It was recently claimed by the opposition party in Australia, that Australia is now in ‘Per Capita Recession‘. A response from the Prime Minister stated that there was no such recognised economic term, implying that the figures underpinning a ‘Per Capita Recession’ are of no real consequence. A recession is two quarters of negative GDP growth, but implication is that the current two quarters of negative per capita GDP growth are inconsequential. So what does it all really mean, and does any of it really matter?
- Per Capita Recession: A real thing?
- Per Capita Recession Significant?
- The stock market ‘big end of town’ perspective
- The average citizen perspective
- What has changed?
- Other Developed Countries
- The impact: Separate Recessions.
- Political Gift:
- If the big end of town is doing well, then who cares about the average citizen!
- An ignored target: Why?
- influential interests
- the fear of an immigration backlash
- Conclusion: Per Capita Recession=A Real and Serious Problem
Per Capita Recession: A real Thing?
A search on google by me for ‘recession’ returned an entry from Investopedia as the first result. Just a few lines in, the following text is provided:
The technical definition of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP)https://www.investopedia.com/terms/r/recession.asp
Per capita GDP is not mentioned on that page. However if you search for GDP, the Wikipedia page reveals
GDP per capita is often used as an indicator of living standard
While there are imperfections with the use of GDP per capita to measure living standards, clearly, GDP per capita is a measure of living standard, while GDP is not at all a measure of living standard. This is why a country such as Sweden has a lower GDP than Mexico, but a far higher GDP per capita than Mexico. Why is the definition of recession based on GDP, when it is GDP per capita that measures living standards? Answer: Because Recession is more a measure for stock market performance, while the trend of GDP per capita would more directly measure the standard of living of the people. This is is why the term ‘recession’ is described on Investopedia. Further, historically per capita recessions have been a consequence of a drop in overall GDP. Recession per capita while GDP rises is a new thing, I would suggest as a consequence of an economy reaching ‘finite world‘.
So No: It is not a term historically as well recognised as ‘recession’ … but if it is new, of course it is not as recognised. The important question becomes: is it significant?
Per Capita Recession Significant?: The stock market perspective.
Consider the four major Australian banks, which each control around roughly 1/4 of the banking market in Australia. As, between these banks they control the entire national market, then with no innovation require by the bans, revenue from transactions for all the banks would grow by 10% if on average Australians increased spending by 10%. However, if spending by the average Australian remains static, but broadly across all layers of society the population increases by 10%, then banks would all record the same revenue rise. It makes no difference to the banks if the increased transaction values arise from more spending power per individual, or arise from an increase in the individuals. In either case the share value should rise. Either increase population or increase individual wealth… in either case their is economic growth which, to the share market dominated by organisations with a market share across the entire nation, will deliver growth in either case. To the financial community, to large national companies and their upper management, and to governments with a national taxation revenue and the politicians who are paid from taxation revenues, per capita GDP can be seen as irrelevant.
Per Capita Recession Significant?: The citizen perspective
Obviously, if per capita GDP is in decline, on average people are seeing their living standard decline. That is clearly negative. Any suggestion that the problem is not serious, is based on the assumption that either
- a) the decline must be small or it would also reflect as a ‘real’ recession also hitting ‘the big end of town’,
- or b) since the ‘big end of town’ is not in recession, ‘trickle down economics’ will ensure encomic benefits for all will soon return.
Assumption a) can be demonstrated to invalid. If the ‘big end of town’, corporations and upper management are still seeing economic growth, then individuals who derive income from these shares or being part of in this group must see their per capita wealth increasing. But the average over all groups is a decline in per capita wealth, despite the lift provided by ‘the big end of town’. This means the drop in living standard by those not included in ‘the big end of town’ must, collectively, be larger than the rise in living standard for those included in ‘the big end of town’. In fact, the further from recession ‘the big end of town’ is placed, the more wealth flowing to that group, the worse it must be for everyone else if, on average, GDP per capita is in decline while overall GDP is not in decline. It follows that the more diverse these two figures, the worse the situation for the average citizen relative to overall GDP. A per capita recession outside a regular recession, in an indicator of an increase between rich and poor with most people getting poorer. A serious social problem.
Assumption b) is also clearly invalid. For average wealth to drop, while one group is seeing a rise in wealth, there is a group seeing a rise, and a group seeing a fall in wealth. The group seeing a rise is the group quoted as the source of wealth in ‘trickle down economics’, but clearly some wealth is being transfer from the rest of society to this very group. In other words, what is being seen is ‘trickle up economics’ or trickle down economics running in reverse. So it is absurd to suggest trickle down economics will address the problem when in fact demonstrably the process is running in reverse.
A per capita GDP recession is now a red flag for a serious decline in household income, or effectively, a recession for most people in society. Many countries now have serious concerns about average household income even when GDP per capita is growing. If GDP per capita is falling, the problem is significant.
What has Changed?
Change of GDP has stopped being a valid predictor of household wealth. The result is a change to the concept of a recession.
Graphs like this from the USA are frequently shown to highlight the problem:
There are various graphs to be found on the net, all of which show that in the USA, growth in even GDP per capita stopped being reflected in household income from around 1980. Sources blame ‘Reganomics‘, the disconnect between labour and wealth generation flowing from technology, and finite world. All probably contribute.
Here are two graphs from this article about the situation in the UK.
These two graphs also show the same type of divergence between economic growth and wages happend in the UK as in US, with only the timing delayed. While this is a limited sample, it does demonstrate the problem is not a US specific problem. In fact, a longer search and more graphs would show the same problem in developed economies globally.
Australia has been running the highest rate of immigration per capita of developed economies, leading to the highest population growth of developed economies.- the biggest change in the denominator or per capita figures. This provides the greatest gap between the GDP trend, and a GDP per capita trend. Australia has the same problems as the rest of the developed economies, however, has the greatest ability with the relative population growth, to have a rise in GDP even when GDP per capita is week.
The Impact: Separate Recessions
Previous large scale recessions generally occurred before the separation of the graph lines of GDP growth and per household growth. This means during previous recessions, the ‘big end of town’ and the ‘average citizen’ experienced the same recession. The big end of town being in recession means high unemployment, so previous recessions had high unemployment. The decoupling of GDP and household income means the average citizen can now experience a recession even without high unemployment.
Translation: “If the big end of town is doing well, then who cares about the average citizen!”
The dismissal of the significance of a GDP recession by the Prime Minister of Australia (Scott Morrison) is in effect a statement that all that matters is ‘the big end of town’, and a statement that a decline in living standard for the average citizen is inconsequential. In fact, the Prime Minister has also stated the elections with be a contest between “enterprise and envy“. Combining that position with the stance on a per capita recession could be seen to be positioning the ‘national enterprises, upper management and large scale shareholders’ as ‘enterprise’, and everyone else as ‘envy’. While the argument could be put, that the elite minority who escape a capita recession by growing their wealth in reverse of the national trend are those government should govern for because they are the source of trickle down economics, on the other side it could be argued this is governing only for those with great influence and ability to donate to political parties. The fact that the Prime Minister, being in upper management in national organisation (the national government) is part of the elite group he identified as ‘enterprise’ when corelating the position on a per capita recession and a contest between enterprise and envy, should create a large target for the opposition.
A Target Ignored: Why?
While it was the opposition party in Australia drew attentaion to the per capita recession, there has been no follow through. It would seem that the response from the Prime Minister was tantamount to drawing a target on himself, but nothing has been fired at that target.
It would seem the government left an opening to be seen as prioritising ‘government for the economic elite’. With the “enterprise and envy” in place, then suggesting a per capita recession is of no consequence would could easily be seen as stating the majority of the country is in the ‘envy’ group, only the very wealthy in the enterprise group. So why no follow up by the opposition?
Could it be that targeting the government for governing for the benefit of the wealthy and influential is risking upsetting that group… and the opposition also is part of that same group?
To suggest that using immigration to ensure positive GDP results in the face of recession for the average citizen, is to question the current ‘immigration to drive economic outcomes’. The whole debate shows that immigration for economic outcomes actually only delivers a positive outcome for the very wealthy, while at the same time eroding the ethical value of immigration. Clearly the opposition is not ready to suggest “immigration for humanitarian outcomes”, which would again distance those very wealthy sections of society.
Conclusion: Per Capita Recession=A Real and Serious Problem
The main problem is that while it seems the opposition get the seriousness of the decline of wealth for the average person and the growing gap between rich and poor… the truth is that either they do not get the issues or are also more concerned about placating those very wealthy large national organisations and their managers and shareholders than they are about the interests of the average citizen.