The sneaky economic trick that explains why we’re worse off but the statistics don’t show it

YOUR income is shrinking dramatically even as Australia’s wealth expands. Here’s how this nasty economic trick works.

AUSTRALIA is about to snag the longest run of economic growth any country has ever seen and we should all feel deeply patriotic.

That’s what we keep hearing. Right?

But here’s some bad news. Even though it’s true, it’s not really relevant. Per person income growth is going backwards and it has been since 2011.

Here’s a graph to prove it.

Source: ABS.

Economists don’t talk so much about per person income growth. They talk about GDP non-stop (that’s the same as national output growth).

But national output growth has to mean something to us to matter. You could grow our national output in lots of ways that don’t make our lives better.

If Australia took over New Zealand, Australia’s national output would suddenly increase by 14 per cent — overnight! But it wouldn’t make us individually better off.

And that’s sort of what’s happened to Australia. We get bigger national output because there’s more people in Australia.

In the last 15 years we’ve added a New Zealand’s worth of people. Extra people eat more, buy more and need more houses. So national output goes up.

You might feel good about that if you’re excited by the chance of overtaking Canada on the Wikipedia page that lists countries by their GDP.

But it doesn’t make much difference to real life per person income.

This next graph shows how per person GDP growth is always smaller than total GDP growth. Even when GDP per person is rising, national GDP is rising faster, because Australia’s population is growing.

Source: ABS.

On Wednesday this week, official figures told us growth was up 0.2 per cent in the last three months. That’s not very good. The sum total of all the output of all the people in Australia rose by just 0.2 per cent.

But incomes per person? They got smaller by a whopping 1.2 per cent. Not many people are talking about that. But they should be.

National output is a dumb measure. A lot of smart people agree. But for some reason we’re stuck with it.

One big difference between national output and individual income is population growth. National output goes up whether individuals earn more or whether there’s more people earning the same. But that doesn’t mean we should stop reproducing or stop migration. Far from it.

In fact, extra babies and extra migrants help keep the economy ticking over. Someone’s got to build places for them all to live, etc. But with our lower growth in income per capita, Australia is now getting a lot fewer migrants.

We’re at risk of going backward even further.

We should have a plan to raise national incomes whether population growth is high or low. That would mean making some big courageous changes to economic policy. And our federal parliament doesn’t seem to have much courage right now.

So, instead of taking over NZ maybe we should decide to just move there. Their income per person may be lower than ours, but it does keep on rising.

Maybe we should just cross the ditch?

Jason Murphy is an economist. He publishes the blog Thomas The Think Engine. Follow him on Twitter @jasemurphy.