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Podcast episode

Jimmy Carter the Great Deregulator, AmFest, MAGA & Migration, and Why Competition? w/ Darren Brady Nelson  – EP269

Gene Tunny and Darren Brady Nelson discuss the economic legacy of President Jimmy Carter, highlighting his deregulation efforts, particularly in aviation, which led to increased competition and significant cost savings. They also touch on Carter’s appointment of Paul Volcker as Federal Reserve Chairman, credited with fighting inflation. The conversation shifts to the America Fest conference in Phoenix, where key speakers included Charlie Kirk, Tucker Carlson, and Glenn Beck. They discuss the tensions within the MAGA movement, particularly around immigration policies. Lastly, they explore the intersection of Christian economics and competition, emphasizing its ethical foundations and the potential for a moral case for free markets.

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

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

Timestamps for EP269

  • President Jimmy Carter’s Legacy and Deregulation (0:00)
  • Carter’s Economic Policies and Personal Anecdotes (5:16)
  • America Fest Conference in Phoenix (14:36)
  • Trump’s Speech and MAGA Movement Dynamics (27:46)
  • Christian Economics and Competition (36:34)
  • Darren’s Critique of Mainstream Economics and Antitrust Regulation (51:22)
  • Regulatory Challenges and Natural Monopolies (55:55)
  • Final Thoughts and Future Directions (59:26)

Takeaways

  1. Jimmy Carter’s Deregulation Impact: Carter’s policies in aviation, trucking, and beer production revolutionized U.S. markets, creating long-lasting consumer benefits.
  2. MAGA’s Immigration Debate: Tensions exist between Bannon’s nationalist stance and Musk’s globalist vision for high-skilled immigration policies.
  3. The Role of Competition: Darren highlighted the economic and ethical importance of competition, criticizing overreach in antitrust regulations.

Links relevant to the conversation

Mises Institute article “Jimmy Carter’s Legacy Is Much More than Good Deeds Done in His Later Years”:

https://mises.org/mises-wire/jimmy-carters-legacy-much-more-good-deeds-done-his-later-years

The previous episode with Darren:

https://economicsexplored.com/2024/11/10/trump-2-0-w-top-wisconsin-door-knocker-economist-darren-brady-nelson-ep261/

Great Reset discussion with Darren from 2020:
https://economics-explained.simplecast.com/episodes/the-great-reset 

Larry Reed, President Emeritus of FEE, speaking about the Parable of the Vineyard Workers:

https://economicsexplored.com/2022/02/05/price-controls-to-fight-inflation-a-bad-idea-infrastructure-lessons-from-potus-21-ep125/

Darren’s articles in Concurrences on competition and antitrust (paywalled, alas):
https://www.concurrences.com/en/page/recherche/?recherche=darren+nelson#

Alfred Kahn’s Economics of Regulation:

https://www.amazon.com.au/Economics-Regulation-Principles-Institutions/dp/0262610523

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Transcript: Jimmy Carter the Great Deregulator, AmFest, MAGA & Migration, and Why Competition? w/ Darren Brady Nelson  – EP269

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

Gene Tunny  00:00

Gene, welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. It’s Saturday, fourth of January, 2025 here in Brisbane, Australia. However, it’s Friday, the third of January in Milwaukee, in the USA, where my guest is based, and it’s Darren Brady Nelson coming back onto the show. Darren, good to have you back on the program. Thank you.3

Darren Brady Nelson  00:55

Thank you. Am I? Am I now in first place, or is that other?

Gene Tunny  00:58

Yeah? Oh, you’re definitely in first place. I think you’ve been in first place in terms of number of appearances for a long time, so

Darren Brady Nelson  01:08

not in quality, just but quantity. I’ll take.

Gene Tunny  01:12

Very good. Wow, yes, yes. I mean, it’s all about consistency, isn’t it that? Yeah, absolutely. Okay. Very good. Well, Darren, thanks for joining me. I wanted to chat with you about a few things. I mean, first we had the news about President Jimmy Carter. He died earlier this week, lived to 100 impressive innings, and you sent me something interesting on Carter being a great deregulator. And I wanted to talk to you about that. I also want to talk about the America fest that you attended. You’re in Phoenix, Arizona. That’s a turning point USA event. And then Doge Trump 2.0 what’s going on there? And finally, there’s an article you wrote recently on why competition. So I want to, want to touch on all of those things to begin with. Can I ask you about President Carter? Now Carter’s seen as well. Often this presidency is seen as an unsuccessful presidency, the presidency of malaise, the presidency before the Reagan administration. You sent an article on Carter being a great deregulator. So there were some positives that came out of the Carter administration. Can you tell us about those, please? Darren,

Darren Brady Nelson  02:30

well, I mean, I always think of two things, and I often even I kind of forgot about, you know, one of them, you know, then the article is about the second thing, which is about deregulation, essentially that, I mean, you think of deregulation in the US, you know, around that time, you probably would have thought, you know, Reagan, obviously, rather than Carter, I guess, you know, Carter would have, you know, certainly had the reputation, and Reagan, I guess, ran on that to some extent of you know, Jimmy Carter being a big government guy. And, you know, and maybe, you know, philosophically, perhaps he ultimately was, but, but the reality is, you know, two things that he did, obviously, was he did start the deregulation process in the US, particularly in transport, I believe, rail, trucking, aviation, and those are huge things, obviously, particularly aviation, you know, that really, I mean, I mean, all of them are, obviously, but I think aviation really is something that, you know, your average american really would have saw the benefits from, you know, maybe rail would have been a little bit more indirect, you know, kind of it might have been part of because they weren’t really deregulating in terms of, like, sort of so much transport, you know, like Amtrak, it would have been more kind of to do with, with freight, and people would have saw some of those benefits. But, you know, would have been kind of a little bit more indirect, same with trucking. You know, trucking would have fed through and, you know, lower prices and better services and all that to consumers, ultimately. But the aviation thing was the thing I think that really stuck out. And, you know, which later came to Australia. And perhaps I’m not, I guess, 100% sure, but you know, Australia usually, often does look to the US to, you know, to get some of its ideas both good and bad. So and the other thing just quickly to mention was that Carter appointed Paul Volcker as the head of the Federal Reserve. And you know, for mine, at least in my lifetime, I think he is by far the best Chairman of the Federal Reserve in terms of being, you know, someone was, you know, a very responsible person of the Federal Reserve, and, you know, having to do what he had to do to, like, try to fight inflation from the 1970s and then, you know, once he did that, to not then just go back to, sort of like, easy money. So sorry, I covered kind of probably more ground in just that introduction than. Than you were looking for. But

Gene Tunny  05:01

good, that’s good. I think it’s a good point about Volcker. I think most economists would agree with you on Paul Volcker, certainly. I mean, Greenspan’s legacy, he’s been his reputation was essentially wrecked by the financial crisis. If it weren’t for that, then he would have been the maestro. I mean, that’s what people were calling him, but, but since the financial crisis, I mean, and he’s seen as the Greenspan put they talk about. And, I mean, Greenspan’s policies are seen as having helped bring about that, that crisis. So I agree with you on Paul Volcker on airlines, I think you’re right. I mean, Australia, we had a two airline policy, and that wasn’t changed until the 1980s so we had the same problems, the restrictions on competition. Now, Carter introduced, it looks like it’s the Airline Deregulation Act in 1978 so that prohibited states from regulating air carrier prices, routes and services. So I think at one time in the states there, I mean, there are rules about how many airlines could compete in a particular market, and it was seen as, oh, this is better for consumers, because then you don’t have all of this terrible competition which is undermining the viability of the airlines. I mean, that’s how they thought, right? You’ve seen, well, you know, you

Darren Brady Nelson  06:19

don’t want the consumer to have too much choice. That’s just, you know, too difficult. Well, isn’t that?

Gene Tunny  06:23

Wasn’t there that scene in The Aviator with, with Alan Alda playing the the rate was he a regulator or a senator, and Alec Baldwin was playing one trip from Pan Am, and they were basically making the case. So this is justifying the regulation of the of the airways, and because they they wanted to crush Howard Hughes, who was trying to compete with them.

Darren Brady Nelson  06:49

Oh, okay, yeah, yeah, seen that movie. Sorry, yeah. Oh, you’d

Gene Tunny  06:52

love it. It’s great film. I mean, DiCaprio is an amazing actor and, yeah, but there’s that, that little, that sort of subplot there about the airline regulation and Alan Alda playing a senator. And I’m pretty sure that’s the avian I put a link in the show notes. It was really good. It’s worth, worth seeing. And I think there are some, sorry, so

Darren Brady Nelson  07:16

I was gonna say one. I forgot to mention the deregulation this. This one might, you know, be something that bit closer to your own heart, perhaps, is, you know, that his deregulation efforts extended to the production of beer making, making the kind of, you know, the particularly the craft beers and all that sort of thing. That industry kind of really grew in the wake of that, which is something I didn’t even realize I knew about the aviation stuff, and that’s really important, obviously, but, you know, it’s interesting that it even extended to things like beer, you know. So,

Gene Tunny  07:48

yeah, well, I mean, that’s important industry for Milwaukee, isn’t it, really, I mean, are you the beer capital of the USA?

Darren Brady Nelson  07:55

Well, they might have been against it because, you know, you know, they like the big, you know, like Miller was here. Miller still is here in Milwaukee. And there were other ones that, you know, have since probably really turned into craft beers, actually, industry interestingly, off these bigger like, there were Schlitz and Old Milwaukee and Pabst and all these other ones that, once upon a time were, you know, quite large beer companies, and, you know, I think they’ve kind of shrunk to become almost, you know, mid tier, possibly even, you know, more competing with the craft beers than they are with like Miller and Budweiser, yeah, yeah. So possibly, maybe walk ins weren’t all that keen on the deregulation, yes, yeah, yeah.

Gene Tunny  08:39

Good point. Okay, well, yeah, it’s an extraordinary legacy, and I’ll put some some links in the show notes, or estimates of how much it saved in terms of air airfares. I mean, airfares, certainly here in Australia, used to be prohibitively expensive, and you’d rarely fly. I mean, it was just so expensive, even in the in the 80s and and so there’s a story that Karen Chester tells she’s a former Treasury official here about how her mother, she couldn’t go visit her, her dying father or in Perth because the of the prohibitive airfares at the time. Just tragic story. And now, in real terms, they’re much cheaper. So many, you know, many poor, many more people flying. That’s the same as in the States. So and Alfred Khan. Was it? Alfred Khan, the economist who was an advisor to Jimmy Carter, who was an important figure in that story, Darren, yeah, I

Darren Brady Nelson  09:39

believe so. And you know, when I’ve, you know, my early days as an economist, you know, out of university, I first started doing sort of competition policy at New South Wales treasury. But then my second job was at the Queensland competition authority, doing, you know, regulation of of infrastructure and all that sort of stuff. And, you know, the, the first kind of textbook. That I kind of read was Alfred Khan’s, you know, he’s got, like, a super thick two volume, you know, sort of book on on the economics of regulation. And Volume Two, I think, was largely devoted to this sort of stuff. You know, a lot of these deregulation, deregulation efforts, particularly, you know, the current administration’s deregulation efforts that. So you know that that’s where I first cut my teeth on regulatory economics and the economics of deregulation as well, sort of thing. So the Queensland competition authority was trying to do kind of both, you know, like be a part of, you know, in, you know, as their name suggests, you know that maybe you help competition and where it can be, you know, sort of introduced or helped along, if you like, that was kind of, you know, their their dual mandate. I think all the kind of Australian state regulators kind of had that, you know, and the ACCC at the federal level now, you know, now they’ve kind of not so much involved in that sort of thing anymore. They kind of straight up regulation rather than being involved in deregulation. But at the time, when I joined the QCA, they were certainly, you know, trying to do that sort of thing as well.

Gene Tunny  11:11

Yeah, yeah, yeah. I’ll put a link in the shop. It

Darren Brady Nelson  11:15

was the textbook, basically. And that feel,

Gene Tunny  11:19

yeah, yeah. And do you have any memories of the Carter administration? Were you living in the States at the

Darren Brady Nelson  11:24

time? Oh, I was a little kid. And, yeah, but not really, you know, my kind of, you know, Reagan’s. I have stronger memories of Reagan because, you know, I was getting a bit older, so thing as a kid, so starting to remember Reagan more than than Carter. But, yeah, kind of small memories, you know, but you know, as a little kid, you know, peanut farmer or something, you know, and his brother and his brother Billy and his Billy beer, right? You go look that up. Yeah,

Gene Tunny  11:53

I vaguely remember all the bad news, because I think when I was first became conscious of the the news was probably late 70s, early 80s, and the news at that time coming out of, well, I mean, worldwide was just terrible. I mean, and you know, Carter had there was high inflation, wasn’t there, particularly after the revolution in Iran, and then because of, you know, impacts on the oil market, and then the hostage crisis, which just went on with the hostages from the American Embassy in Tehran, which just went on forever. And, I mean, that was, yeah, that was probably

Darren Brady Nelson  12:26

my first memories, along with the peanut farming and the fruitless sort of stuff you know about him, you know, being, you know, from a back his brother being a redneck who liked beer, yeah,

Gene Tunny  12:37

yeah. So, yeah, you’re right, yeah. So it’s interesting. He’s got a mixed record on the economy, good on the micro, but generally people think the macro story under Carter was was was poor and but his post presidential legacy has been extraordinary. Many seems to be much loved. He’s built houses for homeless people. He when He goes on flights, he shakes everyone’s hands. Yeah, it seems just to have a really quality, decent man. So, yes, I think an extraordinary, an extraordinary life

Darren Brady Nelson  13:14

well, and it’s funny that what the article I sent to you was from, you know, the Mises Institute. There’s another one which I could share with you. Won’t be too hard to find. Is there was an article there about, basically, the author was suggesting the last, if you like, you know, intellectual or debate, was actually Carter and Reagan, you know, like, you know, good debate about issues and policy, you know, not this kind of, you know, attacking each other and attacking each other as people and, you know, all that sort of stuff. You know, there was, there was levity, obviously, at times, you know, in the debate, you know, between Reagan and Carter, I think they even had some, at least, that levity carried over into the next election, 1984 with Reagan and trying to remember the film Mondale. That’s right, Carter is vice president. So, yeah, you know, times have changed, obviously, not always for the better in terms of, like, the quality of presidential debates. So, you know. So someone’s making the case. You know, basically the, you know, that was kind of the, the, the high watermark appeal of presidential debates was Reagan and Carter and, you know, in 1980

Gene Tunny  14:32

Yeah, okay, I love to check that out. That’s, that’s probably, that’s probably true, Alrighty, now, Darren, what was America fest? You went to this America fest conference in Phoenix. Can you tell us about that? Please?

Darren Brady Nelson  14:47

Yeah, so I think we talked about it, you know, like my the last time I was on the podcast that I was, you know, the door knocking economist, you know, there’s probably not too many of us like. That I’m guessing so, so that was for, essentially for turning point Turning Point action. It was a strange marriage, and I think I may have explained at the time, you know, between Turning Point action and Elon Musk’s America pack. So, you know, Charlie Kirk runs Turning Point action and turning point USA Turning Point space, kind of using the American parlance as a c4 it’s kind of, you know, more of a think tank type of outfit, although, you know, they do a lot of, sort of, like educating on on university campuses, and now they’ve extended that to sort of high school level as well. Turning Point actions, a straight up. You know, get out the vote for the candidates you like, right? Yeah, that’s a c4 sorry, yeah, I believe that’s, am I getting this wrong? No, but is that the c3 My apologies, my I think I need to drink some more coffee or something, but it’s all right. So, you know, they’re totally different types of organizations, and so anyway. So to make a long story short, all the people who did, you know, helped out on that election were offered the opportunity for, you know, free airfares and free hotel and free admission to America fest, which is put on by, you know, Charlie Kirk’s organization. And so it’s kind of like a, you know, if you’re aware of CPAC, you obviously wear CPAC Australia. CPAC Australia is obviously trying to do what CPAC us does, you know, big conference for not just conservative, just anybody, if you like, on the, you know, the right side of politics, whatever that means, you know, center right, whatever, conservatives, libertarians, including kind of, you know, modern day populists on the right. I mean, populists are in the left and the right. You know, over time. You know, that’s kind of a nebulous description populism, but you know, so in Australia, that would include, obviously, you know, Liberal National Party, folks, but include one nation libertarians, all that. And over here, obviously it’s, it’s Trump and, you know, Reagan conservatives, you know Ron Paul libertarians, whatever. And so America fest. I mean, you know it’s not, it’s basically trying to do what I guess CPAC does. And I don’t know the whole ins and outs on why it started out, they thought they needed this. And, you know, to, I’m not sure if they’re trying to be a rival to CPAC, or just, you know, or maybe if you like the markets big enough, and they wanted just another one, the way they hold it in Phoenix, it’s got a, you know, a more blatant, you know, America First type approach, you know, which is kind of a little bit more in line with, you know, the Make America Great Again movement, mega movement, not to say CPAC, not on board with that, because, you know, they are. I guess, if CPAC is trying to, maybe trying to combine that, but keep the establishment Republicans kind of still around, maybe an America fest is, like, we don’t really care about the establishment Republicans, you know, in fact, we want to push them out the door. So they’re probably a little bit more explicitly, you know, mega Not, not, not exclusively So, but they’re certainly, you know, they’re happy, obviously, probably for libertarian types, you know, like, you know, Ted Cruz is kind of bit of a more of a libertarian type, and, and he spoke, there’s certainly, you know, they’re definitely not for the establishment types and Mitch McConnell’s and and certainly not the Liz Cheney types, right? And certainly not the neoconservative types. So anyway, so that, and they hold it in Phoenix. I’m not sure how many they’ve had, I think they’ve had several or more. So basically, I think they took what was good of CPAC and they’ve added to it. There was certainly more energy. It was actually interesting, a bigger than CPAC in Washington, DC, which is saying something, because that’s pretty big, you know, that’s I’ve ever seen, was CPAC until I saw America fest. So

Gene Tunny  19:01

how many people? You’re talking 1000s of people. Oh, boy, oh, boy.

Darren Brady Nelson  19:05

I think the main hall holds 10,000 but the whole, but the whole, you know, conference area is bigger than that. Still, you know, so still, yeah, I don’t know what the numbers are. And, you know, we could probably find a link that maybe sort of said what those numbers might actually be, and I can share that with you where the audience can look that up. But, you know, the biggest thing I ever seen was CPAC, until I saw America fest, and it kind of reinvigorated me too, because I was, I was kind of getting sick of CPAC To be honest, you know, like not to say it was bad or whatever, I just kind of was getting sick of it. And this kind of, you know, the opening night of America Fest was like, you know, pretty Wow. Okay, you know the three key speakers that, I mean, there was more than three speakers. But I mean Charlie Kirk, like, I mean, I was impressed by Charlie Kirk coming in, but, wow, I was even more impressed by Charlie Kirk seeing him speak on the night. He was kind of the opening speaker and, you know, and then one of the last speakers on the opening night was Tucker Carlson, and I’ve been a big fan of Tucker’s for quite some time. And, you know, he certainly delivered as well. And and on the very last night of the conference, Glenn Beck was also, I thought, an amazing speaker as well. And they had plenty of other amazing speakers. We can talk about some of that, including one of the breakout speakers who talked about Marxism, was was amazing, and he’s an academic, and often academics aren’t very amazing speakers, as you probably have experienced yourself. You know, it’s not an easy thing to be someone who’s like, sound on what they’re talking about well and actually interesting at the same time. And who was that? Oh, boy. I mean, it’s really bad that I forgot the fellow’s name, considering he’s from Hillsdale College. He’s got a, he’s got a, he’s originally from Lebanon, so he’s got sort of, you know, you know, maybe I’m being a bit saying he’s got an Arab sounding name, and that’s probably offensive to Lebanese ago. Wait, we’re not Arabs, you know, but, and I think they’re not Lebanese, they’re kind of like a different sort of people’s group than strictly Arabs are, and then they obviously had that interesting mix of like, you know, kind of a bit over half the country’s Christian, and then slightly under half is Muslim. But I think it was originally from Lebanon, because even after the talk, he was talking to someone from Lebanon. He was speaking, you know, in Lebanese, which I understand, is a different language from Arabic, so um, and it sounds different too. So, but anyway, the interesting thing about him is, like, even though his speech was labeled, you know, Marxism, and you know, that obviously gets people, you know, kind of in to see that it was actually more about Jean Jacques Rousseau. Then it was actually about Karl Marx. Yeah, and I knew a bit about Rousseau, but I didn’t realize the importance of Rousseau to the left and he was making, he said, All Marx did was fill in some of the gaps. Rousseau is a guy who, you know, was really leading the charge on the ideas that were, you know, if you like, stuck with today in the 2020s they’ve come to fruition. Yeah. Well,

Gene Tunny  22:25

one of will Durant’s volumes in his history of civilization, I think, is Rousseau and revolution, after the after the age of Voltaire. And so Rousseau is one of those thinkers is associated with the French Revolution. And, yeah, with I mean, yeah, certainly, the Marxists wanted to have their own revolution whereby they get rid of the bourgeoisie, didn’t they? Whereas the French Revolution was, it was against the the aristocracy at the time. Yes, yeah, interesting. Okay, I’ll have to check out his work. And Donald Trump spoke at that event, didn’t he?

Darren Brady Nelson  23:03

He did, and I was, sadly, I got distracted by a pair of Aussies and and I didn’t. And I can tell you more about that. I didn’t. So I didn’t actually get into the main hall to see, you know, the orange MAN there, and, you know, live. So I had to actually just watch them on the big TV screen. So basically, they set these up similarly in CPAC, you know, they have the big main hall, obviously, all the big there’s lots of razzmatazz and all that. Then there’s like an exhibition hall where a lot of, you know, people just, you know, commercial people offering different services, go, hey, you know, here we’re here. You know, either come buyer service or, you know, think tanks go there and say, Hey, join us, or whatever. And then there’s a media row, which is pretty exciting and interesting. So, you know, you have the TV stations and radio stations and podcasts who do their shows live from, you know, from there. So that’s very interesting, too. So you can sit there as an audience and kind of watch this. And some of them you can will interact with the audience as others, they’re not. You’re just kind of watching them. Yeah. And so, so, yeah. So basically, you know, one of the one of the in the exhibition hall was a so not all the media is actually in media rose. Some of the kind of smaller podcasts are in the exhibition area. So one of them was an Australian podcast couple, and so I kind of came across them. They had an Australian flag up so that obviously. And I’ll get you a link to their, their podcast, you know, for for your for the audience, and,

Gene Tunny  24:39

yeah, what do they cover? Do they do politics or economics? Yeah,

Darren Brady Nelson  24:42

their angle is basically doing American politics, but from an Australian perspective, right? And they, and they come over here for big events like this or, you know, and I think they’re going to stay here roaming around until the inauguration, so they’ll end up in Washington. In DC for the inauguration. And, you know, very, you know, like, very cliche Aussies, they were like, you know, just super friendly and super, you know, and I kind of got to know them, and, you know, ended up having, you know, lunches and stuff for them. And sadly, I was chatting so much that the queue to get in to see Trump, you know, it got cut off. Basically, there was, you know, obviously, once it was full, that’s it, you know, you can’t get, but there’s more people in the overall sort of conference than that can fit into the main hall. Yeah, that’s, I’ve actually been, I went to the, the Milwaukee, um, Trump rally right before the election. So, you know. So, you know, it wasn’t, I feel bad for people who actually, that was their thing. They came there Trump, you know. So I’ve seen Trump another, you know, a number of times in person. So, you know, wasn’t as disappointed sort of thing to not see him in person. But, you know, but some people paid money to get there and they’re not from Phoenix, you know, that would have been kind of a real bummer, so I felt kind of sorry for them. Yeah, and there was a few, I’ve met a few other Australians too. So, you know, that was nice. See, there’s probably a lot more Aussies there than I actually ran into. So yeah, it was, oh, actually one of the Australians I did run into. This was a good story. And I think he’s been living in the US now for quite a number of years. And I don’t know perhaps he’s actually married to an American is there’s a quite a popular Catholic podcast, podcast called

Gene Tunny  26:36

pints with Aquinas. Oh yes, yes. It

Darren Brady Nelson  26:38

runs it as Matt Fred, and he’s an Aussie. Ah, yes, yes. I wanted to the, you know, these breakout sessions on, you know, Catholics and, you know, voting and that, you know, I’m was raised a Catholic, but I’m a Protestant nowadays, but I’m still interested. I’m not an anti Catholic, and I find it interesting. And I just went in there, and I sat at the back. And lo and behold, Matt Fred’s behind me. You notice? You notice my my jewel flag? Yeah, you have that, you know. And I told him the story, you know, Brisbane, blah, blah, blah. And then we had a little bit of a chat. Then he wasn’t an official speaker. He was actually there because his son wanted to be there. He’s got a 17 year old son that’s into all this sort of stuff and but, so we had a little bit of chat then. But then later on the day I went out of the conference, I got a good coffee, because you couldn’t get the greatest coffee in the conference. And you know, at the hipster cafe that I was I was talking about, yeah, to go back in, they said no outside coffees. And I go, Okay, fine. So I went to just go drink my coffee, you know, and he was sitting there smoking a cigar, and Matt, that is, and then I said, Oh, you mind if I sit down with you, and we had a good chat for 20 minutes while I drank my coffee and he smoked his cigar. And, you know, we talked about Australia, we talked about Trump, we talked about Catholicism and Protestantism and all that sort of stuff, and and podcasting, and, yeah, it was, it seems like a good, good bloke. Very

Gene Tunny  28:08

good. Well, as I think I’ve mentioned before, you’ve you have a radar for finding the hipster cafes, Darren, whichever city you’re in, so I’ve benefited from that at times. So very good. Now. Can you tell me? Was there any policy discussion at America fest? Did you get any insight into what could happen in the second Trump administration, particularly around migration? Because it looks like there’s a civil war within Maga at the moment between Steve Bannon, the people, you could say are nationalists or Nativists, versus Elon Musk and Vivek Ramaswami, who could be perceived as globalists. Do you have any insights into what’s going to happen? There any any thought, any insights into policy you got from America first?

Darren Brady Nelson  28:58

Yeah, look, I mean, America first wasn’t, you know, much of a policy oriented conference. And so true CPAC isn’t either it’s a lot of you know, it’s a lot of you know, celebration if something’s happened, or getting people you know, fired up for whatever is coming up. Now, look, I don’t know enough about Steve Bannon positions. I never got the feeling it was a nativist as such, like, you know, the one thing that I know Bannon, ramasami and musk agree on is the illegal immigrations that’s got to stop, right? Yeah, not just stop, but it’s got to be reversed. Basically, we can’t have, you know, and they’ll do it in sensible tears. I believe you’re going to, I’ve seen, you know, gangs and criminals, people who are literally, since they’ve arrived the they haven’t just broken the law to get here. They’ve been breaking laws, you know, inside the country too, and particularly the courageous ones. So they’ll prioritize this, you know, obviously, murders, rapists, etc, etc. You know what? You know they. Might come to a compromise with people who’ve, you know, peace, you know, who are peaceful, and they’ve entered and, and they actually did come here with families, as opposed of just, you know, child traffickers and all that sort of stuff. So look, I understood it was over those, those visas for, like, you know, highly skilled and targeted, yeah, you know, Bannon had a problem with that, is that? Is that? Oh, yes, yes,

Gene Tunny  30:21

yeah. But he was podcast the other day, because the the progressive commentators online are, they’re they’re enjoying this. They see this as a civil war within Maga, because you had Ramaswami come out and say, we need more h 1b, visas. Yeah, they’re the ones that Silicon Valley uses, like high skill, particularly bringing in high skilled Indians to work in Silicon Valley. And he, he writes, he wrote a tweet that was probably, you know, badly. He should have thought twice about it. It didn’t go down well with with Maga, really. He said that, oh, we need all of these people on H, 1b, visas, because Americans are, you know, a lot of Americans are lazy and won’t work hard. They’re not entrepreneurial, not not well educated. And that was just, yeah, that caused a bit of a firestorm. And then Steve Bannon on his show, he said, I will, you know, I’m going to fight for control, or something of the GOP. I don’t know the exact words, but he’s essentially saying, Look, we’re going to take on mask and Ramaswamy. We were here first. Well, he in terms of the Trump, you know, being supporters of Trump, where Maga, we’re not going to let you take over Maga. So I think it’s an interesting conflict there between musk and Ramaswamy, who who have a different outlook from that of a lot of the people in Maga, a lot of the supporters of Trump who see, who wants something different from Trump than what musk and Ramaswamy want?

Darren Brady Nelson  32:07

Yeah, look, I think, in a nutshell, I don’t think there’s going to be any sort of civil war, no. And to be honest, also, Bannon influence is just not anywhere near it was in, you know, 2016 2017 I think you know Ramaswamy is gonna certainly, if he hasn’t, he should really go out there and apologize for those statements. That’s just those are, there’s not, I mean, they’re not only offensive, they’re not even, that’s not completely accurate. Anyway, you know, the US is India as the entrepreneurial hub of the world compared to the US over history. No, there’s no comparison, like a really, Johnny Come Lately, you know, to that world. And obviously there’s some good stuff, and they’ve done some good reforms in India, but this is, you know, pretty recent sort of thing. So it’s not like the country that we look to for great entrepreneurs over the past 50 years. No, so you know. So I don’t think there’ll be a civil war. I think they’ll find a compromise Trump, Trump will, you know, Trump’s a strong leader. He’s going to sort this out. They’ll find something that, you know, not necessarily, that Bannon can live with, but I think something that at least your average mega supporter, it’s probably not like up in arms over these visas. But then, you know, when Swami says what? He says, Yeah, they’re gonna be up in arms about that sort of comment. And, you know, Musk, Musk comes from, you know, kind of a, you know, originally, you know, a Democrat type background, if you like. And he’s kind of become, you know, either he’s become more conservative over time, or he can just say the Democrats have become so out of touch with their previous base. Either way, you know, must not going to, he’s not going to be leaving the camp, and Ramaswamy is not going to be leaving the camp, and even Bannon at the end of the day, even if he doesn’t get what he wants on these visas, it’s not going to be, you know, he’s not going to, sort of, you know, be a constant thorn in the side. I would think, to, you know, President Trump. I think, you know, I think things, the compromises, will be reached. And, you know, maybe this on this issue will be one that they disagree, to disagree on. Basically, there’s bigger fights to be had. I think they’re going to fight. They’ll realize that, right? There’s far bigger fights, which is why they have the musks in their camp and the Tulsi gabbards and RFK juniors and stuff. There’s a bigger enemy to be fought, right? The weft type, globalists, you know, you know, rather than, if you like the musk type, small g globalist, if you, if you, if you like,

Gene Tunny  34:43

wow, okay, yeah. Well, we’ll big difference

Darren Brady Nelson  34:47

between that, because the big G globalists are not like, Oh, I just want to have access to better workers. It’s a far more nefarious globalism than than Musk’s type of globalism,

Gene Tunny  34:59

raw. But okay, well, I think we’ve talked about the great reset in the past, and, you know, whether there’s, whether there’s a conspiracy there or not. I mean, I don’t really think there is a conspiracy of any kind there is, because

Darren Brady Nelson  35:11

you can just go on the weft website, and it actually has a black and white it’s like, it’s not like a conspiracy theory. If it’s like, literally sitting there on their website, you know, like that. It’s not even a theory. It’s this is what they want to do. You know? You can say, like, oh, they don’t really want to do what they just said they want to do. Okay, fine, that’s fine. You can have that position, but it’s literally in black and white and reports, and you can go find it today easily. Yeah, they’ve

Gene Tunny  35:35

definitely said some silly things, right? The whole thing about you will, what is it? You will own nothing, and you will be happy. I mean, that’s just,

Darren Brady Nelson  35:43

I’m talking about statements. They have reports on what their is, you know, like it sets it out, you know, like, you know, you know, when someone says what they say, you know, the default should be able to believe what they said, you know, unless some reason not to.

Gene Tunny  36:00

Yeah. Well, I’ll put a link to our conversation on the great reset. I’ll have to go listen back to that. Yes, okay, well, yeah, look. I mean, I’ve got no idea what, exactly how economic policy will play out under Trump. I mean, I think it’s, it’ll be interesting, because there is that tension there, and we have to see how, what you know, how high the tariffs go up that are imposed on China, that are imposed on other countries, whether Australia gets an exemption. I mean, presumably we will, because of our, our strong relationship with the US. But, yeah, we just have to, have to wait and see about that. Okay, Darren, can you tell us about your article? You wrote an article. Why competition for concurrences journal? Can you tell us about that? Please?

Darren Brady Nelson  36:49

Yeah. Look, concurrences is essentially kind of an anti trust, you know, well, not just a magazine. It seems to be kind of bit of an association of particularly lawyers, antitrust lawyers, but also maybe other professionals in the field. And I can’t to this day, I can’t even remember how they approached me, but I remember in 2020 they kind of approached me and asked me to write a forward for one of their, you know, sort of their magazine that comes out, and I kind of wrote about anti trust economics, and kind of did a mix of, kind of like, you know, you know, I did kind of, here’s kind of a the mainstream kind of view on on this from an economics perspective, and then here’s kind of the free market perspective. I think the free market perspective is the better one. But anyway, laid it out and and then, you know, they kind of come back to me, you know, here and there to, you know, you know, ask me to write this or that. And earlier in the year, they were planning on doing a book entitled, you know, why competition voices from the antitrust community and beyond. Just to give it a little bit more context, they’re kind of focused on North America and the European Union, but they’re obviously open to kind of, you know, others around the globe as well. And this was going to have, you know, one of these books where, you know, each chapter has, you know, different author. I mean, they can be co authored or whatever, but they’re kind of in different themes. So my, the chapter that I wrote was, you know, basically, I think I entitled it, you know, kind of competition, economics, evidence, policy and ethics. Again, I kind of try to do, you know, a combination of of, kind of, you know, kind of, what’s the mainstream sort of view, and then kind of a free market view. But interesting enough, when I kind of proposed, you know, I thought, oh, you know, like, you know, as a Christian, as I kind of mentioned, I thought, oh, you know, how about kind of, also, because I’ve increasingly become interested in, kind of Christian economics is kind of even a different thing than than you get from the mainstream and the free market kind of way of looking at things. I thought, oh, you know, maybe this is an opportunity to write a little bit also from, you know, what, what is, what is this? You know, what does competition look like, you know, from a Christian economics point of view. So to my surprise, they went, Oh, yeah, that sounds interesting. Go ahead. So, so, you know, kind of, my, my, my chapter is kind of a mix of those three things wrong. Yeah, you know Christian, yeah. Sorry. Go on, I’ve got

Gene Tunny  39:27

to ask you about that. So, how is economics any different for a Christian versus a non Christian? I

Darren Brady Nelson  39:34

mean, well, it’s a complex thing to answer, because a lot of you know, you know, Christian economics is really just economics written by a Christian, right? So, so they kind of throw in some stuff or, you know, but, but interesting enough, there actually is, if you like, an actual proper Christian economics in the sense of, it’s built up from Scripture. It’s built up. From the Bible itself. Usually, you know, the better ones are people who’ve actually also been there are trained economists, you know, either, you know, from a mainstream perspective, or maybe a free market perspective, or maybe a bit of both. So, you know that, you know, so you kind of, kind of get some interesting feedback, you know, kind of from that. So, you know, like, for instance, you know, Gary north, you know, was, was, I believe, you know, trained in the usual kind of mainstream economics. Over time, he kind of became more an Austrian School economist. But then, you know, he also then tried to build up Christian economics, you know, purely from the Bible, as well as someone who was interesting enough, a trained theologian as well. So, you know, the Bible is, just like, you know, amazingly full of economics, you know, surprisingly full of it. And not just you know, like the parables you know, like the parable of it once or something that you know, probably sorry, the parable of the what’s all right, the talents, oh, you know, yeah, give me that one, you know, like, you know, where you know, a master gives you know, three of his servants, you know, he’s going to go away for a while. And he gives you know one, like one, one talent to go and do something with. And then another two talents, another five talents, you know, you know. So that, you know, there’s not just kind of, you know, they’re ultimately not. The main point of all these things is never just purely to make an economic point. Obviously, in the Bible, it was a more obviously theological point to be made. But, you know, it’s interesting to see just how much economics is in there, you know, as a teaching tool. Because, you know, obviously people can, you know, relate to, you know, least kind of economics in their own life, not necessarily, obviously, you know, the way we as economists necessarily think of things, but obviously economics touches everybody’s life. So, you know, I just wanted, you know, I’m certainly very much a, you know, a Padawan learner and not a Jedi in this just as of yet, okay, you know, I’m kind of, but I just thought it was a good opportunity for me to, kind of, like, write something and just, you know, give me the opportunity to learn more about it myself. Because obviously, you learn you know more from doing, you know, from writing and researching, than just, kind of just reading something, right? Yeah. So, you know, it was kind of a good you know. And I thought, you know, ethics is kind of interesting, too. And ethics, particularly, I don’t know, I find kind of secular ethics, kind of wishy washy for the most part, it’s kind of a lot of just like, how do I feel about things, you know? Like, if I’m from the left, I kind of feel these things. And if I’m on the right and not a Christian, I kind of feel these things. So I think, you know, whether you think Christianity or, you know, the is real or not, you know, it’s certainly more black and white than a lot of these kind of secular ethics is right? And as a Christian, I think it’s objective, right? And I think you go off into secular ethics, it’s kind of very subjective. So I thought it was an opportunity to kind of explore bringing, you know, that there’s an ethical element to economics, at least, you know, from a Christian perspective. And there’s not a, you know, there’s not a tension between the two. They’re kind of wrapped up together. They get like property rights is a concept and not just an economic concept, you know, like, Thou shalt not steal, is both economic and ethical at the same time.

Gene Tunny  43:29

Yeah, yeah, okay, okay, I think I see where you’re coming from, just on the parables. Someone you introduced me to, if I remember correctly, was Larry Reed at Foundation for Economic Education. When he was on my show, he talked about the Parable of the Vineyard workers. The vineyard workers,

Darren Brady Nelson  43:48

oh yeah, the martial, martial value, really, isn’t it? Yes,

Gene Tunny  43:52

yeah, where he’s paying them different amounts of money. And I think Jesus says, Oh, that’s okay, if it’s a fair bargain, if they all are better off because of it?

Darren Brady Nelson  44:03

No, it was. It was basically, it wasn’t even that. It was just like, well, you agreed to it, you know, like, yeah, exactly. So it was actually, I think they were paying the same amount, but these people came in and worked nowhere near as long hours, or, you know, towards the end of the day, and these other people have been working the whole day, and they’re just getting the same pay, you know, I think that’s

Gene Tunny  44:22

right. Okay, gotcha, yeah,

Darren Brady Nelson  44:26

qualifying it by going, Oh, well, as long as it was fair, you know, like it, you know, some nebulous way, he was basically like, you know, is it not the master’s money to decide what he does with it, right? And if he wants to do this bargain, because he needs more workers to come in. And, you know, it was actually strangely in line with, you know, the whole marginal revolution, you know, right, okay, fascinating. It was kind of like a marginal value,

Gene Tunny  44:53

Okay, interesting. I’ll have to put a link to that episode. I have to go to do it actually, to make sure I know the story. It’s quite embarrassing,

Darren Brady Nelson  45:02

that stuff too. But it was something slightly different. But it was, yeah, it was interesting, because then you often, like, people, you know, go like, well, he, he flipped over the the money changers, you know, sort of thing. Therefore he’s anti, you know, markets and anti exchange. No, that that point was to do with the temple and the Pharisees. You know, Jesus didn’t have a problem with commerce. He didn’t run around knocking over exchange tables everywhere. He had a problem with the way that the Pharisees and others are running the temple and, you know, turning it into a farce, you know, sort of thing totally different. So, yeah, yeah, you know. But the thing so, you know, it just was a great opportunity to throw some, I think Christian economics, to me, actually was even surprising to myself as an economist, was like taking the best of the mainstream and taking the best of the free market and not literally building on it like that, but it actually, I found it actually even more insightful, if you like, than even Austrian economics was, yeah, or, you know, neoclassical economics, you know, it had a lot of, you know, you know, good overlap with them. But it was, you know, yeah, I thought it was really interesting. One thing

Gene Tunny  46:15

I remember from Milton Friedman might have been in freedom. It was, it may have been in free to choose, or Capitalism and Freedom. I can’t remember the exact book, but he talks about how there’s a there’s a moral case for free markets, for competition, as distinct from the, you know, the the efficiency case that economists make for free markets is that the case you’re making, you’re saying there’s actually a moral case as well as an efficiency case, correct?

Darren Brady Nelson  46:42

Yeah. And I think the, you know, the Chicago school or Austrian School eventually get down to a level where it’s, it gets a little bit Sandy, you know, like the base wanted to argue an ethical, moral reason for free markets. Eventually it just runs out at depth, right? And I think, yeah, the Bible takes it to a level, you know, that that’s on a solid foundation, that’s literally on a rock, you know, of course, obviously not everybody’s gonna agree with that, if they not a Christian or even a Jew, who can, because they can also go down to the same you know, a lot of this is in the Old Testament too. You know, the, if you like, the ethical, moral foundation for, for, you know, least, largely free markets. But also found that the Christian economics finds doesn’t have the tension between the individual and the collective like the secular Do you know, like the free markets often go into kind of hyper individualism, and then, you know, the left wing ones go into hyper collectivism, right? Christian economics finds the right balance between those two. You know, really marries the individual and the group together better than the secular economics does.

Gene Tunny  47:57

Interesting. Love to think about this some more. Darren, I mean, I’m not, I can’t see how it would affect the laws of economics or or how we would apply economics in practice, but I could see how it could affect your judgments regarding what is good economic policy. I can see that I’d have to wonder though. I mean, what is it? I mean, is there anything superior about I mean, this, I guess, is a bigger conversation. But like, we can’t leave out the Chinese or the Indians or people in other parts of the world who aren’t Christian, can we? Or aren’t predominantly Chris that aren’t Christian countries. So where are they? I mean, they’ve obviously got economists. They’ve got economics. Economics is relevant to them. How to is this just something you that augments your understanding of economics? Or do you think it’s something that’s

Darren Brady Nelson  48:46

essential? Originally, I thought it was augmenting. I think it’s ultimately essential, and it and, you know, if, if the Christian worldview is correct, as I think it is it the God of Christianity is everybody’s God, right? So, so, and the laws that were set, you know, that God created all the laws of this world, right? Sorry, the the natural laws, which say, and I believe he created the economic laws of this world, right? So, and, and there’s good evidence for that. It’s not just a, you know, just a blanket statement, trust me, like we, you know, we told you it was this. So believe us, you know that that, I mean, we’re obviously going to go into a totally different thing. But the world of, you know, Christian apologetics and evidence, which this Christian economics, kind of also kind of overlaps with, it’s not just like these statements that you know we’re right and you’re wrong. Just trust us. You know, there’s a lot of, you know, natural world evidence for this stuff. So, you know, as a Christian, I argue these laws of economics are, you know, the ones that God himself put in place. And he put them in place for a reason, and they’re not in conflict with ethical sort of. The moral laws that he also put in place, and they applied, all of humanity, and all of humanity is welcome. You know, it’s not a case of like, Hey, this is for us, and that’s for you over there. It’s a totally different story, whether you believe it, and you know, whether you’re, you know, saved and all these sorts of things. But you know, and God’s, you know, in the Old Testament is blessed many people that that weren’t Israel as well. So it was never even like only the Jews get the benefits of this. No, it was something that was meant to benefit all of humanity.

Gene Tunny  50:34

Okay, interesting perspective, Darren. I love to come back to that. I mean, I but, yeah, let’s, let’s, let’s leave that there. I want to know what’s your main argument in your article? What’s the main thesis of your of your piece on for in this wire competition volume?

Darren Brady Nelson  50:56

Yeah. I mean, what you know, basic competition is a good thing. Very good. It’s a good thing economically, like efficiency wise, but it’s also good ethically. That’s, that’s, that’s in a nutshell the argument and I, and I draw from, I think, the best of mainstream economic because I’m not in there. In my antitrust article, I was criticizing mainstream economics, and this one, I was just taking some of the good stuff that I thought, you know, it’s still not in conflict with free markets or Christian economics, and just kind of tying it all together to go, yes, competition is a good thing. Yeah,

Gene Tunny  51:28

why were you critical of mainstream economics in that antitrust article?

Darren Brady Nelson  51:34

Well, we can consider a link to it, but you know, even some of the languages that it uses, it kind of presupposes that competitions, you know, either an unattainable thing, and thus government has to intervene, or it’s, you know, using words like power, you know, like, that’s, you know, like, well, free markets aren’t about power, really. They’re about, you know, voluntary exchanges, you know, they’re not the use of power, right? You know, no one’s forcing you to do anything. So, you know, market power. Look, I can understand it, and I there’s some validity to it. I’m not saying there isn’t a beast that’s kind of like that, but to use the word power is almost kind of misleading. And obviously, you know, like using a benchmark, like perfect competition, that they, on the one hand, acknowledge can never really exist, but at the same time using that to judge actual markets, which is what they all do. The a, Triple C does it. The the Department of Justice does it. They all use the same benchmark to go to then intervene. It’s like, Well, you said that this isn’t possible, that you’re using it as a as an excuse to intervene. That’s why I’m getting and you’ll see that in my antitrust article, which is, you know, available, yeah, so

Gene Tunny  52:50

you against all economic regulation, all antitrust action. Is that the position? Um,

Darren Brady Nelson  52:57

yeah, okay, not sure enough. It’s been misused and abused so much that I think it’s not something you know, and it’s usually political, even in Australia, but it’s more so in the US. It’s usually used against people who actually, really, you know, like, even, you know, the people that they supposed like Standard Oil. Well, okay, fine, Standard Oil, at the time, dominated its market. That’s true. But guess what? Prices were going down and quality and quantities were going up. So why were you intervening? Because even under, supposedly under the anti trust laws, you know, even if you are deemed a monopoly, that’s not good enough, you have to be abusing your monopoly power, and if your prices are going down, you’re not really abusing your monopoly power, yeah, yet, yet, they intervene, right?

Gene Tunny  53:48

And I saw in your your article, you had that chart about how all of the the industries that are heavily regulated, their prices have gone up at a faster rate than general prices, than CPI inflation, I think that’s, you know, that’s, that’s certainly something that advocates for regulation need to explain. I mean, the case they’ll make, of course, is that, well, they would have gone up even further if we weren’t regulating. So, you know, what’s the counterfactual? That’s what they’ll that’s what they’ll argue, I suppose, and I

Darren Brady Nelson  54:21

but the thing is, they go up. If you got out of there and you allowed them to go up, and you weren’t getting in the way with all your regulations, they’re good. Someone’s going to come into that market. And I’ll tell you that, you know what? They won’t even do it because, you know, I forgot what that limit. I think it’s limit pricing or something like, you know, we’re monopolists. Are always on the lookout for, oh, if I raise them too much, I’m going to get an entrant, right. So, so, yeah, I don’t know. And the antitrust authorities never go after the regulations that help people monopolize or cartelize their industries. So they basically, they hurt, they make it. They create. It in one hand, not necessarily the antitrust authorities themselves. Government creates these monopolies and cartels and then no pretends to come to the rescue, you know, with the antitrust authority, right?

Gene Tunny  55:10

So you don’t believe in the whole natural monopoly argument, do you? I think we might have chatted about that in

Darren Brady Nelson  55:15

a mainstream economist like Bom will, kind of, you know, kind of heavily question that too, and I believe he’s correct. You know, like, because you know, if you got a natural monopoly, and if you’re you can really produce at a lower cost than two or more others. So what you know, you know, basically the arguments like, so what you know, like, if, but you know, if you can’t, then someone’s going to enter your market unless there’s a, you know, a government created barrier to entry. So even bolmo, you know, mainstream economists recognize that. But even

Gene Tunny  55:50

for water infrastructure or electricity infrastructure, if

Darren Brady Nelson  55:55

you’re a natural monopoly, why do you then, why do you need the regulations that make you a natural monopoly? So you’re not a natural monopoly, you’re a government created monopoly. So monopoly like 99 out of 100 times, right? So, so prove to me that you’re a natural monopoly. Take away the regulations that don’t allow anybody to compete, and then if no one’s competing, then let’s, let’s, you know, then, then the regulator maybe does his thing in that situation. But it never happens that way. They always create the monopoly, or the cartel, and then the regulator comes afterwards. That’s exactly what happened in the US. You know, there was competition in water and sewage, there’s competition in electricity, natural gas, railroads, all the rest. And then some of them couldn’t hack the competition, and they went to get franchise monopolies, and in return for that, you had to have a regulator. Okay, so history is against this concept of net, and they invented the concept decades afterwards, you know. So that’s suspicious in itself, you know. So don’t know. I don’t believe in natural at all, please. Okay,

Gene Tunny  56:55

that’s interesting. That’s good to good to explore these things and and discuss them. One thing I do like about what Lena Khan’s been doing, although she’s getting sacked. I mean, she won’t be appointed. I think Donald Trump will have a different federal trade commission chair. She’s going after the companies that lock you into Subscriptions. Okay? I think that’s a that’s a that’s a really good regulatory action, and Australia is looking at doing that too. The the fact that you sign up to something online, and it’s easy for you to sign up, you give them your and you give them your credit card, but if you want to cancel your subscription, you have to ring someone up. They just make it incredibly difficult to cancel a subscription. And what Lena Khan said is, no, it’s got to be as easy to cancel as it is to sign up. And I think Australia is going to adopt the same thing. I think that is a really good thing to do, because it’s terrible how they do that. And companies which should know better, which should have which should protect their reputation, like the Economist newspaper or magazine in London does that too. I mean, the, you know, the Murdoch papers do it, but okay, probably expect that from them, but for the economists to do it, that’s just disgraceful. So I think that’s actually a good initiative of of the regulatory state, so to speak. If

Darren Brady Nelson  58:23

I wouldn’t be surprised if there was some regulation that made it easy for them to do that in the first place, because that’s usually what happens, usually because, because the regulatory states just constantly building on itself and has all these unintended consequences. You know, just unintended consequences built on unintended consequences, etc, etc, and it’s constantly overriding the common law that would probably would have dealt with that, you know, in a more efficient manner once upon a time, but the common laws been almost just pushed out the door. You know that that would usually not be, you know that would usually break contract law because you didn’t come, you didn’t come to a contract. You know, you can’t just, like, assume I’ve subscribed to your your service, something like that. That’s not how normal contracts work, right? So I would suspect that the, you know, the regulatory states, come to the rescue after it actually created the problem the first place. But I don’t know that for a fact. I’m just those things, having worked around this sort of stuff for 30 years, it’s usually the case, but I can’t say for sure. Well,

Gene Tunny  59:26

I think it’s good to be have that suspicion that you have that as something you certainly want to investigate. I agree there that that’s worth that’s certainly worth considering. Okay, Darren Brodie Nelson, we’ll have to wrap up soon. Any final thoughts, anything you want to come back to to discuss,

Darren Brady Nelson  59:43

oh no, look, you know, appreciate the time, and it’s always fun to kind of, you know, cover, you know, quite different topics. And I imagine, I don’t mean I can’t imagine, there’s too many sort of two economists talking about the kind of variety of stuff that we tend to talk about.

Gene Tunny  1:00:00

Well, I don’t know. I mean, maybe, maybe not, from the angles we talk about them from. I think certainly the the unexpected, the unexpected angles that that we come at things from, I think is, yeah, that that may be that may be unique. Anyway, Darren, it’s always, always a pleasure, and enjoy getting your insights and into what’s happening in the in the US particular. And yeah, well, thanks again for appearing on the show, and look forward to speaking with you in the future. Thank you.

Darren Brady Nelson  1:00:38

Thank you for having me.

Credits

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

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Podcast episode

RBA Deputy Governor’s ‘Beware False Prophets’ talk: Reactions w/ Michael Knox – EP250

Show host Gene Tunny and Morgans Chief Economist Michael Knox explore the recent insights Reserve Bank of Australia Deputy Governor Andrew Hauser shared on monetary policy at the 2024 Economic Society of Australia (QLD) business lunch. They examine the RBA’s data-driven approach to interest rates,  the equilibrium real interest rate concept, and the impacts of Quantitative Tightening (QT). Michael is one of Australia’s leading market economists and RBA watchers, and he led the Q&A session with the Deputy Governor at the lunch. 

If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

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

What’s covered in EP250

  • Introduction. (0:00)
  • RBA’s monetary policy decisions and the influence of high US debt on interest rates. (4:13)
  • The equilibrium real interest rate. (10:29)
  • Monetary policy, inflation, and interest rates. (14:16)
  • Central bank balance sheet unwind and its potential impact on interest rates. (21:42)
  • US budget deficits, bond yields, and quantitative tightening. (27:09)
  • Chinese RMB’s decline in international reserve currency status. (34:18)

Takeaways

  1. RBA’s Data-Driven Approach: The Reserve Bank of Australia relies on actual data more than forecasts when making interest rate decisions.
  2. Criticism of Overconfidence: RBA Deputy Governor Andrew Hauser criticised the unwarranted confidence with which some commentators argue for monetary policy moves.
  3. Implications of Quantitative Tightening (QT): The recent period of quantitative easing has complicated the relationship between government budget deficits and bond yields. However, there are concerns that as QT continues and deficits remain high, this relationship could reassert itself and lead to higher long-term interest rates than otherwise.

Links relevant to the conversation

RBA Deputy Governor Andrew Hauser’s Beware False Prophets speech:

https://www.rba.gov.au/speeches/2024/sp-dg-2024-08-12.html

Chris Joye’s article ‘Arrogant RBA boss should stop trying to muffle opponents’:

https://www.afr.com/policy/economy/arrogant-rba-boss-should-stop-trying-to-muffle-opponents-20240813-p5k25p

Kevin M Warsh: Financial market turmoil and the Federal Reserve – the plot thickens 

https://www.bis.org/review/r080415e.pdf

Transcript: RBA Deputy Governor’s ‘Beware False Prophets’ talk: Reactions w/ Michael Knox – EP250

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, welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene, Tunny, I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. This episode features a conversation that I had with Morgan’s chief economist, Michael Knox, it was about a recent event that the Economic Society of Australia, Queensland branch held with the Reserve Bank of Australia. Deputy Governor, Andrew Houser, it was a business lunch on the 12th of August 2024 in Brisbane. And given that I’m the current president of the Queensland branch of the society. I had to welcome everyone and Michael, he introduced the deputy governor and led the Q and A Michael had that role because Morgan’s sponsored the lunch. In his address, the deputy governor spoke about the challenges of setting monetary policy when there’s so much uncertainty, he suggested that some Australian commentators are overconfident in their assessments of what the central bank ought to do. We’ve had some commentators say the reserve bank hasn’t lifted interest rates enough, and we now have some commentators saying the reserve bank should be cutting interest rates because the economic outlook is so bad. Michael and I start off this episode talking about the deputy Governor’s speech, before we move on to a couple of meaty questions that Michael asked the deputy governor. These questions were about the equilibrium real interest rate and the effect of so called quantitative tightening. I get Michael’s reactions to the answers that the deputy governor gave him I should note that both Michael and I were impressed by the Deputy governor’s remarks, but the deputy governor has received some severe criticism in response to them. One of the strongest bits of criticism has come from well known financial economist and fund manager Chris joy. He’s written in the Australian Financial Review the following the newly appointed English Deputy Governor of the Reserve Bank of Australia, Andrew Hauser, apparently has a proclivity for lecturing Aussies on the history of our penal colonies, arrogance, overconfidence, and the importance of Never daring to criticize our supercilious central bank. Okay, so it’s, it’s a speech that has that’s got everyone talking and I mean, as President of the Economic Society of Australia, Queensland on, I am, I’m happy that people are talking about it. People have taken notice of what the deputy governor has said. What do you think about what he said. I’ll be interested in in your thoughts on it. If you want to get in touch, please do so. My contact details are in the show notes. I’d love to hear from you about the deputy Governor’s speech or his responses to Michael’s questions, or any ideas you have on how I can improve the show. I’d love to hear from you. Okay, without further ado, let’s dive into the episode. I hope you enjoy it. Michael Knox, good to be catching up with you. Good to see you too. We had a great economic society of Australia Queensland Business lunch earlier this week with the RBA deputy governor, Andrew Hauser, and you did a great Q and A session with the deputy governor. So I thought what would be good is to just catch up on that, and you know your reactions to his responses, because at least one of them, I think, was not, probably not what you’re expecting, certainly wasn’t what I was expecting. So just interested in your your thoughts on that. But to start with, what did you think generally of the deputy governor’s talk about the wearing urging us to be what is it? Beware of false prophets?

Michael Knox  04:12

Well, when I got up, I asked I before I asked him the scheduled questions that he and I had talked about before the presentation, I said to him, so it’s really true that the RBA makes its decisions on monetary policy on an inter rated basis, one step at a time. At every meeting, they are looking at the data. They are looking at where employment is. They are looking at what the inflation data is saying, and they and they’re looking at all the other variables and then, and then they’re making the decision on the data a step at a time, yes, yeah. And he said, and he said, Yes. He said, does that mean? I. Don’t have to answer any of your other questions.

Gene Tunny  05:06

Yes, I think that was actually something that the Kook, Steven kookis reacted to on Twitter, like when he heard the speech, his initial like he I think he liked the speech, but his reaction to it was, look, the RBA is confirming that they’re only going to move on hard data. They’re not going to move on, you know, people in the business community saying things are tough and you should cut rates now. They’re not going to move on forecasts from market economists as to what’s going to happen. They’re going to be solely focused on hard data, at least that’s what he took out of it.

Michael Knox  05:37

Yeah. Well, I think that, though, what he talked to me about before, before we were when he went up, was the the influence, and not so much the influence. But I think the annoyance of people like Warren Hogan and other economists saying that the rate should, rate should go up, yeah, or another people saying that rates should go down, and they’re more having their own theory on it, yes. And whereas the he felt that they were looking pretty much at everything that they needed to look at and making the decision the right way. And I think the presentation was about how is about? Was about false positives. Yeah, yeah. People make decisions on a view of what the RBA does, which is their view of what the RBA is doing, but the RBA is actually operating in a different way. Yeah,

Gene Tunny  06:28

yeah. I think so too. I think that gave us a really great insight into how the RBA is thinking about the cash rate decision. I thought that was I thought it was really useful. Can I ask you about the questions that you asked the deputy governor. So the first one you asked about was regarding the equilibrium real federal funds rate. Wasn’t it you were asking, you’re talking about, well, Larry. Was it? Larry Summers had argued that because of the Highland Olivier Blanchard and Olivia Blanchard, right? So some pretty heavy hitters, right? Yeah, real heavy hitters. And you are. They’re arguing that the because of the high level of US debt, you mentioned, that sovereign, net sovereign debt for the United States is going to get to 100% of GDP, of their GDP. And what that means is that the equilibrium federal funds rate nominal is 4% which means, in real terms, it’s 2% have I got that? Right? That’s

Michael Knox  07:29

exactly right, right? That’s what they’ve said. And if you look at the Peterson Institute, they in fact, have five published research papers, not just from them, but for other people who’ve done for the Peterson Institute and and they done over time and their empirical research, and they actually come up with the number of each 1% increase in net G debt to GDP increases the the the equilibrium Fed funds rate by a little over four basis points. So you get Right exactly. You get 450 basis points. Is the equilibrium level of of the Fed funds rate at 100% of GDP, the now the now the net debt of 100% of GDP, that’s a forecast from the International Monetary Fund. So if you go on their their quarterly database, and you’ll see the updated forecast for that 100% of GDP. Very interestingly, Andrews come from the Bank of England, yes, and the UK has exactly the same debt problem that their debt, net debt, is now 100% of GDP. So all of that debt that they paid back from North Sea oil and Margaret Thatcher and all of that kind of thing, they blew it all again, and maybe Boris blew a good bit of it, by the look of it. And and so they’re now in as much debt as they’ve ever been. I

Gene Tunny  09:02

mean, it’s like with all the, you know, many advanced economy governments after the financial crisis, there was, we just took we had the view, oh yeah, we’ve got to spend money to deal with this crisis, and then we don’t really have to worry about debt anymore because interest rates are so low. Larry Summers had secular the secular stagnation hypothesis. I think that’s part of it. There’s some changed attitudes. I mean, I don’t agree with that, but that’s what would you should we go over what? How Andrew responded?

Michael Knox  09:34

Okay, Andrew, so the first question was, in your presentation of 27 June, you showed that historically, Australia has been an importer of capital. And I remark that two noted economists, Larry Summers and Olivier Blanchard of the Pearson Institute, have suggested that the high level of us net sovereign debt to GDP, which reaches a. 100% of GDP next year, according to the IMF estimates, will generate an equilibrium Fed funds rate. This is, according to Larry and Olivier, an equilibrium Fed funds rate of not less than 4% that is to say a real rate of around about 2% so does this mean that the equilibrium real short rate in Australia is likely to move to higher a higher level going forward?

Andrew Hauser 10:29

So I think the this concept of equilibrium real exchange rate [NB he means equilibrium real interest rate] is a bit like the supply capacity number in my speech. It’s a latent variable. You can’t go and look for it anywhere, right if you if someone we Bank of England joined the first week. He wrote, and he said, Can somebody tell me where the measure of the equilibrium interest rate is? And some whip rope out? He says, the same place as the NAIRU, you know, and the sustainable level of output. In other words, who knows? And so that’s an important point to start with. Nobody knows the answer to that. Larry Summers is quite good at saying he does know the answer, although sometimes, if you look back over its forecasting record, it’s not quite, doesn’t always follow quite the certainty of his, of his predictions when you so there’s huge uncertainty about what this number is. It is interest when he when he says real rate of 2% he’s been provocative, right? Because if you look at the fomc.so called dots, for example, at the estimate of FOMC members, that’s us monetary policy makers estimates for the long term real interest rate, they have a number like half a percent. It’s quite low the John Williams estimate. John Williams is head of the New York Fed, the US, who’s made a bit of a name at running various models on this is probably somewhere between nought point five and one. So the two is a higher number, and that’s your point, or his point that he thinks it’s going to be higher. There are enormous number of different drivers of this number, right? I mean, ultimately, our star as it were, sorry to use the phrase, our star equilibrium. Real rate is the outcome of equilibrium in the savings and investment market. And if you think about all the things that could drive that, those who think that number, including John and others, is relatively low, will put weight on things like, well, demographics. People get their countries are getting older, so they’re having to dissave Rather than save they’ll put weight on things like productivity. Whereas when, you know, in Australia and elsewhere, productivity rate, growth rates in most Western countries, not the US, actually, but most countries, have been quite low. And we’ll say, Well, look, actually, I don’t buy this number like 2% it’s a lot lower than that. There’ll be others like summers and others who say, Well, look, you know, there’s new shocks and new issues around I mean, I think in talking about the US debt, he must be talking about a risk premium, if that’s right, which is to say, look, there’s so much debt that the US and the 7% deficit of GDP is pretty impressive. Sometimes there’s some they’re issuing so much debt, at some point there’ll be a wobble. There may even be concerns about default risk premium will go up and that our number will go up as people start charging up to lend to the US. And you could think of other reasons too many people who will think that the energy transition, for example, is going to lead to higher investment demand, which will raise that number. You know, who knows? Is the honest answer, whether it’s 2% 1% or half. You asked a question about Australia, and because it’s actually difficult to take no view on this at all, we have a swathe for our own equilibrium, short rate, equilibrium rate, which is similar to that swathe of numbers that I showed you for unemployment. And actually that’s all that has a central point of something like three and a half, three and three quarters in nominal space. Obviously, our current cash rate is a little bit above that. So I think you pay your money and you take your choice. I wouldn’t want to be someone actually trying to invest on the basis of these numbers. Summers may be right, but it may be wildly wrong.

Michael Knox  13:58

Okay, so what I’ve said about that is, if you go to the Peterson Institute website, you’ll find five studies, different done at different periods, and the most recent one is actually that you get, it’s actually four and a half percent, 450 basis points, 100% of GDP. That’s where you concluded. But what the real test of this when Larry Summers was and actually, Larry Summers did this talk last year, yes. So I’d actually saved this question up for a year, because I’ve been, I’ve been I model bonds myself, and I use deficits and that kind of things in my bond models. But the position that Larry Summers was putting when he talked about this last year, was that when the Fed started cutting rates for 535 basis points, it would be difficult to sustainably cut it below 400 basis points. Yeah. Okay, and so when you got to 400 basis points or lower. Up or you got below 400 basis points, there would be some reaction, either in inflation or the US dollar, which might would make it difficult to continue to cut rates to where the Fed that currently projects they’ll get to, which is 250 basis points, sometime at the end of 25 or 26 Yeah, is where they think on the summary of economic projections, yeah, but they put out every quarter, so, yeah. So expectations of the Fed, of interest rates falling down to two and a half percent might crash into the reality of net debt as proposed by Larry Summers and leveling a Blanchard on the way down, we’re going to find out, yeah, that’s one of the part of the adventure of economics, yeah?

Gene Tunny  15:44

So this equilibrium nominal cash rate, or federal funds rate, so the overnight money market rate, yeah, this is the rate that they believe is, is essentially that it corresponds to neither a monetary policy stance that is neither expansionary nor contractionary. It’s a, it’s a neutral monetary policy, stand. It’s

Michael Knox  16:06

a neutral monetary policy, but it’s, it’s the basic problem here is that there’s the net debt to GDP goes up in the United States. Yeah, the real rate has to rise to attract the inflow of savings to finance that higher level of debt. So the real rate, nominal rate, plus your inflation target goes up, okay, as net the jet to GDP, right? That’s the that’s the problem.

Gene Tunny  16:33

And what did you think of his like the the RBA view? So their view of the neutral cash rate in Australia, in nominal terms, is, was he saying three and a half or three and three quarters percent? Does that sound

Michael Knox  16:46

well, where they’ve where, where it is thought to be. Okay. So when Michelle Bullock, when she herself, presented in the Hilton for us two years ago when she was also deputy governor. At that time, she then thought that the equilibrium real rate in Australia was 50 basis points. That’s what she said at the time. Now, the commentaries of the of the RBA that I’ve read and the surveys they’ve read, so that’s now increased to 75 basis points. So instead of an equilibrium short rate of inflation at two and a half percent plus 50 basis points, saying that 3% is where the equilibrium short rate is, now that’s risen to 325, basis points, or 350 right? So in the surveys they put out in part of their publication in the quarterly outlook for the summit of their not the summary of economic projections, but the statement on monetary policy in their detailed section they they look at, they do a forecast of the detailed cash rate, and they see the detail they in that detailed forecast they see in 26 December, 26 the real cash rate will get down to three and a quarter percent, but that means the inflation of two and a half percent plus 75 basis points for the real rate. They now therefore see that that real rate is 75 basis points. So

Gene Tunny  18:35

real rate 775 basis points and a target, the inflation, the target band of two and a half percent, so that gives us three and a quarter percent. That’s where they expect it to be at equilibrium, right? Gotcha. Okay,

Michael Knox  18:50

so Larry Summers are saying, but I mean, our debt to GDP is half or less, yeah, debt to GDP is half or less what it is in the US. So summers and Blanchard suggest that their equilibrium will be higher,

Gene Tunny  19:03

yeah. Okay, yep. Now that all makes sense. Okay, very good. We might go to the next question that the second question you asked, also an excellent question. So we’ll just, we’ll just play that and then we’ll catch up on that one.

Michael Knox  19:19

So the second question is Kevin Warsh. Kevin Warsh is a previous member of the Federal Reserve Board of Governors, and now he’s he did that job for five years, and now he’s a visiting distinguished fellow at the Hoover Institute at Stanford. In an article on in Wall Street Journal on the 28th of July, Kevin Warsh said that US inflation and interest rates would be rising if the Fed was not reducing the size of its balance sheet. And if it’s reducing the size of its balance sheet, it’s reducing the money base and. Or that’s what’s driving inflation down. So my question is, the RBA is currently running down its balance sheet, and it’s quantitative tightening, and you can see this in the RBA chart book. So is this one of the reasons that the RBA has not have had, has not been forced to increase interest rates.

Andrew Hauser 20:21

So could I give you a one word answer, which is, no, you might not like that quite as much as you like my previous answer. So let me sort of elaborate a bit on that. The reason why people ask this question is obviously when interest rates were at zero or the effective lower bound during the covid period and beforehand in the UK, central banks had to find other ways of expanding of easing policy. And as you know, they did it in the most part, by buying assets, and actually also by lending to banks at longer than normal maturities, both of which the RBA also did before I before I arrived here. But certainly the Bank of England did a great deal of this as well. And it was fairly commonly felt that that effectively added to the amount of monetary stimulus in the economy, that, if you like, the effective short term interest rate went negative to some extent, right? So the thought underpinning the Kevin argument, I guess, is that if it worked on the way in, why wouldn’t it work on the way out? The trouble with that is that, by and large, and people are looking at this very carefully, can’t really find any material macroeconomic effect of unwinding the balance sheet at all, maybe a few basis points here or there, but no major central bank that’s doing it really considers that To be any part of its monetary policy strategy. We’re all watching in case that view learning turns out to be wrong. But our central estimate is that it’s likely that QE unwind, or so called Qt quantitative tightening, actually a bad phrase, right? Because the T implies more of an impact of the kind you’re describing than is actually the case. But there’s the most the central estimate at the moment across countries is the multiplier of the kuti effect is very, very small. Now, I have a particular personal engagement in this, because the Bank of England was one of the very few central banks. In fact, I think the only one that ran down its balance sheet, not only by allowing assets to mature, but by actively selling them back to the market. The New Zealand, RBN said, has been selling assets back to its own debt management agency and the RICS bank. The Swedish central bank has been doing active sales more recently. But when we first announced we had to do this, a reason we felt we had to do this is that the average maturity of the debt stock in the UK is very long, and we faced the prospect of having to hold gilts, government bonds, UK gun bonds, more or less forever, unless we started actively selling. Whereas for most countries, including Australia, the average maturity of bonds is far shorter. You can just let them roll off. We felt we had to do those active sales. I still think we had to do them. But the market, financial market, through its hands up in horror and said, This is a nightmare. You’re going to bring the market, the world to an end. You’re going to drive interest rates up in exactly the way that Warsh is describing, that will cause mayhem in the financial markets. And they were very pleased to say that prediction was another overconfident prediction of mayhem that turned out to be completely wrong. There is very little evidence so far that balance sheet unwind has driven market interest rate rates up materially, though we must continue to watch. So no, it’s not one of the reasons why the RBA has not had to lift rates. There’s one other reason before I finish, which is actually the big unwind in the balance sheet of the RBA that’s happened over the past six or 12 months has not been primarily allowing bonds to unwind. But as you probably know, it’s the maturity of the so called TFF, the term Funding Facility, which is a lending facility to banks. Again, I think there was a considerable concern here. It was, largely before I arrived, that that unwind might cause difficulties. It’s a very sharp reduction in the stock of money in the in Australia. But it has gone by practically without a whimper. So so far so good. At some point, if you keep reducing your balance sheet, you the stock of reserves will hit the demand for reserves. And if you hit that at two sort of sharpen angle, you may find that financial, you know, these relatively calm financial conditions turn into considerable instability again, and a lot of central banks are watching for that moment, but it hasn’t come yet.

Michael Knox  24:28

Okay, so, Kevin Warsh, yes, yes. I think I’ve always loved Kevin Warsh as a character, but particularly when he’s on the Fed, yeah, and he gives a speech, which you can google. Kevin Warsh, fish don’t know they’re wet. And it’s one of the great speeches I’d given at the worst part of the financial crisis about the need for liquidity and the fish. He’s describing other people in the financial market who don’t know that they’ve been swimming in this sea of liquidity until it’s. All gone, and then they they’re all flapping on the flapping on the beach in totally unable to cope with the situation. So I think that’s something you should read. Kevin Warsh fish don’t know they’re wet on the which is a speech of his when he was part of the Fed. So I think the problem, I think the problem that Andrew Hauser is talking about, when you examine this hypothesis now it’s difficult to measure it empirically. Yeah, and I think that’s true, but it doesn’t mean the fact that you can’t measure it empirically doesn’t mean that Kevin wash is wrong. I think Kevin Warsh is right, but talking about the problem of measurement, I’ve been running bond models for Australian bonds and US bonds for a couple of decades now, okay? And I know in that there’s a really big response to increases in decreases in deficit. Yeah, I remember back in the 90s at an Australian economist conference, which was in Tasmania. And at that time, bond yields, the Australian 10 year bond yield, was 9% yield was 9% Yeah. And I showed a model of based on forecasts of where the US budget deficit was going to go, because at that time what was under Clinton, yeah, and Gingrich, the US budget deficit was going back to balance. Yeah, it was extraordinary. And what I said is that that would reduce the budget reduction of budget deficit would drive bond yields down to 5% and I remember at this conference, doing this speech and being met with absolute disbelief that Australian 10 year bond yields, and us 10 year bond yields could ever fall again to 5% I mean, there was, it would be both miraculous and absurd if that, if that occurred. But it is, in fact, exactly what happened when the US balances budget deficit so but what’s happened is, but during the recent period, if you’ve got, if you’re running big budget deficits, at whiz we have in the last couple of couple of years, and at the same time, you’ve got quantitative easing, yeah, it’s what’s actually driving the market. Is not the theoretical level of the deficit, it’s the actual flow of funds, yeah, into the bond market, correct out of the bond market, yeah. And if you’re the Treasury, US Treasury, or the Australian treasury, is issuing a lot of debt, but at exactly the same time they’re being bought by the Central Bank, they’re having no effect upon the upon the bond yields, yeah, some interest rates, yeah. So it’s what happens is that that whites out this effect, which in previous periods you can see very strongly in the relationship between budget deficits and and bond yields. In this period because of quantitative easing and tightening, it’s wided out because you’ve got this influences of what the Reserve Bank is doing in each country, the reverse of what the Treasury is doing and but, but I confidently would suggest that as we go forward and we find that you’ve got big budget deficits, and the Fed is winding down smell and shoot the same time, bigger supply of bonds coming forward to the market in the next couple, one or two or three years time, that will begin to have significant effects upon bond yields. So what we saw two years ago was the lowest level of US Treasury bond yields since Alexander Hamilton invented the US Treasury bond in July 1799 and I believe he had it passed by two votes, maybe one, but I think it was a very small majority for passing the US Treasury bond back in July 1799 I’ve stood on the same floor of the old Congress building in in Philadelphia, where the bill was passed, you know. And I thought at the moment, you know, but as we go forward and we’re trying to the US is trying to finance these big deficits and yeah, and unwind the balance sheet at the same time, I think we will see that those low bond yields two years ago won’t probably be repeated for another 200 years.

Gene Tunny  29:46

Okay, so the Federal Reserve’s going to start or everyone expects them to cut. So we’ll see cuts in the federal funds rate, and so therefore longer term yields should theoretically go down as well. But. You’re saying that if you’ve got this quantitative tightening happening as well, they wouldn’t go down as much as otherwise. Is that? Is that how you’re thinking about it?

Michael Knox  30:07

Well, in the bond models, the bond models are a composition of different variables, yeah, things like budget deficits, things like inflation, short rates, are there. Yeah, capital inflow is really important, also in the early part of this century. So there’s a whole bunch of things in those bond models, but Well, firstly, what you would find is, if Olivier Blanchard and Larry sums are right, the Fed funds rate can’t go down as far as was previously thought. It doesn’t get to two and a half percent. It just gets to 4% or three and a half or something like that. And then they run into a wall for some reason. And that provides a floor in the model that will fly the floor to the to the US Treasury bond yield. And in addition that, what’s if we look at the IMF forecasts for the US budget deficit going forward to the end of this decade, you’ve got average deficits between six and 7% of GDP. Yeah, they have, and they’re really there because of the size of the debt and the amount that has to be refined, yeah, every year. And so you’ve got those two things so that’s supporting in my bond models, that itself is supporting the higher yield for us, treasuries and the and it’s working back in the Larry Summers thing, giving you a higher Fed funds rate. So both of those things will push up the equilibrium yield for the US 10 year bond over the next 10 years. So I think that, in short, the best way of looking at it is we had a bull market in bonds from 19, from when Paul Volcker was around in 8132 until about 2020, and that was a great bull market in bonds. But if you look at what happened during the 60s and the 70s, that was a bull market in bonds was followed by a bear market in bonds of about 15 years. Yeah. So I think the US Treasury bonds and our bonds are going to be in a bear market for about 15 years. And I think that’s the problem that is visitors upon us by the belief that you can spend money on whatever you like, particularly during the Biden Harris period or Biden Harris administration, and run big deficits forever, and it’s never going to cost you anything. And I think that’s wrong, and I think Larry Summers and Olivier Blanchard are right,

Gene Tunny  32:42

yeah. I agree with you about what the Biden, Biden Harris, or the Biden administration has done with inflation Reduction Act, I think that looks excessive. But I mean, if Trump gets in, he’s going to have a big tax cut, isn’t he, so that’s going to have a similar impact on the deficit, isn’t it? I mean, it’s going to potentially blow out the budget deficit, yeah,

Michael Knox  33:00

but empirically, if you actually look at the Trump period, yeah, Trump cut tax corporate taxes during that period. Yes, he put up import taxes on on China. And there was one other thing that he did, but if you remember it, I’ll, I’ll talk about that as well. And these are the things that are supposed to be inflation. But in fact, the average rate of inflation in during the Trump period was 1.9% which was one of the lowest rates of inflation of any presidential period since 1953 on the other hand, Biden and Harris didn’t do any of those things, but they had, I think it was four really big spending programs for which the inflation Reduction Act is the tiniest of those. I think there were four other ones, the American rescue plan, and all over a trillion dollars for each of the each of the those bills. Yeah, and it’s that combination of big budget deficits. It’s not just the big budget deficits, which is not was, wasn’t just short term relief spending. They built out major programs which are going out to the end of the decade. You know, they increased education spending on the on the premise that over the next 12 years there’ll be bigger school rooms and lower bigger school rooms, and therefore lower teacher student ratios in in public schools. And the reason, of course, for that was that if you had graduate dispersion of people in the in the classroom, you’d have lower, lower passage of covid, you see, because Okay, gotcha, and everything had to be Okay, gotcha. So there’s always. Endless spending, and in the inflation Reduction Act, as I’ve noted, the subsidies for making electric cars are only provided to work sites or companies that employ workers that are part of the United order Workers Union, yeah, and the International Brotherhood of electricians too, by the way, interestingly enough, both of these are significant donors to the Democratic Party. And interestingly, the and this is the subsidies for making electric cars. And interestingly, Elon Musk, who in Tesla, is the biggest single manufacturer of electric cars, receives none of these subsidies because he doesn’t employ workers who are part of the United order Workers Union or the International Brotherhood of electricians, and so his employees are not necessarily donors for the Democratic Party, so He doesn’t get a subsidy. So I think there’s that kind of thing built into a lot of these Biden Harris spending bills,

Gene Tunny  36:07

right? Michael Knox, it’s been a pleasure. I’ve really enjoyed your reactions, reflections on the the excellent Q and A session you had with Reserve Bank of Australia deputy governor, Andrew Hauser, anything before we wrap up? Anything else?

Michael Knox  36:23

You didn’t ask me the question about the run on the Chinese RMB,

Gene Tunny  36:28

oh, if we’ve got time for it, tell us what’s happening with the run on the Chinese RMB, please.

Michael Knox  36:33

Well, it’s very interesting that the RMB is, it is China’s announced plan to make it a dominant reserve currency, yeah, in the international monetary system. And it does appear that from by 2020 there was $230 billion worth of bonds held in the international monetary system, RMB bonds, and that was rocketing up. And by the end of 2024 that had got to about $340 billion worth of bonds. And in comparison, at that time, the level of bonds held in Australian dollars was about 215 billion, and the level held in Canadian dollars was about two 70 billion. And that so it rocketed well past the international reserves held in Canadian dollars and Australian dollars, which, by the way, are at that we are at the minnow end of international reserve currency. Yes, yes, but it’s a great thing that the RBA is an international reserve currency and but since that time, what’s actually happened is that the level of international reserves held in RMBs, in fact, crashing. There’s been a run on the RMB and it’s now fallen from about $340 billion at the end of 24 to about 200 less than $240 billion at the end of so the peak was at the fourth quarter of 21 Yeah. And now, at the in the first quarter of 24 it’s fallen from three and $40 billion to $240 billion and is now less than the amount of international reserves held in the Australian dollar. So the question is, why is that run happening? Yeah. And that was my one of my questions. And I said, Is it, is it just because of the trust that people put in the Reserve Bank of Australia that they prefer to hold Reserve Bank of Australia bonds rather or Australian bonds rather than Chinese bonds? And why do why do they trust the RBA so much? Yeah, my unanswered question. But having looked at it, it’s really nothing to do with any of that. It’s really just the fact that at the end of 21 international bond yields, US bond yields, Australian bond yields and Canadian bond yields, with a very, very low yield, the lowest yield for decades, if not, if not centuries. Yeah. And since then, those yields have been going up, whereas the yield on RMB bonds peak. Back then, there’s now, we now bonds are paying 4% RMB bonds are paying a little over 2% so that’s right, and that’s the reason the demand for RMB is forward. It’s just the market, just the market, and the fact that they’ve got a managed exchange rate rather than a floating exchange rate, yeah, so has an effect, but we might talk about that again another time. I think we’ll have

Gene Tunny  39:33

to, I think, yeah, we’ll have to come back to it. But you figured it out. You didn’t need Andrew Hauser to know to answer it in the

Michael Knox  39:40

just wondered what he thought about it. Yeah,

Gene Tunny  39:44

okay. Michael Knox, Chief Economist at Morgans, it’s been a pleasure. We’d better wrap up there. Thanks again. Thank you. You.

Credits

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

Categories
Podcast episode

Economic Freedom and Efficiency: Lessons from Australia’s Competition Reforms – EP244

Gene Tunny is joined by Darren Brady Nelson to discuss the evolution of competition policy in Australia over the past few decades. Darren draws on his experience as an economist in the NSW Treasury and the Queensland Competition Authority. Gene and Darren reflect on the successes of the original National Competition Policy reforms and assess the more limited scope of the subsequent competition policy review. Darren analyzes CPI data to understand rising living costs and argues for reducing government interventions. The conversation also covers unintended policy consequences (e.g. fraud in disability services provision), the US Founding Fathers’ vision for limited government, and debates around the appropriate roles and sizes of government in Australia and the US. 

If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored

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

What’s covered in EP244

  • Australian competition policy history and reforms. (0:00)
  • Free market competition and its impact on living standards. (7:56)
  • Economic policy and its impact on individuals, including a tragic story from Karen Chester illustrating the costs of high tariffs. (12:31)
  • Economic policy reforms in Australia during the 1980s and 1990s, including the Hilmer report and National Competition Policy (16:08)
  • The benefits and costs of National Competition Policy in Australia. (23:36)
  • Sequels and the original, with examples from movies and economics. (31:51)
  • Competition policy and its benefits, challenges, and potential reforms in Australia. (35:27)
  • Cost of living and government interventions. (40:12)
  • Government intervention in various sectors, including energy, childcare, and alcohol/tobacco. (44:42)
  • Government policies and their unintended consequences, including fraud in disability support programs. (49:23)
  • The size and role of government in Australia and the US, focusing on the founding fathers’ intentions. (53:43)
  • Competition policy in Australia and the US, focusing on regulation and deregulation. (1:00:10)
  • Economics, regulation, and antitrust law with a focus on Australia and the US. (1:06:07)

Takeaways

  1. National Competition Policy (NCP) significantly improved economic efficiency and consumer benefits in Australia.
  2. Reforms under NCP included corporatization and privatization of government-owned businesses, and opening up markets such as telecommunications and airlines to competition, leading to lower prices and better services in many cases.
  3. Despite being from a traditionally left-wing political party, the Hawke-Keating Government was crucial in initiating market-friendly reforms.
  4. Future competition policy reforms face challenges due to political and lobbying pressures, especially in regulated sectors like pharmacies.
  5. Transparent and rational community service obligations were key to ensuring fair distribution of competition policy benefits. 

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee until 30 June 2024.

Website: https://www.lumocoffee.com/10EXPLORED 

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Links relevant to the conversation

Where you can find Darren’s submission to the Productivity Commission’s National Competition Policy analysis inquiry:

https://www.pc.gov.au/inquiries/current/competition-analysis/submissions

AFR article “PC’s Karen Chester’s love of economics born of despair” (pay-walled):

https://www.afr.com/politics/pcs-karen-chesters-love-of-economics-born-of-despair-20161206-gt4poh

Whitlam Era book featuring Gene’s article on Whitlam and the Economy:

https://www.connorcourtpublishing.com.au/THE-WHITLAM-ERA-A-REAPPRAISAL-OF-GOVERNMENT-POLITICS-AND-POLICY_p_511.html

Productivity Commission’s 2005 NCP review:

https://www.pc.gov.au/inquiries/completed/national-competition-policy/report/ncp.pdf

Episode featuring John Nantz, Free Markets & Limited Government: Lessons from the Founding Fathers for Today  – EP218: 

https://economicsexplored.com/2023/12/14/free-markets-limited-government-lessons-from-the-founding-fathers-for-today-ep218/

Transcript: Economic Freedom and Efficiency: Lessons from Australia’s Competition Reforms – EP244

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.

Darren Brady Nelson  00:03

socialism ultimately doesn’t work because it doesn’t create prices, right? It doesn’t have prices give that, you know, and to also jump into high IQ, you know, because prices obviously this mix of information and incentives at the exact same time, right? When government does something, you can pretend to have prices, just like the Soviet Union pretended to have prices, but they weren’t real, you know, they didn’t need to reflect, you know, allocation of resources they didn’t, you know, they certainly didn’t inform entrepreneurs or consumers properly and all that sort of stuff.

Gene Tunny  00:42

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, and thanks for tuning in to the show this episode, we’re going to be talking about national competition policy. But before we get into it, I’ve got to let you know this episode is brought to you by LUMO. Coffee seriously healthy or Ganic. Coffee. There’s a 10% discount for economics explored listeners, you can find the details in the show notes, the promo code is 10. explored, that’s in all caps. So definitely check it out. I couldn’t recommend it. Right. Oh, we’d better get into the show. I’m joined today by Darren Brady Nelson. Darren, good to have you back on the show. It’s been a while.

Darren Brady Nelson  01:51

Yeah. Good to be back. Good to see you. And yeah, I’m pretty excited about the topic. It’s a good one, one, near and dear to my heart.

Gene Tunny  02:01

Yeah. Well, let’s, let’s talk about that. Darren, I mean, you’ve got a background in competition policy, haven’t you from your time in New South Wales, treasury and elsewhere? Can you tell us a bit about that place?

Darren Brady Nelson  02:11

Yeah, essentially, it was my first job at a university at New South Wales treasury, an economist and you know, 1995 when national competition policy kicked off, so, you know, absolutely great time to join something like New South Wales treasury, because at that stage, you know, the Commonwealth wasn’t really doing much on that front. Because, I mean, it was the state who had all sort of the government businesses and a lot of that stuff that needed the reform international competition policy. And, you know, obviously, New South Wales being the biggest state, not I mean, that doesn’t necessarily mean they will lead the way on things, but at the time, they were because, you know, both labour and liberal were kind of, you know, amenable to these types of reforms. And at the time, that was Bob Carr’s Labour government, and in particular, you know, I’d say the late great treasurer, Michael Egan, you know, was was in charge, and he was, you know, very, very instrumental and very interested in these reforms. Gotcha.

Gene Tunny  03:12

Okay. So let’s might be good to just go over some of the history of competition policy. So by competition policy, we mean, measures to promote greater competition, because generally, competition I mean, there’s competition is a good thing in terms of making the serve the economy more efficient, we get cheaper services, cheaper goods, generally better quality, too. So there’s a there’s, there’s a virtue, a competition is a virtue. And it before that we had back in Australia, we had this. I mean, we were very highly regulated. We had a lot of government owned businesses, I suppose. You know, we still have some, but could you paint a picture? Darren, what was what were things like before national competition policy here in Australia? Well, to be fair,

Darren Brady Nelson  04:00

actually, things were already moving in that direction. As you would probably recall to with, you know, the Hawke Keating government’s Minister, you know, I remember people, you know, particularly liberals or whatever he said, kind of say, I can’t remember exact phrase, but basically, they were doing the sort of reforms that the Liberals should have done but they didn’t do under like, Malcolm Fraser. And so, now, how can Keating kicked off a lot of great stuff, you know, typically, I think banking and financial forms, you know, various sort of international trade reforms, currency reforms, labour reforms, and then, you know, sort of the competition policy, you know, kind of came out of that. I think so, it was also perhaps inspired by what was happening with Roger nomics. In New Zealand, and also what was happening, you know, in the UK with under Thatcher and the US under Reagan. You know, as experts As you know, what was happening, you know, in the 70s, and prior to that, but I understand, I think you have a better handle on that. But, you know, just how uncompetitive and protected markets were both domestically and internationally, including, you know, obviously, you know, the the two airline policy, the one big monopoly of what was it called prior to tell strike anywhere? Telecom? Telecom? Yeah. So I think, yeah, the telecom sort of reforms have been right before national competition policy, but then they kind of rolled into competition policy as well. And, um, you know, later on, kind of when competition policy, maybe five years or something after that, things like airports started to kind of roll in as well. So the regional competition policy was very much focused on infrastructure, in particular, government owned infrastructure, at state level in particular, but, you know, maybe to a lesser extent, local government, we can kind of touch on that. But, you know, terms of what Queensland did some interesting stuff that the other states didn’t do, in terms of competition policy, for instance, basically, in a nutshell, they they copied what was happening at the federal level, and, and basically tried to incentivize local governments to do sort of similar reforms, you know, with water and sewerage and various other sorts of local government owned businesses, or least local government heavily regulated businesses. And a key component about national competition policy, maybe, I don’t think this was with the other earlier reforms, and they haven’t really done it since is the Commonwealth made payments available? So they basically had these incentive payments, combination of incentives and, and compensation because, you know, to reform something, it’s not cost free, obviously, you know, to reform these things, you know, cost some money to do it in the first place. And then Queensland replicated that model and had money on offer for local governments. So after New South Wales treasury, I worked for the Queensland competition authority, and they were in charge of that programme, that national competition policy where state interacts and incentivize local government. So and I don’t think any of the other states did that. So definitely, you know, we’ll get to this. But you know, if any, if there’s a national competition policy 3.0, I think you have to have that sort of payment system in place, which was at the national level was run by the national competition Council. And then, you know, the QC just kind of replicated that sort of model. And we can obviously, at some stage, you know, I think we first met around the time the national competition policy 2.0 was happening with the Harper review. Yeah. So, yeah. It just for the audience in the Hilmer review was a thing that first led to the original competition policy. As you obviously recall, yeah.

Gene Tunny  07:56

Hmm. You know, we might talk about that in a minute. I just want to go over some of the background. So you mentioned Hawke and Keating. And that’s right, that was a very Suppose you say reformist government or it. And it was a very brave government because it was a Labour government. And so Labour’s traditionally the left wing party in Australia, but yet it fell upon the Hawke and Keating governments in the 80s and 90s, to adopt reforms that you would think you will do their free mark there in the direction of the free market, which was terrific and cutting tariffs and you’re reforming markets. So ending to airline policy, financial deregulation, and that two airline policy, there’s a great story. Well, it’s a terrible story really, when you think about it, but it’s a story by Karen Chester, who was deputy head of the a triple C poor car and got into a bit of trouble early this year. I’m not sure where that that’s all that there was some controversy, but we’ll just ignore that for the moment. She because she’s a great economist and she’s a former Queenslander, she, she told the story at the 75th anniversary or 70th anniversary of the Economics Department at UQ. Customs House whereby when her grandfather, there was a grandfather died in in Perth in the early 80s. And you know that her mother, they were living out of Salisbury or somewhere there her mother couldn’t afford to fly over to the funeral because of the high cost of airfares in real terms because of the restriction of competition. And I mean, I don’t know if you converted it to today’s dollars that it’d be in the 1000s of editor you know, it’d be very costly to fly to would it be very costly to fly from Brisbane to Perth? I think it was Perth back in those days. So it’s just you know, it was just extraordinarily costly and caused all sorts of social problems that that terrible policy so I think that was something that was worth definitely worth reforming. I think that was Karen Chester I’m sorry if it if it was at Cardiff, I’ve got the story wrong but that’s that’s the That’s what I remember something you know, there was a vivid story I may have the facts a bit distorted but it was out very real, real story that just struck me Oh, that’s a that’s a really good example of just how poor economic policy can cost people. So I think that’s, that’s a good illustration. And then I always remember how we always used to have it I would be told I don’t make have to longer phone call with your, your maid in Brisbane is when I was living in Townsville, because of the cost of the cost of the phone calls. The secret subscriber Trump dial dialling phone calls STD calls, just ridiculous when you think about it now, and we’ve managed to reform and bring all of those costs down?

Darren Brady Nelson  10:49

Well, yeah, just to jump off of that, I mean, you know, free market competition is the greatest, you know, sort of mechanism there is for alleviating poverty, for you know, getting rid of it to for the most part, I mean, I mean, you’re not going to get rid of relative if you like, you know, the relative poverty, like, you know, someone has more stuff than me, but, you know, to actually lower costs and make things that were previously unaffordable, affordable. You know, that’s obviously what happened, you know, with the industrial revolution, you know, sort of in England, and then spreads throughout, you know, sort of the English speaking world and Western Europe. And obviously, that’s the same sort of thing that China allowed to happen to, you know, to a much greater degree, you know, I guess, roughly sort of early 90s, I guess, to about the GFC, roughly, you know, so, obviously, that everybody knows how many people, you know, people know that there’s a lot of people were lifted out of poverty through that process as well. And always works, you know, so, you know, some people have this impression, if you allow markets to kind of operate more with less regulations and less tax, that that somehow just makes the rich richer, and the poor, poor, it’s the exact opposite. You know, it’s usually the cartels and stuff, that’s, you know, sort of, I mean, will create, if you like, more unearned wealth, you know, amongst a smaller batch of people, whereas, you know, sure, there’ll be millionaires and billionaires, if you like, under a free market competition system, but they would have earned it like Steve Jobs learned by just providing a good product at a reasonable price, an innovative product, you know, of a high quality product, all that sort of stuff. Yeah, yeah,

Gene Tunny  12:32

yeah, exactly. Exactly. I’ve just found the story about Karen Chester in the financial review, so I’ll link it in the show notes. It’s a it’s a really, you know, incredible illustration, but it was about her. It was about a mother. So Miss Chester’s mother had squirrelled squirrelled away her savings for two years in hopes of buying a return ticket to Perth from their home in the Daggy Brisbane suburb of Salisbury to visit her own mother for the last time, but the cost of clothing was three times higher in real terms than it is today with tariffs of more than 40%. And domestic air travel was four times more costly. Under the two airline policy, a perfect storm for my mother who ended up riding the squirrel tin to reclaim this no flight to Paris. She never saw her mother again. This Chester’s told the conference. And that’s just the that’s just a tragic, you know, really sad story and just shows the human cost of bad economic policy. So, you know, a lot of people accuse us like they accused me I’m always being accused or you’re a neoliberal or You’re heartless. You’re an economic rationalist. And I just pushed back well, okay, these, actually, the policies you’re advocating for are the Heartless policies, right?

Darren Brady Nelson  13:44

Yeah, well, look, if they’re calling you that, I don’t know what they’re calling me. Even more free market, if you like. There was a piece I wrote for this either came in financial review. One of the editors is our mutual friend, Dr. Dan Mitchell. And yeah, so I wrote this piece that, you know, it’s about more than than competition policy, but certainly competition policy played a big role. But in there, I kind of look back, you know, certainly the 1980s. But also start out with a little bit. I was trying to remember the term but I found it and I wrote about it. You probably heard this term, the Australian settlement. Yeah. Yeah. Which apparently was from the early 1900s to the early 1970s. And to actually be fair, interestingly enough, I think some of that tariff reform that you mentioned, actually started under Whitlam deity. Interestingly enough, yeah. Somewhat, you know, you might even think it counterintuitive, I guess. So, you know, that could be also something you could possibly link to, if I can find if I can find a link to it. Yeah. Well, I can tell you that. Yeah, sorry. Go. I can

Gene Tunny  14:58

tell you about the Australian settled because that was Paul Kelly’s conceptualization of it in the classic book about the reforms in the 80s called the end of certainty. And I mean, his thesis was that what we had from your right from around the, from Federation through to the, essentially the early 80s, although it started to be dismantled in the 70s was the Australian settlement. There were three elements of it. And I think it’s three, they’re basically the tariff protection. And then there was the was a conciliation and arbitration, the, you know, the living wage or the, you know, the heavy regulation in the labour market. And then the third element of it was controversially White Australia Policy.

Darren Brady Nelson  15:43

Oh, okay. That was the third. Okay. I didn’t write about that. I wrote about the, the Labour and the tariffs. 

Gene Tunny  15:50

It was, I think that was the third element. But yeah, and essentially, we had to abolish the White Australia policy, because it’s obviously it’s abhorrent, really. And it’s, it’s against the UN convention or whatever we signed. And, and therefore, after that, we then like the in the 70s. So the Whitlam I mean, for all his faults, I mean, I wrote a chapter on the Whitlam government in Scott Price’s book on the Whitlam era. And, I mean, look, they were irresponsible in in many ways, but they did a lot of good things, too. They actually started the reform of government owned businesses. That was when they broke up the old Postmaster General’s department, we had a big government department that delivered the mail and also took care of telecommunications. So they broke that up and formed Australia Post and telecom, which then pave the way to corporatization and then privatisation of Telstra. And then they also cut they had a 25% tariff cut. And that was recommended by Nicholas Gruen’s father. So Nick’s been on the show before I work with him a lot, really great economist, his brother, David runs ABS, I worked for David to back in the Treasury. And there, you know, Nick and David’s dad, he recommended a 25% tariff cut, but that was lodged from what I can tell. Part of it was for micro economic reasons. But another part of it was for macro economic reasons, because the government was involved in embarked on this huge expansion of the federal government. And if you want to make sure you’ve got the resources to do that, you want to you want to get some of them from input. So you need to take pressure off the domestic economy by allowing greater imports, which is and the way to do that is by cutting tariffs. So it was partly for macro reasons, too.

Darren Brady Nelson  17:28

But there was also the in a fixed exchange rate era. Yeah,

Gene Tunny  17:32

yeah, exactly. Yeah. Yeah. So there’s a I mean, it’s a whole different world, the way they thought about economic policy back then it’s, yeah, it’s a really different era. And then we go into the end of the 80s. And yep, you’re right. We have those, those great reforms from Hawke and Keating are backed by John Howard and the opposition. So credit all around. And then we get to Hilmer. So can you tell us a bit about the Hilmer report? who like it was Fred Hilmer? Wasn’t he was a professor, was he a professor at UNSW? Or I knew or somewhere?

Darren Brady Nelson  18:04

Um, yeah, look, I wasn’t involved, you know, like, I came in afterwards. And obviously, I read the report. And yeah, but you’re right, your, your memory is correct, he’s, he was a professor at UNSW. I don’t know, the whole genesis of that, that’s something I’ve never kind of really looked into. I kind of came in, you know, to make it up, you know, to, to, you know, put it into operation. So, I got in, you know, as like a, you know, brand new, you know, baby economist, and I was helping, you know, sort of implement that from, you know, the state of New South Wales point of view. And in particular, I was involved in kind of all aspects of it, but I in particular, was involved in competitive neutrality, if you remember, remember that there was kind of all these, basically, everything was trying to achieve, I think you alluded to, or maybe even said, it was trying to, you know, move things in the direction of competition, if you like, are allowed to move into the direction of competition. But, you know, it had, you know, you know, Hilmer made recommendations, I’m pretty sure most of it was accepted. And it was turned into these these agreements that were between the Commonwealth and the States. And they came up with things like model legislation that I think they, they wouldn’t run to the state of South Australia, for some reason, I don’t know, the whole reason why South Australia, but then you all the states would have the same, you know, pass the same sort of act. And it also involves, you know, sort of, as you mentioned, these incentive payments, which was, I think, crucial, you know, that I think the agreements were great, obviously, legislation was was important and part of that these various competition policy acts around the around the country, and it had certain aspects competitive neutrality, which was about, you know, you know, government businesses competing on a level playing field. Basically, they had all these different mechanisms for making sure that you know, that they had, for instance, tax equivalence, so they weren’t paying for Commonwealth income tax, so they had to have like an equivalent of it. I think it even got to a point where the ATR was actually the one, you know, processing that, but they were actually just giving the money right back to the relevant state.

Gene Tunny  20:15

You mean, the Australian Taxation Office?

Darren Brady Nelson  20:18

Ato, you’re right. Yeah. Yeah. HR that’s in the United States called the Americans for tax reform, not the same place. Yeah.

Gene Tunny  20:27

Just for clarity, the reason that they didn’t have like, they technically didn’t have to pay income tax, but all the corporate company tax because these businesses were owned by state governments, and state governments under the Constitution. I think there was a famous high court case, that rule that the Commonwealth can impose taxes on state governments or state owned entities, is that the case? And so they had to effectively pretend to pay tax? Correct?

Darren Brady Nelson  20:53

Great. Yeah. And they were also a few, like, pretending to pay dividends and stuff to shareholders. So you know, they corporatize them, and the shareholders were, like, you know, often the New South Wales treasurer and some other Minister, that type of thing. So that, you know, I mean, keep that, in reality wasn’t the really big thing. You know, it was like, you know, particularly when they, but it was all part of the process of, you know, like, Victoria kind of went down further path of privatising some of the other states didn’t do that they kind of corporatized and tried to make it so that, you know, they were no longer kind of a monopoly in their market, or, or if they were in there that, you know, they weren’t just dominated with a whole bunch of government advantages of various sorts. So, so can we better tune it neutrality was kind of my thing, in particular, at first, and then even when I went to the TCA, that was kind of the first thing I was starting to do there was to be involved in, you know, there sort of opera operationalizing competitive neutrality in Queensland, and then then kind of moved into more of the trying to get the local governments to do their sort of, if you like, their fair share of reforms, you know, because they had government owned businesses of various sorts, particularly water and sewage in particular, but it wasn’t, there was other ones as well, there was, you know, various waste management and all sorts of other stuff, too. So, you know, and I think they also had things like a more formalised, look, if you’re going to keep these things, and you’re going to designate these things as monopolies, well, then you need to have like a proper regulatory system, you know, proper regulator goes through a process that doesn’t just rubber stamp you, you know, gold plating your networks, and that’s, you know, charging people high prices. So, you know, wasn’t a perfect system, but, you know, considering what, you know, what, you know, what it was prior to that it was a huge improvement. And unfortunately, you know, we can cover, you know, when the Harper review camera, I’ll have a review, really, it was very unheroic. And it was like, mainly tweaking, if you like, Australia’s version of antitrust laws, you know, basically, you know, a triple C related, you know, competitive conduct related laws. Although another thing that happened, the first NCP was they opened up, they allowed I believe government businesses could they were subject to the a triple C’s, anti competitive conduct laws. So, you know, government, unless it was literally, you know, Crown activities, you know, actual government activities and not actually business activities. The actual business activities, whether they corporatize it or not, could be subject to a triple C’s jurisdiction.

Gene Tunny  23:36

Okay. And now in terms of the businesses that were affected, we had and you talked about corporatization and so that’s when effectively the government, it takes the the operations out of a government agency or a board. So been in Queensland oil in Queensland and other parts of Australia. We had electricity delivered by boards. We had the southeast Queensland electricity board the North Queensland electricity board, Norquist, that’s the one I remember growing up. And, you know, it’s effectively a gap

Darren Brady Nelson  24:06

veterans Pacific power in New South Wales. Yeah.

Gene Tunny  24:09

And then and they, their government agencies delivering these, you know, these utility services. And, and, you know, I mean, I think, you know, I mean, the power would certainly had power. I mean, I think we used to have more blackouts back then or brownouts and things, partly because of industrial action at times that the theory is or and I think there is evidence that supports this, that generally in businesses where there’s that heavy government involvement or overlay or control, they’re less efficient, there’s more tendency to overstaffing. And the quality of service is lower now, you know, and so I’m very sympathetic to that. And so, you know, I guess businesses that were corporatized electricity, businesses, ports and railways, et cetera, and then private As a nation, something else and privatisation can be controversial. Maybe we can talk about that later. But what do you see? What do you think that whole period that national competition policy period was a success? How do you how do you rate it? Darren?

Darren Brady Nelson  25:15

Yeah, look, I think overall, you know, kind of using it, like, I’ve seen a lot of economists like to kind of think in terms of cost benefit analysis, I think it was clearly, you know, quite a big death benefit. I mean, the Productivity Commission, you know, did did a number of studies over the years, I think they did one kind of originally 9095 kind of predicting what it might look like, and then they did, they did a kind of an impact analysis in 99, and then did another one. And 2005. And, but I remember, I believe I was looking at the one 2005. And, and, you know, they were they kind of looked at them, they factored in, you know, the, the incentive payments, for instance, because, you know, that should be a part of the costs, obviously, but, you know, they came to some conclusion that it was basically the, the net benefits were essentially about 100 times the costs, you know, so we’re talking kind of, you know, biblical proportions of net benefits, we’re not talking about like, just slightly of net benefit, which you still might do anyway, you know, if it’s, if it’s somewhat a net benefit, you know, because obviously, cost benefit analysis doesn’t make the decision for you necessarily, but it might suggest, hey, look, it’s it’s got a net benefit may not be a big one, you know, then maybe do it, but this ended up being, you know, just amazing, you know, even though that it still had plenty of flaws and could have been done better. But yeah, it was, you know, just the GDP return through, you know, a lot of price reductions, basically, you know, particularly in these infra infrastructure related entities, which, you know, we’re electricity, gas, rail, all sorts of ports, I there was even airports came into it eventually. Just it was amazing, you know, you know, it was ran for about a 10 year period and, and the returns, you know, to the Australian economy, and particularly, you know, going back to your point about you know, just like sort of middle class and lower and lower income people just got amazing benefits out of it because of the low prices and you know, not just a low prices, but the better quality and the better service and all that that came with it, more quantities of things, etc.

Gene Tunny  27:24

Yeah. So what I’ll do is I’ll put a link in the show notes to the Productivity Commission’s 2005 review of NCP where they go over a lot of the empirical evidence and they conclude that benefits from NCP from national competition policy have flowed to both low and high income earners, and to country as well as city, Australia, though some households have been adversely affected by how higher prices for particular services and some smaller regional communities have experienced employment reductions. So I guess what they’re getting at there is that I mean, to it, to an extent some of these efficiency reforms meant that some consumers who were being cross subsidised in the past had to pay more for services such as electricity or water or whatever, or rail services actually. And rail services is a good illustration, I mean, bad illustration for these communities that were affected. But I mean, one of the things the Labour government here in Queensland had to do and they copped out and to their credit, they copped a lot. They copped a lot of criticism for this, because this was against their, you know, their voting base in a way. They ended up having to rationalise the railway services in the 90s. This was the GaAs Labour government, which is completely you know, it was a it was very rational, economic, it was, you know, it had a really good framework. It’s different from the current, you know, previous subsequent Labour governments that that we’ve had here in Queensland, very different flavour. But it basically rationalised a lot of those passenger rail services to far flung places in Queensland where there’s just no one, you know, there might be one or two people cashing the train or maybe no one on some services. So they cut a lot of those services that was hugely controversial. And also they scaled down railway workshops in different parts of the state where there wasn’t really the work to be done. And again, very controversial. And so I guess what I’m trying to say is that these measures, while we think, you know, they’re generally for the whole community, they’re a good thing, they will have some impacts, there could be some people who are adversely affected when we don’t want to be to, you know, just see the world through rose coloured glasses. So that’s just one point I’d make there. Do you have any thoughts on that? Darren?

Darren Brady Nelson  29:39

Well, the Productivity Commission is you kind of, you know, mentioned or certainly alluded to, I mean, they did distributional sort of analysis as well. So it wasn’t it like a straight up to Australia getting that benefit, you know, you have to obviously go a little bit more disaggregated than that and they did, but also part of the competition policy. A key part of it was community service obligations. So basically to take a more a more transparent and rational approach to subsidising stuff. So, you know, at the end of the day governments could make, you know, could like justify with sensible, you know, like they go look at it and go look, there’s, there’s, there’s these externalities, there’s these public good aspects, but at least it made it more transparent and you kind of could, and then you could see it on the books, okay, this is what we’re spending on it, and you can make a better decision. If you’re, you know, fine, we’re going to keep this going. But here’s, here’s the costs and benefits associated with it. So, you know, cost benefit analysis and community service obligations. were, you know, a thread is well, throughout NCP. So, I think, you know, I think, you know, that should make it also, again, if they bring it back, if you use that sort of stuff again, yeah, it should make it more attractive to, you know, abroad, sort of basic constituents. So, yeah, you know, that that’s certainly hopefully something that if they do go ahead with an NCP, three 3.0, which obviously, we don’t know if they will or not, because Productivity Commission is currently just doing kind of analysis, sort of like they did in 1995. Except that 95 Everybody agreed to do it. But so they said, Okay, everybody’s agreed to do was kind of like project what this might look like, was now, it’s not a done deal that they’re actually going to do it. But the Productivity Commission has been given a tough task to kind of like, a very tough task, because they knew exactly what NCP was was going to entail. And then they tried it and it’s still not an easy job, then forecast what that will look like over the next 10 years. But now they got a harder task, like, well, what is NCP might entail? And let’s try to forecast what that’s going to look like in terms of, you know, the benefits and costs and distributions of that. Yeah, yeah, we

Gene Tunny  31:51

might talk about that in just a bit lighter because I want to talk about NCP two first, but you do make a good point. And I think what the PC is hoping and they sort of this is suggested in the terms of reference for that NCP three inquiry that the government or the the Council for federal financial relations or whatever it is, there’s some body that represents the states and the Commonwealth is going to give it a programme for reform, but based on you know, my, I guess we can talk about this later, but I’m not hopeful it’ll be very comprehensive. I think it’ll be pretty high level and it’ll be it’ll be challenging for them. So we’re gonna talk about that a bit later. But I want to ask you about what like, we talked about NCP one, and then there’s NCP two so is this a? Is this the traditional case where the original is better than the sequel? It’s not like Empire Strikes Back or Godfather Part Two, like, this is a case where the original is actually better than the sequel? Yeah.

Darren Brady Nelson  32:48

I’m not sure if nothing jumped in my head. Where is it? What’s a good move example where the original is like, far, far, far, far better than the sequel? Because that’s what the case was NCP to

Gene Tunny  32:59

Georgia thinks the classic example Halloween. You’re

Darren Brady Nelson  33:01

right. Actually, jaws would be a good one.

Gene Tunny  33:05

Friday the 13th Yeah, I would definitely

Darren Brady Nelson  33:07

not Alien and Aliens. Because those two were like, really awesome. And just different from each other. Yeah. And so it’s not casting aspersions on on Harper, which, but I think, you know, the terms of reference was just very heroic and very narrow and very, like, it was more for like, competition lawyers, you know, it’s like, you know, great, I guess the here’s some fiddling around the edges. I guess it’s improved things. I don’t know. But yeah, it’s nothing like the first NCP and it’s kind of sad that it kind of is the 2.0. But that’s all that’s all right. Sometimes. 3.0 is or, you know, can can can ever have a really big comeback. Even if the second one wasn’t that great. So, I’m sure I’m pretty sure there’s been a movie to where, you know, I can jump in my head later, but there was there was one more like the first move. Maybe it looks the back to the future ones. Yeah, that’s it. The first one was obviously great. The second one was like, the third one was like, hey, that might be great. Again, you might remember that. Yeah. Okay. I had a different interior ones. One went back in time, and they had the cowboys and Yeah, you like that one guy? Yeah, I think I think most not everybody, but I think most people recognise that. Even if it wasn’t quite on par with the first one was, you know, vastly better than the second one anyone?

Gene Tunny  34:25

Yeah, that’s probably right. The second one’s the one that gave us the hoverboard though, wasn’t it? That’s where he has the he’s on the whole give us the hoverboard. Yeah, yeah, yeah. Now, yeah. Okay, that’s a nice, great films from the 80s 70s and 80s. We were talking about takes you back. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  34:49

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Gene Tunny  35:18

Now back to the show. Okay, so we’re talking about NCP 2.0. And well, let

Darren Brady Nelson  35:27

me get something that you said earlier, you said like competition is a virtue. I mean, one thing one statement that I remember you on the first NCP doing it, and they kept on being repeated. I think it was written down somewhere as well, basically, I think it might have been in the agreements, actually, the the NCP agreements, the various inter governmental agreement, but you know, there was basically a phrase along the lines of, you know, competition is not an end in itself, but a means to an end. And then you know, that that end being obviously, really, ultimately, consumer welfare if you like, you know, sort of like lower product prices, greater productivity, greater innovation, all these sorts of things. So, hey, look, I largely agree that I think I think competition itself has some aspects that, you know, if you like, are good in themselves, you know, just like working, even though like people, even economists tend to overstate that working is all about ultimately having more leisure or being able to buy more stuff, while actually working in itself is a good thing, too. I think competition, although, yes, it is really more about, you know, obviously, providing that discipline to the market that governments just can’t do. They can’t replicate it with price controls, again, they certainly can’t replicate it through taxing more stuff or even owning things. But you know, but But yeah, it’s largely a means to an end, but it does have some virtue qualities in themselves, I think.

Gene Tunny  36:52

Yeah, yeah, exactly. I guess that’s what I was trying to get at, in part. Because, you know, just to me that I don’t know whether it was Adam Smith, or Frederick Hyack. Essentially, or maybe it was Milton Friedman making the moral case for, for competition for free markets. And don’t just look at it as a as a means to an end see value in the process itself in the in the freedom and the Liberty. So that’s the one of the points I was trying to make. Yeah, it

Darren Brady Nelson  37:19

certainly would have been, you know, a point, you know, for sure made by iron Rand or something, you know, even more so.

Gene Tunny  37:25

Hmm. Yeah, yeah. Yeah, for sure, for sure. Now, just on the hopper review, just, it just got me thinking. One of the problems I think we’ve we’ve had in Australia is that we’ve done the things that were obvious to do, let’s reform all of these really inefficient government businesses, and let’s improve competition in telecommunications, and airlines, and we’ll deliver big gains to consumers, which we have. Part of the problem is that once you do the big things, you get into a lot of these more difficult things. And then you got politics involved in the lobbyists. And I mean, for years have been talking about the need to reform things like pharmacies and get rid of rules which prevent new pharmacies from opening up there all sorts of rules to control how many pharmacies you’re gonna have in an area, and you come up, you come against the industry groups as they are, this is terrible. This is bad for regional areas or whatever. So, I mean, that’s what I see is one of the problems and that’s where I think this latest, NCP 3.0 will come to grief because the particularly this government, which is, I mean, it’s a Labour Government, and it’s, you know, because of its political constituency, it has to do things that are favourable for the union movement and demand that you know, it’s nothing wrong with unions. The thing is, though, that some of the measures that they will adopt will not necessarily be good for economic efficiency. So that’s, I think that’s one of the challenges that we’ve we’ve got with current NCP before we get into well, we might talk about that later. But a bit ask you’ve, you’ve made a submission to this NCP analysis inquiry that the Productivity Commission is, is conducting at the moment, so I’ll just read out the terms of reference. Just to SET set this up. The Commission will undertake a study to assess reform options proposed by a Commonwealth state and territories as part of the revitalised national competition policy, to understand the economic and other benefits to the Australian community as well as the government revenue impacts, while the reform options are yet to be agreed by CFR and that’s that Commonwealth Federal Financial relations body. It is important that they tackle shared priorities such as addressing cost of living pressures, that’s great. And adapting to the netzero transition, digitalization expansion of the care and support economy and creating a more dynamic business environment. So that’s what we’re going to get out of this inquiry and you You decided to make a submission to this inquiry? You’re one of the 14 or so submissions on the website. Why did you want to make a submission to the inquiry? Darren? And what are your main points in that submission? Please?

Darren Brady Nelson  40:14

Well, as I mentioned in the beginning, it’s kind of something that’s near and dear to my heart. And, and also, obviously, cost of living, you know, that’s a particular have been a problem for quite some time. You know, I worked for a senator Malcolm Roberts, in his first term in the Senate. And, you know, kind of one of the big focuses, you know, that I had when I was working for him was cost of living, and, you know, sort of used to do a lot of sort of, you know, speech notes and help with media releases, and also kind of, you know, kind of sort of looking at the statistics that kind of show what’s going on on that front. It also helps with, you know, setting up we did a well, you will you will remember this because you spoke at it. We did we did, I think it’s the first ever Australian cost of living summit, I have never found one that they’ve done before. I know they’ve done some kind of more recently, or since if you like. So, you know, we obviously had a great cast of speakers, including, you know, the late great, Tony makin sort of mutual friend of ours. And yeah, I mean, Dan Mitchell came out for that. It was yeah, it had like a lot of great speakers. And obviously, you know, a bit of entertainment at the end with Ross Cameron, and, and, oh, yeah. Mark Latham. Yeah, Mark. So, and I think Liberty Fest was actually the next day, I think you were probably at that, too. I mentioned, I’m not sure if he spoke at it or not. But

Gene Tunny  41:41

I didn’t go to that. I haven’t had a lot of involvement in or maybe I dropped in to say hello to someone. But maybe I said a lie to you. But I didn’t. I tend not to. I liked your cost of living Summit. Because there was a real there was a lot of economic content there. I I mean, I don’t have any problem with Liberty fest. I think it’s an interesting concept. It’s just, it’s a bit more political than I say, there’s a lot more politics and economics, I’ve found with some of those events, so I tend not to go to them a lot.

Darren Brady Nelson  42:09

Yeah, so So the cost of living Summit, so it’s so obviously, something that I’ve been, you know, as I suppose a lot of economists would be, depending on what you focus on, you know, I’ve had a great interest in that. I just wanted to get on the record, you know, look, you know, I didn’t want to sort of spin too many wheels wasting time. So basically, to be fair to the audience, I did, I spent most of that submission, just quoting myself, you know, I wrote a whole bunch of stuff on cost of living and kind of related matters. And that’s okay, because academics do that all the time, where they sit there and quote themselves, so I’m not an academic. So, but look, I caught myself and I, you know, kind of, you know, went through in kind of a logic, so I didn’t, you know, one thing I did do is I want original thing if you like, and it’s like, completely original, but I thought I’d focus on kind of CPI, you know, like putting aside, it’s, you know, it has its foibles as a statistic, you know, you know, really kind of represents 40% or 50% of the prices that are out there, but that’s fine. Look, you know, so I focus on CPI, I’ve just got the ABS data, and I wanted to kind of go as far back as I could, and go up to obviously, as update as I could and just kind of look at, you know, what are the what, and I looked at it on an industry by industry basis, obviously, you can look at it different ways, capital cities, and all sorts of different ways. But I like to look at stuff on an industry basis or a policy basis, if that’s an option. So that but you know, it kind of intuitively was the sort of stuff I expected, you know, the suffered, government is heavily involved in one way or another, either heavily regulating it, maybe even providing those services, or in the case of, for instance, alcohol and tobacco. It’s taxing it whether you think it should or should not, obviously, people have kind of, you know, health and externality reasons that they justify that. But anyway, I didn’t want to go there. First, I just wanted to see what you know, what’s the landscape look like? So, you know, I was able to provide a lot of that. So I think I looked at it, kind of three sections was kind of you kind of what’s the economics of this, particularly the cost of living was my focus? What’s the data that would be in the CPI stuff? And then then, you know, kind of what’s looking at, you know, what’s driving it? Because my thesis, obviously, is government interventions, for the most part, are driving that. Now. Look, you can say some of these government interventions are justified, well, okay. But still, it’s going to drive up the cost of living, you may think, you know, climate change is the most urgent thing we need to do. Well, if you bet it’s still gonna jack up electricity prices, right? You may want them to be jacked up, but they’re gonna be jacked up. So I don’t think too many economists can disagree that, you know, that’s a factor, right? You may say, Oh, it’s a justifiable factor, I will say differently, but, you know, so I wanted to get there and get that just kind of all on the record, you know, just kind of my my thoughts on it. And you know, As someone who knows something about competition policy, I, you know, obviously as I started out in that world, and I’ve kind of done a lot of similar work, you know, over the years in that, you know, basically in that space either in Australia with utilities and utility regulators, and you know, some of the industry associations, etc. And then kind of more recently, over the past decade more think tanks, both Australian and American. So I just kind of, you know, look, you know, I guess I was a little bit more optimistic, perhaps, that I should have been, yeah, that’s gonna happen. But the point was still, like, look, I want to get on the record, you know, hey, you know, and it’s, you know, in fiscal policy, regulatory policy brings your policy of Reno’s that’s a factor, but I also want to get on the record that fiscal policy is a factor, obviously, they mentioned the terms of reference, you know, I want to go on the record that there’s such a thing as the Laffer curve. So, you know, you government, you know, can get some benefits out of, if you like pro competition reforms, you know, you can, you can get more revenue through the door than just trying to tax people at higher rates, and then monetary policy, which I know, no one’s really going to touch. But it’s a factor, you know, like housing, for instance, is a classic, you know, where you print a lot of money jacks up the demand for housing, then you do stuff, like have heavy environmental regulations inspired by climate change, and you restrict the supply of land use and all that sort of stuff, and then throw in another factor that don’t make much, you know, sort of have been, you know, having, you know, mass immigration, you know, brings in that a lot of just demand for housing as well. So you’ve got a lot of stuff going on. And look, things need you looked at, amongst Even today, there will still be low hanging fruit as you sort of, you know, you didn’t use that term, but you were alluding to low hanging fruit. And that’s fine, you know, prioritise the, the, the, you know, find where there’s kind of a big economic bang, and low political resistance. And obviously, those are the places you can tackle first, and you leave the, you know, the stuff that’s got less economic bang, and high political resistance. And, you know, obviously, there’ll be stuff in between. So, you know, look, I’m, you know, I’m pragmatic, you know, I don’t expect, you know, like, either bring in an entirely free market tomorrow, or don’t do anything. So, you know, the sort of practicals that we can do. Yeah.

Gene Tunny  47:23

And so what you did was did you replicate? There’s a famous chart, I think, that was prepared for the UK by someone, I think it was that Institute of Economic Affairs, or Adam Smith Institute, I can’t remember the exact Institute where they show for the UK, that those heavily regulated sectors are the ones with the highest increase in CPI, that with the highest inflation rates, and I’ll try and track that down. You’ve effectively done that for Australia. Have you said things like, what is it its energy, its childcare, etc? And you mentioned alcohol and tobacco? I’ve got something to say about that in a moment. But as I was

Darren Brady Nelson  47:56

saying, Yeah, well, no, it was the IPA, they did it for Australia, but the report was from, like, 2018, or something. So it certainly lines up with I think they wanted to even greater detail, you know, like really highlighting, you know, what are the areas of high intervention? You know, that’s kind of the analysis that I kind of alluded to, but I wanted to get, you know, there’s data going up to 2023. And I also want to go further back in time. So yeah, the IPA thing was for Australia, and it’s a great diagram. You know, things haven’t changed, you know, like, the logic still, you know, sort of stands at test time. I don’t think they touched monetary policy in there, but they certainly did fiscal and regulatory policy, if you like, I like to think of, you know, in terms of a big three government policies, because, you know, really, government’s instruments are those three things. So if you talking about industry policy or competition policy, they’re still using those three, you know, potentially they cut across those three big areas of policy. Obviously, within fiscal policy, there’s, there’s, you know, spending and, and tax and that sort of thing, but I kind of like to think of it in those three kind of big levers, if you like that, that government has, basically, basically getting out of the ways is ultimately what I’m suggesting in my submission is reducing government’s interventions. As much as possible.

Gene Tunny  49:23

Yeah. So the big three, just for clarity, fiscal policy, monetary policy, regulation, or regulatory regulatory, very good regulatory

Darren Brady Nelson  49:30

policy. Regulatory is basically laws. It’s command and control, right? Yeah. No, do this. Don’t do that. You know, that’s basically and obviously, that’s what most laws are about are regulations. Yeah.

Gene Tunny  49:40

I liked how you mentioned tobacco because one of the Not that I’m advocating for tobacco. But one of the things I’ve noticed, and this is a big story in Australia at the moment because we’ve jacked up the excise on tobacco, just a massively high levels. And you know, it’s $40 Whatever it is for a packet of cigarettes, I don’t know I don’t buy cigarettes, but it’s a lot like 30 to $40 Depending on how many cigarettes you get. And what’s happening is it’s actually encouraged a black market and organised crime is in tobacco. And so we’ve had there all these gangland incidents there are you know, tobacco stores that haven’t paid the I don’t know the protection money that are getting firebomb dried. And, and I don’t know, I don’t know if this is organised crime. But around the corner from me on Wickham terrace, there was a tobacco and vape store that was that caught fire toward the end of last year. Right. So this is happening across Australia. And it’s a consequence of excessive excise on tobacco. But yeah, I covered that in my one of my recent episodes on taxation. So just so you might be interested in that. I don’t know if you’ve been following that at all. Uh,

Darren Brady Nelson  50:52

no, I wasn’t aware of that. I mean, like, I mean, I guess I shouldn’t be surprised as an economist, but it’s still kind of shocking, anyway. Yeah, I guess another thing we should mention, you know, whether you link to it or not, but, you know, Frederic Bastiat, you know, sort of, or his essay, I believe, you know, where he talks about, you know, unintended consequences from these government policies. That would be the classic. And the unintended consequences are almost always bad. They’re not usually good ones. Right. So I should even mention that, you know, that that can even segue into you know, people remembering that there’s such thing as public choice economics, which, which ultimately talks about the economics of government, and also government failure, that would be an example of government failure. Now think the public choice people use this language. But you know, what, externalities today, don’t just exist in markets exist with governments as well, they have externalities, they have a lot of negative externalities to like this policies.

Gene Tunny  51:52

Yeah. I mean, we’ve got multiple examples here in Australia at the moment, I mean, I’d love to bring Frederic Bastiat back, like Jurassic Park style, or wherever you do it. Australia. And, you know, he could write, write, write about all of the, just the insanity? I mean, what are the there’ll be the NDIS is the big problem we’ve got at the moment. And

Darren Brady Nelson  52:18

classic unintended consequences. Yeah, and

Gene Tunny  52:21

I don’t know if the latest story is that you’ve got all of these dodgy operators, because they see, oh, there’s this huge pot of money, let’s open up a disability support business, and then they find someone who’s disabled or they go, you know, they have a condition that gets them out of the NDIS. And then their money pot right there, you know, this is a Yeah, it’s there on the gravy train this, this Disability Support Agency, that’s essentially, you know, getting a share of the package. And the worst case, and they’re saying that there are some providers, they will go to the NDIS recipient, they will go to the ATM the automatic teller machine, and they went, they’ll get, they’ll pull the money out, and then they’ll sell on drugs they’ll sell they’re the person they’re supposed to be helping drugs. So there’s at least one or two cases of that, it’s just yeah, and there are these reports of very high percentages of, of NDIS providers. So the, the businesses that are looking after the disabled people managing their packages, they’re, you know, very large number a huge amount of fraud, at least $2 billion worth of fraud is just extraordinary. And

Darren Brady Nelson  53:33

it’s just gonna balloon anyway, without all that sort of stuff. Because, remember, originally just looking at the definition of disability and legislation, it’s so ridiculously broad. You know, it’s, I think, that Mitchell’s had these good cartoons about like, you know, you know, like when you have like, kind of mainly a market and it’s kind of pulling a small cart of the welfare state, you know, can it can handle it, but then when, you know, then when it gets reversed when like, most everybody’s on welfare, that doesn’t work, you know, that doesn’t work, you know, because money has to be generated, you know, the wealth has to be generated in the marketplace, because government doesn’t create any wealth raw.

Gene Tunny  54:09

I mean, I guess, yeah, I mean, government activity does contribute to GDP and governments can invento so well, no, I mean, yeah, I guess this is this is an interesting philosophical question because governments can actually create productive investment or productive capital stock carded or it can you know, it can help provide the capital stock the public capital the the roads and the infrastructure to to help enable business so

Darren Brady Nelson  54:39

well, okay. Yeah, yeah. But even that is Yeah, look, yeah, that’s a little bit you know, at least a more debatable topic then then then some things that government gets involved in obviously. But, but if not getting back to NCP Yeah, they, you know, the see then was like, okay, whether they can or cannot do it, which I So they did. They certainly don’t do it very well. And you know, it’s very expensive. So, and they do it in a very bureaucratic fashion. As you know, Ludwig von Mises wrote about in his his great little pamphlet on bureaucracy. You know, I think that’s a that’s a timeless sort of pamphlets, you know. And even that links back to his original work on socialism, which was the point basically, that socialism ultimately doesn’t work because it doesn’t create prices, right? It doesn’t have Yeah, price. Yeah, to give that input, you know, and to also jump into Hayek, you know, because price is obviously this mix of information and incentives at the exact same time, right. And when government does something, it can pretend to have prices, just like the Soviet Union pretended to have prices, but they weren’t real, you know, they didn’t, yeah, it really didn’t reflect, you know, allocation of resources. They didn’t, you know, they they certainly didn’t inform entrepreneurs or consumers properly, and all that sort of stuff. So, let you know, there’s obviously grey areas, if you like, I personally think, you know, as someone who studied economic history at university that really, you know, something that becomes more like the nightwatchman is more what government should be doing. And that also gels with, you know, not just the, you know, what was clearly written down in the US Constitution. But the the Australian isn’t as clear about that. But that’s was largely the philosophy to have Australia, the 19 century. And at least going into the 20th century, and then obviously, things changed with the, as you mentioned, the the Australian settlement, etc.

Gene Tunny  56:38

Yeah, well, I guess, you know, as well as I do that the Constitution or the the federal government and the state governments we had at the time of Federation are much more limited than what was government it was, would have been 10, or maybe 15% of GDP at the most. And now it’s 35 to 40%. Right. So like, we had a much smaller government. And I don’t think the founders wouldn’t have come, they would not have realised just the massive expansion of government power that we’ve had, particularly at the federal level. And that came through the 20th century, that the company that was associated with high court decisions in a way or, you know, the federal government taking over income PAC taxpayer over the war, and then keeping that power due to a high court decision, various other decisions related to the external affairs power, which means that the federal government has very, it’s got authority over environmental matters. And then we’ve got the health and welfare Amendment to the Constitution, and after the Second World War, that that facilitates the increase the rise of the welfare state. So the whole bunch of things that happened through referenda, and through high court interpretation that has expanded the role of government. And I guess that happened all around the world. It wasn’t just in Australia, it happened in the US and UK. And partly that was in response to the depression, there was the New Deal in the States, as you know. So yeah, I mean, the founders had no, they would not have conceived the scale of government that we have today. In my view, we’ll look

Darren Brady Nelson  58:13

at it in the US it happened even much earlier, it happened, you know, particular 1913 or Woodrow Wilson, when three things in particular happen, which was the the Federal Reserve Act, the income tax amendment. Previously, the federal government didn’t have any income tax powers. And the other thing, which is getting probably a little bit more esoteric, but prior to 1913, the states appointed senators, they weren’t elected. That changed. Yeah, the Founding Fathers had had, you know, went in great detail, obviously to the Federalist Papers, why they had that as well as why they had a whole bunch of stuff, because they wanted us was set up as a constitutional republic, not a open slathered democracy. Right. So the only thing that was at the federal level that could be Democrat directly elected was the House of Representatives, because even today, the President’s not technically directly elected. The electoral college. So anyways, all it was all with the aim of keeping the federal government small. Yeah,

Gene Tunny  59:20

yeah, exactly.

Darren Brady Nelson  59:22

And you’re basically like, you know, local government was supposed to be the most important than the states, then the feds, so that was kind of an you know, surely didn’t completely copy that. But it’s somewhat did in philosophy, because it certainly looked at that and combined that kind of with, you know, with the Westminster system, obviously, the UK sort of thing. So yeah. Yeah, yeah.

Gene Tunny  59:44

You just reminded me I’ve actually had a guest on John Nance. I think it was. He wrote a book about the vision of the founding fathers and I had him on the show and we talked exactly about that what you were saying about the vision of the founders, the limited government, more state or more local particularly local a favoured local solution. So I’ll put a link in the show notes. I thought that was a great episode. Right. Oh, Darren, we better start wrapping up. This has been a great conversation as usual. We it becomes very expensive and wide ranging. So yeah, again, thanks for thanks for that. We it’s good to good to kick these ideas around. And NCP. 3.0. What sort of things? Do you think it will? Well, it could involve or ideally could involve now, as background, I think all the federal government at the moment has in mind, because of all the political constraints that are faced, I mean, they’ve had to pass the very restrictive industrial relations regulations, or they brought in this closing loopholes bill. Last year, I wrote a paper for CIS about it. It’s introducing all these regulations for the gig economy for labour hire for casuals, and I think it’s the wrong direction. But that’s, you know, we can talk about that another time. The current federal government because they’re constrained so much by their the Polit. The politics, I think what they’ll do is focus on very narrow things like non compete agreements, they’re very, they’re they’ve come out strong against agreements in con in employment agreements, which mean okay, if you work your you work for my law firm for so many years, you, you can’t then go and work for one of my rivals for three years or whatever. They’re, and they’re claiming that these agreements are becoming very commonplace, and even in employment agreements for hairdressers, etc. So I think they’ll come out against that. They might, I don’t know, they might try and get a divestiture power, I think it’s cool the power to like, give the honourable see more power to break up. Companies that are that are that they think are exerting market power. So there might be some things around that. But it’s all still clear. Maybe there’s some things about harmonisation of licences for different occupations, that sort of thing. More work on that, we’ll we’ll have to wait and see. But it doesn’t look like it’ll be a huge deal to me. What are your thoughts on where competition policy in Australia and also in America? If you if you’ve got thoughts on that as well? What do you think are the most important directions to go in for the benefit of, of the economy in the community? Darren?

Darren Brady Nelson  1:02:22

I think just in a general sense, they’ve they’ve allowed kind of almost, you know, I mean, technically, they’ve never, no one’s ever really deregulated, if you like, but you know, to extent they did, they’ve, they’ve just reregulated over time. They’ve re subsidised over time, and often not in any sort of transparent or logical way or anything backed by cost benefit analysis, of course, you know, that that never really took off the way it should have, you know, like to have these proper routes, look at this properly. And if nothing else, just have a transparent process, you know, like, why we’re doing this and all that, and what’s the cost so that people can, you know, at least go vote on that if you’d like, at some stage. So let you know, you know, I wanted to point out just to look at all the CPIs look at look at all the stuff that’s going up. And guess what, it’s the stuff just like IPA pointed out, you know, a number of years back, it’s all the stuff that you have heaps of, you know, interventions in a various sorts. So obviously, you know, I think, yeah, I’m guessing, I think you’re right, it’s probably going to be rather than, say, a Hilmer 2.0, it’s gonna be a Harper 2.0, which is like, nothing special, you know, playing around on the edges, and all that stuff, which is, you know, narrow competition law. So, you know, so but I put it in summation, you know, that, you know, maybe someday, because I always remember, you know, working in policy, you guys might have talked about this, too, when you were with the Commonwealth treasury, you kind of put up like, really what you’d like to do, okay, you can’t get it through at the moment, but you haven’t in that shelf, you remember talking about the drawer, the shelf and like, then you’re always ready to pull it out, you know? Sure, you might have to dust it off, and all that sort of stuff. So that’s what I did. I just put that in there, you know, that? I guess, you know, maybe I was a little too optimistic, you know, but, but it’s there, and maybe some other people put in some really good ideas as well. I’m not saying obviously, I have all the ideas or whatever. But, you know, the the methodology that I was suggesting, was certainly, you know, obviously, what’s tackle the stuff where the prices are going outrageous, let’s at least look at it. And okay, what do you have a justification for it? Or even if you do have a justification, you know, you can always do things better, you know, like, do you really need this aspect of this regulation to achieve what you’re trying to achieve? And you know, that sort of stuff. So and then, you know, and I wrote a 2020 paper on kind of competition policy is something that could be applied in the US as well, because obviously, we’re both federal Federalist systems and all that sort of stuff. And I certainly recommended, you know, going down I’m using the sort of competition payments type of approach, rather than, strangely enough the US often, even though it has a reputation for being more free market oriented, yes, some stuff, but a lot of stuff. They’re very kind of socialistic, you know, particularly infrastructure, airports, they’re all local government owned, and no one’s ever seriously thought about doing something different, you know, for instance, or they have all these kinds of government on port authorities around around the country. So, you know, I sort of wrote that 2020 paper, you know, hey, but, you know, this is, the US could copy this fairly easily. So, yeah. So, but, you know, heavily like in Australia, it really depends on obviously, who wins elections. So, you know, it depends on who who wins in 2024. You know, at the federal level, you know, what sort of reforms may or may not happen? And, you know, and obviously, you know, Trump, for instance, you know, is a mix of things, you know, he’s not like a strange guy, like, he’s not like, he’s just Ronald Reagan coming back into power or something like that. So, you know, he does have some pro market orientation on some stuff and other stuff, not as much. Yeah,

Gene Tunny  1:06:07

I think that’s, that’s a fair assessment just on. I mean, I don’t know whether the if there was a change of government, Australia, whether that would make much difference for competition, because, you know, the LIBS the Liberal Party, it has its own political. There’s constraints on it. I mean, you know, industry like the pharmacy lobbies probably, you know, the Liberal Party is probably got pharmacists, a lot of pharmacists, as members and all those type of constraints, they’re constrained as well, and what they could do, so I wouldn’t necessarily say they’re, they would do much better than the current governor, although they wouldn’t have introduced those terrible industrial relations laws. I could say that I think that’s pretty clear. But yeah,

Darren Brady Nelson  1:06:51

yeah, but I mean, just like, you know, like, you know, just like treasurer, Paul Keating is out walking in the door for labour and neither is treasurer, or Peter Costello walking in the door for the libs, it seems at this stage. A

Gene Tunny  1:07:03

couple other things I want to pick up on. You mentioned the, like the fact that these, you’re hoping your submission has a long shelf life. That’s what that’s what the people of the PC, they often think maybe this report is not going to get read now, or the government will pay attention, but it will have a long shelf life. And the classic example of that was the Campbell Inquiry Report, in 1981. Under the Fraser government, you’re talking about Malcolm Fraser government, which lasted what was it eight years after Whitlam? And it’s widely seen as a missed opportunity for to undertake the types of reforms that Hawke and Keating ended up undertaking. They had the inquiry. So there was that financial systems inquiry by Campbell in 1981. Yeah, and then apparently, that just went into Treasurer John Howard’s office and sat on the shelf. So, you know, this is something that later gets picked up by treasurer, Paul Keating, okay, and then they deregulate the financial system. And then we have, you know, bring in foreign banks, and we have a lot of the restrictions taken away, and then we have, you know, much greater provision of credit for consumers and businesses and, you know, in a way that there were positives with that there also, it also meant, arguably, it may have led to that 1980s, boom, in a way and then the crash. But anyway, that’s another issue. We could talk about another time. But I think generally, we think that those type of measures were favourable and economically beneficial. I think that’s a good example of something that was that had a long shelf life and the government didn’t the initial government that received the inquiry, didn’t know what to do with it. But then later, the subsequent federal government was able to do something with it, which I thought was so that illustrates that point. Just finally on the US, have you been following what Lena Khan has been up to FTC, Federal Trade Commission, she’s the Biden appointee. She said a lot of things about Amazon. She’s She’s an advocate for aggressive anti Trump policy. She is currently investigating the merger between Kroger and Albertsons. Have you looked at it? Do you have any views on what she’s up to?

Darren Brady Nelson  1:09:02

I haven’t No, I have not been following her. I mean, I guess, you know, in a more general sense, nothing to do with with her particular. Again, you can if you want to, you can link to it. You know, I’ve written for that. That antitrust Lawyer magazine. concurrences. Yeah. Which is, has an audience in North America and Europe mainly. And I wrote sort of a kind of an economics of free market economics approach, if you’d like to that. So you know, you can kind of see what I’ve, where I lay out, not just kind of the theory of what I think I mean, so kind of, here’s kind of what the mainstream economics, if you like, says about this sort of thing. Yeah. And then I can’t use it, mainly within Austrian school approach, but not just an Austrian theoretical approach. Yes. But there’s also, you know, one of the Austrian economists is like all over the detail of antitrust, you know, in terms of like the, you know, in terms of what’s actually happening And then the cases, and then what the legislation look like since it first came in. And basically just going through also the data as well, like. So basically, I have a fairly dim view of antitrust law tends to be very political, it basically they tend to go after their political enemies of the current administration, or at least they want to make, or even if it’s not their enemies, they they use it to for political, you know, voting purposes, like, you know, to look good. And some upcoming election, right, we went after these people that our voters don’t like, for whatever reason. And they largely don’t go after you even, you know, I’m no fan of Bill Gates today. But, you know, like Microsoft, when they were going after them, they were not abusing their monopoly power, you know, they’re offering a product that was, you know, at a reasonable price. And often, the price was going down over time, which was exactly the case of Standard Oil, when they first went, you know, when the anti trust laws first came in, you know, they weren’t actually, you know, they were dominating a market, but they were actually reducing their prices, and increasing their quantity. And some say the quality was going up as well over time. So, I think, you know, the evidence really doesn’t support, you know, the antitrust laws make much of a difference, and often actually, sometimes have the opposite effect. So it doesn’t sound like I would really necessarily supporter, I would say, usually need to go back to the as we discussed, I think once upon a time that was it, that section 230 or whatever, that that, under a different piece of legislation gives, you know, a bit of, you know, sort of monopoly power to big tech, and social media in particular. That they, they’re off revisiting that that sort of regulation that actually helps give them a bit of that sort of monopoly power, or that ability to feel like at least having an informal cartel,

Gene Tunny  1:11:59

rah, rah. Yeah, and I think your point, this is the point you’re making your submission, look at what underlying regulations are driving these phenomena that we see before you think that I have the solution is, is more government intervention? So I think that’s, that’s a fair point. And it’s just, it just occurred to me, I mean, childcare. That’s an example where we’ve got all of these regulations about the quality of childcare, the educational qualifications of childcare workers, and that’s something that just drives up the cost. And then, you know, it ends up being subsidised by the federal government. And so then that, you know, increases the burden on on taxpayers. Yeah, there’s a little uh,

Darren Brady Nelson  1:12:33

basically, I think, David Friedman, I think it’s David Freeman, or I got it right. But Milton Friedman son, who’s also quite a good economist, he goes through some good evidence on like, tax season, whatever. The analogy of like, what’s, what’s forced everybody to have a Cadillac, right? Instead of allowing some people to buy a Cadillac, some people will buy, you know, a small Toyota or whatever, you know, so, you know, the just basically just in that just basically squeezes people out of the marketplace. Yeah,

Gene Tunny  1:13:01

yeah, exactly. Okay. Darren, there’s been a comprehensive conversation. Any final thoughts before we close?

Darren Brady Nelson  1:13:09

No, look, you know, yeah, we just gotta keep on, you know, you’re doing your great part of, if you like, you know, getting these reports that are sometimes just going to be, you know, in the drawer for rater later use as well. So, you know, we just keep you have to keep on fighting for, you know, sort of truth and freedom, I suppose.

Gene Tunny  1:13:29

Very good. Darren Bradley Nelson. Thanks so much for your time. I really enjoyed the conversation. And I think we’ll have to have a couple more rounds. There are a couple of juicy philosophical issues and historical issues I’d like to come back to and talk about with you. So again, thanks so much for your time. Thank you rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

Obsidian  1:14:35

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Credits

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

Categories
Podcast episode

The Revival of Industrial Policy: Should Governments Pick Winners? – EP243

This episode explores the resurgence of industrial policy in the US and Australia. We critically analyze whether government interventions can truly shape industries or if they are doomed to repeat past mistakes, such as those experienced during the 1970s and with the Concorde project. The episode includes clips featuring Saxon Davidson from the Institute of Public Affairs and Eamonn Butler from the Adam Smith Institute. 

If you have any questions, comments, or suggestions, please email us at contact@economicsexplored.com  or send a voice message via https://www.speakpipe.com/economicsexplored.

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

What’s covered in EP243

  • Introduction to Industrial policy and its potential consequences. (0:00)
  • Budget, inflation, and economic policies in Australia. (8:34)
  • Climate change policy and government incentives for renewable energy. (13:59)
  • Australian economy, productivity, and government intervention. (19:44)
  • UK’s economic struggles in the 1970s, including strikes. (29:41)
  • The failure of the Concorde supersonic jet project. (35:59)
  • Failures of activist industrial policy – e.g. in Australia’s car industry. (49:16)

Takeaways

  1. Revival of Industrial Policy: Governments in the US and Australia are reintroducing industrial policies to shape their economies, sparking debate among economists.
  2. Historical Lessons: The economic turmoil of the 1970s and failures such as the Concorde serve as cautionary tales against heavy government intervention in industry.
  3. Climate Policy Challenges: The push for renewable energy in Australia raises concerns about the rapid transition and its impact on the economy and energy grid reliability.
  4. Productivity Focus: Effective economic policies should enhance productivity through structural reforms rather than picking winners.
  5. Government’s Role: While there is a place for government to address market failures, extensive intervention often leads to inefficiencies and unintended consequences. 

Links relevant to the conversation

Australian Taxpayers’ Alliance Budget Chat:

https://www.youtube.com/live/MYX35Lk_ZYA?si=0kJzBt47Yh_5sUnS

Gene’s CIS issues analysis paper on the Australian budget, co-authored with Robert Carling:

https://www.cis.org.au/publication/budget-fails-important-policy-tests/

Episode with Eamonn Butler on Thatcher:

https://economics-explained.simplecast.com/episodes/adam-smith-and-margaret-thatcher-with-dr-eamonn-butler-1oXNvQg_

Episode on Concorde:

https://economicsexplored.com/2022/03/20/concordes-economic-lessons-a-closer-look-ep131/

Previous episodes on Australia’s energy transition:

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

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

Australia’s Hydrogen Production and Critical Minerals Tax Incentives:

https://www.ato.gov.au/about-ato/new-legislation/in-detail/businesses/hydrogen-production-and-critical-minerals-tax-incentives

Lumo Coffee promotion

10% of Lumo Coffee’s Seriously Healthy Organic Coffee until 30 June 2024.

Website: https://www.lumocoffee.com/10EXPLORED 

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Transcript: The Revival of Industrial Policy: Should Governments Pick Winners? – EP243

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.

Eamonn Butler  00:04

Mrs Thatcher realised that we couldn’t go on like that. She knew it would be painful and but she was determined enough that the country would go through that pain and it will come out better the other side, which it did.

Gene Tunny  00:23

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, and welcome to the show. Before we get started, I want to give a big shout out to our sponsor for this episode Lumo coffee Lumo is seriously healthy organic coffee that you don’t want to miss out on. You can use the promo code 10 explored in all caps to get 10% off. But hurry, it’s only for a limited time. Check out the details in the show notes. K. Now let’s get into the episode. Something I’ve been thinking a lot about lately is the revival of what’s called industrial policy. In the US, the Biden administration, it’s introduced the chips Act and the inflation Reduction Act. They’ve featured activist industrial policy measures designed to promote domestic microprocessor manufacturing and green industries. In Australia, the Federal Labour government has introduced a future made in Australia plan and that was highlighted in the latest federal budget which was handed down a few weeks ago by the Australian treasurer Jim Chalmers, as a former Treasury official, and indeed, as one who managed treasuries industry policy unit for a little while. I have some fairly strong views on industrial policy. So I thought it would be good to cover the rise of industrial policy or the revival of it on the show. So just to clarify industrial policy, that’s where the government tries to deliberately shape the structure, the industry mix of the economy. So forget about comparative advantage, the invisible hand, the government’s attitude is that the market is failing to give us the highly productive industries that we need. So that the government is going to pull the policy levers to change the industry mix. So that’s the idea and it’s going to use various tools at its disposal. It’s going to use tax policy, tax incentives, subsidies, regulations, etc, to bring about the industry mix that that it desires. Historically, I mean, one way of doing that was through protectionist measures, such as tariffs to, to protect domestic in industries, particularly so called infant industries, but tariffs have fallen out of favour. And increasingly, we’re seeing other types of measures used, so particularly tax incentives, they tend to be a feature of modern activist industrial policy. Now, all this sounds terrific in visionary speeches by politicians. But when you think about it a little, especially using economic logic, and when you consider the historical experience, you’ll realise that activist industrial policy isn’t a great idea, after all, which is that’s going to be the basic message of this episode. And to help demonstrate that, in this episode, I’m going to feature some clips from conversations that I’ve had on industrial policy. Some of the clips are from outside of the show. They’re, they’re from a conversation I had with my colleague, John Humphries, John is at the Australian taxpayers Alliance. And we occasionally do a live stream on YouTube and Facebook, where we talk about economic and budget issues. So I’ll feature some clips from that. And I’ll also feature a couple of clips from previous economic system explored episodes. And finally, I will wrap up with some of my thoughts on industrial policy. Okay, now, the first clip I want to play, it’s from that conversation that I had with John Humphries from Australian taxpayers Alliance. And we also had Saxon Davidson from the Institute of Public Affairs on the show. Now, the full conversation, we had the full budget chat, this was the day after the 2024 25 Australian federal budget. So it was around mid May 2024, the full conversation is on YouTube. And I’ll put a link in the show notes if you’d like to watch the whole thing. It’s, it’s a great conversation. Unfortunately, John’s audio was a bit a bit distorted at times because of internet connectivity issues. But it’s still a great, a great video to watch. And we had Senator Malcolm Roberts and also Senator Matt Canavan on as as guests for part of it. So definitely worth checking out. Now, because John’s audio was distorted, I couldn’t reply the bit that sets up this clip, that what John was saying in in it was that the Australian treasurer, Jim Chalmers, has adopted a Shi Jing ping model of the economy. So John being very provocative there. Now, at the same time, John says that the that’s the vision that the treasurer is setting out for the spending for that is largely going to occur in future budget year, so not the current budget year 2425. But beyond that, and so therefore, in John’s view, the current budget itself wasn’t particularly in this interesting. So with that context, let me play the clip.

John Humphreys  06:59

That’s me being a black pill. Maybe there’s a downer here. What am I missing?

Gene Tunny  07:07

Oh, look, I think you’re missing quite a lot. Yeah. I mean, I think this is quite a consequential budget. I mean, I wouldn’t be compare a job as to shooting pig or to whoever else you did, quite yet. I mean, maybe actly. I mean, I think we’re talking about the sort of post war, you know, semi socialist governments of that Li, et cetera, where they wanted to take over the commanding heights. And I think we’re going back towards that maybe not full on communist but, you know, certainly a greater role for government in the economy than we’ve seen. So I think this is where he’s really implementing it. And it’s also, you know, this is his big play. I mean, this is his big play for the leadership. If he pulls this off, he’s going to be seen as a political genius. I mean, he’s got this really clever way of are I so clever, I’m going to bring down CPI arithmetically. And, um, you know, hopefully that convinces Michelle Bullock to cut rates later in the year or just before the election. So look, he’s, he’s playing, he’s making a big play. This is his play for the leadership. I think he could be too clever by half for the reasons we’ve, you know, alluded to already. But yeah, I think this is a very consequential you know, it’s a stark break from the past from previous, even previous, you know, recent from the Rudd administration or from certainly from Paul Keating, it’s a big change.

John Humphreys  08:27

I just clarify that. Xi Jinping is a communist. I think he’s a different sort of non capitalist, but that’s a different issue. Sorry.

Saxon Davidson  08:34

I think I agree with Jane. I think this is a an outline, for the vision for the future of how Jim Chalmers or perhaps even Anthony Albanese views it, you know, where this is rethinking it. This was all in his essay that he wrote about 18 months ago. This is a rethinking capitalism and vision for the future. It’s no mistake, that when the future mate for Australia policy was announced that Albanese referenced the different models from overseas, you know, the IRA, the European Economic defence strategy. Same with the Japanese economic security idea, the SBR act, whereas the Japanese say it’s rethinking capitalism. It’s a new way of capitalism. And this is actually how Jim Chalmers views it as well. This is a vision for the future of budget. This is why it’s an interesting budget is I do have to leave soon, but I’ll leave it at that and say, it’s a instead of Wait, it’s a vision for the future. This is if you have to lose vision for the future.

John Humphreys  09:37

If you have to leave soon. I take that as not immediately. So one last question if you’ll indulge me his vision of the future, but why is it wrong? If we need all these investments, and the money is lack ing and we need to go in a direction? What’s wrong with this policy? The future made in Australia.

Saxon Davidson  09:53

Well, because we’ve seen it before. This is you know, the 1970s protectionist policies have gone back to the few Chuck, like, we’ve seen it before it entered the era of stagflation. And then that’s why that’s how the great economic free thinkers emerged. In the 1980s, we’ve seen this happen before, we’ve seen this movie before. And when productivity is such a such a low in productivity growth is so low and private investment is so low in the economy. You know, as I said, before, rising tide lifts all boats, there are going to be plenty of Australians left behind in this new capitalist netzero future. And we know this, because, you know, no matter how many how much more green energy is brought into the market, or into the energy grid, how I mean, electricity bills are still up, power bills are still up, people are still suffering, this new vision is not a vision that is sustainable. And what actually concerns me more is the is the idea that, you know, after this election, we might be in the, we might be experiencing a very unstable government, which could actually bring forward these policies further to the left if they are in cohorts with the teals and the greens.

Gene Tunny  11:06

Okay, that was that was good stuff from Saxon. I particularly liked his point about the problems in the 1970s. And we’ll return to that soon. One thing I should clarify, in that clip is this point, might the point I was making about how I think Jim Chalmers has been too clever by half now, one of the features of the budget was this $300 electricity bill rebate that was being offered across Australia, and this is on top of some assistance that’s been provided by Well, the Queensland Government and possibly another, or maybe some other state governments will provide assistance. So Queensland Government’s providing the $1,000 rebate. And the idea is that these, these rebates or these subsidies for electricity, that’s going to reduce the the electricity bills of consumers, and it’s because of that it’s going to reduce CPI inflation. And, you know, this is a bit of a hatch. This is what I call that in the note I wrote for the Centre for independent studies with, with Rob Carlin that I’ll, I’ll quote from later. And I mean, it’s a bit of a trick. It’s not really doing anything to address underlying inflationary pressures. And I mean, this, you know, no, no economists have any credibility actually backed? What, what the government was doing here? I mean, I think, I think most economists, I mean, it well, we’re all sceptical, I mean, how, how is spending more money, the solution to inflation, it just doesn’t make any sense. So that’s what I was. I was referring to there. So you can check out that cis issues analysis paper on the budget, I’ll put a link in the show notes for more on that. Another point, I should note regarding what Saxon was saying there, and he was, you know, he I think he was alluding to, or referring to a conversation or point that Senator Malcolm Robertson had previously made, there’s this concern that in Australia where, you know, arguably, we’re pushing too fast in the direction of renewable energy. And that’s been driven by a lot of the policy measures that are really, you know, heavily pushing us in that direction. And, you know, I’m not saying I wouldn’t want to say that we shouldn’t respond to climate change. I do think climate change is, is something that we do need to respond to. But I think there is a legitimate debate, however, about how quickly we do that and what the right policy response is. Now, the way economists think about it, and this was certainly the view in Treasury when I was there is that we shouldn’t be picking winners are picking in particular, or favouring particular types of technology or trying to direct it. The, you know, the response or micromanage the response. What governments should be doing is to the extent that there is this externality from greenhouse gas emissions, we should put a price on that externality which is the idea of a carbon price. And you can do that in various well. I’ll come to In ways you can have an emissions trading scheme, you can, you can create a market, and then you have a carbon price that falls out of that or you can have a carbon tax. And those are alternative ways of of putting a price on carbon dioxide emissions or co2 equivalent emissions. Now, you know that most economists would say that is the best way to do it, if you’re going to do something about it. And, you know, that’s sending the signal to the market, that there’s a cost to the environment of, of this pollution. And you leave it up to the industry to sort out the most cost effective way to reduce those emissions, you don’t go and, you know, actively promote particular solutions. And in in Australia, there’s a, there’s a growing concern that maybe we’ve been pushing too hard on renewables policy, measures and subsidies etc, have favoured renewables. And we’ve had, we’ve had to faster pace of development. And that’s creating issues for the reliability of the electricity grid. Now, I’ve talked about these issues with with previous guests. So I might put a link in the show notes, where I’ve I’ve covered that. So just just saying, I don’t want to be accused of being a denialist not caring about climate change, I recognise it is an issue. I’m just saying we need to think intelligently about how we respond to it. And in my view, we’re probably we’re probably not adopting the right measures. And certainly all of these new industrial policy or in measures, particularly some we’ve seen in this latest budget, where we’ve got these generous tax incentives for hydrogen production in critical minerals. Where the government is is, is saying, Well, we think these are the industries of the future. I mean, they may well be but hydrogen, renewable hydrogen, that certainly you could say it’s an unproven technology, or commercially unproven, we’re not sure whether we will be able to develop a commercially viable hydrogen industry. And does it make sense for the government to have this tax incentive just for that industry to try to promote the growth of that industry, the movement of resources into that into that industry and away from sectors which actually could be more productive and which aren’t receiving the subsidy? That’s what I’d be wondering. And there has been a bit of criticism of, of this measure the particularly the hydrogen production incentive, because there are some and critical minerals to because there are some well known billionaires who will likely benefit from those measures. And one name that comes up is Andrew Twiggy, Forrest. And there’s been accusations that these tax incentives are millions, for billionaires. So there’s a really interesting debate going on about that at the moment. Right. Oh, I mean, one thing I should note is that those incentives are worth a lot of money. And I’ll put some links in the show notes regarding that. I mean, they’re talking about billions of dollars of subsidies. So check out the show notes for all of the details. Okay, now, let’s hear some more from Saxon about the budget and what he thinks it should have done rather than pursuing these industrial policies. And as you’re listening, just note that the ringing that you can hear that was a bell ringing in Parliament House in Canberra, that was telling members of the House of Representatives to get back to the chamber. So it’s on the audio, we can hear it, because one of the people on the call was Queensland Senator Malcolm Roberts, he joins us from his office in Parliament House and the bell was ringing in the background. So it’s very loud. He’s in the Senate, but he could still hear the bell. Right. Oh, let’s, let’s see this other clip.

Saxon Davidson  19:43

This budget is interesting because it actually lays bare the lack of a productivity agenda that the current government have, you cannot deal with inflation and the anaemic economic growth that we are currently suffering unless you have a productivity agenda because our rising tide lifts all boats. That is actually how you deal with the cost of living, not with handout how to hand out inflationary spending after inflationary spending, and the lack of productivity agenda is really laid out with this future, this protectionist future made in Australia policy. It is shovelling money out of, well, essentially shovelling money out of our other industries, to put to pick winners and to put into the production of solar panels and other subsidised green energy policies. Senator Roberts was correct that a lot of our productivity issues can be solved by removing a policy of net zero emissions by 2050. You know, this government repeatedly over regulates and overburdens our most productive industries that being mining agriculture, gas, coal, iron ore, and then get them to basically create these previous two surpluses about but they’re not structural surpluses, they’re actually we have entrenched deficits, which the government is hiding behind the political euphemism, unavoidable spending. Besides servicing the debt and national defence, I don’t believe there is actually ever such a thing as unavoidable spending. But I’ll leave it there because I know we’re short for time, but we can sort of Yeah, go on from there. Sex.

Gene Tunny  21:19

And can I ask about your productivity agenda? So you identified you think energy is one of those areas, you’re you’d be against all of these net zero emission policies to get to that target? Is there anything else that your productivity agenda? Well,

Saxon Davidson  21:35

I’d reverse a lot of the industrial relation laws that have been passed in the past couple of years, particularly because we actually got a worker shortage, we don’t actually, it is actually counterintuitive to make our labour laws more rigid than they currently are, especially when they were already rigid before this current government entered power in May 2022. For example, there are bountiful of red tape and tax laws that apply to Australians who wish to work but cannot, such as Australian veterans pensioners and students on the Youth Allowance. people receiving those benefits face a tax rate as high as 66% Starting July one thanks to the stage three tax cuts. And that’s because their their benefits and combined their combined benefits and income is is automatically bound to the lowest tax threshold. But also, if a pensioner for example, if they work a day and a half or minimum wage, they’re all of a sudden caught by a 50% taper rate to their benefits, which means they pay a start in July won a 66% effective marginal tax rate for working. This is why only 3% of pensioners are currently in the workforce. And there was no plan to address this in this current budget. When I play research looked at New Zealand and their equivalent tax system where pensioners are not accountable under the same tax rate. They actually pay a minimum tax rate of about 10.5%. Should they choose to work on their combined pension and their income. And this IRS had found that this was the major reason why, why they haven’t suffered a worker shortage crisis. Since COVID. Our worker shortage and productivity sort of solution is actually mass migration. And it simply hasn’t worked. We still have a worker shortage. And as Senator Roberts alluded to, we’re in a per capita recession. The slice of the pie is getting larger, but the slice of the pie is getting small.

Gene Tunny  23:38

Right? Oh, that’s more great stuff there from Saxon so well done Saxon. Saxon is definitely an Australian economist to look out for in the future. And I what I thought was good about that is I think, Saxon highlighting an area where New Zealand is doing something better than Australia. I think that’s, that’s very effective in an argument because nothing is going to annoy Australians more than hearing that New Zealand is doing something better than us. So given our friendly rivalry, I should say with our Kiwi cousins. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  24:29

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Gene Tunny  24:58

Now back to the show. So what I also like there is Saxons talking about productivity. And he’s emphasising that, well, we shouldn’t be trying to pick winners and, and, you know, have the government favouring one sector over the other. I mean, we should be looking at these more fundamental what we should be looking at what economists would call framework policies or structural policies. And this was always the view we had in, in Treasury. I mean, yeah, sure, you can have policies that price externalities or policies that promote something that is generally beneficial, such as innovation where there might be a market failure, which means you don’t get enough of it. But these policies should be economy wide, you shouldn’t be favouring one industry over the other, what you should be doing is getting the right economic framework policies in place. And so those are policies that promote competition, those are policies that that you know, promote a efficient or flexible labour market. So I mean, we want you know, we need some basic protections in the labour market, I mean, we don’t want people exploited, but at the same time, the more you regulate the labour market, the more difficult you make it, the more expensive you can make labour, particularly low skilled labour, and the more difficult it becomes, and, and particularly if we have all of these rules around, unfair dismissal, etc, it can make employers reluctant to, to hire workers. And I think, I think sextons Making some, some fair points there about the tax system. And the welfare system, we’ve got to be careful how we design those policies. I think that’s good stuff from Saxon, he’s pointing us in the direction of what we should be looking at when we’re thinking about how do we make our economy more productive. So very good. Now, recall from the previous clip, not that one, the one before that Saxon mentioned how we’d seen this movie before. So this movie of heavy government intervention, and Saxon mentioned the economic turmoil of the 1970s, and how that was related to the interventionist policies of governments. Now, that brought to mind a conversation that I had on the show in late 2020, with Amon Butler, co founder of the Adam Smith Institute. We talked about how Margaret Thatcher so the UK Prime Minister, how she came to power after the post war, UK socialist economic model broke down in the 1970s. So let me play you a clip from that episode for you. After I watched the season four of the crown, so the Netflix series on the royal family, and Gillian Anderson plays, Margaret Thatcher, the pm the Iron Lady, and I think her performance is amazing. She really, I think she nails the mannerisms of Margaret Thatcher and the voice. But the depiction of fascia seems a bit slanted or bias to me. It focuses on a lot on the social dislocation that the series suggests were was caused by her policies. People are unemployed and struggling. And it contrast that with well, that Thatcher and also the Queen, and they, it suggests that they’re detached from it all. And there’s this episode where Fagan who was the the unemployed man, I think he was who broke into Buckingham Palace and ended up speaking with a queen for 10 minutes, it paints a very sympathetic portrait of him, in contrast to Thatcher. So I wanted to speak with someone in the UK about just what the situation was like in Britain in the in the 70s. Would you be able to describe that, please, amen. So we can understand how Facha got into power. What What was she trying to, to address?

Eamonn Butler  29:40

Well, I can I can describe that very easily because I wasn’t the only one. What am I? Well, two of my colleagues did exactly the same. In the mid 1970s, I joined the brain drain, because I went to America, because I thought there was no future in The UK that the trade unions were running country, people were seriously saying that it was going to end up nearer to an Eastern European country as they were there, rather than a Western European country. And a lot of us thought that there’s no point in sticking around here. And so a lot of us immigrated, large numbers of people simply left the country. And of course, large amounts of money left the country as well. But investors thought there’s no point in keeping your money in Britain. It’s a big world and your investments in Britain look dire. But I mean, in 1939, when Mrs. Thatcher took office, the state controlled everything. When you woke up in the morning, obviously, you wake up to or the BBC, which is a state organisation, of course, you still do. But you wake up to that on perhaps your alarm radio, which is powered by electricity, which was produced by the states, you go downstairs and you, you put your state produced egg into a state produce saucepan and you fill it with state produce water, and you will put it on your state produce gas oven, using state produced gas and so on, you would take your kids to the school in your state car or your state bus. And every part of your life was run by the state because they control all of the key industries, coal, shipbuilding, steel, transport, everything. And of course, the trouble is that when you give people monopolies, they abused them. And these were state monopolies and they were abused. And the the product was expensive, particularly for taxpayers who had to pay for all these things. And everything was run through the convenience of the workforce. And so the trade unions became exceedingly powerful. And of course, they had special legal privileges as well that had been granted them so they could, they could have wildcat strikes and secondary picketing, and nobody could do anything about it. If you pick it came around your your factory, there was nothing you could do, even if you weren’t involved in the dispute. So they they knew that they could bring the entire country to a halt. And, you know, they, during Mr. Sanchez time, they very nearly succeeded. But she realised that that had to be taken on that. People blame her for unemployment, particularly in the north of England where coal mines were closed down and steel mills close. But that wasn’t her fault. The problem was that we had wasted our time and energy and money on these industries decades before, that it was cheaper in 79, to load coal from take coal from Australia, and landed in Southampton than it was to pull it out of the mines in South Wales. It just made no economic sense at all. So Mrs. Thatcher realised that we couldn’t go on like that. And she knew it would be painful. And but she was determined enough that the country would go through that pain and it will come out better the other side, which it did, yes,

Gene Tunny  33:16

yes. So do you remember or were you in the States at the time the so called Winter of discontent, there’s a there’s a photo in this book, the commanding heights by Daniel Yergin, and a co author is a photo of Leicester Square. In the West End in London, it’s been used as a garbage tip, in this so called Winter of discontent. 1978 79. So before Margaret Thatcher was elected, was that because of the gobos, the garbageman were on strike, whether it just strikes across the country, before Thatcher got in.

Eamonn Butler  33:57

Everybody was on strike because the Labour government which lasted until the middle of 1979, realised that it had run out of money, and that it couldn’t keep on paying higher and higher wages to public sector workers, which was most of the workforce. And the Prime Minister James Callaghan famously said that at the Labour Party Conference, and there was an outrage that and so the trade unions, protesting that they weren’t getting pay rises, basically knew that they could bring the country to a halt so that they would put that pressure on the government in order to get higher wages and better conditions. And the government simply said, No, we can’t do that. There isn’t any money. So then, everybody went, I mean, that the whole public sector was was hit by strikes and it wasn’t just garbage in Leicester Square in the middle of London, which I remember very well. And in fact, I think we did a little report on, on how to get out of that crisis. And we use the same photograph of the garbage and rats running around in in the centre of the tourist centre of London, if you can believe that. And then went on Barrett. And there was a famous case where somebody was being transported to hospital over the Yorkshire Dales, in the snow. And the the ambulance drivers got a message that they were now on strike, they had to down tools. So this was he stopped out, make her way home. And it’s that sort of feeling. Business and so it was a winter of discontent. And it was it was a dire period. And I think that convinced the British public, we couldn’t go on like this, we actually had to, to do something else. And Mrs. Thatcher was clear in her vision that something needed to be done and, and so that’s why people voted for it.

Gene Tunny  36:07

Okay, so I think that’s a good reminder of why there was a change, of course, in in economic policy in the 1980s. In Britain, under Thatcher in the US under Reagan, and in Australia under Hawke and Keating, the old interventionist why that wasn’t working? Well, arguably, it never worked. We should remember that. We should remember that when we hear all of these growing calls for more government intervention for industrial policy in particular, which is the topic of this episode. Now, another clip, I want to play, it relates to one of the great failures of of industrial policies. I think there are many failures. There, there are too many to go through this episode. I mean, maybe I’ll come back. I mean, you know, I should probably mention, you could argue there are some successes, but I think the the failures are more numerous. And, and probably more likely, because if if something is commercial, if it’s economic to invest in, then the private sector is probably going to be undertaking it already. It’s going to be investing in it. So you have to argue that are there some market failure that’s preventing that and, I mean, you know, that can be that can be difficult to argue. So yeah, I mean, generally I’m very sceptical and I think the evidence is weighted toward the failures and one of the great failures of industrial policy was the Concorde. Supersonic aeroplane. So the Concorde supersonic aeroplane, as we know, it was an economic proposition. It, it flew for maybe, well, a few decades, it’s no longer flying. It just wasn’t commercial for either British Airways or, or Air France, I think it was. Now Concorde. It was developed in an era when there was a great belief that governments could shape the future of industry, particularly by encouraging r&d and the take up of technology. The UK Labour leader, later Prime Minister Harold Wilson, he gave what was by all accounts and electrifying speech in 1963, to the Labour Party Conference, about how his government would use the white heat of technology to transform Britain’s economy. It was a grand vision and Concord was an important part of that vision of that vision to transform Britain’s economy. So, you know, this was a vision that was you know, it started before Wilson, but, you know, there was almost a pre war Well, sorry, there was almost a post war consensus between the Conservatives and labour regarding the role of government, the role of government to steer the economy but Wilson really crystallised that, in that that famous speech of his and Concorde ends up being overseen by Wilson’s government for during the late the mid to late 60s. And and so I think it’s it really is an important part of that, of that vision of, of the white heat of technology, trends forming the economy. Okay, I spoke about Concord with my adept economics colleague Arturo Espinosa in a march 2022 episodes. So let’s take a listen to this clip. And if you want to learn more about Concord, then definitely check out this episode. But let’s hear the clip. We might chat about what Concorde is, I just want to make sure that if you’re listening, and you’re unfamiliar with Concorde, and I’m guessing you probably know a little bit about it, because it’s such an iconic aircraft, and it’s such a beautiful design really sleek and the delta wing. And that, that knows that. That it’s like a beak, isn’t it like the beak of a bird? I think they call it a droop nose, because it can, it can move around. So depending on what stage of the flight you are, it will either be in the rock than the standard position or it will drop down. So I think when they were coming into land, they would they would drop it down just to improve their visibility. So yeah, it’s got a it’s got an interesting nose there. And yes, it’s, as you mentioned, it’s supersonic. So it can travel faster than the speed of sound. And I think actually travel about two times the speed of sound. So at Mach two, so supersonic when I was chatting with Tim, I said, Oh, is it hypersonic? And now it’s not hypersonic. So Tim corrected me it was supersonic. So supersonic is faster than the speed of sound. And hypersonic is five times the speed of sound, at least I think there are some hypersonic missiles that have been developed that have that I’ve seen while I’ve seen in the news reports. Okay, so yeah, Concorde was it was a joint project, it was a joint venture in a way between the British and the French governments. And the name for it came from an agreement that they reached in the early 1960s, I think was a treaty was signed on 29th of November 1962. And so what you had was, this is something that came out of the 1950s. And you had both there were British and French companies that were investigating supersonic, air travel, and I think the Americans were looking at it too, but the British and French, they reached an agreement whereby there would be a joint project because there was a British company that was looking at it, the British Aircraft Corporation, and that was being funded by the British government. So they were providing funds for research and development by that British Aircraft Corporation. And there was also a French company, which was state owned sued aviation, which later became Aerospatiale. They were looking at it too. And so the two governments got together and decided to enter this joint venture for Concorde, whereby they would jointly develop this aircraft that shared the development costs. And they would also they would split the production of it across Britain and France, too, with a view to creating jobs and all that. So it was a British and French government project. And I mean, I would argue that this is a good example, that there’s there’s a few economic principles which come out of the whole Concorde experience. And we talked about the sunk cost fallacy. Well, the fact you should ignore sunk costs. One, one principle, or close to a principle, I would argue is that governments need to be very careful about going into business. I mean, governments really, governments really shouldn’t be picking winners or picking projects. They should be doing the core business of government, I mean, National Defence and the justice system and mean, arguably some assistance for health and education, rather than trying to develop a new supersonic aeroplane. I mean, when you’ve got governments making these decisions and funding r&d for this sort of thing. I mean, it’s, it’s probably more likely it’s not going to be a commercial proposition, and it’s going to be a waste of money. So that would be one thing. I would argue Do you have any, any thoughts on that tomorrow, of course,

Arturo Espinoza Bocangel  44:37

and that there is an interesting point. So in order to see what is the real scope of the government, right, definitely the government should focus on other issues that are more relevant for people instead of promoting this kind of embarrassment that as we We have seen is worth a failure in terms of economic business perspective, right. So, I think,

Gene Tunny  45:11

yeah, I mean, it’s the sort of thing I mean, it could have, who knows? I mean, maybe, maybe if things weren’t right, and the oil price didn’t increase three or four times over what it was previously, after 1973. Maybe the the economics of the whole project would have been better. And it could have been, it could have been more of a mass proposition. I think the mass market proposition, I think the problem that they ended up having was that it became a real niche product. It was really only wealthy people, pop stars and, you know, CEOs of Fortune 500 companies who could actually afford to fly on Concorde. As we can talk about LIDAR. I mean, I think tickets ended up being about in today’s dollars, I mean, I think over 10,000 US dollars, really, I mean, expensive tickets. Yeah. And so you really have to have a you really have to have deep pockets either don’t you have to be someone who really doesn’t care how much they’re spending, or it’s just absolutely time critical that you need to get from New York, New York to London or the other way or Paris to New York, you need to get there in three hours or so. It was a good fly incredibly quickly. Now, I think the figures I’ve seen is that, so this thing’s flying it basically two times the speed of sound, whereas a Boeing 747 flies at point eight four times the speed of sound, so it’s not supersonic. So it can fly about to the Boeing 747 can fly about 900 kilometres an hour, whereas the Concorde could fly at 2172 kilometres an hour. So just incredible. And it’s 60,000 feet too, so Wouldn’t that be amazing to have been to have been up that high? And so it really ended up just becoming a transport option for the rich and famous in a way. And I mean, one example of that, Have you have you heard the story about the Live Aid concert and Phil Collins, how he used Concorde to fly from the Live Aid concert in London at Wembley Stadium. And so he performed at Wembley, and then he hopped on the Concorde. He got a chopper from Wembley to Heathrow Airport, and helped on the Concorde and then got the Concorde. The JFK, and then he ended up getting it was. It’s pretty, it’s a huge logistical job. Where is it? Yeah. And he took a British Airways Concorde flight to New York City before taking another helicopter to Philadelphia, just so he could perform at at the stadium and in Philadelphia, which I think might have might have been JFK Stadium in Philadelphia. That was in 1985, July 1985. So the big Live Aid concert for I think it was to raise funds for to help address or alleviate the suffering of people in famine in Ethiopia, if I remember correctly. So yeah, that’s one of the famous examples of the use of the Concorde. Que so, yes. The Concorde. I mean, it was such a beautiful aeroplane, but just didn’t stack up. Unfortunately. I mean, maybe one day we will have commercial supersonic travel. That would be amazing. But it didn’t work out. For for the Concorde. Right. Oh, to wrap up, I would like to first quote from that issues analysis paper for the Centre for independent studies that I talked about before. This is a paper I wrote with Robert Carlin. And in that paper, we wrote that activist industrial policy has chalked up numerous failures in history, including a domestic car industry that ultimately was unviable despite decades of tariff protection and billions of assistance with his embrace of activist industry policy. chamas is ignoring history lessons, both here and overseas. So yep. I was referring to the car industry in Australia, which is was, you know, Australia was proud of its current history. And we produced some great cars at times, particularly in the 1970s. And there was, you know, there was a great rivalry between Ford and Holden, at that was featured in the famous race at Mount Panorama in Bathurst. But alas, we just the policy settings weren’t the right policy settings. And we didn’t get a sustainable car industry, we had a car industry that could only be viable with with government support, and ultimately, even the government support that was being provided was insufficient to keep the industry going. So we don’t have any of the major car manufacturers here in Australia anymore. So that’s, that’s a lesson about, you know, the challenges of industrial policy, just how well, if you’ve listened to this episode, you will understand that I don’t think it’s a good idea at all. I’ll end with another quote. And it’s from no less than authority, then Adam Smith, walk a lot of passages in Adam Smith’s writings, this one is still fresh. It’s one of my favourites. And it’s one that I think that everyone in political office, they should ponder it every time that they consider some new intervention in the economy. So this is what Adam Smith wrote over 250 years ago. Little else is required to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things. All governments which thought this natural course which force things into another channel, or which endeavour to arrest the progress of society at a particular point, unnatural and to support themselves are obliged to be oppressive, and tyrannical. That’s brilliant, isn’t it? I imagine that economists will still be quoting Adam Smith in 250 years time, and will have accumulated many more examples of the failures of activist industrial policy. Although I should be hopeful that economists will eventually win the argument against politicians with their grand visions of transforming the economy. I live in hope rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and later writing. Thanks for listening. I hope you can join me again next week.

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Credits

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

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Podcast episode

Unveiling Shrinkflation: How Companies Sneak in Price Hikes – EP241

Consumers have noticed bags of chips, chocolates, and many other products have shrunk, but prices have not come down. This episode of Economics Explored features a detailed discussion on shrinkflation with Gene Tunny and Arturo Espinoza Bocangel. They analyze various examples of shrinkflation and its impact on the cost of living. The episode also considers the potential for regulatory and other measures to address this practice. For instance, a US Senator wants to outlaw shrinkflation, and a French supermarket chain puts a sticker on shelves identifying shrunken products. Gene and Arturo also consider the high degree of market concentration in the grocery sector, and what the FTC in the US and the ACCC in Australia can do about it.

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

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

What’s covered in EP241

  • Introduction to Shrinkflation (product shrinking in size while price remains the same). (0:00)
  • Shrinkflation in the food industry, with examples of product size reductions and price increases. (5:04)
  • Senator Casey’s proposal to stop corporations from deceiving consumers through shrinkflation. (10:05)
  • Shrinkflation and its impact on consumer prices. (13:38)
  • Shrinkflation as a business strategy. (19:10)
  • Market power and concentration in the Australian supermarket industry. (25:25)
  • Supermarket competition in Australia, with a focus on Coles and Woolworths. (30:12)
  • Supermarket power and calls for regulation. (35:47)
  • Coles and Woolworths’ market power and supplier squeeze. (40:41)

Takeaways

  1. Shrinkflation Explained: Shrinkflation occurs when manufacturers reduce the size of products while maintaining the same price, effectively increasing the unit price without consumers’ direct awareness.
  2. Impact on Consumers: This practice can be deceptive, as it often goes unnoticed by consumers who end up paying more for less, affecting their purchasing power and overall cost of living.
  3. Supermarket Power: Large supermarkets like Coles and Woolworths have significant market power, which they can use to negotiate lower prices from suppliers. There are allegations of unfair use of this market power and there are a couple of government inquiries investigating this among other market power issues. 
  4. Regulatory Responses: There are ongoing discussions and legislative efforts, such as those led by Senator Bob Casey in the US, to classify shrinkflation as a deceptive practice and regulate it more strictly.
  5. Market Concentration: The high level of market concentration in the supermarket sector, particularly in Australia and to an extent in the US, means that major supermarkets can allegedly make it harder for new entrants like Aldi and Costco to compete effectively.

Links relevant to the conversation

Senator Casey’s Report on Shrinkflation: https://www.casey.senate.gov/imo/media/doc/shrinkflation_report.pdf

ABS on how shrinkflation is accounted for in CPI calculation:

https://www.abs.gov.au/articles/quality-change-australian-cpi

Carrefour’s Shrinkflation Warning:

https://www.bbc.com/news/business-66809188

Sanjoy Paul’s article on eight ways Woolworths and Coles squeezed their suppliers and customers:

https://theconversation.com/8-ways-woolworths-and-coles-squeeze-their-suppliers-and-their-customers-223857

Details on the exchange between the Woolworths CEO and an Australian Senator during an inquiry – “Greens senator threatens Woolworths CEO with six months in prison for contempt of Senate”:

https://www.abc.net.au/news/2024-04-16/woolworths-ceo-threatened-with-contempt-by-senate-committee/103728244

Bloomberg report on Lina Khan and FTC:

https://www.theguardian.com/us-news/2024/mar/09/lina-khan-federal-trade-commission-antitrust-monopolies

Previous episodes discussing supermarkets and market power with Simon Cowan and Danielle Wood:

https://economicsexplored.com/2023/08/31/how-to-improve-housing-affordability-and-why-the-greedflation-thesis-is-wrong-w-simon-cowan-cis-ep203/

https://economicsexplored.com/2024/03/12/from-the-vault-antitrust-with-danielle-wood-now-australian-productivity-commission-chair/

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Transcript: Unveiling Shrinkflation: How Companies Sneak in Price Hikes – EP241

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

Gene Tunny  00:03

Again, I mean, we don’t we don’t live in a Soviet style centrally planned economies. We don’t want to constrain the activities of visitors too much. But I guess that is an example of okay, these are, these are big players. And that’s an example of power. It is. Yeah, arguably, it is a domain. Do you need some regulation? There’s a question there. I suppose this is the type of thing that the a triple C will be looking at and thinking through. 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, before we get into it, I need to say that this episode is presented by Lumo coffee. So Lumo coffee is the coffee company set up by my occasional co host, Tim Hughes, who if you’re a regular listener, you’ll probably remember from his previous appearances on the show, Luna was a specialty grade organic coffee with triple the antioxidants of regular coffee. I drink it regularly and I can confirm it’s actually very good. So if you’re a coffee drinker, then please consider getting some Lumo coffee. Tim’s offering a 10% discount on Lumo coffee purchases until 30th of June 2024. Check out the show notes for the promo code and for details of where you can buy Lumo coffee. Seriously healthy organic coffee. Check it out. Hello, thanks for tuning into the show. This episode we’re talking about supermarkets and shrink flashin. And I’m joined by my adept economics colleague, Arturo Espinosa, Arturo, good to have you back on the programme.

Arturo Espinoza Bocangel  02:22

How you doing this? My pleasure to be here.

Gene Tunny  02:24

Excellent turbo. Now this, this topic of was inspired by a conversation that I had with my audio engineers, the lads who produce or do the post production on the show they’re over? Well, Josh is in Virginia, in the States, and Blake is somewhere in the States. And this idea came up that well, we should do a show on shrink inflation. And I thought, Well, why not? We haven’t really covered that we’ve talked about inflation, and shrink inflation is one of the ways in which inflation occurs. And so what we’ll do is we’ll talk about shrink inflation, the phenomenon, some examples, and then we will consider this, this big question of to what extent supermarket supermarkets to blame for the inflation that we’ve seen To what extent is there gouging by supermarkets? Which is a related question. So it’s part of this bigger issue of the cost of living? So I think this episode, we’re really going to talk a lot about the cost of living and shrink flirtations. One aspect of that, and then also what the supermarket’s are doing is another one. How does that sound? Arturo?

Arturo Espinoza Bocangel  03:47

Sounds interesting. Let’s start. Excellent.

Gene Tunny  03:50

Okay. So shrink inflation is a type of inflation whereby the price of a product isn’t adjusted, but the product shrinks in size. So the the suppliers or the manufacturers of it, they’re supplying a smaller product. And you know, it’s sold as smaller product and supermarket that the price doesn’t necessarily go up, but the quantity that you get falls. And so that’s a way that companies suppliers are able to adjust for increasing input costs so they can maintain their their profit margins, I suppose that’s one way of looking at it. And I asked Josh, well, what are some examples that you’ve seen of this shrink deflation occurring? And he said, Well, chips are a good example. So bags of chips. So we see that there are some examples of that. And then boxed cake mixes apparently. And one point Josh made was that, you know, that’s interesting because given baking is very precise and if you’re giving less ingredients But you’re not changing the the recipe, then you might get a different result. So I think that’s a really interesting point. And then Blake got into the conversation and mentioned pre packaged meat and cheese as some examples. He’s saying that there used to be, he must be talking about, maybe he’s talking about cheesy or the they used to pack closer to 16 ounces. Now it’s more common to see around 1010 ounces, but for the same price, peanut body butter, honey jelly, etc. Even the oatmeal, oat milk. So all sorts of things. And and there’s a funny line he’s got here. My hands haven’t got larger since middle school, but those chewy granola bars should have gotten smaller, which I think is great. Yeah, yeah. And then the point was raised, look, food prices are absolutely insane in the States right now. So a lot of people are struggling there. And I think in Australia, too, cost of livings way up compared with what what it was. And so, yeah, that’s why we thought this would be a good episode. And one of the other issues that got thrown into this is the consolidation of the supermarket sector, whereby you’ve got some really powerful players and, and your Josh found some statistics on that, which to the point, which told us all this was a Forbes article, the grocery industry is heavily consolidated among a handful of chains, the top five Walmart, Kroger, Albertsons, Costco, and I hold I don’t know what that one is a hold. Not sure what it is or not been in the states are close to 65% national market share. Right. Now, what’s interesting, and we’ll talk about this a bit later is Australia’s much worse than that, because we’ve basically got two companies Coles and Woolworths that account for around 70% of market share or something so

Arturo Espinoza Bocangel  07:04

260 5% Is it

Gene Tunny  07:07

just the two companies, right? Okay. So maybe it’s not as high as I imagined. Okay, so we’ll, we’ll chat about that a bit later. But first, we might look at some of the examples of the, the shrink flotation, because this is all you know, all very, you know, these are real examples, Doritos, Doritos, the packet of Doritos, a particular cheesy type of Doritos, they’ve got the image of here, and I’ll put these in the show notes, a 5%. decrease in size, by weight. So it’s good, the bags gone down from 9.7 ounces to 9.25 ounces. And there’s a useful report from Bob Casey, who’s a Democratic senator from Pennsylvania. He’s, he’s on a mission to stamp out this shrink inflation, which you’ve found out about tourists, we might talk about that in a minute. But he’s got this handy. Handy table in one of his reports, where He’s ranked the item categories with the highest shrink inflation by percent, January 2019, to October 2023. And what you see is that, so for example, it’s household paper products. They’ve had a unit price change percentage, this includes the shrink flotation of 34.9%. So the, the title, what’s this unit? price change has gone up by 34.9%. The unit price change, excluding Sri inflation is 31.2%. Okay, so he’s saying that we’ll get it went up by 31.2%. Anyway, and then there’s a small component of it, which is due to Sri inflation, if you took into account the fact that the household paper products, I guess, paper towels or toilet paper, they’re shrinking the package as well. So they’ve gone up in price, but there’s another What’s that? That’s nearly four percentage points. Is it? Another 3.7 percentage points? Yeah. On top of that, due to the shrink inflation, and then that translates into 10.3% of the price increase being due to shrink inflation. So I guess what he’s showing is that I mean, what we’ve seen is that the companies aren’t just exclusively using shrink flashing, we’ve seen a rise in the price of groceries and at the same time, they’ve, they’ve shrunk the product a bit to help try and maintain profit margins and and try to reduce the impact on consumers because they’re hoping consumers go We don’t mind if we get a little bit less. Maybe we can economise. And in some cases, we’ll you might be better off with the chips, for example, you know, I mean, Doritos or something. But maybe you’re better off with a smaller packet if

Arturo Espinoza Bocangel  10:16

those are high content. Sugar products. Well,

Gene Tunny  10:20

yeah. Yeah. So there’s a handy little, little table there. And he gives various examples of products that have had shrink flash and coffee and ice cream and related products. So I’ll put that in the I’ll put that in the show notes. And, Tara, you discovered that, that Senator? Senator Casey, isn’t it? Yeah, what’s what Senator Casey been doing? What’s he proposing?

Arturo Espinoza Bocangel  10:48

Currently, he’s working to stop Corporation from deceiving American families in pursuit of profits through his shin pension provision of 2024, which has been recently well, which has recently been introduced in the US Senate. Specifically, specifically, the attitude, okay, I’m gonna list what are the main objects, direct the Federal Trade Commission, or FTC, to establish inflation as an unfair or deceptive Act, or practice prohibiting manufacturer from engaging in shoe inflation, then, authorise the FTC to pursue civil actions against corporations who engage in deflation, and finally authorised state attorneys general to bring civil action against Corporation engaging inflation. So those are the basic action that he wants to promote.

Gene Tunny  11:41

And so he’s introduced this into the US Senate.

Arturo Espinoza Bocangel  11:45

In the preliminary stage, yeah.

Gene Tunny  11:48

Right. And I mean, my initial reaction to that, is that I mean, I like where he’s coming from. I mean, yeah, sure. Inflation is something that, arguably could be deceptive, particularly if, if they don’t make it clear, or it’s not obvious that it’s shrunk in size. And arguably, it could be considered a bit deceptive. But do we really want the government telling manufacturers how large their product should be? Or how big the product should be? I mean, I’m not sure we want to go down that, that path, it just, it just strikes me as highly, highly interventionist policies. That’s true. So you know, that that’s why I, I think I like where he’s coming from. But it just seems very interventionist to me. So I wouldn’t be a huge fan of of that measure. But I mean, good work, finding, finding out about it. And what we’ll do is we’ll keep an eye on that and see if anything, eventuate from it, it might be just one of these bills that gets introduced. I mean, various bills are proposed by different congressmen and women and or senators. And, and they don’t really go anywhere, because they’re just for show really, they’re just for it’s a performance. I, this shows that I care about free inflation, and I’m fighting for consumers. Right. Oh, so one thing we should point out is that shrink inflation is actually accounted for in the inflation data. It’s not as if inflation is not being measured properly. And I suppose that I suppose that the stats, yeah, the stats that Senator Casey has used in that report. They are from the BLS. So they’re from the Bureau of labour statistics in the US, so it collects the data on you know, what’s happening with the CPI, it also collects a wide range of labour market statistics. In fact, there’s a shout out to one of my colleagues, Tim one half who’s he’s currently in Denver, Colorado. He’s, he’s running a labour market statistics team in Colorado. So what the BLS does, is it actually gets state agencies to help them collect the labour market data. And Tim’s doing that Tim’s Tim used to be president of economic society here in Queensland. I like to see what they do for CPI, they probably I don’t know if they use Tim’s team or, but anyway, they’ve got resources to go out there and find out what you know what what’s been charged the problem, they’re probably getting data from the companies themselves, they might be using data from scanners. But anyway, they they do take into account shrink flexion in their calculation of CPI is not as if they’re ignoring it. The ABS has given us a good example and I’ll put a link in the show notes to a useful webpage from the Australian Bureau of Statistics. which would be adopting a very similar methodology to BLS. And it is explicitly states, it does take it on cancer inflation. And it gives an example, say you’ve got a 750 mil bottle of drink costing $3. They decrease that volume to 675 mils while the price remains $3. The ABS works that out as a 10%. Price Increase in 750 mils is 10% less than 750 mils and they use that 10% increase in their CPI calculation, so they calculate that basket of goods. So essentially, what they do is, is it all the spares index the CPI? Arturo, is that?

Arturo Espinoza Bocangel  15:51

Sure, I don’t remember.

Gene Tunny  15:52

That’s okay. I vaguely recall so that the idea with the CPI is you’re basically working out how much more the same basket of groceries cost, like how much more it costs now than it did last quarter. And so you’re what you’ve got to do, you’ve got to adjust for what you’ve got to take into account both price and quantity changes. I mean, if they shrink a product, it’s not the same product you measured last time. So you have to adjust for that. And that’s what they’re they’re trying to do. And the ABS knows that it uses detailed scanner data. So it’s going to be getting that from the supermarkets and retailers. And that gives them item level information. And that enables them to identify and adjust for quality changes, like shoe inflation as they note, so that’s good. So what do you think we’ve given enough examples of shrink deflation? I mean, have you seen shrink deflation in your life? How’s the translation affect you? willingboro

Arturo Espinoza Bocangel  16:54

Yeah, I remember that. For example, there is a popular chocolate called sublimate across the time, that suddenly me privately and the size of the chocolate piece has been reduced, and also some inputs change. So So I that was I remember that clear example about how the product has been reduced. And also the price increase raw that reductions over the site? That was the goal. How do you spell it? So will you make it s UBLI? M.

Gene Tunny  17:38

e. All right. So we’d say sublime, but sub Luma is in Spanish, Spanish. Very good. Okay. So I’ll put that in the show notes regarding that as an example of shrink deflation, right. Okay. Looks like it’s a is it a Nestle? It is an SLA product? So yeah, NetFlow had been accused of quite a bit of string inflation so yes, yes. Now one thing you dug out while we were while you’re researching this, Arturo is you found that there is one supermarket chain that actually warns consumers about shrink flashing Can you tell us about that, please?

Arturo Espinoza Bocangel  18:23

Friends, so well. The well known is French supermarket Carrefour, which is the most important retailer in Europe, and it’s the second largest retailer in the world.

Gene Tunny  18:34

After Walmart is all my years.

Arturo Espinoza Bocangel  18:38

They put a sticker on products the in order to warn consumers that that product contest has gotten smaller with a price reduction. For example, products like the Lindt chocolates or Lipton iced tea bolos. So basically, current curve careful indicated that they wanted to put pressure on the providers on those products has been affected by the reduction of the sides. Right.

Gene Tunny  19:09

Yeah. And what do you think they’re doing that? Is that because they don’t want to upset their own their own customers? What’s driving? What’s driving that?

Arturo Espinoza Bocangel  19:18

I mean, I imagine that they wanted to use that as a piece for negotiation prices.

Gene Tunny  19:27

Yes. Yeah. So because they recognise our Hey, hang on, you’re shipping us less product and you’re wanting to charge the same price for it. So yeah, we don’t we think we don’t want this with like, this is bad for us. And because it’s bad for the consumers, and they’re going to be they’re not going to be happy with this. And you know, we could get some pushback or we could sell this product. Because if consumers go Oh, hang on. We don’t we’re not happy about this. That the smaller sizes so. Yeah. And so it’s a tool and then it goes creation. So that’s really interesting.

Arturo Espinoza Bocangel  20:01

And that one wanted

Gene Tunny  20:05

you because I was wondering, is it is this something that you know, is this some French regulation because the French make regulations for all sorts of things. Okay. Yes,

Arturo Espinoza Bocangel  20:14

California. But it should be noted that karaf, California implemented that measure only for the French territory.

Gene Tunny  20:22

They did it wrong in France. No. Okay. Well, maybe it’s something that, yeah, maybe the French in particular got annoyed by string inflation. Maybe there was some could be some cultural issue, I don’t know. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  21:13

Now back to the show.

Arturo Espinoza Bocangel  21:19

Also, I would like to mention that another expert, I don’t remember the name, that he mentioned that this kind of strategy could affect the relationship between the retailers and food firms or the food providers. Also, another important thing is the supermarket’s who they use the same shoe inflation tactic with their own label product. They do do that. I’m not sure you’ve cared for that kind of thing, right?

Gene Tunny  21:48

I mean, I guess I probably couldn’t. Yeah, I mean, that would be a bad look. But But what was this saying? What were you saying about how it affects it affects their relationship with their, their suppliers? Because

Arturo Espinoza Bocangel  22:01

they can be upset for that measure? Because they basically they are highlighting those products that has been reduced in size. For example, oh, I’m gonna we’re gonna put we’re gonna put an image of the sticker. So basically, the customer will see oh, the product from let’s say, let’s lay or Unilever Yeah. Is being pointed out, or is are being highlighted as Pro that are, has been have been reduced. Yeah. However, the price has

Gene Tunny  22:43

increased you Yeah, yeah. Okay. So it’s good. It’s good information for consumers. I think that’s great. I don’t have a problem with that. I have a problem. If we have the government saying, oh, you can’t change the size your product ever. I think that’s a bit that goes too far. I think. Yeah. supermarkets do this volunteer voluntarily. Yeah. That’s terrific. Good on them. Right. Oh, so that’s, that’s shrink inflation. Now, I thought it was interesting. Your mention of the FTC. So Casey, Bob Casey, the senator wants to get the Federal Trade Commission now the Federal Trade Commission’s but really come into the news in recent years because President Biden appointed Lena Khan, have you heard of Lena Khan? She’s an academic. She wrote. She’s, she’s young. She’s I think she’s roughly your age, really. So she’s mid 30s. And she’s, she was a student at Yale Law School, or maybe she was post grad or I forget the exact story, but she wrote a famous paper on Amazon and anti trust and how the FTC should really go harder after big tech than it has been. And I’ve done an episode with Australia’s current productivity Commissioner. She wasn’t the productivity Commissioner, then she was head of the Grattan Institute, Danielle wood, I’ll put a link in the show notes. So Danielle talks about how there’s this new hipster antitrust movement. And Lena Khan has been really prominent in that. And President Biden appointed her to head the FTC. And so she’s really going after a lot of companies. I’m not sure how much success she’s had. I think there’s some concern that look, they you know, they haven’t really been as successful as the Biden administration was hoping. But she’s really, she’s really out there and, you know, communicating the need for, you know, appropriate oversight of corporations potentially blocking some mergers. If they’re not in the public interest. If they were they’re going to result in monopoly or, or no, or heavy concentration. So maybe duopoly where you got two big suppliers. She’s really going after that, and she’s been on John Stewart and all of that. So I might, yeah, I can put some background info in but the point is she’s currently or FTC, under, under her leadership is looking at blocking a takeover from or a merger of Kroger and Albertsons. So Bloomberg reported that the FTC is Kroger, Albertsons merger suit is set for trial in August. So that’s a that’s a really big deal over there. So this issue that Josh raised, yeah, it’s an important one, there’s a bit of action, you know, there’s a lot of attention out in the States. And it looks like there’s going to be, you know, this important case later in the year. So without, without knowing, exactly, you know, what the structure of the US supermarket, you know, the supermarkets and grocery is over there in Kroger, I know is a big player. Albertson, I expect is a is a small applier. But together, you know, I mean, the problem is it results in greater concentration of the market, although it looks like Albertsons in the top five, so it can’t be too small a player. So, yes, anyway, that’s, that’s something to keep an eye on. And I mean, we’ve already as you pointed, or, as we pointed out, before, and you you sort of confirmed or maybe modified my statistic, slightly. We’ve got heavy concentration here in Australia. So we’ve had a range of takeovers of, of different smaller supermarkets by the big supermarkets, Coles and Woolworths, over the years. And so I mean, we must have one of the most concentrated supermarket sectors, I think

Arturo Espinoza Bocangel  26:41

that the most concentrated sector is in New Zealand, New Zealand is around 80%, I think,

Gene Tunny  26:48

Oh, well. So we’re much better than New Zealand. That’s good. So sorry, kiwis. Well, I’d love to do a show on New Zealand sometime. Yeah. So well, if we’ve if we’ve got all these issues here, they must be as bad or worse in New Zealand. So we’ll have to look at what’s happening. Over the ditch, over the Tasman Sea sometime. What’s happening here is that we’re having a range of inquiries into supermarkets into their market power, because last year, probably started 2022 When we had the big surge, and inflation, and you go to, you know, one day you go to the grocery store, the supermarkets and suddenly everything’s like 10% more expensive, or whatever. Some things are, like 20%, more expensive, like coffee really shot up. I mean, you know, some of these, some of these goods are going to have the there gotta be factors specific to those particular products and markets. But generally, we all noticed how much more expensive things were. Now, as we’ve talked about on the show, before, to a large extent that was due to all the stimulus in the economy, the additional money, the too much money chasing too few goods, so to speak, and their supply chain disruptions. There’s a whole range of factors. But one of the hypotheses that came out, is this great inflation ideal, it’s because there’s this abuse of market power by the big corporates and their gouging. And I’ve talked about this, this I think we talked about it, didn’t we, and then reflation and I had a chat with Simon Cowell and my colleague at the Centre for independent studies, I’ll put some links in the show notes to those, those episodes, so I’m sceptical of this as a hypothesis, but at the same time, I do acknowledge that, look, there is substantial market power potentially that these these big oligopolistic firms arguably have. I wouldn’t say it’s a duopoly because like some people say it’s a duopoly like Australia Institute, they’ll go it’s a duopoly. They’re abusing their market power. But there are competitors to these companies. The market is contestable, in a way I mean, you could have a new player come in and and threaten them. And Aldi has done that, and Costco to an extent. So it’s not as if we haven’t had new entrants. The challenge is that Woolworths and Coles are very entrenched in the market. So arguably, they could take advantage of that market power to an extent. This is one of those grey areas in economics where it’s, it’s not quite, it’s not it’s certainly not a perfectly competitive market. And it’s certainly not a monopoly or even a duopoly. It’s arguably an oligopoly. oligopoly, right? It’s all a gobbler yet let’s call it an oligopoly. But in an oligopoly situation is not always clear that there’ll be abuse of market power is there I mean, if the markets can tell estable so the contestability of the market can constrain the behaviour of the major players in a way this is the whole William bomo argument about contestable markets. If I remember correctly, we might cover that in a in a future episode.

Arturo Espinoza Bocangel  30:17

I remember something, something happened when Aldi started to operate here in Australia. They face some constraints. Yeah, yeah. So

Gene Tunny  30:28

Well, yeah. And this is one of the things we’re going to talk about because one of the one of the accusations is that the big supermarket chain so Coles and Woolworths have bought up all the potential sides, so not all of them. But you know, a lot of the the sites that would be suitable for a supermarket, because what, you know how hard it is, this is a, this is what we discovered. We did some work for the Real Estate Institute of Queensland here in Queensland state of Australia, we were in where we were looking at, well, what are the barriers to housing development? And well, there are all sorts of planning and zoning rules and and you have those for commercial property too. So if if Woolworths and Coles can buy up sites that are well situated with good transport, then you know, that’s going to constrain where Aldi and Costco can go. So, yeah, like Costco tends to go in, in new new developments out near airports and things like that doesn’t adore or Greenfield sites out in the in the outer suburbs. Yes, yeah, but LD I think LD is probably having a tough time. Yeah, they probably has a tough time finding places. Yeah,

Arturo Espinoza Bocangel  31:44

I remember that three years ago in Europa Indooroopilly shopping centre. You only you only found Gu Coulson. Goalies after the after, I know what happened at that time. Ali came to in rappelling and now you have more options to buy groceries. Do

Gene Tunny  32:05

you think it’s had any impact on the pricing? Well,

Arturo Espinoza Bocangel  32:08

I’m not sure. But probably there’s a higher competition there. Yeah,

Gene Tunny  32:14

I wonder. That’s something I should look into. Because I mean, I suppose to an extent their prices are going to be determined nationally, I imagine. Or maybe they’ve got state or national policies. That’s something research for this. I should have researched that for this episode that will look into that. I just just occurred to me

Arturo Espinoza Bocangel  32:33

a remember that some news mentioned about that there’s some price differentiation

Gene Tunny  32:40

in Australia, yeah, I guess that would make sense. And then they could take advantage of any local monopoly, so to speak that they have I know that those woollies Metro stores or the Kohl’s Metro store. So the smaller format stores, they’re often more expensive than the through the larger stores. Yes, yes. The ones that a strategically located next to train stations or whatever. Yeah. All right. This this issue of the location of the stores, we might we might look at that a little bit more because this is one of the criticisms of the major supermarkets. So Coles and Woollies. And this came up in a an inquiry that’s been done at the state government level. So we’ve got federal government inquiries. We had the former finance minister Craig Emerson, he’s done a his own inquiry. He did that on behalf of the current federal government here that Albanese government in Australia. And so he’s doing one, the a triple CL, our equivalent of the Federal Trade Commission in the States. So our Australian Competition and Consumer Commission, it’s now doing his own supermarket inquiry, to see if there are any abuses of market power. And the Queensland Parliament. Well, I mean, if everyone else is having an inquiry, why, let’s have an inquiry to and it gives them you know, maybe they think are there’s a political advantage that we can get the supermarket executives, anyone can give them a hard time for price gouging, charging consumers too much. So maybe they think there’s certain political merit in it. I mean, I’m not sure what, what the whole point of it is. But anyway, it actually has uncovered something useful. So I was I would have been initially sceptical of this inquiry. What’s the point of having a state government inquiries? We’ve got a federal one. But it has revealed, I think, some really interesting local cases. And there was a story that I found in the Guardian smaller grocery stores annihilated by major supermarkets tactics, Queensland inquiry told and I might just I’ll just quote for this for a moment that the company behind so the company behind IgA, so that’s met cash, it criticised the practice of resigning land to allow out for major supermarkets to establish themselves in an area so, so they’re arguing that there’s favourable treatment of Coles and Woollies by the council’s different councils. The Metcash Government Relations Manager Luke McKenzie cited an example in which Kohl’s bought an entire shopping centre in the inner Brisbane suburb of Milton. So that’s that’s the Verona Road shops if I’m, I mean, that’s gotta be Bruna road, he told the inquiry, the local IGA was forced to close and called on the Australian Competition and Consumer Commission to unwind the ridiculous acquisition. The community is outraged that they are losing the only independent retailer left in that market when Kohl’s is already present twice. He said. So I mean, that’s just an extraordinary story. I realised that I used to shop there quite a bit when I lived at orchid flower and too long. And yeah, so I mean, it is a it is a it was a great store. And they you know, they had interesting products that often have really good muesli there. So yeah, and they had a good deli delicatessen there for our members. So that is a real loss to that community. Now, again, I mean, we don’t we don’t live in a Soviet style centrally planned economies. We don’t want to constrain the activities of visitors too much. But I guess that is an example of okay, these are, these are big players. And

Arturo Espinoza Bocangel  36:29

that’s an example of power. It is. Yeah, arguably, it

Gene Tunny  36:32

is a domain. Yeah. I mean, do you need some regulation? There’s a question there. I suppose this is the type of thing that the atrium will see. We’ll be looking at and thinking through I mean, you’ve got to think about, yeah, well, I mean, how, from a policy point of view, is this a problem? How would you deal with it? I mean, certainly it raises eyebrows. Whether we need specific regulations to stop that sort of behaviour. That’s another question. Okay. One, before we start wrapping up, I should point out that look, the data do tend to suggest that supermarket profit margins have increased over the last decade or so. So, I mean, depends on how you look at it. I mean, maybe you don’t think it’s a huge deal. But I mean, applied to the huge turnover they have it ends up being a significant amount of money, of course. So their profit margin, according to IBISWorld data, if you look at their estimates, is gone up from about three and point one or 3.2%. In in 2011, maybe that’s about three and quarter, three and a quarter percent, and it’s gone up to in 2024 3.8%. So that’s their estimate of the profit margin for supermarkets and grocery stores in Australia. Anything Oh, okay. is half a percent? Is that a big deal? Well, if you apply to total turnover of 132 billion, probably is a big deal. So, yeah. So that posit, arguably, they have benefited from their privileged position in the market. And so this is something we really need the a triple C to shine a light on. And, you know, I’ll be interested in what they find and what their recommendations are. On the report, the other report I mentioned, so Craig Anderson, so he’s done an inquiry. And he’s issued an interim report. He’s talking in Brisbane in a couple of weeks. Well, he’s talking by video to the Economic Society of Australia Queensland branch, so I’ll be interested to watch that. He found that this, there’s this existing food and grocery code of conduct. That’s been ineffective. So they set up this, because this this, this issue came up, I don’t know 20 years ago, and they had an a triple C inquiry then and I’m not sure that much came of that if I remember. But what what eventually did get set up was this code of conduct, which wasn’t compulsory, which I don’t I don’t think it had really much force, but it was just telling supermarkets look, you should behave ethically you should behave. What’s the exact words here? Okay. Yeah, they should deal with their suppliers lawfully and in good faith. Okay. So I suppose, ethically, there’s minimum public obligations and behavioural standards that are set out in this code. Unfortunately, it’s not compulsory, and we know what happens with any of these sort of video these NGOs that aren’t compulsory or any form of self regulation. They’re they’re often ineffective because, you know, business will You know, if they if they think they could get away with something and as you know, many businesses this is this is the sad fact of life, they will try and get away with it or they sometimes they can justify it to themselves. I mean, we we like to think that the market will discipline businesses and keep them, keep them on the level. But I guess if they’ve got market power, then they can abuse that. And the incentive is strong to abuse it in some cases. And looks like that may well have happened. And so Craig Emerson has recommended that this code of conduct be made mandatory and you have penalties you have, you know, big financial fines and penalties if they breach it. That makes sense. Yeah. Yeah. And there have been some really extraordinary examples of, of how, like, the big issue I think one of the things you often hear about as he’s the poor farmers, like they’ve got to sell to Coles and Woollies. But, you know, they’re such major buyers, Coles and Woollies. They can really put the screws on or turn the screws on Oh, yeah. On these these suppliers and, and really beat down those farmgate prices or beat down the prices that the the farmers sell their produce to them too. And there’s a very useful article that notes this is by Sanjoy Paul from He’s an associate professor at the University of Technology Sydney business school. If I found this article early enough, I would have thought about getting him on the show, so I’ll have to try and get him on the show sometime. He’s written his great article eight ways Woolworths and Coles squeezed their suppliers and their customers. So this is on the conversation website. I’ll put a link in the show notes. And he knows that hundreds of farmers have little choice but to sell their crops to the big two. So Coles and Woolworths and little choice but to accept what’s offered and he gives us the example which I think is you know, this is illustrative of just how significant this this problem can be. One cherry farmer sent 15 tonnes of cherries to Coles and entire semi trailer load, and he hoped to receive $90,000 for that. Instead, he was told the fruit was not up to standard and was only he was only able to get $5,800 on the seconds market. He said when Coles is dealing with 1000s and 1000s of pieces of fruit, it can pick out 10 pieces and say the consignment is no good. So that is power that’s market power when you can simply reject something for no good reason. And then Sanjoy Paul, he goes on to suggest that the behaviour described might amount to misuse of market power under the Competition and Consumer Act 2010. So, I guess what’s possible there is that you know, if Coles and Woollies behave like that, I mean, are they sending? Are they sending a signal that, hey, if you don’t accept our terms, if you if you get too uppity, we can really make life difficult for you, we can reject, you know, or we can claim that your consignments lower quality, and we’re going to pay you a lot more for it a less a lot less for it. I mean, without knowing all the facts, it’s difficult to judge. But you do hear a lot of stories like that, and four corners had a good a good programme on it. So it is something that, you know, I know that there are a lot of farmers who are concerned about this. That’s just a really extraordinary story. I’ll put a link in the show notes, because there are other examples, which I think are equally as compelling. Right? Oh, one thing I should point out is that it looks like and I guess this is why there’s a greater focus on this. This is one of the reasons why. Yeah, we are talking about supermarkets, because it’s both the consumers who are complaining, or you know, rightly, I suppose, and the suppliers to the big supermarkets. So you say the supermarkets are in the middle there, you know, they got market power both ways that appears because they’re such, you know, major, you know, that they’re the major retailers, and they’re also the major buyers of the produce of many, many farmers out there in the community. What I found interesting from the IBIS World, one of the IBISWorld reports, so we subscribed IBISWorld which produces a lot of really good intelligence about different industries and different companies. And they noted that, you know, partly this is, one contributing factor could have been the fact that Aldi and Costco have come into the market so that they’ve written the successes of Aldi, Aldi and Costco are causing dominant players Coles and Woolworths to cut costs in other areas to compete on pricing. Automation data collection and more favourable supplier contracts have helped the Giants maintain their Profit margins. So they’ve been getting more favourable supplier contracts. And you can try it, you know that that could be because of what what Sanjoy Paul has has written about the fact that yeah, they’re they’re all these examples out there of how they’re squeezing their suppliers and customers. Now, for the for the lawyers, we’re not saying that Coles and Woolworths are doing anything illegal at this stage, we we want to see what the a triple C comes up with. And I expect they’ll say similar things to Craig Emerson, that there should be this compulsory code of conduct with some significant penalties for breaching it. Okay, so that’s a, that’s a bit of a review of what’s been happening with supermarkets. We talked about shrink inflation before. Anything else we should we should talk about before we we wrap up?

Arturo Espinoza Bocangel  45:57

Well, I think the only issue that we didn’t mention here is how Wallace and Cole are managing their brand reputation, because given these actions, of course, are affecting their lives, or their brand reputation across customers in Australia. So I think it’s a good point that they those supermarkets. Yeah.

Gene Tunny  46:29

I don’t think they’ve been doing that effectively. I mean, did you see didn’t the CEO of all these have to resign? He had this embarrassing interview on four corners where the ABC programme where he hopped up and walked out of the interview, mid interview, and then that he was finally convinced by his own media person to go back because that’s such a bad look. And I think he ended up standing down eventually. Brad Vander Luci. Like, because he couldn’t explain it. He had difficulty explaining or trying to convince the journalists that Oh, hang on, we’re actually not ripping off consumers. I mean, I’m not saying that they aren’t necessarily, but what I’m saying is that he had he struggled because the journalists was putting really hard questions to him. I mean, I forget, it might have been about the suppliers or you know, abusing your market power suppliers or with consumers. And he struggled. He struggled to answer those questions. And I think similarly, the CEO of Kohl’s she’s had a difficult time to add various inquiries. The problem is that this is a it’s like, if you’ve got the banks in front of you, if it’s an issue with the banks, I mean, the soup, the big supermarkets there, if you’re a politician, they’re a good juicy target to go after. And so you had that that incident of the Australian Senate where Nick McKim, who’s a green senator, they actually threatened the Woolworths CEO. I think it’s Brad Ben DeLucia. With with jail, he said, if you don’t provide this information, we’re off. We’re asking like, because he was getting deep into the detail on your what’s your actual profit margin or what’s what’s your return on equity? What’s your because I think, I think more words, the Woolworths CEO was was talking about their return on assets. So like a particular measure of their profitability, which, which didn’t look as well excessive as, as what may be the return on equity looks like so any wouldn’t give that too. I’ll put the link to the details in the show notes. So that ended up being an interesting exchange. And, yeah, basically, my take on it is that they’re not really doing that. Well. And it’s extraordinary, because 10 years ago, or 20 years ago, I think Woolworths and Coles, maybe Woolworths had a better reputation for that I think they had they had a much better reputation than they do today. I mean, partly it could have been I mean, this is this is another thing, maybe we have to have a deeper dive at this and and look at when the market concentration really occurred. I mean, because we’ve have had we had Aldi and Costco come in, in one was that there might have been in the 2000s. I’m trying to remember I can’t, I’ll have to I have to have a closer look at the timing. But anyway, whatever’s happened is I mean, maybe it is the the extra market power they’ve got since they took over. I think there used to be brands like Franklin’s and bylo, low and all of that Safeway, I think it was and, you know, since there’s been market concentration, maybe they’ve started behaving, you know, less, less ethically. But again, that’s just a hypothesis. And yeah, wait to see what the a triple C says about that. I mean, what’s your take on their, their brand management, Arturo? Well, no,

Arturo Espinoza Bocangel  49:55

they need to be aware of that because people will With all the information that we we have nowadays that you can, you can investigate and you can get from many sources. So, possibly that will affect how the costumer consumer will try to, for example, to buy groceries, perhaps they will try to substitute goods from those supermarkets and buy in other smaller supermarkets or markets or the other, for example, green alternative, or perhaps buy directly to farmers other kinds of things. Yeah,

Gene Tunny  50:38

one point I should make in closing is even though we’re bagged out, or I’ve, you know, I’ve been very critical of the big supermarkets over the last 40 minutes or so. I actually, like shopping at Woolworths actually. You know, I’d rather go to woollies than to well, marginally like woollies over coals for the range of products, I think they have better fresh food that used to be their one of their differentiation the way they differentiate themselves and say where the fresh food people and I’ve got the everyday rewards card which helps me accumulate points and then I can get discounts on shopping and I’ve got my insurance through Woolworths so get a 10% off a shop every every month. I think woollies is doing a lot of good things. And they’re gonna you know, I’m not gonna get IGA because IGA has a smaller range and I think their prices are higher. So I do. I do think woollies is, I think I do actually like shopping at those big woollies or Kohl’s. But I do recognise that yeah, maybe, maybe they are abusing their market power to an extent that we have to see what the a triple C says. And maybe I would benefit from a greater choice because if I want to go to a supermarket I’ve essentially got I can, you know, if I want to go to one that’s going to have everything I want. It’s either within walking distance or a reasonable driving distance is either Woolworths or Coles for me, based on where I live

Arturo Espinoza Bocangel  52:09

for me is the goals and goals I have those three have Yeah,

Gene Tunny  52:14

yeah. Which which is good. I mean, all the I know a lot of people really like Aldi, but some of the products are quirky. Is that right? Like can’t You can’t get everything you could have woollies or Kohl’s can Yeah.

Arturo Espinoza Bocangel  52:25

Yeah. Well, yeah, that’s right. So it’s like in my household. We try we buy a bunch of product from Aldi, and then another product from Kohl’s and also some product from wool. Like a combination of products that we supermarkets to maximise our satisfaction with consumptions and also minimise our budget. Very good.

Gene Tunny  52:56

You’re thinking like an economist. It’s a constrained optimization problem. I like it you guys, your family, your you do a lot of cooking, which is great.

Arturo Espinoza Bocangel  53:05

Also my wife, she’s economy, so yeah, very

Gene Tunny  53:09

good. Okay, Tara, I think we’ve had a good conversation on translation and supermarkets. Anything else to add? There? Very good. Well, thanks for your time. I really enjoyed our conversation. It’s given me a few things. I know that I should follow up on and do some research. It’s always the case for these conversations. You think you’ve, you’ve got all the information you need. And then while we’re talking, it helps, it helps you think of alternative hypotheses or, or alternative alternative ways of thinking about the issue. So it’s really good. Tara, thanks so much for your time. Really appreciate it. Thanks

Arturo Espinoza Bocangel  53:49

for having me again by

Gene Tunny  53:52

rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone who 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.

54:39

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Credits

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

Categories
Podcast episode

How Wall Street Can Help Democracies Survive w/ Marcos Buscaglia – EP225

Show host Gene Tunny interviews Marcos Buscaglia, former head of the Latin America economics team at Bank of America Merrill Lynch, and author of the book “Beyond the ESG Portfolio, How Wall Street Can Help Democracies Survive.” Buscaglia argues that, through their investment choices, many investors have inadvertently been supporting autocratic regimes, and he calls for a change in investment practices. Tune in to this thought-provoking episode to learn more about the ultimate impacts of our investments and how Wall Street can contribute to the survival of democracies.

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

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

What’s covered in EP225

  • Introduction to the episode. (0:03)
  • Aligning investments with values and democratic growth. (4:32)
  • Autocratic regimes, EU funding, and corruption in Hungary. (9:41)
  • Investing in emerging markets while avoiding autocratic countries. (22:31)
  • Economic sanctions, autocratic regimes, and investment strategies. (28:06)
  • Economics, democracy, and the role of finance.

Takeaways

  1. Investing in autocratic regimes can inadvertently support and strengthen those regimes.
  2. ESG (environmental, social, governance) investing should also consider whether countries are democratic.
  3. ESG metrics and indices currently do not prioritize democracy as a factor.
  4. There are limited investment options that exclude autocratic countries, but investor demand can drive change in this area.
  5. Sanctions can be an effective tool in limiting financial support to autocratic regimes.

Links relevant to the conversation

Marcos Buscaglia’s book: Beyond the ESG Portfolio: How Wall Street Can Help Democracies Survive

https://www.amazon.com/Beyond-ESG-Portfolio-Democracies-Survive/dp/1265115605

Transcript: How Wall Street Can Help Democracies Survive w/ Marcos Buscaglia – EP225

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.

Marcos Buscaglia  00:03

By the time Russia invaded Ukraine ESG corrected government bond index of JP Morgan, right. Had a bigger share of Russia than then they they equal index that is not corrected by ESG. Let me open up parentheses to, to make to so everyone can understand. You know, a lot of the investments that finance autocrats end up being funnelled to them through funds that track indices.

Gene Tunny  00:40

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show was 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. My guest this episode is Mark Aasbo. Scalia is the former head of the Latin America economics team at Bank of America Merrill Lynch. And he’s the author of a new book Beyond the ESG portfolio, how Wall Street can help democracies survive, which we talk about in this episode. As I hope you’ll gather from my conversation with Marcos, he’s written a terrific book. It’s one that makes us think carefully about the ultimate impacts of our investments. have investors inadvertently been supporting autocratic regimes worldwide. Marcos argues that they have been and that should change. This is another thought provoking episode. So please get in touch with any comments or reactions, you can find my contact details in the show notes. And you can also find a link to Marcus’s book and other relevant information. Right, I would better get into it. I hope you enjoy my conversation with Marcos for Scalia. Marcus for Scalia, welcome to the programme.

Marcos Buscaglia  02:17

Thank you very much. Thank you for having me, Dean. Of course,

Gene Tunny  02:20

you’ve written a an excellent book, I’ve had a read of your book Beyond the ESG portfolio. How Wall Street can help democracies survive published by McGraw Hill, like us to start off with, could you tell us why did you feel the need to write this book, please? Yeah,

Marcos Buscaglia  02:40

it was it was great that a chance event, I would say, in the sense that I went to a meeting with a client in New York, about the time that Christina Kushner won the, you know, vice presidency, but But you know, she picked the president, the front runner, so she was everybody knew she was going to run the government, that this was the end of 2019. And I went to see this, this very nice client that very smart. And, you know, basically, you know, he argues that, you know, if these guys did the right thing in macro terms in economic terms, you know, they wouldn’t be ready to buy Argentina bonds. And I say, No, this is not right. This is not right, because I knew I suspected what you know, more than I knew, I suspected, you know, that. Christina Kidner will try to undermine democracy in Argentina, at least, you know, checks and balances, particularly not related to her corruption cases, you know, that were going on in courts and will try to undermine democracy in my home country. So I said, this is not right. And, you know, so you know, it was this, like, sort of, you know, small scale Rekha moments in her. And I say, Well, you know, there was something wrong with this. And I wrote a piece that, that the Financial Times blog, beyond breaks was very kind to publish at the beginning of 2020. Before the pandemic, and I got a lot of attention, you know, as so much people, you know, contacted me saying, Yeah, this is not right. For instance, some better roof journalists said, Look, you know, we’re, we’re being jailed. And at the same time, London houses, hold a lot of, you know, Belarusian bonds, but Belarus is, you know, outright autocracy for a long time. There’s no discussion, you know, about that. So, so basically, I say, you know, so So at some point, say, well, maybe I can turn this into a book, because I think this is, you know, this, this may be something important, something that can, you know, change the way we perceive things. Gotcha.

Gene Tunny  04:52

Now, what I’m wondering is, why do you think investors should care about this whether a country democratic mean, obviously, there’s the political reason or it’s the right thing to do. I mean, we want democracies, but they’re investors. So they’re trying to, you know, invest on behalf of clients and they want to get the best returns. I mean, I’d be thinking the things they’re looking at is, well, will we make money on this transaction? Or will this government actually pay its pay? Its its creditors? Will it actually pay the bondholders? So, why is it that this is something that investors should be thinking about? Well,

Marcos Buscaglia  05:37

I think it’s it’s twofold. I mean, there are two reasons. The first is is, you know, to align with your investment with your values, in the same way that you would not invest in companies that use child labour, or that basically, you know, attack one minority or that, you know, pollute, you know, outrageously pollute, you know, the environment, you know, and investors are already doing that, I mean, aligning their, their values with their investments with with the ESG framework, and that’s why we, you know, I put all this view within the ESG framework, you know, because that’s the framework in which, although, as you know, there is a lot of, you know, pushback now, but at least it’s a framework that tried to tries to align, you know, basically values with with with investment decisions, while in the same way that you will do that you will say, Well, you know, what, why would I finance, the finance the availa rules, you know, dictator, you know, or someone that is undermining democracy in his or her country. So, that’s that. So the first reason is to do good, right, to align values with with investment decisions. The second is that, I think that at the end of the day, you you end up doing better, you know, with with investing in democracies, the the empirical evidence on on this is not, there isn’t a lot of empirical evidence to be to be sure, I don’t want to, you know, be, you know, like selling something that is, that is not, you know, a lot of empirical evidence, but, but, look, if you look at what happens with with autocracies, you know, you know, the downsides that you face as an investor are downsides that you don’t face in, in democracies, in which, you know, there’s division of power, there is an independent press, there is an independent judiciary, look at what happened, for instance, we don’t know the litigation stocks in China, you know, a couple of years ago, look at what happened with you know, firms that were expropriated in Oh, no, in Egypt. You know, so there are so many examples of downside risk. And, and there is one thing that I, that there is a little more evidence, you know, that is that at the end of the day, democratic countries end up growing faster than non democratic countries. Of course, you know, there is China, you know, it’s, it’s, it’s, you know, it’s bad, when you put it all together, including China, the evidence suggests that democracy brings more growth, and then you will think, Well, you know, companies that are based in democratic countries, if the country grows faster, should should be doing better, right? It makes it it makes sense. You know, it is common sense to think that so, so again, although I cannot be selling to the people listening to this, you know, look, you’re, you’re for sure don’t going to do better investing in democracies, you know, the, it is reasonable to think that given that democracies tend to grow faster, on average, you know, compared to non democracies, that you would end up doing better. Yeah.

Gene Tunny  08:56

What I think’s interesting about your book is that you give a lot of examples, and you do identify some major financial institutions that are that you or you’re suggesting, are potentially in given the the title of your book. Well, I mean, their actions at the moment aren’t contributing aren’t helping democracies survive and could actually be undermining democracies? Could you explain how that is? I mean, by buying bonds of foreign countries or by investing in those countries, how is that actually undermining democracy in those countries or or supporting the autocracies? Could you give some examples, please?

Marcos Buscaglia  09:41

Yes, of course. You know, at the end of the day, particularly when they’re building their their autocratic regimes, this one of the autocrats build the reputation of being successful, you know, typically they come to power let’s say, let’s say you know the case Since that I’ve started I have not covered, you know, all the autocratic countries, of course, but take the case of, you know, Erdogan in Turkey or Chavez in Venezuela, you know, or, or the commissioners in Argentina, you know, they typically come to power or pull in, you know, in Russia, so they come to power after a period of harsh, you know, economic contraction, and, you know, IMF, typical IMF, you know, austerity programmes, and they come to power and for different reasons, you know, sometimes they’re just lucky, you know, like the cases of Chavez in and occasionally, because commodity prices went up, and they were in the right place at the right time. And, and so, you know, these countries export commodities, namely, oil in Venezuela, and, you know, the cultural goods in Argentina, so, the countries, you know, became wealthier, and they were in power. So for different reasons, but, you know, they consolidate their power, because they’re successful, because they, they come and people say, you know, these guys are successful, but, so, if you’re financing them, you’re helping them to be successful. And, and the market was very happy to finance Venezuela, for instance, when Chavez was clearly undermining, you know, all constitutional checks and balances. Actually, what I’m showing this in the book is that Chavez dismantled, you know, democracy, almost from day one, day one, he called, you know, a constitutional assembly that basically changed the way the institutions of industrial change, work and, you know, forever. And, and, and, and markets, you know, at the same time, we’re, we’re, you know, we’re very happy, you know, you know, taking the bonds that that Chavez redeem, was sent into the market and the VESA, which is the ministry lost one company, so and this has this doesn’t happen in a vacuum in the sense that is not that is people is not aware of what is going on, because you have all these democracy watchers, you know, like, Freedom House, and, and V them and, you know, there are a lot of democracy workers around the world institutions that dedicate themselves to, to, you know, follow up what is going on with democracy. And, and basically, they, they, this, you know, this is this institutions are tracking on real time, you know, what is going on with democracy, and fagging that to the world. And the media also, you know, you know, reflects that. So, it’s not that you’re buying a bond on him off Venezuela or Russia. And you’re totally unaware, you know, that these countries are, you know, sliding into autocracy.

Gene Tunny  12:52

Yeah. Yeah. Good point. Good point. Okay. Now, yeah, what I found interesting is just the the broad range of countries around the world that you that you look at what’s been happening in Hungary, and you, you make the accusation or you identify that the EU has undermined democracy in Hungary? Could you explain that, please, Marcus? Well,

Marcos Buscaglia  13:14

you know, it’s it’s that, you know, Hungary has received for a long time, very important. transfers from the, from the EU, you know, this is part of the typical accession programme, when a country, you know, that is poorer than the average, you know, of the Euro bucks exceeds the European Union, you know, it gets, it gets a lot of money from the European Union, to union to build infrastructure. You know, we have seen that in Spain, for instance, you know, many, you know, some decades ago, and so that happened with Hungary. But the funny fact about Orban is that he speech is an anti Brussels as he called me, you know, speech, you know, he has been bashing the European Union, you know, because European Union puts a lot of constraints on this, of what these countries can do. And at the same time, at the same time that he was bashing the European Union, he was receiving money. Fortunately, you know, very recently, the European Union Fest has changed some rules, and has been withdrawing money, you know, to Hungary, so has not been sending the money to Hungary. So, so, because of violation of some articles, you know, I’m not an expert. Exactly. I don’t remember, you know, I don’t have them on the top of my mind, but it has to buy been violating some articles of the European Union. So, so basically, now, but but in the meantime, you know, it has sent, you know, several percentage points per year of funding a net terms to the to Hungary, the European Union, and, and moreover, there are significant you know, there are there are many indicators, several indications that there was a lot of corruption in this in the contracts for to build infrastructure. funded by the European Union, right? So so so, you know, basically, if you want to put it well, if you want to synthesise this is, you know, there is a band of brothers, you know that, that is managing, you know, Hungary, and these, these guys get all the contracts, you know, we’re almost all the contracts.

Gene Tunny  15:22

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

Female speaker  15:27

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Gene Tunny  15:57

Now back to the show. One of the points you make in the book is that you think that ESG so environment, social governance, the this requirement or this, this commitment by companies to pursue ESG goals, you think that is not enough on its own to, to prevent or to or to just stop the investment in countries that are autocracies. So, why is ESG which does have you know, it’s got environment, social governance, why is that not enough on its own?

Marcos Buscaglia  16:36

Let me tell you a couple of things. We went into, you know, several, you know, let’s say books that analyse you know, ESG standards and, and to several metrics of companies that do that, and you don’t find the word democracy there. Sometimes you find human rights, you know, but But basically, it’s not a, it’s not a big component. So basically ESG is not built to, to reflect, you know, democratic values, as it stands now. So again, and again, we look into, you know, the metrics, that that several companies that they dedicate themselves to ESG standards look into. And let me tell you, a very, you know, telling example of why, you know, that you can see that inaction. You know, by the time Russia invaded Ukraine, that that day ESG corrected government bond index of JP Morgan, right, had a bigger share of Russia than then the the equal index that is not corrected by ESC. Let me open our indices to, to make two so everyone can understand, you know, two parenthesis certified indices, a lot of the investments that finance autocrats end up being funnelled to them through funds that track indices, right? Remember, I don’t know if you saw the news, you know, these days, but ETFs have surpassed, you know, active funds in, in, you know, in assets under management, well, ETFs track indices, you know, set let’s say in the, in the stock market, they are the most you know, popular ones on there are the Morgan Stanley MSCI indices in the in the, but there are many, of course, you know, and in the bond in the government bond indices in the market, the JP Morgan ones are the most common ones are out there, there are a lot of, you know, several indices. So, but they they, particularly for emerging markets, the JP Morgan indices are very important, right, so, so these indices, let’s say the dollar ones, the most common ones are called the NB you know, the MB them the global, the MB diversified. And then very more recently, you know, you know, JP Morgan issued, you know, the ESD corrected versions of this, right. So, so, what happens is that the, the banks or institutions that produce these indices, and then there are ETS or active funds that track these indices, what do I mean by this gene? You may know this, but Is that us imagine that you are an investor and institutional investor and you offer your services, you say, Well, look, I will track the JP Morgan in MB index, and you will see how I over outperform it, because I’m very good, you know, that’s, that’s your benchmark. Okay. So, so now, but back to track, so you have these two indices, and the the the weight of Russia in the ESG, corrected version of the JPMorgan MB was higher than the non ESD. Correct. What does what does that mean? That if Jean, if you were tracking the ESG corrected version of the index, you should have had a bigger share of Russian government bonds than in the non ESG corrected one. You know what I mean? So so you will be more apt supposed to Russia, if you were tracking and ESG index by the day Russia invaded Ukraine. Right? I don’t know if this was clear or not. Yeah.

Gene Tunny  20:08

I mean, that’s extraordinary. So if you were, if you were conscious of ESG goals, and you would have been overweight in Russian bonds, more than the market as a whole, do you have any insight into why that was? Why Russia was disproportionately? In that? That index? You

Marcos Buscaglia  20:27

know, I don’t know, because I don’t I don’t have the the exact ways I just read this in, in a report. Yeah. But my take is that, you know, given that, let’s say, you know, they take into account, for instance, whether you should green bonds, right. So, so maybe, you know, some countries didn’t issue green bonds, and also they have a lower share in that index. And that Biden, by construction, you know, mean, that meant that Russia had a bigger way. You know, that’s, that’s, you know, that’s an alternative that I can think about, I can think of, but remember, at the end of the day yesterday, as it doesn’t take into account democracy, it takes into account, you know, other the other issues that say, let me give you another example, let’s say Poland, remember that Poland, up until very recently, when when the government was ousted in the elections, it was sliding towards autocracy, you know, and Poland is the bigger, biggest sovereign issuer of green bonds. Right? All right. So, come on gene, money is fungible. Right? You know, so yes, if you finance, if you finance the Polish government to let’s say, to build wind farms, that’s very nice. We all want that. Right. But money is fungible, maybe some part of that money was diverted towards, you know, you know, the Secret Service or, you know, or to buy a media company, or, or, or even if that wasn’t the case, you know, you free up space in the budget, you know, because you’re, you’re you’re funding the the wind farms, and then you’re, you’re freeing up space in the budget to, to finance, you know, the secret police or whatever, you know, whatever an autocratic government will be doing. Yeah,

Gene Tunny  22:13

absolutely. I think there’s several good examples in the book there. So, you, you talk about adding a D to ESG? So it would be what ESD, GE or Ed SG, or however you want to want to pitch it? What are your recommendations for going about that markets? How would you actually get the D in there? What are their regulations that need to change?

Marcos Buscaglia  22:39

I think, maybe regulations, but I think at the end of the day, it seems investors asking for this to happen. I mean, you know, there are several investors, which already do that, but not in the sense that I know, you know, some friends in the, in the financial industry, that tell me Well, you know, this is this is not gonna be, you know, recorded anywhere, but, you know, many, but some big clients come to us and say, We know, we want to invest in a portfolio of emerging market bonds, but please exclude you know, this, you know, x and y and z because they’re autocratic. Right. So one way more general, so, so I think that at the end of the day, is investors, you know, requirements that will bring the change, and that’s the purpose of the book, you know, to bring awareness that this is happening, you know, so investors can demand, you know, for instance, they index providers to do something, right, are the ESG score providers to do something, you know, so, so my take is that I want to bring awareness. But but other than that, you know, given that that may may take time, I provide some solutions to that, let’s say you can do that in your portfolio, say, Well, you know, I will, I will there are some ways to invest in, in, in, in both in the in the equity world and the fixed income world in to try to exclude some autocratic countries, for instance, or diminish the importance. Yeah, your portfolio.

Gene Tunny  24:07

Is this a way for some fund managers to differentiate themselves to attract new business? So, for those people around the world who are concerned about this, I mean, I think people should be concerned about this. I, I agree with you, do you see any companies or any hedge funds or investors, investment managers, fund managers doing this at the moment? Very

Marcos Buscaglia  24:29

few that I’m aware of, there are a couple of ETFs you know, one that is, is based on exclusion is an Emerging Markets Equity Fund is called I think life and liberty and, and it’s basically the Exclude autocratic countries. And then the the second one is an ex US equity fund, right? And instead of a It’s gruelling, it diminishes the weight compared to the benchmark, you know? Yeah. The benchmark again is is, is, you know, X US equity, you know, benchmark. And they diminish the, you know, the weight of the autocratic countries. So that’s in the ETF world. And then I have been in contact with this company, this is a rather new initiative called Tom. And Tom is, you know, French asset manager, who offers for it to situational investors in this case, not to, you know, not to individuals, and strategy, equity strategy, I think, or liberty or, you know, something like that. So, and again, I think there are a few more, but it’s not widespread, is not widespread.

Gene Tunny  25:45

Gotcha, gotcha. Few more questions. What’s the role of government here? So in your book, you mentioned something that the Trump administration did so in August 25 2017, President Trump imposed financial and economic sanctions on Venezuela, executive order 13 808, but the Venezuelan government and in its state owned companies in this joint public, private ventures from international credit markets, is this a type of thing that needs to be done? more widely? Should governments be actively promoting democracy using these economic weapons?

Marcos Buscaglia  26:28

Well, you know, there is a big discussion about this, you know, some people say that sanctions could have gone too far. And that, you know, they they undermine the standards of living of the locals. But I do think that I’m on the camp that thinks that, you know, yes, sanctions should, should be used. And this is because at the end of the day, as I said, you know, before autocrats even though they’re out to grads, they need the economy to be doing well, you know, unless, you know, it’s a very tight autocracy like North Korea, you know, probably the probably, they don’t, they don’t care what the economy’s were, but, you know, other other autocratic regimes at the end of the day, you know, the economy is not doing well, you know, they’re gonna suffer at some point. So, so my take is that you need to cut them off from from from fresh funds, you know, because in that way, you will undermine the the the autocrat, and, and basically that that would help, you know, the democracy movements inside the country. Yeah.

Gene Tunny  27:32

Do you have any thoughts on how the measures the sanctions, the freezing of bank accounts, assets in foreign countries, all the other restrictions that have been imposed on Putin’s regime? Do you have any insight into how they’ve they’ve gone? I’ve heard that. I mean, they, Russia seems to be, you know, living through it, or they sit? I mean, I’m sure it’s imposed some pain, but I don’t think they’ve been the take I’ve seen is that they haven’t those measures haven’t been as effective as US Treasury, as the US administration. Hope. Do you have any, any views on that?

Marcos Buscaglia  28:08

Well, you know, I’m not an expert again, but but my take of what I’ve been reading about sanctions is that it depends on what you want to achieve with the sanctions, you know, some sanctions are just, and, you know, are not aimed at bringing regime change. They’re just thought to be to make the life of those, the, you know, the, the autocrats and their Aiders and abettors, you know, Marmee several, you know, so, so, so, you should not, you know, measure the success or not in on whether there is regime change, because they were not aim at that, to start with, you know, so So some of the sanctions, you know, came out of the Magnitsky Act in the US, then then became the global Magnitsky Act, and several counties have, you know, copied that, and this, this arc was born out of, you know, the work of, of an American investor, Bill Browder, who, who had a fund or the Hermitage fund in, in Russia, and suddenly, you know, he got into the wrong people. And, and he got sacked, and everybody escaped Russia, except for this lawyer that was representing him. Magnitsky and he was basically illegally taken to jail and he died there. And so, will rather say, Well, you know, I, I will try to make the life of those people that that, you know, made Magnitsky life miserable, miserable myself, you know, so, so, and, and, and so, so, again, so, the sanctions that I was talking about what not that ones were related to the sales and trading of government bonds, you know, so that’s, that’s those are the sanctions that I referenced in borg in the sense that say, Well, you know, maybe, you know, the trading of bonds that are already out there, you can you can prohibit you will be hurting, you know, the, the American or the or the Western, you know, investors, but, you know, let’s, let’s stop them from from getting new bonds, you know, you can do that. And I think that that, that would be good. Although, you know, I take notice, you know, there are two sides on this debate, you know, of, you know, whether sanctions are to match, you know, my side is don’t give out to grads or out to God wannabes, you know, new money for them to look good on the population of their countries. Yeah,

Gene Tunny  30:41

yeah. And just try and around all around this often just try to summarise it all, is this a, is this essentially an enlightened self interest? So even though in the short term, you might be able to get higher yields on these, you know, that’d be paying a higher interest rate on these bonds from autocratic countries? In the long term? This is not a good thing. I mean, obviously, there’s the moral question. But if there’s this spread of these autocratic regimes, and you raised some concerns about populist regimes potentially becoming autocratic, if there’s this spread of them across the world, ultimately, that’s worse, makes us all worse off? If so, is it a matter of enlightened self interest?

Marcos Buscaglia  31:24

I think so. And again, they’re the metrics particularly, there is no very good research on the fixed income side, but there is some research on the equity side that you end up doing better, you know, in investing in democratic countries. So So So, you know, let’s let’s, you know, yesterday was seen in, in X, you know, formerly known as Twitter, the, you know, chart of, you know, the, the s&p against the, I don’t remember what, what Chinese stock market index, you know, well, you would have done so much better investing in the US or for the sake of the example, you know, against, you know, any European or, or democratic country compared to China, right? And, and we’re talking about the darling of the autocracies in economic terms, right? You know, because remember that for any, you know, China in economic terms, you have 10, you know, failed economic autocracies, you know, autocratic regimes, particularly in Africa, of course, but but you’re talking about in economic terms, the darling of the of the autocracies, and even in that case, you know, on the long run, you will not have done any money in China.

Gene Tunny  32:38

Yeah, yeah. Gotcha. Okay. Finally, before we, before we wrap up, but you’re coming to us from Argentina. Argentina, has a new president who has, you know, really made a huge impact on the world stage with his speech in Davos, what are the what are the prospects for, for him getting things under control there? In Argentina? I mean, I know that you’ve had, you know, very high inflation. There are huge issues with with the government budget, aren’t there? I mean, what are the prospects for, for him getting things under control? Do you have any insights into that? Well,

Marcos Buscaglia  33:15

you know, he doesn’t have an easy job. Because the, you know, the imbalances that he inherited are so big, let’s say, utility prices, transport prices are so out of whack compared to the costs, you know, money printing has been, you know, huge in the last four years. You know, the exchange rate was totally misaligned. I mean, you have so much misalignments on the macro side to correct, you know, for to start with, and then, you know, he’s also trying to change, you know, the economic structure of Argentina, which basically, you know, it’s, it’s an economy that closed, you know, to foreign trade, trade many, many decades ago. And then, on top of that, you know, it assembler, and all sorts of regulations and vested interests, you know, that live well, in a country that is important getting poorer than the rest of the population is getting poorer day by day. So he’s trying to disentangle those, you know, benefits, special benefits, and these special interests will fight and they’re fighting. So, so it’s not a it’s not an easy task. It starts particularly he’s, you know, President carrier Malay is in, in a minority government. So, so But basically, you know, he, I think he has, you know, still a fair chance of success because, you know, Argentina has been stagnant for the last 12 years, you know, we have 12 years of stagnation or decline in per capita terms with very high inflation with a very high poverty rate with a lot of immigration now, so So I think that The population said, you know, further up. So basically there is a there is a chance for him to succeed, you know, he’s not guaranteed because you know, the Sisa isn’t a minority government in an in a delicate macro and structural, you know, programme. Yeah,

Gene Tunny  35:19

yeah, gotcha. It’s fascinating because he’s a Libertarian candidate. Well, he was a libertarian. I mean, now he’s got to manage a government and it’s going to be, it’ll be interesting to see. I mean, I’ve seen it as some sort of experiment into how, you know how that sort of approach can go a libertarian approach to government. So we’ll have to, we’ll have to see how that all works out. Okay, Marcus Pascale, it has been terrific. Yeah, I’ll put a link in the show notes to your book and encourage you if you’re listening, I think this the books definitely worth reading. I learned a lot about the global economy and, and, you know, all sorts of interesting, interesting transactions. And so there’s reference to all of you know, major players, Goldman Sachs, for instance, gets gets called out for some of their their actions. So, yeah, it’s been terrific. Any final thoughts before we close? Marcos?

Marcos Buscaglia  36:22

No, no, I mean, again, I think that that my interest is in bringing awareness that this is happening, that sometimes he says it’s happening unwittingly, that you may be financing autocracy in your portfolio, and you don’t realise it so that it’s time to take action that there is a real struggle in the world for democracy. You know, democracy has been sliding. And and I don’t think that we want to be, you know, involuntary complicit with that, you know? Yeah,

Gene Tunny  36:49

absolutely. I mean, it’s the sort of thing I might start asking questions of myself. So the big thing at the moment here in Australia is we’re looking at how can we improve improve disclosures relating to climate change? What what’s the impact on climate change? What are companies doing in terms of mitigation adaptation? Whereas maybe what we need is to have more focus on what the least the banks and the financial businesses what they’re doing with regard to democracy, why we should have maybe we should have more insight into that, I’ll have to think about that. And he’ll probably

Marcos Buscaglia  37:26

meet let me give you a small but important example of that. A little bit over a month before the presidential election in Turkey, the Turkish government issued the first ever green bond, and the market was very happy $2.5 billion dollars. At the same time, another one was spending money like crazy to win reelection, the polls indicated that he would lose the election, but he was spending like crazy giving handouts to everyone. And he won the election. So you may say, Well, you know, maybe the market thinking that they were, you know, contributing to the environment in because it was a green bond. Maybe they contributed to consolidate autocracy in Turkey.

Gene Tunny  38:06

Yeah, yeah. Very possible. Very possible. Yes. Lots to lots to keep an eye on, Marcos, for sure. Look, this has been fascinating. I really enjoyed your insights. totally recommend your book. So well done. And yeah, I look forward to the to seeing your work in the future and hopefully catching up sometime in the future. Thanks so much for your time.

Marcos Buscaglia  38:32

Thank you, Jean. But it was very nice talking to you.

Gene Tunny  38:35

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

39:22

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Credits

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

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Podcast episode

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

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

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

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

About Professor John Cochrane

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

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

For more on John, check out his bio here:

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

What’s covered in EP214

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

Links relevant to the conversation

Video of the Free to Grow event on YouTube:

CIS web post about the Free to Grow event:

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

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

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

Gene Tunny  00:03

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

John Cochrane  00:17

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

Gene Tunny  00:26

I’m getting through it!

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

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

John Cochrane  02:24

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

Gene Tunny  36:19

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

Female speaker  36:24

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

Gene Tunny  36:54

Now back to the show.

36:59

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

Gene Tunny  37:17

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

John Cochrane  37:55

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

Gene Tunny  39:45

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

John Cochrane  40:02

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

Gene Tunny  41:20

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

John Cochrane  41:38

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

Gene Tunny  42:57

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

John Cochrane  43:16

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

Gene Tunny  43:54

That’s okay.

John Cochrane  43:56

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

Gene Tunny  44:17

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

John Cochrane  45:01

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

Gene Tunny  47:00

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

John Cochrane  47:04

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

Gene Tunny  47:08

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

John Cochrane  47:27

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

Gene Tunny  47:31

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

John Cochrane  48:08

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

Gene Tunny  50:27

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

John Cochrane  50:31

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

Gene Tunny  50:43

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

John Cochrane  50:54

I welcome speeches. Short speeches.

Gigi Foster  50:56

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

John Cochrane  52:08

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

Gene Tunny  53:47

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

Peter Tulip  53:54

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

John Cochrane  54:43

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

Gene Tunny  55:56

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

Michael Potter 55:59

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

John Cochrane  56:23

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

Gene Tunny  58:07

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

David Tregenza 58:14

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

John Cochrane  58:38

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

Gene Tunny  59:36

Nicholas Moore is it? Has the microphone.

Nicholas Moore 59:37

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

John Cochrane  1:00:23

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

Nicholas Moore 1:00:28

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

John Cochrane 1:00:33

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

Gene Tunny  1:01:44

Very good. Michael Brennan is it Michael?

Michael Brennan 1:01:46

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

John Cochrane  1:02:31

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

Gene Tunny  1:03:36

Okay. There’s one question over here.

David Murray 1:03:39

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

John Cochrane  1:03:47

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

Gene Tunny  1:04:21

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

John Cochrane  1:04:51

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

Gene Tunny  1:08:46

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

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

56:06

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Credits

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Podcast episode

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

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

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

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

About this episode’s guest: Simon Cowan

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

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

What’s covered in EP203

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

Links relevant to the conversation

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

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

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

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

Sir Les with Bill Leak.jpg 

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

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

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

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

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

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

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

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

Gene Tunny  00:06

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

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

Simon Cowan  01:06

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

Gene Tunny  01:19

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

Simon Cowan 01:40

Yeah, for sure.

Gene Tunny 01:43

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

Simon Cowan  02:29

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

Gene Tunny  04:56

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

Simon Cowan  05:24

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

Gene Tunny  06:19

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

Simon Cowan  06:23

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

Gene Tunny  07:53

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

Simon Cowan  07:57

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

Gene Tunny  09:10

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

Simon Cowan  09:18

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

Gene Tunny  10:02

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

Simon Cowan  10:19

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

Gene Tunny  10:49

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

Simon Cowan  11:12

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

Gene Tunny  12:13

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

Simon Cowan  12:19

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

Gene Tunny  13:52

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

Simon Cowan  14:24

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

Gene Tunny  16:02

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

Simon Cowan  16:40

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

Gene Tunny  19:07

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

Simon Cowan  19:21

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

Gene Tunny  21:59

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

Simon Cowan 22:02

Yeah, yeah, well look I…

Gene Tunny 22:03

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

Simon Cowan  22:06

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

Gene Tunny  22:32

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

Simon Cowan  22:49

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

Gene Tunny  25:06

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

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Gene Tunny  25:41

Now back to the show.

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

Simon Cowan  26:09

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

Gene Tunny  28:52

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

Simon Cowan  29:09

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

Gene Tunny  31:22

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

Simon Cowan  31:34

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

Gene Tunny  32:12

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

Simon Cowan  32:21

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

Gene Tunny  33:43

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

Simon Cowan  33:59

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

Gene Tunny  35:06

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

Simon Cowan  35:39

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

Gene Tunny  36:11

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

Simon Cowan  36:24

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

Gene Tunny  37:11

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

Simon Cowan  37:49

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

Gene Tunny  37:54

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

Simon Cowan

Yes greedflation!

Gene Tunny

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

Simon Cowan  39:00

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

Gene Tunny  41:58

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

Simon Cowan  42:18

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

Gene Tunny  43:49

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

Simon Cowan  44:31

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

Gene Tunny  45:58

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

Simon Cowan  46:07

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

Gene Tunny  46:37

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

Simon Cowan  47:40

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

Gene Tunny  49:15

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

Simon Cowan  49:31

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

Gene Tunny  50:47

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

Simon Cowan  51:17

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

Gene Tunny  52:17

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

Simon Cowan  52:30

Appreciate it. Thanks for your time.

Gene Tunny  52:33

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

53:20

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Credits

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

Categories
Podcast episode

Exploring the US Banking Crisis with Addison Wiggin – EP192

Economics Explored host Gene Tunny interviews Addison Wiggin, a New York Times bestselling author and market economist, about the US banking crisis. Addison shares insights into the origins and impacts of the crisis, and discusses the future of the US economy and financial markets. Listeners can download Addison’s recent report “Anatomy of a Bust: Winners and Losers in the Banking Crisis of 2023” for free via a link in the show notes. 

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

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

About Addison Wiggin

Three-time New York Times best-selling author, Addison Wiggin, is a 30-year market economist with a passion for the real-world impact of financial markets on our lives.

Addison is the author and host of The Wiggin Sessions, a podcast that connects key thinkers and industry experts for a deep dive into history, politics, and economics. Some of his most accomplished works as a writer, publisher, and filmmaker include the New York Times Best Seller The Demise Of The Dollar and the documentary I.O.U.S.A, an exposé on the national debt crisis in America.

What’s covered in EP192

  • Addison’s background and how he came to the conclusion that the US financial system is in danger of collapse. (1:53)
  • Will the Reserve Bank of Australia increase rates again? (10:46)
  • The uncertain lender of last resort: The Federal Reserve. (17:11)
  • The Fed’s job is to make sure fewer people have jobs. (21:52)
  • Banking crisis and the failure of regulation. (26:21)
  • FDIC and confidence. (32:00)
  • Why it’s important to understand how booms and busts even take place. (37:07)
  • Cryptocurrency as part of the story. (41:47)
  • What has happened to the dollar since 1913, when the US Federal Reserve was established. (46:41)

Links relevant to the conversation

Special download link to Anatomy of a Bust for Economics Explored listeners:

https://jointhesessions.com/ee/

Presentation by Addison that Gene mentions early in the episode:

Anatomy of A Bust: Banks Go First | Special Presentation by Addison Wiggin 

Transcript:
Exploring the US Banking Crisis with Addison Wiggin – EP192

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat about the US banking crisis with Addison Wiggin. He’s a New York Times bestselling author and market economist and commentator with three decades of experience. Allison has his own podcast the Wigan sessions, in which he talks to key thinkers and industry experts for a deep dive in history, politics and economics is the author of the best selling the demise of the dollar, and one of the writers of the 2008 documentary I O USA. Thanks to Addison for providing economics explore listeners with a free copy of his recent report, anatomy of a bust winners and losers in the banking crisis of 2023. I’ve included a link in the show notes so you can download it as well as sign up for Addison’s content if you’d like to read and hear more from him. Personally, I think Addison, someone with following if you’re interested in the US economy and financial markets, and if you’re listening to this show you probably okay, let’s get into the episode. I hope you enjoy my conversation with Addison Wiggin on the US banking crisis. Addison Wiggin, thanks for joining me.

Addison Wiggin  01:53

Yeah, no worries, I’m happy to actually meet you. As I was saying before, I’ve been forwarded some of your material in the past. So I know your name. And I feel like it’s a good opportunity for us to banter a bit about economics.

Gene Tunny  02:07

Absolutely. Thanks, Addison. And I’ve, yeah, I’ve seen the very know your research. And you’ve, you’ve been doing a lot of deep analysis of what’s been happening in banking and what’s been happening in financial markets. And you’re very keen to chat with you about that. In particular, I’ve come across a recent presentation, you’ve given anatomy of a bust, banks go first. And in that presentation, you make the argument that, well, we’re in a panic of the panic of 2023. America’s financial system is in danger of collapse. We’re here to protect ourselves. Would you be able to take us through what leads you to this conclusion? Addison, please. And also, perhaps maybe to begin with, what a bit about your background? How’d you? I mean, you’ve had, as I mentioned, you’ve had deep experience of this, it sounds like you’d be looking at these issues for decades. Can you tell us a bit about your story and how you come to this conclusion, this threat of collapse, please?

Addison Wiggin  03:17

Yeah, absolutely. I’ve been studying booms and busts for a long time. Since the mid 90s. This is literally the only work I’ve done in my adult life. And just to do a shameless plug right at the beginning, I just published a book called The demise of the dollar, which looks at booms and busts as they pertain to fiat currencies in the world. And US dollar is deeply connected to the Aussie dollar. And I addressed some of that, and also, the dollar is a reserve currency of the world. So like even the Aussie banks or New Zealand or Japan or European banks, US and China as well, which is a big part of the story, use the dollar to store their wealth in. So there’s, there’s a symbiotic international connection between my currency and yours. And that’s what that’s what I’ve been interested in for this particular book. But I’ve also been studying booms and busts going all the way back to the famous ones like the tulip bubble and the Mississippi scheme from John La, back in the early 1700s. And then the South Sea bubble which the bankers from from London just ripped off John Maas idea and then they went bust too. So booms and busts are pretty common in the financial cycle of of our lives. And we’re we have just gone through one and that’s what anatomy of a bust. It’s just a special report we put out because it was interesting to have our very own movement boss how Ben right in front of our faces, it starts really in 2018, where a lot of people were using low interest rates that the Fed was fed had kept interest rates low to recover from the 2008 bus for such a long period of time, that there’s like a whole group of traders who grew up in a world where interest rates were at zero or less than that. And so money was free, and they were speculating on all kinds of things. And one of the things they speculated on was cryptocurrencies in 2018. We had this massive bubble in, in cryptocurrencies and a lot of the banks that started failing in March of 2023, which we’re still I maintain, we’re still in that crunch. And I’ll explain why I think we’re still in it, and why we don’t talk about it that much anymore. But a lot of the banks like Silicon Valley Bank grabbed the headlines when they went bust in 48 hours, because they had invested all of the money they were getting from tech entrepreneurs. They had invested it in treasuries, and then the Fed started trying to battle interest rates. And they didn’t account they didn’t either believe the Fed would they didn’t have any risks. There actually was no risk officer on the payroll at Silicon Valley Bank at the time. And they didn’t realise what the impact of an aggressive rate rate hike policy by the Fed was going to be. And that was happening simultaneously with the collapse of X FTX, which was the crypto currency trading firm that a lot of tech startups had their money, had their money. So when they when FTX went bust, they had to pull their money out as fast as they could, or they just lost their money. And in the meantime, the startups were being also financed by Silicon Valley Bank, notably, and they needed their money back to keep their their startups going. So the conflicts of different trends follow the theme of booms and busts that we’ve seen throughout history. So when when it was happening, I was like, Oh, my God, this is our very own like we could write about, it’s actually happening right in front of us. So it’s, that’s what the special report is about is like how that actually happened. And when Silicon Valley Bank collapsed, it collapsed in 48 hours, because all these people wanted to take their money out to cover their own losses in crypto, that was technically what was robbing and they were just yanking their money out. And even though as you know, as credible bankers, we would look at the way that Silicon Valley had put their assets, more than 50% of their assets were in treasuries, which are meant to be, you know, the risk free asset that banks should hold anyway. But they didn’t calculate for the rising interest rates from the Fed to combat inflation. And then when there was a run on the bank, that’s what we call it. It wasn’t I mean, it’s a modern day, extraction of digits really. But when people started taking their money out, Silicon Valley Bank had to sell their treasuries at a loss. And it it happened very quickly. No one thought that with the FDIC, which is the Federal Deposit Insurance Corporation that was set up by the Treasury to like help small banks, stay solvent help, depositors stay solvent, nobody thought that can actually happen anymore. The FDIC was set up in the 30s, to combat some of the forces that were going on in Great Depression. And then the Treasury itself gets together they get all the Wall Street banks together, and they then they construct these bailout plans like what they did for first republic. So those, all of those things happen, and they were grabbing the headlines from March until like the beginning of May. But then our debt, what we call the debt ceiling debate. I prefer to call it the debt default debate over the dancin, and nobody’s really paying attention to the banks anymore, but the underlying issues of the Fed fighting inflation and over capitalization in treasuries. There’s 36 banks in the US that are still under FDIC protection, watch conservatorship, whatever you call it. And then there’s a bunch of other banks that are borderline if what happened in March where people started pulling their money out of banks as a sector in on Wall Street than those banks are going to be in trouble too. There’s a couple others that I’ve been keeping an eye on that that have the word PacWest was one of them. And they’re just banks that are lending to more risky clients. And then depending on the depending on treasuries to rule out there, or to keep their their investments safe. And depending on how long the Fed keeps raising rates, which I think they’re going to raise them again, because inflation is not under control. It’s not only under control here in the US, it’s not under control. In Australia, I think Australia was getting really aggressive recently. Why don’t they? Well,

Gene Tunny  10:46

they increased rates more than people expected. There was a surprise rate hike. And now the the question is whether they will increase again, we’ve got a Reserve Bank meeting next week, there’s it’s a bit unclear, there’s a lot of debate about what the bank will do. Everyone expects that they’re going to have to increase at least one more time by the end of the year, possibly two. It all depends on what’s happening with inflation, we’ve got a monthly indicator that on through the year terms has, has increased or as worsen. But there’s a debate about well, what it’s it’s very noisy month to month. So it’s difficult to read much into that we need to see what happens with a quarterly figure. They’ll be watching services, inflation, so goods inflation has been coming down but services inflation is has been rising. So that’s and now we’ve got a minimum wage hike of six to 8% or something, depending on the actual, whether you’re right on the minimum or if you’re on an award. So yeah, there are, there are concerns about the future of inflation.

Addison Wiggin  11:52

I’d like to ask you a question. I spent some time in Australia. And also we had an office there for a while. So we were trying to manage our own finances there. And it might just be a myopic point of view of my own, because I am an American and the Federal Reserve is what it is. But when the Fed makes moves, often the Ozzie bank or like Japan or EU will follow, like a month later, if to you to think that that’s true. I don’t want to sound like an arrogant American, which I probably am, but But it always feels like the Fed is sort of like the central banks of the world.

Gene Tunny  12:30

Yeah, that’s true. It’s not automatic. It doesn’t always happen. But certainly one of the things that our central bank is conscious of is what’s happening with the exchange rate. And if if we keep our interest rates too low, then that leads to a depreciation of the the Australian dollar. And that’s bad for inflation. So we start importing inflation. So that’s something that they are conscious of. And when the Fed started lifting, was it last March or March?

Addison Wiggin  13:04

A little over a year ago? Yeah. Yeah. And

Gene Tunny  13:07

so the first few rate moves increases by our central bank, we’re pretty much in line with what the Fed was doing. And I mean, my take on an Earth in Michael Knox, who’s a commentator here, and he’s, he’s Morgan’s financial chief economist. I think he’s one of the best market economists in Australia. That was his view on it that, you know, by essentially copying the Fed that they had, the Fed was moving. So our, our guys had to I mean, we read our, our central bank, really, I don’t know if asleep at the wheels the right way to phrase it. But our first rate increase didn’t happen until I think it was May last year. And so it was a couple of months after the Fed, the Bank of England had gone earlier. I think Reserve Bank of New Zealand really got on to it early. But yeah, I think our central bank just wasn’t concerned enough about the risk of inflation. They were too much in that secular stagnation paradigm that they had, prior to the pandemic and those that decade or so they thought, Oh, well, we’re in this world of permanently lower interest rates, and there’s no no concern about inflation. We don’t have to worry about that anymore. For various reasons.

Addison Wiggin  14:23

I mean, that’s literally what thought some of these regional banks, asleep at the wheel was the Fed got really aggressive picket quickly, and even in the books that I’ve been writing? So I have this one, but I’m also looking at another one that’s kind of like the political analysis of how we got to a position where we have 31 trillion in debt, which is just ridiculous, right? Looking at the trajectory of Fed policy from really from 1987 When, when there was a stock market crash and Alan green The internet just become our Fed chair, he dropped rates as a response so that people could get free money in and prop up their balance sheets. That has been the response since 1987. Until now, and no one I like they caught a lot of banks sleeping, when they started raising rates as aggressively as they did, and they were afraid of 1980 81 scenario where inflation would just get out of control. There’s no anchor to the dollar. And everything is based on the dollar index, which is a basket of currencies and including the Aussie dollar that determines what the value is. There is a tone. It’s just astounding to me, actually, with all the history that we have with banking, and even the Federal Reserve since 1913. Like there could be backers who still have jobs. what was gonna happen? Yes. Well,

Gene Tunny  16:04

I mean, it’s an but they play an important role in the economy. But yes, there’s a lot of monetary mischief with a lot of mistakes that a an aid for sure. Absolutely. I like to ask Allison about. You mentioned that this started in? Was it 2018? So you think this started before the pandemic? Is that right? And then the pandemic, all the policies during the pandemic made it worse or contributed to the instability?

Addison Wiggin  16:30

Yeah, well, I would say, though, is that there were separate events, I think that the policies really started in about 2012, when we were seeing QE two, meeting that the Fed was still buying bonds in the market, or in even actually buying up mortgage backed securities in response to what the federal what the, what caused the crash in 2008, which was a global event also, because all the big pension funds and hedge funds, they’re all interconnected globally. So when when we ran into our housing crisis in 2008, it affected everyone. And we saw the ripple effect really quickly. And what the Fed did to head that off, was they dropped the interest rates, we had zero to negative interest rate real interest rates for a number of years between 2012 and 2018. But they were also buying up assets in the market, they were buying bonds in the treasury market to support bonds, because they needed to fund the government. And then they were also buying, they were actually buying assets on Wall Street, which is like, that’s an extreme measure. The bank is not supposed to be buying assets to prop up the market. But anyway, so there was a period of time where we had zero, I mean, money was free. And there was the like, I like to phrase the, the uncertain lender of last resort, that’s what they call the Federal Reserve, you never know what they’re going to do. But in the end, they’ll come in and bail out, you know, they, if they had to, they bail out, gee, JP Morgan, which has literally the fifth largest GDP of any economy of the world, and it’s a private bank. So they would come in and bail them out. That’s just thinking

Gene Tunny  18:25

that on that point about had this, what was it the unexpected lender of last resort?

Addison Wiggin  18:32

Charles Charles, my book I forgot his last name, but he wrote us. Yeah, he wrote an entire book about there needs to be a lender of last resort, but it has to be uncertain. You can’t count on them. You just have to know that they’re there in case the shit hits the fan. And yeah, and that’s what the Fed has been trying to do. But what they’ve been telegraphing what they telegraphed from 2012 until 2018, was we’re gonna keep rates low, and we’re gonna keep buying assets to keep the market propped up. And the beneficiaries of that policy are Wall Street banks, big ones, you know, yeah, Oregon, Citigroup, Bank of America, those companies, those those corporations are beneficiaries of just an extended period of ridiculous monetary policy. And a whole generation of bankers grew up in that in the environment where they believed that the money was just going to be free forever. So when the Fed turn, turned around and started trying to combat inflation, then we started having a serious problem. And the first people that got taken out, were the regional banks who weren’t paying attention to risk policy at all. So that’s why I say it started in in 2018, because there was a big boom in cryptocurrencies stable coins. We’re coming out. Bitcoin had already like fluctuated up to 60,000 and then dropped and like it was already an object of speculation and Aetherium was sort of like its step cousin, you know, it was doing its thing. But there was a lot of money getting pushed into the market because of low interest rates, that tech firms and Wall Street banks the like, and new new banks, like the FTX exchange that that was built, that was only founded in 2017. Like it became one of the largest traders have actual money, dollars to crypto currency in like, under two years, there was a lot of money flowing into the system. And that’s when if you follow Austrian economics, like I do, but a lot of other people do, too. I’m not making any kind of claim to it. But all the mistakes that are made get, they happen in the blue, when there’s money, that’s cheap credit, and people are spending money on things that they don’t understand. That’s exactly what tech entrepreneurs especially were doing, because they were excited about this new money that we could trade. It wasn’t traceable. And then banks grew up around it, that silver gate was one Silicon Valley Bank was another first republic was another pack glass was involved. And so when the tech entrepreneurs started getting nervous about their, their investments, or even their own companies, they wanted to remove the money from banks, and was sort of targeting Silicon Valley Banks specifically because they were getting a lot of deposits. And they didn’t have to loan out money to make money. So they were buying treasuries. And then when the Fed started tackling inflation, which itself, inflation itself was a result of 10 years of, of low interest rates, like we had, of course, we had the pandemic, and then we had the war in Ukraine, which cut off some supply chain, so it created like pain points. But at the same time, there was so much money flowing around in the system, that the natural outcome just in economic terms of that much money flowing into the system is that prices go up. The amount of money chasing goods is more than what the goods have, in what I would call intrinsic value. So it just costs more if you want gas, it cost more if you want eggs, eggs were a big deal. In the US. They were in, in Australia, but they were a big deal for like two years, because they went from like, I don’t know, an average of three bucks for 12 eggs to something like seven bucks. And people were like, What the hell, you know, I need an egg a day. And now it costs Yeah, three times as much. So that’s that’s the way that people feel inflation, but the cause of inflation, inflation is rising prices, but the cause of it is money supply money going in to the system. And they did that in reaction to the 2008 housing crisis, they were pouring money into the system and making it cheap for years to a degree where people just started thinking that was the new norm. But when Powell got in place, and he started raising rates, there was a lot of bankers, especially who were like, Oh, he’s not going to do that. Because this is the new norm. And it wasn’t the new norm, because there’s they still don’t have inflation controlled. So my guess is they’re going to raise another quarter point and they meet again. And then that’s going to ripple out to banks in Australia, in Japan. And mostly, those are the three that I looked at Australia, Japan and EU. Yeah,

Gene Tunny  24:14

it’s quite quite possible. I saw that the US had a good was a good jobs figure was was that what I saw? Yeah. And so that they’re saying the economy is more robust than they expected. And so yeah, they’re doing isn’t it? conundrum a little bit that the feds job is just to make sure that less people have jobs. Yeah, well, that’s the Yeah, that’s the Elizabeth Warren take. And then she was trying to pin it really gets stuck in a jay Powell over that, I think in the in Congress, wasn’t she? Oh, I’m trying to remember. Was it Powell or was it she was given?

Addison Wiggin  24:53

That was a couple of weeks ago, she was giving a speech in front of Congress, but she was taking Jay Powell to test. So he wasn’t actually even talking to him. Right. But that’s just a weird thing that that the feds job has suddenly become too slow the economy down, make sure that more people are unemployed, so that the government can then take care of them. It’s like, it’s, it’s not a free economy, like we like to think that America runs a free economy, we don’t run a free economy at all. And their goal right now is to slow everything down. And then we got the jobs report that you’re talking about. It was, I believe, is yesterday or the day before, it was more robust than what they were expecting. So they’re saying, oh, yeah, the economy is still growing, we gotta raise rates more to slow it down. Like, if we got a jobs report that wasn’t as positive as it was, then the stock market would have actually rallied. But when the draw four came out, down because people were like, Oh, that means they’re gonna raise rates again, we can’t borrow money cheaply again. It’s like, yeah, Pretzel Logic to me. But it’s kind of fun in a way to follow it, because it’s like, it doesn’t really make that much sense.

Gene Tunny  26:19

Yeah, yeah. I better get back on to banking, because I want to ask you about where we’re going there. And this banking crisis. There are a couple of things I just wanted to just quick things a good to get your views on. So you mentioned that this SBB didn’t have a Risk Officer. Is that right? Which I find extraordinary. Is that a failure of regulation? Yeah, I

Addison Wiggin  26:42

only found it in passing. So there were two kind of oversight errors that took place. They didn’t have a Risk Officer evaluating what the impact of rapidly rising interest rates would be on their the holdings that were like the core of the bank. That was one thing. And I think it was just in transition or some of the there wasn’t somebody in that position at the bank for like a year. And that was the year that the Fed started aggressively raising interest rates. And at the same time, no, nobody in the bank thought that the Fed actually pretty much nobody in the economy, though did Wall Street banks didn’t think that they would do it either raise interest rates as aggressively as they did. So even while it was happening, we were like, Oh, they’re going to stop. So there was a lot of speculation of when they were going to pause or when they were going to pivot. I remember back in even before the banking crisis started, the big phrase in the headlines was, when is the Fed going to pivot, meaning they’re going to stop raising and they’re going to turn around and start dropping among regional banks anyway, the first ones to get under stress. They didn’t have people that were taking the Fed seriously at their word, the Fed was saying we’re going to we’re going to fight inflation until it’s done, which is a tough battle. And nobody believed that. So when the cost of treasuries went down, and the interest rates went up, it was harder for a bank, like I just use Silicon Valley Bank, because it was so pronounced. It was harder for them to raise the capital to pay back their depositors when they wanted their money back. And a lot of those depositors had just lost money in the collapse of fts. So it was just sort of an act of boom and bust, you know, a line of love crumbs from what was going on in the crypto market to what happened to the regional banks. And then you saw the entire banking sector get whacked in the market, like, there were other banks that were reasonably sound that were getting taken down because everyone was trying to get out of the banking sector. So when their stocks get are getting punished by institutional investors and by pension funds, then that messes with their balance sheets, as well. And the only reason we haven’t been hearing about it in since I actually tried to pinpoint it was May 18, that the debt ceiling debate sort of took over the headlines. All the issues with the banks still exist. And that was really just a speculation on my part. But if they didn’t, for some stupid reason, come to a political agreement. On the debt ceiling, we would have seen a massive wipe out of bets because Treasuries are supposed to be risk free ish. I mean, they’re about as risk free of an investment you can make other than maybe gold or precious metals, and banks had piled into treasuries for so long because it was cheap. And it was easy and it was risk free. If we had a debt ceiling debate, I mean, that the vault if that debate failed, and we had a default, then treasuries would have been become an object of speculation, like other assets in the market, people would be like, I’m betting they’re going to do this, I’m going to bet that they’re going to do that, and the risk free part of that, where you store your money would have disappeared, that would have been a nightmare for a lot of smaller banks. And then the thing that is kind of a nightmare too, would be that JP Morgan, Citibank, Bank of America, the big Wall Street firms would have just gobbled up all of the, those assets at pennies on the dollar, which is exactly what they did with SBB. And with first republic, they just went in and just took all the assets for like, it was three cents on the dollar.

Gene Tunny  31:04

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

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Gene Tunny  31:39

Now back to the show. So can I ask Allison, where are we going? Now? I mean, over the next six months or a year or so will we see more banks fail? Will we see a contagion? Or will we see impacts on the broader economy? Where do you think this is all going?

Addison Wiggin  32:00

Well, I’ll answer that in two ways. There is a certain level of confidence in the FDIC to like bank to back individual depositors. So like the fear of bank runs is probably abated a bit. Because the FDIC and Janet Yellen to the Secretary of Treasury, she has been going out saying no, we’re not gonna bail everyone out. But if it gets bad, we’ll bail some people out like she’s being that lender of last resort. So I think that the crisis part has abated. But that hasn’t fixed any of the the challenges that banks are facing right now with rising interest rates, and the battle against inflation in the uncertainty of of how committed the Powell Fed is going to be to that. So it would. So that’s why I say I’m going to answer in two ways. One, I detailed all of this special report that we were talking about anatomy of the anatomy of a bust, this is exactly how it happens. And I actually got that phrase from Garrett Garrett, who was writing about how all the banks failed from 1932. Until about they were still failing into the 50s. So they failed for a long time. But the three banks that failed in march into the early part of May, were larger in capital by percentage than all 25 banks that failed in 1932. So like, that doesn’t happen by mistake. And that also doesn’t happen without repercussions. And I expect that that we’re going to be talking about banking places like three years from now, because it hasn’t worked itself out yet. And they’re still trying to fight inflation. So so I don’t know if we’ll have a panic or a crisis period like we had between the beginning of March and mid May. But I think the tension is still there. And it’s definitely something that we want to pay attention to. Because the banking system is the the bedrock for all of the other stuff that we get, like when we buy and sell stocks, when we get mortgages, when we buy cars, send our kids to school and stuff like that that system needs to be. We need to have confidence in that system. And I don’t think it’s there yet. Brought we get a paper version of the confidence from speeches from Janet Yellen. And we forgot her name already, but that was the woman who runs the FDIC. But it’s just a fact the FDIC has like 300. Now they have $37 billion to support $17 trillion worth of deposits like it’s It’s, it’s absurd. Other than me and I’ve written this to this is it’s a competence game. Like, just like the way people, you know, take advantage of retirees because they gain their competence and competence gain is what it is. It’s a it’s a sham. Yeah. Yeah, right now the government is running a competence, that literally people have confidence that the government will figure this out. And so they’re they’re just biding their time. And what are they going to do next? My, my guess is they’re going to drop interest rates. As soon as there’s like a real crisis, they’ll drop interest rates, and now get another speculative boom going on Wall Street. And usually what happens when, when that happens is that mutates into bubbles in other markets, too, like Australia always benefits from booms in the commodities market. And China always benefits from new tech development and the Europeans benefit from new speculation in travel and tourism. Like it’s it’s almost predictable. What’s going to happen next,

Gene Tunny  36:11

abroad. Okay, so this is your report anatomy of a bar stock and put a link in the show notes to that. Can I add in just trying to think about what the risks are? I mean, you make the case that more banks are probably going to fail. What do you think the chances of something like 2008 happening again, or something worse than that? What would you put the probability of that ad in the next couple of years

Addison Wiggin  36:36

right now, I’d say it’s pretty low. Because one of the things that happens is like human beings that the people who run the government also learn. And they did what they thought they had to do in 2008, I’ve written about this many times, the Paulson, delivered a three page memorandum to Congress and said it at like midnight, and said, You have to bail out these banks, otherwise, the entire global economy is going to fall apart. There’s three pages, and they just followed it. So I think they’ve learned that through monetary policy, and also working in concert with other federal, like the Federal Reserve system of the world, that they can mitigate crises. But that doesn’t mean the problems aren’t still there. So that’s why it’s important to understand how booms and busts even take place, you can’t keep interest rates at zero for 10 years, and then expect that no inflation is going to pop up. But it is ridiculous. But it’s worth understanding the mechanisms behind the banks and whatnot, because that’s the that’s where the money flows, if that’s how the markets work. That’s how, you know, they determine interest rates for all kinds of things, credit cards, and student loans, and banks and cars and all that kind of stuff. The economy functions on credit. And banks are the source of that credit. And they’re all connected to the Federal Reserve System. So it’s worth paying attention to what they say. And I hate that. I don’t like politics. And I don’t like the banking system. But I warn people that they ignore those things at their peril. Because when you need to do something financially in your lives, you’re sort of dependent on decisions made by people who live far away from you, and don’t have your interests in mind.

Gene Tunny  38:45

Yeah, yeah, I just want to try to understand what this all means. So does this mean that, like, we’re in a situation where the Federal Reserve and the government is going to have to continuously? Well, maybe not continuously, but every now and then bail out the banks? And, you know, we’re gonna keep trying keep interest rates low, keep the flow of credit going? And therefore, ultimately, this is inflationary? Are we back in? Because we had a period of very low inflation? Are we going to be in a period of higher inflation for for longer than we expect? Is that one of the arguments was that a conclusion?

Addison Wiggin  39:22

Yeah, my conclusion is that we would, it’s not a conclusion because it’s an ongoing story. But we’re going to be in a period of inflation longer than, you know, the headline news tells us like, you can’t just stop inflation. And once it starts, it’s very hard to stop. And I actually got that quote, I, I interviewed, I did a documentary about 15 years ago, and I interviewed Paul Volcker, who was famously the inflation fighter of the early 1980s. He was the Fed chair at the time. And when he said to me, he said two things that have stuck with me he said a lot of other things and I published all buddy But, but he said a couple other things that are two things that have really stuck with me one he’s like, actually, I’m going to set the stage. So this is after walking past a couple of cartoon pictures of him that he had framed in his office of him like turning off the inflation spigot. And then another one where he was like wielding a sword and a shield, and he was like fighting inflation. So he was kind of like a caricature of that time. And that was the worst inflation that the world had seen in since the late 1800s, since the panic of 1893. And the reason was, we had gotten off the Bretton Woods, dollar peg to gold that there was a lot of reasons why it happened. But when I spoke to him, and this is on camera, and in the interviews that I’ve published, he’s, well, first of all, once inflation gets started, it’s very hard to stop. Because it, it creates, like a psychosis in people where they start thinking, if I don’t spend my money for that refrigerator, in June, by September, it’s going to be 30, Luxmore, or something like that. And they start thinking like they have to spend their money now. And that creates inflation, psychosis of sorts where people are just spending more money more quickly, because they think it’s going to be worth less later. And you’d like if the Feds goal is to slow down the economy, that inflation psychosis works against any Fed policy that they can put together.

Gene Tunny  41:43

Okay, just a couple of things. Because yeah, it’s great conversation quickly. What about crypto? You mentioned crypto as part of the story?

Addison Wiggin  41:51

Well, I have a theory about crypto. And it’s the same thing that it’s the same philosophy I have about the internet itself is that we had in 2001, we had a big boom in Internet stocks, like even Toronto, like right now. But the company that makes insulation for houses was doing fibre optic and they dropped the.com on the end of their name. They weren’t even a tech company. And they they exploded in value. Yeah. What’s the pink insulation that we all use? But I don’t even know why I’m drawing a blank on the net. But it’s because it’s a big installation. The point I’m trying to make is that during the.com, boom, there were just ridiculous investment being made. Yeah, all kinds of things. And then they busted. But we were, in the end, after all, the detritus fell to the floor, and people sort of like woke up from their hangovers. We ended up with internet and things like zoom, like I’m talking to you from Australia. Right now. I’m in Baltimore. And these things are possible because of that massive innovation and the investment that went into that period. Like that it even with a Gora, the company I’ve been working with for a number of years. We exploded when we went online, and we benefited greatly from the innovation of email, or changed our lives. So I have the same sort of perspective on crypto, is that I think it’s speculative. And I think there’s booms and busts and we saw that 2018 was crazy. Yeah. And then we saw another spike in in different like Bitcoin and Aetherium. And some of the stable coins in like 2021. Last year was a nightmare. We called it crypto winter, because the underpinning actually doesn’t part of the story I’m telling to is that two of the stable coins that FTX and Alameda research were investing in the traders that were supposed to be pegged to the US dollar, but the traders on pegged them without telling anyone and that started the FTX. So I think you’re gonna continue to see that kind of speculative nature in crypto. And we’ve got this spectre of central bank digital currencies coming up. We don’t know where that’s gonna go. Suppose there’s going to be a vote in the US in July, on whether the Federal Reserve should adopt one or not. But they keep saying that to that story is going to be ongoing, I think the real benefit of the the innovation and the spikes in the highs and lows and, and, you know, the turbulent market that Kryptos has gone through up to this point will ultimately be beneficial because we’ll we’ll end up with Blockchain as a more efficient way to to conduct transactions in the financial markets. So you can make money you can lose money in crypto. I’m not a crypto evangelist. Like I believe that it’s going to be a substitute to the US dollar or the world banking system. But I do believe it efficiencies that are brought to transactions are going to be beneficial to everyone. And that’s kind of how I look at it even from an investment standpoint, I’m like, oh, bitcoins at 15,000, neither should buy some, and then it’s at 27. And then it’s at nine. And it’s like, no, I’m not getting somebody tried to buy some property from a couple years ago, I think it was in 2021. And but they would only do the exchange and in Bitcoin and I’m like, I don’t know if my property is going to be worth less or more if I take your Bitcoin, but I do know what the value of the property is. Yeah. So I think the speculative nature of it is, it’s too early to, to like I prefer gold and silver to Bitcoin or Aetherium. At the moment, maybe there’s a time when, when it makes sense to like use it as a banking tool, but not right now. too speculative for me, and, but I do think that the benefits of blockchain are going to be like email to us a couple years from now, where everyone’s going to be using Blockchain for efficiency, which I think is great. In the boom, bust cycle, that’s what happens, people invest a lot of money quickly into innovative projects, and a lot of people get burnt, a lot of people get rich. And then what we end up with is the core technology that benefits humanity as a whole. I love technology.

Gene Tunny  46:31

Yeah. One thing I wanted to cover too, is this demise of the dollar you talk about? So is that a this is this is a long run concern of yours about where the US dollars going. And I mean, this is related to the point you’re making about.

Addison Wiggin  46:43

Yeah, the thing is, like, I mean, I could slip through the book is that one great chart that shows what has happened to the dollar, I’m not going to be able to find it and make it make sense to your viewers. But since the Federal Reserve was founded in 1913, the original goal of the central bank was to stabilise the currency, and maintain its purchasing power in the economy, for payment, currency users like me, like it’s supposed to be able to, I’m supposed to be able to figure out what my dollar can buy and for how long. But it’s lost more than 97% of its purchasing power since 1913. And it’s, it’s a steady slope downwards, the more money they pour into the system, the like every dollar that you print becomes worth less than the one that was printed last. And the entire banking system of the world is dependent on the dollar as a reserve currency. And at the same time, we’re losing the value of its purchasing power, every debt, and it’s been going on for more than a century. There, their main task was to preserve the purchasing power of the currency that we use in the payment system in the economy. And they have done anything but that it’s, it could be its historic fiat currencies never worked. It accelerated after 1971, with the Bretton Woods system fell apart, the only thing you can do is understand it and then try to move your money around into assets that accumulate value over time. That’s why I like gold and silver, because yeah, there’s a little bit more speculative, but gold when I was younger, and first trying to understand how these things correlate. Gold was trading at like 253 bucks an ounce in 1999, I think and now it’s trading on average, a little bit above 2000. Over that time, he has to be 500. It’s outpaced the s&p 500, which is a broadest measure of big stocks. It’s just been a better investment over time. And that’s that’s just generally what I think is it’s a reverse correlation to the dollar, which is supposed to be managed by the bankers who keep sort of forgetting about risk and inflation and those kinds of things.

Gene Tunny  49:20

I might have to come back to fiat currencies. Yeah, it’s a big, big topic, but another time, because I’ve really picked your brain and it’s been I don’t mind it. We’re very good. That’s great. And yeah, maybe if you if you wanted to sum up your the broadly, the anatomy of a bust. Would you like to summarise it? Or is there anything else you’d like to say before we wrap up?

Addison Wiggin  49:43

No. I mean, I would just say that it’s it was my attempt when, when I was already following the story of FTX and I knew there would be a knock on effect, and I had starting in about December of 2022. So like six months ago, I was like this story is not going to go away. And there’s going to be a knock on effect in other parts of the market that we’re not aware of right now. And that was in December. And then by March, we started having banks fail, which nobody thought was even possible anymore. With the Federal Reserve System and the FDIC backing out small depositors, like nobody thought we would have bank runs ever again. And and then we had the three largest ones within a six week period. So I had already been kind of following the story, and trying to just try and understand how it would even be possible. So that’s what’s in the report is like, here’s what happened, here’s why it happens. Here’s what you need to pay attention to. And here’s how it fits into the historical perspective of booms and busts, the credit cycle is a real thing, even if the government is trying to mitigate it. It does exist and impacts everyone. Because you need a bank, to save your money to borrow to do things that we want it to, to run your business you need, you need a bank that works with you. And if they’re making dumb choices with the assets that they have, it’s better to know that in advance. So that’s what the report is about. And then there’s a couple of recommendations on investment investments you can make. Once you understand what’s going on. We actually recommend bank.

Gene Tunny  51:31

Yeah, yes, it’s for US banks, a lot of to have a lot of have to have this conversation. I don’t know if you look at Australian banks, if I don’t, I

Addison Wiggin  51:40

haven’t looked at Australian banks, except for in a macro sense, where I’m aware that the Federal Reserve decisions that move rates also has a knock on effect in Australia, New Zealand, China, and Japan and Europe. Those are like the big ones. Russia was at two until they decided to destroy their neighbours. Yeah, the

Gene Tunny  52:09

general view here is that our our banks are in a much better position than

Addison Wiggin  52:14

it could be. I haven’t studied them closely enough to know, I think their requirements are different in Australia than in the US too.

Gene Tunny  52:23

Yeah, there. There are definitely differences. So you might have to I’ll have a close look at that myself. But look at us. And it’s been terrific. Yeah, probably more time than you might have expected, delving into it. Because I think what’s great is you you do deep research, and you make a big calls, I suppose what you make you make you really let us know what you think. And I think it’s great. And yeah, it’s it makes me think about what’s going on so much more. So really appreciate all the work you do. And I’ll put links in the show notes to your work. And, and thanks for making that. That report available for listeners. That’s terrific. Yeah.

Addison Wiggin  53:03

It’s information that I like, I would just caution people that I’m learning about it as fast as I can. But I’m also passionate about it. That’s why I do it. This whole project that I have the Wigan sessions is a passion project. I like talking about this stuff. And then it makes me think just like you’re saying, it makes me think. And I want to give away the report just to spread what I’ve learned, because I think it’s important stuff for, especially if you’re trying to manage your own money, it’s really important for you to understand the bigger trends. And, you know, I have a philosophy degree and I studied literature in school and stuff. So I’m interested in the stories of what’s going on. It’s late sound perverse, but I was actually excited when we started having our own banking crisis. It’s happening right in front of my face. I just have to read the news.

Gene Tunny  53:59

Yeah,

Addison Wiggin  54:01

get the report. It’s it’s interesting. And it’s helpful to like, make sense of what’s happening in the news, too.

Gene Tunny  54:07

Yeah, certainly, I guess it could be exciting, stressful. I remember being in Treasury. And here in Australia during the world of financial crisis. We didn’t have it as bad as it was in the States. But it was still quite, quite stressful at a time when we started seeing the drop in government revenues. And yeah, borrow lots more money. And yeah, well, my

Addison Wiggin  54:28

biggest concern, and I put this in the report to but my biggest concern right now is, we were talking about the savings rate during the pandemic. I think the same thing happened in Australia to the savings high because there was a lot of government stimulus, like direct payments to citizens. So the savings rate and then nobody could go anywhere. So the savings rate went really high. It actually peaked above consumer credit for like a, you know, like, a month, and then as the economy started opening up and people started travelling and Like making decisions I, oh, we’re free, we can go to one, the savings rate plummeted. And then the consumer credit rate for all of the things that I’m only talking about the US, but I’m sure it’s mimicked in other Western economies, the consumer credit rate, skyrocket skyrocketed before the Fed started raising rates. So like, all these people are taking on adjustable rate, credit cards and loans and mortgages and things. And then suddenly, the the debt service that they have to pay on those rates went through the roof, it’s tripled. So you had a plummeting savings rate, and at the same time that you have a service to debt ratio going through the roof. It’s not a good scenario. And we haven’t even really seen that impact on, like earnings in the s&p 500, the big retailers and stuff like that. We haven’t seen what that impact is going to look like yet. So that’s not kind of like, I guess, yeah. So other than the banks themselves, because they do it for there’s two points there that I’m keeping an eye on.

Gene Tunny  56:09

Yeah, fair point. We’ll definitely I’ll keep an eye on it, too. I think they’re really good points. Okay, Addison, we’re gonna thanks so much for your time. I really enjoyed that. That was terrific. Good luck to you, man. Very good. Thanks, Addison rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

57:10

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Credits

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

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Categories
Podcast episode

The Greedflation hypothesis – EP186

Economics Explored host Gene Tunny talks about the “greedflation” (greed + inflation) hypothesis with his colleague Arturo Espinosa from Adept Economics. They discuss whether greedy corporations might be responsible for high inflation rates in advanced economies such as Australia and the United States. Gene talks about how the excessive fiscal and monetary stimulus during the pandemic has been a major contributor to higher inflation. 

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

What’s covered in EP186

  • [00:01:28] Australia’s high inflation rate.
  • [00:06:57] UK windfall tax on oil and gas companies. 
  • [00:10:27] Greed inflation hypothesis. 
  • [00:13:29] Markups as a contributor to inflation. 
  • [00:16:20] Industry concentration and inflationary pressure. 
  • [00:21:11] Inflation outbreak and COVID stimulus relationship. 
  • [00:25:45] Problems with Covid stimulus. 
  • [00:27:58] Excessive stimulus and inflation. 
  • [00:32:35] Corporate power and antitrust.

Links relevant to the conversation

Greedflation articles:

Blaming inflation on greedy business is a populist cop out

Profits and Inflation in Mining and Non-Mining Sectors | The Australia Institute’s Centre for Future Work 

Underlying Australia’s inflation problem is a historic shift of income from workers to corporate profits

Corporate profits have contributed disproportionately to inflation. How should policymakers respond? | Economic Policy Institute

‘Greedflation’ is the European Central Bank’s latest headache amid fears it’s the key culprit for 

price hikes 

How Much Have Record Corporate Profits Contributed to Recent Inflation? – Federal Reserve Bank of Kansas City 

Cost-Price Relationships in a Concentrated Economy – Federal Reserve Bank of Boston 

Inflation is being amplified by firms with market power  

Chris Murphy’s economic modeling on stimulus and inflation in Australia:

https://onlinelibrary.wiley.com/doi/full/10.1111/1759-3441.12382

UK windfall profits tax:

What is the windfall tax on oil and gas companies? – BBC News

Energy Profits Levy Factsheet – 26 May 2022 – GOV.UK

RBA on sources of inflation in Australia:

Box C: Supply and Demand Drivers of Inflation in Australia | Statement on Monetary Policy – February 2023 | RBA

Charts:

Australian bank deposits

Australian money supply (M3)

Transcript:
The Greedflation hypothesis – EP186

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

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you could join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. In this episode, I chat with my colleague Arturo Espinosa from adept economics about the greed inflation hypothesis, our greedy corporations to blame for the high inflation that we’ve been living through. After you listen to the episode, please let me know what you think about the greed inflation hypothesis. You can email me at contact@economicsexplored.com. I’d love to hear from you. Okay, let’s get into the episode. I hope you enjoy it. Arturo, good to have you back on the programme.

Arturo Espinoza Bocangel  01:12

I’m very happy to be here.

Gene Tunny  01:14

Excellent. Arturo. So it’s at the end of the week, it’s Friday the 28th of April 2023. Earlier this week, we had the March quarter inflation number for Australia. It came in at 7%. So it was lower than at its peak of 7.8%. The quarter before but it’s still it’s still high. And mean, there’s still concerns about cost of living in Australia for sure. I mean, that’s something we’ve all been noticing as we go to the supermarket and other stores. So for sure inflation is still high. One of the things I think is interesting, and I must admit I’ve come to this issue late. Is this issue or this accusation of greed, deflation? Have you heard about this concept of greed, deflation? Arturo?

Arturo Espinoza Bocangel  02:05

Well, lately, yes. But when I was student in Peru, I haven’t heard that

Gene Tunny  02:11

nine. I think it’s a it’s a new term that that’s been thrown around. There’s this accusation that a lot of the inflation we’re seeing is due to profiteering it’s due to greedy corporations. So obviously, we do need to be concerned about big business and monopoly power. There’s, that’s a legitimate thing to be concerned about. But there is this question of, to what extent can we explain the inflation that we’ve seen by greedy corporations? So is it greed, flotation. And this has been quite prominent in the media. So there’s a think tank here in Australia, the Australian Institute, and it’s put out a paper in which they’re saying that this is a big part of the inflation problem. So we might talk about that in a moment. And it’s an accusation that’s been thrown around in other countries, too, in the States. And also in Europe, there was an article in Fortune magazine earlier this week. Greed flash deflation is the European Central Bank’s latest headache amid fears it’s the key culprit for price hikes. And I mean, what we see in whether it’s in Europe, or whether it’s in the States, or whether it’s here in Australia or the UK, if you just look at the data, if you look at data on inflation, you look at data on corporate profits and wages, and you look at data on other input costs. It is the case that profits have been have been high and they have grown in this post pandemic period. And this has led some people to argue that, well, they’re just profiteering they’re putting prices up more than can be justified. Now, I think this is a difficult hypothesis to prove it been thinking about it a bit and how you might demonstrate whether it’s the case or not that this is true, or whether you can whether we can rule it out, or or is it something that is it is a legitimate possibility. We do know that certainly profits for oil and gas companies and also coal mining companies here in Australia. They’ve been, they’ve been very high and also profits in other sectors to have been, have been higher. So in banks and, and in other sectors, and that’s what The Australia Institute argues. One of the challenges I see however, is that in economics as in other sciences, you need to be careful to distinguish should join correlation and causation. I think what Institute’s such as research, researchers think tanks, such as The Australia Institute have found I think they’ve found a correlation isn’t causation I think that’s a lot harder to establish and might go into, into why that’s the case. So I want to talk about correlation versus causation, how might you prove whether there’s green inflation is, is a legitimate thing or not? And we’ve also got to think about here, what’s the what’s the scientific way to look at this and to come to a conclusion now, The Australia Institute is a think tank, and it has a particular agenda. It has a progressive or a left wing bias. And so this type of hypothesis of green inflation appeals to it. So we need to keep that in mind. And we should think rigorously about whether it makes sense or not. Okay, so that’s, that’s a bit of an intro to this idea of greed, inflation. Or one of the other things I just wanted to mention in the intro is that there have been calls for a windfall tax on oil and gas companies in, in many countries, and they did impose one in the UK, I don’t know if you saw the news about the that windfall tax that they imposed on oil and gas, know, what will happen are they put on a, an energy profits Levy, because arguably, a lot of the the excess profits that the oil and gas companies were making, that was due to the higher prices associated with the war in Ukraine. And if you think about it, from an economic perspective, they really didn’t need those profits to have been motivated to invest in the first place. So you could argue that they were, they were x supernormal profits. And so therefore, you could make a case for a some sort of excess profits. Levy. And so that’s what they did in the UK, they put on a an energy profits levy a 25% surcharge on extraordinary profits, the oil and gas sector is making and, and that’s we saw a similar thing here in Australia wheeling, Queensland with the higher royalty rates on coal. So they put in a new, a couple of new tiers in their royalty rates. I think they had a 40%. There’s now a 40. What is it a $40 a tonne royalty rate, once the coal price gets above a certain, certain level? And I mean, this, this is something that’s controversial, because then companies say, Well, there’s a sovereign risk that oh, there’s a risk of that, that we didn’t anticipate before. Now, we have to really think about whether we invest in your state or your country. So there’s that that to consider. But that’s just to say that why this is relevant is because if you think that this green inflation is a problem, then you might be more inclined to to advance policy measures like that, like a windfall profits tax or higher, higher company tax or something like that. So I think that’s a that’s one of the issues in the policy debate I thought I’d mentioned. Okay, Arturo, any thoughts on ADD or green inflation? So far,

Arturo Espinoza Bocangel  08:26

it seemed that probably these inflation can be caused by these corporate big multinational corporation that wants to maximise the profits. Without taking into account what happening in the White House household level, the pressure of these inflation particularly is on the household Australian households, that they need to pay higher prices in energy, fuel, my grocery staff, so that is, that is painful.

Gene Tunny  09:04

Yeah. How plausible Do you think there’s greed inflation hypothesis is so basically it’s saying that the corporations are taking advantage of this concern over inflation? Or that they see that? Okay, so prices have started to rise and corporations think, okay, let’s just keep increasing prices, because we’re, we’ve got the cover to do. So now. We’re, it’s, we can get away with it, essentially. Now, what’s the problem with that argument? So we’re thinking like economists would say that the problem with that argument is that if one company decides to do that, and they’re doing it illegitimately that their costs of production really haven’t increased. Wouldn’t another company try and undercut them or try to they just, they wouldn’t raise their prices as much and then they could steal some market share from them. Yeah, the third point? Yep. So it requires some time. coordination among the companies, doesn’t it some sort of implicit collusion. And I think this is where some of these models, there are some theoretical models that appears which are trying to lend support to this greed inflation hypothesis. Did I think you found a study, didn’t you, Arturo, that said that this or that? Was that an empirical study you found that said that where there’s market power, it looks like there is some tendency to have

Arturo Espinoza Bocangel  10:25

there’s a few of them, the the those paper have found positive correlation between higher concentration higher inflationary pressure,

Gene Tunny  10:36

really? Okay. And do you think they’re good studies, though they published in good journals, do we what do we know?

Arturo Espinoza Bocangel  10:42

Those are probably most of them are publishing good journals. And also in economy, we know that the mythologies bar are different. And also each metal he has his pros and cons. So we need to, to consider that and analyse in detail what is.

Gene Tunny  11:05

So probably too much for us to do in this episode. But we’ll put links in the show notes. So if you’re in the audience, and you’re interested in having a look at those studies, you can check them out, and I might have a closer look at them after this. I know that there are studies like that, and that would lend support to this greed inflation hypothesis. And so maybe we can’t completely rule it out. There’s a paper by John Quiggin and Flavio ministers, and John and Flavio, their professors at University of Queensland and economics. I know both of them. Well. And John’s actually been on the show before. And they wrote a piece in the conversation. I think they had a working paper to back it up and inflation has been amplified by firms with market power. And so their argument is that where one or more firms is big enough to have market power for any given quantity sold, prices will be higher. Yep, and increasingly higher as demand for the product climbs, okay. This means that after a boost to demand such as the one that followed the COVID stimulus, in the end of the lockdowns, firms with market power amplify the resulting inflationary shock. Okay, so they’ve got a model where they come to a conclusion that having market power means that you’re more likely to be able to take advantage or to put your prices up if there’s this, this demand shock, okay. Possibly. I mean, my feeling is that if there is a level of competition in the market, then that should constrain that. But look, if there is market power, maybe that’s an interesting, interesting hypothesis. And there are studies from the States did you see this isn’t just something in Australia, there are studies from the US as well as a Kansas City Fed study from 2021 There’s a really interesting point they make in this that I think it’s worth thinking about in this whole green inflation conversation. So I think Andrew Glover Jose, I think you know how to pronounce his name. Yeah, cuz Sam was traded veal. Okay, that’s great. And Alice Vaughn and Rebecca they present evidence that markup growth so markups on products sold. So for the to get the profit. So the markup growth was a major contributor to inflation in 2021 markups grew by 3.4% over the year, whereas inflation as measured by the price index for personal consumption expenditures was 5.8%. Suggesting markups could account for more than half of 2021 inflation. This is what I think’s fascinating. They note that the timing and cross industry patterns of markups growth of markup growth are more consistent with firms raising prices in anticipation of future cost increases rather than an increase in monopoly power or higher demand. I think that’s a really critical point. So look, it might be the case that if you look at the data, at the moment, that it looks like the businesses are doing incredibly well. So they’ve got high profits. And they’ve they’ve increased their prices, but it could be that they’ve increased their prices in anticipation of future cost increases. Now to some extent, you have seen those future cost increases will in fuel I mean fuel prices were higher for I think they’re starting to come down. But energy prices here in Australia are still going up. Costs of other inputs are increasing labour costs. Labour hasn’t responded as much as some people have been forecasting for years. So wages growth is still It hasn’t really been that spectacular. But look, I mean, there’s something to that that could be the case that what we’re seeing is businesses. It’s not as if they’re being greedy. They’re just concerned about their own costs rising and they’re increasing their profits. Another thing to keep in mind, of course, is that that profits are procyclical. And this inflation has occurred at a time of a booming economy, the economy post COVID boomed. And as we came out of the pandemic, and that’s a time when you’d naturally expect to see higher profits. And we’ve also seen high inflation, unfortunately. So it could be correlation rather than causation. Again, look, lots of there’s a lot going on. There are lots of aspects of the economy. And I think that Kansas City Fed study, and I’ll link to that in the show notes that makes a good point about how you need to consider expectations in assessing what companies are doing. Okay. There was also a study by the Boston Fed that you found wasn’t there. So this is one of the other Federal Reserve Banks. So what was that cost price relationships in a concentrated? Economy? Was this a study you were talking about before?

Arturo Espinoza Bocangel  16:15

Exactly if the concentration, right,

Gene Tunny  16:19

okay. So the US economy is at least 50% more concentrated today than it was in 2005. So they, their findings suggest the increase in industry concentration over the past few decades, could be amplifying the inflationary pressure from current supply chain disruptions in a tight labour market? Okay, so this was a paper from 2000, until I’ll put a link in the show notes. Right. So that’s, that’s supporting that greed foundation thesis. Look, there’s there’s a whole bunch of you know, there’s studies that support it to an extent and then there’s others that question it, or there’s commentary that questions that. And one of the things you found Arturo, which I think was fascinating was that the so the Reserve Bank of Australia, so as central bank, and here in Australia, it doesn’t really give any credence it doesn’t really think much of this whole green inflation idea, does it or it hasn’t hasn’t raised it or doesn’t talk about it as a possible explanation does

Arturo Espinoza Bocangel  17:20

exactly here that RBA pointed out that there’s a place I fuck towards accounting for around half of the increase in inflation over the year to September 2022. But they didn’t mention anything about really corporations.

Gene Tunny  17:35

Right. Okay. So what I’ll do is so I can be to be objective and to be to be fair, on both sides of the argument, I’ll put links to, to, to what the RBA has been saying to both of those fed studies and also to what The Australia Institute has been, has been saying, I mean, they’re been the most vocal about about this. I mean, their analysis to them suggests this is an analysis of national accounts data. Again, it’s it’s an analysis of correlations of data that’s that they seen these things happening at the same time and drawing a conclusion based on that now, can you make the conclusion that this is due to greedy corporations, or corporations being more greedy than normal? Okay, I mean, we live in a capitalist economy. Okay. So businesses are going to maximise profits. There’s no doubt about that. But look, that’s the system we’re in. But is this something that in times of inflation, does it amplify the inflation or lead to, to more inflation than you you’d otherwise expect? I think that’s the hypothesis, The Australia Institute, based on their correlation, all analysis I call it says just looking at correlations, they would argue that it does. So their analysis suggests to them that 69% of excess inflation, so above the, the Reserve Bank’s target of two and a half percent, since the end of 2019, came from higher unit corporate profit margins, while only 18% of the student labour costs. Right. Okay. And they go on in that report to say that, look, it’s not just the profits in the mining sector, because it was just profits in the mining sector. And whereby, okay, the miners are really profitable. And so there’s a lot more profit in the Australian economy that’s on that’s because of all these export earnings. Right? So it’s not as if they’re making all of these profits by exploiting people in the domestic economy. So that’s where that argument of theirs would fall down. But then they do go on to point out it’s not just mining, that where there’s these excess profits in their view, there’s, you know, higher profits in it. in financial services and banking and in other sectors, so, yeah, check that out. And I think they ask a good question. And it’s good that they’ve made this contribution to the debate, because it forces us to think rigorously about what’s been driving inflation and what’s the cause of inflation. And we’ll get on to that again, in a moment. Okay, we’ll take a short break here for a word from our sponsor.

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Gene Tunny  21:03

Now back to the show. One of my old Treasury colleagues, John to in the financial review, John has written an opinion piece, which is very good. John’s good writer. Blaming inflation on greedy business is a populist cop out. And I think what John is saying here, I think this is where a lot of the economists in the Reserve Bank or the Treasury, I think they would agree with John, I think I largely agree with John, and I’ll go into into why in a moment. And John’s main message is that it was the spillover of public sector stimulus that lasted for too long, not price gouging by companies that fueled the inflation outbreak. Did you have a look at that? That article by John?

Arturo Espinoza Bocangel  21:55

Yeah, yes, I rebuilt the conclusion. Yes. He made a good point.

Gene Tunny  22:00

Yeah. And he relied on a study by Chris Murphy, who’s a former Treasury model. I actually work with Chris’s daughter in Treasury, Carol, I believe, if I remember correctly. So Chris, is a well known Australian macro, economist. And he was at KPMG e contact for a while. Now he’s a visiting fellow at ASU. And he’s done something a bit more advanced than what The Australia Institute did. The Australian Institute just looked at the national accounts and inflation data and tried to draw conclusions from that from just basic data analysis. Now, I think the problem in economics is, you can only go so far doing that, if we’re talking about testing hypotheses, what’s the scientific approach to do that, you probably need something a bit more than just the basic data analysis. Now, one of the problems we have in economics, of course, is that you can’t run controlled experiments as you can in the lab. So we’re always trying to come up with clever ways to, to analyse the data, to do econometric modelling of some kind, to work out whether these hypotheses can be maintained, or whether they’re, they’re rejected. That’s what I’d say on that. And what Chris Murphy does is he runs a simulation. He’s got this macro economic model, this econometric model of the Australian economy based on a broad range of macro economic data, and relationships that have some basis in economic theory. And what he does is he simulates the economy, if it was subject to COVID. But there wasn’t all of the arguably excessive monetary and fiscal policy response there was the there was some contraction in GDP. I mean, there’s a quite a substantial contraction in GDP still in that first quarter of COVID. Because people just would have naturally socially distanced anyway, right, even in the absence of policy measures. And we did say that in in some economies, that there was no, there was no way of avoiding the the economic shock from COVID entirely. But if you didn’t have the, all of that stimulus than by his estimates, you would have avoided a lot of the inflation. And I think this is really, really interesting, really interesting modelling. And Chris Murphy has a paper in the economic papers journal, which is a journal that’s actually published by the Queensland branch of the Economic Society was aranea, which I was once the secretary of. No longer though, but you can get that online, I’ll put a link in the show notes, fiscal policy in the COVID, 19. Euro. Really good paper. And what he does in this paper, which I think is excellent, is he just highlights how massively generous the COVID stimulus was, the stimulus during COVID was particularly job keeper, which was just incredibly generous, and he ended up because of the eligibility rules, there are all these people who are they were only employed part time, but they effectively get compensated as if they were full time workers. So there are a lot of people getting access excess money. And there’s an argument that that stopped some of those people from searching for a new job, if they were if they are on job keeper, or if they’ve been supported by job keeper. So, yeah, lots of problems with that, that stimulus and I think we’re, if we had another pandemic, I mean, let’s hope we don’t, I mean, still getting recovering from that last one. I mean, it was just the excessive response was just at it, and just, yeah, incredible. But if we do have it, I think we would have a much better, or a hope, whatever much better economic policy response. But what Chris Murphy found was that the fifth and this is in Australia, the fiscal response to compensate for income losses. In services industries meant that unemployment was around two percentage points lower for three years than otherwise, than it otherwise would have been. And there was over compensation for every $1 of income, the private sector lost under COVID, fiscal policy provided $2 of compensation. And then there was of course, the ultra low interest rates, point 1% cash rate, the hundreds of billions of dollars of monetary stimulus via quantitative easing, all of this additional money in bank accounts, I’ve got some charts that I’ll put in the show notes. So just show how much the Australian money supply is grown. I think since 2020, the amount of money so the stock of money in Australia has increased by nearly a third or around a third or something like that. And think about that. This is part of this whole. And this is something that what I’ve been saying on this show for the last couple of years, I mean, what we’ve got is too, too much money chasing too few goods, if you looked at what happened during the pandemic, and within the fiscal policy and monetary policy, what we saw with the inflation now, no doubt, significant part of it was due to the invasion of Ukraine. But what we end up seeing with inflation is what you would have expected based on the the massive stimulus and particularly the massive monetary growth that we saw. And so therefore, you don’t need this green inflation hypothesis. You can explain a lot of it by the excessive stimulus. And this is what Chris Murphy shows in that paper. Germany thoughts on that, Arturo?

Arturo Espinoza Bocangel  28:09

Whoa, this point, you the last point that you have mentioned is very clear. It made me think, okay, yes. The these re the cooperation argument is not 100%? Sure, shall we, whether if some academics, or you know, researchers will try to understand the drivers behind inflation. When I mentioned, drivers, of course, we include these government expenditure in increments. And also lit, we can include another factors at fame level, like, for example, to, to use markups in order to maximise profits. So that kind of thing is,

Gene Tunny  29:03

yeah, I think you made a good point before. I mean, we really want to have a look at what’s been happening in specific firms. I think we’ll have to wait for studies that really examined what’s happened at that firm level, maybe using that business longitudinal database data? I don’t know. But yeah, clearly, this is a it’s a big issue. And I think it’s one that we need more evidence to resolve. But I guess what I would say is that we shouldn’t jump to the conclusion. I mean, I’m pretty confident that we shouldn’t jump to the conclusion that it’s greed flesh, and that is just because a greedy corporations, I think there’s there’s a lot more. I’m not even sure to what extent that’s a significant factor. In fact, the corporations more greedy than normal. I mean, it’s this idea that it could amplify a shock that is inflationary, possibly, but I’d like to see, yeah, I have to sort of think deeply about what that means. It’ll is and what that mechanism is, I mean, my view is that you don’t need that great inflation hypothesis to explain what’s happened because it’s perfectly understandable if you just think about the the massive, the massive shock that we saw now. So think Chris Murphy, what he found was that if you didn’t have the stimulus, if you just had COVID, then then by the end of 2022, you’d have inflation at around 4.2%. So you would have ended up with some inflation as the economy bounced back after COVID. But what ended up happening, of course, is that inflation went far beyond 4.2%. In Australia, we ended up with 7.8% in Australia. And what Chris Murphy’s modelling shows is that, in his scenario, his his actual forecast scenario, he’s worked out that the excessive macro stimulus drives inflation, three percentage points higher, so three percentage points higher to a peak of 7.2%. Okay, which is in the wall ballpark of where it did get. So in his model, he can you explain it with the stimulus. Now, of course, it’s a macro model and models that we all know the problems of trying to forecast the economy and modelling the, the actual path of the economy with an econometric model with with equations. We’ve got parameters estimated, statistically or using econometric methods there. They have their limitations. But to me what, what Chris Murphy does is, is a better way to think about this sort of try and answer this question than just this basic correlation analysis that’s done, where we go, oh, well, profits are up. inflation’s up. wages aren’t up by much. It looks like it must all be inflation’s. At the same time as we’re having inflation companies are making more money. Therefore, it’s greedy, greedy corporations, I think I don’t really think that’s, that’s the right way to think about it. Having said that, I mean, it’s worth having the conversation and forces us all to think more rigorously about the causes of inflation and what we should do about it. And he thought cetera? No, I think that’s pretty much all I wanted to go over. I’ll put links in the show notes, to all these various papers and reports we talked about. The RBA has put something out on inflation drivers where they look at the different factors and they don’t seem to think much of this whole green inflation, explanation. But look, I think it’s worth covering. I know that, you know, we do have to be mindful of corporate power we have to be mindful of, of monopolies or oligopolies that exploit their market power. There’s no doubt about that. I mean, then that’s why we have things like the a triple C, the Australian Competition and Consumer Commission, or we have the we have the antitrust statutes in the US. And we have whatever the equivalent is in the UK. Did you see in the in the they’re quite muscular in the UK? Did you see the they’re blocking that? Microsoft’s acquisition of Activision Blizzard? Oh, I haven’t seen that. Oh, yeah. That’s quite interesting, because one of the things I’ve covered on this show is this issue of big tech and to what extent we should be concerned about big tech, so might have to come back to that in a in a future episode. I thought that was a really interesting development, because they’re concerned about Microsoft’s already a behemoth, right. Concerned about Microsoft getting getting even more market power in games. Okay, well, thanks so much for your time and for helping me think about this issue of greed, inflation, it’s helpful to talk about these issues with with colleagues. So I can think about really clarify how I’m thinking about it. Am I on the right track? Am I being biassed? Am I too sceptical of this hypothesis, which might actually have some merit. But yeah, I think my view is that we can probably explain inflation most, if not all of the inflation by the excessive fiscal and monetary stimulus. We don’t need this great inflation hypothesis that said, Look, if they can provide convincing evidence that it is a thing then sure let’s let’s look at it a bit more closely. So think that’s where all I’ll end up. Tomorrow. Thanks so much for your time.

Arturo Espinoza Bocangel  34:37

Thank you for having me, as well was my pleasure. Very good.

Gene Tunny  34:43

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

35:30

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