Showing posts with label immigration. Show all posts
Showing posts with label immigration. Show all posts

Monday, October 23, 2023

Want better productivity? Cut population growth

A simple reading of orthodox economics tells you that the urge to maximise profits leads businesses to continuously improve the productivity of their activities. But, as former competition tzar Rod Sims has often reminded us, improving productivity is just one way to increase profits, and there are other ways to do it that are a lot easier.

One other way is to increase your share of the market by having a better product. Or better, coming up with a marketing campaign that merely cons people into believing your product is better.

Another way to increase market share is to undercut your competitors’ prices. But in oligopolies dominated by only a few big players, which many of our markets are, the threat of mutually damaging retaliation is so great that price wars are rare.

(This why the big four banks were so shocked and offended when the Macquarie group, a huge financial group with deep pockets and a small bank, decided recently to get itself a slice of the lucrative home loan market by offering below-market interest rates.)

Another way to increase profits is to take over a competitor. This may or may not increase profitability – percentage return on the share capital invested in the business – to the benefit of shareholders. But the managers of the now-bigger business will have to be paid commensurately higher wages and bonuses.

But the simplest, easiest way to increase profits? Sell into an ever-growing market. And how do you do that? Persuade the government to maintain a high rate of immigration. This is a mission on which big business has had great success in recent decades.

Polling shows the public does not approve of high immigration. With some justification, the punters tend to blame it for road congestion and rising housing costs.

But the Howard government and its Coalition successors did a roaring trade in keeping the punters’ disapproval focused on poor people who arrived uninvited on leaky boats, while they were quietly ushering in all the immigrants that business was demanding. These people arrived by plane, and so drew no media attention.

Is it mere coincidence that productivity improvement has been weak during the period in which immigration-driven population growth has been so strong? I doubt it, though of course, I’m not claiming this is the only factor contributing to weak productivity improvement.

While it makes self-interested, short-sighted sense for businesspeople to be so untiring in their clamour for ever more immigration, the strange thing is that the virtue of rapid population growth goes almost wholly unquestioned by the nation’s economists.

Population growth is an article of faith for almost every economist. For a profession that prides itself on being so “rational”, it’s surprising how little thinking economists do about the pros and cons of immigration. There’s little empirical evidence to support their unwavering commitment to high immigration, but they don’t need any evidence to keep believing what almost all of them have always believed.

Before we get to the narrowly economic arguments, let’s start with the bigger picture. The primary reason for doubting the sense of rapid population growth is the further damage every extra person does to the natural environment.

As the sustainable population advocates put it: too many people demanding too much of our natural environment.

Economists have gone from the beginning of their discipline assuming that the economy and the environment can be analysed in separate boxes. This further assumes that any adverse interaction between the two is so minor it can be safely ignored.

In an era of climate change and growing loss of species, this is clearly untenable. The economy and the natural environment that sustains it have to be joined up. But when it comes to population growth, these are dots the profession hasn’t yet joined.

Even on narrowly economic considerations, however, economists long ago stopped checking their calculations. It’s obvious that a bigger population means a bigger economy, and since economists are the salespersons of economic growth, what more do you need to know?

Well, you need to know that economic growth achieved merely through population growth leads to what the salespersons are promising the punters: a higher material standard of living. Simply, higher income per person.

If there is evidence higher population growth leads to higher income per person, I’ve yet to see it. I have seen a study by the Productivity Commission that couldn’t find any. And I have seen a study showing that the higher a country’s population growth, the lower its growth in gross domestic product per person.

But it doesn’t surprise me that the committed advocates of population growth don’t wave around any evidence they have to support their faith. What is well understood, though the advocates seem to have forgotten it, is that, whatever economic benefits immigration may or may not bring, it comes with inescapable economic costs.

Which are? That every extra person dilutes our existing per-person investment in business equipment and structures, housing stock and public infrastructure: schools, hospitals, police stations, roads and bridges, and much else.

In other words, every extra person requires us to spend many resources on preventing this population growth from diminishing our economic and social capital per head, and thereby making us worse off.

Economists call this “capital widening”, as opposed to “capital deepening”, which means providing the population with more capital equipment and infrastructure per person.

Trouble is, there’s a limit to how much the nation can save – or borrow from overseas – to finance our investment in housing, business equipment and structures, and public infrastructure. So resources we have to devote to capital widening, thanks to population growth, are resources we can’t devote to the capital deepening that would increase our standard of living.

Using immigration to raise our living standards is like trying to go up a down escalator. You have to run just to stop yourself going backwards. This is smart?

In practice, it’s worse than that. There’s a big government co-ordination problem. It’s the federal government that’s responsible for immigration levels, and that collects most of the taxes the immigrants pay, but it’s mainly the state governments that are lumbered with organising the extra housing and building the extra sewers, roads, transport, schools, hospitals and other facilities needed to avoid congestion and overcrowding.

Another thing to remember is that the easier you make it for businesses to get the skilled workers they need by bringing them in from abroad, the more you tempt them not to go to the expense and inconvenience of bothering with apprentices and trainees.

This is why so many businesses were caught short when, during the pandemic, their access to imported skilled labour was suddenly cut off. No wonder they were shouting to high heaven about the need to reopen their access to cheap labour. A lot of it was actually unskilled labour from overseas students, backpackers and others on temporary visas, who are easy to take advantage of.

Have you joined the dots? If giving business what it wants – high immigration to grow the market and provide ready access to skilled and unskilled workers – hasn’t induced business to increase the productivity of its labour, why don’t we try the opposite?

Make it harder for business to increase profits without improving productivity and investing in training our local workforce. Of course, this would require us to value productivity improvement more highly than population growth.

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Friday, October 13, 2023

Why our standard of living will be rising more slowly

You could call it gloom, or call it realism, but the likelihood is the economy will be growing more slowly from now on.

And we’re talking not just the next year or two – where the Reserve Bank’s rapid rise in interest rates means if we don’t go backwards, we’ll have been let off lightly – but the next maybe 40 years.

No one – not even economists – knows what the future holds, of course. But this long-term slowing is the considered guess of the secretary to the Treasury, Dr Steven Kennedy, who this week gave us his summation of the Treasury’s recent intergenerational report, which makes largely mechanical projections – not hard-and-fast forecasts – for the economy over the 40 years to 2063.

 Kennedy says the projections are “illustrative”. A key assumption on which they’re based, that present government policies don’t change, means the projections demonstrate “the longer-term implications of our current path”.

The report’s “aim is to avoid the risks projected … through ongoing improvement and reform of policy settings”.

Even so, I think we’re justified in concluding that the slower growth the report projects is more likely to eventuate than either unchanged or faster growth. That’s because so many of the factors likely to affect our future growth are beyond the government’s control.

The report projects that real gross domestic product – the nation’s total production of goods and services – having grown by an average of 3.1 per cent a year over the past 40 years, will slow to growth of 2.2 per cent a year over the coming 40 years.

How would this slowdown be explained? The Treasury’s standard way of analysing economic growth is to break it up into the three main drivers of growth – known as “the three Ps”: growth in the population, growth in the population’s participation in the labour force, and growth in the productivity of the workforce.

Notice how people-centred this way of chopping up economic growth is?

First. Population. Whereas our population grew at an average rate of 1.4 per cent a year over the past 40 years, it’s projected to grow by just 1.1 per cent over the coming 40.

These days, “natural increase” – births minus deaths – accounts for only about 40 per cent of the growth in our population, with “net overseas migration” accounting for the remaining 60 per cent.

The Treasury projects a further slow decline in our “fertility rate” – the number of births per woman – which has long been well below the 2.1 children “replacement rate” needed to hold the population steady over the years.

So we’ve long used high immigration to keep the population growing. Net migration fell sharply when we closed our borders during the pandemic. It has surged since the borders were reopened, but the Treasury expects it to fall back to 235,000 people a year once the surge has passed.

This level is what the Treasury projects for the rest of the years to 2063 – meaning that fixed number would fall as a percentage of the growing population. Even so, the population is expected to exceed 40 million in the early 2060s.

It’s just a projection, but I don’t have trouble believing immigration levels will decline rather than increase in the coming years. With all the rich countries – and China - having fertility rates well below the replacement rate, I can see far more competition for immigrants than there has been, especially since we only want skilled immigrants.

This expected slowdown in immigration means the overall size of the economy wouldn’t be growing as fast as it has been, but that doesn’t necessarily mean those of us who are already here will be worse off. That depends less on the economy’s overall growth and more in what’s happening to growth in GDP per person.

The report projects that, whereas real GDP per person grew by 1.8 per cent a year on average over the past 40 years, it will slow to 1.1 per cent a year over the coming 40.

Ahh. So, not just slower growth in the economy, but a much slower rate of improvement in our material standard of living. We’d still be getting more prosperous, but at a rate so small that it would be hard to notice.

And the problem must be coming from the other two Ps – participation and productivity improvement.

At present, the “participation rate” – the proportion of the working-age population that’s either in work or actively seeking it – is the highest it’s ever been, at 66.6 per cent, but the Treasury projects it will have fallen to 63.8 per cent by 2063.

Why? Because the proportion of the population aged 65 and over is projected to rise from 17 per cent to 23 per cent. So population ageing means more people will be too old to work.

But this will be countered to an unknown extent by more women of working age taking paid employment, and a healthier post-65 population choosing to keep working, even if only a few days a week.

However, most of the slowdown in GDP growth per person is explained by the expectation that the rate of improvement in the productivity of labour will be slower.

Whereas productivity improved at an average rate of 1.5 per cent a year over the past 30 years, it’s improved by only 1.2 per cent a year over the past 20 years – and that’s the rate the Treasury has projected over the coming 40 years.

There are plenty of reasons to expect productivity improvement will become harder to achieve. Just one is the greater share of GDP coming from the provision of labour-intensive services and the lesser share from the capital-intensive production of goods. It’s a lot easier to make machines more productive than do the same for people.

Finally, another reason for expecting population, participation and productivity to be weaker in coming decades is that various other rich countries’ experience is leading them to expect the same.

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Wednesday, October 4, 2023

We need economic growth to make us better off, right? Well, actually

For all our lives, worthies – our politicians, business people and economists – have assured us we need economic growth to make us better off. Almost everything I write assumes this to be true. But is it?

These days, there are more doubters than there used to be. Some people don’t believe that spending your life striving to own more stuff will make you happy. (Spoiler: they’re right.)

But a growing number of scientists tell us unending growth in the economy simply isn’t physically possible, and the more we keep growing the more we’ll damage the natural environment, to our great cost. Climate change is just the most glaring example of the damage we’re doing.

Historians remind us that our obsession with The Economy is relatively recent. It didn’t take hold until the middle of last century.

What we call “the economy” is all economic activity. It’s people getting up every morning, going out to earn a living, and then spending what they’ve earned. So it’s “getting and spending”, production and consumption. This is measured by gross domestic product – the value of all the goods and services produced during a period.

It was only when we started regularly measuring GDP in the mid-1950s that we began our obsession with whether it was growing and by how much. Or whether – God forfend – it was going backwards.

But these are just modern words and concepts. In truth, Australians have been preoccupied by what today we call economic growth since the day white people arrived. Their magic words were “settlement”, “progress” and “nation building”.

The recent arrivals saw a “new” nation where nothing had been done, but with huge potential for endless bush to be made to resemble the old country. They set about clearing the land, damming rivers, building houses, establishing farms and digging up minerals.

Why? To become more prosperous. They spurred themselves on with the belief they must “populate or perish” – be taken over by invading Asians.

So how do you achieve what we call economic growth? The easiest way is to grow the population. Have lots of kids and encourage (in those days, white-only) immigration. That gives you more people to work, but also more people needing to be fed, clothed, housed and entertained.

Bingo. A bigger economy. But while increasing the population makes the economy, GDP, bigger, it’s really only if the growth increases GDP per person that it can be claimed to make us better off, to have raised our material standard of living. And this doesn’t follow automatically.

The harder way to grow the economy is to increase the proportion of the population in paid employment, or to increase our investment in plant and equipment, and (well-chosen) public infrastructure. This does increase GDP per person.

But there’s another, more magical way to increase GDP per person. It’s to take the same quantity of resources – raw materials, labour and capital equipment – and use them to produce more output of goods and services than you did.

This is what people mean when they talk about increasing our “productivity”. It’s achieved, as economists keep repeating, by “working smarter, not working harder”.

How? By building a better educated and more skilled workforce, and by finding ways to make the organisation of factories and offices more efficient, but mainly by advances in technology that create better machines (and these days, computer programs) doing better tricks.

This is the bit scientists don’t get. When they hear the word “growth” they think of one thing: growth in humans’ exploitation of natural resources and all the damage we do to the environment in the process.

But that’s not what GDP measures. Economists know that most of the growth in GDP over the long term comes from increased productivity, not increased inputs of raw materials, labour and physical capital.

This means that, unless you believe there’s a limit to human ingenuity, it’s not true that continuing growth in GDP is impossible.

But when scientists say more clearly the kind of “growth” they’re referring to – growth in the use of natural resources and “ecosystem services” – it’s not possible to argue with the laws of physics.

While economists used to argue that the “limits to growth” weren’t as close at hand as some scientists had calculated, the possibility of the developing world enjoying the same profligate use of natural resources as the rich world is not credible. We expect the bottom 80 per cent to resign themselves to lives of relative poverty, while we in the top 20 per cent continue partying as though there’s no tomorrow.

So I accept that we and other rich countries will have to greatly constrain our use and abuse of the natural environment if the planet is to remain functional. A “circular economy” in which resources are so expensive that almost everything has to be repaired, reused and recycled? Sure.

But here’s the joke. It wouldn’t be the scientists who worked out how we could move to such an economy, it would be the economists.

Read more >>

Sunday, September 11, 2022

Labor's 'plan' to fix the economy has three big bits missing

If you think the jobs summit was stage-managed, you’re right. Anthony Albanese & Co got the tick for policy changes they’d always wanted to make. But the two top-drawer economists who addressed the summit – Professor Ross Garnaut and Danielle Wood, boss of the Grattan Institute – proposed three other vital matters for the government’s to-do list, which it had better get on with if it’s to manage the economy successfully.

Both wanted action on competition policy, immigration policy and fiscal (budget) policy. All of these could play an important role in making the economy less inflation-prone, achieving and retaining full employment, improving our productivity and ensuring workers get their fair share of the proceeds.

The major element in our inflation problem that no one dares to name – certainly not Reserve Bank governor Dr Philip Lowe who, in a long speech about the problem last week, didn’t find time to mention it – is the pricing power that our oligopolised economy gives our big businesses.

Much Treasury research has found that Australia’s businesses lack “dynamism”. To be blunt, they’re fat and lazy. Wood reminds us that lower levels of dynamism and innovation have been linked to a lack of competitive pressure in the economy.

“In competitive markets, excess profits should be dissipated over time as new and innovative competitors enter. But increasingly in Australia and elsewhere, we have seen the biggest and most profitable firms remain largely untroubled by new competitors,” she says.

“While being relaxed and comfortable may be profitable, it is not good for Australia’s long-term economic prospects.”

So, what should Labor do about it? “Making sure that Australia’s competition laws are fit for purpose is part of the response ... The former head of the Australian Competition and Consumer Commission, Rod Sims, has argued that the current merger laws are failing to adequately protect competition. His warnings should prompt serious thought,” Wood says.

Garnaut agrees. He says we have to think about the increasing role of “economic rents” – the ability to earn profits exceeding those needed to keep you in the business. “Productivity is reduced and the profit share of [national] income increased by monopoly and oligopoly,” he says.

The answer? “Rod Sims has drawn attention to the increasing role of oligopoly in the Australian economy, and the competition policy reforms that would reduce it.”

The point for the government to note is that, if it leaves big business’s pricing power unchecked, but restores the unions’ bargaining power, that will be a recipe for a more inflation-prone economy – and a Reserve Bank using high interest rates to keep the economy comatose.

Both Garnaut and Wood gave the highest priority to urging a lasting return to full employment and the many social and economic benefits it would bring, if the jobs market was always about as tight as it is now.

But, as Garnaut says, full employment is hard work for employers. “Many prefer unemployment, with easy recruitment at lower wages.”

Which helps explain why they’re so desperate to get the immigration flood gates reopened and flowing. They talk about shortages of skilled labour but, in truth, they’re just as keen to have less-skilled labour. High immigration is just one of the instruments from their toolbox they’ve been using to keep their labour costs low, including the cost of training workers.

But we can’t keep our gates shut forever, so what should the government do to open up without losing the benefits of full employment (including a strong incentive to train our own youngsters)?

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it is focused on permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and cannot be provided by training Australians.

Wood says we need to fix “out-dated” skilled migration rules. “Targeting higher-wage migrants directly for both temporary and permanent skilled migration would improve the productivity of the migration system and the Australian workforce,” she says.

Which brings us to the budget. Wood says that although our response to the pandemic may now seem to have stimulated demand more than is helpful, these pressures will dissipate, “especially if the federal government and the central bank work in tandem to address strong demand, and do what is possible to boost supply”.

That’s her nice way of saying that, if the government fails to get its budget deficit down, the Reserve Bank will take interest rates higher than it would have. And she’s right, it will.

The deficit needs to come down despite Labor’s expensive – but welcome – promise to greatly increase the wage rates of the mainly female workers in aged care and other parts of the care economy.

How can this circle be squared? To Garnaut, the answer’s obvious. If the government has to do more and pay more – including on defence – it will just have to tax more.

He reminds us that “in the face of these immense budget challenges, total and federal and state taxation revenue, as a share of gross domestic product, is 5.7 percentage points lower than the developed-country average.”

And when it comes to what more the government could tax, Garnaut has some ideas. Disruption from the Russian invasion of Ukraine has given our fossil fuel companies record profits from higher coal and gas prices, while substantially lowering living standards by greatly increasing electricity prices.

Garnaut says the government shouldn’t kid itself that leaving this disparity unchallenged wouldn’t leave deep wounds in the public’s faith in government.

Introducing a tax on these windfall profits would be one solution, but I suspect he wants something more substantive. He says a significant part of the increase in the profit share of national income in recent years has come from mining.

One response would be for mine workers to get much higher wages. But, he says, miners are already paid much more than workers in other industries. So, the appropriate public policy response is a mineral rent tax – that is, a tax on the mining companies’ excess profits – which would share the benefits with all of us.

Finally, Garnaut rebukes those economists who rely on fancy calculations to tell them how low the unemployment rate can get before we have a problem with inflation. He says this is not an output from an econometric model, it’s “an observed reality”. That is, you have to suck it and see.

“Economics is less amenable than physics to definitive mathematical analysis because it is about people, whose responses to similar phenomena change over time. We build models in our minds or computers that fit observed reality at one point in time, and reality changes. Then we have to think harder about what’s going on.”

Economics is about the behaviour of people! Who knew?

Read more >>

Wednesday, August 17, 2022

I foresee a world where workers gain the upper hand

Former NSW premier Neville Wran was the first politician – but far from the last – to say the election would be about “jobs, jobs, jobs”. That line captured perfectly one of the great economic certainties of our age: you can never, ever have enough jobs to go around.

That’s what most of us think, and the reason we think it is that it’s been true for the past 50 years. That’s how long it’s been since we had a rate of unemployment so low no one worried much about it.

But, as my colleague Jessica Irvine reminded us only yesterday, at 3.5 per cent, unemployment is at its lowest in almost 50 years.

To put it more positively, at more than 64 per cent, the proportion of the working-age population with a job is higher than it’s ever been. If you don’t find that gratifying news, there’s something wrong with you.

At present, we have a record number of unfilled job vacancies, about as many as we have unemployed workers. (Of course, not all the jobless have the right training – or live in the right part of the country – to fill those vacancies.)

Now, you can argue this happy outcome is just a temporary consequence of the pandemic. For two years, the official interest rate was almost zero, and governments – federal and state – were spending like wounded bulls.

So we had a huge increase in the demand for labour, but at a time when there was a two-year ban on imported workers. Little wonder employment grew strongly, vacancies shot up and employers complain incessantly about skill shortages.

You can also argue that, now our borders have reopened, our normal high inflow of foreign students, backpackers and skilled workers on temporary visas will resume, and the jobs market won’t stay nearly so tight.

Then you can argue that it only needs Reserve Bank governor Dr Philip Lowe to step too hard on the interest-rate brakes and we – as with many other developed economies – will be plunged into recession and rising unemployment.

You can argue all that. But I think these short-term factors are hiding deeper, longer-term trends that have brought us to a turning point. We’re going from never having enough jobs available for people to fill, to never having enough people available to fill all the jobs.

And here’s the bonus: if I’m right, we’ll be going from insecure jobs and stagnant wages to much higher wages and bosses falling over themselves to attract and retain the workers they need.

Business people are nothing if not opportunistic. When workers are plentiful, they pick and choose and make demands. But when workers are hard to find, they become wonderful people whose only concern is their workers’ welfare.

The first factor that’s working to turn the tables is the ageing of the population: more oldies leaving the workforce than youngsters joining it. Fertility has fallen below the replacement rate of 2.1 kids per woman.

For many years we’ve sought to slow population ageing by maintaining one of the advanced economies’ highest rates of immigration, with an emphasis on young, skilled workers.

Skilled immigration is also used to keep downward pressure on wage rates. With the pandemic receding, big business is desperate for high immigration to resume ASAP. And the Albanese government is likely to oblige.

But setting high immigration targets is one thing; attaining them is another. These days, migrants come mainly from developing countries. But all the other rich countries have an ageing problem, so we’ll be competing against them for takers.

China’s population is also ageing rapidly. Our intake of foreign students – some of whom are allowed to stay on – has been reduced by our falling out with China, but has always been a temporary play while Asia’s emerging economies get their universities going.

The final factor that will keep the demand for workers growing faster than the supply is the way the rich economies are becoming service economies, much of which represents the growth of the “care economy”.

Australia has already reached the point where 80 per cent of our production and 90 per cent of our employment is from the services sector. The thing about services is that they’re mainly delivered by people. As the Productivity Commission has noted, it’s much easier to use machines to replace people in farming, mining and manufacturing than it is in the services sector.

As people become old, they need more services – from doctors, nurses, paramedics and age care workers. All these people require education and training – by more services-sector workers.

Have you noticed all the stories lately about shortages of teachers, GPs, hospital workers and, before that, aged care and childcare workers? We’re going to get them all from overseas? I doubt it.

I noticed a tweet from an economics professor: “‘skill shortage’ = wages too low to attract workers”.

Get it? If we want all these people, we’ll have to pay them a lot more than we do now – and treat them a lot better.

Read more >>

Monday, July 5, 2021

Our aspirations for a Big Australia need a big trim

Almost all the nation’s business people, economists and politicians believe too much population growth is never enough. But if there’s one thing I hope to be remembered for, it’s that I always subjected this case of group think to critical examination.

I remain to be convinced that a Big Australia would be better either for our material living standards or for our efforts to limit the damage our economic activity is doing to our natural environment – the erosion of the nation’s “natural capital”.

But, in any case, Treasurer Josh Frydenberg’s intergenerational report last week is a useful warning that our aspirations for a Big Australia need a big trim.

The pandemic is an immediate setback to such ambitions, but beyond that is the likelihood that most countries’ population growth is slowing and, in many countries, will eventually begin falling.

One big message from the report is that population growth over the next 40 years is projected to be much slower than earlier thought, with its size now expected to reach 40 million in the first half of the 2060s, about eight years later than the 2015 report projected.

This is explained by the pandemic, which is expected to cause a temporary fall in the birth rate and four years of below-average net overseas migration (foreigners arriving minus locals leaving). Annual net migration is expected actually to fall in the financial year just ended and in the new financial year, then take two years to return to 235,000 in 2024-25, at which level it then stays every year through to 2060-61.

That is, no catch-up is expected for the growth lost because of the pandemic. The assumed annual net intake of 235,000 is based on unchanged existing federal government policy on permanent and temporary migration levels.

The report’s “sensitivity analysis” shows that, were net migration projected to grow in line with the growing population (at a rate of 0.82 per cent a year) rather than stay at a flat 235,000 a year, real gross domestic product per person would be only a fraction higher in 2060-61, the labour force would be 1 million bigger and the old-age dependency ratio would be 2.8 workers per oldie rather than 2.7.

But you have to doubt whether future governments will remain free to just dial up their preferred level of annual immigration the way they have been over the past 40 years.

If there’s one demographic lesson we should have learnt by now, it’s that as families become more prosperous over the generations, they choose to have fewer children. This has become possible because of effective contraception.

Add growing longevity and you see why a declining fertility rate (expected number of births per woman), not just the retirement of the Baby Boomer bulge, has left all the developed economies with an ageing population. And, thanks to its one-child policy, the world’s most populous economy, China, also has a (rapidly) ageing population.

Like all the other rich countries, our fertility rate has long been below the population replacement rate of 2.1 babies per woman. Unlike most of the others, however, we’ve kept our population growing strongly by ever-increasing immigration.

To date we’ve had no trouble attracting all the skilled (and unskilled) workers we need, mainly from poor countries. We’ve even been able to make a lot of them pay full freight for their Australian-quality education before we scooped them up.

But with population ageing and old-age dependency ratios becoming more acute around the rich world, global competition to attract skilled workers from developing countries may become more intense.

On the other side of the equation, the supply side, as the poor countries become more developed, their living standards rise and their fertility rates fall, there may be fewer skilled workers willing to emigrate to the rich countries.

Population growth is already slowing in most developed and developing countries. It’s already falling in Japan and some European countries. It will start falling in China this decade. Our population growth is also likely to slow, and the day may come when – horror of horrors – it starts to fall.

Slower growth in the population means slower growth in the size of the economy, of course. But I can’t see why this should be a worry.

It’s notable that, though the intergenerational report projects a consequent slowing in economic growth over the next 40 years, it expects this to have little effect on economic growth per person and thus on living standards.

Whereas real GDP growth is projected to slow from 3 per cent a year over the past 40 years to 2.6 per cent over the coming 40, annual growth in real GDP per person is projected to slow only marginally from 1.6 per cent to 1.5 per cent.

Even that small slowing seems to be explained not by lower population growth, but by a similar fall in the assumed rate of average annual productivity improvement.

Taken at face value, this is an admission by the report’s authors that faster population growth makes little or no contribution to the improvement of our material living standards. The immigrants may gain by moving to Australia, but the rest of us don’t gain from their coming.

However, the report’s fine print (aka its technical appendix) advises that its projections “do not capture the broader economic, social or environmental effects of migration, such as technology spillovers or congestion”.

But if those effects were thought to be significant, you’d expect the authors to have made the effort to model them. And, of course, the effects are likely to be both beneficial and detrimental.

Looking at the economic effects, the advocates of high immigration always point to the benefit of greater economies of scale, while brushing aside the costs of the increased housing, capital equipment and public infrastructure that a bigger population and workforce must be provided with to ensure the productivity of its labour doesn’t fall.

Indeed, it’s possible our high rate of population growth is a factor contributing to our weak rate of productivity improvement.

Similarly, it’s inconsistent for advocates of high immigration also to be advocates of Smaller Government. When you’re causing congestion by failing to spend enough on the extra public infrastructure needed, including more schools and hospitals – perhaps because you’re trying to please discredited American credit-rating agencies – you shouldn’t be surprised if economic growth is weaker.

The need for governments to spend more on a bigger population is complicated and compounded by the division of responsibilities between federal and state governments. The budgetary costs and benefits of immigration are not spread evenly between federal and state governments.

The feds pick up most of the tax that immigrants pay, while the states pick up most of the cost of the extra infrastructure and services needing to be provided (especially since immigrants are denied access to many federal benefits for the first four years).

This reveals a major distortion in the intergenerational report’s continual claim that higher immigration does wonders to improve the budget. The federal budget, yes. But state budgets, probably the reverse.

Finally, there are the environmental consequences of a bigger population that both the intergenerational report and most business people, economists and politicians refuse to come to grips with.

Jenny Goldie, president of Sustainable Population Australia, reminds us that the intergenerational report “fails to take into account the environmental costs of urban encroachment on natural bushland, threatening iconic species such as the koala [and biodiversity more generally], and adding to carbon emissions.

“It fails to address the social costs of crowding, housing unaffordability and longer waiting times that generally accompany population growth,” she concludes.

Read more >>

Friday, July 2, 2021

Business lobbies use the productivity slump for rent-seeking

It’s encouraging to see the scepticism with which this week’s intergenerational report from Treasurer Josh Frydenberg has been greeted. Any attempt to peer 40 years into the economy’s future will prove close to the mark only by happy accident.

But it’s discouraging to see the way the usual suspects have seized on the report’s most glaring weakness to do no more than push their vested interests in the name of “reform”.

This fifth version of the five-yearly intergenerational report allows us to see how far astray the report’s earlier projections have been, even though we’re only halfway towards the first report’s picture of the economy in 2041.

In their projections of growth in the population, its authors have repeatedly overestimated the fertility rate (expected number of births per woman) and underestimated the growth in net overseas migration (foreigners arriving minus locals leaving).

They predicted that the retirement of the Baby Boomers would see a fall in the rate at which people of working age participate in the labour force, but this “participation rate” has recently been at record highs.

It would be nice to think that, since the object of all these projections has been to alert us to looming pressures on the budget – caused, in particular, by the ageing of the population – governments have responded accordingly, thus making the reports’ prophecies self-defeating. Nice, but not likely.

The pandemic, and the expected four years of weak net overseas migration in particular, is rightly blamed for our population “growing slower and ageing faster” than previously expected. And slower growth in the size of the population means slower growth in the size of the economy.

We’re told that, whereas real GDP grew at the average rate of 3 per cent a year over the past 40 years, it’s now projected to slow to an average rate of 2.6 per cent over the coming 40.

But the justification for our obsession with economic growth is our desire for faster improvement in our material standard of living. And here’s a point Frydenberg hasn’t highlighted: according to the report’s calculations, the projected marked slowing in the economy’s overall rate of growth is expected to affect growth in GDP per person – a crude measure of living standards - only a little.

GDP per person’s average annual growth is projected to fall only from 1.6 per cent over the past 40 years to 1.5 per cent over the coming 40.

It’s here, however, that business and its media cheer squad have read the fine print and are deeply sceptical: that projection of GDP growth per person rests heavily on the mere assumption that the productivity of labour (output of goods and services per hour worked) will improve at the same average annual rate in the coming 40 years as it did over the past 30 years.

And they’re right. Of all the many assumptions on which the report’s mechanical projections depend, this assumption is far the most critical. As Frydenberg rightly says, improving productivity is what explains almost all the improvement in our standard of living over the decades.

And the sceptics are right to doubt that productivity will improve over the next 40 years at anything like the rate of 1.5 per cent a year. For a start, that 30-year average includes the 1990s, a decade when productivity improved at a rate far higher than experienced before or since.

For another thing, productivity improvement in recent years has been much weaker than usual.

So, purely by omission, the latest intergenerational report reminds us of the second biggest threat to our living standards: a continuing slump in productivity. (The biggest threat is the world’s inadequate response to climate change – another thing the report omits to take into account.)

What’s discouraging, however, is the way the business lobby groups have used this inadvertent reminder to bang the same old self-serving drum. The productivity slump has been caused by this government and its predecessors’ failure to continue the economic reform program begun by Hawke, Keating and Howard, we’re assured.

And what reforms do they have in mind? A cut in the rate of company tax for big business and changes in the wage-fixing rules to make the labour market more flexible for employers.

This lobbying is objectionable on three grounds. First, it implies that productivity improvement depends on an unending stream of changes in government policies, which is absurd. The day “reform” stops, productivity stops.

Second, it shifts the blame for weak productivity improvement from the actions of the private sector – in whose farms, mines, factories, offices and shops productivity either gets better or worse – to the politicians in Canberra.

Third, it seeks to disguise blatant rent-seeking as economic “reform”. Productivity would improve if business owners and high income-earners paid less tax, leaving the punters to pay more, and if the balance of bargaining power between bosses and workers shifted further in favour of bosses.

What this self-serving bulldust ignores is that productivity improvement has slumped in all the rich countries, not just in Australia because our pollies are so defective.

Michael Brennan, chair of the Productivity Commission, says the world’s economists are still debating the causes of the productivity slowdown.

They’ve pointed to “mismeasurement issues, a shift towards lower productivity industries, population ageing, a slowdown in the pace of technological discovery, a slowdown in the pace of technological diffusion, a plateauing of improvements in human capital, reduced rates of firm entry and exit, increased concentration and market power, lower capital investment, a shift to intangible capital and the slowing growth in global trade”.

As Melinda Cilento of CEDA, the Committee for Economic Development of Australia, has noted, “research by federal Treasury . . . showed leading Australian firms were not keeping up with leading global firms on productivity”.

Treasury would be much better employed continuing to research the causes of our productivity slump than doing literally unbelievable projections of what’s unlikely to happen over the next 40 years.

Read more >>

Monday, May 10, 2021

Years of neglect won't make it easy to get wages up

In Tuesday night’s budget, it will be important to note its assumptions about when our international borders will be back to functioning normally. Not because they’re sure to be right, but because our borders will have a big impact on Scott Morrison’s new strategy of getting unemployment down to get wages – and thus living standards – up.

As the Commonwealth Bank’s Gareth Aird has reminded us, fancy calculations about how low unemployment has to fall before labour shortages force employers to bid up wages, rest on the (usually reasonable) assumption that our borders will be working the way they always have.

If our borders are temporarily closed to immigration and overseas students, however, the point where skill shortages emerge may arrive a lot earlier than the fancy calculations suggest. What’s more, it’s become clearer that the day where our border conditions return to normal may be a lot further into the future than we’d first hoped.

It will be interesting to search the budget papers for signs that these complications don’t come as news to the economic managers, but have been built into the new strategy’s design.

The point is that over the decades of what we used optimistically to call “micro-economic reform”, our employers have become used to the idea that finding enough skilled labour – or even unskilled people willing to do the crappy, badly paid jobs that most Australians aren’t, fruit-picking for instance – isn’t something you have to worry much about.

Whenever you look like running out of the workers you need, you just bring someone in on a temporary visa. If they turn out okay, you help them move to a permanent visa. Our immigration program used to be about recruiting factory fodder for the manufacturers, now it’s about people on many classes of temporary visas allowing employers instant access to skilled workers trained by someone else at some other country’s taxpayers’ expense.

The trouble with this is that it’s come at the expense of our technical education system and our young people. Our business people no longer need to worry about whether they’ll have enough skilled workers a few years down the track, so no longer put enough money and effort into training apprentices, trainees and other technical workers.

I see it as further evidence for my theory that part of the reason both productivity improvement and wages have been weak for some years is our businesses’ preference for improving their profits by cutting costs – particularly wage costs – rather than improving their efficiency.

One implication of this emphasis on employers buying skilled (or cheap) labour off the shelf, so to speak, is that the longer the economy recovers behind closed borders, and the more the government tries to use labour shortages to get some decent wage growth, the more pressure employers and their lobby groups will put on the government to open the temporary-visa floodgates.

The more the government gives in to its business mates – who are used to getting their way – the more it will sabotage its strategy for getting wages, consumer spending and the voters’ standard of living going up not sideways.

But Dr Mike Keating, a former top econocrat, argues there’s a different weakness in the new strategy: it continues the economic managers’ earlier error of analysing the wages problem in purely cyclical terms.

For seven years they told us not to worry about weak wage growth because the recovery from the global financial crisis was just taking longer than usual. Wrong. Now they’re saying the problem is too much slack in the labour market, so we must stimulate harder to reduce the rate of labour underutilisation (unemployment plus under-employment) and, once we have, healthy wage growth will return as sure as demand and supply go together.

This thinking fails to acknowledge the likelihood that the problem is more structural than cyclical. It’s not just weak demand that’s the problem, it’s a change in the structure of the labour force, particularly as skill-biased technological change has increased employers’ demand for high-skilled labour and dramatically reduced demand for semi-skilled labour, while not having as much effect on demand for services-performing less-skilled labour.

Even so, the notion that much unemployment is the result of “structural mismatch” rather than weak demand is hardly new. That is, many of the unemployed lack the particular skills employers are looking for. So it’s wrong to assume that unemployment falls in lock-step with rising demand.

We’ve been marvelling at the recent rapid increase in job vacancies, which has reduced the number of unemployed per vacancy to 2.75, well below its decade average of 3.9. Many have taken this as indicating the strength of the recovery and a sign that unemployment will continue its rapid fall.

But Keating, a labour economist, says it indicates “a substantial and increasing degree of structural mismatch in the labour market”. (It could also be a sign that our employers’ dependence on importing the skilled labour they need is already making itself felt.)

“If this mismatch continues through the economic recovery, the wage increase in some jobs will most likely exceed the increase in other jobs. Consequently, pursuit of the target rate of unemployment may well result in an increase in wage inequality, which in turn may not produce the increase in demand that economic recovery requires,” Keating says.

I think the econocrats need to remember that, in the old days, the tendency for wage rises caused by skill shortages in some occupations – or some parts of the country – to spread to all other workers was caused by the operation of the old centralised wage-fixing system. The move to enterprise bargaining was intended to stop that happening. And it has.

These days, the labour market’s only equalising tendency comes from the existence of the more amorphous “wage norms” (“other bosses are giving pay rises of X per cent, so I’ll do the same”).

Keating says the best way to remove structural impediments in the labour market is to ensure the necessary development of education and training so that people have the particular skills needed to meet the requirements for the jobs that are available.

But that, of course, is just what we haven’t been doing.

Read more >>

Friday, May 7, 2021

Our closed borders have turbo-charged the economy's recovery

The economy’s rebound from the lockdowns of last year has been truly remarkable – far better than anyone dared to hope. Even so, it’s not quite as miraculous as it looks.

As Tuesday’s budget leads us to focus on the outlook for the economy in the coming financial year, it’s important to remember that the coronacession hasn’t been like a normal recession. And the recovery from it won’t be like a normal recovery either.

The coronacession is unique for several reasons. The first is that the blow to economic activity – real gross domestic product - was much greater than we’ve experienced in any recession since World War II and almost wholly contained within a single quarter.

The reason for that is simple: it happened because our federal and state governments decided that the best way to stop the spread of the virus was to lock down the economy for a few weeks. But because this was a government-ordered recession, the governments were in no doubt about their obligation to counter the cost to workers and businesses with monetary assistance.

So the second respect in which this recession was different was the speed with which governments provided their “fiscal stimulus” and the unprecedented amount of it: for the feds alone, $250 billion, equivalent to more than 12 per cent of GDP.

But there’s a less-recognised third factor adding to the coronacession’s uniqueness: this time the government ordered the closing of our international borders. Virtually no one entering Australia and no one going out.

The independent economist Saul Eslake points out that “an important but under-appreciated reason for the so-far surprisingly rapid decline in unemployment, from its lower-than-expected peak of 7.5 per cent last July, is the absence of any immigration: which means that the civilian working-age population is now growing at (on average over the past two quarters) only 8,300 per month, compared with an average of 27,700 per month over the three years to March 2020,” he says.

This means that, with an unchanged rate of people choosing to participate in the labour force by either holding a job or seeking one, a rate that’s already at a record high, employment needs only to grow at about a third of its pre-pandemic rate in order to hold the rate of unemployment steady.

So any growth in employment in excess of that brings unemployment tumbling down.

Get it? It’s not just that the bounce back in jobs growth has been much quicker and stronger than we expected. It’s also that, thanks to the absence of immigration, this has reduced the unemployment rate much more than it usually does.

To put it another way, Eslake says, if the population of working age continues growing over the remainder of this year at the much-slower rate at which it’s been growing over the past six months, employment has to grow by an average of just 17,000 a month to push the unemployment rate down to just below 5 per cent by the end of this year (assuming the rate of labour-force participation stays the same).

By contrast, if the working-age population was continuing to grow at its pre-pandemic rate, employment growth would need to average 29,000 a month to get us down to 5 per cent unemployment by the end of this year.

Now, it’s true that as well as adding to the supply of labour, immigration also adds to the demand for labour. So its absence is also working to slow the growth in employment. But this has been more than countered by two factors.

The obvious one is the governments’ massive fiscal stimulus. But Eslake reminds us of the less-obvious factor: our closed borders have prevented Australians from doing what they usually do a lot of: going on (often expensive) overseas trips.

He estimates that this spending usually amounts to roughly $55 billion a year. But we’re spending a fair bit of this “saving” on domestic tourism – or on our homes.

Of course, we need to remember that, as well as stopping us from touring abroad, the closed borders are also stopping foreigners from touring here. But, in normal times, we spend more on overseas tourism than foreigners spend here. (In the strange language of econospeak, we are “net importers of tourism services”.)

Eslake estimates that our ban on foreign tourists (and international students) is costing us more than $22 billion – about 1.25 per cent of GDP – a year in export income. Clearly, however, our economy is well ahead on this (temporary) deal.

Another economist who’s been thinking harder than the rest of us about the consequences of our closed borders is Gareth Aird, of the Commonwealth Bank.

The decision by Scott Morrison and Josh Frydenberg to “continuing to prioritise job creation” and so drive the unemployment rate down much further, has led to much discussion of the NAIRU – the “non-accelerating-inflation rate of unemployment” – the lowest level unemployment can fall to before wages and prices take off.

The econocrats believe that little-understood changes in the structure of the advanced economies may have lowered our NAIRU to 4.5 per cent or even less. But Aird reminds us that, for as long as our international borders remain closed, the NAIRU is likely to be higher than that.

“If firms are not able to recruit from abroad then, as the labour market tightens, skill shortages will manifest themselves faster than otherwise and this will allow some workers to push for higher pay,” he says.

“There is a lot of uncertainty around when the international borders will reopen, what that means for net overseas migration and how that will impact on wage outcomes.”

But “in industries with skill shortages, bargaining power between the employee and employer should move more favourably in the direction of the employee and higher wages should be forthcoming,” he concludes.

Higher wages is what the government’s hoping for, of course. Interesting times lie ahead.

Read more >>

Monday, June 29, 2020

Morrison is taking the recovery too cheaply

In theory, recovery from the coronacession will be easier than recoveries usually are. In practice, however, it’s likely to be much harder than usual – something Scott Morrison’s evident reluctance to provide sufficient budgetary stimulus suggests he’s still to realise.

The reasons for hope arise from this recession’s unique cause: it was brought about not by a bust in assets markets (as was the global financial crisis and our recession of the early 1990s) nor by the more usual real-wage explosion and sky-high interest rates (our recessions of the early 1980s and mid-1970s), but by government decree in response to a pandemic.

This makes it an artificial recession, one that happened almost overnight with a non-economic cause. Get the virus under control, dismantle the lockdown and maybe everything soon returns almost to normal.

It was the temporary nature of the lockdown that justified the $70 billion cost of the unprecedented JobKeeper wage subsidy scheme. Preserve the link between employers and their workers for the few months of the lockdown, and maybe most of them eventually return to work as normal.

Note that, even if this doesn’t work out as well as hoped, the money spent still helps to prop up demand. Had we not experimented with JobKeeper, we’d have needed to spend a similar amount on other things.

Because this recession has been so short and (not) sweet, it’s reasonable to expect an early and significant bounce-back in the September quarter. Just how big it is, we shall see. But, in any case, there’s more to a recovery than the size of the bounce-back in the first quarter after the end of the contraction.

And there are at least five reasons why this recovery will face stronger headwinds than most. The first is the absence of further help from the Reserve Bank cutting rates. People forget that our avoidance of the Great Recession in 2009 involved cutting the official interest rate by 4.25
percentage points.

Second, Australia, much more than other advanced economies, has been reliant for much of its economic growth on population growth. But, thanks to the travel bans, Morrison is expecting net overseas migration to fall by a third in the financial year just ending, and by 85 per cent in 2020-21.

Now, unlike most economists, I’m yet to be convinced immigration does anything much to lift our standard of living. And I’m not a believer in growth for growth’s sake. It remains true, however, that our housing industry remains heavily reliant on building new houses to accommodate our growing population. And if Morrison’s HomeBuilder package is supposed to be the answer to the industry’s problem, it’s been dudded.

Third, we’re used to our floating exchange rate acting as an effective shock absorber, floating down when our stressed industries could use more international price competitiveness, and floating up when we need help constraining inflation pressures – as happened during most of the resources boom.

But this time, not so much. With the disruption to our rival Brazilian iron ore producer’s output, world prices are a lot higher than you’d expect at a time of global recession. And with world foreign exchange markets thinking of the Aussie dollar as very much a commodity currency, our exchange rate looks like being higher than otherwise – and higher than would do most to boost our industries’ price competitiveness.

Fourth, the long boom in house prices has left our households heavily indebted, and in no mood to take advantage of record-low interest rates by lashing out with borrowing and spending. The “precautionary motive” always leaves households more inclined to save rather than spend during recessions, but the knowledge of their towering housing debt will probably make them even more cautious than usual.

The idea that bringing forward the government’s remaining two legislated tax cuts could do wonders for demand is delusional. If you wanted the cuts spent rather than saved, you’d aim them at the bottom, not the top.

Finally, although our politicians and econocrats refuse to admit it, our economy – like all the advanced economies – has for most of the past decade been caught in a structural low-growth trap. We can’t get strong growth in consumer spending until we get strong growth in real wages. We can’t get strong growth in business investment until we get strong consumer spending. And we can’t get a strong improvement in the productivity of labour until we get strong business investment.

Meanwhile, the nation’s employers – including even public sector employers - will do what they always do and use the recession, and the fear it engenders in workers, to engineer a fall in real wages. Which will get us even deeper in the low-growth trap.

I fear, however, that Morrison and his loyal lieutenant, Josh Frydenberg, will learn all this the hard way.
Read more >>

Wednesday, November 27, 2019

High immigration is changing the Aussie way of life

The nation’s economic elite – politicians of all colours, businesspeople and economists – long ago decided we need to grow our population as fast as we can. To them, their reasons for believing this are so blindingly obvious they don’t need to be discussed.

Unfortunately, however, it’s doubtful most ordinary Australians agree. A survey last year by researchers at the Australian National University found that more than 69 per cent of respondents felt we didn’t need more people, well up on a similar poll in 2010.

This may explain why Scott Morrison announced before this year’s election a big cut in our permanent migrant intake – while failing to mention that our booming temporary migrant intake wouldn’t be constrained.

He also foreshadowed measures to encourage more migrants to settle in regional cities. What he didn’t say is what he’d be doing differently this time, given the many times such efforts had failed in the past.

In between scandalising over the invading hordes of boat people, John Howard greatly increased the immigration intake after the turn of the century, and this has been continued by the later Labor and Coalition governments. “Net overseas migration” accounts for about 60 per cent of our population growth.

In 2000, the Australian Bureau of Statistics projected that our population wouldn’t reach 25.4 million until 2051. We got there this year. Our population is growing much faster than other developed countries’ are.

The growth in our economy has been so weak over the past year that they’ve had to stop saying it, but for years our politicians boasted about how much faster our economy was growing than the other economies.

What they invariably failed to mention was that most of our faster growth was explained by our faster-growing population, not our increasing prosperity. Over the year to June, for instance, real gross domestic product grew by (a pathetic) 1.4 per cent, whereas GDP per person actually fell by 0.2 per cent.

That’s telling us that, despite the growth in the economy, on average our material standard of living is stagnant. All that immigration isn’t making the rest of us any better off in monetary terms.

Of course, that’s just a crude average. You can be sure some people are better off as a result of all the migration. Our business people have always demanded high migration because of their confidence that a bigger market allows them to make bigger profits.

Economists, on the other hand, are supposed to believe in economic growth because it makes all of us better off. They’re not supposed to believe in growth for its own sake.

This week one of the few interest groups devoted to opposing high migration, Sustainable Population Australia, issued a discussion paper that’s worth discussing. It reminds us that many of the problems we complain about are symptoms of migration.

The biggest issue is infrastructure. We need additional public infrastructure – and private business equipment and structures, and housing – to accommodate the needs of every extra person (locally born as well as immigrant) if average living standards aren’t to fall.

Taking just public infrastructure – covering roads, public transport, hospitals, schools, electricity, water and sewage, policing, law and justice, parks and open space and much more – the discussion paper estimates that every extra person requires well over $100,000 of infrastructure spending.

When governments fail to keep up with this need – as they have been, despite a surge in spending lately – congestion on roads and public transport is just the most obvious disruption we suffer.

The International Monetary Fund’s latest report on our economy says we have “a notable infrastructure gap compared to other advanced economies”. Spending is “not keeping up with population and economic growth”. We have a forecast annual gap averaging about 0.35 per cent of GDP for basic infrastructure (roads, rail, water, ports) plus a smaller gap for social infrastructure (schools, hospitals, prisons).

One factor increasing the cost of infrastructure is that about two-thirds of migrants settle in the already crowded cities of Sydney and Melbourne – each of whose populations is projected to reach 10 million in the next 50 years, with Melbourne overtaking Sydney.

According to a Productivity Commission report, “growing populations will place pressure on already strained transport systems. Yet available choices for new investments are constrained by the increasingly limited availability of unutilised land”.

New developments such as Sydney’s WestConnex have required land reclamation, costly compensation arrangements, or otherwise more expensive alternatives such as tunnels. It’s reported to cost $515 million a kilometre, with Melbourne’s West Gate Tunnel costing $1.34 billion a kilometre.

Who pays for all this? We do – one way or another. “Funding will inevitably be borne by the Australian community either through user-pays fees or general taxation,” the commission says.

Combine our growing population with lower rainfall and increased evaporation from climate change and water will become a perennial problem and an ever-rising expense to householders and farmers alike.

The housing industry’s frequent failure to keep up with the demand for new homes adds to the price of housing. And the only way we’ll double the populations of Melbourne and Sydney is by moving to a lot more high-rise living.

High immigration is changing the Aussie way of life. Before long, only the rich will be able to afford a detached house with a backyard.
Read more >>

Wednesday, November 21, 2018

Why Morrison has changed his tune on immigration

Wow. And you thought the punters had no political power. Scott Morrison’s change of tune on population growth – following on the heels of NSW Premier Gladys Berejiklian – will please a lot of ordinary voters and enrage big business.

Be clear on this: almost to a man or woman, the nation’s business people, economists, Coalition politicians and Labor politicians have long believed in high rates of immigration, going back to the days of “populate or perish”.

They still do. They’ll have one dismissive, contemptuous word for the Liberal Party’s seeming backflip – “populism”.

By contrast, the public has long had reservations about immigration, going back to Chinese joining the gold rush and, as the movie Ladies in Black reminds us, to post-war resentment of “reffos” (not to mention dagoes and wogs).

It’s quite possible Gladys had a word in the ear of Scott, but I have no doubt both are reacting to results from their party’s private polling and focus groups. (If so, Labor politicians would be getting a similar message.)

That would explain their changed thinking on the topic. Their sudden sensitivity to popular opinion may be explained also by the proximity of elections in Victoria, NSW and federally.

Morrison is nothing if not direct. He’s left no doubt that this is a Sydney and Melbourne special. In the reduction in the size of the annual national permanent migration program he says he expects to emerge from the review, NSW and Victoria may wish to have fewer migrants, while other states may wish to have more.

Whether such picking-and-choosing is practically possible will be a matter for the experts to debate. Sydney and Melbourne are natural entry points of migrants. They have more jobs going, and immigrants are more likely to have relatives, friends and communities already established there. The two big cities’ businesses are likely to want to sponsor more skilled workers.

Before we leave elections, a cautionary tale from the 2010 federal election. Early that year, Kevin Rudd brought forward the next Intergenerational Report, showing the population was projected to reach 36 million by 2050. Rudd proudly proclaimed himself a Big Australia man – which, among other benefits, would give Australia (and him) more clout at international forums.

Then came the backlash. By the time of the election in July, both Julia Gillard and Tony Abbott were loudly proclaiming their opposition to Big Australia.

But here’s the point: after Gillard’s election in 2010 and Abbott’s in 2013, nothing was heard again about the evils of Big Australia. Immigration continued on its merry way.

If the public has always had reservations about immigration, what’s brought matters to a head?

Again, Morrison is direct. Though population growth has played a key role in our economic success, he says, “I also know that Australians in our biggest cities are concerned about population. They are saying: enough, enough, enough.

“The roads are clogged, the buses and trains are full. The schools are taking no more enrolments. I hear what you are saying. I hear you loud and clear.”

So, in a word, resentment over congestion has brought simmering disapproval to a rolling boil.
But I suspect there’s a further factor.

Because the establishment’s enthusiasm for high immigration has always been at odds with the public’s instincts, there was for many years a tacit agreement between both sides of politics not to wake up the question of immigration.

Want to know why this nation of immigrants has never had a formally established population policy? That’s why. (I know because once, during the Fraser government’s time, I wrote in my naivety that we needed a great big debate about immigration and population. The immigration minister immediately slapped me down, almost accusing me of racism.)

That bipartisanship has broken down as politicians realised there were cheap votes to be had by echoing the public’s objection to “too many Asians”. When asylum seekers started arriving by boat, it was on for young and old between the parties.

John Howard allowed very high levels of immigration during his almost 12 years in office – the population was growing by 2 per cent a year at the end of his reign – but the public’s disapproval never boiled over.

Why not? Perhaps because traffic congestion wasn’t as bad as it is today. But my theory is that, while coping with the genuine problem of boat people, Howard also used them to draw the public’s attention away from high levels of conventional immigration. Sometimes you even hear political candidates claiming its boat people who are clogging the roads.

But now there are no boat people arriving – not, we belatedly discover, because none are setting out, but because of our navy’s success in turning them back – this diversionary tactic is no longer available. The voters’ ire turns back to ordinary immigrants.

But what of the much-touted economic benefits of immigration? Business people want a bigger population because having more people to sell to is the easiest way to increase their profits. But that doesn’t necessarily leave you and me better off.

The traditional fear that immigrants take our jobs is wrong – they add about as much to the demand for labour as to its supply.

Immigration does slow down the ageing of our population, but most of the other efforts to show how much benefit it brings the rest of us rest on economic modelling exercises using convenient assumptions. I hae ma doots.
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Saturday, August 11, 2018

Immigration is sharply slowing the ageing of our population

Reserve Bank governor Dr Philip Lowe thinks Australia’s strong population growth in recent years is a wonderful thing, and he sings its praises in a speech this week.

I’m not sure he’s right. Like most economists and business people, Lowe is a lot more conscious of the economic benefits of population growth than the economic costs. As for the social and environmental costs, they’re for someone else to worry about.

But whatever your views, you’ll be heaps better informed after you’ve seen what he says about our changing “population dynamics” and absorbed his tutorial on demography.

Over the past decade, our population has grown at an average rate of about 1.6 per cent a year. This is faster than in previous decades. It’s also faster than every advanced economy bar Singapore.

Most other rich countries – including the US and Britain – grew by well under 1 per cent a year over the period. The populations of Italy, Russia and Germany were stagnant, and fell in Japan and Greece. China’s annual growth averaged only 0.5 per cent.

What’s driving our growth is increased immigration, of course. Over recent times, net overseas migration has added about 1 per cent a year to the population, with “natural increase” (births minus deaths) adding only about 0.7 per cent.

Our rate of natural increase is pretty steady. It perked up a bit a decade ago, but quickly resumed its slow decline, as more couples have smaller families and some have none.

Net migration, by contrast, goes through a lot of peaks and troughs – which, not by chance, correlate well with the ups and downs of the business cycle.

We think of the government controlling immigration with a big lever (making it “exogenous” or coming from outside the system, as economists say, pinching the word from medicos) but many demographers see immigration as “endogenous” or determined within the system.

This has become truer as permanent migration becomes dominated by workers with skills we need, rather than by family reunion, and there’s more temporary migration by overseas students and skilled workers brought in by employers to fill a temporary shortage.

The resources boom showed temporary skilled migration was great at helping us control (wage-driven) inflation, one of Lowe’s primary concerns as boss of the central bank.

But I worry our young people are paying the price for this greater macro-economic flexibility. We’re schooling our employers not to bother training plenty of apprentices ready for the next shortage because it’s easier to wait until the shortage emerges and then pull in a tradesperson or three from overseas.

Sorry, back to Lowe’s speech. He notes that growth in the number of people here on temporary visas adds to the size of our population. For instance, there are now more than half a million overseas students studying in Australia.

Here’s a stat you probably didn’t know: about a sixth of foreign students are permitted to stay and work here after finishing their studies. This boosts our population. Always a man to look on the bright side, Lowe reminds us it also boosts the nation’s “human capital”.

Plus, he’s too polite to say, it does so free of charge. It’s a neat trick: we charge foreign parents in developing countries full freight to educate their children, then allow the best of 'em to stay on.

But wait, there’s more: we also benefit from our stronger overseas connections when foreign students return home, Lowe says.

Now for his big reveal. Particularly because of our emphasis on skilled workers and students (as opposed to bringing out nonna and nonno), the median age of new migrants is between 20 and 25, more that 10 years younger than the median age of the rest of us.

At the time of Treasury’s first intergenerational report in 2002, our present median age of 37 was expected to rise rapidly to more than 45 by 2040. But after the past decade of increased immigration of young people, the latest estimate is that the median age will be only about 40 by then.

“This is a big change in a relatively short period of time, and reminds us that demographic trends are not set in stone,” Lowe says.

This means that, on the question of population ageing, and looking at the latest projections over the next quarter of a century, we compare well with other advanced economies, he says.

First, our median age of 37 makes Australia one of the youngest countries. We are ageing more slowly than most of the others, meaning we’re projected to stay relatively young. This is better than earlier projections suggesting we’d move to the middle of the pack.

Second, we have a higher fertility rate than most rich countries. Australians tend to have larger families than those in many other countries. (Note, not large, but larger than the others.)

Third, our average life expectancy is at the higher end of the range, and is expected to keep rising.

Fourth, our old-age dependency ratio – people 65 and older, compared to people of working age, 15 to 64 – is rising, but less quickly than in most other countries.

And our relative youth and higher fertility rate means our dependency ratio is expect to stay lower than other countries’ for the next 25 years or so. Only then is it projected to rise rapidly.

The first intergenerational report expected that the disproportionate bulge of baby boomers reaching normal retirement age would lead to a steady decline in the proportion of people participating in the labour force.

It hasn’t happened. The reverse, in fact – for fascinating reasons I’ll save for another day.

To economists, this slower rate of population ageing – that is, slower rise in the old-age dependency ratio – is great news. It means the economy’s growth in coming years won’t slow as much as they were expecting (see point above about the participation rate).

It also means ageing will put less pressure on future federal and state budgets. But let me give you a tip: there are so many other pressures we probably won’t notice its absence.
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Monday, March 19, 2018

Immigration the cheap and nasty way to grow the economy

The ABC's temerity in hosting a debate about the merits of high population growth has drawn predictable repostes from the economic establishment. Shades of the legendary note in the margin of a politician's speech: "shout here - argument weak".

There are at least four counts against the advocates of high immigration. First, their refusal to engage with the academic environmentalists arguing that we've exceeded the "carrying capacity" of our old and fragile land. Scientists? What would they know?

Second, they keep asserting high immigration's great economic benefits, blithely ignoring the lack of evidence. Whenever the Productivity Commission has examined the issue carefully it's found only small net effects, one way or the other. Its latest modelling found only a "negligible" overall impact.

Third, the advocates not only decline to admit the high social and economic costs that go with high rates of immigration, they decline to accept their share of the tab, doing all they can to shift it to the young, the poor and those on the geographic outer, including many of the migrants.

You rarely hear pro-immigration economists acknowledging the clearest message economic theory gives us on the topic: more population requires more spending on additional public and private infrastructure if material living conditions aren't to deteriorate.

The more we invest in such "capital widening" to stop the ratio of capital to labour declining, the less scope for investment in "capital deepening" to keep the ratio increasing, and so improving the productivity of our labour.

When we fail to invest sufficiently in capital widening – which we have – the decline in living conditions is manifest in overcrowding, traffic congestion and long commuting times.

Why have we failed to invest sufficiently? Partly because a high proportion of the promoters of high immigration are also promoters of Smaller Government, never acknowledging the two are incompatible.

A bigger population requires a bigger government, with more debt, not less. When you persist with high population growth, but put the clamps on government, you end up with overcrowding, congestion and the rest.

Another truth the high immigration advocates refuse to acknowledge is that a much bigger population must lead to much bigger cities and higher-density living in those cities.

The Reserve Bank's estimates of the huge addition to Melbourne and Sydney house prices caused by state governments' acquiescence to resistance to higher density in inner and middle-ring suburbs, are partly a consequence of successful attempts to shift the spatial cost of high immigration onto the less well-placed.

The fourth criticism of high immigration is that it's the cheapest and nastiest way to pursue economic growth. You get a bigger economy, but not the promised benefits. The studies repeatedly fail to show high immigration leads to a significant increase in real income per person.

Of course, the business lobby has no reason to care whether high immigration yields economy-wide benefits. All they're after is a bigger domestic market, allowing them to sell more widgets, make a higher profit and justify a bigger salary package.

Few economists can see this is a cop-out. An escape hatch. As a way of achieving corporate growth, it's even easier than taking over your competitors. And it sure beats the hard graft of trying to increase profits by being more efficient and contributing to national productivity improvement.

As we've seen, high immigration probably comes at the expense of productivity-enhancing (capital-deepening) business investment and public infrastructure. To the extent that inadequate capital-widening leads to overcrowding and congestion, it worsens productivity.

In principle, one productivity-enhancing effect of high immigration is that you get greater human capital on the cheap by pinching it from other (mainly poor) countries.

After foreign students have come here and paid full freight for Australian qualifications, you let them stay and work. You select permanent immigrants on the basis of their skills, or you let skilled workers on temporary visas stay on.

But as Dr Bob Birrell, of the Australian Population Research Institute, has shown, there's a big gap between the claims made for our skilled migration program and the reality. We let in people whose skills aren't in high demand, and plenty of them end up driving taxis because the local professions' gatekeepers refuse to recognise their qualifications.

So it's not clear the benefits of our skill-pinching program exceed the cost of discouraging businesses from incurring bother and cost training enough of our own young people, when you can always get the government to let you bring in someone ready-trained.

High immigration may suit our rent-seeking business people, but it's a hell of a way to pursue the professed benefits of economic growth.
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Monday, September 11, 2017

Sorry, but using migration to boost growth ain’t smart

Ask an economist where the growth in the economy will be coming from and it's surprising how often they fail to give the most obvious answer: from growth in the population.

Why don't they? Partly because it's an admission of failure: more people, bigger economy. Wow, that must have been hard to engineer.

Economists aren't supposed to believe in growth for its own sake. Their sales pitch is that economic growth is good because it raises our material standard of living.

But this is true only if the economy grows faster than the population, producing an increase in income per person (and even this ignores the extent to which some people's incomes grow a lot faster than others).

This simple truth is obscured by economists' practice of measuring growth in the economy without allowing for population growth.

Take the national accounts we got for the June quarter last week. We were told the economy grew by 0.8 per cent during the quarter and by 1.8 per cent over the year to June.

Allow for population growth, however, and that drops to 0.4 per cent and a mere 0.2 per cent. So, improvement in living standards over the past financial year was negligible.

Over the past 10 years, more than two-thirds of the growth in real gross domestic product of 28 per cent was accounted for by population growth, with real growth per person of just 9 per cent.

It's a small fact to bear in mind when we compare our economic growth rate with other developed countries'.

We usually do well in that comparison, but rarely admit to ourselves that our population growth is a lot higher than almost all the others.

Our population grew by 1.6 per cent in 2016, and by the same average rate over the five years to June 2016. This was slower than the annual rate of 1.8 per cent over the previous five years, but well up on the 20-year average rate of 1.4 per cent.

So in the past decade we've been relying more heavily on population growth – read, increased immigration – to bolster economic growth and make the improvement in our material prosperity seem greater than it is.

By now, much less than half our population growth comes from natural increase (births minus deaths) and much more than half from "net overseas migration" (immigration minus emigration).

Meaning, of course, that the even-faster rate of population growth over the past decade has been a conscious act of policy.

Almost all our business people, politicians and economists support rapid population growth through high migration. With that much conventional wisdom behind it, who needs evidence?

It's certainly rational for business people to support high migration. Their concern is to maximise their own living standards, not those of the rest of us, and what easier way to increase your sales and profits and salary package than to sell in a market that keeps expanding?

But I oppose "bizonomics" – the doctrine that the economy should be run primarily for the benefit of business, rather than the people who live and work in it – and the older I get the more sceptical I get about the easy assumption that population growth is good for all of us.

For a start, I don't trust economists enough to accept their airy dismissal of environmentalists' worries that we may have exceeded our fragile ecosystem's "carrying capacity".

But even before you get to such minor matters as stuffing up our corner of the planet, there are narrowly economic reasons for doubting the happy assumption that a more populous economy is better for everyone.

The big one is that the more we add to the population, the more we have to divert our accumulation of scarce physical capital – housing, business equipment and public infrastructure of roads, public transport, schools, hospitals and 100 other things – from "capital deepening", so as to improve our productivity, to "capital widening", so as to stop our productivity per person actually worsening.

The feds decide how much immigration we get, but it's the hard-pressed states that have to keep increasing their infrastructure spending to keep up with the needs of their ever-expanding populations.

But the states allow discredited American credit-rating agencies to limit how much they can borrow. And then there's the glaring inconsistency between believing in rapid population growth and the smaller-government brigade's eternal struggle to stop tax increases and limit government borrowing.

Is it any wonder the long-suffering denizens of our chronically under-serviced outer suburbs end up diverting so much of their dissatisfaction onto immigrants who arrive uninvited by boat? Sometimes I wonder if that's by design, too.
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Monday, February 13, 2017

Reserve Bank chief gently reproves Turnbull’s failings

Reserve Bank governor Dr Philip Lowe's economic policy to-do list for 2017 contains a lot more implied criticism of the Turnbull government's weak performance than it has suited some in the national press to report.

It's true that, in his speech last Thursday, Lowe was clear in his support for a cut in the company tax rate and, by implication, the government's plan to cut the rate from 30 per cent to 25 per cent over 10 years, at a cumulative cost to revenue of $48 billion, and then a continuing net cost of $8 billion a year.

Last among the four items on Lowe's to-do list was "rebuilding our fiscal buffers", by which he meant getting the budget back into surplus.

Our former good record of successive surpluses and negligible net government debt "provided us with a form of insurance", he said.

"It meant that when difficult times did strike last decade, fiscal [budgetary] policy had the capacity to play a stabilising role. We had options that not all other countries enjoyed."

Note to the government's media cheer squad, Treasury revisionists and Professor Tony Makin: this leaves little doubt about Lowe's rejection of your minority view that fiscal policy is ineffective in stabilising the economy during downturns.

Lowe went on to say that the task of returning the budget to surplus is complicated by our simultaneous "need to make sure that our tax system is internationally competitive".

"One example of this complication is in the area of corporate tax, where there is a form of international tax competition going on in an effort to attract foreign investment," he said.

"Like other countries, we face the challenge of responding to this, while achieving a balance between recurrent spending and fiscal revenue."

Since Labor is using its senators to oppose passing the government's tax cuts to big businesses, one Australian newspaper headlined this "Reserve Bank chief slams Labor on company tax block". Some slam.

I'm unpersuaded by the need to cut the company tax rate at a time when many multinational companies have already found ways to pay far less than 25 per cent, but that's for another day.

A point to note, however, is that whereas the government argues cutting company tax would do wonders for "jobs and growth", Lowe's argument is more negative: if we don't do it while other countries are doing it we'll lose foreign investment – and, presumably, jobs and growth.

Not nearly such an attractive selling proposition.

Another point worth noting is Lowe's implication that the budget needs to achieve balance in spite of the huge cost of cutting company tax.

Maybe we should headline this: Reserve Bank chief slams Coalition's failure to show how company tax cut will be paid for, and so not further delay our return to surplus.

Note, too, Lowe's reference to "achieving a balance between recurrent spending and fiscal revenue" (my emphasis).

This isn't the first time he's quietly taken issue with Treasury's longstanding practice of exaggerating the size of budget deficits by lumping spending on capital works in with recurrent spending – unlike the state governments.

Borrowing part of the cost of building infrastructure that will deliver economic and social benefits for 30 or 50 years is in no way "living beyond our means".

And, indeed, one place higher on Lowe's to-do list than achieving budget surplus in spite of company tax cuts is the task of "providing adequate high-quality infrastructure to help our citizens be as productive as they can be and enjoy a high quality of life".

He notes we've got a strongly growing population which, if we fail to invest in sufficient infrastructure, including transport infrastructure, can "impair our ability to compete and be as productive as we can be".

It's surprising how many people are great advocates of high immigration levels, but won't countenance the increased spending and borrowing needed to provide the additional infrastructure – roads, public transport, hospitals, schools – used by all the extra people.

Then they wonder why our productivity performance is weak.

Which brings us to the first item on Lowe's to-do list: "reinvigorate productivity growth".

"There is no shortage of things that could be done to lift our performance. The challenge is that most of these ideas require difficult political trade-offs." Just so.

Lowe's second issue on the list is "how best to capitalise on the opportunity that the economic development of the Asian region provides".

I'd have thought the answer was obvious: our business people should sit round waiting until our hopeless politicians provide them with tax incentives sufficient to induce them to get off their arses.
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Monday, November 21, 2016

Our politicians go populist at their peril

If I were an Australian politician I'd think hard about the ascension of Donald Trump before I drew conclusions for local consumption.

When someone so unattractive surprises us by winning, it's tempting to conclude he must have done so because of a massive surge of anger over immigrants, Muslims and jobs lost through trade agreements.

We connect this with the Brexit surprise and the resurrection of One Nation and conclude we're witnessing a worldwide populist uprising against globalisation and "neo-liberalism".

Pollies on both sides wonder whether they should protect their backs by reverting to more protectionist policies, rejecting more Chinese investment and shouting louder about Australia-first.

But such a reaction much exaggerates the popularity of populism in America – as is clearer now more of the vote has been counted.

First, note that Hillary Clinton got over a million votes more than Donald Trump did. He actually got fewer votes than Mitt Romney in 2012 and John McCain in 2008.

How is such a wide discrepancy between the popular vote and the electoral college result possible? Because the many smaller states get a disproportionate number of votes in the college.

So Trump won because he got more votes in the right places – three or four smaller "swing states" in the midwest Rust Belt, which normally vote Democrat.

It's true Trump won these states because enough white males without college educations found his plain-talking and promise to "make America great again" – that is, bring jobs back to the Rust Belt – more attractive than establishing a Clinton dynasty.

But let's not kid ourselves America is seeing a nation-wide upsurge in populist protectionism, any more than One Nation's ability to exploit an ill-judged double dissolution represents an existential threat to Labor or the Coalition.

Next, remember populist sentiments can't be satisfied. They're about the expression of emotion – anger, frustration, envy, fear of foreigners, resentment of city-slickers and the better-educated – not about rational choices.

They're about wishing the world hadn't changed and wishing some saviour could change it back.

Populism is about ignoring the things that have changed for the good – such as much lower prices for clothes, groceries, hardware, electronic goods, cars and much else – and assuming we can reverse the changes we don't like without losing the benefits we've come to take for granted.

Populism is about explaining the decline in employment in manufacturing, and the shift in economic activity from the Rust Belt to the Sun Belt, solely in terms of free-trade agreements – which were made by governments and so supposedly can be reversed – while ignoring the much greater role played by technological change, which happened in spite of governments and can't be stopped by governments.

It's perfectly possible for America to make no further trade agreements, but only an American could delude themselves that their government could tear up longstanding agreements with other countries while those countries sucked it up.

Protectionist moves lead to retaliation by your trading partners. That leaves both sides worse off.

Consider all the wild promises Trump made to con the Rust Belt's white male workers into voting for him: a wall along the Mexican border, a 35 per cent tariff on Mexican imports and 45 per cent on Chinese imports, plus renegotiation of the North American free-trade agreement.

Assuming he wanted to, he can't actually do these things. Assuming somehow he could, they wouldn't fix the problem the way his dupes imagine, while introducing a new set of problems.

This says it won't be long before the Rust Belt's plain talkers realise they've been conned.

Add to them the majority that didn't want him in first place, and the many who held their nose and voted Republican because they couldn't stomach any Democrat, and it's not hard to see Trump setting records for the time it takes a president to become thoroughly on the nose.

Sound like a winning formula for our pollies to copy? Since populism fosters aspirations that can't be satisfied, it's suited to new, minor parties, but a high-risk tactic for parties that stand a chance of getting to government and having to deliver on the expectations raised.

None of this says the Rust Belt revolters don't have legitimate grievances.

A small group of business heavies and well-educated city-slickers has grabbed almost all the benefits from the structural change that's so disadvantaged the rust-belters, without governments – even Democrat majorities – doing much to oblige the winners to share with the losers.

For once in their lives, rather than going lower when they see the Yanks go lower, our pollies should, to quote Michelle Obama, "go high when they go low".
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