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.

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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.

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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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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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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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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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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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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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GDP slows as population slows

When is slower economic growth not such a bad thing? When it's caused by lower growth in the population.

If that puzzles you, you're a victim of the economists' practice of focusing on growth in gross domestic product rather than GDP per person.

Nigel Ray, a deputy secretary of Treasury, acknowledged in a speech to the Australian Business Economists this week that last financial year, 2014-15, the economy recorded its third straight year of below-trend growth.

"This means Australia is now in a prolonged period of below-par growth, the likes of which we have rarely seen outside of a recession," he said.

We'll be seeing the national accounts for the September quarter on Wednesday, but they're unlikely to show much improvement.

Reserve Bank heavies have been hinting at it for months, but this week Ray made it official: the economy's trend rate of growth is actually lower than the econocrats had been assuming in recent years.

But what exactly is "trend" growth? Good question because there are actually two versions of it (or three if you include the Bureau of Statistics' practice of referring to its smoothed seasonally adjusted estimates as "trend" estimates).

The backward-looking version of trend is the economy's average actual rate of growth over past 10 years or more. Since 1976-77, for instance, real GDP has grown at an average rate of 3.1 per cent a year.

If nothing in the economy ever changed, the backward-looking version of trend would be the same as the forward-looking version, but things do change.

The future trend rate of growth is also known as the economy's "potential" rate of growth, the maximum rate at which it can grow over the medium-term – periods of five or 10 years or so – without causing a big problem with inflation.

The economy's potential rate of growth is the rate at which its ability to produce goods and services is growing.

This, therefore, refers to the supply side of the economy. The supply side involves combining the economy's three "factors of production" – land, labour and capital – to produce goods and services.

Here, "land" includes natural resources and "capital" means man-made, physical capital, such as buildings and equipment, but also roads and other public infrastructure.

But the economists' custom is to view the economy's supply side – its capacity to produce goods and services – through the perspective of just one factor, labour.

So the economy's potential output is seen as being determined by "the three Ps": population, participation and productivity. Potential growth in production is determine by growth in the population of working age (everyone 15 and over) plus change in the rate at which people of working age choose to participate in the labour force by working or seeking work, plus growth in the productivity of labour (average output per hour worked).

Of course, the economy's potential to supply goods and services is only half the story. How much is actually produced in any period will be determined by the demand for goods and services at the time.

Demand can't exceed supply (when it tries, the excess demand that can't be satisfied from imports just forces prices up), but it can fall short of potential supply. When it does, labour is unemployed or underemployed (people not working as many hours as they want to) and factories and offices have idle capacity.

That's the position we've been in for the past three years: the growth in our demand for goods and services has been falling short of the growth in our potential to supply them. So when the econocrats say growth has been "below trend", that's what they mean.

And every year that actual output falls short of our potential output we get a widening in what economists call "the output gap", which will be manifest in rising unemployment or underemployment as well as unused production capacity in factories and offices.

Whereas we usually think of potential output as an annual rate of growth, the output gap is measured as the difference between the absolute levels of potential and actual output.

The size of the output gap is an indicator of the failure of the managers of the macro economy to achieve their goal of keeping its actual growth in line with its potential growth – that is, to keep it growing at full capacity or "full employment" (of all the factors of production, not just labour).

The continued existence of the business cycle means they can never achieve this goal, of course, but it's still their job to try.

The size of the output gap is also a measure of the extent to which a recovering economy can for a few years grow faster than its trend (potential) rate without that causing any inflation problem. A period of above-trend growth is actually the only way to eliminate the output gap and get the economy back to growing at its full-employment rate.

For some years the econocrats' estimate has been that the economy's potential or (forward-looking) trend rate of growth is 3 per cent a year, compared with its actual growth over the year to June of 2.3 per cent.

Ray said this includes an assumption that the working-age population grows by 1.75 per cent a year, its actual rate over the past 10 years. But now actual growth has slowed to 1.5 per cent because of a decline in holders of temporary visas and lower net migration from New Zealand.

So Treasury has cut its estimate of trend (potential) growth to 2.75 per cent, thereby reducing its estimate of the size of the output gap.

Why is this not such a bad thing? Because, although the growth in workers helping to produce goods and services is likely to be lower than we thought, there'll also be fewer people we have to share those goods and services with. GDP per person shouldn't be much affected.

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Shift to services is boosting exports and jobs

For economy watchers, the most fascinating game in town is the continuing effort to explain why employment and unemployment are performing better than you'd expect while growth in the economy has been so modest.

Despite the Bureau of Statistics' latest national accounts showing that real gross domestic product grew by just 2.3 per cent over the year to March, its smoothed seasonally adjusted labour force figures show employment growing by 2.1 per cent – or 240,000 jobs – over the year to July, with the rate of unemployment seeming to have stabilised at about 6 per cent.

So far in the Reserve Bank's efforts to explain this puzzle, we've heard that it's probably a consequence of slower than expected population growth, helped by surprisingly weak growth in wage rates.

But now an assistant governor of the Reserve Bank, Dr Christopher Kent, has used a speech to the Economic Society in Brisbane to add a third factor: the employment consequences of the economy's accelerated shift from goods to services.

Recent figures show that total population growth has slowed from 1.8 per cent in 2012 to 1.4 per cent in 2014. This slowdown is mainly the result of a decline in the rate of net immigration as skilled workers on temporary 457 visas attracted by the resources boom leave for home when their jobs end, and Kiwi workers go home or stay home.

Slower population growth means slower growth in demand but, equally, slower growth in the population of working age and thus in the economy's supply-side potential or "trend" rate of growth.

This has prompted the Reserve to lower its growth forecasts for 2016 a fraction but eliminate its earlier forecast of rising unemployment, leaving it little changed over the next 18 months.

Since the working population hasn't grown as fast as had been expected, this implies the improvement in the productivity of labour has been a fraction greater than first thought.

Last week's figures from the bureau show wage rates rising just 2.3 per cent over the year to June. Wage growth has slowed to a similar extent as happened in the recession of the early 1990s, even though unemployment has risen by much less than it did then.

Kent says wages may have become more flexible over time and there may have been some general decline in the bargaining power of labour.

Whatever, "low wage growth across the economy has enabled firms to employ more labour than would otherwise have been the case".

But Kent says his sense is that "low wage growth only goes some way to explaining the recent pick-up in labour demand".

Now the likely role of a change in the composition of economic activity. Consumer spending, home building and net exports of services (that is, exports of services minus imports of services) have grown reasonably strongly over the past year, even though overall GDP growth has slowed a fraction.

Surveys suggest that business conditions for firms providing services to households have improved greatly since mid-2013. Conditions for firms providing services to businesses are above average. But those for firms producing or distributing goods remain below average.

These survey results line up reasonably well with employment growth in the three sectors. They also fit with the continuing weakness in business investment spending.

Kent's figuring shows, on average, each worker in the household services sector requires the backing of only about $100,000 worth of capital equipment, whereas each worker in the goods sector (including mining) requires capital equipment of almost $400,000.

Get it? If the fastest-growing parts of the economy are labour-intensive, they can grow and create more jobs without this requiring the same degree of increase in business investment spending and, hence, the same degree of overall growth in the economy.

This compositional change in demand from goods to services – from capital-intensive to labour-intensive industries – is a long-term trend.

But Kent argues there is also a cyclical element to it, as mining investment unwinds and growth in housing construction and consumption – which is increasingly dominated by services – picks up.

Another part of it is that the fall in the dollar has encouraged Australians and foreigners to direct more of their spending to Australian tourism, education and business services.

Over the past three years, the extra workers employed in service industries have outnumbered the extra workers employed in the goods sector by five to one.

It adds up to two things. With slower population growth, we can grow more slowly without being worse off materially. And we don't need to grow as fast to get unemployment falling.

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Why the economy's slow growth may last

The biggest economic story last week wasn't all the wishful thinking about raising the goods and services tax, it was Reserve Bank governor Glenn Stevens' warning that the economy's "potential" rate of growth may be lower than we've assumed.

Predictably, those commentators who did see the significance of this news were too busy putting their own spin on it to make sure what Stevens' said was widely taken in. So let me have a go.

The macro managers' long-standing belief that the economy's "trend" rate of growth is 3 per cent a year or a fraction more has been challenged by the Bureau of Statistics' labour force estimates showing that, over the past year, the rate of unemployment has stabilised at 6 per cent.

Trouble is, the latest national accounts show the economy growing by only 2.3 per cent over the year to March. This is well below the trend rate that, almost by definition, is the rate at which the economy must grow to hold the unemployment rate steady.

How is this discrepancy explained? Stevens ran through the range of possibilities. Maybe employment hasn't been growing as strongly as the figures say at present. Maybe the economy has been growing more strongly than the figures say at present.

Or maybe part of the surprisingly strong growth in employment is explained by the unusually slow growth in wage rates, which would be saving some jobs and creating others.

The final possibility – and the one to which Stevens gives most weight – is that the trend rate of growth is lower than we've assumed, thus allowing unemployment to stabilise at a lower rate of economic growth than we've assumed.

Economists use the term "trend" in both a backward-looking and a forward-looking sense. If you calculate our average actual rate of growth over the past 10 or 20 years, this must have been our "potential" growth during that period.

If nothing in the economy has changed over that time, it should also be our average, trend rate of growth in the coming five or 10 years.

However, things do change – the population ages, for instance – so economists have to make guesses about what our potential growth rate will be in the future.

Our potential growth rate is the maximum rate at which the economy can grow on average over the medium term without a causing a serious inflation problem. It's set by the economy's supply side.

It represents the average rate at which the economy's capacity to produce goods and services is growing. And this is usually thought of as being determined by the rate of growth in the working population plus the rate of improvement in the productivity of labour.

(Whether in any particular year the economy is growing at a rate below, at or above its potential growth rate is determined by the strength of demand at the time. However, the economy can grow faster than its potential "speed limit" only for as long as it has idle production capacity to use up.)

But this is where those commentators who cottoned on to the significance of Stevens' views jumped to their own conclusions about what was causing the suspected slowdown in potential growth. They assumed it must be caused by a slowdown in labour productivity improvement.

Why? Because this fits well with the economists' (including Stevens') long-running campaign to persuade us to undertake more micro-economic​ reform so as to raise productivity and, hence, material living standards.

What they missed in their missionary zeal was Stevens' clear indication that he thought the culprit was slower-than-expected population growth.

The econocrats' figuring suggest a potential growth rate of 3 per cent would be explained by population growth of 1.7 per cent to 1.8 per cent a year, plus growth in labour productivity of 1.2 per cent to 1.3 per cent a year.

So their expected rate of productivity improvement is already pretty low, while the end of the mining construction boom and slow growth generally have seen population growth slow to 1.5 per cent a year or less as the net intake of workers on temporary 457 visas falls and Kiwis go home to a faster-growing economy.

The other thing the missionaries missed was Stevens point that, to the extent the lower trend rate is caused by lower population growth, it shouldn't involve any slower rate of improvement in our material living standards, as measured by growth per person.

Missionary micro-economic reformers won't win lasting converts by misrepresenting our present position, nor the outlook for growth. Their pessimism about future productivity improvement isn't supported by our more recent performance. It's little more than a guess.

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Slower immigration keeps unemployment steady

While we're busy scaring ourselves silly imagining all the terrible consequences that may or may not flow from the turbulence in the eurozone and China, forgive me for intruding with some good news closer to home: unemployment has stopped rising.

The employment figures we got from the Bureau of Statistics this week confirm – and so make a lot more believable – the amazing figures we got a month ago saying the official rate of unemployment had stabilised at 6 per cent.

Barring some unexpected disaster, it's now looking less likely the Reserve Bank's forecast that unemployment will rise to 6.5 per cent by June next year will be realised.

Let's cut through the month-to-month volatility that so many in the markets and media love by sticking to the smoothed seasonally adjusted estimates known as the "trend" figures.

They show that total employment grew by 215,000 over the year to June, an increase of 1.9 per cent. More than half these extra jobs were full-time.

Since the labour force – all those people either in a job or actively seeking one – grew at about the same rate as employment, this was sufficient to get the rate of unemployment back down to where it was in June last year – 6 per cent.

And this happened despite the rate of participation in the labour force – the proportion of the population aged 15 or over who were either employed or unemployed – rising from 64.7 per cent to 64.8 per cent during the year. Not bad considering the retirement of the baby-boomer bulge is working to lower the participation rate.

As I say, this is the same story the figures were telling us a month ago. So where have the extra jobs come from? Well, Kieran Davies, of Barclays bank, has used somewhat different figures – they say we had employment growth of 240,000 over the year to May – to tell us.

He follows the Reserve Bank's practice of splitting the economy into five broad sectors: household services (including accommodation and food services, education, health, recreation and other services), business services (information technology, media and communication, finance, real estate services, professional services and administrative services), goods (farming, mining, manufacturing, utilities and construction), distribution (retail and wholesale trade and transport and storage), and public administration.

Davies found very strong jobs growth in household services of, in round figures, 180,000, with strength in healthcare (90,000), accommodation and food services (50,000), and recreation and arts (40,000).

He makes the point that household services account for a third of total employment, and have driven total jobs growth since the global financial crisis.

Business services, which account for almost a fifth of total employment, have been the next most important sector, with growth of about 80,000. This was driven by professional services, up 90,000, offset by falls in employment in other categories, such as real estate services (20,000) and finance (10,000), but small gains in other categories.

Modest contributions to total jobs growth came from goods distribution (20,000) and public administration (10,000).

Against this, however, there were job losses in mining (30,000), farming (30,000), manufacturing (5000) and utilities (5000), which more than offset jobs gains of 20,000 in construction.

As you see, as well as this quite strong growth in employment overall, there's been a change in the composition of employment, with relatively small contractions in various goods industries more than offset by big increases in service industries.

If this news of strong overall employment growth comes as a shock to you, that's hardly surprising. The economy's been growing at below its "trend" (medium-term potential) growth rate of 3 per cent for a number of years.

And it's often repeated that the economy has to grow at its trend or potential rate of 3 per cent a year just to stop unemployment rising.  (This 3 per cent rate of growth in the economy's potential capacity to produce goods and services comes from labour force growth of 1.7 or 1.8 per cent a year, plus growth in the productivity of labour of 1.3 or 1.2 per cent a year).

So, with real gross domestic product growing by just 2.3 per cent over the year to March (and needing to achieve an unlikely 0.8 per cent growth in the June quarter to achieved the Abbott government's budget-time forecast of average growth of 2.5 per cent in 2014-15), how on earth is it possible for employment to be growing fast enough to hold unemployment steady?

Well, one possibility is that the economy's actually growing a lot faster than the national accounts say it is, but this doesn't seem likely.

A more likely explanation is that the economy's potential rate of growth is no longer as high as 3 per cent a year. It's more likely to have fallen to 2.75 per cent – or even 2.5 per cent, as some are suggesting.

Why? Because slower growth in the population than we've had in recent years –  slower than the econocrats were expecting – is causing slower growth in the labour force.

Population growth is slower because fewer Kiwis are coming to Oz and more are going back home where, for the moment anyway, the economy's prospects are brighter. As well, the end of the mining construction boom means fewer workers and their families are coming in under temporary 457 visas.

If the economy's potential growth rate is lower, that means we can stabilise unemployment at a lower rate of actual growth. In our present circumstances, employment growth is probably being encouraged by the lower dollar and the exceptionally slow growth in wage rates.

Note that when the economy grows more slowly because the population is growing more slowly, we're not left worse off in terms of growth in income per person. But lower immigration does make it easier to get on top of unemployment – something economists prefer not to mention.

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How growth can make us worse off

Just about every economist, politician and business person is a great believer in a high rate of immigration and a Big Australia. But few of them think about the consequences of that attitude – which does a lot to explain our economic problems.

The latest figures from the Bureau of Statistics show our population grew by 1.4 per cent to 23.6 million in 2014. Less than half this growth came from natural increase (births exceeding deaths), with most of it coming from net migration.

When I saw the 1.4 per cent growth figure, I thought it much of a piece with the 1.5 per cent growth over the year to September. It confirmed us as having one of the fastest growing populations among the advanced economies.

But, the Business Bible assured us, growth of 1.42 per cent was a big worry. It was clearly less than the 1.49 per cent average rate of the past 15 years and was, indeed, our weakest growth in eight years.

Slower population growth meant slower growth in real gross domestic product and this would also make it harder to get the federal budget back into surplus, we were told.

Really? This is crazy talk. It shows even our economists have turned off their brains on the question of immigration and lost their way between means and ends. Now they believe in growth for its own sake, not for any benefits it may bring us.

Of course slower growth in the population means slower growth in the size of the economy. But what of it? What do we lose?

The economic rationale for economic growth is that it raises our material standard of living. But this happens only if GDP grows faster than the population grows. So it doesn't follow that slower GDP growth caused by slower population growth leaves us worse off materially.

That would be true only if slower population growth caused slower growth in GDP per person. I suspect many people unconsciously assume it does, but where's the evidence?

I doubt there is any. The most significant recent study, conducted by the Productivity Commission in 2006, concluded that even skilled migration would do little to increase income per person. And what little growth the commission could find was appropriated by the new arrivals.

I doubt it's by chance that economists rarely, if ever, adjust the GDP figures they obsess about for population growth. Meaning we're constantly being given an exaggerated impression of how well we're doing in the materialism stakes. I can't remember GDP per person rating a mention in the budget papers.

Politicians are always boasting about record government spending on this or that, but they never make allowance for population growth in making such claims. (Why would they when often they don't even allow for the effect of inflation?)

As for the claim that slower population growth will make it harder to reduce the budget deficit, it reveals just how unthinking we've become on immigration. It's true enough that slower growth in the workforce means slower growth in tax collections.

But is that all there is to it? What about the other side of the budget? Aren't we assuming a bigger population is costless? Skilled immigrants and their dependents never use the health system? They don't have kids needing to be educated?

They don't add to traffic congestion, wear and tear on roads and 100 other taxpayer-provided services? Since there's often a delay while they find jobs, who's to say budgets, federal and state, wouldn't be better off with fewer immigrants?

But what's strangest about the economic elite's unthinking commitment to high immigration is the way they wring their hands over our weak productivity growth and all the "reform" we should be making to fix it, without it crossing their minds that the prime suspect is rapid population growth.

It's simple: when you increase the population while leaving our stock of household, business and public capital unchanged, you "dilute" that capital. You have less capital per person, meaning you've automatically reduced the productivity of labour.

So you have to do a lot more investing in housing, business structures and equipment and all manner of public infrastructure – a lot more "capital widening" – just to stop labour productivity falling.

The drive for smaller government – and the refusal to distinguish between capital and recurrent government spending – simply doesn't fit with a commitment to rapid population growth and a rising material standard of living.

Lower immigration would help reduce a lot of our economic problems – not to mention our environmental problems (but who cares about them?).

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We're not taking productivity seriously

Given our obsession with materialism, productivity "isn't everything, but in the long run it is almost everything," as Paul Krugman famously said. If so, the intergenerational report's consideration of the topic is quite inadequate.

It's partial in both senses. It mentions most of the key factors that influence productivity improvement - defined as increased goods and services produced per hour worked - but doesn't do justice to many, including climate change.

That's partly because, though the report purports to be about the future of the economy, its real target is Treasury's eternal top priority, the future of the budget balance.

But it's also because the econocrats are leading us towards their preferred policy response to our alleged productivity problem and away from those responses their "priors" - preconceived beliefs about how the world works - cause them to disapprove of.

There are two broad approaches to government efforts to improve productivity: one which involves more intervention and spending and one which involves less intervention and little change in spending. Guess which one Treasury's priors lead it to favour?

For the past 200 hundred years, most of the world's productivity improvement has come from technological advance - people inventing better machines and thinking of better ways to do things.

But the other fish Treasury wants to fry prompt it to embrace an extreme view held by a few American economists that we've entered a period of much less rapid technological change.

When you consider all the disruption the digital revolution is unleashing on so many industries this is hard to believe.

In the era of the knowledge economy, you'd expect much long and earnest discussion about what governments should and shouldn't be doing to encourage acquisition of the "human capital" that comes from education and training.

Should we be cutting budgetary support for science and research and development? Is now the right time to be pushing university funding off the budget and on to students and universities' money-making schemes?

Why would a government that professes to believe in "equality of opportunity" welch on its professed support for the Gonski reforms to school funding? Why would it view Gonski as about private versus public rather than about lifting the future participation and productivity of kids at the bottom of the distribution?

Instead, the issue of human capital is airily dismissed with the line that "there is little evidence that slower productivity growth has been the result of inadequate investment in skills, education and innovation more broadly".

Maybe. But it's probably equally true there's little evidence it hasn't been. All you're really saying is that there's little evidence - because we've never been willing to run to the expense of adequately measuring such a vital ingredient in our future wellbeing.

The other key element of productivity improvement that gets short shrift is public infrastructure spending. To what extent are its inadequacies limiting the productivity of businesses and adding to commuting times (an important part of our wellbeing that doesn't show up in gross domestic product)? But do workers who spend an hour getting to work arrive at their productive best?

No discussion of our present and future productivity performance is adequate without assessment of the role being played by our policy of high immigration. But all we get is the throwaway line that "there is some evidence that" high levels of migration increase productivity because our focus on skilled migration raises the workforce's average skill level and because "migrants can be highly motivated".

This is true and quite dishonest at the same time. It minutely examines the dog in the room while studiously ignoring the elephant. What economists know but try not to think about - and never ever mention in front of the children - is that immigration carries a huge threat to our productivity.

The unthinkable truth is that unless we invest in enough additional housing, business equipment and public infrastructure to accommodate the extra workers and their families, this lack of "capital widening" reduces our physical capital per person and so reduces our productivity.

Think of it: the very report announcing that our population is projected to grow by 16 million to 40 million over the next 40 years doesn't say a word about the huge increase in infrastructure spending this will require if our productivity isn't to fall, nor discuss how its cost should be shared between present and future taxpayers.

No, none of that. Just another repetition of that peculiarly Australian doctrine that pretty much the only way to improve productivity is to engage in unceasing micro-economic reform.

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Treasury under new management

How much does the Treasury's view of the world change when a prime minister comes to power, sacks the head of Treasury (and his heir apparent) and replaces him with his own hand-picked man from outside the public service?

That's what the economic cognoscenti were asking last week when our first political appointment as Treasury secretary, John Fraser, made his first public appearances at a Senate estimates hearing and as a speaker at a conference of the Committee for Economic Development of Australia.

Fraser had risen to the rank of deputy secretary when he left Treasury in 1993 to make his name and fortune as an investment banker at the global level of the UBS bank. It's hard to imagine such an old and rich chap would hang around long if he found his advice wasn't being heeded.

From what he's said so far, you don't get the feeling Fraser has spent the past 22 years keeping tabs on the Australian economy or keeping abreast of the latest applied research on fiscal policy. Even so, he's a man of strong and confidently held opinions, who isn't afraid to tell you about them.

His views were pretty conservative when he left Treasury, at a time when the views of Treasury itself were more cautious than they've been in recent years, and his time as a chief executive is unlikely to have radicalised him.

Dr Martin Parkinson and Dr Blair Comley seem to have been sacked for their lack of scepticism about climate change, so we can presume Fraser doesn't share that failing. I may be wrong, but I don't see him as someone who wastes much time worrying about "wellbeing frameworks".

We know from his evidence to the Senate that he's a great admirer of Ronald Reagan's tax cuts of the early 1980s (which did so much to lay the foundations for America's present towering public debt), but has "old-fashioned" views about the evil of public debt.

He is sceptical about using the budget to stimulate the economy when it's very weak – which means he's invalidated one of the best arguments for getting debt down: the need to "reload the fiscal cannon" ready for the next recession.

And he thinks the policy of "austerity" practised in Britain and (by default) America has been a great success. This opinion he expressed to the Senate and backed up with figures in his later speech.

To silly people on the left, "austerity" is a swear word you slap on any budget saving you disagree with. But it really means a policy of cutting the budget deficit hard even while the economy is very weak.

The lefties never understood that Joe Hockey's first budget was carefully crafted to involve minimal net cuts to the deficit in the first three years, with the big hit delayed until 2017, when the economy was expected to be back growing strongly.

So, is true austerity about to come to Oz under the advice of the new Treasury boss? You might think so. Fraser says "we need to start now" and repairing the fiscal (budgetary) position is "an immediate priority".

But I'm not so sure. Later in his speech he advocates "committing now to savings measures that build over time to deliver a return to surplus over the medium term". And asked if now was the time to cut savagely considering the weak outlook, he said the coming budget would have to be "tailored to the situation".

While much of what Fraser has said so far is what you'd expect of an Abbott appointee, some of it isn't. His summary of how the budget got into its present state doesn't put all the blame on Labor, but acknowledges the role of excessive tax cuts and spending by the Howard government.

And while noting that government spending has grown at an average real rate of more than 4 per cent a year since 2007-08 (mainly under Labor), he also noted that it grew by about 3.5 per cent a year over the four years to 2007-08 under the sainted Howard government.

He is sharply critical of the increase in "middle-class welfare" in Howard's last years, including Peter Costello's (obviously unsustainable) superannuation changes, which he highlights for reform.

And unlike the huge majority of economists, he frankly admits the great drawback to using immigration to boost economic growth: it "places additional demands on government budgets in areas such as infrastructure, health and education".

Maybe high immigration, but inadequate investment in business equipment, housing and public infrastructure, help explain why our rate of productivity improvement isn't as great as Fraser says we need.

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You were a stranger, so we wouldn't take you in

Do you get the feeling we're becoming a more selfish nation? While other countries were pitching in, we hesitated until this week to send experts to help stem the outbreak of Ebola. Sending people to risk their lives in wars doesn't seem a problem, but to send people for humanitarian reasons is asking too much when their personal safety can't be guaranteed.

This comes on top of our decision to slash the planned increase in official overseas aid. Sorry, but we just can't afford to be so generous. Others may look on Australia as among the richest countries in the world, but they don't understand we have our own problems.

We're running a budget deficit, and will be for many years yet. Borrowing money to cover gifts to poor foreigners hardly makes sense. And don't try telling me there are other, less-deserving people whose assistance could be cut.

As Joe Hockey has explained, our top income-earners are already being taxed too heavily to cover our bloated and unsustainable government spending, so this budget was designed to spare the lifters and require the leaners to bear a fairer share of the burden. And how could we make our own pensioners and sick people tighten their belts while we're being so generous to foreigners?

Hugh Mackay, the social commentator, tells us we've reversed the original meaning of the saying that charity begins at home. It used to mean don't demand charity of others until your own giving is up to scratch, but now it means we shouldn't be helping outsiders while any of our own remain in need.

But nowhere is our lack of charity more evident than in our hard hearts towards boatpeople. How dare they turn up on our doorstep uninvited, expecting us to put them up?

In the past, when asylum seekers were found to be genuine refugees, with a "well-founded fear of persecution" should they return to their own country, they were allowed to stay and included in our annual quota for "humanitarian" immigration.

For years we've discharged our obligation to help with the world's asylum problem by accepting just under 14,000 refugees a year for settlement in Australia. If that sounds like a lot, it represents 0.06 per cent of our population of 23.7 million. It's little more than 7 per cent of our total permanent settler intake of 190,000 a year.

For some reason - troubled conscience, perhaps - the Gillard government upped the humanitarian intake to 20,000 a year in 2012-13, but fortunately the Abbott government has returned it to fewer than 14,000.

Much more affordable. Our loathing of boatpeople is so intense that we tend to think of them as nothing more than a drain on the public purse. And for the first few years that's true.

But in a speech Professor Graeme Hugo, a demographer from the University of Adelaide, delivered to the annual conference of the Kaldor Centre for International Refugee Law in Sydney on Monday, he argued that humanitarian settlers eventually make a significant economic contribution.

Consistent with our more self-interested approach to immigration, these days we favour those who possess the skills - including language skills - of which we're most in need. Compared with these people, refugees are unpromising material for building the economy.

Some may have mental health issues arising from their treatment in their home countries, their experiences in transit or the kindly reception they receive from us. Many have low levels of literacy and limited skills and qualifications; few have great proficiency in English.

Those who do have qualifications will have lost their documentation, or won't have them recognised. They know little about our labour market, they often lack family networks in Australia, their family is split up and they bring no savings with them.

So, yes, in their early years many refugees aren't in the labour force and, among those who are, unemployment is high - higher than for other immigrants. Many of the younger ones you may expect to be working are still in the education system, catching up.

And yet their participation in the labour force rises with the length of time they've been here, converging towards the participation rate of the Australia-born, Hugo says. And their second generation end up having higher participation levels than Australia-born. They're also more highly qualified than Australia-born.

The humanitarian intake has other attractions. Refugees tend to be younger than other migrant groups, with a higher proportion of children, meaning they make a greater contribution to slowing the ageing of the population.

Their fertility is slightly higher. Predictably, their rate of returning home is very low compared with other migrants, and the proportion willing to settle in regional areas - almost 18 per cent - is high and rising.

Personal experience and common sense suggests all migrants who uproot themselves to move to Australia have a fair bit of get-up-and-go, with a determination to make the most of the new opportunities for themselves and, particularly, their kids. Hugo says people who move tend to be among the risk-takers.

Migrants tend to be more entrepreneurial - more likely to start their own businesses - and there's increasing evidence humanitarian settlers contain a disproportionate share of entrepreneurs.

On the BRW Rich List in 2000, five of the eight billionaires came from a refugee background. I wonder how generously they gave to charity.

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