Eight Things I Learned From My Aussie Policy Series
In this special highlights episode, I share the eight biggest things I learned from my 2025 Australian policy series.
The conversations totaled more than 12 hours of discussion. I've boiled them down to eight excerpts (about 45 minutes) of what struck me as key insights.
You can find the excerpts in audio, video or textual form below.
Video
Transcript
JOSEPH WALKER: Hi everyone. I'm doing something different this episode. This is a compilation of the biggest things I learned from my 2025 policy-salon series.
A quick recap: during the first few months of 2025, I hosted seven live events in Sydney and Melbourne. For each event, I sat down with an expert guest to discuss a different Australian policy issue, ranging from immigration and housing to taxation and defence.
Altogether, the series totaled more than 12 hours of discussion.
In this episode, I've stitched together just eight excerpts that taught me the most.
My two criteria for choosing the excerpts:
- Number one, I only chose ideas that surprised me — things I didn't know before the discussion. If you've listened to the whole series, you might choose different insights for yourself. You might find mine either too naive or too niche. But that's fine. Everyone has their own set of priors. I can only share what I've learned.
- Second, these are strictly on-the-spot learnings. They're not insights I picked up while preparing for the conversations. They're things I learned in the room during the chat.
So with that, let's begin.
Excerpt 1: Rampant gender discrimination kept teacher quality artificially high
WALKER: First up, one of the most under-discussed policy problems in Australia, at least outside of education policy circles, is the long slide in high school math and literacy scores.
In this excerpt, I'm speaking with Andrew Leigh, a member of the Federal Labour government and a former ANU economics professor.
There are several plausible explanations for Australia's declining test scores, but Andrew shares a surprising one that I hadn't appreciated. If educational outcomes crucially depend on teacher quality, maybe Australia had better quality teachers on average in the past because of gender pay discrimination, which meant that talented women chose teaching. And when that discrimination receded, teaching wages never kept up.
WALKER: I was kind of shocked to learn that at least since mid-century, we've been doing poorly on math and literacy scores. And then, since the early 2000s, our PISA scores have been deteriorating as well. So what explains this? What is going on with Australian test scores?
ANDREW LEIGH: So one of the challenges is that we had a way of getting very talented teachers in front of Australian kids throughout the 1960s and 1970s.
The main way in which we did that was rampant gender pay discrimination across the professions. The consequence was that you had very few talented women going into law, into medicine, into dentistry, and you had lower quality service in all of those fields as a result. Just as you'd get if you kept half of the talented applicants out of any occupation, you got worse doctors, worse dentists, worse business people.
Where did those talented women go? Well, overwhelmingly, they went into teaching and nursing. That meant that the calibre, the academic aptitude, of those going into teaching in the 1950s and 1960s was artificially increased.
Now, through the 1970s and 1980s, you had a reduction in gender pay gaps and in the rampant gender pay discrimination in those other sectors. Gender pay discrimination is legal before the equal pay cases of 1969 and 1972, and there's a change in norms as well that sees a lot of reduction in gender pay discrimination in those other fields. Talented women then flow into those fields, and the question is, what does teaching do as a response? Does it significantly increase the wages in order to continue attracting the same level of academic talent that it had beforehand?
No, it doesn't. Indeed, teaching wages slip a little behind the wages of other professional occupations.
So you see this in the academic aptitude of new teachers. Chris Ryan and I looked at trends from the early 80s to the early 2000s, and some other evidence (although not quite as good) in the decades since.
That's not surprisingly correlated with Australian test scores going backwards to the tune of somewhere between half a year to a year of achievement over the course of the last couple of decades.
WALKER: That's huge, right?
LEIGH: Yeah, it's massive. The OECD's PISA test comes and tests year 9s, and the typical year 9 now is scoring about where the typical year 8 student would have scored back at the start of the century.
Excerpt 2: America isn’t intellectually or culturally primed for a fight with China
WALKER: Next excerpt comes from my Sydney conversation with Sam Roggeveen, Director of the Lowy Institute's International Security Program and author of The Echidna Strategy. Sam argues that the US won't fight China for strategic dominance in Asia because the US lacks any vital interests in the region.
One thing I learned in our conversation, which didn't appear in Sam's book, is how little America's intellectual or cultural leaders seem to care about China, in contrast with the all consuming anti-Soviet mindset of the Cold War.
SAM ROGGEVEEN: … Since China's rise as a great power really began in the early post-Cold-War years, no American president has stood before the American people and said that “this is now our national mission, this is now the thing we devote the entire country to.”
And that's what it would take, right? In your introduction you pointed to the fact that no other power or constellation of powers has ever approached 60% of American GDP. China's well past that figure. So this is a much bigger challenge than the Cold War in most respects and economically already a bigger challenge than Imperial Japan and Nazi Germany. So it would take a whole-of-nation effort—not just whole-of-government, whole-of-nation, bigger than the Cold War. And you can't do that on the quiet. You can't just sort of slip that in. It can't be just a Beltway project. It has to be a whole-of-nation effort.
And that starts with the American president saying to the public: “Listen, we've got to put our shoulders to the wheel and do this now.” And none of them have done that so far.
[There is] one other sort of straw in the wind that I would point to, that's not in the book, but so it's worth actually adding. I wish I'd thought of it at the time, but it came to me much later. The intellectual environment in the US, to me, does not indicate that the United States is primed for a contest like this. It's not there in the popular culture ...
Just as one indicator, I don't see popular commentators like Joe Rogan obsessed with China. And the intellectual heft is not there either. My bookshelf's grown under the weight of American scholars, think-tankers, political advisers, military analysts, writing books about China. And Foreign Affairs, which is the sort of in-house journal of the American foreign policy establishment, is chock full of articles about “the China challenge” and “the China threat”. But I don't see it coming from beyond that Beltway crowd. I don't see [New York Times columnists] David Brooks and Ross Douthat, just to name two, writing books about the China challenge. It doesn't resemble the Cold War in that respect, where Cold War liberalism was an entire school of thought, an entire genre that developed in the Cold War. Samuel Moyn wrote a book about it recently. It doesn't even compare to the war on terrorism, where you had figures like Andrew Sullivan, Christopher Hitchens, Paul Berman, Michael Ignatieff, the New York Times editorial page, all obsessed with this question of: “How do you maintain a liberal democracy in the face of the radical Islamist threat?” I don't see anything like that in the United States at the moment. So the intellectual ferment is just not there to support the scale of the challenge that the governing class in America claims to be embarking upon.
Excerpt 3: What explains Australia’s high level of state capacity?
WALKER: My next excerpt comes from another Sydney conversation, this one with the economists Richard Holden, a professor of economics at UNSW, and Steven Hamilton, a professor of economics at George Washington University.
We discuss Australia's state capacity. State capacity refers to the ability of governments to achieve their policy goals. In preparation for this conversation, I worked with the economist Peter Bowers to produce a literature review of Australia's state capacity. We found that Australia has one of the highest levels of state capacity in the world.
Steve and Richard are two very smart economists and friends of the podcast, and I hadn't yet had a chance to discuss just how they thought about Australia's level of state capacity until we had this conversation. So I was very curious to hear how they thought about that question.
In the excerpt that follows, there's no one big ‘aha moment’, but a series of four different insights I picked up speaking with them about this question for the first time. Those insights include:
- If you take out sheer spending, Australia might start to look like number one in the world on state capacity.
- Second, how voter expectations create pressure for competent service delivery.
- Third, how Australia's political system makes it easier to get things done.
- And then finally, how Australia's egalitarian culture means that wealthy people don't opt out of the bureaucratic state in Australia in the way that they do in America.
WALKER: …if you had to boil it down to 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?
RICHARD HOLDEN: Just to say quickly, I have a conjecture about that, but, you know, I looked at this excellent research... And I wasn't familiar with these indices, but I was sort of like, "Oh, hang, hang on. I'm surprised to see, like, Sweden or Norway and, you know, Australia's behind, 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.
STEVEN 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 on purpose 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…
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 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.
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, because they fly private. 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 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 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, because that's political suicide.
So I think some of those elements are kind of 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.
Excerpt 4: The gold rushes help explain Australia’s remarkably egalitarian culture
WALKER: So if we take Richard's point from that last excerpt that Australians have high expectations of government, it still doesn't give us a deep explanation of where those expectations come from. Richard made the follow up point that these expectations might flow from, for example, the kind of healthcare system we've chosen for ourselves. But then that too requires explanation.
I'd submit that the dark matter of Australian state capacity, the stuff that operates quietly in the background to make it all work, is something to do with our culture. There are two long-running and intertwined cultural strands that seem relevant here. The first is Australia's egalitarianism and the second is our deep faith in government. If you're interested, I've written an essay on these two strands which you can find on my website.
In the next two excerpts, I'll share something I learned about each of these two cultural strands. First, we return to my conversation with Andrew Leigh. I ask Andrew about the historical explanations for Australia's remarkably egalitarian culture. I offer Andrew two plausible stories for that culture. Andrew adds a third which I hadn't properly appreciated: the role of the gold rushes in the mid-1800s, which attracted a massive amount of immigration to Australia, shook up Australian society like a snow globe and diluted hierarchies.
WALKER: So where do you think Australia's egalitarian culture comes from historically?
I can tell at least two stories. The first story would be the kind of story we find in Manning Clark, which is that there was a limited supply of labour in the early days of the colony. So land is plentiful, labour's scarce, and accordingly, workers have a relatively more even balance of power with capitalists, certainly much more so than in Europe or North America.
The second story is that when the colonists leave Europe to set up a new settlement, whether that's in Canada, America, Australia, they kind of carry a shard of the European political culture with them that gets frozen at the time. And so when America is setting up their political institutions, the dominant political philosopher is probably John Locke. By the time Australia is doing the same, it's Jeremy Bentham. And so there's much less, you know, Gladstonian Liberalism, and much more kind of Benthamite utilitarianism in the air that's flowing through to our egalitarian ideology.
Which of those two stories seems more important to you in explaining why we have this egalitarian culture? Or am I missing some kind of other story?
ANDREW LEIGH: So I think your first one is the more important, and I'll add one more, a third theory.
In Australia in the 1800s, you have a country in which labour is scarce and land is plentiful. It's almost the opposite to what you see in Europe, where it's possible to drive down wages because there are many workers around to do the job. Whereas when you get to Australia, you simply can't mistreat your workers because there's not very many of them. And so as a result, you see a lot of the early trade unions forming here. The eight-hour day emerges. In the 1800s, workers in Sydney are earning significantly more than their counterparts in Chicago and London because workers are more scarce.
I'm kind of less attracted to the theory of political philosophers.
But I do think that one other factor is the role of the gold rushes. So the gold rushes are a moment where essentially luck determines your wealth. And so regardless of the skills that you have or the hierarchy that you've occupied, you're able to make it based on the chance of whether your particular plot has enough gold in it. That shakes things up, as, of course, does migration. You know, when countries are settled for very long periods, then hierarchies can emerge. You think about the way in which the hierarchies entrench themselves in Venice, the stories about long French aristocratic families. None of that exists in a settler society like Australia in the 1800s, where, apart from the first nations people, basically everyone's just gotten off a boat.
WALKER: The gold rush story is interesting. I hadn't considered that, but that does make sense. So I think it's in his book Australia, by the great Australian historian Keith Hancock…
So if anyone hasn't heard of this book, Australia, it's kind of our version of Tocqueville's Democracy in America or Bagehot’s The English Constitution. It's kind of like a book that just captures the spirit of Australia at the time. Took me about two weeks to get a second-hand copy. It's out of print. There's definitely some kind of interesting project there in republishing this book.
But in Australia, if I remember correctly, there's this line where Hancock says something like, within a decade of the Gold Rush, basically the whole Chartist programme had been implemented in Australia. So that would support the Gold Rush story, because the timing is so tight there, right?
LEIGH: Yes. And you've got massive immigration, so you have this decade of the gold rushes, in which the Australian population triples, in which the population of Melbourne goes up by a factor of seven.
And that's got to create social fluidity and a whole lot of mixing. It means that those workers are coming in and essentially setting up a society around what they want.
Excerpt 5: Low taxation in the colonial era might be the most important cause of Australia’s deep faith in government
WALKER: If egalitarianism is one hallmark of Australian culture, our faith in government is the other. In Melbourne, I spoke with Judith Brett, Emeritus Professor of Politics at La Trobe University, about her book From Secret Ballot to Democracy Sausage. Her book shows how Australia's system of compulsory and preferential voting was shaped by our majoritarian and bureaucratic culture.
In this excerpt, we speak about the historical forces that shaped that culture in turn. We start by discussing how Jeremy Bentham's utilitarianism was ‘in the air’ when Australia was setting up its political institutions. But then we go on to discuss how colonial Australia's unusual relationship to the British government gave Australians a benign view of the role of government in their lives. I was expecting Judy to place more weight on the first explanation about Benthamite utilitarianism, but she surprised me by emphasising the second.
WALKER: …one of the things that I'd sort of overlooked until I read your book was this second historical explanation for our Benthamite society, which I think John Hirst wrote about as well, and that is that for about the first 100 years of Australian history, the British government paid for our governments and taxation was accordingly pretty low here. Whereas that was not the case in America, they had, you know, the problem with taxation without representation, and that sort of inspired the Declaration of Independence. So the attitude Australians developed towards government during the colonial era was that it was this sort of thing that just gave you stuff, um, without really costing much money. That was really interesting, and I was curious of those two reasons, the kind of Benthamite philosophy being in the air, so to speak, and then the low taxation environment. Which one do you think weighed more heavily on our political culture?
JUDITH BRETT: Look, it's a bit hard to know because…W.K. Hancock, who wrote that little book called Australia in the 1930s, wrote that Australians look at government as a large public utility for the service of individual interests. That is, they don't see government as... The big problem of government being, yes, we need it for law and order. We need it to defend the borders. But we've given it this authority, but it's potentially coercive, and we have to make sure it doesn't coerce us. That didn't seem to be what... And we'd have to make sure it doesn't take too much of our property to pay for itself, you know? And as you say, because Australians weren't paying that much towards the upkeep of the government. And the government was essentially building a colony, so it was borrowing the money to build the infrastructure.
In America, the railways were put through by private enterprise. In Australia, the railways were developed by governments. The land was sold by governments, and that's how they were raising money. They were raising money from the selling of the Indigenous people's land, essentially. But roads, ports, if productive life was to be possible in this new society, this new colony, well, then infrastructure was needed, and the infrastructure was provided by the government.
So, I think what that does is it means that there's a certain trust in government as potentially benevolent, rather than as potentially oppressive.
WALKER: Right.
BRETT: Which is the more influential? I think probably that latter, I would say. The fact that we depended on government for the development of the infrastructure and also a lot of migration. A lot of the migration was assisted migrants. The government helped them get here.
Excerpt 6: Slowing the rate of population ageing has been the dominant objective of Australian immigration policy
WALKER: Speaking of immigration, my next excerpt comes from my second Melbourne event, this time with former Deputy Secretary of the Department of Immigration, Abul Rizvi.
The biggest thing I learned in this conversation relates to how Australian policymakers think and have thought about the objectives of immigration policy. I hadn't realised that probably the dominant rationale of Australian immigration policy over the past couple of decades has been to slow our rate of population ageing. I knew it was part of the mix of objectives, but I hadn't appreciated the full weight that policymakers place on it. As Abul explains to me, slowing population ageing comprised about ‘80%’ of the motivation for the 2001 changes which massively increased Australia's intake of skilled migrants, especially overseas students.
WALKER: So my next question is about the sort of objectives of immigration policy. So you have, you know, one objective or one rationale would be slowing the rate of population ageing. Another would be filling skill shortages. But then you have all these second order consequences as well, like the diversity of the Australian population, fiscal benefits of migrants. What do you think is the right set and balance of objectives for immigration policy? What are we actually trying to achieve with it?
ABUL RIZVI: Right, you’re absolutely right. In my thinking the initial objective of our immigration policy should be, over the next 50 to 100 years, to slow the rate at which we age. We will age, we will get older, we’ll get a lot older. But if we can slow the rate of ageing, our ability to adjust to that is much better than if the rate of aging was very fast. If we were aging at the rate of China or Japan or South Korea or much of Western Europe, the adjustment processes are much more difficult. Businesses would find it much more difficult to adjust. Government agencies would find it much more difficult to adjust. So I think a primary objective should be demography. And indeed it was demography when Arthur Caldwell started the postwar migration program, he was thinking, demography.
WALKER: And so back in the late 90s, early 2000s, when you were advising Ruddock and Costello and then persuading Howard to, you know, implement the changes that we did, how much of that decision was about slowing the rate of population aging? Was that the main motivation?
RIZVI: Probably 80% was demography. It would have been 80% demography and it would have probably been 10% pressure from universities – we need a way of making money and we can’t fund ourselves unless we can make money. And so we had to open up the international education program. It just happened to be the case, that was the best way to also increase the migration program in a manner that it contributed skills to Australia, it contributed export income to Australia, and it slowed the rate of ageing and it was a budget benefit. Put all that together and it was too attractive for any government to refuse.
Excerpt 7: An ambitious deregulatory agenda to boost housing supply would take one to two decades to make housing very affordable
WALKER: Of course, high levels of immigration over the past couple of decades have interacted with inelastic housing supply to push up house prices and produce a housing affordability crisis in Australia.
In Sydney, I asked Peter Tulip, chief economist at the Centre for Independent Studies and former RBA research manager, how quickly a deregulatory agenda could increase supply and thereby bring down prices.
My big update from the conversation — in fact this was probably my biggest update from the whole series — is just how long it will take to resolve the housing crisis by focusing on supply. According to Peter, to bring prices down in Sydney and Melbourne by about 40% using an extremely ambitious supply side policy — that is, a hypothetical policy, even more aggressive than the national cabinet's target of 1.2 million homes over five years — would still take 10 to 20 years.
I'll share two excerpts from my conversation with Peter, which build on each other: one from early in the conversation and another from the end of our chat.
WALKER: …I'm conscious in this conversation, both you and I will probably use zoning to refer to really the broader set of what might be called planning restrictions. But the kind of “what can you use this land for” [question] is traditionally what's meant by zoning. So you're adding zoning, heritage, height restrictions. So then if we cut these things ...
PETER TULIP: Change all of those. So those estimates of the zoning effect, as we called it, I think they were a reasonable approximation to what would happen to housing prices in those cities if you were to completely liberalise the markets now.
But that's not what we're suggesting. To be politically realistic, our aims are much more moderate than that. But ultimately, if you were to take it to extremes, that's where it would hit.
WALKER: And so how much more moderate are your aims than that?
TULIP: I think the national cabinet target of 1.2 million homes over five years is sensible. The numbers that we were talking about before with this pure free-market deregulation would involve something like a 10 or 20% increase in the housing stock in Australia. And you clearly can't do that overnight. In fact, you can't do it within any reasonable planning period. But you can build a lot more.
And the national target of 1.2 million homes essentially takes the previous peak in construction that we saw before the pandemic and [says], “Let's hope we can do that on a sustained basis.” That strikes me as a feasible short-term objective—feasible both economically because we've built at that rate before, but also politically in the sense that the community accepted those rates of construction in the past.
I can run the numbers on what that would mean for affordability if you want.
WALKER: Yeah.
TULIP: Okay. So one million homes is sort of a neutral baseline. And that was the original target. And so the national cabinet target of 1.2 million homes is 200,000 on top of it. We have a national housing stock of 11 trillion homes, so those 200,000 is about, with a bit of rounding, a 2% increase in the national housing stock. As a rough rule of thumb, every percentage point increase in the housing stock reduces the cost of housing by about 2.5%. So that 2% increment that National Cabinet is targeting would give you a 5% reduction in affordability. That is relative to a baseline of housing prices trending up. In real terms, house prices outpace inflation by about 2.5% over a very long average. It's more or less than that, depending on exactly when you take the average from.
So you take 5% over five years from that and … prices are still increasing in nominal terms.
WALKER: Right. So it's not 5% lower than today's prices. It's 5% lower than the counterfactual in five years.
TULIP: Yeah, 5% lower than what was a pretty unattractive counterfactual of continually deteriorating affordability.
WALKER: So earlier in our conversation, you mentioned that to get those kinds of 40% price falls in Sydney and Melbourne, it would require increasing housing supply by, did you say, 10 to 20%?
TULIP: Yep.
WALKER: How many years would that take, roughly speaking, if we got rid of those zoning regulations on the chopping block?
TULIP: As a simple calculation, if we increase the housing stock 1% a year, it would take 10 to 20 years. That's doing it over and above what we would normally do.
WALKER: Okay, so over and above the current baseline?
TULIP: Yeah. But even that is extremely ambitious. I mean, the national target that we talked about before is an increase of 200,000 above baseline over five years. So that's what, 40,000? Just 40,000 a year.
WALKER: So if we removed all of the zoning regulations on your chopping block, how quickly do you think we would get that 10% to 20% increase in supply?
TULIP: No-one has bothered to do that calculation, I think for good reasons.
WALKER: What are the reasons? It's just not realistic?
TULIP: It's not realistic and it's not on the agenda, and no-one is proposing it. I'm not proposing substantial or immediate changes to the legislation, or the process, or how we approve houses. All we need to do is relatively simple: under existing processes, we need to set higher targets for local councils that add up to 1.2 million homes. So that's being done in the New South Wales and Victorian governments.
And that just means local councils need to start approving a block of flats in every third or fourth suburb every few years. Relatively modest changes in the built form of our city will over time amount to a substantial increase in supply. And … there are good reasons for changing the process, but they're not necessary to deliver housing affordability. We just need councils to stop saying no and start saying yes.
And that can be achieved. I think what the New South Wales and Victorian governments are doing is basically right. They've said they're setting ambitious targets for councils. The next step that they need to take is to announce how they will be enforced, which hasn't been done yet. And there is a real worry that once these plans are lodged before councils, councils will start saying no. And then you do get a fight between the state government and the councils. And it's not clear that the state governments have the stomach for that.
WALKER: Right.
TULIP: So I'd like them to pre-announce automatic remedies for councils that don't make satisfactory progress towards their targets.
WALKER: Yeah, but even if we do achieve that national cabinet target of 1.2 million new homes over five years, you're saying that it's only going to lower prices about 5% relative to the counterfactual. And that is ambitious. I mean … I buy your point that realistically that's probably as good as we can expect from our political system. I'm now just kind of feeling a bit deflated listening to you. It feels like we're actually not going to solve the housing crisis, all the people who say we should be cutting immigration are probably right … that seems like the only solution.
TULIP: So 5% reduction after five years, but then you do it again the following five years and that adds up to a 10% reduction and so on. I mean, this was a problem that built up over generations, so it is going to be very difficult to solve it quickly. It will take time, particularly as it requires a very substantial increase in our construction industry, which has difficulties. I mean, we can do it. Other countries have done it; Auckland doubled its construction workforce. But it will take time, and requires changes to training and immigration and accreditation and wages.
WALKER: Do you think over those five-year intervals we can ratchet up the amount of supply we provide each time?
TULIP: I would hope so.
WALKER: Ok. And do you think that's more likely than the opposite? I guess maybe people come to accept it, or people realise it's working, so you can add more supply each time.
TULIP: That's a good question. I mean, so what's happened in Auckland is [that] you've had two effects. One is people have seen that it works, that rents have risen substantially less in Auckland than in other New Zealand cities. But at the same time you've got a backlash, that some people think that the new buildings going up are ugly, and there's this fear of change element we talked about before. And it very often happens that when you change what people are used to, they're uncomfortable with that, and they object. And how those two balance, we don't know.
Excerpt 8: In the late 1990s, Treasury concluded that Australia could aspire to 95% the US level of total factor productivity
WALKER: The reason Peter's answer worried me so much is that even a decade strikes me as too long to wait. The housing crisis is causing problems — for example, for productivity and fertility — which will continue compounding into increasingly terrible outcomes if given decades to run, even if prices are gradually moderating over that time.
So what's stopping us from adopting a maximally ambitious policy for speeding up new supply? The constraints seem to me to be mostly political. For one, housing has, for better or for worse, become the way the middle class gets rich in Australia. Without offering the homeowning constituency an alternative vision for wealth creation, I worry that the supply side agenda entails a slow decades-long grind.
If the thing we care about is affordability, not the price level per se, then what we really care about is the price-to-income ratio. So is there a way to get incomes growing more quickly to improve affordability from the other direction and potentially make price falls more politically palatable?
This raises what I call the 'joint problem of housing and productivity'. To improve national productivity, it's vital that more people can afford to live and work in our major agglomerations, but equally, to prepare the nation to bear falling and lower house prices, we need rising incomes and therefore stronger productivity growth.
To end the series, I spoke with Ken Henry, former Secretary of the Treasury. Ken raises (i) capital deepening and (ii) increasing total factor productivity as two primary ways to fix Australia's stagnant labour productivity growth. Ken seems to prefer focusing on capital deepening as the way to improve productivity growth. But in this next excerpt we focus on total factor productivity.
One of the things I love about talking with Ken is I can ask him almost any random question about Australian economic policy and he'll say something like, "Oh, yeah, we looked at exactly that question in Treasury back in the 1990s," or whenever, and that's what happens in this next excerpt. I ask Ken how close Australia could plausibly get to US total factor productivity.
WALKER: … On productivity, if we take total factor productivity in the US to represent the kind of technological frontier, and other countries can measure themselves against that benchmark, I think generally, Australia sits around 80% of the US level. That might have peaked a bit above 85% in the late 90s, but it came back down. How likely is it that a mix of policies exists that could help us achieve parity with the US level? Or do you think we'll always be constrained by other factors like geographic isolation from major economies, the kind of geographic fragmentation of Australia, the small size of our national market, et cetera?
KEN HENRY: No, no, it's a really good one. So we did some work on this in the late 1990s, asking exactly that question.
WALKER: Oh, wow.
HENRY: Yeah, well, we did, and we came up with the view that 95% is about the best we could hope for, because the other ...
WALKER: What explains the 5%?
HENRY: The last stuff that you were talking about, geographical isolation, separation, blah, blah. We figured that simply putting a rope around the Australian continent and towing it up to sit adjacent to California, that alone would lift productivity by at least 5%, right (laughter)? Yeah, just doing nothing else.
WALKER: Mainly through building all the tug boats.
HENRY: And there is some literature on this, right … the impact of geographic location on national productivity. And that was the consensus position of the literature back in the … And look, you know, your AI assistant would be able to answer this like that right now, whereas it took us months to figure this out. But, so, but realistically, you'd have to think 95%. I would still think 95%. And who knows? The US could be falling off dramatically at the moment. And so maybe something far in excess of that is feasible. Not that that's a good outcome necessarily for the world, right? But anyway, which means that we can do a lot better. All right?
WALKER: It's exciting to know that ceiling is there, and that's what it is, and that's how much better we can do.
HENRY: Yeah. Anyway, I think that's a reasonable aspiration for policymakers in Australia.
WALKER: That final excerpt shows just how much better Australia could be doing, how much more innovative we could become. I'll leave you with the following lingering question: What would it take to close that gap, to raise our level of total factor productivity all the way to its potential ceiling?
Answering that question will be a major theme of future episodes.
But in the meantime, I hope you enjoyed this tour through my policy series.
Full transcripts and the complete set of conversations are available on my website. Thanks for listening and until next time, ciao.