In a post here a few weeks ago, Adelaide economist Jonathan Pincus claims that my Beyond the Boom book confuses output and income. Fair readers will find that Beyond the Boom is painstaking in making exactly this distinction. It is central to understanding the mining boom, which is why I wrote quite a lot about it.
In the book I calculate the effect of the mining boom on real GDP comparing the years 2012 to 2002, and quite separately – indeed, in another chapter, with the distinction and its importance explained – I calculate the income gains. In yet another chapter I discuss a different way of calculating the income gain.
In response to my earlier rebuttal Pincus concedes he was confused about (or 'misreported') exchange rates. I think his confusion is more widespread. The 3% contribution to GDP from the mining boom I infer from an excellent RBA paper, which uses a sectoral analysis approach. The 3% gain in nominal GDP from the boom (in the relevant years) is half of the 6% gain in nominal GDP from additional mining exports – a quite different calculation. All this will be clear to the reader, if not to Pincus. [fold]
Pincus likes the terms-of-trade-adjusted measure of real income. That is fine. I myself use it where appropriate. But it is important to understand what it is. In deflating nominal export revenue by the change in import prices, the measure expresses the change in export revenue in terms of the volume of imports that revenue can buy. Its limitation is that it is a conceptual measure. If for whatever reason people choose not to buy imports, the income gain remains possible, not actual.
As it happens, Australians did not markedly increase the volume of consumer imports during the boom. The big increase was in capital imports, much of it mining investment. In the ten years to the end of 2012 the volume of capital goods imports increased twice as fast as the volume of consumer goods imports. Indeed, in the ten years to the September quarter of 2011 (the peak), capital goods imports increased by just short of 400% – two and half times faster than consumer goods imports. The increase in the volume of consumer goods imports was somewhat faster in the ten years to the end of 2002 (before the mining boom began) than it was in the ten years to the end of 2012. This was part of the remarkable household restraint during the boom, which contributed to the rise in household savings that Pincus elsewhere acknowledges. Savings, incidentally, are calculated as a share of nominal GDP, not real output or income.
That is why I think it is useful to look directly at the actual gains from additional mining and metals exports, or from additional nominal output in metals and mining, again comparing 2012 to 2002. As to the impact of the exchange rate, I would refer back to my earlier reply to Pincus. He now blithely admits error on the exchange rate without addressing the consequence.
Pincus writes admiringly of yet another way of calculating the gains of the boom. This method compares the actual outcomes with those which might have occurred in a different world from ours. In this assumed world, global industrial production and global output were markedly less than in the actual world, and the effect on Australian output and income in this assumed world were then calculated using a model of the Australian economy. The difference between what actually happened and what might have happened in the hypothetical world is then construed as the difference made by the mining boom.
As a measure it is quite unlike either the usual terms-of-trade-adjusted trading gain measure, or the simple calculation of gain in nominal export income, or the sectoral analysis used elsewhere by the RBA. It is a useful and interesting exercise but the result depends entirely on the characteristics of the assumed alternative world economy and the characteristics of the model. It is a might-have-been, like wondering what might have happened if Colonel von Stauffenberg had succeeded in killing Hitler. With little trouble, anyone can think up an alternative world compared to which the mining boom would appear to be either a very big or a very small increase in Australian income and GDP.
I recognise the interest of the exercise but I prefer measures that look at the actual impact of higher prices over the period they occurred, compared to the starting point. I think my calculations will be closer to the actual experience of Australians. For policy purposes, for the question of how we adjust and what comes next, this is the important thing.