 Let's get this show on the road. We've got until 12.30, but not a moment longer than that. And I know that you're all interested in being engaged in this session, as you should be. I'm merely going to act as a facilitator for this session. It's a great pleasure to be able to sit here with these two, with Professor Joseph Stiglitz, who should need no introduction. Well, actually, I was going to say in this audience, but I could probably say in any audience anywhere in the world, just is, of course, Professor of Economics at Columbia University these days. Nobel Laureate 2001 has written extensively in most important areas of economics and is a frequent and powerful commentator internationally on global macroeconomic events and policy challenges, but also on a range of important policy issues that matter to those even who don't take an interest in macroeconomic performance and, most notably, of course, the issue of inequality. Anyway, Joe needs no further introduction and maybe I'll overstep the mark. Warwick McKibbin should need no introduction in this audience and he's an internationally respected modeler of global economic issues. And by the way, that includes not just macroeconomic issues, but climate change policy as well. So Warwick, again, should need no introduction. Warwick is a professor of public policy here at the ANU these days and he is also a public policy fellow at the ANU. And so we see a bit of one another these days, which actually, we were university students together a long, long time ago. So that's good. And of course, we sat on the Reserve Bank and bought for nearly 10 years together. It's good to be able to share this event with you. Just by way of introduction, I'll make a few brief remarks. I'll take no more than two minutes, Gareth. When I reflect on the enormity of this topic and really it covers a vast terrain, I recall having been appointed Deputy Secretary in the Treasury with this responsibility for macroeconomic issues, both domestic and international, and also for international financial relations. And this appointment occurred in 1998, which means that it was in the immediate aftermath of what we called at the time the Asian financial crisis. Let's call it the East Asian Financial Crisis. It wasn't long after the Federal Reserve Chairman in the United States had referred to exuberant growth in the United States, but it was about the same time that he changed his tune from talking about irrational exuberance to talking about a new economy in the United States. It wasn't long before, therefore, 1998, before the US had a spectacular correction in the stock market with the tech wreck and then the recession 2000, 2001. And 2001 is when I was appointed Secretary to the Treasury and I, you know, and through that period, that was a period of, once again, extraordinary capital flows into the United States or perhaps the better way of looking at it was, and this comment was made yesterday, that the People's Bank of China and other central banks in the Asian region were financing the US budget deficit, purchasing every US Treasury that was printed. And so the United States had been through a period of extraordinary access to very, very cheap equity capital in the 1990s, finished with the tech wreck where that tap was turned off, but then through 2001 through, really through to 2008, the United States was a beneficiary of very cheap debt capital financed to some extent, at least, by Asian central banks. And you know, one of the questions that is in people's minds today when they're thinking about not just the United States economy, but the world is where the capital is again, is appropriately priced today. And of course today, they're thinking in particular about the role that monetary authorities are playing in respect of the pricing of capital. Anyway, that's only one of a whole set of issues that I imagine we're going to explore in this next hour and a half. The, I think on the screen there are some words that take us to some of the fiscal challenges that are confronting governments around the globe. And there is a reference also to what the G20 might be able to do in this space. But you know, that's just a subset as well of the issues that we could discuss. There are, I imagine we'll be talking about continuing global financial system fragilities, prospects for the Eurozone, and whether that represents a fault line in the global economy today. The robustness of Chinese growth, prospects for Japan, the robustness of US growth for that matter, and of course, the matter that I started out with, the role that will be played by global capital flows in the evolution of the global economy going forward. With those brief remarks, I hope there wasn't too much more than two minutes. I'm sure it was something more than two minutes. Let me hand over to Professor Stiglitz to introduce his remarks. Okay, thank you. Let me begin by talking about where I see the global economy right now, focusing mostly on the United States and Europe, few words on China and the emerging markets. And then I'll spend a few minutes talking about why I think things are the way they are, and out of that will come some implications for the risks going forward. Maybe I should begin by just the observation that since the global financial crisis, which during my last visit to Australia, I was told should be called the North Atlantic Financial Crisis, because your government took actions to make sure that you were not part of the global financial, I mean, you didn't suffer the way the rest of us did. The authorities, monetary and fiscal authorities in both the United States and Europe have done an absolutely remarkable job of bad forecasting. They have consistently been overly optimistic. And when you've been overly optimistic year after year, you ought to learn that maybe your models are wrong. And they've been very resistant to this simple inference that when you make mistakes repeatedly over five years, they have not yet figured out that maybe there's something wrong with the way they've been forecasting. And I'll try to explain some of the things I think that are wrong with the basic models that they've been using. So as we come to the United States, the growth again was revised downward. To now the standard forecast is about 2.2% for the United States growth, which is really barely enough to create the new jobs for the new inference to the labor force. You have almost 20 million Americans who would like a full-time job and can't get one. When I use a number like 20 million and I'm giving a talk in China, I feel embarrassed because it seems like that's a drop in the bucket. But when I say 20 million in Australia, it seems like- That's the whole bucket. That's the whole bucket. And if you wanna imagine what that means, it means just think about the whole country not being able to find jobs. And that's really what it's like in the United States right now. And as in most of the other countries, it depends on what groups in the population, young people, people who don't have college education are facing a much harder time. Probably more dramatic than just the unemployment rate are other indicators that our economy is not doing well. And that's reflected in some of the revisions in the way the Fed has been operating. They originally had said, we will begin to raise interest rates when unemployment fell to around 6.5%, 6%. They've now abandoned that. And the reason is that they realized that the unemployment rates don't mean what they used to mean. That when people are unemployed, the statistics, the way we gather statistics, asking people, are you actively looking for a job? But there are so many Americans who've looked for a job for three, four years and haven't found one that they've given out looking. So they're not called unemployed, but they're obviously not employed. And this is reflected in the labor force participation rate which is at a 30 year low. And it reflects at the level that it was before women started entering the labor force. Now people in the administration and the Federal Reserve give a standard apology for that. They say the economy has always been, they're trying to relate it to the demography. It's an aging population and the economy has never been good at as good at providing jobs for those in the 50s and 60s as people in the 30s and 40s. But there are several observations about that. First, if you look at the labor force participation of even people in the 30s and 40s, they're very low. So it's not just a problem of the 50s and 60s. Secondly, it is true that the American economy has viewed that once you reach 50 years old, you're a disposable commodity. You've served your useful lifetime and if you are now technologically obsolete, we throw you in the garbage can and provide no safety net. And that sort of, some makes break in the process of making an omelet. And this is just one of the hardships of having a well functioning or actually in our case, a poorly functioning economy is that a lot of eggs get broken. And get wasted. Well, what was a small problem when the 50s and 60s were a small part of the population has become a major problem as the 50s and 60s become a large part of the population. So it's not an excuse, it's a statement that was a minor social problem is becoming a major social problem. And so this is part of the aftermath of the global financial crisis is that people who lost a job in the early 50s see a lifetime of unemployment with very little support. That's one of the reasons that the economy's not recovering well because there's not gonna be demand from people who have no prospects going forward. But there are a lot of other symptoms that our economy's not working well. One is if you look at, the recession was officially over in 2009. In recession, economists used the technical term two quarters of negative growth, too sequential. But in terms of living standards, we're still in a recession. Median income of a household in the United States adjusted for inflation is lower than it was a quarter century ago. So the typical American has seen no increase in standard of living for a quarter century. There's been basically stagnation for longer than that. You look at the median income of a full-time male worker is lower than it was 40 years ago. So American economy has not been delivering for most American families and for large fractions of our population. I think you just have to say the American market model has failed. It's a very strong statement for somebody who believes in a market economy to say that it's failed on this chromatic scale. 40 years of stagnation. You look at the bottom, it's even worse. Minimum wage in the United States are half of what they are in Australia. We're having a debate about increasing it. But they're the level that they were almost a half century ago. So if you have an economy that doesn't lead to rising standards of living for a large fraction of the population over a half century, that's a long time. You have to say it's a failed economic model. And gradually, Americans are really beginning to realize that our economic model isn't working. Now, when I say economic model, I ought to qualify that. It's not just the economic model. It's the economic model interacting with our politics. It's our political model. So I'm a very strong supporter of a market economy, but we have what I call airsocks market economy. It's a fake market economy where we socialize losses, privatize gains. We write rules of the game that help the 1% at the expense of the rest of society before. In terms of where our political economic system is working, it is failing. I could go through some other statistics just to give you in terms of the impact of the global financial crisis. We are, if you projected where we would have been beginning with the growth in 1980, where the growth from 1980 to 2008 was a low growth rate compared to the growth rate that we had in the period after World War II, where we had strong financial regulation. We had shared prosperity. We had a system that worked. Then we began with Reagan and Thatcher to deregulate, to liberalize, and our growth slowed, but all the growth went to the top. Really was a failed system. But then you ask the question, look at that even moderate growth. Where are we relative to that low growth? The answer is that we're about more than 15% below. So the cost of the crisis of extending that slow potential growth and actual growth, the loss is over $5 trillion. Now, I think I forgot the critical number here, was since the recession was officially over in 2009, 95% of the gain has gone to the top 1%. So most Americans do not know that there's been the end to the recession. Now, the only thing that makes Americans feel better is that things could be worse, and when they look at the other side of the Atlantic, they are worse. And the numbers there are striking. I talked about a 15, 16% gap for the United States. The corresponding number for Europe is almost 20%. Most of the countries in Europe have a GDP per capita, adjusted for inflation, a GDP per working age population that is lower than it was before the crisis. In the case of Greece, 25% lower. In several of the countries, this is worse than the Great Depression. And if you look at the numbers, it is still a depression. Average unemployment rate, 12%, but in Spain, Greece, 25%. But youth unemployment, 50% in Spain, 60, well over 60% in Greece. It's been that way since the global financial crisis. No prospects of a job. And if you go to these countries, increasing feeling of despair. And what I mean by that is, they're using up their savings. They've lived off of their capital, family capital, and that's eventually gets used up. It's also, I think, really tearing families apart, more talented people, unemployment rate, a youth unemployment rate would be worse, except that a lot of the more talented people are leaving the countries. Which doesn't bode well for the future growth. The potential growth of these countries is lower than it otherwise would have been. As you've got, it's really, you talk about people being upset about their family being torn apart. Many of them are, we know of a number of friends whose children have migrated to Australia, which I guess you wouldn't think is the worst thing in the world. But in terms of family unity, it's a long way to travel to see your grandchildren. So, but you often hear those kinds of stories and really heart-rending stories of families for which this is the only country of opportunity that they see today. Used to be true of the United States, right? Yeah, no, I should have mentioned, there are many other things going on in the United States. I didn't mean to mention that. With this enormous increase in inequality that has characterized the United States where all the growth is going to the top, people have started looking at other aspects, which is opportunity. And we now realize that this idea of American dream, America's land of opportunity is a myth. That the lifetime prospects of a young American are more dependent on the income and education of his parents than in other advanced countries. And countries that have imitated American model are getting results like America. Not quite, they've not achieved the level of inequality of opportunity that we've achieved, but they're working towards it. And I find some of the debate going on in Australia interesting because it seems that some people here would like to emulate the American model. And I don't fully understand the logic of that. The differences between the Scandinavian countries, both in equality and equality of opportunity, and you might call it the Anglo-Saxon model, UK and United States, are really dramatic now. In both equality and equality of opportunity. So let me just be very brief. On Europe, you might say the fundamentals of Europe are strong, whatever that means. Europe made one big mistake, and that was the Euro. That's a very big mistake. Well, but it's interesting. There are all kinds of natural calamities, earthquakes, hurricanes, floods. This is something they did to themselves. And that you would sacrifice so much for a little piece of paper called the Euro. Currencies come and go. People get excited when they go, but the idea was that the Euro would help bring prosperity. Now the debate in Europe is you have to cut wages, cut public services, cut living standards, all to save the Euro. And I got the feeling that they've got means and ends messed up, that something that was supposed to lead to higher standards of living are now being used to explain why the standards of living have to go down. And they've gone down markedly in large parts of the population. Even Germany, which is put as the best, the success case, Germany's a failure. And if you look at the growth in Germany since 2007, since the beginning of the crisis, in any other terms, their growth rate would be said, that's a failed country. And you look at the bottom 30%, their incomes have gone down. The only thing that is, this is all evidence about is that people can reframe anything. So now they're really excited in Europe that they're not declining. And so they're having big parties that the recession is over. You should say, well, yes, it's nice that recession is over, but any other context, you say you've had a half decade of negative economic growth. And the prospects of another half decade before you get back to where you were, a full decade of stagnation. Is that something to celebrate? All in the name of a piece of paper called the Euro. That was supposed to bring prosperity. So in my mind, you couldn't make the Euro work, but the politics in Germany make it very difficult. And the consequence for the world, I think are very serious because it means, A, Europe is not gonna be growing very fast. Risk, downside risks are very serious. And political risks are very serious as you saw in the elections in Europe with the growth and the largest party in France being Le Pen. And this kind of move to extremes is going on in many of the countries in Europe because the centrist parties are failed. They just look at, you know, and it's undermined their democracy. Whatever country, whatever government wins, whatever party wins, he says, I'm sorry, I can't do anything because our hands are tied by the Euro, by the Euro, Eurozone framework. So people say, what's the point of an election? If at the end of the election, we change parties and the same thing happens. Well, let me stop there because I've talked to more than my 10 minutes and we can come back to some of these issues. Well, I was giving you 15, but you're expecting for more than 15 as well. But everything you've said has been deeply fascinating. And there's actually quite a lot of issues there. I'd like to tease out with you. And so let me just put your on notice right now. But I'm going to move on to Warwick. But one of the questions I want to pursue with you is, you know, you make the observation that the political system in the United States has failed. You know, it's the economic system, but you're a defender of the market system, but it's really the political system that's been the failure. And yet you point to similar failures, at least on the surface of similar failures in Europe, political system the same? Not really. Is there something else? Or maybe they are. Maybe the political systems in the sense that you're talking about them really are sufficiently similar to provide the same explanation. But can I come back to that? That's just one of the things I want to pull up with you. I'll hand the floor to Warwick right now. Thanks, Ken, and thanks very much to Crawford, to Gareth and to Tom for allowing me to share the stage with Joe. It's a great honor. What I wanted to do was give a broader overview of what the state of the world is and to slice through in 15 minutes quite a lot of complexity. The first point I do want to stress is that the world is highly complicated. And to sort of get this broad picture into a very concise explanation is very difficult to do. The second observation to make is that nothing is certain. And people that make arguments about policy or about predictions, they lead you down the wrong path with a high degree of probability because there is a high degree of uncertainty. And so the way I think about the world is to use a fairly complex analytical framework, which resides in a computer, but to have a framework which is then... You use empirical evidence wherever possible to bring to bear on that framework and to improve your understanding and to change your mind in certain circumstances. So the empirical basis of looking at the world, I think, is critically important. And the third thing that I wanted to stress is that every country is different. So when you're doing analysis of the impacts of fiscal policy, monetary policy, climate policy, it varies greatly across countries. And it varies because of different political systems, but also just different economic structures, different country size. Structures of economies are very different. Endowments are very different. Stages of economic development are very different. And the openness to trade and capital flows are very different across countries. So it's very dangerous to draw a conclusion for a country based on some average view of the world. And so just make those key analytical points. Now, if you're going to slice the world, if you want to look at it, you've got to simplify it. And one way of doing it is, let's take three different slices. One slice is, let's look across countries and regions. So you could say, what's going to happen in Japan? What's going to happen in the US? What's going to happen in Europe? And it's a useful discussion to have. The beauty of doing that is that that's what policy makers in those countries are actually doing. They're thinking about their situation in their context. The danger of doing this is that within a country, the responses and the outcomes could be very dependent on the behavior of other countries. And so to give you an example, take monetary policy. In a small open economy, if you cut interest rates, one of the major channels of transmission is that it depreciates the exchange rate. It boosts exports and it gives you a GDP boost in the short term. Now, if a single country does that, it works reasonably well. If all countries do it together, the exchange rate doesn't change and therefore you get very impotent monetary policy. Take fiscal policy. If you do a fiscal stimulus and you do it by yourself, the exchange rate will tend to appreciate, it will tend to knock out exports and you'll tend to get less GDP outcome to unit of stimulus. But if all countries do it together and the exchange rate effect disappears, fiscal policy becomes a lot more powerful. And that's why during the global financial crisis, any country acting alone on fiscal policy was likely not to achieve what was needed. And so all countries acting together gave fiscal policy more potency. So I think this issue of treating countries like an island, well, we are an island but we're not economic island and that's the big difference. Now, the second dimension is the dimension of time and that is it makes a big difference whether you're talking about the short run versus the medium to long run. And in the short run, we face a lot of real challenges in the global economy. But in the medium to long run, we have enormous opportunity with the developments in emerging economies of China, India, Brazil, et cetera. So when you look out to the long distant future, you could be very optimistic. But if you look at the short run today, you can be very, very concerned. The second issue of where time is important is that some policies which are very effective in the short term can have the completely opposite effect in the long term. Take fiscal policy. If you do a fiscal stimulus in the short run, you can stimulate the economy, but depending on what you spend on and how you finance it, you could be paying far more in the future for that benefit in the short run. And so the time issue is very important. The third dimension which you wanna slice it is really what are the issues? And so rather than saying what's the issue in Japan, there are a sequence of global issues that Joe has touched on and Ken touched on, which I think are really important. And there are many of them, but there are five I think, which if I had time I'd elaborate, but I'll just mention them and then maybe talk a little bit about each in my last few minutes. The first big issue is, and it's not big because it's the most important in the long term, it's big because it's an issue now in the world economy. And that is monetary adjustment. The issue of monetary adjustment is critical because in the short term, you have to worry about the short term demand management issues with monetary policy. But in the long term, you have to worry about the inflationary impacts of getting your monetary framework wrong. So if you flood the world economy with money in the short term and you don't have a way of retracting that in the medium term, you can end up with a good short term outcome but a very costly high inflation long term outcome. The second big issue I think is fiscal adjustment. And again, there's this balance between short term demand management, that is putting fiscal stimulus in the economy when you need it, but making sure that you retract it before the negative incentive effects of high tax rates or high debts damage economic growth prospects. The third issue is what we've observed and people have mentioned it in the Australian context. And that is the very large decline in global productivity. The productivity decline is not just an Australian phenomena. Go to conferences in England and they talk about it in London, they talk about it in Germany, they talk about it in the US. It's a global phenomenon. Stuart advanced economies and developing economies. Now what's interesting about that question and I think it's a big issue is in the long term clearly if you have low productivity growth, you have a very much smaller economy. So the supply side potential growth is severely damaged and Joe's mentioned this in his presentation. But in the short run, the implications are if you realize that the growth rate has fallen dramatically. The immediate problem is you have too much capital. And the immediate problem is you have to contract your capital stock to get to this new long run steady state and that means you have to cut investment sharply. And so there is a very big short run demand problem coming from a realization that the world's productivity growth has changed. The fourth one is climate policy, climate change policy, which I would have liked to have seen more on the program in this conference. But there is this issue again with the time dimension there are short run costs of many climate policies and potentially very large future benefits. And so the issue is how you design climate policy to deal with the short run issues and the long run issues. And the final one is the issue of demographic change. To me demographic change is a big issue. And it's a big issue in the long term for the same reason that a productivity decline is a big issue. It changes the growth rate of the global economy. But in the short run, it's a totally different issue because it has very serious fiscal implications and savings investment implications. Now what's interesting about all of these big picture issues is when you look at it across the globe, everyone is facing this set of issues, but it's very different across countries. And what's interesting is the asymmetry across countries. So there are some countries that have to do a lot of fiscal adjustment and other countries that don't have to do anything. There are some countries that have to do a lot of adjustment to climate change policy because of their CO2 emissions and others that don't have to do very much. So this asymmetry across each of these dimensions of issues is a very big deal because it will affect the adjustment of trade and capital flows and exchange rates across countries over time. And these movements relative across countries have very large political implications for the world trading system for a whole range of issues. So what I want to do then is just touch a little bit more on each of those issues and then just touch on one country issue. And that's the one that Joe touched on. I'm much more pessimistic than Joe on Europe, I must say. So what do we feel? You're more pessimistic than Joe on Europe. More pessimistic than Joe. Yeah, I'm pretty pessimistic. I thought you were. I thought you were. And I dare not judge an American, the American economy when I'm debating an American soul, I thought you would touch on the US. But let's just look at these five, and I won't do all five actually, but on monetary adjustment, we're at a very, very critical stage in the global economy. We have the end of quantitative easing in the US where the US Federal Reserve has been buying assets and expanding its balance sheets and trying to stimulate the economy through the balance sheet adjustment. We have negative interest rates in Europe now. The UCB has just started the policy of negative interest rates and are about to start a policy of quantitative easing. Whose assets they buy will be very interesting because of the politics, but nonetheless Europe is in serious trouble. We've got quantitative easing in Japan, which in my view is working effectively as part of the three arrows policy. Now my worry about the monetary space is that the Fed potentially is behind the curve on inflation. It may or may not be, a lot of people argue you won't get any inflation until you hit full employment. My view is, well look at the 70s. We can have inflation and unemployment simultaneously. The critical issue there is expectations about inflation. If people lose confidence in the stability of the Fed and the capacity to manage inflation, then we have a different world. The second issue is fiscal adjustment. When you look at the debt-to-GDP ratios, either gross or net, it's extraordinary how high they are in most of the OECD, but particularly in Europe. And on top of that, many of the economies with the highest debt-to-GDP ratios have the worst economic growth. And so these countries are hanging on because the critical debt sustainability relationship is the relationship between the interest rate and the growth rate. And even though they've got a very low growth rate, fortunately for them real interest rates are negative. But when interest rates globally start to rise, there's a lot of pressure on these countries that have very large fiscal debts. Now on the debt side, it's actually the debt's not really the relevant criteria here. It's really the quality of the spending and the quality of the taxes that are underlying the debt. So you can have a very high debt, but if you've invested that, if the spending has been in infrastructure and high return activities, you won't face the same problem as some country that's borrowed and spent. And so it's a difficult debate to have about debt when, in fact, it's country-specific and it's budget-specific and it's composition-specific and it's very dangerous to have the ideological position on either side to be too extreme. The key, my point of view, if I'm gonna make an observation, is that countries with high debt do need to have fiscal consolidation, but they don't need to have it immediately. And the optimal fiscal adjustment in models and in practice is a credible, sustained fiscal consolidation over a long period that's credible and while cutting debt and deficits, changing the composition of spending away from current spending towards human capital and infrastructure capital in the budget. And so you don't just cut and many countries, the mistake they're making is they're cutting investment expenditure and they're cutting education. So they're cutting the drivers of growth in future years. And so really this whole issue is, it's not just should you cut or not, it's how you do it is pretty important. I've already talked about the global productivity decline and why that's very important. One of the big puzzles many people have is, why is it that investment is so weak in countries when there's so much money in the system? And the answer is probably because the marginal product of capital is likely to be falling if productivity is declining. There is a concern about debt overhang and future tax issues from the fiscal accounts. There is a higher risk premium that is probably realistic, but certainly much higher than what the markets are pricing. And that's a puzzle I do not understand. Let me just come to climate change policy. Again, my view on climate change policy is that we need to start putting in place frameworks to reduce emissions as quickly as possible as an insurance policy against potential future outcomes. We don't know where the climate change in the future is going to be a very large negative to the world or a very small negative. The point here is that you need to take out insurance and we can debate that as a different forum but I think climate policy is a critical part, not just of environmental issues but it's a critical part of macro policy because the links between carbon revenue, budget deficits, incentives to invest in different technology. Final comment, just looking from a country dimension now rather than an issue dimension, back to Europe. Europe is full of contradiction and the Euro, I agree with Joe, was a big mistake. Look at the consequences. Almost every European team has been knocked out of the World Cup. Oh, wow. I mean, what can I say? What can you say, yeah. Unemployment, and I think the big problem is in Europe, unemployment, if you look at unemployment, Joe's mentioned 28% in Greece, 26% in Spain, 12.6% in Italy. Youth unemployment, 58% in Greece, 55% in Spain, 42% in Italy. This destroys social capital. This destroys, not just the economy, it destroys the fabric of society. I do not understand why the Europeans are willing to sustain what they're sustaining. Now, if you look forward, I mean, if you look at the fiscal positions in Europe, Europe debt to GDP growth on average, 108%. Germany is 84%. Greece is 188%. Italy is 147%. These countries, the smaller ones, cannot grow out of that debt ratio. There has to be, if you want to keep the Euro, there has to be a compact in Europe where the Germans pay for the debt, right off the debt, and move forward. That's the only way you can do it. The way they're trying to do it is through the back door of the ECB, which the German constitution probably won't allow. But the problem in Europe is the debt is too high. There's no economic growth. Germany is booming, and therefore that will not lose monetary policy. So monetary policy is too tight. Fisk contraction in a Euro fixed exchange rate world is a very negative thing for economic growth in those countries that are contracting. And internal with Europe, you have a massive competitiveness problem of probably still 20% overvaluation of the periphery exchange rate relative to Germany. So they're not competitive. They're not growing. They've got massive debt. They've got massive social problems with the unemployment rate. I just don't see how you come out of that in the near term without a very serious problem. So if you ask me of all these issues, where in the short term is the critical fragility, and it's, to me, is Europe. It's not China. It's Europe. A final point I'll just make, and Joe's talked about the US, the biggest risk for Europe actually is a recovery in the US, because when the US continues to grow, capital will flow from Europe to the US. Interest rates in Europe will rise, and the peripheral countries will face their fiscal armageddon. And that, although trade people would say, no, no, US growth is great because the US will buy more goods, my view is that the capital flow effect will swamp the trade effect, and that's gonna be the trigger. Yeah, I think that is, yeah, yeah, yeah, Joe. I wanted to just highlight one aspect of what we talked about. From the way I see the global, the weakness from the global point of view is a lack of global aggregate demand right now. And there are several reasons for this lack of global aggregate demand. One of them is this growing inequality, because when people at the top spend a smaller fraction of their income than people at the bottom, and so when you redistribute income towards more inequality, you get less aggregate demand. That broad view that greater inequality is bad for growth and for stability has now been adapted, argued by the IMF, I mean, this is becoming well established. There's a second one that is that when you have large global imbalances, the deficit countries have to cut back. You see that in Greece and other countries. The surplus countries don't have to respond symmetrically, and this is the point that Warwick said that the differences across countries lead to very asymmetric responses. From a macroeconomic point of view, if the deficit countries are contracting and the surplus countries are not expanding, that's gonna lead to a deficiency in aggregate demand. One way of, in the third aspect of this, that's in some ways related, is that there is a need right now for major structural transformations in a number of the events, most of the events countries, going from manufacturing to a service sector economy, markets don't manage this kind of structural transformation on their own, and that contributes both to the inequality and to some of the asymmetries that I described before. Bernanke, before the crisis, talked about there being a savings glut. I think he was wrong. If you look around the world, and you look at the needs in infrastructure, in most countries of the world, but particularly in developing countries, the needs for retrofitting the global economy to global warming, which are huge. If you look at the social needs for investment in education, technology, they're huge. So the problem is not the savings glut. The problem is that we don't have a global financial system that is able to take the surplus savings in China and Germany and Northern Europe, redeploy them into areas where there are very large global social needs. And the evidence that the global financial market wasn't working well before the crisis, clearly the best use of scarce social, scarce savings, global savings, was not to build shoddy homes in the middle of the Nevada desert. But that's where the savings were being deployed. So in my mind, this is another example of looking at the market economy from a global point of view, it's not working the way it's supposed to. It's not taking the, financial markets are supposed to intermediate, take surplus savings and redeploy them to areas where there's a deficiency, where there are high returns. It didn't do that. And it's not doing that now. The result of that is this weak global aggregate demand. And as word pointed out, monetary policy isn't going to solve the problem because when each country has this low interest rate policy, it doesn't have that much effect. It's not leading to more investment for some of the reasons that he identified. The need, I think, is very strongly for fiscal policy, including fiscal policies, focused on those kinds of investments that I talked about. And if you looked at it from a national balance sheet, yes, debt is going up, but so are the assets going up. And it's making the economies stronger. It's not beggar thy neighbor. It's one where if all the countries did it, their exchange rates don't depreciate in the way that they do with monetary policy, which is a kind of beggar thy neighbor policy. So this is something where there's coordination becomes very important and where if all countries do it, the long-run benefits are even greater than the short-run benefits. Yeah. Well, we shouldn't get bogged down in Europe. We did that 100 years ago. Literally. But I think there are a couple of things that are worth teasing out here. Firstly, I think the three of us would agree, would we not, that the eurozone poses the biggest risk to the global economy going ahead. I don't know, if you remember, Joe, you used to attend one of the economic policy committees of the OECD in the early 1990s. And at the time I was posted to the OECD, I was in the Australian delegation. I sat in on a few meetings that you were participating in. And at the time behind the scenes, the economic department of the OECD was working with people in Brussels. It was probably informally in the development of the successor to the European monetary system. And that's what ultimately became the eurozone. And when I used to talk to these guys in the economics department about why you would want to embark on such a crazy mission. And you know what their answer was? Their answer was, what else is going to force these lazy Southern European governments to undertake the structural reforms that are required? That was the answer, right? And you've just pointed right now to the need for those economies and others to undertake much needed structural adjustment. But it's not going to happen, is it? Well, I mean, as I look at the eurozone, the main problem is not the structural problems within each country. Right. It's the structure of the eurozone itself. Yeah, yeah, yeah, fine. Okay, alright. Yeah. And you know, it's nice that it's probably important that they get rid of some of the laws that make taxicabs more difficult to get in Greece than they should be. But taxicab structural reform is not going to change the face of Europe. And those are the kinds of things that the ECB and the European Commission are focusing on. I mean, I'm exaggerating a little bit, but the structural reforms that they are talking about within Europe, within each of the individual countries are things that are actually, many of them are aimed at lowering wages, decreasing aggregate demand, worsening the crisis in Europe. So part of the issue here now is sequencing. It's a lot easier to do these structural reforms when you have full employment. You move people from jobs where they're not very efficient to jobs where they're more efficient. Now, if you move people out of the jobs, you move them from low productivity jobs to unemployment. That doesn't increase economic growth. And that's what the ECB and the European Commission are offering people as a choice. You can, we'll move you out of these inefficient jobs into unemployment. No wonder people aren't enthusiastic about that particular structural reform. So to me, the real issue, and just let me give you an example of the structure of the Eurozone, the idea, one can understand, was based on a certain conception of how markets worked. The idea was, let's say we had a single market so capital could move very easily around Europe. And that would lead to more efficiency. But they forgot a couple of the details. Like behind every banking system is a government guarantee. Banking systems don't exist in isolation. You saw that so clearly in 2009. Where did money go in 2009? The United States, 2008, had just shown that our banking system did not know how to manage risk or allocate capital, right? Did it come to the United States because we had shown that we had superior banks? No, we had shown that we had the worst banks. Why did it come to the United States? Money was flowing into the United States massively. Why? Because the U.S. government, which some of us say the Treasury and the Fed are wholly owned subsidiary of Wall Street, but money was going into the United States because the United States has said to the banks, here's $700 billion, but don't worry. If you need more, we have a couple of trillion dollars in our bank account and we will do whatever it takes to make sure our banks survive. So if you put your money in the banks, we had unlimited deposit insurance and you were guaranteed. So money flowed into the United States. So the United States did well, but the other countries did poorly. Now think about that from the European framework. Money has been moving out of Spanish banks. If you had money in a Spanish bank, would you feel in euros, it seems a lot safer to put it into German banks. And if you look at the CDS-Breg, which is a measure of risk, the CDS-Bregs of Spanish banks and Spanish government, the CDS-Bregs of governments and banks are highly correlated. So that's precisely what's happening. One of the reasons their models have done so poorly, they have consistently underestimated the role of private sector contraction, amplifying public austerity and there being a vicious circle between the two. And the result of that has been these downturns, which are being so much deeper in each of the countries than the ECB and the European Commission anticipated. Okay, well, I think you've already answered the question that I was going to put to you earlier about the difference in the political systems in the US and Europe and so on. Although if you've got more to add to that, by all means, do so. But just, I'm about to throw it to the audience, but just before I do worry, you touched on something that's of particular interest in Australia, well, several things that are of particular interest in Australia right now, but one of the things you touched on is had to do with the pace and nature of fiscal consolidation, right? And listening to Joe, one can't help but draw the conclusion that the consequence of a deep recession is generational, at least generational, right? When you say that everybody over the age of 50 has basically been discarded in the United States, this is a generational event. And therefore, one would imagine the consequence of avoiding a recession should be judged in the same way. And so do you agree, therefore, that the fiscal consolidation, even if it takes a generation, so what? The fiscal consolidation to repair a budget position where the fiscal action was taken in order to avoid a generational consequence of impoverishment. If that takes another generation to unwind, then is that okay? Well, it depends on how credible it is. So if you announce, I promise, I'm gonna fix the budget deficit every year for the next five years and you never deliver any of it, then it's gonna be worse than the actual doing nothing because you're doing something but the expectations are conditioned on something else. And we saw that in the fiscal position of the previous labor government where the treasurer kept promising surpluses. Within the fiscal framework, which is an excellent framework for countries to follow what we have in this country, but the government wasn't delivering what they were promising within the framework so it undermined the confidence in the framework. So it depends how you do it, but I agree with you, big slabs of fiscal cuts are very dangerous in the short term and you have to be Keynesian to believe that, but the best policy is a gradual, credible reduction of fiscal policy that brings debt to GDP to a sustainable level combined with a change in the mix. Get the least distorting taxes in, get the most distorting taxes out, substitute income tax, put in indirect taxes, change the spending mix towards more infrastructure and less waste and supporting industries that have no future in this country. So that sort of issue is underlie the adjustment. So it's not just do you cut or don't you cut? I think it's far more complex. Can I just make a couple of comments? One of them is, I think it's important for policy makers to convey the uncertainties that we always are making decisions under uncertainty and that it wasn't the lack of commitment to reducing the deficit that underlie the failures, it was there were some inherent uncertainties in the global economy, that the IMF, the ECB, everybody was making mistakes in forecast, both before the crisis and after the crisis. For reasons that, as I say, we should begin to try to understand, but they were global in nature and that the fact that you make forecasting errors is very different from a statement where you know what government is deliberately lying. So I mean, maybe I feel more sensitive because it was very clear the Bush administration when it went to war and said that war that was going to cost $60 billion and wound up costing $3 trillion, they were lying. We actually ran our model on that and we found an estimate of 2.5 trillion using the experience of previous wars and making them. That's right, I remember you saying this. We published that in the bookings and so yes, people didn't, not everybody got it wrong. Not everybody got it wrong. But the administration got it wrong and we know that they got it wrong, partly because they were lying and they were trying to deceive the American people. And that, when you try to deliberately deceive, as opposed to, I'm trying to distinguish here, is between when governments tried to deceive, which is the Bush administration, that undermines credibility. When you say, look, there's uncertainty and we don't know what GDP is going to be next year and we don't know the revenue estimates and elasticity, there's going to be some uncertainty, but this is where we're trying to go. The second thing I wanted to talk about, reinforce what Warwick said about the, about trying to get the right expenditure and tax framework, one of the general principles of taxation is in general, it's better to tax bad things than good things. And therefore a carbon tax makes eminent sense because we may be somewhat uncertain about the magnitude of global, the effects of climate change. We know almost certainly that we've continually underestimated the magnitude of the effects, that the consequences, even in the United States, there was a debate because some people said, oh, well, so what if the South gets a little hotter and uninhabitable, Minnesota will get warmer and become more inhabitable and net United States, there were actually people who said net United States was going to maybe be a little bit better off and some people in Canada said that it'd be great that we would have summer. So there were that kind of debate, but one aspect of climate change is weather variability, storms, hurricanes, typhoons, rocks, freezing temperatures. And now the data on that is overwhelming and that the US economy has faced enormous costs as a result of climate change. So it really does make sense to be taxing bad things, to discourage emissions and to get ahead of the game. Something will happen on this, I think. But it's a good idea to tax carbon, it's not a good idea to have a carbon tax, it starts very high and falls to very low, which was the Australian approach. So how you tax is just as important as what you tax. Rowan, come back to that. I am now going to throw the floor and look, I failed miserably in that I thought we were going to have about an hour for interaction at this point in the discussion. In fact, we're going to have half an hour. And I'm going to ask you before you ask your question or make your comment, just to briefly introduce yourself, even though of course everybody in the room pretty much by now knows everybody else. Bob, I've already, believe it or not, I've already got two hands before you. So you're number three. No, that's fine. So first, Ross Garner. Hi, I'm Ross Garner, University of Melbourne. Point about Australia and point about the world. I think it's important for us to understand how we got ourselves into a very difficult type of situation that was through this forecast of revenue. And we had a sound framework limiting growth in expenditure. And every six months from the September quarter of 2011, official forecasts were greatly downgraded. This was essentially a miscalculation of the rate of deterioration of the biggest single arm of revenue from the resources boom, which was developments in China feeding back into Australia, plus a miscalculation of the effects on corporate revenue or corporate tax of the corporate deductions from the huge capital investment in the resources sector, quite a bit of which has turned out to be redundant, is now being written off in the accounts of the companies, but a proportion of that is being paid for by consolidated revenue. The government was trying to meet its commitments to reducing the budget forecast, and as a result in 2012, 13, and this is easily forgotten, we had the tightest budget in Australian history. There was nominal reduction in expenditure, tighter than the famous 1951 horror budget. But then there was a further downgrading of revenue, and the government gave up. And so 2013, 14, there was a loosening of fiscal policy, which makes things harder. On the global situation, very interesting discussion really the global macroeconomic framework, the balance between savings and investment. We've got very low long-term bond rates now globally. Nominal rates, several percentage points below, long-term averages, even in the poorly-performing countries of Southern Europe, amazingly. With real bond rates, the long-term historical average in the US, about 2% in real terms, down about one now for 10-year bonds. Australian higher, but we've got a higher expected inflation, so probably real return, something like that. So the markets are saying, expectations of long-term balance between savings and investment points to low real interest rates. One very important element of the global macro story that didn't come in was what's going to happen to Chinese surplus savings. World Bank's latest figures say China's just about as big as the United States will be soon. Chinese savings have been a touch-over 50% of national income. It's policy to reduce those. They brought them down a little bit, but tiny. It's 48 or something like that, nearly 50. The new model of economic growth in China has much less emphasis on investment. Investment was up there close to 50% in 2009, 2010. It's hardly come down at all. The growth rate is back down to expectations of 7.5%. That may not be realized, but if it is, it's a one-quarter reduction in the growth rate, and therefore, without a change in capital productivity and capital labor ratios at the margin, there'll be an absolute reduction in Chinese investment of about a quarter. A quarter of a 48% of an economy that's almost as big as the United States will mean an addition to surplus global savings of more than half of total US savings. And the world has to absorb all of this. I'd be interested in each of your views of what that does to equilibrium. Okay, I think what I'll do is I'll collect, let's say, four questions and then ask you to respond. Yeah, so let's just hold that one. Alan Gingel was next on my list. Thanks, Ken. It's been interesting and maybe slightly disturbing disjunction between the messages that have come out of this panel and what we've heard in the geo-strategic sessions over the past day or so. In all the discussions about competition, coming competition between the US and China, the message has been, don't bet against the United States. Dynamic economy, flexible markets, youthful demographics are there for the long term. And this actually to please slightly at odds with the line from Professor Stiglitz that the American market model has failed. So I thought it would be useful to hear from the economists rather than the strategists about what you've been saying means for America's capacity to sustain power in the world over the next 20 years. Yeah, that's a good question. It's not the first time you've met that disjunction. But I know. So we'll come back to that. Bob Gregory? My very simple question. I find the economics easy, actually. And if I don't know something, I reckon I'm gonna figure it out in half a day. What I can't understand at all is the politics. And when you look at the world as the politics, that underlie the economics that matters. A view of the world which sort of says a mark to view which says, oh, the economics will dominate the politics and the politics will take office of bail doesn't seem to be the way the world's working. So just to give you one simple example, we began the conference with a proposition sort of that's absolutely essential to cut marginal tax rates on income, absolutely essential. The empirical evidence for that as an economist, I reckon is really tricky. But there wasn't much point debating that because that's what the politics seems to be saying. So anything you can tell us about why the politics are like they are. So you can't get up and say, I don't think that the American system has failed, I believe, in perfect competition without doing exactly what you said. That is, what is the politics like this? And I think that's really a big point. Why is it that we're allowing the bottom to drop so much? Yeah, okay. Why don't I let you respond to any or all of that and then I'll have another round of questions. Who wants to lead off? Warwick? Why don't you? I'll lead off. So let me just start with Ross. So Ross makes a really good point that it's really a bad idea to base policy on forecasts. Now a second example of that is the entire infrastructure we built around the carbon pricing model in this country which was based on the assumption that the world would have an international agreement by 2014 or 15 and the carbon price would be around $35 a tonne globally. And we built an entire policy around a framework that would shift from a price of around $23 a tonne by now we're switching into a global market where the price would be sitting around $35 a tonne. I was involved in the modeling for that first round of that and we were not allowed in the modeling to ask the relevant question which was what's the alternative? How could this go wrong? What if in fact the world didn't have an international agreement? But nonetheless, we weren't allowed to ask that. The politics dictated Kevin Rudd's view of the world that 2010 Copenhagen would be a success. Now the Ghana review based everything very sensibly once you take that as given, everything followed. The problem was the forecast was completely wrong. So there's another example of why forecast based policy is really bad thing to design. You've got to deal with the inherent uncertainties in the system and you have to design policies that are flexibly able to adjust when you get new information. I won't quote Keynes, but I'll just quickly go. So on Ross's point about savings, that's a big deal and the thing that we see about all the fiscal consolidation that we were going to see in the world in the next 20 years is a massive amount not just to the Chinese savings that's going to be looking for investment but global savings and where is it going to come? It's likely to come to Australia and that's the reason why I think the Australian dollar is likely to be getting stronger not weaker, stronger because of the monetary adjustments that are going on and stronger because of the savings adjustments. So it'd be nice if the Australian dollar would drop and let us do some structural adjustment. I don't think you can bet on that. In fact, I think you can bet against it. So therefore the answer has to be structural reform and it has to be input costs. Alan, question? I don't agree with Joe completely. I don't think the US model has failed. I'm actually quite optimistic about the aggregate US economy. I agree that the income distributional issues are really serious and they will undermine the aggregate story but the US is still a very well-functioning, innovative society and if you can fix the politics, I think you can then fix the economics to be even better. Yeah, I'll just go ahead and answer. I'll just go again. I've got a different view that I won't put now Sure, sure, sure, sure. We're not here writing the official record, okay? So, okay, Joe, yeah. Okay, let me begin with the US economy. You know, obviously there are some strong aspects of the US economy, some very strong aspects. We've had the good luck of discovering lots of low-cost natural gas that's given us somewhat of a competitive advantage. We have first-rate universities like Columbia. But on the negative side, average performance in our education system, it's a measure by the PISA scores, is really miserable. I mean, we're not a well-performing education system. So we're like a dual economy, what we used to call developing countries where you have a small group of the economy doing very well and the rest of the economy just sort of getting along, not very productive. But it's worse than that. You look at the areas of innovation of the US economy, the so-called high-tech sector, Facebook, Google and all that, they're mainly advertising agencies. And how do you have an economy that is becoming better and better at running advertising? You have to produce something. And the US has lost the ability to produce, I don't say totally. I mean, it's still a very large manufacturing economy. I don't want to exaggerate, but it is the case that if you looked at it in terms of global balance of economic power, it has shifted very distinctly in many, many areas, even an area that we thought we were gonna do very well, which is solar panels. China has become the best producers of solar panels and some of the other advanced technologies. So I think there are real questions that you think forward about this geopolitical balance. It's sometime in the month of September that the US becomes the second largest economy in the world. And both in terms of the psychological effect, what that means, already we are not the largest saver, we're not the largest trader and a disproportionate fraction of our best talent as it goes into financial speculation, not into producing goods, other things that make welfare really have a real contribution to welfare. And after all that speculation, our financial system, which had garnered a very large fraction of our best students performed miserably. So you look at that and you say, yes, great innovation in how to destroy the world. And in my mind, that's not an element. Also, we have very good drones, really good military equipment. So if you have a model about how to destroy the rest of the world, either through financial weapons and mass destruction or other weapons and mass destruction, we have excelled. The real question is, can we produce products that people actually increase living standards? And that remains an open question. The savings investment story is, I think, really fascinating and really bears thinking. And I think it's going to be a challenge. On the side of China's consumption, I think there is a reasonable chance that there will be significant increases in consumption. What is distinctive about China is the share of consumption is about half that of the United States, our GDP. And that gives it a lot of room for increase. And if they just pay wages a little bit higher, their household income as a share of GDP is also remarkably low. So there are actually a little changes in certain key parameters. It is a very strange economy making its economy move towards, what you might call a more normal economy, would make some of the adjustments naturally. But on the savings investment, trying to think about where real interest rates are going to go, I think we have to change our mindsets. A lot of our thinking is really based on what I call a corn economy. Corn economy is the idea that there are some people who are farmers who don't need all the seed that they've grown, either for consumption or replanting. And there are other people who want more seed, either for consumption or planting. And so you have a demanding supply for seed and that determines the interest rate of what you are going to repay next year, period. We don't live in this kind of corn economy. We live in a credit economy. People's willingness, ability to spend more than their income is not based on the amount of seed, but on the credibility of others that they will repay. And that determines the demand for funds and the supply of funds. And underlying that credibility are government guarantees. So governments are backing our banking system. The banks issue these certificates and say, you can spend more than your income, we'll lend you money. But why do people trust that money that the banks are creating? They trust it because they know behind that bank is the government, the deposit insurance and government guarantees, which we saw in 2008. So the driver in the interest rate is not the demanding supply of seed, which is the model of China versus the United States. It's what the Federal Reserve with the ECB, with the Japan Monetary Authorities are going to do. And my view is that the economies in the North Atlantic are going to remain, and North Pacific, are going to remain sufficiently weak that they're going to keep up a supply of liquidity that will probably keep the interest rates low for some time. We are going to have to move on, there's only on. 12 minutes or so. Ramesh, you had a question. Ramesh, you're coming to what the cost of the Iraq war, they lied about everything else about the war. Was it the naivety of the economists to expect that on the cost, they would actually tell the truth? Or is it the case that on other big issues where they're not busy trying to manufacture justification for a war on other big economic issues, they do tell the truth? If not, what does that imply for the sorts of credibility that Warwick was talking about, for example, with respect to the fiscal deficit? Yeah, yeah, yeah, I think. This relates a little bit to the one question I wanted to talk about, other question about the politics that you raised. Yeah, both of them. And I think there are a couple aspects of that. And your original question, I think the politics in the United States and Europe are markedly different. And in the United States, money has had much greater influence in political life. The last election, each of the candidates spend over a billion dollars. And when you're spending that much money to get elected, you have to raise that money. And when you raise that money, people are giving you that money for the most part, not all of them, but for the most part, they don't view it as charity, they view it as investments. And the return that our banks got on their investments in Washington are much higher than the returns they got in any other other investments. They were a disaster in their investment policy except in Washington. And they got a real high return on that. So, and this has become a very hot point in American political discourse, Citizens United, I don't know, the Supreme Court decisions, a series of Supreme Court decisions that have said that corporations can spend as much as they want, there could be as much secrecy as you want, that even if states want to level the playing field so that those who have less money can have as much, spend a little bit more to make it a more competitive. The Supreme Court said, that's a negative restriction and have struck down laws that try to even the playing field because they say, if you help the guy behind, you're hurting the guy ahead. And therefore, that's an interference with free speech to the guy ahead. So it is unbelievable, but it is having a backlash. I mean, if you talk to a lot of Americans, we believe our political system has become increasingly corrupted by money. And that is, you talk about undermining social capital, so it is really having a very negative effect on the functioning of American society. Now, can you trust government? I think the answer to this is, in many areas we've created institutions that actually are reasonably reliable, when I say reasonable. Our statistical agencies are actually pretty good. The CBO is pretty good. In this particular case, on the cost of the war, for instance, the CBO did come out and say it was much greater than the administration was claiming. They claimed that it was less than we were claiming and we had a big fight over that. We were right. It turned out that we had said in our book that we were being conservative in our numbers about the cost of the war, and we were absolutely right. And we explained where we were likely conservative. And again, we turned out to be right. It turns out that approximately 50% of the troops coming back from Iraq and Afghanistan are disabled. And the cost of disability and health for those coming back are themselves over $1 trillion and increasing. And obviously the administration wasn't going to say, we're gonna have a whole generation of people who are maimed as a result of this war and we're gonna try not to give enough financial support and there's gonna become a big political issue. So I guess the answer is we need to create institutions and that's what civil society, a lot of the independent think tanks are about that act as checks on government and force it to be a little bit honest. Okay. I've already got four other names on my list. I'm not quite sure how best to handle this. This is how I'm going to do it. It may not turn out to be the best way. I'm going to allow each of these four people, maybe 20 seconds and then we'll try and wrap it up down here. And I think first was Tristan, not Tristan. Yeah, what's your name? David. David, God. Sorry, David. Yeah. David. Thank you. David from CSIRO. The question was, we spoke about politics and economic measures for addressing some of the wealth in the politics across the world. It seems to me that there's also a fairly substantial cultural and behavioral issue that we haven't touched on being interested in in comments. Okay. What are some of the cultural and behavioral changes that we might need to see to omit the redistribution of wealth from the I think it was words to that effect. David Gruen. I've got a comment about the Euro, but it's broader than the Euro, which is why I feel it's okay to make the comment. The whole politics of the Euro seems extraordinarily hard to understand, but there's one element of it that's important, which is that several of the peripheral, the peoples in several of the peripheral countries don't trust the institutions of their country, which is why they were willing to give up control of inflation and for that matter, to put constraints on fiscal policy and give them to the center. That hasn't turned out well, but the issue of countries where the people don't trust the political system to develop institutions that will work for the interests of that country is a problem that's more serious than the Euro, but it seems to me the only way to understand why the periphery is willing to put up with this pain, why the peoples in the periphery are willing to put up with this pain is because the alternative of leaving the Euro and going back to a world where you trusted the domestic institutions to keep inflation under control and to keep the fiscal accounts under control in at least several of these countries, the people are profoundly skeptical of the capacity of the domestic political institutions to play that role. Okay, where? Sequencing, Joe, you mentioned sequencing. If I reflect on my observation of Europe 10 years ago, their obsession with sequencing partly led them to this problem. They were continually waiting for the politics, the macro cycle and the structural reform to align at the same time. And many of those structural reforms were not taxis, they were also the big pension systems and other things. And if the Australian example, the theory would have said you should have done labour market first, then product market, then financial markets, we did the opposite, partly pragmatic because what we could do and the financial market deregulation forced the product market deregulation, forced labour market changes. And my instinct, like the reflection is, you take reform when you can find it and you worry less about sequencing, partly for the uncertainties that Warwick's talking about. Okay, and the last one for Sandra Gollum. I wanted to push back a little bit of Warwick on this critique of the counterpricing of this. I think it would be pretty concerning to know how capacity for government to make some decent elections and to do an advance to deal with them. I hear it's long to do challenge for them, but... And I think that into the politics versus the economics, it will be an absolute tragedy for us to lose the machinery for an ETS that a member of the administrator right now here with the context that you've got. We've got a very influential people in the room right now. And I'm really keen for there to be at least some sense that we can get the room in the room and have the basic machinery for pricing carbon, for the pricing of that thing where we have a very huge knowledge of Australia, it would be a basic, you know, the least that we should be able to get out of a reasonable, democratic environment that would accommodate us pretty well. All right, okay, so, thank you. Panelists, you've each got two minutes to both answer all of that and to make any wrap-up remarks that you want to make. So I think I've been completely misunderstood. We need carbon pricing in this country. We need to do it correctly, so that when you get a drawer from the world which is different to what you forecast, it doesn't collapse. No, that was a mistake. The design was a mistake. And I think you can fix it. I think we can fix it under the current government and under the current parliament by getting the system in place. I can't talk about it now, but I've got a book and a hundred papers and I'm happy to report them to you. And I will be making noises about this in the public arena. We have to do something about it. David's point, I think, is really, really important. David Gruen, that is the institution's matter. And Australia has really good institutions for productivity commission, not used very much in recent years, but should be used for evaluating projects. Ross has made the point we need an infrastructure commission like the productivity commission. Completely agree. I think we need an independent Central Bank of Carbon to run climate policy and merge all the other institutions we have into one framework with an independent governor of that bank. And I think that we risk the economy's future by dismantling these institutions. But these other countries can learn from our institutions, and they are. The way we supervise banks, the way we run monetary policy, the way we have a fiscal framework, Australia is a beacon of example. And so people say you shouldn't take action in Australia on climate policy. Well, I think you should take action to create the frameworks that the world will adopt that are in our self-interest. That's different to the sort of policies that have been pushed up until now. Joe, last one for you. Well, they're all very interesting questions. Let me just talk about why the periphery we're willing to put up. I think one of the reasons that some of the countries that are periphery is that it is still in their recent history some really bad events. The fascist colonels in Greece, the fascist government, the local government in Spain, the Russian government in Latvia, in the Baltics. So to them Europe has been a savior. And so Europe really did change their lives from what it was. And they are hoping that the institutions of Europe, the rule of law, all these things, that were such benefit, just messed that they're in. And I think that more than anything else has led to the toleration of what to many of us look at it as an intolerable situation. And it's not just or I would say not so much that they had disparate of reforms in their own countries. Italy, which had a very high debt GDP ratio, the highest of the countries, actually had done a one round of pension reform. And many of the important rounds of pension reform and other reforms and had been talking about it, I think they would have occurred slowly. But I think to repeat what relates to question and Blair talked about, I think it's always easier to do reforms when you're offering somebody an alternative other than unemployment. And that's why, for instance, when Denmark did reform of social security, they came up with an idea called flex security. It was a way of saying, okay, we will make a deal where we will protect you and you give us more flexibility in the labor market. And those were kind of social contracts that worked and that protected people at the same time. It seemed to me that if you naively say, I'm going to seize this opportunity for reform because it's there, without thinking about how it will play out, it's likely to have a backlash. That when I say mean by that is that if the result of that reform is that unemployment goes up, standards will go down, people will say, that's not the kind of reform that we want. And it will be actually set the reform agenda back. And there are lots of examples of that. So in my mind, it is important to have at least some conception about the way things are going to play out. Now in terms of climate change and forecast, you can't not have a forecast. I mean everybody, you have to be aware of the uncertainties. But in terms of climate change I don't think the critical issue is what other countries are doing. Because in the following sense it is still better to tax bad things than good things. And that if you said what is a better way of generating revenue, taxing labor or savings or taxing carbon. It seems to me it's a no brainer. It makes more sense. Now it means that it also has a further advantage I believe over the long run we will have to have a carbon tax. The world will come around to this. And if you have an incentive structure that encourages Australian firms to think about saving natural resources, saving carbon now. It puts you at a competitive advantage in 10 years, 5 years, even if he was wrong 2010 we didn't get an agreement. Maybe 2020 and maybe 2030. In the United States these coasts in the west coast which are the only productive parts of our economy are going ahead with taking strong actions about strong actions about dealing with carbon. We know that in some naive sense it puts us at a little bit of a disadvantage but we believe that over the long run it puts us at a competitive advantage. So it seems to me that this idea of saying oh it's going to put us at a disadvantage you can say well the lower wages that will the higher productivity that we're going to get because we're not taxing savings we're not taxing labor as much that's going to give us an advantage over other countries. And so it seems to me that beginning with the carbon tax, the price of carbon is really giving you a long run competitive advantage and obviously design matters but the overall framework of thinking about a carbon tax makes a lot of sense. Alright I think that's a good point I'll just let you know before wrapping this up that it's very important that you be seated for lunch by 12.40 be in your seat by 12.40 According to my clock it's 12.34 So you are going to have enough time. Can I just wrap this up by saying that we've obviously had a very wide ranging discussion but it's also been a discussion of some depth and the fact of that both the breadth and the depth is due to the quality of the two panellists that we have here can I ask you to join with me and thank you.