Richard Holden & Steven Hamilton — Why Australia Gets It Done: A Conversation on State Capacity [Australian Policy Series]

This episode is the third of my live policy salons. It was recorded in Sydney on February 5, 2025.

We explore the concept of state capacity—the ability of governments to achieve their policy goals—and ask why Australia outperforms almost every other country in the world in this domain.

For the conversation, I'm joined by two of Australia's great public policy economists.

Richard Holden is professor of economics at UNSW Business School and president of the Academy of the Social Sciences in Australia.

Steven Hamilton is assistant professor of economics at The George Washington University in Washington DC and a former Australian Treasury official.

If you’d like to attend an upcoming salon, you can get tickets here.

Video

Transcript

[Transcript may contain errors.]

JOSEPH WALKER: Well, thank you all for coming. Let me set the scene before we begin the conversation. 

Australia, it has been said, has a talent for bureaucracy. And if that is true then there's perhaps no better way to test that talent than in the crucible of a crisis like a pandemic. 

On the 25th of January 2020, the first COVID case was reported in Australia. By the 30th of March 2020, Australia's then Treasurer Josh Frydenberg, a Liberal treasurer, had announced the largest economic intervention in Australian history—stimulus amounting to a third of a trillion dollars. 

All of that happened within the space of about two months. Such was the nature of exponential growth, but equally such was the nature of Australia's high-functioning administrative state. 

Our institutions served us well. On almost any important measure, Australia out-performed the United States, for example. Our employment-to-population ratio returned to its pre-crisis level within 12 months, whereas the United States has barely recovered five years later. And by the time Australia re-opened its international borders and lifted restrictions in 2022, we had about one-tenth the number of deaths per capita as the United States. 

But this isn't going to be a conversation about the pandemic per se. I think we're all a bit tired of talking about the pandemic. For most of us, that probably started around 2021. 

Rather, this is going to be a conversation about state capacity—that is, the ability of our governments, at all levels, to achieve their policy goals. Think of this as the “how” of governing. 

In preparation for this conversation, I worked with an economist to produce a literature review on Australia's state capacity. And while most Australians probably don't regard their government as especially effective—indeed it's far from perfect—we found that Australia has one of the highest levels of state capacity in the world. 

So what explains this? 

Well, to help me answer this question tonight, we have two of Australia's great public policy economists. Richard Holden is Professor of Economics at UNSW. Steven Hamilton is a Professor of Economics at George Washington University in Washington, DC. And together they've co-authored a book called Australia's Pandemic Exceptionalism, which in my reading, is really a book about state capacity told through the prism of the pandemic. 

Steve and Richard, welcome back to the podcast. 

STEVEN HAMILTON: Cheers, Joe.

RICHARD HOLDEN: Good to see you, Joe.

WALKER: So the way this is going to work, like all of my salons, is we'll have a chat for the first 60 or so minutes, and then we'll hear your questions. Please bear in mind my two heuristics for asking good questions. First, ask a question to which you're genuinely curious to hear the answer, and second, the more specific your question, the better. 

So with that, this is gonna be a broad conversation about state capacity, but obviously the pandemic is a major and highly salient example.

Now the central mystery of Australia's policy response to the pandemic is that the same national cabinet and the same public service generated both one of the best economic responses in the world, in the form of JobKeeper, which successfully kept Australian employees tethered to their companies, and generated one of the worst vaccine procurement strategies in the world. It was the worst- 

HAMILTON: The worst.

WALKER: Sorry, the worst. Yeah. Thanks for the correction. So as a quick refresher on why this was the worst, or one of the worst, vaccine procurement strategies in the world: we more or less went all in on two vaccines initially—that was the UQ vaccine and the AstraZeneca vaccine—rather than placing insurance on up to, say, eight, which was the number of vaccines sponsored by Operation Warp Speed. 

Ultimately, that proved to be a problem because the UQ vaccine failed and the AstraZeneca vaccine turned out to be less efficacious than some of the other vaccines that became available.

HOLDEN: Or the other way to put that is: one of them made your head explode and the other one told you you had AIDS.

WALKER: That is a much more vivid way of putting it. 

So what this meant was that for a couple of months in 2021, Australia had the worst vaccination rate of any OECD nation. 

So first question: if Treasury had been given primary responsibility over the vaccine procurement strategy, how different would the outcome have been?

HOLDEN: Well you [Steve] used to work there. 

HAMILTON: That's a good question, and we've asked this question many times. I guess I would say two things. Since we wrote the book, we've learned some things about what happened because people who've read the book have come and talked to us. (laughs) 

WALKER: Oh, nice. So there's stuff we now know that’s not in the book –

HAMILTON: And we sort of go... Well, we could've had this conversation before we wrote the book. (laughs)

I think we present in the book, you know, fundamentally we kind of don't know the answer to the question of why the vaccine strategy was so bad, right? There is a sort of unknown factor there. My sense now is that everyone I've spoken to says, anything that happens in and around the Health Department is a kind of disaster, and anyone who's worked with the Health Department, you know, is completely unsurprised that this is what they did, right? So I think there's a Health Department factor, which would lead you to say, okay, the Treasury would have done better. But we spoke to a lot of people who said Treasury was at the table. Now I don't know, we don't know, right? We weren't in the room, and we were baffled at the time – and we wrote about this a lot, right? 

HOLDEN: Yeah.

HAMILTON: Like, where the hell is Treasury yeah? You know, this is just basic risk management. What are they doing, right? And they were in the room when these discussions were had and the decisions were made. So, you know, were they in the room, but didn't wanna overrule other ministers or other secretaries?

HOLDEN: Well, I think that – I don't know why I think this exactly or if it's right – but I think the conclusion I've come to is, they were sort of in the room but not at the table, something like that. That they were sort of observers, and for whether it's, you know, it's kinda not the done thing to inject yourself into another department's business or whatever, but they weren't part of the active decision-making that was going on. And I at least find it hard to believe that senior Treasury officials who, you know, do actually understand what insurance is about would not have or had a different view about what to do, or at least made that argument and, you know, would have been very hard to refute that argument. So I can only think that they were in the room, but functionally not.

HAMILTON: But there's also a lot of, I mean…(laughs) Richard and I wrote a bunch of pieces about vaccine strategy during the pandemic, and there was so much pushback, like, "What do you two know? Get back in your lane. What do economists have to add to a vaccine strategy discussion? 

HOLDEN: “I think you're full of shit.” Was that not the main –-

HAMILTON: Yeah, I think just... And even editors of newspapers, you know, were reluctant to kind of have economists talk about vaccine strategy. So, you know, there was this bizarre idea that economists had nothing to say about this question, when fundamentally, you know, it was an economic question. You know, subject to the vaccine being safe, your procurement strategy is economics, right? You could be procuring anything, doesn't matter what it is.

You know, I would, I would go to an economist to answer that question.

So I think you could imagine that maybe the health people thought, "Oh, this is our domain," you know? I don't know.

WALKER: Can I give my understanding of the kind of flaw in the thinking there, and then you tell me whether this seems accurate? So, you know, when you go to a doctor, you get medical advice, you sort of don't question it, or don't question it as much as you'd, you'd question other kinds of advice. 

It almost felt like, you know, Greg Hunt, Scott Morrison, perhaps Treasury to an extent as well, was taking the advice from the Department of Health as if it were medical advice which is a category error, because it's not medical advice, it's public health advice. And arguably, it's subject to economic principles and economic thinking. Is that, is that the right way to think about what was going on here?

HOLDEN: I think that's quite plausible. And again, I don't know about, you know, the Kremlinology of Scott Morrison, but I think that would be, that view would be consistent with some of his public remarks at the time. I would have thought that Greg Hunt would be a slightly more savvy consumer than that. 

I mean, just as a sort of aside on doctors, and I have a lot of respect for doctors, but a friend of mine who's probably the leading health economist in the world, I remember some years ago when I was living in the US, told me this story and said, "I can't believe this. I went to my doctor this morning about whether to have some relatively minor elective procedure. And so I said to him, 'What are the chances something really bad happens, like, like that I die or something?'" And she says, "And the doctor says to me," and he's a really good doctor at Mass General, right, probably the best hospital in the world. And he says, "'Oh, 50/50?' What?"

"You know, I'm gonna, you're talking about having like an ingrown toenail out and there's a 50% chance I'm gonna die?" And he said, 'Oh, no, no, 50/... I mean, I don't know.'"

So maybe we could all press a little bit on, you know, doctors' use of statistical reasoning and stuff like that. But yeah, I think that's entirely plausible, that they thought this was like, you know, do I need a quadruple bypass, and you know, if a good doctor says, "You need a quadruple bypass," you're not gonna question it.

WALKER: You follow the doctor's orders.

HAMILTON: But decision-making during the pandemic ought to have been a synthesis of advice, right?

HOLDEN: Yeah.

HAMILTON: It shouldn't have been, you know, Chief Health Officer says X, therefore I do X. It is, the Chief Health Officer has given me an input into my decision-making process, and I add it to all the other things I'm thinking about, and then I make a decision. And they didn't do that. I mean, you know, we talk about this at length in the book about things like ATAGI and other things, right? Um, but advice from bureaucrats, health bureaucrats, health people, you know, that was basically taken as gospel without any kind of, putting it in an economic framework, say.

HOLDEN: Well, and Scott Morrison's defense of the "it's not a race" comment was, which he repeated several times, was that, you know, the health guy said it first.

HAMILTON: Yeah.

HOLDEN: You know, which in one sense might be admirable. In another sense, I think it just says, you know, that guy told me that and, you know, I just, I just took that advice, so.

HAMILTON: You know, these health people don't necessarily think about a social welfare framework, right? They don't put it into a broader framework of, I mean, even thinking about things like negative externalities, right? Um, they think about the threat to the individual, not necessarily the spillover threat to other people, right? So you have to... Ah, it was a huge failure.

HOLDEN: Or thinking about counterfactuals.  

HAMILTON: Sure.

HOLDEN: So the advice that ATAGI gave, which is very explicit. If we wait longer and look at what's happening with the rollout of this, we'll get more information. Yeah, that's true. We'll also get more infections, right? So there's like, do you do cost-benefit analysis? No. Do you think about counterfact-? No. And where I struggle with is how someone like Greg Hunt, given his background, his training, and his intellect, it's like, he wouldn't have got away with that at McKinsey. Why did he think that was okay as Health Minister? I just really don't know.

WALKER: So what's the problem then, what's the institutional problem in the Department of Health and the medical regulatory complex? Is it sort of a lack of mathematical literacy and economic training, or what's the...

HOLDEN: Well, I think when it comes to the medical regulatory complex, they just don't have enough viewpoint diversity and enough people on, you know, sort of making those kinds of arguments. You know, of course they should have lots of people with a lot of medical training. Of course they should have, you know, immunologists and virologists and so on. And of course they should have physicians. But the idea that they have no one other than that, I think is a huge mistake. And you know, Nick Coatsworth, who was Deputy Chief Medical Officer, who we interviewed for the book, he's made that point himself.

WALKER: In terms of isolating the specific error in thinking that led to the vaccine procurement bungle, there are kind of two different accounts in your book, and I think this perhaps stems from the fact that you wrote your chapters largely separately. 

So what I think is a chapter written by you, Richard, it focuses on or it couches the procurement failure in terms of a failure to heed the Tinbergen rule. So the Tinbergen rule is the rule articulated by… is it Jan Tinbergen, the Nobel Prize-winning economist who said that you want one policy instrument per goal or per objective. And the failure here to heed the Tinbergen rule was that we were trying to use vaccine procurement to double as industry policy as well. The reason it seems we picked the UQ and AstraZeneca vaccines was because they could be manufactured locally by CSL in Melbourne. 

Steve, in your chapters, the flaw in thinking focuses much more on a failure to buy insurance, and I feel like that's the threshold question, it's the failure to buy insurance. And if we can happen to kick some other goals or satisfy some other objectives with that decision, then that's not such a bad problem. 

So I wanted to hear from you, Richard, I was curious to hear what exactly you had in mind with the Tinbergen reference.

HOLDEN: So firstly, I think Steve, and I guess I get some credit for it, is also right about the failure to buy insurance. That's absolutely correct. So I don't think they're mutually exclusive.

Yeah. I'm slightly obsessed with the Tinbergen rule because I see everywhere in government like gleefully saying, "We can do this and this and this, and with all just with one instrument." And like, it never works. It just never, ever works.

HAMILTON: Everything bagel liberalism, you know. 

HOLDEN: Yeah. Exactly. Exactly. So you know, Ezra Klein gets a lot of credit for that. So I think that that's a persistent failure, and maybe I'm a little bit obsessed with it, so, and I do write about it - like every third column I mention it. So probably I am a little obsessed.

But I think it's this just pervasive failing that politicians of all stripes seem to have. And you know, I think it was just present throughout Joe Biden's presidency and wasn't the only thing that Joe Biden did wrong, and of course he did some good things as well. But, you know, that's why I sort of emphasize that, I think. 

WALKER: I see. 

HAMILTON: I mean, you've got to nest this, right? So I think like broadly speaking, they failed to procure the full portfolio, but the ones they picked, the two they picked just happened to be the two Aussie ones. Yeah. Is that a coincidence? I don't think so, right?

So I think it can be both things, right? I think there's no doubt about that. The one thing I would say in defense of the Health Department on that is that I think so much of the – this is something I think we both noticed right from the beginning. It was such a strange scenario. You know, it was really a weird thing, this pandemic. It was like, so many of your standard intuitions are just totally inappropriate for this context, right? Keynesian fiscal policy, really problematic when you have supply constraints. So you've got to think differently, right? The Health Department is very used to penny-pinching, right? Because they're trying to grind the growth in health spending down to something reasonable. And if you take that mindset where cents matter and are everything into a context where, you know, the cost-benefit analysis blows out by several orders of magnitude, Alex Tabarrok has a beautiful phrase that he says, "The easiest cost-benefit analysis in the world win," you know, “ trillions are bigger than billions”. Why is it even a question? So I think the health people were so geared towards that penny-pinching mindset that they had difficulty confronting the situation where you have to throw that whole framework out of the window.

HOLDEN: Yeah.

HAMILTON: And it was a failure, right? So I think that's understandable, but still, you know.

HOLDEN: And that's where I think that the premium on leadership becomes so important because, you know, we say quite clearly in the book, we don't blame some sort of mid-level person in the health department doing procurement, whose normal job is to try and get a better deal on insulin, because if they do squeeze out a few cents per dose here or there, that's like more drugs that can go on the PBS. They're saving lives by doing that. That's awesome.

And you can't expect them in the middle of a pandemic to just sort of say, "Well, let me think about the big picture of what we're doing." That's not their job and it's not their role, and you can't expect that of them. But I think we can expect the very, very senior leadership of the department and their political overlords, I think we can expect that. That's what they're there for, is to, is to think about the big picture.

WALKER: So when the next pandemic strikes, assume for the sake of argument it has much worse characteristics, higher transmissibility or a worse fatality rate, what's gonna be the first part of Australia's state machinery to snap in the next pandemic? 

HAMILTON: Do you wanna guess first?

WALKER: What do we need to reform most urgently?

HOLDEN: First? (exhales loudly) You know, I'm tempted to say that t's the medical regulatory complex, that we'll need to, to really think out – I mean if you paint the story of like, you know, some highly transmissible, extremely deadly like sort of Ebola-avian flu combo –

WALKER: Don't give anyone any ideas.

HOLDEN: That's okay. That's already been worked on somewhere, you know? 

Then I think at that point, you know, thinking about stage 3 trials for vaccines and stuff, would probably have to go out the window. So if the smart mRNA people sequenced the genome for that as quickly as they did this time around, they'd have a vaccine in a weekend. We arguably would have the manufacturing capability in Clayton, Victoria already now-ish, ready to go to make that stuff. Now you'd need to get the consumables and, and so on, the sort of inputs into that, but imagine we had those. Then the question would be do you want to spend $500 billion and wait eight months to see if the vaccine's okay? Or do you wanna say, "Well, it kinda worked last time. It's similar enough technology and we're willing to give it a go." That would be the kind of decision that would have to be made. And I think the medical regulatory complex would have a very big role in thinking that through. So that's the first thing that occurs to me.

WALKER: And do you know the specific reform we would need to make to enable that? 

HAMILTON: Burn it, burn it down and then... (laughs)

HOLDEN: But I think we said you should already do that.

[To Hamilton] You like burning things down. Or advocating. You've wanted to burn down the Reserve Bank, Treasury... a couple of political parties. So-

HAMILTON: The NDIS. 

HOLDEN: Yeah, the NDIS. Y- yeah, many things. So-

HAMILTON: I only want to burn half the NDIS down.

HOLDEN: Yeah. Right. I think that's known as reform.

(audience laughs)

But, look, I don't know. Some of my legal scholar friends would know the answer better, but I think my understanding is all you'd need to do is change the composition of the target. I don't think you'd need to change their purview. There might well be some law about, you know, the government can't pay for stuff that hasn't been through a phase 3 trial, but that'd be presumably an act of parliament. So I don't think you'd have to do a lot.

HAMILTON: I want to stress the, you might call, non-pharmaceutical intervention side. You know, quarantine, lockdowns, that stuff. I worry about two things and we talk about this in the book. This is not state capacity… well, it is state capacity in the sense that in order to implement policy, you have to rely on people's good faith, you know. You have to rely on voluntary behavior. So much of what the government does relies on voluntary behavior, and that's an asset, right? You know, we don't audit everyone's taxes. We could, but it would be a nightmare, right? Mostly we rely on voluntary behavior and we hope that people do the right thing without having to audit them, right? So much of the pandemic relied on that - people's willingness to engage in a good faith way to help the country do their bit. And I worry that we've lost that element of state capacity, which is people's willingness to go along with this whole thing. 

And there was a review of COVID that was released right around the same time that book was released. Just a bit after, I think. And the media coverage blanket was, I think, unfortunate, which is that there was a big focus on the failure. You know, we wouldn't do any of that stuff again. And I have to be really honest, and there's gonna be people in the room who disagree, I think the first six weeks, we'd do exactly the same thing. We should. The first six weeks, we shouldn't change a thing. The question is, can we do that? Do we have people's consent, their willingness to go along with that? Because the first six weeks were flawless, right? So that's my question, right? Have we lost that ability to, to implement what was effectively a perfect initial response? Have we lost that forever? 

You know, the review wanted to kinda say, "Oh, we wouldn't do any of this stuff." And it's like, 2021 was a disaster, everyone agrees. 2020, pretty good. So I, I, uh, I, I worry about our ability to do that again.

HOLDEN: And I think about that in the context also if you think about the media landscape in Australia. It took quite a while for what would be called the right-wing media, with the exception of Adam Creighton, to kind of start mounting their kind of fanatical case. You know, Greg Sheridan, Paul Kelly, Judith Sloan, now I don't think of any of them as right-wing fanatics and, and I'm friends with some of those people. But, you know, they argued, you know, yeah, this is all making sense. You know, we don't know what's going on, precautionary principle, all that kind of stuff. I worry that this time around, for reasons partially to do with the pandemic, but also I think just to do with polarization in general, Trump, the global landscape, that there is a media machine that will see an opportunity here and, you know, will not take Sky After Dark very long to kick into gear to make politics out of this and commercial hay out of this. And I worry about the impact of that.

WALKER: Is that what you had in mind, Steve, when you were contemplating us not being able to do this a second time?

HAMILTON: Yeah. I mean, I think, well, it's just a question about people, how they feel, right? You know, did we push them too hard? And I think, you know, this is one reason why we're so critical of the vaccine rollout.

HOLDEN: Yeah. If we'd gotten that right, we'd be in a lot better place.

HAMILTON: People wouldn't be so fucking angry, right? They're not angry because of the first six weeks in 2020. They're angry because of 2021. You know? And a point we emphasize in our book is if you take the days of school lost between March 2020 and March 2021, Australia's right at the head of the world in days lost. I mean, I had the advantage of being in Queensland, but my daughter never missed a week of in-person school. And when people... When I tell that to people in DC they're like, "Are you joking? Right?” 

So, you know, I think you can't push people too hard, and the failures have cascading effects. And we've been talking about this actually in a research sense. But you risk an unraveling, right? You're in a good equilibrium, you've got to work hard to stay there, you know… It doesn't take a lot for the thing to unravel and for you to end up in a really bad equilibrium. And we don't know what the answer is. But I think we need to be very careful, right, to try and maintain that faith.

WALKER:  Right. Many such cases as they say.

HAMILTON: Yeah.

WALKER: So I want to start gently segueing now out of the pandemic and into state capacity more broadly. And one way to read your book is as a general crisis management handbook, but nowhere in the book do you synthesize and summarize those different principles of crisis management. So I want to invite you or give you the opportunity to do that now tonight. 

So imagine a political leader calls you up and, calls both of you up, they've read the book and they wanna bring you down to Canberra to do a seminar to help some senior members of cabinet and the Prime Minister build up their intellectual capital, you know, learn the principles of crisis management. They can't tell you what the crisis is, they've had early warning, but that's confidential. So you're just giving very general principles. What are the headings or main topics in your curriculum?

HAMILTON: Mate, come on. (audience laughs) 

I needed advance warning of this question. Can you go first? 

HOLDEN: I’ll go first. I'll get the obvious bits out of the way and then you can try and think of others.

HAMILTON: Yeah, I'll clean up. I'll clean up after you.

HOLDEN: So I think the first thing is you've gotta be honest with people. You've gotta be honest about what you know and what you don't know. And just say to people, you know... I think an example of what not to do was saying, "Oh, we don't... You know, can you... Don't use a mask, 'cause you don't really need a mask, 'cause it's probably not aerosol. And make sure you wash your hands a lot." Right? 

You know, and it turns out people were saying that 'cause it's like we don't think we have enough masks in the healthcare, in hospitals, for the moment, so it's really bad if people go on Amazon, like I did, and order a whole lot of N95 masks.

WALKER: So no more noble lies.

HOLDEN: Yeah. Don't bullshit the public.

WALKER: Right.

HOLDEN: You know, and come out and said, "We need masks... We think masks are very helpful. We need them most in hospital, for obvious reasons. Let me explain why..." You know, we'll have a doctor explain what it's like to be in an ER and the viral load and what it means. And so we're just asking you, can you please, like, not buy up a whole lot of masks and stockpile masks 'cause of this. And I think you lose a lot of credibility with people if you, if you lie to them. So first thing is, I think it's really hard but you've gotta be honest with people about what you do know and what you don't know. 

Okay. You got, you got one? I'll think of another one if you can...

HAMILTON: This is nebulous, but I will repeat something I said earlier which is, I could not stop thinking about having flexibility in your thinking. You know, just that basic idea of, like, do not... Something we touch on with the economic chapters a lot is everyone's fighting the last war. You know, they wanna pull a book off the shelf and just implement the plan, right? So much of the economic response early on, when I started seeing people on Twitter say, you know, "Checks, checks, checks," the reason they were saying "Checks, checks, checks" is because the failure of 2008 in the US was not getting money out the door, not getting enough money out the door, not getting it directly to people quick enough. You know, that was the focus. Everyone thought, "2008 crisis, we need to get cash out." So they come to the pandemic and they think, "Oh man, we need to get cash out the door." And you're like, hang on, it's a completely different crisis, right? I mean, you have a massive supply contraction at the same time that you have a demand contraction, right? So you have to think about this differently. So, yeah. 

HOLDEN: Don't fight the last war.

HAMILTON: Yeah. Well, there you go. That's glib. Yeah, I like that.

HOLDEN: Not glib. We're talking to politicians. You have to be, direct and like a little-

WALKER: You need slogans.

HOLDEN: ... morsels. And, you know, stop the boats, axe the tax, you know. This is like, this is their language, man. So-

HAMILTON: Democracy is on the ballot. No, I'm sorry. Hang on. One second.

HOLDEN: That didn't work so good. Too many syllables. 

Yeah. So, don't lie, don't fight the last war, optionality.

So, you know, option value's an incredibly important concept here and that would cover a lot of things, but don't give away optionality. You know, keep your options open, something like that, and I think that would apply to a lot of things. 

And you know, one way to think about what we did with the vaccines is we cut off that option value. Had we bought everything, we had the option to use it, we had the option to use it as foreign... You know, the ones that were maybe still really good but we didn't, you know, weren't gonna need 'cause we had enough doses of the other stuff. You know, we coulda helped with our Pacific allies and neighbors or other countries and so on. And I think that's a very broad concept that applies to alot of different crisis management.

HAMILTON: I think there's also something about - like, the thing in economics is like it takes a lot... This is super nerdy, but, like, it takes a lot of Harberger triangles to fill an Okun's gap.

HOLDEN: Oh. Very good.

HAMILTON: Okay? I don't know if anyone knows what that means, but, you know, the point is-

HOLDEN: Who said that? Was that Marty?

HAMILTON: It's, um, it's from, um, oh, what... It's... I cite this, I cite this book in... I cite this paper in my paper. Anyway.

It's like the key thing is to say in a recession, the welfare loss of, you know, unemployment, of some big contraction is massive. Don't sweat spending money in that circumstance. You know, in normal circumstances we're worried about, you know, sending money out the door because it, you know, we get welfare losses in trying to collect that money back. But in a recession, you're dealing with such a mass market failure on a massive scale.

HOLDEN: So, I think that's a great way to put it. So I would use the, you know, Harberger's Triangles and Okun's Gap thing.

HAMILTON: Yeah. Albanese wouldn't know what that means, but you know.

HOLDEN: Well, he didn't do proper economics at Sydney Uni. So that was a mistake. But... And a shame. 

But I think, you know, we wrote about this a lot during the pandemic and to be honest you made me think about this really, really hard. I think I knew this but you made me really focus on it, which was when you think about government spending on a whole lot of things, a lot of it's just being transferred from one group of Australians to another group of Australians. Okay, you've got to raise the money, so what's the distortion that you create when you raise the tax revenue to do that? Well, public, smart public finance people like Steve told me that's about 20 cents on the dollar.

HAMILTON: Yeah, order of magnitude like that.

HOLDEN: So, you're saying well if this money's going from here to here, don't think of that as $100, think of that as costing you 20 cents.

And that's a very different frame of reference than like, but the budget is gonna be like $100 worse off. That doesn't matter. That's just the Commonwealth budget. That's just, you know, one set of books. Think about the whole set of books.

HAMILTON: It's sort of like don't be penny wise, pound foolish. How about that for something? Is that all right?

HOLDEN: Yeah, yeah.

HAMILTON: Think about... Be willing to spend money if you need to spend money. It's not a big deal. The costs are so much larger. That's frequently the case.

WALKER: Okay. So no noble lies. Maintain optionality. Don't be penny wise, pound foolish. And don't fight the last war. Anything else?

HOLDEN: No, if you have too many things, then... 

HAMILTON: Yeah, don't have... And the fifth one is don't have too many points.

WALKER: So, Steve, you spent several years working in Treasury.

HAMILTON: Yeah.

WALKER: Did that give you any insights about Australia's state capacity that you wouldn't otherwise have got? Things that you could surprise Richard with?

HAMILTON: Pff, absolutely. I mean, there's no doubt about that. For the good and bad. You know, I think you learn in general that there's a lot of demonization of public servants. There's a lot of demonization of public servants happening where I live right now. Right? A lot of my neighbors are gonna get fired, pretty sure. You know, and I think working for the public service, you really recognize that like fundamentally, these people want to do the right thing, and they are shockingly socially minded people often, right? 

Yeah, I was impressed by that. Maybe that was a Treasury thing, but like I think it was really impressive. You see what Treasury did during the pandemic, and I think there was a huge mobilization. Or Chris Jordan tells us about the ATO, you know, they converted like a quarter of the ATO, this is the IRS equivalent in Australia, to working on pandemic stuff. And you know, these people are working all through the night, they're pulling out at all stops. So there's a sort of... That, we take that for granted, right? The ability of, in a crisis, to draw on people's goodwill and willingness to kind of go above and beyond. And that's, um, that's not... I wouldn't have appreciated that, I don't think, if I worked there. 

And the old, the other side of the coin is, I think, it's ex- (laughs) it's extraordinary when you work at Treasury or a public department, just how much, how many people are sitting around really not doing anything. And how, you know, we had a lot of conversations when we were at Treasury, like, we could do all of this team's work with two people, and we have eight people, right? And that's not an exaggeration. So, the question is, how do you get rid of the six people, figure out which two to keep, and then how do you get the two people to work really hard? And that's the fundamental problem, right? So, maybe the only way is to hire the eight people, but yeah. That's kind of two sides of the coin.

HOLDEN: That is, I do find that surprising. I do find that surprising.

WALKER: Related to that, I have a friend who works in Treasury, and he was sort of telling me that –

HOLDEN: So, was he one of the two or one of the six?

WALKER: Hopefully one of the two.

HAMILTON: Man, the Treasury people are gonna be so mad.

HOLDEN: For the record, it was, he said that, right? And I expressed surprise.

WALKER: You're on the record as expressing surprise, yes.

HOLDEN: Thank you.

WALKER: So, he was saying that there's not only been a centralization of power toward the Commonwealth, but a centralization of power toward the central agencies, so DPMC, Treasury, Finance.

HAMILTON: Is this a Treasury person?

WALKER: Yes.

HAMILTON: Does he work there now?

WALKER: Yes.

There are now 23 divisions in Treasury. And anecdotally, you know, this might be wrong, but I think directionally it's probably true, if you go back five decades, Treasury was kind of just, you know, tax analysis, which is now one of the 23 divisions today.

It's taken on a range of different responsibilities, like they do the climate modeling stuff now, they have the Australian Center for Evaluation, they have the new Made in Australia program.

HOLDEN: They're costing opposition policies. It all takes time, you know.

WALKER: Big, big team working on that. And Treasury will have shadow departments for all the other different government departments. Did you see this trend across your years in Treasury? And-

HAMILTON: I think that's old. I don't know if that's a new phenomenon.

WALKER: So, what's driving it?

HAMILTON: So, the way it works is, or it's, well, okay, I don't know what the right word here is. The way it's meant to work is Treasury Finance and PM&C are kind of the three central agencies, right? Um, and they're also, they tend to be the three most senior ministers, right? The Prime Minister, the Finance Minister, the Treasurer. That's typically the way it works. They make up the central part of what you call the Expenditure Review Committee of Cabinet, right? 

So, and the basic idea is that, you know, if you're a line agency secretary or minister and you want to do anything, you know, you have to convince the central agencies to let you through the gate, right? Now often it happens at the public service level, right? So, it's a department-led policy, and the Treasury secretary is like, "That is a bad idea, we want to kill it," right? And so they'll maybe work with Finance or work with PM&C to basically kill bad policy. And that happens that way. 

So, the central agencies are meant to be like gatekeepers of the, you know, of what is good policy. Now that, I'm not sure that's new. I think that's always been the way. I mean, if you go back to Malcolm Fraser, this was a long time ago, I wasn't alive, right? You know, he used to be Treasury and PM&C, and then he split Treasury into two departments. And that's how the Finance Department was created, and the idea was to diffuse power so that the Treasury didn't have so much power, right? So, that, I feel like the power of the central agencies goes back that far, right? To the late '70s. So, I'm not sure it's a new phenomenon. I think it's good, you know. I mean, I think, I'll be blunt, a lot of insane ideas come from ministers and line agencies, and literally the role of Treasury is to like weed out those terrible ideas before they ever get to Cabinet. So, I don't know, I think that's good, but I'm a Treasury guy, so of course I would say that.

WALKER: Richard, centralization at the Commonwealth level, net good or net bad for Australia's state capacity?

RICHARD: I think within the Commonwealth, that's good. So, centraliza- you know take the Commonwealth vertical state relationship as given. Within Commonwealth centralization that you and Steve just described strikes me as relatively good. Now, maybe it was always thus or it has been for a long time. I suspect there's something to do with the interaction with the kind of 24-hour news cycle and, you know, changes in the media affecting how politicians have to respond to things and what they need from their departments that may have made it a little bit more that way. I think that's good. Now, I think, you know, what is done by the Commonwealth and what is done by the states, let alone by local government, if there's, if we're talking about more centralization towards the Commonwealth, I think that's a more complicated story. You know, on the one hand, I'm kind of a big fan of Alexander Hamilton. On the other hand, you know, I think Hayek had a pretty good point about, you know, localized knowledge and, and having decision-makers with that localized knowledge who are at the coalface. And I think there's a whole lot of things that, that state government's a lot closer to than the Commonwealth, so I feel more conflicted about that.

HAMILTON: Can I add?

HOLDEN: Yes.

HAMILTON: I think this is... You tend to be more Hamiltonian.

HOLDEN: Yeah, I know.

HAMILTON: And I tend to be more like the laboratories of democracy kinda, you know. And we've had arguments. I mean, there are a set of things that Richard-

HOLDEN: But the US has 50 states. Democratic experimentalism at least has like… You can calculate an exact P-value for that. Like in Australia, it's like, it's kinda six, but it's really only two.

HAMILTON: So, certainly in the book...Queensland. Queensland.

HOLDEN: Well, I'm just weighting by population, you know?

HAMILTON: Jesus. You know, Richard and I, well, we had almost no disagreements on the book. It was kind of amazing. But I think this fiscal federalism thing, we often disagree on. I would love to see the states have a lot more power and I'd love to see more decentralization.

HOLDEN: I wanted them to have an income tax power when Turnbull floated that idea.

HAMILTON: Yeah…

HOLDEN: Oh, now you're gonna disagree with that, too? 

HAMILTON: Some power, you know?

HOLDEN: “I want the states to have more power, but not income power.” 

HAMILTON: I mean, I guess it's part... Who’s the laboratory of democracies guy? 

HOLDEN: De Tocqueville?

HAMILTON: Is it? I don't know. Anyway. someone. 

And then there's the sort of Thibault idea which is, you know, sorting of people across areas. Sorting into their preference for public goods. So you know, lunatics sorted to Melbourne and like, (laughs) and like normal people, Sydney, people who are less highly strung, Brisbane. That's like me, you know. But you know, having a system where people actually can choose, right? And we can have, you know, to some degree, states compete with one another, I kinda like that idea.

HOLDEN: No, I like that idea too, and I think our university sector, for instance would work much better if people moved around more like they do in the United States and things like that, so there's… I do think, you know, not to get cute about two and six and eight or whatever, but you know, we have just a much smaller number of jurisdictions for there to be democratic experimentalism. So I think, you know, Vermont, you know, same sex marriage became law in the United States, you know, slower than it should have but faster than it would have had it not been for Vermont. You know, Vermont, they kind of drove that.

HAMILTON: So I mean, I think during the pandemic I was kind of refreshed by how much state power developed. At the time I remember thinking, "I love this." You know? Like, you've actually got states out there doing what they do. But the countervailing point is that sometimes there are just things that are, they spill over state borders. You know, the way there are kind of agency problems or whatever, you know, there are sort of externalities. And in those circumstances, you have to have a federal government that overcomes those externalities, and I don't think... We do a pretty good job, like we have a horizontal fiscal equalization with the GST, but it's kind of imperfect. You know, I think there are, I think what we need to do is recognize both things, the benefits of competition, decentralization, local knowledge, uh, experimentalism, all that stuff, but also recognize there are circumstances where, you know, you need a national solution because, you know, you don't want sometimes state competition is destructive, right?

And you have spillovers and you've gotta deal with that. So your ability at the state to kind of manage that trade-off, right, which means in certain circumstances you wanna do one thing and certain ones you do the other, and hopefully your constitution reflects those trade-offs, uh, not that ours does, but that's, I think, the key thing.

HOLDEN: Right. No, I think that, by the way, just on that, that whoever the next government is or one of the next governments, I really think one of the missed opportunities of the last decade or so was the kind of vaunted and failed federation white paper and I think that rethinking the political and fiscal arrangements in a really sensible way and it you know, starts with everything around the GST, but goes to much broader issues like the ones that Steve was just mentioning. I think that process should be, you know, kicked back off again at some point and would benefit the nation a great deal.

WALKER: On that, what's the most non-obvious thing you'd like to see us do for our federalism?

HOLDEN: I mean, I think the way that the GST is apportioned between the states, the way it's charged, what it's charged on. I mean, I've had this idea for a… and I wanna get back into it, but for a long time about a so-called progressive GST, sort of raise the rate and broaden the base of the GST, but give everyone some amount of GST free, every adult Australian some amount of GST free expenditure. You know, to do anything like, and maybe that's a good idea, maybe it's not, but as soon as you sort of talk about doing anything about that, so oh, you know, there's a veto of all the states and you'd have to redo all of that. I mean, we have gotten ourselves into a very strong status quo bias with a whole lot of policies, particularly economic policies, because of the way the states interact with the Commonwealth and the implicit kind of veto power. And even if you just look at, you know, and Saul Eslake's been very, very vocal on this about the, the, the deal with WA that was done under a previous government and done again under the current government. You know, that's just a kind of a sacred cow that can't be dealt with under the existing structure, and I don't think it's totally an accident that we haven't had a major policy reform in, you know, major fiscal policy reform in a, in a couple of decades. So I think rethinking those structures is... and the kind of implicit veto power or supermajority rule that exists on a range of issues would be very important.

HAMILTON: I also think, I mean, there's a weird situation where... So the states get... We collect the GST federally, and then we distribute to the states according to a formula, right, which doesn't quite match how much tax they collect, right? And that's, you know, horizontal fiscal equalization thing. We're trying to basically give Tasmania free money and tax New South Wales more or whatever, you know? Whichever state's doing better pays more than they should.

HOLDEN: And, and that's good because if-

HAMILTON: It's insurance.

HOLDEN: But it's all, yeah, and then there's the kind of veil of ignorance thing. There's also… you just have to go to, uh, where you live and look at West Virginia and you would think West Virginia and Massachusetts are on two different continents not just in different countries. You know, to a kid born in, West Virginia, I feel like we do a lot better job with that than in a country like the United States

HAMILTON: Yeah, there's fixed costs.

But there's basically, there's always GST revenue that just goes to them as a block grant, right? But then there's a whole bunch of other grants. There's a huge amount of money. It's roughly 50/50, I think. I haven't looked at it recently.

HOLDEN: No, it is, it is.

HAMILTON: So it's like 50% of their money comes from GST as a block grant, and 50% comes from like, health and education funding, and there are all these grants, and ultimately, in my view, it makes no sense for the federal government to be collecting revenue and then distributing it to the states. The federal government, has political accountability for Medicare, something that it has literally no role in implementing, right? Nothing, right? So I would like a system where we broaden the GST, raise the rate, double the revenue, and basically eliminate grants to the states. Goodbye. 

HAMILTON: You just get money. And I'm not gonna tell you how to spend it, but ultimately it's up to you, and I think that devolvement of like responsibility would be way better.

HOLDEN: No, I'm totally with you on that, and I think that was, that exact proposal was something that was, as I understand it, under active background discussion during that federation white paper process.

HAMILTON: Right.

HOLDEN: And it accords with a very simple principle and closer to the kind of economics that I cut my teeth on and do for a living in some sense or another, about, you know, principal-agent problems, which is you never wanna make something, somebody accountable for something over which they have no control.

HAMILTON: Yeah, exactly.

HOLDEN: That's just a bad design of incentive schemes. And you know, we've got pretty poorly designed kind of political and fiscal incentive schemes as a result of the things that Steve just spoke about.

HAMILTON: But a lot of the feds don't wanna give up that power, you know, and the ability to claim credit, right? Oh, I gave more money to schools, I gave more money to hospitals. It's like, you know.

HOLDEN: No, you just go and look at the little plaques outside of schools and hospitals and look at, you know, that person was the federal minister or something.

HAMILTON: Photo ops, yeah.

WALKER: If we implemented that reform, how would we coerce the states to solve the housing crisis at a federal level? 

HOLDEN: Something I've recommended repeatedly. It's a good question. Well the reason they have leverage... Well it's worth discussing that as a separate thing, right? I have had skepticism about that, right? 'Cause you say to yourself... The simple answer is the federal government has all the money, you know, so the federal government's only tool is to bribe or force the states to pressure local governments to liberalize housing supply. 

But that kind of prompts the question of why, what's the incentive misalignment that this is solving? Like, why is it that the states don't… why is it not in the states' own interest to solve that problem? And what does the federal government overcome? Why does the federal government know the right answer to this question? I don't know the answer to that. Like, how, are there spillovers from New South Wales to Queensland because, I mean… interstate migration or...It's kinda weird, right? Or we just think they're, like, worse?  

HOLDEN: Well, what about, I mean, Chris Minns wanted to bully the councils, in a good way, into doing that. And he got a lot of pushback.

But if, you know, NIMBYism or the councils, or I don't know, but if he sort of said, "This thug of a federal treasurer just said they're gonna take 25% of our GST revenue if we don't meet this housing supply target. And it's not my fault, but I have to do this otherwise, you know, we're all stuffed." Then maybe it would get done. You know, you make someone the bad cop about it, who's actually holding a lot of markets. Whereas I don't think Minns has a credible… New South Wales Premier has a credible, whoever it is, has a credible threat to make about local councils. I mean, what's he gonna do? Is he gonna dissolve Randwick Council?

Well, I don't think he's gonna do, like, you know, maybe he should, right? But one of his advisors must have told him, "What are you gonna do? Dissolve Randwick Council? No." Whatever. 

HAMILTON: Yeah, but I mean, but it's still puzzling to me, why does Albanese know the right answer and Minns doesn't? Or why are Albanese's incentives, political incentives different to Minn's? Why? Why, why? Like, why is it in one of their interests to crush NIMBYs? And why is it in one of their interests not to?

HOLDEN: So think about it. Well, think about it this way. When you negotiate, you know, buying or selling a house, right, we do a lot of bargaining through agents and, and why is that? I think it's because, you know, you kinda wanna be a jerk as the, you know, purchaser or as the vendor. But you kinda don't wanna be seen to be the jerk, so you hire a real estate agent. And by self-selection, they've, like, decided that they're quite comfortable being jerks, right?

HAMILTON: So Albo, Albo is like the fall guy or, you know, the bad cop or something?

HOLDEN: Well, like I said, you know, Jim Chalmers can play bad cop and Minn sort of says, you know, "I don't really wanna do this, but my hands are tied." And so I think you can get those kind of, you know, get somebody else to commit to do that kind of agency relationship-

HAMILTON: Hmm. Maybe.

HOLDEN: We're in a second best world, you know, I can see how that could work.

WALKER: In what's going to prove to be a teaser for next week's salon, and as is now tradition for our Sydney salons, I'm gonna invite Peter Tulip to inject a comment.

TULIP: Two observations. First, playing a bad cop violates your first rule of crisis management. Don't lie. The second observation, why does Albanese have an incentive to do it? Because the costs are local and the benefits are dispersed.

HAMILTON: But is that true at the state level?

TULIP: Yeah, there's interstate migration. I mean, there's-

HAMILTON: Yeah, but is that really...

TULIP: Okay, it's clearly much more important in the United States than it is in Australia, but it is significant and it gives you the… it's there and so it's a motivation for federal involvement. And the way you would do it is through the Grants Commission, you would make housing a hardship, the way the Grants Commission currently treats transportation. And that would give more money to states that build a lot and less to those who don't.

HAMILTON: Yeah. I've advocated doing this. It's just that I feel like there's some magic behind there that I don't understand. 

WALKER: Okay, so my next question will be framed as a pandemic-related question, but I'll take this in a more general direction. So in your book, you describe the unsung hero of the pandemic as not any one individual person, but a thing, and that is Single Touch Payroll.

HOLDEN: Our publisher was so excited when we told him.

That'll sell books, “Single Touch Payroll”.

But it's true.

WALKER: Can I have you give, like, a sort of one-minute primer, to the audience about what Single Touch Payroll is, how it was used in the pandemic and then I'll ask you a question.

HAMILTON: Yeah, so it was by some miracle introduced in, I think, the 1st of July, 2019. It was phased in for different sized businesses at different rates, but it came in for everyone right before the pandemic. And all it is, is it's a system, it's an IT system in the back end where when a firm runs a pay run, we pay all our employees, the data is automatically transmitted to the ATO. So in real time, the ATO receives information about worker pay. And, you know, there's all sorts of detail about exactly how they did it, and it was a fascinating conversation. We talked to, Chris Jordan, who was the ATO commissioner at the time. And, you know, there's all this smart stuff, like its integrated with software, right, that software firms use to pay their workers. ATO kind of worked with those providers to kind of build it into their software. And in a way that governments usually force software providers to kind of do it their way, the ATO was very cognizant of kind of doing the opposite, which is adapting to the way these software, the soft- the, the software works, right? So for example, there was a push to have this be like a fortnightly thing, every two weeks, and it's, like, fixed on a calendar date. And businesses said, "Well, we pay workers monthly, weekly. We all pay it on different dates. Like, we all have to conform to your kind of strict schedule." And the ATO was like, "No, no, we wanna adapt to you," right? So it's built in a way that every time a run happens, no matter when it happens, the date and the amount and all of the numbers to do with who paid, their tax file numbers are all automatically transmitted. So it's kind of amazing. If you think about it like an IT exercise, like, that's extraordinary, right? To get every worker in Australia, every dollar they get paid, when they get paid, that information is instantly transmitted to the ATO, and that worker can log on and go and see, "I got paid." Now, that system was really set up for compliance purposes, right? Like, so that the ATO knew when the worker was paid and what they were paid and how much tax was withheld, right? Um, so it's really a, just an ordinary kind of compliance measure, and I think the key thing with the pandemic connection was I don't think anyone foresaw that that kind of a system, that plumbing would actually come to be critical in a crisis, which no one thinks of, but in the end is, is absolutely the case.

WALKER: So it finished rolling out almost literally six months before the pandemic started. And then it enabled JobKeeper because it reduced the risk of fraud.

HAMILTON: Yeah.

WALKER: So it meant that Chris Jordan could ensure high integrity in delivering JobKeeper.

HAMILTON: Yes.

WALKER: What's the next Single Touch Payroll? So, I think in the book you say that the most obvious next candidate is GST turnover reporting? But what, I'm more interested in what's the next most ambitious candidate.

HOLDEN: Central Bank digital currency.

I got a book on that, too.

WALKER: Say more.

HOLDEN: So I think that we're gonna be, the short version is, China is not piloting, China is not trialing, China is aggressively rolling out a digital currency and they are going to have a whole lot of advantages with that. One of which is they could plausibly end up rivaling the US dollar if the US, uh, US dollar doesn't respond. As if not the world's global reserve currency, a step along the way to that which is having a whole lot of international trade done in digital yuan rather than in US dollars, so trading commodities and things like that. Overwhelming majority of international trade is settled in US dollars. That could change. The other thing is that the much vaunted Web 3.0, so think of smart contracts, programmable money, things like the ability to seamlessly instantaneously transfer money in different currency denominations with zero compliance costs and zero risks, so technically these things are called atomic swaps. All of that stuff needs to be built on either blockchain technology, which is hugely economically expensive. So Bitcoin actually has this environmental cost that people have talked about, but even Ethereum, which operates on a different kind of blockchain that doesn't have the environmental problems, it's unbelievably expensive to run. A centralized ledger done by a central bank with a central bank digital currency could be made extremely, extremely cheap, uh, will give the ability to develop the new range of financial instruments that would be hugely beneficial. And whoever's the first one to do that globally will be in pole position to have a lot of influence over the world's global financial system. So in that book, Money in the 21st Century, I say the US should create a Fedcoin and they need to, you know, get into gear on that. That doesn't look very likely given the current administration and so, and maybe it's not possible. And I'm not saying Australia can become the world... The Australian dollar's gonna become the world's global reserve currency, but I think, again, the sort of option value that could create would be very important and we might be able to be at the forefront of that.

WALKER: How likely that this happens? And have you had conversations with policymakers about it?

HOLDEN: Yeah, I have. How likely is it that we do it in Australia? I think that's just a matter of will, to be honest. Could we do that in the next five years in Australia if we wanted to? And would it be politically palatable and saleable? I don't think it'd be super easy, but I think it's totally doable and I think the euro area may well end up being able to do it. Countries like Singapore definitely can do it. Uh, I think it's really, really hard in the US, but I think it's quite plausible in Australia.

HAMILTON: I know nothing about this, so I have nothing to say. But I just wanna push back on something you said, which is that electronic recording of GST receipts is not ambitious.

WALKER: Yeah, please.

HAMILTON: The reason the GST or the VAT as it's known in Europe - you knew I was gonna do this - is good, literally the whole point is that every time someone buys something, one firm buys something from another firm, the firm that buys it pays tax. And the firm that, you know, then, then they go to sell the good, they add value to it and then they sell it, they get to deduct the cost that they incurred when they bought the goods, the inputs, and then sold it as an output. And because the VAT, it has these obligations, you know, I bought it from you, I've got the receipt, I sell it to the next guy, he gets the receipt. What that does is it creates a chain, right? It creates a chain through the whole production process. And what that effectively does is makes tax evasion literally impossible, right? I mean, literally impossible. 0% chance of any tax evasion. Unless businesses don't actually report the transaction values to the IRS or the ATO, and then with some probability tax evasion becomes impossible. Now, in Australia, it's all paper. There's no... Each transaction is not reported to the ATO, right? It's just like, "I have records and if you audit me, I gotta present the receipts, but you gotta audit me," Right? And there's gonna be some probability that I get audited, so there's gonna be some probability I lie about my taxes. Chile, which you know, um... I don't know if we denigrate Mexico in the book, but... (laughs)

HOLDEN: No, we definitely do not do that. That would be a bad thing to do, so-

HAMILTON: But we kinda say we're worse than Mexico. Like, what the hell's going on? Chile, every transaction in Chile's VAT system is electronically reported to their tax authority. Every single one.

WALKER: Wow.

HAMILTON: So they have perfect compliance, right? And there's been research on this, there's been studies on this. We don't have that in Australia because we introduced the GST in 2000, which was before the time we could've set up an electronic system. Chile introduced their system more recently. So we need it. Like, I think we could reduce fraud evasion in the GST by, like, many billions of dollars with that simple change, as well as doing things like improving, lowering compliance costs, you know, making it easier for businesses to conform with it. So I think, like...

WALKER: Okay. I’II revoke my implicit snub that that wasn't ambitious.

That's interesting.

HAMILTON: Never shit talk the VAT to me. It's not gonna happen, guys.

WALKER: With a particular emphasis on economic plumbing, what does your ideal recession fighting toolkit look like, and how closely does our current toolkit match that ideal?

HAMILTON: You go first.

HOLDEN: Yeah. So one thing I've written about before in a book, with Rosalind Dixon in 2022 called From Free to Fair Markets, a small part of that book is about saying, look, we clearly should have a bunch of shovel-ready infrastructure projects already worked out and all ready to go in a 2008 style crisis, where you wanna be able to get money out the door and only cutting cheque... You know, and you don't wanna be only cutting cheques, although you may want to be cutting cheques. Uh, and I know there's a lot of kind of skepticism about, oh, you know, what are the benefits of these projects during those kinds of things? But if you imagine a crisis where, you know, you do have really high levels of, you know, elevated unemployment, you have, you know, a big - the sort of typical Keynesian type problem with, huge problems with private demand, I think having stuff that is like literally ready to go that's been well thought out, that's less wasteful than some of the things that typically happen when they're sort of dreamt up on the spot, and having a playbook ready to go, and that they could be, you know, they could be very much around environmentally friendly projects, or remediation, various things like that, I think that would be a good thing to have in the back pocket.

WALKER: Before you move on, can I challenge you on that using your own book?

HOLDEN: Yeah. Ideally not, but go ahead. This doesn't sound like it's gonna end well for me.

WALKER: One of the interesting things I learned in Australia's Pandemic Exceptionalism is that infrastructure projects have such long economic lags, and you guys interview Ken Henry and there's this Ken Henry quote where he says that some of the infrastructure projects they used to fight the 1990-1991 recession didn't have their economic effects until 1997.

So I thought we'd sort of moved past infrastructure projects.

HOLDEN: Well, I don't think we should have moved past all infrastructure projects. I think, you know, that's a very good point, but I'd say this, which is, one, often those things take...... you know, two to three years to get actually underway. So you have a recession, it's like, "Okay, like what are we gonna do?" And then it takes a couple of years to get it underway. And then depending on what they are, if they're building a suburban rail loop, well that is gonna take a really long time and you're not gonna see it. That's why I'm talking about like literally shovel-ready stuff, where it's like these folks are unemployed, they're doing, you know, boring stuff, but cool stuff. Dune reme- you know, sand dune remediation. Picking plastic out of waterways. All kinds of things like that, that are very immediately about getting money into the economy and doing something valuable. So I think this sort of old style, big scale infrastructure stuff, Ken's obviously right about that. I don't think that that means that that's not an arrow we want in the quiver when it comes to fighting that kind of recession.

HAMILTON: Yeah, I think the point is it's not, right? And you wanna make it one.

HOLDEN: Yeah.

HAMILTON: I would say it's really bizarre the way Australia does unemployment insurance. This is in the book. This is a separate thing I've worked on. And Richard may disagree. I don't know. But Australia pays a flat UI payment, for everyone. Everyone gets the same dollar number, right? It's this many dollars per fortnight and it pays it indefinitely. So there's no time limited feature. There's zero relationship between how much money you get and what you earned before you lost your job. That's globally unique. The UK is the only other country that does it like that. It's weird. The... Matt Cowgill at Gratt- when he was at Grattan Institute, he'll be a, hopefully a hero to many people in the room, he's a good friend of mine, he produced this graph that showed the UI replacement rates over time, like by unemployment tenure by country. And every single country has a really high rate and then it drops. Every single one. Like 30 graphs. Except Australia's, which starts at a low rate and stays low forever. And I worked on this proposal when I was at, Blueprint, but the basic idea, I think, would be to turn Australia's unemployment insurance system into something that's actually unemployment insurance, have it be a proportion of your former wage, come up with the right rules to have it trigger, you know, in certain circumstances, and, you know, Claudia Sahm, who we interviewed for the book, recommends maybe having the, the generosity be linked to the kind of... Have some trigger points in the economic cycle that lead to both the triggering of the unemployment eligibility, but also the generosity of it, right? Um, so to have that be automatic, and not have to be worked out in the fog of war, right? 

So, in our case, what they did is we've got this weird flat UI system, which is... Like, people can't live on, but you get it forever, which is a difference to the US, and they just said, "Okay, we're gonna double it." Right? That's not really the optimal way, I think, to think about how we should give people money during a recession. So thinking of that beforehand, building the systems that allow you to, you know, condition that on those economic circumstances, and just having a system that is more, you know… That gives people a living wage, right? For some time-limited period, and then drops down to a lower level later, I think we could... I really genuinely think we should basically redesign our UI system and build it more around, like, recession... Get it recession-ready.

WALKER: Right. 

HAMILTON: Not something we needed to do, because we didn't have a recession for 30 years, but something that, you know, maybe if we, if we become decoupled from China or something happens, maybe we end up with more traditional business cycles and that sort of thing becomes useful. You could fund it using superannuation, right? There's all sorts of different models you could use, but yeah, I would do something like that.

HOLDEN: Can I just for the record, say I'm sympathetic to the idea about it not being just totally flat, but I think one of the great things about Australia, and this is, you know, lefty Richard speaking here, um-

HAMILTON: I won't roll my eyes, you know. (laughs)

HOLDEN: Which is, I think it's great that it's not time limited in Australia, and I think it's great that we don't call it unemployment insurance. Uh, I care less about what we call it about, but I think the fact that it is not time limited, it certainly has a lot of conditions on it about searching for a job and checking in and stuff.

And I don't think you were saying it.. Some of your language around, you know, "But you get it forever," I don't think you're saying you shouldn't get it forever, maybe you should get a lower rate than what it starts out at.

HAMILTON: Yeah.

HOLDEN: But I think a really important part of the Australian kind of social contract, and my conjecture, I'm trying to get a smart honors student to work on this idea at some point, which is... So lots of Americans come here, and recently, a friend of mine who has a Nobel Prize in economics came here and said to me, "How come you have so few homeless people in Australia?" And, you know, the best I could come up with is we don't have time limited unemployment [insurance] benefits. But then I was like, "Yeah, but they're so low… why is it..." So I don't know the answer, but I think that the kind of not having it be time limited is pretty important part of our social contract. And so, you know…  But should it be, like, exactly flat?

HAMILTON: It should be way more generous than it is initially.

HOLDEN: Well, even John Howard thinks that, right? Like, you know, John Howard did a lot of good things and, you know, I have a lot of admiration for many of the things that he's done, but you don't often get Cass Goldie and John Howard on a unity ticket about stuff, right? So I think that just says the current system is not acceptable.  

WALKER: Right. Okay, so let's all agree that Australia's state capacity could be much better, but relatively, it's pretty good. So when me and my friend were doing this literature review, a few of the main international indices of state capacity put Australia at somewhere between fourth and 10th in the world. On one of the civil service effectiveness indexes, we are, I think, fifth in the world. To give some anecdotes that kinda make this a bit more vivid, about 98% of our Medicare claims are processed electronically. That's about 1.1 million a day. And I think you can kinda become desensitized to these facts, but they're really amazing triumphs of you know, digitization and Australia's state capacity. Another example from the 30 review, 95% of individual tax lodgements are processed without human intervention, so just electronically. So it's pretty impressive.

HAMILTON: Can I interrupt? Sorry. You're gonna hate this, but I came into... I got here yesterday. Flew from the US. And I texted Richard about this at the time, and he said, "That's a great example of state capacity." I literally... The gate… the gate connected to the plane, 30 minutes later, I was on a train to Sydney CBD. And I had checked baggage. Because you walk through the smart gate.

I mean, has anyone gone to the US before? I mean, literally, if it takes less than two hours to get… Yeah. It was like 30 minutes and I was on the train to the CBD.

And what a perfect example of state capacity, right? Anyway.

WALKER: Yeah, exactly.

HAMILTON: Carry on, yeah.

WALKER: So the question is, what are the, you know, if you had to boil it down to the, the most basic scarce resources, traits, factors that mean Australia has relatively more state capacity than, say, I don't know, the median developed country, what are those scarce factors, traits, resources?

HOLDEN: Just to say quickly, I have a conjecture about that, but, you know, I looked at this excellent research about... And I wasn't familiar with these indices, but I was sort of like, "Oh, hang, hang on. Like, I'm surprised to see, like, Sweden or Norway and, you know, Australia's behind, you know, we're fourth, but, you know, they ha-" And I think a lot of those indices are really sort of saying, well-If the state does more, it gets a higher score.

So I tried to recut some of those a little bit. And I got Australia coming out pretty much first, undeniably.

WALKER: Oh, right.

HOLDEN: If you said like, "We've made a political decision about what we're gonna do. How well do we do it?" So I think we're kind of like number one. But in any case, what makes that the case? I think there's a lot of things that go into it. I mean, one, we pay people who work at like Service New South Wales a lot more than people who get, who work at the DMV in, you know, Houston, Texas or Boston, Massachusetts. 

But I think probably the biggest thing is we have come to expect it in Australia, and we, think of our administrative state as like an Apple product. It's meant to come out of the box and work. And if it doesn't, someone, a politician gets in trouble for that. So, you know, if your Medicare claims weren't getting processed, someone's gonna, you know, be grumpy about that and someone's gonna pay for it. 

I went to Service New South Wales this morning with my daughter to do a certain thing, and, you know, there was a lot of demand and they were under pressure, but like, it worked really quickly. It worked really effectively. It was like, this just works. And I think if people had had to wait an hour... 

When I first got a driver's license in the US, in Boston, Massachusetts, so this is, you know, big wealthy town in a big wealthy state, and it took me from the time that I had to get there to queue up, to the time that I'd been processed, to all I had to do was, you know, like take the test to get a license that would allow me to go take the actual driving test, took eight hours. If that happened here, like Chris Minns would be out of a job by the end of the week.

Right? ABC would be on about it. Shahri Marks, and it'd be on everyone. It'd be a bipartisan across the board shellacking of somebody.

Or you know, I guess the transport minister already got run out of town this week, so they'd find somebody, probably would be Minns in this case. 

So I think when you come to expect this, a bit what Steve was saying about equilibrium, the equilibrium is we expect it to work. So if there's a deviation from that, there's gonna be punishment. Nobody expects it to work in the US.

I mean, in Chicago, there are potholes in the roads everywhere. It's a wealthy town, right? And people just go like, "Oh, you should expect to get a flat tire like once a month here from hitting potholes." And when I moved there I was like, "What do you, what do you mean you get a flat tire once a month?" And they said, "Well, that's just how it works. Like, they are old and corrupt and blah, blah, blah, and we just come to expect it." And so I think we expect a lot, and if you don't get it, then there's trouble. And so we've created an equilibrium with really good political incentives.

HAMILTON: So I think you should think, you know, this is consistent with that, but I think you should think about what are the barriers to getting legislation passed, right? In order to have Smart Gate or single touch payroll or any of these things, there was a... You know, it may not have been legislation, it depends how it was passed, but ultimately the parliament approved it, right? Um, and so I think you ought to ask why does the Parliament approve these things? 

HOLDEN: Or delegate the authority to it. So I don't know what would have had to happen for Smart Gate or single touch payroll, but it may well be that a relevant administrative agency just has the authority to do that. But you know, in the US maybe Congress doesn't delegate that authority.

HAMILTON: No, there's a system… I think in Australia there are just fewer, fewer barriers than in many places. I mean that, a lot of this stuff would happen with supply through the budget process, and that was only ever blocked once, as far as I remember. We just pass the budget every year. Now some pieces of legislation are passed separately, but a lot of the budget measures just get passed through. They just get waved through, right? So we have a system where the legislature and the executive are one, right? Which is very different to where I live where basically the system is designed to literally designed on purpose to prevent the passage of legislation, right? And that just takes, you know, that is frictions just lower, right? We just do it. And I think it means that if people... You know, if Richard's right and people have preferences for those sorts of things, there are just fewer impediments for the system to deliver them. That's also important not just on spending measures but on revenue measures. It's very easy for Australia to raise revenue. It's not hard, right? We have, we have an income tax that automatically goes up no matter what you do, right?

HOLDEN: But we're both against that, right?

HAMILTON: I am, but if you want your state to be well-funded under all circumstances, you kind of want revenue to flow freely and easily, right? And in the US again, we've, I mean, literally deliberately tried to make... We've tried to starve the beast, right? And when you try and starve the beast, the beast dies. And that's what it's like being at the DMV for eight hours, right? So it's sort of by design, I think Australians are willing to have... I mean, it's hard because I have a US reference point and the US itself is so strange, right? It doesn't explain why Sweden's different maybe, but I can just say the frictions to passing laws and funding programs are just very low here. Um, and so we do it.

WALKER: So the equilibrium point makes sense, but for me it just pushes the question back one level, because it doesn't explain why our administrative state was so effective to begin with such that those expectations developed. Is that just due to randomness or...

HOLDEN: Yeah, I mean, the cheap answer is its path dependence and it was due to randomness. I think... I have a sense that it was, it was kind of more important for Australia than some other countries to have highly functioning administrative state in some areas. Now, why is that in, say, Medicare versus other things? That's maybe a harder answer, but go to Steve Smart. 

So when Steve said, you know, I'm... You know, I said something to you here and he said, "Yeah, you know, it's 30 minutes," blah, blah, blah, the anecdote he related. I said, you know, "Smart Gate's awesome. It's a good example of state capacity." And, and then I said, "And you know why?" You know why we have that, I reckon, is because we get a lot of money from tourism, a lot of Australians travel, and a lot of high profile business people in Australia travel a lot, and almost all of them fly commercial. Like in the US, wealthy people kind of have opted out of the administrative state in a major, major way, which is they, they don't give a crap about the TSA 'cause they fly private. You know, they live in communities where they have their own garbage collection. They have their own trash collection. They have their own security. They have their own police forces. I mean, it's like they've opted out and there's just no pressure for it. I think we have... This maybe isn't about state capacity, it's more about service delivery, but if I think about the fact that we have a healthcare system, and I've written about this quite a bit before, which is, you know, we have all these big, I think, excellent carrots and sticks for people who can afford to have private insurance. But everyone has a stake in Medicare, because it's the baseline for everything in our healthcare system. So really wealthy people, not so wealthy people, we're all subject to Medicare. A lot of people, not everyone, but even a lot of people who send their kids to very fancy and expensive private high schools send their kids to the local public school till the end of sixth grade. We have maybe not a perfect stake in public education in Australia, but a lot of us feel like we have a stake in public education. I think Australians across the board, across the income spectrum, across the... It's related to income, you know, wealthier people maybe have more time or more power or more privilege or whatever you want to call it.... to be able to intervene when they see stuff not going right. I think we've got that balance really right and it's, I'd contrast it with, it's not like single payer like France, say, in our healthcare system. It's this hybrid but it's not, you know, the disaster that is in the United States. And I think you can ask why, why is Medicare in the US, you know, which is for, you know, older Americans, that's got very low administrative costs, seems to work very well even though it sort of exists in a totally dysfunctional healthcare system. But it actually kinda works pretty well. Why? Because if that didn't work well, you'd get voted out of office. Why is Trump not gonna cut that? 'Cause that's political suicide. So I think some of those elements are kinda true as to how we got there, and I think those things have been important for Australia. One is about tourism and travel and stuff like that. Some of that other stuff I think is just important as to how we see ourselves. We see ourselves as we wanna have universal healthcare but, you know, not single payer universal healthcare. That system leads you to the kind of thing that I described with those kind of equilibrium properties and those kind of political incentives. That's my take.

WALKER: A lot of the conversation about Australian state capacity either implicitly or explicitly puts us above America. You've both spent quite a lot of time in America. Is there anything that we can learn from the US about state capacity?

HAMILTON: I think it's the opposite. And, and it's the opposite in the sense that I think, and I'm gonna cut against what you said, which is, I'd like to inject a little more choice. I'd like to inject a little more competition. I'd like to break down our socialist system to be a little bit more flexible.

HOLDEN: I think a good example of that is school choice.

So I don't know if, again, if you wanna call this the administrative state or not, but I think while there are a lot of extremely good people, extremely good teachers, extremely good people in state education departments and so on doing incredible work, I think it, not many people would say that we have a highly functioning and improving public education system in Australia at the secondary and primary level, and that it's in need of improvement. And, you know, the US has got its problems but the movement towards school choice, charter schools, things like that, and we have sort of a version of that in some ways. But to Steve's point about more choice, I think that's something where there's been a movement in a certain direction in the US and that seems to have provided a pathway to better outcomes, or thinking about how do we achieve better outcomes that could be rolled out more broadly. That would be one thing that I think is consistent with that.

HAMILTON: Yeah, I mean, I think you just see it in lots of places and... Yeah, there are benefits to having this sort of socialized system, but I also think there are... I guess one, one question is how do you - what do you care about? How do you measure it, right? 'cause all of these, to say, "Oh, we have a better state," you have to think about what the state's actually delivering for people and whether it's good. You know, and that's not really in there, you know? So.

HOLDEN: Well, one of these things that political scientists talk about is, like, you have better state capacity if you tax more. I was like…I don't know about that. Like, so Norway's good because they just take all your money off you?

HAMILTON: And you can't measure, like rev- there's no revealed preference in this system because it's sort of a social system, so you don't really know. I mean, my wife has had a child at the University of Michigan and she's had a child in Australia, in an Australian hospital. I was there both times.

HOLDEN: With a cigar and all that?

HAMILTON: Yeah, Idid have to sleep on the uncomfortable bed, yeah.

HOLDEN: Oh, shit.

HAMILTON: Yuh, it's my personal Vietnam, yeah. 

I gotta be honest, like the public system was like being in a cattle station and the private system in the US was like Rolls-Royce service, you know? But if I was poor, well maybe my wife would be dead in America. So, you know, it's like be careful how you measure these things, right? It's hard, you know? 

It would be nice to be able to inject the system with the benefits of the, of competition, of choice, of all of these things that we think can improve things without losing the kind of safety net, the fairness, and that's… Like, maybe that's impossible, but that's kind of what I constantly think about that living in the US, you know?

HOLDEN: Right. I mean, I like competition a lot. I'm an economist. But, you know, competition and creative destruction kinda go hand-in-hand. And the creative part of destruction is good, but the destruction part's not so great. Particularly in, like, childbirth and stuff.

HOLDEN: Yeah.

WALKER: So let's do some audience questions.

Please raise your hand and we'll get a mic to you. So questions about state capacity for Steve and Richard, and I would ask everyone to please keep your questions concise. So let's go to… Yeah, thanks. Dan.

AUDIENCE MEMBER: One of the interesting things that you bring up is that the great sin of your book is not making the same mistake twice. My point is that a lot of people call the United Kingdom a healthcare system with a military. How do we, and you talk specifically about, like, health policy and things like that. Australia has a really bad track record of bad health policy that retracts kind of freedoms and individual rights and stuff like that. Look at the vapes versus cigarettes discussion. Everyone could've seen the entire writing on the wall, and yet the same mistakes were made about basically making vapes illegal. How, what is the prescription that you guys have for effectively kind of telling doctors there are positive externalities to certain things that they don't like?

HOLDEN: Well, there was an active discussion in the medical community around vapes, so I'm pretty sure that Alex Wodak, who's an incredibly respected doctor and someone I've known for a long time and certainly have great, great admiration for, I think he was pushing pretty hard a different point of view. So I don't know enough about how the kind of debate within the medical community, broadly framed, went, but maybe something went wrong in that debate, so I don't have a good answer. 

But if experts to whom we tend to defer about these things kinda thrash it out and come up with the wrong answer, I'm not entirely sure what to do about that. And I know that's not a very satisfying thing to say and it's sort of just punting it back one thing further, but you know, if we did that in, in any other area, if we had the experts about, you know, border control to do with things like foot and mouth disease and there were two sides of that, and there was this vigorous debate and it was like one side won convincingly, I don't know how we don't end up going with that.

HAMILTON: I mean, I don't wanna denigrate an entire field. Although I'm, although, although I'm an economist, it's kind of what we do...

HOLDEN: It's also what we cop from other people. Right?

HAMILTON: That's true. Uh, and there's always heterogeneity within a field, so there are sensible people. But the public health field, I have a very different view now that I know what they do and what they say and what their kind of attitudes are, uh, than I did before.

HOLDEN: I don't wanna go quite that far, which is, I was quite actively involved with a, a, a relatively large number of epidemiologists and, and public health academics during the pandemic. And I didn't agree with everything that was being said by, by those folks, but I found the best scholars, as measured by, I don't know, Google Scholar counts and Nature publications and the standard hierarchical measures of status and success, I found them on the whole to be incredibly thoughtful people with some exceptions rather than the other way around. But we agree on like Atagi and those guys, like...

HAMILTON: Well, I mean, we just have a different opinion. That's fine. Like I really don't like the health people. I'll reiterate that. I really don't like them.

You know, I mean, the vape thing is perfect, right? The vape thing, the argument is being addicted to nicotine is bad. That is literally the argument. There is no health argument other than being addicted to nicotine is bad. Um, we don't worry about, you know, the fact that people might not use a vape that's now illegal and instead smoke a cigarette, which is unambiguously worse, right? Uh, in any measured way. Uh, we don't worry about the fact that when you ban something, you create a black market which allows you not to regulate it at all, right? But this is the policy we've created in Australia because, you know, that's what the public health people and the Department of Health and the other public health people who've advocated for it and lobbied for it have got, right?

HOLDEN:Yeah. No, that's right.

HAMILTON: I mean, and this is just over and over again.

The bloody mask thing was insane, you know. So, you know, we... And we talked a lot about this during the pandemic, that sort of at first “do no harm”, which is bizarre. Like, if you think about any kind of social welfare criterion that might guide policy, if you run things as at first do no harm, then boy, uh, you can't really do anything, right? 

So I basically don't listen to them anymore. And I'm a different person to Richard, so he can listen to them.

WALKER: All right, next question. Let's go to Aiden.

AUDIENCE MEMBER: Uh, thanks very much. I'm Aiden. I live in Randwick Council, and my question is, why on earth don't you want to abolish this council? I'm curious about what you both think about the importance of competition between different levels of government and what that really means and looks like. And I was so amazed during the pandemic when I learned about this other boundary or demarcation, which is the local health districts, and it was kind of like five that covered Sydney, and I just thought, "Wow, this sort of makes sense." This sort of south and north and a few west ones, and they kind of describe where everyone actually lives. Um, but instead we play, you know, I play beach volleyball on different beaches, and they have different councils running different surf life clubs for, or different surf lifesaving services for different, um, beaches a few hundred meters away. Why do we need, why do we need as many councils, and is that kind of competition between, like, you know, how we line our Fogo bins and stuff like that and how we, how we kind of run our surf lifesaving sort of groups? Is that... Does that help at all? And like, what's the optimal size, and why do we need... Do we need states at all, or can we just have giant councils that are kind of like, you know, supra sort of, you know, four or five per city and one for New South Wales?

HOLDEN: That's an excellent question, and there's been a lot of talk about consolidation of councils and so on.

HAMILTON: Which we did in Queensland.

HOLDEN: Oh, did you? Okay. Was that in the Joe era or subsequent to that?

HAMILTON: No, I think it was... Wasn't it Peter Beattie or something?

HOLDEN:  Oh, okay. He's one of the better guys, right? 

Okay, so I think it depends what you're focused on, and I think, I don't think competition is the best argument for, you know, why we have lots of... If you ask me for an argument as to sort of like justify quite a lot of councils rather than four or five. I think it depends… I don't think competition's the big argument there. I don't like the bin policy here, so I'm gonna move, vote with my feet and move and pay $150,000 in stamp duty for - That doesn't seem right to me. You know, different councils want different... You know, it seems silly, but we care a lot about things like what are the parking rules near this beach or that beach, or, you know, a whole lot of local amenities. How do we treat these parks? When, you know, when can there be floodlit, you know, sports facilities in a local area that affects residents? I think there are genuinely, like, local preferences about those things that I'm not sure that if you had, say, four or five mega councils would do as good a job at that. 

Now, when it comes to health stuff, that doesn't seem to make... You know, in the middle of a pandemic, having to worry about the demarcation between, you know, one relatively small local council and another that happens to cut across public health areas, that seems quite problematic. So, you know, again, yeah, it's a good... Just as the same way that kind of an optimal currency union was a good economic problem for, you know, Robert Mundell and others to work on, I think, you know, it's probably a good idea to, to think about those things, and I don't have any great answers. But I do think sort of local competition between local councils doesn't strike me as a first order important thing at all.

HAMILTON: There's this interesting model, um, which some friends of mine in the UK have come up with, which wants to radically devolve power to, like, the street level.

WALKER: Oh, this is the Street Votes idea.

HAMILTON: Yeah, I love this. I think this is super interesting, and I think  it's challenging.

HOLDEN: Do they have, like, taxation power or?

HAMILTON: No, but it's like, if you want to approve a development, it's like, if you live in the next suburb, you don't get to block it, right? You, you're gonna have the street decide whether they want a house to get a renovation or get a you know, build a bigger thing or whatever. There's a nice idea of aligning-

HOLDEN: That doesn't lead them to just, like, turbo NIMBYism and, like, nothing's happening.

HAMILTON: No, it's the opposite. I think the idea is to.. the people-

HOLDEN: I want to put a toxic waste dump on your street. Nope.

HAMILTON: Yeah, but that's optimal not to put it there.

HOLDEN: Well, okay. I want to build a big block of apartments next to your, you know, $20 million house.

HAMILTON: The people closest are the ones who benefit, and so they... The alignment of the incentives is stronger, right? The more local the decision-making.

HOLDEN: Hmm, okay.

HAMILTON: I think it's an interesting idea. Yeah, I don't think we should have... No. There's this weird idea that we shouldn't have any local councils, which I think is kind of insane. I mean, I think if you think of, like, if all the decisions were made at the state level, that strikes me as, like, very, very bad.

HOLDEN: Can you imagine how bad, like, the Victorian Minister for Trash Collection would be?

HAMILTON: I hope no one's actually from Victoria here. 

HOLDEN: Like, the New South Wales one wouldn't be that much better, you know? 

HAMILTON: But yeah, no, I think that's an interesting question, right? Maybe it's the case that the councils we have sort of, in some senses are too big, and in some senses are too small. So maybe we need to think about what functions we actually make more local and what functions we make less local. I think that's an interesting question.

WALKER: Next question. Let's go David Osmond.

AUDIENCE MEMBER: Thanks very much, guys, and I've certainly enjoyed the Laurel and Hardy show as we've gone through on some of the aspects here. Uh, no, that's up to you to work out who's who. Um, so an obvious question around the quality of statecraft and the favorable impression you've given, Joe, of Australia is the quality of the policies that we then end up actually implementing. And, you know, there's a pretty strong impression in Australia, and I think it's right, that the quality of our policies has eroded over several decades and so. So the question is how much of that has to do with the way the public sector works and, or at least the way the entire system works, politicians, public sector, and so forth from there? I mean, one question that you think about from is how much the... In the '80s, you know, under the Hawke, Keating year and all this sort of stuff which everyone likes to hold up on a pedestal, and to some extent that's right. A big reason for the success was the willingness of governments to talk about trade-offs. How should we do our labor market reforms, or financial reforms, or tariffs and trade and those sort of things? Think about the current discussion around how we should do tax reform, or productivity issues, or deal with AI, or deal with competition. There is no discussion. There's no discussion around the trade-offs anymore.

HAMILTON: We either say... We either refuse to talk about trade-offs or we, or we try and convince the public that we can have everything. There's no trade-off.

AUDIENCE MEMBER:  That's correct, and which means there's no trade-off at all, which whereas we know of course that economics is  the science of choice, because there are trade-offs. We have to make them. And if we don't make them, then we just bring the public along to believe that you can have everything all the time. Um, I mean, an interesting thing that comes out of the pandemic, which is where you started, you focused a lot on the vaccine decisions and whatever. I mean, most people now are thinking about the problem with the pandemic decisions is that we now have this huge inflation. And they don't see the counterfactual that the reason the government gave 10% of GDP is because unemployment was looking like it was gonna go to 15%. And frankly, what would you rather? You know, 15% unemployment or a $15 lettuce? And I think you're gonna choose the lettuce every time. But that's not the way it's played out, because there's no discussion around that governments are always about making trade-offs, making those elaborate and going from there. So my broad question is to say, what have we lost in this? And how much does the public sector in not providing choices to politicians, because there's no demand for choices, the erosion of cost-benefit analysis as a way of thinking about decisions, um, the sorts of politicians perhaps we get in now, the public's expectation of living a risk-free life that you never have to... you know, any problem, the government comes along and does it. I'm speaking very, perhaps a bit extreme here, but how much does all this have to do with the debate you've been talking about, about state craft, particularly here in Australia, in trying to kind of piece together about why the kind of '80s discussion that we had and the quality policies we had seems to have disappeared at this time?

HOLDEN: I mean, my take is they're just two distinct things. One is a sort of more technocratic exercise about how you run, sort of, this New South Wales and, uh, the, you know, a hospital system and, and so on and so on, and that's incredibly important. I think of that as being kind of the administrative state that we're talking about here, or state capacity. And then I think there's the kind of policy-making apparatus which is a politically determined thing. And I couldn't agree more that that, I think, has been... you know, is broken in Australia. It's broken in a lot of places. I gave a talk at The Press Club about a year and a half ago where I sort of reflected on, you know, we went 30 years without a recession, can we do it again? And, you know, if you look back at the Hawke/Keating/Howard/Costello period, it was pretty remarkable. And I think it's an open question about whether they were just four exceptional people or whether, you know, the media environment that we live in has changed since then, or something about what we demand of government has changed. I would like to think that they weren't aberrations. They were perhaps extremely good. Perhaps we can't expect to have, you know, people like that all the time, but that is possible again. But, yeah, this point about people don't acknowledge trade-offs and... I mean, I think that Jim Chalmers said a lot of the right things when he was running for election last time and shortly after he was elected about, "I wanna have these public conversations and I wanna have a serious conversation." And as far as I can tell, that's never happened. And so I... you know, and it... do people get held to account for that? I... it doesn't seem so. So I don't have great answers and I lament it perhaps as much as you do.

HAMILTON: Lots of ang- like facets to this discussion, but I'll try and pin it down to a couple of things. One, uh, state capacity, there's a lot of inertia. So, you know, we're benefiting now from many of the things that were set up in the past. So then really the question is, how's the crisis gonna be handled in 20 years, right? Uh, and it might be a lot worse. That's a open question, but I think that is probably correct. Um, the second thing I wanna say is, to undermine a lot of what we said in the book, I'll just go for it, why not? Are you ready? I don't know. Uh, this, this isn't Richard speaking, this is me speaking. Many of the financial side of the pandemic was easy. It's very easy to spend money. It's not hard to double the rate of UI. It's great, right? It's very easy to subsidize people's jobs. Businesses love it, workers love it. It's really easy, right? Spending money's easy. Politicians love it. So their crisis management during the pandemic was great. I think the crisis management in the last two years has been a massive disaster. Now, people will disagree. I've written a lot about this. And, and because the last two years has been hard, because the last two years optimal crisis management means taking things away from people, right? Uh, it means raising interest rates when you should, right? A- and, and going to dinner parties and having, you know, fancy Sydney business people kind of tut-tut you for, you know, making money tighter. It means not subsidizing people's electricity bills, right? I mean... So I think there's a lot of credit that's due in the pandemic, which I think is fair, but I think we need to think carefully about some crises are much easier to handle than others, because the political incentives are aligned with the kind of optimal economic policy. And, and it's worth looking at crises where that isn't the case and we do a hell of a lot worse.

HOLDEN: I think, I think that's great, but I think there's an... and I agree actually, but I think there's an irony to the fact that you face the prospect of 15% unemployment, negative 10% GDP growth, you know, financial collapse and we... and it turns out that's not that hard to deal with. But all Joe Biden had to do really was not spend $1.9 trillion the day he got elected.

Right? Or the day he took the oath of office. And all Jim Chalmers and Anthony Albanese had to do was, you know, just understand that making the same mistake as Joe Biden did was gonna prolong the crisis, and just, you know, say the right things, empathize, feel people's pain, but don't prolong people's pain. They just can't help themselves.

And I think there's something ironic about that. This is not a hard problem to solve.

HAMILTON: But I think Treasury has given bad advice to the government in the last two years. The government's not just doing what it's doing for fun. Like, they're doing it on the advice they've been giving from Treasury.

HOLDEN: Yeah, the Treasury gave them the advice that they wanna hear as well. Come on, like...

HAMILTON: Yeah, but, you know, that sounds like bad state capacity to me.

Or I think your thesis is right, which I think we've lost something. The system has become worse. And I'll just go back to what I said before. A lot of the benefits that we have now accrued in the past, and I think... I worry about the future. Yeah.

WALKER: All right. So we have only about 10 minutes left. I wanna get through as many questions as possible, so I'm gonna, I'm gonna exercise my Joe capacity and prescribe both concise questions and concise answers.

So raise your hand highest if you think you have an unusually good question.

AUDIENCE MEMBER: So we've talked a lot about Australia's great strength in terms of, um, state capacity. What areas do you think we are particularly weak in, and what would be some relatively straightforward areas we could improve? 

HOLDEN: I think public transport's pretty bad.

HAMILTON: Have you been on the metro? It's amazing.

HOLDEN: Yeah, that's pretty good.

HAMILTON: It's amazing.

Uh, we are like the grift nation. There was this amazing thing on Twitter the other day, uh, where a guy took a photo at a fish and chip shop and it had the fish and chip shop selling gray market cigarettes and selling NDIS services.

And I thought to myself, "Man, that's Australia in one picture."

The highest-selling car in Australia is the Toyota Hilux.... because you get the government to pay for 47 and a half percent of it. You know, there is, uh, just a tremendous amount of grift that we've built into our entire society economy, and that is a political constituency which is essentially, you know, impossible to kill. And I think so many of Australia's problems -I mean, okay, let's, let's talk about housing, right? Try and kill that sacred cow, right? In so many areas we’ve…

HOLDEN: Well, Paul Keating would have said they're spivs. We've just empowered the spivs.

HAMILTON: Yeah, but it's just, you know, we've let these things propagate and build, and build up to the point where you can't do anything about them. Every problem I can think of in Australia is exactly that problem.

WALKER: Next question. Again, raise your hand really high.

AUDIENCE MEMBER: Sort of building off some of the stuff you were talking about right at the end before questions, like, we spend a lot of time bashing the US's state capacity, but at the same time, they have substantially higher incomes than Australia, much better outcomes on things like housing affordability. So, I guess my question is sort of how important is state capacity macroeconomically on those sort of really fundamental outcomes that the US is doing really well on?

HAMILTON: That's a good question. I mean, I think the U- you know, you've gotta, you've gotta control for all the relevant variables. You know, America is 15 times larger. Americans have made a decision to have much more powerful incentives, right? Uh, much fewer barriers to private enterprise. You know, there's all sorts of reasons why the US is advantageous. So, you know, it comes down to Richard's point earlier, I think, which is to say, you know, state capacity, you've gotta be careful how you define it. That's, yeah... That's what I would say. There's other things that matter, yeah.

WALKER: Great. Next question. 

AUDIENCE MEMBER: There will be more pandemics. Um, when they happen, we want to account for it properly. We'll need the hotel quarantine. We'll need the test and trace. Um, when we have lots of other of these problems, like the military trains, the firefighters do drills, should we be practicing something? I feel we're not. If we are, that's good. If we're not, should we? How?

HOLDEN: Well, I think we should be deal- building dedicated quarantine stuff rather than relying on hotels, which, you know, for a whole lot of reasons that people will be aware of, turned out to be very problematic, so... I don't know about sort of doing drills in the duck and cover kind of sense, but doing drills in the kind of more preparedness. You know... Is anyone building another Howard Springs? I don't think so. So, I think there's more that we should be doing to prepare, for sure. I mean, we are doing well in terms of developing domestic, you know, solver and mRNA manufacturing capability. That's a very, very important thing. I think we point to a few things. It's like six or seven things at the end of the book that, you know, we should do, and some of them we are doing and some of them we're not.

WALKER: Can I say one anecdote I enjoyed in your book, was that in 2020, we found out that Victoria was still doing contact tracing by essentially fax machine. 

HOLDEN: And clipboard and fax, yeah.

HAMILTON: And Victoria again.These bloody people.

HOLDEN: Hey we're just reporting the facts.

WALKER: Next question.

AUDIENCE MEMBER: So, a lot of the earlier explanation of state capacity was about high level explanations, such as high expectations about service pres- provision quality. These operate via top down pressures, such as on ministers. In your research, did you come across any examples in which the Australian public service positively differs from other countries in how it actually works at the lower levels, like such as how decisions are made, the daily work in the administrative state is done? So, not that high level, like, pressure, but instead, like, how the business of government is actually done?

HOLDEN: I think the one thing I quickly point to, I'm not sure this is fully responsive is, you know, we do pay people in fairly, you would think of as somewhat low level frontline service positions. So, you know, I won't reveal what they get paid, but I was sort of curious in this Service New South Wales thing I was at, and I had a little bit of time to kill. So, I was sort of asking a few of the workers there, like, you know, what they get paid and stuff like that.

And I wouldn't want... You know, this is what economists do when they-

HAMILTON: I don't do that.

HOLDEN: Well, I was responding to a very snarky SMH columnist saying, you know, "You guys are all obsessed with math and don't care how the actual economy works."

So I was doing primary research at the coal face of service delivery in this country. And,  you know, these were quite impressive people and they seemed to have, they seemed to quite like their job and have reasonably good terms and conditions. I think that's part of it, so.

WALKER: Okay. Any more questions?

AUDIENCE MEMBER: You spoke a lot about the success of the JobKeeper compared to the failure of the vaccine. There was a lot of criticism of a lot of waste in JobKeeper, and I seem to recall at the time, I had a number of friends in businesses where we were scared shitless that if we claimed it and later found that we didn't have a revenue drop, someone was gonna come after us, and no one did. And in New Zealand, there was a different process. I think a lot of trust was lost, and, and you say don't fight the last war, but I think there is an element of needing to be ready to fight the next one. And so much of what you've talked about, the state capacity stuff, relies on that trust. And if we don't kind of be honest and clean up the mess and expose some of the people who did take the money when they shouldn't have, how do we expect people to believe us next time? And in particular, it was interesting that publicly listed companies we found out about, but there was no reason that we couldn't have at least been told the names of the people who took our money.

HAMILTON: Yeah. No, it's a good point. I mean, we've spent a lot of time thinking about this question. I mean, like, we spoke to Josh Frydenberg. We asked him lots of tough questions. We asked him, like, literally, "What was going through your head?" Right? We a- we talked to Chris Jordan, who was at ATO implementing the system. You know, (sighs) I think the problem with JobKeeper is, you know, you're, you've gotta set your expectations for the circumstances you found yourself in. You know, you design this thing in, like, a month, and, you know, you had to design it with integrity and... I mean, if you actually think about what they did, it was extraordinary. I mean, I don't think that, that by any objective measure, right? Did they waste money? Absolutely. Ex-post. Did they waste money where we were? I don't think so. And it kinda, it kinda goes back to this Harberger Triangle/Oakens Gap thing. Obsessing over $20 billion, in the scheme of the broader economic benefits is just not worth worrying about in my view.

HOLDEN: I'd just distinguish between two things, if I understand your question correctly, which is, there's the sort of have a clawback like in New Zealand or don't have a clawback and but then there's the p- And, and I come down on the side of don't have a clawback because of various reasons we talk about in the book, but I think you're distinguishing, if I understand correctly, between okay, suppose you don't have a clawback, but you have a rule that says your revenue has to rah, rah... Do you bother, do you turn around and say, "Oh, pfft, it's all a bit hard to enforce the rule. We're not gonna enforce the rule"? And then people who kind of played by the rules feel like they are the shmucks who played by the rules and, and I think that's, that's a real issue. Now, again, ex-ante, ex-po- You know, I would've liked ex-ante to kind of not make a commitment to do something that we weren't gonna do, heat a battle and all that kind of stuff. But I agree, there's a loss of trust when it comes to that kind of thing. And I think it's, again, about being very clear about what you are gonna do and not gonna do.

HAMILTON: You know, I think the non, actual non-compliance rate was low, very low. It's just that the rule was loose. You know, you had to have an expectation that your revenue was gonna decline by 30%. 

HOLDEN: Yeah, what's an expectation-

HAMILTON: It's impossible to enforce, right? So yeah, I was very critical of that at the time. Then I talked, you know, we talked to people who were actually there and they're like, "There was literally no other way to do it." Right? Um, and the only way to do it was with a clawback, and the clawback comes with all sorts of problems. Um, by the way, I mean, I supported the public disclosure. Different people differ on that. I know Josh Frydenberg is just dead set against it. He thought it was wrong to kind of name and shame people who didn't break the rules. I'm perfectly comfortable with the public disclosure. 

HOLDEN: Me too.

WALKER: Okay, I'm afraid that's all we have time for, but three quick things before we finish. First, we'll be back here next week with Peter Tulip to discuss the housing crisis. So, if you'd like to join us, there are still some tickets available. Second, we have some more food coming out, so if you can stick around for the next 30 or so minutes and have a chat, that would be great. And finally, last but not least, please join me in thanking Richard Holden and Steven Hamilton.