If we're all getting richer, why do we feel so poor - 22nd Aug 2003

Julie Macken & David Bassanese - Australian Financial Review

If you believe most economists and politicians, Australia's economy is so bright you've gotta wear shades. According to Treasury, the economy is expected to grow by 3.75 per cent over the next 12 months, interest rates are low, inflation under control, and the housing bubble has made millionaires out of the most humble home owners in Sydney and Melbourne.

So if everyone is so rich, why do so many - including the very wealthy - feel so poor?

The answer is in two parts.

Part A, is a simple story of mathematics and who is paying what for what. Part B is a not-so-simple story about rising expectations and recalibrated desire.

But first to the maths.

The whiff of deflation - or falling prices - seems to be sweeping across the global economy like a virus. Japan has it. China has it. Germany is close to it, and Americans are openly concerned they could be next.

And even Australia's consumer price index was flat in the June quarter - indicating no overall increase in prices.

Yet for many households struggling to meet budgets, the idea of flat or even falling prices seems like a pipe dream. Everywhere they look, prices seem to be rising - and faster than their paypackets. How is it that households bemoan shrinking real pay at a time when price inflation is low and potentially going into reverse?

Australia's Reserve Bank argues we are far from deflation, though credits us a low-inflation economy. Excluding volatile price changes for some items, the RBA estimates underlying inflation at between 2.5 to 3 per cent over the past year.

Set against wage rises, that's not bad. Over the year to March, private sector wages rose by 3.5 per cent - suggesting households should be at least keeping their heads above water, if not marginally in front.

But the reality is that price performance across the economy is disparate. Some prices are rising strongly, while others are falling. Households are likely to notice and complain about price rises more, while under appreciating the opportunities afforded by falling prices elsewhere.

In recent years, some of the biggest price rises have come not from the goods you buy in stores, but from services - health, transport and education. A major culprit has been the rising cost of insurance - due to the collapse of HIH, rising terrorist risks, and liability payouts. This has had a pervasive impact on services prices across the country.

Another factor is that services are less subject to the price disciplines of global competition. Rising private health insurance has been a source of complaint over the past year, which has been reflected in a 10.3 per cent increase in hospital and medical services within the CPI. And up until recently, global fears about the war in Iraq caused petrol prices to surge - up 17.4 per cent in the year to March. Fuel prices dropped back almost 10 per cent in the June quarter - following the war - but are still up 6 per cent from the first quarter of last year.

Education is another bugbear, with preschool and secondary education rising by 7 per cent over the past year. Wage rises to retain good staff and higher insurance costs are thought largely responsible for the higher imposts. Child care costs rose a staggering 16.5 per cent.

Food prices have also increased, though not by as much. Drought conditions have contributed to hefty price rises for some food items, with the overall food price index up 4.4 per cent in the past year. Standout price increases down the shopping aisle include breakfast cereals (9 per cent), vegetables (24 per cent), and sandwich spreads (16 per cent).

For those looking to buy a house the news has not been great either, though may be getting better. House price growth has been slowing, though is still up 5.3 per cent in the past year - with prices doubling since the early 1990s. Renters have more recently fared better, helped by increased supply as investors have poured into residential property. Rents are up only 1.6 per cent over the past year, with Sydney rents up only 0.4 per cent.

Other items in the standard consumer basket have been more favourable to consumer budgets, especially if you are in the market for clothes, household goods, a TV or sound system. Here we are finding the benefits of global competition, technology improvement and a rising currency dragging down the prices of these largely imported items. Cheap imports from China, in particular, have been a major dampener of price growth.

Shoe prices fell 1.4 per cent over the past year, with men's clothing down 1.2 per cent. Women's clothing prices were steady, while only non-internationally traded clothing "services" - such as dry cleaning and repairs - able to get away with a 4 per cent price hike.

Household goods and services rose only 0.9 per cent in the past year, with falling prices evident for towels and linen, glass and tableware, and appliances.

And for those seeking recreation the news is even better - prices for audio, visual and computing equipment fell 17.5 per cent in the past year as technological improvement, a stronger currency, and global competition continue to pull down prices. Overall recreation prices rose only 0.3 per cent in the past year.

So while the cost of (private) health, education, transport and housing has continued to climb, the cost of other goods has remained steady.

Which brings us to Part B; recalibrated desire.

According to Dr John Buchanan, the deputy director (research) of the Australian Centre for Industrial Relations Research and Training, the answer to the question 'Why do apparently wealthy people feel so poor?' can be found in bookshops across the western world.

Just take a flick through, Loss of Happiness in Market Democracies, by Robert Lane, Luxury Fever by economist Robert Frank, or Overspent American by Juliet Schor.

"They all make a similar point," Buchanan says, "and that is that people's point of reference for what constitutes enough or a good life, has changed. We use to look over our back fence to see what we needed to do to keep up with the Jones', but now the back fence has gone, along with our neighbours, and we're looking at television to try to work out what enough means today."

That can cause a serious disconnect for many but the wealthiest individuals. For example, economists have found that to live the life of one of the characters shown on the US sitcom Friends, a person would need to earn $US100,000 ($151,400) a year. The problem is, Friends is supposed to be about a gang of friends, just like you and me.

"Social reference points are relative not absolute," Buchanan says. "The new norms in consumption are based on what the very wealthy can afford. Unfortunately, these levels are what everyone then aspires to."

A survey by Newspoll on behalf of The Australia Institute last October, found 62 per cent of Australians believe they cannot afford to buy everything they really need. Almost half (46 per cent) of households with incomes of more than $70,000 also found they could not buy everything they really needed.

Bearing in mind that incomes are three times higher than they were in the 1950's, this finding needed further examination.

When respondents were asked about the specific items they had gone without, a different picture emerged.

"Even amongst the lowest income levels the incident of serious hardship is not much more than 10 per cent. It is fair to conclude that a substantial majority of Australians who experience no real hardship, and indeed lives of abundance, believe they are doing it tough."

This racheting up of desire was understood 100 years ago. As Karl Marx said: "A house may be large or small; as long as the surrounding houses are equally small, it satisfies all of our social demands for a dwelling. But if a palace rises beside the little house, the little house shrinks into a hut."


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