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Business as Unusual: No such thing as Business as Usual anymore? w/ Rick Yvanovich – EP204

Serial entrepreneur and executive coach Rick Yvanovich talks about his new book “Business as Unusual: How to Thrive in the New Renaissance.” Rick argues that the world is continuing to undergo a massive shift and that there is no going back to normal. He shares his insights on the mindsets, habits, and skills necessary to succeed in this new era. The conversation also touches on Rick’s journey to Vietnam, where he currently resides, and what it was like living in Saigon during the pandemic. 
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About this episode’s guest:  Rick Yvanovich

Entrepreneur, Techie, Brit, baby boomer, bean counter in: supermarkets, accounting profession, breweries, newsagents, defence manufacturing, IT, Talent, F&B, property development and BP, in the UK, China, Singapore, Switzerland and Vietnam. Posted to BP China as Finance Manager, then to BP Vietnam in 1990 making him likely the longest Brit and one of the most seasoned expats in Vietnam.

Fellow Chartered Institute of Management Accountants (CIMA), Chartered Global Management Accountant (CGMA), Fellow CPA Australia, MSc Strategic Business Management (Manchester Metropolitan University, UK), Certified Coaching and Mentoring Professional (CCMP), Certified Master Coach (CMC).

Treasurer & Board Member BritCham Vietnam, Vice-Chair AMCHAM HCMC DEC (Digital Economy) Group, Chairman Industry Advisory Committee RMIT Vietnam, founder/co-founder/investor/advisor of multiple start-ups.

Regular speaker for Talent, Coaching, Accounting, Digital Transformation, Project Management, Doing Business in Vietnam.

For further info about Rick, check out:

https://www.rickyvanovich.com/about/

What’s covered in EP204

  • [00:01:45] Rick’s career and journey to Vietnam
  • [00:08:00] Business as Unusual. 
  • [00:13:27] The great reshuffle. 
  • [00:16:29] The impact of lockdowns in Saigon. 
  • [00:25:01] Technological advancement. 
  • [00:29:19] Climate change and AI. 
  • [00:33:24] How to Thrive in the New Renaissance. 
  • [00:36:11] How AI helps you overcome the tyranny of the blank page. 
  • [00:41:06] Reflecting on life during COVID. 
  • [00:46:19] Zoom calls as a lifeline during COVID. 

Links relevant to the conversation

Rick’s book Business as Unusual:

https://www.rickyvanovich.com/books/bauu-book-series/

Article on “How AI is helping airlines mitigate the climate impact of contrails”:https://blog.google/technology/ai/ai-airlines-contrails-climate-change/

Transcript: Business as Unusual: No such thing as Business as Usual anymore? w/ Rick Yvanovich – EP204

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a human being, Tim Hughes from Adept Economics, to pick up any clangers that potters… sorry, otters might have missed. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. In this episode, I chat with entrepreneur Rick Yvanovic about his new book “Business as Unusual How to Thrive in the New Renaissance”. Rick argues that nothing is going back to normal and in Business as Unusual, he gives us his thoughts on the mindsets, habits and skills we need in a world in which there’s no more business as usual. Okay, let’s get into it. I hope you enjoy my conversation with Rick Yvanovich.

Rick Yvanovich, welcome to the programme.

Rick Yvanovich  01:17

Thanks for having me, Gene.

Gene Tunny  01:19

That’s terrific. Rick, keen to chat with you about your new book. “Business as Unusual, How to Thrive in the New Renaissance”. So very interested in that. To start off with I understand you’re coming to us from Vietnam. Could you tell us a bit about your journey to Vietnam, please, Rick, how did you end up there? In terms of your career trajectory?

Rick Yvanovich  01:47

Oh, great question. Gene. Yes, I am calling in today from Vietnam from Saigon or Ho Chi Minh City, as it’s known as today, you might be detecting from my accent that it’s from Britain. So I’m a Brit, although people do accuse me of having an Australian twang, but maybe your listeners would dispute that. How do I get here? How do I how do I get from where I actually started off with which was in a supermarket in the UK, I used to work in as a as a as a management trainee in a supermarket chain. When I left school and didn’t quite make the grades to go to university. And having worked in a supermarket for some months, after about six months, I realised I sort of felt brain dead. As in, I wasn’t applying my brain. Because I’m a numbers person. And, you know, I was a good student at school apart from when it came to those last exams. And for some reason, I suddenly decided, you know, work in a supermarket wasn’t for me, working with people wasn’t for me. I want to become an accountant. Okay, I don’t know where that came from. Maybe the numbers, or maybe it was a careers advisor at school who told me Oh, you’re a numbers guy, Rick you should become an accountant. So I went back to accounting school, became an accountant, joined an audit accounting firm, which I really didn’t like. So switch to management accounting and worked for a brewery, which was far more exciting. I think it’s the only company I’ve ever worked with where they, they gave you free beer and wine at lunch, and encouraged you to drink it. And then that led me on to other things. You know, I moved to defence, manufacturing, defence electronics, and then Facilities Management, or an IT Bureau, which is today known as cloud and cloud computing. And then I moved to real estate. And then I moved to oil. And when I was working for that oil company, they moved me to China. And then they moved me to Vietnam. So that was all the way back in 1990. So I’ve been here for a while. It’s been a it’s been a long and and unusual journey.

Gene Tunny  04:21

Right. Yeah. So you’ve worked across a diverse range of industries and you were in oil, but you no longer in in oil. You’ve been doing your own thing or running your own business. Is that right? And that’s what you’re doing now?

Rick Yvanovich  04:33

Yeah, that’s right. I mean, back in. In 94, I was gonna get shipped back to London, oil price was running at about $15 which was ridiculously low compared to today, and it was going even lower. So that obviously changed all the economics of those companies. And having been in Vietnam for some years, I hadn’t met my previous five bosses. So it would be very dangerous to step onto that plane and step off the plane in London and walk into the office because that will be a very short journey, I think. So I found out about a voluntary redundancy package and I retired. So I actually retired back in 1994. I am a workaholic, though. So that lasted for about five seconds. And I started up an IT company. And we’re still doing what we started literally 30 years ago or 29 years ago, so 30 years next year, which is to implement accounting systems, I’m an accountant, implement accounting systems, seems a bit obvious. And we do it in about 80 different countries around the world today.

Gene Tunny  05:39

Very good. Okay. As an economist, yes, I could, I’m very supportive of my cousins, or my fellow people in the accounting profession, and I understand the value of it. So that’s, that’s good stuff. Righto, well Rick I’d better ask you about your new book Business as Unusual. So with the title Business as Unusual, what are you driving at there? What is the, the genesis of that title? Could you explain that, please?

Rick Yvanovich  06:09

Well the genesis of of that was, you know, the book was birthed, as it were, in about 2020. I’ve always had this, you know, on my life goals list, you know, might be or could, may have been a life fantasy list, you know, go write a book. And it’s been that for years. But if we go back, you know, some years if we can all remember, not pretty sure if everybody listening can remember, 2020 is when we had that COVID pandemic sort of sprung upon us by surprise. And it was during that that period, that I actually, because I had time on my hands, funnily enough, I started writing a book, and got it actually published earlier this year. But you know, as, as we were locked down, and I know in Australia, you know, you locked down the country for some years. And here in Vietnam, we effectively locked down the country for some years as well. So as an expat here, as a foreigner, I could leave, but I couldn’t come back, necessarily. So that was not a good idea to leave. And so therefore, I actually worked out from the start of the pandemic, when they started the lock downs, which is tail end of the first quarter of 2020, I didn’t move more than about 10 or 15 kilometres away from where I live for two years, literally for two years. As this is was all happening. And as things started falling apart, and all the wheels fell off everything people kept saying, when this is over, when we you know, go back into the offices, and it goes back to business as usual, when you know, this is just the new normal, you know, we’ll get over this and everything can just go back to the way it was before. And this just sort of annoyed me more than anything else, but there’s nothing remotely normal about any of this, there is no business as usual. And especially here in Vietnam, you know, where the clamp downs were pretty tough, you know, confined to apartment, you know, you need a permit to literally walk out your front door and go down to go down to the shop once a week or twice. So we really, really, really tightly controlled and it was open, close, open, close, open, close. And this went on for a while. And each time people thought it’s over, and we can go back to the office. Something else happened, oh, we got another lockdown or another another. And I said, there is nothing usual about this. This is all unusual. And that’s where the where the title came from business as unusual. Because shock after shock or surprise after surprise kept hitting us whether it is another lockdown, or, you know, other things we’ve experienced. There’s a bit of a war going on and you know, in Europe isn’t there. You know, we have the economic turmoil that’s hitting some countries, we’ve had the great resignation or great insert word that you want. All these things are happening and have been happening. And, and it’s not over yet. This is just unusual.

Gene Tunny  09:34

Yeah, yeah. Yeah. Certainly since 2020. I fully agree with you. I’ve got a couple of questions and a few things I want to explore. So Rick, you said you know things aren’t going back to normal? I mean, what have you noticed what things have you noticed haven’t really settled down in in say, the way we work or the way we live? So the economy society, what have you really noticed that hasn’t gone back to normal?

Rick Yvanovich  10:03

There are a few things. So when we look at normal, and what do we really mean by that? So you could say that’s linked to a bit business as usual. So that business as usual doesn’t have to be in a work context. It can just be an a non-work or a life context. And I think this is all very much linked to this, this great resignation or reshuffle or whatever you want to want to call it. Pre-pandemic, pre all of this happening. Normal, one could argue, was the, you know, we get up, we go the office, we sit in our cube, you know, we go home, we get on with life. So married with our job, married to our job, maybe married to our mortgage, got bills to pay, right? Kids in school, all that kind of stuff. And I feel that there was a as an acceptance that we might be a bit bit like that hamster on a wheel at work, and we’re in a cube, we’re in a cage and we’re not going anywhere. COVID comes along, and they took the office away, they threw the cube away, and they threw that wheel away, you know, are we any better off? Well, we don’t even have a wheel to run around. And you know, we’re not even in that cube anymore. We’re just somewhere else which might be your home, or whatever you ended up being. Because at the end of the day, when the lock downs happen, it’s like musical chairs, isn’t it. And I know people who were on a business trip, and they couldn’t get back into Vietnam. They also couldn’t get back into their country of origin either. And they were just stuck wherever they were stuck. And you know, it’s crazy. I know some people who are stuck literally for six months or 10 months in a third country where they didn’t want to be in in the first place, but they couldn’t move. Anyway. So I liken it to they’ve, you know, we’re no longer that hamster or whatever, running in circles in a wheel going nowhere. I feel that people feel that they’re not too sure what direction to go in anymore. And so it’s more like, we’re still that hamster, or any other animal you want to call yourself. But we’re trapped in a maze. You know, there are lots of different directions we can go in. But they’re not necessarily leading anywhere. And it’s a bit like the, the Cheshire Cat in you know, Alice in Wonderland. And Alice comes to the crossroads and sees the cat and says, you know, which way should I go? And the cat’s sort of saying, well, it really depends where you want to go. And Alice is replying well, I really don’t know, the cat’s saying, well, it really doesn’t matter where you’re gonna go? Because you’re not going to go anywhere. And I feel that’s what the great resignation is all about. You know, some people have been forced to resign because their industry has collapsed, or the company they’re working for has gone bankrupt, and it’s collapsed. Or they didn’t like how they’re being treated when all this was happening, and so they’ve been, they’ve had to resign, or they were terminated, or they walked with their feet, because the grass is always greener. The only problem is, is people have found that the grass isn’t greener. And they’re still moving around. And so the ripple effects of the Great reshuffle as it’s, you know, as it morphed into, a still happening and is, you know, it’s happening across the world. So the way that we look at work has changed. And we can see this by the yo yo that we had, maybe it’s less this year, but especially last year, when companies opened up again, hey, you can come back to the office. Yeah but we’ve been working remotely for a year and I like working remotely, and I don’t want to come back to the office. So you know, if your company allows you to work 100% remotely and you like it, you know, you’re quids in right? But no worries. However, what happens if you know, you’re forced to come back to the office and you’re told you must come back to the office? Or you must be in the office for X days, when you want to not be in the office? Conversely, what are those? What about those people who really, really miss the office, they missed all that collaboration, all their friends and they want to go back to the office, okay, but they’re told no, no, we got rid of the offices we worked out we can save loads of money by having no offices, go work from home or wherever you want. So the whole way of working is changing and some companies are enforcing it. Some people are sitting on the fence, you know, and that’s really confusing. Okay, it’s really, really confusing. And so not only does that affect each one of our citizens as an individual, Hey, what is our company doing in which we may agree or disagree with? Working within that? Okay? Because I’m I’m seeing that more and more or I don’t know what the percentage is, but I feel it’s very high, very high percentage of companies have some form of remote work now or hybrid work. And the way that you work in a hybrid situation is new to a lot of us, okay? Like, hey, we went to the office and like we sit around the watercooler, we go out for lunch, we have a coffee, we go for a beer or whatever. That’s how it works. But how do you do that when half the people aren’t there? So how do we communicate? And today we’re on we’re on a zoom call, which maybe two years ago, and we weren’t that expert zoom. Whereas today, well come on it’s a basic skill to be expert on Zoom and Teams and all the other video conferencing platforms, it’s just a new tool the you absolutely must know. So all how do we work? Well, that’s a tricky one. What’s the best practice for companies? Oh, that’s a tricky one as well. How can there be a best practice when we’re still trying to work it out? And that’s just work. Now, if we look at, but from another point of view, how about our lives, okay, in the year or so, depending on what country you are in, and whatever restrictions that you experience, you know, if your work, the way you work has changed. How has the way you live changed? You know in a lot of countries is especially what I found here in Vietnam, having been locked down for so much. There’s some really basic things that I started missing. You know, I’m not a tree hugger. Okay. However, once them doors were open, you could actually go outside. Hello, gosh, there’s a tree. Let me touch it. I haven’t seen haven’t touched one of these for literally months. Okay, and then you know, what, when things are taken away, maybe we, we start appreciating, and we start noticing things that that we actually missed, going for a walk in the woods, silly thing like that. Or, you know, walking on the grass in bare feet or going down the beach, you know, strike going down the beach and striking up a Barbie. You know, all of these things were taken away.

Gene Tunny  17:35

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

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Gene Tunny  18:10

Now back to the show.

As a matter of interest Rick, can I ask you about Saigon? Because I don’t know a lot about it. I mean, other than I mean, it’s a large city. So if it’s like other Southeast Asian cities, then it could be very difficult to go outside and just walk around and go on a nice relaxing walk. But what is it like? I mean, is it? Are there places you can go? Are there parks? If you do get outside? Or do you have to travel further afield.

Rick Yvanovich  18:39

Ho Chi Minh city, officially then 9 million people, okay 10 million people in a place with 10 million people. There’s one thing you’re guaranteed. They’re always people about? Ok? And the weird thing during COVID was the the city turned into arguably a ghost town. Okay, because like any other sort of urbanised city, where are the people really from? Are they native to the city? Or do they come from outside the city? So the big challenge that that I feel the Ho Chi Minh city face and its impact on people, was that yes, it’s you know, the bustling, the biggest Metropolis there is in the country. And it’s also the employer of an awful lot of people in in in the whole province of Ho Chi Minh city because the city itself is a province is so big. There are multiple industrial zones, and there are hundreds of 1000s if not millions of workers there. Those are not native to the province. They come from elsewhere. So when the pandemic hit, and they say stay at home. And if you’re a factory worker, and a home is the room that you’re sharing that you happen to live in, because you work in a factory. Okay, home is miles away. And as as they tighten down restrictions. And you know, we had things like tent cities emerge as an Yeah, if your company can provide you a place of sleeping a tent, literally, which could be set up in a factory or even in your office, then you can stay there, you don’t actually have to leave that office or building. And that happened for a while. But what what happens if you employ 50,000 people? It’s been tricky, right? So there was mass migration, when they shut it down. And hundreds of 1000s of people were fleeing the city. Okay, so the city sort of shrunk because a lot of people left. And it was literally a ghost city. And whereas on a normal day, you have to look both ways very, very carefully to cross the road. And, and if you go into the busy streets, you might even learned, need to learn how to cross the road, because there’s so much traffic, at this ghost home, you can do what I used to do back in the early 90s when I first arrived here, you could lie down in the middle of the street, and nothing would happen because there was nobody there. So it’s weird. So for me, it was like Oh nostalgia. There’s no one around this is wonderful. There’s an I can’t hear anything. There. No, no, guys, there’s no toot toot there. No, no, there’s no noise control here, either. And so there’s constant noise all the time. And it was like, it was wonderful. I loved it. So it also remind me what I miss what I missed what I’ve been missing.

Gene Tunny  22:00

I mean, it’s good that we’re out of lockdown and restrictions and even if we’re not getting back to normal, even if we’re in this business as unusual. I think it’s still preferable to, to what we had during the pandemic with all the restrictions. Right. Can I ask Rick about a are you arguing or your you think that we’re in a phase now we’ve we’ve left the pre COVID world, and we’ve just got to get used to this unusual, you know, unusual things happen? Or maybe we were deluding ourselves pre COVID. And we forgot that things unusual things can happen. What’s your take on that? Should that just be our basic operating principle, you should be careful assuming things are going to be business as usual. There’s a debate about whether in the past we ever it ever made sense to do that. We should expect volatility, we should expect shocks, so to speak. What’s your take on that, Rick?

Rick Yvanovich  22:57

Yeah, I agree with you. It’s the VUCA mindset, isn’t it? Which was penned a long time ago? Yeah, the VUCA as in volatile, uncertain, complex and ambiguous, so that VUCA mindset. Now, if we had a VUCA mindset with COVID, you know, we’d be highly resilient and agile to it and like whatever, we’d be able to cope with it. But not many of us knew that mindset. And therefore, like, you know, somebody moved all the goalposts. And you know, what do you mean, I can’t go in or out of the country? What do you mean, I can’t walk down the road? Can’t walk my dog or whatever? I mean, this is ridiculous. Yeah. So all of those personal freedoms that we have taken for granted. I think we have got a rude awakening that will okay, this is an unusual situation with we’re taking them away. And there’s huge backlash to that. So anyway, I believe that there is no going back to normal. Okay. That’s why I call it business as unusual. I think we need to embrace the unusual no matter what anybody says COVID is overall whatever you want to class it. Look at what’s happened just this year with a generative AI. Yeah, you know, that took people by surprise. Like, where did this come from? Well, okay, it’s been brewing for more than a decade, guys. But you know, it that that has hit the world by storm. So that’s yet another you could say it’s another shock. Okay. It’s another huge shock on top of all the other shocks that we’ve had. So do you want to call it a shock? Do we want to talk call it technological advancement, okay, because that’s what it is, is just some bright sparks dreaming up some more great, innovative ideas, and it’s called generative AI and the world is embracing it in fits and starts. Okay, so some people are advocating oh this is terrible legislate against it. And other people are, you know, the first movers are embracing it and racing ahead. That’s just version one you could say of generative AI, what’s next? It’s going to keep on coming and coming at us. So how we live, okay? And how we work needs to be adaptive to that. Because we’re either going to get steamrollered and squashed by it, or we are going to be resilient to it, we’re going to be agile to it. And we’re going to embrace it and use it to keep moving forward.

Gene Tunny  25:43

Yeah, well, the take up of it is, is extraordinary. And I mean, all sorts of people are finding uses for it. And I mean, I find, I find it’s helpful, you have to bear in mind that it’s a not very good intern, I think, as Kevin Kelly described it, so you do have to be careful what it gives you, and it says that all you look at it, it doesn’t necessarily give you factual information, if it’s if we’re talking about Chat GPT. And sometimes the images that things is it mid journey, the the generative AI, image creator, but whatever it is, they can do quirky things like creative, you know, give people extra fingers and things like that. So you have to be careful with that as a first start on things. It’s just extraordinary. And I mean, the risk is if you know, we, AI guess you know, if it’s, if it makes it easier for people to commit scams to hack to and then you know, if you think of all of these nefarious or these worst case scenarios where the AI becomes what did Skynet become in Terminator 2 become sentient or became conscious. Takes over a bit. I think that’s probably a bit outlandish. But yeah, I agree with you AI is one of the things we need to that’s a huge, huge development. And yeah, we’ll have we’ll have to see how it all develops. And I mean, potentially, we will need some regulation around it. Anyway, that’s just a comment rather than a question, Rick, but if you did want to respond in any way,

Rick Yvanovich  27:15

It’s true. At the end of the day, AI is a tool. And like any tool, it can be used for different things, you can use it use it for good. And you can use it for not so good. And then unfortunately, there will always be not so good folks around doing not so good things. But we shouldn’t let that overshadow all the wonderful things that AI can actually do. I mean, there’s so many positive applications to it today. And I think as people become more aware of it, and it becomes more readily available and more cheaply available, not just for individuals, but for organisations as well. It can really, really, really help. And at the end of the day, you know, I like your comment that I agree, it’s like a not a very good intern, I would reframe that, I think it’s good to treat it like an intern in that doesn’t know what to do. Okay. So it’s not going to proactively do something until you prompt it. So it really is linked to how good are we in asking it to do what we want it to do? And I think that’s how most people are using the typical AIs that the moment? The next level is already? How do you teach it? And this is even Chat GPT? How do you teach it to respond better? So again, take that intern analogy. How would we teach it to do things better? And if you know how to do that, then it will.

Gene Tunny  29:02

Yeah, absolutely. I mean, we’re, it’s just early days. And already, I mean, it’s helpful. I use it to generate the first drafts of shownotes. episode titles and episode descriptions. And yeah, it gives you somewhere to start. So it’s terrific in that regard. Righto, Rick, what about some other things that could be coming at us? Or that could make things unusual? Have you thought about anything? What other possibilities? There are? I mean, climate change. I mean, if you think about some of the extreme scenarios around that, is that something that concerns you anything else?

Rick Yvanovich  29:39

Oh, yes, climate change should concern all of us. And maybe this is something where AI can actually help us. You know, arguably AI is collective wisdom, isn’t it? It’s all our knowledge. We just have to ask it in the right way. So again, it’s it’s a tool and how we use the tool. So for climate change, there are a couple of things. I read an article the other day about what Google is doing with AI and the airlines, one of the biggest contributors to climate change is air travel. And one of the things that causes a negative climate effect is the vapour trails that an aeroplane creates when it’s flying. Okay? And that contributes, I can’t remember the number but it’s some horrendously high number 30 40% of the pollution that it’s creating. So the challenge was, can we use AI to do something about the aeroplanes trajectory to minimise that, okay? Because it’s the aeroplane going through the different, going through the air, and what you know, what type of air is it, you know, how saturated that air is, how warm it is, how cool it is, and it can cause more or less vapour traps. Keep a long story short anyway, they worked it out, okay? And are trialling getting the air, when when they’re flying the plane is to do some minor adjustments to go a little bit higher or a little bit lower to reduce the vapour trail. And in trials, they reduced it by even as much as 50%. And that’s just a little tweak. You know, that’s not very much. Now other things as well. I mean, we know with the Earth getting a lot hotter. Yes, we all want to whack up that aircon and we’re whacking up the aircon to make our environment cooler. But we’re making our environment cooler because it’s hot. Okay, so there’s other tech out there already to try and reduce the heat. Okay, that a building has. And again, using some AI in their analysis of this. So it’s a bit like the paints that they have created. All right, which will help reflect the right type of rays. Okay, the sunlight, which will, they’ve actually worked out that if they use these panels that they’ve created, which reflects the sun, okay, but only certain wavelengths, it actually cools, it’s cooling. Okay, but it doesn’t block out the sun. It’s only certain rays. And again, AI is being used for for things like this. So there’s an awful lot of good that we can use AI but AI sensibly, and obviously, you know, certain industries like the health industry. And I would expect to see huge, huge inroads in that. Things will carry on changing. And I think with advanced tools like AI coming in and becoming more mainstream, I think the pace of especially technological change is going to accelerate. Yeah, now, going back to the business as unusual. And so without that, that’s unusual. You know, technology is all very well and good. And we all have our attitudes on whether technology is for good or not so good. The second part of the book, or the second part of the title, and our business as unusual how to thrive in the new renaissance. Yes, thank you, you have got a book. And in this business, that’s unusual. Well, you got one, and I still have yet to actually physically touch one. That was another usual thing. But the second half of the, you know, the subtitle, how to thrive in the new renaissance? What’s the renaissance got to do with it? Well, I already touched on technology, in the original Renaissance technology was the printing press, arguably today the new renaissance is technology advancement is Yeah, around the internet, the power of that all the apps we have and now generative AI, you know, the original Renaissance was all about exploration, you know, finding new countries, new lands, these days, it’s find the other things. It’s like going deep inside humans and seeing more inside the brain or whatever is going on inside us. Going into the depths of the oceans, but it’s going beyond the Earth, you know, going to the stars. The other thing, the other Biggie was the challenging of authority. So back on the original Renaissance that was the challenging of the church and the power of the church, in today’s Renaissance is the challenging of political structures and countries and how countries are governed. Okay, Okay. And finally, I think this is the most important thing. And but I left it to last even though I should have said at first, the original Renaissance was about humanism, it was about humanism. And the new Renaissance is all still about humans. And it’s about human potential in the light of all these technological advancements that we have. So that’s why I really believe that the human side is super important. And AI is not a human. And there are quirks about humans that make us human that the AI doesn’t have. So I see AI and other technologies it’s a way to augment our potential, we can do a lot more using AI, for example, you yourself said, Hey, you use AI. And it can dream up a couple of topics for you. That’s wonderful. Yeah. Okay. And it saves you a load of time. Yeah. Which makes you more productive, and you have more time to do some other stuff. That’s wonderful.

Gene Tunny  36:01

It takes you away from what do they call the tyranny of the blank page? Which which can make you procrastinate, so it’s good in that regard. I want to ask you a couple of things about what you said there Rick that, that was all, all fascinating. So one of the things you you talked about was government and so that we’re in this new Renaissance , what are you thinking about with with government? I mean, clearly, there are all sorts of people seem to be more unhappy with government than ever before, there are concerns about? Yeah, I mean, the US in particular is, you know, really problematic. And just looking at it from the outside. It doesn’t look good. What’s going on there. Looks like it’s, it’s cooked. It’s very volatile. I mean, what are you thinking with, with government? I mean, do you see changes in the way we we govern ourselves? Is technology part of that story? What are you thinking? What are you thinking there Rick?

Rick Yvanovich  37:05

That’s a big question. Yeah, I’ll put a caveat around that I’m not political in the slightest. Don’t like talking about politics. It’s always going to upset people. But if we go around the world, and we just look at COVID, I guess the jury’s still out, we can say, on which countries handled it better than others. Okay. And who’s making that opinion, anyway, is that us as individuals? I feel that it really doesn’t matter where we were on the planet during COVID. Each of us experienced, whatever we experienced. And the question is, is, were we expecting some kind of benevolent government to know better, and help and support us? Or should we be more independent, and be able to look after ourselves? That’s a big questions and a loaded question as well. My feeling, my feeling is, a lot of people feel that they need to look after themselves better. Because if no one was looking after them during that period, what are they going to do when it happens again? Because at the end of the day, if we go back to the earlier days of the pandemic, there’s some people saying, well, we knew this was going to happen. Okay, it was inevitable. Yeah, the some kind of pandemic of this scale would happen. All right. And maybe the voices have gone silent, or they’ve been drowned in the noise of everything else that is going on in the world. That, okay, we told you so, we told you, it could happen. And it can also happen again, because we’ve really proven that it can happen. So how prepared are we, for the shock? Or the the new challenge of something similar but different happens again? Yeah, you know, how’s that, you know, how are we going to cope with it? So, going back to the business as unusual, so, how is business as unusual, which is the first in a trilogy is written from an owner an owner leader perspective of an organisation. So how can you make your your organisation more resilient to this kind of shock? You know if you were in the hospitality business, tourism business, you got pretty well beaten up during during COVID. There are certain industries which got absolutely flattened. So how can you be more resilient to that in the future? Now the other two books just so you know, that are in the series? The next one I’m I’m writing is the life as unusual, so I’m looking at the individual, you know how that that needs to change, how we view life needs to change. And it’s all of this, the next two books it’s all already in there in the first book, we’re just going into into more detail and taking a different perspective. Okay? Because on the life one, because you know people used to talk about work life balance, and too many hours at work your’e a workaholic, not spending enough time at home. And some people say it’s not a work life balance it’s a life work balance. I argue it’s neither. Balance is balance, balance is balance, you know, who said life and work are the two sides of the balance there, many aspects of the balance that need to be considered. And this is, I think, the the awakening that I sense has happened during the last few years, is people are reflecting on because they had nothing else better to do maybe, or they were forced to do it on what are they doing with their life? Yeah, so the fact that maybe you couldn’t go out, you couldn’t go for your walk, you couldn’t go down the beach, you couldn’t travel, you couldn’t do the things that you wanted to do. And that was taken away for you for a period of time. How important are those things to you? Some of them, you may realise that, oh, it was irrelevant. Others like ah, I really actually need that. Okay, now as those realisations happen, whether it’s what you do, when you’re not working, the past times, and the hobbies that you have, because you might have had to change them to something that is restricted to where you live, the four walls of where you live, rather than being able to go outside, if he had to go outside to do it. I think we’re having to reevaluate it, what the importance of these things are, because that’s for us as individuals. The other thing that happen, that is, is really acute, I find over the pandemic is relationships. Okay, so how was it? You know, I think what, I can’t remember what the statistic was in the US, but I think the number of divorces went through the roof. Okay, because you’re actually stuck with your partner or your family for a prolonged period of time in a restricted space. So in a lot of cases, it didn’t go so well. And in other cases, it went wonderfully. Okay. But another scenario could be, well, what if you were separated from your family? There are many people who have moved, they might have siblings, they might have parents, they may have their own kids in other countries, and they didn’t see them for a long period of time. Now, what does that do to the relationship? I mean, during COVID, I lost my wife for 10 months. You know some people might be going “Yeah, lucky you!” But she was medivacced in early sort of around March 2020. And then they close the borders in Vietnam, so she couldn’t return. Okay, so I had medivacced her to to a third country, which was Singapore. And she was on rehab, because it was a back operation, they were teaching her how to walk again. And, and so she was in the hotel across the road and just had to go in for to see the doctors and all of that to teach her stuff. And then, as things tightened in Singapore, they commandeered the hotel as a quarantine location and kicked her out of the hotel, to another hotel that happened three times. Also, since to learn how to walk again, they used to take her out outside to walk. They had to stop doing that she wasn’t allowed to go into the hospital because she, she’s an outpatient, she’s not allowed to do that. So she was stuck there for about four months before I managed to move her to her country of origin, which happens to be Switzerland. So she managed to get in there. So for it took me several months to get the right permits when they allow people with the right permits to return to Vietnam. So it took me 10 months to get her back. And my daughter was at University at the time, and yet another country. So for for a long period of time, I had my daughter and my wife in two other countries and I was here with my with my son. And by the time I connected my son and my daughter again, we’ve got got us all back in the same country. They hadn’t seen each other for two years. That’s pretty unusual. And I guess in that case, well, our whole idea of the relationship changes the whole idea. I mean, this Zoom. I remember we had a bunch of interns, because we’re big on internships. And our interns come from overseas. So we brought them over from overseas, and they will work in Ho Chi Minh City. And we used to take interns with a big cohort from Denmark. So we had about anything from about 10 to 15 of them at any point in time. And their government recalled them all. You know, they gave them advice, hey, come back home, come back to Denmark, okay. And they were arranging, like other governments, Australia did the same. You know, they’re arranging flights to bring their country people back home. And we did have some went and some didn’t. But going back to the, to the interns, in this period of time, where some of them moved back, and some of them didn’t, there were there were some quarantines as well, because some of them happened to have got COVID. So they’re put into quarantine. And, and we started doing these zoom calls, to check in on people on a regular basis. And the thing that really hammered it home into me is one day, one session we were having, an intern, turned around and said, these calls are my lifeline, do you realise you were the first people outside of quarantine, that I’ve spoken to this week. You know, it’s, you know, things that we can’t imagine, things that we might get from the history books, or, you know, our great great great grandma parents or whatever, who tell us them old stories of the hardships when they were young, things that that we would think would never ever happen to anyone we would ever know, in this day and age, especially in the more developed worlds that we live in, can actually happen to us.

Gene Tunny  46:57

Very true. Very true.

Rick Yvanovich  46:59

Things will remain unusual.

Gene Tunny  47:01

Yes, Rick. So that was the second book. So you said so your first is business as unusual, then life as unusual. What’s the third one going to be?

Rick Yvanovich  47:09

Work as unusual.

Gene Tunny  47:11

Work as unusual? Got it.

Rick Yvanovich  47:12

I’m leaving that to last because the jury’s out and I’m not really too sure where the dust will settle? Because it hasn’t settled yet. It really hasn’t settled yet.

Gene Tunny  47:21

Yeah, I agree with you on that. Now, before we wrap up, I’d just like to ask, What do you think of the key takeaways for organisations or for CEOs or, you know, managers reading business as unusual? What are you think of the major takeaways for them? Top two or three. Are you able to summarise it in that way, however many you think are the most important.

Rick Yvanovich  47:51

Yeah, I think it’s really around a core belief that I hold really dear, is, I believe that every one of us has the potential to be the architect of change. Now, we live by all these weird technological, and non technological transformations that are happening. And our task, our challenge is not just to keep up and exist, but to actively shape the path forward. Okay. And every single day, our actions, whether they’re big or small, shape our future, because our action is a choice we choose to do, or choose to not do. And therefore each one of us needs to remember, we are our own brand. And every single one of these choices, every single one of these decisions we make is part of the unique story that makes us human, that makes us us, or makes me me and makes youyou, okay, how we react, how we adapt, and how we innovate in the face of change will define not only your story, but your legacy. So that’s, that’s the background to it. So to reflect on the takeaways that I believe that are in the book, because the book is it gives you a framework. So you can shape your life in any way that you wish. But I give you a framework. And within that framework, you know, the framework uses the metaphor of a castle. And within the framework, I’m just hitting you with a shedload of tools. These are all the tools that I use myself. But a lot of the tools that I use are a synthesis and multiple other tools. So I just say here all the tools are a bunch of tools, you know, yeah, five tools, try them all and find out which one resonates. So going back to your original question, you know, I want people to remember that we’re not just a participant in today’s ever changing world, we’re the architect. And as architects, we are shaping the course of our own lives, our own careers, and the world around us. So I encourage all of us as individuals. And if you, you know, if you have more impact, like you’re the business owner or a business leader, I encourage you all to embrace the change, but define it, rather than just adapt to it. So be that catalyst in this in your own business as unusual world.

Gene Tunny  50:39

Yeah, absolutely. And, yeah, expect the unusual, I think I mean, that’s what I would be. I would be saying, Yeah, you’ve got to get across the new technology, so you don’t get left behind. You’ve got to stay as alert and as healthy and fit as possible to be able to make sure you’re, you can play the game as best you can. Yeah. Because I think you’re right. I mean, I think we are in this business as unusual world, just the extraordinary amount of change we’ve been seeing. It’s absolutely. Rick this has been great. Any final thoughts before we conclude?

Rick Yvanovich  51:18

Yeah, I, I, of course, encourage the people to go out, go out and get the book.

Gene Tunny  51:27

Absolutely I’ll put a link in the show notes. Yeah.

Rick Yvanovich  51:30

And, but more important to that is, you know, change transformation starts with each of us. As individuals, it’s, it’s ourselves that has to decide to change, or not, okay. And as we change, we transform because that’s what transformation is, that’s change, you can’t go back after you’ve changed and once the, once the caterpillar is a butterfly, it can’t become a caterpillar again, it has transformed, okay. And this is really important. And I think the journey is only beginning. So I’m really, really curious to hear about your journeys. So as as your listeners embrace this, they try it out. I really encourage them to, you know let Gene know, let me know, reach out to us. And tell us about your journey, because I’m sure they’re going to be absolutely fascinating.

Gene Tunny  52:21

Yeah, that’s, that’s good. That’s a good point recommend. I’d be interested. If you’re listening, and you’ve got thoughts on or how things have become unusual for you and how you’re responding that would be that would be very useful and yeah to the extent that you are that you have adjusted, you’re adapting then. Yes. And some thoughts on that would be great. So yeah, Rick, I think that’s a really good spot to conclude. And I’d like to thank you for, for your time for your, your thoughts on business as unusual. And for the book, which does Yeah, it. I think you’re onto something here with business as unusual. And you’ve got some good, good tips and good tricks, good bits of advice in that that book. So good work on that. And I think yeah, I think the idea of doing a trilogy is terrific. And yeah, I learned a lot from the conversation, learned about your experience in Vietnam, during the pandemic, and just how disruptive that was. And also, that’s the info about Google and AI with the flights and reducing the greenhouse gas emissions. I’ll find that online and I’ll put a link in the show notes below. That was really, really neat. So, again, Rick Yvanovich, thanks so much for your time. I really enjoyed the conversation.

Rick Yvanovich  53:42

Gene thank you, too. I’d like to express my gratitude for for allowing me on your podcast today. It’s it’s been a fascinating conversation, some great questions. I hope our listeners have enjoyed it as much as I have. And to all your listeners, all our listeners, I really appreciate your time and attention. And just like Gene, I look forward to hearing from some of you from learning from your experience, and perhaps giving us the opportunity to share more in depth future discussions. Thank you again, Gene, and to all our listeners for this wonderful exchange. Until next time, goodbye

Gene Tunny  54:22

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

55:09

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

How to improve housing affordability and why the Greedflation thesis is wrong w/ Simon Cowan, CIS – EP203

Host Gene Tunny and Simon Cowan from the Centre for Independent Studies discuss housing affordability and greedflation in the CIS’s Sydney HQ. They delve into recent articles written by Simon on these topics and explore the factors contributing to unaffordable housing (e.g. zoning and other supply restrictions) and why the greedflation thesis is wrong. 

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

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

About this episode’s guest: Simon Cowan

Simon Cowan is Research Director at the CIS. He is a leading commentator on policy and politics, with a regular column in the Canberra Times newspaper, frequent interviews on Sky and the ABC, and multiple appearances before parliamentary committees discussing the budget, citizenship, taxation and health policy. He has written extensively on government spending and fiscal policy, with a specific focus on welfare and superannuation policy. He earlier work focused on government industry policy, defence and regulation.

His latest work includes Attitudes to a post-Covid Australia and Millennials and Super: the case for voluntary superannuation. Some of his other works include a co-authored report on pensions, a deep dive into the Universal Basic Income, and a 2012 piece arguing that Australia should acquire nuclear submarines from the Americans.

What’s covered in EP203

  • The problem with housing affordability. (4:56)
  • High property prices and housing affordability. (10:02)
  • Should we cap migration to improve housing affordability? (14:24)
  • The role of public/social housing. (19:12)
  • Shared equity schemes. (24:15)
  • Home ownership as a key milestone on the way to retirement. (29:09)
  • Local government regulations and housing affordability. (35:06)
  • The Greedflation hypothesis and why it’s wrong. (39:04)

Links relevant to the conversation

Simon’s Canberra Times articles on housing affordability and greedflation:

The Coalition can create generational voting change by tackling housing affordability – The Centre for Independent Studies 

‘Greedflation’ myth hides real causes of inflation – The Centre for Independent Studies 

Images from the Bill Leak room including a poem from Sir Les Patterson (i.e. Barry Humphries):

Sir Les with Bill Leak.jpg 

Sir Les’s poem about Bill Leak part 1.jpg 

Sir Les’s poem about Bill Leak part 2.jpg 

Past Economics Explored episode discussing wage-price spiral mentioned by Gene:

https://economicsexplored.com/2022/06/14/stagflation-be-alert-not-alarmed-ep143-transcript/

Transcript of Q&A session following Phil Lowe’s speech in Brisbane in July 2023 during which Gene asked the RBA Governor about Greedflation:

https://www.rba.gov.au/speeches/2023/sp-gov-2023-07-12-q-and-a-transcript.html

Transcript: How to improve housing affordability and why the Greedflation thesis is wrong w/ Simon Cowan, CIS – EP203

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. This was then looked at by a human, Tim Hughes from Adept Economics, to pick up the bits otters might have misheard. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Thanks for tuning into the show. Today, I have the pleasure of catching up with my colleague at the Centre for Independent Studies, Simon Cowan. We’re in the CIS offices on Macquarie Street in Sydney. And we’re going to be chatting about some recent work that Simon’s done on housing affordability and greedflation, Simon, so good to catch up with you.

Simon Cowan  01:06

Yeah. Welcome to the Bill Leak Room here at the CIS, our little office here in Macquarie Street. It’s fantastic to have you here in our facilities with our totally real plants and our wall of photos.

Gene Tunny  01:19

Yeah, well, it’s great this room. So Bill Leak was a famous Australian cartoonist, and there’s a there’s actually a poem about Bill Leak from Les Patterson, one of Barry Humphries characters. Yeah, just it’s terrific. So I might put a link in the show notes. I’ll make sure I take a photo of that before I go. But yes, Simon, you’ve written some great pieces recently, they were both published in Canberra Times on housing affordability and greedflation both topical issues and I thought I’d be good if we could chat about those.

Simon Cowan 01:40

Yeah, for sure.

Gene Tunny 01:43

Your piece on housing affordability was in the Canberra Times on third of July 2023. “The Coalition can create generational voting change by tackling housing affordability.” I’d like to start off by asking you about the context of that piece because CIS Centre for Independent Studies, it’s a non-partisan Think Tank. The way it’s pitched, it’s pitched as how the Coalition can create generational voting change. Now I know this is this relates to some recent research. Could you tell us a bit about the context of that piece, please?

Simon Cowan  02:29

Yeah, sure. So one of my other colleagues, a man by the name of Matt Taylor who’s actually working out of our Canberra facilities, we’re stretching our tentacles across the country with Brisbane and Canberra and Sydney. He did some work that looked at the prevalence of centre right voting patterns amongst younger people, in particular, millennials and Gen Z. And right. And now in Australian politics, the Coalition vote is a proxy for for the centre right. And, you know, to the extent that the Coalition embodies what you might describe as classical Liberal values and policies, then they’re, you know a proxy of some sorts for classical Liberal voting patterns amongst younger people. And the concern that we had as an organisation and I think it’s been heightened by Matt’s research, is that it’s not just that we’re seeing, you know, that traditional voting pattern of younger voters voting left and older voters voting, right, but that each generation that comes into the electorate is more likely to vote for left wing parties, so not just Labour, but increasingly, the Greens. And for Gen Z, in particular, what we’re seeing is, they’re actually moving further left, compared to the average voter as they get older, which is an unusual pattern, both in Australia and globally. So millennials are moving to the right, they’re doing so at a much slower rate than previous generations. They’re starting from further left, Gen Z started from way further left than the millennials and are becoming more left wing. So the end result of this is that we’re seeing a roughly 65% of that younger cohort is voting for left wing parties, roughly equally Labour and the Greens and that the centre right is attracting for Gen Z in particular, as little as sort of 10% of the vote. Now, our issue isn’t so much for the Coalition’s political fortunes, I’m sure that that’s a concern for them. But for us, it’s to the extent that the Coalition is more likely to implement classical Liberal reforms than the Labour Party, which I think is a reasonable deduction. To the extent that’s true. The fact that young people have no interest in centre right politics and therefore classical Liberal ideas is a real concern of ours.

Gene Tunny  04:56

Okay. So is part of the reason that Gen Z has these left wing views to the extent they do, is that related in part to this issue of housing affordability, the fact that younger people aren’t able to purchase their own homes, to the same extent that previous generations, particularly baby boomers, and to a lesser extent, Gen. Gen X, were able to, is that part of the story?

Simon Cowan  05:24

I think that’s a very big part of the story and Matt’s now working on some more research that will look into that issue more, more specifically around what the actual triggers of that, that are. But I think there’s definitely a problem with millennials and Gen Z, in particular, around housing affordability. The issue isn’t just, and this is, it’s a very important issue. It’s not just that they can’t afford to buy a home, it’s that the prospects of them ever being able to afford to buy a home, and ever being able to move out of that cycle that that sort of rental cycles seems very remote to them. So, you know, they’re not just moving into the market later than their parents, for example, there’s a real fear amongst Gen Z in particular, that they won’t ever get into that point, that they’ll be basically trapped as renters for the rest of their lives. And a number of people have sort of made this observation in the past. If you’ve got nothing to conserve, there’s no reason to vote conservative.

Gene Tunny  06:19

Yeah. And what do you think of that concern Simon, do you think that’s a legitimate concern on their part?

Simon Cowan  06:23

I think in part, it certainly is. There are some people who will be rentals forever, probably more so than was true in previous generations. I mean, if you look at the sort of Baby Boomer and then the previous generation to them as well, almost 95% of that generation ended up buying home at some point during their their lifecycle, once you get into retirement, you see that almost everyone, there’s sort of a core of 10 to 15% of people who who don’t own a home, in retirement, most of the current cycle of retirees own their home, the vast majority of them own it without a mortgage. So far the trend is increasingly people coming into retirement with mortgages, rather than having paid off that during their working life, I think we’ll also see, though, a generation of people, a larger percentage of them will be renting for far longer. And the issue there is, at least in part around the enormous difficulty of saving enough money to get into that first rung of the housing market. And also, you know, those affordable entry level houses are now, so much further away from the CBD of the city, that if you’re someone who works in, you know, if you’re working in the city, it’s very difficult for you to have a young family and commute from two and a half hours away each day. And that option, like if you’re gonna buy a home, you have to, you know, you’re now looking at that two hour commute each way, that becomes a very difficult prospect for a lot of people.

Gene Tunny  07:53

So you’re talking about in Sydney, there’ll be people who are doing that in Sydney.

Simon Cowan  07:57

Yeah, absolutely, so if you go back a couple generations a long commute was was sort of from what is now the sort of almost not necessarily the inner ring of suburbs, but there was a sort of middle density ring of suburbs around, you know, the Canterburys, the Bankstowns, etc, that were all, you know, still 30 or 40 minutes commute from the city, but the prices in those suburbs are now well beyond the entry level, you’ve got to go another 20 kilometres from the CBD before you start to get to places where people can afford to buy houses in that entry level of, you know, even as far as sort of Blacktown and places like that you’re seeing median house price is well over a million dollars. So that becomes very difficult and you end up with a situation like we’ve seen in London, for example and other places, too, as far as I’m aware, people who do essential jobs that are not particularly well paid, you know, your teachers and your nurses in inner city areas can’t afford to live within commuting distance of the places where they work. And that then becomes a real problem for society. If you can’t get teachers for your school, because they can’t live within two hours of your school, you’ve got no teachers.

Gene Tunny  09:10

Yeah, this is the key worker problem isn’t it that they talk about, you know, the key workers can’t find affordable places to live…

Simon Cowan  09:18

There’s always a slight risk that some of this is overstated, right? It’s not it’s not an absolute catastrophe. But things have changed enough that it’s having a significant impact on voting patterns and that’s probably where we’re at now. If things continue to get worse, if the trends that we’re seeing of you know, systemic underdevelopment, particularly in the parts of Sydney where people want to live. If those trends continue, then things will definitely get far worse. Right now we’ve got a problem, not a catastrophe. But there’s a real problem and it’s not yet clear to me that particularly the centre right, there’s been a sufficient level of engagement with this problem, that they’re willing to look at solutions that might actually work.

Gene Tunny  10:02

Okay, okay. Australia does have high property prices relative to median income, we must be one of the highest in the world are we are, you know, particularly for Sydney and Melbourne that I’ve seen some of those ratios, I might dig them up and put them in the show notes. But yeah…

Simon Cowan  10:19

Yeah we’re top, so regularly, so Sydney, Melbourne in particular have been regularly in the top 10 least affordable cities in the world, at various points other Australian cities have snuck in there. So I think at one point, Perth managed to make its way in at the height of the mining boom that it was, you know, one of the most unaffordable cities, so New Zealand has a similar problem, as well, around that, that issue of affordability comparable to us. And then I mean, you’ve got a lot of American cities, and then your Tokyos and Londons as well.

Gene Tunny  10:49

Yeah. But what’s extraordinary is like, based on what you were just saying then, it’s not just, you know, there are some exclusive suburbs in Sydney here say out at Double Bay or out in the Eastern suburbs, and you’ve got places worth 10s of millions of dollars, but this is, you’re paying a lot of money just for property in, in what was traditionally a working class area. I mean, over a million dollars, whatever your…

Simon Cowan  11:12

Yeah, absolutely and places like you know, the Northern Beaches, suburbs, which are a fair way from Sydney. And, and we’re never I mean, they’re not they weren’t poor areas, by any means, right. But they weren’t, they weren’t the areas that the elite and rich of Sydney lived in. But now, many of the homes in that area are way outside the price range for a young family, particularly if you’re in a situation where one of your partners isn’t able to work full time. Or if someone’s in a job where you know, they’re not in a professional capacity and being paid six figure salary, it’s really hard for them. And the thing that becomes even harder, it’s largely about getting over that that initial hurdle of having to save, you know, you need 20% deposit for a million dollar home, you got to save $200,000 of after tax income. When you know we’ve got cost of living spiralling out of control at the moment, we’ve got, you know, 11% of your income’s being diverted into retirement savings. And you’ve got to somehow find $200,000 plus of post tax income. It’s yeah, I mean, it’s a real challenge.

Gene Tunny  12:13

Yeah, yeah. And what do you think’s caused this housing affordability problem we have in Australia Simon?

Simon Cowan  12:19

So the evidence on this is actually really clear, despite the fact that a lot of people really didn’t want to accept that this was true. It is abundantly clear from the work that my colleague Peter Tulip, and others have done that the issue is overwhelmingly restrictions on supply. So people want to say that it’s about demand, it’s about immigrants, it’s about negative gearing, capital gains, they have very minor impacts on price what’s having by far the biggest impact on price is the restrictions on bringing new properties to market, on redeveloping existing properties, it’s zoning and taxes and government restrictions that are aimed to stop people developing, and in Sydney, in particular, and a number of suburbs around the city. But also on the major arterial train lines, you’ve got councils that are simply refusing to allow development. And my colleague has highlighted some of them have massively undershot housing targets. But we see time and time again, things like heritage restrictions and zoning restrictions. And, and you know, even you can’t build high density housing around train lines. If you can’t build high density train on train lines, where are you going to build it? And the answer is, well, for them, at least build it way out in Western Sydney, don’t put it anywhere near where I live. And that attitude is pervasive in the eastern suburbs, in inner West and where I’m currently based in the North Shore, some of the councils out there are actively and very hostile to development of any kind.

Gene Tunny  13:52

Right. Okay. On immigration, do you think that what doesn’t have a major impact on housing affordability? Because that’s one of the things that people are concerned about, because we’ve had a record level of net overseas migration in Australia of 400,000. And there are concerns that, like, it’s just, we should be slowing that down while we let the housing stock catch up, on infrastructure catch up. Do you have any thoughts on that level of immigration we have at the moment?

Simon Cowan  14:24

Yes so my take on this, and I’ll be the first to admit there is, there are differing views on classical liberal amounts of immigration, but for me, personally, I would have almost uncapped skilled migration, I would be happy to take as many skilled migrants as we can get, because I think the economic benefits of skilled migration outweigh the costs. Now, the flip side of that is that we have to provide sufficient infrastructure and build sufficient houses to have those people, give those people somewhere to live. But I think you go, you’ve got it completely backwards if your approach is we’re going to stop migration because we can’t build fast enough when we could build faster, the roadblock, the handbrake on house prices is coming from that refusal to allow development, trying to take some of the pressure off so that councils don’t have to fix their obvious contribution to this seems like just the wrong way to go about it to me, I’d rather have more great migrants and way more housing, and I think you can do it that way. And the economic benefits of doing that way outweigh the costs of it. One of my other colleagues a few years ago, did some work around the sort of, what are the outcomes for skilled migrants in Australia? On average skilled migrants are they earn a slightly higher income, they pay higher taxes, they’re more likely to own a home, they’re more likely to be married, they’re more likely to have kids than the average person. So there’s a there’s a benefit to society beyond just the economic benefit of having more skilled migrants. There’s an issue around housing supply, I would fix the issue around housing supply rather than trying to create alternatives to remove some of that pressure.

Gene Tunny  16:02

Yeah, gotcha. Okay. In your article in the Canberra Times, you wrote that Labour’s signature housing affordability policies have huge problems. So Labour being the federal Labour government led by Anthony Albanese, the Prime Minister, first locking future generations into renting their homes from union-controlled super funds. What’s going on there, Simon? What’s, how to, how would the labour government’s policies lead to that outcome? And what’s the, what’s your concern there?

Simon Cowan  16:40

Yeah, so for long time, Labour was convinced that the issue was, was greedy landlords and negative gearing and capital gains. And Gene, you did some fantastic work for us on that issue, in fact, I think you did a an analysis, not necessarily for CIS, but previously that looked at the impact that those capital gains and negative gearing policies had on housing affordability and found it was what like 4%, almost nothing. Yeah. So for a long time, Labour believed that that was the issue, and then started to come around to thinking about this as a supply side problem. But the solutions that they have, they have two main supply side initiatives. And there’s been some more movement more recently. So this is at least as positive, but their main initiatives were: one they were going to encourage institutional superannuation investors to build residential properties for rent. So that meant in practice, I think it meant that they would incentivize the large super funds, which are overwhelmingly controlled, they’re overwhelmingly industry super funds, which have a 50% union 50% Business control. But overwhelmingly, those funds would be then encouraged, incentivized, to invest in and build rental properties for lease. And the other policy was around building a whole bunch more public and social housing. So rather than allowing, having, they’ve identified the right market block, but instead of removing that block and allowing the market to function, their solution is how do we use government incentives and government money to build additional supply? It just seems extraordinary to me that you would create a situation where individuals couldn’t use their own superannuation money to build their own home, but their super fund could use their super money to build a home for them to rent. And that just I mean, one of the reasons why this policy, I think, has been dis-emphasised by Labour is that there’s almost no one who actually wants that outcome. Super funds don’t want to do it, because they’re seeing the the noises around rent controls and increasing tenant rights and think this is a bad investment for my Super fund. And people are like, well why would I want to rent from my super fund with my money? Why can’t I just use my money to buy my own home? So I think that that policy has just got so many flaws to it, that even Labour’s now started to sort of move away from that.

Gene Tunny  19:07

Ok so they’ve moved away from that, but they’ve, they’re investing more in social housing and it sounds like well, reading your article, you’ve got concerns about social housing as the solution, would you be able to go into that please?

Simon Cowan  19:21

Yeah, you’re gonna get me started on talking about social housing. So look, there is a role for public and social housing, but it’s not the role that the government keeps pushing for it, right. So social housing is very important for people who are temporarily homeless, particularly people say who are fleeing domestic violence, they need emergency accommodation in the short term, and they don’t necessarily have access to funds that would allow them to rent a property go through, you know, the hoops that you need to go through to get a rental property. So you’ve got, you know, people who are in, fleeing violence you’ve got people say, who have, you know, sort of sickness or mental illness issues that need accommodation, you’ve got disability support accommodation, those, those are completely appropriate uses of social and public housing. Now, the difference between social and public housing, public housing is government funded social housing is funded by not for profits. What the government is talking about, though, is providing long term government funded accommodation to people. Basically, along the sort of a line you’re seeing in Britain, where you have a council house for decades, and that’s your home and you don’t own it, you are given it by the government. The problem with that is that it’s a terribly inefficient way of providing support for people who need rental accommodation and are on low income. So when you compare, providing a government house to providing, say, rent assistance through Social Security, it’s way more efficient to provide social security. And it’s way more equitable. Because what you have with government housing, as we have here, there’s a 10 year waiting list. And often, people don’t move on that waiting list at all. So you have people who get they spend years on a waiting list, waiting for free housing, they’re disincentivized to take actions that would get them off that list, especially if they’ve got to the top because if they go back on the list, they go at the bottom, you have people who are living in these public houses who are disincentivized, from getting out of public housing, because if they again, if they you know, they take a job that makes them eligible for public housing, and they lose that job in six months, they go to the bottom of the 10 year waiting list. So and then you also have the the way that rent is structured in public housing, where it’s a percentage of income rather than a fixed amount. So the more money you earn, it’s an effective marginal tax rate of 25%, you lose 25 cents of each dollar extra dollar you earn to your public house rent, rather than the rent being a certain fixed amount a month.

Gene Tunny  21:59

I did not know that. Is that how they do it in New South Wales?

Simon Cowan 22:02

Yeah, yeah, well look I…

Gene Tunny 22:03

I’ll have to check what they do in Queensland, other states…

Simon Cowan  22:06

Social housing again I mean it’s all different, but one of our recommendations, we looked at this when they were putting up the last sort of big round of public housing. And one of the things is that, and it’s designed to make it more affordable, it’s 20% of whatever 25% of whatever your income is. So if you’re on, you know, if you’re on Newstart, then 25% of that’s very low. But the problem is when you then start working and earning money, you’ve got an another marginal tax rate from your accommodation.

Gene Tunny  22:32

Yeah. And without, I don’t want to stig, stigmatise or be critical of anyone who’s who’s living in social housing, but because, you know, obviously, there are people are doing it tough and they’re trying to do the best they can. There are a lot of social problems with social housing is that right?

Simon Cowan  22:49

Yeah especially in the, and again, this has experienced the United Kingdom in particular, that social housing estates, particularly where a lot of public housing is clustered together, you tend to find a lot of antisocial behaviour, you find a lot of other problems, there’s a higher rate of crime. And so what you have is a situation where it’s not particularly pleasant for, for people living in social housing but it’s also, you know, a big disincentive for people to live near social housing. And then you have the effect where if there is a cluster of public housing in a particular place that affects property values that people who live around that by so no one wants, public housing, especially not clusters of public housing, anywhere in their suburb. Yet again, you know, we have this disincentive for development, people want the public housing somewhere else. And then in Sydney, we had a particular issue where, and this is largely a legacy issue, we had public housing that was worth just an extraordinary amount of money by virtue of where it was, you know, in The Rocks, which it’s in the, right in the centre of Sydney with views of the harbour. There’s public housing that had been there for 100 and something years, and each of those houses was worth millions of dollars. So you know, you had this this issue of well, do we, we’re giving away this public housing to someone for basically no money, why don’t we sell their public housing and build, you know, a lot more with with the money that it came from? So you’ve got a whole bunch of problems. I mean, fundamentally, I think the issue with this is if, if the issue that you’re looking at is housing affordability, rather than the need for temporary accommodation or something else, if the issue is housing affordability, you’re always going to be better off allowing the market to develop property than trying to do it by government. And there’s, and there’s a filtering effect of adding supply at any point in the market reduces prices of at every point in the market. Because if you think about this logically, even if you put the supply right at the very top end, the people who are buying those $10 million apartments are selling their $8 million apartments and the the effect of that sort of filters down all the way through the market, so adding supply anywhere, increases supply everywhere.

Gene Tunny  25:06

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

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Gene Tunny  25:41

Now back to the show.

And what about this this idea of Shared Equity? Labour or the government has a scheme a Shared Equity scheme, there’s concerns about how wide a coverage it is? I mean, it seems like small numbers relative to the total, total need out there. But what do you think of these Shared Equity schemes where the government effectively owns part of your property don’t they? Would you be able to take us through that, please?

Simon Cowan  26:09

Yeah so, there’s a I mean, so part of the problem with a lot of these schemes is that they’re designed to be so small, they can’t have an impact in the sort of aggregate level, because the number of caps are limited. And whenever you see a government policy like this, and it’s, it’s limited to a small number of people, you know, that it’s not a good deal for the taxpayers as a general rule. But so you do have that situation where the government would, in some instances, it’d be providing a portion of the deposit. So that the individual who meets a certain criteria jumps through the right hoops in order to be eligible for the scheme can can apply for a loan and basically buy a property with as little as sort of 5% equity. Shared Equity schemes don’t have a fantastic hit track record in Australia. And it’s not so much around the issue of the deposits. But one of the things that we looked at at the other end of the market was was how you could get into equity release schemes for pensioners. So you’ve got an issue with a percentage about sort of one in five people in the age pension are very, very cash poor and very, very asset rich, and most of them, the main asset they have is property. So when we looked at this 5% or so of people who were on the full rate of the aged pension had more than one and a half million dollars in home equity. But what they didn’t have was an ability to release any of that equity in order to fund their lifestyle. So my interest in in Shared Equity comes much more. And again, there’s, there’s a much bigger tradition of this in the UK, where banks and financial institutions will take over a portion of equity for your home and use that to provide an income or a lump sum to people. So it’s not that Shared Equity itself is a bad idea, where it becomes a bad idea where you’ve got government effectively taking the risk for marginal borrowers. And, you know, people who can’t actually afford to borrow the loans that they’re taking, not just they can’t afford the deposit, but they can’t actually afford the loan. And what we saw in America in the lead up to the financial crisis was exactly these sorts of schemes, schemes where the government tried to manipulate the criteria for eligibility for home loans to effectively give a certain group of people a greater chance of buying a home. And the end result of any of that sort of manipulation around loans was the potential for government to bear, the government to bear losses in relation to home equity. So, you know, it’s a small scheme, it won’t have a big impact for that reason, but it does expose the government to risk of default, which seems like a bad way of doing things.

Gene Tunny  28:52

One thing I should ask Simon is, we’re presuming that the ideal is that people end up in their own home by the time that they’ve retired, would you be able to expand on why that is such an important thing? Or why that’s such a desirable policy goal, please?

Simon Cowan  29:09

Yeah, sure. I’d bring it forward in time. I actually think that, you know, there’s some sort of key milestones in people’s lives, you get married, and then you have kids and buying a home’s one of those milestones and ideally, you know, the ideal situation, I think, is you want to be having that in the middle of those two things. So you know, you you get married and you buy a home together and you have kids and you raise kids in your own home. And that’s sort of the sort of model of of family life that was exceptionally prevalent in Australia and I think it’s, it’s one of those sort of, again, you know, talk about conservatives and for a second, but you know, when you’re, you’re married with kids in your own home, you’ve got something to conserve, you’ve got a stake in society, you’ve got, you know, roots and values there. From a retirement perspective, though, it’s, it’s even more important because Australia’s retirements system was built around a couple of specific ideas. And so one of those is voluntary savings, which is or involuntary savings, superannuation, but another, another one is the age pension, obviously government funded income. But the biggest one in Australia in particular was around the idea that you would own your own home. So the Australian retirement system is actually modelled around people owning a home in retirement without a mortgage. And that takes care of a lot of their basic needs. And what we’ve seen consistently and you know, what we see now in particular, the group of people who are struggling the most in retirement, are overwhelmingly people who don’t have voluntary savings, they don’t have any superannuation left, but they also don’t own their home. And they’re the people who are most risk of genuine poverty in retirement, it’s if you don’t own your home, and you’re dependent on the age pension, and you’re renting in old age, overwhelmingly, that’s a group of people who are right at the bottom in terms of income and living standards. And so, you know, whatever our retirement system is built around this idea that you’re going to own your own home in retirement and own it without a mortgage, then the system has to actually facilitate people being able to do that. And right now we’re starting to see that disconnect happening. More and more people are entering retirement with mortgages. Over time, you’ll see more and more people entering retirement who don’t have a home at all.

Gene Tunny  31:22

Yeah. And what’s really worrying is you’ve got all of these people who are then at risk of homelessness. And you know, people living living in cars or worst case…

Simon Cowan  31:34

Yeah, so one of the biggest, one of the biggest demographics of homelessness, and aside from, and this is sort of the broader definition of homelessness, right like because the the you think traditionally people who live on the streets, are far more likely to be sort of middle aged men, but one of the biggest groups of the biggest demographics of homelessness is actually older single women. And overwhelmingly, that’s the issue. It’s really, you know, they’re dependent on unemployment benefits or pensions, but they don’t own a home. They may have been married, their husbands died, they don’t own their home, they’ve got no income. That’s the group that’s most at risk of poverty and homelessness, was one of them at least. And it’s a big issue.

Gene Tunny  32:12

Yeah, yeah. Okay. What about tapping into your own Super? I think you were alluding to this before. What are your thoughts on that, Simon?

Simon Cowan  32:21

So one of my colleagues that sort of looks at that issue, and his view is that what you should use super for is guaranteeing a loan, rather than necessarily being able to tap into it. One of the issues with allowing people to take money from Super is that it is effectively just increasing demand. So you do have a, you do have a slight demographic shift, in terms of who is able to buy properties, if you can, you know, you can withdraw from Super to buy your own home, but you can’t withdraw from Super for an investment property, you do slightly shift who owns property at that point, just in terms of the simple should you be able to take money on your super to buy own home? Yes, because it’s your money. It’s your money, it’s your savings, you’d be better off in retirement, if you could do it, will it solve the problem that it’s trying to solve? Probably not without something else attached to it. And that really has to be around sort of that supply side reform. And, and it doesn’t have to be, I mean talk about supply side reform, it doesn’t have to be the cratering of house prices, what it needs to be is more flexibility in what people can do with their own property. And when you increase flexibility for owners, and you increase flexibility for people who want to buy, you have a more dynamic and more effective and more efficient market, and that’s better for everyone. It’s not just the case that one group has to win and one group has to lose.

Gene Tunny  33:43

Yeah. Now with, with what the federal government is proposing to do is one positive thing that they’re proposing around targets for, or they’re trying to incentivize the states to encourage development, is that, am I geting that right?

Simon Cowan  33:59

Yes, so this is one of our recommendations, it’s been picked up. And it’s it’s got a, you know, it’s a policy tradition that’s been around for a long time, which is the federal government has all the money, but not necessarily all the levers. So they incentivize states to make good policy by, you know, giving them either withholding grants from them, if they don’t do the right thing, or giving them extra money, if they do, and in this instance, they’re talking about, you know, states that meet housing targets should be able to access additional government money. And that makes sense, right? If you’re building more houses, more money for infrastructure is probably right. But if there’s a challenge, it’s that a lot of the levers and the need for incentive isn’t even necessarily at the state government level. It’s actually the local government level. And so, you know, we’ve seen a number of states, I think, both in Victoria and New South Wales that appreciate the issue around supply and housing affordability, but they’ve been unwilling to impose the requirements on local government level, where all the incentives work the other way. So, we think it’s a good policy. We think it’s something that we’ve recommended, but it won’t be as straightforward perhaps as it seems.

Gene Tunny  35:06

Yeah, you’re right about that. I mean, a lot of the problems are at that local government level. So in Queensland where I’m from, some of the places where we’ve been able to get the high density, where we’ve been able to get more people in, it’s, it’s areas that the state government zone priority development areas, so formerly light industrial areas around West End or, or Newstead so the state government’s been trying to do its best but the Brisbane City Council goes and bans town, townhouses in you know, a lot of suburbs, there’s all these character, all these character protection, and anytime someone…

Simon Cowan  35:39

Yeah, well heritage is increasingly become, basically an anti development scam, unfortunately. And you can look on Twitter and you can find fantastic examples of things that are heritage listed. Like there was a, there’s a heritage listed electrical substations and heritage listed broken fences, and it’s like, rusting machinery, heritage listed car parks, I mean, there’s not actually any historical value in a lot of this stuff. What it is, though, it’s a valuable as a foil or as a stop to development.

Gene Tunny  36:11

And it seems to be a lot of grounds for people to oppose developments, whether it’s, ah there’s, there won’t be enough car parking, there won’t, you know, it’ll affect local traffic and there’s all sorts of grounds for objection. So yeah, absolutely. agree there.

Simon Cowan  36:24

I tell you what’s interesting, just to leave this point, I think is in New Zealand, what we saw was that they basically changed the zoning rules that allowed you to have medium density as a right, so that you didn’t actually need Council permission to go up to sort of three or four storeys from, from a freestanding dwelling. And that resulted in a massive increase in, in the sort of developments that would be allowed that council used to say no to, and a reduction in relative prices in Auckland compared to Christchurch and elsewhere. I am reliably informed, however, that, that initiatives towards housing affordability in New Zealand are now trending in the other way, in the same way they are here, unfortunately. But it was a really good example of a sort of natural experiment. What happens if you change the zoning rules? So it turns out more supply, lower prices.

Gene Tunny  37:11

Okay, yeah. But I’d be mean to have a closer look at that. Because I know there are some, there’s a bit of debate about those data, but I’m just not familiar with them enough. But I want to come back to that. I’ve read about that in the past and mentioned it. I just know that the like everything there ends up being a debate on it. But I agree. I think that would be what I expected. If they did that. I would expect to see that. And if it didn’t happen, then something else must have happened to have stopped that. I guess Simon I think we’ve had a great chat about your article on housing affordability. Was there anything else in that article or any other thoughts you had on housing affordable?

Simon Cowan  37:49

I’ve got a lot of thoughts on housing affordability, but, but I have a lot of thoughts on a lot of things.

Gene Tunny  37:54

Okay, well, maybe I’ll ask you, in the last 10 minutes or so about greedflation.

Simon Cowan

Yes greedflation!

Gene Tunny

So yeah, this became, you know, this has been topical because of our friends at The Australia Institute have been very prominent promoting this view that inflation is due to greedy corporations. And I ended up asking Phil Lowe, about this, I asked our Reserve Bank governor about this at the lunch he he spoke at in Brisbane, and I asked, well, what’s your, what are your thoughts on this? And, and Phil Lowe said, well we looked at it and we don’t really think it’s a it’s really a reasonable hypothesis. And you’ve written something similar, or two, on greedflation, you’ve, you’ve said if, well, this is in an article in Canberra Times 12th of August 2023, “Greedflation myth hides real causes of inflation.” So Simon, could I ask you, what are those real causes and why do you think this greedflation hypothesis, it’s a myth?

Simon Cowan  39:00

Yeah sure, so let’s, let’s start with what greedflation is. Greedflation is the idea that the cause of our current cost of living crisis across the western world, is that corporations, collectively, and spontaneously decided to increase profit margins, and take additional money from, from consumers somehow. You know, the best explanation that I’ve seen for this, the best explanation, the only actual causality that I’ve ever seen someone try and say is, oh, there was supply side shocks as a result of the pandemic and that gave companies the ability to change the prices and so they push the prices up massively. Now, internally, I don’t think that’s actually consistent as an argument because if, support, if the cost of supply went up, then profit margins would go down, not up. But I don’t think any of this is actually about what causes inflation because what caused the bout of inflation is actually really clear. During the pandemic, particularly during 2021, across the western world, governments and central banks massively over stimulated the economy. In Australia, we saw an enormous increase in government spending in the tune of hundreds of billions of dollars, we saw a massive stimulus from the RBI in terms of basically creating money, we saw that across the western world, huge deficits, massive stimulus. Now, in 2020, you could argue that that stimulus was needed. And there was this significant shock as a result of the pandemic and significant uncertainty. By the second half of 2021, though, we had most of those variables under control, and governments kept spending and Reserve Banks kept printing money. And the result of that, as it has been, every time this has happened across history, was a massive surge in demand and as a result of that a surge in inflation. Now, the idea of greedflation, greedflation is actually measuring a real thing, there was an uptick in corporate profits, that came from, it wasn’t the cause of, it came from that stimulus, that massive increase in demand. It’s a simple supply and demand issue. There was a massive stimulus in demand, supply is limited to a certain extent, maximum capacity of the economy is certain amount once you go past that, it’s inflation, and that’s what happened. That’s what happened in Australia and Britain and America and Europe, over that period of time, massive increase in demand. And the reason why, you know it’s an increase in demand, and not an increase in costs of supply, is the corporate profits went up. And what we’ve seen in recent times is corporate profits have gone down, as inflation has come down. Why? Because across the western world, governments have been tightening budgets and reserve banks have been increasing interest rates, in other words, reducing demand.

Gene Tunny  41:58

Yeah, yeah. I think that’s, that’s, yeah that’s good. Simon. I mean, I, I largely agree. And I think when I looked at this in a previous episode, I, I talked about a study from Chris Murphy. So Chris, has done modelling of this and he came to that view that it’s because of the huge stimulus…

Simon Cowan  42:18

Yeah I think he predicted it was sort of six or 7% inflation and got pretty close to where it actually landed in Australia for that survey looked pretty good. But I mean, the bigger picture issue here, there’s two really important points coming from this greedflation thing. One of the reasons why the greedflation hypothesis is is so popular or being pushed so hard, is connected to this idea of of wages, and who should be responsible for paying for the cost of bringing inflation under control. So if you can argue truthfully, or realistically or correctly or not, that it’s not workers, and it’s not, you know, ordinary people who are responsible for inflation, therefore, you can’t restrict wages, and your government should be providing cost of living support through their budgets, what you’re trying to do is actually shift the incidence of who has to pay for the cost of getting inflation under control. But it’s such a dangerous thing to do. Because what we know is that the thing that will make inflation enduring, and the thing that will cause the biggest problems if inflation is translated into wage expectations, it creates a cycle that makes it exceptionally hard to break. And the unions and to an extent the government are trying as hard as they can to put in put forward this idea that wages should at a minimum keep pace with inflation. And ultimately, that’s a very dangerous sentiment, in my view.

Gene Tunny  43:49

This is the concern about the wage price spiral. So yeah, yeah, I’ve looked at that in a previous episode. So I might, I might link to that. Yes. So you’ve written in your article on greedflation. “The dissidents seek to de emphasise monetary policy, especially the role of monetary of managing inflation in favour of a greater role for fiscal policy and an equal focus on maintaining full employment.” So you, you see this, this greedflation view, you’re, you’re worried about it because it could lead to really bad policy outcomes in your view?

Simon Cowan  44:31

Yeah I think we’re seeing a shift already. And it’s been coming for a little while, I think, you know, we had a period of time where there was a fairly clear settlement, particularly Australia and macro economic management stability issues were almost exclusively a domain of of monetary policy, and then micro-economic efficiency issues and supply side concerns were the domain of fiscal policy. And the problem with that is that that doesn’t really allow a progressive government that wants to, to, you know, put its finger on the scales in various places to use macro economic measures as a rationale for changing government spending priorities. And so there’s this shift. You can see in America, it’s not just, just here, but away from monetary policy being mechanism for micro, macro economic stability towards fiscal policy being responsible for for huge components of economic well being. And it fits very clearly, I think into what the treasurer has been saying about the role or the return of government to more central position in in determining the direction of economic forces and so greedflation, if you take it away from that over stimulus point and bring it back towards a discussion about employment and wages. It allows you to centralise government in that decision making process again. And it was so hard for us to get past that first time.

Gene Tunny  45:58

Yeah. What are the greedflation, people arguing for greedflation, what are they actually, what would they be suggesting price controls or something? Who really…

Simon Cowan  46:07

Yeah, price controls and tax increases and ,there’s a was a retribution component in some respects. But it’s also this idea that, you know, workers weren’t responsible for this. Therefore, they shouldn’t have to bear the costs of it. And I mean, from a, from a moral perspective, that that sounds right. I mean, it’s not it’s not instinctively wrong, the problem is from an economic perspective, the argument they’re basing that on doesn’t make any sense.

Gene Tunny  46:37

Yeah. Yeah. And particularly, and this is the point Phil Lowe made in response to my question, I might, I’ll put a link in the show notes regarding that, because I had a look at some of the data he was talking about. You don’t see this big spike in the profit share of national income other than in mining, you see it in mining because they’ve had a big terms of trade boom. But you don’t really see it elsewhere in the economy. There’s a little bit but it’s not huge. So it’s hard to see how it supports his greedflation hypothesis. I think that’s a fair point. And I like your point about the lack of a causal mechanism, because, you know, people like the Australian Institute people, what they’ve done is that they’ve shown or they can demonstrate they do some decomposition of the GDP deflator. And they argue that it’s largely associated with, with profits rather than wages. Now, that’s a nice statistical calculation, but it’s just they’re showing a correlation. They’re not necessarily proving any causation, which I think’s your point. Yeah,

Simon Cowan  47:40

Yeah, cool, but far more fundamentally, right? What is inflation? Inflation is an increase in prices. If, and it can only come from from two places, right? It either comes from an increase in costs, or it comes from an increase in in profit share. Now, either it’s come from an increase in costs. That’s a supply side driven inflation. And we’ve seen some of that during the pandemic, particularly around the energy costs. But what they’ve effectively triumphantly discovered is that inflation is an increase in prices, doesn’t say anything about what causes that increase in prices. And you often see, I mean, because unions, I think, unions think this way, because this is how unions work in the sense that everyone gets together and they make a sort of centralised decision. And that then flows outwards, they assume that their opposition works the same way. There is no business or collective sort of companies that can decide what the profit level is like they can’t, there is no mechanism by which you can actually do that. So what we’re seeing is that that sort of accumulation of literally 10s of 1000s of individual decisions in individual markets by individual companies, there’s no, there’s no overarching sort of business sector that makes decisions. It’s just a reflection of what’s happening in the market. And that’s why I mean, it’s the biggest reason why this doesn’t work. Like if, if you wanted companies to reduce profits to cut inflation. How would you actually go about doing that?

Gene Tunny  49:15

Yeah, I largely agree. Now, you’re not saying that, I mean, would you recognise that there are some areas of the economy where there may be excessive concentration or or we do need to be conscious of abuses of market power. Do you have any thoughts on that? Like so…

Simon Cowan  49:31

Yeah, I mean, I have some thoughts on that. I do have a lot of fairly uncharitable thoughts about competition policy for what that’s worth. I do think there are issues around efficiency within markets, and that is a problem. But it’s not at all clear to me that any of the people who are pushing the greedflation agenda, have any idea how to make markets more efficient. And none of their solutions would make markets more efficient or resolve any of those issues. So I I’m less convinced that that’s a solution to this problem. But what we have seen, I think, is over the last sort of 30 or 40 years, as you know, international trade has increased enormously as the sort of tyranny of distance, you know, internet, the ability of markets to sort of reflect international trends, competition has become enormously increased in a number of different markets. So the fact that it’s not immediately visible in Australia, because you can only see the Australian companies doesn’t mean that there’s not a whole bunch of potential competition that could arise there. So, but I mean, I think competition is important, and it’s not as efficient as it could be. But and I’d be very much in favour of making it more efficient. But I don’t know you make competition better or more efficient with more government?

Gene Tunny  50:47

Yeah. Oh, yeah. Yeah, we might have to come back to that in a future episode. I just thought of it because I know there’s a lot of talk lately about Qantas. And how close Qantas is to the government. And the government is making decisions in favour of Qantas like not letting Qatar Airways take a route into Australia. And at the same time, we’ve got Qantas coming out in favour of a policy position advanced by the government on the Voice, and it’s given Anthony Albanese, some chairmanship lounge membership.

Simon Cowan  51:17

Yeah well so I actually looked at this issue in the past too, and this is a really important thing, it’s what it comes down to is what the future direction of the economy is. So there’s, there’s a view where you say, you know, it’s big business and big union and big government, they all get together, and they do what they think is in the best interest of the country. Or there’s a model where you say, consumers should be sovereign, and they should make choices and the market reflects whatever people decide to buy with their money. And what we’re seeing is so many more people coming out in favour of that first view, the idea that, you know, the benevolent elites will come and decide what’s best for everyone and that Qantas and, you know, the ACTU and Jim Chalmers can get together in a room and decide what the priorities for the economy should be. And I mean, I fundamentally reject that view. But I think more importantly, my vision is not a business-centric one, it’s a consumer-centric one. Markets are consumer democracy. It’s not about what’s best for business. It’s what about what’s best for people and consumers?

Gene Tunny  52:17

Absolutely. I fully agree. Simon Cowan it’s been terrific. I’m so glad to have caught up with you here in Sydney at CIS’s offices. So thanks again for your thoughts and for your hospitality today.

Simon Cowan  52:30

Appreciate it. Thanks for your time.

Gene Tunny  52:33

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

53:20

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Australia’s Net Zero transition: successes & challenges w/ Andrew Murdoch, Arche Energy – EP202

A conversation regarding the transition to net zero greenhouse gas emissions in Australia, with Andrew Murdoch, the Managing Director of Arche Energy. Andrew shares his positive outlook and realistic insights into the challenges of integrating renewable energy into the electricity grid. He also advocates for being open to a range of options, including nuclear power and carbon capture and storage.
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.

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

About this episode’s guest: Andrew Murdoch

Andrew Murdoch is the Founder and Managing Director of Arche Energy. 
Andrew has been operating in technical-commercial roles in the Queensland National Electricity Market (NEM) Zone since it was first founded over 20 years ago. In 2017, he founded Arche Energy to provide a high-quality clean energy, power and infrastructure consultancy to facilitate investment in the clean energy sector. He is an experienced general manager, project director and engineer operating in renewable power, power generation, energy, ports and heavy infrastructure.
His experience spans business development activities, major approvals, project execution, operations and maintenance and decommissioning. Andrew is an innovator and optimiser thriving in changing environments through the adaptation and integration of emerging and innovative technologies into business applications.

What’s covered in EP202

How is the transition to net zero going? (1:59)

The problem with intermittent generation. (7:36)

Transitioning from one energy source to another. (13:40)

Traditional hydro & pumped hydro. (16:08)

Geotechnical risks in construction. (20:11)

The infrastructure challenge. (24:00)

Zero marginal cost power. (30:23)

 The role of nuclear energy in the transition to net zero. (45:42)

Links relevant to the conversation

Previous Economics Explored episodes mentioned in this episode:

The Aussie electricity market malfunction of June 2022 – EP156 – Economics Explored

Sir David Hendry on economic forecasting & the net zero transition – EP198

Transcript:
Australia’s Net Zero transition: successes & challenges w/ Andrew Murdoch, Arche Energy – EP202

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a human, Tim Hughes from Adept Economics, to pick up the mondegreens that otters sometimes leave in their wake. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. In this episode, I catch up with Andrew Murdoch to talk about the transition to net zero greenhouse gas emissions here in Australia. My occasional co-host, Tim Hughes took part in the conversation too. Andrew is the Managing Director of Arche Energy, which describes itself as a clean energy power and infrastructure advisory providing depth of experience to the investment community as it develops and executes clean energy power generation and infrastructure projects. It’s headquarters are in Fortitude Valley, Brisbane, not far from my office. As you’ll hear, Andrew is generally positive about the transition to net zero. And he has that can-do attitude you’d expect from an engineer, but he’s also a realist. He gave us some great insights into the challenges associated with bringing large amounts of renewable energy into the system. And he made strong arguments for remaining open to a range of options such as nuclear power, and for persisting with r&d in carbon capture and storage, a so called clean coal technology. Okay, let’s get into it. I hope you enjoy our conversation with Andrew Murdoch.

Andrew Murdoch from Arche Energy, good to have you back on the programme.


Andrew Murdoch  01:59

Thanks Gene. Good to be here.

Gene Tunny  02:00

Excellent. Tim, thanks for joining us for this conversation, too.


Tim Hughes  02:04

You’re welcome. Good to be here.


Gene Tunny  02:05

Excellent. So Andrew, you got in touch after the conversation that Tim and I had recently with Sir David Hendry. And one of the things we talked with Sir David about was the transition to net zero. And we talked about what was happening in the UK and what he thought about nuclear energy as a possibility for Australia. And we talked about these small modular reactors. So you got in touch with us. And you’ve been on the show before. And you’ve mentioned that you have some thoughts on renewables on how we’re going with the transition to net zero on nuclear energy. So we’re keen to chat with you about that today. If you’re happy to do that.


Andrew Murdoch  02:44

Yeah. Thanks. Thanks, Gene. Yes, happy, happy to do so. Yes, Sir David, raised some interesting points. And so I thought it would be good to expand on some of those a little bit.


Gene Tunny  02:52

Excellent. So to kick off with Andrew, could you tell us how do you think this transition to net zero is going here in Australia? And then we might chat about how it’s going overseas, please.


Andrew Murdoch  03:05

Yeah, look, I think in Australia to date, the transition is going going very well. There’s a lot of excellent projects that are that are happening, we’ve seen a significant increase in the share of renewable energy on the market, and a corresponding reduction in the intensity of greenhouse gases per megawatt hour generated. Each of the states have now got some some ambitious renewable energy targets that they are all working towards. And, you know, we’re starting to see statistics like 25% renewables penetration in states like Queensland and higher in other states as well.

Gene Tunny  03:42

25%? Wow!

Andrew Murdoch  03:45

25% for for financial year 2023, which is, which is fantastic.


Gene Tunny  03:48

So this is the percentage of the electricity generated in the state that is coming from renewable sources, such as solar, and hydro, and it includes the rooftop solar, as well as the big solar farms?


Andrew Murdoch  04:01

Yeah, that’s correct. Yeah. So it’s predominantly solar, wind and rooftop power.


Gene Tunny  04:05

Gotcha. Okay. So we’re at 25% or so here, but we’ve, they’ve got some pretty ambitious targets haven’t they for where they want to get to?


Andrew Murdoch  04:14

Correct yes. So for example, Queensland’s renewable energy target is 50% renewables by 2030. So that’s only another another seven years away. And then 80% renewable by 2035. New South Wales is targeting a 70% reduction in greenhouse emissions by 2035 from 2005 levels. So they are really quite ambitious targets. And as renewable penetration increases, it gets harder and harder to manage, as we have to shift more power from times of high renewable generation such as the middle of the day when all of the solar farms are operating, more periods of high wind, collecting the surplus power storing it and shifting it to times when the wind is not blowing the sun’s not shining is is one of two significant challenges. The other significant challenge we have in terms of significantly increasing renewables penetration is in increasing the transmission infrastructure to be able to collect all of the energy that’s generated in the in the renewable energy zones or areas where the sun is strong and the wind and the wind blows and moving that into the load centres in the cities and industrial areas.


Gene Tunny  05:23

Okay, so what’s the issue at the moment, we don’t have the lines where they need to be.

Andrew Murdoch  05:28

Yeah, so the lines have historically connected the large baseload thermal power stations in places like the Bowen Basin and the Hunter Valley, and connected them to, to the load centres in the big cities and, and industrial areas. So because that’s where the energy is flowing, it’s flowing, it’s flowing from the areas where the coal is to where the where the load is, now it needs to now we need to get the energy from where the wind blows and the sunshine as to where the to where the load is. And that’s a lot more geographically dispersed. And, yes, there has always been transmission lines to a lot of these communities. But those transmission lines have been sized to suit the towns and communities in the area, rather than and of course, that load is much, much smaller than the hundreds and 1000s of megawatts that we want to be transmitting from those areas back into the cities.


Gene Tunny  06:20

Right. So what does that mean? We need bigger, more high capacity lines? I mean, how do we think about that? It’s more expensive then is it? There needs to be upgrades, it needs to be new lines?


Andrew Murdoch  06:30

Correct. Yeah. So so the renewable energy zones are all about connecting the high renewables areas to the load centres? And yes, physically, that means new lines, higher voltages, higher capacity transmission systems into those areas.


Gene Tunny  06:45

Right. And what are these renewable energy zones? Do you know roughly where they are?


Andrew Murdoch  06:50

Yes, so New South Wales has five renewable energy zones. They have the Central West Orana, they have New England, Hunter, Southwest, Queensland released its renewable energy zone roadmap. I won’t try and list all of them. There are quite a few, some of the areas that Queensland are progressing North Queensland, area around Biloela or west to Biloela there where there is already some some pretty good transmission systems, but it’s all about connecting, connecting local farms into the local wind farms and solar farms into the into the existing transmission system, Darling Downs, areas around McArthur wind farm, expanding those expanding those zones as well.


Gene Tunny  07:34

Great, okay. Right. You mentioned that as you get more renewables into the system, you have these issues of like, it’s going to be harder to go to the next stage. I mean, we’re at 25%. So you’re saying that it gets more difficult because then you’ve got more of your power from intermittent sources from the renewables, you don’t have as much from coal or from gas. So is what you’re saying have we got the low hanging fruit already? So the the rest of the fruit, they’re going to be more difficult to pick? Is there any rule as to when you have problems? I mean, we’re at 25% now, I mean, can we can we get up to 50%? Like, what does that entail? Is does that is that when we need the pumped hydro, do we need pumped hydro to get to 50%? How do we think about this?


Andrew Murdoch  08:22

You’re sure, so no, there’s not a there’s not a hard rule, things just get harder and harder. So okay, you know, using the low hanging fruit analogy, you need a bigger and bigger ladder as the as the fruit gets higher and higher. So the driver for pumped hydro or any storage is the volatility in the price. So the difference between the low price and the high price is what provides the economic incentive to put storage in. So the more the more generation that happens at the same time, whether it’s solar in the middle of the day, or wind, when the when the wind is blowing as a ratio against the peak demand. The greater that difference is, the greater the economic incentive is for run for the installation of batteries. From a energy supply perspective, from a security of supply perspective, it becomes a probability game. So you’ve got the probability of the sun shining, and the probability of the wind blowing in various different geographically dispersed regions around around the country on the network. And what’s the probability of any one meteor…, meteorological event impacting the energy supply to the point where we have to start turning power off? The more storage you have on the system? The more dispatchable generation you have whether it’s coal or gas, the lower that probability is the more concentrated your your, your renewable energy resources are meteorologically, if you have all of your solar farms in the one location, for example, and and you get you get rain in that location, well you you’re going to get no generation, whereas if you spread them out all over the country, well, you’ve got a greater chance of there being, of it being sunny in any one spot. And of course, if you spread them out in a line that runs east west, then you’re extending your generation day as well. So…


Gene Tunny  10:09

Yeah, yeah, Tim, do you have any questions for Andrew at this stage?


Tim Hughes  10:12

It is a sort of like more of an overview, sort of like question, I guess, when we look at 80% by 2035. Without obviously having a crystal ball, I mean, it’s there as a target, what are the chances of achieving it? And what does it look like to be able to be 80% reliant on renewable energy with those things that you mentioned that, you know, there are pitfalls with wind with solar, with having hydro, which I understand really acts as like a bit of a battery, so that it can have water pumped to the top during the day while there’s available power and then it can access that power in the evening. With 80%, in your view, is that achievable? Are we on track?


Andrew Murdoch  10:52

Yes. So Grattan did some excellent modelling about a year or so ago. And what they found that was that 90% was a was an achievable target from a market operations perspective. And their modelling was around reliability of supply versus time of day, and they found that 90% renewables penetration that was about the optimum. Now the final 10%, was was made up by gas, when it comes to the probability of being able to achieve it. Yeah, look, with enough pumped hydro, and with enough batteries, yes, you can do it. And certainly with the gas in the system to deal with those periods where the sun doesn’t shine, and the wind doesn’t blow for for weeks on end, well, you can just just run gas for that 10% of the time. And if you’re 90%, carbon free and 10% carbon at gas intensities of roughly half that of coal, you know, that’s a pretty good outcome on average 24/7 basis. So in terms of carbon intensity,


Gene Tunny  11:49

So this is interesting, because, like you mentioned, oh, yeah, say it doesn’t you haven’t got the renewables for for a week or so. Like there could be prolonged periods where you don’t have the renewables or you’ve got very little from renewable. And therefore, if you’re saying, well, the gas is 10%. But then for those periods of time, the gas is going to have to be providing 50, 60 or 70%, isn’t it? So you might need that you need more gas capacity than you would in the current configuration. Is that is that one way of thinking? Is that right?


Andrew Murdoch  12:22

Correct. Yeah, and your gas becomes more of a standby generator. And so in that scenario, where you have very low levels of renewable generation, for a for a long period of time, and all of your batteries are flat, and all the hydro dams are empty, that’s when the gas has to has to kick in. And that raises a whole heap of questions around security of gas supply as well. When you are only providing gas for a short period of time, where do you store it? And yes, pipelines have have linepack capability. But that has to be commercial for the pipeline operator and for the provider of the gas in the first place, as well so…


Gene Tunny  13:04

Yeah, what’s that capability line?


Andrew Murdoch  13:06

Linepack. So linepack is gas that is stored in a gas pipeline, in a transmission pipeline. So we have transmission pipelines that criss cross the country, taking gas from gas fields into the into industrial and city centres, the pipes are typically somewhere between 300 and 600 millimetres in diameter. And they’re pressurised, the more the greater the pressure that that you run the pipelines in the more gas you can store in there. So it kind of acts as a big gas bottle, and a transmission pipeline at the same time. And so but that stored gas is what we call linepack.

Gene Tunny  13:37

Gotcha. Okay. Yeah.


Tim Hughes  13:40

I was gonna ask, actually, because one of the other things with this, with different sources of energy, how does the transition looks so for instance, like just to be able to switch from, from one source to another source to another source to then put gas in or hydro or whatever it’s going to be? Undoubtedly, we’re charting, you know, getting into unchartered waters a little bit, because this is the intention to try and make that work. How big a good problem is that likely to be, that flexibility that will be needed?


Andrew Murdoch  14:08

Well, yes. So this is the beauty of the market. So the market operation is such that the generators will each bid in the different technologies that they have at different price points, depending upon what their bidding strategy is, typically, you’ll bid in such that you you’ll bid in to generate whenever the spot price is greater than your short run marginal cost of operation, your cash costs. So then you’re then generating positive cash flow. The market and the transmission system doesn’t really care where the electrons are coming from, if they see, as soon as there is energy flowing through the system. It just flows through the system and the Australian energy market operator, AMO, they run a dispatch engine, where they collect bids from from all of the generators around the country and every five minutes. It will it will issue dispatch instructions to each of the generators to either output more power or output less power or maintain the same level depending upon what price they’ve bid into the system and, and what level of generation they’re physically able to provide at that point in time.


Gene Tunny  15:14

Okay, so, Andrew, in terms of how we compare with other countries, I remember maybe it was when we were chatting last time, but there are some countries that seem to have high renewable penetration, but it’s, it’s the countries with geothermal. Is that correct?


Andrew Murdoch  15:30

Well, it depends upon what natural resources you happen to have. So if you’re New Zealand, or Iceland, and you happen to have some excellent geothermal resources, and then great tap in tap into the side of the volcano that you happen to have, and grab some of that heat and turn it into power, so yeah, yeah. So that that works very well. If you happen to have a lot of hydro resources, if your a Nordic country for example, or or, again, New Zealand, or Tasmania, then then you know, if you’re blessed with that rainfall and you can harvest it, then, then then you have that option. Mainland Australia is a little bit more difficult. We don’t we don’t have the rainfall to support massive hydro schemes other than Snowy Hydro and Tasmania. So we are limited to solar and wind for the bulk of our, the bulk of our renewable, geothermal is an option, but our geothermal resources are very deep and not not high grade, so quite expensive to get that heat to the surface and turn it into power.


Gene Tunny  16:32

So can I ask you a question about hydro versus pumped hydro? Because you mentioned Norway. So does Norway have a lot of hydro? So is it able to generate a consistent or quite a regular amount of energy, from their hydro resources, they don’t have pumped hydro, they’ve got actual, they’ve got enough rain fall? Or that they’re capturing it? They’ve they’ve set up these hydroelectric dams in a way that it’d be good to have some understanding of that just is there a difference between normal hydro and pumped hydro? How does that work?


Andrew Murdoch  17:02

Yeah, so so the key difference between normal hydro and pumped hydro is for normal hydro, the rain or snow falls onto the top of the hill, or a plateau somewhere, collects somewhere into a reservoir or, or some other collection system up high in the mountains, then you run it through a set of penstocks into a turbine that might be several 100 metres, maybe, maybe further underground. And then it will discharge into the river system, several 100 metres below where it’s collected, as opposed to pumped hydro, where you are taking water from a lower reservoir using cheap power to pump it back up the hill, and then storing it at the top of the hill. And then and then running it back down again, during periods when when prices are higher. Now you can do both in the same scheme. And there there are several examples of of both, so you might collect the your snowmelt or your rain up in the up in the hills, run it through the run it through the turbine once and then go, Well, you know what, I wouldn’t mind doing that the second time, and pump it back up the top of the hill again. And that that is particularly useful for areas where there’s seasonal variations in the amount of water that comes through the system, snow melt, for example. So during the during the autumn, you might, you might pump more water up the top of the hill and use it in pumped hydro mode during the spring, you might just use it as a once through system.


Tim Hughes  18:31

And so that will be something where, for instance, because one of the issues that seems with solar or wind, but particularly with solar here is that we can’t store we can generate more than we can store. Is that right?


Andrew Murdoch  18:44

Yeah. Correct. At present, yes, the generation, the PV generation capacity is significantly higher than our ability to store it.


Tim Hughes  18:52

So the pumped hydro is a good solution to use that excess energy in a way of pumping the water back up. So that effectively having it as an extra battery like that the hydro itself serves as a battery. So you can then use that power in the evening?


Gene Tunny  19:06

Yeah, well, it’s a solution. The question is, is it a good solution relative to other solutions we have for for transitioning to net zero, right? Because it’s there’s a cost to it, isn’t there? I mean, presumably like building these big, these pumped hydro dams. That’s I don’t know how billions of dollars, isn’t it? I mean, it’s huge amount of money that we have to spend and…


Andrew Murdoch  19:28

Correct, correct. Yeah, these are big projects. They’re big civil works projects, billions of dollars, many years. Lots of geothermal risk, lots of opportunity, say lots of geotechnical risk. I beg your pardon. Lots of opportunities for the projects to not go as well as perhaps we first planned


Gene Tunny  19:47

Now geotechnical risk. You mean the risk of earthquakes?


Andrew Murdoch  19:50

No I mean, the risk of rock being harder than you expect it to be.

Gene Tunny  19:54

Ah gotcha.

Andrew Murdoch  19:56

I mean, and I mean the risk of tunnel boring machines getting stuck for months. underground, those kinds of those kinds of exercises. So it really impacts in terms of cost and shedule risk and you know, it’s, it is difficult to, it is difficult to predict what rocks underground will cost to dig. And many a construction company has gone to the wall because of not not understanding geotechnical risk.


Gene Tunny  20:22

Right. Wow. Okay. Yeah, that’s that’s a really good point. Because we’ve got to build two new pumped hydro here in Queensland. And that’s because yeah, we need the storage, because we’re going to be relying a lot on solar and wind, we don’t have geothermal as they do in was it Iceland or somewhere like that?


Andrew Murdoch  20:39

Yeah. Iceland and New Zealand, New Zealand, to a lesser extent PNG.


Gene Tunny  20:44

And geothermal will be good. Because is it 24/7 effectively?


Andrew Murdoch  20:49

Correct. Yeah. So the volcano doesn’t sleep. Right. Yeah. So the hot granite doesn’t sleep so it’s a heat source that is there 24/7? It’s a good baseload reserve so…


Gene Tunny  20:59

Yeah, I guess what we’re interested in is, because there’s an upcoming event at the, It’s at The Tivoli I think isn’t it Tim? I think so, yeah, around the corner from where we are here in in Fortitude Valley or Newstead, and it’s about does Australia need nuclear power? Because we’re discovering that the greater penetration of renewables relying more on renewables, well, we need to upgrade the grid, we need to upgrade transmission lines. And there are all sorts of, you know, huge estimates of what that could cost. I’ve seen a trillion dollars or so, it seems that there’s there’s an argument about all what is really the cheapest cost of electricity once you take into account all the all of these network costs, there was a controversy about the CSIRO levelized cost estimates. Could nuclear be part of the the solution given that there are all of these costs with renewables? And we’re not really sure whether it will, well, I mean, maybe maybe we are sure it will work. This is what I want, I’m interested in your view on to what extent should we be looking at nuclear as a potential backup or a plan B, if this, this current plan doesn’t work out?


Andrew Murdoch  22:09

Yeah, well, we certainly should be considering nuclear as one of the options. The, the engineer in me likes to consider things with a sceptical and enquiring mind. So what are all of the options? What are the ones that will work? What are the ones that won’t work? What will they cost? What are the probability that we will achieve the outcomes that we’re trying to achieve? So in the context of assessing any type of technology, we should be looking at? What is it going to cost? What are the consequences? How does it impact our society? How does it impact our landscape? My personal view is that, that advanced small modular reactors have a role to play, particularly when we’re getting into the very deep baseload. So the power that has to run 24/7 at very high levels of reliability, that’s going to be very difficult and expensive to do with intermittent renewables. And it is possible to do it with intermittent renewables, it’s possible to do it with intermittent renewables and storage and gas topping. But another arrow in the quiver of decarbonisation tools that we could use is small modular reactors.


Gene Tunny  23:21

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


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Gene Tunny  23:55

Now back to the show.


Tim Hughes  24:00

It is a really interesting area, because it’s changing very quickly. I was gonna ask, one of the big costs that gets talked about is the infrastructure. And I know before we started recording it was mentioned about Mount Isa, for instance, and the cost of running the copper string connection, which I’ll ask you to talk about in a sec. But as a general thing, the infrastructure as we currently look at it is extremely expensive. With the technology changing as quickly as it appears to be, is it possible that, obviously decisions have to be made now and action has to be done now, is it possible that some of this very expensive infrastructure may become redundant in the not too distant future with the possibility of, for instance, we haven’t also leading into the conversation about SMRs small modular reactors, which I imagine would require less of this infrastructure, if that was to be the case that they would be rolled out in more locations so we don’t need to move energy over large distances. So I guess the overriding question would be, you know, like with this changing technology, battery storage is obviously a big part of this, where it may not be necessary to put all this expensive infrastructure in place. Now, how does that pan out? Obviously, we have to go with what’s available, with current technology, how do we stop ourselves wasting money on infrastructure that becomes unnecessary, fairly soon?


Andrew Murdoch  25:26

Sure. Good question. I guess you there’s a whole heap of crystal balling that…


Tim Hughes  25:33

There is yeah and I realise it’s an impossible question. And it’s very much a sort of moot point, because this is clearly I mean, it’s all expensive. But there’s a lot of money involved in this. And and it’s, you know, it’s taxpayers money getting invested in these systems. And, of course, it’s contentious. And yet, of course, we have to go with what we know, we can’t put things on to what we think is going to happen. But it appears that is moving in a direction quickly enough that we might be able to, I don’t know, it might be prudent to hold off on some of these bigger things. So sorry. I’ve put about five different questions in there for you Andrew. So the copper string connection if we can go with that. So the current way of moving power over long distances is currently quite expensive yeah?


Andrew Murdoch  26:13

Great. Yeah. So I guess I’ll talk specifically about copper string because it’s an interesting project. And it probably in describing it, it, it probably addresses many of your questions. So firstly, the fundamental reason that you would want to connect Mount Isa to the national electricity markets are currently Mount Isa, Cloncurry and all of the mines that operate off that system operate on an isolated grid. So there’s a small power station Diamantina Power Station that operates in Mount Isa, it burns gas, it’s connected to the Carpenteria gas pipeline, and it provides power to those to the mines in those in that area. The original value proposition and this value proposition still holds true today in connecting Mount Isa to the national electricity market is to reduce the cost of minerals processing in Mount Isa. So if you reduce the cost of power, the bulk of the power consumption in the mount Isa grid is used to make big rocks into small rocks so that copper and other minerals can be can be leached out of it. So if you reduce the cost of power, all of a sudden, you can chase lower and lower grades of ore, your mine lifes get extended, and economic output from the northwest minerals province increases. So that’s the value proposition. If you connect Mount Isa to the national electricity grid, those existing power stations at Mount Isa, they still exist, and they can still generate power. And instead of just selling it to customers on the Mount Isa grid, they can suddenly sell that power to people elsewhere on the grid, they can sell it to you and me here in Brisbane or people in Sydney or anyone else who’s connected to the national electricity market. So it opens up the number of customers to them. You also end up in a situation where you have a high voltage electricity network connection going a long way west into a very high solar flux region. So you can still be making a lot of solar power in Mount Isa at 6pm when the sun’s gone down here in Brisbane, and we can take advantage of some of that geographical diversity in the in the network by building that extension. You’re also crossing over the Great Divide, so going from Townsville to Mount Isa, you’re crossing, you’re going very close to Hughenden. And there’s excellent wind resource. And of course, a lot of really, really sunny paddocks along the road as well. You’re going past Julia Creek and all the vanadium deposits in there. There’s multi pronged economic output that comes out of out of this particular investment.


Gene Tunny  28:43

So vanadium is one of those critical minerals, is it? So this is what you’re suggesting that we it might become economic to, are we mining it already and then we process it there? What would be the advantage of…


Andrew Murdoch  28:56

Yes, so there’s there’s a number of vanadium projects in the Julia Creek area that are going ahead and they they will probably be, those projects will probably proceed with or without copper string. It’s just if they can get lower cost power, then that helps the project. So those projects are going to ship the ore, they’ll either process that on site or ship it to Townsville where it will be, where it’ll be processed, and then either export it as vanadium. They also have some other other products that come with it as well. I think one of them has a an oil shale product as well. So there’s a petroleum product that comes out as well from those projects so…


Gene Tunny  29:33

Okay, good one. Sorry, I interrupted you before was just interested in vanadium.


Andrew Murdoch  29:37

Yeah, and then I guess to come back to the redundancy risk point. So for project like copper string, the redundancy risk is I guess, offset by the fact that minerals production in the Northwest will will continue for some time won’t continue indefinitely. At some point we’ll run out of minerals there to mine, irrespective of that is that the solar farms that are being built out there and the wind farms that have been built out there, once they’re built, they will continue to generate at very low cost forever. Whenever, you know subject to upgrades and stuff like that, you know, you might need to replace your solar panels and upgrade to the next level of technology, etc. But once you’ve, once you’ve developed them, why would you ever turn them off if you’ve got this zero marginal cost power coming onto the system? So I’m not so much worried about redundancy. In the context of putting new technologies such as SMR, or clean coal or any other technology into the grid, well, yeah, okay, they’ve got to stand up on their own two feet, every project has to be economically viable. And again, if I owned a wind farm or a solar farm that lived, lived out on the end of a long along spur or in a renewable energy zone, I wouldn’t be turning it off to make space for a competitor I would just keep keep generating so…


Gene Tunny  30:58

On the clean coal, you mentioned clean coal, that’s not really a thing anymore is it? Because they figured out it was not economic, is that right? The whole carbon capture and storage?


Andrew Murdoch  31:08

Not so much figured out that it was uneconomic, I think we just gave up on it. Which is a shame. If you look to Norway, and the US and Canada, they are continuing with carbon capture and storage. There are some carbon capture and storage projects happening in Australia. Santos are doing a project on the Moonee fields, and of course there’s Chevron during the Gorgon project, and all of the under the safeguard mechanism of any new LNG projects have to be 100% carbon neutral, so that sort of enhances the driver to collect reservoir co2 and reinject it back into into underground aquifers. So so…


Gene Tunny  31:51

That’s just the co2 or the greenhouse gas emissions associated with the actual extraction is it? Because it’s not in terms of not the greenhouse gas emissions associated with the burning in some other countries is it?


Andrew Murdoch  32:03

Correct yes. Yeah. So just the scope 1 emissions so for reservoirs, such as typical Northwest shelf reservoir where there is there is co2 and methane in the reservoir. Yeah, instead of venting the co2 and selling the methane that will now be required to deal with the co2 for all new projects connected to LNG facilities… safeguard mechanism.


Tim Hughes  32:25

So their own process becomes neutral as such.


Andrew Murdoch  32:28

Correct. So back to clean coal. Yeah, my personal view is that in Queensland in particular, we’re doing ourselves a disservice by not pursuing clean coal. Now, that’s not to say that it’s going to be the answer. But again, it could be one of several solutions, or one of several contributors to lower lower carbon power in Australia.


Tim Hughes  32:51

Right, just on that note, so for instance, to get to 80% by 2035. So if clean coal was an achievement that could be done, that would be part of the 80% not part of the 20% remaining.


Andrew Murdoch  33:03

Well, it depends upon how you define renewable. Okay, so yeah, okay, so


Tim Hughes  33:08

So actually, sorry. So that’s the distinction is it’s renewable, not necessarily carbon neutral?


Gene Tunny  33:13

I guess you could say it’s renewable equivalent?


Tim Hughes  33:17

Well, no, it’s a fair point. I mean, like, for instance, I mean, as a consumer, like, you know, I love the direction this, this is going and it’s quick, and it stalled for a long time. It’s not too long ago, Tony Abbott and Joe Hockey, were making it making a joke out of renewable energy. So the acceleration and the take up has been incredibly fast, which is really exciting to see. And so the intention here is really good from the consumers through to the market through to government now, which is great. And of course, like the conversation like this really is like, well, how well can it be done? Is it realistic? And, you know, what are the best choices? Because it’s moving so fast? So clean coal? Yeah, I mean, like anything that gets extracted from the earth is still viable, in my view, if it can be done in a good way for the environment, like, you know, it’s a big conversation, but it’s basically can we do things ethically, sustainably, renewable, etc, that’s, that’s great. But these figures, these, these amounts going towards 80%. And, of course, at some point, 100%. I mean, that would be the ultimate target, I’m sure.


Gene Tunny  34:24

I think that’s, I think, in Australia, that it would be too difficult because of the intermittency and just, you’d need some gas still, don’t you? I mean, no one’s talking about 100% renewable at the moment in Australia, are they?

Tim Hughes  34:34

I can be the first

Gene Tunny  34:36

you can be the first I’m just wondering whether it would even be feasible. I honestly don’t know.


Tim Hughes  34:42

I guess from that all I mean, is like, you know, new technique because of the emphasis and the money and the brains and the work going behind this now, obviously, this technology is moving very quickly. So ultimately, yeah I mean, like we could end up with very clean energy fusion could be at some point in the future. I mean, like, this is decades away. Who knows what may happen? But the direction we’re heading in is a positive one. And yeah, we have to do what we can with what we have currently. Can we go back to the SMRs a little bit because this is something, this is something that was new to me with that conversation we had with Sir David Hendry. Looking into it a little bit like everything else, it’s a little contentious. It does appear to be a cleaner option, certainly than the traditional nuclear reactors. But it’s not without risk, and it’s not without some waste. What are your views on SMRs Andrew?


Andrew Murdoch  35:35

Yes, so I think they’e a good option that we should consider for that very deep baseload generation, that role that is currently provided by coal in mainland Australia. We need to address safety and we need to address waste because they are obviously weaknesses in the SMR option. So I’m going to make some comments. These comments are based on the the GE Hitachi BWRX reactor, which is currently being designed for a project in Canada. So BWR is boiling water reactor. It’s a it’s a reactor that consumes uranium 235, splits those into into through a fusion reaction, the core is surrounded by water, that water boils, the water is then dried and then goes through a steam turbine to generate power.


Gene Tunny  36:23

Sorry, you mean a fission reaction? fission reactor? Yeah, gotcha. I might have misheard


Tim Hughes  36:29

To be fair they’re so close. I had to really work that one out and lock it in. So fusion is the one that’s talked about often is a bit of a an Eldorado of energy production. But we’re not there yet. And it could be some time away. But fission is what we currently have yeah?


Andrew Murdoch  36:44

Yeah fission is what we currently have. Yeah. So yeah, so that’s splitting atoms, fusion is squishing them together. Yeah. The power output is moderated in the in the fission reactors by a boron set of boron carbide plates that move up and down within the uranium to regulate the absorption of neutrons. And that dictates the rate of the nuclear reaction and the generation of heat. So these boron boron carbide plates in a modern reactor is when they’re fully inserted, they will will slow the reaction right down and let it come to an end. So in a modern reactor, they’re held up by a set of electromagnets, should power fail to the reactor, if something happens, then that electromagnet obviously loses power, the boron plates will drop under gravity into the off position, and then the reaction will come come to an end. Older reactors don’t necessarily have that failsafe mechanism, there might have been some mechanical linkage that might have had to push them up rather than rather than let them drop down etc. So, you have this this safety system where if the power goes up, it moves to a safe position. One of the improvements that came out of Fukushima was to introduce reduce the energy density in the reactors so that they could cool naturally using convective currents. So the the the GE material states that the BW RX will cool naturally for up to seven days without any operator intervention without any external power. So when we when we start to look at Chernobyl, and that was an issue with the positioning of the control rods, and Fukushima where the the circulating pumps stopped working. Those two failure modes have been addressed in these new newer reactors. The other comment is that are lower temperature, lower pressure. So the GE Hitachi machine runs at 285 degrees C and around seven and a half mega pascal, which compared to a coal boiler is relatively relatively low temperature and low pressure. So if we were, if I was specking, up a new coal fired power stations today, it would be 600 degrees and 30 MPa, so significantly hotter, significantly higher pressure, so pushing the boundaries of modern material science, whereas the BWRX has a lot more achievable, I guess, more comfortable pressures and temperatures that give you a wider range of materials that you can select from and will last a lot longer with respect to creep life and fatigue.


Gene Tunny  39:20

Right. One of the things I think I remember about these SMRs, I don’t know if we chatted about it last time, or if it was when I was chatting with Ben Scott on on the show, can you just put these where we’ve got existing coal fired power stations, you can replace the the coal fired power? What is it the generator or whatever it is, with the with the actual SMR?


Andrew Murdoch  39:30

Yeah, it looks so in my view, that’s a good location for them because you already have the transmission infrastructure and you already have the water. So an SMR is going to use about the same amount of water as an equivalent coal fired power station, maybe a little bit more because that because those temperatures and pressures are a little bit lower, so the thermal efficiency is not quite as high. So it might use a little bit more water. And there’s no reason why we can’t put some hybrid cooling in there as well to reduce that water consumption. So those issues are all are all solvable.

Gene Tunny  39:42

What’s this hybrid cooling?

Andrew Murdoch  39:45

So the traditional way of cooling steam turbines is using evaporative coolers. So they’re the big hyperbolic cooling towers that one associates with nuclear power stations, actually nothing to do with the nuclear part, it’s everything to do with the steam turbine part. Yeah, so and that basically evaporates water to, to take the heat out of the condenser. A dry cooling tower is more like a radiator in your car, where you’re just using the air circulating through the radiator to cool it, a wet cooling tower will an evaporative cooling tower will will be more efficient, because it drops the temperature to the dew point temperature rather than the dry bulb temperature, which gives gives you a couple of percent of efficiency in your steam turbine, which is very valuable. And then if you do a hybrid you the reason you would do a hybrid is essentially to save a bit of water, drop the high temperature heat out using the radiator and then still achieve those lower temperatures by by taking maybe the last 10, 20% of heat out using evaporative cooling.

Gene Tunny  41:12

Right. Okay, gotcha.


Tim Hughes  41:15

So there’s still some radioactive waste from SMRs. Is that right? So it’s reduced. So compared to the energy it can generate, it’s less than a large nuclear station, nuclear power station, but there is still some waste percentagewise, I guess, compared to the power generated,…


Andrew Murdoch  41:35

Correct Yes. Yeah.

Tim Hughes  41:37

Radioactive waste. I mean,

Andrew Murdoch  41:35

Correct Yes. So yes, it does generate high level radioactive waste. And the most significant part of that is the spent fuel rods. Now the spent fuel rods can be reprocessed. It’s I can’t remember the ratio. Now it’s something in the order around 95% of the energy remains in, in the uranium fuel rods after they’re removed from the reactor so that reprocessing which is essentially is, is refining the amount U235 and removing some of the U238. And once it’s reprocessed, it can go straight back in the reactor and run for another…


Tim Hughes  42:08

So is this transuranic waste? Is that right? Because this is David Henry mentioned about he referred to transuranic waste, which can then be reused by the SMR. I’m just repeating this is. I mean, this is we went over this briefly with Sir David. So it would be something we could put to him directly. But that was my understanding that there was a certain amount of the waste that can then be used as fuel by the SMR.


Andrew Murdoch  42:37

Yeah, correct. Correct. Yeah, the bulk, the bulk of it can be reprocessed, and reused. Now, that said, even if you don’t, and a lot of countries don’t reprocess their waste, because it’s quite expensive compared to to producing new fuel rods from raw uranium, even if you don’t you’re just still only generating a very small amount of waste.


Tim Hughes  42:57

Radioactive waste is pretty serious stuff for a long period of time. So the disposal of that, I guess, must be quite expensive, let alone the dangers of handling and processing that


Gene Tunny  43:08

We’ve got a lot of places you could bury it in, in Australia, Outback Queensland, Australia, you know, plenty of place.


Tim Hughes  43:17

So, um, but the thing is, obviously, with the aim for clean energy, it’s an uncomfortable addition to the suite of energy provision sources that we may be looking at. However, I mean, it was interesting, because I didn’t know of it until just recently with the interview with Sir David Hendry. He’s a climate econometrician so very keen on having, you know, a clean, ethical source. And he was a supporter of this. So it’s certainly interesting. And, you know, it certainly is something that needs to be considered because obviously, the alternatives, everything’s got to pay off at some point.


Andrew Murdoch  43:55

Yeah. And that we shouldn’t we shouldn’t be too glib about the waste issue. It is a serious, it’s a serious issue. And, you know, one of the one of the cons on the pro con balance of of any technology, my personal view is that if we do go down an SMR path that we should also be committed to reprocessing. Yeah. So look, I think the this conversation sort of highlights how complex energy is and that in any technology choice we make there, there are trade offs that we have to make. If we look at things like land impacts, okay, well, in nuclear, yes, you’ve got to, you have to store the waste somewhere. So that’s going to have an impact on land. And yes, we’ve got some good geological characteristics about Australia and lots of space. If I look at Coal, for example, well, you’ve got to dig holes in the ground and that has an impact on the land if you want to burn gas you’ve got to go and you’ve got to go and sink gas wells and that has an impact on the land if you want wind then you’re going to have to go and go and find some windy hills that are probably covered in some nice gum trees and and put up some wind turbines. If you want to put up solar farms, you’re going to have to go clear some bush or take some agricultural land or grazing land and turn that into solar cells. So there are no free lunches.


Tim Hughes  45:05

And if you want to store the energy, you’ve got to build the batteries.


Andrew Murdoch  45:09

Build the batteries or dam, the dam, the valleys or whatnot, all of these things, there’s a bill to be paid one way or the other. So the best we can do as, as a community is to is to assess all options. On a level playing field basis with a with a sceptical and enquiring eye. What is the best engineering? What’s the best economics? What’s the best ecological science? Can we afford it? will it produce the ecological social power reliability needs that we want? Or is it the best compromise of all of those?


Gene Tunny  45:42

Yeah, yeah, absolutely. Based on this conversation sounds like we should be considering some more options. Maybe we’ve tied our hands. Because we’re not talking about potential role of nuclear, we’re not talking about potential role of clean coal, or there’s less focus on that, then there once was. This has been amazing again, really good. Good for us, because this is such a complex area. And I mean, I’ve got my own thoughts, but I don’t know enough about the engineering to be able to speak authoritatively on it.


Andrew Murdoch  46:15

Now. Look, it’s been a good discussion. Yes. Thank you. Thank you for the opportunity.


Gene Tunny  46:19

Oh, it’s a pleasure, Andrew, we’re always, always happy to chat. And yeah, it’s good to get your insights on the transition to net zero. So Thanks, Andrew. Thanks, Tim.


Tim Hughes  46:29

Thank you. Thanks, Andrew.


Gene Tunny  46:32

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


47:19

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

The role of experts in a democracy: pandemics, monetary policy & AI w/ Peter Kurti, CIS – EP201

The Centre for Independent Studies’ Peter Kurti asks “ Should those who know best rule the rest of us?” In this episode, host Gene Tunny chats with Peter about his new paper “Authority, Expertise and Democracy,” which explores the role of experts in government and how society should best utilize their knowledge in public policy making. They delve into the question of when it makes sense to delegate power to experts and the relevant considerations. The role of experts in decision making around the pandemic, monetary policy, and AI are discussed. 


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

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

About this episode’s guest: Peter Kurti

Peter Kurti is Director of the Culture, Prosperity & Civil Society program at the CIS. He is also Adjunct Associate Professor in the School of Law at the University of Notre Dame Australia, and Adjunct Research Fellow at the Australian Centre for Christianity and Culture at Charles Sturt University. He has written extensively about issues of religion, liberty, and civil society in Australia, and appears frequently as a commentator on television and radio. In addition to having written many newspaper articles, he is also the author of The Tyranny of Tolerance: Threats to Religious Liberty in Australia; Euthanasia: Putting the Culture to Death?; and Sacred & Profane: Faith and Belief in a Secular Society, published by Connor Court. Peter is a Fellow of the Royal Society of Arts, and an ordained minister in the Anglican Church of Australia.

What’s covered in EP201

[00:02:30] Authority and experts in government.

[00:04:07] Impact of experts during COVID. 

[00:09:29] Discrimination and lockdown restrictions. 

[00:13:29] Delegating power to experts. 

[00:18:12] Politicians’ difficult role in decision-making. 

[00:21:11] Trade-offs in decision making. 

[00:27:23] Vaccine mandates. 

[00:34:27] AI and expert advice. 

[00:37:35] Expert advice and self-interest. 

[00:37:59] The importance of delegation of monetary policy decisions. 

[00:40:19] Expert Failure book by Roger Koppl. 

[00:43:33] Experts and human failings. 

[00:50:32] The length of the leash. 

[00:52:12] The role of experts in policy making.

Links relevant to the conversation

Peter Kurti’s new paper for the Centre for Independent Studies:

Authority, Expertise And Democracy. Should those who know best rule the rest of us?

Episode on Public Choice theory mentioned by Gene:

EP93 – Public Choice theory with Dr Brendan Markey-Towler – Economics Explored 

Transcript:
The role of experts in a democracy: pandemics, monetary policy & AI w/ Peter Kurti, CIS – EP201

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a real human, Tim Hughes from Adept Economics, to pick out any howlers that otters might have missed. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning in to the show. In this episode, I chat with one of my colleagues at the Centre for Independent Studies, Peter Kurti. Peter is director of the Culture Prosperity and Civil Society programme at CIS. He is also Adjunct Associate Professor of Law at the University of Notre Dame Australia. Peter has written a great paper for CIS on the role of experts in government. The paper is titled “Authority, Expertise and Democracy – Should Those Who Know Best Rule The Rest of Us?” In the paper, Peter asked how society should best use experts in public policymaking and he provides some very useful tips. This is a really important issue given how much we rely on experts. At different times, experts have wielded a lot of power. Dr. Anthony Fauci in public health and Jay Powell in monetary policy come to mind. When does it make sense to delegate power to experts? What are the relevant considerations? Peter Kurti provides some great advice in his latest paper, which we talk about in this episode. Okay, let’s get into it. I hope you enjoy my conversation with Peter Kurti.

Peter Kurti, thanks for joining me on the programme.


Peter Kurti  01:59

Thanks, Gene. Great to be with you.


Gene Tunny  02:02

Very good Peter. You’ve recently had a new paper published by the Centre for Independent Studies, “Authority, Expertise and Democracy – Should Those Who Know Best Rule The Rest of Us?” I’d like to ask to begin with what got you interested in this issue of expertise? Why did you think this was a good topic to write a paper on?


Peter Kurti  02:24

This all started really during the period of COVID and the lock downs. And I felt that here in New South Wales, and I know in other parts of the country in Queensland and Western Australia, and certainly Victoria, Premiers, it seemed to me ceded a great deal of authority to unelected chief medical officers, who determined what a government could and couldn’t do, and should and shouldn’t do, and certainly what the population should and should not do. And I felt that it in the course of managing an understandably complex public health situation. Nonetheless, politicians were ceding too much authority to experts, and that when politicians do this, they pose a threat to the liberal democratic society in in which we live, because we elect politicians to do a job, we elect politicians on the basis of policies they undertake to implement. And we look to politicians to regulate the kind of society in which we live. But they are accountable, because if we don’t like what they do, we can we can turf them out at the next election. And we can turf out individual members of parliament at by-elections. But when we have unelected unaccountable experts, such as chief medical officers dictating what can happen in any society, I think that it poses a great danger to us. And we saw the impact of this because there were social consequences. There were economic consequences. And there were cultural consequences as well. And I’m thinking when I talk about that I’m thinking about the impact on families of not being able to travel for funerals, not being able to visit people who are sick or terminally ill. And I think that the standard that chief medical officers set which was you know, keep everybody safe, and that there must be no risk of any contamination or, or contagion whatsoever, meant that the additional costs, the consequences that are borne or have to be borne from those decisions, were not taken into account. And that was really what made me start to think about the problem of experts. I mean, we need experts. They are an integral part of a, of a technologically complex society. I don’t say we don’t need them, but we need to hold them to account and we need to make sure that elected representatives, politicians who are appointed by us to do a job actually do do their job.


Gene Tunny  05:09

So would you say that the, to an extent these experts were ruling over the rest of us during that COVID period, is that, that’s the argument you’re making there Peter?


Peter Kurti  05:18

In Covid yes, I think they were. And I think that there are a number of reasons why that happened. One was that it was a once in a century, once in 100 year, public health emergency, and no politician really knew what to do. Nobody really knew what was coming. And there was a lot of anxiety and a lot of fear amongst the population at large. And politicians clearly had a responsibility to not just to set an example, I think, but to reassure uneasy populations, and one of the ways to do that is to cite medical advice, scientific advice. And the it to an extent, we all looked to chief medical officers to tell us, first of all, what is happening, and then tell us what’s going to happen next. And so as I said, a moment ago, it was a very understandable set of circumstances, but I don’t think it justifies or excuse, it justifies but it doesn’t excuse what happened. And I think that we must always be sure, should such a pandemic ever occur again, that public health advice is just one part of the body of information, one part of the body of opinion that is taken into account.


Gene Tunny  06:38

Yeah, yeah, I agree. Yeah. This is something I’ve covered on this show before and I had concerns about is there’s a point you’re making the paper about how there are, there are trade offs involved, and you need politicians to make those judgments. And there’s no real technocratic answer or no real. I mean, is that one of the arguments you’re making is I mean, the the idea of having an expert in charge or, or their view, almost prevailing all the time, the problem there is that that’s a technocratic answer. It assumes that there’s always a technocratic answer. Is that a fair reading?


Peter Kurti  07:17

I think that’s right. So Gene, and one of the reasons I think we got ourselves into this situation during the pandemic was the politicians didn’t really know what to do, because it was such an unexpected and unanticipated set of circumstances. And I think that they were, you know I’m speaking about in very general terms about a large group of people with different political affiliations. But on the whole, I think, political leaders did not want to be caught out, they did not want to be sort of caught out by the media, who might then say, if if things get worse that to say, well, you know, if you’d taken that advice, this wouldn’t have happened. How do you account for that? And so I think we have an increasingly risk-averse group of politicians who will just as it were hide behind or rely upon or depend upon that sort of expertise in order to, in a sense, make life easier for them. But we need that sort of, I mean, in a sense, we can’t, we cannot avoid engaging with experts. And we cannot avoid engaging with people who have expertise in public health when it comes to managing health issues such as the pandemic. But if we don’t hold people to account, if we just allow experts to make decisions for us, without regard for the broader set of consequences, those trade offs that you mentioned, then I think we’re in trouble. And we saw that we saw that in every state, and territory. But we certainly saw that here in New South Wales, where areas were locked down. So that there was an area in in in Sydney, from which a lot of tradies needed to travel in order to work, when they can’t travel, they can’t work when they can’t work, they can’t earn money. And well, I mean, we know what the economic consequences of and the social consequences of that are. And I think simply to say, you must stay home and stay safe is not enough, because everyday life is full of risks. And we take risks and assume risks and make calculations about risk every day.


Gene Tunny  09:26

Yeah. What area was that? Peter? Was that from Western Sydney? Fairfield? Fairfield. Gotcha. Okay. Was there also a an issue of the composition or the demographic makeup of that area that that suggested that I mean, this was almost discriminatory in a way because I know that some areas which had higher ethnic populations, they ended up being suffering worse restrictions, didn’t they? And that can lead to social tension.


Peter Kurti  09:54

That’s right. And that is exactly what happened because they found, I mean, the police were very, in my view, were very heavy-handed during a lot of this time, and then the police or others found that in communities with large, the large ethnic component, people were not being as observant about the restrictions because, for example, in, in Muslim communities, there are larger families and getting together and mixing with one another is is very important. And they attracted, I think, the particular attention of the authorities because of this. And so the lockdowns and restrictions were more stringent. Again, you know, judging everybody by one standard, everybody must stay safe. Everyone must stay home, regardless of whether or not that’s something that’s practical or even necessary.


Gene Tunny  10:51

Hmm, yeah, exactly. You talk about this concept of double delegation. So I’d be grateful if you could explain that and also reflect on is this something that we’re increasingly seeing these chief medical officers, they’ve been introduced in the last couple of decades? I mean, we didn’t have a Chief Health Officer in Queensland, I don’t think until the early 2000s, we had a public health act in 2005 that came in, and this this new position they’ve created, and they delegate some powers to that position. And presumably there are other examples of this, is this something that’s becoming more common. Is this something you’re concerned about the trend? Could you talk about that, please, Peter?


Peter Kurti  11:36

It is part of a larger trend. It was COVID that alerted me to the problem and brought it into focus. And I suppose maybe I have simply been complacent before because we are used to experts, advising government and all kinds of things. We just think, Oh, well, that’s the way the world works. But not in my lifetime have I seen what kind of impact this expert advice had? But I think it is part of a broader trend. And we see it in other areas. I’ll say something just about double delegation before I come back to that to that manifestations of that broader trend. It’s a phrase I picked up from the English political scientist, Adrian Pabst who talks about the the fact that he describes this problem that arises when we as it were delegate to elected politicians, we delegate to them, we say we appoint you to do a certain job for a certain amount of time, we will assess you. I know this is not necessarily what we actually think. But we say we will assess you at the next election and decide whether you’re going to keep the job. Those to whom we delegate, delegate in turn to, to this body of experts, and Pabst describes it like this. He says, double delegation arises when representatives elected by citizens delegate power to unelected officials, who are part of a professional political class. So it’s not just a matter of delegation, but delegation to a professionalised group of people who, who are then use their professionalised status to further entrench their position. And to argue that what they say not only is right but needs to be observed. Now, we’ve seen in public health that was the most obvious example but I think we also see it when, when there are discussions, for example, about energy, about climate and changes in in the climate. We do see it a lot in economics, although I think that’s to an extent a rather specialised example, because economics is so is so technical. Certainly monetary theory is very technical. But we hear these phrases that are put about when there are discussions about climate change, like the science is settled, for example, which I think is a contradiction in terms because I don’t think science is settled. But a group of professionalised climate scientists decided that this is this is the position we need to adopt. And they’re backed up by the media, who emphasise their opinions and so consolidate their position. So it’s part of a broader trend. And I think we’re going to see more of this, I think with when areas that really, so few of us actually do understand such as AI and the emergence of AI and development of AI. We need to be really vigilant about the way in which we use expert advice. The paper is not I’m not anti experts. I’m not saying we don’t need experts, we can we can make our own decisions any more than I’d say we don’t need we don’t need surgeons. I’ll do my own surgery. Thank you very much. Well, I’m not saying that. What I’m saying is that if we are going to use experts as we are bound to do, we as citizens of a liberal democracy in Australia, need to be thoughtful about the way in which we engage them in ways in which we hold them to account. And we also need to be stronger about defending freedom of speech in the sense that I think we need to be more willing to tolerate dissent, we need to be able to say, well, this group of scientists over here says, you know, there is a climate catastrophe, for example, whereas this group of scientists over here is saying, well, warming and cooling is just part of a trend. These are parts of tre.., these are trends that that take place in on the earth over a period of years. We need to be able to tolerate dissenting views. I’m not saying we are necessarily able to determine which view is correct. But we are increasingly reluctant I feel to tolerate it today. We’re reluctant to tolerate dissenting views, because we want to have the right answer. We want to know what the right position is the right solution is. We saw that during COVID. Of course, when debates about the efficacy of vaccine mandates or mask mandates, or social distancing, dissent was not tolerated. And I think that if we are going to make an intelligent use of experts, we do need to be willing to tolerate dissent and to live with perhaps the discomfort that comes from having dissenting views.


Gene Tunny  16:24

Yes, yes, exactly. Yeah. It makes it difficult for politicians, though, if, if the experts don’t agree, so how, how do we think about that? Or what’s the relationship I mean you mentioned tolerating dissent, that’s one of your rules or your tips for getting experts, like using them effectively? I mean, there’s obviously a role for expertise and people who understand the issues, and they provide the advice to the government of the day. How do you think about how those experts should be used? And I mean, what do decision-makers do when there is a situation of of that of that dissent I mean, is it up to them to judge where the weight of evidence is? I mean, because the politicians will say, Well, look, the bulk of evidence is in favour of this hypothesis. It could be climate change, for instance. So yeah, how do you think about that, Peter, how should politicians use experts?


Peter Kurti  17:21

Well, I think it really just the way that you have outlined by examining what it is the experts are saying, By assessing the evidence, by determining where the bulk of opinion lies, and then using judgement and skill to make a decision. We can apply that sort of framework to any policy area where might think about migration, levels of migration, there are people experts who say Australia, we can’t have a big Australia, others say we can have a big Australia, and each side will mount will present evidence to bolster their own arguments. And I’m sure believe, quite passionately, the evidence that the cogency of the evidence they present, but somebody then has to make a decision about how we do that, and an elected government has to take a position, we can see it in terms of going to war, or whether we supply arms, for example, to Ukraine, we went into Iraq 20 years ago, very controversially, but we did so on the bai., I mean, at the Howard Government did so on the basis of evidence that was presented. And as we remember, because we know those around at the time, there was a huge amount of dissent in this country about that. At the end of the day, it’s elected representatives who have to make the call and are then held accountable. So I think it’s it’s a difficult role. And I’ve never been an elected politician. So I’ve never been in the position of having to implement this. I’m simply really someone on the sidelines who’s advocating for a certain as it were, a certain style of, of a certain style of living, if you like. But I think it’s by by weighing and assessing, carefully, evidence that is presented. And I think not allowing fear, I talked about the importance of political courage, not allowing fear of adverse consequences to deter somebody to deter you from making the right decision, for example. When I mean, how many years ago was it now it’s it’s must be nearly 30 years since the Port Arthur tragedy. And the Howard Government decided that they were going to take a stand on on firearms. And there’s a lot of controversy about that at the time. I remember not being in Australia very long. And the view was that people living in the country or people who are really attached to their weaponry wouldn’t be happy with this. And there were arguments on both sides, but I think the weight of public opinion, or rather, I should say this put it this way. I think the Howard Government made it made a decision based on on the evidence and the politics, and also having to judge which way public opinion whether public opinion would accept this. And it was a controversial decision. But I think, given the horror of what happened at Port Arthur, the Australian public did accept it. But there was no telling, which was the right what was the right decision or not? I think it’s in a sense, you only know whether you’ve made the right decision with hindsight.


Gene Tunny  20:33

Yeah. What really annoyed me during that COVID period was the politicians making decisions and saying, the science tells us this, we have to do this, this is the only the only thing we can do and, and not going into what the decision making process was or they didn’t show that they were weighing up pros and cons, whereas they really should have because there are going to be pros and cons of any decision. There are the trade offs we talk about, there was no right answer in necessarily, in my view, it’s always a judgement call to an extent when we’re we’re dealing with those trade offs. And what made that clear to me and to others, and this is something I was chatting with one of my colleagues, Joe Brannigan about on this, this show when it happened, we had a Chief Health Officer who I don’t know if you remember, they let Tom Hanks in, you know, if you’re a movie star, you’re a footballer, you you had no problem getting into Queensland. But if you were just some regular, you know, person and yeah, bad luck, you got to do two weeks quarantine. And then we had a constraint on the number of hotels for quarantine. So that meant people were camping on the border. It was just disgraceful. So that that’s one thing that annoyed me that I think there was too much relying on the experts saying this is what the experts have told us that it’s based on science. And there’s no acknowledgement that they’ve actually, you know, there’s really a call that’s been made there, or there should be a call, there should be a judgement that the politician should be involved in. I think that makes sense. Does that make sense? What I was just saying?


Peter Kurti  22:16

Yes it does! And the trouble is that the politicians just caved in. I think there was a I mean, there were these sorts of stories all around the country. But there was that famous incident where a mother I think living in Tweed Heads needed to get her very sick child or children to a hospital. The nearest was in Queensland, but it’s qui… You can edit this bit out Tweed Heads, Tweed Heads in New South Wales isn’t it?. Yeah. She needed to get across the border. And Palaszczuk said famously, or notoriously that Queensland hospitals are for Queenslanders? Well, I thought, you know, I mean, it was a disgraceful thing to say, because I felt what was also happening in this time of panic was that our national identity was fragmenting and we were becoming a sort of a collection of fragmented colonies, and I would d.., former colonies, and I thought that even our sense of national cohesiveness has, has has gone. All kinds of stories, like I’ve had people who weren’t able to visit sick, sick relatives in hospital, because there was this fear of contagion. And I think, and politicians just seem to be happy to let that happen. In New South Wales, interestingly enough, when Berejiklian left, left the job of Premier and Dominic Perrottet came into office, the first thing he did was reduce the period of isolation that you had to have if you tested positive from seven days to five days. And there was the usual concern expressed by public health experts that actually this you know, you could still be contagious after five days and, and, you know, this is really not a good decision to make, but Perrottet had the wisdom to see that, in fact, people needed to get back to work and they need to get on with our lives. And that five days was enough. And that you just had then have to assume a degree of risk and in in what you do next, and we all of us, you know, we exposed to the flu virus every year. We know that if we’re sick, we stay home if we’re not if we if we feel really unwell we go to bed, and I think for the state to say and saying to people who are actually very well but happened to have tested positive on a on a on a rat rapid antigen test, which in itself was not 100% reliable, meant that people were exposed or subjected to all kinds of inconvenience. So I think there were lots of examples such as such as the ones that you cite, and and the ones that I’ve cited,


Gene Tunny  24:55

And just on Tweed Heads, so just to provide some context. So it’s part the same urban area as the Gold Coast effectively. I mean, if you if you drove through there, you wouldn’t, unless you saw the sign, you wouldn’t realise you were crossing from Queensland to New South Wales. So it’s, and that was the that was part of the problem. And then they had to put the barricades up and have the police there. It was just just awful situation. So I should ask Peter about the those tips for dealing with experts. You mentioned them before, I just want to go over them again. Because I think this is really good I think this is one of the best things you do in this paper, you’ve got these three cultural contours. There are three of them that if cultivated and emphasised can underpin the approach to engage in experts and help encourage an efficient and responsible contribution to democratic decision making and one tolerance of dissent. Absolutely. Political courage. So the elected representatives need to be less anxious about upsetting public and political opinion in determining the policy trade offs. I think that’s great. I think what would have worked, now it sounds like I’m picking on the politicians or politicians during the pandemic, but of course, it’s it’s one of those, you know, it’s an example. It’s one of the, you know, it’s one of those crisis periods where you really, these issues come to the fore. So, look, I understand the human, I don’t want to be super negative about them. But they really did provide this, this example for us to talk about. So I will talk about it again that say, you know, what would have been better is if say, our Premier had said, okay, look, yeah, this is what the Chief Health Officer advised. I’ve weighed this up, I’ve recognised the fact that this is going to cost the economy, but this is the judgement I make, which you should the politicians should have be more honest about that is that that’s what you’re getting at there?


Peter Kurti  26:45

Well, yes. And I think, not being frightened of making a decision. Lest it turn out to be the wrong one. I felt they played it safe all, all the time. And so I think that’s right. We saw it with the vaccine mandates that I mean, we were, for example, we knew that the vaccine wouldn’t stop you necessarily stop you getting COVID. But it would alleviate the symptoms, you would have it less badly. But it didn’t, if I’m vaccinated, it doesn’t stop me from infecting you. It just something that affects me and yet we had in New South Wales and around the country, these vaccine mandates, and it got ridiculous, you couldn’t go in, you couldn’t go into shops, you couldn’t go into these unless you prove that you’ve been vaccinated, whereas vaccination really did not affect, my vaccine status did not affect you or any other of my neighbours. And yet nonetheless, we were required to do this, and the hurriedly developed vaccines were presented to the Australian population as being safe. And we know that they were not entirely safe as I mean, no vaccine is because science, to an extent, is an art. I mean, it’s a science, but it’s also it’s an art and we don’t, we can’t always be sure of an outcome. And certainly, I think with things like vaccination, especially when they’re rapidly developed, there will be there will be difficult, and there’ll be problems. But anyone who raised those sorts of problems would announced those who expressed concern about about the safety of vaccines, vaccines were, were denounced as being irresponsible. And it seemed to me that no politician was prepared to say, we don’t need to do. We don’t need to do things in exactly this way. We need to be calmer, we need to be more realistic about about the nature of disease, we panicked. I mean, Western Australia shut down the entire state, when there was one case, yet we seem to be blithely indifferent to the 1000s of people who die every year of flu. And I felt there again, you know, the politicians were just caught up in this pandemic panic. And I think that a degree of political courage, would’ve allowed them to say, It’s okay, you know, we have sickness we have people do get sick, but life has to go on. And we need to make we need to be responsible and take decisions in a way that minimises the harm that we expose others to, but that allows us to continue with the lives that we’re living. And the the incomes that we’re earning. So yes, I think it’s, it’s that sort of response that I would like to see cultivated by when that I’m really scribing in terms of political courage.


Gene Tunny  29:45

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Gene Tunny  30:20

Now back to the show.

Okay, very good. So we talked about tolerance of dissent, political courage, and the final cultural contour is institutional integrity. Yes, exactly. Yes. So, “No democracy today can dispense with experts, but institutional mechanisms of accountability can ensure that experts exercise autonomy, responsibly” Could, what, what mechanisms do you mean there Peter?


Peter Kurti  30:49

I think? Well, I cite a number of examples. One is the oversight of budgets that are available to experts, the appointment of experts to advisory panels and boards, the codes of conduct that guide the behaviour of of experts, codes of ethics, just, you know, various sort of social and institutional frameworks that we put in place to ensure that people know, experts know that they have to be accountable and cannot simply claim their expertise as a warrant for doing whatever it is they want. You know, it’s a slightly nebulous idea, because it’s not it’s not something it’s not like a switch that can be can be flicked. And suddenly we have institutional integrity. I think that is a that’s why I call them these three points I call cultural contours, because cultural culture evolves and a cultural contour is something that has to be cultivated. And in a sense, practised as well. Another form of institutional integrity might be the very fact that we can question experts and say, but, you know, you’re wrong. Going back to the pandemic, it was simply not acceptable to say that Sweden had got it right and Australia got it wrong. I remember doctor as a doctor friend saying to me that ivermectin was, which, which in his medical experience was something that had that had the capacity to alleviate COVID symptoms, could now no longer be prescribed off label. And he was very indignant about that, because he felt doctors always have a discretion about prescribing medicines. And that whilst the medication can be prescribed for a specific condition, that it states on label, it might also have an effect on conditions not specified hence the description off label but they were actually prevented from prescribing off label. Well, I think we need to also why is this why but even to utter the word, ivermectin would get you disconnected from, you know, various groups and various fora. So that’s another form of another manifestation of institutional integrity that we can actually, we can have systems in place that are robust enough to ensure that people are held to account and are not free to make those sorts of decisions without without regard for the wider consequences.


Gene Tunny  33:18

Yeah, exactly. I mean, to me, so they’re getting some scrutiny. I mean, there is some media scrutiny, arguably not enough, there was not enough probing, there weren’t enough probing questions during the pandemic of the politicians and the officials and the chief health officers, they should subject themselves to more media interviews. And part of the problem is the normal processes of government were suspended, weren’t they during the COVID period, because we had these public health acts that gave them these emergency powers. So there wasn’t the usual debate in the parliament or the you know, the committee processes where there’s something serious, you know, something of such magnitude or such, such great impact on the economy and society would be debated for, I don’t know I mean should be extensively debated in parliament in committees, and it just wasn’t. So that’s that was what I see as one of the problems too.

Peter Kurti  34:18

I agree, I agree.

Gene Tunny  34:20

Yeah. Okay. Very good. So that’s one thing I really liked about that paper. And I’m going to put a link in the show notes because I think it’s Yeah, I think that’s great. Okay, AI, you mentioned AI, what are you concerned about there? Exactly. If the experts are formulating the response, what are you actually concerned about there?


Peter Kurti  34:37

Oh, no, I think we need we will need to be very attentive to expert advice when it comes to AI because it’s, it seems to me from my layman’s perspective as a non computer expert, that it seems to me that experts themselves are debating about the capacity of AI and these large language models and generative AI to assume increasingly demanding roles. And this is a long standing issue in, in areas like philosophy of mind, and certainly in cognitive science about what consciousness is and whether a machine can be conscious. And we don’t know. And I don’t think the experts know. And there are some AI some some experts who are calling for us to slow down and take things more steadily, others who are quite happy to let the horse out of the stable, well it’s out of the stable but let the horse gallop at whatever speed it wants. So I think that that’s an example of an area where we clearly are going to have to depend upon experts. And it will be foolish not to, but at the same time, we need to, we need to accept that there will be dissent within expert groups. And we need to be comfortable with that dissent, with that dissent, and we need to, in a sense, not abdicate responsibility for my for making our own decisions about these things to experts, and to to attend as best we can, to what experts are saying and to think critically, about how we ourselves respond to what they’re saying. I think AI is very exciting. And I think it’s it’s whether it’s in, in in medicine, or space exploration or, or defence, AI is rapidly changing the way we we interact with technology, but we don’t quite know how it’s going to go. And I think we need to be, as I said, we need to be attentive to what experts are actually saying and to follow the debate, you know, not to give all the authority and all the power away.


Gene Tunny  36:47

Yeah, gotcha. One of the conclusions you reach, you note that this report has argued that any economic account of experts, which takes into consideration the tenants of public choice theory. So that’s something I’ve covered on the show before, I’ll put a link in the show notes to that episode. So any economic account must always allow for the influence of personal interest, opinions and prejudices of those providing expert advice. So do you see that that has been? That has been a serious problem? Do you have any examples of that Peter, are there any examples that come to mind?


Peter Kurti  37:26

I know we’ve talked a lot about COVID in our conversation, but I think COVID provides a good example of that. This notion of information choice theory is an idea I discovered with the writings of Roger Koppl, who of course, develops as you’ve mentioned, public choice theory, but really, information choice theory. Koppl is arguing that perverse outcomes can occur when expert advice is is tended that experts themselves will be motivated by self interest. And he would say that what we have to do is abandon the idea that experts seek only the truth without regard to motives such as fame and fortune. And that sounds a bit cynical in some ways, but I think Koppl is is right that we can’t, we must imagine that experts themselves have got are devoid of human motivation or ambition or desire, and accepting that that’s just the case that is human nature, that Koppl argues that information choice theory suggests that what we need to do is have is to avoid situations where one body of experts has a monopoly over opinion, but they must be able to compete with one another, an example that he cites, and I’m not sure it applies in quite the same way in Australia, but one of the examples he cites is forensic medicine. And he argues that, that when there is no competition about forensic scientists, amongst forensic scientists, and forensic medicine is devoid of those the competing voices of experts, there’s a danger of, of scientific error, which of course, being forensic medicine can in turn lead to instances of injustice, and that where there is more than one forensic medical point of view, the there is a greater chance that error will be avoided and therefore injustice avoided. Now it does happen to an extent here we know in each state and territory of this country, forensic medicine has led to injust, miscarriages of justice, which are then which are then corrected. The problem in the United States is that the death penalty is is reasonably widespread, and that although that can take many years, faulty forensic medicine, forensic research can lead to, you know, very draconian punishments. We don’t have that quite that problem here. But it’s an example that Koppl cites and I think it’s a it’s an interesting one that we would do well to attend to.


Gene Tunny  40:02

Okay, I’ll have to look up his work. I wasn’t, I’m not familiar with Koppl. Did you, was he in the public choice school?


Peter Kurti  40:09

No, he is, it’s Roger Koppl he’s actually it’s finance and financial management. He teaches, he teaches, I’ve not got the book right beside me.


Gene Tunny  40:21

That’s okay. I’ll put it in the show notes. Is he at Syracuse in, in the States?


Peter Kurti  40:26

Yes I think he is, I think he is. And the book that he wrote a really interesting book was Expert Failure, a book published in 2018.


Gene Tunny  40:35

Yeah, I’ll definitely look into that sounds. Sounds interesting. Okay. Before we wrap up, I just want to ask you again about? Well, I want to ask about monetary policy, because you mentioned this is one area where and this is a case study you give in your paper, this is one area where delegation can be justified. Now, could you explain why that is? Peter, why we would delegate the monetary policy decision. So changing the cash rate in Australia, changing the federal funds rate, why we would delegate that to either the Reserve Bank of Australia board or the Board of Governors of the Federal Reserve Bank?


Peter Kurti  41:13

Well, it’s an interesting example. And I think, in a way, it’s a timely example, because the, and again this really flowed out of the way in which the Reserve Bank was considered to have performed in the wake of COVID, not raising interest rates fast enough, not getting on top of the not, not, tapping, trapping that inflationary genie in the bottle promptly enough. And so there was a review. And there was a feeling one of the recommendations in the review was that there should be this, this monetary check, what’s it called a monetary? That’s right, the Monetary Policy Committee, Monetary Policy Board that’s it, that there should be a separate board that will advise the Reserve Bank board about what to do. And there’s this view that, in fact, a view put forward by Peter here, that the the Reserve Bank, governors are well, meaning amateurs, and that’s possibly true. Not all of them are, but they’re engaged in business and corporate and economic life in the country, given that the Reserve Bank has a target band of inflation, and there are ways of meeting that target. And the board has to make a decision about interest rates in order to try to meet that inflationary target. It involves some very difficult some very technical decisions that are really beyond the capacity of ordinary members of the public. So I think I use as that as an example of an instance where we do need experts. But we mustn’t abdicate all responsibility, and that they need to be held to account in in some ways, and I think some it or the way the monetary policy board was promoted in the review. And the way it’s been greeted in the press, by some people, is that this body of experts will now correct and avoid all the failings of the Reserve Bank. And I think that’s a problem. I think that we need that sort of advice. But there were commentators like John Edwards was one of them, who wrote in the Australian saying that actually, the Reserve Bank didn’t do such a bad job when you consider other central banks around the world in western democracies, that the Reserve Bank board didn’t do such a bad job. And I think there’s this idea that now we’ve got the experts, everything will just be fine. And we won’t have those mistakes again. And I cite it as an example, because I think it’s an area where we do need experts, we do need people who are proficient in the complex technicality of monetary monetary policy. But in the sense it’s an instance of that might be an example of information choice theory where you need to account for the fact that even these experts with these technocratic experts, even these people have, have human failings, desires, ambitions, and goals. We cannot think that somehow there is this pure, disinterested advice. That’s been that’s been tendered. And I cite the Reserve Bank. And the other example I cite is ICAC The Independent Commission Against Corruption, because it shows actually how in a sense how complex modern life in a country like Australia is, and that there’s no rule. You can’t say, well, we need experts in these situations but not in those situations. We need experts in in different ways for differing rules, but we have to think about how we use them. So if we have a monetary policy board, is this board a board that is going to be accountable? To who? The treasurer, perhaps, the board? Probably not, it’s independent, who appoints them, and how, for how long are they appointed? and how they removed? Those are the sorts of questions that I think we need to ask about such a board. And that’ll be an example of the kind of institutional integrity that I’m talking about. Where we think about, what are the parameters of control? What are the terms of office? How are the people appointed, how they removed? What are the criteria that are used to make those appointments? And you may feel at the end? Well, that’s all a bit fuzzy. And I suppose in a sense, it is fuzzy. We these are, there is nothing, there are no hard and fast rules about how we approach these questions. I don’t think that means the questions are unimportant, nor do I think it means we should avoid asking them.


Gene Tunny  45:40

Yeah. So that Peter, the other Peter, you mentioned is Peter Tulip, Chief Economist at Centre for Independent Studies, and Peter’s argued that there should be a separate monetary policy board separate from the the bank board with that could run the Reserve Bank. And yeah, look, there are some there are arguments in favour of it. I don’t know whether it’ll actually mean we get better decisions. It might. Because the the current board does have the, it’s got some RBA members on it. It’s got the Treasury Secretary, and then it’s got, you know, it’s getting all the advice from the Reserve Bank. So maybe we could get better decisions. I don’t know. I’d be willing to have the experiment, it’s possibly worth doing the experiment. But one of the things I would point out too or one thing I should note is that, you know, there is a delegation already to the board from the government. I mean, the government, the Treasurer doesn’t make the interest rate decision that is delegated to the Reserve Bank board and economists have generally, you know, most they all sort of agree that that’s a great thing, because, well, monetary policy is a technical decision, we want to keep the politicians as far away as that away from it as possible, because their political interests could be in favour of inflation, getting some short term, you know, giving the economy a short term boost prior to the election, accepting some inflation that comes later, because they want to get elected so that there’s a risk there. So that’s why that’s been delegated. And then what Peter’s arguing for as well, we should then go even further than that, and have a or have a special Monetary Policy Committee with expert economists on it. So you know, really increase the expertise of the body that’s making that interest rate decision here in Australia. Yeah.


Peter Kurti  47:37

And I should say that Peter was kind enough to read that section of the report and gave some helpful feedback. And it was I incorporated a number of his comments in that section. So that I, he corrected any sort of that I was drifting at one point. I mean, I’m not an economist, and I was grateful to Peter for so he’s read this. And he knows what I’m, what I’m saying.


Gene Tunny  48:00

Very good. Okay. And, yeah, I guess the point is that we’re delegating the the technocratic decision on the exact interest rate at a particular in a particular month. But the government does still decide what the target is it decides what the it reaches an agreement with the Reserve Bank on the conduct of monetary policy. So they’re not, they’re not completely abrogating or dodging responsibility for it. They are, they are still accountable. The government is involved in it, but they’re not making the technocratic decision on the interest rate, which could be problematic if they were involved in that. Because for that reason that I mentioned that the you could end up with really bad policy and evidence from the 80s. From before the 80s. It was, the evidence came, I think it was Alesina or in the 90s, late 80s, who showed that central banks that are more independent, that don’t have that the government telling them what they should be doing with monetary policy. Those countries ended up with better inflation outcomes, so lower inflation. So that’s, that’s why it’s good to delegate that decision too.


Peter Kurti  49:17

And I agree with you, I remember when the the the Blair government was elected in 97. Very soon after the tre.., the chancellor, the Treasurer, Gordon Brown, declared the independence of the Bank of England, that had needed to happen long ago. And I mean, Australia had got an independent bank had already got an independent central bank. And I think that that’s very important because we can imagine that for example, if the Anthony Albanese decides to go for a double dissolution, we’re talking now on the last day of July, but if he decides to go for a double dissolution, he’s not going to want to run on on on on his economic policy at the moment because Australians are very cheesed off with the way things are going and so it’d be very tempting for a government to tweak interest rates with if they’ve got their eye on an election. So I think having, it depends it’s very important. And why I cite the example is because I think it’s an it shows the complexity of the relationship between experts and their elected overseers and how that relationship, how is managed, how they are held accountable, and how we decide to what extent they are, they enjoy autonomy and to what extent they need to be to be reined in. There’s a phrase that is used by one of the writers that I quote on this, because there’s a lot of literature about expertise, which was, so it’s a very interesting paper to research and write. He talks, Michael Schudson talks about, we need to work out the length of the leash on which we keep experts, it can’t be too short, otherwise they won’t be able to do their job, but it can’t be too long, otherwise, we won’t, you know, they’ll they’ll just make decisions without any kind of accountability at all. They have to be autonomous, but not too autonomous. How do we calculate the length of that lease? It’s a very difficult thing to do. But I think that I am completely in favour of an independent central bank. And I certainly wouldn’t want this paper to be interpreted by some as advocating for a return to government control.


Gene Tunny  51:20

Oh, no, no, no, not at all. I read that section, I thought Oh, yep. That’s That’s right. And the one thing I would have added into it was that point about how having that delegation of the actual choice of the policy rate that’s, that’s good from the point of view that that independence does lead to better or lower inflation outcomes. So that’s something that’s been widely researched and, and proven so very good. Okay. Peter Kurti. Thanks so much. It’s been great. And I agree, we need to think more about the role of experts and how they’re used in policymaking. It’s important if we have another pandemic, let’s hope not, but also in decision making and all the other great challenges that we face, challenges relating to climate change challenges related to AI. So it’s important to think about the role of experts in advising government and we want we want to avoid the experts taking over, we need governments to be weighing up the the advice thinking about it, you had that the great, the trilogy of of tips, which was good, the, you know, being courageous and tolerating dissent and what was it, thinking about, was it accountability?

Peter Kurti  52:37

Institutional integrity I’ve called it.

Gene Tunny  52:40

Institutional integrity. Very good. That’s great. Peter Kurti thanks so much for your time. I’ve really enjoyed it.


Peter Kurti  52:47

Thank you, Gene. It’s been a real pleasure. I’ve really enjoyed our conversation


Gene Tunny  52:53

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


53:40

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Highlights of last 100 incl. Brad DeLong, Sir David Hendry, Leonora Risse, Andrew May – EP200

In this special 200th episode of Economics Explored, host Gene Tunny is joined by Tim Hughes to discuss some of the highlights from the last 100 episodes. The episode features clips of Brad DeLong (UC Berkeley) describing how we’ve been slouching towards utopia since 1870, Sir David Hendry (Oxford) on the merits of small modular nuclear reactors, Leonora Risse (RMIT) on the benefits of diversity, and Super Forecaster Warren Hatch on what makes a good forecaster, among others.  
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

What’s covered in EP200

Links relevant to the conversation

Episodes from which clips were taken from:

Slouching Towards Utopia w/ Brad DeLong – EP163 – Economics Explored

The Progress Illusion w/ Jon Erickson – EP166 – Economics Explored

Thriving w/ Wayne Visser, Cambridge & Antwerp sustainable business expert – EP130

Sir David Hendry on economic forecasting & the net zero transition – EP198

Superforecasting w/ Warren Hatch, CEO of Good Judgment – EP176 – Economics Explored

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

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

The importance of physical & mental health for top CEO performance w/ Andrew May – EP193

Link to info about Windscale fire mentioned in conversation between Gene and Tim:

Windscale fire – Wikipedia

Transcript:
Highlights of last 100 incl. Brad DeLong, Sir David Hendry, Leonora Risse, Andrew May – EP200

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a human, Tim Hughes from Adept Economics, to see if the otter missed anything in it’s rush to catch fish or star in YouTube videos. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning in to the show. It’s episode 200. And joining me this episode to chat about some of the highlights of the last 100 episodes is Tim Hughes, Tim, good to have you with me again.


Tim Hughes  00:56

Hey Gene, good to be here. Thanks for inviting me on, and congratulations on your bicentenary.


Gene Tunny  01:01

Yes, yes. Thanks, Tim. Well, you’ve been part of, you know, quite a few episodes over the years, and I thought it’d be good to get you on to get your perspective as the man on the street so…


Tim Hughes  01:16

Isn’t it the guy on the Clapham omnibus, is that right?

Gene Tunny  01:19

Yes. The man on the Clapham omnibus, I think it is. Yes. Exactly.

Tim Hughes  01:23

Looking forward to it.

Gene Tunny  01:25

Right. Well, that’s the reasonable man test. So yes, what’s the reasonable man on the street think?


Tim Hughes  01:33

Well, I’ll try and be as reasonable as I can.


Gene Tunny  01:35

Okay, so what I’m going to do, Tim, is I’ll play some of the clips that I think are the best of Economics Explored over the last 100 episodes. Now. I mean, there’s so much good content. And I mean, they’re great. There’s great material that I haven’t been able to include. But these are ones that I really think are great. But look, I’m grateful for all the people who come on the show. So yeah, let’s get into it, we’ll go over these ones that I think are, you know, really standouts. So okay, so to start with, I’m going to play a clip from the episode we did, so this was episode 163, last year with Brad DeLong.


Brad DeLong  02:24

And that’s the state of the world before 1870. And that means that unless you’re in an extremely lucky place, or like Australia, or an extremely lucky class, that life is going to be kind of brutal, short and without very many options, which means that in most times, in most places, governance is going to be how does an elite figure out how to grab enough for itself and maintain its rule over society. And after 1870, everything changes, technological progress becomes rapid, the technological competence of the human race globally doubles every generation, you quickly get a world in which people are kind of rich enough that infant mortality falls substantially. And with that falling infant mortality, and with the erosion of patriarchy, all of a sudden, you don’t have to concentrate a lot of effort on having children, to be confident that if you reach the age of 50, you’ll still be able to run your own life. And so you’ll we get the demographic transition, now headed toward a stable world population of 9 billion. So for the first time after 1870, technology wins the race with human fertility, you know, and we begin to look forward to a time when humanity will be able to bake a sufficiently large economic pie so that everyone can have enough. And you know, people back in 1870, and before, you know, they thought most of the problems of society came because incomes were low, and technology was underdeveloped. And you had this elite running a kind of domination and exploitation game on everyone. And once you can bake a sufficiently large economic pie for everyone to have enough, those things should fall away. And the problems of properly slicing and tasting the economic pie, right? Of equitably distributing it and then utilising it so that people can feel safe and secure and live lives in which they’re healthy and happy. Yep, those should be relatively straightforward to solve. And so we today, at least we today in the rich countries should be living in a Utopia, which we are manifestly not. And so the story of history after 1870 is how we’re well on the way to solving the problem of baking a sufficiently large economic pie. While the problems of slicing and tasting of utilise, of distributing and utilising it continue to flummox us.


Gene Tunny  04:59

Okay, so I thought that was a really great clip, Tim and I was talking to Brad about his new book, or new last year, Slouching Towards Utopia. And it’s a the economic history of the world, basically. And, yeah, I thought that was a really nice way that he talked about just all the, the economic gains we’ve had since 1870. He sees 1870 as the hinge of history, before that we’re in this sort of subsistence way of living. And then after that, when the industrial revolution really took off, and we got electrification, then we just had these massive increases in living standards. So we’ve solved well with I wouldn’t say solved, but we’re so much wealthier, and the, you know, our production possibilities are so much greater. But we’ve still got, we haven’t got everything, you know, perfectly right, obviously. And there are issues, arguably issues of distribution. And there are also environmental issues, too, that I wanted to talk about. So I thought that was a good one to kick off with, because it reminds us that when we think about the economy, when, as economists we should be thinking not just about the GDP, not just about production, but we should also think about distribution. And we should also think about other impacts, so impacts on environment, etc.


Tim Hughes  06:29

Yeah, it’s actually a really good one to start with, because it sort of sets the scene. I know you’ve grouped together a few clips, that are of the same kind of genre. So this is a good one to lead off. It gives a good sort of snapshot of the, of where we’re at and where we’ve come from in the last 150 years. So it’s the equitable distribution question, I guess, is, is really a big one. And of course, a very, as simple as it should be, or could be, clearly it’s, it’s not simple to execute it, it ends up with a lot of the equity being in the hands of a few and people are struggling in great numbers around the world. So that slicing up at the pie seems to be a big challenge that we haven’t really cracked,


Gene Tunny  07:14

Well, fewer people struggling around the world than previously. So I think one of the great things about the last 30 or 40 years, particularly since the economic reforms in China, as we have seen hundreds of millions of people get out of dire poverty. So that’s great. And that’s a that’s a real win for market economics. So it’s a, you know, a win for free markets. Now, I think what Brad is, he’s really concerned about what’s happening in the States, because in the States, particularly since the 80s, you you’ve seen a lot of the gains, the economic gains, go to the top, go to the top 10%, top 1%, top 0.1%. So that’s one of the things he’s concerned about. Now. You know, there’s a there’s a trade off there, because there’s this trade off between equity and efficiency. The big trade-off as Arthur Okun called it. Whereby, I mean, you don’t, you need some inequality. I mean inequality is unavoidable to an extent and you need some you need rewards for people taking risks and working hard. Otherwise, people will, they won’t, they won’t be working hard or taking risks, and you can end up with the Soviet Union. Right? So we want to have a system of rewards. But then there is a question of, you know, what are the right tax policy settings to make sure that those who can pay more, those who can afford it pay more? There’s some redistribution, there’s a, there’s a big debate to be had about that what those appropriate settings are?


Tim Hughes  08:55

Yeah, yeah, I know, we get into a little bit more detail in certain areas in the next few clips. But it’s a massive conversation, and knowing our ability to go at great depth with these, I’m going to cut myself off there, because I’ve got more to say on that on the next few clips.


Gene Tunny  09:12

Very good. Well, I should play some more clips. I thought that, that one from Brad DeLong is Professor of Economics at University of California Berkeley, so very distinguished American economist, a former senior official in the US Treasury, and in the Clinton administration, so very prominent economist, so I was really glad to have him on the show. Okay, so that’s, that was from Brad DeLong. The next clip I want to play is from Jon Erickson, and he’s an ecological economist. He’s from Vermont, and he’s been an adviser to Bernie Sanders. And he’s got some interesting things to say about, well he’s got his, you know, an interesting perspective on the constraints on economic growth. So I’ll play this now. This is from episode 166.


Jon Erickson  10:01

Well, what would an economy look like that was built on maintenance, resilience and cooperation instead of growth, efficiency and competition, right? A late stage maturing economy like yours in the Australia ours in the US. So that’s what I’m asking, you know, an economy, a mature economy should have different goals than an economy at pioneering stages. So it really is about a reprioritization of our goals, especially on consumption, right? Because there’s ample evidence to show that we in the West are over consumers, and our kind of addiction to consumption is creating psychological problems, social problems, that consumption has been kind of become a cure for social ills, right, like a distraction. I mean, the whole advertising industry is designed around the idea of kind of making you and I feel bad about ourselves, right? To sort of fill the void, with more consumption. And I actually think this is one of the lessons coming out of COVID, right? It’s this sort of people were, especially, you know, high income people who, who could weather the storm, better than most, were forced to slow down, were forced to be at home, were forced to kind of reevaluate life’s priorities, and found out that, you know, this kind of ever burning hamster wheel of economic growth isn’t all that it’s cut out to be. So it’s a reprioritization of goals, which is going to have to reprioritize policy instruments. Daly, Herman Daly, used the analogy of a Plimsoll line, I’m not sure I’m pronouncing that right, of a cargo ship, right. So this is the line that’s painted on a ship, very easy technology. And as the as the cargo ship is loaded, it sinks into the water. And when they get to the line, you’re supposed to stop, right, because you’re in danger in danger of overloading the ship. So if we sort of reprioritize and think about the Plimsoll line of an economy, we can’t just more equally or equitably distribute the cargo of an overloaded ship and expect it to be resilient. We can’t just more efficiently load an overloaded ship, and expect it to weather the storm, as the Plimsoll line goes underwater, right. And there’s ample evidence to say that we are a kind of in an overshoot on a lot of environmental parameters, you’re in danger of sinking the ship, especially in stormy waters. So this analogy implies that as we run up against planetary boundaries, planetary limits to growth, the scale of the economic system is way more important to stress than distribution or efficiency. And if we can’t count on a growing system to solve distribution problems, then we’re going to have to quickly think about the fairness of the distribution of benefits and costs of that system. And then and only then can we get to efficiency, which is the priority of economics. So this means that you know, new policy instruments that that focus on scale, distribution, then efficiency is the way to go. And I talk a lot about this in the last chapter of the book, as I kind of wrestle with the idea of, how did I put it, radical pragmatism, right? Lots of pragmatic things that we can do now, for example, to wean ourselves from fossil fuels, you know, home weatherization, and carbon taxation, and, you know, maintenance of our systems, electrification of transportation, transition to renewable energy. But all of these are really hard to do in an economy that continues to bloat, an economy that continues to grow. So we have to be thinking about the scale of the system and that’s probably the radical part of radical pragmatism, right? What’s it going to take to rein power away from the status quo, that part of the system that’s benefiting from this growth model, and create an economy that works for all?


Gene Tunny  14:25

Okay, so that was Jon Erickson, from University of Vermont. Jon Erickson is the David Blittersdorf, Professor of Sustainability, Science and Policy at the University of Vermont. And we were talking about his new book, The Progress Illusion, and I thought that was a great clip, Tim, to play because it’s a completely different perspective from my perspective. And so I’m all for having, well being open to different perspectives and having that conversation. I think he makes you know, some of the points I agree with in terms of what we’ve got to do, I mean, I think long term, there’s no doubt we’ve got to get off fossil fuels. I agree with that. We’ve got to electrify, I’m not disagreeing with that. I’m probably sceptical of what, to what extent we’re, we’re hitting these planetary boundaries already. To what extent we, we should be trying to, I don’t know, he didn’t use the term degrow. But there is this, you’re aware of this term degrowth, aren’t you? And this is something I’m looking at, at the moment for a paper for Centre of Independent Studies. So I think the whole Ecological Economics field, I think, coming out of that there is this, this concern that we are hitting up against these planetary boundaries, we need a, if not degrowing, if we don’t degrow, we at least have to have a steady state economy. They’re worried that we’re just, you know, this, this ever growing economy, ever growing demands for resources that’s causing us a lot of problems. So it’s an interesting perspective. I mean, I’m, I’m a bit sceptical of it. But I did enjoy that conversation with Jon, he’s, he’s a great guy, and I thought that would be a good clip to play.


Tim Hughes  16:09

Yeah, I really enjoyed this one. I think the whole aspect of sustainable contraction, for instance, which we’ve talked about before, as opposed to sustainable growth, like at some point, there’s only so much that can be done, there are parameters. I mean, I see the planetary parameters being quite clearly defined as we get, as the population gets bigger, 9 billion, 10 billion, up to 11 billion by the end of the century, forecasted population. You know, the oceans aren’t infinite, the atmosphere isn’t infinite, the soils, everything that we pollute, you know, we, there’s a point at which, with so many of us on the planet, that, yeah they’re the parameters, and I think they’re quite well defined, Whether people believe in climate change or not, I think the question should be that, given the, the fact that these aren’t infinite resources, at some point, it’s going to be an issue, even if people don’t think it’s an issue yet. And I think we do have the technology and the know-how, and the the will now to, to make ourselves more efficient. So we have less waste, cleaner energy, you know, look after the planet more. So it sort of fits in with, you know, environmentalists that have been talking about this for years. And I think, I think it’s great that it’s come to the fore in conversations around economic policy, because yes, I mean, for instance, I, I firmly believe that it’s really important, it’s possibly the most important thing that we could do, is to be really good in these areas. So talking about, you know, like, so from going from more and more, which we’ve had this incredible growth, you know, going back to Brad DeLong, from 1870 through to now, it’s all been more, more, more. And, and at some point, the question becomes, well can we do it better, better, better, not just more, more more like, it’s, we’ve got enough, like, we’ve got enough to feed the planet, for instance, we’ve got enough to feed everybody on the on the planet. But we don’t distribute it. You know, it’s the whole way of working out who gets what or how we manage our resources isn’t done well enough to do on a good social scale, or a scale that would work financially, economically. And I think that’s the right way to go about it. You know, he talks about the ever burning hamster wheel of economic growth, you know, and that’s a great, great term, radical pragmatism needed to sort of have a fresh look at how we do things. And I couldn’t agree more. I think it’s really good and clearly contentious and not easy to do. But I think that’s the right direction to point in. And there is momentum going towards us, you know, net zero for 2050 fits in with this kind of thinking. And it has a, you know, a lot of support behind it. And I think it’s good.


Gene Tunny  18:50

Yeah, I think the more, well we might have to have a, an episode on degrowth, specifically, because some of the more radical people who are concerned about these planetary boundaries would be saying that we need to do even more than net zero, right? Because conceivably, we could get to net zero, and still keep growing the economy. And there are people who are optimistic. And then there are others who say, well, though, those techno-optimists, they’re naive. Now, I mean, I’m a great believer in technology. And I think technology is one of the reasons that we have had that strong growth since 1870. Or we’ve had all of these amazing gains in productivity, gains and living standards, because we’ve managed to solve our problems, have managed to, we haven’t run out of resources, we’ve managed to, well we’ve explored with our new resources, we’ve switched to new sources. I mean, we switched from whale oil to, to oil to from originally from Pennsylvania and then from the Middle East and all other places. So we’ve managed to, to, you know, to actually to innovate to avoid those constraints. And we’ve historically we’ve been able to do that. Now, I’m not naive enough to think that we, you know, we’re always going to be able to do that. But so far, we’ve had an incredible run at it. Really? So we haven’t really hit those constraints we’ve managed to grow so far.


Tim Hughes  20:22

Well, as far as planetary constraints, I mean, I see that as a resources thing and space, air, water, you know, soil, those kinds of things. That’s what I was, was, yeah, I was reading into that.


Gene Tunny  20:34

And we’re trying to manage those, certainly, in Australia, I guess the problem is in, in other countries and in emerging economies, and you had that great chat with Guillaume Pitron didn’t you…


Tim Hughes  20:44

Yeah, I was thinking of that, too. And it is that thing about, and that’s part of managing our expectations, because the more, more, more in economic growth can be directly transferred over to us as humans materialistically wanting more, more and more, and so our driving, desire for these things, you know, for possessions, is part of that whole story. And so part of managing the planet’s resources better, I think, would also be a question of maybe managing our expectations better as well, you know, like, if we can, I don’t know, become more content with less, you know, which is is often referenced around the world where people seem to be extremely happy with very little because they they engage in, they have strong communities, they don’t necessarily necessarily have a lot of wealth or material goods. But they engage with the things that as humans, we, we need the most, which is social connection. And, you know, that contact, which is lacking more and more, there’s more loneliness in the Western world. And, you know, people unhappy, they have more, but they’re, they’re less happy. So it’s this thing of like, okay, well, maybe we need to look at that, as well as part of this whole conversation about our expectations and who we are as people and what we need as people.


Gene Tunny  22:02

Yeah, well, there’s that concept of the hedonic treadmill. Yeah, so I might put a link in the show notes to that, because you’re right, I mean, you can, at our standard of living, additional increases in standard of living aren’t necessarily going to make us happier, right? I mean, we can, we could be happier on much lower incomes than we do have in Australia. Well, this is what the…


Tim Hughes  22:25

Haha I know I’m kidding, we all we’re all sort of influenced by this, and I…


Gene Tunny  22:28

Or an average or a lower average, lower average income, I suppose. Because part of the problem, I guess, is the yeah, there’s the Keeping Up with the Joneses. And there are a lot of expectations on us.


Tim Hughes  22:40

Well, again, I know, this comes up in one of the other clips, you know, with, in the realms of free market, and you know, the ability for entrepreneurs to do their thing, to be supported or not, etc. And so, with those freedoms come risk, you know, and that’s part of the game if you like, but with most of the western countries, there were social systems that are good enough to help people who are struggling, and you know, that’s, that’s so important to have that, of course, and it gets into the realms of UBI, universal basic income, where that may form part of a fairer society. But you know, it’s, I think, again, it’s, it’s good to point in that direction to see where we might be able to manage, I, you’re the policy guy, I don’t know much about it, until I see it and see what it does as a man on the street, the guy on the street. But clearly, there seems to be a lot of wealth in a few hands and not so much in others. So if it can all be managed better, to be better, equitable distribution, then I’d like to see what that looks like.


Gene Tunny  23:45

Well this is what a lot of the political debates are about. I mean, yeah, again, it’s that trade off, right. I mean, equity and efficiency. I mean, if you have too high tax rates, and you know, you’re not encouraging entrepreneurship. You’re not encouraging people to work hard. But then again, I mean, if if you don’t have some form of progressive taxation, then you can end up with high inequality. And, you know, arguably, what you’re seeing in the US at the moment. You’ve got the, yeah this huge gap between the wealthy and the US and, you know, the middle class, the former middle class. I mean, it’s there’s still a middle class, but it’s not as large as it was back in the, in that post war era. The first 30 years after the war, so yeah, there’s there’s big issues there. Tim, I’d better move on to the next clip, I guess, because I want to play a clip from someone who’s super optimistic. So a South African Professor, I think he was South African, Wayne Visser and he’s, he’s got some role at Cambridge. I’ll put a link in the show notes. And he’s also he’s a Cambridge pracadamic. That’s right. Remember, we were chatting about that? Yes. Actually, he’s not South African. He was born in Zimbabwe. Okay, very good. Well, Wayne, he wrote a book, Thriving, and I interviewed him last year. And that was episode 130. So we’ll hear from Wayne. And he’s got a really optimistic perspective on just how technology is going to help us get out, or get us out of a lot of these environmental challenges.


Wayne Visser  25:29

Eu Green Deal, it’s effectively the Europe strategy on climate change, very, very comprehensive and very ambitious. And it touches everything. It’s got a Farm to Fork area, which touches agriculture, it’s got a mobility area, all around electrification of mobility, it’s got a circular economy element, it’s got a finance element. So yeah, I mean, it’s, it’s a very, very strong policy and it’s being, in some ways, you know, America is, is trying to copy that with the new Green Deal. So, so yes, policy helps with the coherence piece. And then you’ve got creativity, which we’ve talked about a little already. So for things to change for all living systems to change, they need innovation, and that happens through diversity. Again, something we’re working very hard on, but we, we are living in an age of innovation, no doubt about it. And many of our most difficult problems, we are seeing some amazing solutions coming. If we just pick on one, for example, we know electric cars, I’ll leave that alone, but just remember that that is changing much faster than people think. I mean, Norway is banning fossil fuel cars by 2025. That’s just around the corner. And most other countries, you know, UK, it’s 2030. So within 10 years, it’ll really be something to watch. But take food, for example. There’s a whole movement of course around going more plant based, that makes sense from a health perspective, because 20% of mortality can be reduced, just by going more plant based, but also from a climate perspective, and a biodiversity perspective, and of course, animal welfare perspective. But here we see innovation, you know, you’ve seen the Beyond Burger and the Impossible Burger, you know, these are really engineered to look and taste, you know, like the real thing I know that may be a hard sell in in Australia but uh, on blind tests, actually, they they’ve done extremely well. Not only that, but we’ve got cultured meat coming. You know, this is grown in labs, meat essentially grown fermented, grown in vats, like you do for insulin. And this is this is going to completely change everything because again, you don’t have the the input of land and water. You have much lower energy input and you’re not killing anything. So you’re literally just taking cells, live cells from a cow, for example. And you’re creating that is already in Singapore, you can already go to a restaurant that sells cultured chicken. So this is innovation happening very fast, massive amount of investment going into this.


Gene Tunny  28:27

Okay, so that was Dr. Wayne Visser, Professor of Integrated Value and holder of the Chair and Sustainable Transformation at Antwerp Management School. So he wrote a book, Thriving, I was really grateful to have him on the show last year. Tim I thought that was a really good, well, there was some great observations about technological change. And I mean, he had lots of other good examples in his book, I’d highly recommend it. He’s someone who is incredibly optimistic. So I was really glad to talk to him last year. Do you have any reflections on what Wayne said in that clip?


Tim Hughes  28:59

Yeah, I thought it was really good. I’m going to quote from him, he said, “for all living things or systems to change, they need innovation and that happens through diversity.” And it’s great seeing that highlighted as something that is perfectly natural in our world. Like it’s funny diversity is often seen as something that we have to accommodate or get used to and, and bring in, and it’s like, it’s been there all the time. It’s, it’s a perfectly normal part of how we’ve evolved, of how everything’s evolved. And, and the importance of diversity, the role that diversity plays in so many different things. And again, I know this is going to come up with a couple of other clips. But it just shows I mean, and to have, to have it mentioned in this regard, it’s like yeah, great, that that makes so much sense. And also you can see how those things are coming together with technology that fits in with the economic efficiency, if you like or the way of making sure that we can do something better instead of just more and more well, how can we do it differently? You know, what would be a different way of doing this and, and those plant-based meats or meat alternatives are good examples of how we can do something where it’s better for animal welfare, it’s better for human health, it’s better for the environment, there’s a lot of wins with that direction in that area.


Gene Tunny  30:15

Well, I think the cultured meat or the meat grown in a lab that’s effective, it’s effectively the same thing. It’s like the real thing. But you don’t have the you don’t have to raise the livestock and you don’t have the all of the ethical and animal welfare issues associated with with livestock. So I think that’d be terrific. If we could do that on scale.


Tim Hughes  30:36

Yeah, I think there are still a couple of ethical issues around that. But then ethically, you know, as long as it’s safe, and all these different things, as long as it can, you know, tick that ethical box. It’s ethically better than, you know, the the amount of meat that’s going through the current system with the abbatoirs and everything. I eat meat, you know, so like, you know, I wouldn’t, I’m not wanting to be a hypocrite about this and I think meat is important as a choice. But I would like to see, raised ethically, killed ethically, you know, as much as possible. And to have less, you know, I’d be I’d happily eat less meat, with these kinds of alternatives available to, you know, sustain us with our protein intake, for instance.


Gene Tunny  31:18

Yeah, yeah. Very good. Well, I thought that was great from Wayne now, just on this whole theme of economy and equity and environment. Then this theme, I thought I’d play a clip from our recent conversation with Sir David Hendry. So professor at Oxford, he’s an absolute legend in econometrics. And we will, I was really glad to have him on the show. And he made some really interesting observations on the potential role of nuclear energy. So that that surprised me in that conversation. And it’s good that we’re glad that we got onto that subject. So I’ll just play this clip from Sir David Hendry.

We don’t have nuclear energy here, and the opposition party is trying to push it. But then I think there’s going to be a lot of community resistance to that here in Australia.


David Hendry  32:08

Yeah, I can believe that. But do people understand small nuclear reactors? That’s the only ones we’re arguing for, not the big ones, the small ones. In Britain, lots of big ones. And they’ve produced a lot of transuranic waste, that’s going to be a huge problem for humanity. Now, there are two advantages to small nuclear reactors. One, they can use that transuranic waste as their fuel, and greatly reduce the amount of radioactivity that needs to be dealt with from it. And secondly, they’ve been used in nuclear submarines for 50 years, and there’s never been an accident. So they’re very safe, and they don’t have any fissionable material that terrorists might want for bombs. I mean, the stuff they’re using is useless. Other than burning up the waste that’s a problem anyway. If the public knew that these are harmless, that they’re getting rid of a problem, you don’t have nuclear reactors so it’s less of an argument there. But in Britain, people would jump at the chance to cut the amount of nuclear waste that needs to be disposed of burying it, or putting it in deep caves, etc. And these guys can do it.


Gene Tunny  33:23

Right yeah. These are the small modular reactors are they?

David Hendry  33:26

Yes. they are indeed,

Gene Tunny  33:23

Yeah, I think that’s what Peter Dutton, who’s the Opposition Leader here, what he’s talking about.

David Hendry  33:33

Good for him. I think they are actually an important component, but only one possible component, of an electricity provision that would give more energy security and, and be something that can work in almost all circumstances.


Gene Tunny  33:50

Okay, that was Sir David Hendry on nuclear energy. Tim, I mean, we’ve chatted about this conversation with Sir David before, haven’t we? And we both thought, yeah, good stuff.


Tim Hughes  34:00

Yeah it was great and this was something for instance, that I hadn’t heard of before, the SMRs, small modular reactors. And it’s funny that I like it made me very much aware of my own prejudice towards something nuclear, towards being a viable power source because it gets such a bad rap, understandably, from you know, Chernobyl and Windscale and different things around the world where the consequences are catastrophic. And the amount of waste, nuclear waste that has to be buried, like is dangerous for 1000s of years, whatever it like, it’s not great. So the clean, the push for clean energy, seems to be something that would be without anything nuclear. However, it was, it was good because that my first response was like, that doesn’t sound great. But listening to these SMRs, or small modular reactors, and what their capabilities are and what the consequences are. You know, here we are in 2023. There’s a net zero target for 2050. There’s a transition period there of 27 years and in that transitional period, you know, something like SMRs could well be part of that picture to be able to get us through that time or may be part of the future for longer. But I think it helps in opening up the conversation about what these, this range of possibilities might look like. It does not, it seems to be clear, there’s not one thing that’s going to be our main power source. It may be but there’s certainly going to be several. And so if this forms part of that transition, or part of the solution, to be able to get us to net zero, then I think it’s really important to have the right conversations around it.


Gene Tunny  35:36

Absolutely. You mentioned Windscale, so I was I wasn’t aware of that. So there was a fire on 10, October 1957. The worst nuclear accident in the UK’s history. So yeah, I’ll put a link in the show notes to that, I wasn’t aware of that.


Tim Hughes  35:50

Up around the Lake District if I remember correctly around Cumbria? If it’s still called Cumbria, I’m not sure. It is that thing of like, you know, the consequences and concerns or, you know, naturally like, you know, people don’t want to be living near a nuclear reactor. And if they’re big ones, well, the, the spread or the the possible influence of, you know, geographically, the disaster zone is quite big. Right. So, these SMRs, it was interesting. That was something new. And, and hearing the rest of the talk with Sir David, it was like, well, this is coming from a guy who is looking towards net zero, you know, incredibly smart guy and this is the kind of thing that you know my ears really prick up when I see or hear people talking about these things. It’s like, ok, well, this, this is worth, you know, really considering or learning more about.


Gene Tunny  36:46

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


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Gene Tunny  37:21

Now back to the show.

We might leave that theme now and move on to the next theme of of great clips from the last 100 episodes, which has to do with decision-making, forecasting and critical thinking. So the first clip I’ll play is from our conversation early this year, Tim with Warren Hatch, CEO of Good Judgement in New York City. So Warren’s been involved in the whole superforecasting project with Philip Tetlock. So I’m going to play a clip from Warren on what makes good forecasters.

How do you get on this superforecasting panel? Who’s a super forecaster? What are their characteristics?


Warren Hatch  38:05

That’s a great question. And that’s something, and something to keep in mind, too, is that in the research project, that wasn’t part of the research plan at all. They just observed that in the first year, there were some people who were consistently better than everybody else. And being researchers that caused a new research question, what would happen, they asked themselves, if we put them on small teams? Would they get better or would they revert to the mean? And they did not know at all, a lot of people thought there’d be a mean reversion, turns out, no, they continue to get even better. And so we still do the same process now with our public site, where we’ll just take within the top 1% of the forecasting population there, and other platforms too invite them to come and join the professionals. And they have certain things in common. For sure, they gave us a lot of psychometric tests, hours of them before we got to do the fun stuff, you know, when forecast on elections in Nigeria and the like, and then to see what kinds of characteristics correlated with subsequent accuracy. And there’s certain things that really pop out. One has been really good at pattern recognition, right? So you can think of, you know, you’ve got a mosaic about the future that you’re trying to fill in and see what’s coming faster than anybody else and fill in those tiles. And being good at that is a fundamental characteristic of a good forecaster. Another is being what they call cognitively reflective. And basically that means that if you’re confronted with a new situation, you don’t automatically go to what first pops into your head because what first pops into your head might not be right, you might be overfilling the mosaic too quickly and getting the wrong picture. So you want to slow down and in Kahneman terms, let system two be your friend. You know, it’s hard work, but that’s the way you get a better a better result. So those are two very fundamental characteristics that good forecasters have.


Gene Tunny  40:03

Okay, so that was Warren Hatch from Good Judgement. Tim, that was another great interview subject that you lined up along with Sir David Hendry. So well done on getting Warren onto the show. Yeah, I thought that was terrific. Everything he was saying there about the importance of pattern recognition and being cognitively, cognitively reflective. So any thoughts, any reactions?


Tim Hughes  40:28

Yeah, I loved this episode, I got so much from it. We’ll have a round two I’m sure, at some point soon. It was really interesting. And like, it fits in with a lot of the, well, conversations that we’ve had. I mean, for instance, you know, I try and bear those things in mind, you know, if, for my own decision-making, etc. So, so for instance, cognitive being cognitive, cognitive. I’ll start that one again. Gene.


Gene Tunny  40:56

Is that because I struggled with it?


Tim Hughes  40:59

No I’m just trying to make you look good! Being cognitively reflective, is what I, for instance, did with the SMRs that David Henry mentioned. So my first response was nuclear, nuclear, whatever, that doesn’t sound good. But keep listening, keep, keep the mind open as to what that might look like, you know, so there’s good lessons, there’s so much good stuff in that episode, with Warren Hatch, and everything he was doing and talking about. They’re all things that we can all do as humans in our everyday life. So you don’t have to be a super forecaster to benefit from those same practices. You can make better decisions for yourself, for your family, for your colleagues. It’s a good way to approach you know, the way our thought processes are. And yeah, I got a lot from it. I thought it was great. He didn’t actually mention in that clip. But in the episode, he did explain how important the diversity was in getting a group of super forecasters together. Yeah, that’s like six to 12 people and the importance of them not just coming from the same area. The reason that why they outperformed the CIA in a test was because the CIA are all white 50 year old males from the West Coast of America or from a very similar sort of background.


Gene Tunny  42:15

Yeah, East Coast. The old they used to talk about the wasps in the States, you know, from the East Coast, often from the ivy Ivy League schools, so they all went to prep schools, like you know, Phillips Exeter, or whatever.


Tim Hughes  42:31

So the lack of diversity in that regard, held them back as far as like having a better overview or being able to make a better forecast or decision on something. So again, it just showed it was another reason that diversity is such an important part of our build up as humans and you know, to be better as humans make better decisions. And in this case, better forecasts.


Gene Tunny  42:54

Excellent. So just on diversity you because that’s come up twice now, hasn’t it? I’ve got a clip on diversity from Leonora Risse is at RMIT. Leonora is as a former Queenslander. But she’s been doing great work down in Melbourne, she’s involved with the women’s, Women in Economics network, she’s really grown that. And yeah we had a conversation on women in economics in Australia. And we got into this issue of diversity. So Leonora is a Senior Lecturer in Economics at the Royal Melbourne Institute of Technology. So I’ll play this clip from Leonora now.


Leonora Risse  43:36

The issue of diversity, at first glance, it’s about broadening topics, broadening ideas, and broadening the range of issues that are being considered. And then that is really a guard against the risks and the downfalls of what we might call groupthink. If people think the same, you are, by virtue, narrowing your spectrum of potential ideas and potential topics, and then by an extension of that is also the process. So think economics, really an analysis, you know, from identification of the problem, to analysis of the problem to a solution to the problem is a process of interrogation and asking the right questions and deciding on methodologies. It’s all a set of decisions. And what you find in this research is that, that process, you can shortcut it if you all think the same, and you probably just have a standard way of doing things and are less likely to interrogate, you know, are we taking the right decision here? Is there an alternative? Is there a perspective, we just haven’t thought about? Where can we road test this? And if you had that diversity within your pool of minds and brains working on this, you are more likely to engage in those process of interrogation. Now, that doesn’t mean it’s easy this, there’s a quote in the paper to where I found this amazing quote by Justice, the late Justice Ruth Bader Ginsburg. And she talks about dissent, you know, having a different differing opinion. And when they’re, when dissent occurs amongst judges or lawyers, you know, weighing up the evidence, it necessitates a deeper and more robust and more thorough interrogation of the evidence, it forces you to come up with a more convincing argument or to question any assumptions that you may have jumped to. And I love that quote from from Ruth Bader Ginsburg, because I think it has such applicability to economics, where we are, we are weighing up the evidence where we’re making decisions as to what you know, how do we act on this evidence? What gets more weight? What, what do we choose to? You know, what do we judge is good quality or inferior quality? All those all those points of decision making along the way, I think are all ultimately a value based or a subjective choice that we’re making as objectively as possible. But there’s always scope to think, Oh, there’s another way of doing this. So I think the advantage of having diversity of thinking is that it presses for a more robust process. If anyone’s doubtful, then I would, I would say, well, think about the topics that you study, or the the areas of interest that you have, it’s probably been influenced by something throughout your life. So it’s about being shaped by your life experience, which isn’t specifically about gender. It’s just about, you know, those gender, we have gender patterns in our life experiences. And so ultimately, you know, how we operate is a subjective dynamic, because it’s, it’s a function of our view of the world and the bundle of experiences that we carry around with us.


Gene Tunny  47:00

Okay, that was Leonora Risse from RMIT. Tim, what did you think of what Leonora had to say?


Tim Hughes  47:06

I thought it was terrific. It’s right up my street. First of all, Gene, I want to pull you up. You said that Leonora was a former Queenslander and I don’t think there’s such a thing as a former Queenslander…


Gene Tunny  47:18

Aah very good point! That’s a good point yeah exactly. I mean, she’s not living in Queensland anymore, but she went to University of Queensland,

Tim Hughes  47:22

you know what I’m saying?

Gene Tunny  47:24

You’re right. That was poor form on my part.


Tim Hughes  47:28

Ok sorry I just had to point that one out. This was great. And, again, yeah, so diversity of thinking leads to developing robust processes. And it’s so good. There’s so much in there, and it fits in, it dovetails in with so many of the other clips that we’ve just talked about. And it makes sense, you know, the thing that I love about this stuff for me anyway is, like it completely makes sense that accepting of diversity, that necessity for diversity, it’s better. It shows how important it is to stand up for what you think’s right, and to explain why. So that thing of dissent, to push back against groupthink, and all the banal commentary that might come through accepted norms that aren’t good enough, all these kinds of things. And I had to say she didn’t actually mention the quote by Ruth Bader Ginsburg, and I checked it out. And I’m going to read it out here because I thought it was so good. So Ruth Bader Ginsburg said, “dissents speak to a future age, it’s not simply to say, my colleagues are wrong, and I would do it this way. But the greatest dissents do become court opinions and gradually, over time, their views become the dominant view. So that’s the dissenters hope that they are writing not for today, but for tomorrow.” And that’s the thing you know, it needs people to stand up, it needs people to speak their mind, it’s important to listen to hear and you know, not everything is going to be good, not everything is going to make it but you know, by, again, not going with our first what was it? Count? What was that one?


Gene Tunny  49:08

we want to be cognitively reflective…


Tim Hughes  49:11

That’s the one Gene! That’s the one, we want to be cognitively reflective, so not just go with our first opinion, our knee jerk reaction, but to let it settle, give it more thought. And to be okay, listening from places that you wouldn’t normally listen to, I think is a big part of that is so if you find you vote for the red team, listen to what the blue team has to say, in the best possible way and vice versa. And from different news channels, different areas, different people, let it sink in, because it’s quite possible that you can hear something that will land from anywhere. And it doesn’t mean you will agree with everything from that place or person but there’ll be parts of it that maybe should be heard.


Gene Tunny  49:50

Yeah, I think that’s a really good point. Tim, try to genuinely see where the other person’s coming from what their their point of view is. That’s the advice Dale Carnegie, I think it’s it’s been well tested through history that that’s, that’s a good thing to do. So absolutely.


Tim Hughes  50:08

And another thing is to consider, you know, what part you might be playing in groupthink? You know, like, because we’re all influenced by this stuff, whether we’re conscious of it or not. And you could find yourself following or repeating stuff that is just within the group of people you’re with, or political preference, or whatever it is. So be mindful of what you repeat, you know, just blindly I guess that’s, that’s one of the things I get from that.


Gene Tunny  50:32

Yeah. So I mean, I would say that there was a lot of that during the pandemic. So, yeah…


Tim Hughes  50:38

Which is good. So on reflection, this is where, with those, especially when things are heightened in the moment, you know, I guess is how this works. On reflection, we can look back and maybe do a better dissection, you know, with the benefit of hindsight and all of that. But so for instance, with the pandemic as an example, well, the chances are that something like that could well happen again, there’s no reason why it couldn’t happen tomorrow, you know, so, what would we do then? You know, with that benefit of having gone through that, and what would be a better decisions or better decision to make?


Gene Tunny  51:08

Yeah. Okay, Tim, well, I think we’ve got time for one more clip, in this session, I’ve still got the four or five other clips to play, but I might save them for a bonus episode, or for another episode, if we ever catch up. We’ll just play one more clip that’s on this whole theme of critical thinking and, and being cognitively reflective. And it’s from Professor Deb Brown from University of Queensland, who’s in the she’s a philosopher, isn’t she in the philosophy department? And that was someone who, John Atkins, so your friend John Atkins put us on to because she’s been running a project on critical thinking, and was it in the media, evaluating media? Critically, she talks about her Critical Thinking project, yes…


Tim Hughes  51:57

That’s right, with schools, I believe. And yeah, yeah, it was, it looked really good.


Gene Tunny  52:01

So she’s a Professor in the School of Historical and Philosophical Inquiry at the University of Queensland, and we spoke to her early last year. So I’ll play this clip from Professor Deb Brown, Episode 123.


Deb Brown  52:20

And, you know, what we do fundamentally is distinguish between critical thinking, which entails being able to evaluate the quality of one’s own thinking. And so it’s essentially metacognitive. It’s, you know, it’s about, you know, What reasons do I have to believe that, you know, does this evidence stack up, you know, what’s the what’s the contradicting evidence, you know, sort of being disposed to look for not just evidence or reasons that support what you already believe, but actually looking for disconfirming evidence, right, you know, doing doing due diligence in the foundations for what one believes. And we distinguish that from other forms of thinking that that don’t concern that kind of the kind of quality of the foundations for one’s beliefs. So these might be things like, you know, free association, or associative thinking. And that’s very common. And often people mistake that for critical thinking. So, associative thinking is where you’re essentially looking, you know, you’re selecting for information that supports what you already believe. And what you find, then naturally coheres with what you believe, so we all sort of move around the world with these mental models, and the associative thinker, will be looking for things that fit with their mental model. And in you know, in science and in, you know, in other disciplines, this is, this often is connected with what’s called the confirmation bias, right? So that sort of, you know, preferencing, confirming evidence over disconfirming evidence and so on. And it also passes, it also, critical thing is also distinguished from what we call careful thinking, which is where somebody might be, you know, applying rules or procedures, think about, you know, a student in the class, you know, applying their procedural knowledge of mathematics, let’s say to, you know, to derive an answer or value on the basis of the arguments they have, you know, and that careful thinking, people often think they’re being critical thinking when they’re doing that as well. But what’s distinctive of critical thinking, is that critical attitude that one’s, one takes to one’s own reasons, and also to the principles or methods one’s relying on in drawing inferences on the basis of what one understands. So critical reasoning is very much connected up with what Descartes would have called the method of doubt right? Subjecting what one believes, you know, to doubt and, you know, in order to establish a better foundation for, for one’s belief and really being careful about the foundations for one’s belief.


Gene Tunny  55:08

Okay, that was Professor Deb Brown from the University of Queensland, Tim, I thought that was a great clip, I love the idea of thinking about how you’re thinking or metacognition, she really nailed what critical thinking is, and it’s not what you might think it is necessarily. I mean, you might think you’re doing critical thinking, but if you’re just applying a method that you’ve always applied or an algorithm, that’s not necessarily critical thinking, you’ve got to think about, okay, why am I doing that? Is that the right paradigm, the right framework? Is that does that really make sense? What are the implicit assumptions, I think that’s good for economists to do because when we analyse problems, we often go into analysing problems with a specific model in mind.


Tim Hughes  55:53

Again, this was such a good one with, with Deb, and everything she talked about, I found fascinating, because that whole area of like, for instance, to have critical thinking project, delivered in schools makes so much sense. Everybody could benefit from this, but the sooner the better, you know, like, you know, to get these things in as part of your DNA as part of your thought processes. And I think that’s a big part I get from a lot of the guys we’ve just listened to, it’s about the process, you know, what’s your process in, you know, discerning whether something is true or not, or what a good direction is to go in, and what’s a good process. And that’s what these guys talk about. Well, here’s a process that you can use, that’s tried and tested. It can be improved upon no doubt. But it’s, here’s something to go by, because there’s so much bad dialogue in the public forum, where it’s just people shouting at each other or opposing views where, quite realistically, they could probably agree on something that the other person is doing, but because of the party lines, they they have to be opposing and this is quite tedious, you know, to sort of watch, and it’s certainly not a way to come to a good decision. There are better ways out there. And we can employ these individually. And again, like within, you know, for yourself, within families within businesses, you know, with colleagues, here are good processes that are worthwhile going with because they’re better for us as humans, and the better, you come to better outcomes.


Gene Tunny  57:20

Yeah, exactly. Okay, Tim, we might have to wrap up. I’m gonna put links to all of the episodes that all of these clips are from in the show notes. I’ve still got a handful of clips left, but I think we’ll leave that for a bonus episode. There are some others on some other great conversations, but so many great conversations over the last couple of years. aah Tim okay. Yeah, Tim, you did want me to play one clip.


Tim Hughes  57:50

Now you chose this clip, you chose this clip…


Gene Tunny  57:53

I chose this clip that’s right, it’s a good one to finish up on, a good one for your ego so…


Tim Hughes  57:59

No, no, no you chose you chose the clip, it wasn’t about that. It’s about what is said not…


Gene Tunny  58:05

So this is our conversation with Andrew May the Australian Performance Coach, the coach to CEOs on the importance of fitness and business and when, it was funny when he because he hadn’t seen you in years had he Tim? No. And so I mentioned to Andrew about his book Match Fit. And then Andrew makes an observation about speaking of being match fit. So and we’ll just I’ll just play this clip.

How do you go from being a performance coach of the Australian cricket team? If I’m getting that right to coaching CEOs? Can you tell us a bit about that story, please, Andrew?


Andrew May  58:43

Yeah absolutely but before I do, if you want to know about being match fit, look at the guy sitting on your left. I first met Tim 20 years ago, he still looks the same, full head of hair, I’m very envious, so it’s great to reconnect with Tim.


Tim Hughes  58:55

Smoke and mirrors.


Andrew May  58:57

Ok so how did I end up coaching executives and doing mental skills for elite athletes around the world? There was no definitive plan Gene, and a lot of your listeners are going, “What do you mean you didn’t have a 20 year plan?” No. I was a good athlete, not great. I mean I won multiple state championships but never won at the national level, had a scholarship at the IIS in Tasmania. And we moved down to Hobart, which was wonderful in my early 20s. And I just finished studying exercise science. I had a physiology base and then went to the Institute of Sport. And it was a great learning in that high pressure environment. And when I look back, I got to the level I believed I could get to and I believe coaches should coach what they’re good at or what they’ve stuffed up and if you can combine the two you’ve got a really interesting mix. I left talent on the track literally, that any athlete any executive I work with, my real fuel is to help them fulfil their potential. So back to in Hobart, as a runner in Australia you don’t get paid a lot of money. Unless you’re a Craig Mottram or perhaps a Sally Pearson, so I had to supplement my income back then. It’s not politically correct, but I used to walk fat blokes. It’s now called personal training. So the clients I had, that’s Timmy when I met you, when I moved back to Sydney, after I finished down in Tasmania. And Gene a lot of the clients, I were training, they would lose 10 or 15 kilos. And then they’d say, Do you realise I’m not as cranky with my wife or my husband on the weekend, and the kids are not saying I’m an A hole, and I’m actually conscious at their school sport. And I’m not just thinking about what’s going on here. And I’m making better decisions, and I’m more creative. And we’ve opened up this other offshoot in Asia, what have you done to me? And I said I don’t know, just keep walking, don’t drink as much alcohol and keep swimming in the ocean. So I then really started to look into oooh, there’s a link between well-being, physical and psychological well-being and executive performance that was 20 plus years ago.


Gene Tunny  1:01:01

Okay, so wise words from Andrew May there, Tim.


Tim Hughes  1:01:05

Oh, yeah. And, and so just want to reiterate, he was very kind with his comment about me at the beginning. And that’s not the reason that I wanted you to play it. It was very kind, but I just wanted to, because this is the space I’ve been working in myself for the last 17 years and so it’s close to my heart. I’ve known Maysie for many years, even though we’ve been out of touch for quite a few. So it was really good to reconnect. But I just wanted to point out like, I mean, this is one of the areas I think of improvement that we all have at our disposal, which is often overlooked, you know, and that goes back to the pandemic, and all these kinds of things, you know, what can we do next time? Well, next time, the first thing we can do is to get healthier. Now, the healthier the population is, the less devastating anything, any kind of pandemic will be. So that’s like, that’s the first thing I would say. But the link between physical and psychological well-being and executive performance that Andrew was talking about, it’s so true, like we perform better all of us, you don’t have to be an executive or CEO. We’re better when we eat better, and when we move better, and it just makes so much sense. And as far as resilience goes, like with Andrew’s story himself. So he, by his own admission, was a good athlete, but didn’t reach the heights that he he hoped to. But in doing that, like he was able to become a world class coach with what he’s done since then. So he’s, he used that, which some may see that as a failure, ah you didn’t get what you set out to do, you failed. Not at all, like he was able to, it’s a very stoic sort of approach or sort of road he’s taken to say, Okay, well, that didn’t work. Let’s see, why it didn’t work? Or how could it, how could I help that work for someone else, which is what he’s done. And so the research is done on physical and psychological well being helps him, or has put him where he is now as this world class coach. And so for all those reasons, I wanted that to be included. Because I just see that as such a good thing for us all to learn from like we could all the, things he talks about, obviously, there’s there’s detail in there that we don’t have time to go into. But it comes back to the simple things of like, if you can eat well move well sleep well and connect with others, you’re going to tick a lot of boxes that as humans, when we’re going back to one of the earlier conversations about the economy, and in our equitable distribution, all these kinds of things well, just being healthier is, is one of the easiest and at reach, things that we can do. And it’s often overlooked, because we’ve got shiny things, material things that are further away. And these things I think, help us become better humans. And so along with that, the thought processes as well. It’s all part of how we can be better. You know at being, being human.


Gene Tunny  1:03:49

Yeah, just responding to that Tim, the point you make about connection is really an important point. And this is one of the things I really love about podcasting right? And it’s the ability to connect, I mean, like just us having a conversation helps us connect, right? I mean, I’m learning your perspectives. The guests we have on, people I’d never would have connected with otherwise, someone like Andrew May for instance. And you know, being able to get you know, really eminent economists such as David Hendry or Brad DeLong on the show that’s just amazing and then I’ve got listeners who’ll reach out to me with you know what they think and then you know, some of them I’ll, I’ll have on the show even so it’s just amazing for that connection. So that’s one thing I’d say that’s one reason I’m really glad I started podcasting. So that’s connection. The other point I’d make is that yep, since yeah listening to Maysie and also other stuff I’ve been reading, I read his book Match Fit. I read that other great book by Kelly Starrer, Built To Move, Kelly Starrett. Yeah, that’s right, that’s great. And, and since then, I’ve been trying to not just get out of like going to the gym or going for a walk or, or doing some exercise. It’s so easy to go. I’ve just got so much on. I’ve got so many projects on, I can’t find the time. But the attitude you’ve got to have and I think I got this from Laura Vanderkam who in her book, Tranquillity by Tuesday, I think it was, I think it was from her. If it’s not, whatever mentioned is, her book’s worth reading, is a great book regarding how you manage your time. But the attitude you’ve got to have is that working out or exercising, it doesn’t take time it gives you time. I think that’s so true. Because you’re so much more productive, like maybe you lose an hour or an hour and a half even. But when you go back to work, when you go back to the office, you’re really focused, because you could just have an hour a couple hours at work. Like imagine if you don’t take that time, your last few hours at work, you could just be unproductive. You could be demotivated, you could just be checking out what’s happening on on the news? What’s, you know, what’s on YouTube? You know, it could be? It could be, you could just be distracted?


Tim Hughes  1:06:01

Absolutely. And there’s so much good information out there. The big one is prioritising you know, in your diary in your day, to make sure you have time to do this, because most people would say they don’t have time. Well you do, it’s just not a priority, and it needs to be a priority. Or if it is a priority, you’d be better off for it.


Gene Tunny  1:06:19

Yeah. And I mean, I guess maybe it’s easier for me, because I do work for myself. But I guess if you if you’re an employee, then I guess Yeah, go on your lunchtime, or, you know, maybe have a chat with your manager or your boss and say, This really helps me out get makes me more productive. And I’ll stay a bit longer than than I would otherwise. I mean, there are sort of, you know, I think there are ways you can find that time to, to train.


Tim Hughes  1:06:44

Well people like Andrew May are at the leading edge of how this might work in with, with companies. In fact, we’ve got a round two that we have to do with Andrew, we spoke about executive performance for CEOs. Andrew doesn’t know about it yet. But I’m going to email him this week to talk about the impact, of course, on the workforce, you know, which is like everybody else, but it’s a fascinating area, because, you know, quite often, especially with these podcasts, and first of all Gene, congratulations on 200. It’s a huge achievement.

Gene Tunny  1:07:00

Thanks, Tim. Yeah,

Tim Hughes  1:07:02

and you’ve introduced me to guests and areas that I wouldn’t even thought about. And even though you know, like, you said I represent the guy on the street, which is basically, that’s that was an example of we saw that, you saw the value in that diversity, for instance, because as an economist, sometimes you would see things purely through an economists eyes. And so you told me, you you found value in some of the things that I would come up with, I mean, I know, I’ve probably said some crazy stuff. But you saw value in some of the things I saw from a different perspective. So that diversity, just between the two of us was valuable. Yeah, so I appreciate everyone that has been a guest on the show, especially ones I’ve spoken on, because it’s been great, you know, I’ve been opened up to all these different things. And a lot of the subjects or what you would say are outside our control or in the realms of things that are outside our control, which then brings it back to the health perspective of like, well, that’s really very much in people’s control. So it’s something that you can have an impact on.


Gene Tunny  1:08:17

Yeah to a large extent. I mean, obviously, you can have bad luck in your life. For Yeah, for the majority. Absolutely. Okay, Tim Hughes. Thanks so much for joining me on episode 200. It’s been a blast. And I’ll put links to all of the episodes that these clips are from in the show notes. So if you’re listening in the audience and you want to, you’re interested in checking them out, then you can go, go listen, so yeah, thanks for joining us, Tim. Thanks for for being here. It’s been terrific.


Tim Hughes  1:08:43

Yeah no, thank you, Gene. And I want to extend the thanks again to all the guests that have been on the show and to the listeners and for your feedback. It’s been great, and looking forward to next 200


Gene Tunny  1:08:53

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


1:09:43

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

The ESG puppet show & taking Liberty seriously w/ Nicholas Gruen – EP199

Nicholas Gruen, CEO of Lateral Economics, and host Gene Tunny discuss the topics of ESG (Environmental, Social, and Governance) mandates and Liberty. They explore how ESG mandates can create confusion among executives and investors, and delve into Nicholas’ perspective on Liberty, how to take it seriously and the best way to think about it. Nicholas tells a story from the early 1980s about how he tried to change Australia’s laws which allow Parliament to lock people up for contempt of Parliament. The conversation also touches on Nicholas’ concept of citizens’ juries, which is gaining support internationally, including from Martin Wolf at the Financial Times.
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.

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

What’s covered in EP199

[00:01:32] Citizens’ juries and economic policy. 

[00:02:41] Does divestment from emissions intensive firms reduce emissions?

[00:06:47] Investing in fossil fuel companies to help them transition.[00:11:58] Carbon pricing.

[00:17:54] Australian consumers and carbon pricing.

[00:23:26] A different mode of governance.

[00:26:14] Liberty during the COVID pandemic.

[00:30:46] House of Commons Privileges Committee.

[00:34:32] Safeguards and legitimacy in governance.

[00:40:25] Rushed legislation during a pandemic.

[00:43:33] High level political discussion.

[00:50:06] Managing a crisis.

Links relevant to the conversation

Nicholas’s YouTube channel:

https://www.youtube.com/@NicholasGruen
Videos of conversations featured this episode:
Why ESG is a puppet show and what to do about it
Liberty: Safety from tyranny or doing what you like?
Club Troppo posts:
https://clubtroppo.com.au/2023/07/11/why-esg-is-a-puppet-show-and-what-to-do-about-it/
https://clubtroppo.com.au/2021/08/22/lockdowns-and-liberty/
Regarding the journalists locked up the Australian Parliament in the 1950s:
https://clubtroppo.com.au/2021/08/22/lockdowns-and-liberty/
Freakonomics episode on ESG that Nicholas mentions:

https://freakonomics.com/podcast/are-e-s-g-investors-actually-helping-the-environment/

Transcript:
The ESG puppet show & taking Liberty seriously w/ Nicholas Gruen – EP199

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It has also been looked over by a human, Tim Hughes from Adept Economics, to pick out the bits that otters might miss due to their tiny ears and loud splashing. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. This episode features some recent conversations on ESG and liberty that I’ve had with my colleague Nicholas Gruen from Lateral Economics. They’re from our occasional joint podcast Policy Provocations, which is available via Nicholas’s YouTube Channel. In the first part of this episode, we talk about how ESG mandates can be a puppet show, and can create confusion among executives and investors. In the second part, we talk about liberty, and what Nicholas means by taking liberty seriously, and what he thinks is the best way to think about liberty. The title of the YouTube video of the conversation is Liberty, safety from tyranny, or doing what you like. Nicholas is one of the best lateral thinkers in economic policy out there for sure. One of the things I enjoyed about this conversation was the discussion of how his big idea of citizen’s juries can be applied in a variety of different applications. This concept of a citizen’s jury, which Nicholas didn’t invent, but which he’s been the biggest advocate of, in recent years, it was picked up by Financial Times columnist Martin Wolf in Martin Wolf’s latest book, The Crisis of Democratic Capitalism, which quotes Nicholas approvingly it’s great that Nicholas’s ideas are getting greater exposure internationally, and I’m very glad to have the occasional podcast chat with him and to feature them here on Economics Explored. Okay, let’s get into the episode. I hope you enjoy my conversation with Nicholas Gruen.

Hello, Nicholas, and hello if you’re watching, good to be doing back doing Policy Provocations. Nicholas, you’ve recently given a talk to some investors haven’t you on ESG. And you had some thoughts on this whole concept of ESG and how it’s applied. Would you be able to take us through that please?


Nicholas Gruen  02:40

Sure. So if you listen to one of the most recent episodes of Freakonomics, you will find a an episode which follows the work of two US academics, and they ask the question, Does divestment from emissions-intensive firms reduce emissions? Now, you might think it would. But their analysis leads you to believe that it doesn’t. Now, I think both you and I, Gene would have been pretty quick to say that just passing the parcel so that we don’t fund that thing, but the next capitalist to come along to invest in it will fund it. It doesn’t give us as economists a lot of faith that we’re achieving very much. It looks according to their work that it’s worse than that. Because if you starve in the, to the extent that you’re successful at all, you’re successful by raising the cost of capital to highly emissions-intensive firms and emissions-intensive firms are 282 times as emissions-intensive, as the bottom quintile the most emissions-intensive emit 292 times as much carbon as the top quintile into whom we’re going to invest. And if you ask the question, you know, how are we going to get those emissions down if they’re making aluminium or steel or something like that, then one of the obvious things we need them to do is we need them to invest in new technology in inventing it or in applying it. And if we raise the cost of capital to those firms, they won’t invest in new technology. And so these authors find that that is in fact the case and that raising the cost of capital to these firms actually increases their emissions. Now, I was giving a talk to the Centre for Institutional Investors and these are and it was on the subject of ESG. ESG stands for environment, social, and governance, a kind of an institutionalisation of of an old concept like the triple bottom line that firms should think about their environmental impact, their social impact, and the and the way they are governed. So these people, and this is on behalf of super funds, now what we know is that about half of investors in super funds, say that they do want the super funds to be ethical. Of course, it’s easy, that’s an easy thing to say, in their investments, and another 25%, sort of kind of agree, but they’re a little that they feel a little less strongly. So they feel this as a need. They feel this is something they want to provide their, their members. So they try to ask themselves, Well, how could we invest, to be simpatico with what most people think is a good idea, which is to lower emissions. And many of them end up in these positions where they run what’s called a negative filter. And they say, Well, if you’re emitting a large amount of money, sorry a large amount of emissions, we won’t invest in you. Now, another problem with that is you end up investing in banks and companies and consultants and companies that aren’t necessarily doing great things. They’re just doing them with white collars on. So they’re caught in a dilemma because one of the most plausible things you can say to your members is we’re not investing in high emissions firms. And yet, maybe if we want to lower emissions, that’s what we should be doing. And we should be another strategy, for instance, is the strategy of an organisation called Engine Number One, which invested in Exxon Mobil with a view to raiding basically to turning up their annual general meeting and replacing board members for Exxon Mobil. And they managed to do this and really not because of their own shareholding, but because their own quite measly $15 million shareholding in Exxon Mobil, gave them a stake and then going to talk to BlackRock and some really big institutional investors. And they made a big difference to Exxon Mobil, and Exxon Mobil is now less of a climate denier than it was and more interested in trying to make money out of the climate transition. Now, the ESG managers, the easiest thing for them to do is to just say, we’re not investing in emissions-intensive firms and that in fact, it you know, if you think about the divestment campaigns, for university endowments, and things like investments in university endowments, they’re all based on this kind of logic. So I put to them that they’re caught in a kind of a cascade of, of accountability, if you like, or pretend accountability. They’re trying to persuade their members that they’re doing the right thing. And what I said to these ESG people is, I think you should get a sample of your members and pay them to, so, so you might have 100,000 members, you randomly select 25 of them, you pay them to give you a day a month on the weekend, to get briefed on this stuff to talk among themselves, and to tell you how they would handle these dilemmas. And that means that you escaped from this theatricality, that you escaped from this way in which plausible ideas get embraced, and then we pretend that they then you become part of the propaganda effort to tell people that this is all working out well. And it’s not working out well, you’re actually papering over the problems. So I it’s a long explanation. But that’s, that’s the presentation. That’s what I was saying.


Gene Tunny  09:12

That study you mentioned, that’s fascinating. So it could actually be worse. I mean, I was thinking, well, it might not achieve anything, because there are going to be other people who will invest in these mining companies, the ones that are mining coal or whatever. And, and look, the reality is, if you weren’t invested in energy and commodities in coal, or oil and gas last year, you missed a huge amount of gains. Right. So you did your members a disservice. Right? So if you’re a super fund…


Nicholas Gruen  09:40

That’s right. Yeah. And then your members, I guess, are supposed to say yes, we know it did us a disservice. But that was what we were signing up for when we wanted you to be ethical. And the real kicker is that you weren’t being ethical. You were pretending.


Gene Tunny  09:55

So you’re talking about funds where it’s got an explicit investment mandate that they have to…


Nicholas Gruen  10:03

I’m also Yeah, I’m talking about them. But it turns out I sort of this was a bit new to me. You know, this is a much bigger craze than just the ethical investment folks, it’s pretty much taken over the world. Now, exactly how they apply their those mandates is, is not that they’re not applying the mandates as strongly as a fund that markets itself as in as ethical investment. But, but most mainstream funds, take this ESG business seriously. There are standards for reporting on ESG. And in a way, you know, as I thought more about this, one of the things, one of my friends said a bit of an I told you so moment, we there are many problems in the world for which we don’t have near perfect policy solutions. But greenhouse isn’t one of them. Because greenhouse we have carbon taxes, we have carbon pricing, and carbon pricing solves these problems, because it basically says, If you want to emit, it’s going to cost you more, and then you see the colour of people’s money, then ExxonMobil has you don’t have to, then the normal incentives of minimising cost drive this whole thing. Now what’s happened is that because it is so easy to weaponize carbon pricing politically, again, this is all about how easy it is to bamboozle the public in many ways. Because it’s so easy to run a negative campaign against carbon pricing, partly because it’s makes the costs transparent. The world has now built its entire strategy for reducing carbon emissions on guess what? Nice sounding statements and statements that are made by people holding offices who will not hold those offices when those statements are not, don’t come true. You couldn’t kind of make this up.
Gene Tunny  12:18

Yeah, who are you talking about specifically there because you’re talking? Are you talking about people in corporations or in super funds or are we talking about politicians, because one of them,
Nicholas Gruen  12:28

All of them. And they all have a different, they all have a different set of behavioural characteristics. But none of them are perfect. The relationship between what people say and what they do? Well, gee, that’s a bit of a problem for human beings all around. That’s one of the arguments for saying, let’s price things because you know that the people who save on emissions will also save money and people will admire them for it, and they will want to do more of it. And the whole thing is, as economists say, incentive compatible, but to take you, so firstly you’ve got the politicians. Now politicians say one thing and do the opposite. Within weeks, if they want to make it more respectable within a few years. Paul Keating tells us that the GST and I’m not being moralistic about this, Paul Keating tells us that the GST is necessary if we’re to escape being a banana republic. And then he describes it as a giant new tax that will come and monster everyone in Australia. Tony Abbott tells us that if he was getting if he was trying to reduce carbon emissions, he wouldn’t be pussyfooting around with silly regulation and, and renewable subsidies. He’d be introducing carbon pricing until he’s opposing carbon pricing, and so on it goes and Donald Trump will say different things in the morning in the afternoon. So that’s the politicians, the managers will, managers are a kind of politician or they’re, you know, they’re in a bureaucracy. There are lots you’ve worked in a public bureaucracy and managers are, you know, private or a public bureaucracy and they put a large amount of store in reassuring people having the fear you know, giving people are feeling that the adults are in the room, everything’s under control. Nothing could be further from the truth, the the transition to zero carbon, even the transition to about less than 40% of what we’re emitting now has got lots of gets more and more magic asterisks. As you go on magic bits of technology. We’re going to invest we’re going to invent. Well, I’m not I’m not being critical of anyone because that’s the best we can do. Given that we’ve have ditched carbon pricing, although that will come back. Then at the bottom of all this you’ve got people who are voters, and they won’t accept that it’s their responsibility who they vote for. They love the idea that they’re getting ripped off by these politicians who lie to them. But they don’t ask themselves. Why did the politicians lie to them? Because if they don’t lie to them, they won’t vote for them. If the politicians come out and say, well, actually, we all know that carbon pricing is the way to reduce emissions, then they won’t vote for those people. They’ll vote for the people who say, Oh, no, I’ll do it all without carbon pricing. So it’s a big house of cards. It’s not, it’s the wrong metaphor, because it won’t totally collapse. But there is something about it that lacks integrity, and will end in tears to a substantial extent.


Gene Tunny  15:53

Yeah, look, okay, I think I understand what your argument is with ESG. And you want to get more input from the members to really understand their you know, where they’re coming from what they’d like to see their understanding of the trade offs. Just on carbon pricing. I think we might have to have that discussion another time or because there’s, there’s a whole debate about carbon pricing. I agree if we are going to do something about climate change, then definitely carbon pricing is the best way to do it.

Nicholas Gruen  16:25

Yeah it’s a major part of the solution, its not the whole solution. But if that’s what we’re trying to do, it’s a major part of the solution.


Gene Tunny  16:33

The one reservation I’d have in, for Australia, like if you think about Australia, is it optimal for us to adopt it, if other countries don’t adopt it?


Nicholas Gruen  16:45

Yeah, sure, sure that’s right. But we can then adopt a domestic carbon price. So that’s a design, I look at that as a design feature. So Australian consumers should pay a carbon price, whether the exporters of Australian energy should plan to pay a carbon price is something we can we can defer to the design stage. If you like, I agree that that’s an issue. Yeah. But you would agree, wouldn’t you that Australian consumers should pay a carbon price?

Gene Tunny 17:02

If we cut taxes elsewhere?

Nicholas Gruen 17:05

But that’s you’re imposing a, an ideological or, yeah, an ideological preference. I mean, I’m just trying to impress carbon prices, yes I suppose I am. So I, you know, I’ve got my preferences. I’d like to use the money to do X, Y, and Zed, but I’m not going to say, Oh, well, I don’t want to do it. If you can’t, I can’t use the money in the way that I want.


Gene Tunny  17:40

Yeah, but conceptually, I agree that the the best way to tackle climate change is via a carbon price, I wouldn’t want to impose it and and make our industries worse off, and you’re arguing that? Yeah, the the way to stop that or that leakage, whatever they call it, when the industries go to other countries is by having an exemption of some kind. So there’s some design issues, they


Nicholas Gruen  18:06

just don’t want to that is a genuine issue that needs to be sorted out by the international community, if you can make a pretty reasonable attempt to do so at the at the unilateral level, if you have to, it’s not as good as a multilateral solution. But that’s a separate issue.


Gene Tunny  18:23

Okay. I didn’t mean to distract us from the discussion of ESG. Because I’m interested in what this mechanism is, you’re talking about? What is it a group or a sample or a


Nicholas Gruen  18:37

think of it, think of a jury, and you sample from your membership in such a way that it is representative of the membership. So you look at the age profiles, some demographics, and then you try and produce some replication of that in this otherwise random sample. Now, I think that the what that group can do is it can become aware on behalf of the members of these dilemmas, and they’re very deep dilemmas because you really get a governance problem. Any mug can say, Oh, we’re investing in all these high emissions companies in which every time we turn up to the AGM, and we say they should lower their emissions. But that’s not serious. So, if you want to go in this more bonafide direction, you, it raises important governance questions, it raises questions about communicating to your members that you really are doing your best. So that’s one way to involve the members. I also think that at the moment, what we have is we have a thing called the sole purpose test, which it makes a lot of sense, which is to say, you get various concessions to invest in Super and even if you don’t we force you to invest in these pension funds or superannuation funds so we don’t want you to invest in a holiday home, where you will get some benefit from this in your investment fund, it has to be for the sole purpose of your retirement. But a lot of people don’t mind the idea of, they like, in fact, I’ll go further, they like the idea that they will be investing in their community, they’ll be investing in things that will be good for their kids, and so on. So one thing that a fund might do in this model, according to me, and it would actually require some change in the legislation. But one thing that a fund might do is you might the ESG folks might take to this council, they might the ESG. Governance, the people running the ESG might say, Look, this is really very hard. And we’re not sure if this is achieving much. But we do think that there are a whole lot of ways we can spend money. And it may not be it may not get us commercial returns. But we’re prepared to put 1% of your portfolio into some funds that will improve the community for your children and your grandchildren. Our calculations are this won’t reduce your returns by more than this amount. But it needs to be something that you want to do. I think that’d be very healthy. And it would introduce a different kind of collective institution and collective decision making into our world and, and our use of capital.


Gene Tunny  21:38

Yeah, I think that’s, that sounds like a reasonable idea. And what was the reception like at that conference?


Nicholas Gruen  21:44

I’ve been invited to I mean, I didn’t go to that last point. But I’ve been been invited back to talk to CEOs about it, these were just so there was a lot of enthusiasm, because a lot of these in fact, I don’t think there were any, there’s virtually no managers of ESG who aren’t sitting around, really quite perturbed by the fact that they’re sort of putting on a show for the public. And when they, when they read the literature, and they think about what they’re doing. They’re not at all sure that this is a great idea. And it’s growing bureaucracy in all directions. There are standard international standards of what you report. It’s hard graft to connect up profit-seeking with community development. It’s a worthwhile objective, and we don’t understand it very well conceptually, but what’s happening is it’s being driven politically. And that’s kind of just turning into a for at least from my observation into into a pretty unhelpful set of bureaucratic instincts set up by standards, bodies, accounting bodies, everyone’s producing these reports. And I think the agenda is I’m not pooh poohing it, it’d be easy to take the fairly standard sort of public choice, critique of this and say, it’s all rubbish. I think it’s clear that there are good things about it. But then we have to take it seriously. And it should at least take the public choice, criticism of it seriously enough to do the best job of this, that it can.


Gene Tunny  23:25

Okay, and it’s about introducing some economic logic into the ESG discussion?


Nicholas Gruen  23:29

No, not necessarily. No. Well, I would say it’s about a different mode of governance instead of a mode of governance which has a bunch of consumers, and then a bunch of people who are managing a system and marketing to the consumers. You actually say to the consumers, these are difficult questions. We want to invest in a random sample of you guys to help us run this agenda. Because that’s A, going to be useful. B, it’s going to give what we do real legitimacy. We won’t be putting on a show for you. We will be trying to do what it is that you want us to do. And all of our systems default back to what I call the puppet show, and I showed them I don’t know whether you’ve seen many people have seen the film, The Sound of Music in which Julie Andrews and the kids put on a puppet show for Captain von Trapp and his girlfriend at the time. And I say the public out here Captain von Trapp and the and your members are out here. ESG is the puppet show and you’re up here, Julie Andrews and the kids putting on a show and you actually know that there’s a fair bit of unreality to this show. Get the get the audience behind, show them what you’re doing and ask them what they want.


Gene Tunny  24:56

Yeah, yeah, I love it. Very good. The Baroness was his girlfriend at the time if I remember or was it…


Nicholas Gruen  25:05

the Baroness gets gets shafted. It wouldn’t be a nice role to have as the Baroness because the Baroness has to be kind of creepy, gold-digging, vacuous, easily dispatched by the the sweet, innocent Julie Andrews. Maria von Trapp, who the real Maria von Trapp looks extraordinarily like my aunt, I can tell you who was Viennese as well. So that is a remarkable fact for you.


Gene Tunny  25:36

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


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Gene Tunny  26:11

Now back to the show.

Nicholas, you wrote a post during the pandemic, didn’t you on your thoughts on liberty? And there was a whole debate about lockdowns and masks and you had a rather interesting perspective on it. So would you be able to just take us through that, please? Then we might talk about what it all means for policy.


Nicholas Gruen  26:35

Yeah, so during the COVID period, everybody got themselves very worked up about compulsions of impositions by government, and they were lockdowns, vaccine mandates, mask mandates. And it’s entirely appropriate that people talk about those things and debate those things and have different views about those things, and also have passionately different views about those things. That’s, that’s just fine and dandy. But imagine that we were in London during the Blitz, and we had those debates about whether the government should impose a blackout so that the Luftwaffe couldn’t bomb us, we would all understand that it was consistent with our liberty to impose those constraints. And likewise, if there is absolute chaos, that it is consistent with restoring liberty and actually to getting some liberty to impose martial law, for instance. So everything is a matter of context. Now, is that me not caring about people’s liberties under these particular measures? Well, as I wrote in the blog post, I’m the only person I know who’s got a record going back 40 years of actually taking this subject seriously. But I took it seriously in a rather different way. I didn’t say oh I’m on the side of I’m always going to be sort of leaning towards Liberty rather than coercion. What I said was, what are the things about our constitution that are most would be most would be the first things that an authoritarian trying to take control of government, or deny basic democratic values? What are the first things? Where were they hid? What are the weaknesses in our Constitution, that would help them out. And so when John Button who I worked for Senator John Button in 1981, he was in opposition. And I wrote out with the help of the Clerk of the Senate, Harry Evans, I wrote out a bill, a private member’s bill on the subject of parliamentary privilege, because at the time then, and it is still the case now, the members of either house, either our house of representatives or our Senate, can meet as a Privileges Committee, and they can decide according to whatever procedures they wish to adopt, to put someone in jail for contempt of Parliament, including one of their own members, as two journalists were put in jail in Australia in the 1950s. And so this private member’s bill actually picked up some old work of, from memory, Owen Dixon who was, who became the chief justice, but I think this was when he was attorney general. If he was attorney general, I think he was and it started with a private member’s bill he wrote, and we went over it and and made it to our own satisfaction. And so all that Parliament could do was to hold initial hearings and then to present the case to a magistrate to an independent magistrate saying, This person is guilty of contempt of Parliament. And over to you. Now, that is a much safer way to deal with this matter and a way that is consistent with our liberties taken seriously. And it’s quite a topical thing because as you may recall, the House of Commons Privileges Committee has just met and considered the routinely egregious behaviour of its former prime minister, Boris Johnson and decided that he would be suspended for 90 days. Now, I think suspending Boris Johnson from the House of Commons for 90 days, I happen to think that’s a great idea, I might make it longer. But it’s not it’s a disastrous idea that it should be their decision, because they’re politicians. And it’s very easy to imagine a situation where that, in fact, it’s hard to imagine an institution more ripe, to be abused, when people without any respect for the traditions, and the conventions within which those systems operate whenever they come along. So So that’s an introduction to this idea of liberty as being fundamentally about the legitimacy of government. And then secondarily about these particular decisions that get made.


Gene Tunny  31:36

Right, just before we go on Nicholas, which jurisdiction were those? Did you say two journalists were jailed by…


Nicholas Gruen  31:44

Commonwealth, Commonwealth, Commonwealth 1956, thereabouts, maybe 1954, the House of Representatives took umbrage at these journalists, you can look it up, I can’t remember the exact details. But the journalist reported a private discussion or something, it was just the sort of thing that’s pretty pretty standard practice now, off they went cooled their heels in Goulburn jail for a week or so. And they could be detained indefinitely. There’s nothing in our constitution or in the rules of the House of Representatives that prevents the House of Representatives from locking up anyone for any length of time in jail, now, we now have a more activist High Court that would probably get itself involved and say, This is not consistent with the spirit of the Australian Constitution, but that’s what happened. And nobody, yeah, and then, and then what happened is, Button released this thing to the public hadn’t, was a bit of a disaster, because he hadn’t read it very carefully. And I’ve tried to take him through it, but he was kind of busy or tired or something. And Michelle Grattan started asking him quite detailed questions about the bill. And he didn’t know what was in it, which was a little embarrassing. Then his party turned on him and people walked past him in the corridors saying, what has got into you? Why would you want to do this? And he wasn’t too sure himself. It was really all my idea. And it, you know, another idea of mine, and no-one knows who had it, you know?


Gene Tunny  33:20

Yeah. So I just want to understand what you’re, you’re arguing, you’re arguing that well, okay, so liberty, yeah you’re taking this seriously, you’re interested in the constitutional framework, or the all the all the rules we have in place that can affect Liberty before we get into one of these situations, like the pandemic, and I’m just trying to understand what you what you’re arguing, you want to make sure that we’ve got the right mechanisms or the right infrastructure in place so that we make the right decisions, or what are you? What are you arguing exactly?


Nicholas Gruen  33:54

Well, I’m arguing that if you’re serious about liberty, that you accept a few things, you accept that governments need in the final analysis to have quite Draconian powers if we’re at war, and so on. So that puts the focus on safeguards. And it also puts the focus on the importance of legitimacy in the in the post that I did during COVID. I said, I would have thought that it would be a good idea during COVID, if you want to introduce these emergency measures have us, and we talk about this a lot. Now, it’s one of my, one of the things I go on about which is you could have a jury body of randomly selected citizens who are there who are paid to turn up every week and to look at what’s going on and the government can’t do things that it objects to. I think that would have protected a lot of governments and would have protected us from a lot of the culture war that we saw, because these kinds of things need to reflect a sense of legitimacy. And they need to reflect the confidence of people that they’re doing what they think is the right things, and for the right reasons. And there was a great, you know, the the activism against mask mandates, for instance, was, because I regard mask mandates as the least intrusive kind of intervention you could have. And I would be perfectly I think it would be good if we had mask mandates on public transport, properly enforced even now. And again, that’s a, you know, a virus is a public is a public good is an externality, these are, these are difficult questions. And so you want to find a way to navigate them with proper community involvement. If we simply have governments and the usual sort of activism against those governments, it becomes very easy to turn it into a kind of standard issue culture war, which is what we saw more in the United States than here, but certainly it’s become that way here to a substantial extent.


Gene Tunny  36:11

Yeah, okay. So there are a few things I want to comment on there. So you’re right about government. I mean, it needs the the ability to, to at times do things that do constrain liberties, there’s no doubt about that government has a monopoly on violence, as they say, I agree with you there. Now, this point about getting the citizens involved, the citizens jury, it would have been good to have done it before we got into the pandemic, because the problem is because of all of the fear, then the citizens jury might end up just supporting a lot of these the policies? Well, I mean, I mean, the concern I would have is that a lot of these policies were driven by fear. And, you know, and which, to us, to an extent, I mean, to some extent, was rational. And some people for sure, I mean, it was certainly a serious virus. But the governments they would argue that they were polling people like they were like Dan Andrews and Anastacia Palaszczuk, they were relying on opinion polling, and that was driving a lot of their policymaking. So they would argue they had that legit legitimacy. I…


Nicholas Gruen  37:21

Well, I make a distinction, as I think you might know, between the opinion of the people for which I don’t have a high regard and the considered opinion, which for which I do have a high regard. So and certainly the considered opinion of the people, I think the considered opinion of the people would have looked very like the opinion of the people early on. But if it was really fairly clear that a lot of this was the product of project fear, then there would be people in a citizen jury, that would, you know, the citizen jury would have powers to ask questions, to call witnesses, all that kind of stuff. And that’s, we spoke about this in the previous podcast we did on a different subject. The structure we have is a government that is constantly performing for the satisfaction of its consumers, ie the voters, this is what corporations do. And what we need to do is to find mechanisms for bringing ordinary people, these people who we accept are the legitimate source of democratic government, to bring them into the process and to inform them as best we can, and then ask them to deliberate and then give the considered opinion of the people an important role in this. And it isn’t just that I think it would lead to better decisions, it would lead to a grea…, it does lead when you see it being done, to a tremendously less hostile, fearful environment. The situation we’re in, we had to make decisions. I don’t even want to defend lockdowns. I don’t want to attack them either. They were difficult decisions, you could see that the pie could see and one might, you know, you might have seen something different and we’ll never know who’s right. But I think I could see politicians doing their best. That’s an, a very important thing to cultivate during a crisis and this sort of mechanism does that.


Gene Tunny  39:24

Yeah look I’m not going to criticise them for a minute. I think they did. They took it seriously. I think they were trying to do their best. I agree there. I just think there’s a good case to be made that there was an overreaction, and it was because of the the amount of fear and they were making policy based on the fear at the time. Now, pre pandemic hadn’t didn’t we have all of these plans for what we would do during a pandemic and it didn’t involve half of the things that that we ended up doing? So when we were looking at it rationally and we had a different idea of what we were could do, but then because of the, maybe there aren’t enough checks and balances or constraints, there’s not enough, there wasn’t enough time to to actually properly consider these, these policies like what we had in Queensland here, we had the government, it had a Public Health Act, and it introduced in 2005. And you know, it was, it was thinking oh we may need something like this in case there is an emergency, a pandemic. But then when we get to the actual pandemic, they they’re starting to worry about it all. And they’re thinking, Oh, my God, we actually may not have all the powers we need to deal with this. And, and so they rushed through this bill to give Jeannette Young, the Chief Health Officer at the time, all of these extra powers so she can direct individual citizens to isolate and impose lockdowns, etc. And I mean, one of the problems we’ve got here in Queensland and this is in, this is why I’m attracted to your idea of looking at the the institutions, the whatever you want to call it, the policy architecture. I like that as a concept, because one of the problems we’ve got here in Queensland is we don’t have an an Upper House, which would provide some friction. Maybe it’s not enough, because other states have Upper Houses and that didn’t stop…

Nicholas Gruen 40:11

It wouldn’t do a lot.

Gene Tunny 40:13

Policies. Yeah. But yeah, and one thing I found is that their mechanisms weren’t working, there wasn’t enough scrutiny. I mean, I spoke at a parliamentary committee here in Queensland in early 2021. And I was trying to make the case that I thought that some of the restrictions are excessive, and we should look at this as in a cost benefit framework. But the only politician who actually was sympathetic was the One Nation MP, that both Labour and the Coalition or the LNP up here. Well, they were sort of, you know, not not wanting to question anything, there was sort of a consensus view. And I mean, I don’t mind if they come to that, legitimately, but I just thought there should have been more questioning in the in the parliament, but everyone just sort of said, Oh, we’re just going to, yeah, the normal mechanisms, or what we would hope would occur in a democracy, just didn’t work. There wasn’t enough contestability, or there wasn’t enough considered development of policy.


Nicholas Gruen  42:14

Well, I completely agree with you. But I think, I don’t think it’s particularly easy to bring that about now. Because if you look at the life of a politician, certainly a politician in a major party, the major parties are kind of like battleships, manoeuvring around getting a position on a thing, circulating their talking points, and then enforcing rigid party discipline. And when an important issue comes along, that people are very emotional about, the press is doing the same thing. The press is trying to maximise clicks, report excitement, if you get up in the House and you make you make a speech, which isn’t entirely in support of your own party and call for, you know, when you discuss the issues, well, you’re not going to get any benefits in your own party for that. The press will go through it and pick out bits of your what you’ve just said, to amp them up, and then they’ll stick a microphone in front of the party leaders face and say, Well, do you agree with what your backbencher said about what’s going on in Logan? This is just a disastrous environment in which to get high level discussion. And that’s again why, I’m arguing that actually people still like discussion, not on our airwaves, but in the right forums. You bring them together, and they speak to each other civilly. And they try to see each other’s point of view. And they tried to compromise and, and explore their way to a common view. Now, that’s almost totally absent from our politics. I think it’s terrific that the TEALS have done as well as they have in federal parliament because it has set the clock back a bit. I know we’re supposed to think of setting the clock back as a bad thing. But the way the TEALS do electoral politics is a bit more like the way, but I was saying this to a team the other day, one of the members of parliament that’s a bit more like backbenchers were 35 years ago, you know, they can talk about their own situation, their own concerns, they’re not completely preoccupied with the talking points of their party and so on. But if we want really proper deliberation, we, we better try and think about how we, I was gonna say route around parliament. Well, Parliament has the power but it’s not going to, the way we, the way our society runs at the moment, there’s nothing much you can do to make that discussion a search for the truth. It’s a search for advantage. And so we have to try to think, how do we build institutions that cover for that, that allow discussion to take place, allows these processes to take place without imagining that that’s going to happen in Parliament?


Gene Tunny  45:20

I was just going to ask, I mean, like you mentioned the TEALS and, yeah, I mean, they’ve really shaken things up, that’s for sure. Do we need more, you know, more representation from different groups? Could proportional representation help with that? Something like…


Nicholas Gruen  45:35

Yeah it might be able to help with that, I think it may have helped in something a bit like proportional representation in New Zealand. I think the, I mean the worst, the most toxic politics I know of, is in our two historical great and powerful friends, Great Britain and the United States. Both have first past the post voting, I was gonna say both have two major parties. Well, that is true in the United Kingdom, but they also have an outrider, the Liberal Democrats, but those have provided very toxic political environments. And the extent to which we’ve injected other elements, I think, has been good. And in fact, you may recall, you will recall what I call the randos in the Senate, people like Ricky Muir, who got into the Senate. And you could imagine it almost like a randomising process, you just throw in four or five random people who happen to get the benefit of tiny little preference margins. Well, I thought that was actually a very good illustration of it. Like it didn’t make much sense on paper. But the people who ended up in the Senate, listened to the debate and tried to come up with the right answer. Now, that would never do inside a political party, you’re not in Parliament to try and work out who’s winning the debate and where the answers are, you’re there to add one, one vote to your party. And that’s all decided by the party structures, completely disastrous.


Gene Tunny  47:08

Yeah I think the Senate does it’s structure in the way that yeah, because it’s got it’s not just, you know, it’s dominated by one party, that leads to arguably better outcomes and I think that Housing Australia Future Fund, I think that getting held up, I think that was a good idea, because that didn’t doesn’t seem to make much sense as a policy, I know the Greens are getting bashed over the head over that but I think their stance was perfectly acceptable.


Nicholas Gruen  47:34

I don’t think you’d be as keen on their proposal for rent control


Gene Tunny  47:37

No not keen on their proposal, but I think them actually teaming up in the so called Axis of Evil with the Coalition was very good. So the reasons they opposed it was sensible, I don’t agree with what they’re proposing instead. But I was just saying, that’s a good illustration of the Senate federally working.

Nicholas Gruen 47:54

Yes I agree

Gene Tunny 47:56

I like your, how the way you’re thinking about this, we’ve got to get the right frameworks in place, so when we get into the, the crisis, we’re not just, yeah, we’ve got a proper way to deal with it. What I was wondering is whether we decide before a crisis. So outside of a pandemic, these are the thresholds if we exceed this threshold of this virus looks like it’s of this seriousness, we’re willing to accept these restrictions, like we decide all of that prior to the pandemic, so when we get into it, we’re not panicking. And we’re not imposing restrictions that arguably aren’t justifiable. So I’m wondering if we should work all of that out, and then sort of have the debate there and you could have your citizens jury, you could have a more considered process rather than it just being decided all in a panic.


Nicholas Gruen  48:48

You know, there’s, there’s a case for trying to show what foresight you can but remember, all of our plans were predicated, I mean, this was an extraordinary thing, that all of our plans were predicated on the idea that this pandemic would be a flu, and it wasn’t a flu. And yet, all of our our entire official medical establishment, that is the people like Brendan Murphy, Paul Kelly, these are the official, Commonwealth medical officers and state medical officers. They didn’t bat an eyelid. They didn’t say, right, we need to rethink this. That happened actually, the first, because I believe the first medical establishment, and by medical establishment, I don’t mean doctors, I mean general, in general, I mean the offices of the government that are there to provide the government with medical advice. The first country that did this was the New Zealand medical establishment and they did a pretty good job, for after a couple of months they said hang on, this is not a flu, we need to rethink this and that’s what they did. That we, we were incredibly inflexible, not adaptive, not, and a lot of these guys were thinking of their role as making rules for the community rather than helping the community think through the problems. So I would put more effort into that. But we’re still drifting into this question of how do you manage a crisis. And what I’m saying is that crises will be well or badly managed, and that it’s an important thing to think about. But every time I suppose you are doing something, which I’m kind of arguing we should do, which is that every time this sort of thing happens, we should be asking ourselves questions on two levels. What do we do now? And what sorts of institutions should we have to do this thing well? And there we probably should wrap up because we’ve gone on for a fair while but one of the things that just gobsmacks me is in the United States, 51 people, all the governors and the President have a pardon power. Now, maybe some of the States have done to the pardon power, what I wanted to do to parliamentary privilege and to contempt of Parliament. But by and large, the President simply decides, as Boris Johnson decided regarding various knighthoods and so on, that it’s simply an exercise of executive power to give someone a pardon. And so much so that there is serious discussion about whether Donald Trump can pardon himself in jail, because there’s certainly a precedent for him campaigning in jail that was done in World War One when Mr. Dobbs was in jail and picked up something like 3% of the vote from jail, he was in jail for breach of the Espionage Act, the same act that Julian Assange is arraigned under or being pursued under. Now. I don’t know. I am unaware of a single Democratic politician who says By the way, we’ve got to get rid of the presidential pardon power, or if you don’t want to get rid of it, we have to subject it to proper due process. We are no longer in the 18th century. But nobody does this. And I find that completely extraordinary. So there you are. I won’t say another word about it in protest.


Gene Tunny  52:33

Okay, okay. Well, Nicholas, thanks again, for a fantastic Policy Provocation. That one was particularly provoking. So, yes, gave me a lot to think about and yeah reflecting on that period we’ve, we’ve been through and yes, lots to think about for policy. So thanks again. Really enjoyed that one.

Nicholas Gruen  52:52

Thanks Gene.

Gene Tunny  52:55

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


53:44

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Sir David Hendry on economic forecasting & the net zero transition – EP198

Sir David Hendry, the renowned British econometrician, talks to hosts Gene Tunny and Tim Hughes about the state of economic forecasting and the transition to net zero greenhouse gas emissions. Among other things, Sir David talks about how to avoid major economic forecasting failures (e.g. UK productivity), forecasting global temperatures after volcanic eruptions, and the role of nuclear energy in the net zero transition. Sir David is currently Deputy Director of the Climate Econometrics group at Oxford. 
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

About Sir David Hendry

Sir David F. Hendry is Deputy Director, Climate Econometrics (formerly Programme for Economic Modelling), Institute for New Economic Thinking at the Oxford Martin School and of Climate Econometrics and Senior Research Fellow, Nuffield College, Oxford University. He was previously Professor of Economics at Oxford 1982–2018, Professor of Econometrics at LSE and a Leverhulme Personal Research Professor of Economics, Oxford 1995-2000. He was Knighted in 2009; is an Honorary Vice-President and past President, Royal Economic Society; Fellow, British Academy, Royal Society of Edinburgh, Econometric Society, Academy of Social Sciences, Econometric Reviews and Journal of Econometrics; Foreign Honorary Member, American Economic Association and American Academy of Arts and Sciences; Honorary Fellow, International Institute of Forecasters and Founding Fellow, International Association for Applied Econometrics. He has received eight Honorary Doctorates, a Lifetime Achievement Award from the ESRC, and the Guy Medal in Bronze from the Royal Statistical Society. The ISI lists him as one of the world’s 200 most cited economists, he is a Thomson Reuters Citation Laureate, and has published more than 200 papers and 25 books on econometric methods, theory, modelling, and history; computing; empirical economics; and forecasting.

What’s covered in EP198

Conversation with Sir David:

  • [00:02:27] Economic forecasting: are we any better at it? 
  • [00:05:56] Forecasting errors and adjustments. 
  • [00:08:04] Widespread use of flawed models. 
  • [00:12:45] Macroeconomics and the financial crisis. 
  • [00:16:30] Indicator saturation in forecasting. 
  • [00:21:02] AI’s relevance in forecasting. 
  • [00:24:23] Theory vs. data driven modeling. 
  • [00:28:09] Volcanic eruptions and temperature recovery. 
  • [00:32:26] Ice ages and climate modeling. 
  • [00:37:09] Carbon taxes. 
  • [00:40:10] Methane reduction in animal agriculture. 
  • [00:44:43] Small nuclear reactors: should Australia consider them?
  • [00:49:08] Solar energy storage challenge. 
  • [00:54:00] Car as a battery. 
  • [00:57:01] Simplifying insurance sales process. 
  • [01:01:19] Climate econometrics and modeling.

Wrap up from Gene and Tim: 

  • [01:03:23] Central bank forecasting errors. 
  • [01:07:12] Breakthrough in battery technology. 
  • [01:11:18] Graphene and clean energy. 

Links relevant to the conversation

Climate Econometrics group at Oxford:
https://www.climateeconometrics.org/
Conversation with John Atkins on philosophy and truth mentioned by Tim:
https://economicsexplored.com/2021/10/16/ep109-philosophy-and-truth/
Info on solid state batteries and graphene:
https://www.topspeed.com/toyota-745-mile-solid-state-battery/
https://theconversation.com/graphene-is-a-proven-supermaterial-but-manufacturing-the-versatile-form-of-carbon-at-usable-scales-remains-a-challenge-194238
https://hemanth-99.medium.com/graphene-and-its-applications-in-renewable-energy-sector-333d1cbb89eb

Transcript:
Sir David Hendry on economic forecasting & the net zero transition – EP198

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It has also been looked over by a human, Tim Hughes from Adept Economics, to pick out the bits that otters might miss due to their tiny ears and loud splashing. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. In this episode, Tim Hughes and I chat with the legendary British econometrician, Sir David Hendry. We talk with Sir David about the state of economic forecasting, and about the transition to net zero greenhouse gas emissions. Sir David Hendry is co director of Climate Econometrics and Senior Research Fellow at Nuffield College, Oxford. Previously, he was Professor of Economics at Oxford, and before that he was Professor of Econometrics at the London School of Economics. After the interview with Sir David, Tim and I go over our main takeaways from the conversation. Okay, let’s get into the episode. I hope you enjoy our conversation with Sir David Hendry.

Gene Tunny 01:26

Sir David Hendry, welcome to the programme.


David Hendry  01:31

Thank you very much, Gene. Thanks for inviting me.


Gene Tunny  01:34

Oh, of course. It’s a pleasure to have you on to talk about forecasting. So forecasting’s something that Tim and I have been thinking a lot about. And we’ve chatted with Warren Hatch who’s a super forecaster with I’ve also spoken with John Kay, about radical uncertainty and how you deal with that. And I’ve also read your book on forecasting, the one with Jennifer Castle, and Michael Clements, and I thought that was very good. And who better to, to have on to talk about forecasting than someone who has really transformed forecasting and economics, someone who’s had a major impact on forecasting? So to begin with, David, I’d like to ask, how has economic forecasting developed over your career? To what extent has it improved? To what extent are there still areas for improvement? Could you talk to us about that, please?


David Hendry  02:34

So Gene, I don’t think it has improved. I think technology has but the actual practice hasn’t. The time that I got really interested in forecasting was acting for the select committee of parliament that was looking into economic forecasting, after the debacle of Nigel Lawson’s budget and then crashing the economy in the early 1990s. And what I discovered, and acting for them as an advisor, is that 90% of the evidence he got was people actually forecasting and only 10% was looking at how you should forecast, what should you do, what goes wrong when you forecast with no analysis at all? So we started a long programme of analysing what can go wrong in forecasting and why. And once you know that, what can you do about it? Well, obviously, there’s nothing you can do about things that are unpredictable. Right, so the pandemic, unpredictable, forecasters shouldn’t kick themselves because you’ve got it completely wrong forecasting December 2019, for 2020, to discover that it’s vastly different. I mean, the biggest ever fall in GDP in Britain, you couldn’t possibly have forecasted that, that’s not a problem. And we can’t do that, it’s you can start to improve the forecast as you go through 2020. and realise that things are going badly wrong, but you can’t forecast in advance. So we isolated two key features that go wrong in forecasting. One is unpredictable events like that, that shift the data. So data is going along, and then either shifts up sharply, like inflation, or shifts down sharply, like output. But once it has changed, you can do a great deal about it. Some methods now don’t work. And some methods do work. And the methods that don’t work are the methods that stick to what went on before. So they carry on at the same level. And that’s completely wrong relative to the new level. So you have to have very adaptable methods that jump as soon as the forecast has gone badly wrong. You use methods to try to adjust for that. We call them robust methods. Right? So they’re after the shock to GDP. They’re robust. So the Office of Budget Responsibility in Britain, forecasts productivity per decade, completely wrongly, every year, they were wrong for 10 years, if they’d used our methods of adapting because productivity had been growing at about 1.7% per annum up to 2012, and suddenly it stopped, we don’t know why it stopped. But it’s come back to the levels that we had in the 19th century. Point seven. But if you keep forecasting 1.7, we just get massively wrong forecasts all the time, very bad advice for governments. And our methods would have adjusted to that within a year, saying, Okay, it’s changed, it may change back. But meantime, you better forecast along this direction. So the actual, if you like, the forecast errors that people make today are very similar in size to the kind that were being made in the 1960s.


Gene Tunny  05:56

Right. Yeah, that’s a that’s a shame. I should I forgot to introduce Tim. Tim, do you have any questions for Sir David on that?


Tim Hughes  06:04

No, it’s, it’s interesting. I mean, this isn’t my level of expertise. I’m here as the layman in this partnership with Gene. So I tend to look at things from a macro view and more from a guy on the street sort of perspective. But I’m really interested in that when you say that, well, for instance, it hasn’t changed since since the 60s. What’s the delay in the take up of these modelling systems for government?


David Hendry  06:27

Well, one of the reasons it hasn’t changed is that the frequency of large, unpredictable events hasn’t changed. And they’re very common and much more common than people realise, except to see the pandemic has been, Oh, quite unusual. Of course, we’ve had lots of pandemics, some of them happened like SARS too, not to go anywhere. Others like the COVID have gone everywhere. Inflation in Britain in the 1970s. It’s very similar to what it is today. And for very similar reasons. Now, I think a lot of forecasting that you hear about comes from central banks. And that’s the kind of forecasts we can analyse because they’re made to publish it. We don’t see the forecasts within many major institutions like JP Morgan, or Citibank, or whatever, they tend to keep them to themselves unless they do really well, in which case, they tell you oh, we were doing really well. But when you look at Central Banks, say we take the Bank of England as a paradigm, their model collapsed with the financial crisis, it just fell apart, and they said it fell apart. So we started to build a new one, we pointed out to them why it had fallen apart. They’re using a method of mathematical analysis that works fine if things don’t change, but becomes like navigating around the globe using Euclidean geometry when things do change, that just, it just doesn’t apply. And its widespread use has been a disaster in my view, for macroeconomics, and is the reason so much of it has gone wrong, because it assumes that the method that these models are built on assumes there are no sudden, unexpected large changes. Whenever they occur, the models fall apart. And we had a letter recently in the Times saying the bank should try testing their models from the 1970s. And they would find it’s a shambles. It doesn’t work at all. Because the 1970s in Britain was filled with crises, 3 day weeks, IMF coming in, interest at 25%, inflation, etc. And their model just wouldn’t cope with that. And we’re now in is not quite such a bad situation, but we’re now in a similar sort of situation where a wage price spiral is kicking in, these models don’t have wage price spirals. They didn’t allow for the fact that people had saved a great deal during the pandemic, because they couldn’t spend it wasn’t, it was forced saving if you like, and as soon as the pandemic ended they started spending, the supply side had improved to meet this high level of expenditure. So of course, you have all these factors coming and they’re not in their model. So naturally, the model was A they said inflation wouldn’t go up and B they said when it did go up it would be transitory, whereas we were saying, it will go up and it will not be transitory, it will be very persistent and very hard to dampen down.


Gene Tunny  09:24

Right. So this is a letter in the Times I’ll have to have a look for that. That sounds interesting. And it’s a bit of a concern that the Bank of England hasn’t improved its, it doesn’t sound like it’s improved its models very much at all, because in 2010, so you gave a talk to the Institute for New Economic Thinking, and you were talking about the problems with the models that central banks were using. And this was in your conclusion, you said that “there are huge costs to underspecified models and I think the financial crisis is partly due to central banks having very badly under-specified models in their repertoire.” Would you be able to explain what what you meant by that? Is that what you’re talking about here? They’re not allowing for structural breaks. But are there also are there variables they’re not including? Could you just unpack that a bit, please?


David Hendry  10:16

Yeah, there are variables they’re not including and often including variables in the wrong way. So for example, the Bank of England includes wealth. Now some wealth is expendable, like your house, some wealth is potentially spendable like money invested in stock markets and bond markets. In some it’s very spendable, which we call cash, deposits and demand at financial institutions. And it makes a huge difference, to break these up, because wealth itself can change a lot but it doesn’t change expenditure because house prices go up, or house prices go down. But it can also change a little bit and hugely changes expenditures because people run out of money, they have to start borrowing, and they haven’t got time to sell their house or the bond markets in disarray. And financial markets have fallen hugely, and you don’t want to make big losses. So you need to think very carefully about how you include variables in models, as well as which variables to include in models. I was referring to the fact that the housing models in the US when the financial crisis started, were very weak, they didn’t cover all the aspects that that matter, because in some States, if your house price falls greatly, and leads to a large indebtedness, if it was sold, you can just hand back your keys and walk away. You can’t do that in other States. And the subprime crisis generated articles, even from central banks, saying that it’s really important to get poor people onto the housing market, because that’s where how you build that wealth, of course that led to all sorts of speculation, and then house prices crashed. And that’s poor people who end up suffering most and we got a very bad financial crisis. But you guys didn’t have it. Right Australia avoided it, because it hadn’t got engaged in quite such nebulous activities as the AAA assets that were worth nothing.


Gene Tunny  12:16

Yeah, yeah, we avoided it. I mean, partly because of mining. And then the Treasury and the government here, they would say that they had a timely fiscal policy response. I mean, there’s debate about the extent to which that was relevant. But yeah, we were we were lucky. And maybe we hadn’t had as much crazy financial activity as in the States and Britain. We’ve got our regulators too. So yeah, a variety of reasons. But yeah, that’s, it’s fascinating.


David Hendry  12:46

I was gonna say, the way macro economics is taught in almost all major universities around the world still relies on this approach of believing agents optimise across time into the future. And you can’t do that in a world in which you suddenly get big shifts, right? You’re what looked optimal one day becomes a disaster the next, for example, Royal Bank of Scotland trying to buy this Dutch Bank looked optimal to them in the state of the world before the financial crisis and did become an absolute massive disaster after it. And that isn’t something that’s taught in macroeconomics courses that I know off.


Gene Tunny  13:29

Yeah. Yeah, unfortunately, a lot of the macros become very mathematical. And you’ve got all of these forward looking models, these Ramsey type models, and yeah, but I wonder about the just how applicable, they are. So good point. Can I ask you about your methodology David? So you’re famous for having promoted this general to specific methodology, if I’m getting that right. Could you just explain roughly what that is and how its implemented and what the modern implementation of it is? I mean, you’ve got this automatic forecasting system. Could you tell us a bit about that, please.


David Hendry  14:11

The whole idea started in the 1970s, when it was quite clear that the then big models in the US and Britain didn’t really incorporate enough information. And if any, if you leave a variable out of a model that matters, say you didn’t include housing in a macro model, and suddenly you get a big change in house prices, the model will go wrong, because it should be, housing should be in the model, and it’s not there, and it shifts and that then shifts the reality relative to the model. So it became clear you needed to think very hard about all the things that might matter. And that then required you to put statistical method that could discriminate between what does matter, and what you thought might matter but does not matter. And so we had this paper in the mid 70s, on the consumption function in Britain, showing that you could explain everybody else’s consumption function failures by a more general consumption function that pointed out why they went wrong. And that led us to develop this general to specific as a very general approach. Now, it evolved greatly in terms of, as we realise, more and more the importance of shifts and outliers in forecasting, we began to develop these methods, which at first, I have to say were greeted with not scepticism but total disbelief that you could do it. So that to take the basic idea. Say you’ve got a relatively short time series that’s got 10 observations. And you think that within those 10, there might be a discrepant observation, somebody wrote down 10, when he meant one, right? You just fit the model to it, or it’ll go very badly wrong. So what we do is we create an indicator variable for every observation. So it’s one for that observation and zero elsewhere. So you get 10 of them. And you put them in in big blocks, say five, and then the other five, and they won’t do anything, if there is no shift, but they’ll pick up the shift when it happens. And we call this indicator saturation, because you put in as many of these indicators as observations. Now why would anyone think of doing that? Well, it was serendipitous. I was asked to participate in an experiment in econometrics, to model food demand in the United States, from 1929, which isn’t a great date to start, any time see, through to 1986. And I looked at what everybody had done, and they had all thrown away the data before 1946, they couldn’t model it. So I built a model of it and looked what had gone wrong in the interwar period, and discovered there were two gigantic outliers in I think, 1932 and 33 but don’t guarantee that it could have been, but round about that period. And Mary Morgan kindly went to the archives and discovered, guess what, the US had a food programme? Well, will a food programme affect the demand for food, you bet it will. So I put in indicators for those observations and immediately got a very good model for the whole period, for the period up to 1946. So then I thought, right, let’s fit the cost period, including the early one. But we’ll put in indicators for all the observations, which is the kind of forecast test and found the Korean War I think had one big outlier, but otherwise, it was fine. And then about a year later, thought that’s funny, I had put in indicators for every observation. All the ones for the pre war period and all the ones for the post war period. And it had worked, I got the best model of anybody. So I started talking to Soren Johansen, a famous econometrician statistician, he said, “You’re nuts. You can’t do that!” And about a month later, he emailed to say, “Yeah, I think you can do that and I think I know how to analyse it,” which because if you don’t analyse it in economics, they just ignore it. And so we published several papers showing detailed analytics of why it would work for impulses, we then extended that to steps and then trends. So we can pick up trend breaks, step breaks etc. So for our 10 observations, we might end up with 40 variables. Most statisticians look at you, you’re nuts. But actually, you can show it will work. Because if there’s no break, no trend, they’ll all disappear. If there’s no step shift, they’ll all disappear. There’s only one outlier, you’ll be left with one outlier. And that’s it. So that’s how we do general to specific now. And that’s why you need automatic modelling. Because a human can’t do that. The number of possible things is far, far too big. The computer programme can of course, do it in seconds, at worst, maybe minutes if it’s a huge data set, because it’s got many, many things to look across.


Tim Hughes  19:27

Actually, this probably feeds into one of my questions for you, David, which was, you mentioned about the modelling and the mathematics, and the current uptick in artificial intelligence, in AI, is that something that has made a big difference with the work that you do?


David Hendry  19:45

Now our programme is a sort of AI programme date back a long way. Because it’s experimenting with everything. It’s a programme that’s designed for data that keep changing. Most AI programmes are not. Most AI, it takes all the cases and trains the computer to identify things in those cases. But if the cases suddenly change, that’s not going to work. And so AI has itself, the way people have used, it has not made a big impact on forecasting yet. They have to adapt AI to learn from the data, and be ready for it to be adaptable into the future in a way that if you were trying to teach a programme to identify measles, you probably would just take all the cases of measles and the programme would be able eventually to look at the spots and say, Yeah, that’s measles. But if Measles can suddenly evolve, as say the pandemic did, what you’re trying to pick up by AI would no longer be relevant. It would look different, and AI would misclassify. So AI has got to be hugely changed to be relevant for forecasting, which is about a changing world. We’ve got climate change, we’ve got pandemics, we’ve got wars, we’ve got crises, we’ve got inflation, we’ve got changing population levels, etc, etc. Unless it can adapt to that it won’t be useful in forecasting.


Tim Hughes  21:15

In your view, do you think that that is quite likely that AI will get to the point where it will be more predictive and not just reactive?


David Hendry  21:22

Well, we’ve shown you can do it, ours is very simple AI, it’s nothing like the kind of complicated neural networks that are being used in some areas. But it does show that you can do it for forecasting, and it does matter. And in the M4 Forecasting competition, which was run from Melbourne, the AI ones or machine learning, as they were then called, did not do terribly well. We came seventh in our very simple one. And and it turned out that we spent about a 50th of the time that most of the other teams did.


Gene Tunny  21:57

Was this of a motorway was it was at the M4 motorway?


David Hendry  22:01

no no. M for Makridakis fourth forecasting competition. The M four we’re now at five. It’s currently ongoing. Makridakis is a Greek forecaster, who decided the only way to improve forecasting is to find what worked. So he asked people, here’s 1000 time series, we’re not going to tell you what they are, model them, and send us your forecasts for the next 10, 20, 30 observations. we’ll analyse those and see who did best. So at the M4 there was 100,000 time series to model. And you then have to forecast I think, up to 20 years ahead for some of them. And you’ve to send in all your forecasts. And they then worked out who did best and got closest to the actual numbers in the future. Actually Uber did, Uber won the competition, Uber, yeah, the car hire people got algorithms of the kind that could be applied to forecasting. But what they did, we think was accidentally wrong, that they looked across, say, nobody knew what the time series were. But it does turn out that some of them were, say, GNP from 1950 to 1980, and somewhere from 1990 to 2010. Right. Now, they looked across, do some series help us in forecasting other series. And we think they actually included the future of the series they were to forecast in the, seeing if these series helped it, which is why they forecast much better, because we’ve mimicked their method, when all the series are completely independent, and it doesn’t help. So they had to be doing something like that accidentally, I don’t think they realise that, some of the series where the future of others of the series…


Gene Tunny  24:00

Okay, yeah. Can I ask you a question that’s related to that? It just reminded me, because you were saying that they don’t tell you what the data series are. Now. There’s this debate about, well, to what extent do you use theory and you’re modelling, you know, theory driven versus data driven, is it the case that you can get a reasonably good forecast without any theory whatsoever or without any understanding of what the underlying what the data are actually measuring? Or do you need theory? How do you think about the role of theory in your modelling? David?


David Hendry  24:33

Well, when we were forecasting week ahead Covid deaths and cases in the UK, the model only used the past data. And for the first six weeks we were by far the most accurate forecasters relative to epidemiologists with their big models and taking account of whether, you met people who had it and all the rest of it, and that’s because their models needed about 10, 12 weeks of data before they even began to be useful, whereas we could forecast immediately without any theory. I mean, I understand the big models and why they work, but we thought you can’t use that. And it’s because the way COVID hit, it did big jumps, measured on very few cases. And suddenly, like Bergamo, you had 50 people dying in a day, right? And so you get these big jumps and our methods adapt rapidly. So in that area, you could do extremely good modelling without theory. But when it comes to economics, how many variables are there? 5 trillion, possibly in the economy, if you think of everything that’s going on, so you have to have some theories and say, well, most of those don’t matter. We just can’t deal with that. So we use a lot of theory in our models, but we embed it in the general. So say you have a theory, let’s take a very simple theory that only income causes consumption, consumers spend their income and that’s it. So consumption is related to income, period. Okay, we keep that and embed that within a model in which things like well, maybe interest rates matter, maybe wealth, maybe liquidity, maybe, etc, etc, etc, matter. But when you’re searching, you don’t search over the relationship between consumption and income, you always keep it there. And if it doesn’t matter, then it will turn out to have a very small coefficient, and you can decide to drop it in the end. But if it does matter, and it’s the only thing that matters actually our method will give you the same answer as your theory model. So we embed theory in such a way that if it’s correct, that’s what you will get. And if it’s wrong, you’ll get a better model. So it’s both theory driven and data driven.


Gene Tunny  26:53

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


Female speaker  26:58

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Gene Tunny  27:27

Now back to the show.

And so you start off with a very general specification, lots of data in your database, lots of variables, if I’m getting this right, and then you allow for the potential potentially all of these structural breaks things where things go a bit crazy, you jump up to a new level, like during the pandemic or, or whenever, and we we dropped down from the trend growth path we were on maybe we were cycling around it and suddenly we’re somewhere we’re in this hole and so you’ve got models that can adjust for that sort of thing is that if a fair way of thinking about it,


David Hendry  28:05

Yes, it’s post, yeah. Yes. Once it’s happened, then the model will pick it up. So quite a good example that might intrigue you is finding out where all the volcanic eruptions occurred over the last 1000 years. And when the when one of my colleagues gave a paper in our methods at our General Environmental Conference, all the volcanologists were intrigued and asked us can you use these adaptive methods to show where volcanoes were and measure how they work? Well, the answer is yes, we adapt our methods instead of them being one zero zero. They’re kind of like a V. Because when a volcano erupts, the temperature drops immediately. But it then recovers roughly half a half a half a half of what’s left. So the V shape picks that up. So we found all the volcanoes from 1200 AD in the data set of tree ring growth dendrochronology. And the key thing about that Gene is as soon as you’ve got the first observation of the volcano erupting and the drop in temperature, you can very accurately forecast all the remaining observations to the recovery, by having this V shaped go half a half a half. And we showed we could forecast, okay, forecasting after a volcano in 1650 isn’t all that interesting today, but it tells you that the next time we get a world explosive forecast like Tambora or Krakatoa, we will be able to tell the world after it’s stopped erupting, how quickly the temperature will recover to the previous level. It also lets us adjust the so called baseline temperatures that IPCC use. That in fact have been several quite big volcanoes that have dropped the temperature a little bit for a few years, and that actually means that they’re cheating by using a slightly improper average over the periods they’ve picked, as they shouldn’t include the volcanic eruption, right? Because that’s when you should use the natural level that had been over that period overall, if that makes sense.


Gene Tunny  30:22

Yeah, that’s fascinating. And so your, so is that an application of your method? Or are you, the point you’re making about the volcanoes there? Or are you saying that you can apply some theory to get a better forecast? I’m just trying to understand


David Hendry  30:36

It’s our methods purely. And it’s just the knowledge that when volcanoes erupt, the temperature falls, but it goes back again. So the question is, what form do you use for that? We just invented one that says V shape, and then we put in a V for so, it’s just over, I think we had about 900 observations. So we’ve put in 900 of these Vs in big blocks, but it only picks up a significant g if there was a Volcanic Volcanic eruption, right, because otherwise, it doesn’t help fit the model. So it then just picks up all the volcanic eruptions, and the volcanologists started using this method, we’ve done one to get a new archive of volcanic eruptions since zero, like 2000 years ago,


Tim Hughes  31:24

Actually this probably leads us on, do you have anymore questions Gene?

Gene Tunny 31:30

No not at the moment, go ahead Tim.

Tim Hughes 31:33

David, I was gonna ask you about climate econometrics. So you’ve written a book on that with Dr. Jennifer Castle. So I was interested to see exactly what climate econometrics is, and how it might be able to help us tackle climate change.


David Hendry  31:44

Yes, climate change is caused by our economic behaviour. All our methods were developed for modelling economics. So it would be quite unsurprising that they would work from modelling climate change, which is due to economic behaviour, CO2 emissions, and nitrous oxide emissions, the way we travel, the way we live, the way we eat, the way we warm our houses, etc. All these things are economic decisions. And so if the methods work for the economic behaviour, they’ll work for explaining climate, they’ll actually also work for claiming, explaining things like ice ages, even though there’s no humans around then, because they, the kind of dynamics of ice ages how the amount of co2 in the atmosphere, the amount of past sunlight falling on the Earth, that’s created the temperature, the amount of ice that’s around, etc. All of these carry forward into the future and there’s really good data on ice ages, I mean, 800,000 years of pretty accurate data and how it evolved. And we can fit our models to that, again, very general. Now, why would you want to put in indicators? Well, of course, there’s often a lot of dust in the atmosphere. And dust falling on ice turns it black, which turns up the amount of heat that absorbs. So if you have a period of massive volcanism, which does occur, I mean, often you can have 50 years of vulcanism puts up so much dust, it actually changes the pattern, and you can pick that up, and the sudden jumps in temperature that were unexpected, for example. So it can be applied to all these issues. We’ve been applying it to modelling ‘How well is the UK doing in getting to net zero?’ Now we were at a particular point that we had very good data on all the ingredients that lead to CO2 emissions, the amount of coal, which was huge in the 19th century and up to about 1970 was pretty large in Britain, but then began to drop dramatically, because it became inefficient relative to other sources, but also because it was banned in household fires. When you were not allowed to have fires based in smoky coal because smoke, so you get the demand for coal falling, and that led to the discovery of natural gas in the North Sea. Prior to that the gas system was coal gas, which required you to burn coal to get the gas but it’s very inefficient so that got rid of coal and natural gas is much more efficient. And oil was throughout beginning to replace the use of coal in many industries particular. And then in 2008, the government banned it from being used to produce electricity. And that’s the death knell for coal in Britain’s there’s almost none used nowadays. Now, 2008 is something The Climate Change Act of 2008 amazes many people, both parties unanimously voted for it as did the Lib Dems is completely we need this, let’s do it. And you get a huge, very rapid drop in the amount of CO2 emissions in the UK. Now Britain’s been moving towards a service economy from a manufacturing one. But it hasn’t been doing that to get rid of CO2. It’s been doing that because World Trade Organisation rules meant you couldn’t put extra taxes on people who are cheating in the way they were pricing their products. And so they killed off a lot of British industry. So I don’t accept that the offshoring has anything to do with climate change and claim that our domestic reductions. So Britain’s come down from 12 tonnes per person per year to four and a half tonnes per person per year over that period, which is a very dramatic reduction. America is still at 15. So it’s still above the highest it ever was in Britain. And one of the explanations we came across recently is that in Britain, cars went about 20 miles to the gallon in 1920. Now on average, they’re going 55. In America, they went about 20 to the gallon. And now they’re going about 20 to the gallon. And there’s many, many more cars, and they’re driving much further. So they’re consuming vastly more oil, and therefore gasoline. And therefore pumping out much more CO2, nitrous oxide, particulate matters, etc. They’ve had no efficiency gain, whatever, because they’ve gone for these bigger SUVs, much heavier, much bigger engines and petrol, gasoline has never been taxed in the US, whereas in Britain, the tax is about two thirds of the price of a pump.


Tim Hughes  36:54

Yeah, it’s expensive. Yeah, it’s a lot.


David Hendry  36:57

Yeah, it hasn’t discouraged people from driving. Right, people are still driving, there more and more kilometres on aggregate in Britain driven every year despite these high taxes and gasoline is one of my reasons for believing that carbon taxes will not by themselves solve the climate change problem. We need technology we need to adapt until we’ve written several papers, proposing a system of what we call five sensitive intervention points. That can be used to exploit how people behave without trying to change their behaviour, but to make them do things that will then be climate optimal. So for example, cars in Britain last nine to ten years on average, and then become obsolescent. So instead of buying another internal combustion engine car, price electric cars so that they automatically move over and buy an electric car. And if we did that, over the next 30 years, we’d end up with every car being electric, and nobody having suffered and have got the new car that they wanted at each point in time, but switching over gradually. But that requires you to be providing more electricity all the time to meet this, which requires upgrading the grid and installing more wind farms or solar cells, and maybe more small nuclear reactors and perhaps investing more in fusion in the hopes that the current breakthroughs can be made useful for society before 2050, and so on. And the paper tries to spell out how all these steps interact all the way down, clean right down to farming, how we get rid of the massive amounts of nitrous oxide, methane and even CO2 to come out to farming. That’s a huge concern in New Zealand, your neighbouring country, poor farmers, they’re objecting to fart tax. I don’t blame them. I mean, so how can they deal with it? Right? It’s, it’s not like you can deal with the tax when cars were getting more efficient when they’re driving less or getting an electric car. They need to think of the technology that will reduce methane emissions from animals. I don’t know if you know that there’s an island off Orkney called North Rolandsay, where the sheep are not allowed off the Shore, there’s a wall around the island and all the sheep are kept on the shore, and they eat seaweed. But methane…


Tim Hughes  39:25

Yeah, I heard about this recently. And because I was going to say I agree with what you say about technology, making these changes. So you know, rather than forcing people’s habits to change or you know, doing something drastic with our food chain, etc, the technology will contribute towards those changes. And yes, I saw that the seaweed or additives made from the seaweed could be one of the solutions for for methane. So just by adding it to the food. Obviously, it’s early days to see if that may or may not work on scale. But it’s encouraging It is encouraging to see those breakthroughs.


David Hendry  40:02

I think the breakthrough that’s needed is to synthesise the chemical. that does it. Because I don’t think you can grow enough seaweed to feed all the world’s cattle, sheep, goats, etc. I think that’s not on. But knowing that asparagopsis taxiformis, which is the one that seems to be best for stopping the thermogenic reactions within animals, it could be synthesised in the way that aspirin was taken from willow trees, and then Bayer worked out how to synthesise it. And I think these these things are possible. So yeah, I mean, our paper suggests that all of it is possible. Some of it needs subsidies, I don’t think tax is the right way to do it. Because we saw the uprising in France from the yellow vests. And that’s happened in Sweden, people object to their lifestyle being disturbed. This doesn’t disturb their lifestyle. It just says, oh, you know, you’d be better off if you do this. And then you can keep manufacturing going making cars but electric cars and wind turbines and solar cells and heat pumps and so on. All of it’s out there. And the thing that I do emphasise when I meet sceptics is by the end of the 19th century, we had cars that were electric with rechargeable batteries that could go up to 50 miles between recharges. We had solar cells, on roofs, we had wind turbines that were being used on farms, we knew that climate change was caused by excess CO2. And everything was in place for an all electric society, we knew how to generate it from hydro power, from wind power from solar power. But then the Americans discovered oil and the internal combustion engine. And that


Tim Hughes  41:54

So that technology was there at the end of the 19th century. You’re saying?


David Hendry  41:57

At the end of the 19th century, all of it was there. And we trace who invented it, how they invented it, how it developed? Yep, it was all there. Not LED lighting, that’s an important, more recent development.


Gene Tunny  42:12

Yes. Can I ask about that? That paper? I’ll have to look it up. It sounds fascinating. So have you you’re you’ve done modelling, have you of this path to net zero for Britain? Is that what you’re saying?

David Hendry 42:20

That’s what we’re saying yes

Gene Tunny 42:24

Okay. And yeah, it’s feasible. If there’s this technology, some technology shifts, technological improvements, but also that there may need to be some subsidies for electric vehicles, I think, was that what you were…


David Hendry  42:37

For the electric vehicles, but also for the grid. You need a massively improved grid, both because there’s vastly more electricity, but it’s got to be more resilient to climate change, because climate change is going to happen. Irrespective, even if we managed to reduce everywhere, it’s still going to carry on for a long time, because the oceans and the air have got to calibrate the temperature. And that takes a long, long time to happen. So sea level rise will continue, the Earth will continue to warm but at a slower and slower rate, if we stop pumping out quite as much CO2. And obviously, if we can find ways of extracting it, to research that, that would help. One of the things that does extract it, believe it or not, is basalt. Stuff that volcanos erupt, right? Now, if you look at photographs of volcanoes, the land around them is very fertile. So you can actually replace artificial fertilisers by ground up basalt. And that will act as a fertiliser, because it’s got all the minerals in it, but it also absorbs CO2. So it actually helps reduce CO2 whereas artificial fertilisers in making it they produce CO2, they produce nitrous oxide, etc, etc. So one of our proposals is that we start switching quite rapidly to using ground up basalt which costs next to nothing. There’s 300,000 cubic kilometres of basalt in India. That’ll take a long time to use that up.


Gene Tunny  44:12

Right, I’ll definitely have to check this out. I mean, this is a big issue for Australia. How do we get to net zero? And I mean, Britain’s probably got some advantages over us, you, you don’t have as big an area. I mean, we’re gonna have to build all of this transmission to connect up the renewable energy. Like we don’t have nuclear energy here and the Opposition party is trying to push it, but then I think there’s going to be a lot of community resistance to that here in Australia.


David Hendry  44:37

Yeah, I can believe that. But do people understand small nuclear reactors? That’s the only ones we’re arguing for, not the big ones, the small ones. In Britain, lots of big ones. And they’ve produced a lot of transuranic waste, that’s going to be a huge problem for humanity. Now, there are two advantages to small nuclear reactors. One they can use that transuranic waste as their fuel and greatly reduce the amount of radioactivity that needs to be dealt with from it. And secondly, they’ve been used in nuclear submarines for 50 years, and there’s never been an accident. So they’re very safe and they don’t have any fissionable material that terrorists might want for bombs. I mean, the stuff they’re using is useless. Other than burning up the waste, it’s a problem anyway. So if the public knew that these are harmless, that they’re getting rid of a problem, you don’t have nuclear reactors, so it’s less of an argument there. But in Britain, people would jump at the chance to cut the amount of nuclear waste that needs to be disposed of, burying it or put it in deep caves, etc. And these guys can do it


Gene Tunny  45:52

Right Yeah. These are the small modular reactors, are they?

David Hendry 45:56

Yes,

Gene Tunny 45:58

I think that’s what Peter Dutton, who’s the Opposition leader here, what he’s talking about,


David Hendry  46:02

Oh good for him, I think they are actually an important component, but only one possible component of an electricity provision, that would give more energy security. And, and be something that can work in almost all circumstances.


Tim Hughes  46:18

This is an area that we’ve talked about a few times, and one of the things that comes up is that the most likely scenario would be to have a suite of different options as to where they get the power from. So for instance, we’re very lucky here in Australia, we have abundant supply of sunshine. And so that’s clearly one of the options open to us, which we currently use, and it will grow. But there’s also hydro, there’s wind, there’s other options and having the various different things available. So that for instance, I mean, I know in the UK, for instance, like to rely on solar isn’t something that you’d want to rely on fully. So it would be the same everywhere I imagine and that that those suite of options or those suites of available power supplies would be different around the world. But it does seem to be that a lot of this is driven by the market, which we’ve noticed here and it has come up in conversation, which is that’s that seems to have been a big change, where that it’s been widely accepted that climate change is real, and that most people do want to have clean oceans, clean atmosphere, clean fuel. And so that driving force from the market, seems to be also then instigating the technology from the suppliers of those options, you know, people like Elon Musk, or, you know, these, these people who can make things happen very quickly, much more quickly than governments can. So it seems to be accelerating and going in the right direction. And so the net zero target is 2050. I think, is that right for the UK?


David Hendry  47:51

That’s right, it’s too far in the future. But we’ve picked it because the costs of adjusting to it are near zero, and probably even positive benefits from doing it slowly, in terms of machinery running out, cars getting obsolescent, trucks needing replaced. Developments, I mean, in solar cells, for example, Perovskite cells are now able to produce 30% of the energy from the sun as against the standard solar cells 22. That’s an enormous improvement. And that technology will take a little while to get commercialised and applied. And then people will have much, much more efficient solar cells to put on their roofs.


Tim Hughes  48:32

And the infrastructure needed for electric vehicles is obviously going to be enormous, especially in the built up areas. So it’s going to take some time for it all to happen.


David Hendry  48:44

Absolutely, but if the market prices correctly, it can be profitable for them to instal all the connections, it doesn’t necessarily cost much in the same ways they built filling stations. I mean, they didn’t build them for fun. They built them to make a profit to build these guys to make a profit as well.


Gene Tunny  49:03

Yeah, there’s some big issues here. Tim, one thing I would say on the solar I mean, even though we’ve got abundant sunshine, the challenge is, it we’ve got to store that solar energy for when it’s actually because yeah, that’s one of the problems because you don’t have it at night and yet there’s a big peak in demand when everyone gets home from work. And yeah, that’s why we’re having to build hydro where the State government’s here is investing heavily in hydro and trying to progress some couple of hydroelectric plants quite rapidly, which is, which is what you need to do so


David Hendry  49:33

Yeah, Britain’s rethinking hydro again, taking the Great Glen and converting it to a massive lake to reservoir to bag more hydro and Norway has always produced most of its energy from hydro. The first ever house to be lit by electricity was driven by hydroelectric. Armstrong, the gun manufacturer, built a hydroelectric system for just providing his house with electric lighting. That’s the first in Britain. So that’s part of the 19th century that we could have got an all electric world. And storage is a big problem Gene really is. And we’ve recommended using nighttime much later nighttime surplus energy to produce hydrogen. There are several methods, let’s not go into them parallel assistant electrolysis and creating liquid hydrogen, right. And liquid hydrogen is a fantastic storage of power. Okay, and you can use it either for heat, or to provide the electricity that you don’t have otherwise, indirectly or as a high heat source for industry if we’re going to get rid of coal and oil, they’ll need a high heat source. Well, you just see NASA’s rockets taking off and you realise you can get a lot of heat using liquid hydrogen mixed with oxygen


Gene Tunny  50:56

And so do you think that could be commercially viable, we’re trying to build a hydrogen industry here, not me, but the state government and the industry. And I know the Japanese are very interested, Mitsubishi and companies like that they’re looking at, they’ve got all these exploratory projects up and down the coast here. I mean do you think it could be commercial?


David Hendry  51:16

Yes, definitely. I don’t know what the cost to steel makers is of their energy provision. But if the hydrogen is made from the surplus energy at night, from things that wind turbines, which often have to be switched off, because you’re producing electricity that can’t be consumed, but it will always be able to be consumed from making surplus hydrogen, that’s our surplus energy for making hydrogen. And the cooling will also require a lot of energy. So I think it could actually, they could actually end up paying people to make hydrogen. Right to stop the wind turbines being turned off when a large percentage of your electricity is coming from wind turbines. And it’s coming at night, when you know three in the morning, the demand is zero. So I think there’s strong possibilities of using that.


Tim Hughes  52:10

That’s good battery technology is really another area as well, of course that is is going ahead. I was just trying to remember the name of the technology, I think it’s single cell batteries. If that sounds right. But I know Toyota, for instance, have invested a lot of money in this next generation of batteries. And it’s been talked about in the realms of that there will be sufficient enough in a car that you’ll be able to power your house from your car. So it’s that kind of capability that is being expected. Remember John Atkins, mentioned this in one of the


Gene Tunny  52:42

Yes, we might have to go back to that Tim and have a look and put some links in the show notes.


Tim Hughes  52:49

It’s a thing, it’s a thing. I didn’t make it up, I promise.


David Hendry  52:51

Okay, so you have to remember that using that kind of technology, a glider went around the world. Right? Yeah. It was a glider, but they did do it, and Britain has several electric aircraft for short distance travel, which are all electric. And trains. I think both Germany and Britain have been developing trains that ran off fuel cells of the kind that are driven by hydrogen. And they do produce enough electricity. But at the moment, the machines that do it are enormous and very heavy. So they have to find some way of producing fuel cells that work from much less expensive and heavy technology. But why not have solar cells in the roof of your car? Well, at the moment people would rip them off, of course, thieves would just take them, but they become ubiquitous. That may be one of the routes that we could do. Another as you mentioned, Musk, at one point, Tesla put up a video on the car being the battery. And they used graphene tubes filled with electricity all the way around the car, and then it provided enough electricity to drive the electric engine for 1000 miles. They dropped the video very quickly. And we don’t know if they dropped it because it was giving away secrets of they didn’t want or it didn’t work to try to match it didn’t work. I think it should work. I can’t believe that I mean graphene is a super capacitor can store enormous amounts of electricity. And there must be a way of using it and making graphene has now become very straightforward. You can take waste plastic, it was a laser and you turn it because it’s a carbohydrate you turn it into carbon and the carbon can be turned into graphene. Just pick up the tiny bits and join them the way that they originally discovered graphene in Manchester.


Gene Tunny  54:57

Incredible. That’s just incredible what’s going on, David we’ll have to put, I’ll put a link in the show notes to your research group on climate at Oxford, isn’t it. So I’ll put a link in because there’s links to all sorts of great stuff you’ve done and all great articles. There’s one more thing I wanted to cover before we wrapped up, because I know we’re getting close to time. There was one thing that you mentioned in that talk that you gave in 2010. This was to the Institute for New Economic Thinking, if I remember correctly, I think was George Soros in the audience? It was incredible. It kept showing George Soros in the audience because I think it’s his, his Institute, or he funds it. But there’s a mention of the insurance company, you talked about this large US insurance company that you’ve done some modelling for or they were using your approach and 5000 variables, and but only a few 100 data points? And could you give us a flavour of what type of modelling that was? I mean, without revealing anything commercial, I was just…


David Hendry  55:55

Yeah, okay. So the 5000 variables are things like a 28 year old, single woman living in Texas with one car, and no children and owns their house. And that’s a variable. Right. So they then price their insurance for her house, knowing all these factors. They were finding that the sales were getting too difficult. And they wanted some simplification of what was actually driving their profit. So Jurgen Doornik who actually did this work, already had auto metrics, working with quite short time series on these sorts of various people. But you could then model all the things that might be taken into account and discover, actually, it didn’t matter that they were single, it probably didn’t matter, they’re female, it probably didn’t matter they’d no pets, right? What mattered was that they owned the house or didn’t own the house that did have a mortgage or didn’t have a mortgage and whether it was fixed term or so very few variables turned out to matter. And it allowed the company to dramatically simplify the number of people that they employed for sales, right, they came way down until when the financial crisis hit, their cost base was vastly lower. And they survived the financial crisis in the way that many insurance companies didn’t, because they, you know, they lost so much money in housing, for example. So that, although it says 5000 variables in most of them could never have mattered when being male would not apply taking female, for example. So males would not have been entered in the models for females and age that older people can’t be young females. So you can see immediately, although they talked about, we talked about 5000 variables, and there were most of them wouldn’t have been relevant in any given situation.


Gene Tunny  57:56

Right. And so this was the autometrics or autometrics is that part of


David Hendry  58:00

OxMetrics. That’s part of the OxMetric system. And it’s written in Ox, Ox is a computer language that Jurgen developed in the 1990s, early 2000s, it was the first attempt to get fully automatic modelling. And I have to say, our first attempts were really ridiculed by the profession, the idea that you can automatically model it didn’t require human intervention. Well human intervention is of course, thinking about what goes into the model. After that, itt’s pointless spending hours trying to see which is the matter when the programme can do that much more efficiently, much faster and much more generally. So it gives, we believe it gave much more time for thinking and much less time wasted in front of the computer desperately trying to find the model.


Gene Tunny  58:51

Yeah, it sounds to me like our central banks and treasuries and finance ministries should be, yeah they should, if they haven’t got a copy of your programmes, they should get a copy of them and start applying them because we certainly need to do better than the, than we have been in terms of forecasting. So…


David Hendry  59:09

RBS definitely has a copy, the sorry the RBA.


Gene Tunny  59:14

Okay, yeah. Yeah. It’s hard to know what they rely on some, I guess they they’ve got a model. I don’t know to what extent that it informs their policy actions. They got this Martin model, which is Yeah, yeah, it’s I don’t know. I don’t it doesn’t I don’t know whether it’s was developed using your

David Hendry 59:25

No, it wasn’t.

Gene Tunny 59:30

No I might have to come back to that because it’s a it’s a rather complicated model not not today, but just just good to Yeah, it’s good to good to find that out at least they’ve got your software if they and hopefully they’re making use of it to some degree. Okay, Tim anything more for Sir David?


Tim Hughes  59:50

No, I just think so it was really interesting. Thanks again for your time, and I think it just reinforces the, the way you talk about the modelling and the conversation we had about AI. Again, it’s something that’s come up in other areas where it’s a really powerful tool, but there’s a human discernment at some point to sort of like, bring it all together. And without that, it’s only so useful. And so I think it’s always encouraging to see that we need that human intervention to make sense of things. And sometimes humans get in the way of good modelling. I imagine, you know, that, but if we can give that amount of work over to the models and the AI to do the work for us as a tool, then, yeah, it’s very powerful.


Gene Tunny  1:00:35

Very good. Okay. Well, Sir David Henry, thanks so much for your time. I really enjoyed it really appreciate it really learned a lot. So thanks. Thanks so much.

Tim Hughes 1:00:40

Thanks for your time.


David Hendry  1:00:43

Thanks a lot. Thanks for having me interviewed.

Tim Hughes 1:0046

You’re welcome.

David Hendry 1:0050

Take care.


Gene Tunny  1:00:54

So Tim, that was an amazing conversation with Sir David Hendry, what did you think?


Tim Hughes  1:00:59

Yeah, that was fascinating. I really enjoyed it. I was a very happy audience member for most of that but yeah, I really lapped it up.


Gene Tunny  1:01:06

Ah, you’re more than just an audience member Tim! I mean, I think you are. You’re participating in that conversation. And you’re asking some good questions. So yeah, it was good to have you onboard. And what I found fascinating is I mean, I had the I had the line of questions about forecasting. And then we went broader than than just the forecast. And we started talking about climate econometrics. And you know, what he’s doing the modelling of getting to net zero for the UK, which I thought was absolutely fascinating.


Tim Hughes  1:01:40

Yeah. And he mentioned that the modelling hadn’t actually progressed in many ways, like, not necessarily with the climate econometrics, but with the other modelling that we were talking about in the first half of the conversation, which was surprising to hear.


Gene Tunny  1:01:53

Yeah, the forecasting. I mean, not what he’s doing, because he’s really a leader in forecasting

Tim Hughes 1:01:59

Yeah so his model he could back

Gene Tunny 1:02:03

Yeah, I mean, and of course, he’s going to back his own modelling, but I’d actually believe it because he’s one of the gurus of econometrics. So when I was studying econometrics, or first started studying back in the 90s, he was one of the big names. And yeah, the approach that he had this general to specific approach where you’re, you’ve got this very general specification, you’re trying to hone in on this more specific specification, you’re searching for the right functional form the right way to express the equation, the right variables, the right number of lags, and some clever things to get things back on track. If they’re shocked things like error, they call them error correction mechanisms. You remember, he was talking about the volcano modelling the global temperature after a volcanic eruption, I thought that was really interesting how he had this clever little functional form this V shape to get to get it back on track to model that I thought that was really clever. And I mean, he’s renowned for doing that sort of thing in his economic models. And, yeah, I was surprised that there hasn’t been a more widespread take up of that approach. And I think my takeaway from this is that, yeah, there needs to be more education or more outreach from from David’s group, I guess, at Oxford to really, you know, promote their their methodology, I guess they’re they’re doing it, they’re trying to do the best they can. And it looks like, you know, central banks or reserve banks got a copy of their software, the OxMetric software, which has PcGive and the other, the other parts of that software, but from what I’ve seen, it’s not as widely used as it probably should be


Tim Hughes  1:03:50

With any modelling, couldn’t that just be run in tandem as a hypothetical to see how it might have performed against the current models? Is that how it would work?


Gene Tunny  1:04:00

Yeah, yeah. And hopefully, they’re doing that. But


Tim Hughes  1:04:03

yeah, because like, you would think at some point, you know, if it’s outperforming, everybody’s interested in, you know, the best outcome s o it would be interesting to see, didn’t, didn’t actually ask that direct question. But that would be interesting to know if that might be feasible or possible, or if it’s been done?


Gene Tunny  1:04:20

Well, I think hopefully, the central banks and Treasuries are using this approach, or they, or I hope they they’re experimenting with it, they should use it more from what I can tell. What I found interesting about our conversations, he was talking about how I forget whether it was the Treasury in the UK or the Bank of England, they were overestimating productivity growth in the UK for a consistent period for like a 10 year period or something. And so that sort of mistake could have real consequences because if you, if you’re overestimating productivity growth, then you’re overestimating what you’re GDP growth is, what your economic growth is, your, in your forecasts, and therefore, what that would mean is that you may not have your policy settings, your monetary policy settings, right, because you think GDP growth is going to be faster than it actually will be. And so maybe you’re not giving, you don’t have the bank rate low enough to to help, you know, promote economic growth. So that sort of forecasting error can have material consequences, if you know what I mean. So it’s important to get these forecasts, right, because if you’ve got those forecasts of where the economy is going wrong, then that can affect what the Bank of England does, or what the government does with its budget.


Tim Hughes  1:05:41

Yeah. And it seems to be human. The human influence, which is the most unpredictable, or the, the element that is most likely to bring around an incorrect forecast.


Gene Tunny  1:05:53

Yeah, I mean, I guess the human element and yeah, I mean, all sorts of things. But the problem is that the economy Yeah, I mean, ultimately, it’s about humans, because they’re, they’re the the units in an economy. But the economy is so complex, and so many moving parts, it’s just very difficult.


Tim Hughes  1:06:13

There was some, also, with the second part of it, the climate, econometrics, which was fascinating, I didn’t realise the extent to which Sir David had been involved in that. And so he was very deeply involved, and it was really interesting, that part. And I know we’ve talked about climate and getting to net zero and the the challenges faced with that, and the changes in the technology that is driving us towards that, which is obviously an ongoing and very interesting subject. And I have to say, so I made a, I was trying to recall this information that our friend John Atkins initially mentioned to us about solid state batteries. So I was trying to remember what it was exactly. So this, these is the one of the new generation of batteries, which, you know, is still in development. So we’ll link in the show notes, I found something from the Guardian of July 2023 that explains a little bit more about solid state batteries.

Gene Tunny 1:07:00

Oh, good. So what does it say?

Tim Hughes 1:07:05

It says, just briefly, that basically Toyota has made a breakthrough that will allow it to halve the weight, size and cost of batteries, it would be that we are, da da da make batteries more durable, and believed it could now make a solid state battery with a range of 1200 kilometres or 745 miles that could charge in 10 minutes or less. And the company expects to be able to manufacture them as soon as 2027. So this is obviously not, it hasn’t happened yet. So this is a projection. But it seems that they’re quite close. So this is the sort of, I saw this a few months ago, it wasn’t the Guardian article, it was something through ABC, I believe in Australia. Along those lines of about Toyota has worked with solid state batteries. Clearly, there’s technology being, you know, pushed forward all around the world on different areas, and which ones come to the fore or make it to market like, you know, we can only speculate. But it certainly seems that there are changes coming and more efficient, effective ways of storing energy and producing energy, that are all moving towards that target of net zero by 2050.


Gene Tunny  1:08:16

So this is something that’s better than the lithium ion batteries. Yeah.


Tim Hughes  1:08:21

And like everything else, there were problems at the beginning that they’re trying to work out. Yeah. So yeah, it says that for benefits compared with liquid based batteries. I think one of them was I saw that it doesn’t, they don’t burst into flames as easily, which is a good thing, like so when they say there’s no spills, for instance, from a solid state battery, if they get in a prang, or whatever may happen. I mean, I’m sure that there’s pros and cons with most new technologies. And I’m sure there’s none. You know, it’s no different with solid state batteries. But it seems to be one of the ones that’s coming through, it’s been around for a little while, and it seems to be progressing. But it’s just one of those areas that by the end of this decade, it’s going to be very different. And of course, by 2050, there’ll be things we haven’t even heard of yet, that will be key parts of the whole target net zero target,


Gene Tunny  1:09:10

We might have to get someone on the show who can explain to us batteries, solid state versus other types of batteries, because I’d be fascinating to know about the technology and what minerals are required. Right? Because I mean, you had that conversation with Guillaume about the Dark Cloud, wasn’t it? And that’s, you know, the, the fact that we do need to mine all of these, these critical minerals and that’s that’s got consequences, of course. So yeah, we’ll be good to have that conversation. Tim, one of the other things I found fascinating, yeah a couple of other things in the conversation. I found David’s point about all the technology that was available at the end of the 19th century. I thought that was fascinating. That was fascinating.


Tim Hughes  1:09:55

I didn’t I didn’t know that at all. That surprised me. It surprised me big time.


Gene Tunny  1:09:59

Yeah. yeah. And also the point about nuclear energy I was, yeah, that was really surprised by that, that he was so positive about it and thought it could work here in Australia, and that perhaps some of the concerns that we have in Australia, about nuclear energy are misplaced.


Tim Hughes  1:10:20

So that was specifically modular.


Gene Tunny  1:10:23

Yeah, the small modular reactors, and he’s saying they’re a lot safer. And this is something I talked about Ben’s, I talked with Ben Scott, about a couple of years ago, I think, on this show, the potential of small modular reactors, I though that was good that David brought that up.


Tim Hughes  1:10:39

Yeah, that was interesting. I hadn’t actually heard of that before. And I know that we’ve, like spoken about it before with Josh Stabler, for instance, with the the likelihood that there’s going to be different solutions to the energy provision in the future. So it’s not just going to come from one main source it’s going to come from most likely several different ones. So if modular nuclear power stations are a part of that, that’s quite possible. But it’s clearly going to be not just one thing. And just on that subject as well. There was it was mentioned about graphene, David mentioned, oh, yeah, I know this, that’s come up in a conversation we’ve had before here in Brisbane. There’s GMG, who are involved in that, here in Brisbane,


Gene Tunny  1:11:23

with GMG. So G stands for graphene I guess, and there’s…


Tim Hughes  1:11:27

Graphene Manufacturing Group. And so it’s in the space of renewable energy, and this whole push towards clean energy.


Gene Tunny  1:11:35

But what’s graphene got to do with it? Because graphene is a material, isn’t it?


Tim Hughes  1:11:39

Very good question, Gene. And this is something that I will get back to you as soon as I know. Yeah, because this is actually my solid, solid state battery moment in the in the wrap up, I managed to get another one in. So we’ll put something in the show notes to do with the graphene, but I know it was, it came up in a conversation we had with


Gene Tunny  1:12:02

ah apparently it’s going to create products with a better efficiency than the existing ones.


Tim Hughes  1:12:07

Yeah so it’s part it’s part of the all of this emerging technology towards better energy storage. Like most other things, it’s happening in many different parts of the world at the same time but we do have this, this company in Brisbane,


Gene Tunny  1:12:19

it looks like Yeah, yeah. Sorry Tim I just noticed it looks like someone’s built a graphene solar farm. So it looks. Okay.


Tim Hughes  1:12:25

Yeah. So to be to be explored, like, because it’s not something I know a great deal about, or, you know, so I think that w’e’ll definitely will, will earmark that for the next conversation we have about clean energy and where that’s going.


Gene Tunny  1:12:36

Yeah, for sure. Because this is it’s an ongoing issue. And I mean, the conversation, this isn’t going away. And you look at this northern hemisphere summer, and yeah, I mean, that’s just going to intensify this conversation, I think. Yep. Yeah. Okay. The other thing I thought was good about the conversation with David, I liked your question about AI and what’s happening with AI? And David pointed out, well, what they do, their algorithm, their automatic model selection algorithm, their auto metrics, that’s a form of AI. I thought that was a good point that he, he made there. Yeah, yes. Yes. So yeah, it was good question. So all in all, what a terrific conversation. And yeah, I really thought Sir David was amazing. He’s someone I would love to have here in Australia participating in the Australian policy debate on energy in particular, I think he could be that he could provide that sage perspective. He’s someone you’d pay attention to, he’s someone who’s very thoughtful, you know, good communicator, and as well as being a real gentleman.


Tim Hughes  1:13:43

Yeah, I really enjoyed it. And I found it very eye opening. And yeah, I think there’s, like you say, it’s an ongoing conversation. So it’ll, it’ll keep evolving. And hopefully, if we can, maybe they’ll be a round two with Sir David to continue that conversation.


Gene Tunny  1:13:59

We can only hope, so Tim, anything else before we wrap up this, this debrief?


Tim Hughes  1:14:05

No, I think I think I should stop while we’ve still got enough room in the show notes for


Gene Tunny  1:14:13

you introduce a new concept – then I ask ‘Tim that’s fascinating can you tell me more?’ Nope!


Tim Hughes  1:14:20

They say a little knowledge is dangerous. On this one I was lethal, but no, it was fun. I enjoyed it. And yeah, it’s it’s something that affects us all. And it’s something that’s changing very quickly. And so yeah, we’ll we shall return to that conversation no doubt.


Gene Tunny  1:14:36

Absolutely. Tim Hughes thanks for joining me on this conversation.

Tim Hughes 1:14:40

Thanks Gene.

Gene Tunny 1:14:43

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


1:15:27

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Credits

Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Do central banks stabilize or destabilize economies? w/ Addison Wiggin, NYT-bestselling-author – EP196

The episode delves into the effectiveness of monetary policy by central banks in managing the economy over the business cycle. Do the actions of central banks stabilize or destabilize economies? Show host Gene Tunny chats with Addison Wiggin, a bestselling author, market economist, and host of the Wiggin Sessions podcast, about monetary policy and financial crises. Addison also shares some reflections on the US debt ceiling drama. This is part 2 of the conversation Gene held with Addison in early June 2023, the first part of which was released as EP192 on the US banking crisis. 
Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored

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

About this episode’s guest: Addison Wiggin

Three-time New York Times best-selling author, Addison Wiggin, is a 30-year market economist with a passion for the real-world impact of financial markets on our lives. Addison is the author and host of The Wiggin Sessions, a podcast that connects key thinkers and industry experts for a deep dive into history, politics, and economics. Some of his most accomplished works as a writer, publisher, and filmmaker include the New York Times Best Seller The Demise Of The Dollar and the documentary I.O.U.S.A, an exposé on the national debt crisis in America.

What’s covered in EP196

  • How is it that the US dollar can be the reserve currency of the world? (2:37)
  • Why not just accept that the business cycle is a thing and not do anything about it? (7:25)
  • Minsky’s instability thesis. (11:42)
  • The debt ceiling is just political theater. (16:52)
  • Central bankers and economists thought we’d solve the problem of business cycle management. (21:29)
  • How monetary policy was determined during the Gold standard era (25:06)
  • When the Federal Reserve presided over the contraction of the US money supply as multiple banks failed, the money supply fell 30% from 1930 to 1933. (30:17)
  • What does all this mean in the current context? (35:54)
  • Central banks need to choose wisely and they need some methodology to do so. (41:23)

Links relevant to the conversation

Part 1 of Gene’s conversation with Addison:https://economicsexplored.com/2023/06/18/exploring-the-us-banking-crisis-with-addison-wiggin-ep192/
US Federal Reserve on what happened to monetary policy during the Great Depression, “From the fall of 1930 through the winter of 1933, the money supply fell by nearly 30 percent.”:
https://www.federalreservehistory.org/essays/great-depression
Episode with Stephen Kirchner in April 2022 in which the “lean versus clean” debate was discussed:
https://economicsexplored.com/2022/04/20/nominal-gdp-targeting-w-stephen-kirchner-ep135/
Till Time’s Last Sand: A History of the Bank of England by David Kynaston:
https://www.amazon.com.au/Till-Times-Last-Sand-1694-2013/dp/1408868563

Transcript:
Do central banks stabilize or destabilize economies? w/ Addison Wiggin, NYT-bestselling-author – EP196

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then checked over by a human, Tim Hughes from Adept Economics, to pick out any clangers that otters sometimes miss. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory, evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning in to this show. In this episode, I chat about monetary policy and financial crises with Addison Wiggin, The New York Times bestselling author, market economist and host of the Wiggin Sessions podcast. This is part of the conversation that I had with Addison in early June 2023. I broadcast the bulk of that conversation in an episode on the US banking crisis a few weeks ago. But this bit I’ve held back I held it back to this episode, because I wanted to have more time to reflect and comment on the excellent points that Addison makes in this segment. Please stick around until after my conversation with Addison for some additional thoughts from me on the issues. I should note that this conversation that we have about monetary policy, it was triggered by an observation that I made about recent market movements in the Australian dollar in early June 2023. So my observations about the exchange rate are dated. But the discussion which follows is evergreen. Okay, let’s get into the episode. I hope you enjoy my conversation with Addison Wiggin.

It’s interesting how markets react Yeah, it’s just, we just had this situation where because we had this surprise, monthly inflation number, and then we had the minimum wage decision or the award wage decision yesterday, then the markets go oh that makes it more likely that the central bank here the Reserve Bank will increase the cash rate. And so what we’re seeing now is that the dollar has appreciated against the US. So it was going down, it was going down to below 65 cents US and now it’s back up to around 66. Yeah, it’s funny how…


Addison Wiggin  02:37

And that’s one thing that I wanted to point out, because I think it’s it’s a concept that a lot of people either have trouble with, but in this book, I so I’m going to hold up the book again, because I think it’s worth the read. It’s pretty short. And my son helped me write it for millennials. So it’s like a quick read. But I was trying to wrap my head around, how is it that the dollar can be the reserve currency of the world? Meaning it’s the place where people, other banks and like big corporations hold their asset value? And how can we have that at the same that gives the United States a massive amount of advantage globally, when making trade deals, and whatever selling guns to go shoot Russians or whatever, whatever people want to do, we can do that, at the same time that we have inflation domestically, because there’s a difference between the reserve currency of the world which, you know, the Central Bank of Australia is going to is going to make deals with the Federal Reserve. Like that is an exchange trade thing. Or if I don’t know if Apple wants to open a plant in Brisbane or something like those exchanges happen in US dollars. And a lot of the commodities that Australia exports are priced in dollars, gold, and their earths and copper, like those things, they’re all priced in dollars. So there’s a tremendous advantage for the for the US economy that we have the reserve currency of the world, but at the same time, we have a payment currency, which is the stuff that we buy eggs in or we finance our homes or, or we take out loans to put our kids through school, whatever, that you can have massive inflation in that at the same time that the stability of the reserve currency. You know, you were talking about a penny between, it used to be five now it’s six or six like it’s pretty, pretty stable, globally. It’s a freaking nightmare at home when they can’t figure out how to slow prices down or the bizarre thing that we were just talking about. They want people to they want the unemployment and the jobs number rate to go up, but they actually want that to be the result of slowing the economy.


Gene Tunny  05:00

Well, yeah, I mean, they want a sustainable rate of economic growth and you want to avoid the overheating economy, you want to avoid the, the huge boom and followed by the, the big bust. And that’s a concern. I mean, in Australia what we’ve had because particularly because in a combination of the massively generous pandemic response, I mean, just like nothing that was just ever expected. And I mean, incredibly generous to, particularly to small business people, and also to welfare recipients who had their, if you’re on the Jobseeker you had that doubled, compared with what it was before, for maybe six months to a year. And there’s all this and people were allowed to pull money out of their retirement savings, their superannuation, their compulsory super, so there’s all this extra money. And I mean, the boom we had was just incredible. And unemployment nationally got down to three and a half percent. And I mean, I never thought it would go below four, like we we thought full employment in Australia was around, or the natural, the non accelerating inflation rate of unemployment or natural rate of unemployment, we thought it was around 5%. And then suddenly, it’s got unemployment rates got down to three and a half percent never thought we’d see it. Cutting off immigration was possibly part of that for a time. But the idea is to try and set the interest rate so that the economy doesn’t get on, I mean, you know, this, it doesn’t end up in that boom bust cycle or that or it’s not as amplified as it as it would be, if you…


Addison Wiggin  06:33

Yeah, so that I my issue with that is that they that’s that was the idea of lowering interest rates for as long as they did is that they wanted to mitigate the boom bust cycle. They wanted to use the tools that they had from history to figure out a way to mitigate the booms, but also mitigate the busts, they wanted to like level the whole thing out. And look what happened, we had a pandemic. And then we had, we had to throw a bunch of money at citizens, and then they saved it, the savings rate went higher than the credit rate at one point on each money. And then as soon as the market I mean, as soon as the economy started opening again, it plummeted all the way to the lowest rates, we saw the the fastest rate of disposable income drop, since 1933. It just went whoo bump. Like they did anything but mitigate the business cycle. In, in my view, I mean, I’m just a guy who studies and writes about it and talks about it write books about it, whatever. But in my view, why not just accept that the business cycle is a thing and not do anything about it? Let, let credit go to the market price that is this, it’s designed to go to, don’t have a central bank that is trying to manipulate overnight rates so that their buddies on Wall Street can get, can keep funding their projects and stuff. It messes with the natural cycle of booms and busts. And that’s what I honestly believe would would do away with these kinds of massive inflationary cycles that we go through, or the opposite, which they’re really afraid of, which is a deflationary period where they can’t sell anything, and the economy just falls apart. That’s what happened in the 30s. I’ve been reading a lot recently about what’s going on, what went on in the 30s. And that’s when we got all these regulatory agencies, it’s probably about the time that Australia started enacting its own financial regulatory systems too. They don’t help. And in fact, they’re always late and they’re always wrong. So it’s like, they’re not mitigating the business cycle. And they’re not actually helping anyone be more honest and truthful in the marketplace. It’s it’s politics, and it’s nastiness. And nothing actually, like they’re not achieving anything. And I’m costing, casting a wide net here because I’m talking about regulatory agencies within the financial network, like we’ve got the SEC, we’ve got the FTC, we’ve got the CFTC, there’s a bunch of lawyers out there trying to stop people from doing anything under the guise that they can mitigate the boom and bust cycle, and that’s just the natural order of things. That’s capitalism. Let’s, let’s go. That’s the way I look at it.


Gene Tunny  09:44

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


Female speaker  09:49

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

Gene Tunny  10:19

Now back to the show.

Yeah, look, I think there’s, I think some of the fine tuning they’re doing or if that’s the right term, I think there’s there is a concern that some of it may actually be contributing to the instability of the economy. I, I think that’s right. What Bernanke would argue is that if he hadn’t, so if we go back to say, ’08, I mean, he would argue in, you know, Paulson and Tim Geithner, they would argue that if they hadn’t done what they did, or some variation of it, you could have had a rerun of the 1930s. And you could have had unemployment of 20%, or something, or whatever you saw during the Depression. I don’t know to what extent that’d occur, but that’s what their argument would be. Yeah, it’s a it’s it’s something I’ve been thinking about. I mean, I don’t really know the answer myself. I am concerned like you that a lot of the actions that they’ve taken have contributed ultimately contributed to instability rather than making things more stable.


Addison Wiggin  11:26

Yeah, well, let me go back to Hyman Minsky who was writing in the 50s. And he was mostly describing what he read, he lived through the 30s. And then when he was an adult, he was a professor, I think, at MIT. And he was talking about, like, his area of study was the 1930s. And he studied like Schumpeter, and those guys who were writing during that time, Garet Garrett is another one that I’ve been sort of fascinated with. Because as we’re moving through our own like situation, the the stuff that I read, sounds like it was written yesterday, but it was written in like 1932, or whatever. So Minsky’s idea was the longer you have a period of stability, the stability, it, it’s actually called the Minsky Instability Theory, that the longer you have periods of stability, the more mistakes get made, and the inevitability of a crash is going to happen. So artificially creating periods of stability by lowering interest rates, or by keeping them low for longer than the market demands, or by incentivizing the couple of the things that were talking about before 2018, were alternative energy, and areas of the market that had been underserved by the regular stock market, they were passing political motives, or political policies that encouraged, you know, wind and whatever, I wish they had gone into nuclear at that time, but they failed, they missed on that one. But there was a lot of money going into areas of the market that that weren’t rewarded by a return on equity, like money that was put in was not rewarded. And so there was a shit tonne of money going into areas of the market that didn’t deserve it for a long period of time. And so the Minsky instability thesis is that when you do that, for a long period of time, there’s people make mistakes, they don’t, they don’t get punished by the market, that’s a kind of a harsh way to say it. But they don’t, they don’t lose their money, they get rewarded for making bad mistakes that are based on policy. And if that goes on long enough, when you have to clean up the mess after that, which is what Powell has been trying to do, it’s hard to figure out what Powell even thinks, but when you have to clean up the mess, then all of those mistakes that were based on false premises. They come to light in that, like if you’re watching anything of the financial news, currently, that’s each headline is about the mistakes that were made in like 2015 or 2018. Or what the hell happened during the pandemic. Like we’re still cleaning up that mess and we don’t know, a way forward other than this debate of whether the Fed is going to lower either pause or lower rates again, like that’s the only tool they have. They will they have two tools, they have one, they can lower rates and then other central banks around the world will follow. Or they can engage in another round of QE and support specific industries. Like I think we’re gonna see a heavy push either later this year or early next year to support in industries that are trying to develop new technology for cleaner energy, just because there’s so much private equity going into that space right now. That when they start losing money as they have been, there’s going to be a push for government to step in and bail them out.


Gene Tunny  15:24

Right, okay, even though, I mean you, you’ve just you’ve narrowly averted a debt default, haven’t you? And they’re going to have to have some cuts in discretionary spending. So yeah, I guess, yeah, maybe they’ll find some way to do it. But the


Addison Wiggin  15:39

let’s let’s talk about the debt default for just a second. It’s so absurd. Like, I’m like just a citizen of the United States. I grew up here. My dad is mildly conservative. I don’t really give a shit about politics at all, because I mostly think that they’re talking out of one side of their mouths, and then they’re making deals behind doors somewhere else, right. So the idea that we have a debt ceiling came about because Congress used to have to justify all of their spending every year, they had to, once they pass the budget, they had to like stand up and say, We want to spend money on this highway to do this, or this pipeline to do that, or whatever. They had to justify it. But when we went into the very expensive wars that we’ve been involved in World War One, World War Two, Korean War, war on poverty, war on drugs, war in Vietnam, war in Afghanistan, that’s our longest one, like you can’t justify spending that hasn’t happened yet. So they put the debt ceiling in place in 1960. Saying that, well, you can just spend money on whatever you want. But it can’t go above this amount. And 78 times now, I think it’s 79. Now that they’ve just reached a new deal, they’ve had to raise the debt ceiling since 1960. Like, the whole concept of a debt ceiling is just political theatre and it’s not even a useful tool to anyone. It just makes people anxious. I actually started watching the market. I was like, When is this gonna start impacting the market May 18. Nothing in the financial news. Like the banking crisis got wiped off the headlines, which I think is still sustaining right now. We’re gonna see more banks fail. And people other than the NVIDIA boost that we got last week, when AI started grabbing all the tech people’s attention, the markets were just trending slower and slower, lower, like, they were just kind of trending now. And everybody was waiting for Kevin McCarthy and Joe Biden, to come to an agreement. That’s it, it was like really boring. And all they were trying to do is figure out how much they’re going to pay their defence contractors, their buddies who make weapons to send to Ukraine, and that’s literally all they were talking about, one of the things they were talking about is the Republicans wanted work requirements for food stamps. And the Democrats didn’t want that. They just wanted people to get food stamps. And then there was a third one that was a pipeline from West Virginia to Virginia and the Democratic Senator Manchin, Manchin, wanted it to go through and the Democratic senator from Virginia didn’t want it to go through because his constituents, it was going to go through their farms, and they didn’t want it to go through their flocks. The details that they were fighting over were minuscule compared to that $31.4 trillion debt ceiling that they were arguing about. It’s all politics. It’s meaningless, and it’s it’s a charade that comes up and they supposedly put a cap on it for two years, but I’m gonna guess they’re gonna spend more than they agreed to. And we’ll be in this boat again next year or, or in 2025.

Gene Tunny  19:16

Yeah, because you’ve still got the problem of the unsustainability a lot of the the automatic spending really the


Addison Wiggin  19:24

Oh, yeah, that wasn’t even, that was off the table from the beginning. They’re like, Yeah, of course, they Social Security and Medicare and Medicaid and all that. We’re gonna pay that and that is adjusted according to the inflation rate, which earlier this year or late in 2022, it was 9% so that the adjustments were already baked in.


Gene Tunny  19:51

So unless they’re gonna do something about that, or you know, the alternative is to actually increase tax revenue, but no one wants to do that. And so if you not gonna do do that, then you do have to tackle those entitlement programmes. And again, you know, Donald Trump says, I’m not going to touch them. And so the other GOP people, they’re probably not going to do it want to do anything about it?


Addison Wiggin  20:12

It’s kind of ridiculous because one of two, or actually, both of two things need to happen. And I’m like, Libertarian, I don’t I I’m not, I don’t even vote. So for me to say this is like, I’m just talking about the economics, not the political side of things, but they need to raise taxes. And they have to cut spending, there’s no way out of this any other way, unless they can get a bunch of dumb ass central banks around the world to keep funding our debt by buying bonds. Like that’s, it’s just like, if, if I tried to teach this to a, you know, a class of like third graders, they would be like, those don’t make sense, like we can’t spend more than you take in and you have to borrow it from people who don’t like you. Pretty obvious that it’s unsustainable. And yet we tell ourselves day by day, week by week, month by month, year by year that we can do this forever.


Gene Tunny  21:24

Okay, I hope you found that informative and enjoyable. I think Addison made some great points about the effectiveness of monetary policy. At times, it may well have contributed to economic instability. Prior to the 2008 financial crisis, central bankers and many economists had thought we’d solved the problem of business cycle management. Inflation targeting policies were seen as contributing to the period known as the Great Moderation with low inflation and less volatile economies. But as we know, now, the victory was short lived. The fundamental problem of business cycle management has not been solved. It’s possible inflation targeting central banks, they didn’t pay enough attention to the financial risks that were building up in economies. They were too willing to cut rates to shore up financial markets with a view to preventing a wider panic which could cause a recession. There was the so called Greenspan put, named after Alan Greenspan, who chaired the Federal Reserve from 1987 to 2006. It was called the Greenspan put through a comparison to a put option in financial markets. So that’s an option, which allows the owner of stocks to lock in a certain price at which they can sell the stock in the future. There was a view in financial markets that Greenspan would intervene to shore up stock prices so they wouldn’t fall too much. Arguably, this created a moral hazard and encouraged excessive risk-taking in financial markets. So monetary policy could actually have been destabilising. I should note, there is an active debate on the extent to which and whether the central bank should intervene with a view to avoiding the accumulation of financial market risks. So this is the so called Lean versus Clean debate that I discussed with Steven Kirschner in Episode 135 in April 2022. So please check out that episode if you haven’t listened to it yet. I will put a link to it in the show notes. There’s no doubt that the monetary policy actions of Central banks can have significant impacts on economic activity, whether on the whole they are stabilising or destabilising is difficult to assess. In the 60s and 70s, Milton Friedman argued that the best thing for central banks to do would be to adopt a money supply growth rule, so committing to growing the money supply by a certain percent each year. This turned out to be easier said than done and Friedman’s approach known as monetarism was widely seen as a failure. We might come back to monetarism in a future episode for a closer look at how it was implemented and what went wrong. There’s a fascinating story there. The key point is that there’s been a an active debate for decades on the right way to conduct monetary policy and various approaches have been tried. We we’re still grappling for the right approach. The challenge is that central banks need some Northstar for setting monetary policy. So whether it’s inflation targeting or nominal GDP targeting, the latter being something that Stephen Kirchner advocated for in that discussion I had with him last year. It’s no longer as easy as it was during the gold standard, for instance. So if we look back to that period in history. In a 1908 speech to his Manchester constituents, Winston Churchill, who was then the President of the UK Board of Trade, he explained how the gold standard guided the hand of the Bank of England in setting its monetary policy rate, known as the bank rate. If England buys from America or Germany, more than she intends to buy having regard to our own productions, instantly, there is a cause for the shipment of bullion, that is gold, and bullion is shipped to supply the deficiency, then the bank rate is put up in order to prevent the movements of bullions. And the rise of the bank rate immediately corrects and arrests the very trade, which has given rise to this disparity. That quotes from David Kynaston’s excellent history of the Bank of England. Till time’s last sand, if I remember correctly, I’ll put a link to that book in the show notes. So if you want to get a copy of it, you can find it on Amazon. It’s a terrific read, and lots of great history in there. And yes, that quote from Churchill, is in there. So as the quote from Churchill suggests, setting the bank rate, or the federal funds rate in the age of the gold standard, would have been much simpler. Now, that’s not necessarily an endorsement of the gold standard as that system had its problems and economists such as I think it was Eichengreen, Barry Eichengreen have argued that the gold standard ended up contributing to the Great Depression. So there’s a, there’s a big debate around that, that we probably don’t have time to go into now. Going back to the gold standard, isn’t realistic. I’m just making the point here that in history, when there was a gold standard, it was more obvious what should be done with the monetary policy rate, the bank rate in the UK, the federal funds rate in the United States, or the cash rate in Australia. So we’re no longer in that era of the gold standard or even Bretton Woods, the era of fixed exchange rates, which ended in the early 1970s. And because of that, it’s much less obvious what should be done with with these policy interest rates of central banks, so we’re still trying to figure that out. Econometric evidence is only so convincing so any econometric evidence on which monetary policy regime might be more effective than others, which one might have lower inflation and lower economic volatility measured by the volatility of GDP, for example, it’s only going to be so convincing, it’s not going to convince everyone that there’s just so many influences on the economy, that it’s just very difficult to determine whether any particular policy, whether it’s making the impact, the size of the impact, it’s difficult to know what would happen in the absence of a specific monetary policy change. It’s difficult to know what the right counterfactual is so we can’t run controlled experiments in macro economics, there’s no, we can’t treat the economy like a laboratory in which we can test alternative monetary policy so we’re left with questions that are difficult, if not impossible to answer. For instance, what would have happened if the Fed hadn’t intervened so aggressively during the financial crisis or the pandemic? Would we have had repeats of the Great Depression? That was what the policymakers that was what the central bankers were worried about. Look, it’s hard to know there are many factors to consider, for instance, is fiscal policy fiscal policy is is set in a much better way in the post war era than it was during the depression or before that. We have automatic stabilisers in the budget such as progressive taxation and unemployment benefits and they can help prevent economic activity from collapsing and so therefore, there may be less case for an aggressive monetary policy response. So there are other things to consider it’s a very difficult question to answer. Regarding times of economic crisis we could ask, was aggressive monetary policy, so an aggressive monetary policy stimulus was that required, so was it required, or instead, did we simply need a monetary policy that didn’t make things worse. So there is an argument that the Great Depression was caused by bad monetary policy. When the Federal Reserve presided over the contraction of the US money supply as multiple banks failed. The US money supply fell nearly 30%, from 1930 to 1933. So that’s a statistic that you can find on the US Federal Reserve website. I’ll put a link in the show notes. As Ben Bernanke admitted to Milton Friedman in 2002. Regarding the Great Depression, we did it. We’re very sorry. We won’t do it again. That was Bernanke responding to the strong argument that Milton Friedman and Anna Schwartz made in their famous monetary history of the United States from the early 60s. It only took the Federal Reserve 40 years to to admit they agreed with Friedman on that. Now, if you do have a, an emergency, a major economic crisis, then look, the arguably there is scope for a monetary policy response, most economists, the large majority of economists would accept that there has to be some sort of central bank policy response, and probably even a stimulus of some kind, although there’d be debates on just how much that should be and how large it should be. One of the problems I think we’ve been we’ve had recently is that the well, the monetary policy response during the COVID period, when combined with the fiscal policy response was just massive, and it’s been massively destabilising. And it contributed to a very strong recovery, I mean, massive, massively. A very strong recovery in excess of anything that we really expected. And that’s contributed to the inflation that we’re experiencing that that we’re seeing in the United States and the UK and Australia. It’s, it’s what’s happening in Ukraine, of course, but it’s also a lot of it to do with just that, you know, the after effects of that massive fiscal and monetary policy response. So unintended consequences of of that, that policy response. So look, I think economists would accept that there is scope for some stimulus, some response in the face of a massive shock, adverse shock like that, but it looks like it was really over done. And then there’s the issue of just what central banks should do. Outside of these major crises just in the sort of normal course of events or the over the course of the business cycle, to what extent they, they should be actively managing interest rates, trying to control the money supply, trying to influence the course of the economy. There’s a big debate over that, this idea of fine tuning. Now, when I was studying in the early 90s, when I was at uni, the leading macroeconomics textbook at the time was, well it was called macro economics. It was by professors at MIT. So very famous professors Rudiger Dornbusch, and Stanley Fischer. I think Stan Fischer went on to be the governor of the Central Bank of Israel, if our if I remember correctly, he was a former Vice Chair of the Federal Reserve, and he served as the eighth governor of the Bank of Israel, from 2005 to 2013 so very distinguished economist, and what he wrote with Rudiger Dornbusch, in that textbook, they wrote that in discussing the desirability of activist, monetary and fiscal policy, we want to distinguish between policy actions taken in response to major disturbances in the economy. So, I was just talking about that earlier when we think about incidents like COVID or the financial crisis, or the depression. So there, so back to the quote. So in discussing the desirability of activist monitors monetary and fiscal policy, we want to distinguish between policy actions taken in response to major disturbances in the economy. and fine tuning in which policy variables are continually adjusted in response to small disturbances in the economy, we see no case for arguing that monetary and fiscal policy should not be used actively in the face of major disturbances to the economy. Fine tuning presents more complicated issues. The case for fine tuning is a controversial one. I think that’s a good summary of how economists think about monetary and fiscal policy as well, that was written in the early 90s but I think that is still a good summary of, of what the consensus would be. So what, what Dornbusch and Fischer were getting at in terms of the problems with with fine tuning, they’re thinking about the problem there is that you’re not sure whether a particular shock to the economy, is it permanent? Is it transitory? Is this just a normal part of the business cycle, and therefore, you shouldn’t really react to it. There’s also there’s the issue of of lags in policymaking, it can take time to recognise disturbances in the economy, then can take time to implement policy and for that, to have an impact on the the economy. So there are these lags, which complicate macro economic policy. And they mean that the case for having an activist policy, so trying to be clever in how you’re setting interest rates and making these fine adjustments to interest rates. It does make you wonder, just the extent to which we can do that the extent to which our policymakers will get that right, and won’t actually contribute to instability in the economy, which I think is a significant risk. What does all this mean, in the current context? Well, it probably would have meant after we got out of the, the emergency period during COVID, and it was clear that the economy was recovering very strongly. And inflation was a risk, I think, thinking about this, all these points that, that I’ve been discussing here, I think, possibly central bank should have increased interest rates much faster, they should have got them up to perhaps what you might call a neutral rate, or a bit higher than a neutral rate much more quickly than they did. And then leaving them there and not not adjusting them every month or every couple of months, depending on how various economic variables are tracking. I mean, it gets a it gets very difficult to, to do that, and to be sure that you’re making the right judgement. So perhaps that’s one, that could be an interpretation of what central banks could have done if they recognised that this whole approach and fine tuning so to speak, is is not really optimal. I think it’s an open question. I’m not necessarily saying that I’m not saying okay, this would have been the right approach that there isn’t, there isn’t still the potential to fine tune the economy, there may well be, but it’s not clear that some other approach may not be superior. And so therefore, I don’t think you can actually reject the hypothesis or reject the argument that these frequent adjustments of policy interest rates, they could actually contribute to economic instability. We, I think that’s, that’s a question economists should be thinking more about. So there are certainly real examples of where the monetary policy response as part of a fine tuning approach was probably excessive, and it sent the economy into recession. The example I always come back to is the early 1990s recession in Australia, which was arguably deeper than it should have been, much deeper. The unemployment rate went up to around 11% in 1992, our central bank, the Reserve Bank, increased interest rates to around 17 to 18% to slow down the economy so in Australia, we had this colossal boom in the 80s. It was the age of the entrepreneur. And there was a lot of investment particularly in commercial property. And the central bank intervened aggressively, it was also worried about the balance of payments, the it was worried about the current account deficit. And it thought that very tight monetary policy was justified. And at the time, they thought, Oh, well, the economy can handle this, they did their economic modelling the Treasury and the RBA, they were forecasting a soft landing for the economy, it turned out to be the worst downturn since the Great Depression. So when I think of that incident, I’m always reminded of just how difficult it is to fine tune the economy, so to speak, and, and looking back on it that early 90s recession, it happened when I was in high school, and it was something that really made me interested in economics. And it made me actively think about studying economics and, and even eventually becoming an economist. So that was one of the incidents that that stimulated my interest in economics for sure. Okay, so we’re going to start wrapping up this afterword. Central banks, they do need to set policy rates, so they’re at the centre of the monetary system, they can control the amount of liquidity in the overnight money market. So in the cash market, as we call it, in Australia. And that ends up setting the benchmark for interest rates across the economy. So central banks are playing a very important role in our monetary system in our, in our payment system in our financial markets. They need to choose wisely. And they need some methodology to do so. So whether it’s set and forget, some sort of set and forget methodology or some type of rule, whether it’s inflation targeting, nominal GDP targeting, some other method, they need something to help guide their decision making. And we still haven’t figured out what that should be. So for a while, we thought that inflation targeting was the right methodology but that’s imperfect, we’ve learned. Some critics of inflation targeting they argue, it’s given us too much financial instability. Other critics come at it from another direction, they argue central banks, they actually didn’t fully follow the inflation targeting policy, it hasn’t been properly implemented. So they would argue that central banks should have had looser monetary policy during the 2010s so that they could have got the inflation rate up. So it got into the target range. And, and they would argue that what we ended up getting was lower growth, lower employment, higher rates of unemployment than otherwise. So we’ve got criticisms of inflation targeting for a variety of reasons. So it looks like it hasn’t. It hasn’t lived up to the promise it, it’s been imperfect. Okay, in summary, there’s still an active debate over how to conduct monetary policy when it comes to fine tuning the economy. It’s possible that at times central banks have actually contributed to economic instability. We can’t say definitively one way or another, whether their policy actions have been stabilising or destabilising on average. I think that’s fair to say. That’s my interpretation of things. If you’ve got a different view, then please let me know. I would love to hear from you. I think that central banks are trying to do the best they can, I mean arguably, they have helped prevent a rerun of the Great Depression at at certain times, particularly in 2008, you could probably argue that actions by the Federal Reserve, in particular did help prevent a much more severe downturn, although that was a very bad downturn already. But look, outside of those sort of incidents, I guess maybe during COVID, the assistance was was was definitely some assistance was needed but then they overdid it, and now we’re suffering from the high inflation. So look, possibly they do some good in times of crisis, but then, in other times, it’s hard to know they could actually be destabilising. This is one of these issues where it’s difficult to read the evidence. And it’s, it’s unclear, and we’re still trying to figure things out. So that’s not a great answer. But that’s my understanding of what the evidence and the theory tells us at the moment. So yep, if you’ve got a different view, let me know. So any thoughts you have on what Addison or I had to say in this episode, please get in touch. You can email me via contact@economicsexplored.com. Thanks for listening.

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


45:45

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Podcast episode

The Paradox of Debt w/ Richard Vague, ex-Sec. of Banking & Securities, Pennsylvania – EP195

Economics Explored host Gene Tunny chats with Richard Vague, a prominent American businessman and investor, about his new book, “The Paradox of Debt: A New Path to Prosperity Without Crisis.” Richard, who has previously written about “The Case for a Debt Jubilee”, shares powerful insights into the benefits and drawbacks of debt, discussing how it can help grow household wealth while also promoting economic instability and rising inequality. He also offers thought-provoking ideas for helping households and businesses manage and reduce their debts. 

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

Note: this episode was recorded in mid-June 2023, i.e. before the Supreme Court decision regarding student loan relief, which is why the decision isn’t mentioned in this conversation. 

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

About this episode’s guest: Richard Vague

Richard Vague served most recently as Secretary of Banking and Securities for the Commonwealth of Pennsylvania. As the author of The Paradox of Debt (2023), The Case for a Debt Jubilee (2021), A Brief History of Doom (2019), and The Next Economic Disaster (2014), Richard Vague established himself as a clear and independent voice in the ongoing conversation about the role of private sector debt in the global economy.

What’s covered in EP195

  • [00:04:39] Debt and the global financial crisis. 
  • [00:11:23] Debt always grows faster than the economy, Richard argues.
  • [00:12:53] Increased debt and higher net worth. 
  • [00:17:23] Paradox of debt and inequality. 
  • [00:23:01] Type one and type two debt. 
  • [00:28:50] Regional banking crisis in the US. 
  • [00:32:13] The paradox of debt: summary. 
  • [00:35:10] Debt forgiveness in the private sector. 
  • [00:41:43] Debt restructuring in banking. 
  • [00:47:48] A win-win-win solution. 
  • [00:49:53] Massive job training as something Richard would like to see.

Links relevant to the conversation

Where you can buy Richard’s new book The Debt Paradox: A New Path to Prosperity Without Crisis:

https://www.amazon.com.au/Paradox-Debt-Prosperity-Without-Crisis/dp/1512825328

Richard’s previous book The Case for a Debt Jubilee:

https://www.amazon.com.au/Case-Debt-Jubilee-Richard-Vague/dp/1509548734

Gene’s conversation with Allen Morrison about the Enterprise China model which he mentions this episode:

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

Transcript:
The Paradox of Debt w/ Richard Vague, ex-Sec. of Banking & Securities, Pennsylvania – EP195

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked at by a human, Tim Hughes from Adept Economics, to correct anything an otter might miss. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show.

Hello, thanks for tuning into the show. This episode I chat with Richard Vague about his new book, The Paradox of Debt, a new path to prosperity without crisis. Richard Vague is a prominent American businessman and investor. He’s a former secretary of Banking and Securities for the Commonwealth of Pennsylvania. He sits on the University of Pennsylvania Board of Trustees as well as on the boards of other prestigious organisations such as the Institute for New Economic Thinking. As you’ll discover Richard has some powerful insights into the good and bad aspects of debt. He talks about how it helps grow household wealth, while also promoting economic instability and rising inequality. Richard offers some thought-provoking ideas for helping households and businesses de-leverage and get their debts under control. Richard’s book is definitely worth a read. So I’d encourage you to grab a copy of it after you listen to this episode. I’ll include a link to the Amazon page for the book in the show notes. Okay, let’s get into the episode. I hope you enjoy my conversation with Richard Vague on the paradox of debt.

Richard Vague. Thanks for joining me on the programme.

Richard Vague  01:54

Thank you so much for having me.

Gene Tunny  01:55

Excellent. Richard, I’m keen to speak with you about your new book The Paradox of Debt. Debt’s a huge issue around the world. I’ve had recent shows on the debt ceiling in the US and and also the, what they’re calling the emerging economy debt crisis, there’s been a lot of discussion about that. And it’s one of those things that seems to come back every now and then we have these, these debt crises in various places. And in your book, you’ve got, I think, a good description of historically what’s been happening in this, this process that we’ll talk about. Could I ask to start off with what made you want to write this book? What motivated you to write the paradox of debt?

Richard Vague  02:42

Well, thank you so much for asking. And thanks, again, for having me on your show. We had done a lot of work for a number of years about financial crises be it in the Great Depression, or the great financial crisis of 2008, and so forth. And really, all of those are tied up in private debt and really rapid escalations of private debt. And we wrote a book called A Brief History of Doom that chronicled the 43 largest financial crises in the world over the last 200 years. And as we went around and presented that folks would love what we had to say, but ask you know, what about the other side of the balance sheet? You know, what about the assets that these individuals have? And? And can you put this together with the government debt story that we normally spend more time on? So I after hearing that for a few years, I finally said, well, that those questions are legitimate, they’re productive. So let’s roll up our sleeves. And let’s get into it. Let’s look at the entire balance sheet of countries of the sectors within those countries. And that’s this book.

Gene Tunny  03:54

Okay. So you wrote a previous book, and you’ve been speaking with various different people about that. And this gave you the idea. You’ve had a distinguished career in business and public service. Are you taking lessons from that? Are there things you that you saw in your career that have helped inform this book that you’ve written?

Richard Vague  04:14

Absolutely, you know we were in the banking business. So I studied debt, from the context of being a president of a bank. For years and years and years. It’s all I did, but I didn’t think you know, when you’re CEO of a company, you really thinking about the results of that company, and you don’t step back and think about the equation as a whole. And so that’s that really changed in 2000 and 5,6,7, when we began to see this tsunami of mortgage debt in the United States that ultimately ended up being the great global financial crisis. So we I honed my ability to look at debt and my interest in debt over an entire 30 year career, but it took the GFC for me want to step back and look at it holistically.

Gene Tunny  05:11

Gotcha. Right. Okay. And you mentioned the balance sheet. So you wanted to look at all of the you want to look at the debt, you wanted to look at the, well the liabilities for the people who owe the money. But you also wanted to look at the the assets. So is that part of the problem is the problem that a lot of the money that was borrowed was spent on unproductive investments? Is that is that one of the issues that you’ve been looking at?

Richard Vague  05:41

Well, yeah, and I want to be careful with the word unproductive. There. But yes, when you see a great financial crises, as we’ve had in this country, many, many times, we had one in the Great Depression, we had one and the 1980s, we of course, had one in 2008. You see lenders lending too much. And really, what we see is they’re doing loans that in normal circumstances would be just fine, mortgage loans, commercial real estate loans, but they overdo it. They do too many mortgage loans, they do too much construction debt. And not just a little bit too much, an egregious amount too much. So let’s take the 08 crisis, mortgage loans in 2002, were 5 trillion in the US by 2007. They’re 10 trade. So they doubled in five years. Well, you had to be a blind man to miss that. Or you had to have economic theories that excluded debt as a variable. And that’s really the way the Mac, the Orthodox macro economics profession looks at the economy, then their models don’t even take debt as a factor. So if you were looking at debt, it was easy to spot. It was egregious. And clearly, it’s one of the things we study.

Gene Tunny  07:16

Okay, so a couple of things that I’d like to discuss, Richard, what do you mean by their models? Don’t consider debt is a factor is that you? Are you saying that they’re too short term that they’re not thinking about the longer term and debt is in the short term, maybe you can get away with a buildup of debt. But in the long term, there can be a reckoning. So I just want to understand exactly what you’re saying there?

Richard Vague  07:41

Well, it’s surprising. But what’s called the DSGE model, which is the core model used by the Federal Reserve and academic economists everywhere, simply does not have bank and other forms of debt as a variable in the model, period. And you know, as as a career banker, I find that shocking. I’m not sure how you can study an economy without studying debt. But that is, in fact, the case. And it’s pervasive in orthodox economics. And that’s the very simple, straightforward reason that, you know, in 2005, and six and seven orthodox economists, were absolutely sanguine about the economy. At the very moment, it was about fall apart.

Gene Tunny  08:35

Yeah, yeah. I understand what you’re saying. And, and that’s true. So you’re talking about these DSGE models, these dynamic stochastic general equilibrium models of the economy. And yet you look at the macro models that the central banks run, and yeah, I mean, they’ve got a lot on inflation expectations on they’ve got their, their Phillips Curve and their Taylor rule. So they’ve got all of these traditional macro economic equations in them. But yeah, I have to look at what our RBA our Reserve Bank of Australia is doing here. But yep, I take your point and understand what you’re saying there. Now, I might have to have another look at that. And, yeah, I mean, I agree about in the lead up to the financial crisis. I mean, what was extraordinary about that I was in the when I was in the treasury at the time. So we were following it from the government perspective, also what was happening in the private sector, of course, because that was relevant to the state of the economy, government revenue, and what we’d have to borrow. But yeah, I remember just how much it did take a lot of people by surprise that suddenly everyone was talking about Hyman Minsky again. And someone who was considered a heterodox economist. And suddenly, everyone’s talking about the Minsky moment. So yeah, very, incredibly revealing time that one. So yeah, that’s more of a comment.

Richard Vague  09:56

Yeah, what I would say is, you know, I spent my career as a financial analyst, you know, as a as a bank executive, as a bank CEO, as in any of these capacities, you look at companies and industries, in the context of a balance sheet and income statement. And all any economy is, is the sum of the individuals and businesses and other institutions, primarily government institutions. In it, you just add those all up, and you have the aggregate balance sheet of the country. And so, you know, not coming up through a traditional economics route. I just took it as a given that the proper way to study an economy is the way I studied businesses and industries as a financial analyst. And this book, The Paradox of debt is that exercise, we just go in, and we look at it the way, you know, a financial analyst would look at it. And you’ll see for all seven of the largest countries in the world, we have assets, liability, income and expense, and we draw conclusions from that.

Gene Tunny  11:12

Okay. From that framework, Richard, what would you say are your key insights, and how that are different from the traditional way of looking at it?

Richard Vague  11:23

Well, one of the key insights is that debt always grows faster than the economy itself. And I spent decades in my banking career not even thinking about that. But to the extent I did, assuming that debt, you know, ebb and flow that it went up went down. But you know, over time, it was in a similar rein. That’s not even remotely true. Debt always grows faster than the economy. And we see that in the seven largest economies in the world that together constitute 60 plus percent of GDP. In the US, you know, circa 1980, debt to GDP, total debt, government debt, and private sector debt was 125% of GDP. Today, it’s more than double that level. So there’s no equilibrium, we are getting more and more leveraged as economic entities. So that’s the first thing that kind of hit you in the face, like a two by four, you know, we’re getting more and more leveraged. One of the other things that really is, you know, a central conclusion of this book, and again, was something that I hadn’t thought about, but is abundantly ever evident from the data is, the more debt you have, the higher the net worth of households go? So in 1980, at the time, you know, total debts 125% household net worth is about, let’s call it 350% of GDP. Here we are, you know, what is it 40 Something years later, debt has doubled. Net Worth, the net worth after subtracting debt of households is now almost 600%. So we should we actually demonstrate in the book that debt increased debt actually causes asset values to go up? And, you know, that’s good news insofar as it goes, but we also see show that it, it severely increases inequality, because the top 10% are the primary asset holders. So they’re seeing their net worth go up, you know, abundantly and folks kind of in the middle class and below, are not seeing increases in their net worth to GDP.

Gene Tunny  13:51

Gotcha. Okay. So yeah, a few things there. The so you talk about the tendency of debt to grow faster than the economy, and you’re talking about both private and public sector debt?

Richard Vague 14:03

The two added together.

Gene Tunny 14:06

Okay. And that you call this a debt staircase? Is that correct?

Richard Vague  14:11

Yeah, we’re very intentional about that, because most people call it the debt cycle. And while that’s, you know, somewhat accurate, it implies that debt returns to the previous level. Well, that essentially never happens. Debt will go up rapidly and then might come down, you know, a little bit it almost never comes down at all, frankly, and only in a calamity. And then it might plateau for a little while, and then it rapidly ascends again, to an entire new level. So we felt like debt cycle in a certain sense was misleading. So debt staircase really talks about we jump up to a new level plateau jump up in either higher level. That’s really been the history of debt in most countries.

Gene Tunny  15:05

Yeah. So I think this is that Ray Dalio, his idea of a debt cycle. I’m trying to remember who you are, I guess plenty of people, commentators talk about a debt cycle and leveraging

Richard Vague  15:16

it’s a natural tendency to think of things going up and down like a sine curve or something.

Gene Tunny  15:21

Yeah gotcha. Okay. Now, I want to go back to this, yeah, this tendency to go more and more into debt. And you mentioned that it does increase net worth. household net worth over time, and it’s increasing inequality. Yeah, I guess I’d probably Yeah, maybe I think too much in terms of the cycle. So I guess the story, many commentators or economists will tell us is the boom bust cycle. And there’s the exuberance, the over exuberance, and there’s too much lending, because there, there’s just too much optimism or frothiness, about the state of the economy and potential investments. And we see this time and time again, whether it’s railroads or whether it’s IT, whether it’s housing, there’s a there’s a new boom, and that’s when all the new debt gets created. So I’m just wondering, but it sounds like it’s not just a boom and bust phenomenon is it, you’re saying that this is something that actually has a there’s a trend increase in, in debt over time,

Richard Vague  16:30

you’re hitting the nail on the head, you know, I think that when people say boom, bust cycle, debt cycle, things like that, they kind of the unspoken implication is things return to the way they were previously. But that’s simply not the case. We instead, we have a boom, we have a bust, but we’re at an entirely new and higher level of leverage or indebtedness.

Gene Tunny  16:58

Hmm. Okay, I might ask you about this, what you call the paradox of debt. In your epilogue, you’ve got a really great summary of what this is. So I’ll just read this out, because I think this is really, really great. “This has revealed the paradox of debt, debt builds household net worth while also increasing inequality is essential for economic growth, and yet in excess leads all but inevitably to periodic economic calamity and stagnation. As a result, the paradox of debt portends the certainty of economic challenges and difficulties going forward, unless we are willing to get creative, and ambitious.” So I think that’s a really great summary of your of your arguments in this book, I want to unpack that I’d like to ask first, could you just explain again, how does this it builds household net worth, I get that because households are borrowing to invest in housing, but also in some other assets. But it also increases inequality. How does that work, Richard? How does it increase inequality at the same time?

Richard Vague  18:11

Well, this gets back to the relative distribution of stocks in real estate. Right now in the United States, household net worth is about $150 trillion. Let’s put that in perspective. Aggregate government debt is 31 trillion. So you can see household net worth really dwarfs anything else, it’s the biggest factor in any economy, and typically somewhere near 70%. So at least 60%, maybe near 70% of all household net worth is two things. Real Estate net of the debt to acquire that real estate, and stocks net of the debt to acquire those stocks. So your wealth really boils down typically, to those two things, your ownership of stocks and real estate. Well, the top 10% of households in the United States own 65% of all the stocks and real estate in the country. The bottom 60% That’s six zero % That’s surely most if not all of the middle class, collectively only own 14% one four % of all the stocks and real estate. So if stocks and real estate values go up, well then inequality by definition increases. And I think that is the fundamental equation in every developed economy. Debt goes up pushing asset values up. And since assets are held unequally, inequality widens.

Gene Tunny  20:04

And is it access to credit to then? And obviously the I guess the wealthier you are, the higher income, the more access, you have to credit. And that allows you to grow your wealth that way?

Richard Vague  20:15

Well, certainly that’s part of it. But even if we took the extreme example, where somebody in the top 10%, you know, had an asset had real estate, and a company selling goods, it is often the debt that the bottom 60% are accruing, or acquiring to buy the goods from the top 10% that contribute to this rising inequality. You know, famously, Apple didn’t really have much debt as a company and still doesn’t. But I guarantee you that the financing that’s provided to its customers, are what allow them to buy all the laptops and Macs and iPhones and, and other goods. I actually was a banker that provided some of that at one point in my career. So it’s the debt of the 60% that are buying the goods owned by from companies owned by the top 10%. That is part of this equation as well.

Gene Tunny  21:18

Right. And that’s, it sounds like that’s a sign that a lot of that is consumer debt. And so it’s not good debt, so to speak. So. Okay, what I want to understand which I’d love to know, your views on to what extent is this a good bet for the different players in the economy? So it sounds like so households seem to be on? Well, so far, they’ve Well, at least the the top 10% And maybe a larger share, they’ve done well out of this out of, you know, borrowing to invest? It’s, it’s been beneficial to them. I mean, that we’ve, you’ve had a housing crash, and you had one in LA, of course. So it’s not always, it’s not always smooth, but in general, have households benefited from it? What about business? I mean, clearly, some businesses have been able to access finance to grow, but then you do mention that, you know, this can lead to periods of economic stagnation. You talk about this debt, there’s a tax buyer, so the debt is favoured in the tax system in the states relative to equity finance. So how do you think about all of this in terms of is it rational to the whole debt? Or is it? How do you think about this? What about for business? And what about for government trying to regulate all of this, the central bank looking at it? I mean, to what extent should we be concerned about this growth of debt? There’s a lot there sorry, that I’m trying to understand the rationality, what your views are on that, please?

Richard Vague  22:52

Well, I would, what we do in the book is we divide debt, private sector debt into two categories. Type one debt and type two debt. And type one debt is debt for spending on new things, you know, and type two debt is spending to acquire an asset. Now, I’m being a little simplest, overly simplistic here. But, you know, from my perspective, if you borrow to go on a vacation, that debts a little bit more problematic, than if you buy you borrow to buy a house, or a company or something like that, you know, you might, you know, buy a small, you know, gift shop, or a retail store, you might borrow to buy a house or buy a rental property, those have a better chance of increasing your wealth, then the debt you incur to buy that motorcycle you’ve always wanted or go on that trip to Haiti, or what have you, and that that’s a little bit too simplistic, but directionally, I think, that would reveal the direction of our thinking about, you know, what debt we would encourage individuals to enter into and not.

Gene Tunny  24:17

Okay, so that’s for individuals, you mentioned this tax, this the tax system and how that works and how it favours debt finance. Is this part of the story? Is this does this mean that companies end up borrowing too much money and then to an extent, they can then invest in unproductive assets? Is this part of the story this, this tax treatment of the debt because of the interest payments are tax deductible and therefore, the other reforms? Is there any reform to that system that you see to the tax system that you you would propose?

Richard Vague  24:56

Well, you know, this is I think, is something that’s been debated endlessly for a long time. But you know, the, what we want to do, I think, and I think this would be true of all of us, I don’t think you’d find a lot of disagreement around this, what we want to do is we want to encourage stock ownership. And what we would like to somewhat avoid is the accumulation of too much debt. The irony is that the tax code would drive us in the opposite direction, because, you know, much of the interest we incur on debt is tax deductible. That’s a little less true than it was a generation ago. But it’s still, you know, broadly true. And at the same time, companies are double taxed, you know, on the stock side of things, so, you know, they’re taxed on earnings, and then the holder of the equity is taxed on dividends, but it’s famously referred to as double taxation. So, you know, I don’t think changing that changes the world irrevocably or radically, but I think at the margin, if we switch that around, you know, and made, you know, took away the tax penalty on the equity side and took away the remainder of the advantage on the borrowing side. At the margin, it would make a difference over time.

Gene Tunny  26:23

Okay, yep. So, so some difference, but it wouldn’t be the it wouldn’t completely solve this.

Richard Vague  26:29

It’s not the magic bullet

Gene Tunny  26:31

Not the magic bullet. Okay. Okay. Fair enough. Right. Well, I want to ask now about back to your, your summary of the paradox of debt. So “paradox of debt portends the certainty of economic challenges and difficulties going forward unless we are willing to get creative and ambitious” first, how bad could those economic challenges get? So when we were talking about risk, see you talk about how this debts leading inevitably to periodic economic calamity, calamity and stagnation? Are you seeing another financial crisis down the track for the US and the global economy?

Richard Vague  27:10

Well, we measure that by how rapidly the escalation in private debt to GDP is in a short period of time. And we do not see that as a problem in the US at the moment. It’s certainly a problem in China. You know, the Evergrande debacle that we all read about this past year was a direct result of an escalation in the equivalent of private so you know, there’s no private sector in China to speak up. But, you know, non government debt or the equivalent of private debt has shot up since 2008, in China in an unprecedented way. And I think one of the things you have there as a result is something on the order of 100 million empty dwellings, buildings were built in the interest of economic growth, that there are overcapacity, and thus, there are no buyers for so, you know, I think most western economies developed economies right now are not in danger of an imminent financial crisis. I think China’s got got its hands full.

Gene Tunny  28:23

Right, right. Yeah, yeah, absolutely. Good point about China. I had a guest from the business school in Arizona, I think it was on last year to talk about the enterprise China model where just the close links between the business in China and the the the administration over there, so you know, good, good point about that. What about the regional banking crisis in the US? Is that something you’re concerned about? Richard? That’s something that’s been talked about recently.

Richard Vague  29:00

Yeah, it’s it’s a minor concern. It’s not a major concern. You know, there were some banks that broke the, one of the fundamental laws of banking. In banking, you’re supposed to match the maturity of assets and liabilities. You know, I entered banking as a young cub in the late 1970s. And, you know, I think one of the very first reports I was asked to prepare was the asset and liability matching report. So if it, you know, 5% of your assets, were at a 10 year maturity, then 5% of your liabilities were supposed to be at a 10 year maturity, and if 30% of your assets were at a, you know, one month or less maturity, you know, 30% of your liability, so, it matched so that if interest rates went up or down, the spread between the two would be relatively constant. What you didn’t want to have is a lot of long term assets, five year, ten year twenty year bonds, for example, funded by zero maturity liabilities, checking accounts, basically, or what we call demand deposits in the industry. You didn’t want to have that. Because if interest rates go up sharply, you’re screwed. That’s not a new concept. That’s banking 101. Well, what happened was interest rates were so low, and you had certain institutions like Silicon Valley Bank, who had way more deposits than they needed or should have had. And it was actually a penalty to them, because the yield on those assets was so low. Well, what you do to increase the yield on your excess assets is to buy long bonds. It’s the tempt, it’s like, you know, the forbidden fruit in the garden of Eden, you’re not supposed to do that. And everybody knows, you’re not supposed to do that. And yet they did it. And they did it in a huge way, they made a huge bet, has nothing to do with credit quality, has nothing to do with, you know, the fundamentals of the banking system as a whole. It represents their falling to the temptation in a in a gigantic way. And they weren’t the only ones. But it’s not so pervasive, that it’s a sustaining threat to the US banking system, it’s, you can go look at any banks, you know, call reports and other financial information. And we know exactly how much of this misbehaviour occurred and which institutions that occurred in and it’ll it’ll hurt, it’ll hurt a few and it’s hurting a few. It does not represent, you know, I’m gonna put a put a dimension on it. It’s a several 100 billion dollar problem in in an industry that has well over 2 trillion in capital, so it’s not a sustainable growth.

Gene Tunny  32:05

Okay. Okay. That’s, that’s fair enough. I’ll go back to your points on the paradox of debt. Yes, the creative and ambitious solutions you talk about, one of the things you talk about is a debt jubilee? Could you please explain what you mean by that, Richard?

Richard Vague  32:23

Yeah, this is, this is a hard problem. If as the evidence shows, debt always grows faster than GDP, You’ve almost got an engineering problem. You know, it’s as if you were designing an engine, and you found out after you had built it, that the temperature of that engine grows perpetually? Well, as an engineer, you could predict that that engine is going to explode from time to time. So you would introduce some kind of exhaust system or heat valve escape system to try to combat or overcome the perpetual increase in the temperature of that engine. I think we’ve got the same problem. You know, in modern developed economies, they always get more leverage. And so we’ve got, you know, put put your ideology aside put, you know, put all you’ve learned aside, you’ve got a problem here. And, and unless we solve it, we’re going to continue to have a couple of things happen, we’re going to have periodic crises. And we’re going to continue to have a slower and slower economic growth, as businesses and individuals get, you know, what I would call stultified by high levels of death. That leaves you with kind of only one solution, and that is ways of taking away debts that do not involve paying down that debt. Because paying down debt and aggregate just produces GDP, right. So we get into this quite a bit in the book. But there’s no easy way to do this. So I propose, you know, I kind of go out on a limb and try and propose some areas that maybe hopefully will provoke some thinking. So for example, student debt, which has gone from in the United States, a couple of 100 billion dollars to over one and a half trillion dollars really within a very short period of time. So you got all these students who graduate and then you know, lug around too much student debt for the next 20 or 30 or 40 years of their life. How about a programme where even I don’t support a programme of just forgiving all that debt, because it penalises the folks that were that did pay their debt. But I do think a programme whereby we let them do you know, a certain amount of voluntary community or civic work, you know, over, you know, five or 10 year period as a way to get relief on their student debt is something that we could consider. So, right now, if you graduate with student debt, and you enter government service, and you stay there for 10 years and you make 10 years worth of payments, you get whatever’s remaining of your student debt forgiven? Well, let’s, let’s create something that’s similar to that for the private sector. If you did 800 hours of community service, let’s say, after 10 years, the remainder of your student debt would be gone. That’s what I mean, when I say let’s get creative. Let’s try to think of ways to do this.

Gene Tunny  35:43

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

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Gene Tunny  36:18

Now back to the show. So debt jubilee is about debt forgiveness in in some form or another and there might be some community service for two so people could reduce their student debt. What about a more broader programme of debt forgiveness? Is that what you’re proposing in the private sector debt banks forgiving part of the debt? How does it all work?

Richard Vague  36:44

Here’s another idea. Because like I said, I stopped short of just getting a magic wand out and forgiving everyone debt, which, by the way, is what in ancient civilizations, rulers would do. And I think, you know, guys like Michael Hudson and your countrymen, Mike, Steve Keen and others have have talked about, you know, this is Hammurabi, this is Ancient Egypt, this is even ancient China. We don’t have that luxury. So let’s get creative. And, you know, another possible programme would be, after the ’08 crisis, when, you know, it was probably on the order of 15 million mortgages in the United States that were underwater by 10% or more. How about kind of a debt debt to equity exchange, you know, if the lender would write the mortgage down to the new current market value, appraised value. So maybe you bought a house that was 300,000. And now it’s only worth 200,000, you’ve still got a $300,000 mortgage? If the lender will write it down to that new value, and write your payments down proportionately? Well, then you would, in exchange, give the lender certain ownership of the house, which would be realised only on the event of a sale of the house. So they would get the upside. And the way the government could facilitate that is by going to the lender and saying, if you do this, we won’t make you take that as a hit against earnings in the current period. We’ll let you amortise that over, pick a number 30 years. So it’s kind of a win win win at that point that the bank deals with problem loans, the individual gets a lower payment. And the lender has the potential upside down the road if the house is sold.

Gene Tunny  38:49

Okay. Okay. So you’re talking about something that is voluntary, you’re not going to compel banks or lenders to to forgive part of their loans or force them into restructuring your you want this voluntary, but there may be some policy tweaks that could facilitate this restructuring. Is that the argument that you’re making, Richard?

Richard Vague  39:12

Yeah, to make it real, legislatively realistic or feasible? You, you have to construct it. So it there’s something in it for everybody.

Gene Tunny  39:22

Gotcha. Gotcha. And I think one of the interesting points you make is that, look, debt’s a contract. Do you quote, Dave Graeber on this, if I remember correctly, and look, these things get renegotiated. Well, throughout history, we see various periods in which there’s restructuring of debt. I mean, what’s extraordinary is that, you know, some countries seem to the periodically defaulting or and then there’s restructuring and then the banks keep lend to them 20 years later, and then you go through the same thing.

Richard Vague  39:55

Yeah contracts are contracts, you know that you know, if you are a data servicing provider and somebody wants you to write a programme and have it done by August 1, and you don’t have it done by August 1, you haven’t done by the following February. That’s not a moral failure. And, you know, but somehow, and folks like Hudson would argue for good reason. People have conflated morality with performance in a commercial contract. So if an individual doesn’t repay their debt, that’s, that’s a moral flaw or moral moral failing. Well, in my career, I was in banking for 37 years and debt contracts with companies get renegotiated all the time, you know, the company, you know, was manufacturing XYZ product and a competitor came along selling for half of what XYZ was being sold for, and we all knew that this debt was never going to repay. And if we absolutely enforced that repayment, we would cause the company to fail and get zero of our money back. Well, instead, we restructured the note so that we get paid half of what we rode back, the country could company could survive and compete. So you know, a rational restructuring of debt goes on in the banking industry all the time, all day, every day. And I think the light bulb that went on for me was, you know, 10 years or so ago when David Graeber’s book, delightful book, you know, ‘Debt: The First 5000 Years’ and he, and he just says, you know, this is not a moral issue. This is a contractual issue.

Gene Tunny  41:43

Yeah, yeah. Want to ask, What about the policy changes? So you in a official position, you’re in a very senior position in Pennsylvania, but I imagine that this would require a federal change regulatory or legislative changes do have you thought about what, what could be done at a policy level to help smooth things to help make it easier to help make it easier for restructuring to to help households and businesses deal with this higher debt that that we’ve seen?

Richard Vague  42:19

I think the federal regulators in the Fed in particular have this ability. And there are a couple of famous instances of this. And to me, the most famous and applicable would have been in the early 1980s, when the New York money centre banks had been making lots of loans to less developed countries, the predominance of which were in South America. And, you know, they got to a point where the what were called LDC or less developed country debt was equal to, I think so, you know, well over 100%, of the capital of those New York money centre banks. So, you know, 150, 100, and the number that comes to mind is 170% was a big, big number, such that when things turn because of interest rates and the rising price of oil, if the regulator’s had come in and enforced their normal rules, all the New York banks would have failed, which, you know, by the way, would not have been a good thing for the country for, New York, for anybody. And so Paul Volcker, one of the giants of economic history came in, this was in the days before Twitter, and all those other ways in which information leaks, so porously, called those bankers into a room and said, We’re not going you know, you kind of put a fence around this, we’re not going to deduct these loans, from, you know, our analysis of your capital reserve adequacy. But you guys better get busy. And over the next several years, all your earnings ought to go towards building up reserves, again, so much of this as you can muster over the next few years. And then whenever you get a big enough cushion, we want you to write it down. That is exactly the kind of thing and by the way, they did this in a more structured and overt way relative to the savings and loan industry, which at that exact time had a very similar problem. That’s a way the regulators can step in the case of the LDCs. It was a regulatory matter. In the case of the same Solomons, it was actually a legislative matter. But those are ways you can do this. And sure enough, but I can I think it was 86 or 87 when Citibank announced a billion dollar write down of its LDC debt? Well, it shocked the world. But it related to a conversation that actually been held four years earlier. And for Citibank to do that was actually an announcement, they were now in good shape, rather than an announcement that they were in bad shape. They’d been forced do the same thing in 82 they would have failed. They had four years worth of earnings to cushion that. And it was it was actually a positive cleanup sign.

Gene Tunny  45:30

Yeah, yeah. So just, just to be clear, I mean, the reason I’m just just want to make sure I understand this properly in your, in your view as a banker, so what’s the, how are bankers looking at this when they do agree to a restructure or write down, they’re figuring that we can extend the term of the loan, or maybe we can cut the interest rate, or we take a haircut ourselves, we write down some of the value, they figure that well, this makes it more likely that they’ll actually be able to pay us back the full amount is that they’ll survive? Is that the logic from a bankers perspective?

Richard Vague  46:03

Yeah, if you’re the banker, the first thing, let’s just say it’s $100,000 write down, if you’re allowed to take that over 30 years, the hit to earnings this year is what? Roughly $3,000 instead of $100,000. You know, the second thing I would do in that case, is let them take the full deduction for a tax standpoint, because you know, most companies have regulatory accounting and tax accounting are two separate things. So they don’t have to take it, from a regulatory standpoint, they get to take it from a tax standpoint. So probably from a current earnings standpoint, at that point, they’re just fine. But in the meantime, the consumer who was struggling with their, you know, their loan now has a loan, they can make payments on adequately. So they they go from having a credit that is a troubled, questionable credit, to a credit, that is a solid credit. As it relates to the consumer, the household, they now have breathing room, they can go back to being kind of a regular participant in the economy, they now have a little extra money not only to make their payment, but to go on vacation and go out to restaurants and this that the other. And their give up is seven years down the road when they sell their house and they they get a gain of you know, $50,000 or whatever they might have give a third or a half of that to the bank, whatever they negotiated. So it makes it comfortable and possible for everyone. That’s why think of it is kind of a win win win.

Gene Tunny  47:50

Yeah. Okay. Very good. Richard, we’re coming to the end of our time. Any final thoughts, any additional thoughts on what other policy measures may be desirable? Or that you’re someone who’s concerned about the inequality in the US? And, you know, clearly that has grown over the last few decades? Are there any other policy measures you’d be recommending to address that?

Richard Vague  48:14

Well, I would make the observation that if the bottom 60% of the US population only holds 14% of the stocks and real estate, that you can probably afford to actually give tax incentives? You know, because we talked earlier about just modifying the penalties. But how about a tax credit, if you buy stock or a tax credit, if you buy real estate, for those, that bottom 60% It’s such a small number, that you have the room to do that without affecting the tax receipts of the government by much, if any, might actually be a positive there. So I make the point that there’s the latitude to create incentives for accumulating asset ownership among that group that we could be taking advantage of that will probably that we’re not. And there’s other things in that final chapter that we touch on too. And they may all be terrible ideas. Hopefully, some of them are good ideas. But, you know, having set up the problem in the first 90% of the book, we we take a stab at, you know, maybe some ways to deal with it in the last chapter.

Gene Tunny  49:29

Yeah, yeah. So, I mean, we talked about forgiveness or the debt jubilee as a possibility, renegotiations. Then you mentioned some, you’re trying to encourage asset ownership and then there are some others one other one or two that you you’d like to highlight.

Richard Vague  49:45

You know, it kind of kind of gets off the subject a little bit, but I put it in there anyway. I think there needs to be massive job training because if you want the bottom 60% to accumulate assets, you got to give them a little more income. We got a situation in the US that I think it’s parallel, at least to a certain extent elsewhere, that we’ve got a lot of jobs that need training that are going unfilled. We got a lot of under under employed people that don’t don’t qualify for that job that feels to me like a perfect place for government to step in, in conjunction with the private sector, and especially the companies and underwrite that, you know, I think it’s kind of the spiritual equivalent of, in the US what we call the GI Bill, where after World War Two, we underwrote college education for pretty much all the returning soldiers. And I think that helped fuel the increased size of the middle class and the 50s and 60s, I think there’s that opportunity here.

Gene Tunny  50:47

Okay. Well, Richard, thanks so much. And I’ll put a link in the show notes to your book. And yeah, I’d encourage people to buy it and read it. So it’s published by the University of Pennsylvania Press.

Richard Vague 51:16

Yes.

Gene Tunny 51:18

Very good. So very distinguished publisher, and yeah, well researched, and lots of lots of good facts and figures. And yeah, very interesting analysis. And, but very good. But Richard, thanks so much for your time. I really appreciate it. And good luck with the book sales. Yes. And I hope you, you get a lot of a lot of readers and a lot of people are engaging with you on the issues, and I certainly enjoyed our conversation. So again, thanks so much.

Richard Vague  51:29

It’s a privilege and I’m all thanks go to you.

Gene Tunny  51:32

Very good. Thanks, Richard.

Richard Vague 51:36

Bye bye

Gene Tunny 51:39

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

52:23

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Podcast episode

Invisible Hand, social media, money & crypto w/ John August – thoughts on recent episodes – EP194

In this episode of the Economics Explored podcast, host Gene Tunny chats with John August, Treasurer of the Pirate Party of Australia and host of the Roving Spotlight show on Radio Skid Row in Sydney. Together, they discuss previous episodes on topics such as the invisible hand, Goldbacks, and cryptocurrencies. Listeners are encouraged to share their thoughts on these topics.

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

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

What’s covered in EP194

  • [00:02:44] The invisible hand. 
  • [00:04:27] Hidden assumptions in economics. 
  • [00:08:15] Problem with gambling addiction. 
  • [00:14:39] Soviet Union. 
  • [00:26:03] Military expenditure and Soviet collapse. 
  • [00:30:16] Social media and liberty. 
  • [00:33:37] Censorship in social media. 
  • [00:39:01] History of currency. [00:40:47] 
  • [00:44:25] Central Bank Digital Currency. 
  • [00:50:34] Crypto as a solution. 
  • [00:55:46] CBDC concerns and conspiracy theories.

Links relevant to the conversation

John’s website where you can find his writings and a link to his radio show:

https://johnaugust.com.au/

Gene’s previous conversations with John:

https://www.mixcloud.com/Johnorg/roving-spotlight-24-may-22-post-election-all-over-gene-tunny-economics-internet-purchases/

https://economicsexplored.com/2022/06/21/advertising-surveillance-capitalism-w-john-august-ep144/

https://economicsexplored.com/2022/05/11/the-pirate-partys-economic-policy-platform-w-john-august-ep138-transcript/

Recent episodes mentioned in the conversation:

https://economicsexplored.com/2023/05/12/govt-wellbeing-budgets-frameworks-useful-or-useless-w-nicholas-gruen-ep187/

https://economicsexplored.com/2023/04/29/the-invisible-hand-economic-religious-or-mystical-concept-w-dan-sanchez-fee-ep185/

https://economicsexplored.com/2023/04/12/what-are-goldbacks-and-whos-buying-them-e-g-preppers-libertarians-collectors-w-goldback-founder-jeremy-cordon-ep183/

https://economicsexplored.com/2023/03/31/odd-way-to-fix-housing-crisis-proposed-by-aus-govt-invest-in-stocks-first-w-dr-cameron-murray-sydney-uni/

https://economicsexplored.com/2022/09/18/bitcoin-books-w-author-ex-fighter-pilot-lars-emmerich-ep157/

https://economicsexplored.com/2023/03/08/crypto-arbitrage-searcher-dave-belvedere-on-crypto-and-dapps-such-as-wizards-dragons-ep178/

https://economicsexplored.com/2022/12/19/aussie-energy-crisis-net-zero-transition-w-josh-stabler-energy-edge-ep170/

Transcript:
Invisible Hand, social media, money & crypto w/ John August – thoughts on recent episodes – EP194

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked over by a human, Tim Hughes from Adept Economics, to check for mondegreens, things that otters might have misheard. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you could join me for this episode, please check out the show notes for relevant information.

Now on to the show.

Hello, thanks for tuning into the show. In this episode, I chat with previous guest and regular listener John August about some recent episodes. John is the treasurer of the Pirate Party of Australia. And he hosts the roving spotlight show on Radio Skid Row in Sydney. When he was in Brisbane, recently, John dropped into my office and he gave me some thoughtful and provocative feedback on some recent episodes. First, we discuss my conversation on the invisible hand with Dan Sanchez from the Foundation for Economic Education. John and I went on to chat about goldbacks and cryptocurrencies. They were the topics of some other recent episodes. I’ll put links to all those recent episodes in the show notes. If you have any thoughts on what John and I have to say in this episode, or previous episodes, then please get in touch via contact@economicsexplored.com. Okay, let’s get into the show. I hope you enjoy my conversation with John August.

Gene Tunny 01:44

John August, good to be chatting with you.

John August  01:48

Yes, well, you do say at the end of the show, you know, we’d like to know what you’re thinking and boy have I listened to a lot of shows. And boy, have I done a lot of thinking about your show. So so I’m here to sort of follow through on that invitation, I guess you might say,

Gene Tunny  02:01

very good, John. So yes. Good to be chatting with you again. So we’ve previously chatted about things like advertising and, and some other issues. I was on your show talking about economics and philosophy of economics. If I remember, correctly,

John August  02:15

well, I think I was inviting you to talk about three famous economist three issues, three things important. So I think there was a sort of nine things to talk about. And okay, oops, oops, I can’t remember the

Gene Tunny  02:28

Okay, I’ll put a link to it. I remember that was good fun. But you’ve you’ve had some thoughts on some recent episodes, as you said, and I mean, one of the ones was the one I did with Dan Sanchez, from Foundation for Economic Education on the invisible hand. So I’m interested in what do you think about that conversation? What are your reactions to that one?

John August  02:51

Well, in a narrow sort of way, I guess I do celebrate elements of the, you know, the invisible hand. But you know, the overall position, I guess he had just too a naive, a sunny view of things, and I’m going to maybe say, you know, things that I strongly disagree with him. But I hope at the end of the day, maybe I could buy him a beer or something like that. I don’t want it to be that negative. But yes, there’s a lot of things I disagreed with, with him on now, one of the things that he was saying is, look, you know, there are atheists out there that disagree with the whole idea of the invisible hand, just because the guy made one reference to God saying that. Now look, I can’t speak for other atheists. And maybe he has experienced some atheists who have actually said that. But I would never say that a religious view has got no validity to it. Now, I would say to the extent that it does have validity, it’s because people lived certain things. They thought about the world around us, around them, and they tried to put into writing and try to think it through. In other words, it may have some merit, but it’s not revealed truth from God, but it can still have merit. What I’m trying to say is, as an atheist, I think deeply about religion and the ideas and how they propagate. So so that’s a bit of a diversion. But what I’m trying to say is, I would never dismiss something, merely because someone mentions God once, twice or three times in developing their argument. So I would never challenge the idea of the invisible hand on that basis. But as far as the story of the pencil goes, Look, it is remarkable that there’s so much coordination to make the pencil. Okay, that’s impressive. But there’s also a decent number of hidden assumptions built in. Now one is that we’re assuming everyone in that chain are paid reasonably. We’re also assuming that there’s no particular externalities like people are mining whatever minerals they need to make the to make the pencils or they’re cutting down trees or whatever. And we won’t need to assume that. We’re also assuming that people are buying those pencils for legitimate needs. Now, let’s say someone’s buying pencils, because they’re addicted to chewing the ends of it, not because they actually want to design a building with those pencils that people will benefit from. And notice I’m, I’m sneaking in, to some degree, what I think you call in economics, a normative judgement. But keep in mind, if you say, here is this system, it is good. You’re making a normative judgement. So I think I can push back and challenge the normative judgments and say, if people are buying these pencils, because they’re addicted to chewing the ends of the pencils, and they’re addicted to that, like they’re addicted to heroin, well, is it really such a good thing that these pencils are being made. So there’s one equilibrium where things are made that people legitimately need. And, you know, the market coordinates itself in very impressive ways to do that. And I won’t deny that. That’s the good side of the invisible hand. But I think there’s other equilibrium that can also arise in the market, the equilibrium between people’s ability to be manipulated, and the market having the energy to manipulate them, because there’s money to be made from that. Now, we’ve discussed advertising before. But let’s say there’s so many things where there’s a legitimate side, and as you slide down the slope, it gets worse and worse. Now, let’s say someone makes a bet on a footy game of $10. Okay, that bet is recreation. Now, but then at the other end of the scale, you have people who queue up at the clubs at 9am, waiting to go in and play the pokies. Right. And clearly, that’s gone to the end of being addiction. So an in between, I mean, this is one of the things that Dan is also thinking, look, I guess, on one sense, I do celebrate the idea of the sovereign individual, but the psychologist is sort of unpacking the way our brains work, and realising that it’s not such a simple story. Now, we may well struggle to lose weight. And then when the cake is sitting in front of us, you know, we’ll sort of indulge and there’s in a sense there’s two people inside of us that want different things that are struggling for control. And, you know, this naive idea of here is this sovereign individual that wants X Y, Z, they know what they want. And it’s the government that is getting in the way. Now, look, I do not believe in paternalistic intervention, I suppose. But equally, the story Dan Sanchez is telling us just doesn’t seem to be engaging what I think is a much more complicated reality. I mean, let’s talk about or maybe I’ve told this story before, someone’s a heroin addict, did they go out in the market, seek amongst the options and decide and end up becoming a heroin addict because they engage with those options? You know, other stories coming out of AFL? You know, yes, notice I’ve said a certain amount of gambling is a recreation. At the other end, you can say you’re just pandering to someone’s addiction. And there’s this movement within AFL, which is saying, follow the game, not the odds. Because while people do not mind, you know, the single bet on the game sort of thing, which is adding to your experience, when the odds are flashing onto the screen, every advert while the game is playing. A lot of people I think, are getting legitimately concerned about that. And as I say, I’ve got nothing against gambling, per se, but when there’s this big feedback loop, which is I guess ceding to its excesses, then you have a problem there. So that’s one problem that I have with that sort of idea. So notice, I am acknowledging the magic of the pencil. At the same time, I’m also saying there are all these other equilibrium that can happen. And we’ve had the discussion about advertising before. And this is I guess, part of that thing, so. Okay, so we’ve talked about gambling, people queuing up at 9am. Okay, the fact that we struggle to lose weight, and that’s telling us things, okay, then yeah, I mean, it’s the perspective from the affluent society by John Galbraith. He sort of says that in the ideal, we are a sovereign people who have our, to have our wants, we go out into the market, and we satisfy those wants. But he’s saying advertising is a lot more pernicious than that advertising actually shapes our wants, rather than being something a means by which we’re informed of the options to satisfy our wants. So I guess this is a subtle philosophical point. But I would still say, advertising can inform us of our options, or basically our options for satisfying our wants, or it can actively shape our wants. And I think there’s a bit of a conceptual muddle there. So I suppose Dan Sanchez’s view is like, you go out into the world, and the world is this passive thing. And you just, you just pick and choose as a sovereign individual who knows what you want, is totally clear unstressed, no psychological hammocks. But in fact, when you go out in the world, it’s an active thing. It’s reaching out to you. Right. So I think that a lot of his story is problematic there. But at the same time, I do endorse the idea of distributed innovation, people thinking, and, you know, elements of that story. So, so what am I trying to say, look, I acknowledge part of that story of the pencil and that integration. But it’s just that I think people are going too far with it. And taking it’s past its load limit. So in a sense, this is a bit of a bigger dip point of disagreement between myself and Dan Sanchez, and perhaps others, you do say, look, there is this bad stuff going on in the economy, and maybe we need to manage it or have antitrust regulation, and so on. But it’s a matter of how we relate to it. I think, I think people on the other side of the fence, say, it’s over there, we quarantine it conceptually. And then we get on with the interesting stuff, which is thinking about the magic of the pencil, while I sort of say Hang on, it’s all very strongly integrated together. And you can’t really separate them out so clearly or neatly.

Gene Tunny  11:31

So what do you mean by on the other side of the fence? So you see yourself as philosophically different from Dan? Because you, I mean, I’ll have to go back and, you know, really pay close attention to what Dan was saying, because I will, my view was he was making a really good argument that let’s not dismiss what this idea of the market as some sort of fairy tale, because that’s what it all some sort of mystical thing. That’s, that’s what he was reacting to. He was reacting to some commentary that he’d seen where people were saying, Well, you believe in this Invisible Hand thing, and it’s something mystical or religious concept. It’s not something that is, is guiding our, it’s not something legitimate, but he’s saying, well, actually, this is this is what’s supporting the bulk of our society, really, I mean, this is what leads to a higher living standard, higher living standard than, say, in the Soviet Union, which tried a different system. And it proved not to work. So I think he’s making a legitimate point. I would I probably differ from Dan in some of the judgments as you know, what regulations needed. But broadly, I agree with him. I would say that, yeah, I take your points about what economists would call market failures they’re clearly market failures of some kind of different kinds that there could be scope for government intervention to address those. And yeah, people aren’t always rational, they’re not this idea of consumer sovereignty is that’s questionable. And that’s why we have behavioural economics now. So I would say that, largely, Dan is, is on the right track. And I mean, you you yourself, acknowledge the pencil story, there’s some there’s some legitimacy in it. And I guess what you’re saying, or my interpretation is that you think that in telling that story, you you’re not giving enough acknowledgement of these other these deviations from

John August  13:25

I guess so look, I suppose who knows, maybe I need to talk to Dan face to face to sort of get to the bottom of it. But yeah my recollection of that episode was not only was he defending the story of the pencil from unfair criticism, and I think there’s a narrow sense in which I do feel that anybody who dismisses something just because someone mentions God, two or three times, that is wrong. That’s that that’s not right. So in a sense, let’s just say, I will defend Dan against the atheists who make that claim. But then Dan goes a lot further than that. And that was sort of my recollection of the episode that, so notice, I’m saying, Look, I will defend Dan against fellow atheists who, who do behave in the way that he identifies but yeah, there’s a lot more to the story than that. But I suppose there’s some other things that I can talk about that come out of Dan’s story. Now, one of them was social media, but the other one was actually the Soviet Union. Yes. And I suppose you’ve actually mentioned that. And this whole thing of the Soviet Union does actually go into the US and Ukraine. I don’t know whether we want to park that for a later discussion. But let me get started on some stories about the Soviet Union. So my heritage is Lithuania, Lithuanian. And I did actually go to Lithuania, some time after the revolution, and they had sort of, basically they’ve gotten gotten rid of communism on the one hand, and the interesting thing is, the first government that took over Lithuania was not communist, and then they had a successive election and they actually put the old communist back in. Now depends on what you mean by Communism. Now my uncle who was seriously anti Russia and anti communist, he said, Well, if they’re willing to subject themselves to a democratic election and leave based on that, then he says, Well, they’re not really communist. Now this is madder than that. What you mean by communist? Do you mean state control? And obviously, I think the sentiment was those notional communists were Lithuanians first and communist second. And yeah, that was the sort of the way they related to the story there. But there’s this view that like the Soviet Union had shoddy workmanship, but I spoke to people. And there was this idea of, I guess, in the West, you’d call it branding. But people said, if you get a washing machine, or a refrigerator from a factory of known repute, it will just go on and on and on and keep working. Because as far as design goes in the Soviet Union, okay, quality of workmanship, may have been an issue. And it may have varied a bit with the factory. But the engineers were not constrained by what we in the West might call, you know, trade offs to make profit, or, you know, planned obsolescence or those sorts of things. Their design principle was, we make this to work, we make it to last. And if you actually got a factory that did a decent job with putting the bits together, it really did work and last, and what some other stories as you wander around, you see little country towns that have, you know, two storey brick buildings. And if you wander around Australia, you’d say you, you only get two storey buildings when there’s a sufficient density in the township. So on the abstract, you could say that’s wasteful, you know, you don’t need a two storey building in this small township. But you also have the benefits of uniformity, right, a scale, if you know what I mean. Like it’s basically they have one unit that runs around making two storey buildings and makes them wherever and so you have the benefits of scale. So for me, it’s not quite that bad. But let me also tell you a story. Now, this is I’m not sure that people on your show have exactly made this critique, but I know there are commentators who talk about Soviet Union was a place where culture went to die. And now there was a woman I know from Lithuania, who came to Australia to start a family, and she was very musically inclined. And her she actually took her family back to Lithuania, because under the Soviet system, and they actually kept this after the revolution, if your child is musically talented, they can go off to a particular school where their talent is developed, at no particular cost to the parent. Now, we can do that in Australia, but there’s private tuition going to the Conservatorium, this sort of thing. So someone actually went back to Lithuania because of that. So there’s some good things going on there. But let me say, you know, I went to those museums, where the former Soviet Union with the three stamps of the judge, you know, before they execute someone for being a political dissident or whatever. So there was that, you know, evil stuff going on there. And I suppose this is going away from Dan Sanchez, to some of your other commentators that basically I’m very strongly pro Ukraine, partially because of that, that heritage from Lithuania and, and, you know, sure, there are some people on the internet who say that they’re American and very strongly pro Ukraine and I have to take their I take them at face value, but you know, I look at it I’ve seen my my relative with her family from Lithuania. And it’s like, the US theme feels like they’re playing geopolitical chess. But for Poland, the Baltic states, you know, Lithuania, Finland, whatever the Soviet Union is, Russia, I should say is over there and they’re a geographical proximate threat. So they’re actually shall we say, Lithuanian seem more Lithuanian government even seems more pro Ukraine than the US government not to criticise, there are some very strongly pro Ukrainian individual Americans out there who are identifying themselves on the internet. But you know, there’s, there’s an interesting subtlety there. I do actually say that there are some pro Ukraine forces that are stronger even than the US not to deny the US has given us a bucketload of positive aid there. But I suppose with Dan Sanchez, you were having that discussion. You know, what is the story about the Soviet Union there? There are a few little little strange things with the Soviet Union, like compared to China, they’ve got more social capital, you stumble while you’re on the stairs, getting on the train people will be concerned and try to help you up or whatever. But the other story is, remember, once upon a time, when everyone was getting their car stereos pinched out of their cars and and people were putting in the boot and had these special connectors and this sort of thing. And then you went to the stage of having you know, encoding so if I remove it from the power you had to get the code put back into there. Yeah, the thing is you talk to people in Lithuania. And I remember my, my cousin there, you know, people were saying to Oh, why are you putting the stereo in the boot and you don’t have these like, like security keys? And she says, I know, in Lithuania, if you know if there’s money in it, and there’s some technician who can sort of blag the codes, well, you know, it’s not very secure. Now, in Australia, let’s assume that you are some sort of automatic technician that does have access to the codes. And you abuse that I’m not sure it may, maybe you’ll never end up being taken seriously by any automotive firm again, maybe you’ll end up in prison. It’s a very different deal in Australia, if you were to betray that sort of trust. Yeah. But you can see that the degree to which you submit to those sorts of regulations, you know, there were obviously some, I won’t say that. I mean, obviously, yes. Lithuanians will be concerned about you in the street if you stumbled and you know, had that sort of thing. But there was also that sort of aura of criminality, I suppose there as well. And I hope, hopefully, Lithuania is not going to take a swipe at me for saying that. But there’s, I guess, some complexities of the story about the Soviet Union. And I suppose I can but say even though I’m a lefty, I’m certainly not in favour of the Soviet Union or Russia in the way that it was. I mean, going back far enough, I’m aware of that history, you know, way back when, if you’re a dissident in Russia, you would be executed, then the next step is you’d be shipped off to a gulag in Siberia, you might not survive the trip. And then at the end of it, they they locked you up in a lunatic asylum because only the insane would not believe that the Soviet Union could not effective, then right at the end of the thing, if you’re inconvenient, but they didn’t particularly want to lock you up, they’d ship you off to an anonymous township in Siberia would sort of be like the Tower of London, you live a reasonably comfortable but irrelevant existence. So. So anyway, there’s my sort of, I guess, glib summary of the Soviet Union, acknowledging all of the sins along the way.

Gene Tunny  22:07

Yeah. Okay. So I just want to ask one more question about Soviet Union. So look, I acknowledge there were some, there were some positives, and I mean, some I think they had some of the greatest conductors. And certainly there’s some great music that came out of the Soviet Union Shostakovich, for example, or they had great dissident writers too. So that so I mean, that’s, that’s not a positive for the Soviet Union. That’s a that’s a positive for the people, and Solzhenitsyn, who wrote the Gulag Archipelago about the sins of the Soviet Union. But certainly, yeah, this system did encourage the Arts and Sport. They had great sporting achievements. Some of them were assisted by, by doping, of course,

John August  22:51

Well, though, one thing, there were the Olympics in Montreal, and afterwards, they were trawling the river and they found all these syringes there. Anyway, that’s one story about the Soviet Union. Yeah. Was that the 23rd? Olympics? Well, anyway, it was in Montreal.

Gene Tunny  23:11

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

Female speaker  23:16

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

Gene Tunny  23:45

Now back to the show. Well, what led to the collapse of the Soviet Union, in your view? I mean, partly it was because of the oppression and partly it was because of the inability to deliver the consumer goods that the people needed and wanted. I mean, would you agree with that?

John August  24:02

Partially Yes. Well, I would say broadly speaking, it was corruption. And I guess endemic corruption was what what I would say was the downfall of the Soviet Union. I know that I think it may have been Dan Sanchez, but I know that one of your guests was talking about the price mechanism and the great things about the price mechanism. And goodness me I don’t want to go down. Well, I guess my my endorsement of the price mechanism is somewhat guarded. But yeah, I guess I would focus on corruption and lack of democracy and lack of transparency as being the things that undermine the Soviet Union, rather than a lack of price mechanism. But I suppose it’s, that’s a matter of judgement. I acknowledge.

Gene Tunny  24:51

Well, maybe I’ll do a another episode where I look at the economy of the Soviet Union because I acknowledge that it’s, yeah, it’d be good to get the nuance in there and just understand exactly what was going on and to what extent these stories about the bread lines, people queuing for bread, the shortages to what extent they were true. I mean, it looks like they were in many circumstances…

John August  25:13

Well, going off on quite a tangent. But there’s, you know, Hugh White, who’s the Australian academic. And I know, he’s someone who says that he did actually see the downfall of the Soviet Union before it happened, because he looked at it, did his economic calculation, thought, hang on, this is not sustainable. And maybe it’s worth checking out his analysis. But the very interesting contrast is, he’s an academic and like whether the Soviet Union collapses or not, he’s still got a job, right? Yes. But the very interesting thing is that there were all these people from the CIA, who were saying the Soviet Union is a threat, and will continue to be a threat. And this, this Australian academic with a degree of objectivity could actually see clearly that the collapse of the Soviet Union was coming. So I think that’s a very interesting contrast.

Gene Tunny  25:59

I’ll have to have a look at his stuff, whether was he making the argument that it was because of the economy that was just unsustainable, was it because of the big increase in military expenditure that they had to undertake to match what the US was doing? I mean, this is the this is the story. The the the Americans tell, isn’t it that I mean, Reagan defeated the Soviet Union, because he just massively ramped up US defences

John August  26:22

Well there was also, there was also SDI, which I think was, you know, basically, you know, lasers in space lasers on Earth, whatever, which was ultimately ineffective. But you could say that it was a propaganda ploy that prompted the the Soviet Union spend all this money on stuff that they didn’t need to do so. And that that was one of the things that broke the Soviet Union. Well, let’s just say all these things are possible. Notice I mostly tell the story about Hugh White because it’s a cute story. I don’t carry around all of his conceptual detail, although I’m sure he’d made quite a considered judgement at the time,

Gene Tunny  26:58

I’ll look into it. I’ll look into it. Okay.

John August  27:01

So I suppose the last thing Dan Sanchez was also talking about was social media and the government getting its mitts in and causing problems. And let’s just say, Look, if you are into social media, if you were into the internet, and you understand the development of the Internet, now, look, I actually, as a pirate, I’m certainly concerned about government surveillance, I’m concerned about the protection of whistleblowers, more obviously concerned about companies sort of harvesting data and that sort of thing. You know, that rubric of thing. I mean, I am concerned about government and I’m concerned about business. But let’s focus on social media. The the history is, even of people who are very much, shall we say, anarchist inclined in the way that they relate to social media, the big problem has always been that a positive forum gets taken over by trolls, and you know, people who want to abuse the situation, it basically gets taken over by bad actors, if you’re not careful. And you need moderation to control that. And that is something that elements of the internet, you know, anarchist inclined elements on the internet, have struggled with to get on top of yet. And in a sense, if you set up a chat group, a forum, you know, you’re gonna have to be careful about trolls, to some degree, you’re going to be careful about obnoxious people, or you’re going to have to be careful about, you know, people trying to take over your website and promote gambling or something on it, you know, all those threats. But the idea that the government might come in, and censor you, you know, I just think that that just seems to me to be so naive compared to the lived experience, if you’re actually on the internet, trying to manage these things. Now, one of the things that has actually happened on the internet, it’s a concept they call it, this is the environment here is an amicable dinner party. Right? And this is the thing I do not want to send to someone based on what ideas they’re putting forward. But it may be appropriate to, to call someone out if they’re being obnoxious. And, you know, I thought I, you know, Facebook is a bit controlling and whatnot. Let’s go to some of the alternatives. And rather than the alternatives being a hotbed for interesting political debate and divergent opinions, they tend to get taken over by conspiracy theorists. And that’s my own lived experience on the internet. And it just seems polls apart from Dan Sanchez’s view and look, notice, I’ve told you a few things. You know, I’m not really impressed with government censorship. I’m not really impressed with lack of transparency, protection for whistleblowers, all those sorts of things. Those are a part of the things that I bring to the table. And I suspect we’ll get into it later on. But while I’m not totally against government involvement in society in the economy, by golly, there can be some obnoxious bureaucracy developing very easily. Yeah. And we’ll perhaps get to that.

Gene Tunny  30:04

Yeah. Can I ask you about social media, John? Because I’m actually surprised that your point of view on this, I want to make sure I understand it fully. Because isn’t the biggest threat to our liberty, really the government or government overreach or, you know, factions taking over the government and wanting to impose a totalitarian state? Isn’t that the biggest threat to liberty? Not some trolls online? I mean, you can ignore the trolls, can’t you? And isn’t it better to have a robust debate to have that exchange to? This is why Voltaire didn’t what’s the line from Voltaire about how I disagree with what you say, but I’ll defend, to

John August  30:47

defend to my death your right to say yes, yeah, the person Voltaire was talking about. He was probably saying something Voltaire disagreed with, but he was probably doing it in the context of an an amicable discussion over dinner. Okay, right. And remember, I’ve just I’ve just said, I guess I’m repeating myself. I’m not against people who disagree with me, I am against people who are assholes. And there’s a fundamental difference there. And my concern is not over ideas. Or to some degree, there’s an idea, like someone over there thinks blah, okay, they can think that I don’t care. Are they in my face yelling at me telling you this stuff? Okay, then I have an issue. But I don’t have an issue with someone over there thinking x y Z. So as far as like threat to Liberty now look, maybe you’ve got a point in terms of threats to liberty. Okay. Let’s see now that forget the social scientists who were sort of talking about the state having the monopoly on on violent coercive force, violence, being able to jail people, and so on. So one of the things is you got to understand there are corporate platforms, who are making choices, and some people call that censorship, I tend to think censorship is only something that government does, because the government is backed up by its legal monopoly on force. Right? So So when corporations make a corporate choice, to allow something on their platform, or not allow something on their platform, that’s more of a commercial choice than censorship. But when you have, let’s say, Facebook, or whatever, and there’s only one place you can go to to express yourself, then they’re starting to give state like power, because there’s only one place you can go to. So that’s where things start to get a bit murky. But, you know, let’s say that if there’s multiple platforms, and this platform decides, well, we’re not going to allow blah, for commercial reasons. And there’s other platforms you can go to, then I guess, you know, that’s the old thing of, you know, the, the world of possibilities. And that’s not really a problem. But it’s sort of like what’s, what’s the sentiment, you know, this is a, this is a private entity, but it’s becoming like a public utility. And even though it’s privately run the fact that it’s like a public utility, that makes it more complicated. So let me try to engage with what you’re saying in a more complicated way. If you’re talking about freedom, and the fact that government is the one with the legal, the legal monopoly on force, and that is something we should be concerned about. Okay, I agree with you. If you are saying here is this thing called social media, we want social media to be a social good, that does good things in our world, and is pleasant to use. Maybe that’s a different issue to whether we are free or not. But it is still a legitimate concern, that here is something going on in the world that basically shouldn’t have barbs or we shouldn’t be, we should be able to pick the roses without getting our thumbs sort of on the thorns or whatever. You know, it’s, it’s, as I say, it’s not an issue about freedom. But it’s an issue of is this thing actually worth doing? Is this effective? And I still think that then maybe if Dan Sanchez just wants to bang on about freedom, and ah the states got its legal monopoly on force, blah, blah, blah, okay, if that’s his argument, well, there’s a degree where I’ll back off and say alright if that’s what you want to say, but if he’s want to say, look, here’s this wonderful thing called the Internet, and the major threat to it being effective is the state and I’m sort of saying, no, that’s not the major threat to social media being effective. There’s other things going on that you’re totally blind to. So am I making sense there if you want to narrow your argument to freedom government with coercive monopoly on coercive force? Okay, but that what I guess I’m trying to say is, you’re confusing two different arguments there. And who knows, maybe Dan started out talking about personal freedom and then somehow sort of oozed into is social media effective or pleasant to use and he’s confusing those two concepts. Am I making sense there?

Gene Tunny  35:02

I think you are. Look, I mean, my view would be that we want to be careful how much we censor social media. And if there’s demand for that platform you’re talking about, then you would expect someone would try to set that up. And therefore you would sign up for some sort of moderation. So I don’t mind if people sign up for that, if they go into that. And there’s, you know, when you’re going when you join a platform, you’re conscious that yeah, there will be some moderation because people who are coming to this platform, they want to go to that dinner party you’re talking about. So I guess LinkedIn’s sort of like that, where people are talking about their professional accomplishments, and they’re sharing things on that, that seems to be well more behaved. And they they are expressing some opinions, it seems to be a lot better behaved than say, Facebook or Twitter. I mean, Twitter is bad, because it’s anonymous, isn’t it? So that’s one of the problems there. Yeah, yes. Yeah. Yeah. I mean, my view would be to look, I see the problem with trolling. I think the best thing is to ignore it. And you know, you can block trolls, can’t you?

John August  36:10

Well, look, there are ways of engaging with this. But I’m just saying I guess it’s making the whole thing a bit bit more difficult to use. And let’s just say it’s betraying the promise of social media I suppose would be my sentiment. And yes, whatever problems there are, there are workarounds. But the fact that you need to apply workarounds, I think is perhaps telling.

Gene Tunny  36:32

Right. So, John, we’ve had a good chat about your thoughts on the invisible hand episode with Dan Sanchez. And I’ll have to let Dan know, and I might see if he has any reactions in, in reply

John August  36:45

Yes maybe it would be a bit simpler if we basically just had a face to face discussion some time. Because as I say, I’m yes, I strongly disagree. But I hope at the end of the day, maybe I can buy the guy a beer you know, I hit that.

Gene Tunny  36:56

Yeah, I think he might be in Atlanta, but we could certainly have a, we can certainly have a catch up on Zoom. Or if he’s coming over here to Australia. Or if you’re in Atlanta, you could get in touch with him. Okay, so we chatted about the invisible hand. You also had some thoughts on the goldbacks episode that I did with the gentleman who was who’s setting up the he’s got his goldbacks in the state in, in Utah, which is quite fascinating. Yeah, Jeremy Corden. That was, that was a conversation I really enjoyed. And I learned a lot. So what were your reactions to that conversation? John?

John August  37:32

Let’s just say as a as a pirate, and I say people can do whatever they damn well, like, you know, that within reason, I suppose obviously, the within reason is the big rider. But if people want to have these goldbacks, well, good luck to them, they can do that. And I suppose that it’s more people who were in terms of challenging the current norm. I think that was more something to do with crypto, but let me try to focus on on the goldbacks. I sort of scratched my head over whether this really is that useful? Or whether the mainstream monetary system is that corrupt that we need to bail and go down a different path. So in that sense, I wonder about the motivation. But at another level, I say people can do that whatever they damn well, like, and I don’t think anyone who’s buying goldbacks or trading goldbacks is hurting anyone. So good luck to them. They can they can do that. Now, if people want to have goldbacks, like for, like the imminent political crisis, when money becomes worthless then all the institutions of the US unravel, and they’re sort of survivalists, and that sort of thing. And that’s the way they relate to things. Well, I guess that’s your choice, you can do that. But one of the things where I do actually defend what was the gentleman’s name, Jeremy Corden, Jeremy Corden now one of the things where I defend Jeremy Corden and this goes back into the history of currency and the history currency more relates to modern monetary theory but nevertheless, I’ll talk about it now is that once upon a time you had coins, okay, and and the thing is, before you had coins, you actually had lumps of gold or lumps of silver or lumps of whatever. And when you use them to buy stuff, you’d actually have some scales and every time you bought something’s people would weigh out the gold or the whatever. And what you then had was the king would run a stamping unit and probably stamp their their impression onto the coin. And and what you did then, basically by counting out a given number of coins, you have confidence that that was a given weight of gold. So those coins you’re gonna understand it wasn’t theat currency it was obviously the the underlying value of the metal was what made this coin valuable, but the fact it was stamped made it more convenient than the metal itself. So that was the benefit you had. But let’s look at this stamping unit the Emperor running it. Now keep in mind, we didn’t have advanced economies with like, you know the amount of money you need for anything, because like, let’s just say even if people have got the proverbial licence to print money, even if they’re forging currency on their colour printer, the colour printer costs some dollars, the paper costs, the ink costs some dollars, the the electricity costs some dollars. So even if you’re forging currency, yeah, it still costs you some stuff. And going back to the Emperor with his stamping rig, you know, someone is sitting there, measuring out the gold, putting it there applying the stamp, and I guess they probably whacked it with a mallet or something to form it into a coin. That’s a labour intensive activity. Right. So that is a reasonable thing. So the thing is that this gentleman was charging for his goldbacks. And I think that was legitimate. The other thing is that the another metaphor here is, this goes back to the time of coal, okay, you someone will buy 10 tonnes of coal, and then sell it off in bags of coal. And basically, they’d buy those 10 tonnes of coal at a very cheap rate by volume. And because they were segmenting it out into smaller amounts, you know, you’d pay basically more per lump of more per pound of coal, I guess it would have been then. And the service was taking a large amount and turning into small units. Now, let’s say you go down to the service station and buy some petrol. Now I’m sure the person who runs a servo buys that petrol at a very cheaper amount than you would put in into your car, but you are buying the, the petrol one tankful at a time, that’s convenient, that is the service that the service station is providing you, they’re taking something of a large volume, and segmenting it into smaller amounts, smaller quantities that you as consumer can then officially use, and they are charging for that. And okay, they’re going off on quite a tangent, you know, farms will actually have a very big container of petrol. And you know, they’ll have a truck that visits you know, once every, I know, weeks or months, and that will fill up the container. And that’s because for someone who is on a farm, it’s a lot of effort to drive down to the servo to top up, yeah, right. So they have to go through that. But you and I can buy our petrol one tank at a time. And the servo person running the servo is charging, and I think they’re charging legitimately, it’s a reasonable thing to do for them to charge for that. And so running all these things back, it’s a legitimate thing for this gentleman to charge for the goldback in the same way as all these things. The only issue is, is he making a monopoly profit, who is competing with him? Is that a legitimate amount of money he’s charging. And, you know, if he actually wanted to be transparent about these books, we could all sort of look at that if he wanted to be that public about and then go Oh, yeah, okay. That’s a fair return. Okay. Fair enough. If he wanted to be that transparent, the thing that would keep him totally honest, would obviously be other people competing, then again, look, notice I said, Oh, it doesn’t hurt people, people can do what they damn well, like, blah, blah, blah. But I would still say this guy has been innovative. He’s putting himself out there. He’s trying something out. I guess there’s a legitimate moral return for taking that sort of risk and just having a go. Yeah. And that’s the thing, some things, you know, you wonder, is this a monopoly profit? Or is it a legitimate return on your creativity? Bit of a rubbery distinction between those things, but I don’t know how much he’s morally entitled to charge. He’s certainly morally entitled to charge something there.

Gene Tunny  43:35

Well, I mean, that whole question of what’s he morally entitled to charge? I mean, who’s to say, I mean, this is, that would be a value judgement, wouldn’t it? So? Yeah, I mean, I asked the question, I asked him a question. Because when he will, how much of the value of the goldback is due to the gold? And it was a half? Was it a bit a bit under half? Or maybe half? Oh, okay. And I wasn’t, I should have thought more of the time. Okay. So he’s this, he’s got this new process, and he’s got some equipment, and he does need to earn a profit. Of course, I don’t have a problem with him earning a profit. And I guess this is a sort of thing where yeah competition that potentially this is something where there could be competition from other providers of goldbacks a similar type of currency.

John August  44:23

And you wonder if he’s got a patent on the technology. And yeah, my whole concern about IP, that is a pirate thing that for another time,

Gene Tunny  44:33

what about your thoughts on crypto? You had some thoughts on the crypto episodes that I’ve had recently had? Well, in the last several months or so?

John August  44:41

Yeah, yeah. Well, I suppose one of the things is that I guess I do have some understanding of the mathematics of it but I know you had one gentleman there who was trying to say, look, Bitcoin is good and Ether is about some sort of oligopoly controlling the flow of money. Yeah, and I will would differ with that based on what I understand. Now. Let’s also say there’s something called the central bank digital currency. And let me tell you some banks are actually doing trials in association with the Reserve Bank doing a central bank digital currency. And let me tell you, there are some people out there that are freaking out about this. They’re, they’re really going down the conspiracy, the conspiracy theory, rabbit hole. And I can but say, I tend to think it’s too contentious, you want to increase seriously increase the level of trust in government and the financial affairs, because a lot of people are going neurotic about this stuff. But the thing about Central Bank digital currency, and I think your guests identified this too. Central Bank digital currency is not crypto, metaphorically, it is a spreadsheet somewhere in the bowels of the Reserve Bank. And you’ve sort of put up your hand and someone changes the entry in in that spreadsheet in the Reserve Bank. Crypto is much more distributed. Like in order to run Bitcoin, you have computer many, I don’t know how long well have, let’s say, 1000s of computers around the world, but don’t quote me on that one. And the thing is, for something to be validated, more than 50% of those computers have to agree that x y Z is the case. Yeah, now that makes it very resilient against failure, very resilient against fraud, you know, various things like that. And yes, there has been fraud and dodgy stuff happening in crypto. But that’s been exchanges, not in, you know, the actual crypto itself. So your reserve bank, digital currency is a spreadsheet. Bitcoin is basically a consensus thing where you have to have more than 50% of those computers to say that certain thing is the case. And what that mean, that means it’s resilient, it means that it’s actually not subject to the whims of government policy not subject to the whims of the Reserve Bank, crypto is or bitcoin is, and it will continue to roll along, according to its algorithm that was predetermined however long ago. So so that’s a story with crypto. That’s one that’s a story with Bitcoin, I should say. And at the other end of the scale, you’ve got your central bank digital currency, which is just in so notice this thing, it’s a single point of failure. If someone hacks into the reserve bank, it can be compromised. You cannot meaningfully hack Bitcoin, the only way you can turn bitcoin is to control more than 50% of the computers around the world are doing Bitcoin. Right? Right. So and then the thing that’s in the middle is Ether. And my understanding is ether is still run by a pool of like, you know, let’s say 1000 1000 computers. And what you can say is that, okay, it’s in between the two, it’s not a total dispersion like Bitcoin. But equally, the idea that ether could somehow be swung by vested interests is hard to believe, right? Let’s, let’s say for the sake of argument, 500 people, and Ether is mostly running by its predetermined algorithm. You know, it’s hard to believe certainly, you had a guest who was critical of Ether as a quid, I sort of say it’s in between the point is, now the other thing that’s also an issue is, is our mainstream financial system that corrupt or that bad? Now, your guests were basically they were expressing their concerns. But I tend to think, look, you can say that this financial system, our democracy is messed up, and you can bail or you can say, Well, why is democracy not working to the point where we might have these dodgy policy outcomes and spend some time thinking about that? You know, it’s I have this feeling that they’re, that they’re, they’re bailing without due consideration, I suppose, right? In a sense, if people are free to do that. Now, the other thing they talk about, they do talk about the threat of banks suddenly denying us access to our funds. And people have some concern about that. So far, banks haven’t done that. I’m not saying this is a bad thing. But there are narky things like garnishee orders, like if you have a debt, yeah, you can actually make an arrangement. And the banks will sort of basically grab some, grab some of your money as it could flow through your account, and you have no control over that. That happens, but maybe that’s a legitimate thing for the government to enforce. But the point is, the stories of the banks being in some way arbitrarily abusing their power. I don’t think that really happens. I think the concern is overstated, but it’s a matter of judgement. If you really are that upset with the banks and you want to go your own way. Well, fair enough.

Gene Tunny  49:48

John, just on that, I mean, there have been some cases where the banks have denied access to funds to people, where the US Treasury has issued one of those what does it call the, there was that Russian businessman or was he? was he killed? Yeah.

John August  50:05

So it’s the whole thing of Ukraine being pulled out of the SWIFT network. There’s a few dodgy things like that. But, but yeah, okay. You’re, you’re telling me something new? I must say,

Gene Tunny  50:14

No. I mean, so one of the one of the reasons people would, they’re concerned, and maybe this is something that’s a bit of an edge case, or it’s an extreme sort of scenario. But there are situations where government can tell banks deny people access to the funds. And you might argue, Well, okay, well, that’s a good thing, because these people are siding with a dictator, or they’re associated with a rogue regime. So fair enough that

John August  50:42

well, if that is a concern for you, then maybe crypto is a way of dealing with that. Now, let me say that there is there’s there’s one legitimate use case I can think of for crypto, that let’s say you’re a Filipino worker working in Saudi Arabia, or United Arab Emirates, or something like that, you want to get your money back home? My understanding is if you can play the game with crypto, you can actually do it with a much lower overhead than a means of international money transfer. Yeah, I mean, there’s cute stories about in Africa, I think telephone credits on mobile phones become used as currency. Now, again, that’s a centralised currency, like the spreadsheet at the Reserve Bank, but it’s still an interest in digital currency that sort of used instead of money. So there’s a use case there. Now the other thing I would say is that maybe crypto is keeping Visa card and so on honest. Now one of the things about if you’re I want to I’m not sure on the exact details, but if you are I wanted to transact in crypto would probably have to pay the miners like $100 to process our transaction. But that’s a fixed amount. These sorts of charges you a percentage, while you would imagine the amount of computational power to process my purchase of $1, or $1,000 is the same. While with crypto, it’s a fixed charge. Also, the banks run some pretty strange trade offs involving fraud because the calculations are there’s a nonzero quantity of fraud, which is acceptable, because otherwise you just make life too difficult and things don’t happen. So there’s some complicated trade offs that banks are making. And what I’m saying is maybe crypto is keeping the banks honest, is keeping Visa honest. But what I will also say the thing weird thing about crypto is once upon a time, you had all the evangelists, the people who really believed in an alternative currency that wasn’t controlled by the banks, or the government, and they really believe that whether they were right or wrong, they really believed it. But now I think you’ve got a lot of snake oil merchants, you know, people who just want to make dollars. And the scene has become dominated by the get rich quick people, rather than the genuine evangelists. And for me, that sort of changed the whole feeling of it. Yeah, you know, if it never left the, you know, you’ve got to be a nerd to really get into crypto. On the one hand, it’s limiting the market, but it would also have been kept its purity, you know, so yeah, there’s some stories there. Okay, so that’s a bit of a ramble. But I hope I’ve sort of said said some useful things about crypto.

Gene Tunny  53:16

It’s made me think, John, I like it. I’ll just ask one more question, because we’ll have to wrap up soon, unfortunately. But I know we could keep on talking. The thing I was thinking of was the Magnitsky Act. I don’t know if you’ve heard of that, which was there was a bill passed by US Congress and reading from Wikipedia signed into law by Obama in December 2012, intending to punish Russian officials responsible for the death of Russian tax lawyer, Sergei Magnitsky in a Moscow prison in 2009, and also to grant permanent normal trade relations status to Russia. Hang on. And then there’s another act of 2016 it authorises the US government to sanction those foreign officials worldwide, that a human rights offenders freeze their assets and ban them from entering entering the US. Now, I don’t have a problem with any of that, because some of these people probably deserve it. Yeah. But there is this concern that the banking system could be subject to political influence.

John August  54:11

Well, the thing is, at some level, how corrupt is democracy? Do we have faith in democracy? Do we have faith in the means by which the US government makes those decisions? Now this is going off on a whole ruddy other rabbit hole, but the US government has form in terms of meddling in global affairs. You know, there’s Diego Garcia. Goodness me, I think there was, you know, in El Salvador, that’s right. 1986 there were US trained trained soldiers that killed some priests and nuns, a whole family. The list will go on in terms of like the US doing dodgy shit around the planet. And it’s sort of like you know, they give a lot of foreign aid but equally they like, they like they run a protection racket. You got to pay your protection money along the way to participate in the rules of US rules based order and they, you know, they ignore the International Criminal Court and yada, yada yadi. So, look, the US does have a dodgy record. But notice I’ve shifted the ground a bit I’ve sort of said, look, what is the legitimacy of the US in broader terms, and it’s got its things to criticise, maybe those decisions you are making are valid decisions for the US government to make. And yeah, this is I guess, I’m not really answering any question. It’s getting a bit messy and awkward but yeah, if you think that participating in this global framework, and giving the US that sort of discretion is too much, then maybe crypto is the way to go.

Gene Tunny  55:43

Or any government. I mean, I don’t mean to pick on the US. It’s just that it’s the you know, the dominant country. And that’s, that’s very topical. Finally, because this will have to be the last question. What about the concerns people have about CBDC?, you mentioned, I’m trying to understand what your response is. You said, well, there are some people who may be there. You know, there are conspiracy theories about what it is. But you also said that this is CBDC, but you then also said that, are you concerned about political stability? Are you concerned that this is something that will make people more distrustful of government?

John August  56:21

Yes, I guess so, let’s say, look, this may not be what government is up to but there are people who are out there who are saying the banks and the governments are trying to wean us off cash, yes. So we do not use cash. And whatever, whatever these people are thinking they’re thinking government does not have good reasons for having that agenda. They wanting to wean us off cash, so they have more control of us. Right now, there’s a certain conspiracy theory, rabbit hole here, but a reasonable number of people. I don’t know what the proportion is, you’d have to talk to people who know more than me, but some proportion of people are very concerned about the government trying to stop people from using cash. And they see that as part of an agenda. And obviously, you can have your international connections. I do want to do not want to go there. But you know, there’s this whole constellation of conspiratorial concerns, and the government going down the route of central bank digital currency is feeding these people’s concerns. And whether you say that’s right or wrong, people are going to get very neurotic and conspiratorial about this.

Gene Tunny  57:28

Okay, yeah. All right. John August. Any any final thoughts before we wrap up, but it’s been great hearing your reactions to recent episodes, and it makes me think a lot more about these issues. So I appreciate it.

John August  57:43

Okay. Well, I’ve got many more things to say. But that’s probably the appropriate for the present, I think. Yes.

Gene Tunny  57:49

We’ll catch up again soon. John, for sure.

John August  57:55

Sounds good.

Gene Tunny 57:59

Okay, thank you. Thank you.

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58:42

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Credits

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

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

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