Categories
Podcast episode

Hyperinflation: what causes it and what to do about it – EP158

What causes hyperinflation and how can it be avoided in the first place or stopped if it occurs? What characterizes countries which fall victim to hyperinflation? A conversation between show host Gene Tunny and his colleague Arturo Espinoza which explores the economic theory and evidence around hyperinflation, and discusses peculiarities which can arise in hyperinflation-afflicted economies – e.g. pensions denominated in cows in Zimbabwe.  

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

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

Links relevant to the conversation

Current inflation rates around the world (Trading Economics)

What is hyperinflation and should we be worried? (WEF article from June 2022)

Wikipedia entry for Alberto Fujimori

Why a Zimbabwean firm offers pensions denominated in cows | The Economist

The Modern Hyperinflation Cycle: Some New Empirical Regularities (IMF Working paper from 2018)

Chris Edmond’s note on Cagan’s model of hyperinflation

Alberto Alesina and Lawrence H. Summers’ paper Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

Bitcoin Could Solve Zimbabwe’s Hyperinflation Problem—Instead, The Country Is Telling Impoverished Citizens To ‘Just Buy Gold’ (Forbes article)

Inflation is spiking in Zimbabwe (again). Why high interest rates aren’t the answer (Conversation article by Jonathan Munemo): 

Transcript: Hyperinflation: what causes it and what to do about it – EP158

Gene Tunny  00:00

Coming up on economics explored.

Arturo Espinoza Bocangel  00:01

That, of course, affected or negatively affected people’s economic decisions, because my parents are all the people who live at the moment who are subject to new higher prices every day.

Gene Tunny  00:18

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist based in Brisbane, Australia and I’m a former Australian Treasury official. This is episode 158 on hyper inflation, what causes it and what to do about it? In this episode, I chat about hyperinflation with my Adept Cconomics colleague, Arturo Espinoza. Please stick around until the end of the episode for some additional thoughts from me on hyperinflation. I’ll be interested in your thoughts on this episode. So please get in touch and let me know what you think. In the show notes, you can find my contact details along with relevant links, info and clarifications. Please note that alas, I made some Clangers by miss speaking at a couple of points in my conversation with Arturo, the Weimar Republic in Germany came after World War One obviously, rather than World War Two, and the so called Fuji shock happened in Peru rather than Japan. Silly me for misspeaking. Righto. Now for my conversation with Arturo about hyperinflation thanks to my audio engineer Josh Crotts for his assistance in producing this episode. I hope you enjoy it. Joining me today is my adept economics colleague, Arturo Espinosa, Arturo, good to be chatting with you.

Arturo Espinoza Bocangel  01:40

Hi, Gene it’s my pleasure to be here.

Gene Tunny  01:44

Excellent. Arturo. So one of the things we’ve been chatting about a lot lately is inflation. And we’ve been looking at inflation and unemployment. And that’s for a project that we’ve been working on. And back a few months ago, we did chat about stagflation, a particular type of it’s a nasty combination of unemployment and inflation. That was episode 143. And I thought, based on what we’ve been looking at, and you showed me, or you alerted me to some data from Peru, in the 1990s, about a hyperinflation they had, I thought it’d be good to chat about hyperinflation is one of those economic calamities, because there are, well, it’s fascinating. It’s not something that happens a lot. And it’s, it’s awful when it happens. And it’s good to know, well, what are the things that lead to hyperinflation? What are the circumstances? How can we avoid it? And if it starts, how can we stop it? So I think it’s an important thing for us to talk about on the show. So yeah, if you’re happy to chat about hyperinflation, I think we should we should get into it. So. Yes. Yep. Let’s start. Okay. Very good. Right. So I guess where this started, was, we had a look at. But what prompted me to do this episode was I forget how it came up. But we were talking about high rates of inflation. You mentioned that in Peru in the early 90s, you had this hyperinflation and caused all sorts of all sorts of problems. And when I looked at the data on macro bond, it had an inflation rate in one year, I think it was over 10,000%. It was huge. It was it was massive. I don’t know the exact rate, I’ll have to put that in the show notes. I can’t recall it off the top of my head, but very high inflation rate. And then that reminded me Okay, well, this is something that happens from time to time, it’s hyperinflation. At the moment in advanced economies, we’ve got inflation rates of, you know, five to 10% or so. So Australia through the year, a bit over 6%, US eight to 9%. And we’re not in that sort of hyperinflation and territory, the way that they typically define Hyperinflation is where you have a monthly inflation rate. And this is prices, on average, increasing by 50% a month. So that’s a standard definition of a hyperinflation. I think that comes from an article by us economist, Phillip Kagan, I think in the 50s on hyperinflations. But there’s no commonly or there’s no widely accepted definition. As far as I can tell, I mean, there’s no official definition and Dornbusch and Fischer, so Stanley Fischer and Rudiger Dornbusch, who wrote this great macro economics textbook, back in the 80s. And, and, I used it in the 90s when I was studying, they defined it as a, an annual inflation rate of 1,000%. So whether it’s 50% Monthly, which if you looked at that on a yearly basis, that it’d be nearly 13,000%, or whether it’s 1,000%. Annual, it’s still really bad. So 1,000% annual inflation rate, where prices go up, basically 10x, isn’t it? I mean, that’s, that’s a huge. That’s a huge, impressive inflation rate. So you’re challenging for people to, to deal with? And, yeah, so I’ve got some data on the what inflation rates that we’ve seen at the moment, and it looks like, while in recent history, we have had some hyperinflations in places like Zimbabwe and Venezuela, which we’ll talk about in a moment. When I look at the trading economics websites, I’ll put a link in the show notes to this, we look at inflation rates around the world, the highest at the moment. So in annual terms, it looks like we’ve got well Zimbabwe coming in at looks like 285%. Lebanon 168%. So the very high inflation rates, but not in the hyper inflation range just yet. Okay. But it had they have had that sort of experience in the past. And we might cover that in a moment. So I thought this would be good to talk about, because, I mean, it’s something that people are aware of this can happen. And we all know that there are concerns about government, money printing and all of that. And it’s, if you’re a member of the public, and yet perhaps you haven’t studied economics, it may not be obvious what leads to these hyperinflations I mean, is this a risk for countries such as Australia, or the United States or, or Britain? And you know, what would lead to this eventuality of hyperinflation? And so what what I want to do in this episode, Arturo is just articulate. What are those conditions that lead to hyperinflation and when should we worry about it? There was an interesting article on the World Economic Forum website, what is hyperinflation? And should we be worried? I’ll put a link in the show notes to that I think that provides some interesting stories about inflation, I might kick off by talking about hyperinflation, I might kick off by reading from that. So it notes that it’s, it’s readily accepted that France and you are the world’s first recorded instance of hyperinflation during the French Revolution in the late 18th century, when monthly inflation topped 143%. Okay, so recall, at the moment in advanced economies, were concerned about inflation rates of between well between five and 10%, over through the year over a year, whereas when you’re in hyperinflation, you’re getting monthly inflation of could be 143% in France in the late 18th century. They go on to say that nevertheless perhaps the most well known example of hyperinflation incurred in the night occurred in the 1920s, when following World War One and crippled by reparation debt, Weimar, Germany saw its monthly inflation rate reached 29,500% in 1923, according to the Cato Institute, more recently, Zimbabwe was bound by hyperinflation, recording a staggering monthly inflation rate of about 70,000,000,000,  79,000,000,000% in november, that’s just insane. So I guess what those examples illustrate is that you’re dealing with countries where there’s an underlying problem, there’s some sort of deep crisis and or there’s a big disruption that occurs. So French Revolution, obviously, the end of the ancient regime, the new revolutionary government, executions, people getting detained, the end of the old regime, and huge disruption. And then following World War Two, we’ve got the Weimar Republic. And I mean, there was that you’re familiar with that the peace deal at Versailles that they struck, which was very hard on Germany at the time. So the reparations debt so the the victors the the allies, so well, outside or Britain and Australia and the US. We imposed a very tough, yes. Yeah. And so it meant that they really struggled. The Germans really struggled to pay that back and that meant that, you know, they’ve put a lot of pressure on their budget. And, well, this is where the problem comes from, essentially, your budget is in such dire straits, your deficits are so large, you have to resort to the printing press, you have to basically, well monetize your deficit, you have to create the new money yourself to be able to, to pay the bills. And that’s where you end up with, with really well, really high inflation and hyperinflation when things get out of control. And in the public, don’t trust the government anymore. They don’t want to hold the currency and the government keeps having to print more and more to try to get enough currency to pay the bills. And it just all ends really badly, you end up with these very high rate well hyperinflation 1000% plus inflation rate per annum. And you need to take really drastic measures to to get that under control. Right. So what causes it? And I think we’ve, we’ve alluded to that it’s the, it’s the fact that there is this, this printing of money to finance deficits that, for some reason or another, the government of the day can’t raise the money it needs via taxation, or it can’t borrow the money from the bond market, it can’t borrow the money from the private sector. So one of the reasons that a country like Australia or the US or Britain, why they don’t usually have to worry about inflation, or why we haven’t had a sorry, a hyperinflation. And why we haven’t had a hyperinflation here is because, well, we generally don’t resort to the printing press to finance deficits at times in the past, we have to a significant extent, but now what we do is we sell bonds into the market, the government sells the bonds, and it gets the money it needs that way. And we also don’t have the big disruption that tends to lead to hyperinflation. So what you have to have really is this combination of, well, you’ve got the there’s the money print ing going on, but that’s, that’s going on, because there’s some underlying disruption, that means that the government can’t get the money it needs, or it’s in some sort of crisis. And it needs to spend a lot of money, such as what the Germans faced in the aftermath of World War One when they had these heavy reparations payments to make. Okay, so what we see Dornbusch and Fisher note in their textbook, that classic hyperinflations took place in the aftermath of of wars. So that’s one thing we know there’s this disruption. And that’s going to affect the government’s ability to to raise money. And one thing that Dornbusch and Fischer noting, in their textbook is that hyperinflationary economies all suffered from large deficits in many cases, that was because of the war, you ended up with this large national debt. And if you end up with a lot of debt, then you’ve got the interest payments associated with that. And also, it just wrecked the country’s ability to raise taxes. Okay, because, you know, it’s destroyed businesses, for example, or perhaps it’s wrecked your, your tax collection capacity. You don’t, you don’t have the, the administrative capacity anymore to be able to collect the tax. So it’s, it ends up being a two way interaction, as they describe it. They talk about how large deficits lead to rapid inflation by causing governments to print money to finance the deficit, and then high inflation then increases the deficit. And that’s because there are two things going on. The nominal interest rates are increasing, because there’s higher inflation expected. And also because if your taxes if you’re calculating them based on what’s happened over the last 12 months or so, and prices have risen since then, then you’re going to lose out in real terms. So there’s this lag in both the calculation and then, the, the collection of the taxes and this is called the Tanzi-Oliveira Effect. So Tanzi, after a famous economist who was at the IMF, Vito Tanzi, okay, so what you have is that you’ve got this two way interaction. You’ve got, you’ve got large budget deficits that have to be monetized. And that ends up being inflationary. But then you have inflation, increasing the deficit that you’ve got, and this thing becomes a vicious circle, or it’s or it’s reinforcing. And this inflation gets a momentum, it gets a life of its own, and you can end up if you’re not careful. And if things get really bad, you can end up in this hyper inflationary situation. Right. And, I mean, the amazing thing is, I mean, we talked about, we talked about Germany, and then that’s the classic, or the infamous case of hyperinflation. And the stories that come out of these periods are just, they’re unbelievable, and they just illustrate the the hardship that’s occurred by people in these in these hyper inflationary periods, which is why we need to really guard against it and why we, we need to ensure that our monetary and fiscal policies are as sound as possible, because this is a this is a pathology, that you get this is a problem you get when you’ve got both bad monetary and fiscal policy, isn’t it? Because you’ve got the fiscal policy, which is there’s a budget deficit. And there’s also the monetary policy, which, which is financing the budget deficit by money printing. So you need the monetary authority, the central bank, or, well, perhaps it’s the Treasury, you need to have this hyperinflation go on, you need them to be doing the wrong thing there, as well as running the budget deficit, you need them to be monetizing it. So there are a lot of things that have to go wrong before you get into this hyperinflationary situation. And what happens is, you end up with massive hardship. And one thing I find I find extraordinary, there’s that story about the hyperinflation in Austria, after World War One. When, and this was a story that Keynes told, and it’s recounted in Dornbusch, and Fischers textbook. And he, they noted that people would order two beers at a time because they grew stale at a slower rate than the price was rising. So you’d go to a bar and you’d order two beers. Because the next time he went to the bar, the price would, would be high. Prices were rising. So fast, I mean, just terrible. Absolutely extraordinary stories like that. And there’s another story from Zimbabwe, we might tell in the moment, but what I thought would be good to do is we might consider some examples of some hyper inflation’s throughout the world. And because this conversation was motivated, partly by what you’re telling me about what happened in Peru, could you tell me a bit a bit about what happened in Peru in the it was it late 80s, early 90s. And then and then how that was resolved, please,

Arturo Espinoza Bocangel  18:08

In Peru, in my case, my parents, they live through that harsh time, in terms of in terms of economics and social. So basically, in the case of Peru is a particular case where some components, social, economic, and all models converge to this economic result or economic event that you have mentioned about hyperinflation. Let me give you a little bit of context about the Peruvian economy in the decade of 1980s or last decade in Peru, basically was, as I mentioned, marked by hyperstar stagflation, where is the son of hyper inflation plus recession. During those years. In Peru, the government took bad decisions. They started to spend a lot of money printing money, particularly the government of Ireland, Garcia, the first government between 1985 to the end of 80s, 90s.

Gene Tunny  19:31

Was this a socialist government?

Arturo Espinoza Bocangel  19:33

Yes, it was a leftist government. But at that moment, the political decision were the words, they they wanted to do the best. The the results told something different. But during that moment, the Peruvian Economy experience for our unfavourable terms of trade wars credit conditions for public debt and also some work condition, which caused floods, also many economic loss in during that time. So all these factors contributed towards in real economic growth.

Gene Tunny  20:23

Right. So you had this triple whammy, didn’t you? You had the declines in commodity prices, I suppose. So lower commodity prices, which affected your terms of trade, and then you said worse credit conditions for, for debt. So, higher interest rates was it at higher borrowing costs. And then you had the bad weather so, okay, yeah, pretty awful.

Arturo Espinoza Bocangel  20:47

And also is the government of Ireland, Garcia decided not to pay those public depths. So Peru also had some consequences doing that. So in response to that, the Peruvian government implemented a group of heterodox measures. So including the use of price controls, or multiple exchange rates to reduce inflation. So during that decade, Peru faced period of high inflation, so between 20% to 50% K per year, but the wars are pure in September 1988, when Peru faced its first episode of hyperinflation, the second episode of hyperinflation occur between July to August in 1990. So that, of course, affected or negatively affected people’s economic decisions. Because my parents or all the people who live at that moment, were subjected to new higher prices every day. Yeah. So imagine that. So as you mentioned about the viewers, if you want to buy milk, when milk, a jar of milk one day, the next day is, the price is higher also. So imagine that effect. So basically, those relatively poor people were the most affected. Because some of the Peruvians, they started to buy dollars, American dollars in order to avoid all the negative effects of inflationary pressures. Yeah, yeah. So that was the context. Yeah, what happened in Peru.

Gene Tunny  22:48

Um, I might just give you a break there Arturo, because I’ve just found the relevant table in the Dornbusch and Fisher textbook, my old university textbook, and then the estimates they have of the inflation rate in Peru. So if you look at 1985, I mean, it was it would have been higher from our perspective, 163%. And then it got down a little bit in 86, and 87, to 78.86%, in 98 82.5%, 1989 3,399%, 1999 7,482%, before dropping to 410% in 1991, and 88% in 1992. So, you know, just awful numbers would have been difficult for people to plan anything. And if you’re, if you’re holding your wealth in the local currency, I mean, it’s just wiped out. It’s just, you’re just losing all of that, that wealth or if you’re holding government bonds, you’re right. Yeah. You’re in deep trouble. Yeah. Yeah. And so what happened? I mean, the, there was, was there a new government and it implemented new policies.

Arturo Espinoza Bocangel  24:06

Yes, these new governments implemented heterodox policies like they wanted to control prices. And also they implemented multiple exchange rates. And I remember that impor for example, you want to import something at that moment they were restricted so import was controled as well. It was was a very dark moment in Peru.

Gene Tunny  24:36

Right. Okay, and that so that didn’t go well, that period that the initial that their response was not really the best way to tackle this was

Arturo Espinoza Bocangel  24:45

They wanted to do the best, but they think, they didn’t follow the correct prescription. Yeah, for that moment. Yeah.

Gene Tunny  24:53

And so what happens is a is it Fujimori comes in and then he’s got a different way of resolving it.

Arturo Espinoza Bocangel  24:59

At the beginning of 90s, with a new government for the Fujimori government implemented policies to stabilise the economy. So, basically, that kind of package or general economic package in order to combat the, those economic problems also social problems rely in two pillars. The first was related to cut inflationary fiscal financing. Also, the Peruvian central bank became autonomous in 1993. So there was a good hit for tackling inflation. And the second pillar was related to enhance free market conditions to liberalise the Peruvian market.

Gene Tunny  25:54

Yeah, yeah. So that they’re important, aren’t they? Because, let’s, let’s look at it. So there’s the commitment to cut inflationary fiscal financing. So we’re no longer monetizing the deficits. And I’m not sure exactly the relationship between the finance ministry or the Treasury and the central bank there. The way that deficits are monetized, is going to be different in different countries. But I mean, having this autonomy, having this autonomous Central Bank as well as important because one of the ways that deficits are monetized is that the central bank just buys the bonds from the government issues and just credits them with the money in the government’s bank account of the central bank that’s necessary to that the government wants to pay the bills. So the central bank is important in getting rid of this monetization with the central bank is often part of the monetization. So having an autonomous central bank is important because an autonomous central bank is going to tell the government no, we’re not going to buy your, your bonds, you’ve got to sell into the private market, or you need to borrow from another lender and international lender, for example. And, you know, we’re not going to be part of this money printing and monetization of the, of the deficit. So yeah, that’s incredibly important. And there’s evidence to that this autonomy, or this independence of the central bank, that is correlated with better inflation outcomes. And I mean, that’s, that’s across the whole spectrum of, of inflationary outcomes, right? So it’s going to help you prevent hyperinflation. And even if you’re a country with lower levels of inflation, you don’t have hyperinflations, such as Australia, New Zealand, Britain, US, etc. Having a more independent central bank, you’re going to get better inflation outcomes there. And I think there’s evidence by from Alberto Alesina, that’s a commonly cited study from the late 80s. I’ll put a link about that in the show notes. Okay. Now, this was called the Fuji shock. Is that right?

Arturo Espinoza Bocangel  28:11

Yes. Yes, absolutely. Yeah. The combat. hyperinflation. Yeah.

Gene Tunny  28:18

And so what was it? It was a, like they cut the they, cut the deficit, where the harsh fiscal measures. And this is, this is where it gets really bad. This is why you don’t you want to avoid getting into a hyperinflationary situation in the first place. Because the medicine is harsh. It’s harsh medicine, isn’t it? I mean, really, because you’ve got to just cut that deficit. You can’t monetize it, you’ve got to, you’ve got to either raise the taxes domestically, or you’ve got to borrow domestically. But what if people don’t want to lend to you what if your own citizens don’t want to lend to you or they don’t have the capacity to lend enough money to you then then you might have to go to an international lender, or you might have to borrow from overseas and what we find I think, in stopping a lot of these hyperinflations it’s a it’s a combination of this fiscal austerity or getting your budget under control, not monetizing your deficits are getting better monetary policy and independent central bank, but also often it’s getting a loan getting some foreign investment or getting a borrowing from overseas to to help stabilise your exchange rate, for example, that can be part of the solution.

Arturo Espinoza Bocangel  29:41

To facilitate internationally in foreign investment.

Gene Tunny  29:45

Yeah, because there was a paper that you found where you pulled out inflation and the cost of stabilisation, historical and recent experiences and policy lessons by Andre Solimano. World bank research observer in July 1990. And, and in that paper, the author writes that the experiences of stopping hyperinflation provide examples of both rapid disinflation achieved through restrictive monetary and fiscal policies. Yep. So getting your money supply under control by not monetizing deficits, getting your fiscal policy under control. And then he goes on to say, and the key role played by stabilisation of the exchange rate in successful stabilisation. So you need to get your exchange rate stabilised so that you’re not getting inflation through the exchange rate. So if your exchange rate is deteriorating, and then the cost of imports is rising, that’s contributing to inflation, so you need to get that under control. Last but not least, the history of economic stabilisation has amply shown that the availability of adequate foreign financing as a support to the stabilisation effort is a crucial ingredient in the success of stabilisation plan. So I thought that was really fascinating on and that’s an important finding, right? So it just goes to show what you need to get in place to correct a hyperinflation if it if it occurs if you’re in that unhappy situation. Right. And it looks like Peru ended up getting some it ended up borrowing from overseas as part of that if I if I recall, there was a or the IMF ended up guaranteeing loan funding for Peru according to the Wikipedia entry on Fujimori. Fujimori, is it? Yeah, I’ll put it. I’ll put a link in the show notes. And what’s fascinating about him. So he’s, he has Japanese ancestry, and he became President of Peru. But he’s a controversial figure in the end, wasn’t he? There’s a story there’s

Arturo Espinoza Bocangel  31:54

a story about the birth certificate. Well, because in order to be a Peruvian President, you need to be born in Peru. But apparently he will. He was born in Japan, but something strange okay with her with his birth certificate. Yep.

Gene Tunny  32:15

Right. Yes. I mean, he got they seem to have got it under control. But I should know that he was accused of corruption wasn’t a Oh, yes, yes. Yeah,

Arturo Espinoza Bocangel  32:28

there is. He’s considered one of the wards, precedent or corrupted precedent in the world. Yeah.

Gene Tunny  32:38

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

Female speaker  32:43

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  33:13

Now back to the show. So I think we’ve talked a bit about how you stop hyperinflation. It’s, it’s harsh medicine, it’s austerity, and that’s going to deliver pain, getting your monetary policy under control. And also stabilising your exchange rate, possibly through some foreign borrowing. Okay. The other example I wanted to talk about was, was Zimbabwe, because that’s an example of D monetization, isn’t it? So one of the one of the points that you made I remember when we were preparing for this conversation is that one thing you see in Hyperinflation is that people start avoiding the currency don’t they try not to use the currency, they might switch to US dollars, for example, if they’re available, they don’t want to use the local currency. or, in extreme cases, they might even use us commodities as as items at those units of account. So this is this this bizarre story. This is from the Economist magazine, I’ll put a link to it in the show notes and this was from earlier this year, and so may 14 2022. And the headline was wire Zimbabwe and firm offers pensions denominated in cows, okay. And there’s this this actuary, Mr. Chimp, Chairman, Norway, and an actuary trained in Britain started a company, the hacker life insurance, so apologies of mangled those pronunciations instead Out of this company to sell inflation proof pensions to Zimbabweans. The Pensions are not denominated in Zimbabwe dollars, since they quickly evaporate nor in American dollars since many Zimbabweans are struggling to obtain any. Instead, they are denominated in cows, which the government can’t print. This is what I love about the economist. I love these really clever, witty, witty lines in there. That’s great, isn’t it? So say there’s typically wage earners such as teachers, they chip in cash, which NACA immediately turns into cattle. So he, okay, the the assets grow by breeding, when a policy matures, clients can demand payment in cows or the cash equivalent, right? So, look, this is a sort of quirky thing that happens when you’ve got this really disruptive hyperinflation, you see people ordering multiple beers at the bar to avoid having to pay higher prices later. And you see things like this where you’ve got contracts denominated in capital. So it’s just an extraordinarily disruptive economic phenomenon that you really need to avoid, if you can, well, it can end up being incredibly costly to get under control, but you need to do it or otherwise you just end up with? Well, societal breakdown. Really. I mean, Hyperinflation is not something that that you can you can live with, you’ve got to get it under control. Okay. So there are a few other papers I just wanted or a few other studies I wanted to mention, before we wrap up, because I think they help illustrate what sort of economies end up in, in hyperinflation. And, you know, what are those characteristics? And why? When we consider that we start thinking, Well, okay, we’re probably not there yet. It’s not yet a concern for countries like Australia, or the US, or the UK. I mean, we’ve got, we certainly have issues in our countries, but it’s, we’re nowhere near the situation where you could end up in some sort of hyperinflation, you need to have some sort of massive political turmoil, a government that just loses control of things and starts turning on the printing press to finance this deficit. So if we think about mid 80s, Bolivia, this is an example that Dorn bush and Fisher Fisher given their textbook, they had a budget deficit of 26.5% of GDP in 1984 10.8%, and 85. And inflation in those years was 1,282%, and 11,750%, in 84, and 85. So you’ve got very large deficits, like crazily high deficits, and then there’s money growth associated with that, because you’re financing it by the printing press. And you end up with the high inflation, too much money chasing too few goods. Right? Oh, they do give an example of how the sharp cut in the deficit, the fiscal austerity can stop the hyperinflation, but at a high costs, so Dornbusch and Fischer go on, they talk about how, as a result of austerity, and and poor export prices, again, in economics is multiple factors at any one time, you can you can’t run control experiments. If you listen to the show regularly, you’re aware of that Bolivian per capita income in 1992 was 30%, less than it had been 10 years earlier. So they really suffered, again, the lesson is avoid hyperinflation in the first place. have made sure you don’t have that societal disruption and, and you avoid the political turmoil that could lead to a government that, you know, enacts policies that are well, not good and need to be financed with, with money printing, right? So yeah. Okay, so there was a study that was done by the IMF. It’s an IMF working paper from 2018, the modern hyperinflation cycles and new empirical regularities. And I thought this was an interesting study, they looked at multiple countries, they had a data set 62 variables, 496 countries over 57 years, they were looking at what are the characteristics of countries that ended up having hyperinflation, and the three big ones were depressed economic freedoms, deteriorated socio economic conditions and rule of law as well as high levels of debt. aesthetic conflict tivity and government instability. Okay. So it’s when you’ve got lots of political turmoil really and, and that’s why it’s, it’s more common or it has been more common in the last well over the last 50 years or so in either Latin American countries, or in some sub Saharan African countries where there’s just been more political strife for various reasons, whereas countries that have been more fortunate countries where there’s there’s been more established democratic norms, and we haven’t had populist governments generally that on either side, I mean, I guess there have been some But largely, we’ve avoided the the extremes in particularly in Australia. And I suppose in US and UK. What’s that? What that has meant is that we haven’t ended up in a situation where we’d have to worry about hyperinflation. But again, something to be conscious of, we want to guard against it, we want to make sure we know the lessons of history and know the lessons of economics. Right. Finally, I’ll also link to a paper by Well, it’s a note on Kagan’s model of hyperinflation. It’s a note by Chris Edmund, who’s a Queenslander who I went to UQ with really bright guy ended up getting a Fulbright scholarship studied at UCLA then worked at the NYU Stern School of Business, he wrote a paper while he was at stern Kagan’s model of hyperinflation, and he talks about the conditions under which you end up with a hyperinflation. So he goes into the maths behind inflation. And its relationship with the amount of money that that people in the economy want to hold. So it’s very technical paper. But a good one, it’s worth reading, if you can, if you can get through the all of the math there, I’d recommend it. And what he, what he concludes is that one of the important messages that economists take away from Kagan’s paper, so this is the famous paper which introduced the concept of hyperinflation, or defined it in the 50s. Or maybe it was early 60s, I’ll link to it in the show notes. One of the important messages that economists take away from Kagan’s paper is the need one for fiscal discipline, and or an independent central bank to prevent monetize deficits that can allow a hyperinflation to get started, and to the need for individuals inflation expectations to be anchored, and thereby relative Lee unlikely to lead to a momentum driven inflation breakout. Okay, so what Chris is driving out here is that when things get really bad, and no one wants to hold the local currency, no one trust the government, the government just keeps printing more and more currency to try to buy the goods and services it needs. And that leads to more and more inflation. And that leads to higher expectations of inflation. And you just end up with this vicious circle, that just reinforces itself, things get out of control, it gets explosive. Okay, so that’s what he’s driving out there. And then he concludes, of course, part of the trick to anchoring inflation expectations is for government policy to be credibly anti inflation, right. So and this is often why you need a change of regime, you need a new government that comes in a new broom sweeps clean, big shock, Fuji shock, for example, in Japan, it’s tough medicine, but sometimes it has to be done to get hyperinflation. Well to to get rid of it to reduce that inflation over over the coming years. And, look, there’s a bit of a debate in economics. I don’t think we’ll have time to cover it today. But it’s about how quickly you can stop these hyperinflations. And there was a famous paper by Thomas Sargent the end, the end of for big inflation’s, or the ends of for big inflation’s, I think it is Yep. And he argues that you can actually stop these hyperinflations relatively quickly. So it’s not it doesn’t have to be a drawn out process over over several years, where you’re losing all this GDP, you can stop it quickly, if you do have a very sharp and credible change in the policy regime. So there must be an abrupt change in the continuing government policy or strategy for setting deficits now and in the future that is sufficiently binding us to be widely believed. And this is related to his rational expectations theory. So if people believe that the There’s a new credible policy, then there are expectations of future inflation can drop massively, very quickly. And that therefore, that means inflation itself drops very quickly. And you save yourself a lot of pain by having to have a slower economy and higher unemployment for several years to get rid of it. Okay. Anything else? Arturo I know, we might have to wrap up soon.

Arturo Espinoza Bocangel  45:28

I think the these topical Hyperinflation is very complex. But you have provided a good summary. I think my final message is any government around the world must be aware of that it’s important to monitor inflation to target the inflation because that putting these this or that potential economic event would bring a lot of suffer, especially for poor people. Absolutely.

Gene Tunny  46:10

Okay. Tara, it’s been great chatting with you about hyperinflation. So thanks so much for your time.

Arturo Espinoza Bocangel  46:17

Thank you, Jim. Thank you for having me.

Gene Tunny  46:21

Okay, I hope you found the conversation about hyperinflation interesting and useful. As with many of the episodes I record, I feel I could explore this topic a lot more, and I hope to come back to it in the future, it may be useful to do a deep dive on some specific instances of hyperinflation, possibly the 1920s, German hyperinflation or more recent hyperinflations in Venezuela or Zimbabwe. I’d like to delve into exactly what went wrong in the first place. How did these countries end up with big government budget deficits that needed to be monetized in the first place? Please let me know if there’s a specific hyperinflation that you’d like to learn more about, and I’ll see what I can do. I should note that one point I think I could have covered better in this episode relates to D monetization. One way a hyperinflation can end is if the government abandons the currency and replaces it with a currency that people trust such as the US dollar. When this occurs, not only is there D monetization that is declaring that a currency is no longer legal tender, but there is so called dollarization as well. This happened in Zimbabwe in 2009. Eventually, the Zimbabwe government tried to reintroduce a new local currency in 2018 19. And hyperinflation started again. Governments of course, would prefer to have their own currency as it means they can partly finance themselves via the printing press A found a good article on what happened in Zimbabwe on the conversation website, and I’ll put a link to it in the show notes so you can check that out. One other issue I would have liked to have covered in this conversation is whether hyperinflation affected economies could abandon their currencies and adopt a cryptocurrency such as Bitcoin. There was an intriguing Forbes article in July titled Bitcoin could solve Zimbabwe’s hyperinflation problem. I’ll link to it in the show notes. If you’re a regular listener, you’ll know that I’m sceptical about the potential for cryptocurrencies to replace traditional currencies, particularly given the huge degrees of volatility in their values. But I will acknowledge that crypto advocates are right about the potential for fiat currencies to be debauched. Hyperinflation is the outcome of the most extreme divorcement of currencies. As always, I’m trying to be open minded and plan to come back to cryptocurrency and other crypto assets such as non fungible tokens in a future episode. I’m also keen to have a closer look at the concept of smart contracts which are enabled by Aetherium. Right, I better finish up now. I’d love it. If you could join me again next week for some more explorations in economics. Ciao. Okay, that’s the end of this episode of economics explored. I hope you enjoyed it. If so, please tell your family and friends and leave a comment or give us a writing on your podcast app. If you have any comments, questions, suggestions, you can feel free to send them to contact at economics explore.com And we’ll aim to address them in a future episode. Thanks for listening. Till next week, goodbye.

Credits

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

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

Categories
Podcast episode

Global economic outlook + Aussie inflation & house prices – EP150

The message from the IMF July 2022 World Economic Outlook was that the outlook is “Gloomy and More Uncertain”. This week also saw the United States slide into a technical recession. Certainly there are big risks to the global outlook. It’s possible that central banks could tip many economies into recession as they hike interest rates to tame inflation. This episode considers the global economic outlook as well as the economic challenges facing Australia’s new federal government. It’s an abridged version of a conversation that show host Gene Tunny had with Decactivist host Randall Evans on his show. The conversation was recorded prior to the US GDP release, but Gene remarks on the data in his introduction to this episode.

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

Randall Evans’ Deactivist show:

https://www.youtube.com/c/Deactivist

IMF World Economic Outlook July 2022: Gloomy and More Uncertain:

https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022

US recession news from NPR:

https://www.npr.org/2022/07/28/1113649843/gdp-2q-economy-2022-recession-two-quarters

Transcript: Global economic outlook + Aussie inflation & house prices – EP150

Gene Tunny  00:01

Coming up on Economics Explored.

Randall Evans  00:04

I don’t know if you saw the lineup for Qantas, I think two days ago. But it was out the door all the way down the road for Qantas flights in Sydney, like all the way out there. Never seen it like that, it’s insane.

Gene Tunny  00:21

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional Economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 150 on the Economic Outlook. 

We are at a risky point in the global economy. It’s possible that Central banks could tip economies into recession as they hike interest rates to tame inflation. Indeed, I’ve just seen the news that the US has experienced the second quarter of negative economic growth. So, according to the traditional definition, the US economy is in a recession. I’ll have to cover this in more depth in a future episode. But for now, I’ll know that there will be a big debate about this, given the jobs growth has been really good in the States, something noted by US Treasury Secretary, Janet Yellen, she’s claimed the two quarters of negative growth rule for a recession can be misleading. And you need to look at a broader range of indicators, as the National Bureau of Economic Research does when it calls recessions. There’s a lot to explore here, so I’ll leave it to a future episode. 

Okay, I should note that this current episode is an abridged version of a conversation that I had with fellow Australian podcaster, Randall Evans, on his Deactivators show earlier this week, on Wednesday, 27th, July 2022. I’ll put a link to Randall’s YouTube channel in the show notes. So, you can check out the full unedited chat, and Randle’s other videos. 

You may notice I’m short of breath at some points in this episode. That’s because I’m still recovering from COVID. I picked it up at the Conference of Economists in Hobart, two weeks ago. It was an awesome conference, but it was also a super spreader event. Alas. 

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

Right on, for my conversation with Randall on the Economic Outlook. I hope you enjoy it.

Randall Evans  02:38

Hello, everyone and welcome to the show. We’re here with Gene Tunny. Gene, how’re you doing?

Gene Tunny  02:42

Good. Thanks, Randall. How are you?

Randall Evans  02:44

I’m pretty well. For people who don’t know you, why don’t you give us a little background about yourself and what you do?

Gene Tunny  02:52

Okay, I’m an Economist. I’ve got my own consultancy business, Adept Economics. So, I do project work for different clients, private businesses, nonprofits, some government agencies, councils. So, often business cases for different projects or analysis of different policies or programs. So, I’ve been doing that for the last 10 years or so. Before that, I was in the Federal Treasury. So, we’ve got a broad background in Economics.

Randall Evans  03:27

And you’ve also got your podcast as well with over 130 old episodes I think, so far.

Gene Tunny  03:33

Yeah. Economics Explored. Yeah, that’s going well. I’m really happy with how that’s going. I mean, we’ve covered you know, a wide variety of issues on that, including housing and inflation and the RBA and the current review of the RBA. So, yeah, that’s going really well.

Randall Evans  03:55

What’s the current review of the RBA? Is to get rid of it? 

Gene Tunny  04:02

Some people might want that. There are some libertarians out there who are pushing for the abolition of Central banks and the abolition of fiat currency. But no, they’re not going to do that. I mean, they probably won’t do anything too radical, they might make some changes to the board composition, they might make some changes to the language around what the Reserve Bank is supposed to do in terms of targeting inflation. But yeah, there won’t be any radical changes, I’m afraid. Particularly if you look at the people who are who are going to be doing the review. They’ve got an academic Economist. They’ve got a former government bureaucrat, Gordon Brewer, and then they’ve got a deputy head of the Central Bank of Canada. So, you’ve got fairly mainstream people there. So, I don’t think we’ll see big changes. Having said that though, I mean, the Reserve Bank certainly needs reviewing, because there’s been a lot of concern that their policy settings have been wrong at different times. Phil Lowe’s, arguably misled people last year, and there are a lot of people who are concerned about that. His forecast, which was widely reported that interest rates wouldn’t be increasing until 2024. And he was saying that late last year, and now, they’ve already gone up from 0.1; this is the official cash rate, the overnight cash rate, which is lower than what people pay for home mortgages. Now it’s at 1.35. It’ll go up to 1.85 tomorrow, sorry, not tomorrow, on Tuesday, next week.

Randall Evans  06:02

Is that just people wishful thinking that believed that it wouldn’t go up till 2024? I mean, we had mass quantitative easing and the inflation followed, and then the logical step was; interest rates are going to go up. So, who was saying we can hold off till 2024?

Gene Tunny  06:22

Well, I guess there was this view that the economy had changed. And, I mean, there was quantitative easing, not in Australia, but in other countries during and after the financial crisis. So, starting around, 09, 0-10. And there were people forecasting, oh, this is going to lead to runaway inflation at the time, and that didn’t really happen. But what we’re seeing in the last was over the pandemic period, is that we’ve had, you know, more quantitative easing, and we’ve had big budget deficits to try to stimulate the economy as well. And I think the combination of that has meant that, you know, inflation has really soared. So, they were lucky last time, it didn’t happen. Last time, they got away with it. I think perhaps they thought that they might be able to get away with it again. Yeah, they were wrong.

Randall Evans  07:32

Imagine my shock that they might have. So, I guess first off, one of my first questions would be, as you see, is it all doom and gloom for Australia, or are we In a place we have to be? Where do you see us going over the next 12 to 18 months?

Gene Tunny  07:55

Well, I think it’s doom and gloom for Australia. I mean, really, things have been pretty good when you think about it. I mean, we’ve recovered very strongly from the pandemic. And unemployment is now at three and a half percent, right? This is extraordinary. And now there’s talk about sign-on bonuses. I don’t know how legit this report is. But there was a report in Perth now, that McDonalds in WA is paying sign-on bonuses of $1,000 due to the shortage of people; how difficult it is to get people. And the mining sector is paying $10,000 sign-on bonuses just to get people, there’s a shortage. Partly, that’s related to the fact that we haven’t had; I mean, immigration starting to increase now. But we had a year or so when we weren’t letting anyone in the country. So, I guess we’ll start to see that impacting wages. That could end up leading to inflation itself. I mean, one of the things we want to avoid is what they call a wage price spiral, where inflation just keeps feeding on itself. And prices and wages just sort of, go up in this; once leads to so high wages lead to higher prices, higher prices lead to higher wages, because people need to be compensated for that and they push for it in their wage bargaining. So, yeah, that’s the sort of thing that people are concerned about.

Randall Evans  09:35

The unemployment rate, typically, when there’s high inflation will be low. And I think that’s on the Phillips curve, if I’m not mistaken. Can you just explain that for the for the layman viewing?

Gene Tunny  09:52

I probably should finish the previous question, first. I will get on to that, Randall. I just realized you asked me about if it’s gloomy; I don’t want to be too positive, because, there certainly are risks in Australia, I better clarify that. Because of the rising interest rates, and it looks like, people probably; many households possibly overextended themselves, borrowed too much. There was that fear of missing out. And so therefore, as interest rates increase, even though they’re not going to get up to the really crazy levels that they got up to, in the late 80s, when they were up around 17, 18%. I mean, that won’t happen. But I mean, still many households could get into trouble. We’ve seen consumer’s confidence really plummet, and it’s at you would associate with before, like just before a downturn or a recession. So, there are levels that are almost recessionary. I think one of the bank economists, may have been the ANZ, economist, who said that. So, there’s certainly concerns about that.

On this point about unemployment and inflation. Yes, I mean, the traditional view, and this is a view that we learned was not correct. It broke down in the 70s was that, there is this tradeoff between unemployment and inflation; one story you can tell is if you have low unemployment, that means that workers have more bargaining power. Labor is scarce and so, workers are able to negotiate better with their bosses, and that pushes up wages. So, that’s the theory. 

So far, at least in the official data we’ve had up till March, we haven’t really seen a wages breakout in Australia, that’s why there’s was all their talk about declining real wages. And I think that cost Scott Morrison at the last election. That was really a strong attacking point that the then opposition, now government were able to make against the then government that you’ve got inflation running at the time was 5.1%. Now 6.1% yearly, and wages are only grown at 2½%  So, you’ve got a real wage decline of over 2 ½%. So, that was a bit of a worry. 

The traditional story was that, if you had low unemployment, you’d get high inflation. Conversely, you could, if you wanted to reduce inflation, you had to have high unemployment, because that would give workers less bargaining power. Okay, so there’s this tradeoff between unemployment and inflation. And this was based on a study by a New Zealand economist, Bill Phillips, who was actually an engineer, but he was an economist as well. And he might have been at LSE, in London, at the time. But that whole thing sort of, broke down in the 70s because what we noticed is that there wasn’t this stable tradeoff between inflation and unemployment. What there was, was the possibility that you could have both high unemployment and high inflation, and indeed, you could have unemployment increasing and inflation increasing, you could have what’s called stagflation. 

So, there’s no real trade off in the long run between unemployment and inflation. You can have high unemployment and high inflation at the same time, if people come to expect inflation, if there are, what you call inflationary expectations if they increase. So, that’s one of the concerns that people have about the global economy at the moment. The IMF, World Economic Outlook came out overnight. So, it came out Tuesday, in the US, and it’s gloomy; it’s talking about a gloomy outlook, globally. And I think it’s suggesting  we have very high inflation globally. Was it 6 or 7? It was it was a high rate. I’ll have to just check it. But there’s a lot of talk globally about stagflation, where they will end up in stagflation. And then there’s acknowledgement by international agencies that we could end up in a situation with high unemployment and high inflation down the track. I mean, it’s not likely at the moment. I mean, we are having global growth slowdown, because we’ve had this shock from the war in Ukraine, which has increased the oil price and petrol prices. So, one of the reasons you can have a stagflation is if you have this shock to the economy, such as higher oil prices, which push up the costs of production. And that means that it’s less profitable for businesses to produce what they were doing. And so that could lead to reductions in economic activity, and at the same time as costs of production is increasing, that’s passed on to consumers and increases prices. So, that’s one of the great concerns now.

That’s certainly something that, you know, people are concerned about, and you couldn’t rule it out as a possibility. I’d like to be a bit more optimistic than that, though. But so much depends on what happens with this war in Ukraine, and whether we can resolve that; the oil prices are coming down, but they’re still higher than they were a few years ago. So, a lot is going to depend on what happens there. Also the pandemic, which is causing all sorts of problems with the supply chain, it’s very disruptive. Things just don’t work now, as they did before. I mean, you’d see you see all the delays with Qantas and the disruptions that are occurring.

Randall Evans  17:04

I don’t know if you saw the lineup for Qantas, I think two days ago. But it was out the door all the way down the road for Qantas flights in Sydney, like all the way out there. Never seen it like that, it’s insane. I did want to ask you, and perhaps you should explain the theory first because the question from cue, which disappeared off the chat, was whether the RBA will actually increase interest rates enough to slow down inflation. But first of all, what is that theory though? How does that work? And then, what do we expect the right to probably go to?

Gene Tunny  17:46

Okay. Let’s begin with the fact that inflation is a monetary phenomenon. So, this is a famous quote from Milton Friedman. So, inflation is always in everywhere, a monetary phenomenon. In that, it’s associated with an expansion of the supply of money or the stock of money. So, this is currency that we have, but it’s largely; it’s mostly deposits sitting in the bank accounts of households and businesses. Okay, so, there’s the view that although the understanding that we end up with inflation, because the amount of money is expanding, and it’s expanding faster than the capacity of the economy. So, what we have is too much money chasing too few goods. 

So, inflation is a monetary phenomenon. The Central bank, the Reserve Bank is responsible for the money supply. And so therefore, it’s the RBA that has responsibility for dealing with inflation through monetary policy. So, the way they do that is by manipulating the overnight cash rate, this is the standard way of doing it, the official cash rate. This is what they call the cash market, which is a market in which banks and other market participants will borrow money overnight. And banks need money so that they can settle their accounts with each other at the RBA. The RBA controls this overnight interest rate. And what it’s trying to do is it’s trying to influence all the interest rates in the economy that are have a longer term. And so, what happens is as the cash rate increases, though the cost of borrowing money overnight increases, and that has a knock on effect to the cost of borrowing money for 30 days and six months and 12 months, etc. 

What they’re trying to do there is a few things and the RBA talks about different channels by which monetary policy works. Now, let’s think about what those channels are; one of those channels is through the amount of credit that’s created in the economy. One of the reasons we’ve had the big expansion in the money supply in the last couple of years during the pandemic, it’s not just because of the quantitative easing that the bank has engaged in, it’s not just because of their own money printing in their purchases of bonds. It’s also because with the very low interest rates that the bank has said, that’s meant that more people have borrowed money, or the bigger mortgages. So, we’ve had this expansion of Housing Credit. And the new credit, so the net additions the Housing Credit, that is expanding the money supply, I mean, there’s additional money in the economy. 

Okay, so one thing that the bank needs to do through increasing interest rates is reducing the amount of borrowing for housing and new credit creation. So, that’s one thing they’re trying to do. The other way it works is possibly more direct, or more immediate. It’s the fact that I mean, when they increase the cash rate, and that flows through to variable interest rates, mortgage rates, and eventually to fixed rates, when they reset, people have fixed rates for a few years, and then they reset at higher interest rates. What that means is households have less money to spend, they’re paying more to the bank, the bank gets the money, but the bank may not necessarily lend it to someone who’s going to spend it then. So, you have this subtraction from demand that way. So, that’s another channel by which monetary policy works, what the what the bank, what the Reserve Bank, what all Central banks are trying to do is they’re trying to take some of the heat, well, they’re trying to take the heat out of the economy, they want to have the economy go on this Goldilocks path, not too hot, not too cold. So, make sense? 

So, with the interest rate increases, the idea is you can pull some money out of the economy; will have the money supply, expand at a slower rate, or even contract, so that you can get inflation under control. And because you’ve got less, people don’t have as much to spend, that puts less pressure on the economy; it’s not overheating, there’s not as much demand out there. There’s not as much money chasing the few goods that we talked about before; too much money chasing too few goods. So, that’s the general idea. There are multiple channels, we know that if you do increase interest rates, it does eventually slow the economy. The great challenge is knowing how far you have to do that. And it’s not always obvious in advance how much you have to do that. And the problem in the 80s, the late 80s, in the lead up to the recession, is that they discovered that they really did have to increase those interest rates a lot to be able to slow the economy.

Randall Evans  24:18

Yeah. I was going to ask you a question, but then I was reading a comment.

Gene Tunny  24:28

Was the comment okay?

Randall Evans  24:31

Yeah, it was just should Australia be concerned with China’s financial issues that seem to be compounding? And also, these crazy images coming out of China of the tanks rolling in front of the banks not lending money out. What are your thoughts on what’s going on in China, and will it will impact us? I know, that’s kind of off topic to inflation and the housing market, but can we have your initial thoughts?

Gene Tunny  24:59

Clearly, we need to worry about what happens with China given that it has become such an important part of the global economy. And yes, if the Chinese economy did crash; it is slowing. So, we know that it has been slowing down. And the IMF is concerned about the outlook. I mean, there are risks from you know, that the property market, and construction sector, we know about Evergrande. Look, , it could be a could be a real concern for us, because so much of the commodities boom that we experienced, starting around 2003; we had the first phase of that over about 2003 through to 2013. And then, late to late last decade, commodity prices started rising again, then there was a bit of a downturn before; I think coal prices came down even before the pandemic. But since, end of last year, I think this started picking up with the global recovery, the global recovery was stronger than we thought. And then this year, commodity prices have gone absolutely nuts because of what’s happened in Ukraine. So, I guess, China is important. At the moment, it’s hard to forecast what would happen if we did have a downturn in China, because they’re probably, given all the disruptions that have occurred in the world and the fact that they need our; the world needs our coal, and coal prices are crazily high because of that. We probably would be okay in terms of coal. Iron ore would suffer because China has been a major purchaser of that. So, yeah, I mean, it certainly would be a problem. I mean, it’s hard to know what’s going on with China. Just a very difficult place to understand, really?

Randall Evans  27:33

Yeah. I did remember my other question relates to housing as well, you were talking about interest rates in the economy at different times, because a lot of people on mortgages might be on a fixed term mortgage, and that might go for X number of years. So, that flow-in effect might not hit them, and might not actually reflect in the numbers, two years down the track. So, what do we expect for the housing market, even though interest rates just going to keep going up?

Gene Tunny  28:09

Well housing prices are already coming down. I don’t know if you’ve seen those statistics. But Christopher Joy, who’s one of the top financial commentators in Australia, he writes for the Australian Financial Review. I’ve actually done some work for him in the past. He’s incredibly a bright guy. He’s got a company called Coolibar Capital Investment. And they’ve got billions of dollars of money under management. So, they’re really paying attention to this stuff. Look, you just look at the losses in or the reductions in housing prices since the first interest rate increase in May. And this is suggesting that, look, this is already impacting how sales was. I don’t know the exact breakdown; I should have looked it up before I got on. But I mean, there are a lot of households that are on variable rates. We see in the data that house prices are falling. I guess that will be, because as the interest rates increase, people won’t be able to borrow as much as they could have previously. And so that means they don’t have as much or they can’t go to the auction with the same expectations as they did before. Or maybe they’re more cautious about borrowing. They’re more concerned they’re less willing to bid at an auction because they are worried about the future. We know that consumer confidence has dropped. So, I think the interest rate increases have started to have an impact. So, there are obviously enough people worried about it. And it’s also impacting prices because it’s reducing the ability of people to the amounts that they can borrow. So, what was seen as Sydney’s fall and 5%, Melbourne, 3%, Brisbane, around 1%. That since May, since the first rate hike, capital cities overall, that minus 2 ½%. So, look here we prices are going down.

Randall Evans  30:35

I was just saying you’re recovering from COVID and I forgot to thank you for coming on.

Gene Tunny  30:43

Thank you. I usually think I’m okay. I thought I was okay, before I started. And then as I keep talking; should be okay. So, what Chris was writing was, if you look at Sydney, it’s declining at an annual rate of 22%. So, house prices are falling, and it looks like they’re falling at an accelerating rate.

Randall Evans  31:10

That’s a huge number to be dropping at 22%.

Gene Tunny  31:15

That’s if you take the rate it’s dropping out at the moment and annualize it. So, it may not last over the year. Although, it’s possible that it could; house prices soared during that pandemic period, even though many forecasters were expecting they might fall, it actually, surged because there was all this additional borrowing. There’s the fear of missing out. And, the market went nuts. And so, they’ll probably land above where they were at the start of the pandemic, but a lot of the gains will have been lost; it’s looking like that now. Because those interest rate increases are having more of an impact than was expected.

Randall Evans  32:11

Yeah, I couldn’t believe how much housing prices rose during the pandemic, it was just so counter to what I thought was going to happen. But it did, and I guess we’re going to see that correction. Probably not an overcorrection, though maybe, like you said, probably just above pre pandemic levels.

Gene Tunny  32:35

Yeah. And that’s what we’re seeing. It’s it started for sure. The big unknown is just how vulnerable households are to interest rate increases and whether you will start; they will massively cut back on their spending and that could then lead to a downturn. At the moment, the labor markets going ridiculously strongly, we’ve got 3 ½% unemployment, 300,000 vacancies, I think I saw someone report the other day.

Randall Evans  33:11

The unemployment figure that includes people actively looking for work, right. Yes. So, I’m not sure if that’s a great signal to our strength, if there’s a lot of vacancies and a lot of people looking for work, or am I missing something?

Gene Tunny  33:33

But that’s showing that there’s hardly anyone looking for work compared with before the pandemic. And there’s lots of vacancies. So, this is why we would expect wages to start increasing or perhaps we hope that they will. I think they probably are. We’re certainly seeing well, the sign- on bonuses that have been reported, there’s a story about McDonald’s. Possibly, who knows whether that’s true or not, it’s hard to know whether McDonald’s would be paying $1,000 sign-on bonuses, but that was the Perth Now report. I believe it in the mining sector though.

Randall Evans  34:12

Yeah, I could fly to Perth for like 400 bucks, have a job for a week and I’ll pay for my holiday.

Gene Tunny  34:20

You probably have to serve at some time. I’m sure they’ve got something or their agreement to cover that. So, I think the unknown is just how the economy will react as interest rates increase and just how much people will cut back their spending and whether you know, we had a boom and then we’ll have a burst. One of the challenges is going to be; and this is a big issue for the new government. You will recall that the previous government cut the fuel excise in half, so it’s down at about 22 cents a liter now, and what’s going to happen is that that’s going to go up to, it has to be 44 cents because they cut it in half, at the end of September. People will notice that unless petrol prices come down a bit more, they’ll really notice that and that’s going to come at a bad time, because we know interest rates are still going to go up. They’ll go up half a percentage point next week.

Randall Evans  35:38

What are your thoughts on how the Albanese government is going to shake up the economy? I guess some of the things that are promising, like, I guess the government backing certain home loans by 40%, and things like that. Does anything about his election promises stand out to you that will have a big impact?

Gene Tunny  36:06

Not really. They wouldn’t implement policies that I would probably implement at the moment to try to get inflation under control, they wouldn’t do that, they wouldn’t go that far. There was a discussion that we had? Well, I think we have to massively reduce his budget deficit we’ve got now. So, Jim Chalmers, the Treasurer, he’s talking about the need for savings. One of the reasons they’ve got to find savings; they need to get the debt under control – the trillion-dollar debt, but also because the government at the moment is contributing to the inflation problem we’ve got by running these large budget deficits. Still large, what you call a structural budget deficit. so that they’re still running these large structural deficits of 3 to 4% of GDP, if you look at the budget documents. So, what that means is that if you adjust for the state of the economy, you take into account the fact that the economy has been doing very well. At this point in time, the government should be running much smaller deficits or surpluses than they actually are, and they’re not. They’re still running reasonably sizable deficits. So, there’s this structural deficit, and that’s contributing to inflation. They’re adding to the demand in the economy, they’re contributing to the overheating. So, what this federal government has to do is to really cut back on their spending. Or, one alternative, I don’t know whether they’ll do it or not, because they promised that they would follow the stage three tax cuts. I think in stage three. There’s another tax cut coming through, that’s going to knock out one of the marginal tax brackets, if I remember correctly. And so, there are some people on the left who are arguing that the government shouldn’t go through with those, those tax cuts that are programmed in.That’s one possible thing they could do. To address that structural deficit. I’d probably prefer that they cut their spending, because they’ve got some big spending programs that are really getting out of control. So, NDIS, it’s well intentioned; I think a lot of people support the principle of it. But it’s growing, it’s tens of billions of dollars, or 30 billion, or whatever it’s going to overtake Medicare, in terms of the amount of money that’s spent on it over the budget estimates, over the next four years. 

So, that’s something they’ve really got to get under control, but that’s going to be difficult for them. I think it’s a well-intentioned program. The challenge is, where do you limit it? That’s the problem. There’s the desire to keep expanding it and to make it to provide as high level of service as possible and I think yeah, that’s just financially unsustainable at the moment, we need to really fix that up. 

That’s what I think needs to happen. There needs to be the expenditure restraint, or you know, the larger cuts than anything Jim Chalmers would be contemplating. I’m former Treasury, the Treasury would have provided some list of the things that should be cut. And knowing how these things work, Treasury have this huge book full of potential savings that could occur. And the government will probably pick a handful of them, because they look at most of the things Treasury’s proposing and they go, how could you ever contemplate cutting all of these things? Politically naive, so that that’s what will happen, that’ll be the reality. 

Randall Evans  40:38

Well, one of my questions is that, I know the RBA is supposed to be a separate entity, but allowing the RBA to increase interest rates to such a level that’s going to hurt your voter base. It’s almost political suicide. And I know they don’t really have a say, but, there was that kind of situation where I think it was Roosevelt who grabbed one of the members of the Federal Reserve by the scruff of his neck and was like, you’re destroying my presidency. So, is there a situation where the Australian Government can effectively halt the interest rate rise for political reasons? Or do we have enough kind of checks and balances to stop that happening?

Gene Tunny  41:31

Okay, they actually could, there’s, they have the power to do that. I’m trying to remember this is a point that Nick Growing often makes, I’m trying to remember correctly, I think there’s a provision in the Reserve Bank Act that the treasurer can table something in Parliament and tell the RBA what to do, right. So, the Treasurer could direct the RBA. And I don’t know if you remember, back in the 80s, we had a treasurer of Paul Keating, the Labor treasurer at the time, and he gave a famous or probably infamous speech. It was in the lead up to his challenge to Hawk when he said, I am like the Placido Domingo of Australian politics. And I’ve got the Treasury in this pocket, I’ve got the RBA in the other pocket. That was a great speech; it was not a modest man, it was a very coveted man. But yeah, Keating thought he ran the RBA. So, back in the day, the government had a lot more control over the RBA. The problem then is that, you don’t want monetary policy set by the government. Because for that reason, because the government’s going to want to have it more well, looser, they probably want to have the economy more prosperous in time for their reelection. And they’re not thinking longer term about what the inflationary consequences of that are. 

So, what economists have learned from that problem, the problem that if you have a Central bank politically influenced and you can get you can get higher inflation is we need to have Central banks independent of the government. So, we need to give them some independence. And so, what our governments have done is that they’ve struck an agreement with the Reserve Bank, there’s an agreement on the conduct of monetary policy. That was first, I think it was first formalized by Peter Costello, and in the fall, and in the 90s, in 96. And what that did was that codified in an agreement, the inflation targeting goal that we have now. So, the Central bank, the Reserve Bank, is targeting inflation between 2 to 3%, on average, over the economic cycle, so it’s of which means that they don’t have to be zealous or they don’t have to solely target inflation, if they’re going to crash the economy, they could ease up a little bit on interest rate increases, but ultimately, their goal is to get inflation under control, get it 2 to 3%. That’s what they’re accountable for. So, they’re going to be doing everything they can without crashing the economy to get inflation under control. But look, who knows? We hope we’re not in a situation that the Americans or that we were in the late 80s or the Americans were in the sort of early 80s and Britain too when you really had to increase interest rates a lot to get inflation under control because you had double digit inflation. Now we’re not there yet, hopefully we’ve moved in time to prevent that from occurring. But if you get to a situation where you’ve got double digit inflation, then you might have to increase interest rates much more than the economy can bear and then you end up in a crash. 

I’d like to think that we haven’t left it too late. And we’ll need to resort to those measures. But, let’s wait and see. So, I guess the answer is that, the government could direct the RBA. But then, the bad press they would get over that would be incredible. You’d have all the financial journalists around the country, criticizing them over compromising the independence of the RBA, Jim Chalmers wouldn’t be able to finish a press conference.

Randall Evans  45:52

You’re acting like they answer the presses questions. I think Anthony Albanese is the fondest to just brush off questions. But I understand completely what you’re saying. And I wasn’t suggesting; just for my viewers that the government should do that. I was just putting the thought out there. As a former Treasurer, what do you think the current government values most when it comes to the economy? Because everything seems to be a trade-off, right? It’s either we can get inflation under wraps, or we can have high job growth or, we can have housing affordability, so what do you think that they’re actually going to? Because you can’t have all of them or maybe you can? What do you think their focus should be, moving forward?

Gene Tunny  46:49

Well, I think the focus should be on the overall health of the economy. So, it should be about making sure that we’ve got the right tax policy settings or we’re spending on the right things, we’re not wasting money. We’re not contributing to the inflationary situation. We’re not enacting silly policies. 

One thing I have been encouraged by is the fact that they’re not doing really silly things, or they’ve knocked back this idea from the greens that we should have a moratorium on coal and gas projects, right? At a time when the coal price has been; well, that’s what Adam Danza saw, right. And at a time when the global coal prices being up at 500, or 400 US a ton for thermal coal, that’s extraordinary. 500 a ton for metallurgical coal, for coking coal. The idea that you’d actually wouldn’t develop any new coal mines when the world is crying out for it, because there’s no gas. We’ve got a global conflict and Europe’s worried about their gas supplies and whether they’ll have enough gas in the winter. Yeah, it’s a bit crazy. Full credit to the prime minister for knocking that back. 

I think there’ll be broadly sensible, but what you’ll see with a labor government is that they’ll be more aligned to what they perceive as the workers. Okay, and they won’t care as much about the costs they impose on business. Okay. And so, you’ve seen that recently. The problem we’ve got is that there are a lot of well-intentioned policies and so it’s hard to argue against a lot of these things, but they are costly to business. This government will probably do more things like this, we saw that there was that recent decision about from about, what is it? Paid leave for if you suffered domestic violence, or family violence? I can see what why that would be a good thing to have, at the same time, there is already paid leave available, you get four weeks if you’re a full-time employee. And this is an additional cost to employers. And you’d have to be a pretty nasty employer if you didn’t look after an employee of yours who was in that situation. I wonder why this sort of move is necessary from the government. Maybe they think it’s not going to have much of a cost because your employers would probably do the right thing, to begin with. 

I guess it’s a signal that this government is probably going to be more focused on the workers, it’s going to be less concerned about the impacts of its policies on employers. One thing that worried a lot of people, a lot of economists and financial commentators, John Keogh wrote a great column on this in the Finn review was when Anthony Albanese in the lead up to the election, talked about how the Fair Work Commission should just agree to wages going up at the rate of inflation. And there was a concern that, well okay, that’s a good thing that just leads to that wage price spiral where, if prices go up, oh, let’s increase wages by the same amount. And then that increases the cost to employers, they pass it on in prices. And then oh, let’s have wages go up again, prices go up again. And they just sort of gradually creep up a little, not gradually, they can increase, they can go up very quickly. And organizations such as the Bank for International Settlements and various other economic agencies around the world have warned about this wage price spiral, and one of the quickest ways to get there is to have automatic indexation of wages to inflation. 

So, there were people concerned about what the PM said there back in the election campaign. Ultimately, it was up to the Fair Work Commission, the Fair Work Commission recommended an increase that wasn’t complete. It was just a bit; I think it was a bit lower than the inflation rate. For non-minimum wage workers is about 4.6% or something, if I remember correctly.

So, that would be my take on it. I think they won’t do anything too crazy. They’ve resisted that crazy proposal from the greens, so, good on them for that. Sorry, go ahead.

Randall Evans  52:15

I follow a few greeny pages on Facebook just to see what they’re yapping on about. And I did see a lot of angry people today about that very thing you’re talking about. Saying, you can’t be for sustainability, but then allow coal mines to open. 

Gene Tunny  52:42

Yeah, well, just on that. it’s a real threat to labor. So, it was the coalition that got smashed on the climate change issue, last election, they ended up losing some of the blue-ribbon seats. But labor’s similarly threatened, right. Labor got what was it? 31% primary vote. So, labor was lucky to, it’s just the way that it played out in terms of the seats that were that were lost. And it managed to be able to form government, even though it ended up getting fewer votes than the coalition. But yeah, it’s in trouble from the greens as well.

All of these inner city seats are turning green. So, I’d be interested to see what happens in the future, whether Labor has to; how it survives, it’s under threat, as well as the coalition. So, I think that’s one thing that’s going to be fascinating to watch in the next few years.

Just on housing, the government’s policy isn’t going to do much for affordability because it was only going to apply to 10,000 people or so. It was it was limited in the amount of people that would apply to and it has to apply to hundreds of thousands of people to really make any sort of impact. The reality is there’s not much the federal government can do because the states are more relevant when it comes to housing because well, one, they’ve got responsibility for social housing. Now, my view is they’re just never going to be able to build enough of that. One of the problems with social housing is that they’re aiming to offer it at below market rent. The challenge there is you’re going to have a huge demand for your social housing because you’re offering something that’s cheaper than what the market is able to provide right? So, you’re never going to win there. You’re always going to be attracting more people, than you’re going to be able to build houses for. 

So, that’s probably not the answer. I think the answer is having a more liberal approach to development, allowing more development, particularly in the inner cities where we have heritage restrictions. There are all sorts of zoning rules around our capital cities. And even across the whole metro area here in Brisbane, for example, where I am, there’s a ban on townhouses in low density neighborhoods. And that’s just really silly. Because, that’s constraining the supply of housing. And there was research by Peter Tulip, at the Reserve Bank when he was there at the Reserve Bank, that showed that these zoning restrictions, they’re massively increasing the cost of housing, like 50, or 60%, something like that. So, that’s up to councils, but state governments, they possibly could do something like that with some of their planning legislation. But the commonwealth really can’t do much about housing. So, even though it’s an issue, it’s a big issue. I’m not sure they really can do much about that. 

The big issues the Commonwealth is facing; there’s the general economic management issue, what its budget deficit is doing for the economy, what its budget deficit means for the accumulation of debt and risk to the credit rating in the future and our ability to service that debt. And so therefore, that’s why Jim Chalmers is having to trim the budget where he can. He’s going to find it difficult though, just because that reason we discussed. Labor sees itself as the party of the workers, it also sees itself as more socially caring, more compassionate than the conservative side of politics. And so, it’s going to be very hard for them to make the substantial budget savings that are necessary.

Randall Evans  57:15

Well, we’ll touch base with you again, in a couple of months’ time and see where we’re at as a nation. And if people want to watch, we’ve had Gene on before, so you can just search for it in the little YouTube bar and watch that episode too. But apart from that, make sure you check out his website. It’s on the screen right now. If you want to have some more in-depth conversations.

Bye Gene. Thanks for your time. Thanks for being here.

Gene Tunny  57:42

Pleasure. Thanks. Thanks, Randall and thanks to everyone listening. Yeah, glad to be to be connecting with you. So, it’s been great. Thank you. 

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

Credits

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

Categories
Podcast episode

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

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

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

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

About this episode’s guests – Dr Peter Tulip

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

Peter’s twitter handle: @peter_tulip 

Links relevant to the conversation

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

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

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

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

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

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

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

This is the most recent statement:

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

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

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

Peter Tulip  00:01

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

Gene Tunny  00:15

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

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

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

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

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

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

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

Peter Tulip  02:01

Good, Gene, how are you? 

Gene Tunny  02:03

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

Peter Tulip  03:02

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

Gene Tunny  03:41

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

Peter Tulip  03:49

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

Gene Tunny  03:55

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

Peter Tulip  

Yeah, sure.

Gene Tunny  

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

Peter Tulip  04:24

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

Gene Tunny  04:31

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

Peter Tulip  04:58

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

Gene Tunny  05:26

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

Peter Tulip  06:03

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

Gene Tunny  06:09

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

Peter Tulip  06:26

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

Gene Tunny  06:48

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

Peter Tulip  07:14

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

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

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

Gene Tunny  09:53

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

Peter Tulip  10:36

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

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

Gene Tunny  12:04

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

Peter Tulip  12:11

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

Gene Tunny  12:13

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

Peter Tulip  12:18

Can I give you an example? 

Gene Tunny  

Yes, please.

Peter Tulip  

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

Gene Tunny  

So, inflation was below 2%?

Peter Tulip  

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

Gene Tunny  14:01

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

Peter Tulip  14:28

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

Gene Tunny  16:04

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

Peter Tulip  16:15

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

Gene Tunny  17:08

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

Peter Tulip  18:00

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

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

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

Gene Tunny  21:35

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

Peter Tulip  22:27

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

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

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

Gene Tunny  25:09

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

Peter Tulip  25:54

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

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

Gene Tunny  28:05

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

Peter Tulip  28:09

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

Gene Tunny  28:27

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

Peter Tulip  28:57

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

Gene Tunny  30:34

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

Peter Tulip  31:37

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

Gene Tunny  33:48

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

Female speaker  33:53

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

Gene Tunny  34:22

Now back to the show. 

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

Peter Tulip  35:51

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

Gene Tunny  37:30

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

Peter Tulip  38:01

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

Gene Tunny  39:04

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

Peter Tulip  39:09

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

Gene Tunny  40:19

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

Peter Tulip  40:33

The deputy of Stanley Fischer.

Gene Tunny  40:35

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

Peter Tulip  40:39

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

Gene Tunny  40:48

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

Peter Tulip  40:52

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

Gene Tunny  41:59

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

Peter Tulip  43:15

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

Gene Tunny  43:36

I want the doctors and the Epidemiologists for sure. 

Peter Tulip  43:41

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

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

Gene Tunny  45:58

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

Peter Tulip  46:20

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

Gene Tunny  48:08

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

Peter Tulip  48:18

Can I list them in order? Yes, please. 

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

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

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

Gene Tunny  48:53

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

Peter Tulip  49:00

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

Gene Tunny  50:31

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

Peter Tulip  50:56

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

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

Gene Tunny  53:02

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

Peter Tulip  53:08

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

Gene Tunny  53:50

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

Peter Tulip  54:09

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

Gene Tunny  54:23

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

Peter Tulip  54:34

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

Gene Tunny  55:39

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

Peter Tulip  55:58

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

Gene Tunny  56:11

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

Peter Tulip  56:34

Thanks for that, Gene. That’s great.

Gene Tunny  56:35

Pleasure. Thanks, Peter.

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

Credits

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

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

Categories
Podcast episode

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

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

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

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

About this episode’s guest – John August

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

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

Links relevant to the conversation

https://pirateparty.org.au/

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

Land Value Uplift from Light Rail by Cameron Murray

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

Termites in the Trading System by Jagdish Bhagwati

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

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

Gene Tunny  00:01

Coming up on Economics Explored.

John August  00:04

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

Gene Tunny  00:18

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

John August  01:35

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

Gene Tunny  01:38

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

John August  02:24

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

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

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

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

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

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

Gene Tunny  06:58

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

John August  07:28

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

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

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

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

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

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

Gene Tunny  13:43

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

John August  13:49

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

Gene Tunny  14:36

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

John August  15:08

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

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

Gene Tunny  17:17

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

Female speaker  17:26

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

Gene Tunny  17:55

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

John August  18:08

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

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

Gene Tunny  20:09

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

John August  20:25

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

Gene Tunny  20:27

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

John August  20:45

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

Gene Tunny  21:08

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

John August  21:57

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

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

Gene Tunny  23:45

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

John August  24:44

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

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

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

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

Gene Tunny  28:32

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

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

John August  29:59

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

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

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

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

Gene Tunny  32:12

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

John August  32:55

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

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

Gene Tunny  35:20

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

John August  35:57

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

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

Gene Tunny  37:25

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

John August  37:52

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

Gene Tunny  38:17

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

John August  38:46

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

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

Gene Tunny  40:39

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

John August  40:49

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

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

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

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

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

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

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

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

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

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

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

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

Gene Tunny  50:54

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

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

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

John August  53:29

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

Gene Tunny  54:26

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

John August  55:21

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

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

Gene Tunny  57:00

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

John August  57:21

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

Gene Tunny  57:45

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

John August  58:16

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

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

Gene Tunny  59:59

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

John August  1:00:11

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

Gene Tunny  1:01:11

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

John August  1:01:58

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

Gene Tunny  1:02:15

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

John August  1:02:39

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

Gene Tunny  1:02:54

Okay. Very good. Thanks, John.

John August  1:02:56

Okay, thanks, Gene. Bye.

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

Credits

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

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

Categories
Podcast episode Uncategorized

US Inflation, Woke Capitalism & China w/ Darren Brady Nelson – EP127

With US inflation at a 40-year high, who wins and who loses? Are greedy corporations to blame as some pundits are suggesting? Episode 127 of Economics Explored features a wide-ranging conversation with Darren Brady Nelson, Chief Economist of LibertyWorks, an Australian libertarian think tank, which also considers so-called Woke Capitalism and what’s going on with China. Here’s a video clip from the episode featuring Darren chatting with show host Gene Tunny about the 40-year high US inflation rate.

In the second part of the show, the Grattan Institute’s Economic Policy Program Director Brendan Coates explains the franking credits controversy, related to some peculiar Australian tax rules, to show host Gene Tunny.   

You can listen to the episode using the podcast player below or on Apple Podcasts, Google Podcasts, Spotify, and Stitcher, among other podcasting apps.

About this episode’s guests

Darren Brady Nelson is an Austrian School economist and liberty evangelion as well as a C.S. Lewis and G.K. Chesterton style Christian. He is currently the Chief Economist at LibertyWorks of Brisbane Australia and a long-time policy advisor to The Heartland Institute of Chicago USA. He is also a regular commentator in traditional and online Australian and American media. Check out his full profile at Regular guests – Economics Explored.

Brendan Coates is the Economic Policy Program Director at Grattan Institute, where he leads Grattan’s work on tax and transfer system reform, retirement incomes and superannuation, housing, macroeconomics, and migration. He is a former macro-financial economist with the World Bank in Indonesia and consulted to the Bank in Latin America. Prior to that, he worked in the Australian Treasury in areas such as tax-transfer system reform and macro-economic forecasting, with a strong focus on the Chinese economy.

Americans Return to Work as Biden Administration Work Disincentives Expire, but Jobs Remain Over 7 million Below Trend | Latest | America First Policy Institute (article referring to inflation tax of $855/year for an American family associated with a 7% yearly inflation rate)

Summers stumbles – John Quiggin

Woke Capitalism Is a Monopoly Game | Mises Wire

Joe Biden appears to insult Fox News reporter over inflation question

The implications of removing refundable franking credits – Grattan Institute

Here’s another video clip from the episode in which Gene and Darren compare the contributions to economics of Friedman, Keynes, and Mises:

Charts

US CPI inflation rate, through-the-year

US Producer Prices inflation rate, through-the-year

US inflation expectations – University of Michigan estimates

Clarifications

“Average hourly earnings for all employees on US private nonfarm payrolls increased by 5.7% year-on-year in January of 2022” (see United States Average Hourly Earnings YoY – January 2022 Data – 2007-2021 Historical) This compares with inflation running at 7.5% through-the-year. 

Amazon hikes average US starting pay to $18, hires for 125,000 jobs | Reuters

Abbreviations

CPI Consumer Price Index

PPI Producer Price Index

Credits

Thanks to Darren and Brendan for great insights and conversation, and to the show’s audio engineer Josh Crotts for his assistance in producing the episode. 

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

Categories
Podcast episode

Transcript of EP125 on price controls w/ Larry Reed, FEE

This post contains a transcript of EP125 on price controls, infrastructure, and other topics with President Emeritus of the Foundation for Economic Education Lawrence W. Reed. Also, note we’ve published a new video clip from the interview, featuring Larry talking about his article Why I wish we could put Chester Arthur and Joe Biden in a room together to talk infrastructure spending.

Transcript of EP125 w/ Larry Reed, FEE

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.

Gene Tunny 00:01

Coming up on Economics Explored.

Larry Reed 00:04

When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else. It’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion.

Gene Tunny 00:25

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury Official. This is episode 125 on price controls, which some commentators are suggesting could be used to reduce inflation. We also explore some other topics, such as whether Jesus was a socialist, why Joe Biden arguably should look back to the 21st president Chester Arthur, and why the separation of bank and state is so important.

My guest this episode is Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, a leading pro-free market educational nonprofit headquartered in Atlanta, Georgia. Larry has authored nearly 2000 newspaper columns and articles and dozens of articles in magazines and journals in the United States and abroad. His writings have appeared in The Wall Street Journal, The Christian Science Monitor, USA Today, The Epoch Times, and The Washington Examiner among many other places. Larry is frequently interviewed on radio talk shows and TV, including on Fox Business News.

Please check out the show notes for the links to materials mentioned in this episode and for any clarifications. You’ll find the show notes via your podcasting app or at our website, economicsexplored.com. If you sign up as an email subscriber, you’ll be able to download my new eBook, Top 10 Insights from Economics, so please consider getting on the mailing list. If you have any questions, comments, or suggestions, please either record them in a message via SpeakPipe. See the link in the show notes or email them to me via our contact at economicsexplored.com. I’d love to hear from you.

Now, for my conversation with Larry Reed from the Foundation for Economic Education. Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it.

Lawrence W. Reed, President Emeritus of the Foundation for Economic Education, welcome to the programme.

Larry Reed 02:45

Thank you very much, Gene. It’s a pleasure to be with you.

Gene Tunny 02:47

It’s great to have you on, Larry. I have been reading a lot of your writings lately. You’ve started off the year very well and coming on important issues, crazy proposals such as price controls. We might chat about that a bit later. But first, I’d like to ask you about the Foundation for Economic Education. Could you tell us a bit about what its role is and the type of activities it engages in place?

Larry Reed 03:16

Your listeners and viewers can learn a great deal more by visiting its website, which is FEE.org. The foundation was created in 1946 by a great man named Leonard Read. He was no relation to me. He spelled his name R-E-A-D. But after World War Two, he looked around and realised that there was no organisation in the world that was full-time devoting itself to explaining and defending how free enterprise, the profit motive, private property, how that system works. He created the foundation for the purpose of spreading those ideas.

Over the years, our message and our principles have not changed. But the focus of our message and principles has somewhat changed. It’s become a bit more focused on young people, specifically high school and college age. We do that through programmes in-person all over the country, in the US, and abroad, as well as the website videos, on the website courses, you name it. All designed to explain how freedom and free markets work.

Gene Tunny 04:31

You mentioned Leonard Read? Did he write that famous essay, “I, Pencil”?

Larry Reed 04:37

Yes, he did in December of 1958. That has had a remarkable impact on people all over the globe.

Gene Tunny 04:45

Absolutely. I think it shows how complex even products that we think of as simple are and there’s no way any central authority and this is what we discovered with the Eastern European socialist economies with the Soviet Union. You can’t plan this sort of thing. You need to rely on the market mechanism to be able to produce even something that we might think as mundane as a pencil. I’ll put a link in the show notes to that essay because I think it’s brilliant. I think Milton Friedman quotes from it in Free to Choose, if I remember correctly.

Larry Reed 05:23

After someone reads it, they are well-armed to take on a central planner type. Every time I run into somebody that thinks that he knows enough that he can plan an economy of millions of people, I always say, “Wait a minute. You don’t even know how to make a pencil, let alone an entire economy.”

Gene Tunny 05:44

That’s right. You got to think about it. You’ve got to get the timber, you’ve got to cut it, you’ve got to get the graphite, etc., combine them all together. A great essay. Is Hazlitt associated with the foundation? He wrote that book, is it “Economics in One Lesson”? Is that one of the books that you promote?

Larry Reed 06:07

Yes, it is one of the more popular offerings from FEE in the last 70 years. Henry Hazlitt was long associated with FEE. He was one of the charter members of its board of trustees, a good friend of our founder, Leonard Read, and was on the board for decades. I’m happy to say that I knew him personally for the last decade of his life.

Gene Tunny 06:33

That book has had a big impact too. He must have been pleased with how that was received.

Larry Reed 06:40

Yes.

Gene Tunny 06:42

Very good. We might get on to some of the topical issues. The big economic issue at the moment is inflation. We’re seeing accelerating inflation in advanced economies. In a way, this probably should have been expected, given the big expansion in the supply of money that we’ve seen in United States, United Kingdom, Australia, to a lesser extent, but still a substantial increase.

Now, we’re starting to see that in inflation. Some people are saying it’s temporary. There could be some temporary element, there’s a supply-chain disruption. Who knows? My view is that it is something we’ve got to worry about. People are starting to talk about, “What do we do about it?” There’s a monetary policy response. But there are people who are thinking, “Let’s be careful because we don’t want to constrain economic growth and cost jobs. Why don’t we look at price controls?” You’ve written a great article, “Price Controls: Killing the Messenger If You Don’t Like the Message”, could you talk about what you mean by that please?

Larry Reed 07:51

Yes, I’d be happy to. We should think of prices as conveying immense amounts of information. Prices result from the free interplay of supply and demand, which in turn reflect the individual choices, ambitions, opportunities, tastes, and you name it of endless consumers in the marketplace. Prices don’t accidentally arise. The notion that you can fiddle with them by government decree with no consequences is ridiculous. It’s anti-science. It’s anti-economics. Prices are what they are in free markets for good reason because they’re reflecting conditions of supply and demand and people’s preferences and tastes and so forth.

When government comes in and says, “We don’t like prices rising as fast as they are. We’re going to impose controls to prevent that from happening.” First of all, it is treating a symptom of something else, it’s not dealing fundamentally with the issue at hand that produced the rising prices in the first place. It’s a political diversion. It’s politicians, who on the one hand, have got their hand on the printing press cranking out easy money at low interest, easy credit, and pumping up prices. At the other hand, they got a club in their fist and they want to beat people for responding the way you would.

If at any time you massively increase the quantity of something, it will affect the value of every single unit and they’ve been expanding the money supply immensely. If they put on price controls to prevent prices from being at some higher level, all that does by treating a symptom not the cause, is to create economic problems of their own. It creates shortages, for instance, if the market price of something would be $10. But government says, “No, you can’t charge any more than $7.” What happens is at $7, more people want the stuff and fewer suppliers will provide it. That would be the case at $10. You got a double whammy. You got less of the stuff coming on the market and more people wanting it at that artificial price. Bingo! Long lines at stores and shortages. People who propose price controls are ultimately anti-economic science and oblivious to the effects that we have seen historically, literally for centuries with no exception.

Gene Tunny 10:22

One thing about this issue, it seems to be something that the vast majority economists seem to be in agreement on which is good. You quoted in your article, there was an Op-Ed in The Guardian. The title was, “We have a powerful weapon to fight inflation price controls, it’s time we consider it” and Paul Krugman responded, “I am not a free market zealot. But this is truly stupid.” Absolutely. You’ve had experience in the US in living memory of price controls? Was it in the 70s that Nixon’s Whip Inflation Now and then Carter, perhaps with their controls on the price of gasoline that did lead to these big lines at gas stations in the States?

Larry Reed 11:21

The Whip Inflation Now thing actually was Gerald Ford. That was a campaign to get people to wear buttons that said, “whip inflation now” as if that would somehow whip it. Before him, it was Richard Nixon, who actually imposed wage and price controls. First, in the form of a 90-day freeze on virtually all wages and prices and then followed by government directed prices that limited by how much they could rise.

Every economist worth his salt knows that that produced disaster. That was no solution to anything. It gave us long lines at the gas pump and empty shelves in the stores. It was ridiculous. I used to know a man, he’s deceased now, but he was chairman of the Council of Economic Advisers, Paul McCracken, great economist. He cautioned Nixon not to do this. He said it’s never worked in 4000 years, don’t even think of it. Nixon went ahead anyway and shortly thereafter, McCracken resigned.

We’ve had lots of experiences. Lots of countries have had experiences with it. Revolutionary France in the 1790s, the government imposed the so-called Law of the Maximum, which said that government will fix the maximum price of things and the penalty for violating that will be death. They guillotined a lot of people for that and it did not make anybody produce more of anything.

Gene Tunny 12:55

That’s a negative supply shock too, isn’t it? Killing your producers? Terrible. That’s some good stuff there. I take it your view would be that inflation is a monetary phenomenon. Therefore, the key to controlling it is to get your monetary policy, right? This isn’t about monetary policy, but I’m guessing that’s where you’re coming from. There’s a big debate about what that means and role of the Fed, etc. But would that be your view?

Larry Reed 13:33

Inflation, Milton Friedman famously said, “is anywhere and everywhere a monetary phenomenon.” I’m sympathetic to that but I also point out that there’s another dimension here. Prices ultimately reflect, to a great extent, what’s going on in people’s minds. There are extraordinary circumstances, but there are occasions when you could have soaring prices without an increase in the money supply. One of the examples I like to point to is the Philippines.

During World War Two, when the Japanese had occupied it, they imposed their currency on the Philippines. General MacArthur was attempting to ultimately take the Philippines and he was jumping from island to island, getting closer and closer. The Japanese weren’t dumping any more of their paper money into the Philippines and yet, prices would leap every time word came that MacArthur was now a few hundred miles closer. That’s because people’s estimate of the value of that money declined because they knew if he gets here and takes the Philippines back, the Japanese currency will be completely worthless. Given that prospect, we’re happy to pay any price to get anything now while it’s worth something. That’s a rare occasion.

We’re not facing that circumstance today. We do have to fall back on the fact that today’s inflation that we’re witnessing is not a Philippine-style rise in prices. It is a monetary phenomenon, reflecting the massive increase in money and credit that our Federal Reserve in the US has manufactured. Many central banks around the Western world have done as well.

Gene Tunny 15:21

That’s a great story about the Philippines. I’ll have to look that up. MacArthur is a great hero to many of us in Australia because there’s a view that he essentially saved Australia. He based himself in Australia after he fled from the Philippines and he had an office a little bit down the road from where I am here in Brisbane in the ANP Building during World War Two. That was one of the locations from which he waged the war in the Pacific. Great story. Very good. That’s a good discussion of price controls, Larry.

I’d also like to ask you; you’ve also written about whether Jesus was a socialist. I’d like to ask you about that. Also, I don’t know if you saw the recent controversy around Dave Ramsey’s comments. Dave Ramsey, the esteemed financial commentator in the US.

Larry Reed 16:21

Yes. Although I may not be aware of recent comments that you’re bringing up.

Gene Tunny 16:26

Essentially, someone asked him a question, “As a Christian, should I feel bad if I raise the rent on my properties to the market rent, and then that means that some of my tenants can’t afford to live in those properties anymore. It causes them financial hardship.” Dave Ramsey’s comments weren’t received by many, particularly on the progressive side of politics because he said, “There’s no problem with doing that because it’s not me that is evicting you. It’s actually the market.” He was appealing to the market. I’d like to ask you about that. If you haven’t seen his comments, and it’s probably worthwhile considering the whole context of them, feel free not to comment on that.

But I would like to ask you about your work on, was Jesus a socialist? Could you take us through what your analysis of that question has revealed, please, Larry?

Larry Reed 17:29

I’d be happy to, Gene. In fact, the best way to begin that is to tell the story from the New Testament that answers your first question. Along the lines of what Dave Ramsey apparently said. Jesus Himself told nearly 40 parables and most of them deal with things like eschatology and salvation and so forth. But at least three of them have very strong economic content.

One of them that’s relevant to what you’ve just raised is the parable of the workers in the vineyard. This is about a man who apparently owns a substantial vineyard and he needs to bring the grapes in, it’s harvest time. Jesus tells a story of how he gets a group of workers together first thing in the morning and he says, “I’ll give you each a denarius for a full day’s work.” They say, “Okay.” They go out and they start picking grapes.

Around noon time, the owner realises, “I’ve got to get even more out there.” He gets another group together, and he says, “Look, I know that the day’s half-gone, but if you’ll go out for the rest of the day and pick grapes, I’ll give you each a denarius.” Finally, at the end of the day, with maybe an hour before a dark and he still has grapes that have to come in, he calls another group of workers and says, “If you’ll take time out, go out for an hour and pick some grapes, I’ll give you a denarius.”

Later, according to the story, the owner gathers all these three groups of workers together to pay them. The first group is very angry, because they’re saying, “We worked a full day and you’re giving us the same as those guys who showed up at the later, even the ones that only worked for an hour.” You would think that if Jesus were a socialist, he would have the vineyard owner saying, “You’re right, this is unfair. I’m sorry about that.” But instead, Jesus has the vineyard owner say to these guys, “It’s my money. You signed the contract. I’m giving you what I promised. Now, take it and get out of here.”

That’s Jesus basically saying, private property, voluntary contract, keeping your word, honest dealings, and I think supply and demand all defend what the vineyard owner is saying. Presumably, he had to pay that last group of workers a hefty premium to get them. They probably worked for somebody else all day and now, they’re being asked to go for yet another hour, he has to pay them a premium to do that to bring the grapes in.

Jesus does not say, “Let’s be compassionate and give this group the same as that group or in proportion to their time.” Instead, he says, “Each man is getting what he was promised when he agreed to by contract.”

I think Dave Ramsey is essentially right. There is no obligation, moral or otherwise, for someone to endure a loss or to get less than he could for property that’s his when market conditions suggests that a higher rent is worth it. It’s the higher rent that will likely bring more housing units into the marketplace, which will solve the problem in the long run anyway.

Gene Tunny 20:47

By inducing more supply, more investment in rental properties. That’s a good point. I’ll put a link to the article on Dave Ramsey. I thought it was a fascinating discussion. Also, I’ll find something to link to that. Was it a parable?

Larry Reed 21:12

The parable of the workers in the vineyard. I discuss that in more detail in my book, “Was Jesus a Socialist?” if anybody cares to look at it from that perspective.

Gene Tunny 21:25

It’s an interesting question. I must say, I’m surprised that it is something that’s up for debate. Is this because a lot of people on the left side of politics have appealed to Christianity as a way to support what policy positions they’re advocating for?

Larry Reed 21:51

I think so. I don’t give the left much credit for their economics, but I do give them credit for their marketing, because they’re always out there saying, “Go with us because our way of thinking will produce more for people. We’re going to take care of people. We’re going to give them stuff. It won’t cost them anything, they won’t have to worry about where it’s coming from.” The rhetoric is always very promising, but the results and the outcomes are pretty dismal and miserable.

A lot of people come to this mistaken conclusion that Jesus may have been a socialist because He talks so much about helping the poor. But I think in capitalist countries, where more wealth is produced, you have more giving and more caring and more philanthropy than you have in socialist countries. In fact, even government-to-government foreign aid is primarily from the predominantly capitalist countries to the predominantly socialist recipients.

If Jesus came back today and spoke to a large audience of people and said, “I was interested in the poor. Tell me what you all did for the poor?” If you raised your hand and said, “I voted for all the politicians who said they’d take care of that.” I don’t think He’d be impressed. I think He would say, “You’ve resorted to theft? I told you not to steal and I told you furthermore that the poor are folks that you, from the generosity of your hearts and your own resources, ought to help. I never told you you could pass it off to politicians. If they solved the problem, it’ll be at 10 times the price.”

Gene Tunny 23:33

Yes, that’s a good point. I’ll have to come back to this in a future episode and looking at what are the best ways to reduce poverty of it if we’ve actually figured that out? Clearly, the welfare state that we’ve got in countries like Australia, the UK, to a lesser extent, the US, you could argue it has relieved some absolute poverty. But at the same time, it does, arguably, traps many people in poverty in a way.

Larry Reed 24:07

To make a long story short, you can’t solve poverty if the pie is shrinking. You have to make a bigger pie and there is no known system in the history of mankind that makes a bigger pie faster than the system of freedom and free markets.

Gene Tunny 24:24

Absolutely. We’ll take a short break here for a word from our sponsor.

Female speaker 24:33

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

Gene Tunny 25:03

Now, back to the show. The other things I wanted to chat with you about before we wrap up are some recent articles of yours. There was a piece, “Why I Wish We Could Put Chester Arthur and Joe Biden in a Room Together to Talk Infrastructure Spending”. I’d love to hear about that, particularly about Chester Arthur, because he’s one of the lesser-known US presidents.

Larry Reed 25:34

Yes, he is one of the lesser-known ones. He served less than one full term. He took office as vice president, became president when James Garfield was assassinated in the middle of 1881. He served about three and a half years, the rest of Garfield’s term. He’s often written off as sort of—he was tied to the corrupt Tammany Hall machine in New York and so forth. On the good side, historians will remember that he did support civil service reform and made the federal government a little less corrupt. That was a good thing.

But he also understood the Constitution and appreciated it more than Joe Biden does. I wrote that article pointing out what Arthur’s view on infrastructure spending was compared to Joe Biden’s in America. We recently went through a national discussion, a bill passed, supposedly bipartisan. It was a massive, almost $2 trillion in infrastructure spending.

An equivalent bill was called a Rivers and Harbors Act and Arthur vetoed it. In his veto, he raised some great objections, all of which are applied to the bill that Biden recently signed. He said, “This is way too much. There’s no way that a government of our size can know where all this money’s going to go. It looks like a small portion of it is even earmarked for infrastructure. There’s a lot of pork barrel stuff in here. Quit doing this, loading our bills and all this other nonsense.”

That’s what Joe Biden should have said about the recent infrastructure bill. But he was all for it from the start. I think about 10% was aimed at infrastructure, the rest is pork barrel and progressive agenda stuff. I would like to put Joe Biden and Chester Arthur in the same room and say, “Chester, go at it. Tell this guy what infrastructure is and why it’s wasteful to spend so much on.”

Gene Tunny 27:46

At the same time, would you say that there is an issue with infrastructure in the US with the quality of infrastructure? This is something I’ve chatted with Darren Nelson about in a previous episode and Darren’s view was, “We need to get the private sector more involved in public-private partnerships, perhaps.” Do you have any thoughts on that, Larry? What is the quality of infrastructure like? Is there a problem to solve and how would you go about it?

Larry Reed 28:19

With infrastructure, I think there has always been some measure of problem, because government has assumed from the start that this is a legitimate profits of government. Once you do that, you have to at least expect that they’ll keep it up and do it right and keep an eye it to prepare for when it falls apart. But politicians come and go and they’re more interested in the flash in the pan. They show up to cut the ribbon at the start of a bridge that’s being built. But once it’s built, it’s no longer politically sexy to stand around and keep an eye on it in case it collapses because they figure, “If that happens, it’ll be a long after I’m gone. Why should I care?”

You do end up with politicians putting more focus on the construction of the stuff and less on its repair and maintenance. That’s where you can get a bigger bang for your dollars or if you will, by writing contracts with the private sector that require ongoing maintenance and inspection and so forth. I wouldn’t want the government with its own employees and its own infrastructure monopoly becoming a bridge builder. They don’t know about bridges. That’s best done by the private sector. They should be contracting with private sector providers to do it and monitor the contracts. Put all the provisions in those contracts that would require proper maintenance.

Gene Tunny 29:52

That’s a good point. It’s one of those great challenges, how do you get the infrastructure that you need cost-effectively? In Australia, one of the problems we’ve got, there’s a lot of government investment going into infrastructure at the moment that it seems to be at very inflated prices all over the country. There’s a powerful construction union, which is allied with the government in the state that I am, Queensland, which has ended up inflating the cost of any infrastructure project by 30% or 40%. It’s quite extraordinary and taxpayers end up wearing that.

Larry Reed 30:43

I wouldn’t be surprised if you have some of the same kind of history in Australia, as we do in the US. But there’s a lot of history in America of government spending on infrastructure that produced disaster, because it dangled subsidies in front of private contractors, who then went after the subsidies and cared little about how well the infrastructure itself was actually built. The best example is America’s transcontinental railroads.

There were five of them built across the country. Four of them got extensive federal government land grants and subsidies. Not only land grants, but they got subsidies on a per mile basis. Four of them threw down tracks just to get the goodies. And in fact, the two famous ones that met at Promontory Point, Utah, as they were getting closer, they were crossing over to the other companies’ territory and blowing up the tracks because they wanted to get more subsidies by laying more track down. There was only one transcontinental that got no government subsidies. That was James J. Hill’s’ Great Northern. It was not by coincidence the only transcontinental that never went bankrupt because they had to put down tracks when it made economic sense, not because the government was throwing money at them,

Gene Tunny 32:06

Another good example I’ll have to investigate. This is the last question; I’d like to ask about some of your other writings and it looks like you have been prolific or regular traveller. Obviously, COVID cut back on all of our travels, but you’ve written some great pieces. You’ve made observations on what we can learn from other countries around the world and in some places that you generally don’t hear about. One of your articles is, “The World’s Oldest Republic Reveals the Secret to Peace and Prosperity”.

Larry Reed 32:46

Yes.

Gene Tunny 32:48

You’ve also drawn lessons from economic history in Italy. I think it was in Italy, your article, “Why the Separation of Bank and State is Important”. Would you be able to explain what is that secret to peace and prosperity? How that’s revealed by the world’s oldest republic and also the point about the separation of bank and state, please.

Larry Reed 33:13

Both of these articles, you can at FEE.org and you can find them also on where I blog on lawrencewreed.com. With regard to the oldest constitutional republic, we published that last Sunday, it’s about the tiny country of San Marino. It’s the fifth smallest country in the world. It’s entirely enveloped by Italy. It’s in the northeast of the Italian peninsula. Right in its middle is this big rock called Mount Titan.

It’s the oldest Republic in the world, dating back to the early fourth century when that chunk of territory was gifted from its private owner, a woman in Rimini, now part of Italy. She gifted it to a Christian stonemason who had fled there to avoid the persecutions of the Emperor Diocletian. She said, “You can have this property.” He, in effect, declared the first, and now the oldest constitutional republic.

Only twice in its history has it been invaded. In both cases, within a matter of months, the pope ordered the invaders out, lest they be attacked by papal forces. They maintained their independence all these years. They have a GDP per capita that’s a shade below that of the United States. The secret is that they have kept themselves economically free.

Freedom House is non-profit that rates countries as to their degree of economic freedom and they rate San Marino as the 12th freest country in the world. Its capital gains tax is only 5%, which is a third of what ours is in the US. It’s much lower than it is in the European community. A great little success story in that quiet little enclave in the Apennine Mountains.

The other example or article that you’re referring to comes from Genoa, on the other side of northwest Italy. Genoa was, for hundreds of years, an Italian city state, much as Pisa and Venice and Gaeta and some others were. The secret to its success, more than any other single entity, was a private bank that was so private, it was in effect, a country within a country. It was called the Bank of St. George.

When it was chartered in 1407, the separation between the bank and the government of Genoa was as complete as it could get. It basically said, “We’re not paying any attention to you and you don’t have to pay any attention to us but you need us.” Because the bank consistently bailed out the state when it got in trouble. But the bank was very firmly on a gold standard, it had a policy of not issuing any paper for which you did not have gold coin on deposit. It was reliable, it was honest, and for hundreds of years, until Napoleon invaded and shut the bank down, it was a rock of stability and a big reason that Genoa became a maritime trading giant in the Mediterranean.

Gene Tunny 36:37

This wasn’t something positive Napoleon brought then. That’s interesting, I have to read more about it. How does it illustrate that the separation of bank and state is important? How does it illustrate that?

Larry Reed 36:52

The Bank of St. George exerted an anti-inflationary pressure on the government of Genoa. Governments love to inflate, and the moment they get in charge of banking, that’s what they do. They print the stuff and makes it easier for them to pay their bills and to run deficits and so forth. The Bank of St. George did not abide by that. They wouldn’t have recognised any coin or paper from the city of Genoa if it hadn’t been sound. Their example spoke volumes to the people of Genoa and across Europe. Here’s a bank that’s in great shape. It has to bail out the government of the region every now and then because they’re profligate, but the bank is not.

I think the separation of bank and state is an issue I wish we spent a lot more time on these days. We’ve assumed that government should be orchestrating the banking system, but the history of government and banking is not a positive one. They take over banking whenever they can because it’s their avenue to depreciating and debauching currency.

Gene Tunny 38:06

I think it’s a big concern when governments set up these banks or shadow banks to promote particular policy objectives. I remember, back in the late 2000s, there was a lot of talk about an infrastructure bank that was something the Obama administration was looking at but didn’t go through with. There were similar moves here in Australia that didn’t amount to anything because it reminded people of what happened in the 80s with the state banks of South Australia and Victoria, the Tricontinental merchant banking arm and they got heavily involved in speculative property development, if I remember correctly, and ended up going bust and costing taxpayers billions of dollars. People still remember that. There’s a risk if governments get involved in banking and financial shenanigans.

Larry Reed 39:06

Too often anyway, we judge government by the stated intentions rather than by actual outcomes and results. If a government came to me and said, “What do you think about us getting into the banking business?” I would probably say to them, “Aren’t you in the post office business already? Aren’t people complaining about that? Why don’t you get that right before you go into banking?” In US, everybody complains about the post office. What makes you think the same entity can manage a nation’s banking system?

Gene Tunny 39:38

Exactly, very good. Larry, any final words? Anything you think we should be thinking about or looking out for?

Larry Reed 39:48

I would say this thing that people everywhere should be thinking more than they are about the importance of individual liberty. We take it for granted in places where we’ve had a lot of it. But there’s nothing about it that’s either automatic or guaranteed, and it can disappear with bad ideas almost overnight. And yet, life without liberty, in my estimation, is unthinkable. We better think about it. I can’t imagine a life in which you aren’t living yours. You’re not making your choices, somebody else is imposing their choices on you. They’re living their lives through you.

I can’t imagine living in that environment as they, to a great extent, do in places like North Korea or Cuba. Liberty is precious, it’s rare in history. It’s never guaranteed and it deserves the conscious deliberation, and sometimes sacrifice of everyone wants to be a free person.

Gene Tunny 40:50

Absolutely. It just occurred to me, we probably should have touched on the pandemic. Feel free to respond to this if you like. Otherwise, we can wrap up. In Australia, we’ve had quite severe restrictions relating to COVID at times and they’ve raised eyebrows around the world. People have thought, “What’s going on there in Australia?” But what a lot of people in Australia say is that’s necessary for the public good.

You may bang on about civil liberties and I have, at times, think some of these restrictions have been excessive. But you get a lot of pushback and people say, “You think you’ve got the rights to do that but you don’t have the right to spread a deadly virus and spread the disease.” That’s how they push back. I agree, I think we’ve lost the original commitment, a strong love of liberty that we’ve had. I think we’ve lost that. People are terrified of this virus and they push back with that line, “You don’t have the right to spread the virus.” I don’t know how to win those arguments, to be honest.

Larry Reed 42:12

There’s something to be said for this and that is that this circumstance was unprecedented and it’s not over yet. That the jury may not yet be completely in with all irrelevant verdicts. I have a sense though, that the more we learn, the more of this we go through, the more experience we have with it, the more we’re likely to look back and say, “Those lockdowns were counterproductive. The mask mandates went on far longer than they should have, if they ever should have been in existence in the first place.” I think a lot of the tools that government employed will come under more scrutiny and questions.

If you’re a cheerleader for them now, I would say, “Why don’t you hold off because you may be embarrassed in the not-too-distant future?” But what concerns me the most is that all of this totalitarian impulse sets dangerous precedents because people who love power, who want it to be concentrated in government and think that the right people will do the right things, they don’t stop with the power that they get. They usually say, “It’s necessary now, I’ll hold on to it.”

In the long run, if we allow this COVID experience to set the new norm for government intervention, radical intervention in our lives across a broad front, we may look back and say, “We would have been a lot better off if we simply endured COVID.” Because one of the worst things that people can do is to consign their lives to politicians. There are a lot of things they end up regretting whenever they do that.

Gene Tunny 43:51

I think that’s a good point, Larry. We might end there. Thanks so much for your time. I enjoyed that conversation. Some great points and excellent historical examples that I’m going to have to look up and add to my arsenal of historical examples that I can bring up. Very good. Lawrence W. Reed, President Emeritus of the Foundation for Economic Education. Really enjoyed the conversation. Thank you so much.

Larry Reed 44:20

My pleasure. Thank you, Gene.

Gene Tunny 44:22

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

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

Categories
Podcast episode

EP119: What Tony Makin taught us about macroeconomics

The late Professor Tony Makin was a leading Australian economist who made major contributions to the economic policy debate in Australia on the balance of payments and the effectiveness of fiscal stimulus, of which Tony was highly sceptical. In Economics Explored EP119, Former Ambassador to the OECD for Australia Dr Alex Robson, now an Associate Partner at EY, reflects on Tony’s contributions to open economy macroeconomics and the policy debate.  

About this episode’s guest – Dr Alex Robson

Dr Alex Robson is Associate Partner at EY. He has previously been Professor of Economics at Griffith University, Australian Ambassador to the OECD, Chief Economist for the Australian Prime Minister, a lecturer at ANU, and Director at Deloitte Access Economics. He is the author of Law and Markets, and has consulted to ASX 200 companies, Australian and NZ Government Departments and the OECD. Alex has a PhD and Masters in Economics from University of California, Irvine, USA.

Celebrating the Life of Anthony John Makin

Gene’s Economics Explored conversation with Tony: A Fiscal Vaccine for COVID-19 with Tony Makin – new podcast episode

Tony’s critique of the 2008-09 Australian Government fiscal stimulus: Did Australia’s Fiscal Stimulus Counter Recession?: Evidence from the National Accounts

Tony’s paper for the Minerals Council of Australia which prompted a critical response from the Australian Treasury: Australia’s Competitiveness: Reversing the Slide

Australian Treasury’s 2014 Response to Professor Tony Makin’s Minerals Council of Australia Monograph – ‘Australia’s Competitiveness: Reversing the Slide’

Tony’s 2016 paper prepared for the Treasury reiterating the arguments he previously made about the ineffectiveness of fiscal stimulus: The Effectiveness of Federal Fiscal Policy: A Review 

Alex’s papers with Tony (NB full articles behind paywalls): Missing money found causing Australia’s inflation, The Welfare Costs of Capital Immobility and Capital Controls 

Gene’s paper with Tony: The MMT Hoax

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

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

Categories
Economics Explored Live

US inflation and Aussie jobs data – 15 October 21 livestream

Economics Explored Live for 15 October 2021, the first edition of what I’m planning to be a weekly livestream, covered:

  • the growing concern internationally about accelerating inflation, prompted by the latest US CPI figures (see chart below;
  • the September ABS Labour Force data revealing big drops in hours worked and workforce participation in the locked-down economies of NSW and Victoria; and
  • my state of Queensland’s relatively low vaccination rate (72% for 1st dose vs 84% nationally) and what it could mean for the state’s reopening and the economy – it’s pretty obvious the Queensland Premier should set a date for re-opening ASAP to encourage people to get vaccinated promptly, as suggested by the Queensland branch of the Australian Medical Association.

Here’s the video of the livestream, which was streamed to YouTube and LinkedIn Live:

Regarding inflationary pressures in advanced economies, I quoted leading market economist Stephen Roach from his recent Financial Times op-ed The sequencing trap that risks stagflation 2.0:

As brilliant and lucky as they have been, today’s generation of central bankers is afflicted with the same sense of denial that proved problematic in the 1970s. Due to a lack of experience and institutional memory of that tough period, the risk of another monetary policy blunder cannot be taken lightly.

Certainly, central banks have been running a massive monetary policy experiment with ultra-low interest rates and Quantitative Easing, which have been associated with double-digit growth rates in money stocks. I agree with Roach regarding the potential for a “monetary policy blunder”.

Other links relevant to the livestream include:

Pete Faulkner’s post Labour Force; national data hit by lockdowns while QLD powers ahead

QEW post featuring my The Other Side interview on Australia’s economic suicide

Vaccination numbers and statistics

ABS: New data shows lockdown impacts on business turnover

Cross-posted at http://www.queenslandeconomywatch.com. Please get in touch with any questions, comments and suggestions by emailing us at contact@economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

EP97 – BS jobs critique + CBDC thoughts from Dr Nicholas Gruen

David Graeber’s BS jobs thesis (previously covered in EP95) lacks microeconomic foundations, according to Dr Nicholas Gruen. In EP97, Economics Explored host Gene Tunny speaks with Nicholas about BS jobs and also about Central Bank Digital Currency (CBDC). Nicholas is a big believer in the potential of CBDC, which he has written about in the Financial Times.

About Dr Nicholas Gruen

Dr Nicholas Gruen is a policy economist, entrepreneur and commentator on our economy, society and innovation. He is CEO of Lateral Economics, Visiting Professor at Kings College London Policy Institute and Adjunct Professor at UTS Business School.

He was a Chairman of the Open Knowledge Foundation (Australia) (ending 2020), Chairman of international aged care management software provider Health Metrics (ending 2019), Council Member of the National Library of Australia (ending 2016), chaired the Federal Government’s Innovation Australia (ending 2014) and chaired the Australian Centre for Social Innovation (TACSI) (ending 2016). He was the founding chair of Kaggle which was sold to Google and is an investor in numerous other Australian and international start-ups. He was also founding chair of HealthKit (now Halaxy). He has advised Cabinet Ministers, sat on Australia’s Productivity Commission and founded Lateral Economics and Peach Financial in 2000.

Links relevant to the conversation

Re. BS jobs:

https://queenslandeconomywatch.com/2021/07/10/people-escaping-bs-jobs-covered-in-my-latest-podcast-episode-and-going-into-business-for-themselves/#comments

https://www.griffithreview.com/articles/trust-competition-delusion-gruen/

Re: CBDCs:

https://clubtroppo.com.au/2021/05/19/central-banks-get-serious-on-digital-currencies-2/

https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

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

Categories
Podcast episode

EP68 – COVID and Wartime: Comparison of economic impacts

Economics Explored episode 68 COVID and Wartime features a conversation on whether COVID can be compared to wartime, which considers the different scales and scopes of the shocks, and what it all means for prospects for economic recovery. Economics Explored host Gene Tunny, an Australian professional economist and former Treasury official, speaks with businessman Tim Hughes, also based in Brisbane, Australia.

Gene and Tim conclude that a comparison of COVID to wartime isn’t valid. One reason is that World War II required a complete reorganisation of the economy to maximise production for the war effort, while COVID has involved restrictions that have reduced economic activity. 

Links relevant to the conversation include:

Comparing COVID-19 to past world war efforts is premature — and presumptuous

US Council on Foreign Relations Backgrounder on The National Debt Dilemma

Brookings on What’s the Fed doing in response to the COVID-19 crisis? What more could it do?

Australia’s Boldest Experiment (excellent book on Australia’s wartime economy)

Robert Gordon’s The Rise and Fall of American Growth (outstanding book by a leading US economist containing a great discussion of America’s wartime economy)

Aussies over-confident after being over-compensated by Gov’t for COVID-recession

Mint security lapse amazes judge (story about theft from the Australian Mint in early-to-mid 2000s)

Finally, the word Gene got stuck on at 6:55, irredentist, means, “a person advocating the restoration to their country of any territory formerly belonging to it”, according to Oxford Languages.

If you’d like to ask a question for Gene to answer in a future episode or if you’d like to make a comment or suggestion, please get in touch via the website. Thanks for listening.