It's not just the economy, stupid!
Charlie Nelson
July 2001
Dr Martin Parkinson, a senior Australian Treasury officer, said recently “It is fashionable in some circles to criticise the reforms of the 1980’s and 1990’s … and to ignore or take for granted the benefits of reform.” Australia’s faster rate of economic growth in the 1990’s meant that GDP in 2000 was about $1900 per person, or 6%, higher than if we had grown at the same rate we did in the 1980’s, he said (The Age, June 9, 2001).
Such a statement raises five important questions:
- Has Australia’s economic growth rate really gone up a notch?
- If so, was the faster rate of economic growth in the 1990’s only due to economic reforms?
- What costs, especially non-economic (externalities in the jargon of economists) were associated with those reforms?
- Has any increased income been shared equally?
- Do Australian citizens believe that the claimed benefits of reform have outweighed the costs?
The first question is debatable. If we take the decade 1990 to 2000 compared to 1980 to 1990, then economic growth per capita was higher by about 4% over the decade (0.3% per year). But if we compare the decade 1988 to 1998 with 1978 to 1998, then economic growth per capita fell slightly! Either the claimed benefits have only accrued since 1998 or we have to accept that the claim is dubious.
In any case, economic growth in Australia was much faster in the 1960’s than the 1990’s – and the 1960’s were not renowned for economic reform.
On the second question, there are many factors that
affect economic growth rates. Apart
from population growth rate, these include:
- Interest rates;
- Exchange rates; and
- Productivity.
Of course, economic reform can influence these factors, but Australia certainly made more severe policy mistakes with high interest rates in the late 1980’s than during the 1990’s.
Another important factor is the changing age mix of the population. The swell of the large baby boomer generation reaching the peak of their discretionary income earning ability has lifted consumer spending growth in the 1990’s. The post-war baby boom is hardly an outcome of economic reform in the 1990’s!
On the third question, the national accounts make no allowance for environmental damage. If any increased growth has come at the expense of more foreign pests arriving on our shores (fire ants for example) or degradation of the soil and marine reefs then there are costs that have yet to be tallied. We know from our experience with rabbits that imported pests can cause millions of dollars of damage per year for centuries.
The question about whether the rich are getting richer and the poor getting poorer in Australia is hotly debated. The only conclusion that I have been able to reach is that the gap between rich and poor is not narrowing. It may not be widening either.
Finally, has the dubious increase in income improved the satisfaction of citizens or are there other things in life? Survey research by ACNielsen suggests that for most people, there are more important things in life than the fascinations of Treasury boffins.
The top social priority is unemployment. It is the most important issue out, of those canvassed, for 25% of the population and it is in the top three issues for 56%.
Economic growth is the most important issue for 18.5% and in the top three for 35%. Of course, it can be argued that faster economic growth begets lower unemployment but this does not necessarily follow. The Reserve Bank is required to fight inflation before unemployment and economic conventional wisdom states that low unemployment begets high inflation. At the time of writing, unemployment is rising again and there are questions about the measured level of unemployment (The Age, June 13, 2001).
Education, crime, health, and drugs rate higher than
economic growth in terms of the proportion of people who rate these issues
in their top three most important. Even
the environment comes close.
So, economic growth is not the most important issue for over 80% of the
population and it is not in the top three important issues for nearly
two-thirds of people.
And the other issues do not get measured in Treasury’s GDP numbers!
A recent report in the Australian Financial Review starts with “It seems the old saying is true: all the money in the world can’t buy happiness. Citizens of developed countries have never had it so good, yet they’re not satisfied, and scientists are trying to understand why.” The Australian Financial Review, 30 June 1 July 2001.
The answer is that “it’s not just the economy, stupid”.