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Podcast episode

Exploring the US Banking Crisis with Addison Wiggin – EP192

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

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

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

About Addison Wiggin

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

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

What’s covered in EP192

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

Links relevant to the conversation

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

https://jointhesessions.com/ee/

Presentation by Addison that Gene mentions early in the episode:

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

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

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

Gene Tunny  00:06

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

Addison Wiggin  01:53

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

Gene Tunny  02:07

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

Addison Wiggin  03:17

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

Gene Tunny  10:46

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

Addison Wiggin  11:52

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

Gene Tunny  12:30

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

Addison Wiggin  13:04

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

Gene Tunny  13:07

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

Addison Wiggin  14:23

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

Gene Tunny  16:04

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

Addison Wiggin  16:30

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

Gene Tunny  18:25

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

Addison Wiggin  18:32

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

Gene Tunny  24:14

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

Addison Wiggin  24:53

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

Gene Tunny  26:19

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

Addison Wiggin  26:42

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

Gene Tunny  31:04

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

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Gene Tunny  31:39

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

Addison Wiggin  32:00

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

Gene Tunny  36:11

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

Addison Wiggin  36:36

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

Gene Tunny  38:45

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

Addison Wiggin  39:22

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

Gene Tunny  41:43

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

Addison Wiggin  41:51

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

Gene Tunny  46:31

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

Addison Wiggin  46:43

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

Gene Tunny  49:20

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

Addison Wiggin  49:43

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

Gene Tunny  51:31

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

Addison Wiggin  51:40

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

Gene Tunny  52:09

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

Addison Wiggin  52:14

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

Gene Tunny  52:23

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

Addison Wiggin  53:03

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

Gene Tunny  53:59

Yeah,

Addison Wiggin  54:01

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

Gene Tunny  54:07

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

Addison Wiggin  54:28

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

Gene Tunny  56:09

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

57:10

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Credits

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

Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

US debt ceiling & Gene’s Aussie debt ceiling experience in the GFC | Emerging economies debt crisis – EP190

Host Gene Tunny discusses the US debt ceiling and the emerging economies debt crisis with his Adept Economics colleague Arturo Espinoza. Gene shares a memory of his own experience with the debt ceiling the Australian Government had at the time of the 2008 global financial crisis (GFC). 

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

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

What’s covered in EP190

  • [04:35] US debt ceiling negotiations. 
  • [09:18] US hitting its debt ceiling.
  • [14:51] The trillion-dollar coin as a possible workaround. 
  • [16:14] Spending and revenue challenges. 
  • [26:05] Australian debt ceiling legislation in 2008-09. 
  • [29:05] US debt limit and consequences. 
  • [33:25] Argentina’s economic struggles. 
  • [40:02] IMF’s Nightmarish Identity Crisis & emerging economies debt crisis. 
  • [42:27] China’s role in emerging markets debt. 
  • [45:13] PNG and China. 

Links relevant to the conversation

Links relevant to the conversation

Noah Smith’s Subtack post:

https://open.substack.com/pub/noahpinion/p/the-debt-ceiling-deal-what-was-the?r=2hwg1&utm_campaign=post&utm_medium=email

Treasury to take ‘extraordinary measures’ as US hits debt ceiling | Financial Times 

Michael Knox’s note on the debt ceiling:

AUS_ESQ_230523_US government shutdowns and why US treasuries never default.pdf

https://www.whitehouse.gov/cea/written-materials/2023/05/03/debt-ceiling-scenarios/

Federal Spending | U.S. Treasury Fiscal Data

The future US fiscal crisis and how to avert it w/ Romina Boccia, Cato Institute – EP159 – Economics Explored

The IMF faces a nightmarish identity crisis

How China changed the game for countries in default | Financial Times

There Is No Chinese ‘Debt Trap’ – The Atlantic 

Fiscal Monitor April 2023

Argentina raises interest rate to 97% as it struggles to tackle inflation | CNN Business 

Argentina inflation smashes past every forecast to hit 109% | Reuters

Transcript:
US debt ceiling & Gene’s Aussie debt ceiling experience in the GFC | Emerging economies debt crisis – EP190

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning in to the show. In this episode, I chat with my adept economics colleague Arturo Espinosa about the US debt ceiling in the emerging economies debt crisis. We recorded this episode last week on Thursday the 25th of May. A few days before we learned the White House and the Republican leadership have agreed to a deal to avert the US government from running out of money and having to choose between paying bondholders or Social Security recipients. So please keep that in mind when listening to this episode. I thought the Republicans would hold out longer than they did and I was surprised they reached this agreement over the weekend, particularly given the new estimate of when the government will run out of money is June the fifth. That is Monday next week. They may have been worried about how the financial markets might react if an agreement wasn’t breached. And they wanted to avoid suffering politically for any market falls. Also, House Speaker Kevin McCarthy probably figured he needed to reach agreement with the White House over the weekend. So we could get the debt ceiling lifted by Congress this week. Apparently things can still go wrong, as the debt ceiling does need to be lifted by Congress. And it’s up to Speaker McCarthy to ensure his deal is backed by his Republican colleagues. From what I can tell the agreement between the White House and the Republican leaders doesn’t go far enough to fix the structural problems with the US deficit, which I’ve talked about on the show before. Prominent substack analysis Smith is written a manufactured crisis leads to an ineffectual solution. I’ll link to his post in the show notes because it contains a good summary of what the deal covers, including a freeze on discretionary spending in 2020 for 1% growth in 2025. And this will amount to a significant real cut in discretionary spending given inflation. However, as Arturo and I discussed in our conversation, the problem with the US budget is that a large part of it is non discretionary. Around two thirds of it is mandatory as a result of legislation and regulations defining eligibility for different government benefits. That’s an issue for budgets around the world. I should note of course, and we have a similar issue here in Australia. The point I’m making is that it’s very difficult to actually fix these budgetary problems without getting stuck into some major welfare programmes that that can be quite popular. So the Republicans got some concessions from the White House such as a spending freeze and expanded work requirements for food stamps. But I expect the US government will still have a sizable budget deficit and it will keep on accumulating debt. Again, the can has been kicked down the road, as they say. However, at least we may have avoided what could have been a new economic crisis for now. I’d be interested in your thoughts on the US debt ceiling? Do you think having a ceiling is good or bad? How can the US get its budget repaired? You can email me via contact and economics explored. I’d love to hear from you. As always check out the shownotes relevant links and information. I’m recording this introduction around 24 hours before this episode gets published. Anything major happens between now and then I’ll mention it in the show notes. Right oh, now on to the show. Thanks for tuning into the show. In this episode, I’m going to have a conversation about some topical global macro economic issues with my colleague at adapt economics. Arturo Espinosa, Arturo, thanks for joining me again on the programme. Hey, now happy to be here. Excellent. Out here. I thought given all of the the news around the US debt ceiling and the it’s unclear what these negotiations will bring that there’s a possibility the US Treasury could run out of money on the the first of June, according to Janet Yellen. So in early June, there are other estimates of when that will occur. But there’s a general view that things are going to be very difficult for the US Treasury in well next month. So yeah, we’re really at the The point in the negotiations was something has to happen, or else we’re going to have a real serious problem, aren’t we? So I thought we could have a chat about the US debt crisis first, then we might talk about the developing economy, debt crisis. And then if we get time, we might touch on what’s been happening in in Argentina with inflation and interest rates. There’s some big news coming out of there. So does that sound like a good approach? Good thing? Good agenda?

Arturo Espinoza Bocangel  05:29

Yes. It sounds interesting.

Gene Tunny  05:32

Very good. So when we’re talking about the US debt ceiling? Well, given we’re talking about I should know that we’re recording this on the On Thursday, the 25th of May. Now when this episode comes out, the week after, who knows? I mean, something could have happened, there could have been some development. I mean, I’m expecting they’ll just go right down to the wire, though. The Republicans, they will just hold out as long as they can. Before they agree to some package or some they make some compromise with the White House, with Biden and with the Democrats. Just because it’s politically advantageous for them to do this. And so there’s politics involved. And it’s very difficult to, to see how that how this, how this will play out. My view is that we won’t have the US government defaulting, there may be some sort of shut down for a few days, a week, a couple of weeks. The US government has shut down in the past. I mean, it’s shut down some agencies that shut down some national monuments you couldn’t get in to see them. And there were public servants that were temporarily laid off. But generally the US government does meet its its obligations to bondholders. It hasn’t defaulted. In fact, there’s a clause in the amendment to the Constitution that says it has to respect the the I think the executive has to respect the full faith and credit of the US or make sure that that is implemented. Was it the 14th Amendment, I’ll put it in the show notes. But I think it’d be it’d be such an extraordinary situation to see. This era, the US government effectively run out of money, and then not have to pay bondholders. And this is, this is something that Michael Knox has written about in a really good note that I’ll link to in the show notes, where Michael writes that he’s written this note US government shutdowns and why US Treasuries never default. And what Michael’s written so Michael is Chief Economist at Morgan’s here, a major financial advisory firm in Brisbane here. So they, while a stock broking, they do stock broking wealth management. He said in practical terms, the first right of payment for US Treasury bonds continues when the government shuts down us taxation revenue is used to pay the money owed on US Treasury bonds first, and US government employees second, this system has continued from 7091 until this day, this is why US Treasury bonds never default. So, Michaels fairly optimistic about how this plays out. Michael’s a keen observer of, of what’s happening in the States. And I think he’s someone that I respect a lot. So let’s hope he’s, he’s right there. Because I mean, it clearly would be a really extraordinary thing if the US Treasury couldn’t pay or couldn’t meet its debt re payments or couldn’t pay the interest on Treasury bonds, it would be extraordinary. And this is all come about because they have a limit, a legislated limit on how much the national debt can be what the total amount of bonds on issue can be. And that was around I think it’s around 31 trillion. I had that. I’ve got that in the notes somewhere. I’ll put it in the show notes. And they basically hit that limit earlier this year. So around around January, so January 19, the US hit its debt ceiling of $31.4 trillion. And since then, what they’ve been doing, they’ve been taken what Janet Yellen, the Treasury Secretary has called extraordinary measures. So they’ve been not making certain payments that they would into trust funds and so forth. I think retirement benefits for public servants have I remember correctly. So there are certain things that they’ve they’ve been doing to delay the the inevitable when you you run out of money. This is a sort of thing you can do if you’re in a Treasury or a finance ministry there. There is some flexibility there but you you can only do that for so Long. Yep. So I’ll put this in the show notes. There was a great article in the Financial Times earlier this year, which explained this. And it wrote that in order to create additional borrowing capacity, Yellen on Thursday said the Treasury would cease investments into the civil service retirement and disability fund, as well as the Postal Service retiree health benefits fund. So that’s one of the extraordinary measures that they’re being taken to, to really just delay the inevitable when that lack of ability to borrow new money from the market, so the ability to issue new debt, I mean, eventually, you’re going to need to do that. And, and Janet Yellen has previously said that, that critical date is essentially first of June or early June. So as you said that before and we’re fast approaching that date, aren’t we? So? Any thoughts so far, Arturo?

Arturo Espinoza Bocangel  11:02

Well, he’s a very important issue, the in well, in the worst case, or worse scenarios, one effect on the global economy.

Gene Tunny  11:15

Right. So you’ve found there’s a note from the White House, isn’t there? They’ve done some analysis? Yes,

Arturo Espinoza Bocangel  11:21

yes. In the White House, they have published I article, which is a potential economic impact of various debt ceiling scenarios provided by the CEA, the Council of Economic Advisers. The point to be highlighted here is that, for example, there are some estimates about economic effect of debt ceiling standoff for the third quarter 2023. For example, in terms of jobs, the American economy would lose around a point three millions of jobs, just in terms of real GDP, annualised growth, they will lose 6.1. And then deployment will reach almost 5%

Gene Tunny  12:13

G. Given Yeah, okay, I’ll have to I’ll have to look at the night to see how they’ve calculated or given those job losses you reported, I would have thought unemployment would would end up being higher than that in that scenario. Now, a couple of things to think about. It’s from the White House. So it’s they’ve got an agenda clear. They want the debt ceiling increase, they want the Republicans to agree to that with very few conditions. So we’ll come in, it’s going to be self serving to an extent. And I mean, it’s one of these things, how do you actually model this? This scenario? We haven’t really seen it before. We’ve seen plenty of government shutdowns. before. I think Michael had an estimate in his note that there’s been a it’s been over a dozen since 1980. If I remember correctly, I’ll put a link to that. I thought, Michaels No, it was really, really great. So yeah, I mean, it’s clearly would be bad. I mean, it’s a US government just completely was unable to function effectively, because it couldn’t borrow any new money, but it still had to make it was still obligated legally to pay Social Security benefits Medicare, and it also still wants to fund defence and all the other things the US government does, there. Yes, it’s got a problem there. And there have been various ideas floated for how the government could possibly get around it, but the legality of them is a bit suspect. There’s a view that Well, Congress is effectively saying, one view I’ve heard is that, because Congress is sent two different sets of instructions to the White House to the executive, it’s up to the executive to the White House to choose which set of instructions to follow. So on the one hand, Congress is saying you can’t borrow any more than $31 trillion, you are sorry, you can’t have that as your total debt, anything more than that. So once you hit that, bad luck, you’re not going to get any new funding. But then, at the same time, Congress has also told the White House has told the executive government that you have to fund these social security benefits, you have to pay this in Medicare, etc. And so there’s this conflict there. And and so one view is that we’ll the Biden administration should just ignore the the debt ceiling, but then yeah, then it’s operating in a very legal grey area, or probably a red area or however you describe it, it’s possibly illegal. The other idea is is trillion dollar coin. Have you heard this idea that the because the US Mint has the power to well, the US Treasury, the US Mint can mint coins, it has the power to do that it could essentially meant a $1 trillion coin, like a platinum coin would stay $1 trillion. This was one. This was one idea this was floated over 10 years ago, the last time they had a debt crisis. And the idea was your walk that trillion dollar coin after the Federal Reserve, and then say, Oh, here’s our deposit, can you put this in our bank account? So suddenly, we’ve got an extra trillion dollars. And that’s another thing that the legality of it was probably questionable. And, and look, it doesn’t, it doesn’t solve the problem. And in that sort of getting into the modern monetary theory, approach, where the government’s just printing money, creating new money, whereas what you want to be doing is, you do want to be selling the bonds into the private market so that you’re not adding to the money supply with your fiscal policy. So it’s important to be able to borrow from the market if you are going to run deficits. So yeah, really, really tricky. tricky situation there. Any any questions on that? Arturo?

Arturo Espinoza Bocangel  16:14

Probably the equity or the share market is like, quite volatile at this moment, given this, this issue.

Gene Tunny  16:22

Yeah. And imagine what would happen. I mean, the markets would just go crazy if they don’t resolve, which tends to suggest that they will resolve it somehow, because the Republicans there. They believe in America, they don’t want to harm America, they’ve got donors who, who don’t want the economy to crash. And so I think ultimately, there will be some sort of compromise, but it’s a bit of a game at the moment. It’s brinksmanship, as they call it, they want to get as much as they can. The problem is, and there was a great conversation I had last year in October last year, with Romina Bochy, she is a fellow at the Cato Institute in Washington, DC. And she was explaining how this is, it’s about it’s a spending issue. It’s that they’re spending too much relative to their revenue. And we talked about the structural deficit in the States, as in Australia, we’ve got this structural budget deficit, we’ve got this gap in sort of normal times, or if you think about trying to abstract from the economic cycle, try to control for that you’ve got this gap between revenue and spending. And given that tax increases are unpopular, and it’s so difficult to for governments to raise taxes, and there is an economic efficiency, cost with taxes. So you do want to keep taxes as low as possible. That’s not something they can adjust. But then at the same time, they’ve got these entitlements, such as Medicare and Social Security, that mean that government spending is just going to keep increasing. And it’s a big challenge. And they’ve also got the military now that could argue that I mean, does the I mean, America does spend a lot on the military. I saw the numbers from the US Treasury, the US Treasury fiscal data. I’ll put a link to this in the show notes. And you can see where the the federal government is, is spending its money or spending the money of US taxpayers, I should say, That’s stopped working on my machine. But it was a great chart. I’ll put a link in the show notes that I think it’s about $800 billion or something is it that’s spent on defensive you got it there, Arturo.

Arturo Espinoza Bocangel  18:45

You talk about the national defence? Yes. Is 767 767

Gene Tunny  18:54

billion was that in 2022 2020? Yeah. So there’s a lot there. Now, the US spends much more on national defence than any other country, but at the same time, it is one of the global superpowers and plays an important role in global security. So that’s a big, that’s a big challenge. Maybe you can get some efficiency gains in the Pentagon, there is a bit of concern about the efficiency of spending of defence spending. There’s concerns about the Pentagon failing audits. I don’t know if you’ve seen that John Stewart really ripped into one of the Pentagon officials department.

Arturo Espinoza Bocangel  19:36

So the problem there

Gene Tunny  19:39

are essentially she was asking her well, should we? Is it good enough? It’s been he’s employed, implying is not good enough that the defence department can’t account for all the all the money that it’s spending and it’s failing audits. So then she was saying, yeah, it is a problem. We’re trying to fix it. And he was really going after it. And rightly so they’re spending nearly $800 billion. But guess what, what if you look at the spending data, what I’m trying to say is that it’s difficult, given what they’re spending money on, and the big ticket items are health, Medicare, Social Security defence, you can’t really make the budget adjustments without touching some of those spending areas if you don’t want to raise taxes. And that’s probably not going to happen. But then if the problem that they’ve got in the US is that all of the the way you would fix this is by modifying programmes that are popular or going after the defence budget, and that’s going to be difficult because of the concern about the conflict with grants, growing risk of a conflict with China, so they won’t be able to do that. And politically, it’s very difficult to do anything about Social Security and Medicare, and Donald Trump came out and the other the other month, I think, a month or so ago and said, Look, I’m not going to touch it. So given Trump has declared that other Republican candidates, they won’t be able to, to propose any changes. So it’s, it’s going to be very difficult that they might be able to make some savings in, in other areas, but then you’re talking about things like the Department of Transportation or, or the EPA, other agencies like that Housing and Urban Development, perhaps, if that’s still around. So it is, it’s going to be very difficult for the US. Okay, yeah, yeah, HUDs. Housing, urban development certainly does still exist as an agency. Okay, so that’s the debt ceiling. I mean, we don’t really know how it’s going to play out, I think most likely, they’ll come up with some deal. So they will have to be some cuts to non core, maybe non core is not the right word. But they’ll have to be some cuts to agencies within programmes which are less popular. So that’s what we’ll we’ll end up seeing the Republicans will declare a win of some kind, maybe they’ll get some commitment that over five or 10 years, there’ll be there’ll be particular reductions relative to the baseline. But I mean, some they’ll have to, they’ll have to lift the debt ceiling, because the alternative is just so unknown, and new cause such global uncertainty, really, and potentially, lots of economic, economic pain for the US and for the world, given the role of the US and the global economy. And he thought so to her

Arturo Espinoza Bocangel  22:49

while thinking about the when I talk about when we talk about a ceilings of any timing economics. I think that individuals tend to spend spare, for example, if you say to your friend, you, you’re allowed to spend $100, yes, some maximum money they can pay you in order to pin one, let’s say to buy alcohol or drinks. Of course, the the train is gonna spend $100, I think that kind of ceilings are not optimal in economics, because people tend to reach that point, every time they have the opportunity.

Gene Tunny  23:37

Right. I think I understand what you’re saying. So psychologically, but wouldn’t that be suggesting that there could be a benefit from a ceiling? I mean, I don’t I don’t think that I don’t think there should be a ceiling on on this sort of thing, because I don’t think it’s helpful. And it does lead to situations like this. But if you’re saying like, psychologically, that this is, I think, in some cases, like, if there’s someone who has impulse control problems, then maybe they need to have some ceiling to control their, their, their behaviour. So I think, part of the logic for having the ceiling in the first place in the States and we had one in Australia, I’ll talk about that in a moment. It was the limit the the potential of the President to go and borrow a lot of money because there was a concern 100 years ago, or something that the President could go and borrow a lot of money for the to, you know, fund their own programmes and, and get around the Congress. And so they imposed a debt limit of much lower than it is now because it’s been increased over the years as the economy has grown, the federal government’s grown and they’ve, they’ve have needed to increase it. So you can see why they they might introduce it. The problem comes when you’ve got legislation that tells the government to spend money on other things and the spending is mandatory. There’s not there’s no discretion there. It has to provide the Social Security benefits by law or Medicare based on the legislation. And so you’ve got one active congress this priorities. Yeah, that’s conflicting with the other legislation. So this is why I think there is some logic to this, the concept that the Congress has sent two sets of instructions that are incompatible with each other, and therefore the White House should have some discretion in how in how to deal with it. I mean, I’m quite sympathetic towards that argument. I just think legally, it’s, it’s, it’s problematic, it’ll, it’s most likely problematic. So yeah, but one thing I would have thought I’d mention is that we had this issue in Australia here, about 14 years ago, when I was in the treasury, and this was one of the things I was responsible for, we had to amend the, what was called the Commonwealth inscribed STOCK Act. This is quite amusing. When you think about where federal debt is now. I mean, maybe it’s not amusing, or it’s amusing. It’s black humour. It’s, it shouldn’t laugh about this. But prior to the financial crisis, we only had $50 billion of government bonds on issue, because we’d pay down all this debt, partly because we sold off some public assets or government owned businesses like Telstra. And they set in the legislation in Section five, I think it was at the Commonwealth inscribe STOCK Act, they set a limit of $75 billion for government bonds on issue. Okay. And then as soon as we have the, we get into the financial crisis, and they only I think they set this limit in 2007. Okay, so come, we get to the end of 2008. And this is when I’m in budget policy division in the treasury. And we do the forecasts as to, you know, what’s happening with revenue. And then what’s happening with with the borrowing requirement, I mean, we suddenly had to start borrowing new money, we had to start increasing debt, because we’d have to be running deficits. We this federal government wasn’t running deficits. But now with the collapse in revenue, and the possibility of, of stimulus spending that the government wanted to enact or bring in, then we’re going to be running deficits would have to borrow, borrow money, and add to the debt. And this was going to be difficult, because there was a $75 billion limit. Now, when we did the budget update over the next month or so. And we published it in early February. And it was clear that the debt was heading toward 200 billion. So we had it was 50 billion before the financial crisis, then and the debt limit was 75 billion. But when we did the projections are the forecasts in Wait, oh, eight, early Oh, nine, we ended up figuring out we needed to lift that limit to 200 billion. And so we had to change the the act of parliament, it’s just changing one number, we had to change 75 to 200. But our cause such a political mess, and Malcolm Turnbull, the opposition leader decided to oppose it. And yeah, and the government got it up with the support of the crush the crossbench senators with the greens, I actually remember going with David Parker, who was acting treasury secretary at the time, and we had to go and talk to Bob Brown and his staff. He was he was head of the greens in Parliament House, we had to say why this was important? Well, it’s the same thing. I mean, the government has these commitments, it’s required to spend money on these different programmes. And you then can’t say that they can’t borrow the money to meet that to actually meet those commitments. It’s, it’s inconsistent. It’s not, it’s not right, you should lift the you need to lift the the debt limit, or there’s going to be bad consequences, the government might be able to pay to make payments or it won’t be able to enact stimulus measures. Now, there’s a debate about whether stimulus measures are unnecessary or desirable. And I’ve had some episodes on that. I might link to one with Tony Macon. So that’s an that’s an issue for another another day. What I was just emphasising is that the US is now I think I’ve heard it expressed that it’s the only country which has this actual debt limit, or it’s got this conflict between what the debt limit is and what other legislation tells the government to do. But we did have this in Australia about a well over 10 years ago, they amended it they got rid of this legal was about 10 years ago or so now, but we did have this issue. So I just thought I’d note that was that something I was personally involved in in Costa It caused a little bit of angst at the time, it was a huge political issue. Yeah. So yep. So there’s a again, we’re recording this on the 25th of May. So who knows? It may be resolved by the time this episode is published, but I doubt it. I think there’ll be negotiating right until the last minute and the Republicans will be trying to extract as much as many wins or gains as they can. Now, I’m not saying they’re badly motivated. I think they genuinely believe that there’s too much federal government spending and, you know, they, they do want to make savings there. But, look, it’s so difficult politically, because the programmes they probably need to cut according or to adjust, according to Romina had that great conversation with her last year. They are politically popular programmes, so it’s going to be very difficult. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  31:00

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Gene Tunny  31:29

Now back to the show. You’ve been looking at what’s happening in Argentina, I saw a news report the other week that the as a central bank have to they’ve had to put the interest rate up to 98% or 90%. Yeah, that’s, yeah. So what’s going on in Argentina? Well,

Arturo Espinoza Bocangel  31:49

I think Argentina in the last decades, is facing these problems, economic problems in terms of inflation, and also exchange rates. Both problems are the most important that Argentina are not able this case I’m an internet is not able to deal with it, or solve it. Currently in Argentina, there they are facing a soaring inflation. Also, there is a what there is a lack of USA dollars,

Gene Tunny  32:26

or on what’s the inflation right there.

Arturo Espinoza Bocangel  32:28

In April, the monthly inflation rate reach 8.4% 8.4%. Monthly. Yes. And the annual inflation rate was more than 100%. More than 1%.

Gene Tunny  32:42

Yeah. And is it the problem we talked about in our episode on hyperinflation? I mean, it’s not a hyperinflation yet. Technically, because then you Hyperinflation is when you have 50% a month, I think, is it just bad government? Fiscal policy? Is it money printing?

Arturo Espinoza Bocangel  32:57

The main one of them employment or mayor permanent is? Lack of fiscal rules at the school? What sorry? Rigorous?

Gene Tunny  33:07

Do you mean, they don’t follow good public finance practices? Yeah. Right. Yeah. Yeah. Okay, I might have a closer look at that. But I was just really stung by the what’s been happening there with the inflation and the interest rate, because it’d be there a country that in the past, they’ve had, you know, problems have borrowed too much money they’ve had to default effectively, and, you know, renegotiate with creditors. Yeah, I’ve

Arturo Espinoza Bocangel  33:35

found also that this inflation, has pushed one in four people into poverty in our country, in this case, Argentina that has battled for decades with high inflation. Yeah. And also, if we had another problem, which is the historical the historical drove, seen last year, which has damaged the Argentinian soybeans because they are the major producer of corns with and soybeans and they rely on on the export of those. Yeah, also, they are not receiving enough use of American dollars. So there was there’s no problem there.

Gene Tunny  34:17

Yeah. The extraordinary thing about Argentina is that it was once one of the richest countries in the world wasn’t it in the late 19th century? During the gold during the gold rush? Yeah. Yeah. And just bad policy over the 20th century. Was it? Was it the bronze who are in Argentina Yeah. Why and Aveda Braun? Yeah, yeah, just really beyond bad economic management. So yes. Anything else on that odd zero on Argentina,

Arturo Espinoza Bocangel  34:50

just to that there is a mediatic presidential candidate named Emily has allowed to burn to burn The central bank so they, they want to Oh, he wants to shut down the Argentinian cell from bang. If he assume HIV takeover the president, she’ll office.

Gene Tunny  35:11

So what did you say he’s a candidate is? Did you mention his party? Did you or?

Arturo Espinoza Bocangel  35:16

No, I haven’t mentioned the party, but he’s leading the boring.

Gene Tunny  35:22

Right. So he wants to get rid of the central bank. Does he want to replace it with a new central bank?

Arturo Espinoza Bocangel  35:27

Probably? Yeah, sure.

Gene Tunny  35:30

Well, given the given the problems that have gone in Argentina, I mean, who knows? I mean, maybe you need some radical approach like that? I really don’t know. I’d have to look more closely at it. It’s, yeah, it’s a bit of a mess. Right. Okay. Well, I mean, luckily, in Australia, and I mean, even in the US, we’ve, I mean, despite all the problems we’ve been talking about, we do have, we have had generally better management than, say, Argentina. But but let’s say they sorted out because you I think you made a very important point that the, the misery that this causes the misery that comes from bad economic policy, was it one in four people who’ve gone and been thrown into poverty? And that’s what inflation does, right? It erodes the value of, of the money that you’re holding? And, yeah, it’s really bad. And if you’re on a fixed income, or if you’re on a pension that’s been paid in dollars, a certain amount of dollars, then inflation goes up, you’re in a whole lot of trouble.

Arturo Espinoza Bocangel  36:33

They’ve retired. Suffering from

Gene Tunny  36:37

Yeah, and I mean, our pension is here in Australia, as suffering from the inflation we’ve experienced. And now we’ve just learned about 22%, or whatever it was increase in electricity bills. Right. Okay. So that’s, that was Argentina. The other thing I wanted to talk about Arturo, is this, this developing market or developing economy, emerging market, debt crisis that we’ve that’s become quite prominent and was talked about at the the IMF World Bank spring meeting that they have in, in DC, and this was in April, but it’s still still going on. This is something that an issue which will be with us for some time. And what we’ve seen is that there’s been this big increase in, in debt of many developing economies over the last decade or so. And China’s playing a part in that. And this whole debate about China debt trap is China and trapping countries, by lending the money and then seizing their assets when they can’t repay as at lending them for and knowing that they’re not going to be able to repay. Now there’s a big debate about that. I might have to cover that in a specific episode, because I know one of the things we’ve been looking at on this show is, to what extent should we worry about China? To what extent is China a threat? What does that mean for the global economy? And I mean, I’ve been trying to get a wide range of views on that. There was a paper in the wall, there was an article in The Atlantic Monthly from some quite prominent academics in the States. So Deborah Browder, gam from the China Africa Research Initiative. And she’s a professor at Johns Hopkins, very famous school over there. And Meg rothmeyer. Meyer, who is a associate professor at Harvard Business School, so an equally famous school. And they argued that the Chinese debt trap is a myth. So I’ll put a link to that. And they go over all the complexity of what actually happened in Sri Lanka when, when the Chinese bank, I think it was took over that, that port. So there’s a bit of a debate about that. But there’s no doubt that there is this developing economy debt crisis at the moment, we’ve had large increases in debt to GDP. And one of the things that the managing director of the IMF pointed out in the, in her opening remarks is that of this very high percentage of well, not well, you could say it’s, it’s high, if you think about what it means. So 15% of low income countries were already in debt, distress. And so we’re talking about countries like Zambia is is one of those countries in various other African countries. And they’re having they’re having problems paying back their debts. And then there’s this need, potentially to restructure their debts reach a new agreement with their creditors. And one of the one of the issues that we’re we’ve, we’ve discovered, and this is something that’s concerning commentators, and it’s also concerning the IMF because they’re caught in the middle of this. The Economist has called this a nightmarish identity crisis. For the IMF, it said it’s caught between America and China, its purpose is unclear, because an increasing amount of the debt that that has been accumulated by emerging economies, it’s coming from China. And that’s, and that was before Belt and Road Initiative. But it’s also associated with this new Belton Road initiative that Xi Jinping has introducing that is introduced, because a lot lot more of it’s coming from China, then it’s, it’s difficult because the IMF when it wants to assist countries, if they get into trouble, because the role of the IMF is to try and guarantee financial stability and one, one thing they do is to provide emergency lending, Short Term Lending to countries that get into trouble. But what we’re finding now is that because China is involved, it’s one of the creditors. Usually the IMF wants the country to renegotiate its, its debts with its its creditors. It wants to make sure it’s sustainable. It can it’s got sustainable debts, that it’s it’s going to be in a good position to to repay the IMF, if the IMS gonna lend to it, it’s going to provide some emergency assistance, that that countries might need to help shore up their exchange rate or to help them actually meet their their debt obligations. Because part of the problem is that if you’re an emerging market economy, you typically have to borrow in foreign currency you have to borrow in US dollars. For example, actually,

Arturo Espinoza Bocangel  41:50

Argentina has received almost 44 billion from the IMF,

Gene Tunny  41:54

sorry, Argentina has received 44 billion Yep. So Argentina is part of this part of the story. Yeah, but what they’re finding, and this is, this is something that is really a concern to the people in in DC and London and the other, the other Western capitals. The problem is that China is playing hardball in the negotiations, and it’s been difficult in terms of the renegotiation of the debt. I mean, support is a China also has just been like any other creditor in the past, like US banks may have been in the past. But it’s essentially saying that if the US or if the IMF is gonna come in and lend money, then they have to lend on concessional terms to they have to share the pain with with China or with other creditors. So historically, the IMF has been superior to the IMF and World Bank, they’ve been superior to other creditors. But now that China’s involved there, China’s pushing back. And yeah, it’s a rather fast, fascinating story. I’ll put some links to these articles from the economist in the FT but possibly paywalled. So maybe I’ll also try to find some some articles that don’t have a paywall. But basically, this is part of this new conflict that we’re seeing between the US and its allies and China. So we’re seeing, you know, this is another area of tension and other another aspect of that, that conflict. That is that’s heating up. So I just found that really fascinating that we do have this emerging market debt problem again, I mean, this was a huge issue in the in the 80s, then it was Latin America. And now it’s a wide range of countries, including Papua New Guinea to our north, apparently, I saw that they’re a country that’s high risk of fiscal distress where they, they need to, yeah, they may need to renegotiate their debts. So it’s countries in Africa and

Arturo Espinoza Bocangel  44:11

in the case of PNG, Australia, would play an important role in case they they fail in some economic indicators, or

Gene Tunny  44:23

Yeah, I mean, we do provide assistance already to PNG and I think yeah, worst case scenario, we would have to do something because it’s, it’s to our north,

Arturo Espinoza Bocangel  44:33

but now with the Chinese presence is that is gonna be different.

Gene Tunny  44:39

Well, I know they’re in the Solomons ought to look at what China I mean, I guess China is trying to get influence all around the Pacific. But yeah, I mean, I think we would try to, you know, make do it. Do as much as we can for to, you know, to help out p&g Given that it’s to our north, and it’s strategically important. I mean, when we fought the Japanese during World War Two, there was fighting in PNG. Right. So that was a battlefield. Okay. So, yeah, it’s strategically important. Now, yeah, I’ll put a link to some information about PNG and this, you know, how it figures in this conflict with China or this geopolitical tension, maybe not maybe conflicts around work, because I’d like to, I’m hoping that that we are going to be able to, to maintain peace. The alternative is just so horrific at the same time, we need to we do need to protect our national interests, and be conscious of any attempts to go against that. Yeah. So yeah, China’s Yeah, the Chinese President Xi Jinping visited Papa New Guinea four years ago, there was no doubt about China’s green ambitions in the region. This is saying that much of China’s promised aid and investment never materialised. So Beijing is trying to ingratiate itself with PNG. It’s a great defund construction of a hospital for PNGs. Military. So I guess it is an issue that we do need to watch. But we’ve got a star, we’ve got historic links with PNG, Australia is very close to PNG, the Australians living over there. And so I’d like to think that PNG is not a country, we need to, to worry about. And I’m confident that maybe there’s a bit naive, but I expect that we would be able to work, we will be very conscious. And we will we will make sure that we don’t lose png if it if it comes to any sort of any sort of conflict with China. Okay. So there, my thoughts are, I’ll put links to relevant data, there’s a great statistical annex that the IMF puts out, and it’s public debt monitor that shows just how much these public debts have been going up. There’s some great material on what’s been happening with the IMF and how it’s facing this identity crisis. And it’s part of this whole. The problem we’ve gotten now is that, well, we had a post war world, which was essentially underpinned by American preeminence. And I’m talking about the Western world, the communist world did its own thing. But then it collapsed in 89 to 91. So that’s no longer an issue. You know, Russia, of course, is a threat and of its, its decoupling from the West, China, I mean, very difficult, because it’s such an it’s a very populous nation. There are great benefits from trade. But there is this growing tension that we’ve talked about on this show. And one of the aspects of, of this tension is in the international financial system, and it looks like the the preeminence of will, the massively important role the IMF and the World Bank have played in the past. Now they’re in competition with, with China and China’s making life difficult for the IMF, it appears from what I’ve been what I’ve been seeing. And the IMS seems to be failing in this mission, really, it’s had all of this additional, what’s got all this capital that will finance or these got these financial resources that could deploy, that it’s been unable to deploy? So the effectiveness of the IMF is in question. So the economist talked about how nearly $1 trillion so 1000 billion has been injected into the funds since COVID. began to spread, but its loan book has grown by only $51 billion. So yeah, the the economist is painting this picture of the IMF is as really not as effective as it can be. It’s and caught between America and China. So Well, I mean, we may need a we may need a rethinking or re creation of these international financial institution. So that might be something we find some international expert on and talk about on the show in the future on on Argentina, we’re going to try and get a local expert on Argentina to talk about that. So yeah, Julie, so that was a bit of a whirlwind tour of some major macro economic issues that we’ve been monitoring. Arturo anything before we wrap up anything else?

Arturo Espinoza Bocangel  49:57

No, I think this Question was very informative.

Gene Tunny  50:01

The one takeaway I would, I would suggest, as a takeaway I always like to make is that it’s so critically important to get those your government budget under control to get your institutions, right. And, yeah, really, really try and avoid accumulating unnecessary debt. I mean, you can borrow to build arguably, but when you’re in a situation when you’re borrowing money just to to meet recurrent expenses, which is essentially what’s happening in the states now. And you know, it’s happened in multiple countries around the world, when you you’re not getting a return on that investment, then you’re gonna get into trouble. And we just see this time and time again, unfortunately. So just the main takeaway, I think, is just be very conscious of, of what you’re spending if you’re, if you’re in government, if you’re a policy advisor, just be really cautious. And that’s, that’s what I’d say there. And that’s what you’d probably expect a former Treasury person to say. So. Very good, Arturo. Again, thanks so much for your time, and thanks for listening. If you’ve enjoyed this, if you have any questions, let me know. I’d love to hear from you. Contact at economics explored. Thank you. Right Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

52:05

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Credits

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

Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple PodcastsGoogle Podcast, and other podcasting platforms.

Categories
Podcast episode

How to Defeat the Dictators w/ Charles Dunst, Asia Group – EP180

Have democracies failed and is authoritarianism winning? How can democracies reinvigorate themselves? Does the West need to decouple from China? These and other questions are considered in Economics Explored episode 180. Foreign affairs expert Charles Dunst talks about his new book Defeating the Dictators with show host Gene Tunny. Among other things, Charles and Gene talk about the potential benefits of Public Private Partnerships (PPPs), such as Operation Warp Speed, the Trump administration’s COVID-19 vaccine plan. 

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

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

About Charles Dunst

Charles Dunst is deputy director of research & analytics at The Asia Group, an adjunct fellow at the Center for Strategic and International Studies, and a contributing editor of American Purpose. He is the author of Defeating the Dictators: How Democracy Can Prevail in the Age of the Strongman (Hodder & Stoughton, February 2023). 

For further information about Charles, check out https://www.charlesdunst.com/

What’s covered in EP180

  • What is the Asia Group and what does it do? [1:35]
  • Is democracy no longer seen as the path to prosperity in developing economies? [5:28]
  • What are the most important organizing principles for a democratic system? [11:38]
  • Accountability and the lack of trust in government [16:34]
  • Best practices for running a democratic country in the 21st century [21:36]
  • Too much money in politics in the US [25:41]
  • Does the West need to decouple from China? [27:37]
  • The role of public private partnerships (PPPs) such as Operation Warp Speed [32:27]
  • How will dictators be defeated if we govern ourselves better? [34:59]
  • The importance of engaging in the conversation through social media and local governance [38:32]
  • Inequality and the Dream Hoarders [39:00]

Links relevant to the conversation

Defeating the Dictators (Please buy the book via this link to support the show):

https://amzn.to/3liQrjx

Matthew Engel’s FT article “The foreign states that own Britain’s railways”:

https://www.ft.com/content/e57c5fd0-bf54-11e9-9381-78bab8a70848

Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It

https://amzn.to/3LvCOrL

Track Nancy Pelosi’s stock portfolio:

https://www.capitoltrades.com/politicians/P000197

https://twitter.com/PelosiTracker_

Transcript: How to Defeat the Dictators w/ Charles Dunst, Asia Group – EP180

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Thanks for tuning into the show. This is episode 190 on defeating the dictators that’s the name of the new book by up and coming Foreign Affairs expert Charles danced, who joins me this episode. Charles is deputy director of research and analytics at the Asia group based in Washington, DC. I thought Charles’s book would be good to cover on the show, because the revival of authoritarianism around the world is not just a political and human rights issue. It’s an economic one, too. It has profound implications for our trading relationships with other countries. And as we’ve seen with the invasion of Ukraine, the actions of authoritarians can massively disrupt global markets. Please stick around to the end for some additional thoughts from me. Okay, let’s get into the episode. Charles danced, welcome to the programme.

Charles Dunst  01:35

Thanks for having me on.

Gene Tunny  01:36

It’s a pleasure Charles. Nicholas grew and passed on your details to me, regarding your new book, defeating the dictators and yes, very keen to chat about that. I understand you’re the deputy director of research and analytics at the Asia group. Could you just tell us a bit about the Asia group and your work there first, please.

Charles Dunst  02:00

Sure, the Azure group is a strategic risk advisor, essentially, for companies looking to do business in Asia, and we’re headquartered in Washington. But with offices in Tokyo, we have an office in Vietnam, we have an office in in New Delhi, I think we had one or one or two advisors at one point in Australia. But basically, it’s mostly companies looking to do business in Asia on things like how do I start selling cell phones in Vietnam? Or how do I start manufacturing something in India and kind of understanding those marketplaces given just challenges of doing business in those markets. And basically, people come to us looking at former US diplomats, people with longtime business experience in the region, who just need a new knee to help and we can kind of provide that expertise. And at the research team, I kind of said to denied point of the firm where I’m not super client facing in terms of on a day to day basis, I’m not necessarily engaging with, you know, X, X company or y company. It’s more so we look at pan indo-pacific issues. So we Lee, I write a daily news wire that goes to clients, that’s basically four stories from overnight, overnight us time, that happened throughout the region that matter for either business, economics or politics. So we do that we lead coverage on things like the Indo Pacific economic framework on the quad issues that don’t directly fall in one country team baskets, there’s something that’s not China’s specific or something that’s not Australia specific, we kind of handle the pan regional issues. And I handle a lot of the public facing media stuff, just given my given my own background as a journalist. So it’s a really interesting, firm really dynamic. And we just, I think our New Delhi office is now under a year old. So really, lots of lots of movement.

Gene Tunny  03:42

Raw. Yeah, absolutely. Okay. That’s very good. And depending on I mean, it’s hard to know what the right stats are. But India could well be the largest country in the world at the moment. I mean, given China’s declining population, so yes, makes sense to be boosting that Indian presence. Absolutely. Okay. Well, we better talk about your book. It’s getting some it’s got some good testimonials, is really impressive. You’ve got a testimonial from the current UK Chancellor of the Exchequer, Jeremy Hunt, you’ve also got one from? Is it McMaster, a former national security adviser? Yep. And then yes, yes, very good. So defeating the dictators. What motivated you to write this? Charles, why did you think this was an important book to write?

Charles Dunst  04:31

Sure. I mean, I’ve spent a lot of time living in non democracies or kind of countries on the on the cusp, as one might say. So I lived in Hungary when I was still in university. And I remember I was kind of a quasi young journalist at the time, and it was writing articles and pitching around articles about Hungary and writing academic work about Hungary. And it wasn’t getting so much attention because it was this was 2017. So kind of right before Orban became an internationally known figure, precisely because of his his illiberal ism. Ah cracy his notion of kind of setting the stage for folks who win elections legitimately come into government, and then do away with the liberal institutions within. And I basically lived in Hungary I then lived in Southeast Asia and I lived in London and I kind of travelled all throughout Eastern Europe, all throughout Southeast Asia spent a lot of time in the Middle East. And something that kept coming up, when you talk to the intelligence is of say, Hanoi, or the intelligencia. In Kabul, maybe less so Cairo, but the intelligence is certainly in the Gulf. There is this notion that democracy is no longer the path to prosperity, there is a sense that you can follow the models of the Singapore’s of the world that you can follow the model of China that you can follow the model of Saudi Arabia. And I think more and more when I travel around the developing world, that was something I heard, and particularly in our little Western bubbles, sometimes, particularly in the US and the UK, I think we don’t do such a great job of communicating the virtues of democracy, and basically answering the question why democracy for people in the developing world, because if you are Vietnamese, and you’ve seen your country’s GDP, and you’ve seen it grow so much, and you’ve seen your, your life expectancy increased so rapidly over the last 3040 50 years, it’s not entirely clear to me why you might look around and say, well, this system’s not working, we need a democracy, when you see January 6, there when you see three prime ministers in three months in the UK, so I wanted to write a book to make a very affirmative case for democracy. Because there are many books, I think, in recent years, kind of lamenting the decline, the decline of democracy and the rise of the Viktor Orban types. But I wanted to say, write something a bit more affirmative. And saying, well, here is what can be done to actually make sure democracy works once again. And when democracy works, once again, most importantly, you can keep democracy where it already exists. democracy works better in the United States. So if democracy works better in the United Kingdom, you’re going to get fewer elections of people like Trump, who may not necessarily be the biggest believers in the democratic system. And once you can kind of tamp that discontent at home, it’s my belief that democracies can serve as a better model for countries in the developing world, well, maybe this, they might not look at the United States and look at Australia, and look at the United Kingdom in five to 10 to 10 years and say, well, those systems are more innovative than the one in China that they’re more solid. I mean, that right now, I think, if you’re sitting in Vietnam, that might not appear to be the case. So I wanted to write a very affirmative case for democracy and looking how do we can advance our values and really practical ways?

Gene Tunny  07:32

Sounds? And we’ll use that affirmative case for democracy. What do you think are the key points in favour of democracy?

Charles Dunst  07:38

But key point for me is study after study still shows, despite the kind of discontent in our democracies that if you live in a liberal democratic society, or even just the democratic society, you are likely to live longer, you are likely to make more money. And I know there are no studies that can necessarily show this, but it is my belief that you’re likely to live a richer cultural life, and you are more likely to innovate, that is true as well, that the world’s best generally still comes from democracies. And this is not to say that Singapore and China cannot innovate. Of course, of course they can. And of course, great art and great movies and all that can come out of non democracies. But there is a reason why when you travel around the developing world, particularly in Asia, that the media is the the music people listen to his Japanese and Korean democracies, or the movies on TV are mostly American, maybe British, maybe Australian, but it’s not like Chinese, Chinese culture has become predominant in the developing world. And that is kind of a silly example. But it’s indicative to me, of the ways in which democracies embrace the kind of tumult and chaos of our systems and we are better for it in the long run. So it’s just about making sure that we are making sure that our systems are providing for our people, while also embracing this chaos that allows for a Jackson Pollock painting, or allows morikami to write when a cue for these are not works, that someone will be able to conceptualise in a non democracy and think that’s a very, very key point that the art and the innovations that are going to be really necessary for the future particularly think about things like climate change. Well, the Evie transition is going to be fixed by innovations that are primarily coming out of democracy, or democracies. And it’s the same thing on healthcare innovation. I mean, where did where did the COVID vaccines come from? Exclusively democracies, not only the United States, Germany as well, of course. So that was my affirmative case for democracy was starting at this point of saying, well, even the things look really messy. Right now, if you look around, you would rather be the citizen of a democracy than an autocracy bar, not

Gene Tunny  09:41

just on Vietnam, and that was an interesting point you made. Do they recognise that? I mean, a lot of their prosperity does come from embracing the market, doesn’t it from embracing the market and as someone who I mean, I’ve read a lot of Milton Friedman when I was younger, and I mean, Friedman used to make the case that the market and democracy were very closely entwined. Or that you can’t have one without the other. I think Friedman’s argument was. So the people in Vietnam recognise that the importance of the market, and then the importance of freedom more broadly,

Charles Dunst  10:17

I think not so much the notion of freedom more broadly. But I think there is a recognition of the need to have liberal ish economics, I mean, Vietnam, China, Singapore, these countries all got richer. I mean, certainly Vietnam is not rich, like Singapore is, but they all got richer by embracing liberal trade. And I think what’s really not troubling, but a little concerning if you’re in a democracy is that those countries and others have proved that you can have mostly liberal trade without liberal politics. And that is a very different scenario than with the Soviet Union, or the kind of Soviet bloc writ large, or China before dung XIAO PING, where essentially, these were the countries that were illiberal politically, and also illiberal economically, so they couldn’t really grow in any meaningful way. So those systems never had a tonne of legitimacy, because they never worked. Whereas now, I’d be hard pressed to say that the Vietnamese system has not worked, or that the Singaporean system has not worked. Clearly, you can get rich without democracy. And that’s a new relatively new point over the last 180 years. It really was this notion that the way to get rich in the post colonial era was to be a democracy. So the fact that you can actually decouple liberal values from liberal trade is definitely a concern. And part of the reason why why I wanted to write the book,

Gene Tunny  11:38

yeah, just on Singapore, you mentioned Singapore quite a few times in the book. And that’s an interesting example. And probably, I mean, that relied upon just that extraordinary figure of Lee Kuan Yew, didn’t it and someone who was, you know, almost just by his background, and by his education could be that benign dictator or authoritarian, that he was an exceptional individual and probably someone you can’t count on having another another kind countries. So I thought it was interesting. You did tackle that question of Singapore, head on in your book. So yeah, just an observation just while I remembered it on Singapore. Okay. In your book, you give a really good summary of your argument early on, and you’re talking about a No BS approach to the future, committing to our values and, and also to the practices but not buying into utopianism. I really like this, but you go that we must convince the world in practical terms why our organising principles remain preferable to those of autocracies both at home and abroad. We need to look our own failures in the eye while learning from the successes of others. You talked before about the affirmative case for democracy, but could you just restate or reiterate? What are those organising principles? What are the most important ones, Charles,

Charles Dunst  13:03

when I was talking about liberal organising principles, I’m really thinking about the things that are necessary to be a democratic system. So things like freedom of speech, things like free and fair elections, broadly open societies space for civil discourse, space for civil rights organisations, for civil society organisations, this notion that it is actually good to have a dynamic and open society where there can be really aggressive, loud debate and disagreement. And that’s not I don’t think that’s a bad thing. I don’t think it’s a bad thing that we can have really heated political debates. I’d rather that than the opposite of kind of no debate at all. So but I think we really do need to convince countries of well, why should I have? You know, why? If you’re Vietnamese, or your, you know, rich, Chinese rich, rich Chinese person, you turn on CNN, you’re gonna say, Well, why would I want that? Why would I want two people kind of debating angrily at each other over on TV? I mean, how is that helpful for my government? So I think we really need to say, well, here’s why. Because that loud debate tends to lead to a society that’s open enough to produce really strong innovations that’s really good, strong to produce the best kind of art. And these are all things that are vital to the future, but clearly just kind of walking around and dropping into annoyance. And well, you shouldn’t be like us, because our systems are open, and they’re so great isn’t enough, when there is a need to demonstrate very practically, well, why is the United States or why is Australia? Why do we offer a better path for prosperity broadly, than do China or Singapore? So that’s really how I how I thought about it.

Gene Tunny  14:41

Gotcha. Right. And what do you think the failure is? You talk about the failures, so we have to look at our own failures in the eye. What failures do you think are most significant?

Charles Dunst  14:53

I think honestly, one of the biggest ones that I talk about very frequently is this is more of a problem I would say in the US in the UK than Australia, but broadly kind of the mismanagement of globalisation in the sense of thinking that we could essentially export manufacturing to places like Vietnam and China without experiencing any domestic discontent at home, that people who would had who’ve had who have had these manufacturing jobs for generations are mining jobs for generations, would lose them turn around and say, I’m all good. Okay, and wouldn’t revolt in one way or another, and particularly in the US the it is this programme designed to kind of ameliorate that loss with some economic assistance, but it’s kind of a mess and doesn’t really work effectively. And that, to me is so indicative of the problem that the United States China, the UK comes through this free trade through globalisation, we all got richer, but the average person did not get as rich as their as the god the government did, or as the kind of top 1% did. So I think there’s this increased frustration, it’s saying, well, people turn against globalisation, because they turn away because they’re mad or with the way globalisation was managed. And I think really pushing back against that is really important and saying, Well, trade isn’t the problem, or liberalism isn’t the problem, the problem was the way it was managed. And that gets into the broader question of inequality, where, particularly in the United States, particularly in the United Kingdom, inequality is one of the major fuels beyond anti immigration politics beyond I would argue, kind of very strong, populist politics, that lead to things like Brexit or elections of people like Trump. So that those are kind of two big ones. And the other, I think, really, really vital. One is a relative lack of accountability and which is fueled a lack of trust. I think there was a notion if you talk to enough people in the UK or the US and even even Australia times, that there are two sets of rules that there’s a set of rules for normal people and a set of rules for everyone else, me everyone else who kind of that top 1% of rich people and rich people in the government. And that view in the US, I think about the example of the fact that there are so many Congress, people who trade stocks, I’m sure some of them are I’m sure many of them are not doing it illegally, technically. But clearly, you’re privy to some kind of information as a lawmaker with a certain type of security clearance that you probably should not be allowed to turn around and trade stocks. And even when a lawmaker is caught either not filing their stock disclosures on time, nothing seems to happen. They pay a little slap on the wrist fine, and then they’re done. And that’s fuel this notion that if that’s a normal person, that person is getting punished very severely. And I think making sure that we’re restoring accountability is key. So it’s about economics, but it is also about things like accountability, which leads to distrust in government. And when when your government lacks trust, it’s really hard to do just about anything.

Gene Tunny  17:50

Wrong. Yeah. Yeah. Good point. I’ll put a link. I think there’s a Twitter account that tracks Nancy Pelosi stock portfolio. So Pelosi has been one of the strongest performers in the Congress. And I don’t think she’s the top performer. But I’m sort of stuck fix, which is, you know, far exceeds market performance. So yes, does does raise some questions there. Charles, do you have any reflections on how democracies fared relative to autocracies during the pandemic?

Charles Dunst  18:22

Yeah, I mean, I think certainly the US performance was was quite poor. And I don’t think that’s anything intrinsic to democracy. And that’s kind of how I would approach the UK as well as there was nothing intrinsic to democracy that made them fail on the pandemic, it was more so we were just the two of those two countries, my country and then the United Kingdom, kind of had not great leaders for pandemic management when a pandemic happened. Whereas certainly, there are other democracies that did much better, certainly South Korea did much better. Certainly, Taiwan did much better. Certainly, Japan did much better for a period. And when you think about the autocracies, Vietnam had a very strong performance for a while. And again, that’s not because Vietnam was an autocracy, it’s because Vietnam had an extremely high level of social trust, that this is trust in government and social trust between one another so in the government, the government was extremely blunt, and extremely honest with its people and said, This is going to be very painful economically. But please stay home, stay off the streets, and we’ll get through it. We’ll get through it as a country and there was really smart messaging of talking about it like it was another war like the Vietnam wars, the another foreign invader was gonna be kind of overstating, but it was another war, the long line of wars against the Vietnamese people, and they banded together. And for a long time, Vietnam, controlled the pandemic extremely well, kind of until the Omicron variant showed up which no one could contain. So Vietnam performed quite well. And I think the the example people go to all the time, and I think kind of wrongly, to talk about COVID and a COVID. Management in a positive light is China where people say, well, zero COVID policy was great. And I think the irony is that The zero COVID policy was maybe very effective and could have been more effective for like a year, in the sense of if you can manage to have these strong lock downs, where you kind of say, well, you know, please stay home, whatever, whatever. And then you get vaccines and you get good vaccines, the Western vaccines and you get your way out, maybe I would sit here and say, well, that’s not a policy I would sign up for. It’s too restrictive, keeping people at home that long. I mean, as a as a democratic citizen, I am not in favour of giving your government that much power. But I do think the irony of the Chinese approach was they kind of demonstrated the efficiency kind of quote, unquote, efficiency of autocracy of saying, well, we can because we have so much power, we can shut everything down for a year, and then we’ll open up it’ll be fine. But the irony is that autocracy was then the reason she didn’t things her personal disdain for the West, was the reason why China didn’t accept the COVID vaccines from the West, that there was no way of reopening, without what models they were probably a million people who died when China reopened. And certainly that’s a lower death fold in the United States. But most of the US deaths took place before the vaccines were if it were available. So I do think at this point, it’s very hard to sit here and say, well, the autocracies managed COVID. So much better than democracy. did. I just don’t think that’s the case. I think it is. Countries with a large amount of social trust in their governments managed COVID better than others. And that’s kind of the Taiwan case. That’s the South Korea case. Those are both democracies, and they manage COVID better than most countries because, I mean, in Taiwan more so people do trust the government raw,

Gene Tunny  21:35

okay. Are they places to learn from? Are they countries and economies to learn from? You mentioned that in your book, you look at examples of good governance from everywhere past and present to detail best practices for running a democratic country in the 21st century could? What do you think those best practices are? And what examples Could you point to Charles?

Charles Dunst  21:58

Yeah, I mean, in Vietnam, I think one example, I’d point to a lot of government’s focus on winning social trust, and the focus they spend on being communicative to their people. And even in a one party state, I think there’s a recognition of what because there are not elections are not real elections, you need to win over that social trust much earlier. And you need to kind of maintain it much earlier, because there is no way at the ballot box of kind of seeing how citizens actually feel. So you need to be a little more transparent and communications at times. And some of the other examples I think about where I would like if democracies had more put on paper and more of these long term plans. People like to make fun of China’s five year plans because they are modelled off the Soviet five year plans, which of course, set these targets Soviet Union was never going to hit. But I do think the idea of democracies happening, well, maybe let’s have a 10 year critical minerals plan, or a 10 year health care plan. Because far too often, those plans are very much focused on security and defence, which are important. It’s important to have maybe a four or five year review of the state of your country’s defence infrastructure, or of your security infrastructure, what are your cybersecurity infrastructure, but I would like that apply to other things I’d like that applied to things that actually matter to normal citizens on a day to day basis. I think the idea of saying, Well, what’s our healthcare sector looking like right now? What’s our infrastructure looking like right now? On what do we want it to look like in 10 or 15 years? And I think that’s something that there are a few autocracies, particularly China and Saudi, spend a lot of time putting out these reliefs, five years to five year plans, or in Saudi Arabia, kind of the vision 2030 plan, and of course, because they’re autocracies, I would argue that they’re probably less likely to actually fulfil many of those goals. And certainly I don’t think Saudi Arabia is on perhaps the greatest trajectory. But I do think the idea of putting things on paper can be really beneficial. And one other example I don’t, I’m not gonna run through all of them. But one good one that I thought the UAE has pulled out in recent years, is they ranked every health care centre in the country, and then publish the results, and said, you know, this one in Dubai is great, this one in Sharjah is terrible. And it I really do think that’s not the worst idea, particularly in a smaller, smaller countries, you can do it state by state or city by city, where I’m from New York City, I can only imagine if New York City, the New York City government, basically brought in an unbiased agency and have them rank the New York City hospitals, and the ones that are at the bottom, clearly, you’re going to be motivated to perform better, because nothing motivates people like a fear of being embarrassed. So I do think that is this kind of odd way of being accountable and transparent. Of course, as a democracy, you can be more transparent in those rankings and and you can be more accountable than an autocracy ever could. So that was kind of the main thesis of the book was well, there may be things that autocracies put out plans or they look to build social trust, kind of in ways that I think are, are okay are kind of they’re interesting, but because democracies are a kind of a superior system, any of those reforms that we look to put in place into a liberal democratic system, I think we can do better.

Gene Tunny  25:09

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

Female speaker  25:15

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  25:44

Now back to the show. Just thinking in the States, one of the things I hear a fair bit is that there’s too much money in politics in the US. And that’s related to that was at Citizens United that decision. Do you have any thoughts on that? Is that an issue that the lobbyists have too much power to sway the the people in Congress, and they’re, you know, they’re looking for donations and all of that. So do you have any concerns over that?

Charles Dunst  26:13

Yeah, I mean, I think I definitely do have concerns about it, even if at times, it’s slightly overstated. I think maybe in the media of how much power lobbyists actually have preside over the reality is perception at one point or another. And people do think that the lobbyists do have so much power in one way around that. And something I suggested in the book is to essentially, make sure you’re being much more transparent about where the money is coming from and who it’s going to where if the Supreme Court made a ruling, clearly the money is going to keep flowing. There’s no way around that at the moment. But what a government can do, what the US government can do is create a really accessible online database that very clearly demonstrates, well, where’s the money going? Who is it going to, and there are efforts to do that. But you know, the current system is so not user friendly, it’s so difficult to go online and actually look at who’s donated to who, there’s certainly some kind of dark money that doesn’t come that doesn’t isn’t clearly registered. And I think it would be very helpful just to have this transparency, it’s a way to kind of mitigate the problem. Because if you’re a politician running for Senate or running for Congress, and you know that every donation you accept from they come from a big corporation, or every lobbyist to meet with is going to be very much public, it’s going to be a very easy to access database, you might be a little bit more hesitant to take those meetings. Whereas now you do have to register those meetings, but no one knows where to find them, and no one’s actually looking. So that’s not a wholesale solution, but I think we could mitigate the problem.

Gene Tunny  27:37

Okay, a lot ask you about how do we think about and how do we deal with authoritarian countries? So at the moment, the major ones are China and Russia? I mean, obviously, we’ve cut off a lot of ties with Russia due to their invasion of Ukraine. But what about China? I mean, in the last five years, there’s this new concern about China as a strategic threat. And they’re increasingly calls to decouple to. I mean, there are some rather extreme proposals out there, almost trying to cut ourselves off from China and not trade with China. Which, you know, in Australia, we’ve actually had some retaliation from China. And that’s affected some of our exports. But I mean, China has been a major destination for our exports. So that would be very difficult for us. How do you think about that? How should we engage with these authoritarian regimes in the future?

Charles Dunst  28:38

Well, I think it’s important not to, of course, lump them all together, where I think approaching China is very different. We’re approaching Russia at the moment, where certainly, I’m in favour of the broad sanctions policy against Russia saying, Well, this is a country that invaded its neighbour, I don’t know if there’s anything wrong with setting this precedent of Oh, you don’t get to evade your damper. I just kind of continued business as usual, at least with with the broader West. When it comes to China. I think the question is, how do you compete responsibly? I don’t think the idea of complete decoupling is, is really workable, if you’re the United States, if you’re the United Kingdom, if you’re Australia, because the economies are too intertwined. I mean, this is not the Soviet Union, where basically our economy didn’t really touch theirs. Whereas every basically every field is these overlap again, do I think there’s anything problematic about selling a refrigerator to China? or selling shoes to Chinese consumers? No, I that’s not a concern for me. But I do think there was a question of, well, where do you draw the line? What kind of tech is to sell what kind of goods are too sensitive to be sold to to a one party state in China, in which basically, the government does kind of oversee everything and it does seem like if you are selling some type of technology to a private firm, you could never be just how sure how private that firm actually is. And if the government could step in and kind of take that tech in one way or another. Every country is going to define a different only, but basically do I think there’s anything wrong with not selling military applicable semiconductor technology to China? No, I think that’s fine. I think basically recognising that this is a country helmed by a government that does not, frankly seem super interested in positive ties with the West. And that, of course, has been more aggressive in the broader Indo Pacific in recent years. Think about the South China Sea, you think about the drills around Taiwan, I think it makes a lot of sense to deny them certain technology. But the broad way I think about relationships with autocratic countries is just to make sure they’re in our own benefit. Where when you think about us ties with Vietnam, the current state of us Vietnam ties seemed very much in America’s interest. You know, you get a trade partner, you get, broadly a security partner, we raised human rights with them privately. I think we’ve successfully made some advancements on LGBT rights in Vietnam has been broadly kind of a success. Certainly Vietnam is not just liberal society, or is Liberal government as we would like them to be. But we don’t have the luxury of saying we’re only going to engage democracies, there are more autocracies than there are democracies today. So we do have to engage Vietnam, we do have to engage Saudi Arabia, we do have to engage Oman, and we do have to engage Rwanda. It’s just making sure that those relationships are in our benefit, and that we’re using them in our national interest, whether that’s trade, whether that’s security, and making sure that we’re not, we’re not giving the autocrats too much credit, if that makes sense. So we’re not overstating well, how important is the US, the US Saudi relationship, when I don’t think we should just sweep, sweep things under the rug, because we think that relationship is important. I think it requires a real reevaluation of well, how important is that relationship? Actually? How much how much do we actually care and it’s gonna be different for every country, it’s gonna be different. Of course, Australia has a different relationship with Vietnam, United States does, but I think that my broad sentiment is, it’s not reasonable to cut off all ties with autocracies, but it is about managing those relationships carefully.

Gene Tunny  31:59

Okay, Rod, I’ve got two more questions, if that’s okay, I’ve got a question about PPP, public private partnerships. One thing I really liked about your book is, is your openness to the potential gains from these arrangements, these cooperative arrangements between public and private sectors? Could you tell us a bit about PPS, please, Charles, and what you see is their merits?

Charles Dunst  32:27

Sure, I mean, I’m in favour of public private partnerships, only when the goals match at the beginning. And one example I talked about here very frequently, is operation warp speed in the United States, which was the development of the COVID 19 vaccines. And basically, the government gave out a pot of money to companies to develop the current vaccines as quickly as possible. And certainly, while some of these companies share, they probably had a profit motive very well. So thinking, well, this is a terrible pandemic, we need to get our vaccines out as soon as possible. And that was the government goal as well. So clearly, the goals were very meshed from the beginning. And even if the companies in the end are going to make profit, the goal was not necessarily on profit, the goal was then actually delivering. Whereas some of the examples that I’ve other people have raised, particularly when I talked to British media, as well, our our PPVs haven’t necessarily worked as well. And I would argue, well, that’s because the goals weren’t aligned from the beginning, where the government wondered one thing, and the other party was much more focused on profit than anything else. So making sure that you’re partnering with responsible private sector actors, he’s really key. I mean, he should not just be throwing money at private sector firms hoping they’re going to deliver, it needs to be a 5050 partnership goals need to be aligned. But when PPP is work at their best level, I think they serve to actually boost trust in democratic governments, because poll after poll shows that and I showed it for last three or four years, that the private sector is actually more trusted than the government. And that’s true across Europe. It’s true in the United States are basically people look at their governments think of them as sclerotic, and think of them as old and not super effective. When they look at Tim Cook and Apple, they look at the company at Tim Cook, they look at something someone like Pfizer and say this, these are great look at these great innovations they’re doing, look at the iPhone, look at the vaccines, look at the pharmaceuticals. And people do tend to trust the private sector more. And I think governments would be wise to leverage that trust in a way that also helps the government’s deliver. And I think it’s just a question of making sure you’re doing that in a responsible way. And I think there’s this irony, I raised it all the time. That’s the study from a few years ago showing that in the United States, when Americans get good public service, they actually believe that it’s coming from the private sector, because the idea of effective government service is like incomprehensible. Because our system doesn’t work. So well at times that people think, well, of course, you know, I got this, I got this great assistance, I got this homeowners assistance, or I got this vaccine, it must be from the private sector, even when it’s actually from the government. So it’s just one way of basically saying well, publicising, that cooperation, I think can actually help boost trust.

Gene Tunny  34:59

Yeah. Yeah. Okay. And you mentioned that there have been failures of P PPS in Britain that have meant that people in Britain have been negative about them. And we’ve had some notable ones here in Australia too. But what I found interesting is you noted one of the great successes or most successful PPS in the book. So I’ll, I’ll put a link in the show notes to your book, Australia’s upgraded the Ballena bypass highway, completed in 1996, along with four private firms, as in conjunction with the government seven months ahead of schedule and for USD 100 million less than estimated. So that’s an impressive example. And so one I’ll probably use in the future. So yeah, good, good work finding that one. Excellent, Rado? So my final question, Charles is, I mean, how do you think this will will actually work? I mean, how, in what ways will the dictators be defeated? If if we in the democratic countries govern ourselves better? What’s the mechanism here?

Charles Dunst  35:58

I think the mechanism works twofold. Where primarily, if democracies are working better at home, you are less likely to elect people like Viktor Orban, or like Donald Trump, or like ei or Bolsonaro, who come to power through liberal democratic means, and then don’t necessarily govern in a liberal, democratic way, who have little concern, I would argue, in most cases for those liberal institutions, particularly in thinking about Orban Bolsonaro, where there’s no sense of respect for freedom of the press, there’s an effort to stack the judiciary, these are all things that can hollow out democracies from the inside. My argument is that if democracies are delivering better on economic issues on issues like the social safety net, and issues like infrastructure, if people feel optimistic about their future, which many people in democracies Do Not at the moment, they are less likely to vote for reactionary people like these that can erode democracy internally. So that is way one to defeat the dictators at home. And point to is only if you can defeat the dictators at home and prevent that autocratic impulse from taking root at home. Only then can you turn around and actually say, well look at how good we are, as a model. Look at how the United States is outperforming China or look at how Australia is outperforming Singapore, and more people in the Vietnams of the world, or people in I don’t know in a rock or in Egypt might actually look and say, well, we would like to be a democratic system. Even if we don’t agree the United States of the West, then everything. We see how well Australia is functioning, or we see how well Taiwan is functioning. Were looking at how sclerotic Saudi Arabia is their kind of messy, messy internal politics, that corruption scandals, we don’t want that. But it’s making sure that we are working well enough to fend off the autocratic impulse, and simply just that we can be the world’s model once again. Gotcha.

Gene Tunny  37:45

Okay. So showing that you’re the world’s model. Okay. Yeah. Any final thoughts? Charles, before we wrap up? Yeah,

Charles Dunst  37:55

the one thing I would just say briefly is one thing is the line, I keep using it over and over again. But I think it’s important is the lack of faith in democracy right now is really troubling to me. But something I want to say that’s positive is faith in democracy is not necessarily the problem. We all should believe in democracy and work for it. The problem is faith and democracy is automatic functioning, and the sense that everything will work without our engagement. I think the key message of the book for citizens for people who are not lawmakers, not politicians, not in government is just make sure we stay engaged. And we keep pressuring our politicians to actually make democracy work for us.

Gene Tunny  38:31

Got you. And that’s through, I suppose social media or in through, I guess, you’re engaging in the conversation? Is that what you mean?

Charles Dunst  38:40

engaging in the conversation, making sure you don’t miss elections, engaging in your local governance? I mean, it can be on a school board in the United States, you can be in your city council, you can all these local thought their town council, I think far too often we look at our messy politics or messy governments, they just write it off and stop being engaged. But I think engagement is really key to making anything work down the line.

Gene Tunny  39:01

Okay, very good. I guess one more thing, just looking back on my notes. You mentioned one of the big issues with inequality was inequality, I should ask before we go, I mean, do you have any thoughts on how that can be addressed? Or use proposing specific measures to address inequality in your book?

Charles Dunst  39:17

Yeah, one of the things I talked about was inequality in terms of education. And the notion that, basically, I think far too many democratic governments are not starting or not looking at the unequal starting points of children. And basically saying, Well, you know, once you get to university, it’s meritocratic. Its meritocratic when you get into your universities. But of course, if you are born into a lower income household, you’re less likely to have certain academic achievements that gets you into one of those schools. And if you don’t get into one of those top universities, you’re less likely to earn as much money as those who do. And I think there’s this increased need to actually look at starting points and say, Well, how do we make sure that we are doing all we can to let the talented children from lower income households actually rise? Is to top tier universities. And that’s how I think about inequality. There are certainly broader economic reforms that other folks have proposed. But I think about inequality in terms of the lack of meritocracy in the way that basically it does seem like we’re perpetuating kind of an elite with the same people and go to the same schools, their kids go to the same schools, because they have a nice starting point. But I want to make sure that we’re kind of giving more believing and more active inequality of opportunity.

Gene Tunny  40:28

Yeah, and there’s probably another episode in that, talking about how we improve that. But yeah, just wanted to check on that. Because that’s, that’s clearly one of the big issues. Yeah, but I hear about the dream hoarders Is that what you call them in the States? Of hurt? That’s one of the terms that’s been applied to your just that self perpetuating elite or whatever? Have you referred to it? So yeah,

Charles Dunst  40:52

I’ve never heard that one. But that’s a good one. Yeah,

Gene Tunny  40:54

I think that’s what yeah, I’m trying to remember who wrote that book. I’ll put a link in the show notes. So yes, it seemed a bit overly negative to me. But, but I think the data do show that the US is not as there’s not as much social mobility, as people might think, and not as much intergenerational mobility as you might like, relative to some other countries. So I think that’s an uneven in Australia, and in Britain, it’s not as high as as we would hope so. Absolutely. Good point. Okay, Charles Dance from the Asia group. Thanks so much for your time. I really appreciate it. And good luck with the book. I’m sure it will go. Well, I think the message is an important one. And I really enjoyed reading it. So thanks so much. Thank you. Okay, I hope you found that informative and enjoyable. I think Charles is someone we’ll be hearing a lot more from in future years, so I’m very glad I could interview him about his first book. I must say I was impressed by Charles’s passionate advocacy for democracy, and his call for existing democracies to provide better examples to other countries. I hope that Charles is right that we can inspire movements for freedom in non democracies by improving our democracies at home. Maybe that’s a vain hope, but at the very least our own countries will be better run. In our conversation, Charles and I touched on a few ways that democracies could be strengthened. I liked how he talked about improving our education system so that all children get the best start in life. I found a link to the book on the dream hoarders that I was reminded of while chatting with Charles and I’ll include it in the show notes. I think it’s worth having a look at. As always, feel free to email me at contact at economics explore.com. I’d love to hear from you. Thanks for listening. rato thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

43:46

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Credits

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Categories
Podcast episode

China’s falling population & global population update   – EP174

The world’s population keeps growing and passed 8 billion in late 2022, but China’s population is now falling. There are concerns over what that means for its economy and the wider global economy. Is Paul Krugman right that a falling population means a weak Chinese economy? Show host Gene Tunny and his colleague Tim Hughes discuss the possible implications of a shrinking China, as well as global population projections out to 2100. The conversation touches on the environmental impact of a growing population and how well-placed we are to manage environmental challenges.    

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

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

What’s covered in EP174

  • The world’s population is on the rise and passed 8 billion in November 2022 [4:24]
  • Why post-war population growth was so strong [7:43]
  • What does a declining Chinese population mean for the Chinese and global economies? [14:09]
  • The importance of immigration in Australia population growth [19:27]
  • How the world’s population will eventually level out toward the end of the century [23:35]
  • Can governments solve environmental challenges? Discussion of the hole in the ozone layer and the Montreal Protocol [30:09]
  • Paul Krugman vs Dean Baker on the future of China [42:07]
  • Tim asks how do you maintain a growth mindset in a declining population? How do you make it work? [47:25
  • Will demographics and a weaker economy bring down the Chinese administration? [53:06

Links relevant to the conversation

UN World Population Prospects 2022 data

https://population.un.org/wpp/

Paul Krugman’s article “The problem(s) with China’s population drop”

https://themarketherald.com.au/the-problems-with-chinas-population-drop-2023-01-19/

Dean Baker’s article “Paul Krugman, China’s Demographic Crisis, and the Which Way Is Up Problem in Economics”

https://cepr.net/paul-krugman-chinas-demographic-crisis-and-the-which-way-is-up-problem-in-economics/

China’s old-age dependency ratio

https://population.un.org/wpp/Graphs/Probabilistic/Ratios/OADR/65plus/15-64/156

Stanford Business School article “Baby Bust: Could Population Decline Spell the End of Economic Growth?” discussing Charles I Jones views on the link between population, innovation, and economic growth

https://www.gsb.stanford.edu/insights/baby-bust-could-population-decline-spell-end-economic-growth

Transcript: China’s falling population & global population update   – EP174

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  00:07

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. This episode, I discuss China’s falling population and other global population issues with my good friend, Tim Hughes, who helps me out in my business Adapt Economics from time to time. Tim is not an economist, but I always enjoy chatting with him and hearing his views. And I think he asked very good questions, please check out the show notes, relevant links and for some clarifications, for instance, I need to clarify that the fertility rate for Hispanic women in the US has fallen over the last decade, and is now lower than what I remember it being although it’s still higher than for non-Hispanic women. The general point I make about Hispanic fertility contributing to a higher than otherwise, total fertility rate for the US is correct. I think about doing a deeper dive on fertility rates and other demographic issues in a future episode. Please stick around to the end of my conversation with Tim for an afterword from me. Okay, let’s get into it. I hope you enjoy the show. Tim, he is good to have you back on the show in 2023. Good to be back gene. Yes, Tim. Lots to chat about this year for sure. And today, I thought we could talk about one of the big bits of news that’s already come out this year is the news about how China has had a falling population. The population started to fall for the first time. So that was over last year. Did you see that news?

Tim Hughes  02:01

I do. Yeah. And it’s sort of in line with previous conversations we’ve had about world population and declining growth in a lot of countries. But that’s been mainly in the Western countries. So I think it’s the first time we’ve seen this in China.

Gene Tunny  02:15

Yeah, and this is one of the big concerns for China that China could get old before it gets rich. So it’s got an ageing population. And now it’s got a falling population. And there’s concerns about what that means for its economy, its economic dynamism, its ability to look after the elderly people. So that’s one of the concerns, you know, there’s concerns over the dependency ratio and the number of people of working age to support those.

Tim Hughes  02:46

So that’s the same principles. Because I know we’ve talked about a lot of the Western countries have declining, population rates are declining growth rates. So there’ll be the same challenges that those countries face as well, then yeah.

Gene Tunny  03:01

To an extent, it’s much worse in China than in many Western countries, because China really shot itself in the foot, really, if you think about it with that one child policy. And it seemed like a good idea at the time, because at the time, we’re concerned about, well, how do we feed a billion people or so. And so there was a government policy, instituted late 70s, early 80s, that each family can only have one child. And that seemed like a good idea at the time, to help improve living standards, and help feed the population. But what it’s meant 40 years later, is that they’ve now got a declining population. And while they’ve relaxed that one child policy, what they’re finding is that Chinese couples, they’re quite happy with one child, because you know, that’s been the norm for four decades or so.

Tim Hughes  03:56

Yeah, because that was in place until 2016, I saw,

Gene Tunny  03:59

Yeah, around then I think. Yeah.

Tim Hughes  04:03

So I mean, it’s pretty radical, because I guess China is one of the few countries that could implement that – that kind of law. I can’t imagine many countries being able to do that. So it’s interesting seeing it pan out, because it’s interesting that Western countries have a declining growth rate anyway. So without that being put in place.

Gene Tunny  04:24

Yeah. And one of the other big challenges for China, which is less of a challenge for Australia, and for the US, for example. Immigration is a that helps us alleviate some of the challenges from an ageing population, not completely. We’ve got a really strong immigration programme here in Australia, the US gets a lot of immigrants from all around the world. And also because the US has got the benefit of having a large Hispanic population and the fertility rate among Hispanics. So people from Mexico or from South America or wherever Puerto Rico, it’s, I don’t know, it’s over 2.1 For sure, which is the replacement rate. And so what that means is that the US, their fertility rate is not as low as in other other economies. And so they’ve there not the pressure doesn’t come a lot from that source. I mean, in Australia, we’ll end up having that that natural increase turned to a natural decrease eventually. And then we will have to start relying on immigration for additional people at the moment, we’ve still got some natural increase, because we’ve got, because the baby boomer cohort was so big, and then their children, there was plenty of them. And so there are still more people being born in Australia than dying. You get a problem if you don’t have people being born and you got everyone die in, that’s when you know, you don’t have immigration. And that’s what’s happening with China.

Tim Hughes  05:56

immigration has been a big part of national growth for so many countries for since forever. Like, that’s always been the case. And so certainly, places like Australia has count on that massively. Zooming out to a macro level. We’ve been talking about the cause, I remember we had this conversation years ago, and I was open-minded at the time but I was wondering, like, what happens, you know, if world population gets out of control? And you mentioned at the time that the thinking was it was going to level off around 2050 at around 10 billion? I think that might have been raised?

Gene Tunny  06:33

Yeah, it’s been revised. So if we look, we might go to the World Population Prospects. So I’ll put a link in the show notes to this. This is the really authoritative set of projections from the UN. And I mean, they’re really good. They essentially, they were forecasting that China’s population would start declining around now. Yeah. And, you know, India’s, the mean, India’s population is going to overtake China pretty soon, if it hasn’t already overtaken China’s population that we chat about that a bit later. There are some good references I found on that. They’re on the 8 billion mark now. Yeah, I think we crossed 8 billion last year. If you look at the world population, Prospects report, they’re released last year. So the world’s population is projected to reach 8 billion on 15 November 2022. Can you remember what you’re doing that day, Tim?

Tim Hughes  07:24

No,

Gene Tunny  07:25

No. But that was back to the momentous day for the world. So you know, 8 billion amazing. I don’t know what it was, when I was born, it might have been in the 70s. It might have been put it in the shownotes. But I remember when I was at school, it was 5 billion or so

Tim Hughes  07:43

This is a thing that I saw, I remember at the time when we first had this conversation, because the rate of the doubling of the world’s population was so fast. I mean, the turn of the century around the First World War turn of the previous century, is around the 2 billion mark, I believe. And so to get where we are now is like a billion. I mean, that’s a huge growth. And this is the history of the universe, for instance, like for our species on this planet, any planet, you know, to be this money. So it’s a really, it’s a really fast growth.

Gene Tunny  08:19

So why that occurred? It’s because of improvements in agriculture is because of the fertiliser, the ability that’s that process the was invented by those German chemists.

Tim Hughes  08:33

Those German chemists, yes.

Gene Tunny  08:34

I’m not going to pronounce it. I’ll mispronounce it for sure. But there’s a there was a process that to artificially or create ammonium, I think for fertiliser, if I remember correctly, so there’s a something like that there’s a there’s a chemical process that was perfected in the early 20th century by some German chemists. And that meant that we were able to produce, you know, fertiliser artificially, and then that meant that our agriculture could be much more productive. And all of these, you know, we could support much larger populations in India and Bangladesh, and all over Asia, in Africa. So that’s a big part of it. And the other part of it, of course, is just improvements in public health and understanding of germs and bacteria and viruses and all of that eradication of smallpox, all sorts of things that have that mean that billions of people who wouldn’t have been born or wouldn’t have survived beyond infancy, are able to survive and now we’ve got 8 billion people. It’s just incredible. When you think about it.

Tim Hughes  09:42

Infant mortality at that time was terrible, like, it was very common for families to have any number of kids who didn’t make it through to adulthood. And that has definitely improved.

Gene Tunny  09:58

Well, just got any I mean, you got any cemetery and yeah, any older cemetery and you just see all the graves and memorials to infants. It’s incredible, isn’t it?

Tim Hughes  10:08

But go back to the conversation that started this? Well, certainly, as far as I was aware, because so I was of the mind, like, you know, what happens if we just get more and more and more, there’s a massive problem, and it just gets out of control. But you mentioned that this was actually foreseen that there will be a levelling off. So this extreme growth that we’ve seen from so taking that 2 billion mark around the 1900 mark, 2 billion to where we are now 8 billion. I mean, if, you know, I’m thinking, Well, what happens at the point where we can’t sustain any more people, but it was foreseen that we would have this levelling off around 2050. And then 2100, not much growth between 2050 and 2100. Is that still the case?

Gene Tunny  10:49

Yeah, yeah. So if I’m looking, I’m looking at the UN, the world population projections that were put out last year, the latest projections by the United Nations, suggests that the global population could grow to around eight and a half billion in 2039. 9.7 billion in 2050. And 10.4 billion in 2100.

Tim Hughes  11:12

So that’s a real that’s slowing down a hell of a lot from where we are now.

Gene Tunny  11:15

Yeah, yeah. And that’s because of that demographic transition they talk about. So I think we talked about that last time. How as economies get wealthier, as people get wealthier, public health improves, then they have fewer children.

Tim Hughes  11:30

That’s interesting to me, because you would think it’d be quite logical to think it would go the other way, that people would have more children under those circumstances. But there’s actually fewer.

Gene Tunny  11:39

Yeah, yeah because in poorer economies in poorer countries, children are in insurance policy. And they help look after their parents in old age. Yeah, So that’s, that’s how it works.

Tim Hughes  11:52

 I’m thinking that my kids, I might have to mention that to them.

Gene Tunny  11:58

Yeah, so that’s why. And historically, yet, so you’d have that have more children, of course, birth controls, and other another thing, too, right. So birth controls part of the story. But I think largely, it’s, it’s due to the fact that if you’re in a more if you’re in a poorer economy, then it’s probably more likely to be agrarian, or you have lots of people on the farm. And you know, having children’s that’s, that’s your workforce. Right. Okay. Yeah. So, I mean, that sounds harsh, but that’s what it is, right. So that’s  your workforce, it’s to help you out in the home, and it’s to look after you when you’re old. And so that’s why in poor economies, they have more children, and there tends to be this demographic transition, that’s well observed that countries really have this sharp or this big drop in fertility, as they get wealthier.

Tim Hughes  12:53

It’s a really interesting, I mean, I think it’s a good thing, like, you’d have to say, you know, I mean, I was, I was pleased and relieved, to see that that was going to level off, you know, because it’s obviously, you know, if we think of like, a parasitic kind of relationship, you know, and the planet, if we’re a parasite on this earth, and just gonna get too many of us, and potentially, like, trash it, which is still possible with 10 billion people. But it looks like everything’s turning around there to make better choices towards the future generations. So hopefully, that works out. But if the population was going to keep growing, that was certainly going to be a bigger issue. But hopefully, that will make it easier for us to manage the planet and our lives on it in some more sustainable way, you know, that we can sort of level out and do something. And I know, this then brought us to another question of, you know, sustainable growth being constant. Always more, always more. What would that sustainable contraction look like? Or D growth or flexible growth, that we’ve got a few different terms for it that we’ve come with for it. But it’s an interesting sort of concept of like, well, you know, not everything is going to grow, grow, grow. So how do we sort of like, manage that levelling out, you know, as humans on this planet?

Gene Tunny  14:09

Yeah. Well, this is one of the big questions about the Chinese economy and what that means for the global economy. Paul Krugman wrote a really provocative, I mean, really well written piece in The New York Times following that news, or might have been earlier actually a better check when he released it. We might cover that in a moment because there is a question about what a declining population in China or Japan what that means for the dynamism of the economy and your ability to keep everyone employed. So we might talk about that. Just wonder if we need to go back over those world population implication?

Tim Hughes  14:47

Yes. Because that’s in China, for instance. That’s what implications already hasn’t it with what’s going on there. So there’s a lot to unpack just with China, let alone the rest of the world.

Gene Tunny  15:00

Yeah, so these are the big takeaways from this World Population Prospects report. So population growth is caused in part by declining levels of mortality as reflected in increased levels of life expectancy at birth. So globally, life expectancy reached 72.8 years in 2019. So that 72.8 years, that’s a globally that’s not that’s across the whole world, right, not just in the wealthy countries an increase of almost nine years since 1990. So that’s a huge achievement. The other thing I think’s really interesting, in this UN report, this is this demographic transition we were talking about. In 2021, the average fertility of the world’s population stood at 2.3 births per woman over a lifetime. So that’s above the replacement rate of 2.1. Because you need that extra point one to account for the fact that some children won’t make it out of childhood. So that’s 2.3 births per woman over a lifetime having for having fallen from about five births per woman in 1950. Wow, that’s extraordinary, isn’t it? Global fertility is projected to decline further to 2.1 births per woman by 2050.

Tim Hughes  16:14

So was the baby boom, in 1950, yeah?

Gene Tunny  16:18

Yeah, I mean, a lot of that’s going to be in the reason, it was five births per woman. A lot of those births would be occurring in the developing economies in the emerging economies in India and China, because I think China had a big baby boom. And in Australian trying to remember what our fertility rate got up to, I think it peaked in the early 60s, because I remember looking at the data, because we will look when we were working on the intergenerational report in treasury, we were all over this data, I think, maybe got to three or three, between three and four. In Australia, which was pretty high for Australia. Now it’s under two. So it’s below replacement, if I remember correctly.

Tim Hughes  17:01

That reminds me because wasn’t it Peter Costello, who said, have one for each other and one for the country? Yes. So that was the opposite of what China were doing. So Australia was like popping out? Well.

Gene Tunny  17:11

Because we were determined that we need people. Yeah, so it’s interesting. So historically, we wanted to grow Australia’s population for defence reasons. I think Arthur Cornwall who was a minister under Chifley I think that was his he wanted and that’s why he encouraged migration. Isn’t that how you got over here?

Tim Hughes  17:33

Do not tell the authorities, will you. No, my mom’s Australian. So that is my connection.

Gene Tunny  17:42

Oh, that is right, I am just kidding. We encourage, we encourage migration after the war to try to build up the population, I guess, because we thought there’s a limit to how many you know how many how fast you can grow the population just relying on the fertility of, of the population.

Tim Hughes  17:59

I know there was a big like that there’s been a constant source of people from the UK anyway, like, the Ten Pound Poms and all of those guys who came over.

Gene Tunny  18:08

BJs. Yeah. And it’s so I guess we were relying on immigration quite a bit. And even with immigration, we will still have facing this ageing population challenge. And then Treasury crunched the numbers, and it looked like, Okay, this is going to be bad and 30 or 40 years time, because there are going to be fewer people of working age supporting the people of the elderly people also children in the dependency, like, I can’t recall the figures off the top my head, but you’d often see figures, which would suggest that whereas once there were five working people, for every dependents by, some data, there’d be two and a half or whatever, they’d be those sorts of scary statistics, and the budget deficit would end up being 5% of GDP if we didn’t correct this. And so then they the government of the day developed a strategy to try to boost population, or boost the fertility rate and the baby bonus and there’s a huge debate over whether it was effective, whether it was whether it made sense to spend that money, because a lot of people just got the whatever it was $5,000 baby bonus and went out and bought a plasma TV.

Tim Hughes  19:27

We had a baby at least one baby in that time, maybe two, we had three altogether, but I think two of them had a baby bonus. Yeah. So we’re very happy with that.

Gene Tunny  19:37

Yeah. Totally, but the fertility rate did increase over that period. And which, which meant that there was all this talk about Well, Peter Costello’s being the only minister in the Western world, has ever managed to increase the fertility rate or something like that. So we got a lot of praise over that. And there’s that famous photo of him with all the babies surrounding him. Yeah, so I guess we work tried to address our concerns about ageing about declining population, well, we don’t I mean, we’ve still got a growing population, we’ll end up where 26 million now, I think and we’ll end up at 40 million by 2050. Possibly.

Tim Hughes  20:16

So the reality of that is that that’s going to be mainly from immigration.

Gene Tunny  20:19

Yeah, there’s still they’ll still be some natural increase, but a lot of it will be immigration. That’s correct.

Tim Hughes  20:25

I think it’s a really good. I don’t think it’s widely known by everybody, of the importance of immigration, like it’s it, as far as like feeding that growth and like, supporting the ambitions of a country, immigration is essential to have that growth. You know, it’s a big part of it. I know, certainly, in the UK. I know, people from West Indies and, you know, the Caribbean, India, Pakistan, you know, massive influx at different times to be invited over into work, you know, it. And, of course, then there were thriving communities of generations now of people who are British and add to the whole vibrancy and diversity in the country. And that’s part of I mean, I know, it’s a very controversial subject in many countries. You know, we’re not going to cover here. But the fact is that immigration is needed for that growth. Yeah.

Gene Tunny  21:18

Yeah, there’s one way that you can get around this, this challenge in particularly in the western economies, which are projected to have falling populations, you can take advantage of the fact that, well, the population is not falling in other parts of the world in the emerging economy. So there is that opportunity for migration. And we’ve got to look at better ways of allowing people to, to migrate, including on a temporary basis, a lot of the concerns about migration or about people migrating for work purposes, and then settling there permanently and bringing their families. So there’s a lot of concern that. So countries like Germany, which have had bad experiences with or they do them perceive the perceived that they’ve had bad experiences with guest workers in the past, that they’d want to make sure that any migration is temporary. So I think countries are looking at ways that they can have temporary workers schemes that I mean, we’ve got all sorts of visas for temporary workers now. And we’re getting people over from the Pacific where we were before COVID, to help pick fruit here in Australia. So that’s, that’s, yeah, I think migration, certainly part of the solution. At the same time, you want to make sure that it’s, it has community acceptance, and you’re not putting too much pressure on community services, you want to make sure you’ve got the infrastructure to support the population. Yeah, so a bit of a challenge there. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  22:57

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Gene Tunny  23:27

Now back to the show. Let me just check that Australian population forecast Tim.

Tim Hughes  23:35

So I was gonna ask you Gene like, with that levelling out, frustrating gets around 40 million.

Gene Tunny  23:41

That’s what I wanted to check. Yeah. Right, because that’s the number I had in my head. But let me just check with that. That, but go ahead, keep going. 

Tim Hughes  23:48

Yeah, I was gonna say, I mean, I guess Western countries are already there, where they’re starting to level out and have a very slow rate of growth, or in decline. And so it’s just with infrastructure, and all those different things like at some point, you can imagine that people will still want to move around the world. So even with 10 billion, 11 billion, it might be a case of people leaving one area on mass to try and get into other areas, which happens all the time. I guess it’s certainly happening now. Yeah. And so a big part of that is just managing the amount of people that are on this planet, but with the sustainability sort of question, you know, it’s that up until now, everything’s been about growth, you know, population growth, and more, more and more, to getting back to the point I was talking about earlier, like, you know, it’s gonna get to the point where it’s like, well, this is we have to manage this the best way we can. And so yeah, it was going back to those areas of D growth or flexible growth, sustainable contraction.

Gene Tunny  24:45

Yeah, sure what you mean by that, Tim. And well.

Tim Hughes  24:47

I guess, I guess it’s the kind of thing because of, with that levelling out of the population, I mean, like I said, I think it’s a good thing, you know, because there are enough of us.

Gene Tunny  24:57

Yeah. If you’re concerned about the ability of the planet to support the population and there are plenty of people who are who are saying, Oh, well, we’re actually exceeding the planet’s carrying capacity at the moment, which I don’t believe because if we were, I mean, we wouldn’t be able to keep growing our population, and obviously, where we’re able to support the current population, just by the fact that we are supporting it, right,

Tim Hughes  25:20

I guess at some point as a planet, they’ll still be moving people moving around, like I mentioned, like, yeah, that’s understandable. But the growth mindset, as far as population goes, will have to change at some point, you know, like, you know, it’s not just going to be more and more, it’s a case of like, doing better with what we have. Does that make sense?

Gene Tunny  25:38

I think we should always be trying to do better with what we have. I mean, as an economist, as an economist, I think, yeah, I totally agree with that. We’ve got to be more efficient and do better and, and make sure we’re not we’re properly pricing our impact on the planet. So we’re talking with, we’re not polluting too much, or we’re managing the environment as best we can. Yeah,

Tim Hughes  26:02

yeah. I mean, I see good things coming from it. Like, I think it’s a good sort of place to be, because everything up until this point, like it’s, you know, from 2 billion in 1900, to a billion now to 10, or 11 billion. This is, I would imagine that things will have to change in the way that the world is looked at, as far as its population goes and said, Well, this is, this is, how many of us are going to be putting, you know, waste into landfill? How many of us are going to be, you know, how we deal with our own sewerage, and all that kind of stuff? You know, what I mean? Like, the stuff that ends up in the oceans, how we treat our soil, all of that, like as a global sort of, like management of, okay, how do we do this to the best of our abilities, so we can keep doing it indefinitely. And if we have if we had an exploding population that was getting forever, and that was going to be a scenario that would be potentially catastrophic. And so that’s, I guess, we’re looking at it’s like a macro sort of like view of the whole planet, it’s okay. Well, you know, what can we expect to do better? Where we’re not just constantly expanding? As far as like the population goes?

Gene Tunny  27:07

Yeah, I think why is this definitely an issue to manage? How do we deal with all of that, and greenhouse gas emissions? We’ve got to, we need to get them under control sometime, and then you can debate how quickly or not in the Greta Thunberg, we’re all going to die in 10 years, or there’s a climate catastrophe. I think we’re gonna I can’t say, well, basically,

Tim Hughes  27:36

I haven’t heard that.

Gene Tunny  27:39

Oh, yeah. I think so, I mean, we’ve had 30 years of blah, blah, blah, not doing anything, which is actually true, right? I mean, the government’s leaders around the world will talk about how they’re doing all of this, all of these great things to reduce greenhouse gas emissions and get climate change under control. And meanwhile, global emissions keep rising. And so this is one of the points that are the conservative critics of Jacinda Ardern pointed out was, she’s very popular. She’s a progressive politician. She’s very popular among progressives worldwide. And yet, before COVID emissions were rising in New Zealand, according to these commentators, I probably should fact check that one. It’s a big challenge, because our whole industry of our industry, and our economies have been reliant on fossil fuels for so long. And it’s like turning the Queen Mary around. Right?

Tim Hughes  28:34

Yeah, because I know, we’ve talked about that with the energy sector changing massively, yeah, at the moment, and there are good things that potentially can come from it, it seems to be heading in the right direction, but it’s, you know, obviously, in a transition period, at the moment. And I wonder how much of that, you know, is down to having short term governments, who, you know, we’re expecting too much from governments, with a limited term of three or four years to be able to make these changes, you know, like, because obviously, this is a long term view that we need to take, I don’t know, 2050. Net Zero, are these sort of like goals that get put in? But sometimes I think with the longer goals, it’s easier for people to say, Yeah, we’re gonna do that. And then the action is less than what it needs to be.

Gene Tunny  29:15

Hmm. I think you’re right. I mean, the system we have the democratic system, the three or four year electoral cycle, yeah, I think that makes it harder. But I think it’s better than the alternative. I mean, we wouldn’t want to have a dictatorship was I mean, they could end up imposing, you know, a very rapid decarbonisation or that is incredibly costly on us if they thought that that was the right policy, like look what China was doing with the lock downs with the COVID zero until I realised that okay, we’re going to have a revolution on our hands if we don’t relax this policy. I think you’re right I mean, I think the democratic system we have this short term focus. Yeah, the fact that it is easy to always point to the cost the short term costs of any action. Yeah.

Tim Hughes  30:09

I mean, because I have to say like, you know, at times it seems that with governments, it’s hard to know how much difference they do make, or they can make, you know, even with the best intentions in a term, which goes very quickly.

Gene Tunny  30:21

Well, I think they can make a lot of difference. Look at problems we have solved, look at the Montreal Protocol, which meant that we eliminated the use of Chlorofluorocarbons. The ozone hole.

Tim Hughes  30:36

I saw that that was that had improved that that was a Yeah, a good improvement from what it had been.

Gene Tunny  30:42

So 1987. I think that was the Montreal Protocol. Where all the governments, particularly all the governments of the world agreed that yet we’ll phase these things out. Now. That’s different from the climate change challenge, because there were easy substitutes or substitutes, which weren’t too expensive for CFCs. Yeah, that we could replace them in the aerosols. But I think, yeah, I think governments can make a huge difference. The problem with the current mean, there are all sorts of problems is the issue of, well, for Australia. I mean, the view I’ve always had is there’s no point us doing, doing much of if China and India are still going to keep increasing their emissions, and also the states. I mean, we need ultimately, you need the major economies to be leading this. Otherwise, it’s not, it’s not really going to happen.

Tim Hughes  31:37

Well, it seems clear that innovation is going to drive it, you know, because and I get that, yeah, because it’s hard to put yourself at a disadvantage when everyone else is able to take advantage of that, you know, so that argument, for instance, here in Australia, where we’re smack fairly small country, but not necessarily been supporting too many of the netzero sort of ambitions around the world, you know, because of what you’re saying, like, let the big guys lead the way. But innovation, I think we’ll do that as soon as it gets to the point where the energy is cheaper than digging coal out of the ground. If there’s a clean way of producing that energy, then everyone will follow.

Gene Tunny  32:16

Oh, exactly. And that’s what we need. We need that technological innovation.

Tim Hughes  32:21

And the market, like from our discussions before with people in the energy sector, has been that the market is driving this. So we don’t have to, I mean, governments can help by making it easier and sort of greasing the path towards encouraging those changes to happen. But certainly the market is driving it and innovation is providing the opportunity for the market to take up those options with renewable energy.

Gene Tunny  32:42

Yeah, you’re thinking about that conversation we have with Josh. Yeah, yeah, that was interesting. Or he’s talking about the fact that the nature of this transition of any transition really is it’s going to be disorderly, it’s hard to get these things done in an orderly fashion.

Tim Hughes  32:58

I always manage to steer it back to this, don’t I Gene. It doesn’t matter what we talk about.

Gene Tunny  33:01

It’s important. If I’m thinking about, well, what’s the big potentially the big risk to I mean, other than nuclear war, I mean, it’s always a threat, particularly with what’s happening in Ukraine. Now I’m in the risk of that elevated, but the other big, potentially existential risk. I mean, you’ve got to put some probability on it. I’m not as concerned about it as some other people. I’ve got the Steve Koonin view of it, he used to work for Barack Obama, he was in the administration, I think it was in science, one of the I don’t know if he was in cabinet, or he had a, he had a senior position in the Obama administration is a scientist, he was at Cal Tech. And his view is that Yep, this is something we’re going to deal with. But we’ve got decades to deal with it. So what we’ve got to do is to start putting in place agree on some policies globally that are going to get us on this smooth transition path and, and also fund innovation trying, you know, it’d be great if we could find the cost effective solution, perhaps nuclear fusion, that there’s, there’s a lot of excitement about that. But then you got to deal with the nuclear waste. And what was that? What was actually, maybe there isn’t waste with nuclear fusion? Maybe that’s one of the advantages of it. Well, there’s less waste.

Tim Hughes  34:18

I still get my fusion and fission mixed up. So

Gene Tunny  34:21

Fusion is more powerful. Fusion is what the sun does.

Tim Hughes  34:26

Yes, right. Yeah. Fission is the separating of fusion is the joining. Yeah. Yeah. But so and with and there was a breakthrough with Fusion then yeah, just the other week, but it was still claimed that that could be decades away from it being useful for an energy source on a commercial scale. However, if it’s decades where that’s significant in the history of humans, however, with that, especially with that conversation with Josh, it was record notion that, you know, having a suite of different options for clean energy makes a lot of sense. You know, we don’t have to put all our eggs in one basket. And, you know, one choice so, and clearly those things are happening as we speak. And quite successfully. I mean, like the, you know, there’s still a lot of clean, renewable energy is getting more and more prolific.

Gene Tunny  35:22

Oh, no doubt about that. I mean, aren’t they turning the North Sea into a wind farm in? Have you seen that in? Because the North Sea is really good for the wind turbines. Well, it’s I mean, it’s not shallow, but it’s it’s not very deep the North Sea? Was there’s bits of the North Sea that are only a few 100 metres deep, I think, isn’t there?

Tim Hughes  35:48

I mean, obviously, it must be, you know, viable. But it seems odd to me that a wind farm in an ocean, you know. But, obviously, there’s, you know, there’s something in it. Yeah, yeah. It’s extraordinary. It’s a really interesting time. So because all of this is coinciding with this levelling out of the population. So it seems to be a, I don’t know, it feels like it’s a good place to take stock and see how we can sort of really manage this planet. Well, you know, and cleaning it up is the first way to do it, you know, so how we can keep the oceans cleaner than they currently are, like, clean them and stop polluting them and how we can manage our waste, you know, 10 billion, it’s a lot of foods.

Gene Tunny  36:30

Well, I guess this is what’s part of this is what’s motivated all of these measures or measures we’ve had in Australia to reduce plastic waste, and then I was growning about it when they initially announced it. But I guess you adapt. I mean, you can’t get the single use plastic bags any more at the supermarket.

Tim Hughes  36:48

You’re still hurt about that one.

Gene Tunny  36:51

You can’t get the single use plastic cutlery Well, anyway, we should get back to this population stuff. It is important. I do recognise the importance of what you’re talking about. The population of Australia is projected by the Treasury, this was last year, or this was 2021, I mean, who knows. But if they updated and they’ve got different migration projections, these numbers could be significantly different. But they were forecasting the population would grow from around 26 million, around 2021, up to 32 million in 2041, 36 million in around 2050-51 and then 39 million by 2060-61. I think I’ve seen previous, I think I hadn’t had in my head the idea that it’d be about 40 million by 2050. And yeah, it’s hard. It’s hard to forecast. It depends on fertility, it depends on migration, and then all of that sort of thing. So and life expectancy. So quite a few moving parts there. Right. The other thing I want to talk about, Tim, if you still got time, yeah, it’s this issue of what does the declining population mean? So what is China’s declining population mean for its economy and therefore the global economy? One thing to keep in mind, of course, is that I think, what were we talking about a reduction of a population of 850,000 people. So that’s under 1 million, the Chinese population is 1.4 billion. So in percentage terms, we’re talking. What’s that less than point one of a percentage point? Yeah. Does that make sense?

Tim Hughes  38:37

Yeah, I mean, it’s. So it’s level that basically.

Gene Tunny  38:42

I guess that’s one way of looking at it is that it’s yeah, it’s hardly you’d have like, really noticed that on a chart, if you drew the population. The thing is, it’s a sign of things to come, because we all know that it’s expected that the Chinese population would, is going to start falling. And there are all sorts of projections as to where it could get to. By 2050-2100, I think I’ve seen an estimate somewhere that their population by 2100, could end up being, I don’t know, 700 million or so. Yeah, it’s a really big reduction because of that one child policy. I’ll put the actual figure in the show notes, but it’s quite dramatic. Just looking at what that impact of that one child policy, ultimately will be on their population in the future, because you’re not replacing your population. Right. So that’s, yeah.

Tim Hughes  39:42

So it’s funny actually, China is like a microcosm of the globe in a way, isn’t it? Because it sort of has fairly tight borders. And so the decline that that would be for China, would be an example of like, how do you manage that sustainably, how do you sustainably contract successfully from 1.4 billion to 700 million. And yeah, the thing is like, you know, China is extreme in many ways. They may manage it very well. Now, I’ve got no idea how but I think that’s a really interesting sort of point. I mean, they’ve had massive change. Was it 1962 to see the great leap forward? You know, I mean, certainly from 1980. They’ve made in the last 20 years, 25 years, they’ve made themselves this sort of, like, workshop of the world, you know, they’ve produced so much stuff. And they’ve become very wealthy in that time.

Gene Tunny  40:36

Well, the wealthier and some people have become very wealthy, their per capita income is still I don’t know, it’s under a third of what it is in the States. It’s gone. It has gone through big changes. I mean, yeah, considering that once but I mean, I don’t know when you were young and when I was young people were saying, well eat your food, because there are people starving in China. Right. I don’t know if maybe that’s an Australian thing. Yeah. I mean, yes. It was probably still true when I was when I was young. Right. But it’s not, I don’t think it’s true now. Or it’s only in small pockets. Right. Whereas famine used to be a huge problem. And you know, people were incredibly poor. And most people lived on the land. But now I’ve had all the shifts of hundreds of millions of people from the agricultural areas in China into the cities. And it’s just, it’s just amazing.

Tim Hughes  41:27

It is fascinating, because made in the 80s, like you couldn’t go to China, like it was closed off to I think it was around the mid 80s, that they sort of opened up or towards the end of the 80s. You know, and it was a new thing, like tourism in China was a new thing. And of course, it’s really well, I mean, COVID aside, you can travel there freely now. But it’s gone through massive change in a very short period of time. It’s really, you know, I don’t know, if they’ve come to a critical point in their sort of growth as, as this powerhouse of production. With a declining population, I guess that’s going to make a big impact.

Gene Tunny  42:07

Yeah. So a lot of the discussion that pundits and commentators and economists having at the moment is around well, what does this mean for their economy? What does it mean for their society? Paul Krugman had a great article. I’m not sure I entirely agree with it, because there’s a really excellent response from another American economist, Dean Baker, which I’ll link to in the show notes. But so Paul Krugman in the, in the New York Times the other day wrote, a declining population creates two major problems for economic management, these problems aren’t insoluble. But will China rise to the challenge? That’s far from clear, the first problem is the declining populations, also an ageing population. And so you’ve got this issue of the dependency ratio, paying for looking after those people. The other thing Krugman is worried about is that a society with a declining working age population tends other things equal to experience persistent economic weakness, Japan illustrates the point. Now there’s a debate about just how badly Japan’s fared relative to other countries, it certainly hasn’t grown as fast as the US or, or the Australia. But it hasn’t collapsed either. I mean, it’s managed to maintain reasonably low unemployment, it’s kept people employed. But at the same time, they’ve been the government’s had to try to prop up the economy, it’s accumulated a huge amounts of debt. So there are certainly challenges with Japan. And partly that is because it’s, it does have that declining population, as Krugman notes. So the point Krugman is making its a Keynesian point, in a way. What he’s saying is that if you’ve got a growing population, then that, from that, for what follows from that is the need for additional capital investment in your economy, additional spending that helps keep people employed. Yeah, so that’s the that’s the point he’s making, and that if you don’t have that growing population, then you’re at risk of what Japan experience with his last decade or so and potentially at risk of deflation. So I’ll put a link in the show notes here, because we’re getting up to near the time we set for ourselves. This might take a while. Yeah. It’s incredible. And so Krugman is concerned because he thinks that what this declining population could mean ultimately is that China has a period it ends up being economically weak. And there’s also some evidence or there’s an argument from this, this economist at Stanford School of Business, Charles Jones, he argues that we’ll get a declining population is problematic because then you’ve got fewer people to solve problems, it’s less likely you’ll get an Isaac Newton or Albert Einstein, etc. So that’s one of the concerns. When who knows if that’s, I don’t know how valid that is. That’s enough. That’s a hypothesis. I mean, we’ve still got billions of people, right?

Tim Hughes  45:21

I mean, you can say those guys came around when there’s a far fewer people on the planet.

Gene Tunny  45:24

Exactly. So who knows if that’s actually a legitimate concern or not. But that’s quite a, that’s a, I should have him on the show just to talk through. It’s no Charles Jones, you know, and get him on the show rather than just say, I don’t agree with it, or maybe I haven’t done the the concept justice. But there’s certainly I can see the logic, but there are concerns that the dynamism of your economy would be at risk. If you have fewer people. There are concerns about well, how does your economy adjust to this in the short term as you’ve got declining population, and you’ve got less need for investment? We’ve got all of these buildings that have been, you know, what we don’t have as much need for new housing or new construction, which does help employ people? How do we how do we manage that? And that on the other hand, there’s this great critique of Paul Krugman by Dean Baker, who’s an economist and co founder of the Centre for Economic Policy Research, which is DC Think Tank, it’s a progressive Think Tank. I really thought this is a clever critique. And Dean Baker, apparently, his Wikipedia entry claims that he was one of the first people to have foreseen the subprime mortgage crisis in the States. So yeah, I think he’s, he’s got a good reputation. He makes the point that well, Japan’s not really as bad as you think. And then it hasn’t collapsed. They seem to manage to muddling through in some way. And then it’s not, obviously they’ve still got problems because of all the debt. But he’s saying look at something you can you can manage, and there are actually benefits from a declining population. He, he notes that Japan cities are less crowded than they would be if its population had continued to grow. This means less congestion and pollution, less time spent getting to and from work and less crowded beaches, parks and museums, these quality of life factors don’t get picked up in GDP. I’m actually not sure. Does Japan have many beaches? I mean, I understand his point.

Tim Hughes  47:25

Yeah, Echo Beach, yes that is in Japan. That’s one beach that I know.

Gene Tunny  47:32

I was just wondering, I don’t know, never haven’t been to Japan on an island. So I guess it’s yeah. Oh, of course, they have beaches. Yeah.

Tim Hughes  47:39

But that’s actually a really good way of putting, I guess one of the things that we’re talking about is like, you know, declining population doesn’t have to be bad news. I mean, I guess, you know, the, the challenge would be how do you keep maintain a growth mindset in a declining population where can you make it work to your advantage? Or, you know, how can you do the best, you know, with, because part of it would be in a declining population. Once that first surge of older people goes, then it should level out with the number of older people as opposed to the number of younger people, I guess, because as you’re peaking towards your peak population, you’d have the most amount of old people is that right? I’m sort of thinking out loud here. But I’m just wondering,

Gene Tunny  48:25

Tim, is a good question mate. I mean, you’re asking does the as if as your population declines, what happens to the age composition of the population? So I’m gonna have to take that on notice. I mean, I think that’s a hard one. I mean, there could be a point, there could be a time when both the dependency ratio gets worse and your population keeps falling? That’s a good question. I don’t know, let me put something in the afterword about that. I don’t know, conceptually, I can’t figure it out right now on the fly. That’s good question. 

Tim Hughes  49:00

But it’s that thing of like, I imagine, like the you know, because the challenge is this is to manage that. Well. Yeah. And like, so. I mean, one thought that comes to mind with that is, like, the whole thing of retiring at 65 has been around for a long time and around 65, whatever it is now.

Gene Tunny  49:16

67 in Australia now.

Tim Hughes  49:19

Y eah, this thing of like, it’s not necessary for people to stop doing what they do, you know, there’s so much wisdom and, you know, a good life experience that gets lost with that mindset of like, see you later at 67. You know, and I think opening up the opportunity for people to stay in a lower capacity timewise you know, because I think it’s important for people to wind down or do something different or start a new career, you know, like whatever it may be. So, I think maybe the way that you know, we approach ageing or the way we look at ageing, could be one of the factors that changes that declining population as to no right this could actually be looking at how do we manage a declining population better you know, maybe it’s our attitude towards all the roads that we can start with.

Gene Tunny  50:04

Yeah, I think it has to start changing because all the baby boomers are nearly retired, aren’t they? And then Generation X will start retiring.

Tim Hughes  50:13

But it’s that thing of like, you know, as we live longer, we can expect to have more good years, you know? Yeah, hopefully, yeah. And they can be, they can be good years to contribute back towards society as well. It doesn’t have to be just a retirement where you don’t pay any tax at all, because that’s part of the problem isn’t like we’re fewer people paying tax to support an ageing population. You know, so I guess and it’s not just making people work later unwillingly. You know, to give people the opportunity to have different options, different levels of engagement, you know, so they don’t have to do 40 hours a week, of course, but yeah, doing something different stimulating that, you know, people could enjoy doing for longer.

Gene Tunny  50:57

Podcasting.

Tim Hughes  50:58

Podcasting. Exactly. Everybody wants it to be a DJ, everyone was a DJ in the previous life.

Gene Tunny  51:05

Yeah, exactly. I don’t have the turntable, give it time, give it time and we can bring that into the show. Cable

Tim Hughes  51:13

Maybe that’s the way we merge the two.

Gene Tunny  51:17

See how we go. Okay, so I’ll put a link in the show notes to this, these articles by Paul Krugman and Dean Baker. I mean, I don’t know. I mean, some hours of the day I think Krugman is right, then I think I actually Dean Baker is making some great points. I’m still processing it all myself. So Dean Baker, I’ll put a link to this article. It’s on the Centre for Economic Policy Research website. One final point, I thought that well, I thought I should make that Dean Baker may not that was a good one is that? Well, actually, I mean, see it as an opportunity. I mean, China’s got a, it’s got an ageing population, still, while its population is starting to decline, you can put people to well, you’ve built all of that’s right. He’s saying one of the issues that Krugman identifies is that they were building all of this, all of these buildings that, that they may not need these ghost cities. Well, you could use them for aged care accommodation. Or, you know, I don’t know how feasible that is. But that was one of the points that he made. So I thought that was that’s potentially interesting. I mean, there will always be things people can do that the challenge is, can your economy adjust to employ them? So do you have a flexible economy? Gotta make sure you’ve got you’re not regulating business, there’s not the burden on businesses and to hire so that there can be that that adjustment, you don’t have rigid wages or rigid, rigid IR policies that prevent people moving into to new occupations? Yeah, so Dean Baker’s quite positive about what could happen in China. And I’ll encourage, if you’re listening, please read his article. I probably haven’t done it, done it justice. With that, that quick summary there. So yeah, I’d recommend reading that I thought that was really good. And Oh, one other thing we should talk about is that there’s one other concern with the declining population. And the issues with ageing population in China lack of dynamism and what it could mean for their economy, the stability of the whole country, right, the political issues. So Peter Zeihan, I think that’s how you pronounce it. He’s a academic over in the States, he’s come out with his controversial view that the Chinese system as it exists now, that Communist Party regime can only last another 10 years out.

Tim Hughes  53:44

And I mean, it’s been speculation, but it could be true.

Gene Tunny  53:47

If it turns out to be right, he would be held as a genius, the genius.So who knows.

Tim Hughes  53:52

Someone, somewhere will be making those calls.

Gene Tunny  53:54

I mean, my feelings is what I was talking about with Alan Morrison in this chat about enterprise China toward the end of last year. And I think ultimately, that there has to be a regime change in China. I think as economies get wealthier, then there’s naturally more support for democracy.

Tim Hughes  54:14

There seems to be a bit of a paradox with ideology in China at the moment. I mean, we’ve communism is the main ideology, of course, but they’ve embraced capitalism, to the point where individuals are getting mega wealthy, but then they’re sort of getting called into the headmaster’s office and sort of like, you know, put in detention for a bit to sort of keep them in line Jack Ma, from Alibaba, and different people who sort of like disappear off the, you know, public space or forums. And so there seems to be a bit of a tussle there going on, and you wonder how long that can go for. But yeah, there certainly, I think it’s fair to say that there would be an expectation of change coming sometime in the next 10 years. I mean, it’s really everywhere. I mean.

Gene Tunny  54:57

I guess change of some sort. I mean, let’s hope it’s a peaceful change. And there is, uh, you know, maybe the I mean, I don’t know whether they’re going to relinquish power will Xi Jinping I mean what what are the chances of him relinquishing power? I mean, given he set himself up as Emperor for life or whatever it was, I mean.

Tim Hughes  55:15

There’s only Jacinda Arden that I can think of this relinquish power. Yeah, it’s it’s pretty rare thing.

Gene Tunny  55:22

It is very rare because power is seductive, isn’t it?

Tim Hughes  55:27

So they say?

Gene Tunny  55:31

Tim, that’s been an amazing discussion. That’s been fun. Yeah, it’s been good. I’ve really enjoyed that. As always, we managed to go much longer than we expect to or prepared for. Any final thoughts?

Tim Hughes  55:45

No, I mean, it’s funny because it does crossover. I mean, I guess that’s why other things come into it, you know, because they’re all connected. And they, it’s a really fascinating time to be going through this. I mean, like, you know, we’re at a really interesting time, for anywhere in humanity’s history in our like, we’re at these sort of peaks that haven’t been reached before. So yeah, I’m really, and I personally enjoy the direction that things are going in for, you know, the environmental future of the planet, you know, like, I think it’s the right way to go. And I think that’s the overriding direction that it has to get when because otherwise, potentially, yeah, we’re gonna end up in a situation that’s going to be very difficult to reverse. And so seems to be heading that way, which I think is a really good thing. And hopefully, we’ll get there as quickly as we can. Safely.

Gene Tunny  56:39

Yeah, yeah. I mean, I’m optimistic. I think the biggest threat we’ve got is nuclear annihilation. So see how that goes.

Tim Hughes  56:49

It’s still it’s funny, isn’t it? Because that was those threats come and go. But I think our capacity to have our attention on it sort of comes and goes, I mean, it’s sorry, the threats always been there. But our focus on it sort of comes and goes with different things. It’s hard to live under that existential threat constantly.

Gene Tunny  57:09

Yeah, very true. Very true. Okay, Tim Hughes. Thanks so much for your time. I really enjoyed that conversation. I thought that was really he really enjoyed it. We got through a lot, and it was a good discussion to kick off the new year. So thanks so much. Yeah.

Tim Hughes  57:22

Thanks, Gene. You’re welcome.

Gene Tunny  57:25

Okay, I hope you found that informative and enjoyable. In my view, the main takeaway is that China’s declining population is a big challenge to the Chinese economy. And by implication, the global economy, it will be difficult for the Chinese regime to manage this declining population. And indeed, it could even contribute to the end of Communist Party rule, if the declining population actually does lead to a weaker economy and hence an erosion of support for the party. Arguably, one thing that Chinese administration could do to help partly offset the problem of a falling population is to have a more liberal immigration policy. Of course, the administration may worry that bringing in too many foreigners may create political instability which could cost at power. I’d note that for countries which are more open to immigration, and also which didn’t have as bigger collapse in the fertility rate as China did, I’m talking about countries such as the US and Australia, those countries are much better able to cope with demographic challenges. And indeed, they’re actually projected to grow over the future decades. For example, the UN projects that the US will have a population of 375 million in 2050. And between 390 and 400 million in 2100. That’s up from 335 million or so today. Before I go, I better respond to a question that Tim had in the episode. Paraphrasing, Tim asked a question about what happens to China’s old age dependency ratio as the population peaks and starts falling? To answer this question in the shownotes. I’ll put a link to a chart from the UN showing the projected old age dependency ratio for China. That is the ratio of the number of people aged 65. And over to the number aged 15 to 64. The chart shows the old age dependency ratio in China will keep rising for several decades, probably into the 2080s. So in China, we’ve got a falling population, and we’ve got rising old age dependency. So that ratio will increase from around 20 People age 65 and over per 100 working age people. So that’s today it will increase from 20 to 90 people aged 65 and over per 100 working age people in the 2080s. It’s expected China will eventually have almost as many old age people as working age people. That’s the median projection from the UN and everything depends on how closely reality complies with the UN’s assumptions of course, that said there’s no doubt The dependency ratio is increasing and China has a big problem. China’s one child policy has meant that too few people have been born in the last few decades, nowhere near enough to keep the population growing and to look after an increasingly elderly population. Many of the Chinese born are the big cohorts after the 1949 revolution, and before the one child policy was introduced in 1980. They’re still alive and they’re ageing. Right? Oh, I must confess that population dynamics are complicated. And I might try to get a demographer under the show and a future episode for a deep dive. If that’s something you’d be interested in, please let me know and I’ll see what I can do. Okay, thanks for listening. rato thanks for listening to this episode of Economics Explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact@economicsexplored.com Or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if you’re podcasting outlets, you then place router review and later writing. Thanks for listening. I hope you can join me again next week.

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Podcast episode

The future US fiscal crisis and how to avert it w/ Romina Boccia, Cato Institute – EP159

The Cato Institute’s Romina Boccia explains why she’s concerned about a future US fiscal crisis. She explains how entitlement programs such as Social Security and Medicare are the source of the problem. 

This episode’s guest Romina Boccia is Director of Budget and Entitlement Policy at the Cato Institute, where she specializes in federal spending, budget process, economic implications of rising debt, and Social Security and Medicare reform.

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

Romina’s Cato Institute profile

Romina’s first post for the Cato Institution: Joining Cato to Restrain the Federal Budget Leviathan

Council on Foreign Relations article containing deficit projections which Gene mentions: The National Debt Dilemma

U.S. News article: How Much You Will Get From Social Security

Transcript: The future US fiscal crisis and how to avert it w/ Romina Boccia, Cato Institute – EP159

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,

Romina Boccia  00:04

The better solution is to realise that we are on a highly precarious fiscal trajectory even under the best circumstances. And now is the time to adjust our fiscal scenario to reduce the growth in spending.

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 159 on the US federal budget and debt. My guest is Romina Boccia, Director of budget and entitlement policy at the Cato Institute. Romina is concerned that the US is on a path toward a fiscal crisis. We chat about why this is so and what can be done about it. Please check out the show notes, relevant links and details of how you can get in touch. You can send me an email or a voice message. Please get in touch and let me know what you think about what either Romina or I have to say in this episode, I’d love to hear from you. Right now for my conversation with Romina Boccia about the US federal budget. Thanks to my audio engineer Josh Crotts for his assistance in producing this episode. Hope you enjoy it. Romina Boccia, a director of budget and entitlement policy at the Cato Institute. Romina, great to be speaking with you today.

Romina Boccia  01:26

Thanks so much for having me on your show, Gene.

Gene Tunny  01:29

Oh, it’s, it’s excellent. So you’ve joined Cato in recent months, haven’t you Romania. And I read one of your pieces in which you are introducing yourself at Cato. And you wrote that, today I am joining the Cato Institute, to do my part to prevent a severe US fiscal crisis by restraining the federal budget Leviathan. I’ll write and speak about federal spending, the budget process, the economic implications of rising debt, and Social Security and Medicare reform. So really big topics there. To start off with, could I ask you, what do you mean by a fiscal crisis? Just how bad do you think things currently are? How bad could they get in the US?

Romina Boccia  02:26

Yes, you know, the thing with a fiscal crises is a bit like when, whether you’re entering a recession or not that you don’t quite know if you’re in it until you’re in it. And in the United States scenario, there are quite a few factors that make it even more difficult to predict if our when a fiscal crisis might occur, because the United States, of course, as you’re aware, provides the US dollar, which is a world, the primary world reserve currency, which allows the United States government to get away with a lot worse fiscal policy than another nation state might. But that doesn’t mean that lawmakers in the United States can just rest on those laurels. And think that they can spend and borrow as much as they would like in order to satisfy their constituent spending demands, without facing any consequences for that. So what I mean by fiscal crises, and we’ve seen this in various countries over the course of roughly 800 to 1000 years of history. Carmen, Kenneth Rogoff and Carmen Reinhart did an excellent book on this, that, despite a small mistake they made in a research paper, which was corrected later on, still stands in its lessons. And that was over 800 years of history of public debt, and how that affects the countries that accumulate that debt. And so, in, in the scenario of US fiscal crisis, we could potentially face a sudden and very high rise in interest rates, much higher and much more sudden than we’re currently experiencing. And that could result in disrupting productive investments severely lead us into a significant recession. And this could also potentially precede an episode of hyperinflation, which is something that other countries have lived through in the past. I’m originally from Germany, that has a history of hyperinflation after World War Two. And, and that type of rapid accelerating out of control inflation would be very, very damaging to the country, disrupting employment, markets and causing a tremendous pain for US households. And even just, you know, the recent bout of inflation, which was quite severe and not something that the US population has experienced in a long time. Even that doesn’t come close to what we might potentially face in a hyperinflationary scenario. And in the long run, if the US is fiscal standing were to change significantly if the dollar were to lose its prominent status as a world reserve currency, if markets employment investment were severely disrupted, if inflation got out of control, and the Fed wasn’t able to put this genie back in the bottle, it could also have other unforeseen ramifications affecting the security and global standing of the United States as an economic powerhouse as a foreign powerhouse. And also, its, its attractiveness as a destination for immigrants, investment, etc. My point is that lawmakers are playing with fire. And the sooner they come to reckon with that fact and start making amends, the higher the likelihood that we will be able to avert such a fiscal crisis. But it’s it’s a tough pill to swallow because the programmes that are driving us into this large and rising debt, and that could potentially precipitate a fiscal crisis in the future, who knows when those are also the most popular federal government programmes, namely, Social Security and Medicare, which is why in my work, I want to be focused on making reforms to those drivers of growing spending.

Gene Tunny  06:57

Right. Okay, so you mentioned hyperinflation, and we had a, I had a conversation in the last episode about hyperinflation and you refer to the hyperinflation. So Germany had very extreme, it had hyperinflation after the First World War, when the Weimar Republic, and, I mean, there’s a certain set of circumstances that lead to hyperinflation, I mean, a breakdown of your economic system, really your tax, the ability to raise taxes, and then the government turns on the printing press. So that’s the worst case. But short of that your, I think, uh, you’re, you’re concerned about them? Are you concerned about them having to make rapid adjustments, cutting other programmes to be able to service the interest bill or having to raise taxes? Is that the type of scenario you have in mind.

Romina Boccia  07:54

I think that in a, in a lower severity scenario, what we’ve, what we’ll see is much higher tax rates in the United States in the future, which will negatively impact growth and standards of living, and could also undermine the United States as a, as a, as an innovation powerhouse. There’s also a scenario where the debt continues to rise, lawmakers avoid tax increases, and we find ourselves in more of a Japan like stagnation where the economy barely grows, or maybe growth is even negative for some period of time. That’s another, that’s another alternative, which is also not very desirable. Or in, a in a worst scenario. You know, I don’t, I don’t see lawmakers making rapid changes to Social Security and Medicare unless they had no other options left. Yeah, because their primary interest is to get reelected. So I could see us more likely entering into a high inflation scenario in an attempt to continue to pay these benefits, despite there not being the revenue for it. And, you know, the United States can, can and does print its own money. And we’ve seen several bouts of so-called quantitative easing, which are a version of that, where that unfortunately, to me seems more likely than significant changes to entitlement programmes unless we can strike some kind of a grand bargain, which has happened in other nations before. One scenario found quite illustrative is, Sweden went through some significant budgetary reforms. Many of its means tested and other social insurance programmes. And while Sweden still has much higher tax rates than the United States, they’ve, they’ve been able to get to a place where they’re roughly balancing their budget over time. And that is certainly a more stable scenario than the rapid. And at times accelerating increase in the deficit that we’ve seen in the United States. Of course, we’re coming out of a very highly unusual period of time, with massive supplemental spending bills due to the COVID pandemic, and unprecedented deficits. And those are now declining, because we’re not spending as much as we did during the pandemic, but still, us spending as a steep upward trajectory. And most of it, most of that growth will be financed by additional borrowing, which is, which is quite troubling.

Gene Tunny  10:50

Yeah. So you’ve got deficits projected out for the next few decades, if I remember correctly, I think there was a CBO. Or actually, yeah, Office of Management and Budget, congressional and Congressional Budget Office, there’s a chart from the Council on Foreign Relations, I’ll put a link in the show notes. But it’s got the federal deficit, going from several percentage points of GDP, wherever it is now. And then over the next 30 years, it goes, this is all business as usual, if you just assume nothing changes, and I mean, hopefully something changes, they’ve got it getting up to over 13% of GDP, this is the deficit by 2050. Are these the types of projections you’re looking at Romina. And that’s what’s informing your commentary on this?

Romina Boccia  11:42

Yes, so the Congressional Budget Office is a very reliable primary source in the US Congress. It’s a nonpartisan agency that provides information to Congress. However, they are somewhat limited in how they do projections as well. And there have been some questions about some of their assumptions pertaining to fertility and growth, and at times under estimating the potential increase in higher interest rates. So there are some alternative scenarios as well that we consider as fiscal scholars. So we have a range of potential outcomes that we look at. None of them are very good. The current Congressional Budget Office projections are also in many ways, too optimistic. Because the Congressional Budget Office is, is tasked with projecting the deficit and debt and spending levels based on assumptions of current policy. Now, there are many policies, especially tax policies, but also some spending policies in the US context that have been intentionally adopted for a temporary period of time, like certain middle class tax cuts that are slated to expire that were put in place by the Trump administration by 2025. And it seems highly unlikely that Congress will allow those to expire. Because of the families and individuals, middle class families and individuals that would be affected, it would seem like that would not be very politically popular. So if we run alternative assumptions, where those tax cuts get extended, the, the debt scenario going forward looks a lot worse. We’re going from 185% of GDP and publicly held debt over the next 30 years from the current 110% level, to more than doubling to 260% of GDP, and that, again, over 30 years doesn’t take into account that there might be natural disasters, that there could be another war, or the US might get involved in a current active war more so than it has in the past. Or that there could be another pandemic. I mean, lots of things can happen over the next 30 years. And none of those are taken into account with those projections. So again, the better solution is to realise that we are on a highly precarious fiscal trajectory, even under the best circumstances, and now is the time to to adjust our fiscal scenario to reduce the growth in spending. And because that’s what’s driving it, you know, tax revenues are above their historical average level, even with the economy slowing down. And so that’s not what’s driving the growth in the debt and the deficit. It’s it’s very much on spending and primarily spending on so called entitlement programmes and their entitlement programmes, because you don’t have to be poor, you don’t have to. Yeah, you don’t have to be in grave need in order to qualify. Medicare and Social Security are primary or really old age entitlements, with some contributions made by individuals over their lifetimes, but not contributions in the sense of contributions made to say a 401 K, which is the US retirement account that individuals contribute to, they make their defined contributions, and then they own those assets in those accounts. That’s not how these programmes work. There are tax and spend programmes or pay as you go programmes where current workers have financing benefits, health care and retirement benefits for the retire generation. And, of course, lawmakers were able to make promises to these individuals without concerning themselves with how those benefits would be paid. No provision was made to pay those benefits, even social security in the United States context where for some time, there were surpluses, that the programme was accumulating, but they were spend immediately on other federal government priorities. They weren’t saved for Social Security. So now that those bills are coming due, Social Security is already running deficits. Those those those, those prior surplus funds there, they don’t they don’t exist anymore. They would just spend on other priorities. And now Congress would need to raise taxes, or in this case, they’re borrowing more to make up for, for that discrepancy and what they’ve promised current beneficiaries, current retirees, and what they’re able to collect from current workers.

Gene Tunny  17:00

Yeah, I remember reading in the 80s. Or maybe I read the book in the early 90s, that the last time people were worried about the US deficit and debt. This was before the 90s, before Clinton and Gingrich struck some sort of accommodation struck, struck some sort of deal and then managed to get the budget under control for a while. I remember there was a book by Benjamin Friedman, who was at Harvard and day of reckoning. And, and the concern there was because of the tax cuts in the 80s, and the big spending on the, the defence, all of the defence spending, which I mean, arguably lead to the demise of the Soviet Union. So big tick there, but did blow out the deficit. I think the way Friedman described it was that there was a Social Security Trust Fund and the government just took the money out of it and put IOUs in it. So is that right that? Is that roughly right there there? What the I think this is what you were talking about. There was a surplus, but then that money was spent on other purposes?

Romina Boccia  18:12

Yes, the, that’s roughly right. The Social Security trust fund is mainly it’s an accounting mechanism. But it isn’t a trust fund, like you would think about it in the economic or investment sense. Because those trust, investment trust funds would hold real economic assets, could be a portfolio of stocks and bonds. Treasury securities, cash, you name it. The Social Security trust fund is an accounting mechanism for internal governmental purposes. It’s basically is a provision in law that allows Social Security to continue to pay benefits, even when current taxes are no longer sufficient to pay for those benefits. And to find the money elsewhere, in this case, from the Treasury through borrowing by selling more US debt in, in open markets. But those Yeah, those assets, there were no assets in it ever. The way it works is when employers pay payroll taxes or self employed individuals pay their payroll taxes, they go to the Treasury just with, with their income taxes and every and all other tax revenue that the Treasury is collecting. There’s no distinction made, whether those are payroll taxes that are supposed to be designated for Social Security or income taxes or, or corporate taxes. It all gets muddled at that point. And then that money just goes out for current government spending. The US federal government doesn’t have a policy of, say, of saving. And, and so that never happened. Now, the best way in my view, to establish financial security in old age for individuals, if you’re going to have mandatory government programme to, let’s say, help individuals to save for their, for the later years, because apparently, we don’t trust individuals to be able to do that for themselves, then the best way to do it is to do it in a defined contribution way, rather than the current system, which is more akin to a defined benefit system, where you qualify for certain benefit, regardless of what you paid into the system or, or how much money is in the system to pay out those benefits. So a defined contribution system, you would actually set up a savings mechanism, you might invest those funds in the market. Now, I’m not really comfortable with the federal government getting involved in that to a great degree, I would be much more comfortable with individuals being able to own and control the funds in their own accounts. Because the government, as always is subject to special interest pressure, we’re seeing this in the United States with pension funds in the state local level right now, where you have special interest groups, especially the environmental left pushing to disinvest, from fossil fuels and, and other areas of the economy that they disagree with, where there’s more concern for pushing a political agenda through these public investments, then the primary consideration which should be gains for the beneficiaries of these accounts, and I would see a very similar risk if the US government adopted a system of private social security accounts, but actually controlled the investments in those so much better for individuals to be able to control and own their own retirement funds. Though in the big picture, I don’t even think that that is necessary anymore in a way for the federal government to get involved with. I think that the best role the government could play as just to provide a minimum level of security in old age, with the goal of protecting older individuals from falling into poverty if they run out of their own, own resources because they live longer than perhaps they were expecting, or they had low incomes all their lives, and were never really able to save a whole lot, or maybe they fell on hard times their business went went bankrupt, you name it, there’s all sorts of scenarios why individuals can find themselves in need of help. But in terms of private retirement savings, we live in an era where it is so simple to set up auto enrolment savings, to have automatic investments through Target Date retirement funds and other index funds where you don’t have to be a financial whiz to manage your own retirement investments. You can, you can do so much more easily than was the case 85 years ago, when a Social Security first originated. So I questioned the need for a forced, a government based force mechanism for individuals to provide for their own security in old age. I think a minimum poverty level benefit, combined with private individual savings that are owned and controlled by individuals themselves, make much more sense and also take those funds out of the hands of the government which of course, spent the money when it was collecting Social Security funds. They didn’t go towards social security in the end, they went to defence, they went to other social programmes. They went to subsidies and corporate welfare and all sorts of places, but not for their intended use.

Gene Tunny  24:03

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

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Gene Tunny  24:37

Now back to the show. Can I ask about Social Security? So your ,Are you suggesting that the level of social security in the US it’s too generous and that those benefits should be cut? Is that what you’re suggesting? So and that would encourage people to, to save in their own way retirement accounts.

Romina Boccia  25:02

Yes, I’m very much suggesting this. And the benefits are too generous in a number of ways, one of which is that the eligibility age for Social Security has barely budged in light of significant increases in life expectancy. That means that the number of years that have been that individuals are eligible to collect social security benefits has risen significantly. While the number of years that they have to, they’re required to work to qualify for those benefits has not. And so you get an imbalance there, where when Social Security was first launched, the eligibility age was actually above the life expectancy of, of that age, such that very few individuals were expected to ever claim that benefit, it was primarily set aside for those lucky or poor souls who outlive their peers. But today, the Social Security aged early claiming ages is still 62. Right? And, and individuals now live to be roughly 78, which is the current roughly the current life expectancy in the United States. And so there’s many, many more years that individuals can claim those benefits, but they don’t have to work any longer. So that has made the programme more generous over time. And also more unaffordable. Another factor is that the highest income earners receive the highest benefits from Social Security. And they need those benefits the lease. Yeah, so one way to fix the financial picture and also focus benefits on those individuals who need the most. If that was the original intent of old age income support programme, would be to Means test those benefits. Now, I think a fairer way to do this would be by adjusting the benefit formula. So the Means Test doesn’t apply once individuals are in retirement, especially if they’ve done the right thing. They, they work their, their whole lives, they set aside their own funds, so they could enjoy a comfortable retirement. We don’t want to penalise those individuals for doing the right thing for saving for their own needs. But there are ways of making the benefit formula more progressive, that acts as a means test as well. Except it considers lifetime earnings rather than just income in retirement.

Gene Tunny  27:48

Yeah, I think that’s a really good point. Romina. It didn’t occur to me that was the case that the more you earn, the more the government pays you in Social Security after when you retire. So I was just looking on the web. And I’ll put links in the show notes regarding this. So the average social, social security benefit is $1,657 per month, that was in January 2022. So conceivably, there are people getting more than that from the federal government each month as in Social Security. And, yeah, I can see the logic in, in changing that formula.

Romina Boccia  28:31

You’re correct about the average Social Security benefit, but there are some higher income earners can collect up closer to $3,300 per month in Social Security benefits. And that doesn’t account for if you’re looking at a married couple, an additional spousal benefit, that, that would bring their security benefit more than 4500 to $5,000 per month range.

Gene Tunny  29:02

Yeah. And some of these households probably don’t need it because they’ve got other assets, they own their own home, they’ve got investments, etc. Okay. Now, that’s, that’s Social Security. Is that the big? That’s the big programme driving the future deficits, is it or to what to what extent is it Medicare and Medicaid? Do they play a role too?

Romina Boccia  29:25

Yes, Medicare is actually the elephant in the room. Because with Social Security, you’re primarily looking at a fairly predictable benefit formula where you consider demographic factors like fertility rates, the number of new workers in the United States, including immigrants, and then when do, when do people reach the eligibility age roughly in their mid 60s, and what is their life expectancy? And so right now we’re going through a big growth spurt in Social Security as the baby boomers started retiring at, at significant rates, I want to say it was 11,000 per day. 10,000 per day, I think it was 10,000 per day starting in 2011. And over a 20 year period of time, we’re moving through this big bubble of baby boomers entering the Social Security and Medicare systems. Once we’re through that baby boom, bubble, there’s a decline in fertility after that baby boom. And so Social Security roughly levels out at 6% of GDP. And then, you know, fluctuates around around there. But with Medicare, because you’re looking at a health insurance programme, and health care costs are rising steeply, and don’t seem to be slowing down. And what we also know is that health care is a luxury good, where as societies become wealthier, they desire to consume more health care. So wealthier societies tend to increase the portion of their budgets that they spend on health care, not all of which is is very well spend, we also know that much of healthcare expenditures are going towards the signalling or showing that you care, and paying for medical treatments for conditions that that don’t respond well to those treatments for a number of incentives. And that were spending the most during individuals final years of their lives, where perhaps that additional dollar of healthcare spending isn’t doing that much good anymore. But all of those factors are driving up the growth in health care spending. And that seems to be just going up with that with none of that leaving and inside, if you will, for where it will taper off, we can’t we don’t know when or if it will taper off. And so Medicare is the big elephant in the room. And there too, you have very similar issues where, again, the eligibility age is roughly 65 hasn’t gone up, as individuals are living longer. So increasing the retirement age and then indexing the age of eligibility to increases in life expectancy is a very common sense, change that would help alleviate some of the cost drivers. And the other one, again, is that you should consider how much of a health care subsidy you should be giving, if any, to to high income earners. Those individuals who are capable of paying for their own health care, and retirement should pay for a larger share of it. So that you can focus benefits on those individuals who need them to most means testing is one very, very common sense way of adjusting how much you know, the programme spends and who would spend that money on and to get more in line with what incoming revenues and not to drive up the deficit too much. But in the big picture, I think we we’ve come to over rely on a third party payment system where there’s a lot of treatments and even administrative costs are skyrocketing. Because there’s very little consumer interaction in this marketplace. So much is paid. The vast majority of health care expenditures are paid through insurance systems, I think the best use of an insurance system is to pay for catastrophic health care to pay for very expensive chronic conditions to pay for, you know, a big accidents that, that incur large medical costs for individuals, but not for routine healthcare needs. And that’s that’s where we’ve ended up over over several decades of shifting towards a system of third party payment. And, and one of the big reasons in the United States for that is after World War Two, the health care tax exclusion for employer provided health care has really driven up the cost of health care in the United States. And we should have fairer treatment for individuals who are self employed or who choose not to use their employer’s health care to be able to at least get the same tax treatment as their employer. Better yet. My colleague Michael Tanner at Cato has put forth a proposal where instead of employers buying health insurance for their employees, they could provide the funds that they would spend on their employees health insurance through a health savings account, and then the employees themselves could decide how much of that they want to allocate towards health insurance and how much of that they might want to keep in those health savings accounts to pay for out of pocket costs, such as getting A high deductible health insurance plan that’s primarily focused on those catastrophic expenses, while paying for routine health care needs, out of their health savings accounts, that would bring more consumer involvement into this marketplace, which would also help with price transparency, as consumers become more educated as healthcare consumers, and especially for routine treatments start shopping around. Of course, it’s not possible if you are being picked up in an ambulance because you just suffered from an emergency. But there are, there are other scenarios where becoming a more cost conscious patient and healthcare consumer makes a lot of sense and can help to reduce costs.

Gene Tunny  35:47

Hmm, I’ll have to look at Michael’s work. So Michael Tanner, you mentioned his work. Yeah. But I’ll have to, I’ll have to come back to health in a future episode, because I know it’s a very complicated area to look at. On Medicare Romina, do you have any figures on that? I mean, you mentioned it was at US Social Security will get up to about 6% of GDP. Did I hear that right? And do you have any comparable figures for Medicare?

Romina Boccia  36:17

I’m not going to top of my head, but the Congressional Budget Office provides those in their budget and economic outlook. I’m more focused on Social Security, because as you just mentioned, Medicare has its own complex bag of a variety of different policies. So we have a scholar solely dedicated to that.

Gene Tunny  36:41

Yeah, yeah. Fair enough. And I mean, my understanding is that the Social Security’s that’s the, that’s the big one. But then you’re saying that yeah, Medicare is a, it’s an important issue.

Romina Boccia  36:52

It’s approaching, yeah, the size of Social Security. So between Medicare and Social Security, more than half of the federal government’s budget goes towards these two programmes. Okay, gotcha. So they make up the vast majority of federal spending now, and they’re projected to grow significantly.

Gene Tunny  37:10

Right, do you have any concerns about defence spending at all? I mean, often one thing that’s often pointed out as well, I mean, the US spends much more than any other country on defence, of course, you’ve got an important role in the, the world economic or the world geopolitical order, or however you’d like to describe it. So have you looked at that? And do you have any thoughts on defence?

Romina Boccia  37:34

No, not just the fence. But so the way that the budget is, is allocated in the US context is that there’s a so called discretionary spending, which makes up roughly 1/3. And then there’s the so called mandatory or autopilot spending and the key differences that discretionary spending has to be voted on each and every year. For example, this week, the US Congress is voting on defence and non defence discretionary spending to avert a government shutdown because we’re at the end of the fiscal year. That is not the case for programmes like Medicare and Social Security and even Medicaid, which which which have authorizations, which have spending allocations that don’t expire, so they can just continue spending even when the resources aren’t there. But both non defence and defence discretionary spending has seen a large increases, especially during the pandemic, there’s been large increases in in nondefense discretionary spending for varieties of things including support for state and local government to weather the pandemic. Various handouts for special interest groups. We just recently saw the chips act pass for the semiconductor industry in the United States. And then the inflation Reduction Act, which had a lot of green New Deal policies to subsidise green energy and electric vehicles, etc. So there’s been a while that spending, it doesn’t get projected out over the extended periods, 30 years 50 or 75 years in the case of Social Security, Medicare, because Congress, allocates, appropriates it every single year. We are seeing a rise in discretionary spending also in the area of emergency and disaster relief with no budget or notional account to control that spending. So it’s often used as a as a loophole to fund other priorities without going through the regular budget process. And, yes, overall, I’m concerned about most aspects of the federal government being on a growth trajectory and defence and non defence discretionary spending very much in that in that sphere. are as well. One of one solution there is to adopt us spending caps and the US has adopted those, with some success in the past, with little less success in the recent past. But discretionary spending caps that set a goal or a level that then lawmakers have to fight over or the public can hold them to account for can be very helpful. We don’t have any discretionary spending caps right now. And I think it sets up a good discussion when you have those to say, Okay, if you truly believe that, that is not sufficient, you need to spend more, what can we cut instead. And then in more likely scenario, lawmakers are not going to want to cut anything. So instead, we get some discussion over offsetting spending cuts elsewhere, say in the mandatory portion of the budget. Or if they increase, it agreed to a spending increase, at least now we have something we can hold them to. So I do think it sets up a productive debate around the purpose of spending limits priorities for the federal government, what are true priorities and what they’re just want to have spore favourite lobbying groups, so that the public can do a better job also of holding their lawmakers accountable. And there is an opportunity for the US Congress, the new Congress in the next year to impose more spending restraint. The debt limit will approach again likely next summer and the summer of 2023. And the debt limit is often a very effective action forcing mechanism for fiscal restraint. Basically, lawmakers can make demands that they won’t increase the debt limit, unless there are offsetting spending cuts or a budget plan is put in place. And I think a spending caps over the entire federal budget would be, would be best so that Congress can budget within so called Unified budget, consider all priorities and needs within context and and make those necessary trade offs. But one, one good start and those are easy to implement would be discretionary spending caps on defence and non defence.

Gene Tunny  42:16

Right. Okay, I’ll have to look back and see some, look for some examples of those spending caps in the past that sounds really interesting.

Romina Boccia  42:28

So yes, we had the, the Budget Control Act of 2011, that imposed spending caps for a period of roughly 10 years, but they were, they were circumvented several times. But there were also some offsetting spending cuts to allow for those increases in defence and non defence. The other thing that has become sort of gimmicky in the US context, under President Obama and the Democrats are continuing to try and push this, this this idea of parity that the defence account and the non defence, domestic discretionary accounts should be getting the same amount of money, which is just a goal that they have set as if it this was some kind of a political game without any consideration for real needs, either in the domestic economy or on the defence side, the threats that the United States face, it’s just an arbitrary target, we just want to get as much money as the other guys. And that just doesn’t make any sense at all. And I think I think the public should, should call lawmakers out for that apparently doesn’t make any sense we should not be allocating any more spending than is, is necessary. And it should also be within the within the bounds of the US Constitution. Because that document has a has a purpose, which is to restrain the government and protect the rights of the, of the individual. And so that should be our guidance for what to spend money on and how much to spend not some arbitrary goal of we just want parody because it’s political.

Gene Tunny  44:06

Yeah, yeah. Okay, final question. Romina. Have you looked at what we do here in Australia or what’s done in New Zealand with retirement savings? Have you looked at our we have a compulsory.

Romina Boccia  44:18

A little bit? Yeah, I was reading up recently on, on the superannuation, I think it’s called. Yeah, I mean, I like the defined contribution aspect, but I also recognise that there’s a push to increase the amount that employers have to pay for their employees superannuation and, and that can create distortionary incentives for how many individuals to employ because you’re driving up the cost of labour, I would see, I would think that that would be an issue, but what are your thoughts on how how the system’s working?

Gene Tunny  44:53

Oh, well, I think overall, it’s, it’s better to have it than not have it. So we did have the problem that people were too reliant on the aged pension here. So you’re, well, what our Social Security programme for the elderly, although there are differences in the, in the the rate and it doesn’t. It’s not, it doesn’t increase if you contribute more over your, your lifetime. So if you have higher earnings over your lifetime, so it’s different in that regard. And yeah, so I think it’s, it’s good that we’ve got a system that takes some of the pressure off the age pension, but we’ve still got rising age pension costs, it hasn’t removed that problem entirely, the future imposed on the budget of our age pension is a lot lower than your Social Security system from what I can just from my quick, the quick look, I’ve had the figures. Yep. So I think it’s good in that regard. But yeah, you’re right, there is that issue of the fact that in the short run the can hit employers, so we’ve had an increase in the contribution rate, it was 9%. And they’ve been increasing it, I think half a percent every couple of years. And now it’s up at 10 and a half percent, if I remember correctly. And so initially, the employer has to pay more each quarter to the Australian Tax Office, I’m an employer. So this is something I’m very conscious of. So I’ve had to increase the superannuation contributions. But over the long term, I think what the expectation is that it will come out of wages of the employees, so the employees will end up paying for it, because it is a form of compensation. That’s how it was initially sold in the 90s, when it was introduced. So it was a trade off. The treasurer at the time, Paul Keating, who was on, he was part of the Labour Party, he was on the, on the left of politics, but it was a very sensible, very moderate government, and highly praised around the world for economic reforms. And the way that he sold it was that you will get this super so you’re getting the super, but it means you have to have wage restraint at the same time. So that trade off was explicitly recognised. So yeah, but in the short run, there’s a, there’s certainly an impact on employers. But there’s a recognition that over the longer term, it really is the employees who will be paying for it. Look, there are a couple of issues with the, the design of, of super, there’s a concern that these industry super funds control, they have too much control or they’re controlling too much money and they’re too dominated by unions. There are people who are concerned about that. There are other people that are arguing that oh, look, it’d be better if people had access to this money. So they could buy a house, there’s a big debate about whether people should be able to withdraw from Super to buy a house. What else? Yeah, and clearly, some people might be better off if they were able to use that money while they, were while they were young. And when we had COVID. During the COVID period, the government did allow people to withdraw from their super accounts. And we saw a lot of people take that up. And I think they pulled 10 or $20,000 out, if I remember correctly, that was very popular. So yeah, overall, I think it’s a good thing, even though, as a someone who’s very sympathetic to classical, liberal views, I think, Oh, well, it’s not good that the government saying you’ve got to do this, but on the other hand, I recognise that for a lot of people, they might not be saving enough for retirement, and therefore in that case, the government would have to pay for it. So look on balance, I think it’s good. We’ve got it there and are some issues with it. Sure. Yep. So that’s my general, Yeah, that all make sense or any questions.

Romina Boccia  49:17

It’s, it’s certainly an improvement over the US Social Security system where it’s the government handling the entire thing, even though there are contributions by workers and their employers. I did read that individuals who pulled funds from their super accounts during COVID on average, spend longer unemployed than individuals who didn’t choose to tap their super accounts. So it indicates just like in the US, we saw that extended unemployment benefits tend to incentivize people to stay home longer and go back to work later. Even in the context of super, that seems to have had a similar effect.

Gene Tunny  50:07

Yeah, I think that’s that’s probably true. We’ll have to look up that, that evidence of that sounds right to me. Right. Oh, well, remember, this has been fantastic. I think that’s been a great overview of the fiscal challenges facing the US. I hope that you’re, they’re inviting you to appear before Congress at some time to testify to get your views because I think they’re really well informed and important views. So that’s terrific. So yeah, if there’s any final points, anything else to add?

Romina Boccia  50:42

Thank you. I just wanted to just looked up Medicare as a percentage of GDP and it’s roughly 4% right now. Going up.

Gene Tunny  50:49

Okay, gotcha. Right. So that is a big deal. Okay Romina Boccia from the Cato Institute. Thanks so much for your time. I really appreciate your insights and really enjoyed the conversation.

Romina Boccia  51:02

Yeah, so fun chatting with you, Gene. Thanks so much for inviting me on your show.

Gene Tunny  51:06

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

Credits

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

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Podcast episode

US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

US Treasury Secretary Janet Yellen claims the US economy is not in a recession,  despite two consecutive quarters of declining GDP. Economics Explored EP151 guest Darren Brady Nelson disagrees with the Treasury Secretary and argues she is taking a political position. Whether she’s being political or not, Janet Yellen has certainly taken a big risk, as Darren and Gene discuss. Darren and Gene also talk about the review of the Aussie central bank, the Reserve Bank of Australia, particularly how climate change could figure in that review. Darren argues the review team should have a broader range of views represented, including Monetarist and Austrian perspectives. 

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

About this episode’s guest – Darren Brady Nelson

Darren is Chief Economist of the Australian think tank Liberty Works and he’s also an Economics Associate at the CO2 Coalition in Washington, DC. For Darren’s bio, check out the regular guests page.

Links relevant to the conversation

While it’s the NBER that declares whether the US economy is in recession, this CNBC report notes: “Since 1948, the economy has never seen consecutive quarterly growth declines without being in a recession.”

But many economists are skeptical about whether the US is in a recession, including recent podcast guests Stephen Kirchner and Michael Knox. 

Stephen Kirchner on the US recession question.

Michael Knox’s Economic Strategy: Fed hikes rates, but Fed says no recession (PDF).

Transcript: US recession, climate change & monetary policy w/ Darren Brady Nelson – EP151

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 

Darren Brady Nelson  00:05

like to see seemed to have sold or sold for political purposes as the head of Treasury in the US each year is a political appointee. So, that is, to some extent a political position.

Gene Tunny  00:19

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 151 on whether the US economy is in a recession. Joining me is returning guest, Darren Brady Nelson. 

Darren is Chief Economist of the Australian Think Tank Liberty Works. And he’s also an Economics Associate at the CO2 coalition in Washington DC. As well as chatting about the US economy. Darren and I discuss climate change and the review of the Reserve Bank of Australia. 

In the show notes, you can find relevant links and details of how you can get in touch. Please let me know your thoughts on what either Darren or I have to say. I’d love to hear from you. 

In the show notes. I’ll include links to some great commentary on whether the US actually is in a recession from two previous guests, Michael Knox and Steven Kirschner. So, make sure you check those links out. 

Right on, for my conversation with Darren. Thanks to my audio engineer, Josh Crotts, for his assistants in producing this episode. I hope you enjoyed it. 

Darren Brady Nelson, Chief Economist at Liberty works. Welcome back unto the program.

Darren Brady Nelson  01:35

Thank you. Good to see you. I guess it’s been a while since we last spoke about Work Capitalism, I think.

Gene Tunny  01:41

Yes, that’s right. That was a few months ago. So yes, it’s good to catch up again. This is a 151st episode, and this is your 11th appearance on the show if I’m counting correctly. So yeah, we get around to another chat every 15 episodes or so. So, it’s about time to catch up with you. So, it’s great to have you on the show again.

Darren Brady Nelson  02:06

Yeah, congratulation, because I’ve been so prolific. 151 That’s great.

Gene Tunny  02:11

Yeah, well, it’s just drip by drip, really. It’s one per week, and they mount up, yes. Thankfully, we’re out of the COVID period, although I had it recently. And I was in isolation, but we’re over all of that craziness which was dominating the conversation for a while, and now we’re getting on to other issues. 

Okay, so I thought we could chat now about the US GDP figures and we had some big news last week, in Australia. You’re still on Saturday there; I think Darren, there in the states in DC. And now we’ve got two consecutive negative quarters of GDP growth. So, GDP grew at an annualized rate or didn’t grow, it fell at an annualized rate of 0.9% in the June quarter, and that followed a decline of, I think it was 1.6% in the March quarter, that’s at an annualized rate. Okay, so there’s a big debate about whether the US is in recession or not. Darren, what do you think? Is the US in a recession at the moment?

Darren Brady Nelson  03:26

Well, yeah, I would say so. I must admit, in this conversation, certainly, you’re going to be more expertise than I. You’re a guru of sort of macro-economic indicators, and all that, particularly from your treasury background, but other things you’ve done, too. So, maybe I’ll be asking you some questions, too, and hoping to get some answers. But yeah, I’m not sure; maybe you know the answer to this, but, the entire time I’ve been, first studying economics and being an economist, putting aside the debates on whether two consecutive quarters is the greatest definition or not, it seems to have been the definition for a long time. And the most interesting thing I’ve seen recently, and I guess this would have been headlines, I imagined in Australia as well, was the Biden administration going. No, no, that’s not really the technical definition of a recession. 

I don’t think I recall an administration, democrat or republican ever; they may come up with excuses and say, it’s not well, it’s not our fault. It’s the previous administration and all that sort of stuff, or you know, external circumstances. But this is really the first time someone’s ever, including, some of the economists that the Biden administration has. On record, obviously, talking about in the past that yes, the recession. You know, the technical definition, if you like, is the two consecutive quarters of negative growth. So, it’s been very interesting times. Again, I guess in the 2020s, including a lot of media organizations and our favorite, sort of Neo Keynesian Economist, Krugman coming out and also defending that the Biden administration on oh, well, it’s not really a recession. So, it certainly fits the technical definition that, if you’d like I grew up with. And, that’s certainly my impression, just actually being in the US. Is it dire just yet? Yes. On the inflation front, yes. But unemployment, still is fairly low. And putting aside the fact that participation rate, that’s a little bit of a worry, but the unemployment rates not so bad at this stage. And usually, obviously, that’s, if you’d like a key secondary indicator, besides GDP itself, that people usually turn to right away, before they maybe dig into, what aspects of GDP have gone down, energy manufacturing, etc, etc.

Gene Tunny  06:02

Yeah. Okay. So, there are a few things you mentioned there, Darren, 

Darren Brady Nelson  06:09

So, yes. Not a strong yes. So, yeah, I’d say yes. Technical definition? Kind of weak, yes in a kind of more judgement point of view.

Gene Tunny  06:16

Yes. So, you referred to what the White House was saying, and what Janet Yellen in the Treasury was saying. So, I might just read that out. And then we can go from there. And I can let you know what I thought about that. 

So, what Janet Yellen said and this is reported by the Financial Times. “The White House has maintained that the US economy is not at present in a recession, with Treasury Secretary Janet Yellen saying earlier this week that she would be amazed if the NB declared it was okay.” So, what she’s talking about there is the National Bureau of Economic Research, which is I think it’s attached to; is it attached to Harvard or MIT or one of those East Coast universities? There’s this elite group.

Darren Brady Nelson  07:01

I think it’s independent. I mean, look, I don’t know, but I think it’s more independent than even being associated with one particular university, I think.

Gene Tunny  07:10

Yeah, I think you’re right. Yeah. But it’s an elite group of macro economists, some of the top people and you’ll have some of the leading lights of economics on it. And they will date the business cycles, they will declare whether the economy’s in recession or not. And generally, what they’re looking for is a sustained downturn that lasts several months, so more than one quarter. And they look at a broad range of indicators. So, it’s not just GDP. But that having said that, it looks like GDP is an important part of it, because it’s that comprehensive measure of economic activity. 

And one thing I noticed when I was preparing for our chat, is there was a report from CNBC, where it noted that I don’t think there’s ever been a recession that the NBR has called, which didn’t have two consecutive quarters of GDP growth, if that makes sense. So, where’s the actual passage? 

Darren Brady Nelson  08:21

I think that’s not correct. I think they call the recession, during the pandemic, and that wasn’t two quarters, I think. So, they do have a bit of leeway. But they tend to usually use the two quarters as part of the definition as a key component.

Gene Tunny  08:38

Okay, look, I’ll have to check that, I thought I read that earlier today. I had that somewhere here in my notes.

Okay. So, we might go back to what Janet Yellen, what she said here. She underscored the message at a press conference on Thursday, emphasizing that the economy remains resilient. Most economists and most Americans have a similar definition of recession, substantial job losses and mass layoffs, businesses shutting down, private sector activities slowing considerably, family budgets under immense strain. In some abroad-based, weakening of our economy. She said, that is not what we’re seeing now. 

Okay. It seems to me that’s a pretty risky call from her because she is running the risk that the NBA does eventually define this as a recession. And that’s going to be incredibly embarrassing for the administration. So, yeah, that would be my sense of it. I think it is a big call from Janet Yellen. And it may be too early to tell. But look, there are a lot of Economists out there who seem positive about the US economy. But that said, it does appear that I mean, is it the interest rates, is it what the Federal Reserve’s been doing that’s causing issues? Is it inflation that’s hitting Consumers? What do you think are the main forces affecting the US economy at the moment, Darren?

Darren Brady Nelson  10:06

Yeah, I think, you’ve definitely touched on two key components. But just to comment on Janet Yellen. But you know, Janet Yellen was totally wrong on inflation. So, that didn’t seem to impact her credibility within her circle that she goes around with, and the people who hire her; that didn’t seem to make any difference. So, probably when she’s proven wrong on recession, which I think she already has been. Yeah, I mean, that inflation is like, one of the key things; it’s the biggest problems in the US, and obviously, even the Federal Reserve, which has been; our Federal Reserve is part of the process of creating inflation. So, they’ve gotten spooked. Biden administration itself has not, which they, at least publicly, they keep on, they don’t seem to be, they acknowledged it a bit, but they don’t really kind of acknowledge it as bad as, even though the official statistics are showing. So, you have, like, I guess we’ve talked about this many times, but, you have kind of two things going on at once, the unprecedented levels of money printing, and the credit that goes with it, which, if you’d like, from a macro point of view, is hitting the demand side. And then on the supply side, they’re doing all sorts of, the Biden administration’s policies are just hurting supply, and hurting productivity and competition. 

So, that can sometimes, make up a lot for that money printing. The supply side can react to it, and really dampen what, it’s for the money to the demand side of things. So, energy is a classic one, they had a complete 180 on their energy policy. So, the US went from the number one energy producer in the world to not that anymore, and, record time, essentially?

Gene Tunny  12:08

And is that the Biden administration’s fault in your view?

Darren Brady Nelson  12:12

Well, exactly. It’s not just their fault, that is literally their policy. You know, they’re going for the green transition, if you like, come hell or hot water, right? So, which includes, not allowing oil companies to extract oil and all sorts of things. Oil, natural gas, coal, etc. And they’ve also hit agriculture with bad policies as well. You know, manufacturing; yeah, literally, if you want to destroy an economy, the Biden’s administration is basically ticking all the boxes with their policies. And, putting aside, you can argue whether that’s intentional or unintentional, but I think there’s not too many, if you like, remotely free, market friendly economists who think the Biden’s policies are particularly good.

Gene Tunny  13:10

Right, okay, I’ll have to have a closer look at some of the policies and come back to that. I just want to go back to that definition of recession; I think I might have missed or may not have communicated properly what that factoid in that CNBC report was. So, what they were saying was that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. So, they’re not saying that, there could be recessions if you don’t have this, and that’s what you were saying with the pandemic, that was, like you could call a recession, if you don’t have the two negative quarters. But what this point is, is that, in fact, every time since 1948, the GDP has fallen for at least two straight quarters. The NBER ultimately, has declared it a recession. So, you can have a recession, even if you don’t have the two quarters, but every time you’ve seen it in the data, the NBER has ultimately called it a recession. So, what Janet Yellen has done is, yeah, that’s a really big call on her part. And, I mean, Janet Yellen, someone with a distinguished academic reputation, and yep, so really, really big call and potentially, it will backfire on her. We have to wait and see about that. Yeah.

Darren Brady Nelson  14:38

Janet Yellen in not going to make, you know, like she’s she seemed to have sold or sold for political purposes. Not unusual that; it’s not like this has never been seen before. Most of her sort of, like topics when she gets into public is less focused on inflation and recessions and she’s talking about equity and diversity and inclusivity and all that sort of stuff. Well, I guess as the head of Treasury in the US, each year is a political appointee. So, I guess, that is, to some extent, a political position. Although, usually in the past, it’s been Department of Justice and Treasury have, usually been less partisan, if you like. The people regardless of whether it was democrat or republican in charge, but you know, things have changed quite a bit. Certainly, this century and certainly in the 2020s.

Gene Tunny  15:33

Yeah, exactly. Okay. So, you mentioned the supply side before, well, one thing we’ve had in Australia here is just the ongoing disruption to supply chains. And I mean, the random things just been unavailable in the supermarket’s. Quantas seems to have lost its mojo; can’t seem to run a flight on schedule any time anymore. And partly, that’s because they lost people during the pandemic. And now we’ve got people on isolation leave, like if you get COVID, you have to isolate for seven days, and that’s disruptive. Things just don’t seem to be working as they once did. Is that the same in the States? Have you noticed that in the US?

Darren Brady Nelson  16:21

Yeah. I think some extent, less. Although I understand aviation has been kind of bad here, too. But I haven’t actually been, I’m just going on to sort of news reports and talking to other people that, yeah, they’ve had, things. Well, what happened in the US probably, maybe more than Australia is a lot of pilots, either were, let go or just left because they didn’t want to get the vaccine, right? And the federal government has a bigger say in aviation than they do and other industries, for instance, particularly on employment. And so yeah, that’s all contributed, including also I understand, not just pilots, but other people in the aviation industry, various hubs, the people needed at the airports and the hubs as well, similar sort of circumstances. The supply chain disruption in general, I haven’t noticed it as much in terms of like at the grocery store, there was a period where there was a little bit of that. Not as bad, but certainly, there were issues as well, in the US, perhaps, maybe not as bad in terms of like, grocery stores and whatnot. 

So, the 2020s have been very weird times. And I don’t think it’s some sort of like natural market outcomes as such. Obviously, markets wrecked, and they impact, but I think there’s just the amount of, really over the top interventions and status sort of policies in the 2020s have taken me by surprise. We’ve been prepping backwards, if you like, towards bigger and bigger government, and I think, reaping the rewards. I don’t know why people, even people who; seasoned economists, who should kind of, know better, the more the government does stuff and interferes, the worse things get. It literally, is becoming, more and more like an Atlas Shrugged world. I don’t know if you’ve read Atlas Shrugged; probably familiar with the premise anyway. It’s like that. I’m like Atlas Shrugged there, but, there were places to escape to in that world, the fictional world of as many, as you can see, in this world, when, all the governments are, have uniform sort of policies on COVID and uniform policies of not tackling inflation, and all that. And maybe it will be interesting to see if the elbow government copies the Democrat lead, which I suspect they will, if Australia gets two quarters of negative growth, they’ll go that’s not really a recession, we’ll be interesting to see if they go down that road as well.

Gene Tunny  19:12

Yeah, one thing that we’ve traditionally relied on to keep the economy growing is migration, just the addition of people and that those consumption, and so that’s starting to pick up again. Possibly, that try and redefine it. I mean, I don’t think we’re at risk of that at the moment. Although having said that consumer confidence has dropped with the higher interest rates, so people are freaking out over just the increases in interest rates we’ve seen already, because it looks like they just borrow lots of money when interest rates were really low. The Reserve Bank, Governor, I couldn’t believe it. Last year, he was saying, oh, the interest rates will; our official cash rate will stay at 0.1 until 2024. And arguably, he misled people. And so, I mean, he really has a lot of questions to answer for. And there is the Reserve Bank of Australia review, which I’ve talked about in this program. I don’t know if you’ve had a look at that at all, Darren?

Darren Brady Nelson  20:22

No, no. Give me a synopsis of what drove that. And what’s happening? 

Gene Tunny  20:28

Well, the RBA has been under a lot of criticism in recent years for different reasons. There’s been one group of economists who’ve been critical of it, because they argue that they didn’t; that they had interest rates too high in the lead up to the pandemic. Now, whether that’s true or not, I think it’s debatable. But I’ve had people like Peter Tulip and Steve Kirschner on the show. I mean, they’re very good economists. I think it’s worth considering their view for sure. 

Their argument is that if you’re trying to achieve the inflation target of 2 to 3%; they were arguing that because inflation was actually lower than that, you had scope to have looser monetary policy, lower interest rates, to have more employment growth. And there was some modelling that was done by Andrew Lee, who’s a Labor Party MP and a former and new professor, and Isaac Gross, who’s an economist at University of Melbourne, I think. And they showed that if the RBA had met its inflation target, if it had lower interest rates and let the economy grow faster. You could have had; I think it was like 250 to 300,000 more jobs in the economy. So, there were a group of economists criticizing the RBA from that direction. And they were saying that the RBA was too concerned about households taking on too much debt. So, they didn’t want to put interest rates lower. 

I could see why the bank would be concerned about that. So, that’s why I’m not fully on board with that criticism of the bank. That said, I think it is good to review the Reserve Bank, because it is a bit of a; it’s not exactly transparent what they’re doing. So, I think there could be greater transparency. And since last year, when Phil Lowe was making those sorts of bold calls, that turned out to be wrong within months, right. It was obvious that we’re in the in the new year when we started getting those inflation numbers that the Reserve Bank would have to act. So, I think they lost a lot of credibility over that. 

So, it’s important now to have this review. And they’ve appointed Caroline Wilkins from, she’s a former Deputy Governor of the Canadian Central bank. They’ve got Gordon De Brouwer, who’s a former bureaucrat, I worked for him when he was in the treasury. And he was also at a new at times. He’s good. He’s good value. And Rene Fry McKibbin, who’s a professor of Economics at ANU. 

They’re going to review the board like there are issues to do with board composition, who’s on the board? There are issues to do with the inflation target; but I’m not sure they’ll do much about that. They might tweak some of the language. And then there’s issues to do with the transparency of the board’s decision making; what do they release to the public every month? So that’s essentially what the review is about and I think it’s, it’s a good thing that they’re doing that. So, yeah, that’s it. So, yeah, it’s worth definitely worth keeping an eye on. 

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

Female speaker  24:01

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Gene Tunny  24:30

Now back to the show.

Darren Brady Nelson  24:33

So, are they the reviewers? Are they sort of, left or center, for the most part, like a Keynesian and MMT and, something else or what? What’s the story there?

Gene Tunny  24:47

I’d say the typical mainstream macro economists. So, however you’d like to characterize that, they’re definitely not MMT. If you had to give them a label, maybe you give them a new Keynesian label, possibly. But yeah, they’re not I don’t think they’re radical in any particular direction. They’re nonpolitical appointees, which is a good thing. One of the big questions and something that I think the Prime Minister, Anthony Albanese, Albo, as we call him, one thing he will be, he’ll be getting pressured to put a trade union representative on the board. So, they’ve had one in the past, I think Bob Hawke, our former Prime Minister was on the board in the 70s, when he was the head of the ACTU. 

And then we’ve had various other ACTU secretaries on the Reserve Bank Board. There are some people pushing for a regional rep., but, one thing that Peter Tulip, who’s Chief Economist at Centre for Independent Studies has been pushing for is, he said that the problem is, we don’t have enough people who know about inflation and monetary policy on the board. And so, we need more of those people. We need more, it’d be better to have more economic experts or economists on the board.

Darren Brady Nelson  26:05

Yeah. And maybe, also further, how about a variety of use, and not just the one kind of, you say, mainstream, and but that’s still a worldview, it’s still a way of looking at things. And it’s not the only way of looking at things. The combination of, essentially New Keynesians, for the most part, with maybe a little, like 80-20 Keynesian monetarist; that’s maybe what, most mainstream sort of, macro folks, that’s kind of what they’ve learned and whatnot, be good to have somebody else. Have an Austrian point of view, have maybe a full on monetarist point of view, whatever; just something that’s not just the one point of view, , so it’s not just Tweedledee and Tweedledum, every time either on the board or this review.

I’m not saying these people aren’t smart, or anything like that; the three people you mentioned, but I suspect there’s not going to be a whole lot of push and shove between the three. 

Gene Tunny  27:04

So, I think the review in a way, presumes that there won’t be radical changes. The Reserve bank is going to continue as an institution, we’re still going to have Fiat money. Is that the sort of thing that you think should be up for review, that we should be looking at something more fundamental?

Darren Brady Nelson  27:25

Well, at least you have one person on there who can be the dissenting voice to say, something like that, but I’m saying, even if it was, say, one Keynesian, one monetarist, and one Austrian, I think you might get a pretty decent review out of that, with the monetarist if you like, in between the two, to some extent. 

So, you still have 2 – 1, want to keep a central bank going, but we just, good to kind of be realistic about, what a Central bank does and what inflation is, what monetary policy is, all that sort of stuff. That’s fine, if the board, I’m not saying, the board should be all full of economists, even if it was a mix of those types of economists, I think it’s fine to have some other, you know, depending on how big the board is, you know, there would be room, I guess, for a union and a business representatives and maybe some other stuff as well, that’s fine. 

And then they should also review, also the goals of the Reserve Bank; what’s legislation. There’s a lot of stuff in there besides inflation, maybe, just to look at it, and kind of whether all that needs to be in there, or whether there’s should be a better balance, or you should prioritize and go, inflation is number one, and then something, that type of thing. It’d be great. 

A lot of these reviews aren’t all that genuine, they already have a political goal. I mean, you say they’re not political, but it always is, you know, to some extent, they’re under certainly under pressure anyway, regardless of who they stick in there to review things. Now, in the past, some of these reviews have been a lot less political than others, there’s always a political element, like the competition policy review wasn’t particularly political, but there’s always a little bit of an aspect to it, of course, I’d be surprised if they’re not under, some fairly great political pressure to start going beyond and started looking at, kind of cultural war type stuff, too, that they want to ingrain, sort of, race and gender and all that other stuff. I’ll be I’ll be pleasantly surprised as if that isn’t going to be a part of the review.

Gene Tunny  29:37

So, as far as I’m aware, race and gender won’t be at this stage, I don’t think. But one thing that possibly will be, now whether there’s a culture war issue or not, I don’t know. I think I’m not sure it’s, I guess there are aspects of it that are part of the cultural war but the debate about the climate. So, Warwick McKibbin, who is he’s a Professor of Economics at ANU, and he’s actually the husband of one of the reviewers. But you know, she’s independent of; she’s her own person… Renee Fry McKibbin; she’s Warwick’s wife. 

Darren Brady Nelson  30:22

Actually, by definition, at least the old school definition marriages, you’re not, you’re one flesh. But anyway, I understand what you’re trying to say. 

Gene Tunny  30:29

Okay, yes. So, I don’t think she’ll necessarily go along with Warwick’s view. But Warwick was at the conference of Economists in Hobart two weeks ago, where I caught COVID. And, it was a good conference other than that, it was a great conference.

Darren Brady Nelson  30:46

And super spreader of it.

Gene Tunny  30:49

Yeah, that’s right. And Warwick was on the panel. And now we’re talking about the Reserve Bank review. And one of the points he made is that we may have to amend actually, I think he’s saying we will have to amend our inflation targeting settings or our goals or objectives. We’ll have to amend that to incorporate climate change, because we have to recognize that if we’re going to be responding to climate change, we’re going to introduce a carbon price and one that increases over time. So, that’s what you need to have that sort of lowest cost adjustment path. So, to minimize the cost of adjusting to climate change, you’ll need to have a carbon price that increases and so that’s going to be increasing prices. So, you’ll need to look through the inflation, you’ll have to ignore the inflation that comes from the carbon price. So, I think culture war issues won’t come into it. But I think the climate change will come into the RBA review.

Darren Brady Nelson  32:01

Okay, well, that’s good to know. It’s terrible news. But it’s not surprising though.

Gene Tunny  32:06

But doesn’t it make sense what Warwick is saying? I mean, if a government does introduce a carbon price, and you’re going to have increasing prices because of that, then that’s not really inflation that the Central bank should be concerned about. What do you think of that perspective?

Darren Brady Nelson  32:25

It still should be concerned about it, even if, you know; this is all about thinking about the costs and benefits. It sounds like, just assuming, okay, well look, we’re just not going to worry about the downside of our carbon tax and our climate policies, because it’s such a, unquestionable good to pursue this. That’s ideology, that’s not economics, that’s really bad economics. And it’s also bad constitutional law, like, to what enshrine you know, certainly a very long-standing fad, of the climate sort of industry. But, the concept of inflation is something that stands the test of time. You can disagree on various aspects of it, but it’s always going to be, to the extent you’re going to have monetary policy, inflation is going to be an important thing to be thinking about, right. Climate change, may not be. 

I’ve been following this debate since the mid-90s. And, I can tell you; well, just look at the polling, I can’t speak for Australia, but in the US, it’s something along the lines of; it’s well outside the top 10 of topics that people are concerned about in the US, for instance, then you want to start because, elites like him, are in a position to influence these things. They want to shove in the things that they care most about. And I think it’s just atrocious to think you can stick that into the Reserve Bank act. I assure you another government can come along and potentially change that if they want, if the electorate says, alright, you’ve been trying to convince us that the end of the world has been coming for 30 years, it hasn’t arrived, we no longer trust you. Sure, that might happen. And then, government could change things, but you know, so it’s a bit hard to change stuff in legislation, a lot of damage can be done in the meantime.

Gene Tunny  34:20

Okay. So, on where is where they’d make the change? It probably wouldn’t be in the act, they would have it in the agreement between the treasurer and the Reserve Bank. If I remember correctly, I think the general view on the Reserve Bank act from the late 50s was that, look, some of the language is a bit outdated. But you know, maybe leave that alone, you can do all you need you want to do within the agreement between the treasurer and the Reserve Bank. So, I think that’s where they would adopt something like that. 

Just on that Reserve Bank Act, I think what they talk about in that is that the Reserve Bank is supposed to set monetary policy to have a stable currency to achieve full employment and to promote the prosperity of Australians or something. Something broad like that. Yeah. So, they’ll probably leave that and they’ll do whatever they want to do with if they did want to put some wording in about climate change, it’ll probably be very vague, because it is all very vague. We don’t really, I mean, I’ve got no idea what’s going to happen here in Australia. Politically, it’s, it’s such a vexed issue. And you’re saying is not in the top 10 issues in the US, it’s certainly in the top 10. It’s top five; top 3 here in Australia. 

I mean, the previous government lost Blue Ribbon seats, seats that it’s held for decades, seats in affluent areas of Sydney and Melbourne. And it lost them because of climate change, because people in those seats are extremely concerned about it.

Darren Brady Nelson  36:07

Yeah, there’s a different point of view. Certainly, they did, but I wouldn’t extrapolate to say that means Australia as a whole has the same views as these inner-city suburbs, they’ve just changed the demographics and the ideological viewpoints of these people. That’s why they lost. Just like we’ve seen around the world, it’s the rich and upper-class professionals who gravitate towards status policies and status causes, like climate change. The working class, and in the middle, and lower middle classes do not. And electoral politics, isn’t just a straight representation of what the entire nation views necessarily. And putting aside the fact that the polling is often biased and bad and misleading and all that sort of stuff, but that decide. 

I’ve seen some other people who; intelligent Australian commentators, James Allen, and people like that. We’ve been having a bit of look at that, to see whether, that mainstream narrative is actually true. They certainly lost obviously, those seats, they were blue ribbon, but they’ve been changing and moving left for a while now. So, particularly in the US, how climate change is almost really a non-issue from a broad electorate point of view, not any specific electorates. 

Yet, that doesn’t stop the policies from carrying on and then you have all these perverse outcomes of like, I imagined Albanese will get more copy a lot of what the Biden administration so, the push for electric vehicles. Well, electric vehicles are still being produced by coal and natural gas, you know. So, you’re really in many ways, you actually might even be increasing carbon dioxide emissions through transitioning to electric vehicles from petrol vehicles. And the fact is, most of the world is actually increasing the use of coal, mostly India, China, Brazil, etc. And there’s even been a coal like I said, there’s been a coal comeback, even in Western countries as electric vehicle usage gets ramped up. So, these people don’t go, oh, no, we; the same people who say there’s an existential problem, keep on producing, keep on pushing electric vehicles, for instance. So, that their actions speak louder than their words that it isn’t really an existential crisis. Putting aside the fact obviously, all these elites tend to keep on buying beach side homes and all these sorts of stuff. I think just look at their actions, speak much louder than their words. 

So, we’re getting this system where we get a worse electrical system because they keep on showing throwing more and more unreliable and expensive renewable energies on top of it, yet, they’re not actually starting to take much of the load of electricity production, they’re just sitting there costing more money and hurting the rest of the system. Yet, we’re still relying, and we’re going to keep on relying on coal and natural gas and the only renewable energy we’re going to lie and it’s going to be, water – hydro. Putting aside the fact you know, allow many new hydro to be built, but it’s bloody reliable. In the US, if it wasn’t for Quebec, all the hipsters in New York would be having more blackouts because they’re running on water; hydro from Quebec coming down into the US.

Gene Tunny  39:55

Where is that is that near Niagara Falls, or is it is that up in that Region.,

Darren Brady Nelson  40:00

Yeah. Quebec is like, the king of hydro in that part of the world, not just for Canada. In fact, Quebec is mainly supplying electricity to the US, part of the population that’s bigger. And that sort of the northeast of the US. So, that’s kind of insulating on, they can shove on some more solar panels and wind, but that’s not really generating a lot of electricity. And we also have the perverse effect from the main thing that, besides all the kind of pollutants, actually the toxic sort of, chemicals, and all the stuff that it’s needed for electric vehicles, needed for solar panels, needed for wind turbines, which obviously have detrimental environmental effects. They need coal, natural gas, and hydro to make those things in the first place. Not just to be the ones that really, supplemented when the wind’s up blowing, and the sun’s not shining. But if it wasn’t for all the fossil fuels, it couldn’t even build this stuff in the first place. So, all you’re doing is shoving all this stuff, people making a lot of money. A lot of people are virtue signaling, sort of, they keep on crying wolf for what, like 30 years now. There’s, nothing; there’s no significant evidence that we have a problem. 

Gene Tunny  41:15

Well, I’ll push back and say we just had a 40-degree Celsius day in England that they’ve never had in their whole history. 

Darren Brady Nelson  41:23

That’s not true. You go back, and we look at the Paleo challenge. You look at the evidence. For instance, in the US, this damn out in the Colorado River is having; it’s because of climate changes is at its lowest level, lo behold, a study, two weeks prior to them making such statements show that they’ve had more levels on the Colorado River 2000 years ago. 

We’ve had warmer periods, we’ve had more carbon dioxide in the atmosphere in times. No, none of this is accurate. It’s all cherry picked to scare the poop out of people to accept these policies they want anyway. And you watch it when we’re old men, we’re going to be the people will go yeah, we’ll look okay, this thing didn’t happen. But I think it was the right thing to do anyway. 

You hear that a lot, even now. They go like it will even for wrong, it’s the right thing to do. How’s it the right thing to do to make people poor? And have people in Africa starve? How’s that the right thing to do?

Gene Tunny  42:22

Okay, so in a future episode, we’ll have to come back to this, Darren, and we’ll see where we are with the with the data.

Darren Brady Nelson  42:28

You want to see the green policies and action? Look at Sri Lanka.

Gene Tunny  42:31

Yeah. Look, I’m not advocating for these policies, necessarily. Yeah. But I do recognize;

Darren Brady Nelson  42:42

That’s not about you, that’s just kind of aim at whoever’s watching this. It’s like, you want to see the future? The potential future? That’s Sri Lanka. That’s the way Australia could look, if they’re not careful.

Gene Tunny  42:55

And what did they do? They actually required organic produce, did they? Did they ban the importation of some fertilizers or something?

Darren Brady Nelson  43:07

Yes, fertilizers. Fertilizer was the main thing using green organic things instead of actual fertilizer. This is what’s happened in countries like Sri Lanka and African countries is to get their aid money. They do the green agenda, essentially. And it’s just a disaster.

I’ll tell you the countries that won’t be, it won’t be China, it won’t be India; the bigger countries that don’t need the foreign aid. And there’s also strategic implications, obviously. Who controls the green energy market, ultimately? China – communist China.

Gene Tunny  43:51

They are producers of a lot of the solar panels. That’s correct. Yeah.

Darren Brady Nelson  43:54

They are almost a monopoly on this, and increasingly, all the support technology for it as well. So, in China, this is not a coincidence. It’s not like, oh, the market chose China, they were just the best people to do it. This is like, this is a plan. It’s a strategy by the Chinese government, and you can see it’s written down. There are books written on this by them to say, oh, this is what we’re going to be trying to do. That basically, it’s their mind calm. So, don’t be surprised, when some of this stuff comes true. 

They have a plan that the Chinese economy is not a free market economy by any stretch of the imagination. You know, it’s a government controlled run for the purposes of, for the benefit of the Communist Party and the strategic interests of China. It’s not like you’re dealing with the Netherlands, that sort of thing. So, that’s also a huge thing. Because they’re an aggressive military power. 

When the time’s right, they’re going to take action. Taiwan and whoever else, eventually over time gets in their way. So, to aid and abet this through these green policies that are aimed at a problem that doesn’t really exist or certainly not in the scale. And certainly, even if the problem doesn’t exist, too deep, to essentially decarbonize the economy is just like literally the worst solution for it. And to decarbonize it in a way that, benefits China immensely. These’re just terrible policies the whole way through and people hopefully one day will be held accountable for this.

Gene Tunny  45:46

Right, okay. We might go back to GDP just before we wrap up, and yeah, I think I agree. There’s a big debate to be had about those policies for sure. I mean, from Australia’s perspective, given that we’re such a small part of the world, doesn’t make sense for us at this stage to adopt those policies on a large scale. My view is we should try to cooperate internationally. But we need to ensure that other countries are following through with their commitments. And I’m not sure that that has always been the case, or it is the case. So, that my perspective on that. 

On GDP, I guess the view is that; my sort of thought is that, Janet Yellen certainly went too far. The US possibly could be in a recession, despite the fact that jobs growth has been strong, despite the fact that you’ve got unemployment at 3.6%, you could be going into; you could be in a downturn. The GDP figures, if you look at the composition of them, you had inventories falling, that was a big part of it. So, businesses were selling goods, but they weren’t replacing their inventories. So, that could be a signal that they’re not expecting; they’re worried about the future, about future sales. We had a drop in residential construction. That was one and that’s probably driven by the increase in interest rates. At the same time consumption spending was up. So, that’s why the summer economists are thinking it’s a bit of a mixed report. And we’re not entirely sure, but my take on it would be the GDP numbers are definitely something be concerned about and Yellen probably went too far when she said, we’re not in a recession. I think that certainly could come back and bite her. 

Darren, do you have any final thoughts on the GDP numbers? Or where the US economy is that?

Darren Brady Nelson  47:55

Pretty much agree with what you just said. And obviously, time is going to tell. I think the bad ministration policies are very bad. And that’s going to come home to roost. So, I think, it’s not going to be good times, economically for the US and if it’s not good times, economically, for the US, it’s not worth it. China is obviously a major player, but it’s not the engine of growth for the world just yet. The US still pretty much is. When the US sneezes, everybody catches a cold.

Gene Tunny  48:39

Yeah, that’s right. I remember that. That was a popular saying in Australia, at the Reserve Bank and Treasury. So, yeah, absolutely. 

Okay. Darren Brady Nelson. Thanks so much for your time. It’s great to catch up, yes. And I look forward to chatting with you again in the future.

Darren Brady Nelson  48:58

Always great to be on your show and see you, Gene, thank you.

Gene Tunny  49:02

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 this episode’s guest Darren for the great conversations, and 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 Podcasts, Google Podcast, and other podcasting platforms.

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Podcast episode

Stagflation: be alert, not alarmed – EP143 + transcript

In early June 2022, the World Bank downgraded its global economic growth forecast and warned of the rising risk of stagflation, the uncommon combination of high inflation and high unemployment, or falling GDP growth. Stagflation is a portmanteau word, combining stagnation with inflation. Economists first noticed stagflation in 1970s USA (see the chart below) and other advanced economies, when it was triggered by the 1973 oil price shock, which pushed up prices and reduced industrial output as input costs soared.

A simultaneous acceleration of inflation and an increasing unemployment rate in the mid-1970s surprised many people at the time, because it was contrary to the Phillips curve trade-off between unemployment and inflation.

In Episode 143 of Economics Explored, show host Gene Tunny and his colleague Arturo Espinoza discuss how the current global situation is similar and dissimilar to the 1970s, including consideration of recent perspectives from the World Bank and BIS.  While we also have a commodity price shock, associated partly with the war in Ukraine, it is less in proportionate terms than in the 1970s, and we also have better macroeconomic policy frameworks (i.e. explicit inflation targets) than in the 1970s. So the takeaway of the episode is that, while we should be alert to the possibility of stagflation, at this stage we shouldn’t be alarmed.

You can listen to episode 143 using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are also available below.

Links relevant to the conversation

Is a US recession imminent? w/ Michael Knox, Chief Economist, Morgans Financial – EP142 – Economics Explored (Previous episode with Michael Knox)

Jobs report May 2022: Payrolls rose 390,000 in May, better than expected as companies keep hiring 

https://trends.google.com/trends/explore?q=stagflation&geo=US (Google Trends for stagflation)

The Fed must act now to ward off the threat of stagflation | Financial Times

Are major advanced economies on the verge of a wage-price spiral? (BIS Bulletin 53)

Commodity market disruptions, growth and inflation (BIS Bulletin 54)

Robert Heller’s paper on International Reserves and Global Inflation (from p. 28)

Stagflation Risk Rises Amid Sharp Slowdown in Growth (World Bank report) 

Stagflation danger prompts  World Bank to cut growth outlook (Washington Post article)

EP59 on the Natural Rate of Unemployment (re. Milton Friedman’s AEA presidential address)

Friedman’s presidential address

Chart of the Week – The real price of crude oil – Callum Thomas

Clarification

Australia’s wage price index increased 2.4% through the year to March 2022 (see Wage Price Index, Australia, March 2022 | Australian Bureau of Statistics

Transcript of EP143 – Stagflation: be alert, not alarmed

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. My personal feeling is that; and this is informed by my conversation with Michael Knox last week. I don’t think we’ll end up with stagflation similar to the 70s or rather, I hope not. I don’t see at the moment.

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 143 on Stagflation.

Joining me this episode is my colleague at Adept Economics, Arturo Espinosa. Arturo, good to have you on the show again.

Arturo Espinoza Bocangel  00:44

Thank you, Gene. I am glad to be here.

Gene Tunny  00:48

Excellent, yes. It should be a good conversation because we know that this issue of Stagflation is topical with the recent World Bank report that we’ll get into in this episode. But before we do that, I just thought I’d provide an update on last week’s episode.

So, in Episode 142, I spoke with Michael Knox, who is the Chief Economist at Morgan’s, which is a major Australian wealth management and stock broking firm. And Michael and I chatted about the prospects for the US and Australian economies and what’s been happening with monetary policy. And Michael made a bold prediction in that episode, on where the Australian cash rates, so the policy rate that’s controlled by the Reserve Bank of Australia, so that’s the equivalent of the Federal Reserve in the US or the Bank of England. And he forecast that they would lift it by 50 basis points. So, half a percentage point from 0.35%, he forecast that they would increase it to 0.85%. He was the only economist in Australia who was forecasting there, and he explained why he thought that was the case in the episode.

So, if you’re in the audience, you haven’t listened to that episode yet, please, think about having to listen to it because Michael, I think is one of the best economic forecasters out there. He looks at the global economy, he looks at the Australian economy. And it turned out that the Reserve Bank did increase the cash rate by 0.85%. And it surprised all of the other market economists, all the commentators, and now there’s all this talk about what does this mean for the economy?

Will people now have trouble paying their home loans? Will they get into financial trouble? And there’s a huge conversation about that now in Australia; well done to Michael Knox for forecasting that correctly.

And we were also chatting about this idea or this concern that there could be a recession coming up in the US. So, there’s been a lot of commentary about that. It’s associated with all of this commentary, all this discussion at the moment about stagflation, which we’re going to get into. But Michael is very optimistic about the US economy as we talked about, and just after that episode was published, there was some new data that came out from the Bureau of Labor Statistics; at the BLS. And they reported better than expected, employment numbers in the US for May, CNBC reported that the US economy added 390,000 jobs in May, better than expected despite fears of an economic slowdown and with a roaring pace of inflation. The Bureau of Labor Statistics reported Friday, at the same time, the unemployment rate held at 3.6% just above the lowest level since December 1969.

Okay, so that’s an update on last week’s episode. Okay. Any questions or thoughts on that, Arturo?

Arturo Espinoza Bocangel  04:04

No, let’s start discussing about the topic.

Gene Tunny  04:09

Yep, about stagflation, absolutely. So, I want to devote the bulk of this episode, or the rest of this episode to talking about stagflation. This is something that I asked Michael about last week in our conversation. And I mean, this is something we haven’t; it’s a term that, that I remember, you know, I learned in when I studied Economics, and as you did, we would have learned this term stagflation about what happened in the 1970s. But we haven’t really heard it in the economic commentary for a while. So, there were decades when no one was really talking about it. And then there was this revival of interest in it, I think, from around late last year.

And if you look at the Google Trends Data, and I’ll put this chart on the show notes, so you can see, when interest in the concept of stagflation has picked up again. And that was from around, I think it was around September, 2021. And we’ve had various commentators talking about the risks of stagflation. So, on 25th of May this year, Martin Wolf; so Martin Wolf is one of the leading financial economic commentators in the world. He writes for The Financial Times. He wrote a column; “The Fed must act now to ward off the threat of stagflation.” And we know from the 1970s, the time to throttle an inflationary upsurge is at the beginning. And is there going to be a recession in the US and other leading economies? This question has naturally arisen among participants at this year’s meeting of the World Economic Forum in Davos. So, you probably saw, I think that meeting, they had their World Economic Forum meeting in Davos, Switzerland last week.

Martin Wolf wrote that this is however, the wrong question, at least for the US. The right one is whether we are moving into a new era of higher inflation and wage growth, similar to the stagflation of the 1970s. If so, what might this mean? That was one of the motivations for having this conversation today.

And almost as if I forecast that the World Bank would produce this study on stagflation, they released it overnight, or it came overnight our time. And so, we’ve just been looking at this morning, this new report, from the reserve; sorry, not the Reserve Bank, that’s our bank here in Australia, the World Bank. And the press release; June 7, press release, I’ll put this in the show notes. So, if you listen, and you’re interested, you can find that; stagflation risk rises amid sharp slowdown in growth.

So, you had a look at this earlier, Arturo, didn’t you? What were your main takeaways from this report from the World Bank?

Arturo Espinoza Bocangel  06:59

Well, I think these are very good reports, where they dedicate special focus on globalist inflation. And there is a section which they talk about similarities to the 1970s. They mentioned that they are three of them. The first is that supply shocks after a prolonged monetary policy accommodation, the existence of weaker growth. Also, there are some significant problems or inabilities in emerging economies. Those three things can be similar from 1970s to the current period.

Gene Tunny  07:51

This is because these supply side shocks really hurt those emerging economies more than the richer economies; is that the idea? Because they generally have lower incomes in those countries. And so, they’re going to be very badly affected by increases in oil prices, increases in food prices, and that can bring not only economic turmoil, but political turmoil as well.

So, what we might do is; we might revisit those, those similarities. Again, in the podcast first, it just occurred to me that we probably should, or I probably should just talk about what Stagflation is, what does it mean? And I couldn’t find any or there’s no strict definition of what it is. It’s a combination of unemployment and inflation or low GDP growth and high inflation. But there’s no agreed definition of it’s stagflation, if unemployment and GDP growth are x and y and inflation is there; there’s no quantitative definition as far as I can tell.

So, stagflation; it’s a pretty horrible word, if you think about it. I mean, it’s one of these, what do you call it? A portmanteau word. So, it’s a word that is a combination of other words, to try and convey a particular meaning, the combination of themselves. So, it’s a combination of stagnation, plus inflation. Glenn Hubbard’s introductory Economics textbook. So, Glenn Hubbard was the chair of the Council of Economic Advisers for President George W. Bush, in the early 2000s. In his textbook, they define it as a combination of inflation and recession, usually resulting from a supply shock. Okay, and like with everything in Economics, we’ve defined a concept by referring to another concept, we have to define a lot of times. So, supply shock. What do we mean by that? We mean, something that increases the cost of inputs; it’s a shock on the supply side of the economy, our ability to produce.

It’s not like a demand shock, where there’s an increase in spending or an increase in the amount of money. It’s a shock to our productive capacity. So, this concept, I think, originally came into Economics, or it became prominent in the 1970s, when there was the huge spike in oil prices in 1973, when OPEC, because of the Arab countries are upset with the West because they were backing the Israelis in the war, I think it was the young people war. That meant that the cost of inputs increased. And when those inputs increase, we use oil, well for petrol and, you know, across the economy. And so, it’s pushing up costs of production and produces; firms will try and pass that on to customers. That can be inflationary. Okay.

And you mentioned supply shocks before, didn’t you? In terms of the similarities with the 70s? So, we’ve had that,

Arturo Espinoza Bocangel  11:10

Yeah, we have the impact. However, there is a difference there in the case of the World Bank report, they say that the current shocks or current supply shocks are smaller, compared to those shocks in 1970s.

Gene Tunny  11:33

That’s right. I should have checked the numbers before I came on to record. But if you look at the real oil price back in the 70s, that was in proportionate terms, that was a huge increase, wasn’t it? I mean, it was multiples of the then current price, and it really shocked people. It was a huge shock to face those price rises.

So, I’ll have to dig out what that stat was and put it in the show notes. But that’s what they’re driving out there, aren’t they? They’re saying, well, okay, we’ve seen some big increases in commodities prices, but they’re, they’re smaller still than what we saw in the 1970s. So, they may have a chart and that report that we can refer people to in the show notes. Okay.

So, just on this definition of stagflation again, that was one definition. Now, note, there’s no quantitative; there aren’t any numbers in that definition. Dornbusch and Fisher; so, that was the textbook I use when I studied macro Economics back in the 90s. Rudy Dorn, Bush and Stan Fisher, so very prominent, US macro economists, I think are at MIT. They wrote that stagflation occurs when inflation rises, while output is either falling or at least not rising. And on well, actually, there’s probably no point me giving textbook page references, because this is sort of the 1994 edition. But in that edition, they wrote that during periods of stagflation, such as 1973, 74, 1980, and 1991. There are articles in the newspapers that the laws of Economics are not working as they should, because inflation is high or rising, even though output is falling.

So if we go to the, the data for the US, so I’ll put this chart in the show notes as well. We look at what happened in 1973 – 74. And this was a huge shock, I think at the time. We see that inflation went from a rate of 2 to 3%. And it ended up at a rate of over 10%. I think it looks like nearly 12½ % on this chart, I’ve pulled up. And so, we had those two years; well, after the ‘73 oil shock, so 74, 75 inflation is accelerating. And unemployment is also increasing, and it’s increasing from about 5% to nearly 8 to 9% or so. I’ll put this chart in, and I’ll just check those numbers. And this came as a big shock, because there was this concept of the Phillips Curve wasn’t there? There was this idea that there was this tradeoff between unemployment and an inflation, that if you had high unemployment, then at the same time, you should have low inflation. Or if you had high inflation, you’d have low unemployment. There was this idea that there was this trade off; because empirically, if you looked at the data for the 50s and 60s in the States, or for the UK or other advanced economies, it looked like there was this trade off. It looked like there was a menu from which economic policymakers could choose.

The typical story about the Phillips Curve was that, you could get unemployment down by stimulating your economy, a bit of Keynesian fine tuning, a bit of pump priming. You could reduce unemployment, but if you get unemployment; if you if you do reduce that, that puts more power in the hands of Labor relative to capital, you can tell stories about unions, you can tell stories about people being more aggressive in their wage negotiations, because Labor is scarcer, and that leads to higher inflation.

So, there’s this idea of a tradeoff. And this Phillips Curve was something that was found by Bill Phillips, who was a professor, Bill is from New Zealand originally. And he ended up being a professor at the London School of Economics. Have you heard about that? This is a bit of a tangent, but he built that hydraulic, economic model. Have you ever heard of that, ever heard of LSE?

Arturo Espinoza Bocangel  16:08

No, I haven’t heard about it.

Gene Tunny  16:11

And he developed this hydraulic, economic model in the 50s and 60s. They built a representation of the economy; they’re essentially modelling the circular flow of income with using water and mechanical parts. And this was a model that London School of Economics; I just remember that because she gave a lecture at the University of Queensland in 2016, Mary Morgan, she’s a professor at LSE, London School of Economics. She wrote a great book on the World in a Model. So, she’s done some great work on the history of economic modelling. Her first job, she said, was looking after that hydraulic computer.

So, Bill Phillips, one of the great economists, he discovered this correlation between all this trade off; the Phillips Curve, the relationship that ended up being influential in economic policy in the 60s until it broke down in the 70s. As we are talking about, he looked at UK wages growth, so wages, inflation and unemployment data. Even though what he did was look at wages data, well, it soon transferred as a concept to a tradeoff between price inflation and unemployment, because well, there is obviously a link between wages and prices, because employers will try and pass on those increases.

Does that all make sense? I was just trying to explain why this idea of this stagflation came as such a shock in the 1970s.

So, what was wrong with that Phillips Curve concept? Why didn’t it work out? Well, it was because of this supply side shock, wasn’t it? This was something that wasn’t really anticipated in that Phillips Curve story. And the other problem was that when you have high inflation, the expectations of people in the economy of workers and businesses, your expectations of inflation increase. You essentially, come to expect inflation and inflation becomes a self-fulfilling prophecy, because every time there’s a wage negotiation, or a contract negotiation, you essentially allow for the future inflation, you expect it. And you have things like cost-of-living adjustments, you essentially build it into contracts and under wage bargaining. So that’s one of the reasons why the traditional Phillips Curve breaks down. And there was a very famous speech by Milton Friedman; the presidential address to the American Economic Association in 1968. And I’ve talked about this in a previous episode – Episode 59, on the Natural Rate of Unemployment. And Friedman argued, well, in the long run, there’s really no Phillips Curve, you might think that there’s some sort of tradeoff in the short run, that you can get unemployment down if you pump-prime; if you stimulate your economy, and you’ll get some inflation as a result of that or you could go the other way and try and contract the economy to reduce inflation.

But in the long run, there is no trade off; there’s no Phillips Curve to speak of this. The economy should gravitate towards a natural rate of unemployment. And inflation can be whatever is consistent with people’s expectations.

There’s a big problem if you don’t get inflation under control, and people come to expect inflation, and then you can just have persistently high inflation, and you can have that with high unemployment as well.

Have you seen those diagrams of the Phillips Curve, with the vertical long run Phillips Curve? And then if you start off at a point on that Phillips Curve, so say you’re at your natural rate of unemployment, and you’ve got high inflation expected, then what can happen is, there some sort of shock that increases unemployment. And so, you start off at that high point with high inflation already. Maybe, it eventually has some sort of; it does contribute to a reduction in inflation somewhat, but you still at that higher level of inflation. And so, you can have higher unemployment or high unemployment and high inflation still.

So, that was probably a bit more technical information than we needed. If you have a look at an intermediate or advanced macroeconomics textbook, they’ll have some diagrams; I have some models that go over, that we probably don’t need to look into that. But the main point is that this Phillips Curve, discovered by Bill Phillips; people thought it was this stable tradeoff between unemployment and inflation, didn’t hold in the long run. And if your economy is subject to the supply side shocks, so increase in the price of oil, for example. And then if people come to expect inflation, then you can get high levels of inflation. And they can be very persistent, and you can have the economy slow down, you’re going to have high unemployment, and inflation can still persist for a long time.

And if you did want to get that inflation down, you really need a change in monetary policy, you need a much more aggressive monetary policy, and you need a credible Central bank that can deliver it. And I think this is what Paul Volcker in the US did in the early 80s. And this is what when they massively tighten monetary policy, high interest rates, crunch the economy, but they did get inflation under control. And I think this is related to this point that the World Bank made. There was a point about better monetary policy frameworks. Is that right?

Arturo Espinoza Bocangel  22:37

Yes, that’s right. After that economic event occurring 1970s, most of Central banks started to control prices, try to target inflation. Also, they incorporated the old thing related to these rational speculative in order to take into account potentials proven that pulling golden, been analyzed before 1970s since the Phillips Curve wasn’t explained correctly, the prequel evidence, as you mentioned. In the short run, that Phillips Curve is playing well, but in the long run, they didn’t account other factors, and relationships was different. So, I think most of the Central bank started to work better in terms of expectations.

Gene Tunny  23:45

Yeah. And so, this is this point, that Central banks, they need to have a credible monetary policy. And one way of having a credible monetary policy is to have an explicit inflation target that you’re judged on. And that’s why our Reserve Bank of Australia has a 2 to 3% inflation target, and the Bank of England and the Federal Reserve, they’re aiming for, I think it’s 2%. I’ll put that in the show notes. But they sort of; all of these Central banks tend to have inflation targets in 2 to 3%, which is a recognition that you’re going to have some inflation, but what you want to avoid is higher rates of inflation or double-digit inflation, or even worse, that’s what you really want to avoid, because that really causes a lot of misery. People can sort of, live with inflation of 2 to 3%.

So, that was this point about monetary policy; another thing that helps signal a credible monetary policy. So, by credible, we mean that people in the economy, businesses and workers know that if inflation starts to accelerate, the Central bank is going to squash that inflation as soon as it can. And that helps keep inflationary expectations down so people don’t come to expect higher inflation.

Okay, and one other thing that does help with the credibility of a Central bank is having an independent Central bank, who the worst thing you can have is if your Central bank is influenced by politicians; if it’s controlled by politicians, because, say they’re coming up to an election, there might be inflation increasing, but the politicians don’t want the Central bank putting up interest rates just before an election.

Arturo Espinoza Bocangel  25:43

That’s right. In the world, we have seen many examples. For example, Peru is a good example of a thing that would the government shouldn’t do. For example, in the middle of 80s, Peruvian government, had a high level of debt. That moment, government Allan Garcia took place, and he didn’t recognize the debth. So, they didn’t want to pay. And also, in the government, they started to print money because the other Central bank, was subordinated to the current government. And that was the world’s respond for [unclear] because Peru initiated a stage of hyperinflation. And also, Peru faced a recession period.

Gene Tunny  26:52

So, hyperinflation; there is a quantitative definition of hyperinflation. It’s when you have inflation running at about 50% a month or something. It’s a very high rate, and you can end up with annual inflation rates of over 1,000% or something, which is just mad. What they had in Germany in the 1920s. But also, we’ve seen it in South American countries in the;

Arturo Espinoza Bocangel  27:18

Most South American countries, experience periods of hyperinflation.

Gene Tunny  27:23

So, you are highlighting one of the; when it gets really bad when you don’t have that independence. And because the Central bank is the bank for the government as the government just commits to making all of these payments, and it might not actually have the money, but the Central bank just prints the money. It just pays the bills for the government; the money is just created. So yeah, what they call modern monetary theory nowadays; bad results.

We’ve chatted about the Phillips Curve, why it’s not reliable. I’ll put links to all of these things I’ve mentioned particularly to Milton Friedman’s presidential address, which is just brilliant.

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

Female speaker  28:18

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Gene Tunny  28:47

Now back to the show.

Okay, now, one of the things Central banks are essentially wanting to avoid is this idea of a wage price spiral. So, we’ve talked about inflationary expectations, you want to avoid inflation becoming expected, and then it becoming a self-fulfilling prophecy. So, one of the concepts that disgusts is a wage-price spiral.

Okay, so in early May 2022, the Reserve Bank of Australia; this was a report in the Australian Financial Review. The Reserve Bank of Australia has warned of a wage price spiral if unions exploit the low jobless rate to push for higher pay rises to compensate for an inflation rate to peak at a higher than expected 6%.

So, what is a wage-price spiral? The Bank of International Settlements in Basel in Switzerland; it’s defined a wage price spiral in the following way, and this is in a bulletin that they produced, BIS bulletin number 53 on Major Advanced Economies on the verge of a Wage Price Spiral.

A wage price spiral entails feedback in both directions between wages and prices. Inflation then rises persistently on the back of such a spiral. Once the economy enters the spiral, workers bid up nominal wages more than prices, prompting firms to raise prices further, the likelihood of an economy entering the wage price spiral depends in part on macro-economic conditions.

Workers bargaining power is typically greater when Labor demand is strong and Labor supply is tight. Similarly, firms may have more pricing power when aggregate demand is strong. Labor market institutions also influenced the likelihood of a wage price spiral emerging.

Automatic wage indexation and cost of living adjustment. So C-O-L-A or COLA clauses make wage price spirals, more likely.

And this was important in the; well, it became an issue in the Australian election campaign, because the then opposition leader now Prime Minister, Anthony Albanese; did you see his comments when he was saying that, if we were in government, we would support workers being getting a wage rise in line with inflation. Inflation was rising at well; inflation was 5.1%. That was the last reported estimate from the Reserve Bank, which was higher than expected. And then, Anthony Albanese came out and said, yes, workers, their wages should increase by at least 5.1% To make up for that. And then, the then Prime Minister, Scott Morrison tried to make a big thing out of that and he said, Anthony Albanese is a loose unit, because this could then lock in inflation permanently.

So, this is his concern about a wage price spiral and the BIS was arguing that, this sort of thing; there’s automatic wage indexation, which is almost what well, it’s essentially what Anthony Albanese, our current prime minister here in Australia was almost hinting at. I think he regretted making that comment, because they really don’t want to do that. And if I think they’ve walked back a bit from that position, I mean, they put a submission to the Fair Work Commission, ultimately, it’s up to the Fair Work Commission to decide the increase in minimum wages in Australia.

There was some criticism of the opposition leader at the time, because it could have; there were commentators who were saying, this is a sort of thing that risks a wage price spiral. And you could take that BIS note as supportive of that position. Ultimately, I don’t think that mattered much in the election campaign. So, who knows? I mean, it could have even increased support for Anthony Albanese. People think, well, that sounds fair enough that we’re compensated for inflation. Most people are wage earners as more wage earners than business owners in the country. So, it could have been a popular thing. The PM at the time was trying to say, well, he’s a loose unit, who knows how much impact it had on the election campaign?

Ultimately, I think the election was decided over concerns about climate change. There was this general perception out there that the government wasn’t doing enough on climate change, rightly or wrongly. And that was the dominant consideration.

Do you remember that whole debate or that whole discussion around the opposition leader’s comments?

Arturo Espinoza Bocangel  33:43

I remember that. I saw some news about it. I also reviewed some comments from some Australians, And some people or some citizens mentioned that the proposal is not correct for the current situation in the global economy. Because of course, if you want to raise salary, that will be loads, let’s say factor, or determinant to boost inflation pressures in Australia.

I remember that I checked some economic paper; it’s okay to raise the wages, but it could be implemented gradually. Or maybe you can target some sectors in order to improve the salaries but it’s not a good policy response to increase generally, the wages in the whole Australia.

Gene Tunny  35:01

Maybe limited to the lowest paid workers, rather than have at across all of the wage agreements in the economy so that; fair enough. Okay, we might have to come back to this whole issue of how wages are set in a future episode.

So, what did the BIS conclude about whether major economies are on the verge of a wage price spiral? Well, with most economic issues, they weren’t able to reach a firm conclusion. I mean, none of us has a crystal ball. I mean, I’m always very reluctant to give firm or precise forecast, because you just can’t, because there’s so much uncertainty.

So, my reading of what the BIS was saying in that wage price spiral bulletin, is that, well, they’re not really sure. The key things that they noted in their analysis were that while inflation is returned, it’s reached levels not seen in decades, whether inflation enters a persistently higher regime will depend on labor market developments and on whether a wage price spiral emerges. To date, evidence for a broad acceleration in wage growth is mixed. It’s picked up significantly in the US, but it remains moderate in most other advanced economies. So, it’s certainly still moderate in Australia, it is picking up a bit, but it’s not near what arguably, we’d like to have. And this became an issue in the election campaign to you probably remember this. Well, this is why Albanese made those comments to begin with. Because if you looked at wage’s growth, which was, 2.7 or maybe it was a bit lower through the year, compare it with inflation of 5.1%, then you get a real wage decline of 2.6%.

I will put the exact numbers in the show notes. It must have been about 2½%. If we’ve got a 5.1% inflation rate, I think they were saying the real wage decline was 2.6 or 2.7%, that it must have been a 2½% wage price index increase. I’ll put the right data in the show notes.

That became an issue in the recent election campaign.

Here is where the BIS basically admits; we really don’t know:, Extrapolating behavior from low inflation periods is problematic if inflation remains high, households may ask for higher wages to make up for lost purchasing power and firms may raise prices to protect profit margins. And stubbornly high inflation may lead to institutional changes, such as automatic indexation and cost of living adjustment clauses. So, that’s the sort of thing we want to avoid. And that’s why people were worried about what our current Prime Minister was saying, because there was a concern that we could effectively do that sort of thing, if he followed through on what he was saying.

Did you have any thoughts on that wage price spiral article? You had a looked at that today, didn’t you Arturo?

Arturo Espinoza Bocangel  38:17

Yes. I think, in the report, they also mentioned that some condition must be complied to be under these kinds of wage price spirals. But from my point of view, I think is quite complex to determine if all the countries are going to face that wage price spiral? I think that depends on the particular condition from each country.

Gene Tunny  38:50

Yeah, that’s the problem that the World Bank and the BIS, or the IMF have, because they’re trying to produce forecasts, or do analysis for the whole world or all major economies, whereas there are differences in the institutions within those economies; a very good point.

Okay, so let’s get back to the central question. I mean, all of these things we’ve been talking about, are related to because if we have a wage price spiral, and then we have some shock or the economy goes into a downturn, then we could end up with stagflation. So, it’s all related.

We’ll talk about now, the prospects for stagflation. So, is this something we should be worried about? And it turns out the BIS looked at this last month, so before the World Bank, so this is obviously something that economists in these major institutions are concerned about, and the BIS had to report commodity market disruptions, growth and inflation.

We’ve talked about the broad base supply shock increasing inflation, food and energy prices spilling over to other components of inflation, and possibly; well contributing to a reduction in global economic growth. And we should talk about the World Bank’s forecasts because the World Bank now is forecasting a reduction in global growth, isn’t it? That was one of the major things in that latest report. I’ve got it here.

The bank slashed its annual global growth forecast to 2.9% from January’s 4.1% and said that subdued growth would be likely to persist throughout the decade because of weak investment in most of the world.

And so, the BIS was saying that this is the sort of thing that would happen. It was saying this last month, and I guess, I mean, a lot of other economists have been concerned about that. There’s a recognition that what’s happening with Ukraine, what’s happening with commodity prices, that is going to compromise, global economic growth.

Now, it looks like the BIS; they’re saying similar things to the World Bank and the World Bank, probably. I mean, I’m sure it read what the BIS analysis is pretty much; I think they reach the same conclusions almost. So, let’s go over what the BIS says, and then we’ll compare it with what the World Bank says. So, the BIS has concluded, recent shocks have been smaller than the 1970s oil shocks, but broader based encompassing food and industrial commodities as well as energy. Nonetheless, structural changes, as well as stronger policy frameworks and nominal anchors.

So, by a nominal anchor, they mean, something that’s keeping prices down. They’re talking about inflation targets. So, they make stagflation less likely to return. But this is where they acknowledge that.; we’ve said that, but ultimately, things can happen that derail the economy that can mean our forecast is incorrect. And they know commodity price increases in the wake of the war in Ukraine are likely to weigh on global growth and add to inflation. While lower energy dependence and stronger policy frameworks make a repeat of the 1970s stagflation unlikely, high and volatile commodity prices could still be disruptive. This puts a premium on restoring low inflation quickly before it becomes ingrained in household and corporate decisions.

Absolutely. I think that’s a very good point to make. So, that’s what the BIS said, That’s pretty similar to what the World Bank said, isn’t it?

We might have a look at that now, again. Let me just go back to the media release. They also got a comprehensive report and that chapter, the focus on stagflation, which I’ll link to in the show notes, which is worth reading. I’m just going to consult their media release, which is a really good summary and well written.

Let’s just talk about how the current situation resembles the 70s. And why? What are the reasons why we might think that we could end up with global stagflation?

The current juncture resembles the 1970s in three key aspects: persistence supply, side disturbances, fueling inflation, preceded by a protracted period of highly accommodative monetary policy and major advanced economies, prospects for weakening growth and vulnerabilities in emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.

Let’s have a look at what they’re talking about there. We’ve talked about the persistent supply side disturbances, preceded by a protracted period of highly accommodative monetary policy. By accommodative, we mean, loose, we mean, ultra-low interest rates, we mean lots of money printing, that sort of thing; credit creation, due to the low interest rates. And that’s what we’ve seen in Australia, we’ve seen in the US, we’ve seen it in other advanced economies. So, there’s no doubt about that. And the argument is that buildup of that additional money, that additional liquidity will end up with too much money chasing too few goods, accelerating inflation, right. We’ve talked about that on the show before.

They also talked about vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.

So, let’s have a think about what they’re driving out there. I mean, as the western economies increase interest rates, that’s going to mean; this is just one aspect of it. That will attract investment capital, portfolio investment to the US or to other major advanced economies. And if those developing economies don’t put up their interest rates, then that will lead to a depreciation of their exchange rates, which means that the cost of imported goods in those economies will be compromised, or if they’re trying to fix their exchange rates, it puts pressure on their balance of payments. So, it’s a bad situation for those emerging economies.

And also, the thing is, when you have situations like this in the world, when there’s concerns about volatility, there is this flight to safety and money can flow to the advanced economies where there’s a perception, it’s safer, and that could compromise these emerging economies. I wouldn’t be forecasting this yet, but things can happen unexpectedly or rapidly. We know that there can be crises in emerging economies that are difficult to predict, such as the Asian crisis in the late 1990s.

 Any thoughts on any of those key aspects, Arturo? About how, how there are similarities with the 70s?

Arturo Espinoza Bocangel  46:19

No. Your explanation was very clear.

Gene Tunny  46:23

Okay, well, then we should; before we conclude this episode, we should talk about how the ongoing episode also differs from the 1970s. The dollar is strong, a sharp contrast with a severe weakness in the 1970s, the percentage increases in commodity prices are smaller, and the balance sheets of major financial institutions are generally strong.

More importantly, unlike the 1970s, Central banks in advanced economies, and many developing economies, now have clear mandates for price stability. And over the past three decades, they have established a credible track record of achieving their inflation targets.

And they go on to conclude as the World Bank global inflation is expected to moderate next year, but it will likely remain above; I think I’ve missed the words there, it must be above average.

And they talked about; something’s gone wrong with my printout. They do talk about, you know, there is a risk of stagflation. So, stagflation risk rises amid sharp slowdown in growth, okay, so, there’s going to be some moderation in inflation, but it’s likely to still remain high or higher than the normal. And you couple that with the fact that there’s a risk of a slowdown, and they’re talking about a slowdown in global growth. That’s what they’re forecasting, then, yes, certainly, stagflation of some kind is a risk.

My personal feeling is that; and this is informed by my conversation with Michael Knox last week, I don’t think we’ll end up with stagflation similar to the 70s, or rather, I hope not. I don’t see at the moment. I think the US economy based on the indicators I’ve seen in my conversation with Michael, I think, at least for the next year or so, the prospects for the US economy are very good. Likewise, for Australia, I mean, there are always risks. We’ve got some heavily indebted households; we’ve got interest rates increasing. That’s one of the great unknowns at the moment. But if you look at the indicators, such as job vacancies, you look at the fact we’ve got a 3.9% unemployment rate. You look at what’s happening with commodity prices, which were in net terms benefiting from, because we’re a net exporter of energy and minerals to the world. Like, our coal prices have been $400 – $500 US a ton.

Queensland is a huge producer of coal; and that’s benefiting our state and budget. I mean, there’s ultimately; there may have to be a transition out of coal because of concerns over climate change. But at the moment, it’s something that is beneficial to the state economy. So, I think in Australia, I’m not concerned about stagflation at the moment, but as always, I need to say, I don’t have a crystal ball.

Any thoughts, Arturo? I mean, what’s your general feeling on stagflation? Is this just the latest thing that we’re worried about? Perhaps for no really good reason? I mean, it certainly; I haven’t seen this interest in the concept for a long time. And yes, is it something we should be worried about? What do you think?

Arturo Espinoza Bocangel  49:35

I think the case is; it’s good to have these discussions and it’s good to know that most of the Central banks are considering these potential, let’s say, this potential event. If they are well prepared, they can avoid that kind of situation for some countries. As I mentioned this thing, if a cure isn’t going to be general, so some countries perhaps are going to face stagflation. In some cases, if they don’t manage properly their monetary policy and some fiscal responses.

But of course, there are many risks that are out there, for example, as the World Bank report mentioned, if the supply disruption proceeds or the commodity prices continue to climb, inflation could remain above Central bank’s target. So, I think those are potential risks, the Central bank must consider giving good response.

Gene Tunny  51:00

Yeah, good point.

One other point I wanted to make is; and this is related to the other thing that differs from the 70s, which is, the World Bank set out a few ways that the economy is not the same as the 70s. And, one of the important ones, I think, is they talk about the US dollar, don’t they, the dollar is strong. Now, this is a very technical issue, it’s a hard one to sort of get your head around, because you have to go back to the situation in the 60s and the early 70s, before the era that we’re now in, in advanced economies of floating exchange rates. When we had the Bretton Woods system.

Michael Knox referred to the growth in international reserves, he talked about the growth of foreign currencies, held by Central banks in the early 70s that just massively increased in the early 70s. Because what was happening were because of the issues in the US and higher budget deficits and concerns about inflation, people around the world were trying to get out of US dollars. And because of the Bretton Woods system, they were trading their US dollars for their own currency or other currencies, or for European currencies, because there was the strong; well, in those that post-war recovery in Europe and Europe was becoming more prominent. And so, there was a move out of US dollars and to buy those US dollars, the Central banks essentially printed money, they created new money.

So, these changes in international reserves that Michael was talking about, I think was like 80%, over from the end of 1972, sometime in 1972. It was a huge growth in these international reserves, that led to a big increase in domestic money supplies, and that fueled inflation.

This is a great article by Robert Heller, that was in one of the IMF journals; might have been finance and development. I put a link to it in the show notes before, I’ll put it again, because it’s just well worth reading. But I think for us to do that justice, we will probably have to come back and talk about Bretton Woods and the whole international financial system pre 1970s. And look, that’s going to be a lot of work.  

This shows the complexity of the issues that we’re dealing with. In the economy, so many moving parts, it’s all interconnected. And yes, but what we’re trying to do, I think on this show is to simplify it as much as possible. And really make sure we understand those mechanisms because in a lot of economic discussion, there’s just too much that’s assumed in terms of the knowledge of the people reading or listening. There are too many concepts explained by reference to other concepts without explaining those concepts. And I want to try to make sure that we’re as clear as possible.

I think we’re probably in a position to wrap this up. Arturo, any final words? Thoughts?

Arturo Espinoza Bocangel  54:18

I think this conversation was pretty clear. And you’re to understand what is going on globally, in terms of inflation, potentially stagflation problems that some country may face. So, I think let’s stay alert. I think that Central banks are going to react properly in order to address that problem.

Gene Tunny  54:56

Okay, so you said, be alert, I like that. As our Former Prime Minister John Howard once said, Be alert, not alarmed. We will be alert to the prospects for global stagflation. But we’re not going to be alarmed at the moment.

You may not have been in Australia when he said that. That was something that people had amusing. There was about a serious issue is talking about international terrorism, which was, of course, a serious issue. And he said, be alert, but not alarmed. And then that sort of prompted all of these sorts of jokes about, what does that exactly mean to be alert, but not alarmed? I mean, how worried should we be?

And there was the old joke in Australia. Be alert, Australia needs Lurtz. I don’t know if you’ve heard that one. So, I think people would probably; as soon as John Howard said, Be alert, not alarmed. People were instantly sort of thinking, this is a bit of a funny thing to say. But maybe because I remembered that all joke about being alert.

Thank you, Aturo, I really enjoyed that conversation. And if you’re in the audience, and you’re listening, and you’d like to know more about these issues, I’ll put links to everything we chatted about in the show notes. I’ll also make any corrections. If I’ve got anything wrong I discover, in terms of numbers. I generally think the concepts and the facts; I think we got that right. But it’s possible some of the numbers I may have misremembered. So, we’ll put clarifications links in the show notes. And thanks again for listening. Arturo, really appreciate your time today. Thanks so much.

Arturo Espinoza Bocangel  56:43

Thank you again. Thank you very much.

Gene Tunny  56:46 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 EP143 guest Arturo Espinoza and to the show’s audio engineer Josh Crotts for his assistance in producing the episode and to Peter Oke for editing the transcript. 

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

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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.

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Economics Explored Live

Livestream featuring US jobless claims, Aussie GDP + farewell to Tony Makin

I did a livestream earlier today (Friday 3 December 2021) with my regular co-host Tim Hughes on the latest economic news of the week, including the latest US initial jobless claims confirming a strong US economy, the impact of the omicron COVID-variant on equity markets, and the September quarter Australian GDP figures which revealed the adverse impacts of NSW and Victorian lockdowns. You can click on and watch the video on YouTube below. You can also download the slides I showed.  

In the livestream, from around 22:05, I reflected on the late Professor Tony Makin’s contributions to the Australian economic policy debate, particularly on whether we should worry about the current account deficit in the late 80s/early 90s and on the effectiveness of the Rudd Government’s fiscal stimulus. On the current account deficit, Tony’s articles, along with the contributions of John Pitchford, clearly led to a change in the policy consensus on the current account, so it was no longer something that would be a macroeconomic policy target. Sadly, Tony died unexpectedly earlier this week. This came as a huge shock to so many of us, and it’s obvious from all the conversations I’ve had about Tony over the last few days just how much respect and admiration his colleagues and former students had for him. Tony’s funeral is on Monday on the Gold Coast (see notice below). 

Funeral notice for the late Griffith University Economics Professor Tony Makin, who will be greatly missed by his family, friends, colleagues, and former students.

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

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Podcast episode

EP114 – Tax rules benefiting tech titans and hedge fund managers

Controversial US tax rules mean that tech titans and hedge fund managers can pay arguably a relatively low amount of tax, as Steve Rosenthal, Senior Fellow at the Urban Institute, explains to show host Gene Tunny in Economics Explored episode 114. Steve also talks with Gene about former President Trump’s tax affairs in this episode.

About this episode’s guest – Steven M. Rosenthal

Steve Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, researches, speaks, and writes on a range of federal income tax issues, with a particular focus on business taxes. In 2013, he was the staff director of the DC Tax Revision Commission.

Before joining Urban, Rosenthal practiced tax law in Washington, DC, for over 25 years, most recently as a partner at Ropes and Gray. He was a legislation counsel with the Joint Committee on Taxation, where he helped draft tax rules for financial institutions, financial products, capital gains, and related areas. He is the former chair of the Taxation Section of the District of Columbia Bar Association.

Rosenthal holds an AB and JD from the University of California, Berkeley, and an MPP from Harvard University.

Tax Fairness: President Donald Trump, a Case Study (Steve’s testimony before the U.S. House Ways and Means Oversight Subcommittee)

Buy, borrow, die: How rich Americans live off their paper wealth (WSJ article)

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.

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