The Joe Walker Podcast - Policy In An Age Of Politics — John Hewson

Episode Date: May 24, 2021

John Hewson is a former Australian politician and was leader of the Liberal Party from 1990 to 1994.Full transcript available at: josephnoelwalker.com/john-hewsonSee omnystudio.com/listener for privacy information.

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You're listening to the jolly swag men podcast. Here's your host, Joe Walker. Ladies and gentlemen, boys and girls, swag men and swagettes, welcome back to the show. It is great to have you back and I am thrilled to be able to share this conversation with you. Before I introduce our guest, a quick plug for my weekend emails. These are getting a lot of positive feedback. Every weekend, I send out some links to interesting things I've been reading or watching. Make sure you don't miss out. To sign up, head to thejspod.com.

That is thejspod.com. That is thejspod.com. Swagmen and Swaggets, I'm a big fan of Australia's 24th Prime Minister, Paul Keating, but I've always been fascinated by the man he vanquished in the unwinnable election in 1993. And so on Saturday, the 22nd of May, I popped down to Bowral to see how a former Liberal leader has been handling the political wilderness. John Hewson represents a strange sort of Cincinnatus character to me, if Cincinnatus' farm was a nice property in the Southern Highlands. He's a politician from a bygone time, a time when wonks could still become leader, a time when fewer people went into politics simply to stick their snouts in the trough. I admire Keating, but I also admire Hewson. Even if I wouldn't have supported every aspect of Fightback, his economic rationalist policy manifesto, had I been alive when he launched it in 1991. Hewson was leader of the Federal Liberal Party from 1990 to 1994, which saw him go toe to toe with the great political cage fighter of that era, Paul Keating. Hewson is an economist with a

PhD from Johns Hopkins University. Before being elected to Parliament, he worked for the IMF, the RBA, the Fraser government as an economic advisor. He was a director of Macquarie Bank. When he left politics in 1994, a few months before he was due to qualify for the pension paid to former parliamentarians who've served for a particular length of time, he went back to work. He has myriad business interests. He's active on boards and in charities, and he is professor in the Crawford School of Public Policy at ANU. In this wide-ranging conversation, John and I reflect on the degeneration of politics in Australia, he gives me the inside scoop on big policy debates of the past, and we discuss Australia's housing bubble and the precarious position in which it leaves our society.

Swagmen and Swagettes, without much further ado, please welcome the great John Hewson. John Hewson, welcome to the Jolly Swagmen podcast. Thanks very much. Pleasure to be here. Great to meet you. I've admired your work for a long time. Oh, wow. Thank you so much. And your weekly reading list is to behold, really. Thanks so much. I wasn't aware that you were a listener.

Yeah, well, I don't get to listen to them all, but I see the range that you do pursue, and it's pretty balanced. You're not running a particular agenda, which I think is to your credit. There are a lot of podcast series that just run a particular line or interview a particular type of person pushing a particular barrow, but you don't seem to do that, so that's good. No, I'm interested in all sides and very excited to meet you and speak with you. I should give a quick shout out to the Country Women's Association for putting us up here in this illustrious hall in Barrow. We understand the significance of the women's issue. Exactly. We've come to the home of the CWA.

And I wanted to kick off. So, John, last night I was rereading parts of Fight Back, as you do on a Friday night in the 2020s. Suffering from insomnia. And I want to quote from the executive summary, which was tabled on the 21st of November, 1991. Quote, The economic comparisons with our own region

provide an even starker illustration of our economic decline. Throughout the Asia-Pacific region, real GDP growth from 1980 to 1990 averaged 8.6% every year. The economies of Japan, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, China, Hong Kong and Taiwan on average are two and a quarter times larger than they were just 10 years ago. By contrast, Australia's GDP growth averaged just 3.5%, end quote. Just 3.5%, that seems sort of

quaint nowadays, doesn't it? Well, just, it's about half that, isn't it? I mean, the recent Garno report where he's broken the recent years into different decades, and his dog days of the last decade where there was, where growth slowed, income per capita slowed or became negative in some cases, productivity collapsed. It's a very different world. And I guess looking back in the early 90s, I had a very strong view that if we were to have made broad-based, undertaken broad-based reform. I mean, Fightback sort of got focused on the tax elements and that, but we had a strategy across just about every area of public policy. I think there were only two issues we didn't address, and that was native title, which hadn't become an issue then, although it was on its way, and of course

the Republic, which Keating had floated but did nothing about in the campaign. The document was broad-based reform in a lot of areas, a completely different approach to government. And I think back... And what I'd said to the party at the time is, you know, one of the three things I said in my first speech at the party room is we have three major problems. One, we have disunity as an

issue and you'd had the Howard Peacock here and some tension between Libs and Nats. Second one was we had no policy credibility. Being kind, you know Howard's tax policy in 87 just didn't add up, he double counted revenue and Peacock couldn't remember the health policy in 1990. We were seen as not having a substantive policy position. And the third thing was we had a very anachronistic party structure which was not able to match the effectiveness of the Labor Party campaigns on the ground. And so I said, we've got... They're our challenges.

I said quite openly, I think it will take six years to do that. And, you know, but we'll go as hard as we can in three years to see whether we can get those issues addressed. But all in the context of a view about where we wanted the country to be. And so we used a loose concept that in so many areas we could be a leader in the Asia Pacific region by 2000. So everything we looked at was in the context of that decade, from 1990 where you described where we'd been and where we were coming to, and then what we would need to do to actually take a leadership role in education or in health policy or aged care, as well as tax and, you know, fiscal management and so on.

And so everything we did in policy development was against that 10-year objective, which is sort of novel today because you're lucky to have an horizon to the next election. Last budget's horizon vision runs out at the next election which probably be earlier rather than later and that's really a tragedy the drifts that we've seen in the focus on good government and good policy to just a straight political game is staggering to me. When I lost in 93 walking walking back into the parliament on the first day, the two houses of parliament come together, and as Keating and I walked out of the lower house to the upper house, he took me aside. And he apologised. He said, I just want to say that I said some

terrible things about you and called you a lot of names. I didn't believe any of them, which made me somewhat nervous. But then he said, you know, but you've got to understand, John, and I've never forgotten this, that politics to me is just a game. And I will say or do whatever I have to to win. So he was rationalising the fact that although when he'd done the tax package with Hawke in 85, and Hawke had taken out a broad-based consumption tax in a deal with Bill Kelty,

Geating had made some very passionate statements about, you know, I'm going to die fighting for this tax reform and so on. And then, of course, coming into my election, he ditched the whole lot to try and paint me as a radical alternative that was going to do a lot of damage to the country. And what he was saying is that, you know, in the end, it was winning in politics that mattered, not so much the policy. and you saw that as a feature of the Keating period you know only made some pretty outrageous statement so I've legislated the tax cuts so we don't we can deliver the personal tax cuts

without a GST because I've legislated them they became the the LAW tax cuts. Six months after the election, he sends poor old Dawkins out to say, well, we actually can't do that. We've got to withdraw that legislation. It was a big lie and it got away with, I guess, that as part of the attack. And it was always a great disappointment to me that that's how it unfolded. But he was held accountable for that because if you look at the poll reaction the following weekend, he lost about 13 points in Victoria, about eight in New South Wales. And if you just translate that to a margin, that's about the margin that Howard won by 96. So admitting that he'd lied and that he'd played politics had really cost him by the time he got to 96. You might remember that campaign, Howard said very little, promised very little.

They focused a lot on Keating as the sort of person he was. The arrogance of the man and those sort of issues that they ran pretty hard on top of the fact that he'd obviously beaten me by lying. And nevertheless, it didn't really result in a lot of new policy. I thought that I got quite enthusiastic that maybe Howard would do a lot, but they didn't really. So, you know, yeah, it proves the point that economies are dynamic. And there's this very simplistic view in politics

that, OK, we've got to reform something, so let's just do it, and that fixes that, we'll move on to something else. It's not static, that's not the end game. The end game is probably a process of continuous reform in most areas because circumstances change and challenges come and go and so on. So, you know, I think that we've got a long way to go to try and get the political system and the political debate back to what

I used to call evidence-based policy, which I believed in very strongly. When I first started coming out of the Reserve Bank on secondment through Sir Philip Lynch's office as an economic advisor. I did so in the belief that good evidence-based policy would be good government and good politics with a relatively short lag. And today it's used as a way of not doing any policy reform at all. And there's no evidence managed to creep into the process.

When Keating said to you behind that pillar that politics is a game to me and I'll do or say anything I need to in order to win, is it fair to infer from that that he thought that winning was the end game? Winning was the end game. But you need to win first in order to be able to realise your policy agenda. But we were also about challenging people to think about what the country should be like or could be like. And, you know, look, I knew it was high risk and I didn't. I said to the party room and I said to all my colleagues, right through

the election, I didn't think we'd win. I was the only one who didn't think we'd win, apparently, but I didn't think we'd win. Remember, on the night of the election, I had been to all the polling booths in my seat and I said to my team, well, I reckon I've doubled my margin in Wentworth, but we aren't going to win, we're going to lose by a small margin. And the big issue was not the GST or tax as such. It was in the ether and it was there.

But in our nightly polling, key marginal seats, large numbers in key marginal seats, it was quite clear that the GST started to fade as an issue about 10 days out. And the big issue was health and the fact that they ran a very successful scare campaign into those key seats using radio and letterbox drops and print media and and door stops and door knocking and so on to to say that if you went to the doctor under Houston, mum took two kids to the doctor cost ninety something dollars nothing in the policy about that at all, but it really resonated. And I think that if you look at that strategy and go back to the Hawke-Keating contest,

Hawke at the end of the 80s, early 90s had seen that Medicare needed to be reformed and so he'd advocated a co-payment. And Keating used that when he went around the caucus to solicit support to say, I will abolish the co-payment if I get up. And so he recognised the potency of health, I think, and as a party they ran very hard on that. And the Liberal Party didn't have any effective response. I mean, it's funny, in the run-up to the campaign I thought we'd run, we'd argued a very positive case for a long period

of time, for three years, about what was possible and what we could achieve and the opportunities and so on to turn the country around by broad-based reform. So I wanted to run a 100% positive campaign. So I called a special shadow cabinet meeting in Melbourne and I put the proposition that I thought the campaign, including the party organisation, which we don't control the campaign as such, but I put the argument that it should be a 100% positive campaign. And there was one vote for that, which is mine, and there are a lot of them who wanted a 100% negative campaign, which is what they ended up doing. We made about 30 television ads selling the benefits of Fightback to each group aged,

young people, farmers, business, retirees, whatever. And they ran one of those ads in free time on the ABC late at night and they never ran any of the others. And they ran all these negative ads on Keating and gun site ads and trapdoor ads and that sort of stuff. And they spent all their money on that so that when the debate shifted and, you know, health became such a big issue, they had no money to run the negative, to run the counter-campaign.

And so there were a lot of errors in that process. I mean, we'd had no control over the party organisations running of the campaign, but I know a lot of our team were out there selling Fightback flat out, irrespective of the resistance they were getting. And I think it was a pretty good effort on everyone's part. But in the end we didn't make it. Yeah, sure, you have to win to be in government, but if I'd had to compromise to pull back and say, look, okay, as Hawke said to me, we did a couple of functions after he left politics, I left politics, and he got up at one of them, several of them, and said, this bloke, he should have listened to me. I told him, put that stuff in the bottom drawer and pull it out after you get elected.

And he said, if you'd only listened to me, we would never have had John Howard as Prime Minister. And he used to trade on that all the time. You know, and it was probably true. But I just didn't feel that it was you know i thought it was worth challenging people to think about these issues and it's even much more important today to see the nonsense we're hearing from the government in a very reckless fashion about climate when it's going to be the defining issue of the next several decades is staggering to me that that shows you how far we've slipped. Because on climate, we had a policy in the late 80s, early 90s of a 20% cut in emissions in that decade

by the year 2000 of a 1990 base, which was possible. You know, price and carbon is the mechanism. We would have really been way in front of the debate. I think now if you'd just done that 20% each decade for the last three decades, we'd be at less than half our Paris commitments already. It's just we've blown opportunities. And that translates to billions and billions of dollars of investment

and growth and hundreds of thousands of jobs that have just been lost. But that's not an argument that they want to hear you mentioned that politics has become more careerist and more short-termist less interested in policy and the obvious objection to that claim is just to say it's all nostalgia and that every generation somehow looks back on a foregone time and says that politics was somehow nobler back then. And today, we've kind of lost those values. So can you try and quantify that claim for me? Well, I mean, there's no doubt that the sort of people that are attracted to politics these days are very different to the ones that used to be attracted. Remember, I did a radio program

regularly with John Button, Philip Adams was the program, and we were talking one night before that, and Button said to me, you know, I don't know what happened. He said, we used to have people coming into politics towards the end of a career, whatever it had been, with a sole purpose, end game, to make a contribution, to give something back. And he said, look at it today.

You know, that was a couple of decades ago. And, you know, the sort of people that you attract, the sort of games you've got to play, everything from branch stacking and churning up to the allegiance of particular factions within parties or whatever it is, to get pre-selected, undermines the capacity of those people to ever be effective in government.

Some of them come through, some of them are okay, but when they've never had a real job, when they've only ever worked in the political process, in the local government or in a union or in a minister's office or in the party organisation or in a marketing group around politics or whatever, and then suddenly they get pre-selected, alright, they play that game. organisation or in a marketing group around politics or whatever. And then suddenly they get pre-selected, all right, they play that game. But those skills that you need to do that are not necessarily skills that are going to help you run a multi-billion dollar department. And we see it time and time again now in some of the unbelievable excesses that have been approved by these people in particular departments.

I mean, you could say at Dutton right right now he was looking to get out of Home Affairs because the Auditor General was progressively finding unbelievable excesses and so he'd go to Defence where they pride themselves on unbelievable excesses in terms of you know submarine contracts and so on. Yeah but there's an element there that you know if you had an objective, if you advertised for the Minister for Defence and Dutton applied, you wouldn't appoint him. Or Home Affairs. Not just Dutton, he's an example. You can go through a lot of them and they would really have never qualified on merit for the jobs they end up doing.

You see that over time, a lot of the time they rely on the public service they just drift along then suddenly get a big issue and they're not ready for it they get caught short because they don't have the processes they don't have the people and that's a very significant shift in the nature of politics and you know I'd never turn honest I'd never thought of politics as a game I and that's why as leader the opposition I took a very different view and I had a very different view, and I had a fair bit of pushback initially in the opposition for doing it. But I said that as an opposition, we have two functions. One function is obviously to disagree with the government,

to hold them to account. And we do that as strongly as we can on the evidence, right? It has to be evidence-based criticism so we can defend our position against whatever they've done to create their policy position. But the other thing is that we have a responsibility to take a national view beyond the parties and what's in the national interest. And this was something I firmly believed. I said it in my pre-selection.

I said, OK, I might be a member of the Liberal Party, but I'm also an Australian. So I'm an Australian first, member of the Liberal Party second. So if there's a choice here, or if I think the Liberal Party's on the wrong track, I'm going to work hard to change that policy. And so if you are playing a constructive role as opposition, you can get out in front of the government,

you can call on the government to do things which you know they're going to have to do anyway. And so we did that in so many areas. I mean, obviously, in the financial sector, deregulation and reform of the financial sector, we'd done all that work in the Fraser government and was ready to go. All the cabinet documents were sitting there, you know, and I wrote something pretty much straight after the 83 election when everyone was saying, oh, these bastards won't license foreign banks and they won't float the currency. I said they will.

Definitely they will. Even though at those days Hawke won on a policy platform, ALP platform, had bank nationalization in the platform. I said it doesn't matter. And I started working with Hill Samuel to demonstrate that they could get a banking licence, not as a foreign bank, but as a new domestic bank, so we started Macquarie Bank. And I advised a whole lot of institutions through that period.

But it was inevitable they were going to do that because all the hard yards had been done. We tried so many times to defend the currency, you know, in the early days where you'd go into the Cabinet. I spent a lot of time in Cabinet, particularly in the Monetary Policy Committee of Cabinet, which we sat in almost daily. And, you know, we have a Russian on the currency, right?

And so we have people sitting around the table. There's no market for the currency. We don't know what the $8 is actually worth. We don't know how it would really trade against the US dollar or the euro or whatever. But they have these people sitting around the Monetary Policy Committee of the Cabinet making the decision. And I used to sort of laugh with one of Fraser's advisors, John Rose, that we don't have much hope here because of the seven members of that committee, four of them are farmers. So they're never going to think it's a great idea

to put interest rates up. They're never going to think it's a great idea to float the currency. They like to set it where they want it. And it didn't really matter, because of those four, they dominated that. The other three were the Treasurer and the Finance Minister, which they will put their views,

but they didn't care, of course, they were going to be. And so you'd have them make a decision, a political decision. Oh, well, we've got to respond. The currency's under pressure. We'd better move it. Where to? Oh, well, let's move it. There's a classic story told about the 76th evaluation

where Fraser was nervous. Obviously, he'd had a couple of these attempts to reset the currency and they hadn't worked. We'd had a major you'd had a couple of these attempts to reset the currency and they hadn't worked. We'd had a major exchange rate crisis a couple of times. Money was flooding out of the country again. So he sort of said, the Treasury didn't want to do anything. They never wanted to float, never wanted to devalue. They wanted to say, you've got to tighten fiscal policy.

They'd always had that. In those days, Treasury used to put up two options to the government. One they wanted, which happened to have been referred to in an editorial in the Financial Review that morning, by coincidence, and the other one was you'd be insane to contemplate. So they were driving the debate. And in this case, in 76, they just had to agree that, you know, it was so bad, we are going to have to devalue,

but only if you do all these other things, right? So Fraser said to them, okay, seven and a half percent's your recommendation. Will that stop the capital outflow? Well, you know, talking amongst themselves, they weren't sure. Reserve Bank in the room as well weren't sure. What about 10 percent? No, still weren't sure.

What about 12 and a half percent, still weren't sure. What about 12.5%? Still weren't sure, bottom line. A bit of discussion. What about 17.5%? Oh shit, that'll stop it. Fine, it's 17.5%. That's exactly how that decision was taken. And I put a proposal into Lynch to say, if you devalue, start something else, right? Don't go back to a fixed exchange rate. Start moving the exchange rate. Have the Reserve Bank announce their exchange rate every morning. Instead of announcing the same rate, announce a different one. Let's move it up a bit, down a bit, against the TWI. No particular trend.

Just get people used to the fact that the price moves. And so we got that through that Cabinet meeting. Lynch said, see, I told you you've got to be in. I turned down my job with Lynch. So I had a very long interview with him and Ainsley Jolly and so on. He said, I want you to be economic advisor, come out of the Reserve Bank on Saccomba, and I've spoken to the governor. And I said, well, no.

And he said, why? I said, because I didn't spend nine years at university getting four economics degrees to waste it on a bloody politician. He said to me, you know, you're going to have to learn something. He said, that room, the cabinet room, is where these decisions get taken. Unless I win the argument in there, it doesn't happen. You can write all these wonderful papers, which I know you've been writing in the Reserve Bank. I never actually see them.

Ainslie might slip them to me, but Treasury never bring them forward. The Reserve Bank's never heard independently of the Treasury. You know all that good work about floating currencies and all that sort of stuff, I'm never going to hear it. So he said I want to make the point to you. So he said here's my desk, here's a piece of paper, here's a pen, you write me a cabinet submission that says that we should start managing the exchange rate with this devaluation which was inevitable and it has to be on one page but everything Phil had was on one page. I used to laugh at Treasury trying to reduce hundreds of pages submissions to one page sometimes they come back with two pages and he'd say I want one page you know but it was a

way of forcing them to actually crystallize their arguments which I thought you know given some obvious downside it was effective from his point of view so i wrote the one page and went in and they made that decision and we started to manage it and then there was a whole we finally got campbell up and a big review and the recommendations were so significant that they were going to have to do it. And I remember when we gave the Campbell Committee review, the reports, and all the... Campbell we'd set up as a fiercely independent body, not run by Treasury, no secretariat from Treasury, you know, had to be independent.

And Keith Campbell was a known, very strong, independent thinker in the finance sector. He'd done some pretty tough turnarounds and hookers and so on you know he knew his stuff and there was no way they were going to influence him we just made sure that it was funded properly so they go around the world and get the best opinions and the best research commissioned the best research that there was no political influence at all there's no way how it could ring them up or Fraser could ring them up and try and influence their outcome. So got a very substantial report and all the accompanying

professional supporting statements, which was a huge, not the length of this table, of reports put on Fraser's desk. And we're standing there saying, well, Prime Minister, here it is. One of his staffs had put a piece of paper on top of the thing. He said, Prime Minister, do you realise, if you read supplementary paper number whatever, footnote two or something, it says that if you deregulate housing interest rates, they'll go up by 2.5%.

Fraser said, well, I'm not having that. And he just put his arm and swept this to the bin at the end of the table. Credit card swipe. Just the whole lot. And I said, well, Prime prime minister you can't do that why can't i do that i promise you know and of course um i said because there's a massive expectation out there that you are actually going to reform this place and we can't stay with you know politically determined interest rates and exchange rates we'd even though we'd been moving

the process of those treasury bonds and notes to be more tender based and not just you know they used to sit there and make a decision about what the interest rate ought to be so a couple of times we let them go with an interest rate we thought wouldn't raise any money and when it didn't they said what do we do i said why don't you try tender you know why don't you try and see what people will pay for that debt and um you know so anyway the point was as background when you when hawk came in keating came in it was inevitable that they were going to have to do that and when he swept that off into the bin he said to me so okay what do I do I can't go out there and defend this I you know what am I going to do I

said why don't we get a task force of key people one Treasury one Reserve Bank John Rose your advisor and myself and myself. And we'll work through that document, break it into bite-sized chunks, and Cabinet can start the process of deciding. So, you know, they did that and we moved quite a long way in terms of market-determined rates for government bonds and notes. Howard in the early part of 83 announced the licensing of four to six foreign banks. You know, we moved. So when they, or Keating came in, it was inevitable that, you know, as soon as there was an expression on the exchange, they'd have to float.

And, you know, all these big global banks had spent a fortune trying to position themselves for the inevitable, you know, deregulation of the financial system, including licensing them. And of course the Australian banks were a rearguard action immediately. Oh, yes, we understand the merit of more competition, but let us have a couple of years to adjust to being deregulated before you let them in.

We managed to convince everybody that was nonsense and it should all happen pretty much at once. But our thinking behind all of that was that that's fine, you'd actually deregulate, you'd get the politics out of interest rates and exchange rates and ultimately the Reserve Bank would become an independent entity overseeing that.

But it would also mean that you couldn't continue with centralised wage determination. You'd have to start more looking at the circumstances in particular companies, particular industries and so on. You wouldn't be able to stick with high levels of tariff protection because all these extremes would show up over time in terms of movement in exchange rate, movements in interest rates. You'd certainly have to pay a lot more for your debt. There'd be less confidence in the currency.

So it's inevitable that having started that process, then they'd have to deregulate wages, determination process. They'd have to cut tariff protection and they'd have to do a lot of micro reform to make the system work, to get the productivity up. And so all through the 80s into the 90s, the opposition didn't disagree with any of it. We drove it to happen. So we talk about, you know, Hawk did the accord, good it. We drove it to happen.

So we talk about, you know, Hawke did the accord, good start, we're going to have to go to enterprise bargaining. Tariff protection, Keating used to call me Captain Zero because I said over time we've got to go to zero tariffs. And how difficult is that going to be? And I was very conscious of how difficult that was in the Liberal Party to say that because there were those guys in the textile clothing and footwear industry that felt they owned the party.

And I'd seen them threaten Fraser to, you know, give us more protection, we'll, you know, pull our money, this sort of stuff. And but it was inevitable. The process was inevitable. And so all through that process, we could get out in front, call on them to do it, make it easy for them to do it. And so, you know, they didn't get any criticism. Very different world to today where, Abbott's world, where you're just disagreed with everything, no it and so you know they didn't get any criticism very different world to today where Abbott's world where you're just discreet with

everything no to everything you know and that's one of the big changes that's happened in politics in Australia that we don't have the opposition being taking the risk of being constructive you know and I called on Hawke for example to make a commitment to the first Gulf War and I remember getting caught in a press conference and they said, well, so what would you do? You know, you'll put troops on the ground? What are you going to do? I said, I think probably we'd start by putting a couple of ships as part of the US Armada off the coast. And the next day I had a briefing from the Navy and they came in and said,

great stuff, congratulations. That's just the sort of stuff we want to hear. And thank God you said two ships, because we've only got two ships that are consistent with the US communications system, structures and so on. But, you know, it made it easy for Hawke to say yes, where we disagreed, like with the response to Tinaman Square, supported them very heavily on those Chinese that are in Australia, giving them special visa status to continue,

students predominantly, but others. But then he wanted to close the embassy in Beijing and he wanted to, you know, break our diplomatic ties, and I said, no. So I led a major delegation to Beijing. Didn't make it a media event, unlike today, where everything's done for the media. We just went, and had

meetings with Jiang Zemin and Li Peng, senior people and senior ministers for about three days in Beijing, arguing that look the relationship is important and and it will develop, you know, it'll develop in a lot of ways in terms of trade and investment, it will develop in immigration and tourism and so on, cultural exchanges, universities and this sort of so thing but the world's not going to accept China's you know lack of human rights if you want to actually in time join the World Trade Organization or you want to you want to you know get more influence in the IMF all these things that they had on their agenda then you're going to

have to be seen to be meeting, at least attempting to meet, Western standards of human rights. And I got no pushback. We had a very positive discussion. The only pushback in the end was they invited me, they were doing the first major sporting event that the Chinese had ever hosted in Beijing, and it was the Asian Games, and they asked me whether, because I was the first Western leader to go there at post-Tenement Square. Nobody would touch them. And I was asked whether I'd be guest of honour,

you know, stand up with all the fanfare. And I said no. I didn't come here for propaganda. I came here to make a point. And so the last banquet was fairly brief, you know, 13 courses in 12 minutes, sort of. But the reaction was very positive and constructive and when i look at where we are today where minister can't pick up the phone and talk

to their counterpart we've slid a bloody long way and it's cost us enormously and it may end up costing us quite a lot because one of the things we don't do in our chinese relationship is pay any attention to what they're all about you've got to understand the Chinese before you negotiate with them that was part of the point of I was making in 1990 but their strategy now under the new plans is to actually become self-sufficient and in so many areas they're accelerating that process now you don't hear that said here but it means that over time they won't need our iron ore now you know they've, right now they haven't got too many alternatives, but they are developing alternatives,

and they are also stockpiling, and they're also cutting back on steel demand. There's a lot of transitional stuff going on. So in a few years' time, don't be surprised if the iron ore price isn't $2.30. It's under $100. And if we can place it through that that process we'll pay our price. And of course all the smaller things, whether it's wine or lobsters or whatever, of course

they can just say we don't want them. They don't need to have them from us. So we've drifted into a very bad position. But the point I was making is you can be constructive as an opposition to get out in front. Okay, there's a political risk. There's always a political risk. Open your mouth, there's a political risk. Step out of the door, there's a political risk. But the bottom line is if you are being constructive in the national interest, you'll carry the day eventually. So in so many areas, we made it easy for the whole Keating government. Too easy in a way. I used to point out that if Keating did put interest rates up faster,

you know, it'd end up with them at a ridiculous level and give us the biggest recession we'd ever had. And then he immediately twisted that to say this is the recession we didn't need to have, you know. But, of course, it was in the offing. And, you know, having come out of the Reserve Bank, that pressure between him and the Reserve Bank was phenomenal. He put Bernie Fraser from Treasury in there

to take the Governor's poll. John Phillips, who had been a very effective Deputy Governor, who I'd worked for when I was in the Reserve Bank, he burnt him. You know, it was terrible stuff. All because they were arguing, you're creating a monster here, you're going to send this country into really deep recession. And of course they did. Interest rates, people

forget mortgage interest rates at about 18.5% or something, compared to where they are today. I mean, that's a very different world. But they got away with that. I think basically they created enough doubt about me. One of the problems with being in politics as a leader is that you have to get known, and you never really feel that you're known. I mean, Kim Beazley came very close, but he really wasn't known. The average person, they don't pay a lot of attention to politics.

In the bubble in Canberra, of course, it's all terribly... Very finite sort of competition, but more broadly, people are too worried getting on with their of course, it's all terribly, you know, very finite sort of competition. But more broadly, people are too worried getting on with their own lives, and more so now than it was then. But, you know, so to get known, to be seen, to be standing for something, believing in something, prepared to fight for something, is very difficult in politics.

And in our world, we're, you know, elbows not game, you know not game right now he's still doing this bit about small target we're not going to do anything we took to the last election even though there's a reasonable debate that I think a reasonable point and it came out in the review of the election lost by Craig Emerson and Jerry whether or basically their main issue not written in these terms were shortened he was never net positive in his election standing. To the extent he was known, they didn't like him. They didn't trust him.

So, you know, Morrison could actually swan in against that. But, you know, the response of the Labor Party was, you know, we'll ditch the tax changes, we'll ditch the climate stuff, and we'll ditch... Well, suddenly the electorate says, well, you know, you're just like they are. They're not doing anything. You're not going to do anything. And it's sort of, I think, probably a world where you'll see more independence standing and maybe successful. Have you heard of Peter Turchin?

Peter? Turchin? No. He's a Russian-American evolutionary biologist whose work fascinates me he went from evolutionary biology into kind of creating a new field which he calls clear dynamics clear after the greek god of history dynamics changes every time no no yeah yeah clear with an eye not a knee and and he's he's applying mathematics to history to look at cycles, and with Jack Goldstone,

who's the father of structural demographic theory, came on the podcast earlier in the year. They've looked at spikes in socio-political violence through history, and they, back in 2010, Turchin predicted in a Nature article that there'd be a big spike in the US in 2020. Now, whether he actually predicted that or he's just lucky is sort of a separate question but his theory fascinates

me because he looks at the increase in polarization and political infighting in the united states and concludes that it's a result of what he calls elite overproduction so because of rising inequality since the 70s, you've got more people entering the elite or more elite aspirants. And he kind of gauges that by looking at the number of law degrees or MBAs that universities are churning out. And with an increase in demand for elite positions,

there's been a fixed supply of those positions. So the number of seats in the House of Reps or in the Senate doesn't change. Usually the number of judges on courts is fixed. So you've got an increasing amount of elites vying for a fixed number of positions in society, and that intensifies intra-elite competition. And then he kind of also measures intra-elite competition and then he kind of also measures intra-elite competition with a number of proxies like looking at the increase in filibusters in congress and things like that but um i guess what i'm one of the reasons i was fascinated to speak

with you john is i'd love to kind of explore what you see as some of the ultimate causes for this increase in short-termism, careerism and partisanship in politics? Because for me, I think that's quite an interesting, useful theory, that idea of elite overproduction. But I wonder what you make of it and if you think there are any other explanations. It's very pronounced, I'm sure, in the United States compared to Australia, but I wouldn't say that it's not a feature of what's happening here. Yeah. You know, there are a lot of points you can make. I mean, one of the points that's relevant today is this small target, big target stuff. And people basically go back to say, Houston was a big target, dumb policy, lost the election. So don't let's take that risk. And you've seen that all the way through, and Howard certainly worked on that. Howard capitalised

on issues as they broke, but he didn't take big policy positions. The only one where he finally did say something which was tagged as work choices, he didn't understand it so he got it wrong and never understood our industrial relations policy which although he was Shadow Minister of Industrial Relations didn't understand it. And the essence of that policy was we had a condition we had a legal structure of legal support you know free free legal advice a separate court for the employee advocate basically guaranteeing that what you've got your keep was our line you can never be worse off in an industrial relations negotiation and if you've got a complex wage structure with you'll keep was our line. You can never be worse off in an industrial negotiations. If

you've got a complex wage structure with all sorts of add-ons and penalty rates and so on, reduce that to an average hourly rate, that's your base. That can only ever be improved by negotiation. He left that out. It was pretty easy to say that no disadvantage test is at school today. Leaving that out meant that you could run a work choices you're attacking workers rights you know but and that so the big target stuff is large extent goes back to fight back no you don't want to be like that and that is an element of what's what's happened I think and then you know it's a question of the end game and the end game to me was not just winning it was winning to do something you know winning to make a

difference and today you ask most the average voter of average punter from you know politicians in there to make a difference they say yeah for themselves you know snouts in the trough for cheating on their expenses whatever and you know allocating money to key marginal seats to buy votes, which probably don't work anyway. You know, this sort of stuff. So that's... The end game has shifted to be just political winning. At all costs.

And it doesn't matter what you sacrifice in order to get there and what deals you have to do to get there. There's not so much scrutiny. And where there should be scrutiny like with the order to generally a cut his budget the independent anti-corruption and the integral integrity and anti-corruption Commission you draft something that is just a protection racket for the the ministers and their staff and just doesn't do it. This is a drift that's very significant. But it's all elements of the end game becoming just winning.

And that's very sad because people really do now start to see that there is no understanding of the national interest. And, you know, we go and lecture the Chinese about, oh, we're fighting for our principles and values. And they say, say yeah but you're circumventing a lot of those in global trade you know you don't, it's not real and we say it's our national interest, well it's not really

we haven't got a very clear idea of our national interest the same as right now there's an interesting debate as to how we should redefine or whether we should redefine national security us the defence guys, the national security risk is that we'll be invaded and we need to have the military capability to respond to that, which is a very low risk compared to say climate, which is going to do us irreparable damage as a nation if we don't get on

with it. And these debates are very hard for the end game mentality to deal with, because they don't want to take a risk in having to open up those sort of issues. Yet, you know, as long as you drift, I mean, you get, we've got a much more bullshit Chinese response than anyone ever imagined you'd get. And Morrison made a statement yesterday, and the Chinese now responded today and almost Murray's pain my statement you know the Chinese they keep out of our industrial room judicial processes and so on and you know but we don't make any attempt to understand that I I've built businesses in China right we built one they're built like luxury buses and coaches in Qingdao it was a very sophisticated technology Australia makes the best bucks buses and coaches and they were gas fired in those days. They were really very – so we did a joint venture. I did a joint venture with a big state owned government

enterprise. China heavy duty truck, China special truck was the enterprise. A 50-50 joint venture. We built the plant near Qingdao and it was a world class plant with the application of our world class technology. And on the first day, in the first board meeting, the Chinese counterpart, we had sort of divided board responsibilities, turned up with a letter from the government which said, we have terminated your land use rights this can no longer be a factory a plant this has to be reserved for residential development hmm I went to the highest levels in Beijing trying to get that

overturned and I was told quite flatly look you can take it to court if you want to but our courts enforce government policy and the government policies to take your land it's a good luck now that's mentality is what they actually operate with and you know there's no attempt to understand that when you start to lecture them I'm not saying you give in and I'm not saying you don't defend somebody who's being badly treated but you do it in a way that shows an understanding and a respect for what they are trying to do from their system. But having said that, we'll never be communists. We don't want to be communists. We don't want that. And we make those points

quite clearly. And that's where our values start to differ. But you don't see that in that debate. They're just sort of slagging off at each other now, which is not going to achieve anything. and it hardens the arteries I think on the Chinese side that bugger it we'll just show you to show you how our system works so I mean these are big issues and they're elements of what you're talking about in terms of elites yeah there's we have a system that does protect some of those elites and encourage those elites and we have an education system that produces too many of them.

You know, there's always a feeling that a good lawyer should go into politics because that's where you make the laws. Not necessarily the right way to get a good law. But, you know, we're producing multiples of law graduates compared to the number of available jobs. I spoke at a law reform thing in Queensland a couple of years ago and I took out the numbers. That year they were going to produce 60,000 graduates for 12,000 solicitors' jobs. The system doesn't adjust, right? Yeah. I looked at those numbers myself recently.

When you think about it, and that's not just there. We did it in the finance sector. We've seen it in so many other sectors. So there's these big mismatches we build into the system, but they are favouring your elites. And lawyers that get to the top see themselves as in a privileged position. And it is all about privilege. It's in-game, but it's also about privilege. So you want to be a member of Parliament? Why? Oh, I represent the interests of my electorate.

But you don't. The extent to which they don't listen to their electorates is now staggering. The best example of that to me was the National Party in the same-sex marriage vote, where they were very confident they had most of their seats that vote no, and 15 of 16 seats voted yes, and some of them quite decisively. Didn't understand the first thing about their electorate, and that's been reflected, of course, the lack of regional policies, the lack of... But it's building... They see themselves as an elite.

They're members of the political elite, and they do everything they can to get there and to protect that, but not in the interests of their constituency. So there are a lot of elements, I think, that you see in that. And the breakdown of democratic processes in the US is a pretty big one. I mean, Trump complains about the election being stolen. Well, he stole the first one. I think he's just pissed off that it didn't work the second time. He really did spend all his time in the last couple of years suppressing votes, making it difficult for people to vote particularly the load of you know the disadvantaged and low-income groups a lot of black and Hispanic he made it

very difficult you know shifting polling booths and closing down their capacity to get to a to lodge a vote taking over the mail system so that votes that were passed through the mail never actually got counted, you know, because he had his appointment. So these are big issues that show the extent to which, you know, some already in power in the US it's been more, it's easier to do than perhaps in Australia, but we don't handle Australia Post very well at all. You know, it's, they're all elements of what is a way of

confirming the status of particular groups in society at the expense of others and when you then persist with tax systems that discriminate as much as ours does and you know begrudgingly offer some support to low to middle income earners but nothing like the support that's being offered to high income earners or particular industries, as you've seen in COVID. I mean, to have left universities out of JobKeeper, when you put the Catholic Church in so all the priests and nuns are getting JobKeeper, didn't make any sense. And universities are a major sector, major employer, major exporter. It's vindictive. But attack because they're seen as an elite.

I mean, if you talk to the ministers in Canberra, they'll tell you that it's all based on Morrison's personal creditors. He thinks universities are fat and ugly, which they mostly are. They've built big bureaucracies. The vice-chancellors pay themselves too much money, that's true. And the big thing is that they're a breeding ground for left-wing radicals that are going to attack his government. I spent a lot of time at university, I have some trouble finding a left-wing radical these days, compared

to say the 60s. You know, it's just nonsense. Yet the cost, the long-term cost of that elitist attitude is enormous in terms of higher education we're going to lose a lot of good people we have lost a lot of good people we're going to don't fund universities don't fund research yet there is an opportunity and we've tried to put these arguments into the system what about an income dependent loan like a hex scheme for universities lend them the money now on the condition they do restructure, they do cut their bureaucracies, they do refocus their activities on excellence and so on.

And as their revenue recovers, as the foreign students come back, or more domestic students come, as the revenue recovers, you pay back. Automatically they have to pay back. So over time it's just moved them through a process which needed reform. But you know that has never been done. Coming into the, you remember Rudd had an education revolution. There was a big report done at the time, the Bradley Review of the Higher Education. Something like 13 of the then 38 universities were seen as financially non-viable. Nothing was ever done. Nobody tried to merge.

We had too many universities for the size of the population, and they're all fat and ugly in terms of Morrison's position. That compounds a problem. It's an anti-elite position. You know, I mean, academics can get pretty... I mean, I'm fascinated how many people have solved all the world problems in academia, but they've never had a real job and never worked outside the test tube or the mathematical model,

which gives them those conclusions. So, in a nutshell, the number of politicians who view their positions as a prize rather than a responsibility has increased. Yeah, absolutely. Could we view that as the logical endpoint or the political version of the sort of rugged individualism promoted by right of centre parties during the 70s and the 80s? It's a big stretch, I think.

I mean, you know, the Liberal Party would say that it's defining principles, none of which seem to apply anymore, but individual, the power of the individual, the focus on the individual, the responsibilities of the individual, the basis of society in terms of their family structures and so on. Secondly, that they believe in small government, they believe in low levels of regulation, believe in market forces where they can. None of those elements apply. They ignore all of that. Just their position on climate ditches the lot of that.

They prefer to try and bully energy companies into holding prices down than to put in place a system that will give you lower prices. Indeed, you go and build a gas-fired power station, you put prices up, not down. I mean, there's no consistency with their positions at all. So where there was a successful focus on individual initiative and contribution and responsibility and so on, that's all been lost in terms of the way they think. So I think it's a stretch to go back and say, oh, this is some version of that re-emerging. I mean, I think it's more likely that they are in it for their own benefit. As I said before, ask the average punter, as Howard would say, go to the pub test. What are these blokes in politics for? They're looking after themselves. They say they want to make a difference. It's to themselves, it's not to us. Nobody's taking a position that may be difficult politically to take, but clearly in the national

interest. You know, okay, you can handle the coal industry, for example, in climate very easily. Not a lot of people are employed in coal. And you can transition to individuals and communities over time. And you have a pretty clear pathway as to how these coal-fired power stations will have to close and you should be planning to To transition them, but they closed northern in South Australia without any transition strategy at all They closed Hazelwood and Victoria without any transition. They just left those communities short about five or six hundred jobs

Whatever it was, you know, that is staggering and yet if you go to the unions and you work with the unions, you will get, I think, a lot of cooperation for retraining, relocation, you know, community assistance and so on. You can put together a package that facilitates that process, but they don't want to try that as that might, you know, by election today that might disrupt you know somebody should stand up and say look we're not against unions but there's this stupid idea that is perpetrated perpetuated i should say in government that you know we still work with the old sense of a coal miner you know like with a shovel and a light in the helmet and he goes down and digs the coal out the whole thing's automated these days you can go to places in western australia or sydney and in the headquarters of the big mining companies and and it goes down and digs the coal out. The whole thing's automated these days. You can go to places in Western Australia or Sydney

and in the headquarters of the big mining companies and see them run the Pilbara on a laptop. The trucks are automated, the equipment's automated. So we have had this very false argument about what are we doing here? And the cost of that to the nation as a major exporter of coal as well as a major user of coal is enormous cost if you take a two or three decade view. So there's no attempt to deal with those sort of issues in a way that shows that you understand individuals and what they need, what sort of support they need. And you know this budget just throws a lot of money as I mentioned in these social areas of you know child care, aged care, mental illness, National Disability Insurance Scheme, throwing lots of money in it, tens of billions of dollars, but no reform.

You know the child care thing is just the extension of the appalled system, which we know disadvantages women, families, and productivity. The aged care system, there's a lot of recommendations there in the Royal Commission that are ignored, big one being not only train these people better, but pay them more so that you actually make it an incentive to be an aged care worker, to be a 24-hour-a-day nurse. And no reform consistent with the recommendations of the Royal Commission. NDIS is just running out of control. Mental illness. Throw some money at it, you're not solving the problem. You listen to Macquarie and these people,

they'll tell you you're not solving the problem. But the answer from the government's political point of view is I've got a checklist of things we have to do in this budget if to deal with these issues you have to deal with this constituency have to worry about these seats and so on since some staff member there ticks the box yeah you know the budget does is the budget does every and you look at the way they explain it the way they sell it that's all they're doing it's totally political it's got nothing to do with what's in the best interests of a sensible aged care system. And I'm annoyed with the aged care reform, because back in the middle 90s I was the director

of a major healthcare group, and we were putting arguments into the Howard government about what was going to happen if you actually persist with this. So he brings in an Aged Care Act in 97, which is just staggering, ignoring the substance of the issues that were mounting. And 20 reports later, we get the Royal Commission report, which says just how bad things are. We call the first version of that neglect. That's exactly what it is. But I remember, you know, we did a lot of advisory work with, say, Salvation Army at the time, who wanted to shed some of their nursing homes, which would cost them a lot of money. And so they put them out to tender on our advice. And

they called people to put in a range of bids. And we bid a range, I forget, don't go to bid, but 35 to 85 million dollars for the 10 homes. And knowing full well that they weren't worth a penny over $35. But it met the requirements of the tender. And some of these banks came in and paid $124 million for them. OK, so what's going to happen when an institution that knows nothing about aged care, except putting it into a fund and taking a couple of fees on the way into that fund,

and managing that fund, what's going to happen when they realise that they actually have to service $124 million? So they cut the quality of the service, they cut the nursing care, that's what happened. And that was all back to the 97 Age Care Act. And so you see so many examples of that happening. Today, we've got issues in front of the government or both sides just passed a piece of legislation that makes it possible for for property developer donations which states are basically outlawed to go federally and be handed back to the states and both sides voted for that. You've got Taylor in a couple of pieces of legislation right now in the arena he announced his arena can look at gas projects. And he did that by regulation, inconsistent with the Act, which says they

can't do that. They've got to focus on renewables. If he gets caught, he'll change the Act over time. He doesn't want the political debate. So we do it by regulation. And there are elements of what they're doing now, they're just doing more by regulation, less by legislation. It's all confirming this process. And none of that is in the national interest. It might make them feel better that they've ticked a box in return to the coal sector or fossil fuels or paid off to one of their mates in the gas industry, but none of it's in the national interest. In 1976 you published a paper with Jürg Nienz where you looked at two paradigms in theories of money supply and you began rather philosophically by discussing Thomas Kuhn's structure of scientific revolutions and I wanted to ask you what's the biggest paradigm shift you've

seen in economics during your lifetime? It's a good question because I think right now one of the things that strikes me is how so many of the relationships that we sort of took for granted don't apply. Don't apply to the same extent. You know, flooding the world with liquidity would have had the expectation of hyperinflation. People would draw attention to what happened in Germany, what happened in Brazil, a couple of occasions. And, you know, to shift away from that because the relationship has broken down.

It's not clear how it's broken down because we've got massive central bank holdings of debt and keeping interest rates at low, you know, negative interest rates. One of my friends at the university, when we were all building macro models of the world, solving all the world's problems, built a model that implied negative interest rates for a period.

And we had the best monetary macro economists, econometricians in the world at that university. And they threw out the thesis on the basis that that sort of concept was, you know, inconceivable. Outside of the paradigm. Yeah, well, you know, well, what's that, what have you got? We've got long-term interest rates in the German, you know, 10 years negative and have been for a number of years and, you know, people paying governments to take their money,

you know. Yet if you think about it, it doesn't say it easily like that. People wouldn't think that that could be true, but it is true. And quantitative easing and so on has driven that. So the shift from the old simple monetarist, Keynesian view, you know, you worry about a point movement

in the money supply number and you worry about the inflationary consequences. That seems to be long gone. In fact, here's the Reserve Bank out there now campaigning to increase cost base, wages and inflation to get into some sort of notional target, which they will then feel that they go back to more in quotes, normal monetary policy. They've got no idea. I mean I can remember the Reserve Banker criticising them a while back because they were just so obsessed with the possibility of inflation. Even coming out of the GFC they were worried

that putting liquidity into the system, even though it was excess liquidity that created the GFC, you know, the world chasing debt and creating all sorts of... ..chasing yield, I should say, and creating all sorts of debt instruments like collateralised debt obligations and credit default swaps and so on, a mountain of debt, all basically based on a pump that US house prices keep going up and subprime loans would hold. When that base collapsed

and they'd all been securitised into these instruments, the whole lot collapsed. And, you know And they looked at that and thought that they'd be very careful in this country. So they lowered interest rates in this country, but nowhere near as much as other developed countries. And as soon as there was a hint that inflation might be going up, and there were a couple of them, they put the rates back up again, only to have to bring them down since then, all the way down to where they are today. That transformation in thinking about the

link between money, liquidity and inflation has been a phenomenal shift. And we've now got a situation where how do you disengage from what you've got? How do you disengage from negative interest rates? How do you disengage from encouraging people to take more debt? You have the Hayne Royal Commission telling you that banks knowingly lent people more than they knew they could afford. They fudged the numbers to justify the loan in the culture of greed. And the response to the pandemic is increase the amount of liquidity that people can get. They can take it out of their super, they can get it from the bank. Banks are encouraged to lend at lower interest rates. And we already had a record level of household super, they can get it from the bank, banks are encouraged to lend at lower interest rates. We already had a record level of household debt, nearly 120% of GDP, 200%

of household income, and we're now encouraging more. This is an incredible shift, and the unwinding of that is just significant. And that's the drift in, I mentioned before, the drift of funding recurrent expenditure on debt which governments never should have done or never wanted to do and here we've got massive increases in this budget which are on debt and the debt numbers going to rock it out to I don't know three and a half in ten years and but the components of that are going to be very significant so these are that monetary side is very very significant shift. The old trade-off between inflation and unemployment, you know, not really there.

Still hoping that you get some sort of pressure by pushing the unemployment rate down to push wages up, but nothing to guarantee those wages will go up because the nature of the wage of the labour market has shifted so much. It's a very big shift. And when you've had on top of that responses to the pandemic, which have changed the way we work, the way we live, where we travel, where we save, where we

invest, all that, those changes in behaviour haven't filtered through to the thinking about these numbers. So the numbers today don't mean what they meant before. And you can create a situation where the unemployment rate can be driven down because we've got a fortress Australia. We've closed off the international, you know know we are creating a unique set of circumstances which is you know themes of a hundred years or so ago very protectionist what we had a big drift away from when people realized that that sort of protectionism actually cost us we were I think number one in the world in terms of standard of living the turn of the century, suddenly we lose that, mostly because of that protectiveness attitude. Here's an opportunity in the pandemic to go back to that. Now, these are big, big shifts. I'm not putting, not ranking them,

but these are the sort of shifts that have occurred. And, you know, realising that you can, you know, you don't have to work from the office. That's a big shift. A lot of hybrid employment now, and it won't come back. So the values that have been put on commercial property in Sydney and Melbourne, Brisbane, they will not be sustained. And that's going to have a big impact on the debt associated with those and the valuations that people have worked on. And these consequences of what was a really, I think a lot of it was just, let's just deal with the situation with increasing liquidity. It's had a lot of other consequences.

And then governments in the pandemic have said, well, we wouldn't normally want to spend money, but we have to. So we're spending a lot more money. And the transition to see Frydenberg sort of sitting there one day saying, you know, debt and deficits are a disaster, back in back in black thank God and then suddenly spending like a drunken sailor you think you know that transmafation in a year is staggering and it is nobody's thinking about the long-term consequences of that and we I've got a massive debt overhang now which will not just in the household

sector but you know look how sensitive those all these people that rushed in first-time buyers that rushed in, first-time buyers that rushed in the last six months to get into the housing sector, in the expectation that prices won't go down. They might be wrong, right? Prices might go down. They're still a bit in the momentum. They've poured money into JobMaker and HouseMaker, whatever they call these schemes and you know, they've supported that sector

Just to keep the economy going But it's not sustainable. Do we have a housing bubble in Australia? No a massive here And one of the most expensive housing markets in the world and you ask yourself. How do we get there? You know, I'm staggered you go to the United States and big homes, half home, about half our price. Something's wrong. Fiddle with the exchange rate if you like, but bottom line is we have distorted our housing market amazingly. The extent to which around here, in the time I've been living here, we've had massive expansions

in new homes. This used to be an aged care area. Now there's massive expansion in new homes so that the local councillor here has to deal with the fact they've got a very large young population and a very large old population. And those shifts are very big. I mean, the shift away from migration and itinerant workers,

visa-based workers, that's going to have a big impact in this country. And don't turn it around quickly. You can't go back to, let's have an immigration of 200,000 when you haven't got a global solution on the virus. So the counter-argument, John, is to say, well, the price Australians pay for housing isn't like the sticker price on the home. It's not the one point whatever million

that the house goes for at auction on the weekend. It's the amount that they repay in monthly mortgage repayments. And that hasn't really increased substantially. So far? So far. So what do you make of the user cost of housing argument? Well I mean that will increase. I mean there's no doubt that right now you've got the most unique set of circumstances where that money's been pushed out. See, one of the problems with subprime, it's the same thinking. The subprime market, right, was basically politically driven in the US.

We've got to get money out the door. We've got to increase home ownership. We've got to – she had Fannie Mae, Freddie Mac setting a standard, if you like. And basically the loans that the banks were making were incredible. They would lend you up to about 125% of the value of the house, real value of the house, at an artificially low interest rate that you would reset in time, punting that house prices go up, over time your equity in the home goes up, you are able to reset those loans, pay a bit higher interest rate. And of course you've got a bigger equity in the home.

You start with no equity in the home. But in the US case, on a no recourse basis, so that if you could not make your interest payments, you'd hand the keys back. So suddenly, 18 million houses were handed back to the... They were bulldozing new developments in the US because they just couldn't ever make them pay. But that same mentality is, well, where we just you know, don't listen to him. We'll just lend people even more and And the expectation that over time in a foreseeable future

the cost of servicing that debt will not go up much and By the way, their wages probably will go up so they'll be better able to afford it. And most people, younger people, have been seen to push the limit on their wages and push the limit on their borrowing just to get in and hoping that it all settles down in time. But what happens if it doesn't? What happens, for example, if finally all this liquidity is inflationary and the world inflation picks up and central banks even this week power was starting to talk about the possibility that they may have to look at increasing interest rates you just imagine if you suddenly start increasing interest rates in that environment you're going to have a very big shaker because the cost of servicing

those loans is just going to go up so it's nice nice and artificial right now, but it's not sustainable. And house prices will come off. And, you know, then suddenly the people who thought they had net equity in the home don't have net equity in the home. So if anyone starts to reset those loans on the basis of equity or some sort of notion of an LVR, you know, the Reserve Bank's saying, well, we'll keep flooding the world with liquidity,

the markets here with liquidity, because APRA will actually control the lending. They'll put some restrictions on it. At the same time, the government's making it easier, not harder, to get loans. And if APRA starts putting LVR ratios on the banks or whatever mechanism they use, it's going to be a very different world. And that filters through very significantly. And it's just to get so used to how you are and how things are going. But they can be dramatically different. And in Australia, we've ended up creating a huge housing bubble, I think, which will come back to haunt us in time.

Did the deregulation agenda that you pushed with the Fraser government back in the 70s help to enable the great mortgaging? Look, I think there were two things we called for, and I actually wrote a big report for Campbell that nobody paid any attention to, but it was in the context of offshore banking in Australia. But I focused on the fact that deregulation has two shoes. One is the deregulation of the banks themselves, and the other side is the improvement of prudential regulation and supervision. And we only got the first one. And they've been struggling to set the second one. And in this country we came to the view that, well, that's not really something that should be left to the Reserve Bank. We'll set up this separate body, APRA, and they'll do it in conjunction with ASIC and so on.

Well, you know, we still don't have an effective understanding of potential supervision in this country. And, you know, I've argued this now a lot on the climate debate and climate risk and the impact of climate risk on superannuation funds, banks and so on, which they weren't taking account of. We started a project about 12 or 13 years ago called the Asset Owners Disclosure Project. And our whole aim was to say, look, governments are going to dick around deciding whether or not they price carbon or whether they mandate biofuels or whatever. But basically in the end it could be driven by investment and it should be driven by investment. So let's look at what the big investors of the world are doing with their money. So we took the top 500 global investors

which are sovereign wealth funds, pension superannuation funds, some insurance companies, some university endowment funds, top 500. And we came up with a very sophisticated survey of their identification and management of climate risk. And then on the basis of that survey, we rated them and we ranked them, top 500. And, of course, you know, the initial reaction was, piss off, we don't want to do any of this, we don't think this is a risk. But our argument was that,, say a pension fund, a trustee of a pension fund, a director

of a pension fund, has a fiduciary responsibility to manage that money with a long-term horizon, the working life of the individual whose funds they're managing, to maximise their return at the end of their life. And here all these funds were basically, 12, 13 years ago, were basically doing two things. They were using short-term focused asset managers and advisors who they remunerated on the basis of short-term performance, so they didn't look at anything like a climate risk. And secondly, then, when you looked at their allocation of their assets, as best we could

say, initially it was about 55% of their investments in climate-exposed investments, and less than 2% in what you call low-carbon intensive investments, a 50 to 2 punt against a financial crisis, climate-induced financial crisis. And initially, we got a lot of pushback, but then you got the big players coming in, the big CalPERS, the big public pension fund, and the US came in and said, well, we'll take this seriously, and they got a triple A rating. And then all the other pension funds saying, what are they doing and we're not doing? And so it started to spread.

And by the time we pulled out of there about three years ago, at least three quarters of those major asset owners had shifted. And some of them had really, you know, like Norwegian Sovereign Wealth Fund, the largest in the world, quit coal and Rockefellers had no fossil fuel investment even though they made all their money out of fossil fuels. You know, there was a lot of big change taking place. And it got picked up by Mark Carnegie at the Bank of England and under the Financial Stability Board set up the Bloomberg Task Force.

And now our view was we're all about disclosure. We weren't about being prescriptive about how you should deal with climate risk, just that you recognise it. And once you recognise it, put your own price on carbon, if you like, internally, once you recognise it, how are you gonna manage it? And there are a lot of ways in which you can manage it. You can quit, you can divest,

you can put more into low carbon intensive investments, you can derivatives and all sorts of structures. And that really changed everything. And those task forces are now to the point where you're going to get compulsory disclosure of climate risk, not just in those sort of institutions, but also in banks, you've seen the banks react. In corporates are now going to be held accountable for this,

for their management of climate risk, their carbon footprint, if you like. And you know, this has frightened a lot of people. And you've seen a lot of investor action now at AGM's pushing companies to shift their position not not supporting their remuneration unless they adjust to climate now this was a big big big shift a really big shift and now we are at the point where they're starting to understand it so much so that they're pushing governments you know they're pushing governments, you know, they're pushing governments to say, well, you know, we really do need a sensible transition strategy on climate.

We've got one in our fund or in our company or whatever. But these things are not, you know, everyone says they're frightening. I was on the board of a big printing group in the, 15 years ago, so maybe more, 20 years ago. And I made the outrageous suggestion at a board meeting that we should look at our carbon footprint, because we had very heavy power use, big old printing , those big old machines used to have a lot of power.

And you use a lot of transportation logistics. And the report came back. We did it. And the report came back and said, look, if you just restructure your use of power and your use of transport and logistics, don't cut anything, don't fire anyone, you can improve your bottom line by 30%. And suddenly it made sense to worry about your carbon footprint. Now, most companies have gone or are going through that sort of process. That's a big difference. That's a big transition now.

And I think that climate transition where they are now way ahead of governments. There's a fair bit of greenwashing in some of the things you see around the world and what the oil companies say and what they're actually doing. But the trend is irreversible. And that will make a massive difference to the whole thing because once they start shifting their investment strategies... One of the things that happened early on was Hank Paulson, who was Secretary of the US Treasury at the time of the GFC, he came out and said in response to that sort of argument that the risk of a climate-induced financial crisis dwarfed the risk that he

ran in the subprime crisis in the United States. And suddenly people started to say, geez, you know, this is serious stuff. So you've got the Bank of England, you've got ex-heads of Treasury, you've got people really shifting it. And the Reserve Bank started to understand it here too. They called us in and said, well, here you think we've got a systemic risk, we don't think we have. So we suggested that they do their work and work it out and then start raising the issue, which they've done. And that has made a big difference to the attitude of APRA. So I said to the Reserve Bank, you can have APRA do all the stress tests you like on a bank. It doesn't mean you won't have a systemic problem. And

it doesn't mean they write the stress tests either. So you've got to be aware of the risks that you're running. And a climate-induced financial crisis is easy to happen. It can be driven by extreme weather events. I mean, look at the cost of, you know, Katrina wiped out an entire city. One of them went up the coast of New York and had to waterproof the whole New York City and they had to shift from centralised to distributed power generation. Also, these are big costs. And you've seen that around the world secondly governments are responding to

climate those have impacts relative price impacts and of course then there's technology which has changed the face of the response solar and wind are so cheap these days that you know why would you contemplate doing anything else so why would you have a coal investment why would you have a gas investment this is slowly coming through not so much in the morrison government but the rest of the world is moving and so i think that's another big transition that's taken place and you know we feel that we had a big impact on the early stages of that getting people to just think about the climate risk you're running without being prescriptive and it's very interesting how we got a lot of attention globally on that actually

moved the headquarters that that to start in Australia we moved it to London and then we really had some trouble funding it so we rolled it into share action they keep doing those surveys but the points been made and you look at our super and pension funds now they're very conscious of the climate risk they're running and some of them one of the very first triple-a rated funds was the local government super in Australia they had one guy in there that had taken this seriously all the way through they had a very sophisticated system for dealing with it and managing it and changing their investment. And then of course over time, particularly with an increased

focus on ESG investment, they're finding that people don't actually lose revenue. They earn more by having run a sensible investment strategy so that all the old ideas, oh it's going to cost us returns, don't apply either they actually are doing better so investing some of the technology that gives you the transition gives you a bigger return so it's been a long education process but

it's another big change, so you've got a lot of changes in the Institute of Equation that have I think shifted the paradigm and we still have a long way to go, we still have changes in answer to your question that have, I think, shifted the paradigm. And, you know, we still have a long way to go. We still have a terrible amount of denialism in government. One of the things that I set up recently is this Council for the Human Future, where we've

identified 10 existential risks to the future of humanity, basically. But it includes climate, it includes resource depletion, population, you know, food, food security and so on. But one of the big ones is just that governments don't want to actually address any of this nuclear war, weapons of mass destruction. So a lot of those issues. Now that is getting a lot of attention. We just did a big global conference on it. We put in a presentation

to the recent meeting of the Nobel laureates. I mean, there's a whole lot of interest in these longer term threats, but when you get a pandemic, another pandemic is one of them, we had specific warnings about COVID, specific, and nobody paid any attention. And we are now getting one of, I mentioned before about how sometimes the review is static. We'll fix that, we'll get through this pandemic and we must move on. No, you should be preparing for the inevitability of the next one. And you're seeing how fast this one's mutating. You might already be in that.

And there's no consideration of that. We're just looking at vaccinating people and opening the borders and going back to what we were. That ain't going to happen. It's never going to happen. And, you know, so looking at those sort of threats to the future needs people to be prepared to pay attention to the science, listen to the warnings. You know, I've been arguing that I think that the pandemic really is a bit of a dress rehearsal for those issues coming to the fore and everyone's

puts them down plays me on they're not the risk of a nuclear war but really you know you're on the edge of it in the subtler parts of the world certainly weapons of mass destruction being developed everywhere um the um population issue we know the planet can't as it is support the population we've got let alone the sort of growth numbers that are in prospect. Resource depletion is very significant and it's going to impact enormously in the future. Food security, ministers in Australia tell me we've got no problem in Australia because we export food. And I say for how long?

It's a different world when you start to look at the reality. And climate has a big... All those risks are interrelated. Climate has a huge impact on food and on resource depletion. So you've got to take an overarching response to them and start to think about it. And the annoying thing, as I was saying there, is what we call denialism. Nobody likes the term.

But governments don't want to listen to the warnings but governments don't want to listen to the warnings they don't want to listen to the science we say we're basing our medical advice the medical advice pretty thin and be very disparate going you know drawing back join drawing on the Spanish fluid 1918 maybe but the body of evidence on the likely impact of food security or climate, huge scientific evidence, peer-assessed scientific evidence over decades, and they don't want to pay attention to it. I find that just the most disturbing feature of politics and government today, that these warnings are there, and we'll get through this one and we'll just move on.

It's like the bushfires. we don't really prepare properly for the next one or the next flood yet you know working on say floods you can use regenerative agriculture to improve the carbon content of the soil reduces emissions agriculture can be net negative emissions but it also makes the soils more drought resistant resilient why wouldn't you do that the evidence is evidence is overwhelming, but they don't think about those sort of consequences. Politics being short term, we'll get by this pandemic today, we'll handle it the best we can. Morrison sort of set out claiming credit for everything as a national cabinet, basically the states did it. And we still don't have a solution on quarantine. We don't have a solution on quarantine we don't have a solution on vaccine rollout I was asked back in the 23rd of January remember when the first

wheelhand flight arrived in Australia what should we do all flights into quarantine national quarantine immediately it's pretty no doubt that that's the only way and you if you don't do it you're gonna actually have ultimately have to do it yeah and this is the problem you know ultimately they get dragged to doing things which end up costing a lot more money yeah they're much more disruptive and uh and much more difficult to implement and you know they've just caught short and that's what's happened i mean the world switched i think if i look at it go back to the middle of the last century, we started to see the consequences from the Industrial Revolution through of not worrying about the impact of what we were doing on resources, on the climate.

And suddenly we are starting to see this trend to say, well, these are very significant issues. We can't continue to eradicate species. We can't continue to live with a phenomenal ice melt and so on and so forth and people are starting to really think about what we need to do and they make fun of the student protests but kids get it my kids have got a very clear idea that the world's being stuffed up by politicians they both went to a client the first student protest we were away. I was speaking in Fiji.

They did their own posters and turned up. And the 10-year-old's poster was, This is my future. No discussion or direction from us at all. And the 16-year-old, 15-year-old she was then, was, Denial is not a policy. And, you know, kids get it. And their parents aren't getting it.

Their grandparents are getting it. So you've got this sort of two ends of the age spectrum that are getting it. But I don't know how long we can go before it's a major election issue in this country. It's those boomers. On the question of politics being short term, I'm interested in the link between wages stagnation and the housing bubble. And if

your income isn't growing, the only ways to consume more are through debt or capital gains. Actually, interestingly, in one of those books I gave you, House of Debt, Meen and Sufi, the authors, find that for a period during the mid-2000s in the United States, income growth and credit expansion were negatively correlated. So in the areas where incomes were declining, mortgage credit was increasing. And I wonder whether as a result of stagnant or declining wages

over the last decade or more, just focusing on Australia now, politicians and governments have pumped the housing bubble as a way to sort of paper over those cracks and enable people to continue enjoying the same standards of living that they had in the past or that their parents had. What do you make of that idea? I think if you look at the calculation of the standard of living income per capita relative to the level of debt

of the household, you see some pretty alarming trends because we have been able to... Wages have been flat for the best part of a decade. We haven't had the wage growth. We haven't had the productivity growth that in the longer term since justifies the wage growth, we haven't had the productivity growth that in the longer term sense justifies the wage increases. We've had some very big shifts in the nature of the labour market and right now of course without being unable to augment the skills from migration and from itinerant workers

and so on, we're seeing some interesting shakeouts. So you can make the unemployment number look good because we're Fortress Australia, but it doesn't mean you're just solving that labour market problem. This is the big issue, will be job security, not so much unemployment. And people, you've seen the big increase in underemployment, and there's a debate going on as to whether these numbers in the way they were estimated in the past actually make sense today, but just sticking with those numbers, it still, you know, puts the labour market to excess capacity well into the teens, and the sum of unemployment and underemployment,

and some very significant shifts. So right now you've seen, for example, they're boasting that, well, there's not too much reaction from JobKeeper coming off. Except we are starting to see a shift in a couple of things. In that last number that came out, where we lost 60,000 jobs but 30,000 increase, so net loss of 30,000, was all a shift away from part-time

that had been kept on by JobKeeper. They're not going to be there, those jobs. They won't come back, which is a significant shift. But on the other side, why did the unemployment rate go down? Because participation rate fell. And it fell, I think, by 0.3 of a percent, which meant that a lot of numbers of people post-jobkeeper gave up looking for work. They'd been sustained through the process, bugger, it's not going to happen now. We'll go back onto job seeker. These are big changes, early stages, don't know how they were and how they're going to work out but we've got excess labor market in some areas and then in other areas you can't get any workers at all I mean just

go into the hospitality sector is a massive shortage of chefs and baristas and table staff and you know this is massive and they you know they can't see how they can fill that without that was an industry that was always relying on the itinerant visa worker and to some extent migration foreign students and haven't any of those and that's you know so you see these these ads in the hospitality sector staggering we went to i remember going to byron in in january every single restaurant and bar and cafe that we saw had big signs in the window wanting all their stuff they couldn't get them our friends who owned cafes were closing them. That's a hell of a shakeout. But that's

giving you a particular market that wasn't supported, lost international tourism, king hit. It will take years to come back, if indeed it comes back. You're seeing Qantas, even though Joyce has been able to extract a hell of a deal out of the government over the time, they had today, yesterday or this week announcing that they're going to shed more labour, that they're going to cut costs and they're taking an opportunity to do things they would never have otherwise been able to do. But job insecurity is going up, you know and though they were protected in a way during the pandemic and JobKeeper was important to that that's not going

to be sustained and so you're getting a significant shift in the nature of the employment in that industry and so you can go around a lot of industries right now you can't in the building sector because of the money poured into housing you can't get traders people's works are of the money poured into housing, you can't get tradies. People's works are being queued. And you're waiting to get somebody to come if you can get them at all. Because that will all put upward pressure on prices in time, but not necessarily wages. I mean, most of the old idea that the tradies are all blue-collar workers, they're not.

They're all small business people, splitting their income with their wife and doing very well, thanks very much. It's a very different world politically to what was taken for granted, even 10 or 15 years ago. And some of the seats that the Labour Party has depended on for that so-called blue collar vote isn't there anymore. And so this is calling for a very significant shift

in thinking about what story you're going to put out there. So you can make it look good, you can fund a sector. I remember in the 70s when I first had some debates with Treasury about how you're going to get out of recession, how you're going to get out of it. But what we always do is stimulate housing. Housing with all its tentacles flying out to buy white goods and all sorts of things. We get the housing sector up, we use that as the automatic stabiliser. That mentality still applies today in what they've done.

And the Reserve Bank is happily doing it on the basis that APRA will take care of the risks. They're not really thinking about what those risks are. And it doesn't take much for the shit to hit the fan in these things. I mean, suddenly if inflation picks up, and you look at some of the inflation numbers, record levels of copper prices, iron ore prices, some of the basic mineral prices, coffee, corn, massive increases in the last year. I think I looked at some of the freight costs, 700%

from a year ago. These are huge numbers and at some point they must flow into the cost base of economies and they must impact on the measured rate of inflation at a time where the nominal rate of wages is not going to go up. There's nothing going to push that up. It will go up in some sectors where there are acute shortages and they're bidding labour off each other, but that's not going to dominate the aggregate number. And so we are still in a world of low nominal wages, probably negative, even the budget admits negative real wages until the last year, and that's pushed on an assumption and you know so we aren't going to see any improvement in real

wages or nominal or real wages at a time where the risk is really quite large that their debts and it's not just housing debts I mean people put a hold on their credit card okay when they've got some cash they paid it down they had big savings and they paid it down they had big savings and they paid it down that's ephemeral though that's all going the savings have come down rapidly but the credit card debts are there and they're still charging interest rates pre-covered interest rates of you know 20 on credit cards and none of that was reflected no they have none of those have reflected the cut in the official cash rate. So, you

know, I think the potential for a significant debt crisis is very real. Add to that the government debt, add to that the corporate sector debt, and a lot of corporate sector debt is really close to junk status. You know, I had this debate here, I broke a story down here about collateralised debt obligations. Our local council in the local paper, I just happened to not sleeping one night, looked at the report, the finance report, and it said that they had just appointed a new overall funds manager for their trust money,

about 65 million, something like that. And it was Lehman Brothers. So then I looked at, roughly, as you could from published data, how much they'd be put into CDS which is what Lehman's were promoting and it was at least 60 65% so I wrote a piece saying this is insane you're getting a small you know a couple of blips over the bank bill rate and a fixed deposit rate I should say for all this risk that you're taking with a collateralized debt

obligation and they came back the council wrote a letter to the paper saying no I didn't understand these things because there's triple-a rated and they were notionally triple-a rated except the composition of them had only a tiny tranche at the top that was triple-a and they were predominantly junk so I made the prediction that and they said we only have to hold them to maturity to get our money back. This isn't going to happen. You won't get to hold them to maturity.

They'll implode long before that. They're all built on a subprime loan that'll implode when the house price doesn't go up. It's just that simple stuff. But we haven't learnt much about that since. We're still doing those sort of calculations. A lot of the corporate debt is junk. And a lot of that debt got bought by central banks. In Italy and some of the more marginal European countries.

So we're never very good. Economists are hopeless at saying what's going to trigger a crisis. You can see the elements of a crisis. You can't say exactly what it is that triggers it, but it will come. I did predict that 2020 would be a year of recession in Australia and the US. But I was doing that on the basis of the economies weakening the way they were and the inevitable consequences of bubbles in housing and stock markets and so on. And then of course we had the pandemic that made sure I was right for the wrong reason,

which is why economists will usually take credit. I was right, you know. But as a result of what I saw in our local council, I predicted that we would have a global financial crisis, that that mountain of debt based on subprime, which was securitised into those collateralised debt obligations and so on would collapse. And so one of the, a couple of the funds that I manage I recommended that we start reducing our exposure to stock markets. What year was that?

2007 leading into 2008. One of them we called in all our asset managers, whether they were growth managers or whatever, and said okay, I said I want to give you a hypothesis. My view is the stock market will go down 50% next year, 2008. What would you do with the money you manage for us? Every one of them said, don't get out of the market. Stay in the market, underweight this, overweight that, you know, all this sort of bullshit. And I said, no, no, but if you're wrong, right, I've got a 6% fixed deposit here at Westpac.

If I took 10, 15, 20 million and put it in there at 6%, OK, I'm not going to get the peak of the stock market, but I'm sure it's all going to miss that trough if that hypothesis is right. And they didn't change their views. And when it happened, of course, it was a bloodbath and everyone got caught short. But you have to think that way. It's one of those...

Dynamic, it's not static, it's dynamic. Yeah, exactly. It sounds like one of those cases where it's better to fail conventionally than succeed unconventionally. Well, you know, the financial sector heard, nobody wants to be too different. We're all backing the same trend.

And really there's money to be made in not backing the trend. You'll be wrong for a while. People have gone into growth stocks versus value stocks or vice versa only to get that fundamentally wrong for a couple of years. Their performance looks pretty ordinary. But there are elements of that happening all the time. And you've got to make those judgments and you know in economics I grew up in this world where Johns Hopkins we had the leading econometrician in the world Carl Christ

at the time who had worked on the Manhattan Project as a physicist and come into economics and started the econometrics and so on and you know there was so much precision coming into application of mathematics to economics. And I always got very nervous about, you know, you get a point estimate from a model. Nobody actually paid attention to the limiting structure of the assumptions.

They just looked at the point estimate. I'll never forget when I looked at business economists and said, oh, Macquarie Economics. Bill Buttress had been an economist with Hill Samuel, and they started in those days doing these surveys of what the economists think, what a market economist thinks, what's going to be the growth rate, what's going to be the inflation rate, what's going to happen to the unemployment rate, what's going to be the inflation rate, what's going to be the unemployment rate, what's going to be the exchange rate and so on. And he, everyone would do point estimate, you know, 2%, 2.25 something. He'd

always put 0.69 on every forecast on the basis you can all get stuffed. This is irrelevant to, you know, and it was making a valid point that we got so enamoured with the mathematical precision of the models. And I used to teach my students in that era by saying, well, today we want to build a model that will show that interest rates will go up. And then tomorrow I'd come in and say, OK, now we want to build a model that's going to show that interest rates will go down.

And the third day is you tell me what judgment you're going to make about those two models. And that was the essence of judgement. And we still don't see it. We still see point estimates being given all the attention, which, you know, if you look at the extent to which they are so heavily dependent on the assumptions that were made in those models. I mean, in the climate area, everyone who's got a view has got a model.

And surprisingly, those models prove their point. Nobody actually takes it apart. So there's that lack of precision. Or bogus precision. Yeah, bogus precision, which would become an end in itself. You get questions in exams about precise outcomes. Can you prove this? What's the point of proving it if I have to change a whole lot of assumptions you know okay on the basis of those assumptions yes I can prove it but I don't think those assumptions are real and you know that

was always a debate with their academics people like me hands are just interesting guy he's a brilliant person but these are interesting questions because they don't teach judgment and in the end it's judgment used to say to my students okay we've done this big exercise with with interest rates now what about if you're hired by the ANZ on on Monday morning they say what's going to happen to the dollar next week next month the end of the year what are you gonna do don't tell me you're going to run about five of these models and tell them that you get five different conclusions. You're going to have to be able to make a judgment on the basis of those models and a whole host of

other things. And that judgment becomes more important than the mathematical precision of the model. But that gets lost. It's still getting lost. We still see the precision that people say this is a finite outcome outcome this is what's going to happen just like the first estimate of the cost of job keeper you know it was a third wrong because the model's assumptions about the take-up of that were just wrong and nobody bothered to step back and look at the way that was being administered by the tax office to say oh that's not going to happen you know and that's what happened in the end of course somebody did do that i think a low-level Treasury bloke questioned the outcome. And they went back and looked at it and said,

yeah, well, that's right. What's happening at the level of the tax office is not being reflected in the numbers we put out. But this is typical of what is a weakness in the debate today is we have too much focus on the specifics of point estimates and precision, fake precision. It comes down to judgment, and you've got to make a lot of judgments. Today, unfortunately, most of them are made from the point of view of political expediency, not from the point

of view of good policy. Yeah. Big theme of this podcast has been that economics is not physics. Yeah. Is it too harsh to call the 2010s lost decade economically for australia 2010 the 2010s from 2000 to 2010 or 2010 to 2000 the latter yeah look i think i think oh this is my wife. I'd just better tell her. No worries. Hi. Coming shortly.

We've only got two. Okay, yep, coming shortly. Bye. We've only got a couple. I didn't realise that she'd rung me several times. Oh, right, no worries. Luckily we didn't go to pick you up. Yeah, okay.

I'm getting it. But she told me she wasn't going. Again, we have an empirical question there. She calls Asian. It's not lost in that. Yeah. But it is. Look, I understand where Garno comes from

and the sort of numbers he uses. And there are large elements of truth in it. The dog days. Yeah. But whether or not you sign off on the detail, all the detail, is a different thing. But there's no doubt that that decade was a flat decade. And there's no doubt, as we were arguing, I said I predicted that we'd go into recession in 2020.

On the basis of what I saw happening in 2018, 2019, going into 2020, did a lot of speeches to business audiences and so so on saying you've got to get ready for the fact that two things will happen. One, the US will go into recession. This Trump stuff's not going to be sustained. You can boost share prices by giving people financial capacity to buy back their shares, which is a record level, or pay record dividends, but this is not sustainable if you're not paying for those tax cuts.

So that will come apart and then of course Australia will be following that with a vengeance. So we were all saying pretty much the same thing, that there was nothing inherent in the growth numbers that we're going to give it. And give us what the – they were talking about above trend growth numbers, right? To get above trend growth numbers is a big exercise. Right now, for example, everyone's focused on the fact that, ah, we've recovered the GDP level pre-COVID. But we are still 10 percentage points below where we would have been if the pre-COVID forecasts had been validated. So we've got an output gap and how are we going to close that output gap? Nothing in the budget does that. Nothing actually catches that up.

We'd have to sustain above trend growth for a series of quarters to get that. Nobody talks about that. So in terms of the hard numbers, they're running a great fiction about how well we're doing and how well we've done compared to others, but we should have got strong growth numbers. We fell 7%, we threw 15% of GDP at it, and we're coming off a low base of 7% fall. We're coming off a low base, we're coming off a base which is big pent up demand, particularly in consumers and savings and so on. So we get two quarters of three percent growth almost getting back to recovering the seven but that's hardly you know a strong recovery it's good to look at that and you run that political argument for a while but give

me that give me a look at that in two years time or next year even and the numbers won't be strong the growth numbers quarterly growth numbers will come off the quarterly inflation numbers will come off. The quarterly inflation numbers will go up. And we're going to be in a different world come post-election. I think, as I said this week in an interview, normally when a new government comes in, they look at the circumstances and say,

oh, we've just been advised things are much worse than we thought they were. We're going to have to pull back, restructure, whatever. We can't stay committed to some of those promises we made in the election campaign. Well, if Morrison gets re-elected, which looks like he will, he'll be doing it to himself. They'll have to have a budget, you know, day of reckoning. What they've done is unsustainable. And if you, you know, if these big recurrent areas, which will all be blowing out every year,

because eligibility picks up when they never get that right. And of course, businesses work on developing a business model to gain the system. So over time, look at what happened with childcare. We had childcare centres with no kids. It's an extreme example. And there are a lot of those, all these learning institutions that came up when they tried to privatise the training outside TAFE and rolling TAFE into these companies. It was just a rip-off for the business community because there's no way in

government that they could set a set of rules that actually make sure that didn't happen. They could have done it but they didn't think about it and of course it's too late. In home care packages now, I mean we've just had a family experience sitting down with the disability care provider and find that they're overcharging dramatically. I'm on the board of a disability group down here, we run a nursery at Welby, 55 or 60 disabled people. It's been a bloody nightmare trying to link that business-based assistance program to the NDIS. And they've come in and assessed people, you know, oh no you don't need a wheelchair, really? Can't come and work you without a wheelchair. This sort of stuff, you know,

it's really just incredible. But the cost base of that is just running away. You can see it happening every day. And they're going to layers of more bureaucracy to try and police that or to try so you know the come to god moment in the budget is about a year away probably final question i'm interested in your journey post politics and how you think about it so 93 you lose the so-called unlosable election. In 1995, you leave politics fully and finally. And I'd love to hear how that experience was for you and how you think about yourself as a figure or your arc. I made a decision to leave politics because I thought I'd had a fair run.

They were getting to a stage where they were not interested in real policy. Let's just ditch the GST, let's just ditch any sense of reform. I made a personal decision that I would just move on. I'd make them vote for somebody, but I'd move on. I made that decision quite independently of anything else and so I left politics before I was eligible for pension. Laurie Oakes was taking bets all over the Parliament I'd stay the extra few months to get the pension and you know again it was a good example you don't understand why I was here I wasn't here to get money you know I actually when I went into politics I sold all my shares post 87 stock market crash at a massive loss

gave away my Macquarie Bank shares which would have made me tens of millions of dollars or more you know just only had one asset which was a house and the cars or two assets and so you know and I went into politics with a view that I you know I'm not there to make money I'm there to try and make a difference and you know of course you've got accused of a whole lot of stuff like tax minimisation. So I rang the tax commissioner and said, I want an audit.

He said, no, he's never asked for an audit. So he said, and he came back and he said, look, I can't comment under the law, I can't comment on individual tax returns. But if you were caught in a press conference and somebody said whether or not it pay too much sex you can say oh you've talked to me and I think you do pay too much jack so I called a press conference it disappeared but you know you had to set standards which which really challenged people to think about why you were there

and you know I wouldn't use Commonwealth cars early days I realized that they were charging me 150 bucks to go from home in double-bay to the airport and I wouldn't use Commonwealth cars. Early days I realised that they were charging me 150 bucks to go from home in Double Bay to the airport and I could do it in 40 bucks for cab. So I just did cabs everywhere all over Australia and my staff did cabs. We saved hundreds and hundreds of thousands of dollars a year in terms of cost.

Just to make the point, everyone hated me, all the politicians said, you're destroying our entitlements. I said, we're not here for entitlements for Christ's sake and You know your pensions positions are unsustainable You know all these issues are you're not there to milk the system and you know We did a bit of a survey Peter Rees and I reckon About 80% of people to double their income to go on the politics, you know Well, and this this at the time this was just a rough count in about 95, so.

You know, so when I decided to leave, I decided to leave. I didn't have a job to go do. I hadn't organised the party to give me anything. I never asked anybody for anything. I didn't get the pension, which has been a problem because I haven't had any superannuation. I've had to work. The university's lost my super and the Reserve Bank didn't have

any, you know, whatever. It's just so I work and that's been a constraint but I've taken an interest in a whole lot of sectors that I think are important. Obviously I've done a fair bit, I did 10 or so years in aged care. I did on the board of chairman of ABN AMRA for 11 years. We turned it from an average investment bank to a number one investment bank. We had a whole host of other business activities in all sorts of areas, manufacturing, mining. Started doing climate-related projects to show that you make a quid for it.

I was chairman of the Business Council for National Business Leaders Forum on Sustainable Development with Molly Harris Olsen, Philip Toyne, and we were trying to educate the business community that look, there are opportunities everywhere if you actually make the transition properly. So I did a whole lot of them. We built a household garbage recycling plant at Eastern Creek, so you can just turn household garbage into viable business proposition. Energy efficient light bulbs before they became fashionable. Green data centres, a lot of bioenergy sort of projects. But they were all to make the point. I mean, I moved out of most of them for a whole

after different reasons. But so I've done a fair bit of that. I started a couple of charities from scratch, which I thought were in areas. I mean, politics, I was part of the big charities. You know, I'd been part of the AIDS, anti-AIDS movement, as all political leaders were. But I started a breast cancer campaign for women,

trying to... The motivation was to get Keating to increase the amount of money for scientific and medical research. And so I started going from all these sort of mammography centres and so on and launching them and opening them and whatever, just to say, and that's not the best technology solution, I concede that, but it was to raise the profile, so the Yellow Daffodil campaigns when we started in politics, just to make the point. When I left politics anyway, I thought, well,

I don't think I should take the big charities, I should take the more difficult charities and use the position and experience that I've had. So I turned around the Arthritis Foundation from bankruptcy and then split off Osteoporosis Australia 22 years ago and built that to be a really significant charity. Kids Express 15 years ago dealing with kids with extreme mental stress and now taking that one step further, hasn't been announced yet. Dealing with an on the ground learning process in Western Sydney, Mount Druitt, disability care, a whole lot of those exercises. A lot of university committees, like the Sir Roland Wilson Foundation where we train senior public servants with PhDs at ANU. And there's a lot of those sort of activities that I've done. Still maintained interest in some of the climate areas.

We've developed the storage answer, which hasn't been released yet, but everyone's looking at electric batteries. They're only good for the short-term flicker, you know, 100 megawatts for half an hour. They don't store the power. So you've got solar power in the middle of the day worth nothing. Take it and bring it out at the evening peak, or wind power in the middle of the night when it's worth nothing.

They mean negative prices, you know. You pick it up and pull it out at the peak. That will be released. That thermal storage will be released soon, and that does a lot with industrial heat, and it's a really sophisticated technology. So a lot of effort going into those sort of things. But you know, I haven't done them to sort of make a lot of money. I've just been an advisor or maybe I've sat on the board and I've helped get these things

up and running. I mean, early stage technology is tough. It really is tough. And I've done a fair bit of that. I did a lot of corporate turnarounds, turned around more in healthcare from being bankrupt to being the largest healthcare provider, aged care provider in Australia. And took them around the world, we bought nursing homes in England and Northern Ireland

and advising homes in Singapore and Asia and bought a lot of homes in Australia, bought Western Healthcare, bought FAI nursing homes, big groups put into one group. Went from 25 nursing homes to 125, refinanced them several times, sold them out of private hospitals for twice what they were worth to an American group, sold them out of the assisted living, out of the self-care, so we just focused on nursing homes. So we really did know that industry inside out and were frustrated that government wasn't prepared to listen to it, even though they had very significant studies done. Warren Hogan did one on the pricing of residential aged care, which Howard just completely ignored. And so you end up with what you've got today which is a massive mountain of neglect.

So I've tried to make a difference in areas where I think public policy is important. Of course you get accused of, oh you've got a vested interest. Well I declare the interest, you know, I haven't made any money out of it of any consequence and beyond basically a wage in a lot of cases. I've moved on and left it to others to finish or take the company forward. But it makes the point that there are all these opportunities there that we don't take account of. So I've done a whole lot of that sort of thing. For a young person wanting to make a contribution in Australia today, is politics the way to

go? Well, my daughter said... My 16-year-old daughter at the time said to my wife, I think I might look at politics. My wife said, do you understand what a dirty and disruptive dog that is? She would not ever even contemplate it. But I think it is seen, as young people do see it, as a way to, if you

can change it, if you can improve it, put it back to what it used to be or what it should be I should say, it's not a nostalgia for the past, it's what it should be as a process of government. It's all about good governance. And they're not interested in good governance. I've done some trusts for New South Wales government, they're not interested in good governance, you know, they put you there as a board and you do it and but basically they're playing politics around every issue and so I think that young people though are starting to get motivated right here for example we've made a big noise down here about the council I use the example of

the fact that they lost a lot of money on the collateralized debt obligations and Lehman Brothers but they've done a whole lot of really bad governance things to the point where we've got them removed now and they've been replaced by an administrator and who they're fixing all the things they didn't do whether it was a planning issue a roads issue and you know projects that were never going to be done but they're wasting money on it in other cases letting projects go they should have funded now there's an election coming up for the local council and I think hopefully there'll be a new broom and they'll all get pushed out but you

know these are these are very important things which young people are starting to see that I can make a difference if I do actually get engaged in some sort of process like that not easy because you need a level of experience to do it. It's a fair game if you, you know, a lot of people come to me and say I want to get into politics. Well, you know, where do you start? I do a lot, for example, with the Women for Election Lobby and those sort of training exercises for bringing women into Parliament. But something I started in 93 with the head of the Liberal Party was a woman, Chris McDivin, who'd signed my, she was president of the Liberal Party.

And I said, look, it's just so unfair. The system discriminates against women, makes it almost impossible for them to get pre-selected. So let's identify them and train them and bring you know, bring them through and help them, which we did. So the penetration of women in the Liberal Party in 96 was the highest it's ever been. And, of course, Howard settled in and it just never recovered. And we've still got a big issue now. We've got a paucity of representation at the Cabinet level

and in the whole party. But there are issues that are important. But in that context, you're starting to see quite a lot of interest. There's this voices movement in key seats. I'm speaking to the Wentworth one this week. I've done quite a few of them, where they're just looking at getting government to focus on the issues that matter to people. They're not running particularly against a sitting member.

They may end up with a candidate that does that. But a bit like Gonzali against Abbottott it was quite clear that he does not representing the interests of his constituency whether the same-sex marriage or whether it's climate or whatever and she was a shoe in to win I encouraged Karen Phelps to run in Wentworth made the argument on the day that by election was called I was in the ABC and said Anthony Green you know liberals could lose this seat. Oh Christ, 17.5% might as well never lose it. I said they can if some strong independent stands and runs principally on climate they'll win that seat. I know the seat right

and he laughed and of course she won and then the political reaction is not to look at the magnitude of that loss, to say, oh, she only won by 1,800 votes, but that's on top of a 17.5% swing. And still Sharma's sitting 16.5%, 17% behind where Turnbull was. He was always going to get the seat back. But there are messages there that are being ignored and young people see those messages.

So I think you're going to get quite a lot of young people wanting to stand. I've had a few come to me that are really enthusiastic but they may not, well they certainly won't get through the two party system unless they align themselves on the way through which really compromises their capacity to do what they want to do. But I do think standing as an independent maybe gives them a chance. So I think there'll be more independents come. The two-party system has been its own worst enemy. It just won't clean up politics. It won't do anything about campaign funding or lobbying or question time performance of the role of the committees in parliament or integrity commissions or truth in advertising laws in political advertising, false and misleading conduct laws on politicians.

I mean, there are all these things you can do to fix it, but they won't do any of them. In fact, when they get a chance, like recently on developer donations, they made it easier, not harder. It's just they have no interest, because each one believes they can exploit the system better than the other. I think young people are starting to see all that. They're starting to see sports shorts. It gets a lot of attention that you put all that money into things. I broke the story on Ross Kelly and the original sports shorts.

They were paying money for lights and football fields that didn't exist. Change rooms didn't exist. All this bullshit., change rooms didn't exist, and all this other bullshit. And, you know, it was pretty easy to explode the government on that. And how did you do it? You did it on a whiteboard, you know, and then they erased it so there was no record. Now, this is really just how low government goes in terms of playing the system for what they think is a perceived political advantage.

Putting a bit of money into a seat here and fixing that road out there thinks that'll get them a lot of votes. I've never been convinced about that. I think if you were actually standing for something of principle and you are prepared to fight for it, it outweighs the significance of trying to buy the votes by channelling particular money. You know, in this budget there's another regional fund, half a billion dollars or something, a slush fund for the National Party. These are terrible decisions. There's no accountability, really,

because when it gets exposed, even the colour-coded allocation is a sports money. Morrison just said, oh, the Minister had the authority to do that, and it wasn't done on political grounds. No. There isn't any person who thinks that, having looked at those sheets, that it was done those sheets that it wasn't done on political grounds.

It definitely was. Anyway, I'd better go. I think my wife's very careful. I'd better let you get back to your family. But, John Hewson, thank you so much for joining me. No problem. Thank you so much for listening. I hope you enjoyed that conversation as much as I did.

For show notes and to join my mailing list, head to thejspod.com. The audio engineer for the Jolly Swagman podcast is Lawrence Moorfield. Our video editor is Alf Eddy. I'm Joe Walker. Until next week, thank you for listening. Ciao.