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Trump’s Tariffs: Art of the Deal or Economic Disaster? w/ Darren Brady Nelson – Bonus Episode

Are Trump’s tariffs a masterstroke of economic negotiation or a blunder with global consequences? Show host Gene Tunny and returning guest Darren Brady Nelson debate the rationale behind punitive tariffs, the backlash from markets, and whether this is all part of a broader deal-making strategy. They also discuss Elon Musk’s DOGE initiative and Darren’s run-in with a wild turkey on Wisconsin’s special elections campaign trail.

Please let Gene know your thoughts on Trump’s tariffs and any questions or comments regarding this episode by emailing Gene at contact@economicsexplored.com.

You can listen to the episode via the embedded player below or via podcasting apps including Apple Podcast and Spotify.

Timestamps

  • Introduction and Market Reaction to Trump’s Tariffs (0:00)
  • Darren Brady Nelson’s Run-In with a Wild Turkey (1:45)
  • Assessment of Trump’s Tariffs (6:51)
  • Formula for Calculating Tariffs (12:26)
  • Impact on Consumers and Businesses (19:59)
  • National Security Considerations (37:06)
  • DOGE’s Role in Identifying Waste and Fraud (44:07)
  • Wisconsin Special Election and Voter ID Law (55:14)
  • Australian Election Predictions (1:00:42)
  • Final Thoughts and Closing Remarks (1:05:44)

Links relevant to the conversation

Trump’s Executive Order “Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits”:

https://www.whitehouse.gov/presidential-actions/2025/04/regulating-imports-with-a-reciprocal-tariff-to-rectify-trade-practices-that-contribute-to-large-and-persistent-annual-united-states-goods-trade-deficits

Statement by IMF Managing Director Kristalina Georgieva:

https://www.imf.org/en/News/Articles/2025/04/03/pr2587-statement-by-imf-managing-director-kristalina-georgieva

Darren’s 2018 article “Trumpʼs tariffs: free, fair or foul trade?”, in which he discusses Adam Smith and free trade: 

https://drive.google.com/file/d/1xQEt4n1bJ-W3RN2-H7_0w3q6vcI3eBCc/view?usp=sharing

Dan Mitchell’s “Six Visuals to Understand Trump’s Suicidal Tax Increase on Trade”:

https://www.imf.org/en/News/Articles/2025/04/03/pr2587-statement-by-imf-managing-director-kristalina-georgieva

CNN reporting, “This is the dubious way Trump calculated his ‘reciprocal’ tariffs”:

https://edition.cnn.com/2025/04/03/economy/reciprocal-tariff-math/index.html

Axios reporting, “Trump’s surprisingly simple tariff math”:

https://www.axios.com/2025/04/03/how-trump-calculated-tariffs-trade-deficit

CNBC reporting, “Trump open to tariff negotiations, contradicting White House aides”:

https://www.cnbc.com/2025/04/03/trump-tariffs-live-updates-stock-market-trade-war.html

Note this reporting: ‘Top Trump trade advisor Peter Navarro denied that Trump’s new tariffs are being used as a tool to negotiate better trade terms with other countries.’

Great Reset discussion with Darren from 2020:

https://economics-explained.simplecast.com/episodes/the-great-reset

DOGE’s reported savings:

https://doge.gov/savings

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee.

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Transcript: Trump’s Tariffs: Art of the Deal or Economic Disaster? w/ Darren Brady Nelson – Bonus Episode

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

Gene, 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 and welcome to the show. This is a special bonus episode of economics explored to talk about, among other things, what else but the new reciprocal tariffs that President Trump announced in the Rose Garden earlier this week. We’ve seen the S and p5 100. It’s fallen around 10% ASX 200 it’s down 4% over the week. So big impacts on global markets. The IMF Managing Director has called the tariffs a significant risk to the global outlook at a time of sluggish growth. Before we get into it, I should say this episode sponsored by Lumo coffee, they’re high quality, organic coffee from the highlands of Peru. It’s jam packed full of antioxidants. So economics explore. Listeners can get 10% off. So check out the show notes for that link. Now, back to the show. We’re going to be talking about the tariffs. We’re going to be talking about Doge, and also elections that we’ve had in recent, elections in the US, in Wisconsin, the upcoming Australian election. My guest who else? It’s my good friend, Darren Brady Nelson, who’s joining me from Milwaukee, and he’s just he’s had some recent run ins with Turkey, Turkeys on the campaign trail in Wisconsin. Darren, good to have you back on the show.

Darren Brady Nelson  02:06

Great. Yeah, good to see you too. Thank you. First, you got to

Gene Tunny  02:10

tell me what happened with that Turkey. I heard you had a run in with a turkey on the campaign trail.

Darren Brady Nelson  02:15

I did. I did. Yeah, I’ve been doing sort of, you know, you know, like you, well, a little bit similar to you. I mean, you, you actually set up your own firm, and all adept at economics and all that sort of things. You You certainly taken, you know, being, if you like, a freelancer, independent, to sort of higher levels than I have, I’d kind of just go fly solo. And that’s what I do, kind of economic stuff, mainly. But sometimes I get weird stuff, like elections. So, you know, I did the, obviously, the Trump election, I think we spoke about that, you know, last year at some stage, or in the wake of last year, and then more recently, I got, you know, kind of involved in the Wisconsin Supreme Court election. So in the US, pretty much most of the courts, the judges run for office like, you know, politicians, the only exception being the US, you know, Supreme Court. So anyway, so there’s a big election for one, you know, one, one seat was up for contention in Wisconsin, and so, you know, I’ve been doing that for the past five weeks or so, you know, literally going out there and knocking on doors and speaking to people and, you know, handing out literature. So, you know, I’ve become, the past couple of years, the door knocking economist, but as you mentioned, I’ve also become the turkey fighting economist as well. So what happened is there’s a suburb called Wauwatosa in in Milwaukee County. So Milwaukee County’s got the City of Milwaukee, which is dominates, but it has a bunch of other kind of subsidiary cities or suburbs, including Wauwatosa. And just just one morning, when I meet on the second house, I went to Wauwatosa. You know, just after 9am I was walking up to go knock on the door, and I heard this hissing behind me, you know, you know, I don’t know what I was thinking, I guess. I thought maybe cat or something, I suppose. And then I turned around this really huge Turkey. I didn’t even know turkeys could get this big. Was kind of like chasing me. Essentially, I didn’t even know it was until I got up to, you know, nearly to knock on this, this person’s door. And, you know, it was a big male Turkey and all puffed up and all this sort of stuff was like, you know, like, about four feet tall. The thing was huge, you know, a meter. And obviously they puffed themselves up. So, you know, obviously it took me a little bit unawares. And, you know, I tried to shush it off and scare it off with loud noises, but it was not going down for that. And fortunately, there was like a, you know, winter is, you know, pretty much over. But, you know, they had, like a kind of a plastic shovel. Lot of Wisconsinites just keep their shovel just sitting outside. I say most people don’t just steal people’s shovels, I guess. But anyway, it was there. It was, it was, it was plastic, so it wasn’t like a big metal one. So I grabbed that ice, tried to, you know, like, you know, poke it and, you know, have it scare away. But I sat there for like, up to 10 minutes, literally fighting this turkey with a shovel, it would not it kept on coming. In fact, I hit it like several times. Usually when you hit something once it runs off, right? But this thing would not run off. And I actually got saved by just some retired lady and her rather large dog cut me going for a walk, and she sicced the dog on on the turkey, and it finally took off. So, yeah, there’s my weird story about, you know, getting attacked by a turkey, obviously, um, you know, I certainly wanted, um, you know, Brad Schimmel to win pretty badly, but I’m not sure about, you know, fighting a turkey for him, right?

Gene Tunny  05:58

Okay, so Turkey’s protected. I mean, you didn’t harm the turkey, did you? I mean, you just sort of

Darren Brady Nelson  06:05

harm that Turkey because it because they have these, these, you know, really, I mean, they’re not going to kill you, but they could, they have these spurs on their, on their, you know, their feet, so they could, you know, you know, cut you up pretty nicely. So they’re not harmless birds, right? They’re not like, you know, maybe not like an emu or something like that, which is obviously far bigger and, you know, can probably, you know, break your ribs or something if it kicks you. But they’re not, they’re not harmless. They’re not like, gonna kill you, but they’re not harmless, right? So, no, they’re not protected. In fact, while with toast, has had a problem with wild turkeys for quite some time. They need to probably call them actually,

Gene Tunny  06:45

okay, well, thanks to that old lady and a dog. So, yeah, the

Darren Brady Nelson  06:51

dog, the dog was great. So it was a really large sort of golden retriever or something. So, yeah, okay, so

Gene Tunny  06:57

you’re, you’re able to answer my questions regarding Trump’s tariffs, among among other things. So, Darren, first, what’s your assessment of the market reaction? I mean, the market reaction has been pretty bad. It’s it looks like a mark of disapproval for the tariffs. What’s your assessment of it, please?

Darren Brady Nelson  07:15

Um, yeah, that’s not, yeah, that’s a reasonable assessment. Do I think it’s going to be some sort of like even medium term thing for the markets. No, I think they’re going to bounce back fairly quickly. So, you know, my, you know, we’ll obviously get into a bit of, you know, I’ve been kind of like changing my views on tariffs in recent times, not to the point of being like pro tariffs or pro protection, or anything like that. But, you know, I mean, I think that the White House statement, the executive order, and the accompanying statement, you know, sets it out pretty well. I think, you know, the reasons for it, and the whole backdrop, I think it’s actually a and, you know, it’s actually one of the best written executive orders I’ve actually seen, you know. So I don’t know who actually wrote that, but you know it certainly, you know, doesn’t it’s not, you know. I mean, Trump talks in terms of, and sometimes he speaks and he and he trolls people talking about beautiful tariffs and, you know, that sort of stuff. And but you know, I know people have been in the Oval Office with him, and I don’t think he he is a protectionist, nor does he think tariffs actually, you know, ultimately, if that’s all you’re doing, it’s not going to, you know, really create wealth. It’ll help domestic industries, for a time, certain domestic industries, but you know, at the end of the day, it’s not going to, obviously, we’ve seen what happened to, you know, the the automobile industry in Australia, eventually, you know, tariffs and subsidies and all the right and regulations that all directed to help them, eventually they collapse and fail. But that’s what, what Trump’s trying to do is really more art of the deal, and I’ve kind of first started to get a feel for that. You know, that that’s what he was trying to do in, I guess, probably 2018 particularly talking to, you know, a a former Cato economist, who, obviously Cato is, you know, like kind of the libertarian think tank in Washington, DC. So if he was convinced that that Trump wasn’t a protectionist and was just doing it for Art of the Deal purposes. You know, that’s that’s pretty good evidence, on top of what I’ve also seen since then as well,

Gene Tunny  09:29

right? Okay. Now, who do you think drafted that order? Was it Peter Navarro? Is Peter Navarro still involved in in the White House?

Darren Brady Nelson  09:41

I understand he is, I don’t look it’s hard to say who actually, literally drafted that I’m sure was, you know, I’m sure if someone drafted it, and there was a team with input, but you know, it just like, you know, I’ve seen a lot of government stuff across multiple countries, and it just, you know, you know, particularly, I guess, you know, Trump has, you know, him. Self, obviously, what’s what the weave? You know, how? Obviously he does the weave when he’s actually speaking. You heard that term, the we, yes, yes, yes, yeah. You know, he kind of, you know, wanders around and goes kind of off on tangents and comes back and all that, you know, like, you know, I’m not sure how he writes, To be honest, I’m, you know, but I doubt he wrote that, but, so, you know that, I mean, in a nutshell, what I understand, and I remember this, you know, particularly after a g7 meeting, I think in 2018 and I wrote an article about it, which I sent to you. You know, we’re, you know, basically the the g7 leaders were complaining about, you know, some of the tariffs, obviously. And then Trump, you know, hit back with, like, you know, hey, Canada, you’re doing this, you know, these partners are doing these ones. Okay, fine, let’s all get in a room and let’s get rid of all our tariffs, or, you know, or at least significantly reduce them down to, you know, very small numbers. And of course, Trudeau and everybody else backed off from that idea, you know. So that tells me, you know, these criticisms aren’t really necessarily some big stance on principle about tariffs, and not even just simply, hey, you’re harming us with this tariff, which, of course, yes, you know, there’s, there’s that, but I think, I think there’s some broader stuff and bigger stuff going on we can get into later, but, but, you know, at a simple level, I think, again, it’s art of the deal. I think Trump’s doing this. And, you know, as Dan Mitchell, who’s, you know, and you know, essentially, I’ve seen ardent opponent of terrorists, but he’s kind of a little bit of an ardent opponent of Trump, no matter what he does. But he, you know, he says, you know, he points out rightly, these aren’t simply reciprocal at times, like, you know, not just the same level as, you know, China or Canada or the EU that’s true, as far as I understand. But they’re punitive. But they’re punitive with a point to get these people into a room, basically to do a deal, to ultimately, you know, sort of get better trade arrangements, lower tariffs, and not just tariffs, but other non tariff barriers to trade, which there’s plenty of. And because, you know, the US, you know, certainly seems like they’ve kind of allowed countries to kind of hit them harder with stuff over the years, and the US not sort of retaliating, and now they finally are, and they’re making up for lost time.

Gene Tunny  12:25

Yeah, look, Darren, I think you there’s some interesting points you made there. Now the issue about Yeah, you rightly acknowledge these tariffs aren’t genuinely reciprocal. They are. Some of them are punitive, and a lot of economists and market commentators have been shocked by the formula that was used to calculate them. So it’s it’s either 10% or it’s the if there’s any sort of restriction on any imports, then it’s a minimum of and that could be for biosecurity reasons, as in Australia. So one of the things they’re concerned about beef, and I mean, we’ve got very strict regulations on food that can be imported. And so that’s one of the points of contention. But it’s basically, what was it? It was the trade deficit with a country divided by the the exports of that country to the US. And that’s a that’s a percentage, and they divide that by two, and it’s, it’s either that or 10% whichever is greater. So an economist are just sort of scratching their head, how does this make any sense? So that’s one of the, one of the concerns. You mean, where’d you get this formula from? Well, that’s the formula. That’s how that’s basically what everyone’s what everyone’s reporting, how they figured out, how they

Darren Brady Nelson  13:39

actually I contend whether that’s actually in the executive order. But anyway,

Gene Tunny  13:43

that’s, you can work that out from the chart that, you know, the chart he held up on the, yeah, the Rose Garden. So that’s, that’s essentially how he’s come to this. There’s this bizarre formula that that no one can figure out. So that’s one of the concerns. But I think that’s good. You’ve acknowledged that these are punitive. You think this is about the the art of the deal. Now, this is what Scott Besson, the Treasury Secretary, was saying. He was trying to hint, oh, okay, this is, look, we want to have a negotiation with these countries. But then Caroline Levitt, or someone from the White House, has come out and said, Oh, no, this is final. So, I mean, what’s your so is your? Is your view that this is the start of a negotiation with different countries, and so we will have lower tariffs eventually. Or how long is this going to last? How do you see this playing out?

Darren Brady Nelson  14:32

Look, you know, it’s obviously hard to say how long, and it’ll probably be be on a country to country basis. I think some will kind of go all right, you know, like, let’s we’ll come to the table pretty quickly. I didn’t hear the comment by Levitt that you’re saying that doesn’t sound accurate. That doesn’t sound in keeping with, you know, not just Trump over, you know, his previous presidency in the start of this one, but obviously he’s famous for the art of the deal, his book. So. I don’t think Trump’s change on that that, you know, I think he’s changed in terms of the art of the deal, with dealing with Democrats and and the kind of the his ardent left opponents, I don’t think he’s given up that you can’t do a deal with them, right? But that’s not applying this. That doesn’t apply in this setting. I don’t think and, and, you know, in terms of, yes, I think you can do a deal with any country, you know, Canada, China, EU, all that, even though there’s obviously people there who you know, are reluctant to do any deal with with Trump, because they just don’t like him, right? They don’t like what he stands for. They don’t like his style, etc, etc. And then there’s kind of that long standing and growing kind of European disdain for the US anyway, that that’s a separate issue, I suppose, but so, yeah, I totally see it as art of the deal. You can find a statement or something, but that’s not I think that the weight of evidence suggests it’s art of the deal. It does get more complex, because Trump is a bit of a troller, and he and he’s, he’s loose with language. But, you know, I was thinking that too. And I was thinking, Wait a second, maybe not so much, because if you’re doing the art of the deal, if you make it explicit that, well, this is the art of the deal. I don’t actually believe in tariffs, and I don’t really want to keep them on, you know, people might balk and go, all right, we’ll just wait it out for a while, because, you know, you know, he doesn’t really believe in this, and he’ll eventually just get rid of him, right? He’ll, he’ll, he’ll bow to the, you know, the pressure, if the markets don’t recover quite the way we think they will, or, or of the political pressure, or, you know, Republicans in Congress, you know, get weak knees. So I think, you know, actually, to give him a little bit more credit, I think sometimes this trolling also does have a purpose besides the fact he may enjoy the trolling in the first place because you let your opponents note leaner, you know, or your negotiating partners, know, look, I’m not really serious about my position, then that that really undermines your art of the deal. Basically, does it not so. But I think ultimately, you know, he’s not a believer in protectionism, or, you know, like tariffs are somehow the long term path to even domestic growth of industry. So, you know, I think the way to the evidence is, you know, in that and you could certainly, you know, I, you know, I haven’t looked at their formula that you, that you suggest they’re using, and if maybe that is true, I didn’t see that in the executive order doesn’t say that it doesn’t exist, just because it’s not an executive order. But I didn’t get that impression from the executive order. And, you know, ultimately, you could certainly make a cost benefit analysis, you know, case, you know, like, obviously discounted over time, if Trump is doing an art of the deal and he gets a lot of these lower tariffs and other non tariff barriers to trade, putting side, obviously, we can talk about the defense argument too. I think you could certainly make a case, because I think that the world, the WTO and all these things, have just not been doing. They’ve been doing a very bad job, you know, over not just years, but probably decades. Actually, it just hasn’t been really particularly when it comes to non tariff barriers to trade in particular, that I think there’s a reason why Trump and some others are just starting to move to these bilateral trades, because the WTO is just kind of captured by dei and green stuff and all the rest. You know, it’s no it’s no longer devoted to free trade as such,

Gene Tunny  18:37

right? And so do you think that these the failure of the WTO, this is behind the large trade deficits that the US has with China and other countries. Is that the is that the contention definitely

Darren Brady Nelson  18:52

with China, I think, I think it’s huge. I think, I think these trade deals, you know, particularly when they’re like, 8000 pages long, etc, like the, you know, the Trans Pacific Partnership. It’s just a lot of just like, Yeah, you know, we’re gonna help my friends over here. We’ll help your friends over here. We’ll help my friends over here. Blah, blah, blah. They’re not free trade agreements. They’re not even vaguely like, free trade agreements used to be done, you know, once upon a time, I’d argue, you haven’t even had a free trade agreement. You know, maybe you could say, in the early days of these, of these multilateral, you know, gat and stuff, maybe there was some, you know, a period of time where you really were, you know, and probably were moving the in the direction, back in the direction towards free trade. And I say back, because really, since World War One onwards, you haven’t seen much in the way of actual free trade agreements, which used to be very small and didn’t have to say a whole lot, you know, as you’d expect, a free trade agreement too. You know, you’re not sitting there picking winners and losers, which is what they do now. And sadly, you know, they were so keen to get China into the WTO, they just threw all sorts of, you know. Unfair sort of advantages their way. There’s no way Communist China that could do nothing well, all Sun is this, you know, turns into this powerhouse of capitalism purely because they were really good at stuff, or even purely because they had cheap labor, because a lot of stuff that’s going over there is even capital intensive sort of manufacturing and other items, which you know, obviously, over time, China got better at this and that, no doubt, but you know, to suggest, all sudden, almost overnight, China is super awesome at all these things. I know I don’t think so well, what

Gene Tunny  20:37

are some of the unfair advantages you do? You think that China has had thrown its way that, you know, that the White House would be concerned about, what do you think? What is it specifically the Trump administration is concerned

Darren Brady Nelson  20:50

about? Well, clearly, they’ve bought off a lot of politicians. I mean, you know, over the years, you know, to get these sweet deals. They’ve been, you know, the Bidens, the Clintons, the Bucha, over the years, they’ve thrown a lot of money at these people to get kind of sweeter deals. And it’s not always, yeah, it’s not always the stuff you can just pick up the Trans Pacific Partnership and see the bias in there, although you can still see it in there too. But I think it’s, kind of, kind of, if you like, the shady stuff behind the scenes that have been done,

Gene Tunny  21:28

yeah, yeah. I mean, it’d be, I mean, I’m, no doubt there are. I mean, I’ve had guests on this show

Darren Brady Nelson  21:33

labor in Australia, too. I mean, it’s just like, there’s a lot of stuff that’s gone down that’s, you know, it’s been documented. Some people have actually been prosecuted for saying something. Some people have not. So, you know, some stuff, you know, obviously hasn’t gone to court or trial. So you could say, well, that’s just conspiratorial, yeah, yeah, maybe, maybe not. You know, the world’s not sort of, you know, there’s a lot of nefarious things that happen this world, you know, I don’t know why people seem surprised as though, like, this is, you know, everything’s above board, you know. I mean, China’s clearly set out its strategy, and it’s not, oh, we just want to be, you know, just compete in free trade agreements with the world and just be a part of the international community. They fairly well documented their grand strategy in particular, you know, China, I’ve seen particular has so they’re not, you know, they’re not, sort of like, Oh, we’re not going to do shady deals, because, you know, that’s beneath us,

Gene Tunny  22:36

right? Okay, what I would, what I’m wondering about, Darren is, what does this mean for us, consumers and businesses? Because China has become the new workshop of the world. Our mutual friend Dan Mitchell, who you mentioned before, he’s pointed out the tariffs there are tax so you can argue about to what extent the the tax is borne by by foreigners, by by exporters, who might have to cut prices to be able to keep selling to the US or to sell elsewhere. But there’s no doubt that they are a tax, and us, consumers and and importing businesses, will pay more Dan quotes, some estimates that it could cost Americans 2000 to $4,000 reduction in disposable income. What do you think will be the impacts on consumers of the Trump tariffs, please? Darren,

Darren Brady Nelson  23:34

yeah. I mean, I would say that analysis sounds fairly incomplete, because you have to take in in account the whole sort of, you know, gambit of taxes, like the ones that the people who are now paying more tariffs weren’t paying in terms of domestic taxes, you also have to take into effect, obviously, you know, Trump has a huge tax reduction package that’s that’s going to be coming up, so you have to factor that in as well. So to just suggest that it’s just purely tariffs, and there’s going to be no changes to other taxes. So Dan’s right, it is a tax, which means you have to look at the whole sort of like, what’s Trump doing on all the taxes, basically, that are obviously under his disposal at the federal level, of course, and includes, obviously international as well. So again, you could certainly make it a case. I think it’s not unreasonable to, you know, particularly if you’re going to have a trade off and you’re going to have lower income taxes, lower corporate taxes, maybe lower capital gains taxes and that sort of thing, and then you you know, I’m not going to talk about these particular punitive tariffs, but I can see, you know, you know, a sensible level, obviously much lower, once you get, hopefully, people in the room, and you start getting tariffs and non tariff barriers lowered, at least on a bilateral basis, bilateral, bilateral, bilateral, that you could end up with an actual lower tax burden on American consumers over time. Even though you putting aside, like the spike, obviously right now with tariffs. And also you have to throw in the fact the US, unlike a lot of countries, is less reliant on foreign trade than it has historically been. It’s got a huge domestic market, and there’s competition domestically now, again, like I’m saying, in principle, I don’t favor like, hey, we’ll just throw tariffs on because, you know, we want to help out industry a over industry b. Or, you know, domestic industry a versus its its foreign competitors. Like I said, I think in the context of this, I believe this is Art of the Deal. It’s not, they’re not going to keep these in place, they’re going to, you know, massively lower them when they get deals, you know, with each country, China and the EU will probably be the last to come to the table. In fact, I would argue EU will be the very last China will come to the table, much quicker than the EU will, actually, because I think China is so reliant on, you know, you know, sort of, according to the US, I think it’s, it’s, you know, G, G’s pride. At the moment, the EU is a bit different. They, like I said, there’s such a, weirdly enough, I don’t think G. And oddly enough, the Communist Chinese, even though they obviously want to ultimately be the number one power in the world that, weirdly enough, there’s not at the same time, there’s not this kind of decades grown up anti Americanism that you have the EU. So that’s kind of interesting kind of dynamic that’s going to make doing a deal with the EU probably the most difficult. I think, ultimately, weirdly enough, yeah, I know it’s weird. It’s kind of, in one sense, China should be the most difficult, because obviously they want, they want to, you know, supplant the US as the top strategic power. But then you have the EU, you know, with its long standing disdain for American culture, and particularly, obviously, for Trump and mega, Chinese probably don’t, you know, they kind of have, probably have a weird respect for Trump and mega that the EU does not. That’s interesting.

Gene Tunny  27:12

Who is it the Chinese blame for the century of humiliation? I mean, would that be primarily the British because of the Opium Wars? Probably is, I guess

Darren Brady Nelson  27:21

so, yeah, I guess so, yeah, you know. And look, let me put this all in the context of, you know, you know, I was straight up Dan liberty, Dan Mitchell, Libertarian, slash, classical liberal view of tariffs. But the thing is that what I’ve noticed is a lot of people like Dan, and he’s my friend. He’s, you know, he’s turned into a religion, as though, like, you know, like he won’t complain about other taxes so much, but tariffs are, like, sacrosanct, you know, like they’re not, they’re a tax, you know, like they’re not a super special tax, in some sense, you know. You know, they behave like a transaction tax for the most part. And as you mentioned, yes, they get shared between producers and consumers, whether they’re domestic, and in this case, obviously the producers will be the foreign ones. Whereas, you know, normal transaction tax analysis, you’re thinking in domestic context. But that’s fine. It’s, it’s, it’s pretty much the same thing. Well, it’s been on elasticities of supply and demand, obviously, you know, in particular markets, you know how much, which will depend, obviously, on competition versus, you know, how, how much of a cartel type of industry it is, etc. And what you mean, what are the substitutes and compliments, etc? But yeah, I’ve noticed this weird thing. And I think I also had this once about time, like, tariffs, oh, they’re the special tax that you can never, ever do, any ever put on for any reason whatsoever, even if you actually lower taxes elsewhere. You know. So, no, I think, I think that’s kind of ridiculous sort of stance. Well,

Gene Tunny  28:53

I think the point you make about you talked about elasticities. And I mean, if the Trump tariff formula actually had an elasticity or two in it, then you might think, oh, okay, there’s some logic to it. And there is that concept of the optimal tariff for a large country like the US, which can actually affect the terms of trade. So but, I mean, my concern is just how, just the formula that’s been applied, how wide ranging it is. It doesn’t seem I mean, I can’t understand it. I mean, I don’t think they’ll last either. I mean, I think we both agree this is, this is temporary. I have a different hypothesis to why it’s temporary. I think it’s it’s going to be temporary because the people on Wall Street, the people in Connecticut who had got the hedge funds, they’re going to be knocking on the door of the west the West week, saying you’ve got to stop this. This is, yeah, this is costly this week.

Darren Brady Nelson  29:48

Yeah. What’s the sorry, forget the name escapes the who’s the UK Prime Minister that these sort of people pushed out the door fairly? Liz truss, sorry, yeah. Let’s trust Trump is not. Liz truss. They’re not going to be able to to they can come knocking on the door as much as they like. First of all, Trump knows the game as well as they do, right? So he’s he, you know, I’m not sure Liz really understood it as much. And I’d say the US is a much bigger, more powerful country, etc. But also, Trump has almost been killed. I don’t think the hedge people are going to be able to pressure him like you know, maybe they could have in 2017, 1819, but they’re not going to be able to this time Trump. Trump’s sticking to his guns on all these things. Obviously, we’ll talk about Doge as well, but he’s sticking to his guns. I The hedge fund people in Connecticut? No, they got zero influence on Trump. Well, the

Gene Tunny  30:44

benefit, the the what Trump has in his favor is that there’s still a huge demand for US Treasuries, right? There’s still, you know, they talk about the safe asset shortage, so people want to hold US Treasury bonds, because they’re seen as safe. And even, like, if you have global turmoil, people still want to hold US Treasury bonds because they’re seen as safe. So whereas with the UK, I mean people, you know, the people in the markets, go, Oh, we’re, we’re concerned about their ability to repay all this debt, and yeah, we’ll punish them in the in the bond market. So yeah, that’s, that’s really what, what brought down Liz truss? So, yeah, I think he’s a lot in a lot firmer position than than trust. I think he can, yeah, I don’t see any threat to him. I mean, he can’t be kicked out, like Liz truss. I mean, he doesn’t have a he’s in for the next, next four years, isn’t he true?

Darren Brady Nelson  31:38

And it’s actually have said, or the, you know, like, you know, some of the stuff, you know, I mentioned, you know, the kind of the dirty deals and the that are done, you know, I never thought about these things much prior to the 2020s and I probably would have been like, you like, oh, you know, like, you know, kind of like, oh, I don’t know about that. But now here’s the other context, the West globalists. There’s a war against Trump and people like Trump. So this is also and a lot of these people are hedge managers, so there’s that. So they’re trying to make the markets look tanked and make Trump look bad as much as they can as well. So it’s not just purely, yes, there are people literally are scared and whatnot and but there’s also people because, you know, we have BlackRock. It’s not like these markets are. There’s sort of cartel elements to these markets. They’re not these purely competitive markets, and no one’s really influencing it. And this is purely just a sensible market reaction to stuff it. It’s partly that, but it’s also partly people trying to make this happen as well, the black rocks of this world as well. They who are just ardent opponents of Trump, right? And they’re opponents of Trump, they’re opponents of, you know, me lay their opponents of Orban. They’re opponents of all these, you know, these Trump like movements. I know Milo is a bit different, but he’s also, you know, he’s a strong ally of Trump as well, even though, obviously he takes kind of a more libertarian approach that Dan Mitchell would approve of in Argentina. But they’re both on board with fighting, sort of the globalists, right? The Black Rocks, the the weft and all that sort of stuff.

Gene Tunny  33:19

Darren wasn’t Wall Street, weren’t BlackRock and Ray Dalio and all the hedge funders. I mean, maybe not Dali. I can’t speak about him specifically, but my impression was that they were all in favor of Trump, and the didn’t the stock market have a bit of a boost when he got elected. So, I mean, people, people that you’re talking about, were actually excited about Trump, but now they’re not, because they see that the diet, the adverse consequences these tariffs. Did you see Jim Craver Cramer was on with Aaron Burnett on CNN the other day, just saying, What madness it is. I mean, the I just can’t understand that argument. I mean, wasn’t

Darren Brady Nelson  33:54

Wait a second. When were they on board? I don’t I never heard them release statements Well,

Gene Tunny  33:59

I mean, well, the markets were, the markets got a boost when Trump was elected, and when he and he is Trump, was actually claiming that. Well, he was claiming credit for the markets going up when they were starting to think that he could get elected. So, yeah,

Darren Brady Nelson  34:13

look, he does, you’re right. I mean, all politicians start doing that. They claim, you know, markets go up purely because of them, and then when they go down, that’s not to do anything with them. Obviously, it’s a mix of both. But no, there’s the black rocks. And people have never been on they didn’t also turn to Trump, you know, this time around, he has, you know, this is like a drop dead war to the death, almost, you know, actually, literally, maybe also death, you know, between sort of globalists and the kind of, like the nationalist sort of movements of Trump and Orban and Milo and people like that. I don’t know why you’re smirking at me. This is fairly

Gene Tunny  34:53

honestly, Darren, I don’t, I don’t understand. And I mean, most of these people just want to make money, don’t they? I mean, I don’t know about this. Whether you how you can call them. Maybe they they’re more, yeah, definitely, they’re going to be more in favor of, you know, free or globalization, than, say, the people in the current White House. But I just, I just can’t understand this well, I think deliberately crashes the market. That doesn’t make any sense to me. We’re talking

Darren Brady Nelson  35:19

about Soros did the exact same. Soros, back in the day, did the same thing, not for some market driven purposes, for his political agenda. Soros did this, you know, once upon a time. So these people, I mean, Bill Gates, is long removed from like, Oh, I’m just trying to make a profit at Microsoft. I mean, they’ve moved on from this. They have other agendas that they’re using their wealth for. This stuff’s pretty well documented, and it’s not documented on fringe websites. It’s documented fairly well, you know, maybe not on CNN, but it is documented on Fox Business and plenty of other sort of websites like that.

Gene Tunny  35:59

I think if you can send me some links to that. Darren, I’d appreciate it. Yeah, honestly, I’m, I’m skeptical. But look, it just doesn’t, it just doesn’t appear that. It just doesn’t make any sense to me that they would want to crash the market in that way. There are a lot of people who, from what my impression is that there are a lot of people on Wall Street who are mad at Trump at the moment because of what’s happened in the markets due to his tariff announcement. So these

Darren Brady Nelson  36:27

people support, you know, the COVID restrictions that I mean, this little mini crash from Trump and his tariffs is nothing compared to what happened, you know, under the very end of Trump and, you know, for another, you know, the first year or so, Biden and these people were very supportive, yet they were getting smashed in the pocketbook. Were they not? So people aren’t just motivated purely by profit, and even people in Wall Street and et cetera, aren’t just purely profit, particularly if they have kind of, you know, obviously, if they’re not in a position where, if they lose right now, they’re gone. You know, as long as they can recover and they have other purposes, and they can have other influences and and hopefully make a buck, obviously, as well as, you know, pursuing, you know, what are their sort of broader goals they have, like a Bill Gates or, or George Soros or, you know, Larry Fink, because they all have broader goals and, and, you Know, weff in particular, you know, their website sets out those goals, and they’re not just to, oh, let’s we want more free trade. That’s not their goal,

Gene Tunny  37:29

right? It’s the great reset you’re talking about. We had an episode on the the great reset a while back. People

Darren Brady Nelson  37:34

always go like, they go like, Oh, I’m skeptical. And then I immediately send them the link to their actual website that talks about the great reset. It’s like, it’s that it’s not like a crazy conspiracy theory. They set it out quite clearly. What they’re trying to do,

Gene Tunny  37:46

what I’ll do is, I’ll put a link in the show notes to our chat about the great reset, and because I think we had a good conversation about that a few years ago. So just finally, on the tariffs, Darren, you you mentioned, you know, other considerations, or other considerations, I presume you’re talking about national security. What do you see a national security aspect to these tariffs?

Darren Brady Nelson  38:12

Yeah, I think there is. I don’t think that’s the main one. Obviously, if you go through the big list, you know, there will be for China, without a doubt that that’s actually with China. It’s, that’s, that’s actually maybe the number one reason, actually with China. I think you can probably, you know the notes, you know where Adam Smith sets out the three exceptions defense is not before he tried to free trade. Yes, yeah, where he sets out the exceptions to free trade, you know, where it is legitimate to do, you know, tariffs or whatever else, right? So defense is number one, and then the next two are almost kind of the same thing, a little bit different. The second one’s the reciprocal, you know, straight up reciprocal. And the third one is the punitive one. And he sets out for a goal, though not punitive, just to be punitive, obviously punitive to then get them back to the negotiation table, and then, you know, open up both markets, if you like. Are, you know, more than just two markets, perhaps. So Adam Smith sets out the himself, sets out the reason for the punitive tariffs, right? So, you know, which we obviously spent a lot of time on previously. So you know, Adam Smith himself, who is obviously against mercantilism, if you like mercantilism, obviously thought like this was a good long term strategy, right? You know, mixed in with the concept of, like, we want lots of gold and all that sort of stuff. But that’s obviously not an issue nowadays. So, yeah, defense definitely it. You know, I’ve surprised in recent years to learn that just the amount of stuff that, you know, the US military relies on China for, you know, inputs, it’s that’s just like, No, it’s like, it’s one thing to rely on Canada or Australia, obviously, or even like countries that may not be your allies, but aren’t literally. Your rivals and could be your enemies overnight, you know, if something went, you know, you know, in Taiwan, if something happened, for instance, which, of course, the US doesn’t rely on Russia in any way, for, for, you know, defense related inputs, but it does for from China,

Gene Tunny  40:17

right? Okay, so national security. I mean, this is interesting that you think that’s, I mean, that’s part of it. But the the biggest story is you think that you agree with Trump, that you think America is getting ripped off. I mean, I’m just trying to understand what the what is it? How are they getting ripped off? I mean, what’s, what are the consequences of that, that jobs and factories have gone overseas, and the idea is to reassure those jobs and factories, is that the idea? Well, look,

Darren Brady Nelson  40:43

you know, I think it’s partly that. I mean, I’ve just purely as an, you know, you know, the evidence I’ve seen, you know, has looked like the US has done a lot of bad deals that that have, if you’ve like, skewed things in favor of Mexico, in favor of Canada, even in their, you know, their overall North American agreement. But more importantly, obviously, you know, through the WTO, things skewing towards China and other agreements. So, you know. So I think they are trying to rebalance, you know, basically, in a nutshell, to others like, you know, look, I can’t speak for Navarro. And all his views, I think you seem to know a lot more about you know him, and you know where he comes from than I do. Maybe he’s got something, a grand strategy that’s beyond just, hey, let’s kind of, you know, level the playing field, you know. I think this is ultimately just kind of aimed at that, because I don’t think you know Trump, or you know, a lot of Americans don’t feel as though they can’t compete if the fields you know more level than it has been in recent decades you know, particularly from you know, probably Clinton onwards, perhaps longer, but at least since then. So you know, that’s, that’s my take on it, that, you know, ultimately these punitive tariffs and putting again, defense to the side for the moment, defense is a different issue, and I think you’ll have to treat it separately. But of course, you know, you can get, you know, obviously the there’s a danger the military industrial complex claiming things are skewed. You know, you know that things are important to them when maybe it’s not. So there’ll be a lot of you know that obviously this will have to be looked at closely to make sure that it’s not just you end up just protect, if you like, really end up just protecting industries over a longer period of time, rather than, you know, having really good, you know, national security reasons for, for, you know, sort of like taking, you know, so making it hard for China to have an input into, you know, this or that particular, you know, crucial security or defense aspect,

Gene Tunny  42:50

yeah, okay, okay, Darren, I think we’ve chatted plenty about tariffs for the time being. Let me it is totally out of the deal. Yeah,

Darren Brady Nelson  43:04

go ahead, yeah. Look, I think this is, you know, something about this tells me I’m right when, when people get, like, just overly emotional about it, like, particularly economists. I kind of kind of not saying you but, you know, but I’ve been talking to libertarian and classical liberal economists, and they don’t even want to consider that. You know, that maybe these trade deals have not been very good and skewed. They don’t want to consider that. They don’t even want to consider that this is Art of the Deal. They don’t want to even consider that the Trump is anything but a protectionist. They don’t want to consider that tariffs, oh, yeah, their taxes. Remember, their taxes, you know. Thus, let’s look at the overall tax mix, including tariffs. They just have, like, this is like a sacred cow. You can’t ever put a tariff up for any reason or put a tariff on even if you can actually say, you know, these Adam Smith reasons, defense, reciprocal, punitive, to then recapture a more free trade arrangement. I’m surprised at the amount of people who they have such emotive responses to it. And they’re not. They don’t go, oh yeah, okay, let me consider this, you know, or you know. Okay, fine, show me some of the evidence for that, etc. No, there. It’s usually a very visceral reaction right away. Perhaps 10 years ago, I might have had the same or maybe seven years ago, I might have had the same reaction too. Well,

Gene Tunny  44:29

that’s what I’d like to see. I’d like to see what is that evidence that that is being claimed, that of these skewed trade agreements, I think it would be good for for the White House to put that out and then have more targeted. I mean, if the genuine reciprocal tariffs, or if they’ve got a beef with a specific country, then then actually, you know, provide the evidence for that, and rather than just what they’ve done. But look, if you’re saying, look, I mean, maybe it is out of the deal, well, I don’t. Know what’s going on in Trump’s head? Yeah,

Darren Brady Nelson  45:02

look, I would, I think, I think, I think you may have relied too much on reporting and what they’ve done. I think, look at that, go, go to the source, and I sent you the link to the White House, their whole, you know, the executive order, plus their whole rationale for that order. And then, you know, judge that alongside of the commentary of whoever else.

Gene Tunny  45:24

Okay, right? Oh, Darren. I think we’ve chatted plenty about tariffs before we better get on to Doge. Elon Musk is, I think he’s finishing up his what was it 130 days as a special government consultant. And I mean, what’s your assessment of how Doge has performed? It’s been controversial. There was a whole, I mean, USA ID was shut down. There are concerns about what that means for Well, for the countries that it used to support, there are concerns about what it means for us soft power around the world. What’s your assessment of how Doge has performed,

Darren Brady Nelson  46:03

they’ve actually opened my eyes. They’ve actually performed better, you know, even though they don’t, you know, it’s not like, you know, typically, you know, if they, if the White House would have asked us, you know, hey, you know, you know, let’s see. We probably would have got a team of economists or whatever. And there’s nothing wrong with that. Of course, that’s typically how it would be done. But it’s interesting in this, you know, given, yeah, it’s interesting that they’re the tech people, the tech gurus that they got, and they AI wizards, I’ve been, you know, and I’m not a, you know, I’m a skeptic of AI like, you know, and this kind of tech in general, you know, like, I’m kind of like, you know, sure, I have to use tech, and I’m not like, against AI or anything like that, but, you know, I’m skeptical. And I’ve been like, they’ve kind of opened my eyes, like, wow, the stuff they found and how quickly they found it, and how broadly they found it. And then, you know, I was also like, you know, when the first thing they went after it was us a ID, and I’m glad you pronounce it that way, because I used to go USAID, and because it gives it, it gives it a sound of because it isn’t really a foreign aid organization. That’s the thing. I thought it was too It isn’t that, you said soft power. That’s being kind, that’s being very kind to what they do, you know, the, you know, Clinton Foundation and all the other stuff that they fund. I’m not sure. You know, it’s not quite the foreign aid organization that people kind of thought it was, including me, the the amount of Basic Black Ops, political black ops that this thing funds is like that surprises me, too. I didn’t realize that’s what it largely does. You know, for every mosquito net that it may provide in Africa, it’s that’s like, that’s mini skill for what it actually really does. So it’s not just that it’s inefficient and waste, if you like, wasting taxpayers money. It’s, again, it’s far more nefarious than even I kind of thought it might be, to be honest. So now understand why they went after it first. It wasn’t purely like, yeah, you’re wasting taxpayers money on this or that, including, you know, political donations and all these things. And of course, to only one side, it’s far worse than this. So I’m impressed by that, and also things like, you know, finding even though, obviously, social security isn’t really something that you know was going to be a reform target for the Trump administration, in fact, they kind of said the opposite. And obviously, pretty much Republicans and Democrats have said this for decades. We can get onto this, and I think they should just copy the Australian reforms in the 1990s they’re not perfect, but, boy, they’re pretty darn good by comparison. But anyway,

Gene Tunny  48:53

this is, you mean, the individual retirement accounts, superannuation, superannuation, yeah, it’s not

Darren Brady Nelson  48:59

perfect, you know? And then there’s the labor unions and all the, okay, it’s not perfect, obviously, but, you know, it’s, it’s, you know, the US Social Security Systems, clearly, the worst system in the Western world, it seems, as far as I can understand, but, but, you know, Doge is just targeting the the weird stuff, like, Why do you have people on the rolls that are 160 years Old? Clearly, no one is 160 years old, right? So, you know, all that sort of stuff, you know. And as if we went in there, we probably it would have taken us forever to get to that sort of stuff, right? You know. No, no, I think you know, over time, you know, Doge, if they keep it around, I think they need to, obviously, bring in economists and you know, and hopefully they’ll work closely with OMB, which they probably are, I’m not, you know, I don’t know, in Treasury, although the US Treasury doesn’t quite have the same broad role that the Australian Treasury does. You know, it’s very much focused on tax and debt, not so much spending, which is weird. I kind of was surprised to find that the US Treasury doesn’t. Even though they dole out money, they they leave it to OMB to do that, right? So that’s kind of what OMB kind of focuses on, spending and stuff like that. Well,

Gene Tunny  50:10

yeah, I’ll have to look at the specifics. I thought, how they how Doge has been so successful, is that they actually, no, I’m saying that it’s part of Treasury.

Darren Brady Nelson  50:18

Your Treasury doesn’t focus on, they have the data, but they’re not like the way that you’ve worked in the Australian treasury, yes, and state treasuries, you know, they’re heavily involved in what gets spent, right? You know,

Gene Tunny  50:33

yeah, to an extent. I mean, you

Darren Brady Nelson  50:35

know, by agency, by agency, there’s a, there’s a negotiation process, yes, yes. They don’t do Treasury doesn’t do that. It’s they kind of leave it to OMB to kind of do that in along with the Congressional Budget Office. And, you know, it’s kind of a, it’s a, kind of a different sort of system. But yeah,

Gene Tunny  50:52

from what I saw, that they were able to tap into some Treasury system that gave them really amazing data on all of the payments going out from US government. It’s quite extraordinary, and that’s how they’ve been able to be, you know, do as much as they’ve done.

Darren Brady Nelson  51:07

Yeah, Treasury has got data, but it’s weird. It’s like they have it, but they’re not like, they don’t actively use it, and they’re not involved in the process of spending like an Australian Treasury is, or even the Queensland treasury. So, but you’re right, yeah, they, yeah, I understand, you know, I’ve seen some of their data, which is public, obviously, and obviously, Doge has got access to much deeper, and I’ve data than, than what we can get at the public level. Yeah, yeah. Okay. So I’m impressed by just, you know, just the way they get, you know, even when, when, when, you know, the the Republicans in Congress were going to go along with this ridiculous, you know, spending budget. And, you know, Doge got onto it really quickly and went, Wait a second. They found all this stuff really quickly, you know, like the speed and the depth and this, you know, scale and scope. It’s like, it’s fairly impressive. Now, ultimately, when they kind of do the report, you know, by the Fourth of July next year, maybe it’ll probably come out on the Fourth of July, I suppose, you know, it’ll be a grant, you know, kind of a ribbon cutting exercise, maybe, type of thing, you know, if they continue to carry on, or whatever, however they hand us over, maybe to OMB. Then, obviously, OMB has got plenty of economists, you know, but I’m impressed by the tech people, and I still think they should be involved and rolled into an OMB and a Treasury or whatever CBO, because, you know, they’re, you know, quite impressive. What they can do so quickly, just on going

Gene Tunny  52:43

back to us a ID, what evidence is that they is there that they are running Black Ops? Is that just a Is that for real, or is that just a talking point from the doge folk?

Darren Brady Nelson  52:53

No, they said it out. They said they put out a great detail. They give you the numbers and stuff. You know, you mentioned the Treasury data stuff. They weren’t, yeah, they’re not. Such as a talking point. Obviously, it gets turned to a talking point for both sides, you know. You know, one side who says, yeah, and then the other side goes, no, that’s not the case. No. Doge, I found that, you know, they don’t just talk they they provide data, you know. And yeah, like I said, I didn’t, you know, like, six months ago, I didn’t, you know, I didn’t have a particularly strong view one way or the other, towards USAID, to be honest, you know, you know, except for, like, just the broader argument that a lot of economists have made, how foreign aid just doesn’t really work. It’s not, you know, East Asia and other places. You know, using market reforms has done way better than Africa, South America, etc, through this, this, this foreign aid. You know, plenty of economists have documented that, you know, conceptually. So, you know, I guess I had that view of it. But, you know, I was surprised that it really wasn’t really much of a foreign aid, you know, outfit, which is why it’s officially called a ID and not actually aid. You know that lot of people are careful not to call it US aid, to make it sound like a straight up foreign aid organization, which I didn’t know really, to be honest, I was kind of surprised too, you know. So they kind of opened my eyes at the, you know, corruption, which is beyond just inefficiency and waste, you know. I think you know, when it comes to corruption, that should certainly be the number one target. Then, you know, waste, and then you know, just kind of efficiencies, if you like, third. And I kind of miss that. I missed that kind of the corruption element of things, I suppose, I guess I realize that there’ll be elements of government that are corrupt to whatever extent, and fraud too. Obviously, that’s what they’ve been highlighting at the Social Security Administration, not suggesting the Social Security, you know, the SSA are fraudulent in them. Cells, but they’re being taken for a ride at times, I think, is what Doge was suggesting, right? It might

Gene Tunny  55:08

have to come back to Doge and have do a bit of a deep dive on some of these, yeah, some of these issues. Just, just so, yeah, I better do, sounds like, I better have a closer look at some, you know, some of what it’s found, and just try and figure out what’s going on. All right, just before we go, Darren, I gotta ask you about the Wisconsin special election. So the Democrats won is the US falling out of love with Maga

Darren Brady Nelson  55:32

no Wisconsin’s kind of Wisconsin’s always weird, but it’s a purple state. It does these weird little swings. It’s not a referendum on Trump. I mean, two things, it’s certainly, I guess it’s a silly referendum on some of Trump’s supporters of Wisconsin who couldn’t be bothered to get out to vote. And I think it’s also a referendum. The weird thing, because I was involved, you know, I did the Trump sort of campaigning stuff last year, and it was all hands on deck by, you know, all sorts of organizations. It wasn’t all hands on deck this time for the Supreme Court, even though it’s very important, because it has national consequences. Basically, the Republicans could maybe lose two seats in the house because of this? Right? Yeah, right. Two seats in the house, in the House of Representatives, not talking about the state legislature. Talk about the in Washington, DC, right? So, and some other stuff too. There’s other things, important things that you know, the Wisconsin Supreme Court will decide on that that have, obviously, state significance, but they also will have, you know, some federal significance too,

Gene Tunny  56:42

because of the boundaries. Is it the electoral Yeah,

Darren Brady Nelson  56:45

you know, gerrymandering? Yeah, both parties do it, but you know, that’s Australia did the same thing. It’s not like no one’s clean on the gerrymandering thing, but so, yeah, gerrymandering, essentially,

Gene Tunny  56:59

we turned it into an art here in in Queensland, I think we were the best at it for a while. Some of those large, all of those regional like we had these huge electorates in the cities, but the these electorates in the in the regions with far fewer people, and so, yeah, there are many more regional members that are the city. It’s

Darren Brady Nelson  57:19

exactly the same thing Wisconsin. That’s the Democrats complain that that that’s the case. The Republicans are, you know, making it a bit too suburban or rural and not urban enough. And, you know, so, yeah, so, yeah. So, so, basically, so, two things, you know, the trump the mega supporters, they didn’t take the election seriously enough. They didn’t come out. And also the various groups, even the one I was involved with, we didn’t get started till the end of February. This is something that should have jumped in by the bare minimum, the beginning of January, probably really mid November, you know, like once Trump won, get stuck into it, because this was such an important election, I’m not gonna, you know, I won’t blame the Schimmel campaign, because, you know, they only have, you know, they certainly attracted a decent amount of money, you know. And obviously more money was poured into Schimmel and Crawford. These were the two opponents, Brad Schimmel and Susan Crawford. So Brad Schimmel was the Republican, Susan Crawford was the Democrat, with the weird caveat of, they don’t actually officially run as Republican and Democrat. You know, kind of how they do at, you know, like City Council like Brisbane, yeah, and in the US, they had the same convention that council level, they don’t officially run as Democrat or Republican. But you kind of figure them out fairly quickly. Although you do get at council level here, you do get some people literally aren’t either party, you know. They’re just people who’ve been in the community, like I mentioned, wabatosa. There was this guy I kept on seeing his sign up, and he was the only person I saw his sign up next to Schimmel and next to Crawford. At times it’s like, Who is this person? Like both sides, like him, you know. So he’s got to win. He was just kind of a local guy sort of thing, you know. So, so anyway, so it was combination of, yeah, they didn’t get out the vote early enough. They didn’t make, you know, an effort. They poured a lot of money into stupid TV ads. I think that everybody on both sides complained. Were just awful. You know, from both sides, everybody, like that was the feedback I was getting. It’s like, no one liked anybody’s TV commercials. They just weren’t very good. So, anyways, yeah, but, but what did get up is the voter ID constitutional referendum, the Wisconsin State Constitution. So that will be in the Wisconsin State Constitution that you will have to have voter ID. Now it’s also in the context of there already are voter ID laws here, right? Yeah, you can change laws, right? So, and the Democrats were looking to change those laws to not have voter ID. Basically, um. Which, you know, does seem weird, because, you know, even labor, I don’t think has ever suggested that you shouldn’t have voter ID, have the greens. I wonder if the Greens have ever suggested that.

Gene Tunny  1:00:10

I’m unsure. I honestly don’t know. I mean, the greens are more I mean, they’re, yeah, they’re focused on the big issues for them are obviously the environment, but also housing affordability. I mean, housing affordability is pretty dire here in Australia at the moment. And I mean, the Greens have a lot of policies on that. I don’t think they’re the right policies, but at least they’re, you know, they’re concerned about it, and they’re and they’re, you know, they’re making a lot of noise about it. So, yeah, I mean, we’re having an election that’s coming up on third of, think it’s the Third of May. It’s early May. So, yeah, I don’t know if you’re keeping an eye on that, Darren, if you have any thoughts on what we’re in for over here.

Darren Brady Nelson  1:00:50

Yeah, look, I don’t have strong thoughts on it. I have, you know, kind of fairly shallow thought because it, you know, it’s like, I mean, obviously, even in the internet age, obviously, I have access to all the same information as you do sitting in Australia as you do with the US. But it’s funny, when you’re not sitting in the country, you just, there’s kind of you just don’t soak the stuff as much. So, you know, look, I obviously listen to, you know what? You know friends like you or or mutual friend, Alex Robson has to say about, you know, what he thinks about the election and others. So I understand it’s, well, I don’t know. It’s kind of going back and forth, is it not? My feeling is Dutton will win, or, you know, Dutton, it’s not like Dutton literally wins, obviously, but the Dutton government will win. But, you know, maybe scraping it in, I guess it will be a landslide mandate sort of thing. Anyway, it’s

Gene Tunny  1:01:43

actually swung back to the government, to the Labor government, being returned, at least as a, probably as a minority government with support of TEALS, those, you know, those independents.

Darren Brady Nelson  1:01:57

I think dun will still win. That’s all I’m saying. Yeah. Okay, interesting. I think you’ll still win, because the poll, the polls, they’re always a little bit biased against conservatives. Right now, that’s on steroids in the US, right particularly when Trump’s on the ballot. You know, the polls are just like they were wrong. They were dead wrong. They were, they weren’t even close in the US right now, I’m not saying they’re like that in Australia there, but they are skewed and biased a little bit away from conservatives in Australia as they are, I believe, in UK, Canada. So I think you need to factor that in a bit. It was scomo. I mean, like scomo the other he’s got, you know, really not much of a chance. You know, now,

Gene Tunny  1:02:42

was seen as a bit of a disappointment in the end, I think so. Oh no, no,

Darren Brady Nelson  1:02:47

I agree. I mean, I’m not depending scomo How he performed, what he actually won, yeah, but he was, he was not, he was not, you know, favored in the polls very often, right in the lead up to that election.

Gene Tunny  1:02:59

Oh, not to for 2019 That’s right. He, that was a, that was a real surprise. He, he had a good campaign in 2019 but in 2022 I think

Darren Brady Nelson  1:03:08

everyone, well, I’m talking 2019 sorry, yeah, early 2019 Yeah, yeah, just Yeah. I mean, the mainstream media is left leaning. It just is, you know. And their biases, you know, come through, you know Murdoch? Yeah, Murdoch’s in the middle. He’s not right wing, he’s not left wing. He’s murdered Rupert Murdoch, that is, I’m not. His kids are left wing, lock Lachlan and all the rest. But, you know, give Rupert credit, you know, he’s a, you know, he talked about, you know, he said, Oh, Wall Street, you know, these people just want to make a profit. But that’s Rupert Murdoch, to be honest, you know, like he’s backed left and right over the years. I don’t see him as an ideologue. He owns more left wing publications than he does right wing ones, you know. And it was Roger Ailes, you know that, you know, kind of was the brainchild behind Fox News. Murdoch just saw an opportunity. Like, wait a second. I mean, he’s not blind. Freddie, you can see all the mainstream media was all left, left wing, right in the US at the time, and the new cable. Well, CNN wasn’t all that left wing back then. To be honest, they were. They kind of did actually have a decent mix back in the day CNN, but he certainly saw a market for a rate leaning cable TV, Fox News, you know. So I’m not

Gene Tunny  1:04:27

sure what left wing publications you think Murdoch owns, unless you’re claiming the Times and the Wall Street Journal are left wing. Oh,

Darren Brady Nelson  1:04:36

he owns lots of stuff around the world. He still own a lot of stuff that lean left. You know, I’m not sure if he, if he’s divested of some of that stuff over the years, the times, sorry, what did in London? Yeah, he owns the times. That’s, that’s that leans left. Yeah, definitely. And the Wall Street Journal is, at best, a neocon sort of Reg, um. Of it’s basically a combination of neocons and Neo Neo liberals. So whether you call that left or not, I don’t know, but it’s certainly there hardly free marketeers at the Wall Street Journal.

Gene Tunny  1:05:13

Certainly everything’s nothing’s like it once was Darren. I mean, it’s we live in, live in interesting times, don’t we? Right? I think we’ve, we’ve had a we’ve had a good chat of, I think it’s, it’s good to catch up with you on tariffs, and what’s been happening with with Doge, and your experience in Wisconsin, your your story about the turkey, I’ll have to look out for them. I mean, we have those little bush turkeys in here, scrub turkeys in Brisbane, you’d be aware of, but you wouldn’t get cornered by one of them for 10 minutes.

Darren Brady Nelson  1:05:49

I’ve seen, you know, my, my, my niece’s cat chases those things around. So no, you know. Do you have any, you have any views on the the Canadian election?

Gene Tunny  1:06:00

No, I think it’s extraordinary. Mark Carney was it was parachuted in. I did, didn’t see that coming. I don’t follow Canada closely enough. I know that he could get a benefit from the spat with the dispute with the US. I mean, that could actually help him out, couldn’t it? I mean, that could help the liberals in in Canada, yeah, yeah.

Darren Brady Nelson  1:06:22

Actually, the person who saw that, apparently, and probably not the only one, but, you know, some years back, was a Tucker Carlson, how’s that, right? Yeah, yeah. He saw that, yeah. He saw that, that he’d probably be parachuted in for Trudeau at some stage. Yeah. But interesting enough, it seems that the, you know, the opposition leader there is, he’s, he’s doing an uncomfortable game of, you know, trying to be, I’ve seen the conservative alternative a little bit Trump, like on certain issues, but on tariffs, not like Trump, you know. So it’s, it’s not going to be an easy balance for him to do, I imagine. Yeah, well,

Gene Tunny  1:07:00

lots of fascinating, fascinating things to always talk about with you, Darren. I really enjoyed the conversation. Anything you want to say before we wrap up, you can have the final word.

Darren Brady Nelson  1:07:11

Okay, well, look, you know, I predicted shimmel And I didn’t get that right, you know, hopefully I’ll be better on Dutton and the Canadian election. Because, you know, yeah, I hope, I hope those two governments win, but we’ll see what happens.

Gene Tunny  1:07:26

Well, I hope you’re right about the art of the deal, that’s all. I just hope this is part of his negotiated strategy.

Darren Brady Nelson  1:07:32

Well, yeah, I am too. I’m no supportive, like you have tariffs for tariffs sake. No,

Gene Tunny  1:07:38

yeah. Okay. Very good. Darren Brady Nelson, thanks for joining me. I really enjoyed the conversation. Thank you.

Credits

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

Categories
Podcast episode

Efficiency and Externalities: A Q&A on Market Failures – EP254

Show host Gene Tunny responds to listener feedback about the private versus public sector’s role in wealth creation, particularly addressing externalities like environmental harm and whether governments should fund facilities like Men’s Sheds. He also explores the efficiency of the private sector compared to government spending, weighing the evidence on both sides.

If you have any questions, comments, or suggestions for Gene, please email him at contact@economicsexplored.com  or send 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 Apple Podcast and Spotify.

Timestamps for EP254

  • Introduction (0:00)
  • Externalities and Market Efficiency (4:47)
  • Government’s Role in Addressing Externalities (11:30)
  • Coase Theorem and Market Failures (19:43)
  • Government Spending and Efficiency (26:31)
  • Men’s Sheds and Government Support (32:51)
  • Scott Prasser’s Critique of Government Spending (39:43)
  • Balancing Government and Private Sector Roles (45:49)

Takeaways

  1. Externalities in Wealth Creation: Private markets can overlook externalities such as pollution or public health impacts, justifying government intervention in some cases.
  2. Incentives for Efficiency: Due to market competition, the private sector generally has stronger incentives for efficiency, while government projects may lack the same discipline.
  3. Government Spending Criticism: Many government projects, particularly those done for political reasons, are inefficient and do not consistently deliver expected benefits.
  4. Cost-Benefit Analysis is Crucial: Government spending should be evaluated through thorough cost-benefit analysis to avoid wasting public funds.
  5. Coase Theorem and Market Solutions: While private negotiation can theoretically resolve externalities (as per the Coase Theorem), it typically does not work in practice due to high transaction costs and imperfect information.

Links relevant to the conversation

Relevant previous episodes:

Government vs Private Sector in Wealth Creation:

https://economicsexplored.com/2024/07/05/government-vs-private-sector-who-generates-wealth-ep247/

White Elephant Stampede:

https://economicsexplored.com/2022/10/17/white-elephant-stampede-w-scott-prasser-ep161/

Coase theorem paper – “Does the Coase theorem hold in real markets? An application to the negotiations between waterworks and farmers in Denmark”

https://www.sciencedirect.com/science/article/pii/S0301479711003331

Urbis review of Men’s Sheds:

https://www.health.gov.au/sites/default/files/documents/2022/01/review-of-support-for-the-men-s-shed-movement-current-state-report_0.pdf

Beyond Blue Report on Men’s Sheds:

https://mensshed.org/wp-content/uploads/2022/05/Ultrafeed-beyondblue-Mens-Shed-in-Australia-Final-Executive-Report-2013.pdf

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Transcript: Efficiency and Externalities: A Q&A on Market Failures – EP254

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.

Scott Prasser  00:03

The governments love to, love to announce iconic projects. When 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 and visions. Thank you very much. It’s usually the wrong ones, and so it’s this thing of meeting the electoral demand to be doing something, instead of saying nothing can be done. Okay, that in some cases it’s not government’s responsibility to do it, and if we do anything, it doesn’t, doesn’t have any effect.

Gene Tunny  00:40

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 and welcome to the show this episode. I want to respond to a question from a listener about a recent episode, government versus the private sector who generates wealth. And then I also want to respond to some feedback from another listener about a previous episode. So I really value getting your feedback and your questions. It all helps me think about what I should cover on the show and the types of guests you want to hear from so please keep it coming. You can get in touch with me via the contact details in the show notes. So yep, I’d love to hear from you before we get into it. Thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners. Details are in the show notes. Okay, the first thing I want to do is to cover a great question that came from a listener named Mark. I’ll read out the email that I received from Mark. I’m a non economist in the Queensland public service, and as such, very much. Enjoyed your recent ish episode, government versus private sector who generates wealth? One of the arguments in the podcast was that consumers demonstrate how much they value goods and services produced by the private sector in their purchasing decisions, and that these purchases are evidence that the sector is generating value for the public sector, though it was pointed out that government spending is often inefficient and can even create a net loss, for example, because of poor discipline on business cases or spending. And Mark goes on to note, this seems to be comparing the Theory of Value slash wealth creation in the private sector with the practical realities of it in the public sector, and it ignores the externalities in private markets. Is it fair to say that, in practice, the private sector can produce profits and services that create harm to society, ultra processed food, tobacco products that cause environmental harm, etc, and this needs to be factored into an evaluation of its ability to generate wealth. And Mark goes on, this is a bit of a long winded way of raising an old argument. I guess. The response is, these harms are a result only of market design, and companies are merely following the incentives placed upon them. I’d be interested in your views, including, how do you think government should respond to the issue? So that’s a very good question. And I thought, yep, I should respond to this in the podcast. So my my quick answer to Mark’s question is yes, it is fair to say that the private sector can produce products with harmful effects. And Mark indeed gave some examples there, and he he mentioned the important concept of externalities. So these are external costs on to others other than the parties to the transaction so things like pollution, etc, or it could be cost to the public health system. So people, you know, if they smoke too much or they drink too much, then that will end up costing not only the individual who makes the choice to do those things, but others in. The society. I’ve covered externalities in previous episodes, but I probably should have mentioned them in the government versus the private sector episode, because, yep, they are an important qualification to the presumed efficiency of market outcomes. That’s absolutely correct. What I might do is I might play the segment from the episode that Mark has asked about, just so we can, I can think about exactly what I said, and we can talk about that, and can provide some more more commentary on in response to Mark’s observations and his questions. Okay, so let me play the relevant clip now. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about the significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There have I mean, there have been those botched privatizations in the UK, for example, particularly in rail and it looks like water, so I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that well, I mean public sector unions, for example, or construction unions, which where they Have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programs and spending. I think that is something that is worth thinking about here. I should make the standard point that economists always make, that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programs and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise. A simpler type of analysis, but we should be thinking whenever we’re spending money on on government goods as government purchases of goods and services. We should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting to benefit to cost ratio above one, a return on investment, we’re effectively burning money the government is then detracting from the wealth of the community, in my view, because that money would probably would have been Better if that activity was not done if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. Okay, so that was a clip from my government versus the private sector episode, and that’s what Mark was was asking about. Now, even though I didn’t explicitly mention the concept of externalities, they may have been in the back of my mind when I was when I was talking there, particularly when I was talking about the need to consider all relevant costs and benefits. I’ll note that I did try. Talk about the externality, or I’ve talked about externalities, and specifically the externality relating to greenhouse gas emissions in another recent Tish episode. So episode 243, the revival of industrial policy. Should governments pick winners. So what I might do is I’ll play a clip from that episode, because I think it, it does help provide that fuller picture when we’re thinking about government versus the private sector. So I mean my presumption, and this goes back to Adam Smith, right? I mean that if you’ve got two parties engaged in in trade or in exchange, you assume it’s mutually beneficial and that it adds to the well being of the community. Now, of course, if there are third parties that are affected, then that presumption is won’t be won’t be realized. I mean, we have to think about how these the actions, how the trade, how the exchange, could affect third parties, and particularly if there’s no scope for them to negotiate, for the third party to come into the negotiation, whether because of, well, there’s a lack of knowledge or there’s transaction costs involved. So what I’m alluding to there is the Coase theorem, which I might talk about after I play this clip. Now, what government should be doing is, to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality, which is the idea of a carbon price. And you know, you can do that in various Well, a couple two main ways. You can have an emissions trading scheme. You can, you can create a market, and then you have a carbon price that falls out of that. Or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions, or and CO two equivalent emissions. Now you know that most economists would say that is the best way to do it if you’re going to do something about it. And you know that’s sending the signal to the market that there’s a cost to the environment of of this pollution. And you know, you leave it up to the industry to sort out the most cost effective way to reduce those emissions. You don’t go and, you know, actively promote particular solutions and and in Australia, there’s a there’s a growing concern that maybe we’ve been pushing too hard on renewables policy measures and subsidies, etc, have favored renewables, and we had, we’ve had too fast a pace of development, and that’s creating issues for the reliability of the electricity grid. Okay, so I was using a carbon price as an illustration of one way that governments can address externalities, and that is through corrective taxation. That’s that’s one way the the carbon tax, or it could be setting up a market based mechanism, such as an emissions trading scheme, which would impose, and you’d have a carbon price drop out of that. And there’s a debate about, you know, which is, which is the better mechanism, but both sort of pretty much get you to the same outcome. We won’t go into the into the specifics of that debate there, but the idea is to have the the cost of the externality internalized, to bring it into the decision making of the firms and the households in the economy. So that’s, that’s the idea. And I mean, climate change is one obvious example. I know there’s a controversy about, you know exactly how we should respond, how we the pace at which we respond. I was just using that as I recognize that controversy. I’m just using it as an example. And you can think of various other examples. There’s a debate about whether we should impose a specific junk food tax, so a tax on sugary drinks, and, you know, other items of junk food to help prevent or to reduce the incidence of overweight and obesity, diabetes, etc. And that can be viewed as a. Corrective tax, of course, you might have to think about any equity issues there, particularly if poorer households are more likely to consume those those products that have been taxed then richer households. But the idea is that a corrective tax might make sense there and correct the well, the the outcome, the sub optimal outcome that comes from private decision making. On the other hand, you could think of, or you could think of some activities that would be under supplied by the market naturally, and that there could be a case for governments to promote so that’s the other side, or the other possibility, that there could be a case for a subsidy of some kind to subsidize activities that are that are considered beneficial. Now, I think this is, you know, this can be problematic because I think often subsidies come about because of lobbying. So there’s political considerations. I think the case for subsidies can often be weak. Some people, maybe some people, argue that the EV subsidies are justifiable from an efficiency point of view. Maybe they argue, or they possibly do argue that, because there’s such a well you need a critical mass of EV users, so electric vehicles to support the all the charging infrastructure, maybe there’s a case to subsidize the purchases of Ev. So you’ll find at different times various various people in the policy debate making an argument on efficiency grounds for subsidies, and that’s that comes out of that same framework of of market failure that the externalities are part of. You can think of like, typically we talk about negative externalities, such as pollution, but you can also think of positive externalities, so I might have to have another episode where I go into some examples of of that. The key point is that, yep, Mark is correct. I agree with him that the the existence of these externalities is an important qualification on the efficiency of market outcomes. One example of a positive externality that has just occurred to me is the so called Knowledge spillover. So there’s recognition that the knowledge generated by businesses, the R and D that they undertake, that can spill over to other businesses, and you know that’s that’s beneficial to society, and hence that can justify subsidies or favorable tax treatment for research and development expenses. And you do find that in various countries. So, I mean, if we think about the or the development of, you know, various products, there’s R and D that that goes into them, and the whole community ends up benefiting from that, because not everything can be patented, not everything can be protected. I mean the idea of the smartphone, for example, that that Apple invented with the iPhone, while it can protect its own proprietary technology, the the fundamental idea of, or the concept of having, of having a smartphone, of demonstrating that that is indeed possible, that has provided benefits to to other businesses, to the community, because we end up with with competitors copying that concept. So there are these, these external benefits as well. And I think we might come back to this issue of externalities in a in another episode, because there are some really juicy issues to cover. And I’d like to give some really well thought out examples there. The other thing it would be good to talk about in a in a future episode is this concept of the Coase theorem that comes from Ronald Coase, who’s a Nobel Laureate, who was a British economist, but ended up, you know, spending most of his working life in the. The US. I’ve previously done an episode on Coase regarding his theory of the firm, but he’s famous for another theory which is received the name of the Coase theorem. And what that theorem tells us is that in certain circumstances, the private sector agents that are affected by an externality can actually negotiate and reach a an optimal solution, and that optimal solution doesn’t in any way depend on the allocation of property rights, whether it doesn’t depend on whether a particular party has has a right to pollute or a right to to be able to extract A resource free of pollution. So it’s quite a powerful fear, and this idea that you may not need government to impose corrective taxation or a subsidy or regulation, you can have private sector actors figure this out for themselves, and that it doesn’t actually matter who, what the allocation of property rights is. It’s a very powerful concept, and it’s it’s very much consistent with the Chicago School view. So if you’re regular listener, or you study economics, you know there’s this thing called the Chicago school, people like Milton Friedman, George Stigler, which is associated with very pro market or laissez faire thinking, and the Coase theorem fits rather, you know, it’s compatible with that. And indeed, Ronald Coase was a professor of economics at the University of Chicago Law School. So he’s definitely part of that, that Chicago school so very powerful fear, and we might cover this in another episode. I mean, the challenge with it is that, I mean, it’s very elegant, it’s a great theory. It’d be extraordinary if, if it really did work out, it’d solve a lot of our a lot of our problems. But I guess the general consensus among economists is that while you you can see some examples of this happening in practice, and you can see these negotiations, they’re not necessarily widespread. This is not a general solution. This is not a reason. We should just say, oh, let’s leave everything to the market, because the conditions for the Coase theorem are very stringent, so they’re very tough conditions. And there’s a paper that I’ll link to in the show notes. It’s a 2012 paper from the Journal of Environmental Management. Does the coast theorem hold in real markets an application to the negotiations between water works and farmers in Denmark. So the water works are the the businesses or the utilities that are providing water to the town, and the farmers will there. They’re doing things on their farm that can affect the quality of the water through the use of pesticides and and fertilizers. And so there’s a an externality there. And so what this study looks at in Denmark is to what extent private negotiations between the water works and the farmers can help resolve the the externality can can lead to what you’d say is an efficient outcome, and what it concludes Is that okay, so it considers the results of Danish Water Works attempts to establish voluntary cultivation agreements with Danish farmers. A survey of these negotiations, I’m reading from the abstract of the paper, a survey of these negotiations show that the Coase theorem is not robust in the presence of imperfect information, non maximizing behavior and transaction costs. Thus negotiations between Danish water works and farmers may not be a suitable mechanism to achieve efficiency in the protection of groundwater quality due to violations of the assumptions of the Coase theorem, the use of standard schemes or government intervention, eg, expropriation May, under some conditions, be a more effective and cost efficient approach for the protection of vulnerable groundwater resources in Denmark, right. Oh, okay, so, yeah. That’s a that’s a bit of a negative finding about the Coase theorem. I mean, it’s incredibly elegant, and I think it’s an important concept to learn as an economist, but in practice, it, it doesn’t really seem to to help us out a lot. But let me come back to that in a future episode. I think it probably does warrant a whole episode on its own. And yeah, that’s something you want to hear, hear about, or if you’ve got any views on the Coase theorem, or if you know of any, any studies or examples that you know show the a better result for the Coase theorem, then, then let me know. I’d love to I’d love to hear them, and I’d love to hear from you. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  26:20

now back to the show. Okay, so talked about externalities before we go on to the the other part of this episode, I want to go back to this point about there being this presumption that the the private sector will be more likely to be efficient and to provide what people want than the government. I guess I’m a little bit biased. I think that is true, and partly this goes back to, you know, when I first started learning about economics and studying economics. It must have been when I was in high school, and I remember my mother picked up a copy of Milton Friedman’s Free to Choose at a flea market somewhere. I think it was. And I remember reading that and just being struck by the incredible logic that that Milton and Rose Friedman advanced in that. And there’s a, there’s a great quote from Friedman. I found this on the net. I’m not sure whether this one was in free to choose, but something very similar would have been, and that this, certainly this concept is, is in Free To Choose. And Friedman’s other books, like tyranny, the status quo, and this concept, or this, this quote, which I think you know very much, summarized very well, summarizes his thinking, if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government, okay, so he’s talking about spending other people’s money on other people. And that’s the, that’s the situation where the people doing the spending have probably take the least care. Okay, so we’re, we’re going to be most careful and make the best decisions where we’re spending our own money on ourselves. So in the case that that Friedman’s talking about, there’s little incentive to economize or control costs, to ensure the money spent effectively, to maximize the value for for the recipients. I mean, I guess there is some, there is some pressure, because governments, they do have to, ultimately, there is a budget constraint, so they have to, I suppose they have some concern about the effectiveness of the spending, but it’s not as great as it would be if you’re spending your own money on yourself. I think that that’s fairly intuitive, so what we end up with is that we just end up with, you know, quite a significant amount of of wasteful, inefficient spending, spending that’s done for political reasons to get a political win for the government. I think we all can concede or accept that that is that something that happens. Okay? And then I’m just thinking you might if you think about that as a quadrant, so you’re either or a matrix, and you think of the different quadrants in the matrix, there are four different possibilities. You’re spending your own money on yourself, where you’ve got the most care and concern. You’re spending other people’s money on other people where you’re you’ve got the least concern or care. And then there are situations where you’re spending other people’s money on yourself. So if there’s a gift that someone will gives you money, say at Christmas, and then, therefore. I mean, I guess you do try and maximize your well being, but maybe you’re not as careful with your spending decisions. Maybe you see psychologically, even though this is not economically rational, maybe you see it as, Oh well, it’s a gift. It’s free money in a way, and I can afford to splurge, or I might buy something that I wouldn’t if it were my own, you know, if I had to work to to get the money. I mean, I certainly know that when I get gifts of gift cards for for books, I’m possibly more willing to experiment and buy a book that I I wouldn’t normally do, or I’ll just buy more books than I would when I go into the bookstore at one time rather than save that up for another time. So perhaps I am less discerning or less careful, but I’m still not completely careless. And then the other quadrant, there’s the quadrant of when you’re spending your own money on other people, so you’re giving a donation, or you’re, you’re, you’re engaging in some charitable activity, and sure, I guess you want to, you do want To make sure that you’re not wasting the money, but perhaps you’re not as careful as you would be if you had to spend it on yourself. You might, you might think, Oh, well, this, this will do. This is enough for I’ll make the judgment as to what’s best for the people. I’m, I’m, you know, buying this, this item for these clothes for, you know, maybe, oh yeah, they’ll, they’ll be happy with the socks I get them for Christmas. Yeah. I mean, I think we can all think of examples of where we we spend money on, on other people, and maybe, maybe we don’t put the time or attention into it that we’d put into it, we’d put into the decision if we if we were spending the money on ourselves. So I think, I mean, that’s going to differ for different people, of course, and maybe I’m over generalizing, but I do think that Friedman’s way of of thinking about it is useful, and I certainly agree with him about how I think we spend our own money on ourselves with much more care than the government spends other people’s money on other people, right? Oh, okay, well, that was, yeah, that was actually, there’s quite a lot to think about with, with Mark’s comment and his his questions. So Mark, thanks for that. Please continue listening, and please write in with with future comments. And indeed, if you have any reactions to what I’ve what I said today, I’d love to hear them. I’ll go on now to some feedback from another regular listener, John. I mean, John provided me with a heap of comments, and unfortunately, I don’t have time to cover them all in this episode, particularly since I spent so long talking about what Mark what he commented on. So sorry, John, but I will, I will respond to one of your specific comments, and John is, John’s pushing back or on some of the more free market or more libertarian guests and views that, that that I’ve had on the show. And this is, I think this is an interesting comment, and yeah, I’ve got some thoughts on it, so I want to read it out. I’ll read out the comment first, and then I’ll play the audio that that John’s responding to. One of the bits of audio John wrote, government does not necessarily mean centralized. There’s the Men’s Shed, which is a counterpoint to the criticism your co host on the ATA. So that’s the Australian taxpayers Alliance podcast made. I can’t remember who that was. It would have been John Humphries or Saxon Davidson, I imagine, but I’ll I couldn’t find the bits of audio that John was talking about. But anyway, I can imagine that’s that’s the sort of thing they would have would have said. And John goes on some central money, but also real dispersion of decision making and autonomy. Equally, your guest on the white elephant stampede episode. So he’s talking about Scott prasser there. So equally, your guest on another podcast criticize the Men’s Shed. Now, if there’s a credible cost benefit analysis that said that says the Men’s Shed is not useful, well, fair enough, but I’d be really surprised. The Men’s Shed supports a local repair. FA I’m involved with and maybe you’ve seen their things around made for the community. John concludes, while we’ve while we have personal freedom, the government has a legitimate role in helping us make better decisions. I understand we have lower rates of skin cancer from the slip slop slap campaign and a lower road toll resulting from government initiatives over drink driving and seat belts. Yes, I think that’s a fair points from John. That’s that’s absolutely, absolutely correct, and definitely the data supports that. I’m just thinking of an example in my state, in Queensland and Australia, there was a lot of controversy, gee, maybe it was in the 70s or the the 80s, about the introduction of making a compulsory for people to wear seat belts. And, you know, people had could rationalize not wearing seat belts in all sorts of ways. Oh, that, you know, cost us a lot of time, or it’s a distraction and it’s or won’t help us, because if you’re in a crash, then you’re actually better off being thrown out of the car. I mean, all sorts of odd rationalizations for not wanting to wear a seatbelt. And there was a there was a famous study, I’m pretty sure it was by Alan Layton. Yeah, Alan Layton was one of the authors a famous study on the effectiveness of seat belt legislation on the Queensland road toll. And this was an Australian case study in intervention analysis. So this is a paper that was published in 1979 in the Journal of the American Statistical Association. Alan Leighton was one of the co authors. He was at University of Queensland at the time. He went on to have a distinguished career as an econometrician, a great guy and what they did was that they found so they used some time clever time series analytical techniques. I’ll put a link in the show notes to this paper. It’s it’s a great bit of work. They showed that the long run legislative effect was quantified at a specific level of the explanatory variable to be a 46% reduction in deaths. Okay, so the seat belt legislation did have a significant impact, and it resulted in a major reduction in fatalities. And I think you’d be I think that’s probably a case where some type of government paternalism is is justifiable. So look, if you’re a regular listener of the show, you probably figured out I’m not an extreme libertarian or anarcho capitalist. I would describe myself as a classical liberal. I do believe in in liberalism and freedom, but I do accept that in some cases, there could be a role for some paternalistic policy measures. And I think John is is on the right track there regarding Men’s Sheds, I must say, I forgot that the Men’s Shed came up in in one of my podcast episodes. So, I mean, they seem reasonable to me. I have a couple of friends who are involved with Men’s Sheds. So the idea is that men generally of a certain age, I think it tends to be mature age, and senior men, they may have had some issues in their lives, and they get together, and they will do all sorts of, you know, manual, manual work. They’ll do some gardening, or they’ll do some woodwork or some metal shop, and it seems to be something that really helps them out with their mental health. And, you know, men need friends, and I think there’s a concern that just with developments in society, that men don’t have the traditional networks or support that they once did, and particularly with the rise in divorce so so many men, their social life is essentially organized by their wives, and so if they have a divorce, then they’re in all sorts of trouble. They lose their network, their their social support. So look, there could certainly be a case for the Men’s Sheds. What I might do now just go back to the the bit of the episode that John’s reacted to, so I can understand his feedback more fully and also understand what what Scott said in that episode. Now, Scott’s a great guy. He’s a former academic. He’s a former ministerial advisor. He’s. And he’s one of the editors of the 2022, book from Connor court, titled white elephant stampede case studies in policy and project management failures. And we talked about all sorts of big projects that turned out to be white elephants, like desalination plants, etc. I forgot he mentioned Men’s Shed. So let’s, let’s go back to that, and I’ll offer some thoughts after I play the clip.

Scott Prasser  40:27

Government is involved in too many areas. Okay, the government tries to do too much, yeah, and the government is seen as the savior of so many things. So if government could not be involved in so many things and just focus on it, on the core business, what should be, you know, good infrastructure, good roads. And what sort of thing so government is, 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 of financial limitations. So governments often, we saw that during the covid thing, where governments were running around doing all sorts of things. Sorts of things which were completely against the evidence. Just remember, in Queensland, we were formed by the Chief Health Officer. We and it was mandated we should wear a mask in our car. Just think about this. And we should wear a mask walking around a park. Just think about this. Now, I didn’t do that. I refuse to follow the law. So that’s an example where governments have got to ratchet up activities, to do things. Also, governments love to love to announce iconic projects. When 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 government visions. Thank you very much. It’s usually the wrong ones. And so it’s this thing of meeting the electoral demand to be doing something instead of saying nothing can be done. Okay, that’s, in some cases it’s not government’s responsibility to do it. And if we do anything, it doesn’t, it 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 calls or something. So it’s politics. It’s politics. The other factor is that all the organizational things inside organizations, group think happens, yeah, okay. Now, if you worked in the public bureaucracy like me, it’s sometimes very hard if you if you want to be the lone person that 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 so you’ve got to have in the bureaucracy someone willing to say no. Right now, our public services have become politicized. 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 Joe, we had permanent public servants. Okay? Job Peterson, Premier, there 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 Joe won’t do, because the treasurer Leo hilcher and crowd will say, No, Joe, 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. We knew they will give in to the political will all the time. So that’s one of the 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. 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 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 organizational factors, the political factors and government and 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, yeah, thing in America. America was founded by people trying to get away from government. They want a religious freedom. Okay? So there’s a difference, yeah, sort of context. So all those factors have driving that. Plus, I think economic theory, more, you know, modern monetary theory, so it says, oh, spend as much as you want. It doesn’t matter. It’s 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 like. So all those factors, to me, are contributing to this sort of galloping syndrome of white elephants.

Gene Tunny  45:17

Okay, so I think Scott made a lot of a lot of very great points there. And I think that observation he makes about the differences between Australia and the United States and how they were they were founded, I think that’s, that’s rather that’s rather clever. That’s a really good insight there. And perhaps that does explain some of the reasons for differences in in policy choices. Who knows? I’m not a political scientist, but I thought that was a rather. There was a there were a lot of insightful things that that Scott said there regarding Men’s Sheds. Look, I honestly don’t know whether it makes sense for government to to to subsidize them or not, or to provide funding to them. I mean, my my bias, would be to say, Well, look, this government really doesn’t have a role here. I mean, if men want to get together and have Men’s Sheds, then then fair enough go for it. Does the government need to provide some support? Well, look, I mean, there could be a case. I wouldn’t rule it out completely, but you would need to have a it’d be good to see a cost benefit analysis of subcard. Does it make sense to provide funding for the Men’s Shed? Does this help improve mental health outcomes so much or sufficiently that it justifies the government chipping in some money? Look, it’s possible. Maybe it does. Maybe it improves well being. It avoids health costs in some way, it prevents suicides, it it prevents alcoholism, which leads to all sorts of problems. Who knows it? They could have some positive outcomes. And it looks like there have been, there has been a little bit of of research, but that’s not, it’s not no comprehensive studies, or CBAS, from cost benefit analysis studies, from what I can see, I’ll link to a couple of those in the show notes. I think there’s definitely a rationale for the Men’s Shed in how they address social isolation and help improve men’s health by getting them working together, collaborating on woodworking, metalworking, gardening, community projects, etc. So I think they’ll provide some benefits, and I’ll link to some studies that I’ve found. So there’s a report that was prepared for Beyond Blue back in 2013 and what that shows, or what that finds, is that there are clear health benefits associated with Men’s Sheds, Particularly when compared with less socially active men and they have some some data here. So it looks like it’s it’s from a survey shows that the shed members scored significantly higher physical functioning, physical roles, general health, vitality and mental health in non shed members, as measured by this, this survey instrument, it looks like that they use. So there’s some, some evidence looks like it has a, yeah, I mean, they may well be statistically significant. I’d have to think about the the sampling error around the reported stats. But I’ll put a link in the show notes there. You can check that out. There’s that you know that would be of interest. If this is a report by there’s another report by Urbis review of support for the Men’s Shed movement, current state report. And, yeah, generally, it reports on how well it argues that these Men’s Sheds are valuable spaces for men to get together, reducing socialized isolation, improving well being. They have the men the Shedders, so that’s what they call the people who go to the Men’s Shed. They have increased engagement with and across communities, and they recognize that the shed, the Men’s Shed, as a social amenity available to the whole community, thereby increasing social capital within communities. Okay, so some benefits, but these are things that are, you know, could be a bit they are intangible in a way. They’re difficult to measure, but I’ll put a link to this day. Be in the show notes as well. And yeah, thanks John for your comments. And yeah, if you want to, I’m willing to have a chat about Men’s Shed sometime in the future and all of the issues around them. It’s interesting. Yeah, I’d never thought there’d be a big controversy about Men’s Sheds. But yes, I guess it’s a it’s something that government has been contributing a little bit of funding to. It doesn’t look like it’s a huge amount. And yep, as with all government spending, we should be thinking about whether that is a good use of public funds or not. And there can be legitimate debates about what we’re spending money on, and whether that money should be spent on something else, or indeed return to taxpayers. Because, I mean, the the tax burden is seems to be ever increasing, and we have to think about whether spending by governments is is essential for the community. Well being Righto, thanks to Mark and to John for their comments, for their questions. Really appreciate them listening. If you’re listening, you have your own thoughts on either the episodes I talked about today or other episodes. Please get in touch. I’d love to hear from you. Love to reflect on your feedback and to help clarify concepts, provide examples. So yes, please do get in touch. You can find my details in the show notes. Okay, I’ll wrap it up there, and I’ll talk to you next week. Thank you, 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. You

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Credits

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

Categories
Podcast episode

The Limits of Fiscal Policy: Insights from Tony Makin, Alex Robson & others – EP222

This episode on the limits of fiscal policy features highlights from host Gene Tunny’s past conversations with the late Australian economist Professor Tony Makin and former OECD Ambassador Alex Robson. In the discussions, Tony Makin provides a balanced and insightful analysis of Australia’s fiscal response to the COVID-19 pandemic, critiquing programs like JobKeeper while recognizing some justification. He and Alex Robson discuss the importance of considering the open economy impacts of fiscal stimulus and the long-term burdens of debt. The episode looks to validate Makin’s warnings about the limits of discretionary fiscal policy through subsequent evidence and events. Gene summarizes the JobKeeper evaluation results and what happened in the Australian housing market following the pandemic fiscal stimulus. 

Please contact us 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 Podcast and Spotify.

What’s covered in EP222

  • Fiscal policy limits and its impacts: introduction (0:03)
  • Economic stimulus measures during the COVID-19 pandemic. (9:36)
  • JobKeeper program design and targeting. (15:44)
  • JobKeeper program’s effectiveness and infrastructure spending challenges. (21:31)
  • Keynesian economics and infrastructure spending. (27:50)
  • Fiscal policy and its impact on the economy. (33:13)
  • Fiscal policy and its unintended consequences. (40:12)
  • The economic impact of public debt with Tony Makin and Alex Robson. (48:31)
  • Fiscal policy and its impact on the economy: wrap up. (53:39)

Takeaways

  1. Fiscal stimulus packages must be carefully designed and limited in size to avoid unintended consequences.
  2. The nature of the workforce is important to consider when implementing fiscal policy, as not all workers can easily transfer to different industries.
  3. The burden of public debt, including interest payments, can have long-term impacts on national income and economic growth.
  4. The effectiveness of fiscal policy in an open economy is influenced by factors such as capital mobility and exchange rates.
  5. Tony Makin was a leading advocate for sensible fiscal policy in Australia, and his contributions to the field are greatly missed.

Episodes the highlights are clipped from

EP119: What Tony Makin taught us about macroeconomics – Economics Explored 
A Fiscal Vaccine for COVID-19 with Tony Makin – new podcast episode | Queensland Economy Watch

Links relevant to the conversation

Fiscal policy papers by Tony Makin:

The Effectiveness of Federal Fiscal Policy: A Review

(PDF) Australia’s Competitiveness: Reversing the Slide 

 A Fiscal Vaccine for COVID-19

Treasury analysis of JobKeeper:

Independent Evaluation of the JobKeeper Payment Final Report | Treasury.gov.au

The employment effects of JobKeeper receipt | Treasury.gov.au  

News regarding unintended consequences of fiscal stimulus:

Building company collapses into liquidation days before Christmas, impacting four Guzman Y Gomez sites

Transcript: The Limits of Fiscal Policy: Insights from Tony Makin, Alex Robson & others – EP222

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.

Tony Makin  00:03

For instance, baristas who’ve lost their jobs are not necessarily going to be one want to be out there on the road as a construction worker, financial sector employees and not wanting to be perhaps putting paint bets and ceilings. So the the nature of the workforce is important. We can’t just treat the labour force as this homogenous entity where people can transfer across to any sort of industry at whim.

Gene Tunny  00:39

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, in this episode, I’m going to talk about the limits of fiscal policy. So that’s the use of government spending and taxation to influence the economy. So to try to smooth out the business cycle or to respond to some big shock, like the pandemic or the financial crisis. During the pandemic, in particular, we saw heavy use of fiscal policy by governments around the world. While some stimulus may have been warranted, we’re starting to really see some of the adverse consequences of fiscal stimulus packages in different countries. So you could argue that are a good part of the inflation that we’ve seen in the last couple of years that was due to the, you know, these massive fiscal policy responses that occurred that, that injected all of this additional money into household and business bank accounts, and we ended up with too much money chasing too few goods, which is that that classic explanation of inflation. We’ve also seen high public debts. So big increase in debt worldwide. And then we’ve got the growing burden of interest payments on government budgets. We’ve also seen impacts like what you’d call crowding out, we’ve seen supply side impacts, or constraints really starting to, to bite, particularly in the building industry. So some of these, these unintended consequences, you could say, maybe they should have been foreseen, they’re really starting to have an impact, particularly here in Australia, we’ve seen an impact on the building industry on its costs, and that’s affecting firm viability. So there’s all this extra demand, and there’s only so much supply out there. And, you know, supply can only respond in, it can’t respond automatically or instantly, to to this additional demand. So we’ve seen a big increase in in costs in that sector, and then that’s having all sorts of adverse impacts and you know, builders are closing down and then the people who are getting their houses built, they’re badly impacted, too. So that’s, that’s one of the things we’re seeing here in Australia that I’m going to talk about. Early in the pandemic, Professor Tony Macon of Griffith University in Australia. So Tony was based on the Gold Coast, which is south of Brisbane, where I am so early in the pandemic tiny warned about the adverse consequences of fiscal stimulus in Episode 41 of the podcast. So in one of the earlier episodes of this show, in June 2020, I spoke with Tony about his analysis of Australia’s fiscal response to the pandemic. He prepared that for the Centre for independent studies, which is a think tank in Sydney. So the CIS it’s one that I’m an adjunct Fellow at and I’ve had a lot to do with over the years. I’m gonna play some clips from that conversation I had with Tony, in, you know what turned out to be one of the early Months of the pandemic. So, I mean, things started going, going crazy. And when was it March 2020. So that’s a, it’s just a few months after, after that. We had a big a major fiscal policy response by the end of March in Australia, if I remember. And so we’re starting to see some of the, you know, the less desirable features of that already in in June when I spoke with Tony. Okay, so I’m going to play some clips from that conversation to illustrate some really important points about the limits of fiscal policy. So I’m not saying that activist fiscal policy is everywhere and always bad. I think what I want to say is that you’ve really got to be careful with it, you’ve got to think about, well, what’s going to be the ongoing impact on your interest payments? Could could there be any crowding out? Could there be unintended consequences? Could you actually be destabilising the economy in the future? You may be trying to stabilise it now, but could you actually make things worse than they otherwise would be in in the future? So they’re the types of considerations I think are important with with fiscal policy? Okay, one thing I have to say is that tiny Macon is sadly, no longer with us. He died unexpectedly in November 2021. So, in addition to playing some highlights from my fiscal policy conversation with Tony, I’m also going to play some highlights from my conversation about Tony’s legacy that I had with Alex Robson in Episode 119, from December 2021. So I think they’re worth that’s worth sticking around. For. Alex is a you know, he’s a former collaborator with Tony, he wrote some papers with him. And he’s also Australia’s former ambassador to the OECD in Paris, which is really top job in economics. Yeah, so Alex, Alex is a great person to hear from and he has a lot of excellent observations about about Tony. Okay, let’s play the first clip, which it features Tony’s critique of the massive job keeper, payroll subsidy programme that we have in Australia. I think that much of Tony’s critique has been supported by the facts. So new evidence, or what we’ve learned about how Job keeper rolled out and, you know, the impacts that it had. And also, I think that the review of the programme that my old deputy secretary in the treasury, Nigel Ray, so Nigel did a review of it. Last year, I think that that review that brings out some of these, well, that’s supportive of some of the criticisms that that that Tony made, although, of course, it’s it’s going to be measured. And you know, Nigel, is not someone who’s going to come out and say, Look, this is, you know, this is terrible, you really stuff this up, he’s going to be very measured about it all. There’s also a treasury research paper that’s relevant here. And I’ll have more to say about them after I play the clip. Tony, I’d like to ask about the Australian response, I thought you made some really great observations about the different elements of the response. So there was the job keeper programme, the payroll subsidy programme. And then there were there were cash handouts. And there’s also some bringing forward of infrastructure spending. You made some really insightful remarks regarding the efficacy regarding the merits of the different elements of the Australian Government response. And I think there are lessons that can apply to responses across the world, would you be able to take us through what those those insights and lessons that you made workplace turning?

Tony Makin  09:36

Yeah, well, I made a distinction between fiscal responses that were targeting the aggregate supply side of the economy, and, in the paper, endorse those in principle and in particular, we’re talking about job Keeper which I think is a great innovation. We’ve not seen a scheme like like that, before, it’s not original to Australia, Australia copied what was happening in the UK and New Zealand and one or two other European economies. And the innovation was to see firms as a source of employment. Correct. And to alleviate the pressure on firms and their employees in particular, by providing a direct subsidy to the firm. So it was a supply side initiative, more than a demand side initiative, it was helping aggregate supply, it wasn’t an element that he was sought to increase CRI or it was increasing G, of course, but it was it was it was aimed at the firm’s production. So that was an innovation. And I think there’s a prototype there for future fiscal responses in heaven. Let’s hope we don’t have similar sorts of crises. But it’s it’s a preferred means as opposed to the aggregate demand side response. And a, we’re in the form of two cash transfers or cash handouts, as we saw in response to the GFC trying to in the Keynesian ways stimulate spending, and the purpose of stimulating the spending is to enhance employment. So it’s a roundabout way of trying to enhance employment. I think it has the features of a of a subsidy to retailers in effect, because they’re the ones that they’ve been at most. And in any case, if there is spending and evidence shows that such handouts tend to be largely saved, but if they are spent, they are spent on imports. And they’re funded by borrowing from overseas, which has to be paid in the future. So there were two responses there that were trying to sustain employment one was the direct one to Job keeper. Good marks for that one. And then there was another one on top of that, which was the cash handouts, which was a roundabout way of of sustaining employment when there was another policy in place for that purpose.

Gene Tunny  12:24

Yep. So this job keeper, it was originally costed at one 30 billion, it turns out all it it may only cost 70 billion, there was a forecasting error. But that’s that’s, that’s tangential to our discussion. You did know that while job keeper is more justifiable than other stimulus or emergency measures, there are still concerns with the design of job keeper. Could you take us through some of those please, Tony,

Tony Makin  12:57

our look, the key one is the industry is involved. The questions about casuals being paid more on job teper than they were otherwise earning. So they’re being paid more not to work than to work. I think that’s the key floor with the with the programme. And hopefully that will be fixed when the Treasury completes its review very soon. I guess it’s also questions about eligibility and the the the rule that was there for downturn in, in sales, some of those aspects of it could be possibly fine tuned, but I think it is a useful prototype that can be improved.

Gene Tunny  13:49

Yep. If they if they did it again, I’m sure they would better targeted, and they might target it to the industries that are most affected, such as hospitality, tourism, retail, possibly not professional services, which, you know, appear to be, well not as badly affected as some other sectors. So the the key lesson is that this needs to be better targeted. The problem was from what I can tell this was developed within a week, possibly under a week when at toward the end of March, when they realised that they needed something like this because all of the employer groups were coming to the the government ministers and telling them we need this or we’re going to have to sack millions of people. So I think that’s what drove it. It was done very quickly.

Tony Makin  14:43

Yes. And also the alternative was to put enormous pressure on the on the Employment Benefits Scheme. people queuing up for benefits that would have been a major headache as well. Absolutely.

Gene Tunny  14:56

I think one of the great points you made in the paper was Sir. Regarding the cash handouts, we want to get people out spending, but the public health advice is saying actually stay home, we don’t want you to go out. So I thought that was a really interesting point. And actually, yes, that’s right. So the goal of these emergency measures should be to sustain businesses to keep people in employment during this challenging time. It’s not necessarily, though, and the way to do that is not necessarily to give people money to go out and, and spend on new flat screen TVs, which are imported. So that’s, I think that’s a good point that you’ve made. Okay, so that was Tony on job keeper, which was the payroll subsidy programme we had in Australia. And yep, Tony was, Tony was right about the some of the problems with that programme. Um, overall, I mean, I think that was a very balanced assessment of Tony’s he did recognise that to an extent, it could have been justifiable if it was better targeted. So he wasn’t ruling it out completely. He just had the had some concerns about the design. So I think that was a very, you know, measured, balanced assessment of job keeper from tiny, and another measured and balanced assessment of job caper came from Nigel Ray, who, as I mentioned, was my boss in the treasury. So really, really great public servant, Nigel. And, yep, I think he’s written a great report on job keeper. In the independent evaluation of the job keeper payment final report, he prepared that for the Treasury, I’ll put a link in the show notes. It was broadly supportive of the programme. But Nigel, you know, he had to acknowledge there are some serious issues with it with the design of it. And so what did he conclude? Let’s, let’s go through it. So one of the major conclusions was that a more flexible policy designed during the first phase of job keeper. So I think that was the first six months. A lot of the detail is, it’s hard for me to remember at this stage, but I think that he’s talking about the first six months of the programme. They rolled it out for six months, and then they had another six months of it. A more flexible policy designed during the first phase of job keeper would have enabled an earlier move from prospective to retrospective eligibility thresholds. For example, After three months, this would have allowed better targeting of payments beyond the initial three months and lower the costs of the programme. Okay, so what he’s, what he’s talking about there is that when it was rolled out, basically, you know, accountants would apply for their clients that apply to the ATO, and the accountants would be asking their clients, okay, well, what do you think’s gonna happen to your turnover over the next six months, so when whatever the whatever it was, maybe was quarterly basis, and, you know, you’d think, Oh, well, we’re gonna have this major pandemic. So yeah, we think we’re gonna get smashed. And so there are a lot of, you know, firms that applied for job keeper and got this job keep it like this very generous, turned out wage subsidy, that, you know, they really didn’t end up needing and they didn’t have that turnover reduction that they were forecasting and that they, you know, they’re they advise the ATO that they would, they would have, but there was no way for the ATO to claw that, to claw that back. So, yeah, what Nigel’s getting out there is that you could have designed it in a way that limited the fiscal cost by actually seeing, you know, what happened to the businesses like after a few months and then adjusting the payments after that. So I think that’s what he’s getting out there. It relied a lot on what businesses and their accountants were forecasting would be the impact of the pandemic on their, their turnover. And for many businesses that didn’t actually they didn’t experience the big revenue reductions or the turnover reductions that that they were forecasting, you needed to forecast a particular percentage reduction in in your turnover. I can’t remember off the top my head if I can find it. I’ll put it in the show notes. Righto. So and the second major finding from Nigel regarding job keeper he noted that a tiered payment structure One that is proportionate to previous earnings is better targeted than a flat payment. And this is getting at that concern that Tony had that there were quite a few part time. People, part time employees who may have maybe they were working a couple of days a week in, in a business and they, you know, they were earning an award wage that wasn’t much more than the national minimum wage. Suddenly, because of this payment for a job keeper was that it was more gee, it must have been at sort of trying to approximate a might have been a full time wage for a person roughly on minimum wage or something like that. I can’t remember exactly. But it was much higher, then, you know, some it’ll be more money than someone be would be earning if they’re only working a couple of days a week, part time. And so the idea was, let’s make this simple. Let’s get this out to the people who need it. Let’s not worry too much about trying to make it more targeted, because we don’t have time to do that. And what it meant is that you had and this is the point time he’s making you had many part time people actually earning more with job keeper, then they would have learned otherwise. So yeah, that was a really poorly designed part of job keeper. Also relevant regarding job keeper is a recent Treasury research paper and this came out. So this came out late on Friday, the 22nd of December, okay, so the Friday before Christmas 2023. And Peter Tula, who’s my colleague at the CIS, so Peter is the chief economist at CIS. He tweeted on the Friday that the fact that Treasury releases it late on Friday 22nd December suggests that it embarrasses somebody. So Peter was suggesting that this paper from the Treasury by Natasha Bradshaw, Nathan Deutsche and Lachlan vos, or vas, it’s titled The employment effects of job paper receipt, Peter suggesting it must be embarrassing someone. So what does it what’s embarrassing about it? So the main findings from it. So I’ll put a link in the show notes, you can check out what they’ve done. They’ve done some clever things with a, you know, a data set on businesses that where they can try to infer what’s actually going on, it’s rather clever paper. So check that out. Our findings suggest that at its height in early 2020, job keep it directly preserved between 300,000 to 700,000. Jobs. Right. Okay. So that’s, that’s reasonable. I mean, that’s, you know, if that if it was 700,000. And, you know, that could have pushed the unemployment rate up to near 10% or something, they’ve got an estimate of what then what that would have been, and put that in the show notes. So, you know, that’s a, that’s a big deal. But then if it’s only 300,000, well, okay, is that, you know, how effective was that? So I guess, maybe that’s something you could, you could say, justifies the cost of the programme, which was in the order of $100 billion or so that’s, you know, that’s something you could argue about. So, you know, I’d say somewhere between 300,000 to 700,000 jobs, that compares with around three and a half million employees covered by the scheme at its peak. So I think when the government was rolling it out, initially, it it was suggesting it could save something around, you know, 700,000 jobs or so. If it actually is about 300,000, then well, that makes you wonder, you know, was that good value for money? So maybe that’s something that they’re embarrassed about? I’m not sure. I mean, you could say Oh, well, hundreds of 1000s of jobs, maybe it was worth it. That would be their their argument. What could be the potentially embarrassing bit about the paper is a finding that is in the footnote. It’s a one of the footnotes. And this finding is it’s on page two suggestive evidence. That job keeper receipt made casual workers less likely to be employed over a year later. So they found suggestive evidence that job keeper receipt made casual workers less likely to be employed over a year later. So the effects are far smaller and less statistically significant than the positive effects found during early 2020. But are not implausible they could reflect income effects on labour force participation given job keep a lead to some workers having substantially higher incomes than they otherwise would have. Okay. So this is that point about these, you know, these part time workers getting all of this additional, additional cash so many, many casual workers would only be working part time, they would be, you know, they could be working in a bar or at a cafe, and they’re getting much more money than they would have expected. So they’ve got all this extra money in their bank accounts. And so what they do a year later, is, you know, for many of them, they go, okay, but there’s extra cash, maybe I don’t need to work as many hours at the bar or the cafe, I’m going to spend more time on my studies or, or on a hobby, or I’m going to go overseas. So that’s what they’re, they’re driving out there. So this is really illustrative of how you can have these unintended consequences with fiscal policy. So maybe that’s what’s what’s embarrassing about the paper. So check it out. I think it’s a good paper, it illustrates a neat little econometric technique that I might talk about in a future episode. Okay, so that’s, that’s plenty on job keeper, the payroll subsidy programme and the the challenges or the problems you have when you don’t design a programme properly, of course, they had to do it very quickly. Next time, let’s hope they have a much better design, if there is a next time hope there isn’t a next time. If there is it needs to be better designed. The second clip that I want to play from my chat with Tony is about infrastructure spending. So with job keeping, we were talking about this payroll subsidy and you know, often, often the fiscal stimulus comes in the form of cash payments to households or businesses with the payroll subsidy programme, which then had to be paid to the employees. Some fiscal stimulus comes in the form of infrastructure spending, public works, that sort of thing. And I think Tony’s right there, that can also be problematic, you’ve really got to think about that. And that is the topic of this second clip from tiny, so I will play that now.

Tony Makin  27:50

infrastructure spending can be beneficial. And it has lasting benefits. And what it does not do is deteriorate the government balance sheet, as does the spending on cash handouts and other forms of consumption related government stimulus. What infrastructure does is it creates an asset there on the government’s balance sheet that matches the borrowing, it still has to be funded by borrowing, we started with a budget deficit. So all of his extra spending has to be funded by borrowing. And so there’s an asset there, so the balance sheet won’t deteriorate, to the extent otherwise. But again, it needs to be quality spending, it needs to pass certain tests, the crude Keynesian idea would be again, just to spend on anything. And being holes in the ground, as you mentioned earlier, is a form of crude Keynesianism, which, which could well be sort of portrayed as a form of infrastructure spending if it’s working on the road somewhere. But the point about infrastructure spending is it does have to pass the test where the benefits the present value of the benefits of the project, exceed the costs. And one other point to make about infrastructure spending. And this is one feature of government spending, the Keynes instanced in his work originally right back in the 1930s, but he talked about Public Works, which is effectively what we call infrastructure today. But the difference between then and now when they talk about boosting infrastructure spending is that the nature of the workforce has changed dramatically. I mean, people these days, have certain skills. It’s a highly variegated work workforce, people doing different things. And the assumption in Keynes’s theory was you increase spending on public works, then you have workers easily transferred from jobs that they’ve lost places of employment where they used to be in factories and other areas of unskilled work and they can easily be transferred to, you know, working on the road, so to speak. But these days, that seems far fetched, because for instance, baristas who’ve lost their jobs are not necessarily going to be one want to be out there on the road as a construction worker, financial sector employees, and not wanting to be perhaps putting pink bats in ceilings. So the the nature of the workforce is important. We can’t just treat the labour force as this homogenous entity where people can transfer across to any sort of industry at work. And there’s also I mean, there’s, there’s information costs there. There’s transactions costs, which which make the whole process a little bit trickier than than it sounds in terms of increasing employment.

Gene Tunny  31:08

Yeah, it’s not like it was in the 30s when you could get a whole bunch of unskilled or semi skilled workers, unemployed workers and have them carve out a walking track in the national park or something like that. Exactly. Right. Yeah, yeah. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  32:06

Now back to the show. Okay, so another really balanced and insightful clip from tiny. And one of the things Tony was talking about in this clip is Keynesianism, so the ideas associated with John Maynard Keynes, the great British economist, and there’s a particular I guess, a school of thought or there’s a crude Keynesianism often in the way that you know, some, some economists or well, not not many economists, I think most economists recognise the the limits of fiscal policies, the problem with too much discretionary policy with Hey, you got to be careful with it. But there are there still are some we could say crude Keynesians and in in politics, too, there are some people with these these crude Keynesian ideas and they become quite popular during times of crises. And you know, Tony was someone in Australia who was always, always pushing back against that crude Keynesian view and trying to explain what are the what are the potential offsetting impacts, you know, how can interest rates respond, exchange rate, what’s the response to fiscal stimulus and particularly in an open economy like Australia’s Okay, so I’ll play the next highlight in which Tony covers that. So,

Tony Makin  33:42

in the open economy, where you introduce capital flows, exports imports, exchange rates, and emphasising in particular the exchange rate, then you can have a counter model to crude Keynesianism and the best known approach is the so called Mundell Fleming model, which is which features in intermediate macro economics textbooks. And it really just builds upon the IS LM model that Hicks invented by introducing capital flows and exchange rates and net exports. So, listeners may well be familiar with with that model, but simply says that if you increase government spending, you’re going to increase the budget deficit there’s going to be more spending in the economy, but that for a given money supply is going to tend to push up domestic interest rates relative to foreign interest rates and that will induce capital inflow foreigners will be flooding into buy these bonds that are paying a slightly higher interest rate than in their own countries, and that capital inflow will appreciate the currencies. And we’re talking about a floating exchange rate here. And that appreciation will worsen competitiveness because in the short run, price levels are fixed. So a nominal appreciation will translate to a real appreciation. And that loss of competitiveness will crowd out net exports. And this is exactly what we saw. Post GFC. And I’ve written written on this. It’s part of the Treasury external paper. But the exchange rate appreciated massively. As the fiscal stimulus was being rolled out and just look at the national accounts, and you’ll see that the swing variable, there was net exports that went down due due to the loss of competitiveness. That’s, that’s one open economy perspective. And I think that model has been borne out empirically, with reference to Australia’s previous experience, post GFC.

Gene Tunny  36:10

Yeah, so I’ll put a link to that paper of yours, which I think was in agenda. And you also wrote a paper for the minerals Council. One thing which was what one thing that’s really interesting, tiny is that your original minerals Council paper was criticised by the Treasury Secretary, Dr. Martin Parkinson, my old boss at the time. But then a couple of years later, you wrote a paper for the Treasury under the new secretary, John Fraser, essentially, almost refuting what Dr. Pockets and wrote in that rather extraordinary refutation of your minerals Council paper.

Tony Makin  36:58

Yes, yes. It’s quite curious and evidence that economists disagree, even heads of treasury disagree and their economic thinking. So yes, Martin Parkinson issued a press release criticising my minerals Council paper, which was mostly about Australia’s competitiveness. It was not focused, essentially on fiscal policy. That was a part of it. But that’s what caught the criticism from Treasury. And then subsequent to that, when John Fraser Parkinson, successor became Treasury head, he commissioned me to write a paper for Treasury, and that is available from their website, Treasury, external paper where I elaborated on the aspects in the minerals Council paper about fiscal policy and and raise some of these issues about accounting models to to crude Keynesianism. Yeah.

Gene Tunny  37:58

It’s interesting, because I mean, we both worked for Treasury it at different times, though. And I remember the traditional Treasury view is that we have to be careful about fiscal policy because it could end up being destabilising is the open economy impacts that you’ve mentioned, there’s also the problem that you don’t know whether you’re intervening at the right time. The problem that, you know, the stimulus might come on when the economy is recovering anyway. And then it’s, you know, it’s not really necessary. So there are these lags involved. What happened, I think, during the GFC, or the global financial crisis, was that the Treasury people thought, and you know, the, the politicians Kevin Rudd, the Prime Minister, Wayne Swan, the Treasurer, they thought, well, we’ve got this huge shock coming from overseas, we’ve got to do something. So we’re just going to throw as much money at the problem as we can to save the economy. That seems to be the logic and know all of those old concerns about discretionary fiscal policy, what we call discretionary fiscal policy, as distinct from automatic stabilisers such as unemployment benefits, which increase during recessions or the fact that your tax revenues fall during recessions. That all view that discretionary fiscal policy is insensible. That was just thrown out the window. And we’re seeing it again now. So what do you do you have any views on why treasury? The Treasury line on fiscal policy has changed, Tony?

Tony Makin  39:35

Well, I think it’s become crude, Keynesian. And there’s another example that you hadn’t mentioned, and it was the response to the Asian financial crisis, which was also a major, a cataclysmic event at the time in terms of what happened to asset prices and, and we by then had been heavily dependent on the Asia Pacific For our for our trade, not so with the GFC. Because our trade with North North America, the North Atlantic region was minimal compared to Asia. And yet the responses were completely different. In the first instance, there was virtually no fiscal response, there was a strong monetary response, which allowed the exchange rate to stay at a highly depreciated level, which, which soars through that crisis, we didn’t experience a recession that time. And that was what was happening with the global financial crisis, the exchange rate collapse, not as much as it did during the Asian financial crisis. But the government of the day then panicked, reflecting the panic in the US, and by that time, interestingly, the International Monetary Fund had a change course. And it’s thinking it has traditionally been influenced by Chicago economists and had always highlighted in my time working there highlighted problems with activist fiscal policy, including the lags problem that you’ve you’ve mentioned, but there had been this major reversal of thinking at those levels. And the Australian government here, panicked as a consequence of the crisis where we did not where it should not have given that the banking system here didn’t collapse in the same way as it did. In the United States. I fully endorse the the underwriting of the system or the banking system at the time, but the fiscal stimulus was, was completely over the top in my view.

Gene Tunny  41:46

Okay, I really loved that clip of my chat with Tony about fiscal stimulus, I think the comparison he makes or the contrast he makes between how Australia responded to the Asian financial crisis, which as he knows, was a huge deal. Particularly in in Southeast Asia. I mean, it had huge impacts on a major Well, an important economy to the north of us, Indonesia, which, you know, country I’ve had a little bit to do with, particularly with their finance ministry. And it led to effectively to the overthrow of the Suharto regime that they had there. So huge, huge impacts in that region. And yet, Australia responded differently, as Tony was explaining, but by the time of the financial crisis, the thinking in in Treasury, and and also it was a government of a different political persuasion, too. So that may have had something to do with the response. Right. Okay. So we’ve talked about crude Keynesianism. The other thing? Oh, yes, one. One thing I want to mention here is that I’ve been talking about how there are these unintended consequences of fiscal policy that that we can see. And I think that was particularly the case with, with one of the packages that was part of the pandemic response here, which was home builder, which was this home builder grant to two people who were, you know, building or renovating a home. So they had a home builder grant there was about, I think it was two and a half billion dollars. I’ve got that in my notes. And it’s ended up having these, you know, a really adverse impact on the building sector now. So there was a really crisp report from this was on news.com.au. This was on Christmas Eve, Kassar building group collapses into liquidation receivership owing $3.7 million, Guzman and Gomez. So jiwaji sites impacted. And so it’s a nice little as well, you know, it’s not nice, but it’s a good illustration of these unintended consequences. So I’ll just read some, I’ll put it in the show notes. And I’ll just read. I’ll just read some of the main points because I think it does illustrate, you know, what can go wrong if you’re not thinking through what the consequences of your policies can be. So ASIC is the Australian Securities and Investments Commission. So that regulates companies here in Australia. So ASIC insolvencies, statistics show 2213 building companies collapsed during the 20 to 23. financial year, there was a 72% increase on the previous 12 months. The alarming trend has been blamed on a perfect storm of factors including fixed price contracts, escalating costs, supply chain disruptions and tradie shortages. So tradie that’s the what we call tradespersons here in Australia. I’m not sure if you use that term in other countries, if you’re in the state So the UK, for example, the previous Morison government’s home builder grant, which was introduced in June 2020, handed out $2.52 billion to owner occupiers who wanted to build a substantially renovated home it turbocharged the sector, more than 130,000 Customers signed on to the programme with many trainees agreeing to the work under fixed price contracts, it soon became unsustainable as prices began to soar. Okay, so there was this crowding out. And you know, the, the builders or the tradies, they were relying on supply, you know, whether, you know, they may, they may have had to subcontract to other trainees, or they may have been, you know, they may need to purchase the supplies, so plumbing supplies or timber, and they may have been thinking, Oh, well, we’ll just quote based on the prices at the moment. And then suddenly, there’s this additional demand a huge amount of additional demand, and their prices increase for all those input costs. And they’ve signed these contracts to do the work at a particular rate. And these jobs are no longer viable for them. And so now what we’re seeing is we’re seeing these these building companies and collapsing, they’re just going into, into receivership liquidation administration. Yep. So bad results from that. So I’ll put a link in the show notes to that really important piece of information there. This is my final clip from Tony, from my conversation with Tony that had in June 2020. It relates to the ongoing burden of the debt. So those interest payments that, you know, that takes money out of your budget, that’s money that you can’t spend on health and education, for example, and this is something that I think it’s not sufficiently appreciated by decision makers during times of crisis. Okay, so I think, you know, there’s, there’s this need to respond, there’s this, there’s this panic, we think this is, this is the big issue we’re going to deal with. Okay. Sure. Except I accept that. But I think decision makers really have to think more about the long term implications. Okay, because, you know, this, this crisis will pass, presumably, I mean, you don’t want to be, too, you know, obviously, we need to be realistic. But generally, these things will pass, we’ll get to the the other side of it. And I suppose we, we probably should have expected that we would get over this pandemic. I mean, it has been, it has been dreadful, and you know, lots of people have died from it. So I’m not willing to downplay it. But we should have thought that yep, there will be life after the pandemic, and there will be this ongoing burden. Okay. So let’s play the next clip, the final clip from Tony on debt. What do you see as the the problem with this is this buildup of debt isn’t there, and there’s the problem, we have to pay for it, or we have to service that debt and a lot of that money is going to go overseas. You’ve also mentioned the impact on economic growth. What evidence is there regarding the impact on economic performance and growth of a buildup of public debt, which is in Australia is easily going to exceed $1 trillion within a few years?

Tony Makin  48:31

Yes, well, there’s certainly going to be the impact on national income because there’ll be a pure drain from national income of the public interest paid abroad, and we’re talking about 10s of billions there that will just be subtracted from national income to service to service the debt that we will have and that that drain will likely exceed. If it’s a trillion dollar debt, it’s likely to be about eight times the foreign aid budget and a multiple of, of what’s spent on the Pharmaceutical Benefits Scheme and, and a host of other other government programmes. So there’s going to be a direct impact there. But there’s been a number of elaborate econometric studies done. And you’ll find them in the literature. I won’t instance all the authors, but the IMF has done work on this. I’ve actually done had a paper published with a PhD student of mine, looking at Asian economies, and there seems to be a consensus empirically, that a 10% increase in public debt. Other things are saying well, contract, GDP growth, that’s conventionally defined GDP by point two of a percent. So that might not sound much but new compound that through it can be quite significant. After a few years.

Gene Tunny  49:55

What would be the mechanism there tiny would it be the fact that too due to service this debt, you might have to have taxes higher than otherwise. And these taxes, haven’t they lead to an efficiency loss. There’s an efficiency loss with taxation, because you’re discouraging people from working or investing. Could that be one of the mechanisms?

Tony Makin  50:15

Yeah, absolutely. The interest rate is going to play a play a role as well. But the there’s going to be a deadweight losses of the future taxes are going to harm future income. There’s no question about that. But also, there’s other studies have shown that the the the interest rate will will increase by seven basis points, or 1% increase in the public debt to GDP ratio tends to in these studies show that the interest rate tends to go up by about five basis points or up to five basis points. But the mechanism through tax is important, but also, through expectations, if you’ve got this big debt overhang, public debt overhang that’s going to affect expectations. And we can invoke Ricardo there in terms of what what he said for for households having to attend to to save more, but also firms and it’s not something that Ricardo instance, I think it’s important that investment investment is likely to be weak due to the uncertainty that business has about future tax liabilities in the face of an enormous public debt. And then lastly, there’s the impact on future generations that Thomas Jefferson, a founding father of the United States instance, and that the the future generations are going to have to pay for the repayment of the massive debt that’s that’s arisen due to the fiscal response. Yep.

Gene Tunny  52:02

Okay, so that was really interesting from tiny there. Now, some of that was the point he was making about expectations and what you call Ricardian equivalence, I think we’ll have to cover that in a future episode, because there’s a big controversy about that, and to what extent that actually, that actually happens. So, yeah, we’ll we’ll cover that in a future episode. The other stuff, you know, the, I think it’s the other points are really undeniable, really about the the interest burden of the debt and what that does the budget. So I think that’s, that’s well said, from tiny Okay, so that’s, that’s it from my conversation with Tony. What I’d like to do now is I like to play some clips from Alex Robson, who I mentioned before, Alex is out of the amazing Korea. He was an economic adviser to former Australian Prime Minister Malcolm Turnbull has been Australia’s ambassador to the OECD in Paris. And like me, he hails from Townsville in North Queensland. So yeah, I was really glad to catch up with Alex. Well, I wasn’t glad because it was a terrible event. But it was good that I could catch up with Alex after Tony’s passing to discuss Tony’s legacy. So here’s Alex on tinies legacy.

Alex Robson  53:38

I mean, in a closed economy, the assumption is you’ve got no capital inflows or outflows. And so the exchange rate then doesn’t really matter. So what Mondale and Fleming showed in the 60s Was that actually, if you just change that assumption, and then allow for the exchange rate to change, and capital inflows and outflows to occur, and that has been impacted by by imports and exports. And so with policy, say, for fiscal policy, you get this leakage into and out of exports and imports. And so if your sales are up, for example, boosting government spending or reducing taxes that will then have effects on interest rates, exchange rates and exports, so and then an open economy like Australia, that obviously matters quite a bit. And so the critical thing lever there that that changes, or you know, a lot of those predictions of the standard sort of pump priming model, we think about your government goes out and spends more money and has these multiplier effects and so on is this assumption of capital mobility and how it affects the exchange rate. And once you have that, you get a completely different predictions about the effectiveness of these different policy instruments. So and and Tony was always really good at just constantly reminding people of this and and I think it’s the tend to be something which was taught. It’s been taught, obviously, in universities for a long time, but it didn’t seem to quite make it into the, into the policymakers sort of calculus in in in Canberra. And so that was just one of Tony’s big things was just to remind people and of that. And I think, you know, I mean, we saw that during the GFC. With respect to exports, we saw it with respect to the exchange rate, there were big changes going on. And the point is that, you know, Australia is affected by everything else that’s going on in the world. And that’s why places like the OECD and IMF are always talking about coordinating fiscal policy, because, you know, otherwise, you get these leakages across across countries, and you may not get the impacts that you’re trying to achieve.

Gene Tunny  55:50

Okay, and here’s the second clip from Alex. So my conversation with Alex, I

Alex Robson  55:56

mean, thinking about, he had a good mix of very good technical economic skills. I mean, he wasn’t a heavily mathematical person, but he did use those tools when he needed them. And, but also very much an applied focus to policy questions of the day that that mattered. And it wasn’t something where he, you know, there’d be a policy issue. And so I’m now going to think about that. It was, you know, he’d been thinking about these things for a long time. And then when they tended to come up again, and again, he was ready with the arguments that he divided, quite a lot of thought to. So it was wasn’t like he was sort of chasing these different policies. She was, I think he just spent a career thinking about the big macro topics. And they just come back again and again, in Australia. And and it was we were fortunate, I think, to have him as a voice during these tumultuous times in the big macro debates of the 90s. And then during the GFC. And then more recently, as well, yeah, I think, yeah, thinking about his career, it was a good mix of contributions to the academic literature, technical skills, but then also translating that into policy commentary and advice that really stood him apart from a lot of economists today.

Gene Tunny  57:10

Okay, so we’ve come to the end of the episode. I think that the experience of many economies over the last couple of years has provided validation for the criticisms of fiscal policy of activist fiscal policy that came from economists such as the late Tony makin. The takeaway from this episode is that fiscal stimulus packages need to be very carefully designed and limited in their size, if you are going to implement them. There’s a legitimate argument that they’re best avoided altogether, but I would reserve the right to use them in some cases. And even Tony did suggest that there may have been justification was something like Job keeper, but a more targeted in better designed version of it. Okay, so, to wrap up, it’s really pleased me to be able to go back into the archives and to to find these great highlights from my conversation with tiny, tiny making. He was the leading advocate for sensible fiscal policy and Australia for for many years, and he is sorely missed. Thanks for listening. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.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.

59:20

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Credits

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

Categories
Podcast episode

The Power of Economics: A Look Back at the Past 20 Episodes – EP221

This episode features highlights from the past 20 episodes. Economics Explored host Gene Tunny plays clips that illustrate key themes like using economics as a scientific framework, considering different perspectives, and remembering the limitations of models. The clips feature discussions on COVID policies, the role of experts, projections of resource depletion, nuclear energy, and the challenges of development economics. Gene hopes listeners find the highlights thought-provoking and looks forward to feedback on improving the podcast in the new year.

Please contact us 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 Podcast and Spotify.

What’s covered in EP221

  • Economics and decision-making with a focus on open-mindedness. (0:03)
  • Using experts in decision-making and tolerating dissent. (3:12)
  • COVID-19 modelling and its limitations. (9:34)
  • Economic development, critical thinking, and foreign aid. (12:41)
  • The limitations of economics and the need for interdisciplinary approaches. (19:25)

Takeaways

1. Economics is a powerful framework, but we should remember its limitations and consider insights from other disciplines like psychology.

2. We must be open-minded and tolerant of dissenting views when relying on experts to inform policy decisions.

3. Numerical models and projections should be viewed cautiously as they can exaggerate outcomes, given the complexity of real-world systems.

4. It’s important to think critically about all options when analyzing issues and not come to them with preconceived notions or biases.

5. Effective policymaking requires understanding incentives, weighing tradeoffs, and considering how people may respond differently based on cultural and social factors.

Episodes the highlights are clipped from

https://economicsexplored.com/2023/11/09/is-the-american-dream-a-broken-promise-for-latinos-w-dr-paul-rivera-ep213/

https://economicsexplored.com/2023/10/13/private-vs-public-sector-jobs-consulting-scandals-economics-as-an-imperialist-discipline-w-uqppes-ep209/

https://economicsexplored.com/2023/10/06/growth-or-degrowth-w-oliver-hartwich-nz-initiative-ep208/

https://economicsexplored.com/2023/09/14/gigi-foster-estimates-covid-lockdowns-cost-young-people-116x-any-benefits-ep205/

https://economicsexplored.com/2023/08/24/australias-net-zero-transition-successes-challenges-w-andrew-murdoch-arche-energy-ep202/

https://economicsexplored.com/2023/08/19/the-role-of-experts-in-a-democracy-pandemics-monetary-policy-ai-w-peter-kurti-cis-ep201/

Transcript: The Power of Economics: A Look Back at the Past 20 Episodes – EP221

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.

Gigi Foster  00:03

Even if you think that I’m under balling that low balling that, in fact, even if you think the Prime Minister’s estimate of 40,000 people who would have died is correct. If you look at the costs of lockdowns, they still weren’t worth it. Right. So even if I’m totally wrong as Prime Minister’s right, the lockdown still shouldn’t have been pursued.

Gene Tunny  00:25

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist 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, Happy New Year. It’s the first episode of 2024. In this episode, I’m going to play some highlights from the last 20 episodes. I’ve chosen these highlights. So they’re consistent with the theme of using economics in a scientific way to better understand our world and to make better decisions. Take to simple principles that people respond to incentives and that things must add up and you end up with powerful insights. You start to see constrained optimization problems everywhere. You start with a presumption that people are trying to make the best decisions for themselves based on the incentives and constraints that they face. And you think about the trade offs involved in decision making. It’s not a perfect framework, but it gets you a long way in analysing important issues. And I hope I’ve demonstrated that on this show through various conversations that I’ve had over the last four years. One of the other points I make on the show a fair bit. And this has guided my choice of highlights is the importance of being open minded, which I’d argue is consistent with the scientific approach. One quote I think a lot about us from Richard Feynman who said that the first principle is that you must not fool yourself, and you are the easiest person to fool. We should be open to a wide variety of views, and be open to vigorous debate on important issues. Okay, please let me know if you have any reactions to the clip, I play into this episode or anything that I say or my guests have said, I’d love to hear what you think. Also, please let me know any ways that I can improve the show in 2024, you’ll find my contact details in the show notes. Right. So let’s get into it. I hope you enjoy these highlights from our last 20 episodes. The first clip I’ve chosen as a highlight is from Episode 201. On the role of experts in a democracy, it’s with Peter Kirti, from the Centre for independent studies. So I’m an adjunct Fellow at CIS. And Peter’s one of my colleagues there and he’s, he’s always a great person to chat with about these big philosophical issues. I really like are Peter reminds us about the importance of being open minded, and tolerating dissenting views. Here’s the clip.

Peter Kurti  03:11

What I’m saying is that if we’re going to use experts, as we are bound to do, we, as citizens of a liberal democracy in Australia, need to be thoughtful about the way in which we engage them in ways in which we hold them to account. And we also need to be stronger about defending freedom of speech in the sense that I think we need to be more willing to tolerate dissent, we need to be able to say, well, this group of scientists over here says, you know, there is a climate catastrophe, for example, whereas this group of scientists over here saying, well, warming, and cooling is just part of a trend. These are parts of trek, these are trends that that take place in on on the earth over a period of years. We need to be able to tolerate dissenting views. I’m not saying we are necessarily able to determine which view is correct. But we are increasingly reluctant I feel to tolerate it today. We’re reluctant to tolerate dissenting views, because we want to have the right answer and we want to know what the right position is the right solution is. We saw that during COVID, of course, debates about the efficacy of vaccine mandates or mask mandates or social distancing, dissent was not tolerated. And I think that if we are going to make an intelligent use of experts, we do need to be willing to tolerate dissent and to live with perhaps the discomfort that comes from having dissenting views.

Gene Tunny  04:41

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

Peter Kurti  05:38

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

Gene Tunny  08:52

This next clip features the one and only JG foster professor of economics at the University of New South Wales, in Sydney. Tim Hughes and I spoke with Gigi and Episode 205, which was on the costs of COVID policies to young people. I really liked this clip, because it reminds me why we should be careful when we’re relying on the results of numerical models, particularly projections, which show that something is going to get really bad, or, you know, we’re going to end up in a doomsday scenario. So these type of models were heavily relied on during the pandemic. I think that models have their place of course, but we need to remember their limitations and what their underlying assumptions are. Okay, let’s see the clip.

Gigi Foster  09:34

In mid March, you may even recall Neil Ferguson’s ICL modelling came out saying that, you know, 60 million people around the world were going to die or something. And of course, as we know, the COVID death count even now is you know, an order of magnitude less than that. And by the way, Niall Ferguson had been wrong in the past. These epidemiological models that are run in a simulated environment in a computer that necessarily do not include all of the real World variables that are actually relevant to whether people die or suffer from diseases are notoriously exaggerative of the bad outcomes that may occur from the new disease threat. Right that has happened again and again. And again. We’ve had SARS and the swine flu and the you know, all these different fluids that have been modelled and they’ve basically always there has been some coterie of doomsaying epidemiology, people who have said, based on my model, everybody’s gonna die, right? That’s just a common thing it happens, right? And you know why? Because the, you know, the media loves that stuff. It’s, you know, they get ahold of a guy like that, who will be, you know, put on a bleeding headline, that will get eyeballs, right, and they get status, and they get to be the person who really cares about people, because if you care about people, then you know, don’t you care that they’re all gonna die, or I mean, that becomes this whole narrative. And it really crowds out actual science, actual science is based, at best on real data, real data, right? Of course, we have theories about what happens, and we need to use those to structure our understanding of our world. But our world is so incredibly complex and dynamic. And there are endogenous factors that are happening and shocks that we can’t predict. There’s just so much going on, that all models are wrong, as somebody said in my discipline, but some are useful. That’s how you should see a model. So what I did in order to produce that estimate of how many people in a counterfactual non lockdown Australia would have succumbs to COVID is I looked with Sanjeev we looked at the countries in the world that had low restriction levels. So obviously, Sweden is one. Yeah, but it also used another counterfactual, which was about six I think other countries with populations over a million that had low restrictions, mostly in Europe, I think Taiwan might have been in there as well. And we basically took, you know, the average deaths from COVID. This is real data, real data, what they actually experience not something that comes out of a computer generated simulation, but actual data, because we just believe that much more. And then we of course, adjusted for population and then applied it to Australia. And we say, well, this is our best guess right now. Even if you think that I’m under balling that low balling that, in fact, even if you think the Prime Minister’s estimate of 40,000, people who would have died is correct. If you look at the cost of lockdowns, they still weren’t worth it. Right. So even if I’m totally wrong, if my minister is right, the lockdown still shouldn’t have been pursued. Right. But I also think that the Prime Minister is using these simulation models, these SR models or something like this, or you know from the Doherty Institute, or some other kind of, you know, institute that was supporting the narrative and coming out with these doomsday scenarios, to come up with that figure and make himself look like a saviour.

Gene Tunny  12:41

This next clip, which is a short one is from Episode 208 on degrowth, with Oliver Hartwich from the New Zealand initiative. Again, it’s on the theme of the limitations of modelling and making forecasts and projections. It reminds us that we should be sceptical regarding any predictions of impending doom. Let’s hear from Oliver.

Oliver Hartwich  13:02

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

Gene Tunny  13:44

The next clip is from Episode 202. On the net zero transition with Andrew Murdock from RK energy. It reminds us of the importance of thinking through all available options, and not coming to an issue with biases and preconceptions. Let’s play the clip.

Andrew Murdoch  14:01

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

Gene Tunny  15:11

This next clip is from Episode 209, which was a recording of a seminar that I spoke out with the University of Queensland students that were students in the politics, philosophy, and economics degree. It illustrates the importance of thinking critically of really thinking through the implications of a course of action. I talked about a notorious incident that occurred in the history of convict transportation to Australia. It was the second fleet and 7090 rather than the Third Fleet, I should note, I mentioned the Third Fleet in the conversation with the UQ students. So I must remember that I’ve linked to an article in the show notes, which explains all the relevant facts, so you can check that out. Around two out of every five convicts in the second fleet died either at sea or shortly after landing. The contract is transporting the convicts were paid based on the number who bought the ships in England, rather than the number who disembarked in Australia. And they had the right to sell whatever provisions were left over from the voyage. The results were tragic. Let’s hear what I had to say.

Joe  16:16

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  16:36

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 some of the convicts ships are all put out to tender right by the by HM Treasury, or the Admiralty 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 people to die on the ship. Right? They actually want people to survive the voyage. But the ship owners, the ones who are who win 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. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  18:03

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Gene Tunny  18:32

Now back to the show. Rado, this is an ultimate clip is from my conversation with Dr. Paul Rivera, from Episode 213 Regarding the American dream. At the beginning of our conversation, we talked briefly about Paul’s work and economic development for USA ID. He told me a story that well illustrates one of the fundamental challenges in providing foreign aid, again, is on the theme of being open minded this clip about thinking critically and not having preconceptions. Here, the preconception came from a standard model of economic development. So this clip is a good reminder to economists that we shouldn’t fall too much in love with our own models. We need to think about whether any psychological or cultural issues may be relevant to the situation that we’re analysing. Okay, let’s listen to the clip.

Paul Rivera  19:25

One of my first consulting jobs that I ever that I ever took was with one of these large international financial institutions, which shall remain nameless, but they had a they had been working in Western Africa somewhere with these with these fishery fisherman communities. Somebody had the idea that, you know, in my last situation, they said they had worked somewhere in East Asia, I think, I believe it was in Thailand, and they had worked with Fisher communities and they had created this project through which they purchased sort of these laws. on boats with motor but with motors that would help the fishermen they said basically, that the problem in that situation was that there was a sort of a low level capital investment. And so they just infused this capital. And that’s what was needed to bring our productivity. And so they said, copy paste, it worked in East Asia, so it’s going to work in West Africa. And they they did absolutely no consultation. Okay, so I came in actually, as an ex post evaluator, about three years after the project had been completed. And so I go in to this community where I know they had worked. And I started asking about the boats and the fishermen and how things are going and people are looking at me with blank stares, like what are you talking? I’m like, I’m like, a few years ago, there was this project and this organisation came, and they’re like, Oh, you have to talk to the chief. And so this particular country still had sort of a chief says chief type chiefdoms society organisation, right? So they take me to the chief, and the chief walks me down to the beach, and I see 10 of these boats upside down, sitting on the beach completely rotted out, and there’s no motors. Okay. And so what they, when I started asking about it, he said, Well, what is what essentially they didn’t understand was that their society is a very highly structured society. And the fishermen, they were considered to be sort of not high loss, high status, folks. And so this organisation had come in, and given a very high status gift, in effect, to a relatively not high status person. And so the natural thing for them to do was to say, I can’t accept this gift. So they gifted all of the boats to the chief, the chief is the chief. So the chief doesn’t fish. He doesn’t, he’s not a fisherman. So the chief basically sold the boats, sold all the motors, he used the income to buy himself a new house in Switzerland. And that was it. Right? So what happened, right, and I can, I can give you five other similar examples. There was there was basically they external parties came in, they gave some sort of analysis of what they perceive to be the problem, they copy pasted a solution. And they put in millions of dollars for it. And at the end of the day, there was no real impact from that, because they failed to secure the buy in from the community, they failed to do the basic consultation that would show you know what it is that was actually needed in those communities. So you know, that’s our, that’s our big thing is really, really engaging in listening. You know, before, you know, when we talk about wasting taxpayer dollars, and that sort of thing, it’s our responsibility to make sure that that’s that that’s going to be used in a proper fashion, you know.

Gene Tunny  22:44

Now it’s time for our final highlight. It’s another clip from my wide ranging talk with UQ students. And it’s another reminder of how regardless of the power of economics as a way of thinking, economists do need to consider insights from other disciplines. The clip begins with a question from the event MC Joe Christiansen, let’s hear it. 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 other things that economics can’t explain? And we might need other sort of perspectives to understand? I think, certainly, I mean, even economics requires other perspectives. So I mean, I think economics is an incredibly powerful tool. And I mean, 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. Right. So I think any idea that economics is the imperialist discipline, and we’ve got all the answer is 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 is this Great Moderation. markets aren’t always rational. You can’t. There are periods of irrationality and 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 the perspective of consumers consumer welfare, or 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 okay, 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? The whole distinction that thing was David Hume between isn’t bored. Yeah,

Joe  26:14

yeah. Yeah. Yeah, good. All.

Gene Tunny  26:19

Right. Oh, those are all the highlights that I have for now. If you’re a regular listener, I’d like to thank you for tuning in over the last 12 months. In 2024, I’m aiming to dive deep into some critical issues, and to really explore all the relevant theory and evidence on them. Next week, I will talk about some recent things that we’ve learned or relearned about the limits of fiscal policy based on our experience during the pandemic. If you’re a new listener, I hope that you continue listening to the show. Whether you’re a new listener, a regular listener, or an occasional listener, please let me know how I can improve the podcast. Over the years I’ve been grateful for all the feedback on what’s been said on the show, about the types of guests you like and the topics that you’d like me to cover. I want this podcast to be as informative and as objective as possible. So please get in touch with any ideas on how I can improve it. My contact details are in the show notes. That’s it for this episode. And all I have to say now is Happy New Year rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.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.

28:06

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Credits

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

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Podcast episode

Nuclear Power, COVID Policies, & Outsourcing: Thoughts on recent episodes w/ John August – EP220

John August, a Sydney radio host and Pirate Party of Australia official, returns to provide feedback on recent episodes about nuclear power, COVID policies, and government outsourcing and consulting. John discusses his generally positive view of nuclear energy with some qualifications and provides his thoughts on the analysis of COVID restrictions presented in a recent episode by Prof. Gigi Foster. John also weighs in on the challenges of government service delivery, noting potential upsides and downsides to outsourcing and cautioning against contractors dominating policy development.

Please contact us 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 Podcast and Spotify.

About this episode’s guest: John August

John August is the Treasurer of the Pirate Party Australia. 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

What’s covered in EP220

  • 00:04:08 – Discussion on Nuclear Energy
  • 00:13:37 – Gigi Foster’s COVID Analysis
  • 00:25:58 – Economic Impact of COVID Restrictions
  • 00:35:57 – Outsourcing and Consulting in Government
  • 00:44:20 – Final Thoughts and Wrap-up

Takeaways

  • Nuclear power holds promise as an energy source, but challenges around risk management, technology development, and public perception still need to be addressed.
  • In John’s view, there are reasonable arguments on both sides of the debate around COVID restrictions, with disagreement centring around difficult-to-determine counterfactual scenarios.
  • Outsourcing can benefit the government, like additional capacity and fresh perspectives, but oversight is needed to avoid issues like mission creep or perverse incentives.  

Links relevant to the conversation

Recent news about nuclear energy:

First new U.S. nuclear reactor since 2016 is now in operation

NuScale ends Utah project, in blow to US nuclear power ambitions | Reuters  

John talking about nuclear energy on his radio show:

https://www.mixcloud.com/Johnorg/roving-spotlight-26-sept-23-nuclear-nuclear-more-nuclear/

Pirate Party position statement on bureaucracy and rent-seeking:

https://pirateparty.org.au/wiki/Position_Statements/Government_Bureaucracy_Rent-Seeking

Video mentioned by John: “The consulting industry has infantilised government” – Mariana Mazzucato on taking back control

https://youtu.be/ycVBoWsGLJs?si=r7f5qIJds0dENPtI

Review of Jobkeeper payment by Nigel Ray: 

https://treasury.gov.au/consultation/c2023-407908

Previous Economics Explored episodes mentioned this episode:

https://economicsexplored.com/2023/07/27/sir-david-hendry-on-economic-forecasting-the-net-zero-transition-ep198/

https://economicsexplored.com/2023/09/14/gigi-foster-estimates-covid-lockdowns-cost-young-people-116x-any-benefits-ep205/

https://economicsexplored.com/2023/10/13/private-vs-public-sector-jobs-consulting-scandals-economics-as-an-imperialist-discipline-w-uqppes-ep209/

Transcript: Nuclear Power, COVID Policies, & Outsourcing: Thoughts on recent episodes w/ John August – EP220

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.

John August  00:03

Over time, the Public Service changed from this institution that was giving Frank and fearless advice to one that was basically mindlessly implementing government policy without challenge or question.

Gene Tunny  00:20

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, it’s the last episode of 2023. And I thought I’d take the opportunity to share some feedback on recent episodes from listeners. I caught up with previous guests and regular listener John August recently for some of his reactions to some episodes. If you’ve listened to my previous conversations with John, you’ll know he’s a radio show host in Sydney. He’s a member of the Pirate Party of Australia. And he always has interesting things to say. So I’m glad I caught up with him for his reflections. We talked about nuclear power, about COVID policies about consulting and outsourcing. So these reflections of John were inspired by recent conversations that Tim and I had with David Hendry, and with GG Foster, and about a conversation I had with university students. I’ll put links to those episodes in the show notes so you can check them out if you haven’t listened to them yet. If you have any thoughts on what genre I have to say in this episode, or ideas about how I can improve the show in 2020 for them, please get in touch in find my contact details in the show notes. One really great bit of feedback I’ve had recently came from radio it was in a shale. He had some kind words to say about recent episodes with John Cochran and John danced. So thanks for that shale. One of the really good points he makes regards health insurance, so quoting shale, regarding health care and social security. Those are both sticky wickets because of the adverse selection problem. Any medical system whether entirely socialised entirely private or some mixture of the two suffers from the fact that people in their working prime have little incentive to contribute to pooled insurance or annuities, which benefit older strangers more than themselves. Privatisation risk spiralling costs socialisation risks long wait times and rationing of services. I think this is a really good point about the trade offs involved. And one I’ll have to explore in a future episode. So if you think this is a topic I should do early next year, then please let me know. Right. Okay, let’s get into it. I hope you enjoy my conversation with John August. John Agus, good to be catching up with you again. Yes.

John August  03:02

Good to be talking. Again, Jean, you’ve got a lot of interesting discussion on your podcast. And I’ve obviously stuck my order in and a lot of ways on a lot of topics along the way on my own show. But yes, good to be here again.

Gene Tunny  03:14

Excellent, John. So some of the issues I’d like to chat with you about based on the conversations we’ve been having in response to some of those podcast episodes, keen to chat with you about nuclear energy, you’ve got some views on nuclear, and also the episode that I did with Gigi Foster on COVID. And then consulting and outsourcing and possibly we might get on to crypto if, if we have time to start off with on nuclear energy? What’s your position on nuclear? So we’ve had a lot of discussion in Australia about possibly, you know, opening up or allowing these small nuclear reactors? Do you think that’s actually feasible? So one, there’s a question of feasibility. And two, there’s a question of desirability. What are your thoughts on that, John?

John August  04:07

Well, I think it’s desirable, it may not be feasible. But to try it as well, I’d say there’s a lot of ideas I have swirling around and I will get started on them. Like, one of my favourite ideas is to take our existing power stations and retrofit them with a nuclear boiler. And that, you know, people talk about just how long it takes to make a whole new nuclear reactor. And that is true, it is quite an amount of time. But you know, if we had that technology knocked that out, then you know, I guess retrofitting existing new power stations with nuclear actors would be a good thing. And then you also have your small modular nuclear reactors and one of the things you’ve got to say about those reactors as much as I am feeling so positive about their promises In a potential, the technology isn’t there yet. Now, my more contingent statement is, you know, let’s have a list of things once the technology does five or six things in will officially say it’s a goer, and then run with it. Now, one of the things that I sort of straddle the fence between nuclear and renewables. And if you go back, you know, 10 or 20 years ago, there all these people promoting renewable saying, you know, one day we’ll have good solar panels, one day, we’ll have this one day, we’ll have that. And if you look at the last 10 or 20 years, I think we have made considerable progress on those fronts. But the point is just like I was willing to give renewable power a bit of slack back then, in the same way, I’m willing to give nuclear power a bit of a Slack now and say, Look, some of these things aren’t quite nutted out at the moment, but maybe they will be in the future. And you know, that’s a reasonable position to say, let’s wait till these things are sort of working. But in broad terms, going back to nuclear power itself, you know, regardless where we’re talking about new technology or whatnot, there’s like, so many, so much criticism of nuclear power that I think is ill founded. And one of the things that people claim is that, oh, there’s no new nuclear power stations coming online. And I believe there’s one coming online just reasonably soon, or in the next six months or whatever, in the US. Admittedly, it’s been stalled for about 10 years, but it’s finally coming online. And, you know, one of the things is that, like, you’ve got, I think, nuclear reactors elsewhere in the world, I think India, some countries in, in and around Saudi Arabia, are building them. And, you know, you can wonder why are these other nations thinking that this is a reasonable thing to do? The cynical comment would be, you know, they don’t value human lives that much. Or you could just say, Look, they are a sovereign nation, which is making their own calculations and their own decisions, and they think it’s a reasonable thing to do. So in broad terms, I’m actually quite positive about nuclear power. Because even with Shinobu, in Fukushima, and so on, you grind through the numbers. And basically, conventional coal fired power stations built kill a lot more people on a per kilowatt hour basis than nuclear. Because your nuclear accidents, look, they are quite spectacular. Let’s not deny that. But there is some details underneath that, that with a coal fired power station, every bit of coal has to be mined in the mind and transported to the power station with nuclear power, that you have a certain amount of mining and each step down the track, it becomes more and more concentrated till it’s this lump of uranium, you’ve just got to get to the nuclear power station, you don’t need to do it very often. So there’s, there’s basically less fatalities overall. And also, this is one of the things that even though I’m an atheist, I suppose sometimes I tap into concepts like original sin, and so on. And look, with Shinobu, I think we can legitimately say, that was an artefact of the way they did things in the Soviet Union. And like, the reactor had its own faults Built in, the people running it weren’t properly trained. And they did some stupid things, and so on. So so that’s one thing you say there. And with Fukushima, there was a problem with the fault analysis of it. There’s something in engineering called failure mode and Criticality Analysis. And it’s my view that if they properly assessed the Fukushima reactor, they might have actually uncovered this floor in this design, the possibility that tsunamis would not get out, and basically take an action for that maybe elevated their backup reactors to the point where, you know, they were not in a basement that would get flooded, or whatever. But having said that, this is where I talk about original sin, because I don’t blame that nuclear technology. But I do wonder about our human ability to properly manage this risk. And maybe that’s an inherent problem, but the other side of it and who knows, maybe we’ll get into bureaucracy, later on. But I was speaking to a administrator of a nuclear reactor in the US. This was probably a good 10 or 20 years ago, and he was telling me a story that he felt he was being paid by this the signature not by the hour, because in a given day, he signed 500 different bits of paper. Right now, the point is, look, this is a dangerous technology, it needs to be regulated by the government in an appropriate way. Okay, so I think we have to acknowledge that but when they say nuclear power in the US is really expensive. You wonder if it really is expensive. If, or it’s expensive because of the excessive bureaucratic overheads that are piled on it. So, you know, that’s sort of one of the things that I think about. And the other thing is that people say, while nuclear power can actually be very cheap, once you get the reactor running, it’s such an investment to get going, that like the financial markets, you know, they struggle to deal with that. So you might say, you know, sometimes it is interesting that, you know, with, with some people who are critical of nuclear actors, how a lot of the time they’re critical of the market, and maybe that’s a legitimate thing. But then when it comes to nuclear power, they suddenly think that the insurance market is absolutely perfect, while at other times they think the market is totally dysfunctional. And so I sort of say, well, how do we deal with this risk? How do we insure it? And you know, if you look at the deeper picture that basically more people get killed in coal fired power stations, and I don’t know, it was 10 years or more, I think I was checking out an eclipse in China. And I checked out in the newspaper, and they said, you know, some sort of headline like, last year, we had an amazingly good year, only 40,000 people died in coal mines. Right. Right. So so they have a different way of looking at things. Obviously, we’re pretty good with power mines in Australia. But if you look at the global picture, you know, there, there’s more going on there. So what some of the stories that the idea that nuclear waste, is that obnoxious, I tend to think there’s a fundamental trade off here, either you have a lot of pollution in the atmosphere all around you, or it’s all located in one place, and you can point a finger at it. And I have to say, I am much more comfortable with it being located in one place where you can point a finger at it, then it sort of being everywhere. So I’m actually comfortable with nuclear waste. Okay.

Gene Tunny  11:57

And John, is that the Pirate Party position? Are you are you still with the Pirate Party and the I

John August  12:03

am still with the Pirate Party? And I suppose look, we mostly, let’s say there’s a diversity of views on within the Pirate Party. I think our main position, though, is we shouldn’t let we shouldn’t lift the ban on nuclear power, and let things unfold and progress and develop. And, you know, that’s, I think that would be a fair assessment of the position of the Pirate Party on nuclear power. You know, that we don’t put Well, the official position is not to particularly favour it, but let me know, let’s set up a situation where if it’s good, it can show itself to be good.

Gene Tunny  12:43

Yeah, yeah, I think that’s, that’s fair enough. Okay. We might move on to the COVID discussion I had with Gigi Foster. So you had some reactions to the conversation with Gigi, would you be able to take us through First, what were your reactions to Jay Jay’s thoughts on COVID? And the big? I mean, Gigi has analysed, you know, she’s run some numbers. And she’s concluded that, you know, the COVID restrictions, lock downs. In particular, school closures ended up costing young people so much more than any benefits they gained. And I mean, her conclusion is that from a societal perspective, it didn’t make sense, either. So could you take us through what your reactions to that episode? Were please, John?

John August  13:37

Oak? Okay. Well, the point is, I can think of lots of concerns I would have with her analysis. But let me also say at the same time, I haven’t actually sat down and cranked out the numbers. But still at a conceptual level, I could see so many problems with the way she had done her analysis. Now, let me first off say that, you know, I think it’s a healthy thing to do these styles of economic analysis. I think that Jodie Foster was, I guess, you know, basically people were having a personal galette are harassing her and, and I don’t condone that I’m very sympathetic to her in that situation. I think it’s very sad that that happened, because part of me says, I think she’s wrong, but she should be allowed to speak that wrong and we shouldn’t try to censor her. So, but at the same time, there was a certain amount of emotion in her argument where she was presuming that she was correct straying that she was engaging with people, and they were just talking past each other. And there was no, there was no accommodation, no engagement. But I also know that it did seem to me that on the one hand, she was claiming to be this objective economist that was just going through the numbers, but you could also see some definite, I guess, emotional leakage. In the argument that she made, but to try to sort of talk about, I guess the problems I saw with her analysis was where she wasn’t working through what I consider to be some illegitimate costs of COVID. And basically, looking at Rip, because there were the things that we saw in Italy, in the US of, you know, basically funeral homes being overwhelmed with hospitals being overwhelmed. And, you know, I will look, I’ll listen to a detailed argument, if you want to say that those pictures were misleading and not representing the underlying statistics. But, you know, I would be very surprised for me, you know, they let it rip in the US, and Italy, and things got quite bad. Another thing is to sort of say, look, Gigi was saying, oh, you know, the people were asking for, for lock downs, and clamp downs, and so on. And if you look at what was going on in the US was just so many people saying, on our COVID is not a problem, we’ll sort of just, yeah, people are talking nonsense. It’s just a little flu. And, you know, there are a number of tragic cases of people who just thought, Oh, this isn’t going to be a problem, and they caught it, they died, or they got very seriously ill. And then they suddenly thought, oh, cripes. COVID really is a thing. So I challenge that narrative in terms of what did actually happen in the US. But look, you know, I now have a doctor in Melbourne, who was saying, Look, guys, this is a respiratory disease fundamentally, and people are overreacting sort of worrying about surfaces and so on. And but, you know, he was actually saying, Look, you know, breathing on each other is an issue, but surfaces really isn’t an issue. And you know, there was sort of an overreaction there. And I do remember, I think I spoke to an epidemiologist on my own show. And he was willing to say, look, in the latest stages, maybe we should have lifted the lock down sooner than we did. But certainly, he was going to say, look at the early stages, lockdown was worthwhile. Now there was this whole story of flattening the curve, and the hospitals being overwhelmed. And you might remember that concern. And I think that was a legitimate concern. And you know, some of the stories about Sweden, you know, a lot more old people died than they expected, their health services were overwhelmed. You know, the story about rounds wound Sweden was not as rosy as is made out from the outside, though, certainly they took a different approach. And that’s worth paying attention to. But you know, the other thing is, as far as young people is concerned now, you know, sure, it’s good, that they’re educated, it’s good that they have a job. But in a sense, it’s also good that there’s an economy to provide services for us all. And if that economy is disrupted, then that’s a bad thing. And you can say, look, how much is it going to be disrupted when the health services are overwhelmed? You know, when there’s so many people having COVID, so many people going off work, they’re not off work, because it’s locked down. They’re off work, because they’re ill. You know, that is what I guess you call the counterfactual of a situation in Australia being somewhat like that in Italy, or the US. And you know, your GI, we’re talking about qualities. And I would still say that there is the whole thing of like, Sure, it’s, maybe some people just get COVID Very lightly. I remember I had, you know, two decent nights of fever. It was a bit strange, but no, I have actually had worse, I guess, infections or flus and COVID had had a different trajectory. But equally, I think I’d had two in two backs vaccinations at that stage, so maybe it could have been a lot worse if I hadn’t been vaccinated. But the point is, you can actually get long COVID. And if you have long COVID, that means you have a health impact, where you’re knocked around for for quite some time. And I remember a woman I know, she got COVID. And I think a month later, you know, she had, she was struggling to walk upstairs. You know, that’s how badly off it affected her. And I think there’s that sort of effect, ongoing effect on the hill. So you don’t just say, look, either you’re alive or you’re dead. And there’s no grey area in between, I think the grey area in between is quite significant. And once we had vaccinations, alright, you deal with it differently, but before you have vaccinations, then it is appropriate to say, let’s contain the outbreak. And I do remember there was a time I think before, before Delta That’s right. And you know, we Australia had been cleared of COVID and you know, I was sitting at the beach looking at the looking at the beach and thinking this is part of the shoreline of Australia and We’re here and we’re protected by ocean and were safe. And that was truly an uplifting feeling. And keep in mind politically in Western Australia, they had what you might call a pro COVID reaction, because we in the, in the eastern states, were looking at the US and Italy and shaking our heads, and Western Australia, they were looking at the eastern states of Australia and shaking the head and thinking, thank God, we’ve gotten away with COVID. And yes, they wanted their lock downs, and they got their lock downs. And then you know, that government was returned with an astounding majority, because partially because of its behaviour around COVID. So, so I guess that’s going off on quite a tangent. But the point is, you know, you’ve got to contrast against Western Australia to the to the eastern states and their experience of it. But what’s the other thing is sort of like, during the lockdown, some businesses would have reviewed their processes done all the maintenance that have been putting off. So, you know, you want to have a productivity boost when you came back. But the other thing that Judy also mentioned was, look, we got our put ourselves into debt. And I will actually have to say that some of that money may not being targeted, as well as it could have been, you can wonder, was that an honest mistake? Should they have known better? Okay, that’s a more complicated issue. But I’ll certainly say that. But you know, the Liberal Party finally figured out what it was like to be a government and you had to spend some money from the government coffers, I suppose. So then they finally finally got to find out what it felt like. But, but the thing is, in going into debt like that, you’re hopefully giving the economy a soft landing, it’s not crashing into a wall. Now, the problem is, Gigi might well say, Well, I avoided any sort of soft landing hard landing, you would have the consequences, you know, would have been like Sweden, that would not have been that bad. But I believe we manage COVID, we went into debt, we went into debt so that our economy didn’t hit a wall. And in fact, you know, some people were surprised at how the economy bounced back. After like the COVID Depression, the economy just came back. And, you know, one metaphor was that, you know, we had the embers that were still warm in the fire, and were able to come back, you know, we had all the cycle couriers keeping things going during lockdown. And so the economy was able to recover. But I guess what I’m trying to say is, look, my argument is yes, we went into debt, some of that money was ill spent, but broadly speaking, we got the benefits for going into debt. And, okay, and a few things that I will say about that I agree a teensy bit, or think about the possibilities with her argument. Look, okay, SARS, various other I think it was swine flu. Maybe some people were saying, Oh, this is gonna be bad. And it wasn’t as bad as it was. But keep in mind go back at 20 or even 30 years, the smart people were saying, the next pandemic epidemic was spread across the world, through the airline system. And that’s what they said, what happened? And that’s what happened. So, you know, I think so I engaged with both the fact that God legitimately says, Look, some people were overstating the story. And she’s talking about people voluntarily catching COVID To, to sort of give themselves immunity. And this is where I sort of have this engagement of like, you know, an honest volunteer response that makes a conscientious reaction to the situation, I would have thought engaging. Well, Judy says, maybe you get a whole bunch of young people who are willing to catch COVID, take them out to the country, put a campsite there, bring a few people with COVID, everyone gets COVID. And then once everyone has got COVID, and everyone’s got cured of it, then you bring them back into society. And you’re as it were isolating the group of people that do that. And I personally think we could have been a bit more flexible with COVID, where if you wanted to attend a funeral, or some event, you define, let’s say, 20 or 30 people ahead of time, and two weeks out from the event, you isolate yourself at home, and people just drop off eskies of food at your door. And then you all go to that event and then for two weeks after people drop off excuse of food at your door. So you’re still allowing people to attend funerals, but there’s also this this hybrid of sort of quarantining you more stringently than would have otherwise been the case. So notice, and I do engage a little bit with some of Judy’s ideas about we could have gotten immunity and deliberately caught COVID to help things along. So admittedly, okay, there’s my reply to what she said. I don’t know how structured that was, but yes, I thought I blurted it all out anyway. Yeah,

Gene Tunny  24:59

yeah. minutes no doubt that GGS GGS views are I suppose you’d say controversial. I mean, I think there’s a, it’s a good work she’s done. And I think it’s great that she has tried to put it in a framework where we might be able to come up with a rational answer to this. Although, you know, it is challenging because there are, as you said, the challenge is, understanding what that counterfactual is what would have happened. I think my idea

John August  25:29

of what we avoid now is very different to what Gigi, we avoided. I think that’s that’s a fundamental point of disagreement. And as I say, I’m just reacting as best I can. I let me be honest, and say, Look, I’m interested, I’m passionate, but I can’t afford to spend the sort of time on this that Gigi has. So you know, she’s, she’s got one up on me there.

Gene Tunny  25:52

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

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Gene Tunny  26:28

Now back to the show. So a couple other points, Mike. So you talked about, you know, all of the debt now. And we came roaring back. And I mean, partly that was because of all the additional money that people had in their bank accounts that was that was financed by all that borrowing. And so, yeah, we just had this extraordinary recovery. And then we had the inflation because of, you know, too much money chasing too few goods, so to speak. So look, I think, yeah, the stimulus was definitely over done. I think they we recognise that, in hindsight, having worked in Treasury, and having, you know, worked on a stimulus package, the one in 2000, and 809, I know that at the time you don’t have, you just don’t have a lot of time to be able to develop these things as rigorously or as well targeted as you might like. And I think they did the best in the circumstances. And yeah, and I was just thinking about job keeper. I mean, that was at a time when we thought the world economy was just, it was just collapsing, right. And I mean, there was so much pessimism in late March, and they just had to come up with something in a few days or a week or however long they had to design it and announced it. And it was as simple as that.

John August  27:51

I suppose the different layers are, do you want to say it was a mistake or not? And then do you want to say it was an honest mistake or not? You know, do you want to say really, they don’t want to say, well, they maybe they made a mistake, but Well, fair enough, you know, that that’s, I guess the range of ways you can relate to it.

Gene Tunny  28:12

I think they did the best they could in this in the circumstances. But you know, looking at it, you know, some of the design features. In hindsight, were pretty bad.

John August  28:22

I’ve actually spoken to someone in business. And he thought that the way that you would prove that either there was a loss related to COVID, or you would or wouldn’t shed shed staff or whatever, he thought it was very easy to put up your hand, even if you weren’t going to be affected by COVID. And he said that, and I won’t mention the guy’s name, obviously, look, he thought he put up his hand just like everybody else did. But you know, he was actually thinking about what hoops do I have to do to prove that COVID is affected my business and he even he felt you know, the the the the hoops yet to jump jumps through weren’t that stringent? You just put up your hand and I will give you some money sort of thing. That was that was his view of it? And I mean, admittedly, it’s good, good, good one two years since I had that discussion with him. But that was a story that he told me at the time and and then there is a whole thing of these businesses that claimed all this COVID help. And then, you know, however down the track, their their profit margins went up considerably. And you thought I thinking well, hang on, maybe you should pay some of that extra profit back to the government. Isn’t that the reasonable thing to do? And, you know, but that okay, but that’s perhaps going off on a bit of a tangent, I have to say,

Gene Tunny  29:32

yeah, there’s a, there was a good review of job keeper, which I’ll put in the show notes. I thought it was well done. And it did raise a lot of these issues and, you know, issues with the design of it, and okay, if we did it again, we’d probably do it differently. We’ve learned from this experience was done by Nigel Wray who was my old boss in Treasury. So I’ll put a link to that in the show notes.

John August  29:56

I suppose tomorrow. I think it’s the counterfactual. Oh, yes, we got into debt. Yes, we got inflation but the economy didn’t hit a brick wall. Now how valuable is it that their economy didn’t hit a brick wall? You know, that’s that’s to my way of thinking. That’s that, that those are the things you got to balance. Yeah.

Gene Tunny  30:15

Yeah, yeah. Yeah. I agree with you there. Okay. And the other. Oh, yes. The point about lock downs and the all of the restrictions. I think there is a consensus emerging that we probably did go too far isn’t there. I mean, maybe early on, there was a need for a reaction, but there was an independent review by Peter shergold and some other academics and public policy and public health experts, which I thought came to the conclusion that we were imposing them lockdowns when we shouldn’t have or interstate border restrictions. I think they came out against those. So we just went we went too far in our, in our restrictions. And I think that, you know, that possibly, you know, lends some support to what Judy’s been arguing. I mean, we probably we should have listened more.

John August  31:14

Talk to the Western Australians and see what they think about that. Not the Western Australians. Yeah, yeah. Yeah,

Gene Tunny  31:21

I mean, Queensland is too. I mean, we loved it in a while. I didn’t but other Queenslanders seem to love it. And, you know, Anastasia, Paula, che was reelected resoundingly. So yeah, look, people did did love it. But gee, gees argument is that it was, you know, her argument is that it was driven by fear. It was irrational. Now, I mean, that’s, that’s a difficult thing to figure out.

John August  31:44

All I can say is, I haven’t spoken to a bit if I had discussed it, whether I would like to think I would have had an objective and moderately dispassionate discussion whether or not been one of the people whose brains were totally blanked as well. I’m not, I’m not sure. Well, but that’s not the exact words, but the sort of sentiment that she was driving it.

Gene Tunny  32:06

Right. Okay. Well, I think it’s, uh, I mean, I think you make some, make some good points there, John, and ask them good questions. And I’ll, I’ll put a link in the show notes to the episode with Gigi, because I think it’s really worth listening to, I think Gigi is, you know, she’s thought a lot of thought a lot about these issues and done some really provocative, really thought provoking analysis that I think is definitely worthwhile. Okay, one thing I wanted to get back to John, I just remembered about nuclear. You mentioned there was one reactor being built in the states that you’re talking about this one, you’re not talking about this utar project idea that was abandoned because it was news last month, maybe? I don’t know if you saw it about new scale, new scale NS utar project in blow to US nuclear power ambitions. Was that the one you? You thought you were thinking of?

John August  32:56

So yeah, but that that story you have there is, is not to do with a regular nuclear reactor, that that sort of installed for 10 years, and finally came online just recently. And the reason why I was talking about that, who knows, maybe you want to actually link to my own show where I had this discussion, but there was someone involved in brains. And they were saying, look, there’s no nuclear reactors being built anywhere around. I did my research. And I found, you know, there, there were a few in the Arab nations, there was this one in the US that had just come online recently. And I guess I was pushing back saying, you know, maybe they may not be building that arrayed or not. But you know, I think, particularly South Korea is is cranking them out. You know, there’s basically a decent number of them being built around the world, which is contrary to what this gentleman was saying. And I do think you got to say, look, if now if the Indians are making their assessment of the South Koreans are making their assessment, the French are making the assessment. Do we want to say that they’re all stupid? And really, that’s sort of the thinking I was saying, and what the CSIRO have said that, you know, small modular nuclear reactors are not a mature technology, while and maybe they’re onto something there. That’s why I say I’m contingent. I say once you tick enough boxes, then we’ll say this is a goer.

Gene Tunny  34:16

Yeah, yeah. I think you’re right about one coming online recently. I’ve just found on the Energy Information Administration, that’s a federal government US agency. Newest reactive anti Commercial Services Unit three at the Elven W. votable. probably mispronounced that VAG TL E electric generating plant in Georgia.

John August  34:38

That sounds that sounds like it, look, I mean, it’s gonna take me you know, a good three to four, three to four minutes to check through my notes, so I could actually try to find out what these references are. Who knows I can even email them to you after the show.

Gene Tunny  34:55

Yeah, that’d be good. But that’s 31 July 2023. So that sounds like The one you were you were thinking of?

John August  35:01

Yeah. And this was sort of like some International Nuclear Energy Agency, which had, you know, we’ll have all the ones in the US and South Korea, and here and here and here and here and all across the world. And as I say, it’s not a bucket load, but there’s a moderate, moderate number of new nuclear reactors coming online of the conventional variety, not the Small Modular variety. Okay. That yeah, okay. I’ll track that down and send you the notes of that. And obviously, I think you may have listened to some of the show where I had that discussion. So very

Gene Tunny  35:33

good. Okay. Well, that’s so chat about nuclear and COVID. Finally, good. Just so we keep this to a manageable length, we might just cover the outsourcing and consulting issue. So you, you listen to that conversation I had with the university students, the UQ PP. E. S. Society, that that’s correct. Yes. Yes. Yeah. And you had some thoughts on, you know, the use of consulting and outsourcing that’s been quite controversial in in Australia, recently. And now there’s some, you know, I guess, worldwide. There’s the LSE, economist. whose name I won’t try and pronounce it was Mariana

John August  36:18

Mazur. carto. Right. But, yeah, she’s been talking about the experience with outsourcing. But this happened in the UK Government. And there was one time where she mentioned some stuff happening in Australia. And, you know, basically, they’ve had a similar experience over there. And she’s got some perspectives there. But, but, okay, look, I will actually rip in and sort of say that, you know, part of me part of the Pirate Party, we do actually say, look, it’s very easy for there to be excessive bureaucracy. And we do have a more general feeling that there are too many people calculating numbers, but you know, statistics or universities or schools or whatever, and too few people actually doing stuff. So that’s the broad brush thing will actually say about bureaucracy. And also, I think in Queensland, it was Dr. Patel, if you remember him, and our cynical remark was look at how much the Queensland Health bureaucracy Brut grew over the time leading up to Dr. Patel. And it seemed to be mostly concerned with trying to stop the minister from getting embarrassed rather than actually doing good. And you would think if that grind bureaucracy realised its promise, it would have been able to figure out there was an issue with Dr. Patel, as it were, as a result of the regular workings of its own processes. And it was actually as I understand it, some courageous nurses who stood up and said, Hey, there’s a problem here. It wasn’t the regular workings of the bureaucracy. So you know, whether it be me or the Pirate Party, we certainly have a lot of criticisms to make bureaucracy, you know, but we will also say that sometimes the government has got it correct. We do actually think that the CAS did a good job. And it’s been replaced with numerous private providers with twisted incentives, and the whole thing’s quite a mess. But let so so there are those things there. But I guess there’s a whole lot of other things that add to the mix that basically Mariana Meza, Carter has actually said, look, we’ve infantilize the public service to the point where the public service isn’t actually smart enough to properly scrutinise the contracts that they are feeding into the private private service. Because let’s just say, Look, if you’re in a government department, you’ve got some report that needs to be done in three months time, you’ve got a bit of a squeeze on your resources, let’s get this outside firm just to square this on you. That’s probably a very reasonable thing to do. But what he’s saying is that, you know, the private companies, the contractors have taken over, like the comprehensive policy development thing, and sort of taking the lead. And she’s sort of like saying, look, so often, why do we think that the contractors or the will actually have expertise? Now if we want to know what’s going on with health, we ask that the you know, the health bureaucrats if we want to know what’s going on with science, we asked to CSIRO and Marianas political story was looked, you know, the government could have got the CSIRO to make an assessment of climate risks, but they actually got a private contractor to do that. And her suspicion is that they wanted a political answer rather than the objective scientific one that the CSIRO would have would have given. So, so there’s a lot of sort of abuse of that. And to some degree, there’s this like laziness. have sort of like starting to push more and more of your policy development notes, as I say, Sure, a contractor to fix a particular issue, you know, perhaps reasonable, but to take the lead on policy development, and to also think that these these contractors will have good expertise in health in science, like to my way of thinking if you’ve got an issue, you talk to the CSIRO, some academics in a university or an engineering firm or something like that, you know, that’s that if you need to reach outside of government, you know, that’s what you do. Now, one of the things that contracting firm might just have, they might have the outsider’s perspective. And maybe that’s a useful thing to bring in. But you shouldn’t let the outsider’s perspective, you know, stop the insiders, from actually figuring out what’s going on as well. You know, okay, a fresh out pints perspective, maybe that’s the one legitimate justification you might have. But the idea that this ad hoc bunch of consultants would know their science better than the CSIRO seems a bit strange to me. But what’s some other things going on with bureaucracy? I know that if you go to that, I think it’s the cyber the programme, you actually have Malcolm Crompton, who was once a Privacy Commissioner. And he’s actually talking about how I think evil was Whitlam was starting to sort of change the way department heads were hired and fired and allocated. And that this was to try to give the public service more flexibility. But is also saying that over time, the Public Service changed from this institution that was giving Frank and fearless advice to one that was basically mindlessly implementing government policy without challenge or question. And he does say that the right sort of started with Gough Whitlam. But you know, to actually try to be politically neutral. You know, it was John Howard that took it even further. And the original sentiment was good, let’s give people flexibility to prove themselves to demonstrate themselves that free up the public service. But you know, John Howard started to take it away from, you know, the tradition of Frank and fearless advice to, to mindlessly implementing government policy without challenge or question. And you could say that it ended up in the whole Robo debt fiasco. So notice my, my more complicated thing, where I have actually acknowledged that you can have too much bureaucracy going in the very wrong direction. And I’ve sort of introduced that at the start of my talk. But I’ve also said, Look at what’s happened, and I suppose this controversy with those contracting bodies, and just how they’ve basically, you know, basically, you know, had confidential information from government that they have abused and then sold to other corporate clients. And that’s been a betrayal of trust. And yet, you know, on paper, these firms will say, you know, oh, there’s a wall between these different sections of the firm, and that wouldn’t happen. And, you know, well look at you, well, we I can see you’re sort of smiling or shaking your head. But let’s just say, Look, I’m here, I don’t want to mention any names, but it’s amazing how tangled and convoluted any firm can get over time. And, you know, there’s just so many things that are boiling over and you’re, you’re you’re putting out fires all over the place. It’s, it’s amazing how chaotic things can end up. And this is an affirm that I won’t mention names, but it was a good firm, it made a damn good quality product, but by golly, under under the surface, just how, just how, yeah, you’re putting out fires all the time. And I can imagine a similar thing happening in the public service. So or are these private organisations were on paper, you know, you’ve got these rigorous processes and procedures that everyone follows to the letter and you’re sort of going oh, yeah, right. But anyway, so that’s me blabbing about those sorts of things. So that’s my hybrid thing, and unlike the Pirate Party does have their position about bureaucracy and rent seeking. And we do recognise that as a real and substantial problem that by golly, there’s a lot of problems to think about, if you want to think about them.

Gene Tunny  44:20

Yeah. You know, obviously, I’m, it’s a challenging issue for me, because I’m someone who has done some contracting for government and I have, but it’s more along the lines of, you know, occasionally coming in helping out on a report or doing an independent analysis of a specific issue. Now, yeah, there are challenges with this infantilization of the public servants. That’s an interesting way of putting it and I do wonder myself about whether the capacity of the public service has been reduced because of so much outsourcing I think that is a legitimate concern, something that that’s worth thinking about. And you just see it with NDIS. At the moment, like we’ve contracting out so much of that. I mean, that’s just a big, you know, this huge social welfare programme, the National Disability Insurance Scheme in Australia, and there’s, you know, big reliance on delivery by the private sector, and yet it’s overseen by this National Disability Insurance Agency. And it’s not clear to me whether the we’ve got those I mean, I guess we don’t know the rules, right. There’s all of the there are all these inquiries into NDIS. And we’re trying to tighten it up. So it just doesn’t become this huge, cost blowout. But it looks like there’s a lot of women, there’s problems with definition, who’s in and who’s out. But there’s also problems with just blight and rotting by both of these in firms that are NDIS providers. And the government just says, the regulatory agency just seems to lack the capability to to stop this.

John August  46:01

Well, that that is a strange thing. That note, notice earlier on in my narrative, I was saying, Oh, look at these bloated bureaucracies that, that don’t actually deliver on their promise. But at the same time, it’s a strange sort of thing that I will also say, it does feel like a lot of guff government, regulatory agencies just are not sufficiently resourced to do their job properly. And, you know, you end up in this this strange sort of thing where, you know, there’s a mistake made, you get some sort of inquiry, and they point out all these things, and the inquiry probably says, Oh, look, they could do with some more money, and then they don’t end up getting more money. So notice, I’m saying that in some cases, the bureaucracy seems to get bloated. And at some stage, other cases where you really do need some resources, it stopped. So yeah, it gets hard. You know, I

Gene Tunny  46:51

guess if you’re handing out $50 billion a year in, in contracts, or, you know, in funding, which the NDIS is, I don’t know if that’s the right amount, but it’s, you know, it’s 10s of billions of dollars, then you need some you need enough oversight to make sure that that’s not been recorded, and I’m not sure we’ve got that right at the moment. Well, I would

John August  47:11

broadly say I suppose. Yeah. Dealing with these these contracts is not easy. Yeah. That’s that’s, that’s, that’s the generalisation. I’ll make and

Gene Tunny  47:22

a couple other things. You mentioned Patel. So this was Jaden or Patel. I think Jaden Patel, he was a doctor at Bundaberg hospital. And it turns out he wasn’t very competent, and all of these patients died. Really just terrible situation. And I’m trying to remember the circumstances now. Partly is because I mean, there was a shortage of doctors. I mean, we so we were letting I think he was a he was an immigrant, if I remember, and so that I think there’s some question about his exact qualifications, and whether they were actually legitimate or not, or whether they were comparable with with qualifications here. And yeah, part of the problem, I guess, was just poor, administration, poor oversight by Queensland Health. And also we we just weren’t training enough people in, in medicine here in Australia, we just weren’t training enough doctors?

John August  48:22

Well, who knows? Maybe we’ll see common cause here. I mean, admittedly, look, they are obviously we’re trying to be flexible in letting this particular doctor in but I do have the feeling that, you know, our, you know, our medical profession are really don’t want to have sort of people coming in from overseas because it dilutes the amount that they’re able to sort of secure for their services. So having said that, it does get very complicated, where, you know, my my own position, I think it’s reflected in the Pirate Party is like, if we are importing skilled people from nations that are less well off than we are, we should really be making a virtual subtraction of those training costs to our foreign aid budget. And, you know, there is the whole thing of you know, do we want skilled people coming in now, how they’re going to contribute to the economy and so on. And, you know, and sort of like leaning on all those students coming into Australia as a source of foreign revenue, and, you know, oh, my gosh, should get get get sort of complicated. And then people say, Oh, yes, yes, we want to have skilled immigration, I’m thinking, well, if we’ve got skilled people coming in from nations less well than ourselves, aren’t we abusing those nations, you know, and, you know, that’s where the whole thing gets complicated. But let’s say if we quarantine that issue, I think it’s it’s fair to say that doctors in Australia are are protective of their monopoly,

Gene Tunny  49:51

I guess you would say, Yeah, I think that’s that’s correct. Yeah. So that is a that is a an issue. And you know, there’s a there’s a supply side restrict Near and dear. That’s partly the reason yeah, we’re not. We aren’t training enough doctors, arguably and so in because Queensland had a real big growth spurt in the 90s, lots of more, lots more people. Lots of people coming here, big growth in population and therefore, more demands on the health system. And so we maybe our standards did drop in. And it was, it’s quite scandalous. I was just looking at the details. And it turns out there were complaints about that doctor, so giant Patel, in other places who work before Queensland, so in in Buffalo in New York, and hang on, it looks like there was some issues in Portland, Oregon. And so these are things that, arguably our Well, I’d say they should have picked this up, they should have done their, their due diligence. So yeah, that was a that was a huge scandal. That one. The other thing I thought I mentioned is you talked about the CIA is now I mean, we have another CIA, I mean, that brought me, you know, took me back to the 90s. I think they abolished that 96. Didn’t know and how it got and that was a Commonwealth employment service. And yes, yeah, look, I mean, I, I wasn’t sure about how effective the CES was. But I do take your point. I mean, what we’ve replaced it with, there have been all sorts of problems with with that, and concerns about the level of service being provided by many of these. Well,

John August  51:28

one anecdote from an okay, unfortunately, it’s going to be hard for me to map this out and flesh out the details. But, you know, he was telling me a story of, you know, he saw 30 people in a day and place 15 of them in a job. And you go to one of these private agencies, you got to place an appointment, like three days in advance and your front up, and they might well see three or four people that morning, you know, and there’s sort of saying that there’s such a contrast between the effectiveness of the CS versus and, and, you know, I guess you perverse incentives, that there, there are stories of basically people being dragged along to buy become long term unemployed, and then then the agency is finally taken seriously, because there’s extra incentives replacing long term unemployed as compared to short term unemployed, but the CIS had no such distinction, you know,

Gene Tunny  52:18

you get those details of the specifics of the contracts. Right. So you got the incentives, right, or you can have all sorts of problems. So, yeah, yes. So definitely, there’s, there’s issues with outsourcing. I mean, I’m, I think, you know, we shouldn’t be doing looking for efficiencies, and in many cases, it makes sense to outsource but then in other cases, it doesn’t particularly well. And when you do outsource, you got to be extremely careful about how you do it, then you got to make oversee those contracts and make sure that there isn’t any rotting.

John August  52:54

And I’m very pleased and more by accident than design, but I didn’t bite the hand that sees me notice. I was saying that the worth in you know, hiring a contractor to fill in this particular report or this particular issue, but that’s quite different to basically taking over policy development. holdest Bowlus? Yes,

Gene Tunny  53:12

yes. Well, I guess what the some of the big four firms and also BCG, Boston Consulting and McKinsey seem to do very well is really get they get really into the government and or they get their people embedded in some of these agencies to and they’re very closely associated with the policy development and then delivery of of policy, I

John August  53:35

can only suggest let’s listen to some of the videos by Mariana. Cassie, when she sort of goes into that. Yes.

Gene Tunny  53:42

Yeah, I’ll I’ll definitely definitely have a listen. Okay. John Agus, this has been great. Thanks for all your your feedback on and thoughts on those recent episodes we covered? Is there anything else before we wrap up? Oh,

John August  53:58

my gosh. Okay, well, let’s say just say that there’s so many things that I can talk about. There’s a few different guys that you had you had a guy talking about, you know, productivity being a crisis, but he did say some interesting things about intellectual property or junk. I found that that quite Yeah, I found it found, found some of the stuff he was saying quite interesting. And I think you had a guy talking about valuation of businesses. And he was saying, you know, let’s sort of give banks equity in the property for when it gets sold rather than just, you know, to turfing, the turfing, the people who were paying the interest out, but I know you also had someone talking about crypto and some of the I don’t know the details of that show. Let’s say I’ve listened to quite a few shows but maybe not that one. But I would you know, I’m still saying before that the problem with crypto is a whole lot of amateurs are in the field. You can sort of say Oh, I’m in crypto and then you’re on some exchange and my my glib state would be, unless you have some sort of code on your phone that you can write down and transfer to another another phone that is actually engaging with a crypto network beggar theory, or Bitcoin or whatever. If you’re just plugging into an exchange and you’re playing with Lego blocks, you’re not actually doing crypto. Yeah, that that’s my and you know, it is the old cliche that you know, you should only invest in what you’re familiar with. But all the who worry about crypto is to try to get people who know nothing about crypto to be involved in crypto. I think that’s sort of a bit of an issue there. And what am I also thinking about crypto, gosh, that thought is slipping through my fingers? Oh, yes, the thing about crypto is at the moment. The discussion space, if you like, is dominated by snake oil merge. Now, that’s not to say there are some general genuine crypto people out there, you know, hidden behind all the all the all the all the noise, who genuinely want an alternative system of currency because they have problems with the way the central banks and the regular banks relate to our mainstream system of currency. And they are genuinely interested in an alternative. And there may well be people there who are the true believers. But the scene if you like the scene, sad to say, is dominated by the snake oil merchants. And until somehow the genuine players can achieve greater prominence and it not being just all this hooey. You know that the sad thing is that crypto has it has betrayed its promise. It’s gone down this path with all with with the conceptual space, the thoughts face, whatever want to call it being dominated by the snake oil merchants and the true believers being suppressed. You know that the way I’ve described the scene, and in a sense, it said, because I’ve heard the crypto advocates, I’ve heard the passion with which they talk about wanting to go down this alternative path. And while I’m not into crypto, it’s said that their passion hasn’t been realised, you know? Yeah, yeah, fair point.

Gene Tunny  57:25

I agree with you about, yeah, the snake oil, snake oil cycle merchants, I

John August  57:32

suppose. Or if you want to say as I call it, if you want to, say snake oil salesmen, yes, but there’s the old pump and dump thing about talking about some particular crypto. And, you know, basically, some, some prominent people might basically buy a little crypto, and then one week later, they go off and buy it back. Because they managed to suppress the value. You know, those sorts of games, you know, so that that’s getting a bit sad. And Sad to say, look, I’ve listened to a few other episodes. There’s so many thoughts that I have, but it’s hard for me to bring them bring them to mind at the moment. I have to say.

Gene Tunny  58:07

That’s, that’s fine, John. We’ve we’ve covered some, some important issues. So yeah, Happy. Happy to finish up there. So again, thanks for thanks for listening through the and thanks for all the great conversations. Yep. And yeah, I really, really enjoy hearing your thoughts and having having those chats so

John August  58:29

well. I do appreciate it. I know you had some some sort of sentiment that you didn’t want to interview people too often but I hope this is not too often. I know you’re you’re recycling guests to some degree anyway. So

Gene Tunny  58:40

Oh, yes. No happy this. Definitely not too often. I think we we caught up in June, didn’t we? That was when you visited Brisbane.

John August  58:48

Yeah. I think that was that was passing through Brisbane and, and yes, that was lovely. And I guess you had the dare I say you’ve obviously had better sound equipment there. But nevermind. It’s still good to have a chat regardless. Yeah, absolutely.

Gene Tunny  58:59

Okay, John, Olga’s thanks for your time.

John August  59:02

No worries. I’ll leave you to it

Gene Tunny  59:05

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

59:52

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Credits

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

Categories
Podcast episode

Free Markets & Limited Government: Lessons from the Founding Fathers for Today  – EP218

The economic philosophy of America’s Founding Fathers was centred around individual rights, limited government intervention, and a largely free market. In EP218 of Economics Explored, host Gene Tunny interviews John Nantz about his book, “Rediscovering Republicanism.” John discusses the insights of the United States Founding Fathers, such as Ben Franklin and Thomas Jefferson, and how their ideas on limited federal power and local governance are still relevant today. John argues that the country needs to remember these insights and explore how we can apply them to our current situation. Gene asks John, among other questions, how the Founding Fathers tried to reconcile their beliefs with the slavery that existed in the Southern states.
Please contact us with any questions, comments and suggestions by emailing us at contact@economicsexplored.com or sending a voice message via https://www.speakpipe.com/economicsexplored.

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

About this episode’s guest John Nantz

John Nantz is a Stanford-educated, McKinsey-trained strategy consultant and author of Rediscovering Republicanism. Through his book, John re-introduces Americans, particularly younger ones, to the inspiring founding values and ideas of their country. Also, based on his book, John started a highly popular TikTok series on American history that has earned over 4 million views. 

What’s covered in EP218

  • Rediscovering Republicanism’s founding vision and values. (0:03)
  • Rediscovering American republicanism and its values. (2:25)
  • US history and political system. (7:21)
  • US Constitution and citizen power. (10:23)
  • The economic vision of the US Founding Fathers. (15:01)
  • The Founding Fathers’ views on slavery and the Constitution. (20:04)
  • Slavery and political representation in the US Constitution. (25:04)
  • US government role and individual rights. (30:05)
  • Federalism, welfare programs, and state roles. (36:22)
  • Poverty, government role, and healthcare in the US. (40:44)
  • Healthcare and retirement systems in Australia and the US. (48:05)

Takeaways

  • The founders of the United States had a vision of limited central government power, with a focus on individual rights, state governments, and civil society taking on more responsibility for problem-solving.
  • The current state of the United States has deviated from this vision, with a significant expansion of federal government power and involvement in various areas such as social welfare and education.
  • John Nantz argues for a rediscovery of republicanism and a return to the original vision of the founders, with a focus on individual rights, competitive federalism, and a reduced role for the federal government in areas such as welfare programs. The author suggests that this approach could lead to better outcomes and more innovation in addressing complex social issues.

Links relevant to the conversation

Amazon page for John’s book Rediscovering Republicanism:

https://www.amazon.com.au/Rediscovering-Republicanism-Renewing-America-Founding/dp/0761872337

Transcript: Free Markets & Limited Government: Lessons from the Founding Fathers for Today  – EP218

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.

John Nantz  00:03

And that was exactly how the Founders intended it was that we wanted these local organisations to take responsibility for lots of stuff. There’s lots of important things that the central government shouldn’t be doing, because not competent to do it. So these are insights that they had, that we clearly have lost. And so that you know if that’s part of the book is trying to refresh people’s memory and help them rediscover them, and then talk about how we might apply those those ideas and concepts to our current situation.

Gene Tunny  00:37

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, and welcome to the show. In this episode, I chat with John Nance about his book rediscovering republicanism, renewing America with our founding vision and values. It’s about Republicanism as a political idea rather than about the Republican political party. John argues that the United States has forgotten or overlooked the insights of its founders. He argues that his founders like Ben Franklin and Thomas Jefferson, they had insights on governance that are still relevant today. John tells us that the Founders intended for the federal government to have limited power, with state and local governments, community groups and citizens themselves taking on more responsibility for problem solving. John is a Stanford educated McKinsey trained strategy consultant. Based on his book, he started a highly popular Tik Tok series on American history that has earned over 4 million views. As always, if you have thoughts on this episode, or other episodes, or ideas for future episodes, please get in touch. I’d love to hear from you. Let me know if you think a return to traditional Republicanism with a limited role for the federal government is desirable or feasible. Right. Oh, let’s get into it. I hope you enjoy my conversation with John Nance on rediscovering republicanism. John, Nancy, welcome to the programme.

John Nantz  02:24

Bing, thank you. This is great, it’s good to Good to see you. Appreciate you having me on and appreciate you getting up a little early in Australia to do this.

Gene Tunny  02:32

Oh, of course. It’s good to connect. And you’re joining us from Austin in Texas. And you’re you’re currently running a boutique advisory firm Redwood advisors. Before we get into it. Could you tell us a bit about Redwood advisors and what you do there, John? Yeah, sure.

John Nantz  02:48

Happy to tell you a bit about it. So. So I started my professional career at McKinsey and Company went to undergrad at Stanford did some time in McKinsey. It’s a big consulting firm, and actually left the firm to write the book we’re talking about today, and ended up getting a few clients when I was writing the book. And, you know, because when you’re writing a book, you’ve got a little bit of free time and not a tonne of money. So ended up doing some work independently, really loved it, and had an offer to go back to McKinsey but decided to strike out on my own and it’s worked out. And so I have a small boutique firm here in Austin, Texas focused on a lot of strategic planning work.

Gene Tunny  03:26

Excellent strategic planning for corporates, for businesses that this sort of thing you do a

John Nantz  03:32

lot of private sector, some social sectors. So we’ve done projects with companies, your listeners may be familiar with, like lifts, and National Geographic and NASA education, the Bill and Melinda Gates Foundation, the D’Aleo foundation, so it’s a good mix of private sector and social sector. And yeah, it definitely definitely keeps me busy and in stimulated, so.

Gene Tunny  03:57

Very good. Okay. It might might come back to that a bit later. That’s interesting. You mentioned Ray Dalio. I mean, obviously, you know, huge name and someone who, you know, economists obviously keep an eye on for, for all of his, you know, his interesting analysis over the years, so that’s terrific. Okay. So as you mentioned, John, you, you wrote this book, rediscovering republicanism, renewing America, with our founding vision and values to kick off with what do you mean by republicanism? This is something different from the current Republican Party. Is it the values of that party or what are you talking about here? Yeah,

John Nantz  04:38

it’s a great question. So and obviously talking to someone from Australia. If it’s just the Republican Party, United States, it’s a little less interesting. So yeah, the book, the book was really focused on Republicanism kind of as a as a political idea, not not certainly not a political party. And if you look at republics, you know, you go back to ancient Greece, you go up back to ancient Rome. These are sort of the first examples of republics. Obviously, there’s some differences in terms of how you define them. You know, some city states in Greece would qualify as direct democracies, where people actually get together and vote on laws themselves. But pretty quickly things turn into republics, where people would basically vote on elected officials to go represent them and to make laws. And that’s kind of the definition of a republic versus democracy is you elect this sort of middle layer of elected representatives to represent you hence the word like Republic. So when I use that word, rediscovering republicanism, you know, there’s this you know, kind of after the, during the Enlightenment era, you think Montesquieu, and some other Locke, etc, there was this rediscovery of, of Republican theory, going back to kind of ancient Rome and Cicero, but at the time, you know, 1600 1700s, the world was largely ruled by kings. It was a monarchical time. But people had this thought of, well, could we start republics? Could we start them and the United States was one of the first countries to do that. It was the first written constitution, actually, there was a slight predecessor in Corsica, actually, I think technically can take credit for having the oldest written constitution. But the United States is obviously largest, you know, first written constitution of note in 1787. When that got done so United States kind of kicked off this Republican push, obviously Australia, New Zealand, most of the anglophile Anglophone world has Republic’s India has a republic. So we live in a Republican age. And that’s kind of the way that I’m using that term. And when I say rediscovering republicanism, at least in the United States, you know, things have changed a lot from when the country was started. And I think we have forgotten or overlooked a lot of the insights that the founders of this country had in mind when they put together our political regime. And so my book is when it says rediscovering, what I’m kind of arguing is I think we need to go back and take a look and understand a bit better, why the country was set up the way it was set up. And, and I also further argue that we should we would benefit from reapplying those insights and recommendations to to today.

Gene Tunny  07:20

Okay, well, we’ll get into that. I just want to just mentioned zoning is a bit of trivia. So Australia, I’d say yes, effectively, we are a republic, although, legally we’re not we had a referendum 24 years ago to determine whether we should become a republic because we’re still technically a constitutional monarchy, even though we’ve severed any real legal connection with the United Kingdom. There’s no appeals to the Privy Council as There once was. And our laws don’t have to get passed by an imperial Parliament or anything like that. We’ve were completely independent in that regard. But legally, we’re still we still have a governor general who represents the king. So yeah, it’s anyway. That’s the domestic political issues. Yeah. You wouldn’t be aware of or wouldn’t. It’s just, it’s just a real oddity. Okay. Sure. I’d like to ask you about the these founders. So you’re talking about Ben Franklin and Thomas Jefferson, Alexander Hamilton, Madison, what are these insights? What are those insights that those founders had? And if I’ve left any, any important founder out, please let me know.

John Nantz  08:31

Yeah, no, that’s, you hit a lot of the big names. So when they start in the, you know, at least the United States, there was a very, very challenging and complex situation because the United States had basically declared independence from England, United Kingdom 1775 7017 76 period, there obviously, was a war. We call it the Revolutionary War. I’m not sure what the English call it, but I’d argue would love to know what they call it, but it was the 90s. We call it the Revolutionary War. And that wrapped up in 1783. And we had something the governing political document was the Articles of Confederation. And basically, how that worked was each state in the United States that was 13 at the time was pretty much its own government. So the analogy would almost be we almost it was almost like a combination of NATO and the European Union trade bloc. So it’s actually honestly a good analogy is modern day Europe. Actually. Each of the states had their own nine had their own navies. All of them had their own armies. So we have 13 different armies in the United States. So and I people don’t know this, it’s a fascinating period of history. fascinating period of American history. People just kind of, you know, glossed over it because it’s complicated, but it’s it’s absolutely fascinating. That’s 17 Three. Well, it turned out that that was a very fraught situation because the different states hates as states will do start to compete with each other, they started taxing each other’s trade. They wouldn’t let trade merchants go through their ports to get other states. There was not unified policy with foreign powers. So England wasn’t. England had agreed to leave certain forts on the borders of the United States, but didn’t it didn’t didn’t really have an army to enforce those provisions. So the English were just like, well, we’re not going to leave. And you’ve got Spain is on the Mississippi River with New Orleans and is is is blocking the export of farm goods. So there’s and then you have actual local domestic rebellions called Shay’s Rebellion. So you have these farmers rising up and saying, We don’t want to pay our taxes to the Massachusetts government, you know, and we have guns, you know, if you want to come to get the money coming taken. So this is a very challenging situation. And so, in 1787, a lot of the founders of the country that people that you were just mentioning, were like, Okay, this is not a stable equilibrium, this is going to devolve into European squabbling, or we’re going to be taken over by a foreign power, the English will come back. We have to, we have to rethink this. And so it’s it’s very interesting situation where you have these, these men, who has spent seven plus years of their lives revolting from the United Kingdom, fighting a war against central authority, because of how corrupt think they they view the English as at the time getting together and saying, we actually need more central power to hold us together. And so that was the really rich situation that the founding fathers of the United States and Philadelphia in 1787 found themselves is we just fought a war we lost 10s of 1000s of men against this will be called a foreign despotic power that was called Becoming corrupt. And now we’re getting together to basically create a new one. That is a very, very tight rope to navigate. And so that’s kind of what they were trying to do. So I think what that basically meant was, we needed to have a centralised power that could deal with foreign affairs, that could create a consistent set of laws in the country. Eliminate, you know, interest, state taxes, or kind of getting rid of a lot of the things that clearly weren’t working in that 7377 period, while at the same time not letting the government get out of bounds, because what the founders believed was that what the exam but the English example showed, is, if you have no restraints on the government, it’s just going to keep growing and growing and growing and growing. That’s just the nature of government. So they were trying to thread that needle. And so the three things that I talked about a lot in the book is the kind of bulwarks of this political order, or the first was really very strong individual rights. So the government, you know, it’s interesting, if you look at the language of the 18th century, and you guys may, I don’t, not sure where you all are now in the in, in Australia, but at least the United States, the citizens were called the subjects of the king, which is, if you actually slow down for a second, you think about that, that’s actually a really interesting turn of phrase, because basically, we are subject to the king, the king has the power, and we are subject to it, it’s very clear the power dynamic there. So they want to do is they want to make each citizen in the United States at least, is really the raison de Jatra of our political polity. We’re not a collective, we’re not at the beck and call of a king or an aristocracy. Each citizen really is their own little centre of political power, right, and the government is here to serve them, not the other way around it, the people are not the subjects of the king, the king, the government is really the subjects of the people. That’s why the Constitution is the first start, you know, the first phrase is we the people. So we the people come together to create a government to serve us. So it’s a huge inversion of the historical relationship. So he basically had and then, of course, you have the bill of rights in the United States, which were the first 10 that came out on free speech and establishment of religion, basically saying, if the government forgets what it’s supposed to do, it’s not supposed to do these things. Right? These are out of bounds. And then in the Constitution itself, there’s this listing of the powers of the federal government, what the Congress can do, the president can do, etc. All of that was intended to support a regime where the government had pretty limited powers. And the citizens had come at this open ended, right open ended ability to sort of do what they want. So that was political idea. Number one is let’s put the citizen as the primary political power in our country, not the government. The second was state governments. So like I was saying, originally, in the United States, we had these state governments, the 13th, were really their own countries enlarged in the election. So the United States those what happened is those 13. The concept is called federalism. But the federal government doesn’t have doesn’t have all the power in the United States. And I think this is common in the Anglophone world. These these subsidiary government, governments provinces is done. I don’t know what term is used in the United Kingdom. But that’s another term I think, in Canada, they use the word province Anyways, these provincial governments or state governments actually have a lot of power. So United States, they have the police power, they have the education power. So you know, there’s local laws that they can enforce that the federal government actually can’t election law, for example, it’s a state law is the state prerogative in the United States. So the states got their own power, which was separate from the federal government. And that was intended to sort of like make sure that the federal government didn’t get too big. And then the third thing was the civil society. And this was a sort of a softer, more tacit thing. But it was absolutely critical to how the founders looked at the world, which was, we don’t want government to be the problem solver for every social problem. Like that idea, which is endemic now. Yeah, is would is totally foreign to them. Right. You know, Benjamin Franklin, you know, started the first public library, quote, public, it was a private library, right formed by the citizens of Philadelphia didn’t need the government managing it. Same thing with fire departments. Same thing with toll roads, in the United States, all of this stuff was done, sometimes locally, with the citizens working amongst themselves, sometimes by the local or state governments. So that was the third one was they assumed that and that’s where the indigent like help for the poor. You know, we we’ve had that in our country since the 1600s. But the federal government hasn’t didn’t get involved until the 1960s in the United States. And that was exactly how the Founders intended it was that we wanted these local organisations to take responsibility for lots of stuff. There’s lots of important things that the central government shouldn’t be doing, because not competent to do it. So these are insights that they had, that we clearly have lost. And so you know, that’s part of the book is trying to refresh people’s memory and help them rediscover them. And then talk about how we might apply those those ideas and concepts to our current situation.

Gene Tunny  17:35

So what I liked about your, your book, you talk about the economic vision that they had, they had a vision of a particular type of economy and people within that economy, you talked about self reliance, but it’s broader than that, isn’t it? I mean, in the concepts that you were talking about in their book, we could you could you explain what the economic vision, the economic vision of the founders was pleased, John.

John Nantz  18:03

Yeah. And I know that’s, that’s of interest to you. And a lot of your listeners, this is this is this is this economics perspective. So, you know, to give a sense of how important this was to them. A lot of people don’t know this, but actually, in the Constitution, there’s a fair amount of language around intellectual property rights, which is kind of fascinating. You’re like, wow, I mean, it’s not a very long document. But they actually took the time to articulate rules around or guidelines in terms of, okay, if you create something, how long can you patent it? Can you have rights to that, etc. That is a huge tell about how they expected things to play out how they wanted them to play out. So the founders were sort of setting up this system, that they their vision was they would have, you know, independent, free, you know, individuals making largely free choices, working together. To, at least in those times, many people were working on their farms, so obviously run their farms independently, but they had manufacturing firms, traders, all these people doing, all these folks will be working independently, to build wealth to create income for themselves and their families. They’ll be working together collaboratively, sometimes in the economic realm, sometimes in the social realm to sort of solve social problems, but they will be doing this sort of in these voluntary civic society. This is what Tocqueville who visit United States, this was the most remarkable thing he thought he found about the United States was all these civil associations that were solving various problems. So that yeah, I don’t know if that answers your question. But, you know, obviously, the Constitution is a political document. It’s kind of how things should be working politically. But embedded in that is this vision. It’s a political system that was intended to support and for Oster, a very largely free market. I mean, we didn’t have regulations in this country. I think the first regulation, I could get this wrong, but it was there, there was like a little bit of federal regulation in the 1820s. Regarding like smallpox, but you didn’t even really see the first thing, the concept of a federal regulation, even the concept, federal even existed until the 1850s 1960s, the federal government ran for 80 years, that tells you how not involved they expected the federal government to be. They didn’t even think it was something they didn’t have the idea of doing it, that they assumed all of this would be done, either at the individual level or the state level. Yeah.

Gene Tunny  20:43

How did the Founding Fathers reconcile this? The belief in, in limited government or in or in freedom in rights? How do I reconcile with the slavery that existed in the southern states?

John Nantz  20:59

It’s great question. It’s a very fraught question. It’s very interesting. And obviously, there’s, there’s a lot of this is kind of a hot topic in the United States. There were basically what, here’s how I would characterise and of course, each person had their own perspective. Right? So I’m characterising a group. But obviously, each person has their own view on it. But I’m broadly This is I think, correct. He looked at the people who were there at 1787. In the room, the broad consensus was, this is not the future. This is not in line with our values. So there was a pretty clear, I mean, you couldn’t have gone through the Revolutionary War with, you know, no taxation without representation, right. And you think, Well, how does that apply to slavery. And by the way, if you, you know, you can read books on this, Bernard Bailyn has some, the ideological origins of the American Revolution is Pulitzer Prize winner and fantastic. It was not lost on these people, that the ideology of the revolution did not support the philosophical underpinnings of slavery, that was not lost that intelligent people. So you have that you also have the reality of slavery, which is that you have the majority of southern wealth in slaves, you have, I think, at that point, almost a million slaves. So which is a good portion of the country back to a bigger portion of the country at that time, then then now and a bigger portion of the country then then, actually, during the Civil War, because the Civil War, the North actually grew more? So you had this practical consideration? You had this this IDI, you know, idea. And so what they did is they tried to come up with some compromises. So So one thing is the word slavery is not in the Constitution, which is a very important thing, they knew the word could have been the reversions of the Constitution, drafts that included it, and they took it out, because they didn’t want the word in the documents. And I think that’s a huge important tell. They had this compromise on the three fifths compromise. You can argue that both ways, but I think again, you kind of see them struggling with how do we deal with this. Very importantly, black people don’t know this. The Constitution actually included a provision allowing the elimination of slave imports in the 1800s, early 1800s, I think of 1805 1806, I might be getting that wrong, but it’s during Thomas Jefferson’s presidency. So the Constitution actually predicted we’re going to ban the import of slaves, which they actually did. So the second that day came around the United States embargo, the slave trade in the early 1800s. So we didn’t actually import slaves. So you can kind of see where all this is going. Everyone is sort of like, and then here’s the other interesting thing is that that time, a lot of people thought that slavery would just sort of go away, that it would sort of not be, it wouldn’t be economically efficient, right? That actually slaves would be more of a burden than a boon. And that this is actually what they believed. And there was some good evidence for that at the time that it actually wasn’t that productive to pay for and feed slaves relative to what they could produce. The cotton gin and all that stuff. What really changed the dynamic is an early 1800s, Eli Whitney came up with a cotton gin, which allowed the very efficient This is an economic point, by the way that a lot of political historians don’t understand. But it’s fundamental to what actually happened. Eli Whitney creates the content, I forget when I think it’s in the early 1800s, which massively increases the productivity of cotton production, meaning you can kind of go out and get all the stuff that’s in these cotton balls out using just running it through a machine as opposed to doing it by hand. So we’re not talking about 20%. We’re talking about multiples more efficient. At the same time, cotton demand is skyrocketing. And no one wants to go outside and if you’ve been to Mississippi, but like you’d have to pay someone a lot of money to do that. That created a massive demand for slaves and that’s where you see the price of slaves United States starts to skyrocket. As they can produce cotton, which then can be sold into the, into the global market. That is what made slavery last. And that’s I think what led to the war, because 10% of African Americans or I should say blacks in the South were free. By the beginning of the Civil War, people don’t know this, but Manumission was actually not uncommon. And there are some parts of Virginia 15 20% Were already freed before the Civil War. So the founders thought this was kind of going to go away, it was a little bit naive. But that was their belief. They didn’t think it was. They didn’t think it was moral. They weren’t proud of it, they wouldn’t have they won’t even say the word. And just it technological and historical things intervened, and it took a civil war to figure that out wrong.

Gene Tunny  25:43

And what was the three fifths compromise? Is this? I mean, it sounds ghastly, is this actually counting a slave as three fifths of a, of a person for the purposes of, of some calculation? What what’s the what’s it about there? John, please? Yeah, it’s

John Nantz  26:01

no, it’s a good, good. Yeah, good question. So. So obviously, slaves can’t vote. So it’s very interesting, because it’s the southern slave people. Let me actually, I hope you don’t mind. Let me go back really quickly to the Constitution. In the debates, there were some people from some of the southern states, particularly South Carolina, I think your guys made Pickney, who basically said, if we are not allowed to have slavery, we are out. So I want to be really clear about that. It was not. And it kind of makes sense. When you look at their economy, it makes sense why those people would not support that. And so basically, hope you don’t mind. But let’s just quickly go back, I wanted to wrestle this one down, which is that the South would have would not want to join the Constitution is there is a very simple, so if you’re from the north of Europe, in New York, or Pennsylvania, or whatever, where they didn’t have a lot of slaves, they didn’t support slavery, the South would have just started their own country. So we would have had the Civil War, but 80 years before, so the compromise was required to get all 13 States in. Okay, so let me just, that’s a nice segue into the three fifths compromise, you had to have a compromise, or the states would have just left, I mean, you know, that it said South Carolina was not going to be in for that. So the three fifths compromise was basically, slaves largely couldn’t vote. But the South was still like, Yeah, but they’re people, we feel like they should get some representation. So the compromise was three fifths. So when we’re deciding how to allocate in our country, the House of Representatives, which is by population, a slave would count as three fifths of a person. So if I have 10 slaves, that would count that would be worth six white voters. And that’s how we decide how many representatives a certain state would get. Now, each state also gets two senators. There’s a very, you know, you can argue this both ways, like some people say, Oh, that’s, you know, some people who they say, hey, well, you’re kind of acknowledging they’re a person. That’s good, right? So some people say there’s an abolitionist, anti slavery part of the three fifths because you’re kind of conceding their person. And then of course, other people say the opposite of, yeah, but you know, you’re giving slavery more political power, and you know, etc. So you can argue both ways.

Gene Tunny  28:21

Yeah. Okay. I was just interested in what that what that was. Exactly.

John Nantz  28:25

Yeah. So it gave the slave states more political representation. Yeah.

Gene Tunny  28:29

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

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Gene Tunny  29:07

Now back to the show. Okay, so, you would argue in favour of rediscovering the rediscovering republicanism, the original vision, the values of the founding fathers? How would you apply this today? I mean, look, you’ve got them in the we’re in a different economy, aren’t we? We’ve got an industrialised society, more people living in urban areas. We don’t have the same I mean, there’s organised religions just fallen off a cliff. I mean, more so in Australia than in the United States. We’ve got a massive welfare state we’ve got money in events intervention everywhere. How would you go about it or what are you I suppose what do you see as the the worst areas or where would you apply this vision for as to how do you how would you see this applaud today, John?

John Nantz  30:04

Yeah, no? Great, great, great question. So what I would say is, you know, even at the founding period, the the federal government, the central, our central government had a lot to do. They were completely in charge of military National Defence, they were completely in charge of Foreign Affairs. They were completely in charge of intellectual property law. They were completely in charge of any legal disputes across state lines. This is the founding, by the way, this isn’t reason this is like at the beginning. So when we say, and I think it was an important insight, which is the founders didn’t say we shouldn’t have any central political power the the federal government constitution, the whole reason it exists is to stand up a federal power. A lot of people in United States don’t understand that. Okay. So it’s not about whether it should exist or not, it’s about what it should do. And I think that’s where we were, we got off, at least in our country, and I think a lot of countries across the developed world, particularly in the Anglophone world, we all we all actually have pretty similar traditions, we may think we’re really different. But, you know, compare yourself to China, right? Compare yourself to Russia, and I think we can realise, okay, there’s a lot of commonality among the English speaking peoples of the world. I think what we did in the United States is we just really index on on central power. You know, it depends on what country you’re talking about. But for us, it was really the Great Depression, we have would be called the New Deal in the United States, which just led to this massive profusion of federal power. We, the federal government get into the economy in a really big way. We had the creation of Social Security. We had Works Progress Administration, which employed millions of people to like do various projects across the country, regulatory state, social welfare. So the federal government, at least in our country, and I think in a lot across the world, took on responsibility for helping the the indigent among us, the people who are economically, in challenging circumstances. Wow. Right. That’s a massive amount. And they’re still doing national defence, and they’re still doing Foreign Affairs. And I would argue we’re not doing it that well. At least I’m just gonna say the United States in the last 50 years, I don’t think is a high is not a high point of American governance, right, you can look at, you know, the wars we fought in, I’m not sure those were the smartest wars, or poverty rate, really, isn’t that great. We have a massive homelessness problem, our education really hasn’t gotten better. So, you know, we we made this change. It sounded good. And then, of course, in my book, I talk about the evidence, I say, look, I think if you look at the evidence, it’s hard to say that this was a positive experiment, right, we ran an experiment, and things really didn’t get a tonne better in a lot of areas. So in the book, what I’m saying is, let’s rediscover some of those insights and apply them. And so we go back to those three things, the individual rights, the federalism or subsidiary of like using more local governments, and then civil society. So I quickly tick through through each if you like, individual rights. I think the most salient example there is, is retirement. We’ve got Social Security, we’ve got Medicare. In our country, I’m sure you all have similar programmes in Australia, if not even

Gene Tunny  33:14

more comprehensive, and more expansive. Yeah. Yeah. So

John Nantz  33:18

you guys have more expansive. We’ve had conversations in the United States about, you know, setting up individual accounts, you know, we’ve completely socialised your retirement income and healthcare, meaning you pay in some payroll taxes, and then the government promises to give you some money and to take your healthcare when you’re older. Which is one way to do it, I think a more American way to do it would be to give people individual accounts. So when they save money, it goes into an account with their name on it, that they get to have some influence and control over with a backstop. So if you run out of money, right, or if you are too low, or you need help topping off your healthcare premiums, the government’s there for you. But let’s at least give people an opportunity to kind of manage their own affairs. It’s a much more American way to do it. Right. I’m not saying it’s how every country should do it. The United States, I mean, people here like to take care of their own stuff. So this having a big social insurance model, which we kind of got stuck on, and it’s quite the narcotic. We’ve been on this since the 1930s. It’s hard to get off. But in my book, I think we should I argue we should. And I think there’s really good reasons to do that. And I think that would be a huge step towards getting back to a citizen first approach to life in the in the united states. States. The federal government, United States got into education, they’ve gone to social welfare. It’s gotten into a tonne of stuff. It’s kind of crazy. The idea that these people could manage all of this stuff simultaneously. It’s just horses completely far completely far fetched. So in the book, I basically argue some of these, some of these powers should go back to the state governments, we have 15. United States, I don’t know how many you guys have in Australia. But, you know, like homelessness, we’re not gonna figure it out in Washington DC, we’re just not, we may not figure it out, we may not figure it out anywhere. But I would prefer we have 50 Different states trying things. And to see what works, and some states are going to be more conservative, some states are gonna be more liberal, some states are going to have more law and order, some people are gonna be more permissive, fine, run all the experiments. It’s just like science 150 experiments get results you can learn from each other. Right? The centralised model is very, it’s actually not always nonscientific. It’s like, let’s just have some smart people come up with an idea. And that’s how it’s gonna be one way. That’s not science. Right? That’s philosopher Kane. That’s like, that’s like Plato, the, you know, going back to that way of looking at the world. So with these types of complex things, I just think we’re gonna get better results. If we let 50 different experiments. And let’s add Australia, let’s add Canada. I mean, we can learn from you guys. You can learn from us, these are global issues, and figure out what works and decentralise that. So that’s kind of like saying the book is let’s get the federal government out of some of these social issues, these kind of social welfare, domestic issues, and let the state governments take the lead.

Gene Tunny  36:21

Yeah, yeah. So you’ve got this vision of competitive federalism. And look, I? Yeah, I think there’s a there’s a good point there. There’s some good points there. Particularly, you see a state like California where it’s, I don’t know if you’d call it a failed state, but that it obviously is not the power that it once was. It said, it’s got some problems, and you’ve got people leaving California and going to places like Florida or Texas. So yeah, I am

John Nantz  36:51

one of those people. I lived in San Francisco and I moved to Austin, seven years ago. You’re looking at one of those refugees. Yeah,

Gene Tunny  36:58

yeah. Yeah, absolutely. Okay. And that’s why

John Nantz  37:02

I love federalism, right? Because, you know, at least at least on some issues, I get to choose the regime I live under, you know, and I don’t mind that California does it that way. And they, if they want a top tax rate of 14%, and they want very lacks homeless rules, and they want all this stuff. There’s an argument for that. And there’s also an argument for no income tax, which we have in Texas, and law and order, you know, like, you can’t sleep and set up tents on the sidewalks in this state. We got we have we have places for you. We have camps, but it’s not downtown. Yeah. And, you know, and that’s just, that’s just how we do it. So, you know, I think it’s good. And we can learn from each other.

Gene Tunny  37:48

I’m wondering, John, with your, your idea of having the federal government get out of some of these areas? And I mean, I’m just thinking, I mean, what else needs? Have you thought about what else needs to happen? I mean, if I look at it, I think I mean, you talk about civil society. Now, you’d have to have a big increase or a big boost in civil society or in, you know, welfare philanthropy from, from the private sector to be able to fill that gap, because it’s going to be huge, was presumably when Lyndon Johnson introduced the Great Society. I mean, that was one of the periods where you had like FDR, but then you also had Johnson, who brought in a lot of the new welfare programmes, and then that’s right. Presumably, he was mean, I think, was he concerned about poor, the poor living in the Appalachians? Or there was some, you know, really remote areas of the states where people were living in really poor conditions. So it’s generally concerned about poverty. I’m just wondering, have you thought about, you know, how would this, how would this work? What else needs to happen? If you if the federal government suddenly I mean, what are you talking about? You’re talking about cutting the welfare programmes? I mean, how, what happens in that circumstance? You know,

John Nantz  39:10

I so it’s a great, it’s a good question. So I’m on welfare. I actually think just I think sending it to the States. I think there probably is a state role there. states in the United States had been had been involved in indigent programmes since the 1800s. So state governments have had a role here for a long time. What’s new is the federal government getting involved. That’s what’s relatively new. And it’s funny now, West Virginia is one of those conservative states in the country, which you were talking about women and Johnson referring to Appalachia, and they’re still quite poor. And the reason is, if you if you visit, is that they’ve seen the impacts of these programmes that for decades and you create dependency and you create a lack of work and you you know, federal government has a really hard time, right monitoring anything And so, yeah, it’s, that’s a whole thing we could go down. But there are a lot of things that are not helpful for people in the long run that that I think federal programmes are really not very good at determining like, are you an addict? Like if you’re an addict, there is a very big difference between someone who lost a job at a steel plant or a car plant and someone who is addicted to alcohol or opioids or whatever. And if you’re sitting both of them the check, right, which is what the federal government basically does, right? That’s kind of what they’re in the check distribution business in this country. That’s great for the person who’s down on their down on their luck, right? It’s really not good for the person, you’re you’re now literally paying someone to stay in the addiction cycle. And this is happening to millions people. I mean, you know, so there’s a finesse required. Poverty is so funny, because it’s conceptually really simple. It’s like, oh, here’s this person, they haven’t they don’t have enough money. Easy definition. The solution is really complicated. And it’s heterogeneous. It completely depends on the person, right. And people who in as part of my book, I cite people who spent decades working on this issue, and the one thing that’s consistent when you listen and learn and spend time with people who’ve worked with poor people, is able to tell you how complex it is. So and that is one thing that federal government is really bad at. And laws are really bad at because laws are, by definition, treating multiple cases the same way. That’s what law is about. That’s what they are trying to get at in my book is I think there’s something in that I think, I hope my book is making a contribution to this conversation, because what I’m arguing the book is, there’s something inherent, right? It’s not that we have bad people or that people are not competent. It’s the idea that somehow you’re going to pass laws that are going to create these formal bureaucratic programmes that are going to successfully tackle complex problems, like poverty is inherently a very questionable assumption. Yeah, right. Yeah. So that’s why I’m saying poverty, you push down to the states. They can work with social sector institutions, they can be much more innovative. And there’s a lot of evidence to support that. Yeah. Yeah. I think that’s I don’t think we get government completely out. I don’t. Yeah, I don’t personally support that. But I do. I think the state governments, I’d love to see them play a much bigger role, I think they’re gonna be a lot smarter, I think they’re gonna be a lot more creative. I think they’re gonna be able to handle diversity of cars a lot better. You know, that sorry, we’re having as a country, and I think we might get there. I gotta be honest. I’m actually, next 50 years, I think it’s possible that that some of the things I’ve talked about this book will will happen. Okay.

Gene Tunny  42:46

Finally, I’d like to ask you about healthcare, John. So I mean, one of the things like, from an Australian perspective, we look at the US and, and a lot of a lot of us over here would probably think, oh, we’d actually rather live in Australia with with the single payer or the socialised medicine, or whatever you want to call it, then in the US, because I mean, we we looks like we get better outcomes in terms of life expectancy. Now, I mean, this is not to necessarily be negative about what’s what’s happened in the States. But how do you see the role of government in in healthcare and you had the Obamacare now that didn’t really replicate what we’ve got here in Australia or the UK, but it moved to your way from where you were? And how do you see the role the federal government in in health care, given that if you look at other countries, it looks like there might be public support for that, or that looks like something that may be beneficial? How do you how do you think about health care in your framework?

John Nantz  43:53

Yeah, that’s a good it’s a good question. So yeah, I mean, look, the United States is a bit of an outlier in terms of how we do this with with a private market, really playing playing a leading role. What I would say on healthcare that I think might be interesting to your listeners is, there’s the way that I think about and this I think, helps kind of understand what’s going on the United States. You can there’s the consumption and provision of medical care and you can socialise or privatise either. So almost imagine a little bit of Punnett square. So I’ve got the provision, which is like supplying it, I can have private practices and all this stuff or I can have a nationalised socialised system, which you have in the UK, you sounds like you guys have in Australia. And then the consumption can actually also be privatised, or socialised meaning, the amount that’s provided to the to the citizen can be controlled or it could just be like, hey, the government’s gonna provide it but you can consume as much as you want. So you can privatise demand. In India, in a lot of developing countries, we have private supply and pry I have it consumption, meaning we have it. That’s true. That’s right. The government doesn’t have much involvement there. They do among among all people, and he have some insurance companies but they actually have a lot of self pay. So it’s almost like a it’s like an actual market. Would you see there is typical market dynamics is actually relatively low cost, actually decently high quality. Then you have you guys UK, socialised consumption, socialised provision, the doctors are paid by the government. And and there’s waitlists meaning Yeah, hey, this is how many surgeries we’re going to do. And you just get in line and you wait until your spot opens up. So it’s socialised consumption. We have a very weird thing where we socialised the consumption. But we privatised the provision. So we socialised a lot of people’s consumption. So they’re gonna buy a lot of it. But then we actually privatise the doctors are still for profit companies. Yeah, well, that’s gonna get you guess what that’s gonna get you that’s gonna get you really expensive. You’re gonna spend a tonne of money because I still have a bottom line as a hospital or a physician group. But my consumers don’t care. Well, that’s where you get the United States where we have 8090 $20,000 per capita. And like you said, accurately, we don’t have better life expectancy. We just don’t. That’s the evidence. So I don’t get a tonne of I don’t get into this a tonne in the book. But I think to the extent that we can, if we’re going to privatise the provision, if we can do something to incentivize, we probably I think that’s not a stable equilibrium. I’ll be honest with you, I don’t think it’s stable. You’re either gonna go socialise or you’re gonna go privatise, you can’t have the middle because in the middle, it gets super, super expensive, which is what we have. You either have market forces, controlling demand, like you have in India and China, and some other developing countries, which actually has some benefits to it, or you go full social. That actually does make sense. There’s an argument for that. So I think we’re in a bit of an unstable equilibrium. Switzerland has a model similar to this where they have private insurance companies, and then they basically help people pay for their insurance. That’s probably where America is going to land. Honestly, this is in the Obamacare in the ACA like world, where we base is you take take Medicare, for example, with the United States, it’s our programme for old age 65. And up. The portion of the party that’s growing the most is Medicare Advantage, which is private insurance companies getting people’s premiums and supplying them as opposed to Medicare, which is the government programme. And Medicare Advantage is almost up to 50%. So what we’re finding is American seniors are choosing the for profit insurance company, just apply their care. And it’s completely voluntary. Ron? Yeah. So look, healthcare is super complicated. I work at it from a business perspective. I wish I could tell you where it’s going. I can’t. But yeah, I don’t think what we have now is sustainable.

Gene Tunny  48:05

Yeah. Yeah, I agree. I mean, I don’t have the answers, either. I just, I’m just interested in how, in how you do things over there. And yeah, well, I mean, I mean, there’s like one point that john cochran made, or John was at a, an event, he came over to Australia for a reserve bank conference, and I interviewed him at an event in Sydney recently, and the point that he made was that if you want to, you know, the US still has the best treatment of the world. I mean, you have to be able to if you’ve got the insurance, and you can get the best cancer treatment, best treatment for anything in the world. So there are some great things about the American system and, and you don’t have to wait as you might do if you go have to go to a public hospital here in Australia. That’s one of the issues of the cueing. So yeah, look, there are some the pros and cons with each system. So yeah, just thought I’d better clarify that this has been great.

John Nantz  48:57

I love Yeah, well, and I love the question. And I would just say Do you mind if I can I know you’re trying to get your heads up? I was just gonna say that. It is really interesting. Because one way to look at this and this is an economics perspective is the US when you look at profit pools. So when you look at where our drug companies and medical device and technology companies making money, the US is I think two thirds of the profit pool not revenue profit pool, right? Yeah. Two thirds. So here’s what’s interesting is if we did socialise and the political will go down massively because the government would buy everything, you would absolutely see a reduction. i There’s no i I don’t know. I’d love to see this argue the other way. But I’m I’m pretty confident. Yeah. Just based on basic economics, that the province will drop that much, you would see a substantial reduction in drug development medical device, because what’s happening now is the United States mark is basically subsidising r&d. Yeah. What’s the what’s the developed world globally? People in Australia are benefiting from if we socialised and our market shrunk and was more competitive. We took our cost per capita from 18 to 12, which we could absolutely do. Right? There’d be a lot less money and all those things. And so knee replacements, you know, weight loss, drugs, diabetes, drugs, all the stuff that we all love with the pace that it would slow. So there’s a huge benefit globally. So the way that we’re doing it, I’m just not sure we’re seeing the benefit.

Gene Tunny  50:26

Yeah, personally, I think that’s a good point. And that’s the point that Russ Roberts has made, if I recall correctly on econ talk, so very, very good point. Yeah. Okay. I just might clarify a couple of things, John, because just so I don’t give you the wrong impression of what we do over here in Australia. So yeah, we do have, we’ve got a Medicare system, which covers a lot of, you know, the whole population, which means you can go to the doctor and get a lot of that, that primary care paid for. We’ve got state hos state hospital systems are a public public hospitals, which will, you know, provide the free health care for people, but we also have a private system, you can get private insurance, and then you can go to a private hospital if you want to. But, I mean, there’s a heavy reliance on the the public healthcare system in Australia, and Medicare does pay for a lot of basic services. So health care, primary health care, and also, you know, AI tests and things like that for, for the whole population. So, you know, we definitely do things different. The other thing is retirement. We’ve got, we do have those individual accounts, like you’re talking about, but we still have the back, we’ve got a backstop of the pensions, the age pension system, but the fact is that most people can arrange their affairs so that they get either the full pension or part pension, right, you need to accumulate a lot in your individual retirement account not to actually get access to the pension. So we introduced individual retirement accounts, compulsory, super, but we haven’t actually, we haven’t really tried to avoid the problem that they were trying to, to avoid.

John Nantz  52:05

Yeah, bit of what you guys are ahead of us there. You guys are ahead of us there. Yeah. It’s so funny, because I’m like, sometimes I’m like, Yeah, I feel like we’re really, the United States is really behind the ball in a lot of ways. It’s like, you guys are doing it. Sweden is doing it. The United Kingdom is doing it. I mean, I would argue more left wing countries in general, right. But when you look at the actual policy, it’s like not really, right. I mean, you guys have these, we don’t have that. We have 401k, as you all know, stuff. But yeah, we don’t have it in our government system. And the thing is, Gene two is like this stuff is going to take decades to play out, you know, so it’s like, you guys got it set up. But you have to get this really high threshold. You know, very few people are there. You know, but let’s, you know, give it 2030 4050 years, you know, saying And and I think it’ll start to work.

Gene Tunny  52:51

Yeah. All right. John. Nance, thanks so much for the conversation on your book rediscovering republicanism, I really found that really enlightening. And I really like how you’ve thought a lot about these issues and the, the, you know, the founding vision and the values and how that could be applied in the modern context. I think that’s, that’s terrific. And I really enjoyed the conversation. So thanks so much, John. Thanks,

John Nantz  53:17

Jen. Really appreciate it. Thank you for the time.

Gene Tunny  53:19

Thank you. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.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.

54:09

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Credits

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

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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.

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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

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Credits

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

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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

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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

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Podcast episode

Structural budget deficits – EP164

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

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

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

Links relevant to the conversation

Australian structural budget balance indicators available here:

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

Australian Treasury methodology for estimating structural budget balances:

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

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

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

Media coverage of Australian budget:

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

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

IFS analysis of UK mini budget:

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

Transcript: Structural budget deficits – EP164

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

Gene Tunny  00:00

Coming up on Economics Explored. 

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

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

Arturo Espinoza Bocangel  01:49

Hi Gene. My pleasure to be here.

Gene Tunny  01:51

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

Arturo Espinoza Bocangel  04:45

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

Gene Tunny  04:58

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

Arturo Espinoza Bocangel  14:01

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

Gene Tunny  14:33

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

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Gene Tunny  26:52

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

Arturo Espinoza Bocangel  27:01

No, at the moment..

Gene Tunny  27:02

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

Arturo Espinoza Bocangel  30:39

Yes, it’s all clear.

Gene Tunny  30:42

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

Arturo Espinoza Bocangel  35:21

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

Gene Tunny  36:04

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

Arturo Espinoza Bocangel  43:39

No, thank you for all your explanation Gene.

Gene Tunny  43:43

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

Arturo Espinoza Bocangel  44:14

Thank you for having me, Gene. Bye.

Gene Tunny  44:17

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

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

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