I was a little thrilled when I saw a link to my blog from a Scott Sumner post on econlib (thanks Rajat!).
Scott took a look at my NGDP post and said that he prefers total labor compensation — which in the Australian National Accounts is called Household Gross Income (HHGI). The man knows what he is talking about — over the last 30yrs (1990+) the correlation between nominal consumption and HHGI is a bit better than the correlation with Household Gross Disposable Income (HHGDI). I had expected that variation of interest rates and tax rates over time would make HHGDI a better guide to consumption trends … turns out that’s not the case.
If you focus instead on GHHI, nominal growth is ~3.4%y/y, or about 70bps better than the growth rate of GHHDI. The difference between the two is “Total Income Payable”, which is growing at +5.75%y/y. That is an interesting story itself, but beyond the scope of this post.
In Scott’s blog about monetary equilibrium, he argues in favour of targeting a nominal income measure that is also adjusted for population growth. The growth rate of Australia’s civilian (15+) population is ~1.7%y/y, which brings the per-capita growth rate of nominal household income down to ~1.75%y/y (chart below).
From 1980 to 2012, the median growth rate of this measure was ~6%, so I would think that 1.75%y/y is a bit skinny. I’d love to know what Scott (or those of you who think this way) have to say about this development. I would suppose it means that monetary policy is way too tight.
I agree, of course.
Because I’m still stuck to my old ways, I am going to paste the deflated chart below. Annual growth of real per-capita income at ~20bps is around historical lows, and certainly consistent with the periods when the RBA has been cutting rates (the 1980 to 2012 average was ~1.75%). The wonder is that there’s any inflation at all!