Saturday, December 14, 2013

Australian living standards and the importance of arithmetic

I have been travelling and have not been able to post. On my travels, I saw in passing an interview with WA Premier where he seemed to say that real Australian living standards must fall because Australians had been living above their means. The first is true, but it has little to do with the second.

The previous increase in the value of the Australian dollar meant that Australians could buy more imported goods for the same amount of cash whether it be cars or overseas travel. This increased real living standards. This process has gone into reverse with the decline in the value of the dollar. People have the same number of dollars, but get less for those dollars. Real standards of living decline as a consequence.

The Australian dollar had become grossly over-valued. This provided a windfall gain to those who had cash, but also squeezed domestic economic activity for both import competing and export activities. Effects here were not clear cut, since many economic activities including export activities rely on imported inputs. However, the net effect was forced restructuring. Would Holden have closed if the Australian dollar was still at 57 cents US?  Quite possibly not.

A lower Australian dollar will bring price pressures, but it will also ease adjustment within the Australian economy. That's a good thing, but it has nothing to do with Australians living above their means. It's just a matter of arithmetic.


Scott Hastings said...

The high dollar has been disastrous for places like Port Macquarie and Coffs Harbour that have a high reliance on domestic tourism. I admire the optimism and drive of the Port Macquarie people, who are forging ahead with expansion of the airport regardless.

Jim Belshaw said...

The high dollar did hit domestic tourism hard, Scott. Interesting on the airport. That's one of the things where you have to adopt a longer term perspective. It seems (is) a long time since the first EWA plane landed at Port -