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

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

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

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

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

About this episode’s guest: Richard Vague

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

What’s covered in EP195

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

Links relevant to the conversation

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

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

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

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

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

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

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

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

Gene Tunny  00:06

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

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

Richard Vague. Thanks for joining me on the programme.

Richard Vague  01:54

Thank you so much for having me.

Gene Tunny  01:55

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

Richard Vague  02:42

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

Gene Tunny  03:54

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

Richard Vague  04:14

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

Gene Tunny  05:11

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

Richard Vague  05:41

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

Gene Tunny  07:16

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

Richard Vague  07:41

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

Gene Tunny  08:35

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

Richard Vague  09:56

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

Gene Tunny  11:12

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

Richard Vague  11:23

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

Gene Tunny  13:51

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

Richard Vague 14:03

The two added together.

Gene Tunny 14:06

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

Richard Vague  14:11

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

Gene Tunny  15:05

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

Richard Vague  15:16

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

Gene Tunny  15:21

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

Richard Vague  16:30

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

Gene Tunny  16:58

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

Richard Vague  18:11

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

Gene Tunny  20:04

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

Richard Vague  20:15

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

Gene Tunny  21:18

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

Richard Vague  22:52

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

Gene Tunny  24:17

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

Richard Vague  24:56

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

Gene Tunny  26:23

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

Richard Vague  26:29

It’s not the magic bullet

Gene Tunny  26:31

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

Richard Vague  27:10

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

Gene Tunny  28:23

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

Richard Vague  29:00

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

Gene Tunny  32:05

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

Richard Vague  32:23

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

Gene Tunny  35:43

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

Female speaker  35:48

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Gene Tunny  36:18

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

Richard Vague  36:44

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

Gene Tunny  38:49

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

Richard Vague  39:12

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

Gene Tunny  39:22

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

Richard Vague  39:55

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

Gene Tunny  41:43

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

Richard Vague  42:19

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

Gene Tunny  45:30

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

Richard Vague  46:03

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

Gene Tunny  47:50

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

Richard Vague  48:14

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

Gene Tunny  49:29

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

Richard Vague  49:45

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

Gene Tunny  50:47

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

Richard Vague 51:16

Yes.

Gene Tunny 51:18

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

Richard Vague  51:29

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

Gene Tunny  51:32

Very good. Thanks, Richard.

Richard Vague 51:36

Bye bye

Gene Tunny 51:39

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

52:23

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Podcast episode

Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

Australian Treasurer Jim Chalmers argues for values-based capitalism and against neoliberalism in a January 2023 essay in the Australian Monthly magazine. In this episode, show host Gene Tunny discusses the Treasurer’s essay with Dr John Humphreys. John is the Australian Taxpayers’ Alliance (ATA) Chief Economist and the founder of the Australian Liberal Democrats. Gene and John discuss just how literally we should take the Treasurer, the risks of the so-called co-investment approach, and whether the Treasurer is arguing for socialism (or a different -ism).      

This episode features audio from an ATA Econ Chat livestream broadcast on 31 January 23. You can watch the whole thing here:

https://www.facebook.com/AusTaxpayers/videos/509950911277607

You can follow the ATA on various platforms including Facebook and YouTube.

You can follow John Humphreys on Twitter.

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

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

What’s covered in EP175

  • Jim Chalmers’ idea of co-investing with the private sector [4:21]
  • Regarding superannuation funds increasingly having social goals that they aim to meet as well as financial goals [9:12]
  • The Australian stage 3 tax cuts and values-based capitalism: are they compatible?  [12:37]
  • ESG, stakeholder capitalism, and socialism [15:24]
  • How does the Treasurer intend to direct investment? [23:28]
  • How a poor government policy can lead to another poor government policy [27:31]
  • The social impact investment bank expected in the 2023 Australian budget [32:34]

Links relevant to the conversation

Jim Chalmers’ essay Capitalism after the Crises

Clean Energy Finance Corporation Financial Outcomes 2021-22

Australian Government principles for social impact investing | Treasury.gov.au

Impact Investing Won’t Save Capitalism  

Transcript: Values-based Capitalism: What is the Aussie Treasurer planning? w/ John Humphreys – EP175

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. Thanks for tuning into the show. In this episode, I discuss so-called values based capitalism with John Humphreys. John is chief economist of the Australian taxpayers Alliance, and he’s President of the Australian Liberal Democrats. The idea of values based capitalism has been injected into the Australian policy debate by the Australian treasurer of Jim Chalmers. In a monthly magazine essay, the Treasurer argues we need greater coordination between the public and private sectors, and we need co investment. He argues that government business philanthropic and investor interests and objectives are increasingly aligned and intertwined. The Treasurer is the top economic official in Australia. He’s the equivalent of the US Treasury secretary in the UK Chancellor of the Exchequer. So obviously people pay attention when he tells us what he thinks. The audio of my conversation with John Humphreys is taken from a live stream I did with him on the 31st of January 2023. I’ll put a link to the full live stream in the show notes. Okay, let’s get into the episode. Please stick around to the end, because I have additional thoughts after my conversation with John. Well, I think we have to chat about this essay by the treasurer Jim Chalmers capitalism, after the crises, rather extraordinary for the treasurer to publish something like this. I mean, although we had the former PM, Kevin Rudd, publish something similar about how he was going to save global capitalism in I think it was around February 2009. While we’re all busy in Treasury, with actually managing the budget and all of that, somehow, the pm found time to write a 8000 word essay. And now, I mean, Jim Chalmers is done. Well, I think is 6000. It may not be as long as the one Rudd wrote. And Jim Chalmers wants to remake Australian capitalism. I don’t know if he necessarily wants to remake global capitalism. But he does have a critique of neoliberalism. So that’s the new thing that everyone hates. And I mean, it’s similar to a lot of critiques of so called neoliberalism that, you know, we we’ve gone too far in the direction of the market, and we don’t care about society as much anymore and isn’t as all dreadful. And isn’t all this inequality, terrible. It’s causing problems for Democracy Now look, okay. There’s certainly issues and in some countries, inequality has certainly increased, there’s no doubt about that. Overall, it’s this very simplistic analysis. And look, it’s Jim Chalmers is views. I mean, you know, fine. That’s his philosophy, it’s probably what you’d expect from Jim chamas. He’s entitled to those views. I mean, my personal view is you should be looking at specific policies. I mean, what exactly do you think we did wrong? Okay, let’s look at specific issues and see how we can fix those up. I mean, is it tariff cuts? You don’t approve of them in tariff cuts that the whole Keating government supported? I mean, what is it precisely that you think is the problem? So there’s this general critique of neoliberalism, which is no different from a lot of stuff you see online by various progressives? And, look, I mean, I’m not necessarily going to defend everything that that’s been done in economic reform. I mean, there certainly been like, I think there have been some great successes. But there have also been areas where the insert less than stellar results. There’s no doubt about that. But I think what’s important is to get it all. Okay, let’s understand what he actually wants to do because he’s got this general critique, okay. But what do you want to do? And his main idea seems to be this idea of co-investment. That’s the real substantive thing. That seems to be how he’s going to define his time as treasurer or his time as PM if he later becomes PM, because in a way, this is job application for PM he wants to be Labour leader. He sees this as defining his philosophy as a labour treasurer. We’re going to fix capitalism. He talks about values based capitalism, he thinks capitalism, we want to move away from a system where it relies upon people beings If interested in greedy and the private sector alone, we want to have a cooperation between the private sector and the public sector. We want the public sector, getting the policy settings right and and then co-investing with the private sector to provide some, some ideas about how that will occur. He talks about the Clean Energy Finance Corporation, which is designed to provide finance for various renewable energy projects. He sees that as a success, even though it doesn’t appear to be meeting its investment mandate. So I had a look at that, because I found it interesting that that was his one, the example that he gave, so he talks about co-investment as a powerful tool at our disposal. The Clean Energy Finance Corporation has been a great success, partnering with investors to direct capital where it can have the greatest impact, not by subsidising returns, but by helping structure investment vehicles in a rapidly emerging economic sector, we will employ this co-investment model in more areas of the economy, with programmes already underway in the industry, housing and electricity sectors. Okay. So they’re looking at providing some type of framework, having these entities like the Clean Energy Finance Corporation, and I think they’ve set one up similar to that in housing, it’s to encourage investment by the private sector and by I guess, providing more accessible finance, or making creating financial products, perhaps with some government guarantee, I don’t know, we have to wait and see what exactly the treasurer is, is talking about here. So yeah, that’s where I think we’ve really got to focus. This seems to be his idea of how he’s going to be this innovative, new wave labour treasurer. Yeah, Nick’s made a good point here in the comments that they want the super funds to, to invest in some of these areas such as housing, or an infrastructure. But again, I mean, we’ve got to ask exactly how are they going to do that? There’s, what I see is the risk that the government provides some sort of guarantee or does provide financing, he’s saying it’s not subsidised. But, I mean, you’ve got to wonder about if it isn’t subsidised? Or if if the government’s not making finance more readily available in the market within the banks would then what exactly is the market failure they’re addressing? Why wouldn’t the private sector do it? So I think there is going to be some sort of subsidy or, or risk taken on by the public sector that’s not compensated for. And so when I looked at the Clean Energy Finance Corporation webpage on financial outcomes, I discovered that and this is what this is a an institution that the treasurer claims has been a great success is its return its lifetime annualised portfolio benchmark. Return. So this is, this is a return that they’ve earned. So 4.38%, which is, you know, hardly anything, really, if you think about what you’d really want to be earning as an investment vehicle like that. So I think there is a risk that this sort of thing is subsidised. I think there’s a risk that they’re taking too much risk onto the government balance sheet. And there’s a potential to fund projects, which are uneconomic. So if that’s the big idea, I mean, okay, well, let’s see the specifics, and let’s analyse exactly what you’re, you’re recommending, and we can talk about that. Yeah. And there’s that point about, yeah, they do want access to the super funds, money, they will have to make sure that it’s a compelling investment opportunity to actually get that money. And, and that is a big risk. I mean, we don’t yeah, that those super funds, if they just invest in something because the government wants them to invest in it, then they are breaching their fiduciary duties. That would be a terrible thing if the government does direct where that money should go.

John Humphreys  09:12

Interesting points on that today. I think this is part of the problem that we’re sneaking up on the situation several ways. Super funds increasingly have social goals that they need to meet, as well as financial goals. You make a good point that, well, that needs to show that they’re going to meet the financial needs of the super investors. Increasingly, the super funds feel the need to meet their social KPIs, rather than their financial KPIs. And if they are required to meet social KPIs, then they’ll very easily get away with it. Remember, it’s not like this super is optional. We’re forced to give it and if the government gives the super funds who have guaranteed access to our money, social KPIs, you must do something social. By the way, here’s something social we want you to do. You can imagine it happening, even if it doesn’t have financial risk. I think the point Nick can correct me if I have not expressed her concern accurately, please jump into the chat again, Nick. But that’s my understanding of your point.

Gene Tunny  10:09

Yeah. So the whole thing with this values based capitalism, one of the concerns is that you end up with this very odd relationship between the government and banks and super funds. And in a way, it’s very odd for a Labour leader or an aspiring Labour leader. And this is a point that Matt Canavan made that he was very critical, as you probably would expect of this sort of thing. And I mean, he was saying that the treasurer seems to have been spending too much time in the boardrooms of banks and super funds. So yes, it’s, it’s very strange, but what I think might be going on, and this is, this is one thing that I’m wondering is, is this because he really doesn’t have many other options due to the state of the budget due to the high amount of debt, and due to the fact that he’s committed to the stage three tax cuts? Katherine Catherine Murphy on the Guardian podcast asked him, Okay, if you’re talking about values based capitalism, does this mean or she, she was basically asking me if you actually, given what you’re professing about values based capitalism and your concerns about inequality, etc? Does this mean you’d revisit those stage three tax cuts? And other there was a good question, and he just gave the standard line? I look, we’ve already dealt with that. And we’re, you know, my position on that. I think she probably could have pressed him more on that because it is a legitimate question, if in terms of traditional Labour government, some people have been saying that with this essay, Jim Chalmers is channelling Whitlam or it’s going back to the Whitlam government, I’m not entirely sure about that, because the Whitlam government was big spending on social welfare programmes, I really ramped that up. I mean, I know now we are spending more on that sort of thing. But there’s, I don’t know if there’s a capacity for this government, given the fiscal situation to really increase those welfare payments, or expand the welfare state much at all. And so he’s really falling back on this sort of thing, because he may not have any other option. And to an extent, that’s because the government’s had to go along with the stage three tax cuts for political reasons to win the last election. And now they can’t go back on it. So you know, this could be the only shot he’s got in the locker, so to speak. That’s one thought I’ve had on this, this essay.

John Humphreys  12:47

It will be interesting to see what they do in the next budget in terms of tax, I suspect, I’ll sneak that tax rate up, they are going into that. Look, I think that was politically hamstrung with their previous commitments. And quite frankly, I think they made the right decision to stick to their promise, both because I’m a big advocate of the stage three tax cuts, but also politically, if you want to keep any political capital, you can’t just line up lie after lie after lie in your first year in power. So I think it was the right political move and the right economic move. I suspect they also know it’s the right political move. They think it’s the wrong economic move, but they’re stuck with it. And so I’m happy about that. You’re not just a couple of quantifications. I haven’t thought about this article as long as you have, but I think you’ll write in one very important point. There’s been a lot of furor about the words. And I think the words of what Jim says, if taken literally, we shouldn’t be worried if they can, literally. But you pointed out, I think that it’s not necessarily true that we should take it literally, because there’s a lot of fluff and waffle in the middle there, that could be interpreted multiple ways. And to a large degree, what we have to do is go back to them and say, what does that mean, exactly? Exactly what I’m suggesting here. And I suspect what’s happening is there’s two things it’s worth responding to both. I suspect he’s the policy recommendations coming out of this, I suspect will end up being tinkering. I don’t think it’d be good tinkering. But this is probably a lot of grandiose statements. I’m not sure if they’re going to follow through on grandiose actions. I gotta say, as I say that, if I’m right, that would be a good thing. Because if they followed through on all the grandiose statements, I think it would be a supreme mistake for the future evolution of our country. So I am hopeful that this is a lot of bluff and bluster. But also if history is anything to go by, politicians are often full of bluff and bluster and grandiose statements. And then once they actually sit down and work out, what does this mean? It can be a tweak here and tweak there.

Gene Tunny  14:46

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

Female speaker  14:51

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Gene Tunny  15:21

Now back to the show.

John Humphreys  15:24

I do worry about them targeting the super funds, I do worry about what they when they say race, it just sort of interaction cooperation between the government in the corporate sector, that could be done in several different ways. Some of them supremely damaging, and some of them rather mild. And some of them perhaps useful, we really need to know the details first, but I worry that what he’s talking about is not the mild version. But hopefully what he does is the mild version. But what he’s talking about here has echoes of a lot of things that have been growing over the last couple of decades. Some people have actually said it in the chat and see if I can find some here. I think Percy said this twice. It’s the ESG goals. A lot of the language here is also the language of ESG, the environment, the social and governance systems. And it’s steadily in being embedded through several different means fair and foul into the goals of a lot of companies sometimes basically being shoehorned in there by governments, sometimes by industry super funds, which as was also pointed out by Percy, I think, that they are closely related to the union’s so you are getting lots of deviations from normal capitalism for ESG. Another term that’s been thrown around a lot by people that are it looks like Jim Chalmers is influenced by the stakeholder capitalism, and stakeholder capitalism, it sounds so benign, but if you scratch the surface, it’s a very worrying idea. The whole point of capitalism is that corporations are supposed to represent the owners and benefit the owner, it is capitalist who make a profit and the profit goes to the people who made the investment. That’s the idea. Stakeholder capitalism basically means all you know that ownership thing we told you about, yeah, not so much. Right? I mean, you don’t have to be an owner to have a stake, you could be a consumer, or a worker, or a neighbour or just anyone with a pet dog that ran across someone’s front yard. And that basically means society, if society is the owner, where that’s not a real thing, right? That’s always code word for government. If society is the owner of the business, i.e. government is the owner of the business. That does not, that system and economics does not have a good track record at work. There’s a couple of things here. The Chalmers thing has been likened to out and out socialism. I don’t think that’s quite right, because what he’s talking about is this incestuous relationship with big business and big government and big unions. And now socialism, just what’s the leaders of big business up against the wall, shoots them and takes their property. This is like traditional socialism. It’s been likened a bit to Whitlam. And you already mentioned that before, but it’s not quite that either. Because what Whitlam wanted to do was have the government take over all of the realms of how you help the massive welfare state, massive redistributions. He’s not really talking about changing the welfare state. He’s talking about changing the way business operates. So it’s not quite socialist. It’s not quite Whitlamisk, what I call it an eco socialism. It’s instead, this incestuous mix of big government, big corporations, big unions, and we need another word for that. There was a word for that this is not a new idea. This is the thing I’m seeing showing up by some of the op ed writers look at this wonderful new idea. It’s not Whitlam. It’s not Marx, it’s a new idea. It’s actually not a new idea. These ideas have been around for quite a while they were quite prominent, about 100 years ago. I believe, Jim Chalmers is the follower of an Italian economist at the moment. These ideas were very popular amongst a certain Italian politician. From about 90 years ago, if anyone knows their Italian history, El Deus, the Mussolini ideas were basically exactly this. But we don’t need to get rid of business. What we do is we need to have a really close relationship between big government, big business, big unions, we all work together. It may be better than for more efficient for socialism, but it’s a bloody dangerous system. And of course, if you actually call it fascism, everyone gets upset because they say no, no, no, Jim Thomas doesn’t hate the Jews. But fascism isn’t only the economic system of fascism isn’t just about being a Nazi. The economic system of fascism was quite literally the idea that big business can exist, but they just have to cooperate in bed with big government. That was literally the idea of the fascist model of the economy. And it’s not a new idea. I don’t think it has a good track record is actually working as an economic idea. And I’m not trying to say Jim Chalmers is a fascist, I’m just simply saying that we can look at how this has worked in the past. And I don’t think it’s been pretty. The other thing to note about this is they talk a big game about how much they want to cooperate with big business and integrate with them. It’s as if they that they’re unable to draw a distinction between the markets and a business. Right. I mean, most people on my side of politics we believe that a market is a better way of cool donating things, then bureaucrats and politicians. That’s true. That’s not from a love affair with business. Indeed, business are often also the enemy of markets. Like I am not pro business, I am pro markets and markets happen to have business in them. And it seems when a lefty stumbles across this idea and sees markets working, they think markets work, because there’s a couple of nice businesses. So they Co Op those businesses. But it’s not the existence of those businesses that make the market work. It’s the nature of the dynamic nature and the competitive nature of the market. That helps the market system to work. And sometimes a good market needs businesses to fail. If businesses make enough bad decisions, they fail this idea that markets defending markets are about defending businesses. Some people on outside of politics need to get out of that way of thinking, bad businesses should fail. We’re not here to defend businesses, I’m happy to defend people who make good decisions and get ahead and are rewarded for that, whether they are in any field of Endeavour. But it’s not just about defending businesses. And this approach the Chalmers has seems to be pro business anti markets, whereas I am pro market and indifferent to any individual business. And that’s some of the things I do notice in some of his language. He talks about redesigning markets, and that markets need to be carefully constructed. So I think once again, that shows a fundamental misunderstanding of what we mean with markets. Markets are evolutionary concepts. They’re not design. They’re not constructed at all. They happen sort of spontaneously out of the interaction of a bunch of voluntary interactions between consenting adults, it is a it is an evolved system. And one of the most dangerous things we have is these politicians that lack the humility to realise that they can’t design such a complex system meddling in a hugely complicated evolved system that is probably beyond their capacity, it’s beyond their can to actually understand the dynamics. It’s beyond the understanding of most people. Leonard Reed famously wrote a book saying no one knows how to, it’s called “I pencil”. And he pointed out that no one knows how to make a pencil, seems like a crazy statement. But if you unwrap each part of making a pencil, someone has to know how to cut down the wood, which means they have to know how to use a chainsaw, which means they have to know how to make the chainsaw, which means they don’t have to know how to get the metal for the chainsaw, which means they have to know how to make the iron, which the steel which comes from the iron, which comes from the mining. So you go back through all the parts of making a pencil, no one person can do it, but it comes together spontaneously, seemingly spontaneously without any central controller. That’s the important point. There’s no central controller in that. And yet, you can go and buy a pencil now for 10 cents. It involves the cooperation of literally 1000s of people around the world who speak different languages, and may not even like each other, they may hate each other. And yet 1000s of people around the world all coordinated and managed to bring you a pencil at your local store for 10 cents. That is insane. And there is no controller. It wasn’t designed, it wasn’t carefully constructed, as Jim Chalmers seems to think, it was a spontaneous order coming together. And that is the dangerous thing. I think there is when these politicians decide that they need to redesign markets in their own image. And often they have wonderful goals, right? I mean, their vision of the world, that vision of the future is not some dystopian nightmare. That’s just the accidental byproduct of their arrogance and their lack of humility. So anyway, that’s my rant on this. Now, I haven’t spent as little thinking about it as you, so maybe I’ll have to duck into it a bit more over the next week.

Gene Tunny  23:28

But I want to have a closer look at just what these vehicles are and how they intend to direct investment. I mean, he talks about, well, we’re not going to pick winners. Okay, that’s great. Oh, but we’re just gonna set the priority. So it’s like this state directed model that the French had, I think in the 50s or 60s, I wouldn’t call it fascism. I’d call it corporatism, or, or whatever the French used to call their system back in the day, the government’s got an idea of where the investment needs to go broadly. It’s sort of national economic planning. That’s the type of mindset and one thing I’m waiting to see is will they try and revive this idea of an infrastructure bank? So this was something that was raised during the time of the Rudd Government but got knocked down. Turnbull criticised Kevin Rudd has been Kev Lonnie, with reference to Kim Lonnie and there was the people were talking about well is this gonna be the new transcontinental I don’t know if you remember it was it transcontinental, the tri-continental, the, the Merchant banking arm of the state bank of Victoria that went bust in the late 80s. Victoria, when it just got into, you know, just made all these crazy loans during that, that colossal boom in the late 80s. There’s a real risk to government balance sheets here, and I just want to wait and see just what they’re proposing. And whether there is some bold scheme like that, that the treasurer could be announcing. That’s what I’m going to be looking out for.

John Humphreys  24:58

I think on the retail politics that is the right thing to look for I should reiterate, I don’t actually think Jim Chalmers is intended to be a fascist, because I don’t think he intends to follow through on the logical consequences of his own article. But I still think it’s worthwhile pushing back on the substance of the article, even if I don’t think you’ll follow through on it. I don’t want people to think of it as an ideal, because I still think the ideals in there are very dangerous. And look, I also take your point, in reality he’ll be whether it’s fascism, or corporatism, it’ll be a watered down version of that. And we need to see the details I agree. But still, the steel man version of that is worth addressing, in case it seduces the thoughts of any young people that stumble across these ideas. You make a good point that perhaps corporatism is the better word for it than fascism. I’ve thought about that a bit lately, that could work. I wonder though, whether there is a difference between the two, they both involve this incestuous relationship of big business and big government. Perhaps the difference is who has the upper hand. And I think in corporatism, perhaps the idea is that big business has the upper hand, and they kind of use big government as their tool for success. And in fascism, it’s the government has the upper hand, and they use big businesses, their tool for enforcement, or getting things done. But anyway, that’s a thought bubble there on what the potential difference could be. I don’t know which one Jim Thomas hopes he would achieve. Probably not corporatism. But I’ll cheekily put that aside for the voters. What he

Gene Tunny  26:17

wants to achieve is he wants to get enough votes from the labour left by imagining he’s can remake capitalism, where, really, he’s going to get some he’s going to create some investment vehicles. There’ll be some additional money into into renewables and housing. But is it really going to make much of a difference? And I don’t know, I mean, in housing that, you know, that’s one of their big challenges. I mean, that housing affordability is a massive problem now. And the number of people who can’t find accommodation, particularly in Brisbane, I mean, I go for a walk along Wickham terrace in Spring Hill. And I mean, the usual homeless people, you see, but now you see there are people living in cars, they’ve got all their worldly possessions, in, in the back of their vehicles. And it’s just tragic. And it’s because for years, we’ve just stopped people from building houses where people want them. So we’ve got, we’ve got problems that have been created, in part through government regulation. And now that’s going to be used as one of the excuses for remaking capitalism and providing, I don’t know, whatever, they’re going to do subsidised housing, there’ll be some money for that social housing, but it’s not really going to be enough to solve the problem, in my view.

John Humphreys  27:30

But it’s so often the theme, isn’t it? A government programme goes wrong. And the lefties turn around for capitalists to say, Why did you do that? And then they use that to justify another government programme that also goes wrong. And the whole cycle repeats itself. I do like the fact that every time I try to get us distracted in a conversation about the grandiose philosophy of the implications of Jim Chalmers article, he brings us back to the real retail politics, which I think is entirely correct. I think your read on this is true that his grand philosophical statements, they’re mostly just fluff and waffles so that he can try to get the Labour leadership and it’ll mean a bit of tinkering. I think you’re right. I just still enjoy rebutting the actual words. Anyway, that this has been a fun discussion.

Gene Tunny  28:13

Definitely John. Okay, I hope you enjoyed my conversation with John Humphrys about the Australian treasurer’s essay on values based capitalism. I’d say the takeaways from the episode include firstly, that there’s clearly been a big change in the intellectual climate since the financial crisis, and treasurer Jim Chalmers has picked up on this making some of the standard criticisms of so called Neo liberalism. Secondly, it’s important to consider specific policies and to weigh up their costs and benefits and the likelihood that claim benefits will be achieved in my view. If we do so it’s understandable why there’s been such a negative reaction to Jim Chalmers essay by economists and financial commentators here in Australia, I should say, I don’t want to be too negative. I have met Jim Chalmers in the past when he worked for treasurer Wayne Swan, and he struck me as a nice person. He clearly thinks a lot about economic issues, and I respect that. And the treasurer did say some say on things in the essay, for instance, he writes, in the wider world, the contest between democracies and autocracies is economic as well as military. Despite deep disquiet about our own economic models. The reality is that democracies largely work. As of 2021 GDP per capita is around 60%, higher in democracies than in autocracies and the gap isn’t closing. Thankfully, Chalmers is a Social Democrat rather than a revolutionary. But he argues that to protect democracy, we need to have greater economic inclusion. That’s fair enough, but we need to think critically about the measures he proposes to promote it. obvious questions include, will they actually achieve greater economic inclusion, what will they cost? What are the risks to the government’s balance sheet and to taxpayers who will ultimately bear the cost of any bad investments? As I suggested in my conversation with John, history tells us we should be wary of governments owning banks or other financial institutions that don’t have a great track record. The failures of the state banks of South Australia and Victoria were big news in the early 90s. But now three decades have passed and the lessons may have been forgotten sadly. Also, as I noted, when chatting with John the results of the body that the treasurer calls a great success, the Clean Energy Finance Corporation, well, they’ve been pretty ordinary and they don’t appear to be meeting the target of return. The presentation of the financial results for the corporation is rather confusing, but it looks to me that they’re underperforming. I’ll put a link in the show notes so you can see for yourself. One thing I should have covered in my chat with John is the concept of social impact investing. This is an investment where there are both financial and social returns, such as in a profitable social housing development. Social impact investing is one of the concepts that Jim Chalmers is fond of. In a recent financial review article, John Keogh referred to an example from New South Wales in 2013, a social impact bond which raised $7 million from investors to finance the new PIN programme. N E W P I N. New PIN stands for New Parent Infant network. It appears to be a programme to support new parents so they look after their children properly and the children don’t end up in foster care. It looks like the Queensland Government has tried something similar. Typically, impact investments require government involvement of some sort to ensure that the private sector investors get a return. For instance, governments could pay performance bonuses if certain social outcomes are achieved. There’s a handy note from the Treasury which summarises the Australian Government’s principles for social impact investing, which I’ll link to in the show notes refers to such things as payments by results, contracts and outcomes focus grants, that’s how the investors will be rewarded if the investment achieves its social objectives. These payments could be justified because successful programmes could result in budgetary savings in the future. For example, if programmes result in healthier children, that could reduce health costs in the future. You could also imagine programmes resulting in savings in welfare spending, or cost of the justice system. I’d say that such savings are possible, but we should think critically about the likelihood of such benefits and follow up to make sure that they do actually occur. That is, so we’re not paying nonprofits and investors additional money for results that they don’t actually achieve. It looks like treasurer charmers might end up announcing a social impact investment bank in his next Australian government budget in May 2023. James says that the Financial Review gave a good summary of what this bank could do in an article in October last year, which I’ll link to in the show notes. He wrote, the new body would work with investors to supply capital to intermediary funds, which would direct private investment into social housing, aged care, early education or disability services alongside government funding. This could take some pressure off the government budget for providing these services alone. Okay, that’s the point I made in my chat with John, that some of the motivation for what Chalmers is proposing is the poor state of the government budget, they just don’t have the money to undertake traditional programmes. He’s talking about impact investing because he doesn’t have a lot of options. With his social impact investing bank, he can support things that he wants to do off budget, so to speak. James Ayers continues, the institution would make returns when service providers who would typically be receiving some government funding make predetermined improvements to social outcomes such as housing, education or caring for more people under agreed service standards. Apparently, there’s a body like this already in the UK called Big Society Capital. There’s a fair bit to explore with impact investing, so better return to it for a closer look at a future episode. There are a lot of players involved and I’ll do my best to get someone familiar with impact investing on the show for a deep dive. In the Australian model, it looks like there’ll be a government backed social impact investment bank referred to as a wholesaler. Major commercial banks could also provide capital for this bank. It appears based on reporting from the financial review. There’s talk about 200 million coming from the government and 200 million from the private sector. I expect the social impact investment bank will provide finance at lower than market rates for social impact investing funds. These funds then invest in nonprofits or so-called Social Enterprise causes which are delivering programmes under government contracts. An example of a social impact investing fund is the $91 million social impact investment trust, established by social ventures Australia, a nonprofit and Hester a superannuation fund. How the performance bonuses are shared by the nonprofit, the investors and the government back bank will need to be defined by various contracts between the players. This all seems very elaborate to me. There are no doubt a lot of investment bankers and fund managers earning healthy fees along the way. Does this lead to better results? It may do so if the investors push the nonprofit to deliver superior services. As always, I’m open minded but sceptical. I’ve seen that the consultancy firm Airbus has undertaken a positive evaluation of the New South Wales new ping programme. So it could be good to go through that in a future episode. I haven’t had a real chance to dissect that one yet. I do wonder just how much we can rely on impact investing to solve social problems compared with other measures. As I noted with John, I doubt it will solve the housing availability shortage, which to me appears related to restrictions on housing developments. And it’s not going to replace welfare state programmes such as Australia’s various support payments and the National Disability scheme. Maybe you can do positive things at the margins, we have to wait and see because it’s still early days when it comes to impact investing. For a sceptical take on impact investing, which I’ll link to in the show notes, I’d refer you to a 2020 Harvard Business Review article by Ruben Finnegan, who I know well and Alan Schwartz is a prominent Australian businessman. Impact Investing won’t save capitalism. Okay, that’s all from me on values based capitalism for now. If you’d like a closer look at impact investing or any other topic, please let me know. Thank you. Right oh, thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

37:41

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Podcast episode

The Progress Illusion w/ Jon Erickson – EP166

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

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

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About this episode’s guest: Jon Erickson

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

Links relevant to the conversation

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

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

Transcript: The Progress Illusion w/ Jon Erickson – EP166

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

Gene Tunny  00:00

Coming up on Economics Explored.

Jon Erickson  00:03

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

Gene Tunny  00:25

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

Gene Tunny 01:00

Thank you so much. 

Jon Erickson  01:03

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

Jon Erickson  01:56

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

Gene Tunny  03:52

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

Jon Erickson  04:48

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

Gene Tunny  05:51

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

Jon Erickson  05:58

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

Gene Tunny  06:39

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

Jon Erickson  06:50

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

Gene Tunny  07:22

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

Jon Erickson  07:47

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

Gene Tunny  10:16

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

Jon Erickson  11:43

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

Gene Tunny  14:08

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

Jon Erickson  14:30

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

Gene Tunny  15:59

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

Jon Erickson  16:12

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

Gene Tunny  17:44

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

Jon Erickson  18:38

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

Gene Tunny  21:47

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

Jon Erickson  22:51

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

Gene Tunny  24:47

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

Female speaker  24:55

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Gene Tunny  25:24

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

Jon Erickson  26:04

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

Gene Tunny  29:40

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

Jon Erickson  29:58

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

Gene Tunny  30:40

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

Jon Erickson  31:40

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

Gene Tunny  36:05

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

Jon Erickson  36:41

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

Gene Tunny  38:57

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

Jon Erickson  39:37

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

Gene Tunny  42:58

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

Jon Erickson  43:10

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

Gene Tunny  45:45

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

Jon Erickson  46:11

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

Gene Tunny  46:36

just wants more? The rational utility Maximizer? Yeah,

Jon Erickson  46:40

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

Gene Tunny  49:13

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

Jon Erickson  49:39

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

Gene Tunny  50:10

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

Jon Erickson  50:22

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

Gene Tunny  53:39

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

Jon Erickson  54:42

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

Gene Tunny  55:17

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

Jon Erickson  55:24

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

Gene Tunny  55:30

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

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

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

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

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

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

You can listen to the full audio episode via podcasting apps, including Apple PodcastsGoogle PodcastsSpotify, and Stitcher, among others.

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

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Podcast episode

EP112 – Taxing the rich: Billionaire and inheritance taxes

There are growing calls to increase taxes on the wealthy in advanced economies such as the United States and Australia. For instance, US Congresswoman Alexandria Ocasio-Cortez controversially wore a white evening dress with the words “Tax the Rich” written in red across it to the 2021 Met Gala. In Economics Explored episode 112, Australian tax expert Professor Miranda Stewart speaks with show host Gene Tunny about taxes on wealth, including inheritance taxes and the proposed billionaire tax in the United States. What is driving calls to “Tax the Rich” from politicians such as Alexandra Ocasio-Cortez and various commentators? Would it be sensible to do so? 

About this episode’s guest – Professor Miranda Stewart

Miranda Stewart is Professor of Law at the University of Melbourne Law School where she is Director of the Tax Group and is a Fellow at the Tax and Transfer Policy Institute at the Crawford School of Public Policy, The Australian National University. Miranda was the inaugural Director of the Institute from 2014 to 2017. Miranda has more than 25 years research, practical and leadership experience in tax law and policy in academia, government and the private sector.

Death duties: Why experts think this tax should be re-introduced (Australian media article quoting Prof. Stewart on inheritance tax)

The coming boom in inherited wealth by John Quiggin

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

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.

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Podcast episode

EP98 – Political legitimacy with Prof. Phillip LeBel

In Risk and the State, Professor Phillip LeBel argues the political legitimacy of governments worldwide is “under trial from questions of borders and national identity, from rising economic inequality, from the way in which information is gathered, managed, and disseminated, and from varying perceptions of risk.”

In EP98 on political legitimacy, host Gene Tunny interviews  Prof. Phillip LeBel about his new book published earlier this year by Brown Walker Press: Risk and the State: How Economics and Neuroscience Shape Political Legitimacy to Address Geopolitical, Environmental, and Health Risks for Sustainable Governance.  

Phillip LeBel is Emeritus Professor of Economics at Montclair State University, NJ. With a career combining academic research and teaching with professional consulting, Professor LeBel has accumulated a record of economic expertise in a variety of domestic and international fields. Over the years, he has lived in and/or worked in 30 countries, including Africa, East Asia, Central America, and Latin America.

Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

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