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Interview: Dr Pippa Malmgren, Former Presidential Advisor -

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EMMA ALBERICI, PRESENTER: Dr Pippa Malmgren is a former economic advisor to both President George W. Bush and Barack Obama and a one time deputy head of global strategy at UBS. She saw it coming.

She has written a book that challenges common assumptions about how we measure prosperity and shows us how to read other signals. She's in Australia for a series of talks and she joins me now in the studio.

Welcome.

DR PIPPA MALMGREN, FORMER UN PRESIDENTIAL ADVISOR: Thank you for having me.

EMMA ALBERICI: Your book Signals starts with the examination of 2007 and the fact that all the traditional signals, all the traditional measures didn't really give us a clue about what was on the horizon but you saw it coming and you sold the family home in May, 2007.

What were you looking at that other people weren't?

DR PIPPA MALMGREN: Well, the main thing is we go through life almost blind in one eye. Looking only at things through a mathematical lens. So if its data, we take it seriously.

But if it's just common sense, like I saw women's fashion with very bold patterns, I thought this is because the Chinese are belting out so much product and they're having to create these bold patterns to get you to buy one more piece of clothing. To me that was a big signal that there was overproduction and not enough demand. It wasn't a number that told me that. It was just by common sense looked at it.

EMMA ALBERICI: Intuition?

DR PIPPA MALMGREN: Yeah and I think it's a thing. You want a wholistic view. Keep your data and your quantitative analysis but the qualitative matters as well and open your eyes because today what we have are chief executives, business people, politicians, every day people who were totally surprised by Brexit, by the election of Trump. These things actually there were a lots of signals that they were coming and I think populism persists today. Anyway, my thought it hold it open.

EMMA ALBERICI: Give us some of the signals on that? Let's go to that. What were some of the signals you determined around Donald Trump's election, that were people were blind to otherwise?

DR PIPPA MALMGREN: Yeah, well first of all there are two Americas. There is coastal America which is what the world knows and likes and the middle of where all the action is but the rest of the world doesn't like the middle of the country. In the middle it was clear that they wanted someone who stood for much smaller government, less red tape, lower taxes.

And they would be willing to take that person in any form, including someone who is, let's say as tricky as the President is.

EMMA ALBERICI: And in many ways this was a layover from 2007, right?

DR PIPPA MALMGREN: Absolutely. And I think actually in Australia you have a similar phenomena. I've watched Pauline Hanson for some years and her popularity does seem to be gaining somewhat. It's a similar populist kind of movement by people who feel that they've been left behind somehow by the system. And interestingly, just like in the case of Trump, it's not people who are unemployed and uneducated, often it's educated employed people who just are resisting the centralisation of power on the coastlines or in the capital and want it pushed back to the local level.

EMMA ALBERICI: So we escaped the global financial crisis and you pointed to the fact there that you've been following our economy for some time and our politics. Are we at the moment at risk of hubris?

DR PIPPA MALMGREN: Well, I think the key thing is to understand Australia avoided the crisis but there's a price to pay and that is what I would call inflation. I know the central bank here says there's no inflation. They say the same thing in the US and the UK where I live but the one thing everybody talks about is the rising cost of living. The grocery bill is going up. Rent is going up. The rail fare is going up, but there's no inflation.

Well actually, the whole point of record low interest rates and all this money that got chucked into the world economy was to make asset prices rise. That means the stock market, that means house prices. So we can't be surprised that our cost of living is going up.

And yet, everybody is surprised. So this is a thing I think you could see coming. One way you can see it is what I call 'shrinkflation'. I notice in my last trip here, Tim Tams was just starting to announce they were going to make the cookies and the biscuits smaller. But you're going to be paying the same price as you used to pay. So your price per unit, or per weight is going up. That's an early sign inflation is making its way through the system.

EMMA ALBERICI: Is 'shrinkflation' a word you made up?

DR PIPPA MALMGREN: Yeah I did. It seems to be in wide use now which I'm delighted about because it means people are conscious of this.

EMMA ALBERICI: One of the issues that's most exercising the minds of, yes, economists, but definitely politicians in this country, is the rising gap, the inequality measure, the gap between the haves and have nots if you like.

We have now come to a position where the top three Australians have more wealth than the bottom one million. Is that just something that is the new normal? Or is there going to be a way that could be addressed?

DR PIPPA MALMGREN: I think it can be addressed. Now it's very much a function again of this business of chucking money at the economy. Because when asset prices go up, it means asset owners benefit and there are relatively fewer of them then everybody else. But I think there are ways to fix it. One of the ways I recommend in the book is something actually that Australia is better at than most countries and that is giving people vocational and practical skills, not just university education. And we're finding globally the demand for people with practical skills like welding metal, constructing things, has gone through the roof. In America we're paying the graduates of those schools more than the Harvard Business School graduates. And I think it's a good sign, we'll get more innovation. We'll get more creativity from that process.

I actually cofounded a manufacturing firm, we make commercial drones. I can find tonnes of young people who have high degrees in mathematics. They can't make anything fly in real life. What I need are people who know how to weld metal and construct stuff. So, that is one way we can start to fix this inequality gap. But I don't think there's enough of it going on.

EMMA ALBERICI: Now innovation and agility are buzz words that our Prime Minister, Malcolm Turnbull, has adopted. It's what he sees as the future for our economic prosperity. But a lot of people here grapple with the concept, what does it actually mean to them? You look at this in your book and I'm curious to know what are the most exciting developments that you're seeing on the horizon?

DR PIPPA MALMGREN: Well, I think we're in the next industrial revolution. The technological revolution that's under way is incredible. To give you an idea, the computing power in your telephone in your pocket is more than we used to have in a defence lab.

So you may not be able to use it or I may not be able to. I always say the 14-year-old in your house is probably the only one that can, but nonetheless it's there. So this is incredibly exciting and the degree of innovation is extraordinary. Also we see new policies coming out.

So one that's important for Australia is China's one belt, one road initiative, which is the biggest buildout of infrastructure, physical railway links, roads, ports and airport, globally.

Given that Australia's economy is so tied to China, it's important for Australia to go with China on this journey abroad. We have the longest railway journey that goes from eastern China to London now. So this is not a hypothetical maybe, this is real. So the question is, will this be China's salvation or will this bankrupt them? That's an open question. I personally think there's going to be a lot of wealth created in this process.

EMMA ALBERICI: Pippa Malmgren unfortunately we've run out of time. Thank you so much for joining us.

DR PIPPA MALMGREN: Thank you.