30 with the VC | Associate Professor Dennis Wesselbaum

[00:00:00] Grant Robertson:
Kia ora koutou katoa. Nau mai, haere mai to 30 with the VC. I'm Grant Robertson, the Vice-Chancellor of the University of Otago - Ōtākou Whakaihu Waka. And this is a series where we talk to the researchers and staff at the University of Otago about the interesting and exciting work that they're doing. Our guest today is Associate Professor Dennis Wesselbaum from the Department of Economics. Welcome, Dennis.

[00:00:23] Dennis Wesselbaum:
Kia ora, Grant. Thanks for having me.

[00:00:24] Grant Robertson:
Oh, fantastic to have you here. As we do at the beginning of each of these shows, we take a look at an object that our researcher or staff member has brought in. And Dennis, you appear to have brought a puzzle in today.

[00:00:37] Dennis Wesselbaum:
I have. So in case we're running out of things to talk about, we can puzzle a little bit. So it's a very colourful puzzle. I have the puzzle actually down there, which is a little bit more engaging to the topic. But my research is actually quite difficult to put into one prop. Because it's quite broad. So I always like to use the analogy of a puzzle to communicate what it is that I'm doing, because each individual piece of the puzzle looks very different, but if you zoom out you see the bigger picture. So in one piece of the puzzle it's about climate and the environment, climate migration, effects of air pollution. In a different piece, which looks very different, it's about food insecurity. What are the drivers, what are the consequences, what's the inequality in it?

[00:01:24] Dennis Wesselbaum:
Then a different puzzle, it's about well-being, it's around what are the factors, how are they different to income, what's the inequality in it again? The latest things are more about loneliness, which relates to well-being, stress, mental health. And then in the probably final puzzle piece, it's about the macroeconomics, monetary policy, inflation expectations. Fiscal policy, which is about growth, productivity, labour market, what happens to a university student and graduates during recession, how do they get integrated in the job market? So all of these puzzles look very different from each other, but if you put them together and you zoom out and it's all about how can we understand people's behaviour, firms' behaviour, how can we design and evaluate good policies and hopefully improve the lives of people down the road a little bit.

[00:02:19] Dennis Wesselbaum:
So that's why I like the analogy of a puzzle.

[00:02:21] Grant Robertson:
Yeah, it's a good, it's a great analogy. Is that how you think about economics as a study of the things that we put them together well and puzzle pieces will make people's lives better?

[00:02:32] Dennis Wesselbaum:
I think that economics is a way of thinking. It's not this—what some people, I think, perceive of it, it's like interest rate, debt, exchange rates, like these things.

[00:02:43] Grant Robertson:
All those terribly exciting things.

[00:02:44] Dennis Wesselbaum:
Exactly. You get very excited. This is what you want your Netflix show to be about, right? No. So it's more of a way of thinking where there is a problem and we can address that. So I have a co-author who's in public health, and he works with cancer survivors. So the question is, I have no idea about that particular issue. But what I do know is I can study the data that allows me to think about how do people with a cancer history get integrated into the labour market. So that brings us together, and I can do that research with someone who has the context-specific knowledge, and I don't need that, but I can contribute something else.

[00:03:23] Grant Robertson:
The way of thinking.

[00:03:24] Dennis Wesselbaum:
Exactly. So that's how I think about economics.

[00:03:26] Grant Robertson:
How did economics become your passion and your area of work and life? Did you always think this was what you wanted to be?

[00:03:33] Dennis Wesselbaum:
So my family background is that my parents are business people. So in the mornings or in the evenings when we had breakfast together, lunch or dinner together, it was always something that was going on in the wider economy and how it affected the business. So it was about, okay, we're going to do some trade deal with a Chinese company. We're going to have some people from California come over to do some deal. What's the exchange rate? And I'm, you know, revealing my age of the Deutsche Mark versus something else before the euro came in. So it was always a topic. So I was always very interested in the maths, econ side of things, physics, I liked. And so eventually I had to make a decision and I thought, you know, econ is the common denominator around these and I can use the maths within econ to do stuff.

[00:04:27] Dennis Wesselbaum:
But also I do a little bit of econophysics, so I can still bring that into the game. So it looked like a flexible choice and so far I don't regret it.

[00:04:37] Grant Robertson:
Which is good and we're pleased that you don't. It's interesting because that kind of mathematical basis is clearly critical to being able to understand economics, but what you've described in terms of your puzzle seems to me to have a very strong people-centred element. Is that something that sort of evolved for you as you've studied and then taught economics?

[00:05:00] Dennis Wesselbaum:
Bottom line, yes. The longer answer is if you study in Germany, your first semester is basically just maths. And then eventually you get introduced into economic topics because they also end up being quite theoretical. Now there has been a long-standing debate, at least in Germany, around should economics be more of a science or more of a social science, so, i.e., more maths or less maths, and I think it's a tightrope that you have to walk and you need the maths, the proper science, but then also you need to be able to communicate and you need to relate to topics that people actually care about, whether they know that they should care about or not, but it's very important to think about this from both perspectives. We don't want to get caught up in equations, but at the same time it is important to understand the basics and then be able to hopefully communicate that to the general public.

[00:05:56] Grant Robertson:
And indeed that's a really important moment as we get into the general election here in New Zealand and one of the reasons to have Dennis come in and have this conversation now is lots of the topics that you research and that you teach about are now the things that people are discussing as we enter into an election campaign. Often we hear when people are asked what's the most important thing running into an election campaign you'll hear a catch-all phrase like the economy. I wonder for you when you hear that what do you think are the kind of constituent parts of that that people are really thinking about when they answer the question the most important issue to me is the economy?

[00:06:38] Dennis Wesselbaum:
Yeah it's a very interesting time to be an economist and I'm sure to be a former politician. So it's very interesting to see how the discussion is shaped and which are the topics that are that are highlighted by different parties. It's not a surprise that cost-of-living crisis is a big topic, right? I mean this is just the big elephant in the room that everybody's talking about but even there there is I think not much of an appreciation of even how we measure inflation. What does it actually do? Which are the forces that drive inflation? Can monetary policy do something about it? What's the contribution of fiscal policy in it? And often, especially in this election campaign, which is heating up, I appreciate that, and there's more policy announcements to come, but right now it seems that this topic is dominating everything.

[00:07:32] Dennis Wesselbaum:
We want to reduce somehow prices, which is not really how monetary policy works, but that's the thing that we really want to focus about, and that's what you see with supermarket policies and all these things that are somehow come up, which I think are not really addressing the underlying problems. And so you have this disconnect, at least from my perspective, about the topics that we should be talking about and the topic that some political parties are pushing and think that this is what is the best to address problems and maybe get votes.

[00:08:11] Grant Robertson:
It's interesting. We'll come back to monetary and fiscal policy in a minute, but just to explore that a little bit further, because, as you know, as a recovering politician and as a current economist, you and I can have a conversation about some of the details of that. I think what I'd ask you is when the general public are having this conversation, that ability to be able to connect the price I'm paying for a block of cheese at the supermarket to those underlying issues is quite a challenge for people to be able to understand. And in some ways, politicians, I think, know that and will mainly focus on the price of the block of cheese. From your perspective as an economist, that must be quite frustrating.

[00:08:57] Dennis Wesselbaum:
Yes, in short, yes, it is. And look, we understand that it's an election. It's about getting elected, right? We understand that. And there is some different trade-offs that policymakers have to do relative to an academic. And it's very easy for an academic to sit there and say, oh, well, you know, you should be caring about this and that, right? Because that's our objective. So understanding the different objectives is part of the problem. But no, I do agree that it becomes sometimes very frustrating to see the general debate, not necessarily also from politicians, but also from media and other commentators, when you think that even understanding the difference between an inflation and the price level.

[00:09:44] Dennis Wesselbaum:
And that gets confused a lot with people often thinking, oh, well, why are prices not going down again? Inflation has slowed. And these are two different things, right? So it's very technical in nature, but it's the heart of everybody's experience. It's connected to everything, the supermarket, the gas station, your mortgage payment. Everything is related to these arguably very technical, aristocratic topics but that's why you want to have the experts that deal with that and then hopefully take care of them.

[00:10:16] Grant Robertson:
Well, let's unpack that a little bit for people. So let's talk about the relationship between inflation and prices and indeed what we do to measure inflation. If you are looking to explain that to an audience of people, what's your sort of Reader's Digest explanation about how we measure inflation and what that actually means in terms of what people are paying?

[00:10:36] Dennis Wesselbaum:
Yeah, if you want to bore students, then getting into the technicalities of inflation rates is one good approach to do it. It is important. But in the big picture, you look into a basket of goods and you track the prices of these goods over time. Now, there's a whole lot of detail in that, regional price differences, what do you do with discounts? So it becomes very difficult, how do you update the basket over time? So there's a lot that's very, very, very detailed. Nevertheless, in the big picture, it is this basket, how it's changing its price over time. And that is a price level, and this price level is changing over time. It can go up, it can go down. But the change in that price level is the inflation rate.

[00:11:23] Dennis Wesselbaum:
And monetary policy these days, since at least the 1990s in New Zealand, is what we call inflation targeting. So we're targeting the price rate change rather than the price level itself. And there are some good reasons for doing that.

[00:11:37] Grant Robertson:
And I think that's a really important point you've just made there. It's the rate change that's been targeted rather than the price itself. So a consumer, as you say, oh, inflation's gone down. Surely the price of my good will go down. Not necessarily true.

[00:11:51] Dennis Wesselbaum:
Not necessarily true, generally not true unless it's something like you have a drought and the price of apples goes up in the next season, there's no drought and the prices of apples goes down. But generally for the types of shocks, things that hit the economy, there we talk about an inflation rate and the price level shock that goes up and then inflation might go down but the price level itself doesn't go down. And there's very good reasons for not doing that. Price level targeting rather than inflation targeting.

[00:12:19] Grant Robertson:
Do you want to say a little bit more about that?

[00:12:20] Dennis Wesselbaum:
Absolutely. So the extreme argument is if you have some kind of shock, something that hits the economy, that drives up prices, then generally with prices come wage increases, nominal wage increases. And then if you'd had price level targeting, the central bank would have to drop the price level down. And they can only do that if they drop wages down as well. Now, firms don't like to do that because once they deal with certain contractual negotiations and that has some law background that applies to that. And then the other part of it is that they're worried that effort will be reduced. So I'm sure nobody from us would like it if our employer shows them and says, well, now you get 10% less.

[00:13:08] Dennis Wesselbaum:
And how would you respond to that? So it's very complicated to drop down nominal wages, to drop down prices. So generally, we don't like to do that. We can do it, but we don't like to do it because it's very uncomfortable. So generally, the alternative is, okay, we have the inflation rate to be targeted at about 2%, give or take. And we'd like to keep nominal wages and prices kind of rising, you know, at the same rate, roughly. And that's more the real purchasing power. As we would say, it stays the same or hopefully gets a little bit better, but generally stays around the same level. So that's the reason why we do inflation targeting.

[00:13:46] Grant Robertson:
Back to our basket of goods that we're measuring. So a couple of questions here. One is that obviously it's goods and services. And so I'm interested in the way we decide on what we measure there in inflation. And then secondly, there is effectively what happens domestically in the economy, but then obviously we're heavily impacted by what is known as imported inflation. I wonder if you want to talk about just the way that basket is thought about both in terms of services, but also in terms of what's here and what's coming from outside.

[00:14:19] Dennis Wesselbaum:
Yeah, so two important points. The first point, how is the basket designed? And one of the things that my professors back in the day, when they were talking about this, were talking: look, there is technological progress. And in this basket today you might have a TV, and we both probably still remember the TVs that was like a wardrobe. And eventually you get flat-screen TVs. And so at what point do you switch in your basket from the old-school TV to the, to the modern TV, right? Or to your laptop from a, from a desktop computer? So these are decisions that are very difficult to make, which here Stats New Zealand would be making. And there's surveys behind it. There is, like, you would have interviews with people and you would see what are they purchasing, and then over time update this basket.

[00:15:09] Dennis Wesselbaum:
So it's a very difficult thing and our baskets will vary a lot. So it depends then what is the average basket in the economy? Which is even a more difficult question to answer. But you get the idea that there is a basket that is evolving over time with technology, with preferences, and then over time this gets updated. Now, your point about what is actually driving inflation is also something that will change over the business cycle. So, at the moment, what we have is we have a large energy price shock, largely coming from the Middle East. Somewhat still the Ukraine-Russia conflict that, for example, drives up fertiliser prices that go into food, and down the stream it goes into your block of cheese and what have you in your supermarket.

[00:16:01] Dennis Wesselbaum:
So that energy price shock drives up the transport part, and then from there it goes into everything else that relies on transport. And New Zealand is a very spread-out country. So if you're a supermarket and you have a product in Christchurch and you have to get it to Invercargill, you have to somehow get it there. And if petrol goes up by 10%, somewhere the costs have to go. So right now we're dealing with this very substantial, what we call a cost-price shock. So the costs go up on the supply side of the economy and it's very difficult to deal with that shock. Very difficult. Covid recession is another example where we've seen initially the global supply chains, transport costs being under a lot of pressure, border closures.

[00:16:53] Dennis Wesselbaum:
So it seems that the nature of these supply shocks is changing. The old narrative was, well, supply shocks, they happened. It's a drought. It's a little conflict that happens for a little bit, but it's not persistent. It doesn't take too long. It seems that now the supply shocks are hitting very differently. They seem to be more persistent. They seem to affect more parts of the economy, and they seem to be going into inflation expectations much faster. And so maybe monetary policy need to be responding differently to these supply shocks right now than they did in the past.

[00:17:32] Grant Robertson:
It's really interesting. In my old life, we used to talk about the cost of housing and the cost of building housing as a domestic cost and a price rate increase to be measured domestically. But of course, I think at the time, something like 75% of building products were imported. And so actually we were importing in the inflationary pressures that were coming from outside, but we were thinking of building houses as a domestic inflation cost. So these definitions are actually quite hard to manage and in a way probably slightly pointless because in the end people are just paying what they're paying wherever it comes from.

[00:18:12] Dennis Wesselbaum:
Yes and the part of the tradable, non-tradable parts, that's how we would call it, is very important and even within that are underlying different factors that can change over time. So if you look into the non-tradable part, the domestic part, that would be at the moment rates which drive quite a bit of that part of the overall inflation change. And the question then is, what can monetary policy do about rates?

[00:18:38] Grant Robertson:
Yeah.

[00:18:39] Dennis Wesselbaum:
We'll just leave that open. We can come back to that. And then for the tradable part, shipping prices have gone up recently. You have the energy prices that go up. So that's a very different part. And what can monetary policy do about that? It's a very interesting question, but to be the policymaker in real time, it's a different story.

[00:19:03] Grant Robertson:
It is. So the cost of living, as we know, is the big issue for people. And I think it's been really helpful to understand what's actually sitting behind that and how we measure it. When people are surveyed, the economy, the cost of living is what they'll mention quickly. You've done some work recently or written recently around different views about what the most important issues are from country to country. And I think the economy is pretty standardly right at the top but New Zealand has a little bit of a difference perhaps to the rest of the world about what comes next.

[00:19:36] Dennis Wesselbaum:
It was very interesting to see the outcome of that survey. So it's a global survey, it has about a thousand people in each country and it was a very surprising thing. We were not surprised the economy to see first, you've talked about that but then in New Zealand the second most important topic was social issues. Discrimination, racism, poverty, inequality. And at a very high rate relative to every other country. Australia is a natural comparison for Kiwis and there it was rated way further down. They cared about housing affordability and even the environment more than New Zealanders did. So it was very surprising to see because this second highest impact in in people's minds was very different to the rest of the world in even Australia which is close geographically so that was very surprising to see.

[00:20:34] Grant Robertson:
Do you have a view on what might be driving that?

[00:20:38] Dennis Wesselbaum:
So, been looking into that a little bit more into detail. So it looks like there's quite a bit of variation between age, between income and gender. So it looks like women, compared to men, women tend to care more about the social issues, health care, whereas men cared more about the economy and work, so getting jobs, unemployment, these types of things. Then across age, younger people cared more about still economy, but work, jobs, and housing affordability. And then as we increase age, suddenly health care pops up, and then social issue, politics, government pops up. Income distribution, similar story. At the lower end of the income distribution, it's of course prices, but it's also work, housing affordability, food.

[00:21:28] Dennis Wesselbaum:
And then as you increase income, it becomes more healthcare, it becomes more social issues. So why and how that is different to the rest of the world? I don't yet have a good answer. I think it's an interesting research question, but I don't yet have a good answer.

[00:21:45] Grant Robertson:
I definitely do. I remember a few years ago, John Key, as a sort of centre-right politician, said that New Zealanders were inherently egalitarian and that his side of politics needed to understand that. And I wonder if there's a little bit of that sitting behind this, that there's an ethos of egalitarianism, which some might argue, given what you've just said, you can think about perhaps a little more as you get older and more comfortable in some ways. But I wonder if that's an interesting thing to investigate as to whether some of that sits behind us. Obviously in Australia, I mean, I think housing affordability has been a more acute issue immediately, but to me it's fascinating that there can be that big a difference between countries that are relatively similar, like New Zealand and Australia.

[00:22:32] Dennis Wesselbaum:
And on the flip side, the topics that are discussed in some parts of the media, immigration, crime, education, actually rank somewhere at the very bottom. So, you get also this disconnect between, you know, the global view and what maybe some parts people are talking about. So, yeah, what people really care about in New Zealand was economy and social issues. And I don't know within social issue what it is, it could be discrimination, it could be inequality, maybe two equal parts. But I do believe that you're right that Kiwis are more looking out for each other. And then the inequality, discrimination part becomes more relevant than maybe in other societies.

[00:23:18] Grant Robertson:
And it's interesting as you come to what is it that we are debating as we enter into a general election, and I think that's a really interesting point about what a media narrative might be alongside where people are. I know one of the things you would like New Zealanders to be talking about in an election is productivity. And I think it would be really interesting to hear from you why you think that's so important. You've kind of alluded to this already about, it's all very well to debate the outcomes of something, but what are the underlying issues? So maybe a quick definition of productivity and then why you think that's something New Zealanders should be talking about.

[00:23:54] Dennis Wesselbaum:
Yeah, it does feel like Groundhog Day, right? It feels like what year is it? We could have debated, had the same discussion 10, 20, 30 years ago. But in any case, so productivity, really think about it. You compare the stuff that we produce, goods and services, and you relate that to the inputs that we're putting in: labour, capital, knowledge, effort. And so that transmission is essentially productivity. And so it allows us, if productivity is higher, to afford higher wages, higher living standards. The government can have a higher tax income, so they can use that tax income to spend it on education, health care, safety, whatever you like. So that's the crucial bit of what is productivity and why is it important.

[00:24:41] Dennis Wesselbaum:
Now New Zealand has, as you're well aware, a long-standing problem with low productivity relative to other OECD countries. So at some point other countries kept growing at, like, two-ish percent, and New Zealand did a little bit of a bit of a nosedive. So that went down to one and a bit percent, and then went down to, like, point-something type of a percent. And it really matters. So in one of my classes, I think it was last week even, so I told students: by the year 2100, if you live in the US, at historical growth rates, you look at 800 percent more GDP. If you're in New Zealand, historical growth rates, you look at 200-ish percent more GDP. It's still better, but you see that the wedge is opening up. And that is a problem because it does not allow us to pay more wages, and we still, as we discussed, prices will still go up. And it doesn't allow the government to maybe invest as much as it would like to.

[00:25:47] Dennis Wesselbaum:
So it is much of the part of the problem that we're debating, inflation and other things that, that you had to deal with in your former life. And in this election at least there are policies that try to address it, but almost like as a side effect. You know, people, parties talk about infrastructure. They talk about trade, but they don't do the next step in saying, “We do that because we want to improve productivity.” It's probably not a very sexy topic, but it is the topic, the topic that matters.

[00:26:21] Grant Robertson:
But this is the point, because it underpins all of those things. And you mentioned, you know, what are—you know, we do about what are some of the things we could be focusing on? You're right about infrastructure, capital investment. The other area I often think under-discussed there is research, research innovation. And obviously New Zealand underspends on that relative to some of these other countries. So it's these sorts of topics, isn't it, that actually would underpin the economic growth that might solve some of the other problems?

[00:26:49] Dennis Wesselbaum:
Yeah I don't think that we can redistribute ourselves out of the out of the problem. And there is a fair point about how much inequality would we like to have and how much and how do we redistribute, that's fine, but at the same time we need to have a discussion about how do we get better in the long run. And that, as you point out, it's about capital, access to capital, foreign capital coming in, being more flexible, lower barriers to these types of things. And also then talking about how can we improve productivity, and one thing is tax credits for research and development. And that can kind of go into building that kind of productivity. Clusters is something that was tried in New Zealand in the 90s, I think, failed.

[00:27:38] Dennis Wesselbaum:
But we can revisit that. We have better communication technology, we have still better infrastructure. So maybe we can revisit that. If you wanted to have like an AI discussion in there, which everyone seems to be very keen on these days, how do we deal with that in the future? So some parties propose the universal basic income, right? That old chestnut. But there's alternatives to that. There's automation taxes. And I'm not saying that's the best solution, but it's a solution that we could at least debate. And I don't see that very much at all in the media so far.

[00:28:15] Grant Robertson:
Well, I really hope that even us raising this question of productivity starts it being discussed more and people might want in the election campaign to think about how they ask people about these kind of underlying issues. Dennis, our half hour has flown by but I want to say thank you very much for this. I think people's understanding of what economics is, is evolving and you're playing a really important role in helping explain it to people so thank you very much.

[00:28:41] Dennis Wesselbaum:
Thanks for having me.

[00:28:42] Grant Robertson:
Now, as we do at the end of all of these, we give the opportunity to our staff member here to say anything they want to the Vice-Chancellor. Um, and so this is your chance, Dennis to give us 30 seconds or so on whatever you think I should know as the Vice-Chancellor of the University.

[00:28:57] Dennis Wesselbaum:
Yeah, uh, putting me on the spot, right? That's, that's, that's fair enough. That's fair enough. Look, I—it's—I always think it's easy to criticise people who have to make decisions. And I actually want to get away from that, because as an economist, when I was criticising during Covid recession, it's always very easy to make these criticisms when you don't understand and when you're not responsible for the actions. So I don't actually have a big, like, “You need to do this, you should change that.” I think we're in a very difficult situation where the funding for the entire tertiary sector is constrained, that I think radically would have to change. So I think in what we are doing and what we can do, I think the university is moving in the right direction.

[00:29:46] Grant Robertson
I'll take that.

[00:29:47] Dennis Wesselbaum:
So I don't think that we need to be overly negative. I think Kierkegaard has said that life can be understood backward but has to be lived forward.

[00:29:58] Grant Robertson:
Love it. That's a great note on which to finish. Thank you so much Dennis and thank you for joining us on 30 with the VC. Please do join us again for another interview with a researcher and staff member at the University of Otago. Nō reira, tēnā koutou, tēnā koutou. Kia ora koutou katoa.