Tag: economics

Top 10 Insights from Economics – EP129 show notes & transcript

Post author By Gene Tunny
Post date March 7, 2022
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In Economics Explored EP129, show host Gene Tunny reviews his top ten insights from economics with Tim Hughes. These include insights regarding specialization and trade, opportunity cost, and the price mechanism, among others. Applications to traffic congestion and climate change, among other issues, are explored.

You can listen to the episode using the podcast player below or on Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps. A transcript of the conversation is included below.

The e-book which is the basis of this episode is available to subscribers of the economicsexplored.com website.

Links relevant to the conversation

On comparative advantage:

https://www.economicsonline.co.uk/global_economics/comparative_advantage.html

https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/scarcity-and-growth/v/comparative-advantage-specialization-and-gains-from-trade

On California’s emissions reduction scheme:

https://ww2.arb.ca.gov/our-work/programs/cap-and-trade-program

Transcript: Top 10 insights from economics – EP129

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. But can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.

Tim Hughes 00:11

It was. I remember the few times I was there, and it was like every European city. It was just chockers. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward.

Gene Tunny 00:25

Tim Hughes 00:49

Hey, Gene. How are you?

Gene Tunny 00:50

Good, mate. Very good. Thanks for joining me for this mini episode in a way. I just want to go over my top 10 insights from economics. So I’ve prepared an e-book. And if you’re listening and you’re interested in getting it, you can subscribe to the website, the economicsexplored.com website, and you’ll get a copy of that e-book. So Tim, I just wanted to go through what I think those top 10 insights from economics are. And one thing I should note is we’re recording this on the 2nd of March, 2022. Currently, there’s a huge crisis in Ukraine with the Russian invasion. We’ve got no idea how that will play out.

Tim Hughes 01:36

Hopefully swiftly and peacefully.

Gene Tunny 01:38

Yeah. But look, I mean, huge, huge risk to the world. And yeah, just feel for the people of Ukraine who are suffering from that invasion.

Tim Hughes 01:48

Absolutely.

Gene Tunny 01:48

Just terrible. Okay, so should we get into it, Tim?

Tim Hughes 01:53

Yeah, let’s do it. Can I ask if this is one to 10 in any sort of preference or order? Is it just top 10 all round?

Gene Tunny 02:00

This is one to 10 in the order that they occurred to me as I was jotting them down.

Tim Hughes 02:05

Cool.

Gene Tunny 02:06

So I think I’ve tried to order them in what I think are the most important insights. But having said that, I recognise that there’s possibly insights that other economists would put ahead of the ones I’ve chosen, or maybe they don’t agree with what I think are insights. And so if you’re listening in the audience, and you have a different view, or if you think I haven’t explained something exactly correct, then sure, please get in touch. So you can send me a message via SpeakPipe, there’s a link in the show notes, or email contact@economicsexplored.com. We’d love to hear from you, as always.

So Tim, just to begin with, I mean, this is one that I often point out when we’re just chatting is that insight about how $50 bills or $50 notes aren’t just lying on the sidewalk, waiting to get picked up. There’s a famous joke about the two economics professors walking along the street and one of them sees a $50 note and says, “Oh, there’s a $50 note there.” He’s about to bend down to pick it up, and the other one says, “Don’t be silly. If it was a real $50 note, then somebody would have already picked it up.” So it’s the idea of opportunities for profit or gains from trade are rapidly exploited in a market economy. So it’s that sort of insight, this idea of arbitrage, so the fact that you don’t have exchange rates being out of alignment. If you think about what we trade, say Australian dollars for US dollars, and then US dollars for British pounds, they all sort of make sense collectively. You’re not going to get an opportunity to, say, take your British pounds, buy Australian dollars, then sell them for American dollars, and do better than if you just sold your British pounds for American dollars. So those gains will actually be arbitraged away.

Tim Hughes 03:58

So if there is a $50 note on the footpath, it’ll get picked up so quickly that it’ll be unnoticeable on the macro.

Gene Tunny 04:04

Well, yeah, exactly. And I guess it’s a philosophy for life too. It’s something that Seth Godin, world’s number one marketing guru, will often say, that look, someone’s going to be number one, or someone’s going to win in this game. Someone’s going to be the top YouTuber. Somebody’s going to be Joe Rogan.

Tim Hughes 04:24

It’s probably not going to be you. Still hope yet, Gene, there’s still hope.

Gene Tunny 04:32

So I’ve always thought that was an important lesson from economics. That’s a key insight. It’s important in economics, because we’ve got all of these models in which there’s optimising behaviour. So we’ve got businesses trying to maximise profits and consumers trying to maximise their utility or their satisfaction. And generally if you assume competitive markets, then businesses can try to maximise profits all they like, but the force of competition means that they’re just earning a reasonable return on their capital. I mean, they’re being compensated for their investment, for their assumption of risk. But they shouldn’t generally be earning monopoly profits. Of course, then there’s that issue about, well, what about if you’re Amazon or what about if you’re Facebook, and so clearly, there are some monopoly profits or supernormal profits being earned. But the way that some economists rationalise that is that they’re being rewarded for the innovation. And you really need those supernormal profits to stimulate innovation in a way.

Tim Hughes 05:40

Yeah, it’s an interesting one, because, I mean, there are so many of those big companies. Certainly Amazon is profitable, but a lot of the big ones who aren’t profitable, just to get scale Uber, and I don’t know if Airbnb are profitable, but you know, it’s those ones that are massive to market. Spotify, for instance so they’re actually making money. But they’re getting market share. So it’s interesting to see how that’s possible without turning a profit. And it’s obviously on the future promise of reward.

Gene Tunny 06:15

It’s all based on future earnings. And so this is what’s interesting in this world of low interest rates, because interest rates are so low, and you can borrow money so cheap and invest for the long term. If you look at what these companies such as Uber could be earning in the future, and you make assumptions about, oh, well, we could all be using Uber, no one will own a car anymore, and look at what the potential revenues could be. If you’ve got very low interest rates, then if you discount those future earnings back to the present, they’re worth a lot more. And that pushes up the value of those companies, because in a way, it could make sense to borrow a lot of money now and invest in those companies, because interest rates are so low, and these companies have such huge potential earnings into the future. So that’s why you’re seeing a lot of these tech companies having such high valuations. And as soon as interest rates start increasing, that could reduce the value of these tech companies, because well, people would rather get the money in the short term, because the opportunity cost of money is higher if the interest rate is higher. Does that make sense?

Tim Hughes 07:32

It does. Yeah. Yeah. I mean, is this still along the lines of the $50 note on the on the street?

Gene Tunny 07:38

We somehow got onto that issue of … You’d talked about the tech companies.

Tim Hughes 07:42

It was my fault. I guess what it is is that they all lead from one to the other, but without getting off that first one, because it is a thing, for instance, of like, yeah, if there is innovation, and if people can copy it, then it will be copied. And generally more people will be doing it, so that general movement away, so that opportunities get taken advantage of by more than one person, obviously. If it works, then other people will copy it and follow and it becomes more dispersed. That would naturally be how it works. So I guess we’re talking about exceptions to that rule with these big, massive companies that are all on the promise of future reward, whereas most companies can’t operate that way. They have to be more instantly profitable if they’re going to survive.

Gene Tunny 08:29

Yeah, look, I may have gone on a bit of a tangent there. But that’s insight one. We might go into insight two. And that is this concept of, there ain’t no such thing as a free lunch. Now a guest I’m having on in hopefully next episode or the episode after is David Bahnsen. He’s a fund manager over in the States. And he’s written a great book, There’s No Free Lunch. And this is the idea that, look, there’s always an opportunity cost with any action. And so my insight two is it’s opportunity costs rather than cash outlays that matter in economic decision making.

Now, I think the original idea or the original, is it a proverb or a saying about there ain’t no such thing as a free lunch, came from bars in the, might have been late 19th century or early 20th century USA, where they advertised as having a free lunch to get the patrons in the door. And they’d know that they could cover the cost of the free lunch by selling them drinks, or maybe they inflated the prices of those drinks a bit while having the free lunch. So there’s that idea.

But also, if you think about it, you’ve got an opportunity cost. Someone could offer to take you to lunch, but that’s an hour of your time and that hour is worth something Time is money. I mean, that’s one of the things we often do in economics in cost-benefit studies. We value people’s time and we work out well how much benefit could erode or a new bridge provide through the time savings. There’s an Australian government estimate. I think it’s $32 an hour or something, on average, you can value people’s time at.

Tim Hughes 10:11

I think it’s a good rule of thumb. You know, there’s usually some reason for something being given freely. Sometimes if it’s charitable, then that is what it is. But in many cases, I think it’s tied in the process of reciprocation, in the form of something else, the other party reciprocating in some form or other, or an opportunity to sell a product or service at some stage. So I think everyone’s aware of … I think that’s a fair one to have in there, Gene. That’s a good home truth, I think.

Gene Tunny 10:49

Yeah. And it’s important because you’ve got to recognise the opportunity cost of your own assets. If you’ve got assets, and they’re not being used, then you’re losing the income from that. So you’ve got to recognise that. It might make sense for you to offload something that’s just sitting around, like an old car or something, that’s costing you. You’re losing money on it through depreciation every year. So yeah, why not get rid of it? So I think that’s an important concept, this idea of opportunity cost, what are you giving up through your current course of action, your current actions.

Okay, insight three, comparative advantage and gains from trade. So this is the classic principle from David Ricardo, the British stockbroker, member of Parliament I think he was, economist from the 19th century, which is essentially arguing that there’s generally going to be gains from trade. Even if a country can produce most things, or in his model, it’s even if a country can produce everything better than another country, more efficiently, it still makes sense for one country to specialise in particular goods and services, relative to another country. Then that maximises the total amount that can be produced, and then you trade amongst each other. So it’s an argument in favour of specialisation and then trading.

Often the examples are given … I think they have the example of England trading with Portugal, and they use the commodities of cloth and wine. And there’s a numerical example that shows why it makes sense for, I guess it was England specialising in cloth and then Portugal specialising in wine. What’s neat about it is it doesn’t actually matter. If one country is superior in productivity to another country, it still makes sense to have specialisation.

One of the ways it’s often explained in economics classes is if, say, you’ve got a professor, and the professor has a secretary. And the professor could be as good as the secretary in administrative tasks, or even better. They could be an even better typist, or better at the admin stuff. But they’re also a great researcher. If the professor gives up an hour to do the admin stuff, that’s going to cost them a lot in terms of the great research output they could produce, whereas the admin person, they’re not going to be able to produce in an hour. If they gave up an hour, they’re not going to be able to produce anywhere near what the professor could in terms of research output. And it makes sense collectively. If you look at it collectively, it makes sense for specialisation to occur. So I’ve got some examples in the insight in the e-book. It’s essentially the benefits of specialisation.

Tim Hughes 13:56

And then maximising the available time within that sphere of specialisation as well, I guess. So for instance, like if you’re educated to a point of being a specialist in a certain area, like in your example there, so you want to be operating in that area of specialisation for the most amount of your available time.

Gene Tunny 14:16

Exactly.

Tim Hughes 14:17

This would speak to scale though, I guess, as well, wouldn’t it? For instance, certainly around my part of the world, originally Manchester, and cotton or linen production around there was huge. And so if you do that to such a scale, then per unit cost or square metre or however you measure the product, that would be ultimately cheaper to produce than if everyone tried to do it somewhat on a smaller scale.

Gene Tunny 14:47

Yeah. I think it’s related. I mean, definitely the gains from scale, the economies of scale, that will come from specialisation. And this is I think what Adam Smith was getting at. He was talking about how just the productivity and efficiency gains from specialisation, the division of labour. Ricardo’s model, his theory of comparative advantage doesn’t depend on that though. It is related. That’s a good point. I mean, maybe I needed insight about increasing returns in economies of scale in this in this e-book. I haven’t got one at the moment. I think that is an insight. That’s an important insight.

Tim Hughes 15:33

For instance, I don’t know what Portugal’s opportunity or capability was to manufacture cotton or linen, but I know the vineyards of Manchester wouldn’t have cut it as far as supplying the local areas with wine. I don’t know if anyone’s tried, but I’m certain that we would have heard about it if it was any cop.

Gene Tunny 15:51

I’ll have to put some examples in the show notes, a link to them on comparative advantage, because there are neat little numerical examples. And, I mean, yeah, it’s just not going to work in the podcast, but I’ll link to it in the show notes if you want to check it out.

Tim Hughes 16:06

I’ve just googled Manchester vineyards and it’s just tumbleweed blowing across my screen.

Gene Tunny 16:13

What about with climate change? See what happens.

Tim Hughes 16:15

Maybe, maybe.

Gene Tunny 16:16

See what happens. I shouldn’t be joking about that sort of thing, because there was a new IPCC report that came out. Was it yesterday? Just saying, yeah, still urgent. Something has to be done. We’re not really doing anything.

Tim Hughes 16:37

As far as climate change and crops.

Gene Tunny 16:39

We’re not doing enough. I think that’s what the message is.

Tim Hughes 16:41

Yeah, absolutely. There’s a different podcast on that one. And I know we’ve talked about it. But absolutely, I think, just very quickly, urgency would be a good thing. No matter whether people believe in climate change or not, urgency in the right direction, of all the changes that would make this planet cleaner, would be a good thing. Anyway, I’ll stop it there.

Gene Tunny 17:05

We’ll have to come back to that. I mean, there is one insight where we could talk about climate change. Insight nine, we can use market mechanisms, taxes or subsidies to correct market failures. So climate change can be thought of as a market failure, because businesses aren’t … At the moment, unless they’re paying a carbon tax, or there’s an emissions trading scheme of some kind … There aren’t many of those around the world. There’s one in Europe. I think there might be one in California. I’ll have to put that in the show notes. If they don’t have that, then they’re not paying the cost of the pollution. They’re not facing that cost. So the idea of the emissions trading scheme or the carbon tax, they’re two different ways of doing the same thing. It’s a way of putting a price on the carbon dioxide that’s emitted. So forcing people to pay for it. So the polluter would essentially pay for it. They’d have to buy the emissions permits. So they would pay the tax based on their emissions. And then they’d pass it on to consumers, to an extent. That’s one of the insights.

So now, the challenge is, of course … That sort of makes sense. It’s a global problem. That’s the problem. So we really need a scheme that operates globally, or there’s some sort of compatibility or trading between different countries, the schemes of different countries. Otherwise, I’ve made this point many times about Australia. It doesn’t make sense for Australia to do much to reduce emissions if the rest of the world isn’t. If China and the USA aren’t doing it, what’s the point of us imposing these costs on our economy?

Tim Hughes 18:55

It’s a fair point, because it is that thing of like, why hobble yourself if other people … Then you’re just giving an advantage elsewhere, and making it harder. But here’s one of those things, it’s like one in all in, which of course, is different around the world, like people from different circumstances or Third World countries who are going to struggle to try and meet a matching scheme. But I’m certain that whatever the future holds in the way of making things better, I think technology and breakthroughs in cleaner energy and all these different things, they’re probably the areas which will get taken up, because if you can make it cheaper for someone to have clean energy, compared to digging fossil fuels out of the ground, or having something that’s not clean energy, as soon as it becomes cheaper, then you’ll have uptake naturally. You won’t have to have schemes or anything in place. That will be widely accepted and welcomed, because you’re going to be better off doing it.

And so those kind of breakthroughs, I think, I can only hope that that would be the sort of game changers. Of course we’re talking about future technology in most cases, but given the right intent behind doing that, and the right minds, the right backing, I’ve got no doubt that that would be a reality. And so that’s where the support globally could come from, if that’s supported, to go down that road and follow that opportunity, because there are opportunities there. Then that would be the global uptake, rather than … I think it would be too hard to try and expect everyone to join a global scheme. I think that is hard. And maybe that’s just an intermediate sort of measure. Maybe that’s an intermediate measure between those who can and that still would make a difference. But anyway, again, I don’t want to get off your top 10 here, Gene.

Gene Tunny 20:47

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

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Gene Tunny 21:21

Now back to the show. Okay, we better rip through these pretty quickly, because you’ve got to get going in about five to 10 minutes. So far we’ve got through … I think we’ve done four insights now. I’m up to insight four, the magic of the price mechanism, or you can ration by price or by queuing. So this is another point I often make about how a lot of the problems we’ve got is because we don’t have appropriate prices, or we’re not charging for scarce resources.

And a classic example is car parking, the high cost of free parking, as Donald Shoup I think it was, who was a professor at UCLA, that’s what he calls it. And part of the reason you can never find a park is because the councils, at different times they’ll allow people to park for very little cost or for free on the streets. And so they’re not appropriately charging for the scarcity of that resource, the fact that yeah, street park is valuable, and it’s not necessarily going to the person who would be most willing to pay for it.

Tim Hughes 22:40

So going against the supply and demand model, you’re suggesting? Is that right?

Gene Tunny 22:43

Yes.

Tim Hughes 22:44

Because normally supply and demand would go to-

Gene Tunny 22:46

Economists, we’re great believers in supply and demand.

Tim Hughes 22:48

That makes sense.

Gene Tunny 22:49

Another example is congestion. And so economists for years have argued that there’s a lot of benefit to congestion charges. There’s a congestion charge in central London, and I think in Singapore. It’s terrible, isn’t it?

Tim Hughes 23:04

I got stung. I got stung. Don’t get me started, Gene. I haven’t got time to go through.

Gene Tunny 23:11

You get confused at Marble Arch and you end up in the centre of London.

Tim Hughes 23:17

Just very briefly, we were there for two days, like five years ago. And we left central London and paid. We knew there was a fee. We weren’t sure if we were in the central area or not. We were told we were just outside it, had a higher car, etc. But you’re supposed to pay by midnight the following day. And we did it the day after that, and it was 80 quid. It stung massively. It’s like, come on. It was not straightforward or easy to make those payments. And that’s my issue with any of this stuff. Happy to pay for … It was 12 quid a day, I think whatever. That sounds about right. But to then be fined 80 pounds in such a short period of non-payment, which by anybody’s standards, by midnight the following day was like, hang on.

Gene Tunny 24:07

Can you imagine what traffic would be like in central London if you didn’t have a congestion charge? I mean, it’d just be mad. Well, you wouldn’t be able to move.

Tim Hughes 24:13

It was. I remember like the few times I was there. It was like every European city, it was just chockers, you know. But regardless, I don’t mind those kind of charges. But I do resent the fact that they’re not straightforward. When you went across the Sydney Harbour Bridge 40, 30 years ago, whatever, you threw coins into the tollbooth, and off you went. It was very clear if you paid or hadn’t, etc. There was a little bay to pull over into if you couldn’t find the loose change or whatever it may be. Whereas now those costs are far less visible, I find. You just ticker over on these costs, which come out. I think there’s an element of rot in a lot of this, which I’m not so keen on.

Gene Tunny 24:54

Tim, I agree. That’s an implementation issue there. We’re dealing with the high level ideas here.

Tim Hughes 24:58

Sorry, Gene. I got sidetracked there. It’s a personal thing, and I said I wouldn’t talk about it, but I did.

Gene Tunny 25:02

It’s fair enough. Insight number five, ignore sunk costs. Bygones are bygones. Economics is forward looking.

Tim Hughes 25:11

That’s timely.

Gene Tunny 25:13

Well, it’s true.

Tim Hughes 25:15

That’s right, just forget about it, write it off.

Gene Tunny 25:18

But we often fall into the sunk cost fallacy and we just throw good money after bad. I mean, we spend a few billion developing a Concorde jet that we figure out pretty early on is not gonna be very commercial, or it’s just a money pit. The British and the French government just keep investing in it. And it turns out it just wasn’t commercially viable. Beautiful aeroplane.

Tim Hughes 25:41

Yeah, definitely.

Gene Tunny 25:43

Amazing technological feat, but the economics just didn’t make sense. You just couldn’t pack enough people on the Concorde.

Tim Hughes 25:50

I never knew the economics behind it. It was a tragic end to the Concorde era when it caught fire, which was awful, however many years ago that was. But I wasn’t aware of the economic cost of it at all.

Gene Tunny 26:07

I think the economics of it were bad, so never going to recommission them or to build new ones because I think the problem was you need so much jet fuel to get hypersonic. I mean, it was hypersonic, wasn’t it?

Tim Hughes 26:19

Supersonic.

Gene Tunny 26:20

Supersonic, that’s it. Supersonic, that’s right. And so you need a huge amount of jet fuel to get supersonic. Beautiful design, but it was very sleek.

Tim Hughes 26:32

It was stunning.

Gene Tunny 26:33

You couldn’t pack as many people into a Concorde as you could a 747, could you?

Tim Hughes 26:39

No. I mean, I guess looking back at the time, that was very soon after the lunar landings, and around that sort of time, so it was very much a modern forethinking sort of thing to get involved in. So there’s probably a bit of ego involved in the whole thing.

Gene Tunny 27:01

Yeah. It was British and French prestige. I mean, they wanted to play with the big boys. I mean, they wanted to play with the Russians and the Americans. There was a space race, and the Brits and the French wanted to, I don’t know, I guess they wanted to show that they were technologically advanced as well.

Tim Hughes 27:24

I was just a kid at the time. But I remember there was pride in the Concorde. Pictures of it were plastered everywhere. And it did, it looked amazing. You did take some pride in that in some way. And I guess that, yeah, maybe if they felt that there was other benefits from having that kind of visibility of something that modern looking. I don’t know.

Gene Tunny 27:50

Yeah. Well, it’s a shame. But anyway, it’s the example I give about sunk cost, because they just kept throwing money at this thing, even though it was a really bad investment. So you’ve got to ignore what you’ve spent already, and just think about, is the additional money you’re spending on this endeavour, is that going to be worthwhile?

Tim Hughes 28:09

So cutting the losses?

Gene Tunny 28:10

Exactly, exactly. We better rip through the rest of them pretty quickly. Insight 10, that’s an easy one. We’ve chatted about this one before. Inflation is always and everywhere a monetary phenomenon. So that’s something from Milton Friedman. I’ve chatted about that enough on this programme. So far, we probably don’t need to elaborate.

Insight six, redistributing via the tax transfer system can be superior to redistributing via fixing prices. What I’m talking about there is, a lot of times governments try to fix prices, try to set wage rates or try to fix prices of different goods and services. Rent control is one example, generally a bad idea, because that can discourage investment in new apartments. And that can make the situation worse for people. It’s good for the people who’ve got a rent-controlled apartment, but it’s not good for the majority. So economists tend to think that rather than trying to fix prices, you’re better off letting prices adjust, because there’s the magic of the price mechanism that economists talk about. And then if people, they’re doing it tough, because there are people who need help, then provide that through the welfare system. That’s an idea. That’s one of the insights there.

Tim Hughes 29:30

So now we’ve got something to talk about more in more depth in that area as well, coming up. It would be good to expand on that because it’s certainly an area where it’s getting very, very difficult for new homeowners to get a foot on the market ladder. And I know there are different schemes in place around the world. I know Singapore has got a scheme whereby the government buys the buildings and allows people to get homeownership through a scheme that they basically provide the building or the land.

Gene Tunny 30:08

It seems very interventionist to me. But yeah, we should chat about that in a future episode.

Tim Hughes 30:13

There were a few things. I know we never talked about having that. But it’s along the lines of this, because that still basically isn’t a fixed thing, but it’s more of an assisted service or assisted package.

Gene Tunny 30:26

Insight seven, collusion and monopoly power can be a concern and may require regulatory action. That’s probably pretty self explanatory. I mean, economists celebrate the market generally. We think the market system’s great. But of course, there can be situations where companies become extremely dominant, they can abuse their market power, and hence, you might want to have some antitrust action against them. I mean, we’ve got an Australian Competition and Consumer Commission here in Australia to do that sort of thing. The United States has got a Federal Trade Commission, I think, or they’ve got the Department of Justice. So there’s a lot of talk now about should we break up big tech companies like Facebook, like split Facebook proper from Instagram and WhatsApp, is there something that they should do with Google, should we break Google away from YouTube, etc. There’s all that debate going on at the moment. I’ve covered that on the show before

Tim Hughes 31:23

It’s a thorny issue, isn’t it?

Gene Tunny 31:28

It is. And I think what my takeaway from economics would be that, yeah, it can be a problem in some circumstances. And there’s some guidance in the literature. I’ve offered that as an insight. And I guess it’s a topic we should come back to in a future episode, because there are a lot of issues to consider pros and cons, because you don’t want to eliminate that process of creative destruction as Joseph Schumpeter, the Austrian economist, who is at Harvard, called it, because that’s important. We like that creative destruction. New companies are rising and innovating and offering services that everyone enjoys. I mean, Amazon. I’m not a great Facebook fan. Maybe Google’s a better example. I think Amazon and Google have certainly provided a lot of value to consumers and to people in the community,

Tim Hughes 32:25

it seems to come down to ethics, I think, and that’s maybe the direction to take. That would be my feeling on it, because it’s hard to put limitations on a free market. The less governance I think is always a good thing. But then there comes responsibility with these massive companies then to do the right thing and to employ people under good conditions, etc, all those kind of areas, you know. That money should be going back into society at some level. If the profits are so huge, then yeah, it would be, I think, a fair thing to tax those companies more, to give back to society.

Gene Tunny 33:07

Yeah. So there’s a big issue there on multinational tax avoidance. So that’s covered on the show with Pascalis Raimondos.

Tim Hughes 33:13

Outrageous, yeah.

Gene Tunny 33:14

Important issue. Final insight for now, inside eight, because we’ve already covered nine and 10.

Fallacy of composition and the paradox of thrift. So what’s good for the household is not necessarily good for the economy, so just the idea that in economics, you’ve got to think about how everything fits together, just how does everything connect together. And this comes from Keynes in the ‘30s. There are a lot of people who are negative about Keynes and think it’s a very … It’s the economics of depression, you could argue, but the idea is that it might make sense for a household to cut back on its spending if the breadwinner loses their job or one of the household members loses a job. But if everyone in the economy does that, it’s bad for the economy collectively. It’s less spending, less income, less production. So that’s the paradox of thrift, that what could be good for the household may not be good for the economy.

Now I’m not necessarily advocating a Keynesian viewpoint or Keynesian fiscal policies. But I think that is a key insight, that you’ve got to think about how everything collectively fits together. And if you think about governments, back in the ‘30s, when the revenues fell due to the Depression, a lot of the governments thought, we’ve got to tighten our belts, we’ve got to cut spending, to make sure we balance the budget. Sound public finance was what was going to help us in the Depression. But it turns out that wasn’t the case, because when they cut spending, that meant they weren’t spending as much on their public servants or on infrastructure projects. And that meant less activity in the economy. So it was a perverse fiscal policy.

Tim Hughes 35:13

That’s interesting, because now that’s happened more recently, when there have been cases of the government handing out money to people just to get the stimulus packages, for instance, just to keep money moving around and keeping businesses going in it. The first time it happened, it seemed like the craziest thing. I’d never seen that happen before. I’m trying to remember when it was.

Gene Tunny 35:37

2009, Kevin Rudd, the Rudd money.

Tim Hughes 35:39

That’s right. Yeah, it was the GFC, wasn’t it?

Gene Tunny 35:40

$900 checks.

Tim Hughes 35:42

Yeah. And it was just like, it seems insane. But it appeared to work, which is remarkable. But it’s exactly what you’re talking about, I guess, isn’t it?

Gene Tunny 35:51

I’d say it’s got a mixed record historically. But that’s the idea that comes from John Maynard Keynes in the 30s. That’s why Keynes is seen as revolutionising economics, because up until the ‘30s, in 1936, when he published the General Theory of Employment, Interest and Money, everyone thought that idea was crazy.

Tim Hughes 36:12

It seemed counterintuitive. We’re in tough times, and you start spending. But there was sense to it.

Gene Tunny 36:18

What’s counter?

Tim Hughes 36:19

Well, for instance, the stimulus package, like at the time, a GFC.

Gene Tunny 36:24

Oh, I see.

Tim Hughes 36:25

It would appear. And at a household level, you’d think, yeah, tighten your belts and sort of, like, hold on to everything, whereas like, it was completely the opposite. Here you go, put this into the economy, like keep everything moving. The value of that on the greater scale, on the national scale, was really effective. It was impressive to see.

Gene Tunny 36:52

Exactly. So I’m not in any way endorsing Keynesian fiscal stimulus, because there are all sorts of issues with it in terms of timing, are we gonna get the timing of it right. There’s a possibility you could actually add instability to the economy, that sort of thing. Crowding out impacts, all that sort of thing we can cover in another, or I’ve covered with Tony Makin in a previous episode. Tim, that’s been great. Thanks so much for sitting in, as I’ve sort of done this quick tour of my top 10 insights of economics. You’ve given me some things to think about. I want to add something in about economies of scale or increasing returns to a future addition to this. But at the moment, if you’re listening, you’re interested in this, please get on the website and subscribe so you can download it. Tim, thanks so much. Really enjoyed that conversation.

Tim Hughes 37:37

Thank you, Gene. That was great. It was really interesting.

Gene Tunny 37:39 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@economicsexplored.com, and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to my guest Tim Hughes and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Tags climatechange, concorde, congestioncharge, economics, macroeconomics, microeconomics, opportunitycost, specialization, trade

Podcast episode

Risk, CBA, & the Enlightenment w/ Prof. Deb Brown – EP128

Post author By Gene Tunny
Post date February 27, 2022
No Comments on Risk, CBA, & the Enlightenment w/ Prof. Deb Brown – EP128

In Episode 128 of Economics Explored, Philosophy Professor Deb Brown helps us explore some big questions around risk, cost-benefit analysis (CBA), and public policy, particularly relating to the pandemic. Deb also explains what was so important about the Enlightenment.

About this episode’s guest – Prof. Deb Brown

Deborah Brown is Professor, School of Historical and Philosophical Inquiry at the University of Queensland, Australia. During her time in the Faculty of Humanities and Social Sciences, Deb has coordinated a wide range of projects focusing on critical thinking. She has been instrumental in establishing connections and partnerships within the school sector, including with the Queensland Department of Education, as well as building partnerships across UQ and with international education providers.

As part of her role, Deb works to link the UQ Critical Thinking Project into relevant projects within the university to provide educators with an understanding of how to embed critical thinking in classroom practice and assessment and to maximise outcomes for students, particularly those from disadvantaged backgrounds. Deb has established a professional development program for educators, booster courses for school and university students and research collaborations with a diverse range of researchers from the broader UQ community.

Deb has a Bachelor of Arts from the University of Queensland and a Master of Arts and PHD from the University of Toronto.

Links relevant to the conversation

Truth (or the lack of it) in politics and how to think critically with help from Descartes – EP123

Abbreviations

QALY Quality-Adjusted Life Year

Transcript of EP128 – Risk, Cost-benefit analysis, and the Enlightenment w/ Prof. Deb Brown

Gene Tunny 00:01

Coming up on Economics Explored.

Deb Brown 00:04

What is the Enlightenment is that the movement is about promoting intellectual autonomy, not just relying on what others or testimony or what authority tells you.

Gene Tunny 00:17

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is Episode 128, on philosophy, risk, cost-benefit analysis and the Enlightenment. This is part two of a conversation that my occasional cohost Tim Hughes and I had in January 2022, with University of Queensland philosophy professor Deb Brown. Part one of their conversation was broadcast in Episode 123, in which we chatted with Deb about truth and critical thinking. In part two, which is in this episode, we consider some big questions around risk and public policy, particularly relating to the pandemic.

Assessing government policy measures during the pandemic has been very challenging. In my view, there aren’t easy answers. Basic Facts are disputed and people are making different subjective assessments of what restrictions on our liberty are justifiable, for public health reasons. I found this conversation with Deb really helpful in clarifying some of the important issues for me. And I’ll aim to come back to the pandemic in a future episode soon with some further thoughts.

Deb also helped me understand just what is meant by that critically important period in our history known as the Enlightenment. Part of the way forward out of the mess that we’re in globally at the moment, in my view, surely has to be a greater appreciation and a recommitment to the values of the Enlightenment. Okay, please check out the show notes for links to materials mentioned in this episode, and for any clarifications and abbreviations, such as QALY, Q-A-L-Y, which stands for quality adjusted life year, that’s one of the abbreviations that Deb uses in our conversation. You can find the show notes via your podcasting app, or at our website, economicsexplored.com. If you sign up as an email subscriber, you can download my new e-book, Top 10 Insights From Economics. So please consider getting on the mailing list. If you have any questions, comments, or suggestions, then please either record them in a message via SpeakPipe, see the link in the show notes, or email me via contact@economicsexplored.com.

Righto, now for our conversation with Professor Dave Brown on philosophy, risk, cost-benefit analysis and the Enlightenment. Thanks to my audio engineer, Josh Crotts, for his assistance in producing the episode, I hope you enjoy it.

One thing that I’m always conscious of is that as economists, we do cost-benefit analysis studies. And we try to put everything in dollar terms. And we do this over the lifecycle of a project or over X number of years, 30 years. And we come to conclusions such as, well, the present value of benefits exceed the present value of costs, and therefore this is a good thing to do. But we’ve always got to bear in mind that there are some big philosophical assumptions we’re making when we’re doing a cost-benefit analysis. And in some cases, those assumptions are fine. Or if we’re doing a cost-benefit analysis of a bridge or a new raw railway tunnel or a road, okay, well, then, maybe that’s okay to put everything in dollar terms. But it’s difficult in the context of the pandemic, because we’re dealing with people’s lives and you’ve got – there are all the issues of like, can you quantify that in dollar terms? And then even if you did a cost-benefit analysis, there’s a utilitarian assumption underlying cost-benefit analysis in economics is Benthamism, this Benthamied approach. And I think if you understand that, as an economist, that helps you in understanding how much you should take out of any particular bit of analysis you do. You need to be honest about what it is and you need to have an understanding of this – I think it’s David Hume, his problem.

I find I’ve been thinking a lot about that during the pandemic and I’ve been tried to be less dogmatic or less – maybe it’s making me less confident in saying that if you’ve got a particular cost-benefit analysis result and that’s the right thing. That’s a bit of a ramble. Sorry, Deb, but do you have any thoughts on that or in response?

Deb Brown 05:01

Yeah. First of all cost-benefit analyses have their place. Sometimes I wish there were more of them driving decision making because sometimes I look at decisions and think that that isn’t even valid from a cost-benefit analysis. The fact the matter is, is that there are other considerations as well. There are considerations of ethics and equity and morality and so on. And I actually sort of do hold the view that morality has its advantages, and that we only get those advantages if we aim at morality, not if we aim at something else. And I think the problem with utilitarianism is that because it focuses on the consequences and maximising what’s perceived as utility, that other factors can be obscured in the process. So the pandemic is a good example.

I was part of a webinar series with the Chinese University of Hong Kong, which included virologists from UQ, and people in the medical faculty, and as well as people who worked in biomedical ethics, which is not a specialisation of mine, so bit out of my league there. But, I was looking at these quality based arguments against lockdowns and, I actually think that… There, the argument was that you should only lock down if the quality0adjusted life years of doing so from a cost-benefit perspective outweigh not locking down. This was back in 2020, and at the time, it was relatively older people who were dying. So the quality0adjusted life years saved by locking down compared to the $11 billion a week it was costing during lockdown looked like it wasn’t justifying locking down in terms of pure monetary value. But the problem with this is that quality0based analyses and decision making, they make sense in certain contexts. So, here’s where I think that cost-benefit analyses do have a point.

So if you’re a hospital, and you’re trying to decide whether to invest in in one medical technology over another, and you’ve got information about how much QALYs each one will save, then you should go for the one that has the highest return on investment, in terms of QALYs. But the thing is, there’s an implied ceteris paribus clause there. All else being equal, if you’re choosing between A and B, and A gives you the biggest return on investment, in terms of QALY, then B should go for A.

But what was happening in the pandemic is that it wasn’t the case that all things were equal. So there were certain communities who were more durable than others. So not just the elderly, but also migrant communities in the United States. It was African American communities and indigenous communities who are being adversely affected by COVID. Often, because they’re frontline workers they’re often living in more crowded housing, and all of these different reasons contributing to them being a more vulnerable group, than say whites, or in the US, Asians. Here in Australia we were seeing that we’re certainly affecting low SES communities more, and in the UK, same deal. And also in the UK we’ve seen recently that disabled people are more adversely affected by COVID than other communities as well. And so things are not equal. So in those kinds of circumstances, you can’t just rely on the cost-benefit analysis, you have to take into account these fundamental issues of equity.

Gene Tunny 09:31

Yeah, there are all sorts of issues to take into account. Equity is important. So I’m trying to think how Gigi Foster, who is someone who came out and she was against the lockdowns because of she thought it wasn’t justified. You couldn’t justify it with a cost-benefit analysis for the reasons you were just describing before. And I think that Gigi is associated with that view. She would probably counter that, well, we could take that into account in our cost-benefit analysis with weights. We could, we could weight the loss of life for particular groups, we would provide more of a weight to that or that there’d be some way you could adjust it, I’m sure she’d say.

The problem is, what I think is incredibly difficult in analysing policy during the pandemic is we just don’t know. Early on, we just didn’t know how bad this would be. And now, the pandemic keeps surprising us with Omicron. And it’s just incredibly difficult to know what the right policy is. And we’re going to have to assess this in future decades. Well, what made sense, what didn’t?

I think we also need to take into account issues of civil liberties. And I think one of the problems with lockdown as a policy, even if you did think that in a cost-benefit sense it maybe it did make sense, o if you took into account the effects on different groups in the community, maybe you could argue it made sense. But even if it did, there are people who value those individual rights, the civil liberties, and you could argue that well, this was a breach of that this is something that really – I don’t think anyone contemplated government would do what they did during the pandemic. I think it’s quite extraordinary measures. I never thought governments would impose those lockdowns and stay at home orders that they did implement. And they saw what happened in China. That’s one view, argument, that we imported this policy of lockdown from China, which is an authoritarian regime. So depending on what your values are, you could argue against lockdown, because you think this is such a breach of our individual liberty. Am I on the right track there, Deb? Is that an important value to consider too?

Deb Brown 11:52

Well, certainly liberty is an important value, but the concept of liberty and the , associated concept of a right is not unqualified or unconditional. So from the earliest discussions of rights, take for example, John Stuart Mill back in the 19th century, so, you only have a right, if the exercise of that right does not interfere with the liberty or rights of others. Okay, so this is often referred to as Mill’s harm principle. So I don’t have a right, I don’t have a right to drive on whatever side of the road I like, because that will deprive you of your freedom of movement and your right to life. So that’s always been a constraint on the notion of freedom and the notion of freedoms and rights is that you just do not have a right to something, if that right is going to deprive somebody else of their rights and their liberties.

The interesting thing to me about this whole discussion around lockdowns is that we accept all sorts of curtailments of our freedom big so as to avoid harming others, right. I don’t remember this kind of stink about not allowing people to smoke in public places. Right? So we ban smoking in bars and clubs and public places and buildings and so on. And we’ve all just sat that out, because, and the argument was, is that people are exercising their right to smoke whenever they like actually causes harm through secondhand smoking to others. And so it can interfere with the exercise of their rights, their right to health and life and so on. And the kind of mask mandates lockdowns whatever might be our infringement on what you might think of as our freedoms, but we don’t have the liberty to harm others. And that’s the justification for those kind of mandates.

Now, it doesn’t mean when you when you curtail somebody’s freedom or their rights, it doesn’t mean that you are you are not respecting the concept of a right or a freedom. Right. But as I say, right, it has to be measured against what are the foreseeable harms here. I think that’s very different from embracing authoritarianism and I think we need to keep a distinction there. Not every curtailment of our freedom means that we’re subject to authoritarian control, right.

But it was interesting. I don’t know whether either of you saw this this wonderful publication pre 2020 by the Rockefeller Institute. They do this scenario kind of planning. And, and one of the scenarios that that they discussed is called Lockstep and they anticipate a global pandemic, and, and what sort of behaviours it will drive. And one of the things that that they envisage there is that in some countries, it will drive authority an acceptance of authoritarian control, and it predicts that those countries will do better in terms of managing the managing the pandemic, but at considerable costs to the liberty of citizens or subjects in those countries. Right. And that that may have long term consequences that are not justified by the authoritarian control. It also predicted that there would be anti-authoritarian movements. So, you can read this document and think, oh, my gosh, they were reading the tea leaves on the pandemic, because all of those sort of anti-authoritarian anti Vax movements are also predicted as well where people , do feel that they are suddenly being thrust under authoritarian control. And that’s why it’s very important to distinguish between authoritarianism to not sort of operate with extremes, to not just think because we have to wear masks in public spaces we’re heading in the direction of an authoritarian regime. No, it’s more subtle and complicated than that.

Gene Tunny 16:38

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

Female speaker 16:44

Gene Tunny 17:13

Now back to the show. Did you have any thoughts, Tim?

Tim Hughes 17:18

Actually there’s so much involved in this whole in this whole talk. Could go on for hours. I’m cool with that. For instance, with the authoritarian lockdowns, etc. it is a very effective way of treating with contagious diseases and everything. So it’s been around for centuries that that whole thing. It’s an authoritarian measure, but it’s still very effective in locking down or containing contagious diseases.

Gene Tunny 17:52

I think quarantine or cordoning off particular areas.

Tim Hughes 17:56

Yeah, isolation.

Gene Tunny 17:57

Where there is infection. Yeah.

Tim Hughes 17:58

As far as measures go, it was a predictable measure that was going to come in. But I understand and agree. There’s this lively debate around how long and if it was the right thing to do, etc. I just hope that we get good modelling from this for whatever comes next, because who knows what may come in the future, but hopefully, we’ll be better prepared for it for what we’ve gone through with this.

Gene Tunny 18:26

Oh, absolutely. Let’s hope. We certainly will be. We’ll be talking about this and analysing this for decades. Deb, I was just thinking, this point about how we, you’re right, we don’t have a right to harm others, that’s right. The issue is what level of harm or risk or probability of harm, what’s the threshold, because every time we go out into the community, there’s a risk that we could be involved in a traffic accident, say, and we could harm someone else so there’s a level of risk that’s assumed, but this may be too big a question to deal with. This is where I think this whole issue of the lockdowns, that’s what annoys people. Some libertarians are thinking well, okay, well, what’s really the risk? I guess that the argument is that each person, anyone breaking the rules could actually start off a cluster and then that could grow in numbers. This is not relevant now in Australia, because it’s gotten out of control and it’s out there so that we’re not going to have any more lockdowns so there’s probably no point. But in the early days, the argument was that anyone doing the wrong thing could actually start off a cluster and so therefore, yeah, that could affect everyone else. Maybe I can see the logic there but that’s what I’ve been struggling with, what’s that level of risk to others in the community that would justify a restriction on liberties. And I don’t think we’ve got an answer to that. Has anyone been doing any thinking on that?

Deb Brown 20:07

I don’t know, although I think you’re exactly right, that we really need to, we really need to think about risks here, because you’re right, that there’s all sorts of things that we do. We assume normal risks, because the benefits of taking those risks warrant the risk. As you say, every time we get in the car there’s a risk that we could lose our lives, or suffer serious bodily harm. But overall, people agree to those risks, because driving has benefits, let’s say. Maybe less so as climate as climate change takes off. But for a long time, that’s what really justified people in assuming a level in that level of risks. And so then the question there’s been a lot of discussion.

I think, actually, Robert Nozick had something to say about this, and there were economists that he was drawing on as well, about the difference between a normal risk and an abnormal risk. Right. So we allow certain levels of normal risk in a society but we don’t allow, for example, people to play Russian roulette, right not for any amount of money, not for any benefit, right. And we regard that as, as an abnormal risk, it’s not justified and so on. And so the question is, like, where at various stages of the panic of the pandemic, … Panic pandemic, that’s interesting. Where at various stages of the pandemic, what kinds of risks are we actually facing here? And I think I think that underlying a lot of the policy changes that we’re seeing recently is just the assumption that we are moving more into that normal risk space. And because I’ve sort of gotten tired of hearing about sheer numbers of people with COVID. The relevant data is numbers of hospitalizations, numbers of deaths. Deaths and hospitalizations, per capita, those are the relevant figures. If it’s true, I think it’s probably too early to say, but if, if we are moving more with the kind of vaccination regime into to having fewer hospitalizations, per capita from the pandemic, then that will sort of shift the balance. And lockdowns won’t be as justified as they were when the risks were much higher, when it was a bit like playing Russian roulette in terms of number of people dying from the from the pandemic. So I’m not myself a risk analyst. And you in your field you’re kind of masters of risk analysis. So I would have to learn from you here. But conceptually, it seems to me that’s the sort of space we need to be in.

Gene Tunny 23:10

Absolutely. I haven’t seen an authoritative analysis along those lines yet, for the pandemic. Hopefully. I’m sure economists will be turning their minds to that. There have been some. Judy Foster’s done a cost-benefit analysis of a sort for Victoria. She presented that to the Victorian Parliamentary inquiry. Gigi and some of her colleagues have written a book on the great panic. You could consider it polemical, in a way, but we do need to have some sort of authoritative analysis along those lines, because these are big questions about just how do we manage these things and what regulations are acceptable, what level of risk are we willing to bear. I’m going to have to look up that, that work by Nozick. It seems to ring a bell, but I’ll look it up, the normal risk versus abnormal risk. That looks like it could be highly relevant.

Deb Brown 24:14

Yeah. It’s a chapter in Anarchy, State and Utopia. as I as I recall, though it’s been a while since I looked at it.

Gene Tunny 24:24

Okay, I’ll I’ll look that up.

Deb Brown 24:28

I’m trying to remember the name of the economist, whether it was French or something beginning with F. I’m not sure. Yeah, there was an economist on whom he was, I think drawing in terms of that risk. He was sort of particularly interested in compensation, so when is compensation warranted for risky behaviour? And of course, being very interested in… He’s a libertarian right. So he’s sort of interested in in when is it ever justified to restrict people’s freedom to take certain kinds of risks, and when is compensation warranted and so on. That’s what I recall from that.

Gene Tunny 25:07

Okay. Oh, yeah, I’ll look it up. But that may be of interest. I may try and cover that on the podcast in the future. We’ll probably have to wrap up soon, given how much of your time we’ve taken, Deb. Sorry.

Deb Brown 25:18

No, I’m having a ball.

Gene Tunny 25:19

Oh, very good. Okay. Oh, well,

Deb Brown 25:21

I was just going to talk about the media literacy issue because I think in terms of the critical thinking project, that’s, that’s a massive area. And I’ve been shocked learning from colleagues at Queensland University of Technology, and University of Western Sydney, and particularly Tanya Notley there is a specialist on youth media literacy. I’m kind of shocked at the data coming out about not just the general public, but also sort of academics capabilities, in terms of fact checking and checking the sources of media articles and being able to do lateral searches, and so on to see what different sites say about the same the same article. Then I’m also shocked that the youth, right, get most of their news entirely from social media, there’s very little engagement with mainstream media, very little engagement with credible news and media. So I think this this is another kind of – the lack of media literacy is another kind of pandemic, and it really does contribute substantially to that culture of, of confusion and mistrust.

Tim Hughes 26:45

I love you’ve said that because that was what I was going to come back to because way back and, we’ve touched on it with intention and trust. And I think it’s such a big area, and you’ve gone straight to it, which is great. And how do we trust the new sources? And this isn’t a present day problem. This has always been a thing for everyone throughout the ages. How do you how do you trust your source of any kind of news, whether it be from a person or from an agency, or whatever it may be. And so with that also comes a limited amount of time that we may have as individuals to make our minds up on these different things that come up to us where we form an opinion, and any opinion is only as good as the information it’s based on. So if we’ve got good information, we’re going to have a reasonably good opinion, the more varied information, again, better opinion. So all of these things, and like you’re touching on, for instance, people getting their information, information from just one source is going to be biased, or maybe not a full picture. There are all these different ethical sort of problems with … We form our opinions. And we find our trusted news sources. And of course, there are more and more coming out all the time. Where does this sit in with critical thinking and to try and do this in a in a reasonably quick period of time, knowing that most people only have a certain amount of time in their day to give towards forming an opinion on something in the new cycle? How can we do this better?

Deb Brown 28:31

I mentioned earlier we have this collaboration with the Impact Centre, which works with office forces and critical thinking to school students. And last year, one of my colleagues, who was the UNESCO Professor of Journalism at the University of Queensland, Peter, Greste – do you know Peter Greste, the foreign correspondent with that awful experience in in Egypt? So he approached me and he said, “I really want to work with schools to try and get a kind of journalism media literacy course going with schools. And I know you have all these collaborations with the Department of Education.” And, and he and I together, and other colleagues as well, and colleagues and the collaborators in the Impact Centre, put together this course on media literacy in journalism, and it’s offered to senior secondary students. And effectively what they’re doing is they’re learning about media literacy, but they’re also learning it in conjunction with critical thinking.

So often, when you look at the media literacy courses, they often concern tips and tricks for checking sources, right, finding out who the sponsor is of a page, doing lateral searches, but adding a layer of critical thinking over that. What you get is you get students thinking about how their thinking is framed, within, within an article. So what gets to be in the headline? The headline shapes how you’ll think about the rest of the article. How’s the information presented? What’s up front? Right? Is there an argument developed? Is there an analysis? Right? What justification is there for the things that are said in the article, so getting students to interrogate an argument, look within those practices of justification.

Then in conjunction with that media literacy course – and then there are teachers at the Impact Centre, particularly Dr. Luke Zaphir and, and Dave Thornton, who put together a fantastic course for school students, developing all those critical thinking and media literacy skills. It’s just amazing. In conjunction with that, the students also develop their own article. Sorry, they work with journalists from In Queensland, which is an independent news service in Queensland, and has a commitment to public service journalism. Journalists from In Queensland work with students in the, in the Media Academy to basically construct articles for publication in In Queensland. So if you look at the In Queensland website, they’ve got a Media Academy tab, and those are all the articles that were written by students in school. Fantastic opportunity for students to learn how journalism works, how it’s actually produced, and to think critically about the way in which information is presented in an article.

And I think , another big problem within media is that if you haven’t got a kind of blatantly biased media outlet, right, on the right, or on the left, whatever it might be, you’ve got this kind of bizarre assumption that all you need to do is to provide a balance of opinions. Right, and you’ve done your duty in critical analysis. First of all, there’s very little analysis. Often it’s just kind of putting together these polarised opinions and this assumption that as a journalist, you have to stay neutral. Neutrality will come through, if you actually do a critical analysis, right. I think that sort of presenting balanced opinions just contributes to the confusion out there, right. People think well, there’s this opinion and that opinion, and everybody has got a different opinion. So I can believe whatever I like. No.

Tim Hughes 32:52

Actually, one of the things with this, because we seem to, which isn’t a bad thing, but we look for certainty where we can. We’re always looking for definitives and absolutes. We like to know this is this is correct, and that’s wrong, etc, whereas, of course, the reality is, there’s a spectrum of likelihood or possibilities with so many things that we look at. And I love that in the article, the ABC article, you mentioned that one of the keys was being comfortable with doubt and uncertainty, and feeling free to change position if evidence or new information required it, which we touched on earlier. But it’s just such a great statement, I think, in allowing people to be okay being not so sure, this is the best yet, at the moment, this is the best information that’s out there is going to change and being open to that change and to changing opinions when things evolve now, so I think that’s a really … When we talk about polarisation, quite often, that’s because people have found a certainty maybe too soon or without researching it very much, whatever the issue may be, and, and then being sort of loyal to that certainty, regardless of what other information comes through, which of course, is a problem.

Deb Brown 34:17

I think being able to divest one’s ego from the argument of work is very, very important, but it’s very difficult for people to do because their identity is so much bound up with what they think and what they believe.

Tim Hughes 34:30

That’s right. And so to change their mind would be affecting… It’s a decision then to change their identity, or tribe, even. It can be part of the group that you’re in or the environment that you’re in, which you identify with. And so the incentive to change opinion or to change mind or to hear different views, of course, is not a welcome one.

Deb Brown 34:53

Yeah. It’s interesting that in collaborative reasoning environments, if they’re run effectively, you do see that behaviour shift, because the focus of the group is on the on the pointed issue, on the topic. And if you sort of don’t allow people to just make assertions, but to actually back that up with reasons very soon you start to see them giving and taking reasons where – not just giving out reasons, but taking them standing corrected. In children, you see that behaviour shift remarkably quickly. And then something happens to us, and we end up terrified to change our minds. Where did it all go wrong?

Tim Hughes 35:39

With this, with the critical thinking project, teachers and students, is it also open to anybody who might want to get in touch and learn from this? You might have mentioned this before, so apologies if you’ve mentioned it. But this is open to everybody? Is there something there for everyone? Because everyone I think could benefit from it.

Deb Brown 35:58

Oh do I get to do some product placement here?

Tim Hughes 36:02

You do. Well, you are God after all today.

Deb Brown 36:05

[unclear 36:05]. Of course, working with the Department of Education, that’s restricted to government schools. But we also, we also have contracts with other schools. Peter and I have both done corporate training, for example, in critical thinking. I had a wonderful time in India with fin tech capital of the Tata Group, Tata’s biggest company in India. Had a wonderful session doing critical thinking with them. It was it was really fun. Like I said, we’ve got contracts and done work with Singapore, and UCLA, University of California, Los Angeles. They actually included the media literacy and journalism course in their critical thinking summer programme last year. And it was a huge hit. And I think so I think that that course could easily be made available to anyone. And I think it should. This is not just for kids. We all need this.

Tim Hughes 36:18

Yeah, for sure.

Deb Brown 36:19

The other issue that the other issue that’s driving along misinformation is just the unavailability of peer-reviewed publication sites. So the more open source publishing, open access publishing we can do – I would love it if university libraries we’re open to the public again, not just coming onto campus, but actually the online edition, but there’s all sorts of issues there around publishing as an industry as well, right? So that’s what sort of impedes that. But the more information we can make accessible, and quality information, we can make this accessible, the better off we’d all be.

Gene Tunny 38:03

Yeah, you’ve got those big journal companies, such as Elsevier and – is it Springer, I’m trying to remember – but they make millions or hundreds of millions or whatever out of university libraries paying for subscriptions to journals. It’s, it’s a bit of a racket, arguably.

Deb Brown 38:25

It’s very strange. We do all the work, the writing, reviewing. We do all the hard yards, and then [unclear 38:33] business model that one.

Gene Tunny 38:35

Yeah, that’s true. Okay, I think we’re gonna have to wrap up at a minute. This has been great. I did have one question. We’re hearing a lot about the need for these Enlightenment values. More people are talking about the Enlightenment and the Age of Reason, because there’s this recognition that we’ve, maybe we’ve lost touch with that. And then I know you’re an expert on Descartes. And he’s associated with rationalism. Is rationalism, like, how does that fit in with the Enlightenment and the Age of Reasons. Is the Age of Reason the same as the Enlightenment? Is rationalism – is that a very specific part of the Age of Reason? Is that just a hyper or a total reliance on reason, or is the Enlightenment something broader? Is there a way for us to understand this, Deborah, or is it just such a big question that it’s not really answerable in this context in this podcast?

Deb Brown 39:29

No, it’s a great question. And I’m all for a renaissance in the Age of Reason. So I think those terms are often used interchangeably, Age of Reason and Enlightenment. And a lot of people trace the Enlightenment as beginning really with Descartes, the publication in 1637 of his Discourse on Method, which really was sort of that introduction to the new method of relying on reason and needing yourself to be intellectually autonomous, as opposed to intellectually heteronomous, where you’re relying on authority.

The Enlightenment was connected up with this metaphor of light that permeates discussions in the, the 17th and 18th century. So Descartes appeals to the natural light, and distinguishes that from the teachings of nature, right? Nature might teach you that things are hot and cold. But if you examine them from a scientific point of view, it’s more likely that that heat is certain motion of molecules, and cold is nothing at all.

So the light of reason will revise what nature teaches you, if you like, and one should be guided by the light of reason, not by what seems to want to be true on the basis of sensory apprehension. The light metaphor was common. So you get lumiere in French, and you get aufklaren, which means sort of clarity or light in German, as being in opposition to Aristotelian scholastic philosophy, which dominated philosophy, particularly in the schools and universities, up to the end of the 16th century. And it was perceived as being doctrinaire and authoritarian so, even though a lot of original work went on in the Middle Ages, there was always this deference to authorities as Aristotle said, as Augustine said, and so on. And with the advent of the scientific revolution, that begins in the late 16th century, with people like Copernicus, and Kepler, and Galileo sort of developing a heliocentric view of the universe and really starting to develop this new mechanical, scientific theory and doing a lot more sort of experimental work and observational work using telescopes and so on. That all sort of doctrinaire, the categories of Aristotelian scholastic philosophy were thought to be mysterious, occult and didn’t fit with the new science.

Also coming into the 17th century, you’ve got] the European humanist tradition, right, this reclamation of ancient texts, particularly the Stoics, but also the sceptics as well. And both Latin and Greek texts, and that revival of kind of classical as opposed to Scholastic philosophy. All that sort of feeds into the 17th century.

And then you get Descartes who thinks that we can’t just keep going with philosophy has to kind of catch up with these revolutions in science and also in engineering as well. And it needs a nice new face, and it needs a new message, right? And it needs to be grounded in reason, because only that will sort of, in a way fit the kind of mechanical mathematical science that that is really taking over the whole scientific space. And Descartes, of course, is also motivated to ground that new science in a system of philosophy that’s not antithetical to religion, but is really basing his connection to religion on reason, right? And I think when people talk about the Age of Reason, this is what they mean is they mean a sort of rational foundation for religion as opposed to faith, right.

And that goes all the way through to Thomas Paine’s book, The Age of Reason, which is really like a rationalist kind of attempt to sort of ground religion on reason, as well. But yeah, so the Enlightenment is sort of set in opposition to the so-called Dark Ages, which is a term that seems to be coined by Petrarch, who’s one of these European humanists in the 14th century, even though he’s embedded in that mediaeval context, but he’s sort of arguing against this kind of authoritarian aspect of philosophy in that period.

And so when you get to the 17th and 18th century, you’ve got a new method, you’ve got this method of doubt, you’ve got scepticism being taken seriously again, and that scepticism becomes part of the message. Again, that’s just subjecting what you believe to doubt and upholding the highest standards of reasoning and evidence. It wasn’t as if it was all rationalist. I don’t actually like the division between rationalism and empiricism myself because the so-called rationalists like Descartes and Spinoza and the Leibniz, Newton, these are often [unclear 45:06] people are doing experimental philosophy, and often the empiricists so the people like Barclay and Locke and Hume and so on, are often relying on philosophical reasoning as well, not just sort of observation and induction. And, of course, Hume famously problematizes the very inductive method of science anyway, so those kind of binary categories are not really helpful.

But I think in a way, Kant kind of encapsulates in his essay what is the Enlightenment, is that the movement is about promoting intellectual autonomy, right? Not just relying on what others or testimony or what authority tells you, but applying the the methods of reasoning and analysis, so that your own beliefs on the securest foundation they can possibly be.

Gene Tunny 45:57

Yeah, yeah, that’s, that’s a great explanation of that, Deb, I was just thinking, not trusting, don’t necessarily trust authority. And this is where we’re getting into problems nowadays, because we’ve got people who are thinking, oh, well, I’m doing my own research. Fauci says this, but I’m doing my own research, but often it’s on the internet. It’s on the net, and the source might not be that accurate. And you could argue that maybe they haven’t thought enough about the reliability of what they’re looking at, to justify their dismissal of what the certain authorities such as the CDC, or in our country, what different state chief health officers are saying.

I guess this is where it’s challenging, because there is value in being sceptical. And this is an important part of, of scientific method is being sceptical. Then the challenge is, sometimes there is something valid being said by some of these authorities, and you can take that scepticism too far. Particularly if you’re not relying on , good information, if you’re not, if you’re not fully embracing that critical thinking and you’re thinking critically about the information you’re getting and the points of view you’re putting across. So that that just occurred to me, then when you talked about the importance of being sceptical and not necessarily deferring to authority. I thought that was a really good point.

Deb Brown 47:36

Yes, it’s interesting. My husband and I spend each morning looking at World Metre. That’s what passes for fun nowadays. Let’s have a cup of tea and see how the virus is doing, darling. In general, I’m a little frustrated, just that you often can’t get the data. I think there’s an issue that maybe a lot of people are not going to be able to even interpret the data. And that’s certainly a problem. And that’s why everybody needs some training and statistics and critical thinking. But there’s a lot of data that you just can’t get like this data, I want to know, hospitalizations, I want to know deaths. Then there’s also this issue about how much of this is being reported. Make more data, make more information available. That’s sort of one thing.

And then there is also this question of trust. So who can you trust in this in this context? And one of the I guess the most important questions to ask is who has a vested interest in a certain kind of outcome being reported? I’m happy to trust Fauci because I don’t think that he has any vested interest in this. I’m less inclined to trust somebody who I think is spinning a yarn, because they’re only interested in being reelected or making their political party look good. Right. That’s an important question to always ask about any source. Then you do have to do those lateral searches, right, how is this being reported by these different organisations, what are their interests, who’s sponsoring this page and so on. You’re right, it’s a minefield, and the more information that there is out there that is just sort of polarised and politicised and all that, it just noise that interferes with being able to give an accurate assessment of the situation.

Gene Tunny 49:52

Absolutely. Okay. Deb, that’s been great. I think we’ve got to wrap up there. We’ve taken so much of your time. I’ve got so much tape here. I’ll have to think about whether release it as a whole episode or Imight have to split it up in two.

Tim Hughes 50:08

Six parts. Six-part series.

Deb Brown 50:12

I’m sorry.

Gene Tunny 50:14

Not at all.

Deb Brown 50:15

I’m just not getting out enough. This constitutes as getting out. I’m just so excited, I got a bit carried away.

Tim Hughes 50:21

Not at all.

Gene Tunny 50:22

That’s great.

Tim Hughes 50:23

We could completely carry on because it is fascinating. And they are very big topics. So really appreciate the care you’ve put into the responses there, Deb.

Gene Tunny 50:34

Yeah, thanks so much. Deb, really enjoyed chatting with you. And I’ll put links to as much of the material that you mentioned in the show notes so people can find that. Really valued your perspectives and your great knowledge of philosophy, which it’s given us a lot, given me a lot to think about, and a lot for Tim and me. I’m sure we’ll be chatting about this a lot in the future, these issues that came up today.

Tim Hughes 51:06

That’s the thing. They’re big issues that remain big no matter where you are in history, and important questions.

Deb Brown 51:18

Thank you. I really enjoyed your questions, and it was such a great conversation. Thanks for having me.

Gene Tunny 51:24

It’s a pleasure. Professor Deb Brown from University of Queensland. Thanks so much.

Tim Hughes 51:29

Thanks, Deb.

Deb Brown 51:28

Thank you. Bye-bye.

Tim Hughes 51:29

Bye-bye.

Gene Tunny 51:31

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

Credits

Thanks to Deb Brown and Tim Hughes for their great conversation and insights, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode.

Tags costbenefitanalysis, covid-19, criticalthinking, economics, enlightenment, pandemic, philosophy, risk, scientificmethod, truth

Video clip

Clips from EP126 on UBI: impact on inequality & can a wealth tax fund it?

Post author By Gene Tunny
Post date February 16, 2022
No Comments on Clips from EP126 on UBI: impact on inequality & can a wealth tax fund it?

I’ve published some new video clips of highlights from EP126 on Universal Basic Income (UBI) with ANU Associate Professor Ben Phillips. The first one considers the potential reduction in inequality that a UBI could deliver. Ben thinks a UBI could reduce inequality in Australia to the level experienced in Nordic countries.

The second clip asks whether a billionaire tax or a wealth tax more broadly can fund a UBI? According to Ben, it could make a contribution to funding a UBI, but alone it couldn’t fund a UBI at a level most people would expect a UBI to be set at.

You can listen to the full audio episode via podcasting apps, including Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among others.

Tags australia, economics, inequality, tax, ubi

Podcast episode

UBI: Universal Basic Income w/ Ben Phillips, ANU – EP126

Post author By Gene Tunny
Post date February 13, 2022
No Comments on UBI: Universal Basic Income w/ Ben Phillips, ANU – EP126

Episode 126 of Economics Explored features a conversation about the pros and cons of a Universal Basic Income (UBI) with my old University of Queensland economics classmate Ben Phillips, now an Associate Professor at the Australian National University (ANU). Ben is one of Australia’s leading modellers of the impacts of tax and welfare policies on households, so he’s the perfect person to chat with about UBI. Here’s a video clip from the episode to give you a sense of the issues Ben and I discuss.

You can listen to the full audio episode using the podcast player in this post or via podcasting apps, including Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among others.

A transcript of EP126 is provided below.

About this episode’s guest – Ben Phillips

Associate Professor Ben Phillips is a Principal Research Fellow at the Centre for Social Research and Methods. He has nearly 20 years of experience as an economic and social researcher in Australia. Prior to joining the ANU Ben was responsible for a range of modelling projects at NATSEM including the STINMOD microsimulation model of Australia’s tax and transfer system. Ben managed several key projects including the distributional analysis of the Australian Government’s 2014-15 and 2015-16 Budgets.

Prior to joining the ANU Ben twice worked at NATSEM and has also had roles at the Australian Bureau of Statistics as a methodologist and economist, The Housing Industry Association as a senior economist and the Bureau of Tourism Research as an economic forecaster. Ben has a first class honours degree in economics and is undertaking a PhD through the Crawford School of Public Policy focusing on the tax and transfer system.

Links relevant to the conversation

EP112 – Taxing the rich: Billionaire and inheritance taxes with Miranda Stewart

Ben’s co-authored 2019 paper: A basic income for Australia? Exploring rationale, design, distribution and cost

Economist article Gene quotes from: Might the pandemic pave the way for a universal basic income?

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode.

Transcript – EP126 on UBI w/ Ben Phillips, ANU

Gene Tunny 00:01

Coming up on Economics Explored.

Ben Phillips 00:04

Well, I think there’s some ideas of UBI that we can borrow. I think a lot of the issues we’ve identified could be used to improve what we’ve currently got. I think a more realistic and practical approach is probably just to fix up some of the issues in the current system that have fairly minimal costs.

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 126 on UBI, universal basic income. The pandemic has amped up enthusiasm for a UBI, because people have seen government’s boosting various welfare benefits and paying new benefits. Would a UBI have been a better option? Does the huge spending on emergency support during the pandemic prove that governments could afford a UBI? These are intriguing questions.

My guest this episode is Australian National University Associate Professor Ben Phillips, from ANU’s Centre for Social Research and Methods. Ben is one of the world’s leading experts on micro simulation modelling. As background, here’s how the Urban Institute describes micro simulation. In the social sciences a micro simulation model is a computer programme that mimics the operation of government programmes and demographic processes on individual micro members of a population, people, households, or businesses for example. For each observation in the large scale survey, a computer programme simulates outcomes of interest, such as income tax liabilities or Social Security benefits, by applying actual or hypothetical programme rules to the survey data about that observation. This is what you need to do if you want to analyse the costs and benefits of a UBI.

And hence, I thought, Ben would be the perfect person to talk to about UBI. And indeed, he has done some great research work on a UBI here in Australia. I’ve known Ben for over 25 years. We’re both in the same honours year in economics at the University of Queensland. Ben’s worked at the world leading National Centre for Social and Economic Modelling, NATSEM, the Australian Bureau of Statistics, and the Housing Industry Association. His micro simulation work has been widely quoted in the media, and he’s the go-to expert in Australia on the impact of the federal budget on households.

Please check out the show notes for links to materials mentioned in this episode. And please check out our website economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new ebook, Top 10 Insights from Economics. If you have any questions, comments or suggestions, then please either record them in a message via SpeakPipe, see the link in the show notes, or email them to me via contact@economicsexplored.com. I’d be really interested in whether you have any suggestions of good people to talk to about UBI in the US, the UK or other parts of the world. While I think that the points I make in my conversation with Ben this episode generalise to other economies, I’m conscious that there are specific circumstances in each economy, which may modify the economics of a UBI somewhat.

Okay, before we get into it, I’d like to ask you to please stick around until the end of the conversation, after which I will follow up some of the points in the discussion with Ben. Righto. Now for my conversation with Ben Phillips on UBI. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Associate Professor Ben Phillips from the Australian National University, good to have you on the programme.

Ben Phillips 04:16

Hello there, Gene, how are you doing there?

Gene Tunny 04:18

Excellent. Thanks, Ben. Ben, I’m keen to chat with you today about this concept of universal basic income. So this has been requested by a listener of mine who’s just fascinated with this concept and suspects that given where the sort of views that are often expressed on this programme, he suspects I’m probably sceptical of it, and he’s generally right, but I’m sceptical of a lot of proposals. But I do remain open-minded and I want to understand what it would involve and just whether it could be feasible, what it would look like. And given that you’ve done some great work on this in the Australian context, so you’re one of Australia’s top micro simulation modellers. So you understand all the data about what people are earning, what they’re paying in tax, what welfare benefits they’re getting. And so I thought you’d be great to chat about this issue. So to kick off, Ben, I’d really like to sort of just establish, what is this idea of a universal basic income. So are we talking about a payment that goes to, everyone, so every adult in the economy, of a particular amount, so I don’t know, 10,000 a year or 20,000 a year? And that’s the idea to give a basic type of income? That’s essentially what we’re talking about?

Ben Phillips 05:47

Look, I think at its most simple level, there’s lots of different models of what it can be or what it might not be. But typically, what you’re talking about is, at the moment we’ve got a very means-tested system of welfare payments. So you say you have to be unemployed, or you have to be a single parent with young children or you have to have a disability to receive a certain payment. Those payments vary by your age, or what type of payment that you’re on. They’re relatively meagre, I suppose. Universal basic income, obviously, as I said, it varies. You’re typically looking at, as you say, of a payment of say at least the amount of say the JobSeeker Payment that we have in Australia at the moment, which is around about sort of $14-15,000 per year, and potentially higher than that. So I say maybe the age pension or even higher. I think the Greens at the moment, the Greens Party, are actually suggesting I think it’s about 1,150, 1,160 per fortnight, which is a fair way above even the age pension. So the age pension is about sort of nearly $1,000 a fortnight, and I think the Greens are after a payment of over 1,100 per fortnight, I think for all adults in Australia. So at the moment, current welfare payments might go to around about say, oh, with maybe around about 4 million people in Australia at varying levels, so JobSeeker, that 600 a fortnight, up to say, 1,000 a fortnight for the age pension, whereas if you had a full blown universal basic income, say as say the Greens are suggesting, you’d be looking at about, you know, a payment of 1,150 a fortnight or getting up towards $30,000 a year for around about 20 million Australians. So it’s a huge difference. And obviously, that requires some rather astronomical numbers in terms of financing. But of course, there are different models of basic income. That’s just, I guess, what we most commonly perceive as being universal basic income, everybody gets enough to get by. And obviously, someone has to pay for it, either through more personal income tax or wealth tax or some other form of tax.

Gene Tunny 07:41

Right. Okay. What are the different models, Ben? What sort of things are you thinking of?

Ben Phillips 07:48

Well, there’s various models in terms of, I guess, generosity. So the most generous one that I’ve seen is really what the Greens are currently suggesting. And that is where you’ve got about $30,000 per year for every single adult in Australia. Going down from that, there’s others who have proposed, I think Ross Garnaut, not that long ago, proposed a similar system where every adult gets a certain amount of money. I think it was more like the JobSeeker or the old Newstart payment, which is more like about sort of $13-14,000 per year, so a lot less expensive. And then going down from there, you have what I guess we’ve looked at a few different models that are much cheaper than that. And that’s where you’ve got more of a means-tested approach, or what in one of the papers we’ve called affluence testing. So that is, the higher your income or the more wealth you’ve got, the less you would receive. So it’s a little bit like means testing. There’s other versions that are similar. So things like a negative income tax, that’s where everybody gets like a tax refund, a full tax refund of say maybe $10,000 per person, that as your income increases, you lose some of that, and at some point, it goes to zero. So that’s another way of looking at it. Another one is sort of a guaranteed minimum income. So everyone has a sort of a guaranteed minimum amount that might be say you’ve got at least $10,000 per year. And again, that’s means tested. So the more you earn, the less of that you get, and obviously at some point, it peters out to nothing. So that’s sort of the basic models. Obviously, the full-blown basic income’s easily the most expensive, and I dare say the most unlikely to ever, evidenced to be so boring to legislation in Australia, or to the past legislation in Australia, whereas the guaranteed minimum income, that might be something that’s a little more realistic. Obviously, they’re all quite different to our current, very tightly means-tested system. We also have a lot of conditionality on our current payment system or current welfare system, particularly if you’re working age, obviously for an aged pensioner. If you’re under a certain income limit, certain wealth limit, you get that payment. But if you’re of working age, unless you’re disabled, there’s usually some sort of fairly strict sort of workplace sort of, I guess, work requirements that one must get through.

Gene Tunny 10:02

Yeah. And that’s allowed Australia to have a, well, a very cost effective welfare system, you could argue, or one that … I mean, arguably, the benefit of means testing is you can assist the people who really need it at a low fiscal cost, or that that’s the theory, isn’t it? So that you could argue that, well, you know, what’s wrong with that? Isn’t that a great idea? I mean, UBI is sort of moving away, a long way from that. It’s the opposite of means testing, isn’t it? Is that right?

Ben Phillips 10:34

Yeah, so the current system, Gene, just to put it in perspective, so we currently pay out about a little over $100 billion per year in welfare payments to adults. There’s another sort of 20 or so million in family payments, which is effectively for the cost of children. So you put that to one side, if you will. So about $100 billion dollars. So the most expensive welfare system under a UBI, say under the grand scheme, would be somewhere around about $500 billion per year. So you’re looking at an additional $400 billion per year. Keep in mind, Gene, the current federal tax receipt is about 500 billion. So you go from 500 billion to 900 billion. That’s an unbelievable amount of money. And as you probably remember well, Gene, we had a big argument, big fight about carbon pricing in say 2012. That was over about a $5 billion tax. Now, regardless of what we thought of the carbon price, we’re having a big argument over 5 billion, how would we go with an additional 400 billion? Having said that, of course, you don’t have to have the full-blown measure, the full-blown universal basic income. But even the more sort of the cheaper versions, say like the affluence-tested model that we’ve modelled was more like a bare minimum of $100 billion per year. So you’re still looking at having to sort of double the welfare system in Australia, and knock-on from that is to increase taxes by, you know, 20, 30% across the country. So I think in a current environment that’s very unlikely to ever happen. But still it’s an interesting idea to think about, I guess.

Gene Tunny 12:04

Oh, absolutely. Certainly interesting to think about. So a couple of things I want to pick up on there. Ben, you mentioned negative income tax. So that, I think that was associated with Milton Friedman, who I’ve got a poster on the wall there. So he was advocating that back in the 70s I think. There’s a great paper that you co-authored along with Miranda Stewart, who’s been on the programme before. We chatted about wealth taxation, and in a way this discussion sort of goes on, or it’s related to that discussion. So we’ll go into that a bit later. And with David Ingles, or Ingles, is it? Sorry.

Ben Phillips 12:44

Ingles, yeah.

Gene Tunny 12:45

Ingles, great. Yep. And it’s got an excellent intro where you go through just the history of this proposal, and you talk about how it was suggested by Bertrand Russell, this basic income concept. And then the idea was resuscitated during the 60s, when Milton Friedman, among others, they proposed this negative income tax you talked about, and there was an experiment. There were negative income tax experiments in Canada and the US in the 70s. I’m going to have to look up those, because that sounds fascinating. And George McGovern, who was a US presidential candidate, he was proposing a $1,000 demo grant to all citizens. And then what the paper does, which I like, is it says, well, okay, this idea is coming back, because there’s this growing concern about wealth inequality, and there’s this growing concern about AI and automation, and we won’t have any jobs in the future, there’ll be fewer jobs, even for accountants and lawyers possibly, and just given how good the AI is getting. And so you’ve got a lot of people in Silicon Valley even, they’re proposing this idea of a UBI. I think Andrew Yang, who is a US presidential candidate, has this idea. So from what I’m sensing, it’s come out of this concern about wealth inequality. You’ve looked at the possibility of a wealth tax paying for this UBI. Is that the sort of thing that you’d have to do? Because you mentioned, look, people would probably, you know, they’d push back on a big increase in taxation. Is there a way of sort of taxing the richest or the wealthiest, the billionaires? Is it possible to get more tax out of that group to be able to pay for this UBI? Have you looked at that, Ben?

Ben Phillips 14:42

I think no doubt there’s probably some there’s … I think most of the modelling I’ve seen around taxing billionaires is a little disappointing in that the amount of money you typically get out of billionaires isn’t usually as much as what people might want to think. I think the Parliamentary Budget Office has done some recent work around, it was a Greens proposal again for taxing billionaires. I’m not saying it’s a bad thing to do that, but the amount of money is probably not really enough to be funding these sorts of schemes. You have to have a revenue base that I think is a lot broader than just say billionaires, which we may only have, you know, a couple of dozen or so in Australia. And it’s a pretty precarious base anyway. During good times, it might be healthy money, and during bad times, well, who knows, you might not have too much at all. So you need to have a fairly broad-based wealth tax, if that’s the path you’re going to go down. And that certainly could be done. I think we probably don’t tax wealth as much as we probably could in Australia. We’re very income-heavy. And that’s something that we could look into changing. But if you’re going to find additional money, you’d have to have a fairly broad-based wealth tax. And it’s certainly true to say that saying superannuation at the moment, there’s a lot of concessionality there in superannuation taxation, which perhaps goes further than where it needs to do. And I guess beyond that there’s the family home. There’s no tax on the family home. And there’s other concessions around wealth in Australia, things like trusts and so forth. So there’s certainly money that can be found there. I think for the sort of scheme that David Ingles and Miranda Stewart were proposing, that was probably quite a sensible place to go. They’re also trying to minimise the effective marginal tax rates. So if you fund it through personal income tax increases, you go straight to increasing what are called effective marginal tax rates. And that’s sort of lowering your incentive to work, whereas wealth tax, you tend to get at those people who perhaps are not actually even working, and it returns a little bit of money to the state through that avenue.

Gene Tunny 16:35

Right. Could you tell me a bit about that proposal that you modelled for Miranda and David? So what did the wealth tax look like? Can you recall the threshold and what the impacts were, Ben?

Ben Phillips 16:49

So from memory, Gene, the amount of money that was being given out through this scheme wasn’t actually particularly large. I think it was roughly in line with the sort of amount of money that we give out to family payments, which is around sort of five or $6,000 per year. So in that sense, it wasn’t there to replace the current welfare system. It was really just as a very low base addition to what we currently have. So it wasn’t a large amount of money. We didn’t need to find nearly as much money say as a full-blown universal basic income scheme. And I think in terms of wealth, we just made a very simple assumption around I think it was non-housing-related wealth, and taxing that. So you’ve still got a fair amount of money. You’ve got about $4 trillion in Super. That compares to say that $10 trillion in housing, which much of which we weren’t touching, because it’s in the family home. I think it was just a flat rate of tax per year. I can’t remember the exact rate. It was at probably a small amount per year, which is enough to sort of fill out probably the several trillion, the several billion dollars worth of money you need to fund these sorts of schemes.

Gene Tunny 17:54

Right, okay. Yeah. Okay, so I guess it’s probably the politics of it that’s going to defeat it, from just based on this conversation. It sounds like, I mean, sure, if you’re going to implement it, and if you’re going to implement what people would generally perceive as a universal basic income when they think of a universal basic income. So I think Andrew Yang was talking about in the States, was it 1,000 US advance then? And that’s why I was thinking, well, if we had it in Australia, it’d probably be around maybe 15 to 20,000 a year. And if we’re going to have that, then that does imply a large increase in taxation. And there will be a lot of pushback, but in some segments of the community, particularly where they’re going to be paying more. And we saw what happened in the last election, the last federal election when there was a proposed change. I mean, you mentioned the carbon tax and then look at what happened when the opposition proposed doing something about the franking credits issue with the with the shareholders. So yeah, it seems like people, if you look at what it actually implies, it’s probably politically infeasible to bring it in. Do you have any thoughts on that, just how the likelihood or feasibility of bringing something like this in?

Ben Phillips 19:30

Look, to be honest, Gene, and I don’t really think it’s something that’s on the radar of say the major political parties at this point, not to say it won’t be at some point in the future if the world changes, but at the moment, I think as you pointed out, the potential of the requirement for such substantial tax increases would virtually rule that out. Ignoring whether or not it’s sensible or that it’s economically sensible, I think it’s the tax increases will just be too substantial. I think there are some problems with our current welfare system at the moment. But they really are only, they’re relatively small changes that are required to fix that. So for example, the JobSeeker Payment many would argue is a little bit too light, needs to be increased by probably a modest amount per year. So at the moment it’s about 630 per fortnight. It probably needs to be at least another couple of $100 a fortnight higher than that. The cost of that is only a few billion dollars per year. There’s a few other issues with the welfare system, particularly around say some of the conditionality, that’s probably a little bit too punitive on those on the payment. You could loosen some of those up, I think you can potentially improve the current system that we’ve got. That is very well targeted, I think. And you can improve it with only relatively modest amounts of money. So maybe, you know, as little as say $10 billion per year could really make a very large difference to that system. So $10 billion for what I think could give you a reasonable system compared to say having to spend potentially at least $100 billion on one of these more grandiose schemes of universal basic income. I think that shows the relative costs and minimal additional benefit, I think, where you end up a very big sort of a churn, additional churn in the system, for no particular great benefit. So I think there’s some relatively easy fixes that are relatively cheap. More people might disagree with to say $10 billion is relatively cheap or not. But compared to these other big schemes, I think it’s relatively cheap. So get a relatively simple fix for not a lot compared to these very expensive schemes. That’s probably where I would see it potentially going, if we are going to go down that path.

Gene Tunny 21:33

Yep. So it’s probably not. I mean, the big issue at the moment is that, well, arguably, some of the welfare payments are too low, and that therefore if you’re going to do anything with the welfare system in Australia, then you should look at increasing some of those payments. I was just thinking, I mean, in other countries, maybe that there are different issues. I mean, with the US, for example, I guess what’s attractive about the UBI in the US is that their welfare system is not as generous as ours, or it’s not as much of a safety net. So perhaps that’s why it’s more attractive in the States. Although I guess it does have a lot of support here in Australia. There was something reported on ABC, a majority of Australians would welcome a universal basic income, a survey found. But then I think that’s because people aren’t aware of just what it means for tax rates. And if anyone actually proposed that as a real thing, and they had to talk about how they funded it, how they would fund it, it will quickly become apparent it was … It’s not something necessarily I’d support, but it would involve some redistribution. I guess where some people, why they support it is that they, you know, there are a lot of people who think housing’s becoming increasingly unaffordable. And this could be seen as a way of supplementing their income. So could it be seen as a way of … Is it basically about more redistribution? So redistributing more from the top end to the lower deciles? How have you done analysis of what it means in a distributional sense, this universal basic income? I suppose it depends on the model that you apply. But what could it look like? I mean, could it actually improve the wellbeing of households in the sort of lower deciles? Not just the most disadvantaged, where we’re assisting them currently with welfare benefits, but households where they’ve got people in the house are working? Is it going to be a way of supplementing their incomes and, you know, making it easier for them to say buy a house? Could that be a benefit of it?

Ben Phillips 24:00

It’s certainly one benefit of it, Gene. Again, as you say, it depends exactly what sort of model you’re using here. It could vary wildly. But the models that I’ve looked at in the more sensible versions, they are funded usually through an increase in a wealth tax or increase in say, an income tax. And they usually tend to be quite progressive taxes. So as a result, you do tend to find that with most of the basic income schemes, at least I’ve seen, you do get a redistribution from the rich to the poor, effectively, and we end up having income inequality that looks a little bit more like Nordic countries, rather than our current system, which is fairly sort of middle of the road, I suppose, similar to the UK and a little bit better than the US, but more closer to the Nordic countries. So you do get that impact. A lot of people are concerned about why would you give say $10,000 to someone on $150,000 a year. Well, that’s understandable, but they’re probably paying even more than $10,000 in tax to fund it because we’ve got such a progressive system. So that’s true, it does redistribute the income from the rich to the poor. That’s probably one of the positives of it.

Gene Tunny 25:02

Right. Okay. Now, what does it mean for those effective marginal tax rates? Does it actually reduce them? Is this a way of reducing the impact or am I on the wrong track here, Ben? Sorry, I think I’m off.

Ben Phillips 25:21

Again, Gene, I think it really depends on the model. You could have one model where it would reduce them, one where it would increase them. I think, as a general rule, the more money that the higher the programme costs, the higher the overall EMTRs are for the country. The more churn you have, the more you more you give, the more you’re going to take as well. There having said that, I think what it can do is it probably does lower the effective marginal tax rates for certain groups, particularly low-income groups and say, single parents, where they do typically have quite high EMTRs, but it would increase the EMTRs from say the middle of the income distribution to the higher end of the income distribution, because they’re the people who are funding it. So for example, I did some modelling with some guys from Macquarie Uni in Sydney. And we had a relatively cheap form of basic income, which is costing about 100 to 120 billion a year. And I think what we found there is you have to increase the marginal tax rates across the board by about 15 cents on the dollar. So that means that say that the 19 cents becomes 34 cents in the dollar. And so the 45 cents becomes sort of, you know, around 60 cents on the dollar. So obviously, for those who are not in the welfare system, at the moment, they would have a much higher marginal tax rate. Those who are in the welfare system, probably what we call the withdrawal rates of that basic income are quite small. So you probably have a lower effective marginal tax rate down the bottom end of the income distribution. So it really varies where you are in the income distribution. But I think as a general statement, overall, if you’re giving more money out, you’re probably going to have a higher EMTR across the board. But for certain groups that do face very high EMTRs at say, 70, 80, 90 cents on the dollar, they probably would come down.

Gene Tunny 27:04

Right, okay.

Ben Phillips 27:05

When you’ve slanted out across the income distribution is one way of thinking better, but a little bit higher overall.

Gene Tunny 27:10

Okay, I’m just trying to understand how this would work. So it sounds like with some of these, that well, the age pension, it sounds like that’s probably at the moment higher than any, or what I was thinking would be a universal basic income, which is sort of in the 15 to 20k range. So does that mean, could there actually be some welfare recipients who would be worse off under some models of UBI?

Ben Phillips 27:42

Yeah. Look, I think mostly what they do, Gene, is they, they only apply it to the working age population. So they say, look, if you’re an aged pensioner, we’re not so concerned about you. Many of the issues that relate to universal basic income, as to why you might introduce the UBI, don’t apply to the age pensioners, so we leave them as they are on the age pension. It’s more about the working age first. So if you’re on JobSeeker or say you’re missing out on JobSeeker at the moment because of you know, the wealth, the liquid assets test or some other income test you’ve got, you would be better off under the UBI scheme. And also, you would be losing that money more gradually as your income increases, whereas at the moment, you might be losing say 50 cents, or 60 cents on the dollar, for every dollar that you earn. It’s people who are on the JobSeeker payment, who are working part time, they might be better off and face lower effective marginal tax rates as they increase their income. Where it would impact people is say those around say 80 or 90,000 a year, you might go from say being on 30 cents on the dollar to say 45 cents on the dollar. That’s a big problem, I think, as I see it, for these more expensive versions of the universal basic income,

Gene Tunny 28:50

Right, okay, what about single parents? Do you know how they would be affected by a UBI if it was brought in and it replaced the current suite of benefits?

Ben Phillips 29:03

Yeah, so some of the models that I’ve looked at, what we’ve tended to do on this, really, it’s where you start to make … One of the main reasons you have a UBI is to have it as it’s sort of simple. One of the big arguments is that the current system is too complicated. And it is complicated, no doubt at all. I would argue it’s complicated because it is complicated. The world’s complicated. You’ve got single parents, you’ve got disability, pension recipients, you’ve got all sorts of different people in different situations. This is one of the things I like about the current system, where it targets to those sorts of issues. But in terms of single parents, yeah, if they are on 15,000 a year, they will be worse off. And that’s where you might have some special clause where if you’re a single parent, you remain on the current payment, but then you’re going back to another complicated system. This is why I sometimes wonder about what the point of a UBI is, unless it’s I’d say at the age pension level.

Gene Tunny 29:58

Right, which is …

Ben Phillips 30:00

Which is about say about $25,000 a year.

Gene Tunny 30:05

Okay. And is that similar to what the Greens is proposing that’d be …

Ben Phillips 30:10

Thereabout 30,000 a year.

Gene Tunny 30:11

30,000 a year, right, okay.

Ben Phillips 30:13

So where that comes from, Gene, is when the JobSeeker was increased when we had COVID, it was increased to about 1,115 per fortnight. And I think the Greens have gone along with that number, which is closer to about sort of 28, 29,000 a year or 30,000 a year. I forget the exact figure. Which relates to the Henderson Poverty Line, which is, in my view, a fairly outdated version of … As you probably recall, Gene, it was constructed by the Henderson review into I think, probably in Australia back in the 60s and 70s. Yeah, so it’s very outdated.

Gene Tunny 30:50

Yeah. So UBI, I mean, it certainly would be a nice thing to have, just thinking about it. I mean, and one of the advantages that’s put all the pros or the arguments in favour of it is it would allow us to be able to choose our lifestyle. And I mean, we could take a few months off and devote it to yoga or to improving our wellness, that sort of thing or writing a book. So look, I can see the attraction of it. It’s just the fiscal cost of it and implementation. We’ve already got this welfare system in Australia, at least that seems to do a reasonable job at not too high a cost. But I can see the attraction. What about this, there’s this vision of the future where with AI on automation, we have massive job losses, even among white collar professionals? Now, I mean, you know, we’re economists, so we’re probably great believers in the market adjusting, and eventually people finding new jobs in this in the services sector. But do you have any thoughts on that, Ben? I mean, how big a risk is AI and automation? And to what extent does that improve the argument for a UBI, if that’s the case that we could see these massive job losses in the future?

Ben Phillips 32:26

Yeah, look, I would, probably a bit like yourself, Gene, be clouded by my economics background. I guess looking at history over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods of course, where you have some higher unemployment. But generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappear, and that there is the argument of, as you said, of basic income advocates that you have a UBI for that potential outcome in the future. But I’m sceptical of it, Gene. That said, I’m not a futurist, so I don’t really know what the future holds in that area. I could be wrong, but I’m a little sceptical, just given that we’ve had very large technological change in over the last century and people still remain in jobs. Yes, there are issues, you know, for certain people in certain industries. But that’s sort of part of the ebb and flow of the economy.

Gene Tunny 33:34

Absolutely. Okay. Well, just finally, this affluence-tested model, is that the one you recommend? Would you be able to go over that again, please, Ben? I’m just interested in what exactly that is.

Ben Phillips 33:50

The affluence-tested model, Gene, this is the model that some co-authors of mine, Ben Spies-Butcher from Macquarie University and Troy Henderson from University of Sydney, I guess it’s their model, their version of universal basic income. Obviously they’re well aware that a full-blown UBI is very expensive and politically difficult to implement. So it was an attempt to come up with a model that might be a little bit more politically possible within Australia. And that model really was, let’s look at the current JobSeeker amount. We’re a little bit higher than the JobSeeker amount, so that 15,000 or 18,000, two different models, 15,000 year and a more generous 18,000 a year and apply that to all adults. But it was in effect means-tested or affluence-tested, as they called it. So that was as your income increased, you’d lost some of that payment. So basically, up to about 10. You can earn up to 10,000 a year in income, and you’d receive the full 15 or 18,000 for the year, by that median income that have gone to about half and by about 180,000 you have none at all. So it still costs about 100 or $120 billion per year. So that’s still roughly a doubling of the current sort of welfare system. So it’s very, very substantial. But obviously, it’s a lot cheaper than a full-blown system. And it does have the benefits of, some of the benefits of the basic income. It sort of becomes a bit more like a guaranteed minimum income, I guess, rather than a universal basic income. So that was their model. I think it’s quite interesting. But again, it’s got that concern of being wildly expensive, and we didn’t need to increase personal income tax rates, I think it was by 15 percentage points to the more expensive version. And I think adding that on to the current personal income tax rate regime would scare a lot of people off and would be politically extremely challenging.

Gene Tunny 35:43

Yeah, yeah. Okay. So just for clarity, this was a proposal that the other authors, it was their proposal, and you were doing the modelling for that.

Ben Phillips 35:53

That’s correct. Yep.

Gene Tunny 35:54

Gotcha. Okay. Ben Phillips, any final thoughts on UBI before we wrap up?

Ben Phillips 35:59

Oh, look, I think we’ve covered pretty well, Gene. I think it’s a really, in one sense, it’s interesting. I think that people are talking more and more about these sorts of schemes. I do feel that there are some problems with the current welfare system and I think there’s some ideas of UBI that we can borrow. I think the a lot of the issues we’ve identified could be used to improve what we’ve currently got. I think a more realistic and practical approach is probably just to fix up some of the issues in the current system at a fairly minimal cost, as opposed to the full-blown versions of UBI that I think are interesting, but perhaps not really realistic in the current environment. Too much of a change for Australia, whether we like it or not.

Gene Tunny 36:41

Yep, yep. Absolutely. I agree with you. So yeah. Thanks, Ben. That was great, a really good overview of the issues in Australia. I’ll have to have a look at what it might mean in other countries, but I’m guessing that it would involve a similar high level of expenditure, additional expenditure, and therefore a higher tax burden. I will have to look into that. And, yeah, I thought that that point you made about how well it could be seen as a way of addressing some of these inequality issues. And then we’d look more like the Scandinavian countries. And perhaps we do. I mean, our inequality isn’t as high as in the US, but you’re saying it’s similar to UK. It’s lower in some of those Scandinavian countries. So that’s something I’ll cover in a future episode. Just, you know, what’s going on in those countries. Always fascinated with that sort of Nordic model they talk about. So I thought that was a really good point. So Ben, but just want to thank you so much. I think what’s great about your work is that you’ve really modelled all this out, you’ve thought about what this looks like, in a practical sense, how it could be implemented, what that means for all the different groups in the community. And so yeah, I can highly recommend your work. So there’s Basic Income for Australia: Exploring Rationale, Design, Distribution and Cost, that you co-authored with David and Miranda. I’ll link to that in the show notes. So Ben Phillips, really enjoyed that. Thanks so much.

Ben Phillips 38:26

Thank you, Gene. My pleasure talking to you.

Gene Tunny 38:29

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

Female speaker 38:35

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Gene Tunny 39:04

Now back to the show. Okay, I hope you enjoyed my conversation with Ben on UBI and got a lot out of it. I certainly did. In this segment of the episode, I want to cover some issues that I didn’t get to chat about with Ben, particularly whether UBI will have a big negative impact on people’s labour supply. So their willingness to work. Will we see people dropping out of the workforce, drastically reducing their hours of work, and therefore reducing the capacity of our economy and the government’s capacity to raise money to pay for a UBI?

Now around the world, we’ve had several experiments of different types of UBI over the years. I intend to devote a future episode delving into the details of these experiments, and even into the negative income tax experiments in the 70s. I probably don’t have enough time at the moment to do full justice to those experiments, but I will try to summarise what I’ve found so far. One UBI experiment which received a lot of media attention happened in Finland, in 2017 and 2018. 2,000 randomly selected unemployed people received a 560 euro a month payment, which was similar to the unemployment benefit payment. But they received it for the trial period, and they didn’t lose it, they didn’t lose the UBI if they started working.

Now, I’m going to rely on a great article from The Economist. So one of my favourite magazines. This article was in March 2021, Might the Pandemic Pave the Way for a Universal Basic Income. I’ll put a link to that Economist article in the show notes, but it may be paywalled, and you may need an Economist subscription to access it. In the article The Economist reported evidence from the experiment was muddied by a change to a law in 2018, which tightened conditionality for receiving unemployment benefits. Even so, the results are intriguing. Among the biggest worries relating to UBI is the possibility that it might discourage recipients from seeking paid work. Yet, participants who received unconditional payments actually work more than those on the dole. Reported wellbeing was substantially higher. Recipients also registered less depression and stress, a higher degree of confidence in their abilities, and more social trust than did those in the control group.

The Finnish results are broadly consistent with findings from other experiments. Rebecca Hasdell of the Basic Income Lab at Stanford University conducted a review of 16 basic income studies published between 2009 and 2019, that covered rich and poor countries. The research provides consistent evidence of a positive effect on educational attainment and on measures of physical and mental health and reduce poverty. Effects on labour market participation are generally small. Half of the studies that assess its impact do not find a statistically significant effect. Most of the rest find a positive effect, she writes. Okay, so that’s really interesting.

Based on the experimental evidence that we have, and assuming the Economist is reporting it correctly, we may not have to worry about lots of people dropping out of the workforce if a UBI is implemented. However, as the Economist notes later in that article, these experiments don’t necessarily tell us what would happen if a UBI were available on a wide scale. They talk about the possibility of a social multiplier effect. Okay, so the Economist notes, some activities become more enjoyable as more people engage in them. So what they’re getting at there is that being out of the workforce is going to be much more enjoyable when more of your friends or family are also out of the workforce, they’re not working, so you can more easily spend time with them.

Possibly, you could even foresee a risk that you have sizable groups of people that maybe they can drop, they might drop out of the workforce at the same time and set themselves up in, well, for lack of a better word, communes. Perhaps that’s something that could happen. Are these legitimate concerns? I really don’t know.

But I do know a UBI would cost a lot of money. As Ben and I chatted about in our conversation. So the major criticism of UBI that it’s incredibly costly, and it would require much higher taxes, I think that is an important criticism and it still holds. On the work incentives issue, Ben Phillips’s view is that the net impact of a UBI is unclear. This is because of what Ben and some of his co-authors describe as a complex interaction of income and substitution effects. Okay, what do they mean by this? Here’s how I understand it.

The income effect that they’re talking about is the change in labour supply expected to be negative due to the change in income brought about by a UBI. So, a UBI, all other things equal, will boost income. And people might choose to spend that income on more leisure by working less in paid employment, okay. The substitution effect that they’re talking about relates to the substitution between work and leisure, as the relative price of leisure changes as the opportunity cost of leisure. So the loss of income, the money that you get in the bank, if you take an hour off work, or you, you take an hour in leisure, there’s a substitution effect. Because a UBI affects what is called the effective marginal tax rate, the EMTR. So Ben and I were chatting a bit about that, in our conversation.

Let’s remind ourselves that the effective marginal tax rate is the percentage of additional income that we earn, that we don’t get to keep. So it’s the percentage we don’t get to keep. And we don’t get to keep it because either A, the government takes it off us in tax, or B, the government reduces a welfare benefit that we’re currently receiving. And it does that because we’re earning money from working. If there’s a change in the EMTR, then the relative price of leisure changes, okay, so if the EMTR increases, so the government’s taking more off you in tax for an additional hour that you work, then that makes work less attractive to leisure, it means that the relative price of leisure has fallen, so the opportunity cost of leisure has fallen, because you’re getting less money for that additional hour of work. That makes leisure more attractive. And so you might work less, you’ll take more leisure.

Okay, I hope that makes sense and I explained that properly and I didn’t get lost midway. As you can appreciate, this is extremely complex. There’s quite a lot going on. As Ben and I discussed in our conversation, a UBI is expected to reduce the EMTR for current welfare recipients. So if you’re currently receiving a payment from the government, then your effective marginal tax rate is expected to fall, because the UBI wouldn’t be as aggressively taken away or clawed back as current welfare benefits are when people start earning money. Okay. So for welfare recipients, a UBI could actually result in additional hours worked, depending on their circumstances.

This gets really complicated, as Ben tried to explain in the in our conversation and as they go into in their papers. Okay, so Ben and his colleagues, David Ingles, and another colleague of his, previous show guest Professor Miranda Stewart, they wrote in a 2019 paper, which I’ll link to in the show notes, that the aggregate impact on work incentives is unclear. This is because the high linear tax rate required to finance the BI, so BI is what the authors are calling UBI in whatever model that … They go through a few models in their paper, but when they say BI they basically mean UBI. That high linear tax rate may increase work disincentives across the population.

Okay. So to finance the UBI, we’ve had to put up tax rates. And that’s going to increase the effective marginal tax rate for many people who are working and aren’t receiving welfare benefits. And so therefore, if they work an additional hour, they don’t get to keep as much. And so what does that mean? Well, that means that the relative price of leisure or the opportunity cost of leisure, if I take an hour off, then I don’t lose as much because the government, it wants to take more of that money I make, an additional hour. So it affects the work incentives for that group of people.

Now look, there’s a big literature on labour supply and how it’s affected by after tax earnings that we don’t really have time to go into today. I should cover it in a future podcast. I think it’s enough for now to say that look, this is very complex. This is the point Ben’s trying to make. The key takeaway is that the UBI will mean different people will respond to it in different ways. And it’s hard to know what will happen to overall labour supply unless, well, unless we actually introduce a UBI and find out.

Okay, I should note that Ben has used a static micro simulation model. So his modelling has been conducted using ANU PolicyMod. So he hasn’t explicitly modelled those work incentive effects or the impacts on labour supply. Now, my feeling is this, this is something that would be extremely difficult to model. Policy experiments are possibly our best hope of figuring out whether a UBI is simply a utopian fantasy that is unaffordable, or whether it is something that really is feasible, and that could improve our lives immensely.

As always, I’m trying to keep an open mind on these important policy issues. So that’s all I have to say on UBI for now, but I’m sure I’ll come back to it in future episodes. I know a lot of people are interested in it. So please consider this as a first instalment. I hope you enjoyed it and found it informative. Please get in touch with any comments or suggestions. I would love to hear from you. You can email me, contact@economicsexplored.com. And again, there’s a SpeakPipe service that can let you record a voice message if you’d like to do that. Okay. Thanks for listening.

Tags australia, economics, leisure, socialsecurity, tax, ubi, welfare, work

Podcast episode

Transcript of EP125 on price controls w/ Larry Reed, FEE

Post author By Gene Tunny
Post date February 7, 2022
No Comments on Transcript of EP125 on price controls w/ Larry Reed, FEE

This post contains a transcript of EP125 on price controls, infrastructure, and other topics with President Emeritus of the Foundation for Economic Education Lawrence W. Reed. Also, note we’ve published a new video clip from the interview, featuring Larry talking about his article Why I wish we could put Chester Arthur and Joe Biden in a room together to talk infrastructure spending.

Transcript of EP125 w/ Larry Reed, FEE

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.

Gene Tunny 00:01

Coming up on Economics Explored.

Larry Reed 00:04

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. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury Official. This is episode 125 on price controls, which some commentators are suggesting could be used to reduce inflation. We also explore some other topics, such as whether Jesus was a socialist, why Joe Biden arguably should look back to the 21st president Chester Arthur, and why the separation of bank and state is so important.

My guest this episode is Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, a leading pro-free market educational nonprofit headquartered in Atlanta, Georgia. Larry has authored nearly 2000 newspaper columns and articles and dozens of articles in magazines and journals in the United States and abroad. His writings have appeared in The Wall Street Journal, The Christian Science Monitor, USA Today, The Epoch Times, and The Washington Examiner among many other places. Larry is frequently interviewed on radio talk shows and TV, including on Fox Business News.

Please check out the show notes for the links to materials mentioned in this episode and for any clarifications. You’ll find the show notes via your podcasting app or at our website, economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new eBook, Top 10 Insights from Economics, so please consider getting on the mailing list. If you have any questions, comments, or suggestions, please either record them in a message via SpeakPipe. See the link in the show notes or email them to me via our contact at economicsexplored.com. I’d love to hear from you.

Now, for my conversation with Larry Reed from the Foundation for Economic Education. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, welcome to the programme.

Larry Reed 02:45

Thank you very much, Gene. It’s a pleasure to be with you.

Gene Tunny 02:47

It’s great to have you on, Larry. I have been reading a lot of your writings lately. You’ve started off the year very well and coming on important issues, crazy proposals such as price controls. We might chat about that a bit later. But first, I’d like to ask you about the Foundation for Economic Education. Could you tell us a bit about what its role is and the type of activities it engages in place?

Larry Reed 03:16

Your listeners and viewers can learn a great deal more by visiting its website, which is FEE.org. The foundation was created in 1946 by a great man named Leonard Read. He was no relation to me. He spelled his name R-E-A-D. But after World War Two, he looked around and realised that there was no organisation in the world that was full-time devoting itself to explaining and defending how free enterprise, the profit motive, private property, how that system works. He created the foundation for the purpose of spreading those ideas.

Over the years, our message and our principles have not changed. But the focus of our message and principles has somewhat changed. It’s become a bit more focused on young people, specifically high school and college age. We do that through programmes in-person all over the country, in the US, and abroad, as well as the website videos, on the website courses, you name it. All designed to explain how freedom and free markets work.

Gene Tunny 04:31

You mentioned Leonard Read? Did he write that famous essay, “I, Pencil”?

Larry Reed 04:37

Yes, he did in December of 1958. That has had a remarkable impact on people all over the globe.

Gene Tunny 04:45

Absolutely. I think it shows how complex even products that we think of as simple are and there’s no way any central authority and this is what we discovered with the Eastern European socialist economies with the Soviet Union. You can’t plan this sort of thing. You need to rely on the market mechanism to be able to produce even something that we might think as mundane as a pencil. I’ll put a link in the show notes to that essay because I think it’s brilliant. I think Milton Friedman quotes from it in Free to Choose, if I remember correctly.

Larry Reed 05:23

After someone reads it, they are well-armed to take on a central planner type. Every time I run into somebody that thinks that he knows enough that he can plan an economy of millions of people, I always say, “Wait a minute. You don’t even know how to make a pencil, let alone an entire economy.”

Gene Tunny 05:44

That’s right. You got to think about it. You’ve got to get the timber, you’ve got to cut it, you’ve got to get the graphite, etc., combine them all together. A great essay. Is Hazlitt associated with the foundation? He wrote that book, is it “Economics in One Lesson”? Is that one of the books that you promote?

Larry Reed 06:07

Yes, it is one of the more popular offerings from FEE in the last 70 years. Henry Hazlitt was long associated with FEE. He was one of the charter members of its board of trustees, a good friend of our founder, Leonard Read, and was on the board for decades. I’m happy to say that I knew him personally for the last decade of his life.

Gene Tunny 06:33

That book has had a big impact too. He must have been pleased with how that was received.

Larry Reed 06:40

Yes.

Gene Tunny 06:42

Very good. We might get on to some of the topical issues. The big economic issue at the moment is inflation. We’re seeing accelerating inflation in advanced economies. In a way, this probably should have been expected, given the big expansion in the supply of money that we’ve seen in United States, United Kingdom, Australia, to a lesser extent, but still a substantial increase.

Now, we’re starting to see that in inflation. Some people are saying it’s temporary. There could be some temporary element, there’s a supply-chain disruption. Who knows? My view is that it is something we’ve got to worry about. People are starting to talk about, “What do we do about it?” There’s a monetary policy response. But there are people who are thinking, “Let’s be careful because we don’t want to constrain economic growth and cost jobs. Why don’t we look at price controls?” You’ve written a great article, “Price Controls: Killing the Messenger If You Don’t Like the Message”, could you talk about what you mean by that please?

Larry Reed 07:51

Yes, I’d be happy to. We should think of prices as conveying immense amounts of information. Prices result from the free interplay of supply and demand, which in turn reflect the individual choices, ambitions, opportunities, tastes, and you name it of endless consumers in the marketplace. Prices don’t accidentally arise. The notion that you can fiddle with them by government decree with no consequences is ridiculous. It’s anti-science. It’s anti-economics. Prices are what they are in free markets for good reason because they’re reflecting conditions of supply and demand and people’s preferences and tastes and so forth.

When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else, it’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion. It’s politicians, who on the one hand, have got their hand on the printing press cranking out easy money at low interest, easy credit, and pumping up prices. At the other hand, they got a club in their fist and they want to beat people for responding the way you would.

If at any time you massively increase the quantity of something, it will affect the value of every single unit and they’ve been expanding the money supply immensely. If they put on price controls to prevent prices from being at some higher level, all that does by treating a symptom not the cause, is to create economic problems of their own. It creates shortages, for instance, if the market price of something would be $10. But government says, “No, you can’t charge any more than $7.” What happens is at $7, more people want the stuff and fewer suppliers will provide it. That would be the case at $10. You got a double whammy. You got less of the stuff coming on the market and more people wanting it at that artificial price. Bingo! Long lines at stores and shortages. People who propose price controls are ultimately anti-economic science and oblivious to the effects that we have seen historically, literally for centuries with no exception.

Gene Tunny 10:22

One thing about this issue, it seems to be something that the vast majority economists seem to be in agreement on which is good. You quoted in your article, there was an Op-Ed in The Guardian. The title was, “We have a powerful weapon to fight inflation price controls, it’s time we consider it” and Paul Krugman responded, “I am not a free market zealot. But this is truly stupid.” Absolutely. You’ve had experience in the US in living memory of price controls? Was it in the 70s that Nixon’s Whip Inflation Now and then Carter, perhaps with their controls on the price of gasoline that did lead to these big lines at gas stations in the States?

Larry Reed 11:21

The Whip Inflation Now thing actually was Gerald Ford. That was a campaign to get people to wear buttons that said, “whip inflation now” as if that would somehow whip it. Before him, it was Richard Nixon, who actually imposed wage and price controls. First, in the form of a 90-day freeze on virtually all wages and prices and then followed by government directed prices that limited by how much they could rise.

Every economist worth his salt knows that that produced disaster. That was no solution to anything. It gave us long lines at the gas pump and empty shelves in the stores. It was ridiculous. I used to know a man, he’s deceased now, but he was chairman of the Council of Economic Advisers, Paul McCracken, great economist. He cautioned Nixon not to do this. He said it’s never worked in 4000 years, don’t even think of it. Nixon went ahead anyway and shortly thereafter, McCracken resigned.

We’ve had lots of experiences. Lots of countries have had experiences with it. Revolutionary France in the 1790s, the government imposed the so-called Law of the Maximum, which said that government will fix the maximum price of things and the penalty for violating that will be death. They guillotined a lot of people for that and it did not make anybody produce more of anything.

Gene Tunny 12:55

That’s a negative supply shock too, isn’t it? Killing your producers? Terrible. That’s some good stuff there. I take it your view would be that inflation is a monetary phenomenon. Therefore, the key to controlling it is to get your monetary policy, right? This isn’t about monetary policy, but I’m guessing that’s where you’re coming from. There’s a big debate about what that means and role of the Fed, etc. But would that be your view?

Larry Reed 13:33

Inflation, Milton Friedman famously said, “is anywhere and everywhere a monetary phenomenon.” I’m sympathetic to that but I also point out that there’s another dimension here. Prices ultimately reflect, to a great extent, what’s going on in people’s minds. There are extraordinary circumstances, but there are occasions when you could have soaring prices without an increase in the money supply. One of the examples I like to point to is the Philippines.

During World War Two, when the Japanese had occupied it, they imposed their currency on the Philippines. General MacArthur was attempting to ultimately take the Philippines and he was jumping from island to island, getting closer and closer. The Japanese weren’t dumping any more of their paper money into the Philippines and yet, prices would leap every time word came that MacArthur was now a few hundred miles closer. That’s because people’s estimate of the value of that money declined because they knew if he gets here and takes the Philippines back, the Japanese currency will be completely worthless. Given that prospect, we’re happy to pay any price to get anything now while it’s worth something. That’s a rare occasion.

We’re not facing that circumstance today. We do have to fall back on the fact that today’s inflation that we’re witnessing is not a Philippine-style rise in prices. It is a monetary phenomenon, reflecting the massive increase in money and credit that our Federal Reserve in the US has manufactured. Many central banks around the Western world have done as well.

Gene Tunny 15:21

That’s a great story about the Philippines. I’ll have to look that up. MacArthur is a great hero to many of us in Australia because there’s a view that he essentially saved Australia. He based himself in Australia after he fled from the Philippines and he had an office a little bit down the road from where I am here in Brisbane in the ANP Building during World War Two. That was one of the locations from which he waged the war in the Pacific. Great story. Very good. That’s a good discussion of price controls, Larry.

I’d also like to ask you; you’ve also written about whether Jesus was a socialist. I’d like to ask you about that. Also, I don’t know if you saw the recent controversy around Dave Ramsey’s comments. Dave Ramsey, the esteemed financial commentator in the US.

Larry Reed 16:21

Yes. Although I may not be aware of recent comments that you’re bringing up.

Gene Tunny 16:26

Essentially, someone asked him a question, “As a Christian, should I feel bad if I raise the rent on my properties to the market rent, and then that means that some of my tenants can’t afford to live in those properties anymore. It causes them financial hardship.” Dave Ramsey’s comments weren’t received by many, particularly on the progressive side of politics because he said, “There’s no problem with doing that because it’s not me that is evicting you. It’s actually the market.” He was appealing to the market. I’d like to ask you about that. If you haven’t seen his comments, and it’s probably worthwhile considering the whole context of them, feel free not to comment on that.

But I would like to ask you about your work on, was Jesus a socialist? Could you take us through what your analysis of that question has revealed, please, Larry?

Larry Reed 17:29

I’d be happy to, Gene. In fact, the best way to begin that is to tell the story from the New Testament that answers your first question. Along the lines of what Dave Ramsey apparently said. Jesus Himself told nearly 40 parables and most of them deal with things like eschatology and salvation and so forth. But at least three of them have very strong economic content.

One of them that’s relevant to what you’ve just raised is the parable of the workers in the vineyard. This is about a man who apparently owns a substantial vineyard and he needs to bring the grapes in, it’s harvest time. Jesus tells a story of how he gets a group of workers together first thing in the morning and he says, “I’ll give you each a denarius for a full day’s work.” They say, “Okay.” They go out and they start picking grapes.

Around noon time, the owner realises, “I’ve got to get even more out there.” He gets another group together, and he says, “Look, I know that the day’s half-gone, but if you’ll go out for the rest of the day and pick grapes, I’ll give you each a denarius.” Finally, at the end of the day, with maybe an hour before a dark and he still has grapes that have to come in, he calls another group of workers and says, “If you’ll take time out, go out for an hour and pick some grapes, I’ll give you a denarius.”

Later, according to the story, the owner gathers all these three groups of workers together to pay them. The first group is very angry, because they’re saying, “We worked a full day and you’re giving us the same as those guys who showed up at the later, even the ones that only worked for an hour.” You would think that if Jesus were a socialist, he would have the vineyard owner saying, “You’re right, this is unfair. I’m sorry about that.” But instead, Jesus has the vineyard owner say to these guys, “It’s my money. You signed the contract. I’m giving you what I promised. Now, take it and get out of here.”

That’s Jesus basically saying, private property, voluntary contract, keeping your word, honest dealings, and I think supply and demand all defend what the vineyard owner is saying. Presumably, he had to pay that last group of workers a hefty premium to get them. They probably worked for somebody else all day and now, they’re being asked to go for yet another hour, he has to pay them a premium to do that to bring the grapes in.

Jesus does not say, “Let’s be compassionate and give this group the same as that group or in proportion to their time.” Instead, he says, “Each man is getting what he was promised when he agreed to by contract.”

I think Dave Ramsey is essentially right. There is no obligation, moral or otherwise, for someone to endure a loss or to get less than he could for property that’s his when market conditions suggests that a higher rent is worth it. It’s the higher rent that will likely bring more housing units into the marketplace, which will solve the problem in the long run anyway.

Gene Tunny 20:47

By inducing more supply, more investment in rental properties. That’s a good point. I’ll put a link to the article on Dave Ramsey. I thought it was a fascinating discussion. Also, I’ll find something to link to that. Was it a parable?

Larry Reed 21:12

The parable of the workers in the vineyard. I discuss that in more detail in my book, “Was Jesus a Socialist?” if anybody cares to look at it from that perspective.

Gene Tunny 21:25

It’s an interesting question. I must say, I’m surprised that it is something that’s up for debate. Is this because a lot of people on the left side of politics have appealed to Christianity as a way to support what policy positions they’re advocating for?

Larry Reed 21:51

I think so. I don’t give the left much credit for their economics, but I do give them credit for their marketing, because they’re always out there saying, “Go with us because our way of thinking will produce more for people. We’re going to take care of people. We’re going to give them stuff. It won’t cost them anything, they won’t have to worry about where it’s coming from.” The rhetoric is always very promising, but the results and the outcomes are pretty dismal and miserable.

A lot of people come to this mistaken conclusion that Jesus may have been a socialist because He talks so much about helping the poor. But I think in capitalist countries, where more wealth is produced, you have more giving and more caring and more philanthropy than you have in socialist countries. In fact, even government-to-government foreign aid is primarily from the predominantly capitalist countries to the predominantly socialist recipients.

If Jesus came back today and spoke to a large audience of people and said, “I was interested in the poor. Tell me what you all did for the poor?” If you raised your hand and said, “I voted for all the politicians who said they’d take care of that.” I don’t think He’d be impressed. I think He would say, “You’ve resorted to theft? I told you not to steal and I told you furthermore that the poor are folks that you, from the generosity of your hearts and your own resources, ought to help. I never told you you could pass it off to politicians. If they solved the problem, it’ll be at 10 times the price.”

Gene Tunny 23:33

Yes, that’s a good point. I’ll have to come back to this in a future episode and looking at what are the best ways to reduce poverty of it if we’ve actually figured that out? Clearly, the welfare state that we’ve got in countries like Australia, the UK, to a lesser extent, the US, you could argue it has relieved some absolute poverty. But at the same time, it does, arguably, traps many people in poverty in a way.

Larry Reed 24:07

To make a long story short, you can’t solve poverty if the pie is shrinking. You have to make a bigger pie and there is no known system in the history of mankind that makes a bigger pie faster than the system of freedom and free markets.

Gene Tunny 24:24

Absolutely. We’ll take a short break here for a word from our sponsor.

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Gene Tunny 25:03

Now, back to the show. The other things I wanted to chat with you about before we wrap up are some recent articles of yours. There was a piece, “Why I Wish We Could Put Chester Arthur and Joe Biden in a Room Together to Talk Infrastructure Spending”. I’d love to hear about that, particularly about Chester Arthur, because he’s one of the lesser-known US presidents.

Larry Reed 25:34

Yes, he is one of the lesser-known ones. He served less than one full term. He took office as vice president, became president when James Garfield was assassinated in the middle of 1881. He served about three and a half years, the rest of Garfield’s term. He’s often written off as sort of—he was tied to the corrupt Tammany Hall machine in New York and so forth. On the good side, historians will remember that he did support civil service reform and made the federal government a little less corrupt. That was a good thing.

But he also understood the Constitution and appreciated it more than Joe Biden does. I wrote that article pointing out what Arthur’s view on infrastructure spending was compared to Joe Biden’s in America. We recently went through a national discussion, a bill passed, supposedly bipartisan. It was a massive, almost $2 trillion in infrastructure spending.

An equivalent bill was called a Rivers and Harbors Act and Arthur vetoed it. In his veto, he raised some great objections, all of which are applied to the bill that Biden recently signed. He said, “This is way too much. There’s no way that a government of our size can know where all this money’s going to go. It looks like a small portion of it is even earmarked for infrastructure. There’s a lot of pork barrel stuff in here. Quit doing this, loading our bills and all this other nonsense.”

That’s what Joe Biden should have said about the recent infrastructure bill. But he was all for it from the start. I think about 10% was aimed at infrastructure, the rest is pork barrel and progressive agenda stuff. I would like to put Joe Biden and Chester Arthur in the same room and say, “Chester, go at it. Tell this guy what infrastructure is and why it’s wasteful to spend so much on.”

Gene Tunny 27:46

At the same time, would you say that there is an issue with infrastructure in the US with the quality of infrastructure? This is something I’ve chatted with Darren Nelson about in a previous episode and Darren’s view was, “We need to get the private sector more involved in public-private partnerships, perhaps.” Do you have any thoughts on that, Larry? What is the quality of infrastructure like? Is there a problem to solve and how would you go about it?

Larry Reed 28:19

With infrastructure, I think there has always been some measure of problem, because government has assumed from the start that this is a legitimate profits of government. Once you do that, you have to at least expect that they’ll keep it up and do it right and keep an eye it to prepare for when it falls apart. But politicians come and go and they’re more interested in the flash in the pan. They show up to cut the ribbon at the start of a bridge that’s being built. But once it’s built, it’s no longer politically sexy to stand around and keep an eye on it in case it collapses because they figure, “If that happens, it’ll be a long after I’m gone. Why should I care?”

You do end up with politicians putting more focus on the construction of the stuff and less on its repair and maintenance. That’s where you can get a bigger bang for your dollars or if you will, by writing contracts with the private sector that require ongoing maintenance and inspection and so forth. I wouldn’t want the government with its own employees and its own infrastructure monopoly becoming a bridge builder. They don’t know about bridges. That’s best done by the private sector. They should be contracting with private sector providers to do it and monitor the contracts. Put all the provisions in those contracts that would require proper maintenance.

Gene Tunny 29:52

That’s a good point. It’s one of those great challenges, how do you get the infrastructure that you need cost-effectively? In Australia, one of the problems we’ve got, there’s a lot of government investment going into infrastructure at the moment that it seems to be at very inflated prices all over the country. There’s a powerful construction union, which is allied with the government in the state that I am, Queensland, which has ended up inflating the cost of any infrastructure project by 30% or 40%. It’s quite extraordinary and taxpayers end up wearing that.

Larry Reed 30:43

I wouldn’t be surprised if you have some of the same kind of history in Australia, as we do in the US. But there’s a lot of history in America of government spending on infrastructure that produced disaster, because it dangled subsidies in front of private contractors, who then went after the subsidies and cared little about how well the infrastructure itself was actually built. The best example is America’s transcontinental railroads.

There were five of them built across the country. Four of them got extensive federal government land grants and subsidies. Not only land grants, but they got subsidies on a per mile basis. Four of them threw down tracks just to get the goodies. And in fact, the two famous ones that met at Promontory Point, Utah, as they were getting closer, they were crossing over to the other companies’ territory and blowing up the tracks because they wanted to get more subsidies by laying more track down. There was only one transcontinental that got no government subsidies. That was James J. Hill’s’ Great Northern. It was not by coincidence the only transcontinental that never went bankrupt because they had to put down tracks when it made economic sense, not because the government was throwing money at them,

Gene Tunny 32:06

Another good example I’ll have to investigate. This is the last question; I’d like to ask about some of your other writings and it looks like you have been prolific or regular traveller. Obviously, COVID cut back on all of our travels, but you’ve written some great pieces. You’ve made observations on what we can learn from other countries around the world and in some places that you generally don’t hear about. One of your articles is, “The World’s Oldest Republic Reveals the Secret to Peace and Prosperity”.

Larry Reed 32:46

Yes.

Gene Tunny 32:48

You’ve also drawn lessons from economic history in Italy. I think it was in Italy, your article, “Why the Separation of Bank and State is Important”. Would you be able to explain what is that secret to peace and prosperity? How that’s revealed by the world’s oldest republic and also the point about the separation of bank and state, please.

Larry Reed 33:13

Both of these articles, you can at FEE.org and you can find them also on where I blog on lawrencewreed.com. With regard to the oldest constitutional republic, we published that last Sunday, it’s about the tiny country of San Marino. It’s the fifth smallest country in the world. It’s entirely enveloped by Italy. It’s in the northeast of the Italian peninsula. Right in its middle is this big rock called Mount Titan.

It’s the oldest Republic in the world, dating back to the early fourth century when that chunk of territory was gifted from its private owner, a woman in Rimini, now part of Italy. She gifted it to a Christian stonemason who had fled there to avoid the persecutions of the Emperor Diocletian. She said, “You can have this property.” He, in effect, declared the first, and now the oldest constitutional republic.

Only twice in its history has it been invaded. In both cases, within a matter of months, the pope ordered the invaders out, lest they be attacked by papal forces. They maintained their independence all these years. They have a GDP per capita that’s a shade below that of the United States. The secret is that they have kept themselves economically free.

Freedom House is non-profit that rates countries as to their degree of economic freedom and they rate San Marino as the 12th freest country in the world. Its capital gains tax is only 5%, which is a third of what ours is in the US. It’s much lower than it is in the European community. A great little success story in that quiet little enclave in the Apennine Mountains.

The other example or article that you’re referring to comes from Genoa, on the other side of northwest Italy. Genoa was, for hundreds of years, an Italian city state, much as Pisa and Venice and Gaeta and some others were. The secret to its success, more than any other single entity, was a private bank that was so private, it was in effect, a country within a country. It was called the Bank of St. George.

When it was chartered in 1407, the separation between the bank and the government of Genoa was as complete as it could get. It basically said, “We’re not paying any attention to you and you don’t have to pay any attention to us but you need us.” Because the bank consistently bailed out the state when it got in trouble. But the bank was very firmly on a gold standard, it had a policy of not issuing any paper for which you did not have gold coin on deposit. It was reliable, it was honest, and for hundreds of years, until Napoleon invaded and shut the bank down, it was a rock of stability and a big reason that Genoa became a maritime trading giant in the Mediterranean.

Gene Tunny 36:37

This wasn’t something positive Napoleon brought then. That’s interesting, I have to read more about it. How does it illustrate that the separation of bank and state is important? How does it illustrate that?

Larry Reed 36:52

The Bank of St. George exerted an anti-inflationary pressure on the government of Genoa. Governments love to inflate, and the moment they get in charge of banking, that’s what they do. They print the stuff and makes it easier for them to pay their bills and to run deficits and so forth. The Bank of St. George did not abide by that. They wouldn’t have recognised any coin or paper from the city of Genoa if it hadn’t been sound. Their example spoke volumes to the people of Genoa and across Europe. Here’s a bank that’s in great shape. It has to bail out the government of the region every now and then because they’re profligate, but the bank is not.

I think the separation of bank and state is an issue I wish we spent a lot more time on these days. We’ve assumed that government should be orchestrating the banking system, but the history of government and banking is not a positive one. They take over banking whenever they can because it’s their avenue to depreciating and debauching currency.

Gene Tunny 38:06

I think it’s a big concern when governments set up these banks or shadow banks to promote particular policy objectives. I remember, back in the late 2000s, there was a lot of talk about an infrastructure bank that was something the Obama administration was looking at but didn’t go through with. There were similar moves here in Australia that didn’t amount to anything because it reminded people of what happened in the 80s with the state banks of South Australia and Victoria, the Tricontinental merchant banking arm and they got heavily involved in speculative property development, if I remember correctly, and ended up going bust and costing taxpayers billions of dollars. People still remember that. There’s a risk if governments get involved in banking and financial shenanigans.

Larry Reed 39:06

Too often anyway, we judge government by the stated intentions rather than by actual outcomes and results. If a government came to me and said, “What do you think about us getting into the banking business?” I would probably say to them, “Aren’t you in the post office business already? Aren’t people complaining about that? Why don’t you get that right before you go into banking?” In US, everybody complains about the post office. What makes you think the same entity can manage a nation’s banking system?

Gene Tunny 39:38

Exactly, very good. Larry, any final words? Anything you think we should be thinking about or looking out for?

Larry Reed 39:48

I would say this thing that people everywhere should be thinking more than they are about the importance of individual liberty. We take it for granted in places where we’ve had a lot of it. But there’s nothing about it that’s either automatic or guaranteed, and it can disappear with bad ideas almost overnight. And yet, life without liberty, in my estimation, is unthinkable. We better think about it. I can’t imagine a life in which you aren’t living yours. You’re not making your choices, somebody else is imposing their choices on you. They’re living their lives through you.

I can’t imagine living in that environment as they, to a great extent, do in places like North Korea or Cuba. Liberty is precious, it’s rare in history. It’s never guaranteed and it deserves the conscious deliberation, and sometimes sacrifice of everyone wants to be a free person.

Gene Tunny 40:50

Absolutely. It just occurred to me, we probably should have touched on the pandemic. Feel free to respond to this if you like. Otherwise, we can wrap up. In Australia, we’ve had quite severe restrictions relating to COVID at times and they’ve raised eyebrows around the world. People have thought, “What’s going on there in Australia?” But what a lot of people in Australia say is that’s necessary for the public good.

You may bang on about civil liberties and I have, at times, think some of these restrictions have been excessive. But you get a lot of pushback and people say, “You think you’ve got the rights to do that but you don’t have the right to spread a deadly virus and spread the disease.” That’s how they push back. I agree, I think we’ve lost the original commitment, a strong love of liberty that we’ve had. I think we’ve lost that. People are terrified of this virus and they push back with that line, “You don’t have the right to spread the virus.” I don’t know how to win those arguments, to be honest.

Larry Reed 42:12

There’s something to be said for this and that is that this circumstance was unprecedented and it’s not over yet. That the jury may not yet be completely in with all irrelevant verdicts. I have a sense though, that the more we learn, the more of this we go through, the more experience we have with it, the more we’re likely to look back and say, “Those lockdowns were counterproductive. The mask mandates went on far longer than they should have, if they ever should have been in existence in the first place.” I think a lot of the tools that government employed will come under more scrutiny and questions.

If you’re a cheerleader for them now, I would say, “Why don’t you hold off because you may be embarrassed in the not-too-distant future?” But what concerns me the most is that all of this totalitarian impulse sets dangerous precedents because people who love power, who want it to be concentrated in government and think that the right people will do the right things, they don’t stop with the power that they get. They usually say, “It’s necessary now, I’ll hold on to it.”

In the long run, if we allow this COVID experience to set the new norm for government intervention, radical intervention in our lives across a broad front, we may look back and say, “We would have been a lot better off if we simply endured COVID.” Because one of the worst things that people can do is to consign their lives to politicians. There are a lot of things they end up regretting whenever they do that.

Gene Tunny 43:51

I think that’s a good point, Larry. We might end there. Thanks so much for your time. I enjoyed that conversation. Some great points and excellent historical examples that I’m going to have to look up and add to my arsenal of historical examples that I can bring up. Very good. Lawrence W. Reed, President Emeritus of the Foundation for Economic Education. Really enjoyed the conversation. Thank you so much.

Larry Reed 44:20

My pleasure. Thank you, Gene.

Gene Tunny 44:22

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 economicsexplored.com and we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Tags covid-19, economics, government, inflation, infrastructure, money

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Value of dissent for analysis & decision making – Leonora Risse quotes RBG in EP124

Post author By Gene Tunny
Post date February 2, 2022
No Comments on Value of dissent for analysis & decision making – Leonora Risse quotes RBG in EP124

In Episode 124 of Economics Explored, Australian Women in Economics Network Chair Dr Leonora Risse reflects on the value of diversity and dissent for analysis and decision making. In the conversation, Leonora mentions that, in a 2019 journal article, she quoted late US Supreme Court Justice Ruth Bader Ginsburg on the importance of dissent. RBG had said:

“There is nothing better than an impressive dissent to lead the author of the majority opinion to refine and clarify her initial circulation.”

Here’s a clip from Episode 124 with Leonora featuring a discussion about the value of having diverse views in economic research and policy advice.

Tags decisionmaking, diversity, economics, rbg

Podcast episode

Women in Economics with Dr Leonora Risse of RMIT, Melbourne – EP124

Post author By Gene Tunny
Post date January 29, 2022
No Comments on Women in Economics with Dr Leonora Risse of RMIT, Melbourne – EP124

RMIT’s Dr Leonora Risse, formerly of Harvard’s Women and Public Policy Program, argues greater gender diversity in economics would improve the quality of economic analysis and policy advice. Arguably, it would shine more light on and promote solutions to gender inequality (e.g. the gender pay gap). Is Leonora right, or is this “self-serving identity politics” as some fellow economists have alleged about a focus on gender issues? In Episode 124, Economics Explored host Gene Tunny explores this question in a wide-ranging conversation with Leonora. The discussion considers differing average preferences among male and female economists on policy issues such as fiscal austerity and redistribution, touching on UBI.

Tags economics, genderdiversity, genderpaygap, identitypolitics, women

Podcast episode

Truth (or the lack of it) in politics and how to think critically with help from Descartes – EP123

Post author By Gene Tunny
Post date January 22, 2022
No Comments on Truth (or the lack of it) in politics and how to think critically with help from Descartes – EP123

Why politicians need to stop lying and cut the endless BS. Episode 123 of Economics Explored features a conversation with Philosophy Professor Deb Brown, Director of the Critical Thinking Project at the University of Queensland. Deb also chats with show host Gene Tunny and guest co-host Tim Hughes about what it means to think critically, drawing on her expertise in philosophy, including her study of Descartes.

https://economics-explained.simplecast.com/episodes/truth-or-the-lack-of-it-in-politics-and-how-to-think-critically-with-help-from-descartes-ep123

About this episode’s guest – Professor Deb Brown

Deb has a Bachelor of Arts from the University of Queensland and a Master of Arts and PHD from the University of Toronto.

Links relevant to the conversation

Abbreviations Deb uses:

NAPLAN: National Assessment Program – Literacy and Numeracy
SES: Socio-economic status

The Australian ABC News article Deb was quoted in:

Is telling the truth too much to ask of our politicians?

A book Deb highly recommends:

On Bullshit by Harry G. Frankfurt

Article on the AUKUS (Australia-UK-US) nuclear submarine agreement:

What is the AUKUS partnership?

NPR report on Trump-Trudeau argument about the US’s trade balance with Canada:

Trump Admits To Making Up Trade Deficit In Talks With Canadian Prime Minister

Note that the allegation made by President Trump was that the US was running a trade deficit with Canada, whereas the US typically has a trade surplus with Canada (i.e. typically US exports of goods and services to Canada exceed imports to the US from Canada). The White House argued that President Trump was referring to the trade balance relating to goods only and excluding services.

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode.

Tags criticalthinking, economics, philosophy, politics, scientificmethod, truth

Podcast episode

Dan Mitchell on the global tax cartel and California’s economic suicide – EP122

Post author By Gene Tunny
Post date January 15, 2022
No Comments on Dan Mitchell on the global tax cartel and California’s economic suicide – EP122

136 countries have agreed to implement a global minimum corporate tax rate of 15%. Renowned US public policy economist Dr Dan Mitchell explains why he thinks this “global tax cartel” is bad news. In episode 122 of Economics Explored, Dan also explains to show host Gene Tunny how California is committing “economic suicide”, and why entrepreneurs are moving to Texas, Nevada, and Florida, among other low tax states.

https://economics-explained.simplecast.com/episodes/dan-mitchell-on-the-global-tax-cartel-and-californias-economic-suicide-ep122

Here’s a clip from the conversation that Dan has shared on YouTube:

About this episode’s guest – Dr Dan Mitchell

Dan Mitchell is Chairman of the Center for Freedom and Prosperity, a pro-market public policy organization he founded in 2000. His major research interests include tax reform, international tax competition, and the economic burden of government spending. Having also worked at the Heritage Foundation and Cato Institute, he has decades of experience writing editorials, working with the public policy community, and presenting the free-market viewpoint to media sources. He holds a PhD in economics from George Mason University.

Links relevant to the conversation

Relevant posts on Dan’s International Liberty blog:

Yes, Starve the Beast

The Need for Global Tax Competition

The Global Tax Cartel Is a Victory for Politicians over Workers

The Necessary and Valuable Economic Role of Tax Havens

California and Economic Suicide

Other relevant material:

https://www.weforum.org/agenda/2021/11/global-minimum-tax-rate-deal-signed-countries/

https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/g20-endorses-global-minimum-tax-rate

https://www.reuters.com/business/ireland-backs-global-tax-deal-gives-up-prized-125-rate-2021-10-07/

Information on incidence of corporate taxation

In his textbook Public Finance and Public Policy (6th edition, p. 748), MIT’s Jonathan Gruber wrote:

Suarez Serrato and Zidar (2016) estimate that 35% of corporate taxes are shifted to wages, 25% is shifted to land owners (through general equilibrium effects), and 40% is borne by corporate owners.

The study Gruber cites was published in vol 106, no. 9 of the American Economic Review:

Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

Tags california, corporatetax, economics, government, publicchoice, publicfinance, spending, tax

Podcast episode

What is the Economy? And Why It Matters to You | EP121

Post author By Gene Tunny
Post date January 8, 2022
No Comments on What is the Economy? And Why It Matters to You | EP121

What is the Economy? And Why It Matters to You is a new book from UK economics writers Beth Leslie and Joe Richards, who are interviewed in episode 121 of Economics Explored. Legendary music producer Brian Eno has endorsed the book, writing “This clear and comprehensible book is long overdue.”

https://economics-explained.simplecast.com/episodes/what-is-the-economy-and-why-it-matters-to-you-ep121

About this episode’s guests – Beth Leslie and Joe Richards

Beth Leslie is a writer and editor. She became interested in economics when she realised it was a great way to better understand the world around her. Beth is currently the Editor for Economy, a charity that seeks to make economics more understandable for everyone.

Joe Richards is an author, educator and economist. After the financial crash of 2008, Joe’s family lost their business and the home they grew up in. Spotting a lack of public understanding in the economy, Joe’s journey in economics began. Joe campaigned to make economics more accessible for everyone, working with organizations from the Bank of England and BBC News, to local schools and the UK government.

Links relevant to the conversation

Where you can purchase What is the Economy? And Why it Matters to You:

US https://www.bloomsbury.com/us/what-is-the-economy-9781786995605/

UK https://www.bloomsbury.com/uk/what-is-the-economy-9781786995605/

Australia https://www.booktopia.com.au/what-is-the-economy–beth-leslie/book/9781786995605.html

Thanks to the show’s audio engineer Josh Crotts for his assistance in producing the episode.

Tags degrowth, economics, economy, environment, fairness, housing, power, work