Last week, we witnessed RBA governor Michele Bullock address Senate Estimates, where she stated that the notion of a per capita recession “isn’t very helpful.”
Treasurer Jim Chalmers has also played down talk of a per capita recession, instead insisting that the economy is healthy and that a recession will be avoided.
Over the weekend, I talked to Luke Grant on Radio 2GB, explaining why GDP was useless in measuring Australian economic progress because it failed to consider individual outcomes.
Edited Highlights:
GDP simply measures the economic activity of Australia.
The latest March quarter national accounts recorded the weakest annual economic growth in the country outside of the brief pandemic lockdown since the early 1990s recession. So, we certainly have a weak economy.
The result has to be taken into context. We are running this very high immigration program and Australia’s population is growing incredibly quickly—almost at its fastest rate since the early 1950s.
So, we have the weakest GDP growth since the early 1990s at the same time as we have had the strongest population growth in around 70 years.
What this basically means is that everyone’s slice of pie, which is what really matters, is shrinking.
This is one thing I hate about the economics profession. I hate the way the ABS and the media report on the economy.
They only ever talk about the overall economy in terms of GDP. But GDP is irrelevant to you and me because we don’t really care how much Australia grows in aggregate. We care about what our share of that growth is.
On that measure, GDP per capita, the data is absolutely abysmal. GDP per capita went backwards by 1.3% over the year, which again was the worst read since the early 1990s recession.
There were actually five consecutive quarters where Australia’s growth has gone backwards in per capita terms. And that is actually the longest period of per capita economic decline on record since 1973.
It wasn’t the largest decline; we had a bigger one in the early 1990s recession. But we haven’t had five consecutive quarters since the start of modern records in 1973.
This shows you how important the personal impact or share of the pie.
We often heard in the years leading up to the pandemic that Australia was this miracle economy that hadn’t had a recession since the early 1990s. And that we were world beaters.
However, Australia ran one of the highest immigration programs over this century. And we actually had several per capita GDP declines over that period.
This high immigration allowed Australia to paper over the economic weakness of the country. It made Australia look better, but in per capita terms, the economy was deteriorating.
Per person, our living standards are actually getting a lot worse, especially given GDP is a pretty useless figure. It is just economic activity.
For example, my house is perfectly good. It is in good condition. But if I decided I wanted a flasher house, I could knock down my house and build another house where this house currently stands.
The knockdown of this house would raise GDP. The removal of all the rubble would raise GDP. The building of the new house would raise GDP. But at the end of it, we would still just have a house. So, the economy is no better off.
That is why GDP is not a great measure of welfare.
Also, when you run this high population growth policy, as we do in Australia, we have to build a whole bunch of infrastructure and all of this other stuff that we otherwise wouldn’t need.
When we build that infrastructure, that adds to GDP. So, it is considered an economic benefit when it is actually a cost of immigration.
We are merely building this stuff to keep up with population growth.
One of the hilarious things that happened this week is that our esteemed Reserve Bank Governor, Michele Bullock, fronted Senate Estimates and said that the notion of a per capita recession is not very useful. Basically, it doesn’t matter.
To the contrary, per capita GDP is the measure that does matter. It is aggregate GDP that doesn’t matter.
If I could change economics, one of the things I would change, is that I would force the ABS to report as the headline figure whenever it releases the national accounts per capita GDP.
So, instead of reading, “Australia’s economy grows 0.1% in the March quarter,” the ABS would have said, “Australia’s declines 0.4% in per capita terms in March quarter”.
Because it is the per capita that matters to Australians.
Australia could have perpetually strong population growth if we wanted. We could import a million people every year and we would have very solid GDP growth. And it would look good on the surface.
Once you divide the pie amongst more people, everyone’s slice of the pie will shrink.
Is that really what we want? And does that make us better off as a country? I don’t think it does.
