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

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

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About Professor John Cochrane

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

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

For more on John, check out his bio here:

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

What’s covered in EP214

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

Links relevant to the conversation

Video of the Free to Grow event on YouTube:

CIS web post about the Free to Grow event:

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

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

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked at by a human, Tim Hughes from Adept Economics, who did his best to decipher some tricky dialogue that otters understandably missed. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.

Gene Tunny  00:03

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

John Cochrane  00:17

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

Gene Tunny  00:26

I’m getting through it!

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

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

John Cochrane  02:24

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

Gene Tunny  36:19

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

Female speaker  36:24

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  36:54

Now back to the show.

36:59

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

Gene Tunny  37:17

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

John Cochrane  37:55

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

Gene Tunny  39:45

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

John Cochrane  40:02

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

Gene Tunny  41:20

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

John Cochrane  41:38

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

Gene Tunny  42:57

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

John Cochrane  43:16

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

Gene Tunny  43:54

That’s okay.

John Cochrane  43:56

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

Gene Tunny  44:17

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

John Cochrane  45:01

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

Gene Tunny  47:00

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

John Cochrane  47:04

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

Gene Tunny  47:08

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

John Cochrane  47:27

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

Gene Tunny  47:31

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

John Cochrane  48:08

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

Gene Tunny  50:27

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

John Cochrane  50:31

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

Gene Tunny  50:43

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

John Cochrane  50:54

I welcome speeches. Short speeches.

Gigi Foster  50:56

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

John Cochrane  52:08

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

Gene Tunny  53:47

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

Peter Tulip  53:54

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

John Cochrane  54:43

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

Gene Tunny  55:56

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

Michael Potter 55:59

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

John Cochrane  56:23

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

Gene Tunny  58:07

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

David Tregenza 58:14

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

John Cochrane  58:38

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

Gene Tunny  59:36

Nicholas Moore is it? Has the microphone.

Nicholas Moore 59:37

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

John Cochrane  1:00:23

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

Nicholas Moore 1:00:28

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

John Cochrane 1:00:33

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

Gene Tunny  1:01:44

Very good. Michael Brennan is it Michael?

Michael Brennan 1:01:46

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

John Cochrane  1:02:31

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

Gene Tunny  1:03:36

Okay. There’s one question over here.

David Murray 1:03:39

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

John Cochrane  1:03:47

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

Gene Tunny  1:04:21

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

John Cochrane  1:04:51

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

Gene Tunny  1:08:46

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

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

56:06

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Categories
Podcast episode

Growth or Degrowth? w/ Oliver Hartwich, NZ Initiative – EP208

Show host Gene Tunny delves into the concept of Degrowth: the idea of deliberately shrinking economies to avoid the runaway climate change, ecological collapse, and societal breakdown that degrowth proponents are worried about. Gene first discusses degrowth with Oliver Hartwich from the New Zealand Initiative, and then responds to questions about degrowth at a recent University of Queensland Politics, Philosophy, and Economics student event. 

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: Dr Oliver Hartwich, NZ Initiative

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative. Before joining the Initiative, he was a Research Fellow at the Centre for Independent Studies in Sydney, the Chief Economist at Policy Exchange in London, and an advisor in the UK House of Lords. Oliver holds a Master’s degree in Economics and Business administration and a PhD in Law from Bochum University in Germany.

What’s covered in EP208

  • [00:04:39] Degrowth to stop climate change? 
  • [00:08:00] Economic growth and adaptation to climate change? 
  • [00:11:53] How a threatened lungfish colony stopped a new dam in South East Queensland. 
  • [00:15:47] Are we rich enough already? 
  • [00:20:20] Democratization of wealth and prosperity. 
  • [00:24:05] Economic growth as a positive. 
  • [00:30:39] Carbon pricing. 
  • [00:34:10] Decreasing Antarctic sea ice extent.

Links relevant to the conversation

Gene’s September 2023 Centre for Independent Studies (CIS) paper on Degrowth:

https://www.cis.org.au/publication/debunking-degrowth/

NZ Initiative podcast from which part 1 of this episode was borrowed:

https://www.nzinitiative.org.nz/reports-and-media/podcasts/podcast-debunking-degrowth/

Transcript: Growth or Degrowth? w/ Oliver Hartwich, NZ Initiative – EP208

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

Oliver Hartwich  00:03

William Stanley Jevons in the 1860s actually predicted the word would run out of coal. This is general tendency to do linear thinking where everything is always continuing on a certain path. I mean, there was a letter right I believe, in the London Times in the early 20th century, predicting that London at some stage would be under six feet of bossman year from all the offices in the city. It is this tendency to always think we’re just continuing on the same path and it will never change.

Gene Tunny  00:41

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. To grow or not to grow, or indeed to D grow. That is the question. Do we need to rapidly shrink our economies to avoid runaway climate change, ecological collapse and societal breakdown? This episode features on my recent conversations on degrowth I speak with Oliver Hartwich from the New Zealand initiative. And thanks to Oliver for letting me reuse the recording from the New Zealand initiative podcasts that are recorded with him. This episode also includes a response that I gave to a question from Joe Christiansen at a recent event hosted by the University of Queensland politics, philosophy and economics society. Okay, let’s get into the episode. I hope you enjoy it. After you Listen, please reach out and let me know your own views on whether we should pursue D growth or not.

Oliver Hartwich  02:07

Hello, and welcome to the New Zealand initiatives podcast. My name is Oliver Hartwich, and today we are joined by our special guests from Australia we have gene Tunny, who is an adjunct Fellow at the Centre for independent studies, and also a director of ADAPT economics consultancy in Brisbane. Welcome to the podcast Gene.

Gene Tunny  02:24

Hello, Oliver, pleasure to be here.

Oliver Hartwich  02:26

Great to have you with us because we want to talk about a paper you just published last week with a centre for independent studies called debunking degrowth. Now, I thought we should start this conversation by just admitting freely that we are both economists. So degrowth is something that doesn’t come naturally to us usually, because normal economic theory, correct me if I’m wrong is all about trying to find better ways of combining factors to do more with less or to do more with the same, to find different combinations to create growth, to really find out what works and make an economy grow. And now suddenly, we’ve got a bunch of scholars turning this on its head telling us to actually try to not create so much wealth and not create so much prosperity, but really put the reverse gear in and go in the other direction. Is that a fair summary of what this movement is about?

Gene Tunny  03:16

Yes. I mean, they certainly want us to go in the other direction. I mean, the two steel man, their argument, I think, how I describe it is that they think we’re breaching these planetary constraints. So they think that we’re at a level of consumption, whereby we are essentially, you know, we’re sacrificing the well being of our children or grandchildren. So they’re concerned that we’re, we’re going to destroy the planet, some of this degrowth literature is it’s apocalyptic. It’s, I mean, I think it’s catastrophizing. But you know, they, they’re worried about climate change. They’re worried about ecological breakdown. They’re worried about resources being exhausted. So yeah, look, I largely agree with you, but to to steal man their argument, they think there’s evidence to support the view that we’re consuming too much if we want to have you know, sustainable living standards for future generations.

Oliver Hartwich  04:18

Right. And in your paper, you then produce a reproduce their claims, and you’re debunking them one after the other. And you’ve got five claims in your paper. So I thought what we might do so much is go through the list, and try to figure out what this movement wants and your response towards so the first unproven claim you talk about in your paper is one that you already alluded to. We need to de grow to stop climate change. Why do they say that and why do you think this is wrong?

Gene Tunny  04:46

Oh, well, essentially they’re they think that we’re on these tipping points. I mean, you’d know that it appears that the planet is warming I mean, there’s scientific support for for co2 We were warming the atmosphere to an extent. So that’s difficult to contest. But they claim that they believe these real these tipping points sort of scenarios. Whereby, I mean, the permafrost melts. There’s all this methane release, you know, we have the, what is it one of those ocean currents that shuts down? And I mean, all sorts of apocalyptic scenarios. And I mean, just looking at it. I mean, I think that the evidence for that is, I mean, a lot of it comes out of computer modelling, there are all these computer simulations, whereby if you look at what they’re doing a lot of the conclusions, the apocalyptic conclusions are essentially assumed or built into the model. So I mean, my feeling is that the evidence isn’t, isn’t strong enough to justify that apocalyptic thinking. Sure, there’s some warming going on. But there are policy measures been introduced to try to address that, or, I mean, none of the credible modelling on climate change mitigation has degrowth. in it. I mean, we can still grow, we’ll still be wealthier in per capita terms. Maybe the growth rates less or more if we respond to climate change. I mean, now we’ve got people saying that if we don’t address climate change, we’ll have lower growth. So look, I think they’re making big claims about how we’re going to, you know, have this unsustainable runaway global warming if we don’t do something radical and massively cut back our consumption. So that’s essentially their argument. And I just don’t think the evidence supports that.

Oliver Hartwich  06:43

But of course beyond that, because we’ve already decoupled economic growth to a degree from emissions. Yeah. So just because you’re growing doesn’t mean you’re necessarily growing your emissions.

Gene Tunny  06:53

Yeah, yeah, exactly. And I think they’re ignoring a lot of the technological change. They’re, they’re ignoring our capacity for innovation. Yeah, that’s absolutely correct. So I guess not to not to necessarily defend them, but they do address that decoupling argument. And they do acknowledge that that, you know, the emissions intensity of GDP is declining. But in their view, I mean, we’re still increasing co2 emissions, or sorry, we’re still, you know, the co2 in the atmosphere is still growing. So they’re a bit sceptical of that whole decoupling argument.

Oliver Hartwich  07:31

There’s another aspect to the whole climate change debate. And that’s adaptation, of course. So I mean, if we’re comparing countries like the Netherlands and Bangladesh, Bangladesh is subject to flooding, but so is the Netherlands because they are mainly under normal sea levels. And yet, the Dutch build dikes and all sorts of infrastructure to deal with that, because they could afford it. And then Bangladesh, and they’re still waiting for that to happen. So actually, isn’t actually economic growth, the thing that saved the Netherlands from flooding

Gene Tunny  07:58

out? Yeah, look, that’s, that’s a good point. I mean, you wouldn’t want to de grow and stop emerging economies from getting wealthier, because that will decrease their capacity to actually adapt to deal with it. I absolutely agree with you there. And look, that’s one of the things that the degrowth movement misses in my view. I mean, there’s all of this, you know, it’s a lot of the standard sort of criticism of, of capitalism and, and economists that you get from people on the left, and yeah, I mean, it ignores the fact that I mean, since countries such as China and India embrace the market, right, China in the 80s, and things are paying and then we had the, the end of the licence, Raj and in India, I mean, they’ve they’ve had, you know, much better growth than previously and we’ve had over a billion people lifted out of poverty. So yeah, absolutely agree with you there, Oliver.

Oliver Hartwich  08:52

Okay, then let’s move on to your second unproven claim, we need to de grow to stop resource depletion, environmental degradation and biodiversity loss. That leads us straight into the debate around Julian Simon, or if we want to go back a little bit further. Thomas Malthus. Yeah, absolutely.

Gene Tunny  09:08

And I think history shows that I mean, we are able to address these issues. And a lot of the concerns came best addressed through the market through clear delineation of property rights. A lot of the problems we have in Brazil, for example, that there was a recent economist article I’ve mentioned in the, in the paper, which is essentially saying a lot of the problem with the rainforest, destruction of the rainforest is lawlessness, it’s bad enforcement. Right. And look, you know, there are efforts all around the world to, to conserve to the off the common Exactly, exactly. So it’s really just, yeah, they just seem to ignore that. You know, what economists know about the people who own a resource are going to, you know, protect it and conservator. So yeah, absolutely. And look, I mean, look, you have to acknowledge that there has been a loss of biodiversity over over decades. And I mean, I think we’re starting to address that we’re starting to arrest that decline. And certainly the so I’ve got a there’s some evidence there about the decline in biomass globally or number of animals. And, you know, that’s, that’s been arrested that decline, which, which is good. So look, I think, you know, it’s a lot of just negativity, and isn’t capitalism awful. Whereas, really, I mean, we can address these issues, they’re within our ability to control and look, just look what we’re doing in Australia. I mean, we’re a wealthy country. So we, and this goes to your point before all over that the wealthier countries are going to be better able to address these issues. I mean, we’ve got things like biodiversity offsets. Anytime you want to do a development that impacts the environment, you have to prove about how you manage those impacts. And we’ve even stopped, we stopped the dam in southeast Queensland, even though we need the water. Right, it’s good. We’ve got a hugely growing population. And we stopped a dam because we were concerned about a lungfish. So yeah, I mean, we are trying to address these issues. And I think, yeah, that that argument really doesn’t, doesn’t hold up. And the other point too, as you know, as an adopt a dam over length, yep. Travis didn’t dam. That sounds like an episode straight out of utopia. Well, it happened. It was Peter Garrett, who was environment minister here. So um, yeah, it was a huge issue, because we had a water crisis in the 2000s here in southeast Queensland. And so we built a desalination plant, which is hugely expensive. We built a recycled water plant. And then we were looking at a dam north of Brisbane in the Murray Valley, the travesty and dam and it got right to the point where the federal government had got to the federal approvals process and it was blocked by the environment minister, Peter Garrett, former lead singer of Midnight Oil. Yes, I have this man. He was the environment minister. It’s a burning blocked it because the lungfish was threatened. So yeah, apparently there was no way of, of looking after the lungfish if you built the dam. So yeah, that’s that’s just an example of how we do care about the environment in this country. It’s not as if we’re sacrificing the environment for growth.

Oliver Hartwich  12:31

The other idea of course, in all of us resource depletion seems to be one of these ideas that you simply cannot ever refute, keeps coming back. Going back to Morpheus, of course, that’s the starting point. But William Stanley Jevons in the 1860s actually predicted the world would run out of coal. It’s this general tendency to linear thinking where everything is always continuing on a certain path. I mean, there was a letter right, I believe, in the London Times in the early 20th century, predicting that London at some stage would be under six feet of horse manure from all the horses in the city, it is this tendency to always think we’re just continuing on the same path, and it will never change.

Gene Tunny  13:11

Yeah, exactly. So and the thing with the scarcity of resources, I mean, we know that as they do become scarcer, the price is going to increase. And that’s going to encourage conservation, or it’s going to encourage people to switch to two alternatives. So and you mentioned, you alluded to the Julian Simon Paul Ehrlich bet, which ended up losing because he thought we were in the 70s, they thought we were on a path to, you know, massive resource scarcity. And that

Oliver Hartwich  13:41

perhaps, just for the benefit of listeners who may not be aware of that, so can you tell us briefly what this bench was about?

Gene Tunny  13:49

It was about prices of commodities, they selected, maybe a couple of dozen commodities, major commodities. And Ehrlich was betting that that increase in price over the the 80s by a certain percentage, amount across extreme people would run. Exactly because there was all of that modelling in the world. Ehrlich was infamous for that population bomb book in the late 60s, which forecast that you know, would, you know, even with, like, what was it 888 billion people which where we are now we’d end up with, you know, massive famines and the chaos and all of this. And

Oliver Hartwich  14:27

then we’ve got the Club of Rome, of growth and all of our

Gene Tunny  14:30

forests and meadows, and there was all of this apocalyptic thinking, you know, Doomsday was at hand. So I think what I found interesting looking at this old degrowth literature, is a lot of the a lot of the concerns or a lot of their arguments could could be questioned or rebutted, if you go back to just what sensible people like Robert Solow and then the Treasury here in Australia, what they were saying in response to the club Right, right. Yeah. So

Oliver Hartwich  15:03

we make made a very similar point in one of our publications. A few years ago, we had a little booklet published under the title The Case for economic growth. And we were talking about environmental Kuznets curve, where, first of all, when the economy grows, yet there is an impact on the environment, and it might be negative. But once you get past a certain point, people will demand action and clean it all up. Yeah. And actually, it gets better over time.

Gene Tunny  15:26

Yeah. And that’s one of the points that I made in the paper. Yeah, absolutely.

Oliver Hartwich  15:31

Your third point, your third unproven claim is perhaps even more interesting. We are rich enough already? Well, it would be harder to make that claim in New Zealand, because we’re 25% behind Australia. What’s the thinking behind that?

Gene Tunny  15:47

Oh, well, they make the argument that if you look at happiness, Carl, you know, correlations of happiness and GDP per capita beyond a certain level, it starts to flatten out. And so the argument is that countries such as Australia, and I mean, maybe New Zealand doesn’t qualify yet, but we’re wealthy enough already got a way to go. It’s all about you know, it’s it’s an issue of inequality. So there’s this sort of argument that I look, the West is rich enough already. It’s if you concern about the rest of the world, and it’s, you should redistribute that income. And you know, the people in the West were the ones who, of course, we’ve caused all the problems with climate change, et cetera, it’s all our fault, imperialism, and all of that. And so that we should redistribute our income and wealth, the problem is, that’s only going to go so far. Right? It’s not going to solve the problem. And it’s not good for, you know, incentives. Right. It’s not good for it’s not sustainable. So it’s just a really bad argument, I think. And, and it also, I mean, when you look at it, this, this is going to require authoritarian measures to introduce because at the moment here in Australia, we’re going to cost a living crisis, right? So you’re not going to be able to tell people, and we’ve got no shortage of housing, you’re not gonna be able to tell people, you’re rich enough already. Because a lot of people who don’t know when I’m What are you talking about this nonsense? You’d have to engage in really authoritarian measures to bring about D growth. So yeah, I think it’s a really bad argument of the D growth people.

Oliver Hartwich  17:20

Exactly. Right. I think there is another point actually, that we should consider. Sometimes it’s not so much the absolute wealth that you hold. It’s the direction of travel. So I’ve actually seen some really happy people and countries that are not that rich yet, but they’re travelling in the right direction, whereas you can be in a richer country that’s kind of stagnating, declining, and feel really miserable about it. So actually, people want to have hope they want to see that the future is better. And then it almost doesn’t matter from which starting point you come in just the direction of travel that actually determines how happy you are.

Gene Tunny  17:51

Yeah, that’s a good point. I mean, the the example of a country that was rich and started declining, everyone was miserable. It’s probably Britain in the 1970s. So yeah, I think that’s a that’s a good point. Yeah.

Oliver Hartwich  18:03

unproven claim number four, we need to de grow to reduce inequality. What about well,

Gene Tunny  18:11

yep, I mean, I guess this is this is related to that previous point. So and this is part of their whole critique of capitalism that capitalism makes the rich richer and the poor, poor? And look, I think that’s a really silly argument. And there’s not a lot of evidence for that. And, and if you look at just the huge gains we’ve had in living standards in emerging countries, emerging economies over the last 30 years, since we’ve opened up to the market, and it’s just extraordinary, over a billion people taken out of out of poverty, there are a few stats that I use, or that the World Bank’s produce, which shows that I think, around 1990, it might have been 70% of the world was living on $6 us a day or something like that. So not the diarist poverty of $2 a day, but And now that’s under 50%. Right. So if you look at the numbers living on $2 a day, then you have, you know, a big decline there, too. So we’ve got huge gains, so that in relative terms the world is becoming more equal, but we are seeing in some countries that, you know, there is an increase in inequality, particularly in the United States. But I think you don’t want to then conclude that our the market systems terrible isn’t, because a look I mean, that’s associated with new technology. I mean, we’ve gone through a period of, of huge technological disruption and I mean, America, America is the leader in that and so therefore, the people who are responsible for that are doing doing very well. And look, you probably you’re better off having a more productive a wealthier economy. And you know, having In the pie bigger and then sure you can then have a debate about the, the shares of that pie. But you want to have the biggest pie possible, I’d say,

Oliver Hartwich  20:09

because in the end, what capitalism and what economic growth? Does it actually share us? The wealth with more people, it’s the democratisation of luxury, if you like. Yeah, I remember actually speaking as an event, and quite a few years ago, under the headline, people with flat screen TVs should stop whinging about capitalism. One of the arguments I made was actually, if you teleport at someone who was really, really rich a few 100 years ago, so you take the Sun King Louis Catorze, and you kind of get do rica tours and visit 21st century Australia or New Zealand? What would Luca tours be really impressed about? Well, that you could switch on the light with a switch, or that you could read your newspaper from a foreign country on your phone, or that you could just call someone in a distant city. But I think what he would really be surprised about was that this was available not just to his modern day equivalent, but to everybody. And so we have actually completely democratised wealth and prosperity to a degree that we had never seen it before in the history of humankind. No, absolutely.

Gene Tunny  21:13

I mean, indoor plumbing is one of the great innovations and better sanitation. I mean, the world today is clearly much better, even even if you’re a king and seventh eighth 13th centuries, and yes, you’d much rather live today I’d say yeah.

Oliver Hartwich  21:30

Yeah. Even if you’re not a king. Which then leads us to the combination of all these unproven claims. Number five, we need to de grow to avoid economic and social collapse. So listening to you, it seems obvious, it is the opposite. If we want to avoid social and economic collapse, we need to grow.

Gene Tunny  21:50

Yeah, well, this is part of that whole, apocalyptic or catastrophic line of thinking. And you know, that there was that study a few years ago by she was a consultant. And she wrote this, I should have I’ve got the I’ve got the reference in the in the report, but she reproduced the the meadows analysis, or the the Limits to Growth analysis from the 1970s. And she’s saying, Oh, if you look at the data, we’re on track for societal economic and societal collapse, which is what the limits to growth model was predicted. So she had an update to limits of growth. Harrington is a surname. But I mean, it just, it’s part of this, you know, catastrophizing, when you look at these models, and this is a point that solo made back in the 70s, when he just tore apart the, the whole Limits to Growth analysis in his great challenge article he wrote is the is the end of the world at hand that are referenced in the paper. And I mean, they just build in the fact that we’re going to hit some point of no return, and then everything’s just going to collapse. So there’s a in their simulations, they have eventually population industrial output, reach some peak and then just collapse. But it’s just built into the model that programme that into it. And you can’t say that because we’re or maybe some variables are tracking with what the model forecast, you can’t then conclude, oh, here, well, then we’re gonna hit this peak, and then we’re going to suddenly collapse because there’s no evidence that that’s going to happen. And any person who does forecasting knows that these tipping points, these turning points are the most difficult things to actually forecast. So yeah, it’s just, again, it’s just catastrophizing.

Oliver Hartwich  23:42

Absolutely. So, in conclusion, you have saved conventional economics, you have actually demonstrated that what economists have been telling us all along is basically Correct. Actually, economic growth is a positive. And by finding better ways of combining economic factors of production, we are improving prosperity, we are making societies return that’s a good thing.

Gene Tunny  24:05

Look, yeah, I largely agree with that, Oliver. And what I would say is that, just as we degrowth, like targeting negative growth would be silly, or not, when I’m not necessarily advocating that we target a specific rate of economic growth, because ultimately, that’s going to be the product of, of the market of people making. Yeah, and I don’t want to be, I’m not saying that look, unfettered capitalism is what we want. I mean, we need some regulations, we, you know, there are some market failures we may need to address but what I’m saying is that, you know, this whole degrowth thing is rather silly and, and there’s no evidence to suggest that we can’t continue to grow and really, I mean, growth is a solution to a lot of problems. So particularly if you’ve got a shortage of housing, you know, if we want to lift living standards in emerging economies, where they’re still much lower than, than here in Australia and New Zealand,

Oliver Hartwich  24:58

and of course for the last few years we’ve had a movement, trying to make the case that actually it’s not about growth. It’s not about conventional economic measures, it should be something bit fuzzier, something like a well being budget. That’s what we pay on it here in New Zealand. And I think your minister of finance or whatever he’s called an Australian federal, Jim Sharma has has bought completely into that narrative. And, you know, also on to wellbeing budgets, but that’s not really compatible with and with a growth mind or growth. Focus.

Gene Tunny  25:27

Yeah, I mean, that’s, that’s a separate thing. I mean, I don’t necessarily have a problem with looking at a broader range of indicators than than GDP per capita, but you just don’t, I mean, look at a lot of that. The well being or to

Oliver Hartwich  25:42

me, it always sounded as if they were trying to find an excuse for not having to deliver GDP per capita increases. And so they’re looking for something fire and quality well being. Yeah,

Gene Tunny  25:51

quite possibly. And, yeah, I mean, it’s another thing that the treasurer couldn’t launch and, you know, makes them look like they care about different concerns of the community. So look, yeah, I think it’s a bit, you know, a bit of a waste of time, the whole well being budget, because, yeah, a bit of a distraction. But yeah, take your point. Maybe that is what they’re trying to do that it’s a, it’s a cover for not actually achieving a decent rate of economic growth.

Oliver Hartwich  26:19

Well, that could be a topic for your next paper. And if you’re looking for materials, you’ll find them all in New Zealand. Very good. Okay. Sounds good. But, but for now, can I just thank you for sharing your thoughts with us on the podcast. And just for all our listeners, genes paper is called debunking degrowth, you can find it on the Centre for Independent Studies website in Australia sets ci s.org.au. But for now, thank you, gene for being our guest. And good luck for your future papers, we look forward to seeing them.

Gene Tunny  26:50

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

Female speaker  26:55

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Gene Tunny  27:24

Now back to the show.

Joe  27:29

You mentioned the environment there and sort of political movements and value judgments obviously very, very important. For everyone alive, yeah. But especially with the sort of younger generation. And one idea that is sort of gained popularity in recent years has been this idea of D growth as a way to sort of solve the ongoing climate crisis. And you wrote an article, I think recently, the Centre for independent studies about about D growth. And you said that any attempt will like to sort of implement this idea that we need to have negative growth will greatly reduce the living standards and cause significant unemployment. We have a question here that says, if it is as severe as predictions suggest, then is not some form of dramatic economic structural change necessary to prevent continued pollution, mass production, carbon emissions, environmental degradation. So yeah, it seems that either this change will be voluntary, in that we will decide to do it, whether that be D growth or some other sort of economic restructuring, or it will be forced by the nature of the crisis in that our economic system will collapse?

Gene Tunny  28:46

Well, I hope that’s not the case. You talk about prediction. So well, this is where it’s difficult. Like this is a very difficult area to actually talk about, because there’s so much complexity going on there. And in terms of predictions, there are projects, some predictions that have catastrophe of permafrost melting all this methane being released to the atmosphere, this Supercharged global warming, ocean currents shutting down in Arctic melting. And I mean, horrible scenarios. Now, that’s not generally what we think is going to happen. I mean, that suppose look, there’s anything really could happen, right? I mean, I’m not a climate modeller or an expert on climate change. But if you look at what the IPCC has been, what it’s been modelling or projecting what our own governments have been doing, they do show that there is a path to get into net zero by 2050. There will be warming of one and a half to two degrees, probably two degrees Celsius on average. There seems to be an acceptance that by many that, okay, that that’s something we can adapt to it’s there will be a First consequences of that, but it’s not going to be catastrophic or lead to that Armageddon scenario. Now look, the question, if that is the case, if it is the case that we are in that situation where the worst predictions do come to come, you know that they do occur, then we will have to do something radical, it won’t be a matter of trying to get that change gradually over time. And the idea of having a carbon price is to send that signal to the market to, in an efficient way, reduce your emissions, invest in new technology to get to net zero. So that’s what the policy’s been now, governments are finding it very difficult to do that. Okay. So we’ve got an implicit carbon price in Australia, we’ve got these Australian carbon credit units, we’re going to market for that. We’ve got a safeguard mechanism, which is going to be requiring big emitters to reduce emissions. And so we’ve got an implicit carbon price. But you could, you know, there’s arguments about what that should be, are we are we doing it fast enough, there’s the how many we’re gonna have to keep coal going coal fired power stations going for a lot longer than we expect. We wanted to because we’re worried about the reliability of the energy grid. Unless we can get the hydropower stations on on schedule. And then that’s pretty difficult to see what’s happening with snowy 2.0. They’ve had one of the tunnel boring machines stuck. So it’s, it’s a big challenge. Now, I don’t know if you saw what Rishi Sunak has done in the UK, they’re delaying their transition to net zero. So Boris Johnson had committed to stopping the sales of petrol powered vehicles by 2030. Rishi Sunak, push that back to 2035. And there are a few other things to do with I think, gas in the home. So I think the push push that back when I have to stop having guests in the home, because these policies are they’re challenging to implement, or politically, they’re difficult. And as we we really need American leadership, we need China, America and China, the EU and Japan. They’re the major economies we need them to come up with a binding global agreement. And we go along with that. Yeah, it’s, it’s a big challenge. So we’ll get my opinion there. And I’m, I’ve got to admit, I’m not an expert on the climate. So for what for what it’s worth, my opinion is those predictions. There’s apocalyptic predictions, I like to think of them as catastrophizing. We’ve had predictions of doomsday for as long as I’ve been alive. And before then Malthus were Club of Rome. I mean, this is the latest. And in that sort of line of thinking, I’d like to think that there though, those horror stories, I mean, look, if that if we if it does come to be that that is the situation, we will have to change very rapidly. And that will require very strong measures. And it may be that yeah, there is a big hit to GDP. But at the moment I my sort of judgement, the judgement of I think practically all the people in governments around the world is that that’s not the situation we’re in. Could they be wrong? It’s very possible that I sit? I hope not. But look, I admit there, there are certainly concerning signs out there. I mean, and, you know, I’m a lot older than than you are. So you’d have to live with it more than I will. So maybe that’s something to that. I know that I understand why young people are concerned about it, for sure.

Joe  33:24

Yeah. Yeah. Awesome. Thank you. For that perspective, we have John Quiggin. Yes, he teaches still, he teaches one of the PPE courses, and that’s sort of his, like the the environmental economics perspective on climate change is very much up his alley way. So it’s, it’s good to hear your perspective as well. But not

Gene Tunny  33:45

having John here. So we can get you on the question, but I’m not. I don’t imagine John Wooden is there’ll be arguing for degrowth would eventually be arguing for a high carbon price to bring about that transition as rapidly as possible. And to try and encourage innovation. And the great thing about him is that we’re proven is that we are great innovators when there’s a challenge. So be maybe there’ll be people we did have to have that that radical policy shift because the Antarctic starts, you know, I mean, we know that the sea ice is the extent of that is not as great as it has been. It looks. You look at that chart. Okay, that’s a bit of a worry if that continues. And if we do have all of these record heat waves, I mean, we’re currently in El Nino at the moment here. So that’s driving as the lot of the heat. Yeah. If things get really bad, then yeah, sure. We may have to act rapidly. There may be a hit in the short term, but I expect we’ll solve it somehow. Humans are great innovators, loose. That’s the hope maybe that’s naive optimism.

Joe  34:48

No, definitely. Definitely something to cling on to at least with hope. Yeah. Awesome.

Gene Tunny  34:56

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

35:43

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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

Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

Show host Gene Tunny talks with Dr. Nicholas Gruen, CEO of Lateral Economics, about the increasing focus of governments on wellbeing. For instance, former NZ PM Jacinda Ardern rebranded the national budget as a Wellbeing Budget, Wales has a Futures Generations Commissioner, and Australia is developing a new wellbeing framework, Measuring What Matters. Gene and Nicholas discuss the limitations of the current top-down approaches and platitudes, and consider potential solutions for better integrating wellbeing into policymaking. 

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 EP187

  • What is the “well-being agenda”? (2:44)
  • The “Easterlin paradox”. (5:08)
  • How do you make these judgments? How do you measure well-being? (10:50)
  • How is this relevant for policy? Should governments be tracking this broader measure? (28:36)
  • Is complexity a plus or a minus in the Treasury wellbeing framework? (33:39)
  • Why do you need a framework? (40:02)
  • Good examples of programs which could improve wellbeing. (44:29)
  • The importance of being connected to family and friends. (53:42)

Links relevant to the conversation

Nicholas Gruen’s YouTube channel:

https://www.youtube.com/@NicholasGruen

Video version of this episode on Nicholas’s Uncomfortable Collisions with Reality podcast:

Wellbeing: can we escape the iron law of business-as-usual 

Measuring what matters — second consultation process | Treasury.gov.au

Fairfax Lateral Economics Index of Australia’s Wellbeing Final Report (the HALE index discussed in the conversation).

Transcript:
Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dr. Nicholas grilling about the growing interest of governments in well being something broader than living standards or GDP per capita. Former New Zealand PM Jacinda Ardern, rebranded her national budget as a well being budget, Wales as a future generations Commissioner. And now Australia is going to produce a wellbeing framework called measuring what matters. As you’ll hear in our conversation, Nicholas is highly supportive of bringing wellbeing into policymaking. But at the same time, he’s sceptical of the way we’re going about it. He breaks down what’s wrong with the way we’re doing it. In short, there’s too many platitudes and too much top down thinking, and he explains how we could really make a difference if we did it right. Nicholas is CEO of lateral economics. He’s an angel investor, and he’s headed various government inquiries, including the Australian Government 2.0 Task Force, according to the Financial Times as Martin Wolf, Nicholas is a brilliant man who deserves to be better known, although he’s widely known within Australia, and he has an ever growing international reputation. This episode is at joint production with Nicholas as YouTube show uncomfortable collisions with reality. So please consider checking out his other content on that channel and you get a chance, a follow up to the conversation, this episode will be available on that channel brought out now for my conversation with Nicholas grown on well being. I hope you enjoy it. Nicholas, thank you, good to be with you. So I mean, you’re aware that New Zealand has a well being budget doesn’t it? And our own government here in Australia, it’s going to be releasing a measuring what matters statement. So it’s looked at what New Zealand’s done and it’s been? It’s excited by that. There’s a lot of interest in well being at the moment. What do you attribute that to Nicolas?

Nicholas Gruen  02:43

It comes goes, Gene, I think this, this urge, it’s an anti agenda. In other words, it comes from a frustration with the idea that we are obsessed with economics, we’re obsessed with dollars and cents, we’re obsessed with a single measure. And that single measure is GDP. And there’s a lot to be said for that. GDP is in fact, a much better measure of human wellbeing than we think. But that’s a little bit like saying democracy is a terrible, it’s a terrible mess. If you have to have a single measure, it’s, you know, I think you we can improve it somewhat. But there are all kinds of ways in which GDP is a much better measure than you might think. And that’s kind of partly because you can’t get rich without attending to basic social facts. And social institutions like schools, hospitals, families have to be in reasonable functioning order, if you’re going to have a wealthy society. So in a kind of an indirect sense, measuring how wealthy countries are, does help you distinguish between societies that are relative functioning relatively well, and societies that are not functioning relatively well. Please don’t think that that’s me saying we should put down our classes and forget about the deficiencies in GDP. So Bobby Kennedy put it best many years ago, 1968, when he said that GDP measures all those things in life, except the things that matter most to us, how well we bring up our kids, how beautiful our cities are, how kind we are to each other, how we manage how effective we are staying out of wars, GDP doesn’t measure any of those things. And it doesn’t measure a whole lot of other things as well. So that I think quite a good way to think of the well being agenda is to say that it’s trying to draw our attention to those deficits. And I’m very happy to say that it should live or die by how successful it is in addressing those deficits.

Gene Tunny  04:59

Okay. So wellbeing is going to be correlated with GDP per capita to an extent and is it the case?

Nicholas Gruen  05:08

And we see that in the there’s this famous thing called the Easterlin paradox. Why don’t you tell us what these? Oh, well, I

Gene Tunny  05:15

Was gonna ask you that. The way I the way I remembered if I’m remembering correctly, is that up until level of Is it personal household income, which years ago, I think was about 75 or 80,000. US dollars,

Nicholas Gruen  05:31

it was quite a lot less. Was it a lot less? Was it? Yeah, yeah. So you get a strong correlation between GDP and subjective well, and people telling you that they think their lives are working out relatively well, if you go, and it’s not very surprising, you go and ask people in war torn Sudan or somewhere like that a lot of highly corrupt and poor places. Well, being is low and GDP is low, and they climb together, and then they tie a lot and then the relationship tails off. And I think it was about $20,000 per annum, where you get that tail off. We remember this is maybe even less than that, because remember, I think it’s dates to 1974, the Easterlin paradox. And in many ways, it probably comes out of the kinds of sentiments that Bobby Kennedy was giving expression to in 1968. And it’s it says, Look, after you get tolerably wealthy, other things seem to matter more to people than how much more wealthy they’re getting.

Gene Tunny  06:37

Yeah. And what’s this idea of well being is so I’d like to ask is this happiness? Is it utility? To what extent is governments when they’re promoting well being is that about promoting the greatest good for the greatest number as Jeremy Bentham expressed it? How do you know?

Nicholas Gruen  06:54

I mean, I like to be vague about this. And I like to be vague, constructively invasions. And what I mean by that, in fact, if you’re vague, then you can honour the well being agenda as and when I called earlier, a kind of anti agenda, it is saying, hang on, where we’re never, it’s pretty unlikely we’ll ever not managed for GDP, but that leaves out all these other things. And the thing is that if you try and same, you can use words, I mean, Bentham had this problem himself, when he said the greatest good for the greatest number, he could never quite say what good was, he would sort of associate it with pleasure or whatever. And, as you know, what economists did in the, towards the end of the 19th century is that they did a little bit of on the spot, metaphysics and said that economics was about utility, that the ultimate out quote from the economy was not money, can’t take it with you, and you can’t eat it. It was money existed to improve utility. And I think utility is a nice word, it anchors the activity to what we all think of what uncertainly we did in the late 19th century and early 20th century, as all the useful things about life. Today, our lives are much more postmodern, they’re much more saturated with fantasies, entertainment, advertising, and so on. And that’s created all I mean, it’s right, why rather like that, the the, this is an Australian word for people overseas, but I’m going to use it anyway. The Daggy if you like nerdy sense of the word utility, it’s saying how can we be useful and we get a lot of utility. A poor person who is a paraplegic gets a lot of utility out of a wheelchair, or hundreds of 1000s of dollars worth of utility. If you want to get that much use that much usefulness to someone who is able bodied and has plenty of money, you’d have to do an awful lot to be more useful to them than a wheelchair is for a paraplegic person. So I think of it as quite an anchoring quite an egalitarian idea. So to Bentham, and this is one of the things that’s one of the characteristics of economics during its period of what I call clarified common sense. People like Alfred Marshall, Cecil Pigou, who were working toward in the turn of the 20th century, they built their idea about what the economy about was about around usefulness. And one of the upshots of that was that if you’re just focusing on usefulness $1 to a poor person or a pound to a poor person buys much more usefulness by It supplies them with much more urgent needs. If they spend it halfway wisely, then it can provide to a wealthy person. So that injects into our thinking a degree of egalitarianism in the guise of scientific thought, or if you like, economics has clarified common sense. So I see the well being agenda as reviving some of those ideas. And one of the people who’s responsible for it, Richard Layard, at the London School of Economics has written very much in that in that kind of tradition.

Gene Tunny  10:38

Right? Okay. So you talk about this idea of $1. In a poor person’s hand, the more valuable than in a wealthy person’s are the utility that comes from it? Yeah, but how do you make these judgments? I mean, can you do this scientifically? How do you measure well being for example, can you actually put a number on it? How do you think about that,

Nicholas Gruen  11:00

and you can’t measure utility either. So So modern economics, after that period got mesmerised by the idea of being scientific. And it didn’t get anywhere. All it managed to do is to we had a, if you like, a blurry vision of what was true, because I think almost every person listening to this will say, yes, yes. In general, on average, it’s strongly true, that money going to poor people, right now, with a budgets being prepared, and people are talking about increasing the dole for people over 55. Well, there will be some people who take it to the casino. But most people and I don’t know whether that buys anything, probably buys less, they probably buys less utility, less well being than money to me or you. But most people will spend it on things that are much more useful. So I don’t want to say Oh, well, we can’t be scientific about that thought, therefore, we’re just not going to have it. But that’s essentially and we can talk about this more if you want to, but what you can just agree with. That’s essentially what happened in modern economics from about the 1930s onwards, where we moved from a criterion of well being, which basically said, everyone’s wellbeing can be presumed to be everyone can presume to count the same. And therefore, if we’re just focusing on well being, and of course, we can’t just focus on well being, we’ve also got to think about incentives and stuff like that. But abstracting from that, ignoring that it’s a powerful, stylized fact, that money to the poor, is urgently needed, and money to the rich is not. And that basic idea kind of disappeared from the methodology of economics, in the pursuit of making it more scientific. And so we watered down the idea of what a improvement in the well being of a population was. And all we said was something which is sort of useless for practical purposes, it’s okay for modelling and that’s called Pareto, making a Pareto improvement, named after bill for a great thinker, Vilfredo Pareto, who ended up being rather sympathetic to Mussolini towards the end of his life. But he was he didn’t like the idea that you could compare any one’s subjective, state with anyone else’s, he produced Pareto wellbeing, which says, you get a Pareto improvement only if you can show that you can improve one person’s well being without harming anyone else’s. Well, that rules out progressive taxation, it rules out actually pretty much anything you’ve worked in the treasury, it’s almost impossible to do anything in policy without fight without some losers turning up. And then economics has nothing to say about that. And I don’t think that’s good news. And I think the well being agenda is one way to remind ourselves of that lack that absence. And it’s an excuse to try and bring back some of this not to, and maybe we’ll get to this not to erect a kind of big alternative approach with a big brand new thing, but a correction to some of the obvious moats in our eye on this in the sort of ways economists are thinking at the moment.

Gene Tunny  14:39

Okay. So how can we measure this? You’ve done some work on this Hale index? Is that a way of measuring well being can that be useful for assessing whether our well being has increased or

Nicholas Gruen  14:52

moving into that? That’s a good illustration of what I’m trying to say because I guess you could mark at the Hale index. I’ll explain what it is in a minute, as a sort of brand new way to conceptualise well being. But that’s not how we thought about it. We started with GDP for some of the reasons that I’ve outlined earlier. And then we said that there are some obvious ways in which GDP doesn’t tell us, that doesn’t give us what we can correct this in big, ugly ways. Where there are big ugly deviations from common sense. And then we know that we’ll, we think we’ll have a better measurement of well being, and it won’t be perfect. And it’s not something we want to run away with. But it will help us think about policy priorities, and talk about whether we’ve been getting richer or poorer as a society. So let me give you some examples. GDP is blind, to whether young people from 15 to 25, are spending their extra money going on holiday, or going to TAFE going to uni, going to school, and building what economists call human capital. We take that into account because we say that if you are spending this money, on your education, your knowledge, your training, your capability, then you are investing it. And so we put that back into GDP. And of course, if you think about how long in our lives we educate ourselves, well, 12 years is a kind of minimum for people pretty much now. And a lot of us have at least another three or four or five or six years. That’s a huge amount of your life. And therefore it’s a huge part of the economy. And so when we started, when we put that in, we changed the you know, you could see that as Australia invested in increasing retention in schools, which happened quite in a big surge during the whole government. And then, as we as we got more and more people with cert three and above qualifications, that that produced a large surge in benefit. And that would be a good thing to think about. That’s something we should congratulate ourselves on when we when, when it’s working and, you know, give ourselves a talking to if we’re not making those things happen. And another way to think about this is to say that the business will alter in this period, the business community, we’re obsessed with talking about workplace relations and workplace relations are quite important. But that’s the interface that businesses have with policy, that’s the one that they think about. And it’s vastly less important. I mean, if you do a really bad job of either, you’ve got a lousy economy on your hands. But if you are doing a halfway tolerable job of either, then human capital is vastly more important than exactly how you configure workplace relations. And anyway, no one’s ever worked out a perfect way to configure workplace relations. So one way to think about this is to say that the Hale index, this index that we built, tells you what’s important and what’s not. And some other big differences, that reflecting the comments I made about money in the hands of poor people buys you more urgent needs than money in the hands of wealthy people. During the last 20 or 30 years, Australia has become somewhat more unequal, it’s it’s a little overstated. People tend to overstate it, they tend to think we’re nearly there were as bad as the United States or the or Great Britain. And we’re not by quite a long chalk. But nevertheless, there’s an effect there. And so that that should go in. And if we have become richer, but more unequal, it’s not clear that we’re better off. And so, you know, I think quite a good, quite a good measure of a just a single measure of economic well being is median income, and median income has not grown as much as actually I’m not sure about that median income. No, I think median incomes not grown very strongly, you might be able to correct me on that. But what we’ve done well as we’ve looked after people at the bottom quite a lot better than they have in the United States. And the PR people at the top have been very well looked after, but not nearly as well looked after as they have been in the United States. Anyway, so it takes into account inequality. It tries to take into account natural capital and the result that natural capital is you know, the quality of our air and our streams and, and the amount of minerals that remain in the ground. One Upshot from that which I’m not, I’ll just tell you about it is that we, the methodology we arrived at We certainly didn’t try to come up with this result. But the methodology we arrived at told us that natural capital, at least in terms of diminution of natural capital, at least in terms of what’s happened so far was pretty minor. And that even took into account greenhouse. But of course, that depends on the trajectory that greenhouse takes. So that at least gives you something to argue about that, you know, you’re not just waving your arms around, as I’m doing right now. And then the other thing we did is we talked a few areas of mental health, which have, which are common, and have large impacts on well being. And they were depression, and anxiety and obesity. Well, obesity is a physical condition. But that has a notice that is correlated with large reductions in self reported well being. And so we threw that in the mix. And as obesity has been rising, that’s been taking 10s of billions of dollars off our GDP. So that’s what it looks like. And that to mention what I said before, I don’t want to con anyone into thinking this is a comprehensive measure of well being even though sometimes it gets reported in the press is that, but I want to say, look, it’s GDP, and then we’ve made some big changes where the worst problems of GDP exist. And that’s got to be a good thing. It’s, it’s the old clarified common sense idea, rather than welcome to the new paradigm.

Gene Tunny  21:32

Okay, so the Hale index, Harold age, lateral economics index, on well being Yeah, well being just so clarification, you talked about human capital. So are you valuing the time input that people are spending in education and training because the the actual resource cost of the education and training or the value added, that’s already counted in GDP are

Nicholas Gruen  21:58

correct. So what we say that if you go to TAFE, you go to uni, you build your human capital, the resource cost of doing that as already take is already measured in GDP, we paying your tutor as your lecturers, we’d pay for the buildings if you go to them, and, and so on. And but then we say that at the end of this process, you have invested in an asset and that asset and so and we do the same, you see GDP doesn’t contain depreciation. So it’s a basically, it’s purely recurrent. And it has no way to conceptualise the capital account, it has no way to conceptualise whether you’ve made yourself richer for the future, or poor for the future. And so it tries to do that. Does that make sense?

Gene Tunny  22:55

I’ll have to have another look at it. Yeah. Because I mean, the, what I’ve seen in the past is that people have adjusted GDP for the depreciation. So part of the That’s right, well, yeah, yeah. Part of capital expenditure that occurs is just to replace existing capital. So, you know, some people argue, well, you should actually look at net domestic product or net rational product. And

Nicholas Gruen  23:21

we do that in. So we start at that. I mean, I didn’t mention that because I just thought it was too technical, but we start with NAMI national income. Okay. So we got depreciation in there. So we put capital, so we need to put capital appreciation in as well.

Gene Tunny  23:38

I see what you’re driving at. Yeah. Okay. Capital appreciate. Yeah. Okay. Right. Well, I’ll put a link.

Nicholas Gruen  23:44

I mean, let me just let me just so people can conceptualise it. So you start with GDP, which has no measure of depreciation, your point, but the buildings you had this year, are worth less at the end of this year than, let’s say plant and equipment. Yeah, the cars you own are worth less at the end of the year than this year. So we take that out of GDP. And if you’re going to do that, by exactly the same token, you would put back into GDP all the ways in which you’ve built capital. And the main ways in which you built capital is through human capital. There’s sort of three four times as much human capital in the economy than there is physical capital.

Gene Tunny  24:27

Okay, okay. The big effect

Nicholas Gruen  24:29

two big effect.

Gene Tunny  24:32

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

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Gene Tunny  25:07

Now back to the show. Like what I wonder, is whether we are actually much better off than we were, say, in, in the 80s or 90s. Because, I mean, clearly the technology is just incredible that we’ve got now I mean, I remember having a Commodore 64 When I was in high school, with 64 kilobytes of RAM. And now I mean, everything you’ve got now, it’s just I don’t know how many 1000s of times better it is. But it’s just an incredible improvement. But yet, I don’t know how much better the quality of our life is, particularly with all the smartphones and the distraction? And do you know what the evidence is on that though? What is it?

Nicholas Gruen  25:50

Well, my style? Well, I mean, leaving the smartphone, the distraction point out, because that’s a very different sort of thing you’re thinking about, we can talk about that. But my kind of guess from scanning the literature on that is, so I think one of the main things you’re talking about is that a lot of the streams of benefit that we get from technology of free, or you go to Google, we go to Facebook, if you call that a benefit, there are just all these free services and free doesn’t work with GDP, GDP to GDP, it’s just invisible to GDP, because GDP, put your binoculars on and then whenever someone’s paying for something, you work out, you know, you say, Oh, that was $2, that’s $2 to GDP last whatever they paid for it. And anyway, it’s a, it’s an process of serial accounting, working out how much value has been added with each transaction. And in this process, the value that’s added is not counted, some of the commercial value that added is counted, and that is the advertising revenue. But so so again, it’s it raises the question of the household economy as well. I didn’t mention one of the great weaknesses of GDP is that GDP goes up. If you go out to dinner, and it doesn’t go out, if you if you get someone else to pay for your dinner, or you know, to cook your dinner and pay for them, that that GDP rises, but if you cook it at home, GDP doesn’t rise, I could give you some more striking examples, more sexual examples. They’re a bit more striking, which is that most people’s sexual activity doesn’t contribute to GDP, but going into a prostitute does. So that doesn’t seem to be a very good way of measuring human wellbeing. So there are anyway, we haven’t tried to correct for those things. But those are the those are some of the sort of paradoxes of GDP. Yeah. But I don’t mean to be too critical of GDP because of it. Clearly, we are, we are wealthier. And

Gene Tunny  28:06

to an extent, I mean, just given the expansion of I mean, houses are much larger, on average than they were 30 years ago. We’re probably I mean, the quality of cars is better. We can you know, then they’re cheaper in real terms, I think. And partly that’s because we’re brought down the tariff wall here. But yeah, I guess we are better off in a material sense. But it’s not as much as you might think, if you just look at the GDP per capita numbers, because there are these other things we should be taking into account. Yeah,

Nicholas Gruen  28:36

yeah, that’s right. That’s right. I mean, the other thing is, I’ll just tell you, I went this afternoon to somebody who was looking at an MRI of my shoulder, which is sore and tingling. Now, I’m pretty confident that I mean, there are various ways various pathways, you can imagine that the existence of MRIs is picked up in GDP, I mean, you pay money for the for the MRI, but the fact that the fact that he can look inside my shoulder and look at where the bone is, and where the where the sinews are on sale, there’s a spur there. And we couldn’t do anything remotely like that. As an economist sitting there, very few people would have this reaction when they’re doctors looking at an MRI. But that was what I was thinking about. I was thinking, well, I doubt if that is properly reflected in productivity statistics. And in GDP. It’s an incredible thing to basically have your doctor be able to look right inside things and you know, that that’s a very powerful thing.

Gene Tunny  29:43

Yeah, yeah. Okay. Okay. So I think basically, the takeaway is that well being is this it’s much broader than than GDP. It’s challenging to measure. How is this relevant And for policy, Nicholas, I mean, should should governments be tracking this broader measure? Should they be tracking something like the Hale index? Or the ABS be producing it? And should they therefore then adjust their policies to address this if there’s a deficiency? And yeah,

Nicholas Gruen  30:15

so So that’s, that’s the nub of the question. So there are various lots of people say how wonderful it is, you’ll hear this it’s almost a cyanide, I will hazard to guess it’s a sign that you’re listening to someone who hasn’t really thought about these things very carefully, or sceptically when they start talking about Bhutan. So Bhutan made a really big splash by saying that it was managing its economy for gross national happiness. But if you take it seriously, and you look how they do it, it’s a bit of a joke. No offence to Bhutan, good on them. And they’re doing quite well. So you could argue that it’s all because of well being. But if you try to look at what they’re doing, I mean, it’s very hard to get anything published after about 2009 on the subject anyway, from Bhutan. So it’s a cart that people love the idea that they’re managing for wellbeing. I’m not sure exactly when, but probably in the, the tooth, the, you know, the 2000 to 2010. But maybe earlier than that fair bit of pressure was put on the Australian Bureau of Statistics to produce a wellbeing measure. And I basically pushed back and said, Look, we will produce a thing with series of indicators called measuring Australia’s progress is that it, of course, and we will not aggregate it all and pretend that we can put this all in a single measure. And so you know, they look at natural capital, they look at equity, they look at the environment, and they produce rich data on this stuff. But the calls keep coming, oh, we need to. So in other words, if we had this big demand to manage for well being, then that’s fine, the ABS could produce this data. And then our politicians and our senior thought leaders will put inverted commas around that. They’d be saying, Good, we’ve got the data. Now we’re going to manage for wellbeing, but that’s not what happens. So that’s a sign that something funny is going on. And so around the world, we hear this idea that we’re going to, we’re going to manage for wellbeing. Now, we might be able to go into this in more detail in the next podcast that we’re going to have on this where we’re going to have a closer look at some of this. But I think that is a mistake. I think it is a mistake to go running around creating, quote, wellbeing frameworks, if there are a wellbeing framework of a particular kind, because so New Zealand has done that. Well, let’s go through what’s happened. The Treasury announced that it had a well being framework. And this was announced in a speech by a senior Treasury official, who shall remain nameless, but is closely related to me. And it was announced that there were these five principles in the treasury Wellbeing Framework. And you can imagine, you know, we can work out what they are the first, you know, the top three or four are going to be prosperity, equality of some kind, and we’re going to read a reference to equality. Another one will be a reference to the environment, you know, health, happiness, stuff like this. And the fifth one was happened to be complexity, which was intriguing. And I sort of looked at this and thought, Well, that’s it that’s on what’s like, I can see how complexity is sort of important. But is it a plus? Is it a minus? What’s it doing that? Now, the Treasury Wellbeing Framework or so it was called a well being framework? I think it was quite obvious at the time that it was not a well being framework. It was a set of talking points. Is that a bad thing? I don’t think it is a bad thing. Can Henry wanted the Secretary of the Treasury at the time wanted to make the point or wanted Treasury officials to think more broadly about what the Australian economy was about? No problems there. But it wasn’t a framework because of framework constraints. You and it’s it, you will be applying this framework. Wherever you do work, wherever it’s relevant. I can prove that that didn’t happen, because the Treasury wrote a submission to I think the a triple C on Consumer Policy and another submission on regulation of financial instruments. Now, if that doesn’t raise the question of complexity, nothing does and the word complexity did not appear in those submissions. I’ve documented this So, so it wasn’t a framework. That’s okay. But it’s a very good illustration of a number of things, which is that, you know, it’s very easy to grandly talk about visions. And we should be suspicious of that, we should be suspicious of that for lots of reasons. But without going into, like, if you’re serious about that, I’d be suspicious, because I don’t think it can be done, I don’t think it’ll be helpful. I think it’ll all fall over. But in fact, you don’t really have to worry, because when you get suspicious, what I’m mainly suspicious of is that this is what I call a re skinning operation. And we will get business going on more or less, as usual, with some new words dotted around. And I think that that’s clearly demonstrated in the, in the case of the Australian treasury. And And to top it all off. John Fraser, when he was the Treasury Secretary, just got rid of it. And a number of people were quite upset. I think you were a bit upset. And you said you were sad to see it go. And I said, Well, I’m sad to see it go. But it will it made no difference and making everything go will make no difference. And and I said, Can you tell me anything? Any thing, any piece of work that was changed for you in the treasury by the framework? And I think you had nothing to say then. But you might have more to say now?

Gene Tunny  36:24

Well, I think what I said at the time, Nicholas, was that I think it was designed to change the mindset. There authorising words. Yes, yes. And I don’t think you could ever say, Well, as you mentioned, there was a a submission that it appears wasn’t informed by the well being framework at all, which I think is a really, that’s a that’s, that’s not very good. I mean, I’m surprised that complexity wasn’t, wasn’t mentioned in that. But yeah, you’re right. I mean, it’s very hard to operationalize these things. I mean, because you know, these things come from, you know, the senior executive, or I think it was either Ken Henry, or Blair calmly or someone like that very senior in the treasury. And I mean, you know, that they wanted to have it permeate through the organisation, they wanted people to change their, their mindsets from because there was a concern treasury, or we’re just all the corner Kratts. And all we care about is GDP and the the economic numbers, we’re not concerned enough about broader well being. So I think it was well motivated. It just didn’t, it’s hard to change practice

Nicholas Gruen  37:32

being stuff is well motivated. And that’s my point. Let’s, let’s have a little D tumescence, about how well motivated we all are. And let’s attend to the difference that we’re making. So that’s the Treasury, that’s the Australian treasury. Now the New Zealand Treasury is a very different story than New Zealand Treasury, actually kind of contacted me I’d written some stuff on well being and they contacted me. And I was amazed when I had a look at what they’ve done. They’ve been working away before Jacinda Ardern, turned up and said, Let’s have a well being budget. The New Zealand Treasury were actually doing a great deal of work, trying to reconceptualize the national accounts, and all this kind of stuff. And they were pretty serious about doing it. But I’ll tell you what’s happened. We can talk a bit about this, about their well being budget in a minute. But what’s happened is they have put a lot of work in and the result is that at least in principle, whether they’ve got to this stage or not, I don’t know. But in principle, they would be able to tell you, the world self reported well being of Maori in Rotorua. Now, isn’t that impressive? Well, actually, it’s not impressive, because what’s not impressive about it is that you’ve you’ve put a huge amount of effort and resources into something and thinking resources. And what are you missing out here? Well, what I’m arguing you’re missing out is, you know, what the Mary well being in Roger or is and you’ve got no further information about how to improve it. And that’s what matters. So I want to use well being frameworks. Well, this this hankering for well being as an authorising environment, to start finding some things where wellbeing and GDP deviate the way they were something where there’s a big problem with the well being and GDP is ignorant of it is it’s invisible to GDP, there’s suffering. And I would like to, I would like the well being thinking to start being used to authorise this and I was talking to a state government a treasury, actually, Treasury state government this year, and and I was saying this to them and they said, Well, you Yes, but we need a framework. And I said two things. I mean, firstly, why do you need a framework, it’s not going to help you achieve anything. But I said, I can give you a framework, the framework will be not on how to measure wellbeing everywhere for no apparent reason. But how to build a framework which will deliver wellbeing benefits. And we already have a bit of a, we already have a bit of a picture of that, because we’ve done it conceptually, in another area, which is sort of simpler and more technical, and therefore doesn’t involve the human element so much, and doesn’t therefore engage our feelings in quite the same way. And that is greenhouse. So we have cost curves are very basic, the firt, the first language we ever developed about greenhouse before, even before Kyoto, which I think if I’m correct is 1997, we develop the concept of no regrets measures, what are no regrets measures, they’re things that are good for the economy, and good for greenhouse. And there are quite a lot of those. The classic case of trying to improve the efficiency of at small levels, that management don’t pay a lot of attention to the installation of warehouses and factories, the energy efficiency of electric motors in those things. And they’re actually quite large economic benefits. And they come with greenhouse reductions, and there are still some of those around so I think so the very first thing you go looking for is wellbeing benefits that are no regrets measures, things that have a big impact on the work on wellbeing, while they actually do no harm to the economy. But if that’s the case, is highly likely, given that people who feel good about themselves are more productive and less fractious, and less likely to try and pinch, you know, try and blame other people for their problems and so on. That is that something that could be we could do something very exciting. Now, let me give you a very small illustration, my best illustration of this, it’s actually happening now might have happened earlier, if we’d taken this seriously. In hiring, there is a bit of a craze, you can call it a bit of an ounce, maybe one of the best part best outcroppings of the the woke stuff, which I’m not terribly fond of in lots of guises. But here, if you go to an interview, and you don’t, one way of presenting well you’ll tell most people is you, you aren’t afraid to make eye contact, you make the right amount of eye contact. Well, autistic people find that extremely hard. And autistic people can be extremely productive. So your HR people, the people doing interviews need to be aware of this. And if you’re running an organisation that has lots to do with computer programming, statistics, various kinds of management probably pretty much anywhere, people who who are somewhere on the autism spectrum, not wildly over so that they become socially dysfunctional, but people on the autism spectrum can be if you know that and you manage for that you can massively improve their well being you can massively and you can go do yourself on the productivity benefits that this produce. And so that problem I just mentioned is a large problem. It’s not you know, it might it might affect 234 percent of the population. And it’s in some way, I think, another large problem is that carers, older carers, so I get a bit older and my wife looks after me or vice versa, they tend to be socially isolated. Now Australia has got some quite good policies on this. And we have, we were an early innovator in funding people to go round to older people’s houses and make them a cup of tea, have a chat and then move on or put their dinner on and things like that. But there are lots of things we could do to improve the social connection between carers and of carers and their community and so on. So that’s another area. Another area I would argue would be teaching and probably kids on the autism spectrum, teaching and dyslexia. There are all kinds of things that we don’t manage for these things. Well, well, these things massively depressed, the well being of the particular kids with those with who who have those characteristics. So that’s just a bunch of they’re right at the no regrets area. Yeah. And then I’d like to see some real curiosity about what other kinds of things can we do, which have very low, low short term costs and improve well being. Because a lot of those are actually going to be over any reasonable period of time, no regrets measures, they’re going to contribute to GDP, and they’re going to improve well being. But other than our kind of broad sympathy for such things, you don’t see these types of this type of thinking and those types of initiatives being very high up on the agenda. For in in, for instance, just interact Dan’s wellbeing budget. And if you ask the right question, I will then opine on the well being budget. I just feel I need to give you a word in edgewise.

Gene Tunny  45:51

Okay, okay. Well, I do have a, at least one more question. And but yeah, it would be good to talk about just in the well being budget, too. I was gonna ask, I mean, how are you gonna go about this, but without it being? Like, one of the concerns I have about this whole? Let’s try and, you know, I guess governments have a role of, you know, they’ve got to look after the population, but you don’t, you don’t want it to go too far. Because you don’t I mean, in my view, this is my opinion, you don’t want to reduce the capacity of people to look after themselves. I mean, we should be encouraging Self Reliance to an extent. To what extent does this become paternalism? I mean, how do we do this without public servants becoming busy bodies without interfering too much? How do you go about this? That’s what I’m doing. So I’ll

Nicholas Gruen  46:41

give you an example with Yeah, with I mean, I completely agree. I mean, the idea of public servants fixing that problem, you know, with a hub and spoke model with Canberra bureaucrats or Sydney and Melbourne bureaucrats is just take just take me out and kill me now. What Yeah, this sort of thing is an example I chaired a thing called the Australian Centre for Social Innovation and they have a programme called weavers and weavers is an I call it place base. That’s a term that a lot of people understand. And essentially what it does is there’s a little bit of money there and it engages carers it so it sort of is engaging carers in a local community. A particular care might be my get an honorarium for being a weaver and a weaver will be weaving together, we’ll be running some activities, keeping in touch with local carers, etc, etc, etc, just realising that, because of the circumstances they find themselves in, they need a bit of help and resourcing in maintaining social connection. So it has to be and it’s very cheap. And, you know, and also your some of that money will get wasted, and it won’t work very well and others, it will do terrific things. And it can be, it can provide sort of different kinds of sinews for a community. I’ll give you another example. My wife set up an organisation, my wife and a friend of hers set up an organisation in Seymour called I Wish I’d asked, it was based on it began thinking about oral history. And the idea was to connect school kids and people in aged care homes and older people in the community to record our oral histories. But it turned into a much bigger programme than that. And it was, was it conceived of itself as a multi generational, well be a multi generational anti loneliness programme. They didn’t actually use the word well being. But and it was a, it was a fabulous programme. And I’ll let me just give you an example of because it does go to the connectedness of things. And this is something which maybe we’ll talk a bit more about when we when we look at when we talk about this again. But one of the things that people involved in well being boys talking about is the way things are connected up. And I think so many of those connections are serendipitous, that they’re very difficult to manage for but let me tell you that in Seymour, one of the app camps of this was that young boys so they’re 14, they’re going they’re thinking to themselves, I’m going nowhere, probably they’re not that good at school, their inseam or they’re not quite sure, you know, they’re thinking I might just end up unemployed I don’t really want to end up unemployed and they get in they get involved in this programme. Now some of them are gonna think all people don’t want to talk to old people, and they get in their various the programme have various ways of ensuring that these introductions worked out as well as possible Anyway, they start making friends with these old people. And they saw one autistic kid, we saw an old RSL guy. And they, and the autistic kid became very obsessed with the metals that the old guy or the old guy had. And they talked about these metals and the battles that he’d had every week. Now, that was fantastic for both of them. That is, we’ll be back, let me tell you something else that happened, you know that three of seven or eight boys who were about 14, you know, what they decided they wanted to do for a job. They wanted to work in aged care homes. Wow, you don’t think of young 14 year old boys wanting to do that. But because because we’re brought up in silos. Because, you know, this is reintroducing into the community stuff that existed on its own 80 years ago. And I don’t think, well, I don’t think what happened is that these three kids thought, Oh, I’ve always wanted to do tarot, that’s, that’s me to a tee. I think they thought I can do that. And I won’t be unemployed. And I’ll be useful. And I like these people. And I’ll feel useful. And I’ll have a decent life. And we’re sitting around in Canberra worrying about how do we staff our aged care homes?

Gene Tunny  51:24

That’s a great example.

Nicholas Gruen  51:25

Yeah. So you could justify that. But you could justify this programme, which is run, that wouldn’t cost. It doesn’t cost nothing. But it’s run on the smell of an oily rag, you could use it. I mean, one of the things that the institutions, the aged care homes and the schools, I won’t call them resistant to doing this. But some are. And of course, all of them are subjected to strong regulation, which has been put in place for completely other reasons. So safety checks, police checks, insurance. And it’s not that you want to ignore the issues that those that that regulation is trying to address. But you do want to say that this is a valuable thing. And if it’s getting in the way we want to know about it. And then we want to think about the costs and benefits and whether we can do this in a better kind of way. And so it’s those kinds of things that the the well being agenda, could could address, but really only by making stuff happen and then watching the ripples come out and working out where government’s getting in the way where it can help, generally speaking, not with large amounts of money.

Gene Tunny  52:41

Yeah, yeah, I like that. Good ask what we’re seeing more is that a disadvantaged area in Melbourne as it is

Nicholas Gruen  52:48

pretty disadvantaged, it’s the place where the Australian would furphy comes from see more and further for fees, which have now make money selling their name as a beer, and they give that money to charity. And, and I wish I’d asked picked up some of that money. So shout out to Murphy’s. But so so it’s about 120 My best guess out of Melbourne up north, just getting into Kelly country. And yeah, and it’s where a lot of canned fruit came from, and the firt and the further fees made boilers. And a furphy. In the Australian idiom is what soldiers the story soldiers told, I think this was in Gallipoli, sitting around the boiler and having a cup of tea. I think that’s roughly the story. And that’s where Seymour’s very good learn something.

Gene Tunny  53:41

And I was just thinking that shows the importance of connection and, and connections and important part of well being being connected to family or to friends. And, and that’s, and a lot of people would argue that’s what we’ve lost. We’ve got more people living alone. Yeah. And people just aren’t connected generations as generational divide. Yep. So yeah, I think you’re highlighting that that’s a such a great example of highlighting how you can improve well being with something simple. Now, this might this might have to be the last question for this. This part one of this conversation. You talk about these could be cost effective. This could be low cost is this where something like Andrew Lee’s evaluation unit could be an important part of this story and figuring out okay, we’re spending billions of dollars on these big welfare programmes. And you know, that it could be that it’s better, we’re better off spending a small amount of money on little interventions like this. Yeah,

Nicholas Gruen  54:37

yeah. Yeah. Well, one would hope that some nows about evaluation would enable us to get counterfactual snapshots. I wouldn’t want to say let’s do away with welfare, I would want to say welfare costs us an absolute shedload of money. And for a tiny fraction of that money. We could be doing these kinds of things which are broad health benefits and by health I mean in the broadest sense physical, mental, and community and the health of the community. And we could try to be, I won’t use the word rigorous because that conjures up people with clipboards and bureaucrats, and I just and mathematicians and economists, and I’m not talking about that. I’m talking about trying to be trying to be evidence based, trying to work, trying to notice what works, doubling down on what works and just doing less of what’s not working so well. So I think that’s a great place to finish up. We didn’t get to talk about New Zealand’s well being budget and we can certainly fit that into the next exciting episode.

Gene Tunny  55:42

Excellent. Okay, thank you, Nicholas. Fantastic.

Nicholas Gruen  55:45

thanks very much, Gene.

Gene Tunny  55:47

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

56:34

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Podcast episode

Chokepoint Capitalism w/ Rebecca Giblin – EP169

Corporations such as Google, Amazon, and Live Nation are allegedly taking advantage of chokepoints in the economy, earning excessive profits. That’s the thesis of a new book, Chokepoint Capitalism: how big tech and big content captured creative labour markets, and how we’ll win them back. The authors are Uni. of Melbourne Law Professor Rebecca Giblin and writer and activist Cory Doctorow. Show host Gene Tunny speaks with Prof. Giblin about Chokepoint Capitalism in this episode. 

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

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: Rebecca Giblin

Rebecca Giblin is an ARC Future Fellow and Professor at Melbourne Law School, and the Director of the Intellectual Property Research Institute of Australia. Her work sits at the intersection of law and culture, focusing on creators’ rights, access to knowledge and culture, technology regulation and copyright. Using quantitative, qualitative, doctrinal and comparative methods, she leads interdisciplinary teams with expertise across data science, cultural economics, literary sociology, information research and law to better understand how law impacts the creation and dissemination of creative works.

You can follow Rebecca on Twitter: 

https://twitter.com/rgibli

Links relevant to the conversation

Where you can buy Chokepoint Capitalism:

https://amzn.to/3HohDFV

Website about the book:

https://chokepointcapitalism.com/

Transcript: Chokepoint Capitalism w/ Rebecca Giblin – EP169

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

Gene Tunny  00:00

Coming up on Economics Explored.

Rebecca Giblin  00:03

We’re sharing less and less in the value that’s that’s created by our work. And that’s happening because we’ve got these increasingly powerful corporations, creating choke points that allow them to extract more than their fair share.

Gene Tunny  00:18

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane Australia. This is episode 169 on choke point capitalism. That’s the name of the new book from University of Melbourne law professor Rebecca Giblin and from writer and activist Cory Doctorow. Professor Giblin joins me this episode to discuss the book. Please check out the show notes, relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Rebecca I have to say in this episode. I’d love to hear from you. Right now. It’s my conversation with Rebecca Giblin on a new book with Cory Doctorow chokepoint capitalism, thanks to the publisher scribe for sending me a copy of the book. And finally, thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Rebecca Gibson, welcome to the programme. 

Rebecca Giblin  01:00

Hi, Gene. 

Gene Tunny  01:01

Yes, good to have you on Rebecca keen to chat with you about your new book, Choke Point Capitalism: how big tech and big content captured creative labour markets and how we’ll win them back. So to begin with, Rebecca, could you explain what’s the meaning of a choke point? And why do you think capitalism can be labelled in this way? Or there’s a form of capitalism that is chokepoint capitalism?

Rebecca Giblin  01:40

Well, competition is supposed to be fundamental to capitalism. It is supposedly about the free exchange of goods and services. But you have this new orthodoxy that’s come out in the last 30 or 40 years. When you have Peter Thiel say competition is for losers. You have Warren Buffett salivating over companies that have what he calls wide, sustainable moats, which are barriers to competition that stop that, you know, lock in customers and lock in suppliers, and stop that free exchange. And once and this is now the orthodoxy that’s been taught in business schools, people are told that if you want to make a fortune, you don’t make something, don’t provide a service, but find a way to scrape off the value of other people’s labour. And these are the choke points. So it’s where you manage to lock people in. So you lock in customers, you lock in suppliers, you use, the power you get from that. And those increased margins you get from that to do a scorched earth approach where anybody in your kill zone gets eliminated so that there are fewer and fewer choices for those locked in customers and suppliers. And then ultimately, you shake everybody down for more than your fair share. And we see these choke pointed markets in throughout the culture industries in particular, that’s what we talk about in the book to demonstrate this problem. But they’re everywhere. We’ve started seeing the term getting used in the context of all different kinds of businesses. We’ve had people talking about on social media emailing us to tell us about it. One of the more interesting ones and somebody saying this is exactly what’s happening in the global ornamental plant industry is a big plant is a problem as well.

Gene Tunny  03:28

Ornamental what? Sorry?

Rebecca Giblin  03:30

Plants, Yes. Yeah, it’s a big problem in the plant market, we discovered. And, and what we’re really trying to demonstrate here is the danger of this. And the reason why so many of us are feeling squeezed right now. It’s not our imaginations, it’s that we are being and that we need to become really aware of it if we want to change the material conditions in which we live and work.

Gene Tunny  03:54

Okay, so by many of us, are you talking about creative professionals?

Rebecca Giblin  03:59

But it goes much beyond that as well. If you’re working, or if you’re a supplier to Coles and Woollies, for example, you are dealing with a similar kind of buyer power as what we talked about in the book. And so let me mention this. This book, we talk about monopoly a bit, which is, you know, we’re all familiar with that concept, because we got a board game for that one. It’s where you’ve got a seller, that’s really powerful. So Amazon, for example, is a really powerful seller. And its relationship with consumers because it controls so many consumer markets, including the market for books, but it’s also an incredibly powerful buyer. So if you’re a publisher or an author, you you you need to go through Amazon to reach those customers. And so it’s, it’s it’s got monopsony power as well, which is where you’ve got a powerful buyer. So if you’re a supplier to Coles and Woollies, you’re dealing with people. I have to say this word monopsony, it does turn a lot of people off. It did appear a lot more often in the book in the first draft and people begged us to take it out, but we do think we can make it sexy. Technically what we’re talking about here is oligopoly, which is probably even worse, which is where you’ve got a couple of very powerful buyers. But I’m going to use monopsony just for simplicity. But that’s what you’re dealing with if you’re a supplier to Coles and Woollies, in Australia or so many other companies that have increasingly come to control their markets. And the reason why we’ve got this increased corporate concentration throughout the world is largely due to the emergence of what we call Chicago School of Economics reasoning, this, it gets a little bit wonky at this point, but this consumer welfare theory, that suggests that we should only be concerned about corporate concentration, not just because it exists, but where it has the effect of, of harming consumer welfare, which is often treated as just looking at the prices people pay. There’s many problems with that standard. And we’ve seen them the consequences of that really starting to play out now. But one of the consequences is that it really ignores the fact that when you’ve got a powerful buyer, right, it may be that the prices that the consumer pays are not affected. But that buyer has its hand in the pockets of its workers and its suppliers. And you’re it’s a little bit of a stage magic, sleight of hand misdirection where you’re looking over there at the Consumer Price, and not noticing that you’ve got somebody picking your pocket on the other. And we think I mean, it’s exactly the same end result. If you’re if you’re having downward pressure on your wages, the salary that you bring, bring in the what you get paid for your goods and your services, it has the exact same end result as higher prices at the checkout, which is that you’ve got less and less capacity to pay for what you need. And what we’re really seeing now in the current environment. And a lot of these prices, we are seeing big price increases at the checkout. And partly those are inflationary pressures. But we are seeing as well, there’s a lot of evidence of companies, these powerful concentrated industries, hiking up their profit margins and using inflation as an excuse for that. So we’re seeing higher prices at one end, and also these companies having their hands in our pockets at the other. And so it’s no wonder that everybody’s feeling squeezed.

Gene Tunny  07:30

Right. Okay, so you mentioned a few things there. You talked about antitrust, and I’ve chatted with Danielle Wood from Gratton about this, this issue of you know, there was this consumer welfare standard. And that meant that there may be, there wasn’t as much antitrust enforcement. But now there’s been a change, you’ve mentioned, is it Lina Khan in the States? So there’s more of a, a willingness to look at antitrust as a tool. And can we, Rebecca can ask about what mean, what companies you’re talking about? I mean, are you talking, you mentioned. Well, it’s could, though, there could be companies in the sort of more traditional economy, but it’s, is it mainly big tech? Are they these are the companies that are exhibiting the characteristics of being a choke point, capitalist, what are some of these companies?

Rebecca Giblin  08:23

Okay, so the ones that we talk about in the context of the creative industries, they go all the way through the chain. So if we think about just music to begin with, musician has to deal with the big three record labels, who control almost 70% of global recorded music rights. They own the big three records, the big three music publishers, which control almost 60% of global song rights, they structure the deals in ways that benefit their executives and shareholders, and work to the detriment of these creative workers. Then the streaming industry, which is where most of the increasingly most of the money from recorded music is generated, the streaming we lots of people know that music streaming really doesn’t pay very well. But fewer people are aware that the reason that works, the way that it does is because this is the way those big three record labels, arranged things, the streaming platforms had to have to go through those records, those record companies in order to get permission to play the songs. And in order to clear those rights, they have to enter into these deals that again, favour those record labels, again, to the detriment of the artists, and that give those those those major labels who should be far less relevant and indeed are far less relevant today than they were 30 or 40 years ago because they no longer control all of the avenues to distribution, but because they’ve got these huge reservoirs of copyrights that they’ve acquired often through buying up distressed companies very, very cheaply, that’s given them outsized power to control the future of music. And so you can see that those, the copyrights themselves create a choke point, at one point, the incredible complexity of the licencing systems that we have in music, create other choke points, because it is only Spotify and the big tech music offerings that can afford to go through the, you know, these hoops to pay that what’s demanded by the record labels and also to comply with these complex regulatory rules and that keeps lots of other companies that that could be started by people who love music and want to support artists and passionately believe in alternative ways of getting music out there. It stops them from being able to start up any kind of meaningful competition. And then if you look, and you say, Well, that’s all right, people don’t really need to make money from recorded music. No one’s really made money from recorded music except a few outliers. People make money from touring. Well, then we start looking at Live Nation, which is the behemoth in that space. It controls nearly all of the world’s largest and most prestigious music venues. It also has a music management and promotion business. And it bought Ticketmaster a few years ago to, you know, in the face of many, many warnings that what has happened would happen, the Department of Justice in the United States still permitted this merger to go ahead. Now, just think about this for a moment. Imagine you are a company. So you’re a music venue, right? And you want to book acts, you will have Live Nation tell you well, if you don’t use us for your ticketing, you won’t be able to book our biggest acts that we control through our management, business and promotion business, or, or any other kind of incredible threat that they’ve made. In the book, we talk about this we are in, we looked in an incredible range of creative industries in our research for this book. And we always gave people the opportunity to be synonymous or anonymous if they wanted to. And I think nobody took us up on that. Even when they were talking about these other really big, really scary giants like Amazon, who’s also known for not playing fair, except the people we spoke to about Live Nation. Almost all of those said that they could not be named. And they were really genuinely terrified about what kind of retribution could come if it got out that they’d spoken to us about this company. But it has a voyeurs, voyeurs view at the businesses of all of its competitors, right? If you’ve got to use Ticketmaster or if you’re a venue, or you face all of these other consequences, all of these other things that you miss out on. But that gives Ticketmaster the ability to see, well, okay, so which other acts that you are hosting are doing well, who are the artists that look like based on the ticket sales, they’re about to break out, and maybe Ticketmaster, Live Nation can jump in with its promotion and management business and snag up those acts. Now, even though they didn’t do the early investment, they can just sneak in and grab them now that they’re about to start making lots of money. And, you know, all kinds of other, you know, extraordinary advantages this gives them and we’re really seeing this play out at the moment with anyone who’s listening. Is there is there much crossover? Do you think Gene in the economics explained audience and the people who are big fans of Taylor Swift, and been waiting in a queue for days in order to get tickets to her concert? You have

Gene Tunny  13:47

Look, I have no idea. I mean, I quite like Taylor Swift. I wouldn’t line up for days to get tickets. But yeah, who knows? Tell me more.

Rebecca Giblin  13:55

Look, the Department of Justice is investigating again, they did do an investigation a couple of years ago that we talked about in the book, where a bunch of venues who all had to be assured of anonymity in order to speak, we’re talking about Live Nation’s mob tactics and ways in which it was using its power to crush other people’s businesses. It got a fine that was just really a slap on the wrist and told really sternly not to do it again. But in this kind of context of fine is a price. The Live Nation is quite happy to pay that kind of fine in, you know, in order to get to continue its predatory behaviour. It will only be stopped if there is sort of meaningful enforcement. And the DOJ hadn’t done anything since until this Taylor Swift controversy came up. And and and we are seeing now there’s going to be another investigation. So hopefully, there’ll be some kind of more meaningful enforcement here and what we really need to see is Ticket Master broken up. That’s one of the main domain remedies were there. antitrust breaches. You can have structural remedies, which is where you break a company up or conduct remedies, which is where you sort of get them to pinky swear they won’t do anything bad. Now, unfortunately, those remedies are not particularly easy to enforce. Right. It took literally decades to break up AT&T In the United States. I was it was a Bell. I think it was Bell before it became AT&T. So there’s so many, the Bell System we concentrated. Yeah, concentrated firms the sometimes I get mixed up. And it can be incredibly expensive and lasts for decades to take these actions and we don’t have decades. And the other problem with those antitrust remedies or competition law remedies is that they work even less well when you’re dealing with monopsony rather than monopoly for various reasons. And so what we argue for in the book is remedies that we know do work in response to monopsony power. And that’s things like encouraging new entrants into the market, directly regulating excessive buyer power by limiting what they can do and by taking measures to build countervailing power in workers and suppliers.

Gene Tunny  16:21

Okay, well, I want to come back to that that point about the monopsony you said, it’s harder for antitrust act on monopsony if you meant I think you said that I’d be interested in that if you can explain why or, and also the, I guess, I’d like to ask about, I mean, is this really so bad? I mean, you mentioned that it’s, it’s captured creative labour markets. I mean, okay, I’m, I’m against a lot of the surveillance capitalism. And I think you know, where to the extent there are choke points, and they’re really bad business practices, or they’re they are, they’re relying on some. Yeah, I guess it’s IP, they’re relying on these relationships they have and they’re, they’re preventing competition from, from coming into the market. Yeah, I can see the problem with Ticketmaster. At the same time, I mean, I think a lot of these platforms have enabled a lot of people to make a living out of content creation, haven’t they? I mean, if you look at YouTube, and you look at all the podcasting platforms, I mean, there are many more people that are able to, you know, quit their jobs and become full time content creators, aren’t there. So, I mean, is there a risk that we, we, we undermine this system that has actually created a lot of benefits? I mean, how do you see it, Rebecca?

Rebecca Giblin  17:48

Let me answer that second part. The second part first, I think we are constantly being sold the idea that we can’t have the good things without the bad things, right. So Amazon is constantly telling us that we can’t have a good search engine without surveillance. But we can have a great search engine without surveillance. Google didn’t surveil us for the first several years of its existence, right. And it was a terrific search engine. We, with the access to digital technologies and the Internet, we absolutely can have global virtually instantaneous gloop at virtually costless, like zero marginal cost of distribution, supply of many kinds of creative work. So we’ve got this potential for the good things anyway, what we don’t have to have is the bad parts, the lock ins, right, these strategies that are used to create these hourglass shaped markets, so that you’ve got audiences at one end, and creators, the other and these predatory companies squatting at the NEC, were they using that power that they’ve artificially created by locking everybody in to extract more than their fair share? So that’s what I say in response to that. And getting, I’m so glad you asked me more about monopsony. Most people run away screaming from that pot. So some of the reasons suddenly tell you a couple of things about it. One reason why monopsony is so dangerous is that it accrues at far lower market concentrations than monopoly power does. So you know, when monopsony when when when a buyer controls even eight or 10% of the market, that already gives it quite outsized power over its suppliers. And that says that’s assuming that there’s no alternative buyer for that. And we saw that when Amazon started out one of its one of its as soon as it got power over the physical book market. It started exerting that to try and squeeze margin out of everybody else. And, you know, this is a famous Bezos aphorism. Your margin is my opportunity. He’s very clear about what he’s trying to do. But sometimes when you look at how the sausage gets made, it can be a little bit frightening. They created something called the gazelle project, which is exactly what it sounds like the way that a cheetah cuts out the weakest Gazelle from the herd, they went after the smaller and more vulnerable publishers to squeeze margin from them. One of them was Melville House, who lots of people have read books from. And the publisher they resisted, he said, look, if you I cannot, we cannot afford to give you what you’re asking for our business won’t be sustainable on that basis, we just won’t do it. And Amazon instantly retaliated by removing the buy buttons for all the Melville House books on its platform. Okay and now at that, at that time, I think Amazon only controlled about 8% of the market for those books. But nonetheless, Melville House was forced to instantly get virtually instantly given because without that, that eight or 10% of sales, it was just no longer sustainable. And so if you look at how much power Amazon had, when it had such a small market share relative to what it has got now, you can see how dangerous that’s become. And then if we look at other industries, in so many of them, you’ve only got, you know, one or two or three buyers that are available. And coincidentally, they often seem to have very, very similar policies and very, very similar abuses. And this is what this is what puts them in that position where they can extract so much from the people that they’re dealing with. Yeah, the other. The other thing about monopsony that I think is relevant here to why the remedies are not particularly effective, is that there’s real concern that when you regulate a powerful buyer, that maybe the reason why it’s so powerful is because it’s very efficient. And this is what Amazon argues it argues that it has this highly efficient structure, that it has these lower costs, which leads to attracts customers, which then attracts suppliers. And then there’s a better customer experience, which brings more in and sort of feeds this loop which Amazon calls its virtuous cycle, right. But what we see when we look at Amazon, and my co author, Cory Doctorow just did a terrific thread, or blog post on his pluralistic website about this a day or two ago, is Amazon increasingly is a shitty place to buy from, because most of it has been taken up by advertising. People, people know that Google and Facebook have big online advertising businesses, but not many people know that Amazon is a close third now. It shakes down the people that sell on it. For placement fees, and for the right to be shown first and for the right to be earlier in the search listings. And that means that you know, rather than getting the best search experience, the best customer experience, you’re just being inundated with ads all the time. They’re making billions upon billions of dollars from this. So the evidence is that in practice, it’s probably not from efficiency, but regulators are concerned that they might not be able to tell the difference. And that makes them hesitant, even more hesitant to intervene in cases of monopsony than monopoly.

Gene Tunny  23:24

And Rebecca, how do you respond to the argument that these companies are simply being rewarded for the innovation, they’re being compensated for the innovation, that they’ve undertaken to deliver new services to consumers, because a lot of these platforms are delivering value or consumer surplus to a lot of consumers. And, you know, providing opportunities for content creators. I’m just wondering how you respond to that argument, because as economists, I mean, we’re very much a lot of economists are sympathetic to that Schumpeterian idea of creative destruction, that wherever there are these, you know, the opportunities for profits that encourages innovation. And I mean, who knows? I mean, will these companies survive? Or will there be new innovative innovators who take over?

Rebecca Giblin  24:10

Let’s see, that’s the thing. This is another thing that we’re constantly being sold this idea, but look at Google, how much innovation does it actually manage? Alright, it made a great search engine, and a pretty good Hotmail clone, right? And nearly everything else that it’s ever provided that’s had any kind of success. It’s bought from other people who did actually innovate with its monopoly profits that it’s making on from these choke points. Right. And so, you know, Google tried really hard, and we talked about it in the book to create a Google video service, right? Absolutely failed with all of its resources and all of its smart people it could not, it’s almost ludicrous, how hard and how many ways it failed on that. And so it had to buy YouTube, right, which scrappy people above a pizza shop where they were actually doing innovation. And we see this time and time and time again, you know Facebook came to control the messaging market, and to control the way you communicate with your community and your family and your friends, not by innovating and creating the products that we want. But by buying up what’s happened Instagram for billions of dollars each when they had, you know, virtually no employees, because these tiny companies were the ones who actually doing the innovation, okay, so we don’t need not only do we not need these, these massive companies in their massive war chest to be innovating, they’re actually getting in the way of other people innovating. Because everybody knows what happens if you get in the kill zone, right? So it’s a risk, you either get bought up. And that’s like, that’s what many, many people are aiming to do. If they’re trying to innovate in this area, they know that the only exit is to get acquired by these companies, or crushed by them. And so it’s called the kill zone. And if you and venture capitalists know, we know that there is less VC investment in territories that are controlled by big tech and other powerful corporations, because of these kill zones. So Amazon, for example, burned, I think it was 200 million US dollars in a single month, undercutting and going directly up against diapers.com, in order to control the nappy market in the US. And that’s an extraordinary amount of money drove this innovative competitor absolutely under because it had access to these, these war chests from its monopoly profits and access to capital markets that this scrappy little innovator didn’t have. Now $200 million in a month to control the diaper market might sound like a lot of money. But it’s actually incredible value, because it didn’t just get rid of diapers.com it sent an incredibly clear signal to anyone else that was thinking of entering any space that Amazon has marked that you will be absolutely burnt out if you even attempt it.

Gene Tunny  27:04

Yeah, it’s a real gangster move, as they’d say, isn’t it? I mean, really?

Rebecca Giblin  27:08

Yeah, they would say no, no, it’s just it’s just it’s good, hard. It’s good fair competition. But it’s not is it? Right. And all of that. There’s extensive research on this, we see that there’s less investment, less innovation in areas where you’ve got choke points.

Gene Tunny  27:26

Okay. Rebecca, I think I should have booked you for longer. There’s been fascinating, and I’m enjoying the conversation. But yes, if, if there’s anything else? Yeah, I’d love to if you had any final points, you know, feel free to make them otherwise. We might have to, we can wrap up. And yeah, I’ll, I’ll try and connect with you sometime in the future. Because I’m sure there’ll be a lot of discussion about your book and this debate will continue on into the future.

Rebecca Giblin  27:55

Yeah, I guess the final thing I would say just to sort of sum up the ultimate message is that you know, creators, but also the rest of us are getting choked, that we’re sharing less and less than the value that’s that’s created by our work. And that’s happening because we’ve got these increasingly powerful corporations, creating choke points that allow them to extract more than their fair share. But we don’t have to put up with it. There’s lots of things that we can do to widen these choke points out once we see them for what they are.

Gene Tunny  28:25

Okay. Rebecca Giblin. Thanks so much for your time. I really enjoyed the conversation. Thank you so much.

Female speaker  28:33

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  29:03

Okay, I hope you enjoyed that conversation I had with Rebecca. Overall, I think Choke Point Capitalism is a book worth reading, although I disagree with some of its assertions. Regrettably, I didn’t book Rebecca Long enough to ask her all the questions that occurred to me from reading the book, so I’ll aim to get her back on the show next year for another conversation. The book includes many compelling examples of dubious business practices by big companies. So I must admit I am somewhat sympathetic to the choke point capitalism thesis. And if you’re a regular listener, you will know that I’ve covered surveillance capitalism and problems with big tech in the past. There does appear to be scope for some antitrust action against some of the badly behaved big tech companies for sure. That said, one reservation that I have about the book is that it appears to have a wider ambition than simply acting against the market abuses of big tech. In parts, it reads like a polemic against capitalism in general. For instance, the book concludes, we’ve organised our societies to make rich people richer at everyone else’s expense. I think that sweeping statement goes too far. Like some other popular economics books I’ve read in recent years, choke point capitalism adopts to negative view of our economic system. Capitalism, after all, has lifted hundreds of millions of people out of extreme poverty in recent decades. And it has fostered a bewildering array of innovative new services that have benefited billions of people. And we still have progressive tax systems in which the wealthy generally pay much more tax than the less wealthy. Of course, many wealthy people avoid paying tax I know. But I think it’s broadly true that we still have a highly progressive tax system, at least in Australia and European countries, possibly less so in the US. Okay. Despite some reservations, I’d still recommend the book for its vivid examples of so called choke point capitalism. The book makes a useful and stimulating contribution to the important debate over the regulation of big tech. So I’ve included a link to the Amazon page for the book in the show notes, so please consider buying a copy. Thank you. Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

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

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Podcast episode

The Progress Illusion w/ Jon Erickson – EP166

Professor Jon Erickson is an ecological economist and advisor to policymakers including Senator Bernie Sanders. In his new book The Progress Illusion, he criticizes what he calls “the fairytale of economics” and argues we are failing “to design an economy that is socially just and ecologically balanced.” Show host Gene Tunny discusses Prof. Erickson’s new book with him in this episode of Economics Explored. 

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: Jon Erickson

Jon D. Erickson is the Blittersdorf Professor of Sustainability Science and Policy at the University of Vermont, faculty member of the Rubenstein School of Environment and Natural Resources, and Fellow of the Gund Institute for Environment. His previous co-authored and edited books include Sustainable Wellbeing Futures, The Great Experiment in Conservation, Ecological Economics of Sustainable Watershed Management, Frontiers in Ecological Economic Theory and Application, and Ecological Economics: a Workbook for Problem-Based Learning. He is also Adjunct Professor at the University of Iceland, and has been a Fulbright Scholar in Tanzania, Assistant Professor of Economics at Rensselaer Polytechnic Institute, and visiting professor in the Dominican Republic, Norway, Germany, and Slovakia. Outside of the university, he is an Emmy-award winning producer and director of documentary films, co-founder and board member of numerous non-profit organizations, past-President of the US Society for Ecological Economics, and advisor to state and national policymakers. Jon lives in Ferrisburgh, Vermont with his wife Pat, their occasionally visiting sons Louis and Jon, and a menagerie of dogs, cats, horses, chickens, and donkeys.

Links relevant to the conversation

You can buy The Progress Illusion and if you listen to the episode Jon will reveal a discount code:

https://islandpress.org/books/progress-illusion

Transcript: The Progress Illusion w/ Jon Erickson – EP166

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

Gene Tunny  00:00

Coming up on Economics Explored.

Jon Erickson  00:03

Since at least the night, late 1970s. For a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown, grown. But these alternative metrics, whether it be GPI, or surveys on quality of life, or the ecological footprint, these things have not improved. They have not kept up with the pace of growth, right.

Gene Tunny  00:25

Welcome to the Economics Explored podcast a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 166 on the progress illusion, a new book from Jon Erickson, Professor of sustainability science and policy at the University of Vermont. Professor Erickson is past president of the US society for Ecological Economics. And he’s an adviser to state and national policymakers, including Senator Bernie Sanders. Please check out the shownotes for relevant links and information and for details where you can get in touch with any questions or comments. Let me know what you think about what either Jon or I have to say in this episode. I’d love to hear from you. Right oh, now for my conversation with Professor Jon Erickson on his new book The Progress illusion. Thanks to my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Professor Jon Erickson, welcome to the programme. 

Gene Tunny 01:00

Thank you so much. 

Jon Erickson  01:03

It’s a pleasure, Jon to have you on. I’ve read your new book, progress, the progress illusion, reclaiming our future from the fairy tale of economics. So given this as an economics podcast, there’s definitely a lot to talk about with your new book. Yes, yes. So can I ask you first? Why do you think progress is an illusion? What are you trying to communicate in this book, please?

Jon Erickson  01:56

Sure. Sure. Yeah. So the progress illusion is really a reference to a fairy tale of humanity’s place and purpose in the world. Certainly, economics isn’t the only discipline that is subject to the solution, but it’s the one that I’m trained in. It’s a story that economists like myself have been teaching and practising for decades, decades that, you know, every time we see the size of the global economy double, which doubles every 25-30 years at current growth rates, that we erode the very foundations of life and human societies in the process. So, in this book, I questioned that, that reigning logic, that reigning story, I unpacked various dimensions of this grand illusion of economics, you know, which I see as an illusion of history and a lot of economics programmes, mine included, we don’t teach the history of economic thought we don’t discuss the debates of, of economists of the past. It’s an illusion of the individual, me, so much of the focus of economics is on the individual and what’s best for the individual in the assumption that whatever’s best for the individual is best for society. So I unpack that and think about the debates over that question. It’s an illusion of choice. I mean, economics sort of sets itself up as the science of choice. But it’s always framed this choice at the margin, right, the choice of the next incremental decision. Yet, when you add up all those decisions together, we very often get into situations that the original decision makers never would have voted for. Right. And ultimately, it’s an illusion of growth and illusion of, you know, a sort of fairy tale or dream of infinite economic growth on a finite planet.

Gene Tunny  03:52

Gotcha. I think it’s interesting. You mentioned that there were these debates, and they’re not always well covered in economics. I remember. I remember learning at least about Malthus, and there was the Malthusian prediction or his his view that, well, we’re in trouble because any economic growth we had, we just ended up having more children, and we’d be back to subsistence. Whereas I think the way that economists started to view that was all well, we solved that problem with technological progress. And, but I mean, look, I understand the point that that’s in a few 100 years or over the last couple 100 years say we’ll be able to do that. Who knows if that can continue indefinitely? I mean, who knows what shocks are coming? So, I mean, maybe, is that what you’re arguing? We could be we could be too optimistic based on recent history.

Jon Erickson  04:48

Well, look, I mean, we’re recording this in the second week of November during that latest Conference of Parties for the UN Framework Convention on Climate Change. And there’s ample evidence to show that this economic system we’ve created is putting dangerous strains on the global climate system, right? A climate system that is, is increasingly called as chaos as in danger of, you know, collapsing the whole experiment of the economy. So, you know, we can go back to Malthus if you’d like. But we’ve always seen that a growing economy creates benefits, and costs. And what we’ve seen, particularly over the last three or four decades is as those benefits have become super, super concentrated. And the costs have been spread out on more and more people, and especially on future generations. So we’re in kind of, you know, yet again, a kind of Malthusian tragedy.

Gene Tunny  05:51

Right. And so is that your biggest concern at the moment, climate change, or other other concerns,

Jon Erickson  05:58

tThere are plenty of concerns to go around. But having a habitable planet is a big one. It’s a big one that fellow economists are concerned about. You know, economists have been part of various signatures, signatories to various pledges of action. It’s a concern that’s related to mass extinction. It’s a concern that’s related to growing inequality and persistent poverty and declining quality of life, even in the richest countries. You know, I think it was, I think it was Alcoholics Anonymous, right, that said, you know, when you do the same thing over and over again, expect something different. You know, that’s the kind of insanity. And that’s what this book is about.

Gene Tunny  06:39

Right? Now, you mentioned, well, you talk about the fairy tale of economics, you mentioned you were trained in economics, do you still consider yourself an economist?

Jon Erickson  06:50

I mean, I often describe myself as an ecological economist, because I’m really trying to understand interdependencies between the economic system, and society and culture and the social system and the environment. I see this work as reforming economics for sure. I’d love someday, where we didn’t have to have all these kind of competing camps and different flavours of economics, we could just call it economics. But since I really don’t identify with the mainstream of economics, I tend to call myself an ecological economist.

Gene Tunny  07:22

Right? And you tell a story in the book about how just something like that was it the JEL, the Journal of Economic Literature codes, and you were stunned? Yeah, the way that Yeah, could you tell that story because of those fascinating, I’d never thought the JEL. Yeah, would be so controversial, or yeah, but please tell the story. I thought it was a good one.

Jon Erickson  07:47

I don’t know that they were controversial it just it just gave me pause. When I saw that ecological economics was given its own code, and treated as a sub discipline of a field that we were trying to overturn or be the alternative to. And this really is, you know, this, this is, you know, reflect on kind of why I wrote this book. You know, it’s a reflection on my career in Ecological Economics, when ecological economics was formalised in the late 80s and early 90s, before it got to JEL code, books and journals and organisations and degree programmes, and folks like me were supposed to be created to try to question the mainstream and reform it. So in many respects, this book is kind of my midlife crisis book, where I take a critical look at the history state and fate of this movement of ecological economics as an alternative to the mainstream. Funny story about 10 years ago, I was the president of the US society for Ecological Economics, and one of these professional societies that have emerged to support this field. And I was at our conference at Michigan State University, and I had thrown my back out. So I was like, during most of the meeting, I was horizontal in my hotel room, just miserable, just really grumpy. I was laying on my back, trying to write notes for my presidential address right, to the society’s membership. And I just was so grumpy, so grumpy, so grumpy. And it really got me thinking about the state and fate of ecological economics, and made me think about like this code, Q 57. Right, the seven hundreds plus subject areas of economics, and how ecological economics was increasingly being absorbed by the mainstream, including by folks who call themselves ecological economists. In fact, at that meeting, there were just, you know, all of these sessions on monetary valuation of ecosystem services, which I saw as, you know, a real slippery slope, you know, can we sort of challenge the mainstream with the logic of the mainstream and commodify nature. So, in a lot of ways that kind of grumpy week in Michigan, set the stage for this book, and, and my desire to really critique my own field.

Gene Tunny  10:16

Right. Okay. So I probably should provide some background on so these JEL codes, they’re the codes that you would put at the bottom of an abstract for a journal paper or a conference paper to signal this is the field or that the field of economics are the sub discipline of economics that it’s in. And so that helps them identify where it should go in conferences, for example, which session. Now, it’s interesting you mentioned how environmental economists have come to start valuing nature or to quantify environment, environmental damage, or to value what a wetlands are worth or in I mean, as a, as an economist, I’ve done various exercises like that in the past. I just want to understand where you’re coming from, do you think that’s the wrong way to go about it, to think about the the economy or the environment to think about? Well, we’re doing this many dollar dollars of damage to the environment, and therefore we need to impose this, this cost this charge on people who are damaging it, and to make sure we have, you know, where I’m going, what we’re trying to get ya get some sort of, we’re getting some solution by having the right taxes and charges in place or Pigovian tax, for example, what do you what are your thoughts on that, Jon?

Jon Erickson  11:43

Yeah, that the field of environmental economics and and before that natural resources, economics, really preceded this field that I’m describing of ecological economics, really treating the economy as an ecosystem, and environmental economics has its roots in the late 1960s, early 70s. And, you know, reaching back to Pergo, in the 20s, and 30s. And fitting the environment inside the marketplace, right, using prices to correct the so called market failures of what were framed as environmental externalities. So that’s how I was trained at Cornell University, I was in an agricultural economics department, learning natural resource, environmental economics, and kind of, you know, buying into that logic of, of the environment is just a failure of the marketplace. Ecological Economics. So that’s valuable. And that’s pragmatic. And I’ve done my share of work that is trying to make the case the economic case for environmental protection. The challenges is when that tool when that approach, when the sort of expansion of cost benefit analysis to environmental concerns, when that rises to a worldview, right? When you commodify all of nature and when you reduce all social relations of humanity to market logic, we start to run into what economic historians or people in the 40s and 50s The Economist name is escaping me right now, the fellow who wrote The Great Transformation, Karl Polanyi. Yeah, the Karl Karl Polanyi warned of the merging market society, right. Whereas the rules and priorities of a market system that envelop the democratic system, that envelop our social and environmental values. So I’m okay using economics as a tool and treating economists as mechanics or janitors to sort of tune the market system. But when economists are sort of framed as overlords of the social environmental system, right, or conveyors of a master worldview, that’s where my hairs go up. And that’s, that’s largely what this book is about, and thinking about the progress solution of economics.

Gene Tunny  14:08

Right? Is the problem that we have this objective of maximising economic growth where we’re concerned about GDP, are you arguing? We’re not as concerned about these environmental measures? How do you what do you think we should be concerned about? Or how should we be making decisions as a society?

Jon Erickson  14:30

I’m making the case that 21st century economics should reflect 21st century problems and values. I think when the mainstream of economics or what we often call neoclassical economics was formed in the late 1800s, early 1900s. Maybe the focus was well placed on growing an economy of the efficiency of market system right, of taking power away from the church and state and putting it into the hands of the consumer. and producer. You know, it’s much like thinking about an ecosystem at the early stages of any ecosystem. It’s the pioneering species that are prioritise its growth and competition and resource exploitation, that is prioritised. But as the system matures, as the system grows into a fixed, fixed environment, the goal should change, right, the goal should move away from growth and towards maintenance, bitterness, towards durability, towards resilience, away from competition and towards cooperation right away from sort of thinking about the number one priority is to grow our way out of problems, to realising that growth itself creates problems that growth can’t fix. So Ecological Economics reflects a maturing of economic thinking, that reflects the challenges of the 21st century.

Gene Tunny  15:59

Right. Okay. So it seems you’re, you’re concerned about the problems that growth can’t fix. Okay. You don’t think regulations can help? I mean, because we’ve got cleaner air?

Jon Erickson  16:12

Not exactly. I mean, I think we need to move beyond just economic instruments to fix things using the market to fix market failures, right. But really trying to find that balancing act between market mechanisms and government regulation between improving and making government work better, instead of the opposite narrative of, you know, government is the problem, not the solution. No, in this book, I reflect on kind of my own upbringing in the United States, and my parents generation, you know, and growing up in the Kennedy years, where the narrative was, you know, you know, ask not what your, what you can, what your country can do for you ask what you can do for your country. And I grew up in the Reagan Thatcher generation, right. And the Reagan narrative was, you know, it’s all about the individual, it’s greed is good. Don’t ask what you can do, you know, do for your country, get government off our backs, you know, that’s what we need to do. So, I think in an age of climate chaos, in an age of the sixth mass extinction, and an age of growing inequality, the narrative has to change, the story has to change, we have to recognise that a system and an economics that was created in the context of a 1940s 1950s expansion out of the Great Depression had its day. And now, the realities of our time, need to need to start to shape a new reality.

Gene Tunny  17:44

Okay. And so what does that? What does that mean, Jon? Does that mean, we need? Do we need redistribution policies? Is that what you’re arguing for to address inequality? We need greater environmental? Well, we need to prioritise the environment. I mean, that’s gonna be I mean, obviously, the environments important, I’m not denying that. I’m just thinking in in Australia here. I mean, it’s we’ve got very stringent environmental regulations already. And if we have more stringent environmental regulations, it’d be very difficult to develop anything. So I’m just wondering what it all means is it? Does it mean, we have to accept a lower standard of living in the future? are you pessimistic about technological change or ability to to innovate our way out of these constraints? Could you talk about that, please?

Jon Erickson  18:38

Yeah, I think that’s too narrow of a frame. When you think about economy environment, and what I’m concerned about, there is reams of evidence show that so called advanced economies, such as the United States and Australia, built on hyper individualism, built on the legacy of a social disease that sociologists call affluenza, right, or this addiction to consumerism, that this model of progress has leaves a little lot to be desired. And that in fact, maybe we’ve been in a progress recession for some time now. Scholars in the United States and Australia and dozens of other countries around the world have been estimating for years now. What’s called the genuine progress indicator, something that is meant to be compared to the more common gross domestic product. And what this indicator does is it recognises that a growing economy has benefits and has costs. In fact, I first discovered the GPI when I was in grad school in the early 1990s. And in the US, we were in in the the bush one recession. And there was a beautiful article written in the in the Atlantic and it had the title of something like if GDP is up. Why is America so down? Right? We were kind of in this recovery state. And people were, you know, economists are saying, hey, the economy’s growing, we’re all good again. And the average American, I’m not good, I can’t make ends meet. I’m miserable. And the same narrative has popped up at the tail end of every recession ever since ever since. In fact, it started working on this book at the tail end of the so called Great Recession. And the same thing was happening, we were using the instruments of economics using mainstream thinking to grow our way out of problems. And the average person was saying, who is benefiting? And who does who? Who’s paying the cost? Yeah. So the GPIO through this series of 26, some odd calculations and says, What are the true benefits of a growing economy? And what are the costs? What are the environmental costs? What are the social costs, and have shown quite convincingly that since at least the night, late 1970s, for a country like the United States, we’ve been in a progress recession, the GDP has grown, grown, grown grown. But these alternative metrics, whether it be GPI or surveys on quality of life, or the ecological footprint, these things have not improved, they have not kept up with the pace of growth, right. So we have to start asking at these kind of higher levels. What do we do with this for right? What’s, what’s the new balancing act in a maturing economy? How should we reprioritize what is the good life? And how should we I mean, you frame it as accept the lower standard of life, the standard of living the material standard of living, I frame it as as asking the question, how do we live better? How do we how do we live well, within our means?

Gene Tunny  21:47

Yeah, sure. I can, I can understand that. I guess what I’m thinking, Jon, is that at the moment, in Australia, one of the big issues is, well, the rising cost of living, high inflation relative to wages, and the lack of housing, I mean, we’ve got a dire shortage of housing here in Australia. Now. I mean, look, there are a variety of reasons for that, possibly. But I mean, at the moment, when I’m looking at things, I’m thinking a bit more economic activity to construct houses would have been good over the last 10 to 20 years. And, and we’ve got rising cost of energy. So yeah, I take your point, I think I think a lot of people out there would be concerned though, about this. Yeah, that they that, yeah, I’m not I’m not necessarily wanting to criticise what you’re saying, I understand where you’re coming from. I’m just yeah, that’s where I’m coming from, if that makes sense.

Jon Erickson  22:51

Yeah, that makes perfect sense. And that’s the big question, right? Like, can the same kind of thinking that got us into these current messes? That is making the billionaire class hugely, hugely more material well off, while the rest of us feel like we’re on a treadmill, just barely getting by? Can the same kind of system, right? That has privatised the benefit of growth and socialise, the costs? Can that continue? Or should it continue? Right? Should we sort of create a social movement and start to ask, what is the economy’s purpose? Who is the economy? And growth for whom and for what? Now, you know, when I debate economists, they always say, like, come on, come on, you know, you’re not being fair economics is just a model. It’s a model of progress. All models are wrong, some are useful, right? They quote George George Box. Right? All models are wrong, some are useful. And I said, Yeah, I, I agree, all models are wrong, some are useful. But what box didn’t ask is useful for? Right. So in the US, we’re seeing these energy prices, and we’re seeing record profits to oil companies. In the US, we’re seeing housing shortages, right? Yet we’re seeing record rents to the ownership class. In the US, we’re seeing families, you know, struggle to get by in these kinds of post pandemic months and year. And kind of returning to, you know, try and train as quickly as we can to get back to normal, right? Pre pandemic years. And a lot of us, and a lot of folks that are most vulnerable in this current system, are saying we don’t want to go back to normal normal was already in crisis.

Gene Tunny  24:47

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

Female speaker  24:55

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Gene Tunny  25:24

Now back to the show. Okay, can I ask about that genuine progress indicator? Who’s producing it? And can I ask him about what, what some of the the variables that go into? It are? Please, you’re really interested in that? Because look, I understand the criticisms of GDP. And I mean, at least if we’re destroying, or we’re subtracting from the environment, or we’re, we’re damaging the environment that you probably should recognise that as some sort of disinvestment or a loss of capital stock. So yeah, would you be able to explain the genuine progress indicator, please?

Jon Erickson  26:04

Sure. I mean, it starts with the basic premise, right, that the economy is subsystem of the environment, and that when the economy grows, it has opportunity cost. So I mean, it’s a basic, it’s built on basic economic system has benefits and has opportunity costs. So with GPI, we start with consumption, the biggest part of GDP, and we say, Okay, let’s take consumption, and then let’s correct it for income inequality, to recognise which what Pergo recognised in the 1920s and 30s, right, that growing incomes grow and give diminishing returns, right, that the next unit of of income to a rich person creates far less welfare society than the next income, a next unit of income to a low income family or a low income person. So we correct for income inequality. We then go through a series of calculations that for example, take consumer durables and GDP and say, you know, a society a GDP benefits by building a throwaway society. With durables, washing machines, automobiles, long lasting expenditures, if they were out often have to be replaced. That’s great for GDP. Right. But is it good for progress? So we say, Okay, here’s the expenditure of durables, and here’s the benefits of durables, right? Over time, these things are supposed to last more than a year or two or three years. So there’s economic adjustments, there’s an adjustment for over for underemployment, right. Idle work, people who wish they could work more. So it’s got that kind of basic economic logic built into it. But then there’s a whole category of depletion and pollution costs, right? We shouldn’t be treating depletion of our soils, our water, our air, as income. In fact, any business that treated depreciation of capital assets as as income instead of costs wouldn’t be in business very long. But that’s exactly what we do in our economic book keeping for nation states. Then there’s a whole series of interesting calculations on the social side of thing, right, we have to recognise that the GDP only recognises the value of your time in a market, earning income, earning wages earning profits. And so what the GPI the genuine progress indicator says is that there’s, um, use trade offs, right? Every hour extra hour work, the opportunity cost of that is an hour, not with your family, an hour, not in your community. And now we’re not leisure. So rather than feeding every single hour at work as a benefit with no costs, GPI goes through and says, let’s be honest here, right? Work is good, up to a point, income is good, up to a point consumption is good, up to a point. But we have to recognise that consumption and income and growth have diminishing returns. And at some point, at some point, the growth of an economy creates more costs than benefits. What Herman Daly, one of the founders of ecological economics, who, unfortunately passed away a couple of weeks ago, called an economic growth, right, a growing economy that creates more cost and benefits. Okay, we could do a whole podcast just on GPI, so don’t get me going.

Gene Tunny  29:40

Yeah, that’s fine. I might. I’ll have another look at it. Because, I mean, it’s one thing that comes up in various conversations I have, and I’ve been looking at the national accounts recently, I’ve had people on talking about that and their conceptual foundations and we’ve, we’ve we’ve mentioned that every

Jon Erickson  29:58

time we have a recession Yeah, the critique of GDP comes up, right? Yeah. Like, hey, wait a second growth isn’t providing what’s going on here. And every time coming out of recession, we question the metric. And then we kind of start growing again and says, Okay, let’s go back to normal. Yeah. But we have to kind of keep revisiting these alternatives. You know, the original architect architects of GDP back in the 30s, and 40s. Were very careful to say this is not a measure of human progress, human welfare. This is a measure of economic activity, which contributes to human welfare, but is not in and of itself. human welfare.

Gene Tunny  30:40

Yeah. Yeah. I agree there. Now, what about what can be done? Do you have a set of policy recommendations? Jon, are there? What would What do you think needs to be done? Are there things that there will be things that need to be done by governments? Are there things that need to be done by individuals? I mean, it sounds like, Well, okay, maybe you tell me if I’m wrong here. But when I read your book, and I heard about the progress, I was reading about the progress illusion that concerns about how we were consuming too much, I mean, do we need to show that we as individuals be consuming less Is that is that part of your argument? We should we shouldn’t be going on as many overseas trips, we shouldn’t be using the car as often we should think about our purchasing decisions, not get a new washing machine or get a I only get one, when it breaks down, try to repair things. What are you arguing in this book? Is the solution?

Jon Erickson  31:40

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

Gene Tunny  36:05

Okay, so I’m just wondering what exactly that involves? And is this part of this whole idea of D growth? Is that what you’re arguing for? I’ve heard about this concept of D growth, that that’s coming up, and there was an article in the FT about it the other day. So you’re just wondering, what needs to be done? I mean, do how do we, how do we have that, though? How do we recognise those constraints? I mean, you mentioned carbon tax. I mean, that’s something that, but you’re also saying that that’s not going to be enough and mean, given current magic

Jon Erickson  36:41

bullet, but it changes that changes the system? Yeah. Yeah. I mean, degrowth is the sort of social movement side of ecological economics, if you will. It’s a question of, how do we orchestrate a just transition to a right sized economy. Now in some parts of the world, and for some people in the world, you know, growth still creates more benefits and costs. But there are plenty of parts of the world and plenty people in the world where growth, Grace, more cost and benefits, right. So we have to orchestrate a kind of Race to the middle. And in fact, if you plot something like the HDI, the Human Development Index, which is a UN level index, this used to sort of monitor, you know, the benefits of development. If you plot HDI at national levels against energy per capita, you get this curve, right that the initial development improves considerably, with just a little bit more energy use per capita a little bit more than final impact per capita, Right. but only to a point that we get into this kind of club of countries, where continuing use of energy continuing depletion of the environment, continuing materialisation of the economy, doesn’t improve development doesn’t improve the HDI. And you get this long tail with countries with the same HDI of countries that that consume 20 or 30, or 40, or even some cases 80% less energy and material. So countries like mine, the US were way out on this tail, where we’re not getting improvements in human development. Yet, we’re consuming way, way, way more energy than the average human right. And way more energy in the countries that have similar levels of development, similar qualities of life. So what are we doing? Right? We’ve got to orchestrate a race to the middle and whether you call that d growth for the rich countries, and to be more agnostic about growth for everyone else, like grow, where it makes sense and shrink where it doesn’t. That’s the kind of century that we’re in. That’s the biophysical reality of the new economy.

Gene Tunny  38:57

So Jon, do you need a command economy to actually to orchestrate this transition to a right sized economy? I’m just trying to think about how this would happen. Because I mean, people, a lot of people out there, just, you know, they’re trying to live their lives and do the best they can. And a lot of people have to a lot of families, the couple have to work two jobs. They’re trying to make ends meet. I mean, they Yeah, they probably wouldn’t see themselves as as living a hugely materialistic lifestyle, but then compared with other parts of the world. Yeah, sure. It probably is. Yeah, I’m just wondering how we how we can do that. I mean, I’ll

Jon Erickson  39:37

yeah, yeah. My trainer has economists. I assume you’re trained economists. We were sort of taught these, these two different DS, roughly two different models, market economy and a command and control economy. And we were taught that this command and control thing is inefficient and unfair and results in a kind of an over regulated world and we need to the market economy is not perfect, but may Is it better than command and control? I’ve come to realise that that’s a load of BS. The market economy is also a command and control economy, right? Markets are designed by those and power markets are social constructs, especially the last three or four decades of neoliberalism has created a kind of free market experiment, right? That is concentrating the benefits and widely distributing the costs. So talk to the average guy or gal on the street and ask them, Is this economic system working for them? And if they say no, do you say, well, let’s double down on the logic of the system? Or do we try something different, right. So we’re finding that more cooperative forms of of economies are resulting in more shared benefits and shared costs. Were working with a group called the next systems project that has been sort of systematically cataloguing different political economics systems, local skills, community skills, United States that have dramatically different outcomes and dramatically different structures. It’s not just either or of command and control of free markets. It’s blending things in between, it’s the continuum in between, that is the secret sauce. So I don’t buy that we immediately just have to go to command and control. Although in crisis, what we learned from COVID is what happened is the world’s government goes goes to command and control, right? If climate is a crisis, if, if environmental depletion is a crisis, we might be using the very system of free market thinking, to push us into a state where the only option is going to be command and control. And I don’t want that you don’t want that. People don’t want that. We want our basic liberties and freedoms. But we want to do it in a way that creates an economy for all for children and for for future. I also kind of reject the the narrative of economic freedom, right? Because that’s awesome. That’s also painted as freedom to do things. And instead of freedom from tyranny, right, freedom from the impacts of, of the environmental costs of a growing system, freedom from the social inequalities, of a system that’s geared towards making the billionaire class even richer. Freedom from the costs of growing economies, what we should be thinking about, not freedom to do things to our neighbours, to our environment, and to future generations that ultimately are going to come back and bite us in the tail. Yeah, a buy in any of this.

Gene Tunny  42:58

Well, I’m interested in the new systems project. I’ll have to make system next systems project. I’ll have to look into that. I mean, do you have any examples of those communities you’re talking about?

Jon Erickson  43:10

Well, it’s examples of of. So you take the US and you think that we’re this kind of, you know, outside looking in and the narrative on the mainstream news channels is that, you know, we’re this free market, capitalistic system. It’s actually not true. So much of what makes the US economy work is cooperative ownership, collective ownership, state run, companies, state state run banking systems, state state runs systems of have that make the the economic system work. Take the banking sectors, trillions of dollars and coops where the depositors get votes on the matters of their banks. Take agriculture and education, and even energy and electric utilities. So much of those industries are run by cooperatives. In fact, electricity cooperatives deliver electricity, the United States, to a well over half of the geography of the high states, to rural communities, where the sort of economics doesn’t work for for industrial companies. There’s experiment after experiment, after experiment of different kinds of political economic institutions that have that we have lots of lessons to learn from. And this is what I meant in the beginning, when I talked about you know, economics, part of the Progress illusion is this kind of illusion of history right. To think that the current economic system, the neoliberal system, the free market, system, is is is the only one is has been perfected, right? Is the kind of logical inclusion of everything along the way, and that we don’t have to learn from our history. We don’t have to revisit the debates. We don’t have to consider the morality of our economic choices, or their biophysical consequences. And yeah, there’s a lot. I mean, I speaking mostly as a, you know, from the perspective of an American, maybe it’s different in Australia. But man, we have this sort of US centric view of the world, that everything we do is right. And every thing that we do is the best that ever was. And we don’t need to learn from our history. And we don’t have to need to learn from other other experiments around the world. And where I land is, that’s some pretty insular thinking,

Gene Tunny  45:45

huh? Yeah. Yeah. Okay. We’ll start wrapping up soon, Jon, this has been Yeah, really thought provoking. So it’s good to have you on the show. could ask you about neuro neuro economics. So you talk about that in the book. This is a new field, I’ve only learned about recently, what what’s that? What’s your interest in that field? And what’s it broadly trying to tell us? Or what’s it found?

Jon Erickson  46:11

Yeah, sure. Well, so this is where, you know, I’m kind of researching the book, like, what are some alternative ways to think about the human agent and our economic models? Because the economics, we’re taught a very, very, very narrow version of humanity, right, which is sometimes called like a subspecies of human homo economic is, yeah, isolated individual at a point in time, right, who

Gene Tunny  46:36

just wants more? The rational utility Maximizer? Yeah,

Jon Erickson  46:40

exactly. Exactly. And both within economics and outside of economics, you know, we’re learning that when we test our theories, with real data, and not just abstract mathematics, that this sort of foundations of this rational actor model, unravel. So what I do in the book is I explore what you might call borderline disciplines, right? Where economists have cooperated with other disciplines, especially other natural science disciplines. And so neuro neuro economics is one of those examples where economists have collaborated with neurosciences to ask questions of proximate cause. Right. So in science, we think of proximate cause and ultimate cause. And then the case of economic decision making proximate causes asking how we make decisions, whereas ultimate causes more a question of why do we make decisions that we do? Neuro economics is an example of a borderline disciplined, proximate cause where, literally economists are taking tests objects, with their neuroscience colleagues, asking people to solve economic puzzles, or make economic choices that are watching their brain light up, right, and trying to understand where and when do the kind of precepts of the rational actor model hold up? And where don’t they? So it’s one of these Borderlands this was, such as neural economics is an example. But also behavioural economics, experimental economics, where we’re trying to kind of understand the brain in the case of economics, the whole human case of behavioural economics, groups of humans in the case of experimental economics, groups of groups in the case of institutional economics. And then there are entirely evolutionary history as a species in the case of evolutionary economics. So these are all examples of, of the isolated discipline of economics, starting to cooperate with other fields, and building what I call in the book, borrowing from the biologist, EO Wilson, a more conciliate form of economics, where we find the jumping together of knowledge to really watch it watch the 21st century version of this field.

Gene Tunny  49:13

Right now. Okay. Well, yeah, oh, it’s something I want to have a closer look at, because I definitely recognise the limitations of that. That standard economic model. I mean, for years, economists were saying, Well, it’s, we recognise that all the assumptions are a bit unbelievable. But as long as it makes good predictions, and it’s, then it’s fine, but it turns out, it may not actually make good predictions. So,

Jon Erickson  49:39

I mean, I gotta go through the history of you know, the running joke, of course, right is that economists have successfully predicted seven of the last three recessions. So it’s, this this model of the rational actor model turns out to be not a very predictive model, or a model. Again, all models are wrong, some are useful. But we should start asking useful for whom? And it turns out this this isolated model is useful for the billionaire class but not useful for the rest of us.

Gene Tunny  50:10

Right I so we might start wrapping up, I’m keen to just learn about, what are you hoping this book we’ll achieve? Jon, what’s your What are your hopes for this, this book,

Jon Erickson  50:22

my generation, I’m 50 birthday this month, I’m 52 going on 53 My generation was inspired by the works of a number of like, you might call a renegade economist, right? Who sort of solid different path. Folks like Herman Daly, who I mentioned to, we just recently lost that 84 years old. I mean, Herman was on a similar journey that I was he started out with aspirations to be a growth economist, he thought that the logic and approach of market fundamentalism could be sort of bred when he was training to be an economist in the 50s and 60s, to solve problems, particularly problems of poverty, right to grow the economy, lift people out of poverty, but in his own educational journey, set against the aspirations of the Great Society in the US in 1960s, the civil rights and environmental movements of the 60s and 70s You know, he was inspired by inspired, inspired by the work of earlier group of renegades folks like Nicholas Dzerzhinsky regime who wrote on energy and the economic problem, bringing the principles of physics into economics, Kenneth Boulding, who wrote the infamous article, the economics for the coming Spaceship Earth that was really coming to terms with the opportunity costs of a growing economy inside of a fixed ecosystem. John Kenneth Galbraith, who, whose social critique in the affluent society really sort of, you know, early on question a society built around, creating more and more affluence into an affluent class. And, of course, the 1962 book by Rachel Carson’s Silent Spring, which was really impactful on Herman’s thinking, and design of an economic study of economy inside environment. So, you know, these sorts of scholars were also inspired by long standing debates about the function and purpose of the economy, you know, really going back to the classical era of economics, when economics was seen as as a branch of moral philosophy, right. Not not a pseudo science hiding behind abstract mathematics. So Herman’s work was another kind of link in the chain. His work on economics, the life sciences, first big published article, his work on steady state economics in 1977. Book, his work on for the common good that he wrote in 1989, with a theologian, John, John Cobb, you know, he was created another link in the chain that was trying to build a study of economics as if people and planet mattered. So I hope, you know, this book is yet another link in this chain of link that comes from my generation, that can continues to build a kind of more modest, more humble economics that can contribute to social well being and environmental, environmental protection, and not just simply,

Gene Tunny  53:39

okay, well, I’ll put a link in the show notes. So if you’re in the audience, and you’re interested in, in the in the progress, illusion, and look, it’s got a lot of, it’s got a lot of great information in it. Lots of lots of great analysis, and it’s very thought provoking. So I certainly enjoyed or I learned a lot reading it. I thought it was good. I liked how you went through the evolution of of economic thought and all the debates and even what I was struck by was, I didn’t realise that was Tinbergen, the famous Dutch economist. Yeah, he had a bit of a Nobel Prize winner. Yeah, he ended up he started to question the whole the the economic growth narrative in the was it the 80s or 90s? Are some of the you tell the story along those lines, I thought was interesting. Yeah. Yeah. So I think there’s a lot of good stuff in there. Okay, Jon, any final thoughts before we wrap up?

Jon Erickson  54:42

Look, I really appreciate this. Thanks so much for your podcast. I was listening to a bunch of your past thoughts in preparation for this and this is such a great show. Very valuable show. And yeah, folks are interested in this book. It’s, it’s been published by Ireland press which is One of the bigger nonprofit publishers of environmental books in the US and give your listeners the secret code. If they order a book from Island Press they get 20% off if they answer the enter the code illusion so but on my capitalism have there for a second

Gene Tunny  55:17

okay, is that all is that this capitalization matter is what did you just tell me that and I missed it sorry was

Jon Erickson  55:24

no I don’t know that it needs to be capitalised. But it’s the word illusion is the code for 20% off.

Gene Tunny  55:30

Okay, good one. Well, I guess people try it and if, yeah, hopefully it doesn’t matter whether you capitalise it or not, or try and capitalise that, that doesn’t work. Without caps. Okay. Very good. Okay. Jon Erickson. Thanks so much for your time. I really enjoyed the conversation and really appreciated your insights. So that’s been terrific. Thank you. Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explored.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

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

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

Structural budget deficits – EP164

he governments of many countries have structural budget deficits, so even as their economies recover from the COVID-recession they are still running deficits. In many countries, the fundamental structure of the budget is bad. There is too much spending relative to revenue, even in normal or good times, not just in recession. In this episode we explore how economists can calculate structural budget balances. We look specifically at what the Australian Treasury does, given that a new Australian Budget came out last week.

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.

Links relevant to the conversation

Australian structural budget balance indicators available here:

https://budget.gov.au/2022-23-october/content/bp1/download/bp1_bs-3.pdf

Australian Treasury methodology for estimating structural budget balances:

https://treasury.gov.au/publication/economic-roundup-issue-3-2010/economic-roundup-issue-3-2010/estimating-the-structural-budget-balance-of-the-australian-government

IMF Fiscal Monitor which contains cyclically-adjusted budget balances (Tables A3 and A4):

https://www.imf.org/en/Publications/FM

Media coverage of Australian budget:

https://www.theaustralian.com.au/nation/politics/jim-chalmers-takes-forensic-approach-to-tax-concessions/news-story/25c4e1be826abb87f27c918532a69614

https://www.theaustralian.com.au/nation/bill-shorten-admits-push-to-curb-ndis-cost-growth/news-story/8a15cb3daabd55961e35df957f206bcf

IFS analysis of UK mini budget:

https://ifs.org.uk/articles/mini-budget-response

Transcript: Structural budget deficits – EP164

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

Gene Tunny  00:00

Coming up on Economics Explored. 

So I think this is a really neat methodology that the treasurer is trying to break down the different influences on the budget to see what’s really going on. And what it reveals is that there’s this structural problem with the budget. 

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny broadcasting from Brisbane, Australia. This is episode 164 on structural budget balances, government budgets around the world was smashed by COVID-19. With countries recording huge deficits and big increases in debt. The governments of many countries have structural budget deficits. So even as their economies recover, they are still running deficits. In many countries, the fundamental structure of the budget is bad. There is too much spending relative to revenue, even in normal times, not just in recession. For example, the IMF estimates the United States will have a structural or cyclically adjusted government budget deficit of five to 7% of GDP over 2023 to 2027. In this episode, we explore how economists can calculate structural budget balances, we consider the different components of budgets, the structural, cyclical and temporary. We look specifically at what the Australian Treasury does, given that a new Australian budget came out last week. Joining me for the conversation is my Adept Economics colleague, Arturo Espinoza. Please check out the show notes relevant links and clarifications and for details where he can get in touch with any questions or comments. I’d love to hear from you. Righto, now for my conversation with Arturo on structural budget balances, thanks for my audio engineer Josh Crotts assistance in producing this episode. I hope you enjoy it. Arturo, good to be with you again.

Arturo Espinoza Bocangel  01:49

Hi Gene. My pleasure to be here.

Gene Tunny  01:51

Excellent. Arturo, so I thought today we could have a good chat about this concept of a structural budget balance. So we had our federal budget, the Australian government budget was released last week. So for 2023, the financial year. And this was because we have a new government. So there was an election in May. And there was a change of government, we now have a Labour government. So a more left wing government than the previous government, which was the Liberal National Government, the coalition government, and in Australia, a Liberal government is actually a conservative government. It’s all very confusing. Right, so we had a change of government and there was some improvement in the current year budget balance because of higher commodity prices, which flow through to, to earnings to and to tax revenue, that the federal government pulls in, particularly from the big mining companies. So there was an improvement in that underlying what they call the underlying cash balance. But this federal government is still running quite significant deficits. So it’s still running a deficit of some $37 billion, this financial year, the previous government did its budget back in May, I think they were projecting that up around must have been nearly 80 billion, I can’t remember exactly. But it was an improvement on that. But it’s still one and a half percent of GDP at $37 billion. And then over what they call the forward estimates, which is out to 25-26. We’ve still got deficits in the range of 40 to $50 billion, approximately, and, you know, up to 2% of GDP is in 24-25. So we’ve still got significant deficits. And the problem that we’re seeing in Australia, and this is similar to in other countries, too, is that governments are just spending much more than they’re bringing in in revenue. I mean, I guess that’s what a deficit is, right? I mean, that’s, but but there’s a problem that, that because of politics, because no one wants to pay taxes, politicians don’t want to put up taxes, and they want to deliver the goodies, they want to fund a high level of services for the population, and that helps them get elected. And so we’ve got this, this problem, this imbalance between what they’re spending and what they’re bringing in in taxes. And this is where I think this structural budget balance concept is of great use. And I just want to talk about that. So does that make sense Arturo, what we’re going to cover today?

Arturo Espinoza Bocangel  04:45

Yeah, that makes sense. It also is a very interesting topic related to government debts and this structural budget.

Gene Tunny  04:58

Yeah, yeah. So It’s always a concept that’s fascinated me. So I used to work in the Treasury in the budget policy area. And when I was there, we didn’t produce this structural budget balance estimate, and there was a big debate about whether Australia should have one and whether it’s feasible to develop one because as we’ll discover, you have to make all sorts of assumptions to generate it. It’s it, there’s a there’s a bit of, you know, there’s there, there’s a bit of number crunching that goes into it. And you have to make all sorts of assumptions regarding, well, what’s the normal state of affairs, because one way of thinking about this structural budget balance is that it’s what the budget would be if you took away the cyclical or cyclical factors. So if you if you’re able to abstract or control for the business cycle, so whether the economy is booming, or whether it’s slumping, then it gives you the budget balance that you would get in that situation, because one of the problems with the standard budget balance as a, as a measure of how the gut of the government is performing in a fiscal sense is that it is what economists call endogenous, it’s determined, partly, it’s determined or largely as determined by the state of the economy is determined within the system, it’s endogenous. It’s not something that the government can, can totally set, exogenously or it doesn’t have full control over it. Because your level of taxes depend on the state of the economy and commodity prices in Australia, if the iron ore prices is really high, or the coal price is high, then BHP, Rio Tinto, et cetera, the big mining companies, they’re only more profits and the federal government, it gets a share that it gets about 30% of their profits. So yeah, that can have a, you know, that can mean billions of dollars to the budget bottom line. And so that’s why we see the budget balance, it’s, it moves with the economic cycle, and so your government could be running a deficit. But that could be understandable, given the state of the economy. And so the underlying budget is okay, the structural part of the budget is okay, that’s not the case with Australia, but I’m just using that as an illustration. So it may be useful. Well, I think it is very useful to adjust for those cyclical factors. And that’s what the Australian Treasury has done in what I think is one of the most useful charts in the budget, which is in their statement on the fiscal outlook chart 320, the structural budget balance. And that really tells a story, it tells a story about how within the federal budget, because of this, this gap between what the government is spending money on and what we’re paying in taxes. So if government spending is at a level of around 26% of GDP. And revenue is under 24% of GDP. Or maybe it’s 25. And 23. It’s sort of that sort of order of magnitude, or it’s those are approximate figures, I’ll put the right figures in the show notes, we’ve got this gap. And this is a permanent gap. It’s a structural gap. And this is what this chart shows of two percentage points of, or 2% of GDP. And this is baked into the budget. And this is what this structural budget balance chart shows. So what they’ve, what they’ve done is the they’ve worked out that structural factors, leading to a deficit of about 2% of GDP, cyclical factors, so the state of the economy, the state of commodity prices, the fact that the iron ore price is super high, the fact that the economy has been booming. What that’s doing is pushing up, or that’s improving the budget balance by looks like 1.8 or 1.9%. If you look at the chart, and what that is telling me and what that is, this is for the current financial year 22-23. What it’s telling me is that, well, if we didn’t have that, that structural problem in the budget where we’re just spending more than we’re, we’re bringing in, and that’s the case and that would be the case in a normal year, in an average year. If we just control the economic cycle. If we didn’t have that structural problem. And if we looked at what the strength of the economy is commodity prices, and the government should be running a budget surplus of nearly 2% of GDP, and in actual fact, it’s running a budget, a budget deficit of what is it, one and a half percent of GDP. So there’s this big, there’s this big gap, which, in a way, represents the additional demand that the government is generating in the economy that isn’t warranted, given the economic circumstances. So the government budget is highly stimulatory to the economy and that is arguably a problem for Well, I think it is a problem, it’s contributing to the inflationary situation that we have in the Australian economy at the moment. And likewise, governments around the world that are running large budget deficits, such as the US government, such as the UK Government are contributing to the inflationary situations in in those countries, because if you looked at what the budget should be, given the state of the economy, it should be in a lot better state than than it is now than then those budgets are now and that’s what this cyclically adjusted budget balance or structural budget balances is approximating. Okay, one of the other fascinating things in that chart, I should note, the Treasurer is prepared on the structural budget balance for Australia, is that in 22-23, there’s still a sizable impact over 1% of GDP coming from temporary fiscal measures. So these are things that are related to COVID 19, to the pandemic response. So even though, I mean, look, I know that COVID COVID is still around, and apparently we’ve got another wave coming. I mean, the worst part of the pandemic is over, but still there is a, we do have these temporary fiscal measures occurring. And so what that means is, yeah, so that’s, that’s something that’s contributing to the, the deficit here in Australia. So what that chart is telling us is that, look, the structural budget, the structural problem in the budget is around two percentage points, or 2% of GDP. The cyclical, the benefit to the budget from the improvement in the economic cycle and higher commodity prices is, is just under 2% of GDP. So what that would suggest is that, that would mean we’d have a budget deficit of just a fraction of GDP, like maybe point one or point 2% of GDP. But then we’ve got these. Actually, it might be point three or point four, I’ll have to check the numbers that don’t put the exact numbers in the charts. I’m just trying to eyeball and I’m not wearing my glasses. But then we’ve got this temporary fiscal measures, which is, which is worsening the budget by over 1% of GDP. And how these all sort of add up is that we end up with a budget deficit in 22-23. Of what was it, one and a half percent. So I think this is a really neat methodology that the treasurer is trying to break down the different influences on the budget to see what’s really going on. And what it reveals is that there’s this structural problem with the budget. And, you know, this is something that all treasuries and finance ministers should do, in my opinion. There are some IMF estimates for other countries we’ll talk about later, the Australian Treasury seems to be doing a really good job at its estimates, and it’s discovered this structural problem, this big hole in the budget. Okay, so does that all make sense Arturo?

Arturo Espinoza Bocangel  14:01

Yeah, that makes sense. That was very clear. This is incredible how Australia is spending around this, because you, you mentioned around two or 3% is spending more than what they receive in terms of revenue. But let’s explore what are the main components of that structure, structural deficit?

Gene Tunny  14:33

Yes, well, a big component, or one of the major contributors to it in recent years, has been the National Disability Insurance Scheme. So it’s this expansion of the welfare state. Now I’m not making any judgement about whether that’s a good idea or not, because it’s very popular, and it’s well intentioned and there are clearly a lot of people out there in need. One of the challenges with it, though, is that it is growing at a very high rate. So it’s not the total structural deficit, because it’s at the moment, I think it’s around $30 billion. So it’s not just the NDIS. It’s other things. And then we have, we’ve had various tax cuts in the past, there’s a stage three tax cut that’s programmed in. So there’s going to be a tax cut in 2024-25, which aims to get rid of one of the tax brackets and to flatten the progressivity of the tax system. And that’s going to cost the budget revenue. So it’s a combination of spending new spending programmes and spending programmes that are costing more money than were expected. Also, we’ve got rising interest, a rising interest bill at the moment because of higher interest rates. And then people on the left of politics would argue, Well, look, the the problem is, we’re just not raising enough in taxation, if you’re going to spend this and that, look, that’s one legitimate perspective. If the government is going to spend this much on a permanent basis, if we are committed to an NDIS, National Disability Insurance Scheme, then we will have to have higher taxes to make the budget sustainable in the long term. I mean, personally, I’d prefer that we’d have lower taxes, we would, we would, we would get spending under control. But look, if we can’t get spending under control, then we may have to, we may have to put up with that. So because ultimately, we do need a sustainable budget, we’ve got to keep that debt to GDP ratio under control. At the moment, the projections are that for Australia, it’s not looking catastrophic yet, luckily, I mean, it’s on the current budget projections, it’s going to get up to around 48% of GDP. So it’s going to plateau around that, by the What is it 2030 to 2033. There’s another chart where they’re projecting that in how that’s going to perform. So this is the debt to GDP, which is one of the critical ratios that commentators, economists, ratings agencies, like S&P and Fitch and Moody’s, what they look at. And I mean, Australia’s lucky we started off with so what we started off with no debt to begin with, in 2008, we had, we had negative net debt, and we only had $50 billion of bonds on issue. So we’re in a good position to start with, so we’re at, we’re only gonna get up to about 50% of GDP at the moment compared with you look at the states, which is the US it’s over. We had a look the other day, didn’t we? I mean, it’s up 120 to 130% of GDP or something. Yeah. Okay. It’s very high if you look at projections for actual data and projections for the US. So we’re, we’re nowhere near that what’s happening is that the outlook is worsening. So if you look at that Treasury chart and the budget, compared with where we were back in May, or back in April, when the government released its last budget, that’s right before the election, and then the Treasury put out the pre election, fiscal, economic and fiscal outlook, the instead of the gross debt to GDP ratio, peaking around 24-25 and then falling as the economy grows, and the debt doesn’t, doesn’t grow as fast, which was what they were previously forecasting back in April. And they had the gross debt to GDP ratio going to 40%. Instead, it’s going to continue to grow over this decade, and then start to flatten out around 2032 to 33 at around 48%. And I mean, who knows that could get worse. I mean, this out. So much depends on what happens with interest rates and a big part of this change, why things are worse now than they were back in April is one, it’s because this NDIS is growing, the cost of that is growing faster than expected. And also because of the higher interest burden. I think that’s really shocked people and this is something I’ve been calling out for a while I’ve been identifying for a while that this as interest rates rise, that’s going to have a big impact on the budget, because we’ve got so much debt already not as much as other countries but still more than we’ve had in the past. So well in the last few decades, okay, so does that answer your question Arturo? You’re asking about where’s it come from? And yeah, where’s that structural deficit come from? And look, it’s a, it’s a variety of things. It’s just our willingness to bear the taxes. It’s either you can either look at it as our unwillingness to pay the taxes that we need to to fund the level of services. That’s one perspective. That’s the perspective of people like The Australia Institute, they would argue that all these things we’re spending money on. So from a left wing perspective, I’m not making any judgments at the moment about, I mean, I’ve got my own personal judgement, but I’ll just present both sides of the story, they would argue we’re not, we’re not raising revenue. And then the people on the other side, they would like the IPA or whoever the right, they would argue, well, we’re actually spending too much relative to what we’re paying in taxes, the level of taxation is fine or should be cut even further, let’s cut expenditure. And the government itself is very conscious it, it doesn’t want to raise taxes, right, because raising taxes is politically unpopular. No one wants to buy any more tax. So it looks like the government itself recognises that it will have to cut spending. I mean, maybe it’ll try and tweaks and tax policy settings or, or cuts in tax concessions. Jim Chalmers, the Treasurer here who he’s talking about taking a forensic approach to tax concessions. There was a story in the Australian today, so it looks like they’re gonna have a look at some of those tax concessions, so who knows they could look at tax concessions for superannuation, and they could look at our concessional taxation of capital gains, things like that. So we’ll have to wait and see what happens there. But look in the IRS is the one that they really need to look at because it’s just growing at a very high rate. So let me try to illustrate that with some figures. So last week’s federal budget so I’m quoting from a report in the Australian day today revealed the NDIS which will cost the federal and state governments $35.5 billion this financial year is on track to hit 52 billion by 2025 26, dwarfing the costs of both Medicare and aged care. So long term Treasury forecasts suggests the federal government’s contribution to the scheme will grow by almost 14% a year for the next decade, with total scheme costs approaching 100 billion by 2030 to 33. It became operational in 2013. It currently has 555,000 participants. Its annual financial sustainability reports suggest numbers will reach almost 860,000 by 2030. More young people with diagnoses of autism and psychosocial disorders are entering the scheme. Almost a third of current participants have an autism diagnosis. And four and 10 are age 14 and under. So this is an illustration of one of the challenges of public services. I think because there is a lot of need out there are a lot of people who are doing it tough or there’s a lot of need in the community. And as soon as the government gets involved, there are a lot of pressures on the government to expand the level of service to increase the level of service. This is a great challenge for the government. I remember when I was in workplace health and safety here in Queensland, it’s nearly 20 years ago now. I remember the policy discussions around the need to look after people who are catastrophically injured. This NDIS has come out of a need to at least look after people who fell through the cracks of the previous system. What happened years ago was if you were catastrophically injured say you had a diving accident. And it was recreational diving. You weren’t covered by any insurance. Okay, there’s, it’s it wasn’t a motor vehicle accident. It wasn’t a workplace accident. And there would be very high costs of care if you were made quadriplegic, for example, but there’s no insurance to cover you. And so there was this concern that there are these people who are missing out. And so there’s clearly some sort of there was a need definitely to do something to help those people out. And this whole NDIS from what I can tell grew out of that conversation that was occurring around the early 2000s because I remember being part of the conversation at the Queensland Government level and some of the policy development there and then it came out of this 2008, the 2020 summit that Kevin Rudd organised his ideas fest that they had in the talk fest that they had at Parliament House and, and they invited 1000 of the best and brightest from around Australia. And this was one of the ideas that was advanced at the summit. And, this was one of the ones that progressed and then the Gilad government introduced that I think in 2013. And look, it’s a really valid thing. There is certainly cases, people that needed assistance. The problem is where do you draw the line, and this is a problem that governments often have. And here, the line has become, the circle has expanded even more. And I mean, people or families with autism, and with developmental delay, certainly need assistance. And I’m on the board of a non-for-profit that advocates for families where a child has a developmental delay, so I fully understand the concerns. And the need. The issue is that there’s a big cost to the budget from having this expansive definition. And the government is currently I mean, we’ll have to wait and see what it what it does about it all. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  26:23

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Gene Tunny  26:52

Now back to the show. So any questions or any thoughts on that Arturo?

Arturo Espinoza Bocangel  27:01

No, at the moment..

Gene Tunny  27:02

Good. So yeah, that’s essentially where we’ve got this structural budget balance problem coming from Australia. And I thought it might be good just to go over quickly, what the different sources or the different ways that they adjust for the state of the economy. And what it comes down to is coming up with estimates of how the economy would have performed, what it would do in the absence of a business cycle. So you have to work out what a trend level of GDP is. So the if you think about macro economics, one way of thinking about how the economy evolves over time is a cycle and trend. There’s the economy. Over time, we know that the economy expands. So the economy today is much larger than it was 10 years ago, it’s much larger than it was 20 years ago, 30 years ago. So over time it grows, there’s trend growth, it’s on an upward trajectory. But it will cycle around that trend. So you can have periods where you’re well above that trend when the economy’s booming. And then you can have periods when you’re, you’re well below you’re in a recession, for example. And so what these structural budget balance estimates, what they do, is they will they based on an estimate of what that trend level of GDP would be. And so what they will do, what the Treasury will do, if they will look at, well, what’s the underlying population growing at? What’s productivity, on average growing at? And are there any trends in labour force participation that we need to take into account? And this is this supply side model, underpinning these trend GDP estimates? So these are what you would expect in the absence of a business cycle. And so that’s one of the core parts of it, they’re trying to control the business cycle. And then they also have to control commodity prices. So they’ll look at well, how much higher than we normally are commodity prices, the iron ore price or coal price, how much higher are they than we normally expect them to be? And let’s discount that, let’s, let’s, let’s assume that they’re not so high. And so the Treasury will have these parameters. They’ll have these sensitivities of different types of these revenue, items of income tax and company income tax, two different commodity prices they’ll have, and they’ll have an estimate of how sensitive the unemployment benefits that are paid are to the state of the economy to where GDP is relative to its trend. And I think that’s the one item that the Treasury adjusts. So it tweaks it adjust revenue on the revenue side and adjusts income tax and company tax. And I think capital gains tax, if I remember correctly on the expenditure side, it just adjusts unemployment benefits. We know that unemployment benefit payments are going to be higher if the economy’s in recession, lower if it’s, if it’s booming. And so there’s an adjustment that’s made there. And there’s a whole bunch of assumptions that go into these estimates. Does that all make sense Arturo?

Arturo Espinoza Bocangel  30:39

Yes, it’s all clear.

Gene Tunny  30:42

Okay, so what I’ll do is I’ll put a link in the show notes to a paper estimating the structural budget balance of the Australian government that was by three of my old colleagues. So Tony McDonald, Yong Hong Yan, who I don’t know, Blake Ford and David Stephan, I worked with Tony, Blake and David. So all good people. So that’s a great paper. I’ll link to that in the show notes. And I’ve noticed that the IMF also produces some estimates of these structural budget balances, although they call them, they use the other, the other name for them cyclically adjusted balance, and you can find these at the back of what’s called the IMF fiscal monitor. And I’m looking at the one from October 2022. So check that out. There’s a whole range of interesting estimates there. So if for example, you look at table A3 for advanced economies, general governments cyclically adjusted balance 2013, to 27. So it’s got historical data, it’s got forecasts in it. For Australia, they’ve got their own estimates of what the structural budget deficit is, they’ve got estimates that go from around, or three and a half percent in 2022. So that’s a calendar year 3.1%, deficit and 2324 to 2.6%. And it gets down to about .7%, deficit in 2027. So not as bad as the Australian Treasury’s estimates, which are, which have the structural deficit maintaining around 2%. There are reasons why the IMF figures are different from the Australian Government’s because the IMF, the IMF doesn’t take into account as many factors. It’s on a calendar year basis, the Treasury and I think in one of its papers, it goes through why it’s estimates are different from say, the IMF or the OECD, I think for Australia, the Treasury are probably doing a better job at it just because the IMF and and the other agency, international agencies, they have to do it for all the countries and they’re not experts in any particular country. I think the Australian Treasury’s estimates are probably better for getting a sense of the structural problem in the budget, the Treasury has got access to, to much better info, much better data on Australia, then the IMF, it’s got much better insights, I should say, into what’s going on. And its model for the structural budget balance for Australia is much more precise. It goes into more detail than the IMF. So all I’m saying is I think the, I think the Australian Treasury numbers are better than what the IMF is, is estimating there. And I tend to agree that there is that structural budget balance of, of 2% of GDP, which is a challenge for this current government, and will probably be a challenge for future governments. And it’s going to require either large cuts in spending. So getting the NDIS under control, which is going to be hugely unpopular, because it’s a very popular programme and well intentioned. And I know people are benefiting from it. And you know, it’s, it’s, it’s giving people a sense of dignity and improving people’s quality of life. So look, who knows, I mean, this government, because it’s a government from the sort of left wing I mean, it’s not as left wing as some other governments you’d see around the world. It’s not left if you think about what left, left wing governments are in South America, for example. But it’s not. It’s going to find it difficult because it is more left wing than right wing. So the Liberal National Government is going to find it difficult to cut something like NDIS or cut welfare benefits, and hence maybe it does have to look at some tax measures. Maybe it does have to cut it tax concessions heavily. Maybe it does have to adjust that stage three tax cut that’s programmed in, maybe not give us much of much, maybe not have such a big tax cut. We’ll have to wait and see. Okay. Anything else Arturo, that we should cover before we wrap up?

Arturo Espinoza Bocangel  35:21

Yes, I think I wanted to highlight that it should be a good discussion was a good topic to see which of those programmes social programmes are working? Good in terms of indicators. So in terms of the results on population, you’re in to see if there is any problem there. But because we know that not all the things are all the social programmes are working well. Perhaps that will be a good topic to discuss, to discuss in other episodes.

Gene Tunny  36:04

Yeah, look, I think you’re right there. And what this is highlighting I think, Arturo is yes, the need to, to really delve into whether these programmes are working or not, because we’ve got these programmes that are well intentioned, that governments they hope to do some good to achieve outcomes, but how do we know that they are actually achieving outcomes? Are they doing it in the most cost effective way? And that’s why something like this evaluate a general concept could be so valuable. This is an idea that the first person I remember proposing it was Nicolas Gruen. And so Nick’s been on the show before, well known Australian economist, CEO of lateral economics, I do some work with Nick from time to time. And, you know, he’s been involved in public policy for decades, he was involved with the button car plan back in the 80s. He was involved with your work for the treasurer in the 90s, very lateral thinker, and he came up with this idea of the evaluator general, which would have a, it would have a brief of going across the Australian Government and figuring out which programmes work, which don’t, are there other ways we do things, other innovative ways we can do things to, to solve problems. And it looks like this government is going to go ahead with some sort of evaluator general. So Jim Chalmers has pledged to put in place an effective and rigorous evaluator general and new offers based within treasury and flagged by Labour before the 2019 election, which could work with other departments to access to assess the effectiveness of government programmes. Okay, great stuff. So this is in an article by Joe Kelly in the Australian, I’ll put a link in the show notes that I was quoting from there. I think one of the issues Nick has with that proposal, though, is that it’s located within the Treasury, I think he would prefer that it has its own life, it’s outside of the Treasury. It’s a statutory authority, it has some degree of independence granted by the parliament. So yeah, I don’t think Nick’s actually I can’t speak for him. I should have him on the show to talk about that. But I’m guessing he’s probably thinks that that’s not exactly what we need. But look, I should let him. Let him speak about that in the future. So that’s the evaluator general. So I think that’s the sort of thing you’re driving at is it Arturo? That we, because we need to evaluate these programmes. The evaluator General’s one way of doing that. Exactly. So one thing I thought I should cover before we wrap up, is just what happened with the UK earlier. When was it last month? Or remember, they had their mini budget, maybe it was in September now? They had the mini budget, Liz Truss the new PM, no longer PM, shortest reigning PM in British history. And the chancellor Kwasi kwarteng, I think it was, and they released that mini budget with a big tax cut, and the markets just absolutely went nuts. The pound crashed. We had yields on UK bonds spike, because everyone there and this is the recognition that there was a structural problem already with the UK budget, the UK couldn’t afford to have a tax cut, who was going to spend, go on spending what it was spending, and it’s just quite extraordinary the way that the Institute of Fiscal Studies describe that and I’ll put a link to this in the show notes, I think it’s a great note and some really good take on it. The way they describe that mini budget, which has been reversed because the current, there’s a recognition that it was unsustainable, so we’ve got a new PM now and a new chancellor, and they’re, and they’re, they’ve reversed that. I think Liz truss, had even reversed it. And she had sacked her Chancellor, but okay, so it’s gone. But for a short time it was in place and the markets absolutely freaked out. And yeah, this is the IFS take, which I think is great, which was made at the time the chancellor announced the biggest package of tax cuts in 50 years without even a semblance of an effort to make the public finance numbers add up. That is just brutal. Goes to show just how important it is to actually care about this stuff. And I mean, I’ve been saying this for years, I used to work in the Treasury in the budget area, and I know how important it is to get this stuff right and not to go and do silly things. And so I understand where IFS is coming from and understand why the markets really just hated that mini budget. And there’s a great, there’s a great chart and that IFS analysis, which showed that if you look at what was happening to the, to the national debt or the the UK public debt, if you compare that mini budget, what would have happened with the mini budget was what was expected before so instead of the debt as a percent of national income, staying in the range from 80 to 85%, of GDP going down gradually, over the next five years, from around 85 to 80. Instead, it was going to end up going from a bit under 85% to nearly 95%. So it’s just a really bad policy. So understandably, that mini budget was absolutely. Yeah, I mean, the markets just reacted very badly and essentially brought down the Prime Minister and the Chancellor, just because, yeah, it was just very irresponsible fiscal policy. And that’s what we’ve always got to guard against now. We’re not there yet in Australia because we started off in such a good position, debt to GDP is still relatively low compared with other countries. We’ve got a bit of room, still we’ve got time, we’ve got time to turn it around. But we’ve got to start doing something because we just can’t be in a situation where we keep accumulating debt. And we know, we know there’ll be another crisis of some kind, there’ll be a downturn, hopefully, we don’t have another pandemic, but there’s going to be another crisis, there’ll be a period when we end up adding lots of debt in a short period of time or a few years. And that will mean a higher interest burden, these projections of our debt to GDP, starting to flatten out around 2032 to 33 at 48% of GDP. Okay, that could give us some comfort, but we just don’t know what’s coming down the track. My worry is that interest rates could go higher. There could be another downturn or a crisis and then we add more debt on and then that gross debt to GDP, instead of flattening out it goes on an upward trajectory. That’s a risk I worry about and why it’s so important to get the budget under control. Okay. Final thoughts, Arturo?

Arturo Espinoza Bocangel  43:39

No, thank you for all your explanation Gene.

Gene Tunny  43:43

Very good. Well, it’s been great chatting with you, Arturo. And I’ll look forward to chatting again. And if you’re listening in the audience, if you want to look at any of these, these articles I’ve mentioned, I’ll put links in the show notes. Please get in touch with any questions or comments. Let me know whether you agree or disagree. Let me know if they’re things you want to know more about, and I’ll do my best to cover them in a future episode. So thanks for listening. And Arturo, thanks for joining me.

Arturo Espinoza Bocangel  44:14

Thank you for having me, Gene. Bye.

Gene Tunny  44:17

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

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

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

Slouching Towards Utopia w/ Brad DeLong – EP163

Slouching Towards Utopia is the new book from Brad DeLong, Professor of Economics at University of California, Berkeley. Professor DeLong joins show host Gene Tunny to discuss the long twentieth century from 1870 to 2010. The conversation considers the three factors which came together to massively raise living standards post-1870, and how nonetheless we’ve struggled to achieve the Utopia that once appeared possible. The “neoliberal turn” beginning in the 1970s and 1980s is considered, and DeLong explains why he writes that “Hayek and his followers were not only Dr. Jekyll–side geniuses but also Mr. Hyde–side idiots.”

You can buy Slouching Towards Utopia via this link and help support the show:

https://amzn.to/3TK4evm

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

Highlights

  • The big story after 1870: technological progress becomes rapid, the technological competence of the human race globally doubles every generation. [6:50]
  • The importance of industrial research labs in the big story since 1870 [16:35]
  • The role of the modern corporation [18:23]
  • Globalization in the late nineteenth century and pre WWI [23:25]
  • How bad governance can make a country very poor very quickly [29:09]
  • The neoliberal turn [35:56]
  • Prof. DeLong thinks the big lesson of history is that trying to maintain social and economic systems past their sell-by date doesn’t work [58:28]

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: Brad DeLong

Brad DeLong is a professor of economics at U.C. Berkeley, a research associate of the National Bureau of Economic Research, a weblogger at the Washington Center for Equitable Growth, and a fellow of the Institute for New Economic Thinking. He received his B.A. and Ph.D. from Harvard University in 1982 and 1987. He joined UC Berkeley as an associate professor in 1993 and became a full professor in 1997.

Professor DeLong also served in the U.S. government as Deputy Assistant Secretary of the Treasury for Economic Policy from 1993 to 1995. He worked on the Clinton Administration’s 1993 budget, on the Uruguay Round of the General Agreement on Tariffs and Trade, on the North American Free Trade Agreement, on macroeconomic policy, and on the unsuccessful health care reform effort.

Before joining the Treasury Department, Professor DeLong was Danziger Associate Professor in the Department of Economics at Harvard University. He has also been a John M. Olin Fellow at the National Bureau of Economic Research, an Assistant Professor of Economics at Boston University, and a Lecturer in the Department of Economics at M.I.T.

Links relevant to the conversation

Brad DeLong’s substack:

https://braddelong.substack.com/

DeLong on Hobsbawm’s short 20th century (1914 to 1989) compared with his long 20th century:

https://www.bradford-delong.com/2016/12/the-short-vs-the-long-twentieth-century.html

Re. Yegor Gaidar’s analysis of the collapse of the Soviet Union:

https://sites.dartmouth.edu/asamwick/2007/06/08/the-soviet-collapse-grain-and-oil/

Lant Pritchett’s book Let Their People Come: Breaking the Gridlock on Global Labor Mobility:

https://www.cgdev.org/sites/default/files/9781933286105-Pritchett-let-their-people-come.pdf

Transcript: Slouching Towards Utopia w/ Brad DeLong – EP163

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

Gene Tunny  00:00

Coming up on Economics Explored.

Brad DeLong  00:02

2008 you seemed to see the engine of technological progress itself drop into a lower gear slow down by half or more. Starting in 2012-2013, we see the rise of anti democratic movements all over the world.

Gene Tunny  00:23

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 163, on Slouching Towards Utopia, the new book from the renowned US economist, Brad DeLong. He joins me this episode. Brad DeLong, is professor of economics at the University of California Berkeley. From 1993 to 95. He was deputy assistant secretary of the US Treasury for economic policy, and slashing towards utopia. Professor DeLonge explores why, despite the incredible increase in our productivity since 1870, we have failed to achieve a utopia. DeLong argues that what he calls the long 20th century began in 1870 mended by 2010, after which a productivity slowdown and stagnant wages have contributed to political discontent around the world. Please check out the show notes, relevant links and details of how you can get in touch with any comments or suggestions. I’d love to hear from you. If you’d like to buy Professor Long’s book, very grateful if you could do so via the Amazon page link in the show notes. By doing so you’ll help support the show. Right oh, now it’s my conversation with Professor Brad DeLong on Slouching Towards Utopia. Thanks to Nicholas Gruen for connecting us and to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Professor Brad DeLong thanks for appearing on the programme.

Brad DeLong  02:02

It’s wonderful for me to be here. Right. Might help me sell some books. Excellent. Something I’m very, very interested in right now.

Gene Tunny  02:09

Excellent. Yes, yes. I hope to help you do that. And hopefully if people in the audience if they enjoy the conversation, and I’m sure they will, I’ll put a link in the show notes for sure for to your book. So I’ve been I’ve been reading your book and enjoying it.

Brad DeLong  02:20

Thank you very much. 

Gene Tunny  02:23

Yes, I’m the Kindle. Nicholas Gruen put me on to it. So Nick’s a big fan, too.

Brad DeLong  02:33

Yes. Yeah. So I’m very grateful to him for spreading the word.

Gene Tunny  02:37

Yes, yes. And it’s Slouching Towards Utopia in economic history of the 20th century. Brad, I’d like to kick off by asking, What motivated you to write the book? And what message are you trying to convey with the title, please?

Brad DeLong  02:53

Well, I suppose I started. I guess it really was reading Eric Hobsbawm’s, Age of Extremes, you know, back in 1994. And thinking that the story he was telling wasn’t the big story, that what he was telling was only a relatively small part of the big story. And that someone should write a book that told the other big story of history after 1870. And so I grossed about that for a couple of years. And in 1998, I thought, since no one else was writing it, maybe I should write the big story. And so I wrote a chapter to kind of put a stake in the ground and started showing it around, but you didn’t do anything else. And then maybe a decade, a decade and a half later, an editor from basic Tim Sullivan came around and said, You know, someone should write this, that someone should be you, you’re clearly not, why don’t we put you under contract. So I can call you once a year and yell at you about where the manuscript is. Um, and, you know, he did that. And to get into that once a year, that was a call and so forth. And then eventually, I just kind of buckled down and wrote the thing. Then, after writing the first draft, I had to take the chainsaw to it, because it was twice as big as the book that was published. And then after that, we had to polish it, and was out there in the world, you know, spiffy and polished and shrunken down considerably from the project I originally attempted. But it’s out there in the world. And I’m, I actually like it a lot, which I didn’t expect to at this point. At this point. I expected to be sick of it and thinking there was a lot wrong with it, then I find but I’m not thinking that way.

Gene Tunny  04:45

Okay. Yes. Well, that’s good. I mean, I think it’s, I think it’s terrific. And, I mean, it’s still a big book, it’s still 600 pages or so. So it’s still very, very meaty. I was impressed by all of the examples. In history, I didn’t know things that I found fascinating. So thank you. Yes. One thing I didn’t appreciate until I read your book. And maybe I’ve just missed this in other places, but the role of the Saudis in ending the Soviet Union, I didn’t appreciate how much when they increased oil output in the 80s. I think that’s the story, isn’t it? That meant the Russians or the Soviets weren’t earning as much income from their own production and that effect. Yeah. Yeah. I thought that was.

Brad DeLong  05:32

This was this was what the late Yegor Gaidar always insisted on, you know, that as long as the Soviet Union could trade oil for grain, the fact that the system was so sclerotic, they were unable to figure out a way to grow more grain at all was, you know, a problem, but not a crisis. But then the price of oil falls by two thirds and 1986, you know, as the Saudis react to with current, what’s currently going on in the Iran, Iraq War, and other things, and all of a sudden, the Soviet Union has to start borrowing if it wants to import its grain, and it starts borrowing from banks. And then the banks begin to say no. And then it goes and starts borrowing, starts asking for loan guarantees from Western governments. And then the demands come for well, we’ll guarantee these loans, but we want you to kind of be cooperative and open with respect to politics and democracy and things. And then the whole system simply collapses. It’s really quite an interesting story. Yegor Gaidar, Gaidar has a short speech he gave, I think, at the American Enterprise Institute called something like grain and oil. It’s very much worth reading,

Gene Tunny  06:50

RIght. Okay. Well, that’s good. I’ll see if I can track it down and put a link in the show notes. I mean, that’s one of many examples of, of good stories in the book, I look, I’d like to go back to what you mentioned about Eric Hobsbawm, who’s a Marxist historian, if I remember correctly, and you’re saying that you think he got the he missed the big story of what happened after 1870? Could you please explain what was he saying? And how is what you’re saying? What what do you think the big story is, please,

Brad DeLong  07:19

Eric’s big story is that you know once upon a time, there was Vladimir Lenin, there was the Bolshevik Revolution. And it created world communism, which was the world’s only hope for utopia. And in the end, world communism was betrayed by exterior enemies outside it, and by interior enemies inside of it, and it expired. But before it expired, I managed to defeat the worst tyranny in human history, the Nazis, because without the Soviet Union, the Nazis would probably still be ruling Europe. And when it expired, that brought the end of human hopes for a really good society. And, you know, from my perspective, this is a story. It’s kind of the story of the Soviet Union as tragic hero betrayed internally and externally is, you know, it’s a story that is, in some ways, simply total bonkers. Unless you’re a strong believer in world communism, as it was formed in the middle of the 20th century, you know, and Eric was right, Eric was, you know, a young Jewish teenager in Berlin in the early 1930s. You’re watching The Nazis marched past calling for the immediate death of himself and all of his family in a time when everyone else was pussyfooting with the Nazis. And you know, only the Soviet Union and the Soviet Communist Party, Soviet led German Communist Party was willing to say, these are horrible people, we need to fight them. And so he made that political commitment as a teenager and you know, was never really able to outgrow it. I’m told that even at the end of his life, if you got a couple of drinks into him, you could get him to say that, you know, Stalin had been too harshly judged by history. And a very smart guy, you know, very learned historian, desperately trying to get it right. Yeah. And the fact that someone like me thinks he could still get it so wrong is very much a cautionary tale about how I should not be proud. And be aware that other people are likely to judge me in the future the way I judge Eric.

Gene Tunny  09:30

Right. And so what do you think is the big story after 1870? So you’ve got to, you’ve got a more optimistic view of history, obviously.

Brad DeLong  09:39

Yeah. Yeah. Well, maybe that 1870 really is the hinge of history. Right. But, you know, before 1870, your technological progress is slow. And you know about infant mortality is extremely high. You’re going to see half your babies die before you’re five. And do something like 1/3 of women are going to wind up without surviving sons, should they be lucky enough to reach 50? themselves? And do you know when the pre 1870 high patriarchy world you reach 50 without a surviving son, you have no social power whatsoever, you know, you have absolutely no account, you have no one to advocate for you. And so before 1870, pretty much whenever there was an improvement in human technology, the response was, oh, great, now I can try to have more kids and raise the chances I’ll have surviving sons above two thirds. And so you’ll from minus 6000, BC, on up to 1870. There is a lot of improvement in technology. Yes, and the upper class lives better, yes. But for most people, you know, you simply have 100, and you simply have a farm size only 102 50th as large potentially at 1870, as your ancestors had back in minus 6000. And you know, you’re still living at something like $3 a day, you’re spending 60% of your income on just getting your 2000 calories plus essential nutrients. And there are a lot of days when you can’t think about much other than you’re very hungry. And that’s the state of the world before 1870. And that means that unless you’re in an extremely lucky place, or like Australia, or an extremely lucky class, that life is going to be kind of brutal, short, and without very many options, which means that in most times in most places, governance is going to be how does an elite figure out how to grab enough for itself and maintain its rule over society. And after 1870, everything changes, technological progress becomes rapid. The technological competence of the human race globally doubles every generation, you quickly get a world in which people are kind of rich enough that infant mortality falls substantially. And with that falling infant mortality, and with the erosion of patriarchy, all of a sudden, you don’t have to concentrate a lot of effort on having children, to be confident that if you reach the age of 50, you’ll still be able to run your own life. And so you’ll we get the demographic transition, now headed toward a stable world population of 9 billion. So for the first time after 1870, technology wins the race with human fertility. And we begin to look forward to a time when humanity will be able to bake a sufficiently large economic pie so that everyone can have enough. And you know, people back in 1870, and before, you know, they thought most of the problems of society came because incomes were low, and technology was underdeveloped. And you had this elite running a kind of domination and exploitation game on everyone. And once you can bake a sufficiently large economic pie for everyone to have enough, those things should fall away. And the problems of properly slicing and tasting the economic pie, right? Have equitably distributing it and then utilising it so that people can feel safe and secure and live lives in which they’re healthy and happy. Yep, those should be relatively straightforward to solve. And so we today at least we today in the rich countries should be living in a utopia, which we are manifestly not. And so the story of history after 1870 is how we’re well on the way to solving the problem of baking a sufficiently large economic pie. While the problems of slicing and tasting of distributing and utilising it continues to flummoxed us.

Gene Tunny  13:57

So with 1870, that’s several decades after what is traditionally thought of as the start of the Industrial Revolution, is it and in there are a few things that come together. Around that time, would you be able to explain that please?

Brad DeLong  14:13

Well, I’d say that the industrial revolution itself, you know, that steam power and metallurgy and early engineering, you know, they were really really weren’t quite enough that they get the average rate at which technology improves along the world up to about half a percent per year. And of that maybe, maybe a third comes from the fact that you’re concentrating on that you can cut that you’re suddenly concentrating all the manufacturing of the world in the districts, most of them in England where manufacturing is most efficient. And you know, 1/3 of it comes from the underlying engine of science and discovery and engineering. And 1/3 of it comes because we were lucky enough that the last round of glaciers, that they scraped all the rock off of the coal around a huge chunk of Northwest Europe, which left you with a lot of coal at sea level that you could just pick up off the ground and ship it out. But come 1870 you’ve concentrated all the manufacturing and you know, you’re pretty much mining out the really easy coal and you have to go deeper, which is more expensive. But the possibility was that, you know, the industrial revolution would be not completely but largely over, except that in 1870, we got the development of the industrial research labs to rationalise and routinized the discovery and development of new technologies. And then the modern corporation, the modern corporate form to rationalise scrutinise, the development and deployment of technologies plus full globalisation, which provides us enormous incentives to deploy and diffuse technologies. And so all of a sudden, instead of half a percent per year, you had a 2% per year rate of global technological change. And while it was possible for human humanity to be fertile enough to kind of offset the half a percent per year technology growth before 1870 with greater fertility and a population explosion, after 1870, even the population explosion could not keep us poor. Yeah. And then we go through the demographic transition and the population explosion reaches its end.

Gene Tunny  16:35

Yeah. So this is the industrial research lab. So you’re talking about Thomas Edison in Menlo Park. 

Brad DeLong  16:41

Yeah, Menlo Park and others. You know, I like Nikola Tesla. Because, you know, Nikola Tesla was, I suppose today, we’d call him neurologically divergent. He’s definitely not neurotypical. Which means that unless you can slot him in exactly the right place, you know, where he has lots of people surrounding him who will tolerate him being in A-hole, and pickup which of the crazy ideas he has that might actually be useful unless you have George Westinghouse to build an industrial research lab, to surround him with and then the Westinghouse corporation to deploy his technologies. While Edison is General Electric, and others are frantically trying to keep up because, you know, Tesla knew how to make electrons get up and dance in the way that nobody else did. Without that Nikola Tesla would have been no use to humanity at all, as it was he personally pushed the entire electrical sector forward in time by a decade. And that’s a wonderful set of things. That’s a wonderful set of meta inventions. You know, that turns the process of technological development from being a difficult one in which you have an idea, but then you need to be a human resource department and a executive, a marketer and impresario, an advertiser you know, a well as an engineer, in order to get anything done to one in which engineers can engineer and find people who are good at the other things, to kind of surround them and do all the things you need to do to actually deploy a technology and make it useful. And that really only falls into place around 1870.

Gene Tunny  18:23

Right, okay, yep. And what about this modern corporation or the modern corporate form? So corporations have existed in some form since well, the first few centuries? I mean, the East India Company, the Dutch East Indies Indies Company, yes, yeah.

Brad DeLong  18:40

No, no, but still, they were relatively, they were relatively small things and they were tight have very special the fact that anyone could kind of organise a form in which us have a special royal charter as well. And the idea that anyone could set up a framework which would be a a large, internal, centrally planned division of labour, which could expand and copy itself, but also which had all of these interfaces with the market economy so that it was focused on producing the things that people wanted or at least that people with money wanted. This is something that allows once you have a good idea, and once you’ve built it in one factory, you know, it’s then very natural for the corporation to say, Okay, let’s build it over in the next town. And let’s expand the factory, let’s licence it, let’s move it to another country. You know, all of that only happens to all of what you know, management. The Business School professor Herbert Simon used to call these red islands of central planning, you know, in mesh to connected with the green lines of market exchange. Those are very characteristic of the modern economy. And we really need to have those islands in there and working very well, you know, in order to be even nearly as productive as we are.

Gene Tunny  20:09

Right, and what would be the exemplars of that modern corporate form Brad, are you thinking of General Electric or DuPont of those sort of companies

Brad DeLong  20:18

In the early days, in the early days, it was things like the great farm machinery producers. Were I think the first because, you know, once you figure out how to make a Reaper or a harvester, or later on a combine, you know, demand for it is absolutely huge. And so you don’t want to have one small workshop, you know, one small workshop in some small town in Illinois or something, you know, making a Reaper when the Reaper can be put into use from the Murray Darling River Valley all the way to Argentina and up there. Yeah. Later on, it was Ford Motor Company and General Motors that were the classics. And now of course, I think it is, you know, Apple Computer, which is simultaneously the most to market economy and capitalist driven thing in the world, but also the orchestrator of this enormously complicated, and centrally planned division of labour all over the world with all of its suppliers, in which a relatively small number of people in Cupertino, California, can conduct an economic division of labour, that dwarfs that of the centrally planned Soviet Union at its most prosperous, in terms of how much money and resources are moved around in a way in which in response to commands and to requests issued by Cupertino, to produce the more than a billion iPhones that currently populate the world.

Gene Tunny  22:01

Yeah, yeah, absolutely. It’s extraordinary for sure.

Brad DeLong  22:04

And, you know, we haven’t even gotten into its role as the pusher forward of electronics technology of modern semiconductor, whereby your Apple Computer pays the Taiwan Semiconductor Manufacturing Corporation $30 billion each year, which it then turns around and uses to invest in pushing semiconductor technology forward to make circuits smaller and chips faster and bigger, which it then sells to Apple, which then puts into iPhones so it can earn the $30 billion it needs for the next round.

Gene Tunny  22:40

Yeah, yeah, for sure. And I mean, Apple is still innovating even though Steve Jobs is no longer around.

Brad DeLong  22:47

Jobs is gone. Yeah, yes.

Gene Tunny  22:51

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

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Gene Tunny  23:25

Now back to the show. Can I ask you about full globalisation? You talk about that? And then you talk about what happened later in the 90s with what you call re globalisation, I think and then there’s hyperglobalisation. What I think what your book reminded me of was just those the large flows of people, and also capital that occurred in the late 19th century and before World War One, and that’s something I think Polanyi wrote about, could you talk about that please Brad?

Brad DeLong  23:54

Oh, well, one thing is to say that, that kind of from 1870 to 1914, 50 million people leave Europe and also 50 million people leave Asia. The people who leave Europe by and large go to you know, Argentina, Chile, southern Brazil, United States, Canada, Australia, New Zealand. They go there they bring European biotechnology crops and animals and so forth. In Australia, they find at least before the great drought of the 1890s that there is not a better place for European sheep than Australia. And so Australia before the drought of the 1890s becomes the place with by far the highest standard of living in the world. As you know the equivalent of the equivalent of OPEC instead of oil. It’s sheep. And instead of shipping petroleum and container ships, they ship out wool in steam powered ocean going ships and they produce the you know an amazingly rich and prosperous middle class civilization of its day, something that I don’t see know very much about. Except for the things I see are the backgrounds I see on Mrs. Fisher’s murder Mr. Rene Fisher’s Murder Mystery Show, which my wife says the clothes the clothes at does extremely well. And then Australia with its large middle class, you’ll powers the demand for Australian factories and Australia industrialising and becomes and remains an extremely rich and prosperous country. Brazil might have seen the been on the same trajectory. You know, Australia has land that’s wonderful for sheep. You know, Brazil in the second half of the 19th century was the best place for rubber. It was the place rubber came from. And so you know, you have the rubber tappers of Brazil making a good living, you have the growth of the Brazilian economy, you have the construction that European singers like Enrico Caruso or Jenny Lind, when they went on world tours, they would go up to Amazon to Manassas and performing them in Manassas Opera House and things worked very, very well, except that the British arrived and they grabbed some rubber plants from Brazil and they carried them back to Kew Gardens. And then the Belgians got a hold of them and they took them down to the Congo and then King Leopold began cutting off the hands of people who didn’t bring in enough rubber from the villages. And in Malaysia, the British Empire brought down workers from China combined it who were desperate to get out of China, given how small farm sizes were and how poor China was, combined it with British capital, and this Brazilian biotechnologies, so that Malaysia, Malaysia, the Malay Peninsula becomes the world’s biggest rubber producing centre in the world by 1914. And the enormous crash, and the enormous crash of the Brazilian rubber industry as well, because the rubber plant had left all its pests and parasites behind in Brazil. And so it grew like a weed on the Malay Peninsula. And, you know, the Chinese plantation workers brought down from the Pearl River Delta, were extremely happy that the British could pay them a quarter of what the Brazilian rubber tappers were used to getting. And they would still say we’re much better off than they would be back in China. That is, and this transfer of all kinds of tropical goods and plants around the world, right that Yemen finds itself suddenly faced with enormous competition from coffee grown in Indonesia, and in kind of Costa Rica as well. Which means that if you were in the tropics between 1870 and indeed, up until 1950, you’d find that whatever you export, its price was dropping like a stone because there was all of this extra competition from all of these extra sites for production opened up by this Asian migration. Well, the rich first world countries did quite well and did quite well in large part because immigrants from India and China were by and large kept out of Australia and the United States. And so wage levels in Australia and Australia and the United States stayed very high. And they got the middle classes in the middle class demand needed to provide the demand so that they could industrialise you know, while Brazil or Malaysia or Congo really didn’t have a chance to industrialise because, you know, no middle class large enough to buy the manufactured goods and no ability to export given how cheap and how good at manufacturing Britain was back then and how eager Britain was to export. 

Gene Tunny  29:09

The story we tell ourselves is that it’s, it’s all about it was all about good governance as well. I mean, in good institutions.

Brad DeLong  29:17

Yeah, no bad governance can make something very country very poor very quickly. That and indeed, Arthur W. Economist, Arthur Lewis, you know, all those used to say, look, Australia and New Zealand are not just cousins of Canada and the United States, but also of Argentina and Chile, and in some ways South Africa. And, indeed, come 1914, Buenos Aires looks a lot like Melbourne. But then governance falls apart in the 1920s and 1930s. And even more so after World War Two. And now, you know, no one thinks of Argentina as being a country that is kind of on the same level of development of the Earth, Australia or Canada, because it simply is not. And yet, it certainly has the land, it certainly had the resources that had the education in 1914 it had the technology base, but bad governance can do terrible things. You know, you see this most with respect to communist, right that when the Iron Curtain failed in 1990, we could actually look, and we could see that those countries that had been ruled by the Communists were only 1/5, as rich as the countries immediately outside, immediately across the border. And you know, where that border was, was principally determined by where the Red Army had managed to march in 1945. Yeah, what’s the difference between Czechoslovakia and Austria? Yeah, yeah. Or Yugoslavia and Italy?

Gene Tunny  30:59

Yeah, very good point. I’d like to ask now about the what you call the is it the long 20th century? You talk about this period from 1870 to 2010? And is that the period where we were Slouching Towards Utopia?

Brad DeLong  31:15

Yeah, where every generation, we were doubling humanity’s technological competence. And it was really clear that we were solving the problem of baking a sufficiently large economic pie. And we were trying to figure out how to slice and tastes how to distribute and utilise it. And that was kind of flummoxed more sometimes than others. And people were trying various things. Some of them reasonable, and some of them absolutely horrible and genocidally destructive. Yeah, yeah. I’d say that’s what gives 1870 to 2010 its unit, you know, that we’re solving the what people thought was the big problem, but not at all solving what people thought were, but people back before 1870 had thought would be smaller problems.

Gene Tunny  32:03

Okay, and so 2010, that’s in the aftermath of the financial crisis. So that’s a pivotal event, in your view.

Brad DeLong  32:13

Except it’s not really a pivotal event, okay. It’s more like a pivotal 20 years. Maybe it starts on September 11 2001, when all of a sudden, a willingness to kill people because they worship God differently that we thought was over in 1648, at the end of the 30 Years War in Central Europe, after which people said, let’s not do that, again. We’re back. Maybe it continues in 2003, you know, when the United States stops acting like a relatively cooperative leader of the world, and instead says, We’re another great power, and we’re going to act like great powers do, maybe it’s 2007, when it becomes very clear that in the attack that an ideological attachment to the view that I’m rich, because the market has rewarded me, therefore the market must be a good thing. Had that that idea had hobbled the regulation of finance, and then come 2010 It’s clear, that same idea keeps people from responding to the Great Recession, by saying we need to get back to full employment rapidly instead, all over the globe, people are saying, well, you know, the market is a good thing. And the market has been doing this for a reason. And so you know, we shouldn’t artificially we shouldn’t artificially stimulate the economy. 2008, seemed to see the engine of technological progress itself to drop into a lower gear slow down by half or more. Starting in 2012-2013, we see the rise of anti democratic movements all over the world from you know, Modi’s version of national Hinduism to Viktor Orban and many, many others. And last, I’d say, come 2022, we have the return of major power war. Right, the idea that big wars rather than wars that are kind of a civil war component are a way to solve things. You know, even though if I wanted to convince the Ukrainians that they weren’t a separate nation, but only a Russian ethnicity, you know, I would send the Bolshoi Ballet and I would send orchestras to play the works of Tchaikovsky and I would send poets to read the poems of Pushkin in the general streets of Ukraine. I would not say send killer robots flying overboard to drop overhead to drop bombs and kill but you know the return of a major power war. Add to that global warming is now We’ll go not a distant threat. But lots of people were underwater in Pakistan early this summer and lots of people saying, Why is the Yangtze River five metres below where it’s supposed to be? It’s now a thing. And a thing for the three and a half billion people of Asia who live in the great river valleys and the monsoons and some with the coming of global warming. We have a different and more complicated and I don’t think we yet understand what the post 2010 story is. But it isn’t the technological progress is pulling ahead extraordinarily rapidly making us potentially all prosperous, and we only need to figure out how to distribute and utilise our wealth. Instead, the world faces other and probably bigger problems, and certainly more of them. So that’s why I bring it to an end in 2010.

Gene Tunny  35:56

Okay, okay. I’d like to ask you about what you call the I think it’s the neoliberal turn in your book. So you talk about how we changed or the philosophy the I don’t know, the dominant philosophy and government and politics change from social this, we’re talking about advanced economies change from social democratic, or whatever you want to call it to, starting in the 70s, and 80s, with Thatcher and Reagan. And we also had a variant of it here in Australia. You call it this neoliberal turn and would you be able to be good if you could explain what you mean by that? And also, I’d like to ask you about your this is great, one of my favourite quotes in your book, you wrote that Hyack. So Frederick Hayek, the Austrian economist Hayek, and his followers were not only Dr. Jekyll, side geniuses, but also Mr. Hyde side idiots, I love that. So if you could explain what you’re driving out there, please, that’d be great.

Brad DeLong  36:56

1945 to 1975 or so are absolutely wonderful years. peace, prosperity, the most rapid growth, at least in the Global North that has ever been seen before. Middle class society, everything seems to be going right. But come and after 1975, you know, there’s inflation, which leads to the general consensus that there’s something wrong with social democracy, that it’s handing out too many tickets to things more tickets to things than the economy and society can produce. And when you hand out more tickets, and there are seats, the result is going to be the tickets get the value that is also going to be inflation. And so social democracy needs to get a grip, and become, you know, more responsible and less willing to simply hand out tickets to anyone who asks, add to that the idea that it’s greatly over bureaucratized that the government is doing too much, and there are too many forms to fill out. Add to that, the idea that too many people have taken advantage of the social democratic system, you know, to grab benefits to which there were not in title. I remember in the late 1970s, as a young teenager, there were people who would come around with maps of where the people in Australia drawing unemployment benefits were. And the claim was that they were on the beaches. Yeah, you know, that you get unemployment benefit. And you say, Okay, I won’t look for another job for two months, I’ll go to the beach for two months, and then I’ll look for a job. That all kinds of things in which too many people were saying too many union members and welfare recipients were getting away with too much and not working hard enough. Yeah, that benefits for the slackers were too great than the taxes on the actual productive members of society were too high. And that the tax system was greatly discouraging investment. And thus, economic growth. And thus, the inflation and the slowdown of economic growth that we saw in the late 1970s. Were a result of the fact that social democracy had tapped out and it needed very much to be a rethink. And the rethink takes the form of Thatcher in the United Kingdom and Reagan in the United States. You know, the idea that taxes need to be lower, that the job creators need to be properly incentivized that, you know, the non rich need to be a little bit poor, so they’re a little bit hungrier and work harder. That sources of rent seeking, you know, people who have claims to income but who are not productive, need to have those claims erased , especially if they’re welfare recipients on the one hand, who haven’t been able to maintain a stable family, or if they happen to have lucked into a particular union that manages to have its kind of hands around the throat of some important part of the distribution system. You know, Ronald Reagan’s saying, I’m going to destroy the, Jimmy Carter in fact, Jimmy Carter was, in fact, launched the Airline deregulation effort in the 1970s. One big purpose of which was to make the lives of airline pilots a little less cushy. And Ronald Reagan followed that up by breaking the strike of the air traffic controllers. It was Jimmy Carter, who by deregulating trucking in the United States, you know, applied the same medicine to the then powerful teamsters union, saying, once deregulated trucking, you’re going to be exposed to all kinds of rail and non union competition as well, you know, in your ability to extract an extremely cushy life go. And the ability of the collected organised crime gangs of the United States to draw on the teamsters pension fund is going to be sufficiently reduced. So you have this great wheel around 1980. So much so that in 1994, Bill, Bill Clinton, who really is a Social Democrat at heart, wants to win another term, he feels he has to go out there and say that the era of big government is over. That just as Dwight Eisenhower, a very conservative person could only govern in the 1950s. By saying the New Deal, social democracy is a good thing, but I’m going to be a much better manager. Because I can say no to interest groups that are demanding too much while the Democrats are relying on those interest groups to turn out the vote. So you should elect me to be the president to run the new deal rather than let a Democrat. Yeah, so Bill Clinton was having to say that I’m going to be because I understand how valuable government can be, I’m actually the one who will do the best job of cutting it. So it’s so to do the most good. And that kind of lasted that kind of era in which neoliberal, this neoliberal view, that the market should be doing more, and the government should be doing less? You know, it really lasted up until the great recession since then, since then, we’ve had a time of confusion.

Gene Tunny  42:28

Yeah, yeah. Yeah, for sure. I’m just interested. I’m interested in your thoughts on the that neoliberal term? Because I mean, you’re someone you’ve got, you know, people who are very prominent in our time, and you worked with Larry Summers you’ve written and you’ve done research with, with Larry Summers, who was US Treasury secretary. I mean, how do you feel about all because Would you say there was some benefits to it? Because, I mean, Airline Deregulation, and I mean, that was good for consumers. How do you think about it now?

Brad DeLong  42:58

As they say, you know, in some ways Friedrich von Hayek really was Dr. Jekyll. Yeah, in that if you have a, you know, if you have a command and control system, you know, there’s somebody at the top, who’s issuing orders and everyone else is kind of not really using their mind that they’re kind of robots doing what the person at the top orders. And, you know, if you’ve ever worked in any large organisation, you know that the person at the top has very little idea of what’s actually going on down at the bottom. And will often be issuing commands about what you should do next that are best nonsensical, and that are worst highly destructive. You try to have a committee solve that problem of central command by establishing it by writing a rulebook. And then you have a bureaucracy because God knows the rulebook only covers about a third of the cases, it’s simply not possible for any small group to think about. But um, assign people private property and let them trade and exchange in a market. And all of a sudden, the people who are actually on the ground in the situation, you’ll have the ability to do things because the property is theirs. And also, as long as market prices are in accord with social values, they have a very strong personal incentive to do the right thing. Or at least the thing that makes money and then there’s the well, but our market price is in accord with social values problem, but if you can solve that problem, then a properly tuned market economy with private property is the best possible anti bureaucratic, you know, anti authoritarian crowdsourcing mechanism for helping people to organise themselves in order to do what is needed for the common good. Did you know much better to impose a carbon tax and say, you know, gas filling up your car was going to be expensive. Then too, as Jimmy Carter said to say, if your licence plate ends in an even digit, you can only fill your car with gas on even days and with an odd digit, you can only fill your gas on odd days. Friedrich von Hayek was a Dr. Jekyll positive genius and seeing this and seeing this very clearly. But as I say, he also was on Mr. Hyde style idiot. Because you’ll Hayek, having grasped on to this value of the market, he couldn’t think of anything else. And so he reached his position, which is the market economy will take modern science and technology and make us all prosperous, full stop, we need to be happy with that. We should not ask for anything else, we should not ask for an equitable income distribution or any form of social justice. Because if we do, we’ll find ourselves monkeying with the system. And when we monkey with the system, we will destroy the ability of the market to actually be productive and to make us rich. And ultimately, we’ll wind up on the road to serfdom. We won’t get social justice, and we will be at our we will make ourselves poor. And so the one thing we definitely need to do is whenever anyone starts talking about social justice, or income distribution or their rights to something that isn’t, that aren’t property rights, we need to tell them to shut up, you know that the only rights that matter are property rights, and that’s how it should be, you know, and yes, this is not social justice. You know, the market gives most things, not the people who deserved them, but instead of the people who are lucky enough to own the valuable pieces of property. But if you can’t accept that you don’t have any business doing politics or speaking in the public square. Yeah. And, you know, that’s profoundly unhealthy. That’s profoundly unhealthy in actually figuring out how we should utilise and distribute our wealth, but you know, Hayek stuck to that to the end. So much so that he was an enthusiastic supporter of Augusto Pinochet. Believing at some level that you know, Pinochet would reform Chile. And then once Marxism and Social Democracy had been stamped out, then you know, he could retire and the Chilean people could be allowed to go back to electing their governors again. But in the meantime, you definitely need it. You know, he called it the Lycurgan moment. And the myth of the semi mythical dictator, yeah, even though not a king of Sparta had established what people said was the Spartan system of government and war back in the Classical Age.

Gene Tunny  48:03

Yeah, I was shocked by that. Brad, when I read that in your book, I’ll have to go back and look at where Hayet wrote that because I mean, it’s quite shocking to think that someone who is a champion of liberty, and I mean, he’s inspired there’s a think tank in Australia, the Centre for Independent Studies, which I have a bit to do with which is inspired by Hyack. And so I mean, I’ve read Road to Serfdom, but I don’t remember anything like that, but I’ll definitely go back and look.

Brad DeLong  48:31

He gets cranky, he gets cranky or as he gets older. That, you know, in 1944, when writing the Road to Serfdom, he’s chiefly interested in trying to persuade a future British Labour Party government not to be really stupid with respect to nationalising everything in sight. But you know, he ages and as my father says when you get older, you discover that you are more like yourself and it’s not necessarily a good person. That back when you were younger and had to pretend not to be yourself and weren’t quite as much as yourself, maybe we’re better off right, Yeah. Yeah. There is a letter from Maggie Thatcher back to Hayet saying thanking him for one of his and indeed saying but you are recommending the use some Chilean and methods and do those are unacceptable given our constitutional traditions, and I haven’t been able to find out what this is in response to.

Gene Tunny  49:29

Right, okay

Brad DeLong  49:32

In the context of a world that is drifting towards Central planning and very heavy bureaucracy, it’s more understandable than as account. You know, Hayet’s, crankier parts are more understandable and useful as a counterweight than they are as you know, an accelerator, an accelerant for a kind of neoliberal era.

Gene Tunny  49:56

Yeah, I think you definitely make some I mean, a lot of what you’ve you’ve written I think is great. And I mean, I’ve been thinking about this myself, I think we’ve I feel it in Australia, we’ve probably managed things better than in the States. I mean, there’s definitely. And then the way I’ve thought about it is that some of the neoliberal policies we’ve enacted, I think, have been good for consumers, we cut tariffs, I mean, we used to have this very high tariff wall. So I think it was as late as 1988, or 89, we had a 57% tariff on motor vehicles. And so cars were, in real terms, much more expensive. So they benefited a lot. But there has been dislocation, but we seem to have manage that, because we’ve had a Social Security system and a public health care system. And I look at the states. And I mean, I mean, I think Americans, I think the US is a great country. But the lack of a public health care system, and the lack of a social security system, I think, is making things very difficult. And that’s meaning the politics becomes very, I mean, it’s just, it looks awful at the moment from over here. So yeah, that’s just a comment. But if you have any reflections, that’d be great.

Brad DeLong  51:09

Things are never as awful as they look on YouTube. Still, it’s still strong and rich, and you know the sense of a very, very strong sense of one nation, and we should all be pulling for each other. Which you won’t see if you go on YouTube or Twitter where it is indeed, the politics of you know, Ezra Klein says you get clicks only if you make enemies. And that’s really not how most people normally live their lives. But yeah, there’s a great book that’s getting some considerable play now by Elizabeth Berman called Thinking Like an Economist, you know, how efficiency replaced equality in the US public policy, which I think definitely could use a dose of the good Dr. Jekyll Hyatt, right. That says that demanding equality, demanding one size fits all rather than letting people crowdsource solutions on an individual level, is something that we should value greatly. And yet Elizabeth Popp Berman doesn’t value it at all.

Gene Tunny  52:21

Right. Okay. Okay. I’ll have to check that out. I might have to wrap up soon. But the final final question i’ve good is just referencing one of your quotes in your book where you talk about the power of some individuals, and you talk about the power of Keynes and FDR? Yeah. How do you think they would want to know it’s almost an impossible question, but how would they be diagnosing where we are today? And what needs to be done? Do you have any thoughts on that?

Brad DeLong  52:53

With respect to the Great Recession, Keynes would certainly say, I told you so. And with glory in it, because he was at some level of British upper class twit of the early 20th century. With respect to the rest, he would say that, by and large on my number with the predictions he made in a 1930 speech, he gave on economic possibilities for our grandchildren to have indeed come true. And that at least the global north is approaching the stage in which we do indeed have enough. And then our problems are that we’re kind of hag written by ideas and ideologies that were useful and essential in past poor age, you know, avarice, usery, and precaution. And that we’re also facing the prominent problem of the human race, which is how to take your wealth and resources and live life wisely and well. And he would say that he had hoped that we would have made more progress on learning how to live life wisely, and well than we have, and would have hoped that we were less hag written by you know, avarice, usury and precaution. By kind of not realising how wealthy we are. And you know, how broad open our possibilities should be, but being instead do to mean and ungenerous to ourselves and to others.

Gene Tunny  54:17

Yes, yeah. Okay. And what do you think? I mean, what would you have any thoughts on? I mean, what’s, what’s to be done, particularly in the US or in other? What other advanced economies? I mean, I mean, one of the challenges we’ve got here in Australia is how we pay for this National Disability Insurance Scheme. So we’ve got this permanent structural deficit in our budget now of about 2% of GDP. And the current government when it was in opposition committed to these what we call over here, these stage three tax cuts that are kicking in in a few years, where there’s, they’re more geared well, because the wealthier pay more tax just because of the way the system is set up. And the way these tax cuts work is that the bulk of the benefits go to the upper end. And there’s a big debate about whether it’s appropriate or not to have those tax cuts at the moment in Australia, but what are the levers? Is that you see, is it around? Is it taxation? Is that one of the levers for redistribution? Or is it regulation? What what do you see as the levers?

Brad DeLong  55:22

Well, you know, I think, I think the biggest and the best lever and in fact, the one in which the United States and Australia have historically been most successful, you know, is immigration, right. That over time, we have been very, very good at taking in people from elsewhere whose parents were not Americans, Australians, and making them into, you know, Americans and Australians. Like, I remember Maine Senator George Mitchell, you know, the guy who negotiated the Good Friday Accords in Ireland. And, you know, he looks like one of my great uncle’s, someone all of whose ancestors had been in Maine since 1750. And, you know, talked with an extremely strong accent, you know, um, and so actually, he’s simply a second generation immigrant, he’s half Irish, half Lebanese. He just looks and sounds exactly like my great uncles with their eight generations of, you know, hardscrabble time in the soil. But, um, we have enormously powerful and strong cultures, ideologies, and forms of Nash forms of national unity, that are actually not based on us all really being the descendants of our founders, and both countries willingness to take in large numbers of people from elsewhere. You know, Australia, taking in an enormous number of refugees after World War Two have been huge sources of national strength. And we are still largely empty countries, and you can move someone from Mexico to the United States, you know, from Malaysia to Australia. And you know, you are going to triple their productivity just by doing that alone. And that will generate a huge amount of potential wealth from a well we grow by immigration. Otherwise, the problem is that, you know, we had a steam power economy in 1870. And, you know, an electricity and diesel and chemical economy in 1900, and a mass production economy in 1940, and you know, a global value chain economy in 1990. And now we’re headed for info biotech economy and whatever worked in the sense of, you know, politics, economics and sociology, 30 years ago, back when the technological foundations of the economy are different, it’s probably not going to work well now. So anyone who says we need to go back to X is probably going to wind up unhappy. And so we should try to move forward into the future rather than trying to pick up models from the past. Although what those forward and the future models are, you know, that’s beyond me.

Gene Tunny  58:19

Okay. Okay. You’re telling the economic history story, the policy and then that’s, that’s for someone else.

Brad DeLong  58:28

But the big lesson of history is that trying to maintain social and economic systems past their sell by date as the technology changes underneath it just doesn’t work.

Gene Tunny  58:39

Right. Yeah. Yeah. Interesting point about immigration. We one of the one of the challenges in Australia we have is that, I mean, everyone wants to live in one of the big the three major capital cities. I mean, I’m in one of them, I’m in Brisbane, and Nick’s down in Melbourne, then Sydney is the, you know, the biggest, but the concern is that everyone wants to live in those cities. And there’s just not enough housing. I mean, we’ve got, I mean, I guess, it’s around. It’s in other advanced economies, too. But there’s a housing crisis and property prices have surged, although they are falling out, because the of the dynamics of the lending and what’s happened with the monetary policy, but they’re still very high rents are going up. So we’ve got concerns about housing availability. And in the short term, I think, if we’re bringing immigration back, I think that’s going to cause a lot of pressure. So we’ve got to manage that better and harder. No, there’s the environmental issues about allowing development. So I think, yeah, I agree with you about immigration providing benefits. So just see that in the short term. There are a lot of these absorption issues that we have to deal with.

Brad DeLong  59:48

A lot of people who think they have rights that things need to stay as they are. Yes, yes. And do you know to this, there’s a great Italian novel called I think Lampedusa, no written by Lampedusa, called Gattopardo, called The Leopard about Sicily in the 1860s, in which at one point, the young guy yells at his uncle, the count of Selena, you don’t understand in order for everything to stay the same. Everything has to change. Yeah, yeah. As the young guy goes off to join Garibaldi in the Italian revolution. And so I do think we need to look much more at the things that need to change. He says, sitting in a house built in 1897, we think, at a time, but it was surrounded by pear orchards. And now when it is half a mile or two thirds of a mile south of the university campus and two thirds of a mile north of the subway line. And so is a, that something so close to so many extremely desirable places, should house only three people right now. Rather than have been turned into a 10 storey apartment building is in some sense, an offence against land planning.

Gene Tunny  1:01:08

Yeah, well, I think we’ve got to find a better balance. I mean, who knows. That’s, that’s an issue for another episode, I think.

Brad DeLong  1:01:17

It is, you know, and we did actually build a cottage on our lot as soon as we were allowed to do so. But still. Yeah, so we did add to Berkeley’s housing stock. Yep. Still, you know,, the San Francisco Bay Area has seven and a half million people and looking back at the past 450 years of history, it’s easy to say how if we’d had a 1800s view toward development, we now have 20 million people, you know, we the size of Los Angeles in population. And it would probably be a better world I must say, because those other 12 and a half million people who aren’t here are in other places that are kind of less great to live in, and where they are likely to be less productive than they would be if they were here.

Gene Tunny  1:02:14

And just just finally, probably, you know, you’ve I don’t want to take too much of your time. But have one more question is, in your view, what are the most what’s the most important factor there is the governance, it always the agglomeration effects when they move countries because I know that Lant Pritchards crunched the numbers on this, and there’s this huge gain from moving people around the world. What’s the benefit? Where does it come from? Do you have thoughts on that?

Brad DeLong  1:02:38

A lot of it is agglomeration, thick market agglomeration effects that we don’t really understand that appear to be extremely large. And, but that also can very quickly turn into pollution and crowding effects if the local government is not competent at handling the process.

Gene Tunny  1:02:59

Yeah, I think that’s right. I think that makes sense.

Brad DeLong  1:03:03

And a lot more is that, you know, it is, throughout history, it’s always proven much, much easier to move people that where institutions are good, and where they can be productive than to somehow move institutions to where the people are, that attempts to build prosperity or build democracy in places where it does not seem to be strongly established, that those rarely go very well. And I would say, I do not really understand why that is the case. And I used to have a guru, a classmate of mine, who I went to about that, Alberto Alesina, to teach me. But alas, he dropped dead of a heart attack a few years. And I haven’t found another guru who I trust.

Gene Tunny  1:03:48

Okay, I might try and cover that in a future podcast episode. It’s a fascinating question. It just occurred to me then.

Brad DeLong  1:03:57

I love what Lant has to say about his numbers actually why his numbers are what they are.

Gene Tunny  1:04:05

Yes, yes. Yeah. I’ll put a link in the show notes to some of that work. Okay. Very good. Okay.

Gene Tunny  1:04:11

Well, I’m Professor Brad DeLong. It’s been a real pleasure. I’ve really enjoyed talking with you very much about your book and I’ll put a link in the show notes. And so if you’re listening in the audience, and please, I’d suggest getting a copy. Yeah. I’ve got it on Kindle. But I mean, it’ll be in bookstores and major bookstores in Australia I’m very sure. And yeah, Professor DeLong. Any final thoughts before we wrap up?

Brad DeLong  1:04:38

Just thank you very much. And I think be hopeful right that even though individually, each of us is just a jumped up East African plains ape who often forgets where he left his keys yesterday. Together, there are 8 billion of us and if we talk to each other together, we can be a very smart anthologie intelligence.

Gene Tunny  1:05:02

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

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

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

How the Australian Bureau of Statistics prepares the National Accounts w/ Robert Ewing – EP162

The National Accounts is the comprehensive data set on a country’s economic performance. It gives us GDP growth estimates and a whole bunch of other important indicators. Australian Bureau of Statistics Principal Advisor Robert Ewing takes us behind the scenes at the ABS and provides some great info and insights into how the GDP figures are prepared. Learn about the huge range of economic data from households, businesses, and governments that go into the National Accounts, the roles played by algorithms and judgment, and how the numbers are crunched using the time series database FAME, short for Forecasting Analysis and Modeling Environment. 

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.

Links relevant to the conversation

Robert Ewing’s LinkedIn profile:

Economics Explored EP153 which also considered the National Accounts

Transcript: How the Australian Bureau of Statistics prepares the National Accounts w/ Robert Ewing – EP162

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

Gene Tunny  00:01

Coming up on Economics Explored.

Robert Ewing  00:04

It’s the work of hundreds of people across the ABS once you count the people in the survey divisions, the data acquisition divisions, all the other publications such as the balance of payments, the capital expenditure, the business indicators publication, which all feed into the national accounts.

Gene Tunny  00:24

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 162 on how the national accounts are put together, my guest is Robert Yuen from the Australian Bureau of Statistics, the ABS. Rob is the principal adviser to the ABS statistical services group. In this episode, Rob takes us behind the scenes of the ABS and provide some great info and insights into how the GDP figures are prepared. While Rob and I chat about the Australian National Accounts, I hope this conversation is useful for you, wherever you’re living. statistical agencies around the world will be using similar data and procedures to the ABS as they prepare their own GDP figures. Please check out the show notes relevant links Information and for details of how you can get in touch. Please let me know what you think about either Rob or I have to say in this episode, I’d love to hear from you. Right now for my conversation with Rob Ewing on the national accounts. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Robert Ewing from the Australian Bureau of Statistics, good to have you on the programme.

Robert Ewing  01:42

Very happy to be here Gene, always keen to spread the gospel of the great work that the ABS is doing statistics and trying to tell people the story of what’s going on in the economy.

Gene Tunny  01:53

Excellent. Well, I’ve been really impressed, Rob, that you’ve been communicating on LinkedIn, you’ve been talking about the data and giving us some insights into how the ABS compile the data. And I mean, one of the sets of data I’m really interested in is the national accounts and GDP, which is the statistic that measures the amount of economic activity in a certain period of time. And I’d be keen to chat with you about GDP given that you’re at the ABS and you’re involved in, in collecting the data and, and crunching the numbers to create the GDP figures. I chatted previously with a colleague of mine, Brendan Marquis Taylor, we chatted about the three different measures of GDP, would you be able to kick off by telling us what those measures are, please Rob, why do we need three different measures?.

Robert Ewing  02:48

Sure, so I should just say at the outset that, you know, today, I’m going to skip over an awful lot of the technical detail. And so I’m sure that the more statistical methodology knowledgeable are going to be screaming occasionally. But it is very complicated. The manual for the national accounts is several 100 pages long, and you know, can take a lot to get into. I think to start with, I tend to think of the GDP as it’s one concept that you can measure three ways. So GDP, as you say, is the measure of all economic activity. But we have to get a bit more specific than that. One of the things I’ve been talking about on LinkedIn is this idea of the production boundary, we have to put boundaries around GDP, because really, anything you could think of could be economic activity, we have to narrow that down a bit. And so we focus on market activity. And we focus within market activity on production. So GDP is a measure of the total value of production for the market sector in an economy over a period of time. It turns out that the way that the national accounts frameworks are set up, and it very clever frameworks developed over you know, more than 50 years by international groups. You could also measure this two other ways. So the first way is to measure how much income everybody in the economy has gotten from these productive activities. So if you measure the total amount of money that goes to labour, what’s called compensation of employees in the national accounts, and if you measure broadly, the national accounts concept of profit, what’s called gross operating surplus. And so if you add those two together across the entire economy, then you also get a measure of GDP. And that’s because if you think about production, well the measure of production is how much what you produce is worth minus how much you had to buy, in order to produce it, or the two things that are left over after that are income and profit. So it’s quite easy to see how those two match up. The third way, which is the expenditure method of GDP, is to think about it from the other side and think that will, we know, in economies and in markets, that there’s both a supply the production, but also a demand the consumption of the goods. And so the expenditure approach looks at where all this production of goods and services in the economy gets used. And so it adds together, the total amount of money spent by households, the total money spent by governments, some of the things that we produce gets sent overseas. And so we count the exports. Some things go into a warehouse, even though be produced, so we count inventories. And then we didn’t produce all the inputs that we use. So we subtract imports. And so that also gives you that same measure of how much was produced in the economy. And so those are the three measures of GDP, which are normally called the E measure, the I measure and the P measure in Australia. In theory, if you have measured everything absolutely perfectly, they will be equal.

Gene Tunny  05:58

Yeah, conceptually, from the way that they’ve that just because of the theory, and there’s a national accounting framework, isn’t there. So you were talking about this has been developed over 50 years? I mean, that’s since the you’re talking about since the UN codified it, I think, did they try and codify it in the late 60s? And then there’ll be various iterations of that approach? And we follow that there’s an international methodology.

Robert Ewing  06:27

Yeah, that’s right. So there’s the system of national accounts. So I think the first one was 1968. And that was building off kind of a lot of international cooperation. But I believe 1968 was the first time they really sit down like a consistent set of international rules. There was an update to it in 1993, and update in 2008. And if you do the math between those, you won’t be surprised to know that there’s an update currently underway thinking about further changes to the system of national accounts. And that will be due out for hopefully for endorsement by the UN statistical commission in 2025.

Gene Tunny  07:04

Yeah, yeah. And I remember from my time being on ABS reference committees for different things, or the technical reference groups, just all of the the issues you have to think about and R&D is a tricky one. I remember that, but we don’t need to go into into that today. I’m keen to understand what sort of data go into this Rob. I mean, you mentioned there’s production, there’s, there’s income, there’s expenditure. So is the ABS collecting data on all of these different transactions? You’re collecting data from businesses, you’re collecting it from households? What sort of data go into the mix, Rob for GDP?

Robert Ewing  07:46

Well, I think the short answer is anything that you can get your hands on. So a good national accountant is a bit of a data scavenger, because we’re only ever looking through kind of little windows into the economy. Kind of weird, we only have these narrow snapshots. So probably the two absolute most core measures of that production side, firstly, the annual economic activity survey. And so that’s a quite a large survey that we do once a year. And we go out to businesses, and we asked them quite a lot of questions about what they produce, how much money they made, you know, kind of how their money was spent, and so forth. And that allows us, in particular, to do what is quite a complicated little fiddly job, which is to try and convert things from the world of business accountancy, into national accountancy, because there are some things where there are some very, very important differences between the way that GDP is measured. And the way that business accounts are put together. The two most important are probably the concept of profit, which can be measured quite differently to that concept of gross operating surplus I talked about before, and also the concept of depreciation, and the differences between economic depreciation and accounting depreciation. But, you know, there are a lot of very complex nuances about that. And so a lot of the economic activity surveys asking the questions that allow us to take the business’s accounting estimates and convert them into economic estimates. So that’s absolutely kind of a foundational piece of us understanding that business side of the economy. So at a quarterly level, then its equivalent will be the quarterly business indicators survey. So that’s a somewhat smaller survey and asks a much smaller set of questions was kind of trying to give us a bit of an idea about what’s happening quarter to quarter, as well. And that’s kind of a very important survey there but the range of inputs is enormous. I’m household final consumption expenditure quarterly uses something like 15 or 20 different input data series, including retail trade, data from APRA, data from various private sector organisations who provide information, data from the quarterly business indicators surveys. So there’s a, an absolute broad range, because things like those big economic activity survey or the quarterly business indicators survey don’t necessarily cover everything. And so we bring the other bits of information to kind of tell us about, particularly the expenditure side of GDP, but also thinking about the role of government, where we have a lot of data that comes directly from federal, state, territory and local governments and tells us about their activities. We have detailed trade information, probably some of our most detailed data sets on the trade side, which allows us to get a pretty good idea of what’s going on with exports and imports. We rely very heavily on the consumer price index and the Producer Price Index publications, because they give us an idea of prices in the economy. And they allow us to convert those current price numbers into volume estimates of what’s going into GDP. So the real GDP as it’s often called.

Gene Tunny  11:17

Right, okay, yep. And that’s, that’s what’s often reported, that’s the that’s seen, that’s the data set that are the item that is looked at to determine whether the economy is going into recession or not. It’s that real GDP number, that volume number where you’re trying to abstract or control for inflation that occurs? Okay, so you’ve got less data for quarterly GDP than annual, it seems, is that right? So you’ve got detailed estimates, annually, you’ve got this other survey, quarterly, you’ve got, I mean, you still got a whole bunch of data. And what are you doing? You’ve got all of these models? You’ve got I mean, Is it done in spreadsheets? Are we able to go into that, or is it in R or or Python? And then is there some way of describing what goes on?

Robert Ewing  12:10

Well, so it is, fundamentally, it’s a very large code base, in our language and computer stuff, piece of software called Fame. And if anybody listens here, knows Fame and doesn’t currently work at the ABS, please immediately make a job application, we’ll fast track you, we need as many people who know this fairly obscure computer language as possible. And so we have here that’s 1000s and 1000s, of lines of code across all sorts of different modules. The basic approach is we’re trying to build things up from the absolute base level estimates. So we’re trying to look at the lowest level of the information that comes in and when we build the GDP up from that, so it’s very much a bottoms up approach to estimating it. The approach that we take is quite different in different areas. So in some cases, we get pretty good information, quarter by quarter on what is happening in the economy. So exports and imports, as I mentioned, is a pretty good case. We know, not perfectly but you know, we have almost census level data, we know almost every transaction that’s happening with imports and exports, there are some complexities around imports and exports of services where we don’t have as strong information. But we have a pretty good idea about what’s happening there. And so all we really need to do is just make some conceptual and timing adjustments and add everything up at the other end of the spectrum would be something like imputed rent. This is a really interesting kind of concept here in GDP. So one of the really important parts of the overall economy is the service we all get from the houses that we live in. Now some of us pay for that to the rent that we send to our landlord, kind of once every week or fortnight or month. But if you own your own home, we still want to count that value, because it’s still an economic service that’s being provided in a market like environment. And so for that we have what’s called imputed rent. So we impute how much rent is there. The data set that we have for that is primarily the Australian census. So every five years as part of the census, we go out and measure every household in Australia. And that also gives us an estimate of how many households they are there are and in what type of houses and in what locations. And so putting that into a model allows us to estimate imputed rent. But between censuses, we don’t have a solid survey or a data point. And so we have to model that. So it’s really a form of nowcasting. We’re using the information that we have about changes in the population, information about household formation and information about kind of your building construction. estimates of how much demolitions are happening to us forget how the number of households are changing and we obviously have information about rents from other series. And so at that end of the spectrum, it’s really a model, which is using a bit of data. But it’s not a massive amount of data compared to like its base, which is set every five years with the census. And that will be something the team will be turning its mind to very shortly having just had the second set of census results released.

Gene Tunny  15:21

Yes, yes. Great, great work. Everyone’s excited about that. So I saw your boss, David Gruen who’s well, it was, I mean, we both worked for him and within the various times in Treasury when we were there, and you’re working for him again, at ABS. He’s been getting a bit of media on that on people working from home, which is good to see. So all very good. Rob, can I ask you about this quarterly data? So you’ve got all of these bits of data going into it? And you’ve got these different modules? And there’s all this code? Which was a revelation. So I’ll have to do some research on that. I found that fascinating. What’s the quality of the quarterly data like? I mean, I know you revise it in the future, and there’s a statistical discrepancy, isn’t there? Could you tell us a bit about what the quality of that is like first, and then we might go into the annual data and what you’re doing there? How you’re trying to, yep. If you can tell us about that, please. That’d be great.

Robert Ewing  16:20

Yes, sure. So I think that’s so I think there’s two answers given to the quality of the quarterly data. So this is all in the context of we kind of spent a lot of time and a lot of resources and a lot of effort on making the quality, the highest it can be. But inevitably, a lot of the systems and the data in the economy is fundamentally on an annual, particularly financial year basis. So if you think about the financial accounts of the company, they will be producing kind of view monthly and quarterly financial information. But it’s only at the end of the year, that they really do that complete process of producing a full set of accounts, and making all of the adjustments and thinking about all of the different bits and pieces they need to take into account. And no matter how well you’ve gathered the quarterly data, the annual data is always going to be better. So you’re always going to have this view of the world that is a little bit sketchy. And yeah, and I think that if you look at the revisions, the revisions, they will move the numbers around, they very rarely change the story of what’s going on. So GDP might move up a little point one or point two, down to point one or point two, but very rarely does the story of what’s happening to the economy change very substantially. The other element to that is that even the quarterly estimates get a bit better with time. So we produce the estimates for GDP, roughly nine weeks after the end of the quarter. So our June quarter is published in the first week of September, on the first Wednesday in September. So that is a pretty good amount of time. But there’s still information that continues to come in, there will be businesses that we surveyed, who didn’t have time to respond, there will be data sources, for instance, ATO tax data, some of that won’t even arrive until after the national accounts has been published. So our picture of each quarter gets better with time as we gather more data, and you know, some late returns come in. And so that’s part of what contributes. But the big story is that really, GDP is fundamentally an annual measure that we can do on a finer time horizon using really a combination of different approaches. And for some things, such as household final consumption expenditure, there’s not a massive difference in the quality between the quarterly and the annual household final consumption expenditure has pretty much the same sets of information. But if you’re thinking about production, it’s quite different. And yeah, you mentioned statistical discrepancy. I think this is probably a good, a good way to talk about how we actually measure those three measures of GDP in practice, and how we actually make them equal to each other as they theoretically should be. So when we measure GDP every quarter, we can. It is very rare that the three measures come out exactly the same. Probably has happened once or twice. We were probably very suspicious when it did happen. As of now that can’t be right. There can’t be equal. We do two things in response there. Firstly, we use the differences between them as a way of looking at the different components and models and data sources and thinking about, are there gaps here? Are there adjustments that we should be making? There are other pieces of information that we should be seeking that would allow us to bring those measures closer together, but we’re not going to arbitrate them all together without some source of evidence for that. And so the three measures will be a little bit different from each other. So in order to get the measure of GDP that’s published on the front page of the webpage, what we do is we average the three of them. And so we have what’s called GDP A for average. And that is really just literally you add the three measures, and you divide by three. And you know, for those who are fans of the details, you’d notice, now we’re doing that in terms of the level of GDP, not the percentage change. Now, of course, it would be nice to get rid of that statistical discrepancy. And to do that, we need that information set that we have for the annual publication. And this brings us to, I suppose, what is the core of kind of producing like the benchmark GDP estimates, which is a process that’s called supply use balancing. And so I talked before about the idea that we can match production to income to expenditure at that top level. But in theory, we can also do that for every individual product that’s produced in the economy, that we should be able to say, for every products, let’s say, mushrooms, just picking on that one, because it’s very early in the list. We know, you know, in theory, we know we’ve produced you know, this many mushrooms. And you know, we know this many mushrooms got used by restaurants and other people and food manufacturers, this many mushrooms got sold to households, this many mushrooms got exported. And so in theory, we know well, those two numbers, the supply of the product and the use of the product have to be equal. We’ve defined as the way we’ve defined GDP, of course, the way that we’ve measured everything, through all these different surveys, we haven’t gotten a complete survey of every single person in the economy, we haven’t asked every single household what they consume. So we know there are some errors there and they don’t balance. And so every year, we go through this process of supply use balancing where we look at products, we don’t look at it at the level of every single kind of view, 375 mil Coke can, and 750 mil Coke can, and we have about 300 products that we look at so that we broad categories, like legal services, or metal, steel manufacturing products, or things like that. And we look for each of those products. We want to balance, how much was produced, how much got used by households, by government, how much got exported, how much went into inventories, and how much was used by other industries in their own production. And we make sure across all of those products, the supply and use is balanced. And once we’ve achieved that, then we have the three measures of GDP will be equal, because we’ve now brought those two halves of the measurement of the economy together. And so that’s, I suppose that’s the really, that’s the big work that kind of goes on, after a year is completed. So once we’ve finished the financial year, then the work starts on producing those supply use tables and doing that balancing. And when you’ve done that, the reason that’s important is I suppose it gives you that foundation that you can build on. So when policymakers are looking at GDP, they’re mainly going to be focused on what’s happening to GDP. Right now, they don’t care about what happened to GDP a year and a bit ago, which is about how long it takes us to produce those supply use tables. But through producing them, we make sure we’ve got an accurate representation of how much every different industry and sector and product matters. And so when we take that information, that’s you know, kind of you know, that lesser information set that we have quarterly to update the numbers and say, well, this is how much this bid has grown. We’ve given GDP the best base to sense, put everything together and give you the most accurate information out of the most recent quarter.

Gene Tunny  24:14

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

Female speaker  24:19

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Gene Tunny  24:48

Now back to the show. So this they supply use tables. That’s what you’d call an input-output table. Is that right Rob? This is an input-output table your developing, how these industries interact with each other, the flows of resources between them and then what goes to sales, what’s exported, etc?

Robert Ewing  25:09

It’s a very closely related cousin of an input-output table. So there are a couple of pretty technical differences between supply use tables and input-output tables. Importantly, in Australia, the input-output tables that we produce are a lot more detail. So I mentioned supply use, we’ve got about 60 industries times 300 products, when we get to the input-output tables, we’re able to expand that to about 115 industries and a bit over 900 progress. So we can give you more detail in the parameters as a couple of other technical details. But it’s broadly that same sort of concept. It’s trying to understand what is produced in the economy, and how it flows through the economy. And they’re a very powerful analytical tool.

Gene Tunny  25:53

Yeah, absolutely and Rob what I think’s interesting is you meant just, I mean, you’ve got all of this data and you’ve got these three measures that on a quarterly basis, you’re trying to get as close as possible. And you mentioned that, look, you have to make some adjustments. I mean, so there’s some judgement involved, but that’s going to be informed as much as possible by other data or whatever information you’re gathering. And you talked about he getting data from a huge range of sources, government and your own surveys, from the private sector. You probably can’t go into this. But what I’ve what I’ve been surprised at now is just how much real time data or up to date data that banks for instance, so the who else is Dun and Bradstreet, they’ve got whatever they’re called now, they’ve got more up to date data about how things are going into the economy, I presume the ABS is, is trying to get hold of some of that data.

Robert Ewing  26:52

Yeah, no, absolutely. And we have, for instance, on the bank data, we have a new publication, it’s been running since February this year, which is the monthly household spending indicator. And so that takes information from bank transactions, so credit card and debit card data. And it gives you a much broader picture of what’s happening to household consumption, then the retail trade survey does, the retail trade survey was a great survey. It’s one of the longest running surveys, and it’s very closely watched. But it only tells you about a third of consumption. Because today, in terms of things, you can walk into a store and buy or kind of buy through a retailer online, that’s only about a third of what households consume every day, when we’ve got the amount of the household spend indicator variable to expand out to more categories of consumption. And so that covers a little over two thirds of consumption of households. So that kind of finer grained data is definitely something we’re very interested in. Another example is the monthly business turnover indicator, which is another fairly recent publication. I think that started a little under 12 months ago, that takes ATO business activity statement data, and it gives you a month by month picture of how the turnover is moving in different industries. And so these are giving us that month by month picture of what’s happening in the economy. And that’s something which in the past, we’ve had to rely on the quarterly surveys and the quarterly national accounts for and I think that’s really exciting development with the data becoming more available. And, you know, the ABS showing its capability to transform that data into useful insight for people is definitely something we see is a growing kind of part of the business but going forward.

Gene Tunny  28:51

Yeah, absolutely. And it’s so important as we’re trying to monitor the economy as the RBA and the Treasury are monitoring the economy. And, and you know, that obviously feeds into policy. But yeah, that’s, that’s something for another another time. Right, on the supply use balancing, if you just got some a little bit, a few more minutes, while you’re trying to get these data internally consistent, it’s all about making sure everything adds up. All of these data are consistent. It’s the story makes sense. This balancing, I think I asked you about this on LinkedIn, what do you do, how do you do this, this a some sort of algorithm, is it..

Robert Ewing  29:31

So it’s a mix of things here? So for a lot of the large things, it is a human being looking at the data and looking at the whole picture and making a decision about all based on what I know, this is the bit here that must be wrong. So there’s a lot of it, which we’re not yet able to put into an algorithm. But if you think about I mean, I described that kind of 60 by 300 kind of matrix, you know, it’s an enormous number of cells. Once you’ve got to fill in, and so once we get past those things where you can reasonably make a human judgement. We use an algorithm, it’s a constrained optimization algorithm. And what we do is we tell that algorithm, the same things that we know from the national accounts framework. So we tell that algorithm, things like, Well, we know, you know, this supply has to equal this use. And we can also give it some other parameters, kind of like, it’s rare that the financial sector consumes many sheep directly, for instance, you know, so you can apply a bunch of constraints there, and it can then kind of go away, and it can algorithmically kind of find a sensible solution for you based on that. But the reality is that, you know, right, this second, there isn’t a good solution from a lot of this beyond a human being who can look at and just make a judgement about what makes sense here, you know, does it make more sense to kind of say that the excess rolled steel production is going to be going to export or to households? Because the algorithm is not going to have a view on that one, but the human is going to be able to say, no, no, we must have just mismeasured some exports there. Yeah, let’s have a look at that.

Gene Tunny  31:15

Yeah, gotcha. Okay. Yeah. So some constraint optimizations and judgement. Very good. And right so Rob, this is all fascinating. Is there any, any other points you think would be important for, for us to understand in detail to appreciate just the magnitude of this task? So I think I’m hoping we people understand how important these data are. And I’ve covered that in a previous episode. But is there anything else we should know, in terms of just the, the, you know, what, what are the challenges for ABS in doing this? Because it does take several months, doesn’t it, you do this on a quarterly basis, and it comes out, it comes out two months after the end of the quarter, doesn’t it? So there’s obviously a lot of work involved.

Robert Ewing  32:02

Yeah. And I think I divide that into two halves. So there’s about a month of data gathering and so this is kind of you the various surveys going out and measuring things. So it’s kind of, you know, working with partners, such as the banks and private sector, and governments, and so on to get the information streams. And then there’s about a month of what we call compilation, sitting down, running the pros, running the computer code, seeing how the numbers make sense or not. And then ultimately, you know, writing media releases and producing a publication and getting it onto the website. And just to put it in a plug, also, for our new product, which is, we are each quarter producing a nice little list of, you know, 10 to 15 things you should know about the national accounts. It’s nice and easy to digest. And you can just find that on the ABS web page. So if you find the idea of clicking on a GDP release a little intimidating, we’ve got some much more user friendly products available now. But yeah, it’s as you say, it’s about a couple of months to put it together. It’s the work of hundreds of people across the ABS, once you count the people in the survey divisions, the data acquisition divisions, all the other publications such as the balance of payments, the capital expenditure, the business indicators publication, which all feed into the national accounts, the communications team, the compilation team it’s hundreds of people across the ABS contributing to every quarter. And they are not to forget the 1000s of businesses and households answering surveys out there. I mean, the most fundamental thing is just how grateful the ABS is for the people who take the time out of their busy business and personal lives to kind of give us this data that we need to tell Australia about what’s happening.

Gene Tunny  33:57

Yeah, yeah, that’s a good point. Yeah, absolutely.

Robert Ewing  34:00

And one final point I’d make is, GDP is the figure that gets all the fun headlines. But the national accounts are a very rich publication. They tell you about a lot of different parts of the economy, they can take a bit of expertise to understand. But there’s a lot of information in the national accounts beyond GDP. It tells you about how each state is tracking, it tells you about the consumption of different goods and services in the economy. It tells you about the balance sheets of households and governments and businesses. There’s a massive amount of information beyond that top level GDP figure in there and I think a lot of the criticisms you sometimes hear about GDP not taking into account depreciation or not taking into account other things. An awful lot of that is in there somewhere. But it is a very big publication. I know it can be a bit intimidating to try and find anything in it.

Gene Tunny  34:58

Yes, yeah, but you’re right there, Rob. And, I know that there is work going on. And it may not be in the national accounts, the core national accounts, we do have satellite accounts. I know you’ve, you’ve tried to estimate the contribution of different sectors like tourism. And I’m trying to remember if you’ve done natural, natural capital estimates. So I think there are some other estimates where you’ve tried to estimate them, I’ll have to check. I remember, this is one of the issues or one of the things people are concerned about is that GDP doesn’t take into account environmental degradation. And so but there are estimates, there are people who have looked at those sorts of estimates, I’ll have a look offline and just add something in the show notes if I need to. But I know that that’s one of the issues people are concerned about.

Robert Ewing  35:49

And it looks, it’s there. It’s not my area of expertise. But there’s a whole range of work that the ABS has done on environmental economic accounts, which is really bringing together those two data sources. And I think that’s one of the unique advantages of the ABS is because we kind of sit in the middle of this data architecture, we can bring together the data that we have from these different domains and put them next to each other. And we can see how the story of the environment and particular aspects such of water align with the story of the economy. And you know, it’s something which is still like an ongoing piece of work to fully develop all the products there, but something we’ve been actively developing over the past.

Gene Tunny  36:32

Okay, very good. Rob, in from the ABS. Thanks so much for your time. I really enjoyed that. And, yeah, I look forward to seeing more of your contributions on LinkedIn. I think that I’ve been learning a lot about the work that you’ve that you do over at ABS and I’ve got a renewed appreciation for that work. So thanks again, Rob. Very good.

Robert Ewing  36:53

Thank you very much.

Gene Tunny  36:55

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

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

Please consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

GDP & the National Accounts: What they are and why they matter w/ Brendan Markey-Towler – EP153

The National Accounts are a huge intellectual achievement and an incredibly useful set of data, including GDP and its components. Chatting about the National Accounts with Economics Explored host Gene Tunny is fellow economist Dr Brendan Markey-Towler, author of the Substack newsletter Australian Economy Tracker. Brendan explains how the National Accounts help us track the current state of the economy as well as longer-term trends, such as shrinking manufacturing sectors and growing services sectors in many advanced economies.

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

Links relevant to the conversation

Brendan’s Australian Economy Tracker Newsletter

Brendan’s post discussed in this episode

Planet Money episode on Simon Kuznets

Australian Financial Review article (pay-walled, alas) which reported “Federal government business generated $1.7 billion in revenue for the big four accounting and consulting firms over the past five years – though the government has a different take on the contract value of that business.”

Transcript: ROI of education: how economists estimate it + US economic update – EP152

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

Gene Tunny  00:01

Coming up on Economics Explored.

Brendan Markey-Towler  00:04

So, that’s where we get the view that Australia is less and less a country that makes things and builds things. Construction, manufacturing declining as a share of GDP.

Gene Tunny  00:16

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. 

This is episode 153 on GDP and the National Accounts. What they are and why they matter. 

Chatting about the national accounts with me this episode, is my good friend and fellow economist, Dr. Brendan Markey-Towler, who started a new sub stack newsletter, Australian Economy Tracker. Brendan explains how the national accounts help us track the current state of the economy, as well as longer term trends, such as shrinking manufacturing sectors and growing services sectors in many advanced economies. 

In the show notes, you can find relevant links and any clarifications. Please send any comments or questions to contact@economicsexplored.com. I’d love to hear from you. I’ve been very grateful for all the comments on recent episodes. Your comments really helped me figure out the issues that you’re interested in, and the types of guests that you’re interested in hearing from. So, please keep the comments coming to me.

Right oh! Now for my conversation with Brendan Markey-Towler on the national accounts. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Brendan Markey-Towler, welcome back to the program.

Brendan Markey-Towler  01:43

Gene, it’s always a pleasure to be here. Sorry, I’m a bit husky today, but I’ve bruised my throat. I’d like to pretend that it was under heroic circumstances, but it was not.

Gene Tunny  01:52

Okay, well, thanks for participating. I understand it’s not damaging your throat, you’re able to talk, you’ve been talking all day. And you’re still happy to talk.

Brendan Markey-Towler  02:01

I could talk under wet cement, mate. So, a bruised throat isn’t going to stop me.

Gene Tunny  02:07

Well, you know, now, you can get a job as a rugby league commentator, possibly?

Brendan Markey-Towler 02:14

That’s true. I’m more of a union man. Yeah, but I will go with league. That’s good. 

Gene Tunny  02:18

Right oh, okay. So, the topic of today, national accounts, what it is, why it matters? You’ve started a sub stack and one of your first pieces that came out on the sub stack was on the national accounts. And you displayed a level of enthusiasm for the national accounts that is very rare. And it actually reminded me of just how marvelous the set of data – the national accounts are, and what a superb intellectual achievement. 

So, going back to the work of Simon Kuznets, and Colin Clark, who, was it Stone as well, Richard Stone, who formulated the methodology financial accounts, and then it was like a system a toss by the UN. So, I think, what your note did was it really helped us; well, it really reminded me of just how impressive those national accounts are. So, could you just tell us first, what you were trying to do in that note? And what’s your sort of general take on the national accounts, please, Brendan? Why do you think they’re so important?

Brendan Markey-Towler  03:28

Partly to justify why I had no friends at school. Because I get excited about nerdy stuff like this. But look, when you actually know what the national accounts are, they’re extremely interesting. And what they really do is they aim to provide a snapshot of the activity within an economy over a set period of time. So, in Australia, and throughout almost the world, I’m not sure of any country that doesn’t do it this way. It gives you a snapshot of all the activity that went on in an economy over the previous quarter. And the central number that depicts that activity is the number that we call gross domestic product. And gross domestic product is a measure of how much wealth was added to the economy, how much production, how much activity, and under the three great categories production, exchange, and income, or earning. That’s what the national accounts do. And they add that up into a single number, GDP. And that tells you how much activity went on in the economy over that quarter. 

Now, where it gets really interesting, is that number not alone would be kind of cool. And we talk about the GDP growth rate. That’s what we mean when you hear on the news that people say economic growth or the economy grew by, that’s what they meant that GDP number increasing or decreasing. But where it gets really interesting is that we approach GDP in three ways. And you can think of this as looking at the economy as the same thing, but from three different directions. And that changes the way that you interpret that number. So, we call these GDP I, or at least I call them GDP I, GDP O, and GDP E. That is, GDP expenditure, GDP income and GDP output. 

And what those numbers are doing are adding up GDP, the activity in the economy, looking at that activity from one to three ways: as a production, as an expenditure, and as an income, right. So, if you think about it this way, when you go down and you buy something that’s dear to our heart, here in Queensland, you go down into buy your coffee, there’s three things going on, there’s three ways that they get that same transaction gets measured and add to GDP. From the expenditure side, the expenditure that you make, when you buy that coffee goes into GDP E, and we add all of those up together, and we get GDP. That expenditure becomes income from the perspective of the person behind the bar. And that gets added up into GDP income. 

And there’s also an interesting concept of gross value add, which is how much value has been produced by that transaction. The way that we measure that in GDP O, is we take the value of the output that was sold and subtract the value of the inputs that went into it. And that by definition, that’s the value that was added. 

So, that’s the three ways that we add up GDP and we get an interesting view of the economy from that. A little bit further breaking that down, obviously, you can break that down to the level of the individual transaction. But the you know, you don’t get a huge amount of information that you get so much information, you have no information. So, we categorize at a high level, these different activities to get a sense of what’s driving GDP. So, within GDP E, the expenditure, which is the most popular and most focused on of the national accounts measures of GDP, we break down expenditure by consumption, investment; in Australia, we break down by housing, as well, government expenditure, both consumption and investment, and net exports.

Gene Tunny  07:34

And by investment, we mean capital investment, we mean expenditure on capital goods. So, we mean, new housing developments, or we mean, new, non-residential buildings, new schools, new factories, new capital equipment that’s purchase.

Brendan Markey-Towler  07:55

That’s right. Yeah. So, in Australia, we call it gross fixed capital investment, which is at the addition to the capital stock of the country in the capital stock of the country is; in Australia, again, we trade a little, perhaps, oddly, that we add housing into that. But factories, equipment; we actually add intellectual property as well. So, science and technology research get added into that figure. And so that’s what we that’s, that’s the way that we break down the economy. 

So, when we break down GDP E that way consumption, investment, government spending net exports, we get a sense of which sector of the demand side of the economy is pulling the economy along. Is it household consumption? Is it buying new houses or building new houses? Is it businesses investing? Is it government consuming, spending money? Or is it government investing? Or is it coming from the international sector? And that gives us a lot of information about the activity within a country, it also gives us information about what might be dragging economic growth as well. So, that’s expenditure. 

Another really interesting measure, well, I mean they’re all interesting, but the second measure GDP O – GDP output, sometimes called GDP gross value add, gives us a sense more of the supply side of the economy. 

So, expenditure gives us a view of what’s driving the economy on the demand side. GDP O gives us a view of what’s driving the supply side. So, we get GDP in Australia, broken down by industry. And that’s where it gets really interesting because we can see which industries are adding the most to GDP. So, that’s cool. We can say, oh, mining adding more? Or how much is mining adding to GDP and how much is it driving or dragging on GDP? Ditto for professional scientific and technical services is another one that we use, agriculture and fishing, public administration safety; how much are these sectors adding to GDP and how much are they dragging or driving GDP. And then finally, the GDP I number. This is typically not quite as informative as the others, which is kind of ironic because it’s the easiest to add up because we just look at the tax returns. GDP I, breaks down GDP by income. And in Australia, we do it by what we’d call the greatest states of Australian society. So, wage earners, non-financial corporations, financial corporations, and government. And we can get a view of who’s earning the income within GDP. How what of that GDP that’s expended and outputted. Where is the income from that activity accruing to? Is it accruing to wages? Is it accruing to company profits? If it’s an accruing company profits, is it occurring to financial or non-financial companies? So, that’s some of the really interesting stuff that we get from GDP, it gives us this, really, especially in Australia, because our accounts are quite amazing.

Gene Tunny  11:05

Yeah, we’ve got some of the best in the world for sure. 

Brendan Markey-Towler  11:09

They really are and we get a really rich view of what’s driving and dragging the Australian economy. What’s creating the wealth in our economy and what’s potentially dragging on the wealth of our economy. And kind of, we get a sense as well, where it’s going.

Gene Tunny  11:26

Okay, so the few things I want to talk about there, Brendan. Okay, so you mentioned that GDP; well, is it an approximation of the addition to wealth? Let me think about this. I mean, part of it is in addition to wealth, to the extent that you’re increasing the capital stock, but then part of it is consumed, and then part of the investment is consumption of fixed capital. So, I mean, it’s national income really, isn’t it? I mean, it’s related to wealth. Yes. So, it’s certainly related to that. It gives us a picture of our national income. I think national income was the original term for it, wasn’t it?

Brendan Markey-Towler  12:11

Yes, although national income gets a little trickier because the we focus on GDP, because it’s really limited to the geographical definition of the country. And that distinction was made early on in the development of the methodology, because national income is a bit fuzzier because it’s typically added up by nationals, rather than by where the activity occurred. So, that’s why the classic example that we give in an economics course, is that national income for a country like Luxembourg is, I think, Ireland, sorry. National income for a country like Ireland is actually much higher than its GDP, because a lot of its nationals live overseas. So, there’s few distinctions that we make within it. But really, what it’s giving you is a view of the activity that’s occurred in the economy, the economy being that system of human behavior, why we produce and exchange stuff that we need for everyday life. And so obviously, that adds to the stock of wealth in the economy, because some of that gets consumed and taken out and other elements of it gets allocated to the national wealth. 

So, yeah, it’s a flow metric in the classic distinction between stocks and flows. It a reflection of the consumption and investment activity in an economy during a particular period.

Gene Tunny  13:40

Yes, it was developed during, well; the need for it became obvious during the 30s, when they were trying to quantify the extent of the Great Depression, I think Kuznets produced a report for the US federal government that strangely became a best seller. I mean, it was the first time someone had produced numbers like this. There’s a great planet money episode on that. I’ll try and find it and link to it in the show notes.

Brendan Markey-Towler  14:09

Well, that’s a good point, right? Because before then everyone kind of knew when times were good, or times were bad. And so, you could tell there were panics and manias and crashes as Charles Kindleberger famously said, but before the national accounts were developed, we never really were able to quantify what that was. And a lot of this was crystallized by John Maynard Keynes, his famous book, The General Theory of Interest, money and employment. I’ve got that wrong, interest money I think I got three. I’m one of the few in my in my generation, I think who actually read the book, which is, which is why it’s embarrassing I can’t remember the name because we always refer to it as the general theory.  And what Keynes was trying to do there was give a theory of why we experienced these manias, panics and crashes, you know, boom and bust. And the problem was that when he wrote it, he was dealing with a lot of abstract thoughts and that needed to be measured. And I’ll actually give a little plug here for our home state of Queensland because Queensland was at the forefront of this, currently the building out at UQ, which houses the School of Economics, the University of Queensland, the School of Economics there is housed in the Colin Clark building, which is kind of ironic because Colin Clark didn’t become an academic at UQ until much later in life, I think around the 1980s. But Colin Clark was at the forefront of developing the methodology, not only for what the national accounts are, but how you actually design the surveys that add up those numbers and find out what the numbers are. 

Gene Tunny  15:49

And he’s quoted in Keynes’s book because Keynes used his estimates of consumption spending for Great Britain, if I remember correctly, in the general theory. 

Brendan Markey-Towler  16:01

And it’s kind of funny. So, Colin Clark who came out here to Australia and did a tour of Australia and he was the hotshot wizkid political economist from Cambridge. And he met with all of the premiers because back in those days, we understood the constitution. So, the premiers were much more powerful than the prime minister. And when he came up here to Queensland, the premier at the time William Forgan Smith, which the alumni of UQ will know, is that is the main building at the University of Queensland. Kind of, a nice little coincidence. Forgan Smith basically said to him, look, do you want to come and be my adviser on all things economics? As Forgan Smith was a great reformer and trying to develop the Queensland economy, he needed to be able to measure the size of the Queensland economy: what was driving, what was dragging, what was causing development, what was dragging on development. And there’s a famous letter that Colin Clark writes back to Keynes to say, I’ve been offered a job to basically become the shadow premier of Queensland. I’m not going to turn that down. And Keynes, I think said something to the effect of where is Queensland. So, then, Colin Clark came out, join the Queensland Statistical Bureau and, he was instrumental in the development of the national accounts and as a point to why the national accounts are so important. While Colin Clark was doing that, he’s obviously thinking about what goes into an economy? What is an economy? What exactly does it mean to say an economy? Because when you actually; we all kind of know what it is, is the economy stupid?

Gene Tunny  17:44

It’s an abstraction, isn’t it? 

Brendan Markey-Towler  17:47

But it is an abstraction. And so, he had to think about, Okay, what does it actually mean? What is an economy, what counts as economic activity? And this is becoming very pertinent again, in these days, where we’re talking about things like Facebook and Amazon and Google where a lot of the activity that goes on there, we sort of think of as economic but it doesn’t measure it. But what happens as a result of Colin Clark thinking through these questions, is he’s starting to develop views of how economic development occurs. So, he ends up writing a large book, which sort of became a classic and development economics on how economies develop, what the basis for economic development are, what the settings for economic policy should be to encourage development. Particularly important question here in Queensland, which was a quite underdeveloped economy at the time.

And as a result, he became a very close adviser to Bob Santamaria, who those diehard fans of Australian politics will know was instrumental in the foundation of the Democratic Labor Party. So, this is the guy who invented a lot of the methodology behind the national accounts. So, when you understand something at that level, when you understand what an economy is, when you know how to measure it, imperfect as that measure may be, you get really rich insights into how an economy is tracking over time. And you get really rich insights as a result that develop over a long period of time of working with these things of what drives economic growth. You can situate those numbers in a history that tells you why the economy is growing, or why it’s not.

Gene Tunny  19:32

Yeah. Where do you get that Colin Clark story from? Is that in that book you keep talking about by, was it Millmow?. 

Brendan Markey-Towler  19:38

Yeah. Alex Millmow, A History of Australasian Economics Thought. I think that’s where I got it from. Yes, it is where I got it from. It’s a really good book because Alex points out that a lot of Australia’s economic contributions to economic thought came from really practical questions like this. How do we measure?

Gene Tunny  19:57

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

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You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  20:36

Now back to the show. Okay, now, I did want to go back to the point you made about the difficulty of well, the issues around the modern economy and the India head, etcetera. There was a great lecture that John Quiggin, who’s a professor at UQ. And if any Australian economist is going to win a Nobel Prize, it’d be John. I mean, he’s one of the most cited academic economists that Australia has. I mean, maybe, Warrick McKibben could win one. So, but yeah, certainly, John is;

Brendan Markey-Towler  21:11

I always like for John Foster personally.,

Gene Tunny  21:15

Well, John Quiggin, is incredibly distinguished economist and his view at the this lecture he gave was that the problem with GDP is that it’s gross, its domestic and its product. Okay, so we’ve already talked about the domestic issue. So, the fact that you could have a lot of production, but if all your incomes remitted overseas, okay, because it’s just foreign mining companies producing and sending profits home, and then you may not see all of that benefit. But the point he was making is it because its product, and it’s measured at market prices, what you could be missing out on is consumer surplus, you’re not necessarily measuring the benefit to consumers, because all of these products are provided for, well, a lot of them for free. But yet, the foreign company makes money out of you in some other ways, because it’s monetizing your attention, isn’t it?

Brendan Markey-Towler  22:11

Yeah. And so, this is a debate that’s been really reopened, it’s been a perennial debate in economics, and there’s a lot of interesting ideas floating around, inspired by it, which is that when we talked about, you know, how GDP is added up, we talked about the exchange, okay. But the only way that we really observe and exchange is by the exchange of money, right? So, the price multiplied by the quantity of goods or services sold. Now, the problem merges; what happens in a world full of freemium models? What happens in a world where the price of a Facebook membership is zero? That sort of kind of, well, I don’t particularly like Facebook. So, you know, I would challenge just how much consumer surplus is creating, but there’s, you know, many people would argue that there is a value added.

Gene Tunny  23:11

I think TikTok is creating the most at the moment. Especially among the younger generation..

Brendan Markey-Towler  23:16

Massively, yeah. the only thing that shows up in the national accounts from Facebook, Google, TikTok, Instagram, is the data sales. That’s the only thing that shows up in the national accounts. I mean, apart from the marketplace exchanges that go on as well in the Facebook marketplace, and so on like that. But really, it’s ultimately the advertising for Google the sales of data from all of them. That’s the only thing that shows up in the national accounts. So, but there’s more than that, as well. Another problem, And Peter Thiel has recently raised this issue.

Gene Tunny  23:53

Oh, the billionaire? Right.

Brendan Markey-Towler  23:57

The chap who founded PayPal, he thinks that we’ve actually had no economic growth or very little economic growth in the past 70 years. And the reason he says that is because he contends that what is observed as economic growth in the past 70 years, is actually just us bringing production and exchange; valuable production exchange that used to happen in the home, into markets. So, cooking, cleaning, keeping the house in order, gardening; all this stuff gets done on marketplaces, rather than in the home. And that’s a bias in GDP. It doesn’t measure that stuff because it’s not on a marketplace. It can’t be observed. So, that’s another argument. 

You know that GDP doesn’t measure the actual value that’s being created. Now, the problem ultimately is, this goes back to a problem of micro economic theory, which is what is utility? And what is consumer surplus? And actually, from my perspective, why I ultimately say, look, let’s stick with GDP. It’s the worst measure we have, except for all the other things. Some countries have toyed with measuring gross national happiness. You know, New Zealand is toying with that at the moment, Bhutan famously measured it. The UN uses the Human Development Index, which is a weighting of GDP per capita literacy rates and life expectancy, I think.

Gene Tunny  25:31

All of which are highly correlated, aren’t those?

Brendan Markey-Towler  25:33

Yeah, and so, that was a March Ascends Brainchild, Jagdish Bhagwati famously said, well, yeah, they’re correlated. So, what are we talking about here? So, all those debates over replacing GDP ultimately, were reduced to a deep, deep philosophical problem, which economists are not well placed to solve, which is, what is value? What is good, what is true, what is beautiful? And I got some views on that. But as an economist, I ain’t got nothing to say about that. And so, when economists start dabbling in it, you kind of go, I used to be a fan of the happiness literature. But now I read and go, ah, this is, you know, it’s very simplistic. We’re going to use subjective wellbeing measures to add up Gross National Happiness. Okay, fine, that’s a really subjective and not very tangible measure. Whereas I can look out the window and see the cranes on the skyline here in Brisbane and see that’s an objective, measurable thing.

Gene Tunny  26:37

Well, it stood the test of time, hasn’t it? So, we’ve been using it for decades now. And there’s a general feeling that it does capture the state of the economy reasonably well. I mean, there are going to be people who grumble about it from time to time, but generally well, in Australia, at least when we had the recession, I mean, I always remember the 91 recession, because I was in high school at the time. And like, things just look bleak for anyone who was in high school and wanted to get a job. But then that was the period when retention rates at high school really ramped up. So, it was it was telling us something important there and it tends to; like it could give false signals, there’s a big debate at the moment over what’s happening in the US. But then look, the economy’s looks like it is slowing to an extent. There’s the impact of the Federal Reserve hikes. So, let’s wait and see how it all plays out. I mean, my feeling is, it’s generally a pretty good indicator of the state of the economy. 

Brendan Markey-Towler  27:38

I look bad, I’m a Queenslander first, Australian second, and as a result, I do have a bias which is towards tangible reality. Right, feelings are very ephemeral. And feelings are important, right? They are very important, but they’re really difficult to measure. And they’re very subjective, and they can be easily manipulated. Now, GDP can be manipulated as well, depending on how you count things up. But at the end of the day, it’s stuff that’s being produced stuff that’s being consumed. And it’s tangible, observable goods and services. So, insofar as I really have a criticism of GDP, my major criticism is that it really; I agree with Peter Thiel largely, biases us away from realizing the value that is produced in a house. 

And look, I’ve got a young, I’ve got a four-month-old son now so and my wife is at home, taking care of that. And I tell you what, that is incredibly mind blowing valuable work that she’s doing; doesn’t show up anywhere in GDP. Now, that doesn’t negate GDP. Because I think the solution to that is really, let’s just realize what GDP is actually measuring. Now, that does work in a political debate, because in politics and the way that the media works, you need a number and you need that number to be growing, otherwise, elections get lost, and so on and so forth. But when you’re, you know, when you’re doing grown up analysis instead of politics, I think the solution is to look at what GDP is actually measuring. It’s not a measure of value and if you think of it that way, then you’re wrong. Stop thinking of it like that. Think of it as it’s a measure of the production of stuff and the exchange of stuff within the economy, within the market that we can observe. Don’t try and start thinking about as a measure of all of the economic activity that ever happens in an economy. Just recognize the limitations, it doesn’t measure this stuff that goes on the household and that’s incredibly important.

Gene Tunny  29:51

Yeah, fair enough. That’s a good point. I’ll have to come in another episode to this issue of what’s in GDP? What’s out? What does it all mean? I’ll try and have that discussion in a future episode because there is a couple of other things I wanted to pick up on from your note; your note reminded me of a couple of things. And it’s the fact that this system is so beautiful, I mean, we end up getting from two different directions, possibly two different sets of data. I mean, we can look at what spend on consumption goods, final consumption goods, now, we have to be careful, we’re talking about final consumption goods and final investment goods, because what we’re trying to do is avoid double counting, we’re trying to get; because there are a lot of business to business transactions, businesses selling to other businesses inputs, so you have to take care of all that and make sure you’re not double counting title output, you want the expenditure on final goods and services. 

So, if you look at that, that ends up telling you what GDP is, once you add exports, subtract imports, because, well, if you import something, then you don’t have to produce it here. So, there could be stuff that shows up a consumption spending or an investment spending that’s imported, and we didn’t produce it here. So, you have to subtract it. And likewise, if we’re exporting something, well, we produced it here, we know we produced it here, then that adds to our output. But then, you look at spending data, on the other hand, you can look at income data. So, you are saying, look at the wages data, look at the profits data. And yeah, I guess it is coming from the ITR. I’m not sure exactly where the IBS gets it from. But I mean, that’s a likely source. I do surveys of businesses.

I’d have to check exactly how much they’re using ATO data, but I know they do surveys of businesses to get that information. They’ve got a household expenditure survey, they’ve got surveys of, well I guess they got their business server; I’d be looking at what they spending on capital goods. Looking at what they’re earning. And so, they build up this picture of earnings that way, and also the gross value added in the business. Which as you described, is their revenue less their production costs, and wages are part of the value added to. So, wages plus the gross operating surplus, is your value added in the business?

Brendan Markey-Towler  32:21

Yeah, it’s a very slippery definition, because it’s not quite profits. But it’s, you know, the value of inputs minus the value of outputs. And that by definition has to be the value that is added by that business to the economy, insofar as we can measure it.

Gene Tunny  32:35

This is because we’re talking about gross domestic product. So, we haven’t subtracted for the depreciation of capital stock, because some of the investment that occurs is just replacing existing capital stock. So, the building wears out and we have to replace it.

Brendan Markey-Towler  32:52

Too hard. We set that aside. Depreciation is very funny thing to talk about.

Gene Tunny  32:56

Right? Yeah. Well, we’ll leave that for now. You got time just to chat about your great quote? I should have brought it in earlier. You use these different perspectives on GDP to provide a really nice summary of what’s been happening in Australia. I thought this was very good. Exactly. Okay, so after you analyze where the growth has occurred, and you know, it’d be good if you could explain this at the moment. You concluded this; to put it somewhat tribally, Australia is less and less a country that derives its wealth from making and building things. Still a country that makes its wealth by digging stuff out of the ground and renting houses, and more and more a country that consults and cares. Could you please explain how you came to that conclusion, Brendan?

Brendan Markey-Towler  33:53

Well, you so what I did there, this is one of the most informative aspects of the national accounts I’m very interested; everyone focuses on the demand side of the economy, because we’re all Keynesian.

Gene Tunny  34:07

What we’ve been heavily influenced by Keynes, yes. There’s no doubt about that, whether we’re Keynesian. So, that’s another question. You can go ahead. Yes.  

Brendan Markey-Towler  34:13

We are all Keynesians. But the supply side of the economy is super interesting. See which sectors of the economy are generating the wealth. Now, the way that you can do that is by looking at gross value add, right. So, then you take the gross value added by each industry divided by the total GDP and you get the share of GDP, economic activity, economic value that is being created by that industry. And you can track that over time. Now, the problem with that data why almost no one really uses it? Some people do, but almost no one does. And you’ve used it, Gene, is that there’s a lot there, the ABS breaks the economy down by I think its 20 sectors. possibly 25. So, you’ve got to kind of cut it down to get some useful insights from it. 

So, the way I did it was alright, let’s cut out everything that’s less than 5% of the economy and look only at things that produce more than 5% of Australian GDP. Now, no sector really produces more than about 15. But there’s a clear standout. And there are clear standout trends once you do that, and you clean the graph up by eliminating all the Martin “minor sectors”. And you see some very strong trends. 

Trend number one that’s quite striking, and I should emphasize, this is all by real data. So, we hold prices constant to see what’s going on at the volumetric level in each of these sectors. So, we hold P constant, and we look at what’s changing in Q. Q is for quantity. And so, there’s benefits and costs to doing that. But it’s valuable as an exercise as long as you’re aware of the limitations of doing that. First interesting thing, manufacturing and construction are in decline in Australia. They’re not producing as much value add. In volumetric terms, they’re not producing as much value add anymore. They’ve been declining for the past 10 years as a share of GDP. So, that’s where we get the view that Australia is less and less a country that makes things and builds things; construction, manufacturing declining as a share of GDP.

Gene Tunny  36:30

So, with manufacturing, we had a car industry once, we subsidized a car industry, we tried to buy ourselves a car industry, and it just could not be viable on its own. And there wasn’t any more money we could throw at it to keep it open. 

Brendan Markey-Towler  36:48

And you look at somewhere like Maroubra or Ipswich. Which would you know, once kind of manufacturing ish areas in Queensland. Maroubra main manufacturing now is government contracts, building bullets for the Australian Army.

Gene Tunny  37:03

And do they build trains, still?

Brendan Markey-Towler  37:06

They do now. Yes, Maroubra now has a trains contract to build trains for the Queensland Government as well. And I think Ipswich still has a little bit of a train industry as well. But really not too much, by the way of price manufacturers. It’s not to say that it doesn’t exist, and it’s not to say that it’s very valuable. Queensland, for instance, has very vibrant medical manufacturing sector. That’s kind of grown up on the back of our extremely good hospitals and medical research. But generally, across Australia, the story is one of the car industries; we don’t really make stuff anymore. It’s just not competitive to build stuff. And so, that number is reflecting something that you see a lot when you go down to Fortitude Valley here, which, you know, the state would like to think Silicon Valley. Yes. Anyway, it’s Fortitude Valley, Queensland Silicon Valley, you see that a lot of the companies there just want to grow big enough that they can afford to offshore their manufacturing elsewhere. And the classic one is, I think Trivium, the electric car battery manufacturer, which is, as soon as they got big enough, they got a loan from the Queensland Government and then went to build factories in Tennessee.

Gene Tunny  38:17

Is that right? Is that a good use of taxpayers’ money?

Brendan Markey-Towler  38:21

Well, I’m completely agnostic on that. So, that’s what’s that number is reflecting. Similarly, construction,  this runs a bit counter to the crane index that we’re seeing in the city at the moment, but construction has been adding less and less to the economy. It’s not just large construction projects, but construction is declining as a share of GDP. 

Gene Tunny  38:48

Well, I’ll have to look at this. But I think what could be explained is 10 years ago, we had that massive project up in Gladstone at Curtis Island where we built the three LNG terminals or what are they? Refrigeration or liquification facilities. They turn the methane that comes from the coal field, the coal seams to liquefy it so, they can put it on a boat economically and ship it to Japan or Korea. And that was like $70 billion.

And it basically doubled the level of capital expenditure in Queensland at the time. It’s absolutely extraordinary.

Brendan Markey-Towler  39:31

There’s a huge effort on part of government corporations to get that going. 

Gene Tunny  39:35

And then in the southern states, maybe a few years later, I can’t remember the time; we had that big apartment construction boom. So, that could be explained. I’ll have to look at the data but go on. 

Brendan Markey-Towler  39:48

And that’s what’s really good about the national accounts is kind of counter to what you’re seeing if you’re walking around, particularly, Brisbane at the moment. The number of cranes in the sky is astounding, but this is why statistics are important because what’s local loss to a particular area is not necessarily true of the entire country. And what’s even true of a particular sector of construction, residential construction, government construction is not necessarily true, it might mean that we’re not building that many mines, which ties into the second point, which is, although it has declined in volumetric terms, the mining sector is still the single biggest contributor to Australian real GDP. And it’s not close, it’s way up; I forget the exact number, but it’s well up towards 10% of the entire Australian economy value added is produced by the mining sector. 

So, that’s, you know, digging stuff out of the ground, selling it to various countries around the world.. Behind that really interesting sector is, is the rental sector. So, a lot of value added in the Australian economy. It’s the only sector that holds candle to mining is the rental sector where people are building houses and renting them.

Gene Tunny  41:03

Okay. So, when you analyzed that, did you look at the industry, is it rental services? Or did you look at what’s in the national accounts as; there’s rental income, isn’t there? What do they call it? Trying to remember what the label is in the national accounts, but they impute rent for owner occupied dwellings as well, in that sector. If I remember correctly.

Brendan Markey-Towler  41:29

Rental services. I’m pretty sure is the exact name of the sector.

Gene Tunny  41:33

Looking at it by industry. Okay. Yeah.

Brendan Markey-Towler  41:36

So, that’s an important point, right? Because rent to also shows up as an income segment as well. Not nearly as big there. But the value add is quite large. And so that’s saying, you know, the Australian economy is very much one that is dominated at the moment, by digging stuff up out of the ground, and then sending it offshore, and providing housing for people. Those are the two biggest sectors of the Australian economy. And then, finally, the very long-term trend, we come to the third part of that bond ma that you so ably quaffed, which is, surprisingly, the sectors that are growing fastest as a share of the Australian economy are; you’ll have to double check me on this, but I’m pretty sure it’s called health care and social assistance.. And professional scientific and technical services. Those have gone quite strongly over the last few years as a share of GDP. 

Scientific and Technical Services is obvious enough, right? That’s the IT department and you know, the lab.

Gene Tunny  42:45

There’s professional too. 

Brendan Markey-Towler  42:49

Yeah. Professional Services is the big one. So, this is your consultancy lawyers. So on and so forth, right. It’s Eagle street, the consulting firms along Eagle street.

Gene Tunny  42:58

Where we are in Brisbane, in the top end of town, would you call it the big end of town? You’re sitting in water from place to the moment and the offices of Hopko Gannon, thanks, again for allowing us to use.

Brendan Markey-Towler  43:13

And so this area is growing really strong. I forget where the legal services are counted among professional service.

Gene Tunny  43:18

But I think I would be Yeah, sure.

Brendan Markey-Towler  43:21

They might be under administration, administrative services. But professional, scientific and technical services, basically, scientific and technical can kind of be in house. But a huge majority of that professional services is consulting, right? So, Australia is doing a lot more consulting as a share of GDP.

Gene Tunny  43:40

And this is business to business, typically? Business-to-business consulting services or business to government.

Brendan Markey-Towler  43:47

Business to government is the big one, especially here in Queensland right now. That’s not backed by a number. But that’s you know, that’s kind of;

Gene Tunny  43:58

There are numbers for the Australian Government. I’ll put them in the show notes, because I looked at what the Australian government has spent on the Big Four consulting firms like KPMG and PwC. And it’s hundreds of millions a year, right? It’s big money. 

Brendan Markey-Towler  44:12

And then, you go step below and the state governments will probably be even bigger again, because every consulting project by the Department of Public Works now gets a cut benefit cost analysis written by one of the big firms, right. So, just because of the procurement rules around that, so professional, scientific and technical services really growing as a segment of GDP, but also health care and social assistance. And so that I would posit is really a reflection of the ageing population. Ageing population, you need more health care and social assistance, certainly. That sector is growing very strongly – aged care.

Gene Tunny  44:49

Yeah. Which is NDIS too, the National Disability Insurance Scheme.

Brendan Markey-Towler  44:53

Absolutely massive, huge boom. You throw a stone in Brisbane and you hit NDIS provider, which is really not good, you shouldn’t do that because that’s naughty. And that getting on the back of Yeah, health departments are in Queensland; Queensland Health is the largest single employer in the state. That’s a massive sector. It’s a $20 billion in the state budget. That’s a big number, right? And we’re always trying to spend more on it. So, very big sector that. So, those are the two real growth sectors in the Australian economy. And again, I should stress by volumetric measures, right? So, notice that that kind of cuts against the mining booms like us, and that goes to the difference between real and nominal GDP. Real being a volumetric thing where we’re trying to hold prices constant, and the reason we do that is because nominal GDP could be growing because the actual underlying productive capacity of the economy is growing, or because inflation is growing. And real GDP tries to say, what’s the underlying volumetric productive capacity of the economy? How’s that growing and contracting. And in that measure, you really see the big growth sectors, mining is actually declining as a volumetric share of GDP as a share of real GDP, but it’s still the biggest by far professional, scientific and technical services, and healthcare and social assistance really, really growing. Yeah, that’s where the saying, that’s where my little trite way of putting it came from. Australia is less and less a country that makes things and build things. It’s still very much a country that digs stuff out of the ground and provides housing, but it’s more and more something of a white collar economy.

Gene Tunny  46:43

Oh, yeah. It’s postindustrial. We’re moving more to services. Yeah.

Brendan Markey-Towler  46:49

Natural I mean, with the natural resources sector.

Gene Tunny  46:52

Yeah. that’s right. And I mean, because the world wants to buy our resources. And for the last year or so, they’ve been paying ridiculously high prices for them. It’s an open question over whether we want to sell it. Right. Well, yes. I mean, there’s the big issues there of course that we don’t have time for.

You’ve been very generous with your time, Brendan

Brendan Markey-Towler  47:22

You are very generous letting me on the podcast to talk to people again, Gene.

Gene Tunny  47:27

You’re a great talker. Always enjoy having you on.

Brendan Markey-Towler  47:30

Even with the bruised throat? Like I told you, I could talk through a wet cement.

Gene Tunny  47:35

Very good. So, any final points before we wrap up?

Brendan Markey-Towler  47:39

No, it just ends up on I ended up with the note of circling back to where we started, which is don’t underestimate the national accounts. They’re a really, really, really interesting data set. They give us such a rich view. We didn’t even talk tonight about how in Australia, they break down by state as well, so, we can get an even richer view of how the different states are doing because you know, Australian economy tracker – my blog.

Gene Tunny  48:06

Okay, right. On Sub stack, is it?.

Brendan Markey-Towler  48:09

Yeah, on Sub stack. Please subscribe and contribute to the Markey-Towler retirement fund. It’s founded on two points, which is that one, the perfect graph says more than a doctoral thesis and two, there’s no such thing as an Australian economy. There’s actually six different city state economies and two territories. So, the national accounts in Australia are amazing, not just because of the depth of analysis, they allow us on the supply side of the economy, but on the demand side as well. We get some really, really rich version. So, a plug to remember has to diehard nerds who didn’t have friends at school, but now we have the national accounts.

Gene Tunny  48:53

I’m sure you had friends at school, Brendan. Brendan Markey-Towler, that’s been terrific. I really enjoyed talking to you about the national accounts. 

Brendan Markey-Towler  

I really enjoyed talking to you, Gene. Thanks for having me. 

Gene Tunny  

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

Credits

Thanks to Josh Crotts for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.auPlease consider signing up to receive our email updates and to access our e-book Top Ten Insights from Economics at www.economicsexplored.com. Also, please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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Podcast episode

US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

US Treasury Secretary Janet Yellen claims the US economy is not in a recession,  despite two consecutive quarters of declining GDP. Economics Explored EP151 guest Darren Brady Nelson disagrees with the Treasury Secretary and argues she is taking a political position. Whether she’s being political or not, Janet Yellen has certainly taken a big risk, as Darren and Gene discuss. Darren and Gene also talk about the review of the Aussie central bank, the Reserve Bank of Australia, particularly how climate change could figure in that review. Darren argues the review team should have a broader range of views represented, including Monetarist and Austrian perspectives. 

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 – Darren Brady Nelson

Darren is Chief Economist of the Australian think tank Liberty Works and he’s also an Economics Associate at the CO2 Coalition in Washington, DC. For Darren’s bio, check out the regular guests page.

Links relevant to the conversation

While it’s the NBER that declares whether the US economy is in recession, this CNBC report notes: “Since 1948, the economy has never seen consecutive quarterly growth declines without being in a recession.”

But many economists are skeptical about whether the US is in a recession, including recent podcast guests Stephen Kirchner and Michael Knox. 

Stephen Kirchner on the US recession question.

Michael Knox’s Economic Strategy: Fed hikes rates, but Fed says no recession (PDF).

Transcript: US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

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

Gene Tunny  00:01

Coming up on Economics Explored 

Darren Brady Nelson  00:05

like to see seemed to have sold or sold for political purposes as the head of Treasury in the US each year is a political appointee. So, that is, to some extent a political position.

Gene Tunny  00:19

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. 

This is episode 151 on whether the US economy is in a recession. Joining me is returning guest, Darren Brady Nelson. 

Darren is Chief Economist of the Australian Think Tank Liberty Works. And he’s also an Economics Associate at the CO2 coalition in Washington DC. As well as chatting about the US economy. Darren and I discuss climate change and the review of the Reserve Bank of Australia. 

In the show notes, you can find relevant links and details of how you can get in touch. Please let me know your thoughts on what either Darren or I have to say. I’d love to hear from you. 

In the show notes. I’ll include links to some great commentary on whether the US actually is in a recession from two previous guests, Michael Knox and Steven Kirschner. So, make sure you check those links out. 

Right on, for my conversation with Darren. Thanks to my audio engineer, Josh Crotts, for his assistants in producing this episode. I hope you enjoyed it. 

Darren Brady Nelson, Chief Economist at Liberty works. Welcome back unto the program.

Darren Brady Nelson  01:35

Thank you. Good to see you. I guess it’s been a while since we last spoke about Work Capitalism, I think.

Gene Tunny  01:41

Yes, that’s right. That was a few months ago. So yes, it’s good to catch up again. This is a 151st episode, and this is your 11th appearance on the show if I’m counting correctly. So yeah, we get around to another chat every 15 episodes or so. So, it’s about time to catch up with you. So, it’s great to have you on the show again.

Darren Brady Nelson  02:06

Yeah, congratulation, because I’ve been so prolific. 151 That’s great.

Gene Tunny  02:11

Yeah, well, it’s just drip by drip, really. It’s one per week, and they mount up, yes. Thankfully, we’re out of the COVID period, although I had it recently. And I was in isolation, but we’re over all of that craziness which was dominating the conversation for a while, and now we’re getting on to other issues. 

Okay, so I thought we could chat now about the US GDP figures and we had some big news last week, in Australia. You’re still on Saturday there; I think Darren, there in the states in DC. And now we’ve got two consecutive negative quarters of GDP growth. So, GDP grew at an annualized rate or didn’t grow, it fell at an annualized rate of 0.9% in the June quarter, and that followed a decline of, I think it was 1.6% in the March quarter, that’s at an annualized rate. Okay, so there’s a big debate about whether the US is in recession or not. Darren, what do you think? Is the US in a recession at the moment?

Darren Brady Nelson  03:26

Well, yeah, I would say so. I must admit, in this conversation, certainly, you’re going to be more expertise than I. You’re a guru of sort of macro-economic indicators, and all that, particularly from your treasury background, but other things you’ve done, too. So, maybe I’ll be asking you some questions, too, and hoping to get some answers. But yeah, I’m not sure; maybe you know the answer to this, but, the entire time I’ve been, first studying economics and being an economist, putting aside the debates on whether two consecutive quarters is the greatest definition or not, it seems to have been the definition for a long time. And the most interesting thing I’ve seen recently, and I guess this would have been headlines, I imagined in Australia as well, was the Biden administration going. No, no, that’s not really the technical definition of a recession. 

I don’t think I recall an administration, democrat or republican ever; they may come up with excuses and say, it’s not well, it’s not our fault. It’s the previous administration and all that sort of stuff, or you know, external circumstances. But this is really the first time someone’s ever, including, some of the economists that the Biden administration has. On record, obviously, talking about in the past that yes, the recession. You know, the technical definition, if you like, is the two consecutive quarters of negative growth. So, it’s been very interesting times. Again, I guess in the 2020s, including a lot of media organizations and our favorite, sort of Neo Keynesian Economist, Krugman coming out and also defending that the Biden administration on oh, well, it’s not really a recession. So, it certainly fits the technical definition that, if you’d like I grew up with. And, that’s certainly my impression, just actually being in the US. Is it dire just yet? Yes. On the inflation front, yes. But unemployment, still is fairly low. And putting aside the fact that participation rate, that’s a little bit of a worry, but the unemployment rates not so bad at this stage. And usually, obviously, that’s, if you’d like a key secondary indicator, besides GDP itself, that people usually turn to right away, before they maybe dig into, what aspects of GDP have gone down, energy manufacturing, etc, etc.

Gene Tunny  06:02

Yeah. Okay. So, there are a few things you mentioned there, Darren, 

Darren Brady Nelson  06:09

So, yes. Not a strong yes. So, yeah, I’d say yes. Technical definition? Kind of weak, yes in a kind of more judgement point of view.

Gene Tunny  06:16

Yes. So, you referred to what the White House was saying, and what Janet Yellen in the Treasury was saying. So, I might just read that out. And then we can go from there. And I can let you know what I thought about that. 

So, what Janet Yellen said and this is reported by the Financial Times. “The White House has maintained that the US economy is not at present in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be amazed if the NB declared it was okay.” So, what she’s talking about there is the National Bureau of Economic Research, which is I think it’s attached to; is it attached to Harvard or MIT or one of those East Coast universities? There’s this elite group.

Darren Brady Nelson  07:01

I think it’s independent. I mean, look, I don’t know, but I think it’s more independent than even being associated with one particular university, I think.

Gene Tunny  07:10

Yeah, I think you’re right. Yeah. But it’s an elite group of macro economists, some of the top people and you’ll have some of the leading lights of economics on it. And they will date the business cycles, they will declare whether the economy’s in recession or not. And generally, what they’re looking for is a sustained downturn that lasts several months, so more than one quarter. And they look at a broad range of indicators. So, it’s not just GDP. But that having said that, it looks like GDP is an important part of it, because it’s that comprehensive measure of economic activity. 

And one thing I noticed when I was preparing for our chat, is there was a report from CNBC, where it noted that I don’t think there’s ever been a recession that the NBR has called, which didn’t have two consecutive quarters of GDP growth, if that makes sense. So, where’s the actual passage? 

Darren Brady Nelson  08:21

I think that’s not correct. I think they call the recession, during the pandemic, and that wasn’t two quarters, I think. So, they do have a bit of leeway. But they tend to usually use the two quarters as part of the definition as a key component.

Gene Tunny  08:38

Okay, look, I’ll have to check that, I thought I read that earlier today. I had that somewhere here in my notes.

Okay. So, we might go back to what Janet Yellen, what she said here. She underscored the message at a press conference on Thursday, emphasizing that the economy remains resilient. Most economists and most Americans have a similar definition of recession, substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain. In some abroad-based, weakening of our economy. She said, that is not what we’re seeing now. 

Okay. It seems to me that’s a pretty risky call from her because she is running the risk that the NBA does eventually define this as a recession. And that’s going to be incredibly embarrassing for the administration. So, yeah, that would be my sense of it. I think it is a big call from Janet Yellen. And it may be too early to tell. But look, there are a lot of Economists out there who seem positive about the US economy. But that said, it does appear that I mean, is it the interest rates, is it what the Federal Reserve’s been doing that’s causing issues? Is it inflation that’s hitting Consumers? What do you think are the main forces affecting the US economy at the moment, Darren?

Darren Brady Nelson  10:06

Yeah, I think, you’ve definitely touched on two key components. But just to comment on Janet Yellen. But you know, Janet Yellen was totally wrong on inflation. So, that didn’t seem to impact her credibility within her circle that she goes around with, and the people who hire her; that didn’t seem to make any difference. So, probably when she’s proven wrong on recession, which I think she already has been. Yeah, I mean, that inflation is like, one of the key things; it’s the biggest problems in the US, and obviously, even the Federal Reserve, which has been; our Federal Reserve is part of the process of creating inflation. So, they’ve gotten spooked. Biden administration itself has not, which they, at least publicly, they keep on, they don’t seem to be, they acknowledged it a bit, but they don’t really kind of acknowledge it as bad as, even though the official statistics are showing. So, you have, like, I guess we’ve talked about this many times, but, you have kind of two things going on at once, the unprecedented levels of money printing, and the credit that goes with it, which, if you’d like, from a macro point of view, is hitting the demand side. And then on the supply side, they’re doing all sorts of, the Biden administration’s policies are just hurting supply, and hurting productivity and competition. 

So, that can sometimes, make up a lot for that money printing. The supply side can react to it, and really dampen what, it’s for the money to the demand side of things. So, energy is a classic one, they had a complete 180 on their energy policy. So, the US went from the number one energy producer in the world to not that anymore, and, record time, essentially?

Gene Tunny  12:08

And is that the Biden administration’s fault in your view?

Darren Brady Nelson  12:12

Well, exactly. It’s not just their fault, that is literally their policy. You know, they’re going for the green transition, if you like, come hell or hot water, right? So, which includes, not allowing oil companies to extract oil and all sorts of things. Oil, natural gas, coal, etc. And they’ve also hit agriculture with bad policies as well. You know, manufacturing; yeah, literally, if you want to destroy an economy, the Biden’s administration is basically ticking all the boxes with their policies. And, putting aside, you can argue whether that’s intentional or unintentional, but I think there’s not too many, if you like, remotely free, market friendly economists who think the Biden’s policies are particularly good.

Gene Tunny  13:10

Right, okay, I’ll have to have a closer look at some of the policies and come back to that. I just want to go back to that definition of recession; I think I might have missed or may not have communicated properly what that factoid in that CNBC report was. So, what they were saying was that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. So, they’re not saying that, there could be recessions if you don’t have this, and that’s what you were saying with the pandemic, that was, like you could call a recession, if you don’t have the two negative quarters. But what this point is, is that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. The NBER ultimately, has declared it a recession. So, you can have a recession, even if you don’t have the two quarters, but every time you’ve seen it in the data, the NBER has ultimately called it a recession. So, what Janet Yellen has done is, yeah, that’s a really big call on her part. And, I mean, Janet Yellen, someone with a distinguished academic reputation, and yep, so really, really big call and potentially, it will backfire on her. We have to wait and see about that. Yeah.

Darren Brady Nelson  14:38

Janet Yellen in not going to make, you know, like she’s she seemed to have sold or sold for political purposes. Not unusual that; it’s not like this has never been seen before. Most of her sort of, like topics when she gets into public is less focused on inflation and recessions and she’s talking about equity and diversity and inclusivity and all that sort of stuff. Well, I guess as the head of Treasury in the US, each year is a political appointee. So, I guess, that is, to some extent, a political position. Although, usually in the past, it’s been Department of Justice and Treasury have, usually been less partisan, if you like. The people regardless of whether it was democrat or republican in charge, but you know, things have changed quite a bit. Certainly, this century and certainly in the 2020s.

Gene Tunny  15:33

Yeah, exactly. Okay. So, you mentioned the supply side before, well, one thing we’ve had in Australia here is just the ongoing disruption to supply chains. And I mean, the random things just been unavailable in the supermarket’s. Quantas seems to have lost its mojo; can’t seem to run a flight on schedule any time anymore. And partly, that’s because they lost people during the pandemic. And now we’ve got people on isolation leave, like if you get COVID, you have to isolate for seven days, and that’s disruptive. Things just don’t seem to be working as they once did. Is that the same in the States? Have you noticed that in the US?

Darren Brady Nelson  16:21

Yeah. I think some extent, less. Although I understand aviation has been kind of bad here, too. But I haven’t actually been, I’m just going on to sort of news reports and talking to other people that, yeah, they’ve had, things. Well, what happened in the US probably, maybe more than Australia is a lot of pilots, either were, let go or just left because they didn’t want to get the vaccine, right? And the federal government has a bigger say in aviation than they do and other industries, for instance, particularly on employment. And so yeah, that’s all contributed, including also I understand, not just pilots, but other people in the aviation industry, various hubs, the people needed at the airports and the hubs as well, similar sort of circumstances. The supply chain disruption in general, I haven’t noticed it as much in terms of like at the grocery store, there was a period where there was a little bit of that. Not as bad, but certainly, there were issues as well, in the US, perhaps, maybe not as bad in terms of like, grocery stores and whatnot. 

So, the 2020s have been very weird times. And I don’t think it’s some sort of like natural market outcomes as such. Obviously, markets wrecked, and they impact, but I think there’s just the amount of, really over the top interventions and status sort of policies in the 2020s have taken me by surprise. We’ve been prepping backwards, if you like, towards bigger and bigger government, and I think, reaping the rewards. I don’t know why people, even people who; seasoned economists, who should kind of, know better, the more the government does stuff and interferes, the worse things get. It literally, is becoming, more and more like an Atlas Shrugged world. I don’t know if you’ve read Atlas Shrugged; probably familiar with the premise anyway. It’s like that. I’m like Atlas Shrugged there, but, there were places to escape to in that world, the fictional world of as many, as you can see, in this world, when, all the governments are, have uniform sort of policies on COVID and uniform policies of not tackling inflation, and all that. And maybe it will be interesting to see if the elbow government copies the Democrat lead, which I suspect they will, if Australia gets two quarters of negative growth, they’ll go that’s not really a recession, we’ll be interesting to see if they go down that road as well.

Gene Tunny  19:12

Yeah, one thing that we’ve traditionally relied on to keep the economy growing is migration, just the addition of people and that those consumption, and so that’s starting to pick up again. Possibly, that try and redefine it. I mean, I don’t think we’re at risk of that at the moment. Although having said that consumer confidence has dropped with the higher interest rates, so people are freaking out over just the increases in interest rates we’ve seen already, because it looks like they just borrow lots of money when interest rates were really low. The Reserve Bank, Governor, I couldn’t believe it. Last year, he was saying, oh, the interest rates will; our official cash rate will stay at 0.1 until 2024. And arguably, he misled people. And so, I mean, he really has a lot of questions to answer for. And there is the Reserve Bank of Australia review, which I’ve talked about in this program. I don’t know if you’ve had a look at that at all, Darren?

Darren Brady Nelson  20:22

No, no. Give me a synopsis of what drove that. And what’s happening? 

Gene Tunny  20:28

Well, the RBA has been under a lot of criticism in recent years for different reasons. There’s been one group of economists who’ve been critical of it, because they argue that they didn’t; that they had interest rates too high in the lead up to the pandemic. Now, whether that’s true or not, I think it’s debatable. But I’ve had people like Peter Tulip and Steve Kirschner on the show. I mean, they’re very good economists. I think it’s worth considering their view for sure. 

Their argument is that if you’re trying to achieve the inflation target of 2 to 3%; they were arguing that because inflation was actually lower than that, you had scope to have looser monetary policy, lower interest rates, to have more employment growth. And there was some modelling that was done by Andrew Lee, who’s a Labor Party MP and a former and new professor, and Isaac Gross, who’s an economist at University of Melbourne, I think. And they showed that if the RBA had met its inflation target, if it had lower interest rates and let the economy grow faster. You could have had; I think it was like 250 to 300,000 more jobs in the economy. So, there were a group of economists criticizing the RBA from that direction. And they were saying that the RBA was too concerned about households taking on too much debt. So, they didn’t want to put interest rates lower. 

I could see why the bank would be concerned about that. So, that’s why I’m not fully on board with that criticism of the bank. That said, I think it is good to review the Reserve Bank, because it is a bit of a; it’s not exactly transparent what they’re doing. So, I think there could be greater transparency. And since last year, when Phil Lowe was making those sorts of bold calls, that turned out to be wrong within months, right. It was obvious that we’re in the in the new year when we started getting those inflation numbers that the Reserve Bank would have to act. So, I think they lost a lot of credibility over that. 

So, it’s important now to have this review. And they’ve appointed Caroline Wilkins from, she’s a former Deputy Governor of the Canadian Central bank. They’ve got Gordon De Brouwer, who’s a former bureaucrat, I worked for him when he was in the treasury. And he was also at a new at times. He’s good. He’s good value. And Rene Fry McKibbin, who’s a professor of Economics at ANU. 

They’re going to review the board like there are issues to do with board composition, who’s on the board? There are issues to do with the inflation target; but I’m not sure they’ll do much about that. They might tweak some of the language. And then there’s issues to do with the transparency of the board’s decision making; what do they release to the public every month? So that’s essentially what the review is about and I think it’s, it’s a good thing that they’re doing that. So, yeah, that’s it. So, yeah, it’s worth definitely worth keeping an eye on. 

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

Female speaker  24:01

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Gene Tunny  24:30

Now back to the show.

Darren Brady Nelson  24:33

So, are they the reviewers? Are they sort of, left or center, for the most part, like a Keynesian and MMT and, something else or what? What’s the story there?

Gene Tunny  24:47

I’d say the typical mainstream macro economists. So, however you’d like to characterize that, they’re definitely not MMT. If you had to give them a label, maybe you give them a new Keynesian label, possibly. But yeah, they’re not I don’t think they’re radical in any particular direction. They’re nonpolitical appointees, which is a good thing. One of the big questions and something that I think the Prime Minister, Anthony Albanese, Albo, as we call him, one thing he will be, he’ll be getting pressured to put a trade union representative on the board. So, they’ve had one in the past, I think Bob Hawke, our former Prime Minister was on the board in the 70s, when he was the head of the ACTU. 

And then we’ve had various other ACTU secretaries on the Reserve Bank Board. There are some people pushing for a regional rep., but, one thing that Peter Tulip, who’s Chief Economist at Centre for Independent Studies has been pushing for is, he said that the problem is, we don’t have enough people who know about inflation and monetary policy on the board. And so, we need more of those people. We need more, it’d be better to have more economic experts or economists on the board.

Darren Brady Nelson  26:05

Yeah. And maybe, also further, how about a variety of use, and not just the one kind of, you say, mainstream, and but that’s still a worldview, it’s still a way of looking at things. And it’s not the only way of looking at things. The combination of, essentially New Keynesians, for the most part, with maybe a little, like 80-20 Keynesian monetarist; that’s maybe what, most mainstream sort of, macro folks, that’s kind of what they’ve learned and whatnot, be good to have somebody else. Have an Austrian point of view, have maybe a full on monetarist point of view, whatever; just something that’s not just the one point of view, , so it’s not just Tweedledee and Tweedledum, every time either on the board or this review.

I’m not saying these people aren’t smart, or anything like that; the three people you mentioned, but I suspect there’s not going to be a whole lot of push and shove between the three. 

Gene Tunny  27:04

So, I think the review in a way, presumes that there won’t be radical changes. The Reserve bank is going to continue as an institution, we’re still going to have Fiat money. Is that the sort of thing that you think should be up for review, that we should be looking at something more fundamental?

Darren Brady Nelson  27:25

Well, at least you have one person on there who can be the dissenting voice to say, something like that, but I’m saying, even if it was, say, one Keynesian, one monetarist, and one Austrian, I think you might get a pretty decent review out of that, with the monetarist if you like, in between the two, to some extent. 

So, you still have 2 – 1, want to keep a central bank going, but we just, good to kind of be realistic about, what a Central bank does and what inflation is, what monetary policy is, all that sort of stuff. That’s fine, if the board, I’m not saying, the board should be all full of economists, even if it was a mix of those types of economists, I think it’s fine to have some other, you know, depending on how big the board is, you know, there would be room, I guess, for a union and a business representatives and maybe some other stuff as well, that’s fine. 

And then they should also review, also the goals of the Reserve Bank; what’s legislation. There’s a lot of stuff in there besides inflation, maybe, just to look at it, and kind of whether all that needs to be in there, or whether there’s should be a better balance, or you should prioritize and go, inflation is number one, and then something, that type of thing. It’d be great. 

A lot of these reviews aren’t all that genuine, they already have a political goal. I mean, you say they’re not political, but it always is, you know, to some extent, they’re under certainly under pressure anyway, regardless of who they stick in there to review things. Now, in the past, some of these reviews have been a lot less political than others, there’s always a political element, like the competition policy review wasn’t particularly political, but there’s always a little bit of an aspect to it, of course, I’d be surprised if they’re not under, some fairly great political pressure to start going beyond and started looking at, kind of cultural war type stuff, too, that they want to ingrain, sort of, race and gender and all that other stuff. I’ll be I’ll be pleasantly surprised as if that isn’t going to be a part of the review.

Gene Tunny  29:37

So, as far as I’m aware, race and gender won’t be at this stage, I don’t think. But one thing that possibly will be, now whether there’s a culture war issue or not, I don’t know. I think I’m not sure it’s, I guess there are aspects of it that are part of the cultural war but the debate about the climate. So, Warwick McKibbin, who is he’s a Professor of Economics at ANU, and he’s actually the husband of one of the reviewers. But you know, she’s independent of; she’s her own person… Renee Fry McKibbin; she’s Warwick’s wife. 

Darren Brady Nelson  30:22

Actually, by definition, at least the old school definition marriages, you’re not, you’re one flesh. But anyway, I understand what you’re trying to say. 

Gene Tunny  30:29

Okay, yes. So, I don’t think she’ll necessarily go along with Warwick’s view. But Warwick was at the conference of Economists in Hobart two weeks ago, where I caught COVID. And, it was a good conference other than that, it was a great conference.

Darren Brady Nelson  30:46

And super spreader of it.

Gene Tunny  30:49

Yeah, that’s right. And Warwick was on the panel. And now we’re talking about the Reserve Bank review. And one of the points he made is that we may have to amend actually, I think he’s saying we will have to amend our inflation targeting settings or our goals or objectives. We’ll have to amend that to incorporate climate change, because we have to recognize that if we’re going to be responding to climate change, we’re going to introduce a carbon price and one that increases over time. So, that’s what you need to have that sort of lowest cost adjustment path. So, to minimize the cost of adjusting to climate change, you’ll need to have a carbon price that increases and so that’s going to be increasing prices. So, you’ll need to look through the inflation, you’ll have to ignore the inflation that comes from the carbon price. So, I think culture war issues won’t come into it. But I think the climate change will come into the RBA review.

Darren Brady Nelson  32:01

Okay, well, that’s good to know. It’s terrible news. But it’s not surprising though.

Gene Tunny  32:06

But doesn’t it make sense what Warwick is saying? I mean, if a government does introduce a carbon price, and you’re going to have increasing prices because of that, then that’s not really inflation that the Central bank should be concerned about. What do you think of that perspective?

Darren Brady Nelson  32:25

It still should be concerned about it, even if, you know; this is all about thinking about the costs and benefits. It sounds like, just assuming, okay, well look, we’re just not going to worry about the downside of our carbon tax and our climate policies, because it’s such a, unquestionable good to pursue this. That’s ideology, that’s not economics, that’s really bad economics. And it’s also bad constitutional law, like, to what enshrine you know, certainly a very long-standing fad, of the climate sort of industry. But, the concept of inflation is something that stands the test of time. You can disagree on various aspects of it, but it’s always going to be, to the extent you’re going to have monetary policy, inflation is going to be an important thing to be thinking about, right. Climate change, may not be. 

I’ve been following this debate since the mid-90s. And, I can tell you; well, just look at the polling, I can’t speak for Australia, but in the US, it’s something along the lines of; it’s well outside the top 10 of topics that people are concerned about in the US, for instance, then you want to start because, elites like him, are in a position to influence these things. They want to shove in the things that they care most about. And I think it’s just atrocious to think you can stick that into the Reserve Bank act. I assure you another government can come along and potentially change that if they want, if the electorate says, alright, you’ve been trying to convince us that the end of the world has been coming for 30 years, it hasn’t arrived, we no longer trust you. Sure, that might happen. And then, government could change things, but you know, so it’s a bit hard to change stuff in legislation, a lot of damage can be done in the meantime.

Gene Tunny  34:20

Okay. So, on where is where they’d make the change? It probably wouldn’t be in the act, they would have it in the agreement between the treasurer and the Reserve Bank. If I remember correctly, I think the general view on the Reserve Bank act from the late 50s was that, look, some of the language is a bit outdated. But you know, maybe leave that alone, you can do all you need you want to do within the agreement between the treasurer and the Reserve Bank. So, I think that’s where they would adopt something like that. 

Just on that Reserve Bank Act, I think what they talk about in that is that the Reserve Bank is supposed to set monetary policy to have a stable currency to achieve full employment and to promote the prosperity of Australians or something. Something broad like that. Yeah. So, they’ll probably leave that and they’ll do whatever they want to do with if they did want to put some wording in about climate change, it’ll probably be very vague, because it is all very vague. We don’t really, I mean, I’ve got no idea what’s going to happen here in Australia. Politically, it’s, it’s such a vexed issue. And you’re saying is not in the top 10 issues in the US, it’s certainly in the top 10. It’s top five; top 3 here in Australia. 

I mean, the previous government lost Blue Ribbon seats, seats that it’s held for decades, seats in affluent areas of Sydney and Melbourne. And it lost them because of climate change, because people in those seats are extremely concerned about it.

Darren Brady Nelson  36:07

Yeah, there’s a different point of view. Certainly, they did, but I wouldn’t extrapolate to say that means Australia as a whole has the same views as these inner-city suburbs, they’ve just changed the demographics and the ideological viewpoints of these people. That’s why they lost. Just like we’ve seen around the world, it’s the rich and upper-class professionals who gravitate towards status policies and status causes, like climate change. The working class, and in the middle, and lower middle classes do not. And electoral politics, isn’t just a straight representation of what the entire nation views necessarily. And putting aside the fact that the polling is often biased and bad and misleading and all that sort of stuff, but that decide. 

I’ve seen some other people who; intelligent Australian commentators, James Allen, and people like that. We’ve been having a bit of look at that, to see whether, that mainstream narrative is actually true. They certainly lost obviously, those seats, they were blue ribbon, but they’ve been changing and moving left for a while now. So, particularly in the US, how climate change is almost really a non-issue from a broad electorate point of view, not any specific electorates. 

Yet, that doesn’t stop the policies from carrying on and then you have all these perverse outcomes of like, I imagined Albanese will get more copy a lot of what the Biden administration so, the push for electric vehicles. Well, electric vehicles are still being produced by coal and natural gas, you know. So, you’re really in many ways, you actually might even be increasing carbon dioxide emissions through transitioning to electric vehicles from petrol vehicles. And the fact is, most of the world is actually increasing the use of coal, mostly India, China, Brazil, etc. And there’s even been a coal like I said, there’s been a coal comeback, even in Western countries as electric vehicle usage gets ramped up. So, these people don’t go, oh, no, we; the same people who say there’s an existential problem, keep on producing, keep on pushing electric vehicles, for instance. So, that their actions speak louder than their words that it isn’t really an existential crisis. Putting aside the fact obviously, all these elites tend to keep on buying beach side homes and all these sorts of stuff. I think just look at their actions, speak much louder than their words. 

So, we’re getting this system where we get a worse electrical system because they keep on showing throwing more and more unreliable and expensive renewable energies on top of it, yet, they’re not actually starting to take much of the load of electricity production, they’re just sitting there costing more money and hurting the rest of the system. Yet, we’re still relying, and we’re going to keep on relying on coal and natural gas and the only renewable energy we’re going to lie and it’s going to be, water – hydro. Putting aside the fact you know, allow many new hydro to be built, but it’s bloody reliable. In the US, if it wasn’t for Quebec, all the hipsters in New York would be having more blackouts because they’re running on water; hydro from Quebec coming down into the US.

Gene Tunny  39:55

Where is that is that near Niagara Falls, or is it is that up in that Region.,

Darren Brady Nelson  40:00

Yeah. Quebec is like, the king of hydro in that part of the world, not just for Canada. In fact, Quebec is mainly supplying electricity to the US, part of the population that’s bigger. And that sort of the northeast of the US. So, that’s kind of insulating on, they can shove on some more solar panels and wind, but that’s not really generating a lot of electricity. And we also have the perverse effect from the main thing that, besides all the kind of pollutants, actually the toxic sort of, chemicals, and all the stuff that it’s needed for electric vehicles, needed for solar panels, needed for wind turbines, which obviously have detrimental environmental effects. They need coal, natural gas, and hydro to make those things in the first place. Not just to be the ones that really, supplemented when the wind’s up blowing, and the sun’s not shining. But if it wasn’t for all the fossil fuels, it couldn’t even build this stuff in the first place. So, all you’re doing is shoving all this stuff, people making a lot of money. A lot of people are virtue signaling, sort of, they keep on crying wolf for what, like 30 years now. There’s, nothing; there’s no significant evidence that we have a problem. 

Gene Tunny  41:15

Well, I’ll push back and say we just had a 40-degree Celsius day in England that they’ve never had in their whole history. 

Darren Brady Nelson  41:23

That’s not true. You go back, and we look at the Paleo challenge. You look at the evidence. For instance, in the US, this damn out in the Colorado River is having; it’s because of climate changes is at its lowest level, lo behold, a study, two weeks prior to them making such statements show that they’ve had more levels on the Colorado River 2000 years ago. 

We’ve had warmer periods, we’ve had more carbon dioxide in the atmosphere in times. No, none of this is accurate. It’s all cherry picked to scare the poop out of people to accept these policies they want anyway. And you watch it when we’re old men, we’re going to be the people will go yeah, we’ll look okay, this thing didn’t happen. But I think it was the right thing to do anyway. 

You hear that a lot, even now. They go like it will even for wrong, it’s the right thing to do. How’s it the right thing to do to make people poor? And have people in Africa starve? How’s that the right thing to do?

Gene Tunny  42:22

Okay, so in a future episode, we’ll have to come back to this, Darren, and we’ll see where we are with the with the data.

Darren Brady Nelson  42:28

You want to see the green policies and action? Look at Sri Lanka.

Gene Tunny  42:31

Yeah. Look, I’m not advocating for these policies, necessarily. Yeah. But I do recognize;

Darren Brady Nelson  42:42

That’s not about you, that’s just kind of aim at whoever’s watching this. It’s like, you want to see the future? The potential future? That’s Sri Lanka. That’s the way Australia could look, if they’re not careful.

Gene Tunny  42:55

And what did they do? They actually required organic produce, did they? Did they ban the importation of some fertilizers or something?

Darren Brady Nelson  43:07

Yes, fertilizers. Fertilizer was the main thing using green organic things instead of actual fertilizer. This is what’s happened in countries like Sri Lanka and African countries is to get their aid money. They do the green agenda, essentially. And it’s just a disaster.

I’ll tell you the countries that won’t be, it won’t be China, it won’t be India; the bigger countries that don’t need the foreign aid. And there’s also strategic implications, obviously. Who controls the green energy market, ultimately? China – communist China.

Gene Tunny  43:51

They are producers of a lot of the solar panels. That’s correct. Yeah.

Darren Brady Nelson  43:54

They are almost a monopoly on this, and increasingly, all the support technology for it as well. So, in China, this is not a coincidence. It’s not like, oh, the market chose China, they were just the best people to do it. This is like, this is a plan. It’s a strategy by the Chinese government, and you can see it’s written down. There are books written on this by them to say, oh, this is what we’re going to be trying to do. That basically, it’s their mind calm. So, don’t be surprised, when some of this stuff comes true. 

They have a plan that the Chinese economy is not a free market economy by any stretch of the imagination. You know, it’s a government controlled run for the purposes of, for the benefit of the Communist Party and the strategic interests of China. It’s not like you’re dealing with the Netherlands, that sort of thing. So, that’s also a huge thing. Because they’re an aggressive military power. 

When the time’s right, they’re going to take action. Taiwan and whoever else, eventually over time gets in their way. So, to aid and abet this through these green policies that are aimed at a problem that doesn’t really exist or certainly not in the scale. And certainly, even if the problem doesn’t exist, too deep, to essentially decarbonize the economy is just like literally the worst solution for it. And to decarbonize it in a way that, benefits China immensely. These’re just terrible policies the whole way through and people hopefully one day will be held accountable for this.

Gene Tunny  45:46

Right, okay. We might go back to GDP just before we wrap up, and yeah, I think I agree. There’s a big debate to be had about those policies for sure. I mean, from Australia’s perspective, given that we’re such a small part of the world, doesn’t make sense for us at this stage to adopt those policies on a large scale. My view is we should try to cooperate internationally. But we need to ensure that other countries are following through with their commitments. And I’m not sure that that has always been the case, or it is the case. So, that my perspective on that. 

On GDP, I guess the view is that; my sort of thought is that, Janet Yellen certainly went too far. The US possibly could be in a recession, despite the fact that jobs growth has been strong, despite the fact that you’ve got unemployment at 3.6%, you could be going into; you could be in a downturn. The GDP figures, if you look at the composition of them, you had inventories falling, that was a big part of it. So, businesses were selling goods, but they weren’t replacing their inventories. So, that could be a signal that they’re not expecting; they’re worried about the future, about future sales. We had a drop in residential construction. That was one and that’s probably driven by the increase in interest rates. At the same time consumption spending was up. So, that’s why the summer economists are thinking it’s a bit of a mixed report. And we’re not entirely sure, but my take on it would be the GDP numbers are definitely something be concerned about and Yellen probably went too far when she said, we’re not in a recession. I think that certainly could come back and bite her. 

Darren, do you have any final thoughts on the GDP numbers? Or where the US economy is that?

Darren Brady Nelson  47:55

Pretty much agree with what you just said. And obviously, time is going to tell. I think the bad ministration policies are very bad. And that’s going to come home to roost. So, I think, it’s not going to be good times, economically for the US and if it’s not good times, economically, for the US, it’s not worth it. China is obviously a major player, but it’s not the engine of growth for the world just yet. The US still pretty much is. When the US sneezes, everybody catches a cold.

Gene Tunny  48:39

Yeah, that’s right. I remember that. That was a popular saying in Australia, at the Reserve Bank and Treasury. So, yeah, absolutely. 

Okay. Darren Brady Nelson. Thanks so much for your time. It’s great to catch up, yes. And I look forward to chatting with you again in the future.

Darren Brady Nelson  48:58

Always great to be on your show and see you, Gene, thank you.

Gene Tunny  49:02

Thank you. 

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

Credits

Thanks to this episode’s guest Darren for the great conversations, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au

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