It's the economy, stupid!

Are you better off now than you were six years ago?

Over at the 2013 election media panel Brian McNair asks a good question. “I wondered aloud, …, why the ALP had failed to take the credit for managing Australia through the GFC with relatively few adverse impacts.” Fair point - why hasn’t the ALP taken more credit for Australian economic performance?

Let’s set aside the internal personality politics that has plagued the ALP since 2010. Julia Gillard knifed Kevin Rudd immediately before the 2010 election, only to be knifed by Kevin Rudd immediately before the 2013 election. It seems neither wants to build on the policy successes of the other.

I want to look at two indicators of economic performance. The first is youth unemployment - the government justified the stimulus expenditure on “saving jobs”. In 2009 David Gruen from the Federal Treasury made this argument: “recessions do long-lasting damage, particularly to that cohort of people entering the labour market at the time the recession hits. Thus, for example, university graduates entering the labour market in a recession suffer sizeable initial earnings losses, losses that persist for a period estimated at between eight and fifteen years – that is, long after the recession has ended”. Clearly one of the objectives of the stimulus package was to avoid a long and sustained increase in youth unemployment.

But the government failed in that regard. In the graph below I have plotted the (seasonally adjusted) unemployment rate for 15 - 24 year olds over the Howard era (in blue) and the Rudd-Gillard era (in red). (The data are sourced from the ABS Cat. 6202.0 Table 17.)

Youth Unemployment.

Despite the fact that the economy did not experience two consecutive quarters of negative growth and so avoided recession, it is also quite clear that the stated goal of stimulus was not achieved. Getting youth unemployment back onto a downward trend will be a challenge for the next government.

Then there is the Reagan question: “Ask yourself, ‘Are you better off now than you were four years ago?’” In the Australian case that would be “six years ago”. Objectively the answer to that question is “yes” - I suspect, however, most Australians would answer “No”.

NATSEM released a very interesting study last week. The study includes standard of living indices and they show that Australians enjoy a higher standard of living compared to six years ago.

That is not surprising - everyone expects their standard of living to rise. The “real” question is how does the standard of living compare to what people expected their standard of living to be? Here the Rudd-Gillard-Rudd government is in a spot of bother. To guesstimate expectations I took a linear extrapolation of the standard of living indices from the Howard era and extended it over the last six years and compared that to the actual standard of living for equivalised household income (NATSEM divide the data into quintiles).

For illustration purposes I show the results of that exercise for the Q3 quintile - those with 40 to 60 percentiles of household income. The red line (EQ3) is the linear extrapolation and the blue line (Q3) is the actual index.

Standard of Living.

We can quibble, of course, perhaps I should have used some other function and not a linear function, or I should have used a longer time period, and so on. The principle remains, however, that while objectively Australians are better off now than they were six years ago, and are better off than individuals in many other OECD economies, Australians do not think they are as well off as they should be, or could be.

That is the problem the Rudd government faces on Saturday. As Brain McNair indicates voters’ think, “The ALP inherited a strong economy, and have gone on to screw it up for six years.”