It is often forgotten that the ultimate purpose of economics is to increase living standards. This aim is ignored in the pursuit of other less noble causes, such as higher gross domestic product or a stable level of inflation or a low level of unemployment. But improving economic indicators aren’t always a good thing if the lives of the citizens of an economy aren’t getting any better.

Australia has experienced two decades of almost uninterrupted growth. But how effective has that growth been at improving the living standards of many Australians?

Australians are now dedicating a record proportion of their disposable income to servicing their mortgages. Of course, this isn’t an even representation. Many Australians (usually older ones) have no mortgage at all. It is generally the young who have been lumped with a sizable mortgage, often intruding into upwards of 40% of their disposable income.

Then there is the other great expense of many aspirational Australian families — private school fees. The Sunday Age last week reported that fees at leading Victoria school leapt by 91% in the last decade. That is more than double the increase in average household income, which rose by 39% between 2000 and 2008. It now costs upwards of $23,000 to send one child to a private school in Melbourne. That is after tax. If you have three children at a private school, the household would need to be earning taxable income of upwards of $130,000 before any other expenses are even considered.

The cost of education is not the only thing that risen in recent years. According to the ABS, less than 7% of homes are deemed “affordable” to low-income earners. It probably hasn’t helped that the bottom 40% of income earners collect only 13.2% of income earned (down from 13.7% in 1996).

But these are all symptoms of a confused economy. An economy that encourages the smartest graduates to pursue careers in finance and law (and heaven forbid, real estate) rather than engineering or science. An economy that seeks growth in GDP, above growth in living standards — an economy that pumps billions of dollars of taxpayer money into stimulus programs that create jobs in industries where there should be no jobs being created.

Bill Bonner noted recently in the Daily Reckoning that:

There are some activities that are positive sum activities. That is, they are productive.

They increase the total of real wealth in a society.

There are other activities that are zero sum activities … or even negative sum activities.

War, for example. Excess legal wrangling. Paperwork. Too much time spent in schools. Too much support for the unemployed, the malingerers and the loafers. These things decrease the total of real wealth in a society.

Sometimes people are bright, honest and hard working. Sometimes they are lazy, shiftless and cunning. They always prefer to get wealth and status by the easiest means possible. In some societies, the best way is by working hard. In others, it is by being clever … becoming a lawyer … a banker … or a government hack.

Bonner was actually speaking about America, but he could have been referring to Australia, when he continued:

As societies (or economies) age, they become decadent, arthritic, and backward-looking.

They shift from wealth creating to wealth shuffling … and then to wealth destroying. They evolve into societies that are more concerned with redistributing wealth than with creating it … more focused on the appearance of wealth creation than with the real thing.

People shift with their societies. When hard work and creativity pays off … they become hardworking and creative. When connections and corruption pays, they are up to the job.

Last year, a large US-based investment bank paid a Melbourne-based banker $10 million to switch firms away from another US-based investment bank. Other young investment bankers get paid upwards of hundreds of thousands of dollars a year to essential sell assets owned by companies — their bosses get paid millions to do the same. Australia’s retail banks are able to generate about $20 billion in profits by stimulating a gigantic property bubble while at the same time having their liabilities guaranteed by taxpayers.

The lending underpinning that bubble leads to further increases in GDP, making it seem like everyone is richer, when in reality, many household balance sheets have an overpriced asset in one column, and a fixed debt in the other.

Rising assets prices, higher food costs, skyrocketing utility costs and increased education expenses have turned Sydney, Perth and Melbourne into three of the world’s most expensive cities. Economic statistics have created a mirage a wealth. People feel richer but in reality, they can afford less.

If Australians are really richer now than 20 years ago, why, for many, is everything to unaffordable?

Peter Fray

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