Interview with David Epstein, Chifley Research Centre Conference Q&A

DAVID EPSTEIN:

We've had a number of questions, and we invited people to send questions in. I've got this one from someone called Malcolm of Point Piper. He says 'David, I think you know me. I'm currently on the 389 bus between Bondi and Point Piper but I have been listening to Jim online. I can appreciate that he would want to look to Heraclitus this afternoon but what is his position on Thucydides question?'  More seriously, you mentioned Martin Wolf - who does have a new book out - but he's been beating the drum - as Rod Sims pointed out last week - for some time. And one of the points that Martin makes - his view is over the last 40 years where we've essentially seen a situation which has not been the triumph of free market capitalism, but in fact a growth of people trying their hardest to pursue monopoly capitalism. He doesn't regard that as unexpected - he says if you were a large capitalist capable of dominating the market, of course, you would try to do that but he does say we need to tackle it. And it probably reflects a pattern over the last four decades of deregulation, where people have actually taken advantage of reforms that were introduced, alongside basically dismantling some of the more well‑defined and documented Bretton Woods regime. Is he right or is that too an extreme a position, and how do we deal with the fact that a lot of what we've benefited from - particularly post war - has been the product of liberalisation but a regulated and quite structured economic reform process that as it succeeded, it's withered back. And the very people who have taken advantage have forgotten the disciplines that need to be exerted to ensure that there's community support and community benefit out of these things.

JIM CHALMERS:

I have a lot of time for Martin Wolf. I think if you made a list of four or five of the key people that you had to read in a job like mine, Martin would be on it. I got to spend some time with him in DC late last year at a dinner at the Canadian Embassy, where he was talking about finalising his book which came out on Thursday and where I have a lot of common ground, I think, with Martin - and indeed with almost everybody that I interact with in my job internationally and here in particularly in the investment community - is that it's possible to recognise the good that has come from a period of economic reform, as I do, and still at the same time acknowledge that things aren't working as they should. They're not working perfectly as they should, nobody should expect them to. And so my view about the changes of the last 40 years is that there is much to commend them, particularly in Australian context, particularly when it comes to the Hawke‑Keating legacy but our job now is to make our own way in the 2020s in this defining decade. So the same things that worked for Paul in 1983 are not going to be the same things that I'll reach for in 2023. That is as absurd as somebody saying to Paul when he fronted up with Treasury for the first time 40 years ago and saying what we need you to do is copy Ben Chifley's policies as treasurer 40 years before that. It's really quite remarkable: Chifley - 40 years - Keating, as treasurer, and 40 years until now. And so the point that Martin Wolf and I share is we can do better. You can believe in markets, you can believe in the important role of the private sector as I do, as he does. But what we need to do is do a much better job of working out how do we better design and define and inform our markets so that we get the right kind of economic outcomes, but also ideally outcomes that align with our values in our society. And so the book that he wrote, which was out Thursday, and many of you will read, some of you may have read already, I think there's a lot of common ground between what he's saying and what I'm saying. We don't think that everything that's happened in the last 40 years has been bad. On the contrary, we think that there is a new frontier now when it comes to some of the things I'm talking about and some of the things he's talking about. And that's how in the Australian context, we create another 30 years across prosperity like the 30 years that ended under Scott Morrison.

EPSTEIN:

You've just mentioned, the period of time from Chifley to Keating and now Keating to Chalmers. Of course, some of the markers of the first two stages of that was what were the objectives of the Reserve Bank and the full employment statement under Chifley, and then under Keating - and also later governments - there was a change to emphasising some of the inflation objective. I won't question the motivations of either - I think the people behind that were well motivated. There's a review of the Reserve Bank underway. What role do things like charters play in setting some of these frameworks that you're talking about?

CHALMERS:

It's crucial. One of the things that the Reserve Bank review is looking at right now is how do we balance the bank's objectives - primarily the fight against inflation, but also full employment as a central objective, and financial stability as well - at a time when one of the most disruptive parts of our economy is the financial system. The review panel - which is really quite a remarkable, international as well as domestic experts - they will give me a report next month, probably towards the end of next month. And part of what they're dealing with is how do we balance all of these considerations. Obviously at a time like this we've got what would traditionally be seen as full employment - in the middle threes, it's really quite remarkable in historical terms. But we've got this inflation challenge, and that's obviously the bank's major focus right now as it is the Government's major focus right now. And so they will weigh all that up. Usually when a new treasurer comes into office, he or she will write to the Governor of the Reserve Bank setting out the charter of expectations, the expectations of the government. What I did when I came to office - because I had in the back of my mind and I'd said in opposition that we were going to do a big review - I wrote to them and I said, let's finalise this after we get the review, and that's because I knew the question that you ask is really one of the central questions that they're grappling with right now.

EPSTEIN:

Yesterday, we had a session on wellbeing budgets and inclusive growth. And it's fair to say that our panellists landed on a position - reasonably unanimous although they differed on a few things - the one thing that they all agreed on was we need to have a broader marriage of fiscal and macro‑economic objectives with the social objectives of public government. You've just been touching on some of that now - the balance. How broad do you go before it becomes potentially unmanageable? And how do you weave in some of the agencies and departments outside of your own into the design process and the integration process?

CHALMERS:

The easiest part of that question is the last bit - the enthusiasm has been terrific. Around the government, not just in Treasury, and not just where you would expect it - really right across the government, the ministerial engagement, public service engagement, has surprised me on the upside as economists say. And so that's been terrific. In terms of where does it begin and where does it end, that is obviously a key consideration because we have the capacity to measure almost everything now. And so working out what the 20 most important things to us are as a country that's not an easy set of things to trade off, and so that's what we're doing now. I'm smiling wryly when you asked me that specific part of the question because I just read a whole bunch of stuff on the plane about how we're going to do some of this so it's very timely question. My view is we can measure the economy in all the usual ways and we should. Not since the first time I showed up to Ben's think tank at the time and said that we should measure what matters in our economy and our society, I've never said let's replace GDP, unemployment, wage price index, but let's add to work, let's bolster it and see what else we might be able to meaningfully measure so that we know if we're making progress against some of the other things that we value in our society in particular. And there's been a great reaction to that. But if your question is, it's difficult to work out, how you kind of ringfence that. True, it is right, but it's worth the effort. And again, if you think about the kind of usual suspects that say it's not worth the effort - what they are arguing is that we shouldn't measure progress against the things that we care about: mental health, environmental degradation, these sorts of things. I would have thought in lots of ways it's a no brainer, it requires a lot of work, there is some difficult trade‑offs, but I think it'll be worth it.

EPSTEIN:

These things have been tried to some degree in Western Europe, they've been tried, certainly on an operational basis in New Zealand. Are there any particular models that have attracted your attention?

CHALMERS:

For the aficionados in the room, some people would know here that when you put out a budget, there's a thing called Budget Statement 4 - catchy title. Each treasurer chooses each budget what they want Budget Statement 4 to focus on and I asked for a focus on wellbeing frameworks and we use the OECD one as the starting point to say this is what adapting the OECD one for Australia might look like - this is the upsides and the downsides of doing that, to try and invite a conversation from people about whether they think that's the right foundation or not. We're working through a mountain of feedback right now but I think that OECD, one partly because - to be frank about it - you want to start with a big, credible institution if you can because this is not a fringe concern in the world. It has been treated that way by my predecessor and by others, I think wrongly, and I have a little cheeky shot at Josh in the essay for those of you who have read about the approach to wellbeing by our predecessors, but I think there's something in this and most of the world agrees.

EPSTEIN:

Perhaps not speaking of Josh but you did mention some of the usual suspects who seem to have been a little bit agitated over the last week or so - did you expect that degree of agitation?

CHALMERS:

I expected the content of it, but not the volume of it. I thought that the editorial page would be predictable, and I thought people would be interested in it because of the time of year and people are focusing on how do we combine what we need to do now with what we need to do for the future. I feel people were interested in it because it's not the usual kind of flurry of press releases. And I'm genuinely pleased that even people who've had a shot at it, I'm genuinely pleased - it's better than being ignored. A lot of time went into it. But I was a little surprised the persistence of it. I'm pleased you’re all still talking about it but I'm a little surprised it's still being covered eight days after it appeared. 

EPSTEIN:

What do you think the motivation is? Is it about creating controversy and therefore readership or screen clicks or is it genuine ideological motivation? Or is it a blindness to what's been occurring in western economies over the last 20 years or so? 

CHALMERS:

I don't really know. There's not much for me in going down that path, but there's a contrast between some of that coverage and what you pick up in investor circles and the like. I spent Wednesday morning around a table with groups representing about $20 trillion in capital to invest and they wanted to talk about our sustainable finance framework, how do they make sure that when they're trying to invest in cleaner and cheaper energy, that they can compare in a consistent way the different investment targets - and that's my day usually and I think that's not aligned with the way some people think about it.

People get into habits and one of the benefits of writing something like this and trying to put a lot of thought into it and a lot of effort into it is because you don't want to get on a train, spend a political life on the train and get off it, and there to be this inertia about it. If you want to do these jobs well you're not here to make up the numbers, you want to actually make people think differently about what you want for the country. And so I think people get into a habit of what their views are and some habits were formed some time ago. That's not the case in the investor community, it's not the case largely in the international community and so I think there's a little bit of a disconnect there. I've had a chuckle about it, as everyone has about the coverage last week. I don't want to spend my time obsessing over what people write about it. I'm pleased they've written about it. I'm pleased I've got a lot of encouragement from a lot of places and I think the only shame would be if there was someone here who was going to be doing my job in 20 years’ time if they thought, well when you stick your head up in this country it doesn't go well so I'm not going to do it. That would be my only fear.

EPSTEIN:

Well, having heard that, let's segue to some questions that we've had about perhaps the more tangible problems before you in your actual role as Treasurer. And we've got one here from Gerard Cudmore. Gerard's a GP and he says, ‘As a GP I find much of the recent Strengthening Medicare Taskforce recommendations very good to address long‑term issues and needs, but there is a big short‑term problem too and that's funding. How will budgets address this short‑term issue?’

CHALMERS:

I see Mark Butler's calling himself Gerard now.

EPSTEIN:

I didn't want to go there. Gerard is real. Reveal yourself Gerard. There he is - hi Gerard.

CHALMERS:

Well, one of the big tasks that we've got - and I suspect Katy might engage with this later on if you ask her too - one of the highest priorities of the whole government, not just the Health Minister, is how do we strengthen Medicare. Primary care is probably in its worst nick since Medicare came in and there are the pressures that you identify Gerard, there are other pressures on the system as well and we spend a huge amount of our deliberative time - Expenditure Review Committee, Cabinet, other various forums in the government - trying to work out how we're going to make a meaningful difference. And one of the reasons that Katy and I put so much time into trying to repair the Budget, trying to trim some of the wasteful spending that's built up over the best part of a decade is because we want to fund the things that we care most about. And we care a lot about Medicare, if not most about Medicare - it's fundamental to our society. And so we don't want to nickel‑and‑dime it, we want to invest in it. We need to find room in other ways in the Budget - there's not a kind of a limitless pool of money as much as we would like there to be for things like Medicare. But really, right across the Cabinet, we are as one with Mark trying to work out how we strengthen Medicare. We have a taskforce report and engagement with the states and territories that will be central to it, key to it and we'll have more to say in May.

EPSTEIN:

Okay. Going back almost to where we began, you touched briefly on inflation, both of us mentioned Martin Wolf and of course, Rod Sims as I said was beating a similar drum to Martin Wolf. Rod, in particular, as you would expect from an ACCC head said we've got to do more about how we manage competition in this country and that's what seems to me to be particularly important as we tackle inflation longer term and potentially things like the balance between wage and profit shares. Would you like to offer any comments about competition?

CHALMERS:

I really would and I want to shout out my colleague, Andrew Leigh - we are doing a bit of work on this front. And let me make a sort of a half an admission about this. So I've read Rod's piece and it was characteristically brilliant. In the hundreds of conversations we've had about the last eight days or so since the essay came out, some people say you didn't do enough on the Budget - there's a lot in there about the Budget. People say you didn't do enough about growth or productivity - there's a lot in there about growth and productivity. If I had a little more room, I could have done more on competition because I do believe that competition is a progressive force in our economy. It's progressive in the sense of getting prices down for people but it's much more broad than that. As Andrew, as Rod, as I on other occasions, Stephen Jones and others have said - we do want the economy to be more competitive because the more concentrated an economy is, if it's not dynamic enough, it's not delivering for enough people, creating enough opportunities for people. And so I read Rod's thing and I thought 6,000 words is enough but if I had more time and had it over again, I would have done a bit more on some of the sorts of things that I have been working on and talking about as Rod identified in his piece.

EPSTEIN:

Well, in terms of some of the other things, there's been a bit of a view and is regarded positively or negatively, that we've tended to operate with quite distinct perspectives from the Reserve Bank and the Treasury, that is we've divided the difference between our macroeconomic management and our Reserve Bank management and monetary policy too much for too long. Do you have a view on that? And how we would manage that without necessarily upending the entire system?

CHALMERS:

I think the independence of the Reserve Bank's served us pretty well. And I'm a historian as well in the sense that I obviously engage with what interest rate settings used to look like before the RBA had proper independence and the idea of sitting around a room and setting interest rates is not something that appeals to me. So the independence has served us well but I think where it most matters - where your question most matters and what most matters to the review that we were talking about before of the Reserve Bank is - how do we make sure that the work that the Reserve Bank is trying to do independently, that the government is not making the job of the independent Reserve Bank harder. That's why in the October Budget after a decade in Opposition, I think one of the underappreciated elements of that Budget was we got a lift in revenue from commodity prices - temporarily higher for two years, we banked them. And that's because our view, and I think we've been right about this, is if we sprayed around the same amount of that upsurge in revenue as our predecessors did, then that would add to inflation and instead, we showed restraint that hasn't been seen for a long time. Not everybody loves the idea of Budget restraint, I get that but that was a really important thing that we did, that Katy and I and the colleagues on the ERC and Cabinet signed up to and the Prime Minister led on in October, because you don't want to get our goals in conflict with the RBA's goals, you need to show some restraint when we've got this inflation challenge and that's what we're doing and have done.

EPSTEIN:

So it's in essence tackling a double jeopardy, is it?

CHALMERS:

It's making sure that we are not making their work harder. And that's why when you've got inflation at 7.8 per cent in 2022, you've got eight interest rate rises in a row, our job is to provide cost of living relief where we can without adding to inflation and that's what we did in October, that's what we will do in May, because this inflation problem and higher interest rates are difficult enough without the government making it harder.

EPSTEIN:

Now, I hesitate to dwell too much on previous governments’ economic advisers but I've got a question here from Neil Halliday, again a real person here. There he is. Neil points us towards what Ross Garnaut had to say relatively recently about Treasury and the Reserve Bank working together on the employment front and collaboration on minimum wages. How much does that sort of thing dwell on your mind as well?

CHALMERS:

I think the full employment objective is obviously crucial. It's crucial to the bank, it's crucial to the government. The whole reason we've got this Employment White Paper that we're working on at the moment, we'll put out later in the year, is because we want to work out how do we try and maintain full employment in our economy but in a way that doesn't kind of stop there but delivers the sorts of things that you would expect from full employment. For example, one of the consequences of the last decade, even when unemployment was low, we weren't getting wages growth - that was deliberate. We want to see full employment at the same time as we see decent, sustainable wages growth, at the same time as the opportunities of a full employment economy reach communities like mine, frankly, where there's still a whole chunk of Australians who see an unemployment rate at three and a half and think it's fantasy because those opportunities are not within easy reach. And so when we think about employment, when we think about full employment, unemployment with a three in front of it doesn't mean we put our feet up. We try and work out - how does a full employment economy create the opportunities and life chances that we expect it to which is where Chifley began. Chifley didn't pull this idea of full employment out of a hat and think that it was an end in itself. He saw all of the kind of social and economic advantages that hung off it and that's how we see it too.

EPSTEIN:

Well, look, thank you very much for your time. And thank you for your return to Chifley, especially on the decade.

CHALMERS:

I wonder if it's almost to the day, it could be - early February.

EPSTEIN:

Let's not dwell on that because I haven't done the research. But if it's a little bit later in February, we'll work out a way to celebrate it properly and amending the omissions. Thank you very much, Jim. Always a busy time for you but particularly on the eve of parliamentary sittings for the year and also because there is a Budget to come. This is what a lot of people forget that just because you delivered one last year, you don't get to escape the normal cycle this year and I can imagine that's already occupying your mind.

We really appreciate your attendance here and I know a lot of people have been very stimulated by the essay that you've done even though we don't want to focus on it too much, we're going to move on because there are other things in life as you say. Thank you very much, Jim.