Forecasting Australian GDP II

In my last blog I questioned the projections published in the Federal budget documents. Interestingly the OECD has just released its own set of predictions.

The OECD predictions for 2009 and 2010 are -0.4 and 1.2 respectively. The budget projections for 2009/10 and 2010/11 are -0.5 and 2.25. The latest IMF GDP forecasts are –0.5 (2009) and 1.5 (2010). Evidently the budgeted projections are significantly larger than IMF and OECD predictions.

Once again, the real issue is, what impact will smaller growth rates (which are much more likely) have on the economy?

I am not aware of a detailed answer in existence, however smaller growth rates will mean the debt will be larger and around for longer.

Although the prediction periods differ slightly it does not invalidate the concerns outlined above.

Obesity and advertising

The Age reports that

Australia's fast food industry has agreed to a voluntary code to govern the way it markets products to children.

The code sets new nutrition standards for the foods featured in television advertisements, and other marketing efforts, which target the under-14s.

Seven fast food chains - including McDonald's and KFC - have signed up to the initiative, which will also dictate how they can interact with schools while requiring improved nutrition information disclosure to parents.

An article last year in the Journal of Law and Economics estimated the effects of television fast‐food restaurant advertising on children and adolescents with respect to being overweight in the United States. The paper reported that a ban on these advertisements would reduce the number of overweight children ages 3–11 in a fixed population by 18 percent and would reduce the number of overweight adolescents ages 12–18 by 14 percent.

The voluntary code is clearly less costly in welfare terms than an outright ban on advertising, as it does not impose significant welfare costs on those children and adolescents who consume fast food in moderation and may benefit from the provision of information. The report suggests that the code appears to apply to a range of "marketing efforts" (perhaps including radio and magazines?) and not simply television advertising, which is important given the potential for media substitution (although it could be argued that television advertising is relatively effective when it comes to youth consumption choices).

Quarantine and trust in public health authorities

Given the risk of quarantine detention in Singapore and China as a result of swine-flu fears, it is useful to consider the different attitudes towards quarantine across countries. A paper in Health Affairs in 2006 reports on a survey of residents of Hong Kong, Taiwan, Singapore, and the United States in relation to their attitudes towards compulsory quarantine during a public health emergency. Some interesting cross-country differences emerge, and may help to explain the different trade-offs that countries are currently making between public health and individual liberties. For example, as reported in the table below, trust in public health authorities is significantly higher in Singapore than in the United States, Hong Kong and Taiwan.



Isolation and quarantine during a pandemic raise important ethical issues, and need to be taken into account in the process of preparedness planning and policy formation. These issues do not appear to have been widely discussed in Australia.

The Sun Also Sets

Today's Sunday Age reports on the decline of Victoria's solarium industry

VICTORIA'S solarium industry is on the brink of collapse, with increased skin cancer fears and a crackdown on rogue operators sparking a 45 per cent drop in the number of tanning salons.

Government figures obtained by The Sunday Age show that 196 businesses have either closed or removed their sunbeds since State Government regulations were introduced in February last year.

Owners say customers started abandoning tanning salons following the public cancer battle of 26-year-old Clare Oliver, who died in September 2007 from melanoma she and her oncology team linked to solarium use.

Since the introduction of the laws, which ban children from using solariums and force operators to display health warnings or risk $1 million fines, the number of tanning salons across the state has plummeted from 436 to 240. But while cancer experts celebrate the news, the industry claims it is a victim of a scare campaign that saw solarium operators compared to heroin dealers...

"The whole Clare Oliver saga just scared a lot of people off. People were comparing us to heroin dealers … It's one thing to regulate, but another thing to wipe out an entire industry."

Is the dramatic decline in solarium use the result of the regulatory response to some supposed market failure in the solarium industry? Is it the response to new information regarding the adverse health effects of excessive solarium use? Or does it suggest that we are particularly open to influence from people who we like, which may in turn give rise to a dramatic shift in social norms?

Foreasting Australian Gross Domestic Product

For some weeks I have been growing increasingly sceptical of the projected GDP growth figures published in the Federal Government's Budget. They state consecutive annualised real GDP growth rates of 4.5%.

I remember Mr Swan claiming that these projections were "extremely realistic and conservative." I am also aware that some economists believe that these forecasts are as plausible as any other (though like all such forecasts, they are only ‘best guesses’).

I, however, am not so sure. The more I think of them, the more implausible and unrealistic they become. Consider the chart above, 11 times in the last 47 years real growth in GDP exceeded 4.5%. Only on 6 of these occasions were they consecutive. The last time we experienced consecutive annualised growth rates of 4.5+% was 1985. Before that, mid 1960s to 1970. Therefore recent history suggests these projections are very unlikely.

It is also important to understand the conditions under which these growths were experienced. In 1985 the Australian economy was being deregulated (for example in 1983 the exchange rate was floated) and union power was being curtailed (wages and income accord). These environmental factors are a lot different to what we are experiencing today. One may reasonably argue the current Government is moving in the exact opposite direction as the Hawk government.

This brings me to the real issue, what impact will smaller growth rates (which are much more likely) have on the economy?

Crowding out

Sinclair Davidson at Cattalaxyfiles provides a useful discussion and overview of the debate surrounding the crowding out implications of public debt.

Thinking more broadly, and casting our minds back to national income accounting identities (which are logically independent of whether or not, and to what degree, crowding out exists) a sudden increase in the public borrowing requirement will be funded by either an equal reduction (increase) in private sector borrowing (saving) or an increase in our current account deficit.

For Australia, much of the increase in public borrowing has, thus far, been matched by a softening in corporate and household borrowing growth. The key uncertainty over the year ahead is whether this change in the flow of private sector savings will continue, or whether our reliance on offshore savings will increase, pushing out our current account deficit.

Public broadcasting

After a exam marking induced month long blogging break, it's well and truly time for a post.

The recent controversy over The Chaser's "Make a Realistic Wish Foundation" skit on the ABC raises the issue of whether there is any economic rationale for public broadcasting. Public broadcasting could theoretically be justified on two grounds.

A. Missing markets. This is where society is willing to pay for certain programming, but markets fail to provide it, thereby undermining program diversity. Particular programs that attract a relatively small number of viewers with relatively high willingnesses to pay/intense preferences may not generate the number of "eyeballs" required by stations that wish to maximise audience size and associated advertising revenue. Of course, there are weaknesses associated with this argument. It assumes a low elasticity of substitution between free to air television and other distribution channels that generate tremendous information and entertainment diversity. Markets may also be unwilling to provide programs in cases where existing public broadcasts crowd out potential private broadcasts. Furthermore, if the marginal cost of public broadcasting exceed the marginal benefits to viewers, then there is no economic justification for such provision.

B. Externalities and merit goods. Programs that feature explicit violence may be a source of concern either because it may induce violence in viewers (thereby affecting individuals not involved in viewing or broadcasting the program), or simply because policy makers believe that preferences for violence programs should have no weight in the social welfare function. There may also be children's programing, or current affairs programing that have important spillover effects but are ignored by profit maximising commercial broadcasters. The extent to which these effects are in fact internalised by viewers themselves is a matter of debate. Regardless, these concerns can be addressed through regulation, rather than public ownership.

Are there any other economic grounds for public broadcasting?

Zero Growth, only just!

Yesterday the latest GDP figures were released. Interestingly, the last three quarterly growth rates sum to zero. If you use the original Sept 08 estimate their sum is -0.1.

Yesterday's release demonstrate why we should not rely solely on numbers. They also demonstrate why we shouldn't rely on arbitrary definitions. The debate as to whether we are in a recession or not is futile. Irrespective of the numbers and rules, unemployment is set to rise, businesses are struggling, confidence is down etc.

I believe, although we may not be technically in a recession, we are certainly in the midst of a recessionary environment.