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UBI Experiment: Success or Failure? Insights from Sam Altman’s Trial – EP257

In this episode, Gene Tunny dives into a recent Universal Basic Income (UBI) experiment funded by Sam Altman, CEO of OpenAI. Gene explores the key findings of the randomised controlled trial and discusses whether the positive outcomes are enough to convince sceptics. Are UBI recipients more financially secure, or are there deeper concerns about its impact on labour force participation and long-term wealth? Get Gene’s balanced analysis of this major UBI trial and its broader implications.

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

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

Timestamps for EP257

  • Introduction (0:00)
  • Defining Universal Basic Income (UBI) (4:21)
  • Overview of the OpenAI UBI Experiment (8:09)
  • Positive Findings from the OpenAI UBI Experiment (13:54)
  • Concerns and Criticisms of the OpenAI UBI Experiment (21:55)
  • Financial Impact of UBI on Household Net Worth (22:50)
  • Gene Tunny’s Skepticism About UBI (34:17)
  • Closing Remarks and Previous Episode Clips (37:57)

Takeaways

  1. Mixed Outcomes of UBI: The experiment showed some positive effects, such as increased financial flexibility and well-being, but also concerning results, such as a slight decrease in labour market participation.
  2. Spending Behavior: UBI recipients spent more on necessities like food and rent; interestingly, they were more likely to help others financially.
  3. Limited Educational and Employment Impact: Younger participants showed interest in further education, but there was no significant boost in human capital or labour productivity.
  4. Debate Over Financial Impact: UBI did not lead to clear improvements in recipients’ financial health. The study found increased debt in some cases, raising questions about UBI’s long-term benefits.
  5. AI and UBI: As technological advancements continue, UBI is seen by some as a solution to technological unemployment, though Gene and some experts remain sceptical about the scale of potential job loss.

Links relevant to the conversation

Bloomberg article “Sam Altman-Backed Group Completes Largest US Study on Basic Income”:

https://www.bloomberg.com/news/articles/2024-07-22/ubi-study-backed-by-openai-s-sam-altman-bolsters-support-for-basic-income

OpenResearch’s website:

https://www.openresearchlab.org

Pete Judo’s video on UBI experiment failing:

https://youtu.be/oyoMgGiWgJQ?si=j3T-3yaEL5Rajcpw

NBER working papers on the study

The Employment Effects of a Guaranteed Income: Experimental Evidence from Two U.S. States:

https://www.nber.org/papers/w32719

The Impact of Unconditional Cash Transfers on Consumption and Household Balance Sheets: Experimental Evidence from Two US States:

https://www.nber.org/papers/w32784

Two Computer Scientists Debunk A.I. Hype with Arvind Narayanan and Sayash Kapoor:

https://youtu.be/M3U5UVyGTuQ?si=qcqSflHCf837GisA

AI can do only 5pc of jobs, says MIT economist who fears crash:

https://www.afr.com/world/north-america/ai-can-do-only-5pc-of-jobs-says-mit-economist-who-fears-crash-20241003-p5kfil

Previous episodes:

https://economicsexplored.com/2022/05/03/a-ubi-advocate-on-its-benefits-and-costs-ep137-show-notes-transcript/

https://economicsexplored.com/2022/02/13/ubi-universal-basic-income-w-ben-phillips-anu-ep126/

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Transcript: The Future of VC: Blockchain, Web3, and Emerging Markets w/ Qin En Looi, Partner, Saison Capital – EP256

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.

Ben Phillips  00:04

I guess looking at history, over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods, of course, where you have some fire unemployment, but generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappeared.

Gene Tunny  00:38

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host, Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. I get asked a lot about the concept of universal basic income, ubi, and I’ve had some previous episodes on it. I had an advocate for UBI in episode 137 Michael Haynes and I had an academic expert, someone who’s done a lot of modeling of the welfare system and tax system, Ben Phillips, an associate professor at ANU. He’s somewhat skeptical about UBI, and I had that conversation with Ben in episode 126, so I’ll put links to those episodes in the show notes. So it’s, it’s a concept that I’ve, you know, I’ve talked to a lot of people about, I’ve been thinking about myself, and I think it’s time for an update, because I’ve seen a few reactions online to a new UBI experiment that was funded by Sam Altman from open AI, the chat GPT company, and the results of that came out a few months ago, so in July. And now this is a really fascinating study. It’s a large scale, randomized controlled trial, a large scale experiment. So they’re using the gold standard methodology, and it’s it’s for the US. So it’s arguably more relevant, more applicable to what a UBI could achieve in the United States or other advanced economies and some other studies that have been conducted in emerging economies, some people see the experiment as a success and as supportive of UBI, and others See it as a failure. Now what is the truth? That’s that’s what I’m trying to explore in this episode. So I’ve read the results of the study. I’ve read a couple of academic papers that have been produced using rigorous techniques. They’ve been published as NBR, so National Bureau of Economic Research working papers, so very high quality research papers, and we’ll go through the results of those in the episode. My view is that this study of the UBI experiment that’s been funded by Sam Altman, I don’t think this will get a UBI across the line. There are some positive results for UBI advocates, but I don’t think they’re enough to really convince the people who need convincing that this is a good idea. And there are some, there are some results you could perceive as negative or that really raise doubts about the whole idea of a UBI. So we’ll go through those. I’ll give my thoughts on what the results mean, and I’ll be interested in your thoughts too. So please let me know. You can contact me through email or via a voice message. So the information’s in the show notes that will allow you to do that. First, let’s recap what we mean by UBI Exactly. And there are various definitions of it, but essentially it comes down to a regular payment of some kind. So it’s a, say, $1,000 a month. Is provided to all adult citizens, and it’s unconditional. There’s no work requirements, or there’s no means testing. It’s not dependent on how much money you’re making already. You don’t have to there’s no eligibility requirements in terms of, well, it’s for people who are. Are unemployed, or they’re not earning enough money, or they’re a single parent, etc. It’s unconditional, and the idea is to provide a minimum level of income. It’s often described as a flaw to stand on, or a platform to to build your life on. The people who who advocate it do they see this as something that will help people well. It provides financial security, and it will allow people to pursue education, to pursue improving their health and fitness, their their well being. It will enable people to, essentially, you know, take some time out and try to find themselves that sort of thing. And it’s something that is seen as, uh, desirable, given that we know that there are these potentially massive technological changes happening we all know about AI that really surprised us a couple of years ago when chat GPT came out. I think that was a real shock to many of us, just how how good it, it is. I mean, obviously there are some some issues. You’ve got to be careful with what comes out of it. But really it was, it was rather extraordinary. And there are all sorts of forecasts of what AI could mean, and automation, what they could mean for the level of employment, the level of unemployment. There are concerns about massive technological unemployment. So unemployment related to new technology. Then there are also concerns about, well, what does this mean for inequality? And so what we see is some people arguing for UBI as a way to to correct those, those concerns. Now I’m I’m skeptical about some of those diagnoses, so I’m less convinced by that, but I can see the logic. I can see the rationale behind why some people are are arguing for for universal basic income. Another, another argument relates to just the nature of the welfare system and how the way we’ve set it up, where you have benefits being withdrawn as you earn more money, so you could lose part of your your pension or your your unemployment benefit. If you get a job, you’ll lose that, or you’ll lose food stamps, etc. Then that can create a disincentive to actually do better, to get a job, to work harder, and it can create a welfare trap. That’s one of the reasons why they make this. They think, well, let’s just have an unconditional benefit. There’s there’s no questions asked, and it’s just for a basic level of of support. And then if you want to make more than that, if you want to live better than that, provides, then you go out and you make the money to support yourself. Okay? So that’s, that’s essentially where these advocates of UBI are coming from. In my view, that’s what I’ve interpreted. If you’ve got a different view on UBI or what you think’s driving it, then, then let me know. Drop me a line. So let’s, let’s go on to this study in particular, and we’ll go through that. So this study, as I mentioned before, it was funded by Sam Altman, the CEO of open AI. It’s a large scale UBI experiment. It ran for three years, concluding in 2024 so this year, and it’s considered one of the most comprehensive Basic Income experiments so far, it involved 3000 participants across the US. So in Illinois and Texas, 1000 participants received monthly payments of $1,000 so that’s the treatment group, and then you had 2000 participants in a control group who received $50 monthly payments. And so they’re aged 21 to 40, and the duration was, was three years. So as I mentioned before, the open AI, they’ve published a variety of findings on their website, relating to employment and relating to what what people spent money on, education impacts health care and what it means for people’s well being or their their agency. Okay, I’ll put some links in the show notes to where those results are reported. A good summary is in a Bloomberg article that I found, and I’ll also put a link to that. And the way that they summarized it is as follows. They said that, like many of the other studies before. For it, this study has found that the recipients of the UBI, they spend more to meet their basic needs and to to assist others, and they don’t drop out of the workforce, but they work slightly fewer hours. The biggest thing that that advocates of UBI are taking out of this study, and this is this is Bloomberg summary, the researchers biggest takeaway is that cash provides flexibility, and the researchers in the for the project, they said that it can be used to address recipients specific needs. It’s responsive to changing demands and creates a possibility for increased agency. Bloomberg reports the researchers resist generalizations on the Find insane outcomes vary depending on recipients income starting out, their family structures and their priorities. So there are some benefits. So they talk about how, you know, people do end up spending more on their their basic needs. People were more likely to go to the dentist. That was seen as a, you know, a major, a major finding. Now, that’s, that’s something that’s important. I mean, as someone who’s had various dental issues through their life, I think, I think that is a good thing. There’s a bit of a bit of uncertainty about what it means for education and skills. It’s been reported that in the headline results, that recipients were significantly more likely to report plans for further education. So they’re planning to to undertake further education. Those 6% percentage points more likely, which was a 15% increase compared with the average control participants. So they’re they’re more interested in pursuing it. But then there’s one of the NBR studies that was of the data set it wrote in. This is in the abstract of this is a paper the employment effects of a guaranteed income experimental evidence from two US states. So this is NBR working paper, 32719, and this is by various researchers led by Elizabeth Rhodes, is the research director of the project, and the finding this is one thing I found interesting. We observe no significant effects on investments in human capital, though younger participants may pursue more formal education overall, Our results suggest a moderate labor supply effect that does not appear offset by other productive activities. Okay, right? So what they’ve found so younger participants may pursue more formal education. Okay, so they might be studying more, but they observe no significant effects on investments in human capital. So within the the timeframe of the study, they didn’t observe any significant increase in people graduating or obtaining particular qualifications, although they do note that younger people may pursue more formal education, this is the bit that I find potentially concerning or makes you question. Well, okay, well, is UBI really such a great idea? Because what these researchers have found in their analysis of the data coming out of this experiment is that the program resulted in a two percentage point decrease in labor market participation for participants, and a 1.3 to 1.4 hour per week reduction in labor hours. Okay, so it looks like, you know, some people did actually drop out of the workforce, although you could argue it’s not a huge number, and this is what I find. Is probably the most concerning, is that, essentially, people just took this what they did with those extra hours was engaged in leisure activity, so they watched Netflix, or maybe hopefully they went and did something more active, that they weren’t doing anything productive, so to speak. So they weren’t engaging in education activity. So I think that is potentially a bit of a concern with with the results of this experiment. Okay, we might just have another look at some of the more positive findings, because I don’t want to completely just be negative about this. Because. There could be some benefits from from UBI and particularly people having the money to be able to spend on necessities and increase in agency. So they seem to be the major positive findings that have, that have come out of this study, as I mentioned before, the key finding regarding spending cash is flexible and allows people to spend on their unique needs. So this is on open researchers page. Just go to their page on key findings spending, and what they find is that, in terms of the dollar amounts, the largest increases in spending in response to the cash transfers were on basic needs, food, rent and transportation. Now in proportional terms or in percentage terms, the largest increase so this is relative to the average spend of control participants, the largest increase was on financial support to others. So we’ll go over these results again. So so this is with this $1,000 extra a month, so recipients increase their spending by $310 well, this is the observed increase in spending. It looks like there’s some unaccounted for spending. That’s my impression from the studies. But they found that, based on this additional money, they spent $310 more a month, food, $67 rent, $52 and transportation, $50 more. So they they’re spending more. We’ll talk about the transport issue a bit spending category A bit later, because there’s a an interesting result there that does reinforce concerns over the UBI study. What they found this is the other finding that the greatest proportional increase in spending was in this category of supporting others, and that increased by an average of $22 a month. So that’s a 26% increase. And I mean that’s right, cash as open. Ai the open research, people say cash provides increased flexibility to support others. So, yeah, I guess that just shows. I mean, there are a lot of people in need, and we do try to look after our relatives where we can Okay, so that’s a summary of the findings regarding spending. And as you expect, you give people additional money, they’re going to spend some of that money. And so it’s probably a bit, probably no real surprise. You could take some comfort out of the fact that they are using it to spend on what, what are mostly essential items, and then they are helping out relatives or friends. They’re helping to support others. So, okay, maybe that’s not really that unexpected, but that’s seen as one of the great findings, or positive findings that people have. You know, they they did spend this additional money on what appear largely to be worthwhile things. So the other other significant findings that the open research people talk about is, well, they refer to a lot of it seems this is a bit of anecdotal evidence, but there are a lot of quotes in here about how people feel more in control of their destiny. So one recipient, Kendra, said it best, I feel more in control of my destiny because of not only the additional income, but the consistency of the income, it allowed me to plan, to forecast a dream, to achieve things that I thought I wouldn’t be able to achieve because I couldn’t see beyond them financially. And again, this is, this is one of the main, you know, this is one of the arguments in favor of UBI, that it does provide people with this flexibility. They can they can take risks, they can do something entrepreneurial. And one of the interpretations of of these findings is that UBI does help people do that. So there’s a there’s an increased ability to set and to achieve goals. There’s a finding about how it it helps facilitate people to move, to move neighborhoods, an 11% increase in the ability to to move. I. Okay, so moving that can be part of making a fresh start that can improve your your opportunities, your ability to get a higher paying job. So that’s potentially a positive finding, okay, so the that 11% so that was that’s an increase in the propensity to move relative to control participants. So if you go to the the actual page on open research, it said that recipients were 4.4 percentage points more likely to move neighborhoods and 11% increase compared to the average among control. Participants and recipients were four percentage points more likely to move housing units, a 9% increase relative to control participants, right? Okay, I’m not sure what the baseline rate of moving is there, but I’ll put a link in the show notes if you want to check that out. I suppose it makes sense that you get a bit more money. It does provide that flexibility to move maybe, and you know, there certainly could be benefits for doing that, particularly if it allows you to get a better job, move closer to family, or to move to a better school district, that sort of thing. Okay, we’ll take a short break here for a word from our sponsor.

Female speaker  21:33

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Gene Tunny  22:03

Now, back to the show. Okay, so there’s some of the findings of this new study, this open research study of UBI and certainly there are some, there are some positive findings, people are more likely to spend on they’re spending more on what you could say are necessities. They’re helping relatives. They’re more likely to go to the dentist. They feel more agency. These are all positive things. Now, on the other hand, we see that they have reduced their their working hours, and what we find is that the impact on their financial situation is not what may be expected. And this comes out of the second NBR research paper that you can find on via their website. There’s a paper that has some really intriguing results, and it’s the impact of unconditional cash transfers on consumption and household balance sheets, experimental evidence from two US states. So that’s NBR working paper. 32,784 it’s just incredible how many working papers they produce. I think when I first started looking at NBR working papers at university, they’ll probably up to number. I mean, it would have been several 1000 by then. I’m not sure if it had reached five figures. I’ll have to, I’ll have to put that in the shadows. But, yeah, it’s just amazing how much research comes out of that. So that’s the elite Economic Research Group in in the US. That’s, I think it’s attached to Harvard. It’s attached to one of those Ivy League universities. It’s they, they’re responsible for a lot of good research, and a lot of it goes on to be published in the top journals like American Economic Review, quarterly, Journal of Economics, etc. So all that is to say that this is a really high you’d expect. This is a really high quality study, and they’ve they’ve used really good statistical techniques to try to work out what’s going on to to determine causality, what, what’s what’s really been the impact of of this experiment, or what’s the UBI Well, they’ve used an experimental design which does help you infer something about causality. They’ve said it’s by Alexander Bartik, Elizabeth Rhodes, David Brockman, Patricia Kraus, Sarah Miller and Eva vervelt, so I’ll put a link in the show notes. Looks like a great study, and this is, this is the study that has prompted some critics of UBI or, well, some scare. Dix, I suppose. Or some people who look at the data, they’re they’re empirical people. They’ve raised big questions about UBI after this study. And there’s a great video by Pete judo. He does a lot of good work on academic malpractice. He’s got some great videos out there that are worth watching. And he’s released a video UBI failed, and everyone is pretending it didn’t, so that is definitely worth watching. And it’s that video I saw that, and then that made me think, well, I should have a closer look at what these these findings are and and just see if that is, if that is the case that the UBI experiment has failed, I’ll just go over what Pete Judo has, what his main points are and, well, what he’s taken out of it is that, okay, look, one of the main things that is advanced as a benefit is that people who get UBI are 10% more likely to go to the dentist. And he’s saying, well, they seem to highlight that because there’s not really a lot of other great findings in the study, or nothing. That means that the experiment shows that UBI as a is a total winner, and he notes that the coverage doesn’t mention the fact that people who receive the UBI ultimately they end up with a reported $1,000 lower net worth compared to the control group you think. You hang on, what’s going on there. That’s a bit of a surprising finding. And this comes out of that, that paper, that NBR, paper I was just talking about before, about the balance sheet impacts of UBI. So let’s, let’s have a look at what that study that that $1,000 negative impact that he was talking about, that that is in the paper. They do report that, but they do know that there’s a lot of uncertainty about the magnitude of those impacts, and their conclusion is that this is how they write it. This is very, very academic. I guess they’re being careful about what they conclude and how strong you know, based on the data, how confident are we in these results? And they write that we find noisily estimated, modest positive effects on asset values driven by financial assets. Okay, so people save some of the the UBI that they get. They have higher they have higher cash balances, although they’re saving them temporarily, I suppose, or they’ve just got more money in their bank account on average, but these gains are offset by higher debt, resulting in a near zero effect on net worth. Okay? So based on their analysis of the data, they they can’t see any real impact, or any significant impact on on net worth. What what you see is that there’s some additional financial assets, higher bank balances, but then they’ve taken on some additional debt, okay? And so what happens is that there’s really no impact on on net worth, and they conclude these results suggest that large temporary transfers increase short term consumption and improve financial health, but may not cause persistent improvements in the financial position of young, low income households. Okay, so that’s the that’s the group that this study was focusing on. So it doesn’t really provide much of a longer term benefit the results in this study. That’s what Pete Judo was referring to in his video, and he concluded, well, this study shows that they’re they’re actually worse off. What’s going on there? I’ll put a link in the show notes, as I said to this paper, and I’ll just highlight some of the key parts of it so you can see where the results are coming from with that Pete Judo has has referred to what he’s what he’s referring to. There’s a there’s a passage on starting in. On page three. So combined these treatment effects on asset and debt indicate that the transfer decreased household household net worth by about $1,000 the net worth estimates are noisy, but we can rule out rises in net worth of more than $5,700 including real estate and mortgages, or $3,000 excluding real estate and mortgages. Okay, so what they’re saying there is, there’s because of the just the fact that of random variation in people, there’s statistical noise, sampling error, so to speak. You have to be careful interpreting these numbers. That’s essentially what they’re they’re they’re saying there, and they do put a footnote to that statement about the the transfer decrease in household net worth by about 1000 were they right? It’s important to note our sample consists of low income households, many of whom had little in the way of savings or assets. At baseline, median net worth was essentially zero. Median savings were was less than $1,000 and only 61% of participants had at least $100 in savings. Okay, it’s hard to know what to make of that. I suppose they’re saying, Well, we’re talking about people who didn’t have much to begin with. Perhaps they’re using that as a way to justify why they may have taken on more debt. I mean, what we find is that they use this extra money to help them borrow money to buy a car, to buy a vehicle. So I’ll go to that part of the paper in a moment. Whatever they’re trying to say there. Essentially the main point is that, okay, that if you crunch the numbers, it looks like it does reduce household net worth by $1,000 but we’re not really sure what that means. And if that’s a general finding that UBI actually makes people poorer over the the long run, who knows? I mean, I I think they’re probably right to be, to be a bit cautious of making that conclusion. So I think their their general conclusion that we can’t really find any impact on household net worth, that’s probably a reasonable conclusion. And the other point is, I mean, maybe $1,000 worse off. Okay, well, is that such a is that such a big deal? I mean, is that significantly they’re saying, well, that’s not really significantly different from from zero. $1,000 isn’t what it once was. So I can, I can see why they may have reached that conclusion. What I did find interesting. I found that the fact that what the UBI enables people to do is it must improve, or it makes them more likely to want to get a car loan, they feel more likely to be able to to service a car loan. And we find that this is a finding on page 31 of the paper total auto debt rose by about 17% 17% of the control mean, and monthly minimum payments on auto loans rose by 16.5% of the control means. So maybe they went out, they they got a new car, they sold their old car, bought a new one, and they they financed that. So they got some additional auto debt, and that’s offset the gain from the higher cash balances to and they’ve had practically no change in in net worth, or possibly even a negative net worth, and that’s the finding that Pete judo’s picked up on. Okay, I guess the thing to conclude from that is that UBI doesn’t improve your financial circumstances over the long run, or this at least over the three year period that they they studied, and again, the group that they’re looking at, or they’re considering, is young, low income households in the United States. So again, I’ll leave it to you to check out. You can check out some of these findings. I’ll put some links in the show notes. See what you think. Make up your own mind, it looks like those studies are very rigorous, and results that do to me. I mean, they they do raise questions about whether UBI makes sense as a policy. I don’t see results, that would make me think, Wow, that’s amazing. Let’s roll this out across the population. And if you, if you’re a regular listen to this show, if you listen to my previous episodes on UBI, you’d know that I’m pretty skeptical about UBI. It would be hugely expensive. Of I also think it’s unnecessary. I don’t believe in the forecast of mass technological employment. I think that the market will adjust. And as economists, we’ve got great faith in in the price mechanism. We’ve got great faith in in markets, uh, eventually clearing, and we have great faith in the the ingenuity and entrepreneurial activity of people. So I’m rather skeptical about this forecast of mass technological employment. And one thing I’ve noticed is that there’s, there is a growing skepticism about just how significant or how transformational some of the recent AI developments have been. I’ll put some links in the show notes, some some videos that I’ve seen lately from there was some computer scientists. I think one of them was from MIT. So top computer scientists debunk AI hype, and they talk about AI snake oil. So they think that some of the benefits of, particularly the large language models, are oversold. And there’s also this has been widely reported. Daron simoglu, who’s professor of economics at MIT, really top economist, and he’s come out and said, Look, AI can only do 5% of jobs. I mean, that seems, yeah, that seems probably fair enough for me to consider it’s limited in the number of jobs that can take over. The more likely scenario is it will increasingly use AI as a co pilot so it’s helping us become more productive. And I mean, as this is one of the reasons economists, probably most economists, probably don’t worry too much about this forecast of mass technological unemployment. I mean, what’s going to happen is that if we are increasingly using AI as a co pilot, and then that’s helping reduce the cost of delivery. That means we can do things a lot quicker. That means various professionals, lawyers, accountants, can can provide their analysis and advice much quicker. Then it becomes cheaper, and then there’s more demand for it from from consumers or from from business for business to business transactions. That’s one of the reasons I would be skeptical about all of these doom and gloom forecasts.

37:36

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Gene Tunny  37:37

those videos. They’re great. Provide you with with much more with it, well, like provide a bit of comfort. Of course, the future is inherently challenging to predict, so who knows? I mean, chat GPT was a bit of a revelation, so who knows what? What else is, what other technological developments will come up? But that’s not, that’s not the base case, in my view, that will have mass Technological Unemployment, right? So what I want to do to finish off the the episode is, I’ll, I want to put some, want to play some clips from previous episodes I’ve had on UBI, well, the previous one with Ben Phillips, I think Ben really summarized this the high cost of UBI and why. It doesn’t seem to make sense, given where we are now, the type of tax and welfare system that we have at the moment, it’s hard to see how we can actually transition to to UBI and may not actually be be sensible. And then there’s also another clip I’ve got, which is the second clip that I’ll play on this issue of technological unemployment. I think we’re essentially we, I mean, Ben, sort of, you know, make some some good points about how we’ve had sort of concerns about mass technological unemployment before, and they really haven’t. It really hasn’t occurred. So to end the episode, I’ll play those clips so you can, you can check out those clips to sample what’s in that. That UBI episode with Ben, and if you want to listen to that, please go the full episode, then please go back and have a listen. I’ll, I’ll put a link in the show notes. I think Ben is one of the people who has really analyzed what a UBI would mean in practice. And I think that’s that’s the sort of thing that if you are going to advance a UBI, you should think you should do the analysis. You should crunch the numbers on what it means, what it’ll cost, what it means for other welfare programs. So yeah, how do you make sure that you don’t have all these people who end up worse off if you just get rid of the existing welfare system and replace it with the UBI I think that’s a that’s a significant thing to think about, all right? Okay, so thanks for listening to my update on UBI. As more studies come out, I’ll, I’ll talk about those. I’ll also try to go back to some previous studies and compare what this study has found with some of those others that could be useful. But for now, I’ll, I’ll play these clips from the previous episode with Ben, so you can get a sense of of what’s in that episode. Okay, thanks for listening.

Ben Phillips  40:31

Yeah, so the current system gene, just to put in perspective, so we, we currently pay out about a little over $100 billion per year in welfare payments to adults. There’s another sort of 20 or so million to in family payments that which is effectively for the cost of children. So you put that to one side, if you also about $100 billion so the most expensive welfare system under a UBI, say, under the green scheme, would be somewhere around about $500 billion per year. So you’re looking at an additional $400 billion per year. Keep in mind, Gene, the current, current federal tax, tax receipts is about 500 billion. So you go from 500 billion to 900 billion, that’s an unbelievable amount of money. And as you probably remember well, Gene, we had a big argument, big fight, about carbon pricing, and say, 2012 that was over about a $5 billion tax. Now, regardless of what you thought of the carbon price, we’re having a big argument over 5 billion. How would we go with an additional 400 billion? Having said that, of course, you don’t have to have a full blown measure, the full blown universal basic income, but even the more sort of the cheaper versions say the like, the affluence tested model that we’ve we’ve modeled was more like a bare minimum of $100 billion per year. So you still looking at having to sort of double the welfare system in Australia and knock on from that is to increase taxes by, you know, 20 30% across the country. So I think I’m in the current environment, that’s very unlikely to ever happen, but it’s still it’s an interesting idea to think about, I guess so hibi, I

Gene Tunny  42:04

mean, it certainly would be a nice thing to have just thinking about it. I mean, and one of the advantages that’s put all the pros, or the the the arguments in favor of it is that would allow us to to be able to choose our lifestyle. And I mean, we could take a few months off and divide it to yoga or to improving our wellness, that sort of thing, or writing a book. So look, there are. I can see the the attraction of it. It’s just the fiscal cost of it and implementation. We’ve already got this welfare system in Australia, at least that seems to do a reasonable job at at not too high a cost. But I can see the attraction. What about this? There’s this vision of the future where, with AI on automation, we have massive job losses, even among white collar professionals. Now, I mean, you know, we’re economists, so we’re probably great believers in the market adjusting and eventually people finding new jobs in this in the services sector. But do you have any thoughts on that? Ben, I mean, how, how big a risk is AI and automation? And I mean, to what extent that, does that improve the argument for a UBI, if that’s the case, that we could see these mass job losses in the future?

Ben Phillips  43:37

Yeah, look, I would probably a bit like yourself gene, bitter by my economics background, and I guess looking at history, over the past 50 or 60 years, we’ve had some pretty incredible technological changes that arguably are larger than what we’re currently seeing. And you know, you have periods, of course, where you have some high unemployment, but generally speaking, the economies have transitioned and people have transitioned. Perhaps there are strong arguments for, I guess, helping people restructure their lives, structural assistance packages for those in industries that disappear and that there is the argument, as you say, that basic income advocates that have have a UBI for that potential outcome in the future, but I’m skeptical of it. Gene that said I’m not, I’m not a futurist, so I don’t really know what what the future holds in that area. I could be wrong, but I’m a little skeptical, just given that we’ve had very large technological change in over the last, you know, century, and people still remain in jobs. Yes, there are issues, you know, for certain people in certain industries, but that’s sort of part of the part of the ebb and flow of the economy,

Gene Tunny  44:47

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

Obsidian  45:35

Thank you for listening. We hope you enjoyed the episode. For more content like this, or to begin your own podcasting journey. Head on over to obsidian-productions.com.

Credits

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

Categories
Podcast episode

Balancing Needs & Wants: Chris Ball, Hoxton Wealth, on Global Wealth Management in an Uncertain World – EP255

Chris Ball, CEO of Hoxton Wealth, discusses the company’s focus on wealth management for internationally mobile individuals, particularly in Dubai. Hoxton Wealth, with offices globally, offers fee-based services to high net worth and mass affluent clients, emphasizing comprehensive financial planning. Ball highlights the use of AI for administrative tasks and the challenges of property investing in the current political climate. He also addresses the debate on retirement income withdrawal rates, advocating for a balanced approach between needs and wants. Ball mentions the impact of geopolitical risks and economic trends on their business and the importance of risk-tailored investment strategies. NB This episode contains general information and should not be considered financial or investment advice. 

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

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

Timestamps for EP255

  • Introduction (0:00)
  • Hoxton Wealth’s Services and Client Base (4:59)
  • Challenges in Property Investing and Political Climate (5:14)
  • Client Profiles and Financial Planning (5:28)
  • Investment Strategies and Risk Management (14:43)
  • Cryptocurrency and Geopolitical Risks (20:35)
  • Economic and Demographic Trends (23:59)
  • AI in Wealth Management (31:58)
  • Technology and Client Communication (34:37)
  • Final Thoughts and Contact Information (35:44)

Takeaways

  1. The complexity of Global Wealth Management: Managing assets across multiple jurisdictions requires expertise in different tax regimes and regulatory environments, especially for high-net-worth individuals and ex-pats.
  2. AI’s Role in Financial Planning: While AI may not replace human financial advisors, it helps streamline administrative tasks, reduce costs, improve efficiency, and allow advisors to serve more clients.
  3. Property Investment Challenges: Rising interest rates and increasing regulation make property investments less attractive, especially for those looking for passive income in retirement.
  4. Retirement Strategies Vary: Wealth management clients need personalized plans that balance their wants and needs for a comfortable retirement.
  5. Crypto’s Place in Wealth Management: Chris Ball believes cryptocurrencies are here to stay. However, investors need to be prepared for volatility and risk with crypto, making it unsuitable for many traditional clients.

Links relevant to the conversation

Chris’s business, Hoxton Wealth: https://hoxtonwealth.com/ 

Chris’s bio: https://hoxtoncapital.com/staff/chris-ball/ 

Chris Ball’s LinkedIn page: https://www.linkedin.com/in/chrisballhx/ 

Fundsmith Equity Fund mentioned by Chris in the episode: https://www.fundsmith.co.uk/ 

Controversy over Dave Ramsey’s retirement withdrawal rate recommendation:

https://youtu.be/Rc1nJj4vE_w?si=_7fVgjShgFKg6VX-

https://youtu.be/kghKiz1Mi_8?si=2jAP9DtWKN-LoR50

https://youtu.be/dM6Jqm7PPpg?si=pPvYh08bieusPBzO

Info on tax in UAE:

https://taxsummaries.pwc.com/united-arab-emirates/individual/taxes-on-personal-income

Lumo Coffee promotion

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

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

Promo code: 10EXPLORED 

Transcript: Balancing Needs & Wants: Chris Ball, Hoxton Wealth, on Global Wealth Management in an Uncertain World – EP255

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.

Chris Ball  00:04

Crypto is here to stay number one. I don’t, I don’t really think it’s going anywhere. I think you’ve got to be quite that, have quite thick skin to invest in crypto and be comfortable with ups and downs. Probably most of these things is, as we saw, kind of pre 22 was that a lot of people don’t really understand what cryptocurrencies are and what drive them, and unfortunately, a lot of people lose a lot of money.

Gene Tunny  00:35

Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode. Please check out the show notes for relevant information. Now on to the show. Hello and welcome to the show. In today’s episode, we’re joined by Chris ball, CEO of Hoxton wealth, we talk about his company’s focus on wealth management for internationally mobile individuals based in Dubai. Hoxton wealth operates globally, with offices in the UK, Australia, the US and Europe. The company caters to high net worth and to mass affluent clients, offering fee based services. Chris emphasizes the importance of understanding clients’ needs versus their wants and developing comprehensive financial plans for them. In our conversation, he highlights the use of AI to streamline administrative tasks and the challenges of property investing in the current political climate with various left wing parties proposing radical policy interventions. OK, thanks to Lumo coffee for sponsoring this episode. This grade one organic specialty coffee from the highlands of Peru is jam packed full of healthy antioxidants. There’s a 10% discount for economics explored listeners and details are in the show notes. Okay? Without further ado, let’s dive into the episode. I hope you enjoy it. Okay? Chris ball from Oxton wealth, the CEO and founder, thanks for appearing on the show.

Chris Ball  02:22

Thanks very much for having me appreciate it. Gene, yes,

Gene Tunny  02:26

be good to chat about wealth management and what you’re up to. So you’re based in the Middle East. Is that right? Chris,

Chris Ball  02:34

exactly, yes. I’m based in Dubai. I’ve actually been in the Middle East for 13 years now. So I moved out in 2011 in August, 31 of August. 2011 actually was in Abu Dhabi for nine years, which is the capital of the UAE. So Dubai’s more well known part of the business, well part of the country or part of the territory, but Abu Dhabi is actually the capital, and that’s where a lot of the oil wealth is in the United Arab Emirates. So yes, I’ve been based here for 13 years. Really enjoy it. We built out our business here. My kids were born here. So it’s been, it’s been quite a nice place or good it’s been a good place to me, I suppose, is the best way to put

Gene Tunny  03:18

it right. Okay, and what’s your business involved? What does Oxton wealth focus on?

Chris Ball  03:22

So we’re a wealth management business team. We focus on helping people that are internationally mobile manage their funds. And we’ve also got a UK domestic business as well, where we help people domestically in the UK with their financial planning. You know, we help with everything from helping people plan for retirement, plan for their kids’ education, funding for property purchases, tax planning, insurance planning, all of this good stuff that fits under that umbrella of financial planning. We’re a fee only or fee based service as well. So we don’t get paid commissions unless it’s for insurance related products, but all the financial planning and the investment advice that we give, we charge a fee, which makes us quite unique internationally, because a lot of people still work off the commission only model, and all day, every day, we’re helping people globally manage, manage their money in The in the most effective manner. We typically have people come to us with more complex situations, so maybe assets in Australia, but living in the UAE, or assets in the UK and living in the States. And we’ve got businesses globally. So obviously, in Dubai, where I currently am, we’re licensed and regulated. Also got offices in the UK. We’re regulated by the Financial Conduct Authority. We have offices in Australia, where we’re regulated by ASIC. In the US with the Securities and Exchange Commission sec, and in Europe, our base is in Cyprus, which gives us that global coverage and enabling people move around to, you know, to manage their. Their their money and their funds and their planning more effectively. Gotcha.

Gene Tunny  05:03

And what’s your client base look like, broadly? Is it a lot of expats? Yeah,

Chris Ball  05:09

a lot of them are gene A lot a lot of our clients are expats or internationally mobile. Funnily enough, a lot of them have gone back to their home destinations as well now. So we have quite big footprints, dostically, with domestic what you would see is domestic clients, but it’s they’ve lived internationally, and now they cut, now they’ve come back. But, yeah, we, we typically help people with more complex financial planning needs than, you know, I’ve been a plumber and have, you know, put away a bit of their retirement, and they just want someone to manage it. So typically, we’re dealing with assets in multiple countries, and helping people plan for the next generation and how to how to pass it

Gene Tunny  05:46

on, right? And you have a lot of high net worth individuals. We

Chris Ball  05:51

do, indeed, yeah. So we deal with what we call mass affluent and high net worth individuals. We don’t have too many ultra high net worth individuals that we deal with our service or how we you know, the advice that we provide is is more geared to towards mass affluent and high net worth individuals, but typically, like I said, it’s more complex planning needs. So assets spread around different tax taxation rules that you need to take into account different regulatory regimes because they’ve got assets in different places and really working with them to find the best solution for them and their families,

Gene Tunny  06:27

right? Okay, before we I want to ask you a question about that. But before we do that, can you explain what do you mean by mass affluent versus high net worth? I mean, I just use high net worth individual, I sort of had an idea in my mind of what it is, but I wasn’t thinking too specifically. And then you mentioned ultra high net worth. How do you distinguish between those categories? We typically

Chris Ball  06:51

do it in kind of investable assets. So we’d say, let’s say I don’t know, half a million, up to a million, or that’s probably more like 250,000 up to a million, of assets we would class as what we call mass affluent. So there’s, you know, a lot of those people, and they’re affluent high net worth, we typically say from one to 5 million, and then ultra high net worth would be 5 million plus.

Gene Tunny  07:15

Gotcha, okay. And you talked about how you help them manage their their affairs. What are the typically, what are the things you look at, or what are the issues you deal with? I mean, you mentioned assets in different jurisdictions and tax I suppose I’m wondering, how do you, how do you go about finding a solution for your clients? A

Chris Ball  07:36

lot of people come to us with a very you know, they typically come in with one thing that they want to get, you know, one thing they want to get sorted. So let’s say a lot of our clients, what we call us connected people. So they have assets in the US, but they no longer reside in in the United States. So we would work with them to help them manage those US assets when they no longer reside in the US. But what most people really want to know is how much and when. So how much do I need and when can I stop working if I want to? Yeah, and you know, they’re the type of questions that we ask people because it’s difficult. You have to look holistically at all of their assets. You need to understand what their objectives and what motivates them and what they want to do, how much and when is very broad. How much you need will depend whether you want to fly business class, or you know you’re happy with economy, or whether you want five holidays a year, or you just want to go on one, whether you just want to travel domestically, or whether you want to live internationally, whether you want to support your kids, all of these things. It’s about questioning and listening and trying to find out, ultimately, what’s important to the client, to help them understand how much that they will need when they want to stop working. Now, where, you know, we kind of split that into kind of two buckets, which is, you know, what do I what do I need? You know, what’s a want, what’s a need, I suppose the best way to describe it. So what do I need to survive? And what do I want on top of that? And you know that also helps us understand realistically when they can retire. So you know, if you want $200,000 a year of income, and you’ve only got half a million dollars saved up at the moment, between your assignment assets in your bank account, you’re going to need to work for a bit longer, unfortunately, and helping them understand when that, you know, is likely to be given how much they can put away. And, you know, looking at realistic returns, and also stress testing that and flexing it as well. Yeah, is important. And you know, they’re the kind of things that we do, and they’re the kind of things that we really help people with. It’s about helping them develop that plan.

Gene Tunny  09:45

Yeah, gotcha. And you do financial modeling. How do you actually come up with that advice?

Chris Ball  09:51

So we’ve got an app that we have. So the first kind, I suppose, the first kind of step is, is that we would look to help people understand where they are. Are in the journey right at the start. So, you know, it’s great knowing where you want to get to, but if you have no idea where you started from, you’re not going to know how to get there. Very simply. There can be multiple ways to get to destination. So first off, it’s really getting a, you know, building a balance sheet, building a view of your net worth, of what you currently have. So we can get a good picture of where you currently are. We then go to the next phase, once we’ve got that. And we do this all on our app, our Hoxton wealth app, it’s free to download, even for people that aren’t clients, and they can go through this same exercise. The next is understanding their objectives, what’s important to them, understanding what they want out of life. Like we just said, The next phase is the modeling gene, which is we do through Cash Flow Planning, so ultimately helping them understand how much, and then looking at when. Then it is developing out the financial plan with them, step four, and then step five, which in my view, is the most important part, is constantly reviewing that with them every, every year, every six months, to make sure it’s still in line with what they want, making sure, you know, if there’s been any life changes we’ve, we’ve been working with them to ensure that their plan still works, or in making any tweaks to it if we need to.

Gene Tunny  11:17

Yeah, okay. Oh, that’s that’s good. And Have you followed this debate in I’ve seen it on YouTube between Dave Ramsey and and other financial advisors about what percentage you can take out of your your retirement funds each year and live on without running the risk of running out of money. And so one of Dave Ramsey’s colleagues, George Carmel, I think it is He. He was saying, Oh, be really conservative. There’s a he was saying 3% I think the fire people financially independent retire early people say 4% and then Dave Ramsey goes, no, that’s just too conservative. You can take 8% out or so, yeah, it was, yeah, but no one else agreed with Dave. That’s a huge controversy on about that bit of advice. I don’t know if you had a if you came across that at all, or had any views on that, but I’ll put some links in the show notes anyway, if people are interested in in checking that out. I just thought it was interesting that there was that even with someone like Dave Ramsey, who’s a well known financial advisor, he Yeah, that advice just seemed a bit yeah. It was very contentious. So there’s still some, it’s not a, I guess there is an element of that is up for debate and some of this advice. And suppose it depends on what rates of return you’re assuming and what level of risk you’re willing to tolerate. I don’t know if you’ve got any thoughts on that at all. Chris,

Chris Ball  12:55

yeah, I think the issue with kind of operating this, kind of, what the rule of four some people call it, it’s, you know, 4% which is the fire people like you said it’s, you know, it’s kind of widely adopted, I think, by a lot of planners. I mean, really, again, what we look at is, is okay, so needs and wants, you want your needs, ideally, to be built up with some kind of fixed level of income, because you don’t want to be worrying about your needs in retirement. So far, at the moment, what an area that we’re looking at for a lot of people, is using those needs or getting those needs funded by annuities, if you can do that when interest rates are high, and lock it in now, actually, that gives you a really good base in the US. You’ve got things like social security in the UK, state pension, etc, that can go towards that. But building that solid base up can be, can be a very sensible and prudent thing to do, because then you haven’t got to worry about the needs. With the wants, you can be more flexible. And typically with the wants, you want to be more, you know, in it, and you know you’re talking about 4% but you might actually want to take out 8% in the earlier years, and then 3% later on, as life tends to slow down, and that’s what we see a lot of as well. As people get, you know, older and maybe less mobile and want to go on less holidays, then you know that what’s the point in taking out more you really want to spend more in the earlier years? Well, probably when you can enjoy it, and then less than the later years, when you know, potentially, you know, health or or, or other issues, and getting around might, might prove a problem. Um, ultimately, what you don’t do is die the richest person in the graveyard, either way. Yeah. But also, you don’t want to be having to go back to work at 75 because that’s no fun for anyone, because you’ve run out

Gene Tunny  14:39

of money. Yeah. Yeah, exactly. So that point you made about, okay, make sure they get a steady, dependable income. And you were saying, annuities. What about investment property? To what extent are you getting? Are you advising them on the types of investments to generate that steady income? Do you have thoughts on. That, Chris,

Chris Ball  15:00

I think, I think property investor. I mean, look, it depends what parts, what parts of the world you’re talking about. So property investing, for a number of years, has been in vogue. So a lot of people have really found it attractive, or wanted to be a landlord. Now, what we’re finding is, with it rising interest rates, is it’s not very attractive to be a landlord. And actually, there’s a lot of headaches that come with being a landlord. So mortgage payments have gone up, but rental increases haven’t gone up as much. There’s very there’s more, you know, there’s a lot more socialist movements in the western world as well now that are making it more difficult to become a landlord. And, you know, put pushing, uh, pushing tougher regulation and on on landlords and how they operate, and then obviously, you’ve got all the maintenance that goes along with it as well. Do you really want to be trying to arrange a plumber in your 70s when you’re enjoying your retirement because your rental property is gone? Probably not. However, some people are portfolio landlords, and they’ve got, you know, a big you know that they use it for their fixed level of income. It is a great level. It is a great way to earn an income, I believe. And it should probably, you know, you should have some property in your portfolio, the cornerstone of it. But if you want a hands off investment, and you don’t like the day to day running of it, then you know, you should almost forget it, because I think it will become more of a job in retirement. It’s like most things, you’ve got to really want to do it and enjoy it, whereas your more traditional style investments, much less hands off, much more liquid. You know, there’s no management involved really, you know, by dividend paying stock or something like that. So I feel that more people are going to creep back into that side, and property will become less in vogue as we go forward. But, yeah,

Gene Tunny  16:48

gotcha. So can I understand? I just want to understand, are you, are you advising on the specific investments they should make, where they should put their money, or you just advising on the broadly what they should be saving what the broad asset allocation should

Chris Ball  17:04

be. So we’re holistic financial planners. We do take into account people’s risk tolerances and then ultimately help them devise investment portfolios that are suited to their risk. You know, we everything we do is risk created for our clients. Ultimately, we don’t want to be putting someone in 100% equities or a single stock equity, if they are if they won’t sleep at night when the market goes down by 10% you know, it’s all about what tolerance that you have to risk and how comfortable you can get with taking on risk yourself. But you know, typically, Gene we don’t advise on individual stocks and shares, so we’re not saying, buy Apple, sell Amazon, buy Tesla, sell Nvidia. They probably don’t want to sell nervidia at the moment. But ultimately, what we’re set what we’re saying to them is, is that we are broad based, indexed investors. We have a few actively managed funds in there with active managers that we feel have a good chance of beating the market over time due to their investment philosophy, which is typically long term investing. But we are in this for the longer term. We’re not day traders, we’re not jumping in and out. We’re not jumbling around asset allocation. We’re not trying to be territory specific. It’s it’s broad based, indexed investing is what we typically do,

Gene Tunny  18:24

yeah. And so those active investors, or the fund managers, where are they based? Are you able to say anything about them? I mean, I recognize it might be confidential, but what sort of businesses are we talking about there?

Chris Ball  18:38

So one of the funds that we invest in is a fund called fund Smith. I don’t know if you’ve ever heard of them before, by a guy called Terry Smith. So he’s the UK’s answer to Warren Buffett. They run about a 50 billion US dollar equity fund. They do, you know they do really well. He’s actually in our office yesterday, talking to our team. So we invested in it, in their active fund, other funds that we’ve looked at before, Blackrock world technology, we found that’s been good fun to get technology exposure, and there’s a couple of others as well. But really what we’re looking for is long term over performance of the equity market, which, as we know, it’s very difficult for a active manager to do over a long period of time. But there are the kind of, there are the there are the individuals that can potentially do it. And ultimately, I know it’s very difficult to pick them, and statistically speaking, it’s unlikely that they will over long periods of time, but we find it just offers, you know, that kind of passive, active hybrid can be quite nice and can offer some good returns to,

Gene Tunny  19:41

okay, so, well, a combination of passive and active. Okay, gotcha, gotcha. And how did you come to pick those funds you were looking at their historical performance, or you just, I mean, I imagine they do a roadshow, they pitch to you. I mean, how do you make the decision which, uh. Which fund manager to go with. So we

Chris Ball  20:01

have a fund research team that are constantly looking at different managers and speaking to them. We have a buy list, and then from that buy list we, you know, we essentially drill down. We have investment notes on each and then we’ll drill down and pick the underlying model portfolios. So we don’t tend we tend to run model portfolios again. Our our planners are financial planners. They’re not investment advisors. They’re two separate things. So we have a set of investment advisors that construct the portfolios for the financial planners. Gotcha?

Gene Tunny  20:35

Okay, yep, yeah, that makes sense. And I should ask, because I’ve had a few guests on the show talk about crypto, and what are your thoughts about cryptocurrency?

Chris Ball  20:46

I think crypto is here to stay number one. I don’t, I don’t really think it’s going anywhere. I think you’ve got to be quite, quite thick skin to invest in crypto and be comfortable with ups and downs. Probably most of these things is that, as we saw, kind of pre 22 Hey, it was during 2021 when the market, the crypto markets, got up to their highest points, was that a lot of people don’t really understand what cryptocurrencies are and what drive them. And unfortunately, a lot of people lose a lot of money when your next door neighbor becomes a expert in something. It normally means that the market is getting pretty hot and it’s time to get out. Unfortunately, when you’ve got people shouting to the moon every five minutes, then you know it’s it can make things slightly more difficult. But I do think, if you are happy for a large risk rated return, are you happy for a very big upside, but also happy to stomach that the big downside that can go with it and the volatility, then I think crypto does present an interesting opportunity. And like I said, I think it’s here to stay, but that’s not something that we would typically advise on. That’s just kind of my personal opinion on it. But as a business, we, we aren’t regulated, to advise on crypto, right?

Gene Tunny  22:01

Okay, yep, gotcha. And how concerned are you with geopolitical risk at the moment, particularly since you’re in the Middle East, is that affecting your your advice at all? Yeah.

Chris Ball  22:15

I mean, look, we don’t advise locally in terms of our you know, we’re not investing in local assets here in the Middle East. Obviously, political tensions are rising with, you know that Hamas and Israel, and now Hezbollah and Israel, that seems to be getting stronger. Obviously, if there is an out and out war, that wouldn’t be good for the Middle East, but you would expect things like oil prices to rise pretty rapidly as a result of that, especially if it’s affecting especially for other parts of the Middle East, getting involved as well, Saudi UAE, other bigger players, that would not be good necessarily, for for the overall region, in terms of locally. Are we seeing anything on the ground? No. I mean, this business is normal. You actually hear very little about it, unless you’re reading a lot of the publications. It’s not impacting your daily life in any way. Obviously, we’re looking, from a investment, short term investment perspective, at what’s happening in the US. And you know, seeing, we’re seeing how then elections in November will play out Ultimately, though, we don’t think a lot of it will impact too much. I think you know, if Miller Harris gets in, then ultimately it will continue. How, how will what we’ve seen with Biden more the same, and then obviously, if Donald Trump gets in, you know, we know that he tries and pushes up the markets. We might seem see a bit more of a short term push in it. But really, you know, the Constitution in America is, is, is insanely well guarded, and doesn’t really allow governments to make too many horrendous decisions. You know, it has to go through. Congress has to go obviously, before it can, you know, be put into action. So it’ll be interesting to see how it goes and what happens. But I wouldn’t expect anything too drastic, right?

Gene Tunny  24:07

Okay, okay, fair enough. And I’d like to ask about the economic and demographic trends and how they’ve affected your business and what you see happening over, say, the next decade or two. I mean, are you seeing changes in the demographics of your client base? Are you seeing more of the high net worth individuals due to I don’t know to what extent you’d you’d see it, but there are concerns expressed by some about growing inequality globally, the rich getting richer, the poor getting poorer, so to speak. Do you see that those impacts in what’s happened with your business, the growth of your business, the composition of your client base?

Chris Ball  24:53

Yeah, I think yes, and no, I suppose that there is obviously that worry that the rich are getting richer and the. Were getting poorer, that that equality gap, I think what we’ve seen more of is the flights of wealthy people to places like the Middle East, or places with lower taxes, as we’ve seen Taxes increase. And obviously, you know, that was bound to happen with the amount of money that they were spending during covid and, you know, trying to push the push through more money into the economies that’s got to be paid back for from somewhere. And I think it’s kind of like payback time now, especially in the UK, we’ve got a Labor government in now, and Keir Starmer came out and said, those with the broadest shoulders would bear the cost of it. You know, for everyone, basically, you know, if you’re rich, you’re rich, you’re going to get taxed more than anyone else, so that obviously, what concerns a lot of more wealthy people, I think that you’ve got the one end of the spectrum, which is the ultra high net worths that it doesn’t really matter, and they will go wherever they need to, and obviously they can pay for the advice. It’s more that kind of mass affluent ultra high net worth that it will really pinch the can’t move as easily. And, you know, we’ll, we’ll get caught up other things that we’ve seen, obviously inflation and rising interest rates. You know, that’s that’s been interesting, because we’ve obviously seen money come out of equity markets and go into things like money market instruments. So, you know, there was an insane amount last year in money market instruments, because interest rates were so high and the risk rated return meant that you could keep it there, and you were getting over 5% return. I mean, you know, why would you be investing in equity markets that had the potential to go down quite a lot? You know, technological advancements, we’ve obviously seen things like aI really driving the markets this year as well, and that’s had a big impact whether that kind of shine wears off, and what happens over the longer run is this, is there a lot of hype with looking at some of the PE ratios of some of the S, p5, 100. I mean the top seven, all of them are over 30. I think bar meta, which was at 29 that’s a lot. I mean, I think it was something like Tesla, yeah, he was paying, I think it was nearly double check, but I’m pretty sure it was like 74 I suppose. I mean, how can a car manufacturer be beat that? I know they’re trying to build themselves as more as a technological business, but crazy. So a lot of things like that are driving our business as well, because ultimately, it’s driving more wealth to people that hold that and have back technology. Shift to ESG, another one you know that we’ve had, we before, covid, if you remember, everyone was on this call, whole kind of environmental, social and governance piece. It seems a little bit less in your face now, but I think we’ll get back to that as as things, as things die down a bit more. Maybe not with a Republican, with a with a Republican Congress or republican president, but we shall, we shall see how that plays out. There’s so much that goes on that that impacts how we operate, but it’s really just trying to put your finger on it, isn’t it, and see which things really move the move the dial.

Gene Tunny  28:09

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

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Gene Tunny  28:43

Now back to the show. You remind me about the tax settings in the Middle East. Said is, am I right in remembering they don’t have an income tax is that right? Some

Chris Ball  28:57

countries do, but ultimately, where I’m currently based now, the United Arab Emirates, doesn’t they recently introduced corporation tax, but there’s no income tax on individuals. Saudi Arabia, no income tax. QA no income tax. Qatar, no income tax. Bahrain, no income tax as well. So the GCC zero income tax for individuals,

Gene Tunny  29:22

right? And, I mean, Saudi’s got, I guess, does UAE get oil income too, like the Saudis do from their their state owned oil company, yeah, and have a soft and wealth fund. Okay, I’ll have to, I’ll look a bit more into it, but yeah, it might put some links in the show notes. So it’s interesting, isn’t it? That’s one of the reasons people are attracted to to Dubai, for example. And you get a lot of really good people go to Dubai. But then there’s also concerns about money laundering. I’ve seen that there’s concerns about Australian outlaw motorcycle gangs, their members. Buying up luxury apartments in Dubai high rises. There was a 60 minute story about that couple of months ago. So yeah, Dubai is very attractive to people with money from all sorts of different places in the world, all sorts of

Chris Ball  30:16

backgrounds, exactly. I mean, Dubai was on the gray list for money laundering, until recently, where it’s come off. So I think that was the kind of jolt that was needed locally. And they take it very, very seriously. So the banks over here, you know, probably more so than you get in Australia and in the UK, constantly asking you, where’s the money come from? You’ve sent money. Can you prove where it’s come from? Like, there is a there is a high area of transparency that’s needed with the banks. You can’t operate in this opaque nature anymore. You know, cash transactions for properties, they’re trying to wean out and things like that. So they are making it more and more difficult and trying to take it seriously, as you would expect from an economy that is developing and wants to be developed, and is doing, you know, all the good things that they’re doing it, it would be a shame to get tarnished with that, with that brush, but, yeah, I mean, look locally the wealth is earned from, you know, the locally Abu Dhabi, the wealth is earned from will that is then, you know, that has been their main source of income. They’ve developed the Abu Dhabi Investment Authority, and then various subsidiaries around that as well, which is their sovereign wealth fund, which ultimately they go out and invest in other businesses as well to try and buy returns. So when the oil does run out, they can continue to support the country as well. And obviously, very similar to what they do in likes and Norway Saudi Arabia’s got there, I think it’s the the PIF, the public investment fund as well. So, yeah. So, you know, it seems like a lot of these Gulf states, that’s how they want to go and do things, which is obviously great, because if that keeps income taxes down, then then that’s obviously good for them to attract wealth as well, which will ultimately be spent indirectly in their economy as well,

Gene Tunny  32:00

yeah, yeah, okay, and that’s, that’s good, Chris, it was a good overview of different, different factors, different trends. What ask about AI. You mentioned AI and you were talking about, you know, what that meant for the market, for investment opportunities, what does it mean for you? What does it mean for wealth management? Are you taking advantage of it?

Chris Ball  32:22

Yeah, definitely. I think that AI will not replace advice, because advice is about questioning and trying to work with you to get answers. But where, I think you know, ultimately, people want to see the whites of people’s eyes when they when they invest. It’s it’s nice to deal with a person. And I don’t think you’ll replace that in the in the near future. Anyway, I think ultimately, AI, what we’re using it for, is to try and limit the amount of repetitive tasks that we have to do, trying to take, you know, trying to improve our administration, processes, data entry, processes, all of these things by using AI, which ultimately, hopefully drives down costs, increases profit margins within the business, and means that ultimately we can try and help a wider range of people that need our services. Because, again, you were talking before about that equality in terms of net worth that exists in wealth management as well. I mean, you know, there’s a subset of people that could probably really do with advice, but don’t get it because it’s not profitable for firms to be able to service them. They can’t do it. They can’t run it at a loss. So yeah, so it’s we all. I think we’ll see more AI tools come in to offer simplified advice to that subset of people, and then as their wealth accumulates, then they’ll be able to deal with maybe more face to face advisors, where, when it becomes a, you know, feasible for them and for the company?

Gene Tunny  33:51

Yeah, yeah. So there’s talk about robo advisors. So is that that’s what you’re thinking about. For the people with the smaller amounts of of funds they there’d be automated advice.

Chris Ball  34:03

Or, yeah, I think, I think Robo advice is an interesting one. I don’t think a good financial planner has ever lost a client to a robo advisor. Okay, robo advisors more. I’ve got $100,000 or $50,000 I don’t want to use an advisor. I just want someone to place the funds for me. So it’s more. I think it Okay. Probably replace investment advice, but the financial planning aspect is much more personal.

Gene Tunny  34:25

Yeah, gotcha, because you have to take into account the personal circumstances figure out what Yeah. The thing I liked how you were, you were talking about needs versus wants and the standard of living that they want in retirement. I thought that was, they were good points, right? Oh, okay. And how, finally, how are you using technology to interact and communicate with your clients? So, how does so, do you have an app or a portal that they Yep, okay,

Chris Ball  34:56

so we’ve got the Hoxton wealth app gene, which is our client portal. So they can, like I said, they can see their overall net worth, their plans, their policies, they can upload their documents. We communicate through push message out to them and things like that. And we’re really developing that out to become our one stop shop to communicate with clients. We have our back end, which is our operating system, effectively, which is called matrix. And that is how we, how we, you know, do fact finds, how we manage our client relationships, how we help the advisors manage more clients efficiently, rather than through paper based things, losing data, you know, data security, data integrity, is super important to us, and also, you know, it’s, it’s, you know, worth a lot to a business in terms of management information and the like. To, yeah,

Gene Tunny  35:46

absolutely okay. And Chris, what, what? Where can we find more about you? Do you have a podcast? Do you have a newsletter that people can can subscribe to? Yep,

Chris Ball  35:57

so I feature regularly on a podcast called financial planner life. But the best place to find out more about me is through my LinkedIn profile, which is Chris Paul. If you just type Chris Paul Hoxton into the search bar, it will come up and then also, obviously our company website, http://www.hoxtonwealth.com, you’ll be able to see more on you know what we’re about and what we’re doing and how everything’s going.

Gene Tunny  36:23

Okay? Well, I’ll put links in the show notes to those, to your LinkedIn, for sure, and to your to your website. Found this really informative. And, yeah, good discussion, Chris, I like the point you made about, yeah, the risk to investment properties. We’re seeing that here within Australia, because we’re having a, you know, major housing crisis, and I guess, yeah, big increase in homelessness. That was a sharp increase in rents about a year or maybe a year or so ago, and now you’ve got a political party, which was the Greens political party, and it’s morphing into a party of renters, and they’re getting a lot of traction because there are a lot of disaffected, you know, people out there who, who are, you know, not happy with the housing situation. And so, yeah, the great, but the so I understand where they’re coming from. The issue is that the policies that The Greens are advocating for are not actually correct the problem, and could actually make it worse with their the idea of red freezes and caps and things so that all sorts of silly, you know, really bad economic policy. But yeah, I thought your point was well made, and it did it. So, yeah, yeah, absolutely, that’s a really good point. Any, any final thoughts before we wrap up?

Chris Ball  37:47

No, that’s it for me, really, unless you’ve got anything. But thanks very much for having me on. Really appreciate if your if your listeners want to download our app, the Hoxton wealth app, type it into the app store, they can download it for free. Yeah. And if you ever need anything, let me know. Will

Gene Tunny  38:04

do okay? Chris ball from oxen wealth, thanks so much for joining me.

Chris Ball  38:08

We appreciate gene thanks very much.

Gene Tunny  38:11

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

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Credits

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

Categories
Podcast episode

Government vs. Private Sector: Who Generates Wealth? – EP247

In this episode, Gene Tunny explores the relationship between government spending and wealth creation. He talks about President Obama’s memorable expression, “You didn’t build that”, and how economists think about the role of government and wealth creation. Gene discusses the roles of both the government and private sector in generating wealth and their impact on productivity, GDP and living standards. 

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

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

What’s covered in EP247

  • Government role in the economy – private sector vs public sector. (0:00)
  • Government spending and its impact on the economy. (5:52)
  • Keynesian economics and the role of aggregate demand in determining GDP. (11:51)
  • Government spending and its impact on productivity. (18:13)
  • Government intervention in the economy, with a focus on public goods and cost-benefit analysis. (25:11)
  • Government’s role in the economy, potential for crowding out the private sector. (31:32)
  • Government impact on the economy and living standards. (38:20)

Takeaways

  1. Government Spending and GDP: Government expenditures can contribute to GDP, but their efficiency and the type of spending critically determine their economic impact.
  2. Private Sector’s Role: The private sector is essential in wealth creation due to its efficiency incentives, but it also depends on government-provided infrastructure and services.
  3. Crowding-out Effect: Excessive government spending can crowd out private investment, potentially reducing overall economic efficiency and growth.
  4. Cost-Benefit Analysis: It is vital to conduct thorough cost-benefit analyses for government projects to ensure that public funds are used effectively and do not become a drain on the economy.

Links relevant to the conversation

Dan Mitchell’s article on the impact of government spending on economic growth:

https://www.heritage.org/budget-and-spending/report/the-impact-government-spending-economic-growth

Dan’s article “OECD Economic Research Finds that Government Spending Harms Growth”

https://danieljmitchell.wordpress.com/2016/11/28/oecd-economic-research-finds-that-government-spending-harms-growth/

Episode on Alvin Hansen and Evsey Domar:

https://economicsexplored.com/2024/06/19/popularizing-keynes-how-alvin-hansen-and-evsey-domar-shaped-post-war-macroeconomics-ep245/

Episode on Thatcher:

https://economicsexplored.com/2020/12/06/ep64-adam-smith-margaret-thatcher-with-dr-eamonn-butler/

Bacon and Eltis’s 1978 book “Britain’s Economic Problem: Too Few Producers”:https://link.springer.com/book/10.1007/978-1-349-15863-8

Lumo Coffee promotion

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

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

Promo code: 10EXPLORED 

Transcript: Government vs. Private Sector: Who Generates Wealth? – EP247

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

Gene Tunny  00:00

Jeanne, 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. Today, I want to cover an economic issue, and it’s also somewhat a philosophical issue that came up in a recent conversation that I had with Darren Brady Nelson on competition policy. To what extent is the government paid for by the activities of the private sector? To what extent is it a drain on the wealth of the community, is it only the private sector that generates wealth. You may remember that in the 2012 election campaign in the United States, President Barack Obama, in a speech in Roanoke, Virginia, famously said that somebody helped to create this unbelievable American system that we have that allowed you to thrive, somebody invested in roads and bridges. If you’ve got a business, you didn’t build that very, very controversial statement, very I mean, just goes to show what an effective speaker Obama was, that that phrase really captured a lot of people’s attention, and there’s an important economic issue there that I think it’s worth having an Episode on. So yes, I thought this would be a great topic to talk about relevant theory and evidence before we get into it. This episode is brought to you by Lumo coffee. So seriously healthy organic coffee with triple the antioxidants of regular coffee, there’s a 10% discount available for economics explored listeners if you use the promo code 10 explored. So that’s all in caps. You can check out the show notes for further details. Now, I should let you know I’m going to take a break soon from the show. I’ll see if I can get one more episode out before I go on the break. So I’ll probably have about four weeks off and then come back in August. I need to spend some time finalising the book I’m working on, and I need to spend a bit of time on that, but I will be excited to get back on to the podcast, and yeah, looking forward to trying to get more great guests and more great topics. I’ll be interested in your ideas on future topics or guests, or how I can improve the show. Let me know if you have any ideas. You can email me at contact, at economics explored.com, right? Oh, we’d better get into it. One reason I thought that this would be a good topic for the show is after this issue came up in the conversation I had with Darren, I found a passage on this issue in Hanson and Perloff book, state and local finance and the national economy, their 1944 book that I did an episode on a few weeks ago. That was the episode on Alvin Hansen and FC Domar. Now this is a very Keynesian book, and Keynesian economics has become controversial. And if you’re a regular listener to this show, you will know that we’ve talked about the debates about activist fiscal policy, having said that there is, there are some important lessons from Keynes that have been very influential in macroeconomics. So I think while Keynes is controversial, he is an important figure in the history of economic thought, and he has influenced the development of economics, and there are still Keynesian concepts that are very influential and widely agreed upon, even if all of the whole. The Keynesian doctrine and the the primitive Keynesian NISM that we saw in the immediate post war period, even if we now reject that, or most, or I’d say mainstream economists, would would reject that. So with that caveat in mind, we might, we might get into it, because I think what Hansen and Perloff wrote in this book, there is a lot of truth to it. Their discussion of this issue is very illuminating, and hence I think it’s worth us just going through it, and then I will provide some further thoughts and talk about views of other economists and what the evidence is telling us on this very important question. Now I’m going to read from Chapter Nine of the Hansen and Perloff book, public expenditures, income creation and costs. And I’m going to I’m going to start on page 184 and they write that the popular view is that government expenditures and activities are entirely sustained and supported out of income derived from private business. This is quite wrong, as a little economic analysis will reveal the public expenditures made in operating a public school are no less income creating and productive than a private business, say, a cosmetics factory. Indeed, the public school is productive, not only in the sense that it supplies a once satisfying service, as does also the cosmetics factory, but also in the respect that it increases the efficiency and productivity of the future labour force of the nation. Okay, so that very you know, that’s a very good point, and you know, that’s where you know that’s consistent with what Obama was saying, in a way. I mean, Obama’s making the point that public services are helping the operations of the business. Now, of course, you do have to think about the efficiency of those public services or public goods that are provided, which we’ll talk about later. But I think what Hansen and Perloff write, what they’ve written there, is, is sound okay. Let’s go on economic activities, whether governmental or private, involve two operations with respect to their income, with sorry, with respect to their impact in the flow of income, which must be entered on opposite sides of the ledger. And quite erroneous conclusions follow by looking at one side and closing one’s eyes to the other side, with respect to the cosmetics factory, the erroneous argument might be advanced that it is a burden on the community, since the sale of its products drain off a part of the money income flow from the community, that the cosmetics factory is dependent upon all other businesses, since they are the ones that create the income stream and purchasing power enabling the factory owner to find a market for his product. This analysis would, however, be quite unfair to the factory owner, since, in fact, at the same time that he taps a stream of purchasing power and selling his product, on the other side, he turns an equivalent amount of purchasing power right back into the income stream through the expenditures involved in operating the factory, he therefore sustains other businesses just as much as they sustain him. Okay? So, yep, fairly important point there, and that goes to show the the interdependence of all of the the businesses in an economy. So businesses, households and also government, as we’ll talk about, they are all connected. They interact. There’s flows of money, flows of goods and services between them. So very, very important point there we shall proceed. Precisely the same is true of government expenditures and activities. The government, in operating the school, taps a part of the income stream in the form of taxes, but it throws this right back into the income stream through the expenditures made in operating the school. It is not true that government is sustained and supported out of private business any more than the prior than that private business is supported and sustained out of government expenditures and activities in. Okay, so what I would say regarding that paragraph is, look, that’s all fair enough. If we think about it from a normative perspective, though, if we think about it from in terms like more philosophically and make value judgments, where I think some people start to wonder about how we measure economic activity. We’ll get onto this soon, and the value of economic activity. You you might think, well, if we’re talking about goods and services sold in the market, and we work out their value, there’s the presumption that, well, because people paid for those goods and services with their money, with their own money, they at least valued the good and service as much as the price of that good and service, whereas, with government, if the government provides goods and services to the public and it’s funding them from taxation, and we don’t really have a say, I mean, maybe at the ballot box we can have some influence on it, but we we basically have to pay the government. We have to pay our taxes. We don’t really have a lot of say in it individually. Then they provide us goods and services, and when we add them up and put them into GDP, they go in at the cost of delivering those services. But who’s to say they’re really of that value, and we might talk about that a bit later too. So that’s the that’s one commentary I’d make on on what Hansen and Perloff are saying so far. I mean from a factual point of view, from the point of view of impacts on GDP, then they are absolutely correct from the point of view of what this means normatively, or what it means philosophically, I suppose, then, well, you could argue that that may be the case in terms of impacts on GDP, but it may be that the government, what the government spending money on, isn’t sensible. It’s not a good use of our tax dollars. And the point I’ll make even further later is that to the extent that government isn’t spending on sensible things, to the extent that it’s not doing the job it’s supposed to, in terms of supporting the generation of or supporting the productive capabilities the economy, or it’s not providing essential goods and services to the people, then it may well be wealth destroying. We may well have, we may well be able to achieve a higher GDP per capita if we, if we cut some of those inefficient government activities, if we if we cut taxes, if we move towards greater provision of the market sector, that’s a that’s a possibility that I wouldn’t want to rule out. So that’s my one commentary on what’s been written so far. I mean generally, factually, in terms of what it all means for GDP, it’s sound that we should also be thinking about whether we could be doing things differently, whether what government is funding is giving us the best value for money. Okay, we will go on. No private business can sustain its sales volume unless the outlays of other businesses and the government continued to feed the income stream. Nor is private business as a whole self sustaining. It was not self sustaining when the national income fell from 80 billion to 40 billion in the early 30s. So that was the Great Depression. Obviously, that was me saying that not Hansen and Perloff, nor indeed in any other period of depression, the sales receipts of private business, no less than the tax receipts of government, depend upon the maintenance of a high national income, and the outlays of government can and do contribute to a sustained national income no less than the outlays of private business. Indeed, when private business outlays decline, the government alone is in a position to go forward and sustain the income through increased expenditures. Okay, so that’s that’s a very Keynesian one. Point there that in the short run, the level of output, the level of activity, the GDP, is determined by aggregate demand, so the sum of what all of the different sectors are wanting to purchase, in terms of goods and services, and in our national income accounts, GDP, that is equal to aggregate demand, which is equal to the sum of the expenditures by the major sectors. So we’re talking about consumption expenditure, Big C, plus investment expenditure by business, big i, plus government expenditures on goods and services, including infrastructure. This does not include transfer payments, so we talk about them a little bit later. Plus exports minus imports. That’s the net exports component. So we typically see aggregate demand written as C plus I plus G plus x minus m equals y, which is income or GDP, because GDP is defined and is constrained in the short term by the level of aggregate demand, because if people don’t want to purchase the goods and services, then they won’t get produced, and income and employment will fall. So output gets constrained by aggregate demand. That’s one of the core messages in Keynesian economics. And I mean this is, this is something that is widely accepted by economists, that the role of aggregate demand in determining short run, GDP, what happens to the economy in, you know, over in the you know, currently, what, what’s, what’s actually driving economic circumstances? It’s, it’s influenced by the level of spending. That’s, that’s something that’s widely agreed, how, what, what ends up being controversial, as we’ve talked about in in other episodes, is to what extent governments should actively intervene to try to get GDP closer to some desirable level. So Should they actively intervene if GDP, they think GDP is too low for in a depression, should they try and stimulate the economy, or should they try and take some of the heat out of the economy by running a budget surplus so that that there’s more of a debate about, well, there’s a big debate about to what extent governments should be pursuing activist policies, beyond what are called the automatic stabilisers, where the budget naturally reacts to the business cycle, where if the economy slumps, you have less tax revenue, more unemployment benefits. So there’s this automatic stability built in, in a way, and I’ve talked about that in other episodes. So we may not, we may not cover it. I won’t cover it in too much detail. Now, the other thing I should talk about here is this point about taxes and transfers. I said that the government expenditure item in the national accounts doesn’t include taxes and transfers, because where that gets picked up, picked up that will get picked up in the in the consumption spending item so any so what will happen is that if governments, to the extent that governments are taxing and then transfer that money to households, those households spend that money on consumption goods and services, And that gets picked up, picked up in the C item that the transfer spending itself doesn’t add to GDP, it’s just redistributing the taxes and transfers are redistributing incomes from some households to others and helping those other households consume goods and services. Okay, so there’s just one more paragraph from Hansen and perlifer I’d like to read before we I had more of my own commentary the view that public investment is unproductive while private investment is productive, will not withstand careful analysis public investment, just as with private investment, may be merely utility creating, or it may be also or it may also be efficiency creating, the development of a public. Park, swimming pool, playground or concert hall, makes possible a flow of real income, no less than the creation of a radio factory. Public invest, investment in the National Forest, by preventing soil erosion and floods or the construction of school buildings, may contribute to raising the efficiency of labour, no less than private investment in improved machinery. Public investment, like private investment, if wisely made, will be utility creating, or both utility and efficiency created. So yes, the that final, that clause there that that final part of the sentence, where they go, if wisely made, will be utility created, or both utility created and efficiency created. So there, Hansen and Perloff do acknowledge the point that, okay, all of this assumes that what the government’s spending money on is sensible. It may add to GDP in a statistical sense, and it may well employ people, but in terms of whether it actually creates what we might call utility, or whether it improves efficiency, that’s that’s another question that depends on the quality of the spending. I mean, sadly, governments can waste, can waste a lot of money. We can have programmes that that are essentially, you know, not contributing a lot to the community, and end up being brought to a bit. Darren and I, when we chatted, we talked about the National Disability Insurance Scheme here in Australia. So a very noble scheme. And perhaps, I mean, it is doing a lot of good. I suppose there are a lot of people who are benefiting of it, from it, but it is very expensive, and there are, there is a lot of Rorty. Now, all of this is to say that we should be thinking about what the expendit, what’s what’s happening, if what government is doing, whether the dollars that we’re taking that might otherwise be employed in the private sector, whether they’re most productively employed in private or public sector, what’s best for productivity? And that brings me to a famous quote from Paul Krugman. I think it was in his book peddling prosperity. But I could be wrong about that. I’ll have to check that where Paul Krugman wrote that productivity isn’t everything, but in the long run, it is almost everything. So while I I think Hansen and burloff, their analysis of what government spending means in an economic sense is is correct, I’m not, and I think they do recognise the qualifications that I’m about to make. Maybe they have a different judgement as to how, as to how big of a an issue. This is the than I do. But it can be the case that if government’s not spending money wisely, then that’s not going to be good for your long run. Living standards, more spending and transfers, they mean higher taxes, particularly on employees and businesses. And that’s going to impact efficiency. It’s going to impact economic efficiency. Taxes create what’s known as a dead weight loss, an excess burden. They can discourage productive activities. They can discourage people from working or opening businesses. They can discourage people from consuming certain goods and services that that would make them better off. So I think the question we have to ask is, what’s the most productive use for our resources, where we’re thinking about what’s going to deliver the best bang for buck, what’s going to give the best ROI, and we think we should think broadly about what that ROI is. It’s not just going to be, it’s not necessarily going to be what it’s not neces it’s not necessarily, it doesn’t necessarily have to mean that it. It generates an ROI in for the business community, it could be an ROI in terms of providing services, goods and services, education or health, government services that are valued by the community, if a government can do an activity more productively than the private sector. Yeah, or do an activity that the people demand, but which gov but which the market will fail to provide, then that’s fine. I mean, government should be doing that. And so we have various public goods, such as national defence. The traditional example is a lighthouse. You often hear that given as an example, but there’s a wide range of public goods out there. There. There would be a free rider problem if we were relying on the private sector to provide them. So there’s there’s scope for government intervention. But generally speaking, and this is the point I will often make when I’m thinking about, well, when I’m talking about these issues, the incentives for efficiency are better in the private sector, and I think there’s a lot of evidence for that that came out of when governments were reforming public enterprises in the 80s and 90s, we learned about significant efficiency gains that can come from that when governments outsource more of activity, outsourced more activities from the public sector. Clearly, there are failures. I’m not going to deny there have been challenges. There I mean, there have been those botched privatisations in the UK, for example, particularly in rail and it looks like water. So I’m not going to be too I’m not going to be unrealistic or just assume, Oh yes, the market is always going to do things better. But I think generally, the evidence is that the private sector is going to be more well, it’s got greater incentives for efficiency, because if you’re not efficient, you go out of business, whereas governments could, you know, governments keep going, and we tend to see that. Well, I mean public sector unions, for example, or construction unions, which where they have a lot of members working on government projects, they can be very, very influential and affect the efficiency, affect the costs and the efficiency of government programmes and spending. I think that is something that is worth thinking about. Here. I should make the standard point that economists always make that it’s important to crunch the numbers. So we always should be doing cost benefit analysis of programmes and projects. In some cases, we want to do a comprehensive cost benefit analysis. In other cases, it’s, maybe it’s a much smaller amount of money, and it’s more of a it’s not the full blown let’s, let’s do a comprehensive economic study where we’re trying to estimate all of the relevant costs and benefits. It might be more of a desktop exercise, a simpler type of analysis, but we should be thinking, whenever we’re spending money on on government goods as government purchases of goods and services, we should be thinking about the costs and benefits, the pros and cons, and to the extent that we’re not getting that those net benefits, to the extent that we’re not getting a benefit to cost ratio above one, a return on investment, we’re effectively burning money, and the government is then detracting from the wealth of the community, in my view, because that money would pro it would have been better if that activity was not done, if it was, if it if some other activity occurred, possibly in the private sector. And I mean, the last governments have funded many poor projects. They continue to do so, whether because of politics or they, they think that there’s some social benefit that mean, or equity benefit that means that the project should go ahead. One, one example that comes to mind, there’s a new Weir on the Fitzroy River in central Queensland. I actually visited it. I visited it just before it opened. I got a tour of the construction site. Thanks to Sun water, the project proponent. It’s the Queensland Government’s irrigation water business. I mean, it’s a very impressive Weir, and it’s certainly going to deliver some benefits to the community, in terms of, well, there’s, you know, it improves the reliability of water supply. There are some local farmers, they’ve built, uh, they’ve constructed pipes that hook them up to the the weir, and they’re going to be getting water from that. And I think they’re planning things like macadamias and and. Other crops that you need to that you need to water. So there will be some, I mean, you need to irrigate, rather than just rely on the the water from the from the sky, for relying on rainfall. So this is certainly going to expand agriculture, irrigated agricultural production. The problem was, it’s a very high cost dam. It was already going to cost 200 or 50 million, I think it was, and it ended up blowing out its costs. And it’s costing 450 to 500 or something like that. So it was a big cost blowout. And the economics of the dam are pretty of the we are a fairly questionable. There was a business case prepared for it that showed that it had a benefit cost ratio. I think it was under point five. It was, it was rather embarrassing, but the government went ahead and built it anyway, I think because there was such political pressure to build it, and you could argue, well, let’s help it sustain those regional communities. So maybe there’s an equity element to it, but yeah, unfortunately, even where governments do cost benefit analyses, even sometimes they ignore them. So having said about having just talked about the importance of cost benefit analysis, I just note that it’s, it’s not always the cure, and often governments go ahead and, do you know, spend money unwisely anyway. But that, of course, is not going to stop me from arguing always in favour of crunching the numbers right. I might, might go on to a few other things I’d like to talk about before we wrap up. I talked earlier about the the issue, the problems you have when you do have a larger government sector, and you can crowd out the private sector, and you can end up in a situation where, by I mean, that can, that’s going, that’ll affect your living standards. Because even though the government may be boosting, you know, it may be adding to GDP, the C plus I plus G plus x minus m, it could be the case that if those resources were better deployed, then GDP were would be higher and and also, in an international comparison, your GDP per capita would be higher through Well, you know better, better use of resources in your economy. Your economy is more productive, and also because the economy is producing more things that you can sell overseas, that people overseas might want to buy, and therefore that helps improve your exchange rate. You’re not sucking resources out of out of the private sector. So this crowding out, I mean crowding out so well, well known phenomenon in economics. But there was a famous book in the late 60s or early 70s, actually might have been 70s, the bacon eltus thesis, 1976 it was, which was a really interesting diagnosis of the economic problems that Britain faced in the 70s. And this is essentially what led to Thatcher taking over? I did a podcast episode on Thatcher a few years ago. I mean, Thatcher is a, I mean, she’s a very controversial figure. And they’ll, I mean, a lot of people really hate Thatcher. And I mean, certainly she, you know, she was, yeah, she’s, she was a very controversial figure. But the what, if you look at where Britain was economically in the 70s, then really Thatcher taking over and, you know, having to, you know, really shake up the economy. That was inevitable, given that the state the economy was in, the stagflation, the excessive industrial action garbage piling up in Leicester Square in London because there was a strike of the the garbos. It’s, it was really awful time. And this book, this was written by Robert bacon and Walter eltus. So eltus was chief economic advisor to Michael Heseltine, or Heseltine in the Department of Trade and Industry from 1992 until 1995 and he also edited Oxford economic papers. So he was an economist, and he ended up going on to be an advisor to a minister in the major government made John Major followed Thatcher in the he was a Conservative Prime Minister after Thatcher. So their book Britain’s economic problem too few producers that argued that it was the rapid expansion of the public sector that was contributing to Britain’s economic difficult. Is during that period because it was taking resources. It was taking labour and capital out of more productive uses of the private sector and into the public sector. And yeah, so that was a rather influential book at the time, and I’ll put a link in the show notes it. It goes to show that. And I think this is a this is a qualification that I think Hansen and Perloff themselves would have accepted, that, you know, while the government can contribute to the wealth of the community, while the government can help the private sector be more productive. And while the government can provide goods and services and it can invest, it can it can provide capital goods. It can produce public capital, public assets that are of great value, unfortunately, it can also produce things services that aren’t, that are inferior, that are that aren’t as good as what could be provided in the private sector, and in those cases, that it’s subtracting from the the wealth of the community, or we could be richer if we had a shift from government to the private sector. So look, it’s a difficult one, because I do recognise that I get a lot of benefit myself out of public services. In particular, what I the one I think about all the time is the Roma street Parklands in Brisbane, which were built by the state government. Here, there’s an amazing park with a beautiful spectacle garden. And there’s a a great walk that I go on every morning. I go up to, up to the parklands, and I walk through the parklands, and there’s a there’s a rain forest, part of it, there’s a bridge, the Fern Gully bridge, I think it’s called that. I that I go on. It’s been, it’s closed for maintenance at the moment, but it’s just amazing. And that’s that’s a public asset, and my life is is better because the government built that, that public asset and and they maintain it. So I’m not going to say, look, government’s terrible. Let’s get rid of government some government services are are valuable. There are at the same time, you’ve got to recognise that there are cases where public provision of services is is subpar and it’s not. Maybe we could be better off if we have a shift to the private sector. And I mean, maybe this isn’t the best example, but we know that there are a lot of failing government school funded schools out there. We have a real problem in Australia with the lowest performing schools. I think they’re letting down the people in those in the areas where they they’re serviced by these subpar schools. And we should be thinking about whether there’s whether there’s an alternative, whether we can rely on greater school choice, charter schools, etc. That is a big issue, and one I should come back to in a future, a future episode. One person who has a really good take on this issue that we’re talking about today is Dan Mitchell, who is a is a guest. He’s been a former guest on this show. Dan’s been on, oh gee, a handful of times at least, we had a conversation recently about US debt. Dan wrote a really good piece on relevant to this question of how government impacts the economy, how it impacts wealth, the impact of government spending on economic growth. This was for the Heritage Foundation. This is, this is about 20 years old. This piece, I’ll put a link in the show notes, it’s very good. Dan writes that economic theory does not automatically generate strong conclusions about the impact of government outlays on economic performance. Indeed, almost every economist would agree that there are circumstances in which lower levels of government spending would enhance economic growth, and other circumstances in which higher levels of government spending would be desirable. If government spending is zero, presumably there will be very little economic growth, because enforcing contracts, protecting property and developing an infrastructure would be very difficult if there were no government at all. In other words, some government spending is necessary for the successful operation of the rule of law. And then he goes on to say that, that said, well, in his view, most government spending has a negative impact. And. And there’s overwhelming evidence that government spending is too high and that America’s economy could grow much faster if the burden of government was reduced. Okay, so that those point, those final points, are probably going to be more controversial. But the I think what the passage I read out before from Dan, I think that’s, I think that’s very non controversial. You know, he’s saying it’s all about getting the right mix, the right balance. And then you can have an argument over whether, you know, we’ve got too much or too little at the moment. I mean, I probably share Dan’s presumption that we’ve got too much government. But then there are others. I mean, folks at The Australia Institute here in in Australia, and they’re arguing, oh, we should actually have more tax, we should have more government spending, and we’ll be better off. Okay, that’s, uh, that’s an interesting perspective. It’s not one I share. But, I mean, they’re entitled to it. Perhaps I’ll, uh, I’ll have, I’ll have Richard Dennis, or one of his colleagues on the show one day to talk through that. Okay, so that was, that was a broad discussion about the theoretical and philosophical issues associated with government involving in the economy, and to what extent it affects, like, how does it affect living standards? How does it affect the wealth of the community? I mean, clearly we just can’t say something like, government doesn’t create wealth, it just subtracts through wealth. That’s not true, but we should be thinking critically about the how our resources are used in the economy. To what extent are they used by government versus the private sector, and whether we can have a better mix, whether we could be have a higher GDP per capita, whether our living standards could be higher if we move resources out of government back to the private sector. I think that’s a that’s a legitimate question, even if the sort of the simplistic point, or the simplistic argument that the government is just dependent on the private sector and it’s it doesn’t create any wealth itself, even if we reject that, we still recognise that government can be too large. And in the view of economists such as Dan Mitchell and myself, I must say, I think it is too large. I think we would be better off with a smaller government. Okay, one point that you know, I’m going to talk a bit about empirical evidence now before we wrap up, because I think it’s important to always look at the data. What does the data tell us? And Dan, Dan always saw talks about these OECD studies, so he always criticises the OECD you says, Oh, well, you know, you’ve got all of these bureaucrats over in Paris and highly paid and but they’re they’re always saying, Oh yeah, let’s just raise taxes on everyone and spend more money. However, he does note that their research departments, the research part of the OECD and also the IMF, often produces research which contradicts the policy views that are being advocated by these international bodies. And Dan wrote a post, OECD Economic Research finds that government spending harms growth. I will link to it in the show notes. This was back in 2016 very good post. And Dan wrote that a new working paper by two economists at the OECD contain some remarkable findings about the negative impact of government spending on economic performance. And what it found is that, yeah, there certainly is an impact that when they did the cross country data analysis, they did some econometrics, if I remember correctly, they found that larger governments are associated with lower long term growth, and larger governments also slow down the catch up to the productivity frontier. Okay, so the larger the government sector, that’s going to constrain the productivity of your economy. It’s going to adversely affect it, which is in line with what I was saying before. Okay, so there’s some good evidence there. I’m going to link to that in the show notes. That’s, that’s worth that’s worth checking out. Okay, so I hope you found that episode informative. I think it’s an important question, and it it is worth us thinking carefully and critically about how government does impact the economy and our living standards. I’ve given an introduction to this topic and have provided some of my own views. Now, of course, they’re my views, and your views may differ. You may have. Different experiences. I mean, you will have different experiences from me. You may be aware of of different evidence that’s out there. So I yeah, I’d really love to hear from you if you have any thoughts on what I’ve said this episode. If you think there’s there’s evidence, or there are points that I should be considering, then please get in touch. Let me know what you think. You can email me at contact@economicsexplored.com I’d love to hear from you, and I hope that you tune into a future episode. So I’ll be taking a break soon, but should be back strongly in August 2024 I may have one more episode before then I’ll see how I go. But thanks for joining me. I think this is these are important issues to talk about, and I really hope you got something out of it. Thank you. Bye.

Credits

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

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EP112 – Taxing the rich: Billionaire and inheritance taxes

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

About this episode’s guest – Professor Miranda Stewart

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

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

The coming boom in inherited wealth by John Quiggin

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

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

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