiest thing to explain. Basically, when a bank lends money to someone, they’re not grabbing the cash from someone’s account, this is not like, I have to make a very contemporary joke. FTX, they take people’s cryptocurrency and do with it what they want, the bank merely creates new money, it’s totally created brand new money. That’s what a licenced bank does, in virtually every country in the world. So that’s how new money is created, it’s created through bank lending. And the money can go away, when the when the loan is repaid, it disappears. So it’s how critical it is to understand that I’m not sure what people’s particular frustrations are or what their particular interests are. But to understand where money comes from and how it’s created, it’s basically important to anyone who wants to get more involved in these kinds of issues, to understand them better. And ideally, to have an impact on policy, you have to understand the basics before you can go ahead and get involved in, in assessing policy.
Gene Tunny 17:59
Right, okay. And it’s certainly important for macro economic policy we’ve had, because of how our monetary policy has pushed down borrowing costs, and then there’s been a huge explosion in credit for housing here in Australia. And that’s pushed up property prices and and that’s also help keep the boom going. We’ve had this incredible post COVID Boom, that I think will probably end.
Howard Yaruss 18:28
We’ve had this here too. I think the whole developed world is having inflation, eight, nine 10%. It’s an important issue for people understand, I also talked in the book about hyperinflation. Inflation is a problem, clearly a problem that needs to be dealt with. But it’s not a civilization ending kind of problem like hyperinflation, hyperinflation almost always results in nation collapse and death, which is fundamentally different from just eight or 9%. Inflation. It’s, it’s again, it’s not a good thing. But people have to separate the two and, and they make it very, very clear point in the book that I don’t think there’s any advanced nations, certainly not the United States or Australia, that’s risking hyperinflation, which is a whole level, a problem on a whole nother level. We do have inflation, which is a problem, but it’s you need to separate it from the kind of hyperinflation inflation that for instance, brought us nuts, Nazi Germany.
Gene Tunny 19:25
And what do you say about the Fed? How do you say anything about their quantitative easing policies that they’ve had over the last decade and a half?
Howard Yaruss 19:35
Well, we see inflation. So I think that speaks a lot more loudly than anything I can say. If, if their policies were more effective, we wouldn’t be having inflation. So the suggestion is or the inference is that they were hit the accelerator a little too heavily. Yeah, yeah. Yeah, for sure. And now they’re slamming on the brakes. A lot of people claim they may be slamming the brake too heavily, because there’s, as you know, there’s this very significant lag between them hitting the brakes and the car coming to a stop. And it’s very hard to know how hard to tap the brakes as the car slowing down, but it may not be slowing down enough. My own personal opinion is that we’re going to see a assuming, again, there’s so many assumptions here, that the war in Ukraine doesn’t doesn’t escalate, that the supply chains get sorted out that there isn’t another problem that arises on the horizon, we’ll probably see the effects of all the central banks, their attempt to rein in inflation to start having some success.
Gene Tunny 20:44
Yeah, yeah. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 20:53
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 21:22
Now back to the show. Okay, can I ask you about what you see as the false solutions? I think you suggested before that economics helps us understand how the economy works, what sound policy responses would be. And then also, what are some of the dead ends to go down or false solutions? What would some of those be?
Howard Yaruss 21:49
Well, I already mentioned one in the tax cuts for the wealthy to spur the economy. We see in England that in a period of inflation, the government proposed tax cuts for the wealthy, which is just throwing more money out there, creating more inflation. So that’s definitely a false solution. I’m not sure what the problem was. But it’s definitely a bad policy idea. That seems to be in response to I don’t know what. So that’s one example of something in the United States, we’ve had a debate about Social Security, pensions for older people. And there’s always this talk of the government running out of money, Social Security going bankrupt. And as Alan Greenspan, the former chair of the Federal Reserve System, once said, It can’t run out of money. The United States government can always create money. What it is, it’s a question of will and will not, it’s a question of politics and not economics. It’s a decision as to whether we, as a society wants to devote our resources to these things. And that takes us back to what we just discussing at the very beginning. It’s not like physics, where you plug certain variables into a formula and outcomes an answer. It’s a value judgement about how we, as a society want to use our resources. Do we want to help people in their old age and obviously tax workers to do that or not? And again, there’s no formula that will give you an objectively right answer on that. What, what we need to do is have people understand the trade off, and then make an informed decision as to what they want. And I want to give one example, I serve on my local community board here in New York City. And we talk about different projects, like a bathroom in a park, or an elevator in a subway station. And these all sound great, but then I look at the price of these things. And a bathroom in a park is $4 million to put in. To make one subway station handicap accessible, which involves in all fairness, putting in multiple elevators. Yeah, it’s $70 million. That seven, zero million. And so again, people need to be cognizant of these economic issues because it all comes down in that case to a cost benefit analysis. And all of these things are good, Social Security is good. But there is no formula that’s going to give you the right answer to that. Although I think even if there were a formula it would tell you the $4 million bathroom doesn’t make sense. But the point is, this is a value judgement. It’s something that people shouldn’t rely on economic experts because there’s no objectively right answer for that. It’s something that people have to get an understanding of how it works, and then apply their own values to that issue and make the decision for themselves.
Gene Tunny 24:55
Yeah, I think that’s, that’s right. This is one of the points I’ve been trying to make on this. show over the years as I’ve been, as I’ve been doing it is that, you know, we economists need to be honest or need to be. Yeah, we need to realise that there are in decision making value judgments come into play. And often the best thing economists can do is outline what are the trade offs and, and what we expect will happen. And then it’s up to any decision typically involves a value judgement. Yeah, I’m just saying, Yeah, essentially, I agree with you. I agree with you there with Social Security. I’ve had a guest on the show, Romina Boccia, she was at Cato I forget, I’ll put it in the show notes. I think it was Cato or Heritage. But she’s very concerned about Social Security. And look, if you project it out, and you don’t, it is going to add to the deficit. And, like, you can think about that two ways. And I guess that’s what you’re saying, it depends on your values, you could, if you, you could try and limit that spending, you could reduce the entitlement or constrain it. Or you could just raise taxes to address the deficit. And making that choice, to an extent, depends on values. But I think what economists should be saying is that if you do make the choice to fund the higher social security, then you need higher taxes, and there are efficiency costs associated with that. And I mean, that’s the way how I’d be trying to frame it. What what do you think about that, Howard?
Howard Yaruss 26:41
Well, it’s again, it’s a trade off, I think we, in a democracy, should decide how society uses resources. And we shouldn’t make the decision in that context. It’s running out of money, you need to cut it with your personal finances, you have a job, that’s an issue, it’s finite, with a nation, there are all sorts of trade offs that can be made. And people need to understand this is not a crisis situation. There’s in the United States, the $22 trillion of goods and services created every year. And if we are committed to certain programmes we have, we have the ability to support them. It’s it’s not something that there’s a finite amount of money there that can only be used, I will go back to the first President George Bush, when he was talking about education, which I think is the most important investment of society could make it to keep itself wealthy, and not only wealthy but happy and secure. Again, I’d make the point in the book, you could look at places like Congo, and Venezuela and to a large extent Russia, which have enormous resources, natural resources, and yet they’re relatively poor countries. And you could look at Germany or Switzerland or Israel, which really don’t have any or Japan or any resources, and they become quite wealthy. What’s the difference? Human capital. And so the original, the first President Bush said, with regard to education, we have the will to fund it, but not the wallet. Well, I think he had it totally backwards, we’re a very rich country. And it’s there’s the question of just allocation of resources, which is, again, something that I think people who haven’t studied economics don’t understand the concept of opportunity cost that, that you can have, if you if some, if you prioritise something enough, you can have it, but you just have to realise that you’re not going to you’re going to have less of something else.
Gene Tunny 28:38
Yeah, absolutely. I think that’s an important concept. And you talk about how what we’ve got in this in advanced economies, we have a mixed economy, and, and in different countries, they make different judgments about the scale of government versus the private sector. And, and, you know, us is one where it’s, I mean, there’s still obviously, government plays a very substantial, significant role in the economy, but not as much as say, in Scandinavian countries or in France or, or Germany. So I think that’s a good point.
Howard Yaruss 29:14
All along a spectrum. Yeah. Yeah. I think it’s easy to fall into that trap of, are you capitalist or are you socialist? We’re all basically the same. It’s just that some countries are a little further on the spectrum of government spending, and some countries are a little less on the spectrum of government spending. We all basically have free markets that are regulated by the government. It’s not a question of socialism that they throw around the word socialism in the United States all the time. The textbook definition is where the government controls the means of production. I don’t think that’s what anyone’s talking about. And I make the point in the book pretty emphatically that all these isms can sometimes warp understanding of what’s going on in the economy, the way to understand what’s going on in the economy is to actually look at what’s going on. And that get involved in all this esoteric theoretical discussion of different types of economic systems.
Gene Tunny 30:11
Yeah. A lot of people are interested in crypto currencies. What does your book say about cryptocurrencies, Howard?
Howard Yaruss 30:19
Well, I make the analogy that it actually is, in a certain way, very similar to the US dollar or the Australian currency. It’s something that’s created totally out of thin air. The big difference is who creates, I don’t know, who creates Bitcoin, or Dogecoin, for that matter, but I know exactly who creates the US dollar. It’s the Federal Reserve System. I know exactly who the people are. I know exactly what the rules they operate under. I know exactly who to turn to if there’s a problem. When it comes to cryptocurrencies, we don’t know any of that. If you have a problem, we’ve all had problems with our checking account. And we know how frustrating it is to call customer service. But could you imagine if your quote unquote bank didn’t even exist, there doesn’t have any employees and doesn’t even have a customer service number to begin with? And I think we’re going to see more problems with cryptocurrencies because it’s just something created out of thin air by people. We don’t know operating under rules they claim they have but how do we know we have them in Bitcoin suddenly doubled the number of tokens out there? Who would we sue? What recourse would anyone have?
Gene Tunny 31:30
Yeah, exactly. And I mean, you mentioned what’s happening with the news around FTX. Is it and Sam Bankman-friedand here what we’ve seen in the news recently, yeah, yeah. Yeah.
Howard Yaruss 31:45
As I’m concerned, he was supposedly FTX was supposedly a place people could use to store their cryptocurrency. Well, if it’s not there, it was stolen. It was misappropriated. So I think it’s this is something that the prosecutors need take a look at.
Gene Tunny 32:04
Yeah, it’s all very confusing. I mean, I thought the great benefit of crypto was this decentralisation. And then suddenly, people are losing all this money, because they’re involved with this exchange.
Howard Yaruss 32:19
It’s decentralised. But the question is, what we were discussing before, there need to be rules, there are literally no rules with regard to this. So it’s like going to a highway driving on a highway where there are literally no rules. People could drive at any speed on any side, and do anything they want. If eventually there’s going to be a crash. If enough people come to that highway, you guaranteed a crash.
Gene Tunny 32:44
Yeah, yeah, for sure. What I liked about your chapter on money, was that you talked about how a lot of the value or the value of the US dollar is that you can pay bills in it right? Or you can, you can, people will accept it. It’s widely accepted. And it’s a fiction that everyone believes in. So I think that was a little something along those lines, I’m trying to remember the exact words used, but that’s essentially what Milton Friedman, how he described it. I mean, all money is fiction. So I thought that was, that was good. Okay. Now, what about modern monetary theory, which is another popular topic? What are your few things to say about modern monetary theory in your book? Could you take us through that Howard?
Howard Yaruss 33:39
Well, the most amusing thing I say about it is that it’s not particularly modern. It’s not a theory. And yes, it has to do with money. So I’ll give it that. Basically, they’re saying that the government can create as much money as it wants, as long as it doesn’t create inflation. That’s, I don’t understand why that’s anything new. Everyone knows that the government has printing presses and they could create as much money as they want. What I think is interesting about what they say is that the government should not be constrained by a balanced budget, that we all know it can produce as much money as they want. The modern monetary theorists say they should be able to create as much money as they want, as long as they don’t cause inflation. And arguably, that’s right. They if they’re printing money, and it’s not causing inflation, that really is a free lunch, if if you create an extra $10 and magically, an extra sandwich appears. That’s that’s literally a free lunch. The problem is, you need some constraint. And that’s why we have the central banking system we have today. Because if politicians could just rev up the printing presses, and print money for whatever They want tax cuts for their donors, giant spending programmes, you have the catastrophic problem we discussed before hyperinflation. And yes, if politicians could show adequate constraint, restraint rather. Yeah, I guess it makes sense. I think there are lost opportunities when the Fed is a little parsimonious with the money, and the economy could be more robust. But I think the downside risk of the politicians running amok and printing too much money and having the lose, lose control over that risk is too great, because that’s, again, a nation ending kind of risk. So I agree with what they say. I just don’t agree with their conclusion that we should turn trust, trust our politicians to show proper restraint. If we gave them the right to rev up the printing presses and print whatever they needed or wanted.
Gene Tunny 35:59
Yeah. Exactly. Okay. Do you say anything about climate change in the book, Howard, the solutions to climate change, or if that’s really to worry about?
Howard Yaruss 36:13
Not really, included in the book is the fact that if we want change, if people want change, then they have to assert themselves, it doesn’t happen on its own. If, if company if there’s a company that is doing something that people don’t like they need to, to promote policies that would rein in that behaviour. And it’s the same with climate change, that people need to be clear that this is something that is important to them, and that they want, because that’s how our political system works. Again, economics is not like physics, you don’t put things into a formula and outcomes and answer, it’s, it’s, it’s what you can get people to agree to do. And the more people understand, and this is a perfect example, the more people understand the harm we’re doing to our climate, the more they’re likely to support regulations that would rein in climate change. Ignorance is a threat to good policy. And that’s the whole point of the book. It’s to get people to think about it more, to understand it more. And I make it very clear in the epilogue, I passionately believe we would have better public policy if people had a better understanding of what’s going on, not only in the economy, but in with regard to climate change as well.
Gene Tunny 37:34
Okay. In terms of better public policy, one thing I liked in your book was your analysis of bailout. So you were highly critical of the bailouts that occurred, or the all of the assistance that went to was it to airlines in the States and other companies? Airlines as an example? Yeah, yeah. You were highly critical of that during the, during the pandemic. Could you explain your logic there, please, Howard?
Howard Yaruss 38:03
Oh, certainly, we gave billions of dollars to the airlines. But what did we get for it? Were the planes going to disappear? The planes are there, they were grounded, because there was a pandemic going on. But they don’t, they wouldn’t fall into the earth. So by giving money to the airlines, we were just saving the management of the airlines and the shareholders of the airlines. What what a lot of European countries did is they actually funded the wages of workers, which would have made a lot more sense and would have been a lot cheaper. Instead, we threw enormous amounts of cash at the airlines. And I think I don’t remember the exact figure in the book, I think it came out to about $750,000 per employee, we could have saved a lot of money by just paying the wages of the employees saving the employees. And the airplanes would save themselves, they’re not disappearing. So they’d sit there on the tarmac, the shareholders would get hit very hard, which is unfortunate. But given that there are finite resources, I don’t think they’re at the front of the queue in terms of warranting a handout. And when the economy came back there, the airplanes can be put back into service. So the point I’m making in the book is bailouts help management and shareholders as opposed to what Europe did, helping individual employees or or not offering assistance at all, and the assets would stay there and be acquired presumably by another company.
Gene Tunny 39:36
Yeah, yeah. I think that’s, that’s a good point. And remember, during the pandemic, there was a Silicon Valley, one of the billionaires in Silicon Valley who was making that point on or a similar point on CNBC and I thought, you know, that’s a that’s a that’s a good way of looking at it. And yeah, I think, you know, the way you go through it in your book is great. So I’d recommend your book for that. on that issue. It’s a key issue in industry policy. So I think that’s great.
Howard Yaruss 40:09
Okay, I’m just gonna add that that’s, that’s another great example of how people are misled that the hotels are going to go away, the airplanes and the airlines are going to go away if we don’t offer them a bailout, the hotels are there. There’s bricks and mortar, if they don’t get the bail, if they don’t collapse, the planes are there. The executives, if they lose their jobs, don’t get to fly them off and take them wherever they want to take them, then there, it’s just the management and the shareholders that are the risks. Now, not the actual wealth of the country, the actual infrastructure, the hotels, the air, the aeroplanes, they’re, they’re not going to go anywhere, whether or not there’s a bailout.
Gene Tunny 40:49
Yeah, yeah. Good point. Okay. I just want to go back over, go back to this winner takes all economy, you mentioned that early on, is that what you see is one of the big challenges in advanced economies at the moment? And what exactly brought this about? I think, if you could take us through that I think your book does a good job of explaining how we’ve ended up with what you call a winner takes all economy, or at least an economy where, at least in the US in, in Australia, it’s we haven’t had the same increase. And it’s a bit of an argument about whether we’ve had an increase in income inequality, certainly in wealth inequality. But could you explain what you know, what’s led to this winner takes all economy, please. And what in your view, economics suggests is a way we could get out of it. Or your logic suggests there’s a way we could get out of it.
Howard Yaruss 41:48
I teach this subject and I love one word answers. And I can give you a one word answer to that. And they’ll give you a more expensive answer the one word answer the internet, basically, the cost free platform that enables Jeff Bezos, or any of these big companies to do their business, internationally with no costs, has enabled the best providers to have economies of scale that have been able have enabled them to grow much larger than any company was able to grow before, before the internet era. For instance, in 1950, if you were selling clothing in New York, and wanted to sell clothing in somewhere in Australia, that was incredibly difficult. Just the phone calls alone wouldn’t cost a fortune. And now, it’s cost free. It’s frictionless. They’re the ultimate economies of scale. So Jeff Bezos can do his business, internationally, and basically take all so technology actually, it’s not just the internet, it’s technology in general, has facilitated this winner take all in the book, I use the example of musicals before 100 years ago, every city of any size, have a musical where people want to hear live music, and now he’s just flicking it on your computer. There are a few major international stars who provide the music. And I’ll add that not only do they provide the music, but they provide their performance in infinite number of times whenever you’re interested in hearing it, based upon one performance. That wasn’t the case 100 years ago. So yes, the best performers in New York City 100 years ago, probably or definitely earned more than the mediocre performers somewhere in Indiana. But the point is that many people earn livings in connection with that business. And now there are just a much smaller number of people. And the earnings are much more concentrated among the most popular performers.
Gene Tunny 43:52
Raw. Yeah, yeah. And what about the role of there’s obviously the role of monopolies or market power in this?
Howard Yaruss 44:01
Absolutely. Because with this, these economies of scale, we’re natural monopolies what economists would call natural monopolies develop. And you see this in ride sharing with Uber. I mentioned Amazon, information Google, social, social networking with Facebook, there are many more natural monopolies because of these economies of scale. And it’s a problem. Why is it a problem? Your Facebook’s free. Why is that a problem? Because you lose, you lose innovation when there’s a monopoly there’s no incentive to innovate. And as they really consolidate the monopoly, it’s, it’s it reduces opportunity for workers. And this is again fueling the winner take all phenomenon that the average worker has fewer options for potential places to work. Certainly entrepreneurship is foreclosed, you can’t go up against these behemoths. And so there’s a shift of resources from labour to capital, when you have these kinds, when business gains more power in this way.
Gene Tunny 45:16
Yeah, yeah. And so what in your view is the is a way to address this winner takes all economy? If you? I mean, I’m assuming you think it’s, it needs to be addressed. It’s not something that we need to spur innovation. I mean, it’s not actually I think probably most people agree that there’s a problem with big tech so far across the political spectrum. So, or across the economics profession to.
Howard Yaruss 45:45
This is a perfect example of what we were talking before about regulation. Here’s a question. I’m a lawyer that Facebook has had hate speech or a speech that motivated people to commit all sorts of crimes on its site throughout the world. Why isn’t there a potential liability there, and in the United States, they’re exempted from liability. But because they claim to be like a town square, but they’re not a town square, they prioritise certain speech over others. For instance, on Twitter, I tweet something it’s going to get, it’s going to be replicated many fewer times. And if someone else tweets something, so they are curating, they are involved in amplifying certain speech. So I don’t know why they’re exempt from free speech, from the laws governing libel and slander. So that’s one thing we were not we’re sort of asleep at the wheel in a way, we are not regulating these companies the way we need to regulate them. Every monopoly is different, or companies get monopolies for all sorts of reasons. And the government needs to look at them, it has the tools, it just needs to employ them to make sure they’re not abusing their market power. Because ultimately, if they do that, it’s not good for the economy. And it’s not good for workers.
Gene Tunny 47:09
Right? So would you break up any of these big tech companies?
Howard Yaruss 47:15
Well, there are such incredible economies of scale with a social networking site, you don’t want to go to a social networking site that only has a few people. So I think the government is going to have to look at, for instance, I talked before a moment ago about legal liability, to the extent they promote certain speech, and it causes harm, maybe they should be on the hook for that. And maybe they would be more equitable, and more fair, in running their business, if that were the case. So I think that, again, every monopoly is different. I think the government needs to look at them, and make sure we’re getting the best social benefit from them. Because again, they are natural monopolies in my opinion, if I wanted to set up a social networking site, I could set it up. But Facebook has 3 billion users, I’d have one, none’s going to it. I think, I think given that the government needs to, to impose some fair rules so that society gets the maximum benefit out of it.
Gene Tunny 48:15
Right? And what about inequality? How do you propose dealing with that? How would you see that as a substantial problem? Do you and how would you deal with it?
Howard Yaruss 48:26
Yeah, as we have more of a winner take all economy, there’s more of a gap between the people who are doing well, and the people who are not doing well. And that’s a great failing of a society as as our economy grows, on average, most people should do better. And that’s what was so great about America and Australia for so many years, people bought into the system. And to the extent that people are alienated by the system, I saw a recent survey that the majority of young people don’t trust capitalism. That’s a catastrophe as far as I’m concerned. And I think what we need to do is give them a reason to have more faith in the system that has created more wealth than any system in the history of humankind. I make the point in the book that since roughly 1800, we evolved from a society where the vast majority of people were food insecure to a society where the average person does quite well. And so we have to keep that, that we have to continue that to make sure that people buy into the system and we continue to grow.
Gene Tunny 49:31
Right, and what measures in your view would be required to do that? Are we talking but yeah, exactly what measures would be needed?
Howard Yaruss 49:41
Well, in the United States, there was a lot of talk a few years ago about a universal basic income that we may get so efficient. John Maynard Keynes talked about this. There was a writer I think his name was Edward Bellamy in the in the late 1800s, who talked about this how’s this It got so wealthy, that people, many people just didn’t have to work. And we could just have an income and benefit from automation. And the fact that society would be so efficient, we haven’t reached that point yet, in my opinion, I don’t think we’ve reached that point in anyone’s opinion. So that’s not going to work. But what can work is, is to have a more progressive tax system. And let me be clear what I’m talking about. In the United States, hedge fund managers pay a lower tax rate than teachers and firemen. That’s ridiculous. Again, to use a technical term, that we people need a better understanding of exactly what the 10s of 1000s of pages in the tax code are doing, and try to have a more reasonable, a more equitable approach to the way we allocate society’s resources. So off the top of my head, I would say that better funding for education to give people opportunity, certainly increase the tax rate on hedge fund managers. So it’s at least as great as teachers and fire man. Warren Buffett always says that he pays a lower tax rate than his secretary, that makes no sense. So that’s one easy place I would start to have a to provide more opportunity to the average person, I would I would have higher taxes for the people who who’ve enormously benefited from this winner take all economy and provide more resources to, for instance, for education, so as to maximise the chances that children growing up today can participate in contribute to this kind of economy.
Gene Tunny 51:40
Right. Yeah, I think certainly there’s some issues with the tax code in the States, I did an episode with Steve Rosenthal, from Urban Institute, do must have been toward the end of last year, just on the rules that you’re talking about, so I think is it carried interest?
Howard Yaruss 52:03
There’s a rule of carried interest exactly the provision that allows hedge fund and venture capital executives to basically have their income taxed at capital gains rates, which rates are lower than personal income rates. But I’ll raise a bigger issue, why should investment income be taxed at a lower rate than working income? I think that’s something that should be changed. And not only is it equitable, but by having the two types of taxation, you make the whole tax code so much more complicated, you introduce all sorts of distortions that people go through, so as to re-characterise their earned income, as investment income, it throws friction into the economy. And so that’s something that I think needs to be corrected. Again, to make it more equitable and more efficient. There are companies that have meetings in Bermuda, to leave the United States, because of tax reasons, that literally makes no sense. That’s a lost opportunity for the American hospitality industry, and just a colossal waste of resources. That’s something that needs to be looked at. And, frankly, when the tax code is 10s of 1000s of pages, I think the Internal Revenue Service is going to be out manned, by the whole army of lawyers and accountants that businesses and wealthy individuals have, it has to be simplified.
Gene Tunny 53:30
Yeah, I have a lot of issues with tax. I’ll have to come back to them in a future. Just interested in your thoughts on how to deal with that. Okay. Now, how would we better start wrapping up. I’ve been really grateful for your time. I mean, this has been this has been terrific talking about your new book, which I think yeah, I certainly recommend reading it. There’s a lot of good stuff in there. I’m probably more concerned about debt, you’re suggesting in your book that, you know, the federal debts. It’s not a huge concern, I guess it depends on how you characterise it. And your point is that it’s something that you can manage over time. But I should ask you about that. I mean, what is your view on the US federal debt and the fact that the US is running, you’re running a structural budget deficit, aren’t you, which is quite substantial, you’re not? You’re not raising enough revenue to pay for the spending. Do you see that, do you see that as something that has to be fixed up? I mean, you do have to be ultimately concerned to some extent about the debt and will you want to try and stabilise the percent of GDP, what’s your exact view on the debt, please in the States?
Howard Yaruss 54:51
This is such an important issue. It’s like the allocation of society’s resources that I tried to give people the foundational knowledge so that they in turn can reach an informed conclusion on their own. What I do in the book 20 trillion – 30 trillion. I don’t know about you, I can’t get my head around it. So what I do in the book is divide the national debt by the 330 million Americans and I come up with a national debt of roughly six to $8,000 per person with an annual interest payment of roughly $1,045 a person. And so there’s the question, Is that sustainable? Is that an existential threat to the United States? And I make the point that virtually everyone who went to medical school or started a business has bought a home for that matter has a debt hanging over their heads greater than that. The question is to just step back and offer some insight, try to offer some insight is that if the debt is growing faster than the economy, there could be a problem. Yeah, I mean, yet grow at the rate of the economy. It’s like, you owe a certain amount of money. If your income doubled, and your debt coverage doubled. It’s not a problem. It’s only when the debt is growing faster than the economy are issues raised. And yes, our debt has been growing faster than the economy, not significantly faster. The past fiscal year in the United States, the deficit was half of what it was in the preceding year. And so well, we have to watch it. But the question is, do people feel comfortable with this level of debt, I also make the point that when you say it’s a crisis, this debt is being paid, we have to pay it. But to whom is it being paid, two thirds of the payment goes to other Americans. So this is merely a transfer of money, from taxpayers to bondholders, which quite frankly, overlap enormously. Wealthy people tend to pay higher taxes, and wealthy people tend to own more bonds, poor people tend to pay lower taxes, poor people tend to own fewer bonds. So it’s really just moving most, two thirds of it is literally moving money from one pocket of the left pocket of a American to the right pocket of American, it doesn’t necessarily do any harm. A third of the interest payment, roughly 300, and some odd dollars here does go abroad. And you know, there are questions about that. But the question is, is $300 a year, per American in a $22 trillion economy? An existential nation bankrupting kind of issue? And personally, I don’t think it is, but you might reach the conclusion as that it is, and and vote and promote policies accordingly.
Gene Tunny 57:43
Right oh well, look out I think your book does, yeah, it makes a contribution. I think it’s got a place. It’s in this emerging genre of economics for everybody. I chatted with some people from the UK early this year, they had a book, what is the economy? I think it fits nicely in that, in that genre. To finish with, what do you think is different? Or what’s special about your book? Or what are the main? What do you think should be the major takeaway, or if there’s anything else, any other thoughts you’d like to make? Before we wrap up, please, that’d be great.
Howard Yaruss 58:21
I appreciate your asking that. And I think my book is, is is special, or I’ll go as far as saying it’s unique, in that it does, it tries not to have a political perspective, it tries to be fair, it tries to give the foundational knowledge to people so that they can reach their own conclusions as to what makes sense for the economy. Or there are points at which I do say something, but I make it very clear that it’s my opinion. And I make it clear why I’m saying so I think the book is accessible. It’s one of the only books on economics that has no formulas, their jargon, no graphs, it’s supposed to read like narrative nonfiction. And I hope it can reach an audience that ordinarily would would not learn about economics, but would pick up the book, read it, become more informed, more able to understand what’s going on in the economy, and hopefully, support better policies that would benefit not only their lives, but yours in mind, frankly,
Gene Tunny 59:20
That’s terrific. I just thought when you said about no equations. There’s a joke that John Kenneth Galbraith used to make in some of his books where he said that his publisher told him that every time there’s an equation in the book, it cuts sales in half. That’s what he heard you didn’t want to have any equations because it’s bad for sales. Okay. Howard Yaruss from NYU that’s been terrific. I really enjoyed the conversation. Thanks so much.
Howard Yaruss 59:51
Yeah, I really enjoyed it. Thank you.
Gene Tunny 59:55
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to email@example.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
Professor Jon Erickson is an ecological economist and advisor to policymakers including Senator Bernie Sanders. In his new book The Progress Illusion, he criticizes what he calls “the fairytale of economics” and argues we are failing “to design an economy that is socially just and ecologically balanced.” Show host Gene Tunny discusses Prof. Erickson’s new book with him in this episode of Economics Explored.
Jon D. Erickson is the Blittersdorf Professor of Sustainability Science and Policy at the University of Vermont, faculty member of the Rubenstein School of Environment and Natural Resources, and Fellow of the Gund Institute for Environment. His previous co-authored and edited books include Sustainable Wellbeing Futures, The Great Experiment in Conservation, Ecological Economics of Sustainable Watershed Management, Frontiers in Ecological Economic Theory and Application, and Ecological Economics: a Workbook for Problem-Based Learning. He is also Adjunct Professor at the University of Iceland, and has been a Fulbright Scholar in Tanzania, Assistant Professor of Economics at Rensselaer Polytechnic Institute, and visiting professor in the Dominican Republic, Norway, Germany, and Slovakia. Outside of the university, he is an Emmy-award winning producer and director of documentary films, co-founder and board member of numerous non-profit organizations, past-President of the US Society for Ecological Economics, and advisor to state and national policymakers. Jon lives in Ferrisburgh, Vermont with his wife Pat, their occasionally visiting sons Louis and Jon, and a menagerie of dogs, cats, horses, chickens, and donkeys.
Links relevant to the conversation
You can buy The Progress Illusion and if you listen to the episode Jon will reveal a discount code:
Transcript: The Progress Illusion w/ Jon Erickson – EP166
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.
Jon Erickson 00:03
Since at least the night, late 1970s. For a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown, grown. But these alternative metrics, whether it be GPI, or surveys on quality of life, or the ecological footprint, these things have not improved. They have not kept up with the pace of growth, right.
Gene Tunny 00:25
Welcome to the Economics Explored podcast a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 166 on the progress illusion, a new book from Jon Erickson, Professor of sustainability science and policy at the University of Vermont. Professor Erickson is past president of the US society for Ecological Economics. And he’s an adviser to state and national policymakers, including Senator Bernie Sanders. Please check out the shownotes for relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Jon or I have to say in this episode. I’d love to hear from you. Right oh, now for my conversation with Professor Jon Erickson on his new book The Progress illusion. Thanks to my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Professor Jon Erickson, welcome to the programme.
Gene Tunny 01:00
Thank you so much.
Jon Erickson 01:03
It’s a pleasure, Jon to have you on. I’ve read your new book, progress, the progress illusion, reclaiming our future from the fairy tale of economics. So given this as an economics podcast, there’s definitely a lot to talk about with your new book. Yes, yes. So can I ask you first? Why do you think progress is an illusion? What are you trying to communicate in this book, please?
Jon Erickson 01:56
Sure. Sure. Yeah. So the progress illusion is really a reference to a fairy tale of humanity’s place and purpose in the world. Certainly, economics isn’t the only discipline that is subject to the solution, but it’s the one that I’m trained in. It’s a story that economists like myself have been teaching and practising for decades, decades that, you know, every time we see the size of the global economy double, which doubles every 25-30 years at current growth rates, that we erode the very foundations of life and human societies in the process. So, in this book, I questioned that, that reigning logic, that reigning story, I unpacked various dimensions of this grand illusion of economics, you know, which I see as an illusion of history and a lot of economics programmes, mine included, we don’t teach the history of economic thought we don’t discuss the debates of, of economists of the past. It’s an illusion of the individual, me, so much of the focus of economics is on the individual and what’s best for the individual in the assumption that whatever’s best for the individual is best for society. So I unpack that and think about the debates over that question. It’s an illusion of choice. I mean, economics sort of sets itself up as the science of choice. But it’s always framed this choice at the margin, right, the choice of the next incremental decision. Yet, when you add up all those decisions together, we very often get into situations that the original decision makers never would have voted for. Right. And ultimately, it’s an illusion of growth and illusion of, you know, a sort of fairy tale or dream of infinite economic growth on a finite planet.
Gene Tunny 03:52
Gotcha. I think it’s interesting. You mentioned that there were these debates, and they’re not always well covered in economics. I remember. I remember learning at least about Malthus, and there was the Malthusian prediction or his his view that, well, we’re in trouble because any economic growth we had, we just ended up having more children, and we’d be back to subsistence. Whereas I think the way that economists started to view that was all well, we solved that problem with technological progress. And, but I mean, look, I understand the point that that’s in a few 100 years or over the last couple 100 years say we’ll be able to do that. Who knows if that can continue indefinitely? I mean, who knows what shocks are coming? So, I mean, maybe, is that what you’re arguing? We could be we could be too optimistic based on recent history.
Jon Erickson 04:48
Well, look, I mean, we’re recording this in the second week of November during that latest Conference of Parties for the UN Framework Convention on Climate Change. And there’s ample evidence to show that this economic system we’ve created is putting dangerous strains on the global climate system, right? A climate system that is, is increasingly called as chaos as in danger of, you know, collapsing the whole experiment of the economy. So, you know, we can go back to Malthus if you’d like. But we’ve always seen that a growing economy creates benefits, and costs. And what we’ve seen, particularly over the last three or four decades is as those benefits have become super, super concentrated. And the costs have been spread out on more and more people, and especially on future generations. So we’re in kind of, you know, yet again, a kind of Malthusian tragedy.
Gene Tunny 05:51
Right. And so is that your biggest concern at the moment, climate change, or other other concerns,
Jon Erickson 05:58
tThere are plenty of concerns to go around. But having a habitable planet is a big one. It’s a big one that fellow economists are concerned about. You know, economists have been part of various signatures, signatories to various pledges of action. It’s a concern that’s related to mass extinction. It’s a concern that’s related to growing inequality and persistent poverty and declining quality of life, even in the richest countries. You know, I think it was, I think it was Alcoholics Anonymous, right, that said, you know, when you do the same thing over and over again, expect something different. You know, that’s the kind of insanity. And that’s what this book is about.
Gene Tunny 06:39
Right? Now, you mentioned, well, you talk about the fairy tale of economics, you mentioned you were trained in economics, do you still consider yourself an economist?
Jon Erickson 06:50
I mean, I often describe myself as an ecological economist, because I’m really trying to understand interdependencies between the economic system, and society and culture and the social system and the environment. I see this work as reforming economics for sure. I’d love someday, where we didn’t have to have all these kind of competing camps and different flavours of economics, we could just call it economics. But since I really don’t identify with the mainstream of economics, I tend to call myself an ecological economist.
Gene Tunny 07:22
Right? And you tell a story in the book about how just something like that was it the JEL, the Journal of Economic Literature codes, and you were stunned? Yeah, the way that Yeah, could you tell that story because of those fascinating, I’d never thought the JEL. Yeah, would be so controversial, or yeah, but please tell the story. I thought it was a good one.
Jon Erickson 07:47
I don’t know that they were controversial it just it just gave me pause. When I saw that ecological economics was given its own code, and treated as a sub discipline of a field that we were trying to overturn or be the alternative to. And this really is, you know, this, this is, you know, reflect on kind of why I wrote this book. You know, it’s a reflection on my career in Ecological Economics, when ecological economics was formalised in the late 80s and early 90s, before it got to JEL code, books and journals and organisations and degree programmes, and folks like me were supposed to be created to try to question the mainstream and reform it. So in many respects, this book is kind of my midlife crisis book, where I take a critical look at the history state and fate of this movement of ecological economics as an alternative to the mainstream. Funny story about 10 years ago, I was the president of the US society for Ecological Economics, and one of these professional societies that have emerged to support this field. And I was at our conference at Michigan State University, and I had thrown my back out. So I was like, during most of the meeting, I was horizontal in my hotel room, just miserable, just really grumpy. I was laying on my back, trying to write notes for my presidential address right, to the society’s membership. And I just was so grumpy, so grumpy, so grumpy. And it really got me thinking about the state and fate of ecological economics, and made me think about like this code, Q 57. Right, the seven hundreds plus subject areas of economics, and how ecological economics was increasingly being absorbed by the mainstream, including by folks who call themselves ecological economists. In fact, at that meeting, there were just, you know, all of these sessions on monetary valuation of ecosystem services, which I saw as, you know, a real slippery slope, you know, can we sort of challenge the mainstream with the logic of the mainstream and commodify nature. So, in a lot of ways that kind of grumpy week in Michigan, set the stage for this book, and, and my desire to really critique my own field.
Gene Tunny 10:16
Right. Okay. So I probably should provide some background on so these JEL codes, they’re the codes that you would put at the bottom of an abstract for a journal paper or a conference paper to signal this is the field or that the field of economics are the sub discipline of economics that it’s in. And so that helps them identify where it should go in conferences, for example, which session. Now, it’s interesting you mentioned how environmental economists have come to start valuing nature or to quantify environment, environmental damage, or to value what a wetlands are worth or in I mean, as a, as an economist, I’ve done various exercises like that in the past. I just want to understand where you’re coming from, do you think that’s the wrong way to go about it, to think about the the economy or the environment to think about? Well, we’re doing this many dollar dollars of damage to the environment, and therefore we need to impose this, this cost this charge on people who are damaging it, and to make sure we have, you know, where I’m going, what we’re trying to get ya get some sort of, we’re getting some solution by having the right taxes and charges in place or Pigovian tax, for example, what do you what are your thoughts on that, Jon?
Jon Erickson 11:43
Yeah, that the field of environmental economics and and before that natural resources, economics, really preceded this field that I’m describing of ecological economics, really treating the economy as an ecosystem, and environmental economics has its roots in the late 1960s, early 70s. And, you know, reaching back to Pergo, in the 20s, and 30s. And fitting the environment inside the marketplace, right, using prices to correct the so called market failures of what were framed as environmental externalities. So that’s how I was trained at Cornell University, I was in an agricultural economics department, learning natural resource, environmental economics, and kind of, you know, buying into that logic of, of the environment is just a failure of the marketplace. Ecological Economics. So that’s valuable. And that’s pragmatic. And I’ve done my share of work that is trying to make the case the economic case for environmental protection. The challenges is when that tool when that approach, when the sort of expansion of cost benefit analysis to environmental concerns, when that rises to a worldview, right? When you commodify all of nature and when you reduce all social relations of humanity to market logic, we start to run into what economic historians or people in the 40s and 50s The Economist name is escaping me right now, the fellow who wrote The Great Transformation, Karl Polanyi. Yeah, the Karl Karl Polanyi warned of the merging market society, right. Whereas the rules and priorities of a market system that envelop the democratic system, that envelop our social and environmental values. So I’m okay using economics as a tool and treating economists as mechanics or janitors to sort of tune the market system. But when economists are sort of framed as overlords of the social environmental system, right, or conveyors of a master worldview, that’s where my hairs go up. And that’s, that’s largely what this book is about, and thinking about the progress solution of economics.
Gene Tunny 14:08
Right? Is the problem that we have this objective of maximising economic growth where we’re concerned about GDP, are you arguing? We’re not as concerned about these environmental measures? How do you what do you think we should be concerned about? Or how should we be making decisions as a society?
Jon Erickson 14:30
I’m making the case that 21st century economics should reflect 21st century problems and values. I think when the mainstream of economics or what we often call neoclassical economics was formed in the late 1800s, early 1900s. Maybe the focus was well placed on growing an economy of the efficiency of market system right, of taking power away from the church and state and putting it into the hands of the consumer. and producer. You know, it’s much like thinking about an ecosystem at the early stages of any ecosystem. It’s the pioneering species that are prioritise its growth and competition and resource exploitation, that is prioritised. But as the system matures, as the system grows into a fixed, fixed environment, the goal should change, right, the goal should move away from growth and towards maintenance, bitterness, towards durability, towards resilience, away from competition and towards cooperation right away from sort of thinking about the number one priority is to grow our way out of problems, to realising that growth itself creates problems that growth can’t fix. So Ecological Economics reflects a maturing of economic thinking, that reflects the challenges of the 21st century.
Gene Tunny 15:59
Right. Okay. So it seems you’re, you’re concerned about the problems that growth can’t fix. Okay. You don’t think regulations can help? I mean, because we’ve got cleaner air?
Jon Erickson 16:12
Not exactly. I mean, I think we need to move beyond just economic instruments to fix things using the market to fix market failures, right. But really trying to find that balancing act between market mechanisms and government regulation between improving and making government work better, instead of the opposite narrative of, you know, government is the problem, not the solution. No, in this book, I reflect on kind of my own upbringing in the United States, and my parents generation, you know, and growing up in the Kennedy years, where the narrative was, you know, you know, ask not what your, what you can, what your country can do for you ask what you can do for your country. And I grew up in the Reagan Thatcher generation, right. And the Reagan narrative was, you know, it’s all about the individual, it’s greed is good. Don’t ask what you can do, you know, do for your country, get government off our backs, you know, that’s what we need to do. So, I think in an age of climate chaos, in an age of the sixth mass extinction, and an age of growing inequality, the narrative has to change, the story has to change, we have to recognise that a system and an economics that was created in the context of a 1940s 1950s expansion out of the Great Depression had its day. And now, the realities of our time, need to need to start to shape a new reality.
Gene Tunny 17:44
Okay. And so what does that? What does that mean, Jon? Does that mean, we need? Do we need redistribution policies? Is that what you’re arguing for to address inequality? We need greater environmental? Well, we need to prioritise the environment. I mean, that’s gonna be I mean, obviously, the environments important, I’m not denying that. I’m just thinking in in Australia here. I mean, it’s we’ve got very stringent environmental regulations already. And if we have more stringent environmental regulations, it’d be very difficult to develop anything. So I’m just wondering what it all means is it? Does it mean, we have to accept a lower standard of living in the future? are you pessimistic about technological change or ability to to innovate our way out of these constraints? Could you talk about that, please?
Jon Erickson 18:38
Yeah, I think that’s too narrow of a frame. When you think about economy environment, and what I’m concerned about, there is reams of evidence show that so called advanced economies, such as the United States and Australia, built on hyper individualism, built on the legacy of a social disease that sociologists call affluenza, right, or this addiction to consumerism, that this model of progress has leaves a little lot to be desired. And that in fact, maybe we’ve been in a progress recession for some time now. Scholars in the United States and Australia and dozens of other countries around the world have been estimating for years now. What’s called the genuine progress indicator, something that is meant to be compared to the more common gross domestic product. And what this indicator does is it recognises that a growing economy has benefits and has costs. In fact, I first discovered the GPI when I was in grad school in the early 1990s. And in the US, we were in in the the bush one recession. And there was a beautiful article written in the in the Atlantic and it had the title of something like if GDP is up. Why is America so down? Right? We were kind of in this recovery state. And people were, you know, economists are saying, hey, the economy’s growing, we’re all good again. And the average American, I’m not good, I can’t make ends meet. I’m miserable. And the same narrative has popped up at the tail end of every recession ever since ever since. In fact, it started working on this book at the tail end of the so called Great Recession. And the same thing was happening, we were using the instruments of economics using mainstream thinking to grow our way out of problems. And the average person was saying, who is benefiting? And who does who? Who’s paying the cost? Yeah. So the GPIO through this series of 26, some odd calculations and says, What are the true benefits of a growing economy? And what are the costs? What are the environmental costs? What are the social costs, and have shown quite convincingly that since at least the night, late 1970s, for a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown grown. But these alternative metrics, whether it be GPI or surveys on quality of life, or the ecological footprint, these things have not improved, they have not kept up with the pace of growth, right. So we have to start asking at these kind of higher levels. What do we do with this for right? What’s, what’s the new balancing act in a maturing economy? How should we reprioritize what is the good life? And how should we I mean, you frame it as accept the lower standard of life, the standard of living the material standard of living, I frame it as as asking the question, how do we live better? How do we how do we live well, within our means?
Gene Tunny 21:47
Yeah, sure. I can, I can understand that. I guess what I’m thinking, Jon, is that at the moment, in Australia, one of the big issues is, well, the rising cost of living, high inflation relative to wages, and the lack of housing, I mean, we’ve got a dire shortage of housing here in Australia. Now. I mean, look, there are a variety of reasons for that, possibly. But I mean, at the moment, when I’m looking at things, I’m thinking a bit more economic activity to construct houses would have been good over the last 10 to 20 years. And, and we’ve got rising cost of energy. So yeah, I take your point, I think I think a lot of people out there would be concerned though, about this. Yeah, that they that, yeah, I’m not I’m not necessarily wanting to criticise what you’re saying, I understand where you’re coming from. I’m just yeah, that’s where I’m coming from, if that makes sense.
Jon Erickson 22:51
Yeah, that makes perfect sense. And that’s the big question, right? Like, can the same kind of thinking that got us into these current messes? That is making the billionaire class hugely, hugely more material well off, while the rest of us feel like we’re on a treadmill, just barely getting by? Can the same kind of system, right? That has privatised the benefit of growth and socialise, the costs? Can that continue? Or should it continue? Right? Should we sort of create a social movement and start to ask, what is the economy’s purpose? Who is the economy? And growth for whom and for what? Now, you know, when I debate economists, they always say, like, come on, come on, you know, you’re not being fair economics is just a model. It’s a model of progress. All models are wrong, some are useful, right? They quote George George Box. Right? All models are wrong, some are useful. And I said, Yeah, I, I agree, all models are wrong, some are useful. But what box didn’t ask is useful for? Right. So in the US, we’re seeing these energy prices, and we’re seeing record profits to oil companies. In the US, we’re seeing housing shortages, right? Yet we’re seeing record rents to the ownership class. In the US, we’re seeing families, you know, struggle to get by in these kinds of post pandemic months and year. And kind of returning to, you know, try and train as quickly as we can to get back to normal, right? Pre pandemic years. And a lot of us, and a lot of folks that are most vulnerable in this current system, are saying we don’t want to go back to normal normal was already in crisis.
Gene Tunny 24:47
Yeah, yeah. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 24:55
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Gene Tunny 25:24
Now back to the show. Okay, can I ask about that genuine progress indicator? Who’s producing it? And can I ask him about what, what some of the the variables that go into? It are? Please, you’re really interested in that? Because look, I understand the criticisms of GDP. And I mean, at least if we’re destroying, or we’re subtracting from the environment, or we’re, we’re damaging the environment that you probably should recognise that as some sort of disinvestment or a loss of capital stock. So yeah, would you be able to explain the genuine progress indicator, please?
Jon Erickson 26:04
Sure. I mean, it starts with the basic premise, right, that the economy is subsystem of the environment, and that when the economy grows, it has opportunity cost. So I mean, it’s a basic, it’s built on basic economic system has benefits and has opportunity costs. So with GPI, we start with consumption, the biggest part of GDP, and we say, Okay, let’s take consumption, and then let’s correct it for income inequality, to recognise which what Pergo recognised in the 1920s and 30s, right, that growing incomes grow and give diminishing returns, right, that the next unit of of income to a rich person creates far less welfare society than the next income, a next unit of income to a low income family or a low income person. So we correct for income inequality. We then go through a series of calculations that for example, take consumer durables and GDP and say, you know, a society a GDP benefits by building a throwaway society. With durables, washing machines, automobiles, long lasting expenditures, if they were out often have to be replaced. That’s great for GDP. Right. But is it good for progress? So we say, Okay, here’s the expenditure of durables, and here’s the benefits of durables, right? Over time, these things are supposed to last more than a year or two or three years. So there’s economic adjustments, there’s an adjustment for over for underemployment, right. Idle work, people who wish they could work more. So it’s got that kind of basic economic logic built into it. But then there’s a whole category of depletion and pollution costs, right? We shouldn’t be treating depletion of our soils, our water, our air, as income. In fact, any business that treated depreciation of capital assets as as income instead of costs wouldn’t be in business very long. But that’s exactly what we do in our economic book keeping for nation states. Then there’s a whole series of interesting calculations on the social side of thing, right, we have to recognise that the GDP only recognises the value of your time in a market, earning income, earning wages earning profits. And so what the GPI the genuine progress indicator says is that there’s, um, use trade offs, right? Every hour extra hour work, the opportunity cost of that is an hour, not with your family, an hour, not in your community. And now we’re not leisure. So rather than feeding every single hour at work as a benefit with no costs, GPI goes through and says, let’s be honest here, right? Work is good, up to a point, income is good, up to a point consumption is good, up to a point. But we have to recognise that consumption and income and growth have diminishing returns. And at some point, at some point, the growth of an economy creates more costs than benefits. What Herman Daly, one of the founders of ecological economics, who, unfortunately passed away a couple of weeks ago, called an economic growth, right, a growing economy that creates more cost and benefits. Okay, we could do a whole podcast just on GPI, so don’t get me going.
Gene Tunny 29:40
Yeah, that’s fine. I might. I’ll have another look at it. Because, I mean, it’s one thing that comes up in various conversations I have, and I’ve been looking at the national accounts recently, I’ve had people on talking about that and their conceptual foundations and we’ve, we’ve we’ve mentioned that every
Jon Erickson 29:58
time we have a recession Yeah, the critique of GDP comes up, right? Yeah. Like, hey, wait a second growth isn’t providing what’s going on here. And every time coming out of recession, we question the metric. And then we kind of start growing again and says, Okay, let’s go back to normal. Yeah. But we have to kind of keep revisiting these alternatives. You know, the original architect architects of GDP back in the 30s, and 40s. Were very careful to say this is not a measure of human progress, human welfare. This is a measure of economic activity, which contributes to human welfare, but is not in and of itself. human welfare.
Gene Tunny 30:40
Yeah. Yeah. I agree there. Now, what about what can be done? Do you have a set of policy recommendations? Jon, are there? What would What do you think needs to be done? Are there things that there will be things that need to be done by governments? Are there things that need to be done by individuals? I mean, it sounds like, Well, okay, maybe you tell me if I’m wrong here. But when I read your book, and I heard about the progress, I was reading about the progress illusion that concerns about how we were consuming too much, I mean, do we need to show that we as individuals be consuming less Is that is that part of your argument? We should we shouldn’t be going on as many overseas trips, we shouldn’t be using the car as often we should think about our purchasing decisions, not get a new washing machine or get a I only get one, when it breaks down, try to repair things. What are you arguing in this book? Is the solution?
Jon Erickson 31:40
Well, what would an economy look like? That was built on maintenance resilience and cooperation is that growth, efficiency and competition, right, a late stage maturing economy like yours in the Australian ours in the US? That’s, that’s what I’m asking, you know, an economy, a mature economy should have different goals than an economy at pioneering stages. So it really is about a reprioritization of our goals, especially on consumption, right? Because there’s ample evidence to show that we in the West are over consumers, and our kind of addiction to consumption is creating psychological problems, social problems, that consumption has been kind of become a cure for social ills, right? Like, it’s a distraction. I mean, the whole advertising industry is designed around the idea of kind of making you and I feel bad about ourselves, right. And to sort of fill the void with more consumption. And I actually think this is one of the lessons coming out of COVID. Right, as sort of people were, especially, you know, high income people who, who could weather the storm, better than most, were forced to slow down, were forced to pee at home, were forced to kind of reevaluate life’s priorities, and found out that, you know, this kind of ever, burning hamster wheel of economic growth isn’t all that it’s cut out to be. So it’s the reprioritization of goals, which is going to have to reprioritize policy instruments. Daily Herma, daily use the analogy of a plinth Plimsoll line, I’m not sure I’m pronouncing that right, of a cargo ship. Right. So this is the line that’s painted on a ship, very easy technology. And as the as the cargoes ship is loaded, it sinks into the water. And when it gets to the line, you’re supposed to stop, right, because you’re in, you’re in danger of overloading the ship. So if we sort of reprioritize and think about the principle line of an economy, we can’t just more equally or equitably distribute the cargo of an overloaded ship and expect it to be resilient. We can’t just more efficiently load an overloaded ship and expect it to weather the storm. As the pump, some land goes underwater, right. And there’s ample evidence to say that we are kind of in an overshoot on a lot of environmental parameters. You’re in danger of sinking the ship, especially in stormy waters. So this analogy implies that as we run up against planetary boundaries, planetary limits to growth, the scale of the economic system is way more important to stress than distribution or efficiency. And if we can’t count on a growing system to solve distribution problems, then we’re gonna have to quickly think about the fairness of this distribution of benefits and costs of that system. And then it only then can we get to efficiency, which is the priority of economics. So this means that you know, new policy instruments stuff that focused on scale distribution, then efficiency is the way to go. And I talk a lot about this in the last chapter book, as I kind of wrestled with the idea of how did I put it radical pragmatism? Right? Yeah, that’s a pragmatic things that we can do now, for example, to wean ourselves from fossil fuels, you know, home weatherization, and carbon taxation, and, you know, maintenance of our systems, electrification of transportation, transition to renewable energy. But all of these are really hard to do in an economy that continues to bloat an economy that continues to grow. So we have to be thinking about the scale of a system. And that’s probably the radical part of radical pragmatism, right? What’s it going to take to rein power away from the status quo, that part of the system that’s benefiting from this growth model, and create an economy that works for all?
Gene Tunny 36:05
Okay, so I’m just wondering what exactly that involves? And is this part of this whole idea of D growth? Is that what you’re arguing for? I’ve heard about this concept of D growth, that that’s coming up, and there was an article in the FT about it the other day. So you’re just wondering, what needs to be done? I mean, do how do we, how do we have that, though? How do we recognise those constraints? I mean, you mentioned carbon tax. I mean, that’s something that, but you’re also saying that that’s not going to be enough and mean, given current magic
Jon Erickson 36:41
bullet, but it changes that changes the system? Yeah. Yeah. I mean, degrowth is the sort of social movement side of ecological economics, if you will. It’s a question of, how do we orchestrate a just transition to a right sized economy. Now in some parts of the world, and for some people in the world, you know, growth still creates more benefits and costs. But there are plenty of parts of the world and plenty people in the world where growth, Grace, more cost and benefits, right. So we have to orchestrate a kind of Race to the middle. And in fact, if you plot something like the HDI, the Human Development Index, which is a UN level index, this used to sort of monitor, you know, the benefits of development. If you plot HDI at national levels against energy per capita, you get this curve, right that the initial development improves considerably, with just a little bit more energy use per capita a little bit more than final impact per capita, Right. but only to a point that we get into this kind of club of countries, where continuing use of energy continuing depletion of the environment, continuing materialisation of the economy, doesn’t improve development doesn’t improve the HDI. And you get this long tail with countries with the same HDI of countries that that consume 20 or 30, or 40, or even some cases 80% less energy and material. So countries like mine, the US were way out on this tail, where we’re not getting improvements in human development. Yet, we’re consuming way, way, way more energy than the average human right. And way more energy in the countries that have similar levels of development, similar qualities of life. So what are we doing? Right? We’ve got to orchestrate a race to the middle and whether you call that d growth for the rich countries, and to be more agnostic about growth for everyone else, like grow, where it makes sense and shrink where it doesn’t. That’s the kind of century that we’re in. That’s the biophysical reality of the new economy.
Gene Tunny 38:57
So Jon, do you need a command economy to actually to orchestrate this transition to a right sized economy? I’m just trying to think about how this would happen. Because I mean, people, a lot of people out there, just, you know, they’re trying to live their lives and do the best they can. And a lot of people have to a lot of families, the couple have to work two jobs. They’re trying to make ends meet. I mean, they Yeah, they probably wouldn’t see themselves as as living a hugely materialistic lifestyle, but then compared with other parts of the world. Yeah, sure. It probably is. Yeah, I’m just wondering how we how we can do that. I mean, I’ll
Jon Erickson 39:37
yeah, yeah. My trainer has economists. I assume you’re trained economists. We were sort of taught these, these two different DS, roughly two different models, market economy and a command and control economy. And we were taught that this command and control thing is inefficient and unfair and results in a kind of an over regulated world and we need to the market economy is not perfect, but may Is it better than command and control? I’ve come to realise that that’s a load of BS. The market economy is also a command and control economy, right? Markets are designed by those and power markets are social constructs, especially the last three or four decades of neoliberalism has created a kind of free market experiment, right? That is concentrating the benefits and widely distributing the costs. So talk to the average guy or gal on the street and ask them, Is this economic system working for them? And if they say no, do you say, well, let’s double down on the logic of the system? Or do we try something different, right. So we’re finding that more cooperative forms of of economies are resulting in more shared benefits and shared costs. Were working with a group called the next systems project that has been sort of systematically cataloguing different political economics systems, local skills, community skills, United States that have dramatically different outcomes and dramatically different structures. It’s not just either or of command and control of free markets. It’s blending things in between, it’s the continuum in between, that is the secret sauce. So I don’t buy that we immediately just have to go to command and control. Although in crisis, what we learned from COVID is what happened is the world’s government goes goes to command and control, right? If climate is a crisis, if, if environmental depletion is a crisis, we might be using the very system of free market thinking, to push us into a state where the only option is going to be command and control. And I don’t want that you don’t want that. People don’t want that. We want our basic liberties and freedoms. But we want to do it in a way that creates an economy for all for children and for for future. I also kind of reject the the narrative of economic freedom, right? Because that’s awesome. That’s also painted as freedom to do things. And instead of freedom from tyranny, right, freedom from the impacts of, of the environmental costs of a growing system, freedom from the social inequalities, of a system that’s geared towards making the billionaire class even richer. Freedom from the costs of growing economies, what we should be thinking about, not freedom to do things to our neighbours, to our environment, and to future generations that ultimately are going to come back and bite us in the tail. Yeah, a buy in any of this.
Gene Tunny 42:58
Well, I’m interested in the new systems project. I’ll have to make system next systems project. I’ll have to look into that. I mean, do you have any examples of those communities you’re talking about?
Jon Erickson 43:10
Well, it’s examples of of. So you take the US and you think that we’re this kind of, you know, outside looking in and the narrative on the mainstream news channels is that, you know, we’re this free market, capitalistic system. It’s actually not true. So much of what makes the US economy work is cooperative ownership, collective ownership, state run, companies, state state run banking systems, state state runs systems of have that make the the economic system work. Take the banking sectors, trillions of dollars and coops where the depositors get votes on the matters of their banks. Take agriculture and education, and even energy and electric utilities. So much of those industries are run by cooperatives. In fact, electricity cooperatives deliver electricity, the United States, to a well over half of the geography of the high states, to rural communities, where the sort of economics doesn’t work for for industrial companies. There’s experiment after experiment, after experiment of different kinds of political economic institutions that have that we have lots of lessons to learn from. And this is what I meant in the beginning, when I talked about you know, economics, part of the Progress illusion is this kind of illusion of history right. To think that the current economic system, the neoliberal system, the free market, system, is is is the only one is has been perfected, right? Is the kind of logical inclusion of everything along the way, and that we don’t have to learn from our history. We don’t have to revisit the debates. We don’t have to consider the morality of our economic choices, or their biophysical consequences. And yeah, there’s a lot. I mean, I speaking mostly as a, you know, from the perspective of an American, maybe it’s different in Australia. But man, we have this sort of US centric view of the world, that everything we do is right. And every thing that we do is the best that ever was. And we don’t need to learn from our history. And we don’t have to need to learn from other other experiments around the world. And where I land is, that’s some pretty insular thinking,
Gene Tunny 45:45
huh? Yeah. Yeah. Okay. We’ll start wrapping up soon, Jon, this has been Yeah, really thought provoking. So it’s good to have you on the show. could ask you about neuro neuro economics. So you talk about that in the book. This is a new field, I’ve only learned about recently, what what’s that? What’s your interest in that field? And what’s it broadly trying to tell us? Or what’s it found?
Jon Erickson 46:11
Yeah, sure. Well, so this is where, you know, I’m kind of researching the book, like, what are some alternative ways to think about the human agent and our economic models? Because the economics, we’re taught a very, very, very narrow version of humanity, right, which is sometimes called like a subspecies of human homo economic is, yeah, isolated individual at a point in time, right, who
Gene Tunny 46:36
just wants more? The rational utility Maximizer? Yeah,
Jon Erickson 46:40
exactly. Exactly. And both within economics and outside of economics, you know, we’re learning that when we test our theories, with real data, and not just abstract mathematics, that this sort of foundations of this rational actor model, unravel. So what I do in the book is I explore what you might call borderline disciplines, right? Where economists have cooperated with other disciplines, especially other natural science disciplines. And so neuro neuro economics is one of those examples where economists have collaborated with neurosciences to ask questions of proximate cause. Right. So in science, we think of proximate cause and ultimate cause. And then the case of economic decision making proximate causes asking how we make decisions, whereas ultimate causes more a question of why do we make decisions that we do? Neuro economics is an example of a borderline disciplined, proximate cause where, literally economists are taking tests objects, with their neuroscience colleagues, asking people to solve economic puzzles, or make economic choices that are watching their brain light up, right, and trying to understand where and when do the kind of precepts of the rational actor model hold up? And where don’t they? So it’s one of these Borderlands this was, such as neural economics is an example. But also behavioural economics, experimental economics, where we’re trying to kind of understand the brain in the case of economics, the whole human case of behavioural economics, groups of humans in the case of experimental economics, groups of groups in the case of institutional economics. And then there are entirely evolutionary history as a species in the case of evolutionary economics. So these are all examples of, of the isolated discipline of economics, starting to cooperate with other fields, and building what I call in the book, borrowing from the biologist, EO Wilson, a more conciliate form of economics, where we find the jumping together of knowledge to really watch it watch the 21st century version of this field.
Gene Tunny 49:13
Right now. Okay. Well, yeah, oh, it’s something I want to have a closer look at, because I definitely recognise the limitations of that. That standard economic model. I mean, for years, economists were saying, Well, it’s, we recognise that all the assumptions are a bit unbelievable. But as long as it makes good predictions, and it’s, then it’s fine, but it turns out, it may not actually make good predictions. So,
Jon Erickson 49:39
I mean, I gotta go through the history of you know, the running joke, of course, right is that economists have successfully predicted seven of the last three recessions. So it’s, this this model of the rational actor model turns out to be not a very predictive model, or a model. Again, all models are wrong, some are useful. But we should start asking useful for whom? And it turns out this this isolated model is useful for the billionaire class but not useful for the rest of us.
Gene Tunny 50:10
Right I so we might start wrapping up, I’m keen to just learn about, what are you hoping this book we’ll achieve? Jon, what’s your What are your hopes for this, this book,
Jon Erickson 50:22
my generation, I’m 50 birthday this month, I’m 52 going on 53 My generation was inspired by the works of a number of like, you might call a renegade economist, right? Who sort of solid different path. Folks like Herman Daly, who I mentioned to, we just recently lost that 84 years old. I mean, Herman was on a similar journey that I was he started out with aspirations to be a growth economist, he thought that the logic and approach of market fundamentalism could be sort of bred when he was training to be an economist in the 50s and 60s, to solve problems, particularly problems of poverty, right to grow the economy, lift people out of poverty, but in his own educational journey, set against the aspirations of the Great Society in the US in 1960s, the civil rights and environmental movements of the 60s and 70s You know, he was inspired by inspired, inspired by the work of earlier group of renegades folks like Nicholas Dzerzhinsky regime who wrote on energy and the economic problem, bringing the principles of physics into economics, Kenneth Boulding, who wrote the infamous article, the economics for the coming Spaceship Earth that was really coming to terms with the opportunity costs of a growing economy inside of a fixed ecosystem. John Kenneth Galbraith, who, whose social critique in the affluent society really sort of, you know, early on question a society built around, creating more and more affluence into an affluent class. And, of course, the 1962 book by Rachel Carson’s Silent Spring, which was really impactful on Herman’s thinking, and design of an economic study of economy inside environment. So, you know, these sorts of scholars were also inspired by long standing debates about the function and purpose of the economy, you know, really going back to the classical era of economics, when economics was seen as as a branch of moral philosophy, right. Not not a pseudo science hiding behind abstract mathematics. So Herman’s work was another kind of link in the chain. His work on economics, the life sciences, first big published article, his work on steady state economics in 1977. Book, his work on for the common good that he wrote in 1989, with a theologian, John, John Cobb, you know, he was created another link in the chain that was trying to build a study of economics as if people and planet mattered. So I hope, you know, this book is yet another link in this chain of link that comes from my generation, that can continues to build a kind of more modest, more humble economics that can contribute to social well being and environmental, environmental protection, and not just simply,
Gene Tunny 53:39
okay, well, I’ll put a link in the show notes. So if you’re in the audience, and you’re interested in, in the in the progress, illusion, and look, it’s got a lot of, it’s got a lot of great information in it. Lots of lots of great analysis, and it’s very thought provoking. So I certainly enjoyed or I learned a lot reading it. I thought it was good. I liked how you went through the evolution of of economic thought and all the debates and even what I was struck by was, I didn’t realise that was Tinbergen, the famous Dutch economist. Yeah, he had a bit of a Nobel Prize winner. Yeah, he ended up he started to question the whole the the economic growth narrative in the was it the 80s or 90s? Are some of the you tell the story along those lines, I thought was interesting. Yeah. Yeah. So I think there’s a lot of good stuff in there. Okay, Jon, any final thoughts before we wrap up?
Jon Erickson 54:42
Look, I really appreciate this. Thanks so much for your podcast. I was listening to a bunch of your past thoughts in preparation for this and this is such a great show. Very valuable show. And yeah, folks are interested in this book. It’s, it’s been published by Ireland press which is One of the bigger nonprofit publishers of environmental books in the US and give your listeners the secret code. If they order a book from Island Press they get 20% off if they answer the enter the code illusion so but on my capitalism have there for a second
Gene Tunny 55:17
okay, is that all is that this capitalization matter is what did you just tell me that and I missed it sorry was
Jon Erickson 55:24
no I don’t know that it needs to be capitalised. But it’s the word illusion is the code for 20% off.
Gene Tunny 55:30
Okay, good one. Well, I guess people try it and if, yeah, hopefully it doesn’t matter whether you capitalise it or not, or try and capitalise that, that doesn’t work. Without caps. Okay. Very good. Okay. Jon Erickson. Thanks so much for your time. I really enjoyed the conversation and really appreciated your insights. So that’s been terrific. Thank you. Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.
Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
he governments of many countries have structural budget deficits, so even as their economies recover from the COVID-recession they are still running deficits. In many countries, the fundamental structure of the budget is bad. There is too much spending relative to revenue, even in normal or good times, not just in recession. In this episode we explore how economists can calculate structural budget balances. We look specifically at what the Australian Treasury does, given that a new Australian Budget came out last week.
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:00
Coming up on Economics Explored.
So I think this is a really neat methodology that the treasurer is trying to break down the different influences on the budget to see what’s really going on. And what it reveals is that there’s this structural problem with the budget.
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 164 on structural budget balances, government budgets around the world was smashed by COVID-19. With countries recording huge deficits and big increases in debt. The governments of many countries have structural budget deficits. So even as their economies recover, they are still running deficits. In many countries, the fundamental structure of the budget is bad. There is too much spending relative to revenue, even in normal times, not just in recession. For example, the IMF estimates the United States will have a structural or cyclically adjusted government budget deficit of five to 7% of GDP over 2023 to 2027. In this episode, we explore how economists can calculate structural budget balances, we consider the different components of budgets, the structural, cyclical and temporary. We look specifically at what the Australian Treasury does, given that a new Australian budget came out last week. Joining me for the conversation is my Adept Economics colleague, Arturo Espinoza. Please check out the show notes relevant links and clarifications and for details where he can get in touch with any questions or comments. I’d love to hear from you. Righto, now for my conversation with Arturo on structural budget balances, thanks for my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Arturo, good to be with you again.
Arturo Espinoza Bocangel 01:49
Hi Gene. My pleasure to be here.
Gene Tunny 01:51
Excellent. Arturo, so I thought today we could have a good chat about this concept of a structural budget balance. So we had our federal budget, the Australian government budget was released last week. So for 2023, the financial year. And this was because we have a new government. So there was an election in May. And there was a change of government, we now have a Labour government. So a more left wing government than the previous government, which was the Liberal National Government, the coalition government, and in Australia, a Liberal government is actually a conservative government. It’s all very confusing. Right, so we had a change of government and there was some improvement in the current year budget balance because of higher commodity prices, which flow through to, to earnings to and to tax revenue, that the federal government pulls in, particularly from the big mining companies. So there was an improvement in that underlying what they call the underlying cash balance. But this federal government is still running quite significant deficits. So it’s still running a deficit of some $37 billion, this financial year, the previous government did its budget back in May, I think they were projecting that up around must have been nearly 80 billion, I can’t remember exactly. But it was an improvement on that. But it’s still one and a half percent of GDP at $37 billion. And then over what they call the forward estimates, which is out to 25-26. We’ve still got deficits in the range of 40 to $50 billion, approximately, and, you know, up to 2% of GDP is in 24-25. So we’ve still got significant deficits. And the problem that we’re seeing in Australia, and this is similar to in other countries, too, is that governments are just spending much more than they’re bringing in in revenue. I mean, I guess that’s what a deficit is, right? I mean, that’s, but but there’s a problem that, that because of politics, because no one wants to pay taxes, politicians don’t want to put up taxes, and they want to deliver the goodies, they want to fund a high level of services for the population, and that helps them get elected. And so we’ve got this, this problem, this imbalance between what they’re spending and what they’re bringing in in taxes. And this is where I think this structural budget balance concept is of great use. And I just want to talk about that. So does that make sense Arturo, what we’re going to cover today?
Arturo Espinoza Bocangel 04:45
Yeah, that makes sense. It also is a very interesting topic related to government debts and this structural budget.
Gene Tunny 04:58
Yeah, yeah. So It’s always a concept that’s fascinated me. So I used to work in the Treasury in the budget policy area. And when I was there, we didn’t produce this structural budget balance estimate, and there was a big debate about whether Australia should have one and whether it’s feasible to develop one because as we’ll discover, you have to make all sorts of assumptions to generate it. It’s it, there’s a there’s a bit of, you know, there’s there, there’s a bit of number crunching that goes into it. And you have to make all sorts of assumptions regarding, well, what’s the normal state of affairs, because one way of thinking about this structural budget balance is that it’s what the budget would be if you took away the cyclical or cyclical factors. So if you if you’re able to abstract or control for the business cycle, so whether the economy is booming, or whether it’s slumping, then it gives you the budget balance that you would get in that situation, because one of the problems with the standard budget balance as a, as a measure of how the gut of the government is performing in a fiscal sense is that it is what economists call endogenous, it’s determined, partly, it’s determined or largely as determined by the state of the economy is determined within the system, it’s endogenous. It’s not something that the government can, can totally set, exogenously or it doesn’t have full control over it. Because your level of taxes depend on the state of the economy and commodity prices in Australia, if the iron ore prices is really high, or the coal price is high, then BHP, Rio Tinto, et cetera, the big mining companies, they’re only more profits and the federal government, it gets a share that it gets about 30% of their profits. So yeah, that can have a, you know, that can mean billions of dollars to the budget bottom line. And so that’s why we see the budget balance, it’s, it moves with the economic cycle, and so your government could be running a deficit. But that could be understandable, given the state of the economy. And so the underlying budget is okay, the structural part of the budget is okay, that’s not the case with Australia, but I’m just using that as an illustration. So it may be useful. Well, I think it is very useful to adjust for those cyclical factors. And that’s what the Australian Treasury has done in what I think is one of the most useful charts in the budget, which is in their statement on the fiscal outlook chart 320, the structural budget balance. And that really tells a story, it tells a story about how within the federal budget, because of this, this gap between what the government is spending money on and what we’re paying in taxes. So if government spending is at a level of around 26% of GDP. And revenue is under 24% of GDP. Or maybe it’s 25. And 23. It’s sort of that sort of order of magnitude, or it’s those are approximate figures, I’ll put the right figures in the show notes, we’ve got this gap. And this is a permanent gap. It’s a structural gap. And this is what this chart shows of two percentage points of, or 2% of GDP. And this is baked into the budget. And this is what this structural budget balance chart shows. So what they’ve, what they’ve done is the they’ve worked out that structural factors, leading to a deficit of about 2% of GDP, cyclical factors, so the state of the economy, the state of commodity prices, the fact that the iron ore price is super high, the fact that the economy has been booming. What that’s doing is pushing up, or that’s improving the budget balance by looks like 1.8 or 1.9%. If you look at the chart, and what that is telling me and what that is, this is for the current financial year 22-23. What it’s telling me is that, well, if we didn’t have that, that structural problem in the budget where we’re just spending more than we’re, we’re bringing in, and that’s the case and that would be the case in a normal year, in an average year. If we just control the economic cycle. If we didn’t have that structural problem. And if we looked at what the strength of the economy is commodity prices, and the government should be running a budget surplus of nearly 2% of GDP, and in actual fact, it’s running a budget, a budget deficit of what is it, one and a half percent of GDP. So there’s this big, there’s this big gap, which, in a way, represents the additional demand that the government is generating in the economy that isn’t warranted, given the economic circumstances. So the government budget is highly stimulatory to the economy and that is arguably a problem for Well, I think it is a problem, it’s contributing to the inflationary situation that we have in the Australian economy at the moment. And likewise, governments around the world that are running large budget deficits, such as the US government, such as the UK Government are contributing to the inflationary situations in in those countries, because if you looked at what the budget should be, given the state of the economy, it should be in a lot better state than than it is now than then those budgets are now and that’s what this cyclically adjusted budget balance or structural budget balances is approximating. Okay, one of the other fascinating things in that chart, I should note, the Treasurer is prepared on the structural budget balance for Australia, is that in 22-23, there’s still a sizable impact over 1% of GDP coming from temporary fiscal measures. So these are things that are related to COVID 19, to the pandemic response. So even though, I mean, look, I know that COVID COVID is still around, and apparently we’ve got another wave coming. I mean, the worst part of the pandemic is over, but still there is a, we do have these temporary fiscal measures occurring. And so what that means is, yeah, so that’s, that’s something that’s contributing to the, the deficit here in Australia. So what that chart is telling us is that, look, the structural budget, the structural problem in the budget is around two percentage points, or 2% of GDP. The cyclical, the benefit to the budget from the improvement in the economic cycle and higher commodity prices is, is just under 2% of GDP. So what that would suggest is that, that would mean we’d have a budget deficit of just a fraction of GDP, like maybe point one or point 2% of GDP. But then we’ve got these. Actually, it might be point three or point four, I’ll have to check the numbers that don’t put the exact numbers in the charts. I’m just trying to eyeball and I’m not wearing my glasses. But then we’ve got this temporary fiscal measures, which is, which is worsening the budget by over 1% of GDP. And how these all sort of add up is that we end up with a budget deficit in 22-23. Of what was it, one and a half percent. So I think this is a really neat methodology that the treasurer is trying to break down the different influences on the budget to see what’s really going on. And what it reveals is that there’s this structural problem with the budget. And, you know, this is something that all treasuries and finance ministers should do, in my opinion. There are some IMF estimates for other countries we’ll talk about later, the Australian Treasury seems to be doing a really good job at its estimates, and it’s discovered this structural problem, this big hole in the budget. Okay, so does that all make sense Arturo?
Arturo Espinoza Bocangel 14:01
Yeah, that makes sense. That was very clear. This is incredible how Australia is spending around this, because you, you mentioned around two or 3% is spending more than what they receive in terms of revenue. But let’s explore what are the main components of that structure, structural deficit?
Gene Tunny 14:33
Yes, well, a big component, or one of the major contributors to it in recent years, has been the National Disability Insurance Scheme. So it’s this expansion of the welfare state. Now I’m not making any judgement about whether that’s a good idea or not, because it’s very popular, and it’s well intentioned and there are clearly a lot of people out there in need. One of the challenges with it, though, is that it is growing at a very high rate. So it’s not the total structural deficit, because it’s at the moment, I think it’s around $30 billion. So it’s not just the NDIS. It’s other things. And then we have, we’ve had various tax cuts in the past, there’s a stage three tax cut that’s programmed in. So there’s going to be a tax cut in 2024-25, which aims to get rid of one of the tax brackets and to flatten the progressivity of the tax system. And that’s going to cost the budget revenue. So it’s a combination of spending new spending programmes and spending programmes that are costing more money than were expected. Also, we’ve got rising interest, a rising interest bill at the moment because of higher interest rates. And then people on the left of politics would argue, Well, look, the the problem is, we’re just not raising enough in taxation, if you’re going to spend this and that, look, that’s one legitimate perspective. If the government is going to spend this much on a permanent basis, if we are committed to an NDIS, National Disability Insurance Scheme, then we will have to have higher taxes to make the budget sustainable in the long term. I mean, personally, I’d prefer that we’d have lower taxes, we would, we would, we would get spending under control. But look, if we can’t get spending under control, then we may have to, we may have to put up with that. So because ultimately, we do need a sustainable budget, we’ve got to keep that debt to GDP ratio under control. At the moment, the projections are that for Australia, it’s not looking catastrophic yet, luckily, I mean, it’s on the current budget projections, it’s going to get up to around 48% of GDP. So it’s going to plateau around that, by the What is it 2030 to 2033. There’s another chart where they’re projecting that in how that’s going to perform. So this is the debt to GDP, which is one of the critical ratios that commentators, economists, ratings agencies, like S&P and Fitch and Moody’s, what they look at. And I mean, Australia’s lucky we started off with so what we started off with no debt to begin with, in 2008, we had, we had negative net debt, and we only had $50 billion of bonds on issue. So we’re in a good position to start with, so we’re at, we’re only gonna get up to about 50% of GDP at the moment compared with you look at the states, which is the US it’s over. We had a look the other day, didn’t we? I mean, it’s up 120 to 130% of GDP or something. Yeah. Okay. It’s very high if you look at projections for actual data and projections for the US. So we’re, we’re nowhere near that what’s happening is that the outlook is worsening. So if you look at that Treasury chart and the budget, compared with where we were back in May, or back in April, when the government released its last budget, that’s right before the election, and then the Treasury put out the pre election, fiscal, economic and fiscal outlook, the instead of the gross debt to GDP ratio, peaking around 24-25 and then falling as the economy grows, and the debt doesn’t, doesn’t grow as fast, which was what they were previously forecasting back in April. And they had the gross debt to GDP ratio going to 40%. Instead, it’s going to continue to grow over this decade, and then start to flatten out around 2032 to 33 at around 48%. And I mean, who knows that could get worse. I mean, this out. So much depends on what happens with interest rates and a big part of this change, why things are worse now than they were back in April is one, it’s because this NDIS is growing, the cost of that is growing faster than expected. And also because of the higher interest burden. I think that’s really shocked people and this is something I’ve been calling out for a while I’ve been identifying for a while that this as interest rates rise, that’s going to have a big impact on the budget, because we’ve got so much debt already not as much as other countries but still more than we’ve had in the past. So well in the last few decades, okay, so does that answer your question Arturo? You’re asking about where’s it come from? And yeah, where’s that structural deficit come from? And look, it’s a, it’s a variety of things. It’s just our willingness to bear the taxes. It’s either you can either look at it as our unwillingness to pay the taxes that we need to to fund the level of services. That’s one perspective. That’s the perspective of people like The Australia Institute, they would argue that all these things we’re spending money on. So from a left wing perspective, I’m not making any judgments at the moment about, I mean, I’ve got my own personal judgement, but I’ll just present both sides of the story, they would argue we’re not, we’re not raising revenue. And then the people on the other side, they would like the IPA or whoever the right, they would argue, well, we’re actually spending too much relative to what we’re paying in taxes, the level of taxation is fine or should be cut even further, let’s cut expenditure. And the government itself is very conscious it, it doesn’t want to raise taxes, right, because raising taxes is politically unpopular. No one wants to buy any more tax. So it looks like the government itself recognises that it will have to cut spending. I mean, maybe it’ll try and tweaks and tax policy settings or, or cuts in tax concessions. Jim Chalmers, the Treasurer here who he’s talking about taking a forensic approach to tax concessions. There was a story in the Australian today, so it looks like they’re gonna have a look at some of those tax concessions, so who knows they could look at tax concessions for superannuation, and they could look at our concessional taxation of capital gains, things like that. So we’ll have to wait and see what happens there. But look in the IRS is the one that they really need to look at because it’s just growing at a very high rate. So let me try to illustrate that with some figures. So last week’s federal budget so I’m quoting from a report in the Australian day today revealed the NDIS which will cost the federal and state governments $35.5 billion this financial year is on track to hit 52 billion by 2025 26, dwarfing the costs of both Medicare and aged care. So long term Treasury forecasts suggests the federal government’s contribution to the scheme will grow by almost 14% a year for the next decade, with total scheme costs approaching 100 billion by 2030 to 33. It became operational in 2013. It currently has 555,000 participants. Its annual financial sustainability reports suggest numbers will reach almost 860,000 by 2030. More young people with diagnoses of autism and psychosocial disorders are entering the scheme. Almost a third of current participants have an autism diagnosis. And four and 10 are age 14 and under. So this is an illustration of one of the challenges of public services. I think because there is a lot of need out there are a lot of people who are doing it tough or there’s a lot of need in the community. And as soon as the government gets involved, there are a lot of pressures on the government to expand the level of service to increase the level of service. This is a great challenge for the government. I remember when I was in workplace health and safety here in Queensland, it’s nearly 20 years ago now. I remember the policy discussions around the need to look after people who are catastrophically injured. This NDIS has come out of a need to at least look after people who fell through the cracks of the previous system. What happened years ago was if you were catastrophically injured say you had a diving accident. And it was recreational diving. You weren’t covered by any insurance. Okay, there’s, it’s it wasn’t a motor vehicle accident. It wasn’t a workplace accident. And there would be very high costs of care if you were made quadriplegic, for example, but there’s no insurance to cover you. And so there was this concern that there are these people who are missing out. And so there’s clearly some sort of there was a need definitely to do something to help those people out. And this whole NDIS from what I can tell grew out of that conversation that was occurring around the early 2000s because I remember being part of the conversation at the Queensland Government level and some of the policy development there and then it came out of this 2008, the 2020 summit that Kevin Rudd organised his ideas fest that they had in the talk fest that they had at Parliament House and, and they invited 1000 of the best and brightest from around Australia. And this was one of the ideas that was advanced at the summit. And, this was one of the ones that progressed and then the Gilad government introduced that I think in 2013. And look, it’s a really valid thing. There is certainly cases, people that needed assistance. The problem is where do you draw the line, and this is a problem that governments often have. And here, the line has become, the circle has expanded even more. And I mean, people or families with autism, and with developmental delay, certainly need assistance. And I’m on the board of a non-for-profit that advocates for families where a child has a developmental delay, so I fully understand the concerns. And the need. The issue is that there’s a big cost to the budget from having this expansive definition. And the government is currently I mean, we’ll have to wait and see what it what it does about it all. Okay, we’ll take a short break here for a word from our sponsor.
Female speaker 26:23
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Gene Tunny 26:52
Now back to the show. So any questions or any thoughts on that Arturo?
Arturo Espinoza Bocangel 27:01
No, at the moment..
Gene Tunny 27:02
Good. So yeah, that’s essentially where we’ve got this structural budget balance problem coming from Australia. And I thought it might be good just to go over quickly, what the different sources or the different ways that they adjust for the state of the economy. And what it comes down to is coming up with estimates of how the economy would have performed, what it would do in the absence of a business cycle. So you have to work out what a trend level of GDP is. So the if you think about macro economics, one way of thinking about how the economy evolves over time is a cycle and trend. There’s the economy. Over time, we know that the economy expands. So the economy today is much larger than it was 10 years ago, it’s much larger than it was 20 years ago, 30 years ago. So over time it grows, there’s trend growth, it’s on an upward trajectory. But it will cycle around that trend. So you can have periods where you’re well above that trend when the economy’s booming. And then you can have periods when you’re, you’re well below you’re in a recession, for example. And so what these structural budget balance estimates, what they do, is they will they based on an estimate of what that trend level of GDP would be. And so what they will do, what the Treasury will do, if they will look at, well, what’s the underlying population growing at? What’s productivity, on average growing at? And are there any trends in labour force participation that we need to take into account? And this is this supply side model, underpinning these trend GDP estimates? So these are what you would expect in the absence of a business cycle. And so that’s one of the core parts of it, they’re trying to control the business cycle. And then they also have to control commodity prices. So they’ll look at well, how much higher than we normally are commodity prices, the iron ore price or coal price, how much higher are they than we normally expect them to be? And let’s discount that, let’s, let’s, let’s assume that they’re not so high. And so the Treasury will have these parameters. They’ll have these sensitivities of different types of these revenue, items of income tax and company income tax, two different commodity prices they’ll have, and they’ll have an estimate of how sensitive the unemployment benefits that are paid are to the state of the economy to where GDP is relative to its trend. And I think that’s the one item that the Treasury adjusts. So it tweaks it adjust revenue on the revenue side and adjusts income tax and company tax. And I think capital gains tax, if I remember correctly on the expenditure side, it just adjusts unemployment benefits. We know that unemployment benefit payments are going to be higher if the economy’s in recession, lower if it’s, if it’s booming. And so there’s an adjustment that’s made there. And there’s a whole bunch of assumptions that go into these estimates. Does that all make sense Arturo?
Arturo Espinoza Bocangel 30:39
Yes, it’s all clear.
Gene Tunny 30:42
Okay, so what I’ll do is I’ll put a link in the show notes to a paper estimating the structural budget balance of the Australian government that was by three of my old colleagues. So Tony McDonald, Yong Hong Yan, who I don’t know, Blake Ford and David Stephan, I worked with Tony, Blake and David. So all good people. So that’s a great paper. I’ll link to that in the show notes. And I’ve noticed that the IMF also produces some estimates of these structural budget balances, although they call them, they use the other, the other name for them cyclically adjusted balance, and you can find these at the back of what’s called the IMF fiscal monitor. And I’m looking at the one from October 2022. So check that out. There’s a whole range of interesting estimates there. So if for example, you look at table A3 for advanced economies, general governments cyclically adjusted balance 2013, to 27. So it’s got historical data, it’s got forecasts in it. For Australia, they’ve got their own estimates of what the structural budget deficit is, they’ve got estimates that go from around, or three and a half percent in 2022. So that’s a calendar year 3.1%, deficit and 2324 to 2.6%. And it gets down to about .7%, deficit in 2027. So not as bad as the Australian Treasury’s estimates, which are, which have the structural deficit maintaining around 2%. There are reasons why the IMF figures are different from the Australian Government’s because the IMF, the IMF doesn’t take into account as many factors. It’s on a calendar year basis, the Treasury and I think in one of its papers, it goes through why it’s estimates are different from say, the IMF or the OECD, I think for Australia, the Treasury are probably doing a better job at it just because the IMF and and the other agency, international agencies, they have to do it for all the countries and they’re not experts in any particular country. I think the Australian Treasury’s estimates are probably better for getting a sense of the structural problem in the budget, the Treasury has got access to, to much better info, much better data on Australia, then the IMF, it’s got much better insights, I should say, into what’s going on. And its model for the structural budget balance for Australia is much more precise. It goes into more detail than the IMF. So all I’m saying is I think the, I think the Australian Treasury numbers are better than what the IMF is, is estimating there. And I tend to agree that there is that structural budget balance of, of 2% of GDP, which is a challenge for this current government, and will probably be a challenge for future governments. And it’s going to require either large cuts in spending. So getting the NDIS under control, which is going to be hugely unpopular, because it’s a very popular programme and well intentioned. And I know people are benefiting from it. And you know, it’s, it’s, it’s giving people a sense of dignity and improving people’s quality of life. So look, who knows, I mean, this government, because it’s a government from the sort of left wing I mean, it’s not as left wing as some other governments you’d see around the world. It’s not left if you think about what left, left wing governments are in South America, for example. But it’s not. It’s going to find it difficult because it is more left wing than right wing. So the Liberal National Government is going to find it difficult to cut something like NDIS or cut welfare benefits, and hence maybe it does have to look at some tax measures. Maybe it does have to cut it tax concessions heavily. Maybe it does have to adjust that stage three tax cut that’s programmed in, maybe not give us much of much, maybe not have such a big tax cut. We’ll have to wait and see. Okay. Anything else Arturo, that we should cover before we wrap up?
Arturo Espinoza Bocangel 35:21
Yes, I think I wanted to highlight that it should be a good discussion was a good topic to see which of those programmes social programmes are working? Good in terms of indicators. So in terms of the results on population, you’re in to see if there is any problem there. But because we know that not all the things are all the social programmes are working well. Perhaps that will be a good topic to discuss, to discuss in other episodes.
Gene Tunny 36:04
Yeah, look, I think you’re right there. And what this is highlighting I think, Arturo is yes, the need to, to really delve into whether these programmes are working or not, because we’ve got these programmes that are well intentioned, that governments they hope to do some good to achieve outcomes, but how do we know that they are actually achieving outcomes? Are they doing it in the most cost effective way? And that’s why something like this evaluate a general concept could be so valuable. This is an idea that the first person I remember proposing it was Nicolas Gruen. And so Nick’s been on the show before, well known Australian economist, CEO of lateral economics, I do some work with Nick from time to time. And, you know, he’s been involved in public policy for decades, he was involved with the button car plan back in the 80s. He was involved with your work for the treasurer in the 90s, very lateral thinker, and he came up with this idea of the evaluator general, which would have a, it would have a brief of going across the Australian Government and figuring out which programmes work, which don’t, are there other ways we do things, other innovative ways we can do things to, to solve problems. And it looks like this government is going to go ahead with some sort of evaluator general. So Jim Chalmers has pledged to put in place an effective and rigorous evaluator general and new offers based within treasury and flagged by Labour before the 2019 election, which could work with other departments to access to assess the effectiveness of government programmes. Okay, great stuff. So this is in an article by Joe Kelly in the Australian, I’ll put a link in the show notes that I was quoting from there. I think one of the issues Nick has with that proposal, though, is that it’s located within the Treasury, I think he would prefer that it has its own life, it’s outside of the Treasury. It’s a statutory authority, it has some degree of independence granted by the parliament. So yeah, I don’t think Nick’s actually I can’t speak for him. I should have him on the show to talk about that. But I’m guessing he’s probably thinks that that’s not exactly what we need. But look, I should let him. Let him speak about that in the future. So that’s the evaluator general. So I think that’s the sort of thing you’re driving at is it Arturo? That we, because we need to evaluate these programmes. The evaluator General’s one way of doing that. Exactly. So one thing I thought I should cover before we wrap up, is just what happened with the UK earlier. When was it last month? Or remember, they had their mini budget, maybe it was in September now? They had the mini budget, Liz Truss the new PM, no longer PM, shortest reigning PM in British history. And the chancellor Kwasi kwarteng, I think it was, and they released that mini budget with a big tax cut, and the markets just absolutely went nuts. The pound crashed. We had yields on UK bonds spike, because everyone there and this is the recognition that there was a structural problem already with the UK budget, the UK couldn’t afford to have a tax cut, who was going to spend, go on spending what it was spending, and it’s just quite extraordinary the way that the Institute of Fiscal Studies describe that and I’ll put a link to this in the show notes, I think it’s a great note and some really good take on it. The way they describe that mini budget, which has been reversed because the current, there’s a recognition that it was unsustainable, so we’ve got a new PM now and a new chancellor, and they’re, and they’re, they’ve reversed that. I think Liz truss, had even reversed it. And she had sacked her Chancellor, but okay, so it’s gone. But for a short time it was in place and the markets absolutely freaked out. And yeah, this is the IFS take, which I think is great, which was made at the time the chancellor announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up. That is just brutal. Goes to show just how important it is to actually care about this stuff. And I mean, I’ve been saying this for years, I used to work in the Treasury in the budget area, and I know how important it is to get this stuff right and not to go and do silly things. And so I understand where IFS is coming from and understand why the markets really just hated that mini budget. And there’s a great, there’s a great chart and that IFS analysis, which showed that if you look at what was happening to the, to the national debt or the the UK public debt, if you compare that mini budget, what would have happened with the mini budget was what was expected before so instead of the debt as a percent of national income, staying in the range from 80 to 85%, of GDP going down gradually, over the next five years, from around 85 to 80. Instead, it was going to end up going from a bit under 85% to nearly 95%. So it’s just a really bad policy. So understandably, that mini budget was absolutely. Yeah, I mean, the markets just reacted very badly and essentially brought down the Prime Minister and the Chancellor, just because, yeah, it was just very irresponsible fiscal policy. And that’s what we’ve always got to guard against now. We’re not there yet in Australia because we started off in such a good position, debt to GDP is still relatively low compared with other countries. We’ve got a bit of room, still we’ve got time, we’ve got time to turn it around. But we’ve got to start doing something because we just can’t be in a situation where we keep accumulating debt. And we know, we know there’ll be another crisis of some kind, there’ll be a downturn, hopefully, we don’t have another pandemic, but there’s going to be another crisis, there’ll be a period when we end up adding lots of debt in a short period of time or a few years. And that will mean a higher interest burden, these projections of our debt to GDP, starting to flatten out around 2032 to 33 at 48% of GDP. Okay, that could give us some comfort, but we just don’t know what’s coming down the track. My worry is that interest rates could go higher. There could be another downturn or a crisis and then we add more debt on and then that gross debt to GDP, instead of flattening out it goes on an upward trajectory. That’s a risk I worry about and why it’s so important to get the budget under control. Okay. Final thoughts, Arturo?
Arturo Espinoza Bocangel 43:39
No, thank you for all your explanation Gene.
Gene Tunny 43:43
Very good. Well, it’s been great chatting with you, Arturo. And I’ll look forward to chatting again. And if you’re listening in the audience, if you want to look at any of these, these articles I’ve mentioned, I’ll put links in the show notes. Please get in touch with any questions or comments. Let me know whether you agree or disagree. Let me know if they’re things you want to know more about, and I’ll do my best to cover them in a future episode. So thanks for listening. And Arturo, thanks for joining me.
Arturo Espinoza Bocangel 44:14
Thank you for having me, Gene. Bye.
Gene Tunny 44:17
Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to firstname.lastname@example.org And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye
Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
Slouching Towards Utopia is the new book from Brad DeLong, Professor of Economics at University of California, Berkeley. Professor DeLong joins show host Gene Tunny to discuss the long twentieth century from 1870 to 2010. The conversation considers the three factors which came together to massively raise living standards post-1870, and how nonetheless we’ve struggled to achieve the Utopia that once appeared possible. The “neoliberal turn” beginning in the 1970s and 1980s is considered, and DeLong explains why he writes that “Hayek and his followers were not only Dr. Jekyll–side geniuses but also Mr. Hyde–side idiots.”
You can buy Slouching Towards Utopia via this link and help support the show:
Brad DeLong is a professor of economics at U.C. Berkeley, a research associate of the National Bureau of Economic Research, a weblogger at the Washington Center for Equitable Growth, and a fellow of the Institute for New Economic Thinking. He received his B.A. and Ph.D. from Harvard University in 1982 and 1987. He joined UC Berkeley as an associate professor in 1993 and became a full professor in 1997.
Professor DeLong also served in the U.S. government as Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995. He worked on the Clinton Administration’s 1993 budget, on the Uruguay Round of the General Agreement on Tariffs and Trade, on the North American Free Trade Agreement, on macroeconomic policy, and on the unsuccessful health care reform effort.
Before joining the Treasury Department, Professor DeLong was Danziger Associate Professor in the Department of Economics at Harvard University. He has also been a John M. Olin Fellow at the National Bureau of Economic Research, an Assistant Professor of Economics at Boston University, and a Lecturer in the Department of Economics at M.I.T.
Transcript: Slouching Towards Utopia w/ Brad DeLong – EP163
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:00
Coming up on Economics Explored.
Brad DeLong 00:02
2008 you seemed to see the engine of technological progress itself drop into a lower gear slow down by half or more. Starting in 2012-2013, we see the rise of anti democratic movements all over the world.
Gene Tunny 00:23
Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 163, on Slouching Towards Utopia, the new book from the renowned US economist, Brad DeLong. He joins me this episode. Brad DeLong, is professor of economics at the University of California Berkeley. From 1993 to 95. He was deputy assistant secretary of the US Treasury for economic policy, and slashing towards utopia. Professor DeLonge explores why, despite the incredible increase in our productivity since 1870, we have failed to achieve a utopia. DeLong argues that what he calls the long 20th century began in 1870 mended by 2010, after which a productivity slowdown and stagnant wages have contributed to political discontent around the world. Please check out the show notes, relevant links and details of how you can get in touch with any comments or suggestions. I’d love to hear from you. If you’d like to buy Professor Long’s book, very grateful if you could do so via the Amazon page link in the show notes. By doing so you’ll help support the show. Right oh, now it’s my conversation with Professor Brad DeLong on Slouching Towards Utopia. Thanks to Nicholas Gruen for connecting us and to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Professor Brad DeLong thanks for appearing on the programme.
Brad DeLong 02:02
It’s wonderful for me to be here. Right. Might help me sell some books. Excellent. Something I’m very, very interested in right now.
Gene Tunny 02:09
Excellent. Yes, yes. I hope to help you do that. And hopefully if people in the audience if they enjoy the conversation, and I’m sure they will, I’ll put a link in the show notes for sure for to your book. So I’ve been I’ve been reading your book and enjoying it.
Brad DeLong 02:20
Thank you very much.
Gene Tunny 02:23
Yes, I’m the Kindle. Nicholas Gruen put me on to it. So Nick’s a big fan, too.
Brad DeLong 02:33
Yes. Yeah. So I’m very grateful to him for spreading the word.
Gene Tunny 02:37
Yes, yes. And it’s Slouching Towards Utopia in economic history of the 20th century. Brad, I’d like to kick off by asking, What motivated you to write the book? And what message are you trying to convey with the title, please?
Brad DeLong 02:53
Well, I suppose I started. I guess it really was reading Eric Hobsbawm’s, Age of Extremes, you know, back in 1994. And thinking that the story he was telling wasn’t the big story, that what he was telling was only a relatively small part of the big story. And that someone should write a book that told the other big story of history after 1870. And so I grossed about that for a couple of years. And in 1998, I thought, since no one else was writing it, maybe I should write the big story. And so I wrote a chapter to kind of put a stake in the ground and started showing it around, but you didn’t do anything else. And then maybe a decade, a decade and a half later, an editor from basic Tim Sullivan came around and said, You know, someone should write this, that someone should be you, you’re clearly not, why don’t we put you under contract. So I can call you once a year and yell at you about where the manuscript is. Um, and, you know, he did that. And to get into that once a year, that was a call and so forth. And then eventually, I just kind of buckled down and wrote the thing. Then, after writing the first draft, I had to take the chainsaw to it, because it was twice as big as the book that was published. And then after that, we had to polish it, and was out there in the world, you know, spiffy and polished and shrunken down considerably from the project I originally attempted. But it’s out there in the world. And I’m, I actually like it a lot, which I didn’t expect to at this point. At this point. I expected to be sick of it and thinking there was a lot wrong with it, then I find but I’m not thinking that way.
Gene Tunny 04:45
Okay. Yes. Well, that’s good. I mean, I think it’s, I think it’s terrific. And, I mean, it’s still a big book, it’s still 600 pages or so. So it’s still very, very meaty. I was impressed by all of the examples. In history, I didn’t know things that I found fascinating. So thank you. Yes. One thing I didn’t appreciate until I read your book. And maybe I’ve just missed this in other places, but the role of the Saudis in ending the Soviet Union, I didn’t appreciate how much when they increased oil output in the 80s. I think that’s the story, isn’t it? That meant the Russians or the Soviets weren’t earning as much income from their own production and that effect. Yeah. Yeah. I thought that was.
Brad DeLong 05:32
This was this was what the late Yegor Gaidar always insisted on, you know, that as long as the Soviet Union could trade oil for grain, the fact that the system was so sclerotic, they were unable to figure out a way to grow more grain at all was, you know, a problem, but not a crisis. But then the price of oil falls by two thirds and 1986, you know, as the Saudis react to with current, what’s currently going on in the Iran, Iraq War, and other things, and all of a sudden, the Soviet Union has to start borrowing if it wants to import its grain, and it starts borrowing from banks. And then the banks begin to say no. And then it goes and starts borrowing, starts asking for loan guarantees from Western governments. And then the demands come for well, we’ll guarantee these loans, but we want you to kind of be cooperative and open with respect to politics and democracy and things. And then the whole system simply collapses. It’s really quite an interesting story. Yegor Gaidar, Gaidar has a short speech he gave, I think, at the American Enterprise Institute called something like grain and oil. It’s very much worth reading,
Gene Tunny 06:50
RIght. Okay. Well, that’s good. I’ll see if I can track it down and put a link in the show notes. I mean, that’s one of many examples of, of good stories in the book, I look, I’d like to go back to what you mentioned about Eric Hobsbawm, who’s a Marxist historian, if I remember correctly, and you’re saying that you think he got the he missed the big story of what happened after 1870? Could you please explain what was he saying? And how is what you’re saying? What what do you think the big story is, please,
Brad DeLong 07:19
Eric’s big story is that you know once upon a time, there was Vladimir Lenin, there was the Bolshevik Revolution. And it created world communism, which was the world’s only hope for utopia. And in the end, world communism was betrayed by exterior enemies outside it, and by interior enemies inside of it, and it expired. But before it expired, I managed to defeat the worst tyranny in human history, the Nazis, because without the Soviet Union, the Nazis would probably still be ruling Europe. And when it expired, that brought the end of human hopes for a really good society. And, you know, from my perspective, this is a story. It’s kind of the story of the Soviet Union as tragic hero betrayed internally and externally is, you know, it’s a story that is, in some ways, simply total bonkers. Unless you’re a strong believer in world communism, as it was formed in the middle of the 20th century, you know, and Eric was right, Eric was, you know, a young Jewish teenager in Berlin in the early 1930s. You’re watching The Nazis marched past calling for the immediate death of himself and all of his family in a time when everyone else was pussyfooting with the Nazis. And you know, only the Soviet Union and the Soviet Communist Party, Soviet led German Communist Party was willing to say, these are horrible people, we need to fight them. And so he made that political commitment as a teenager and you know, was never really able to outgrow it. I’m told that even at the end of his life, if you got a couple of drinks into him, you could get him to say that, you know, Stalin had been too harshly judged by history. And a very smart guy, you know, very learned historian, desperately trying to get it right. Yeah. And the fact that someone like me thinks he could still get it so wrong is very much a cautionary tale about how I should not be proud. And be aware that other people are likely to judge me in the future the way I judge Eric.
Gene Tunny 09:30
Right. And so what do you think is the big story after 1870? So you’ve got to, you’ve got a more optimistic view of history, obviously.
Brad DeLong 09:39
Yeah. Yeah. Well, maybe that 1870 really is the hinge of history. Right. But, you know, before 1870, your technological progress is slow. And you know about infant mortality is extremely high. You’re going to see half your babies die before you’re five. And do something like 1/3 of women are going to wind up without surviving sons, should they be lucky enough to reach 50? themselves? And do you know when the pre 1870 high patriarchy world you reach 50 without a surviving son, you have no social power whatsoever, you know, you have absolutely no account, you have no one to advocate for you. And so before 1870, pretty much whenever there was an improvement in human technology, the response was, oh, great, now I can try to have more kids and raise the chances I’ll have surviving sons above two thirds. And so you’ll from minus 6000, BC, on up to 1870. There is a lot of improvement in technology. Yes, and the upper class lives better, yes. But for most people, you know, you simply have 100, and you simply have a farm size only 102 50th as large potentially at 1870, as your ancestors had back in minus 6000. And you know, you’re still living at something like $3 a day, you’re spending 60% of your income on just getting your 2000 calories plus essential nutrients. And there are a lot of days when you can’t think about much other than you’re very hungry. And that’s the state of the world before 1870. And that means that unless you’re in an extremely lucky place, or like Australia, or an extremely lucky class, that life is going to be kind of brutal, short, and without very many options, which means that in most times in most places, governance is going to be how does an elite figure out how to grab enough for itself and maintain its rule over society. And after 1870, everything changes, technological progress becomes rapid. The technological competence of the human race globally doubles every generation, you quickly get a world in which people are kind of rich enough that infant mortality falls substantially. And with that falling infant mortality, and with the erosion of patriarchy, all of a sudden, you don’t have to concentrate a lot of effort on having children, to be confident that if you reach the age of 50, you’ll still be able to run your own life. And so you’ll we get the demographic transition, now headed toward a stable world population of 9 billion. So for the first time after 1870, technology wins the race with human fertility. And we begin to look forward to a time when humanity will be able to bake a sufficiently large economic pie so that everyone can have enough. And you know, people back in 1870, and before, you know, they thought most of the problems of society came because incomes were low, and technology was underdeveloped. And you had this elite running a kind of domination and exploitation game on everyone. And once you can bake a sufficiently large economic pie for everyone to have enough, those things should fall away. And the problems of properly slicing and tasting the economic pie, right? Have equitably distributing it and then utilising it so that people can feel safe and secure and live lives in which they’re healthy and happy. Yep, those should be relatively straightforward to solve. And so we today at least we today in the rich countries should be living in a utopia, which we are manifestly not. And so the story of history after 1870 is how we’re well on the way to solving the problem of baking a sufficiently large economic pie. While the problems of slicing and tasting of distributing and utilising it continues to flummoxed us.
Gene Tunny 13:57
So with 1870, that’s several decades after what is traditionally thought of as the start of the Industrial Revolution, is it and in there are a few things that come together. Around that time, would you be able to explain that please?
Brad DeLong 14:13
Well, I’d say that the industrial revolution itself, you know, that steam power and metallurgy and early engineering, you know, they were really really weren’t quite enough that they get the average rate at which technology improves along the world up to about half a percent per year. And of that maybe, maybe a third comes from the fact that you’re concentrating on that you can cut that you’re suddenly concentrating all the manufacturing of the world in the districts, most of them in England where manufacturing is most efficient. And you know, 1/3 of it comes from the underlying engine of science and discovery and engineering. And 1/3 of it comes because we were lucky enough that the last round of glaciers, that they scraped all the rock off of the coal around a huge chunk of Northwest Europe, which left you with a lot of coal at sea level that you could just pick up off the ground and ship it out. But come 1870 you’ve concentrated all the manufacturing and you know, you’re pretty much mining out the really easy coal and you have to go deeper, which is more expensive. But the possibility was that, you know, the industrial revolution would be not completely but largely over, except that in 1870, we got the development of the industrial research labs to rationalise and routinized the discovery and development of new technologies. And then the modern corporation, the modern corporate form to rationalise scrutinise, the development and deployment of technologies plus full globalisation, which provides us enormous incentives to deploy and diffuse technologies. And so all of a sudden, instead of half a percent per year, you had a 2% per year rate of global technological change. And while it was possible for human humanity to be fertile enough to kind of offset the half a percent per year technology growth before 1870 with greater fertility and a population explosion, after 1870, even the population explosion could not keep us poor. Yeah. And then we go through the demographic transition and the population explosion reaches its end.
Gene Tunny 16:35
Yeah. So this is the industrial research lab. So you’re talking about Thomas Edison in Menlo Park.
Brad DeLong 16:41
Yeah, Menlo Park and others. You know, I like Nikola Tesla. Because, you know, Nikola Tesla was, I suppose today, we’d call him neurologically divergent. He’s definitely not neurotypical. Which means that unless you can slot him in exactly the right place, you know, where he has lots of people surrounding him who will tolerate him being in A-hole, and pickup which of the crazy ideas he has that might actually be useful unless you have George Westinghouse to build an industrial research lab, to surround him with and then the Westinghouse corporation to deploy his technologies. While Edison is General Electric, and others are frantically trying to keep up because, you know, Tesla knew how to make electrons get up and dance in the way that nobody else did. Without that Nikola Tesla would have been no use to humanity at all, as it was he personally pushed the entire electrical sector forward in time by a decade. And that’s a wonderful set of things. That’s a wonderful set of meta inventions. You know, that turns the process of technological development from being a difficult one in which you have an idea, but then you need to be a human resource department and a executive, a marketer and impresario, an advertiser you know, a well as an engineer, in order to get anything done to one in which engineers can engineer and find people who are good at the other things, to kind of surround them and do all the things you need to do to actually deploy a technology and make it useful. And that really only falls into place around 1870.
Gene Tunny 18:23
Right, okay, yep. And what about this modern corporation or the modern corporate form? So corporations have existed in some form since well, the first few centuries? I mean, the East India Company, the Dutch East Indies Indies Company, yes, yeah.
Brad DeLong 18:40
No, no, but still, they were relatively, they were relatively small things and they were tight have very special the fact that anyone could kind of organise a form in which us have a special royal charter as well. And the idea that anyone could set up a framework which would be a a large, internal, centrally planned division of labour, which could expand and copy itself, but also which had all of these interfaces with the market economy so that it was focused on producing the things that people wanted or at least that people with money wanted. This is something that allows once you have a good idea, and once you’ve built it in one factory, you know, it’s then very natural for the corporation to say, Okay, let’s build it over in the next town. And let’s expand the factory, let’s licence it, let’s move it to another country. You know, all of that only happens to all of what you know, management. The Business School professor Herbert Simon used to call these red islands of central planning, you know, in mesh to connected with the green lines of market exchange. Those are very characteristic of the modern economy. And we really need to have those islands in there and working very well, you know, in order to be even nearly as productive as we are.
Gene Tunny 20:09
Right, and what would be the exemplars of that modern corporate form Brad, are you thinking of General Electric or DuPont of those sort of companies
Brad DeLong 20:18
In the early days, in the early days, it was things like the great farm machinery producers. Were I think the first because, you know, once you figure out how to make a Reaper or a harvester, or later on a combine, you know, demand for it is absolutely huge. And so you don’t want to have one small workshop, you know, one small workshop in some small town in Illinois or something, you know, making a Reaper when the Reaper can be put into use from the Murray Darling River Valley all the way to Argentina and up there. Yeah. Later on, it was Ford Motor Company and General Motors that were the classics. And now of course, I think it is, you know, Apple Computer, which is simultaneously the most to market economy and capitalist driven thing in the world, but also the orchestrator of this enormously complicated, and centrally planned division of labour all over the world with all of its suppliers, in which a relatively small number of people in Cupertino, California, can conduct an economic division of labour, that dwarfs that of the centrally planned Soviet Union at its most prosperous, in terms of how much money and resources are moved around in a way in which in response to commands and to requests issued by Cupertino, to produce the more than a billion iPhones that currently populate the world.
Gene Tunny 22:01
Yeah, yeah, absolutely. It’s extraordinary for sure.
Brad DeLong 22:04
And, you know, we haven’t even gotten into its role as the pusher forward of electronics technology of modern semiconductor, whereby your Apple Computer pays the Taiwan Semiconductor Manufacturing Corporation $30 billion each year, which it then turns around and uses to invest in pushing semiconductor technology forward to make circuits smaller and chips faster and bigger, which it then sells to Apple, which then puts into iPhones so it can earn the $30 billion it needs for the next round.
Gene Tunny 22:40
Yeah, yeah, for sure. And I mean, Apple is still innovating even though Steve Jobs is no longer around.
Brad DeLong 22:47
Jobs is gone. Yeah, yes.
Gene Tunny 22:51
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 23:25
Now back to the show. Can I ask you about full globalisation? You talk about that? And then you talk about what happened later in the 90s with what you call re globalisation, I think and then there’s hyperglobalisation. What I think what your book reminded me of was just those the large flows of people, and also capital that occurred in the late 19th century and before World War One, and that’s something I think Polanyi wrote about, could you talk about that please Brad?
Brad DeLong 23:54
Oh, well, one thing is to say that, that kind of from 1870 to 1914, 50 million people leave Europe and also 50 million people leave Asia. The people who leave Europe by and large go to you know, Argentina, Chile, southern Brazil, United States, Canada, Australia, New Zealand. They go there they bring European biotechnology crops and animals and so forth. In Australia, they find at least before the great drought of the 1890s that there is not a better place for European sheep than Australia. And so Australia before the drought of the 1890s becomes the place with by far the highest standard of living in the world. As you know the equivalent of the equivalent of OPEC instead of oil. It’s sheep. And instead of shipping petroleum and container ships, they ship out wool in steam powered ocean going ships and they produce the you know an amazingly rich and prosperous middle class civilization of its day, something that I don’t see know very much about. Except for the things I see are the backgrounds I see on Mrs. Fisher’s murder Mr. Rene Fisher’s Murder Mystery Show, which my wife says the clothes the clothes at does extremely well. And then Australia with its large middle class, you’ll powers the demand for Australian factories and Australia industrialising and becomes and remains an extremely rich and prosperous country. Brazil might have seen the been on the same trajectory. You know, Australia has land that’s wonderful for sheep. You know, Brazil in the second half of the 19th century was the best place for rubber. It was the place rubber came from. And so you know, you have the rubber tappers of Brazil making a good living, you have the growth of the Brazilian economy, you have the construction that European singers like Enrico Caruso or Jenny Lind, when they went on world tours, they would go up to Amazon to Manassas and performing them in Manassas Opera House and things worked very, very well, except that the British arrived and they grabbed some rubber plants from Brazil and they carried them back to Kew Gardens. And then the Belgians got a hold of them and they took them down to the Congo and then King Leopold began cutting off the hands of people who didn’t bring in enough rubber from the villages. And in Malaysia, the British Empire brought down workers from China combined it who were desperate to get out of China, given how small farm sizes were and how poor China was, combined it with British capital, and this Brazilian biotechnologies, so that Malaysia, Malaysia, the Malay Peninsula becomes the world’s biggest rubber producing centre in the world by 1914. And the enormous crash, and the enormous crash of the Brazilian rubber industry as well, because the rubber plant had left all its pests and parasites behind in Brazil. And so it grew like a weed on the Malay Peninsula. And, you know, the Chinese plantation workers brought down from the Pearl River Delta, were extremely happy that the British could pay them a quarter of what the Brazilian rubber tappers were used to getting. And they would still say we’re much better off than they would be back in China. That is, and this transfer of all kinds of tropical goods and plants around the world, right that Yemen finds itself suddenly faced with enormous competition from coffee grown in Indonesia, and in kind of Costa Rica as well. Which means that if you were in the tropics between 1870 and indeed, up until 1950, you’d find that whatever you export, its price was dropping like a stone because there was all of this extra competition from all of these extra sites for production opened up by this Asian migration. Well, the rich first world countries did quite well and did quite well in large part because immigrants from India and China were by and large kept out of Australia and the United States. And so wage levels in Australia and Australia and the United States stayed very high. And they got the middle classes in the middle class demand needed to provide the demand so that they could industrialise you know, while Brazil or Malaysia or Congo really didn’t have a chance to industrialise because, you know, no middle class large enough to buy the manufactured goods and no ability to export given how cheap and how good at manufacturing Britain was back then and how eager Britain was to export.
Gene Tunny 29:09
The story we tell ourselves is that it’s, it’s all about it was all about good governance as well. I mean, in good institutions.
Brad DeLong 29:17
Yeah, no bad governance can make something very country very poor very quickly. That and indeed, Arthur W. Economist, Arthur Lewis, you know, all those used to say, look, Australia and New Zealand are not just cousins of Canada and the United States, but also of Argentina and Chile, and in some ways South Africa. And, indeed, come 1914, Buenos Aires looks a lot like Melbourne. But then governance falls apart in the 1920s and 1930s. And even more so after World War Two. And now, you know, no one thinks of Argentina as being a country that is kind of on the same level of development of the Earth, Australia or Canada, because it simply is not. And yet, it certainly has the land, it certainly had the resources that had the education in 1914 it had the technology base, but bad governance can do terrible things. You know, you see this most with respect to communist, right that when the Iron Curtain failed in 1990, we could actually look, and we could see that those countries that had been ruled by the Communists were only 1/5, as rich as the countries immediately outside, immediately across the border. And you know, where that border was, was principally determined by where the Red Army had managed to march in 1945. Yeah, what’s the difference between Czechoslovakia and Austria? Yeah, yeah. Or Yugoslavia and Italy?
Gene Tunny 30:59
Yeah, very good point. I’d like to ask now about the what you call the is it the long 20th century? You talk about this period from 1870 to 2010? And is that the period where we were Slouching Towards Utopia?
Brad DeLong 31:15
Yeah, where every generation, we were doubling humanity’s technological competence. And it was really clear that we were solving the problem of baking a sufficiently large economic pie. And we were trying to figure out how to slice and tastes how to distribute and utilise it. And that was kind of flummoxed more sometimes than others. And people were trying various things. Some of them reasonable, and some of them absolutely horrible and genocidally destructive. Yeah, yeah. I’d say that’s what gives 1870 to 2010 its unit, you know, that we’re solving the what people thought was the big problem, but not at all solving what people thought were, but people back before 1870 had thought would be smaller problems.
Gene Tunny 32:03
Okay, and so 2010, that’s in the aftermath of the financial crisis. So that’s a pivotal event, in your view.
Brad DeLong 32:13
Except it’s not really a pivotal event, okay. It’s more like a pivotal 20 years. Maybe it starts on September 11 2001, when all of a sudden, a willingness to kill people because they worship God differently that we thought was over in 1648, at the end of the 30 Years War in Central Europe, after which people said, let’s not do that, again. We’re back. Maybe it continues in 2003, you know, when the United States stops acting like a relatively cooperative leader of the world, and instead says, We’re another great power, and we’re going to act like great powers do, maybe it’s 2007, when it becomes very clear that in the attack that an ideological attachment to the view that I’m rich, because the market has rewarded me, therefore the market must be a good thing. Had that that idea had hobbled the regulation of finance, and then come 2010 It’s clear, that same idea keeps people from responding to the Great Recession, by saying we need to get back to full employment rapidly instead, all over the globe, people are saying, well, you know, the market is a good thing. And the market has been doing this for a reason. And so you know, we shouldn’t artificially we shouldn’t artificially stimulate the economy. 2008, seemed to see the engine of technological progress itself to drop into a lower gear slow down by half or more. Starting in 2012-2013, we see the rise of anti democratic movements all over the world from you know, Modi’s version of national Hinduism to Viktor Orban and many, many others. And last, I’d say, come 2022, we have the return of major power war. Right, the idea that big wars rather than wars that are kind of a civil war component are a way to solve things. You know, even though if I wanted to convince the Ukrainians that they weren’t a separate nation, but only a Russian ethnicity, you know, I would send the Bolshoi Ballet and I would send orchestras to play the works of Tchaikovsky and I would send poets to read the poems of Pushkin in the general streets of Ukraine. I would not say send killer robots flying overboard to drop overhead to drop bombs and kill but you know the return of a major power war. Add to that global warming is now We’ll go not a distant threat. But lots of people were underwater in Pakistan early this summer and lots of people saying, Why is the Yangtze River five metres below where it’s supposed to be? It’s now a thing. And a thing for the three and a half billion people of Asia who live in the great river valleys and the monsoons and some with the coming of global warming. We have a different and more complicated and I don’t think we yet understand what the post 2010 story is. But it isn’t the technological progress is pulling ahead extraordinarily rapidly making us potentially all prosperous, and we only need to figure out how to distribute and utilise our wealth. Instead, the world faces other and probably bigger problems, and certainly more of them. So that’s why I bring it to an end in 2010.
Gene Tunny 35:56
Okay, okay. I’d like to ask you about what you call the I think it’s the neoliberal turn in your book. So you talk about how we changed or the philosophy the I don’t know, the dominant philosophy and government and politics change from social this, we’re talking about advanced economies change from social democratic, or whatever you want to call it to, starting in the 70s, and 80s, with Thatcher and Reagan. And we also had a variant of it here in Australia. You call it this neoliberal turn and would you be able to be good if you could explain what you mean by that? And also, I’d like to ask you about your this is great, one of my favourite quotes in your book, you wrote that Hyack. So Frederick Hayek, the Austrian economist Hayek, and his followers were not only Dr. Jekyll, side geniuses, but also Mr. Hyde side idiots, I love that. So if you could explain what you’re driving out there, please, that’d be great.
Brad DeLong 36:56
1945 to 1975 or so are absolutely wonderful years. peace, prosperity, the most rapid growth, at least in the Global North that has ever been seen before. Middle class society, everything seems to be going right. But come and after 1975, you know, there’s inflation, which leads to the general consensus that there’s something wrong with social democracy, that it’s handing out too many tickets to things more tickets to things than the economy and society can produce. And when you hand out more tickets, and there are seats, the result is going to be the tickets get the value that is also going to be inflation. And so social democracy needs to get a grip, and become, you know, more responsible and less willing to simply hand out tickets to anyone who asks, add to that the idea that it’s greatly over bureaucratized that the government is doing too much, and there are too many forms to fill out. Add to that, the idea that too many people have taken advantage of the social democratic system, you know, to grab benefits to which there were not in title. I remember in the late 1970s, as a young teenager, there were people who would come around with maps of where the people in Australia drawing unemployment benefits were. And the claim was that they were on the beaches. Yeah, you know, that you get unemployment benefit. And you say, Okay, I won’t look for another job for two months, I’ll go to the beach for two months, and then I’ll look for a job. That all kinds of things in which too many people were saying too many union members and welfare recipients were getting away with too much and not working hard enough. Yeah, that benefits for the slackers were too great than the taxes on the actual productive members of society were too high. And that the tax system was greatly discouraging investment. And thus, economic growth. And thus, the inflation and the slowdown of economic growth that we saw in the late 1970s. Were a result of the fact that social democracy had tapped out and it needed very much to be a rethink. And the rethink takes the form of Thatcher in the United Kingdom and Reagan in the United States. You know, the idea that taxes need to be lower, that the job creators need to be properly incentivized that, you know, the non rich need to be a little bit poor, so they’re a little bit hungrier and work harder. That sources of rent seeking, you know, people who have claims to income but who are not productive, need to have those claims erased , especially if they’re welfare recipients on the one hand, who haven’t been able to maintain a stable family, or if they happen to have lucked into a particular union that manages to have its kind of hands around the throat of some important part of the distribution system. You know, Ronald Reagan’s saying, I’m going to destroy the, Jimmy Carter in fact, Jimmy Carter was, in fact, launched the Airline deregulation effort in the 1970s. One big purpose of which was to make the lives of airline pilots a little less cushy. And Ronald Reagan followed that up by breaking the strike of the air traffic controllers. It was Jimmy Carter, who by deregulating trucking in the United States, you know, applied the same medicine to the then powerful teamsters union, saying, once deregulated trucking, you’re going to be exposed to all kinds of rail and non union competition as well, you know, in your ability to extract an extremely cushy life go. And the ability of the collected organised crime gangs of the United States to draw on the teamsters pension fund is going to be sufficiently reduced. So you have this great wheel around 1980. So much so that in 1994, Bill, Bill Clinton, who really is a Social Democrat at heart, wants to win another term, he feels he has to go out there and say that the era of big government is over. That just as Dwight Eisenhower, a very conservative person could only govern in the 1950s. By saying the New Deal, social democracy is a good thing, but I’m going to be a much better manager. Because I can say no to interest groups that are demanding too much while the Democrats are relying on those interest groups to turn out the vote. So you should elect me to be the president to run the new deal rather than let a Democrat. Yeah, so Bill Clinton was having to say that I’m going to be because I understand how valuable government can be, I’m actually the one who will do the best job of cutting it. So it’s so to do the most good. And that kind of lasted that kind of era in which neoliberal, this neoliberal view, that the market should be doing more, and the government should be doing less? You know, it really lasted up until the great recession since then, since then, we’ve had a time of confusion.
Gene Tunny 42:28
Yeah, yeah. Yeah, for sure. I’m just interested. I’m interested in your thoughts on the that neoliberal term? Because I mean, you’re someone you’ve got, you know, people who are very prominent in our time, and you worked with Larry Summers you’ve written and you’ve done research with, with Larry Summers, who was US Treasury secretary. I mean, how do you feel about all because Would you say there was some benefits to it? Because, I mean, Airline Deregulation, and I mean, that was good for consumers. How do you think about it now?
Brad DeLong 42:58
As they say, you know, in some ways Friedrich von Hayek really was Dr. Jekyll. Yeah, in that if you have a, you know, if you have a command and control system, you know, there’s somebody at the top, who’s issuing orders and everyone else is kind of not really using their mind that they’re kind of robots doing what the person at the top orders. And, you know, if you’ve ever worked in any large organisation, you know that the person at the top has very little idea of what’s actually going on down at the bottom. And will often be issuing commands about what you should do next that are best nonsensical, and that are worst highly destructive. You try to have a committee solve that problem of central command by establishing it by writing a rulebook. And then you have a bureaucracy because God knows the rulebook only covers about a third of the cases, it’s simply not possible for any small group to think about. But um, assign people private property and let them trade and exchange in a market. And all of a sudden, the people who are actually on the ground in the situation, you’ll have the ability to do things because the property is theirs. And also, as long as market prices are in accord with social values, they have a very strong personal incentive to do the right thing. Or at least the thing that makes money and then there’s the well, but our market price is in accord with social values problem, but if you can solve that problem, then a properly tuned market economy with private property is the best possible anti bureaucratic, you know, anti authoritarian crowdsourcing mechanism for helping people to organise themselves in order to do what is needed for the common good. Did you know much better to impose a carbon tax and say, you know, gas filling up your car was going to be expensive. Then too, as Jimmy Carter said to say, if your licence plate ends in an even digit, you can only fill your car with gas on even days and with an odd digit, you can only fill your gas on odd days. Friedrich von Hayek was a Dr. Jekyll positive genius and seeing this and seeing this very clearly. But as I say, he also was on Mr. Hyde style idiot. Because you’ll Hayek, having grasped on to this value of the market, he couldn’t think of anything else. And so he reached his position, which is the market economy will take modern science and technology and make us all prosperous, full stop, we need to be happy with that. We should not ask for anything else, we should not ask for an equitable income distribution or any form of social justice. Because if we do, we’ll find ourselves monkeying with the system. And when we monkey with the system, we will destroy the ability of the market to actually be productive and to make us rich. And ultimately, we’ll wind up on the road to serfdom. We won’t get social justice, and we will be at our we will make ourselves poor. And so the one thing we definitely need to do is whenever anyone starts talking about social justice, or income distribution or their rights to something that isn’t, that aren’t property rights, we need to tell them to shut up, you know that the only rights that matter are property rights, and that’s how it should be, you know, and yes, this is not social justice. You know, the market gives most things, not the people who deserved them, but instead of the people who are lucky enough to own the valuable pieces of property. But if you can’t accept that you don’t have any business doing politics or speaking in the public square. Yeah. And, you know, that’s profoundly unhealthy. That’s profoundly unhealthy in actually figuring out how we should utilise and distribute our wealth, but you know, Hayek stuck to that to the end. So much so that he was an enthusiastic supporter of Augusto Pinochet. Believing at some level that you know, Pinochet would reform Chile. And then once Marxism and Social Democracy had been stamped out, then you know, he could retire and the Chilean people could be allowed to go back to electing their governors again. But in the meantime, you definitely need it. You know, he called it the Lycurgan moment. And the myth of the semi mythical dictator, yeah, even though not a king of Sparta had established what people said was the Spartan system of government and war back in the Classical Age.
Gene Tunny 48:03
Yeah, I was shocked by that. Brad, when I read that in your book, I’ll have to go back and look at where Hayet wrote that because I mean, it’s quite shocking to think that someone who is a champion of liberty, and I mean, he’s inspired there’s a think tank in Australia, the Centre for Independent Studies, which I have a bit to do with which is inspired by Hyack. And so I mean, I’ve read Road to Serfdom, but I don’t remember anything like that, but I’ll definitely go back and look.
Brad DeLong 48:31
He gets cranky, he gets cranky or as he gets older. That, you know, in 1944, when writing the Road to Serfdom, he’s chiefly interested in trying to persuade a future British Labour Party government not to be really stupid with respect to nationalising everything in sight. But you know, he ages and as my father says when you get older, you discover that you are more like yourself and it’s not necessarily a good person. That back when you were younger and had to pretend not to be yourself and weren’t quite as much as yourself, maybe we’re better off right, Yeah. Yeah. There is a letter from Maggie Thatcher back to Hayet saying thanking him for one of his and indeed saying but you are recommending the use some Chilean and methods and do those are unacceptable given our constitutional traditions, and I haven’t been able to find out what this is in response to.
Gene Tunny 49:29
Brad DeLong 49:32
In the context of a world that is drifting towards Central planning and very heavy bureaucracy, it’s more understandable than as account. You know, Hayet’s, crankier parts are more understandable and useful as a counterweight than they are as you know, an accelerator, an accelerant for a kind of neoliberal era.
Gene Tunny 49:56
Yeah, I think you definitely make some I mean, a lot of what you’ve you’ve written I think is great. And I mean, I’ve been thinking about this myself, I think we’ve I feel it in Australia, we’ve probably managed things better than in the States. I mean, there’s definitely. And then the way I’ve thought about it is that some of the neoliberal policies we’ve enacted, I think, have been good for consumers, we cut tariffs, I mean, we used to have this very high tariff wall. So I think it was as late as 1988, or 89, we had a 57% tariff on motor vehicles. And so cars were, in real terms, much more expensive. So they benefited a lot. But there has been dislocation, but we seem to have manage that, because we’ve had a Social Security system and a public health care system. And I look at the states. And I mean, I mean, I think Americans, I think the US is a great country. But the lack of a public health care system, and the lack of a social security system, I think, is making things very difficult. And that’s meaning the politics becomes very, I mean, it’s just, it looks awful at the moment from over here. So yeah, that’s just a comment. But if you have any reflections, that’d be great.
Brad DeLong 51:09
Things are never as awful as they look on YouTube. Still, it’s still strong and rich, and you know the sense of a very, very strong sense of one nation, and we should all be pulling for each other. Which you won’t see if you go on YouTube or Twitter where it is indeed, the politics of you know, Ezra Klein says you get clicks only if you make enemies. And that’s really not how most people normally live their lives. But yeah, there’s a great book that’s getting some considerable play now by Elizabeth Berman called Thinking Like an Economist, you know, how efficiency replaced equality in the US public policy, which I think definitely could use a dose of the good Dr. Jekyll Hyatt, right. That says that demanding equality, demanding one size fits all rather than letting people crowdsource solutions on an individual level, is something that we should value greatly. And yet Elizabeth Popp Berman doesn’t value it at all.
Gene Tunny 52:21
Right. Okay. Okay. I’ll have to check that out. I might have to wrap up soon. But the final final question i’ve good is just referencing one of your quotes in your book where you talk about the power of some individuals, and you talk about the power of Keynes and FDR? Yeah. How do you think they would want to know it’s almost an impossible question, but how would they be diagnosing where we are today? And what needs to be done? Do you have any thoughts on that?
Brad DeLong 52:53
With respect to the Great Recession, Keynes would certainly say, I told you so. And with glory in it, because he was at some level of British upper class twit of the early 20th century. With respect to the rest, he would say that, by and large on my number with the predictions he made in a 1930 speech, he gave on economic possibilities for our grandchildren to have indeed come true. And that at least the global north is approaching the stage in which we do indeed have enough. And then our problems are that we’re kind of hag written by ideas and ideologies that were useful and essential in past poor age, you know, avarice, usery, and precaution. And that we’re also facing the prominent problem of the human race, which is how to take your wealth and resources and live life wisely and well. And he would say that he had hoped that we would have made more progress on learning how to live life wisely, and well than we have, and would have hoped that we were less hag written by you know, avarice, usury and precaution. By kind of not realising how wealthy we are. And you know, how broad open our possibilities should be, but being instead do to mean and ungenerous to ourselves and to others.
Gene Tunny 54:17
Yes, yeah. Okay. And what do you think? I mean, what would you have any thoughts on? I mean, what’s, what’s to be done, particularly in the US or in other? What other advanced economies? I mean, I mean, one of the challenges we’ve got here in Australia is how we pay for this National Disability Insurance Scheme. So we’ve got this permanent structural deficit in our budget now of about 2% of GDP. And the current government when it was in opposition committed to these what we call over here, these stage three tax cuts that are kicking in in a few years, where there’s, they’re more geared well, because the wealthier pay more tax just because of the way the system is set up. And the way these tax cuts work is that the bulk of the benefits go to the upper end. And there’s a big debate about whether it’s appropriate or not to have those tax cuts at the moment in Australia, but what are the levers? Is that you see, is it around? Is it taxation? Is that one of the levers for redistribution? Or is it regulation? What what do you see as the levers?
Brad DeLong 55:22
Well, you know, I think, I think the biggest and the best lever and in fact, the one in which the United States and Australia have historically been most successful, you know, is immigration, right. That over time, we have been very, very good at taking in people from elsewhere whose parents were not Americans, Australians, and making them into, you know, Americans and Australians. Like, I remember Maine Senator George Mitchell, you know, the guy who negotiated the Good Friday Accords in Ireland. And, you know, he looks like one of my great uncle’s, someone all of whose ancestors had been in Maine since 1750. And, you know, talked with an extremely strong accent, you know, um, and so actually, he’s simply a second generation immigrant, he’s half Irish, half Lebanese. He just looks and sounds exactly like my great uncles with their eight generations of, you know, hardscrabble time in the soil. But, um, we have enormously powerful and strong cultures, ideologies, and forms of Nash forms of national unity, that are actually not based on us all really being the descendants of our founders, and both countries willingness to take in large numbers of people from elsewhere. You know, Australia, taking in an enormous number of refugees after World War Two have been huge sources of national strength. And we are still largely empty countries, and you can move someone from Mexico to the United States, you know, from Malaysia to Australia. And you know, you are going to triple their productivity just by doing that alone. And that will generate a huge amount of potential wealth from a well we grow by immigration. Otherwise, the problem is that, you know, we had a steam power economy in 1870. And, you know, an electricity and diesel and chemical economy in 1900, and a mass production economy in 1940, and you know, a global value chain economy in 1990. And now we’re headed for info biotech economy and whatever worked in the sense of, you know, politics, economics and sociology, 30 years ago, back when the technological foundations of the economy are different, it’s probably not going to work well now. So anyone who says we need to go back to X is probably going to wind up unhappy. And so we should try to move forward into the future rather than trying to pick up models from the past. Although what those forward and the future models are, you know, that’s beyond me.
Gene Tunny 58:19
Okay. Okay. You’re telling the economic history story, the policy and then that’s, that’s for someone else.
Brad DeLong 58:28
But the big lesson of history is that trying to maintain social and economic systems past their sell by date as the technology changes underneath it just doesn’t work.
Gene Tunny 58:39
Right. Yeah. Yeah. Interesting point about immigration. We one of the one of the challenges in Australia we have is that, I mean, everyone wants to live in one of the big the three major capital cities. I mean, I’m in one of them, I’m in Brisbane, and Nick’s down in Melbourne, then Sydney is the, you know, the biggest, but the concern is that everyone wants to live in those cities. And there’s just not enough housing. I mean, we’ve got, I mean, I guess, it’s around. It’s in other advanced economies, too. But there’s a housing crisis and property prices have surged, although they are falling out, because the of the dynamics of the lending and what’s happened with the monetary policy, but they’re still very high rents are going up. So we’ve got concerns about housing availability. And in the short term, I think, if we’re bringing immigration back, I think that’s going to cause a lot of pressure. So we’ve got to manage that better and harder. No, there’s the environmental issues about allowing development. So I think, yeah, I agree with you about immigration providing benefits. So just see that in the short term. There are a lot of these absorption issues that we have to deal with.
Brad DeLong 59:48
A lot of people who think they have rights that things need to stay as they are. Yes, yes. And do you know to this, there’s a great Italian novel called I think Lampedusa, no written by Lampedusa, called Gattopardo, called The Leopard about Sicily in the 1860s, in which at one point, the young guy yells at his uncle, the count of Selena, you don’t understand in order for everything to stay the same. Everything has to change. Yeah, yeah. As the young guy goes off to join Garibaldi in the Italian revolution. And so I do think we need to look much more at the things that need to change. He says, sitting in a house built in 1897, we think, at a time, but it was surrounded by pear orchards. And now when it is half a mile or two thirds of a mile south of the university campus and two thirds of a mile north of the subway line. And so is a, that something so close to so many extremely desirable places, should house only three people right now. Rather than have been turned into a 10 storey apartment building is in some sense, an offence against land planning.
Gene Tunny 1:01:08
Yeah, well, I think we’ve got to find a better balance. I mean, who knows. That’s, that’s an issue for another episode, I think.
Brad DeLong 1:01:17
It is, you know, and we did actually build a cottage on our lot as soon as we were allowed to do so. But still. Yeah, so we did add to Berkeley’s housing stock. Yep. Still, you know,, the San Francisco Bay Area has seven and a half million people and looking back at the past 450 years of history, it’s easy to say how if we’d had a 1800s view toward development, we now have 20 million people, you know, we the size of Los Angeles in population. And it would probably be a better world I must say, because those other 12 and a half million people who aren’t here are in other places that are kind of less great to live in, and where they are likely to be less productive than they would be if they were here.
Gene Tunny 1:02:14
And just just finally, probably, you know, you’ve I don’t want to take too much of your time. But have one more question is, in your view, what are the most what’s the most important factor there is the governance, it always the agglomeration effects when they move countries because I know that Lant Pritchards crunched the numbers on this, and there’s this huge gain from moving people around the world. What’s the benefit? Where does it come from? Do you have thoughts on that?
Brad DeLong 1:02:38
A lot of it is agglomeration, thick market agglomeration effects that we don’t really understand that appear to be extremely large. And, but that also can very quickly turn into pollution and crowding effects if the local government is not competent at handling the process.
Gene Tunny 1:02:59
Yeah, I think that’s right. I think that makes sense.
Brad DeLong 1:03:03
And a lot more is that, you know, it is, throughout history, it’s always proven much, much easier to move people that where institutions are good, and where they can be productive than to somehow move institutions to where the people are, that attempts to build prosperity or build democracy in places where it does not seem to be strongly established, that those rarely go very well. And I would say, I do not really understand why that is the case. And I used to have a guru, a classmate of mine, who I went to about that, Alberto Alesina, to teach me. But alas, he dropped dead of a heart attack a few years. And I haven’t found another guru who I trust.
Gene Tunny 1:03:48
Okay, I might try and cover that in a future podcast episode. It’s a fascinating question. It just occurred to me then.
Brad DeLong 1:03:57
I love what Lant has to say about his numbers actually why his numbers are what they are.
Gene Tunny 1:04:05
Yes, yes. Yeah. I’ll put a link in the show notes to some of that work. Okay. Very good. Okay.
Gene Tunny 1:04:11
Well, I’m Professor Brad DeLong. It’s been a real pleasure. I’ve really enjoyed talking with you very much about your book and I’ll put a link in the show notes. And so if you’re listening in the audience, and please, I’d suggest getting a copy. Yeah. I’ve got it on Kindle. But I mean, it’ll be in bookstores and major bookstores in Australia I’m very sure. And yeah, Professor DeLong. Any final thoughts before we wrap up?
Brad DeLong 1:04:38
Just thank you very much. And I think be hopeful right that even though individually, each of us is just a jumped up East African plains ape who often forgets where he left his keys yesterday. Together, there are 8 billion of us and if we talk to each other together, we can be a very smart anthologie intelligence.
Gene Tunny 1:05:02
Absolutely. I think that’s a great note to end on. Professor Brad DeLong thanks so much. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to email@example.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye
Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.
US Treasury Secretary Janet Yellen claims the US economy is not in a recession, despite two consecutive quarters of declining GDP. Economics Explored EP151 guest Darren Brady Nelson disagrees with the Treasury Secretary and argues she is taking a political position. Whether she’s being political or not, Janet Yellen has certainly taken a big risk, as Darren and Gene discuss. Darren and Gene also talk about the review of the Aussie central bank, the Reserve Bank of Australia, particularly how climate change could figure in that review. Darren argues the review team should have a broader range of views represented, including Monetarist and Austrian perspectives.
Transcript: US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Gene Tunny 00:01
Coming up on Economics Explored
Darren Brady Nelson 00:05
like to see seemed to have sold or sold for political purposes as the head of Treasury in the US each year is a political appointee. So, that is, to some extent a political position.
Gene Tunny 00:19
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official.
This is episode 151 on whether the US economy is in a recession. Joining me is returning guest, Darren Brady Nelson.
Darren is Chief Economist of the Australian Think Tank Liberty Works. And he’s also an Economics Associate at the CO2 coalition in Washington DC. As well as chatting about the US economy. Darren and I discuss climate change and the review of the Reserve Bank of Australia.
In the show notes, you can find relevant links and details of how you can get in touch. Please let me know your thoughts on what either Darren or I have to say. I’d love to hear from you.
In the show notes. I’ll include links to some great commentary on whether the US actually is in a recession from two previous guests, Michael Knox and Steven Kirschner. So, make sure you check those links out.
Right on, for my conversation with Darren. Thanks to my audio engineer, Josh Crotts, for his assistants in producing this episode. I hope you enjoyed it.
Darren Brady Nelson, Chief Economist at Liberty works. Welcome back unto the program.
Darren Brady Nelson 01:35
Thank you. Good to see you. I guess it’s been a while since we last spoke about Work Capitalism, I think.
Gene Tunny 01:41
Yes, that’s right. That was a few months ago. So yes, it’s good to catch up again. This is a 151st episode, and this is your 11th appearance on the show if I’m counting correctly. So yeah, we get around to another chat every 15 episodes or so. So, it’s about time to catch up with you. So, it’s great to have you on the show again.
Darren Brady Nelson 02:06
Yeah, congratulation, because I’ve been so prolific. 151 That’s great.
Gene Tunny 02:11
Yeah, well, it’s just drip by drip, really. It’s one per week, and they mount up, yes. Thankfully, we’re out of the COVID period, although I had it recently. And I was in isolation, but we’re over all of that craziness which was dominating the conversation for a while, and now we’re getting on to other issues.
Okay, so I thought we could chat now about the US GDP figures and we had some big news last week, in Australia. You’re still on Saturday there; I think Darren, there in the states in DC. And now we’ve got two consecutive negative quarters of GDP growth. So, GDP grew at an annualized rate or didn’t grow, it fell at an annualized rate of 0.9% in the June quarter, and that followed a decline of, I think it was 1.6% in the March quarter, that’s at an annualized rate. Okay, so there’s a big debate about whether the US is in recession or not. Darren, what do you think? Is the US in a recession at the moment?
Darren Brady Nelson 03:26
Well, yeah, I would say so. I must admit, in this conversation, certainly, you’re going to be more expertise than I. You’re a guru of sort of macro-economic indicators, and all that, particularly from your treasury background, but other things you’ve done, too. So, maybe I’ll be asking you some questions, too, and hoping to get some answers. But yeah, I’m not sure; maybe you know the answer to this, but, the entire time I’ve been, first studying economics and being an economist, putting aside the debates on whether two consecutive quarters is the greatest definition or not, it seems to have been the definition for a long time. And the most interesting thing I’ve seen recently, and I guess this would have been headlines, I imagined in Australia as well, was the Biden administration going. No, no, that’s not really the technical definition of a recession.
I don’t think I recall an administration, democrat or republican ever; they may come up with excuses and say, it’s not well, it’s not our fault. It’s the previous administration and all that sort of stuff, or you know, external circumstances. But this is really the first time someone’s ever, including, some of the economists that the Biden administration has. On record, obviously, talking about in the past that yes, the recession. You know, the technical definition, if you like, is the two consecutive quarters of negative growth. So, it’s been very interesting times. Again, I guess in the 2020s, including a lot of media organizations and our favorite, sort of Neo Keynesian Economist, Krugman coming out and also defending that the Biden administration on oh, well, it’s not really a recession. So, it certainly fits the technical definition that, if you’d like I grew up with. And, that’s certainly my impression, just actually being in the US. Is it dire just yet? Yes. On the inflation front, yes. But unemployment, still is fairly low. And putting aside the fact that participation rate, that’s a little bit of a worry, but the unemployment rates not so bad at this stage. And usually, obviously, that’s, if you’d like a key secondary indicator, besides GDP itself, that people usually turn to right away, before they maybe dig into, what aspects of GDP have gone down, energy manufacturing, etc, etc.
Gene Tunny 06:02
Yeah. Okay. So, there are a few things you mentioned there, Darren,
Darren Brady Nelson 06:09
So, yes. Not a strong yes. So, yeah, I’d say yes. Technical definition? Kind of weak, yes in a kind of more judgement point of view.
Gene Tunny 06:16
Yes. So, you referred to what the White House was saying, and what Janet Yellen in the Treasury was saying. So, I might just read that out. And then we can go from there. And I can let you know what I thought about that.
So, what Janet Yellen said and this is reported by the Financial Times. “The White House has maintained that the US economy is not at present in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be amazed if the NB declared it was okay.” So, what she’s talking about there is the National Bureau of Economic Research, which is I think it’s attached to; is it attached to Harvard or MIT or one of those East Coast universities? There’s this elite group.
Darren Brady Nelson 07:01
I think it’s independent. I mean, look, I don’t know, but I think it’s more independent than even being associated with one particular university, I think.
Gene Tunny 07:10
Yeah, I think you’re right. Yeah. But it’s an elite group of macro economists, some of the top people and you’ll have some of the leading lights of economics on it. And they will date the business cycles, they will declare whether the economy’s in recession or not. And generally, what they’re looking for is a sustained downturn that lasts several months, so more than one quarter. And they look at a broad range of indicators. So, it’s not just GDP. But that having said that, it looks like GDP is an important part of it, because it’s that comprehensive measure of economic activity.
And one thing I noticed when I was preparing for our chat, is there was a report from CNBC, where it noted that I don’t think there’s ever been a recession that the NBR has called, which didn’t have two consecutive quarters of GDP growth, if that makes sense. So, where’s the actual passage?
Darren Brady Nelson 08:21
I think that’s not correct. I think they call the recession, during the pandemic, and that wasn’t two quarters, I think. So, they do have a bit of leeway. But they tend to usually use the two quarters as part of the definition as a key component.
Gene Tunny 08:38
Okay, look, I’ll have to check that, I thought I read that earlier today. I had that somewhere here in my notes.
Okay. So, we might go back to what Janet Yellen, what she said here. She underscored the message at a press conference on Thursday, emphasizing that the economy remains resilient. Most economists and most Americans have a similar definition of recession, substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain. In some abroad-based, weakening of our economy. She said, that is not what we’re seeing now.
Okay. It seems to me that’s a pretty risky call from her because she is running the risk that the NBA does eventually define this as a recession. And that’s going to be incredibly embarrassing for the administration. So, yeah, that would be my sense of it. I think it is a big call from Janet Yellen. And it may be too early to tell. But look, there are a lot of Economists out there who seem positive about the US economy. But that said, it does appear that I mean, is it the interest rates, is it what the Federal Reserve’s been doing that’s causing issues? Is it inflation that’s hitting Consumers? What do you think are the main forces affecting the US economy at the moment, Darren?
Darren Brady Nelson 10:06
Yeah, I think, you’ve definitely touched on two key components. But just to comment on Janet Yellen. But you know, Janet Yellen was totally wrong on inflation. So, that didn’t seem to impact her credibility within her circle that she goes around with, and the people who hire her; that didn’t seem to make any difference. So, probably when she’s proven wrong on recession, which I think she already has been. Yeah, I mean, that inflation is like, one of the key things; it’s the biggest problems in the US, and obviously, even the Federal Reserve, which has been; our Federal Reserve is part of the process of creating inflation. So, they’ve gotten spooked. Biden administration itself has not, which they, at least publicly, they keep on, they don’t seem to be, they acknowledged it a bit, but they don’t really kind of acknowledge it as bad as, even though the official statistics are showing. So, you have, like, I guess we’ve talked about this many times, but, you have kind of two things going on at once, the unprecedented levels of money printing, and the credit that goes with it, which, if you’d like, from a macro point of view, is hitting the demand side. And then on the supply side, they’re doing all sorts of, the Biden administration’s policies are just hurting supply, and hurting productivity and competition.
So, that can sometimes, make up a lot for that money printing. The supply side can react to it, and really dampen what, it’s for the money to the demand side of things. So, energy is a classic one, they had a complete 180 on their energy policy. So, the US went from the number one energy producer in the world to not that anymore, and, record time, essentially?
Gene Tunny 12:08
And is that the Biden administration’s fault in your view?
Darren Brady Nelson 12:12
Well, exactly. It’s not just their fault, that is literally their policy. You know, they’re going for the green transition, if you like, come hell or hot water, right? So, which includes, not allowing oil companies to extract oil and all sorts of things. Oil, natural gas, coal, etc. And they’ve also hit agriculture with bad policies as well. You know, manufacturing; yeah, literally, if you want to destroy an economy, the Biden’s administration is basically ticking all the boxes with their policies. And, putting aside, you can argue whether that’s intentional or unintentional, but I think there’s not too many, if you like, remotely free, market friendly economists who think the Biden’s policies are particularly good.
Gene Tunny 13:10
Right, okay, I’ll have to have a closer look at some of the policies and come back to that. I just want to go back to that definition of recession; I think I might have missed or may not have communicated properly what that factoid in that CNBC report was. So, what they were saying was that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. So, they’re not saying that, there could be recessions if you don’t have this, and that’s what you were saying with the pandemic, that was, like you could call a recession, if you don’t have the two negative quarters. But what this point is, is that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. The NBER ultimately, has declared it a recession. So, you can have a recession, even if you don’t have the two quarters, but every time you’ve seen it in the data, the NBER has ultimately called it a recession. So, what Janet Yellen has done is, yeah, that’s a really big call on her part. And, I mean, Janet Yellen, someone with a distinguished academic reputation, and yep, so really, really big call and potentially, it will backfire on her. We have to wait and see about that. Yeah.
Darren Brady Nelson 14:38
Janet Yellen in not going to make, you know, like she’s she seemed to have sold or sold for political purposes. Not unusual that; it’s not like this has never been seen before. Most of her sort of, like topics when she gets into public is less focused on inflation and recessions and she’s talking about equity and diversity and inclusivity and all that sort of stuff. Well, I guess as the head of Treasury in the US, each year is a political appointee. So, I guess, that is, to some extent, a political position. Although, usually in the past, it’s been Department of Justice and Treasury have, usually been less partisan, if you like. The people regardless of whether it was democrat or republican in charge, but you know, things have changed quite a bit. Certainly, this century and certainly in the 2020s.
Gene Tunny 15:33
Yeah, exactly. Okay. So, you mentioned the supply side before, well, one thing we’ve had in Australia here is just the ongoing disruption to supply chains. And I mean, the random things just been unavailable in the supermarket’s. Quantas seems to have lost its mojo; can’t seem to run a flight on schedule any time anymore. And partly, that’s because they lost people during the pandemic. And now we’ve got people on isolation leave, like if you get COVID, you have to isolate for seven days, and that’s disruptive. Things just don’t seem to be working as they once did. Is that the same in the States? Have you noticed that in the US?
Darren Brady Nelson 16:21
Yeah. I think some extent, less. Although I understand aviation has been kind of bad here, too. But I haven’t actually been, I’m just going on to sort of news reports and talking to other people that, yeah, they’ve had, things. Well, what happened in the US probably, maybe more than Australia is a lot of pilots, either were, let go or just left because they didn’t want to get the vaccine, right? And the federal government has a bigger say in aviation than they do and other industries, for instance, particularly on employment. And so yeah, that’s all contributed, including also I understand, not just pilots, but other people in the aviation industry, various hubs, the people needed at the airports and the hubs as well, similar sort of circumstances. The supply chain disruption in general, I haven’t noticed it as much in terms of like at the grocery store, there was a period where there was a little bit of that. Not as bad, but certainly, there were issues as well, in the US, perhaps, maybe not as bad in terms of like, grocery stores and whatnot.
So, the 2020s have been very weird times. And I don’t think it’s some sort of like natural market outcomes as such. Obviously, markets wrecked, and they impact, but I think there’s just the amount of, really over the top interventions and status sort of policies in the 2020s have taken me by surprise. We’ve been prepping backwards, if you like, towards bigger and bigger government, and I think, reaping the rewards. I don’t know why people, even people who; seasoned economists, who should kind of, know better, the more the government does stuff and interferes, the worse things get. It literally, is becoming, more and more like an Atlas Shrugged world. I don’t know if you’ve read Atlas Shrugged; probably familiar with the premise anyway. It’s like that. I’m like Atlas Shrugged there, but, there were places to escape to in that world, the fictional world of as many, as you can see, in this world, when, all the governments are, have uniform sort of policies on COVID and uniform policies of not tackling inflation, and all that. And maybe it will be interesting to see if the elbow government copies the Democrat lead, which I suspect they will, if Australia gets two quarters of negative growth, they’ll go that’s not really a recession, we’ll be interesting to see if they go down that road as well.
Gene Tunny 19:12
Yeah, one thing that we’ve traditionally relied on to keep the economy growing is migration, just the addition of people and that those consumption, and so that’s starting to pick up again. Possibly, that try and redefine it. I mean, I don’t think we’re at risk of that at the moment. Although having said that consumer confidence has dropped with the higher interest rates, so people are freaking out over just the increases in interest rates we’ve seen already, because it looks like they just borrow lots of money when interest rates were really low. The Reserve Bank, Governor, I couldn’t believe it. Last year, he was saying, oh, the interest rates will; our official cash rate will stay at 0.1 until 2024. And arguably, he misled people. And so, I mean, he really has a lot of questions to answer for. And there is the Reserve Bank of Australia review, which I’ve talked about in this program. I don’t know if you’ve had a look at that at all, Darren?
Darren Brady Nelson 20:22
No, no. Give me a synopsis of what drove that. And what’s happening?
Gene Tunny 20:28
Well, the RBA has been under a lot of criticism in recent years for different reasons. There’s been one group of economists who’ve been critical of it, because they argue that they didn’t; that they had interest rates too high in the lead up to the pandemic. Now, whether that’s true or not, I think it’s debatable. But I’ve had people like Peter Tulip and Steve Kirschner on the show. I mean, they’re very good economists. I think it’s worth considering their view for sure.
Their argument is that if you’re trying to achieve the inflation target of 2 to 3%; they were arguing that because inflation was actually lower than that, you had scope to have looser monetary policy, lower interest rates, to have more employment growth. And there was some modelling that was done by Andrew Lee, who’s a Labor Party MP and a former and new professor, and Isaac Gross, who’s an economist at University of Melbourne, I think. And they showed that if the RBA had met its inflation target, if it had lower interest rates and let the economy grow faster. You could have had; I think it was like 250 to 300,000 more jobs in the economy. So, there were a group of economists criticizing the RBA from that direction. And they were saying that the RBA was too concerned about households taking on too much debt. So, they didn’t want to put interest rates lower.
I could see why the bank would be concerned about that. So, that’s why I’m not fully on board with that criticism of the bank. That said, I think it is good to review the Reserve Bank, because it is a bit of a; it’s not exactly transparent what they’re doing. So, I think there could be greater transparency. And since last year, when Phil Lowe was making those sorts of bold calls, that turned out to be wrong within months, right. It was obvious that we’re in the in the new year when we started getting those inflation numbers that the Reserve Bank would have to act. So, I think they lost a lot of credibility over that.
So, it’s important now to have this review. And they’ve appointed Caroline Wilkins from, she’s a former Deputy Governor of the Canadian Central bank. They’ve got Gordon De Brouwer, who’s a former bureaucrat, I worked for him when he was in the treasury. And he was also at a new at times. He’s good. He’s good value. And Rene Fry McKibbin, who’s a professor of Economics at ANU.
They’re going to review the board like there are issues to do with board composition, who’s on the board? There are issues to do with the inflation target; but I’m not sure they’ll do much about that. They might tweak some of the language. And then there’s issues to do with the transparency of the board’s decision making; what do they release to the public every month? So that’s essentially what the review is about and I think it’s, it’s a good thing that they’re doing that. So, yeah, that’s it. So, yeah, it’s worth definitely worth keeping an eye on.
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 24:30
Now back to the show.
Darren Brady Nelson 24:33
So, are they the reviewers? Are they sort of, left or center, for the most part, like a Keynesian and MMT and, something else or what? What’s the story there?
Gene Tunny 24:47
I’d say the typical mainstream macro economists. So, however you’d like to characterize that, they’re definitely not MMT. If you had to give them a label, maybe you give them a new Keynesian label, possibly. But yeah, they’re not I don’t think they’re radical in any particular direction. They’re nonpolitical appointees, which is a good thing. One of the big questions and something that I think the Prime Minister, Anthony Albanese, Albo, as we call him, one thing he will be, he’ll be getting pressured to put a trade union representative on the board. So, they’ve had one in the past, I think Bob Hawke, our former Prime Minister was on the board in the 70s, when he was the head of the ACTU.
And then we’ve had various other ACTU secretaries on the Reserve Bank Board. There are some people pushing for a regional rep., but, one thing that Peter Tulip, who’s Chief Economist at Centre for Independent Studies has been pushing for is, he said that the problem is, we don’t have enough people who know about inflation and monetary policy on the board. And so, we need more of those people. We need more, it’d be better to have more economic experts or economists on the board.
Darren Brady Nelson 26:05
Yeah. And maybe, also further, how about a variety of use, and not just the one kind of, you say, mainstream, and but that’s still a worldview, it’s still a way of looking at things. And it’s not the only way of looking at things. The combination of, essentially New Keynesians, for the most part, with maybe a little, like 80-20 Keynesian monetarist; that’s maybe what, most mainstream sort of, macro folks, that’s kind of what they’ve learned and whatnot, be good to have somebody else. Have an Austrian point of view, have maybe a full on monetarist point of view, whatever; just something that’s not just the one point of view, , so it’s not just Tweedledee and Tweedledum, every time either on the board or this review.
I’m not saying these people aren’t smart, or anything like that; the three people you mentioned, but I suspect there’s not going to be a whole lot of push and shove between the three.
Gene Tunny 27:04
So, I think the review in a way, presumes that there won’t be radical changes. The Reserve bank is going to continue as an institution, we’re still going to have Fiat money. Is that the sort of thing that you think should be up for review, that we should be looking at something more fundamental?
Darren Brady Nelson 27:25
Well, at least you have one person on there who can be the dissenting voice to say, something like that, but I’m saying, even if it was, say, one Keynesian, one monetarist, and one Austrian, I think you might get a pretty decent review out of that, with the monetarist if you like, in between the two, to some extent.
So, you still have 2 – 1, want to keep a central bank going, but we just, good to kind of be realistic about, what a Central bank does and what inflation is, what monetary policy is, all that sort of stuff. That’s fine, if the board, I’m not saying, the board should be all full of economists, even if it was a mix of those types of economists, I think it’s fine to have some other, you know, depending on how big the board is, you know, there would be room, I guess, for a union and a business representatives and maybe some other stuff as well, that’s fine.
And then they should also review, also the goals of the Reserve Bank; what’s legislation. There’s a lot of stuff in there besides inflation, maybe, just to look at it, and kind of whether all that needs to be in there, or whether there’s should be a better balance, or you should prioritize and go, inflation is number one, and then something, that type of thing. It’d be great.
A lot of these reviews aren’t all that genuine, they already have a political goal. I mean, you say they’re not political, but it always is, you know, to some extent, they’re under certainly under pressure anyway, regardless of who they stick in there to review things. Now, in the past, some of these reviews have been a lot less political than others, there’s always a political element, like the competition policy review wasn’t particularly political, but there’s always a little bit of an aspect to it, of course, I’d be surprised if they’re not under, some fairly great political pressure to start going beyond and started looking at, kind of cultural war type stuff, too, that they want to ingrain, sort of, race and gender and all that other stuff. I’ll be I’ll be pleasantly surprised as if that isn’t going to be a part of the review.
Gene Tunny 29:37
So, as far as I’m aware, race and gender won’t be at this stage, I don’t think. But one thing that possibly will be, now whether there’s a culture war issue or not, I don’t know. I think I’m not sure it’s, I guess there are aspects of it that are part of the cultural war but the debate about the climate. So, Warwick McKibbin, who is he’s a Professor of Economics at ANU, and he’s actually the husband of one of the reviewers. But you know, she’s independent of; she’s her own person… Renee Fry McKibbin; she’s Warwick’s wife.
Darren Brady Nelson 30:22
Actually, by definition, at least the old school definition marriages, you’re not, you’re one flesh. But anyway, I understand what you’re trying to say.
Gene Tunny 30:29
Okay, yes. So, I don’t think she’ll necessarily go along with Warwick’s view. But Warwick was at the conference of Economists in Hobart two weeks ago, where I caught COVID. And, it was a good conference other than that, it was a great conference.
Darren Brady Nelson 30:46
And super spreader of it.
Gene Tunny 30:49
Yeah, that’s right. And Warwick was on the panel. And now we’re talking about the Reserve Bank review. And one of the points he made is that we may have to amend actually, I think he’s saying we will have to amend our inflation targeting settings or our goals or objectives. We’ll have to amend that to incorporate climate change, because we have to recognize that if we’re going to be responding to climate change, we’re going to introduce a carbon price and one that increases over time. So, that’s what you need to have that sort of lowest cost adjustment path. So, to minimize the cost of adjusting to climate change, you’ll need to have a carbon price that increases and so that’s going to be increasing prices. So, you’ll need to look through the inflation, you’ll have to ignore the inflation that comes from the carbon price. So, I think culture war issues won’t come into it. But I think the climate change will come into the RBA review.
Darren Brady Nelson 32:01
Okay, well, that’s good to know. It’s terrible news. But it’s not surprising though.
Gene Tunny 32:06
But doesn’t it make sense what Warwick is saying? I mean, if a government does introduce a carbon price, and you’re going to have increasing prices because of that, then that’s not really inflation that the Central bank should be concerned about. What do you think of that perspective?
Darren Brady Nelson 32:25
It still should be concerned about it, even if, you know; this is all about thinking about the costs and benefits. It sounds like, just assuming, okay, well look, we’re just not going to worry about the downside of our carbon tax and our climate policies, because it’s such a, unquestionable good to pursue this. That’s ideology, that’s not economics, that’s really bad economics. And it’s also bad constitutional law, like, to what enshrine you know, certainly a very long-standing fad, of the climate sort of industry. But, the concept of inflation is something that stands the test of time. You can disagree on various aspects of it, but it’s always going to be, to the extent you’re going to have monetary policy, inflation is going to be an important thing to be thinking about, right. Climate change, may not be.
I’ve been following this debate since the mid-90s. And, I can tell you; well, just look at the polling, I can’t speak for Australia, but in the US, it’s something along the lines of; it’s well outside the top 10 of topics that people are concerned about in the US, for instance, then you want to start because, elites like him, are in a position to influence these things. They want to shove in the things that they care most about. And I think it’s just atrocious to think you can stick that into the Reserve Bank act. I assure you another government can come along and potentially change that if they want, if the electorate says, alright, you’ve been trying to convince us that the end of the world has been coming for 30 years, it hasn’t arrived, we no longer trust you. Sure, that might happen. And then, government could change things, but you know, so it’s a bit hard to change stuff in legislation, a lot of damage can be done in the meantime.
Gene Tunny 34:20
Okay. So, on where is where they’d make the change? It probably wouldn’t be in the act, they would have it in the agreement between the treasurer and the Reserve Bank. If I remember correctly, I think the general view on the Reserve Bank act from the late 50s was that, look, some of the language is a bit outdated. But you know, maybe leave that alone, you can do all you need you want to do within the agreement between the treasurer and the Reserve Bank. So, I think that’s where they would adopt something like that.
Just on that Reserve Bank Act, I think what they talk about in that is that the Reserve Bank is supposed to set monetary policy to have a stable currency to achieve full employment and to promote the prosperity of Australians or something. Something broad like that. Yeah. So, they’ll probably leave that and they’ll do whatever they want to do with if they did want to put some wording in about climate change, it’ll probably be very vague, because it is all very vague. We don’t really, I mean, I’ve got no idea what’s going to happen here in Australia. Politically, it’s, it’s such a vexed issue. And you’re saying is not in the top 10 issues in the US, it’s certainly in the top 10. It’s top five; top 3 here in Australia.
I mean, the previous government lost Blue Ribbon seats, seats that it’s held for decades, seats in affluent areas of Sydney and Melbourne. And it lost them because of climate change, because people in those seats are extremely concerned about it.
Darren Brady Nelson 36:07
Yeah, there’s a different point of view. Certainly, they did, but I wouldn’t extrapolate to say that means Australia as a whole has the same views as these inner-city suburbs, they’ve just changed the demographics and the ideological viewpoints of these people. That’s why they lost. Just like we’ve seen around the world, it’s the rich and upper-class professionals who gravitate towards status policies and status causes, like climate change. The working class, and in the middle, and lower middle classes do not. And electoral politics, isn’t just a straight representation of what the entire nation views necessarily. And putting aside the fact that the polling is often biased and bad and misleading and all that sort of stuff, but that decide.
I’ve seen some other people who; intelligent Australian commentators, James Allen, and people like that. We’ve been having a bit of look at that, to see whether, that mainstream narrative is actually true. They certainly lost obviously, those seats, they were blue ribbon, but they’ve been changing and moving left for a while now. So, particularly in the US, how climate change is almost really a non-issue from a broad electorate point of view, not any specific electorates.
Yet, that doesn’t stop the policies from carrying on and then you have all these perverse outcomes of like, I imagined Albanese will get more copy a lot of what the Biden administration so, the push for electric vehicles. Well, electric vehicles are still being produced by coal and natural gas, you know. So, you’re really in many ways, you actually might even be increasing carbon dioxide emissions through transitioning to electric vehicles from petrol vehicles. And the fact is, most of the world is actually increasing the use of coal, mostly India, China, Brazil, etc. And there’s even been a coal like I said, there’s been a coal comeback, even in Western countries as electric vehicle usage gets ramped up. So, these people don’t go, oh, no, we; the same people who say there’s an existential problem, keep on producing, keep on pushing electric vehicles, for instance. So, that their actions speak louder than their words that it isn’t really an existential crisis. Putting aside the fact obviously, all these elites tend to keep on buying beach side homes and all these sorts of stuff. I think just look at their actions, speak much louder than their words.
So, we’re getting this system where we get a worse electrical system because they keep on showing throwing more and more unreliable and expensive renewable energies on top of it, yet, they’re not actually starting to take much of the load of electricity production, they’re just sitting there costing more money and hurting the rest of the system. Yet, we’re still relying, and we’re going to keep on relying on coal and natural gas and the only renewable energy we’re going to lie and it’s going to be, water – hydro. Putting aside the fact you know, allow many new hydro to be built, but it’s bloody reliable. In the US, if it wasn’t for Quebec, all the hipsters in New York would be having more blackouts because they’re running on water; hydro from Quebec coming down into the US.
Gene Tunny 39:55
Where is that is that near Niagara Falls, or is it is that up in that Region.,
Darren Brady Nelson 40:00
Yeah. Quebec is like, the king of hydro in that part of the world, not just for Canada. In fact, Quebec is mainly supplying electricity to the US, part of the population that’s bigger. And that sort of the northeast of the US. So, that’s kind of insulating on, they can shove on some more solar panels and wind, but that’s not really generating a lot of electricity. And we also have the perverse effect from the main thing that, besides all the kind of pollutants, actually the toxic sort of, chemicals, and all the stuff that it’s needed for electric vehicles, needed for solar panels, needed for wind turbines, which obviously have detrimental environmental effects. They need coal, natural gas, and hydro to make those things in the first place. Not just to be the ones that really, supplemented when the wind’s up blowing, and the sun’s not shining. But if it wasn’t for all the fossil fuels, it couldn’t even build this stuff in the first place. So, all you’re doing is shoving all this stuff, people making a lot of money. A lot of people are virtue signaling, sort of, they keep on crying wolf for what, like 30 years now. There’s, nothing; there’s no significant evidence that we have a problem.
Gene Tunny 41:15
Well, I’ll push back and say we just had a 40-degree Celsius day in England that they’ve never had in their whole history.
Darren Brady Nelson 41:23
That’s not true. You go back, and we look at the Paleo challenge. You look at the evidence. For instance, in the US, this damn out in the Colorado River is having; it’s because of climate changes is at its lowest level, lo behold, a study, two weeks prior to them making such statements show that they’ve had more levels on the Colorado River 2000 years ago.
We’ve had warmer periods, we’ve had more carbon dioxide in the atmosphere in times. No, none of this is accurate. It’s all cherry picked to scare the poop out of people to accept these policies they want anyway. And you watch it when we’re old men, we’re going to be the people will go yeah, we’ll look okay, this thing didn’t happen. But I think it was the right thing to do anyway.
You hear that a lot, even now. They go like it will even for wrong, it’s the right thing to do. How’s it the right thing to do to make people poor? And have people in Africa starve? How’s that the right thing to do?
Gene Tunny 42:22
Okay, so in a future episode, we’ll have to come back to this, Darren, and we’ll see where we are with the with the data.
Darren Brady Nelson 42:28
You want to see the green policies and action? Look at Sri Lanka.
Gene Tunny 42:31
Yeah. Look, I’m not advocating for these policies, necessarily. Yeah. But I do recognize;
Darren Brady Nelson 42:42
That’s not about you, that’s just kind of aim at whoever’s watching this. It’s like, you want to see the future? The potential future? That’s Sri Lanka. That’s the way Australia could look, if they’re not careful.
Gene Tunny 42:55
And what did they do? They actually required organic produce, did they? Did they ban the importation of some fertilizers or something?
Darren Brady Nelson 43:07
Yes, fertilizers. Fertilizer was the main thing using green organic things instead of actual fertilizer. This is what’s happened in countries like Sri Lanka and African countries is to get their aid money. They do the green agenda, essentially. And it’s just a disaster.
I’ll tell you the countries that won’t be, it won’t be China, it won’t be India; the bigger countries that don’t need the foreign aid. And there’s also strategic implications, obviously. Who controls the green energy market, ultimately? China – communist China.
Gene Tunny 43:51
They are producers of a lot of the solar panels. That’s correct. Yeah.
Darren Brady Nelson 43:54
They are almost a monopoly on this, and increasingly, all the support technology for it as well. So, in China, this is not a coincidence. It’s not like, oh, the market chose China, they were just the best people to do it. This is like, this is a plan. It’s a strategy by the Chinese government, and you can see it’s written down. There are books written on this by them to say, oh, this is what we’re going to be trying to do. That basically, it’s their mind calm. So, don’t be surprised, when some of this stuff comes true.
They have a plan that the Chinese economy is not a free market economy by any stretch of the imagination. You know, it’s a government controlled run for the purposes of, for the benefit of the Communist Party and the strategic interests of China. It’s not like you’re dealing with the Netherlands, that sort of thing. So, that’s also a huge thing. Because they’re an aggressive military power.
When the time’s right, they’re going to take action. Taiwan and whoever else, eventually over time gets in their way. So, to aid and abet this through these green policies that are aimed at a problem that doesn’t really exist or certainly not in the scale. And certainly, even if the problem doesn’t exist, too deep, to essentially decarbonize the economy is just like literally the worst solution for it. And to decarbonize it in a way that, benefits China immensely. These’re just terrible policies the whole way through and people hopefully one day will be held accountable for this.
Gene Tunny 45:46
Right, okay. We might go back to GDP just before we wrap up, and yeah, I think I agree. There’s a big debate to be had about those policies for sure. I mean, from Australia’s perspective, given that we’re such a small part of the world, doesn’t make sense for us at this stage to adopt those policies on a large scale. My view is we should try to cooperate internationally. But we need to ensure that other countries are following through with their commitments. And I’m not sure that that has always been the case, or it is the case. So, that my perspective on that.
On GDP, I guess the view is that; my sort of thought is that, Janet Yellen certainly went too far. The US possibly could be in a recession, despite the fact that jobs growth has been strong, despite the fact that you’ve got unemployment at 3.6%, you could be going into; you could be in a downturn. The GDP figures, if you look at the composition of them, you had inventories falling, that was a big part of it. So, businesses were selling goods, but they weren’t replacing their inventories. So, that could be a signal that they’re not expecting; they’re worried about the future, about future sales. We had a drop in residential construction. That was one and that’s probably driven by the increase in interest rates. At the same time consumption spending was up. So, that’s why the summer economists are thinking it’s a bit of a mixed report. And we’re not entirely sure, but my take on it would be the GDP numbers are definitely something be concerned about and Yellen probably went too far when she said, we’re not in a recession. I think that certainly could come back and bite her.
Darren, do you have any final thoughts on the GDP numbers? Or where the US economy is that?
Darren Brady Nelson 47:55
Pretty much agree with what you just said. And obviously, time is going to tell. I think the bad ministration policies are very bad. And that’s going to come home to roost. So, I think, it’s not going to be good times, economically for the US and if it’s not good times, economically, for the US, it’s not worth it. China is obviously a major player, but it’s not the engine of growth for the world just yet. The US still pretty much is. When the US sneezes, everybody catches a cold.
Gene Tunny 48:39
Yeah, that’s right. I remember that. That was a popular saying in Australia, at the Reserve Bank and Treasury. So, yeah, absolutely.
Okay. Darren Brady Nelson. Thanks so much for your time. It’s great to catch up, yes. And I look forward to chatting with you again in the future.
Darren Brady Nelson 48:58
Always great to be on your show and see you, Gene, thank you.
Gene Tunny 49:02
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 firstname.lastname@example.org and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.
Thanks to this episode’s guest Darren for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au.