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Podcast episode

Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

Show host Gene Tunny talks with Dr. Nicholas Gruen, CEO of Lateral Economics, about the increasing focus of governments on wellbeing. For instance, former NZ PM Jacinda Ardern rebranded the national budget as a Wellbeing Budget, Wales has a Futures Generations Commissioner, and Australia is developing a new wellbeing framework, Measuring What Matters. Gene and Nicholas discuss the limitations of the current top-down approaches and platitudes, and consider potential solutions for better integrating wellbeing into policymaking. 

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What’s covered in EP187

  • What is the “well-being agenda”? (2:44)
  • The “Easterlin paradox”. (5:08)
  • How do you make these judgments? How do you measure well-being? (10:50)
  • How is this relevant for policy? Should governments be tracking this broader measure? (28:36)
  • Is complexity a plus or a minus in the Treasury wellbeing framework? (33:39)
  • Why do you need a framework? (40:02)
  • Good examples of programs which could improve wellbeing. (44:29)
  • The importance of being connected to family and friends. (53:42)

Links relevant to the conversation

Nicholas Gruen’s YouTube channel:

https://www.youtube.com/@NicholasGruen

Video version of this episode on Nicholas’s Uncomfortable Collisions with Reality podcast:

Wellbeing: can we escape the iron law of business-as-usual 

Measuring what matters — second consultation process | Treasury.gov.au

Fairfax Lateral Economics Index of Australia’s Wellbeing Final Report (the HALE index discussed in the conversation).

Transcript:
Gov’t wellbeing budgets & frameworks: useful or useless? w/ Nicholas Gruen – EP187

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I chat with Dr. Nicholas grilling about the growing interest of governments in well being something broader than living standards or GDP per capita. Former New Zealand PM Jacinda Ardern, rebranded her national budget as a well being budget, Wales as a future generations Commissioner. And now Australia is going to produce a wellbeing framework called measuring what matters. As you’ll hear in our conversation, Nicholas is highly supportive of bringing wellbeing into policymaking. But at the same time, he’s sceptical of the way we’re going about it. He breaks down what’s wrong with the way we’re doing it. In short, there’s too many platitudes and too much top down thinking, and he explains how we could really make a difference if we did it right. Nicholas is CEO of lateral economics. He’s an angel investor, and he’s headed various government inquiries, including the Australian Government 2.0 Task Force, according to the Financial Times as Martin Wolf, Nicholas is a brilliant man who deserves to be better known, although he’s widely known within Australia, and he has an ever growing international reputation. This episode is at joint production with Nicholas as YouTube show uncomfortable collisions with reality. So please consider checking out his other content on that channel and you get a chance, a follow up to the conversation, this episode will be available on that channel brought out now for my conversation with Nicholas grown on well being. I hope you enjoy it. Nicholas, thank you, good to be with you. So I mean, you’re aware that New Zealand has a well being budget doesn’t it? And our own government here in Australia, it’s going to be releasing a measuring what matters statement. So it’s looked at what New Zealand’s done and it’s been? It’s excited by that. There’s a lot of interest in well being at the moment. What do you attribute that to Nicolas?

Nicholas Gruen  02:43

It comes goes, Gene, I think this, this urge, it’s an anti agenda. In other words, it comes from a frustration with the idea that we are obsessed with economics, we’re obsessed with dollars and cents, we’re obsessed with a single measure. And that single measure is GDP. And there’s a lot to be said for that. GDP is in fact, a much better measure of human wellbeing than we think. But that’s a little bit like saying democracy is a terrible, it’s a terrible mess. If you have to have a single measure, it’s, you know, I think you we can improve it somewhat. But there are all kinds of ways in which GDP is a much better measure than you might think. And that’s kind of partly because you can’t get rich without attending to basic social facts. And social institutions like schools, hospitals, families have to be in reasonable functioning order, if you’re going to have a wealthy society. So in a kind of an indirect sense, measuring how wealthy countries are, does help you distinguish between societies that are relative functioning relatively well, and societies that are not functioning relatively well. Please don’t think that that’s me saying we should put down our classes and forget about the deficiencies in GDP. So Bobby Kennedy put it best many years ago, 1968, when he said that GDP measures all those things in life, except the things that matter most to us, how well we bring up our kids, how beautiful our cities are, how kind we are to each other, how we manage how effective we are staying out of wars, GDP doesn’t measure any of those things. And it doesn’t measure a whole lot of other things as well. So that I think quite a good way to think of the well being agenda is to say that it’s trying to draw our attention to those deficits. And I’m very happy to say that it should live or die by how successful it is in addressing those deficits.

Gene Tunny  04:59

Okay. So wellbeing is going to be correlated with GDP per capita to an extent and is it the case?

Nicholas Gruen  05:08

And we see that in the there’s this famous thing called the Easterlin paradox. Why don’t you tell us what these? Oh, well, I

Gene Tunny  05:15

Was gonna ask you that. The way I the way I remembered if I’m remembering correctly, is that up until level of Is it personal household income, which years ago, I think was about 75 or 80,000. US dollars,

Nicholas Gruen  05:31

it was quite a lot less. Was it a lot less? Was it? Yeah, yeah. So you get a strong correlation between GDP and subjective well, and people telling you that they think their lives are working out relatively well, if you go, and it’s not very surprising, you go and ask people in war torn Sudan or somewhere like that a lot of highly corrupt and poor places. Well, being is low and GDP is low, and they climb together, and then they tie a lot and then the relationship tails off. And I think it was about $20,000 per annum, where you get that tail off. We remember this is maybe even less than that, because remember, I think it’s dates to 1974, the Easterlin paradox. And in many ways, it probably comes out of the kinds of sentiments that Bobby Kennedy was giving expression to in 1968. And it’s it says, Look, after you get tolerably wealthy, other things seem to matter more to people than how much more wealthy they’re getting.

Gene Tunny  06:37

Yeah. And what’s this idea of well being is so I’d like to ask is this happiness? Is it utility? To what extent is governments when they’re promoting well being is that about promoting the greatest good for the greatest number as Jeremy Bentham expressed it? How do you know?

Nicholas Gruen  06:54

I mean, I like to be vague about this. And I like to be vague, constructively invasions. And what I mean by that, in fact, if you’re vague, then you can honour the well being agenda as and when I called earlier, a kind of anti agenda, it is saying, hang on, where we’re never, it’s pretty unlikely we’ll ever not managed for GDP, but that leaves out all these other things. And the thing is that if you try and same, you can use words, I mean, Bentham had this problem himself, when he said the greatest good for the greatest number, he could never quite say what good was, he would sort of associate it with pleasure or whatever. And, as you know, what economists did in the, towards the end of the 19th century is that they did a little bit of on the spot, metaphysics and said that economics was about utility, that the ultimate out quote from the economy was not money, can’t take it with you, and you can’t eat it. It was money existed to improve utility. And I think utility is a nice word, it anchors the activity to what we all think of what uncertainly we did in the late 19th century and early 20th century, as all the useful things about life. Today, our lives are much more postmodern, they’re much more saturated with fantasies, entertainment, advertising, and so on. And that’s created all I mean, it’s right, why rather like that, the the, this is an Australian word for people overseas, but I’m going to use it anyway. The Daggy if you like nerdy sense of the word utility, it’s saying how can we be useful and we get a lot of utility. A poor person who is a paraplegic gets a lot of utility out of a wheelchair, or hundreds of 1000s of dollars worth of utility. If you want to get that much use that much usefulness to someone who is able bodied and has plenty of money, you’d have to do an awful lot to be more useful to them than a wheelchair is for a paraplegic person. So I think of it as quite an anchoring quite an egalitarian idea. So to Bentham, and this is one of the things that’s one of the characteristics of economics during its period of what I call clarified common sense. People like Alfred Marshall, Cecil Pigou, who were working toward in the turn of the 20th century, they built their idea about what the economy about was about around usefulness. And one of the upshots of that was that if you’re just focusing on usefulness $1 to a poor person or a pound to a poor person buys much more usefulness by It supplies them with much more urgent needs. If they spend it halfway wisely, then it can provide to a wealthy person. So that injects into our thinking a degree of egalitarianism in the guise of scientific thought, or if you like, economics has clarified common sense. So I see the well being agenda as reviving some of those ideas. And one of the people who’s responsible for it, Richard Layard, at the London School of Economics has written very much in that in that kind of tradition.

Gene Tunny  10:38

Right? Okay. So you talk about this idea of $1. In a poor person’s hand, the more valuable than in a wealthy person’s are the utility that comes from it? Yeah, but how do you make these judgments? I mean, can you do this scientifically? How do you measure well being for example, can you actually put a number on it? How do you think about that,

Nicholas Gruen  11:00

and you can’t measure utility either. So So modern economics, after that period got mesmerised by the idea of being scientific. And it didn’t get anywhere. All it managed to do is to we had a, if you like, a blurry vision of what was true, because I think almost every person listening to this will say, yes, yes. In general, on average, it’s strongly true, that money going to poor people, right now, with a budgets being prepared, and people are talking about increasing the dole for people over 55. Well, there will be some people who take it to the casino. But most people and I don’t know whether that buys anything, probably buys less, they probably buys less utility, less well being than money to me or you. But most people will spend it on things that are much more useful. So I don’t want to say Oh, well, we can’t be scientific about that thought, therefore, we’re just not going to have it. But that’s essentially and we can talk about this more if you want to, but what you can just agree with. That’s essentially what happened in modern economics from about the 1930s onwards, where we moved from a criterion of well being, which basically said, everyone’s wellbeing can be presumed to be everyone can presume to count the same. And therefore, if we’re just focusing on well being, and of course, we can’t just focus on well being, we’ve also got to think about incentives and stuff like that. But abstracting from that, ignoring that it’s a powerful, stylized fact, that money to the poor, is urgently needed, and money to the rich is not. And that basic idea kind of disappeared from the methodology of economics, in the pursuit of making it more scientific. And so we watered down the idea of what a improvement in the well being of a population was. And all we said was something which is sort of useless for practical purposes, it’s okay for modelling and that’s called Pareto, making a Pareto improvement, named after bill for a great thinker, Vilfredo Pareto, who ended up being rather sympathetic to Mussolini towards the end of his life. But he was he didn’t like the idea that you could compare any one’s subjective, state with anyone else’s, he produced Pareto wellbeing, which says, you get a Pareto improvement only if you can show that you can improve one person’s well being without harming anyone else’s. Well, that rules out progressive taxation, it rules out actually pretty much anything you’ve worked in the treasury, it’s almost impossible to do anything in policy without fight without some losers turning up. And then economics has nothing to say about that. And I don’t think that’s good news. And I think the well being agenda is one way to remind ourselves of that lack that absence. And it’s an excuse to try and bring back some of this not to, and maybe we’ll get to this not to erect a kind of big alternative approach with a big brand new thing, but a correction to some of the obvious moats in our eye on this in the sort of ways economists are thinking at the moment.

Gene Tunny  14:39

Okay. So how can we measure this? You’ve done some work on this Hale index? Is that a way of measuring well being can that be useful for assessing whether our well being has increased or

Nicholas Gruen  14:52

moving into that? That’s a good illustration of what I’m trying to say because I guess you could mark at the Hale index. I’ll explain what it is in a minute, as a sort of brand new way to conceptualise well being. But that’s not how we thought about it. We started with GDP for some of the reasons that I’ve outlined earlier. And then we said that there are some obvious ways in which GDP doesn’t tell us, that doesn’t give us what we can correct this in big, ugly ways. Where there are big ugly deviations from common sense. And then we know that we’ll, we think we’ll have a better measurement of well being, and it won’t be perfect. And it’s not something we want to run away with. But it will help us think about policy priorities, and talk about whether we’ve been getting richer or poorer as a society. So let me give you some examples. GDP is blind, to whether young people from 15 to 25, are spending their extra money going on holiday, or going to TAFE going to uni, going to school, and building what economists call human capital. We take that into account because we say that if you are spending this money, on your education, your knowledge, your training, your capability, then you are investing it. And so we put that back into GDP. And of course, if you think about how long in our lives we educate ourselves, well, 12 years is a kind of minimum for people pretty much now. And a lot of us have at least another three or four or five or six years. That’s a huge amount of your life. And therefore it’s a huge part of the economy. And so when we started, when we put that in, we changed the you know, you could see that as Australia invested in increasing retention in schools, which happened quite in a big surge during the whole government. And then, as we as we got more and more people with cert three and above qualifications, that that produced a large surge in benefit. And that would be a good thing to think about. That’s something we should congratulate ourselves on when we when, when it’s working and, you know, give ourselves a talking to if we’re not making those things happen. And another way to think about this is to say that the business will alter in this period, the business community, we’re obsessed with talking about workplace relations and workplace relations are quite important. But that’s the interface that businesses have with policy, that’s the one that they think about. And it’s vastly less important. I mean, if you do a really bad job of either, you’ve got a lousy economy on your hands. But if you are doing a halfway tolerable job of either, then human capital is vastly more important than exactly how you configure workplace relations. And anyway, no one’s ever worked out a perfect way to configure workplace relations. So one way to think about this is to say that the Hale index, this index that we built, tells you what’s important and what’s not. And some other big differences, that reflecting the comments I made about money in the hands of poor people buys you more urgent needs than money in the hands of wealthy people. During the last 20 or 30 years, Australia has become somewhat more unequal, it’s it’s a little overstated. People tend to overstate it, they tend to think we’re nearly there were as bad as the United States or the or Great Britain. And we’re not by quite a long chalk. But nevertheless, there’s an effect there. And so that that should go in. And if we have become richer, but more unequal, it’s not clear that we’re better off. And so, you know, I think quite a good, quite a good measure of a just a single measure of economic well being is median income, and median income has not grown as much as actually I’m not sure about that median income. No, I think median incomes not grown very strongly, you might be able to correct me on that. But what we’ve done well as we’ve looked after people at the bottom quite a lot better than they have in the United States. And the PR people at the top have been very well looked after, but not nearly as well looked after as they have been in the United States. Anyway, so it takes into account inequality. It tries to take into account natural capital and the result that natural capital is you know, the quality of our air and our streams and, and the amount of minerals that remain in the ground. One Upshot from that which I’m not, I’ll just tell you about it is that we, the methodology we arrived at We certainly didn’t try to come up with this result. But the methodology we arrived at told us that natural capital, at least in terms of diminution of natural capital, at least in terms of what’s happened so far was pretty minor. And that even took into account greenhouse. But of course, that depends on the trajectory that greenhouse takes. So that at least gives you something to argue about that, you know, you’re not just waving your arms around, as I’m doing right now. And then the other thing we did is we talked a few areas of mental health, which have, which are common, and have large impacts on well being. And they were depression, and anxiety and obesity. Well, obesity is a physical condition. But that has a notice that is correlated with large reductions in self reported well being. And so we threw that in the mix. And as obesity has been rising, that’s been taking 10s of billions of dollars off our GDP. So that’s what it looks like. And that to mention what I said before, I don’t want to con anyone into thinking this is a comprehensive measure of well being even though sometimes it gets reported in the press is that, but I want to say, look, it’s GDP, and then we’ve made some big changes where the worst problems of GDP exist. And that’s got to be a good thing. It’s, it’s the old clarified common sense idea, rather than welcome to the new paradigm.

Gene Tunny  21:32

Okay, so the Hale index, Harold age, lateral economics index, on well being Yeah, well being just so clarification, you talked about human capital. So are you valuing the time input that people are spending in education and training because the the actual resource cost of the education and training or the value added, that’s already counted in GDP are

Nicholas Gruen  21:58

correct. So what we say that if you go to TAFE, you go to uni, you build your human capital, the resource cost of doing that as already take is already measured in GDP, we paying your tutor as your lecturers, we’d pay for the buildings if you go to them, and, and so on. And but then we say that at the end of this process, you have invested in an asset and that asset and so and we do the same, you see GDP doesn’t contain depreciation. So it’s a basically, it’s purely recurrent. And it has no way to conceptualise the capital account, it has no way to conceptualise whether you’ve made yourself richer for the future, or poor for the future. And so it tries to do that. Does that make sense?

Gene Tunny  22:55

I’ll have to have another look at it. Yeah. Because I mean, the, what I’ve seen in the past is that people have adjusted GDP for the depreciation. So part of the That’s right, well, yeah, yeah. Part of capital expenditure that occurs is just to replace existing capital. So, you know, some people argue, well, you should actually look at net domestic product or net rational product. And

Nicholas Gruen  23:21

we do that in. So we start at that. I mean, I didn’t mention that because I just thought it was too technical, but we start with NAMI national income. Okay. So we got depreciation in there. So we put capital, so we need to put capital appreciation in as well.

Gene Tunny  23:38

I see what you’re driving at. Yeah. Okay. Capital appreciate. Yeah. Okay. Right. Well, I’ll put a link.

Nicholas Gruen  23:44

I mean, let me just let me just so people can conceptualise it. So you start with GDP, which has no measure of depreciation, your point, but the buildings you had this year, are worth less at the end of this year than, let’s say plant and equipment. Yeah, the cars you own are worth less at the end of the year than this year. So we take that out of GDP. And if you’re going to do that, by exactly the same token, you would put back into GDP all the ways in which you’ve built capital. And the main ways in which you built capital is through human capital. There’s sort of three four times as much human capital in the economy than there is physical capital.

Gene Tunny  24:27

Okay, okay. The big effect

Nicholas Gruen  24:29

two big effect.

Gene Tunny  24:32

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

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Gene Tunny  25:07

Now back to the show. Like what I wonder, is whether we are actually much better off than we were, say, in, in the 80s or 90s. Because, I mean, clearly the technology is just incredible that we’ve got now I mean, I remember having a Commodore 64 When I was in high school, with 64 kilobytes of RAM. And now I mean, everything you’ve got now, it’s just I don’t know how many 1000s of times better it is. But it’s just an incredible improvement. But yet, I don’t know how much better the quality of our life is, particularly with all the smartphones and the distraction? And do you know what the evidence is on that though? What is it?

Nicholas Gruen  25:50

Well, my style? Well, I mean, leaving the smartphone, the distraction point out, because that’s a very different sort of thing you’re thinking about, we can talk about that. But my kind of guess from scanning the literature on that is, so I think one of the main things you’re talking about is that a lot of the streams of benefit that we get from technology of free, or you go to Google, we go to Facebook, if you call that a benefit, there are just all these free services and free doesn’t work with GDP, GDP to GDP, it’s just invisible to GDP, because GDP, put your binoculars on and then whenever someone’s paying for something, you work out, you know, you say, Oh, that was $2, that’s $2 to GDP last whatever they paid for it. And anyway, it’s a, it’s an process of serial accounting, working out how much value has been added with each transaction. And in this process, the value that’s added is not counted, some of the commercial value that added is counted, and that is the advertising revenue. But so so again, it’s it raises the question of the household economy as well. I didn’t mention one of the great weaknesses of GDP is that GDP goes up. If you go out to dinner, and it doesn’t go out, if you if you get someone else to pay for your dinner, or you know, to cook your dinner and pay for them, that that GDP rises, but if you cook it at home, GDP doesn’t rise, I could give you some more striking examples, more sexual examples. They’re a bit more striking, which is that most people’s sexual activity doesn’t contribute to GDP, but going into a prostitute does. So that doesn’t seem to be a very good way of measuring human wellbeing. So there are anyway, we haven’t tried to correct for those things. But those are the those are some of the sort of paradoxes of GDP. Yeah. But I don’t mean to be too critical of GDP because of it. Clearly, we are, we are wealthier. And

Gene Tunny  28:06

to an extent, I mean, just given the expansion of I mean, houses are much larger, on average than they were 30 years ago. We’re probably I mean, the quality of cars is better. We can you know, then they’re cheaper in real terms, I think. And partly that’s because we’re brought down the tariff wall here. But yeah, I guess we are better off in a material sense. But it’s not as much as you might think, if you just look at the GDP per capita numbers, because there are these other things we should be taking into account. Yeah,

Nicholas Gruen  28:36

yeah, that’s right. That’s right. I mean, the other thing is, I’ll just tell you, I went this afternoon to somebody who was looking at an MRI of my shoulder, which is sore and tingling. Now, I’m pretty confident that I mean, there are various ways various pathways, you can imagine that the existence of MRIs is picked up in GDP, I mean, you pay money for the for the MRI, but the fact that the fact that he can look inside my shoulder and look at where the bone is, and where the where the sinews are on sale, there’s a spur there. And we couldn’t do anything remotely like that. As an economist sitting there, very few people would have this reaction when they’re doctors looking at an MRI. But that was what I was thinking about. I was thinking, well, I doubt if that is properly reflected in productivity statistics. And in GDP. It’s an incredible thing to basically have your doctor be able to look right inside things and you know, that that’s a very powerful thing.

Gene Tunny  29:43

Yeah, yeah. Okay. Okay. So I think basically, the takeaway is that well being is this it’s much broader than than GDP. It’s challenging to measure. How is this relevant And for policy, Nicholas, I mean, should should governments be tracking this broader measure? Should they be tracking something like the Hale index? Or the ABS be producing it? And should they therefore then adjust their policies to address this if there’s a deficiency? And yeah,

Nicholas Gruen  30:15

so So that’s, that’s the nub of the question. So there are various lots of people say how wonderful it is, you’ll hear this it’s almost a cyanide, I will hazard to guess it’s a sign that you’re listening to someone who hasn’t really thought about these things very carefully, or sceptically when they start talking about Bhutan. So Bhutan made a really big splash by saying that it was managing its economy for gross national happiness. But if you take it seriously, and you look how they do it, it’s a bit of a joke. No offence to Bhutan, good on them. And they’re doing quite well. So you could argue that it’s all because of well being. But if you try to look at what they’re doing, I mean, it’s very hard to get anything published after about 2009 on the subject anyway, from Bhutan. So it’s a cart that people love the idea that they’re managing for wellbeing. I’m not sure exactly when, but probably in the, the tooth, the, you know, the 2000 to 2010. But maybe earlier than that fair bit of pressure was put on the Australian Bureau of Statistics to produce a wellbeing measure. And I basically pushed back and said, Look, we will produce a thing with series of indicators called measuring Australia’s progress is that it, of course, and we will not aggregate it all and pretend that we can put this all in a single measure. And so you know, they look at natural capital, they look at equity, they look at the environment, and they produce rich data on this stuff. But the calls keep coming, oh, we need to. So in other words, if we had this big demand to manage for well being, then that’s fine, the ABS could produce this data. And then our politicians and our senior thought leaders will put inverted commas around that. They’d be saying, Good, we’ve got the data. Now we’re going to manage for wellbeing, but that’s not what happens. So that’s a sign that something funny is going on. And so around the world, we hear this idea that we’re going to, we’re going to manage for wellbeing. Now, we might be able to go into this in more detail in the next podcast that we’re going to have on this where we’re going to have a closer look at some of this. But I think that is a mistake. I think it is a mistake to go running around creating, quote, wellbeing frameworks, if there are a wellbeing framework of a particular kind, because so New Zealand has done that. Well, let’s go through what’s happened. The Treasury announced that it had a well being framework. And this was announced in a speech by a senior Treasury official, who shall remain nameless, but is closely related to me. And it was announced that there were these five principles in the treasury Wellbeing Framework. And you can imagine, you know, we can work out what they are the first, you know, the top three or four are going to be prosperity, equality of some kind, and we’re going to read a reference to equality. Another one will be a reference to the environment, you know, health, happiness, stuff like this. And the fifth one was happened to be complexity, which was intriguing. And I sort of looked at this and thought, Well, that’s it that’s on what’s like, I can see how complexity is sort of important. But is it a plus? Is it a minus? What’s it doing that? Now, the Treasury Wellbeing Framework or so it was called a well being framework? I think it was quite obvious at the time that it was not a well being framework. It was a set of talking points. Is that a bad thing? I don’t think it is a bad thing. Can Henry wanted the Secretary of the Treasury at the time wanted to make the point or wanted Treasury officials to think more broadly about what the Australian economy was about? No problems there. But it wasn’t a framework because of framework constraints. You and it’s it, you will be applying this framework. Wherever you do work, wherever it’s relevant. I can prove that that didn’t happen, because the Treasury wrote a submission to I think the a triple C on Consumer Policy and another submission on regulation of financial instruments. Now, if that doesn’t raise the question of complexity, nothing does and the word complexity did not appear in those submissions. I’ve documented this So, so it wasn’t a framework. That’s okay. But it’s a very good illustration of a number of things, which is that, you know, it’s very easy to grandly talk about visions. And we should be suspicious of that, we should be suspicious of that for lots of reasons. But without going into, like, if you’re serious about that, I’d be suspicious, because I don’t think it can be done, I don’t think it’ll be helpful. I think it’ll all fall over. But in fact, you don’t really have to worry, because when you get suspicious, what I’m mainly suspicious of is that this is what I call a re skinning operation. And we will get business going on more or less, as usual, with some new words dotted around. And I think that that’s clearly demonstrated in the, in the case of the Australian treasury. And And to top it all off. John Fraser, when he was the Treasury Secretary, just got rid of it. And a number of people were quite upset. I think you were a bit upset. And you said you were sad to see it go. And I said, Well, I’m sad to see it go. But it will it made no difference and making everything go will make no difference. And and I said, Can you tell me anything? Any thing, any piece of work that was changed for you in the treasury by the framework? And I think you had nothing to say then. But you might have more to say now?

Gene Tunny  36:24

Well, I think what I said at the time, Nicholas, was that I think it was designed to change the mindset. There authorising words. Yes, yes. And I don’t think you could ever say, Well, as you mentioned, there was a a submission that it appears wasn’t informed by the well being framework at all, which I think is a really, that’s a that’s, that’s not very good. I mean, I’m surprised that complexity wasn’t, wasn’t mentioned in that. But yeah, you’re right. I mean, it’s very hard to operationalize these things. I mean, because you know, these things come from, you know, the senior executive, or I think it was either Ken Henry, or Blair calmly or someone like that very senior in the treasury. And I mean, you know, that they wanted to have it permeate through the organisation, they wanted people to change their, their mindsets from because there was a concern treasury, or we’re just all the corner Kratts. And all we care about is GDP and the the economic numbers, we’re not concerned enough about broader well being. So I think it was well motivated. It just didn’t, it’s hard to change practice

Nicholas Gruen  37:32

being stuff is well motivated. And that’s my point. Let’s, let’s have a little D tumescence, about how well motivated we all are. And let’s attend to the difference that we’re making. So that’s the Treasury, that’s the Australian treasury. Now the New Zealand Treasury is a very different story than New Zealand Treasury, actually kind of contacted me I’d written some stuff on well being and they contacted me. And I was amazed when I had a look at what they’ve done. They’ve been working away before Jacinda Ardern, turned up and said, Let’s have a well being budget. The New Zealand Treasury were actually doing a great deal of work, trying to reconceptualize the national accounts, and all this kind of stuff. And they were pretty serious about doing it. But I’ll tell you what’s happened. We can talk a bit about this, about their well being budget in a minute. But what’s happened is they have put a lot of work in and the result is that at least in principle, whether they’ve got to this stage or not, I don’t know. But in principle, they would be able to tell you, the world self reported well being of Maori in Rotorua. Now, isn’t that impressive? Well, actually, it’s not impressive, because what’s not impressive about it is that you’ve you’ve put a huge amount of effort and resources into something and thinking resources. And what are you missing out here? Well, what I’m arguing you’re missing out is, you know, what the Mary well being in Roger or is and you’ve got no further information about how to improve it. And that’s what matters. So I want to use well being frameworks. Well, this this hankering for well being as an authorising environment, to start finding some things where wellbeing and GDP deviate the way they were something where there’s a big problem with the well being and GDP is ignorant of it is it’s invisible to GDP, there’s suffering. And I would like to, I would like the well being thinking to start being used to authorise this and I was talking to a state government a treasury, actually, Treasury state government this year, and and I was saying this to them and they said, Well, you Yes, but we need a framework. And I said two things. I mean, firstly, why do you need a framework, it’s not going to help you achieve anything. But I said, I can give you a framework, the framework will be not on how to measure wellbeing everywhere for no apparent reason. But how to build a framework which will deliver wellbeing benefits. And we already have a bit of a, we already have a bit of a picture of that, because we’ve done it conceptually, in another area, which is sort of simpler and more technical, and therefore doesn’t involve the human element so much, and doesn’t therefore engage our feelings in quite the same way. And that is greenhouse. So we have cost curves are very basic, the firt, the first language we ever developed about greenhouse before, even before Kyoto, which I think if I’m correct is 1997, we develop the concept of no regrets measures, what are no regrets measures, they’re things that are good for the economy, and good for greenhouse. And there are quite a lot of those. The classic case of trying to improve the efficiency of at small levels, that management don’t pay a lot of attention to the installation of warehouses and factories, the energy efficiency of electric motors in those things. And they’re actually quite large economic benefits. And they come with greenhouse reductions, and there are still some of those around so I think so the very first thing you go looking for is wellbeing benefits that are no regrets measures, things that have a big impact on the work on wellbeing, while they actually do no harm to the economy. But if that’s the case, is highly likely, given that people who feel good about themselves are more productive and less fractious, and less likely to try and pinch, you know, try and blame other people for their problems and so on. That is that something that could be we could do something very exciting. Now, let me give you a very small illustration, my best illustration of this, it’s actually happening now might have happened earlier, if we’d taken this seriously. In hiring, there is a bit of a craze, you can call it a bit of an ounce, maybe one of the best part best outcroppings of the the woke stuff, which I’m not terribly fond of in lots of guises. But here, if you go to an interview, and you don’t, one way of presenting well you’ll tell most people is you, you aren’t afraid to make eye contact, you make the right amount of eye contact. Well, autistic people find that extremely hard. And autistic people can be extremely productive. So your HR people, the people doing interviews need to be aware of this. And if you’re running an organisation that has lots to do with computer programming, statistics, various kinds of management probably pretty much anywhere, people who who are somewhere on the autism spectrum, not wildly over so that they become socially dysfunctional, but people on the autism spectrum can be if you know that and you manage for that you can massively improve their well being you can massively and you can go do yourself on the productivity benefits that this produce. And so that problem I just mentioned is a large problem. It’s not you know, it might it might affect 234 percent of the population. And it’s in some way, I think, another large problem is that carers, older carers, so I get a bit older and my wife looks after me or vice versa, they tend to be socially isolated. Now Australia has got some quite good policies on this. And we have, we were an early innovator in funding people to go round to older people’s houses and make them a cup of tea, have a chat and then move on or put their dinner on and things like that. But there are lots of things we could do to improve the social connection between carers and of carers and their community and so on. So that’s another area. Another area I would argue would be teaching and probably kids on the autism spectrum, teaching and dyslexia. There are all kinds of things that we don’t manage for these things. Well, well, these things massively depressed, the well being of the particular kids with those with who who have those characteristics. So that’s just a bunch of they’re right at the no regrets area. Yeah. And then I’d like to see some real curiosity about what other kinds of things can we do, which have very low, low short term costs and improve well being. Because a lot of those are actually going to be over any reasonable period of time, no regrets measures, they’re going to contribute to GDP, and they’re going to improve well being. But other than our kind of broad sympathy for such things, you don’t see these types of this type of thinking and those types of initiatives being very high up on the agenda. For in in, for instance, just interact Dan’s wellbeing budget. And if you ask the right question, I will then opine on the well being budget. I just feel I need to give you a word in edgewise.

Gene Tunny  45:51

Okay, okay. Well, I do have a, at least one more question. And but yeah, it would be good to talk about just in the well being budget, too. I was gonna ask, I mean, how are you gonna go about this, but without it being? Like, one of the concerns I have about this whole? Let’s try and, you know, I guess governments have a role of, you know, they’ve got to look after the population, but you don’t, you don’t want it to go too far. Because you don’t I mean, in my view, this is my opinion, you don’t want to reduce the capacity of people to look after themselves. I mean, we should be encouraging Self Reliance to an extent. To what extent does this become paternalism? I mean, how do we do this without public servants becoming busy bodies without interfering too much? How do you go about this? That’s what I’m doing. So I’ll

Nicholas Gruen  46:41

give you an example with Yeah, with I mean, I completely agree. I mean, the idea of public servants fixing that problem, you know, with a hub and spoke model with Canberra bureaucrats or Sydney and Melbourne bureaucrats is just take just take me out and kill me now. What Yeah, this sort of thing is an example I chaired a thing called the Australian Centre for Social Innovation and they have a programme called weavers and weavers is an I call it place base. That’s a term that a lot of people understand. And essentially what it does is there’s a little bit of money there and it engages carers it so it sort of is engaging carers in a local community. A particular care might be my get an honorarium for being a weaver and a weaver will be weaving together, we’ll be running some activities, keeping in touch with local carers, etc, etc, etc, just realising that, because of the circumstances they find themselves in, they need a bit of help and resourcing in maintaining social connection. So it has to be and it’s very cheap. And, you know, and also your some of that money will get wasted, and it won’t work very well and others, it will do terrific things. And it can be, it can provide sort of different kinds of sinews for a community. I’ll give you another example. My wife set up an organisation, my wife and a friend of hers set up an organisation in Seymour called I Wish I’d asked, it was based on it began thinking about oral history. And the idea was to connect school kids and people in aged care homes and older people in the community to record our oral histories. But it turned into a much bigger programme than that. And it was, was it conceived of itself as a multi generational, well be a multi generational anti loneliness programme. They didn’t actually use the word well being. But and it was a, it was a fabulous programme. And I’ll let me just give you an example of because it does go to the connectedness of things. And this is something which maybe we’ll talk a bit more about when we when we look at when we talk about this again. But one of the things that people involved in well being boys talking about is the way things are connected up. And I think so many of those connections are serendipitous, that they’re very difficult to manage for but let me tell you that in Seymour, one of the app camps of this was that young boys so they’re 14, they’re going they’re thinking to themselves, I’m going nowhere, probably they’re not that good at school, their inseam or they’re not quite sure, you know, they’re thinking I might just end up unemployed I don’t really want to end up unemployed and they get in they get involved in this programme. Now some of them are gonna think all people don’t want to talk to old people, and they get in their various the programme have various ways of ensuring that these introductions worked out as well as possible Anyway, they start making friends with these old people. And they saw one autistic kid, we saw an old RSL guy. And they, and the autistic kid became very obsessed with the metals that the old guy or the old guy had. And they talked about these metals and the battles that he’d had every week. Now, that was fantastic for both of them. That is, we’ll be back, let me tell you something else that happened, you know that three of seven or eight boys who were about 14, you know, what they decided they wanted to do for a job. They wanted to work in aged care homes. Wow, you don’t think of young 14 year old boys wanting to do that. But because because we’re brought up in silos. Because, you know, this is reintroducing into the community stuff that existed on its own 80 years ago. And I don’t think, well, I don’t think what happened is that these three kids thought, Oh, I’ve always wanted to do tarot, that’s, that’s me to a tee. I think they thought I can do that. And I won’t be unemployed. And I’ll be useful. And I like these people. And I’ll feel useful. And I’ll have a decent life. And we’re sitting around in Canberra worrying about how do we staff our aged care homes?

Gene Tunny  51:24

That’s a great example.

Nicholas Gruen  51:25

Yeah. So you could justify that. But you could justify this programme, which is run, that wouldn’t cost. It doesn’t cost nothing. But it’s run on the smell of an oily rag, you could use it. I mean, one of the things that the institutions, the aged care homes and the schools, I won’t call them resistant to doing this. But some are. And of course, all of them are subjected to strong regulation, which has been put in place for completely other reasons. So safety checks, police checks, insurance. And it’s not that you want to ignore the issues that those that that regulation is trying to address. But you do want to say that this is a valuable thing. And if it’s getting in the way we want to know about it. And then we want to think about the costs and benefits and whether we can do this in a better kind of way. And so it’s those kinds of things that the the well being agenda, could could address, but really only by making stuff happen and then watching the ripples come out and working out where government’s getting in the way where it can help, generally speaking, not with large amounts of money.

Gene Tunny  52:41

Yeah, yeah, I like that. Good ask what we’re seeing more is that a disadvantaged area in Melbourne as it is

Nicholas Gruen  52:48

pretty disadvantaged, it’s the place where the Australian would furphy comes from see more and further for fees, which have now make money selling their name as a beer, and they give that money to charity. And, and I wish I’d asked picked up some of that money. So shout out to Murphy’s. But so so it’s about 120 My best guess out of Melbourne up north, just getting into Kelly country. And yeah, and it’s where a lot of canned fruit came from, and the firt and the further fees made boilers. And a furphy. In the Australian idiom is what soldiers the story soldiers told, I think this was in Gallipoli, sitting around the boiler and having a cup of tea. I think that’s roughly the story. And that’s where Seymour’s very good learn something.

Gene Tunny  53:41

And I was just thinking that shows the importance of connection and, and connections and important part of well being being connected to family or to friends. And, and that’s, and a lot of people would argue that’s what we’ve lost. We’ve got more people living alone. Yeah. And people just aren’t connected generations as generational divide. Yep. So yeah, I think you’re highlighting that that’s a such a great example of highlighting how you can improve well being with something simple. Now, this might this might have to be the last question for this. This part one of this conversation. You talk about these could be cost effective. This could be low cost is this where something like Andrew Lee’s evaluation unit could be an important part of this story and figuring out okay, we’re spending billions of dollars on these big welfare programmes. And you know, that it could be that it’s better, we’re better off spending a small amount of money on little interventions like this. Yeah,

Nicholas Gruen  54:37

yeah. Yeah. Well, one would hope that some nows about evaluation would enable us to get counterfactual snapshots. I wouldn’t want to say let’s do away with welfare, I would want to say welfare costs us an absolute shedload of money. And for a tiny fraction of that money. We could be doing these kinds of things which are broad health benefits and by health I mean in the broadest sense physical, mental, and community and the health of the community. And we could try to be, I won’t use the word rigorous because that conjures up people with clipboards and bureaucrats, and I just and mathematicians and economists, and I’m not talking about that. I’m talking about trying to be trying to be evidence based, trying to work, trying to notice what works, doubling down on what works and just doing less of what’s not working so well. So I think that’s a great place to finish up. We didn’t get to talk about New Zealand’s well being budget and we can certainly fit that into the next exciting episode.

Gene Tunny  55:42

Excellent. Okay, thank you, Nicholas. Fantastic.

Nicholas Gruen  55:45

thanks very much, Gene.

Gene Tunny  55:47

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

56:34

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Credits

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Categories
Podcast episode

A new Monetary Policy tool to end Inflation and avoid Recession w/ Prof. Larry Marsh, Notre Dame – EP184

In this episode of the Economics Explored podcast, host Gene Tunny interviews Professor Larry Marsh about his proposal for a new monetary policy tool that uses a central bank digital currency (CBDC) to end inflation without causing a recession. They also discuss the disconnect between the financial sector and the real economy. Larry Marsh is Professor Emeritus in the Department of Economics at the University of Notre Dame and author of the book “Optimal Money Flow.” 

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

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

What’s covered in EP184

  • What is optimal money flow according to Prof. Marsh? [1:28]
  • What is the role of government in controlling the economy? [6:24]
  • A helicopter drop of money [13:58]
  • What is the idea of a Federal Reserve/central bank digital currency (CBDC)? [18:56]
  • Fractional Reserve Banking [23:08
  • Narrow banking as a solution to the banking sector problems [24:55]
  • A good example of an all-employee owned company: Burns & McDonnell, Kansas City, MO [31:31]
  • What Larry describes as a winner-takes-all economy [34:37
  • The invisible hand of the market [37:43]
  • Gene’s wrap up: How the current monetary policy tightening is causing hardship in many economies, it may well be worth experimenting with a new monetary policy tool [43:47]

Links relevant to the conversation

Larry Marsh’s Optimal Money Flow website:

https://optimal-money-flow.website/

Where you can purchase Larry’s Optimal Money Flow book:

https://www.avila.edu/optimal-money-flow/

AEA conference session in which Larry presented his idea for the new monetary policy tool using a CBDC (presentation available for download):

https://www.aeaweb.org/conference/2023/program/1335

Australian ABC News article referring to Nicholas Gruen’s savings policy proposal mentioned by Gene in the episode:

https://www.abc.net.au/news/2023-02-12/raising-interest-rates-reserve-and-bank-and-inflation-management/101952926

Nicholas’s 1999 paper outlining the policy proposal:

https://lateraleconomics.com.au/wp-content/uploads/2014/02/AvoidingBoomandBust.pdf

Links to videos on China a listener sent me in response to EP182 with Dr Jonathan D T Ward: 

Prepare for Armageddon: China’s warning to the world | 60 Minutes Australia

Two Davids & Goliath | David Matas & David Kilgour | TEDxMünchen

America Just KILLED China’s Tech Industry 

Transcript:
A new Monetary Policy tool to end Inflation and avoid Recession w/ Prof. Larry Marsh, Notre Dame – EP184

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

Gene Tunny  00:06

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. I’m your host Gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning in to the show. In this episode, I chat with Professor Larry Nash about his idea for a new monetary policy tool which uses a central bank digital currency, a cbdc. Larry argues that this new tool could end inflation without causing a recession. Larry is professor emeritus in the Department of Economics at the University of Notre Dame. In the episode, Larry and I also discussed the disconnect he sees between what’s been happening in the financial sector and in what’s often labelled as the real economy or Main Street. Okay, let’s get into the episode. I hope you enjoy my conversation with Professor Larry Marsh. Professor Larry Marsh, welcome to the programme.

Larry Marsh  01:27

Well, thank you, Gene, this is a great honour to be on your programme.

Gene Tunny  01:31

Excellent. Larry, I’m keen to chat with you about your book optimal money flow. And also a proposal that you presented at the American Economic Association meeting earlier this year. Now this is all very topical, given what’s been happening in the US and in Europe, with banks, we’ve got this age old problem of the stability of the banking system that we really haven’t resolved after many centuries. So I think, I think your book and your work looking at the role of money, the role of credit in the economy, I think that’s, I think that’s highly relevant. So to begin with, Larry, could I ask you about your book, optimal money flow? What do you mean by optimal money flow? And what’s your argument in that book, please?

Larry Marsh  02:28

Well, it’s primarily about the role of government in our economy, and that there’s, in order to have a efficiently running free market economy, government plays a critical role in certain realms where they need to be able to match the marginal cost with marginal benefits. And so you got some that are fairly obvious negative externalities, water pollution, air pollution, positive externalities, where you can talk about a vaccine for a highly contagious disease. So if it was not contagious, and it would be up to the individual to pay for the whole thing. But if it’s a contagious disease, then there’s a common property resource aspect to it. And so you have also you have public goods, and then you have things like highways and so forth. But there’s there’s a lot of areas that people have neglected and not fully recognised. Then I do get into the book into the role of the Federal Reserve, and propose a new policy tool to the bigger the fundamental problem is the the financial markets have become more and more separated from the real economy. No, my father was a Wall Street investment banker. So I learned as a little boy, how the markets worked, and how to invest the money and all of that. But the thing is that the real economy, the GDP has been growing on average, over the decades, about 3% In recent decades, whereas the stock market has been growing by 10%. There’s over three times as much. Well, how can it be that these financial markets are growing so much faster than the real economy? And part of it is the back in 1996? I believe it was that our Federal Reserve Chairman, Alan Greenspan, was talking about irrational exuberance. He said, All these people are pouring money into these financial markets and but then instead of doing something about it, he contributed to this and then other fed chairs and fed boards have contributed to pumping money into the financial markets, whatever they thought the economy was a little bit on the weak side. So part of the problem is that so much money has been diverted, from the real economy, from employees and so forth, that they can no longer afford to buy back the value of the goods and service that they’re producing. And so they go up to their eyeballs in debt they get the private debt is just mushrooms tremendously. So there was this large buildup of private debt as more and more money went into the stockpile. And then I kind of discovered this personally, when I invested in a company and kind of forgot about it, and later discovered that I got a 7,000% return on my investment. I thought, wow, I thought why deserve a decent return, but not 7,000%. You know, I thought free free markets and free enterprise is all about incentives and giving people incentives. So hard work pays off, but not for the person doing the hard work hard work, hard work pays off for the shareholder. And so you really want to see people like Steve Jobs at Apple Computer, you know, when he created Apple Computer to get rewarded strongly, all the hard working employees, the company that I had invested in was Adobe. And they were very creative, and imaginative people, but, but I was getting all this money. And what did I do all 84% of the stock market is owned by the 10% richest people. And when you get a certain amount of money, it gets to the point where you’re not quite sure what to do with it, you can only wear one pair of shoes at a time or buy one car at a time, you may have a couple of summer cottages and you know, maybe you have three or four cars. But after a while it gets to be a burden to deal with all these things. And so you basically just find that you have to invest the money somewhere. I mean, you couldn’t just take it home and stuff in your mattress. So it makes sense to reward entrepreneurs and creative people. But because the stock market has been ballooned by so much money going into it, and then Chris Leonard wrote the book, The Lords of easy money about how the Federal Reserve was pumping money. And then Karen Petroff, has written the book the engine of inequality, about how the Fed is pumped so much money into the give the money to the wealthy people through the financial markets, and then trickle down with the idea that it would trickle down to the real economy. And unfortunately, doesn’t trickle down all that well. And it just builds up and the markets just growing up, up and up without the money. And it’s gotten so bad that non financial firms have discovered that they can actually make more money investing in the stock markets and investing in their own business. So instead of creating new products, or enhancing the products already have or improving their productivity, they say, Hey, we can take this money and put it into the stock market and get a better return than just investing in your own business. And this is really hurt productivity in America and in other developed countries as well. And money flows from around the world into New York financial markets. And sometimes it’s detracts from real investment in the real economy. And so, in retrospect, I think maybe I should have bought my book distorted money flow, or money flow. You know, I was trying to say where we should be going. But I probably should have spent more time laying out where we are, and what what needs to be done than just laying out an optimal world as to what the role of government should be in that in that situation.

Gene Tunny  08:06

Okay. So Larry, in your view, what does need to be done? Well,

Larry Marsh  08:11

as far as the Federal Reserve is concerned, I think it’s very important to recognise that there’s two tools that one could use in controlling the economy. The tool that the Federal Reserve uses exclusively is the cost of borrowing tool. But there’s also a return on savings tool, which the Federal Reserve has ignored. Well, of course, part of the reason it’s ignored it because it hasn’t been authorised by Congress to make use. So I can’t really blame Jay Powell and the others in the Federal Reserve Board for not using a tool that they have been authorised to use. But I talked about this in the book, and why they need to have accounts for everyone with a social security number in the United States would get an account with the federal government. And these could be interpreted as part of a central bank, digital currency, to be a true central bank digital currency, you would have to allow anybody in the world, say somebody in India or Australia, who had US dollars, to set up an account with the US Federal Reserve Bank. And so if anybody anywhere in the world could could set up an account, and then transfer money in and out of their account that account when in fact be a digital currency. That’s the kind of the idea behind digital currencies. Now you the alternatives is have a coin based or per token type base, like Bitcoin, but then you would be supporting money laundering and a lot of legal activities. So one of the ideas I had to protect people’s privacy was to have two separate files. So transactions file, where you keep track of all the transactions that take place, and then a personal identification file. There may be a few transactions that need to go on the personal identification file because it’s becomes too obvious who the person is. But basically, you want to have a situation where government agency, government authorities can look through the transaction file all they want. If they find something that looks suspicious, that looks like criminal behaviour, then they go to a judge and get the authorization to access the Personal Identification file. So this would hopefully satisfy some conservatives that were concerned about the government having too much oversight or control over their accounts and what they were doing and so called spying on them. I personally knew that I’m happy to have the government spy on me as long as I can spy on the government, but you know, happy to have the police spy on me as I can, I can spy on the police. So I don’t have a problem with with the privacy issue, but some people do. And so I did propose that as part of this idea. The other idea is to use these accounts, so that you could intervene directly into the real economy, and not have to go through the financial economy. And so if you were able to offer say, if they have a six or 7% inflation, if you’re able to offer 10%, return the 10% savings interest rate, then this, this would target the marginal saver where you don’t know it’s only on the first say $10,000. Or you can even limit it to 5000, you want to target the marginal saver not the wealthy who are just moving their money around, not the poorest of the poor that can afford to save anything. But the marginal saver who’s probably making about 50,000 US dollars a year and could be saving more. Because the whole problem with inflation is you’ve got too much money chasing too few goods, the demand is too strong and the supply is too weak. The problem with the way the Federal Reserve does it now is when they raise the cost of borrowing. Yeah, they do raise the cost of items that require getting a loan, for example, automobiles or housing. But it doesn’t affect the items that don’t require getting a loan. So you’re really just shifting the inflation from the items that require loan to items that don’t require a loan. But where the Fed is able to be effective is through the supply side. Because there’s a lot of businesses that have to borrow. Some are retail businesses that operate in the red most of the year until they get to the holiday season, where they cover their costs and make a profit is farms that may operate some marginal fields where they have to put a lot of money in in the spring, and they don’t get any money until harvest time. So there’s all sorts of businesses that have to pay for their inputs before they ultimately work to the point where they have outputs to sell and get the money. So if you raise the cost of borrowing, this, this puts the brakes on to some degree, it means that the these businesses cut back hours layoff workers and close outlets. And this ultimately suppresses demand because the workers aren’t getting the money, and you can’t spend money you don’t have. Yeah, so ultimately, that’s what slams on the brakes, and causes us to suppress the inflation, but it does so at a great risk of having a recession. Whereas if you offered the 10% on savings, and targeted the marginal saver, and of course, prices are set on the margin, not on the average. So it’s actually the marginal saver that sets the prices and determines the inflation or not. And in times of recession, you can inject money directly into these accounts, the central bank digital currency accounts for everyone with a social security number within the United States. Now, you can offer the 10% savings on the first say $10,000, but only for those that had a social security number. So if you’re in Australia, you wouldn’t get the 10% return on the money in the accounts because you didn’t have the social security number, your social media, because the US would be targeting its own country, you know, the US in terms of inflation or recession? And then presumably, Australia would have its own central bank digital currency could do something similar. In that respect. Yeah,

Gene Tunny  13:58

that it makes the so called helicopter drop of money a bit easier what it is, that’s essentially what it is you’re injecting an additional 10% into all of these accounts in the States.

Larry Marsh  14:10

Yeah, there’ll be different ways of doing this. So if you’re trying to fight inflation, you offer 10%. But if you’re trying to stimulate the economy, you can inject money directly, and just put it in the people’s accounts say, okay, and which, which they’ve done to George W. Bush, they did, they did inject money, you know, gave people the money. So there’s certainly a more direct way of doing it, then doing it through the financial markets during trying to trying to control the real economy through the financial markets, which has not been working very well.

Gene Tunny  14:38

Well, and it certainly, I mean, people are asking a lot of questions about I’ve noticed that so that, I don’t know if you saw the interview that Jon Stewart had with Larry Summers, and I mean, he absolutely ripped apart Larry Summers it was it was quite extraordinary. And it just shows the popular. Just how the Federal Reserve’s going about it. monetary policy, it’s difficult for it to explain and it’s difficult for the, for it to convey to the public why it needs to do this. And you may have seen the other exchange that was at some of the senators with Jay Powell, and he was trying, they were trying to get him to say that he was, you know, he basically wanted unemployment to go up to slow inflation. So it’s a very, it’s very difficult for the central banks to explain what they’re doing. And perhaps Yeah, this could be another tool for them. But Larry could ask about the feasibility of this, what do we know about the responsiveness of savings to interest rate changes to the returns on saving? Well, that’s

Larry Marsh  15:39

a good question. And this, I would agree that I am not very precise on this. And so we would have to do some experimenting to find out what level of interest rate may work. Now we know that when things get too extreme, people will respond. So we know for example, when inflation starts getting faster and faster, people will start spending money faster and faster. And then sometimes they’ll get their paycheck, and they need to spend it within hours in Zimbabwe or, or Venezuela, where you get this horrendous inflation. So we know that people do ultimately respond to financial incentives. It’s just a question of how extreme you have to go. And so we would experiment I’ve said 10%, right off the top of my head without any empirical evidence to support it. So I would be the first one to admit or to agree that there needs to be a great deal of econometric research to determine what the appropriate levels would be, and how effective they would be.

Gene Tunny  16:37

Yeah, yeah, I had to look at what the literature says, doesn’t mean people. consumption spending will be influenced by in savings will be influenced by the way, those interest rates to an extent, but then they’re influenced heavily by your, your level of income. So I might have a look, I might do some digging myself. It’s an interesting proposal, for sure. Can I ask you about the Postal Service? Yes. Can you tell us that story, please.

Larry Marsh  17:09

So I talked about using a central bank digital currency to influence the problem and inflation or the problem where the recession, but one could also do it through the postal bank accounts, which we used to have in the United States under the postal banking act of 1910. So for over 50 years, when I was young, over 50 years, people could go to their local any post office and cast a check or set up a savings account. And Canada also did this. And we continued until 1966, when they terminated this postal savings accounts. And Canada went for a couple more years, and they terminated theirs in 1968. But Canada now in 2022, has reinstituted the postal banking, they they’re focused somewhat on concern for the disadvantaged to get into an automobile accident or a medical emergency or the rent goes up and they go to pawn shops or payday loans, and they get exploited where they they get deep into debt and then can’t get out of debt. So there’s been some political concern for these people in the in the United States with the end in Canada, as to how you could make loans available at a reasonable interest rate small loans, and Canada has now started their their postal banking back and are making these loans available to people who are in a tight situation and don’t have much income and need need some help with the over the short term without having an exorbitant interest rates.

Gene Tunny  18:56

Rod. Okay. So with your your proposal, you’re proposing that people could have accounts, essentially with the Federal Reserve, so you have this CB DC, does that do away with the need to have a bank account or to deposit money into? I don’t know what’s what the I mean, what are the banks had put money in in the states would have been Chase Manhattan? It was at an investment bank. I’m just thinking in Australia,

Larry Marsh  19:27

Bank of America, Bank of America an example. Okay, yeah. So this is a very interesting gene, because there’s been a lot of people have been raising questions about this, and saying, well, maybe there’s a better way to do it. And I would agree that it’d be interesting to have intermediaries to access your fat account so that the referring to it as the Fed account in the central bank, digital currency, United States is the Fed account. And so you could go through your regular bank and they would be paid a fee for allowing you access to your central bank digital currency. So it might be that instead of by going directly to the Fed, you would be operating through PayPal Venmo, you know, digital wallets. And part of the idea behind that is the feeling that the private sector has a tendency more creative than to come up with other financial tools and things that are valuable to consumers. And so rather than trying to exclude the private sector, from the central bank, digital currency, we might even pay them to help carry out some of the work and, and the the access by individuals and, and how to access their account and how to use their financial situation more efficiently in this context.

Gene Tunny  20:45

Yeah, yeah, there may be some benefits in that rather than having the central bank having to manage all of that. So yeah, I can see the logic in that. Larry can ask you about the banking system. So one of the things I’ve talked about in a previous episode, is this idea of narrow banking, which has been one of the proposals to address this fundamental problem that we’ve got with banks that rely on deposits. There’s this mismatch in the the maturities of their assets and liabilities. Have you done any thinking on this? What was called the Chicago Plan, this narrow banking concept? And is that a way that some of these problems could be solved? Could it fit into your framework? Could you tell us about that, please?

Larry Marsh  21:36

Yeah, people don’t realise that. Over 90% of the money in the United States is actually not created by by the Federal Reserve is created by banking system, that that people sometimes have the mistaken belief, and it’ll be called the loanable funds theory that you put money in the bank and the bank loans that money out? Well, that’s not what’s happening. Then other people think, okay, I put $1,000 in the bank, and the bank leaves $100 And they loan out $900? Well, no, that’s not the way it works. either. You put $1,000 in the bank, let’s say you put a 10 $100 bills, okay, so that’s, that’s real money, or whatever you want to call it. And then the bank would that $1,000 can then create $9,000 out of thin air. That because then that, that 1000 is 10%, which is the wonder the quote, so called fractional reserve banking, but it really the the term fractional reserve banking is a little bit misleading. It should be called Creative creation, banking, or something like that. But so part of the problem is that you are, as you point out, if you’re allowing people or banks to create all this money out of thin air, just on the basis of deposits, especially checking deposits or deposits, that can be withdrawn almost immediately, then that makes for a very shaky situation. And not only does it make it for a shaky situation for individual bank that might get into trouble as we’ve seen. But it also creates a situation where when, when the economy is doing well, the economy starts expanding and really looking great, then these banks have a tendency to make lots and lots of loans, because they have all these excess reserves, so they can they exacerbate the situation so that the irrational exuberance carries over into the loan market. And it’s become even worse now that they can securitize these loans. So it used to be that the local banker was very careful in making loans that be pretty certain things would be, and they would know about local conditions, much better than any one out any other banks or outside the local area. And so but nowadays, they can securitize the loans, they can make a loan. And it’s a little bit shaky. Yeah, what the heck, I’ll just sell it off to the markets. And so this securitization has made it even more shaky. And then when the economy starts to slow, or when they think, for example, that the Federal Reserve is trying to slow the economy and might push us into a recession, then they say, Oh, we better cut back on our loans. So they cut back. And that makes things even worse, and especially during an inflation, the banks don’t want your money, when they think the economy is going to be slowing. Because they don’t, they’re not going to use it. And they just have to pay you some interest rate. They’d like to set the savings rate at zero at that point that would freak everyone out. So they’re not going to do that. But they really don’t have use for your money. And but you’re putting money in the bank that just causes them a liability of having to pay you on your account for money they don’t need and don’t want. So that’s why it’s necessary for the government to step in and offer say 10% on savings in order to slow inflation those times because the banks aren’t going to do it.

Gene Tunny  24:55

Okay, and I mean with this. So with narrow banking do Do you think there’s merit in that concept?

Larry Marsh  25:02

Yeah, I think there’s some merit in that, because you could limit it to a savings account. So in other words, don’t allow checking to serve as the basis, but you could use any discounts or you could use certificates of deposit, they’re even more solid. Because you can’t withdraw that is readily. So yeah, you could do narrow banking, where you focused on savings accounts and certificates of deposit and not on checking accounts. So that would certainly reduce the irrational exuberance, if you say, you know, the, the generating getting too far out on the limb for the individual banks and, and exacerbating the problems of the economy, for the the banking system as a whole contributing to problems and for the economy. And so, you know, there are definitely both individual bank problems, and the economy wide problems that come about through this fractious so called fractional reserve banking, which I which, as I said, really should be called very credit creation banking. Yeah. And then narrow banking would help reduce these problems, both for the individual banks and also economy wide. So now banking would certainly be better than what we’re doing now.

Gene Tunny  26:17

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

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Gene Tunny  26:52

Now back to the show. I wanted to ask you, how was your your presentation at the AAA meeting receive Laurie was it was a positive reception?

Larry Marsh  27:08

Well, I think so now, my discussing. You know, there’s an old joke, I don’t know if you know this, the difference between a British discussion and an American discussing the British discuss it, we will say a few nice things about your work and then proceed to tear it to shreds. The American discussion will summarise your work, and then proceed to spend the rest of the time talking about their own research. But but so my discussion did point out, which I think is perfectly legitimate to do so that if you want something to serve as as purely a medium of exchange, you shouldn’t introduce the interest rate, either positive or negative interest rate, you should just make $1 be $1. And you don’t gain anything, you don’t lose anything. It’s just like the dollar bill in your pocket. A US dollar bill in your pocket. So he felt that to be a medium of exchange, you wouldn’t. And I can say well, okay, but then we could do that through the post office as I’ve, as an alternative, instead of saying, well, your central bank, digital currency will earn you 10% interest, I can say, okay, an account with the post office loan you 10% interest, so we can do it in a separate way. So I did run into the idea that maybe there’s different objectives. And you may want to have a central bank digital currency that doesn’t get you involved in the offering the return on savings and do that through the post office instead. Now that’s a possibility.

Gene Tunny  28:41

Rod. Okay. I’ll have to check whether the discussing prepared any remarks or or a PowerPoint, just to see what they are. They’re driving it there. Right. Okay. Larry, you mentioned about the just this disconnect, or this apparent disconnect between what’s been happening in the real economy. So what’s been happening with GDP, and then what’s been happening in the stock market, and then you talked about the disproportionate returns. Do you have any thoughts on what needs to be done there? Do you have any proposals there? I mean, yes. You mentioned the Federal Reserve’s probably

Larry Marsh  29:20

there’s interesting problem in that. Right now. The way our corporate boards work, is the CEOs tend to get other CEOs on their board. So it’s basically the CEO and his golf buddies or their corporate board. And so I’m on your board and you’re on my board and I maximise your compensation, you maximise my compensation, and we’re all concerned with the short term share price. But the problem is, you want an innovative economy, you want a board that’s really knows what’s going on in the company, and the CEO basically gives the board all these reports about what a great job the CEO is doing, you know. And really, you want representation from product development, you want representation. From sales, you want representation from marketing, you want representation from distribution you want to get. So Germany has come up with an approach where they require a certain proportion of the corporate board be elected directly from the rank and file employees. And this gives representation of what’s actually going on in the company. And not some hypothetical theoretical stuff that the CEO comes up with to show the corporate boy, what a great job they’re doing. And so this problem is that the maximising of shareholder value has diverted the attention to the short term share price. And an example of this would be Apple Computer, Apple Inc, as it’s now known for Steve Jobs is a very creative, innovative guy who came up with all these great ideas and then this, and then John Sculley came along and said, You know what, Steve, you need a professional manager, you need someone that knows how to maximise the margin and get the profits up, and let’s get our share price up. And so John Sculley came along and kind of pushed Steve Jobs aside, and took over. And then after a while, they became to realise that Apple was losing his competitive advantage against his Microsoft and other companies. And they said, no, no, no, we need to get Steve Jobs back in here. Because you’ve gotten off on the wrong track, you’re no longer focused on the customer, you’re no longer focused on innovation, creativity. And so we need a system. And I found out here in Kansas City, there’s a company called Burns and McDonnell, and a former CEO of burns. McDonald just wrote a book called create amazing. And what it is burns in McDonald’s started as a small construction company in Kansas City, then it grew to a nationwide us wide construction or an engineering company. And now it’s a worldwide engineering company. Well, it turns out that Burns and McDonnell is all employee owns, when you retire, you have to sell your shares and get the money, but only the employees own the company. So you This is recognising the agency of employees, employees are not just another factor and put like steel or glass or plastic, these these people have agency. And when they work together, and they say, Okay, we benefit when the company benefits. So it’s not just that individuals are motivated, because they’re gonna benefit as an individual, but because their teammates need to do their job. So it’s like being on a football team or you know, on any sort of athletic team, that it’s not just you’re doing your job, you got to be on the case of your compatriots, your colleagues to do their job. And so this is really we’re talking about free enterprise, you talked about incentives, the proper incentive structure, and getting employees involved in the corporate operation, and getting them rewarded for their involvement in the proper operation. Instead of giving that 7,000% return to you know, that Adobe, I invested in Adobe and got that 7,000% return while I was a deadbeat, I’d forgotten that invest in the company. I was like getting this money, please creative entrepreneurs, these these employees, these hard working people that create this new software, they should get the money, not me, I should get some return on my investment, but not 7,000%. That was just too much.

Gene Tunny  33:22

Well, yes, I mean, well, Dan Mitchell, I don’t know if you know, Dan, at all, but Dan is former Cato Institute, on his on his website, he often links to, I think you can make voluntary donations to the US Treasury. But now he puts that as a bit of a joke. I don’t think anyone would like to do that. But what I would like to ask you about Larry is if there are these outsized returns, or returns that people really, you know, they may not have needed those returns to have actually inspired them or induce them to invest or to save or invest? Do you see any role for tax policy? Do you see any tax policy changes? Would they be desirable in the US?

Larry Marsh  34:05

Well, that’s a good question. I was actually inspired and reading my book by a book by George Cooper was recently called Money, bloody revolution. And later, he really issued it as sort of a second round revised edition called fixing economics. And he points out and I remember the chair of the economics department, Sherwin Rosen back in 1981, I believe was wrote an article in American Economic Review called superstars. And he’s basically pointed out and George Cooper picked up on this idea that this there tends to be a winner take all approach in our economy and you know, athletics, it’s pretty obvious entertainment is pretty obvious, but it’s also obvious. I’m trying to think about an Amazon I think the average pay was something like 33 $1,000 That year, and the new CEO, I’m trying to remember his name is now getting $214 million a year. I mean, you know, the question is, you know, is this is this the free enterprise system? But no, and the the interesting book by Steven Clifford called the CEO pay machine. Steven Clifford was on these boards. And he came to realise that this was not free market that competing to get the most capable CEO. This was a rigged system, where the CEOs maximise each other’s compensation. And so, you know, when we talk about free enterprise and incentives, we need to be realistic about what we’re talking about. And not imagine a hypothetical world, a theoretical world where there’s full information and one of the things I talked about in my book is that economics is based on rational independent decision makers. When we’re talking about rational expectations and all this rational list and rational down that on average, people should be rational. And then Dan Ariely wrote the book, predictably irrational, but not only are people irrational, but they’re predictably irrational, why is taken out now, of course, the field of behavioural economics and economics has come about to explore some of these possibilities that people are irrational and predictably irrational. But why it took economists so long to figure this out. But the people in marketing have understood this and exploited this for hundreds of years. To kind of uncivil very slow and facing the reality that we don’t have this perfect information, perfect efficiency in the markets don’t solve all of our problems, we need to be realistic about what the markets can do and what they can’t do. And they work very well, for goods and services up to a point, although in reality, Adam Smith, really there was really two invisible hands, people, people talk about the first invisible hands were businesses compete with one another, to produce better quality products at lower prices. But Adam Smith implicitly had a second invisible hand, and in his second invisible hand, is that businesses conspire with one another against the public to raise prices. So you have the second invisible hand of market power, you have the first play of a competition, but then the second invisible hand of market power, and these invisible hands are in constant struggle with each other. And it’s government it has to be has to play a role in making sure that the invisible hand of competition wins out, and that the head of market power doesn’t corrupt and undermine the system.

Gene Tunny  37:43

Raw and okay, I’ll have to look back. I know that there are I know that famous passage in Adam Smith about how seldom do men have the same trade gather together? And the the conversation does not eventually get on to some conspiracy to fix prices or something like that. Exactly. That’s exactly, yeah. But did he was he? Was he suggesting that was another invisible hand? Was he did he do that explicitly? I’ll ask well, I

Larry Marsh  38:09

don’t think he did that explicitly. No, no. So I’m basically proposing that, you know, but I think others may have proposed that as well. So say there’s really two invisible hands.

Gene Tunny  38:17

Gotcha, gotcha. Because he did actually talk about the invisible hand of the market or the price mechanism. And then your suggested or and others have suggested that there could be this other invisible hand. That’s that’s an interesting concept. But yet he certainly he was, he was concerned about market power. I like that example of what was it Burns and McDonnell. City. So to look at that, it is challenging to find, I mean, I know there are examples of these of a worker cooperatives or cooperatives more generally, in the world, and either asset, some successful examples, but they’re, they’re often special circumstances, or it can be something that’s hard to get, right. But that’s it sounds like they’re doing something right. Or they’ve got a very good culture, they’re in their business that enables them to be successful, and then how to look on their website looks like they’re doing all sorts of incredible things in aerospace and in, in clean energy, etc. So I’ll put a link in the show notes to that operation. Okay. Couple more things. Larry, there was a proposal in Australia here from an economist, Dr. Nicholas grew and which, when you were talking about your, your idea of these accounts with the Fed, and then you could use, you could use this borrowing rate to encourage saving and that can pull you know, that means that there’s less money chasing those few goods and that can pull back on inflation. There was an idea from an economist to Dr. Nicholas grew and he was suggesting that in Australia, we could use the there’s a compulsory superannuation system so what you could do is If there is a inflationary time, you could require more contributions into that. So that’s another. That’s another concept. I don’t know whether you’ve seen that idea at all whether you have any reactions to that. I know I

Larry Marsh  40:14

need to understand that a little better. Okay, I’ll might I

Gene Tunny  40:17

might send on a link to the to that that idea, because probably should have given you a heads up on that.

Larry Marsh  40:25

Very interesting. I’d like to look at that. Yes, absolutely.

Gene Tunny  40:28

Yeah. So because there’s a bit of discussion about this in Australia at the moment, too, because these interest rate increases are starting to affect households. And I think unlike in the US, the large majority of you know, people who borrowed for Home Loans here in Australia, mortgage holders, they’re, they’re on variable rates. So they’re really affected when those interest rates change when they increase and so there are people who are now paying $1,000 or more a month, on their, on their home loans. And that’s really starting to affect budgets. Okay, Larry, before we wrap up any final thoughts on optimal money flow, or how we can make things better?

Larry Marsh  41:16

Well, let me first just say that if one purchases Apple mindset, or directly to Apple University Press, then all $24.95 goes to student scholarships, I pay for the production of the book and the mailing of the book. On the other hand, if you’d prefer to listen to Apple money flow for free, Bupa digital.com, is used by many public libraries. And it’s actually better in my average humble opinion than Libby or some of the other ones where they where the public library just gets a couple of copies of an e book or, or an audio book, where and then then you have to go through a hold period to wait until one becomes available. But in hoopla digital, it’s a rental system. And if 20 People suddenly want this book, big, all 20 Again, so there’s no hold period. So it’s free to listen to through your public library, or your Public Library’s paying for it, and you’re paying for it in your taxes, which is important. And that’s something I also wanted to point out was the public libraries. And public education in general is so important, because our most valuable resources are people. And too often, conservatives overlook the important role that government plays in making sure that we get or as close to equal opportunity as we can. Because they say the most important decision you make in your life is your choice of parents, you want to choose rich, well executed parents, well, you haven’t been able to do that, then the public library and our public education system is designed to give you a fighting chance. So I think that we need to recognise how important it is to make sure that all children and I like to say I think the solution to crime in the inner cities is college, get these kids out of that crime laden area and get them into college, we have a number of colleges now, because of the low birth rates and the fewer people coming to college, who are really trying to help get scholarships, funding for disadvantaged students, and get them out of those prime laden inner cities and get them into nursing, accounting, chemical engineering, anything other than shooting it out in the inner city. So, you know, I like to say the solution to crime is college.

Gene Tunny  43:41

Yeah, yeah. Yeah, absolutely. I think education is incredibly important. Okay. Yeah. First, Larry Marsh, thanks so much for your time, I really enjoyed talking about optimal money flow and learning about your proposals. So I thought that was great. And yeah, really found some of those examples. Valuable, though, particularly burns. And McDonnell, I’ll look into that a bit, a bit more. And you gave some good references there, this idea of the co pay machine, that’s something that I find I’m interested in looking at a bit more, because there’s definitely the potential for co pay to get out of proportion to what is optimal, given there is that principal agent problem in companies? So the fact that the people who run the company are acting as agents of the principals who are the shareholders and so yeah, that’s that’s certainly a problem. Yeah, very good.

Larry Marsh  44:52

If I could mention another book by Lynn stout called the shareholder value myth. And so she’s actually a I’m lawyer who has really investigated this whole concept of shareholder value, and found that there’s a lot of flaws in the way this shareholder value concept has been presented. And she really explains that well, and it’s worth looking at the shareholder value event. So I know your guests probably don’t spend all that time promoting other people’s books. But I found so many books that are so valuable. And I mentioned the Greg graves book create amazing another, which is also on hoopla digital. So it’s easy to access to your public library.

Gene Tunny  45:35

Very good. I’ll definitely put a link to to your book, Larry, and to optimal money flow and also to your AAA presentation, which I thought was was was great. Yeah, lots of lots of good illustrations in it. So well done on that. Very good. Well, Larry, I’m pleased that things are getting warmer there. For you in in Kansas City. And thanks so much for your time. Really appreciate it.

Larry Marsh  46:06

Ron Frank Eugene, you have a wonderful podcast. I was very excited when I’ve learned about it. And you’ve covered some wonderful topics. I’ve been going through your podcasts and learning a lot from your guests. So I encourage people to check out your podcasts and take advantage of all their wonderful information that you’re making available.

Gene Tunny  46:26

Excellent. Thanks. Thanks, Larry. And yeah, have a great day. And I’ll see who knows, maybe I’ll chat with you again soon. Really appreciate it.

Larry Marsh  46:35

We’re okay, great, thanks to.

Gene Tunny  46:41

Okay, have you found that informative and enjoyable? Given all the hardship that the current monetary policy tightening is causing in many economies, it may well be worth experimenting with a new monetary policy tool along the lines suggested by Larry. As I noted in my conversation with him, I’m unsure just how responsive household savings will be to the interest rates on cbdc accounts. But I’d be interested in seeing the results of a pilot study of the concept. That said, I know concerns have been expressed about CBDCs by many people, including libertarians and crypto advocates. For instance, there’s a concern that a cbdc could allow central banks and governments greater control over our lives. I probably need a full episode to explore the pros and cons of cbdc. So I’ll aim to do that in the future. I should note here that a previous guest of the podcast, Nicholas grown an Australian economist that I’ve worked with from time to time, he’s previously proposed that the RBA provides digital bank accounts for Australian so a proposal similar to what Larry is proposing for the US. He’s also offered his own interesting alternative to conventional monetary policy. And this is something that the ABC journalist Gareth Hutchins is written up in a recent story of his and I mentioned that to, to Larry, in my conversation, so I’ll put a link in the show notes to that ABC article. In a 1999 paper for the Business Council of Australia. Nicholas proposed very in the superannuation contribution rate. So that acts as a counter cyclical macro economic policy instrument. I’ll link to that paper in the show notes, and I might try to get Nicholas back onto the show to discuss the idea with me. Overall, I’m not sure about the feasibility, economic and political of various alternatives to the existing monetary policy approach to fight inflation. But given the downsides of the existing approach, I’m open to exploring and testing alternatives. Okay, I’d be interested in your thoughts on this episode. For instance, Are you positive or negative about CBDCs? What do you think? And what do you think about employee owned companies such as burns, and McDonnell and Kansas City? Can they work? Have you seen any good examples of them? Please send me an email with your thoughts, you can reach me via contact at economics explore.com. Recently, I’ve had a listener send me links to several videos on China after he listened to my recent conversation with Dr. Jonathan DT ward. Those videos included some rather troubling evidence which would support Dr. Ward’s arguments. So I’m very grateful to that listener for having sent links to those videos because they’re forcing me to think more deeply about the West’s relationship with China. I’ll include the links in the show notes. Finally, if you enjoyed what Larry had to say this episode, please consider getting a copy of his 2021 book optimal money flow, also linked to in the show notes. Thanks for listening. Right Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com or Smile via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting outlets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.

50:34

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Credits

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Podcast episode

Aussie Conference of Economists wrap-up w/ Leonora Risse & Cameron Murray – EP148

While in Hobart, Tasmania for the 2022 Australian Conference of Economists, show host Gene Tunny caught up with Dr Leonora Risse and Dr Cameron Murray to reflect on the big economic issues covered at the conference. The Conference was framed in the context of adjusting to the so-called new normal. It dealt with issues such as government wellbeing budgets, the housing affordability crisis, the pandemic, and nowcasting, among others. Hear from Gene, Leonora, and Cameron regarding conference highlights and takeaways, including the risk of unintended consequences of government policy interventions.

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

About this episode’s guests – Leonora Risse & Cameron Murray

Dr Leonora Risse is an economist who specialises in gender equality. She is a Research Fellow with the Women’s Leadership Institute Australia, and recently spent time in residence at Harvard University as a Research Fellow with the Women and Public Policy Program. Leonora is a co-founder of the Women in Economics Network (WEN) in Australia and currently serves as the WEN National Chair. Leonora earned her PhD in Economics from the University of Queensland, and previously served as a Senior Research Economist for the Australian Government Productivity Commission. She is currently appointed as a Senior Lecturer in Economics at RMIT University in Melbourne, Australia. Her Twitter handle is @leonora_risse. 

Dr Cameron Murray is Post-Doctoral Research Fellow in the Henry Halloran Trust at The University of Sydney. Cameron has taught a number of courses including UQ’s MBA economics course, macroeconomics, globalisation and economic development, and managerial economics. He writes for MacroBusiness, IDEA economics and Evonomics. Cameron has a PhD from the University of Queensland on the economics of corruption. He hosts the podcast Fresh Economic Thinking and his Twitter handle is ‎@DrCameronMurray.  

Links relevant to the conversation

Greta’s articles at the Lowy Institute Interpreter:

https://www.lowyinstitute.org/the-interpreter/contributors/articles/greta-nabbs-keller

Greta’s articles at ASPI’s the Strategist:

https://www.aspistrategist.org.au/author/greta-nabbs-keller/

Greta’s conversation article on Australia’s relationship with South East Asia:

https://theconversation.com/how-well-has-the-morrison-government-handled-relations-with-southeast-asia-181958

Background reading on China and Taiwan:

https://www.cfr.org/blog/what-xi-jinpings-major-speech-means-taiwan

https://www.brookings.edu/on-the-record/understanding-beijings-motives-regarding-taiwan-and-americas-role/

Transcript: Aussie Conference of Economists wrap-up w/ Leonora Risse & Cameron Murray – EP148

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

Gene Tunny  00:01

Coming up on Economics Explored.

Leonora Risse  00:04

I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel-good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation.

Gene Tunny  00:17

Welcome to the Economics Explored podcast, a frank and fearless exploration of important economic issues. 

I’m your host, Gene Tunny. I’m a professional economist based in Brisbane, Australia, and I’m a former Australian Treasury official. This is episode 148 on the 2022 Australian Conference of Economists, or ACE as we call it. The conference was held on 11th to 13th July in Hobart, Tasmania. 

In this episode, I reflect on the highlights of ACE with my colleagues, Dr. Leonora Reese, and Dr. Cameron Murray, who I was lucky enough to catch up with at the conference. 

Leonora is the chair of the women in Economics Network, and she’s a senior lecturer at RMIT, the Royal Melbourne Institute of Technology. This is Leonora’s third appearance on the program. 

Cameron Murray, however, is appearing on the program for the first time, and I’m delighted that he agreed to share his thoughts on the conference with me. Cameron is postdoctoral research fellow in the Henry Halloran Trust at the University of Sydney. 

One of the big takeaways for me from the conference was the risk of unintended consequences from government policy interventions. And I give some examples of those in this episode. 

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

Right oh, now for my conversations with Leonora, who’s on first, and Cameron who’s on second on ACE 2022. 

Thanks to my audio engineer, Josh Crotts for his assistance in producing this episode. I hope you enjoy it. 

Leonora, good to be chatting with you again.

Leonora Risse  02:00

Thanks, Gene for having me. 

Gene Tunny  02:02

Oh, it’s good to catch up here at the conference in Hobart. So, how have you found the conference so far?

Leonora Risse  02:10

It’s great to be back in person. This is the first Annual Conference of Economists in Australia since the pandemic. So, it’s wonderful to be surrounded by people again, seeing people face to face, hearing the latest research. In some ways, it feels like time hasn’t really passed. You know, we’re seeing everyone again. And there’s some great research that’s really timely reflecting on COVID. But also thinking about climate change, politics, immigration, the labor force, So, many highly topical issues are being covered.

Gene Tunny  02:49

Absolutely. And we just had this amazing presentation via Zoom last because he couldn’t make it by Martin Wolf, one of the editors at the Financial Times. And he was talking about a number those issues and the crisis of democratic capitalism, which I found really a fascinating presentation and gave us a lot to think about and their issues I’ve tried to cover on the program in the past. I was grateful for that presentation. Were you involved in the organization of this conference?

Leonora Risse  03:19

This year, I wasn’t. So, the way that the conference works is each state or territory branch usually takes carriage of organizing it. So, this year, a big shout out to the Tasmanian branch of the Economic Society who organized it. I’m part of the Economic Society Central Council, a representative of the Women in Economics Network. So, we were involved in organizing the wind sessions of the conference. So, I was involved in that part.

Gene Tunny  03:48

Okay, good one. So, what were those sessions, Leonora?,

Leonora Risse  03:52

Each year, since WEN was created, that’s the Women in Economics Network, that was created in 2017. So, WEN has been a part of the program, we’ve held a special session where we’ve discussed some of the issues that are confronting women in the economics profession. 

This year, we talked about what WEN had achieved in its first five years. We looked back at what action we had taken to deal with this problem of women’s under representation in economics. So, we were sharing some statistics as well as some examples of the initiatives that WEN had embarked on in that session, and it was more it was broader than just talking about gender inequality. It was talking about diversity and inclusion in the economics profession. So, we held that special session. 

We made sure that there were females amongst the keynote speakers, we had Angela Jackson, talking about the well-being budget. And Angela is a member of our WEN committee, but a very distinguished speaker in her own right and that was wonderful to make sure we had females amongst the keynotes. And tomorrow, we have a lunch for WEN members to come along and network and meet and talk about some topical issues.

Gene Tunny  05:12

Oh, good one. And So, Angela is a co-author of Yours. On a paper, I’d like to talk with you about; so, you had a look at how COVID affected the economy here in Australia and how it had differential impacts by agenda. So, would you be able to tell us about that, please, Leonora?

Leonora Risse  05:32

Thanks so much for the opportunity to share this with you, Gene. We looked at the workforce impacts of the first year of the COVID pandemic in Australia, where we had very strict lockdowns as well as the direct effects of the pandemic. And at the time, there was obviously a lot of interest from the news, from the media, from the government, what exactly were the impacts, and we knew that women were generally being more severely affected on average than men, because of the gender patterns that exist in industries of employment. So, we know that the types of industries that women are employed in, they tended to be the ones that were most affected by the direct lockdowns, particularly in the state of Victoria. But then, also women were potentially dropping out of the workforce, because they were responsible for homeschooling; schools were closed. Childcare wasn’t necessarily available through out that duration. 

So, we wanted to produce a systematic and statistical based analysis of what exactly happened in terms of labor force indicators. So, employment, unemployment, labor force participation; and break it down by gender, because I think there was a lot of talk, and there’s potentially some misinterpretation about what exactly those effects were, and generally, we saw a dive, a plunge in women’s employment, that was steeper than men’s. Then towards the end of the first year of the pandemic, women’s jobs did start to pick up again, which was a positive thing. And we were concerned that that was giving the impression that things were okay again, and even though there were huge numbers of women who dropped out of the workforce, just looking at those numbers climb again, it potentially led to people assuming that that time out of the workforce hadn’t caused any damage for women being detached those interruptions losing your job, and perhaps coming back again, but not being the same job that you had before; losing potentially, your eligibility for leave entitlements. It’s what we call scarring effects of economics.

Gene Tunny  08:05

Is this hysteresis? Is that the old term for it? Or am I thinking of something else? Was that related to it? There was that idea that if you had a period out of the workforce that reduced your; well, you lost the attachment, it can affect your marketability in the future, So, it can have these long run consequences. 

Leonora Risse  08:27

Yeah, that is a concern about people sort of, getting stuck in that state of unemployment or labor force detachment. That’s exactly right. So, we were looking at net numbers, aggregate numbers. We weren’t necessarily following the same individuals to see potentially, people who dropped out of the workforce who lost employment and didn’t reenter. But that would have been a concern behind the scenes. When I presented the paper here at the conference, there was an excellent question about long term unemployment, people would become entrenched in unemployment or drop out of the workforce and don’t reenter. So, that’s part of that concern about hysteresis as well, people getting stuck. And that skill erosion and perhaps that lack of confidence to reenter again, some of the dynamics that can explain what you’re describing there.

Gene Tunny  09:14

Right. So, I’ve got a couple of questions. You looked at the Australian data, do you know if this happened in the US and the UK as well? Was this the xi session that they talked about?

Leonora Risse  09:26

Yes. This was very much a global picture. You’re right. We were hearing this from the US, from Europe and the UK, from many other countries throughout Asia, Canada; that there were terms like it was a she-session, a play on the recession, but emphasizing the gender element of it. And the thing is that this is very different from past economic downturns. So, in our analysis, we look at what happened with job losses during the 1990s recession in Australia and during the global financial crisis around 2008. And what you see with the economic downturn, the recession that occurred as a result of COVID, women share those total job losses was a much higher proportion than what had occurred in previous economic downturns. And why that matters is because, it meant the policy responses needed to be different.

Gene Tunny  10:24

That was stunning. So, I was struck by just the proportion of the jobs lost in the early 90s recession here in Australia that were lost by men; what was it? 90% or something. I guess that makes sense because at the time, the industries that suffered were manufacturing industries or construction, because we had the colossal property boom in the 80s, and then the crash. So, they were industries dominated by men, but this time, and this is what you found, I think, isn’t it? that it was those sectors where women were disproportionately employed such as hospitality.

Leonora Risse  10:58

Yes, that’s right. So, it was the preexisting patterns of employment. For instance, at retail trade, what are the types of jobs within retail trade that women tended to be employed in things like clothing stores, Ford fronting customer service roles, waitress or waiter jobs in hospitality, whereas males tended to be employed in things like in retail, but in electronic stores, or building supply and hardware stores, which actually were all booming during the pandemic, because of all the incentives for people to stay at home or invest in these other things and things like shell fillers, or deliveries and transport behind the scenes rather than face to face customer service. 

So, these preexisting gender patterns of employment, as well as who’s doing the bulk of caring duties at home and who takes on the majority of the homeschooling responsibilities, meant that there were demand side factors as well as supply side factors, putting a lot of pressure on women’s capacity to retain their attachment to the workforce as well.

Gene Tunny  12:12

Okay. I might ask you about your highlights of the conference. I can tell you mine so far. I mean, one highlight was definitely Martin Wolf’s presentation, which made me think a lot about, how do we get that balance between having a market system which provides the goods and services we want that’s dynamic, that allows for you know, that is compatible with individual liberty, but at the same time, avoid a system where we have monopolization, where we have money getting into politics and corrupting it and inequality widening for various reasons, including monopoly, because of the big tech platforms, the big tech giants, people being able to earn money globally because of these platforms. And then if you’ve got an advantage that can be magnified by the technology, also skill biased technological change all those reasons. How do we deal with that in a way that keeps the incentive to innovate, but means we don’t have inequality that could be politically devastating? And I mean, I don’t know the answer to that. But I’m just saying that I thought that was a great presentation and Hal Varian, I mean, that was amazing. Talking about how they’re using all of the Google Trends data to Nowcast the economy, so, unemployment claims just based on people searching, where’s the local unemployment office in Michigan or wherever. So, I thought that was great. But how about you, Leonora? What were your highlights?

Leonora Risse  13:41

Oh, I haven’t been able to see everything on the program, which is frustrating when there’s so many options, you can’t see them all. The keynote speakers have been fantastic this year, because they’ve been so timely. The topics, the issues that they’ve been delving into, I thought hell variants, illustration of how we can use Google data for economic analysis, really enlightening. There’s so much capacity there. I’m looking forward to hearing Joseph Stiglitz speak tomorrow. So, we haven’t come to the end of the program. And he’s, he’s obviously an eminent voice in terms of inequality issues. I really enjoyed Angela Jackson’s keynote address at the start of the conference. And Angela talked about a well-being budget and put a lot of thought into what would be the dimensions of well-being. 

And also, she brought up some really potentially confrontational issue. She did talk about how do we handle domestic violence and family violence? And I think that was an indication that these are some hard topics that economists and policymakers and researchers need to deal with. And I mentioned that as a highlight, because I really don’t think in past conferences, we’ve been empowered or bold enough to bring up some of these confrontational topics.

Gene Tunny  15:02

I think that’s true. I want to see how this wellbeing budget is implemented in practice. I mean, as a former Treasury bureaucrat and someone who worked in Budget Policy Division, I’m just not sure what it’s going to mean. Is it just another chapter in the budget, enhance more work for Treasury analysts? Or is it a fundamental rethinking of how the budget process works and how the all of these policy measures are assessed? Will there be an explicit wellbeing score? I don’t know; we have to see exactly how the government is going to implement it. And whether it is something that really will mean that the budget is reformulated or rethought of as something that’s explicitly dedicated to improving well-being and therefore you would look at the whole range of government expenditures and activities. 

Is it that or is it just something that is just going to be another glossy budget document or something that the government of the day can sort of, wax lyrically about, but doesn’t have any real practical implications? That’s just my natural skepticism. So, I’m not knocking it. I just want to see how it’s implemented.

Leonora Risse  16:10

Yeah, I think that’s a really healthy degree of skepticism to have with any government. I sense that this government is really sincere and actually quite well informed by the research because as your listeners have known, there are very deep and comprehensive streams of research looking at measures of multi-dimensional poverty or disadvantage, which is really part of that literature on what constitutes a well-being and life satisfaction. And I think the takeaway here is when we think about a well-being budget, it’s about broadening the suite of indicators that we monitor, and we care about. So, it’s not just GDP, or inflation or wage price index. But we include a wider and fuller list of economic indicators, including measurements of inequality. So, I imagine that if you’re constructing a well-being budget, you’d want to compute a Gini coefficient, for instance. So, at least inequality is going to be on the minds of your policymakers, it becomes more salient, so that when they’re developing their policies, they’re not just thinking about how do we increase GDP, but what is the distribution of those prosperity benefits?

Gene Tunny  17:19

So, they could ask how do these particular budget measures affect inequality, affect the Gini Coefficient? Is that what you thinking?

Leonora Risse  17:26

Potentially along those lines, that’s right. So, it’s thinking about measuring success along a broader spectrum or dimensions of real world impact.

Gene Tunny  17:37

Yeah. Okay. So, every budget, as well as providing the economic outlook in terms of GDP and talking about what the budget aggregates are, you could have a reflection, the government could reflect upon what’s happening with some of these other indicators, such as inequality. Angela mentioned a whole range of things they could be interested in targeting in the interests of well-being, mental health, reducing domestic violence. 

Leonora Risse  18:04

The budget contains a lot of that already. And it’s about pointing out; actually, a lot of that contributes to GDP, which we know like, if you invest in your mental health and physical health and community inclusion in your population that are all in federal ingredients was making people or supporting people to become more productive as well. But I think it will probably find that there are a lot of government initiatives that are in place that are supportive of well-being and this is, I guess, perhaps justifying that expenditure in a broader set. 

I think we also need to clarify that a well-being budget doesn’t mean just spending more, like spending more on feel good items. I think there is some misinterpretation out there. I think it’s more about proper reallocation. So, you could say, well, let’s not go ahead with this hypothetical, say tax cuts for a higher income bracket, because that’ll have a negative effect on the Gini Coefficient. It will detract from income equality. 

So, we then have another benchmark of impact you consider some of these redistribution or reallocation decisions, it doesn’t mean spending more, it just means spinning things in different ways.

Gene Tunny  19:23

Yeah, fair point. Okay, Leonora thanks so much. Great to catch up with you here in Hobart.

Leonora Risse  19:27

Thanks, Gene. And thanks for running such a great podcast.

Gene Tunny  19:30

Thank you. 

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

Female speaker  19:38

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Gene Tunny  20:07

Now back to the show. 

Cameron Murray, good to be chatting with you.

Cameron Murray  20:13

Thanks for having me,Gene.

Gene Tunny  20:14

It’s a pleasure. We’re both finished the Conference of Economists for 2022, here in Hobart. We just had the lecture by Joseph Stiglitz. And, yes, it’s been a busy, few days. How have you found the conference, Cameron?

Cameron Murray  20:30

Yeah, pretty good. Pretty broad range. I’ve been to this conference many times, I like it because you, you will find a few people that study related topics, and you can catch up with your mates who researched your area, and then you can sit in on the random ones. Your session was called what, Miscellaneous? Which is actually pretty good. I think most people enjoyed, you know, a variety of discussions that you just don’t really get a lot of smart people in one room to chat about that often. Yeah, it was a good time.

Gene Tunny  21:01

Thanks. Yes, that was an interesting session. And we can touch on that a bit later. I thought it’d be good to chat about highlights of the conference and also what the themes of the conference have been. So, I guess on the themes, there was a big theme, it seemed to me of Economics in the New Normal; I think that was actually the designated theme of the conference, something about the new normal. And there was that speech by Martin Wolf, where he’s talking about the crisis of democratic capitalism. And then Joseph Stiglitz, today was talking about the Post-Neoliberal Order. So, there seems to be this general recognition that things need to change. I still don’t know exactly what they’re proposing. 

Cameron Murray  21:54

Yeah, I got the same impression. There’s a lot of; we’re at the end of some era, and something’s happening. And I wasn’t clear what specifically is not working? I’m not a big believer in labelling of things; oh this is proper capitalism. I’m like, well, you can have capitalism and a good welfare state and good public services and, you know, all of those functions well, together. It’s not clear that we need a new label. I think we do have a lot of things right. I found that a little bit unusual, I thought Stiglitz was right, in terms of Economics as a discipline evolving. And I can observe that I’ve been involved after the financial crisis in that rethinking economics and those groups trying to add some color and flavor to your economics education, because it can be a bit dry, like it’s straight with the neoclassical view on things. But in terms of actual policy, yeah, it’s wasn’t super clear to me where it’s going, but it was kind of unusual to get that feeling that everyone thinks there’s some change happening..

Gene Tunny  23:03

So, you’ve got a blog, haven’t you? Fresh Economic Thinking, and I found that interesting, what you were saying about the teaching of Economics and you said that you’ve tried to give it a different flavor. What sort of things have you done? What have you tried to emphasized in your teaching and your writing?

Cameron Murray  23:20

Yeah, well, maybe let me give you an example. Because Joe Stiglitz, one of the last things he talked about was, well, we use Robinson Crusoe as this example of production. And when Friday comes, we talk about specialization. And I use that to say, well, that’s one element of the coordination problem when you’ve got two people. Someone pick the coconuts and someone go fishing. That example allows us to think more broadly? Why is someone better at picking coconuts? Who taught them? Who has the fishing net? And why do they have it and not the other person? Can they be more productive if the two of them go fishing on one day using a net holding one end each, and then the two of them pick coconuts the next day by helping them climb the tree? Like these, the coordination problems are much broader than I guess the way we’re trying to think about it. And I think in Economics training, we can think more broadly as issues come up, we can maybe see where there’s these net improvements on the status quo. And that’s kind of, what my blog is; is there a different angle to this problem? Is this really a coordination problem? Is it really specialization? Is it this? Is it that?

When I look at housing, for example, I was writing about the Shared Equity proposal, I’m like, well, is this the best option? Why isn’t a 100% equity better? This is the proposal where the government will buy 30% of a house for you as an equity partner for first home buyers. 

Gene Tunny  24:46

Are they going to go ahead with that, aren’t they? Because they want government here in Australia, right. 

Cameron Murray  24:51

And someone at the conference was telling me that the details are being worked out, can’t say anymore. I think we got to think well, that’s one policy, and we can look at it. But we should be tweaking at the edges as well and going well, if 30% is good, why isn’t 40% better? And if 40% is better, why not 100%. And if we’re at 100% equity, where sort of the government owns your house, that’s public housing. Like we should be a bit more expansive in thinking about how things fit together. And that’s what I tried to do.

Gene Tunny  25:22

So, we’re reportedly having a housing crisis here in Australia. And you’ve previously commented, or you’ve recommended a Singapore model, haven’t you? Is that what you’re driving at with a 100%?

Cameron Murray  25:37

Oh, well, my example, for example, in that blog post was the Land and Housing Corporation in South Wales that owns all the public housing stock. And the value of that housing stock went from $32 billion in 2012, to $54 billion in 2019. And like, that’s a really good return on equity for government, if we consider that as an independent entity, making $20 billion in seven years in terms of the value. So, that was my example of well, you know, we’re going to start another fund over here, and it’s going to buy equity in people’s houses; we have a fund here, that’s buying equity, we’re just not conceptualizing it this way, we’re only looking at the costs, and we’re ignoring the fact that what public housing is is an equity investment. So, that’s the expansive way to think about it.

Gene Tunny  26:24

Right. Okay. I’ll put some links to your blog in the show notes, and also some of the reporting on your recommendation regarding that Singapore model.

Okay. What I found were the highlights, and I can ask you about yours. Papers that really struck me as something I wasn’t expecting, or that made me think differently, it was an analysis by this recent master’s graduate from Harvard, Nicole Kagan, not so super. And what she showed was that, that policy during the COVID period here where they let you withdraw $10,000 from your superannuation balance, and it was a lot easier than the normal requirement where you had to demonstrate hardship. And she was making the point that it could actually backfire on the government in the long term due to the fact that it’s reducing their super balance, and therefore the government would have to pay them more pension in the future. She had some calculations that illustrated how that could occur. I thought that was a good analysis, a good paper, and it just shows those unintended consequences and just how there, whenever you’re designing a policy, there’s probably or there’s possibly a lot better way to do it. And So, you should be thinking laterally about the types of policies.

Cameron Murray  27:58

I thought hers was very good as well, because she didn’t just say, this is the result of this policy. She said, oh, here’s another policy of an interest free loan. And what was the other; that she had a third one as well and said, here’s something else. And now I’m going to compare all three of them. And I feel like that’s a really fundamental economic approach of saying, well, this is a good policy I showed you, it’s like, no, what are all the alternatives? And we should be picking the best one, because if we can beat this, we should. Right. So, I thought that was very good. And that was my comment to her as well, there was another. And it might be related to your presentation as well, that the government could have let you take your super or it could have bought your assets from your super and given you the cash and held those assets in its own fund and got their compound growth or whatever. And, therefore, the government would have had those future assets to pay you back when you got the pension, if you know what I mean. So, you could sort of draw a little circle around the super early release program, and take that forward through time by the government owning those assets in its own federal treasury super account, and then paying the extra pensions to you in the future out of that account if it wanted to. So, you know, that’s just another alternative. And she evaluated three and I really liked that approach and was enthusiastic to look at more.

Gene Tunny  29:25

Yeah, I thought it was good. The other papers I liked; Stephanie Schurer who won Young Economist of the Year Award, she looked at a paper, while her paper looked at these anti interventions of various measures in the Northern Territory to a world to reduce alcoholism or to reduce domestic violence and sexual abuse in the indigenous population there. She had this, I think it was some differences model share this methodology to identify what happened in Alice Springs when they introduced a minimum price of alcohol to try to reduce the drinking and the cost of wine. It didn’t have the effect that they necessarily expected. When they looked at what did it mean for babies with the birth way of babies? And what seems to have happened is, well, there was some substitute; they did stop drinking cask wine. There was a big drop in the consumption of that. But then, there was an increase in consumption of beer and other alcohol, to an extent. So, there’s sort of substitution there. But also smoking, smoking increased.

Cameron Murray  30:43

Yeah, it did. That was pretty clear and one of the main results, wasn’t it? 

I think that’s actually a result I’ve seen elsewhere of trying to change behavior with the sort of syntax approach where you tax the behaviour you don’t want to get. And I think we get that in cigarettes and marijuana and things like that, if there are substitute ways to get the broader consumption good. Then you’ll find them.

Gene Tunny  31:12

Yeah. I thought that was a good illustration of the possibility of unintended consequences that you can get with policy and as was Nicole’s paper, too. Okay. The other one I thought was great was Warwick McKibbin’s paper on COVID. So, he went over some modelling results of his early in the pandemic. And I mean, Warwick was claiming, I think he’s probably right about this, that he got reasonably; I mean, his estimates were probably better than any ones in terms of the ultimate economic impact. And a lot of it came from voluntary, people voluntarily withdrawing from the labor market.

Cameron Murray  31:58

I wasn’t in that one. Can you? What did he predict? And why?

Gene Tunny  32:03

This was a paper he released in February of 2020. He saw that COVID was spreading in China. And it was going to come to the end; I think it was in Italy at the time. And he used his, what is it, the McKibbin Sachs Global model – MSG model he’s got some global economic model originally built with Jeffrey Sachs at Harvard. And he’s sold it; to all of these finance ministries, I think Treasury had a copy when I was there. How would you describe it? Well, it’s a general equilibrium macro-economic model of the global economy. And he was projecting; he calls them simulations, he’s not calling them forecasts. He made a joke today about how he doesn’t like doing forecasts, because you’re only ever going to be wrong, you never forecast know precisely.

Cameron Murray  33:10

I think that’s very wise. 

Gene Tunny  33:12

So, I think that’s very clever of Warwick to do that. And he was showing what GDP deviations he was getting from his assumptions around how COVID would spread. Then he had endogenous policy responses, or actually, they may not have been endogenous, he must have assumed what policy responses would be in terms of fiscal policy, and then monetary policy. He knew that governments would respond and that would help the economy recover. And he was showing that he had the big GDP losses to begin with, but then the V-shaped recovery or the rapid recovery. So, Warwick was claiming that; and it’s probably right.

Cameron Murray  33:56

Did you get the inflation element as well as it’s sort of second half of last year and this year? Because the V-shape recovery; remember, there was a big debate, V-shaped recovery, W-shaped recovery. There was a lot of chatter, and I think obviously he was right on that. But what about the inflation part?

Gene Tunny  34:19

I think he was. He may not have got it to the; he may not have predicted as much as it has occurred, but I’ll have to check that. I think he did say something about that. I just can’t remember off the top of my head. I’ll put links in the show notes to that paper. I found that fascinating. 

One thing he didn’t predict and he was surprised by; he was really surprised by just how badly the United States did. But he was modelling the COVID infections and mortality, the COVID deaths, and his prediction for the US was too low. And because in his model he was basing the health response. So, he had the epidemiological development of the disease, the infections and the deaths. He had that related in part to the public health system or the public health response. And because the US, because of the CDC, it came out high in terms of public health effectiveness. So, in his model, US had high public health effectiveness. So, that was reducing his estimate of what would happen in the States. We all know that it just didn’t work. I mean, they may have had the CDC, but for some reason or another, something didn’t work.

Cameron Murray  35:49

Well, you know, the assumptions matter don’t they? One of the standout presentations for me was Hal Varian, the Chief Economist at Google. And I think, simply because he’s got the inside run on all the data, he had a great method of augmenting your traditional time series forecasts that have seasonality and trends with an additional regression that selects for the most useful search terms out of Google Trends, and then uses them as predictors in the regression part of the overall model. And was pretty good at predicting a lot of economic outcomes from Google trends search data, which I thought was pretty impressive, but I guess we kind of, accept that that happens. But what impressed me more is they have a Google survey tool that you can put as like an ad on the news item. And people get credit on Google Play or something if they fill in surveys. So, you can do these really rapid surveys, and it will distribute them to readers of news that meet certain criteria. And it replicates really well, these well-done official surveys that sample representatively across society based on census records of types of people and where they live, it replicates a lot of findings by being completely non representative, and just flooding the internet, essentially, with the survey. 

So, the message here is sort of saying is we don’t know if representativeness is that important, but you can find out cheaply and quickly by just doing a Google survey to augment your official survey where you’ve got representative samples from different parts of the country, in different age groups and so forth. 

We’re obsessed about sampling and he’s now saying, well, as long as we throw it out to the internet, sometimes it doesn’t really matter. 

Gene Tunny  37:54

It’s good enough, the results are good enough. It may not be as precise as a random survey, or a survey done by Roy Morgan or Gallup but it’s got to be good enough for what most people need it for.

Cameron Murray  38:07

Especially picking the trends, right? Is this declining in interest or rising interests, you’ll get that sort of stuff very quickly and cheaply. So, I immediately went back to my computer after that session and looked at housing markets and predictions and tried to catch up with the state of the literature on that, and it’s booming right now. So, I think that’s going to be something we’ll hear more about. And I expect, for example, in the next five years, we’ll probably have a new house price index that is informed by daily Google search trends. Like a live modelled index from this type of stuff, that would be my expectation, given that people are already trying to do that.

Gene Tunny  38:46

Yeah, because CoreLogic put out a daily House Price Index, I think, don’t they? 

Cameron Murray  38:52

They do put out a daily index but there’s a lot of assumptions because you don’t know sales data until the settlement and the price was 30 or 60 days beforehand. Over a longer term, it works well. And it seems to pick turning points well. But I think if you’re in the market for producing high frequency index like that, and you can augment that with Google Trends, I think you would dominate that market because people would put more stock in yours, you’d get more press coverage, you’d become very; So, I’d be very interested in if CoreLogic has got people looking at this. They obviously have a lot of data nerds. You might see live daily trackers of many things; could be an interesting new world at the next conference.

Gene Tunny  39:40

Yeah, absolutely. That was great, that nowcasting session and I chatted about that with Leonora. I’ll put a link in the show notes regarding that, too. 

So, on housing, Cameron, you presented a paper on housing, didn’t you? Would you be able to tell us about that, please?

Cameron Murray  39:56

Yeah. So, it’s pretty straightforward. There was a lot of very detailed statistical modelling at this conference and mine was the exact opposite. Mine was just, here’s the data on the rate of production of housing from new major subdivisions in Australia. Because the argument that we have at the moment, are planning regulations, stopping supply and keeping the price of housing up. And my question was, how are planning regulations stopping supply? Because we can observe in practice, all these major approvals with three to 20,000, approved housing lots, and we can observe how quickly they supply after the approval. And what you find is that during an economic boom, these property developers will sell at a rate that’s 30 to 50 times faster than when it’s not a boom. 

So, they’ll sell five a month, and then they’ll sell eight a month for a few months when there’s a boom. So, if you look at land sales in major subdivisions around Melbourne, when there was that 2015 to 17, boom, you can see, not only did the price rocket, but the sales rocket, and then when the price is up, typically, supply and demand say, well, at higher prices, you sell more, but then it stops once price gets up. So, as prices start rolling over, they stopped selling again. 

The main point of that is, there seems to be a built-in speed limit. And then in addition to that, I looked at aggregate company data for listed companies across states where they had eight to 12 different projects. And the question there as well, is that variation I’m observing; does it average out across different areas, if we diversify? And it does, but only to a small degree. And then I looked at council level data for the different councils in Queensland and showed that actually, the variation, even at a whole council level is much the same. So, the point of all that is that there’s some kind of built in speed limit that the market will supply, regardless of planning restrictions. So, if you want to talk about the effective planning regulations, it has to go via this market absorption rate, this optimal rate per period that you would produce new housing. 

Gene Tunny  42:20

Yeah, I see what you’re arguing there. So, at any point in time, there is going to be a speed limit. I think that’s fair enough. It’s like with the sale of government bonds, for example. So, they don’t just go and auction off the whole years in one day.

Cameron Murray  42:42

Yeah. The market has a finite depth, right? Especially in property, your local market has a very; it’s very competitive. But in your local area, if there’s only a few buyers rocking up each week, you can’t really sell faster than that. And if you did want to, you’d have to reduce the price dramatically. And that itself might not even work, because who wants to buy something that’s falling in price? Right? You’ve just showed me this is a terrible property asset to buy, because you keep decreasing the price on me. Right? I think property markets function like other asset markets, property developers aren’t in the business of panicking, and to reduce price and selling very quickly. So, if we want to talk about cheap and affordable housing options or systems, we’ve got to acknowledge that limit. 

We can’t go around saying oh up zone, and it’ll all be fine, because we’ve got a property boom in the whole world, regardless of local planning conditions. There’s almost no city you can name right now, Regardless of whether they’ve got very generous planning, whether they’ve got height limits, where they’ve got no height limits. Auckland, famous in 2016 up zone the whole city, and then had the biggest boom, I think just about in the world between 2016 and 2021.

So, that was mine. Yours was one of the last sessions of the day, that was just before Joe Stiglitz. I actually really liked your topic because, I have a strong interest in privatizing public assets and accounting trickery.

Gene Tunny  44:26

Yeah. Well, what I thought was bizarre about what Queensland Government did. This is the state government, where Cameron and I both reside; it’s the state government where Brisbane is the capital. What I found odd about what they did was they actually didn’t privatize it, they pretended they privatize it. They said if we did privatize it, we could sell it for $8 billion, and therefore, even though it’s still doing the same thing it did yesterday, we’re now going to treat it as a well; we’re creating this private company, we’re converting a government.

Cameron Murray  45:08

This was the property title’s office, right where you change, when you sell a house, you register the change in ownership. It’s the Torrens title.

Gene Tunny  45:16

Yeah, that’s right. Sorry, I should have mentioned that. Well, this is actually a private company, and we own shares in it. So therefore, we’re going to take it out of the general government sector. And we’re going to recognize this $8 billion asset on our balance sheet and use it to offset our $40 billion worth of debt or whatever it was, and that reduces our net debt.

Cameron Murray  45:47

That’s an accounting trick. I did think it was very interesting that we’re going to privatize, we’re not going to change the ownership. We’re just going to say that it’s; and I guess my point to you was; The other point you were saying is that Queensland has a future fund that does investments in private companies. And they were saying that we’re not putting it in that fund is that?

Gene Tunny  46:14

I know they did. So, it is in that future fund? Yeah. It is in there – the debt retirement fund they’ve got. 

Cameron Murray  46:22

Well, and I think one of the questions in your comments was that New South Wales got a lot of flak last year for doing the same thing. And they created this thing called the transport asset holding entity. Did you follow that news? 

Gene Tunny  46:38

Yeah, I’ve got to look more into it.

Cameron Murray  46:4

The basic gist was the same thing. They said, well, this is the Department of Rail or whatever it’s called. But actually, we’re going to corporatize it and say it’s a private company. So, when we subsidize it, that’s an equity injection. So, that’s actually an investment, not a cost. So, there was this great big accounting trick to get around there other standard measures of government spending and standard ways that they produce the budget. They’re like, well, no, that’s not a cost, that’s an equity injection, which of course, you could do for anything.

Gene Tunny  47:19

I have to have a closer look at that. I guess the point I was trying to make is that I thought this was a good example of just the financial or the public accounting trickery that can go on. And I think as economists, we need to be mindful of that.

Cameron Murray  47:40

I think your point; you said at the beginning that we’re meant to be sort of, reporting in a standardized way. And you’re comparing governments between countries and budgets and debts. How much does this accounting trick matter? And we’re comparing Queensland and Western Australia or Australia to New Zealand to Canada.

Gene Tunny  48:01

Yeah. It’s difficult to know. And while any one of them, you might think in the greater scheme of things, okay, maybe that’s not the biggest deal but they just all add up and you just don’t know. 

I remember what I was saying about what was going into the future fund. What I was trying to say is that originally, they were going to put in liquid assets. So, the original idea was, we would have, I think it was 4 billion or whatever it was, from the defined benefit. The funds set aside to meet the defined benefit superannuation liability, and they were going to take that out, because they were saying, well,  we’ve got excess there, we don’t need that much to pay the pensions. We’ll put that into this future fund, but they would have been liquid financial assets. So, cash or shares or whatever. But then, they didn’t have as much as they expected. So, they couldn’t actually put in liquid assets. What they then did was said, well, oh, we’ve got these $8 billion titles registry, let’s stick that in the future fund. And is not the same thing, because it’s not actual ready money. It’s not a liquid asset.

Cameron Murray  49:13

No, it’s definitely not. Although, we did later discuss before we recorded that, a cynic might say that the government is wedged right now in not privatizing any public assets. And they’re literally setting this up. So, when they’re out of power, they get the result they want because the next government, it makes it easier for them to then privatize and sell this off, because the structure is already changed.

Gene Tunny  49:42

It certainly does do that.

Cameron Murray  49:45

It depends how much you think these political games are being played behind the scenes.

Gene Tunny  49:50

Yeah, I’ll put a I’ll put a link to both of our papers in the show notes. I’ve got to think more about your housing article because I think that’s a fair point about the speed limit at a point in time. And I’ve had Peter Tulip on the show before. Peter is someone that you’ve debated or you have a lot of interactions on Twitter and

Cameron Murray  50:15

and in person every time. Yeah.

Gene Tunny  50:19

So, Peter was here at the conference too. And I think Peter’s point is that; I think he acknowledges that, like, you’re not going to solve the housing supply shortfall overnight by relaxing restrictions, because there’s just so much construction or so much building that would have to occur. I mean, have to occur over many years. And I think his point is that, well, the problem is we’ve had these restrictions in place for decades. So, there’s been a whole lot of under building. 

Cameron Murray  50:51

We had a good conversation last night with Peter. I think there’s a hidden mental model that we both have that I can’t quite articulate with both tried. One of the components of that is this competitive element in the property market, like how fast would we supply? What’s the real counterfactual? Because his argument, and it’s a common argument, is that we’ve had supply constraints for a long time, therefore, we don’t have enough houses. If we didn’t have a supply constraint, we would have more dwellings per person and more space than ever before. And yet, that’s actually what we have. 

Although prices are high. Part of that’s the interest rate, right? Rents compared to income in the private market are 20%. They were 20% in 1996. So, we’re talking, what’s that 26 years ago, quarter of a century. So, not only are rents the same proportion of income, and we’d probably expect people to spend roughly the same proportion of income on housing as they do, you know, there’s a fixed budget share results in the Cobb Douglas function as your income grows. But we have bigger houses, we have more bedrooms and more area and fewer people. And we actually saw that in the recent Census. Census was interesting, because last year, the week that we filled it out in August 2021, I predicted that the homeownership rate in the census would go up. Because it was 65.4%, in the 2016 census. And when the data came out a month ago, it was 66.0. So, a 0.6% increase. So, we got more homeownership. And we saw that the number of people per dwelling fell quite a lot as well, partly because of COVID. People sort of spread out a little bit more. Yeah. And we had a bit of a building boom as well, in that period. And So, we’ve got bigger houses, fewer people in them. So, the question is, why isn’t this the market outcome? Like, surely, you’ve got to tell me why the market outcome is something of even bigger houses and fewer people than what we have. And why would that be the case? That’s where we still disagree. Myself and Peter Tulip as the most active housing supply debaters on Australian social media.

Gene Tunny  53:27

Absolutely. Love to have you both thoughts for a chat in the future. But anyway, we’ll have to leave it there. Because we’ll wrap up soon, because we’ve got the State of Origin game between Queensland and New South Wales coming up. 

Yeah, I thought that’s been a great discussion. I just thought of something with Nicole Kagan’s paper.. So, you’ve got that idea that the government could have bought the shares off or it could have basically bought the super assets…

Cameron Murray  54:05

From people if they want to cash out their super, then the Superfund says, okay, we’ll give you cash but the government’s got to give us the cash to take a claim on their same assets.

Gene Tunny  54:15

Yeah. So, the government would have to borrow to buy or to let them cash out. But your argument would be they would be earning more, the government would be earning more from those assets than the cost of the borrowing, giving borrowed and was so cheap.

Cameron Murray  54:31

Yeah. And also, that whatever they earn on those assets is exactly what the people who took the money out of super would have earned. So, if you’re thinking about a cost to the age pension in the future, well, the government now got those assets, exactly the same amount of assets that it can use to spend on your age pension. Do you know what I’m saying? Because you don’t have the super, the government has it. And if you need the age pension, they’ve got exactly the same amount of money that they can give back to you if you qualify for the age pension.

Gene Tunny  55:00

I’ll just have to think that through because I’ll also have the debt one day to a border. Although you could think about the Reserve Bank doing it, perhaps. I mean, that’s one thing that could have;

Cameron Murray  55:14

I mean, it’s a balance sheet expansion for the government. And it’s a contraction for the person who took the cash and doesn’t have that other asset. I might write a blog on this; 

Gene Tunny  55:25

I think would be good. I’d love to see.

Cameron Murray  55:27

Nicole was the author of the paper? I’ll reach out because I thought she had the right idea of testing all these scenarios. There you go. That’s what conferences are for; meeting people and sharing ideas.

Gene Tunny  55:41

Absolutely, very good. Cameron Murray, from University of Sydney. Thanks so much for your time. It’s been really great chatting. And it’s been amazing catching up with you at this conference. It’s been great.

Cameron Murray  55:52

Yeah, I know, it has been great to hang out, Gene. 

Gene Tunny  55:57

Thanks, Cameron.

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

Credits

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

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