Categories
Podcast episode

Uncovering the Secrets of Valuing and Selling Businesses w/ Arthur Petropoulos, Hill View Partners – EP211

Show host Gene Tunny is joined by Arthur Petropoulos, founder and managing partner of Hill View Partners, a company specializing in mergers and acquisitions, business sales, and capital advisory services for middle market companies. They discuss how Arthur finds, values, and sells businesses, as well as the wider economic impacts of his work and the role of private equity. They also explore whether we should be concerned about modern-day Gordon Gekkos and how the business landscape has changed since the 1980s. 

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.

YouTube clips

What’s covered in EP211

  • Business sales and capital raising with Hillview Partners. (1:22)
  • Business brokering process and outreach strategies. (5:18)
  • Business valuation and acquisition strategies. (8:10)
  • Buyers and sellers in mergers and acquisitions. (14:47)
  • Business sale process and foreign investment constraints. (17:34)
  • Selling a business, focusing on narrative and information sharing. (24:18)
  • Private company sales and legal risks. (28:00)
  • The role of capital markets in the economy. (38:05)
  • Private equity’s role in the economy, including pros and cons. (44:10)

Links relevant to the conversation

About this episode’s guest Arthur Petropoulos:

https://hillviewps.com/leadership/

Arthur’s YouTube channel:

https://www.youtube.com/channel/UCZu4Nl6i5IseEJBqp1IPd3g

Hill View Partners social media:

https://www.linkedin.com/company/hillviewpartners/

Transcript: Uncovering the Secrets of Valuing and Selling Businesses w/ Arthur Petropoulos, Hill View Partners – EP211

N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It was then looked over by a human, Tim Hughes from Adept Economics, just in case the otters missed anything whilst they were munching on fish. 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

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. I’m delighted to be joined this episode by Arthur Petropoulos, Founder and Managing Partner of Hill View Partners, which specialises in mergers and acquisitions, business sales and capital advisory services for middle market companies. We talk about how Arthur finds businesses to sell, how he values them and how he sells them. We also talk about the wider economic impacts of the work he does and the role of private equity. Should we be concerned about modern day Gordon Gekkos or were the 1980s different from today? Okay, let’s get into the episode. I hope you enjoy my conversation with Arthur Petropoulos.

Arthur Petropoulos from Hill View Partners, thanks for coming onto the show.

Arthur Petropoulos  01:22

Good to be here. Gene. I appreciate it. I like, contents great, listened to a bunch of it and happy to add to the archives.

Gene Tunny  01:30

Excellent Arthur, what I’m looking forward to is learning a bit more about what you do and in Hill View Partners and the broader community that you’re part of the broader industry. One of one of my favourite podcasts is David Bahnsen’s Capital Record. And David’s someone who’s always talking about the strength of American capital markets, and just what that contributes to the economy. So yeah, I’d be keen to explore that with you. To start off with, could you tell us a bit about what you do at Hill View Partners please?

Arthur Petropoulos  02:06

Sure. So fundamentally, our company helps companies do two things. We advise and assist companies in the sale of their business and we do the same for companies that are seeking to secure capital. So you can think of it investment banking business brokerage intermediary, but the simplest way to explain it is when you think of a real estate broker, or help people sell real estate, we do the same thing, but with businesses, and we’re helping people find capital for those businesses. And it’s a real area of specialisation and focus, privately held companies generating one to 10 million in pre tax profit, typically owned by families, entrepreneurs, small groups of investors. So in the broad scale of the economy, it’s kind of that line between the lower middle market and middle market, that’s our area of specialisation. And really where we focus.

Gene Tunny  02:53

Right and what sort of businesses would they be? I’m just trying to think I mean you’d have some professional services businesses, do you have bakeries or…

Arthur Petropoulos  03:02

So if you think of kind of the, and the reason why we started the business and folks in this space is I spent about 10 years in New York, doing this both on the investment banking side of helping companies as well as the private equity side of buying companies. And what we found is there’s this doughnut hole of sorts, where very large companies kind of work with the Wall Street investment banks, and then very small companies work with the local business brokers. But there’s a huge swath of stuff in between. So you might have a software company that it’s kind of it has a very specialised niche that generates a million or $2 million in profit a year. I think everybody thinks of software’s giant companies are just growth growth. There’s plenty of kind of very niche software’s dashboard, task force management, pricing tools for particular industries, whether it’s construction or satellite dish installation, it could be anything, right. And those companies are a lot of what we do a b2b and b2c services. So you could think of window cleaning companies we’ve sold or gutter cleaning or roofing companies or, you know, irrigation, those are broad Real Estate Services, then there’s just general kind of like specialty manufacturing or distribution companies. So we sold a company that sold cleanroom supplies into pharmaceutical companies. There’s another company that manufactured component parts that went into aeroplanes. And so what I will say the consistent theme for companies we represent so we really, we’re agnostic of industry, so so long as it fits the profitability criteria as well as kind of the complexion of ownership. But what you find after iterations and iterations is that companies in the size that we represent, are not competing on the cost of capital. They do not provide commodity products, and so whatever it’s b2b or b2c services products offering, where we’ll be is there will be something specialised about it, there’ll be something niche something proprietary, there’ll be something they do better than anybody whether they have just better economics, whether they have access to certain markets or customers, or whether they just have a capability or an aptitude that’s unique. There’s usually something so that’s, you know, that’s part of the fun. And part of the exercise is as we’re talking to new people, figuring out what kind of that secret element is to their, to their respective business.

Gene Tunny  05:18

Right? Can I ask you, how does it, how does it work? I mean, so say you’re in business broking. And you’re selling some of these businesses, you’re trying to get the best price for the the seller, and then you get obviously commission, I don’t need to know, you know, that’s probably proprietary and confidential, but I’m interested in, like, do they pick up the phone? Or do you go actively looking for these businesses? You’re in Rhode Island, are you driving around Providence, and you go up to New York City? I mean, how do you how do you do it?

Arthur Petropoulos  05:51

No, so I mean, look, we endeavoured to make this business a national and international business from the get go, because I think historically, it has been a hyper regional business where you have, you know, three guys sitting at the back of a bar, you know, drinking with the guy who owns a local lumberyard, right, or whatever the business may be. And I think as things have evolved, where middle market businesses have, now they’re doing much more national and international work, we find that there, it’s really about just having the dialogue with people and really understanding the objectives and facilitating the process. And so we work with companies all over the states, as well as international to a lesser degree, but Western, Eastern Europe, Southern Asia, then a small amount of Middle East, but it’s really about finding the business that meets kind of the size, ownership complexion, I think season and in the business lifecycle where they’re looking to accomplish one of these goals. But it’s a because it’s not, it’s not a hyperlocal business. Because there’s you can’t just drive up and down a main street or high street and find a lot of these things. They’re kind of, there’s more of them than you think in some places. And there’s less than you think in other places, right? It’s a it’s a quirky business, because you might not realise but there’s a large like, you know, pillow manufacturer down the street from you, or a software company that’s in just this nondescript building that does this thing. And so, our outreach, we do some direct outreach, whether it’s email, whether we’re chatting on LinkedIn, with people, we put out content that on LinkedIn, as well as YouTube, we have two videos going out every week, kind of just explaining different categories, we get a lot of inbound conversations from that. And then I think some of the best relationships and conversations you have are from other happy customers. And so every time a deal closes, and our client’s very happy, they do tell their friends and say, Hey, we know a firm that did a real good job for us and that and engenders some goodwill. So, you know, I think there’s this kind of direct outreach inbounds there’s some warm outreach from kind of relationships and referrals. And then there’s just kind of goodwill generated by I think, good results.

Gene Tunny  08:04

Good one, and in that process of the sale, like getting it ready for sale, are you, are you involved? Are you providing advice on business operations, governance, that sort of thing to try and improve the value of it at the sale?

Arthur Petropoulos  08:20

Yeah, I think there’s certain things that, that are malleable at that stage of the game. There’s other things where it’s a matter of characterization and kind of just understanding it and documenting because a lot of times the processes are there, the people are there. And it’s just a matter of kind of memorialising precisely what the different people do, how are they cross trained? What are their capabilities? What are the processes of the business relative to origination and sourcing of new business operations and the administration of the company as well as kind of the execution and fulfilment of the actual work? And so, most of these things are there. They just need to be crystallised as part of the narrative. And but look, there are time to time where as we’re having those dialogues, where there are things that, hey, you know, it would if this, we don’t want, we call kind of like single source reasons for failure, right? And so if there’s one employee that does this one very important thing, who else could do that if they couldn’t, right? Or if you’re getting certain raw goods from one particular source, what happens if you can’t get it from them? And so I do think it’s kind of parsing through each part of the business and trying to poke holes in it, that has a lot of good dialogue, because the more we can try to poke holes, the more we either get the answers as to why there’s a safeguard or, you know, it allows for the implementation and incorporation of a safeguard and mitigation means at that juncture.

Gene Tunny  09:46

And how would you know, if you’re getting a fair price, I mean, how do you know what sort of sort of price to to aim for there? Is it multiples of earnings or the how do you actually work that out? And also how do you do it across all these different industries you mentioned you’re industry agnostic. I mean, yeah, that you mean, you must have to get across a lot of new industries really quickly. How do you do that, Arthur?

Arthur Petropoulos  10:10

Sure. So by virtue of focusing, I think on the size of the profitability of the company, and by virtue of that it must be profitable. Capital tends to kind of work in different ecosystems. And what we find is that the delineation of ecosystems is much more predicated on the size of the company than necessarily the industry in terms of capital and in terms of acquirers, right. So you have, if it’s a not profitable business, but it’s growing fast, and it’s that venture capital world, or growth equity, right, that’s its own ecosystem, whereas private equity for the profitable companies that we work with, strategic acquirers in the middle market, that’s its own ecosystem. So it’s fascinating, but you’d be surprised at how many of the counterparties on the other side are looking kind of agnostic of industry as well. And more specific to size and complexion. And then kind of large private equity, and publicly traded companies have their own ecosystems as well. So we focus on our one ecosystem, which is important to do. And then but there is always kind of a specialised research that’s necessary for a particular industry, because there are quirks and idiosyncrasies with any industry as we’ve done, you know, 100 plus transactions as Hill View Partners, and I’ve done 100 plus transactions in my life before starting the company, you do learn kind of which, where to look and how to research different industries. And so it’s not so much that you need to know every industry, but you have to know what to look for in every particular industry. So as we kind of get into any particular new ones, and there’s not many that we have not been involved with, but we still take a fresh look towards it. You know, it’s a matter of finding who are the active parties, we have our own internal database, as well as some, we subscribe to external databases and Cap IQ, PitchBook Data, there’s a handful of them out there. And we do a lot of our own kind of proprietary research. I think the difference in largely what we do is, many intermediaries will just kind of gather all the information, puke it to the universe to 20,000 people and just wait for the phone ring. We are proactive, not reactive, we do a lot of research upfront. That way we’re pinpointing who to reach out to. And what that ultimately does, is A) it mitigates a lot of the kind of typical pain points. So shrinks the duration limits, distraction keeps the discretion generates better results. But also, it really fine tunes the conversation. So getting back to your question about multiples, that’s usually a good place to start, right? The fundamentals are the driver. So if we look at it, you’ll see like different stratas of size will usually have different multiple ranges. So a company that does a million dollars in EBITDA will generally trade at four to seven times EBITDA, a company that does 2 million will trade at five to seven, five to eight, maybe 3 million you probably see six to a four, 5 million, maybe you start getting towards nine, 5 million plus, can you get to 10 at 10 million, can you get to 12 times but there’s this multiples expansion. And candidly, I mean, that’s a lot of the private equity thesis, right is if you buy 10 $1 million companies for $6,000,000. Six times multiple for a million dollars of EBITDA for each acquisition, once you have 10 of those together, it’s worth 10 to 12 times EBITDA right? So that’s how you spend 60 and it’s worth 120. But our logic, our research is finding what the comps are, looking where it kind of falls in the strata. But then also, by doing research about finding where our client is the missing puzzle piece for someone’s bought a puzzle, right? So yes, well, you know, if we sold a company that made a certain type of widget, that mega widget company just doesn’t have this one thing to sell, right? We want to talk about that as a buy versus build opportunity for them. So yes, you have the fundamentals but the two other reasons why companies are bought are A) access to certain end markets, but B) proprietary capabilities. And so if it’s something special about what the company does, or if it has very unique access, then we can pivot the conversation to say, Well look, yes, you may think that there’s $1 million EBITDA company’s worth $6 million. However, it would cost you $15 million to start this company from scratch, to build, to take time the resources to allocate to try to build this. So maybe you can buy it for split the difference, right? And so what we say is we wanted to the fundamentals are the starting point. And then the access to capabilities and pivoting the dialogue to buy versus build. Those are the enhancing factors that hopefully we can get even better but to answer your question more simply a lot of research and a lot of conversations. That’s how we know we’re getting the best results.

Gene Tunny  14:46

Yeah, good one. Okay. And can I just clarify some things so you’re on the the sell side, you’re a business broker or an investment bank, or you’re similar, are you similar to an investment bank?

Arthur Petropoulos  15:00

Yeah, I mean, the key differentiator is investment banks deal with security. So they’re dealing with publicly traded companies for the most part, and we deal almost entirely with privately held companies. So that’s why we’re an M & A advisory firm would be the phrasing because we don’t deal with securities.

Gene Tunny  15:15

Yep. Gotcha. Okay. And private equity so they’re on the buy side. And is that companies like Carlyle Group, is it Carlyle is it?

Arthur Petropoulos  15:26

Yeah, so Carlyle, KKR, Blackstone are the really big ones. TPG, I mean, there’s a lot of them. And then there’s different stratas of them for size. There’s industry specialists. But yes, that’s generally the buy side are, so it used to be you’d have kind of two big buckets, you’d have private equity that were funded just to buy companies and sell them. And then you had strategic acquirers that were basically just large companies that would occasionally acquire smaller businesses or different capabilities. But now you have lots of strategic companies have have created corporate development and strategic acquisition groups. There’s private equity that buys strategic companies. And so it’s a bit more of a continuum. But yes, generally speaking, that is the buy side is companies and financial buyers and strategic buyers that are looking to make acquisitions. And we represent solely the sell side. So the companies that are looking to either sell or receive that capital.

Gene Tunny  16:22

Okay, so you mentioned your private equity, strategic acquirers. Could that include individuals or is it generally corporations at this or companies?

Arthur Petropoulos  16:34

So what’s interesting about the companies we work with, I was just telling someone, I believe we have the broadest swath of prospective acquirers for a company, right, like, if you were selling that bakery, you probably wouldn’t be selling it to a person or a few different people. Now, if you were selling a billion dollar company, you’re probably only selling it to private equity or a very large strategic company. But in our businesses say you’re selling a $2 million EBITDA company for $12 million, or $15 million, right? The buyers for that are going to be incredibly broad, it could be a publicly traded company, it could be a private equity firm, it could be a family office, it could be an independent sponsor, a search fund, a high net worth individual, right. So yes, it runs that whole spectrum. From of, of both size, and I wouldn’t, sophistication is not correlated entirely with size, right. So like sometimes the best buyer that knows something inside and out is just a person who’s obsessed with one particular field who really wants a company. And sometimes it’s the largest corporation. So the important part of our job is to just, you know, we say kiss a lot of frogs to find the prince, right or turn over, a lot of rocks to find gold, but it’s having all those dialogues, both within each category, and then across categories to make sure we’re finding the right the right home for a business.

Gene Tunny  17:54

Right and how long does it typically take to sell a business? Like once you get in touch, or once they get in touch or you find the business? You get the the contract to, to, you know, you’ve got the agreement to, I mean, I imagine you’re going to be an exclusive seller is that correct? You’re that…

Arthur Petropoulos  18:14

Yes.Yeah.

Gene Tunny  18:16

Gotcha. Okay, what what’s, how long would it typically take?

Arthur Petropoulos  18:19

This is not a shameless self promotion. But if you weren’t using Hill View Partners right, these processes can take, you know, 18 to 24 months. We want in the part of why that proactive versus reactive process is important is we want six month processes we want offers within 100 days. And then after the 100 day mark, it’s really the confirmatory diligence from an acquirer, but we have the process broken down and crystallised into different component parts. That way, the day we sign an engagement with a client, we are getting the information that we need, putting our materials together and doing the research about the acquirer so that we’re out there in the market within two to three weeks talking to people. We’ve pushed the dialogues through a process of asking people for follow up questions, having conversations, Zoom meetings, indications of interest, letters of intent, there’s, we have a lot of steps along the way to keep shaking the tree, if you will, right. And so that way, every time you shake the tree, things fall away, and things fall away, right. And that’s the fastest way to get to the conclusion, while not losing any of the substance cohesion or comprehensive approach to it. And so we find our processes we can run in a six month process, if sometimes it’ll slip a month or two, depending on if the diligence has taken too long, depending on negotiations, but largely speaking, six months start to finish. That’s the goal, and we stick to it.

Gene Tunny  19:44

Gotcha. And in the US, what are the rules around foreign investment like so if you’ve got a foreign company or or you know, high net worth individual wanting to buy a business in America, how does that is that a constraint is there, are there barriers there?

Arthur Petropoulos  20:01

I mean, not really because it doesn’t tend to be, you know, if you’re getting the foreign investors that will come and acquire businesses in the states are largely part of larger organisations that have a global business that’s doing something, right. Like the probability that someone’s going to want to move from Dubai to Oklahoma to buy a water hauling company is probably low. So, you know, candidly, we’ve had people I mean, look, I mean, it’s more likely, you know, that hey, someone’s moving it from, you know, from London and, and they want to buy a business in New England somewhere. I’ve seen those things. So Oh, no, it’s it hasn’t been an issue on our part. I guess there were a couple businesses that were a little sensitive relative to they sold into the aerospace and defence industry. So there was some prohibition against even then we were just told, like, don’t even bother talking to people in these countries, because couldn’t sell to them anyways. But that’s, that’s where we’ve seen so less about the individual or more if there’s kind of sensitive stuff that’s going into government agencies or something that they don’t want to have the exposure to foreign ownership.

Gene Tunny  21:09

Yeah, yeah. Just back on the sale process. So do you have a Expression of Interest process? And then you have a tender process? So how does that work?

Arthur Petropoulos  21:18

Yeah. So so we don’t we don’t go out there with an asking price on something, right? I mean, we can give some guidance in the sense that if someone says, Well, what are they looking for, this or that we can say well, you know, we’re seeing comps, we’re seeing transactions for companies like this falling in this range. Because we don’t want it to always just focus on the dollar amount too because the structure matters, the transition period for ownership matters, what happens to the stakeholders, the employees, the community, the buildings, that whatever it is, right, there’s a lot of variables. And so we’ll provide a little bit of guidance. But largely speaking, we let the process determine the price because the people we’re talking to are sophisticated parties, they know what these things trade for. And, and I think people know, we’re pretty communicative in the sense that we say, Look, if, if you’re looking to just kind of kick the tires and lob something in here, like don’t waste your time, like don’t waste our time either. And so we’re able to get down to the real bonafide parties quick. And in the process. Typically, there’ll be dialogue questions going back and forth, we have a data room that we populate, but we’re usually asked for an indication of interest, and then a letter of intent. So what that means is, send us an email tell us generally how you valuing this, how are you looking at structure this or that, because then we can have a constructive dialogue with the prospective acquirer so that when they finally put something forward on letterhead, they now have a good sense as to how probable it is that it’s gonna work. And it’s kind of had some dialogue, if you will, or discussion. So we like to have information sharing conversations, indication of interests, and more communication form a letter of intent. And a lot of that happens from day 60 to 90 of a process.

Gene Tunny  23:02

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

Female speaker  23:08

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

Gene Tunny  23:37

Now back to the show.

Can I ask you about how you promote or advertise the businesses? I’m just thinking about real estate. And I mean, you look at some of the things that real estate agents are doing now particularly in, in capital cities in Australia, where people are mad about real estate, you know, they’ve got these cinematic type videos, they’ve got the the houses all dressed up, they’ve put a lot of work into it. And they’ve got these really impressive videos. I imagine you have a prospectus of some kind, like, how do you how do you promote it?

Arthur Petropoulos  24:14

Yeah, I would say there’s less style points in this business. Right? The because it’s less of an emotional acquisition for the most part, right? Like it has to make fundamental sense for companies to buy things. They’re buying capabilities. They’re buying access, like you know, it’s slightly a different sale than saying like, you know, imagine drinking you know, hot chocolate on the veranda on a Friday night, right? So, the product or if you will, or the thing that’s actually transacting has a slightly different approach. Now, that being said, must be professional must be crisp, clear, concise, but the substance of the narrative is more valuable than the form if you will. And so we communicate to the to the prospective acquirers. We have materials that we put together, it’s in our space, we found like the 100 page pitch book, you just everything gets drowned out in, in the one page thing is far too brief. So we have a happy medium that provides kind of the high level overviews of all the things that are important. We have data rooms that we support back, but we kind of sequence or phase the sharing of information. So that way we make sure people are focusing on the optimal or the key elements of it first. But yeah, so it’s it’s, it’s clean, it’s crisp, it’s direct. It’s not as not as razzle dazzle as some other things. But the goal being to communicate the narrative clearly, communicate the value proposition clearly to the prospective acquirer, and getting their attention. Because, you know, the trick in this business sometimes is that if we’re representing a small company to a very big company, the hardest part of that dialogue is getting the first part of their attention, right? If we can get their eyeballs on it, and they like it, well, then it just creates traction amongst themselves, right? Because now they’re saying, Well, this is interesting, want to look at it want to learn more, and they have their own momentum. And at a certain point, they don’t really care what I want to tell them, they care what they want to look at, right? And so they say, Well, I want to learn more about this and learn more about that. So you can’t drown them out with your own narrative. But you do have to make sure you’re giving them enough for not too much and get the attention. And then if the attention leads to interest, it kind of becomes self fulfilling at that point.

Gene Tunny  26:24

Gotcha. And what if, say, I’m looking at, I don’t know a plumbing supplies business in Milwaukee or something like that, could I actually, and I’m a prospective buyer, could I line up a visit to the, the company’s premises and talk to the management?

Arthur Petropoulos  26:41

Sure. At a certain point of the conversation. So we try to phase things out, right? Like, you should be able to, if you are the plumbing supply distributor guy, and you know, this business, right, so we have to kind of validate prospective buyers. So what’s your track record? What’s your history? What’s your industry knowledge? What’s your financial capability to do these things? And let’s say you check out on all these things, well, then you really should be able to give an offer, or at least a skeleton of an offer just based on numbers and conversations with ownership, right. And so there is a certain, so only when we get to like a high level structure, that you would, you can at least put the ? on the back of an envelope. And that ownership can get on board with that we then pivot to you know, whether it’s an in person meeting, facility review, I think the problem with a lot of intermediaries is they allow too much access too soon. And it’s like, you know, this isn’t a field trip, right? Like, we’re not looking to have like 25 people come around and kick the tires and things because it creates an environment of instability for the employees. It’s not good, right? And so you really don’t want to do that until, you know you have something and we try to push. And it’s a tug of war sometimes, but we really try to push things as far as we can. Before we’re doing anything, that could be a disruption.

Gene Tunny  28:00

Gotcha. And you mentioned so you’re trying to validate or vet the buyers, is that that’s a risk mitigation measure I it? Are you, I mean, you’re I guess you want to protect the legacy of the business for the person who sells it. Like, what’s the what’s the thinking there?

Arthur Petropoulos  28:19

It’s not so much from a, I guess it’s qualitative in a way, right? Like, we’re not gonna we don’t want to sell businesses to criminals, or people who have bad track records, you know, in terms of like treating employees and stuff. But, you know, we also don’t, you know, it’s not like, oh, I don’t want it to what’s the Aussie word, you know, a bug in some way, right? Like we don’t like so it doesn’t get to that level, where it’s like, I don’t want these kinds of people or those kinds of, it’s really about capability. It’s about, you know, it’s about industry experience knowledge, feeling comfortable, that they would be a good steward of the business from a fundamentals perspective. Because you’d be surprised. I mean, you know, we always joke and say it’s separating the prospects from the suspects. But it’s, you there’s, there’s a lot of people out there that I think are looking at businesses is like, you know, when you sell a house, right, like you ever sell a house and you put the house for sale, and take buyer, the neighbours show up? Yeah. And it’s like they’re not buying the house. And it’s like that same neighbour, it’s like their hobby is to go look at houses every weekend, right? And they just go in and they like, eat the food and kick around and like, take some paper towels. And so in business, you’d be surprised that a lot of the same names show up and so we want real buyers, but we don’t want to waste any time. There’s no value. There’s no style points to fluffing up the numbers of interested parties on the front end. It’s no good for anybody. So it’s more about capability and are they a bonafide prospect. And and you know, qualitatively, are they going to be the right steward. It’s less about, you know, did they go to a proper preparatory boarding school. It’s more about actual capabilities.

Gene Tunny  30:01

Yeah, yeah. And is this regulated Arthur? Like I imagine it’s not SEC, but are there state regulations around this? I mean, what’s the

Arthur Petropoulos  30:10

Yeah, and there are there are SEC regulations pertaining to private company sales, you know, relative to sizing and structure of deals in a way that does not kind of conflate with securities. And then state by state, there’s different considerations depending on on what it is, for the most part, though, this is it’s kind of free market, third party transactions to other people who are owning things. And, you know, not many of these transactions are going to be either, you know, pivotal to national defence, or, you know, under like, Hart Scott Rodino Act for like, antitrust and stuff like that. I mean, these tend to be, you know, if you said, What is kind of the typical situation, it’s a company that does a thing, either for a particular product or geography, there’s a giant company or bigger company that does it everywhere else, and wants to get access to their geography, and they kind of bolt them on. So. And that’s, you know, sometimes it’s merger of equals, sometimes it’s just one person, but a lot of times it’s kind of the aggregation strategy that’s looking to bolt something on. And so it is regulated, and there’s certainly laws and rules to it. But it’s not to the same level of securities, because not dealing with, you know, selling shares, small amounts of shares to large number of kind of passive investors.

Gene Tunny  31:31

Gotcha. Is there much legal risk on the seller side, I’m thinking, I mean, you know, with any sort of tender process or auction, there’s always, you know, there’ll always be a significant number of people where there’s the the winners curse, so to speak. How do you deal with that?

Arthur Petropoulos  31:47

Yeah, so part of the negotiation. And so once we have a deal, basically, under a letter of intent, you enter into the diligence phase, in which case, the buyer puts forward a purchase and sale agreement for the consummation of the transaction. So unlike real estate, where you have a purchase and sale agreement that you sign, and then you enter into diligence, in corporate transactions, you sign a letter of intent, you do the diligence, and then the purchase and sale agreement is signed, kind of coterminous with the closing of the transaction. But within that, within the purchase and sale agreement are representations and warranties both ways, right. There’s disclosure schedules, so that a seller would have to say, Are there any pending litigation? Is there any complaints? Or what are the customers you’ve lost? There’s things that have to be put in there. And from a buyer’s perspective, they have to say, what they are willing to take, you know, at face value. And so the way we an old, an old mentor of mine said, reps and warranties are there for, you know, fraud, willful misrepresentation, things like that, to protect buyers against, but it is not in what he called, he said, It’s not schmuck insurance, right? It’s not, it’s not insurance that you paid, you didn’t pay too much, or you didn’t know this and do that, right. Like, this is a business between sophisticated parties. And so if a seller sells a company, you know, without using a person like us, and they don’t get a good price and don’t get a good structure, they really don’t have any recourse to complain about it, because that’s the deal they agreed to. Buyers similarly if they, you know, if it’s not, if it’s not in the contract, then then it’s, it’s not part of it. So point is, it sounds more adversarial than it is. There’s just kind of customary reps and warranties that very clearly define what the post transaction risk or exposure is from both parties. They are negotiated pretty heavily by the attorneys. And, you know, as it pertains to the business elements, we get involved as well. But our general positioning on it is we want to protect the buyers from fraud from, you know, willful misrepresentation things we don’t know, which don’t happen with the clients that we work with. But what we don’t want is for anybody to just say, like, I bought the company, I mismanaged it. And now I want, you know, some money back because I didn’t do the right thing, right? That’s not That’s what we avoid. And nobody really asked for that. But we don’t want it to be grey.

Gene Tunny  34:15

Right. So do you engage the lawyer or does the seller engage the lawyer?

Arthur Petropoulos  34:21

It depends on the situation. And it depends on what kind of an attorney a seller’s using. And so sometimes, if a seller is using a corporate attorney for a lot of activities that they’re with they’ll say, hey, I really want our attorney in the mix here. And that’s perfectly fine. We work with lots of people’s attorneys and that usually when we get the letter of intent, negotiated but not signed, that’s typically when they come into the process review that and then we work alongside them shepherding diligence. But there are other times where people say like, you know, I you know, my attorney is a great guy. He’s a great friend. You know, he helped me buy my flat in Brisbane, but you you know, I have a $50 million business, maybe he will play a part in the process. But do you have someone that you can bring in that just does corporate transactions all day, in which case, we have a global network of people that we’ve worked with, that we can bring in, depending on the locale of the business. So it’s situational. And we can work with clients either way, depending on their preference, but we always keep a strong roster of, of attorneys. And I, what I’d say is the right types of attorneys, because you can have, you know, anybody can pick up the phone book and call up the most expensive law firm in the world. But it’s where do you find kind of that optimal mix of value and capability? And so whether it’s people that have spun off of the big law firms running smaller boutiques that are slightly off the radar, or are more tactical people, we like those kinds of relationships.

Gene Tunny  35:46

Yeah, very good. I should ask Arthur, how did you get in, how did you get into this? I mean, you mentioned you worked on Wall Street. Could you just tell us a bit about what you studied? And did that help you get into Wall Street and then your path to Hill View? Partners, please?

Arthur Petropoulos  36:03

Yeah, sure. So when I grew up, my father used to read, he had a very broad spectrum of books he was interested in, and ideas. And so I remember, you know, it was gonna be Plato’s Republic or Aesop’s Fables. But he read a lot of history books to us. And so I remember going through like, you know, Amerigo Vespucci, he was travelling the world selling pickles or the Dutch West Indies Company was fine, you know, whether it was silk or spices, but it felt like the history of the world was the history of business and war for other things, but business, right commerce, and, you know, the idea of a finite amount of resources and an infinite amount of want. And so when I studied more and I would get into like the industrialization of America, and, you know, Carnegie Steel turning into US Steel, and all of these aggregations, I found the combination of business transactions of finance of growth and in aggregation of industry to be fascinating. And when I grew up, the only people I knew that who really had their hands in these things were always attorneys, you hear like, oh, this attorney just helped this person sell this company. Because I do think particularly in days past, I think a lot of attorneys kind of served a dual role in these things. And they still are, you know, key advisors to companies. But so I went to law, I studied undergrad business, I actually wanted, I wanted to get a minor in music theory, I played the piano. But I remember my mom said, if you want to play the piano, you can just leave school and stay in the living room. But we, but anyway business was the key focus in undergrad, and I went to law school, and law school doesn’t have majors, but you can effectively create your own focus. And so we created or I focused on corporate transactions, both from a mergers and acquisitions and financing perspective. And it was when I was in law school that I was reading the case law, you’d have to study of your KKR and acquiring Nabisco and Philip Morris, and this and that. And when you started reading all of these cases, you’d say, well, who is that? And how do they work? And how does this work? And so once I figured out, what is an investment bank, what is a private equity firm? How does capital work, who are these lenders, that’s when I think the world kind of opened up and I said, Ah, like, there’s this whole ecosystem of corporate transactions and all these participants in it. And then I realised, you know, although I believe the law degree is phenomenal in terms of understanding the allocation of risk and structuring of things. I found that, you know, the investment banking was a bit more firmly in line with where my interest was. And so it’s not an atypical path in the sense that I think Lloyd Blankfein and Brian Moynihan and Sam Zell like they all actually had law degrees, because I think they went through a similar kind of learning exercise. And so even that’s, that’s how I was in law school. And then did whatever a young guy looking for a job, you know, picked up the phone and found lists of names and called and called and called and got a job helping middle market companies sell themselves and then went to the buying side and had a few jobs in New York and then said, Hey, we should start our own thing, came back to Rhode Island to do that. And here we are today a little wiser, and with a little more grey hair.

Gene Tunny  39:19

And I mean, there’s no disadvantage to being in Rhode Island I imagine is there?

Arthur Petropoulos  39:24

You know what, there was a time but I think it predated me a little bit where if you wanted to be in finance in the States, it was either really LA or New York. And then you saw outposts pop up in Houston for oil and gas businesses or, you know, Florida because of how many New Yorkers moved there. You know Boston for pharmaceutical businesses. But my notion when we started Hill View was it was already felt like no one really cared where anyone was, as long as A) you could get to where you need it to be, and B) you produce results and B was far more important than any other stuff. So, so no, I mean, I think like we sit right between Boston and New York. So it is a nice hub to kind of do stuff locally, but we’re doing things all over the world at this juncture. And, you know, again, so long as we produce the results, then, you know, it doesn’t matter if we’re in San Francisco or Saskatchewan.

Gene Tunny  40:05

Yeah, yeah. Because even if you did take a meeting in New York City, for example, what’s that a couple hours away is it at most?

Arthur Petropoulos  40:19

Yeah three hours.

Gene Tunny  40:21

Three hours. Gotcha. Okay. Righto. So before we wrap up, Arthur, I’d like to ask I mean, like what do you see as the value that you’re adding to the economy or the business brokers, then we might talk about the other side of it, the private equity, because there are a lot of there’s a lot of negativity out there about private equity, a lot of concerns about market concentration, and these leveraged buyouts and all of that. So could you just talk about what you see as the benefits to the economy of you’re, what you’re doing to start with please?

Arthur Petropoulos  41:04

Sure, I believe that, you know, capital and transactions are kind of the the oil that facilitates or greases the skids for the economy in the sense that transactions have always taken place. But if you read about, you know, John Rockefeller going through Standard Oil, I mean, he was just kind of bludgeoning people and buying things for nickels and in like, you know, there was a lot of unfair competitive practices. Whereas I think, as the capital markets, and as the M & A markets have evolved, it’s facilitated things so that they happen faster, so that they happen in fairer terms for the selling party. And ultimately, I think, allow for the evolution of industry on a quicker and more efficient basis. And also, I think bolster, economic, competitive positioning, you know, particularly for domestic companies, versus kind of international, you know, many times like you have US conglomerates, competing against, you know, state run organisations in other countries, right. So the only way you’re going to compete is on scale and is own size and is on innovation. You know, there’s always that joke about politics, they say, the number one rule of economics is the idea of scarcity, that there’s more want than there is stuff. And the number one rule of politics is to ignore the number one rule of economics. And so I forgot what economist said that but so in reality, right, there’s scarcity. And there’s, there’s scarcity of talent, there’s scarcity of stuff of services of goods. And so the further you can evolve any particular industry, it does allow for even as painful as it can be the reallocation of human capital, to things that are less efficient, right. And so it’s almost this, like, it does push things forward, like, you know, irrespective of how much anybody could complain about, you know, life in America in 2023. Like, it’s hard to argue that, like, your life is not just as good as like a mediaeval King, right, like you have. I mean, literally, I’m sitting in a chair right now, I’ve got the Library of Alexandria, in my pocket, I can have more pizzas show up at my door in a half an hour than then I can ever eat. I mean, it’s like, it’s amazing. But the only reason all of these things happened is because, you know, the guy said, Hey, I have one pizza place, I could own 10 pizza places, and we should do delivery. And then so, you know, Little Caesars and Pizza Hut and Domino’s. Right. And so it’s like, I think that there’s, there’s places and ways to kind of rein in just the pure animal spirits that can come out with that. But at the same time, I mean, that is why for all of our black eyes, you know, the, you know, the most capital, capitalist focused countries have been the most economically dominant because they allow for that. And I think that the part that we play as intermediaries in the capital, intermediaries is facilitating the efficiency of that exercise and allowing for innovation and consolidation on a quicker and effective basis and protect while protecting the interests of those who contributed to the evolution right to the sellers of companies.

Gene Tunny  44:10

Gotcha. And what about on the buyer side, the private equity, do you have any thoughts on on that side? There’s this caricature of Gordon Gekko going in and, you know, the concerns about loading companies up with debt and stripping money out of companies and, and sacking lots of workers. Do you have any thoughts on that? Do you think private equity adds value out there in the economy?

Arthur Petropoulos  44:37

Absolutely. Because I mean, I think that they very much are the facilitators of innovation and consolidation. Right? It’s capital. It’s looking for return on capital that’s doing that. But you know, taking a few steps back, you know, if you think of the United States economy, a lot of that kind of Gordon Gekko element was a bit of an idiosyncratic situation. So you had, you know, let’s say, we leave World War Two and all all of these conglomerate companies start to form, right? Because they basically apply like war learned processes and they just say, we’ll buy everything right and putting it together. And so you had, you know, CBS owned the Steinway Piano Company, and you had all these, like things that came together because they figured they could just run the same process. And so you hit the 1970s, you have huge inflation, because of too much money printing and we won’t get into that. And then Nixon takes the dollar off the gold standard, inflation goes through the roof values of companies go down. And so you start to see all of these companies where it’s like, you’ve got five different companies combined, that all do different things, and no one knows how to value any of it. Because it’s like, you know, the same company owns Jello pudding that owns like, you know a concrete company, or whatever it might be. So the initial premise of it was buying under, under, misunderstood assets that were put together incorrectly, and disaggregating them in a way that allowed for a better value of each constituent element. Secondly, there was a lot of, you remember the Gordon Gekko speech about, you know, tell their paper company when he’s saying like, all of the executives own 1% of the company, and they’re just pillaging it from cash. There was a certain glut of industry in that time period of inefficiency, that was losing kind of our competitive positioning on a global basis. So you can make the argument that and this is where it gets tricky it because, yes, there were a lot of layoffs. But truly it created efficiencies and companies that allowed them to be globally competitive reallocating the human capital to industries, you know, that made that were more ripe for innovation. Now, there’s pain that goes along with that. And then it’s not to be ignorant of the fact that there were a lot of greedy people involved, right, like all of that leverage was not necessary to accomplish these things, it was just a way of choosing the, you know, choosing the return. So the pendulum goes back and forth. And anytime it goes too far, it will pull back, what I would say is that the modern incarnation of private equity has largely been one of innovation and scale, right. And so buying up a lot of small companies and aggregating them, I think, the biggest myth in private equity in today’s environment. Now, I’m not saying if private equity goes out and buys a bloated software company and fires a bunch of people. But you know, that wasn’t making any profit. But I’m saying when private equity goes out there and buys an aggregation of distribution or manufacturing companies, they want to keep the people, the people are the valuable part. That’s where there’s scarcity. So in today’s environment, that notion of over levered like financial engineering and layoffs is really, I think, a relic in private equity in today’s environment does a lot more, I think, good than harm, and a lot of those excesses have been had been pulled in. That’s not to say, you know, there’s not exceptions to that. But in today’s environment, they are a accelerant of aggregation and innovation, I think in in industry as they consolidate different businesses.

Gene Tunny  47:59

Okay, very good. Arthur that’s been terrific, I’ve learned a lot I learned, I hope you don’t mind, I grilled you over the process and what you do exactly. And I mean I learned a lot about how this, these transactions occur. So thanks, heaps for that. That was great. Tell us about your, your outreach, or your YouTube and newsletter or whatever, please. That’d be great.

Arthur Petropoulos  48:23

Yeah, so I’d say check us out on YouTube at Hill View Partners, if you just typed in Arthur Petropoulos, you’d come up on and on LinkedIn our company page Hil View Partners both on YouTube and LinkedIn, we put out two videos a week, talking about just different topics in the mergers and acquisitions and capital world kind of recurring themes, almost like an FAQ of the things we’re always talking about. And then reach out to us, either on LinkedIn, myself, or the company page, or on our homepage, hillviewps.com. So hillview, P as in Peter, S as in sam .com, where you can reach out and set some time up as well. But that’s where to where to find us. And on a, you know, on a closing thought, not to get too philosophical, but I think I think anytime you kind of take a position, that something is just entirely wrong or entirely right, or you’re you’re missing a lot of the nuance, right? And so a lot of the economy has excess in both ways. Right? And so, there are, you know, have there been situations where, you know, companies have been too greedy? Yes. Have there been situations where, you know, look at the industrialization of what America had lots of greed there, right? Look at situations where the unions were too greedy and look at how the steel disappeared in the 1970s. Right, so like, so I think the key to being good at our job, and I won’t extrapolate it enough to say good at anything is like you must understand nuance, you must understand subtlety. There’s four sides to every story and the truth sits somewhere in between and so it’s our job to kind of see reality for what it is not necessarily what we wish it would be. And by virtue of taking that kind of sober yet realistic look on things you know, we’re not, we’re not people that are always cynical and say it’s bad. We’re not people that are always optimistic and it’s always good. But we say, life is hard. The world can be a nasty place. But there are glimpses of good and nice things along the way. And we, we, we like those. And so any event for what it’s worth, that’s our that’s our view of the universe that you didn’t ask for. But this is a this has been good Gene, I appreciate it.

Gene Tunny  50:22

Very good, Arthur. I’ve really enjoyed it. And yep, I like having rounding it out with that philosophical thought. So I think that’s terrific. So yep. Very good. Arthur Petropoulos from Hill View Partners. Thanks so much for the conversation. I really enjoyed it.

Arthur Petropoulos  50:37

Likewise Gene. Appreciate it.

Gene Tunny  50:41

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

51:28

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

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

Private vs public sector jobs, consulting scandals & economics as an ‘imperialist discipline’ w/ UQPPES – EP209

Show host Gene Tunny speaks with students from the University of Queensland Politics, Philosophy and Economics Society. They discuss topics such as private versus public sector jobs, the future of consulting, and the risks of outsourcing for government officials. Gene takes an historical perspective and goes back to the time of convict transportation to Australia. He also talks about, among other things, his time working in Treasury during the Rudd Government, and how psychology is relevant to economics. The students express concerns about the consulting sector in light of a recent scandal involving PwC partners misusing confidential government information.

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.

What’s covered in EP209

  • Economics career paths and differences between public service and consulting. (3:04)
  • Consulting industry challenges and scandals. (15:39)
  • Outsourcing in government and potential mitigation of risks. (17:50)
  • Greedflation. (28:30)
  • Limits of economics as a discipline. (33:59)
  • Public vs private sector work experiences. (38:22)
  • Government consulting and ethics. (43:48)

Links relevant to the conversation

About UQPPES:

https://uqppes.com.au/about-us/

On how badly designed outsourcing of convict transportation created the ‘death fleet’, see:

https://www.themandarin.com.au/73989-contracts-and-convicts-how-perverse-incentives-created-the-death-fleet/

Transcript: Private vs public sector jobs, consulting scandals & economics as an ‘imperialist discipline’ w/ UQPPES – EP209

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  00:03

I mean, I think economics is an incredibly powerful tool where it gets difficult is trying to predict behaviour and, and in in cases where people don’t act fully rationally, and that’s what you need to bring the psychology in. Right. So, I think any idea that economics is the imperialist discipline and we’ve got all the answers, I think that was destroyed by the financial crisis. 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. If you’ve listened to my recent episode on degrowth, you would have heard a little bit of the recent event that I spoke at. The event was hosted by the University of Queensland PPE society where PPE stands for politics, philosophy and economics. This episode features the rest of the conversation that I had with the students. We talked about private versus public sector jobs, the future of consulting and the risks that government officials need to watch out for and outsourcing. In the conversation I picked up there many of the students appear especially concerned about the future of the consulting sector, which is a major employer of graduates. The context is that we’ve had this big scandal in Australia over some PwC partners allegedly misusing confidential information they received from the government. They allegedly used it for private gain. As you’ll hear the students were super interested in the differences between working in the private and public sector, and which was the better option for economics students, I gave the best advice that I could on this question among many others. As with many questions, there’s no easy answer. It says good things and bad things about private and public sector jobs. And a lot will depend on people’s individual preferences and personalities. As you’ll hear, I think that the public sector provides a better training ground for young economists. The work environment and training opportunities are generally much better. But there are challenges in the public sector. As the higher up you get, the more you get exposed to the political side of government, which brings new challenges. That said, there are some people who thrive on that. So it depends on just what you’re looking for. If you have your own thoughts on working in the private versus the public sector, or any of the other issues that we talked about this episode, then please reach out and share your thoughts. My contact details are in the show notes. Okay, let’s get into the episode. I hope you enjoy it.

Joe  03:04

Welcome, everybody. Thank you very much for coming. My name is Joseph. I’ll be your emcee for this evening. And I’d like to say a very, very warm welcome to esteemed economist gene Tunny. He is here with us tonight. He’s the Director of Adult economics, and a 1997 CIS liberty and society alumnus. He is a former Australian Treasury official, and has worked on a range of domestic and international consulting projects. So we’re very lucky to have someone with such expertise. Joining us tonight to answer some of our questions about economics. So I guess to start off with Jean, could you maybe tell us a little bit more about yourself about the work you’ve done and how you maybe came to work in consulting?

Gene Tunny  03:50

Yeah, so I’m an economist, done a broad range of things are taught at this university in the past. So in this very room, subjects such as cost benefit analysis, there’s probably macroeconomic policy that I taught in 2015 in this room here. So I’ve got a background in macro policy budget policy when I was in the Treasury in Canberra, so worked on a lot of issues there, industry policy issues to do with the car industry, the budget debt, so we had to borrow a lot of money again, during the financial crisis. So I was heavily involved in that. And yeah, around probably around 2009, I started thinking I’d be good to for a bit of a change. And a friend of mine, Tony, Hans, was heading Mars and Jacob up here, the consulting office, and he was doing a lot of good stuff, cost benefit studies of all the new water infrastructure we needed because we’re in a drought. And I thought I’d be great to come back to Queensland I think it might have been a wedding that was up at nursery or went up to a wedding, a friend’s wedding. And you know how magical nurseries and the reception was at sales and a probably had a couple of glasses of champagne and thought, what on earth? Why would I want to go back to Canberra when you’re on the beach here and beautiful? That was partly why I wanted to come, I came back. So I worked here at uni, I worked in state government, as a public servant do different analytical roles, workers compensation, industrial relations, then treasury. And since 2009, I’ve been doing consulting since 2014, my own firm and yeah, work for a huge different range of clients, agribusiness companies, some government agencies, industry bodies, major corporations, ANZ Bank, for example, say all sorts of clients,

Joe  05:39

you know, you said in, you know, you were thinking of wanting for a bit of a change up coming back up here and working in consulting what, because for us, consulting and public service are too so the main employment pathways, could you maybe give us some sort of insights into the differences between the two, the, you know, the positive sides of both, and perhaps some, some negative sides or things you didn’t like, as much from either?

Gene Tunny  06:06

Yeah, so the public service is a good training grounds, and there are a lot of a lot of opportunities. They look up to you. So I think if you’re beginning in particular, you’re studying PPE, places like treasury, productivity commission, Reserve Bank, de fat, foreign affairs, and trade, I think they’re excellent places to go to learn about the issues and potentially get training opportunities or international postings that they can be really great opportunities. And public sector. Yeah, it’s different. I mean, the different The obvious difference is that, in one, there’s a mission that set by the government of the day and there’s a, you know, there’s a bureaucratic national, you’ve got to achieve some tasks. So that could be improving the health of the population, running the health system, or the education system, educating people, or could be Treasury where it’s this broad concept of well being, and you’re overseeing a whole range of agencies, you got to make sure that the budget is in good shape. So that’s, that’s a bit more of a, like, every agency has got a different mission. And that’s, that’s what determines that. In the private sector. It’s about profit. So profit. I mean, that’s, that’s what Yep, you need to make money to be able to keep the operation going. So there’s a clear goal, and that ends up driving a lot of things and forcing efficiency. So when I think one of the challenges in the public sector is because you don’t have that, there’s not that focus on profit, things can become a little bit inefficient. Yeah, there’s not the same sort of laser focus on, on doing things efficiently. And going after profitable opportunities. Your mission is set by politicians. And that can be problematic, because sometimes they can change their mind. Sometimes the politicians, I mean, maybe some of the things that they that they’re aiming for aren’t necessarily sensible. But yeah, as a public servant, you do have to try and achieve the objectives of the government of the day. To me, those would be the major differences. But if you want to explore that any more feel free either. Because because I’m not sure about answer that question very well. But that’s just what occurred to me. And with the private sector, I mean, you’ve got like, I work for a whole range of clients. And it can be a different project, like one day, it can be looking at lb farms. So there’s a client of mine, who’s built a big lb farm out at Dundee windy, and he’s trying to extract Omega three rich oil from the the algae. So now he can make some money out of that. And so I’ve helped him get a grant from the state government to do the r&d. And that’s fascinating. But then another day, I might be looking at parcels and issues to do with freight transport. So there are a whole range of things that you study, whereas if you’re in a public service agency, one of the risks is you could what you want to avoid is staying in the one spot and just doing the day to day because there is a lot of day to day responding to emails or letters from the public and writing Minister replies writing speeches, writing question time briefs, you want to get into an area where you you’re not. You’re not doing that day to day public service stuff, but there are a lot of good places like treasuries, terrific. Reserve Bank, doing rigorous analysis trying to inform the monetary policy decision that that’d be a great place. Yeah.

Joe  09:32

Super interesting. Yeah. I mean, I would never have even sort of imagined that consulting firm would be working out in Gander windy.

Gene Tunny  09:40

Oh, well, I mean, I mean, in Queensland, Australia is huge in agriculture, okay. And you’d be blown away if you if you go out there and just see how advanced a lot of these operations are. Here. There’s a lot of work for consultants. I mean, economists are probably I mean, we would have only a very small part of the work I mean, this has worked for Engineers is work for agronomist experts in agriculture. Yeah, there’s all sorts of all sorts of work and in a lot of things are automated. Yeah, they’re increasingly used. I think they’re even using AI now to work out, you know, optimal irrigation and optimal spraying of pesticides and things like that. Yeah, right. Yeah.

Joe  10:21

Very cool. That’s a good point. I think that you said that, you know, economist consultants would be doing a small part of it. And I guess, for your firm, or just for consultants, in general, as you say that the jump between lots of very different projects from different clients? How do you sort of go about preparing for a new client or, you know, perhaps in an area that is not necessarily somebody that you’ve worked before, but still have to deliver services or help your your client in some way? Well, you’ve

Gene Tunny  10:54

got to be a quick study, you have to get across the issues as best you can. And it’s like, if you’re doing an assignment at uni, you want to start early, you want to get all the resources, do the reading, learn as much as you can ask questions. So I mean, when you’re doing consulting projects, the the client is they’re motivated to help you to assist and to provide all the information they can see, it’s about being a detective or a journalist, and asking questions, to get all the information you need. But you do have to be a quick study. Ultimately, the, the Principles of Economics are the same. And I guess you learn a process of gathering the information, you sort of get an idea of what they might have on hand, what you might, sometimes you might need someone else to help out, you might need an engineer to come in and, and help work out how to solve a particular problem like in, in on their farm or in their factory, and they might have an estimate of what that will cost. You might need an architect or a quantity surveyor to do lifecycle cost estimates for a building that you’re doing a cost benefit analysis on. So there are the experts that you might have to bring in. But yeah, you need to have a, you need to plan you need to think think with the end in mind, begin with the end in mind, which is one of the seven habits that Stephen Covey talks about, it’s so true, you got to think about what’s the ultimate thing I need? And where am I now? What needs to happen to get there, you got to figure out the most efficient route to get there. So a lot of problem solving.

Joe  12:26

Yeah. And that’s, I think, a really big, exciting thing about economics and about, like studying policy and things like that is that a lot of it is problem solving? Would you have any advice for any students studying economics, or PPE, or any sort of related discipline in sort of getting into the consulting world, post

Gene Tunny  12:46

graduation, I mean, I wouldn’t get into consulting unless you are super passionate about it. Or, I mean, there are some good places that are working to death. I mean, if you get a, if you get a really good GPA, I don’t know what you need to get now that if you can get into some or like McKinsey, or BCG or aubaine, they’re really good training grounds for getting into C suite or, or getting into a, you know, really top job. So I think if you if you could get into one of those coming out as a grad, that’d be great. Other places where signing, you’re probably better off going, you want somewhere that will give you I mean, it sounds silly. It sounds terrible. What’s the word I’m trying to think of the word, but you want something that looks good on your CV, right. And so you want something that is recognisable, and that’s why Treasury or productivity commission or RBA works so well. So I’d be applying for somewhere like that and get good training and, and learn how to and what’s good about those biases is that they have high standards, and they teach you how to write well and communicate. And I think that’s very important. And they can also give you international opportunities. So one of the things that I that blew me away when I went into treasury was just all the international opportunities there. You work on issues with OECD or G 20, or IMF, World Bank, and Treasury people get postings all over the place. Beijing, Tokyo, London, Jakarta, Washington, DC. So that’s, yeah, that’s, that’s a good way to get a national experience and D fat too, of course. But that’s what I’d be doing. I’d be trying to get into, you know, as you probably all know, this, you got to work hard, study hard, try and do extracurricular things that will impress people have a reasonably good interview performance. And yeah, that’s, that’s all I can recommend is just work hard. You’re probably doing all that already.

Joe  14:39

Some of us maybe not awesome. Thanks for the advice. Like it’s really helpful, especially from someone who’s working in the industry. Yeah.

Gene Tunny  14:49

I mean, why I’d say that I mean, I mean, I enjoy consulting but I always see it as something that I’ve sort of fallen into. I mean, it’s good for me because it allows me to do a lot of interesting things and work with different people. And you know, potentially develop a business and grow the business. So what you ultimately want to do is specialise create products. So that’s the path I’m on now. So you probably don’t want to be doing lots of different things. I mean, I’ve been opportunistic, I’ve been trying to, you know, get the contracts in. And to do that I need to work on a lot of different things. Because partly, it’s because I’ve got a wide range of experience. So I’ve dabbled in different areas, and I can do those for a wide range of things. But ultimately, I’d like to sort of niche down and develop products that, that provide that recurrent revenue, that’s what you ultimately want, I think. And I think consulting can be difficult when you’re at the beginning, I wouldn’t say the bottom. But you know, the Finder mind their grinder model? Have you heard of that? But they talk about it, like Deloitte and PwC. The big four? Well, the finders, the partners, they’re the ones who have the connections, they’ll have, they’ll know the CEOs, they’ll go cycling with him, or they’ll play golf with them. And the CEO will ring them up, and can you do this analysis for us? Can you crunch the numbers for us on this project, and then there’ll be no partner or go, Okay, that’s great. Well brought that in the Finder, they don’t want to do the work, they just want to go to the, you know, the soirees, they just want to do the networking, and bringing the projects ever mind who’s a senior person, and not necessarily that senior, just there a few years or five, five or 10 years, they’re the managers. And so they’ll manage the projects being done. And the people who are doing the projects are the grinders. And today, the analysts, and that’s where the grades come in. And they could just work ridiculous hours. And partly because it’s a tournament because everyone wants to get up to the next level and prove themselves. And to get into one of those firms, you have to be really good generally. And so you’ve got young, ambitious people, they’re all competing against each other. But it can be very difficult that people work ridiculous hours. So that’s why I wouldn’t necessarily recommend consulting to start off with you better coming in later on when you’ve got some experience. So you can come in as a manager, or you could come in or you can do freelance on your own or set up your own business. I think it’s much more enjoyable then.

Joe  17:16

And then you get to work on your golf skills as well.

Gene Tunny  17:20

Yeah, although cycling, I know, golf used to be the big thing. I think it’s more cycling now. Yeah, yeah.

Joe  17:27

Awesome. Well, I guess speaking about the Big Four, as someone who’s working in the consultancy industry at the moment, what’s your take on the ongoing scandals that have been happening involving PWC and other consulting firms at the moment? Do you think this may be raises questions or concerns about the efficacy of outsourcing public policy?

Gene Tunny  17:50

Oh, look, I think there’s always been concerns about the efficacy of outsourcing. And if you look at the history of contracting out, I forget which fleet it was, but was it the Third Fleet, there was one of some of the convicts ships are all put out to tender right by the by HM Treasury, or the Admiralty in in the UK, and the Admiralty or the the Treasury they want, they want the most people to get out, they want people to come to Australia, they don’t want to people to die on the ship. Right? They actually want people to survive the voyage. But the ship owners, the ones who are who when the contract, they want to fulfil the contract to just to the letter so they can get the payment from the Treasury. But they don’t really care much about the people who were the people survive unless you make that explicit in the contract. So and there was a scandal with one of the convict ships, if I remember correctly, I can look it up, and we can put it in the show notes. So yeah, there’s always been issues with government contracting, there’s always been concerns. And so I’m a great believer in outsourcing, because I think it does save money. But you’ve got to do it for specific things for specific jobs that you can keep a close eye on and where you trust the people to deliver those jobs. So I think the problem with PwC is you have too much trust was placed in people that they shouldn’t replace that trustee and given the incentives on their end their ability to make money out of it. Right. And so the, arguably the people in the government should have seen that as a risk and pay closer attention to it. At the same time, what the partners in PwC did, what they allegedly did for the lawyers appears unethical. And you know, just just terrible. I mean, I’d like to think that if I was in the same situation, I wouldn’t do the same thing because I’ve been on the I’ve been on the other side of that in the treasury, in government. And I know just, yeah, there are opportunities all the time to profit off information that the government has, and I don’t know if you’re aware There’s an insider trading scandal with the lad who was working in ABS and he had a maid in Melbourne, and he was leaking the inflation data to him. So yeah, you’ve guessed that’s the problem in the public sector, you’ve got to there’s what I’m trying to say is there’s information in the public sector has is valuable. If you’re giving outsiders access to that, you’re going to make sure that there’s controls on it, you keep an eye on it, at the same time, what the PwC partners allegedly did was unethical, really bad form. Will it stop outsourcing? No, because there’s a lot of benefits to it. There’s a lot of expertise out there, that people who can help government from time to time they’ll take on things that are really big, and they need the outside advice and the outside labour outside assistance. So I think we’ll still need it. But there are lessons. And but that’s outside, as I was saying those lessons, we’ve been learning them for 200 years, and we keep forgetting them.

Joe  20:56

Do you think I remember reading a few months ago, there was quite a bit of talk about this new in house consulting section of the Department of Premier Prime Minister and Cabinet that they were bringing in? Do you think that that might be sort of a potential solution to that sort of issue, or

Gene Tunny  21:14

I think it will, it’s worth trying, I just don’t know how well it will perform partly because of the role of the profit motive in motivating consultants. So consultants to get jobs done, because they know that if they don’t get the job done, the client won’t pay the money. And then that looks bad for them. And if they’re, if they’re the actual proprietor or if their partner, then their compensation is gonna directly depend on that. And even if they’re, they’re an employee, then that can affect their progression, or they could even get the sack if they really stuffed something up super badly. There’s a lot of incentive to get the job done and get it done efficiently work weekends work long hours. I mean, there are some times I’ve stayed up till God, yeah, I’ve done at least one or two all nighters. Some people will do multiple all nighters to get jobs done, but you will really push yourself. Is there the same incentive? And in that government body? I don’t know. And, and I don’t know to what extent they’re going to be constrained by the the APS pay structure, and to what extent bonuses can be paid. So I think that’ll be the test of that. Look, it’s worth trying out. Yeah, I’m a bit sceptical about whether it’ll work or not. Yeah, that you got to make sure you get the best people in there. And if I was in government, I’m not sure I’d want to go to that team. I’d probably rather be in PMC or Treasury if I was federal, yeah, yeah. Yeah. So the idea that it was in PMS? Yes. I think it’s supposed to be a subsection of, of the PMC, portfolio or whatever. But yeah, you’d want to, I’d be concerned, if I was in the public service, I’d want to be in one of the core areas where I was working on the really juicy policy issues. And yeah, where you got the potential to advise the ministers, often directly, some will sometimes directly up at Parliament House, that’s that they’re the really interesting things to do. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  23:16

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

Gene Tunny  23:46

Now back to the show.

Joe  23:51

I guess another sort of perspective that I was thinking about is having independent public institutions like the Productivity Commission, for example, or the RBA, that you mentioned before, that are not necessarily beholden to a particular department, but still part of the public service. How do you see the role for those sorts of institutions evolving?

Gene Tunny  24:15

Yeah, I think they’re terrific. I think that’s, that’s a good idea. I think the PC has done a lot of good stuff. But we’ll have to see how it goes under the new commission head. So Danielle wood, who’s an old friend of mine, we’ll see how it goes. And I think she should be she should be great. She might have a different focus, she might be more focused on social policy issues than than some of the previous Productivity Commission heads. But yeah, I think Productivity Commission is a great idea a lot depends on the terms of reference. It’s given by the government though. So it can be it can be effective if the government uses it right. But a lot depends on what the government gets us to do. Yeah. The other one that’s interesting is the parliamentary Budget Office, which is really good. So I’m not too familiar with that. So that’s That’s in, that’s based in the parliament itself on the hill, rather than in a public service agency. And what it is, is it’s an independent costing agency, and it estimates the cost of policies. So if you’re from the opposition or the grains, or your tail, you can go to the parliamentary budget office and say, Hey, I’ve got this policy idea. Can you produce a costing for us and tell us, you know, what, what do you think this would cost? And so that, that provides a service to the whole parliament. And it provides a service to the public, because we’re not just relying upon the Treasury, which works for the government of the day. And potentially, I mean, I’d like to think they wouldn’t be influenced by the government the day but there’s that perception that maybe they’re not independent? Well, they’d certainly not independent, but maybe they’re not. Yeah, there’s a perception that they could be influenced to extent by the government. So therefore, it is good to have something like parliamentary budget office. And it’s really, it’d be a really good place to work. They’ve got an amazing data set, they’ve got a 20% extract of the ATO is taxation data, right. So all data on all the taxpayers out there, the the PBO has got a 20% extract of that, and that helps them work out, you know, the impacts of policies is pretty impressive.

Joe  26:25

Yeah, very interesting. I’m surprised that it doesn’t come up more as sort of a, an option.

Gene Tunny  26:30

Yeah, it’s either that I think it’s a textbook tax, the tax database, or the census that’s linked to the tax database, I’ll have to, might look that up as well. But it’s impressive data set that they’ve got. And that enables them to do really detailed, precise estimates of the cost of policies, because there’s policy at the Commonwealth level is so complex, because of all of the rules around social security payments, superannuation and taxation. It’s everything so complicated. And so therefore, you need really fine, detailed data to be able to cause some of these policies.

Joe  27:06

Yes. super interesting. And I guess really, like sort of a dream for an economist or quantitative economist to have access to all that data? Yeah, yeah. Well, I

Gene Tunny  27:15

guess I mean, that’s one of the things that’s really changed. And just the the amount of data that is available now. All these big longitudinal or panel data sets, blade, the business longitudinal data set Hildur, household incomes, Labour dynamics, Australia. And you can do all really neat statistical methods with them lots of good econometrics. So if you’re into econometrics, and yet see if you can get somewhere like PbO, or there are some think tanks that are really good like Grattan Institute, or II 61, you would have heard of those places. So yeah, I’d, I’d highly recommend either of those. II 61, the research director, there is an old UK boy, Dan Andrews, who worked at Treasury OECD, he’s good value,

Joe  28:00

no relation to the Victorian

Gene Tunny  28:06

though he’s not a dictator, that’s a good guy. Wasn’t a political COVID.

Joe  28:20

Also, thank you for that sort of tour of the landscape of policy and consulting that was super interesting and hopefully informative for all of us going out there into the world. Moving sort of to another topic, I guess, there’s been obviously over the last year or so inflation has been one of the main policy points or issues, pretty much any sort of discussion about the economy is related to inflation. And a lot of there’s been a lot of media coverage talking about wage growth, particularly over the last six months and and how that might be contributing to inflation or might potentially contribute to inflation. So we have a question here asking, is it misleading for the media to highlight wage growth as a contributor to inflation? Given that, in Australia, we are experiencing negative real wage growth at the moment?

Gene Tunny  29:18

I don’t know to what extent the media has been blaming wages, I mean, that what we’ve seen is that the central banks that reserve bank is concerned about this concept of a wage price spiral that if wages take off, then that’ll feed into prices, and that’ll force up wages again. Now, we haven’t really seen that yet. Okay, so look, some of those concerns may be misplaced. There’s a bit of a debate about that. At the moment. The Australia Institute’s got a lot of press, arguing that it’s all because of greedy corporations. This greed inflation. I’m a bit sceptical of that I’m not sure whether to what extent corporations are any more greedy than they were previously and whether the markets more concentrated than it has been in the past. So I’m sceptical about about that story too. But essentially, we had, it’s the classic story of too much money chasing too few goods, right? We had this big COVID stimulus, additional hundreds of billions of dollars more in bank accounts, and, therefore, extra money, not enough supply prices a bit up the whole wage price spiral thing that central banks have been worried about. Yeah, that that actually hasn’t happened. So maybe you could say it’s misleading, but I’m not sure that’s been I think that’s been what some of the economists and central bank governors have been talking about. I don’t know, to what extent the media have been blaming them or talking about that. I think, if anything, it’s that great inflation story that that’s been dominant. Yeah, I think there’s problems with that, too. I mean, essentially, it’s just prices have been rising, because there’s been a lot more money, and there’s been the shortages and your businesses have, yeah, they’ve put up their prices. And that’s helped them, you know, that’s encouraged them to expand, supply where they can. Yeah,

Joe  31:08

I agree that it definitely has sort of picked up pace in the media over the last few months, this idea of, and often you see it linked to earnings calls or record profit margins. Oh, yeah. Do you think that profit margins should sort of receive more scrutiny from economists as a sort of concept, especially when we’re thinking about inflation?

Gene Tunny  31:32

Well, I guess, what you’re seeing is you’re seeing a correlation, right? Because we’ve had, we did have a very, very strong rebound, after the pandemic, okay, when we came out of lockdown. And so you’re going to expect high profits, okay, because the economy was really performing strong, it’s slowing down. Now, as we all know, and we’ve got this per capita recession that they’re talking about. So yeah, it was natural that profits would increase, because we had such strong economic conditions, that’s just the business cycle. And at the same time, we had inflation because we had all of this extra money chasing only so many goods that could be produced profits, I mean, we do want companies to be profitable, I think you should be looking at what’s causing the profits, if there is market power, or if there is concentration, if they’re abusing it, then we should be looking at that. And that’s what the a triple sees. Therefore, now you could argue that may be the a triple C isn’t as effective as it should be the a triple C’s, it’s looked at groceries in the past, it’s looked at all sorts of sectors in the past, and now we’ve got a competition policy review. And I think it’s looking at the airlines, that’s where we should get. So maybe there is a case for there’s possibly some restriction of competition, or in the airline sector, maybe weak that could be more competitive, it’s a lot better than it used to be when it was super regulated back in the 80s. And it was really expensive to fly around. But no one be jetting around to different cities, it was a certain it was very expensive. It’s because we deregulated it back in the 80s. And we allowed in a lot more competition. Now, this is why this whole issue of the Qatar decision not letting them in on those international routes. That’s why that’s become so politically difficult for this government, because that was something that could have helped reduce the cost of flights, particularly to Europe. And so so you could argue cornices was getting some protection from the government. And so we shouldn’t be thinking about what are their barriers? Are there? Is there a problem with an issue with the market structure? Is there too much oligopoly or monopolistic power? And are there levers that the government can can use to stop that? In cases where it’s where they’re clearly doing something anti competitive? Can we prosecute them under the age of the consumer and competition policy? I can remember the exact name off the top of my head. But yeah, we should. It’s definitely something we should be concerned about. And it is something that, that economists do study. Yeah.

Joe  33:59

Awesome. Thank you for that. Yeah. I mean, as a personal anecdote, I remember I wanted to catch a flight to Europe a little while ago, and I had to go fly with cuantas to first before I could even get a Qatar flight and it was so much better, that I’m going from Perth, Qatar Airways. I will. I think they’re really good. So yeah, it was an interesting decision. We’ve got another question here. Again, sort of taking another step. Russ Roberts, who is the host of econ talk a podcast. He refers to economics as an imperialistic discipline. This idea that, you know, being like, you know, economists often try to apply economics and economic thinking too broadly, to domains where the assumptions may no longer hold and its utility is questionable. I guess, someone that might come to mind is someone like Gary Becker, you know, bringing the idea of economics and supply and demand to the family and areas that typically it hadn’t been applied to before. And for you personally, what do you think the limits are of economics as a discipline? And are there things that economics can’t explain? And we might need other sort of perspectives to understand?

Gene Tunny  35:15

I think certainly, I mean, even economics requires other perspectives. So I think economics is an incredibly powerful tool. And, you know, it’s a science of the economy and studying the economy there. There’s some core economics, you need to know, where it gets difficult is trying to predict behaviour and, and in in cases where people don’t act fully rationally. And that’s what you need to bring the psychology and right. So I think any idea that a court economics is the imperialist discipline, and we’ve got all the answers, I think, that was destroyed by the financial crisis. I mean, maybe up until 2008, people could have believed that. But after 2008, I think there was a recognition that, okay, we haven’t really solved the business cycle, we thought we’ve solved the business cycle as this Great Moderation. markets aren’t always rational, you can’t, there are periods of irrationality in economics is not going to help you there. That’s where you need psychology to bring psychology. And that’s why behavioural economics is trying to bring in psychology with economics. So yeah, I think there are clearly limits to economics. And one of the one of the important limits or considerations, is that economics to the extent Well, if it’s, you could say it’s a science or it’s a study a field of study, it can answer questions of fact, or we can make predictions. Or we could argue, analyse what might be the most efficient course of action from a the perspective of consumers consumer welfare, from economic welfare, broadly construed. What we can’t necessarily answer is what’s the best thing to do for society? Because then you’ve got ethical issues, value judgments, how do we look if something is affecting the environment, for example, and that affects future generations? How do we, how do we analyse that, that those can be difficult issues? Or how do we make choices regarding health policy measures? So it’s not always they’re not always issues where economic considerations are the final determinant, you may need to bring in value judgments? Yeah, the whole distinction that thing was David Hume between isn’t board? Yeah, yeah. Yeah. Yeah. Could

Joe  37:34

all Hume who I guess himself was sort of an economist when he talked about Yeah, money and things like that? Yeah. Well,

Gene Tunny  37:42

anyway, he wrote a famous essay on the gold standard on price, the seaflo mechanism? I think it was, yeah, yeah. I

Joe  37:50

think the argument was that, yeah, it doesn’t matter if you if you have the money supply, and prices have as well, like, every, the welfare of everyone is the same, essentially, I think I only remember that because Polanyi then talked about it. Yeah. He was a pride our economist. Yeah, for sure. Yeah. So that’s all the pre prepared questions that we’ve got. I’m gonna go over to the lectern mic, and then we’ll be handing the handheld around to the members of the audience, if they want to ask gene any questions.

38:21

Just going back, I guess, to your discussion about public and private. And I guess, us as university students entering into the workforce, I just wrote a question down. So as university students, we are involved in Dubai, developing a variety of skills that, I guess were not explicitly taught in university, but that we hope to apply when we get into the workforce, from your experience, or what schools have surprised you from the recent generation of you know, incoming university graduates, and what do you think, you know, is missing from you know, they’re the skills that they’ve developed that they might not have been taught explicitly? Throughout University?

Gene Tunny  39:00

Okay. What’s most surprised me is just how savvy or how brilliant uni students are at producing PowerPoints, like slide deck, Oculus nowadays, we’re all competing in these case study competitions. I’ve been blown away. So yeah, that’s really impressive. Otherwise, yeah, just, I guess maybe I’ve been lucky. But yeah, I found the slide decks. The students type employed generally have good presentation skills, very good at research, good at getting across data and information. I think the skills you need to learn, like everyone needs to learn them, it’s it’s about writing as clearly as you can. Being proactive. It’s hard once you get out of uni because uni, you’ve got the targets to hit, you know, when the you’ve got to lodge your, your papers or when the exam is on, you got to turn up to it. It’s more structured work can be a bit unstructured at times. And so you got to, you’ve got to learn how to manage yourself, manage others get others to help you out a lot of those interpersonal skills, it’s just about building those up, you’ve probably been developed in developing them here at UNI. Anyway, that’s what I, I’d say, the I’ve been really impressed with UQ students in particular.

40:18

G’day, Gene, thanks for the talk. And for your time, I just want to go back to, again, back when you were talking about the distinctions between working in public and private sectors you mentioned as a downside, or a potential downside of working in the public sector was perhaps changing ministries disagreement with, I guess, the government of the day and, you know, a general sense of inefficiency about projects that you’re doing as a possibility. Did you find that your experience in the private sector was a bit more alleviated of those concerns? Or did you also have times where you disagreed with the direction of your projects,

Gene Tunny  40:54

I guess, you’ve got choices in the private sector. So you could actually refuse to do a job. But then you want to try and do a job if you can, if the client is going to pay you, that you have so many clients, you can move on and you can you can sack clients in a way and go okay, I’m not working with you again, if there if, if you didn’t enjoy it, or if it was just hard work. So that’s, that’s what I was getting out there. Whereas with, with government, if the government’s in for several years, and like, I think you’ve got to work for the government of the day, this isn’t a matter of politics. I’ve worked for both labour and coalition governments. And, and I don’t think the quality of the work, I actually think it’s more related to the people in charge at top, I think it relates a lot to their personal characteristics rather than their politics. So I don’t think there’s any correlation between the political strife of government and how good it is to work for, but yeah, you’ve got to be you’ve got to be flexible and realise, I mean, some people enjoy it. I can be challenging. Yes, Minister might be too old. But there was a show for two years, you know, yes, Minister, from the 70s and 80s with Nigel Hawthorne, and, and Jim Hakka. Do you remember he played Chewbacca, too? Anyway, it was a great show. But there’s a line in it where Bernard who was the principal Private Secretary to the Minister was talking to Humphrey says, I don’t understand why the minister wants to do this. How do we how do you cope with all of these changes in in policy direction and sound free says look, if I actually cared about what the policy direction the government was, I’d be stark raving mad because one minute, I’d be pro nationalism, nationalising steel, I’d be then Pro D nationalising steel, and then I’d be pro renationalising steel, because those things change. You’ve got to be flexible in government, that maybe that’s not for everyone. And politicians, I think can be difficult too. Because, you know, working for the government is can be challenging, because there’s a lot of media, there’s a lot of light on the government, and there are a lot of crises. And you can be called in at odd hours, particularly, like, the craziest time in Australian politics in the last 20 years was the Rudd Government. And I mean, it was just completely different from the previous government. But you know, a lot to his credit. I mean, Kevin Rudd wanted to do things, he he saw urgency, he had a great sense of urgency, he was an incredible hard worker himself. But that meant that there were requests coming in at odd hours, he’d he’d be flying back from a meeting a DC, he’d be there for the first time g 20. Meeting, and then he is playing with land in Hawaii. And then we get a call that the wants a paper on. So it’s such it’s such an issue by the time he lands in, in Canberra. And so this is might be on a Sunday or something. So it can be a bit crazy. But that’s what you get, if you want to be in that sort of environment, because there’s that political aspect to working in government. Some people really enjoy that they thrive on it. Others find that find it difficult. So yeah, that’s just Yeah, who knows? I mean, my experience could be a bit idiosyncratic. So that’s one thing to bear in mind to

44:09

sort of on that with the PwC scandal, they ended up selling all of their public sector work company, do you there’s been talk about whether all the big four companies are gonna end up having to do that. Do you think that that will happen and also just sort of see that as a good path forward

Gene Tunny  44:27

in terms of preventing corruption or in front of the think? Yeah, I think I mean, PwC has been forced to do it. The other firms, I think, would rather not do it. I’m trying to remember if v y looked at it and try remember where EY was trying to split its audit from its the rest of its business. And I don’t think it went ahead. I’ll have to look at the details of that. There are probably other ways to stop that, that conflict. I don’t know if that’s going to happen with the other firms, or not close enough to the people in those firms too. Uh, to make that judgement, but yeah, I don’t know to what extent it would look, if you got a job at one of those big four firms, then, you know, that’s, that’s going to be good, it’ll be good experience, even still at PwC is probably still good experience, despite the scandal, they’ll bounce back, they’ve got so many connections, they had a good reputation for a while, I’m sure they’ll be able to turn around eventually. Now, I’d have to wonder, like, as if you want to do consulting work, I’m not sure whether you’d want to go to a company just focused on public sector work. Because then why not just go into the public sector itself, if you like, if public sector is your thing, I’d go into government itself, because one of the things with consulting, I enjoy it, because I actually get to do a wide variety of things. I found personally, I found government difficult because I’m reasonably opinionated. And like, I wasn’t the Sir Humphrey cat character who could been just changed, not not care about the political, you know, the actual policy direction or, yeah, I thought I’d find that very difficult to do. So I actually quite enjoy being on my own or having freedom to, to write to comment. Whereas you can’t do that in government, you can’t say anything critical of the government. It’s difficult. There are advantages, because you can then get involved in, you know, in the policymaking and the decision making. You can work with the minister’s office, even the ministers. But if that’s what you want to do, you’re more likely to get that to do that in the public service, than if you did a public sector, in a public sector consulting organisation that consults to the to the government just depends on what you’re after.

46:43

This is kind of flowing on from that question a bit. Do you see any other consequences coming out of the PwC? Scandal? And I guess now, the KPMG scandal with defence contracts, I think, that kind of flow onto other consulting firms outside of the big fall? Or do you think that I guess, kind of trust in interpersonal relationships that might already exist? Kind of, I guess, being more important than that? Maybe?

Gene Tunny  47:09

Yeah, I think government public servants will be more conscious of the risks. And it may be harder as a consultant to work for, to work for government clients, because they may not automatically trust you. It may be harder to get access to information, you may have to sign more documents. It can be difficult, it’s difficult already working for the government agency. So projects I’ve done, Nicholas grown and I and another colleague did a job for services in Australia recently, looking at my gov and looking at the the investment in that and the benefits of of improving the Margao functionality. And I mean, we had to sign all’s we had to sign those documents that said we wouldn’t share this information. Of course, we wouldn’t. And you know, then PwC, they I think they probably their person who allegedly breached the trust signed documents to and they should have, they should have taken it seriously. And it looks like they didn’t. But what Services Australia did was they wouldn’t let us take documents away. We could only see some documents physically, in a Services Australia offers, because they’re highly confidential information relevant to the budget process. So they had the right controls in place. I think you’ll see more of that there. There’ll be less trusting. I think they’ll still be consulting opportunities. I think I think that they need the expertise from outside so much. They’re not going to cut back on that. But it’ll be more difficult. There’ll be more constraints in terms of access to information, they won’t automatically trust you. But I think they’ll still be, they’ll still be jobs that consolidate if you want to do that. Yeah.

Joe  48:44

Awesome. Well, if there’s no more questions, we just want to say thank you so much gene for coming along. And we’d like to offer you this gift. This is the statecraft which is our PPE society, student magazine. So lots of different articles from all sorts of students. Yeah, so thank you so much for coming and sharing your knowledge with us. It’s been really great and really appreciate you and hope to see you again in the future.

Gene Tunny  49:15

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

50:02

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

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

Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

The Australian Government has been having trouble getting its proposed Housing Australia Future Fund (HAFF) passed by the Senate. The policy looks odd. With some justification, the Australian Greens have commented: “In its current form the Housing Australia Future Fund (HAFF) legislation will see the housing crisis get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteeing a single cent will be spent on housing.” In their dissenting report on the bill, the Greens’ cited the views of this episode’s guest, Dr Cameron Murray. Cameron is a Post-Doctoral Researcher at the Henry Halloran Trust at the University of Sydney. 

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 Dr Cameron Murray

Dr Cameron Murray is Post-Doctoral Researcher at Henry Halloran Trust, The University of Sydney. He is an economist specialising in property and urban development, environmental economics, rent-seeking and corruption.

Book: Rigged: How networks of powerful mates rip off everyday Australians

Website: https://fresheconomicthinking.substack.com/  

Twitter: @drcameronmurray 

What’s covered in this bonus episode

  • Cameron’s submission to the Senate Inquiry into the Housing Australia Future Fund Bill [2:39]
  • What’s going on with the Housing Australia Future Fund [5:02]
  • The only reason you can make a premium is if you take risk [8:57]
  • Why you need to separate the funding and the spending [10:36]
  • Why doesn’t the Future Fund just directly invest in new houses? [14:21]
  • How governments are increasingly doing financially tricky things that don’t make sense [19:23]
  • Cameron’s thoughts on the impact of the bill on the level of investment in housing [23:14]
  • What’s going on behind the scenes at Parliament House [26:18]

Links relevant to the conversation

Cameron’s submission to the inquiry into the Housing Australia Future Fund:

https://fresheconomicthinking.substack.com/p/australias-housing-future-fund-my

Direct link to Senate Committee inquiry report:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills/Report

HAFF inquiry home page:

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/HousingPackageofBills

Transcript: Odd way to fix housing crisis proposed by Aus. Gov’t: invest in stocks first w/ Dr Cameron Murray, Sydney Uni.

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, welcome to this bonus episode on the housing Australia Future Fund. The H A double f or half. It’s Saturday the 25th of March here in Australia and throughout the week, the Australian government has been having trouble getting the half passed by the Senate. That’s probably unsurprising because the policy looks like a bad one. With some justification the Australian Greens have commented in its current form the housing Australia Future Fund legislation will see the housing prices get worse. We can’t fix the housing crisis by gambling money on the stock market and not guaranteed a single cent will be spent on housing. That paragraphs from the Greens dissenting report on the housing Australia Future Fund bill. In that dissenting report, the greens relied significantly on testimony to the inquiry from my guest this episode, my fellow Brisbane based economist Dr. Cameron Mary Cameron is a postdoctoral researcher at the Henry Halloran trust at the University of Sydney. I recorded this conversation with Ken Friday last week on the 17th of March 2023. I’ll link in the show notes to Cameron’s submission to the inquiry into the half cam submission as a great example of the application of economic logic to an important economic policy issue. Cam sees through the accounting trickery and the financial engineer at behind the fund. He shows how the Australian government has been too clever by half. It’s trying to get credit for doing something about the country’s housing crisis. But what it’s proposing could be next to useless. Right. Let’s get into the episode. Please let me know what you think about what either camera I have to say by emailing me at contact at economics explored.com. I hope you enjoy my conversation with Cam Dr. Cameron Murray, welcome back to the show.

Cameron Murray  02:39

Thanks for having me again, Gene.

Gene Tunny  02:40

Oh, it’s a pleasure, Cameron, I read with much interest your latest post on fresh economic thinking. And it’s about your submission to the Senate inquiry into the housing Australia Future Fund Bill 2023 and other bills. Could you tell us a bit about what that involves? So you’ve written a submission to this inquiry? And you’ve also presented to the inquiry you gave testimony? Did you?

Cameron Murray  03:07

Yeah, that’s right. So this bill was passed their house, the lower house, and now the Senate is reviewing it. And what they’ve done is held this inquiry asked for public submissions, and had people who made submissions come in for a day of expert testimony so that their senators can ask specific people, you know, technical questions, what do you think about this? What about this design element? And so I was part of that on on Wednesday, this week. And yeah, so the bill itself is called the housing Australia future funding bill. And the basic idea is the government has decided to address Australia’s current housing problems. We’ve seen rents rise, we’ve seen rising homelessness, we’ve seen longer queues in public housing waiting lists, they’ve decided the best thing for them to do is take $10 billion from the Treasury and give it to the Future Fund, which is a sort of publicly managed investment fund, and cross their fingers and hope that that fund makes a return that’s higher than their opportunity cost, you know, the cost of the government’s dead and use that margin on the risk to fund something in the future, some unspecified, granting in relation to what in the text of the bill is called supporting housing need. So that’s what it was all about. And, and yeah, I gave some testimony on Wednesday.

Gene Tunny  04:35

So the federal government’s claiming that this is going to help them build I think 30,000 social housing dwellings over the next five years or so. So that’s their that’s the plan. But I think what I like about your submission is it essentially talks about how this is a rather roundabout way of going about it, which doesn’t actually guarantee you’re going to deliver it to you As in,

Cameron Murray  05:00

this is the mad thing. And this is. So let me start by saying, to be clear what they’re doing to build houses is taking $10 billion and buying all sorts of assets in the future funds that are not houses. Right? So that’s what they’re trying to do. And it’s really funny because there’s an actually an episode of Utopia, you know, the comedy show about the bureaucracy in Australia, where Rob switches character, who’s the sane one, amongst the insanity is explaining to a political staffer who says to him, What about an infrastructure? Future Fund? Yeah, don’t you get it, it’s about the future, he says. But spending the money on infrastructure today solves the future, we don’t need a fund. We don’t need a new office, we don’t need these fund managers. And you know, when we watch utopia, we all laugh and think we’re the same guy in the room. But what happened at the Senate inquiry is that I was the only guy and everybody else who laughed at Utopia when they watched it was the crazy guy who thinks that spending money on not houses is the best way to spend money on houses. And so there was this really perverse political slogan that kept creeping in, which was, this is going to secure funding for the future and insulated from future political decisions. And I just sat there going, I don’t, I’ve read this bill, because this funding is riskier, because you’re investing in a risky asset and the current Future Fund loss $2.4 billion last year, and spent half a billion dollars on fund managers to achieve that outcome. So we almost lost $3 billion last year. So it’s possible that we put 10 billion in this fund and have 9 billion next year. And then that’s the way we’re securing the future funding. The legislation is also written such that the future Minister has the discretion of how much from the fund to spend, and on what projects. And it also introduces a cap of 500 million per year that a future minister can withdraw from the fund. So what you’re actually doing is providing a great excuse for a future minister to spend less than 500 million. And in fact, zero if the fund is losing money. So there’s this weird disconnect between the political slogan of securing long term funding insulating it from politics and the reality, which is adding risk to a fund compared to just having 10 billion in the bank or at the Treasury where it is, and not insulating at all, and just still relying on future ministers discretion with no commitments. So that 30,000 dwellings you said, is not enough. There’s no, it’s not written in their rules. It’s written in the guideline as a hypothetical of how much, you know, if all went according to plan, and we would expect this, and I’m like, but there’s like, like many housing strategies and plans that the federal government and state governments have had in the past, there is nothing holding them to account on those promises. So yeah, it’s, it’s a really, really strange one. And I felt like there are about 20 or 30 witnesses or experts at the hearing. Now, only two or three of us actually calling this out the majority of the industry. And the researchers had really, I don’t know, bought the line that this is something that it’s not.

Gene Tunny  08:16

Yeah. So what’s going on, it appears to me is they’re essentially that borrowing, they’re going to be borrowing this money, or it’s going to increase the borrowing requirement by $10 billion, because we’re currently we have been running budget deficits. So it’s going to increase that, that borrowing requirement, we’re going to put that into this the future funds, so we’re essentially borrowing money to then invest in the share market or Enron’s Yeah, well,

Cameron Murray  08:45

if we’ve invested in bonds, we’re borrowing money to buy the bond back off ourselves. If this fund, if this fund is like eight or seven or 8%, government, Australian government treasury, that’s just pure accounting. Yeah, you know, trickery, you know, and that shows it but the whole thing is accounting trickery, right? Because, you know, you’re just recycling the money via the current shareholders of BHP into Telstra and Commonwealth Bank, right, by buying the shares off them and then later selling it back to them. And the only reason you can make a premium with this fund over the over not borrowing it, right, because you still gotta pay interest on the Treasury borrowing. The only reason you can make a premium is if you take risk. Yeah, if you’re taking risk, then it’s not a secure, long term funding thing. You’re just adding risk unnecessarily, and delaying spending money on building houses. And, you know, it took a little bit of explaining to get that through at the hearing. But ultimately, I had, for example, John Corrigan, you know, back me up on that argument, and I think Brendan Coates from the Grattan Institute who is a big supporter, the policy sort of had to concede that Yeah, at the end of the day, you’re adding risk in the hope of increasing the funding. But risk is real, right? We just can’t count on winning In the next few years,

Gene Tunny  10:02

right, so Brennan was buying the government’s line that this is about getting a secure funding source. He, I mean, I know you can’t speak for Brendan, I’m just wondering where he was coming from?

Cameron Murray  10:13

Well, actually, the idea is actually from one of our Grattan Institute report, and they proposed a $20 billion social housing fund. And, and, and, you know, I’m not averse to the government sort of diversifying the capital side, right on its balance sheet. Yeah. And and owning some high risk assets? I don’t, I’m not averse to that, in principle, right. But you’ve got to separate the funding and the spending idea. So the way I try to tell people, if the government’s saying we don’t have the money for it, it means we don’t want to do it. Because look at the submarines look at every other big look at the Olympics, right, no one’s has gotten the Olympic Future Fund, no one’s got a submarine future fun. We spend on what we want. And if someone’s saying where’s the budget, or where’s the funding, you sort of missing the idea, but but even more fundamentally, you know, if you go and raise money in the share market, from new investors for your business, each investor doesn’t say, I’ll give you this money, but you can only spend this money on, you know, cleaning your office and and the other shareholder says, no, no, but I only want you to earmark my money for doing this, right. What we do is we pool that money together and spend it the best way we can on the operations we need to do and it’s the same for the government, you need to separate Well, we’re gonna raise money, the best way we know how, whether that’s different types of taxes or borrowing, and we’re going to spend money the best way we know how and tying two things together is bad. Operationally, it’s just like, it’s bad for my business to promise one shareholder that their money goes to one type of spending, and another shareholder that I’ll only spend yours on new trucks. You know, it doesn’t really make sense it and it’s very hard to break through this kind of weird, I don’t know, budget illusion that we’ve all got that, you know, we must do this. For this, we must raise money in this way for this spending.

Gene Tunny  12:06

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

Female speaker  12:12

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  12:41

Now back to the show. I liked how you wrote about this off balance sheet trick or the off balance sheet tricks, the basic idea of the half. So that’s the housing Australia Future Fund is to create an off balance sheet accounting trick whereby the debt associated with the fund and the assets in the fund are considered as a bundle and hence not counted in measures of public debt. So I mean, I haven’t seen exactly how they’ll what the accounting treatment of this will be in the budget, it seems to me what they’re doing is they’re setting this up as a, it’s an SPV, or some sort of public Financial Corporation so they can get it outside of the traditional balance sheet measures. They put in the budget, which is for they have it for general government, but then they also have public non financial corporations, but they don’t have public Financial Corporation. So I’m wondering if that’s what they’re going to categorise it as

Cameron Murray  13:34

I think, yeah, that’s part of the intention. And we actually see those types of budget tricks a lot, I think, New South Wales rail, you know, they tried to shift things off balance sheet, but at the end of the day, you know, we as economists should be looking through that, right. Oh, yeah. And saying, Look, you know, debts debt, but, you know, these are all assets, we can bundle them all together, you know, doesn’t matter where you’ve accounted for them. And the way we’re going to assess whether that debt was, you know, justified or efficient or productive is what, you know, what the investments made in general are, so whether it was on budget or off, you know, it should be the same, right, and you’re borrowing money to buy these assets. Doesn’t matter how you account for it. And that’s the that’s what sort of leads me to my other point is that houses are assets. Yeah. Australia’s property market is the hottest market every property every investor wants to own some. Yeah. So why doesn’t the Future Fund build new houses to expand this pool of property assets in the process, that equity can be on its balance sheet, but instead of, you know, bumping up the prices of BHP shares that you’re going to buy, you actually expand the housing stock in the process, and you can still have your off balance sheet tricks. I actually looked historically and since the Future Fund started in 2006, that’s the current investment fund Australia hands. They’ve made 7.8% average return annually, the average Australian dwelling increased in value by 7.7% per year since 2006. So just the capital value increase of owning a representative sample of Australian property would have got you the same returns as the Future Fund. So it’s not clear to me why we’re recycling this money via other assets, before we build housing assets, we can look at the balance sheets of state, public housing managers. Yeah. And when they value their land and their property portfolios every year, they got to bump it up, you know, 5 million billion. So here 10 billion here, because all this portfolio of properties they own, you know, it’s a valuable asset that rises in value. So So I’ve proposed quietly to a lot of people involved that if you want to have your financial trick and your Future Fund, get the border of the future find to only spend the money, building new dwellings, and then put the equity that you have, yeah, into the fund, you can keep your financial track, but at least you’re you know, keeping the housing construction going. And you’re immediately accumulating a pool of houses that you can allocate to the people who need it at a cheap price.

Gene Tunny  16:13

Yeah. And so is this been driven by the State of the Commonwealth budget, they, they want to make sure that they think they’re gonna get some earnings from this housing Australia Future Fund that can then offset the spending that they’ll have to make on public housing. So they want to get that they’re hoping they can get that. Because if they just go ahead and start building public housing, then they don’t have that revenue to offset that. Is that what they’re thinking?

Cameron Murray  16:39

I think you’re right, I think that’s what the thinking is. But at the end of the day, you know, having those houses supplied to people at a cheap price offsets are the spending on those people already. So the benefit is there, either in the form of the rental, or in the form of the income from the other assets. So, if I was to put on my cynical, political economist hat, I would say the reason this programme has gained so much traction and is probably going to be the law few months, is because it doesn’t change the housing market, it’s going to pass because it doesn’t achieve anything. And that’s what is truly desired. By, you know, the political parties involved is that they want to look like they’re doing something without actually doing it. I’ve had conversations with politicians who’ve told me what’s wrong with the housing market? You know, prices went up, because we dropped the interest rate, that’s good. And rents went up, because incomes went up. That’s good. There’s no market failure here. government shouldn’t do anything. So if that’s what they say to me, how is it then that they passed this bill that’s meant to do something, the only coherent story there is that this bill is to look like you’re doing something, but not doing something because you genuinely think the property market is doing what it’s doing? Well? Yeah, that’s my super cynical. Political Economy hat.

Gene Tunny  18:08

Yeah, you may well be right. I mean, it’s the Sir Humphrey Appleby type of approach where people actually don’t care about whether a problem solved, they just want it look as if something’s being done.

Cameron Murray  18:21

I’ve had a lot of people message me since my testimony to tell me their experiences of this. And I don’t know what I’m going to call this pattern, you know, does it have a name? I’ve tried to call it something like pre compromising. Where you take a good idea, you turn it into a bad idea, but it’s still got the same words in the bill. While so it looks like you’re still doing something. Yeah, you push that. And you’ve totally compromised the content, or the effectiveness, just so you can keep the name because the name is what people will talk about. And it looks like you’re doing something. It’s a what’s it called housing Australia Future Fund? Yeah. Sounds like something important is being done. Right. Yeah. And the more that gets in press headlines, the more we give credibility to the current government, who is trying to, of course tread this line of keeping prices up for people who own property, and pretending they want to keep prices down and rents down to people who don’t own property. And that’s a real interesting political tightrope. That happens a lot in this country.

Gene Tunny  19:23

Yeah, I really liked your submission, Cameron, because I thought it. I mean, it highlights our governments are increasingly doing these sorts of things. And they don’t really make a lot of sense when you think about it, because I remember when I was in Treasury, we had to set up these buildings Australia fund education investment fund, that’s I forget the name of the other one. And it didn’t really make a lot of sense because you’re just taking money and we ended up I think we ended up having to borrow money to put into them, because of the time you know, but the original idea was that there was Yeah, and they were gonna stick them in these funds, but then by the time On had to transfer the money, it was the financial crisis. So the timing wasn’t very good. And then they we see they constrain your ability to get cash. I mean, because you’re saying, Okay, we’re going to lock up all of this money in these funds, even though we don’t need it at the moment. So it can it can constrain your budget flexibility. So I don’t like them for that reason. And the other point that you’re making is your your, if you end up having to borrow to invest in it, well, you’re, you’re borrowing money just invested in the share market. And it’s not necessarily achieving the public policy objectives that you that you want to achieve. So yeah,

Cameron Murray  20:43

that’s exactly the way to put it, you’re gonna borrow 10 million to build houses for people and give it to them below market? Why do you need to recycle that money through the share market? Why don’t you put it through the pokies, there’s also a chance of making more money there, you know, it’s high risk. Why don’t you just take your half million, that half billion that you want to spend each year and spend it for the next 20 years, and just start a construction programme? Like, the really bizarre thing? To me, I read this bill. And in Part Seven H or whatever it is, it says, The Treasury will credit the housing Future Fund with $10 billion. It just doesn’t. And I just think to myself, How does where’s this 10 billion coming from? Aren’t we having this fund to get the money that we don’t have a now you’re saying we have 10 billion? If we have 10 billion? We don’t need the fund? Right? Yeah. And, you know, no one else seems to pick up on that, oh, we just credit with 10 billion. I’m like, why don’t you just build houses, credit them? Credit, the builders is 10 billion. Yeah.

Gene Tunny  21:45

So this is where they’re hoping that by doing it, you know, essentially gambling or well investing with borrowed money, they can get enough of a return on that, to then help fund this additional expenditure. And that’s going to lessen the budgetary impact. So that’s essentially what’s going on. And I just think it’s interesting, because it’s an interesting example of one of these. These things, these clever financial vehicles, the Polly’s and the advisors, I think, in particular, they love it, they think they’re geniuses, but it’s not really solving the problem.

Cameron Murray  22:20

Yeah. And let me just talk you through what I think is the best case scenario. They put money in this fund, sometime in the middle of this year, after we’ve had a big asset market correction, and they they’re near the bottom. In the next 12 months, there’s a real big boom. And in 12 months time, the ministers say, Oh, look, we’ve been making all this money. I’m gonna make this happen. Yeah, that’s the best case. The worst case is, you know, we’ve just seen a bank collapse in the United States, and you know, Swiss government bailout the Credit Suisse bank, the worst case scenario is they put $10 billion into the Future Fund, start accumulating assets in the next six months. And then come September, October, you know, popular time for financial market crashes, the fund loses 10% of its value. And next year, the minister says, oh, we can’t spend anything on public housing, because we just lost a billion dollars on the share market. Yeah, that’s, I don’t know which one’s more probable, but both are potential outcomes. And if the second one happens, you know, I hope the public and the press hold the government to account and say, Hey, this is what you wanted. You were told this is the risk you’re taking. And you still did it anyway. I really hope that opens people’s eyes. If that happens.

Gene Tunny  23:34

Yeah, that’s a good. That’s a good point. So you’re saying that the the level of investment in public housing could end up being dependent upon the returns on this fund

Cameron Murray  23:46

highly likely, implicitly, tells the minister only spend what you make, you know, for funds doing well spend money, if it’s not don’t spend money, the way it sort of described, and it’s got this cap in it as well. I would say there’s a sort of, you know, a built in excuse, yeah. Whereas you kind of want the opposite incentive. You want more public spending on housing during a downturn in the markets, right? You want to smooth out construction cycles. Yeah. Whereas I sort of feel this builds in the opposite political incentive. But the you know, the next 12 months are going to be very interesting if this bill is finally passed. And you know, the markets are very volatile at the moment. And the Future Fund, of course, lost a couple of percent last year, you went down the existing funds. So if that happens again, yeah. Who knows? Yeah.

Gene Tunny  24:40

Just before we wrap up, Cameron, can I ask you what was it like presenting to the committee? I mean, did anyone get it? Did any bells rang? Or what’s the expression? I mean, I imagined some of the Imagine that. There must have been, some of them must be sceptical, or I hope some of the people on this committee worse sceptical. But yeah. What was your impression?

Cameron Murray  25:05

My impression is that this process is a little bit of a charade. So that each political party in the crossbenches can get their sort of own experts on to provide excuses for the political bargain that they want out of this in the Senate. So I think most of the action is happening behind the scenes. And this is just each, each person in the Senate had a chance to call forth their own experts. And so that was done. My impression is that your committee is loaded based on the political party of the day, right. You know, I was cut off from my introduction, when I was saying, you get a few minutes to make introductory remarks. And I was explaining how I can’t believe you’re trying to describe this as a low risk secure, politically insulated funding stream when it seems the exact opposite. Yeah. And they’re like, oh, you know, we only allowed two minutes for these opening remarks get. And, of course, if you if you go and check the footage, everyone bloody rambled for five minutes. So you can sort of see that and, and, you know, I’ve spoken to a variety of Senators offices, as well. And they’ve obviously taken on board what I’ve said, but you don’t see minds being changed. Live during this process. That’s not where it happens. It’s all happening with phone calls and meetings and negotiations amongst each party and independents are

Gene Tunny  26:36

all behind the scenes. Okay. Because I was just wondering, I imagine that the, the greens would probably be pushing the for the government just to build public housing. Right. Yeah. Well, that must be in there. That’s right. So

Cameron Murray  26:50

I think it’s Nick McKim is the green senator from Tassie. And he was, you know, onboard when I started my opening remarks by saying, you realise there’s a scene in the comedy show utopia, right? We started today. That is exactly what you’re doing. But you all laughed with the other side of the joke. And now you’re you are the joke. And so he got a few chuckles But you know, the other the other people didn’t really like it. So yeah, the greens are definitely not keen on these off balance sheet financial tricks at all, which is really puzzling, right? It’s really puzzling to me. I don’t know what the Liberals should be sort of have a similar mind being a bit more honest financially and say, let’s focus on what’s a waste of money and what’s not. Let’s not focus on where you record it in the accounts. So I don’t I don’t know what their views are. But my impression is the Labour Party, you know, they’ve almost got this superannuation brain, or this Future Fund brain like this sort of, yeah, it’s inhibited their ability to go, you know, this is not magic. It’s not a Magic Pudding. It’s just buying different assets.

Gene Tunny  27:57

Yeah, yeah, exactly. So I’ll put a link to your submission in the show notes. I think it’s really good. And you make a good point about how, yeah, I didn’t realise the fees paid by the Future Fund for funds management was so high, but I guess it makes sense, given the amount of funds under

Cameron Murray  28:13

point 2% of the funds under management. That is still half a billion dollars a year, which is of course, again, the maximum that this Future Fund for housing can actually spend on housing subsidies or housing construction. Yeah. So the maximum they can spend is roughly what the average management fee is for the existing Future Fund. Yeah, just to get your orders of magnitude straight of what’s involved.

Gene Tunny  28:40

Okay. And, yes, it has been passed by the lower house, it’s going to it’s being considered by the Senate at the moment, and it’ll probably be passed, I imagine, based on what you were saying,

Cameron Murray  28:51

my understanding is the cross bench has a lot of power in the Senate here to get things changed. My suspicion is that if there are key crossbenchers that take my argument seriously and a couple of other of the submitters as well, they may, for example, put in the legislation a minimum amount of spending out of the fund instead of a maximum to sort of guarantee it. And they may, you know, and that might just be a way of diverting instead of buying bhp shares and Commonwealth Bank, you know, build houses with it and own the equity of those houses with your public housing developer or however you account for that. So that that that may be a realistic change. I don’t think it’s gonna get thrown out or go back to the drawing board.

Gene Tunny  29:38

Right. Okay. Well, again, well done, Cameron. Yeah, excellent submission, lots of very sound, economics and public finance in there. Any final words before we wrap up?

Cameron Murray  29:49

No, I just want to, you know, cross my fingers that the best case scenario turns out if this fun gets passed.

Gene Tunny  29:55

Very good. Okay. Cameron Murray, thanks so much for appearing on the show.

Cameron Murray  29:59

Thanks for having me, Gene.

Gene Tunny  30:02

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

Cameron Murray 30:49

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

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

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

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  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

White Elephant Stampede w/ Scott Prasser – EP161

Various projects worldwide have been labeled White Elephants. These projects include the Gold Coast desalination plant and the Berlin Brandenburg Airport, among many others. What exactly is a White Elephant? How can we identify them and how can we stop them from happening in the future? In this episode, Scott Prasser joins show host Gene Tunny to talk about White Elephants. Scott is a former academic and ministerial adviser, and is one of the editors of the new book from Connor Court titled White Elephant Stampede: Case Studies in Policy and Project Management Failures. 

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: Scott Prasser

Scott has worked in senior policy and advisory roles in Australian state and federal government public service. From 2013 to 2019 he was Senior Adviser to three federal cabinet ministers covering portfolios of education and training, and regional health, sport and decentralisation. In addition, Scott has held academic positions at five universities across four states and territories, the last at professorial level. Scott gained his undergraduate and master’s degrees from University of Queensland, and his doctorate from Griffith University. Scott’s most recent publication with Helen Tracey was Royal Commissions and Public Inquiries: Practice and Potential (2014); and Audit Commissions: Reviewing the Reviewers (2013). 

Substack newsletter: Policy Insights by Scott Prasser

Links relevant to the conversation

The new book from Connor Court White Elephant Stampede: Case Studies in Policy and Project Management Failures

Criteria for identifying White Elephant projects.pdf

Regarding the cost of the Gold Coast desalination plant, see Brisbane Times article:

The Brisbane Times article reports:

“The controversial $1.2 billion Tugun plant was closed in 2009 after a string of complaints including rusting pipelines  and mothballed from fulltime water production in 2010.

Normally it provides only three megalitres per day to Southeast Queensland’s water grid and costs between $12 million and $15 million a year to operate.”

Time Out article on fixing up the acoustics in the concert hall of the Sydney Opera House

Transcript: White Elephant Stampede w/ Scott Prasser – EP161

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,

Scott Prasser  00:04

The whole thing was driven by politics. Right, rather than by policy. Yeah, that’s the problem.

Gene Tunny  00:12

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 161. On white elephant projects. My guest is Scott Prasser, who is a well known commentator on public policy issues here in Australia. Scott is one of the editors of the new book, White Elephant Stampede, published by Connor Court, please check out the show notes relevant links, including a link to the Connor court website so you can get a copy of the book if you’d like to learn more about white elephants. The show notes also include a clarification that I need to make regarding the cost of operating a white elephant not far from me, a Gold Coast desalination plant. I couldn’t remember the actual cost while chatting with Scott. And I overestimated it. That said, it’s still a costly facility and arguably fits the white elephant definition. Finally, the shownotes contain details of how you can get in touch. Please let me know what you think about what either Scott or I have to say in this episode. I’d love to hear from you. Right now for my conversation with Scott Prasser on white elephants. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Scott Prasser, welcome to the programme.

Scott Prasser  01:34

Thank you very much.

Gene Tunny  01:35

It’s good to have you here. Scott, keen to chat with you about white elephants. So you’ve recently been one of the editors of a new book that’s coming out from Connor Court on white elephants, White Elephant Stampede case studies in policy and project management failures. So yes, looking forward to speaking with you about that. To kick off. Could you tell us a bit about your background in public policy, please, you’ve got an extensive background. And I think it’d be good to sort of let people know about that. I think it’s, it’s, it’s a really extensive, interesting experience. So if you could tell us a bit about that, please, that’d be great.

Scott Prasser  02:12

Sure. I’ve worked in federal and state governments, in state governments. I worked in state government, Department of Welfare Services, State Development and Premier and Cabinet in Queensland, under the Bjelke-Petersen government , and also under the Beattie government. Okay. So I’ve worked in those roles. I was basically running different policy units inside government. I also got seconded to minister offices in state government, and also in federal government. So immigration Minister’s office, I was Chief of Staff way back in the Fraser government days. And more recently, after serving, running a Public Policy Institute at the Australian Catholic University in Canberra. I work for three different federal cabinet ministers, Christopher Pyne, Simon Birmingham, and Bridget McKenzie, across education in regional services. And so, I’ve been in and out of the public service Minister offices and academia over the last 30 years or so, and writing on all sorts of things about Australian politics, public policy, Royal commissions, inquiries, and those sort of bodies. And I did teach project management at one university, which is how I got interested in white elephant projects because you run across a quite a wide a lot of white elephant projects when you’re teaching project management.

Gene Tunny  03:32

This was it was at University of the Sunshine Coast. Right. Okay.

Scott Prasser  03:36

So I’ve worked at RMIT, University of Sunshine Coast, University of Southern Queensland, Australian Catholic University, and also taught at QUT and University of Queensland. So as a sort of tutor, person, so I’ve done all those sort of things. So I’m interested in really what’s happening in the real world, okay, and how we can, how we can learn from mistakes and not so they don’t happen again.

Gene Tunny  04:01

Absolutely. Okay. So, Scott, can you say about this idea of this concept of a white elephant? Where does this why is it called a white elephant? What’s the story behind that?

Scott Prasser  04:13

Well really, the story really comes from Thailand or Siamese, it used to be called that if you were caught by the king, with your hands in the till, or committing fraud, instead of having your head cut off, or your hands cut off, which is one way of punishing people. The idea in Thailand is a very interesting place, which I like a lot. The king would give you a white elephant and a white elephant is sacred. And it means you’ve got to look after it. You can’t. In Thailand, elephants are work animals, you know, they live logs and things like that. You’re not allowed to make a sacred animal work. So this becomes a very expensive issue for you to have to look after. This gift from the king. You can’t sell the gift. You can’t kill the gift and you gotta maintain it and look after it. So basically bankrupts the person you give the gift to, that’s where the whole term comes from really, white elephant.

Gene Tunny  05:08

Right. And so when we’re talking about government projects, or I suppose any sort of project, we’re talking about a project, which is you can draw an analogy, or you can, it’s similar to this white elephant that the King of Siam would would give to you because it it’s not a good thing to invest in, it costs you money on an ongoing basis is that the idea?

Scott Prasser  05:34

Thats right, the white elephant project, or white elephant policy is something that doesn’t work properly, that something that’s too expensive to maintain, that something that often Looks good, looks good, but doesn’t, can’t, can’t do can’t perform. And it becomes very expensive maintain and therefore gives no return back to the owner or to the originator of it. That’s for a white elephant project, is it a very expensive thing, it costs more to maintain, and it doesn’t serve any utility, any particular function to do that, for the amount of investment you got to put in to keep this thing going.

Gene Tunny  06:10

Okay. And we’re typically talking about public sector projects, are we?

Scott Prasser  06:14

That’s right. We’re talking about public sector projects, there are no doubt in the private sector, white elephant projects and things that go astray. But the shareholder puts up the bill for that. And I don’t really care too much about the shareholders in the sense that I do care about the waste of public money. Since public money is finite, like everything. And I am concerned, in these days of sustainability, how we waste money on projects, and we repeatedly waste money on projects, that self Evon were going to become white elephant projects or are white elephant projects.

Gene Tunny  06:49

Okay, so what types of projects are good examples of white elephants? Scott, you’ve you’re looking at some in this new book, you’re editing the case studies in policy and project management failures, the white elephant stampede, what are some of the examples in that book?

Scott Prasser  07:03

Okay, well one of the examples close to home is the Queensland desalination plant. Okay. So this is rusting way down the Gold Coast there, it cost billions of dollars to do. And it was an overreaction to the drought we had a number of years ago right now. Now, from my point of view, all droughts come to an end, basically, as we are seeing right now. So we built a billion dollar desalination plant, but we haven’t built any dams in Queensland for a long time. And this basically, it was really a bad idea from the beginning. But it’s an example of what governments do when they got to be seen to be doing something. So that’s one example. The other one is close to my heart is the hospital payroll system we had in Queensland, which was going to cost you know, a couple of million dollars and ended up costing a billion dollars, we end up having to have a Royal Commission into this. It was such a monumental mess that should have been avoided. Olympic Games also tend to be white elephant projects, they always run at a loss there is one or two haven’t. They build infrastructure that serves only a short term timeframe. And since we’re in the Olympic game, game at the moment in Queensland, we’re suggesting and we’re seeing the issues about the GABA and the immense costs that this is a this will be a white elephant that’s going to grow before our eyes. So it’s we can grow up with it in the next 10 years.

Gene Tunny  08:36

Yeah, because Brisbane is the Olympic city and 2032 and the GABA at the cricket ground, the Woolloongabba at the GABA, which we abbreviate as the GABA here in Brisbane, they’re talking about just increasing the capacity by what, five or 10,000 people, but it’s going to cost $2 billion or something ridiculous, so they have to revisit that just on the desal plant. I think that’s a really good example and it illustrates how these things can be an ongoing burden because if they’re not using it, they can’t mothball it, you have to keep it in this Hot Standby mode or something. There’s some specific term they have for it you have to keep you have to turn it on every now and then. So the membranes keep fresh or something so they don’t dry out.

Scott Prasser  09:24

You can’t just let it sort of rot away. Yeah. So there’s the issue of a white elephant project that even after it become doesn’t serve its original purpose was not working. You they got to maintain them. That’s the problem. It’s a bit like having a Jaguar Car, its good when its going but not when its in the garage.

Gene Tunny  09:43

You have to get a good mechanic.

Scott Prasser  09:45

So it’s no use having these sort of things. You got to keep maintaining them. Yeah, that’s the problem about these things.

Gene Tunny  09:53

Yeah, exactly. And I remember I went to a presentation maybe five or six or seven years ago with our explaining this Hot Standby mode for the desal plant, I mean, it’s hardly making any contribution to our water reliability or water security. But yet, it’s costing, I don’t know, 50 to 100 million a year, I can’t remember the exact figure. But it’s a significant amount of money and for something that we isn’t really adding to our water security, it rained again. But this goes back to that time when in the 2000s, there was a view that, well, it would have, it didn’t we’d never have the rain we had in the past because of climate change. Tim Flannery was saying that and the government here was panicking about water supply and all of that. So that’s where it came from. It came in a time of crisis. So that’s one way we could get projects that aren’t really sensible. What are some other ways, Scott, that what why do we end up with these projects that are, that are white elephants?

Scott Prasser  10:52

I think there’s a number of reasons. One, I think that government is involved in too many areas. Okay, the government tries to do too much. Yeah. And the government is seen as the saviour of so many things. So if government could not be involved in so many things, and it’s focused on on the core business, where it should be, you know, good infrastructure, good roads, and that sort of thing so, government is often called upon to be doing things now politicians reaction to that, is, something’s got to be done. This is something we can do. Right. Okay. And they have no concept of our financial limitations. So governments, often we saw that during the COVID thing, where governments were running around doing all sorts of things, which were completely against the evidence this remember, in Queensland, we were formed by the Chief Health Officer we, and was mandated, we should wear a mask in our car. Think about this, and we should wear a mask walking around a park. Let’s think about this. Now, I didn’t do that, I refuse to follow the law. So that’s an example where governments are going to ratchet up activities to do things. Also, governments love to love to announce iconic projects, you know, I hear the word iconic, I run a mile, okay. This is Danger, danger, or this is going to be a landmark, or they want to have a vision. I don’t want governments to have visions. Thank you very much, especially the wrong ones. And so it’s this thing of meeting the electoral demands to be doing something instead of saying nothing can be done. Okay, that in some cases, is not government’s responsibility to do it. And if we do anything, it doesn’t, doesn’t have any effect. So, you know, it’s like, you know, why does the Commonwealth government spend $5 million on men’s work sheds? I mean, what has that got to do with the Commonwealth Government? There’s like a little mini, a mini white elephant, because they want to be seen to be giving out money for some minority group cause or something. So it’s politics in politics. The other factor is that all the organisational things inside organisations, groupthink happens. Yeah, okay. Now, if you’ve worked in the public bureaucracy like me, it’s sometimes very hard if you if you want to be the lone person who says I think that’s a dumb idea. Yes, right. Yeah, it doesn’t go well with the rest of the team and the hierarchy, which CERN you got to have in the bureaucracy, someone willing to say, No, right. Now, our public services have become politicised, that is people are on short term contracts. They give the government what they want, not what they need. So this sort of Once Upon a Time treasuries would have said, and that’s why under Joh, we had permanent public servants. Okay, Joh Bjelke-Petersen, Premier, they were permanent public servants. Queensland didn’t have a zoo. Queensland didn’t own a bank. Okay, Queensland didn’t do all the crazy things that Joh wanted to do because the treasurer, Leo Hilscher and crowd will say, no, Joh, you’re not going to have it right. Now, I don’t think that happens anymore. Because all the senior public servants are on five year contracts. They want to get their contract renewed, they will give into the political will all the time. So that’s one of the issues that helps help throughout why we’re getting more of these things. And why frank and fearless advice is no longer being given. I don’t want to sound too precious, but it is very hard in the bureaucracy, if you’re in the hierarchy, and you want to get a promotion in the future, and you’d write a memo to the premier. This is a really dumb idea. And I have done this myself and I have saved the taxpayer money. I can tell you right here. And that’s because I had a very good director general in the Premier’s department, but it’s hard all those organisational factors, the political factors and government in all the interest group pressures now interest group pressures on wanting to get something from government. Australia has always looked more to government than other countries. You know, we’ve always We founded by government Australia was founded by, you know, sending out convicts here. It was a government thing in America, America was founded by people trying to get away from government, they want to religious freedom. Okay, so there’s a difference. Yeah, sort of context. So all those factors have driving that. Plus, I think, economic theory, modern, modern monetary theory. So it says, oh, spend as much as you want, it doesn’t matter. It All right, you know, there’s no, there’s no limitation on what government can spend. So the idea of balanced budgets being careful, and frugal has sort of gone by the by, if you’d like. So all those factors are contributing to this sort of galloping syndrome.

Gene Tunny  15:45

Well if it was a good infrastructure project, or a good if it was delivering public benefits into the in the long term, then you could make an argument that it may make sense to borrow money to invest in it, it could be good debt. But the problem is, these are such bad projects. They’re, they’re not delivering that return. And they, they’ve got this ongoing cost, for hardly any benefit. And I think this is a point you make, and this criteria for selecting white elephant projects for identifying white elephant projects, which I think is really good. And I’ll put it in the show notes if that’s okay. I think it’s excellent, I think this was something you did for your public policy course at Sunshine Coast, etc. And one of the points you make is that, so while white elephant projects might produce some marginal benefits, the issue is they never cover the project’s real costs, and more often end up costing more, okay, so we’re not saying that these things are completely worth worthless that they don’t deliver some benefits, it’s just that they’re not enough to justify the large costs.

Scott Prasser  16:45

I think you see it in, you know, stadiums or things like that, or opera houses and so on, which you know, do serve a certain public purpose. And there’s a there’s a place for them, but they, they never really will cover their costs. So they’ve got to be subsidised. And the first indication that seems wrong, after things been developed, we need more funding, or we need more to keep it going, right. I’m in the Sydney Opera House, many of you are together as a white elephant, by the way, because A, it was a design that no one knew how to build. Yeah. The technology wasn’t there. It cost phenomenally more than I think 2,000% more than the original costs. Yeah, it costs 150 million bucks a year to keep, to keep going, right cleaning and all that sort of stuff. And acoustically, I’m told, not that I go to opera, everything like that. I’m told that it’s not that all great, you know, the there are better opera houses or sound places around the world and build a lot less cost than the Sydney Opera House. It looks fantastic. No one No one can deny that. It is a landmark. But there’s an example where it still serves some purpose. But okay, it, you’ve got to keep it. You’ve got to keep it up to the mark and only the public taxpayer can keep it up to the mark. No one’s going to buy the Sydney Opera House.

Gene Tunny  18:06

Yeah. Yeah, exactly. Amazing building, though. It is. So I’m trying to remember the issues. Yep. There’s an issue with a concert hall. So I think there’s, there’s the different shells of the Opera House. And I think there’s a there’s the Opera Theatre in one shell. And the problem there is that depending on where you sit, your view can be limited. So if you’re sitting on Yeah, so in some seats, you don’t get to, it’s not a full view. And the problem with the concert hall part of it. Yeah, that’s definitely an acoustic issue. And they’ve tried various fixes over the years to improve that I might put a link in the show notes. Remember, I’m trying to remember they had some some donuts hanging from the ceiling? I’m trying to remember correctly.

Scott Prasser  18:50

That’s right, there’s a book that came out in the 70s called great planning disasters. The Sydney Opera House was listed. Yeah. You know, but no, and as an example, it is it is pretty fantastic when you’re on the ferry to look at and so on. But you have to think, what this is costing you, and there’s lots of things like that all around the place where governments and what happens is a project or something which is developed for purpose x, it doesn’t meet purpose x. So gradually the purpose changes to purpose y. Okay, yeah, it’s not really a great opera house, but it’s a fantastic tourist attraction and you see what I mean. So you sort of transfer the goal from what it was originally to be to as a fantastic tourism attraction. Now how you measure the impact of tourism is pretty hard, as you know, the best of times, so they happen a lot, gold is placement happens a lot with with white elephant projects.

Gene Tunny  19:50

Yeah it’s a hard one because it’s hard to think of Sydney Harbour nowadays without the Opera House, but we know that it is one of the the most magnificent harbours in the world. Also it’s still be, you would expected to still get tourists there regardless of what you put there. You could put something up cheaper. That’s an attraction instead of the opera.

Scott Prasser  20:09

Yeah, look years ago when I was in the premiere department, the Roma street Parkland issue. What should we do with the Roma street parkland, and I read the project team to look at that. And we talked about getting the Smithsonian to try and build something there. We went to America, Premiere Beattie winter America, and we had a committee of the great and famous people of Queensland, I can tell you the great and famous of Queensland. And the trouble was, I could never get them to focus on the purpose of the building of a building and want to build some sort of building, everyone focused on the design of the building. And it was quite exasperating with this committee of great and famous people. And I had to get the Director General to go and actually talk to them in the end, because I couldn’t control him because everyone just came with their pictures of iconic buildings from around the world, you know, Bilbao and all that sort of stuff.

Gene Tunny  21:03

Which is a white elephant. Guggenheim.

Scott Prasser  21:08

Yeah, they all went through the design, but what are we going to put in the building, which was, to me, the important issue, what are we going to use the building for? Is it going to be and to build a proper museum type thing is you’re talking about 300 million bucks. $300 million. Okay. Yeah. And what’s it going to do? And it was impossible to get the great and good committee to look at function as distinct from design of the building. Okay. And it was a very interesting experience. To try. We had museum people in and we had all sorts of people discussing this. But fortunately, it wasn’t, it wasn’t tempted and eventually got dropped.

Gene Tunny  21:45

I need to ask you more about this, because I walk through there practically every day or every second day. I live near the park lands it’s this amazing space. They’ve got this beautiful floral garden there, the spectacle garden, there’s a lake, there’s a Well, I mean, it is a rain forest is part of it. There’s not a lot of rain forests, but there’s a little bit there. And there’s this canopy walk, which is great. I think it’s an amazing attraction. I couldn’t imagine anything else been there. But what ended up happening? Did they just think, Oh, this is all to hard redevelop or?

Scott Prasser  22:15

Smithsonian doesn’t do things outside the United States. That is the crux of the issue. Smithsonian is an American only and the money for the Smithsonian came from an Englishman, by the way, called Smithson, whatever comes from he gave money to America in the 1840s. The American government didn’t know what to do, in gold in gold, by the way, they didn’t know what to do with it. And then the idea was to set up the sort of museums, museums were run by governments in the 19th century to largely be places where you brought back your booty from your colonies. Okay, the English Museum, German Berlin museums. And so the Americans decided to build this museum complex, which anyone been there is fantastic. Because it’s multiple museums in Washington, DC, it’s fantastic place. And that’s what they did. And we brought Smithsonian people out to Brisbane, and all sorts of things to try and see if we could get interesting. We develop some sort of agreement and we develop some sort of interchange of scholars and people, I left the Public Service and that probably didn’t happen. Right. 

Gene Tunny  23:29

Okay, that is very interesting. Now, I had to ask because it’s so close to home. So yeah. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  23:42

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  24:11

Now back to the show. Okay, let’s go over some of these other criteria. Scott, I think this is a really great list. This was for your students, so they could come up with examples of white elephant projects. And this is when you’re teaching project management. And so first, they do not fully achieve their public stated objectives. So second, white elephant projects usually cost more than was promised or estimated and much, much more. So this whole thing about mega projects is this mega project risk. I think you refer that, the Oxford scholar who’s written a lot on mega projects. So you’re in that’s in your oval, overcoming the white elephant syndrome. Yeah, yeah. Good one. And fourth, they often so yeah, third, they might produce some marginal benefits, but they don’t cover their full real costs. Fourth, though, too often maintain past their use by dates. Okay and fifth, they were perceived as counterproductive in its own time, not merely by hindsight. So you’re talking about so your contention is that a lot of these projects, at the time were criticised as being potential white elephants and politicians went ahead anyway. Is that right?

Scott Prasser  25:27

Yeah. Politics like to say we’re doing it. Okay. Yeah, we’re gonna do it. Right. Peter Beattie was very big into we’re doing it sort of syndrome. And they don’t want to have a back down, because that’s a political embarrassment. Right. Okay. So I used to have a superior in the public service. And his slogan used to be let’s do it. And my slogan was, let’s think about it. This cause conflict, okay. I said, Why are we doing this crazy project sort of thing and that was also my view. And so I’ve and I’ve worked in ministerial offices in Canberra, why, Minister are we doing this project? You know, is this a good idea? And so, once this things gets going, it’s really, really hard despite all the contrary evidence that happens. Now, sometimes that evidence could be inaccurate and wrong. And that’s when judgement is required. We know and Prince Albert was building the Crystal Palace in England for the Great Exhibition, everyone said it was going to be a white elephant, and there’s going to be a disaster and people are gonna die. That Her Majesty Queen Victoria stuck by him and it got built in it was an exhibition was a financial success, you know, it built a whole stack of things afterwards, not for the money, the profit went. So, but you know, what is interesting is, is governments do not like to admit they’ve made a mistake. Yes, right. That’s now I think, it’s sometimes we can say sorry for lots of thing. But we don’t want to say sorry for the sort of mistakes. And we I mean, the other who want to see lots of mistakes is Defence projects, phenomenal amount. And helicopters that don’t fly. Tanks that are too heavy for our bridges, and so on, so forth, frigates that we don’t know where they’ve worked or not. Submarines, and we still don’t have, and so on and so forth. It just goes on and on.

Gene Tunny  27:19

So this submarine debacle or whatever you want to call it. This was intensely political, wasn’t it?

Scott Prasser  27:27

It was about saving Liberal Party seats in South Australia. Right. That’s the story. That’s really it. We, we could have bought, the German Germans have had pretty good experience of u-boat type things, okay. And we could have bought the German programme. And if we bought the German product, they were knocked down form, they would have cost $12 billion. The Germans would have come out and train people as they tend to do. Yeah. Okay. And they will now be operational. Right. We then went down, we then retrofitted nuclear French submarines, put diesel engine in because we can’t have nuclear power. Why we would want to build diesel submarine is beyond my comprehension. Yeah. And then to prop up the liberal seats in South Australia. Then we went down this track. And so here we are, in 2022. We still haven’t got a single submarine. And by the way, the Collins submarines have also been a bit of a disaster, too, in terms of their they’ve had to get refitted with lots of problems with them, and so on. So I don’t know it’s a real, it’s a real problem. And there’s an example where we really the whole thing was driven by politics. Right? Rather than by policy. Yeah, that’s the problem.

Gene Tunny  28:45

Yeah. So we were trying to get manufacturing jobs in South Australia for political reasons. So we were either we are, we were building submarines here, or what was it retrofitting French submarines. Yeah. And then we ended up having a change of course, a couple of years ago, because we signed this ORCAS agreement with the US and UK. Fair enough, but that’s upset the French.

Scott Prasser  29:10

Yeah, I think what we should have done is gone and bought a couple of nuclear submarines from America or, I’m sure had a couple lying around somewhere or and gone ahead with the debt. That’s what we could have done. So that’s an issue.

Gene Tunny  29:24

Yeah, yeah, absolutely. Okay, six, there were feasible alternative courses of action available. In short, the project chosen did not have to be adopted or take the particular form it did to tackle a perceived problem. Okay and certainly in that water crisis, when we went ahead and built that expensive desalination plant, a better option was possibly well, if we’d built dams in the past.

Scott Prasser  29:47

Just remember that the Goss government came in and canceled the Wolffdene dam. Dum dum, okay. against the advice of the coordinator General Affairs Department at the time. Um, so you know how during the drought, remember, there was all this incentive of buying, getting tanks in your backyard tanks, I didn’t buy a tank, because I have this very odd view that since I pay rates in water rates, I expect the government to supply me with water. Okay, it’s not my job to go and spend 10,000 bucks on a tank to be in my backyard. And so its the same with solar panels, we could use the same analogy. So the government’s don’t often sit down properly and say, how could we tackle this issue in a different way they jump to the obvious, most visible idea, right. The big project, the big deal, we’re doing this, we’re going to save everyone, if we go ahead of this big problem, when they’re often alternatives. And look, you know, this and I know this, most public policy problems are really caused by people’s behaviour. Okay. Okay. Why are there car accidents? Because a lot of people drink too much. Okay. Right. Okay. Why do people get sick lots? Because they have lousy diets and have bad lifestyle. Okay, hospitals pick up the residual. Now, we can’t change people’s behaviour, except by all sorts of incentives and so on things like that. But governments don’t really sit down. It’s like freeways. I mean, do we have to keep building freeways when maybe you have completely different urban development or you have different timescales for people to work and go home and all sorts of stuff. And you don’t have to go down the big spending alternative and sit down and think about, look, you’re hearing this in education at the moment. Ah, you know, we’ve got to we’ve been spending more money on education, by the way, by quite a large amount and our results are declining in Australia in a big way. Federal government more than the states, the federal government is actually now the biggest single spender on schools. Okay. Right. Okay. And where did that where did the money go? Largely goes in teacher salaries? Yeah. Because we got smaller classrooms. Okay. So is that really the appropriate thing to do? Or should we be thinking about? What are teachers? How are teachers properly trained? And things like that, you know, what’s, what’s the way to do it? Aboriginals have a poor education, but you talk to people, a lot of the problem is that they don’t attend school, right. The people don’t attend school, then there’s the problem. There it is. And they’re very hard things to tackle. But governments just jump to the obvious so often, and don’t end as in because of rushed decision making gotta be seen to be doing something. And the media, piling it on. What are you doing about this? What are you doing about this? This, like, when you see an accident, train accident or something? There’s some poor person, you know, dragging themselves to the train or the poor ambulance service dealing with people. What’s the government going to do about this. You know, give us a give us a bribe. And what I found is government rush too many things. rushed to meet the media agenda. Yes, yeah. Then yeah. The policy agenda.

Gene Tunny  33:30

Yeah. Right. So yeah, and this is where this is how we get white elephants. They want something iconic. I mean, you’re talking about. No, thankfully, that Smithsonian thing never went ahead. But they ended up with this idea of a there has always been this idea of a landmark or an iconic building in Brisbane, I think it probably will come up again with the Olympics. So we wanted something to sort of excite the world or make Brisbane distinctive. To an extent I think that GOMA, that Gallery of Modern Art that was they were trying, I think that one intention of that was that it could serve as a building that

Scott Prasser  34:07

Yeah, well, the art world is very big on that, mainly because so much art shown is so terrible. They’re got to have something good outside to look at.

Gene Tunny  34:15

Yeah, oh, yeah. Some of it’s difficult…

Scott Prasser  34:18

I’m obviously a Philistine. I don’t understand.

Gene Tunny  34:21

Some it is. It’s difficult to comprehend really, but but they’ve had some great exhibitions at GOMA. They had a great David Lynch exhibition many years ago.

Scott Prasser  34:31

I think Southbank which is basically developed by the National Party government, essentially, for the expo 88 is quite a successful sort of precinct in a sense. Yeah, without being too grand. The art gallery is a reasonable size, there’s the Queensland library we’re one of the few places that actually have a State Library, not everyone is very keen on those things. So there’s a lot of good things about the South Bank, I think it was developed and the government would push through and got that done. And there is a bit of style about it without it being over the top, over the top, not that it’s not a Guggenheim by any stretch of the imagination. So it’s, if you go over there, it’s pretty busy in this kid’s swimming and what sort of stuff. It’s got some things going for. But yeah, there’s one example where it’s at a scale that is confit in Brisbane, say where I mean, the, the iconic thing of, of Brisbane is the climate. That’s the iconic thing. And unfortunately, don’t build houses to suit the climate. We build houses of air conditioning systems, designed in Melbourne. Yeah, that’s another story.

Gene Tunny  35:41

Yeah. Yeah, coming back to the white elephant. So the last criterion that you specified, the decision to proceed with a policy or project should be that of a group, not an individual ruler. So all case study selected involves some form of collective decision making process in a democratic environment, not by tyrants, dictators or in authoritarian regimes. That’s because we just assume dictators will do crazy things.

Scott Prasser  36:13

Starling, yeah, you know, Hitler, and those sort of people. North Korea, you can look at lots of those sort of, yeah, sort of buildings, they can make it happen. Sometimes it’s, you know, it’s great. I mean, I suppose you could say Adolf gave us the German highways, which were brilliantly designed and, and still are pretty brilliant to drive on. They’re much better than American highways. But you know, that’s a big cost to pay. But I think all the things we’re talking about, were decided in this democratic system. That is there’s a so called independent public service, there was some sort of parliamentary approval, there’s some sort of accountability, there’s some sort of openness about them. They, I mean, Mr. Beattie, might have been a very powerful Premier, but he still had to get approval from his cabinet. One assumes for the things that went ahead, yeah, so we can’t just blame the premier, you know, the premier was part of a government. Yeah, therefore, we say, and we have a reasonable, you know, free press to comment on things. So that’s what we’re saying that you can’t just blame, you know, one person in our solar system. Our white elephants have been collective fair decisions, if you like, right, we’ve tried to point out.

Gene Tunny  37:29

So we’ve got to look out for them as, as citizens, or if we’re in government, then we should be looking out for these things. And because they’re not really, what’s your view on whether they’re actually politically sensible or not? Like if you’re if you’re just looking at completely politically? Do you think these things? Do politicians get a benefit from them, when they open? When they open the desal plant, or they open a new school that ends up running under capacity or a new hospital?

Scott Prasser  37:58

They think they do. Now, that’s politicians, I often have arguments in with politicians about grants and things, you know, why are we involved in giving out this grant of $5,000 to x project so the local member can hand over this check? Do which gets a tiny article in the local paper. Do you really, really, think, minister, that this is going to get votes for the government? Yes, Scott, you don’t understand politics. I do understand the politics. I’m saying it’s not very good politics.

Gene Tunny  38:33

Yeah. Okay. So as an advisor, you’ve got made a push back. Yeah. Okay.

Scott Prasser  38:40

I’m very proud that on a couple of things. There was one crazy idea going on in one office, about a moving government testing body to somewhere in the country. And the public servants said to me, Scott, this is going to cost $50 million to do . That is what it’s going to cost, what can we do? I said, we’re going to slow it down. And we slowed it down. And got so slow down, it didn’t get to cabinet, and it was too late for the election. Right. We didn’t do it. Okay. How are we all happy.

Gene Tunny  39:18

Right. Okay, so, going back to your book, just before we wrap up the white elephant stampede. We talked about the desal plant. You talking about the payroll system debacle here in Queensland, the state of Australia, we’re in other what other examples are there in this book? Are there international examples too?

Scott Prasser  39:42

Yes, there is one. Paul Hooper talks about airports. He’s basically, a what do you call him a transport economist? Yeah. And PhD has worked in, worked overseas. And he looks at how new airports often become phenomenal, disasters in one in Berlin became a disaster, one in Thailand. And he looks at how airports often develop with little thought about what it really gonna cost and how effective it will be. So, there’s when he looks at those sort of things, I think that’s a really good one to look at. So in his national one, if you like, the Olympic Games and looks in other Olympic Games, as we’ve talked about, so we’ve talked about those, the other one I like is the COVID Safe App, which people may remember in the Commonwealth Government, the COVID Safe App. Okay. And I had come in, I refused to join, join it, by the way, as I did on anything, I never tried to join and link up with government. And that’s been a complete waste of time and effort. Yeah. Right. And, again, the government rushing into it and sometimes technology makes government think, Oh, we can use this new technology for something. And again, that wasn’t wasn’t thought thought through. So there’s a very recent example, which is in the book being discussed by Professor Schwartz, who used to be Vice Chancellor of Macquarie University and so on and is an extremely bright person. There’s an example of that very, it didn’t cost a lot of money, but it still cost some money and took up a lot of time. And and expectations were just never met, it eventually just faded away.

Gene Tunny  41:35

That’s completely useless. So what was it it was an app on the phone at work through Bluetooth and if you passed, every time you pass someone who also had the app on and Bluetooth was enabled, there would be a communication that you you’d register that you were in close proximity one and a half metres within one and a half metres of this person. And therefore if they tested positive for COVID, you would then get notified or you are in close proximity of someone who had COVID and that was supposed to allow us to manage goes better.

Scott Prasser  42:07

Appalling, appalling authoritarian government scenario going on I mean, fact that it was it was a liberal so called Liberal government brought tortures up. Is even m ore repulsive. What’s the next bright idea coming from the powers that be in Canberra land?

Gene Tunny  42:25

Yeah, well.

Scott Prasser  42:26

I mean, Canberra is a white elephant by the way, the whole thing. That’s another story.

Gene Tunny  42:31

I know that it was in the top 10 policy mistakes public policy mistakes for Australia that the Institute of Public Affairs put out. I forget how many years.

Scott Prasser  42:43

Redfern post office or something was the other one where all the mail went through Redfern and Sydney exchange and got stuck if there was a strike. Means all the mail in Australia got stuck on something like that. I think it was Redfern, one of those sort of things. And see the other thing is government often put all their eggs in one basket. Yeah, another issue. And this is why a federal system of government is good because you can have different baskets going on. And if you over over capitalised, you turn over capitalise in your house, you have interpreters in your car, or government going over capitalising in spending money. Yeah, and they put all their eggs in this, this is the solution for the problem. And of course, you ought to have a couple of horses in the race rather than just one horse in the policy race. If you’re lying. There are many ways to policy heaven, I say. Yeah, so we all be careful about adopting just one thing as the magic solution.

Gene Tunny  43:46

I was just thinking, does anyone talk about is there a chapter on public transport projects in there?

Scott Prasser  43:51

No, not Not really. But that might be next book we what we’re wanting to do is, is have a series, another book coming out and have an annual White Elephant award. Yeah, that’s what we want to do. And we’re going to link up with project management institute and Master Builders Association, those sort of bodies, Master Builders, of course, I’ll build anything they sell me. They’ll build anything, downside, people pay, they’ll knock down as long as people pay. They don’t question the value of what they’re doing. If you give me money, we’ll build it. No matter how stupid and how bad the design will be. We’ll build it. That’s not our decision. Okay.

Gene Tunny  44:29

Yeah. Well, I was just thinking public transport because there’s a bit of a question about whether this new subway project we’re building here in Brisbane is economically viable, particularly now as the cost of it’s blowing out. It’s one of these mega projects Cross River Rail.

Scott Prasser  44:45

That’s right, blowing out. The Sydney light rail project is one that’s been very expensive and very disruptive and took longer and so on and so forth. And given that what we’ve learned from COVID. What have we learned about how lot of people can work from home. We don’t really need all these offices and buildings running around the place. And so Heaven has arrived, in a sense, you can work from home. And given that, you know, a lot of our people workforce works in white collar office type jobs, then that’s possible. When I was in the public service, it was very hard to work from home. Okay, it was very hard to let one of your staff work from home, there’s all sorts of forms that had to be filled out. And sometimes some staff could work more effectively at home, you’re not being interrupted by, you know, coffee halls, and I would let staff work from home sort of unofficially. And, okay, you got three days, I want, all I want to see is the paper at the end of the three days, and had that person stayed in the office, it probably would have taken two weeks, because of all the disruptions and meetings and, and rubbish that goes on. So now we can work more from home. So we need to think about, you know, when people travel, why they travel? And do we need a lot of the infrastructure, you know, coming into the city? For what purpose? And for how many?

Gene Tunny  46:13

Yeah, so I’m just thinking, what’s the how do we fix this? I mean, can we actually fix it? Or is it just a feature of our democratic system is, we’re always gonna have politicians being political. Could should our journalists be challenging the politicians to give us the to provide the cost benefit analysis before us bill? Should there should be rigorous scrutiny of that cost benefit analysis? Should we have competing cost benefit analyses? So you’re not just getting the view from Deloitte or the view from whoever that this is a great project and I mean, the government’s paid them a tonne of money tax, right.

Scott Prasser  46:48

That’s right, I certainly wouldn’t trust those people. Well, we’ve done this, haven’t we in other areas of government, I mean, the Productivity Commission. And it’s for run, the industries Assistance Commission, which which came out of the Whitlam government period, are examples where if you set up a process, and you have public reporting, and I’m not totally in favour of everything the Productivity Commission has recommended, but we know, don’t we, that if you want to keep x industry going, it is going to cost you $15,000 per employee to keep x industry going. You didn’t know that before. And now I’m, I’m all in favour of that information being in the public arena. But I’m also in favour of governments making democratic political decisions about keeping in industry costing $15,000. But I think the taxpayer ought to know what it’s costing in the trouble of so many of our projects, and especially state governments, which tend to be more secretive, is that we often are not told the truth about the cost of a project. It’s fuzzy, fuzzy figures. Don’t you worry about answers. Yeah. Okay. So in public policy, we often talk about speaking truth to power, that is, advisors, telling the leader, the King, the minister, the truth about what’s going on, highly admirable, if you don’t want to get shot or deported or whatever. The King of Prussia, Frederick the Great, he was a very hardworking king, he was absolute king. He worked from four in the morning till midnight, he had ministers, and they would have to report to him once a year of annual report. And but he did allow his ministers to tell him the truth, the one he put into jail for six months, he didn’t cut his head off. But he was telling him that the King’s idea was really a bad idea. And he released him because he said he was right. But I think the other problem we’ve gotten our democracy is that governments don’t talk truth to the people. We have so much political pallava going on. And we’re seeing it now, with the Albanese government over the defence projects, I’ll blame the previous government. Well, how about we have a real valuation of projects properly, rather than just jumping into the blame game sort of process all the time. How about telling us what the real alternatives that you came to government? You said that you could decrease energy costs that we need to spend more money on these things? Or how are we going to do it? How are we going to do it? And I think I would like some processes set up in Queensland, I’ve often recommended there should be a state priorities commission. And it should operate a bit like the Productivity Commission, we sort of have one. And anytime a government wants to do saying it should go to this body and it should release a Cost Assessment in the public arena. Yes, right. Yes. Yeah. It’s got to be independent, truly independent, not filled with political hacks or whatever, and then the government, then the government can make a decision, we’re still going to go ahead with the project because we think this is in the wider public interest. Yeah. So that’s what I think should happen. You’ve got to have processes. And you’ve got to insulate some of the advisory systems from the interference in the public. We’ve seen from Royal Commission, the Royal Commission to overseas doctors, in 2005, highlighted how the Premier’s department interfered in the release of quality reports about health. There was fixing of the hospital waiting list. Okay. This is all down to politics by the public. We had all we had all the body we had health Commission’s we had ombudsman, we had all sorts of rules that they weren’t insulated from political interference. I believe the biggest problem Australia’s got is not climate change is the politicisation of our public service, our judiciary, and our universities, where we people are appointed because of their political allegiances, not because of their competence. And because of that people are showing their allegiance to the governor of the day, and they’ll do what the government wants them to do.

Gene Tunny  51:20

Right. And that’s both sides of politics.

Scott Prasser  51:25

Newman missed a great opportunity in not fixing the problem. And his government was marked by just as many bad cases of cronies getting positions.

Gene Tunny  51:37

Right. Okay. Okay. Yep. There’s a lot of politicisation for sure. And that’s behind these white elephants. Absolutely. Okay. So any final points? Scott, what did you think? Were some of the highlights of this book? What are you most happy about with this, this edited volume?

Scott Prasser  51:58

Well, I think it was interesting how easily we got people to find examples. And then there was an as we could have been twice the size, okay. We didn’t think initially we would have a lot of interest. But a lot of people we’ve sent a flyer to, and we’re going to have a launch in November, in Brisbane and one in Canberra that there’s tremendous interest in this. And our job is to try and make people aware, what we want, we want we’re not against public funding. We want public funding spent more effectively. And if you’re talking about sustainability and the environment, surely we shouldn’t be wasting money on projects that are consuming resources and causing pollution in the construction or whatever it may be. When there are alternatives in the way, things could be done. That’s what we’re really on about. And we’re sort of surprised that the universities are letting us down on not being critical commentators on these sorts of things. There’s there’s very few people in universities writing about these sorts of matters.

Gene Tunny  53:12

Okay. Scott Prasser, thanks so much for your time chatting about white elephants has been terrific. Really enjoyed it. 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 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

EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill  – EP155

An electrified vehicle fleet will mean lower fuel tax revenues for governments and possibly greater traffic congestion as EVs are cheaper to run. Governments around the world are having to reassess how they charge for road use and one Australian state, Victoria, has introduced an EV tax based on distance traveled. In Economics Explored EP155, Marion Terrill from the Grattan Institute discusses what a rational road user charging system would look like. She also talks about Grattan’s truck plan, which is designed to get high polluting old trucks out of major Australian cities.  

This episode’s guest Marion Terrill is Transport and Cities Program Director at the Grattan Institute. Marion is a leading transport and cities expert with a long history in public policy. She has worked on tax policy for the federal Treasury, and led the design and development of the MyGov account. She has provided expert analysis and advice on labour market policy for the Federal Government, the Business Council of Australia, and at the Australian National University.

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

Marion’s bio: https://grattan.edu.au/expert/marion-terrill/ 

Grattan Institute on Twitter: @GrattanInst

Marion’s Australian Financial Review article “Electric vehicles: Feds should pave way for gold standard road user charges” (pay-walled)

Grattan’s 2019 report Right time, right place, right price: a practical plan for congestion charging in Sydney and Melbourne

The Grattan truck plan: practical policies for cleaner freight

Previous episodes featuring Marion:

Megaprojects with Marion Terrill from Grattan Institute | Episode 62

Unfreezing Discount Rates with Marion Terrill of the Grattan Institute | Episode 42

Transcript: EV taxes, congestion charges & taking high-polluting trucks off the roads w/ Marion Terrill  – EP155

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.

Marion Terrill  00:01

As we get more and more electric vehicles, great in many ways, and they’re much cheaper to run than internal combustion engine vehicles. But if they’re cheaper to run, it means people will be inclined to drive more. So I think unless governments take some kind of action on congestion, this is a recipe for gridlock.

Gene Tunny  00:26

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 155. On road user charges, what’s the right way to charge for road use, particularly as we switch to electric vehicles and governments lose revenue from fuel taxes. My guest this episode has been thinking a lot about this. It’s Marion Terrill, who was transported cities programme director at the Grattan Institute, a leading Australian Think Tank. You may recall I previously spoke with Marion and on the podcast, we spoke about mega projects in Episode 62. And about discount rates in Episode 42. I’ll put links to those episodes in the show notes along with other relevant links. In the show notes, you can also find out how you can get in touch with me. Please let me know what you think about either Marion and I have to say in this episode, I’d love to hear from you. Right now from my conversation with Marion Terrill on road user charges. And we also chat about Grattan’s new truck plan for Australia. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Gene Tunny  01:47

Marian Terrell from the Grattan Institute Good to have you back on the show. 

Marion Terrill

Hello, Gene. 

Gene Tunny 

Yes, good to see you, Marian. I’m keen to chat with you about the piece you had published in the financial review last week on road user charges. And also I know that Grattan released a new truck plan. So I’m keen to, to chat a bit about that as well. Now in the financial review, last week, you had a piece that was titled, Feds should pave way for gold standard road user charges by and by feds, you mean federal government. And there’s a sub heading here, which may have been written by their sub editor. I’m not sure. But we can. I’d like to sort of launch off from this. It says that regardless of what the High Court decides, fuel excise duty, should be killed off quickly and give way to a smarter way to pay for roads. By mentioning the high court you’re referring to this. There’s a challenge isn’t there that some people are challenging? This new Victorian electric vehicle tax and the Commonwealth has got involved? Can you tell us about that, please?

Marion Terrill  02:58

That’s right. So Victoria introduced new charges on electric vehicles in July of last year. So, the rate that they pay is 2.6 kilometres, or sorry, 2.6 cents per kilometre for an electric vehicle and 2.1 cents per kilometre for a plug in hybrid. And New South Wales is also planning to impose similar charges from 2027, or whenever electric vehicles make up 30% of new car sales, whichever comes sooner. And there was a plan to do this in South Australia. But when the government changed, I understand it’s been canned. So but I think there is, there has been, some coordination across the states to do this. That’s what the charge is. And then what’s happening here in Victoria, is that electric vehicle drivers have been up in arms about it. And two of them are challenging it on constitutional grounds. And so they’re saying, as I understand that this the argument is that it is a tax on kilometres is actually an excise or ad valorem tax, if you like for your business. And so this all hinges on how broadly or narrowly you define an excise because only the Commonwealth can charge an excise. So that’s the basic argument. I don’t know how that will play out. There would have been other ways to implement this tax or this charge this charge on electric drivers but this particular method of charging it does permit space for this constitutional challenge.

Gene Tunny  04:54

Right and what was the justification that these EVs aren’t paying, well, there’s no fuel excise paid by the owners of the EVS because, well, they, they’re powered by electricity. And presumably, this is the reason why the hybrid charge is lower because the they would be saying, well, they are at least contributing somewhat in terms of the fuel excise the 44 cents a litre. Yeah, so that must be the justification. But it is a bit cheeky, isn’t it? Because it’s the federal government that collects the excise, isn’t it? Is that right?

Marion Terrill  05:31

That’s right. That’s right. It’s a little bit of a rat’s nest here. So the, the rationale is, as you say that these drivers are not paying fuel excise, therefore, they’re not contributing, some people say contributing to the upkeep. But it all goes into one big pot really. But the other the other way of making that argument is a fairness argument to say, Well, how is it fair for this driver over here to be paying like this, and this driver over here not to be paying? So those are the arguments, but I think there is a further argument that doesn’t get so much of a public hearing. But that, and I guess this is what I’m pointing to in my, in my article that really, you would imagine that fuel excise is a even though it’s kind of not declining. Today, it is in structural decline as the fleet electrifies. And so it will become increasingly unfair because the because electric vehicles are more expensive to buy, the people who most quickly get out of paying it, those who can afford a more expensive vehicle and, and that I think that will become acute as a political pressure. And so the federal government has got the option to let it just wither on the vine, and become kind of increasingly unpopular. Or another option is just to say, Okay, we’re gonna kill it off now. And we’ll hand over the responsibility for taxing the taxes on driving to the States, but we’ll also hand over a funding responsibility to go with it.

Gene Tunny  07:17

Yeah, yeah, I think that could be there could be some attraction there or there could be an attractive option. I mean, it’s good to have that funding, the ability to fund it and the spending responsibility in the same place. Okay, so yeah, I guess it is a big issue, isn’t it? Because the is it 11 billion a year or something is is raised in fuel excise by the Commonwealth? Yeah.

Marion Terrill  07:41

That team in net fuel excise. It’s the actual amount is somewhat higher. It’s about 19 billion, I think. 18 or 19. But then seven, and a half of it is, is rebated throw the fuel tax credit. So the net amount that 10 million, so it’s, it’s about five? Well, yeah, it’s sorry, it’s about two and a half percent of Commonwealth taxman news, the net amount?

Gene Tunny  08:10

Yeah, and you mentioned all goes into the same or a bit the big pot of money that is consolidated revenue, so it’s not earmarked or hypothecated. Is that correct? That’s right.

Marion Terrill  08:21

Not in any meaningful way. It was last hypothecated in 1959. Right. 59, it was hypothecated. There is a little bit of it, that’s hypothecated. So this is getting a bit in the weeds, but basically, it wasn’t indexed for a period from 2001 to 2014. And when the indexation restart, and the index amount is hypothecated, but it’s gonna not meaningful, because it’s such a tiny amount and far less than what the current spends on roads.

Gene Tunny  08:58

Okay. Yeah. I’ll have to just look at that that small bit, just to make sure I’m across all the detail. Yes, because there is that common understanding. People seem to think that well, this pays for roads. And I mean, I guess it does go into the pot. And so it does help pay for roads, but then you can’t say that any that particular dollar raise from fuel excise is what actually pays for roads, because money is fungible, as they say,

Marion Terrill  09:22

Because the amount that is raised through fuel excise and about 10 billion is more than the Commonwealth spends on transport infrastructure, which is usually it’s lumpy, but it’s usually seven to eight. So, I mean, kind of where you draw those lines, I think, is an open question. But yeah, the amounts Don’t bear any relationship to one another.

Gene Tunny  09:44

Yeah. Have you looked at whether the fuel excise and motor vehicle registration fees at the state and territory level combined? Do they add up roughly to what is spent on roads by federal and state governments? I heard that some One quarter that I’ve heard or quoted in the last few months, but I’ve never been able to verify whether that’s the case or not I’ve ever seen that

Marion Terrill  10:08

We have been looking at that sort of thing. And the short answer is no. Okay. What we have noticed those and as a trend is that the the share of road related tax revenue raised by state seems to be rising. But it’s harder to discern a trend on spending, because it is so lumpy, from, as you know, from one year to the other, to the next, it does jump around a bit. So, which would be a problem if you did try to hypothecated? Actually, because they’d be it’d be quite difficult to predict how much you’d have to spend, but you do need to predict because the roads take time to plan. So yes. They there’s, there is a lot of, or there’s a lot of reasons why Hypothecation isn’t a great idea, but people do really believe that. It’s hypothecated. And even if not formally, that it’s somehow it is informally hypothecated.

Gene Tunny  11:12

Yeah, yeah. Yeah. I’m not a big fan of earmarking, because it reduces your, your flexibility with your budget. Okay. Do you know what’s happening in other parts of the world? Marion? I mean, you look, you mentioned Victoria’s, it’s tried to impose this. EV tax. Sa was going to but then there was a change of government, New South Wales is considering it. Are we leading the world on this? So do we know if other countries are looking at this sort of thing as well?

Marion Terrill  11:43

I’m not too sure. Who is I think, at the time when the Victorians announced this tax, there was a lot of media. And it’s sort of painting in quite extreme terms, even calling it the worst EV tax in the world. That I think a lot. I mean, we’ve been looking at the different fuel excise type regimes around the world. And, and sort of, I think, by global standards, a couple of things I’d say on this and one is we don’t charge much in fuel excise or similar types of taxes compared to other countries, particularly similar countries to us. And we see genuine the like, and we also don’t have any congestion charging or that kind of thing. So on the whole driving, is, appears to be relatively lightly taxed here, compared to in many other countries.

Gene Tunny  12:42

Yeah, I’ll have a look for whether there’s any OECD table. I seem to remember one years ago. Is it the case that, UK has high excise or taxes on fuel? I’m guessing the Germans probably do.

Marion Terrill  13:00

Yeah. Continental Europe does. Yeah. Sorry. I don’t know off the hoof.

Gene Tunny  13:06

level. I’ll have a look. Yeah, I agree with that general point you made? I think that yeah, I have seen some data on that. So that’s good. might be good to go on to what you’re arguing in that piece? Because you said that? Well. Yeah, this EV tax? Well, it’s probably not the way you resolve this problem we’ve got with this The problem we’ve got with fuel excise duty disappearing. This EV tax probably isn’t the right way to go about addressing what you might see as a an issue there. Could you explain what your argument is, Marion? I mean, what do you think would an optimal policy would look like and first, am I right that you don’t agree with this EV tax just for just to be clear on that.

Marion Terrill  13:56

I don’t think it’s the worst tax in the world. I think it’s fair enough for the states to raise this revenue. And I would also say, given that you’re running an economics podcast, perhaps I can make the point that the people’s, like if you think about fuel price, elasticities, they’re pretty low, are not likely to change their behaviour much in the presence of a modest tax. And this is very modest. I think the estimates are that the typical driver might pay $300 a year. So I would have thought it was a reasonably efficient base. And I think it is arguably laying the groundwork for it to become to spread to other types of vehicles and to be paid at a higher rate over time. So I think all of that is fine. I guess I think well, if you just think about it as a revenue base, that you know, this low elasticity is a good thing. But I think a lot of the debate does sort of invoke the fact that EVs are better or better for the community because they aren’t producing the carbon emissions. And so they should be advantaged not disadvantaged. And I think that that’s in the absence of an economy one carbon price. That’s absolutely right. But I think in the the point of taxing driving, that I think makes the most sense is to try to bring about an efficient use of the road network. And by that, I mean that you should be charged, little or nothing, if you’re driving at a time of day in in a place where there’s no congestion. But if you want to contribute to congestion in peak hour, then you should be paying for it. So here, it’s an externality argument. So what you really want to do is set it at a low rate, so that you just deter that driver who can be most flexible, who cares the least about being there, they’ll put their trip off or take it another way. And that’s an efficient outcome. But if you do that, you won’t raise much revenue. So I think that governments are confronted with a choice. But I suppose I think in the road network is so important to the economy and society that what you really want is the latter. So I would like to see road user charges that vary by time of day and location, and vehicle size. So the Commonwealth can’t impose that kind of charge, because it cannot charge different Taxs, to different parts of the country, under the Constitution. So this has got to be in state based charge. And so that’s why I think, well, perhaps it is time for the governor for the federal government to step out of its role in taxing driving and hand that job over to the States because the technology has now improved. And it’s it is now much more realistic for states to do sort of fair and precise charging in a way that probably wasn’t feasible, even 10 years ago.

Gene Tunny  17:23

Right. So by the technology has improved. You mean that there are ways of tracking people. I know that if you’re going on toll roads here, in Queensland, you’ve got a tag or something that pings or that that tells the toll road company when you go on the toll road? So imagine there’d be some device, is that what you’re thinking?

Marion Terrill  17:47

Or you can do that, I think, look at the I think the most foolproof way is to use number plate recognition cameras, which are more up to date technology really than those tollgate. But I think people are foreshadowing when we’ll be able to use GPS to do this. Now, my, my feeling that that is it will happen. But we’re not really there yet. That no country has used GPS to introduce a road pricing scheme across the board. But they’re so let’s sort of see what Singapore does, really, but I think that that is becoming increasingly likely, but number plate recognition cameras, much less kind of unsightly and obtrusive than Tollgate entries. And so that that’s definitely a way that you can do it. In the shorter term.

Gene Tunny  18:45

I should have thought of that because I’m a big fan of British crime shows and often they will catch people with that, that number plate recognition, technology or they’ll know where they’re going. So I should have thought about that.

Marion Terrill  19:00

It has improved a lot and become that technology. So yeah.

Gene Tunny  19:03

Okay. And one point that one of my guests will Tim who was on the show, last week I was chatting with about EVs. One thing he was concerned about is this issue of well, it’s surveillance where our privacy is being compromised. Have you thought about that at all? Is that often raised as an objection to this sort of thing?

Marion Terrill  19:25

Yeah, I think it’s, I agree with him. I think people are very quick to dismiss it. It is actually another reason why I’m dubious about GPS technology, because there’s sort of a few different ways in which Surveillance can be a problem. One is that the government can surveil you. The other one is the company can surveil. Yeah. And maybe market at you or, you know, interact with you in a unwelcome way. So both of those are concerns I think. So really what you want is the, you need to set up a structure I think where you have the information, that’s the image of you, or image of your vehicle is sent to a place in the encryption key that links that image to you is in a different place to protect people’s privacy, but I do think in this country, we do have, we have had a long history of the, of the, of privacy. The Privacy lobby, I think, is quite effective at unraveling government ideas, too, to act in ways like to make use of technology in ways that could be prejudicial to people’s sort of freedom to go about their lives anonymously.

Gene Tunny  20:52

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

Female speaker  20:57

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 modeling of all sorts. Our head office is in Brisbane, Australia, but we work all over the world. You can get in touch via our website, http://www.adepteconomics.com.au. We’d love to hear from you.

Gene Tunny  21:26

Now back to the show. So Marion, have you looked at how this is working? Or how road user charges have worked in other countries? I mean, you mentioned? Well, I mean, there’s the UK. I mean, there’s the the infamous congestion charge in central London. That’s probably the only one I’ve experienced. But I understand. Well, I’ve heard that there’s this sort of thing is there this sort of thing in Singapore and is it germany you mentioned?

Marion Terrill  21:55

Well, it’s interesting this, there’s established congestion charging in quite a few cities around the world. So Singapore was the first London, Stockholm and other countries, other cities are thinking about it. But what’s happening these days is now low emission zones are coming in. And so in London, for example, the low emission zone is layered on top of the congestion zone. And really these many, many, many cities are doing low emission zones. And they kind of like a coordinate around the central part of the city, that now the motivation, we’re recommending that for the major capitals here in Australia, because the the effect of exhaust pipe pollution from trucks is so terrible for health. But it’s interesting, because in some cities like Milan, for example, there is a low emission zone, but the reason for it is to preserve the beautiful buildings rather than to preserve people’s health. So there’s, I think there’s certainly a significant, a significant global movement towards this sort of thing. And it can usefully be combined with congestion charging, because what you’re really doing is you’re trying to deal with two externalities at once. And you can calibrate your instrument to do both of those things. Because where there’s a concentration of vehicles, that’s where you get obviously, congestion, but also concentration of exhaust pipe pollution.

Gene Tunny  23:28

Right. Okay. Okay. Yep. So with the congestion charging, that’s almost like a syntax is it or it’s a form of corrective taxation, or you’re making the driver face the marginal social cost of them going on the road network at that particular time in that particular place?

Marion Terrill  23:50

Yeah, that’s right. And people have different sort of strength of desire to use the roads at peak periods. And so it would be a poor result, to put off too many people. So don’t want to set your charge too high. And you certainly want someone who’s going to a job interview or an important appointment, you don’t want to put them off. But if you are thinking about someone who’s perhaps a retired person going to a medical appointment, for that person, it may be very low cost to do it at 11am, not 9am. And so to send a signal to such a person, to that gets them to take into account their contribution to slow it not only being slowed down by everyone else, but also to slowing everyone else down. And I think this is going to become more acute Gene because as the as we get more and more electric vehicles, great in many ways, and they’re much cheaper to run than internal combustion engine vehicles. But if they’re cheaper to run, it means people will be inclined to drive more. So I think unless governments take some kind of action on congestion. We really are. This is a recipe for gridlock. I think is very strong for governments to act on congestion charging, and preferably to do so early. And so that to go back to the we were talking before about our electric vehicle chargers. Yeah, I think, you know, this is the side of it that the current charges in Victoria and on the table elsewhere, don’t really take account of at this point 

Gene Tunny  25:31

Right Yeah, I look, I think what you’ve, what you’ve said, and what you wrote in that piece is great. I mean, as an economist, it definitely appeals to me. I’d like to see the model, though, of course, as you would do, you know, if anyone’s developing this, what this could look like, what the parameters would be, what those charges would be. When, I mean, how would the prices be set? Would it be? How regularly they would they be reviewed? Is there some algorithm involved? Have you thought about how this would work? In practice? Is anyone developing a model for this, Marion?

Marion Terrill  26:08

Yeah, we’ve developed a detailed model for it, actually. So yeah, we published it in 2019. So we designed in detail, a congestion charging scheme for Sydney, and Melbourne and one for Melbourne. And what we did was we in terms of phasing, just start with a cordon around the CBD. And we worked out exactly where the cordon would go, and how many detection points you would need. Look through all the different technologies that’s really rare came to the view that number plate recognition was the way to go. And then we looked at the, we looked at traffic data and worked out when peak hour and when the shoulder period should be. And finally, we worked out the what we thought were the appropriate charges to levy taking into account the cost of public transport into the CBD. And then we worked with Veitch Lister Consulting who did the demand modeling for us to see what the impact on congestion would be? So all of that detail is in a report called ‘Right Time, Right Place, Right Price’ up on the grattan website. So we did do that. And so that was on congestion charging. I guess. This week, we put out a report on trucks, Grattan truck plan, and one of the recommendations was to introduce a low emission zone. And we didn’t scope that up in detail, because I think it is the subject for reporting its own right. It’s quite a complex area. But we are, we’re planning to do that report and publish in 2023. With detailed design for how to, and this takes into account, things like how much proximity matters to a main road. How much sort of how much difference it makes when when you’ve got a more vulnerable population in one way or another. So and what kind of mitigations you can take in terms of sort of greening and that sort of stuff, so that we can come up with a detailed design, but at this point, our recommendation is that trucks manufactured before 2003 should be banned from the densely populated areas of the major cities.

Gene Tunny  28:30

Yeah, I wondered about that. And I was stunned. Looking at the figures you had in that report regarding how much worse they were or trucks that were, you know, over 20 years old, how much worse they are in terms of the the toxic particles that come out and the in the exhaust? Or how much worse than more modern trucks? Is there some reason you chose 2003? Was there some change in technology?

Marion Terrill  28:58

There was. Yeah, so the pollution levels for trucks are the international standards and known as Euro standards. And before 1996, there were no standards at all, so anything goes and those trucks are the worst. So a pre 1996 truck emits 16 times as much particulate matter, and eight times as much of the poisonous nitrogen oxides as a truck sold today. And then in the when the Euro standards were first adopted in Australia, Euro one the first level, operated until 2003. And that is better than nothing but still, by today’s standards, very lenient standards. And so, the reason all this matters is that more than a quarter of the trucks on the road today 2003 or earlier, and 14% of them are these pre 1996 ones which are particularly toxic. And that’s if they’ve been properly maintained, some of them will be worse. So, over time the standards have increased have become more stringent. At the moment, we’re on Euro five standards, we have been since 2011. We’re a decade behind kind of most major markets, which have been on Euro six for a long time. And so we’ve been agitating to get on to Euro six. But even this year, Euro seven is coming out. So we’re, we’re so far behind. And so of course, the track operators don’t really have an incentive to adopt these standards, because it costs money. So it really is a matter of for government regulation to prevent the interaction of really dirty old trucks with densely populated areas.

Gene Tunny  30:51

Yeah. So have you thought about how this would impact the industry? I’m sure you have. I’m just interested in your thoughts on it. Because I mean, there could be significant short run costs, you could have a lot of probably smaller operators, leave the market if they can’t use their truck anymore. I mean, imagine that the bigger operators have more a more modern truck fleet, but then there’s a lot of smaller operators that have the older trucks. Could this impact our supply chains? I mean, we’ve had all the logistics problems this year and associated with people being off work or in isolation due to COVID. Things haven’t been turning up at the supermarket. Have you thought about how this would? What impact would have on the industry and how that could be mitigated Marion?

Marion Terrill  31:36

Yeah, we have some I’m very alive to this. I think you’re absolutely right, that the big fleets of trucks are generally pretty new. And they’re the ones that kind of get sold on and feed through the chain. So at the at the oldest end of the spectrum, it is a lot of operators who might struggle to get them to upgrade the truck. So a couple of things, I’d say. One is that we don’t really the compromise that we thought was reasonable was that these trucks would be able to operate but not in the densely populated area. So, for example, a lot of trucks that do farm runs can be quite old. And it’s if they’re in an area where there aren’t many people will, the harm is much less. Now that’s not any good if you’re the actual driver, but it’s some some mitigation, that you’re not going past childcare centers and spewing out poisons at the kids. So there is one comment I’d make. The we did. We did recommend, though, that the government should assist by sort of with a track replacement fund or scrappage fund. Basically, we thought it should have a tender based programme where truck owners can make a binding bid for how much they’d be prepared to accept to scrap their truck. And because government’s got to be bit careful not to overpay for this stuff. In the end these traps have been allowed perfectly legally, to create quite a public health hazard. And we think that should stop, but we, you know, recognising that there are implications and that the government might want to assist with the scrappage fund.

Gene Tunny  33:39

Yeah. And so are you confident that this would pass the cost benefit analysis tests, if there was a regulation impact statement arrears on this, you’d be able to demonstrate that the avoided costs of the community through the fact that these particulates were causing an elevated level or incidence of disease in the community? And if we tried to put some, you know, put a figure on that, what you’d be willing to pay to avoid that? What it’s costing the economy in terms of the well, having to replace that truck fleet, any disruptions associated with that. Are you confident that that equation would be in favour of this measure? Have you done any numbers yourself?

Marion Terrill  34:26

Yeah, look, the government’s done a raise. And, and there are clear social benefits to doing it. So we’ve updated that and I think the, the basic figure is like the health benefits or health costs avoided, if you like, like by 2014, would be of the order of 1.7 billion in a year. Yeah. So yeah, very considerable health benefits. And just just to clarify for your listeners by health benefits, or health costs, avoid I don’t mean In the costs of treatment in hospitals, it’s the pain and suffering of, of getting the disease. Like, they’re the diseases that you get from these poisons, or you get, obviously, respiratory illnesses. But because the particles are so fine, they get into your bloodstream. And so you can get cancer type two diabetes, stroke, can affect it affects children in particular and vulnerable people, even in children in the womb. And it also even when it’s not causing diagnosable disease can impair cognitive function. Then every time the World Health Organisation or researchers do research on this, they find Oh, it’s worse than we thought

Gene Tunny  35:41 

Right? Yeah, yeah. So this really is I’ll have to have a look into this. So this has already been done. Do you know how recent it is? I mean, is this on the agenda of governments to do something about?

Marion Terrill  35:54

Yeah, it’s been on the agenda of governments for quite a while. The I think the reason is about five years old, yeah. So we, we’ve updated that. But it’s, if anything more compelling now than it was then.

Gene Tunny  36:13

Yeah. Yeah. But they’ve obviously that there, someone in government has been concerned about what it mean for the industry. Maybe they’ve been lobbied on it. I’m just wondering why they haven’t done anything. But it looks like you’re, you know, have been I mean, I guess, assuming that these numbers are right, I mean, hopefully, your report does motivate some action in this on this issue.

Marion Terrill  36:39

Yeah we are really hoping so. And I think by doing some follow up work in 2023. We’re working with some students at Monash to get more sort of air quality data, and to just enrich our understanding so that we can do detailed design, that that should be pragmatic and practical and effective. So it’s it. I think it’s a big issue. And it’s, I think it’s an under researched issue, actually.

Gene Tunny  37:10

Yeah. Yeah. Okay. Just final question. When I read the press release, and I had a quick look at the report, it looks like you’re focused on Sydney and Melbourne. Why not Brisbane, one at the third largest city in Australia.

Marion Terrill  37:26

Oh, we had a lot of debate about this actually, Gene. And I absolutely think that Brisbane should be in this, Adelaide in particular has got almost it’s got 45% of its trucks, pre 2003. So, so. And people have said to me, Well, what about Wollongong? And what about Newcastle? Absolutely. So in Europe alone, there are 250. More than 250 Low Emission zones. This is not a big deal. But we, yeah, we’re so we do plan to unfold more on this, but I think you’re absolutely right that Brisbane has got I forget the exact figure but approximately 20% of trucks. Pre 2003. It’s too many.

Gene Tunny  38:13

Yeah, yeah, I wouldn’t be surprised. I mean, there are still a lot of old trucks out there for sure. Okay, Marion, this has been fantastic. I’ll put links to all of these reports that have been mentioned in the show notes. I’ll put links to your social media. Anything else before we wrap up?

Marion Terrill  38:32

Oh, no, I reckon that’s about it for now.

Gene Tunny  38:35

Great. Yeah. Well, thanks, Marion. And that’s been terrific. Good. A good summary of all of these issues, and I’ve learned a lot. I mean, I always think I’m keeping up to date with what different think tanks are putting out and including Grattan’s. But maybe I sort of in the back of my mind, remember that that congestion charging one but I’m gonna have to revisit it this ‘Right time, Right Price, Right Place’. Yeah. And, and have a close look at that. So that’s terrific. So yeah, again, thanks so much for your time. I really enjoyed the conversation.

Marion Terrill  39:13

Me too. It’s always a pleasure. Thank you, Gene.

Gene Tunny  39:17

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

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.

Categories
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.

Female speaker  20:07

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  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.

Categories
Podcast episode

Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

The Reserve Bank of Australia has allegedly made some bad calls in recent years and now the Australian Treasurer has commissioned a major review. This episode’s guest, Dr Peter Tulip of the Centre for Independent Studies, has long pushed for a review of the RBA. Peter, a former RBA and US Fed economist, thinks the RBA can learn from other central banks such as the Fed and Sweden’s Riksbank, and it can avoid future bad policy decisions which cost hundreds of thousands of jobs. 

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

Here’s a video clip of Peter’s conversation with show host Gene Tunny to give you a flavour of what is covered in the episode.

About this episode’s guests – Dr Peter Tulip

Peter Tulip is the Chief Economist at the Centre for Independent Studies, a leading Australian think tank. Peter has previously worked in the Research Department of the Reserve Bank of Australia and, before that, at the US Federal Reserve Board of Governors. He has a PhD from the University of Pennsylvania.

Peter’s twitter handle: @peter_tulip 

Links relevant to the conversation

Peter’s previous appearance on Economics Explored: https://economicsexplored.com/2022/04/11/the-high-cost-of-housing-and-what-to-do-about-it-w-peter-tulip-cis-ep134/

Australian Treasurer’s 20 July 2022 announcement of RBA review:

https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank

Peter’s CIS paper on the RBA: https://www.cis.org.au/publication/structural-reform-of-the-reserve-bank-of-australia/

Kevin Warsh’s review of the Bank of England Monetary Policy Committee: https://www.hoover.org/sites/default/files/transparency_and_the_bank_of_englands_monetary_policy_committee.pdf

This is the 2010 Statement on the Conduct of Monetary Policy that Peter refers to at the end of the episode:

https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-5-30092010.html

This is the most recent statement:

https://www.rba.gov.au/monetary-policy/framework/stmt-conduct-mp-7-2016-09-19.html

Transcript: Reserve Bank of Australia being reviewed after big mistakes w/ Peter Tulip – EP149

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.

Peter Tulip  00:01

Coming up on Economics Explored. Many of us, including me, think that the Reserve Bank has been making big mistakes and is in need of structural reform.

Gene Tunny  00:15

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 149 on the review of Australia’s Central Bank, the Reserve Bank of Australia, or RBA. This review was announced by Australia’s new Labour government on the 20th of July, 2022. 

My guest this episode, is Dr. Peter Tulip. Peter has long pushed for a review of the RBA, and he’s been extensively quoted in local media on what needs to change. Peter thinks that the RBA has made some big mistakes in the past, and it could learn from other central banks, such as the US Federal Reserve, and the Bank of England, as he explains in this episode. 

Currently, Peter is the Chief Economist at the Centre for Independent Studies. And before that, he’s worked at the RBA, and at the US Federal Reserve Board of Governors. So, he knows how central banks work on the inside, and his perspective is a valuable one. 

This is Peter’s second appearance on the show. He previously appeared in Episode 134 on the high cost of housing. So, if you haven’t listened to that yet, please listen to it after this episode; it’s great. 

In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments or suggestions. Please get in touch and let me know your thoughts. I’d love to hear from you. 

Righto. Now for my conversation with Peter Tulip on the review of the Reserve Bank of Australia. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Peter Tulip, Chief Economist at the Centre for independent studies, welcome back to the program.

Peter Tulip  02:01

Good, Gene, how are you? 

Gene Tunny  02:03

Good. Thanks, Peter. It’s great to be chatting with you again. I’m keen to speak with you about the review of the Reserve Bank of Australia that was announced earlier this week by the treasurer, Jim Chalmers. One of our colleagues, Steven Kirschner; Stephen has been on the show before too. He wrote that the RBA review is; he wrote about it that everything is on the table, and that’s good. So, it is a very expansive review. The only thing it looks like they’ve left off the table to me, is that they’re not reconsidering the split in responsibilities between the Reserve Bank and the Australian Prudential Regulation Authority. They obviously still see a role for that as a separate entity, rather than rolling, prudential regulation back into the RBA. But other than that, it seems like a very broad ranging review. Are you generally happy with what’s been announced?

Peter Tulip  03:02

I’m delighted. Many of us have been calling for something like this for a long time. And the terms of reference are fairly deep and broad. The people running the review, first class, and there’s a good mix of people too. I mean, they’ve got a central banker, an academic and central bureaucrat. And any substantial reform, the RBA is going to require integrating those three perspectives. So, that’s useful also.

Gene Tunny  03:41

Right, okay. So, we’ve got an international expert, someone who’s been on the committee, the Monetary Policy Committee in the UK;

Peter Tulip  03:49

The Financial Policy Committee, slightly different. That’s financial stability rather than monetary policy.

Gene Tunny  03:55

All right. Okay. But she’s had a senior position in the Canadian Central bank, is that right? Caroline Wilkins? 

Peter Tulip  

Yeah, sure.

Gene Tunny  

And also, Renee A. Fry-McKibbin, who is an academic at the Australian National University, so highly regarded macro Economist, and also Gordon Brewer, who I worked with in the Treasury many years ago. And I mean, I think Gordon’s an excellent choice for that. So, yeah, it looks like;

Peter Tulip  04:24

And before that, Gordon worked at the RBA, so it’s good to have some internal experience.

Gene Tunny  04:31

Right, okay. But it wasn’t exactly what the RBA wanted, was it? Even though it looks like the RBA has had some role in shaping the terms of reference, I saw an interview with Jim Chalmers on, was either Coffee show or the Today show here in Australia. And he was saying that the RBA said some input in the terms of reference, but originally, they just wanted to review themselves, didn’t they? Which would have been a great idea if you think about it.

Peter Tulip  04:58

To be credible, it needs to be external and independent. They’ll have a secretariat, which will be largely staffed, I think, from Treasury and the RBA. So, they’ll be able to call on the resources of the bank, and it’ll be informed by the bank by insiders, but the ultimate judgments will be independent and external, which I think they need to be.

Gene Tunny  05:26

Well certainly will, particularly if they’ve got Rene on the review committee. So, Rene is the editor of the Economic Record here in Australia, which is the top Economics journal here, and she’s well known in the economics profession and her husband, Warwick McKibbin, is actually a former board member, isn’t he? I mean, she’s obviously a separate person to Warwick. But I mean, I’m wondering if this is a way that Warwick’s views are actually getting inputted into the review in some way, even though obviously, she’s her own individual.

Peter Tulip  06:03

Yeah. His views will clearly get a lot of weight. But Rene is an expert in her own right. Yes.

Gene Tunny  06:09

Yeah, along with other economics colleagues. So, it’s not going to be something that the Reserve bank is going to necessarily get its way on, which is good. There’s going to be input from a broad range of sources, including yourself, I mean, I’m guessing you’ll be making a submission to the review.

Peter Tulip  06:26

I’ve already written my submission. I mean, so I did a big paper calling for reform of the RBA, just a few months ago. In the context that this review has been called for. And I set forward my views on what I was hoping the review would look at and what it would conclude. So, I’ve done my bit, and now it’s up to them.

Gene Tunny  06:48

Great., I mean, you’ve certainly been one of the most influential people in in this discussion so far. And you wrote a fascinating AFR piece earlier this year, which was titled Reserve Bank must be made accountable for inflation mistakes. So, might chat about that in the moment. But to begin with Peter, could you tell us why do you think this review was necessary in the first place? Is it because of those inflation mistakes?

Peter Tulip  07:14

Can I give a long answer to that? So, there are three levels of an answer in increasing areas of being controversial. The first and simplest answer is that, it’s just good practice to regularly review your monetary framework every few years, in the light of new research and new experience. People are writing about these frameworks all the time, and you need to, every now and then have a stock take of that. And this is what all of our foreign, not all, most other Central banks do. It’s standard amongst foreign central banks to have regular reviews. And the format of those varies, and we’ll talk a bit about that. Some of them are external, some of them are internal. Some of them have a heavy academic focus. Some of them are on; the Bank of Canada does is on a regular five years schedule. Others are more ad hoc. So, that’s one thing. It’s just regular practice. 

The second bigger argument is that the Reserve Bank has been missing its targets that prior to the pandemic, the inflation rate was well below the target of 2 to 3%. And the unemployment rate for an even longer period was well above estimates of its sustainable or full employment level. And so, particularly with the inflation rate, which is the reserve bank itself describes as a key performance indicator, when you’re persistently failing to hit your targets, there is there has to be a presumption that a review is necessary that otherwise there’s just no accountability at all. 

And then the third layer of arguments I gave, which is more controversial, is that many of us, I mean, including me, think that the Reserve Bank has been making big mistakes, and is in need of structural reform. And it’s great to have a chance to hear those views. And these are arguments that part of them are related to the composition of the board that these are decisions for the government and parliament often, rather than for the bank itself. And so, you need some kind of external review to evaluate this widespread argument.

Gene Tunny  09:53

Yeah, I think they’re good points. Peter, can ask you about that inflation target of 2 to 3%. Now, there could be two possibilities couldn’t there? It could be that either the 2 to 3% target doesn’t make sense, or we should review that target; we should, maybe we could downgrade it or just set it at 2% or have it at 1 to 2%? Or another possibility is the Reserve Bank; I mean, it was derelicting its duty. So, is that right? There are two possibilities there, there could be; and this is why a review would be desirable because you’d either look at the appropriateness of the target, and also whether the Reserve Bank is actually doing what it would need to do to achieve that target.

Peter Tulip  10:36

Correct. So, the reviews that other Central banks have had, often have had a strong focus on the specification of the targets. And that should be part of this review. And there are many people that would prefer a different target to the 3%. There are some people who think the inflation target should be lower, there are some people who think it should be higher. There are respectable arguments for both that the review should be considering. And that should be an important part. In my view, those arguments are really secondary, oh sorry, I should also say, there are other people who want to target a different objective completely, such as nominal income. And we’ll talk about that later on. 

In my view, those arguments are really secondary. That for most of the past decade, the bank has not been hitting its targets, it hasn’t even been trying to hit them. So, it’s a bit pointless specifying worrying about how you exactly define the target. If the bank isn’t just going to ignore. The most important question is governance, and how can we change the incentives of the RBA so that it actually does hit the targets it’s given? And you need to get that right before you worry about what that target actually is.

Gene Tunny  12:04

Okay, a bit of follow up on that. Peter, you’re saying that it hasn’t even been trying to achieve those targets?

Peter Tulip  12:11

Sorry, I’m wording that too strongly. You’re right.

Gene Tunny  12:13

I think I understand the point you’re making. I want to just explore that a bit. 

Peter Tulip  12:18

Can I give you an example? 

Gene Tunny  

Yes, please.

Peter Tulip  

So, in November 2019, just before the pandemic came along, the Reserve Bank issued a set of forecasts, and it had underlying inflation staying outside the target range for the whole horizon. And it had unemployment exceeding the bank system, it’s a full employment for the whole horizon. 

Gene Tunny  

So, inflation was below 2%?

Peter Tulip  

Yeah. Unemployment was I think, being forecasted 5% or higher, varying depending on the horizon. And despite what you would think is an obviously unsatisfactory outlook. The Reserve Bank didn’t change interest rates, either at that November meeting or subsequent meetings until the pandemic came along. And it did so because it was worrying about other things, in particular, financial stability. So, there was a disregard, or at least down weighting the bank statutory responsibilities in the legislation that says, the objectives stability of the currency, which we interpret is 2 to 3% inflation, and full employment, which we would interpret now as the preferred terming, that other Central banks uses, maximum sustainable employment, which were estimated about four and a half percent. So, there was a down weighting of those objectives in favor of this new objective that the bank invented about indebtedness, and we’ll talk about that later on too.

Gene Tunny  14:01

Okay, so shouldn’t central bank be concerned about indebtedness and the related issue of financial stability? I mean, that’s ultimately what they’re concerned about, isn’t it that if they’re worried that monetary policy, if it’s too loose, if it’s too accommodative, then households could take on too much debt and then get into trouble at a later date and that could have adverse economic consequences.

Peter Tulip  14:28

Sure. So, we know from the global financial crisis, that if your banks start failing, then it’s catastrophic for the economy. Australia had a similar experience in; when was it? In the early 1990s. When several of our small banks failed and some of our big banks came close. And again, that that was one of the worst recessions Australia’s had in living memory. So, yes, financial stability matters a huge amount. The question is how you deal with that? And what’s the appropriate instrument for that? And there’s a very large volume of research saying that it’s not interest rates or monetary policy, it’s prudential policy. And they were in particular, about the capital requirements that banks are required to have. And the way to avoid a repetition of the GFC is not to put 270,000 people unemployed, is to raise your capital requirements. So that if in the event of losses, banks making losses on their loans, banks have sufficient equity to cover that. And so, the important objective is, yes, we do very much want to avoid a repetition of the GFC. The way to do that is with high capital requirements.

Gene Tunny  16:04

This 270,000 jobs number Peter, is this from an analysis by, is it Andrew Lee and?

Peter Tulip  16:15

And Isaac Gross. So, Andrew Lee is now an assistant Treasurer, he’s a government minister. And Isaac Gross is an academician at Monash University of Economists. And they, just recently, published a paper in the economic record, which you were referring to before. That’s the journal that Renee A. Fry-McKibben edits. Where they found that, yes, the reserve bank kept interest rates too high, between 2016 and 2019. And because of these worries about debt, and because of that, unemployment was 270,000, higher than it should have been.

Gene Tunny  17:08

Yeah, it’s interesting. I mean, I’ll take the point there about; if you do run that simulation, and I think they use the Reserve Bank’s own macro-economic model Martin, I think they’d call it. And so, look, yeah, good point. I mean, if I were on the board, I’m probably one of those who wouldn’t have minded them having kept the rates where they are. I probably wouldn’t have supported cutting them, as that model would suggest, given that I would have those concerns about financial stability. But I do recognize that there are a variety of views. And I’ve been interested to learn about that literature that you’ve written about, and also Steve Kirschner talked about when I spoke with him on nominal GDP targeting. And I want to have a closer look at that. 

Peter Tulip  18:00

I’m happy to argue the merits of that particular argument further if you want, but what’s maybe a more important point to make here is that the process was bad. Yes, the bank never really explained or defended its position in public, that there seems to have been a real lack of scrutiny of the decision. So, there are people such as yourself, who were sympathetic to what the bank did. But those arguments, I would say, the large majority of expert opinion is on the other side, which is that you should regulate these considerations with prudential policy, not with monetary policy, that the most direct instrument is almost always the most efficient, and involves the least collateral damage? Yeah. 

And even though, a majority of expert opinion in a majority of other central banks were explicitly opposed to the bank, there was no real defense of that position in the bank’s documentation. Beyond a few brief sentences. The bank never quantified its concerns, was never actually very precise, even about whether it was really worried about the level or the growth rate of indebtedness. It didn’t even say what; no discussion of what’s the best way to measure this, no real clear discussion of the consequences of this. But maybe even more important, even though most expert opinion was against the bank, there was no; counter arguments were never addressed. 

So, in the paper I wrote that earlier this year, I mentioned another half a dozen arguments against the bank’s focus on indebtedness, any one of which I think would be fatal. And none of these were publicly addressed. Just to give one, a lot of research studies find that low interest rates don’t actually have almost negligible effect on indebtedness, that the debt to GDP ratio has a numerator and a denominator. And low interest rates will encourage both. And a lot of research says that actually, you have a bigger effect on GDP than you do on the debt. So, low interest rates have a greater effect on the capacity to repay, or to bear a burden than on the actual burden itself. Insofar as what the bank was doing, it was counterproductive. And there are more arguments and people; rather than going through succession of arguments on it. Yeah, actually, this is the paper. It’s called structural reform of the Reserve Bank of Australia. I mentioned a lot of further reasons as to why the bank was wrong in targeting indebtedness at the expense of its core objectives.

Gene Tunny  21:35

Yeah. I’ll put a link in the show notes to that paper for sure. Peter, in fact, I’ve got it in front of me, it’s a Centre for Independent Studies analysis paper, 36, April 2022. And in that paper, I mean, you, I mean, it’s Frank and fearless for sure. You’re someone who used to work at the bank. And you’ve probably still got a lot of friends there at the bank. But you mentioned or you talked about their poor communication and poor process. Now, I mean, you’re talking about that before. What do they need to do better? How do we improve it? I’m guessing this would be one of your hopes for what the review recommends. But how do we improve the process in the communication?

Peter Tulip  22:27

So, let’s start with this particular issue, the bank needs to fully explain itself, that it needs to outline the pros and cons of its arguments and address obvious counter arguments. And preferably, if something is important, you need to say what’s the evidence, both consistent with the bank’s position and how do we address evidence that people think weakens the position? And some kind of quantification of these effects is, well, I mean, some of these things can be measured, and there is substantial research on aspects of this question. And that really needs to be discussed and its relevance to policy explained. 

So, that’s dealing with one specific error, and why that’s important, is, unless you do that, mistakes will happen. And so, regardless of your position, on this particular question of indebtedness, the process was clearly flawed. That if you keep making big decisions that slip hundreds of thousands of people out of work, without a full, open public discussion, sometimes you’re going to make mistakes. And when you make mistakes, they will persist. An open discussion is the best antidote to making serious mistakes. Because this was not just a one off, the bank has a record of very controversial decisions that run counter to mainstream economics. For example, Warwick McKibbin, we mentioned earlier, was pushed out of the bank when he objected to its policy. This is back in the late 80s, early 90s of targeting the current account deficit. The bank had interest rates far too high, because it was worried about the current account deficit. Warwick McKibbin said that that was wrong. And essentially, he was told he wasn’t welcome. So, he left.

So, this is a cultural problem within the bank, its resistance to criticism and to scrutiny, even internal scrutiny.

Gene Tunny  25:09

Peter, can I just ask what are they doing now? So, at the moment, they do publish; there’s a decision, there’s a monetary policy decision every month regarding what they do with the cash rate, there’s a page or so of, you know, discussion of where the economy’s at and some sort of; all they make clear what their decision is, you’d like to think there’s some logical connection with their analysis of the economy in that decision. The governor does make himself available to give speeches, he appears that I mean, parliamentary committees, from time to time. So, what more needs to be done? And are there any examples around the world of how it’s done better?

Peter Tulip  25:54

Yeah, I think most Central banks are clearer and more transparent than the RBA. Where it matters most is in reasons better decision. So, where transparency, I think is most necessary is for the banks to say why it made a decision, and why its choice was preferable to alternatives. So, for example, at the moment, the bank with the rising rates, the market expects to be going up about 50 basis points a month, the next few months. It would be very useful, in fact, I think it’s necessary for the bank to say, what would be the consequences of alternative choices? Suppose interest rates were to rise slower, and interest rates could rise higher, and what would be the unemployment and inflation consequences of those alternatives? My guess is that a faster path of increases would give us lower inflation and higher unemployment, in both cases, bringing those variables closer to the bank’s targets. 

So, why is that not the preferred choice? That strikes me as the central requirement for transparency, explaining why you’re not doing something different, and the bank doesn’t really do that. It certainly doesn’t quantify it. But other central banks do. The Federal Reserve, the Risk bank are prominent examples. I mean, all it takes is just a little four panel chart to show; again, this is the Goldilocks path in the middle, and this is too high and this is too low. And these are the consequences and we pick the path, the Goldilocks path with the best outcomes. Other central banks do that as a matter of routine, so should the RBA.

Gene Tunny  28:05

Right, so you’re talking about the Federal Reserve and the Bank of England? Okay. 

Peter Tulip  28:09

The Bank of England does it in a slightly different way with scenario analysis. That would not be my preferred model. Either the Riksbank or the Fed approaches, or just very clearly convey the central issues in the monetary policy position.

Gene Tunny  28:27

Yeah. In preparing for our chat, Peter, one thing I noticed was a review that was done of the Bank of England’s Monetary Policy Committee by Kevin Walsh, 2014. Actually, I may have learned about that from you. I’m trying to, I can’t remember exactly, but I thought that was very good. If I’m reading one of his tables correctly, it does suggest that we have very low transparency here in Australia relative to those other countries. I think that’s.

Peter Tulip  28:57

So, about Kevin Walsh, he used to be a governor of the Federal Reserve and went to the Bank of England. This is an example of the kind of external reviews we were talking about, specifically to review their processes for transparency and openness. And it ended and it’s a very good thoughtful report, and anyone interested in that issue, I strongly recommend it. As part of his review, he looked up the Central bank practices and then yeah, the RBA was terrible. And the RBA is partly rectified. It as been more opened since that report was done. And in particular one, one of his glaring findings was that Australia was the only country he looked at where the Central bank didn’t give regular press conferences and and other countries find that a very useful way of explaining that as decision, and in particular, having important decisions challenged and defended. But since then, Philip Lowe has started getting press conferences, so, that’s a great thing. I’d still like them to be more frequent. He only does them occasionally, I would think you should do them, at least quarterly.,

Gene Tunny  30:34

Yeah. They certainly need to improve their communication. I’ll have to think myself about what that would best look like. I quite like the idea of having scenarios or having different, you know, looking at what different policy parts could mean for inflation and unemployment, but also being honest about what’s the uncertainty around that. And I mean, one of the things that our Governor, Philip Lowe has got into trouble for in the last few months is just the fact that their forecasts appear to have been just so bad. Perhaps, if they’re more honest about just how unreliable economic forecasts can be, given that the economy is hit by shocks all the time, and I mean, we’re not even sure we’re properly modelling the underlying mechanisms. Perhaps that would have; he would be held in high regard now. But everyone’s mad at him because he was, people were taking his word for it, that interest rates would stay where they were until 2024. And so, he’s in a heap of trouble now.

Peter Tulip  31:37

If I can comment on that. So, I think people exaggerate how bad these forecast errors were, and in particular, their relevance to the review. You have to remember that Jim Chalmers came out in support of a review of the RBA, over a year ago. So, before inflation took off, in fact, back a year ago, inflation was below the target. So, what’s happened? There are these unusually large forecast errors, but they’re not the reason we’re having a review. And forecasting is difficult, and in particular, if you’re forecasting in the middle of a pandemic that you’ve never been through before, you’ve got no historical experience to go by. And as it turned out, vaccines came on stream very much quicker than expected. And they worked much better than they’re expected. And the RBA got that wrong. You know what, no one can forecast accurately. I’ll be impressed with criticisms about the bank’s forecast record from people who actually do forecasts better than the bank. Hearing a lot of criticisms that we’re forecasting for people that don’t actually present forecasts themselves makes me roll my eyes a bit. Yeah, fair point. And the bank will always make forecast errors. And it has processes to improve its forecast performance and it does reviews of its models and this and the databases and things like that. The review will probably look at that. I’ve actually been involved in that process. I don’t see great scope for change or even questioning what the bank is doing there.

Gene Tunny  33:48

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

Female speaker  33:53

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

Gene Tunny  34:22

Now back to the show. 

Okay, can I ask you about this transparency, like how we improve that? One of the suggestions that came from a panel member at the conference of economists last week when we’re in Hobart, you were there? I can’t remember. Sorry, Peter, were you in that session? You were in that session, weren’t you? There was that recommendation that I forgot who made it. But that part of members of the board of the Reserve Bank that their deliberations or their decisions are published or someone’s got a dissenting opinion that’s published. So, we get more communication from the board members. And so, we understand that there is a difference of views and that could help the public understand the deliberations and realise that the Reserve Bank isn’t this all-seeing, all-knowing entity that’s fully in command, or maybe that’s the wrong way of putting it. But maybe that would make people realise that they’re human, and mistakes can be made. And so, when we have a governor who says, oh, interest rates will remain this, at this level until 2024, we should realise, well, he’s talking about based on these assumptions. I mean, you can never guarantee anything. But what do you think about that idea of having more information about what different board members are thinking?

Peter Tulip  35:51

I think that’s a great idea, partly to improve the incentives have individual board members, that individual board members should be accountable for their decisions. And at the moment, there isn’t any individual accountability, these decisions are presented as decisions of the board. And so, I think there’s no incentive for a board member to say, I think this decision is wrong. The research says opposite. We need to pursue an alternative course of action. So, partly, there’s inadequate challenge within the board process, as and as a result, less need for the bank to defend itself. But also, it means the public is not brought into these highly consequential debates and decisions. And that would improve things. And where a board is divided on a particular course of action or a particular piece of analysis, this is where external research and external opinions are most valuable. But no one knows that. So, people talk about monetary policy, including you and me, but we’ve got no idea whether we’re talking about something that the board regards has completely settled, or as a 50-50 decision. And so, a lot of what we say is not relevant. And there are big questions on which further evidence would be useful. That we don’t know about.

Gene Tunny  37:30

Right. On the members of the board, you’ve been quite prominent in the media recently, and in the commentary on this RBA review, you’ve made the point that the level of expertise of board members is not really where it should be. I mean, obviously, there are some that have the expertise. But are you arguing for more economists on the board rather than business people? Is that correct?

Peter Tulip  38:01

Yes. And to be precise, more monetary policy experts. And this would be my number one recommendation for reform of the RBA. We talked earlier about the bank making mistakes, the first place that they should be caught and challenged is at the board level. But at the moment, the board seems to be operating as a rubber stamp for the governor, and that’s not good. I mean, so Phil Lowe is a very talented economist who gets lots of things right. But he is human and he’s just one person and he makes mistakes. You’ll have you will have fewer mistakes, if the decisions were instead, made by a committee of experts.

Gene Tunny  39:04

And is that what they’ve got in the States or in England or in or in the UK?

Peter Tulip  39:09

Yeah. So, I mean, that’s an interesting comparison. So, in 1959, when the RBA board was being set up, it was actually common to have non economists making monetary policy decisions. But since then, other Central banks have decided these are technical questions on which research is relevant and needs to be apply. So, they’ve moved to monetary policy committees, overwhelming, really comprised with monetary policy experts. Actually, it’s not just experts, but they have some of the leading economists in the world on monetary policy, sitting on their monetary policy committee. These the people that wrote the textbooks I learned my monetary policy from are often on the FOMC, or the Monetary Policy Committee of the Bank of England. So, whereas other countries have stars making their monetary policy decisions, we have part-time amateurs.

Gene Tunny  40:19

Yeah. Well look at who’s been the Federal Reserve Bank Governor in the US. You’ve had Ben Bernanke. You’ve had, I mean, he’s made huge contributions to macroeconomics. Janet Yellen.

Peter Tulip  40:33

The deputy of Stanley Fischer.

Gene Tunny  40:35

Right. And he’s the person who wrote the textbook;

Peter Tulip  40:39

And Bernanke and Frederick Michigan. Yeah, they’ve written textbooks on how to do monetary policy.

Gene Tunny  40:48

Okay. Yeah, good point. That’s a very good point,

Peter Tulip  40:52

Let’s say a bit more about the composition of the board. So, there are two parts of it, you would get better decisions with more experts on the board. And it’s just like, any other technical decision being made by a government bodies on immunisation or building a bridge or whatever you want. You don’t want business leaders making these decisions, you want experts in the field. Within that, you want a diversity of views. So, you want a mix of hawks and doves, for example, some empirical people, some theoretical people. Instead of that diversity of expertise, sorry, that diversity of views, we have a diversity of expertise, that there are some members of the board that are capable of challenging the governor, but most are not. And that results in groupthink and status quo bias and other flaws in decision making that we see in our monetary policy decision.

Gene Tunny  41:59

Yeah. So, look, I agree with you on that, Peter. And I think the government will find it, I mean, I don’t think that I’ll accept a recommendation along those lines, unfortunately. They’ll probably want to have a trade union member on the board. I think there’s going to be a push for that. Some people pushing for, let’s have a regional representative on the board. I mean, I don’t necessarily think we should be selecting people for the board for that reason. But what you’re going to have is, you’re going to have; there are people who are sceptical of experts, because there’s this general view out there now in western economies, that look, experts have led us down. And you know, people are upset about things that happened during the pandemic, and even before then. So, there’s a larger scepticism about experts. And there’s this issue of democracy, isn’t there? I mean, so, there could be an objection. Well, we don’t want all these technocrats running things. We think there should be some democratic element there. But then I think the issue there is that if you don’t have an independent Central bank, then you get worse inflation outcomes.

Peter Tulip  43:15

See, you’re raising several issues there, Gene. So, think about the other big important decisions that have been made in the news lately. I’m going to say public health. Do you want doctors and Epidemiologists making decisions on whether vaccines are approved? Or do you want business leaders?

Gene Tunny  43:36

I want the doctors and the Epidemiologists for sure. 

Peter Tulip  43:41

If a bridge is being built, you want that decision to be made by engineers or by business people? I mean, so in other areas, government policy, we rely exclusively on people that prompt eminent experts with technical expertise, and monetary policy is the same. It used to be that the values of monetary policy and even the objectives were vague and not clearly decided. And so, the board had a lot of discretion as to why monetary policy should be set but that’s no longer the case. Central bank has moved to a world of clearly defined objectives, essentially set by the government by the elected representatives. So, they decide that the objectives of the RBA are full employment and inflation of 2% to 3%. And it then becomes a technical question as to how to best achieve that, and that’s the decision that should be made in the national interest. It should not be made by representatives of sectional interests. Excellent point. And this interacts with the other recommendation we’re talking before about public votes. 

So, if you have a representative of say, the mining industry or the agricultural industry; industries that are heavily exposed to the exchange rate, do you want them making decisions that affect the exchange rate for the national interest or that will affect their sectional interests? I mean, if it’s the sectional interest one, they’ll always be voting for lower interest rates, and a depreciation of the exchange rate, and their constituencies will be expecting and demanding that. So, if you do have so called sectional interests, but you want the vote to be a national interest, you would need to keep the votes private. And this is an unusual way of dealing with a conflict of interest. Normally, we think conflicts of interest are best dealt with by transparency, not by secrecy.

Gene Tunny  45:58

Okay, what about the banks themselves, the staff on the banks themselves? Do you have views on how our reserve bank, how it compares with its peers with the Federal Reserve or Bank of England in terms of its ability to analyse the economy and to provide the advice to the board?

Peter Tulip  46:20

Yes. So, as background to that, before I worked at the Reserve Bank, I worked with the Federal Reserve Board of Governors, I was on the staff there for 11 years. I also worked at the OECD, on monetary policy, going on around the world talking to Central bankers about how they were sitting, making their decisions. And so it’s interesting, I mean, that background shows real differences in character and culture between different Central banks. I mean, have you noticed that just in government departments, different cultures, but even with Central banks, where they’re technically doing the same decision from different countries, they vary enormously. The RBA tends to be much less interested in research, and much less interested in technical modelling than other Central banks. And most clearly, with the Fed where the Fed has 400 PhDs on his staff, essentially putting together its forecast. The RBA has a very different human capital model, where academic qualifications and less important promotion and research is not ending, external research is not expected of most staff. And again, that is something that the review could look at a lot of people. I mean, there are differences on views as to whether that’s appropriate, and reflects lots of reasons that I mean, culture and history is a lot of it.

Gene Tunny  48:08

Yeah. So, your big recommendations for this review, or what you hope to get out of this review, improvements in transparency and communication.

Peter Tulip  48:18

Can I list them in order? Yes, please. 

Number one, we want more monetary policy experts on the board. 

Number two, we want those members to be individually accountable. That means public votes and public explanations of decisions. 

And third, the bank needs to be more open and transparent. And in particular, needs to do clear reasons for its decisions, and why alternatives are not taken. They would be my three main recommendations.

Gene Tunny  48:53

Okay. So, no changes to the inflation targeting regime, this flexible inflation targeting regime they talk about?

Peter Tulip  49:00

That’s why I have views on that. But as I said before, I think they’re secondary. So, the main changes I would make is, first of all, every time there’s a change in government or change in governor, there’s a new agreement between the bank and the government called the agreement on the statement of conduct of monetary policy. And that is where the target is specified in detail, which I think is appropriate. Currently, that says the main objective of the bank is inflation 2 to 3%. In my view, it should also specify full employment, or to be precise, maximum sustainable employment as an objective of equal status to the inflation rate. So, in legislation, the bank has a dual mandate that’s not reflected in the agreement on the statement of conduct and I think that causes a lot of confusion. People think that when people read the bank’s explanations of what it does, they often think that the bank is an inflation nutter. Which it’s not, it takes its unemployment objective very seriously. And it does it in this vague way, because flexible, inflation targeting, which should be specific about what flexibility is required and what isn’t. There would be other changes, but that would be the main one I would make.

Gene Tunny  50:31

Do you think there’ll be any changes to that framework? There seems to be a view from the RBA, and I guess from others that the inflation targeting approach seems to have worked pretty well in keeping inflation low over the last few decades, I mean, you mentioned, there is that issue of the times it might have meant we had higher unemployment than otherwise.

Peter Tulip  50:56

No, that was because they abandoned their inflation target. They had inflation too low, accompanied by excess unemployment, you would have sold both of those problems with lower interest rates. It didn’t do that, because it did invent this other objective of indebtedness that it should not have done. And it certainly shouldn’t have done it without a more open, transparent and accountable process. So, I think the main proposal for a change in the framework is for nominal income targeting, which Warwick McKibbin and Steve Kirschner and numerous other monetary policy experts think would be preferable. I think that’s a minority position. And I think you’re right, that the consensus of informed opinion doesn’t think that the framework needs to change much. I mean, I think there are some minor tweaks that shouldn’t be implemented. 

Nominal income targeting is not popular, partly because no other Central bank does it. So, there’s no example to show that it works. And the RBA is not a pace setter in these things. It’s a follower, not a leader, which is useful in a lot of ways. But also, the American literature on nominal GDP targeting some phrases in terms of nominal GDP targeting, which would just be inappropriate for Australia, because we have such volatile terms of trade. And we don’t want monetary policy being jerked around to target the coal price. Which just would mean big dislocations for most households. Not much apparent benefit.

Gene Tunny  53:02

Yeah. There seem to be some recognition of that in that panel discussion in;

Peter Tulip  53:08

So, Warwick McKibbin has said, you would target a slightly different variable, maybe some measure of nominal income. And that makes more sense. Warwick keeps contrasting his arguments for nominal income targeting with inflation targeting, which is what the bank says it is that it’s not what the bank is, in practice. In practice, the bank has a dual mandate. And we’re its main argument, as I take it is that inflation targeting is wrong, because activity is an appropriate objective of the Central bank and being explicit about the dual mandate would avoid that confusion.

Gene Tunny  53:50

Yeah. Okay. I’m just thinking about the tweaks; one tweak that seems clear to me that needs to be made is clarification on this point about what do you do about indebtedness? So, one way or the other, make that clear. Is the bank targeting financial stability or not?

Peter Tulip  54:09

And in my view, I mean, it’s the bank as an institution needs to worry about financial stability, but primarily, it should be dealt with, with prudential policy, not monetary policy.

Gene Tunny  54:23

And by that, you mean the Prudential Regulation Authority, which is looking at the banks and, you know, in looking at their balance sheets and making sure that they don’t make a bunch of risky loans.

Peter Tulip  54:34

Well, the nature of banking is you make risky loans. The big question is whether you’ve got an equity buffer to deal with those risky loans in the event that they all go sour at once. I mean, there are arguments about lending controls. That’s another controversial argument. But for this review, what’s going to be relevant is the status of financial stability within monetary policy. And in my view, I liked the wording. I think it was the 2009 agreement that the government had with the RBA, which said financial stability is an objective of the RBA, but it’s secondary, it’s subordinate to the core objectives. Or it should be said to be subordinate to the core objectives of full employment and stable inflation.

Gene Tunny  55:39

Okay. I’ll look that up and put in the show notes. Right, Peter, that’s been great. I mean, there are so many other aspects of this, I guess we could explore but we’ll probably have to wrap up because you’ve been generous with your time so far. Any final thoughts before we go? Anything we missed that you think is important to convey?

Peter Tulip  55:58

Oh no. I think it’s been good discussion of the key points. People who do want more, again, a lot of it is in my earlier paper.

Gene Tunny  56:11

Yes. You’ve been incredibly influential on this, Peter. So, well done. I saw you on ABC the other day, and it’s terrific that you’ve had this impact. And let’s say we get a really high-quality review with some recommendations that improve monetary policy in the future. 

Peter Tulip  56:34

Thanks for that, Gene. That’s great.

Gene Tunny  56:35

Pleasure. Thanks, Peter.

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 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

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

Charter Cities: A Public-Private Partnership (PPP) model w/ Kurtis Lockhart – EP147

In episode 147 of Economics Explored, Kurtis Lockhart, Executive Director of the Charter Cities Institute, tells us about the benefits of charter cities – cities with their own rules or charter, independent of national or subnational governments. Kurtis argues the best way to implement charter cities is via public-private partnerships (PPPs). Learn about the fascinating work the Charter Cities Institute is involved in around the world, particularly in sub-Saharan Africa, with a view to stimulating economic development and lifting millions out of poverty.  

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

Here’s a video clip of Kurtis’s conversation with show host Gene Tunny to give you a flavour of what is covered in the episode.

About this episode’s guest – Kurtis Lockhart

Kurtis Lockhart is Executive Director & Head of Research at the Charter Cities Institute. Kurtis is also a PhD candidate in political science at the University of Oxford. His research examines the effect of institutional reforms on public goods provision with a regional focus on sub-Saharan Africa. At Oxford he has taught both quantitative methods and African politics. 

In the field, Kurtis has previously worked as a Research Manager for the International Growth Centre (IGC), for Warc Africa (both in Sierra Leone), and for the ELIMU Impact Evaluation Center in Kenya where he managed the implementation of several randomized control trials across many different sectors (health insurance, rural electrification, tax administration, and legal aid). Kurtis has also completed consulting projects with both Oxford Development Consultancy and with Warc Africa. He holds an MSc in Development Management from the London School of Economics where he graduated top of his class, as well as a BA in Economics and Development Studies (First Class Honors) from McGill University. 

Find him on Twitter @kurtislockhart.

Links relevant to the conversation

The Charter Cities Institute 

Podcast Archives – The Future of Development (Charter Cities Institute podcast)

Paul Romer: Why the world needs charter cities 

The Charter Cities Institute on Twitter: @CCIdotCity

Transcript: Charter Cities: A Public-Private Partnership (PPP) model w/ Kurtis Lockhart – EP147

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…

Kurtis Lockhart  00:05

As an organization, CCI’s vision is to empower new cities with better governance; to lift tens of millions of people out of poverty. So, we’re all about poverty alleviation.

Gene Tunny  00:17

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

This is episode 147 on Charter Cities. We’re going to learn what Charter cities are exactly, and what progress has been made setting them up. My guest this episode, is Kurtis Lockhart, Executive Director at the Charter Cities Institute, and a PhD candidate at Oxford. One important takeaway for me from this episode was the importance of having a genuine partnership with host countries. So, Charter cities aren’t seen as Neo colonialism.

In the show notes, you can find relevant links and details of how you can get in touch with any questions, comments, or suggestions. Please get in touch and let me know your thoughts on this episode, or have any ideas that you have for future episodes. I’d love to hear from you.

Right on, now for my conversation with Kurtis Lockhart on Charter cities. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Kurtis Lockhart, Executive Director at the Charter Cities Institute, welcome to the program.

Kurtis Lockhart  01:33

Thanks so much, Gene. I’m happy to be here.

Gene Tunny  01:36

It’s great to have you here. I’m keen to learn about what you’ve been up at the institute. As an economist, this is a concept that’s I’ve been fascinated by since, I think it was Paul Romer, famous Economics Professor Nobel Laureate, if I remember correctly; he had this great TED Talk, probably about eight years ago now on Charter cities. I’ll put a link in the show notes.

To begin with, Kurtis, could you just tell us a bit about the Charter Cities Institute, please? Where’s it located, what you’re doing, what your mission is, please?

Kurtis Lockhart  02:17

The Charter Cities Institute is a 501C3. That just means a nonprofit Think Tank and nonprofit research organization. We are headquartered here in Washington, DC. There’s a Zambian office of CCI in Lusaka, that we’re really proud to have opened late last year. That now has three full time staff there, so we’re ramping up quickly there. And I can break down CCIs activities around Charter cities into a few buckets. And they’re all-around building the ecosystem for Charter cities. So, one is around just research, right? So, we provide very nerdy, longer papers on academic jargon and that you’re more e-con inclined audience members would probably resonate with, around why Charter cities are an idea whose time has come. Why they are; we think they’re convincing from a public policy standpoint, to pursue, and why we think that they could be game changers in terms of economic growth, and spurring economic development. So, that’s research, in addition to this longer, more academic oriented pieces, we also, you know, we want to start a movement, and we want people to be involved. You also need to communicate it in other forms, like blogs, like media outlets in more popular press, and exactly like I’m doing with you here today, Gene, on podcasts. So, that’s the research bucket.

The second bucket is around events; we host various events and conferences and summits. One other things that we’re really excited to do, later this fall is co-hosting a conference, a two-day conference with MIT in Boston. They have a sustainable urbanization lab there. And we’re hosting a two-day conference with them, where the first day will be focused on academics; talking about this idea of Charter cities and new city developments as a way to grapple with really rapid urbanization that we’re going to experience as a species over this century. And then the second day, we’ll be less academically inclined and more focused on practitioners and policymakers and new city developers themselves.

So, we’ll go from, the abstract and the academic on day one to the practical and the real world on day two. And I think that’s really necessary in a new space like this with a new novel idea is to get those two silos talking to each other and that’s one of the key things that we see CCI doing in terms of building the ecosystem. So, first bucket – research, second bucket – events.

The third bucket of activities that CCI engages in, is around technical assistance and partnerships. So, engaging in and providing advisory to new city projects on the ground to get these things built in thriving new Charter cities out there in the real world.

Gene Tunny  05:24

Great. I mean, I’m keen to learn about new cities being built. And because this Charter cities idea, it’s designed to stimulate economic development to improve outcomes for people out there in the real world. So, you’re keen to learn what’s going on there? Would you be able to explain first, what is a Charter city? How do you conceptualize it? How would you describe it, Kurtis?

Kurtis Lockhart  05:48

Our simple definition of a Charter city is new city with new rules. And there are two pieces of that: the city component, which is the built environment, or the urban space, and the rules, which economists, have a fancy jargon word; institutions for rules. And economists of all stripes pretty much come to agree that the fundamental determinant of long run economic growth, long run economic development, is institutions and governance. And the issue is, across a lot of countries, low-income countries, lower middle-income countries in the Global South, you have poor governance and poor institutions. And they’re really hard to change. So, we see Charter cities as a mechanism to bring about deep reforms needed in governance and institutions that can then lead to increases in long run economic growth, which is, we think, the major way to lift masses of humanity, from poverty, to prosperity, in its short amount of time as possible. And that’s the main reason; I can go more into why we think that Charter cities are a great mechanism to bring about that institutional reform and institutional transition, if you want. But I’ll pause there.

Gene Tunny  07:17

So just first, why is it called a Charter city? The Charter, is there an actual charter that you give to the city? Is that the idea there’s a document or a set of principles, a set of rules? Is that the idea?

Kurtis Lockhart  07:32

Yes. So, I mean, it comes from history, where new jurisdictions being settled, were granted charters; and basically charter is a standing for the new rules that apply in this new jurisdiction. And it’s a stand-in for institutions. That’s what we mean by charter. And then city, I always break it down by those two words, because that’s what we’re all about at CCI is cities, which is about the physical, geographic space, and urban planning, and land use regulation, and how the city is kind of planned, it is super important. Transportation, urban infrastructure, the built environment. And then on the other hand, the charter, right? That’s what you could call the soft infrastructure of the city, which is the rules that govern different policy domains in a city. Both of the soft and hard infrastructure need to be right, in order for a city to thrive.

Gene Tunny  08:39

So, it’s a new city with its own rules. So therefore, you either need to carve out, or you need to carve out territory from an existing country. I mean, you’ve got to; most of the world’s is going to be covered by sovereign nations, isn’t it? Like, how does this work? I mean, you have to get the agreement of a government, is that right to get a new bit of land and have your own rules? Is that correct?

Kurtis Lockhart  09:09

Yeah. So, this is a great time to bring in Paul Romer, who you alluded to in the first question. So he had a TED Talk back in 2009, that you talked about, where he coined this term Charter cities and defined this concept to begin with, or at least early versions of the concept. And his model, Romer’s model of Charter cities is what we can call the foreign guarantor model to Charter cities where he advocated for a high income, well governed country like Canada to come into a low income poorly governed country like Honduras, and Honduras would cede a large city scale chunk of land to Canada. Canada would then effectively you know, import its good institution. And in that delimited chunk of land that it’s been ceded, and because of that institutional shift towards good institutions, and being administered by Canadians; I’m Canadian, so I’m kind of, patting myself on the back right now, then you would therefore, get economic activity, you’d attract investment, you’d get business formation. And those things would spur sustained rates of growth moving forward, and you get all these good outcomes.

So that was kind of Romer’s foreign guarantor model – a candidate coming into Honduras. As you’ve brought up now, that idea was seen as controversial by a lot of people because it has implications for sovereignty, right. A lot of Hondurans are going to say, wait a second, you’re telling me that we don’t have sovereign control over all of our Honduran territory, and we’re ceding that sovereignty to foreigners? Like no, I did not agree to this.

Well, I think that critique, that sort of, Neo colonialism critique is a bit misguided in certain ways, nonetheless, it’s real. And it rubbed a lot of people the wrong way and was seen as controversial. So Romer tried to implement this model in Honduras, and in Madagascar, and it didn’t work out so well, and then he sort of, receded from this charter cities movement. So, the Charter Cities Institutes, CCIs model is different from Romer’s, We advocate for Public Private Partnership, a PPP between a host country and an urban developer. And ideally, it’s an urban developer from that host country so that they know the context, they have appropriate connections and whatnot. And the reason we think that’s better is basically two reasons:

One is it sidesteps all of these issues of sovereignty that are implicit in Romer’s model, right. This space of land that the developer is going to build is not at all, a separate entity. It is part of the sovereign jurisdiction of the country, subject to its constitution, subject to its criminal law, subject to its international treaties. The only other things that it has kind of special control over is commercial law and everything else other than those three things; constitution, criminal law, and international treaties.

So, number one, it sidesteps these issues of sovereignty implicit in Romer’s model. Number two, we think that this PPP model does a much better job aligning incentives between the urban developer on the one hand, and both the host government and the population, the city residents on the other. The reason is because, urban developers make their profit from the appreciation in land values over time, right? And so that’s their main incentive; is to maximize land values. How do you maximize land values? Well, you attract as many people, as many residents and businesses to your city as humanly possible. How do you do that? You create a livable city, you govern that city well, you provide urban services and urban amenities to the businesses and residents of that city and you will attract more residents and businesses, and therefore see land values increased.

So, we think that aligning incentives is done much better under this PPP model than the foreign guarantor model. It’s a lot sort of, analogous to, you could say, the way a shopping mall is set up. I think that’s a good model in a lot of people’s heads, maybe your listeners. You have a shopping mall, where there’s the mall owner, and then they rent out storefronts, or store space to various shops. And the shopping mall owner provides public goods like lighting, garbage removal, and cleaning and security to the public space within the mall. And in exchange, they get rents from the various stores within the mall to the extent that it then therefore attracts foot traffic to those various stores, and therefore the force base within that mall increases. That benefits the shopping mall owner. So, it’s a very kind of similar model and you can use that as an analogous thing to the way it aligns incentives.

Gene Tunny  14:50

Right. You mentioned that Paul Romer had; there were some practical examples of this that he was involved in. He was advising them, was he? And they just didn’t work out. Do you know why they didn’t work out? What were the problems that occurred?

Kurtis Lockhart  15:07

His full involvement is still unclear; the extent to which was involved. I know that the Hondurans in particular saw the Ted Talk that both you and I have alluded, and I think he was the adviser to the President, really resonated with him. And so, he called Paul Romer and got the Presidential in support and they said, let’s go with these things. And there were a few, several iterations that I don’t want to go into all the history. But eventually, this new Charter cities law, you could say was passed called the ZEDE law, which basically stands for the Zone for Economic Development and Employment. And Romer, as part of this law was placed on the transparency commission. So, there was like an oversight board, that would make sure there’s not a lot of, abuse going on with these zones and the developers kind of, given a lot of powers within these special jurisdictions, these ZEDEs,

The issue then became that potential developers or deals started to arise between folks that wanted to govern these ZEDEs and the government that were being held without the oversight or input from the transparency commission. So, Paul Romer said, okay, I’m done with this, you’re kind of, not at all going about this in a transparent way that I had signed up for. So, he left the ZEDE project.

There have since been a few that he’s started. I think there are three in operation right now, including well known one called Prospera, on the Island of Roatán.

Gene Tunny 

Sorry, Roatán; where’s that? Sorry.

Kurtis Lockhart 

Roatán is an Honduran Island. Those were the first kind of, ZEDEs under this law, a socialist was elected president last fall in Honduras. And she was elected with one of her platform planks being the abolishment of this deadly law. The Honduran Congress just passed that abrogation earlier this year. And so that’s kind of a huge blow to this ZEDE regime.

I think the three ZEDEs that are currently in place, that were passed before that law came in or was abolished, aren’t going to be abolished, they still have the ability to function. But obviously, if you’re an investor, and you see a president in place, that is hell bent against this concept of a ZEDE, that’s going to likely give you pause about getting involved. So, it’s great for the space. But I think what the Honduran example goes to show you is that you need legitimacy. And you need buying from the local population. And I think the way that the ZEDE law was passed in Honduras in the early days, did not at all, have that legitimacy necessary for long term success.

Gene Tunny  18:19

Right. Did you mention Madagascar as well? I can have a look into it. It’s just fascinating, I wasn’t aware that that was happening. And I mean, if I can get Paul Romer, on the show in the future, or, I’d love to chat with him about that. But you did mention Madagascar, was that right?

Kurtis Lockhart  18:38

Yeah, Madagascar happen. I think Paul Romer met with the president whose name is long, and so I’m not even going to attempt to say it, but they had a conversation and the president, I think was on board. But for many other reasons in addition to this one, what was happening is I think a South Korean company was going to come in and get a large tract of land, and the local population didn’t like that idea. So, a kind of protests broke out. Again, this is somewhat related to the Romer presidential conversation, but there were other factors involved that spurred the protests and riots. So the reform didn’t end up going through. Both attempts, well-attempted and in the Honduran case, it did get implemented, t just hasn’t been very successful. They didn’t end up having an enduring impact and Romer has since receded.

Gene Tunny  19:39

I was interested in that point you made about the new; there was a new government in Honduras and it’s a socialist government. They’re not going to like a Charter city. If you think about it, because is the idea of a Charter city, it’s going to have more liberal or more free market institutions, lower taxes, lower tariffs, more business friendly regulations, is that the idea? That they want to try and replicate what Hong Kong was in a few decades ago. I mean, Hong Kong is still a prosperous place. But there’s concerns about the, the administration or the influence of Beijing in Hong Kong now. Is that the idea that it’s; you want to have a free market type of city state? Is that the idea?

Kurtis Lockhart  20:34

By our simple definition of Charter city being new cities with new rules, that’s a pretty politically agnostic definition, right. So, if you think about it, that could be taken on either end of the spectrum and ran with. I think the model that CCI advocates for is more in line with what you’ve been saying. So, liberalizing and introducing market-oriented reforms, just because if you look at history and how well you know Hong Kong has done and Zen Jen has done and Singapore has done and Dubai has done when they’ve liberalized, that would seem to indicate that that’s a good idea to do. And then you contrast that with reforms on the other end of the spectrum and how those worked out. And I think that effective option is pretty clear from history.

But that’s not to say that we have been approached by, for example, indigenous groups that are interested in this model of Charter cities, because they want as a group, and want to push for an advocate for more decentralized, and devolved authority and autonomy over the jurisdiction that their group resides in. And they see this Charter cities model as a potential way to do that. So, I wouldn’t label that as kind of libertarian or free market fundamentalism in any way; that’s more just an indigenous group seeking some more ability to control their own fates. And I think this is an interesting avenue of the Charter cities movement is around this kind of more traditional local groups that are pushing for more reforms or more powers over their areas.

One other things that; I’m from Vancouver So, I’ve been following this. I guess, developments around this section of Vancouver that’s reserved, a first nation’s reserve, it’s called the Squamish nation. And they own some very, the reserves on some very prime real estate within Vancouver, and just as other in thriving cities elsewhere in Vancouver, real estate prices are astronomically high. And so, what this Squamish nation decided to do was partner itself with an urban developer and say, hey, instead of letting this very pricy and scarce, urban land lay vacant, and just dedicating it to a park or something, let’s build some skyscrapers. Let’s build some housing and apartments for Vancouverites. We have an equity stake in this development. We partner with this urban developer that they bring in the technical expertise and the financing to get the project built. The urban developer benefits, we benefit as the Squamish nation, and each of our members can benefit and was voted positively, overwhelmingly by the Squamish nation. And now, this indigenous group is going to benefit immensely from an urban development project. It’s also going to provide a lot of housing that’s very sorely needed in the city of Vancouver.

So, there’s win-win situations. And I think the model of Charter cities can span the gamut between these helpful models that indigenous groups can like as they want more devolved authority, all the way to more libertarian like sea steading models or something like this have in the past.

Gene Tunny  24:10

I remember listening to an episode of, I think it was Ross Roberts econ talk show about see steady, it just sounded like something that couldn’t work. I couldn’t see how that would be feasible. You just have to give up too much of your lifestyle. I mean, like I often complain about regulations where I live here in in Brisbane in Australia, but I do recognize that there are a lot of good things about living in Brisbane and I couldn’t imagine as much as I am relatively free market and I do have some sympathy for libertarian views. I couldn’t imagine going on to; I don’t know what would you go on to, an oil rig or something or you’d have to buy an island somewhere, I suppose. But I mean the amount of investment you need to get a critical massive population, don’t you? I mean, they’re all these things that you’d have to get right.

But I guess we can talk about your Charter city model in a minute and how that’s going to work and how it’s going to grow and develop.

I want to ask you about this concept of institutions. So, you’re talking about institutions and how important they are to economic development, and then they facilitate trade, and they facilitate innovation. Now, there was a great book about, I don’t know, maybe a decade or so ago, why nations fail, and that really emphasized the importance of institutions. And the problem is in some many developing economies, the ones that can’t get beyond that, per capita income of a few or a few thousand US dollars a year or So, they’re trapped because those institutions are so bad, and they’ve got kleptocrats in charge, and they’ve got marketing boards, which are extracting surplus, and you’ve got all of these really bad institutions. I mean, Reimer gave an example of regulations that mean that electricity companies won’t, they’re not covering a lot of the population. So that’s where you really want the Charter cities, is it in developing economies, particularly in Sub Saharan Africa? Is that where your focus is?

Kurtis Lockhart  26:35

Yeah, I would say that’s accurate. As an organization, CCIs vision is to empower new cities with better governance to lift 10s of millions of people out of poverty. So, we’re all about poverty alleviation. And so our focus does tend to be on those places in low and lower middle income countries, because that’s where most of the poverty lies, almost teleologically. And so that’s where we focus our efforts. And, like, I want to go into the mechanism of institutional change that sort of our theory of change, because you kind of alluded to that we’re talking about kleptocracy and marquee awards and sort of incumbents that kind of dominate the current rule set in the current system. And I think this is really important.

Some of your listeners may be familiar with, not just Why Nations Fail, which is a fantastic book on institutions, but also a book called The Rise and Decline of Nations by Mancur Olson. And he writes about this phenomenon called, The Logic of Collective action. And in essence, you get collective action problems when you have concentrated benefits and dispersed costs. So, what do I need? Let me unpack that. I’ll give an example. So, the main example given in the book and in the States is around sugar tariffs. So, you have these Florida sugar farmers that because of this sugar tariff in the States, sugar therefore, in the US is a lot higher per unit than elsewhere. That tariff puts a lot of money and profits in the pockets of these sugar farmers. Because there are a few farmers, they’re really incentivized and mobilized to go lobby their politicians to keep this sugar tariff in place and not abolish it.

On the flip side, consumers of sugar like you and me that maybe go to the store to buy a bag of sugar once every year for like a few bucks, we are maybe going to have to pay 50 cents extra because of this tariff. And while the group of consumers that are impacted by that 50 cents is huge, much larger than the number of farmers, because that impact is so small at 50 cents is so sort, of trivial. We, I mean you are not going to get all mobilized and angry and co-lobbying our politicians to abolish this tariff. That is completely the opposite for the farmer, they are going to be mobilized.

And so, you get this bad equilibrium for these rules where despite the tariff being suboptimal for society as a whole, it is continued because of this dynamic of the logic of collective action. And you can apply this example with the sugar tariffs to institutions writ large. There are incumbent political elites that are currently benefiting from the status quo institutions, right. So, they have every incentive to see the status quo institutions continued and undermine attempts to reform them, despite reforms, potentially bringing these institutions into a much better and more optimal equilibrium. And because, on the flip side, everyone maybe, has to deal in that place with those institutions, maybe as to kind of, give a bribe once every three months or so. We’re not hugely, hugely impacted in our day to day lives, or perhaps we have other worries to worry about. We are less mobilized as a group of citizenry to push for institutional change on a national level, than the small group of political elites who currently benefit from the status quo are at mobilizing to keep those subnational suboptimal institutions in place.

So, we see Charter cities as a way to, instead of attempting to pass national level reforms, where you’re going to get and threaten all of these political elites interests, and therefore those elites are going to try and stymie and undermine reforms. We see Charter cities as a way to circumvent those interests in elites by situating themselves in a delimited, small geographic space. Ideally, greenfield space where it’s sparsely populated, so you’re not bumping up against any of these incumbent elites interests, and therefore, these spaces can get a lot deeper institutional reforms than otherwise possible. And so that’s the mechanism and theory of change, and why we think Charter cities are this great policy tool to get very deep and needed institutional reforms.

Gene Tunny  31:28

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

Female speaker  31:33

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  32:02

Now back to the show.

So, could you now tell us please, Kurtis, where your institute is involved in new Charter cities? Like where are we talking about? Where will these cities be? Where are they in the development cycle? What’s happening? I’d love to know.

Kurtis Lockhart  32:22

So, we are an organization CCI, we were founded in 2017. So, we’re in year five, that’s in the think-tank world, we’re still a baby. And, it does take a long time to build driving new cities. So we’re talking on the timeline of decades, not years.

We are involved in several projects. They are nascent, so I’ll go over some of them. One of them is in Lusaka, Zambia, just outside Lusaka, Zambia, it’s called Nkwashi. It’s a Charter city, a new city development that’s aimed at 100,000 residents. And its anchor tenant is anchored around a university. So, what the model is, is to have this stem University of science, technology, engineering, math, attract really bright smart Zambians to this university, train them up in STEM subjects, and then connects those graduates that STEM graduates with remote work in either Europe or the states. And that does two things. I mean, you’re going to earn more being employed by these European and American tech companies – number one.

Point number two, these graduates are also going to earn in American dollars or euros and that allows them also to hedge against the volatility of the Zambian kwacha, which is really tied to copper price, copper price fluctuations, which can be it can experience really wide swings. And so that’s the model for Nkwashi. Nkwashi attracted its first few residents; I think it’s a few years in operation, the groundwork foundations have been laid for the building of the university. There’s also a feeder school, a high school that will attempt to feed students into the university called Explore Academy; that’s I Nkwashi.

The other ones worth mentioning are a Talent city, in Nigeria. The founder of Talent city, his name is Iyinoluwa Aboyeji. He is one of the most successful Nigerian tech founders in the country. He’s co-founder of Andela and Flutterwave, two or the more successful African tech startups and unicorns. So, he wants to give back to the Nigerian tech community that’s growing really rapidly. But he sees the biggest constraint on that tech ecosystem in Nigeria as tech talent. And so, he wants to establish this space, this jurisdiction with new rules that especially allow for freedom around things like crypto and more innovative technologies, and provide very reliable digital infrastructure, and power and electricity, and all those things that you need in order to function as a tech company in the modern world. So that’s talent city.

Another one in Nigeria is called Enyimba Economic city. It’s in the south west, not on the outside of Lagos like Talent city, but in a place called Abia State, and that’s in the Delta region. And so those familiar with Nigeria know that the Delta region is sort of the oil and gas sector, oil and gas region of Nigeria. This city is aiming for 1.5 million residents, it would in phase one, be oriented around logistics and processing around the O&G sector in the Delta region. But it envisions and phase two and phase three, to expand beyond that focus on logistics and O&G processing, to having a university and a world class research hospital, because some of the social sector provisions in the south and southeast of Nigeria are just really, really lacking. And so that’s probably our biggest and most ambitious, single project.

The other, and this is the most recent project that we’re engaged with is in Malawi. And we’re really, really excited. So, we’ve just signed an MOU with the National Planning Commission in Malawi, who have spent the last three years coming up with these secondary cities plan. This plan is really and this has happening across the continent. It’s aimed to address this challenge across a lot of African countries of really rapid urbanization. As it stands right now today, Malawi, is actually among the least urbanized countries on planet Earth. It’s about 17% urbanized. But what we’re going to see in the next 30 years, 28 years to 2050 is Malawi’s urban population is going to more than triple. And so very kudos and plaudits to the National Planning Commission, they see this trend and say, okay, well, we need to get our ducks in a row, and plan for this really, really rapid urbanization in advance. So, the secondary cities plan that they’ve created, and they launched on May 31, I spoke at the launch, it lays out eight new secondary cities, and lays out the spatial development plan for those eight cities.

Malawi is a North South country. So, the cities are spread out from the north, all the way down to the south. What we are going to do as CCI, after we’ve signed this MOU, and we’re now an official implementation partner of this secondary cities plan. We’re in the process with the National Planning Commission, the Ministry of local government, the Ministry of lands, the president’s office, writing up the special jurisdiction laws that are going to apply to these eight secondary cities across Malawi.

So, this, to me is one of the most exciting projects because we have, government buying across a slew of needed ministries, including the President. There’s already been a lot of resources and thought put into this over a sustained period of time. So, you have a demonstration effect that there is that political buying. The plan is already in place for these eight secondary cities. And we’re getting in at the ground floor to shape the legal jurisdiction around those eight cities. So, this is a huge opportunity for us. And we’re really excited about what we’re seeing in Malawi.

Gene Tunny  38:56

Yeah, that’s fantastic. Are you involved in getting any of the financing or any funding from say, World bank or other donors? Do they get any funding from those organizations? You mentioned PPP, Public Private Partnerships? So, there’s an infrastructure developer, or what did you call it? An urban developer or a development company that develops it and they’ve got some deal with the government that the government will not pay them for providing infrastructure? How does that work, Kurtis?

Kurtis Lockhart  39:30

One of the roles that we will play as implementation partner is to help facilitate financing. This is one of the constraints I think most African cities and towns face is this ability to adequately finance urban expansion, right. It’s the most rapidly urbanizing place on planet Earth. In Africa, the estimate is that almost a billion people are going to move into their cities over the next 30 years. So this is a huge transformation. Yet, African towns and cities are not able to issue municipal bonds to the same level that historically, European cities and American cities were able to tap in order to fund and finance urban infrastructure.

So we see these kinds of municipal bond markets in Africa are either kind of, really nascent, or more commonly just nonexistent. So we want to help number one, come up with a de risk model of municipal bonds. And number two, help fill that financing gap by not just kind of public sector debt in the bond market, but also deifies. Like you mentioned the World Bank; the IFC is a World Bank arm that invests in privates. I know, the Millennium Challenge Corporation was also at the launch of the secondary cities plan in Malawi on May 31. And they’re involved in work in Malawi. So, they would be great partners, because they focus on infrastructure growth and institutions.

You have the municipal bonds that need to be figured out, that’s on Malawi, you have the DFIs that will be involved in financing as well. And then the hope is that once those two financial pillars are in place, that a third financial pillar will be then convinced that this is a good idea, and that’s the private sector. Typically, in these new emerging frontier markets, it’s the government that needs to get its house in order, and then the DFIs that come in ahead of the private sector, and that’s a signal to the private sector that okay, this is now a place where I can do business and start offering different financial instruments to.

Gene Tunny  41:47

Can I just clarify Kurtis DFI, do you mean Development Finance Institutions, the World Bank, Asian Development Bank, etc? Is that right?

Kurtis Lockhart  41:58

Yeah, that’s exactly right.

Gene Tunny  41:59

That’s okay. I was just wondering, because I used to work in the Treasury in Canberra, we call them IFIs. I think International Finance Institutions, or I can’t remember. I remember there was some sort of abbreviation or acronym…IFIs.

Kurtis Lockhart  42:12

IFIs is more fun than DFIs. So, I’m happy to go by if IFIs.

Gene Tunny  42:18

Right oh, yeah. Sorry, I interrupted you there. We’re talking you’re going to help sort of, sort out financing and all that. One thing I’m wondering is about the deal or the relationship with the host country? Because I mean, one of the; and you would have thought about this. I know, and this is why I’m interested in your thoughts on it. How do you constrain or tie the hands of the host country of the host government? Because I mean, one of the risks is that you have this thriving Charter city, and the economy is going gangbusters. And, everyone’s wanting to move into it. And if you’ve got lower taxes, or it’s running itself, the host country, their finance ministry, they’re going to look enviously on this little Charter city, aren’t they? And, I mean, they’ll want to get a piece of the action. So, isn’t there a risk there that they could then impose? They could ramp up taxes, they could try and, take, extract some money out of the Charter city, and that threatens the viability of it. How do you deal with that situation?

Kurtis Lockhart  43:32

You hit on what I think of as probably the biggest risks to Charter city projects. And that’s just the fact that there’s a political risk. And, the urban developer is going to enter into a public private partnership in a point in time with a particular political regime. And because these city projects are decade’s long projects, the project is going to span multiple political regimes. And so how do you as the developer know that the political regime that’s agreeing to the public private partnership today, is going to also agree to that same public private ship, public private partnership tomorrow, when that political regime has changed or altered? How do you know that there is a credible commitment? So that risk of the government’s killing the birds that laid the golden egg is ever present.

We’ve thought of this, and there are several ways that we can go about trying to mitigate that risk, that political risk of expropriation, two of the simplest, I think, are just about, again, aligning incentives. One, I think, within that public private partnership, there should be a revenue sharing agreement that’s embedded. So, every year the developer within that jurisdiction collects user fees, they collect taxes, they collect land leases, right land lease rents, from those within that jurisdiction. And I think a proportion or percentage of those funds should be remitted to the host country so that every year, the country gains something in their coffers from the success of that Charter city. Therefore, it has less of an incentive to, see that pot of money that it gains every year, destroyed.

Another way to do exactly that is by giving an equity stake in the development company, to the host country, right. So, if the urban developer succeeds immensely, as has happened in kind of Sangen, and Singapore, and Hong Kong and Dubai, and the city grows, 5, 10%, on average year on year, then the post country also reaps huge rewards from that success. So those are two pretty simple ways to align financial incentives.

Another simple way is that there are organizations that do offer political risk insurance MIGA, M-I-G-A, I forget what the acronym actually stands for, but they are the entity under the World Bank Group of organizations that offers political risk insurance. A few other things that could be attractive to help mitigate this risk is floating the development company and publicly trading the development company. So, then you have big sort of institutional investors within that host country, like pension funds, for example, invested in the success of this Charter city, and whether we like it or not sort of business elites, and political elites kind of talk with each other and influence each other. And if the political elites are threatening to expropriate the Charter city, and that’s going to have adverse consequences for the pension fund folks. They’re going to raise a stink and say, hey, don’t do that, that’s going to hit our pocketbooks, and we might not support you in the next election. And so that could also be some cover.

Another way, and I think this is this is probably really effective, is to include sort of an objective, international organization in the project. You mentioned the World Bank. So, by including the World Bank in a Charter city project, whether that’s alone, or I don’t know, if they would do equity investments in a private company, that would more be IFC, which is their private arm. But including them in the project would mean that if the political elites decide to expropriate or jeopardize or threatened interfere with that Charter cities project, and the World Bank is involved, that means they’re also jeopardizing a bunch of other loans and projects that the World Bank is investing in their country. And they’re also jeopardizing their access to concessionary loans and finance that the World Bank offers their country. So, they would not want to, ideally, they would not want to do that.

So, there’s a bunch of ways to lessen the risk, to de risk, but you cannot fully get rid of that risk of political expropriation, just because, again, unlike Romer, our model doesn’t create a new sovereign, right? These are not sovereign entities, they are subject to the constitution, and criminal law and international treaties of the host country. And so that’s sort of an ever-present list. But again, I just listed off a bunch of ways you can help de risk and mitigate that risk such that it’s, it’s less, much less likely to occur.

Gene Tunny  49:01

I just wanted to ask, those examples you gave of how you can de-risk. Have they been any of those been applied? Or is that just your ideas of how you can de-risk?

Kurtis Lockhart  49:12

I know revenue sharing agreements are part of it. And I know for example, Enyimba Economic city, which I mentioned in Nigeria, both the state government, located in Abia state, as well as the federal government in Nigeria, have equity stakes in the Enyimba development company. And so that risk mitigation technique has been implemented there. There’s also a revenue sharing agreement embedded in the PPP.

When it comes to others that I recommended; it’s not a Charter cities project, but it was a pipeline project in Cameroon. And it was, oil was discovered in Cameroon and Exxon Mobil at the time. I think this is the late 90s or the early 2000s. Exxon Mobil saw an opportunity there to operate in the country. But there had been some protests in the past about the oil sector. So, ExxonMobil was worried about, engaging in all this upfront investment and investing all this capital only to have these protests breakout and then to have to, leave the country. So, they wanted reassurances, they wanted a credible commitment on the part of Cameroon and the Cameroonian government, that that wouldn’t happen. And that also the sort of funds, the revenues derived from the pipeline project would not be expropriated by the Cameroonian government. So, it is what both the Cameroonian government in negotiation with ExxonMobil agreed to, was there would be this escrow fund, that the revenues flowing from the pipeline project went to, and there would be a council approving disbursements from that escrow fund. And some of the spots on that council would be appointed by Exxon, some of the spots on that council would be appointed by Cameroon, but that basically, the tie breaking vote on that council would be the World Bank. It was seen as sort of legitimate from both sides from both Exxon and in the Cameroonian government. Any sort of dispute or kind of corruption or revenue issue was sort of mitigated by having the World Bank involved. Again, for this reason that I brought up earlier that the World Bank is involved in a lot of these low and lower middle-income countries in terms of a bunch of infrastructure projects, or health projects, or education projects, and gives loans of various sizes and numbers to a bunch of really important political projects across the country. If they’re involved, the host government is much less likely to interfere with and expropriate the project than otherwise would be the case. So, I use that example, as kind of illustrative of that, of that power of that risk mitigation technique.

Gene Tunny  52:15

Right. Now, I do want to just ask about special economic zones. This idea of a Charter city, this is broader than a Special Economic Zone, S-E-Z or SEZ because you’ve got people living there, haven’t you? You want to actually establish a city? It’s not just a sort of an export processing zone or whatever it says is, is that right?

Kurtis Lockhart  52:40

Yeah. So, there are a few main differences between a special economic zone and a Charter city. They’re kind of analogous in that both are delimited jurisdictions with different rules, right. But there are a few main differences that we think make Charter cities much more impactful than SEZs. One is just size, right? So Charter cities are cities scale, SEZs are usually much smaller and more narrow. And that just affects how many people and how many businesses can agglomerate within a particular area. Both you and I, being economics nerds, we know the importance of agglomeration economies, and this is why cities are fantastic, because of all these agglomeration economies. So, that’s number one is size.

Number two is SEZs tend to be focused on a single or one or two different sectors or industries. So, you have textile or manufacturing, or tech hubs, those types of zones that have one sector that they really want to focus on. Whereas, Charter cities are mixed use and multisector. They’re cities, right.  There’s not just an industrial component, there’s also a commercial component, and very importantly, residential component.

A lot of zones and industrial parks don’t have people living there, right? And again, that impacts this urban agglomeration potential, and we really, really want conglomeration economies to take off. So, the mixed use so multisector and the residential component are super key differentiator.

The third difference is around governance and the rule set. SEZ legislation, when it’s passed, is sort of, you could say setting stone; my whole thing is humility. So, we’re not going to get the rule set exactly perfectly right at the beginning of these things. And the zone operator or administrator is going to figure out that, okay, hey, we didn’t get this law that we wrote, five years ago, completely right. There are a few clauses that are causing us a lot of problems that we need to change pretty quickly, otherwise, these businesses aren’t going to like it. When that happens with SEZs, they have to go to higher tiers of government or Parliament even and get Parliament to pass an amendment or pass a new SEZ law. As you can imagine, that takes a lot of time and slows the reform process down immensely. And, usually the reform doesn’t even happen at all. And so that hurts business dynamism and the ultimate success of those zones. Whereas, Charter cities, we devolve that ability to change the rules over time, down to the city administrator and the city operator. And so instead of having to do that slow process of every time they need to change, they have to go up to higher tiers of government, they can make those changes really quick on the fly as needed within the Charter city. So, those are the four main differences.

Gene Tunny  55:44

Good one. Okay. Just finally, I’ll try and sneak this in. You’re doing a PhD at Oxford. Are you nearly finished? And is it on Charter cities?

Kurtis Lockhart  55:51

Yes, I have a year left. I mean, I’m knocking on wood right now. I am doing a Doctorate in Political Science at Oxford. It’s focused on political decentralization. So, a couple of the articles will be around New City developments and Charter cities, and the potential of these for economic growth and prosperity around the globe. So, that work really aligns with the work that CCI is dedicated to.

Gene Tunny  56:18

Brilliant. Okay, Kurtis has been fabulous. I’ve really enjoyed and I’ve been blown away learning about what you’re doing. And the sheer potential of Charter cities is something that excites me. So terrific work, I’ll put links to your institute and to your social media in the show notes. I really enjoyed the conversation. If there’s anything you want to say to wrap up, please do otherwise. Yeah. I’ve really enjoyed it. And thanks so much.

Kurtis Lockhart  56:50

Yeah, thanks so much, Jean. I will just say if people are hearing this, and they want to learn more and get involved in the Charter cities movement, we are starting and has started a coalition this year called the next 50 Cities Coalition. So, it’s really easy to sign up, you can sign up as an organization, or even an individual, and you’ll get notifications of upcoming events and conferences, you’ll get newsletters and all that stuff. So, I’d encourage you to go to our website, Chartercitiesinstitute.org. And it’s backslash nxt50. And you can join the movement that way.

Gene Tunny  57:26

Great. I’ll have to look into that. I mean, one of the things I found fascinating about this conversation, you talked about the indigenous people in Canada, we’ve got indigenous people in Australia. I don’t know whether any of the indigenous leaders in this country have been thinking about Charter cities, but that’s something I might follow up. Yeah, absolutely fascinating. Kurtis Lockhart from Charter cities institute. Thanks so much for the conversation, I really enjoyed it.

Kurtis Lockhart  57:51

Yeah. Thanks so much, Gene. This has been fun, appreciate it.

Gene Tunny 

Okay, ciao.

Gene Tunny  57:56

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 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

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

The Pirate Party’s economic policy platform w/ John August – EP138 + transcript

What does the economic policy platform of a Pirate Party look like? What does it say about intellectual property protection (i.e. copyright and patents), the Right to Repair, UBI, taxation, and business support? And what type of pirates are Pirate Parties inspired by exactly: Captain Jack Sparrow or Kim Dotcom? Pirate Party Australia Treasurer John August answers these questions in a conversation with Economics Explored host Gene Tunny in Episode 138 of the show.

You can listen to the conversation using the embedded player below or via Google Podcasts, Apple Podcasts, Spotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Here’s a clip from the video recording of the conversation in which John talks about the Pirate Party’s views on intellectual property.

About this episode’s guest – John August

John August is the Treasurer of the Pirate Party Australia and a Fusion Party candidate for the electorate of Bennelong in the 2022 Australia federal election. John does computer support work in retail and shareholder communication. He is passionate about justice and ethics in our world, particularly as it plays out in law generally and intellectual property in particular. He has stood on behalf of the Pirate Party in the Federal seat of Bennelong and also as a Councillor for Ryde City Council.

Along with technology and law John is also interested in spoken word and poetry. He broadcasts on community radio and hosts the program “Roving Spotlight” on Tuesdays from noon-2pm on Radio Skid Row Marrickville Sydney, and writes about his ideas on the website www.johnaugust.com.au. You can keep up to date with what John is up to via his Facebook page

Links relevant to the conversation

https://pirateparty.org.au/

https://www.fusionparty.org.au/

Land Value Uplift from Light Rail by Cameron Murray

On the persistence of the China shock by David Autor, David Dorn, and Gordon Hanson

Termites in the Trading System by Jagdish Bhagwati

Transcript of EP138: The Pirate Party’s economic policy platform w/ John August

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.

John August  00:04

And there is the whole thing of, you know, patent trolls who have a bunch of patents sitting on the shelf, and all they do is run around with a mallet and whack people on the head who try to make that. And to my way of thinking that’s a complete abuse of what a patent should be.

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. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is Episode 138, on the economic policy platform of the Pirate Party, Australia, one of several Pirate Parties around the world. I’m joined this episode by John August, treasurer of the Pirate Party Australia, which is part of the Fusion Party Coalition. The Fusion Party brings together the Pirate, Secular, Science, and Climate Emergency parties. This episode was recorded in late April 2022 in the lead up to the 2022 Australian federal election. John is running as a Fusion Party candidate for the Sydney-based electorate of Bennelong. Please check out the show notes for relevant links, any clarifications and for details of how you can get in touch with any comments or suggestions. I’d love to hear from you. Righto. Now for my conversation with John August on the economic and policy platform of the Pirate Party. Thanks to my audio engineer, Josh Crotts, for his assistance in producing this episode. I hope you enjoy it. John August from the Pirate Party of Australia, welcome to the programme.

John August  01:35

Well, thank you, Gene. Great to be here.

Gene Tunny  01:38

Yes. Good to have you on the show. I’m keen to learn about the economic policy platform of the Pirate Party. So I’ve recently had some discussions with some members of the Pirate Party regarding UBI. I had one member reach out to me after they listened to my episode with Ben Phillips. And so I’ve been speaking with him about that. And I’d just like to make sure I understand this where the Pirate Party is coming from because you hear pirate party and instantly you think of Long John Silver, but I mean, that’s not quite the case is it? So I’d like to understand then where’s the Pirate Party coming from? So if you could take us through that, please, that’d be great.

John August  02:24

Okay, well, I guess you’ve got the right thing that if you actually look at our policies, you’ll find that we’re very much into individual freedom, at the same time as we’re also into social concern. And one of the things, I think this will come out in this discussion, is that every party claims to get that balance or claims to sort of put some effort into it. But you know, obviously, I’m not just saying this. Hopefully, it’ll come out in the discussion. But I think the Pirate Party does a better job of realising that duality than I think any other political party.

And you know, one of the things, yes, there’s this stuff about pirates, they have to understand that way back when, I guess computer games were in fact copying software and other things. And the industry was calling them pirates. And so they thought, well, hang on, if you’re going to call us pirates, we should embrace that and run with it. And along the way, I guess the pirate movement, you might say, they started to appreciate how business was actually flexing its muscles and abusing its position. And then you also had a certain concern about government. So the Pirate Party is, I guess, both concerned about corporate overreach, and also government overreach and government censorship. And we also believe in individual freedom.

But the thing is, along the way, you’re starting to think, look, we believe in individual freedom, we believe in personal initiative, and drive and enterprise and so on. But what does the good drive, the good initiative really look like? And I guess we saw in business, a lot of businesses abusing the situation, you know, rent seeking, abusing intellectual property, and similar. And I guess there’s also, you know, land ownership, you know, the Georges do actually talk about the land ownership monopoly. And we’re certainly informed by those sentiments. So we came from a point of view of saying, we want to celebrate real economic initiative, at the same time as we want to be compassionate and care for people and enable them. And again, no political party runs into government claiming they’re not going to do that and that the devil is in the details.

But like when it comes to social welfare, we do actually believe in the pirate universal basic income, which you might say, I guess it’s more a guaranteed minimum income because not everybody gets it. The idea being that if you make the nominal amount you neither pay tax, nor do you get a top up, but if you make less than that, you get A bit of a top up until finally at zero, you get a certain amount of money regardless. And that means that you provide people with the incentive to apply themselves, you save on bureaucracy, and obviously at the top end, I have to be careful, they’ll call it an incremental rate of taxation. Because obviously, in one sense, it’s a flat rate, but it’s not a flat rate, because it doesn’t, you know, intersect the origin. But certainly, if you are, I guess reasonably well off, you make a bit of money, and you will get a relatively fixed portion of that. Obviously, it’s mathematical, it’s, you know, the offset plus the gradient and this sort of thing.

So I suppose I guess you’re sort of more concerned about economic policy, but we certainly cherish individual freedom, freedom of speech, freedom from government intervention. And look, it’s not economic, but we’re certainly concerned about Witness K and Bernard Collaery and Julian Assange, and I guess the government surveillance laws to sort of eavesdrop on our mobile phones and make fiddles and change, it’s with them. And I guess you also have, you know, the corporations who are basically pulling large amounts of data and taking advantage of it.

So we basically are concerned about government and corporations in equal measure. But we do believe in freedom of speech, and we do believe in individual initiative. And as I say, No, I don’t think any political party claims to not believe in enterprise, or these various things. But I think our particular combination, is a result of this being targeted by both government and corporations. And that’s where we’ve ended up. And I think, as a result of the journey we’ve taken to get here, we actually have a, as I say, a much better point of like mixing the celebration of individuality and also looking after people as well.

Gene Tunny  06:58

Yeah. Okay. So is the Pirate Party explicitly Georgist? You mentioned Georgism, or the philosophy of the American economist Henry George from the 19th century. And I mean, you’re probably better placed to explain what his philosophy was. But I guess he was in favour of taxing land, wasn’t he? He talked a lot about the unearned rent from land, is that right?

John August  07:28

That is correct. Now, of our policy platform, if you look at it, we do say, look, land value taxation is a good thing, it would be good to sort of re-emphasise our tax system to do that. And like when you have the universal basic income, I guess there’s lots of people will chuck moral rocks at it, but one of the things we do try to do is say, look, how do we actually cost this in such a way we don’t need print money to actually give people this basic income. And okay, I’m going off on a bit of a tangent. But you know, one of the principles is, once you give people that basic income, without constraints, we reasonably expect, a lot of people will just work a few hours a week, because they don’t fall off a cliff and lose all their benefits. So you will immediately sort of enable that initiative.

But getting back to Henry George, yes, let’s just say I suppose one way of capturing this duality is that if you have a property, and the government does something that lowers the value of your land, you wouldn’t believe you know, the hew and cry, the number of letters to the editor, you know…to the local member. But let’s assume the government sets up a rail station, not so close that it’s polluting noise and making life inconvenient, but actually makes life very convenient for you. And the value of your land just shoots upwards. And I have yet to see a queue of guilt-ridden people at the tax office saying, wow, you’ve increased the property of my land enormously. I’ve got to give you some of that money back. So that’s sort of capturing what Georgism is about.

Now, the speculators will say, oh, by buying and selling land, we sort of contribute to the proper operation of the economy and society and so on. And okay, that’s its own rabbit hole. And I, broadly speaking, say that, to the extent that’s true, people are getting overly remunerated for that. But yeah, the thing is land is in scarce supply. And, you know, if you actually tax land, it’s a much better way of doing things, let’s say, going off on a bit of a tangent, but I think whether you want to have a right wing or left wing inclination, you know, everyone says you should get rid of payroll tax, and yet there was this idea we deal with GST, where supposedly the tax states were going to get rid of payroll tax and it didn’t happen. But the point is, if you actually tax on land, on the one hand, it’s fairer, and another hand it’s actually progressive in its way because if you’re wealthy, you’re more likely to own land. But the other thing is as society changes, and business can be conducted here or overseas, and people can telecommute, and so on, taxing labour when labour is so mobile, you know, I think it makes more sense to say, here’s a business, a business is set up in this location, and we tax it based on the operation there.

But yeah, the idea of the unearned increment, I mean, that is one of the things. With a lot of economic perspectives, I guess we all draw the difference between genuine work that yields an income and basically just sitting back and raking it in. And that’s, I guess, a moral distinction. And I think most, where there might be a hybrid of economic and other perspectives, they demarcate the good economic effort from the dodgy economic effort. And we do actually celebrate innovation, not Silicon Valley style innovation. But like, you sort of say, hey, you know, there could be a green grocer here, maybe I should set up a green grocer. That’s being creative. And that’s what we consider to be the real, worthwhile creativity of economics. But sitting back and speculating, we don’t see that as being so useful. And we think there’s an over-return for it.

So bringing it back to Georgism, taxing land makes a lot of sense. And, of course, the word tax has, you know, all these negative connotations. Some people get neurotic about tax. You could say, the charge on land is paying for the privilege that you have that monopoly. And I guess I’m going off on… You’re prompting me with other tangents. But if you’re aware, there’s some Georgists in Melbourne that actually did some analysis of apartment blocks, based on the water usage. And they figured out that a lot of these apartment blocks were actually owned, but vacant and unused. And I know, I’ve actually heard some commentators on your programme talking about supply and demand of housing. And believe it or not, in a limited sort of way, I do actually endorse the idea of supply being a factor, but what we identify is that people are doing land banking, rather than actually either living at their property themselves, or renting it or otherwise putting it into the market. And the incentives we have is such that it makes sense to just sit on property. But widening it out, we sort of say, if the economy was more based on actual innovation, and real economic activity, then people would have… Shall we say, the non-speculative part of the economy would be stronger, land would be easier to afford, and it’s a win-win situation. You know, basically, accommodation is cheaper, but the non-land non-speculative part of the economy is also more dynamic and stronger.

So but I think that story of the railway station setting up next your place, and the value shoots through the roof, and you know, just everyone just swallows up that and just sort of, oh, this is lovely, I think that captures a lot of what Georgism is about, the idea that maybe there’s some speculation, maybe there’s some useful speculation that lubricates the economy. But really, a lot of it is people, I guess, having unearned income. And that’s ethically problematic. But yet the Georgist perspective does actually fix that. Now, I emphasise, the Pirate Party is informed by Georgism, we emphasise land value taxation. But if you look at our policies, our economic policies, everything, it is a part of what we’re about.

Gene Tunny  13:43

Yeah. Did he advocate for a single tax on land? Was that correct?

John August  13:49

That is correct. I don’t think we would go so far as to say a single tax on land. You know, we are believing in this negative income tax. And we also believe in fiddling around with the other parts of the tax system in order that that guaranteed minimum income and negative tax of that package can be sustainable. And you can basically give people who earn no income a moderate amount of money, without breaking the bank, so to speak, and part of the picture to sort of beef up our tax intake would be landowner taxation. But equally as I say, as our economy changes as a global economy changes, I think it will actually make less sense to emphasise income as a source of taxation.

Gene Tunny  14:36

You mentioned the rail line and boosting property values. You may have seen it already but there was a good study that was done by a fellow Queenslander who’s attached to University of Sydney, Cameron Murray. I don’t know if you saw Cameron’s study of the Gold Coast Light Rail, and he estimated some percentage value uplift for land within, you know, several hundred metres of the Gold Coast Light Rail. So I’ll put a link to that in the show notes. I don’t know if you’ve seen that. But you may be interested in that study.

John August  15:08

I haven’t seen that. But I will sort of stick my oar in and say, we have actually had Cameron Murray in on a more general discussion of housing, within the auspices of the Pirate Party. And Cameron Murray has also written that book Game of Mates, which I’ve had a read of. And that Game of Mates book, I think that one of the origins of that was actually a paper, where he was talking about how there are all these increases in land value. And surprise, surprise, it seemed like the recipients of those improvements were often relatives or in some way related to people at Council. And that, you know, I guess, let’s say we don’t want to point fingers at anyone in particular, or name anyone, but call that grey corruption, and his sort of thing that he was talking about, was a taxation of the uplift. So if you have a zone change, and that increases the value of your property, then that improvement is taxed. I think it’s called a betterment tax was what it was called originally. And that’s one of the things that Cameron Murray is talking about. Now, obviously, a zoning change is obviously a windfall in its own way.

I guess, my story I started with was the railway station within moderate proximity to you. And that’s not really a zoning change, apart from I guess the fact that maybe they had to change the zoning in order to have a rail line there and a station there or whatever. But yeah, there’s different ways of increasing your property value. And one of them is, you know, the railway station. Another one is actually the shopping centre nearby, you know, or the swimming pool or whatever. And, you know, one argument is that if you’re just living there, and the world just changed around you, and it was your choice to live there, and that’s a bonus, well, fair enough. But if you’re essentially buying and selling and you’re actively in the market, and someone else does something, and you get the financial benefit from that, you can wonder how fair that is. But, you know, one of the things about economics, there’s all this hand wringing about what’s fair and unfair, and I recognise that’s part of the picture.

Gene Tunny  17:17

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

Female speaker  17:26

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  17:55

Now back to the show. You mentioned this negative income tax, so then a guaranteed minimum income, so you’re not necessarily going for a UBI. Is that right? You’ve got something –

John August  18:08

That’s right. Okay, yeah, I guess there’s a terminological issue here. I call it a pirate UBI. Technically, it’s a guaranteed minimum income. Now, your universal basic income is a wad of cash that you get regardless. I think in Alaska, they have this thing where they’ve re-allocated the money from them, their oil or their mineral reserves there. And everyone just gets a plunk of money every year, but in a sense, that is sharing the real wealth that’s created. So that’s fair enough, I guess. But yeah, your pirate UBI, or the guaranteed minimum income we are talking about, if you make the neutral amount of money, you pay no tax, nor do you get a top up. If you make less than that, you get a bit of a top up, so the government gives you a bit of money. And finally, if you’re making no money, then you get a wad of cash, which is our guaranteed minimum income. And notice, in a sense, it’s means tested. We’re not just giving people lots of money regardless, so we are trying to avoid the inflationary risk. And in fact, really do our best to make sure that the budget actually balances and we’re not actually printing money to pull this thing off.

If you there is a criticism of some forms of universal basic income, we’d say. If you just give everybody you know a wad of cash each year, regardless, that’s going to be inflationary risk. And we agree that our guaranteed minimum income is targeted. If you’re not making income by other means, you get this wad of cash. And if you’re making a little bit of money, you get a top up. And the thing about that whole slow incline is that you don’t have a poverty trap. You rarely will have a disincentive to sort of work or just work a little bit extra. Who knows there might be some benefits, some concessions or so on that you might lose. And that’s going to be a little bit of a disincentive, but not falling off the cliff like you do at the moment.

Gene Tunny  20:09

Right. And so it’s a negative income tax because below a certain amount of income, the tax office is actually giving you money. When you get up to that level of income, you start paying positive income tax. Okay.

John August  20:25

That’s correct. Yes. Yes, that’s right.

Gene Tunny  20:27

Good one. Okay. I think I chatted about that with Ben Phillips. I think he mentioned that was one of the models, because, you know, UBI, in practice, you know, that’s one of the ways you could do it. And, you know, there are all these sort of terminological issues about what’s UBI.

John August  20:45

I suppose with terminology, you have this broad thing called UBI, which is like the general, you know, we’re giving people some money. But UBI is universal basic income, is we give everybody a certain wad of cash, regardless. The guaranteed minimum income is that it’s to some degree means tested, we give people money, if they need it is a bit of a leg up.

Gene Tunny  21:08

Yeah. Okay. So what I found interesting, so far, and I didn’t realise was that influence from Henry George, I mean, he’s a major figure in economics. At different times he’s been very influential. I mean, there are a lot of, you know, still followers of Henry George. And, you know, he always gets written up in the histories of economic thought. And there’s also the thinking or the philosophy of the people in IT, in the tech sector. And it’s an interesting blend of that. I know that labels can be… They may not be suitable. But is it possible to describe the Pirate Party as a left Libertarian Party? Or am I on the wrong track there?

John August  21:57

I think left libertarian would be a good way of describing it. And we have had some limited overlap with I guess you’re right libertarian parties. I think one was the Liberty and Democracy Party. Some time ago, this is quite separate to economic policy. But they articulated a position about the civil marriage versus religious marriage. And what he had to say, yeah, you guys are on the mark there, you actually expressed it better than we could, though, certainly those right libertarian parties, they don’t believe in Medicare, public health. We actually believe in expanding public health to include dental care, and expanded support for mental health, you know, supporting the NDIS. But all the time, we want to be, I guess, financially responsible about doing that.

I mean, so much of social welfare, I think… Look, there are financial constraints, but the way it rolls out, it really does feel very penny pinching to the recipients. And I know some people who, yes, they got their NDIS, but the amount of reports and you know, turning up to doctors and, and getting XYZ certified, you know, you listen to their stories and go, well, alright, maybe one doctor to say, tick the box and say you really do have that condition, but there seems to be this overload of bureaucracy there. And like with the universal basic income, I mean, obviously, yes, we want to, we want the books to balance, but you do have a saving in bureaucracy, because at the moment, whole government departments have to figure out whether you really are unemployed, whether you have been trying to look for work, all these sorts of things, and you would get rid of those sorts of overheads in administering the system.

Gene Tunny  23:45

Yeah. Can I just ask about NDIS? So National Disability Insurance Scheme, if you’re listening internationally, this is a scheme we have in Australia to assist people and their families or their carers if they have a disability. And yeah, I mean, John, you rightly mentioned that for recipients, they see that it can be bureaucratic, and it can be hard to get the support that they need. At the same time, there is an incredible amount of money being spent on it. I mean, what is it? Is it going up to 30 to 40 billion or something, or there are projections of that? And it’s going to overtake Medicare. So our single payer health care system here in Australia, we’re going to be spending more on NDIS than that. And yeah, I mean, so what are your thoughts on that? I mean, how do we control that cost? Or how do we pay for that?

John August  24:44

Well, there are the various broad changes. We’ve been talking to the tax system, you know. I did mention you know, land value taxation. Another one is to properly tax religion. Now I’m going off on a bit of a tangent here, but I know they were some people who analysed the value, I think it was Catholic church property in Victoria, and said it was comparable to the Westfield property holdings. And then there was a council in Bondi. This goes back to the 1980s. But they said that they had to double their rates to cover the cost of garbage collection, because they couldn’t charge the churches for garbage collection. So again, that’s the thing where sometimes the tax is a tax in the more pejorative sense. And sometimes it’s more a payment for services. And you know, those church properties get away without that.

But let’s see, then another one we’re talking about doing is doing capital gains tax if you use an asset to secure a loan. So there’s a whole gamut of tax changes we can make. And look, I acknowledge the thing about NDIS is you want to properly support things, but at the same time, you want to control the cost, and you want to have it that at least it doesn’t feel markedly bureaucratic to those participating in it. And let me just acknowledge that that is still a work in progress.

I’ll be a little bit political here and say, if you look at the current government, you know, lifters and leaners, the age and entitlement is over, all this sort of rhetoric, and, you know, sort of suddenly saying that, you know, the unemployed aren’t working hard. And, you know, if you look at, say, the Illawarra, that’s a region to the south of Sydney, that over five or 10 years, their rate of unemployment suddenly shot up. And it doesn’t make any sense to say that suddenly, over five or 10 years, all these people suddenly became lazy and couldn’t be bothered working. And yet, that’s sort of the rhetoric of the government going around. So I would say, look, who knows, maybe occasionally, the government does actually have some good ideas that are, shall we say, morally neutral or morally good. But it’s in the context of then having form in terms of saying all these narky petty things, and implementing all these narky petty things, like say, there’s Robodebt. I guess I’m being a bit political there. But what I’m saying is, look, you can have good ideas for economic reform. But if the rest of your story is dodgy, no one will believe you. Now somehow, John Howard managed to implement GST and get away with it, which was a bold thing in its way, but for a government to credibly make grand changes, and do it credibly, and be believable, you know, I think that’s hard.

But anyway, getting back, I’ve gone off on a bit of a sidetrack, but let’s just say, Yes, coping with NDIS and not having the cost blowout, while trying to sustain it, and not have it heavily bureaucratic in the rollout, that is one thing there. But the other thing I would try to… I mean, I haven’t looked into in detail, but I would like to think that if you can run NDIS properly, support people properly, you will then give them the opportunity to participate in the economy. And as it were, bring some of that investment back. And, you know, people, I guess maybe that’s happening already, and we haven’t really identified that benefit. Or maybe we need to target our schemes better. You know, there may be ways of trying to reduce, shall we say the overall financial impact of NDIS while still will be money coming out of the government at some level. So anyway, I’m not sure I’ve answered your question properly. But let’s just say yes, it is a challenge…

Gene Tunny  28:32

Yeah. Yeah. Just occurred to me when you mentioned NDIS, so that I/d bring that up, on the taxation of religion, it’d be good to see some of religious organisations, which are largely, I think that they’re exempt from tax, aren’t they? It’d be good to see some estimates of that, what that could bring in. I haven’t seen them. But yeah, it could be it could be substantial.

One thing I was surprised by, and you probably know this already, but I went to a friend’s birthday party, they held it at the Presbyterian Church, their head office here in Brisbane city, on Ann Street. And I never realised but back in the 19th century, the state governments of the day granted land to the various churches. There was some authority under a New South Wales Act of Parliament, to provide grants of land to churches, and so Catholic Church and the Anglican Church and Presbyterian Church and various others. And so in part, that’s why they have these inner city properties. So that’s why they’ve held on to them, I guess, and they had some extra land that was surplus to requirements and they’ve redeveloped that land. So, you know, that’s helped them out immensely. It’s related to an initial grant of land they had from state governments back in the day, which I found quite interesting. I don’t know if you’re aware of that at all, John.

John August  29:59

In Sydney there’s a suburb called Glebe. And it’s called Glebe because it was originally attached to a church. And I think over time, you know, the church only had its only tiny little part of Glebe. But Glebe is called Glebe because it was originally a church allotment. So I’m sort of aware of that.

But yeah, it is the broader issue that churches have a lot of privilege. And they excuse it, because of the good things they do. But at the same time, it’s not very transparent, and you just have to take their word for it. And I think also, our government in the past has like, basically thrown a lot of money at churches for services that I don’t think were efficiently thought through or efficiently allocated. So I guess it is pointing a finger at the church and saying that they are the equivalent of a feather bedded monopoly, I suppose, you know, would be one way of looking at it.

 Now, sure, the churches do have some community stuff to do. But you know, that community stuff should be supported by the people in it. I mean, you could say, look, there’s only a certain number of people who are Catholics, but taxpayers at large pay for that privilege. You know, so there’s some things that are really out of whack there. But I know, there’s the book The Purple Economy, was written quite some time ago.

And, look, it’s great that you’re asking these questions. The sad thing is, I was a bit more up on these things 10 or 15 years ago, and it has been a topic of debate on the fringes, but it’s never really hit the mainstream. And, you know, look, if the government is struggling to pay for, you know, XYZ, you know, they play silly buggers, they screw over us with taxation, councils are obliged to jack up their parking fines rather than charge the council’s rates. But, you know, the government never thinks laterally and says, Well, hang on, let’s take a good look at this religious privilege, and maybe we can reform things and basically get a bit of extra money to spend on these things we want to do. But like, I just see just how creative government is at sort of shaking trees and finding money in high logs, but they never look in that direction though.

Gene Tunny  32:12

Just with the taxation of religion, you mentioned, it was something you were more up on 10 or 15 years ago. And you’re right, it hasn’t really been a prominent issue. The only time I remember it becoming an issue in say the last 10 years was when Jim Sorley, the former Lord Mayor of Brisbane, who was a preacher at one stage in his life, he brought it up and suggested that given that, you know, many religious organisations are doing very well, they probably should, or they’ve got substantial assets. I don’t know how well they’re doing day to day. Then, you know, they could actually pay some or make a greater contribution, or they could make a taxation contribution. So I thought that was interesting.

John August  32:55

Makes a lot of sense, because occasionally, you do get your secular religious types. And, you know, obviously New South Wales, and one of the contrasts I make is that Gillard was an atheist, but she had to be dragged kicking and screaming to do, you know, inquiry into churches and child abuse.  Kristina Keneally was an Australian Catholic, and in New South Wales, she was the premier that oversaw the introduction of ethics education in schools, of non-religious education in schools. But yeah, at times, you get religious people who really are quite considerate. And if you look at a lot of elements of the Uniting Church are actually quite secular in the way that they relate to things. Obviously, yes, they get a bit of religious privilege, but it’s not something they covet, if you know what I mean. And at times, they will even push back against it. So you know, it does vary. And obviously there was this particular person you’re saying that was was sort of saying, hang on, maybe the churches should pay tax.

Now, if you go back far enough way, way back in the depths of time, before there were the Greens, before there was the Democrats, there was actually a political movement called defence of government schools. And they were very concerned about the way the government was feeding so much money into religious schools and was trying to say that it was against the Constitution. Now, I’m no constitutional lawyer. But I’ve read the commentaries, when people were writing the constitution of Australia. And I think based on what they were saying about the Constitution at the time, we never really should have given all this money to religious schools. Obviously, yes, I’m not a lawyer, and it was the High Court judges who get to make these calls. But yeah, if you go back decades, there was the defence of government schools movement. It was such a strident political force before the Greens or the Democrats. And it really had a lot of energy to it before my time, and I read about and think, wow, this is amazing. And the sad thing is, that was decided in the High Court when it was in Melbourne. So then the High Court moved to Canberra and it basically fell off the radar of the High Court because the High Court loves to sort of parade all the controversial decisions that were made within its halls, even if the public didn’t like them, or the controversial or whatever. They couldn’t get [inaudible] decisions made in Melbourne before they moved to Canberra. There you go.

Gene Tunny  35:20

Right. Okay, I’ll have to look into that. I mean, it’s a big issue, the division between church and state and therefore, what governments can do to assist religious organisations or schools. I mean, I guess the issue in Australia was that, at the time, didn’t we have some Catholic schools that were struggling financially because they charged relatively low fees, and they couldn’t afford to install the science blocks. This was during the Cold War, and there was a push to educate people in maths and science. And so therefore, you could argue there was some public policy rationale for it.

John August  35:57

There was a bunch of schools in Canberra, Catholic schools that went on strike because they weren’t getting the money together for that. And details of that story are not sort of close to hand. But I do know, during the Cold War, even though the US was very religious, and you even had some fist-waving creationists, when the Russians put Sputnik into orbit, they all thought, oh, shit, we better roll out the science education in our schools. And, you know, that’s my understanding, that that was why creationism took a backseat until the Cold War sort of thawed out, and there was no longer that pressure. So I do believe that’s not got a lot to do with economics, of course, but I do believe that’s some of the history there.

And look, it’s not at my fingertips, but there has been this whole thing of charities and the definition of charities. And I certainly would say that churches have a lot of privilege when it comes to charities, but my narky observation about the government is they really want to reduce the charitable status of any group that might criticise government. And, you know, of course, you know, there’s the whole freedom of speech thing, yada yada yada, but yeah. Let’s say yes, historically, this whole thing of what is a charity, we should have a charities commission and so on, that was bubbling away at the side. And again, I was more familiar with this 10 or 15 years ago, and then I got serenaded by intellectual property and the Pirate Party, I suppose.

Gene Tunny  37:25

Okay, well, yeah, we want to get on to IP, because that’s fascinating too. Just with religion for listeners internationally, I should know that when I mentioned Jim Sorley, he was a former Lord Mayor of Brisbane here, so well-known figure in one of the political parties, in the Labour Party. And yes, he was also at one time a Catholic priest. So that’s why it made news when he came out and said that the churches should pay tax.

John August  37:52

Yes, well, it is one of the things that a secular Australia I should say, that the minority seat of secular Australia do actually say that Gough Whitlam made a deal with the Catholics to get into power. So that’s the one narky thing that secularists will actually say increased criticism of Gough Whitlam. I don’t want to get embroiled in the whole bog mire of Gough Whitlam. That’s one observation I’d make.

Gene Tunny  38:17

Okay. Okay. Well, we might move on to IP and then we’ll finish off with a discussion of business support or crony capitalism, or however you want to describe it. The Game of Mates, you might like to describe it. You mentioned Cameron and Paul Frijters’s book before. What’s your position on IP? I mean, is it complete no protection of IP, something extreme like that? Or is there some protection to encourage innovation?

John August  38:46

We do believe in some protection for IP. But there’s a whole heap of reforms and changes. Like, as far as copyright’s concerned, we’d have a whole heap of like, what is it, fair use exemptions. Now, one of the things we get into is like, the right to repair, say. It is actually bubbling. And I think it’s sort of starting to get to the mainstream. But you know, the cliche is, you’ve got this farmer in Western Australia. They’re so damn far from civilization. They’ve got this farming equipment. Their harvest season runs a few weeks, and if one of their bits of equipment is out of action, and they’ve got to wait a few weeks for some guy from Perth to travel all the bloody way. Oh, okay, we need this spare part ordered. That will be a week away. That sort of makes no sense. And, you know, there is the idea of the right to repair.

And this is another thing about individual freedom. There’s some people who run repair cafes, they talk about the dignity of risk, okay, and you know, it is one of those things that I guess a slightly libertarian sense is, you know, cotton wool drawers and that sort of thing. And, you know, my own personal view is look, companies have a legitimate concern that, you know, you don’t mess with their thing, injure yourself and get sued. Okay? We do think there needs to be some sort of way of saying, look, I’m going to mess with this. I’m taking the responsibility onto myself. If I injure myself, it’s my own problem. But I do think a lot of firms run around saying, oh, we can’t let the consumers do blah, blah, blah, because they might hurt themselves. And that’s actually an excuse for them to flex their muscles in terms of intellectual property.

Gene Tunny  40:39

Yeah. So John, just for clarity, what do they do that prevents you from repairing it? They void the warranty? They say the warranty is voided if you do any work on it, if you actually open it up?

John August  40:49

There’s a few things. One is the warranty is voided. The other one is software that basically logs the fact that you’ve opened the case or tried to tamper with it. And worst case, you have software that basically self destructs if you meddle with something. That’s getting even more serious. I mean, there was a story of I think, Sony put a dodgy thing on CDs, that actually put a programme in your laptop that stops you from doing further copying of CDs. That caused quite a kerfuffle in the IT world. Whether it got to the outside world, I don’t know. But there’s some dodgy stuff that goes on there.

But anyway, so fair use exemptions for copyright. Okay. And obviously, that sort of spilled into the copyright of bits and pieces and of right to repair rather. And certainly, I think the Australian Government does have something that if you sold a car and you stopped selling it, you gotta keep selling the fit spares five or 10 years. Well, we also think that once a car is no longer really properly supported, it should be a free for all for people to make knockoffs and you know, run their 3D printers, bananas, whatever. So I think they should be thresholds where, okay, until this point, people could can claim a bit of copyright and this sort of thing. But beyond this point, come on, let people rip in.

But as far as patents go, for sure, our view is a few things. One is that that basically patents should only be used to protect stuff that’s actually being bought and sold in the market. And if you go back far enough, in our patent legislation, but there was a previous thing saying that if you have a patent, you have to serve the market. There was actually an obligation in legislation. In other words, it was saying, if you’ve got a patent, you should be making stuff and flogging it. Our position is that if you have a patent, then you should be making it. You shouldn’t be using that patent defensively and stopping others from doing it. And there is the whole thing of you know, patent trolls who have a bunch of patents sitting on the shelf, and all they do is run around with a mallet and whack people on the head to try to make that. To my way of thinking, that’s a complete abuse of what a patent should be. And we also have actual schemes where you actually declare the value of your patent. And if you’re not declaring it properly, someone can just put up their hand and buy the patent off you. So you have to value it publicly in a way that that sort of is sustainable.

And I suppose there is a whole thing of copyright that it shouldn’t be, you know, death of the author plus 50 years or 70 years, which is ridiculous. Now, the US kept trying to extend the copyright of Mickey Mouse to keep them. And so that was to my way of thinking, clear abuse of the patent process. So you’ve got patent trolls. You’ve got so-called evergreening of patents where a medicine is used for one use, and then they figure out an alternate use and get an extended patent on it. But it still gets a bit grey as to whether you could use it for the use to sort of run out a patent.

And I suppose a broader thing would be, it would be lovely, my vision is that, you know, an arm of the UN farms out grants the universities for basic research. And if some particular university then comes up with a idea, then the free market can get that idea for a nominal licence fee, and then rip in and sell it. And that’s re-pivoting the whole way corporations relate to medical patents. So notice we’re not totally against patents for medicine, but you know, these medical firms, I think there’s something like, oh, look, they spend a bucketload on R&D, and they spend even more on marketing. I think that’s telling us look, there’s something wrong with this picture.

And there was a story goes back… Unfortunately, I’m not up on these things recently. But going back about 10 or 20 years ago, there was a bunch of researchers in the UK that made this variant on interferon and that actually evaded the then existing patents and then they hired some Indian chemical firms to crank this stuff out. And it was what you might call an open-source pharmaceutical metaphorically. Those sorts of models I think are much better. But then there’s the fact that in the US, like me clicking on a button, software patents, to my way of thinking…

Look, this is going into the technical details of patent law. But I know a lot of commentators who said that like, way back when 100 years ago, in the UK, a patent was something that you basically bribe someone to do good things in the community, for the general good of society. In other words, yes, you were making a profit. But it should be articulated that not only were you making a profit, but society as a whole was benefiting. And that was the way the Brits articulated patent law 100-odd years ago. And it’s my view that that got morphed into the US, and the US much more was worried about coveting assets, you know, people own this, and we’ve got to protect the people who own it. And then the lawyers got in and defined all these things around it. So the emphasis changed. And along the way, the idea of the inventive step got watered down. And it used to be that was a very strong thing. This had to be really creative, you’ve done something big here. And then that’s been diluted in US patent law to think, oh, you’ve run this algorithm that anyone could have dreamed up, you clicked over here, oh yeah, we’ll give you a patent for that.

And, again, going back in patent law, there was, I think, a manufacturer of, goodness me ,of airline engines, of engines for aircraft, and they actually came up with this way, you can operate this engine in a certain way and reduce noise, and they wanted to get a patent on it. And the judge at the time said, look, these people piloting these planes responsible for hundreds of lives. And you want to add to their cognitive load that they can have to actually figure out whether they’re licenced to operate this bit of equipment in this way, or not, based on how they’re licenced. And that particular judge said, go away, that’s nonsense. And then, you know, there’s obviously the more recent excesses like the EpiPen. Someone was sort of making a gadget to check for COVID. And someone else wanted to do a patent injunction against them. I mean, even if they have a bit of a case, the best that the legal system should do is say, this is something of merit for society. Let’s let these people make the COVID equipment. And you can do a court case and extract profits from them after the event if it really is relevant. But so there’s a whole lot of messiness to do with intellectual property.

And what’s a few other things I can point out? That like, with Hollywood, I don’t know if you’ve heard the term Hollywood accounting, there was a guy who wrote the novel… Goodness me, what was it called? Forrest Gump, I think it was. And the first movie didn’t make a profit and they wanted to make a sequel. And he’s saying, Why the hell do you want to make a sequel if the first movie didn’t make any money? And so I think there’s this moral duplicity, where Hollywood gets very resentful about people copying their movies, but has no problem with dibbling their creative partner partners on their end of the fence. So there’s some dodgy stuff going on in the copyright industry there.

And there’s various cases of, you know, bands in Australia getting done by overseas copyright claims on music in their tracks and, you know, I think the band Men at Work was dragged through the courts. So there’s a whole lot of dodgy shit going on with intellectual property. What’s another story? I think Mattel had the Barbie doll and they had a copyright on the Barbie doll. And someone wanted to do a book on anorexia that had Barbie in the title. They said, no, you can’t do that. So again, copyright, trademarks, defamation, you had all these things into mix. Sure, you shouldn’t be able to sell a knockoff doll and call it Barbie and make money out of it. Okay, maybe. But, you know, protecting your trademark and stopping people from doing derivative creative works. I mean, come on.

Oh, yes. Okay. There’s one more thing I will say, which is, I think, a bit of a sideline to do with Trump. Now, you might remember, Trump was pushing back against the Trans-Pacific Partnership, and he obviously managed to win an election. And it’s my suspicion that a lot of people in the Rust Belt saw all of these trade treaties, and what those trade treaties meant was that, you know, overseas countries would sell stuff in the US, in exchange for them recognising US intellectual property laws.

And look, let’s just say, look, you’re the economist, and I’m sure we will agree that on paper, you have international trade and parties benefit, and the net wealth is increased. But under the hood, what happened in the US was there was a net transfer of wealth from people who made stuff with their hands to people who owned ideas. And it’s my suspicion that that might have been one of the factors in the Rust Belt of people going, hang on, there’s all these lovely trade treaties, which are supposed to be so beneficial, and we see ourselves losing our jobs. So that’s sort of, I guess, less to do with intellectual property directly. But I think it’s one of the things going on in in global trade and global politics. Look, I can I can say more about intellectual property. You got me started, but maybe I’ll leave it at that for the moment.

Gene Tunny  50:54

I’ll make a few comments on that. John, very good points. With the Rust Belt, look, yep, absolutely. And economists have studied that. And they have concluded that there certainly has been an impact on some of those regions. Some regions have been disadvantaged, jobs have been lost, and they haven’t come back. Metropolitan areas have prospered. They’ve done well. Their consumers are getting cheaper products. But then there are some Americans in some states, in rural areas or in the Rust Belt, as you call it, that have been disadvantaged. I’m trying to remember the study. It might have been by David Autor. I can put a link in the show notes. He looked at I think he called it the China shock.

That point about trade agreements, there is actually a debate in economics about these preferential trade agreements, free trade agreements. They’re not necessarily welfare enhancing for countries. I mean, the best thing you can do is actually to lower tariffs for all countries selling to you. So there are issues with these preferential trade agreements. In particular, if we sign up to some of these IP provisions that mean that we have to pay the American producers more, as you mentioned.

What’s the other point? Oh, I think you’re on strong ground on the IP stuff, because, yeah, economists generally think that… At least my impression is that economists are very much against just this, you know, these excessive IP, these copyright terms. So you know, what is it, 70 years you mentioned. And I remember when I was in Treasury, in Canberra, we had a visit once from David Levine, I think it’s Levine, from Berkeley. He’s a professor of economics at University of California, Berkeley. And he was arguing that, look, I mean, that as an economist, what you want is you want people to be incentivized to innovate, and to create new works. But you actually don’t need a lot of copyright protection to do that, right? I mean, you might need 5, 10, 20 years at the most. Beyond that, that would discount any sort of benefits beyond that practically to zero. And I mean, they’re not really going to care what their heirs… I mean, maybe some of them do, but they’re not really going to care about what their grandchildren are going to be earning from their creative works. That is not what is motivating them to be innovative. And I thought that was a good argument. So I don’t know if you’re aware of his work.

John August  53:29

Certainly, I mean, the echo there is, a long time ago, Walt Disney came up with the Mickey Mouse character. Did he think, wow, this is lovely, 70 years after my death, my estate will still be making money from this. So this is a bloody good move on my part to come up with this lovely looking mouse. And that’s sort of echoing your sentiment. And I suppose further to the point that we’re making before is that I think particularly in the US, they are artificially by legal means extending the life of assets to benefit the person who owns that asset, but not in any meaningful way contributing to the economy at large. And, as I say, my feeling is that in the US, they really got behind, oh, you own that thing, oh, we need to protect you. And that sort of just went a bit crazy in the US as compared to the origins of intellectual property in the UK, which were a bit more restrained and sensible.

Gene Tunny  54:26

So on the trade agreements, I might put a link in the show notes, there’s a book that I’ve read recently that I can highly recommend, Termites in the Trading System, by Jagdish Bhagwati, one of the great Indian American economists. He’s based at Columbia. He’s a professor there. So very good book and he’s been very critical of all of these trade agreements, for reasons including what we’ve talked about there, that they’re not necessarily welfare enhancing, just the way that they’re rolled out. Okay. Finally, John, it’d be good to chat about business support. Do you have a blanket ban? Or are you against business support? So all of the subsidies, the what you might call crony capitalism, what’s your position on that?

John August  55:21

Well, in broad terms, yes, I’m very much against crony capitalism, against support for business. Now, look, there are some exceptions for very well-defined social outcomes. Now, this is going off on quite a tangent, but you know, the whole thing of like, childcare, and like, you know, subsidies to consumers of childcare. And, you know, I guess it’s more a personal position that’s informed by other, not that I’m an economist, but other economists in the Pirate Party. And we talk about subsidising supply. So it may make sense to have grants to businesses to either establish childcare facilities, expand childcare facilities, and maybe have a hex discount for people who are trying to qualify themselves to work in childcare. And notice, that would be a corporate subsidy for a very well-defined social need that needs to be properly articulated and costed, and yada yada yada yada.

But in broad terms, I think a lot of the subsidies we get, like, I guess the whole cliche is, you know, the government expands this port, spends bucketloads of money on it, then these firms sort of ship the gas off overseas, and we end up paying more for the gas as a result of the cabinet investing in the port works, you know what I mean. There’s a lot of dodgy stuff like that, that you can point to. So certainly against that. And I suppose we have a broader position against bureaucracy and rent seeking broadly defined. So that’s certainly the case. But to get into the nuts and bolts of that, I have to admit, I’m going to struggle to get into…

Gene Tunny  57:00

That’s okay. Well, I mean, it’s probably a good time to wrap up. I’ve had you for nearly an hour, and we’ve had a really good discussion of IP and before that on Georgism. I thought that was really interesting. Also the negative income and the taxation of churches. So something that I’ve been interested in in the past, particularly when –

John August  57:21

I can but say, yes, go back 10 or 15 years ago. And look, there are a moderate number of like, shall we say, economically qualified people on the secular side of the fence, who are all going, look, look, look, and no one’s paying attention. So in a sense, it’s lovely that your programme, which you might say, as it’s starting to approach the mainstream is actually putting a bit of light on this sort of issue. And that is actually quite wonderful, I have to say.

Gene Tunny  57:45

Yeah, well, I’m trying to be frank and fearless. And as someone who was in, I worked in the treasury, and I’ve worked in around policy, I think we really should approach these issues rationally, and not have these… I guess a lot of people probably think, oh, we can’t do that, or we’ll upset these people. And if you look at these things rationally, that a lot more policies become, or changes become, you know, something that should be discussed and debated. So that’s what I’m trying to do with this show.

John August  58:16

Well, I will put in a bit of a plug for the Pirate Party. Look, I’m not saying we’re not were the only innovative party out there. But as a small party, we can actually talk some very creative and innovative things. And as I say, look, who knows, maybe the Liberal Party will have the odd good idea. But for them to do it, and have people believe that they’re honest and honestly inclined, you know, they have such a track record, where a party who can say, look, there’s some economic realities we should consider here and let’s think about XYZ. And if the Liberal Party did something like that, people would just shake their heads and go, Yeah, another one, you know. So there are some opportunities that small parties have to put innovative ideas out there.

And yeah, as I say, I won’t claim that pirate party is the… I should say Fusion. Oops, I think we’re finally got to this point, I should emphasise the Pirate Party is a part of the Fusion amalgam. And so that does actually include the Science Party, the Secular Party, the Pirate Party, and Climate Emergency. So they are the different branches of Fusion. And while what you were saying, certainly, there are degrees of development of policy within the Pirate Party, and like we have our basic original form of the Pirate UBI that you can look at, and that’s all very good, and we’re continuing to develop our ideas, and obviously, that’s within the Pirate realm or the Pirate branch of Fusion. And obviously, the Fusion has sort of more universal policies that everybody adopts. But you know that that’s a limited subset of what we’ve been talking about.

Gene Tunny  59:59

Yeah. Okay. John, this has been great. I’ll put links to your social media channels. And you’ve got your own radio show. Is that right?

John August  1:00:11

Yes, I have a radio show broadcasting out of Marrickville in Sydney on Radio Skid Row. So there’s some links to that. You can check out some old episodes. There’s also my own website, johnaugust.com.au. But, you know, hopefully, you’ll put that amongst the links there. And I will also mention, there’s a gentleman, Quinton Fernandez, Professor Quinton Fernandez of University of New South Wales. And he’s actually been saying that, like, the UK was abusing the free trade situation when they were the top dogs. And he’s also got his own views on intellectual property, like value global value chains, and just how much intellectual property is a part of the fact that like, things are a token amount coming out of Taiwan. And then the price goes up by 10 times because of, you know, intellectual property and branding. And it’s quite staggering when you listen to the picture that he paints.

Gene Tunny  1:01:11

Okay, I’ll, I’ll have a look at his work and might see if I can get him on the show sometime in the future. Okay, John August, thanks so much for your time. I really appreciated learning about the Pirate Party platform, and just the discussion of the economic issues because you raised some very good ones there. And it was great to be reminded of the work of Henry George, because it’s one of those fascinating ideas that economics has come up with over the centuries. I remember what I learned about him in the history of economic thought, I thought, that’s a fascinating perspective. Yeah. So very good. So, again, thanks so much for your time.

John August  1:01:58

Well, there is a lot of merit in what Henry George says, but I don’t believe in the single tax. And I do think that his philosophy was 90% correct. There will be some little sort of rejoinders I’ll make to what you said, but you know, it’s certainly 90% got the full picture.

Gene Tunny  1:02:15

Yeah, that’s an important thing to note. I might try and find a guest to cover Henry George in a future episode, just to go through some of the intricacies of it. Righto. Okay. John, thanks so much for your time, and all the best. And, yeah, hopefully I’ll chat with you again soon. Thank you.

John August  1:02:39

Oh, well, I do look forward to that. Thank you very much for the opportunity. I think the Pirate Party has been saying some interesting stuff. It would be lovely for that to be more broadly recognised, and it’s lovely that you’ve obviously taken the interest in interviewing me, so very much appreciate that.

Gene Tunny  1:02:54

Okay. Very good. Thanks, John.

John August  1:02:56

Okay, thanks, Gene. Bye.

Gene Tunny  1:02:59 Okay, that’s the end of this episode of Economics Explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a rating on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact@economicsexplored.com And we’ll aim to address them in a future episode. Thanks for listening. Until next week, goodbye.

Credits

Big thanks to EP138 guest John August and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

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

WP Popup