We're a nation of stay-at-homes

Would you be surprised if I told you the resources boom and its two-speed economy had led to a big increase in the number of people shifting between states? No, I thought not.

Well here's my surprise: it hasn't gone up, it has gone down. Research by Professor Jeff Borland, of the University of Melbourne, finds that the rate of interstate migration has declined over the past decade.

The eternal lament of oldies (me included) is that we're getting more and more like America. But this is one respect in which we aren't. The Americans are inveterate movers between states, but we have never moved as much as they do, and now even fewer of us are doing it.

"Australians have never been big movers," Borland says. "Most of us complete our schooling in the same state. We're not likely to shift states to find employment if we lose our jobs. And when we move in retirement, this is mostly to another place in the same state."

Borland's paper shows that, in 2003, the proportion of the population moving between states was 2.1 per cent. Last year it was just 1.5 per cent, a decline equivalent these days to 130,000 fewer people.

This was the lowest rate for at least 40 years. And it was no flash in the pan. It was the continuation of a decline that's been occurring steadily for 10 years. The rate of interstate migration rose between the mid-'70s and the late-'80s, then stayed pretty stable at about 2 per cent a year until the early noughties.

The rate of decline was reasonably similar in all states, with one exception. No, it wasn't Western Australia. It was Queensland. And Queensland's share of the decline wasn't disproportionately smaller than for the other states, it was larger.

The decline has occurred among people of all ages. But that's not to say people of all ages are equally likely to pack up and move interstate. They aren't.

Borland finds that the peak ages for state migration are the 20s and 30s. "People above 40 years move progressively less as they get older," he says.

If we take the example of the late 1990s, one in 25 people aged 20 to 24 moved interstate in the previous year, whereas for those aged 70 to 74 it was one in 200.

So why has interstate migration declined? If moving tends to be concentrated among people in their 20s and 30s, could such migration be down because, with the ageing of the population, people in that age range now constitute a smaller proportion of the total population?

No, the overall decline is explained by declines in all age groups, although it's true that the decrease has been larger at younger ages.

It seems clear to me that most interstate migration is work-related. Or, as Borland puts it, "suppose we think of the main rationale for interstate migration as being to match the location of the population to the location of jobs".

In that case, could the decline in movement between states be caused by less reallocation of jobs between states? Doesn't seem so. An index of the annual change in the distribution of employment by state shows no downward trend in the extent of change.

So what is the reason? Borland isn't certain, but he finds evidence to support the idea that the change is in the behaviour of recent immigrants to Australia, not that of people long resident here. There's been an increase in the correlation between the states immigrants first come to and the states where employment is growing fastest.

My guess is it gets back to the Howard government's move to a much greater proportion of skilled migration, with greater employer nomination of migrants via 457 visas. Migrants are now more likely to come straight to a particular job than to land in Sydney or Melbourne and start hunting for one somewhere in Oz.


RIVALRY between the Coalition and Labor can reach petty levels. The budget papers always had white covers until the Rudd government decided dark blue would be a good reform. Under the Abbott government they've reverted to white.

For many years the federal government spelt "program" the way this newspaper does. But John Howard, spiritual son of Bob Menzies, insisted it revert to the fancy English spelling. Labor changed it back to the no-bulldust way. Now Tony Abbott, spiritual son of Howard, has reverted to "programme".

Pedants who know their stuff know the Poms - including Shakespeare in his day - used the simple spelling until the 19th century, when it was prettied-up during a bout of francophilia.

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Hard to hear angels above the racist heartbeat

Scientists used to think chimpanzees - our close relatives - were a gentle, peace-loving species, until they observed their behaviour in the wild and found they could be quite murderous in the treatment of other chimps.

And what was it that caused them to become so vicious? The arrival of chimps from a different troop in the part of the forest they considered to be their territory.

I remembered this one day after failing to persuade a friend who took a dim view of boat people that her objections were unfounded. Whenever I knocked down one argument she'd just switch to another.

Our evolutionary history has left us with an instinctive fear of outsiders - people who are different, people who invade our territory to steal our food and our women or, in the contemporary context, to jump the queue and steal our jobs, overcrowd our schools (and win most of the prizes), overwhelm our culture, crowd out the rellos we're trying to get into the country, push up house prices and add to congestion on the roads.

You can call it racism or religious intolerance - the nation that invented the White Australia Policy can hardly object to that charge, except to say we're no worse than most nationalities and better than some.

But it's best thought of as xenophobia - a fear of foreigners, people who are different, who aren't one of us.

And it's so deeply ingrained in us - so visceral - it's not susceptible to rational argument. It would be nice if a greater effort by the media to expose the many myths surrounding attitudes towards asylum seekers could dispel the fear and resentment, but it would make little difference.

Our politicians have long understood that widespread dislike of newcomers, especially those of darker skin or strange religious practices, lay just beneath the surface and could be easily aroused. The politician or party that tapped this vein would draw much support.

For decades there was an unspoken agreement between the major parties to keep such tactics off limits. Their role was to avoid bringing out the worst in the Australian psyche.

But maybe 20 years ago that bipartisan approach began breaking down. Perhaps it was the rise of Asian immigration, perhaps the era of so many people arriving uninvited by boat.

It may be true we have a bigger problem with visitors arriving by plane and overstaying visas, but the more visible arrival of scruffy people on an overcrowded, leaky boat - the footage of which can be replayed many times, leaving an exaggerated impression of the numbers involved - seems far more threatening.

Perhaps it was the huge rise in the levels of sanctioned immigration in recent years, for which governments have failed to provide sufficient housing and public infrastructure.

Another factor was the advent of talkback radio, which gave greater currency to the disaffection of individuals, and then the rise of shock jocks who, in pursuit of ratings and commercial gain, where prepared to incite their listeners' resentments.

Pauline Hanson brought the issue crashing onto the stage of federal politics, forcing the major parties to respond. But politicians had begun walking away from their commitment to avoid politicising the issue much earlier.

Perhaps they couldn't avoid responding to public concerns; perhaps in the heightened contest between the parties they could no longer resist the temptation to gain an advantage over their opponents.

Some people blame it all on John Howard, but the harsh treatment of boat people began under his Labor predecessors. And whoever started it, once the embargo had been breached both sides got down and dirty.

Julia Gillard took the debate to a lower level before the election when she invited people to give their prejudices free rein. "People should feel free to say what they feel," she said. "For people to say they're anxious about border security doesn't make them intolerant. It certainly doesn't make them a racist."

To acknowledge we have an evolutionary predisposition to fear and resent outsiders is not to condone such attitudes. The process of civilisation involves gaining mastery over our base emotions which, if they once contributed to our biological "fitness", are now antisocial and counter-productive.

But if such attitudes are instinctive and impervious to rational argument, what's to be done now the pollies have let their standards fall?

I was at a loss to answer that until last week and the arrival in Sydney of that poor distressed orphan boy for the funeral of his father. Suddenly a crack appeared in the wall of prejudice against boat people. Tony Abbott and his immigration spokesman, Scott Morrison, got caught going beyond the pale in their pursuit of electoral advantage. It emerged that Morrison had earlier proposed exploiting the popular resentment of Muslims, but had been rebuffed by colleagues insisting the Liberals' long-standing commitment to a non-discriminatory immigration policy remain inviolate.

The minister, Chris Bowen, was widely criticised for his bureaucratic and insensitive treatment of the boy and his relatives. And it seems the episode has prompted Gillard to find the courage to lead.

"People easily fear change. People easily fear difference," she said. "It is the job of national leadership to reassure in the face of that fear, to explain to people that there is ultimately nothing to be afraid of."

What changed? Here's a clue: in their efforts to gratify and exploit public resentment of "illegals", governments of both colours have given the highest priority to preventing individual boat people from telling their stories to the media. They must continue to be seen as monstrous invaders, never as flesh and blood.

Our attitudes towards asylum seekers may be impervious to rational argument, but they're not to rival emotions - particularly the positive emotion of empathy.

Like all nationalities, Australians are neither good nor bad, they're both. Our leaders can play up to our darker side, or appeal to the better angels of our nature.

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Beware gurus selling high migration

The economic case for rapid population growth though immigration is surprisingly weak, but a lot of economists are keen to give you the opposite impression. Fortunately, the Productivity Commission can't bring itself to join in the happy sales job.

I suspect that, since almost all economists are great believers in economic growth as the path to ever higher material living standards, they have a tendency to throw in population growth for good measure. There's no doubt a bigger population leads to a bigger economy; the question is whether it leads to higher real income per person, thereby raising average living standards.

Of course, business people can gain from selling to a bigger market, regardless of whether the punters are better off. So I'd be wary of advice coming from economists employed by business or providing consulting services to business.

In 2006 the Productivity Commission conducted a modelling exercise to assess the effect of a 50 per cent increase in our skilled immigrant intake. It found that, after 20 years, real gross domestic product was only about 4 per cent higher than otherwise.

And the increase in real income per person was minor. What's more, most of the gains accrued to the migrants themselves, with the existing population suffering a tiny net decline in income. Why this lack of benefit? You'd expect the extra skilled labour to raise the proportion of the population participating in the labour force, thus boosting production per person.

But most of the productiveness of workers are achieved by the physical capital they're given to work with. So unless your extra workers are given extra capital equipment - a process known as "capital widening" - their productivity is likely to decline, thus offsetting the gain from having more workers.

Note, too, that we have to increase the housing stock to accommodate the migrant workers and their families, as well as providing the extra public infrastructure for a bigger population. So the migrants are paid to supply their labour, but the rest of us have to provide the extra economic and social capital they need if standards aren't to fall.

Last week Tony Burke, the federal minister responsible for developing a "sustainable population strategy" next year, released an issues paper to encourage discussion. It was accompanied by the reports of three advisory panels, including one on the economic aspects, led by Heather Ridout of the Australian Industry Group.

Ridout's report sets out to talk up the economic case for high migration by dispelling "myths" and pointing to hard-to-quantify benefits "often ignored by low-growth advocates when they skim the literature" (that's what they call a professorial put-down).

The main hard-to-quantify benefits left out of the Productivity Commission's modelling are the economies of scale arising from a bigger market. But why after all these years have economists been unable to produce good empirical evidence of something as straightforward as scale economies?

And why wax lyrical about unmeasurable benefits without mentioning unmeasurable costs? In its recent booklet on population and immigration, the commission acknowledges that as well as economies of scale there could be diseconomies.

The Ridout report objects that the commission's modelling measured the benefit of increased immigration only over 20 years. Sorry, but if you have to wait more than 20 years for the payoff you're not talking about a powerful effect.

A relatively new argument in favour of high immigration is that it could foster economic growth by countering to some extent the decline in labour-force participation caused by the ageing of the population. But, since immigrants age too, all this can do is put off the evil hour (not a course of action usually promoted by economists). To continue postponing the crunch you have to keep upping the dose of immigration.

The Productivity Commission is blunt: "changes in migration flows are unlikely to have a significant and lasting effect on the ageing of Australia's population".

The Ridout report argues that a faster-growing, immigration-fuelled economy would require greater levels of investment by businesses and in public infrastructure. This greater capital spending would generally involve investment in more productive capital equipment, as recent technological improvements will be embedded in the newer stock. In this way, faster growth of the size of the economy would drive the productivity gains that are central to advances in material living standards, we're told.

Huh? The proposition is that by taking on a need for considerable investment in capital widening (to provide the extra workers with the equipment and infrastructure they need to be as productive as the existing workers) we're increasing the scope for capital deepening (giving each worker more and better capital equipment).

Am I missing something? This is a twist on a common economists' argument I've never managed to fathom: we need to grow more and do more damage to the natural environment because when we're richer we'll be able to afford to fix the damage we've done to the environment.

The Ridout report asserts that provided population growth is "balanced and managed well", living standards will rise. It needs to be "matched by greater commitments to education and skills development, more and better investments in infrastructure, greater attention to the development of our cities and regions and to our natural environment".

In other words, to give business the extra population it wants but prevent this from worsening all those things, governments at all levels will really need to lift their game as well as spend a lot more. Turn in a perfect performance and high immigration won't be a problem.

I prefer the commission's way of putting it: "population growth and immigration can magnify existing policy problems and amplify pressures on 'unpriced' entities, such as the environment, and urban and social amenity".

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A few facts would be useful in the migration debate

If we are going to have great debate about whether we want a Big Australia, people will need a much stronger grasp on the factors driving population growth and immigration than they've shown so far.

This is the rationale for a useful booklet, Population and Immigration: Understanding the Numbers, issued by the Productivity Commission this week.

Over the past 50 years, Australia's population has averaged growth of 1.6 per cent a year, causing it to double to 22.3 million. This is faster than for most developed countries.

The growth in our population comes from two factors: natural increase (more births than deaths) and "net overseas migration" (more immigrants than emigrants).

Natural increase is relatively stable, averaging about 130,000 people a year, whereas net migration can vary a lot from year to year.

Our "total fertility rate" (the number of babies per woman) has risen a bit in recent years to 1.9, although it's only about half the peak it reached in the 1960s.

It's fallen over the decades because of more effective contraception, the higher education of girls, and married women wanting to return to the paid workforce.

It's recovered a bit in recent years because of a slight reversal of the trend for women to leave starting their families later and later. Women worry more about leaving it too late and, when they start a bit earlier, more couples are able to achieve the common desire to have two kids rather than one.

The commission doubts whether Peter Costello's baby bonus has had any significant effect on fertility.

Demographers put the population "replacement rate" at 2.1 children (the extra 0.1 is to allow for a few who die before being able to reproduce). Since our fertility rate has long been below that (as it is in most developed countries), without net migration our population eventually would start to fall.

However, natural increase has been kept positive by rising longevity (a falling death rate). Longevity has risen significantly over the past century because of improvements in public health measures, improved nutrition (from a rising material standard of living) and advances in medical science.

Since the 1980s, net migration has overtaken natural increase as the main contributor to population growth. In the 1970s it accounted for about 30 per cent of population growth but in the past 10 years it's grown strongly to now account for about 65 per cent of the growth.

Our long-term rate of population growth is 1.6 per cent but in recent years strong migration has caused growth to be higher than that, with a rise of 2 per cent in the year to June 2009. This included net migration for the year of 313,500.

This high level of migration - combined with Treasury's projection that our population could reach 36 million by 2050, Kevin Rudd's remark that he believed in a big Australia and public anxiety over boat people - has prompted the debate about Big Australia.

But there's a lot of confusion over the extent to which the government controls the level of immigration.

Immigrants can be divided into two streams: those coming permanently and those coming temporarily. Starting with the former, the government has a permanent migration program. Each year it decides on the maximum number of permanent immigrants it will take and this figure gets a lot of publicity.

The limits set for this financial year are unchanged from last year: a total of almost 169,000, being 114,000 places for skilled migration plus 55,000 places for families. The big increase in recent years has been in the skilled category.

Also in the permanent stream is the government's humanitarian program. Each year the government sets a limit of about 14,000 on the number of refugees it's prepared to let in. People who arrive by boat and are found to be genuine refugees are given permanent residence under this program.

But fewer than 3000 humanitarian places a year (less than 20 per cent) are given to people who apply after they get here. The rest apply overseas and the program doesn't increase to make room for onshore applicants.

So repeated TV footage of people arriving on overcrowded boats has left the public with a quite exaggerated impression of how many of them there are. Some people imagine it's boat people who explain the high levels of migration in recent years but that's quite wrong. Their numbers are trivial in the scheme of things and don't increase the modest total of refugees admitted each year.

Finally in the permanent stream come Kiwis. Just as you and I can move to New Zealand any time we choose, so Kiwis can come here without government permission.

But here's the trick: most of the growth in net migration in recent times has been in the short-term stream, accounting for about two-thirds of annual net migration. In June 2009, there was a stock of almost a million people in the country on temporary visas. The three main temporary categories are: overseas students (contributing 110,000 to net migration in 2007-08); long-stay "457" business visas (contributing about 35,000); and working-holiday visas (about 21,000).

Long-stay business visas can run for as long as four years. In principle, if there was no increase in the number of people in these three categories over time, they'd make no contribution to population growth. About the same number of people would be coming and going each year.

Similarly, if that was all there was to it, any increase in their numbers would make only a temporary contribution to population growth. Eventually the increase would stop and eventually they'd go back home.

But in recent years more than half the people with long-stay business visas have been granted permanent residency, as have about a third of the overseas students.

Now, it's important to realise the government imposes no limits on any of these categories. Overseas student numbers are driven by the efforts of Australian universities and private training colleges to attract paying customers. The long-stay business visa numbers are driven by employer demand for skilled workers not available locally.

But the government has recently more than halved its list of skilled occupations in short supply and tightened up on the overseas student category. Combine this with the high dollar and the troubles of Indian students in Melbourne and it seems likely the number of overseas students will now fall quite heavily.

It's a safe bet net migration won't grow nearly as fast in the next few years.

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Punters well aware of economic case against more immigration

The Big Australia issue has gone quiet since the election but it hasn't gone away. It can't go away because it's too central to our future and, despite Julia Gillard and Tony Abbott's rare agreement to eschew rapid population growth, the issue remains unresolved.

This year Rebecca Huntley of Ipsos, a global market research firm, and Bernard Salt of KPMG, a financial services firm, conducted interviews with business people and discussions with 13 groups of consumers, showing them two markedly different scenarios of what Australia could look like in 2020.

In the "measured Australia" scenario, governments limited population growth, focused on making our activities more environmentally sustainable and limited our economic links with the rest of the world.

In the "global Australia" scenario, governments set aside concerns about the environment, promoted rapid economic and population growth, and made Australia ever more a part of Asia.

Not surprisingly, the business people hated measured Australia and loved global Australia. But even though global Australia was described in glowing terms - ignoring the environment apparently had no adverse effects - ordinary people rejected it. And although measured Australia was painted in negative terms - all downside and no upside - there were aspects of it people quite liked.

The message I draw is that if governments keep pursuing rapid growth to please business they'll encounter increasing resentment and resistance from voters.

Considering the human animal's deep-seated fear of foreigners, it's not surprising resentment has focused on immigration. It's clear from the way in the election campaign both sides purported to have set their face against high migration that they're starting to get the message.

But at the moment they're promising to restrict immigration with one hand while encouraging a decade-long, labour-consuming boom in the construction of mines and gas facilities with the other. And this will be happening at a time when the economy is already close to full employment and baby boomers retire as the population ages.

Their two approaches don't fit together. And unless our leaders find a way to resolve the contradiction there's trouble ahead.

Business people support rapid population growth, which really means high immigration; there's little governments can do to influence the birth rate, because they know a bigger population means a bigger economy. And in a bigger economy they can increase their sales and profits.

That's fine for them, but it doesn't necessarily follow that a bigger economy is better for you and me. Only if the extra people add more to national income than their own share of that income will the average incomes of the rest of us be increased. And that's not to say any gain in material standard of living isn't offset by a decline in our quality of life, which goes unmeasured by gross domestic product.

The most recent study by the Productivity Commission, in 2006, found that even extra skilled migration did little or nothing to raise the average incomes of the existing population, with the migrants themselves the only beneficiaries.

This may explain why, this time, economists are approaching the question from the other end: we're getting the future economic growth from the desire of the world's mining companies to greatly expand Australia's capacity to export coal, iron ore and natural gas, but we don't have sufficient skilled labour to meet that need and unless we bring in a lot more labour this episode will end in soaring wages and inflation.

Peter McDonald, a leading demographer at the Australian National University, argues that governments don't determine the level of net migration, the economy does. When our economy's in recession, few immigrants come and more Aussies leave; when the economy's booming, more immigrants come and fewer Aussies leave. Governments could try to resist this increase, but so far they've opted to get out of the way.

To most business people, economists and demographers, the answer to our present problem is obvious: since economic growth must go ahead, the two sides of politics should stop their populist pandering to the punters' resentment of foreigners.

But it seems clear from the Ipsos discussion groups that people's resistance to high immigration focuses on their concerns about the present inadequacy of public infrastructure: roads, transport, water and energy. We're not coping now, what would it be like with more people?

And the punters have a point. In their instinctive reaction to the idea of more foreigners they've put their finger on the great weakness in the economic case for immigration.

As economists know - but don't like to talk or even think about - the reason immigration adds little or nothing to the material living standards of the existing population is that each extra person coming to Australia - the workers and their families - has to be provided with extra capital equipment: a home to live in, machines to use at work and a host of public infrastructure such as roads, public transport, schools, hospitals, libraries, police stations and much else.

The cost of that extra capital has to be set against the benefit from the extra labour. If the extra capital isn't forthcoming, living standards - and, no doubt, quality of life - decline.

If we don't build the extra homes - as we haven't been doing for some years - rents and house prices keep rising, making home ownership less affordable. To build the extra public facilities, governments have to raise taxes and borrow money. But they hate raising taxes and both sides of federal politics have sworn to eliminate government debt.

The interviews and discussion groups revealed both business people and consumers to be highly doubtful about the ability of governments - particularly state governments - to provide the infrastructure we need. As well they might be.

At present, our leaders on both sides are heading towards a future that doesn't add up.

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A sustainable Australia?

Clancy Auditorium, UNSW
Thursday, November 4, 2010

My strongest reason for opposing continuing high levels of net migration is my scepticism about the airy assurances from economists and others that continued population growth is compatible with an ecologically sustainable Australia. Economists offer these assurances not because they’ve thought deeply about Australia’s ecological carrying capacity - it’s not a subject they know much about - but because they’re used to thinking about the economy in isolation from the environment and because they have a suspiciously convenient faith in the ability of technological advance to solve environmental problems and faith in the ability of increases in man-made capital to substitute for the depletion of non-renewable resources, the over-exploitation of renewable resources, the degradation of waterways and soil, the destruction of species and the damage to ecosystem services (such as carbon sinks).

But since I’m no expert on ecology either, I’ll stick to something I know a bit about. It’s to warn non-economists that the contribution of immigration to increased material prosperity isn’t all it’s cracked up to be. There’s no doubt that net migration causes the economy to grow - to be bigger because it has more people in it. Businesses want a bigger economy because it gives them more people to sell to and profit from. From their self-interested perspective, that’s quite rational. But for economists and politicians it’s not good enough to assume that bigger is better, to believe in growth for the sake of growth. No, according to their narrow, materialist perspective, growth is only a good thing if it makes us better off, if it raises our material standard of living, if it increases real income per person.

Now here’s the thing: although economists don’t like to talk about it - don’t like to think about it - plenty of studies have shown that immigration does little or nothing to raise real income per person. What little gain there is goes to the immigrants themselves, not the pre-existing population that invited them in. This conventional but little-trumpeted finding is confirmed by the most recent study, undertaken by the Productivity Commission in 2006.

So why is it that adding extra workers tends not to raise the average standard of living? Well, it’s well understood by economists: it’s because all those extra people require additional spending on capital - ‘capital broadening’ as economists call it - if the average amount of capital per person isn’t to fall. The extra people need to be supported by additional capital in their private lives - more housing - additional capital equipment in the firms where they work, and additional public infrastructure: more roads, more public transport, schools, hospitals, power and water. Thus the economic benefit of having more workers is essentially cancelled out by the cost of providing the extra capital that needs to go with them and their families (most of which has to be borrowed from foreigners).

The fashion among economists at present is to ignore this glaring drawback and focus on more seemingly appealing arguments, such as that high immigration will reduce our problem with ageing (true but exaggerated) and Professor Peter McDonald’s argument that politicians don’t determine the size of our immigration, the needs of the economy do. There’s some truth to this, but then economists point to the resources boom and the massive increase in construction activity it involves and conclude we must open the immigration flood gates to avoid skilled-labour shortages and wage inflation. Actually, we only surrender our control over immigration to the economy when we proceed from the assumption that economic growth is pretty much the only thing that matters and that the role of the natural environment can be left out of the model.

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Does the economy depend on population growth?

Talk to University of Sydney Political Economy Society
May 4, 2010

There are a hundred political economy points I could and would like to make about immigration and population, but time doesn’t permit so I’m going to focus the more strictly economic question: does the economy depend on population growth?

I’ll start by stating upfront where I’m coming from on population: I believe we should do what we can to limit the growth of our population, and do that by focusing largely on immigration. Net immigration has accounted for about half our population growth over recent decades, with natural increase (births minus deaths) accounting for rest. Immigration (and the subsequent children of immigrants) would account for well over half of the 60 per cent growth in the population, from 22 million to 36 million over the 40 years to 2050, as mechanically projected by Treasury - the projection that’s stirred up so much debate.

The reason for focusing on immigration rather than natural increase is that fertility is much harder and more controversial for governments to attempt to influence. In any case, the fertility rate is running just below the 2.1 babies per woman needed just to hold the population constant over the longer term. Arithmetically, some net migration would be necessary to stop the population starting to fall by around the middle of the century. So immigration is the ‘swing instrument’, so to speak, and I’ll focus on it from here on.

What are my reasons for favouring limiting immigration to limit our population growth? It’s mainly my concern about the damaging ecological effects of population growth, as much from a global perspective as from a local Australian perspective. But this concern is augmented by my belief that economic growth (ie increase in material standard of living, as conventionally measured by the real growth in GDP per person) does nothing to increase subjective wellbeing (happiness) in developed countries. If so, why pay a social or environmental price to pursue it? But this isn’t true for developing countries, which is why I believe the rich countries need to limit both their population growth and their growth in GDP per person, to leave more ecological space for the understandable material aspirations of the poor countries. All this is discussed in my new book, The Happy Economist, which will be out in August.

OK, let’s get down to it: what’s the relationship between population growth and economic growth? This needs to be unpeeled like an onion. First, it’s clear that if you have a growing population - more people producing and consuming goods and services - you’ll get a bigger economy. But in narrow economic terms, what’s so good about having a bigger economy? Well, just about all business people, politicians and even economists think it sounds pretty nice. Business people like it simply because it gives them a bigger market to sell to and profit from - a much easier way to grow your business than trying to pinch market share from your competitors. To take an obvious example, the home-building industry wants to boost the demand for new houses. What business wants the politicians generally want, and they probably also think that in a growing economy voters are likely to be more content with the way things are going. As for economists, I think many of them are so conditioned to believe in growth that they’ve long ago stopped inquiring into the whys and wherefores.

But now the second layer of the onion. For a rigorous economic analysis it’s not good enough to simply assume that bigger is better. Why exactly is it better? The conventional answer is that bigger is better if it brings us a higher material standard of living - if it makes us more prosperous. But for this to happen - not necessarily for each individual, but on average, and for the community as a whole - the economy must grow faster than the population grows ie there must be an increase in real GDP per person.

But there’s a third layer: even if increased population does lead to higher GDP per person, who shares in that increase? Conventional economics is about self-interest, so for immigration to be justified economically it has to be shown that the pre-existing population benefits from the decision to increase the population. If instead all the benefit went to the immigrants, then the immigration program would be merely an act of charity.

So, from a narrow, strictly economic perspective, those are the questions to be answered when asking what the relationship is between economic growth and population growth: does population growth lead to higher income per person and, even if it does, do the people who agreed to let in more immigrants gain from that action?

The most recent official attempt to answer those questions came in a report prepared by the Productivity Commission in 2006, Economic Impacts of Migration and Population Growth. Now, the Productivity Commission is a body of impeccable credentials in economic orthodoxy, it’s one of the leading advocates for economic growth and you’d expect it to be very favourably disposed to the belief that immigration makes us better off materially. Which makes its findings all the more significant.

It sought to answer these questions the way economists do, by commissioning some economic modelling. Such models are built on a host of simplifying assumptions, they are driven by the modellers’ beliefs about how the economy works, and so their findings should be viewed with caution. The key assumptions driving the results need to examined, and the whole exercise can be subject to a lot of critical scrutiny. The proposition the PC modelled was the effect of a 50 pc increase in the level of skilled migration over the 20 years to 2024-25. It found that this did cause real GDP to be 4.6 per cent bigger than otherwise in 20 years time. And, yes, this did lead to an increase in real income per person, but the increase was pathetically small: 20 years later real income per person would be 0.7 per cent higher, or $380 a year. The PC found that ‘the distribution of these benefits varies across the population, with gains mostly accrued to the skilled migrants and capital owners. The incomes of existing resident workers grow more slowly than would otherwise be the case’.

The PC concludes that ‘factors other than migration and population growth are more important to growth in productivity and living standards’. Indeed, growth in income per person from technological progress and other sources of productivity growth, and long-term demographic changes, could be expected to be about 1.5 pc per year, or more than $14,000 a year by 2024-25.

So that’s an end point of $380 a year from immigration versus $14,000 a year from technological advance. On this evidence, a rational economic rationalist would have little enthusiasm for population growth. From my perspective, it leaves me confident my opposition to immigration-fed population growth on ecological grounds would not come at any great cost in terms of our material standard of living (or our happiness, for that matter).

But let’s look at why the PC’s modelling exercise came up with conclusions so at variance with what almost all business people, politicians and economists would have expected. It’s because the effects of immigration on the economy are complex, with some positive and some negative, so you have to try to determine the net balance, and the two pretty much cancel each other out. (PC2006report, from p115)

The first positive effect on GDP per person is that immigration leads to an increase in the proportion of the population that’s in the workforce producing things. The second positive effect on GDP per person from an increase in skilled migration is that the workforce is now a little more highly skilled on average, making its production more valuable. The third positive effect is that, eventually, consumer prices don’t rise as much as they would have, which increases incomes in real terms.

But offsetting those three positive effects - according to the PC’s very conventional analysis - are three negative effects. The first is that when the country suddenly gets more workers, those workers have to be supplied with additional physical capital (machines) to work with. That is, immigration leads to a need for ‘capital widening’. If the extra equipment isn’t forthcoming, we suffer a problem called ‘capital dilution’ - the amount of capital available per worker falls, which means the economy’s ratio of capital to labour falls, which means the productivity of labour falls. To the extent this happens, real income per person falls.

The second negative effect arises from the likelihood that a far bit of the extra physical capital our businesses need to avoid capital dilution will end up being supplied by foreign investors. The return that has to be paid to these foreign investors - in interest and dividends - represents a loss of income to Australian residents. So immigration will have the effect of adding to our current account deficit and foreign debt. The third negative comes from the model’s assumption that the bigger economy involves more exports and more imports, but while the prices we pay for those imports are unaffected, to sell more exports we have to accept slightly lower prices, meaning a deterioration in our terms of trade, which reduces our real national income.

That’s all very technical and hard to understand, and based on all the assumptions of the neoclassical model, many of which are wrong or misleading. For instance, I doubt that it takes sufficient account of the effect of the extra pressures migration creates for the public sector: the extra public infrastructure needed to meet the needs of the bigger population and the greater demands on the budget for services provided to immigrants and their families. This implies a need for higher taxation - paid by the original residents, not just the immigrants. And any delay or foul-up in providing the extra housing, roads, public transport, utilities, schools and hospitals etc could have significant negative effects on road congestion and other aspects of our amenity.

Even more significant, conventional economic analysis abstracts from the effect of economic activity on the natural environment, essentially assuming the environment to be a free good. Only when specific effort is made to ‘internalise’ environmental externalities - such as through an emissions trading scheme - do they enter into the model’s calculations. So these modelling results would take no account of the increased environmental costs generated by immigration-fed population growth: the increased emissions of greenhouse gases, the greater pressures on water, land quality, fish stocks and the destruction of species. All these very real costs - which eventually would feedback disastrously into GDP - are ignored in conventional analysis.

Now let’s take a different tack. When you ask why we in the developed countries should continue pursuing economic growth when the evidence says it does nothing to increase our subjective wellbeing, the best answer you get back is that we need continued economic growth to create the additional jobs needed to cope with a growing population. That is, if the population’s growing the economy needs to grow or we end up with ever-rising unemployment. This is a strong argument, but it loses its force in our world of an ageing population and a fertility rate that’s below the replacement rate of 2.1 babies per woman.

But in the present population debate the argument coming from the pro-growth side is the reverse: rather than arguing we need economic growth to cope with population growth, people such as the prominent demographer Professor Peter McDonald of ANU are arguing we need population growth to keep up with economic growth. The economy is growing strongly as we seek to exploit the super-high prices China and the world are willing to pay for our coal and iron ore. This growth is increasing employers’ demand for labour at a time when the unemployment rate is low and we’re close to full employment. High immigration is filling that demand, as well as helping to supply the growing labour needs of the mining states without them having to bid their wages up to persuade workers in other states to move to the backblocks of Western Australia and Queensland. In other words, if the economy’s demand for labour is outstripping the local population’s ability to supply that demand, but the government were to decline to allow more workers into Australia, the result would be a wage explosion as employers sought to attract the workers they need by bidding them away from other employers, which would soon lead to rapid inflation - which the Reserve Bank would respond to by greatly increasing interest rates so as to avoid inflation and trying to keep the economy comatose.

So McDonald’s argument is: the government doesn’t control the level of immigration, the economy does. Over the years the rate of immigration has gone up and down, and you can see a strong correlation with the ups and downs of the business cycle. More people come (and are let in) when the economy’s booming; fewer people come (or are wanted) when the economy’s in a slump.

It’s good to be reminded that economic growth is essentially endogenous. Governments use their fiscal and monetary policies to smooth the rate of growth, not to cause it. The micro-economic policies they pursue can encourage or discourage growth to some degree. But, fundamentally, the economy grows because businesses in free markets are always seeking out new ways to make a quid.

All this says that, as the economy is presently configured, it’s difficult for governments that have long courted economic growth to refuse to provide to the economy the immigrant labour it needs to avoid serious overheating.

But to acknowledge this difficulty is not to detract from my earlier point: all of this argument has proceeded on the conventional assumption that the environmental consequences of our economic actions can be safely ignored, to be thought about another day. So if our economy is presently configured in such a way that we can’t keep it functioning stably without doing additional damage to our natural environment - without exceeding the land’s carrying capacity - then the economy needs to be re-configured to put it onto a basis that’s ecologically sustainable. If it’s presently working on a basis that’s unsustainable then, by definition, things can’t continue the way they have been.

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