Why do economists ignore the per capita economy?

Twenty-three ‘leading’ Australian economists assembled to take part in The Conversation’s July 1 forecasting survey have warned that Australia’s economy will fail “to regain the growth it had either in the years leading up to the crisis or the much higher growth in the decades before”:

On balance, the panel expects year-average economic growth (the measure reported in the budget) to slide from 4% this financial year to just 2.2% by 2024-25, well below the average of 2.6% assumed in this week’s intergenerational report…

During the decade leading up to the COVID-19 crisis, economic growth averaged 2.6% per year. During the 27 years between the early 1990s recession and the crisis, it averaged 3.2%.

The panel’s average forecast of 2.2% by the end of the four-year budget forecasting horizon is lower than both the budget forecast of 2.5% and the 2.6% in the intergenerational report.

Why are these 23 ‘leading economists’ focusing on aggregate real GDP growth when it is real GDP per capita growth that matters for living standards?

The federal budget’s population growth projections over the forward estimates were:

• 0.1% in 2020-21;
• 0.2% in 2021-22;
• 0.8% per cent in 2022-23;
• 1.2% in 2023-24; and
• 1.4% in 2024-25.

This implies real per capita GDP growth of 1.8% in 2022-23 falling to 0.8% by 2024-25.

While this growth is nothing special, it is no worse than the decade leading up to COVID (March 2020) where GDP per capita growth averaged only 0.8%:

Real per capita GDP sucked before COVID.

More importantly, these 22 ‘leading economists’ expect that the collapse in immigration will cause unemployment to crater – a process that will unwind as immigration is rebooted:

The panel expects unemployment to fall more quickly than the government does, to 4.7% by mid-2022, a low the budget didn’t foresee until mid-2023.

The unemployment rate is already 5.1%, something the May budget didn’t expect for a year. However, it is to some extent artificially assisted because jobs that used to go to temporary foreign workers and were not counted in the employment statistics are now being taken by domestic workers who are counted.

As foreign workers return to Australia, the process will unwind, putting upward pressure on the recorded unemployment rate.

Thus, surely the closure of Australia to immigration is a ‘good news’ story economically, since it has improved the labour market for Australians without adversely impacting per capita GDP growth? In turn, the labour market tightness will inevitably lead to higher wage growth for Australian workers – something that has been missing for a decade.

Economists’ infatuation with headline GDP, while ignoring per capita outcomes, is the profession’s biggest flaw. It leads to dumb policy decisions like running a mass immigration program, which props up the aggregate economy to the detriment of the wellbeing of individual citizens.