Copywrong

Geraldine informed her listeners today that Mickey Mouse turns 74 this month. His debut was in a cartoon entitled "Steamboat Willie" on November 18 1928.

This means that next year he turns 75 and the Disney Corporation will no longer own the copyright for his distinctive image. Or it wouldn't have had it not been successful in persuading California congressman Sony Bono to introduce the Copyright Term Extension Act which blows the term out to 95 years. Mickey will now not be forced to leave home until he is 95 in 2003. The same for Donald who was due to enter the public domain in 2009. Disney will now continue to own his image until the year 2029. Bono and other legislators had support ass they drew up the Bill. Disney is reported to have spent $US 6.3 million in campaign donations in the leading up to the Act's proclamation.

Of course it affects everything. Documents and artistic works from the war which were about to become publicly available now won't for another 20 years. Unless of course Disney gets the copyright term extended again. And there's every reason to believe that it will. Sony Bono's widow Mary who now has his seat in Congress has foreshadowed extending the term of copyright again and again until it lasts "forever less one day".

Disney which itself has plundered the public domain for material (Cinderella Pinocchio, Alice in Wonderland, Snow White, The Jungle Book" etc) appears to want to make sure that it never has to give back to it...

To paraphrase Paul Keating (about tax) people who drink from the well should not complain about attempts to fill it."

And so there's a legal challenge before the US Supreme Court right now.

The US constitution says the Congress shall have the power "To promote the Progress of Science and useful Arts, by securing for limited times to authors and Inventors the exclusive right to their respective writings and discoveries."

The challenge asks how extending a term of copyright protection for a work already created can promote the progress of science and useful arts.

And anyway 95 years of exclusive rights seems a bit longer than is necessary to encourage people to draw cartoons. The US term of copyright used to be fourteen years. It's been extended eleven times since then, many of the extensions just as Mickey Mouse was about to enter the public domain. But Disney has continued to draw cartoons every step along the way.

Drug companies get by with patents of 14-15 years - and Australia's own Productivity Commission thinks that's too much.

Personally I am not sure copyright "protection" is needed at all. The internet (and blog sites) demonstrate that people are willing to create art and contribute ideas without the need for payment.

Elton John is unlikely to stop writing music just because he isn't given about 100 years in which to exclusively profit from it. It think one year would do him.

My Dad told me that many true inventors refused to have their inventions patented, believing that they belonged to the people.

Okay so my view is extreme and utopian. But what about the view attributed to the American Association of Publishers about Libraries. Libraries allow people to read books for free and so are apparently similar to "terrorist organisations" opposed to the basic principles of the US system.

My eldest daughter admires Walt Disney. She would like to emulate him. If the challenge to the Son Bono Act fails she is unlikely to ever be able to do so. The term of copyright will be extended and extended again way beyond the human lifespan leaving virtually nothing in the public domain to comment on or improve upon without falling foul of a lawsuit.

UPDATE January 17 2003 The constitutional challenge failed. Details here.

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Any complaints?

I am not a real blogger. I talk on the radio Monday mornings and (these days) take forever to blog what I have just said. When I started bogging I would go straight into the studio next door to Geraldine's and blog what I had meant to say within minutes of not quite saying it. Recently I have waited up to a week.

So here goes, to catch up.

LAST Monday 18 November I spoke with Geraldine about what happens when you try to complain.

When you see a fire and you report it, you expect the Fire Brigade to investigate. But that wouldn't be a wise expectation when you report something to the Australian Prudential Regulation Authority, the Australian Securities and
Investments Commission, the Australian Competition and Consumer Commission, or the Australian Tax Office.

The Palmer Report into APRA's conduct in the lead up to the collapse of HIH Insurance discloses an amazing mindset. "A company could not be considered to be in breach of the solvency standard until it had reported a breach in its returns." When HIH did fall below minimum solvency standards "no action was taken but to hope that it traded out of it." When in July 2000 APRA received an anonymous document that was a "road map" to HIH's troubles it warned its likely author that he was leaving himself open to legal action. HIH supervisors concluded that the comments should be treated with caution because they came from a disgruntled employee. Palmer appears to have been astounded.

APRA's attitude was partly cultural, the "London tea and bickies" approach in the words of APRA Board member Alan Cameron, and partly caused by very limited resources, according to Palmer. Only four people were supervising HIH and more than one-hundred other similar institutions, the man initially given hands-on responsibility for HIH was 24-years old with no general insurance experience.

So what?

Firstly APRA and its predecessor the Insurance and Superannuation Commission liked to give the impression that they were keeping our money safe. Some of us may have taken out insurance or extra supervision because we believed that they did.

And secondly APRA is not alone in, shall we say, a "selective" approach to complaints...

I quoted from annual reports that reveal that ASIC routinely investigates 2 to 3 per cent of the seven to eight thousand complaints it receives each year. It makes some contact with the complained about party in fifty per cent of the cases, and forty per cent of the complaints are merely "analysed, assessed and recorded."

Its lack of checking extends to prospectuses. Last year it inspected only 237 of the 913 prospectuses lodged with it. Not that the prospectuses lodged with it are squeaky clean. It had to issue stop orders for 67 of the 237 prospectuses it did examine.

The ACCC received 51,000 complaints last year. It investigated just 4,000 of them.

The copper isn't routinely on the beat.

The Tax Office copper no longer reveals in its annual reports the number of returns it selects for auditing.

The last time it did, in 1996 the number was -- 5,121.

Which isn't very many, in a nation the size of Australia.

Not that our tax returns are squeaky clean. No matter how many returns the Tax Office audits it seems the proportion that need correcting is about 70 per cent.

The last Budget gave the Tax Office an extra one billion dollars to start auditing again and the accounting profession is having kittens. They had grown so used to getting away with mistakes they'd forgotten that the act has grown just about too complex to apply, or so argues tax lawyer Michael Inglis in this and other brilliant pieces.

The Tax Office and its brethren bodies defend what they are doing by talking about "meta risk management". It is quite an interesting idea, but a bit like fighting the Taliban with technology and no troops or intelligence gatherers on the ground. And we know where that leads.

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Meaning

It may be as important to us as happiness.

After talking about happiness on Life Matters earlier this year, this week I returned to the subject and asked in the phrase made famous by Peggy Lee: is that all there is?

Our other big need appears to be meaning in what we do. We get it by having an identity and being true to that identity, or at least that is the persuasive argument made by two academics from the University of Connecticut.

Often the identity comes from religion. How else to explain the actions of people who don't eat or drink anything from dusk to dawn during Ramadan, or of people who don't eat pork without ever having tasted it, or of suicide bombers.

"They only do it in the pursuit of happiness" is an unsatisfying explanation. A better explanation is that most of the time people do such things in pursuit of meaning.

This means that changes in prices are likely to have very little effect on certain sorts of behaviours. I haven't eaten meat since I was 15 or 16 years old. A cut in the price of meat is unlikely to tempt me. A cut in the price of alternative leisure activities is unlikely to tempt a would-be suicide bomber.

And there are more issues raised in the paper. Traditional microeconomic analysis assumes that all our tastes are pretty much the same. (So much for classical economics celebrating the individual) Our behaviour is determined by our income and by relative prices.

The new approach recognises that different people have different tastes, and create different tastes as part of creating an identity. It means that behaviour is determined not only by changes in income and relative prices but also by who we are and who we have decided to be.

If taken on board it'd make economic modelling much more complicated (perhaps unnecessarily so).

But how else can we take seriously the actions of someone who won't eat or even drink water from dawn to dusk?

Worth a read.

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Unpalatable as it is, we need a bond market

I spoke about the threatened demise of the Bond Market on Life Matters on Monday, which is where you will find several good references.

I am philosophically inclined to agree with Alex Erskine who refers to bond traders as "basket weavers and candlestick makers" who almost deserve the same fate as they've been prescribing for others workers made redundant by the progress of technology and new work practices.

If they weren't so arrogant (arrogant as a bunch - a few individuals in the bond market are humble) it'd be easier to feel sorry for them.

BUT the more I thought about this preparing for Life Matters the more I realised that, unpalatable as it is, we need a bond market.

And more. We need, yes we really need, the government to invest for the sake of it, and to borrow to raise the money.

Nicholas Gruen of Lateral Economics makes the point in a paper not on the net, although a dot-point version of it is.

He says for the Australian Government, as for any organisation, there is an optimal level of debt and an optimal level of funds invested. These should be decided quite separately from the question of whether or not the government should own a phone company.

Given the government's long-term investment horizon it makes sense to borrow at around 5 per cent and invest for an average return over the longer term of 10 per cent. Who wouldn't?

More importantly: there can be big benefits to the wider economy from the government doing so.

Buy buying Australian stocks when they are cheap and selling when they look pricey (an sensible practice) the government can deepen and smooth out volatility in the Australian stock market.

This is what the Reserve Bank of Australia does in the Australian Foreign Exchange market.

To the extent that the arms-length government investor put funds into the Australian stock market it would also would be helping to raise equity prices closer to their true value, reducing the debt-equity premium.

Everyone wins? That's how it looks.

I can see no good reason why the government should deny itself the right to invest and deny itself the right to raise funds. Indeed, it seems to me that the business of government is too important to deny it these rights.

What if a real crisis arises and the government suddenly needs to borrow - without a bond market it would find it hard. Australian might well regret the boldness of the brash Australian Treasurer who paid off his debts.

Update: Nicholas Gruen's paper IS on the web - here.

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Deflation

This week on Life Matters with Geraldine Doogue I discussed deflation, as I had on The Business Show on SBS TV on Sunday.

If you haven't thought much about deflation, that's okay. Many Australians hadn't thought much about inflation back at the start of the 1970's. They needed to be convinced that it could be a problem. That's the sort of situation we are in now with deflation. It is happening. Price indexes are falling in China, Japan, Singapore, Hong Kong and Taiwan. They are on the edge of falling in Europe, and may soon fall in the United States. But is it a problem?

Japan's problems are well known - but there's more than deflation involved. The argument is that falling prices encourage consumers to put off spending in the expectation that prices will fall further, which encourages producers to cut prices to try to sell goods. And so on. Also loans become harder, not easier, to repay over time, forcing investors to sell assets, which pushes down the value of houses etc. in another downward spiral.

Well, that's the argument. On Life Matters and on the Business Show I asked whether deflation was really that bad, just as skeptics asked the same about inflation in the early 1970's. The answer may be that it is a question of degree. Mild inflation (two or three per cent) probably doesn't encourage consumers to bring forward spending, just as mild deflation probably doesn't encourage them to postpone it. As the macroeconomist Barry Hughes asked me: If you save $200 on the price of a $20,000 car by delaying buying for a year, would you do it?

And the downward asset price spiral caused by the inability to pay off loans is probably unlikely to take hold while interest rates are falling.

Which brings us to the real fear about deflation - seen in Japan, that it'll be impossible to get out of by cutting interest rates. In Japan they are already at zero.

The US Fed has studied what happened in Japan and it finds that there's a fundamental asymmetry in the management of prices. Interest rates can always be pushed high enough to kill inflation, but they can't necessarily be pushed low enough to kill deflation. Therefore it says central banks should err on the side of caution when deflation is a possibility. It's better to have prices moving up too much than it is to have prices moving down too much. You can always correct inflation. You can't always correct deflation. It is a message Australia's Reserve Bank is probably taking on board.

So, does Australia need to worry? Our CPI looks healthy - it is moving up at the rate of 3.2 per cent a year, but within that, the price of goods is scarcely moving at all. The price index for private sector goods moved up only 0.1 per cent in the September quarter. And this after three years in which our dollar has devalued against the US by about 30 per cent. So deflation is clearly knocking on our door. But against that most of what we do in Australia is not particularly affected by the price of manufactured goods. Australia specialises in mining, agriculture and services. We may be one of the last countries in the world to succumb to worldwide deflation should it take hold. Although we would certainly be affected by any worldwide recession that resulted.

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The limits to economics.

On Life Matters with Geraldine Doogue last week I discussed what the Bali tragedy and others like it tell us about the limits to economics and pricing.

After September 11 last year Allianz Insurance specifically excluded from its travel insurance policies cover for consequences of acts of terrorism.

Yet as soon as an act of terrorism took place that exactly fitted the criteria for exclusion, Allianz waived the exclusion.

Many Australian travelers to Bali chose not to take out travel insurance, knowing that their cost of travel back home would not be covered if something went wrong.

And yet within hours of the Bali tragedy the Australian government said it would help out anyone who wasn't insured.

Which might make you wonder whether there is any point in treating the wording on insurance policies seriously...

I am told (perhaps unreliably) that the first-class tickets for passengers on the Titanic entitled them to guaranteed access to lifeboats. Not so for the third-class tickets.

And yet when tragedy struck the clearly-defined rules fell apart.

Tragedy shows up the limits to economics and pricing.

As do religious matters. In 1990 Clive Hamilton headed research at the Resource Assessment Commission. He attempted to put a financial value on the worth of preserving Coronation Hill at Kakadu. He used to ascertain how much money Australians would be prepared to pay to have Coronation Hill not mined. He told me later that he lost his faith in such surveys when he asked himself how it would sound if he asked the same questions to an aboriginal people with spiritual ties to the land. Even to ask the questions would be offensive, and would degrade the religious attachment it was attempting to measure.

That's the concept I dealt with on Life Matters, quoting from a paper entitled Taboo Tradeoffs: Reactions to Transactions that Transgress the Spheres of Justice.

The Abstract says:

"Taboo trade-offs violate deeply held normative intuitions about the integrity, even sanctity, of certain relationships and the moral-political values underlying those relationships. For instance, if asked to estimate the monetary worth of one's children, of one's loyalty to one's country, or of acts of friendship, people find the questions more than merely confusing or cognitively intractable: they find such questions themselves morally offensive."

God, life and death, and love appear to be among the entities that pricing is not only bad at handling, but to which it can do enormous damage.

The authors Fiske and Tetlock attempt to explain why this is, and suggest ways how, in the absence of prices, we can rationally make the tradeoffs that we have to between say, mining and god, or prices and life.

I agree with them that prices are useless and actually cause damage in many circumstances, I think their explanations of why this should be the case are reasonable, but I find their suggested solution unsatisfying. Having said that, I can't think of a solution at all. How can you trade off apples and oranges if you can't use prices?

Worth a read.

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More (maybe less) happiness

Returning to happiness once more (it is after all a research area of one of the winners of this year's Nobel Prize for Economics), Don posts this interesting comment:

"A lot of people have seized on this research because they like the conclusions it seems to lead to - things like wealth and income redistribution, direct job creation and high taxes on luxuries.

These people ought to stop and think.

Try these thought experiments:

1. A neuro-psychologist invents a therapy which she guarantees will instantly resolve feelings of bitterness and injustice and induce long lasting feelings of contentment and well being. She suggests administering it to Indigenous land rights campaigners and members of the stolen generation. If it makes everyone happier then what's the problem?

2. Imagine that new research demonstrates that people who are poor in relative terms are only unhappy because they know that others are better off. This leads to contentment sapping cognitions of unfairness. Should we improve their level of happiness by banning media portrayals of wealth? Could we improve their standard of psychological well being by segregating poor people so that wealth disparities are concealed from them?

3. Imagine that researchers discover that some people are using opera, classical music, and listening to Radio National as positional goods ('cultural capital'). They choose these things in order to set themselves apart from ordinary folks who prefer things like action movies, Kylie Minogue, and Alan Jones. Should we abolish government subsidies to opera, orchestras, and Radio National?

Could it be that there's more to life than being happy?"

My response: A very good point.

I said (on ABC Radio National) some years ago that the ultimate goal of life had to be more to life than merely happiness.

Otherwise we would all take a happiness drug or connect ourselves to electrodes that stimulated the happiness parts of our brains.

We need struggle, we need to be unsatisfied, we need stress in order to make life truly rich.

As I say to my daughter, stress, even anguish is like salt. We need some, but not too much in order to make life truly taste good.

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The Nobel Prize for Economics

That was my topic of conversation with Geraldine Doogue on Monday.

The most interesting winner isn't even an economist. He is the psychologist Daniel Kahnerman. The most interesting thing I have read about him is in this article by Jason Zweig in the US magazine Money in May 2001.

"Kahneman was born in Tel Aviv in 1934, but his French parents returned home to Paris when he was three months old. Six years later, as Kahneman was finishing first grade, the Nazis invaded France, and his family was forced to wear the yellow star that marked Jews for deportation to the death camps. His father, a research chemist, was taken away but then released because he was considered useful to the war effort. The family escaped to unoccupied France and spent the rest of the war in hiding and on the run. His father died in 1944, and 12-year-old Danny moved to Palestine with his mother two years later.

Kahneman thought of becoming a physicist or economist, but he ended up studying math and psychology at Hebrew University in Jerusalem. He finished his B.A. at the age of 20. Having survived so many horrors, he had already developed a deep distrust of things that others take for granted--the notion that humans are rational, the confidence that knowledge can solve all problems, even the belief that there's a God. He entered the work force as an unorthodox thinker determined to challenge the status quo."

There is much, much more. As I said, it is the best account, and it was written 18 months ahead of the Nobel.

Here are two quizzes:

Quiz One:

600 individuals contract a severe illness. There exist two options:
A. Definitely saving 200 people;
B. There is a 33% chance of saving all the patients and a 66% chance that all will die.

Which would you choose?

Quiz Two:

600 individuals contract a severe illness. This time, the two options are:
A. 400 patients will definitely die.
B. There is a 33% chance that nobody will die.

Which would you choose?

Kahneman found that

Quiz One: 72% of subjects chose the first option.
Quiz Two: 78% of subjects chose the second option.

You may have noticed by now that Quiz One and Quiz Two are the same.

It felt a bit funny to be talking to Geraldine Doogue about such matters on Monday. Everything feels strange at the moment.

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The law of small numbers

Today on Life Matters I used the excuse of the grand finals to speak to Rebecca Gorman about what psychologist Amos Tverski calls "The Law of Small Numbers.''

It is an ironic reference. The so-called law of big numbers states correctly that when an experiment such as a coin toss is repeated (say) thousands of times, heads will come up about half the time.

Tverski finds that people wrongly believe this bo be the case for very small numbers as well.

If a couple has two children, both of them girls, people attach significance to this. It must be in the man's genes. Yet this is highly likely (25 per cent) to happen just by chance.

When it comes to runs of heads, they are far more likely than we think. If you toss a coin 20 times, a run of 4 heads in a row (somewhere in the sequence) is extremely likely - the probability of that happening by chance alone is about 50 per cent!

But Tverski thinks that because we are victims of belief in "the law of small numbers" we feel the need to attach significance to a run of four wins in a row.

In sport in the US, this is called belief in "the hot hand". Tverski has shown that for basketball in the US the hot hand seems not to exist. Sone study reports that after a run of successes a certain player had a 75 per cent chance of having another success. After a run of failures the player also had a 75 per cent chance of success.

Neither players nor their supporters believe this.

We seem to have an almost programmed-in need to look for meaning in what might be meaningless noise....

Even the Australian Bureau of statistics publishes trend estimates, some of which are meaningless. I remember in 1993 that the direction of the trend for the current account deficit used to point up in some months, down in others. In reality the underlying movement in the current account deficit probably wasn't changing at all.

Which brings us to the Australian Securities and Investments Commission and its position paper on the advertising of investment returns. ASIC wants the rules governing the advertising of past performance tightened up.

It has commissioned a survey from the Financial Policy Research Centre which examines 100 surveys of the performance of funds managers over time. It says about half of the studies found no correlation at all between good past and future performance. "Good performance seems to, at best, a weak and unreliable predictor of good performance over the longer term."

There are all sorts of reasons why this should be the case. Without knowledge that the market doesn't have (which is illegal in equities) it should be impossible to consistently better predict where the market will end up than the market itself. An investment style which works in one set of market conditions may not work in the next. Successful funds managers will face a run on their staff, everyone will copy them, they will believe their hype. (Remember BT?)

I said on Life Matters that if a firm wins "Funds Manager of the Year" two years in a row, ditching it might be as good advice as keeping it.

Tverski points out that for sport there is no reason why a run of wins shouldn't signal something, it is just that the statistics show that it doesn't.

I must say that I personally found Tverski's findings about perception challenging. Until now I must have believed (subconsciously) that "god's hand" manipulates the outcome of a coin toss to ensure that a run of heads is always followed by a run of tails. I now see (late) that that isn't how it happens. A run of heads isn't reversed by the hand of god, its effect is diluted over time by other results, so that when the number of tosses gets very large the results are about 50-50. (If you toss a coin and get five heads in a row, and then keep tossing until you have tossed 1,000 times in total, probablity theory does not predict that the total number of heads will be 500, it predicts that the number will be about 502.)

Actually I still find the workings of probability hard to get my head around. Perhaps because I know from quantum physics that the hand of god does manipulate the results of wave/particle experiments to give us the result it wants us to see. So maybe our intuitive belief in a hand of god isn't so wrong after all.

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The mathematics of inequality

That was the title of this week's discussion on Life Matters with Geraldine Doogue.

Two French physicists believe they can explain why in every society the distribution of incomes follows the same mathematical pattern.

The arguments are best sumarised in New Scientist.

There is not a lot to add except that it'll pay to follow the work of the new "econphysists" closely.

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Information Technology - use it, don't make it

Noël Coward is said to have observed that TV is for appearing on, not for looking at.

The Wall Street Journal is now saying something similar about IT. It's for importing, not making.

And it cites Australia as the success story.

"...one of the biggest beneficiaries from information technology is Australia, which hasn't any high-tech industry at all. Yet it is one of the few economies to have enjoyed a 1990s surge in productivity (or output for each hour of work) as impressive as the one the U.S. has seen. Its secret: import high-tech gear that others make. As in the U.S., the spread of bar-coding, scanning and inventory-management systems is making Australian wholesalers much more efficient, and that is paying economywide dividends. Compared to its population, Australia has more secure servers, the sort used in e-commerce, than anyone else besides the U.S. and Iceland (that is another story)."

In 1997 our own Information Industries Taskforce produced a report entitled The Global Information Economy: The Way Ahead in which it advised the government quite differently. We had to make, not just use.

"Australia’s future as an advanced economy will depend on the extent to which it participates in the evolving global information industries as a provider of products and systems; not just a taker. Full participation in the digital economy will require a significant increase in current exports by the information industries based on a much more focused and cohesive export strategy."

Perhaps it is just as well the report lay largely unread...

As did many reports commissioned by the new government. What about the one by Charlie Bell advising the government to cut the burden of red tape on small business?

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Tipping

This week on Monday Economics with Geraldine Doogue I discussed the economics of tipping. Pure economic theory would suggest that we should not. We try to get the best possible price for things. So why pay more, and why do it after the service has been rendered? Especially if you are not likely to ever go to that town or restaurant again?

The Research at Cornell University suggests that we do it in large measure to ensure good service. Tipping is a sort of shadow market which fulfils a role legal contracts cannot. These days there is such a contract for employment. I will work more than the strict number of hours required, and in return you will pay me more than you are legally required to, and keep me on in a downturn.

We also do it for status. Ray Williams of HIH did it a lot. Men do it much more than women.

We are more likely to tip when other people are watching (say, in a big group).

And women are significantly more likely to do it when their waiter is a man, especially a man of eligible age.

For men, apparently, there is no such effect.

Some of the references are here.

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Happiness 3

The debate continues in Ross Gittins' column over the weekend. Many people find these conclusions shocking. They are debating at Henry Thornton.

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Happiness 2

Tom V writes: the correlation between having a job and being happy might be because theres so many negative connotations of being unemployed. perhaps because were stuck with the protestant notion of work ethic.

To decipher this cause, it would be interesting to take some people, and pay them the same amount but they dont actually have to turn up to work. i doubt their happiness will decline.

So two things: searching for a job might cause total misery, and then getting a job makes one happy. second, there may be a big difference in happiness for the small difference in income between welfare and entry level job.

...tom

I agree, there must be reasons why we want to work, and those reasons might be social, as well as biologicial.

But the experiment about taking some people, and paying them the same amount with some not having to turn up to work has been done (on paper and with economietrics at least). The finding, reported by Frank and Stutzer is that for the European countries observed, "a move from the lowest income quartile to the highest income quartile would not be enough to offset the adverse effect of unemployment."

It is true that some days I would quite like to be paid not to work. I would like to volunteer for any experiment in which I was paid not to work, but I am not sure I would like to be part of that experiment for ever.

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Happiness

Today on Life Matters with Geraldine Doogue I spoke about happiness.

Money doesn't matter much. The average Japanese can buy five times what they could after the war but is no more happy. The average American can buy 2.5 times what they could and is no more happy. Psychologist Bob Cummins from Deakin University refers to "homeostasis". He says our body regulates how happy we feel to keep our mood in a tight band, in much the same way as it regulates blood pressure and temperature. There are doubtless good adaptive reasons for doing that. Too little happiness and we'll commit suicide or forget to eat. Too much happiness and we won't bother to hunt, or look out for predators.

One way in which adaption happens is rising expections. The higher our income, the more income we feel we need. So we believe that a certain increase in our income will make us happy, but it never does. The Journal of Economic Literature article includes a graph which describes the process perfectly.

What does make us happy is work. Having a job is usually far more important to happiness than the income the job provides.

Even moving from the lowest quartile of income to the highest won't be enough to compensate for losing a job. It's worth paying money in order to be in work...

The implications for policy: a tax on employed Australians designed to create employment is a good idea. Also the economists obsession with GDP is probably the right one - but for the wrong reasons! We need high GDP not because of the goods that it will deliver us but because of the work that getting the high GDP will make for ourselves along the way!

The other thing that matters is democracy. The Swiss local government areas where citizens can take part in direct elections are far more happy than those where citizens can not. The process matters. Economists Frey and Stutzer determine this by observing that immigrants to Switzerland who can't vote, aren't made nearly as happy by living in a district with direct referenda as are those who can vote, even though they enjoy the same outcome in terms of good government.

Taken all together - the implications are that redistribution of income is a very good idea, positional goods should probably be banned (in aggregate they make people unhappy by raising expectations) jobs matter, and that democracy matters in its own right, regardless of where it leads us.

After the discussion Geraldine told me of a Background Briefing program on happiness which noted the importance of festivals. Experiences give a much bigger happiness bang for the buck than goods. (Unless it is the experience of buying the good. A new kitchen increases happiness at the time it is bought, but not a lot after that). Much of India is very poor, but poor Indians devote a lot of effort to festivals (and weddings, as some recent films make clear).

Also aftert the discussion Kathy Golllan, the Life Matters Executive Producer, told me of her amazing finding. Teaching English to upper class children in Indonesia, she asked, as a language excercise: "What would you do if you had a million dollars?" One of the replies shocked her. "I would get a job".

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Game Shows.

Each Monday I discuss economics with Geraldine Doogue on Life Matters on ABC Radio National.

This Monday I talked about what economists are learning from TV game shows. The Price is Right and The Weakest Link are almost-perfect laboratories in which to study financial behaviour. Unlike artificial laboratories the money is real (six million for the price is right) and the data is rich (7,000 banking decisions in 70 episodes of the Weakest Link.)

The findings are that we don't behave entirely rationally. We approximate rational behaviour by using easy rules of thumb.

We make a rational decision to be economical with our thinking resources. Ironic, huh?

And there was more besides.

Here are some of the references.

Next Monday, I'll be discussing happiness, using the references dug up this week by Ross Gittins.

I'll go further. I'll reveal what really does make us happy.

For the SBS Business Show I am researching a panel discussion about the unwieldy nature of taxation in Australia.

The problem is that it is an unwieldy topic.

That discussion should go to air on Sunday September 15.

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Hello

This is my first post.

I report for "The Business Show" on SBS television in Australia. 6.00pm Sunday nights.

For most of the two decades before that I was the Economics Correspondent for ABC Radio Current Affairs.

I am a former Treasury economist with an honours degree in economics.

I am married to the award winning journalist Toni Hassan, and I have two children, Alexandra and Grace.

My email address is peter at petermartin.com.au

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2001 Economic Survey. Rates cut to soften landing; economy to grow far less than officially forecast

Josh Gordon:

Australia's private forecasters believe the economy is coming in to land after a period of soaring growth and this could see the jobless rate shooting back towards 7 per cent before next Christmas.

The half-year economic survey by The Age has found that an overwhelming consensus predict that the Reserve Bank will cut interest rates this year - possibly by as much as one full percentage point - to cushion the landing.

The economists have also tipped a modest recovery of the Australian dollar, a slowing world economy and a continuation of the housing construction slump that hit the industry after the GST was introduced.

The survey of 25 economists from business, academia and the finance sector predicts the economy will expand by 3.18 per cent in 2000-1 - far below the federal government's November budget up-date forecast of 4 per cent growth. It is also less than the growth rate of 3.50 per cent forecast by The Age panel in the previous survey, published six months ago. Looking ahead to 2001-2, the forecasters predict the economy will grow by 3.12 per cent - again well below Federal Treasury's forecast of 3.75 per cent growth.

The survey reflects a substantial change in sentiment about the economy following a string of economic signs pointing to slower growth. But most said a recession, which would technically require two quarters of negative growth, was unlikely. There were, however, some dissident voices.

The major pessimist was Duncan Ironmonger, from Dun and Bradstreet. He predicted that a recession would hit the economy in 2001, with GDP contracting by 0.4 per cent in 2001-2 on very weak private investment and a slowing world economy.

Richard Robinson, from BIS Shrapnel said he did not believe there would be a recession in 2001, "just a major down-turn" and tipped the economy would grow by 1.5 per cent next financial year.

Others were very optimistic, with five economists forecasting the economy would grow by 4 per cent or more in 2001-02.

Rothschild's Alan Siew, who tipped 3.8 per cent growth in 2001-2, said the GST, higher interest rates and soaring oil prices had weakened the economy, but growth would return to a solid pace as these factors disappeared over the next few months.

One forecaster, Shane Oliver from AMP, took a jab at his own kind and warned, "Economists, almost without exception, are notoriously bad at forecasting recessions".

The tipsters were at particular odds with the Federal Government about the outlook for Australia's jobless. Federal Treasurer Peter Costello believes the unemployment rate will fall below 6 per cent before next June on 3 per cent employment growth. For the Treasurer to be right, about 25,000 jobs would need to be created each month.

According to the panel, this could be a brave prediction. The consensus was that the decade low of 6.3 per cent unemployment achieved in October would be as good as it gets for the jobless. Seven of the economists tipped that unemployment would be at or over 7 per cent by Christmas, while on average the forecasters predicted a jobless rate at 6.75 per cent with very modest 1.27 per cent employment growth.

A year ago, many of The Age panelists were worried that workers would chase pay rises as extra compensation for the GST. However, the latest survey shows this concern has diminished. Wages growth should be solid, but not a major threat to inflation. Average weekly earnings were tipped to rise by 4.24 per cent and the more reliable wage cost index by 3.48 per cent over the year to December.

There was also optimism that economy would continue to take the GST in its stride. Most felt that by the September quarter its inflationary effects would well and truly have washed through the economy. On average, the panel forecast that annual inflation would be a benign 2.59 per cent in December, comfortably within the Reserve's 2 to 3 per cent target band. Two of the economists, Shane Oliver from AMP and Steven Kates from ACCI, predicted the official interest rate would be 5.25 by December, a full percentage point lower than the current level.

However, some warned that oil prices and the dollar were still a la+.1major threat to interest rates.

The panel also saw the dollar shrugging off some of its weakness in 2001, with predictions that the investor love affair with the US would begin to turn sour. By December, the dollar would be trading at 61.19 US cents, 66.21 Yen and 62.16 Euros. .

Almost all of the economists surveyed said the dollar had been extremely undervalued. But many, including Bruce Freeland from the Commonwealth Bank, urged caution, arguing a recovery could not be guaranteed since the dollar was no longer trading off Australian economic fundamentals.

The survey predicts the account deficit will shrink to $26.45 billion for the calender year. Exports will by boosted by the low dollar and imports constrained by the slowing domestic economy. Australia's net foreign debt is expected to rise from about $268 billion in the June quarter last year to $298.35 billion by December.

Changing conditions to keep lid on CPI

Three months ago, with the release of better-than-expected inflation data for the September quarter, local businesses were hailed as the saviour of a potential CPI blowout.

This year, leading economists in The Age's half-year economic survey are predicting that it will be lower oil prices, a stronger Australian dollar and a global economic slowdown that will keep inflation under control.

While many analysts expect that at least part of the raft of additional costs absorbed by business in the September quarter - GST, rising oil prices and higher import costs - will be passed on to consumers this year, changing economic conditions should counter any substantial increase in the CPI.

The consensus view from the survey is that by the end of 2001, underlying inflation will be at 2.59 per cent, well within the Reserve Bank's target band of 2-3 per cent.

"The most important factor for CPI-inflation over the next 12 months is oil prices. We assume the price of oil in Australian dollars will begin to fall shortly due to a nominal appreciation of the Australian dollar and a drop in world prices," said Philip Adams of Monash University's Centre of Policy Studies.

"Importantly, the risk of a sharp acceleration in wages growth has not yet materialised and labor market conditions are expected to ease during 2001 as a lagged response to the sharp fall in job ads," said Macquarie Bank senior economist Andrew Hanlan.

While economists predicted that the effect of the GST was largely a "one-off" and would not boost inflation, the effect of higher import prices had five economists surveyed tipping inflation would exceed 3 per cent by the end of December.

"December quarter 2000 and March quarter 2001 will exhibit quite strong increases reflecting the flow through of higher import and export prices," said UBS Warburg chief economist Mark Rider.

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Pundits forecast strong trade

The low dollar will boost exports while the slowing economy will limit imports and this will help shore up Australia's trade position over the new year, according to The Age half-year economic survey.

Despite predictions of a modest recovery of the Australian dollar, most economists said it would be a strong year on the trade front.

The annual current account deficit is tipped to narrow to $26.45 billion by December, compared with $33.68 over the year to June 2000.

Some even predicted a sustained run of trade surpluses.

Shane Oliver from AMP said: "Thanks to the low Australian dollar, export growth should be solid and imports restrained over the next 12 months.

"This will help hold up growth and should also ensure a trade account near balance. This does imply that we will see several monthly trade figures in surplus."

Bill Evans from Westpac agreed, and said even if the dollar recovered to 60 US cents it would still be a very competitive exchange rate and would continue to deliver a windfall to exporters.

The Federal Government believes the economy will grow by 4 per cent this financial year.

This prediction, which is regarded as highly optimistic by most private sector economists, is based on the assumption that strong exports will keep the economy humming. Australia's exporters have already received a windfall from the stunningly competitive dollar and a strong world economy.

Over the year to September 2000, the value of Australia's exports soared by 40 per cent, and in September and October the trade balance was in surplus for the first time in three years.

According to the private sector forecasters, the key risk to Australia's exports will be a hard, rather than soft, landing for the global economy.

Geoffrey Sims from Telstra said the trade performance would critically depend on the extent and timing of the US slowdown.

"With the global economy more highly leveraged to the US economy than ever before, the looming US slowdown will have a more pronounced impact on the global economy and hence demand for Australian exports," Mr Sims said.

Despite strong exports, some economists warned that imports would pick up over the year, ensuring the trade balance remained in deficit.

Alan Siew from Rothschild said: "To achieve sustained trade surpluses next year would need a slump in imports, which in turn would only occur with a recession. This is very unlikely."

Anthony Thompson, from HSBC, said there was a risk that imports would pick up if business investment recovered more rapidly than the pessimistic business surveys suggested.

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2000 Economic Survey. Full speed ahead in 2000

Phillip Hudson:

Although interest rates could rise by up to one percentage point, the economy will continue to boom and the unemployment rate could be as low as 6 per cent by next Christmas, according to The Age half-year economic survey.

The new year is also tipped to see the sharemarket reach new highs and the dollar pick up ground, but Australia still faces another tough year on the trade front.

The survey of 30 economists from business, academia and the finance sector predicts economic growth will average 3.9 per cent in 1999-2000 — above the Government's November Budget update of 3.5 per cent.

It is also much stronger than the 3.4 per cent rate of growth forecast by The Age panel in the previous survey, published six months ago, and substantially stronger than the 2.6 per cent average forecast this time last year by the group. It reflects a substantial change in sentiment about the Australian economy, which has prospered despite the Asian financial crisis.

Looking ahead to 2000-01. the panel believes growth will slip to 3.65 per cent — slightly lower than the forecast made by the Treasury of 3.75 per cent.

One of the optimists is Mr Bruce Hockman, from Deutsche Bank, who predicts growth will be 4.2 per cent for 1999-2000 and a huge 4.8 per cent for 2000-01.

Mr Hockman is one of the 11 economists to predict the official interest rate will rise from 5 per cent to more than 6 per cent. However, he does not believe this will he enough to slow the economy.

He says private consumption will remain strong and that the $6 billion being spent from the Budget surplus to help pay for the GST tax cuts will boost already strong growth.

Mr Tooby Johnston, from AXA Australia, is also bullish about the economic outlook. He is among four experts predicting growth of 4.5 per cent for 1999-2000 — a full percentage point higher than the Government. Mr Johnston says domestic demand "looks pretty good to us" and it will be complemented by stronger international growth.

The pessimist is Professor Neville Norman, of the University of Melbourne, who predicts growth of 3.2 per cent this financial year and just 1.8 per cent next year. Professor Norman says he had a "sombre view", especially about the risk of a downturn in the United States. He believes "somebody ought to be alerting the business community of this risk".

The panel predicts employment will grow by 2.3 per cent and the unemployment rate, which fell to a decade-low 6.7 per cent last November, will average 6.5 per cent by next Christmas.

Mr Hockman and Mr John Edwards, from HSBC, predict it will be as low as 6 per cent, while Mr Bill Evans, from Westpac, and Mr Philip
Adams, of Monash University's Centre of Policy Studies, forecast 6.1 per cent. Only Mr Geoffrey Sims, from Telstra, believes the jobless rate will be back above 7 per cent.

For those with a job, the average wage is tipped to rise by 3.9 per cent, but the cost of living may increase by more than 5 per cent. The outlook for inflation is distorted by the introduction of the 10 per cent GST on 1 July.

The panel believes the GST will cause prices to leap by 3 per cent in the September quarter. The full-year effect of the GST will be a 2.6 per cent lift — slightly lower than the Government's estimate of 2.75 per cent.

The biggest risk to interest rates is perceived to be the threat of a wages breakout by workets chasing extra GST compensation, although some economists say an already strong economy could be overheated by the $8 billion being taken out of the Midget to help pay for tax cuts.

For the first time, the panel was asked to predict the Reserve Bank's official cash rate. Dr Steven Kates, from the Australian Chamber of Commerce and Industry. and Ms Heather Ridout, from the Australian Industry Group, believe it will stay unchanged at 5 per cent throughout the year. Mr Hockman, Mr Johnston and Mr Mark Rider, from Warburg Dillon Read, predict it will be at 6 per cent by June.

Ms Ridout said there was no need for an interest-rate rise since the economy was enjoying "Goldilocks growth — not too hot and not too cold. it's good for job growth with no inflation pressures."

In the next six months. 18 economists expect a 0.5 per cent rate rise and nine economists expect that, by December. rates will be at 6 per cent. Professor Norman and Mr Richard Robinson. from BIS Shrapnel, believe they will reach 6.5 per cent. Many economists said one of the key risks for investors in the year ahead was the possibility that the Wail Street bubble would be pricked.

However, the panel said the All Ordinaries Index, which ended last year at 3152.5 points, was expected to break records and be 3238 at the end of this year. The dollar, which ended last year at 65.33 US cents, is forecast by the panel to rise to about 69 US cents over the year.

The trade outlook will continue to be tough. despite a brighter position for international growth and demand for Australia's exports. The current account deficit is expected to be $33 billion for the calendar year. The net foreign debt is tipped to rise marginally from $239 billion in the September quarter last year to $242 billion by year's end.

GST hit will be a one-off: analysts

The introduction of the GST will only threaten low inflation and put upward pressure on interest rates if workers chase pay rises as added compensation for the tax changes, according to economists surveyed by The Age.

In fact, the greatest pressure on rates flowing from the tax revolution will be the $12 billion tax cuts, with $6 billion being spent from the Budget surplus to sweeten the tax package.

Economists surveyed by The Age generally agreed with the Reserve Bank's view that the GST would have a one-off impact on the cost of living.

The panel believes the rise in the cost of living will average 5.4 per cent in the year to December. The Age also asked the panel to predict the exact impact of the GST on the September quarter Consumer Price Index and on inflation in the year to June 2001.

The average forecast was that prices would leap by 3 per cent in the September quarter due to the GST and the one-off rise in prices would be 2.6 per cent for the first year.

This average is slightly lower than the Government's prediction that the GST would add 2.75 percentage points to the CPI in the first year.

Aside from the tax cuts, the Government will increase social security and family payments, but some unions have suggested they will seek higher wages to compensate for the GST.

ANZ's chief economist, Mr Saul Eslake, expects a 3.5 per cent jump in prices in the September quarter after the introduction of the GST. He said that as the benefits of the removal of other taxes flowed through, the impact on prices in the year to June 2001 would be 2.25 per cent.

"The GST's impact on the CPI is one-off," Mr Eslake said. "There will be lasting effects only if wage claims also increase by way of completely unjustified compensation for this one-off impact, or if businesses increase profit margins, the ACCC notwithstanding."

Dr Steven Kates, from the Australian Chamber of Commerce and Industry, said employers wanted the Government to carefully manage the issue because any rate rise would have no immediate impact on prices "but would have harmful longer-term consequences for growth and employment".

"It must be clearly articulated by the Government that there are compensating tax cuts taking place, which more than repay the cost of the goods and services tax," he said.

Ms Heather Ridout, from the Australian Industry Group, said rates would rise if workers sought to "double dip" by getting GST compensation from the Government and their employer.

"Low interest rates and rising employment opportunities are much more valuable than an illusory wage increase," she said.

St George Bank's Mr Tim Crawford said he did not believe the GST would affect interest rates, but the tax cuts might. "The tax cuts associated with the GST will add impetus to economic growth and add to the case for modest monetary policy tightening," he said.

AMP's Mr Shane Oliver shared that view, saying: "The interest rate impact relates more to the tax cuts and the net fiscal easing. This is probably worth 25 to 50 basis points of monetary tightening. If we see wages rising, then the GST effect could add another 25 basis points or so to cash rates."

Economists also said traditional measures of inflation would be distorted by the GST and Mr Steven Wojtkiw, from the Victorian Employers' Chamber of Commerce and Industry, said it was crucial for business to make sure prices and contracts linked to the CPI were not based on the GST-inclusive rate.

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1999-2000 Economic Survey. Growth, imports set to rise

Phillip Hudson:

Australia can look forward to a sustained period of high growth and low inflation, but the unemployment rate will remain stuck around 7.2 per cent and the nation faces a continued tough time on the trade front, according to the Age half-year economic survey.

Home loan interest rates are expected to remain unchanged, the dollar is predicted to rise and the stockmarket tipped to be largely unchanged amid nervousness about the high prices of Wall Street stocks.

While the current-account deficit is tipped to reach $35 billion, some economists have raised the prospect that it could climb to 7 or 8 per cent of national output without sparking a Banana Republic-type crisis - a view that was previously considered unthinkable.

The survey of 32 economists from business, academia and the financial sector predicts economic growth will average 3.4 per cent in 1999-2000 - well above the Government's May Budget prediction of 3 per cent.

It is also a massive increase from the 2.6 per cent average forecast by the Age panel in the previous survey published six months ago. It reflects the significant shift in the economic outlook for Australia and the expectation that the Asian economic crisis will not have a savage effect on the economy.

Looking ahead to 2000-01, the panel believes growth will largely hold up at around 3.3per cent - slightly below the Treasury's 3.5 per cent projection.

The optimist in the survey is Mr Peter Summers, from the Melbourne Institute of Applied Economic and Social Research, who predicts growth of 5.2 per cent this financial year and 4.8 per cent next year.

"Australia's external environment should improve, with US growth remaining strong, and Europe and Asia (especially Japan) experiencing accelerated growth," he said.

Five economists take a pessimistic line: Professor Neville Norman from the University of Melbourne, Mr Ric Simes from Rothschild, Mr Michael Blythe from Commonwealth Bank, Mr Joseph Capurso from Econotech, and Mr John Kyriakopolous from J.P. Morgan. They predict growth will drop to 2.75 or 2.8 per cent this year.

Mr Blythe said that although the economic performance had been exceptional, a period of slower growth lay ahead.

"Some imbalances are now emerging that point to slower growth. The pace of activity is increasingly reliant on the consumer and increasingly leaking into imports. Neither of these trends is sustainable over the longer term," he said.

But the most bearish is Ms Shangitha Rajendan, from the National Institute of Economic and Industry Research, who says growth will tumble from 3.3 per cent this year to just 0.8 per cent in 2000-01 - the year of the Olympics, the $12 billion tax cuts and the GST.

The panel predicts employment will grow by 2 per cent but the unemployment rate will average 7.2 per cent. But, within the group there is a massive divergence of opinion.

Mr Richard Robinson, from BIS Shrapnel, predicts the national jobless rate will fall to 6.3 per cent and Dr John Edwards, from HSBC, tips 6.6 per cent. But Mr Bruce Hockman, from Deutsch Bank, and Mr Blythe say it will rise to 8 per cent.

For those with a job, the average wage is tipped to rise by 3.6 per cent while prices rise by 2.2 per cent.

Asked about the outlook for inflation, the panel said the introduction of the GST could pose a threat if wage claims were made by workers seeking extra compensation. Professor Norman said "wage retaliation" could push inflation above 3 per cent and cause the Reserve Bank to lift interest rates.

The panel predicted that home loan interest rates would not change significantly.

The dollar, which was yesterday trading at 64 US cents, is forecast to have a more stable 12 months than last year when it tumbled to a record low. The panel expects it to average 67 US cents in the next six months.

Most economists said one of the key risks for investors in the year ahead was Wall Street's overpriced stocks.

The panel said the All Ordinaries Index, which closed yesterday at 3059.8 points, was expected to be 3068 at the end of the year and 3151 next June.

The trade outlook will continue to be grim, with imports expected to outstrip exports.

GST may push inflation over 3%

The GST could pose a threat to low inflation - and force up interest rates - if workers chase wage claims to compensate for tax changes, according to economists.

The Age's panel of economists believes inflation will average 2.2 per cent in the year to June - well below the Reserve Bank's medium-term comfort limit of 3 per cent. The prediction is bang on target with the Government's Budget forecast of 2.25 per cent.

But despite the Bureau of Statistics yesterday saying inflation was still at historic lows and sitting at an annual rate of 1.1per cent, some economists are nervous about the introduction of the 10per cent GST on 1 July.

The Government will deliver $12 billion in income tax cuts plus increased social security and family payments as a sweetener. The Reserve Bank has said it will ignore the expected one-off inflation jump of 2 per cent.

However, some unions have suggested they will seek higher wages to compensate for the GST. The ACTU has said it believes the tax cuts will not even return bracket creep of the tax scales for the past decade.

The Age asked the panel what the risk was of Australia's inflation rate rising above 3 per cent.

Dr Barry Hughes said the key issue was wages. "If there is a significant wage flow-on in compensation then the Reserve Bank will worry and hike rates," he said. Dr Hughes rates this a 25 per cent chance.

Professor Neville Norman, from the University of Melbourne, also warned that "wage retaliation" would pose a significant chance of inflation rising above 3 per cent.

Dr Steven Kates, from ACCI, said underlying inflation would rise above 3 per cent "if wage increases rise to compensate for the perceived increase in the cost of living".

8% deficit is safe, say economists

The current-account deficit could climb to 7 or 8 per cent of national output without triggering an economic crisis, according to economists.

In a significant shift of market sentiment from the panic of the 1980s and early 1990s, economists surveyed by The Age said a current-account deficit of 6per cent of gross domestic product - the same level that caused the Banana Republic crisis in 1986 - was manageable.

Mr Des Moore, from the Institute for Private Enterprise, said he believed Australia's more flexible economy could cope with a current-account deficit as high as 8per cent of GDP as long as it was fuelled by productive investment. "It could reach 8 per cent if it was investment-driven and it was clear that it was productive investment and not investment in real estate or speculative assets," he said.

"If the US is chugging along OK, 8 per cent with an investment surge would be acceptable by financial markets, but if it is consumption-driven it will be a major risk."

Mr Peter Horn, from Credit Suisse First Boston, has the most pessimistic current-account forecast for the year ahead, predicting that the deficit will be $42.1 billion or 6.7 per cent of GDP.

This is well above the panel's average prediction of $35 billion and $10billion higher than the Federal Government's May Budget forecast of $32 billion.

Mr Horn said he believed low commodity prices would continue to cause problems, and while sales would increase to Asia as the region recovered from the economic turmoil, Australia could find lower-volume sales to many of the new markets developed last year. He believed it was possible for Australia to run a current-account deficit of 7 or 8 per cent but it would need tight interest rate and Budget policies.

The Reserve Bank has indicated that interest rates are set to encourage expansion and the Government is preparing to loosen the Budget purse strings to help fund its $12billion GST-tax cut sweetener.

Mr Horn said that if the current-account deficit stayed at high levels after the tax cuts were paid next July "then monetary policy may need to be tightened". Mr Paul Brennan, from Salomon Smith Barney, also suggested financial markets could wear a larger balance of payments problem.

"It would need to push towards 7 per cent of GDP accompanied by further measures that reduced the Budget surplus (for there to be a crisis)," he said.

Commonwealth Bank's Mr Michael Blythe says Australia's high current-account deficit is "the price we have to pay for a strong domestic economy at a time when our major trading partners have been pretty subdued".

The survey revealed that economists and the markets had largely accepted the case put forward by the Treasurer, Mr Peter Costello, and the Reserve Bank governor, Mr Ian Macfarlane, that the deficit was beyond Australia's control but it was not out of control.

"It is only a crisis if international financial markets decide it is," said Telstra's Mr Geoffrey Sims. "So far they have been quite accommodating and have recognised that, unlike past blowouts in the current-account deficit, this one has been caused by demand contraction in Australia's major export destinations rather than overly strong domestic economy," he added.

But the Australian Industry Group's Ms Heather Ridout took a different view saying that the critical issue was whether the deficit stayed at 6 per cent of GDP. "If, as forecast, domestic demand slows and moderates imports and export markets recover this shouldn't happen," she said. "However, the possibility cannot be excluded. The need for strategic action to address the current-account deficit remains: increasing national savings and further diversifying our export base are key issues."

Dr Steven Kates, from ACCI, said the deficit was of less concern than in past years because the Federal Government was not borrowing money and had returned its Budget to surplus. The debt was entirely private sector and commercially based.

"However, with recovery in Asia expected, export volumes and prices should begin to rise and the current-account deficit fall to more acceptable levels. A current-account deficit of 6 per cent is not sustainable in the long term," he said.

Mr Geoff Bills, from the Housing Industry Association, said there was no crisis if the funds to finance the deficit were invested wisely. "But they usually aren't and if investors or lenders fear they aren't then the dollar will fall and interest rates rise," he said.

J.P. Morgan's Mr John Kyriakopolous said a deficit of 6 per cent was not sustainable and "could make Australia vulnerable to sharp swings of investor sentiment towards domestic financial assets".

BIS Shrapnel's Mr Richard Robinson was one of the few economists to say 6 per cent was a crisis level. "It will add to foreign debt, or worse, force us to sell more of the farm (local companies and assets). This will add to foreign interest payments and profit repatriation and ultimately worsen the current-account deficit," he said.

Mr John Edwards, from HSBC, predicted the deficit would drop, but stay above 4 per cent of GDP this year. He said it continued to underline the nation's savings problems.

Mr Ric Simes, from Rothschild, said such a high deficit was "a clear sign that something is seriously out of kilter". "Policy needs to be directed at boosting national saving and to do so quite aggressively over the next few years. Disturbingly, Government policy on superannuation has gone backwards over the past few years," he said.

Recession unlikely, say tipsters

The pace of economic growth in Australia will slow in the next two years but the risk of a recession is low, according to most economists surveyed by The Age.

But there are one or two predicting a post-Olympic slump.

"If interest rates are not raised, if public spending is not increased, and if protection levels do not go up, the risk of recession remains minimal," said the Australian Chamber of Commerce and Industry's Dr Steven Kates.

Mr Peter Horn, from Credit Suisse, rates the chance of a recession at less than 10 per cent. He said Australia's economy would be supported by a pick-up in global growth, the GST-linked tax cuts, worth $12billion next year, and the Sydney Olympics.

Mr Steven Wojtkiw, from the Victorian Employers Chamber of Commerce and Industry, agrees. He also believes the privatisation of a further 16per cent of Telstra, continued low inflation, and the increased social security benefits that flow from the GST package are reasons why growth will continue.

However, Colonial State Bank's Mr Craig James sounded a warning about a switch in economic conditions in early 2001. "A post-Olympics slump in construction is expected in Sydney," he said. "Further, in New Zealand and Canada monetary policy was kept overly tight on the introduction of a GST. A similar risk exists with Australia."

BIS Shrapnel - one of the survey's most accurate tipsters - says there is only a 5 per cent chance of a recession in the next 18 months. But after that? It's more likely than not.

Colebatch: Rough time for our economics tipsters

For four years the economics tipsters in The Age survey were hitting smoothly down the fairways of forecasting. Then came 1998-99: the Carnoustie of financial years for a forecaster.

Most of our tipsters' growth forecasts for 1998-99 ended up in the rough, half-buried in waist-high grass. A couple landed in the lake, and a few got some bunker practice. No one overshot the green.

Only two landed on the fairway. Dr Peter Summers, of the Melbourne Institute, went in the right direction with his forecast of 3.6 per cent, though he might wish he had used a stronger club. (Actual GDP growth in 1998-99 is estimated at 4.7 per cent).

And the one tipster on the edge of the green is the reigning champion: Richard Robinson, of BIS Shrapnel. The firm's uncanny record in the "90s continued in 1998-99; its tip of 4.1 per cent was easily the most accurate.

In July 1993, Shrapnels were among the few to predict the imminent boom. In the five years since, on average, its tips have been out by less than 0.5 per centage points, a gold medal achievement.

This year, too, it has struck out boldly. Apart from Shrapnels and the Melbourne Institute, our other forecasters tip growth to slow sharply, to around 3.25 per cent. But Shrapnels predict another boom year, with the economy growing 4.3 per cent. It tips extraordinary growth in employment, with almost 400,000 new jobs, and unemployment plunging to 6.3 per cent by June 2000.

The Melbourne Institute, our silver medallist, is buoyant too, tipping 5.2 per cent growth in 1999-2000. But Dr Summers sees most of this coming from investment and productivity growth, with unemployment still 7.5 per cent in mid-2000.

In a welcome return to form, our new bronze medallist is the Federal Treasury. It, too, undershot last year, tipping 3 per cent growth, but that was better than most. In the past five years, Treasury's tips on average have been within 0.6 percentage point of the actual growth.

For 1999-2000, Treasury has repeated its 1998-99 forecasts: 3 per cent growth, unemployment at 7.5per cent, and the current-account deficit held to just $32 billion. It stuck to these numbers in last week's quarterly roundup, although its comments seemed to imply stronger growth.

EXCHANGE RATES: Last year the panel tipped the dollar to be worth 65.58 US cents at 30 June. It ended up at 66.01 US cents. Bruce Hockman, of Deutsche Bank, and Barry Hughes both hit the bull's-eye, and many others came close. Hughes and Hockman both tip the dollar to reach 69 or 70 US cents by June 2000.

Last year's yen guru was Bruce Freeland, of Commonwealth Bank, who hit the bull's-eye with his 80-yen forecast; everyone else tipped the yen to be weaker by now.

INTEREST RATES: Last year the panel tipped the 90-day bill rate to be a tad below 5.25 per cent at mid-1999; it ended up a tad below 5 per cent. Not a bad outcome, given that in four of the previous eight years, the actual outcome was outside the entire range of forecasts.

Several hit the bull's-eye, including Paul Brennan, of Salomon Smith Barney, Chris Cheatley, of the EIU, Saul Eslake, of ANZ Bank, and Barry Hughes (again!). All four tip 90-day rates to be virtually unchanged in a year's time.

A year ago our panel tipped the major banks' mortgage rate to be 6.62 per cent by now; it is actually 6.55 per cent. The gold medal will go to the tipster who best answers the question: if we have real competition in banking, how come all four major banks charge the same mortgage rate?

No one can fault our panel on business ethics. Disdaining the chance to use insider knowledge, our tipsters from Commonwealth, National and Westpac declined to predict the mortgage rate in mid-2000. Only ANZ's Saul Eslake took a punt: no change.

Last year the panel thought 10-year bonds would end June 1999 at 6.22 per cent; in fact, they ended at 6.27 per cent, a stellar performance for the team. Des Moore earns the gold for his tip of 6.25 per cent.

BUDGET: Our panel last year thought Treasury had overestimated the Budget surplus. Thanks to "the Australian miracle", it underestimated it, and the gold medal in this class goes to: Treasury (along with Commonwealth Bank and VECCI, which took Treasury at its word).

UNEMPLOYMENT: The panel thought jobs would grow by 130,000 and unemployment would stay at 8.1per cent. The tipsters underestimated jobs growth and the fall in workforce participation rate, which cut trend unemployment to 7.3 per cent in June. Econtech was closest, tipping 7.4 per cent. It predicts a rebound to 7.7 per cent in June 2000.

INFLATION: As usual, the panel was far too pessimistic; the CPI rose 1.1 per cent, less than half our team's 2.4 per cent forecast. Mike Nahan, of the Institute of Public Affairs, hit the bull's-eye; but then, Mike also tipped a recession.

CURRENT-ACCOUNT DEFICIT: Treasury tipped a deficit of $31billion. The panel tipped $32.7 billion. That looks like being very close to the final figure due on 30 August. We will take a punt and provisionally award the gold to Bill Evans, of Westpac, for his tip of $33.2 billion.

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1999 Economic Survey. Continued growth tipped

Phillip Hudson:

The Australian economy will avoid recession this year and continue on its path of high growth and low inflation despite the worst effects of the Asian financial crisis reaching our shores, according to The Age half-year economic survey.

However, the unemployment rate will remain stuck above 8 per cent and the current account deficit is set to become a hot political issue.

The survey of 33 economists from business, academia and the financial sector predicts economic growth will average 3.4 per cent in 1998-99, slightly better than the pre-Christmas Budget update from the Treasurer, Mr Peter Costello, which revised the Treasury forecast from 2.75 to 3.25 per cent.

But looking ahead to 1999-2000, the panel believes growth will drop back to just under 2.6 per cent.

The majority of those surveyed said the chance of a recession in Australia in 1999 was less than 20 per cent.

The optimist in the survey is Mr Peter Summers, from the Melbourne Institute of Applied Economic and Social Research, who predicts growth of 4.3 per cent this financial year due to strong consumption, business investment and real share prices.

The pessimist is Professor Neville Norman, from the University of Melbourne, who says growth will be 2.5 per cent, based on a "fairly sombre view about private business investment" due to last year's gloom about Asia and a trade blow-out due to poor

commodity prices, aggressive import competition and some weakness in sales to Japan.

Professor Norman said growth of 2.5 per cent in the ninth year of an economic expansion was a strong result. He almost takes the prize as optimist for 1999-2000 with his prediction against the trend that growth will soar by 3.8 per cent.

That forecast - bettered only by Mr Richard Robinson, from BIS Shrapnel - is based on the improving mood about business investment next year, some pick-up in commodity prices, and economic recovery in the Philippines and Malaysia.

The 1999-2000 pessimist is Mr David Corby, from National Mutual Funds Management, who believes the worst effects of the Asian economic crisis will crunch growth to 1.3 per cent.

The international outlook is for a further slowdown in the United States and a continued malaise in Japan.

On the employment front, Mr Geoff Bills, of the Housing Industry Association, and Mr Des Moore, from the Institute of Private Enterprise, predict a gloomy 9 per cent jobless rate for next Christmas but Mr Phillip Adams, from Monash University's Centre

of Policy Studies, is punting on 7.2 per cent. The majority said the jobless rate would stay at 8.2 per cent.

For those with a job, average earnings are predicted to rise by 3.75 per cent, well ahead of price increases of 2.24 per cent. All the economists believe inflation will stay below the Reserve Bank's 3per cent "comfort zone".

Professor Norman is warning home buyers that the standard variable home loan interest rate could be above 7 per cent by Christmas but he said interest rates would "still not be back to where they were three years ago".

The dollar, which ended 1998 at 61.45 US cents after its record low of 55.30 last August, will have another rocky year, according to the panel, which values it between 57 and 70 cents by next Christmas.

The Asian economic crisis will continue to bite into exports (despite efforts to find new markets) and strong domestic demand will increase the appetite for imports. This will feed into a rising current account deficit - nominated by some as the key domestic issue to watch in 1999 - which is expected to rise to $32 billion.

Downturn on Wall Street big risk ahead

The overvalued United States sharemarket poses the greatest risk for investors in the year ahead, and any severe correction could drag down the Australian economy, according to The Age economic survey.

While the most pressing domestic concerns are the rising current account deficit, a rapid change in the value of the dollar, and the implementation of the goods and services tax, almost half the economists surveyed nominated Wall Street as the big risk in 1999.

Mr Rob Henderson, from Dresdner, said Wall Street was "overvalued on practically all measures used by equity analysts". Using historical data by the Australian National University academic Professor Adrian Pagan - who is a member of the Reserve Bank board - Mr Henderson said the chances of the US bull market continuing "are getting very low".

The Westpac analyst Mr Bill Evans noted concern about "irrational exuberance" in the US stockmarket while many others simply said 1999 would be the crunch year when the bubble would burst and the US economy would slow.

The other flashpoints to watch, according to the experts, include economic troubles in Brazil and Russia, the continuing sluggish performance of Japan, how the troubled South-East Asian economies perform, and whether China is dragged into the financial crisis.

The wildcard for 1999 comes from Mr Craig James, from Colonial State Bank, who suggested plunging oil prices could spell the end of the Organisation of Petroleum Exporting Countries.

"If oil prices fall further, then the contagion spreads to the Middle East with pressure for devaluations, the collapse of OPEC could be the X factor for 1999," he said.

The primary domestic concern is not a slowing of economic growth but what happens if growth remains strong.

Mr Saul Eslake, from ANZ, summed it up: "If the Australian economy does not slow, as almost universally expected, it will raise renewed concerns regarding the current account deficit and inflation, with the possibility that interest rates rise rather than fall."

Telstra's corporate economist Mr Geoffrey Sims said a "rapidly" rising current account deficit would constrain the Reserve Bank in further cuts to interest rates.

The 33 experts were asked their view on the risk of a recession in Australia in 1999.

Many said while there would be a recession at some stage, there was less than a 20 per cent chance of it being in 1999.

The Melbourne Institute's Mr Peter Summers used historical data to calculate that the possibility of a recession by the end of 1999 was 33.8 per cent.

The Victorian Employers' Chamber of Commerce and Industry's Mr Steven Shepherd was one of the few to mention the GST, saying business must focus on how tax change would affect investment strategies.

At the Australian Chamber of Commerce and Industry, Mr Stephen Kates warned an ACTU wage claim of up to 7 per cent "would cause deep problems within Australian industry".

The Australian Industry Group's Ms Heather Ridout said while the threat of a recession in 1999 "seems ridiculous, post 2000 might be another story".

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1998-99 Economic Survey. Asia to hit growth

Philip Hudson:

Lower export sales, weaker job growth and depressed consumer and business confidence due to the Asian economic crisis will combine to cut Australia's growth rate in the new financial year, according to the Age half-yearly survey of economists.

But while some experts believe up to three percentage points could be wiped from growth, there is a majority view that the worst of the Asian crisis will be over by the year 2000.

Economists were asked by The Age to predict how many percentage points the Asian economic crisis would subtract from Australia's rate of economic growth in 1998-99 and 1999-2000.

Nikko Securities' chief economist, Mr Peter Horn, said the effects of the Asia slowdown would cut 3 percentage points from growth this year and 0.75 per cent next year.

"The direct effect of lower exports will detract two percentage points in 1998-99 and indirect effects, including lower employment growth and consumer spending and deferred business investment will detract 1 percentage points," he said.

ANZ's economist, Mr Saul Eslake, said Australia's heavy trade reliance on Asia would cut growth by 1.5 per cent this year and a further 1 per cent for the following year.

"Asia's financial crisis is one of the largest of the post-war era and will cost Asian economies at least 20 percentage points in terms of forgone growth relative to trend over the next four to five years," Mr Eslake said.

"Australia is more exposed to these losses than any other non-Asian OECD country. Direct losses through weaker exports and (eventually) heightened import competition will be compounded by income and employment losses and by adverse effects on business and consumer confidence."

Mr Steven Shepherd, from the Victorian Employers Chamber of Commerce and Industry, said domestic consumption would remain robust but cheap Asian imports and weaker business investment would cut growth by 0.75 per cent each year.

The Australian Chamber of Manufactures' Mr Tony Pensabene said the Asian economic crisis would hurt business much sooner and harder than originally anticipated.

"Key metals and engineering industries are highly exposed to Asia and given these are among our largest corporations the effects are flowing quickly through the rest of the economy," he said.

Mr Steven Kates, from the Australian Chamber of Commerce and Industry, believes that, barring any destabilising developments, most of our trading partners should be well into recovery by 1999.

"There are, however, still enormous downside risks, particularly if the measures taken to revive the Japanese economy fail to achieve their intended aim," he said.

"This would be compounded by any serious downturn in the Chinese economy, which would significantly lower business confidence."

Mr Bruce Hockman from Deutsche Bank said that the Asian impact might not be as large as feared as many exporters were finding new buyers.

We'll take a big hit from Asia: economists

The Asian economic crisis could wipe as much as three percentage points from Australia's rate of economic growth in 1998-99, according to economists surveyed by The Age.

The brakes will be applied to the economy in the year ahead as the Asian slowdown reduces imports, dampens the hopes of the unemployed and hits consumer and business confidence.

But the dollar is predicted to rise after its slump last month.

The Age half-yearly survey of 28 economists also predicts inflation will rise, the Government is unlikely to meet its Budget surplus prediction and the current-account deficit and foreign debt will increase during 1998-99.

Every aspect of the Australian economy will be touched by the economic trouble in Asia. The overall prediction for economic growth in 1998-99 is 2.27 per cent - well below the Government's May Budget forecast of 3 per cent.

The pessimists are Mr Mike Nahan, from the Institute of Public Affairs, and Mr David Corby, from National Mutual Funds Management, who forecast a recession.

The most optimistic person in the survey was BIS Shrapnel's Mr Richard Robinson, who expects the economy to grow by 4.1 per cent.

Only two others predict growth will be stronger than 3 per cent while six said it would be less than 2 per cent.

Mr Peter Horn, from Nikko Securities, believes the Asia crisis will cut growth by three percentage points.

The outlook for employment is mixed, with most economists predicting job growth will be lower than the Government expects.

Three economists believe the jobless rate will be above 9 per cent by this time next year.

Yet 10 others have predicted the unemployment rate will be less than 8 per cent.

Wages are expected to grow by 3.85 per cent, which is below the Government's forecast 4.25 per cent.

There is broad agreement prices will rise by less than the Government's 2.75 per cent forecast.

Six economists are punting on a cut in interest rates.

And despite the dollar's recent plunge below 60 US cents, most economists believe it will be above that mark by Christmas.

Surprisingly, six of the experts believe the current-account deficit will be lower than the $31 billion forecast by the Government.

Not one of the economists surveyed believes the Treasurer, Mr Peter Costello, will do better than the May Budget prediction of a $2.7 billion surplus.

How the tipsters fared

OK, so 28 tipsters have told us what they think will happen to Australia in the next 12 months. But their forecasts differ, so the question any market punter should be asking is: what are these guys' records?

It is a fair question, given that in our Sunday paper's $50,000 investment race, racing tipster Lucky Phil has taken a commanding lead over the brokers investing in share portfolios. So we decided to benchmark past Age survey forecasts and came up with interesting results.

For example, on average, our panel does better than Treasury at tipping the Budget deficit. It also does better than Treasury at tipping growth rates: over the past five years, our panel's average tip has been within 0.5 percentage points of the actual growth rate.

Yet the panel, although dominated by market economists, is no good at tipping what markets will do with interest rates and currency. It tends to assume little change ahead; no one has predicted big shifts, such as the interest rate rises of 1994 or last year's currency plunge.

Let's look at the details:

GDP: The best news in today's survey is that Sydney consultants BIS Shrapnel forecast growth of 4.1 per cent for 1998-99. That matters because in the past five years, Shrapnel has been the most accurate forecaster of GDP in Australia.

On average, BIS Shrapnel has come within 0.3 per cent (percentage points) of tipping the actual growth rate each year. By contrast, the Treasury has been wrong on average by 0.7 per cent and the panel on average by 0.5 per cent.

Shrapnel won its gold medal partly in 1993-94, when it was one of few to predict the acceleration into rapid growth. And in four years since, it has scored two bullseyes and been within 0.5 per cent twice.

Runners-up, with an average error of 0.5 per cent, are Chris Cheatley of the Economist Intelligence Unit, Saul Eslake and predecessors at the ANZ Bank, and David Corby and predecessors at National Mutual. Corby is one of the two panelists now forecasting a recession.

EXCHANGE RATE: Last year blitzed the reputations of all exchange-rate forecasters. No one foresaw Asia dragging down the Australian dollar to these levels.

At the end of 1996, when the dollar was worth 79.65 US cents, the panel believed it would be the same a year later. By June 1997, when the dollar had fallen to 74.5 US cents, the panel forecast it would be at 77 US cents by now. On average, the best of the currency tipsters has been Alan Oster of the National Australia Bank. He virtually hit the bullseye in the 1995 and 1996 mid-year polls, came closest to tipping the dollar's plunge in late 1997 and has been on the leaders board in every survey.

Honorable mentions are also due to Peter Horn of SBC Warburg, Chris Murphy of Econtech, Chris Cheatley of the Economist Intelligence Unit and Des Moore of the Institute for Private Enterprise.

INTEREST RATES: Here too, the panel missed the big shifts. In July 1994, it saw little change ahead; short-term rates promptly rose 2.75 per cent in four months. By January 1995, with two exceptions, it tipped further rises of 1.75 per cent; instead, rates then held tightly. In July 1996, only two forecasters tipped any fall, let alone five drops, totalling 2.5 per cent.

In every mid-year survey since 1991, the panel has tipped short-term rates to stay within 0.5 per cent of current levels. In four of the past eight years, the actual outcome was outside the entire range of forecasts.

That said, the best recently has been Don Harding of the Institute of Applied Economic and Social Research, the only one to correctly tip the past two turning points. Alan Oster and Des Moore tipped one each.

BUDGET: Treasury ought to do far better than the private forecasters in tipping the Budget deficit. Not so. In most years, the Treasury and panel forecasts have been almost identical.

The big difference was in 1995-96, when Treasury forecast a headline surplus of $718 million, The Age survey tipped a $900 million deficit - and the outcome was a $5 billion deficit!

The accurate one in 1995-96 was Dr Philip Adams of the Centre of Policy Studies, who tipped a $5.6 billion deficit, while the National Institute of Economic and Industry Policy tipped $3 billion. In 1996, Treasury understated the headline surplus by $2 billion, and the panel by $2.3 billion. Only Paul Brennan, Nigel Douglas and David Lansley came close.

Will this year restore Treasury's reputation? Has BIS Shrapnel got it right again, or David Corby? See you next year.

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