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Transcript:

ANNOUNCER: This is Planet Money from NPR.

[COIN SPINNING]

ROBERT SMITH: The world is filled with smart ideas that can help all of us live better lives. And at Planet Money, we haven’t just talked about those ideas. We have followed the money around the world, crossing borders–

ERICA: Very nice to meet you. I’m Erica.

SPEAKER 1: From America.

ERICA: Erica from America.

ROBERT SMITH: –squeezing into the economy section of airplanes–

SPEAKER 2: How are your knees?

SPEAKER 3: If the guy in front of me were to put his seat back, I would be screwed.

ROBERT SMITH: –braving the waves of the high seas.

SPEAKER 4: Oh my god.

[INDISTINCT CHATTER]

SPEAKER 4: Oh. This is the worst boat ride I’ve ever been on in my entire life.

ROBERT SMITH: –all of this to meet the people trying to make it in the global economy, from CEOs to a drug dealer in the Netherlands.

SPEAKER 5: [NON-ENGLISH SPEECH] boys in the building. [NON-ENGLISH SPEECH]

ROBERT SMITH: This summer, pack a bag. Because this time, you’re coming along for the ride– seven continents, eight weeks, 1,000 insights.

[AIRPLANE SEATBELT CHIME]

[UPBEAT MUSIC]

[ENGINE ROARING]

ROBERT SMITH: Welcome back, everyone, to Planet Money Summer School World Tour, the international economics degree that fills your passport and your soul. I’m Robert Smith. This season on Summer School, we are spending our parents’ money on a semester abroad. We’ll hang out in cafes, learn a few exotic swear words, and, uh, we’ll study. We’ll study a bit. I mean, it is definitely not a vacation, Dad. Each Wednesday until Labor Day, we will jet to a different country and meet people like us, facing problems like the ones we face, but coming up with we could never have dreamed of. Then we’ll have our very own guide to the country teach us a few economic lessons we can carry back in our carry-on. This season, we’ll hit China, South Korea, Nigeria, Norway, Argentina, and a few more surprises.

[UPBEAT MUSIC]

ROBERT SMITH: But today, we start as far away as you can get from Planet Money headquarters– New Zealand and Australia. Our guide today is as Aussie as they get.

JUSTIN WOLFERS: Hello. I’m in the middle of breakfast, avocado toast with eggs. It’s amazing.

ROBERT SMITH: [LAUGHS] Justin Wolfers, economics professor at the University of Michigan and the host of the new YouTube channel and podcast Platypus Economics. I guess, as an Australian, koala economics was already taken.

WOLFERS: The truth is, Robert, I was not– ready? Wait for it– “koala-fied” to teach that one.

ROBERT SMITH: [GROANS] Oh, no. When you spend a semester abroad, you have to learn to appreciate the local humor, I guess. OK. Justin, as our first country guide, you can answer the big question for the entire series. Why spend time looking at how economics works in different countries?

WOLFERS: So the first thing that other countries are– I mean, apart from beautiful places with lovely people– is they’re laboratories. They’re places where other countries are trying different policies, different approaches. And we get to watch how they play out.

ROBERT SMITH: Which is interesting, right? The principles of economics are the same wherever we go, for every person, every community. But each country has different demographics, different leadership, different expectations. So who actually benefits from an economic exchange– say, a market– can be a political choice.

WOLFERS: Political and economic, which is markets do stuff, but ultimately, what a market does is all about the rules of the game. Let me give you an analogy for an American audience. American football’s a wonderful game. But if we got rid of the rules, it would be actually kind of a boring athletic spectacle. The rules of the game are what channel enterprise and skill and energy, either into something beautiful or into a horrific mess of blokes fighting with each other.

ROBERT SMITH: So using that metaphor, I guess today we’re looking at Australian rules economics, which is a cross between rugby and John Maynard Keynes in short shorts. After our break, our Aussie guide will show us an innovative market for the most important substance on Earth. We’ll tell you what it is after the break. And we’ll hear from a New Zealand jazz musician who also happened to figure out the way that the US uses to fight inflation.

[RELAXING MUSIC]

ROBERT SMITH: The Planet Money Summer School charter jet has just touched down in New South Wales, Australia. This is the location for our first case study, which is about water, the commodity that keeps all of us alive. Professor Justin Wolfers is with us. Before we hear our case study, what question should our students keep in mind?

WOLFERS: Look, so here’s the thing. Here’s how water is currently allocated without markets. It rains. That’s it. God decides, the weather, the pressure system. So there’s no way the weather is deciding to put the water where it’s needed most. So then the question is, if we want the water to go where it’s needed most, how would we solve this problem that nature is naturally giving it to us in the weirdest freaking places?

ROBERT SMITH: We will be back with Justin after the case study, which comes to us from a story on the Planet Money Indicator from back in 2021.

[AUDIO PLAYBACK]

STACEY VANEK SMITH: I’m Stacey Vanek Smith.

DARIAN WOODS: And I’m Darian Woods. And, Stacey, we are really digging into the economics of irrigation and droughts. So we wondered, what could we learn here in the US from the driest inhabited continent on Earth? And we thought, Australia.

CARLY MARRIOTT: Come on over. We’ll show you what not to do. [LAUGHS]

WOODS: This is Australian farmer Carly Marriott. She’s wearing a white woolly jumper, of course.

MARRIOTT: My husband and I, we run a sheep and cropping farm. We’ve got three little kids. And yeah, we spend most of our days either wrangling sheep or children or a combination of the two.

WOODS: Carly’s family have been able to farm in the Australian state of New South Wales for generations, thanks to her great-grandfather, actually, who was part of this massive project about a hundred years ago building huge irrigation lines drawn from Australia’s biggest river, the Murray River. It was built around the same time as developments on the Colorado River in the US, which is kind of the equivalent. These are both huge bodies of water that have dams and canals that keep farming going in what would otherwise be pretty drought-prone areas. And it works, until the droughts got worse.

STACEY VANEK SMITH: Now, if there’s not enough of something to go around, like water, a lot of economists will just say, put a price on it, right? Like, let the market decide where that water is best used. And that is what Australia has done. They have one of the most advanced water markets in the world, where anyone can buy and sell water.

WOODS: Carly Marriott, the sheep farmer, she can easily log on to a website on her phone.

MARRIOTT: It’s very exciting. [LAUGHS] So you just go into the Water Exchange.

WOODS: Got it.

MARRIOTT: And you say, yes. And here’s temporary water for sale.

STACEY VANEK SMITH: In Australia, it’s as easy to trade water as it is to use, like, an app like Venmo or Robinhood.

MARRIOTT: You could do it.

WOODS: I could do it. I could start trading– trading New South Wales water rights.

MARRIOTT: [LAUGHS] I’m sure you’re a good journalist, but you’d make more money–

[LAUGHTER]

MARRIOTT: You’d make far more money trading water.

WOODS: I got roasted, Stacey. The basic idea is this, though. The government sets aside water that it reckons can be sustainably taken from the dams. It puts that water on the open market for the taking to the highest bidder.

STACEY VANEK SMITH: And the economic intuition behind this is that it allows trades that make everyone better off. Like, say I have an apple orchard in the middle of a drought. And, Darian, you are a cotton farmer.

WOODS: I was born for this role.

STACEY VANEK SMITH: So if I don’t get enough water for the year, my apple trees will die. And it will take me six years to grow them back. Of course, I would be willing to pay a lot of money for that not to happen and to get a little extra water. And let’s say, Darian, that you have some extra water that I would like to buy, please.

WOODS: That is an intriguing offer, Stacey. OK. I’ll look up water prices on the app. And hmm, I see water prices are very high. The value of cotton I could grow this year is less than that. And unlike those apple trees, if my cotton dies this year, that’s OK. Like, no sweat. I can start again next season. So I think, well, this year it might make sense to sell that water to you, Stacey. And I won’t grow cotton for now.

STACEY VANEK SMITH: Thank you, Darian. Deal. The water has gone where it is best used, to me and my apples.

WOODS: And these kinds of trades, letting water go to its highest-value use, has been analyzed by Neal Hughes and his team at the Australian Bureau of Agricultural and Resource Economics and Sciences. Neal says that allowing different regions to trade water has meant huge economic gains. For example, in the Southern Basin Region, where much of the country’s farmland is–

NEAL HUGHES: Benefits are about 12% of the value of water rights, which is about $170 million a year.

WOODS: Basically, they modeled that water trading allowed an additional $117 million worth of stuff that could be grown. So you could think about that as, like, 12% more produce and meat and wool with the same amount of water. And Neal says that those benefits are even greater in the drought years, when getting water to its most-valued use matters the most. So these are all the benefits. But it has not been all hugs and rainbows, the way it’s actually happened, right? Is that fair to say?

HUGHES: Yeah, I think that’s right. So in 2019, there was a lot of bad press emerging around water markets. And a lot of that was because water prices were, you know, extremely high.

WOODS: Carly Marriott, the farmer, remembers this price spike well. She was thinking, at the time, she might grow some sheep feed over the summer. So she’d logged into the website, and there it was.

MARRIOTT: From $100 a megalitre to $1,000 a megalitre. And we just felt like, yeah, the rug had been pulled out from under our feet.

STACEY VANEK SMITH: And Carly started digging in to how the water market worked. And she was particularly frustrated that she was being offered really expensive water from people who were not even farmers themselves. This is the major difference between the US and Australia. Yes, the US has water markets, but they are generally tied to land. But in Australia, you do not need to own land to trade water.

WOODS: And when, say, each month, when water first onto the website?

MARRIOTT: Within an instant, you know, whatever the water availability becomes, these investors can swoop in and just buy up every possible megalitre and just hold it.

STACEY VANEK SMITH: Carly and her family got really riled up. They felt like these people were water flippers. So they helped organize a convoy to Australia’s city of Canberra.

[PROTESTERS SHOUTING]

MARRIOTT: We dragged our kids five hours in the middle of summer to protest. And we actually stormed– like, not America style, but we stormed to the front of parliament. And we were– we were shouting out.

SPEAKER 6: Littleproud!

MARRIOTT: Like, we were shouting the name of the water minister. And my three-year-old, she had the megaphone. And she was into him. She had it up. And you just think, is this what we’ve become? Like, we were just flat-out, you know, growing crops and chasing sheep. And here we are, you know, demanding to be heard and seen by the nation.

STACEY VANEK SMITH: This economic theory, the idea of just letting the markets decide, it was colliding with reality. Stories like Carly’s kickstarted the government into commissioning a massive review of the water market.

WOODS: Neal Hughes, the economist from earlier, he was very positive about the whole system. He said that having those outside investors was a good thing for the proper functioning of the market. It meant that those trades of water were likely to actually happen. If there aren’t that many people using the water-trading website, then farmers might just hold on to water that they don’t need.

STACEY VANEK SMITH: But that view is by no means the consensus in water policy circles. In fact, Carly’s concern that outsider investors are totally distorting the market is part of that debate.

WOODS: But putting aside that controversy, you know, coming out of that big report, it has basically three main lessons for water markets. Lesson number 1 is regulation. Water markets are serious markets. And according to this report, regulation should be just as vigilant as you would have in other industries, like finance. The same way that you might have rules around conflicts of interest or insider trading, you’d also, by that logic, need those rules in the water market. And lesson number 2 coming out of that report– make sure the rules reflect a rapidly-changing climate.

STACEY VANEK SMITH: And finally, lesson number 3– share information widely. At the moment, the institutional investors can be at an advantage with forecasts, models, and, like, really fast internet connections. If that information is better shared, there might be less of a sense of grievance from farmers working from a slow internet connection, who never signed up to be rapid day traders of water.

WOODS: Have you tried to beat them at their own game, sitting at the computer right on the dot of the hour?

MARRIOTT: We got better things to do. We grow grass when we can. We feed them grain when we can. We destock when it’s not viable. And we no longer have that security that our dads and grandfathers had a couple of generations ago.

[END PLAYBACK]

ROBERT SMITH: That Indicator episode from Stacey Vanek Smith and Darian Woods in 2021. Of course, we also have along a man who loves his markets, water and otherwise, Professor Justin Wolfers. Hey, Justin.

WOLFERS: Hey, Robert.

ROBERT SMITH: So let’s go back to a very basic question. What would happen in Australia if everyone just used the water that they needed? Their farmers, they know what they need to grow their crops. You want the crops. Let them just make the decision about what they need and pass on the water to someone else if they don’t need it.

WOLFERS: Hey, look, that sounds lovely. What a great idea. And in a world in which we had more than enough water, that would work. The problem is one of scarcity, which is, if the bloke upstream from me uses the water he needs, there’s less water left for me. And so if you don’t have a market, that bloke’s thinking, well, this water’s got no value to me, so I might as well use it all. So the bloke who’s upstream, he’s not only watering his crops, he’s having two or three showers, and he just bought a cold plunge as well.

ROBERT SMITH: In previous Summer Schools, we have gone over the economic term for this, which is tragedy of the commons. You should check your notes, students. And Australia’s chosen to tackle this problem with a sort of classic solution, a market. So, Justin, what is it about markets that can help combat scarcity?

WOLFERS: Right. So the question here is, what does a market do? Deep question. And what I tell my economics 101 students is, markets reallocate resources to their best possible uses. You’ve got a barrel of water. Who should get it? Well, I can offer you money. The bloke next to me can offer you money. Presumably, how much money I offer for it is in proportion to how valuable I would find it for helping my sheep or my crops. And so, therefore, if you’ve got water that’s not very valuable to you and it’s very valuable to me, then by allowing me to buy it from you, we are reallocating that resource to a better use.

ROBERT SMITH: But as we heard from the story, there were concerns about the fact that once you have a centralized market, like this, then anyone can walk in and trade water, even if they’re not farmers, even if they’re not in Australia. You can be part of this market. Is that a good thing? Does that help?

WOLFERS: So this is one of those things that feels bad in your bones, but I want you to–

ROBERT SMITH: Yeah, it does.

WOLFERS: –get past bones.

ROBERT SMITH: OK.

WOLFERS: So let’s say there’s some bloke in New York who’s got a fancy pinstripe suit and drives a Maserati, and he’s in this market. You start to feel really bad about it, right? Like, that guy’s a jerk. He doesn’t want good things for the world. There are times and ways and places where, actually, adding speculators to markets actually makes them more efficient. Because what’s that guy trying to do? They’re trying to buy when the price is low, and they’re trying to sell when the price is high. So at a time when there’s not much demand, they’re a little bit more demand. And at a time when there’s not much supply, they’re [INAUDIBLE] a little bit more supply. That’s a story in which speculators help. Now, I want to be clear, by the way, I can also tell you stories in which they don’t help. The part where it doesn’t work is, if this guy goes from driving a Maserati to driving two Maseratis, where did he get the money for the second Maserati from?

ROBERT SMITH: Excellent question. I assume the money comes, at some point, from the farmers. And maybe this is how a healthy amount of speculation can turn into a speculative bubble. At a certain point– economists always argue this– prices can become divorced from reality, and everyone’s trying to buy or sell based on who might come into the market– the greater fool theory as prices go up. It didn’t seem to happen in the Australian water market, but it does happen. It happened with the real-estate bubble in America in 2006.

WOLFERS: That’s a story for how speculators actually make the markets function less well.

ROBERT SMITH: So this is the thing about markets. They usually increase efficiency. But there are people who make money, and there are people who lose money. There are winners and losers in a market.

WOLFERS: It’s one of the deepest lessons in all of economics. Economic efficiency is saying the size of the pie got bigger. It’s not promising your slice got bigger. Economists defend efficiency by saying, well, look, when there’s a bigger pie, there exists a way of slicing it so everyone’s better off. But when it comes time to actually slice the pie, we never get around to doing that.

ROBERT SMITH: We actually talked a lot about that in last year’s Summer School, about government and government policy. Justin, if you don’t mind, I’m going to just throw a little assignment in here for our listeners at home. What is the scarce resource in your neighborhood or your state or your country? Mine is picnic tables in Prospect Park, near where I live– impossible to get. What is your scarce resource, and could a market be designed to help? Could you make that market more efficient? Could you grow the pie and slice it so that everyone gets more of that scarce thing? Let us know. Think about that as we take our break. And when we return, we will visit the islands of the Kiwis and hobbits and economists who figured out a clever way to fix one of the most vexing problems we face.

[RELAXING MUSIC]

ROBERT SMITH: It is just a short hop on the Summer School jet from Australia to Auckland, New Zealand. And our next case study is about an economic concept that strikes fear and hatred into people around the world. That concept is inflation, prices going up. People hate it. Economists in just about every country in the world worry about how to control inflation. And it turns out, the best tool for that comes from New Zealand. Justin Wolfers, our professor, what should we think about as we listen to this next case study?

WOLFERS: So there’s a weird economic theory that just turns out to be wildly powerful, which is that perception can create reality. Here’s the thing. If I believe that inflation’s going to be low, I’m going to walk into my shop, and I’m not going to raise my prices by very much. If I think inflation’s going to be high, then I raise my prices, and you raise your prices. And so the perception that inflation would be high creates the reality that inflation will be high.

ROBERT SMITH: I know you’re an economist, but when you talk about it this way, it sounds a little bit like magic and mass delusion.

WOLFERS: It is magic, but we call it multiple equilibria.

ROBERT SMITH: No, no, no, no, no, no. We cannot spoil it yet. We will define multiple equilibria after our second case study. It was hosted by Karen Duffin and Sarah Gonzalez in 2018.

[AUDIO PLAYBACK]

SARAH GONZALEZ: There’s this number. It’s probably the most important number in the world.

KAREN DUFFIN: This number determines how many people in the US have a job. It has wipe out our savings accounts.

GONZALEZ: This delicate, fussy little number is the inflation rate. A bunch of what the Federal Reserve does all day is try to get this number just right. And for the longest time, the Fed didn’t want us to know what number they were targeting.

DUFFIN: But on January 25, 2012, the then-Fed Chair Ben Bernanke told us.

BEN BERNANKE: The committee judges that inflation at the rate of 2%–

GONZALEZ: Ben Bernanke said the Fed had an explicit goal of keeping this powerful number at 2%.

DUFFIN: This was a huge shift in American economics.

GONZALEZ: But what we didn’t know at the time was that this big bombshell announcement was because one guy in New Zealand, decades earlier, had proven that sharing your economic secrets is a good thing. His name is Arthur Grimes.

DUFFIN: Arthur completely reimagined the role of central bankers, changed the way whole countries keep their economies stable. He is one of the most important economists in the world.

GONZALEZ: How do you think New Zealanders view you?

ARTHUR GRIMES: They’ve probably never heard of me. That’s fine. [LAUGHS]

GONZALEZ: Arthur used to be the chief economist at New Zealand’s central bank. He is a current professor of well-being. And he’s a jazz musician, a saxophone player.

GRIMES: Tenor saxophone, yeah. And actually, I’ve got a duo called “Duopoly.” You’d like that as an economist. The other guy’s got a PhD in economics too, so what else would we call it?

DUFFIN: For most of Arthur’s life, New Zealand had massive inflation, which meant prices were going up and everyone’s money was losing value. This can happen when there’s too much money floating around an economy and everyone tries to spend it on not enough stuff. And the government had tried everything to lower inflation for nearly two decades.

GONZALEZ: There were carless days, days the government didn’t let you drive your car, to try to stop gas prices from going up. There was a time the government banned businesses from raising prices for a year.

DUFFIN: And finally, they turned to Arthur. They say, you’re a smart economist. You go find a way to fix this. Go see what other countries do. And around 1985, 1986, they sent Arthur on a trip around the world.

GRIMES: When you’re in a small country that’s on the other side of the world from virtually everywhere, it’s just natural for us to actually see, what do other people do? You know, how do other people do these things?

GONZALEZ: Arthur meets with a bunch of smart people in the US, the UK, Germany, Canada. They all have different methods for controlling inflation.

DUFFIN: Some central banks have a monetary supply target, which just means they’re capping how much money is printed every year. Others have an employment target, like, what’s the perfect amount of people with jobs for the healthiest economy? And some have an interest rate target. They’re trying to pin down, what’s the right interest rate for loans?

GONZALEZ: But all these targets were aimed at keeping inflation low. So Arthur thinks, why not just cut to the chase?

GRIMES: Let’s target the ultimate goal, which is inflation. It became inflation targeting.

DUFFIN: Inflation targeting– set an ideal level of inflation and drive the economy toward that. It took the central bank three years to develop this whole new system.

GONZALEZ: But people had talked about inflation targeting before, right?

GRIMES: No, not at all. No. No, not at all. No, no, no. It was only after New Zealand had done it that that term was actually invented.

GONZALEZ: You invented inflation targeting?

GRIMES: There was no such thing as inflation targeting at the time.

GONZALEZ: So the government says, OK, central bank, give us a number so we can hold you accountable. Inflation is at 9% right now. What should we shoot for?

DUFFIN: Arthur says, I’m not going to give you a number. I will give you a range.

GRIMES: 0% to 2% by ’92.

GONZALEZ: 0% to 2% by ’92.

GRIMES: Yeah. That sounds good, doesn’t it?

[LAUGHTER]

GONZALEZ: 0% to 2% inflation by 1992. This was the target.

DUFFIN: Here’s the thinking behind this, aside from it being catchy. If you have 0% inflation, that is true, absolute price stability. The price of carrots, sugar, your rent– it never changes.

GONZALEZ: If you have 1% inflation, that means that the price of carrots goes up by 1%. But you’re not skipping meals over this. You just buy turnips instead of carrots now. 1% inflation doesn’t affect your well-being. So economists in New Zealand consider 1% inflation kind of like neutral inflation.

DUFFIN: And then Arthur thinks, we need some wiggle room. And so he says, let’s give ourselves plus or minus 1%. So that’s how they got 0% to 2%. But they knew that reaching this target would be much easier said than done.

GRIMES: None of us in our lifetimes, almost, had experienced 2% inflation. We’d all been brought up with double-digit inflation, you know. It was considered extremely difficult to get to 2%.

GONZALEZ: New Zealand was going to dramatically force inflation down from 9% to under 2%.

DUFFIN: And having low inflation, like 2%, that’s good. But the process of bringing it down, that hurts people. It is a painful process.

GONZALEZ: And if they were going to meet their target, they needed someone who could say, I don’t care what happens to people. We’re doing this, and we’re not looking back.

DUFFIN: They chose a guy appropriately named Don Brash.

DON BRASH: Yep, Don here.

GONZALEZ: This is Don Brash.

BRASH: I had to portray myself as someone who didn’t give a fig.

GONZALEZ: You had to present yourself as someone who didn’t give a fig?

BRASH: Yeah. Yeah. That’s what I said. Yeah. There’s probably an American expression which is more vulgar than you want to include.

DUFFIN: Don’s job was to force the inflation rate down. He did it by restricting how much money regular banks had in their vaults, which affects how much money everyone has.

GONZALEZ: That was the easy part. He literally just had to snap to make it happen.

DUFFIN: But that easy thing would cause a huge spike in unemployment.

GONZALEZ: At the time, inflation was really high, so people needed high wage increases just to break even. And Don is telling people, those wage increases you need, they’re going to make unemployment last longer.

DUFFIN: But you can help shorten this pain if you just believe me. Have a little faith.

GONZALEZ: Start acting like inflation is already at 2%, and we will get to 2% much faster.

DUFFIN: He was basically New Zealand’s Smokey the Bear. Only you can prevent long-term unemployment.

GONZALEZ: So you were going around New Zealand telling workers, listen, I know that inflation is almost 6% right now, but trust me, I’m going to bring it down, so just don’t ask for a 6% wage increase in your salary. That’s what you’re doing?

BRASH: That’s roughly what I’m doing.

GONZALEZ: And then you’re also going to businesses and saying, businesses, we know the inflation rate is almost 6%, but we’re going to bring it down, so just don’t charge more for your goods.

BRASH: That’s right. That’s right.

DUFFIN: But nobody believes him. Employees keep asking for high raises, even though, technically, they don’t need them anymore. And companies are continuing to give them because the employees are demanding them. And so companies now cannot afford to pay everyone at such high rates. So they lay people off. And then they lay more people off.

GONZALEZ: Unemployment goes up past 11%. One in nine people who wanted to work couldn’t.

BRASH: Well, it didn’t look good at all. And I make no apology for that. It looked very bad. And I was as concerned about it as anybody else, believe it or not. I mean, you’d have to be an awful, miserable so-and-so not to care.

GONZALEZ: Don was supposed to get inflation between 0% and 2% by 1992.

BRASH: And, sure enough, we achieved it, not only by ’92. We actually achieved it by ’91, which was a little earlier than planned. And there were people who said, look, by getting there early, you have subjected the real economy to more pressure than you needed to do. And there was some truth on that.

GONZALEZ: How did people feel about you in New Zealand?

BRASH: [LAUGHS] Well, well, it varied greatly, depending on who you were talking to.

GONZALEZ: Mm, no, people hated him. Even though inflation went down, unemployment was still high, and it stayed high for years. But he did lower inflation in this new way that no one ever had before. And, yes, there were still problems, but economists understood the logic behind inflation targeting.

DUFFIN: And the world’s biggest economies, they start following in this tiny country’s footsteps. They announce inflation targets of their own– Canada first, the UK, then Australia.

GONZALEZ: They all chose different ranges. And they all told their citizens, just like Don did.

DUFFIN: New Zealand? Their original was 0% to 2%, and they quickly raised it to 0% to 3%. And now the target is 1% to 3%.

GONZALEZ: But remember Arthur Grimes, the jazz musician econ PhD who invented inflation targeting? He likes the original 2% target.

GRIMES: No, I like under 2%. That’s where we started, after all. Yeah.

GONZALEZ: This is Arthur’s jazz duo. Planet Money listeners, “Duopoly.”

GONZALEZ: [SINGING, SAX PLAYING] I just want someone that I can talk to

GONZALEZ: I want you just the way you are

GONZALEZ: He wants inflation rates–

BOTH: –just the way they are.

[LAUGHTER]

[JAZZ MUSIC]

[END PLAYBACK]

ROBERT SMITH: That was the mellow tones of Sarah Gonzalez and Karen Duffin here on Planet Summer School After Dark.

[RELAXING MUSIC]

ROBERT SMITH: The inflation rate right now in the United States is 4.2%. 4.2%, yes. That is double what the target is. Where’s Don Brash when you need him. Our Aussie economist is back after the break to reveal the secrets of the New Zealand inflation magic trick.

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ROBERT SMITH: All right, everyone, eyes up, phones put away. Our economist, Justin Wolfers, is back at the blackboard for his final lesson. Justin, you said, before the case study, that perception can create reality. And then the case study showed it actually working in New Zealand and in other countries around the globe. How exactly does the magic trick work?

WOLFERS: Great. Let me answer in a completely uninterpretable way. The magic is multiple equilibria. Just say that at your next dinner party. But let me rewind and explain what I mean. Equilibria is just stuff that might happen. And multiple is, many things might happen. So what are the different things that might happen? Let me tell you a story about a virtuous cycle. If Don Brash has convinced me that inflation’s going to be very low next year, then I’m going to think to myself, well, the cost of my inputs isn’t going to rise much, and my competitors aren’t going to raise their prices much. So I probably shouldn’t raise my prices much either.

ROBERT SMITH: No. I’d be a jerk.

WOLFERS: Not just a jerk– I’d lose a lot of money. And, Robert, you’re going to go through the same process, and you’re not going to raise your prices very much either. And because we’re talking about the New Zealand economy, having two suppliers, that’s basically the whole economy. There’s a little Aussie joke there.

ROBERT SMITH: [LAUGHS]

WOLFERS: So what we get there is, the expectation of low inflation creates the reality of low inflation. That’s a virtuous cycle– magic. Let me tell you something terrible. What used to happen in New Zealand is, people thought inflation next year would be high. So I thought that my competitors would raise their prices. So therefore, I thought the best move for me– not to be a jerk, not to be a nice guy, to make profits– would be also to raise my prices in lockstep. The expectation of higher prices and, therefore, higher inflation created the reality of higher prices and higher inflation. That’s a vicious cycle. That’s the thing about multiple equilibria. It just means many things could happen. And what you try and do is you get everyone to believe one of them is going to happen. Heck, if we’re going to get people to believe one of them’s going to happen, let’s get them to believe in the virtuous cycle. Hey, guess what? Everyone else is going to the virtuous cycle. You’d be a goose not to join us. And that’s the miracle of how you can reduce inflation without having to have a recession.

ROBERT SMITH: But in order to get this miracle, you need at least two things. You need credibility. When the phone rings, you need to trust the person on the other end of the line. And you need transparency, which is, everyone needs to know this credible information.

WOLFERS: Yeah. You’re a really good economist.

ROBERT SMITH: I should run– I should run a small country’s central bank–

WOLFERS: But this actually–

ROBERT SMITH: –just a small one.

WOLFERS: –helps explain– there’s a whole lot of rhetoric– Ben Bernanke was really big on this. He would talk for transparency, transparency, and transparency. And you might have thought that was some sort of good government, pro-democratic sort of a thing. But you know economists better than that. It’s that we think it’s effective.

ROBERT SMITH: Justin, this season, on Planet Money Summer School, we are going to ask all of our guest economists for one idea that we can take from our featured country that would improve life here in the United States. New Zealand– thank you– obviously gave us the 2% inflation target. They’re covered. But what trick should we adopt from Australia?

WOLFERS: In Australia, our elections are held on a Saturday, so the boss can’t influence whether you vote or not. By the way, they’re always held– the local school will hold a barbecue so you can get what we call a democracy sausage. So you’re doing your bit, and you’re also having a good feed.

ROBERT SMITH: Wait, a literal sausage you can buy?

WOLFERS: A delicious sausage on a piece of white bread with tomato sauce, which Americans call ketchup, and onions. And it nourishes the soul as well as the democracy. And I believe, in my shoes, in my teeth, in every part of me, that Australia is one of the world’s more perfect democracies. And I say this not as a democratic theorist, but as an economist who believes that that’s what gives us the ability to respond cohesively, clearly, quickly to the global financial crisis, to the next pandemic, to the rise of inequality, and all of the sorts of problems that bedevil us.

ROBERT SMITH: And I guess the sausage is just a delicious bonus. Speaking of bonuses, we do offer a diploma at the end of this semester of international economics, but our students will have to pass an online test. Justin, to help them study, let’s go over some of the vocabulary words we have featured today. The most basic one should be easy. What is a market?

WOLFERS: A gathering of buyers and sellers.

ROBERT SMITH: Very good. OK. I’m going to give you a harder one to pull off. Multiple equilibria– do it in 20 seconds.

WOLFERS: Love this. I’ll give you 10 seconds back at the end. Equilibrium is just something that could happen. Multiple is many of them. Many different things could happen.

ROBERT SMITH: Well, it sounds simple when you say it that way.

WOLFERS: But it’s a blindingly important insight, because if many different things could happen, then economic policy can move us from the bad one to the good one.

ROBERT SMITH: In the case study, we saw the importance of transparency, the central bank telling everyone what they were going to do. And even more important was credibility. What is your definition of credibility?

WOLFERS: Yeah. So unfortunately, you’re talking to someone who has none. But a good central banker has credibility, which is, when they say something, you believe them. So it’s the ability to move to a world in which words matter.

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ROBERT SMITH: Justin Wolfers, professor at the University of Michigan and the creator of Platypus Economics, which has some really fun videos. You can find them on YouTube. Planet Money listeners will love them. Thanks, Justin.

WOLFERS: Been a great joy, mate.

ROBERT SMITH: So if you like Summer School, may I recommend the Planet Money book? Oh, have we mentioned that before? Here’s a specific idea. Chapter 18 is called, “Why Is My Money Worth Less Every Year?” Excellent question. And also, while you’re on these long flights for Summer School, how about the Planet Money audiobook? It’s been named one of the best audiobooks of 2026 so far, according to Spotify. So we’re really proud of how it turned out. You can check it out on Spotify or wherever else you get your audiobooks. Summer School’s produced by Sophia Paliza-Carre and edited by Alex Goldmark. It’s fact checked by Sierra Juarez. The show is engineered by Annlie Huang with help from Robert Rodriguez. I’m Robert Smith. When I’m not summer schooling, I’m also the host of the new podcast Business History, a show about the history of business. This is NPR. Thanks for listening.

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