One of our goals here at Economists at Large is to call out bad economics.  I just can’t let a short article by Andrew Burrell published in  The Australian  newspaper on the 28th go unanswered (Labor decades behind us on Asia links, says Barnett, 28/11/2012).

In the article Western Australian Premier Colin Barnett demonstrates a lack of understanding of economics. To quote directly from the article:

Mr Barnett repeated his claim that the rest of Australia did not understand the economic changes that had occurred in WA as a result of the resources boom.

He cited Australian Bureau of Statistics data showing average GDP per capita in Australia was $64,000, but in WA it was $102,000. “It is only the tax havens of Monaco and Lichtenstein and a few places that actually have a figure as high as that.

There are three points to make here. Firstly, GDP per capita is always going to be high in an economy with a small population (compared to east coast Australia) with highly capital intensive industries (mining, oil and gas). Second, high levels of investment in mining, oil and gas lead to problems of their own that affect the rest of the Australian economy, as highlighted by the Australia Institute:

 The mining industry’s advertisements ignore the way that the mining boom is driving up the exchange rate, driving up mortgage interest rates and driving down employment in other sectors of the economy.

– Mining the Truth, Press Release, The Australia Institute

But perhaps most importantly, Barnett’s use of  GDP per capita carries with it the implied assumption that higher GDP per capita is a good measure of progress for the state. It isn’t necessarily so. Even the ‘father’ of national accounts, Simon Kuznets, acknowledged the limitations of GDP for inferring welfare. GDP simply measures economic activity, not necessarily how well off people are. A common example of this is that an oil spill will increase GDP in the short term as money is spent cleaning it up, despite the longer term impacts.

If Barnett really wanted to compare Western Australia with the rest of the economy, the better way would be to look at purchasing power adjusted median incomes. Nicholas Biddle wrote a piece on The Conversation that comes about as close to this as I’ve found.

The article shows that median incomes in WA have grown significantly since 2006 and are now the highest in Australia, but not by much. Interesting, Nicholas’ article also shows that as of 2011, Perth was second only to Sydney in terms of income inequality between the highest and the lowest earners. Unfortunately, the Australian Bureau of Statistics doesn’t track spatial price indices required to adjust incomes in each major city for living costs. A quick Google turns up a report by the Western Australian Council of Social Service entitled ‘The Rising Cost of Living in WA‘ in which it is stated:

While the WA economy has recovered from the global economic downturn of 2008-09 and
is again driving the national economy, not all West Australians are sharing in this prosperity.
Cost of living increases over the past two years, many of which are linked to the resources
boom, have put financial pressure on many West Australian households.

GDP has been relied on for far too long by politicians and the media to gauge economic progress and welfare. It’s time politicians (and journalists) went back to economics school and stopped promoting bad economics.

Further reading:

• The Rise and Fall of G.D.P. (New York Times, May 2010)
• Measuring economic well-being, GDP vs Median Incomes (State of the USA, July 2010)